THE SOUTHERN
Richmond & Danville—East Tennessee, Virginia & Georgia—Formation
of the Southern Railway Security Company—Growth and Combinations
—Failure and reorganization of the East Tennessee—Reversal of
position between the Richmond & Danville and the Richmond & West
Point Terminal—Acquisition of the Central of Georgia—Failure and
reorganization of the whole system—Subsequent development.
At the present time there are in the South five great railway systems:
the Atlantic Coast Line; the Seaboard Air Line; the Southern Railway;
the Louisville & Nashville Railroad; and the Illinois Central Railroad,
which cover, in the order named, the territory between the Atlantic
Ocean and the Mississippi River.
The backbone of the Southern Railway is formed by the old Richmond &
Danville and East Tennessee, Virginia & Georgia companies: of which the
first formerly stretched with its subsidiary lines from Washington and
Richmond on the north to Atlanta, Georgia, and Greenville, Mississippi,
on the south and west; and the second reached from Bristol, Tennessee,
in a great half circle to the ocean at Brunswick, Georgia, and by means
of the Mobile & Birmingham straight to the Gulf at Mobile.
The Richmond & Danville was opened in 1856 between Richmond and
Danville, Virginia. It was largely aided by the state of Virginia.
Three-fifths of its stock were owned by the state in 1867, there was a
state loan of $400,000, and a state guarantee of $200,000 besides.[286]
In natural consequence the state elected three of the six directors.
It was not long, however, before the state was able to relieve itself
of a large part of its investment. On the 31st of August, 1871, all
of the state shares were taken over by the Pennsylvania Railroad
Company.[287] The money sunk in the company’s bonds still remained.
From Danville the Richmond & Danville steadily pushed south in the
years following 1856. Under the leadership of the Pennsylvania it
became its ambition to open direct rail communication from the great
Northern cities to the heart of North and South Carolina and Georgia.
To obtain a ninety-mile extension to Charlotte the company leased
the North Carolina Railroad, 223 miles in length.[287] To get into
Atlanta it allied itself with the Atlanta & Richmond Air Line Company,
projected to construct a line between Atlanta and Charlotte.[288] In
1878 it bought a controlling interest in the Charlotte, Columbia &
Augusta Railroad and secured entrance to the latter city.[289] The
Pennsylvania aided the new enterprise by advances from time to time,
and when the current liabilities became unmanageable took $1,000,000 of
a new refunding mortgage.[290]
Meanwhile the East Tennessee, Virginia & Georgia Railroad had been
established to the west of the Richmond & Danville, in the heart of
the southern Appalachians.[291] This company was a consolidation in
1869 of the East Tennessee & Virginia Railroad, from Bristol, on the
boundary between Virginia and Tennessee, to Knoxville, Tennessee; and
the East Tennessee & Georgia Railroad, from Knoxville, Tennessee, to
Dalton, Georgia. Both roads were aided by the state of Tennessee. In
1870, however, the new company extinguished its debt to the state by
the payment of $4,117,761 in state bonds. Not long after the completion
of its line from Bristol to Dalton, the East Tennessee fell under the
control of the Pennsylvania Railroad, which already dominated its
neighbor to the east. To facilitate the control and to unify the
interests of the Pennsylvania south of Washington a “Southern Railway
Security Company” was formed, with a capital of $5,000,000. This
company was entrusted with a majority of the stock of the Richmond &
Danville and of the East Tennessee. It also controlled the Coast Line
railroads from Richmond to Charleston, and the Memphis & Charleston
from Chattanooga to Memphis.[292] Unfortunately the financial results
of the combination were disappointing. Of the subsidiary roads the East
Tennessee managed to pay at least 3 per cent on its capital stock from
1872 to 1876; but the Richmond & Danville paid nothing, the Coast Lines
nothing, and the Memphis & Charleston barely earned the 3 per cent
guaranteed under its lease. In 1873, therefore, a special meeting was
held at the office of the Southern Railway Security Company to consider
the propriety of making sale of certain properties of the company.[293]
In 1874 the lease of the Memphis & Charleston was surrendered,[294]
and in 1876 the bulk of the securities held, outside of the Richmond &
Danville stock, were disposed of.[295]
The retirement of the Southern Railway Security Company marked the
beginning of the withdrawal of the Pennsylvania from investment in
the South. For the rest, it left the lines north of South Carolina
in three main competing groups. There were the Coast Lines from
Richmond south, the Richmond & Danville, and the East Tennessee,
Virginia & Georgia properties. And stretching from west to east was
the Memphis & Charleston, which was already in financial difficulties
of a serious nature. All three of these groups were now thrown upon
their own resources; and two of them, at least, took vigorous measures
in self-protection. The policy of the East Tennessee was the most
aggressive. Shut up in the narrow valley between the Clinch and the
Great Smoky Mountains, and flanked by hostile roads, it conceived it
to be necessary for it to acquire connections to the south, to the
east, and to the west. Accordingly, it leased the Memphis & Charleston
in 1877 and obtained an outlet upon the Mississippi River.[296] In
1878 it bought the Georgia Southern and the Selma, Rome & Dalton
and provided itself with a line as far south as the Flint River in
Alabama.[297] In 1881 it bought the Alabama Central, extending some 96
miles west from Selma. The same year it secured control of the Macon
& Brunswick in Georgia, and began construction from Macon to Rome to
complete a line to the South Atlantic coast.[298] In the north it made
an alliance with the Norfolk & Western, which opened that company’s
line from Bristol to Norfolk,[299] and arranged with the Louisville &
Nashville and the Kentucky Central for construction to a connection at
the Kentucky-Tennessee state line which should open to it the business
of the Central West.[300]
The Richmond & Danville fell under the control of a group of
capitalists who already controlled the Atlantic Coast lines and held an
interest in the East Tennessee, and who now bought the 24,000 shares
of Danville stock still held by the Pennsylvania Railroad.[301] Like
its rival, it enlarged its system. It leased the Atlanta & Charlotte
Air Line in 1881,[302] with certain minor roads in the Carolinas and in
Georgia. In 1882, under the charter of the Georgia Pacific, it began
construction westward from Atlanta to the Mississippi. It did not
stretch out, as did the East Tennessee, but it secured a very complete
control of the territory between Richmond in the north and Augusta,
Savannah, and Atlanta in the south. In 1881, also, the Richmond &
Danville took a step destined to have important consequences. Since
it desired to acquire certain railroads, and since its charter
allowed it to hold stock in none but connecting lines, it caused to
be incorporated a so-called Richmond & West Point Terminal Railway
& Warehouse Company, with authority to acquire stocks and bonds of
railroad companies in North Carolina, South Carolina, Tennessee,
Kentucky, Georgia, Alabama, Mississippi, and other states. This
company increased its stock by October, 1881, to $3,000,000; of which
the Richmond & Danville then owned $1,510,000. The most important
acquisition which it made at the time was the Virginia Midland Railway,
from Alexandria, Virginia, to Danville; but other additions were to
follow.
The independent action of the Danville and East Tennessee companies
was followed by a new consolidation which reunited most of the lines
dominated by the old Security Company. In response to queries in
August, 1883, Mr. Calvin S. Brice admitted that a syndicate in which he
was interested had bought control of the Richmond & Danville.
“We have secured,” said he, “about 28,000 of the 50,000 shares of stock
issued by the Richmond & Danville Company. Our syndicate controls,
besides our new purchase, the East Tennessee, Virginia & Georgia
Railway and the Chesapeake & York River line of steamers that ply
between West Point, on the Chesapeake, and Baltimore, and has close
traffic arrangements with the Clyde steamers, which run between New
York and Philadelphia and all Southern points. Our purpose is to
confine all our railroad and steamship lines under one management, and
to equip and operate the system in the best possible manner.”[303]
It appears from this statement that the capitalists who controlled the
East Tennessee now again consolidated with the leading interests of
the Richmond & Danville and lines east, albeit changes in personnel
and transfers of holdings occurred. Return to the old combination was
made desirable by the more intimate connection of the two groups of
roads. The Western North Carolina had been opened across the mountains
of North Carolina in 1882. This had made practicable the diversion of
the western traffic of the East Tennessee from the Norfolk & Western
to the Richmond & Danville; a traffic which the northern connections
of the East Tennessee promised largely to increase. Consolidation
was doubtless also prompted by the desire to save the East Tennessee
from serious financial difficulty which threatened it. It had become
apparent that this company, at least, had severely taxed its strength
in the rapid extension of mileage which had followed 1876. Before that
time its position had been secure. It had possessed a monopoly of the
somewhat limited local traffic between Chattanooga and Bristol, and had
formed part of the most direct route between New York, Philadelphia,
Baltimore, and Washington, and towns in Tennessee, Northern Alabama,
and Mississippi. Its extensions had changed the situation. They had
brought it into touch with the Mississippi River and the Atlantic
Ocean, and had increased its fighting power; but they had also endowed
it at large cost with a group of poorly equipped, unprofitable lines
located in a keenly competitive territory. The Selma, Rome & Dalton had
been purchased just after a foreclosure sale. The Macon & Brunswick had
never been able to earn much more than working expenses. The Alabama
Central had not seen fit to publish its financial figures after 1878,
while the Memphis & Charleston, as we have seen, had turned to the East
Tennessee only to escape bankruptcy.
The East Tennessee had hoped to make profitable the lines which it had
so rapidly acquired. Unfortunately the company was poorly equipped for
such a task. Its finance had been extravagant. In 1875, on 269 miles
of lines there had been $7317 in stock and $15,620 in bonds per mile.
In 1883 the mortgage bonds and car trusts outstanding per mile owned
amounted to $23,444, the income bonds to $15,404, and the capital stock
to $41,079. A grand total of $79,927 as compared with the $22,937 of
eight years earlier, and an average of almost $100,000 in securities
per mile of new line acquired! Ninety-nine per cent of net income
was being absorbed in paying interest on all classes of securities,
although maintenance figures were kept as low as $630 per mile of line.
This large volume of stocks and bonds made improvement from earnings
impossible, and prevented conservative management by taking from the
stockholders any chance of dividends, and by reducing the quotations of
common stock to less than $5 per share. And though in some respects
the location of the system was good, the route which it offered to much
of its business was indirect, the competition which it had to meet was
severe, and its Atlantic terminal, Brunswick, was of small importance
compared with the thriving cities of Savannah and Norfolk. The result
was a failure to secure the gains from consolidation which had been
expected. Surplus earnings were continuously small, and current bills
were left to run; until by 1883 the floating debt had become so large
that an issue of $1,200,000 in debenture bonds was required to take
care of it.
The failure of the East Tennessee to weld its connections into an
efficient transportation system left it helpless in face of the panic
of 1884. Earnings fell off in that year, a directors’ committee was
appointed,[304] and the resulting report revealed a plain inability on
the part of the company to meet its charges.
“The interest charges proper for the calendar year
1885 are,” said the committee, $1,476,505.85
“To this must be added the principal due on car trusts
and debentures in 1885, 280,954.11
-------------
“Or a total of $1,757,459.96
“The payments on similar account will be—
in 1886, $1,739,196.28
in 1887, 1,720,932.60
gradually decreasing until the debentures and car
trusts being paid off in 1894, the total fixed
charges for the year 1895 will be $1,295,970.00
“The net revenue for the year 1883–4 was 1,699,925.84
“The net revenue for 1885 and 1886, allowing for the
decrease in earnings following the panic, and
supposing the road to be operated for 60 per cent,
may be estimated at $1,400,000.00
“This will leave,” said the committee, “an annual deficit of $350,000,
to which must be added a total of $1,000,000 required by the general
manager for steel rails, iron bridges, and other needed improvements.
“The sums for covering these expenses should not be raised by temporary
loans, as this would not relieve the company of its embarrassments
nor place its finances upon a sound footing. It cannot be raised by
an additional mortgage, on account of the provisions of the mortgage
securing the income bonds. It must and can be raised from a funding of
coupons which shall leave the earnings of the company sufficiently free
to meet the demands upon them. The committee therefore recommends:
(1) “That the holders of the consolidated 5 per cent bonds be asked
to fund four coupons, being those maturing January and July 1, 1885,
and January and July 1, 1886, by depositing said four coupons with the
Central Trust Company of New York, as trustee, and receiving instead
the company’s funded coupon bond dated July 1, 1885, and bearing 6 per
cent interest per annum from that date, ... which bond shall run ten
years from its date and be redeemable at the pleasure of the company at
par and accrued interest after three years, on three months’ notice;
such funded coupon bond to be secured by the coupons so deposited, the
lien of which will be in all respects preserved.
“The total extensions under this clause would be $1,467,400.
(2) “That the holders of the $2,000,000 of the Cincinnati & Georgia
Division first mortgage 6 per cent bonds be asked to fund four coupons,
... being those maturing March and September 1, 1885, and March and
September 1, 1886, ... and accepting in lieu thereof a funded coupon
bond ... dated September 1, 1885.
“The total amount extended under this clause would be $240,000.
(3) “That the holders of the debentures be asked to extend for ten
years such of the debentures as fall due during the years 1885 and
1886, and to accept similar debentures running from five to ten years,
for the interest....
“The total amount extended under this clause would be $373,200.
(4) “That an arrangement be made with the holders of the car trust
certificates of the company, series A, for an extension for ten years
of all the payments of principal falling due in 1885 and 1886, being
$100,000 in each year.
“The total amount extended under this clause would be $200,000.”[305]
The committee had an apology to offer for the state in which the
company was placed. “The actual cost of the 190 miles of the new roads
constructed by the company has largely exceeded,” said they, “the
estimated cost. The physical condition of the roads purchased by the
company necessitated the expenditure of large sums in the improvement
of roadway and track; the construction and reconstruction of bridge
masonry and bridge superstructure. The facilities for the conduct of
the company’s business were entirely inadequate to the requirements
of its increasing traffic and had to be enlarged. Unfortunately the
company did not fully provide for these expenditures, and the shrinkage
of the value of its securities greatly aggravated the evil.” This much
was very true. In its criticism of existing facilities the committee
was on sure ground. In its suggestions for relief it was less well
advised. It seems to have felt that the East Tennessee’s difficulties
were due to a temporary inability to raise cash for the improvement of
its roadbed and equipment, and that the suspension of certain charges
for a few years would allow the expenditure of liberal sums from
income, ensure the improvement of the road, and bring about a condition
of permanent prosperity. The truth was that the East Tennessee was
in too bad a shape to be reëstablished by such means. The heavily
burdened and physically defective lines which made up the system were
past being restored from income even with the aid of a funding of a
few years’ coupons. They required a definitive surrender of portions
of the claims against them, extensive new charges to capital account,
and a correspondingly complete reconstruction of their whole operating
plant.[306] The practical service which the committee rendered was
not in suggesting an adequate remedy for existing troubles, but in
making plain how serious these troubles were. So imminent, in fact, did
they show collapse to be, that the management determined to forestall
hostile action by themselves asking for the appointment of a receiver;
and on January 7 the Circuit Court appointed Henry Fink to that
position.[307] The committee’s funding scheme fell of its own weight.
The decrease in the earnings of the company, a truer appreciation of
its condition, and, it may be surmised, the influence of New York
banking houses, forced it to make room for a thorough plan of financial
reconstruction.
Action looking toward reorganization of the East Tennessee, Virginia &
Georgia began with the year 1886. In January Mr. Nelson Robinson,[308]
who had held proxies for a controlling stock interest at the
previous election, returned from Europe; and after a conference with
certain large bondholders agreed with them to draft a plan for the
reorganization of the property. A reorganization committee was chosen
from members of large banking firms,[309] meetings were held, and in
the first part of February, 1886, a scheme was put forth. This plan
comprised the following points:
(1) Reduction of fixed charges;
(2) Exchange of new bonds and preferred stock for old bonds;
(3) Assessment on the junior securities;
(4) Foreclosure.
Foreclosure was to take place under the consolidated mortgage. A new
5 per cent seventy-year consolidated mortgage was then to be created.
Enough of the bonds under this mortgage were to be reserved to retire
the liens prior to the existing consolidated mortgage as they should
mature, and the balance was to be used for taking up the outstanding
consolidated mortgage bonds, the Cincinnati & Georgia division bonds,
and the ten-year debentures. It was estimated that the exchanges would
reduce the annual interest charge from $1,757,460 to $994,737.[310]
This necessitated considerable demands upon old securityholders. Thus
the old consolidated mortgage bonds bearing 5 per cent received only
60 per cent of their face value in new consolidated bonds with the
same rate of interest; and the old 6 per cent Cincinnati & Georgia
division bonds received only 48 per cent in consols, besides suffering
a decrease in interest rate from 6 to 5 per cent. The difference was
made up by the allowance of preferred stock, to which, moreover, was
given the right for five years to elect a majority of the board of
directors, unless before that time the new company should have paid
out of its net earnings 5 per cent dividends on such preferred stock
for two full successive years. To the Cincinnati & Georgia division
bonds were given 62 per cent in new first preferred besides the 48
per cent in bonds,—a total of 110 per cent; upon which the yield in
prosperous times might exactly equal the yield on the securities which
they surrendered. To the consolidated bonds were given 50 per cent in
new first preferred, making possible a total return greater than that
which they had formerly enjoyed. For the debentures was made the same
provision as for the divisional bonds. In order that net earnings might
go first of all to the prior liens and to the above securities, new
second preferred and common stock was issued for the benefit of the old
income bonds and stock. Of these the income bonds received 100 per cent
in new second preferred; while the old preferred received 100 per cent
and the old common stock 40 per cent in new common. Only in return for
their assessments did the income bonds receive first preferred stock,
and even for their assessment the common stock took second preferred.
Cash assessments were 5 per cent on the income mortgage and 6 per cent
on the new common stock. This was expected to yield $2,475,000, which,
with a surplus of new securities in the treasury of $1,534,000, was
thought sufficient to liquidate outstanding car trusts and to provide
the company with a fund available for future use.[311]
The plan may be criticised in some respects. It made no adequate
provision for future capital requirements. Two millions and a half of
cash and two millions of securities were considerable sums in hand,
but of these over half a million was in the form of stock, and from
the rest had to be deducted at least a million and a half for the
liquidation of car trusts. This left, it is true, enough for existing
needs,[312] but it did not allow for constantly recurring and
legitimate demands for improvements out of capital in future years.
Moreover, the securities given for the consolidated, the Cincinnati
& Georgia division, and the debenture bonds exceeded by 10 per cent
the nominal value of the bonds retired by them. But on the whole the
reorganization plan was an excellent attempt to solve a difficult
problem. It proceeded on a sound principle, it laid the burden on the
proper parties, it avoided a funding of current liabilities, and even
in respect to the volume of securities outstanding it accomplished a
much needed reform by wiping out 60 per cent of the almost worthless
common stock.[313] It was accordingly accepted by the securityholders.
On March 18, the reorganization committee obtained a decree of
sale.[314] By May 1, practically all the consolidated and income bonds,
with a majority of the preferred stock, had assented;[315] and on May
25, 1886, the East Tennessee, Virginia & Georgia Railroad was sold
for $10,250,000 to a representative of the reorganization committee.
Previous to this the opposition committee, which had been formed by
the minority stockholders, had disbanded.[316] The final step was
the organization of the East Tennessee, Virginia & Georgia Railway,
which on July 1 took over the title to the East Tennessee, Virginia &
Georgia Railroad and branches, a controlling interest in the stock of
the Knoxville & Ohio, and a controlling interest in the stock of the
Memphis & Charleston Railroad Company.[317]
During this time the Richmond & Danville had not been standing still.
It will be remembered that in 1883 the capitalists who dominated the
East Tennessee and the Coast Lines had purchased a controlling interest
in this company, with the purpose, according to Mr. Brice, of confining
all their railroad and steamship lines under one management and of
operating the system in the best possible manner. These gentlemen
had found the earnings of the Richmond & Danville sufficiently
unsatisfactory and the need for improvements sufficiently great to
lead them to pass the interest on its debenture bonds in October,
1883. The net earnings for 1882, out of which this dividend would have
been paid, they found had been fully taken up by the fixed charges
and the expenses for new equipment and betterments. The net earnings
for 1883 they believed sure to show large gains, but still not likely
to be equal to necessary expenditures.[318] Strict economy was to be
the order of the day. In the three previous years the company had
accumulated a large floating debt. This the new management reduced
more than one-half by the end of 1885. The funded debt it allowed to
increase largely, but the earnings it managed somewhat to improve. In
general, however, it secured no very striking gains. Union in interest
with the East Tennessee and the Coast Lines modified the severity of
competition, but the panic of 1884 checked business, and the real
saving in operating cost was very slight.[319]
In their search for means to reduce expenses the owners of the Richmond
& Danville came across the Richmond & West Point Terminal Company.
By 1884 this company was in peaceful possession of 1815.8 miles of
railroad, which included all the important branches of the Richmond
& Danville except the North Carolina Railroad, from Goldsboro to
Charlotte, and the Atlanta & Charlotte Air Line, from Charlotte to
Atlanta. It had been obliged to issue notes to retire its floating debt
in 1883,[320] but had no earnings apart from dividends on the stock
which it held, and no expenses other than its cost of administration
and the interest on the notes above mentioned and on its floating debt.
There was a possibility, nevertheless, that the maintenance of the
company involved the Richmond & Danville in unnecessary outlay, and
caused a certain loss of efficiency through indirectness of control.
The Terminal Company had originally been necessary because the Richmond
& Danville could by its charter hold stock in none but connecting
lines. By 1885 this prohibition had been removed, and there was open an
opportunity to consolidate the system.
Early in 1886 the directors of the Richmond & Danville appointed a
committee to report a plan of union with the Richmond & West Point
Terminal.[321] Apparently this committee recommended the elimination
of the Terminal Company; for in April it was known that the Richmond
& Danville was trying to buy from the Terminal the stock of certain
of the more important branches which it had formerly controlled.[322]
In that month the Richmond & Danville leased the Virginia Midland
Railway[323] and the Western North Carolina; in May it took over the
Charlotte, Columbia & Augusta and the Columbia & Greenville; in June
the Northeastern of Georgia; and in October the Washington, Ohio &
Western, or a total of 1483 miles out of the 1839 held by the central
corporation.[324] At the same time the Richmond & Danville transferred
into its own treasury $13,617,400 in stock and bonds of subsidiary
companies, giving in return 25,000 shares of the Terminal’s own stock,
and a guarantee of the Virginia Midland’s general mortgage bonds. This
done, the Danville Railroad threw the rest of its holdings of Terminal
stock upon the market; where they were bought by investors who knew
nothing of the above transactions. The operation left the Terminal
high and dry. It was of no further use to the Richmond & Danville, for
that company had made arrangements with its branch lines direct; and
it could not launch upon an independent existence, because the greater
part of its mileage was in its rival’s hands.
Fortunately for the small Terminal holders it so happened that men
of large wealth and resourcefulness were interested with them. Under
the leadership of these capitalists the Terminal Company began in its
turn the purchase of Danville stock. It may have been that the East
Tennessee group who had acquired a majority in 1883 had meantime parted
with their holdings, or members of that syndicate may have sold in 1886
to take advantage of a favorable price.[325] At any rate, 25,000 shares
were rapidly acquired, and the control of the company obtained. This
done the new Terminal interests turned to the East Tennessee, Virginia
& Georgia. Negotiations were at once begun, and culminated in an
agreement in 1887 by which the Brice-Thomas group sold 65,000 shares of
East Tennessee first preferred for $4,000,000 in cash and 50,000 shares
of new Terminal common. Since the Tennessee first preferred elected a
majority of the directors this ensured control. At the same time the
Richmond Terminal provided for its floating debt, and for the purchase
of the balance of the Richmond & Danville shares outstanding.[326]
Thus was the Richmond & West Point Terminal Company saved, and the
principal railroads east and west of the southern Appalachians still
kept under common control. The new grouping was weaker than the old,
however, in that it did not include the Coast Line railroads. It was
also imperfect as regards the nature of the control possessed over the
East Tennessee, Virginia & Georgia. It has been said that the Richmond
Terminal held a majority of the first preferred stock of this latter
road.[327] By the terms of the Tennessee reorganization of 1886 this
stock was to have the right for five years to elect a majority of the
directors, unless before that time it should have received 5 per cent
dividends for two successive years. This gave control to the Terminal
Company; but it plainly made a control precarious which rested, as this
did, on ownership of first preferred alone. In 1887 4 per cent was paid
in dividends, and in 1888 5 per cent. In 1888, accordingly, a lease
was drawn up, and the Richmond & Danville took the operation of the
road for ninety-nine years. For four years it agreed to pay over 33⅓
per cent of the gross earnings; for five years more 35 per cent; and
so on until 37 per cent should be reached. And, further, it guaranteed
that the percentage allowed should be sufficient to pay all the East
Tennessee’s fixed charges, including 5 per cent annually on the first
preferred shares outstanding.[328]
It cannot be denied that the ethics of the Tennessee’s lease were
questionable. The East Tennessee reorganization had invested the
first preferred stock of that company with temporary authority. To
use this to bind the property for years to come was neither fair to
the other stockholders, nor in accordance with the spirit of the
reorganization plan. We need not, therefore, be surprised at the prompt
application for an injunction and for the appointment of a receiver
which occurred.[329] In a circular to the second preferred and junior
stockholders the opponents of the lease urged that its consummation
would constitute an abuse of power on the part of the existing
board; that it was entirely in the interests of the first preferred
stockholders; that under no circumstances could the junior stockholders
derive any income from the lease; that it failed to provide other
safeguards and was in many respects improvident and imperfect. In one
suit before State Chancellor Gibson at Knoxville, Tennessee, emphasis
was laid on the statutory prohibition of the consolidation of competing
lines. In another, petition was even made that the holders of the first
preferred stock be enjoined from electing a majority of the board of
directors at the approaching meeting.[330] Chancellor Gibson handed
down two vigorous opinions. He refused to enjoin the voting of the
first preferred stock, on the ground that the plaintiffs had been in
possession for two years of stock certificates which bore on their face
the conditions and agreements under which they were issued, and that
the complaint was not justified, either in law or equity.[331] But he
held that the East Tennessee had no power under its charter to lease
its road as it had done; that the combination of the East Tennessee and
the Richmond & Danville was forbidden by the law of Tennessee against
the consolidation of competing lines; and that similar prohibitions in
the laws and constitution of Georgia were so stringent as to imperil
the East Tennessee’s charter in case the lease should be carried
through.[332] This effectually checked the lease. After Chancellor
Gibson’s first opinion the East Tennessee election had been held and
the arrangement with the Richmond & Danville approved.[333] After
his second the lease was cancelled, and the management of the East
Tennessee restored to its own officers.[334] The Richmond Terminal
was still left in control of the property. It was forced, however, to
secure a majority of all the East Tennessee stock outstanding if it
wished to make its control permanent, and it was prevented from using
the power temporarily given a section of the stock to bring about a
ninety-nine-year arrangement distasteful to the majority.
Master of the Richmond & Danville, the East Tennessee, and their allied
lines, the Richmond Terminal now took one step further; it acquired
the Central Railroad & Banking Company of Georgia. The importance of
this was very great. The Central Company owned the most considerable of
the lines in Georgia and Eastern Alabama. It stretched from Savannah
and Port Royal on the Atlantic coast to Spartanburg, South Carolina,
on the north; to Atlanta, Birmingham, and Montgomery on the west; and
to Albany, Georgia, and to Columbia on the south. Its system had been
formed by a consolidation in 1872 of the Central Railroad from Savannah
to Macon with the Macon & Western from Macon to Atlanta,[335] and was
compact, ably managed, and profitable. Previous to June, 1847, the
Central Railroad Company had paid seven dividends aggregating 10.68
per cent. From June, 1847, to June, 1889, the Central Railroad and
the Central Railroad & Banking Company which succeeded it, had paid
seventy-five dividends aggregating 337.5 per cent,[336] besides stock
dividends of 8 per cent in 1854 and 12 per cent in 1861, and a dividend
of 40 per cent in certificates of indebtedness in 1881. It was paying
8 per cent in 1888 when the Richmond & Danville was paying 5, and the
East Tennessee was congratulating itself on the 5 per cent which it was
able to turn over to its first preferred stock.[337]
So fruitful a piece of railroad property was naturally looked on as
desirable, especially since its acquisition was to free the East
Tennessee from one of its most dangerous competitors. From a traffic
point of view, nevertheless, the advantages of a consolidation were
doubtful. The local business of the Central was likely to be little
increased by a merger. The through business was in danger of being
decreased. The Central lines ran on the whole east and west. It was to
their interest to carry freight from Georgia, Alabama, and the West to
Savannah, and thence to send it north by way of the Ocean Steamship
Company which they controlled, and from which they obtained in 1889
one-fifth of their total net earnings; while the Richmond Terminal’s
interest was to send this traffic north by land so as to secure for
its own railroads the long haul. The advantages to the Terminal of a
union depended on the price at which the Central Railroad could be
acquired. The purchase was made, and the price was a high one. And this
price was paid, it was freely charged, not in pursuance of an honest
though mistaken judgment, but in order to allow a large personal gain
to individual capitalists who were interested in both the Central and
the Terminal Companies.
Among the most prominent owners of Central of Georgia stock at this
time were members of the Logan-Rice group of financiers, who had begun
to accumulate holdings at least as early as 1886. The average price
which these parties paid was later estimated at 130, and their holdings
were apparently secured with a view to resale at a higher figure. At
any rate, when 40,000 shares had been purchased, a double operation
was put through. The shares bought were turned over, with $400,000
cash, to a newly formed “Georgia Company,” and for them $4,000,000 in
5 per cent trust bonds and $12,000,000 in Georgia Company stock were
received in exchange. And, second, a vigorous campaign was entered upon
to secure control of the Richmond Terminal. Sully resigned the Terminal
presidency in April. For his vacant place the Logan-Rice people
offered General Alexander of the Central of Georgia, and the Terminal
management supported John H. Inman. The struggle which ensued was most
extraordinary. The existing board of directors charged the Central
group with trying to unload their Georgia Company’s stock upon the
Terminal system; and the Logan-Rice party insinuated that the purchase
of the East Tennessee Railroad had been the occasion of fraudulent
profits to the Terminal directors.[338]
“We understand,” declared the directors, “that a majority of the
names thus far proposed by the parties soliciting proxies to be cast
for directors and president of this company are gentlemen who are
well known to be the owners of a majority of the stock of the Georgia
Company, which owns railroads whose business and interests are at
all points of our system in competition with and antagonistic to the
business and interests of this Company; any diversion of traffic,
or exercise of influence favorable to the Georgia Company at the
numerous competitive points would work incalculable injury to your
prosperity.... If on the other hand the preponderance of the Georgia
Company’s interest in this Company should result in a sale to and
purchase by your Company of the Georgia Company stock owned by these
gentlemen, it would necessitate the issue of many millions of your
common stock, or some kind of obligation taking precedence of that
stock, the effect of which upon the value of your property you are
fully competent to judge.”[339]
The general election of the Terminal was held on May 31, and Mr. Inman
was elected president for the remainder of the unexpired term.[340]
The Rice party was apparently overwhelmingly defeated. In reality its
activity and the presence of its friends in the councils of the victors
resulted in the successful sale of the Georgia Company securities. In
October, 1888, little over five months after the directors’ circular
of April 6, the Richmond Terminal took over the Georgia Company stock
at $35 a share and allowed its owners to withdraw successfully from
their speculation. Subsequently it also took the Georgia Company bonds
from the bankers who had purchased them.[341] This left Inman, Hollins,
and the rest a profit of $60 a share on their original investment. It
meant for the Richmond Terminal a direct annual loss which there was
very little prospect of making good. To provide for the $4,000,000
in bonds and the 120,000 shares of stock acquired, this latter issued
approximately $8,200,000 of 5 per cent collateral bonds bearing
an annual interest charge of $410,000. Now both the stock and the
$4,000,000 of bonds were a lien on 40,000 shares of Central of Georgia
stock and depended altogether upon the dividends declared on these by
the Central Company. The Central never paid over 8 per cent, or a total
of $320,000 on 40,000 shares. The difference between this and $410,000,
or $90,000, constituted a direct loss which the Terminal pledged itself
to meet each year. If the victory of the friends of the company in May
is to be considered a genuine one, one wonders what price the owners of
the Georgia Company would have charged had the election gone the other
way.
With the Central of Georgia, the East Tennessee, and the Richmond
& Danville under its control the Richmond Terminal could look for
still further extension. In 1890 it acquired control of the Erlanger
group of roads from Cincinnati in the north to Chattanooga, thence
to Meridian, Mississippi, thence to Vicksburg, Mississippi, and to
Shreveport, Louisiana. At the same time it took in the Louisville
Southern, which joined Louisville with the Cincinnati lines.[342] In
1888 the Richmond & Danville had concluded a close alliance with the
Atlantic Coast Line,[343] and arrangements had been made for terminal
facilities at Norfolk.[344] In 1889 it leased the Georgia Pacific, and
two years later, when this road reached Arkansas City, it executed a
traffic agreement with the Missouri Pacific.[345] In 1891 the Georgia
Pacific leased the Central Railroad & Banking Company of Georgia
for ninety-nine years at 7 per cent on its capital stock.[346] This
immensely improved the connection of the East Tennessee with the
North and West, did away with the competition of a parallel line, and
afforded another outlet upon the Mississippi.
Here, then, was the Richmond Terminal system in 1890. Three great north
and south lines: one from Cincinnati through Birmingham to York, over
the Erlanger system; one from Bristol through Rome to Selma, over the
East Tennessee, Virginia & Georgia; and one from Alexandria and West
Point through Danville, Charlotte, and Atlanta to Montgomery. One of
these took business from Indiana, Illinois, and the North and Central
West; one from Baltimore, Philadelphia, and the East; one from both
West and East; and all three opened upon the Gulf over the Mobile &
Birmingham to Mobile. In addition, three parallel east and west lines:
from Chattanooga to Memphis, from Birmingham to Arkansas City, and from
Meridian to Shreveport in Alabama; outlets on the Atlantic coast at
Charleston, Port Royal, Savannah, and Brunswick; and dominance of the
local traffic of the whole territory east of Alabama, south of Kentucky
and Tennessee, and north of Florida. It was by all odds the leading
system in the South. It had a mileage of 8558.5 as compared with the
2383.4 of the Louisville & Nashville, and gross earnings, exclusive of
the Erlanger lines, of $41,361,095, or more than twice those of its
greatest competitor.
And yet, for all its size, the Terminal group was perilously near
collapse. Its physical condition was poor and much of its mileage was
unprofitable; its capitalization was tainted with dishonesty; and the
legality of its recent combinations had not been tested in the courts.
Let us quote from the results of an examination made by a well-known
banking firm three years later.
“While in a general way the _main lines_ of the Richmond & Danville
[West Point and Alexandria to Atlanta],” said this firm in its report,
“are in fair condition—better than those of the East Tennessee,
excepting parts of its main line between Bristol and Chattanooga, the
Cincinnati, New Orleans & Texas Pacific, and the Alabama Great Southern—
nearly all the rail in both systems is too light (50 to 60 lbs. while
on the main lines it should be 70 to 75 lbs.), many of the trestles
need renewing, and a large number of the bridges, principally on the
East Tennessee system, are not sufficiently strong to warrant the
use of heavy engines, which are essential to hauling long trains and
operating with economy. To a very large extent ballast is altogether
lacking or insufficient in quantity. Excepting that portion of the
equipment represented by equipment bonds or notes, the engines and cars
are generally small and weak and unsuitable for main-line service, and
are also insufficient in quantity for any considerable enlargement of
business. Other appointments, such as shops, yards, etc., are, with but
few exceptions, crude and uneconomical.
“On the branches and secondary lines, especially those of the Richmond
& Danville system, the condition is even worse, little or no effort
having been made to maintain them at proper standard, even for a
moderate traffic. About 700 miles of the Richmond & Danville secondary
lines and branches (including about 200 miles of narrow-gauge lines)
are still laid with _iron rails_. On July 1st, 1892, there were 72
miles of iron rails in the _main_ lines of the East Tennessee.
“An expenditure of several million dollars should be promptly made on
these properties for equipment alone, but it is no use to do so, even
if it were possible, unless additional track and yard facilities are
also provided, nor unless such enlargements of engine and car shops be
made as will permit of the equipment being kept in order.”[347]
This verdict was only reinforced by the characterization in detail of
a number of the subsidiary lines. Thus the Columbia & Greenville was
termed “a collection of weak lines of constantly decreasing value”;
the Mobile & Birmingham “of no value whatever to the East Tennessee”;
and the Memphis & Charleston “valuable, but in a condition totally
unsuited to modern requirements.” How the capitalization of the system
was tainted with fraud has already been pointed out. The legality
of the recent combinations had not been tested in the courts. In
January, 1889, counsel for certain unnamed parties had a plea for a
_quo warranto_ presented to the Attorney-General of Virginia.[348]
The petition alleged that the purchase of the control of the East
Tennessee, Virginia & Georgia Railway and of the Virginia Midland was
an abuse of the powers of the Richmond & West Point Terminal ... a
violation of public policy, and an usurpation to the great damage and
prejudice of the constitution and laws of Virginia. This petition the
Attorney-General dismissed on technical grounds. The legality of the
various mergers was soon, however, to be attacked again, and in 1889
the question was decidedly unsettled.[349]
The storm broke in August, 1891. On the eighth of that month the New
York _Herald_ published a vigorous onslaught upon the company. It
maintained that the Richmond & Danville system had failed to earn its
fixed charges by $526,560 in the year ending 1890; that this fact had
been concealed by deceptive or false entries on the books which made a
fictitious profit emerge by covering up the losses on auxiliary lines;
that the 8 per cent dividends which had been paid on the Central of
Georgia had not of late years been earned, and that the price paid for
the Georgia Central stock had been grossly excessive; that the East
Tennessee was just about paying its way; and, finally, that the other
recent acquisitions were either just paying their way or were showing
annual deficits.[350] Color was given to the charges by the trouble
caused by the floating debt. Though denied by the officials of the
company, the sale of 2000 shares of Baltimore & Ohio stock held in the
Terminal treasury;[351] the negotiation of a short time loan at 6 per
cent and 2½ per cent commission for the Central of Georgia and the
extension of another loan;[352] the placing of $500,000 at 6 per cent
for the Richmond & Danville; and the active financial support which
General Thomas felt obliged to render the East Tennessee showed the
anxiety which it occasioned.
On November 25 the directors held a meeting and appointed Messrs.
Eckstein Norton, late president of the Louisville & Nashville; Wm.
Solomon, of Speyer & Co.; Jacob H. Schiff, of Kuhn, Loeb & Co.; Chas.
S. Fairchild, president of the New York Security & Trust Company;
and Louis Fitzgerald, president of the Mercantile Trust Company, a
committee to carefully inquire into and examine the condition of the
Terminal properties and to aid the company in perfecting a plan of
readjustment. Owing to the financial depression, they explained, “the
company has been unable to sell securities based upon engagements they
had made prior to the period of depression and to pay for necessary
equipment and improvements. A large floating debt has in this way been
accumulated, but each of our important railroad systems is solvent....
After maturely considering the whole situation, we felt it wise to
invite the gentlemen whose names appear ... to aid us in perfecting the
best plan for a permanent adjustment of our affairs.”[353]
The committee reported provisionally on December 8. It then stated that
it was essential to the proposed plan of relief that the elections of
all the subordinate companies in the Richmond Terminal system should be
postponed till after the Richmond Terminal affairs were settled, and
requested that financial provision be made for the employment of an
expert or experts in the examination of the properties and accounts.
It was understood that the committee’s plan was to make a considerable
assessment on the stockholders. The board of directors refused to
respond and the committee therefore withdrew.[354]
The next day the stockholders selected Mr. F. P. Olcott to appoint
a new committee to take up the work.[355] They were not in favor of
radical action, and Mr. Olcott expressed the opinion that there was no
necessity for measures so stringent as those which the Schiff-Norton
Committee had had in mind. It was but natural that at this point there
should have been some delay. Meetings were held, expedients for raising
cash discussed, and a reorganization plan was gradually whipped into
shape. It was not, therefore, until March 19, 1892, that the public
were informed what Mr. Olcott and his backers did consider that the
situation required. The main points of the elaborate scheme which was
then proposed were as follows:
First, a consolidation of the Richmond Terminal, Richmond & Danville,
and East Tennessee properties. The Central of Georgia and the Erlanger
systems were not to be included in the reorganization, but the interest
of the Richmond Terminal and the East Tennessee in their stock was to
be made subject to a new mortgage.
Second, a reduction in fixed charges.
Third, the sale of securities to pay off the floating debt.
Consolidation of properties was found advisable for several reasons.
“While some of the companies show a surplus of earnings,” said the
committee, “in many instances it has been impossible to apply such
surplus earnings to make up deficiencies arising from the operations
of other companies. The committee finds that the various systems
have not been operated throughout for the common benefit of the
controlling interest, but that they have competed among themselves for
business, each system maintaining separate organizations for obtaining
business.... In the judgment of the committee the only adequate remedy
which can be adopted is to unite the several corporations, as far as
practicable, in one system under one management, and to consolidate
their obligations.”
In order to unify the system the committee proposed three great issues
of new securities as follows:
$170,000,000 four per cent first mortgage 35-year gold bonds, to be
issued by a new corporation representing the consolidation of the
Richmond & Danville Railroad Company and the Richmond & West Point
Terminal Railway & Warehouse Company.
$70,000,000 five per cent non-cumulative preferred stock.
$110,000,000 common stock.
In general, the new bonds were to exchange for old bonds and the new
common stock for old common and preferred, while the new preferred
stock was to be joined in varying proportions with each of the other
issues to make the exchanges look attractive. Thus, for the Richmond
& Danville consolidated 6s were offered 120 per cent in new bonds and
45 per cent in new preferred; for the East Tennessee first mortgage 7s
120 per cent in new bonds and 45 per cent in new preferred stock; for
the Richmond Terminal common stock 100 per cent in new common and 50
per cent in new preferred. This arrangement was not rigidly adhered to.
Some of the poorer of the outstanding stocks received new common only,
and the Richmond Terminal preferred was given par in new bonds besides
a bonus in preferred. These were, however, exceptions. The principle
which determined the various ratios of exchange is more difficult to
discover. It was not that of equivalence of return. The plan did not
attempt to allow to each holder a chance at the same receipts which
he had formerly enjoyed while reducing the amount which he could
demand, but gave sometimes more than this and sometimes less. And the
variations from what might be called a normal ratio did not always
correspond with the relative security of different issues as indicated
by their market quotations. For instance, the East Tennessee first 7s
sold in December, 1891, at 113½ and the Richmond Terminal collateral
6s at 83; yet the former received 120 per cent and 35 per cent and the
latter 120 per cent and 40 per cent in new bonds and preferred stock
respectively. Again, the Atlanta & Charlotte first 7s sold in October,
1891, at 118½ and received under the plan 120 per cent in bonds and 40
per cent in preferred stock; the Richmond & Danville consolidated 6s
sold at 109 and received 120 per cent and 45 per cent. It is clear that
the committee desired to reduce the interest which the various classes
of bonds should have a right to demand, and that it expected to make
compensation by means of preferred stock on which payments should be
made if earned. So much of its scheme was commendable. On the other
hand, the rates of exchange of old securities for new were in many
cases ill-advised. The reduction in fixed charges was to be $1,819,837,
although by the exchanges alone the capitalization was to be increased
by over $50,000,000. The charges on the system had amounted in 1891
to $9,474,837.[356] Net earnings had been $8,744,736. Fixed charges
under the plan were to amount to $7,666,000. As a matter of fact they
would have been greater than this, for some of the old bonds would have
remained outstanding, and the estimate did not include interest on any
bonds issued for improvements. The floating debt was to be retired by
the sale of new securities, namely, $18,235,800 new first mortgage
bonds and $6,382,530 preferred stock. These were to net $14,588,640, or
sufficient to cancel a debt of $6,310,000 and car trusts of $2,369,564
and to provide a balance for miscellaneous uses. A syndicate guaranteed
the sale, but holders of stock or of collateral trust 5 per cent bonds
were to be allowed to subscribe up to 16 per cent of their holdings
at the rate of $800 for one new mortgage bond and $350 in new stock.
New bonds to a maximum of $10,000,000 were to be issued only for the
acquisition of additional property, while beyond this the vote of
a majority of preferred stock was to be required to authorize any
additional mortgage on property covered by the first mortgage.[357]
Such was the plan laid before securityholders. It proposed a
considerable reduction in fixed charges, though probably not enough to
put the company out of danger, and a large increase in new securities.
It failed because it imposed losses upon the wrong parties. As between
the various classes of bonds its terms were frequently inequitable. As
between the bonds and the stock it altogether favored the latter. It
levied no assessment, it compelled no subscription to new securities,
and in three cases only did it announce an intention of reducing the
nominal value of the stockholders’ holdings.[358] The original time
limit for deposits was set at April 14, 1892. This was subsequently
extended, but without effect, and on May 16 the Olcott Committee
announced that the plan had failed.[359]
The collapse of this attempt at readjustment was a blow to those who
had hoped for a speedy and amicable reorganization of the Richmond
Terminal system. On the same day that failure was confessed the
stockholders met and appointed Messrs. W. E. Strong, Samuel Thomas,
and W. P. Clyde a committee to confer with the Olcott Committee to
ascertain what had best be done. A week later General Thomas reported
a plan for the reorganization of the Richmond & Danville alone. The
Richmond Terminal Company, he said, should be wound up and be succeeded
by a new company with $43,000,000 of preferred stock and $70,000,000
of common. The present 6 per cent bonds should be given 170 in new
preferred stock; the present 5 per cent bonds and preferred stock par
in new preferred stock; and the present common should receive par in
new common and be compelled to subscribe for $8,000,000 collateral
trust two-year 6 per cent notes at 92½.[360] This amounted to an
assessment of 10 per cent upon the common. It was not proposed to pay
off the floating debt with the proceeds of this assessment, but to buy
the claims held by bankers, and, if necessary, foreclose these claims
and take possession for the stockholders. If the full amount should not
be subscribed by the stockholders the preferred stock was to have the
right to make subscription for the balance, and to take the securities
that would have gone to the non-paying common stock; and the common
stock not subscribing was to have no rights to the common stock of the
new company.[361]
That this scheme was much more radical as well as more limited than
the Olcott plan appears upon its face. No serious attempt was made to
carry it into effect. On suggestion of General Thomas the stockholders’
meeting voted that a consulting committee of fifteen be appointed by
the chair to confer with the committee of three, and then adjourned
subject to call.[362] The enlarged committee found that application
had been already made to Messrs. Drexel, Morgan & Co. by a number
of prominent banking firms, asking that they enter upon the work of
reorganization. It therefore dropped the Thomas plan and joined in the
petition. Drexel, Morgan & Co. on their part agreed to undertake an
examination of the Terminal property,[363] but four weeks later replied
that while in their opinion a reorganization was feasible, the lack of
assurance of support from Mr. Clyde made them unwilling to undertake
the task.[364]
At this point efforts at reorganization were checked. One plan had
failed, one had been formulated but not pushed forward, and the task
of creating a third had been refused by the banking firm which was
apparently best able to carry a plan to a successful conclusion. For
a time now the field was left to the disputes between members of the
Richmond Terminal family, which made up in bitterness for what they
lacked in the matter of valuable result. Mention will be made only of
the wrangles between the Central of Georgia and the other parts of the
system.
The Central of Georgia had been placed under a receiver of its own
some two weeks before the publication of the Olcott plan. Some months
later this receivership was made permanent, and the Richmond Terminal
was enjoined from voting the 42,200 shares of Central stock which it
held. It can scarcely be said that the withdrawal of the Central of
Georgia from the Terminal system was unwelcome to the latter. Already
the Richmond & Danville had refused to carry out its guarantee on the
Central’s stock unless that company should deposit bonds to cover an
alleged sum due from it,[365] and President Oakman had hastened to
inform General Alexander, the temporary Central receiver, that the
Richmond & Danville would not operate the Central of Georgia after the
end of the temporary receivership.[366] When, however, the Central not
only insisted on withdrawal, but asked Judge Speer, of the District
Court of Macon, Georgia, to appoint a receiver for the Richmond &
Danville Railroad on the ground that that company was insolvent and
was indebted to the Central in the sum of $2,459,670,[367] prompt
action was made necessary. Application was made to Judge Bond of the
Circuit Court for the Eastern District of Virginia, and on June 16
this magistrate appointed Messrs. F. W. Huidekoper and Reuben Foster
receivers of the Danville road.[368]
“This appointment of receivers by Judge Bond,” explained the parties
responsible,[369] “is not only not inimical to nor in opposition to
any plan for the financial reorganization and rehabilitation of the
Danville system, but will be found to greatly facilitate and aid
any plan of reorganization, while if the Georgia court had obtained
possession of and jurisdiction over the Danville system this would
have been rendered practically impossible.... The necessity for such
action,” they continued, with a touch of pathos, “will be further
appreciated when it is known that for some weeks past the Richmond &
Danville Company has not been able to keep either a dollar in bank or
in its safes within the state of Georgia, because every such dollar
has been attached or garnished by parties alleging claims against the
company, and even the money sent by express for the liquidation of
pay-rolls has been attached in the hands of the express company, and
in every instance enormous bonds have been required to release such
moneys....”[370]
The temporary securing of their position by the receivership allowed
the Danville people to hit back at the Central in its weakest point—
the details of the sale to the Terminal of the Georgia Central Company.
On August 19 the Advisory Committee of Seventeen of the Terminal
securityholders declared that the investigations of their sub-committee
showed that certain trustees of the company, with their friends, had
profited to the extent of between three and four million dollars in
this operation.[371] Toward the end of the year tender of the Georgia
Company stock and bonds was made back to the original vendors and was
refused.[372] In December suit was begun to set aside the purchase on
the ground that there had been no ratification sufficient in law or
equity to bar the stockholders from cancelling the transaction. The
plaintiff charged that “the said combination and plan so formed by and
between its president and divers of its directors [referring to the
purchase of the Georgia stock], confederating with the other syndicate
defendants for the purpose of selling their unsalable and discredited
securities to the plaintiff at such prices as yielded them an enormous
profit and necessarily imposed on plaintiff a heavy yearly loss,
was contrary to equity and good conscience, and that the pretended
contract dated October 26, 1888, ... and all the acts done in pretended
purchase of the stocks and bonds of said Georgia Company ... and the
taking from the assets and money of the plaintiff of over $7,000,000
cash ... to put into the pockets of the said faithless directors, the
syndicate defendants, and their confederates, were all acts planned
... and performed by said Inman, or under his direction, in the
execution of such original fraudulent scheme, combination, purpose, and
confederacy....” And so the plaintiff prayed the court to decree the
contract of purchase void.[373]
These accusations and counter-accusations, justified though many
of them were, had little direct bearing on reorganization. In this
progress had completely ceased. At the same time some progress was
urgently required. The Richmond Terminal, the Richmond & Danville, and
the Central of Georgia were in the hands each of a different set of
receivers, unpaid interest was piling up, and the year 1893 was to show
a marked decline in earnings. Necessity and mutual distrust dictated a
second appeal to Drexel, Morgan & Co. to undertake the rehabilitation
of the property. On February 2, 1893, the following letter was
addressed to the firm in question:
Messrs. Drexel, Morgan & Co.,
Gentlemen: Since the time you were previously requested to
take up the reorganization of the Richmond Terminal system
much time and thought have been devoted to its affairs, and we
realize that adverse financial conditions and also the present
general distrust of all plans for the restoration of this
system require that, to be successful, its reorganization must
be undertaken by parties possessing the confidence of both the
securityholders and the public, and also the financial strength
sufficient for its accomplishment. We therefore ask you to take
up this reorganization of the Richmond Terminal and its allied
properties, each pledging you our personal support and aid in
full confidence that the securityholders will support us in this
request.
We appreciate the labor and responsibility connected with this
undertaking, and are therefore willing to do all in our power
to give you full control of the reorganization, as suggested in
your letter of June 28,[374] and to advise our friends and the
securityholders generally to deposit their securities, without
requiring the assurances customary in such cases.
Very respectfully,
WM. P. CLYDE,
GEO. F. STONE,
WM. E. STRONG,
J. C. MABEN,
THOMAS F. RYAN.
This letter was accompanied by a letter from F. P. Olcott, president
of the Central Trust Company, pledging his support. Inasmuch as lack
of the assurances contained in this correspondence had alone prevented
Drexel, Morgan & Co. from undertaking the task proposed the previous
year, their prompt though conditional acceptance was not surprising.
A definitive engagement to attempt the work followed on April
12.[375] The enlistment of Drexel, Morgan & Co. in the reorganization
provoked general satisfaction. Mr. Hollins, of the Central of Georgia
reorganization committee, expressed his pleasure in having responsible
parties to deal with not connected with any past differences.[376] The
directors of the Richmond Terminal urged all classes of securityholders
to deposit, and the Clyde Committee was emphatic in its recommendation.
It was recognized that the situation was the most favorable which could
be hoped for. No group of Southern railroad financiers seemed capable
of producing a fair reorganization plan, and it was also probable
that no plan from such a source, however fair, would have received a
sympathetic welcome. Drexel, Morgan & Co., on the other hand, were both
capable and sure of a hearing.
There was remarkably little delay in making public the Drexel-Morgan
plan. Less than three weeks after their final acceptance of
responsibility, though about three months after the correspondence of
February 2, the firm published a comprehensive plan, to the examination
of which the next few pages may be devoted. The principles of this plan
of May 1, 1893, were simple, and were clearly and convincingly set
forth. The property to be considered was to be that of the Richmond
Terminal, the Richmond & Danville, and the East Tennessee. The Central
of Georgia was to be omitted. The imperative needs of these properties
the plan declared to be two:
First, the provision of a large sum for the physical improvement of the
system;
Second, the reduction of fixed charges to an amount which the companies
could earn.[377]
The physical condition of the above roads in 1893 was extremely bad.
“One obvious trouble ... is,” said the plan, “that their maintenance
and repairs have been neglected. Another is that, while nearly all
the lines in the United States have been steadily substituting solid
roadbeds, heavy equipment, and other modern facilities for the light
and ineffective appliances formerly in use, these lines, because of the
constant drain to which they were subject for the obligations assumed,
and from the necessities of the Terminal Company for the payment to
it, as dividends, of every available dollar with which to meet its
own obligations, have not been in a financial condition to keep up to
the times in this respect, and now they find themselves so far behind
as to be, to a considerable extent, unqualified to handle business
with economy, or to compete successfully with other lines.”[378] The
financial condition was little better. The absolute fixed charges of
the Richmond Terminal, the Richmond & Danville, and the East Tennessee
systems, viz., interest on bonds held by the public, rentals, equipment
notes, and sinking funds, and interest on floating debts, receivers’
certificates, etc., the plan declared to amount annually to about
$9,900,000. The entire net earnings for the fiscal year ending June
30, 1893, were estimated at $7,000,000. The result was a deficit for
the year of about $2,900,000. This state of affairs required serious
sacrifices from somebody. The Olcott plan had illustrated the folly of
laying the burden largely on well-secured senior bonds. The Drexel plan
proposed to demand the necessary concessions from the junior bonds and
from the stock. “About $74,000,000 of the bonds and guaranteed stocks
of the Richmond & Danville and the East Tennessee systems held by the
public,” it continued, “are on properties which are believed for the
most part to afford adequate security, and for this or other reasons
this plan has not sought to disturb them. About $50,000,000 (mostly
recent issues) are junior liens, inadequately secured, or else are on
new or branch lines of uncertain earning capacity, and the holders,
in self-preservation, must make such reasonable concessions as the
situation necessitates, taking compensation therefor in preferred or
common stock of the new company....”
The tools of the reorganization were to be the following new issues:
$140,000,000 first consolidated mortgage and collateral trust 100-year
5 per cent bonds, secured by mortgage and pledge of all the property of
the new company. This total might be subsequently increased to acquire
the whole or part of the Georgia Central system, or to acquire the
ownership of the Cincinnati Southern Railway or any other line as a
substitute therefor.
$75,000,000 5 per cent non-cumulative preferred stock.
$160,000,000 common stock.
“The general theory of adjustment of disturbed bonds,” said the plan,
“is to substitute for them the new 5 per cent bonds to such an extent
as is warranted by earnings and situation of the properties covered by
the present mortgages, and the new preferred stock for the remainder of
the principal. In some cases, where the bonds are on properties of no
actual and little prospective earning capacity, a more severe reduction
is necessary. In several instances, where the bonds are on properties
which are likely to improve more rapidly than other disturbed parts of
the system, this fact is recognized, and an extra allowance is made
in compensation. Finally, in one or two cases, where the bonds are on
properties the loss of which would adversely affect the rest of the
system, a proper recognition is made of this fact.” In practice not
only bonds and preferred stock, but preferred and common stock, or even
common stock alone were exchanged for old securities of little value.
This provided for old securities but not for cash requirements. To
raise cash three devices were resorted to, all of which bore entirely
on the junior securityholders or on the stock. The most direct was the
levying of an assessment. Terminal common stock was assessed $12.50
per share, East Tennessee first preferred $3, second preferred $6,
and common stock $9; new preferred stock being in each case given in
return. This distribution was based on the idea that the stockholders
of each railroad should provide for its floating debt. The floating
debt of the Richmond & Danville was about $7,000,000, that of the
East Tennessee about $3,000,000, and that of the Richmond Terminal
about $100,000. But since the last named held practically all of the
Richmond stock and a considerable proportion of the East Tennessee,
its stockholders were saddled with a total of $8,300,000 or an
equivalent of $12.50 per share, while the East Tennessee was taxed
proportionately. The rest of the cash requirements were covered by the
sale of $8,000,000 new bonds at 85, and $33,333,000 new common stock at
15. Depositors of all classes of Terminal securities and of all classes
of readjusted securities of the other systems were allowed to subscribe
to the extent of $1000 in a new bond and $4000 in new stock trust
certificates for each $22,000 par value of stocks or bonds deposited.
The balance of the issues was looked after by an underwriting
syndicate.[379]
Future capital requirements were provided for mainly by new bonds.
$35,383,000 in new 5 per cents were set aside to be used only for new
construction, betterments, purchase of rolling stock, and extensions
and additions to the system. Not over $2,500,000 of these were to be
used in any one calendar year; except that, in addition to this annual
appropriation, a total of $3,000,000 in bonds might be specifically
appropriated with the unanimous consent of the stock trustees, for
the building of branches or extensions, if undertaken within three
years after the creation of the new mortgage. All property acquired
with these bonds was to be brought under the lien of the new mortgage.
$8,000,000 of the cash raised by assessment and sale of securities,
moreover, were to be available for new construction and equipment on
the Richmond & Danville and the East Tennessee. And, finally, there was
provision for the limitation of new bond issues, for a voting trust and
for the consolidation of the Terminal system.
“The ultimate object of the reorganization,” said the plan “(excluding
the Georgia Central Company from consideration), is to have the new
company acquire, so far as practicable, the ownership of the Richmond &
Danville and East Tennessee systems, including the various securities
now owned by the Terminal Company ... and the securities pledged for
the Richmond & Danville and East Tennessee floating debt....
“Both classes of stock of the new company ... are to be issued to
three Stock Trustees, who shall be appointed, on or before completion
of reorganization, by Messrs. Drexel, Morgan & Co. The stock shall be
held by the Stock Trustees and their successors, jointly, for five
years, and for such further period (if any) as shall elapse before the
preferred stock shall have paid 5 per cent cash dividend in one year,
although the Stock Trustees may, in their discretion, deliver the stock
at an earlier date....
“No additional mortgage shall be put upon the property to be acquired
hereunder by the new company, nor shall the authorized amount of the
preferred stock be increased without the consent in each case of the
majority in amount of the preferred stockholders.”[380]
The result of all these provisions was to be a cancellation of the
floating debt, a reduction in fixed charges, and a decrease in mortgage
bonds; though inevitably also an increase in stock outstanding.
The plan proposed to disturb $49,117,900 of outstanding bonds, or,
including the Richmond Terminal 5s and 6s, a total of $65,617,900. But
the new bonds which it offered in exchange amounted to $19,806,700
only. On the other hand it took $111,819,550 in stock from the hands
of the public, and offered $165,559,514 new stock in the course of
the exchanges.[381] This was very conservative, since the increase
in total capitalization through these exchanges was less than 4½ per
cent; and less too than the cash assessment for which preferred stock
was allowed. Somewhat greater increase in securities appears if we
consider, not only the exchanges, but the provisions of the plan as
a whole; for here we must include $33,300,000 new common stock and
$8,000,000 new bonds issued to retire in part the $12,900,000 of
floating debt and for other purposes. Even so the net increase was
only 6 per cent.[382] The natural result was a considerable reduction
in fixed charges. The absolute fixed charges of the system in 1893 the
plan stated to be $9,900,000. The fixed charges under the plan were to
be $6,789,000. This was certainly a step in the right direction. It was
the point, nevertheless, at which the plan was weakest. The clauses
which have been outlined made abundant and conservative provision
for cash requirements; and the sums which they allowed for future
development were not on their face inadequate; but the reduction in
fixed charges was less than should have been ensured. The net earnings
for the year ending June 30, 1892, were $7,725,000, and those for 1893
were estimated by the plan itself as not likely to exceed $7,000,000.
This would have left $936,000 over the proposed fixed charges in 1892
and $211,000 in 1893:—or a surplus of some 3 per cent in the latter
year. This was altogether insufficient. It not only put out of the
question dividends on the $200,000,000 of stock, but it precluded the
partial improvement of the road from earnings, and left the system at
the mercy of the slightest decrease in the annual returns. Compared
with previous fixed charges the plan proposed noteworthy reductions;
compared with the earnings of the lines involved it did not go far
enough.[383]
The reception of the Drexel-Morgan plan was, nevertheless,
satisfactory. Certain concessions were made to various classes of
bonds, and by June 17, over 95 per cent of the securityholders had
given their assent.[384] Unfortunately the earnings of the property
now steadily decreased. The gross receipts of the Richmond & Danville
proper were 15 per cent less in 1893 than in 1892; and Terminal system
lines which had earned $6,100,000 in 1892 earned $5,300,000 in 1893,
and promised to earn some $4,250,000 only in 1894. This decrease
was common to the country at large. It was of peculiar importance,
however, in emphasizing the weak point in the Drexel plan. From January
1 to July 1, 1893, the Terminal floating debt, exclusive of car trusts,
increased $2,600,000. From July 1 to March 1 it increased at least
a million more. The reorganization plan had been prepared “on the
assumption that, during reorganization, the receivers of the various
properties could provide for the interest charges on the undisturbed
securities, as well as accumulate a sum sufficient for the interest
accruing on the ‘disturbed securities’ as readjusted.”[385] As it
turned out, the receivers were obliged to make many defaults among
the undisturbed securities, and saved nothing for the disturbed. Some
modification of the published plan had perforce to be arranged.
These modifications were detailed in a pamphlet dated February 20,
1894. They comprised three proposals:
(1) To exclude from the reorganization certain unprofitable properties
which had previously been included. Certain alterations had already
been made toward this end in the exclusion of the Erlanger line, the
Memphis & Charleston, and the Mobile & Birmingham. Further modification
was to exclude the Northeastern Railroad of Georgia, the Macon &
Northern, and five other subsidiary lines.
(2) To fund for a year or two the coupons on new bonds given for
certain securities, and to provide in other cases that the new bonds
should not bear interest till 1895 or 1896.
(3) To lighten the assessment on Richmond Terminal and East Tennessee
common stock, and to allow to all assessed securities one-quarter of
their assessment in bonds and three-quarters in preferred stock instead
of all in preferred stock.
At the same time a few other modifications allowed to some bonds a
more liberal grant of new securities than they had obtained in May.
It was hoped by these means to raise the average earning ability of
the system, while reducing the new securities to be issued.[386]
The temporary funding of coupons further lightened fixed charges
until business should have had time to revive. “Under the plan as now
modified,” stated Drexel, Morgan & Co., “and assuming that one-half of
the new bonds to be sold are used in 1894 and the other half in 1895,
the fixed charges are estimated at about
$4,100,000 in 1894,
4,700,000 in 1895,
5,400,000 in 1896.[387]
“The depression in the South began in 1890–91. There would appear to
be no reason why in a comparatively short time these properties should
not very easily earn, _gross_, as much as and more than they earned in
that fiscal year, viz., over $21,000,000. Operated at 70 per cent ...
there would remain, say $6,600,000 net against an interest charge of
$5,400,000.”[387]
The reduction in assessments was made possible by the decrease in
mileage. Although the floating debt had increased $2,600,000 from
January 1, 1893, and the equipment notes recorded were greater by
$1,048,000,[388] yet the debt to be provided for by the modified plan
of 1894 was estimated at only $12,200,000. Besides this the cash to be
reserved for new construction was reduced $3,000,000, and the surplus
for expenses and contingencies $1,380,000. Assessments were therefore
set at $10 a share on Richmond Terminal common instead of $12.50; $7.20
on East Tennessee common instead of $9; and $3 and $6 on East Tennessee
first and second preferred as before. The new securities to be sold
were reduced correspondingly to $8,000,000 of bonds and $25,000,000
of common stock. Finally, the bonds to provide for new construction,
betterments, and additions were reduced from $35,383,000 to about
$19,000,000, of which not over $2,000,000 (instead of $2,500,000) were
to be used in any calendar year. Other provisions of the earlier plan
were to remain unchanged.
It was this modified plan which was carried to a successful conclusion.
In principle it did not mend the weak spot in its predecessor of
May. That plan had contemplated a surplus of $211,000 over fixed
charges for 1893. This estimated charges at $4,100,000 for 1894 and
net earnings at $4,250,000 on a somewhat reduced mileage. There was
not to be more left for dividends and improvements than there had
been before, while the cash and bond provisions for improvements
were notably reduced. The concession of bonds to stockholders for
one-quarter of their assessments was unsound financiering, as was,
on the whole, the funding of coupons on the new mortgage bonds. The
success which the modification had, nevertheless, in restoring the
company to solvency, was due to the improvement in earnings which soon
took place. The original plan had based its calculations on the first
year of depression; the amended plan kept charges down till three years
had elapsed. By that time business had begun to mend, and all danger
of bankruptcy was past. Other points in either plan leave little to
criticise.
The modifications to the original plan were issued on February 20,
1894. Over 75 per cent of the system bonds had assented by March 24.
At one foreclosure sale after another the reorganization committee now
bought in the portions of the old system covered by the plan. Suits
against the Richmond Terminal had been brought under the two collateral
mortgages, and on July 13, 1893, the reorganization committee bid in
the pledged securities. On February 6, 1894, it bought the remaining
assets of the Terminal Company; on June 15 it bought the Richmond &
Danville, and on July 7 the East Tennessee, Virginia & Georgia. Two
trustees’ sales, one receivers’ sale, ten foreclosure sales, and six
conveyances without foreclosure had occurred by September, 1894, and
more minor sales were in progress.[389] On June 15 the Southern Railway
Company was organized with a charter from the state of Virginia, and
took over in succession properties to the extent of 4607 miles.[390]
Samuel Spencer was elected president. Some thirty corporations were
swept away and thirty boards of directors abolished; for the Southern
Railway was an operating company, and, unlike the Richmond Terminal
and the Richmond & Danville, controlled but an inappreciable fraction
of its mileage through the ownership of stock. The new securities
were issued at the proper times, and according to the plan the common
and preferred stock was turned over to three voting trustees,[391] who
issued trust certificates in their stead.
This completed the reorganization of the Richmond Terminal Company so
far as the principal part of its mileage was concerned. The portions
of the system excluded from the plan have been to some extent bought
back in later years. Control of the Alabama Great Southern was bought
in 1895; the Memphis & Charleston was acquired in 1898; the Richmond
& Mecklenburg was leased in 1898 and the Mobile & Birmingham in 1899;
and the Northeastern of Georgia was bought in 1899. The system has
not yet, however, fully regained its old position. The most important
loss has undoubtedly been that of the Central of Georgia. We left this
company engaged in active disputes with the Terminal management. During
1892 and 1893 efforts to reorganize it were made under the leadership
of Hollins & Co. The principal difficulties were the large floating
debt and the money required to put the property into good physical
condition.[392] A plan was actually prepared at the beginning of 1893
and submitted to securityholders, but failed because of that same
decline in earnings which had caused the modification of the Terminal
reorganization plan. A second plan, prepared in 1894, had a better
fate,[393] and in modified form was put into effect. The _Railroad_ was
sold at auction in 1895, the Central of Georgia _Railway_ was organized
to take its place,[394] and the corporation entered upon a new career
which we have not space to follow.[395]
As for the Southern Railway, the years from 1895 to 1907 have brought
it prosperity. It has extended considerably in mileage. Besides
reacquiring lines which formerly were part of the Richmond Terminal
system, it has grown south to Jacksonville and Palatka, east to
Charleston and to a more direct connection with Norfolk, and west from
Louisville to East St. Louis. It has further joined its Louisville-East
St. Louis line to Chicago by acquiring a half-interest in the Monon,
and to the rest of its system by a half-interest in the Cincinnati,
New Orleans & Texas Pacific; and it has bought control of the Mobile
& Ohio, which stretches through four states from East St. Louis to
Mobile. Instead of 4392 miles as operated on June 30, 1895, it now
reports 7546. The earnings of the system have increased more rapidly
than its mileage. The revival of business after 1897 occurred with
singular force in the South, and seems to have introduced there a new
industrial era. As a result, the Southern’s gross earnings have trebled
and its net earnings have been multiplied by two. Passenger receipts,
which were $4,329,499 in 1895, have become $14,683,006 in 1907. Freight
receipts have increased from $10,816,024 to $37,368,095.
It has been this increase in earnings which has at last allowed some
of that margin for improvements which the reorganization plans weakly
attempted to secure. And accordingly, large sums have been expended.
Maintenance of way charges are now over $1000 per mile instead of
$630. Expenses per locomotive mile have increased from 4.19 cents in
1895 to 7.54 cents in 1907; expenses per passenger car mile from .83
to 1.03 cents; and expenses per freight car mile from .47 to 2.18
cents. It is true that locomotives and cars are larger to-day and
that rails are heavier, but this fact is far from accounting for the
difference. Not only has the existing plant been kept in good repair
from earnings alone, but distinct improvements have been made. New
rail has been laid, additional ballast put in, wooden trestles filled
or replaced with steel. It was estimated in 1906 that $5,000,000 had
been spent in betterments and charged against income up to that time,
besides some $15,000,000 more paid for equipment out of earnings.
Meanwhile considerable sums had been spent from capital account. The
reorganization plan allowed for some $19,000,000 of new bonds to be
sold at the rate of $2,000,000 per year.[396] Of these the company had
sold $13,000,000 for improvement of the property by February 1, 1906,
besides disposing of some $23,000,000 of equipment obligations.
The appreciation of the need for still more liberal expenditure led
in 1906 to a comprehensive plan for the issue of new capital. Under
date of February 1, the company submitted to its voting trustees[397]
a scheme for a $200,000,000 mortgage, of which $15,000,000 were to
be issued at once and the rest were to be reserved. Of the immediate
issue $4,962,774 were to refund payments for equipment hitherto made
and charged to capital; $3,501,000 were to refund investments in
securities of, and advances to, subordinate companies, as well as
to be used for the acquisition of property not heretofore funded;
and $6,536,226 were for double track, revision of grades, new yards,
shops, etc. Of the securities reserved, $65,164,000 were for refunding
purposes: $20,000,000 for certain subsidiary lines: and $99,834,000
to go, first, for betterments and improvements on the entire system
and for new equipment in amounts not exceeding $5,000,000 in each
year; and second, in exchange for first mortgage bonds not exceeding
in amount the actual cost of railroads and terminals hereafter to be
acquired. In other words, about one-half of the total issue is to go,
sooner or later, for improvements, and the rest for refundings and for
new acquisitions.[398] It was believed that the Southern could readily
pay the interest on the increased immediate issue without endangering
dividends on its preferred stock, and that the subsequent increases
in earnings would more than provide for whatever additions to charges
might occur. Negotiations for the placing of the new securities were
concluded with J. P. Morgan & Co. at a reported price of 96½.
The results of the expenditures for improvements have been remarkable.
In 1895 the Southern Railway had in use 623 locomotives; in 1907 the
number was 1536. In the former year there were 487 passenger cars and
18,924 freight cars; in the latter there were respectively 995 and
56,225.[399] Only 370 miles of track in 1895 were over 65 pounds in
weight per yard; more than 3100 surpassed that limit in 1907. It is
nevertheless in its inability to handle the business offered it that
the Southern has provoked sharpest criticism. Over 3600 miles of its
system still have rails weighing 62 pounds or less to the yard;—that
is, rails incapable of meeting modern operating conditions. Only 206
miles of double and 1981 of side track exist. Equipment appears to
be still inadequate. Signals are imperfect, and speed and promptness
seemingly impossible to attain. The late tragic death of Mr. Spencer
was a forcible illustration of the deficiencies of the road which he
had done so much to improve.
The earning power of the system cannot yet, therefore, be said to be
secure. Moreover, the capitalization of almost $72,000 per mile,[400]
as well as the less dense railroad business in the South, the slight
construction of many of the Southern Railway lines, the lack of
adequate facilities which compels an operating ratio of 76 per cent,
and the absorption of minor roads less prosperous than the main stem,—
all these factors have kept down the net surplus from operation. On
the other hand, the management is making an earnest attempt to raise
the standard of the property. Bonds and notes to the par value of over
$32,000,000 have been sold to provide for additions and improvements
during the past year, and a very great change for the better has taken
place. Dividends on the preferred stock have been paid since 1897. As
the country develops, and as the sums spent upon improvements come more
and more to have their effects, a dividend upon the common stock will
be paid. The near future is more likely to witness the cessation of
dividends upon the preferred.