ATCHISON, TOPEKA & SANTA FE
Charter—Strategic extensions—Competitive extensions—Effect
on finances—Raise in rate of dividend—Reorganization of
1889—Acquisition of the St. Louis & San Francisco and of the
Colorado Midland—Income bond conversion—Receivership—English
reorganization plan—Mr. Little’s report—Final reorganization plan
—Sale—Subsequent history.
The Atchison, Topeka & Santa Fe Railroad has been reorganized twice, in
1889 and in 1893–5; the first time without, but the second time after
a foreclosure sale. The keynote of its history has been extension. It
was the enterprise of the men in control before 1889 which gave it the
position and power it holds to-day, but it was also that enterprise
which necessitated its first reorganization by imposing upon it heavier
burdens than it could bear.
Chartered in Kansas in 1863, the Atchison spread west, southwest,
south, and northeast. It received some aid from the state of Kansas in
the shape of a grant of lands, but depended primarily on the investment
of private capital. Kansas itself was not, in 1870, a very encouraging
field for railroad building. It had been admitted as a state only in
1861, and could boast for the most part of less than two inhabitants
to the square mile;—although settlement was pushing westward with
considerable rapidity, and stores of mineral wealth had been discovered
in Colorado. The railroad in those days had to create its own traffic,
and population followed the means of transportation. The peculiarity of
Kansas was a central position, which lent itself to schemes of the most
far-reaching nature. A railroad reaching from one end of the state to
the other might almost equally well have been extended to California,
to Chicago, or to the Gulf; and could be sure in time, if it survived,
of the carriage of a vast volume of traffic out in every direction
from the Central West. The Atchison managers saw this opportunity, and
courageously and persistently endeavored to realize it;—part of the
project they announced, and part they kept back till the fitting time
should come.
The systematic extension of the Atchison Railroad may be divided into
four parts:
(1) The construction through Kansas to Colorado, to save the charter,
then down the valley of the Rio Grande to Albuquerque.
(2) The securing of a connection with the Pacific Coast by
construction, lease, or traffic agreement.
(3) The connection with the Gulf.
(4) The connection with Chicago.
As the system neared completion, and its territory came to be invaded
by other roads, there were added to this systematic extension what
may be called competitive extensions, consisting largely in the
construction of branch lines, and multiplied beyond anything which the
country could need for years to come. This sort of building was most
prominent from 1884 to 1888 and will be considered in its place.
The first stretch of road was built with few difficulties or
complications. It was commenced in 1869, and, after numerous delays, it
reached the western border of the state of Kansas on December 28 of the
same year; from this point it went on more leisurely, first west and
then southwest, to Albuquerque.[401] These early miles were paid for
from the proceeds of both stocks and bonds. From Albuquerque a variety
of routes presented themselves. The Southern Pacific had by that time
built to El Paso, and it was feasible to extend the Atchison to that
point and to rely on a traffic agreement for the handling of the
western business. Or, building to Deming near El Paso, Atchison might
have extended its line down the river valleys in the northwestern part
of Mexico to Guaymas on the Gulf of California. Or, Atchison might have
built directly west from Albuquerque. All three of these routes were
considered, and all three were eventually carried out.[402]
The connection with the Southern Pacific was not a very difficult
one to make, and the Atchison reached Deming in March, 1881. By the
traffic agreement then concluded the Atchison secured the use of the
Southern Pacific tracks from Deming to Benson, Arizona, and arranged
to build south into Mexico from this point; while the Southern Pacific
was allotted 51 per cent of the through rate on traffic passing over
Southern Pacific lines.[403] This formed the second through route
from the East, and in September, 1881, it took one-quarter as much
business as the Central Pacific. It was also the first of Atchison’s
projected routes to be completed. The line to Guaymas was added by
purchase. Instead of building, Atchison exchanged its stock for the
stock of the already existing Sonora Railroad in the proportion of one
to two, and guaranteed the interest on the Sonora first mortgage 7
per cent bonds.[404] This made up for the lack of an independent line
to the coast further north. The total of Sonora stock was $5,400,000,
requiring $2,700,000 Atchison stock in exchange. The total first
mortgage 7 per cent bond issue was $4,050,000. With the railroad came
a subsidy of $2,608,200 (American gold), equal to $11,270 (Mexican)
per mile. This subsidy kept cropping up in Atchison finance for some
time, and was finally adjusted in 1896 by the transfer to the company
of $1,159,800 in 3 per cent bonds of the Mexican Interior Consolidated
Debt.
For the direct route President Strong sought the help of the St. Louis
& San Francisco, and the use of the charter of the Atlantic & Pacific
which it owned. The Atlantic & Pacific was a road incorporated in 1886,
with a charter to build from St. Louis to California. In spite both of
its charter and of its name it had never gone further west than Vinita,
in the northeast corner of Indian Territory.[405] President Strong and
the Frisco now agreed to continue construction under the name of the
Atlantic & Pacific, both from Vinita and from Albuquerque. The Atchison
was to be given a half-interest in the charter, directors were to be
chosen equally from the two companies, and the cost was to be met by a
$25,000,000 loan, which the Atchison and the Frisco were to guarantee
jointly but not severally.[406] Before the new construction neared
completion, however, the St. Louis & San Francisco fell under the
control of Messrs. Gould and Huntington, who, as owners of the Texas &
Pacific and the Southern Pacific respectively, naturally disapproved of
the plan to extend the Atlantic & Pacific to the coast. The Atchison,
therefore, agreed to build no further west than the Colorado River. At
that point the Southern Pacific was to meet it with a line from Mojave.
The Southern Pacific gave to the Atlantic & Pacific an interest
guarantee on its bonds to the extent of 25 per cent of the gross
earnings derived from Atlantic & Pacific through business, and the
latter road retained all its rights for a line in California.[407] This
proved unprofitable, for the Southern Pacific persistently diverted
traffic to Ogden and El Paso, and in 1884 still another arrangement was
made. By this—
(_a_) The Atlantic & Pacific bought the Southern Pacific division
between the Needles (the Colorado River) and Mojave, 242 miles, for
$30,000 per mile, and, until such time as title could be given by the
discharge of the mortgage upon it, took a lease at an annual rental of
6 per cent on the purchase price.
(_b_) The Atlantic & Pacific secured trackage and traffic rights and
facilities between Mojave and Oakland and San Francisco, as well as the
use of terminals at the latter point.
(_c_) The Atchison (and the St. Louis & San Francisco likewise) agreed
to buy from the Pacific Improvement Company first mortgage bonds
and other securities of the Atlantic & Pacific of the par value of
$3,096,768, at the actual cost to the Improvement Company, to wit,
$1,524,356.
To complete the connection to the coast the Atchison built from
Waterman, some seventy miles east of Mojave on the Atlantic & Pacific,
to Colton on the Southern Pacific, and secured control of the
California Southern from Colton to San Diego.[408] In 1885 entrance was
obtained to Los Angeles by lease of the Southern Pacific track between
Colton and that city.[409]
The money for this rapid progress was obtained by the sale of both
stocks and bonds, but on the whole stock predominated. The directors
rightly considered it much more conservative to issue stock and sell
it at par than to load the road down with a heavy debt in the shape of
bonds; and what is more, they were able to make good their word, and to
sell stock at or near par in spite of the risk incident to operations
such as the Atchison was conducting and the frequent bonuses or stock
dividends declared.
By 1884, then, Atchison had reached the Pacific coast. The next great
steps were the extensions to Galveston and to Chicago. The year
of entrance to Los Angeles the Atchison did not cross the southern
boundary of Kansas. Certain of its stockholders were, however,
unofficially interested in the Gulf, Colorado & Santa Fe, which ran
from Galveston on the south to the Indian Territory on the north,
roughly 200 miles. In 1884 a charter was obtained for the Southern
Kansas Railway Company, a corporation organized solely to build south
from Arkansas City. The same year the Gulf, Colorado & Santa Fe
obtained permission to stretch north. The two roads met at Purcell in
the summer of 1887.[410] In 1886 the Gulf, Colorado & Santa Fe was
formally brought in. Gulf stock then amounted to $4,560,000 and bonds
had been issued to a limit of $17,000 per mile. For the entire capital
stock, subject to the above encumbrance, Atchison agreed to pay $8000 a
mile in Atchison stock, par value.[411] The final move was to get into
Chicago. “The Atchison Company has been much too conservative during
the last few years,” said the _Chronicle_, “and thus has allowed its
territory to be invaded.” The first intent was to build direct. There
were incorporated, in Illinois the Chicago, Santa Fe & California
Railway Company, and in Iowa the Chicago, Santa Fe & California Railway
Company of Iowa. In 1887 the Atchison was able to purchase the Chicago
& St. Louis Railroad, between Chicago and Streator, with a branch to
Pekin,[412] and to save itself construction between these points. The
whole line was opened for traffic in May, 1888.[413]
This completed Atchison’s systematic extensions before 1889. From a
local road in Kansas it had become a through route, taking freight
over its own rails from Chicago to Galveston and to the Pacific coast.
But especially in the latter eighties competition had become keen; and
to its strategic extensions Atchison was obliged to add competitive
building on an enormous scale. Of the 7000 miles in 1888, over 2700
had been added since January, 1886, and had been built, not to tap new
sources of traffic, but to defend what was thought to be Atchison’s
rightful territory by means of a desperate war of rates. “About three
or four years ago,” said a competent observer, “a mania seized three
great corporations (Atchison, Missouri Pacific, and Rock Island) to
gridiron Kansas with railroad iron, and each tried hard to see which
could cover the most ground, without regard to the character of the
ground, the result [being that] railroads were built where they would
not be required for ten years to come.”[414] Such roads could not
be expected to pay, and in fact did not. Even in the case of better
planned extensions, the lines had to be built in an unopened territory,
the traffic of which had yet to be developed. In Indian Territory,
Oklahoma, and Arizona, the bulk of the country had less than two
inhabitants to the square mile; in New Mexico and Lower California only
one-half of the area was more thickly settled; and it was largely from
this southwestern corner that local traffic for the Atchison had to be
built up.
The method of financiering these competitive extensions varied:
sometimes the parent company guaranteed the principal and interest
of the branch-line bonds; sometimes it took these into its treasury
and issued collateral bonds against them; sometimes, perhaps more
frequently still, it leased new roads for a rental equivalent to the
annual interest on their bonds. If the branches could have earned their
fixed charges the burden on the Atchison would have been nominal, but
as in large part they could not it was real and serious. In 1888 there
were actually paid in rentals, interest on Sonora Railway bonds, and on
sundry railway bonds, $2,361,300. Large sums were carried to capital
account. In 1888 there was an accumulated account of “due from sundry
leased, controlled, and auxiliary roads in construction and general
account” (net) $13,558,678, including various cash current construction
and other charges, which was carried as an asset, but which in
reality consisted of advances from which there was little or no hope
of return. Besides the claims for interest the parent company had in
practice other claims to meet. Where a branch failed to earn operating
expenses, as often happened, sums had to be advanced to keep the road
and rolling stock in repair. Thus the item “due from auxiliary roads in
current traffic and operation accounts” amounted in 1888 to $1,008,554.
Bills and accounts payable the same year were $6,553,775, and accrued
interest, taxes, and sinking funds totalled $915,337. The following
table shows vividly the effect upon the system of the rapid extension
of the years 1884 to 1888:
_Total System_
1884 1888
Mileage 2,799 7,010
Bonds 48,258,500 163,694,000
Stock (Atchison) 60,673,150 75,000,000
Gross earnings 16,699,662 28,265,339
Operating expenses 9,410,424 21,958,195
Net earnings from operation 7,289,237 6,307,145
Net profits, excluding dividends 5,147,883 def. 2,933,197
Net profits, including payments
for dividends and interest on
floating debt def. 5,557,323
Whatever may be said as to the necessity of extension, it is evident
that the position of the system by 1888 had changed for the worse. This
last-named year was a bad one, it is true, but certain evils of which
the directors then complained were permanent, and should have been
permanently allowed for. Some realization of the fact that the Atchison
might be going too fast appeared in the financial journals of the time.
“Were these undertakings less solidly backed,” said the _Railway Age_,
“there might be apprehension that enterprise was being pushed too far
and too fast.”[415] But on the whole the rapid growth and enormous
extent of the system seem to dazzle beholders. “The career of this
company,” said the _Railway Age_ again, “has been one of the marvels
of railway enterprise, and it would be unsafe now to attempt to fix a
limit to its extension or to the ambition of its Napoleonic president
and its bold and enterprising directors.”[416]
In 1887 the directors increased the rate of dividend from 6 to 7 per
cent.[417] The action was thoroughly unjustifiable, and the rate was
speedily again reduced. By the end of 1888 the main company was liable
to be called on any year to the extent of $8,625,365, which was the
amount of interest on auxiliary roads either guaranteed or payable as
rentals. In four years the mileage of the Atchison system had increased
150 per cent; its bonded indebtedness 239 per cent; its fixed charges
216 per cent; and its gross earnings only 69 per cent; while the
deficits on its branch lines were obviously not matters of bookkeeping,
and the value of interchanged business was not equal to the increased
burdens which the subsidiary lines imposed. The floating debt mounted
up, as is usual in times of trouble. From a total of $3,317,446 in
1884 it increased to $8,076,059 in 1888. To offset it the directors
secured in October, 1888, subscriptions to a $10,000,000 issue of
“guarantee fund,” three-year notes. Not all of the amount authorized
was to be sold at once, but from time to time Atchison was to call on
subscribers to take part of their subscription, and the notes were to
bear 6 per cent from the time they were put forth.[418] For the rest,
the directors economized as much as possible. Salaries were cut 10 per
cent in every branch of the service, beginning with the president, and
the unlucky 7 per cent rate of dividend was reduced to 6 per cent, to
2 per cent, and then to nothing at all in successive quarters. None
of these expedients proved sufficient. In fact, the situation was so
critical that nothing short of a general reorganization could probably
have secured the radical reduction in fixed charges which the company
required.
In September, 1889, accordingly, Messrs. Libby, Abbott, Peabody,
and Baring were appointed a committee to consider the broad question
of financial and general reorganization,[419] and in October a plan
for the complete rehabilitation of the company was brought forward.
The obligations with which the plan had to deal are indicated in the
following table:
_Obligations of the Atchison Company in 1889_
_Principal_ _Interest_
Bonds, guarantee fund notes $160,786,000 $9,203,620.00
Contingent issue of additional bonds 775,000 38,750.00
Car trusts 1,445,660 86,739.60
------------ -------------
$163,006,660 $9,329,109.60
Less interest on bonds and guarantee
fund notes owned by the Company 253,340.00
-------------
$9,075,769.60
Sinking Fund 359,000.00
Taxes 1,221,000.00
Rentals 502,000.00
--------------
$11,157,769.60
Of the bonds outstanding $56,498,000 were direct loans upon the
Atchison’s main lines, bearing anywhere from 4½ to 7 per cent, and
$104,288,000 were bonds upon some of the thirty-two subsidiary
corporations for whose obligations the Atchison was responsible.
The dealing of the Libby Committee with this situation was intelligent
and comprehensive. It proposed an increase and simplification of
securities, a decrease in fixed charges, and a cancellation of the
floating debt. In place of the forty-one classes of bonds outstanding
it suggested that two grand issues be put forth, one of 4 per cent
general mortgage bonds to the amount of $150,000,000, and one of 5
per cent income bonds to a total of $80,000,000. From these issues
$13,750,000 should be used to provide for cash requirements,[420]
and the remainder should be employed in direct retirement of old
obligations. The exchange of some $216,000,000 of new bonds for
$163,000,000 of old was to mean an increase in securities outstanding,
but since interest on only part of the new bonds was to be obligatory
fixed charges were to be less than they had been before. The managers
figured on what the property could earn, good times or bad, and
capitalized this sum into 4 per cent general mortgage bonds. They
then calculated the difference between this and the former return to
bondholders, and capitalized the difference into income bonds.[421]
Each individual bondholder, therefore, was offered a chance to receive
the same return which he had previously enjoyed, although his right to
demand an annual payment was limited to an amount which the road could
earn.
A few points deserve to be specially noticed. The reduction in interest
was sufficient to have transformed the deficit for the whole Atchison
system for 1888 into a respectable surplus, providing that no dividends
had been paid; but this reduction was dependent on the retention of the
income bonds as optional obligations. There was no cash assessment. Had
the reorganization taken place in a time of general depression, the
sale of securities for cash would probably have been impossible, but
the days of depression had not yet arrived. The stockholder suffered
in the introduction of the principal of some $67,000,000 additional
indebtedness between him and his property, although he was not called
upon directly; but it should not be forgotten that for a long while
the Atchison stockholders had received very liberal dividends, both in
stock and in cash, and could not well complain of the moderate loss now
necessary. There was no voting trust, although one was proposed, and
the bonds were not even temporarily given voting power. The situation
seems to have been that the securityholders thought it more to their
advantage to reduce voluntarily the rate of interest than to force
a foreclosure sale and take their chances; for the directors, in
submitting the plan, said that they felt it necessary “to state in the
strongest terms that the non-success of this proposal will inevitably
result in foreclosure, with all its attendant misfortunes.”[422]
By the end of November, although the plan had not been promulgated
until well into October, more than one-half of the outstanding bonds
had assented, and the directors were enabled to announce success.
Certain changes in the management had already taken place. President
Strong had resigned in September, and had been succeeded by Mr. Allen
Manville, general manager of the St. Paul, Minneapolis & Manitoba
Railway.[423] Mr. Reinhart was credited with a large part in the
construction of the new plan of 1889, and his later promotion may have
been connected therewith.
After the reorganization Atchison resumed its policy of expansion,
its new directors being apparently as “bold and enterprising” as the
old. In 1890 it took in the St. Louis & San Francisco, a road running
from St. Louis west and southwest through Missouri, Kansas, Arkansas,
and Indian Territory, connecting at Paris, Texas, with the Gulf,
Colorado & Santa Fe, and through half-ownership of the Atlantic &
Pacific connecting Albuquerque in New Mexico with Barstow in Southern
California. The total length of the Frisco system, exclusive of jointly
owned roads, was 1329 miles, and this constituted the largest single
acquisition that the Atchison had ever made. The terms of the purchase
were highly favorable to the Frisco shareholders, but the benefits to
the Atchison were less than was expected. Although the consolidation
removed certain difficulties experienced from the joint ownership
of the Atlantic & Pacific, and although the united roads were in a
better position to compete for transcontinental and Gulf traffic than
either of them had been before, the Atchison directors were forced to
announce in 1891 that, “with every opportunity given it to work with
advantage, the property (Frisco) has failed to demonstrate its ability
to carry itself financially and to liquidate its debts; nor could it
hope to obtain such results without the provision of New Capital....
This is due largely to the absence of complete and proper facilities
and machinery with which to conduct operations in the nature of Round
Houses, Machine Shops, Stations and other buildings, improved Bridges
and Equipment.”[424] A bond issue was needed, and was in fact put
forth,—the Atchison taking a goodly share.
Less important than this was the purchase, in 1890, of the Colorado
Midland, a road 346 miles long in Colorado, valued chiefly for its ore
traffic. In August, 1890, the Mexican Government resumed payment of the
Sonora subsidy, on which nothing had been paid for eight years.[425]
It does not seem as if at any time after 1889 the Atchison enjoyed
unalloyed prosperity. The year 1890 showed an increase in net earnings
of 48 per cent according to the figures given, and the directors were
unhappy until they had increased the fixed charges to match, but the
year 1891 recorded a falling off, and 1892 showed a comparatively
slight gain over the figures of 1891. There was obviously nothing
in the reported figures to cause alarm, but there was nothing which
justified the payment of more than 2¾ per cent any year on the income
bonds, or of any dividends on the stock.
Toward the end of 1891 the guarantee fund notes fell due. They had been
issued, it will be remembered, to protect the property in 1888, and
were secured by an equal amount of general mortgage 4s; but now the
directors, disliking to put these 4s on the market at 83¼, decided to
extend the notes for two years at par with a cash commission of one per
cent.[426]
Extension of the guarantee fund notes did not increase the fixed
obligations, it merely postponed a reduction; but the conversion of
the income bonds of 1889 acted as a positive increase. There were
$80,000,000 of these incomes, and it was in the optional character
of payments upon them that the saving of fixed charges by the
reorganization of 1889 had consisted. They had been issued instead of
preferred stock probably because more acceptable to the bondholders;
but it was early found that their use involved difficulties which had
not been sufficiently regarded. By the conditions of their indenture
no bonds could be inserted between them and the general mortgage 4s;
they held a second lien for all time. But similarly it was difficult
to put bonds after them. Their lien was on income,—interest was
payable only when earned; any regular mortgage would of necessity have
taken precedence. The hindrance to new issues was real and serious,
and although some check on an aggressive management was salutary, yet
the system required additions and improvements from time to time which
could not be supplied from current income. Under these circumstances
the Atchison directors decided within three years to sacrifice the
reduction in fixed charges secured in 1889 in order to obtain new
capital with greater ease. “It is the opinion of the Management,” said
the annual report for 1892, “that the time has now arrived when all the
obligations of the Company can be returned to a Fixed Basis, sufficient
funds provided to take care of all Improvements ... required for at
least four years, and at the same time the junior Bonds and Capital
Stock be restored to a more permanent market value with assured returns
on the first, and probable balances for the latter.”[427] “The Atchison
plan of conversion,” said Mr. Reinhart, “... is the completion of the
reorganization plan put in effect October 18, 1889, and returns the
obligations of the company ... to a fixed and stable basis....”[428]
The plan so cordially referred to provided for the issue of a new,
second mortgage, 4 per cent bond, and the exchange of this security for
the outstanding income bonds. The second mortgage was to be issued in
two classes:
(_a_) $80,000,000. These were to exchange for income 5s, par for par,
and bore a rate of interest which increased from 2½ per cent in 1892 to
4 per cent in 1896, and then remained at 4 per cent until maturity.
(_b_) $20,000,000. These bore 4 per cent and were to be issued in no
greater sum in any year than $5,000,000 for specific improvements on
the Atchison exclusive of the Colorado Midland or the St. Louis & San
Francisco. There was reserved to the company the right, when all the
above should have been exhausted, to issue more bonds of the same sort
as in class B for the same purposes and on the same mileage, up to a
limit of $50,000,000.[429]
The conversion plan was approved at the annual meeting in 1892, and was
put into effect. The result was most unfortunate. The annual burden
on the company was increased at the very time when the panic of 1893
was about to reduce railroad earnings, while the advantages of freer
issues of new bonds were of little account in a year when the sale of
new securities was practically impossible. Moreover, a new light was
soon to be thrown on the whole operation by disclosures of dishonest
manipulation of figures in the Atchison reports.
In 1892 and 1893 rumors of trouble were afloat, and were repeatedly and
vigorously denied by Mr. Reinhart, president of the Atchison Company.
Thus in June, 1893, this officer declared that “the Atchison, Topeka
& Santa Fe Railroad Company, strictly speaking, has no floating debt.
Its current liabilities are more than equalled by its current cash
assets.”[430] In December Mr. Reinhart said again: “The interest on the
General Mortgage Bonds of the Atchison Company, due January 1, will
be paid. It seems hardly necessary to make this statement, because
doubts as to its payment have, in my judgment, been created solely by
speculators who have no substantial interest in the property.” These
official denials did not carry conviction, but opinions varied as to
the seriousness of the situation. The _Boston News Bureau_ cheerily
insisted that all the Atchison needed was “days of grace” during the
existing depression,[431] while in England it was thought that the
rumors of a receivership were at most but premature.[432]
At the end of the year President Reinhart went to Europe to float
a loan. On his return, after a failure to obtain subscriptions, a
receivership was applied for and granted. It had been hoped up to
the very last moment that the January interest could be met; but the
refusal of English bondholders to subscribe additional capital, the
failure to place a third mortgage loan in the United States, and the
death of Director Magoun, one of the strong influences in Atchison’s
affairs, made a crash inevitable. Current obligations had mounted to
over $10,000,000, credit had disappeared, and the railroad necessarily
succumbed. The Atlantic & Pacific, the Colorado Midland, the Gulf,
Colorado & Santa Fe, and the Southern California lines were not
included in the Atchison receivership, though the Atchison receivers
were given like office in respect to the Atlantic & Pacific.[433] The
Gulf, Colorado & Santa Fe announced that it would continue to operate
its own line, and was prepared to pay its current obligations as
before.[434]
No sooner was failure announced than committees of bondholders sprang
up. In Boston a committee was formed with six members, including J. L.
Thorndike and H. L. Higginson. In New York the Union Trust Company, the
Mercantile Trust Company, the New York Life Insurance Company, Baring,
Magoun & Co., and Giddes & Smith got together in a committee, with
Edward King as chairman. A second New York committee, R. Somers Hayes,
chairman, was formed by express invitation of the road. A directors’
committee was organized, of which E. B. Cheney, Jr., was chairman.
The London holders of the second mortgage class A bonds themselves
formed a committee. Even before 1888 Englishmen had invested heavily
in Atchison, attracted perhaps by glowing stories of the business to
spring up across the western plains. It was said that not only had
they been influential in shaping the reorganization of 1889, but that
from that date to 1893 the management had been controlled by a board
elected by proxies entrusted to representatives of English interest.
In particular Englishmen had become interested in the second mortgage
bonds of 1892, successors to the income bonds of 1889, holding about
one-half of the total issue, and they now fought for the protection of
this issue as against the stock.
A plan of reorganization was early matured after the English influence
substantially as follows: Either the general mortgage or the second
mortgage bonds were to be foreclosed and a new company was to be
formed. If the foreclosure should be under the general mortgage,
overdue interest on that mortgage was not to be paid, and new
securities, similar to the existing bonds, were to be issued, bond
for bond. If the foreclosure should be under the second mortgage, the
company was to provide for past due interest, and was to assume the
payment of principal and interest on the general mortgage bonds. The
capital stock was to remain as before. There was to be a new income
mortgage to the amount of $115,000,000, of which $84,000,000 were to
go for the existing second mortgage A bonds, and $5,600,000 for the
existing B bonds; the surplus to be given for assessments, or for
the securities of such auxiliary companies as it should be thought
advisable to acquire. These income bonds were to bear 5 per cent and
were to have voting power. There was to be a second mortgage, to amount
eventually to $35,000,000; of which $5,000,000 were to be used at once
to retire the floating debt and for other purposes, and $3,000,000 were
to be used each year for improvements. The new stock was to be held
in trust until 5 per cent per annum should have been paid in cash on
the new income bonds for three consecutive years. Finally there was to
be an assessment of $12 per share upon the stockholders, the proceeds
of which were to go as far as necessary to pay the debts of the old
company, including interest on the general mortgage.[435]
On the whole, the scheme was to put the Atchison back to the condition
of 1889, and to regain the margin of safety afforded by the income
bonds. So far it was acceptable enough. Conservative officers had
looked askance at the income bond conversion in 1892, and this was a
simple acknowledgment of the mistake. The old difficulty as to future
capital requirements, moreover, was evaded by a provision for an annual
increment of second mortgage bonds to take precedence of the incomes.
The notable part of the scheme was the anxious care of the bondholders
to protect themselves. Since their bonds had been converted from income
bonds less than two years before they could not claim a large allowance
for the reconversion; but as a condition of their assent to this and
to the introduction of a second mortgage for $35,000,000 before their
lien they demanded not only a bonus of 5 per cent in the new incomes
for their holdings, but the grant of voting power to the income bonds,
a stock assessment of $12 per share, and the interposition of an
additional $5,000,000 of bonds between the stock and the property of
which it was nominally the possessor. “It is true,” said the _Railway
Review_, “that the scheme contemplates the issue of income bonds which
shall be given to assenting stockholders at par in return for the cash
assessment, but it is a little difficult to see wherein such bonds
are of very much more value than the stock of the company except that
they are not subject to assessment.”[436] The reception of the plan
was what might have been expected. On July 30, in London, the London
bondholders’ committee met and passed a resolution in its favor. Having
now secured, they said in substance, the substantial features for which
they had contended, and although the plan was not altogether what they
could have desired, they considered, after very prolonged and anxious
negotiations, that a plan had been arrived at which was the best
obtainable in the interests of bondholders.[437] Meanwhile meetings of
stockholders were held in New York in protest. Resolutions were adopted
condemning the plan, and a stockholders’ committee was chosen.[438]
Debate was stopped by the publication in August of the report of an
expert who had been selected to examine the books of the Atchison
Company. Few more disgraceful instances of the juggling of figures have
been brought to light in the history of American railroad finance.
Whereas the reports of the company had shown net earnings steadily
increasing from $7,600,000 in 1890 to $12,100,000 in 1893, being ample
to meet existing charges and to pay from 2 to 2¾ per cent on the income
bonds besides to the time of their conversion, Mr. Little, the expert,
reported that the net earnings had never exceeded $8,085,608; and
maintained that an annual deficit had occurred each year from 1894,
which reached the portentous amount of $3,000,000 for 1891 alone. The
condition of the company was far worse than had been imagined, and all
plans had to be thoroughly recast. The following is an abstract of the
report in question:
“I have already advised you verbally,” said Mr. Little, “that income
was, in my judgment, overstated in these several years (since ’89), to
the extent of $7,000,000 or more, and I now confirm this specifically.
These overstatements may be classified as follows:
“(1) _Rebates._ For the four years ending June 30, 1894, the debits
for rebates to shippers on the Atchison system aggregated $3,700,776,
and on the St. Louis & San Francisco system $205,879, or a total of
$3,906,656.
“This sum was charged, not to the earnings from whence it came, as it
should have been, but to an account entitled, ‘_Auditor’s Suspended
Account-Special_,’ and was reported from year to year as a good and
available asset, while in fact it had no value whatsoever.
“(2) _Additions to Earnings and Deductions from Expenses._ Next in
order of importance to the rebate account comes an aggregate of
$2,791,000, which, on instructions from the East, was credited from
time to time to the earnings and expenses respectively, but which
credit has no foundation in fact. Of this aggregate $2,010,000 was
added to earnings and $781,000 deducted from operating expenses, the
sum of the two being debited to ‘_Auditor’s Suspended Account_.’
“(3) _Improvements._ The sum of $488,000 was in the period under
consideration transferred, improperly as I contend, from Operating
Expenses to Improvements or Capital Account, these Improvements being
finally closed into the account of Franchises and Property, which
represents the cost of the road and property.
“(4) _Traffic Balances._ It further appears that a traffic agreement
for a division of business was formed in November, 1890 (running to
July, 1891), between the Atchison Company and certain other companies,
whereby such other companies were charged with a balance of $305,843,
which the Atchison Company was unable to collect, and which is
absolutely uncollectable, and should have been heretofore written off,
though it still stands as an asset, and hence must be written to the
debit of profit and loss.”[439]
Two facts appear from these charges on which emphasis was laid from
different points of view: (1) That for four years the Atchison had
been persistently violating the law by the granting of rebates. (2)
That to conceal these rebates, and for other purposes, the books had
been so systematically falsified as to defy detection, and to deceive
not only the investing public but the whole railroad world. The
report was handed to Mr. Reinhart, and an answer was requested by the
following day. The answer was made, and proved inadequate; for though
Mr. Reinhart pointed out some half-dozen items which he argued that
Mr. Little had wrongly excluded, he explained no one of the charges
directly brought against him.[440] There is no doubt at the present
time that Mr. Reinhart was guilty, though perhaps because of the
difficulty of fixing legal responsibility he was never prosecuted for
falsification of the books. He resigned, of course, and Major Aldace
F. Walker was appointed receiver in his stead. Two months later he was
indicted with other officers of the company and certain shippers, not
for falsifying the books, but for the illegal granting of rebates. His
defence was that he had been, at the time the rebates were given, only
the general auditor at Boston, and had had no part in the fiscal or
executive business of the road.[441] The Government failed to prove
connection, and the case fell through.
All this completely altered the requirements to be met by a
reorganization plan. A more sweeping reduction in charges, and a
more general distribution of losses was needed than before had been
the case. Old proposals were laid aside once and for all, and a new
scheme was built up from the beginning. The mortgage indebtedness of
the Atchison in 1895 was $233,595,247, of which the first and second
mortgage bonds comprised $217,258,276. The reorganization of 1889 had
done its work in one respect at least, and the reorganization managers
were able to concentrate their attention on two issues. The annual net
earnings, according to the company’s reports had been:
1890 $7,632,348
1891 7,631,598
1892 10,953,896
1893 12,126,866
but as corrected in Mr. Little’s report were:
1891 $5,204,880
1892 7,853,173
1893 8,085,608
1894 5,956,615
Inasmuch as Mr. Little had discovered annual deficits of
1891 $1,964,285
1892 60,938
1893 134,825
1894 3,008,242
it was very evident that a reduction in interest charges was called
for. As in 1889 the salvation of the company was sought in the
substitution of securities on which payment was optional for securities
bearing an obligatory charge.
Soon after Mr. Little’s final report in November three of the existing
committees, namely, the General Reorganization Committee, the London
Committee, and Messrs. Hope & Co. of Amsterdam, joined in a Joint
Executive Reorganization Committee, with Edward King as chairman.[442]
With these now worked a committee chosen by the directors themselves.
The result was a reorganization plan under date of March 14, 1895. The
purposes announced were:
(_a_) To reduce fixed charges to a safe limit;
(_b_) To make adequate provision for future capital requirements,
subject to proper restrictions as to issue of bonds for this purpose;
(_c_) To liquidate the floating debt, and to make adequate provision
for existing prior lien indebtedness shortly to mature;
(_d_) To reinstate existing securities upon equitable terms in their
order of priority;
(_e_) To consolidate and unify the system (so far as practicable) and
thus to save large annual expense.
It was proposed to foreclose the Atchison general mortgage ... and to
vest in a railway company the bonds, stocks, and other properties of
the existing company, acquired at foreclosure sale or otherwise. The
new company was to issue:
(_a_) Common Stock $102,000,000
(_b_) Five per cent non-cumulative preferred stock 111,486,000
(_c_) General mortgage 4 per cent bonds 96,990,582
(_d_) Adjustment 4 per cent bonds 51,728,310[443]
Of the above the interest on only the general mortgage bonds was to be
a fixed charge;—the stock obviously got a return only when earned,
and the adjustment bonds were income bonds in fact if not in name.
Additional issues to a comparatively small aggregate were provided
for, but no mortgage, other than the general and adjustment mortgages,
was to be executed by the company, nor was the amount of preferred
stock to be increased, unless the execution of such mortgage, or such
increase of preferred stock, should have received the consent of the
holders of a majority of the whole amount of preferred stock at the
time outstanding, given at a meeting of the stockholders called for
that purpose, and the consent of the holders of a majority of such
part of the common stock as should be represented at said meeting. The
securities mentioned were to retire all previously existing issues.
Old common stockholders were to receive share for share in the common
stock of the new company. They were to be assessed $10 per share,
and to receive for the assessment $10 in new preferred stock, while a
syndicate guaranteed payment of assessments by engaging to take the
place of non-assenting or defaulting stockholders. The general mortgage
bondholders were to get 75 per cent of their holdings in new general
mortgage 4s and 40 per cent in adjustment 4s. The second mortgage and
income bondholders were to be assessed 4 per cent and were to get
new preferred stock.[444] The prior lien bondholders were dealt with
separately, and were to be paid either in general mortgage 4s of the
additional issues (over the $96,990,582) mentioned, or in the new
prior lien bonds. If in the latter, the general mortgage bonds which
would otherwise have been issued were to be held for the ultimate
retirement of these bonds. Provision was made for future construction
and additions by the allowance of $3,000,000 general mortgage bonds, to
be issued each year to a limit of $30,000,000, and then of $2,000,000
adjustment bonds, to be issued each year to a limit of $20,000,000.
Additional new general mortgage bonds, up to $20,000,000, might be
issued and used in such amounts respectively and in such proportions as
the Joint Executive Committee might determine, for the acquisition of
the Atlantic & Pacific, the St. Louis & San Francisco, and the Colorado
Midland; and for like purposes $20,000,000 preferred stock. The lien
of the new general mortgage was to cover all properties which should
be vested in the new company, and also any other property which might
be acquired by use of any of the new bonds, but the Joint Executive
Committee might, in its discretion, except from the new general
mortgage the stocks and bonds deposited under the existing general
mortgage, representing branch lines, the operation of which should
be found to be unprofitable and an unnecessary burden to the system.
A voting trust was considered, but was rejected as unsatisfactory;
and the committee confined its efforts to the securing of the best
possible management.
The proposed fixed charges amounted to $4,528,547
Net earnings according to Mr. Little had been in 1891 5,204,880
1892 7,853,173
1893 8,085,608
1894 5,956,615
Thus the new charges appeared well within the earning power of the
road. The plan made the following, provision for cash requirements:
Assessment on Atchison stock at $10 per share $10,000,000
Assessment on second mortgage and on income bonds at
4 per cent 3,567,644
-----------
$13,567,644
The estimated cash requirements were:
For receiver’s debt, preferred or secured floating
debt of the Atchison Company, estimated as of
January 1, 1895 $7,793,875
Leaving for receivers and floating debt, accrued
interest and undisturbed securities, etc., 773,769
-----------
$13,567,644[445]
This reorganization had certain interesting features. As before
remarked, it sought, as did the reorganization of 1889, to replace
securities, the interest on which was a fixed charge, by securities
on which payment of interest or dividends should be optional. But
whereas the earlier reorganization had depended on income bonds,
this plan included both income bonds and preferred stock. There are
several reasons why preferred stock is preferable to income bonds,
and it will be remembered that a peculiar difficulty experienced
from the income bonds of 1889 had arisen from the impossibility
of putting other mortgages ahead of them; yet that this was not
the chief obstacle sought to be avoided by the use of preferred
stock at this later date appears from the current use of adjustment
bonds. Provision for future capital requirements was in fact made in
another way, and the question was not here involved. So far as the
acceptability of the income bonds and the preferred stock respectively
to the old bondholders was concerned, it should be noted that the
men who received the greater part of the new issue were the holders
of the old income and second mortgage bonds; that is, Englishmen
who had already shown their preference for income bonds as opposed
to stock. The chief reason for the new expedient seems to have been
the desire to retain for the general mortgage holders a priority
of lien, while reducing part of their holdings to the level of an
optional obligation. If income bonds or preferred stock alone had
been used, these would necessarily have been given to the owners both
of general mortgage and of second mortgage or old income bonds; so
that the former might have received a larger amount, but not any lien
different in kind. By the scheme proposed, all possible interest on
the securities given for old mortgage 4s was to be met before anything
was to be paid on the equivalent of issues which had been inferior
before the reorganization took place. Abundant provision was made for
future capital requirements. That lesson had been learned once for
all. Cash requirements were met by an assessment. In speaking of the
reorganization of 1889 the rule was laid down that the disposal of
securities for cash is impossible except at an enormous sacrifice in a
time of general depression. There was widespread depression in 1895,
and the reorganization managers wisely made no attempt to negotiate
a sale. The amount of the assessment on the common stock was very
considerably above the quoted price of the shares, but it was correctly
figured that the hope of future increase in value would be sufficient
to induce stockholders to furnish the sums required. Not to tax them
too heavily call was made also on the junior securities. On the whole,
the decrease of $5,000,000 in fixed charges more than compensated the
stockholders for the additional obligations put between them and their
property; their claim on the road itself was made more remote, but
their chances for dividends were improved. Examination of the plan
shows clearly that nothing was taken from either bonds or stock which
those securities had a right to retain. The bondholders could not, in
any case, have received more than the earnings of the road; and an
amount equal to the return previously due them was assured, whenever
the road should earn it, by the new combination of mortgage and income
bonds and preferred stock. As it was, in return for an assessment they
retained the right to participate in any future prosperity, a right
which has proved of extreme value.
The plan was underwritten by Messrs. Baring Bros. & Co. and other
strong foreign and American bankers, who assumed the liability of
paying the assessment and of taking the stock.[446] The comment at the
time was favorable. “On the whole,” said the _Railway Age_, “we do
not believe that any one who is acquainted with the properties could
have expected a more satisfactory plan than that which the committee
has evolved.”[447] The London bondholders promptly accepted the plan.
“We are disposed,” said the _Railway Times_ of London, “to regard the
latest of Atchison reorganization schemes as a praiseworthy attempt
to grapple with a very thorny problem.”[448] Such opposition as there
was came from a minority of the stockholders, and was directed at two
points: the prevention of foreclosure, and the inauguration of an
entirely new administration. It was asserted that certain old members
of the board of directors who had been forced to resign by the earlier
disclosures, had nevertheless secured the election of successors to
perpetuate their policy and to protect their interest. With a directory
so constituted, it was maintained that the stockholders would have no
guarantee of important changes in the executive offices, financial
policies, or business methods of the company.[449] Sharp criticism was
directed to a statement of the existing board which referred to the
“mistakes and misfortunes of the previous management.” “Only those who
believe,” said the Stockholders’ Protective Committee, “that gross
irregularities, if not worse, have been perpetrated ... may be relied
upon to probe to the bottom the acts of the former officers of the
Atchison.”[450] On the other hand, the accusations of the committee
were asserted by the directors to be unqualifiedly false.[451] It soon
became apparent that the opposition could not muster enough votes to
control an election, and although their fight had been begun in August,
they had proxies by November for only 250,000 out of the 1,020,000
shares of stock. Recourse was had to the courts, and an attempt was
made to secure at least a minority representation on the coming board
by the enforcement of a provision for cumulative voting embodied in
a Kansas law of 1879. This failed in November, 1894, and no further
obstacle to reorganization was encountered.
Practically all of the assessments were paid in by September 21. On
November 25 Mr. E. P. Ripley was elected president, and in the first
week of December, 1895, Mr. Aldace F. Walker was elected chairman of
the board of directors of the new company. On December 10, 1895, the
property and franchises of the Atchison were sold at foreclosure, and
were purchased for $60,000,000 by Edward King, Charles C. Beaman, and
Victor Morawetz, representing the reorganization committee.[452] The
Atchison, Topeka & Santa Fe Railroad Company was then organized by
the purchasers pursuant to the laws of Kansas, under a certificate
of incorporation dated December 12, 1895. A board of directors was
elected, and by-laws were adopted. The entire estate embraced in the
foreclosure sale was duly conveyed by deed of the same date as the
incorporation of the company, in consideration of which the company
executed a delivery to the Joint Executive Reorganization Committee
of the securities acquired under the plan of reorganization. Certain
subsidiary roads were subsequently foreclosed and bought in, notably
the Atlantic & Pacific and the Chicago, Santa Fe & California. The St.
Louis & San Francisco was not so bought in. “The question of retaining
the St. Louis & San Francisco as a part of the Atchison system,” said
the annual report of 1896, “received very careful consideration from
the Directors.... A series of conferences was held, which resulted in
the matter ultimately presenting the alternative of the sale of our
existing interest upon favorable terms, or the purchase by us of all
other outstanding interests upon terms involving the outlay of a very
large amount of both cash and securities. While the future control
of that road was regarded as important, the financial considerations
affecting the situation prevailed, and the sale was decided on the
whole to be more prudent than the purchase.” “With the acquisition of
the Frisco,” said Mr. Fleming of the Joint Executive Committee, “the
fixed charges on the Atchison system of 7780 miles would have been
increased from $7000 to $9000 per mile. Atchison is financially much
stronger without Frisco.”
This ends that part of the history of the Atchison Company which can
be connected with either of its reorganizations. From 1895 to the
present time the Atchison has enjoyed a rapidly increasing prosperity,
due in part to the lightening of the charges upon it, in part to able
management, and in part to the great increase in volume of business
which has been a characteristic of the time. One or two things may
be noted. A final settlement has been made of the relations between
the Southern Pacific and the Atchison in the Southwest. It will be
remembered that the final result of the negotiations in 1882 had been
the purchase of the former Mojave division from the Needles to Mojave,
but that since title could not be acquired until the maturity of the
outstanding mortgages, Atchison had leased this track at an annual
rental of 6 per cent on the purchase price. In 1897 this rental was
cancelled. The Southern Pacific could not even then give a clear title,
but exchanged a long time lease of the Mojave division against a
similar lease of the Sonora Railway, the Atchison branch which reached
from Deming to Guaymas. The rentals cancelled each other, and the
actual transfer is eventually to take place.[453] The arrangement is
mutually advantageous. On the one hand the Mojave division formed a
spur of the Southern Pacific, and on the other the Sonora Railway was
totally disconnected from the Atchison, so that the latter company was
obliged to use the Southern Pacific’s tracks to reach the property at
all. In 1898 Chairman Walker of the Executive Committee was able to
announce the substantial completion of negotiations for the purchase
of the San Francisco & San Joaquin Valley Railroad, running from
Bakersfield to Stockton, California; the former town being sixty-eight
miles from Mojave and the latter something less than that from San
Francisco.[454] Atchison at once began building at the Stockton end,
and reached San Francisco the following year. The Santa Fe Terminal
Company was then incorporated with a capital stock of $1,000,000,
Atchison secured a traffic contract with the Southern Pacific, and
through freight trains were run from Chicago to San Francisco on May 1,
1900, through passenger trains following two months later. Besides this
there have been important extensions in Arizona and New Mexico. In 1901
the Atchison purchased two-thirds of the bonds, and practically all of
the capital stock of the Pecos Valley & Northeastern Railway Company,
stretching 370 miles from Texico through the southeastern corner of
New Mexico to Pecos City, Texas. In July of the same year it bought
the Santa Fe, Prescott & Phœnix Railroad, from Ash Fork, Arizona, to
Phœnix, Arizona, some 195 miles. Construction has been practically
completed between Belen, New Mexico, a few miles south of Albuquerque,
and Amarillo, Texas, to afford an alternative and somewhat shorter
route from California to Eastern Kansas. A still more noteworthy
project is under consideration for a road to join the Gulf, Colorado &
Santa Fe at Brownwood with the Belen line at Texico, and to open direct
connection over the Atchison from California to the Gulf.
Briefly stated, the Atchison’s mileage has increased from 6479 miles in
1897, to 9273 in 1907. Its gross earnings have grown from $30,621,230
to $93,683,407; its net earnings from $7,754,041 to $32,153,692; and
its surplus above all charges from $1,452,446 to $21,168,724. This
marvellous showing has been accompanied by heavy expenditures for
improvements, so that the physical condition of the system is much
better than before. Operating expenses, fixed charges, and taxes
took less than 77 per cent of gross income in 1907, and a decline
of over $21,000,000 can be suffered in net before interest on even
the adjustment bonds becomes imperilled. It is not to be wondered
at that Mr. Harriman saw fit to invest $10,395,000 of Union Pacific
money in Atchison preferred stock in 1906,[455] nor that dividends
of 5 per cent on preferred, and 5 per cent on common stock are being
paid. The Atchison owns 1791 locomotives instead of 953 as in 1897;
1135 passenger cars instead of 622; 49,770 freight cars instead of
26,776. There has been a large increase in the capacity and power of
rolling stock. The average freight train load has increased from 131
to 320 tons. Freight train mileage has grown but 35 per cent, while
ton mileage has more than tripled. Thus, although the average length
of haul has increased and the average receipts per ton mile have
diminished, the earnings per freight train mile are actually more than
double in 1907 what they were in 1897. And, finally, the Atchison is
not dependent for its revenue upon any single kind of business. Coal,
ore, and other mineral products yielded but 30.87 per cent of its
tonnage in 1907; products of agriculture 25.34 per cent; manufactures
17.37 per cent; and products of the forest 12.12 per cent.
The capital account, meanwhile, has been kept from undue expansion. The
funded debt has increased from $174,196,750 in 1897 to $284,171,550 in
1907, but the capital stock has decreased somewhat, and the greater
part of the new bond issues have been convertible serial debenture
bonds, which occasion no permanent increase in charges. It is within
the last two years only that Atchison stockholders have authorized
the issue of new capital on a scale commensurate with the growth of
their property. In 1906 $26,060,000 in 4 per cent convertible bonds
were offered to them at par, and this last year they have authorized
the issue of $98,000,000 of common stock for improvements, extensions,
and the like. This provides ample facilities for the future without
endangering the solvency of the road.