There were to be issued:

General mortgage 100-year 4 per cent gold bonds,$114,000,000 
Non-cumulative, 4 per cent first preferred stock (subject to an increase of $21,000,000),28,000,000 
Non-cumulative 4 per cent second preferred stock,42,000,000 
Common stock (subject to an increase of $21,000,000),70,000,000 

If at any time dividends of 4 per cent should have been paid on the first preferred stock for two successive years the company might convert the second preferred stock at par, one-half into first preferred and one-half into common stock. These new issues were ultimately to retire all outstanding securities, to provide for expenses of reorganization, and to go for new construction, additions, betterments, etc., in the succeeding years. Since, however, it was obviously impossible to cancel prior liens before maturity, sufficient general mortgage bonds ($44,550,000) were reserved from immediate issue to retire these when they should fall due. This left new general mortgage bonds with four classes of stock against old general mortgage bonds with three classes of preferred bonds, common stock, and deferred incomes; and, as might be expected, new general mortgage 4s were given for the old general mortgage, second preferred and common stock went for preference bonds, and new common stock for old common stock and deferred income bonds. Certain cash payments were made on the general mortgage, and $4,000,000 of the new issue were sold to a syndicate; but on the whole we may say that the prior liens and general mortgage bondholders occupied the same position in the new company which they had occupied in the old; that the income bondholders exchanged a bond with a lien on income for a stock with a right to dividends; and that the floating debt, syndicate, and other expenses were given equal rights with the general mortgage.

No additional mortgage was to be put upon the property, nor was the amount of the first preferred stock to be increased, except with the consent, in each instance, of the holders of a majority of the whole amount of each class of preferred stock, given at a meeting of the stockholders called for that purpose, and with the consent of the holders of a majority of such part of the common stock as should be represented at such meeting, the holders of each class of stock voting separately; neither was the amount of the second preferred stock to be increased, except in a similar way. These careful clauses made some provision for future capital requirements necessary which should be independent of the consent of the stockholders at any time; and $20,000,000 general mortgage bonds were accordingly set aside, to be issued in amounts not greater than $1,500,000 in any one year for future construction, equipment, and the like. Additional general mortgage bonds were provided to retire Philadelphia & Reading Terminal and Coal & Iron Company bonds up to the sum of $21,000,000.

The floating debt, estimated at $25,150,000, was provided for in part by assessment, and in part by the sale of securities to the syndicate for cash; 20 per cent being levied on first, second, and third preference income bonds, 20 per cent on the stock, and 4 per cent on the deferred incomes; while the syndicate agreed to take $4,000,000 of the new general mortgage bonds and $8,000,000 of the new first preferred stock. The assessment was expected to yield $20,862,289, and the syndicate to contribute in cash $7,300,000; leaving an estimated cash balance of $3,000,000. In addition, the syndicate (Messrs. J. P. Morgan & Co., J. Kennedy Tod & Co., Hallgarten & Co., and A. Iselin & Co.) undertook to underwrite the payment of the assessments on the income bonds and stock, and to guarantee the extension or payment of the improvement mortgage and Coal & Iron Company bonds, most of which were to mature in the following two years. No great reduction of fixed charges was of course to be expected. The cancellation of the floating debt effected, nevertheless, a certain saving, so that charges for the future were estimated at $9,300,000 as against net earnings of $9,839,971 in 1894; while the refunding or extension of maturing bonds was looked to for a reduction of $500,000.[275]

It is plain that this plan favored the general mortgage bondholders to the last degree, and admitted them to the reorganized company with absolutely no sacrifice save that of the addition of $4,000,000 to the total general mortgage issue. They funded no coupons, they suffered no diminution of interest and no shaving of principal; they paid no assessment; and as an additional protection to them, the provision was inserted that all classes of stock of the new company, except such number as might be disposed of to qualify directors, were to be voted by three voting trustees, of whom J. P. Morgan and F. P. Olcott were designated in the plan. It has seldom happened in any reorganization that a mortgage similar to the general mortgage in this case has been able to take and hold so strong a position.[276] The secret lay in the fact that the road had been earning the interest on the general mortgage bonds; and that under these circumstances no interest or combination of interests could force the holders to accept less than payment in full of all their claims. The situation could never have arisen in the earlier reorganization; it could never have occurred where a reduction in annual payments was required for the salvation of the property, or even where the amount of cash to be raised to pay the floating debt was so large that junior securityholders would have relinquished their holdings rather than pay the necessary assessments. In this case none of these conditions existed, and all the burden was thrown on the holders of junior mortgages and stock. It must be remembered, also, that though in ordinary cases the difference between the income bonds which the old first and second preference bondholders surrendered and the preferred stock which they received would not have been very great, yet here the provisions of the old income mortgage, which forbade the deduction from net earnings of any interest on bonds subsequently created until its interest should have been paid, rendered the loss more serious.

To sum up, the holders of junior securities and stock paid the expenses of reorganization, paid the floating debt, lost what right they had to interest before the settlement of interest on subsequently created claims, and got only stock, and for the most part second preferred or common stock at that. The general mortgage bondholders got new 4 per cent bonds, plus 12 per cent, or 2 per cent in cash, had no greater interest charges ahead of them, and without paying any assessment or making any concession, except to allow the immediate increase of the amount of their issue by $4,000,000, and thereafter by $1,500,000 per year, secured a lien on the assets of the company; a privilege which was, moreover, extended to undeposited as well as to deposited bonds. The company itself was dissolved, but the new corporation which took over its assets enjoyed, with slightly decreased charges, freedom from the old floating debt and from the extensions and combinations which had caused the floating debt of the old management, and seemed besides a strong financial backing.

In May, 1896, Judge Atchison of Philadelphia signed the decree for the foreclosure and sale of the property of both the Railroad and the Coal & Iron Companies, and on September 23 the sale took place, C. H. Coster, of J. P. Morgan & Co., and Francis Lynde Stetson paying an aggregate of $20,500,000 for the whole estate.[277] The sale ended the life of the old Reading charter; and in view of the constitution adopted for the state of Pennsylvania in 1871, which forbade any railroad owning more than 30,000 acres of coal land, some device had to be sought whereby the Philadelphia & Reading Railroad and the Philadelphia & Reading Coal & Iron Companies could hold together. Diligent search revealed the existence of the “National Company,” a corporation chartered in 1871 by special act of the legislature of Pennsylvania at the very time when the new constitution was under consideration. This company, originally the Excelsior Enterprise Company, had power “to purchase, improve, use, and dispose of property to contractors and others and for other purposes,” with privileges fully as broad, it was said, as those enjoyed by the Reading before foreclosure.[278] The National Company now changed its name to the Reading Company, called a special meeting, increased its stock to the amount required by the plan of reorganization, and, jointly with the Coal & Iron Company, authorized a mortgage to secure bonds up to a possible amount of $135,000,000; to be secured on the property of both companies, including the stock and bonds of the Railway Company. Meanwhile the Philadelphia & Reading Railway Company had been organized to succeed to the property and franchises of the old Philadelphia & Reading Railroad Company,[279] with a capital stock of $20,000,000 in $50 shares. The charter of the Coal & Iron Company was preserved in spite of the foreclosure sale.[280] The next step was for the Reading Company to exchange its bonds and stock for the general mortgage bonds and stock of the two minor companies in the proportions already agreed upon, and to deposit the securities so obtained in its treasury; leaving the prior liens the only direct obligations of either company in the hands of the public. This meant, of course, absolute control of both companies by the Reading Company; and in the future, when the prior liens should mature, it was to mean the replacement of all outstanding obligations by the obligations of the holding company. Both the Railway and the Coal & Iron Companies retained their separate organizations; the belief was that there was no merger which might be attacked before the courts; that it only happened that one corporate individual had invested in both Railroad and Coal Company shares and proposed to vote this stock, as was lawful, to further the policies of which it approved.[281]

Representatives of the reorganization managers laid an elaborate defence of the legality of these operations before Attorney-General McCormick of Pennsylvania, and on January 2 secured an opinion confirming the validity of the charter of the Reading Company. “After due consideration,” said Mr. McCormick, “I reach the conclusion, most reluctantly, that the Commonwealth of Pennsylvania cannot now successfully attack the chartered rights of the Reading Company.... My view of the whole matter is that the charter of the company authorized it to do the kind of business in which it engaged prior to January 1, 1874, which business was of the same general character as that in which it proposes to engage for the purpose of controlling the stocks of the Railway Company and the Coal & Iron Company.”[282]

Like the Baltimore & Ohio and the Erie, the Reading has benefited largely from the favorable business conditions of the last decade. The combined income of the three Reading companies has grown from $48,422,971 in 1898 to $95,715,088 in 1907.[283] Earnings on the Philadelphia & Reading Railway alone are now nearly as great as the combined income of the three companies at the earlier date. Net receipts were $13,586,710 in 1898 and $29,190,316 in 1907; and the surplus over all payments rose from $1,376,420 to $8,741,454 between those years. It is important to notice that this showing does not depend primarily upon the anthracite business. Not only has the carriage of general merchandise increased until it affords to the railway a return almost equal to the earnings on coal, but in the coal business itself bituminous has assumed an importance nearly as great as that of its harder rival. The Coal & Iron Company still concerns itself almost entirely with anthracite, and has accordingly been more affected by special causes. The strike of the miners in September and October, 1900, and again from May to October, 1902, checked the growth in production for a time; but the increased demand for domestic consumption has made possible an increase in output from 4,849,002 tons in 1897 to 10,034,713 in 1907. Increasing business has stimulated improvements. Over $15,300,000 have been withdrawn from income by the Philadelphia & Reading Railway Company for this purpose between 1896 and 1907; and over $10,000,000 have been invested from earnings by the Coal & Iron Company during the same time in colliery improvements alone. Maintenance charges have been ample. Whereas $1300 to $1500 per mile of single main track are sufficient for normal repairs upon a trunk line, the Philadelphia & Reading Railway has spent over $2600 per mile of line for the last seven years, and over $1700 for the three years preceding. As much as $73 has been spent in a single year for average maintenance per freight car, $609 in maintenance per passenger car, and $3244 in maintenance per locomotive. In consequence of these repairs and of renewals upon a considerable scale, the average value of all locomotives has increased between December 1, 1896, and June 30, 1906, from $4906 to $8393; the average value of freight cars producing revenue from $383 to $622; the average value of steam colliers and tugs from $41,533 to $55,451; and the average value of barges from $7930 to $21,074. The average freight train load was 194 tons in 1897 and 403 tons in 1907. Ton-mileage has increased during the period 159 per cent and freight train mileage only 27 per cent.