(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: