KEPORT 
 
 THE LIBRARY 
 
 t'-’ . 
 
 OF THE 
 
 BOARD OF DIRECTORS 
 
 OF THE 
 
 iouD m 
 
 TO THE 
 
 STOCKHOLDERS. 
 
 December 31, 1887. 
 
 General Offices 
 
 DUBUQU E, IOWA. 
 
REPORT 
 
 OF THE 
 
 BOARD OF DIRECTORS 
 
 OF THE 
 
 )itii« ui hi Cilj Railroad Compai 
 
 TO THE 
 
 STOCKHOLDERS. 
 
 December 31, 1887. 
 
 General Offices : 
 
 DUBUQU E, IOWA. 
 
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 ^ 'S 
 
 DIRECTORS AND OFFICERS 
 
 OF THE 
 
 )Blii(|oe ai(l Siii Cilj lailrdai 
 
 F O Pt 18 8 8 
 
 
 iV 
 
 I Ton. W. J. KNIGHT, President, - 
 
 E. C. WOODRUFF, Esq., Vice-President, 
 
 John Anthon, Esq., 
 
 S. V. R. Cruger, Esq., 
 Stuyvesant Fish, Esq., 
 
 W. D. Guthrie, Esq., 
 
 E. H. Harriman, Esq., 
 
 H. F. Webster, Esq., - 
 Albert Willcox, Esq., 
 
 • - Dubuque, Iowa. 
 
 Elizabetli, New Jersey. 
 
 - New York. 
 
 New York. 
 
 New York, 
 
 New York, 
 
 - Chicago, Illinois. 
 
 New York. 
 
 New York. 
 
 Hon. clarence A. SEWARD, General Counsel, 
 
 \ 
 
 \ 
 
To the Stockholders of the Dubuque & Sioux City Rail- 
 rocid Company : 
 
 Your i^resent Directors were chosen in Sej^tember, 1887. A new 
 President of the Board was elected in the place of the President, who 
 resigned as a Director on September 6, 1887, and who had been Presi¬ 
 dent of the Board, with only brief interruptions, if any, from 1864 to 
 1887. Other new officers were also chosen at the same time, and about 
 October 15, 1887, the Treasurer and Assistant Secretary received from 
 the former Assistant Secretary, besides the official record of the trans¬ 
 actions of the Board of Directors, letters, letter books and other 
 documents relating to the afifairs of the Company. At one of the earliest 
 meetings of your j)resent Directors, Clarence A. Seward, Esq., of the 
 City of New York, was apq)ointed to be General Counsel of the Com¬ 
 pany. 
 
 More than twenty years ago, and on Sejitember 27, 1866, a lease for 
 forty years of the Cedar Falls & Minnesota Kailway having been ten¬ 
 dered by that Company, was accepted by the then President of this 
 Company under circumstances to be hereafter referred to, and there¬ 
 after, on September 13, 1867, your Kail way was leased to the Illinois 
 Central for the term of twenty years. An option was therein given to 
 the lessee to renew the latter lease in peiqietuity. The Illinois Central 
 therein agreed to assume, for twenty years, that lease of the Cedar Falls 
 k Minnesota to your Company. 
 
 It is set forth in the book containing the proceedings of your Direct¬ 
 ors that in March, 1887, more than six months before the expiration of 
 the lease, the Illinois Central gave to your President due and sufficient 
 notice, as prescribed in the lease, of its election to surrender your Kail¬ 
 way on October 1, 1887, and to demand payment for improvements as 
 therein provided. Your Kailway was so surrendered by the Illinois 
 Central on October 1, 1887, and has since been operated by officers 
 chosen by us. 
 
 The sum of the several amounts which the 
 lessee had charged from year to year 
 for permanent exj)enditures on your 
 
 Kailway was. $914,928 42 
 
 And on the Cedar Falls & Minnesota. 103,793 86 
 
 SI,018,722 28 
 
r 
 
 In the lease of the Cedar Falls & Minnesota no provision was made 
 with respect to betterments. Even though your Company may, at the end 
 of the term, have an equitable claim for improvements made, and 
 
 
 although it certainly can then remove the personal jiroperty and the roll¬ 
 ing stock, none of which belongs to tlie Cedar Falls Company, it is clear 
 that the Illinois Central Comj^any had no such claim as your sub-tenant, 
 nor was any such claim made. 
 
 The lease of Sei^tember 13, 1867, provides that “ no account is to be 
 made for improvements made in maintaining and operating ” the Rail¬ 
 way, and it restricts the allowance to the appraised value at the end of 
 the term of “necessary additional side tracks, new buildings and im¬ 
 provements, properly chargeable to construction,” and to the first cost 
 of real estate furnished by the lessee during the term. An appraisal 
 made by Mr. David G. Scott, of Dubuque, acting for your Company, 
 and Mr. Leverett H. Clarke, the Consulting Engineer of the Lake Shore 
 and Michigan Southern Railway, acting for the Illinois Central, re¬ 
 sulted in an award for betterments of. $518,590 81 
 
 The first cost of real estate furnished bv 
 
 c/ 
 
 the lessee during the term, and the 
 appraised value of other real estate 
 since bought from them were. 150,486 29 
 
 8669,077 10 
 
 For the j)ayment of which sum in one year from October 1, 1887, the 
 obligations of this Comj^any have been given to and accepted by the 
 Illinois Central, and all transactions or agreements arising out of the 
 lease having been closed and performed by both jiarties, each has re¬ 
 leased the other, by an instrument under seal, from all obligations 
 thereunder. 
 
 Immediately on entering upon their new duties, your Directors made 
 needed traffic and business arrangements with the Illinois Central, the 
 Iowa Falls & Sioux City, and other comj^anies. 
 
 Early in November, 1887, the Cedar Falls & Minnesota Company de¬ 
 manded of your Company 89,447.50 as rent for the previous month. It 
 is believed that the Cedar Falls & Minnesota Company had already 
 claimed the same rental of the Illinois Central as payable by that Com¬ 
 pany under the lease of September 13, 1867, which demand was rejected. 
 The officers of your Company gave immediate consideration to the oper¬ 
 ation of the Cedar Falls k Minnesota road by the Illinois Central, while 
 
7 
 
 in its possession, and also to a comparison'thereof with the operation 
 under the lease of your road to the Illinois Central. They found the 
 result to have been as follows: 
 
 Comparison of the Results obtained from Operating the D. tfc S. C. R. R. and 
 the C. F. d' M. R. R. under Lease of Sept. 13lh, 1867. 
 
 Twenty Years — Od. 1, 1867, to Sept. 30, 1887. 
 
 
 D. and S. C. E. K. 
 
 C. F. and M. R. R. 
 
 Proportion 
 IN Percent¬ 
 ages OF the 
 
 former. 
 
 Length of Railroad Oct. 1, 1867. 
 
 142.89 miles. 
 
 14.00 miles. 
 
 9.80 
 
 “ «• Sept. 30, 1887.... 
 
 142.89 “ 
 
 75.58 
 
 52.89 
 
 Average length operated. 
 
 142.89 ” 
 
 70.2693 “ 
 
 49.17 
 
 Equipment owned: 
 
 Engines. 
 
 17 
 
 None. 
 
 
 Pass’r, &c., cars. 
 
 Freight “ . 
 
 14 
 
 tt 
 
 
 206 
 
 << 
 
 
 Gross Earnings —20 years. 
 
 $20,530,142 16 
 
 $2,561,291 73 
 
 12.47 
 
 Yearly average. 
 
 1,026,507 11 
 
 128,064 58 
 
 12.47 
 
 Yearly average per mile oper 
 ated. 
 
 7,183 90 
 
 1,822 48 
 
 25.37 
 
 Operating Expenses, including 
 Taxes and Permanents—20 
 years. 
 
 10,629,427 98 
 
 2,244,837 54 
 
 21.12 
 
 Yearly average.. 
 
 531,471 39 
 
 112,241 87 
 
 21.12 
 
 Yearly average per mile oper¬ 
 ated.. 
 
 3,719 44 
 
 1,597 31 
 
 42.94 
 
 Net Earnings —20 years. 
 
 9,900,714 18 
 
 316,454 19 
 
 3.20 
 
 Yearly average. 
 
 495,035 72 
 
 15,822 71 
 
 3.20 
 
 Yearly average per mile oper¬ 
 ated. 
 
 3,464 46 
 
 225 17 
 
 6.50 
 
 Rents— 20 years*. 
 
 6,057,917 76 
 
 2,108,080 00 
 
 34.79 
 
 Yearly average. 
 
 302,817 50 
 
 105,404 00 
 
 34.79 
 
 Yearly average per mile oper 
 ated. 
 
 2,119 23 
 
 1,500 00 
 
 70.78 
 
 Proportions: 
 
 Expenses to gross earnings.... 
 
 Per Cent. 51.77 
 
 Percent. 87.64 
 
 
 Net earnings to gross earnings. 
 
 » 48.23 
 
 “ 12.35 
 
 
 Rent to gross earnings. 
 
 “ 29.50 
 
 82.30 
 
 
 Rent to net earnings. 
 
 “ 61.17 
 
 “ 666.15 
 
 
 * Note.— The totarreut paid to the D. & S. C. E. K. Co. was. $6,576,508 57 
 
 Less to be repaid for betterments made under the lease, exclusive 
 
 of first cost of real estate. 518,590 81 
 
 Rent actually reserved by lessor... $6,057,917 76 
 
 The undertaking by your Company in 1866, to pay a minimum annual 
 rental of ^1,500 a mile for a railway having no rolling stock, and which 
 did not in any one of the three years last past, and cannot now, earn its 
 
8 
 
 operating expenses, naturally led your Directors to inquire how, and 
 why, such an onerous and improvident lease could have been accepted 
 by your Com 2 )any. 
 
 This (question became for the first time practically important to your 
 Company by reason of the termination of its lease to the Illinois Central 
 and the consequent throwing back upofl your Company of the obliga¬ 
 tion of the-annual rental. Your Board therefore addressed itself to the 
 ascertainment of the facts and circumstances connected with the origin 
 of the lease,*and with the following result: 
 
 On an examination of the proceedings of your then Directors, as set 
 forth in their book of minutes, it aj^peared that in 1866 the number of 
 your Directors, fixed by law, was nine, but at the meeting of the Board 
 which accepted the lease jDresented by the lessor and authorized its ex¬ 
 ecution, only four of the nine Directors -were present in person, and that 
 the votes of four of the Directors, who were not present, were given in 
 favor of the lease by a proxy held and exercised by the then President 
 of your Company. 
 
 At the time the lease was executed the President of the lessee Com¬ 
 pany and the President of the lessor Company were copartners in the 
 business of supplying the Dubuque & Sioux City, the Cedar Falls Sc 
 Minnesota and other railways with iron and supplies. 
 
 A further inquiry into the circumstances under which the lease came 
 into existence was thereupon committed to the General Counsel of your 
 Comi^any, who advised us, among other things, that in the proceedings 
 of the Directors of the Cedar Falls & Minnesota Comj^any, as set forth 
 
 in the Minute Book of that Board, it appeared that at the date of the 
 
 * 
 
 lease, (September 27, 1866,) only fourteen miles of the now seventy-six 
 miles of the lessor had been bnilt; that not even the survey had then 
 been made, or the right of way acquired for the remaining sixty-two 
 miles; that in 1866, the ownership and control of a majority of the 
 shares of the lessor were in the hands of certain “associates,” who 
 became a construction Company for the sixty-two miles afterward built; 
 that the six persons who were members of and controlled such associa¬ 
 tion or construction ComjDany, were six of the nine Directors of your 
 Company in 1866; that members of the association or construction Com¬ 
 pany were Directors of the lessor Com 2 :)any, and, as such, controlled its 
 affairs; that the associates voted in and controlled the directory of each 
 company; and that the lease of the Cedar Falls Sc Minnesota was, in 
 
9 
 
 effect, a sale of the railway of the latter for forty years to your Company 
 by a transaction in which six associates, a majority of your Directors, 
 sold, what was substantially their own property, to themselves as Agents 
 and Directors of your Company. 
 
 In fixing the minimum annual rental at SI,500 a mile, the controlling 
 consideration could not have been, as it should have been, the earning 
 capacity of the leased road, but was the sum of money needed to pay the 
 interest on the bonds of the Cedar Falls & Minnesota Kailroad Com¬ 
 pany, which the associates had issued, or were preparing to issue, to 
 themselves, which rate of interest was 7 per cent, per annum. To pay 
 such interest and to maintain the organization of the Cedar Falls & 
 Minnesota Company, required the annual sum of about ^113,370. It 
 was secured by fixing the minimum annual rental at $1,500 per mile, 
 and must have been the only basis upon which such an inordinate 
 rental could have been arranged. 
 
 The opinion of our General Counsel was taken on the question, 
 whether or not, upon those facts, and under those circumstances, and 
 after an expiration of. twenty years since the execution of the lease, the 
 liability of your Company for such an unconscionable rental thereunder, 
 could be presented for judicial inquiry and decision. The reply was in 
 the affirmative. 
 
 On being thus advised, your Directors were unwilling, as your 
 Agents and Trustees, to appropriate the money of your Company to pay 
 such a rental under such a lease, and a suit was forthwith begun in 
 Iowa by this Company for the purpose of presenting the question to the 
 Court whether such lease was, in its inception and execution and char¬ 
 acter, a valid and binding obligation upon your Company, requiring it 
 to pay, for the ensuing twenty years, the annual minimum rental re¬ 
 served. This suit is now pending, and will be pressed to an early deter¬ 
 mination. 
 
 The lease of the Cedar Falls & Minnesota Kailroad to your Company 
 provided, as has already been stated, for the preposterous minimum fixQd 
 rental of $1,500 per mile per annum under all circumstances, and then, 
 by an ingeniously increasing and upward sliding scale, it was contrived 
 that, under no circumstances, could the proportion of gross earnings 
 reserved for rent be less than 30 per cent, of such gross earnings, and the 
 further sum of $625 per mile per annum, which last sum would alone be 
 
 per cent, upon the actual cost of the road. Had the business and earn¬ 
 ings of the Cedar Falls & Minnesota been equal to the pretended antici^ 
 
10 
 
 pations of the promoters of building that road to the Minnesota State 
 line, and of the jn’ornoters of the lease to your Company, the result 
 under the lease would have been even more injurious to your Company, 
 for if the earnings of the Cedar Falls & Minnesota llailroad had been 
 equal j^er mile to those of the Dubuque & Sioux City llailroad (they were 
 scarcely equal to one-quarter thereof), the proportion of the gross 
 earnings reserved for rent to be paid by your Company would have been 
 38 1 *^ 0 % per cent., and the rental would have been ^205,956 per annum, 
 and that for a piece of railway, without shops, equipment or terminal 
 facilities, and traversing a sparsely-settled country. 
 
 Early in the year 1887, the then Directors of your Company published 
 a Statement containing the following: 
 
 BALANCE SHEET, DECEMBER 31, 1886. 
 
 Assets. 
 
 Railroad and Appurtenances. $5,621,112 71 
 
 Iowa Land & Loan Co. Stock.. 260,819 40 
 
 Cash.. 457,461 62 
 
 $6,339,393 73 
 
 Liabilities. 
 
 Capital Stock. $4,999,950 62 
 
 Dividend Scrip. 94 05 
 
 Notes, bearing interest at 5 per cent., due 1888, given to 
 
 retire First Mortgage Bonds. 295,000 00 
 
 7 per cent. MortgageBonds, due 1894, on road from 
 
 Cedar Falls to Iowa Falls. 586,000 00 
 
 Unclaimed Dividends. 2,286 48 
 
 Unpaid Coupons. 2,553 24 
 
 Income Account. 453,509 34 
 
 $6,339,393 73 
 
 Between the date of that Balance Sheet and September 30, 1887, 
 there appear to have been distributed to the Stockholders of the Du¬ 
 buque & Sioux City R. R. Co. by the former Directors: 
 
 In stock of the Iowa Land and Loan Company 
 And in cash. 
 
 $249,980 00 
 404,967 60 
 
/ 
 
 11 
 
 The remaining assets, together with the sum of ^70,385.82, which 
 was paid to the former management of your Company on September 1, 
 by the Illinois Central R. R. Co., on account of rent will, doubtless, be 
 hereafter accounted for or turned over by the former officers. 
 
 The rent due by the Illinois Central R. R. Co. to the Dubuque & 
 Sioux City R. R. Co. for the nine months from January 1 to September 
 
 30, 1887, amounted to. S179,577 85 
 
 Of which there were received by former man¬ 
 agement ...... ^70,385 82 
 
 And by present management. 94 80 
 
 ^ -- 70,480 62 
 
 Making the sum due this Company by the Illi¬ 
 nois Central R. R. Co. on September 30, 
 
 1887. $109,097 23 
 
 At that date three months’ interest had ac¬ 
 crued upon the Bonds of your Company, 
 and upon Notes given in extension of 
 
 Bonds which fell due in 1883. $13,942 50 
 
 And works had been undertaken by the Illi¬ 
 nois Central Railroad Company, as your 
 lessee, which made necessary an expendi¬ 
 ture for betterments of. 13,527 42 
 
 - 27,469 92 
 
 ' Leaving the available cash resources Oct. 1, 
 
 1887. $81,627 31 
 
 The surplus income of the Railway for the 
 three months from October 1, 1887, after 
 providing for the interest on the Debt, 
 
 Rent of the Cedar Falls & Minnesota R. R., 
 if due, and the Dividend of 1 per cent, 
 paid December 31, 1887, was, as will be 
 
 seen from detailed statement attached ... 4,760 48 
 
 Available cash resources, after paying the in¬ 
 terest due January 1, 1888. $86,387 79 
 
 By order of the Board, 
 
 W. J. KNIGHT, 
 
 Presidmt. 
 
 EDWARD P. SKENE, 
 
 Assistant Sec7’eiari/. 
 
 March 14, 1888. 
 
Dubuque & Sioux City Railroad. 
 
 Earnings and Expenses. 
 
 Three Months, October 1 to December 31, 1887. 
 
 
 D. & S.C. R. R. 
 142 miles. 
 
 C. F. & M. R.R. 
 75 yjfff miles. 
 
 Both Roads. 
 218 jYd miles. 
 
 Gross Earnings. 
 
 $243,348 33 
 137,383 53 
 
 $27,313 38 
 36,236 65 
 
 $270,661 71 
 173,620 23 
 
 * Operation Expenses & Taxes. 
 
 
 Excess of Earnings over Operation Ex¬ 
 penses h Taxes. 
 
 $105,964 75 
 
 
 $97,041 48 
 
 Excess of Operation Expenses & Taxes 
 over Earnings. 
 
 $8,923 27 
 
 
 
 
 * This includes $236.97, Permanent Expenses of C. F. & M. R. R. 
 
 Application of Income. 
 
 Three Months, October 1 to December 31, 1887. 
 
 Net earnings from Traffic of D. & S. C. R. R. 
 
 Net loss from Traffic of C. F. & M. R. R., exclusive of rent. 
 
 Available Income for the Quarter. 
 
 Applied as follows: 
 
 Quarters’ interest on debt, Oct. 1 to Dec. 31, 1887. i 
 
 Notes IJ^ % on $295,000. $3,687 60 
 
 Bonds % on $586,000. 10,256 00 
 
 $105,964 75 
 8,923 27 
 
 $97,041 48 
 
 $13,942 60 
 28,342 50 
 49,996 00 
 4,760 48 
 
 To provide for rent of C. F. & M. R. R., if due. 
 Dividend December 31, 1887, 1 ^ on $4,999,600. 
 Balance of Income carried forward.