TO BONDHOLDERS OF fm THE WABASH SYSTEM OF RAILWAYS EAST OF THE MISSISSIPPI RIVER. * > A W//4J^ To Bondholders of The Wabash System of Railways East of the Mississippi Riyer : cD m After three and a half years of costly litigation, large holders of all the various classes of Wabash securities, above named, have agreed to a plan of ad¬ justment which, while it proposes some concessions of rights which might possibly be enforced by a continu¬ ance of the litigation, is so equitable in its provisions that we believe a fair consideration of the reasons which suggested it will ensure your approval. It is undoubtedly in the power of any class of bond¬ holders from whom a concession is asked, to assert its rights and thereby prolong litigation, as the rights of the different securities are so conflicting that many questions relating thereto can only be determined by judicial decision, which through appeals from Court to Court by either party meeting an adverse decision, would result in almost interminable delay. Such delay is certainly to be deprecated, and therefore it is not without reason in this /respect, that a compromise is suggested. First mortgage bondholders claim, that even though sectional liens only, their securities are good for their demands, because of the intrinsic value of each of the different properties upon which they are secured, but first mortgage bondholders are unable to enforce the immediate satisfaction of their claims, because of the care with which Courts always rightfully protect the I i 03567 2 interests and equities of underlying securities; therefore it is not permitted them to say effectively “ let the property be sold to satisfy our claims ” until such interests and equities as are claimed have been ad¬ judicated. So far as determination of equities is concerned, all that has been said is peitinent and applicable to the Second Mortgages as well as the First, though in consecutive order. From the fact that neither the First nor the Second Mortgages cover as an entirety the Wabash system (East of the Mississippi Fiver) an element of uncertainty is introduced into the otherwise complicated question, which hitherto has prevented either of these divisional bonds doing more than to ob¬ struct reorganization. A statistical presentation of this statement may be more convincing than its assertion. The First and Second Mortgages cover the Wabash property in sections as follows : NOV. 1st, 1887. Miles. 1st Mtge. Bonds Funded Debt and Acc’d Interest. 2d Mtge. Bonds Funded Debt and Acc’d Interest. Totals. TOLEDO & ILLINOIS') or ^. 75 | $900,000 136,830 174,232 $1,000,000 175,052 261,705 TOLEDO & WABASH] LAKE ERIE, WAB. & ST. L.) or >. 1671 1,211,062 2,500,000 380,363 484,688 1,436,757 1,500,000 262,353 392,615 $2,647,819 or $35,300 per mile. WABASH & WESTERN j GREAT WEST. OF 1859. 180 3,265,051 2,496,000 380,056 481,454 2,154,968 2,500,000 437,770 656,079 5,420,019 or $32,500 per mile. QUINCY & TOLEDO... 33 3,357,510 500,000 87,500 85,685 3,593,849 6,951,359 or $38,600 per mile. 673,285 3 Nov. 1st, 1887. ILLINOIS & SO. IOWA DECATUR & E. ST. L. HANNIBAL & NAPLES CHICAGO DIVISION... DETROIT DIVISION... Miles. Total 29 109 51 262 112 1st Mtge. Bonds Funded Debt and Acc’d Interest. 2d Mtge. Bonds Funded Debt and Ace’d Interest. Totals. $300,000 43,066 49,853 392,919 2,700,000 467,250 514,402 1,018 500,000 000,000 89,483 4,500,000 000,000 554,250 2,052,000 000,000 230,000 miles. 3,681,652 589,483 5,054,250 2,282,000 From the foregoing table it will be seen that even the First Mortgages have in themselves no principle of cohesion except that of contiguity, and though they cover by divisions the entire property, they possess no power of binding it together as a whole, while the Seconds have not even the advantage of attaching to all the numerous sections. In fact the portion of road upon which they are a lien is less in mileage than that on which they have no claim, while that to which they do attach is divided into three sections, and the lien of each mortgage is specifically located on one or the other of the three. So that while it is not impossible that the property mortgaged in these three sections might be worth the entire lien if it could be held for the benefit of all , yet the fact is, that the Ohio Section, which in¬ cludes the Toledo terminals would probably show a sur¬ plus in case of sale under sectional foreclosure, which of course would be the property of the junior mortgages, while the Indiana and Illinois Sections, charged with a lien of $32,500 per mile in Indiana, and $38,600 per 4 mile in Illinois, would be entirely without terminals, and to compete for business, would be compelled to ex¬ tend at once to Toledo and St. Louis. The other sections would also be compelled to build in the dissevered link, and the Wabash Western be¬ cause of the disintegration consequent upon such sale, would of course establish other Eastern connections, and thus, three roads in place of one, would be the in¬ evitable outcome. It is needless to say how disastrous to all any such result would be. These are some of the reasons why concessions are asked from Second Mortgage bondholders. The reasons why consideration for the junior mort¬ gages is asked are briefly as follows : Competent legal authorities advise us, that after care¬ ful examination they fail to find any equipment what¬ ever upon which the old First and Second Mortgage bonds are a lien. The existing equipment (outside of that owned by the Pacific Car Trust) was purchased with proceeds of junior mortgage bonds, and together with whatever has been acquired by the Railway Com¬ pany since the creation of those mortgages, is specifi¬ cally covered by clauses to that effect in them con¬ tained. The junior mortgages also cover whatever sur¬ plus values exist in the terminal properties, inasmuch as the lien of the different Firsts and Seconds does not extend beyond the section on which they are each def- initelv located. The old Firsts and Seconds therefore might, it is true, own a roadbed and its superstructure, without equip¬ ment or terminals, but the junior bonds would own the terminals, because of the value in them over and above the senior bonds; together with the equipment, and as these are the only means whereby the roadbed and superstructure can earn an income, it is not unjust that they should in this case—which is an unusual one— have consideration. The Receiver’s statements which show the earning o capacity of this system as a unit, are the strongest argument we can offer to urge its maintenance in that condition. We have already shown what disastrous competition would be the almost certain result of dis¬ integration, and it is needless to add that it is merely the wildest conjecture for any one to assert what any portion of the road could earn under such circum¬ stances. The results of such competition in the past scarcely encourage engagement in such an experiment, yet enforcement of the literal and absolute rights of senior bondholders in this case means that and noth¬ ing less. With these facts in view, a fair analysis of the pro¬ posed plan of reorganization will also show, that the new mortgages offer a much safer and more desirable secur¬ ity, than can be claimed for the old. The present divisional mortgages cover lines which owe much of their intrinsic strength to the union of these divisions, and to the harmonious operation of the different lines, and the joint use of the important termi¬ nals at Toledo, Detroit, Chicago, St. Louis and Hanni¬ bal. This is the fundamental argument in favor of mort¬ gages which cover continuously the termini, and all the lines between. The traffic reports of certain portions of the—so-called—main lines, and of divisions, separated by methods of bookkeeping—although correct accord¬ ing to the method adopted—are untrustworthy as evi¬ dences of the actual earning capacity of such parts, unassisted by the others. Without the aid of the Chicago Division for example, the Decatur and East St. Louis Branch could not earn its present surplus; nor could the Chicago Division dispense with its St. Louis connection. Without the Hannibal and Naples and the Decatur and East St. Louis, the main line from Toledo to Meredosia could not count upon the profits allotted to it. Each part helps support a part. The main lines contribute to the 6 divisions, and the divisions to the main lines. The large terminal charges are as much a part of the oper¬ ating expenses of the whole system, as are those in¬ curred in the movement of trains, and their magnitude is consequent on the extent of the system, and the aggregation of its business. As a matter of fact, they are indivisible equitably in a consolidated system, except upon some principle which will pro rate expenses incurred for the benefit of the whole, over every mile of road operated. Conse¬ quently accounts which debit to one division the entire rental of the terminal of that division which is used in common with, and for the benefit of the other divisions, cannot be a fair test of the earning capacity of either. Hence the logic which concludes that figures made by order of the Court, merely to determine approximately the profits of divisions which in operation are never divided, is utterly unsound. By way of illustration : Take the gross earnings of the year 1886, which were $12,886,460.77. Of this the Chicago Division earned $1,590,529.24 and contributed to the main lines $832,802.17, thus furnishing an aggre¬ gate of $2,423,331.41. Is it not manifestly unfair to¬ wards the Chicago Division, to charge upon that alone the rental charges at Chicago, which amount to about $145,000 annually, while to the connecting lines mutually benefited by the use of the terminal, no charge is made ? Nothing can be more delusive than such an apportionment of expenses and profits. The same reasoning applies to the terminal expenses charged to the Hannibal and Naples, a road 51 miles in length. This section in the Receiver’s statements is made to bear the burden of all the terminal expenses, which should be distributed over the lines between Toledo and the Mississippi River. In the same year the Detroit Division earned $786,- 362.57, and contributed to the main lines $475,446.71, but was made to bear the entire terminal charge at De- 7 troit, amounting to $68,556.96. But notwithstanding these heavy and inequitable rental charges, the Chicago Division actually earned in 1886 a net profit of $191,- 558.04; and the Detroit Division $99,202.22. If the rentals had been fairlv distributed, both divis- ions would have earned a surplus over the interest on their mortgage bonds. In 1887, the Chicago Division earned from January 1st to August 31st a net profit of $71,937.91, after de¬ ducting the entire amount of rental and sinking fund for the eight months. This was a gain of $36,705.96 over the period of 1886. If therefore, for the four months to December 31, 1887, this Division does as well as it did in 1886, the net profit will not be less than $228,264, or $3,264 more than interest on its bonds, notwithstanding the unjust debit to it of all ter¬ minal charges. Up to September 30, 1887, the Detroit Division had earned a net profit of $125,573.05, thus showing in nine months a considerable surplus over interest on its bonded debt, with three months of earnings yet to be added. In the plan of reorganization, the new First Mortgage not only embraces these divisional lines, but it is also extended over that part of the Chicago Terminals now owned by the Purchasing Committee, and the lines of the Wabash Western. Now, as the lines of the Wabash Western will, it is estimated, show a surplus of at least $600,000 this year over all fixed charges—equal to the interest on $12,000,000 at 5%—and as the prop¬ erty of the Purchasing Committee in the Chicago Terminals cannot be fairly valued at less than $2,000,000, it follows, that while the new mortgage shows a small increase over the total of the old mortgages, the additional security covered thereby is equal to $14,000,000 of capitalized value. It is obvious that such a mortgage must take a higher rank than the old First Mortgages, and it is equally ob- 8 vious that a consolidation which will strengthen the lines East of the Mississippi River by $600,000 of net profit, is also valuable to the junior mortgages, and, if possible, should be secured. The following comparative statement of debt per mile under the old and new First Mortgages is worthy of consideration : Debt per mile 1st Mtges. Main Line Wabash (Old Mtges.), excluding St. Louis Div.$18,500 Debt per mile Jst Mtge. Main Line and including entire system East of the Miss. River. 19,200 Increase. $700 pr. mile. Value of additional security : Equipment, say.$5,000,000 (Chi., Tol. & St. Louis) Ter¬ minals, say. 3,000,000 -$8,000,000 $8,000 per mile, and the equity in the lines West of the Miss. River. The old second mortgages, extending in divisions over the lines in Ohio, Indiana and Illinois, to Mere- dosia and Naples (422 miles), amount to $7,185,574, inclusive of overdue coupons. The new mortgage is increased to $14,000,000, but is extended over 596 miles of additional road, and over all the terminal prop- perties. Of this $14,000,000, the sum of $3,000,000 is to be a First Mortgage on all of the rolling stock now owned by the New York and Pacific Car Trust Com¬ pany, whether in possession of the Wabash Western, or Receiver McNulta, and costing originally nearly $5,000,000. The issue of $3,000,000 for this purpose depends upon the consent of the owners of the Car Trust to accept the bonds in exchange for their certifi¬ cates. If not accepted, the second mortgage will be limited to $11,000,000 and no one familiar with the property mortgaged can consistently deny that it offers a better security as extended over 1,018 miles and the terminals, than can be claimed for the old mortgages. This comparison may safely be challenged. 9 If the East Lines remain in the hands of the Re¬ ceiver, and earn as much in the ensuing years as now claimed for them in 1887, the Receiver may be able to pay three coupons per annum on the First Mortgages, and as there are now four overdue, it will take four years to pay off the interest arrears of the First Mort¬ gages. This will bring us to January 1, 1892, at which date the Second Mortgage bondholders will naturally expect a share of the surplus earnings, but even now the question is raised by the junior bondholders as to their right to compensation for use of equipment covered by their mortgages, and this question may de¬ fer the satisfaction of the First Mortgage interest even longer than the time named ; but, admitting that it be all paid up by January, 1892, seven years of overdue coupons on the Second Mortgages and their Funded Debt bonds will have accumulated mean while—that is to say, 49% on the former, and 42% on the latter, in round numbers amounting to. $2,820,000 To which add interest, about . 590,000 And principal of bonds. ... 5,875,175 50 Making a total of... $9,285,175 50 Thus at the beginning of the year 1892, with a Sec¬ ond Mortgage debt .on 422 miles of about $22,000 per mile, and subject to First Mortgages of over $16,- 000 per mile, an aggregate debt of over $38,000 per mile ; the holders of Second Mortgage bonds can apply to the Court for arrears of interest. Met here by the holders of the Consolidated Mortgage bonds and the Sevens of 1879, which are Second Mortgages also on some of the most important parts of the lines East of the Missis¬ sippi River, and with claims to a priority of lien on the bulk of the rolling stock, what will be the conse¬ quences V The Purchasing Committee has given substantial evi¬ dence of its co-operation in carrying out this plan—by 10 depositing security with the Central Trust Company to provide against the funding of First Mortgage interest, beyond a limited amount, in a very remote contingency ; thus providing against any weakening of the security now held by the junior bondholders ; and the only con¬ dition of their co-operation is, that assent to the plan be given by a sufficient amount of bonds within a speci¬ fied time. All details will appear on examination of the plan proposed, which may be obtained on applica¬ tion to the Central Trust Company, 54 Wall street, New York. The Purchasing Committee, however, reserves the right to withdraw at any time if satisfied that success is improbable. For this reason the time in wdiich bondholders may elect as to what they will do, is limited by the committees to January 20, 1888, and also, in order that the duties which will devolve upon them when the anticipated assent is obtained, may be deliberately and safely performed, and the delivery of the proposed new securities be delayed no longer than is absolutely necessary. The mortgages securing these bonds will, for the pro¬ tection of bondholders, be drawn with the utmost care, under the auspices of this committee, acting with advice of the best legal authority. Let bondholders of all classes weigh the advantages of this reorganization plan as compared with a proposed continuance of contention, such as has existed for the past three and a half years. It has been framed by representatives of all classes of bondholders and ac¬ cepted by the Purchasing Committee with a view of meeting bondholders to the full extent of their means and power. If it fails, it will plunge all interests into a conflict, . the end of which no one can foresee, but which will certainly be to the loss or disadvantage of all concerned. 11 Bondholders are not subjected to any expense by reason of their acceptance of the proposed plan, all expenses being assumed by the Purchasing Committee. We believe that a large majority of Wabash bond¬ holders are extremely desirous that some settlement whereby their investments will be amply secured and made interest paying, shall be reached without further delay, and we are confident that the proposed plan, when fully comprehended, will meet with their approval and support. Any further information relating to the plan will be cheerfully given by either of the undersigned. Cyrus J. Lawrence, 31 Broad St. Henry K. McHarg, 40 Wall St. Thomas B. Atkins, 2 Wall St. New York, Dec. 21, 1887. i j Of the Y Bondholders’ Committee. STATEMENT OF PAYMENTS IN CASH ON BONDS. WABASH, ST. LOUIS & PACIFIC RAILWAY CO. Re-Organization. First Mortgage Bonds. Interest. Old Bonds. Receive New Firsts. Receive Cash. Toledo & Illinois R. R. Lake Erie, Wabash & Coupon Feb. 1,1886, 7 %.. $1,000 $l,00u $165 90 St. Louis . Coupon Feb. 1,1886, 7 %.. 1,000 1,000 165 90 Great Western of Illinois .. Coupon Feb. 1, 1886, 7 %.. 1,000 1,000 165 90 Decatur & East St. Louis... Coupon Feb. l, 1886, 7 %.. 1,000 1,000 165 90 Illinois & Southern Iowa... Coupon Feb. 1,1886, 6%.. 1.000 1,000 142 20 Quincy & Toledo. Coupon May 1, 1886, 7 %.. Coupon Dec. 1,1885, 7 %.. 1,000 1,000 146 30 Hannibal & Naples. "Wabash R. R. — Chicago 1,000 1,000 178 96 % Division. Funded Debt Bonds — Coupon Jan. 1, 1886, 5%.. 1,000 1,000 123 16 % Toledo & Illinois. Funded Debt Bonds, Lake Coupon Feb. 1,1886, 7 %.. 1,000 1,000 165 90 Erie & Wab. Coupon Feb. 1,1886, 7 %. 1,000 1,000 165 90 12 First Mortgage Bonds. Interest. Old Bonds. Receive New Firsts. Receive Cash. Funded Debt Bonds, Great Western. Coupon Feb. 1,1886, 7 %. $1,000 $1,000 $165 90 Funded Debt Bonds, Illi¬ nois & Southern Iowa.... Coupon Feb. 1,1886, 7%. Coupon Feb. l, 1886, 6 %. 1,000 1,000 165 90 Funded Debt Bonds, Deca¬ tur & E. St. Louis. 1,000 1,000 142 20 Funded Debt Bonds, Quin¬ cy & Toledo. Coupon Feb. 1,1886, 6 %. 1,000 1,000 142 20 Scrip, Toledo & Illinois. Interest Feb. 1, 1886, 7%. 1,000 1,000 164 32% “ Lake Erie, Wab. & St. Louis. Interest Feb. 1,1886, 7 %. 1,000 1,000 164 32% “ Gt. Western of Ills .. Interest Feb. 1,1886, 7 %. 1,000 1,000 164 32% “ Illinois & Southern Iowa. Interest Feb. 1, 1886, 7 %. 1,000 1,000 164 32% “ Decatur & East St. Louis. Interest Feb. l, 1886, 6 %. 1,000 1,000 140 85 “ Quincy & Toledo. Interest Feb. 1, 1886, 6%*. 1,000 1,000 140 85 [ 18132 ]