The reduction in capitalization resulted in the following decrease in annual interest and dividend requirements: The above capitalization and charges compare with the old capitalization of $439,652,512 of which $310,760,000 was fixed interest debt with fixed interest charges of $12,878,000 annually. This reduction in charges and capitalization was probably the most drastic of any of the major systems under section 77 of the Bankruptcy Act. Thus a harsh reorganization has been made even more stringent by the reductions outlined above. Further reduction in the above will be accomplished after the reorganization. The "New" first mortgage bonds will in all probability be refunded with a 3-percent issue. Cash, over and above the requirements of the plan and working capital needs should be in excess of $50,000,000. This amount is sufficient to retire all the new first mortgage bonds to be outstanding ($26,846,186) or 68 percent of the income bonds ($74,007,150 outstanding). If the income bonds can be obtained at a discount over 80 percent of the issue may be retired. 2. Old interest charges approximated $12,900,000 annually, new interest charges approximate $4,900,000. The difference $8,000,000 is subject to income tax. At the present rate of 38 percent this means, that the security holders will pay $3,000,000 in each and every subsequent year in income taxes for the privilege of being reorganized under section 77. 3. There have been definite changes in the Rock Island situation since the ICC plan was formulated. The ICC stated that Rock Island could reasonably be expected to earn $11,000,000 annually for interest charges and dividends. During the war years this figure was greatly exceeded, but even in 1946, the first postwar year, there was $17,248,000 available for such purposes, or 1.34 times the old fixed charges. The year 1946 was generally not a good rail year, principally because of the wage increase without compensating rate increases. In 1947, conditions are different; a rate increase has been granted and at the present rate of traffic Rock Island should earn $25,000,000 or two times the present interest charges. 4. The present plan allows the senior bondholders committees to appoint the reorganization managers who in turn will select the first board of directors. Once appointed, control of the road is assured for years. The Metropolitan Life Insurance Co. controls the majority of these committees and therefore picks the majority of the reorganization managers; and this control is exercised through ownership of only approximately 11,000,000 bonds out of a total of 300,000,000 bonds. Do you wonder that Metropolitan still persists most strenuously to force through the present plan? The reason for this action is plain. Yet it is strangely at variance with the testimony of Harry Hagerty, vice president of Metropolitan and its representation on the Rock Island bondholders committee. Last year in testifying at the hearings before the Committee on Interstate Commerce of the United States Senate (on p. 290 of the record thereof) he stated: "I would just like to say that there should be another look taken at these plans of reorganization. I would prefer to have it done by the Interstate Commerce Commission which I think is the only proper tribunal to consider this matter." Again (on p. 291 of said record) Mr. Hagerty stated: "These life insurance companies and the savings banks have one idea in mind. That is to get these railroads back in the hands of the people in the territory. We do think we are entitled to one director. That is all we want. We don't want to control these railroads. It would be against public policy to do so." 62410-47 To which the chairman of the committee interjected: "Not only against public policy but it is a bad thing looking at it from your own institutional standpoint; it is a bad thing." Mr. Hagerty then went on: "That is why I am for anything that will serve to get them (the railroads) out of the courts and to provide some means by which the Interstate Commerce Commission could take a look at these plans, with some time limitation on it." 5. Recently, I proposed a program that would have substantially reduced the debt of Rock Island and simplified further proceedings immensely, and which would have resulted in better treatment for all security holders. A copy of said proposal is attached hereto. The Metropolitan has thus far been able to block any progress along these lines, and they are doing this despite the fact that the bonds that they represent stand to receive substantially better treatment under such program In substance, said proposal provided for the payment of $25,845,445 in cash for past due interest on $99,981,000 of general mortgage bonds from the date of default to July 1, 1946, at the rate of 3 percent per annum, instead of the coupon rate of 4 percent, and for a modification of all future interest on said bonds from 4 percent per annum to 3 percent per annum to the date of their maturity in 1988. Further, $38,400,000 principal amount of general mortgage bonds which are pledged under the first and refunding mortgage of 1934 were to be exchanged (by incorporation in a new plan as modified by the Commission) for $39,813,600 principal amount of secured 42 percent bonds due September 1, 1952, outstanding in the hands of the public, with cash equalization to offset the difference in the principal amount of said bonds. With respect to so-called divisional mortgages, of which there are five different issues outstanding in the hands of the public in aggregate principal amount of $46,291,055, bearing interest at rates of 42 percent and 5 percent per annum, said proposal provided for the payment of all of these outstanding bonds in cash at varying prices which were based upon allocations of value made by the Interstate Commerce Commission together with their marketable value. The total cash to be paid from funds in the debtor's estate for the purchase of these bonds aggregated an amount of $32,085,400, compared with an aggregate face value of said bonds of $46,291,055, as previously stated. The effectuation of said proposal in its entirety would have been the means of reducing the principal of the outstanding bond indebtedness of the debtor corporation from $293,862,655 to $246,158,000 (exclusive of equipment indebtedness of approximately $11,000,000) and all unpaid past due interest would have been paid off except on the refunding 42 percent bonds which matured on April 1, 1934, and the unsecured 41⁄2 percent convertible bonds due in 1960. As a result, the only outstanding bonds of the debtor, exclusive of the aforementioned equipment debt, would have been as follows: C. R. I. & P. Ry. Co. general mortgage 3-percent bonds, due 1988, Principal amount with interest on a current basis.. $99, 981, 000 C. R. I. & P. Ry. Co. first and refunding 4-percent bonds, due April 1, 1934 C. R. I. & P. Ry. Co. unsecured-convertible 41⁄2-percent bonds, due 1960_ 110, 425, 000 32, 228, 000 Choctaw & Memphis first mortgage 5-percent bonds, due Jan. 1, 1949, with interest on current basis_ Total____ 3, 524, 000 246, 158, 000 No further provision then would have been necessary in the reorganization proceedings for the above listed general mortgage bonds and the Choctaw & Memphis bonds. The latter mentioned are a relatively small issue which matures on January 1, 1949, and, therefore, need not be considered. The response to my suggestion was overwhelmingly favorable. I received hundreds of letters, personal visits, and telephone calls from security holders who were anxious to endorse my proposals. With your permission I would like to read one or two of them. The vote on the ICC plan was taken 2 years ago. Since that time the insurance companies (except Metropolitan) who voted in favor of the ICC plan have sold their bonds. It is my opinion, if a vote were taken today, the ICC plan would be overwhelmingly rejected, and I am firmly convinced the vast majority of bondholders would readily accept the proposals in my plan. Why does the Metropolitan insist on forcing through the plan, despite the fact that much better treatment can be obtained? Can it be that they want to control the road? Actually the Metropolitan is the respresntative of innumerable policyholders. Shouldn't they therefore endeavor to obtain the best possible treatment for their policyholders, instead of selling them down the river? Mr. Hagerty has stated before the Senate ICC that his company does not wish to control railroads. He should be brought here to explain the action in the Rock Island case. 6. Under the plan the senior mortgage of the system, namely the general 4's, 1988 are to receive: Under my plan, or a similar plan, the Rock Island generals could be made whole in fixed interest bonds and all other issues would receive vastly improved treatment. Yet the Metropolitan objects. Assuming the carrying out of my proposals a new plan could be formulated as follows: Bondwise, provision would have to be made only for the aforelisted matured 4 percent refunding bonds and the unsecured-convertible bonds. Therefore, the process to complete the reorganization of the debtor on a sound financial basis would be, indeed, a simple one and could be accomplished by the issuance of new income bonds bearing interest at the rate of 31⁄2 percent per annum in exchange for the principal amount of defaulted first and refunding 4 percent bonds with the issuance of new no-par common stock in payment of defaulted interest on said bonds, and the issuance of new $100 par value 4 percent preferred stock in exchange for the principal amount of the aforelisted unsecured-convertible bonds, without compensation to these unsecured bonds for past interest. On the basis of a financial reorganiztion as above related there then would be equity for the present outstanding preferred and common stocks of the debtor by the issuance of new common stock in exchange for the old outstanding stock on the following basis: Seven-tenths of one share of new no-par common stock in exchange for one share of old outstanding 7 percent preferred stock; Six-tenths of one share of new no-par common stock in exchange for one share of old outstanding 6 percent preferred stock; An assessment of $10 per share on each outstanding share of old common stock for the privilege of converting said stock into new common stock of no-par value. The financial structure of the newly reorganized company on the basis of the foregoing proposal, as compared with the capitalization proposed in the Interstate Commerce Commission's plan of reorganization, follows: 1 For the purpose of the foregoing tabulation the no-par common stock is stated at $100 per share. Interest on the income bonds listed above, in each instance, would be payable for each calendar year only to the extent that net income would be available for payment of said interest; unpaid interest, in each instance, would be cumulative to the extent of 131⁄2 percent of the principal amount. While the capitalization under my proposal in the aforelisted tabulation aggregates $377,582,514, $74,359,723 of said capitalization represents new no-par common stock which would be issued only to the extent that an assessment of $10 per share would be paid to the newly reorganized company by the old common stockholders in exchange for each share of new common stock of no-par value; therefore, on the basis stated, the new company would receive $7,435,972 in cash which is not taken into consideration in said tabulation. Further, despite the increased capitalization of my proposal, the annual charges to service the bonds and preferred stock under that proposal are $533,257 less than the annual charges to service similar securities under the ICC plan, notwithstanding that my proposal provides for the issuance to unsecured convertible bondholders of new 4 percent preferred stock of $100 par value for 100 percent of the principal amount of said bonds outstanding in an aggregate amount of $32,228,000, whereas the ICC plan allots to these securities only 4.967 shares of new no-par common stock for each $1,000 bond. The fixed interest charges of $2,999,430 shown in the above tabulation for payment on bonds provided by my proposal is well within the income of the leanest years in the last 10-year period. Further, the combined interest charges of $6,864,305 on the fixed interest bonds and income bonds provided by my proposal are well within the income of the lowest year in the last 7-year period; further, from a cash income standpoint, i. e., before deduction of depreciation from income, the combined interest charges here referred to are well within the income of the lowest year in the last 10-year period. The depreciation charges here referred to, which are deducted from income before determining the balance of earnings available for the payment of interest and dividends, now aggregate $6,783,000 per year. These deductions, or charges against income before interest, are within $81,000 of the total interest accruals, both fixed and contingent, as provided by my proposal. Therefore, under the most adverse conditions, from a cash standpoint of income the annual fixed and contingent interest under this proposal could be regularly paid. An appeal from the order of the court on my petition to ballot of September 30, 1946, was taken in the United States Circuit Court of Appeals by the Metropolitan groups, who have so consistently opposed me. This appeal was heard by the circuit court at the time of hearing of an appeal by the same group from an order of the United States district court refusing to confirm the Interstate Commerce Commission's plan of reorganization. The Circuit Court of Appeals remanded the plan to the district court with an order to confirm the plan and, by reason of its action in this proceeding, it vacated the order of the district court with respect to my proposal for debt reduction and payment of divisional mortgage bonds. If section 77 were repealed and the proposed new law substituted, I can say with the utmost confidence that it would be possible to work out all the proposals which I mention without the slightest difficulty. As a result the bondholders would receive better treatment and the stockholders would retain practically their entire equity in the property. I therefore again urge upon you the speedy passage of this new legislation. All of these reorganizations are drawing to a close and if something is not done forthwith it will soon be too late to save anything. Respectfully submitted. AARON COLNon, Trustee, THE CHICAGO, ROCK ISLAND & PACIFIC RAILWAY Co., Debtor. MAY 16, 1947. Petition for Order. (Filed September 30, 1946.) IN THE DISTRICT COURT OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF ILLINOIS, EASTERN DIVISION No. 53209 IN THE MATTER OF THE CHICAGO, ROCK ISLAND AND PACIFIC RAILWAY COMPANY, DEBTOR PETITION OF Aaron colNON, CO-TRUSTEE, TO COMPLY WITH MEMORANDUM OPINION OF THE COURT DATED JUNE 28, 1946 Aaron Colnon, Co-Trustee of the Estate of the principal debtor herein, complying with the suggestion of the Court relative to the payment of the General Mortgage and divisional first mortgages of the subsidiary debtors, as set forth in the Court's memorandum opinion of June 28, 1946, respectfully shows: 1. That the General Mortgage and divisional mortgages (with the exception of the Choctaw and Memphis mortgage), are as follows: NOTE.-No consideration is given herein to the payment of the Choctaw and Memphis 5% bonds, due 1949, since said bonds are not callable by their terms and since prior offers of the Trustees to purchase the same at premiums as high as 32% did not result in the retirement of more than 20% of said issue. Hence the $2,759,000 still outstanding are to be regarded as running to maturity and to be paid off thereon with treasury cash. 2. That, if past due interest on the General Mortgage bonds is computed from the date of default to and including the coupon due July 1, 1946, at the rate of 3% per annum for the total outstanding issue of $99,981,000, with deduction therefrom of the amount paid to the publicly held owners thereof by order of this Court in October 1945, there would be due the sum of $25,845,445. 3. That said sum of $25,845,445, by reason of the various pledges of General Mortgage bonds and First and Refunding bonds, would be allocated as follows: (a) to the publicly held General Mortgage bonds-$11,445,445, or $185.86 per $1,000 bond; (b) to the publicly held First and Refunding bonds-$10,230,787, or $92.65 per $1,000 bond; and (c) to the publicly held Secured 42% Bonds of 1952-$4,169,280, or $104.72 per $1,000 bond. 4. That if said sum is ordered paid by this Court, its payment should only be made upon the following conditions: (a) That the holders of at least $85,000,000 par value of said General Mortgage bonds (including the $38,400,000 held by the trustee for the First and Refunding Mortgage, as collateral) accept said payment in full discharge of all interest due them to and including July 1, 1946. (b) That said holders of at least $85,000,000 par value of General Mortgage bonds surrender all unpaid coupons from July 1, 1934, to maturity for cancellation; and have attached to their bonds in lieu thereof a modification agreement and new coupons beginning with that due January 1, 1947, and running to maturity (1988) evidencing interest at the rate of 3% per annum payable semiannually. Said modification agreement shall provide among other things: I. That each bond to which it is attached shall have stamped on its face and filing an appropriate legend indicating its modification of terms. II. That the interest rate has been reduced from 4% per annum to 3% per annum. III. That an annual sinking fund of not to exceed $1,000,000 shall be provided out of available net earnings, computed after all expenses of operation and taxes and the interest on equipment trust obligations and this mortgage, to retire at not over par any bonds tendered for this purpose to the full extent of the fund. IV. That any, or all, of said bonds may be called for payment on any interest date upon 90 days previous published notice at 1021⁄2 until July 1, 1951, 102 until July 1, 1956, and at a declining premium, until a par figure is reached, of one-half of 1% for each five year period thereafter. 5. That if as respects the various divisional mortgages due weight is given to the careful and discriminating allocations of value made by the Interstate Commerce Commission to each issue, and this is further balanced by a review of action of the security markets in appraisal thereof, it would indicate that equitable treatment would be accorded all divisional mortgage holders in full discharge of principal and interest due on their claims, if this Court should order the payment in cash to each holder thereof as follows: St. Paul and Kansas City Short Line Railroad. $635.00 per each $1,000 bond |