Senator REED. I discussed the matter of the Central of Georgia before we actually framed this legislation, and I told them that based on their statement, which I had no reason to doubt was correct, they should be excluded from the operation of the bill.

Mr. NOBLE. Yes, sir.

Senator REED. We used $50,000,000 of earnings as the dividing line last year. That figure was offered by the Interstate Commerce Commission itself. The President found objection to it. It was not mine. I am not a lawyer; I am just a newspaperman; but I had something to do with the framing of that bill last year, and we put that $50,000,000 limit in there at the suggestion of the Interstate Commerce Commission.

Mr. NOBLE. I see.

Senator REED. Personally, I did not like it. I do not want to use any figure of gross earnings.

Mr. NOBLE. Yes. Well, of course, in our situation, one of the technical amendments I suggested would make them applicable to all leased lines which do not report any earnings, but which would cause that to happen. We have a consolidated report to the Commission, but in our case it would bring us within the framework of the bill because I believe the New Haven qualifies.

Senator REED. Have you anything further, Mr. Noble?

I am much obliged to you for your patience in trying to get this picture to us.

Senator.

Mr. NOBLE. I hope that I have succeeded in explaining some of the more difficult parts. I think that is about all I had to say, Senator REED. Well, thank you very much.

We will now hear from Mr. Reuss.

STATEMENT OF W. WENDELL REUSS, OF THE FIRM OF MCLAUGH-
LIN, REUSS & CO., 1 WALL STREET, NEW YORK, N. Y.

Mr. REUSS. Senator, May I read my statement as is?
Senator REED. Surely.

Mr. REUSS. My name is W. Wendell Reuss, residing at 71 Hillside Avenue, Tenafly, N. J. I am a partner in the firm of McLaughlin, Reuss & Co., members of the New York Stock Exchange, and associate members of the New York Curb Exchange; our place of business is 1 Wall Street, New York City.

Our business, primarily, is the specialized function of acting bond brokers on the floor of the New York Stock Exchange, concentrating our information, service, and efforts in the railroad securities' field.

I believe that a significant statement to make to this body is the fact that our firm never takes positions, either on the long side or on the short side, in any type of security.

In my capacity as a specialist in railroad securities, I have taken, until recently, only a perfunctory interest in whether new railroad reorganization legislation was enacted. In other words, until the present, I had been content to see all rail reorganization plans, as initiated by the Interstate Commerce Commission and generally approved by the courts, be consummated in conformity with the provisions of section 77 of the Bankruptcy Act. In this connection, neither my partners nor myself, either by word of mouth, letter, or

financial contributions, has lifted one finger to aid the cause of a change in section 77.

Rather, to put it simply, I was content to rest on the outcome of railroad reorganizations as propounded under section 77, or if, by chance, the act was amended, as was proposed last year and vetoed, or as is now proposed, I would still have been guided accordingly. Again, I wish to repeat: No action, so far, has been taken by my partners or myself against or for the newly proposed legislation.

Of late, however, I have given much serious thought to the new proposals and the statements thereon pro and con. I now feel that I should no longer remain inactive.

I am convinced that the proper course now is to come out wholeheartedly in support of the proposition to so amend section 77 as it affects railroad securities, that the still remaining "old" bondholders may be given an opportunity to receive materially better treatment, as the present, up-to-date figures would seem to clearly to make feasible.

To support my conviction, let us first refer to the Rock Island reorganization.

On October 31, 1940, the Interstate Commerce Commission apppoved the initial Rock Island reorganization plan, fixing the effective date as of January 1, 1941.

In August 1941, the Interstate Commerce Commission approved a modification of this plan, with a new effective date of July 31, 1941. Subsequently, the effective date was advanced to January 1, 1942.

Then, 2 years later, the Interstate Commerce Commission issued a second modification of the plan, with the effective date further advanced to January 1, 1944.

Herewith attached, in the form of schedule A, is a comparison of the Rock Island's "old" capitalization outstanding as of these various effective dates, together with selected financial facts and newly proposed capitalizations as of the same dates; also given are the current figures of the "old" capitalization and selected financial data. (Schedule A is as follows:)

SCHEDULE A

Following are comparisons of Rock Island's “old” capitalization outstanding on each of the proposed effective dates, together with selected financial facts and newly proposed capitalizations as of the same dates; also given are the current figures for the "old" capitalization and selected financial data:

1 Reflects, among other uses of cash, payments totaling $34,279,750 made to creditors on October 17, 1945, account combined principal and interest.

1 Giving effect to interim retirement RFC loan and Choctaw & Memphis first 5's, 1949.

Mr. REUSS. This schedule shows

1. At the time of the first effective date, January 1, 1941, the road's total cash and equivalent amounted to only $10,730,804, with net working capital at $10,615,519;

As of January 1, 1947, 6 years later, the total of cash and equivalent was $78,679,250, and net working capital $77,720,849, notwithstanding intervening elimination of the $11,499,168 RFC loan, and accrued interest thereon, a $21,364,832 reduction in receivers' and trustees' certificates, now equipment trust certificates, and $34,279,750 of payments made to creditors on account of principal and interest, among other uses of cash.

Herein is disclosed a net cash improvement, debt elimination, and claim reduction, totaling $135,092,196, yet

ry

2. Allowable capitalization, as shown by comparison of the Janus 1, 1941, and January 1, 1944, effective dates, revised in the latter instance to January 1, 1947, to reflect intervening elimination of RFC claims, and other debt reduction, is $24,507,619 lower; the January 1, 1941, allowed total being $351,180,912 and the January 1, 1944, revised to January 1, 1947, total being $326,673,293.

3. More than this, the Rock Island's 1946 annual report states that during the pendency of the reorganization proceedings and up to December 31, 1945, the sum of $102,322,946 was spent out of current earnings for additions and betterments; equaled roughly $76,000,000. In each of these cases, I stress that these substantial amounts are entirely apart from liberal expenditures for maintenance of way and equipment.

Contrasted with this showing, Rock Island's total "old" debt. currently amounts to $304,597,678, on which the accrued interest equals an additional $165,977,928, making for total claims of $470,575,606, without taking into consideration the "old" issues of preferred and common stock.

The crux of this brief accounting lies in the following summary: This is the meat of the whole argument.

The "new" adjusted capitalization of $326,673,293 is $143,902,313 "short" or shy of treating wholly with the $470,575,606 total claims senior to the "old" capital stocks.

Yet, the latest adjusted "new" capitalization is $24,507,619 lower than the intially proposed January 1, 1941, capitalization, beyond which currently:

Cash improvement, in the same period, was $67,948,446, and

62410-47-6

77

ions and betterments roughly equal $76,000,000 in the

507,619 lessened "new" adjusted capitalization allowable, he net cash increase, plus the gross additions and betterde to property amounts to somewhat more than $168,000,000; 00,000 more than the $143,902,313 deficiency of treatment now being experienced by those holding securities senior to the "old" capital stock.

I am not suggesting that the "new" Rock Island capitalization be allowed to be swollen by this $168,000,000, but I am pointing out as vigorously as is possible that new legislation which would allow or provide for a combination of some increase in capitalization, and use of surplus funds to retire debt and claims, by call by tenders, if no other means be found, at a discount, would easily accomplish the righting of a wrong, which now is so patently manifest.

In this connection, it was only a little more than 6 months ago that two proposals were made, one by one of the road's trustees and another by the debtor, using cash funds varying between $55,000,000 and $58,000,000; whereby interest claims and outstanding debt would be very largely reduced and more equity produced for those desiring to remain in the reorganized Rock Island securities.

With regard to the contents of the previous paragraph, allow me to refer to one of the senior Rock Island bond issues; the general 4's of 1988. The claim of each $1,000 bond, including defaulted interest, after crediting the payment made in late 1945, was $1,210.86 as of January 1, 1944, effective date. The reorganization plan provides the following treatment per $1,000 bond against this claim:

$143.72 in new first mortgage bonds.

$454.14 in new general mortgage income bonds.

4.45 shares in new preferred stock.

3.36 shares in new common stock.

Not quite 12 percent of the total claim of this senior mortgage issue is satisfied in new first mortgage bonds, yet the road recently was shown to be in the position of having available as much as $55,000,000 to $58,000,000 for use in a debt claim reduction program. One of these proposals indicated that the result could equal a reduction in total claims to be treated with of $127,825,635; a calculated elimination of $2.32 of debt claims for each $1 of cash expended.

Carrying out of such a proposal would, in my opinion, certainly permit those remaining holders of one of the senior mortgage issues to emerge under a new reorganization plan with far more than 12 percent of their claim represented by the new first-mortgage issue. After all, it is matter of simple arithmetic that those wanting "out," via the tender-request route, not being forced to dispose of their holdings indiscriminately, are creating far more equity for those desiring "in," Pursuing this thought down to the lowliest bond issue of the Rock Island, the convertible 41⁄2's, 1960, instead of emerging with only $496.70 of calculated treatment per $1,000 bond, carrying a total claim of $1,480, the elimination of so large a total of claims on senior bond issues would assuredly more fairly treat with the $983.30 deficiency per $1,000 bond now suffered by these bondholders.

However, lack of specific sanctions among the provisions of section 77 so far have operated to prevent the carrying out of these measures. Senator, may I interject an additional thought here. That is, in

this particular case, Judge Igoe has ordered the plan back for refinement, and appeal was taken in the circuit court and now he cannot do what I think section 77 gives him the power to do.

Senator REED. Mr. COLNON, one of the trustees, testified the day before yesterday. We discussed it quite thoroughly.

Mr. REUSS. Yes, sir.

Let us now refer to the Missouri Pacific reorganization.

On January 10, 1940 the Interstate Commerce Commission approved the initial reorganization plan, with an efective date of January 1, 1940.

On July 4, 1944, the Interstate Commerce Commission approved what is currently referred to as the "compromise plan," with an effective date of January 1, 1943.

Herewith attached, in schedule B, is a comparison of Missouri Pacific's "old" consolidated capitalization outstanding as of these various effective dates, together with selected financial facts and newly proposed capitalizations as of the same dates; also given are the current figures for the "old" consolidated capitalization, and selected financial data.

(Schedule B is as follows:)

SCHEDULE B

Following are comparisons of Missouri Pacific's "old" consolidated capitalization (inclusive of New Orleans, Texas & Mexico and International Great Northern) outstanding on each of the proposed effective dates together with selected financial facts and newly proposed capitalizations as of the same dates, also given are the current figures for the "old" consolidated capitalization and selected financial data: