the part of the parties in interest, to have taken the capital stock of any new corporation at par for cash values; without having come within the corporation laws of this State, and without having subjected the proposed new capital to taxation, both at the time of the organization of the company and thereafter. In addition to the properties of the Brooklyn City Railroad Company, the Long Island Traction Company also owns the entire capital stock of the Brooklyn, Queens County and Suburban Railroad Company, as will hereinafter be pointed out. The position of the Long Island Traction on January 2, 1894, and many facts of interest as to its antecedents, appear in a letter addressed "To the Public," by President Lewis, on the 18th of that month, and published in the daily newspapers. It is annexed, and marked "Exhibit O." Notwithstanding the fact that the Brooklyn City Railroad Company received into its treasury the proceeds of $3,000,000 of stocks and $3,000,000 of bonds, and went ahead with the electrical conversion of the properties, the Brooklyn Heights Company, as lessee, nevertheless soon found itself, in conjunction with the Long Island Traction Company, in financial embarrassment. President Lewis testified that the guaranty fund of $4,000,000 deposited by the Long Island Traction Company and the Brook. lyn City Railroad Company has already been drawn up to the extent of $250,000 toward the payment of the agreed dividend of 10 per cent. on the Brooklyn City Railroad Company's stock; that the companies consumed the entire $6,000,000 and more, the proceeds of the final issue of stock and bonds of the Brooklyn City Railroad Company, and that they are nevertheless heavily in debt, and need, at least, $2,850,000 to pay their floating indebtedness and to complete electrical equipment of the Brook lyn City system. The Brooklyn Heights Company, as early as the summer of 1894, had expended out of its own moneys, in addition to the proceeds of the Brooklyn City Company's stocks and bonds, a sum exceeding $1,000,000, which it had borrowed upon its shorttime notes in the market. For the purpose of relieving this unhappy situation, the Long Island Traction Company proposed an issue of $3,000,000 of so-called collateral trust notes. At the time this proposition was made the condition of the company was set forth in the following communication addressed by the board of directors of the Long Island Traction Company to the stockholders of that company, under the date of 15th of September, 1894, which your committee regards as of the utmost importance: It discloses very fully the entire situation, and the company can not now controvert its statements. Attention is particularly called to the estimated profit to the Long Island Traction Company, as owner of the lessee company, of an average for the next three years of $302,500 per annum. And here it is to be remembered that of the $4,500,000 paid into the Traction Company, it had $4,000,000 well invested as a guarantee fund, but on which it was drawing interest for its own account, so that the annual earnings of $302,500 would really have been on a total cash cost investment of not over $500,000. The communication was as follows: "To the stockholders of the Long Island Traction Company: "In June, 1893, the Brooklyn Heights Railroad Company took possession of the property and franchises of the Brooklyn City Railroad Company, under the lease between the two companies, and has since continued the operation of the railroads embraced in the Brooklyn City Railroad Company system, consisting of 200 miles in operation under electrical equipment, and 93 miles of extensions not yet built upon. "The Long Island Traction Company owns or controls all the capital stock of the Brooklyn Heights Company, and the directors and officers of the two companies are identical. "The Brooklyn Heights Company, as lessee, agreed to proceed with due diligence to complete the electrical conversion of all the leased property. The proceeds of the sale of certain increased capital stock and of certain consolidated bonds of the Brooklyn City Company and of certain of its real estate and personal property not necessary for the use of its railroad were to be expended in the prosecution of the electrical conversion of the properties. "The balance of the moneys necessary to complete the electrical conversion of the property was under the lease to be provided by the Brooklyn Heights company out of its own funds. By the terms of the lease the Brooklyn City Company is to pay to the Brooklyn Heights Company, in the event of the expiration of the lease or its sooner termination, the actual cost of all property, extensions, branches, improvements and equipments, made, acquired and paid for by said Brooklyn Heights Company out of its own funds for use in connection with the operations of the railroads of the Brooklyn City Company less the cost of such part as may be required to preserve said railroads, extensions, additions, improvements and equipments in good repair and serviceable condition, and less the cost of such part as may be necessary to preserve and secure efficiency in the operation of the railroads. "Besides disbursing the moneys realized from the sale of the increased capital stock and of the consolidated bonds of the Brooklyn City Company, the Heights Company has expended out of its own funds a sum exceeding $1,000,000, and will be required to spend before the electrical conversion is completed a large additional amount. "After applying toward the July rental $250,000 of the guar anty fund deposited as security for the performance of the lease, and the interest in the guaranty fund, the Brooklyn Heights Company now needs the sum of $2,850,000 in order to pay existing indebtedness and to complete the electrical equipmens. This sum will be reduced by the proceeds when realized of the real estate and personal property of the Brooklyn City Company to be sold as above stated. "The value of the real estate of the Brooklyn City Railroad Company, which was to be sold as appraised by D. & M. Chauncey Company and John F. James & Son, the well-known real estate experts of the city of Brooklyn, amounts to $875,000, and the estimated value of the personal property exceeds $200,000. "The following causes may be said to have contributed to create the indebtedness of the Brooklyn Heights Company: "I. The above-mentioned real estate and personal property, the value of which amounts, as stated, to $1,075,000, have not yet been disposed of. "II. Large sums of money have been expended in the completion of certain necessary extensions of the Brooklyn City system which had been begun by the Brooklyn City Company before the lease took effect. "III. The earnings of the system, though satisfactory, have been less than they would have been under ordinary business conditions. "Had the time been such that the personal property and real estate could have been sold to advantage, and had it not been essential to complete extensions, the Traction Company and the Heights Company would not have needed the temporary relief provided by the plan proposed. "The first 13 months' operation of the road under the lease-a peculiarly bad period for railroad earnings-while the electrical conversion of the road was proceeding with all the loss of income incident to such work, shows net profits to the lessee from all sources of $115,520.78. The gross receipts of the road for the first fiscal year under the lease were $4,284,000. It is believed, as an unnecessarily conservative estimate, that the gross receipts will average $4,750,000 per annum for the next three years and, assuming trat the road can be operated for not exceeding 60 per cent. of its gross receipts, including payment of all taxes, there will remain as annual net proceeds of operation "Adding annual interest on the guaranty fund held as security for payment of the rental charge by the Brooklyn Heights Company to the Brooklyn City Company .. .... "The net income from these sources will be... $1,900,000 187,500 $2,087,500 "Deducting rental charges, including $1,590,000 195,000 $1,785,000 "The annual net return to the Brooklyn Heights $302,500 "The foregoing figures have been referred to and found to be correct by Charles D. Phelps, an acountant selected at the request of your directors by the trustees of the holders of collateral trust notes below mentioned the New York Guaranty and Indemnity Company. "Mem.In addition to these sources of income, the Long Island Traction Company owns all the capital stock of the Brooklyn, Queens County and Suburban Railroad Company (which owns 44 miles of railroad now being electrically equipped and representing a consolidation of the old Broadway and Metropolitan Avenue and Jamaica and Brooklyn Companies), the result of whose operations for the next three years, it is believed, will show an average annual profit of not less than $25,000 over fixed charges. "There is, however, no obligation on the part of the Brooklyn Heights Company, the Brooklyn City Company or of the Long Island Traction Company, to meet any fixed charges on this property, the Long Island Traction Company simply owning the capital stock of the Brooklyn, Queens County and Suburban Railroad Company. |