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"The general design and capacity of the working parts of the equipment are good and sufficient to meet the present requirements of the system. I found that the equipment was all in thoroughly first-class operative condition and having been exceptionally well maintained, and in fact in some instances the original apparatus has been improved since its installation, the depreciation should be set at the minimum for each part of the property."

E-Manhattan Lease.- Inasmuch as the lease from the Manhattan Railway Company is itself in the nature of a franchise, for the purpose of determining the actual value in operation of the system as a whole, I shall consider this item in conjunction with that of the value of the leases of the Subway railroads, and the controlled companies, at the conclusion hereof.

F-After Acquired Equipment. The tentative mortgage pledges all of the real estate of the Interborough Rapid Transit Company by specific description, including all that which at present constitutes, technically, a part of the equipment of the Subway. The equipment proper is covered in general terms. The tentative mortgage was, however, considered to be inadequate in that it did not include all after acquired property which might constitute a part of the equipment as defined in the leases of the Subway. The company has, however, acquiesced in the suggestion that the terms of the mortgage be so amended as to include in the mortgaged premises all property now owned or hereafter acquired by the company which shall constitute a part of the equipment as the same is defined in the leases of the Subway, thereby materially strengthening and improving the security.

G-Claim Against City of New York. In this connection it may also be noted that a claim against the city of New York arising out of the construction of the Subway under Rapid Transit Contract No. 1, has been asserted in the name of John B. McDonald, the original contractor, but a three-quarters interest therein is owned by the construction company, the remaining one-quarter interest having passed to the petitioner. This claim is now in the course of liquidation under the terms of an arbitration agreement between the parties in interest in the form of an amendment to Rapid Tr sit Contract No. 1, approved by this Commission. Inasmuch as this claim is at present undetermined and indeterminate, and inasmuch as when recovered, and for whatever amount recovered, it may be taken into consideration by this Commission in connection with an application for leave to make any further issue of bonds under the mortgage, no requirement should be made by the Commission at the present time that such indeterminate claim be included in the mortgage

Having thus considered the petitioner's indebtedness now sought to be refunded, and its assets available for the purpose of securing the payment of obligations which may be authorized for such refunding purposes, there still remains to consider:

H-The Present Net Earning Capacity of the System. There remains to consider the present net earning capacity of the petitioner's Subway and Elevated railroad systems, operated as a whole.

The estimate of the company's auditor based upon the, actual income expenditure for the first three months of the calendar year, with due consideration for the actual earnings of the past calendar year, is as follows:

Gross earnings
Operating expenses

Net earnings
Other income

Gross income

Interest on bonds and 3-year gold notes and rentals.
Taxes

$24,959,728
10,903,996

Surplus.

$14,055,732
1,070,772

$5,296,832
1,600,000

Total interest, rentals and taxes.

Balance

7% on Manhattan Ry. Co. stock.

Net income

Dividends on $35,000,000 Interborough Rapid Transit Company capital stock.

$15,126,504

6,896,832

$8,229,672 4,200,000

$4,029,672

3,150,000

$879,672

It will be noticed that the foregoing would show if the future justifies the present estimate, an apparent earning capacity upon the present basis of the joint operation of the two divisions, of 9 per cent upon the $35,000,000 of capital stock of the Interborough Rapid Transit Company, and a surplus of $879,672, after making all provisions for the payment of the interest on funded and floating debt, and after making provision for maintenance account and operating expenses as the same actually prevailed for the first three months of the calendar year, without reference to their adequacy or liability to increase. There should, however, in my judgment in any event, be eliminated from this estimate of surplus the sum of $275,000, which the company's auditor has included as the estimated additional contribution to gross income from the opening of the extension of the Subway to Atlantic avenue, Brooklyn. Although the same may be realized in the future it is at present a matter of pure speculation. This estimated surplus is, however, subject to reductions precisely as the petitioner itself may voluntarily make a larger expenditure for maintenance or a new attribution to reserve for depreciation, or as the petitioner may be required so to do by this Commission, and it is impossible for one or anyone at this time to say more, nor are called upon to say more than that the net income will in my opinion be much more than ample to meet the service of the notes and bonds to issue which at the present time the petitioner asks leave, without reference to the dividends on the stock.

The Commission acquires jurisdiction of the matter in this petition under and by virtue of the provisions of section 55 of the Public Service Commissions Law, and of subdivision 10 of section 4 of the Railroad Law.

The petitioner is without authority to execute the mortgage or to issue securities thereunder, and the Commission is without authority to authorize such act on the part of the petitioner, unless the bonds, notes, or other evidences of indebtedness sought to be secured by the mortgage have been found by the Commission to be necessary

1. For the acquisition of property, construction, completion, extension or improvement of its facilities; or

2. For the improvement or maintenance of its service; or

3. For the discharge or lawful refunding of its obligations,—

and in the event of the Commission authorizing such issue it is necessary for the Commission to find that in its opinion the use of the capital to be secured by the issue of such stocks, bonds, notes or other evidences of indebtedness is reasonably required for the said purposes of the corporation.

The Commission has carefully considered each detail of the proposed mortgage, with the result that it has suggested to the petitioner many changes in the form, phraseology and scope of that instrument, in respect more particularly to the following matters:

1. It has been deemed desirable and proper that the mortgage should include the lease of the Manhattan Railway, in order that the bondholders shall have the security of the entire earning capacity of the railroad system operated by the petitioner. 2. The proceeds of the Steinway tunnel, when and as the same shall be disposed of, should be devoted to the purposes of the mortgage as hereinbefore set out.

3. The sinking fund is approved as proposed in the petition, but the provisions of the mortgage have been modified so that the annual sinking fund payment may be increased by the petitioner at any time, and must be so increased if the Commission, as a condition of the authorization of any subsequent issue of bonds, shall so require.

4. No bonds shall be issued at any time without the previous approval of the Commission.

5. The price at which bonds may be purchased for the sinking fund or redeemed at the option of the petitioner should be 105 per cent and accrued interest, instead of 110 per cent and accrued interest, as requested in the petition.

6. Bonds redeemed pursuant to the option reserved to the company shall be cancelled, and shall not thereafter be reissued, and bonds originally issued as security for notes and not used for the payment or redemption of notes shall be cancelled, but a corresponding amount of such bonds may thereafter be issued for the purposes in the mortgage defined, with the previous approval of the Commission.

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7. The mortgage has been required to be so altered that instead of bonds being issued thereunder to raise funds with which to make advances to subsidiary companies (taking their bonds in return as security under this mortgage, and thereby devoting to the purposes of the subsidiary companies the proceeds of the new proposed issue) those companies be left to finance their own requirements by the sale of their own securities, upon application to and approval of the Public Service Commissioners, where such approval is required by law.

8. With the exception of such of the bonds as shall be exchanged for the notes of the $25,000,000 note issue, no bonds may be issued by the company for less than par, except after public advertisement for bids upon due notice; with the right to the company, however, to cause an underwriting syndicate to be formed to take the bonds at a price below which they shall not be offered to the public, and subject to such public offering, and to pay a reasonable commission for the formation of such underwriting syndicate; and in respect of the exception made to the foregoing rule in the matter of the issue now authorized the bonds issued and pledged as security for the company's notes may not be disposed of by the company in exchange for such notes at a discount of more than 1 per cent without the consent and approval of the Commission.

9. The proceeds of the sale of all bonds must be set aside, separate and apart from all other assets and funds of the company, and used only for the purposes for which the issue of the said bonds or notes is authorized.

10. The company must keep true and correct accounts showing the application by it of the proceeds of the sale of all bonds, and showing also the receipt and application by it of the proceeds of the sale of all property at any time subject to the lien of the mortgage which may be sold free from such lien, which accounts shall at all reasonable times be subject to inspection by bondholders as well as by the Public Service Commission, and such accounts shall be audited from time to time by an impartial accountant or accountants appointed for such purpose by the Public Service Commission, and a copy of the accounts as so audited be subject at all reasonable times to the inspection of any bondholders

11. The proceeds of the sale of all properties at any time subject to the mortgage and sold free from the lien thereof must, except so far as the same shall be replaced by a new property or equipment, be applied to the reduction of the mortgage debt.

The foregoing are the most salient changes which have been suggested by the Commission (and which have been acquiesced in by the petitioner) as necessary to the more perfect protection and security of the bondholders of the company, to the prompt and speedy reduction of the company's indebtedness, and to the more perfect accounting for the disposition of the funds procured through the sale of bonds as authorized.

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Special attention may be called to the matter of the Subway Realty Company. The law authorizes the acquisition by the company of real property "for the purposes of its incorporation," which "shall be deemed to be required for a public (Railroad Law, section 7). By section 18, subdivision 5 of the Railroad Law, the company is authorized to acquire and use such real estate and other property in this State as may be necessary in the conduct of its business, but the value of such real estate held at any one time shall not exceed the sum of one million dollars ($1,000,000)."

If the right of the petitioner to acquire and hold real property were confined to the two foregoing provisions of the law, it is doubtful whether this Commission could recognize the propriety of its investment in the so-called Belmont Hotel property, but by section 42 of the Stock Corporation Law it is provided that:

"Any corporation may purchase any property authorized by its certificate of incorporation, or necessary for the use and lawful purposes of such corporation, and may issue stock to the amount of the value thereof in payment therefor."

It is also provided by section 40 of the Stock Corporation Law as follows: "Any stock corporation, domestic or foreign, now existing or hereafter organized, except monied corporations, may purchase, acquire, hold and dispose of the stocks, bonds and other evidences of indebtedness of any corporation, domestic or foreign, and issue in exchange therefor its stock, bonds or other obligations if authorized so to do by a provision in the certificate of incorporation of such stock corporation,

or in any certificate amendatory thereof or supplementary there to filed in pursuance of law.

Article 12 of the certificate of incorporation of the petitioner provides as follows:

The corporation shall have power to purchase, acquire, hold and dispose of the stocks, bonds and other evidences of indebtedness of any corporation, domestic or foreign, and to issue in exchange therefor its own stock, bonds or other obligations." It is therefore indubitable that the holding of the Interborough Rapid Transit Company in the capital stock of the Subway Realty Company is for a lawful corporate purpose, and that it has corporate capacity not only to hold, but to pledge, said stock as collateral security for its lawful obligations. The question here presented is not as to whether or not this Commission would approve of the issue of new secur ities for the purpose of the acquisition by the company of real estate for a hotel purpose, but whether the petitioner's investment heretofore made in the capital stock of the Subway Realty Company is, or was at the time thereof, a proper and lawful investment, as to which there can be no doubt.

The mortgage as executed will in all respects be absolutely subordinate to the rights of the city as lessor under the provisions of the contracts of lease, and can in no way, directly or indirectly, affect, modify, limit or change such rights, and neither will nor can constitute a lien upon the property detrimental or antagonistic to the interests of the city as lessor; and in this connection the proposed mortgage has been so modified as to include within its terms not merely the interest of the petitioner as lessee in the subway railroads, but also all property, real and personal, now, and which may at any time hereafter be acquired, as a part of the equipment of the two said subway railroads, pursuant to the terms of the leases thereof, to the end that in case the mortgage should be foreclosed, the purchaser would step into the shoes of the lessee as the holder not merely of the terms created by the leases, but of all of the property constituting at that time the equipment of the said railroads under the provisions of the contracts, and therefore the better enabled to fulfill and comply with the provisions of the said leases, subject, nevertheless, always, to the city's right of acquisition of the equipment at its then appraised value, at the expiration of the term.

It must also be borne in mind that the authorization of the issue of the $25,000,000 of notes secured by the $30,000,000 of bonds as proposed is not in any respect an authorization to increase the company's indebtedness. The unsecured indebtedness of the corporation at the date of the application amounted to $35,352,726.11. The authorized issue of bonds at the present time is $30,000,000, to secure a note issue of $25,000,000, and there is also brought under the security of the mortgage an outstanding note issue of $10,000,000 maturing two years hence. The purpose for which the issue is authorized is solely for the payment of petitioner's obligations, or for the payment of indebtedness about to mature, as representing accounts payable and obligations incurred for the acquisition, construction, completion, extension and improvement of the company's facilities in the matter of the so-called Brooklyn extension. The obligations heretofore incurred and not yet due by and from the petitioner for the acquisition of the said property and the construction and extension of its road, as aforesaid, including among others the sum of $3,771,147, or thereabouts, payable to the Rapid Transit Subway Construction Company on the completion of the Brooklyn extension of the rapid transit railway to its terminus at Flatbush and Atlantic avenues, Brooklyn, being on account of the excess cost of said railway over and above the amount payable with respect to the construction thereof by the city of New York. The present transaction, therefore, merely provides for the extension or funding of the company's indebtedness in respect to the greater part thereof, and for the liquidation of the remainder thereof. The company's creditors under the mortgage will be in a better position than the present creditors would be in if their claims were reduced to judgment and the property in the hands of a receiver; and a failure to authorize the refunding and the better securing of the company's existing indebtedness would have the effect of compelling the company to seek extensions of its existing debt upon onerous terms, even assuming that, given the present state of the market, such extensions could possibly be secured, or otherwise to fall under the administration of the court. The result of the refunding as proposed is to the benefit of the stockholders and creditors of the company, and carries with it the

assurance to the public of the company's ability to exercise the functions involved in the acceptance by it of its franchise and the terms of the obligations assumed by it to the city of New York in the leases of the rapid transit railways more perfectly and satisfactorily, and to the maintenance of the company's credit under conditions which will the more perfectly enable it to comply with the requirements of this Commission for an improved and extended service.

The Commission has held six public sessions on this matter. No objections have been made to the granting of the petition except on the part of one stockholder. to wit, Continental securities Company, represented by C. H. Venner. its president, the holder of 300 shares of stock, and which has objected upon the five following grounds:

1. That the notice calling the meeting of the stockholders of the petitioner for the purpose of authorizing the mortgage was not sufficiently specific.

2. That the Interborough-Metropolitan Company, or Windsor Trust Company, trustee, as holder of 339,128 shares of stock of the petitioner, was not entitled to vote for the approval of the mortgage, upon the ground that the said InterboroughMetropolitan Company had acquired said stock by issuing its bonds pursuant to an illegal combination with other companies constituting a combination and monopoly in violation of law.

3. That the proposed bond issue is insufficient to meet the future requirements of the company, and that it would be a serious mistake to authorize a mortgage for less than $75,000,000, and that even $100,000,000 would be found insufficient within twenty years.

4. That the investment in the stock of the Subway Realty Company and the advances to that company were unlawful and improper.

5. That the claim of the petitioner against the city of New York when collected should be applied to the payment of the floating debt, and that no bonds should be issued for purposes which could be met by applying the amount of the said claim against the city.

Considering these objections in their order, it is my opinion:

1. As to the notice: The notice calling the special meeting of the stockholders states it to be "for the purpose of considering a proposition to issue and dispose of bonds for the refunding of the obligations of the company and for its other corporate purposes, and to authorize and consent to a mortgage of the property and franchises of the company to secure payment of said bonds and of the present outstanding gold notes of the company or any renewals or extensions thereof, and to take such other action in connection therewith as may be brought before the said meeting."

The requirements for action by stockholders regarding the issue of mortgages by a railroad corporation are those contained in subdivision 10 of section 4 of the Railroad Law, to wit:

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But no mortgage except purchase-money mortgages shall be issued by any railroad corporation under this or any other law without stockholders owning at least two-thirds of the stock of the corporation the consent of the which is represented and voted upon in person or by proxy at a meeting called for that purpose upon a notice stating the time, place and object of the meeting.

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The rule as to the form and contents of such notice is succinctly stated in the American & English Encyclopaedia of Law, Second Edition, vol. 26, pages 992-993 :

No particular form of notice is required, except that the notice must generally show the authority of the person issuing it and the time, place, and objects of the meeting. In stating the time not only the day must be given, but the hour also, and the objects of the meeting, that is, the business to be transacted, must be stated with sufficient particularity to enable the stockholder to determine for himself whether it is necessary for him to attend in order to protect his interests. to the notice, however, will not be sustained where it is substantially sufficient to Technical objections enable the stockholders to determine whether their interests are involved and to attend the meeting if they wish to do so, and no one has been misled by the defects complained of."

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