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Show IlilOM DECLARES , M'CABTHY IN ERROR p.j Head of Union Pacific Sys-j Sys-j tern Replies to Secretary of Traffic Bureau, j 1 EXPLAINS BOND ISSUE J j Declares Criticism Based j Either Upon Ignorance I j or Misrepresentation. 1 1 l Senator Charles Thomas of Colo-I Colo-I ' J rado a few days ;ijro road into tlie I j records of the scunto a loiter ho had I , I Tcoeivcd from I?. S. Lovett, president I ' of the Union Pacific railroad board of I j directors, in which the latter replies to 1 I criticism t hat had been offered by J TV. S. McCarthy of Salt Lake, socre-h socre-h tarv of the Salt Lake City traffic j; ' "boreaii. Mr. McCarthy sought to have congress prevent, the distribution of a ; dividend of S0.000,000 derived .from i itr. sale of the Southern Pacific 1 In the letter Judge Lovett hays the M H fundnnionlal orror of McC'arthv'H oriti- cism is bis contention that. Tie bonds h in (juestion are still outstanding, tho Li actual fart being that, they were, all i retired in J906, when $99",-l;"0,000 of ', those bonds were converted into coni-ij'J coni-ij'J ' moii Block, and the remaining $550,000 ; i called for redemption and paid. The ; cause of the misinformation given by I ,' McCarthy, pays Judge Lovott, is prob-j prob-j , ably that the company Las now out-, out-, standing part of an entirely different t issue of convertible bonds made in j , 1P07, of which some $73,000,000 were i ' originally issued, and all but $26,835,-if $26,835,-if I 000 of which havo been converted into common stock, j J Text of Reply. Judge Lcvctfs letter, in full, is as I , follows: y " Referring to your remarks in the if v senate on Monday based upon" letters 4 9: " of W. S. McCarthy- to you, dated i April 1 and April J, 101-1. concerning ; I tho extra dividend recently declared li by this company upon its common ' stock: , "McCarthy's denunciation of the ! 1 ' ation of "t his company is based primarily upon an absolutely erroneous understanding of the facts, and toe-!1 ondnrily upon an ontiro ignorance or disregard of the principles of law and accounting affecting tho declaration of. dividends. Such uninformed criticism I should ordinarily ignore, Jiut when madn in tho United States senate I do not feel at liberty to permit the grayo injustice involved therein to be suffered bv tho company without pro-1 pro-1 test. I History of Bond Issue. 'It is true that in 1H01 the Union Pacific Railroad company issued $100,-, 000,000. fare value, of bonds known as its first lien -1 per cent convertible gold bonds, convertible- at the option of tho holders into common stock at par until May 1, 1006, and that nart. of this issue, namely, about $-12,000,; 000, was used for the acquisition or $75,000,000, par valno, of Southern Pacific Pa-cific company stork. The fundamental error upon which Mr. McCarthy's on tiro criticism is constructed is that these bonds are still outstanding. The fact is that they wero all retired in 1906. N'inetv-niiio million four hundred hun-dred and fift'v thousand dollars of the bonds were coinerted into an equal amount of common stock ami I ho remaining re-maining $550,000 wore called for redemption re-demption and paid. The cause of this inisuudcrstandine is I'robnblv that the company has now outstanding p?,rt ot an entirely different issue "ol convertible convert-ible bonds made in 1907, known as its "IVenty-vcar 4 per cent convertible convert-ible gold bonds.' of which somo $73,-000,000. $73,-000,000. face aluc. were originally issued is-sued and all but $26,835,000 of which have been converted into common stock. Dividend Division. "The extra dividend declara.ui was not r consequence of the decree in the government suit requiring thj company to dispose of its holdincr of Southern Pacific Pa-cific company stock. The dividend consists con-sists of $3 'in cash, $12 par value, in Baltimore & Ohio preferred- stock and $22.50 par value, in Baltimore & Ohio common stock upon each sharpy of Union Pacific common stock outstanding at the close of tho books on March 2. Tt was determined at the same time to reduce tho regular common i.t.oek dividend rate to S per cent after the payment of the extra dividend. This extra dividend is merely a partial distribution of accumu-Iated.'surplns accumu-Iated.'surplns profits. The board' of directors di-rectors ordered' that tho amount of cash and Baltimore & Ohio stock distributed pursuant to the dividend should be charged to profit and loss account. The Union Pacific system on June 30, 1913, had unappropriated accumulated surplus profit, appearing as a credit, balance to its profit and loss account, of $151.-153.3SG. $151.-153.3SG. This balance of accumulated profits if derived in part from uet operating oper-ating revenues, in pari from income from investments and miscellaneous jn-como. jn-como. in part from a profit of some $58,-000,000 $58,-000,000 realized on the sale of Xorthoni Securities, Northern Pacific, and: Great Northern stocks in 1005 and subsequent vcars in excoss of. cost, and from other profits of a miscellaneous character. The existenco of so largo an accumulated surplus is, of course, the result of tho practice which the company has followed fol-lowed of not distributing each year in regular dividends the entire surplus income in-come or other profits realized during tho year. The aggregate equivalent of this 'extra dividend might have boon paid out in regular dividends during past, years by an increase of the rate of the regular common stock dividend. Surplus on Hand. " Upon the common stock outstanding on March 2, 191-J, the dividend involves about $7-1,000,000 in cash and Baltimore & Ohio stock, taking tho Baltimore & Ohio stock at $S0 per share for the preferred pre-ferred and $92 for the common, its prevailing pre-vailing market value at the time of tho dividend declaration. As this dividend does not result in tho appropriation of one-half the accumulated surplus profits if is obvious that a dividend of this amount might have ibeen declared at any time during several years past. There has beon more or less agitation for years, us is well known, for a distribution distribu-tion of the company's accumulated profits. "'Haying accumulated surplus profits sufficient for tho payment. 01 this dividend divi-dend it wns immaterial from a. loga or accounting standpoint whether tho dividend divi-dend should be paid in cash or in property. prop-erty. Tho company had ample casli resources re-sources to havo enabled it to pa' tho dividend entirely in cash. J3ut tor various vari-ous roasons of "policy it was thought preferable, to retain tho cash resources and disburse I ho greater part of tho dividend div-idend iu Baltimore Sr Ohio slock. Holds Law Clear. "Under the law, as long settled, any excesses of assets over capital stock and liabilities constitutes proht available for dividends. It is quite immaterial what funds or other assets aro distributed as a dividend if tho amount does not exceed ex-ceed the amount of profit availablo for dividends. In selecting Baltimore & Ohio stock for this dividend the board of directors thought their nction, in view of tho ycry considerable proportion propor-tion of tho entire stock of tho Baltimore & Ohio held by this company, would "be entirely consistent with the policy of the government and; receive gqncrnl"coTn-niendation. gqncrnl"coTn-niendation. "Tho company hold .28,-t80.000 of tho Baltimore & Ohio preferred and .S3,607,S00 of the Baltimore & Ohio common. About one-half of this stock, namely, $21 27:?,G00 of the preferred and $21,273,600 of the common stock was acquired in July, 1913, under the decreo in the government suit in exchange ex-change for '$38,292,400 of Southern Pacific Pa-cific stock. Tho remainder of the Baltimore Bal-timore & Ohio stock has been owned sinco 1906, when it was purchased as a part of the reinvestment of funds realized from the sale of a large amount of Northern Securities, Northern Pacific Pa-cific and Great Northern stocks theretofore there-tofore owned. The balance of the Southern Pacific stock, remaining after the exchange of a part of tho holding for Baltimore & Ohio stock as above stated, was disposed of under the decree de-cree of tho court for cash, realizing somo $80,000,000. Neither the Baltimore Balti-more & Ohio stocky nor tho cash realized upon tho disposition of tho Southern Pacific stok has affected the profit and loss account up to the present time, for tho exact amount of profit roalizcd from the Southern Pacific stock transaction trans-action has not yet been ascertained, aud theroforo has not been credited to profit and loss. The balance of the credit of profit and loss at the time of tho declaration of the dividend is therefore there-fore precisely what it was on June 30, 19.13, .before any of tho Southern Pacific stock was sold or exchanged, subject only to some additional credits to profit and loss representing current surplus income between Juno 30, 19.13, and the dato of tho dividend. Basis of Payment. "M. McCarthy overlooks the fact that overy dividend payment must, under un-der tho law and under correct principles princi-ples of corporate accounting, leave assets as-sets sufficient to represent the entiro outstanding capital stock and to pay off all liabilities of whatever character. Tt is fundamental that dividends which impair tho capital stock arc unlawful and render the directors personally liable. lia-ble. The result of this principle is that even if Mr. McCarthy were correct in his belief that the $100,000,000 of bonds issued in 1901 wero still outstanding, it would bo absolutely immaterial upon the question of the right to pay this or any other dividend whether the $-100.-000,000 of bonds continued outstanding outstand-ing or were redeemed before the dividend divi-dend was paid. The balance sheet of tho Union Pacific system as of Juno 30. 19.13, showed total assets of $902,-713,031, $902,-713,031, and total liabilities (including capital stock and $50.34-J.SS6 of rescrvo funds) of $751,560,5-17. The surplus assets as-sets were theroforo over $151,000,000, corresponding, of course, with accumulated accumu-lated surplus appearing as the credit balauco of tho profit and loss account. Source of Profits. "It seems to bo implied in Mr. McCarthy's Mc-Carthy's letters that the regular dividend divi-dend payments of 10 pot- cent, per annum an-num made in recent years ou tho Union Pacific common sto'ck, are from tho operation of tho railroads it owns. The Union Pacific has not paid and could not pay a regular dividend upon its common stock at the rato of- 10 per cent per annum from its railroad operating operat-ing revenue alone. That rate has been made possiblo only by reason of the largo amount of 'inco'mc received by way of dividonds aud interest on stocks and bonds held as investments. The incomo realized exclusively from interest inter-est and dividends upon investments and sources other than from operation of its railroads has amounted siuce. nnd including tho fiscal year 1907, to the following sums-1007--Income other than from Its railroads $11.jS7,01S (Iiqulvnlcnt, to 5.S7 per c-ont on common stock.) 100S Incomo other than from It-s railroads 1 C.TS'J. 157 (Equivalent to S:10 per rout on common stock.) 1009 Incomo other than from Ita railrondu 1S.110.4S1 (Equivalent to S.O per rent on common Ktock.) 1!H(! lnc-onic: other than from lt railroads IP, WO. IG0 (Lqulvalcnt to 0 1 per cent on commiy stock ) 1011 Income other than from Its railroads 18,(jdS,16S (Equivalent to S. 19 per cent on common stock.) 1012 Tncomc other than from Its; railroads 1S.040.03S (Equivalent to S.63 per cent on common stock.) 1013 Income other than ' from its railroads 10.20,0.1 (Equivalent to S.23 per cent on common siock.) "Thus, siuce the fiscal year 1907, during which the 10 per cent dividend rate was established, the company could have paid more than S per cent, without with-out using a dollar from its railroad operations. op-erations. " Furthermore, a large part of tho additional common and preforrcd stock of this company issued since the reorganization reor-ganization was issued, dollar for dollar, dol-lar, in exchange for securities of the Oregon Short Lino Railroad company and the Oregon "Railroad & Navigation company, then outstanding in the hands of tho public, and resulted in bringing the properties of those companies com-panies into the exclusive ownership of the Union Pacific Railroad company. The balance of the additional stock issues is-sues bv this company docs not equal the acfual expenditures made since tho reorganization for construction of new lines, doublo tracking and other additions addi-tions and betterments. Tho aggregate interest paid on funded debt of the sys tern in tho hands of the public is now about $14,200,000 per anmim. and there has been no year sinco 1907 when tho dividends and" interest realized from investment in-vestment securities have not exceeded Lho entire annual interest payment on tho funded debt. Must Deal Fairly. "It would be manifestly unfair to the stockholders and disadvantageous to the compaii' to redeem any of the outstanding funded indebtedness at a premium. Many of the outstanding bond issues, including all those bearing bear-ing a high rate of interest, are not subject sub-ject to redemption, and those cau be retired if at all only by the payment of an unreasonably high premium. Those issues which are subject to redemption are redeemable only at specified prices in excess of par. The bonds which are expressly subject to redemption are all bonds bearing rates of interest lower than tho rate at which railroad bonds can now be sold. The retirement of bonds under such circumstances would involve an unjustifiable waste of surplus sur-plus and great injustice to stockholders. "The suggestion might be made that the capital stock should be roduccd. Such action could not be effected under un-der the statutes governing this corporation corpo-ration except by voto of tho requisite majority of thc stockholders: and woiild involve" the pro rata surrender of stock bv overy stockholder, over 25.000. in numberObviously no stockholder would give the necessary assent unless he were 1o receive his proportionate share of tho entire present surplus in addition addi-tion lo the par amount of tho stock surrendered by hi 111 for reduction. Even these terms would probablv be thought b' most stockholders unjust to them and an unwise weakening of the company. Legality Not in Issue. "The litigation pending in the courts of this stale with roforence to the extra ex-tra dividend docs not attack the legality legali-ty of the dividend from any standpoint, but is litigation brought in behalf of preferred stockholders seeking an adjudication ad-judication which will relieve tliom from the 4 per cent dividend limitation iu ihe charter, uud enable thchi to share with the common stockholders in any distribution of accumulated surplus profits. I believe that all the figures and statements mentioned herein relating relat-ing lo matters up to Juno 10, 1913, can be verified from tbc records of tho interstate in-terstate commerce commission. "The Union Pacific has been at all times honestly and conservatively financed. fi-nanced. Such mi attack as that of Mr. MeCartnv. especially when given sanction sanc-tion and authority by quotation in the United States senate, is not merely an abstract injustice, but operates to" the actual injury of the company's reputation reputa-tion for honest financing and its credit among the becuritv holders and financial finan-cial public here and abroad, noon whose confidence tho company's ability to improve im-prove its properties and build new Hues is dependent. I earnestly hope, thore-fore: thore-fore: that you will to the extent, of your ability correct the ininsticc to which you have unintentionally contributed. " Respect full v' vours. (Signed) "R."S'. LOVI3TT.' |
