8
THE OMAHA SUNDAY BEE: MAY lfi, 1909.
K33
No. 17
and.
Capitalization
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The majority of the stock of the Omaha & Council Bluffs
Street Railway Company is owned by , citizens of Omaha and
Council Bluffs, arid control of the property, therefore, is vested
at home. There are now about 500 stockholders in the cor
poration. Of late yearsmany local investors have bought the
company's stocks and bonds, a practice which the Company is
glad to encourage. .
In this article is presented a condensed statement of the
earnings and expenditures of the Company for the year 1908,
and also a condensed balance sheet at the close of business
December 31, 1908, showing the assets and liabilities.
From the first at will be seen that the net profits of the
Company for the year were $422,680, of which $400,000 was
paid in dividends, and $22,680 carried to surplus.
The second statement shows that the outstanding capitaU
ization of the Company amounts to $9,433,000 in bonds, and
$9,000,000 in stock, or a total of $18,433,000.
That the entire physical property of the Company could
be reproduced today for less than $18,433,000, all conditions
being equal, is undoubtedly true. In this connection several
important factors must be considered. Millions of dollars
have been spent for construction and equipment of which no
trace remains today. Large amounts were forced into the capi
talization through the principle of competition fostered by the
people in the 80s. The capital account was further swelled by
reason of the absence of a depreciation fund prior to the re
organization of 1902.
A considerable part of the capitalization of the Company
represents values which never went into the property because
it was necessary to sell securities for much less than par in
order to obtain capital for construction, reconstruction, re
newals, rehabilitatibns, electrification and the purchase of com
peting lines. The principal reason why the Company
was forced to part with its stocks and bonds at sacri
fices was because the corporation never succeeded in
paying a dividend until 1899.
For illustration: An investor buys stock which has borne
no dividends on the theory that some day it will pay dividends.
The difference between the par value 1 of the security and the
price he pays for it is the way he measures his belief in the
chances of dividends being paid. He offers $60, say, for a
$100 stock (face value); $60 goes to the Company and is spent
on the property. But when the days of profit-making comes
the Company has to pay dividends on $100, not on $60.
As a general rule the more prosperous a company is the
less of this kind of "water" gets into the capitalization. A very
prosperous corporation can sell its securities at a premium, and
the premium as well as the par-value proceeds may be spent on
the physical property. Fortunately this Company has now
established the value of its securities so that in future little,
if any, discount will be required if present conditions continue
in the sale of its securities.
Before presenting the condensed statements permit us to
call attention to the fact that the Omaha & Council Bluffs
Street Railways paid no dividends for thirty out of forty years,
and that in 1908, if the capitalization outstanding was cut in
two, the total earnings on bonds and stocks were less than 10 .
per cent, for that year. .
Following is the statement of the receipts and expenses of
the Company for the year 1908:
Gross earnings $2,304,162.29
Operating Expenses including Depreciation 1,251,934.47
Taxes.-. ..$127,909.76
Interest on Funded Debt . . . 441 137.38
Kent of Leased Lines . . . . 00,500.00
Net Income,
$1,052,227.82
$629,547.14
422,680.68
Dividends :
5 on $4,000,000 preferred stock.., $200,000.00
4 on $5,000,000 common stock 200,000.00 $400,000.00
$ 22.GS0.G8
Surplus for the year. , )
Following is the condensed General Balance Sheet as of December 31, 1908:
ASSETS
Plant, Property, Franchises and Leases $17,046,352.39
Stock held in trust for improvements, etc. 6,000,000.00
Other Permanent Investments 2,379,261.05
Material md Supplies : 69,971.48
Cash 263,517.04
Sundry Accounts 59,494.76
$25,818,596.72
LIABILITIES
Capital Stock, preferred , $ 5,000,000.00
Capital Stock, common ' 10,000,000.00
Funded Debt bonds 9,433,000.00
Current Accounts , 155,515.48
Eeserve for Depreciation . .r 868,742.19
Damages, etc. . . , 85,631.26
Surplus.. .275,707.79
$25,818,596.72
The total number of passengers carried by the entire sys
tem in 1908 was 55,087,993. Of this number 12,810,947 rode
on transfers oriree, the latter being comparatively few and rep
resenting, firemen and policemen in uniform and the Company's
own employes.
In 1903 the percentage of passengers carried on transfers
was 21 per cent. In 1908 the proportion had grown to 30 per
cent and it is constantly increasing. This condition not only
decreases the earnings per passenger, but tends to decrease the
net earnings of the Company.
Professor Mortimer E. Cooley, Dean of the Department
of Engineering at the. University of Michigan and a foremost
street railway authority, recently, while testifying in an import
ant case, discussed the subject of universal transfers, stating
that they increased travel, but diminished earnings per pas
senger. AH expenses advanced with the number of
passengers carried, he said, and therefore, universal
transfers had resulted not only in decreased net earn
ings per passenger, but in decreased net earnings for
the Company.
Transfers reduced the revenue per passenger for that part of the system
in Omaha and suburbs to 3.76 cents in 1908.
In the 'general balance sheet will be noticed an item of $868,742.19
''reserve for depreciation." The Company is setting aside a constantly increas
ing amount each year $240,000 for 1909 as a depreciation fund. This
account is for this purpose of replacing construction or equipment worn out
or junked because of obsolescence. It does not go for additional equipment
or for new construction, but simply, to maintain the operating efficiency of
the existing plant.
If there is no depreciation fund the expenditures for this purpose find
their way into the capitalization. This his been declared contrary to public
policy by the New York, Wisconsin and other State Public Service Commis
sions and by the United States Supreme Court. It is proper, therefore, to make
provision for depreciation from the earnings, in order to preserve the integrity
of the property and keep down the capitalization.
Up to 1898 the local street railways did not succeed in earning enough
to establish a depreciation fund. As a result depreciation charges found their
way into the capital account. There was no alternative since it was manifestly
impossible to increase the rate of fare. ,
In considering the capitalization of the Omaha & Council Bluffs Street
Railway Company it should be remembered that it reflects actual conditions
developed while Omaha and Council Bluffs were growing from frontier outposts
to large and splendid citier. The man who put his money in real estate and
kept it there has seen his capital increased many times. The man who put
his money in our street railways received nothing in the nature of profits for
years, and today is receiving less than would be deemed remunerative in
mercantile or manufacturing lines.
This particular installment of our series marks a departure in corporate
methods in the United States. We have been presenting articles for many weeks
in the hope of making our Company and its affairs understood. Our effort is
being watched all over the country as a guide to indicate how far a large
corporation may go in. dealing with the public on terms of utmost frankness.
G. W. WATTLES, President,
Omaha Council Bluffs Street Railway Company.
(The Installment Next Sunday will be the Concluding Chapter of this
Series, and will Recapitulate what has already been -presented.)
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