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Starting Out with C++: Early Objects, 7e (Gaddis, et al.)
Chapter 9 Searching, Sorting, & Algorithm Analysis

Chapter 9, Test 1

1) The advantage of a linear search is that ________.

A) it is simple
B) it is efficient
C) it is fast
D) it can be used on unordered data
E) both A and D
Answer: E

2) A(n) ________ search is more efficient than a(n) ________ search.

A) string, double
B) integer, double
C) binary, linear
D) linear, binary
E) None of the above; all searches are equally efficient.
Answer: C

3) The linear search is adequate for searching through ________ arrays, but not through
________ ones.
A) int, double
B) char, string
C) ascending, descending
D) small, large
E) any regular, vector
Answer: D

4) True/False: Using a linear search, you are more likely to find an item than if you use a binary
search.
Answer: FALSE

5) A binary search begins by examining the ________ element of an array.

A) first
B) last
C) largest
D) middle
E) smallest
Answer: D

1
Copyright © 2011 Pearson Education, Inc.
6) If the item being searched for is not in the array, binary search stops looking for it and reports
that it is not there when ________.
A) array index first > array index last
B) Boolean variable found = false
C) Boolean variable found = true
D) it finds a value larger than the search key
E) it has examined all the elements in the array
Answer: A

7) True/False: When searching for an item in an unordered set of data, binary search can find
the item more quickly than linear search.
Answer: FALSE

8) A search can be performed on an array of ________ .

A) integers
B) strings
C) objects
D) All of the above
E) A and B, but not C
Answer: D

9) A sorting algorithm can be used to arrange a set of ________ in ________ order.

A) numeric values, ascending
B) numeric values, descending
C) strings, ascending
D) strings, descending
E) All of the above
Answer: E

10) The ________ sort usually performs fewer exchanges than the ________ sort.
A) bubble, selection
B) selection, bubble
C) binary, linear
D) linear, binary
E) linear, bubble
Answer: B

11) To find a value that is in an unordered array of 100 items, linear search must examine an
average of ________ values.
A) 7
B) 10
C) 50
D) 100
E) 101
Answer: C

2
Copyright © 2011 Pearson Education, Inc.
12) To determine that a item is not in an unordered array of 100 items, linear search must
examine an average of ________ values.
A) 7
B) 10
C) 50
D) 100
E) 101
Answer: D

13) To locate a value in an ordered array of 100 items, binary search must examine at most
________ values.
A) 7
B) 10
C) 50
D) 100
E) 101
Answer: A

14) A bubble sort is being used to arrange the following set of numbers in ascending order:
7 5 3 9 2 6
After the first pass of the sort is completed, what order will the data be in?
A) 2 5 3 9 7 6
B) 5 7 3 9 2 6
C) 5 3 7 2 6 9
D) 2 3 5 6 7 9
E) None of the above
Answer: C

15) A selection sort is being used to arrange the following set of numbers in ascending order:
7 5 3 9 2 6
After the first pass of the sort is completed, what order will the data be in?
A) 2 5 3 9 7 6
B) 5 7 3 9 2 6
C) 5 3 7 2 6 9
D) 2 3 5 6 7 9
E) None of the above
Answer: A

16) True/False: When sorting an array of objects or structures, one must decide which data item
to sort on.
Answer: TRUE

3
Copyright © 2011 Pearson Education, Inc.
17) When sorting an array of objects, if the values in the data member being sorted on are out of
order for two objects, it is necessary to ________.
A) examine a different data member
B) swap these two data values
C) swap the two objects
D) swap one-by-one all data members in the two objects
E) stop the sort
Answer: C

18) True/False: Bubble sort and selection sort can also be used with STL vectors.
Answer: TRUE

19) We can measure the complexity of an algorithm that solves a computational problem by
determining the number of ________ for an input of size n.
A) output statements it has
B) times it loops
C) basic steps it requires
D) variables it uses
E) operations it performs
Answer: C

20) If algorithm A requires 2n + 1 basic operations to process an input of size n, and Algorithm B
requires
3n + 2 basic operations to process the same input, algorithm A is considered to be more efficient
than Algorithm B.
Answer: FALSE

Chapter 9, Test 2

1) A ________ search uses a loop to sequentially step through an array.

A) binary
B) unary
C) linear
D) relative
E) bubble
Answer: C

2) True/False: A binary search requires that the elements be in order.

Answer: TRUE

4
Copyright © 2011 Pearson Education, Inc.
3) The ________ search is adequate for searching through small arrays, but not through large
ones.
A) binary
B) linear
C) blind
D) bubble
E) random
Answer: B

4) True/False: Using a binary search, you are more likely to find an item than if you use a linear
search.
Answer: FALSE

5) If a binary search is used to search for the number 4 in the 11-element array shown below,
which value will the 4 be compared to first?
1 2 3 4 6 7 8 9 10 12 17
A) 1
B) 7
C) 8
D) 9
E) None of the above
Answer: B

6) When searching for a particular object in an array of objects, it is necessary to compare the
________ to the value in each examined object's ________ .
A) search key, private member data
B) key field, public member data
C) search key, public member data
D) search key, key field
E) key field, search key
Answer: D

7) To determine that a value is not present in an unordered array of 50 items, linear search must
examine an average of ________ values.
A) 1
B) 6
C) 25
D) 50
E) 51
Answer: D

5
Copyright © 2011 Pearson Education, Inc.
8) To locate a value that is in an ordered array of 50 items, linear search must examine at most
________ values.
A) 1
B) 6
C) 25
D) 50
E) 51
Answer: D

9) To locate a value in an ordered array of 50 items, binary search must examine at most
________ values.
A) 1
B) 6
C) 10
D) 25
E) 50
Answer: B

10) A ________ algorithm arranges data into some order.

A) sorting
B) searching
C) ordering
D) linear
E) binary
Answer: A

11) Sorted data can be ordered ________.

A) from lowest to highest value
B) from highest to lowest value
C) using a bubble sort algorithm
D) using a selection sort algorithm
E) in all of the above ways
Answer: E

12) When an array is sorted from highest to lowest, it is said to be in ________ order.
A) reverse
B) forward
C) descending
D) ascending
E) downward
Answer: C

13) True/False: Any sorting algorithm, such as bubble sort or selection sort, that can be used on
data stored in an array can also be used on data stored in a vector.
Answer: TRUE

6
Copyright © 2011 Pearson Education, Inc.
14) A bubble sort is being used to arrange the following set of numbers in ascending order:
8 6 4 9 3 7
After the first pass of the sort is completed, what order will the data be in?
A) 3 4 6 7 8 9
B) 3 6 4 9 8 7
C) 6 4 8 3 7 9
D) 6 8 4 9 3 7
E) None of the above
Answer: C

15) A selection sort is being used to arrange the following set of numbers in ascending order:
8 6 4 9 3 7
After the first pass of the sort is completed, what order will the data be in?
A) 3 4 6 7 8 9
B) 3 6 4 9 8 7
C) 6 4 8 3 7 9
D) 6 8 4 9 3 7
E) None of the above
Answer: B

16) The ________ sort usually performs more exchanges than the ________ sort.
A) bubble, selection
B) selection, bubble
C) binary, linear
D) linear, binary
E) linear, bubble
Answer: A

17) Selection sort requires ________ passes to put n data items in order.
A) n
B) n/2
C) n/2 +1
D) n-1
E) n+1
Answer: D

18) True/False: When sorting an array of objects, if the values in the data member being sorted
on are out of order for two objects, those two data values should be swapped.
Answer: FALSE

7
Copyright © 2011 Pearson Education, Inc.
19) We can estimate the ________ of an algorithm by counting the number of steps
it requires to solve a problem.
A) efficiency
B) number of lines of code
C) run time
D) code quality
E) result
Answer: A

20) True/False: If algorithm A requires 2n + 1 basic operations to process an input of size n, and
Algorithm B requires 3n + 2 basic operations to process the same input, algorithms A and B are
considered to be equally efficient.
Answer: TRUE

8
Copyright © 2011 Pearson Education, Inc.
Other documents randomly have
different content
of $3,096,768, at the actual cost to the Improvement Company, to
wit, $1,524,356.
To complete the connection to the coast the Atchison built from
Waterman, some seventy miles east of Mojave on the Atlantic &
Pacific, to Colton on the Southern Pacific, and secured control of the
408
California Southern from Colton to San Diego. In 1885 entrance
was obtained to Los Angeles by lease of the Southern Pacific track
409
between Colton and that city.
The money for this rapid progress was obtained by the sale of
both stocks and bonds, but on the whole stock predominated. The
directors rightly considered it much more conservative to issue stock
and sell it at par than to load the road down with a heavy debt in
the shape of bonds; and what is more, they were able to make good
their word, and to sell stock at or near par in spite of the risk
incident to operations such as the Atchison was conducting and the
frequent bonuses or stock dividends declared.
By 1884, then, Atchison had reached the Pacific coast. The next
great steps were the extensions to Galveston and to Chicago. The
year of entrance to Los Angeles the Atchison did not cross the
southern boundary of Kansas. Certain of its stockholders were,
however, unofficially interested in the Gulf, Colorado & Santa Fe,
which ran from Galveston on the south to the Indian Territory on the
north, roughly 200 miles. In 1884 a charter was obtained for the
Southern Kansas Railway Company, a corporation organized solely to
build south from Arkansas City. The same year the Gulf, Colorado &
Santa Fe obtained permission to stretch north. The two roads met at
410
Purcell in the summer of 1887. In 1886 the Gulf, Colorado & Santa
Fe was formally brought in. Gulf stock then amounted to $4,560,000
and bonds had been issued to a limit of $17,000 per mile. For the
entire capital stock, subject to the above encumbrance, Atchison
411
agreed to pay $8000 a mile in Atchison stock, par value. The final
move was to get into Chicago. “The Atchison Company has been
much too conservative during the last few years,” said the Chronicle,
“and thus has allowed its territory to be invaded.” The first intent
was to build direct. There were incorporated, in Illinois the Chicago,
Santa Fe & California Railway Company, and in Iowa the Chicago,
Santa Fe & California Railway Company of Iowa. In 1887 the
Atchison was able to purchase the Chicago & St. Louis Railroad,
412
between Chicago and Streator, with a branch to Pekin, and to
save itself construction between these points. The whole line was
413
opened for traffic in May, 1888.
This completed Atchison’s systematic extensions before 1889.
From a local road in Kansas it had become a through route, taking
freight over its own rails from Chicago to Galveston and to the
Pacific coast. But especially in the latter eighties competition had
become keen; and to its strategic extensions Atchison was obliged to
add competitive building on an enormous scale. Of the 7000 miles in
1888, over 2700 had been added since January, 1886, and had been
built, not to tap new sources of traffic, but to defend what was
thought to be Atchison’s rightful territory by means of a desperate
war of rates. “About three or four years ago,” said a competent
observer, “a mania seized three great corporations (Atchison,
Missouri Pacific, and Rock Island) to gridiron Kansas with railroad
iron, and each tried hard to see which could cover the most ground,
without regard to the character of the ground, the result [being that]
railroads were built where they would not be required for ten years
414
to come.” Such roads could not be expected to pay, and in fact
did not. Even in the case of better planned extensions, the lines had
to be built in an unopened territory, the traffic of which had yet to be
developed. In Indian Territory, Oklahoma, and Arizona, the bulk of
the country had less than two inhabitants to the square mile; in New
Mexico and Lower California only one-half of the area was more
thickly settled; and it was largely from this southwestern corner that
local traffic for the Atchison had to be built up.
The method of financiering these competitive extensions varied:
sometimes the parent company guaranteed the principal and interest
of the branch-line bonds; sometimes it took these into its treasury
and issued collateral bonds against them; sometimes, perhaps more
frequently still, it leased new roads for a rental equivalent to the
annual interest on their bonds. If the branches could have earned
their fixed charges the burden on the Atchison would have been
nominal, but as in large part they could not it was real and serious.
In 1888 there were actually paid in rentals, interest on Sonora
Railway bonds, and on sundry railway bonds, $2,361,300. Large
sums were carried to capital account. In 1888 there was an
accumulated account of “due from sundry leased, controlled, and
auxiliary roads in construction and general account” (net)
$13,558,678, including various cash current construction and other
charges, which was carried as an asset, but which in reality
consisted of advances from which there was little or no hope of
return. Besides the claims for interest the parent company had in
practice other claims to meet. Where a branch failed to earn
operating expenses, as often happened, sums had to be advanced to
keep the road and rolling stock in repair. Thus the item “due from
auxiliary roads in current traffic and operation accounts” amounted
in 1888 to $1,008,554. Bills and accounts payable the same year
were $6,553,775, and accrued interest, taxes, and sinking funds
totalled $915,337. The following table shows vividly the effect upon
the system of the rapid extension of the years 1884 to 1888:

Total System
1884 1888
Mileage 2,799 7,010
Bonds 48,258,500 163,694,000
Stock (Atchison) 60,673,150 75,000,000
Gross earnings 16,699,662 28,265,339
Operating expenses 9,410,424 21,958,195
Net earnings from operation 7,289,237 6,307,145
Net profits, excluding
dividends 5,147,883 def. 2,933,197
Net profits, including
payments for dividends
and interest on floating
debt def. 5,557,323
 Whatever may be said as to the necessity of extension, it is
evident that the position of the system by 1888 had changed for the
worse. This last-named year was a bad one, it is true, but certain
evils of which the directors then complained were permanent, and
should have been permanently allowed for. Some realization of the
fact that the Atchison might be going too fast appeared in the
financial journals of the time. “Were these undertakings less solidly
backed,” said the Railway Age, “there might be apprehension that
415
enterprise was being pushed too far and too fast.” But on the
whole the rapid growth and enormous extent of the system seem to
dazzle beholders. “The career of this company,” said the Railway Age
again, “has been one of the marvels of railway enterprise, and it
would be unsafe now to attempt to fix a limit to its extension or to
the ambition of its Napoleonic president and its bold and enterprising
416
directors.”
In 1887 the directors increased the rate of dividend from 6 to 7
417
per cent. The action was thoroughly unjustifiable, and the rate
was speedily again reduced. By the end of 1888 the main company
was liable to be called on any year to the extent of $8,625,365,
which was the amount of interest on auxiliary roads either
guaranteed or payable as rentals. In four years the mileage of the
Atchison system had increased 150 per cent; its bonded
indebtedness 239 per cent; its fixed charges 216 per cent; and its
gross earnings only 69 per cent; while the deficits on its branch lines
were obviously not matters of bookkeeping, and the value of
interchanged business was not equal to the increased burdens which
the subsidiary lines imposed. The floating debt mounted up, as is
usual in times of trouble. From a total of $3,317,446 in 1884 it
increased to $8,076,059 in 1888. To offset it the directors secured in
October, 1888, subscriptions to a $10,000,000 issue of “guarantee
fund,” three-year notes. Not all of the amount authorized was to be
sold at once, but from time to time Atchison was to call on
subscribers to take part of their subscription, and the notes were to
418
bear 6 per cent from the time they were put forth. For the rest,
the directors economized as much as possible. Salaries were cut 10
per cent in every branch of the service, beginning with the
president, and the unlucky 7 per cent rate of dividend was reduced
to 6 per cent, to 2 per cent, and then to nothing at all in successive
quarters. None of these expedients proved sufficient. In fact, the
situation was so critical that nothing short of a general
reorganization could probably have secured the radical reduction in
fixed charges which the company required.
In September, 1889, accordingly, Messrs. Libby, Abbott, Peabody,
and Baring were appointed a committee to consider the broad
419
question of financial and general reorganization, and in October a
plan for the complete rehabilitation of the company was brought
forward. The obligations with which the plan had to deal are
indicated in the following table:

Obligations of the Atchison Company in 1889

Principal Interest
Bonds, guarantee fund
notes $160,786,000 $9,203,620.00
Contingent issue of
additional bonds 775,000 38,750.00
Car trusts 1,445,660 86,739.60
$163,006,660 $9,329,109.60
Less interest on bonds and
guarantee
fund notes owned by
the Company 253,340.00
$9,075,769.60
Sinking Fund 359,000.00
Taxes 1,221,000.00
Rentals 502,000.00
$11,157,769.60

Of the bonds outstanding $56,498,000 were direct loans upon

the Atchison’s main lines, bearing anywhere from 4½ to 7 per cent,
and $104,288,000 were bonds upon some of the thirty-two
subsidiary corporations for whose obligations the Atchison was
responsible.
The dealing of the Libby Committee with this situation was
intelligent and comprehensive. It proposed an increase and
simplification of securities, a decrease in fixed charges, and a
cancellation of the floating debt. In place of the forty-one classes of
bonds outstanding it suggested that two grand issues be put forth,
one of 4 per cent general mortgage bonds to the amount of
$150,000,000, and one of 5 per cent income bonds to a total of
$80,000,000. From these issues $13,750,000 should be used to
420
provide for cash requirements, and the remainder should be
employed in direct retirement of old obligations. The exchange of
some $216,000,000 of new bonds for $163,000,000 of old was to
mean an increase in securities outstanding, but since interest on
only part of the new bonds was to be obligatory fixed charges were
to be less than they had been before. The managers figured on what
the property could earn, good times or bad, and capitalized this sum
into 4 per cent general mortgage bonds. They then calculated the
difference between this and the former return to bondholders, and
421
capitalized the difference into income bonds. Each individual
bondholder, therefore, was offered a chance to receive the same
return which he had previously enjoyed, although his right to
demand an annual payment was limited to an amount which the
road could earn.
A few points deserve to be specially noticed. The reduction in
interest was sufficient to have transformed the deficit for the whole
Atchison system for 1888 into a respectable surplus, providing that
no dividends had been paid; but this reduction was dependent on
the retention of the income bonds as optional obligations. There was
no cash assessment. Had the reorganization taken place in a time of
general depression, the sale of securities for cash would probably
have been impossible, but the days of depression had not yet
arrived. The stockholder suffered in the introduction of the principal
of some $67,000,000 additional indebtedness between him and his
property, although he was not called upon directly; but it should not
be forgotten that for a long while the Atchison stockholders had
received very liberal dividends, both in stock and in cash, and could
not well complain of the moderate loss now necessary. There was no
voting trust, although one was proposed, and the bonds were not
even temporarily given voting power. The situation seems to have
been that the securityholders thought it more to their advantage to
reduce voluntarily the rate of interest than to force a foreclosure sale
and take their chances; for the directors, in submitting the plan, said
that they felt it necessary “to state in the strongest terms that the
non-success of this proposal will inevitably result in foreclosure, with
422
all its attendant misfortunes.”
By the end of November, although the plan had not been
promulgated until well into October, more than one-half of the
outstanding bonds had assented, and the directors were enabled to
announce success. Certain changes in the management had already
taken place. President Strong had resigned in September, and had
been succeeded by Mr. Allen Manville, general manager of the St.
423
Paul, Minneapolis & Manitoba Railway. Mr. Reinhart was credited
with a large part in the construction of the new plan of 1889, and his
later promotion may have been connected therewith.
After the reorganization Atchison resumed its policy of
expansion, its new directors being apparently as “bold and
enterprising” as the old. In 1890 it took in the St. Louis & San
Francisco, a road running from St. Louis west and southwest through
Missouri, Kansas, Arkansas, and Indian Territory, connecting at Paris,
Texas, with the Gulf, Colorado & Santa Fe, and through half-
ownership of the Atlantic & Pacific connecting Albuquerque in New
Mexico with Barstow in Southern California. The total length of the
Frisco system, exclusive of jointly owned roads, was 1329 miles, and
this constituted the largest single acquisition that the Atchison had
ever made. The terms of the purchase were highly favorable to the
Frisco shareholders, but the benefits to the Atchison were less than
was expected. Although the consolidation removed certain difficulties
experienced from the joint ownership of the Atlantic & Pacific, and
although the united roads were in a better position to compete for
transcontinental and Gulf traffic than either of them had been
before, the Atchison directors were forced to announce in 1891 that,
“with every opportunity given it to work with advantage, the
property (Frisco) has failed to demonstrate its ability to carry itself
financially and to liquidate its debts; nor could it hope to obtain such
results without the provision of New Capital.... This is due largely to
the absence of complete and proper facilities and machinery with
which to conduct operations in the nature of Round Houses, Machine
Shops, Stations and other buildings, improved Bridges and
424
Equipment.” A bond issue was needed, and was in fact put forth,
—the Atchison taking a goodly share.
Less important than this was the purchase, in 1890, of the
Colorado Midland, a road 346 miles long in Colorado, valued chiefly
for its ore traffic. In August, 1890, the Mexican Government
resumed payment of the Sonora subsidy, on which nothing had been
425
paid for eight years. It does not seem as if at any time after 1889
the Atchison enjoyed unalloyed prosperity. The year 1890 showed an
increase in net earnings of 48 per cent according to the figures
given, and the directors were unhappy until they had increased the
fixed charges to match, but the year 1891 recorded a falling off, and
1892 showed a comparatively slight gain over the figures of 1891.
There was obviously nothing in the reported figures to cause alarm,
but there was nothing which justified the payment of more than 2¾
per cent any year on the income bonds, or of any dividends on the
stock.
Toward the end of 1891 the guarantee fund notes fell due. They
had been issued, it will be remembered, to protect the property in
1888, and were secured by an equal amount of general mortgage
4s; but now the directors, disliking to put these 4s on the market at
83¼, decided to extend the notes for two years at par with a cash
426
commission of one per cent.
 Extension of the guarantee fund notes did not increase the fixed
obligations, it merely postponed a reduction; but the conversion of
the income bonds of 1889 acted as a positive increase. There were
$80,000,000 of these incomes, and it was in the optional character
of payments upon them that the saving of fixed charges by the
reorganization of 1889 had consisted. They had been issued instead
of preferred stock probably because more acceptable to the
bondholders; but it was early found that their use involved
difficulties which had not been sufficiently regarded. By the
conditions of their indenture no bonds could be inserted between
them and the general mortgage 4s; they held a second lien for all
time. But similarly it was difficult to put bonds after them. Their lien
was on income,—interest was payable only when earned; any
regular mortgage would of necessity have taken precedence. The
hindrance to new issues was real and serious, and although some
check on an aggressive management was salutary, yet the system
required additions and improvements from time to time which could
not be supplied from current income. Under these circumstances the
Atchison directors decided within three years to sacrifice the
reduction in fixed charges secured in 1889 in order to obtain new
capital with greater ease. “It is the opinion of the Management,” said
the annual report for 1892, “that the time has now arrived when all
the obligations of the Company can be returned to a Fixed Basis,
sufficient funds provided to take care of all Improvements ...
required for at least four years, and at the same time the junior
Bonds and Capital Stock be restored to a more permanent market
value with assured returns on the first, and probable balances for
427
the latter.” “The Atchison plan of conversion,” said Mr. Reinhart,
“... is the completion of the reorganization plan put in effect October
18, 1889, and returns the obligations of the company ... to a fixed
428
and stable basis....”
The plan so cordially referred to provided for the issue of a new,
second mortgage, 4 per cent bond, and the exchange of this security
for the outstanding income bonds. The second mortgage was to be
issued in two classes:
 (a) $80,000,000. These were to exchange for income 5s, par for
par, and bore a rate of interest which increased from 2½ per cent in
1892 to 4 per cent in 1896, and then remained at 4 per cent until
maturity.
(b) $20,000,000. These bore 4 per cent and were to be issued in
no greater sum in any year than $5,000,000 for specific
improvements on the Atchison exclusive of the Colorado Midland or
the St. Louis & San Francisco. There was reserved to the company
the right, when all the above should have been exhausted, to issue
more bonds of the same sort as in class B for the same purposes
429
and on the same mileage, up to a limit of $50,000,000.
The conversion plan was approved at the annual meeting in
1892, and was put into effect. The result was most unfortunate. The
annual burden on the company was increased at the very time when
the panic of 1893 was about to reduce railroad earnings, while the
advantages of freer issues of new bonds were of little account in a
year when the sale of new securities was practically impossible.
Moreover, a new light was soon to be thrown on the whole operation
by disclosures of dishonest manipulation of figures in the Atchison
reports.
In 1892 and 1893 rumors of trouble were afloat, and were
repeatedly and vigorously denied by Mr. Reinhart, president of the
Atchison Company. Thus in June, 1893, this officer declared that
“the Atchison, Topeka & Santa Fe Railroad Company, strictly
speaking, has no floating debt. Its current liabilities are more than
430
equalled by its current cash assets.” In December Mr. Reinhart
said again: “The interest on the General Mortgage Bonds of the
Atchison Company, due January 1, will be paid. It seems hardly
necessary to make this statement, because doubts as to its payment
have, in my judgment, been created solely by speculators who have
no substantial interest in the property.” These official denials did not
carry conviction, but opinions varied as to the seriousness of the
situation. The Boston News Bureau cheerily insisted that all the
Atchison needed was “days of grace” during the existing
 431
depression, while in England it was thought that the rumors of a
432
receivership were at most but premature.
At the end of the year President Reinhart went to Europe to float
a loan. On his return, after a failure to obtain subscriptions, a
receivership was applied for and granted. It had been hoped up to
the very last moment that the January interest could be met; but the
refusal of English bondholders to subscribe additional capital, the
failure to place a third mortgage loan in the United States, and the
death of Director Magoun, one of the strong influences in Atchison’s
affairs, made a crash inevitable. Current obligations had mounted to
over $10,000,000, credit had disappeared, and the railroad
necessarily succumbed. The Atlantic & Pacific, the Colorado Midland,
the Gulf, Colorado & Santa Fe, and the Southern California lines were
not included in the Atchison receivership, though the Atchison
433
receivers were given like office in respect to the Atlantic & Pacific.
The Gulf, Colorado & Santa Fe announced that it would continue to
operate its own line, and was prepared to pay its current obligations
434
as before.
No sooner was failure announced than committees of
bondholders sprang up. In Boston a committee was formed with six
members, including J. L. Thorndike and H. L. Higginson. In New York
the Union Trust Company, the Mercantile Trust Company, the New
York Life Insurance Company, Baring, Magoun & Co., and Giddes &
Smith got together in a committee, with Edward King as chairman. A
second New York committee, R. Somers Hayes, chairman, was
formed by express invitation of the road. A directors’ committee was
organized, of which E. B. Cheney, Jr., was chairman. The London
holders of the second mortgage class A bonds themselves formed a
committee. Even before 1888 Englishmen had invested heavily in
Atchison, attracted perhaps by glowing stories of the business to
spring up across the western plains. It was said that not only had
they been influential in shaping the reorganization of 1889, but that
from that date to 1893 the management had been controlled by a
board elected by proxies entrusted to representatives of English
interest. In particular Englishmen had become interested in the
second mortgage bonds of 1892, successors to the income bonds of
1889, holding about one-half of the total issue, and they now fought
for the protection of this issue as against the stock.
A plan of reorganization was early matured after the English
influence substantially as follows: Either the general mortgage or the
second mortgage bonds were to be foreclosed and a new company
was to be formed. If the foreclosure should be under the general
mortgage, overdue interest on that mortgage was not to be paid,
and new securities, similar to the existing bonds, were to be issued,
bond for bond. If the foreclosure should be under the second
mortgage, the company was to provide for past due interest, and
was to assume the payment of principal and interest on the general
mortgage bonds. The capital stock was to remain as before. There
was to be a new income mortgage to the amount of $115,000,000,
of which $84,000,000 were to go for the existing second mortgage A
bonds, and $5,600,000 for the existing B bonds; the surplus to be
given for assessments, or for the securities of such auxiliary
companies as it should be thought advisable to acquire. These
income bonds were to bear 5 per cent and were to have voting
power. There was to be a second mortgage, to amount eventually to
$35,000,000; of which $5,000,000 were to be used at once to retire
the floating debt and for other purposes, and $3,000,000 were to be
used each year for improvements. The new stock was to be held in
trust until 5 per cent per annum should have been paid in cash on
the new income bonds for three consecutive years. Finally there was
to be an assessment of $12 per share upon the stockholders, the
proceeds of which were to go as far as necessary to pay the debts of
435
the old company, including interest on the general mortgage.
On the whole, the scheme was to put the Atchison back to the
condition of 1889, and to regain the margin of safety afforded by the
income bonds. So far it was acceptable enough. Conservative
officers had looked askance at the income bond conversion in 1892,
and this was a simple acknowledgment of the mistake. The old
difficulty as to future capital requirements, moreover, was evaded by
a provision for an annual increment of second mortgage bonds to
take precedence of the incomes. The notable part of the scheme
was the anxious care of the bondholders to protect themselves.
Since their bonds had been converted from income bonds less than
two years before they could not claim a large allowance for the
reconversion; but as a condition of their assent to this and to the
introduction of a second mortgage for $35,000,000 before their lien
they demanded not only a bonus of 5 per cent in the new incomes
for their holdings, but the grant of voting power to the income
bonds, a stock assessment of $12 per share, and the interposition of
an additional $5,000,000 of bonds between the stock and the
property of which it was nominally the possessor. “It is true,” said
the Railway Review, “that the scheme contemplates the issue of
income bonds which shall be given to assenting stockholders at par
in return for the cash assessment, but it is a little difficult to see
wherein such bonds are of very much more value than the stock of
436
the company except that they are not subject to assessment.”
The reception of the plan was what might have been expected. On
July 30, in London, the London bondholders’ committee met and
passed a resolution in its favor. Having now secured, they said in
substance, the substantial features for which they had contended,
and although the plan was not altogether what they could have
desired, they considered, after very prolonged and anxious
negotiations, that a plan had been arrived at which was the best
437
obtainable in the interests of bondholders. Meanwhile meetings of
stockholders were held in New York in protest. Resolutions were
adopted condemning the plan, and a stockholders’ committee was
438
chosen.
Debate was stopped by the publication in August of the report of
an expert who had been selected to examine the books of the
Atchison Company. Few more disgraceful instances of the juggling of
figures have been brought to light in the history of American railroad
finance. Whereas the reports of the company had shown net
earnings steadily increasing from $7,600,000 in 1890 to $12,100,000
in 1893, being ample to meet existing charges and to pay from 2 to
2¾ per cent on the income bonds besides to the time of their
conversion, Mr. Little, the expert, reported that the net earnings had
never exceeded $8,085,608; and maintained that an annual deficit
had occurred each year from 1894, which reached the portentous
amount of $3,000,000 for 1891 alone. The condition of the company
was far worse than had been imagined, and all plans had to be
thoroughly recast. The following is an abstract of the report in
question:
“I have already advised you verbally,” said Mr. Little, “that
income was, in my judgment, overstated in these several years
(since ’89), to the extent of $7,000,000 or more, and I now confirm
this specifically. These overstatements may be classified as follows:
“(1) Rebates. For the four years ending June 30, 1894, the
debits for rebates to shippers on the Atchison system aggregated
$3,700,776, and on the St. Louis & San Francisco system $205,879,
or a total of $3,906,656.
“This sum was charged, not to the earnings from whence it
came, as it should have been, but to an account entitled, ‘Auditor’s
Suspended Account-Special,’ and was reported from year to year as
a good and available asset, while in fact it had no value whatsoever.
“(2) Additions to Earnings and Deductions from Expenses. Next
in order of importance to the rebate account comes an aggregate of
$2,791,000, which, on instructions from the East, was credited from
time to time to the earnings and expenses respectively, but which
credit has no foundation in fact. Of this aggregate $2,010,000 was
added to earnings and $781,000 deducted from operating expenses,
the sum of the two being debited to ‘Auditor’s Suspended Account.’
“(3) Improvements. The sum of $488,000 was in the period
under consideration transferred, improperly as I contend, from
Operating Expenses to Improvements or Capital Account, these
Improvements being finally closed into the account of Franchises
and Property, which represents the cost of the road and property.
“(4) Traffic Balances. It further appears that a traffic agreement
for a division of business was formed in November, 1890 (running to
July, 1891), between the Atchison Company and certain other
companies, whereby such other companies were charged with a
balance of $305,843, which the Atchison Company was unable to
collect, and which is absolutely uncollectable, and should have been
heretofore written off, though it still stands as an asset, and hence
439
must be written to the debit of profit and loss.”
Two facts appear from these charges on which emphasis was
laid from different points of view: (1) That for four years the
Atchison had been persistently violating the law by the granting of
rebates. (2) That to conceal these rebates, and for other purposes,
the books had been so systematically falsified as to defy detection,
and to deceive not only the investing public but the whole railroad
world. The report was handed to Mr. Reinhart, and an answer was
requested by the following day. The answer was made, and proved
inadequate; for though Mr. Reinhart pointed out some half-dozen
items which he argued that Mr. Little had wrongly excluded, he
440
explained no one of the charges directly brought against him.
There is no doubt at the present time that Mr. Reinhart was guilty,
though perhaps because of the difficulty of fixing legal responsibility
he was never prosecuted for falsification of the books. He resigned,
of course, and Major Aldace F. Walker was appointed receiver in his
stead. Two months later he was indicted with other officers of the
company and certain shippers, not for falsifying the books, but for
the illegal granting of rebates. His defence was that he had been, at
the time the rebates were given, only the general auditor at Boston,
and had had no part in the fiscal or executive business of the
441
road. The Government failed to prove connection, and the case
fell through.
All this completely altered the requirements to be met by a
reorganization plan. A more sweeping reduction in charges, and a
more general distribution of losses was needed than before had
been the case. Old proposals were laid aside once and for all, and a
new scheme was built up from the beginning. The mortgage
indebtedness of the Atchison in 1895 was $233,595,247, of which
the first and second mortgage bonds comprised $217,258,276. The
reorganization of 1889 had done its work in one respect at least, and
the reorganization managers were able to concentrate their attention
on two issues. The annual net earnings, according to the company’s
reports had been:

1890 $7,632,348
1891 7,631,598
1892 10,953,896
1893 12,126,866

but as corrected in Mr. Little’s report were:

1891 $5,204,880
1892 7,853,173
1893 8,085,608
1894 5,956,615

Inasmuch as Mr. Little had discovered annual deficits of

1891 $1,964,285
1892 60,938
1893 134,825
1894 3,008,242

it was very evident that a reduction in interest charges was called

for. As in 1889 the salvation of the company was sought in the
substitution of securities on which payment was optional for
securities bearing an obligatory charge.
Soon after Mr. Little’s final report in November three of the
existing committees, namely, the General Reorganization Committee,
the London Committee, and Messrs. Hope & Co. of Amsterdam,
joined in a Joint Executive Reorganization Committee, with Edward
 442
King as chairman. With these now worked a committee chosen by
the directors themselves. The result was a reorganization plan under
date of March 14, 1895. The purposes announced were:
(a) To reduce fixed charges to a safe limit;
(b) To make adequate provision for future capital requirements,
subject to proper restrictions as to issue of bonds for this purpose;
(c) To liquidate the floating debt, and to make adequate
provision for existing prior lien indebtedness shortly to mature;
(d) To reinstate existing securities upon equitable terms in their
order of priority;
(e) To consolidate and unify the system (so far as practicable)
and thus to save large annual expense.
It was proposed to foreclose the Atchison general mortgage ...
and to vest in a railway company the bonds, stocks, and other
properties of the existing company, acquired at foreclosure sale or
otherwise. The new company was to issue:

(a) Common Stock $102,000,000

(b) Five per cent non-cumulative preferred
stock 111,486,000
(c) General mortgage 4 per cent bonds 96,990,582
(d) Adjustment 4 per cent bonds 443
51,728,310

Of the above the interest on only the general mortgage bonds

was to be a fixed charge;—the stock obviously got a return only
when earned, and the adjustment bonds were income bonds in fact
if not in name. Additional issues to a comparatively small aggregate
were provided for, but no mortgage, other than the general and
adjustment mortgages, was to be executed by the company, nor was
the amount of preferred stock to be increased, unless the execution
of such mortgage, or such increase of preferred stock, should have
received the consent of the holders of a majority of the whole
amount of preferred stock at the time outstanding, given at a
meeting of the stockholders called for that purpose, and the consent
of the holders of a majority of such part of the common stock as
should be represented at said meeting. The securities mentioned
were to retire all previously existing issues. Old common
stockholders were to receive share for share in the common stock of
the new company. They were to be assessed $10 per share, and to
receive for the assessment $10 in new preferred stock, while a
syndicate guaranteed payment of assessments by engaging to take
the place of non-assenting or defaulting stockholders. The general
mortgage bondholders were to get 75 per cent of their holdings in
new general mortgage 4s and 40 per cent in adjustment 4s. The
second mortgage and income bondholders were to be assessed 4
444
per cent and were to get new preferred stock. The prior lien
bondholders were dealt with separately, and were to be paid either
in general mortgage 4s of the additional issues (over the
$96,990,582) mentioned, or in the new prior lien bonds. If in the
latter, the general mortgage bonds which would otherwise have
been issued were to be held for the ultimate retirement of these
bonds. Provision was made for future construction and additions by
the allowance of $3,000,000 general mortgage bonds, to be issued
each year to a limit of $30,000,000, and then of $2,000,000
adjustment bonds, to be issued each year to a limit of $20,000,000.
Additional new general mortgage bonds, up to $20,000,000, might
be issued and used in such amounts respectively and in such
proportions as the Joint Executive Committee might determine, for
the acquisition of the Atlantic & Pacific, the St. Louis & San
Francisco, and the Colorado Midland; and for like purposes
$20,000,000 preferred stock. The lien of the new general mortgage
was to cover all properties which should be vested in the new
company, and also any other property which might be acquired by
use of any of the new bonds, but the Joint Executive Committee
might, in its discretion, except from the new general mortgage the
stocks and bonds deposited under the existing general mortgage,
representing branch lines, the operation of which should be found to
be unprofitable and an unnecessary burden to the system. A voting
trust was considered, but was rejected as unsatisfactory; and the
committee confined its efforts to the securing of the best possible
management.

The proposed fixed charges amounted to $4,528,547

Net earnings according to Mr. Little had 1891
been in 5,204,880
1892 7,853,173
1893 8,085,608
1894 5,956,615

Thus the new charges appeared well within the earning power of the
road. The plan made the following, provision for cash requirements:

Assessment on Atchison stock at $10 per share $10,000,000

Assessment on second mortgage and on income
bonds at 4 per cent 3,567,644
$13,567,644

The estimated cash requirements were:

For receiver’s debt, preferred or secured

floating debt of the Atchison Company,
estimated as of January 1, 1895 $7,793,875
Leaving for receivers and floating debt,
accrued interest and undisturbed securities,
etc., 773,769
445
$13,567,644

This reorganization had certain interesting features. As before

remarked, it sought, as did the reorganization of 1889, to replace
securities, the interest on which was a fixed charge, by securities on
which payment of interest or dividends should be optional. But
whereas the earlier reorganization had depended on income bonds,
this plan included both income bonds and preferred stock. There are
several reasons why preferred stock is preferable to income bonds,
and it will be remembered that a peculiar difficulty experienced from
the income bonds of 1889 had arisen from the impossibility of
putting other mortgages ahead of them; yet that this was not the
chief obstacle sought to be avoided by the use of preferred stock at
this later date appears from the current use of adjustment bonds.
Provision for future capital requirements was in fact made in another
way, and the question was not here involved. So far as the
acceptability of the income bonds and the preferred stock
respectively to the old bondholders was concerned, it should be
noted that the men who received the greater part of the new issue
were the holders of the old income and second mortgage bonds;
that is, Englishmen who had already shown their preference for
income bonds as opposed to stock. The chief reason for the new
expedient seems to have been the desire to retain for the general
mortgage holders a priority of lien, while reducing part of their
holdings to the level of an optional obligation. If income bonds or
preferred stock alone had been used, these would necessarily have
been given to the owners both of general mortgage and of second
mortgage or old income bonds; so that the former might have
received a larger amount, but not any lien different in kind. By the
scheme proposed, all possible interest on the securities given for old
mortgage 4s was to be met before anything was to be paid on the
equivalent of issues which had been inferior before the
reorganization took place. Abundant provision was made for future
capital requirements. That lesson had been learned once for all.
Cash requirements were met by an assessment. In speaking of the
reorganization of 1889 the rule was laid down that the disposal of
securities for cash is impossible except at an enormous sacrifice in a
time of general depression. There was widespread depression in
1895, and the reorganization managers wisely made no attempt to
negotiate a sale. The amount of the assessment on the common
stock was very considerably above the quoted price of the shares,
but it was correctly figured that the hope of future increase in value
would be sufficient to induce stockholders to furnish the sums
required. Not to tax them too heavily call was made also on the
junior securities. On the whole, the decrease of $5,000,000 in fixed
charges more than compensated the stockholders for the additional
obligations put between them and their property; their claim on the
road itself was made more remote, but their chances for dividends
were improved. Examination of the plan shows clearly that nothing
was taken from either bonds or stock which those securities had a
right to retain. The bondholders could not, in any case, have
received more than the earnings of the road; and an amount equal
to the return previously due them was assured, whenever the road
should earn it, by the new combination of mortgage and income
bonds and preferred stock. As it was, in return for an assessment
they retained the right to participate in any future prosperity, a right
which has proved of extreme value.
The plan was underwritten by Messrs. Baring Bros. & Co. and
other strong foreign and American bankers, who assumed the
446
liability of paying the assessment and of taking the stock. The
comment at the time was favorable. “On the whole,” said the
Railway Age, “we do not believe that any one who is acquainted with
the properties could have expected a more satisfactory plan than
447
that which the committee has evolved.” The London bondholders
promptly accepted the plan. “We are disposed,” said the Railway
Times of London, “to regard the latest of Atchison reorganization
schemes as a praiseworthy attempt to grapple with a very thorny
448
problem.” Such opposition as there was came from a minority of
the stockholders, and was directed at two points: the prevention of
foreclosure, and the inauguration of an entirely new administration.
It was asserted that certain old members of the board of directors
who had been forced to resign by the earlier disclosures, had
nevertheless secured the election of successors to perpetuate their
policy and to protect their interest. With a directory so constituted, it
was maintained that the stockholders would have no guarantee of
important changes in the executive offices, financial policies, or
449
business methods of the company. Sharp criticism was directed to
a statement of the existing board which referred to the “mistakes
and misfortunes of the previous management.” “Only those who
believe,” said the Stockholders’ Protective Committee, “that gross
irregularities, if not worse, have been perpetrated ... may be relied
upon to probe to the bottom the acts of the former officers of the
450
Atchison.” On the other hand, the accusations of the committee
451
were asserted by the directors to be unqualifiedly false. It soon
became apparent that the opposition could not muster enough votes
to control an election, and although their fight had been begun in
August, they had proxies by November for only 250,000 out of the
1,020,000 shares of stock. Recourse was had to the courts, and an
attempt was made to secure at least a minority representation on
the coming board by the enforcement of a provision for cumulative
voting embodied in a Kansas law of 1879. This failed in November,
1894, and no further obstacle to reorganization was encountered.
Practically all of the assessments were paid in by September 21.
On November 25 Mr. E. P. Ripley was elected president, and in the
first week of December, 1895, Mr. Aldace F. Walker was elected
chairman of the board of directors of the new company. On
December 10, 1895, the property and franchises of the Atchison
were sold at foreclosure, and were purchased for $60,000,000 by
Edward King, Charles C. Beaman, and Victor Morawetz, representing
452
the reorganization committee. The Atchison, Topeka & Santa Fe
Railroad Company was then organized by the purchasers pursuant to
the laws of Kansas, under a certificate of incorporation dated
December 12, 1895. A board of directors was elected, and by-laws
were adopted. The entire estate embraced in the foreclosure sale
was duly conveyed by deed of the same date as the incorporation of
the company, in consideration of which the company executed a
delivery to the Joint Executive Reorganization Committee of the
securities acquired under the plan of reorganization. Certain
subsidiary roads were subsequently foreclosed and bought in,
notably the Atlantic & Pacific and the Chicago, Santa Fe & California.
The St. Louis & San Francisco was not so bought in. “The question
of retaining the St. Louis & San Francisco as a part of the Atchison
system,” said the annual report of 1896, “received very careful
consideration from the Directors.... A series of conferences was held,
which resulted in the matter ultimately presenting the alternative of
the sale of our existing interest upon favorable terms, or the
purchase by us of all other outstanding interests upon terms
involving the outlay of a very large amount of both cash and
securities. While the future control of that road was regarded as
important, the financial considerations affecting the situation
prevailed, and the sale was decided on the whole to be more
prudent than the purchase.” “With the acquisition of the Frisco,” said
Mr. Fleming of the Joint Executive Committee, “the fixed charges on
the Atchison system of 7780 miles would have been increased from
$7000 to $9000 per mile. Atchison is financially much stronger
without Frisco.”
This ends that part of the history of the Atchison Company which
can be connected with either of its reorganizations. From 1895 to
the present time the Atchison has enjoyed a rapidly increasing
prosperity, due in part to the lightening of the charges upon it, in
part to able management, and in part to the great increase in
volume of business which has been a characteristic of the time. One
or two things may be noted. A final settlement has been made of the
relations between the Southern Pacific and the Atchison in the
Southwest. It will be remembered that the final result of the
negotiations in 1882 had been the purchase of the former Mojave
division from the Needles to Mojave, but that since title could not be
acquired until the maturity of the outstanding mortgages, Atchison
had leased this track at an annual rental of 6 per cent on the
purchase price. In 1897 this rental was cancelled. The Southern
Pacific could not even then give a clear title, but exchanged a long
time lease of the Mojave division against a similar lease of the
Sonora Railway, the Atchison branch which reached from Deming to
Guaymas. The rentals cancelled each other, and the actual transfer is
453
eventually to take place. The arrangement is mutually
advantageous. On the one hand the Mojave division formed a spur
of the Southern Pacific, and on the other the Sonora Railway was
totally disconnected from the Atchison, so that the latter company
was obliged to use the Southern Pacific’s tracks to reach the
property at all. In 1898 Chairman Walker of the Executive Committee
was able to announce the substantial completion of negotiations for
the purchase of the San Francisco & San Joaquin Valley Railroad,
running from Bakersfield to Stockton, California; the former town
being sixty-eight miles from Mojave and the latter something less
454
than that from San Francisco. Atchison at once began building at
the Stockton end, and reached San Francisco the following year. The
Santa Fe Terminal Company was then incorporated with a capital
stock of $1,000,000, Atchison secured a traffic contract with the
Southern Pacific, and through freight trains were run from Chicago
to San Francisco on May 1, 1900, through passenger trains following
two months later. Besides this there have been important extensions
in Arizona and New Mexico. In 1901 the Atchison purchased two-
thirds of the bonds, and practically all of the capital stock of the
Pecos Valley & Northeastern Railway Company, stretching 370 miles
from Texico through the southeastern corner of New Mexico to Pecos
City, Texas. In July of the same year it bought the Santa Fe, Prescott
& Phœnix Railroad, from Ash Fork, Arizona, to Phœnix, Arizona,
some 195 miles. Construction has been practically completed
between Belen, New Mexico, a few miles south of Albuquerque, and
Amarillo, Texas, to afford an alternative and somewhat shorter route
from California to Eastern Kansas. A still more noteworthy project is
under consideration for a road to join the Gulf, Colorado & Santa Fe
at Brownwood with the Belen line at Texico, and to open direct
connection over the Atchison from California to the Gulf.
Briefly stated, the Atchison’s mileage has increased from 6479
miles in 1897, to 9273 in 1907. Its gross earnings have grown from
$30,621,230 to $93,683,407; its net earnings from $7,754,041 to
$32,153,692; and its surplus above all charges from $1,452,446 to
$21,168,724. This marvellous showing has been accompanied by
heavy expenditures for improvements, so that the physical condition
of the system is much better than before. Operating expenses, fixed
charges, and taxes took less than 77 per cent of gross income in
1907, and a decline of over $21,000,000 can be suffered in net
before interest on even the adjustment bonds becomes imperilled. It
is not to be wondered at that Mr. Harriman saw fit to invest
$10,395,000 of Union Pacific money in Atchison preferred stock in
455
1906, nor that dividends of 5 per cent on preferred, and 5 per
cent on common stock are being paid. The Atchison owns 1791
locomotives instead of 953 as in 1897; 1135 passenger cars instead
of 622; 49,770 freight cars instead of 26,776. There has been a
large increase in the capacity and power of rolling stock. The
average freight train load has increased from 131 to 320 tons.
Freight train mileage has grown but 35 per cent, while ton mileage
has more than tripled. Thus, although the average length of haul has
increased and the average receipts per ton mile have diminished, the
earnings per freight train mile are actually more than double in 1907
what they were in 1897. And, finally, the Atchison is not dependent
for its revenue upon any single kind of business. Coal, ore, and other
mineral products yielded but 30.87 per cent of its tonnage in 1907;
products of agriculture 25.34 per cent; manufactures 17.37 per cent;
and products of the forest 12.12 per cent.
The capital account, meanwhile, has been kept from undue
expansion. The funded debt has increased from $174,196,750 in
1897 to $284,171,550 in 1907, but the capital stock has decreased
somewhat, and the greater part of the new bond issues have been
convertible serial debenture bonds, which occasion no permanent
increase in charges. It is within the last two years only that Atchison
stockholders have authorized the issue of new capital on a scale
commensurate with the growth of their property. In 1906
$26,060,000 in 4 per cent convertible bonds were offered to them at
par, and this last year they have authorized the issue of $98,000,000
of common stock for improvements, extensions, and the like. This
provides ample facilities for the future without endangering the
solvency of the road.
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