New-York tribune., 1922-09-25
STATEMENT TO ALL SECURITY HOLDERS
REGARDING CITIES SERVICE COM
PANY DEBENTURE BONDS:

since the adoption by Cities Service Company of par
tcpating convertible Debentures vehicle of finance
and the Company deems II duty again to inform the
holders Of its securities of the nature of these Deben
lures and to call attention the fact that it not to
the advantage of the holders to make tenders as these
Debenures have much higher market value The above
notice published simply to comply with the terms of
the agreements with the trustee. In working out the
provisions OF these bonds the aims of the Company
First, to create an attractive security which would
be eagerly sought by investors. This primarily
accomplished by making the issue convertible into stocks
with additional proftsharing feature through the
accrual OF Common stock dividends which are accunu-
lated and added to the conversion rights.
Second, to create bond which would not lessen
the atractveness of the Preferred stock an invest
ment security, because, while ranking ahead of the
stock, nevertheless is mortgage on the assets of
the Company. This accomplished by making the
bond OF long maturity (o66) and by accumulatng dvi-
dends on the Common stock in amount sufficient to
reasonably insure the early retirement the bond In
other words 1t would be apparent to anyone studying
the bond that 1t was temporary obligation only it
being to the interest of the Company to retire it at
the earliest possible date
Third, to create bond which the Company could
convert at any time it advantageous to do so and
at the same time to entirely control these conversions
by making the provisions of the bond such that it
would always be to the interest of the holder to retain
it as long possible. This was accomplished by the
participation feature of the conversion right the holder
OF the bond getting all of the dividends from the Com
mon stock accumulated for his benefit plus interest on
the full par value of the bond For instance the "B"
bondholder gets in addition to the dividends on the
Common stock $40 interest, and after converting
he loses this $40 interest the bond and gets in lieu
thereof go interest $500 par value of Preferred
stock, or $48
Cities Service Company the owner of the capital
stock OF approximately hundred operating subsid
aries, widely distributed throughout the country and
about equally divided between public utilities and the
petroleum industry, has we'll diversified its invest
ments that its earnings remarkably stable Under
normal conditions the subsidiaries should be able to
raise substantially all of the capital for their growth
and development by the sale OF their own securities
to investors but under the abnormal conditions which
have prevailed, this has not always been true When
public utility securities not in high favor with
investors during the period, and when petroleum
securities not generally appreciated by investors
which was the case prior to 1916, Cities Service Com
pany was compelled to supply capital for these prop
critics When subsidiaries able to raise capital for
their requirements through the issuance and sale to the
public of their own securities then Cities Service Com
pany receives earnings from widely diversified business
enterprises excepting those which it assisting through
the development stages.
Thus, Cities Service Company is in the position of
an investor in fundamentally the most essential indus
tries widely distributed throughout the United States
and extending into Canada and Mexico we'll as other
foreign countries but occasionally it act as banker
tor some OF its operating companies to tide them over
difficult operating and financial conditions Soon after
the direct entry of America into the world in 1917
urgent demand for additional public utility service
particularly electric power together with Governmental
lnslstence upon maximum production of OIL but inves
tors were reluctant to furnish the necessary capital by
the purchase of securities Of individual operating COR
porations. There remained however strong and Der
stent inquiry tor securities representing wide degree
OF diversity and high degree Of safety provided the
investor might also receive a conversion right and
participation in profits we'll fixed rate Of interest
study of all of the factors involved resulted in
the adoption by Cities Service Company of new prin
cple OF financing which would serve the purpose of
raising the capital by the creation of temporarv
indebtedness which would automatically be converted
INTO capital stock In effect self qudating bond was
devised-the Cities Service Convertible Debenture
The Debentures of equal priority and of the
same maturity date differing only in their interest rate
and terms of conversion into capital Stocks and are
distinguished In this respect by lettered series
The principle involved is best explained by descrip-
ton Of the conversion feature of the Series "B" issue
Each 500 Debenure "B" is convertible into $50 par
value of Cities Service Company Preferred stock and
$40 par value of Cities Service Company Common stock;
the holder in addition receiving at the time of CONVEX
sion an amount equivalent to dividends this Com
stock at the full from the date of issue of
the Debenture Therefore, the holder regularly collects
the face rate of co interest on his Debenture while
there is additional income accrung at the full dyi
dend rate on certain amount of Common stock This
accumulation continues to build up for distribution only
at the time of conversion 1t should be noted that
whereas the 79o interest payment to the Debenture
holder is prior obligation of the Company ahead of
its Preferred stock the additional earnings above the
interest rate are at the of the Common stock
holders
1t is not to the advantage of the holder of the
Debenture to make conversion because his income will
thereafter be reduced After conversion the holder of
a. 500 "B" Debcnture continues to receive the same
dividends the Common stock, acquired through con-
version that formerly accruing in his favor but
instead of receiving $500 annually in interest he there
after receives $50 dividend $50 rar value OF Pre-
ferred stock This amounts to reduction OF the income
his investment to the extent of $3.50 year There
FORE it is not in the interest OF the Debentue "B,
holder to convert into stocks until he is required to do
by the call of the issue for redemption which auto
matcaiy terminates his right to in thirty days
This places the Company in the position of choosing
the time when the Debentures to be converted into
stocks.
This arrangement nsures the early retirement OF the
bonds, or otherwise, allowed to run for many years