Formation of Separate Companies         

Since we do not yet have documents which show how the Independent Cycle Mfg Co was incorporated into the Hill-Climber Bicycle Mfg Co, we must assume that they are separate entities, Independent Cycle having been organized solely for the manufacture and selling of the Hill-Climber Bicycle.  In fact, the Articles of Co-Partnership (p. 3) refers to an:

“agreement with the Hill-Climber Bicycle Mfgr Co. dated Sept fifth 1903 Granting Exclusive right to Mfgr and sell certain Changeble Geer and Hill-Climber Bicycles.

The Hill-Climber Bicycle Mfg Co may have been organized for the sole purpose of retaining ownership and controlling interest in the capital, over $144,000 of which was subscribed from January to September, 1903.  The Hill-Climber Bicycle Mfg Co was also formed to retain control of the Patent Rights to #725,547, “the Crank-Hanger Bearing for Bicycles” patent and # 707,359,  the latter being the Changeable Gear for Bicycles patent. 

Background of the Principal Parties

The original investors formed two classes of partners.  The first class which we will call Scharbach/Hoerth included Peter J. Scharbach and Kathrina (Catherine) Hoerth.  Their combined investment made up ½ of the capitalization.   They also were partners in Scharbach, Hoerth & Co, a San Franciso firm which had its business address as 1818 Market St. and which represented itself as agents for the Hill-Climber Bicycle Mfg Co..  Peter Scharbach was the original inventor of the mechanism, the changeable gear, which was the feature of Patent #707,359 and which in turn was used as the “intellectual property,” around which the initial investors were formed.  From Scharbach, Hoerth & Co 50% of the money or $60,000 was contributed. 

The other half of the investment came from the Muller Brothers and their associates, who contributed the other $60,000.  We know, for example, that Eberhard Lacher was a brother-in-law who had married Josephine Muller. John Borgelt and Frank A. Miller were acquaintances of the Muller Brothers.  Together, these seven formed the Pe Ell half of the venture.

Nominal Purchase of Interests

There are several interesting journal entries which bear examination.  On page 10,  the journal shows P.J. Scharbach purchasing 1 share for $25 and the journal notation,  “By Capital Stock, 1 share @ $25.00.   Joseph A. Muller also purchases, “1 share @ $25.00, By Capital Stock.”  These individuals have already invested $20,000 and $5,000 respectively.

On page 10, John J. O’Toole purchases “1 share @ $25.00.”  Then on page 11, the entry to create the stock certificate is made in favor of John J. O’Toole with the notation, “1 share @ $25.00. Trans send to J.A. Benson.”  Then immediately below,  the journal entry recognizing this transaction shows that J.A. Benson, now has  “1 share @ $25.00 Trans from J.J.O.T.”     J.J.O.T is John J. O’Toole. who apparently purchased 1 share on behalf of J.A. Benson and then transferred ownership to J.A. Benson.     

Q.    Was John J. O’Toole the silent partner in Scharbach, Hoerth & Co?
A.     These transactions also do not make sense if all Capital Stock carried the same voting rights.  For example in order to own a 51% controlling interest ownership or proxies for 2,448 shares would be required.  Again on page 15 of the journal, we find that Felix Schmalz purchases “8 shares @ $25.00 per share,”  with the additional note that this is a transfer from Eberhard Lacher.  This would mean a direct sale reducing Eberhard Lacher’s holding of  533 1/3 shares down to 525 1/3 shares.   Then a companion journal entry shows, Scharbach, Hoerth & Co as the owners of these particular  shares of stock with the notation, “8 shares @ $25.00 per share transferred from E. Lacher to Felix Schmalz.   All of these purchases must be nominal and cannot be construed as attempts to acquire controlling interest in the Hill-Climber Bicycle Mfg Co.  For such attempts we need to look elsewhere.       

Note:   The first entries in the journal, up to January 16, 1903,  have been made in a different cursive hand than those commencing on January 16th.   The first hand that we see has made the entries for the nine principal investors; the entry to create the Capital Stock account and then nominal entries for single shares each to, P.J. Scharbach, Jos. A. Muller, John J. O’Toole, Thomas W. Hickey, Eustace Aullinau and J.A. Benson.   As of January 16, 1903, all the remaining journal entries are made in a broad, sweeping, cursive penmanship hand.

Formation of Voting Class of Stock, January 20, 1903

The journal recovered from Joseph Muller is a record of the transactions for the sale of Capital Stock in Hill-Climber Mfg from a period of January 3, 1903 to September, 1903.  We also do not know whether the “big distribution” of stock carried with it voting rights.  We do know, however, from the journal than another class of stock may have been issued at a par-value of  $ .01 per share and not $25 per share.  This stock, issued on January 20, 1903 is also identified in the journal as Capital Stock, but not as voting stock, and was issued in the amounts shown at right. The entries from the journal are as follows at right:

The companion entry here is as follows:

Dead Hand Poison Pill
The journal entries creating this January 20, 1903, voting class of stock bear much
resemblance to an anti-takeover device designed to prevent the acquisition of a
company even if a majority of shareholders favor the acquisition.  Dead hand
poison pills can only be removed by incumbent directors or their chosen successors.

Initial Capitalization Accounts
From the journal we can see that these persons donated capital, principally in the form of cash and were credited on the company books with having contributed the cash.   Because we do not have the cash books, we cannot determine whether Peter J. Scharbach contributed $20,000 in personal funds or whether he received an outright grant of 800 shares in exchange for his Patent # 707, 359. From the journal transactions we can see that these funds were initially debited or assigned to an account called Patent Rights.  The subject of these patent rights was Patent #707,359, The Changeable Gear for Bicycles, which was valued at $120,000 for the initial capitalization of the firm. 

In the second part of the journal entry, the entire value, $120,000 is transferred to the Capital Stock account of the Firm and Patent Rights is credited, at a rate of 4,800 shares for $25 dollars per share.  This transaction creates the Capital Stock account with the following journal entry.

The capitalization of the Hill-Climber Mfg Co is now $120,000 with 4,800 shares @ $25/share.

Eberhard (Ed) Lacher had an investment of 400 shares

More Interesting Financial Details

J.A. Benson is named General Manager in the Sept 25th agreement.  J.A. Benson has also submitted a statement in the amount of $2,869.45 as agent for and on behalf of the Hill-Climber Bicycle Mfg Co.   Conrad J. Dorff is an assignor of Patent Rights, [51/100 interest in #725,547] for $3,000 and certain other instructions for the sum of $3,000 over the life of the agreement [which is three years] for a total $6,000    Joseph A. Muller is named as the Treasurer by this document.   The Muller Brothers,  Frank Z. Muller,  John K. Muller, Marzell Muller and Joseph A. Muller are partners in some capacity.   Except for Joseph A. Muller, it is not clear what their role is in the management of the Independent Cycle Mfg Co. 

Q: Was there a Release of Assignment back to Conrad J. Dorff for Patent #725,547 before September 25, 1903? 

A: We’ll answer that question below after we examine the other documents and the journal. 

Hill-Climber Bicycle Mfg Co: 97-101 S. Clinton St., Chicago, Illinois

Conrad J. Dorff, of Chicago, Illinois, is the assignor of forty-nine one-hundredths [49/100] interest in this same patent to Peter J. Scharbach, of San Francisco, California, namely, a Bearing for Bicycles, #725,547, dated April 14, 1903. We do not know the terms of this assignment or when it was made. What C.J. Dorff claims as “new” is the design of the crank-hanger bearing, an outer casing having a housing for a gear-wheel, a ball-race and a locking-ring on the end of the barrel for adjustment. This application was filed January 16,1903 and notarized December 20, 1902.

(1)   The Hill-Climber Journal shows an entry on January 20, 1903, an exchange of interest
in “Patent Rights on one piece chainless crank and gearing appliance,”  for 700 shares Capital Stock at $25/share for $17,500.   Debit C.J. Dorff, [ledger]; Credit Capital Stock

(2)    The same journal shows the reversing entry to the Patent Rights account and a credit to C.J. Dorff [ledger account], but not until Sept, 1903; there is no specific date for this entry. The journal notation is, “49/100 Part of Crank-Hanger bearings Patent Under #725,547.”

Patent # 725,547 would make Peter J. Scharbach effectively a silent and beneficial partner in the Independent Cycle Co because he owns a 49/100 interest in the Bearing for Bicycles patent, also known as the Crank-Hanger Bearing Patent, unless he has released all such interest in that patent before September 25, 1903.

Note: See the discussion above where Conrad Dorff is identified as having also sold or exchanged, to the Hill-Climber Bicycle Mfg Co, a 49/100 part interest in Patent #725,547 for a value of $17,500 and received as consideration 700 shares of Capital Stock in that company on one of two different dates, either January 20, 1903 or in Sept, 1903.
      

What is the sequence of events here?  
 
Q.        When was the assignment of 49/100 interest made to Peter J. Scharbach?
A.        Most likely it was made after December 20, 1902 and on or before January 20, 1903

Q.        Was there a Release of assignment or assignment back to C.J. Dorff before Sept, 1903?
A.        Possibly?  Only another agreement or the partnership terms organizing the Hill-Climber Bicycle
Mfg  Co could answer this.  Perhaps such assignment was made under such an agreement.

Q.        How can C.J. Dorff assign 49/100 interest to Hill-Climber Co in Sept, 1903, on January 20th
and receive 700 shares in exchange if he has,  in fact, already assigned 49/100 interest to
Peter J. Scharbach on or before either January 20, 1903 or Sept, 1903?
A.        He cannot, at least not without a corresponding agreement returning 49/100 interest.
            Otherwise someone is double booking the same 49/100 interest.   

Q.        Doesn’t there need to be another agreement transferring interest back to C.J. Dorff
A.        Yes, probably, and we are missing that agreement.

Q.        Couldn’t this be a case where the accountant made a mistake with one entry on January
 20, 1903 and then realized that he needed a corresponding entry  in September, 1903?
A.        It could, but throughout January until July 27, 1903, when the journal entries stop, whenever money or consideration were exchanged for shares of stock, the entries were almost always, though not uniformly, made as companion entries.  That is,  Debit [Cash Book]; Credit the Purchaser’s Account;  then Debit Purchaser’s Account and Credit Capital Stock and Issue X shares of stock to the Purchaser from the company Treasury.

Patent # 649,878,  Gear for Bicycles,   May 15, 1900

Patent # 707,359,  Changeable Gear for Bicycles, August 19, 1902

This patent, also referred to at the August 19, 1902 patent, is valued at $120,000 in the Hill-Climber journal and is used as the basis for capitalization of the Hill-Climber Bicycle Mfg Co. Subsequently, and in each case, where the principal investors contribute funds, they receive Capital Stock at a rate of $25/share according to their investment.  The notation for each journal entry is,  “Acc’t patent rights held in changeable gear.”  Even the Inventor and Owner of the patent, Peter J. Scharbach, contributes funds or is otherwise credited with funds of $20,000 for which he receives 800 shares or a 1/6 interest.  We can envision three scenarios here. 

First, that Peter J. Scharbach actually did contribute real cash money, in addition to assigning interest in Patent #707,359 to the Hill-Climber Co.   It does not seem likely that all other investors would contribute as much cash money as they did without Peter Scharbach having some skin in the game.  Without their investment his patent is worthless.

Second, Peter J. Scharbach could have contributed no cash money, but only his patent and received shares of Capital Stock in exchange for his patent.  This is the same circumstance under which C.J. Dorff, who was not a prinicipal owner, received 700 shares of stock for Patent Rights valued at $17,500.  

Third, if the second scenario is the case, then we have a company which on the books has a capitalization of $120,000, but whose retained capital at the outset is only $100,000.  Moreover, when the value of the principal owners’ shares are further diluted by a grant of 700 shares to C.J. Dorff, on January 20, 1903, for no cash, then we have a company which is further overvalued. 

The extant stock certificate example that we have for one, Mike Dublo, shows an advertised  capitalization of 6,000 shares at $150,000.   The actual amount of additional stock that was sold beyond the initial capitalization of $120,000 is only  $7,300 or 292 shares.   If we assume that both Peter J. Scharbach and C. J. Dorff received grants of capital stock for their patents, then actual capitalization is only $144,800 or $5,200 short of the $150,000, as stated on the stock certificate. 

This means two things: (1) that they did not reach their capitalization goal or (2) that they still had in reserve 208 shares authorized which were not sold in the initial drive. In other words, the initial public offering or IPO was not fully subscribed. Whether there was an underwriting firm involved is another detail that we do not know. We do know that all the principals, including the Muller Brothers were acting as Sales agents and delivering certificates to their friends and acquaintances in return for purchases of stock in the new venture.

Scenarios for failure

By 1910, both the Hill-Climber Bicycle Co and the Independent Cycle Co are gone. The capitalization for the Hill-Climber Bicycle Co was authorized at $150,000 of which only $144,800 was realized through the initial offering.  Of that amount, only $104,500 was real cash since the share values held by Conrad Dorff and Peter J. Scharbach were booked as contributory for their patents. It is not apparent that either Dorff or Scharbach ever contributed “hard money,” toward the formation of Hill-Climber. In contrast, the other principal investors were:  Catherine Hoerth, $40,000; the Muller Brothers,  John K., Marzell, Joe and Frank, $5,000 each; Ed Lacher, John Borgelt and Frank Miller, $13,333 1/3 each for a total of $40,000 collectively.  This means that small share owners invested only $4,500.

The burn rate must have been terrific because the money is gone by the end of 1904 and the enterprise has folded. The manufacturing arm, Independent Cycle, was entirely dependent on the parent Hill-Climber Co for sales and cash. It is likely that the company was undercapitalized, even at $150,000 and that the money simply went too quickly for expenses in both Chicago and in San Francisco while sales did not generate enough cash flow.  From the general ledger journal entires we know that there were at least 21 Cash Books used to record these expenses. 

There is yet another scenario that could have contributed to the failure of the Hill-Climber Bicycle Co.  In March, 1902, Catherine Hoerth was a widow, living in PeEll, and having lost her husband, Frederick Hoerth.  Then in September, 1902, she also lost 3 of her 6 children in the same month to a black diphtheria epidemic. A fourth child died in December, of the same epicemic. It is hard to imagine why Catherine Hoerth would invest $40,000 in Hill-Climber in early 1903, if she had the ability to make an informed choice.  Perhaps by virtue of holding the majority interest, she was allowed to protect herself when the fortunes of the company waned in 1904, and was allowed to pull back her investment