| Principal | Interest | ||
|---|---|---|---|
| Before reorganization, | $54,394,100 | $4,073,106 | |
| After reorganization, | 46,634,134 | 3,316,238 | |
| Decrease | $7,759,966 | $756,868 |
The net earnings for 1874–5 had been $3,715,609, and those from 1871–3 inclusive, with the deductions declared proper in the report of the London accountants, had averaged $4,175,699 each year, so that a safe margin seemed to intervene. The extent of the margin depended, however, on the fixed charges, such as rentals, over and above interest on the funded debt; and although it was proposed to cancel burdensome leases and contracts the actual leeway after 1880 was to be very small indeed. To speak briefly, the plan was definite but not sufficiently radical to meet conditions which were likely to arise. In counting upon the ability of the company to spare considerable sums from revenue for improvements during the next few years, it was leaning on a broken reed; in increasing the nominal amount of bonded indebtedness, it was making a step in the wrong direction; and by interposing additional claims on earnings while leaving the volume of stock the same, it took from the stockholders any very lively interest in the road’s future welfare. The plan was nevertheless accepted by the English securityholders, subject to such modifications as might afterwards be found desirable.[106]
The next step was to obtain the unanimous acceptance of this Watkin scheme. Messrs. Robert Fleming and O. G. Miller were accordingly sent to New York in February, 1876, to consult with the officers of the company and the securityholders in America. No very vigorous interest was taken on this side, but the Erie directors appointed a committee to confer with the English representatives, and discussions took place for something over a month. The committee criticised the plan proposed from the point of view of the stockholders; they maintained that it would destroy all their interest in the property unless they made further sacrifices, which they were unable to do, and suggested that the funding of from four to eight coupons by the first consolidated, gold convertible, and second consolidated bonds was all that would be needed to put the road in a prosperous condition, provide for steel rails, and for the narrowing of the gauge.[107] This was so plainly inadequate that it is a matter of surprise that it was entertained by the English committee; and even they insisted that the stockholders agree to put a majority of the $86,000,000 of stock in the hands of the bondholders as a preliminary, and would do no more than lay the proposal before their constituents.
On their return home in April Messrs. Miller and Fleming stated that the essential conditions to a successful reorganization were:
(1) An effective control of the management by the real owners,—the bondholders;
(2) The restoration of the equilibrium between the compulsory interest charge on the mortgage debt and the minimum net earnings;
(3) A change of gauge from 6 ft. to 4 ft. 8½ in.[108]
“The foreclosure scheme of the committee” (Watkin plan), said they, “is certainly the soundest plan and would doubtless be preferred by those shareholders who really care for the welfare of their property.” Then referring to the directors’ plan, “If it were possible to present to the bondholders the scheme of proceeding by amicable arrangement as practicable, and therefore as presenting a real alternative for their acceptance, we should suggest to you at the same time to lay the option before them. We feel, however, that that scheme can only be regarded as such an alternative when stockholders enough have signified their willingness to vest their shares in trustees on the footing of it, and so secure an effectual control to the bondholders for a certain period. We must, therefore, content ourselves for the present with suggesting that the committee should proceed with vigor in the direction of foreclosure, at the same time inviting the stockholders to signify their willingness to vest their stock in trustees as above mentioned.”[109]
The suggestion of the directors was the last alternative plan proposed, and from April, 1876, the only question was how to perfect and carry through the Watkin plan. As eventually put forward, this differed in a few points from its form as earlier announced. The fundamental principle was still the funding of coupons of the first and second consolidated and the convertible bonds. Of these the first consolidated mortgage and sterling 6 per cents were now to fund alternate coupons from September 1, 1875, to September 1, 1879, instead of funding all coupons to March 1, 1876, and receiving cash thereafter: and whereas in the earlier plan mortgage bonds of the same class had been given for funded interest, the later plan created special issues of funded coupon bonds, secured by deposit of the funded coupons, and bearing the same interest as the first consolidated bonds themselves. A more serious difference appeared in the treatment of the second mortgage and the gold convertibles. It will be remembered that it had been proposed in December, 1875, to exchange these for two classes of new bonds, of which 60 per cent were to bear interest at the rate of 6 per cent and 40 per cent were to consist of 4 per cent income bonds. The new plan did away with this permanent reduction in fixed charges. Instead, the second consolidated and convertible gold bonds funded alternate coupons from June 1, 1875, to December 1, 1879, and received a new 6 per cent bond for the principal of their holdings, and funded coupon 6 per cent bonds for the interest thus postponed; the new mortgage bonds not having the right of foreclosure until after default for six successive interest periods (3 years). The funded coupon bonds were to be funded at the existing rate of interest on the second consolidated and convertible bonds, i. e. 7 per cent, so that the reduction in interest was compensated for by the greater volume of securities given; and both classes of these coupon bonds were to bear lower interest at first than that to which they would ultimately attain. The assessment proposed in 1875 was retained in 1876, except that stockholders were given the choice of paying $6 on common and $3 on preferred stock and obtaining therefor income bonds, or of paying $4 on common and $2 on preferred and receiving nothing but new stock, dollar for dollar for their old.[110] One-half of the shares of the new company (after foreclosure) were to be issued in the name of one or more sets of trustees, who were to hold them to vote on until a dividend had been paid on the preferred stock for three consecutive years. Provision was made for an issue of $2,500,000 in prior lien bonds, to take precedence of the remainder of the second consols, the proceeds to be applied to capital requirements. Voting power was conferred on the first and second consols, funded income bonds, prior lien bonds, and income bonds, in all about $57,000,000; one vote to every $100 of bonds.[111] The property of the company was to be foreclosed by or under the direction of certain reconstruction trustees, for the choice of whom careful provisions were inserted.
Divested of all complications, what this reorganization plan proposed for the salvation of the property was the funding of the coupons on four classes of bonds from 1875 to 1879; the reduction of the interest to be paid on $25,000,000 second consolidated and convertible 7s one per cent per share; and the raising of a certain amount of cash by assessment upon the stockholders; while it dropped the one point of the earlier plan which might have given a key to the solution of the whole problem, viz. the exchange of mortgage and income bonds for the old second consolidated in the ratios respectively of 60 per cent and of 40 per cent. When we remember the desperate straits to which the company had been reduced, the permanent relief seems slight enough; and given the fact, which proved but too true, that the net earnings were to fall off until the road was little more than able to meet the alternate coupons which it was obliged to pay in cash, it appears to have been nothing at all. If we suppose no changes to have occurred in capital account between 1878 and 1883 save those provided for in the plan of reorganization itself, a comparison of the two periods would have stood as follows: