“Both classes of stock of the new company ... are to be issued to three Stock Trustees, who shall be appointed, on or before completion of reorganization, by Messrs. Drexel, Morgan & Co. The stock shall be held by the Stock Trustees and their successors, jointly, for five years, and for such further period (if any) as shall elapse before the preferred stock shall have paid 5 per cent cash dividend in one year, although the Stock Trustees may, in their discretion, deliver the stock at an earlier date....
“No additional mortgage shall be put upon the property to be acquired hereunder by the new company, nor shall the authorized amount of the preferred stock be increased without the consent in each case of the majority in amount of the preferred stockholders.”[380]
The result of all these provisions was to be a cancellation of the floating debt, a reduction in fixed charges, and a decrease in mortgage bonds; though inevitably also an increase in stock outstanding. The plan proposed to disturb $49,117,900 of outstanding bonds, or, including the Richmond Terminal 5s and 6s, a total of $65,617,900. But the new bonds which it offered in exchange amounted to $19,806,700 only. On the other hand it took $111,819,550 in stock from the hands of the public, and offered $165,559,514 new stock in the course of the exchanges.[381] This was very conservative, since the increase in total capitalization through these exchanges was less than 4½ per cent; and less too than the cash assessment for which preferred stock was allowed. Somewhat greater increase in securities appears if we consider, not only the exchanges, but the provisions of the plan as a whole; for here we must include $33,300,000 new common stock and $8,000,000 new bonds issued to retire in part the $12,900,000 of floating debt and for other purposes. Even so the net increase was only 6 per cent.[382] The natural result was a considerable reduction in fixed charges. The absolute fixed charges of the system in 1893 the plan stated to be $9,900,000. The fixed charges under the plan were to be $6,789,000. This was certainly a step in the right direction. It was the point, nevertheless, at which the plan was weakest. The clauses which have been outlined made abundant and conservative provision for cash requirements; and the sums which they allowed for future development were not on their face inadequate; but the reduction in fixed charges was less than should have been ensured. The net earnings for the year ending June 30, 1892, were $7,725,000, and those for 1893 were estimated by the plan itself as not likely to exceed $7,000,000. This would have left $936,000 over the proposed fixed charges in 1892 and $211,000 in 1893:—or a surplus of some 3 per cent in the latter year. This was altogether insufficient. It not only put out of the question dividends on the $200,000,000 of stock, but it precluded the partial improvement of the road from earnings, and left the system at the mercy of the slightest decrease in the annual returns. Compared with previous fixed charges the plan proposed noteworthy reductions; compared with the earnings of the lines involved it did not go far enough.[383]
The reception of the Drexel-Morgan plan was, nevertheless, satisfactory. Certain concessions were made to various classes of bonds, and by June 17, over 95 per cent of the securityholders had given their assent.[384] Unfortunately the earnings of the property now steadily decreased. The gross receipts of the Richmond & Danville proper were 15 per cent less in 1893 than in 1892; and Terminal system lines which had earned $6,100,000 in 1892 earned $5,300,000 in 1893, and promised to earn some $4,250,000 only in 1894. This decrease was common to the country at large. It was of peculiar importance, however, in emphasizing the weak point in the Drexel plan. From January 1 to July 1, 1893, the Terminal floating debt, exclusive of car trusts, increased $2,600,000. From July 1 to March 1 it increased at least a million more. The reorganization plan had been prepared “on the assumption that, during reorganization, the receivers of the various properties could provide for the interest charges on the undisturbed securities, as well as accumulate a sum sufficient for the interest accruing on the ‘disturbed securities’ as readjusted.”[385] As it turned out, the receivers were obliged to make many defaults among the undisturbed securities, and saved nothing for the disturbed. Some modification of the published plan had perforce to be arranged.
These modifications were detailed in a pamphlet dated February 20, 1894. They comprised three proposals:
(1) To exclude from the reorganization certain unprofitable properties which had previously been included. Certain alterations had already been made toward this end in the exclusion of the Erlanger line, the Memphis & Charleston, and the Mobile & Birmingham. Further modification was to exclude the Northeastern Railroad of Georgia, the Macon & Northern, and five other subsidiary lines.
(2) To fund for a year or two the coupons on new bonds given for certain securities, and to provide in other cases that the new bonds should not bear interest till 1895 or 1896.
(3) To lighten the assessment on Richmond Terminal and East Tennessee common stock, and to allow to all assessed securities one-quarter of their assessment in bonds and three-quarters in preferred stock instead of all in preferred stock.
At the same time a few other modifications allowed to some bonds a more liberal grant of new securities than they had obtained in May. It was hoped by these means to raise the average earning ability of the system, while reducing the new securities to be issued.[386] The temporary funding of coupons further lightened fixed charges until business should have had time to revive. “Under the plan as now modified,” stated Drexel, Morgan & Co., “and assuming that one-half of the new bonds to be sold are used in 1894 and the other half in 1895, the fixed charges are estimated at about
$4,100,000 in 1894,
4,700,000 in 1895,
5,400,000 in 1896.[387]