ITEM 1. BUSINESS.
(a) Development of the Business
GENERAL
Allis-Chalmers Corporation (Allis-Chalmers or the Company) was incorporated in 1913 under Delaware law. The Company sold its major operating businesses in 1988 in accordance with its First Amended and Restated Joint Plan of Reorganization (Plan of Reorganization) under Chapter 11 of the United States Bankruptcy Code. The Plan of Reorganization was confirmed by the Bankruptcy Court on October 31, 1988 after acceptance by creditors and shareholders and was consummated on December 2, 1988. See Item 3. LEGAL PROCEEDINGS for a discussion of such proceedings.
The Company has its principal executive office in Milwaukee, Wisconsin and it maintains three wholly-owned subsidiaries. One subsidiary, Houston Dynamic Service, Inc., operates a machine repair business in Houston, Texas; the other two subsidiaries, KILnGAS R&D, Inc. and U.S. Fluidcarbon Inc., are inactive.
On September 22, 1994, the Company sold its B.R.B. Industries division. B.R.B. Industries, which was acquired by the Company on December 20, 1989 in a purchase of assets, is a Hoboken, New Jersey manufacturer of molded fabric products serving the apparel and lingerie markets and the home sewing and notions industries.
(b) Financial Information About Industry Segments
The Company operates in a single industry segment -- the repair and service of mechanical rotating equipment for the industrial, utility and governmental aftermarkets.
(c) Narrative Description of Business
The principal business activities of the Company are as follows:
MACHINE REPAIR
Sales of the machine repair business operated by Houston Dynamic Service, Inc. (HDS), a wholly-owned subsidiary of the Company, were $5,021,000 in 1998, $4,062,000 in 1997 and $4,060,000 in 1996. The increase in 1998 sales from 1997 and 1996 was primarily the result of strong market conditions coupled with a more focused marketing strategy and product offering.
HDS services and repairs various types of mechanical equipment, including compressors (centrifugal, rotary, axial and reciprocating), pumps, turbines, engines, heat exchangers, centrifuges, rollers, gears, valves, blowers, kilns, crushers and mills. Services provided include emergency repair, disassembly, inspection, repair testing, parts duplication, machining, balancing,
metalizing, milling, grinding, boring, welding, modification, reassembly, field machining, maintenance, alignment, field service, installation, startup and training.
HDS employed 41 people on December 31, 1998. It operates out of a facility in Houston, Texas which was purchased by HDS in 1990. The facility includes a repair shop and office space.
HDS serves various industrial customers, including those in the petrochemical, chemical, refinery, utility, waste and waste treatment, minerals processing, power generation, pulp and paper and irrigation industries.
OTHER DATA
Competition in the Company's machine repair business consists of nine major original equipment manufacturers (OEM) and numerous smaller independent competitors. Many of these competitors have special strengths in certain product areas because of customer preferences for OEM suppliers or because specialized patented technologies are offered. The principal methods of competition are price, quality, delivery, customer service and warranty.
The principal raw materials and purchased components used in the machine repair business are alloy and stainless steels, castings and forgings, aluminum, copper, gears and other basic materials. Alternative sources of supply exist or could be developed for all of these raw materials and components. This business is highly labor intensive.
Some of the Company's products, processes and systems are covered by patents owned by or licensed to the Company. No particular product, process or system is dependent on a single fundamental patent, the loss of which would jeopardize the Company's business. The Company licenses the use of a number of its trademarks, from which it receives income.
During the past three years, Amoco Chemical was the only customer which accounted for 10% or more of total Company sales -- Amoco Chemical generated 24% of 1998 sales, 12% of 1997 sales and 16% of 1996 sales.
Expenditures relating to compliance with federal, state and local environmental protection laws are not expected to have a material effect on the Company's capital expenditures, results of operations, financial condition or competitive position. The Company is not aware of any present statutory requirements concerning environmental quality that would necessitate capital outlays which would materially affect the Company. In conjunction with consummation of the Plan of Reorganization, the Company settled all known environmental claims asserted by the United States Environmental Protection Agency (EPA) as well as claims asserted by certain state agencies. However, the EPA and third parties have claimed that Allis-Chalmers is liable for cleanup costs associated with certain hazardous waste disposal sites in which products manufactured and sold by Allis-Chalmers before consummation of the Plan of Reorganization were ultimately disposed of by others. Since Allis-Chalmers manufactured and sold the products disposed of in these sites before consummation of the Plan of Reorganization, Allis-Chalmers has taken the position that all cleanup costs or other liabilities related to these sites were discharged in the bankruptcy. See Item 3. LEGAL PROCEEDINGS.
The Company's employment was 47, 42 and 44 at December 31, 1998, 1997 and 1996, respectively.
For more detailed information, you should read in their entirety the audited 1998 Consolidated Financial Statements, Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations contained elsewhere in this report.
(d) Financial Information About Foreign and Domestic Operations and Export Sales
The Company has no foreign operations or significant export sales.
ITEM 2.
ITEM 2. PROPERTIES.
The Company's principal operating facility is a 25,000 square foot repair shop and office building in Houston, Texas, which is owned by HDS. Allis-Chalmers leases its administrative offices in Milwaukee, Wisconsin on a short-term basis. The facilities are considered adequate and suitable for the Company's principal business.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
REORGANIZATION PROCEEDINGS UNDER CHAPTER 11 OF THE UNITED STATES BANKRUPTCY CODE
On June 29, 1987, Allis-Chalmers and 17 of its domestic subsidiaries filed separate voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code. The Plan of Reorganization was confirmed by the Bankruptcy Court on October 31, 1988 after acceptance by the Company's creditors and shareholders, and the Plan of Reorganization was consummated on December 2, 1988.
At confirmation, the Bankruptcy Court approved the establishment of the A-C Reorganization Trust as the primary vehicle for distributions under the Plan of Reorganization, two trust funds to service health care and life insurance programs for retired employees and a trust fund to process and liquidate future product liability claims. Cash of approximately $400 million and other assets with a net book value of $38 million were distributed to creditors or transferred to the trusts, and the trusts assumed responsibility for substantially all remaining cash distributions to be made to holders of claims and interests pursuant to the Plan of Reorganization. The Company was thereby discharged of all debts that arose before confirmation of the Plan of
Reorganization, and all of its capital stock was canceled and made eligible for exchange for shares of the reorganized Company.
The Company does not administer any of the aforementioned trusts and retains no responsibility for the assets transferred to or distributions to be made by such trusts pursuant to the Plan of Reorganization.
For a description of restrictions on the transfer of the common stock of the reorganized Company, see Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
ENVIRONMENTAL PROCEEDINGS
As part of the Plan of Reorganization, the Company made a cash payment of $4.5 million to the EPA in settlement of the EPA's claims for cleanup costs at all sites where the Company was alleged to have disposed of hazardous waste. The EPA settlement included both past and future cleanup costs at these sites and released the Company of liability for claims of contribution or indemnity which may be asserted by other potentially responsible parties against Allis-Chalmers in connection with these specific sites.
In addition to the EPA settlement, the Company negotiated settlements of various environmental claims which had been asserted by certain state environmental protection agencies. These settlements, totaling approximately $200,000, were approved by the Bankruptcy Court.
Since consummation of the Plan of Reorganization on December 2, 1988, a number of parties, including the EPA, have asserted that the Company is responsible for the cleanup of hazardous waste sites. These assertions have been made only with respect to the Company's prebankruptcy activities. No claims have been asserted against the Company involving its postbankruptcy operations.
Before the settlement with the EPA in the bankruptcy proceedings, an attempt was made by the parties to identify all possible hazardous waste disposal sites and to settle all liabilities relating to those sites. Notwithstanding the breadth of the settlement, various EPA regional offices have continued to assert cleanup claims against Allis-Chalmers with respect to several sites. Apparently, not all offices of the EPA are aware of the settlement agreement, since at least two of these claims involve sites with respect to which the EPA specifically agreed not to sue.
Certain other parties have asserted that the Company is responsible for environmental cleanup costs or associated EPA fines in connection with additional sites. In each instance the Company activities complained of occurred prior to the Company's bankruptcy proceedings and the third parties did not file proofs of claim in the bankruptcy proceedings. The filing of such proofs of claim is required by the Bankruptcy Code to effect a claim against a Chapter 11 debtor. A bankruptcy discharge defense has been asserted by the Company in each instance.
Although the law in this area is still somewhat unsettled, three Federal Courts of Appeal have held that a debtor can be discharged of environmental cleanup liabilities related to its prebankruptcy activities. The Company believes it will prevail in its position that its liability to the EPA and third parties for prebankruptcy environmental cleanup costs has been fully discharged. In one particular site, the EPA's Region III has concurred with the Company's position that claims for environmental cleanup were discharged pursuant to the bankruptcy. While each site is unique with different circumstances, the Company has notified other Regional Offices of the EPA of this determination associated with the Region III site. The Company has not received responses from the other Regional offices.
The EPA and certain state agencies also continue to request information in connection with various waste disposal sites in which products manufactured by Allis-Chalmers before consummation of the Plan of Reorganization were ultimately disposed of by other parties. Although the Company has been discharged of liabilities with respect to hazardous waste sites, it is under a continuing obligation to provide information with respect to its products to federal and state agencies. The A-C Reorganization Trust, under its mandate to provide Plan of Reorganization implementation services to the Company, has responded to these informational requests because prebankruptcy activities are involved.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Plan of Reorganization provided for cancelling the old common stock of Allis-Chalmers on December 2, 1988 and issuing new common stock of the reorganized Company (Common Stock) to certain holders of claims and interests, including holders of old common stock.
After receiving approval of a majority of shareholders of Common Stock, the Company amended its Amended and Restated Certificate of Incorporation (Amendment), effective as of July 8, 1992, to effect a 1-for-15 reverse stock split of the Common Stock pursuant to which each 15 shares of Common Stock, $.01 par value per share, were combined into one share of new Common Stock, $.15 par value per share. In lieu of the issuance of fractional shares of Common Stock, the Amendment provided that shareholders owning less than 15 shares of Common Stock were entitled to receive a cash payment at the rate of $8.85 per share of Common Stock (equivalent to $0.59 per share of the presplit Common Stock). This action, decreased the number of outstanding shares of Common Stock to 1,003,596 from 15,164,195 shares immediately prior to the reverse stock split and decreased the number of shareholders to 7,408 from 17,799 prior to the reverse stock split. Per share amounts in the accompanying financial statements reflect the reverse stock split.
The Common Stock is subject to trading restrictions that are set forth in the Company's Amended and Restated Certificate of Incorporation. The trading restrictions are designed to maximize the likelihood of preserving the Company's substantial net operating loss carryforwards. There is no established public trading market for the Common Stock. It is not certain when or if trading in the Common Stock will commence or on which registered stock exchange or quotation system, if any, the Common Stock may eventually be listed or quoted. At the present time, the Company does not intend to file a listing application to any registered national stock exchange or Nasdaq for trading or quotation of the Common Stock.
No dividends were declared or paid during 1998, 1997 or 1996.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This discussion should be read in conjunction with the Consolidated Financial Statements including the Notes to Consolidated Financial Statements.
Overview
Allis-Chalmers, after emerging from Chapter 11 under the Plan of Reorganization, entered into an agreement with AL-CH Company, L.P. (Investor) pursuant to which the Investor agreed to purchase 6.1 million shares (on a prereverse stock split basis) of Common Stock (40% of the outstanding Common Stock) for $3,750,000 in cash. The Investor is a limited partnership controlled by Messrs. Robert E. Nederlander and Leonard Toboroff, two of the Company's directors.
The Company continues its efforts to conserve cash resources. However, the expenses associated with the ongoing Securities and Exchange Commission and other governmental reporting as well as legal, accounting and audit, insurance and costs associated with other corporate requirements of a publicly held company will continue to make it difficult for the Company, at its present size, to achieve positive cash flow.
As of the date of the Chapter 11 filings in June 1987, the Company sponsored 19 defined benefit plans providing pensions for substantially all U.S. employees. The pension plan for U.S. salaried employees was capped and frozen effective March 31, 1987, so there have been no further benefit accruals after that date. As a result of divestitures during the Chapter 11 proceedings, eight active plans were transferred to the buyers of the businesses, leaving the Company as sponsor of 11 plans, none of which permitted additional benefit accruals. Effective January 1, 1989, the 11 remaining plans were consolidated into a single plan, the Allis-Chalmers Consolidated Pension Plan (Consolidated Plan).
In 1994, the Company's independent pension actuaries changed the assumptions for mortality and administrative expenses used to determine the liabilities of the Consolidated Plan. Primarily as a result of the changes in mortality assumptions to reflect decreased mortality rates of the Company's retirees, the Consolidated Plan was underfunded on a present value basis. In the first quarter of 1996, the Company made a required cash contribution to the Consolidated Plan in the amount of $205,000. The Company did not, however, have the financial resources to make the other required payments during 1996 and 1997. Given the inability of the Company to fund such obligations with its current financial resources, in February 1997, Allis-Chalmers applied to the Pension Benefit Guaranty Corporation (PBGC) for a "distress" termination of the Consolidated Plan under section 4041(c) of the Employee Retirement Income Security Act of 1974, as amended (ERISA). The PBGC approved the distress termination application in September 1997 and agreed to a plan termination date of April 14, 1997. The PBGC became trustee of the terminated Consolidated Plan on September 30, 1997.
Upon termination of the Consolidated Plan, Allis-Chalmers and its subsidiaries incurred a liability to the PBGC for an amount equal to the Consolidated Plan's unfunded benefit liabilities. Allis-Chalmers and its subsidiaries also have liability to the PBGC, as trustee of the terminated Consolidated Plan, for the outstanding balance of the Consolidated Plan's accumulated funding deficiencies. The PBGC has estimated that the unfunded benefit liabilities and the accumulated funding deficiencies (together, the PBGC Liability) total approximately $67.9 million.
In September 1997, Allis-Chalmers and the PBGC entered into an agreement in principle for the settlement of the PBGC Liability (the PBGC Agreement). The PBGC Agreement calls for the PBGC to release Allis-Chalmers and its subsidiaries from the PBGC Liability in return for that number of shares of Allis-Chalmers' common stock that represents 35% of the total number of shares issued and outstanding on a fully-diluted basis.
The PBGC Agreement is subject to negotiation of definitive documentation and discussions regarding definitive documentation continue with the PBGC on certain issues contained in a proposed agreement between the Company and the PBGC. The Company is close to resolving these issues with the PBGC and an agreement between the Company and the PBGC should be signed in the near future. However, if a satisfactory agreement cannot be finalized with the PBGC, Allis-Chalmers will evaluate other alternatives, including a bankruptcy filing. .
The PBGC Agreement is also subject to satisfactory resolution of the Company's tax obligations with respect to the Consolidated Plan under section 4971 of the Internal Revenue Code of 1986, as amended (Code). Section 4971(a) of the Code imposes, for each taxable year, a first-tier tax of 10 percent on the amount of the accumulated funding deficiency under a plan like the Consolidated Plan. Section 4971(b) of the Code imposes an additional, second-tier tax equal to 100 percent of such accumulated funding deficiency if the deficiency is not "corrected" within a specified period. Liability for the taxes imposed under section 4971 extends, jointly and severally, to Allis-Chalmers and to its commonly-controlled subsidiary corporations.
Prior to its termination, the Consolidated Plan had an accumulated funding deficiency in the taxable years 1995, 1996, and 1997. Those deficiencies resulted in estimated first-tier taxes under Code section 4971(a) of approximately $900,000.
On March 2, 1998, Allis-Chalmers sent the Internal Revenue Service (IRS) a formal Offer in Compromise of the Company's tax liability under Code section 4971. On July 16, 1998, the parties reached a settlement agreement in principle in the amount of $75,000. Following final IRS approval, payment of this amount was made on August 11, 1998.
The acquisition environment has been unfavorable since the Investor's 1989 cash contribution to the Company and remained very difficult for the Company during 1998. The problems continued to include the Company's lack of cash for investment, limited availability of debt financing for acquisitions and the financial exposure associated with the Consolidated Plan. Therefore, the Company continues to proceed cautiously with its efforts to identify and evaluate potential candidates for acquisition.
Results of Operations
Results of operations for 1998, 1997 and 1996 reflect the sole operation of the business of Allis-Chalmers: the machine repair business, HDS.
Sales totaled $5.0 million in 1998, compared with $4.1 million in both 1997 and 1996. The increase in sales for 1998 from 1997 and 1996 is primarily the result of strong market conditions coupled with a more focused marketing strategy and product offering.
Gross margins, as a percentage of sales, were 29.7%, 25.0% and 26.1% in 1998, 1997 and 1996, respectively.
Marketing and administrative expense was $1.7 million, $1.7 million and $1.4 million in 1998, 1997 and 1996, respectively. Marketing and administrative expense was 33.6% of sales in 1998 compared with 40.9% in 1997 and 34.8% in 1996. While there were additional costs incurred in 1998 in pursuit of acquisitions and certain engineering costs at HDS, these costs were offset by a reduction in 1998 of legal expenses as compared to 1997 (which had nonrecurring legal expenses associated with the termination of the Consolidated Plan and related negotiations with the PBGC and IRS). A significant portion of the Company's administrative expense relates to expenses for Securities and Exchange Commission and other governmental reporting as well as the legal, accounting and audit, insurance and other requirements of a publicly held company.
Interest income in each of the years resulted mainly from earnings on short-term investments. Interest expense primarily relates to a term loan, the proceeds of which were used to purchase the shop and office building from which HDS operates and additional financing for capital improvements at HDS.
Pension expense which relates to the recognition of the pension liability associated with the Consolidated Plan in accordance with Statement of Financial Accounting Standards No. 87 "Employer's Accounting for Pensions," was $1,397,000 and $1,422,000 in 1997 and 1996, respectively. In 1998 there was no expense as a result of termination of the Consolidated Plan. The 1997 expense was for a nine month period as the transfer of the Consolidated Plan to the PBGC took place on September 30, 1997. The termination of the Consolidated Plan resulted in an additional $64.5 million pension expense in 1997, including $.9 million for IRS excise taxes.
The Company had net income of $618,000, or $.62 per common share in 1998, compared with a net loss of $66,545,000 (including recognition of pension expense of $65,926,000), or $66.34 per common share, in 1997 and a net loss of $1,728,000 in 1996. Net income in 1998 included income of $825,000 as a result of a $900,000 IRS liability settled for $75,000. Pension expense accounted for $65.73 per common share of the net loss in 1997.
Liquidity and Capital Resources
At December 31, 1998, the Company had cash and short-term investments totaling $223,000, a decrease from $699,000 at December 31, 1997. This decrease was the result of acquisition
expenses in 1998 and expenses associated with the ongoing corporate reporting, as well as legal, accounting and audit, and insurance expenses. In addition, HDS had expenditures of $353,000 for capital items.
Trade receivables at December 31, 1998 were $796,000, compared with $683,000 at December 31, 1997. This increase was primarily the result of increased sales and certain major projects completed and billed by HDS near the end of the year.
Inventory at December 31, 1998 was $127,000, an increase from $101,000 at year end 1997.
Net property, plant and equipment at December 31, 1998 was $1,308,000, an increase from $1,107,000 at December 31, 1997. The Company incurred $353,000 on capital expenditures during 1998. Approximately $234,000 was invested in machinery and equipment acquisitions while approximately $119,000 was spent to improve HDS's facilities (including air conditioning and upgrading its telephone system). The expenditures for additional or upgrades of machinery and tooling were necessary to reduce production costs by decreasing downtime and increasing production efficiency output, helping to position the Company for further growth through the increased capacity and service capabilities it offers to the marketplace.
Current maturities of long-term debt at December 31, 1998 were $60,000 compared with $38,000 at year-end 1997. The increase was due to financing of an air conditioning system installed at HDS. In addition, there were payments on the real estate loan refinanced by HDS in August 1996. The proceeds of the original loan were used in 1990 for the purchase of the land and building in which HDS operates its business in Houston, Texas. The amount refinanced is required to be repaid in monthly installments of $3,278 through August 20, 2001, when the remaining unpaid balance is due. At December 31, 1998, the interest rate on the note was 10.5%. This rate is subject to adjustments during the term of the note in accordance with increases or decreases in the prime rate. The note is secured by the HDS facility (having a net book value of $444,000 at December 31, 1998) and the Company's guaranty.
The Company's principal sources of cash include earnings from operations and interest income on short-term investments. The cash requirements needed for the administrative expenses associated with being a publicly held company are significant, and management believes that the Company will continue to use a substantial portion of its cash balances generated by HDS for these purposes in 1999.
The A-C Reorganization Trust, pursuant to the Plan of Reorganization, funds all costs incurred by Allis-Chalmers which relate to implementation of the Plan of Reorganization. Such costs include an allocated share of certain expenses for Company employees, professional fees and certain other administrative expenses.
The EPA and certain state environmental protection agencies have requested information in connection with eleven potential hazardous waste disposal sites in which products manufactured by Allis-Chalmers before consummation of the Plan of Reorganization were disposed. The EPA has claimed that Allis-Chalmers is liable for cleanup costs associated with several additional sites. The EPA's claims with respect to one other site were withdrawn in 1994 based upon
settlements reached with the EPA in the bankruptcy proceeding. In addition, certain third parties have asserted that Allis-Chalmers is liable for cleanup costs or associated EPA fines in connection with additional sites. In one of these instances a former site operator has joined Allis-Chalmers and 47 other potentially responsible parties as a third-party defendant in a lawsuit involving cleanup of one of the sites. In each instance the environmental claims asserted against the Company involve its prebankruptcy operations. Accordingly, Allis-Chalmers has taken the position that all cleanup costs or other liabilities related to these sites were discharged in the bankruptcy. In one particular site, the EPA's Region III has concurred with the Company's position that claims for environmental cleanup were discharged pursuant to the bankruptcy. While each site is unique with different circumstances, the Company has notified other Regional offices of the EPA of this determination associated with the Region III site. The Company has not received responses from the other Regional offices. No environmental claims have been asserted against the Company involving its postbankruptcy operations.
Management considers the Company's only significant application that is year 2000 sensitive to be its accounting system. The Company has received written assurances from its software provider that the accounting system is year 2000 compliant.
Financial Condition
Shareholders' deficit at December 31, 1998 was $67.4 million. A three-year comparison of shareholders' deficit follows:
(millions) 1998 1997 1996 ---- ---- ----
January 1 $ (68.0) $ (13.6) $ (9.9) Net income (loss) .6 (66.5) (1.7) Pension liability adjustment .0 12.1 (2.0) -------- -------- -------
December 31 $ (67.4) $ (68.0) $ (13.6) ======== ======== =======
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Consolidated Financial Statements ------------------------------------------
Page ----
Financial Statements:
Report of Independent Accountants 16 Statement of Operations for the Three Years Ended December 31, 1998 17 Statement of Accumulated Deficit for the Three Years Ended December 31, 1998 17 Statement of Financial Condition at December 31, 1998 and 1997 18 Statement of Cash Flows for the Three Years Ended December 31, 1998 19 Notes to Consolidated Financial Statements 20
Financial Statement Schedule
II Valuation and Qualifying Accounts 40
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Allis-Chalmers Corporation
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Allis-Chalmers Corporation and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company's application for a distress termination of the Allis-Chalmers Consolidated Pension Plan (the "Consolidated Plan") was approved by the Pension Benefit Guaranty Corporation ("PBGC") on September 30, 1997. At such date, the PBGC became the trustee of the Consolidated Plan and the Company and its subsidiaries incurred an estimated liability to the PBGC for unfunded benefit liabilities and accumulated funding deficiencies totaling approximately $68 million. The Company does not have the financial resources to fund this liability to the PBGC. This matter raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to this matter are described in Note 9 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP Milwaukee, Wisconsin March 24, 1999
STATEMENT OF OPERATIONS
STATEMENT OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. EMERGENCE FROM CHAPTER 11
Allis-Chalmers Corporation (Allis-Chalmers or the Company) emerged from Chapter 11 proceedings on October 31, 1988 under a plan of reorganization which was consummated on December 2, 1988. The Company was thereby discharged of all debts that arose before confirmation of its First Amended and Restated Joint Plan of Reorganization (Plan of Reorganization), and all of its capital stock was cancelled and made eligible for exchange for shares of common stock of the reorganized Company (Common Stock).
Claims asserted against the Company and allowed by the Bankruptcy Court beyond those recorded prior to the consummation date amounted to approximately $483 million. Such amounts were subsequently recorded by the Company in 1988. Because total recorded liabilities discharged at consummation exceeded the book value of assets and Common Stock distributed to creditors and the various trusts at that date, extraordinary income of $388.1 million was recorded.
See the Plan of Reorganization and the First Amended Disclosure Statement dated September 14, 1988 for additional information regarding distributions to holders of claims and interests.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Allis-Chalmers through its wholly-owned subsidiary, Houston Dynamic Service, Inc., services and repairs various types of mechanical equipment, including compressors, pumps, turbines, engines, heat exchangers, centrifuges, rollers, gears, valves, blowers, kilns, crushers and mills.
Principles of Consolidation
The consolidated financial statements include the accounts of Allis-Chalmers and its subsidiaries. All significant intercompany transactions have been eliminated.
Short-Term Investments
Short-term investments consist primarily of government repurchase agreements and commercial paper with original maturities at date of purchase less than three months.
Fair Value of Financial Instruments
The carrying amounts in the Statement of Financial Condition for cash and short-term investments, trade receivables and long-term debt approximate their fair market value.
Inventories
Inventories are stated at the lower of cost, determined by the first-in, first-out method, or market.
Properties and Depreciation
Plant and equipment used in the business are stated at cost and depreciated on the straight-line basis over the estimated useful lives of the assets which generally range from 40 years for buildings, 3 to 12 years for machinery and equipment and 3 to 12 years for tools, patterns, furniture and fixtures. Maintenance and repairs are expensed as incurred. Expenditures which significantly increase asset values or extend useful lives are capitalized.
Income Taxes
Deferred income taxes are determined on the liability method in accordance with Statement of Financial Accounting Standards (SFAS) No. 109. See Note 5. Income Taxes.
Income (Loss) Per Common Share
In February, 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings Per Share." This statement establishes revised standards for computing and presenting earnings per share and was adopted by the Company during the fourth quarter of 1997. Given the fact that the Company did not have any common stock equivalents over the past several years, its income (loss) per common share remain unchanged as basic and diluted per share amounts are identical. As such, the adoption of this statement did not impact the historically reported income (loss) per common share amounts.
Statement of Cash Flows
For purposes of the Statement of Cash Flows, the Company considers all highly liquid debt instruments with a maturity of three months or less at date of purchase to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Major Customers
In 1998, 1997 and 1996 Amoco Chemical was the only customer which accounted for 10% or more of total sales -- 24% of 1998 sales, 12% of 1997 sales and 16% in 1996.
NOTE 5. INCOME TAXES
Temporary differences are differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in differences between income for tax purposes and income for financial statement purposes in future years. A valuation allowance is established for deferred tax assets when management, based upon available information, considers it more likely than not that a benefit from such assets will not be realized.
The following table depicts the temporary differences as of December 31, 1998 and 1997:
Net future tax deductible items relate primarily to estimated future bankruptcy claim payments to be made by the Company's two grantor trusts. Gross deferred tax liabilities at December 31, 1998 and 1997 are not material.
The Plan of Reorganization established the A-C Reorganization Trust to settle claims and to make distributions to creditors and certain shareholders. The Company transferred cash and certain other property to the A-C Reorganization Trust on December 2, 1988. Payments made by the Company to the A-C Reorganization Trust do not generate tax deductions for the Company upon the transfer but generate deductions for the Company as payments are made by the A-C Reorganization Trust to holders of claims.
The Plan of Reorganization also created a trust to process and liquidate product liability claims. Payments made by the A-C Reorganization Trust to the product liability trust do not generate current tax deductions for the Company. Future deductions will be available to the Company as the product liability trust makes payments to liquidate claims.
The Company believes the above-named trusts are grantor trusts and therefore includes the income or loss of these trusts in the Company's income or loss for tax purposes, resulting in an adjustment of the tax basis of net operating and capital loss carryforwards. The income or loss of these trusts is not included in the Company's results of operations for financial reporting purposes.
Tax carryforwards at December 31, 1998 are estimated to consist of net operating losses of $439.0 million expiring 1999 through 2013, investment tax credits of $1.0 million expiring 1999 through 2001 and energy tax credits of $1.0 million expiring 1999 through 2001.
During 1990, the Company initiated litigation against the Internal Revenue Service (IRS) in the United States Bankruptcy Court for the Southern District of New York, challenging the validity and retroactive applicability of proposed regulations issued by the IRS on August 13, 1990. On January 2, 1992 the IRS issued final regulations under Sections 269 and 382 of the Internal Revenue Code of 1986 relating to the use of net operating loss carryforwards following corporate reorganizations under the Bankruptcy Code.
Following issuance of the final regulations the Company withdrew its retroactivity challenge because the final regulations were made retroactive only to August 14, 1990 and are not applicable to a plan of reorganization that was completed before then. The Company's Plan of Reorganization was consummated on December 2, 1988. The Company, however, continued to challenge the validity of other provisions of the regulations.
On June 8, 1992, the Bankruptcy Court issued a decision denying the Company's motion for a judgment against the IRS with respect to the application of Section 269 of the IRS Code to the Company. The Court also granted the IRS's motion to dismiss the Company's complaint challenging the regulations. The Court entered judgment pursuant to its decision on June 29, 1992 and, consistent with the advice of its counsel, the Company decided not to appeal that judgment.
Although the Company was unable to obtain a judgment that would have prevented the IRS from applying Section 269 to the Company, the Court's ruling leaves the Company in substantially the same position it was in prior to issuance of the final regulations. The possibility of an IRS challenge under Section 269 of the Internal Revenue Code to the Company's use of its
prepetition net operating loss carryforwards has always existed and, in light of the Court's ruling, that possibility continues to exist.
The Court, however, stated that, should the IRS ever seek to use its new Section 269 regulations to limit the Company's use of its net operating loss carryforwards, nothing in its opinion would prejudice the Company's right to defend itself by using the Court's confirmation finding that the primary purpose of the Company's Plan of Reorganization was not tax avoidance. While the Company's Common Stock is subject to trading restrictions which are designed to maximize the likelihood of preserving its net operating loss carryforwards, a change in ownership of the Company could also limit the use of its net operating loss carryforwards.
NOTE 6. LONG-TERM DEBT
SFAS No. 87, "Employers' Accounting for Pensions," requires recognition in the Statement of Financial Condition of a minimum pension liability. The minimum pension liability that must be recognized is equal to the excess of the accumulated benefit obligation over plan assets. A reduction of shareholders' investment in the amount of $12.2 million in 1996 was recorded. This unfunded amount was recognized as expense in 1997 in connection with the distress termination of the Consolidated Plan and recognition of the Company's liability to the PBGC.
NOTE 8. LONG-TERM STOCK INCENTIVE PLAN
The Company's Long-Term Stock Incentive Plan (1989) provides for the grant of stock options, stock appreciation rights, performance shares, restricted stock, restricted stock units and other stock-based awards. Under the plan the maximum number of shares which may be granted with respect to stock-based awards is 50,000. Options may be granted at prices equal to or not less than the fair market value at date of grant, except that options to purchase up to 13,333 shares may be granted at a price which is not less than the fair market value on October 25, 1989, the date on which the plan was approved by shareholders. Options are exercisable within a period not to exceed 10 years from date of grant. The plan also provides for the discretionary grant of stock appreciation rights which allow the holder to receive in cash or shares of common stock the difference between the exercise price and the fair market value of the stock at the date of exercise. There have been no grants under the plan.
NOTE 9. POSTRETIREMENT BENEFIT OBLIGATIONS
Pensions
As of the date of the Chapter 11 filings in June 1987, the Company sponsored 19 defined benefit plans providing pensions for substantially all U.S. employees. The pension plan for U.S. salaried employees was capped and frozen effective March 31, 1987, so there have been no further benefit accruals after that date. As a result of divestitures during the Chapter 11 proceedings, eight active plans were transferred to the buyers of the businesses, leaving the Company as sponsor of 11 plans, none of which permitted additional benefit accruals. Effective January 1, 1989, the 11 remaining plans were consolidated into a single plan, the Allis-Chalmers Consolidated Pension Plan (Consolidated Plan).
In accordance with the Plan of Reorganization, the 11 plans received a Company contribution of $53.8 million in December 1988. As a result of actions taken in connection with this contribution and the then-existing securities of the pension plans, the assets of the Consolidated Plan were invested in a dedicated bond portfolio that consisted of high-grade fixed income securities in which the market value of the assets was matched to the present value of the anticipated pension benefits and administrative expenses of the Consolidated Plan in a way intended to make the pension fund immune from interest rate fluctuations.
Under the Plan of Reorganization, future contributions to the Consolidated Plan were required if the mortality assumptions used in calculating the present value of the pension benefits expected
to be paid or the assumptions used in calculating the future administrative expenses proved inaccurate. For the years 1989 through 1993, retirees eligible for benefits under the Consolidated Plan, as a group, outlived the projections of the mortality assumptions used in the Plan of Reorganization for funding the Consolidated Plan. For the same five years, actual administrative expenses were slightly in excess of assumed levels. Effective January 1, 1994, the Company's independent actuaries reflected such decreased mortality for funding calculation purposes. For the years 1994 through 1996, the mortality experience was negative compared with the revised assumptions, in an amount in excess of the 1989-1993 average actuarial loss. This mortality loss was partially offset, however, by gains in the asset portfolio.
This underfunded condition in the Consolidated Plan required the Company to make significant cash contributions to the Consolidated Plan pursuant to the Employment Retirement Income Security Act of 1974, as amended (ERISA), funding requirements starting in 1996.
The Company failed to make required quarterly contributions starting in April 1996, resulting in the filing of a lien by the Pension Benefit Guaranty Corporation (PBGC) against the Company. Given the inability of the Company to fund such obligations with its lack of financial resources, in February 1997, Allis-Chalmers applied to the PBGC for a "distress" termination of the Consolidated Plan under section 4041(c) of ERISA. The PBGC approved the distress termination application in September 1997 and agreed to a termination date of April 14, 1997. The PBGC became trustee of the terminated Consolidated Plan on September 30, 1997.
Upon termination of the Consolidated Plan, Allis-Chalmers and its subsidiaries incurred a liability to the PBGC for an amount equal to the Consolidated Plan's unfunded benefit liabilities. Allis-Chalmers and its subsidiaries also have a liability to the PBGC, as trustee of the terminated Consolidated Plan, for the outstanding balance of the Consolidated Plan's accumulated funding deficiencies. The PBGC has estimated that the unfunded benefit liabilities and the accumulated funding deficiencies (together, the PBGC Liability) total approximately $67.9 million.
In September 1997, Allis-Chalmers and the PBGC entered into an agreement in principle for the settlement of the PBGC Liability (the PBGC Agreement). The PBGC Agreement calls for the PBGC to release Allis-Chalmers and its subsidiaries from the PBGC Liability in return for that number of shares of Allis-Chalmers' common stock that represents 35% of the total number of shares issued and outstanding on a fully-diluted basis.
The PBGC Agreement is subject to negotiation of definitive documentation and discussions regarding definitive documentation continue with the PBGC on certain issues contained in a proposed agreement between the Company and the PBGC. The Company is close to resolving these issues with the PBGC and an agreement between the Company and the PBGC should be signed in the near future. However, if a satisfactory agreement cannot be finalized with the PBGC, Allis-Chalmers will evaluate other alternatives, including a bankruptcy filing. .
The PBGC Agreement is also subject to satisfactory resolution of the Company's tax obligations with respect to the Consolidated Plan under section 4971 of the Internal Revenue Code of 1986, as amended (Code). Section 4971(a) of the Code imposes, for each taxable year, a first-tier tax of 10 percent on the amount of the accumulated funding deficiency under a plan like the Consolidated Plan. Section 4971(b) of the Code imposes an additional, second-tier tax equal to
100 percent of such accumulated funding deficiency if the deficiency is not "corrected" within a specified period. Liability for the taxes imposed under section 4971 extends, jointly and severally, to Allis-Chalmers and to its commonly-controlled subsidiary corporations.
Prior to its termination, the Consolidated Plan had an accumulated funding deficiency in the taxable years 1995, 1996, and 1997. Those deficiencies resulted in estimated first-tier taxes under Code section 4971(a) of approximately $900,000. This amount was accrued by the Company at December 31, 1997.
On March 2, 1998, Allis-Chalmers sent the IRS a formal Offer in Compromise of the Company's tax liability under Code section 4971. On July 16, 1998, the parties reached a settlement agreement in principle in the amount of $75,000. Following final IRS approval, payment of this amount was made on August 11, 1998.
Medical and Life
Pursuant to the Plan of Reorganization, the Company assumed the contractual obligation to Simplicity Manufacturing, Inc. (SMI) to reimburse SMI for 50% of the actual cost of medical and life insurance claims for a select group of retirees (SMI Retirees) of the prior Simplicity Manufacturing Division of Allis-Chalmers.
Net postretirement benefit expense for the years ended December 31, 1998, 1997 and 1996 included the following components (in thousands):
Presently, the Company's postretirement benefit obligations are not funded. The status and a reconciliation of the Company's postretirement benefit obligations as of December 31, 1998 and 1997 was as follows (in thousands):
The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 6.5% at December 31, 1998 and 7.0% at December 31, 1997. The assumed rate decreases each year until an ultimate rate of 5.0% is reached at December 31, 2004. The health care cost trend rate has a significant effect on the amounts reported. For example, a one percentage point increase in the health care cost trend rate would increase the accumulated postretirement benefit obligation by approximately $40,000 at December 31, 1998. The discount rate used in determining the accumulated postretirement benefit obligation was 7.50% at December 31, 1998 and December 31, 1997.
NOTE 10. COMMITMENTS AND CONTINGENT LIABILITIES
Substantially all litigation proceedings pending against the Company were resolved pursuant to emergence from the Chapter 11 proceedings in 1988. Various loans, lease agreements and other commitments and contractual obligations of the Company were also satisfied pursuant to the Plan of Reorganization. The Company knows of no significant pre-Plan of Reorganization lawsuits presently pending against it or its subsidiaries which have not been assumed by the various trusts or other entities.
The Company is a party to litigation matters and claims which are normal in the course of its operations, and, while the results of litigation and claims cannot be predicted with certainty, management believes that the final outcome of such matters will not have a material adverse effect on the Company's consolidated financial position.
Environmental Matters
The Environmental Protection Agency (EPA) and certain state environmental protection agencies have requested information in connection with eleven potential hazardous waste disposal sites in which products manufactured by Allis-Chalmers before consummation of the Plan of Reorganization were disposed. The EPA has claimed that Allis-Chalmers is liable for cleanup costs associated with several additional sites. The EPA's claims with respect to one other site were withdrawn in 1994 based upon settlements reached with the EPA in the bankruptcy proceeding. In addition, certain third parties have asserted that Allis-Chalmers is liable for cleanup costs or associated EPA fines in connection with additional sites. In one of these instances a former site operator has joined Allis-Chalmers and 47 other potentially responsible parties as a third party defendant in a lawsuit involving cleanup of one of the sites. In each instance the environmental claims asserted against the Company involve its prebankruptcy operations. Accordingly, Allis-Chalmers has taken the position that all cleanup costs or other liabilities related to these sites were discharged in the bankruptcy. In one particular site, the EPA's Region III has concurred with the Company's position that claims for environmental cleanup were discharged pursuant to the bankruptcy. While each site is unique with different circumstances, the Company has notified other Regional offices of the EPA of this determination associated with the Region III site. The Company has not received responses from the other Regional offices. No environmental claims have been asserted against the Company involving its postbankruptcy operations.
Allis-Chalmers Consolidated Pension Plan
Contributions to the Consolidated Plan were required starting in 1996 due to a change in the mortality assumptions used in calculating the present value of the pension benefits expected to be paid and the assumptions used in calculating the future administrative expenses compared with the projections of the mortality and administrative expense assumptions used in the Plan of Reorganization for funding the Consolidated Plan. Contributions were projected to be $2.5 million in 1996, then increasing to $3.1 million in 1997 and $8.1 million in 1998. After making one installment of $205,000 on January 15, 1996, the Company failed to make any subsequent installments. The Company's failure to make required quarterly contributions starting in April 1996, resulted in the filing of a lien by the PBGC against the Company. Given the inability of the Company to fund such obligations with its current financial resources, in February 1997, Allis-Chalmers applied to the PBGC for a "distress" termination of the Consolidated Plan under section 4041(c) of ERISA. The PBGC approved the distress termination application in September 1997 and agreed to a plan termination date of April 14, 1997. The PBGC became trustee of the terminated Consolidated Plan on September 30, 1997.
For additional information regarding the Consolidated Plan, see Note 9.
NOTE 11. RELATED PARTY TRANSACTIONS
H. Sean Mathis, Chairman of the Board and Chief Executive Officer, Leonard Toboroff, Vice Chairman of the Board and Executive Vice President and John T. Grigsby, Jr., Vice Chairman of the Board, Executive Vice President and Chief Financial Officer, did not receive any compensation for their services as executive officers of the Company for the three years ended December 31, 1998.
NOTE 12. QUARTERLY FINANCIAL DATA
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Identification of Directors
The following individuals were elected as directors of the Company at the meeting of shareholders on October 25, 1989 (or have been appointed to fill vacancies caused by the resignation of two such directors) to serve until the next meeting of shareholders.
John R. Collins, age 71, a director since December 1988. Mr. Collins retired in 1989 after serving since 1985 as Administrative Assistant to the Secretary-Treasurer of International Union, United Automobile, Aerospace & Agricultural Implement Workers of America -- UAW.
John T. Grigsby, Jr., age 58, a director since December 1988. Mr. Grigsby has been a Vice Chairman of the Board of the Company since May 1989, an Executive Vice President since October 1989 and Chief Financial Officer since January 1996, having previously served since December 1988 as the Company's Chairman and Chief Executive Officer. Prior to that time and since July 1987, Mr. Grigsby was employed by the Company as Managing Director, Restructure Project. Mr. Grigsby also serves as the A-C Reorganization Trustee, as President of Thomson McKinnon Securities, Inc. during winddown and liquidation of its affairs and President and Chief Executive Officer of N.W. Liquidating, Inc. He has been a director of 1st Southern Bank of Boca Raton, Florida since September 1987 and First Florida Industries, Inc. since July 1985.
H. Sean Mathis, age 51, a director since December 1988. Mr. Mathis was elected as Chairman and Chief Executive Officer of the Company on January 16, 1996 and prior thereto Mr. Mathis served as a Vice President of the Company since July 1989. From July 1996 to September 1997, Mr. Mathis was Chairman of the Board of Universal Gym Equipment Inc., a privately owned company (Universal). In July 1997, Universal filed for protection under Federal Bankruptcy Laws. In September 1997, Mr. Mathis resigned as Chairman of the Board of Universal. From 1991 to 1993, Mr. Mathis was President of RCL Acquisition Corp., the predecessor firm of HMG. From 1993 to 1995, Mr. Mathis was President and a Director of RCL Capital Corporation, which was merged into DISC Graphics in November 1995. From 1988 to October 1993, Mr. Mathis was a Director and Chief Operating Officer of Ameriscribe Corporation (Ameriscribe), a national provider of reprographic and related facilities management services. From August 1992 to May 1994, Mr. Mathis acted as the Federal Court Appointed Trustee for International Wire News Service Liquidation Corp., formerly United Press International (UPI). From November 1991 through July 1992, Mr. Mathis was Vice Chairman and Director of UPI (then a news syndication service). In August 1992, as a part of a restructuring program, UPI filed for protection under the Federal Bankruptcy Laws. Mr. Mathis is also a Director of Thousand Trails, Inc., an operator of recreational parks.
Claude D. Montgomery, age 46, a director since December 1988. Since November 1996, Mr. Montgomery has been a partner in Phillips Lytle Hitchcock Blaine & Huber, a law firm. From June 1993 to October 1996, Mr. Montgomery was a director and shareholder in Marcus Montgomery P.C., a law firm, formerly known as Marcus Montgomery Wolfson P.C. Mr. Montgomery was a director and shareholder in Varet, Marcus & Fink P.C., formerly known as Milgrim, Thomajan & Lee P.C., attorneys, New York, from August 1989 through June 1993.
Robert E. Nederlander, age 65, a director since May 1989. Mr. Nederlander was elected by the Board of Directors on November 16, 1993 to serve as a Vice Chairman of the Board, having previously served as Chairman of the Board and Chief Executive Officer of the Company since May 1989. He resigned as Vice Chairman on October 18, 1996. He is also President and director of Nederlander Organization, Inc., New York, an owner and operator of one of the world's largest chains of theaters, since November 1981; President of Nederlander Television and Film Productions, Inc. since October 1985; Partner in the New York Yankees Baseball Club since 1973 and Managing General Partner from September 13, 1990 through December 31, 1991; director and Chairman of the Board of Riddell Sports, Inc. since April 1988; Chairman of the Board of MEGO Financial Corporation since January 1988; a director of MEGO Mortgage Corp. from September 1996 until June 1998, News Communications, Inc. and HFS Incorporated since 1995 (which was merged into Cendant in 1997).
John E. Sundman, age 72, a director since December 1988. Mr. Sundman retired in December 1991 as Vice President of Corcap, Inc., Hartford, Connecticut, a position which he held since July 1988, when Corcap was spun off by Lydall, Inc., Manchester, Connecticut. He remains a director of Corcap, Inc.
Allan R. Tessler, age 62, a director since September 1992. Mr. Tessler served as Chairman of the Board and Chief Executive Officer of the Company from November 1993 until January 1996. Mr. Tessler is Chairman of the Board and Chief Executive Officer of International Financial Group, Inc. since 1987; and Co-Chief Executive Officer of Data Broadcasting Corporation since June 1992. Mr. Tessler is also Chairman of the Board of Enhance Financial Services Group, Inc., Jackpot Enterprises, Inc., and Checker Holdings Inc. and director of The Limited, Inc. and Marketwatch.com.
Leonard Toboroff, age 66, a director since May 1989. Mr. Toboroff has been a Vice Chairman of the Board and an Executive Vice President of the Company since May 1989; a director and Vice Chairman of Riddell Sports, Inc. from April 1988 to the present; a practicing attorney continuously since 1961 to the present; a director since August 1987 and former Chairman and Chief Executive Officer from December 1987 to May 1988 of Ameriscribe; and formerly a director, Chairman and Chief Executive Officer from May 1982 through June 1982 and Vice Chairman June 1982 through September 1988 of American Bakeries Company. Mr. Toboroff is also a director of Banner Aerospace, Inc. and Saratoga Beverage, Inc.
(b) Identification of Executive Officers
(c) Identification of Certain Significant Employees
None
(d) Family Relationships
None
(e) Business Experience
See this Item 10, subsections (a) and (b) above.
(f) Involvement in Certain Legal Proceedings
None
(g) Promoters and Control Persons
Not applicable
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
No executive officer earned in excess of $100,000 in 1998. H. Sean Mathis who served as Chairman of the Board and Chief Executive Officer in 1996, 1997 and 1998 received no compensation for his services as such..
LONG-TERM STOCK INCENTIVE PLAN
The Company's Long-Term Stock Incentive Plan (1989), adopted by the shareholders at the 1989 shareholders meeting, provides for grants to officers and key employees of stock options, stock appreciation rights, performance shares, restricted stock, restricted stock units and other stock-based awards. The maximum number of shares which may be granted with respect to stock-based awards is 50,000. Options to purchase shares may be granted at prices equal to not less than the fair market value at the date of grant, except that options to purchase up to 13,333 shares may be granted at a price which is not less than the fair market value on October 25, 1989, the date on which the Stock Incentive Plan was approved by shareholders. Options are exercisable within a period not to exceed 10 years from date of grant. Stock appreciation rights allow the holder to receive the difference between the exercise price and the fair market value of the stock at the date of exercise in cash or shares of common stock. No stock options or stock appreciation rights have been granted to date.
RETIREMENT PLAN
The Consolidated Plan covered 6 active employees at the beginning of 1998. The Consolidated Plan is a tax qualified defined benefit pension plan. Effective March 31, 1987, the Consolidated Plan was capped and frozen, without further increase in benefits provided by the Company after that date.
The retirement benefits paid under this plan are before any adjustment for a surviving spouse's pension and are not subject to Social Security offset or other deductions.
SAVINGS PLAN
The Company's Savings Plan was initiated in 1968. The Savings Plan permits the Company to contribute in its discretion cash or stock to participants' accounts. However, on June 1, 1985, the Company discontinued contributions to the Savings Plan.
During 1998 contributions by Company participants to the Savings Plan under Section 401(k) of the Internal Revenue Code totaled $23,721. At December 31, 1997 there were a total of 192 participants in the Savings Plan, of whom 19 were active employees of the Company.
Due to the significant administrative costs associated with the Savings Plan, on December 22, 1997, the Company filed an Application for Determination for Terminating the Savings Plan with the IRS. The participants in the Savings Plan were notified of the termination which became effective September 20, 1998, at which time all funds had been withdrawn from the Savings Plan.
COMPENSATION OF DIRECTORS
Since December 1, 1990, the annual retainer for services as a director (previously $13,500 per year) has been suspended, the attendance fee for each Board meeting attended was reduced from $425 to $100 and the attendance fee for each Committee meeting was suspended.
TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENT
None.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(a) Security Ownership of Certain Beneficial Owners
The following table lists the beneficial ownership with respect to all persons known to the Company to be the beneficial owner of more than 5% of the Company's Common Stock as of March 1, 1999.
Amount and Nature Percent of Name and Address of Ownership Class ---------------- ------------ -----
AL-CH Company, L.P., 810 Seventh Avenue, New York, NY 10019 (includes shares held by Messrs. Nederlander and Toboroff as described below) 407,251(1) 40.6%
Amount and Nature Percent of Name and Address of Ownership Class ---------------- ------------ -----
Wells Fargo Bank, P.O. Box 60347, Los Angeles, CA 90060, Trustee under that certain Amended and Restated Retiree Health Trust Agreement for UAW Retired Employees of Allis-Chalmers Corporation 136,406 13.6%
Firstar Trust Company, 777 East Wisconsin Avenue, Milwaukee, WI 53202, Trustee under that certain Amended and Restated Retiree Health Trust Agreement for Non-UAW Retired Employees of Allis-Chalmers Corporation 101,977 10.2%
(1) Messrs. Nederlander and Toboroff are beneficial owners of and have shared voting power and shared dispositive power over the 407,251 shares of common stock held by AL-CH Company, L.P., a Delaware limited partnership, of which the general partners are Q.E.N., Inc., a Michigan corporation controlled by Mr. Nederlander, and Lenny Corp., a Delaware corporation controlled by Mr. Toboroff. Mr. Allan R. Tessler is a limited partner in AL-CH Company, L.P.
(b) Security Ownership of Management
The following table sets forth the number of shares of Common Stock of the Company beneficially owned as of March 1, 1999 by directors and all directors and executive officers as a group. Except as otherwise noted in the footnotes, the persons listed have sole voting and investment power over the shares beneficially owned.
Amount and Nature Percent of Name of Ownership Class ---- ------------ -----
John R. Collins 0 * John T. Grigsby, Jr. 9,535 1.0% H. Sean Mathis 0 * Claude D. Montgomery 533(1) * Robert E. Nederlander 407,251(2) 40.6%(2) John E. Sundman 3,333 * Allan R. Tessler 0 * Leonard Toboroff 407,251(2) 40.6%(2)
All directors and officers as a group (nine persons) 420,652 42.0%
*less than 1%
(1) Shares are owned beneficially by Mr. Montgomery's spouse as to which he disclaims beneficial ownership.
(2) Messrs. Nederlander and Toboroff are beneficial owners of and have shared voting power and shared dispositive power over the 407,251 shares of common stock held by AL-CH Company, L.P., a Delaware limited partnership, of which the general partners are Q.E.N., Inc., a Michigan corporation controlled by Mr. Nederlander, and Lenny Corp., a Delaware corporation controlled by Mr. Toboroff. Mr. Allan R. Tessler is a limited partner in AL-CH Company, L.P.
(c) Changes in Control
None
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
(a) Transactions with Management and Others
None
(b) Certain Business Relationships
None
(c) Indebtedness of Management
None
(d) Transactions with Promoters
Not applicable
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) List of Documents Filed. The Index to Financial Statements and Financial Schedule is included on page 15 of this report. Financial statements Schedules not included in this report have been omitted because they are not applicable or the required information is shown in the Financial Statements or Notes thereto.
(b) Reports on Form 8-K. There were no Reports on Form 8-K filed in the fourth quarter of 1998.
(c) Exhibits:
2 .1. First Amended Disclosure Statement pursuant to Section 1125 of the Bankruptcy Code, which includes the First Amended and Restated Joint Plan of Reorganization dated September 14, 1988 (incorporated by reference to the Company's Report on Form 8-K dated December 1, 1988).
3.1. Amended and Restated Certificate of Incorporation of Allis-Chalmers Corporation (incorporated by reference to the Company's Report on Form 8- A dated August 12, 1992).
3.2. By-laws of Allis-Chalmers Corporation (incorporated by reference to the Company's Report on Form 8-A dated August 12, 1992).
10.1. Amended and Restated Retiree Health Trust Agreement between Allis-Chalmers Corporation and Wells Fargo Bank (incorporated by reference to Exhibit C-1 of the First Amended and Restated Joint Plan of Reorganization dated September 14, 1988 included in the Company's Report on Form 8-K dated December 1, 1988).
10.2. Amended and Restated Retiree Health Trust Agreement between Allis-Chalmers Corporation and Firstar Trust Company (incorporated by reference to Exhibit C-2 of the First Amended and Restated Joint Plan of Reorganization dated September 14, 1988 included in the Company's Report on Form 8-K dated December 1, 1988).
10.3. Reorganization Trust Agreement between Allis-Chalmers Corporation and John T. Grigsby, Jr., Trustee (incorporated by reference to Exhibit D of the First Amended and Restated Joint Plan of Reorganization dated September 14, 1988 included in the Company's Report on Form 8-K dated December 1, 1988).
10.4. Product Liability Trust Agreement between Allis-Chalmers Corporation and Bruce W. Strausberg, Trustee (incorporated by reference to Exhibit E of the First Amended and Restated Joint Plan of Reorganization dated September 14, 1988 included in the Company's Report on Form 8-K dated December 1, 1988).
10.5.* Allis-Chalmers Corporation Long-Term Stock Incentive Plan (1989) (incorporated by reference to the Company's Report on Form 10-Q for the three months ended September 30, 1989).
10.6. Subscription and Shareholder Agreement between Allis-Chalmers Corporation and AL-CH Company, L.P. dated May 18, 1989 (incorporated by reference to the Company's Report on Form 8-K dated May 24, 1989).
10.7. Commercial Installment Loan Agreement by and between Allis-Chalmers Corporation and Marine Midland Bank, N.A., dated as of December 20, 1989 (incorporated by reference to the Company's Report on Form 8-K dated December 20, 1989).
10.8.* Employment Agreement between Allis-Chalmers Corporation and John T. Grigsby, Jr. (incorporated by reference to the Company's Report on Form 10-Q for the three months ended September 30, 1989).
10.9.* Allis-Chalmers Savings Plan (incorporated by reference to the Company's Report on Form 10-K for the year ended December 31, 1988).
10.10.* Allis-Chalmers Consolidated Pension Plan (incorporated by reference to the Company's Report on Form 10-K for the year ended December 31, 1988).
21.1. Subsidiaries of Allis-Chalmers Corporation.
27.1. Financial Data Schedule.
*A management contract or compensatory plan or arrangement.
ALLIS-CHALMERS CORPORATION AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(thousands)
(a) Includes writeoff of uncollectible receivables, less recoveries.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Allis-Chalmers Corporation
/s/John T. Grigsby, Jr. John T. Grigsby, Jr. Vice Chairman, Executive Vice President and Chief Financial Officer Date: March 29, 1999
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, this report has been signed on March 26, 1999 by the following persons on behalf of the registrant and in the capacities indicated.
/s/H. Sean Mathis /s/Robert E. Nederlander H. Sean Mathis Robert E. Nederlander, Director Chairman of the Board, Chief Executive Officer and Director
/s/ John R. Collins /s/John E. Sundman John R. Collins, Director John E. Sundman, Director
/s/John T. Grigsby, Jr. /s/Allan R. Tessler John T. Grigsby, Jr. Director Allan R. Tessler, Director
/s/Claude D. Montgomery /s/Leonard Toboroff Claude D. Montgomery, Director Leonard Toboroff, Director