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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _________________
Commission file number 1-2199
ALLIS-CHALMERS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 39-0126090
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4180 Cherokee Drive, Brookfield, Wisconsin 53045
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (414)781-7155
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock - $.15 Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
At March 6, 2000, there were 1,588,128 shares of Common Stock
outstanding.
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1999 FORM 10-K CONTENTS
PART I
Item Page
1. Business. 3
2. Properties. 5
3. Legal Proceedings. 5
4. Submission of Matters to a Vote of
Security Holders. 7
PART II
5. Market for Registrant's Common Equity
and Related Stockholder Matters. 8
6. Selected Financial Data. 9
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 10
7A. Quantitative and Qualitative Disclosures about
Market Risk. 16
8. Financial Statements and Supplementary Data. 17
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. 33
PART III
10. Directors and Executive Officers
of the Registrant. 34
11. Executive Compensation. 37
12. Security Ownership of Certain Beneficial
Owners and Management. 38
13. Certain Relationships and Related Transactions. 40
PART IV
14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K. 41
Signatures. 45
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PART I
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 consists of 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.
(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 $4,370,000 in 1999,
$5,021,000 in 1998 and $4,062,000 in 1997. The decrease in 1999 sales from 1998
was due to continued soft conditions as a backlash to the very low oil prices
during the second half of 1998 which resulted in lower shipments in 1999
compared to the same period in 1998. Even with the current higher oil prices,
HDS continues to be affected by volatile market conditions that prevail in the
oil related fields of refining, processing, chemicals and petrochemical
operations throughout the Gulf Coast.
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,
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balancing, metalizing, milling, grinding, boring, welding, modification,
reassembly, field machining, maintenance, alignment, field service,
installation, startup and training.
HDS employed 34 people on December 31, 1999. 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, Entergy and Amoco Chemical were the only customers
who accounted for 10% or more of total Company sales. Entergy generated 13% of
1999 sales and Amoco Chemical 24% of 1998 sales and 12% of 1997 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
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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 37, 47 and 42 at December 31, 1999, 1998 and 1997,
respectively.
For more detailed information, you should read in their entirety the audited
1999 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. 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. The facility is
considered adequate and suitable for the Company's principal business.
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.
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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
7
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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
8
PART II
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. Pursuant to the PBGC Agreement (See ITEM 7. MANAGEMENTS DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and NOTE 7 to the
FINANCIAL STATEMENTS entitled SHAREHOLDERS DEFICIT), in June 1999 the Company
issued (pursuant to the exemption from Registration provided by Section 4(2) of
the Securities Act of 1933 and/or Regulation D thereunder) 585,100 shares of its
common stock to the PBGC increasing the total shares outstanding to 1,588,128 as
of March 31, 1999. Per share amounts in the accompanying financial statements
reflect the reverse stock split and issuance of shares pursuant to the PBGC
Agreement.
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 1999, 1998 or 1997.
9
ITEM 6. SELECTED FINANCIAL DATA.
1999 1998 1997 1996 1995
(millions, except per share data)
Statement of Operations Data:
Sales $ 4.4 $ 5.0 $ 4.1 $ 4.1 $ 3.2
Net income (loss) (0.1) 0.6 (66.5) (1.7) (1.4)
Net income (loss) per common share
(Basic and Diluted) (.08) .62 (66.34) (1.72) (1.44)
Statement of Financial
Condition Data:
Total assets 2.5 2.6 2.7 3.4 4.1
Long-term debt classified as:
Current 0.1 0.1 0.1 0.1 0.3
Long-term 0.2 0.2 0.2 0.3 -
Shareholders' deficit (66.5) (67.4) (68.0) (13.6) (9.9)
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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.
11
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. Effective March 31, 1999, the Company issued 585,100 shares to the PBGC
reducing the pension liability by the estimated fair market value of the shares
to $66.9 million.
In September 1997, Allis-Chalmers and the PBGC entered into an agreement in
principle for the settlement of the PBGC Liability which required, among other
things, 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% 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% 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 the
Company 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 July 16, 1998, the Company and the Internal Revenue Service (IRS) reached an
agreement in principal to settle the Company's tax liability under Code Section
4971 for $75,000. Following final IRS approval, payment of this amount was made
on August 11, 1998.
In June 1999, but effective as of March 31, 1999, the Company and the PBGC
entered into an agreement for the settlement of the PBGC Liability (the PBGC
Agreement).
Pursuant to the terms of the PBGC Agreement, the Company issued 585,100 shares
of its common stock to the PBGC, or 35% of the total number of shares issued and
outstanding on a fully-diluted basis, and the Company has a right of first
refusal with respect to the sale of the shares of common stock owned by the
PBGC. In conjunction with the share issuance, the Company reduced the pension
liability to the PBGC based on the estimated fair market value of the shares
issued on the effective date of March 31, 1999. In accordance with the terms of
the PBGC Agreement, the Company was required to and has (i) decreased the size
of the Board of Directors of the Company (the Board) to seven members; (ii)
caused a sufficient number of then current directors of the Company to resign
from the Board and all committees thereof; and (iii) caused Thomas M. Barnhart,
II, Alexander P. Sammarco and David A. Groshoff, designees of the PBGC, to be
elected to the Board. The PBGC has caused the Company to amend its By-laws
(By-laws) to conform to the terms of the PBGC Agreement. Furthermore, the
Company agreed to pay the PBGC's reasonable professional fees on the 90th day
after a Release Event (as hereinafter defined), which is currently evidenced by
a Company promissory note in favor of the PBGC in the amount of $75,000. During
the term of the PBGC Agreement, the Company has
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agreed not to issue or agree to issue any common stock of the Company or any
"common stock equivalent" for less than fair value (as determined by a majority
of the Board). The Company also agreed not to merge or consolidate with any
other entity or sell, transfer or convey more than 50% of its property or assets
without majority Board approval and agreed not to amend its Amended and Restated
Certificate of Incorporation (Certificate) or By-laws.
In order to satisfy and discharge the PBGC Liability, the PBGC Agreement
provides that the Company must either: (i) receive, in a single transaction or
in a series of related transactions, debt financing which makes available to the
Company at least $10 million of borrowings or (ii) consummate an acquisition, in
a single transaction or in a series of related transactions, of assets and/or a
business where the purchase price (including funded debt assumed) is at least
$10 million (Release Event). If the 585,100 shares are disposed of by the PBGC
prior to a Release Event and the final satisfaction and discharge of the PBGC
liability, the liability will be accreted by the estimated fair market value,
$1,024,000, of the shares issued to the PBGC.
In connection with the PBGC Agreement, and as additional consideration for
settling the PBGC Liability, the following agreements, each dated as of March
31, 1999 were also entered into: (i) a Registration Rights Agreement between the
Company and PBGC (the Registration Rights Agreement); and (ii) a Lock-Up
Agreement by and among the Company, the PBGC, AL-CH Company, L.P., a Delaware
limited partnership (AL-CH), Wells Fargo Bank, as trustee under that certain
Amended and Restated Retiree Health Trust Agreement for UAW Retired Employees of
Allis-Chalmers Corporation (the UAW Trust), and Firstar Trust Company, as
trustee under that certain Amended and Restated Retiree Health Trust Agreement
for Non-UAW Retired Employees of Allis-Chalmers Corporation (the Non-UAW Trust)
(the Lock-Up Agreement).
The Registration Rights Agreement grants each holder of Registrable Shares
(defined in the Registration Rights Agreement to basically mean the shares of
common stock issued to the PBGC under the PBGC Agreement) the right to have
their shares registered pursuant to the Securities Act of 1933, as amended, on
demand or incidental to a registration statement being filed by the Company. In
order to demand registration of Registrable Shares, a request for registration
by holders of not less than 20% of the Registrable Shares is necessary. The
Company may deny a request for registration of such shares if the Company
contemplates filing a registration statement within 90 days of receipt of notice
from the holders. The Registration Rights Agreement also contains provisions
that allow the Company to postpone the filing of any registration statement for
up to 180 days. The Registration Rights Agreement contains indemnification
language similar to that usually contained in agreements of this kind.
The Lock-Up Agreement governs the transfer and disposition of shares of the
Company's common stock and the voting of such shares, as well as grants the PBGC
a right of sale of its shares prior to AL-CH, the UAW Trust and the Non-UAW
Trust.
Pursuant to the Lock-Up Agreement, unless the Board has terminated the common
stock transfer restrictions set forth in Article XIII of the Company's
Certificate, AL-CH, the UAW Trust and the Non-UAW Trust each agreed that, during
the period commencing on March 31, 1999 and
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ending on the third anniversary of the Release Event, it will not, directly or
indirectly, sell, transfer, assign or dispose of any shares of Company stock it
beneficially owns. Commencing with the third anniversary of the Release Event
and continuing until the fifth anniversary of the Release Event, each of AL-CH,
the UAW Trust and the Non-UAW Trust agreed not to sell, transfer or dispose of
any shares of Company stock without first giving the PBGC an opportunity to sell
all or any portion of the shares of Company stock the PBGC owns. The foregoing
right of the PBGC applies to the sale of Company stock in a public offering or
otherwise.
The Lock-Up Agreement also contains a voting component. During the term of the
Lock-Up Agreement, each party to the agreement agreed to vote, at any meeting of
the Company stockholders and in any written consent, all shares of Company stock
owned by it in favor of the election as directors of the Company the persons
nominated by the Nominating Committee of the Board and to refrain from taking
any action contrary to or inconsistent with such obligation. During the term of
the Lock-Up Agreement, each party to the agreement further agreed not to vote
its shares of Company stock or take any other action to amend the Company's
Certificate or By-laws in a manner that is inconsistent with, or in breach of,
the PBGC Agreement. Each party further agreed that it will vote all of its
shares (i) in favor of certain specified amendments to the Company's
Certificate, (ii) for the election of the persons designated by the PBGC (each,
a PBGC Director) to serve on the Board and (iii) in favor of the election of
Company directors who are committed to cause, and who do cause, one PBGC
Director to be appointed to the Nominating Committee of the Board and one PBGC
Director to be appointed as the Chairman of the Compensation Committee of the
Board.
The acquisition environment has been unfavorable since the Investor's 1989 cash
contribution to the Company and remained very difficult for the Company during
1999. 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 1999, 1998 and 1997 reflect the sole operation of the
business of Allis-Chalmers: the machine repair business, HDS.
Sales totaled $4.4 million in 1999, compared with $5.0 million in 1998 and $4.1
million in 1997. The decrease in sales for 1999 from 1998 was due to continued
soft conditions as a backlash to the very low oil prices during the second half
of 1998 which resulted in lower shipments in 1999 compared to the same period in
1998. Even with the current higher oil prices, HDS continues to be affected by
volatile market conditions that prevail in the oil related fields of refining,
processing, chemicals and petrochemical operations throughout the Gulf Coast.
Gross margins, as a percentage of sales, were 24.2%, 29.7% and 25.0% in 1999,
1998 and 1997, respectively.
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Marketing and administrative expense was $1.5 million, $1.7 million and $1.7
million in 1999, 1998 and 1997, respectively. Marketing and administrative
expense was 35.4% of sales in 1999 compared with 33.6% in 1998 and 40.9% in
1997. The decrease in marketing and administrative expense was due to reduced
acquisition costs as well as corporate overhead. While there were additional
costs incurred in 1998 in pursuit of corporate acquisitions and certain
engineering costs at HDS, these costs were offset by a reduction in 1998 of
legal expenses as compared to 1997 when the Company experienced 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 continues to relate 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
in 1997. In 1999 and 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 loss of $113,000, or $.08 per common share in 1999, compared
with a net income of $618,000, or $.62 per common share, in 1998 and a net loss
of $66,545,000 in 1997. Net income in 1998 included income of $825,000 as a
result of a $900,000 IRS liability settled for $75,000. Recognition of pension
expense of $65,926,000 accounted for a significant portion of the net loss in
1997.
Liquidity and Capital Resources
At December 31, 1999, the Company had cash and short-term investments totaling
$501,000, an increase from $223,000 at December 31, 1998 principally the result
of Plan of Reorganization implementation reimbursement.
Trade receivables at December 31, 1999 were $570,000, compared with $796,000 at
December 31, 1998. This decrease was the result of an addition to the reserve of
$102,000 relating to a warranty dispute, decreased sales in 1999 and certain
major projects completed and billed by HDS near the end of 1998.
Inventory at December 31, 1999 was $157,000, an increase from $127,000 at year
end 1998 due to one job consisting of approximately $81,000 in inventory not
completed until January, 2000.
15
Net property, plant and equipment at December 31, 1999 was $1,170,000, a
decrease from $1,308,000 at December 31, 1998. The Company incurred only $21,000
on capital expenditures during 1999. In 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, 1999 and 1998 were $60,000.
Consistent with the prior year, the majority of the current maturities represent
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, 1999, 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 collateralized by the HDS facility (having a net book value of $432,000
at December 31, 1999) and the Company's guaranty.
The Company's principal sources of cash include earnings from operations. 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 2000.
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
16
not received responses from the other Regional offices. No environmental claims
have been asserted against the Company involving its postbankruptcy operations.
Management considered the Company's only significant application that was year
2000 sensitive was the accounting system. The accounting system experienced no
year 2000 problems and management does not anticipate any additional year 2000
problems..
Financial Condition
Shareholders' deficit at December 31, 1999 was $66.5 million. A three-year
comparison of shareholders' deficit follows:
(millions) 1999 1998 1997
---- ---- ----
January 1 $ (67.4) $ (68.0) $ (13.6)
Net income (loss) (0.1) 0.6 (66.5)
Pension liability adjustment 0.0 0.0 12.1
Issuance of common stock 1.0 - -
-------- -------- -------
December 31 $ (66.5) $ (67.4) $ (68.0)
======== ======== =======
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
None.
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Consolidated Financial Statements
Page
Financial Statements:
Report of Independent Accountants 18
Statement of Operations for the Three Years Ended December 31, 1999 19
Statement of Accumulated Deficit for the Three Years Ended
December 31, 1999 19
Statement of Financial Condition at December 31, 1999 and 1998 20
Statement of Cash Flows for the Three Years Ended December 31, 1999 21
Notes to Consolidated Financial Statements 22
Financial Statement Schedule
II Valuation and Qualifying Accounts 44
18
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Allis-Chalmers Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, accumulated deficit and cash flows present
fairly, in all material respects, the financial position of Allis-Chalmers
Corporation and its subsidiaries at December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. 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 auditing standards
generally accepted in the United States, 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. Effective March 31, 1999, the
Company issued 585,100 shares to the PBGC reducing the pension liability by the
estimated fair market value of the shares to $67 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, 2000
19
STATEMENT OF OPERATIONS
Year Ended December 31 1999 1998 1997
---------------------- ---------- ---------- ----------
(thousands, except per share)
Sales $ 4,370 $ 5,021 $ 4,062
Cost of sales 3,312 3,530 3,048
-------- -------- --------
Gross Margin 1,058 1,491 1,014
Marketing and administrative expense 1,546 1,689 1,660
-------- -------- --------
Loss from Operations (488) (198) (646)
Other income (expense):
Interest income 7 33 54
Interest expense (34) (50) (45)
Pension expense (Note 9) -- -- (65,926)
Other (Note 11, 9) 402 833 18
-------- -------- --------
Net Income (Loss) $ (113) $ 618 $(66,545)
======== ======== ========
Net Income (Loss) per Common Share
(Basic and Diluted) $ (.08) $ .62 $ (66.34)
======== ======== ========
STATEMENT OF ACCUMULATED DEFICIT
Year Ended December 31 1999 1998 1997
---------------------- ---------- ---------- ----------
(thousands)
Accumulated deficit beginning of year $(75,673) $(76,291) $ (9,746)
Net income (loss) (113) 618 (66,545)
-------- -------- --------
Accumulated deficit end of year $(75,786) $(75,673) $(76,291)
======== ======== ========
The accompanying Notes are an integral part of the Financial Statements.
20
STATEMENT OF FINANCIAL CONDITION
December 31 1999 1998
-------------- ---------- -----------
(thousands)
Assets
Cash and cash equivalents $ 501 $ 223
Trade receivables, net (Note 3) 570 796
Inventories, net 157 127
Other current assets 66 112
-------- --------
Total Current Assets 1,294 1,258
Net property, plant and equipment (Note 4) 1,170 1,308
-------- --------
Total Assets $ 2,464 $ 2,566
======== ========
Liabilities and Shareholders' Deficit
Current maturities of long-term debt $ 60 $ 60
Trade accounts payable 461 291
Accrued employee benefits 120 155
Accrued pension liability (Note 9) 66,877 67,901
Other current liabilities 281 312
-------- --------
Total Current Liabilities 67,799 68,719
Accrued postretirement benefit obligations (Note 9) 927 981
Long-term debt (Note 6) 193 232
Commitments and contingent liabilities (Note 10) -- --
Shareholders' deficit (Note 7)
Common stock ($.15 par value, authorized
2,000,000 shares, outstanding 1,588,128
at December 31, 1999 and 1,003,028 at
December 31, 1998) 238 152
Capital in excess of par value 9,093 8,155
Accumulated deficit (accumulated deficit of
$424,208 eliminated on December 2, 1988) (75,786) (75,673)
-------- --------
Total Shareholders' Deficit (66,455) (67,366)
-------- --------
Total Liabilities and Shareholders' Deficit $ 2,464 $ 2,566
======== ========
The accompanying Notes are an integral part of the Financial Statements.
21
STATEMENT OF CASH FLOWS
Year Ended December 31 1999 1998 1997
---------------------- --------- --------- ---------
(thousands)
Cash flows from operating activities:
Net (loss) income $ (113) $ 618 $(66,545)
Adjustments to reconcile net (loss) income to
net cash provided (used) by operating activities:
Depreciation and amortization 165 149 131
Gain on sale of equipment (2) -- --
Changes in working capital:
Decrease (increase) in receivables, net 226 (113) (31)
Increase in inventories (30) (26) (8)
Decrease in other current assets 46 9 15
Increase in trade accounts payable 170 72 137
(Decrease) increase in other current
liabilities (66) 60 (135)
(Decrease) increase in accrued pension
liability 0 (900) 65,926
Other (54) (9) (3)
-------- -------- --------
Net cash provided (used) by operating
activities 342 (140) (513)
Cash flows from investing activities:
Capital expenditures (21) (353) (304)
Proceeds from sale of equipment 16 3 3
-------- -------- --------
Net cash used by investing activities (5) (350) (301)
Cash flows from financing activities:
Net proceeds from issuance of long-term debt -- 66 --
Payment of long-term debt (59) (52) (55)
-------- -------- --------
Net cash provided (used) by financing
activities (59) 14 (55)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents 278 (476) (869)
Cash and cash equivalents at beginning of year 223 699 1,568
-------- -------- --------
Cash and cash equivalents at end of year $ 501 $ 223 $ 699
======== ======== ========
Supplemental information - interest paid $ 34 $ 50 $ 45
======== ======== ========
Noncash investing and financing activities:
Purchase of equipment under capital lease
obligation $ 29 $ -- $ --
======== ======== ========
Issuance of common stock in partial
settlement of accrued pension liability $ 1,024 $ -- $ --
======== ======== ========
The accompanying Notes are an integral part of the Financial Statements.
22
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.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents.
Fair Value of Financial Instruments
The carrying amounts in the Statement of Financial Condition for cash and cash
equivalents, trade receivables and long-term debt approximate fair market value.
23
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.
Statements of Cash Flows
For purposes of the Statements 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
Entergy, the only customer to have 10% or more of total sales, accounted for 13%
of 1999 sales. In 1998 and 1997, Amoco Chemical was the only customer which
accounted for 10% or more of total sales -- 24% of 1998 sales and 12% of 1997
sales.
NOTE 3. RECEIVABLES
December 31 1999 1998
-------------- ----------- ----------
(thousands)
Trade accounts receivable $ 692 $ 817
Allowance for doubtful receivables (122) (21)
----------- -----------
$ 570 $ 796
=========== ===========
24
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
December 31 1999 1998
-------------- ----------- -----------
(thousands)
Land and buildings $ 545 $ 545
Machinery and equipment 1,550 1,606
Tools, patterns, furniture, fixtures
and leasehold improvements 721 752
----------- -----------
2,816 2,903
Accumulated depreciation (1,646) (1,595)
----------- -----------
$ 1,170 $ 1,308
=========== ===========
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, 1999
and 1998:
1999 1998
----------- ----------
(millions)
Net future tax deductible items $ 35 $ 35
Net operating loss carryforwards and
other tax credits 123 156
Valuation allowance (158) (191)
----------- -----------
Net deferred taxes $ - $ -
=========== ===========
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, 1999 and 1998 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 did 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 did not generate
25
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, 1999 are estimated to consist of net operating
losses of $349.0 million expiring 2000 through 2019, investment tax credits of
$376,000 expiring 2000 through 2001 and energy tax credits of $282,000 expiring
2000 through 2002.
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
26
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
December 31 1999 1998
----------- ----------- -----------
(thousands)
Real estate loan $ 203 $ 226
Other 50 66
----------- -----------
253 292
Less amounts classified as current 60 60
----------- -----------
$ 193 $ 232
=========== ===========
The real estate loan relates to the 1990 purchase of the land and building in
Houston, Texas which had previously been leased by HDS. In August 1996, HDS
refinanced this loan which is required to be repaid in monthly installments of
$3,278 through August 20, 2001 when the remaining unpaid balance shall be due.
At December 31, 1999 and 1998, the interest rate on the note was 10.5%. The rate
will be adjusted during the term of the note in accordance with increases or
decreases in the prime rate. The note is collateralized by the HDS facility, (
having a net book value of $432,000 at December 31, 1999) and the Company's
guaranty.
NOTE 7. SHAREHOLDERS' DEFICIT
During 1999, the Company issued 585,100 shares of common stock to the PBGC. See
Note 9. As a result, $86,000 was reclassified from capital in excess of par
value to common stock and $938,000 was credited to capital in excess of par
value representing the excess of the fair market value of the shares issued over
par value.
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
27
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
28
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. Effective March 31, 1999, the Company issued 585,100 shares reducing
the pension liability by the estimated fair market value of the shares to $66.9
million.
In September 1997, Allis-Chalmers and the PBGC entered into an agreement in
principle for the settlement of the PBGC Liability which required, among other
things, 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% 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% 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 the
Company 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 July 16, 1998, the Company and the Internal Revenue Service (IRS) reached an
agreement in principal to settle the Company's tax liability under Code Section
4971 for $75,000. Following final IRS approval, payment of this amount was made
on August 11, 1998.
In June 1999, but effective as of March 31, 1999, the Company and the PBGC
entered into an agreement for the settlement of the PBGC Liability (the PBGC
Agreement).
Pursuant to the terms of the PBGC Agreement, the Company issued 585,100 shares
of its common stock to the PBGC, or 35% of the total number of shares issued and
outstanding on a fully-diluted basis, and the Company has a right of first
refusal with respect to the sale of the shares of common stock owned by the
PBGC. In conjunction with the share issuance, the Company reduced the pension
liability to the PBGC based on the estimated fair market value of the shares
issued on the effective date of March 31, 1999. In accordance with the terms of
the PBGC Agreement, the Company was required to and has (i) decreased the size
of the Board of Directors of the Company (the Board) to seven members; (ii)
caused a sufficient number of then current directors of the Company to resign
from the Board and all committees thereof; and (iii) caused Thomas M. Barnhart,
II, Alexander P. Sammarco and David A. Groshoff, designees of the PBGC, to be
elected to the Board. The PBGC has caused the Company to amend its By-laws
(By-laws) to conform to the terms of the PBGC Agreement. Furthermore, the
Company agreed to pay the PBGC's reasonable professional fees on the 90th day
after a Release Event (as
29
hereinafter defined), which is currently evidenced by a Company promissory note
in favor of the PBGC in the amount of $75,000. During the term of the PBGC
Agreement, the Company has agreed not to issue or agree to issue any common
stock of the Company or any "common stock equivalent" for less than fair value
(as determined by a majority of the Board). The Company also agreed not to merge
or consolidate with any other entity or sell, transfer or convey more than 50%
of its property or assets without majority Board approval and agreed not to
amend its Amended and Restated Certificate of Incorporation (Certificate) or
By-laws.
In order to satisfy and discharge the PBGC Liability, the PBGC Agreement
provides that the Company must either: (i) receive, in a single transaction or
in a series of related transactions, debt financing which makes available to the
Company at least $10 million of borrowings or (ii) consummate an acquisition, in
a single transaction or in a series of related transactions, of assets and/or a
business where the purchase price (including funded debt assumed) is at least
$10 million (Release Event). If the 585,100 shares are disposed of by the PBGC
prior to a Release Event and the final satisfaction and discharge of the PBGC
liability, the liability will be accreted by the estimated fair market value,
$1,024,000, of the shares issued to the PBGC.
In connection with the PBGC Agreement, and as additional consideration for
settling the PBGC Liability, the following agreements, each dated as of March
31, 1999 were also entered into: (i) a Registration Rights Agreement between the
Company and PBGC (the Registration Rights Agreement); and (ii) a Lock-Up
Agreement by and among the Company, the PBGC, AL-CH Company, L.P., a Delaware
limited partnership (AL-CH), Wells Fargo Bank, as trustee under that certain
Amended and Restated Retiree Health Trust Agreement for UAW Retired Employees of
Allis-Chalmers Corporation (the UAW Trust), and Firstar Trust Company, as
trustee under that certain Amended and Restated Retiree Health Trust Agreement
for Non-UAW Retired Employees of Allis-Chalmers Corporation (the Non-UAW Trust)
(the Lock-Up Agreement).
The Registration Rights Agreement grants each holder of Registrable Shares
(defined in the Registration Rights Agreement to basically mean the shares of
common stock issued to the PBGC under the PBGC Agreement) the right to have
their shares registered pursuant to the Securities Act of 1933, as amended, on
demand or incidental to a registration statement being filed by the Company. In
order to demand registration of Registrable Shares, a request for registration
by holders of not less than 20% of the Registrable Shares is necessary. The
Company may deny a request for registration of such shares if the Company
contemplates filing a registration statement within 90 days of receipt of notice
from the holders. The Registration Rights Agreement also contains provisions
that allow the Company to postpone the filing of any registration statement for
up to 180 days. The Registration Rights Agreement contains indemnification
language similar to that usually contained in agreements of this kind.
The Lock-Up Agreement governs the transfer and disposition of shares of the
Company's common stock and the voting of such shares, as well as grants the PBGC
a right of sale of its shares prior to AL-CH, the UAW Trust and the Non-UAW
Trust.
Pursuant to the Lock-Up Agreement, unless the Board has terminated the common
stock transfer restrictions set forth in Article XIII of the Company's
Certificate, AL-CH, the UAW Trust and the Non-UAW Trust each agreed that, during
the period commencing on March 31, 1999 and ending on the third anniversary of
the Release Event, it will not, directly or indirectly, sell,
30
transfer, assign or dispose of any shares of Company stock it beneficially owns.
Commencing with the third anniversary of the Release Event and continuing until
the fifth anniversary of the Release Event, each of AL-CH, the UAW Trust and the
Non-UAW Trust agreed not to sell, transfer or dispose of any shares of Company
stock without first giving the PBGC an opportunity to sell all or any portion of
the shares of Company stock the PBGC owns. The foregoing right of the PBGC
applies to the sale of Company stock in a public offering or otherwise.
The Lock-Up Agreement also contains a voting component. During the term of the
Lock-Up Agreement, each party to the agreement agreed to vote, at any meeting of
the Company stockholders and in any written consent, all shares of Company stock
owned by it in favor of the election as directors of the Company the persons
nominated by the Nominating Committee of the Board and to refrain from taking
any action contrary to or inconsistent with such obligation. During the term of
the Lock-Up Agreement, each party to the agreement further agreed not to vote
its shares of Company stock or take any other action to amend the Company's
Certificate or By-laws in a manner that is inconsistent with, or in breach of,
the PBGC Agreement. Each party further agreed that it will vote all of its
shares (i) in favor of certain specified amendments to the Company's
Certificate, (ii) for the election of the persons designated by the PBGC (each,
a PBGC Director) to serve on the Board and (iii) in favor of the election of
Company directors who are committed to cause, and who do cause, one PBGC
Director to be appointed to the Nominating Committee of the Board and one PBGC
Director to be appointed as the Chairman of the Compensation Committee of the
Board.
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.
31
Net postretirement benefit expense for the years ended December 31, 1999, 1998
and 1997 included the following components (in thousands):
1999 1998 1997
----------- ----------- -----------
Service cost $ - $ - $ -
Interest cost 41 53 62
Recognized actuarial gain (37) (22) (3)
----------- ----------- -----------
Net periodic postretirement benefit cost $ 4 $ 31 $ 59
=========== =========== ===========
The change in benefit obligation and plan assets and reconciliation of funded
status for the years ended December 31, 1999 and 1998 are as follows (in
thousands):
Change in APBO 1999 1998
----------- -----------
Benefit obligation at beginning of year $ 606 $ 733
Interest cost 41 53
Actuarial gain (125) (140)
Benefits paid (58) (40)
----------- -----------
Benefit obligation at end of year $ 464 $ 606
=========== ===========
Change in Plan Assets
Fair value of plan assets at beginning of year $ - $ -
Employer contribution 58 40
Benefits paid (58) (40)
----------- -----------
Fair value of plan assets at end of year $ - $ -
=========== ===========
Reconciliation of Funded Status
Benefit obligation at end of year $ (464) $ (606)
Fair value of plan assets at end of year - -
----------- -----------
Funded status (464) (606)
Unrecognized net actuarial gain (463) (375)
----------- -----------
Accrued Benefit Cost $ (927) $ (981)
=========== ===========
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 6.2% at December 31, 1999 and 6.5% at
December 31, 1998. 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 $26,000 at December 31, 1999.
The discount rate used in determining the accumulated postretirement benefit
obligation was 7.25% at December 31, 1999 and 7.5% at December 31, 1998.
32
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
33
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, 1999.
During 1999, Allis-Chalmers received payments totaling $400,000 as reimbursement
for expenditures they incurred in prior years on behalf of the A-C
Reorganization Trust. These payments are included as other income in the
accompanying Statement of Operations.
NOTE 12. QUARTERLY FINANCIAL DATA
(unaudited)
First Second Third Fourth
Quarter Quarter Quarter* Quarter
--------------------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998 1999 1998
------ ------- -------- --------- -------- -------- -------- ---------
(thousands, except per share)
Sales $ 1,052 $ 1,503 $ 1,084 $1,249 $ 894 $ 943 $ 1,340 $ 1,326
Gross Margin 339 486 249 312 212 273 258 420
Net Income (Loss) (57) 137 (137) (197) (122) 680 203 (2)
Net Income (Loss) per
Common Share
(basic and diluted) (.06) .14 (.09) (.20) (.08) .68 .13 0.0
*Net income in the third quarter of 1998 included income of $825,000 as a result
of a $900,000 IRS liability settled for $75,000.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Identification of Directors
The following individuals currently serve as directors of the Company.
Thomas M. Barnhart II, age 38, a director and Chairman since October
1999. Mr. Barnhart is Senior Vice President and Associate General Counsel
of Pacholder Associates, Inc., Cincinnati, Ohio, a financial advisory and
money management firm representing the PBGC. In 1999, Mr. Barnhart also
became Chairman of Phonetel Technologies Inc. Mr. Barnhart serves on the
Board on behalf of the PBGC
David A. Groshoff, age 28, a director since October 1999. Mr. Groshoff
has been employed by Pacholder Associates, Inc. since September 1997 and
currently serves as Assistant Vice President and Assistant General
Counsel. Between 1995 - 1997, Mr. Groshoff was an associate at Katz
Management Group, a Cincinnati-based professional athlete representation
firm, as well as a law clerk for Richard L. Katz Co., L.P.A., Brian M.
Goldberg, Moskowitz & Moskowitz, and the firm of Smith & Colner. Mr.
Groshoff serves on the Board on behalf of the PBGC.
Dr. Richard Lichtenstein, age 52, a director since October 1999. Dr.
Lichtenstein is an Associate Professor of Health Management and Policy at
the University of Michigan School of Public Health, where he has been
employed since 1971. He is not a director of any other publicly held
companies.
Robert E. Nederlander, age 66, a director since May 1989. Mr. Nederlander
served as Chairman of the Board of Allis-Chalmers Corporation from May
1989 to 1993, and from 1993 to 1996 as Vice Chairman. Mr. Nederlander has
been Chairman of the Board of Riddell Sports Inc. since April 1988 and
was Riddell Sports Inc.'s Chief Executive Officer from April 1988 through
March 1993. From February 1992 until June 1992, Mr. Nederlander was also
Riddell Sports Inc.'s interim President and Chief Operating Officer.
Since November 1981, Mr. Nederlander has been President and/or a director
of the Nederlander Organization, Inc., owner and operator of one of the
world's largest chains of legitimate theaters. Since December 1998, Mr.
Nederlander is co-managing member of the Nederlander Company LLC,
operator of legitimate theaters in various cities outside New York. Mr.
Nederlander served as the Managing General Partner of the New York
Yankees from August 1990 until December 1991, and he has been a limited
partner since 1973. Since July 1995, Mr. Nederlander serves on the Board
of Directors of Cendant Corporation, formerly Hospitality Franchise
Systems, Inc. (HFS). Mr. Nederlander is Chairman of the Board and Chief
Executive Office of MEGO Financial Corporation since January 1988, and
served as a director of MEGO Mortgage Corp. from September 1996 until
June 1998. Since October 1985, Mr. Nederlander has been President of
Nederlander Television and Film Productions, Inc. In October 1996, Mr.
Nederlander became a
35
director of News Communications Inc., a publisher of community oriented
free circulation newspapers.
Alexander P. Sammarco, age 28, a director since October 1999. Mr. Samarco
has been employed by Pacholder Associates, Inc. since 1996 and currently
serves as Vice President. Mr. Sammarco serves on the Board on behalf of
the PBGC.
Allan R. Tessler, age 63, 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 director of Data Broadcasting Corporation since June
1992. Mr. Tessler is also Chairman of the Board of Enhance Financial
Services Group, Inc., Chairman of the Board and Chief Executive Office of
Jackpot Enterprises, Inc., and and director of The Limited, Inc.
Leonard Toboroff, age 67, 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., Saratoga Beverage, Inc. and H-Rise
Recycling Corp.
(b) Identification of Executive Officers
Name, Age as of March 1,
2000, and Position Business Experience
Leonard Toboroff, 67, See Item 10, subsection (a) above.
Vice Chairman of the Board
and Executive Vice
President
John T. Grigsby, Jr., 59, Vice Chairman of the Board of the
Executive Vice President and Company from May 1989 until October
Chief Financial Officer 1999, 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
36
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.
Jeffrey I. Lehman, 50, Mr. Lehman commenced his employment with
Treasurer Allis-Chalmers and was elected to his
current position in February 1996. Since
1991, Mr. Lehman has been employed by
the A-C Reorganization Trust and Thomson
McKinnon Securities during winddown and
liquidation of their affairs. He has
also provided financial consultation
since 1985.
(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
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, as well as beneficial owners of 10% or more of
the Company's Common Stock, to file reports concerning their ownership of
Company equity securities with the Securities and Exchange Commission and the
Company. Based solely upon information provided to the Company and by individual
directors, executive officers and such beneficial owners, the Company believes
that during the fiscal year ended December 31, 1999 all its directors, executive
officers and beneficial owners of 10% or more of its Common Stock complied with
the Section 16(a) filing requirements, except that Form 3s required when Messrs.
Barnhart, Groshoff, Sammarco and Lichtenstein became directors were filed late.
37
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
No executive officer earned in excess of $100,000 in 1999. H. Sean Mathis who
served as Chairman of the Board and Chief Executive Officer in 1997, 1998 and
1999 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 4 active employees at the beginning of 1999. 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.
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.
38
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. 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, 2000.
Amount and Nature Percent of
Name and Address of Ownership Class
Pension Benefit Guaranty Corporation
c/o Pacholder Associates, Inc.
8044 Montgomery Road
Suite 382
Cincinnati, OH 45236 585,100 36.8%
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) 25.6%
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 8.6%
39
Amount and Nature Percent of
Name and Address of Ownership Class
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 6.4%
(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, 2000 by directors, the
former Chief Executive Officer (the only "named executive officer" of
the Company) 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
Thomas M. Barnhart II (1) 0 *
David A. Groshoff (1) 0 *
Dr. Richard Lichtenstein 0 *
H. Sean Mathis 0 *
Robert E. Nederlander (2) 407,251 25.6%
Alexander P. Sammarco (1) 0 *
Allan R. Tessler 0 *
Leonard Toboroff (2) 407,251 25.6%
All directors and
officers as a group
(ten persons) 416,786 26.2%
*less than 1%
(1) Even though Messrs. Barnhart, Groshoff and Sammarco were appointed
to the Board by the PBGC under the PBGC Agreement, they do not
beneficially own the 585,100 shares of the Company's Common Stock
owned by the PBGC.
40
(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. 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
41
PART IV
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. Amended and Restated By-laws of Allis-Chalmers Corporation
(incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended September 30, 1999).
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).
*A management contract or compensatory plan or arrangement.
42
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
quarter 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 quarter 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).
10.11. Agreement dated as of March 31, 1999, by and between Allis-
Chalmers Corporation and the Pension Benefit Guaranty Corporation
(incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended June 30, 1999).
10.12. Lock-up Agreement dated as of March 31, 1999, by and among
Allis-Chalmers Corporation, the Pension Benefit Guaranty Corporation,
acting in its individual capacity and as trustee of the Allis-Chalmers
*A management contract or compensatory plan or arrangement.
43
Consolidated Pension Plan, AL-CH Company, L.P., Wells Fargo Bank, as
trustee under that certain Amended and Restated Retiree Health Trust
Agreement for UAW Retired Employees of Allis-Chalmers Corporation and
Firstar Trust Company, as trustee under that certain Amended and
Restated Retiree Health Trust Agreement for non-UAW Retired Employees of
Allis-Chalmers Corporation (incorporated by reference to the Company's
Report on Form 10-Q for the quarter ended June 30, 1999).
10.13. Registration Rights Agreement dated as of March 31, 1999, by and
between Allis-Chalmers Corporation and the Pension Benefit Guaranty
Corporation (incorporated by reference to the Company's Report on Form
10-Q for the quarter ended June 30, 1999).
21.1. Subsidiaries of Allis-Chalmers Corporation.
27.1. Financial Data Schedule.
*A management contract or compensatory plan or arrangement.
44
ALLIS-CHALMERS CORPORATION AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(thousands)
Balance at Balance
Year Ended Beginning at Close
December 31, 1997 of Period Additions Deductions of Period
- ----------------- ----------- --------- ---------- ---------
Doubtful receivables $ 30 $ 6 $ 0 $ 36
----------- ----------- ------------- -----------
Balance at Balance
Year Ended Beginning at Close
December 31, 1998 of Period Additions Deductions of Period
- ----------------- ----------- --------- ---------- ---------
Doubtful receivables $ 36 $ 0 $ 15 $ 21
----------- ----------- ------------- -----------
Balance at Balance
Year Ended Beginning at Close
December 31, 1999 of Period Additions Deductions of Period
- ----------------- ----------- --------- ---------- ---------
Doubtful receivables $ 21 $ 102 $ 1 $ 122
----------- ----------- ------------- -----------
45
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.
Executive Vice President and Chief
Financial Officer
Date: March 29, 2000
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 29, 2000 by the
following persons on behalf of the registrant and in the capacities indicated.
/s/Thomas M. Barnhart II /s/Alexander P. Sammarco
Thomas M. Barnhart II, Director Alexander P. Sammarco, Director
/s/ David A. Groshoff /s/Allan R. Tessler
David A. Groshoff, Director Allan R. Tessler, Director
/s/Dr. Richard Lichtenstein /s/Leonard Toboroff
Dr. Richard Lichtenstein, Director Leonard Toboroff, Director
/s/Robert E. Nederlander
Robert E. Nederlander, Director