SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED JUNE 30, 1998 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.)
1126 South 70th Street
West Allis, Wisconsin 53214-3151
(Address of principal executive offices) (Zip code)
(414)475-2000
Registrant's telephone number, including area code
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 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 July 21, 1998 there were 1,003,028 shares of Common Stock outstanding.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLIS-CHALMERS CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF OPERATIONS
Three Months Ended Six Months Ended
June 30 June 30
----------------------- --------------------
1998 1997 1998 1997
---------- --------- ---------- ---------
(thousands, except per share)
Sales $ 1,249 $ 985 $ 2,752 $ 2,013
Cost of sales 937 717 1,954 1,534
----------- ---------- ---------- -----------
Gross Margin 312 268 798 479
Marketing and
administrative
expense 515 355 874 724
---------- ---------- ---------- -----------
Loss from Operations (203) (87) (76) (245)
Other income (expense)
Interest income 6 11 12 26
Interest expense (9) (12) (18) (20)
Pension expense 0 (466) 0 (932)
Other 9 0 22 13
----------- ---------- ---------- -----------
Net Income/(Loss) $ (197) $ (554) $ (60) $ (1,158)
=========== ========== ========== ==========
Net Income/(Loss)
per Common Share $ (,20) $ (.55) $ (.06) $ (1.15)
=========== ========== ========== ===========
STATEMENT OF ACCUMULATED DEFICIT
Six Months Ended June 30 1998 1997
------------------------ ---------- -------
(thousands)
Accumulated deficit - beginning of year $ (76,291) $ (9,746)
Net loss (60) (1,158)
--------- --------
Accumulated deficit - June 30 $ (76,351) $ (10,904)
========= ========
This interim statement is unaudited.
The accompanying Notes are an integral part of the Financial Statements.
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ALLIS-CHALMERS CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF FINANCIAL CONDITION
June 30, December 31,
1998 1997
(thousands)
Assets
Cash and short-term investments $ 678 $ 699
Trade receivables, net 660 683
Inventories, net 78 101
Other current assets 108 121
----------- -----------
Total Current Assets 1,524 1,604
Net property, plant and equipment 1,238 1,107
----------- -----------
Total Assets $ 2,762 $ 2,711
============ ===========
Liabilities and Shareholders'
Deficit
Current maturities of long-term debt $ 69 $ 38
Trade accounts payable 143 219
Accrued employee benefits 171 123
Reserve for legal expenses 204 174
Accrued pension liability 68,801 68,801
Other current liabilities 204 110
----------- -----------
Total Current Liabilities 69,592 69,465
Accrued pension liability - -
Accrued postretirement benefit
obligations 964 990
Long-term debt 250 240
Shareholders' deficit
Common stock, ($.15 par value,
authorized 2,000,000 shares, outstanding
1,003,028 at June 30, 1998 and December 31,
1997) 152 152
Capital in excess of par value 8,155 8,155
Accumulated deficit (accumulated deficit of
$424,208 eliminated on December 2, 1988) (76,351) (76,291)
----------- -----------
Total Shareholders' Deficit (68,044) (67,984)
Commitments and contingent liabilities
Total Liabilities and Shareholders'
Deficit $ 2,762 $ 2,711
========== ===========
This interim statement is unaudited.
The accompanying Notes are an integral part of the Financial Statements.
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ALLIS-CHALMERS CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CASH FLOWS
Six Months Ended
June 30
1998 1997
(thousands)
Cash flows from operating activities:
Net loss $ (60) $ (1,158)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 88 70
Gain on sale of fixed assets 0 (13)
Change in working capital:
Decrease in receivables, net 23 71
Decrease (increase) in inventories 23 (1)
Increase (decrease) in trade accounts payable (76) 4
Increase (decrease) in other current items 185 (272)
Increase in accrued pension liability, net 0 932
Other (26) (47)
--------- ----------
Net cash (used) by operating activities 157 (414)
Cash flows from investing activities:
Capital expenditures (219) (228)
Proceeds from sale of equipment 0 15
--------- ----------
Net cash (used) by investing activities (219) (213)
Cash flows from financing activities:
Net proceeds from issuance of long-term debt 71 -
Payment of long-term debt (30) (26)
--------- ----------
Net cash (used) by financing activities 41 (26)
--------- ----------
Net decrease in cash and short-term investments (21) (653)
Cash and short-term investments at
beginning of period 699 1,568
--------- ----------
Cash and short-term investments at
end of period $ 678 $ 915
========= ==========
Supplemental information - interest paid $ 18 $ 20
========= ==========
This interim statement is unaudited.
The accompanying Notes are an integral part of the Financial Statements.
5
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING POLICIES
This interim financial data should be read in conjunction with the consolidated
financial statements and related notes, management's discussion and analysis and
other information included in the Company's 1997 Annual Report.
All adjustments considered necessary for a fair presentation of the results of
operations have been included in the unaudited financial statements. The results
of operations for any interim period are not necessarily indicative of
Allis-Chalmers operating results for a full year.
NOTE 2 - POSTRETIREMENT OBLIGATIONS--PENSION PLAN
In 1994, the Company's independent pension actuaries changed the assumptions for
mortality and administrative expenses used to determine the liabilities of the
Allis-Chalmers Consolidated Pension Plan (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 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
to the Consolidated Plan during 1996 and 1997. Given the inability of the
Company to fund such obligations with its limited financial resources, in
February 1997, Allis-Chalmers applied to the Pension Benefit Guaranty
Corporation (PBGC) for a "distress" termination of the Consolidated Plan under
section 4041(c) of the Employee Retirement Income Security Act of 1974, as
amended (ERISA). The PBGC approved the distress termination application in
September 1997 and agreed to a plan termination date of April 14, 1997. The PBGC
became trustee of the terminated Consolidated Plan on September 30, 1997.
Upon termination of the Consolidated Plan, Allis-Chalmers and its subsidiaries
incurred a liability to the PBGC for an amount equal to the Consolidated Plan's
unfunded benefit liabilities. Allis-Chalmers and its subsidiaries also have
liability to the PBGC, as trustee of the terminated Consolidated Plan, for the
outstanding balance of the Consolidated Plan's accumulated funding deficiencies.
The PBGC has estimated that the unfunded benefit liabilities and the accumulated
funding deficiencies (together, the PBGC Liability) total approximately $67.9
million.
In September 1997, Allis-Chalmers and the PBGC entered into an agreement in
principle for the settlement of the PBGC Liability (the PBGC Agreement). The
PBGC Agreement calls for the PBGC to release Allis-Chalmers and its subsidiaries
from the PBGC Liability in return for that number of shares of Allis-Chalmers'
common stock that represents 35% of the total number of shares issued and
outstanding on a fully-diluted basis.
The PBGC Agreement is subject to negotiation of definitive documentation and to
satisfactory resolution of Allis-Chalmers tax obligations with respect to the
Consolidated Plan under section 4971 of the Internal Revenue Code of 1986, as
amended (Code). Section 4971(a) of the Code imposes, for each taxable year, a
first-tier tax of 10 percent on the amount of the accumulated
6
funding deficiency under a plan like the Consolidated Plan. Section 4971(b) of
the Code imposes an additional, second-tier tax equal to 100 percent of such
accumulated funding deficiency if the deficiency is not "corrected" within a
specified period. Liability for the taxes imposed under section 4971 extends,
jointly and severally, to Allis-Chalmers and to its commonly-controlled
subsidiary corporations.
Prior to its termination, the Consolidated Plan had an accumulated funding
deficiency in the taxable years 1995, 1996, and 1997. Those deficiencies have
resulted, or will result, in first-tier taxes under Code section 4971(a) of
approximately $900,000.
On March 2, 1998, Allis-Chalmers sent the Internal Revenue Service (IRS) a
formal Offer in Compromise of the Company's tax liability under Code section
4971. On July 16, 1998, the parties reached a settlement agreement in principle
subject to final IRS approval. In the meantime, discussions regarding definitive
documentation continue with the PBGC on certain issues contained in a proposed
Shareholder Agreement between the Company and the PBGC. The Company is
encouraged by the progress made in these discussions. However, if a satisfactory
agreement cannot be negotiated with the PBGC, Allis-Chalmers will evaluate other
alternatives, including a bankruptcy filing.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
Sales in the second quarter of 1998 totaled $1,249,000 an increase of 27% from
$985,000 in the second quarter of 1997. This significant increase was due to a
healthy market, better pricing, new customers served and expanded services
provided. Operations of the Company consist of Houston Dynamic Service, Inc.
(HDS), the Company's machinery repair and service subsidiary.
Gross margin, as a percentage of sales, was 25% in the second quarter of 1998, a
decrease from 27.2% in 1997.
Marketing and administrative expense was $515,000 in the second quarter of 1998
compared with $355,000 in the prior year. The increase reflects additional costs
in managing the Company's business along with the pension and IRS issues. See
Note 2 to the Financial Statements for further discussion. A significant portion
of the Company's administrative expenses relates to expenses for Securities and
Exchange Commission and other governmental reporting as well as legal,
accounting and audit, tax, insurance and other corporate requirements of a
publicly held company.
There was no pension expense in the second quarter of 1998 as compared to
pension expense in the second quarter of 1997 of $466,000. See Note 2 to the
Financial Statements for further discussion.
7
The Company incurred a net loss of $197,000, or $.20 per common share, in the
second quarter of 1998 compared with a net loss of $554,000, or $.55 per common
share, in the same period of 1997.
In the first half of 1998, the Company incurred a net loss of $60,000 or $.06
per common share compared with a loss of $1,158,000 or $1.15 per common share in
the same period of 1997.
Financial Condition and Liquidity
Cash and short term investments totaled $678,000 at June 30, 1998, a decrease
from $699,000 at December 31, 1997. The slight decrease in cash was partially
due to selected capital expenditures for equipment upgrading.
Net trade receivables at June 30, 1998 were $660,000, reflecting a decrease from
the December 31, 1997 level of $683,000. This slight decrease was due to
aggressive collection activity and is significant considering the increase in
sales.
Inventory at June 30, 1998 was $78,000, a decrease from $101,000 at year end
1997,
Net property, plant and equipment was $1,238,000 at June 30, 1998, an increase
from $1,107,000 million at year end 1997. For the six months ending June 30,
1998, $219,000 of capital expenditures were made to insure cost competitiveness
and the ability to reach new markets.
Other current liabilities at June 30, 1998 were $204,000, an increase from
$110,000 at December 31, 1997. This increase reflects additional corporate costs
in managing the Company's business along with costs related to the ongoing
pension and tax issues. See Note 2 to the Financial Statements for further
discussion.
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, thus avoiding additional demands on the liquidity of the
Company. Such costs include an allocated share of certain expenses for Company
employees, professional fees and certain other administrative expenses.
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 second quarter of 1996,
the Company made a 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 to the Consolidated Plan during 1996 and 1997. Given the
inability of the Company to fund such obligations with its limited 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.
8
Upon termination of the Consolidated Plan, Allis-Chalmers and its subsidiaries
incurred a liability to the PBGC for an amount equal to the Consolidated Plan's
unfunded benefit liabilities. Allis-Chalmers and its subsidiaries also have
liability to the PBGC, as trustee of the terminated Consolidated Plan, for the
outstanding balance of the Consolidated Plan's accumulated funding deficiencies.
The PBGC has estimated that the unfunded benefit liabilities and the accumulated
funding deficiencies (together, the PBGC Liability) total approximately $67.9
million.
In September 1997, Allis-Chalmers and the PBGC entered into an agreement in
principle for the settlement of the PBGC Liability (the PBGC Agreement). The
PBGC Agreement calls for the PBGC to release Allis-Chalmers and its subsidiaries
from the PBGC Liability in return for that number of shares of Allis-Chalmers'
common stock that represents 35% of the total number of shares issued and
outstanding on a fully-diluted basis.
The PBGC Agreement is subject to negotiation of definitive documentation and to
satisfactory resolution of Allis-Chalmers tax obligations with respect to the
Consolidated Plan under section 4971 of the Code. Section 4971(a) of the Code
imposes, for each taxable year, a first-tier tax of 10 percent on the amount of
the accumulated funding deficiency under a plan like the Consolidated Plan.
Section 4971(b) of the Code imposes an additional, second-tier tax equal to 100
percent of such accumulated funding deficiency if the deficiency is not
"corrected" within a specified period. Liability for the taxes imposed under
section 4971 extends, jointly and severally, to Allis-Chalmers and to its
commonly-controlled subsidiary corporations.
Prior to its termination, the Consolidated Plan had an accumulated funding
deficiency in the taxable years 1995, 1996, and 1997. Those deficiencies have
resulted, or will result, in first-tier taxes under Code section 4971(a) of
approximately $900,000.
On March 2, 1998, Allis-Chalmers sent the Internal Revenue Service (IRS) a
formal Offer in Compromise of the Company's tax liability under Code section
4971. On July 16, 1998, the parties reached a settlement agreement in principle
subject to final IRS approval. In the meantime, discussions regarding definitive
documentation continue with the PBGC on certain issues contained in a proposed
Shareholder Agreement between the Company and the PBGC. The Company is
encouraged by the progress made in these discussions. However, if a satisfactory
agreement cannot be negotiated with the PBGC, Allis-Chalmers will evaluate other
alternatives, including a bankruptcy filing.
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
9
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.
The Company's principal sources of cash include earnings from the operations of
HDS and interest income on marketable securities. The cash requirements needed
for the administrative expenses associated with being a publicly held company
are significant, and the Company will continue to use cash generated by
operations to fund such expenses.
The necessity to assure liquidity emphasizes the need for the Company to
continue in a prudent manner its search for appropriate acquisition candidates
in order to increase the Company's operating base and generate positive cash
flow.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See PART I. Item 2, "Management's Discussion and Analysis."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: (27) - Financial Data Schedule
(b) Reports on Form 8-K - No report on Form 8-K was filed during the second
quarter of 1998.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Allis-Chalmers Corporation
(Registrant)
/s/ John T. Grigsby, Jr.
John T. Grigsby, Jr.
Vice Chairman, Executive Vice
President and Chief Financial
Officer
July 29, 1998
EXHIBIT INDEX
Exhibit No. Description
27 Financial Data Schedule