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 SEPTEMBER 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 October 23, 1998 there were 1,003,028 shares of Common Stock outstanding.
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PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
ALLIS-CHALMERS CORPORATION AND CONSOLIDATED SUBSIDIARIES
- --------------------------------------------------------
STATEMENT OF OPERATIONS
- -----------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
1998 1997 1998 1997
---- ---- ---- ----
(Thousands, except per share)
Sales $ 943 $ 813 $3,695 $ 2,826
Cost of sales 670 652 2,624 2,186
----- ----- ------ -------
Gross Margin 273 161 1,071 640
Marketing and administrative
expense 426 356 1,300 1,080
---- ---- ------ ------
Loss from Operations (153) (195) (229) (440)
Other income (expense)
Interest income 7 10 19 36
Interest expense (10) (8) (28) (28)
Pension expense 0 (465) 0 (1,397)
Other 836 0 858 13
---- ----- ----- -------
Net Income/(Loss) $ 680 $(658) $ 620 $(1,816)
===== ====== ====== ========
Net Income/(Loss) per
Common Share $ .68 $(.66) $ .62 $ (1.81)
===== ====== ====== ========
STATEMENT OF ACCUMULATED DEFICIT
Nine Months Ended September 30 1998 1997
------------------------------ ---- ----
(thousands)
Accumulated deficit -
beginning of year $(76,291) $(9,746)
Net income/(loss) 620 (1,816)
Accumulated deficit - September 30 $(75,671) $(11,562)
========= =========
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
- --------------------------------
September 30, December 31,
1998 1997
-------- --------
(thousands)
Assets
Cash and short-term investments $ 426 $ 699
Trade receivables, net 477 683
Inventories, net 70 101
Other current assets 135 121
--- ---
Total Current Assets 1,108 1,604
Net property, plant and equipment 1,284 1,107
----- -----
Total Assets $ 2,392 $ 2,711
-------- --------
Liabilities and Shareholders' Deficit
Current maturities of long-term debt $ 55 $ 38
Trade accounts payable 163 219
Accrued employee benefits 137 123
Reserve for legal expenses 174 174
Accrued pension liability 67,901 68,801
Other current liabilities 126 110
------ ------
Total Current Liabilities 68,556 69,465
Accrued pension liability - -
Accrued postretirement benefit obligations 950 990
Long-term debt 250 240
Shareholders' deficit
Common stock, ($.15 par value, authorized
2,000,000 shares, outstanding 1,003,028
at September 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) (75,671) (76,291)
-------- --------
Total Shareholders' Deficit (67,364) (67,984)
-------- -------
Commitments and contingent liabilities
Total Liabilities and Shareholders'
Deficit $ 2,392 $ 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
Nine Months Ended
September 30
------------
1998 1997
---- ----
(thousands)
Cash flows from operating activities:
Net income/(loss) $ 620 $(1,816)
Adjustments to reconcile net loss to net cash
(used) provided by operating activities:
Depreciation and amortization 138 107
Gain on sale of fixed assets (2) (13)
Change in working capital:
Decrease in receivables, net 206 206
Decrease (increase) in inventories 31 (19)
Decrease in trade accounts payable (56) (3)
Decrease (increase) in other current items 16 (273)
(Decrease) increase in accrued pension liability, net (900) 1,398
Other (40) (62)
----- ------
Net cash (used) provided by operating activities 13 (475)
Cash flows from investing activities:
Capital expenditures (313) (245)
Proceeds from sale of equipment 0 15
----- -----
Net cash used by investing activities (313) (230)
Cash flows from financing activities:
Net proceeds from issuance of long-term debt 71 -
Payment of long-term debt (44) (41)
---- -----
Net cash (used) by financing activities 27 (41)
Net decrease in cash and short-term
investments (273) (746)
Cash and short-term investments at
beginning of period 699 1,568
--- -----
Cash and short-term investments at
end of period $ 426 $ 822
===== ======
Supplemental information - interest paid $ 28 $ 28
===== ======
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 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
6
deficiency is not "corrected" within a specified period. Liability for the taxes
imposed under section 4971 extends, jointly and severally, to Allis-Chalmers and
to its commonly-controlled subsidiary corporations.
Prior to its termination, the Consolidated Plan had an accumulated funding
deficiency in the taxable years 1995, 1996, and 1997. Those deficiencies
resulted in first-tier taxes under Code section 4971(a) of approximately
$900,000.
On March 2, 1998, Allis-Chalmers sent the Internal Revenue Service (IRS) a
formal Offer in Compromise of the Company's tax liability under Code section
4971. On July 16, 1998, the parties reached a settlement agreement in principle
in the amount of $75,000. Following final IRS approval, payment of this amount
was made on August 11, 1998. 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 third quarter of 1998 totaled $943,000 an increase of 16% from
$813,000 in the third quarter of 1997. This increase was due to 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 28.9% in the third quarter of 1998,
a significant increase from 19.8% in 1997. However, this increase is in line
with all of 1998.
Marketing and administrative expense was $426,000 in the third quarter of 1998
compared with $356,000 in the prior year. The increase reflects $103,000 of
expenditures in our continuing pursuit of an acquisition. A significant portion
of the Company's administrative expenses relate 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 third quarter of 1998 as compared to pension
expense in the third quarter of 1997 of $466,000. However, there was other
income of $825,000 resulting from the settlement reached with the IRS in the
amount of $75,000 for a liability previously recorded in the amount of $900,000.
See Note 2 to the Financial Statements for further discussion.
The Company had net income of $680,000, or $.68 per common share, in the third
quarter of 1998 compared with a net loss of $685,000, or $.66 per common share,
in the same period of 1997.
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In the first nine months of 1998, the Company had a net profit of $620,000 or
$.62 per common share compared with a loss of $1,816,000 or $1.81 per common
share in the same period of 1997.
Financial Condition and Liquidity
Cash and short term investments totaled $426,000 at September 30, 1998, a
decrease from $699,000 at December 31, 1997. The decrease in cash was partially
due to the IRS payment of $75,000 along with higher corporate administrative
expenses.
Net trade receivables at September 30, 1998 were $477,000, reflecting a decrease
from the December 31, 1997 level of $683,000. This decrease was due to
aggressive collection activity and drop off in sales.
Net property, plant and equipment was $1,284,000 at September 30, 1998, an
increase from $1,107,000 million at year end 1997. For the nine months ending
September 30, 1998, $313,000 of capital expenditures were made to insure cost
competitiveness and the ability to reach new markets.
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 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 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.
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
8
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, third-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 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
in the amount of $75,000. Following final IRS approval, payment of this amount
was made on August 11, 1998. 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 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.
9
The only function that is year 2000 sensitive is our accounting system. We have
received written assurances from our software provider that the system is year
2000 compliant.
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
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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 third
quarter of 1998.
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
November 11, 1998