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Mr. Boulis. I will make arrangements to.
The CHAIRMAN. Senator Roth?

Senator Roth. I wonder if either you or the gentleman who, as I understand, represents the local union, would care to comment as to what might be done to hopefully build greater support in the union movement for this kind of approach, a participation by blue-collar workers in stockownership.

Mr. Boulis. If I understand your question, Senator, you are asking if anything can be done to get the unions behind employee stockownership?

Senator Roth. Yes.

Mr. Boulis. The only thing I know is when there are enough employee stockownership plans in existence and the employees still see fit to belong to the unions, the big unions are going to have to get with it to maintain their place. It is a very difficult question to answer, because, obviously, I have had it said to me that employee stockownership is aimed at getting rid of unions. Believe me, that was not the case in South Bend Lathe.

In fact, before we bought the company, we sent the Steelworkers a contract and said, please sign it. Our bankers wanted to make sure we had a stable workforce. Our bankers wanted to make sure we had a union contract.

But they chose not to. We bought the company anway.
I am afraid I cannot answer that.

Mr. VOGEL. As I said, it has been around for many, many years, but to us it is a brandnew concept and I think that maybe the big unions are a little reluctant to get involved in it because it is so new. Therefore, I think the education of it is very important at this time.

Senator Roth. I take it you are president of the local union ? Mr. VOGEL. No; our president was unable to make it, and this is why Mr. Boulis has said that neither one of us are really prepared to come into this meeting. We more or less are winging it. But I am the vice president, and I have been involved with the ESOP program ever since its inception.

Senator Roth. Have there been any discussions, as far as you know, between your local leadership and the international on the ESOP!

Mr. VOGEL. We have discussed it with them many times, sir. And they chose to just let it lie. So, more or less, this is why we just took it on our own to do what we did.

Senator Roth. By education, you mean both with the leadership and membership

Mr. VOGEL. Yes.
Senator ROTH. Thank you.
The CHAIRMAN. Senator Danforth?

Senator DANFORTH. In your opinion, would 100 percent employeeowned companies provide a disincentive to additional equity financing, to a new issue?

If you have a company that is owned 100 percent, or even more substantially than half, say, by its employees, in essence it seems to me what you have is a company that is financed entirely by debt, as far as its capital structure is concerned.

What effect would this have down the road as far as deluding the employee?

Mr. Boulis. We are not on the market. Our stock is not avaliable. We would not finance expansion by that method.

I might say this, though, that we have been looking hard at that, because we want to diversify. Machine tools are quite cyclical, as we all know. We have talked to our bankers, and we recently were holding negotiations with a company three times as large as we are. Our bankers assured us that they would stand behind a $10 million offer, based upon our performance to date and our 100-percent employee stockownership plan and the assets.

Senator DANFORTH. But even if you did that, you would have a larger company, but you would still be really, in effect, your whole financing would be debt financing.

Mr. Boulis. That is right.
Senator DANFORTH. Do you think that that is sound!

Mr. Boulis. Well, I think time will tell. You have to recognize that, in our situation, it was a matter of necessity being the mother of invention, and it has worked so far.

In less than 2 years, we have paid off over $4 million in commercial debt-just completely eliminated it. The value of our stock has increased. It is currently being valuated now. We have to have ours evaluated by private firms—it is not on the market-but we expect to see a definite increase in the value of the stock.

Senator DANFORTH. You pretty much rule out the possibility of a new issue being offered?

Mr. Boulis. At the present time. However, we have looked at acquiring a public company and at that time, exchanging our stock and being on the market, but not issuing new stock for a public offering.

Senator DANFORTH. Thank you.
[The prepared statement of Mr. Boulis follows:]

SOUTH BEND LATHE, INC.,

South Bend, Ind., July 25, 1978. Hon. RUSSELL B. LONG, Russell Office Building, Washington, D.C.

DEAR SENATOR LONG: Jerry Vogel and I certainly were pleased to have the op portunity of meeting you, joining you for breakfast, and testifying before the Senate Finance Committee.

Attached is a typewritten copy of the general text I followed in my testimony. I apologize for not having submitted these comments in advance.

Senator Long, there is a subject which I didn't get a chance to discuss with you, and I will therefore cover it now. When we set up our Employee Stock Ownership Plan, the one point we had the most difficulty with was the formula used for allocating stock to our employee stockholders. Every company that we have discussed this subject with allocate stock on the basis of annual earnings, but our union president insisted the stock should be allocated equally. This may sound ridiculous, but a large segment of the blue collar workers and clerical force embraced this idea.

We finally adopted a formula, over the objections of the union president, allowing 20 points for each $1000 of salary up to the limits allowed by IRS and 10 points for each year of service up to 15 years. However, many of our people still believe we are being unfair and should allocate the stock equally as originally proposed by the union president. In fact, this point has been the cause of more discord in our company than any other single item.

It seems to me if you are in agreement that the allocation of stock should rather closely approximate the distribution of annual earnings, it would be well if this could be covered in S3241.

It is probably too late for this to be of any significant benefit to our companyalthough it might be of some assistance in calming the waters—but it would

certainly be an assist to companies adopting an ESOP in the future if they could
advise their employees the stock is being allocated on an equitable basis in ac-
cordance with the legal requirements.

Once again, Senator Long, we appreciated the invitation to testify on behalf
of your very important bill and I would appreciate any consideration you can
give to the above suggestion relative to the method for allocating stock.
Sincerely,

J. R. BOULIS,

President and Chairman. Attachment.

GENERAL TEXT OF COMMENTS

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I'm Dick Boulis, Chairman and President of South Bend Lathe and this is Jerry Vogel of our company. Jerry is one of our skilled machinists, Vice President of our union—Local 1722 of the Steelworkers, and a member of our Board of Directors.

Unfortunately, since our plant was shut down the first two weeks of July, Jerry wasn't aware he would be attending this meeting until this past Monday morning. Therefore, he does not have a prepared statement. However, if Jerry doesn't agree with any of my comments, you can be assured he will state his own position. It's important to note that Jerry is not here as a representative of the Steelworkers but is representing Local 1722 and the hourly employees of SBL.

Let me now give you a little background about South Bend Lathe, although I would assume that most of you have seen some of the many articles that have been written about us in the past three years. There have been at least 75 articles written about what has happened at our company including articles in the Wall Street Journal, Business Week, Newsweek and many other leading publications.

South Bend Lathe is a producer of machine tools and was founded in South Bend, Indiana in 1906. In 1959 Amsted Industries of Chicago acquired SBLbut in the early Seventies Amsted became disenchanted with the profit performance of SBL and in late 1974 I was informed that the Division would be sold if they could find a buyer. I was advised it would not be sold at a bargain price and therefore I was not concerned as to the future for I believed the operation would be continued.

However, in early 1975, it became apparent SBL would be sold at substantially less than book value and it also appeared evident the prospective purchaser would quite likely liquidate our company, and close the doors which would have put almost 500 people out of work.

I immediately started searching for ways to buy the company but was not having any success until one day a friend asked if I had ever considered an Employee Stock Ownership Plan. Shortly after this, in the spring of 1975, I began working with the Industrial Development Department of the First Bank and Trust in South Bend, John Gibson of the Economic Development Administration office in Chicago, and several other people too numerous to mention at this time and things began to happen. These efforts were finally successful and on July 3, 1975 the acquisition of SBL from Amsted Industries was finalized and the employees immediately became the beneficial owners of their company through the establishment of a 100% Employee Stock Ownership Plan.

The acquisition was accomplished by a $5 million grant from the EDA to the City of South Bend who then loaned this to our ESOP at 3% interest repayable over 25 years. An additional amount of approximately $5 million was required and this was provided by conventional financing sources a major portion of which was at an interest rate of 7 points over prime.

From a financial point of view, our ESOP has been a resounding success, and I would like to give you a brief summary of the financial condition of our company at the end of our 3rd fiscal year which ended June 30th.

1. We have had 3 profitable years after a string of unsatisfactory years as a division of Amsted.

2. Profits have improved each year, and for the fiscal year just ended, the profit before taxes was almost 10% of sales.

3. Sales were slightly depressed during our first year due to the general eco nomic conditions at the time and due to rumors that had circulated in the marketplace for several months concerning the possible closing of SBL. But since then, our sales have steadily increased and Fiscal 1977 and 1978 were higher than any prior years in SBL's history.

4. Sales for the year just ended were approximately $18.5 million or a 34% increase over our first year.

5. We have no bank debt at the present time. The commercial loans of almost $5 million were completely paid off in May of 1977, and our current banking arrangements provide for a $3 million line of credit at the prime rate of interest.

6. Our current ratio has steadily improved and at June 30 was 3.2 to 1.

7. Earnings per share increased from $20.30 our first year to $52.24 the second year, and to $69.48 for our third fiscal year that just ended.

I think it's important to note these financial accomplishment were not achieved at the expense of our employee-stockholders.

Since we acquired our company as of June 30, 1975, our employees' earnings have steadily increased and with the general increase to be put in effect August 1st, the average earnings of our employees will have increased by about 45% to an amount averaging in excess of $15,000 annually.

Since acquiring SBL we have distributed seven bonus checks to our employees— the last six of which were each equal to a week's pay.

The maximum tax deductible contribution of 15% of salaries and wages has been made to our ESOP for each of the three years, and this annual contribution has averaged $2,000 per employee. This is 2.5 times the average contribution to pension plans in our industry. Our employee stockholders now have an average of $6,000 in company stock credited to their ESOP account.

We do not have a conventional pension or retirement plan at SBL. Prior to acquiring our company it didn't appear we could financially succeed if we had to assume the costs and related liabilities of the hourly and salaried pension plans in effect at that time. All of our employees were aware of this and agreed to work for the new corporation with an ESOP in lieu of the pension plan.

In terms of employee motivation, our productivity increased very substantially in all areas of our company for the first several months after the acquisition. Unfortunately the fact our people agreed to work for an ESOP rather than the previous pension plan created problems with the Steelworkers which still haven't been resolved. There has been a suit pending in Federal Court for over two years wherein the Steelworkers are attempting to have us named as the successor to the contract in effect with Amsted at the time we bought the company-or in oher words to force us to reinstate the pension which had been in effect when Amsted owned our company. Unfortunately, these problems have taken the edge off our success and productivity bas declined somewhat. However, it is still significantly better than when we were a division of Amsted.

We have not established a TRASOP at our company because of the relatively low level of new equipment purchases as compared to the problems involved in allocating the additional tax credit to the employee stockholders. We would, there fore, encourage the adoption of a program for labor intensive companies based on payroll

We've accomplished a lot at South Bend in three years but the job is not finished—we still have many things that must be accomplished in order that the future of our employee-stockholders can be reasonably secure. However, we're confident that we will solve the problems that are still plaguing us and that the future of our ESOP is bright.

We don't profess to be experts as to the economic theories of ESOP. However there is no question it is getting the job done at our company.

Certain experts claim that productivity in the U.S. is increasing. I guess it de pends on how you define productivity. There isn't any question that output in terms of product per man hour is increasing as a result of more sophisticated equipment, tools, materials, and methods. But in my opinion, and I have visited many plants in the U.S. and abroad, the individual work effort in our country is declining and lags behind our foreign competitors. We believe that Employee Stock Ownership will go a long way toward reversing this situation.

We don't have all the answers, but we're working at it. We've come a long way at South Bend Lathe in the past three years and if we ever get rid of the one main problem that has been plaguing us—the suit pending in Federal Courtwe're confident we'll really break out into the clear and be an extremely successful company.

Thank you, Senator Long, for inviting Jerry and me to testify here today. We certainly appreciate your efforts to encourage the establishment of ESOP's, and we at SBL are especially appreciative for your intercession with Mr. Mizell on our behalf in 1975 when our request for the $5 million grant was pending at the EDA.

Thank you.

The CHAIRMAN. Next we will call Mr. Glenn W. White, of Dow Chemical Co.

Mr. White ?

STATEMENT OF GLENN W. WHITE, DIRECTOR OF TAX DEPART

MENT, DOW CHEMICAL CO.

Mr. WHITE. Good morning, Mr. Chairman and members of the committee. My name is Glenn White. I am the director of the tax department of Dow Chemical Co.

We appreciate the opportunity to testify regarding this proposed legislation to expand the scope of employee stock ownership plan.

We want to tell you about Dow's experience with employee stock ownership. As early as 1953, Dow had adopted a plan which provided to a broad group of employees shares in the

company without out-of-pocket

cost to the employee. The Dow stock benefit plan makes available to that group of employees an investment by the company in shares for the employee's account at the rate of 2 percent of base salary per year.

The shares are distributed to the employee upon termination or retirement. The Dow concept of employee stockownership was expanded with the adoption if the Dow investment benefit plan. This was our response to the employee stockownership legislation contained in the tax reduction act of 1975. As a result, employees now receive an additional benefit as provided under the employee stock ownership plan provisions to the extent of 1 percent of Dow's investment in qualified property each year.

This plan was extended to cover all U.S. employees through at least 1 year of service. This includes those represented by bargaining units, about 8,400 employees.

As a result, 90 percent of 32,600 employees, or 29,300 people have become shareholders in our company. This has helped make possible a long-term management objective of making as many Dow employees as possible owners of the company. In addition to the Stock Benefit Plan and the Investment Benefit Plan, Dow also has an Employee Stock Savings Plan that permits Dow employees on a worldwide basis to purchase stock in the company at favorable prices.

The Dow investment benefit plan was so named to express the concept that through the company's investments in new plants and equinment, the employees are sharing in the planning, building, and operation of the company and thus are deserving of receiving under this plan a share of the corporate ownership.

Without Dow's growth and capital investment, there would be neither tax benefits nor employee stockownership plan stock benefits.

In 1976, the first year our plan was in operation, $5,900,000 was contributed to the plan. This was used to acquire about 187,000 shares of stock. That is 6.4 shares for the average employee, for a value of about $200.

Also, the plan guarantees that each participant will receive at least one share of stock per year under our allocation formula. The real advantage to employee stock ownership plans from Dow's point of view is not derived from the tax benefit. The tax benefit makes a desirable plan economically feasible.

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