problem that needs to be dealt with is created by this new credit and the overly restrictive one-year carry-over provision.

Fourth, in connection with bargaining unit employees, while most existing ESOPS, including my own company's, provide for participation by employees generally, we believe that no special requirement for offering ESOP participation is appropriate. Internal Revenue Code Section 410(b) (2) (A) ties the participation rules for qualified plans to good-faith bargaining over benefits, and to require anything more will only complicate collective bargaining.

CONCLUSION

We in the electric utility industry hailed the provision for employee stockownership in the Tax Reduction Act of 1975 as a truly innovative and important achievement in corporate finance. This program has benefited employees and employers by its two-pronged thrust, on the one hand promoting widespread advancement of stock ownership among the working people of America in the corporations they work for, while at the same time providing an additional means of capital formation, especially important to the capital intensive and extremely hard pressed electric utility industry.

We support S. 3241 as a further strengthening and expansion of this important program begun in 1975.

The CHAIRMAN. Next, we will call Mr. J. R. Boulis, president of South Bend Lathe.

Mr. Boulis, we are very pleased to have you here today. We have heard a lot about your company and what it has been doing to save that company and the jobs of those workers. We appreciate your testimony.

Mr. BOULLIS. Thank you, Senator Long.

STATEMENT OF J. R. BOULIS, CHAIRMAN AND PRESIDENT, SOUTH BEND LATHE

Mr. BOULIS. I am Dick Boulis, chairman and president of South Bend Lathe and this is Jerry Vogel. Jerry is one of our skilled machinists. He is vice president of our Union, Local 1722 of the Steelworkers, and he is a member of the board of directors.

I think it is important to note, at the outset, that Jerry is not here representing the United Steelworkers of America, but representing our local and our employees.

I would like to say, Mr. Chairman and Senators, that I apologize for not having submitted written testimony in advance. Unfortunately, I have been on a 2-week vacation. I was up in the north woods, fishing. I was not aware of the requirements until I returned to the office Monday. But I will certainly submit it following my return.

Let me give you a little background about our company, because we are quite unique. I would assume that most of you people are aware of us, since we have had volumes of publicity in the past 3 yearsprobably 75 to 100 articles have been written about what has happened in South Bend, including articles in the Wall Street Journal, Business Week, Newsweek, and many, many others.

But to give you that background, South Bend Lathe is a producer of machine tools. Initially, it was world famous for the production of small lathes. It was founded in 1906 in South Bend, Ind.

In 1959, the company was acquired by Amsted Industries, Chicago, and along about the late sixties or early seventies Amsted became disenchanted with South Bend Lathe, due to the profit performance, and

in late 1974, I was advised that the division would be sold if a buyer could be found. I was not too concerned at this news, because I felt that a buyer would be found. Since they had told me that they were not going to sell it at a bargain price, I felt the operation would be continued.

Unfortunately, in early 1975, I was advised that the company would be sold at substantially less than book value, and it appeared that the prospective purchaser would quite evidently liquidate the division and put some 500 employees on the streets of South Bend.

At this point, I started searching for a way to buy the company. I have no private funds myself. I could not do it. I tried to get our distributors together, I talked to many of our employees, and it looked like we were about to strike out.

Along about this time, a friend of mine in South Bend, the president of a local foundry, asked me if I had ever heard of ESOP. Frankly, I had not, but in a matter of 3 or 4 days, I had become somewhat conversant with employee stock ownership plans and the benefit that you could gain from it. I commenced working with John Gibson of the Chicago Office of the Economic Development Administration, a local bank, and many other people who are too numerous to give credit to at this time, but I thank all of them for their efforts. As a result of these efforts, in a matter of about 3 months, we put the deal together and on July 3, 1975, we acquired our division from Amsted Industries and established a 100-percent employee stockownership plan whereby our employees immediately became the beneficial owners of South Bend Lathe.

This acquisition was accomplished by a $5 million grant from the Economic Development Administration to the city of South Bend. This grant then flowed through our employee stockownership trust and was loaned to the new corporation at 3-percent interest repayable over 25 years. Well, some people have said-well, 3-percent interest; that was some gift. But you have to remember that we were really not a financeable company at that time, and this $5 million was not all that was required. We had to go out and borrow another $5 million. We raised that through conventional financing sources, not at 3 percent, but a major portion of it was at 7 points over prime.

So our average rate that we had to pay to acquire the company was more than normal.

From a financial point of view, our employee stockownership has been a resounding success, and I would like to give you just a brief summary of the financial position of our company at the end of the current fiscal year, which just ended June 30.

We have had 3 profitable years after a series of unsatisfactory years under Amsted. Profits have improved each year, and for the year just ended, the profits were approximately 10 percent before taxes.

Sales were slightly depressed during our first year, due to the unfortunate rumors that many of our competitors had been passing in the marketplace that we were about to be closed, and also due to the general economic conditions, but since then, our sales have steadily increased and, in fiscal 1977 and 1978, they were higher than any prior years in South Bend's history, dating back to 1906.

Sales for the year just ended was $18.5 million which represented a 34-percent increase over the first fiscal year.

We started off completely in debt-we simply had nothing to start with, except the debt that we leveraged-but we worked hard at it, and we presently have no bank debt whatsoever. We paid off all of our bank loans and the total commercial debt which was approximately $4.5 million. That was completely paid off in May 1977, and I may remind you, that was only 22 months after we had started our operations. Our current banking arrangements provide for a $3 million line of credit, should we need the funds, at the national prime rate of interest. We are not using this line of credit, at all. We have a quite liquid position. I think we currently have around $600,000 or $700,000 in cash or short-term investments.

Our current ratio has steadily improved and, at June 30, was 3.2 to 1. Earnings per share have increased from $20.30 the first year to $52.24 the second year and $69.48 in the third year.

I think it is important to note that these financial accomplishments were not achieved at the expense of our employee stockholders. Since we acquired our company, our employee's earnings have steadily increased and for the fiscal year just ended averaged over $15,000 a year. With the general increase to be put into effect on August 1, our average employee's earnings will have increased by 45 percent since our ESOP was established and since we acquired the company.

Of course, these increases included bonuses that we have distributed. Since acquiring the company, we have distributed seven bonuses, the last six of which were equal to a week's pay. Three of these were distributed in this past fiscal year.

The maximum tax-deductible contribution of 15 percent was made to our ESOP for each of these 3 years, and our employee stockowners will now have an average of $6,000 in company stock, credited to their ESOP account.

From our analysis of statistics in our industry, it appears that our contribution to our employee stockownership plan is approximately twice the average contribution to pension plans for companies in our industry. We do not have a conventional pension plan or retirement plan at South Bend Lathe. Unfortunately, when we acquired our company, it did not appear that we could be financially successful if we had to assume the costs and legal liabilities for the pension plans in effect at that time.

All of our employees were aware of this and agreed to work for the new corporation for an employee stockownership plan in lieu of the pension plan in existence at that time.

In terms of employee motivation, our productivity increased very, very substantially in all areas of our company for the first several months after the acquisition. Unfortunately, the fact that our people had agreed to work for an employee stockownership plan rather than the previous pension plan created problems with the International Steelworkers that still have not been resolved. There is a suit pending in Federal court that has been pending there for 2 years wherein the steelworkers are attempting to have us named as the successor to Amsted which, in reality, means we would have to assume the pension liabilities and reinstate the pension plan that was in effect at that time. This obviously has taken the edge somewhat off our success. Our employees spend time talking about this and they wonder which way to bounce. But regardless of that, our productivity under ESOP is

still significantly better than under the prior ownership, and we thank employee stockownership for that.

We have not established a TRASOP at our company because of the relatively low level of equipment purchases and the costs involved to make these distributions.

We have accomplished a lot in South Bend. The job is not yet finished. We still have many things that have to be done in order that each of our employee stockowners can be secure, but we are confident. Thanks to ESOP, we believe that we have a bright future.

Now, we do not profess to be experts in the economic theories of ESOP. As I said earlier in my testimony, in early 1975 when a friend told me, about ESOP I did not know what it was, and I had to start reading on it. I am still not an economic expert on ESOP. But it works. It works in our company.

There definitely is a better rapport, better morale; regardless of the problems that we have had with the Steelworkers, we get along better.

I think one reason why I personally support employee stock ownership is I am concerned about the decline of the American industry that is facing our country. At one time, and for many, many years, America led the world in the production of machine tools. We no longer do. We have been replaced by West Germany and Japan. Much of that has to be attributed to a decline in productivity.

Now, there are some experts that say productivity in America is increasing. I do not profess to have all of the answers, and I am sure that depending on how you define productivity it probably is. With more sophisticated machines, sophisticated materials, sophisticated methods and tools, the tool output per employee no doubt is increasing. But, from my observations, in our industry, the factories that I visit, and the factories that I visit abroad, the American work ethic is. not what it used to be, especially with the people entering the labor market.

And we think that employee stockownership is the answer. We really sincerely believe that this is a way to revitalize American industry and to put us back on top of the heap, if you will.

And, Senator, we thank you for the opportunity to visit with you today.

The CHAIRMAN. Mr. Boulis, what was your relationship to the company, or your position with the company, when you were first told that South Bend would be closed.

Mr. BOULIS. I was president. I was head of South Bend Lathe. I was transferred there from another Amsted entity in 1969 to take over the division and I was president of the operation.

The CHAIRMAN. Did the employees take a pay cut to get this thing started or not?

Mr. BOULIS. No, they did not. What the employees did do, and this was-I had mass meetings with the employees to advise them of what was going on. The employees did have to give up their pensions. We did not see any way that we could be financially successful if we continued the pension plans that were in effect at that time. Except for that, all other benefits were continued-and increased, in fact. The CHAIRMAN. Are you a former union member?

Mr. BOULIS. Well, I have to explain that a bit. Yes. I come from a town in Michigan, near Flint. It was raised there in the depression.

As you were well aware, that was somewhat of a hotbed of the UAW-CIO.

I come from a union family, and at one point in my career I worked in a factory in my hometown and participated in the organization of the plant by UAW-CIO and went or led the people in my department out on strike to get better wages and benefits. So yes, I belonged to the union, and I believed in the union. I still do to a degree. The CHAIRMAN. You may know that I was the one who went to Mr. Mizell and urged him to make a grant to help get this operation going, to help your people save their jobs, and I have followed what you have done with great interest. Now, in situations of that sort, businesses failing and the potential of a tremendous employee interest might save it, it would seem to me that we ought to have a chance to see what employee stockownership can do in terms of motivation, and yours, of course, is a prime example.

Now, unions are interested in the jobs of their people. I regret to say that they do not have as much enthusiasm for employee stockownership as they do about pension plans.

Could you just give me your thought, and this committee your thought, as to how you would hope the union would react to employee stockownership?

Mr. BOULIS. Well, that, of course, has been one of our problems. Some of that I have to take the blame for. Before we bought the company I did not talk to the international. I kept our local advised every step of the way. I was somewhat ignorant of the fact that I should be talking to the international.

But I would hope that they would join us. I would hope that the big unions would get behind employee stockownership.

Frankly, Mr. Chairman and Senators, I am not sure of why they do not. You asked the question of did I ever belong to the union; yes, I did and my father did. I have to say-and this is my opinion-I have to say that maybe the present union leaders do not have the same goals that Samuel Gompers and other people who started the labor movement did.

I always thought that unions were to raise the standard of living for the employees and give them more benefits. Employee stockownership certainly has done that in our company. There is no question that our people are far, far ahead of what they were before, and yet I have to say that the Steelworkers still have not embraced our employee stockownership plan.

I do not have the answer as to why. I can only give my opinion. The CHAIRMAN. Thank you very much.

Mr. Byrd?

Senator BYRD. I have no questions.

The CHAIRMAN. Senator Packwood?

Senator PACKW004. I have no questions.

The CHAIRMAN. Mr. Gravel?

Senator GRAVEL. Mr. Chairman, I will not take the time of the committee. I will ask Mr. Boulis if he would have the time this afternoon to meet with me privately. I would like to go into some depth as to the financial structures involved.

Mr. BOULIS. Certainly.

Senator GRAVEL. Will you still be here at 5 o'clock?