EMPLOYEES STOCK OWNERSHIP PLANS

TUESDAY, FEBRUARY 27, 1979

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON ECONOMIC STABILIZATION,

COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS,

Washington, D.C.

The subcommittee met at 10:05, in room 2128 of the Rayburn House Office Building; Hon. William S. Moorhead (chairman of the subcommittee), presiding.

Present: Representatives Moorhead, Blanchard, Lundine, D'Amours, Oakar, Kelly, Green, Shumway, Hinson, and Paul.

Also present: Representatives Peter H. Kostmayer of Pennsylvania and Matthew F. McHugh of New York.

Chairman MOORHEAD. The Subcommittee on Economic Stabilization will please come to order.

This morning's subcommittee hearing is for the purpose of learning about employee-owned companies and particularly about companies which would have shut down had the employees not purchased them and kept them operating.

Members will recollect that our colleague, Congressman Stanley N. Lundine, cosponsored a bill in the last Congress along with Congressmen Kostmayer and McHugh-the Voluntary Job Preservation and Community Stabilization Act. The bill would have provided Federal loan assistance for employee groups or employee-community groups to purchase economically viable businesses which would otherwise close. The primary purpose of such assistance, of course, is to preserve jobs.

Our colleagues have reintroduced their bill again in this Congress, H.R. 2203, and it has been referred to this subcommittee.

While the subcommittee was not able to consider the legislation in the last Congress, we did hold an informal 1-day hearing in Jamestown, N.Y., in November. At that session we heard from a number of individuals in New York State who had firsthand experience-some successfully, others unsuccessfully-in employee purchase attempts. [The proceedings of the hearing of November 20, 1978, in Jamestown, N.Y., may be found in the appendix.]

The purpose of our session today is to add to this case history information from employee-owned companies in other parts of the country. Hopefully, we will be able to hold hearings on the legislation itself later in the Congress. The testimony of our witnesses this morning, together with the November testimony, will be most useful to us in considering the legislation.

(1)

Our witnesses this morning are individuals who have been closely associated with various aspects of employee purchased companies.

I hope they will not only share their experiences with us, but also give us their views on what some of the factors are which contribute to the success or failure of these types of ventures.

Before introducing our first witness, I would call on other members who wish to make opening statements.

Mr. Lundine.

Mr. LUNDINE. Thank you, Mr. Chairman. And I thank the chairman for scheduling this hearing at a time of year when this subcommittee and others have a great deal of business.

I believe that the idea of employee participation in reorganized private-sector enterprises has great potential for economic stabilization in this country in certain situations. The only way we are going to really learn how to craft a Federal approach which will not falsely encourage those employees whose companies are not able to be saved and at the same time give the proper support to those enterprises which can be rescued is by looking into these cases we have in some detail.

I thank the chairman for his courtesy, also, in permitting my colleagues, the cosponsors of this bill, Mr. Kostmayer and Mr. McHugh, to sit in on this hearing. I guess it was 212 or 12 years ago, up in Ithaca, we met with some professors and other experts to explore the possibility of legislation to assist employee-owned businesses. At least I recall that it was a nice day in Ithaca, and you don't get many of those other than in the summertime, so it must have been 111⁄2 years ago, anyway. And we have been working hard on this matter ever

since.

And so, I appreciate their cooperation and collaboration in this effort as well as your courtesy in focusing the attention of the subcommittee on this subject.

And I have a written statement that I would like to ask unanimous consent to be introduced in the record at this point.

Chairman MOORHEAD. Without objection, it is so ordered. [The statement of Congressman Lundine follows:]

STATEMENT OF HON. STANLEY N. LUNDINE

I welcome this opportunity to examine in depth the experience of the South Bend Lathe Company and the Vermont Asbestos Group-two most important examples of firms that were purchased by their employees to avert liquidation.

From my own observations of employee-owned companies, I consider this approach a promising alternative. Loss of industry, as we all know, can be devastating to a community: the personal hardship and economic dislocation can last for years. Moreover, decisions to close down or relocate a plant do not automatically mean the enterprise could not be operated profitably.

Under such circumstances, employee ownership offers a practical way to retain jobs and industrial activity in threatened local areas. These arrangements, in addition, can significantly improve business performance by giving workers a clear stake in the financial success of their companies.

Along with my colleagues Peter Kostmayer and Matthew McHugh, I have introduced legislation intended to enable interested groups of employee and community investors to purchase firms that would otherwise close down. It would establish a special program in the Department of Commerce to make loans for this purpose, beginning on a small scale with $100 million in loan. authority. Last year the three of us introduced an identical bill, which 70 Members of the House cosponsored.

Last November, a field hearing was held under the auspices of the subcommittee to explore the experiences of several employee-owned firms in upstate New York. In some cases, employee ownership resulted in dramatic improvements in profits and productivity, reversing the previous performance patterns. We also heard accounts of unsuccessful attempts by employee groups to purchase companies on the verge of closing and examined the setbacks they encountered. I would like, at this point, to ask unanimous consent that the proceedings from that hearing be included with today's proceedings as part of the record.

By looking at actual cases, we can gain a fuller understanding of both the achievements and problems experienced by employee-owned enterprises. Analysis of the difficulties involved in obtaining financing, dealing with technical and legal requirements, and, of course, operating the new business should be particularly relevant to our efforts to design appropriate Federal assistance. I look forward to the testimony of today's witnesses and greatly appreciate their participation in this hearing.

Chairman MOORHEAD. And without objection, the Chair will first welcome the gentleman from Pennsylvania, Congressman Peter H. Kostmayer, and the gentleman from New York, Congressman Matthew F. McHugh.

And without objection, I would recognize the gentleman from Pennsylvania first, for an opening statement if he would care to make one. Mr. KOSTMAYER. Mr. Chairman, I would just like to very briefly thank you for the opportunity of serving temporarily on your subcommittee, and I appreciate being around to sit in.

Chairman MOORHEAD. Mr. McHugh.

Mr. MCHUGH. Mr. Chairman, I would like echo the thanks of my colleagues for this opportunity. Clearly, we think this is an important initiative in terms of trying to preserve jobs and the tax base in all parts of our country, but we in the Northeast have been burdened particularly by this experience of losing our plants and jobs, and the weakening of our tax base. So, as I said, we are very grateful to you for taking the initiative in having these hearings, which we hope will lead to enactment of legislation, if not exactly like our own, at least similar to it.

Chairman MOORHEAD. Before yielding further, I would just like to get some business out of the way.

I would ask unanimous consent that the proceedings of the November hearing in Jamestown be made a part of today's record, because it is the same subject matter.

And, without objection, so ordered.

[The proceedings of the hearing of November 20, 1978, in Jamestown, N.Y., may be found in the appendix.]

Chairman MOORHEAD. Mr. Kelly, do you have any opening remarks you would like to make?

Mr. KELLY. Thank you, Mr. Chairman.

Mr. Chairman, I think that the suggested legislation in this inquiry is a pretty good example of what is the matter with the economy right now. Instead of going to the source of the trouble-that is, high utility costs, high tax costs, the high cost of regulation, the uncertainty of regulation, and all of the causes for business failure, especially in the Northeast-we are now going to come along and have another Government program to try and have the Government give a little more salvation to the private sector when the private sector can't afford or stand the salvation they are already getting from the Government.

And I think that it certainly will behoove this subcommittee and the Congress and the Nation to look with a great deal of suspicion upon new programs at a time when we are not even paying for and have accumulated an enormous debt for the programs we have enacted in the past, most of which were not calculated to be much better than the the one that we are dealing with now.

Chairman MOORHEAD. Mr. Green.

Mr. GREEN. I have nothing, Mr. Chairman.
Chairman MOORHEAD. Mr. Shumway.

Mr. SHUMWAY. I have no opening statement, Mr. Chairman. Chairman MOORHEAD. Then we will proceed. The subcommittee will hear first from J. R. Boulis, chairman and president of the South Bend Lathe Co., of South Bend, Ind.; and then from John Deak, who is president of Local 1722 of the United Steelworkers, and who was on the original board of directors of the South Bend Lathe Co. Mr. Boulis, would you open up, sir.

STATEMENT OF J. R. BOULIS, CHAIRMAN AND PRESIDENT, SOUTH BEND LATHE COMPANY; ACCOMPANIED BY JOHN DEAK, PRESIDENT, LOCAL 1722, UNITED STEELWORKERS

Mr. BOULIS. Thank you, Mr. Chairman.

I am Dick Boulis, chairman and president of South Bend Lathe Co., and this is John Deak, of our company. Mr. Deak is one of our leading and better production electricians and a troubleshooter when our machines don't run properly. Mr. Deak is also president of our union, Local 1722 of the United Steelworkers, and was a member of our board of directors. He is also a member of the ESOP Committee.

Mr. Chairman and gentlemen, we want to thank you for inviting us today. We feel we have benefited in South Bend as a result of the grant which the Federal Government gave to the city of South Bend, and we are more than pleased to come in and tell our story and, hopefully, assist other people that also need help.

Mr. Deak has a few comments of his own to make when I am finished, and you can be sure that if he doesn't agree with my comments-John is his own man-and he will say so.

It is important to note that Mr. Deak is not here representing the International Steelworkers, he is here representing Local 1722 of South Bend, Ind.

Let me now give you a little background about South Bend Lathe, though, because we are quite unique. However, I would assume that most of you have seen some of the many articles that have been written about us in the past 3 years. There have been at least 75 articles about what has happened in our company, including articles in the Wall Street Journal, Business Week, Newsweek, and many other leading publications.

Attached to the comments that you have is an article which appeared in the September 21, 1978, issue of our South Bend Tribune, which outlined the position at the close of our third fiscal year. [The article referred to may be found at the end of Mr. Boulis' oral statement.]

South Bend Lathe is a producer of machine tools and was founded at South Bend, Ind., in 1906. In 1959 Amsted Industries, of Chicago,

acquired South Bend Lathe, but in the early 1970's Amsted became disenchanted with our performance. In late 1974 I was informed that the division would be sold if they could find a buyer. I was advised that 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 and I believed that we could make it a success.

However, in early 1975 it became apparent that South Bend would be sold at substantially less than book value, and it also appeared evident that the prospective purchaser would quite likely liquidate our company and close the doors, which would have put about 500 people on the streets of South Bend.

At this point I started searching for a way to buy the company. I discussed it with several of our distributors, members of my staff, Mr. Deak here. But since we were not wealthy people, there wasn't any way we could finance such an acquisition, and it looked like we were about to strike out.

About this time a friend of mine in South Bend, the president of a local foundry, one of our bigger suppliers, asked me if I had ever heard of ESOP. Frankly, I hadn't. But in a matter of 3 or 4 days I became conversant with employee stock ownership plans and the benefits that could be gained.

I then commenced working with John Gibson of the Chicago office of the EDA and a local bank and many other people who are too numerous to give credit to at this time, but I thank them all 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 stock ownership plan, whereby our employees immediately became the beneficial owners of South Bend Lathe.

This acquisition was accomplished by a $5 million grant from EDA to the city of South Bend who then loaned this to our ESOP at 3percent interest repayable over 25 years. An additional amount of approximately $5 million was required, and this was provided by conventional financing sources. And, gentlemen, this wasn't 3 percent. A major portion of this we had to pay seven points over prime for it, and that is not easy to do.

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 third fiscal year, which ended on June 30, 1978.

We have had 3 profitable years, and each one being better than the previous one, after a string of unsatisfactory years as a division of Amsted. Profits have improved each year; and for the fiscal year just ended, the profit before taxes was almost 10 percent of sales. Sales were slightly depressed during our first year due to the general economic conditions at the time and due to rumors that had circulated in the marketplace for several months concerning the possible closing of South Bend Lathe. But since then our sales have steadily increased and fiscal 1977 and 1978 were higher than any prior year in SBL's history dating back to 1906. Sales for the year just ended were approximately $1812 million, or a 34-percent increase over our first year.