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 $18 million, or a 34-percent increase over our first year.

We started off completely in debt-and I mean "completely." We simply had nothing to go with except the debt that we leveraged. But we worked hard at it, and we presently have no commercial debt whatsoever. We paid off all of our bank loans and the total commercial debt which was approximately $42 million. That was completely paid off in May 1977, and I may remind you that was only 22 months after we commenced.

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 liquid position. I believe currently we have around $2 million or $2.3 million in cash or short-term investments. Our current ratio has steadily improved and at June 30 was 3.2:1 and as of the end of January it was 3.7:1. Earnings per share have increased from $20.30 our first year to $42.24 the second year to $69.48 for the third year that has just ended. I think it's important to note that these financial accomplishments 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, for the fiscal year ending June 30, 1978, averaged over $15,000 per year. The average earnings of our employees have increased by about 45 percent since our employee stock ownership plan was established and since we have acquired the company. Of course, these increases include bonuses we have distributed. Since acquiring the company, we have distributed eight bonus checks to our employees. The first was for $50; the next six were equal to a week's pay; and this past Christmas all of our employees received a check equivalent to 12 weeks' pay.

The maximum tax-deductible contribution of 15 percent was made to our ESOP for each of these 3 years, and our employee stockowners now have an average of $6,500 in company stock credited to their

account.

From our analysis of statistics in our industry, it appears that our contribution to our ESOP 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 this time. Unfortunately, when we acquired our company, it did not appear that we could be financially successful if we had to assume the cost and legal liabilities for the pension plans. All of our employees were aware of this and agreed to work for the new corporation for an ESOP in lieu of the pension plan in existence.

In terms of employee motivation, our productivity increased very, very substantially in all areas of our company for the first several months after the acqusition.

Unfortunately, the fact that our people had agreed to work for an ESOP 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 about 3 years, wherein the Steelworkers are attempting to have us named as the successor to Amsted, which, in reality, means that we would have to assume the pension liabilities and reinstate the pension plan that was in effect.

This obviously has taken the edge off our success somewhat. Our employees spend a certain amount of time talking about this, and they wonder which way the ball is going to bounce.

But regardless of that, our productivity under ESOP is still significantly better than under the prior ownership, and we thank the employee stock ownership for that. We have accomplished a lot at South Bend in 3 years, but the job is not finished. We still have many things to do that must be accomplished in order that the future of our employee stockholders can be reasonably secure.

However, we are confident that we will solve the problems that are still plaguing us and that the future of our ESOP is bright.

One of the things Mr. Deak and I were talking about outside the room just this morning is the fact that we have been so doggone busy we haven't really had the time to sit down and put together the necessary network of communications to make sure that our employees really feel they have got a piece of the action. That is something we have got to do even if we have to hire somebody from the outside and show us how to do it. We don't profess to be experts in economic theories of ESOP. If any of you ask me any questions, you will probably recognize that very readily.

But, 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 we started reading about it. I am still not an expert, but it works. At least, it works at South Bend Lathe. 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 American industry that is facing our country. At one time and for many, many years, America led the world in production of machine tools. We no longer do. We have been replaced by West Germany and Japan, and, as I understand it, Russia is getting very close. Much of that has to be attributed to a decline in productivity.

It is easy for us to talk about that, but let us not forget that machine tools are behind everything in this country. Without machine tools, you have nothing. Everything-you look around in this room-was built by machine tools. There are some experts that say productivity in America is increasing. I don't profess to have the answer to that. I am sure that depending upon 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 observation in our industry and the factories that I visit and our own factory, 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 currently.

We don't have all the answers at South Bend, but we are working at it. We have come a long way in the past 3 years, and if we ever get rid of the one main problem that has been plaguing us the suit pending in Federal court-we are confident we will break out into the open and be extremely successful. And we think that employee stockownership is the answer. We sincerely believe that this is the way to

revitalize American industry and to put us back on top of the heap, if you will.

Several times since the Federal grant of $5 million was made to the city of South Bend in the spring of 1975, I have heard comments that that was a "gift" and smacked of socialism and communism. In my opinion, people making comments such as this simply don't know the facts. And, gentlemen, I am not a wild-eyed liberal. I consider myself quite conservative in my business, my personal life, and in my politics. The fact is that as a result of this grant, the commercial financing which we secured and the efforts of all the people at South Bend Lathe, we have kept our employees gainfully employed with a good level of annual income.

I don't have the calculations here with me today, but we have made the calculations of the costs and the various governmental agencies would have incurred if our 500 employees had been terminated in 1975.

Also, of course, we at SBL have paid over $3 million in taxes to various governmental units in the past 3 years, not including the personal income tax of our employees. During the 3 years ending June 30, we spent approximately $7 million in the South Bend area for material, services, and supplies, an additional $13 million outside the South Bend area.

There was a small company in South Bend who had received an SBA loan that was about to fold up. We acquired them, kept their doors open, and currently there are 15 to 20 people gainfully employed. As I have said before during this presentation, I don't profess to be an economic expert, but I certainly cannot understand why people elected to serve us here in Washington would prefer to give our money away-the taxpayers' money-in nonproductive areas, rather than assisting to maintain and further develop the base from which all capital is generated. And the base I am speaking about is American industry. Even with the success that we have achieved at SBL, I have heard that under the current rules existing at the EDA the grant to the city of South Bend could not have been made.

Now, based upon our achievement, in retrospect that seems rather strange. I sincerely hope you would pass legislation making lowcost capital available to encourage and enable other companies to establish employee stock ownership plans, but, of course, with the proper restraints to make sure there is minimal failure.

No, I say "make low-cost capital available"; I don't say "make gifts." An interesting sidelight: When I came to Washington back in February of 1975 to see if I could raise the money, I wasn't coming looking for a gift: I came looking for a loan. The story I was told by the person I discussed it with in the Commerce Department was: "Gentlemen, we can't loan it to you, but we can give it to the city of South Bend." And this is how this came about.

Now, I don't know how these things work out, but I do know that we have got a lot of people in this country who would like to have a piece of the action, and why shouldn't the working man and the working girl and the clerk and the executive, why shouldn't they enjoy the efforts of their work instead of having it go to big conglomerates or big insurance companies or whoever owns the bulk of American industry.

Thank you, gentlemen, for inviting Mr. Deak and I to testify. We certainly appreciate the efforts to encourage the establishment of ESOP's. And we at SBL are especially appreciative and grateful for the Federal grant of $5 million that was made to the city of South Bend.

Thank you.

Chairman MOORHEAD. Thank you, Mr. Boulis.

And, without objection, the newspaper article that you referred to earlier in your statement will be made a part of the record. [The article referred to follows:]

[From The South Bend Tribune, September 21, 1978]

S.B. LATHE KEEPS GROWING

Employe-owned South Bend Lathe had a third year of spectacular financial growth during fiscal 1978, officials of the company announced this morning.

The annual financial reports being mailed today to South Bend Lathe's 100 employes included the news that the workers' stock allocations now total more than $1 million following the third year under a federally-sponsored employe stock ownership program.

Sales during the fiscal year that ended on June 30 were $19 million, a 20 percent increase compared with a year earlier, J. Richard Boulis, president announced this morning.

Earnings, on a per share basis, were $71 in the 12-month period compared with earnings per share of $42.24 a year earlier and $20.30 in the first year of ESOP. Boulis said this morning that he feels South Bend Lathe's earnings and sales will continue to grow during the current year, but he added, "I'm not sure we can continue to grow at this rate."

Boulis acknowledged that sales of cheaper, imported machine tools are continuing to hurt South Bend Lathe's potential sales, but he noted that the company has been successful in penetrating new markets.

He also said that South Bend Lathe has "a couple of new products still under wraps" that are expected to add to sales.

South Bend Lathe became the nation's first federally sponsored ESOP pany on July 1, 1975, when it decided to continue operating with the aid of a $5 million, government-backed loan after Amsted Industries, owners of the company, announced plans to sell or liquidate South Bend Lathe.

William G. York, South Bend Lathe's vice president of finance, noted that employes' stock holdings averaged $6,500 at the end of the fiscal year, an increase of nearly $3,000 because of the record growth and a new appraisal of the stock value.

South Bend Lathe's stock was appraised recently at $525 per share, a 15 per cent increase.

Boulis said that employes' income has increased 45 per cent during the three years under ESOP.

He noted that three bonuses, each equal to a week's pay, were paid last year and that the current, one-year contract with members of Local 1722, United Steelworkers included an 8.5 per cent wage increase.

Jerry Vogel, vice president of the local and a member of both the board of directors and the ESOP committee, agreed with Boulis' assessment that labor relations are good at the company.

The decision by about 270 members of the local last November to continue to be represented by the steelworkers raised questions about whether workers who owned the company could negotiate with "management."

Vogel said that although the workers decided to continue to be represented by the union. they have no doubt that South Bend Lathe would not exist today without ESOP.

Although the union local has accepted ESOP, Boulis noted that steelworkers officials at the national level continue to describe South Bend Lathe as "a bad experience."