ALLIS CHALMERS CORP, 10-K405, 1999-03-31

ALLIS CHALMERS CORP
10-K405, 1999-03-31
MISC INDUSTRIAL & COMMERCIAL MACHINERY & EQUIPMENT

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FORM 10-K

SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1998

[ ] 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.)

4180 Cherokee Drive, Brookfield, Wisconsin 53045
(Address of principal executive offices) (Zip code)

Registrant's telephone number, including area code (414)781-7155

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Title of each class

Common Stock - $.15 Par Value

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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X

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 March 1, 1999, there were 1,003,028 shares of Common Stock
outstanding.

<PAGE>

1998 FORM 10-K CONTENTS

PART I

Item Page
---- ----
1. Business. 3
2. Properties. 5
3. Legal Proceedings. 5
4. Submission of Matters to a Vote of
Security Holders. 7

PART II
5. Market for Registrant's Common Equity
and Related Stockholder Matters. 8
6. Selected Financial Data. 9
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 10
7A. Quantitative and Qualitative Disclosures about
Market Risk. 14
8. Financial Statements and Supplementary Data. 15
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. 30

PART III
10. Directors and Executive Officers
of the Registrant. 31
11. Executive Compensation. 34
12. Security Ownership of Certain Beneficial
Owners and Management. 35
13. Certain Relationships and Related Transactions. 37

PART IV
14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K. 38

Signatures. 41

<PAGE>

PART I

ITEM 1. BUSINESS.

(a) Development of the Business

GENERAL

Allis-Chalmers Corporation (Allis-Chalmers or the Company) was incorporated in
1913 under Delaware law. The Company sold its major operating businesses in 1988
in accordance with its First Amended and Restated Joint Plan of Reorganization
(Plan of Reorganization) under Chapter 11 of the United States Bankruptcy Code.
The Plan of Reorganization was confirmed by the Bankruptcy Court on October 31,
1988 after acceptance by creditors and shareholders and was consummated on
December 2, 1988. See Item 3. LEGAL PROCEEDINGS for a discussion of such
proceedings.

The Company has its principal executive office in Milwaukee, Wisconsin and it
maintains three wholly-owned subsidiaries. One subsidiary, Houston Dynamic
Service, Inc., operates a machine repair business in Houston, Texas; the other
two subsidiaries, KILnGAS R&D, Inc. and U.S.
Fluidcarbon Inc., are inactive.

On September 22, 1994, the Company sold its B.R.B. Industries division. B.R.B.
Industries, which was acquired by the Company on December 20, 1989 in a purchase
of assets, is a Hoboken, New Jersey manufacturer of molded fabric products
serving the apparel and lingerie markets and the home sewing and notions
industries.

(b) Financial Information About Industry Segments

The Company operates in a single industry segment -- the repair and service of
mechanical rotating equipment for the industrial, utility and governmental
aftermarkets.

The principal business activities of the Company are as follows:

MACHINE REPAIR

Sales of the machine repair business operated by Houston Dynamic Service, Inc.
(HDS), a wholly-owned subsidiary of the Company, were $5,021,000 in 1998,
$4,062,000 in 1997 and $4,060,000 in 1996. The increase in 1998 sales from 1997
and 1996 was primarily the result of strong market conditions coupled with a
more focused marketing strategy and product offering.

HDS services and repairs various types of mechanical equipment, including
compressors (centrifugal, rotary, axial and reciprocating), pumps, turbines,
engines, heat exchangers, centrifuges, rollers, gears, valves, blowers, kilns,
crushers and mills. Services provided include emergency repair, disassembly,
inspection, repair testing, parts duplication, machining, balancing,

<PAGE>

metalizing, milling, grinding, boring, welding, modification, reassembly, field
machining, maintenance, alignment, field service, installation, startup and
training.

HDS employed 41 people on December 31, 1998. It operates out of a facility in
Houston, Texas which was purchased by HDS in 1990. The facility includes a
repair shop and office space.

HDS serves various industrial customers, including those in the petrochemical,
chemical, refinery, utility, waste and waste treatment, minerals processing,
power generation, pulp and paper and irrigation industries.

OTHER DATA

Competition in the Company's machine repair business consists of nine major
original equipment manufacturers (OEM) and numerous smaller independent
competitors. Many of these competitors have special strengths in certain product
areas because of customer preferences for OEM suppliers or because specialized
patented technologies are offered. The principal methods of competition are
price, quality, delivery, customer service and warranty.

The principal raw materials and purchased components used in the machine repair
business are alloy and stainless steels, castings and forgings, aluminum,
copper, gears and other basic materials. Alternative sources of supply exist or
could be developed for all of these raw materials and components. This business
is highly labor intensive.

Some of the Company's products, processes and systems are covered by patents
owned by or licensed to the Company. No particular product, process or system is
dependent on a single fundamental patent, the loss of which would jeopardize the
Company's business. The Company licenses the use of a number of its trademarks,
from which it receives income.

During the past three years, Amoco Chemical was the only customer which
accounted for 10% or more of total Company sales -- Amoco Chemical generated 24%
of 1998 sales, 12% of 1997 sales and 16% of 1996 sales.

Expenditures relating to compliance with federal, state and local environmental
protection laws are not expected to have a material effect on the Company's
capital expenditures, results of operations, financial condition or competitive
position. The Company is not aware of any present statutory requirements
concerning environmental quality that would necessitate capital outlays which
would materially affect the Company. In conjunction with consummation of the
Plan of Reorganization, the Company settled all known environmental claims
asserted by the United States Environmental Protection Agency (EPA) as well as
claims asserted by certain state agencies. However, the EPA and third parties
have claimed that Allis-Chalmers is liable for cleanup costs associated with
certain hazardous waste disposal sites in which products manufactured and sold
by Allis-Chalmers before consummation of the Plan of Reorganization were
ultimately disposed of by others. Since Allis-Chalmers manufactured and sold the
products disposed of in these sites before consummation of the Plan of
Reorganization, Allis-Chalmers has taken the position that all cleanup costs or
other liabilities related to these sites were discharged in the bankruptcy. See
Item 3. LEGAL PROCEEDINGS.

<PAGE>

The Company's employment was 47, 42 and 44 at December 31, 1998, 1997 and 1996,
respectively.

For more detailed information, you should read in their entirety the audited
1998 Consolidated Financial Statements, Notes to Consolidated Financial
Statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations contained elsewhere in this report.

(d) Financial Information About Foreign and
Domestic Operations and Export Sales

The Company has no foreign operations or significant export sales.

ITEM 2. PROPERTIES.

The Company's principal operating facility is a 25,000 square foot repair shop
and office building in Houston, Texas, which is owned by HDS. Allis-Chalmers
leases its administrative offices in Milwaukee, Wisconsin on a short-term basis.
The facilities are considered adequate and suitable for the Company's principal
business.

ITEM 3. LEGAL PROCEEDINGS.

REORGANIZATION PROCEEDINGS UNDER CHAPTER 11
OF THE UNITED STATES BANKRUPTCY CODE

On June 29, 1987, Allis-Chalmers and 17 of its domestic subsidiaries filed
separate voluntary petitions for reorganization under Chapter 11 of the United
States Bankruptcy Code. The Plan of Reorganization was confirmed by the
Bankruptcy Court on October 31, 1988 after acceptance by the Company's creditors
and shareholders, and the Plan of Reorganization was consummated on December 2,
1988.

At confirmation, the Bankruptcy Court approved the establishment of the A-C
Reorganization Trust as the primary vehicle for distributions under the Plan of
Reorganization, two trust funds to service health care and life insurance
programs for retired employees and a trust fund to process and liquidate future
product liability claims. Cash of approximately $400 million and other assets
with a net book value of $38 million were distributed to creditors or
transferred to the trusts, and the trusts assumed responsibility for
substantially all remaining cash distributions to be made to holders of claims
and interests pursuant to the Plan of Reorganization. The Company was thereby
discharged of all debts that arose before confirmation of the Plan of

<PAGE>

Reorganization, and all of its capital stock was canceled and made eligible for
exchange for shares of the reorganized Company.

The Company does not administer any of the aforementioned trusts and retains no
responsibility for the assets transferred to or distributions to be made by such
trusts pursuant to the Plan of Reorganization.

For a description of restrictions on the transfer of the common stock of the
reorganized Company, see Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.

ENVIRONMENTAL PROCEEDINGS

As part of the Plan of Reorganization, the Company made a cash payment of $4.5
million to the EPA in settlement of the EPA's claims for cleanup costs at all
sites where the Company was alleged to have disposed of hazardous waste. The EPA
settlement included both past and future cleanup costs at these sites and
released the Company of liability for claims of contribution or indemnity which
may be asserted by other potentially responsible parties against Allis-Chalmers
in connection with these specific sites.

In addition to the EPA settlement, the Company negotiated settlements of various
environmental claims which had been asserted by certain state environmental
protection agencies. These settlements, totaling approximately $200,000, were
approved by the Bankruptcy Court.

Since consummation of the Plan of Reorganization on December 2, 1988, a number
of parties, including the EPA, have asserted that the Company is responsible for
the cleanup of hazardous waste sites. These assertions have been made only with
respect to the Company's prebankruptcy activities. No claims have been asserted
against the Company involving its postbankruptcy operations.

Before the settlement with the EPA in the bankruptcy proceedings, an attempt was
made by the parties to identify all possible hazardous waste disposal sites and
to settle all liabilities relating to those sites. Notwithstanding the breadth
of the settlement, various EPA regional offices have continued to assert cleanup
claims against Allis-Chalmers with respect to several sites. Apparently, not all
offices of the EPA are aware of the settlement agreement, since at least two of
these claims involve sites with respect to which the EPA specifically agreed not
to sue.

Certain other parties have asserted that the Company is responsible for
environmental cleanup costs or associated EPA fines in connection with
additional sites. In each instance the Company activities complained of occurred
prior to the Company's bankruptcy proceedings and the third parties did not file
proofs of claim in the bankruptcy proceedings. The filing of such proofs of
claim is required by the Bankruptcy Code to effect a claim against a Chapter 11
debtor. A bankruptcy discharge defense has been asserted by the Company in each
instance.
<PAGE>
7

Although the law in this area is still somewhat unsettled, three Federal Courts
of Appeal have held that a debtor can be discharged of environmental cleanup
liabilities related to its prebankruptcy activities. The Company believes it
will prevail in its position that its liability to the EPA and third parties for
prebankruptcy environmental cleanup costs has been fully discharged. 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.

The EPA and certain state agencies also continue to request information in
connection with various waste disposal sites in which products manufactured by
Allis-Chalmers before consummation of the Plan of Reorganization were ultimately
disposed of by other parties. Although the Company has been discharged of
liabilities with respect to hazardous waste sites, it is under a continuing
obligation to provide information with respect to its products to federal and
state agencies. The A-C Reorganization Trust, under its mandate to provide Plan
of Reorganization implementation services to the Company, has responded to these
informational requests because prebankruptcy activities are involved.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not applicable.

<PAGE>

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.

The Plan of Reorganization provided for cancelling the old common stock of
Allis-Chalmers on December 2, 1988 and issuing new common stock of the
reorganized Company (Common Stock) to certain holders of claims and interests,
including holders of old common stock.

After receiving approval of a majority of shareholders of Common Stock, the
Company amended its Amended and Restated Certificate of Incorporation
(Amendment), effective as of July 8, 1992, to effect a 1-for-15 reverse stock
split of the Common Stock pursuant to which each 15 shares of Common Stock, $.01
par value per share, were combined into one share of new Common Stock, $.15 par
value per share. In lieu of the issuance of fractional shares of Common Stock,
the Amendment provided that shareholders owning less than 15 shares of Common
Stock were entitled to receive a cash payment at the rate of $8.85 per share of
Common Stock (equivalent to $0.59 per share of the presplit Common Stock). This
action, decreased the number of outstanding shares of Common Stock to 1,003,596
from 15,164,195 shares immediately prior to the reverse stock split and
decreased the number of shareholders to 7,408 from 17,799 prior to the reverse
stock split. Per share amounts in the accompanying financial statements reflect
the reverse stock split.

The Common Stock is subject to trading restrictions that are set forth in the
Company's Amended and Restated Certificate of Incorporation. The trading
restrictions are designed to maximize the likelihood of preserving the Company's
substantial net operating loss carryforwards. There is no established public
trading market for the Common Stock. It is not certain when or if trading in the
Common Stock will commence or on which registered stock exchange or quotation
system, if any, the Common Stock may eventually be listed or quoted. At the
present time, the Company does not intend to file a listing application to any
registered national stock exchange or Nasdaq for trading or quotation of the
Common Stock.

No dividends were declared or paid during 1998, 1997 or 1996.

<PAGE>

ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>

1998 1997 1996 1995 1994 1.
---- ---- ---- ---- ----
(millions, except per share data)

Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Sales $ 5.0 $ 4.1 $ 4.1 $ 3.2 $ 3.6

Income (loss) from:
Continuing Operations .6 (66.5) (1.7) (1.4) (1.1)
Discontinued Operations - - - - (0.2)
Sale of molded fabric
products division - - - - (2.9)
--------- -------- ------- ------- ----------
Net income (loss) .6 (66.5) (1.7) (1.4) (4.2)

Income (loss) per common share
(Basic and Diluted) from:
Continuing Operations .62 (66.34) (1.72) (1.44) (1.08)
Discontinued Operations - - - - (.23)
Sale of molded fabric
products division - - - - (2.82)
--------- -------- ------- ------- -------
Net income (loss) .62 (66.34) (1.72) (1.44) (4.13)

Statement of Financial
Condition Data:

Total assets 2.6 2.7 3.4 4.1 4.6

Long-term debt classified as:
Current 0.1 0.1 0.1 0.3 -
Long-term 0.2 0.2 0.3 - 0.3

Shareholders' deficit (67.4) (68.0) (13.6) (9.9) (6.9)

1. Reflects the results of operations of the Company's BRB division as a
discontinued operation.

</TABLE>

<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.

This discussion should be read in conjunction with the Consolidated Financial
Statements including the Notes to Consolidated Financial Statements.

Overview

Allis-Chalmers, after emerging from Chapter 11 under the Plan of Reorganization,
entered into an agreement with AL-CH Company, L.P. (Investor) pursuant to which
the Investor agreed to purchase 6.1 million shares (on a prereverse stock split
basis) of Common Stock (40% of the outstanding Common Stock) for $3,750,000 in
cash. The Investor is a limited partnership controlled by Messrs. Robert E.
Nederlander and Leonard Toboroff, two of the Company's directors.

The Company continues its efforts to conserve cash resources. However, the
expenses associated with the ongoing Securities and Exchange Commission and
other governmental reporting as well as legal, accounting and audit, insurance
and costs associated with other corporate requirements of a publicly held
company will continue to make it difficult for the Company, at its present size,
to achieve positive cash flow.

As of the date of the Chapter 11 filings in June 1987, the Company sponsored 19
defined benefit plans providing pensions for substantially all U.S. employees.
The pension plan for U.S. salaried employees was capped and frozen effective
March 31, 1987, so there have been no further benefit accruals after that date.
As a result of divestitures during the Chapter 11 proceedings, eight active
plans were transferred to the buyers of the businesses, leaving the Company as
sponsor of 11 plans, none of which permitted additional benefit accruals.
Effective January 1, 1989, the 11 remaining plans were consolidated into a
single plan, the Allis-Chalmers Consolidated Pension Plan (Consolidated Plan).

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 required 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 during 1996 and 1997. Given the inability of the
Company to fund such obligations with its current 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.

<PAGE>

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
discussions regarding definitive documentation continue with the PBGC on certain
issues contained in a proposed agreement between the Company and the PBGC. The
Company is close to resolving these issues with the PBGC and an agreement
between the Company and the PBGC should be signed in the near future. However,
if a satisfactory agreement cannot be finalized with the PBGC, Allis-Chalmers
will evaluate other alternatives, including a bankruptcy filing. .

The PBGC Agreement is also subject to satisfactory resolution of the Company's
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 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 estimated 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.

The acquisition environment has been unfavorable since the Investor's 1989 cash
contribution to the Company and remained very difficult for the Company during
1998. The problems continued to include the Company's lack of cash for
investment, limited availability of debt financing for acquisitions and the
financial exposure associated with the Consolidated Plan. Therefore, the Company
continues to proceed cautiously with its efforts to identify and evaluate
potential candidates for acquisition.

<PAGE>

Results of Operations

Results of operations for 1998, 1997 and 1996 reflect the sole operation of the
business of Allis-Chalmers: the machine repair business, HDS.

Sales totaled $5.0 million in 1998, compared with $4.1 million in both 1997 and
1996. The increase in sales for 1998 from 1997 and 1996 is primarily the result
of strong market conditions coupled with a more focused marketing strategy and
product offering.

Gross margins, as a percentage of sales, were 29.7%, 25.0% and 26.1% in 1998,
1997 and 1996, respectively.

Marketing and administrative expense was $1.7 million, $1.7 million and $1.4
million in 1998, 1997 and 1996, respectively. Marketing and administrative
expense was 33.6% of sales in 1998 compared with 40.9% in 1997 and 34.8% in
1996. While there were additional costs incurred in 1998 in pursuit of
acquisitions and certain engineering costs at HDS, these costs were offset by a
reduction in 1998 of legal expenses as compared to 1997 (which had nonrecurring
legal expenses associated with the termination of the Consolidated Plan and
related negotiations with the PBGC and IRS). A significant portion of the
Company's administrative expense relates to expenses for Securities and Exchange
Commission and other governmental reporting as well as the legal, accounting and
audit, insurance and other requirements of a publicly held company.

Interest income in each of the years resulted mainly from earnings on short-term
investments. Interest expense primarily relates to a term loan, the proceeds of
which were used to purchase the shop and office building from which HDS operates
and additional financing for capital improvements at HDS.

Pension expense which relates to the recognition of the pension liability
associated with the Consolidated Plan in accordance with Statement of Financial
Accounting Standards No. 87 "Employer's Accounting for Pensions," was $1,397,000
and $1,422,000 in 1997 and 1996, respectively. In 1998 there was no expense as a
result of termination of the Consolidated Plan. The 1997 expense was for a nine
month period as the transfer of the Consolidated Plan to the PBGC took place on
September 30, 1997. The termination of the Consolidated Plan resulted in an
additional $64.5 million pension expense in 1997, including $.9 million for IRS
excise taxes.

The Company had net income of $618,000, or $.62 per common share in 1998,
compared with a net loss of $66,545,000 (including recognition of pension
expense of $65,926,000), or $66.34 per common share, in 1997 and a net loss of
$1,728,000 in 1996. Net income in 1998 included income of $825,000 as a result
of a $900,000 IRS liability settled for $75,000. Pension expense accounted for
$65.73 per common share of the net loss in 1997.

Liquidity and Capital Resources

At December 31, 1998, the Company had cash and short-term investments totaling
$223,000, a decrease from $699,000 at December 31, 1997. This decrease was the
result of acquisition

<PAGE>

expenses in 1998 and expenses associated with the ongoing corporate reporting,
as well as legal, accounting and audit, and insurance expenses. In addition, HDS
had expenditures of $353,000 for capital items.

Trade receivables at December 31, 1998 were $796,000, compared with $683,000 at
December 31, 1997. This increase was primarily the result of increased sales and
certain major projects completed and billed by HDS near the end of the year.

Inventory at December 31, 1998 was $127,000, an increase from $101,000 at year
end 1997.

Net property, plant and equipment at December 31, 1998 was $1,308,000, an
increase from $1,107,000 at December 31, 1997. The Company incurred $353,000 on
capital expenditures during 1998. Approximately $234,000 was invested in
machinery and equipment acquisitions while approximately $119,000 was spent to
improve HDS's facilities (including air conditioning and upgrading its telephone
system). The expenditures for additional or upgrades of machinery and tooling
were necessary to reduce production costs by decreasing downtime and increasing
production efficiency output, helping to position the Company for further growth
through the increased capacity and service capabilities it offers to the
marketplace.

Current maturities of long-term debt at December 31, 1998 were $60,000 compared
with $38,000 at year-end 1997. The increase was due to financing of an air
conditioning system installed at HDS. In addition, there were payments on the
real estate loan refinanced by HDS in August 1996. The proceeds of the original
loan were used in 1990 for the purchase of the land and building in which HDS
operates its business in Houston, Texas. The amount refinanced is required to be
repaid in monthly installments of $3,278 through August 20, 2001, when the
remaining unpaid balance is due. At December 31, 1998, the interest rate on the
note was 10.5%. This rate is subject to adjustments during the term of the note
in accordance with increases or decreases in the prime rate. The note is secured
by the HDS facility (having a net book value of $444,000 at December 31, 1998)
and the Company's guaranty.

The Company's principal sources of cash include earnings from operations and
interest income on short-term investments. The cash requirements needed for the
administrative expenses associated with being a publicly held company are
significant, and management believes that the Company will continue to use a
substantial portion of its cash balances generated by HDS for these purposes in
1999.

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. Such costs include an allocated share of certain expenses for
Company employees, professional fees and certain other administrative expenses.

The 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

<PAGE>

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.

Management considers the Company's only significant application that is year
2000 sensitive to be its accounting system. The Company has received written
assurances from its software provider that the accounting system is year 2000
compliant.

Financial Condition

Shareholders' deficit at December 31, 1998 was $67.4 million. A three-year
comparison of shareholders' deficit follows:

(millions) 1998 1997 1996
---- ---- ----

January 1 $ (68.0) $ (13.6) $ (9.9)
Net income (loss) .6 (66.5) (1.7)
Pension liability adjustment .0 12.1 (2.0)
-------- -------- -------

December 31 $ (67.4) $ (68.0) $ (13.6)
======== ======== =======

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.

None.

<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Index to Consolidated Financial Statements
------------------------------------------

Page
----

Financial Statements:

Report of Independent Accountants 16
Statement of Operations for the Three Years Ended December 31, 1998 17
Statement of Accumulated Deficit for the Three Years Ended
December 31, 1998 17
Statement of Financial Condition at December 31, 1998 and 1997 18
Statement of Cash Flows for the Three Years Ended December 31, 1998 19
Notes to Consolidated Financial Statements 20

Financial Statement Schedule

II Valuation and Qualifying Accounts 40

<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Shareholders of Allis-Chalmers Corporation

In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Allis-Chalmers Corporation and its subsidiaries at December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company's application for
a distress termination of the Allis-Chalmers Consolidated Pension Plan (the
"Consolidated Plan") was approved by the Pension Benefit Guaranty Corporation
("PBGC") on September 30, 1997. At such date, the PBGC became the trustee of the
Consolidated Plan and the Company and its subsidiaries incurred an estimated
liability to the PBGC for unfunded benefit liabilities and accumulated funding
deficiencies totaling approximately $68 million. The Company does not have the
financial resources to fund this liability to the PBGC. This matter raises
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to this matter are described in Note 9 to the
consolidated financial statements. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
March 24, 1999

<PAGE>

STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>

Year Ended December 31 1998 1997 1996
---------------------- ---------- ---------- -----------
(thousands, except per share)

<S> <C> <C> <C>
Sales $ 5,021 $ 4,062 $ 4,060
Cost of sales 3,530 3,048 3,000
----------- ---------- -----------
Gross Margin 1,491 1,014 1,060

Marketing and administrative expense 1,689 1,660 1,413
----------- ---------- -----------

Loss from Operations (198) (646) (353)
Other income (expense)
Interest income 33 54 70
Interest expense (50) (45) (39)
Pension expense (Note 9) - (65,926) (1,422)
Other (Note 9) 833 18 16
----------- ---------- -----------

Net Income (Loss) $ 618 $ (66,545) $ (1,728)
=========== ========== ===========

Net Income (Loss) per Common Share
(Basic and Diluted) $ .62 $ (66.34) $ (1.72)
=========== ========== ===========
<CAPTION>

STATEMENT OF ACCUMULATED DEFICIT

Year Ended December 31 1998 1997 1996
----------------------------- ----------- ---------- -----------
(thousands)

Accumulated deficit beginning of year $ (76,291) $ (9,746) $ (8,018)
Net income (loss) 618 (66,545) (1,728)
----------- ---------- -----------
Accumulated deficit end of year $ (75,673) $ (76,291) $ (9,746)
=========== ========== ===========

The accompanying Notes are an integral part of the Financial Statements.

</TABLE>

<PAGE>

STATEMENT OF FINANCIAL CONDITION

December 31 1998 1997
----------- ---------- -----------
(thousands)

Assets

<S> <C> <C>
Cash and short-term investments $ 223 $ 699
Trade receivables, net (Note 3) 796 683
Inventories, net 127 101
Other current assets 112 121
---------- -----------
Total Current Assets 1,258 1,604

Net property, plant and equipment (Note 4) 1,308 1,107
---------- -----------
Total Assets $ 2,566 $ 2,711
=========== ===========

Liabilities and Shareholders' Deficit

Current maturities of long-term debt $ 60 $ 38
Trade accounts payable 291 219
Accrued employee benefits 155 123
Accrued pension liability (Note 9) 67,901 68,801
Other current liabilities 312 284
---------- -----------
Total Current Liabilities 68,719 69,465

Accrued postretirement benefit obligations (Note 9) 981 990
Long-term debt (Note 6) 232 240

Shareholders' deficit (Note 7)
Common stock ($.15 par value, authorized
2,000,000 shares, outstanding 1,003,028
at December 31, 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) (75,673) (76,291)
---------- -----------

Total Shareholders' Deficit (67,366) (67,984)
Commitments and contingent liabilities (Note 10)
---------- -----------
Total Liabilities and Shareholders'
Deficit $ 2,566 $ 2,711
=========== ===========

The accompanying Notes are an integral part of the Financial Statements.
</TABLE>

<PAGE>

STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>

Year Ended December 31 1998 1997 1996
---------------------- ---------- ---------- -----------
(thousands)

Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) $ 618 $ (66,545) $ (1,728)
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Depreciation and amortization 149 131 92
Changes in working capital:
(Increase) decrease in receivables, net (113) (31) 241
(Increase) decrease in inventories (26) (8) 35
Decrease in other current assets 9 15 106
Increase in trade accounts payable 72 137 9
Increase (decrease) in other current
liabilities 60 (135) (137)
(Decrease) increase in accrued pension
liability (900) 65,926 1,217
Other (9) (3) (27)
----------- ---------- -----------
Net cash used by operating activities (140) (513) (192)

Cash flows from investing activities:
Capital expenditures (353) (304) (127)
Proceeds from sale of excess equipment 3 3 5
----------- ---------- -----------
Net cash used by investing activities (350) (301) (122)

Cash flows from financing activities:
Net proceeds from issuance of long-term debt 66 - 311
Payment of long-term debt (52) (55) (310)
----------- ---------- -----------
Net cash provided (used) by financing
activities 14 (55) 1
----------- ---------- -----------

Net decrease in cash and short-term
investments (476) (869) (313)

Cash and short-term investments at
beginning of year 699 1,568 1,881
----------- ---------- -----------

Cash and short-term investments at end of year $ 223 $ 699 $ 1,568
=========== ========== ===========

Supplemental information - interest paid $ 50 $ 45 $ 39
=========== ========== ===========

The accompanying Notes are an integral part of the Financial Statements.
</TABLE>

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. EMERGENCE FROM CHAPTER 11

Allis-Chalmers Corporation (Allis-Chalmers or the Company) emerged from Chapter
11 proceedings on October 31, 1988 under a plan of reorganization which was
consummated on December 2, 1988. The Company was thereby discharged of all debts
that arose before confirmation of its First Amended and Restated Joint Plan of
Reorganization (Plan of Reorganization), and all of its capital stock was
cancelled and made eligible for exchange for shares of common stock of the
reorganized Company (Common Stock).

Claims asserted against the Company and allowed by the Bankruptcy Court beyond
those recorded prior to the consummation date amounted to approximately $483
million. Such amounts were subsequently recorded by the Company in 1988. Because
total recorded liabilities discharged at consummation exceeded the book value of
assets and Common Stock distributed to creditors and the various trusts at that
date, extraordinary income of $388.1 million was recorded.

See the Plan of Reorganization and the First Amended Disclosure Statement dated
September 14, 1988 for additional information regarding distributions to holders
of claims and interests.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Allis-Chalmers through its wholly-owned subsidiary, Houston Dynamic Service,
Inc., services and repairs various types of mechanical equipment, including
compressors, pumps, turbines, engines, heat exchangers, centrifuges, rollers,
gears, valves, blowers, kilns, crushers and mills.

Principles of Consolidation

The consolidated financial statements include the accounts of Allis-Chalmers and
its subsidiaries. All significant intercompany transactions have been
eliminated.

Short-Term Investments

Short-term investments consist primarily of government repurchase agreements and
commercial paper with original maturities at date of purchase less than three
months.

Fair Value of Financial Instruments

The carrying amounts in the Statement of Financial Condition for cash and
short-term investments, trade receivables and long-term debt approximate their
fair market value.

<PAGE>

Inventories

Inventories are stated at the lower of cost, determined by the first-in,
first-out method, or market.

Properties and Depreciation

Plant and equipment used in the business are stated at cost and depreciated on
the straight-line basis over the estimated useful lives of the assets which
generally range from 40 years for buildings, 3 to 12 years for machinery and
equipment and 3 to 12 years for tools, patterns, furniture and fixtures.
Maintenance and repairs are expensed as incurred. Expenditures which
significantly increase asset values or extend useful lives are capitalized.

Income Taxes

Deferred income taxes are determined on the liability method in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109. See Note 5. Income
Taxes.

Income (Loss) Per Common Share

In February, 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings Per Share." This statement establishes revised standards for
computing and presenting earnings per share and was adopted by the Company
during the fourth quarter of 1997. Given the fact that the Company did not have
any common stock equivalents over the past several years, its income (loss) per
common share remain unchanged as basic and diluted per share amounts are
identical. As such, the adoption of this statement did not impact the
historically reported income (loss) per common share amounts.

Statement of Cash Flows

For purposes of the Statement of Cash Flows, the Company considers all highly
liquid debt instruments with a maturity of three months or less at date of
purchase to be cash equivalents.

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Major Customers

In 1998, 1997 and 1996 Amoco Chemical was the only customer which accounted for
10% or more of total sales -- 24% of 1998 sales, 12% of 1997 sales and 16% in
1996.

<PAGE>

22
<TABLE>
<CAPTION>

NOTE 3. RECEIVABLES

December 31 1998 1997
-------------- ----------- -----------
(thousands)
<S> <C> <C>
Trade accounts receivable $ 817 $ 719
Allowance for doubtful receivables (21) (36)
----------- -----------
$ 796 $ 683
=========== ===========

NOTE 4. PROPERTY, PLANT AND EQUIPMENT

December 31 1998 1997
-------------- ----------- -----------
(thousands)
<S> <C> <C>
Land and buildings $ 545 $ 545
Machinery and equipment 1,606 1,426
Tools, patterns, furniture, fixtures
and leasehold improvements 752 582
----------- -----------
2,903 2,553
Accumulated depreciation (1,595) (1,446)
----------- -----------
$ 1,308 $ 1,107
=========== ===========
</TABLE>

NOTE 5. INCOME TAXES

Temporary differences are differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements that will
result in differences between income for tax purposes and income for financial
statement purposes in future years. A valuation allowance is established for
deferred tax assets when management, based upon available information, considers
it more likely than not that a benefit from such assets will not be realized.

The following table depicts the temporary differences as of December 31, 1998
and 1997:
<TABLE>
<CAPTION>

1998 1997
----------- ----------
(millions)

<S> <C> <C>
Net future tax deductible items $ 35 $ 36
Net operating loss carryforwards and other tax credits 156 188
Valuation allowance (191) (224)
----------- -----------

Net deferred taxes $ 0 $ 0
=========== ===========
</TABLE>

Net future tax deductible items relate primarily to estimated future bankruptcy
claim payments to be made by the Company's two grantor trusts. Gross deferred
tax liabilities at December 31, 1998 and 1997 are not material.

<PAGE>

The Plan of Reorganization established the A-C Reorganization Trust to settle
claims and to make distributions to creditors and certain shareholders. The
Company transferred cash and certain other property to the A-C Reorganization
Trust on December 2, 1988. Payments made by the Company to the A-C
Reorganization Trust do not generate tax deductions for the Company upon the
transfer but generate deductions for the Company as payments are made by the A-C
Reorganization Trust to holders of claims.

The Plan of Reorganization also created a trust to process and liquidate product
liability claims. Payments made by the A-C Reorganization Trust to the product
liability trust do not generate current tax deductions for the Company. Future
deductions will be available to the Company as the product liability trust makes
payments to liquidate claims.

The Company believes the above-named trusts are grantor trusts and therefore
includes the income or loss of these trusts in the Company's income or loss for
tax purposes, resulting in an adjustment of the tax basis of net operating and
capital loss carryforwards. The income or loss of these trusts is not included
in the Company's results of operations for financial reporting purposes.

Tax carryforwards at December 31, 1998 are estimated to consist of net operating
losses of $439.0 million expiring 1999 through 2013, investment tax credits of
$1.0 million expiring 1999 through 2001 and energy tax credits of $1.0 million
expiring 1999 through 2001.

During 1990, the Company initiated litigation against the Internal Revenue
Service (IRS) in the United States Bankruptcy Court for the Southern District of
New York, challenging the validity and retroactive applicability of proposed
regulations issued by the IRS on August 13, 1990. On January 2, 1992 the IRS
issued final regulations under Sections 269 and 382 of the Internal Revenue Code
of 1986 relating to the use of net operating loss carryforwards following
corporate reorganizations under the Bankruptcy Code.

Following issuance of the final regulations the Company withdrew its
retroactivity challenge because the final regulations were made retroactive only
to August 14, 1990 and are not applicable to a plan of reorganization that was
completed before then. The Company's Plan of Reorganization was consummated on
December 2, 1988. The Company, however, continued to challenge the validity of
other provisions of the regulations.

On June 8, 1992, the Bankruptcy Court issued a decision denying the Company's
motion for a judgment against the IRS with respect to the application of Section
269 of the IRS Code to the Company. The Court also granted the IRS's motion to
dismiss the Company's complaint challenging the regulations. The Court entered
judgment pursuant to its decision on June 29, 1992 and, consistent with the
advice of its counsel, the Company decided not to appeal that judgment.

Although the Company was unable to obtain a judgment that would have prevented
the IRS from applying Section 269 to the Company, the Court's ruling leaves the
Company in substantially the same position it was in prior to issuance of the
final regulations. The possibility of an IRS challenge under Section 269 of the
Internal Revenue Code to the Company's use of its

<PAGE>

prepetition net operating loss carryforwards has always existed and, in light of
the Court's ruling, that possibility continues to exist.

The Court, however, stated that, should the IRS ever seek to use its new Section
269 regulations to limit the Company's use of its net operating loss
carryforwards, nothing in its opinion would prejudice the Company's right to
defend itself by using the Court's confirmation finding that the primary purpose
of the Company's Plan of Reorganization was not tax avoidance. While the
Company's Common Stock is subject to trading restrictions which are designed to
maximize the likelihood of preserving its net operating loss carryforwards, a
change in ownership of the Company could also limit the use of its net operating
loss carryforwards.

NOTE 6. LONG-TERM DEBT
<TABLE>
<CAPTION>

December 31 1998 1997
----------- ----------- -----------
(thousands)

<S> <C> <C>
Real estate loan $ 226 $ 248
Other 66 30
----------- -----------
292 278
Less amounts classified as current 60 38
----------- -----------
$ 232 $ 240
=========== ===========

The real estate loan relates to the 1990 purchase of the land and building in
Houston, Texas which had previously been leased by HDS. In August 1996, HDS
refinanced this loan which is required to be repaid in monthly installments of
$3,278 through August 20, 2001 when the remaining unpaid balance shall be due.
At December 31, 1998 and 1997, the interest rate on the note was 10.5%. The rate
will be adjusted during the term of the note in accordance with increases or
decreases in the prime rate. The note is secured by the HDS facility, ( having a
net book value of $444,000 at December 31, 1998) and the Company's guaranty.

NOTE 7. SHAREHOLDERS' DEFICIT

The components of Shareholders' Deficit are as follows:

December 31 1998 1997
----------- ----------- -----------
(thousands)

<S> <C> <C>
Common stock $ 152 $ 152
Capital in excess of par value 8,155 8,155
Accumulated deficit (75,673) (76,291)
Pension liability adjustment - -
----------- -----------
Shareholders' Deficit $ (67,366) $ (67,984)
=========== ===========
</TABLE>

<PAGE>

SFAS No. 87, "Employers' Accounting for Pensions," requires recognition in the
Statement of Financial Condition of a minimum pension liability. The minimum
pension liability that must be recognized is equal to the excess of the
accumulated benefit obligation over plan assets. A reduction of shareholders'
investment in the amount of $12.2 million in 1996 was recorded. This unfunded
amount was recognized as expense in 1997 in connection with the distress
termination of the Consolidated Plan and recognition of the Company's liability
to the PBGC.

NOTE 8. LONG-TERM STOCK INCENTIVE PLAN

The Company's Long-Term Stock Incentive Plan (1989) provides for the grant of
stock options, stock appreciation rights, performance shares, restricted stock,
restricted stock units and other stock-based awards. Under the plan the maximum
number of shares which may be granted with respect to stock-based awards is
50,000. Options may be granted at prices equal to or not less than the fair
market value at date of grant, except that options to purchase up to 13,333
shares may be granted at a price which is not less than the fair market value on
October 25, 1989, the date on which the plan was approved by shareholders.
Options are exercisable within a period not to exceed 10 years from date of
grant. The plan also provides for the discretionary grant of stock appreciation
rights which allow the holder to receive in cash or shares of common stock the
difference between the exercise price and the fair market value of the stock at
the date of exercise.
There have been no grants under the plan.

NOTE 9. POSTRETIREMENT BENEFIT OBLIGATIONS

Pensions

In accordance with the Plan of Reorganization, the 11 plans received a Company
contribution of $53.8 million in December 1988. As a result of actions taken in
connection with this contribution and the then-existing securities of the
pension plans, the assets of the Consolidated Plan were invested in a dedicated
bond portfolio that consisted of high-grade fixed income securities in which the
market value of the assets was matched to the present value of the anticipated
pension benefits and administrative expenses of the Consolidated Plan in a way
intended to make the pension fund immune from interest rate fluctuations.

Under the Plan of Reorganization, future contributions to the Consolidated Plan
were required if the mortality assumptions used in calculating the present value
of the pension benefits expected

<PAGE>

to be paid or the assumptions used in calculating the future administrative
expenses proved inaccurate. For the years 1989 through 1993, retirees eligible
for benefits under the Consolidated Plan, as a group, outlived the projections
of the mortality assumptions used in the Plan of Reorganization for funding the
Consolidated Plan. For the same five years, actual administrative expenses were
slightly in excess of assumed levels. Effective January 1, 1994, the Company's
independent actuaries reflected such decreased mortality for funding calculation
purposes. For the years 1994 through 1996, the mortality experience was negative
compared with the revised assumptions, in an amount in excess of the 1989-1993
average actuarial loss. This mortality loss was partially offset, however, by
gains in the asset portfolio.

This underfunded condition in the Consolidated Plan required the Company to make
significant cash contributions to the Consolidated Plan pursuant to the
Employment Retirement Income Security Act of 1974, as amended (ERISA), funding
requirements starting in 1996.

The Company failed to make required quarterly contributions starting in April
1996, resulting in the filing of a lien by the Pension Benefit Guaranty
Corporation (PBGC) against the Company. Given the inability of the Company to
fund such obligations with its lack of 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 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 a
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.

<PAGE>

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.

On March 2, 1998, Allis-Chalmers sent the 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.

Medical and Life

Pursuant to the Plan of Reorganization, the Company assumed the contractual
obligation to Simplicity Manufacturing, Inc. (SMI) to reimburse SMI for 50% of
the actual cost of medical and life insurance claims for a select group of
retirees (SMI Retirees) of the prior Simplicity Manufacturing Division of
Allis-Chalmers.

Net postretirement benefit expense for the years ended December 31, 1998, 1997
and 1996 included the following components (in thousands):
<TABLE>
<CAPTION>

1998 1997 1996
----------- ----------- -----------

<S> <C> <C> <C>
Service cost $ - $ - $ -
Interest cost on accumulated benefit obligation 53 62 54
Amortization of unrecognized net gain (22) (3) (17)
----------- ----------- -----------
Net postretirement benefit expense $ 31 $ 59 37
=========== =========== ===========
</TABLE>

Presently, the Company's postretirement benefit obligations are not funded. The
status and a reconciliation of the Company's postretirement benefit obligations
as of December 31, 1998 and 1997 was as follows (in thousands):
<TABLE>
<CAPTION>

1998 1997
----------- -----------
<S> <C> <C>
Actuarial present value of accumulated postretirement
benefit obligation $ 606 $ 733
Unrecognized net gain 375 257
----------- -----------
Accrued postretirement benefit liability $ 981 $ 990
=========== ===========

<PAGE>

28
<CAPTION>

1998 1997
----------- -----------

<S> <C> <C>
Obligation at beginning of year $ 733 $ 867
Interest cost 53 62
Actuarial gain (140) (134)
Benefit payments (40) (62)
----------- -----------
Obligation at end of year $ 606 $ 733
=========== ===========
</TABLE>

The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 6.5% at December 31, 1998 and 7.0% at
December 31, 1997. The assumed rate decreases each year until an ultimate rate
of 5.0% is reached at December 31, 2004. The health care cost trend rate has a
significant effect on the amounts reported. For example, a one percentage point
increase in the health care cost trend rate would increase the accumulated
postretirement benefit obligation by approximately $40,000 at December 31, 1998.
The discount rate used in determining the accumulated postretirement benefit
obligation was 7.50% at December 31, 1998 and December 31, 1997.

NOTE 10. COMMITMENTS AND CONTINGENT LIABILITIES

Substantially all litigation proceedings pending against the Company were
resolved pursuant to emergence from the Chapter 11 proceedings in 1988. Various
loans, lease agreements and other commitments and contractual obligations of the
Company were also satisfied pursuant to the Plan of Reorganization. The Company
knows of no significant pre-Plan of Reorganization lawsuits presently pending
against it or its subsidiaries which have not been assumed by the various trusts
or other entities.

The Company is a party to litigation matters and claims which are normal in the
course of its operations, and, while the results of litigation and claims cannot
be predicted with certainty, management believes that the final outcome of such
matters will not have a material adverse effect on the Company's consolidated
financial position.

Environmental Matters

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.

<PAGE>

Allis-Chalmers Consolidated Pension Plan

Contributions to the Consolidated Plan were required starting in 1996 due to a
change in the mortality assumptions used in calculating the present value of the
pension benefits expected to be paid and the assumptions used in calculating the
future administrative expenses compared with the projections of the mortality
and administrative expense assumptions used in the Plan of Reorganization for
funding the Consolidated Plan. Contributions were projected to be $2.5 million
in 1996, then increasing to $3.1 million in 1997 and $8.1 million in 1998. After
making one installment of $205,000 on January 15, 1996, the Company failed to
make any subsequent installments. The Company's failure to make required
quarterly contributions starting in April 1996, resulted in the filing of a lien
by the PBGC against the Company. Given the inability of the Company to fund such
obligations with its current 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.

For additional information regarding the Consolidated Plan, see Note 9.

NOTE 11. RELATED PARTY TRANSACTIONS

H. Sean Mathis, Chairman of the Board and Chief Executive Officer, Leonard
Toboroff, Vice Chairman of the Board and Executive Vice President and John T.
Grigsby, Jr., Vice Chairman of the Board, Executive Vice President and Chief
Financial Officer, did not receive any compensation for their services as
executive officers of the Company for the three years ended December 31, 1998.

<PAGE>

NOTE 12. QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>

(unaudited)
First Second Third Fourth
Quarter Quarter Quarter* Quarter
-----------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997 1998 1997
------ ------- -------- --------- -------- -------- -------- ---------
(thousands, except per share)

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $ 1,503 $ 1,028 $ 1,249 $ 985 $ 943 $ 813 $ 1,326 $ 1,236
Gross Margin 486 211 312 268 273 161 420 374

Net Income (Loss) 137 (604) (197) (554) 680 (65,187) (2) (200)

Net Income (Loss) per
Common Share
(basic and diluted) .14 (.60) (.20) (.55) .68 (64.99) 0.0 (.20)

*Net loss and loss per share amounts have been restated compared with amounts
previously reported by the Company to reflect the termination of the
Consolidated Plan and recognition of the related liability to the PBGC as of
September 30, 1997. Net income in the third quarter of 1998 included income of
$825,000 as a result of a $900,000 IRS liability settled for $75,000.

</TABLE>

ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

(a) Identification of Directors

The following individuals were elected as directors of the Company at the
meeting of shareholders on October 25, 1989 (or have been appointed to
fill vacancies caused by the resignation of two such directors) to serve
until the next meeting of shareholders.

John R. Collins, age 71, a director since December 1988. Mr. Collins
retired in 1989 after serving since 1985 as Administrative Assistant to
the Secretary-Treasurer of International Union, United Automobile,
Aerospace & Agricultural Implement Workers of America -- UAW.

John T. Grigsby, Jr., age 58, a director since December 1988. Mr. Grigsby
has been a Vice Chairman of the Board of the Company since May 1989, an
Executive Vice President since October 1989 and Chief Financial Officer
since January 1996, having previously served since December 1988 as the
Company's Chairman and Chief Executive Officer. Prior to that time and
since July 1987, Mr. Grigsby was employed by the Company as Managing
Director, Restructure Project. Mr. Grigsby also serves as the A-C
Reorganization Trustee, as President of Thomson McKinnon Securities, Inc.
during winddown and liquidation of its affairs and President and Chief
Executive Officer of N.W. Liquidating, Inc. He has been a director of 1st
Southern Bank of Boca Raton, Florida since September 1987 and First
Florida Industries, Inc. since July 1985.

H. Sean Mathis, age 51, a director since December 1988. Mr. Mathis was
elected as Chairman and Chief Executive Officer of the Company on January
16, 1996 and prior thereto Mr. Mathis served as a Vice President of the
Company since July 1989. From July 1996 to September 1997, Mr. Mathis was
Chairman of the Board of Universal Gym Equipment Inc., a privately owned
company (Universal). In July 1997, Universal filed for protection under
Federal Bankruptcy Laws. In September 1997, Mr. Mathis resigned as
Chairman of the Board of Universal. From 1991 to 1993, Mr. Mathis was
President of RCL Acquisition Corp., the predecessor firm of HMG. From
1993 to 1995, Mr. Mathis was President and a Director of RCL Capital
Corporation, which was merged into DISC Graphics in November 1995. From
1988 to October 1993, Mr. Mathis was a Director and Chief Operating
Officer of Ameriscribe Corporation (Ameriscribe), a national provider of
reprographic and related facilities management services. From August 1992
to May 1994, Mr. Mathis acted as the Federal Court Appointed Trustee for
International Wire News Service Liquidation Corp., formerly United Press
International (UPI). From November 1991 through July 1992, Mr. Mathis was
Vice Chairman and Director of UPI (then a news syndication service). In
August 1992, as a part of a restructuring program, UPI filed for
protection under the Federal Bankruptcy Laws. Mr. Mathis is also a
Director of Thousand Trails, Inc., an operator of recreational parks.

<PAGE>

Claude D. Montgomery, age 46, a director since December 1988. Since
November 1996, Mr. Montgomery has been a partner in Phillips Lytle
Hitchcock Blaine & Huber, a law firm. From June 1993 to October 1996, Mr.
Montgomery was a director and shareholder in Marcus Montgomery P.C., a
law firm, formerly known as Marcus Montgomery Wolfson P.C. Mr. Montgomery
was a director and shareholder in Varet, Marcus & Fink P.C., formerly
known as Milgrim, Thomajan & Lee P.C., attorneys, New York, from August
1989 through June 1993.

Robert E. Nederlander, age 65, a director since May 1989. Mr. Nederlander
was elected by the Board of Directors on November 16, 1993 to serve as a
Vice Chairman of the Board, having previously served as Chairman of the
Board and Chief Executive Officer of the Company since May 1989. He
resigned as Vice Chairman on October 18, 1996. He is also President and
director of Nederlander Organization, Inc., New York, an owner and
operator of one of the world's largest chains of theaters, since November
1981; President of Nederlander Television and Film Productions, Inc.
since October 1985; Partner in the New York Yankees Baseball Club since
1973 and Managing General Partner from September 13, 1990 through
December 31, 1991; director and Chairman of the Board of Riddell Sports,
Inc. since April 1988; Chairman of the Board of MEGO Financial
Corporation since January 1988; a director of MEGO Mortgage Corp. from
September 1996 until June 1998, News Communications, Inc. and HFS
Incorporated since 1995 (which was merged into Cendant in 1997).

John E. Sundman, age 72, a director since December 1988. Mr. Sundman
retired in December 1991 as Vice President of Corcap, Inc., Hartford,
Connecticut, a position which he held since July 1988, when Corcap was
spun off by Lydall, Inc., Manchester, Connecticut. He remains a director
of Corcap, Inc.

Allan R. Tessler, age 62, a director since September 1992. Mr. Tessler
served as Chairman of the Board and Chief Executive Officer of the
Company from November 1993 until January 1996. Mr. Tessler is Chairman of
the Board and Chief Executive Officer of International Financial Group,
Inc. since 1987; and Co-Chief Executive Officer of Data Broadcasting
Corporation since June 1992. Mr. Tessler is also Chairman of the Board of
Enhance Financial Services Group, Inc., Jackpot Enterprises, Inc., and
Checker Holdings Inc. and director of The Limited, Inc. and
Marketwatch.com.

Leonard Toboroff, age 66, a director since May 1989. Mr. Toboroff has
been a Vice Chairman of the Board and an Executive Vice President of the
Company since May 1989; a director and Vice Chairman of Riddell Sports,
Inc. from April 1988 to the present; a practicing attorney continuously
since 1961 to the present; a director since August 1987 and former
Chairman and Chief Executive Officer from December 1987 to May 1988 of
Ameriscribe; and formerly a director, Chairman and Chief Executive
Officer from May 1982 through June 1982 and Vice Chairman June 1982
through September 1988 of American Bakeries Company. Mr. Toboroff is also
a director of Banner Aerospace, Inc. and Saratoga Beverage, Inc.

<PAGE>

(b) Identification of Executive Officers
<TABLE>
<CAPTION>

Name, Age as of March 1,
1998, and Position Business Experience
--------------------------------------------------------------------------------------------------

<S> <C>
H. Sean Mathis, 51, See Item 10, subsection (a) above.
Chairman of the Board and
Chief Executive Officer

Leonard Toboroff, 66, See Item 10, subsection (a) above.
Vice Chairman of the Board
and Executive Vice
President

John T. Grigsby, Jr., 58, See Item 10, subsection (a) above.
Vice Chairman of the Board,
Executive Vice President and
Chief Financial Officer

Jeffrey I. Lehman, 49, Mr. Lehman commenced his employment with
Treasurer Allis-Chalmers and was elected to his current position
in February 1996. Since 1991, Mr. Lehman has been
employed by the A-C Reorganization Trust and
Thomson McKinnon Securities during winddown and
liquidation of their affairs. He has also provided
financial consultation since 1985.
</TABLE>

None

(d) Family Relationships

None

(e) Business Experience

See this Item 10, subsections (a) and (b) above.

(f) Involvement in Certain Legal Proceedings

None

<PAGE>

(g) Promoters and Control Persons

Not applicable

ITEM 11. EXECUTIVE COMPENSATION.

EXECUTIVE COMPENSATION

No executive officer earned in excess of $100,000 in 1998. H. Sean Mathis who
served as Chairman of the Board and Chief Executive Officer in 1996, 1997 and
1998 received no compensation for his services as such..

LONG-TERM STOCK INCENTIVE PLAN

The Company's Long-Term Stock Incentive Plan (1989), adopted by the shareholders
at the 1989 shareholders meeting, provides for grants to officers and key
employees of stock options, stock appreciation rights, performance shares,
restricted stock, restricted stock units and other stock-based awards. The
maximum number of shares which may be granted with respect to stock-based awards
is 50,000. Options to purchase shares may be granted at prices equal to not less
than the fair market value at the date of grant, except that options to purchase
up to 13,333 shares may be granted at a price which is not less than the fair
market value on October 25, 1989, the date on which the Stock Incentive Plan was
approved by shareholders. Options are exercisable within a period not to exceed
10 years from date of grant. Stock appreciation rights allow the holder to
receive the difference between the exercise price and the fair market value of
the stock at the date of exercise in cash or shares of common stock. No stock
options or stock appreciation rights have been granted to date.

RETIREMENT PLAN

The Consolidated Plan covered 6 active employees at the beginning of 1998. The
Consolidated Plan is a tax qualified defined benefit pension plan. Effective
March 31, 1987, the Consolidated Plan was capped and frozen, without further
increase in benefits provided by the Company after that date.

The retirement benefits paid under this plan are before any adjustment for a
surviving spouse's pension and are not subject to Social Security offset or
other deductions.

SAVINGS PLAN

The Company's Savings Plan was initiated in 1968. The Savings Plan permits the
Company to contribute in its discretion cash or stock to participants' accounts.
However, on June 1, 1985, the Company discontinued contributions to the Savings
Plan.

<PAGE>

During 1998 contributions by Company participants to the Savings Plan under
Section 401(k) of the Internal Revenue Code totaled $23,721. At December 31,
1997 there were a total of 192 participants in the Savings Plan, of whom 19 were
active employees of the Company.

Due to the significant administrative costs associated with the Savings Plan, on
December 22, 1997, the Company filed an Application for Determination for
Terminating the Savings Plan with the IRS. The participants in the Savings Plan
were notified of the termination which became effective September 20, 1998, at
which time all funds had been withdrawn from the Savings Plan.

COMPENSATION OF DIRECTORS

Since December 1, 1990, the annual retainer for services as a director
(previously $13,500 per year) has been suspended, the attendance fee for each
Board meeting attended was reduced from $425 to $100 and the attendance fee for
each Committee meeting was suspended.

TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENT

None.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT.

(a) Security Ownership of Certain Beneficial Owners

The following table lists the beneficial ownership with respect to all
persons known to the Company to be the beneficial owner of more than 5%
of the Company's Common Stock as of March 1, 1999.

Amount and Nature Percent of
Name and Address of Ownership Class
---------------- ------------ -----

AL-CH Company, L.P., 810 Seventh
Avenue, New York, NY 10019
(includes shares held by Messrs.
Nederlander and Toboroff
as described below) 407,251(1) 40.6%

<PAGE>

Amount and Nature Percent of
Name and Address of Ownership Class
---------------- ------------ -----

Wells Fargo Bank, P.O. Box 60347,
Los Angeles, CA 90060, Trustee
under that certain Amended and
Restated Retiree Health Trust
Agreement for UAW Retired
Employees of Allis-Chalmers
Corporation 136,406 13.6%

Firstar Trust Company,
777 East Wisconsin Avenue,
Milwaukee, WI 53202, Trustee
under that certain Amended and
Restated Retiree Health Trust
Agreement for Non-UAW Retired
Employees of Allis-Chalmers
Corporation 101,977 10.2%

(1) Messrs. Nederlander and Toboroff are beneficial owners of and
have shared voting power and shared dispositive power over the
407,251 shares of common stock held by AL-CH Company, L.P., a
Delaware limited partnership, of which the general partners are
Q.E.N., Inc., a Michigan corporation controlled by Mr.
Nederlander, and Lenny Corp., a Delaware corporation controlled
by Mr. Toboroff. Mr. Allan R.
Tessler is a limited partner in AL-CH Company, L.P.

(b) Security Ownership of Management

The following table sets forth the number of shares of Common Stock of
the Company beneficially owned as of March 1, 1999 by directors and all
directors and executive officers as a group. Except as otherwise noted
in the footnotes, the persons listed have sole voting and investment
power over the shares beneficially owned.

<PAGE>

Amount and Nature Percent of
Name of Ownership Class
---- ------------ -----

John R. Collins 0 *
John T. Grigsby, Jr. 9,535 1.0%
H. Sean Mathis 0 *
Claude D. Montgomery 533(1) *
Robert E. Nederlander 407,251(2) 40.6%(2)
John E. Sundman 3,333 *
Allan R. Tessler 0 *
Leonard Toboroff 407,251(2) 40.6%(2)

All directors and
officers as a group
(nine persons) 420,652 42.0%

*less than 1%

(1) Shares are owned beneficially by Mr. Montgomery's spouse as to
which he disclaims beneficial ownership.

(2) Messrs. Nederlander and Toboroff are beneficial owners of and
have shared voting power and shared dispositive power over the
407,251 shares of common stock held by AL-CH Company, L.P., a
Delaware limited partnership, of which the general partners are
Q.E.N., Inc., a Michigan corporation controlled by Mr.
Nederlander, and Lenny Corp., a Delaware corporation controlled
by Mr. Toboroff. Mr. Allan R.
Tessler is a limited partner in AL-CH Company, L.P.

None

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

(a) Transactions with Management and Others

None

(b) Certain Business Relationships

None

(d) Transactions with Promoters

Not applicable

<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K.

(a) List of Documents Filed. The Index to Financial Statements and Financial
Schedule is included on page 15 of this report. Financial statements
Schedules not included in this report have been omitted because they are
not applicable or the required information is shown in the Financial
Statements or Notes thereto.

(b) Reports on Form 8-K. There were no Reports on Form 8-K filed in the
fourth quarter of 1998.

2 .1. First Amended Disclosure Statement pursuant to Section 1125 of
the Bankruptcy Code, which includes the First Amended and Restated Joint
Plan of Reorganization dated September 14, 1988 (incorporated by
reference to the Company's Report on Form 8-K dated December 1, 1988).

3.1. Amended and Restated Certificate of Incorporation of
Allis-Chalmers Corporation (incorporated by reference to the Company's
Report on Form 8- A dated August 12, 1992).

3.2. By-laws of Allis-Chalmers Corporation (incorporated by reference
to the Company's Report on Form 8-A dated August 12, 1992).

10.1. Amended and Restated Retiree Health Trust Agreement between
Allis-Chalmers Corporation and Wells Fargo Bank (incorporated by
reference to Exhibit C-1 of the First Amended and Restated Joint Plan of
Reorganization dated September 14, 1988 included in the Company's Report
on Form 8-K dated December 1, 1988).

10.2. Amended and Restated Retiree Health Trust Agreement between
Allis-Chalmers Corporation and Firstar Trust Company (incorporated by
reference to Exhibit C-2 of the First Amended and Restated Joint Plan of
Reorganization dated September 14, 1988 included in the Company's Report
on Form 8-K dated December 1, 1988).

<PAGE>

10.3. Reorganization Trust Agreement between Allis-Chalmers Corporation
and John T. Grigsby, Jr., Trustee (incorporated by reference to Exhibit
D of the First Amended and Restated Joint Plan of Reorganization dated
September 14, 1988 included in the Company's Report on Form 8-K dated
December 1, 1988).

10.4. Product Liability Trust Agreement between Allis-Chalmers
Corporation and Bruce W. Strausberg, Trustee (incorporated by reference
to Exhibit E of the First Amended and Restated Joint Plan of
Reorganization dated September 14, 1988 included in the Company's Report
on Form 8-K dated December 1, 1988).

10.5.* Allis-Chalmers Corporation Long-Term Stock Incentive Plan (1989)
(incorporated by reference to the Company's Report on Form 10-Q for the
three months ended September 30, 1989).

10.6. Subscription and Shareholder Agreement between Allis-Chalmers
Corporation and AL-CH Company, L.P. dated May 18, 1989 (incorporated by
reference to the Company's Report on Form 8-K dated May 24, 1989).

10.7. Commercial Installment Loan Agreement by and between
Allis-Chalmers Corporation and Marine Midland Bank, N.A., dated as of
December 20, 1989 (incorporated by reference to the Company's Report on
Form 8-K dated December 20, 1989).

10.8.* Employment Agreement between Allis-Chalmers Corporation and John
T. Grigsby, Jr. (incorporated by reference to the Company's Report on
Form 10-Q for the three months ended September 30, 1989).

10.9.* Allis-Chalmers Savings Plan (incorporated by reference to the
Company's Report on Form 10-K for the year ended December 31, 1988).

10.10.* Allis-Chalmers Consolidated Pension Plan (incorporated by
reference to the Company's Report on Form 10-K for the year ended
December 31, 1988).

21.1. Subsidiaries of Allis-Chalmers Corporation.

27.1. Financial Data Schedule.

*A management contract or compensatory plan or arrangement.

<PAGE>

ALLIS-CHALMERS CORPORATION AND CONSOLIDATED SUBSIDIARIES

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

(thousands)
<TABLE>
<CAPTION>

Balance at Balance
Year Ended Beginning at Close
December 31, 1996 of Period Additions Deductions of Period
- - ----------------- ----------- --------- ---------- ---------

<S> <C> <C> <C> <C>
Doubtful receivables $ 306 $ 0 $ 276(a) $ 30

Plant rearrangement $ 68 $ 0 $ 68 $ 0
----------- --------- ---------- ---------

Balance at Balance
Year Ended Beginning at Close
December 31, 1997 of Period Additions Deductions of Period
- - ----------------- ----------- --------- ---------- ---------

Doubtful receivables $ 30 $ 6 $ 0 $ 36
----------- ---------- ---------- ---------

Balance at Balance
Year Ended Beginning at Close
December 31, 1998 of Period Additions Deductions of Period
- - ----------------- ----------- --------- ---------- ---------

Doubtful receivables $ 36 $ 0 $ 15 $ 21
----------- ---------- ---------- ---------

</TABLE>

(a) Includes writeoff of uncollectible receivables, less recoveries.

<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

Allis-Chalmers Corporation

/s/John T. Grigsby, Jr.
John T. Grigsby, Jr.
Vice Chairman, Executive Vice
President and Chief Financial Officer
Date: March 29, 1999

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, this report has been signed on March 26, 1999 by the
following persons on behalf of the registrant and in the capacities indicated.

/s/H. Sean Mathis /s/Robert E. Nederlander
H. Sean Mathis Robert E. Nederlander, Director
Chairman of the Board,
Chief Executive Officer
and Director

/s/ John R. Collins /s/John E. Sundman
John R. Collins, Director John E. Sundman, Director

/s/John T. Grigsby, Jr. /s/Allan R. Tessler
John T. Grigsby, Jr. Director Allan R. Tessler, Director

/s/Claude D. Montgomery /s/Leonard Toboroff
Claude D. Montgomery, Director Leonard Toboroff, Director

ALLIS-CHALMERS CORPORATION AND CONSOLIDATED SUBSIDIARIES
--------------------------------------------------------

EXHIBIT 21.1.
SUBSIDIARIES
------------
State
in Which
Subsidiary
Organized
---------

Houston Dynamic Service, Inc. Texas

KILnGAS R&D, Inc. Illinois

U.S. Fluidcarbon Inc. Delaware

<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS OF ALLIS-CHALMERS CORPORATION AS OF AND FOR
THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 223
<SECURITIES> 0
<RECEIVABLES> 817
<ALLOWANCES> 21
<INVENTORY> 127
<CURRENT-ASSETS> 1,258
<PP&E> 2,903
<DEPRECIATION> 1,595
<TOTAL-ASSETS> 2,566
<CURRENT-LIABILITIES> 68,719
<BONDS> 232
8,307
0
<COMMON> 0
<OTHER-SE> (75,673)
<TOTAL-LIABILITY-AND-EQUITY> (2,566)
<SALES> 0
<TOTAL-REVENUES> 5,021
<CGS> 0
<TOTAL-COSTS> 3,530
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33
<INCOME-PRETAX> 618
<INCOME-TAX> 0
<INCOME-CONTINUING> 618
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 618
<EPS-PRIMARY> .62
<EPS-DILUTED> .62

</TABLE>