CAPITALIZATION OF W-7A The capitalization of W-7A as at May 31, 1968 was as follows: Fixed loan by banks under credit agreement maturing September 1, 1972(1) (8)... (1) Interest on such fixed loan is at a rate equal to 1⁄2 of 1% above the prime commercial rate of The First National Bank of Boston as from time to time in effect without giving effect to amounts required to be maintained on deposit with such bank and its participating banks. As of May 31, 1968, such interest rate on the fixed loan was 7% per annum. As security for the loans under the credit agreement, W-7A has pledged all of its present and future accounts receivable and the capital stock of the principal subsidiaries of W-7A, including the former subsidiaries of Warner Bros. Pictures, Inc., and has mortgaged all of its rights in completed motion pictures, both present and future. See Note 6 to W-7A's financial statements and the caption "Business of W-7A and Related Information". (2) Consists of a revolving productions loan under the credit agreement with banks. Interest on revolving productions loans is at a rate equal to 1⁄2 of 1% above the prime commercial rate of The First National Bank of Boston as from time to time in effect on amounts borrowed prior to March 1, 1968, and at a rate equal to 4 of 1% above such prime commercial rate as to revolving productions loans made on or after March 1, 1968, in each case without giving effect to compensating balances. The entire amount outstanding as at May 31, 1968 had been borrowed prior to March 1, 1968. See Note 6 to W-7A's financial statements and the caption "Business of W-7A and Related Information". (3) Consists of a loan made by C.I.T. Corporation under the credit agreement with the banks and is secured by specified receivables under television contracts, aggregating not less than 110% of the unpaid principal balance of the loan. See Note 6 to W-7A's financial statements and the caption "Business of W-7A and Related Information". (4) The 6% Debentures were issued on November 23, 1966 in connection with the acquisition at that time of 1,573,861 shares of common stock of Warner Bros. Pictures, Inc. See caption "Business of W-7A and Related Information" and notes 8 and 14 to W-7A's financial statements. (5) The 5% Debentures were issued on July 15, 1967 in connection with the acquisition of the assets and business of Warner Bros. Pictures, Inc. See caption "Business of W-7A and Related Information" and notes 9 and 14 to W-7A's financial statements. (6) See notes 7 and 14 to the W-7A financial statements with respect to the 5% Subordinated Notes. (7) Consists of promissory notes of subsidiaries issued in connection with the acquisition of licenses to distribute feature motion pictures and notes issued by, and contingent obligations of, a subsidiary in connection with the acquisition of Atlantic Recording Corporation and affiliated companies. Such notes are without interest except for $1,500,000 principal amount thereof on which interest at the rate of 5% per annum is payable. The contingent payments of $6,894,305 ($7,560,000 less $665,695 paid in April, 1968) bear interest at the rate of 4% per annum. Such notes and contingent payments are included under Contractual Obligations Payable in the W-7A Consolidated Balance Sheet herein. See notes 5 and 11 to W-7A's financial statements and the caption "Business of W-7A and Related Information". (8) The indebtedness under the credit agreement is senior to the indebtedness represented by the subordinated securities See caption "Business of W-7A and Related Information". (9) Does not include (i) an aggregate of 571,428 Common Shares reserved for issuance upon conversion of 6% Convertible Subordinated Debentures, due 1976, (ii) an aggregate of 1,018,880 Common Shares reserved for issuance upon com version of 5% Convertible Subordinated Debentures due 1988, (iii) an aggregate of 200,000 Common Shares reserved for issuance under W-7A's Key Employees' Qualified Stock Option Plan approved by shareholders in 1968, of which 45,000 shares related to outstanding options and 155,000 shares related to options available for grant under that Plas (iv) 25,000 Common Shares reserved for issuance upon exercise of an outstanding option issued under a prior stock option plan, or (v) an aggregate of 64,443 Common Shares reserved for issuance upon the exercise of certain Warrants for the purchase of Common Shares. (See the caption "Business of W-7A and Related Information".) (10) See note 14 to W-7A's financial statements with respect to the Warrants for the purchase of Common Shares. (11) Obligations under long term leases on real property are not material. Reference to notes to financial statements indicated above refer to the notes to financial statements of Warner Bros.-Seven Arts Limited set forth elsewhere in this Prospectus. APPENDIX “A” The following is a full and direct quotation of the text of the complaint in the civil action referred to in the Prospectus under the caption "Background of the Exchange Offer and Related Litigation." "Plaintiff, Great American Holding Corporation, by its attorneys, Shearman & Sterling, for its complaint alleges: 1. The jurisdiction of this Court is based upon §§ 1331 (a) and 1337 of Title 28 of the United States Code, § 22(a) of the Securities Act of 1933, § 27 of the Securities Exchange Act of 1934 and § 44 of the Investment Company Act of 1940. 2. This action seeks to enjoin violations by the defendants and co-conspirators, as hereinafter averred, of § 17a of the Securities Act of 1933. §§ 7, 9, 10b. 13d. 14a and 14e of the Securities Exchange Act of 1934, § 17a of the Investment Company Act of 1940, and the Rules and Regulations promulgated thereunder, including but not limited to Rules 10b-5 and 10b-6 of the Securities and Exchange Commission and Regulation T of the Board of Governors of the Federal Reserve System, as well as damages resulting from such violations. 3. Plaintiff is a corporation duly organized and existing under the laws of the State of Delaware having its principal place of business at 99 John Street, New York, New York. 4. Defendant National General Corporation (hereinafter called 'NG') is a corporation organized under the laws of the State of Delaware having its principal office at One Carthay Plaza, Los Angeles, California, and a place of business at 600 Madison Avenue, New York, New York, and, among other things, operates a chain of motion picture theatres and distributes pictures for theatres and television. 5. Defendant Carter, Berlind & Weill, Inc. (hereinafter called 'Carter, Berlind') is a corporation having a place of business at 55 Broad Street, New York, New York, engaged in the securities business and, among other things, acting as a 'consultant' for defendant NG. 6. Defendant Kleiner, Bell & Co., Incorporated (hereinafter called 'Kleiner, Bell') is a corporation having a place of business at 140 Broadway, New York, New York, engaged in the securities business and acting as a Dealer Manager for defendant NG. 7. Defendant Allen & Company, Incorporated (hereinafter called 'Allen & Co.') is a corporation having a place of business at 30 Broad Street, New York, New York, engaged in the securities business and acting as a Dealer Manager for defendant NG. 8. Defendant Allen & Company is a partnership having a place of business at 30 Broad Street, New York, New York, engaged in the securities business and under common control with defendant Allen & Company, Incorporated. 9. Defendant Georgeson & Co. is a corporation having a place of business at 52 Wall Street, New York, New York, and has been retained by defendant NG to solicit tenders of, and proxies with respect to, plaintiff's stock. 10. Defendant The Kissell-Blake Organization, Inc. is a corporation having a place of business at 50 Broadway, New York, New York, and has been retained by defendant NG to solicit tenders of, and proxies with respect to, plaintiff's stock. 11. Defendant Eugene V. Klein is President and Chairman of the Board of Directors of defendant NG, and has an office at One Carthay Plaza, Los Angeles, California. 12. Defendant Herbert Allen, Jr. is a Director of defendant NG, the President of defendant Allen & Company, Incorporated, and a controlling person of Allen & Company, Incorporated and Allen & Company, a partnership, and has an office at 30 Broad Street, New York, New York. 13. Defendant Charles Allen, Jr. is a general partner of Allen & Company, a partnership, a Director of Warner Bros.-Seven Arts, Ltd., and a controlling person of Allen & Company, a partnership and Allen & Company, Incorporated, and has an office at 30 Broad Street, New York, New York. 14. Defendant Alan May is a Director and Financial Vice President of defendant NG, and has an office at One Carthay Plaza, Los Angeles, California. 15. Defendant Harold A. Lipton is a Director, Vice President and Secretary of defendant NG, and has an office at One Carthay Plaza, Los Angeles, California. 16. Defendants Doe Funds A, B, C, D, E and F are partnerships, trusts and corporations whose identities are presently unknown to plaintiff, but who have aided, abetted and conspired with defendants as hereinafter alleged. 17. Defendants Roe Dealers A, B, C, D, E, F, G and H are other individuals, partnerships and corporations whose identities are presently unknown to plaintiff, including 'Soliciting Dealers' under the NG Prospectus hereinafter described, who have aided, abetted and conspired with defendants as hereinafter alleged. 18. Plaintiff is a publicly held corporation whose stock is listed on the New York Stock Exchange. As of the close of business on August 30, 1968 there were outstanding 6,183,453 shares · of Common Stock of plaintiff. 19. The principal asset of plaintiff is its ownership of 3,061,311 shares, or 98.3%, of the outstanding Capital Stock of Great American Insurance Company, a New York corporation engaged in the insurance business since 1872, having assets as of June 30, 1968 exceeding $600,000,000, and all of the violations of law by the defendants hereinafter described were and are in connection with, and directly related to, the sale of said shares of Common Stock of Great American Holding Corporation. -- 20. The substance of this action is that, after the management of AMK Corporation (hereinafter called 'AMK') had opened discussions with plaintiff's management relating to the combination of plaintiff and AMK, defendants and co-conspirators whose identities are presently unknown to plaintiff conspired to effect a take-over of plaintiff and its principal assets - the stock of Great American Insurance by the making of untrue statements of fact (both overtly and by omissions) and employing manipulative and deceptive acts, practices and devices which are fraudulent as to plaintiff and its stockholders to prevent the sale to AMK of the stock of Great American Insurance Company and to obtain control of such stock by acquiring the outstanding stock of plaintiff. 21. In May of 1968, the management of AMK Corporation, a corporation duly organized and existing under the laws of the State of Delaware, having its principal place of business at 245 Park Avenue, New York, New York, approached plaintiff with the idea of a combination of plaintiff and AMK. Subsequent negotiations between plaintiff and AMK led to an Agreement between them entered into as of August 1, 1968 to be approved by the stockholders of each company providing for, among other things, a sale by plaintiff of all its property and assets to AMK in consideration of the issuance to plaintiff of AMK securities. Thereafter plaintiff will be liquidated by the distribution to its public stockholders of the AMK securities received by plaintiff. 22. A notice of Special Meeting of Stockholders of plaintiff on October 8, 1968 to be held at the offices of Morgan Guaranty Trust Company in New York City to vote upon the sale of assets to AMK and the plan for liquidation was sent to plaintiff's stockholders on September 13, 1968, together with a Proxy Statement soliciting proxies in favor of the plaintiff's combination with AMK. FOR A FIRST CAUSE OF ACTION 23. By the use of means and instruments of transportation and communication in interstate commerce and by the use of the mails, the defendants and co-conspirators have employed and are employing devices, schemes and artifices, including the NG Prospectus hereinafter referred to, to defraud plaintiff and its stockholders, and by means of untrue statements of material facts and omissions to state material facts necessary in order to make the statements made not misleading, are embarked upon a fraudulent scheme to prevent approval by plaintiff's stockholders of the sale of plaintiff's assets to AMK and of plaintiff's plan of liquidation, and the consummation thereof by plaintiff, by inducing plaintiff's stockholders to tender irrevocably their stock to defendant NG and its agents and co-conspirators and to give NG irrevocable proxies relating to plaintiff's special meeting of stockholders on October 8, 1968 and for any meetings thereafter until June 30, 1969. Defendants and their co-conspirators are engaged in a course of conduct which operates and will operate as a fraud and deceit upon plaintiff and its stockholders, and are employing in connection with the tender offer and purchase and sale of not only plaintiff's securities but of defendant NG's securities as well fraudulent, manipulative and deceptive acts, practices and devices. Such scheme and conspiracy is in violation of § 17a of the Securities Act of 1933, § 10b of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission promulgated thereunder, and § 14 (including § 14e) of the Securities and Exchange Act of 1934. 24. Plaintiff repeats and realleges paragraphs 1 through 23. 25. On September 19, 1968 a Registration Statement, including a Prospectus, previously filed by defendant NG with the Securities and Exchange Commission under the Securities Act of 1933 became effective. By the Registration Statement and Prospectus defendant NG made a public offer to exchange NG securities for securities of plaintiff. The Prospectus was sent by and on behalf of defendant NG to the stockholders of plaintiff, and shortly thereafter the defendants and co-conspirators solicited tenders from plaintiff's shareholders, including particularly the Dealer Managers and Soliciting Dealers. 26. One of the more egregious falsehoods in the Prospectus (both from the standpoint of lack of truth and the omission to state facts required to be stated or necessary to make statements made not misleading) is the following paragraph found on page 9 of the NG Prospectus: 'During the last fiscal year, after giving effect to the acquisition of Grosset & Dunlap, Inc., the contribution to gross revenue by the significant phases of the business of National and its consolidated subsidiaries, and the profit of each phase, was as follows: book publishing contributed $39,038,000 to gross revenues and had a profit of $2,821,000; production distribution activities contributed $9,467,000 to gross revenues and had a profit of $1,221,000; motion picture exhibition contributed $53,158,000 to gross revenues and had a profit of $3,460,000; and, the relocatable structures operation contributed $9,941,000 to gross revenues and had a profit of $812,000. The total profit of these significant phases of such operations exceeds the total consolidated profit of National due to losses and expenses incurred by the parent, or by various other phases of National's operations which, taken separately, are not significant.' 27. The aggregate of the figures in the quoted statement suggest NG's gross revenues were $111,604,000 and NG's net income (profit) was $8,314,000 for the fiscal year in question, i.e., that ended September 26, 1967. In fact, NG had no book publishing business during such fiscal year and the $39,038,000 of gross revenues and $2,821,000 of net income attributed to this source actually are the gross revenue and net income of Grosset & Dunlap, Inc. during a period when it was not owned by NG. The gross revenue and net income figures set forth in the preceding sentence correspond with the unaudited gross revenue and net income of Grosset & Dunlap, Inc. for the period in question as shown in the second column of figures on pages 28 and 29 of the Prospectus. However, their inclusion in a paragraph summarizing contributions to NG's revenue and net income is completely misleading since it fails to reflect the high interest charges which NG would have incurred (and actually did incur) in connection with financing its purchase of Grosset & Dunlap, Inc. If these charges had been properly reflected, the pro forma contribution to profit by this after-acquired book publishing business, if one accepts as reasonable the pro forma figures used by NG on pages 28 and 29 of the Prospectus, would have been less than $1,000,000. 28. More important, if the figures with respect to the Grosset & Dunlap, Inc. book publishing business are eliminated from consideration so as to permit comparison of the remaining aggregate figures with the audited summary of NG's earnings for its fiscal year ended September 26, 1967 on page 16 of the NG Prospectus, it is clear that the figures in the paragraph overstates NG's net income for the September, 1967 fiscal year by over 33%. Deducting the $2,821,000 of net income attributable to the after-acquired Grosset & Dunlap, Inc.'s operations from the $8,214,000 aggregate of the net income items shown in the quotation above leaves a balance of $5,493,000, which is $1,378,000, or approximately 33% in excess of NG's $4,114,713 net income for its September, 1967 fiscal year as shown in said audited Summary of Earnings. This discrepancy is not the complete one since the $4,114,713 of reported net income includes extraordinary items of $244,375 and NG's equity in the undistributed earnings of a savings and loan subsidiary amounting to $679,910, both of which must be deducted from reported net income to reach a figure comparable to the $5,493,000 aggregate of the paragraph quoted above from page 9 of the NG Prospectus. These deductions reduce the reported net income to $3,191,000 and increase the discrepancy to $2,302,000, i.e., an overstatement of NG's net income by 72%. 29. The quoted paragraph from page 9 of the NG Prospectus is misleading in other material respects. It does not reflect the fact that one of the 'significant' phases, namely the relocatable structures operations, was sold on July 1, 1968 under an agreement made sometime previously and that at the present time NG has no relocatable structures operation. In fact, the portions of the Prospectus beginning on page 44 which purport to describe the business of NG and its subsidiaries do not even refer to a relocatable structures operation. On information and belief such relocatable structures operation was conducted by a subsidiary, Designed Facilities Corporation, which the NG Prospectus states has been sold. 30. An additional misrepresentation in the quoted paragraph from page 9 of the NG Prospectus is the statement that NG's production and distribution activities contributed $9,467,000 of gross revenues and had a profit of $1,221,000, an extremely favorable profit ratio, which would obviously induce plaintiff's stockholders to look with favor on the possibility of the acquisition by NG of Warner Bros.-Seven Arts, primarily a producing and distributing firm, to which a very substantial portion of the Prospectus is devoted. In fact, NG's production and distribution operations in the fiscal year ended September 26, 1967 produced little or no revenues or profit. $9,194,000 of the revenues from production and distribution and $1,039,449 of the net income from this source were the revenues and net income of Banner Productions, Inc., which was acquired by NG on December 20, 1967 after the close of the September, 1967 fiscal year, and the NG gross revenues and net income from this source were insignificant balances. 31. The information as to Banner's results of operations for the fiscal year ended September 26, 1967 admittedly can be found on pages 102 and 103 of the prospectus under the illuminating caption 'Interest of Management In Certain Transactions', but nothing on such pages or on page 9 suggests to the reader of page 9 the overwhleming part Banner's independent operations played in the stated results. Even more important, some idea of the true scope of the deception practiced by the quoted paragraph from page 9 of the NG Prospectus attributing 'significance' to the production and distribution activities of NG can, but only with diligent search, be found on page 46 of the NG Prospectus where NG admits not only that its own activities in production and distribution are of recent origin and that there is no assurance that they will make a significant contribution to revenues or net income but also that the revenues and income which Banner enjoyed prior to its acquisition by NG have ceased. Such Banner revenues were derived from a television series known as 'Tarzan' which appeared on the NBC network under a contract which came up for renewal a few months after NG acquired Banner and was not renewed. 32. The final misleading suggestion of the paragraph quoted from page 9 is, on an overall basis, NG's business had, during its September, 1967 fiscal year, four 'phases' which were significant from the standpoint of gross revenues and net income. In fact NG had only two phases, namely motion picture exhibition and the 'relocatable structures operation', and the second of these had been disposed of. 33. As an inducement to Great American stockholders to accept the NG exchange offer and give NG their irrevocable proxies effective to June 30, 1969, NG's Prospectus states that NG may acquire the assets of Warner Bros.-Seven Arts, Ltd. (Warner-Seven Arts). 34. In respect of this acquisition the Prospectus states on page 10 as follows: 'National and W-7A recognize the possible interest of agencies of the Federal government in the above propoed transaction, either because of the consent judgment by which National is bound (see "Business of National" elsewhere herein), or because of the general interest of the Department of Justice in corporate acquisitions. The foregoing has been considered by National and its counsel, and consultations have been undertaken by National, through its counsel, with representatives of the Department of Justice with a view to completing the proposed transaction within the limitations of all existing laws.' This bland statement is completely misleading since it fails to disclose that, in fact, National is prohibited from making the acquisition by the consent judgment referred to and that the ‘interest' of the Department of Justice is more than 'possible'. In addition it completely omits the fact that the acquisition is also prohibited by the corresponding consent judgment by which WarnerSeven Arts is bound. Moreover, it completely omits any description even approaching candor of the nature of the so-called 'consultations' with the Department of Justice. More important, there is no indication that in order to consummate the acquisition NG is seriously considering the possibility of divesting itself of its motion picture exhibition operations to Cinerama Corp., which constitutes, as described above, the only significant phase of NG's operations continuing for more than a year. Nonetheless, despite the frailty of the whole Warner-Seven Arts proposition, to seduce the plaintiff's stockholders, approximately 34 pages of text and 36 pages of financial statements relating to Warner-Seven Arts are included in the NG Prospectus. 35. Nowhere in the Prospectus is there any explanation as to how National General expects to pay the $11,280,000 annual interest charge on the $282,000,000 principal amount of 4% Convertible Subordinated Sinking Fund Debentures due 1993 which would be issuable if all plaintiff's stockholders were to accept the exchange offer. There is a statement buried on page 109 of the Prospectus which indicates the existence of this interest requirement and that possibly there is a problem meeting it. This statement reads as follows: 'The annual interest requirements on the Debentures offered hereby initially will be $11.280.000 assuming (on the basis of Holding Corporation shares outstanding on December 31, 1967) that 100% of the common stock of Holding Corporation would be owned by National at the Effective Date of Exchange. Dividends payable at the current annual rate on Holding Corporation Common Stock would not be sufficient to cover the annual interest requirement of the Debentures. Also, see Note C to Pro Forma Consolidated Statement of Income of National and subsidiaries for the year (52 weeks) ended September 26, 1967 elsewhere herein.' Apart from the fact that Note C referred to in the quoted material is completely without bearing on the matter, the quoted material is materially misleading since it suggests the possibility that the interest requirements will be covered by an increase in the dividend paid by Great American Insurance Company, but no mention is made of the fact that, because of the system under which the directors of Great American Insurance Company are elected for staggered terms of three years' duration, there is no assurance and in fact because of the opposition of the management of plaintiff to a combination with NG, little likelihood - that NG would be able, even if it obtained a majority of plaintiff's common stock through its exchange offer, to elect a controlling number of directors of Great American Insurance Company prior to April, 1970. 36. Moreover, there is a complete omission in the NG Prospectus to make any reference to the fact, which is a matter of public record, that a special committee appointed by the Superintendent of Insurance of the State of New York (which has regulatory jurisdiction over Great American Insurance Company) has recommended that legislation be adopted to limit transfers by dividends or otherwise of the funds of a New York insurance company to a non |