How about the companies that did the taking over? A few of them are suffering indigestion: LTV is having its problems with J&L Steel. General Host came close to choking to death when Greyhound blocked its takeover of Armour, and has been left with a huge amount of debt incurred in buying into a company which it could neither consolidate nor control. Northwest Industries, hardpressed on several fronts, is sitting with a huge block of Goodrich, acquired at fancy prices; meanwhile it has been decisively beaten in its efforts to get control of Goodrich's assets. But in other cases, the takeover has been a mighty good thing for the company doing the taking over. Computer leaser Leasco captured rich Reliance Insurance and now has gone out of leasing new computers. AMK took over Morrell and United Fruit, both rich in assets. Control Data won Commercial Credit, and now for the first time has the financial backing to give IBM a real across-the-board fight. Leon Hess' Hess Oil won Amerada and now overnight heads a strong, integrated oil company. LOGIC PAYS OFF Actually, there is nothing surprising about the outcome of all this. The simple truth is that these takeovers really amount to little more than a recapitalization of the company taken over; usually the takeover is intended to increase the leverage. But leverage isn't much use unless the takeover really results in a stronger company. Where the consolidation made basic business sense, as in Control Data-Commercial Credit or in Singer-General Precision, the numbers should work out quite well in the long run. Where the approach was basically financial-as in the case of AMK-United Fruit or NVF-Sharon Steel-they may not. However glibly they talk, financial wheeler-dealers have to show real profits in the world of steel and bananas, tires and cigarettes, or all their packaging and repackaging cannot long show results-at least not for the bulk of stockholders. Mr. HARKINS. Mr. Klein, to return to the situation on June 10, 1968, did you authorize Mr. Alan to purchase the major shares of the Great American Co. at a top of $55? Mr. KLEIN. No, sir. Mr. HARKINS. You did not? Mr. KLEIN. I so stated, I did not. Mr. HARKINS. Mr. Lipton, do you have a copy of a document addressed to the New York Stock Exchange, dated July 3, 1968? Mr. LIPTON. By whom? Mr. HARKINS. Signed by Arthur Carter, president. Mr. LIPTON. I do have it. Mr. HARKINS. The attachment to this document is entitled "Factual Statement Relating to Purchases of Great American Holding Corporation." Mr. LIPTON. It is a document headed "Factual Statement Relating to Purchases of Great American Holding Corporation." Mr. HARKINS. On page 2 of that document, "... Purchases of Great American Holding Corporation", you have "Purchases of GAH” as a heading, do you see that? Mr. LIPTON. There is a heading "Purchases of GAH." Mr. HARKINS. I will read the bottom paragraph and would you look at it and follow it, too, Mr. Klein. Late in the afternoon of June 10, Mr. Edward Netter, Vice President of CBW and the person who prepared the August, 1967 research report, advised Mr. Alan that he might be able to secure 600,000 shares of GAH with the possibility that a total of 1,000,000 shares might be available. Mr. Alan related the information to Mr. Klein, who indicated he might be prepared to bid up to 1,000,000 shares of GAH with a limit of 55, on the condition that such purchase could and would not be paid for until twenty-one days after purchase, that is, for settlement in 21 days. Mr. Klein indicated he could not pay for the purchase because of the size until early in July. Is that a correct reading of the paragraph? Mr. KLEIN. It is. Mr. HARKINS. Did you authorize Mr. Carter to purchase a million shares of stock limited at 55 ? Mr. KLEIN. No, sir. Mr. HARKINS. Do you say the statement I just read is incorrect? Mr. HARKINS. You said, then, that you might be prepared- Mr. HARKINS. You did not put in an order for 1 million shares? Mr. HARKINS. Turn the document to page 3, the first paragraph states: The original idea for a 21-day settlement contract was Mr. Klein's since it was not suggested to or recommended by any person associated with CBW. Mr. Klein also had indicated that he had done this previously with other firms. Is that a correct reading? Mr. KLEIN. That is a correct reading. Mr. HARKINS. Is that a correct statement? Mr. KLEIN. No, sir. Mr. HARKINS. Would you indicate in what way this statement is incorrect? Mr. KLEIN. The original idea for a 21-day contract was my suggestion. It was not the suggestion of Carter, Berlind, and Weill. I never indicated I had done this previously with other firms. That is where it is incorrect. Mr. HARKINS. The next paragraph states: On the morning of June 11, prior to opening (at about 9:45) Mr. Alan (who was out of the office at the time) called and spoke to both Mr. Netter and Mr. Julian Robinson, CBW Secretary-Treasurer and Institutional Trader, regarding Mr. Klein's interest. Mr. Alan stated that CBW "was authorized to buy 1,000,000 shares GAH, top limit 55 for 21-day settlement." Is that a correct reading of the statement? (The document referred to appears at p. 285.) Mr. KLEIN. That is a correct reading. Mr. HARKINS. Had you authorized CBW to buy 1 million shares GAH, top limit at 55? Mr. KLEIN. I have previously testified, and this is the third time, that I did not authorize them to buy 1 million shares. I told them I might be interested in 1 million shares. That is entirely different, totally different than authorization to buy. This statement is contradictory to the statement on page 2. I guess the statement was made by Carter, Berlind people. Is there an Alan Alan statement? In one paragraph he says it correctly and factually. I said I might be interested. In the other, he says he got authorization. That is contradictory, incorrect. He did not have authorization. Mr. HARKINS. But they did buy stock for or on your behalf? Mr. HARKINS. They did buy shares of stock on your behalf on June 10 and 11. On June 10 they bought 180,000 and you testified these shares were purchased on your behalf and on June 11 they bought 266,300 shares on your behalf, is that right? Mr. KLEIN. Those are the trade dates and those were the amounts of shares; yes. Mr. HARKINS. And you authorized the purchase of those shares? Mr. KLEIN. Yes, sir. Mr. HARKINS. Now are we talking about another 1 million shares or are we talking about the same 266,000 shares being purchased under the first authorization? Mr. KLEIN. I don't know what Mr. Alan Alan is talking about. I can't speak for Mr. Alan Alan. I can speak for myself. In no way were they authorized to buy 1 million shares of stock. They were authorized to buy and did buy 403,700 shares of stock, which they duly bought and executed, and we duly paid for. Mr. McCULLOCH. Was there an additional authorization beyond the first authorization that you got and the total of 400,000-odd shares that were delivered? Mr. KLEIN. No, sir; the 403,700 shares were the only shares we bought for cash, sir, and the only other shares we bought until a tender offer. Mr. McCULLOCH. Did you give an authorization for a total of 400,000-odd shares in this sequence of a day or two or three? Mr. KLEIN. Yes, sir. Mr. McCULLOCH. It was not a million, it was 400,000-odd, is that right? Mr. KLEIN. Yes, sir. Mr. McCULLOCH. And you did give that order? Mr. KLEIN. Yes, sir. Mr. McCULLOCH. And did you settle for those shares in accordance with the terms of this document? Mr. KLEIN. I don't follow you, sir. Mr. MCCULLOCH. When did you pay for those shares you got? Mr. KLEIN. I will get the record. All shares of stock, without replying to exact dates, which we have here, all shares of stock that were purchased, the third, fourth, fifth, sixth and 10th, to the best of my recollection, were paid for on regular settlement dates. The 266,300 shares were paid for in 21 days. There was a 21-day settlement arrangement made. Mr. McCULLOCH. That answers my question. Mr. KLEIN. Thank you, sir. Mr. HARKINS. Mr. Chairman, Mr. Klein, on June 10, is it not a fact that National General did not have sufficient cash to cover purchase orders, for 1 million shares of Great American Holding Co. stock? Mr. KLEIN. It is a fact and that is why they could never get an authorization from me to buy the 1 million shares. Mr. HARKINS. In fact, you were negotiating for the sale of Designed Facilities at the time in order to acquire cash, is that true? Mr. KLEIN. No, the Designed Facilities sale was done. Mr. HARKINS. On July 1, National General sold Designed Facilities, so you were negotiating the sale on June 10? Mr. KLEIN. No, sir, that is not correct. The sale was completed. Negotiations were done, the papers were signed before June 10th. Payment was to be made July 1, but the contract was with Kaiser Industries and it was a firm document signed by all parties. It went into February, the deal was in February, was effectuated, payment was to be made July 1. Mr. HARKINS. So you wouldn't have cash to cover the Great American purchases until July 1, is that right? Mr. KLEIN. No, we had part of the cash. Mr. HARKINS. You didn't have all of the cash? Mr. KLEIN. That is correct. Mr. HARKINS. You sold the Designed Facilities Corp. for $12 million cash, consisting $9 million for stock and $3 million for repayment of advances. In addition, National's lending banks released $11 million of indebtedness owed by Designed Facilities, is that right? Mr. KLEIN. Correct. Mr. HARKINS. So you had a total of $12 million and $11 million or $23 million that would be available for this transaction? Mr. KLEIN. No, sir. The $11 million that was owed to the banks was paid, was taken over by Kaiser Industries. No cash came to National General. Mr. HARKINS. I see. Mr. DONOHUE. How much did the corporation pay for borrowing? Mr. KLEIN. To the best of my recollection, I believe we were borrowing money at that time at three-quarters of a point over prime. Mr. DONOHUE. What was the prime? Mr. KLEIN. The prime rate? Mr. DONOHUE. What was the prime rate? Mr. KLEIN. I don't really recall. I believe it was either 6 or 6.5 percent, to the best of my recollection. Mr. DONOHUE. Later on you issued debentures for refinancing? Mr. KLEIN. No, sir. Mr. DONOHUE. At any time, did you issue debentures? Mr. KLEIN. For the purpose of refinancing, sir? Mr. DONOHUE. Yes. Mr. KLEIN. Yes, sir. Mr. DONOHUE. What rates of interest did the debentures carry? Mr. KLEIN. The debentures carried a 4-percent rate. Mr. DONOHUE. What you actually had paid when you had borrowed? Mr. KLEIN. Approximately 3 percent less than we were paying, but debentures had a better feature. They were convertible. Mr. DONOHUE. Into what? Mr. KLEIN. Common stock of National General. Mr. DONOHUE. As of what date? Mr. KLEIN. As of what, sir? Mr. DONOHUE. As of what date? Were they convertible immediately? Mr. KLEIN. Convertible immediately, at any time, yes, sir, and many were converted. They were convertible immediately but, as I recall, 33-762-70-pt. 4 -5 not callable for 3 years. We could not call the debentures in 3 years, but the people who had debentures could convert them at any time. Mr. DONOHUE. What did the debentures sell for? Mr. KLEIN. The debentures opened up for a price of 100 to 105, which is par or a little over. Mr. DONOHUE. What was the National General stock selling for? Mr. KLEIN. National General's share? Mr. DONOHUE. Yes. Mr. KLEIN. I believe they were, it is hard to pin the dates down, sir. I think they were between $50 and $55 a share and the debentures were convertible at 48-50. Mr. DONOHUE. Thank you. Mr. HARKINS. Mr. Klein, on August 21, 1968, National General advised the SEC as follows-and do you have the document there? Mr. KLEIN. Yes. Mr. HARKINS. On page 2 of this document, paragraph II, states: Substantially all of the proceeds from both the recent sale of such warrants, and the disposition of Designed Facilities Corporation, aggregating approximately $21,000,000, was applied toward the purchase of the 403,700 common shares of Great American Holding Corporation by National General Corporation. Such acquisition of shares was at a total cost of approximately $20,500,000. The earnings of Great American Holding Corporation which are attributable to the shares so acquired, have been included in the pro-forma statements of earnings, and for this reason no further income has been assumed to accrue from the proceeds of sale of Designed Facilities Corporation. (The document referred to appears at p. 292.) Now, it is a fact, is it not, that you sold warrants and you sold Designed Facilities Corp. and the proceeds from those two sales were used to purchase the 403,700 shares of Great American Holding Corp. Mr. KLEIN. We sold warrants and we sold Designed Facilities. Designed Facilities, I can specifically pinpoint the proceeds, and pinpoint the use of the proceeds because they were transferred immediately upon receipt for the payment of stock. We sold warrants before we made the purchase of stock and the moneys were in the general corporate treasury. I believe you can assume those moneys, because the amounts account so closely were used to pay for stock. We counted how much money we had to spend and how much money we could spend for stock and spent it. Mr. HARKINS. Do you quarrel with the statement in this letter? Mr. KLEIN. No, I am just commenting, not quarreling. Mr. HARKINS. So, on June 10 and June 11, you did not have sufficient moneys to pay for 266,300 shares of Great American stock? Mr. KLEIN. Additional shares, we did not have the cash on hand, that is correct. Mr. HARKINS. But on June 11 you did authorize Cogan, Berlind to purchase 266,300 shares? Mr. KLEIN. Let me recount to you, sir, what The CHAIRMAN. Can you answer that question directly? Mr. KLEIN. I am going to answer the question directly. I am going to tell you what happened and how it happened. The answer will certainly be in what I am going to say. I received a call, I received a call from Mr. Alan Alan, stating that that amount of shares were available and at a specified price. I believe |