ASSETS			1977	1976
CURRENT ASSETS:
	Cash		$ 2,569,303	$ 1,642,797
	Short-term investments—at cost, approximating market value:
		Held for dividends payable	1,768,044	1,705,600
		Held for payment of income taxes	400,000	900,000
		Other	100,058	13,405
	Receivables:
		Trade, less allowance for doubtful accounts ($148,675 and $123,000)	5,378,716	4,352,593
		Dividends from Eltra Corporation	932,567	932,567
		Other	169,002	433,031
	Inventories (Note 1)		9,208,275	8,324,709
	Deferred Federal income taxes—current (Notes 1 and 3)		5043875	411,403
		TOTAL CURRENT ASSETS	21,030,840	18,716,105
INTEREST IN ELTRA CORPORATION (Notes 1 and 2)			94,208,739	86,524,883
PLANT PROPERTY—At cost (Notes 1 and 4):
	Land		597,323	389,949
	Buildings		5,601,614	5,364,459
	Machinery and equipment		8,912,714	7,840,557
	Leasehold improvements		64,982	110,753
		TOTAL	15,176,633	13,705,718
	Less accumulated depreciation and amortization		7,462,532	6,765,879
		PLANT PROPERTY—NET	7,714,101	6,939,839
DEFERRED FEDERAL INCOME TAXES—relating to deferred pension credit (Note 1)			266,640	287,160
PREPAID EXPENSES, DEFERRED CHARGES, ETC.			336,270	226,943
		TOTAL	$123,556,590	$112,694,930
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
	Accounts payable (principally trade)		$ 1,390,001	$ 1,306,946
	Dividends payable		1,768,044	1,705,600
	Accrued taxes on income		414,692	941,569
	Other liabilities (including current portion of long-term debt)		2,147,676	1,903,668
		TOTAL CURRENT LIABILITIES	5,720,413	5,857,783
LONG-TERM DEBT (Note 4)			2,861,031	833,443
DEFERRED CREDIT FROM ACQUISITION (Note 1)			170,559	255,838
DEFERRED PENSION CREDIT (Note 1)			555,654	598,398
STOCKHOLDERS’ EQUITY (Notes 2 and 5)
	Common stock—Authorized 2,800,000 shares of $6.25 par value; 1,494,214 shares issued		9,338,838	9,338,838
	Capital surplus		10,290,271	10,399,979
	Earned surplus		99,185,947	89,994,293
	Less cost of common stock in treasury (274,973 and 276,028 shares)		(4,566,123)	(4,583,642)
		TOTAL STOCKHOLDERS’ EQUITY	114,248,933	105,149,468
		TOTAL	$123,556,590	$112,694,930
See Notes to Financial Statements

10-K
AITS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET

			March 31,
ASSETS (Note 5)			1977	1976
CURRENT ASSETS:
	Cash		$ 1,557,226	$ 2,579,567
	Accounts and notes receivable, less allowance for possible losses of $4,966,592 and $4,659,704 (Note 2)		4,235,738	4,678,251
	Inventories		327,268	316,506
	Prepaid expenses		412,104	1,369,423
	Certificates of deposit		1,527,778	3,125,347
		TOTAL CURRENT ASSETS	8,060,114	12,069,094
PROPERTY AND EQUIPMENT, mortgaged—less accumulated depreciation (Notes 1, 3 and 5)			55,372,049	56,452,139
EXCESS OF COST OVER FAIR VALUE OF UNDERLYING NET ASSETS OF ACQUIRED BUSINESS, net of amortization (Notes 1, 6 and 7)			14,410,294	13,130,599
OTHER ASSETS (Note 7)			675,814	1,033,516
			$78,518,071	$82,685,348
See notes to consolidated financial statements

The footnotes to the American Manufacturing financial statements did not point to any potential liabilities that seemed likely to seriously impact the business. The principal problems revolved around litigation described in footnote 8, but by year-end 1977, the risk of a large impact from unfavorable court decisions, though still in existence, seemed manageable. Footnotes to the AITS financial statements, on the other hand, indicated the possible existence of encumbrances over and above those appearing on the balance sheet—as, for example, the possibility discussed in AITS footnote 5 that North American Mortgage Investors (NAMI) might not honor a commitment to lend a needed $15 million to AITS.

AMERICAN MANUFACTURING COMPANY

8. Litigation

In connection with the merger of The Electric Auto-Lite Company (“Auto-Lite”) and Mergenthaler Linotype Company (“Mergenthaler”), now Eltra Corporation, a derivative and class action was instituted by two Auto-Lite shareholders on June 26, 1963, against Auto-Lite, Mergenthaler and American Manufacturing Company, Inc., in the United States District Court for the Northern District of Illinois. The complaint asserted claims under both federal and state law. On January 20, 1970, the United States Supreme Court upheld a ruling of the District Court which had granted plaintiffs’ motion for a summary judgment of liability on the ground that the merger proxy statement failed to bring out adequately the relationship between the Auto-Lite Board members and Mergenthaler. Following a trial on the issue of relief, the District Court, on April 11, 1975, awarded damages in the amount of $1,233,918 plus interest. On April 7, 1977, the Court of Appeals for the Seventh Circuit reversed this decision, holding that the terms of the merger were fair and that plaintiffs should recover no damages. The Court of Appeals further held that plaintiffs must pay their own attorneys’ fees and expenses for their unsuccessful attempt to obtain damages. However, the Court held that Eltra Corporation should pay plaintiffs’ fees and expenses through the Supreme Court’s decision upholding the summary judgment of liability. On October 31, 1977, the United States Supreme Court declined to further review the case and on December 12, 1977, the Supreme Court denied a request for rehearing. Despite the ruling of the Seventh Circuit, plaintiffs took the position before the District Court that they were still entitled to recover damages under their state law claims. A judgment order has been entered by the District Court dismissing all damage claims, including plaintiffs’ state law claims. Plaintiffs may attempt to secure appellate review of this order. It is the opinion of counsel in this matter that the amount ultimately awarded by the court for plaintiffs’ fees and expenses will not be material to Eltra Corporation’s financial position.

AITS FINANCIAL STATEMENTS IN 10-K

5. LONG-TERM DEBT		March 31,
Long term debt consists of:
		1977	1976
Notes payable to banks, with interest of ½% above prime rate (6¼% at March 31, 1977, payable $220,000 in 1978, $7,065,000 in 1979, $6,939,000 in 1980 and 1981 and $7,200,000 in 1982 and 1983 (a) (d)		$35,441,385	$25,000,000
Notes payable to bank, with interest of 4% above prime rate to a maximum of 10%, due November 15, 1978 (b) (d) (f)		15,000,000	17,500,000
Note payable to bank, with interest of ½% above prime rate, payable $25,000 per week (b) (d) (f)		4,025,000	—
Notes payable to stockholders of an acquired company (c) (d) (f)		13,197,779	16,490,000
9½% note payable to bank, $150,000 including interest, due monthly commencing July 1, 1977 (f)		3,900,000	—
Notes payable to two principal stockholders, with interest of ½% above prime rate, payments of $483,000 due quarterly commencing April 1, 1980 (e)		5,375,000	4,150,000
Other notes payable with interest at 5% to 8%		2,787,565	—
		79,726,729	63,140,000
Less:
	Current maturities	8,460,535	8,820,000
	Debt due to banks being renegotiated	35,441,385	—
Long-term debt		$35,824,809	$54,320,000

The Company has been negotiating to restructure the various debt agreements covering the $35,441,385 notes and to revise payment schedules on such debt. As of July 6, 1977, the Company has not signed agreements with such major lenders but expects to have them signed shortly. During the fiscal year ended March 31, 1977, the Company did not make its required payments on prior agreements and obtained waivers on all defaults resulting therefrom. The Company has obtained deferrals of demands for payment through July 31, 1977. Such debt has been classified as “Debt due to banks being renegotiated,” and are included as a current liability until the agreements are signed. The debt schedule in the next paragraph and the information in paragraph (a) below reflect the agreements in substantially the same format as they are presently in draft form.

Long-term debt (reflecting the debt agreements as now drafted) is payable as follows:

Year ending March 31,	Amount
1979	$19,378,362
1980	24,714,274
1981	9,056,394
1982	9,295,350
1983 and thereafter	8,821,814

The payments may be accelerated based upon earnings (see (a) below).

A. Principal payments are to be increased 90 days after each of the fiscal years ending March 31, 1978, 1979, and 1980 for all “cash flow” for each such year in excess of $20,000,000. The term “cash flow” is defined as net operating income before federal income tax, plus depreciation, amortization and interest. Additional payments may be required for the fiscal years ending March 31, 1981 and 1982 based upon the Company exceeding certain earnings levels.

Compensating balance requirements identical to those discussed under (b) are required on $25,000,000 of these notes.

B. The Company is expected to maintain compensating balances equal to 10% of the outstanding loan. Deficiencies in compensating balances require the payment of additional interest at the average Federal Fund rate plus ½ of 1 %.

The Company’s subsidiary has a mortgage loan commitment from North American Mortgage Investors (NAMI), a real estate investment trust, for $15,000,000 to close on October 15, 1978, and to mature on October 15, 1983, with no principal payments prior to maturity. This proposed borrowing is intended to partially repay the loans due on November 15, 1978. Interest will be payable at an annual rate of 4% above prime, but not more than 10%. This loan will be collateralized by a first mortgage on all real property and the personal guaranty of Meshulam Riklis in the amount of not more than commitment will terminate upon the bankruptcy or insolvency of Mr. Riklis. Fees of $862,500 were payable in connection with this commitment, of which $712,500 had been paid as of April 15, 1977. The remaining $150,000 is payable in equal installments of $75,000, payable on October 15, 1977 and April 15, 1978.

NAMI stated in its Form 10-K, filed with the Securities and Exchange Commission for the fiscal year ended December 31, 1976, that “since the unfunded commitments of the Trust and standby commitments outstanding exceed the Trust’s available cash, it is conceivable that the Trust might not have sufficient funds to fulfill such commitments.” The Company has obtained a commitment from its principal lender that if financing is not available prior to November 15, 1978, the note due to bank will be extended for one year.

C. These notes are comprised of a $4,583,332, 7% note due November 15, 1978, a $7,614,447 note, with interest of 2% over prime, not to exceed 9%, payable in monthly installments of $334,000, and a $1,000,000, 9½% note payable to an officer payable $200,000 quarterly.

D. The Hotel Riviera property and the stock of the Hotel Riviera, Inc. which represents substantially all of the assets of the Company, are pledged under the above agreements. Further, the agreements contain various restrictions substantially restricting the ability of the Company to borrow, declare dividends, reacquire shares, etc. The insolvency or death of Mr. Meshulam Riklis, the Chairman of the Board or Isidore Becker, President, is an event of default under several of these agreements. Mr. Riklis has personally guaranteed approximately $65,000,000 of the above notes.

E. These notes are due to Meshulam Riklis ($3,700,000) and Isidore Becker ($1,675,000).

F. Debt of Hotel Riviera, Inc.

MANAGEMENT AND CONTROL GROUP OBJECTIVES

An examination of Forms 10-K and proxy statements of American Manufacturing and its 28 percent owned affiliate, Eltra Corporation, indicates that management remuneration has been reasonable, that there have been no major transactions between the companies on the one hand and insiders on the other, and that since 1963 there has been no major litigation brought against the companies or insiders alleging wrongs that affect outside security holders. The American Manufacturing-Eltra disclosures in this regard should be contrasted with similar disclosures about remuneration, certain transactions and litigation made by Rapid American Corporation and Medallion Group.

Remuneration

Contrast the levels of compensation between American Manufacturing and Eltra, on the one hand, and Rapid American Corporation, on the other.

Eltra Proxy Statement Remuneration and Other Transactions with Management and Others

The following table sets forth (a) the direct remuneration accrued by the Corporation and its subsidiaries during the fiscal year ended September 30, 1977 for the following persons for services in all capacities: (1) each director of the Corporation whose aggregate direct remuneration exceeded $40,000, (2) each of the three highest paid officers of the Corporation whose aggregate direct remuneration exceeded $40,000, and (3) all directors and officers of the Corporation as a group; (b) the estimated annual benefits proposed to be paid by the Corporation upon retirement to the persons named and to all directors and officers as a group, the amounts stated being based generally on assumed continuous employment until age 65 at the base salary for the fiscal year ended September 30, 1977; and (c) the aggregate deferred compensation for all years accrued as of September 30, 1977 for the persons named and for all directors and officers as a group:

There was no deferred compensation accrued during the fiscal year ended September 30, 1977 for any officer or director.

Agreements between Mr. L. L. Garber and the Corporation provide, among other things, for payment of deferred annual compensation in the amount of $15,000 per year following his retirement on December 31, 1974 and ending at such time as his aggregate accrued deferred compensation ($144,667 accrued as of September 30, 1977) has been fully paid. Each payment of deferred compensation is subject to certain provisions prohibiting competition by Mr. Garber with the Corporation and its subsidiaries.

As of March 24, 1977, the Corporation entered into an agreement with Mr. J. A. Keller regarding his employment with the Corporation. The term of the agreement extends from that date until September 30, 1980 and, unless terminated effective as of that date, continues thereafter from year to year unless either party gives the other at least six months’ notice of termination in advance of any subsequent September 30th. The agreement provides, among other things, for payment of a fixed salary in the amount of $155,000 per year and, pursuant to prior employment agreements between the parties, aggregate deferred compensation of $133,333 payable after termination of employment in 13 equal annual installments. Each payment of deferred compensation is contingent upon Mr. Keller during his lifetime making himself available to render advice and counsel to the Corporation and is subject to certain provisions prohibiting competition by Mr. Keller with the Corporation and its subsidiaries. The Corporation has accrued the $133,333 deferred compensation as indicated in the table on the previous page.

On March 24, 1976, the Corporation entered into an agreement with Mr. Richard B. Loynd regarding his employment with the Corporation. The term of the agreement extends from that date until September 30, 1981 unless Mr. Loynd gives notice to the Corporation on or before February 28, 1979 that he desires a new employment agreement with the Corporation in which event the agreement shall terminate on September 30, 1979. The agreement provides, among other things, for payment of a fixed salary in the amount of $155,000 per year.

As of November 30, 1977, the Corporation extended for one year a consulting agreement with Mr. Stephen A. Stone which provides, among other things, for payment of consulting fees of $2,000 per month. The consulting agreement prohibits competition by Mr. Stone with the Converse division of the Corporation for a period of five years from its termination. Mr. Stone has a one-third beneficial interest in a trust which leases property in Berlin, New Hampshire to the Corporation at an annual rental of about $80,000. Mr. Stone is one of many beneficiaries of a discretionary trust which leases property in Malden, Massachusetts to the Corporation at an annual rental of about $97,000. The Corporation or its subsidiaries became the lessee under each of these two leases in arms-length negotiations prior to the date Mr. Stone became a director of the Corporation. The Corporation has agreed to pay the cost of demolishing certain buildings on the Malden, Massachusetts property in order to reduce the Corporation’s expenses.

As of January 1, 1977, the Corporation entered into an agreement with Mr. Glenn E. Taylor, Jr. regarding his employment with the Corporation which continues from year to year unless either party gives the other at least six months’ notice of termination in advance of any subsequent September 30th. The agreement provides, among other things, for payment of a fixed salary in the amount of $98,675 per year and, pursuant to prior employment agreements between the parties, aggregate deferred compensation of $46,667 payable after termination of employment in ten equal annual installments. Each payment of deferred compensation is contingent upon Mr. Taylor during his lifetime making himself available to render advice and counsel to the Corporation and is subject to certain provisions prohibiting competition by Mr. Taylor with the Corporation and its subsidiaries. The Corporation has accrued the $46,667 deferred compensation as indicated in the above table.

During the fiscal year ended September 30, 1977, the Corporation paid American and its subsidiaries an aggregate of $81,589 for sales commissions and for purchases of products, and American made purchases from the Corporation in the amount of $44,003. Purchases from and sales to American were made at competitive prices. As stated under the heading “Principal Holders of Securities,” American has a controlling interest in the Corporation.

Directors who are neither employees nor consultants of the Corporation receive a fee of $200 for each meeting of the Board of Directors attended. Directors who are also employees of the Corporation (Messrs. Keller, Loynd, Taylor and Gurdon W. Wattles) and Mr. Stone, presently a consultant to the Corporation, receive no additional compensation for attendance at meetings of the Board of Directors. The Board of Directors met nine times during fiscal year 1977.

STOCK OPTIONS AND STOCK APPRECIATION RIGHTS

No stock options may be granted under the Corporation’s 1959 Employee Stock Option Plan, as amended, after December 31, 1976. No stock options have been granted to any director or officer since March 24, 1976. The following tabulation shows as to certain directors and officers and as to all directors and officers as a group (i) the amount of shares of Common Stock acquired between October 1, 1976 and December 31, 1977 through the exercise of options granted prior to October 1, 1976, and (ii) the amount of shares of Common Stock subject to all unexercised options held as of December 31, 1977. All figures have been adjusted in accordance with the terms of the options to reflect the three-for-two stock split in March 1976.

Stock appreciation rights were granted under the Corporation’s 1977 Employee Stock Appreciation Rights Plan on November 29, 1977 to five officers, other than Messrs. Keller, Loynd and Taylor. These unexercised stock appreciation rights are calculated on 4,250 shares of Common Stock having a per share price of $24.875.

AMERICAN MANUFACTURING ANNUAL REPORT FOOTNOTE

5. Stock Option Plan

At December 31, 1977, there were unexercised options for 12,497 shares granted prior to 1975 under a stock option plan which expired April 5, 1975. The options are exercisable at various dates to November 20, 1982.

During 1975, the stockholders approved a new qualified Stock Option Plan dated April 6, 1975. Under the Plan, options to purchase common stock not exceeding an aggregate of 28,000 shares may be granted prior to April 6, 1980 to officers and employees at a price not less than market value at date of grant. The options granted expire five years after date of grant. No options are exercisable during the first year; during each of the second and third years options are exercisable for 15% of the shares, and thereafter options are exercisable in such amounts as are determined in each individual case by the option committee.

When options are exercised and common stock is issued, its cost is credited to the treasury stock account and the difference between option price and cost of treasury stock is charged or credited to capital surplus.

Changes in stock options during 1977 and 1976 were as follows:

At December 31, 1977 a balance of 8,300 shares of common stock remained available for future option grants. Of the options unexercised at December 31, 1977, options for 8,677 shares were exercisable at that date.

The dilution in per-share earnings which could arise from exercise of options is less than one percent, therefore the earnings per share shown in the statement of consolidated income do not reflect such dilution.

AMERICAN MANUFACTURING PROXY STATEMENT

Remuneration

The following table sets forth (a) the direct remuneration paid by the Company and its subsidiaries during the year ended December 31, 1976 to the following persons for services in all capacities: (1) each Director whose direct aggregate remuneration exceeded $40,000, (2) each of the three highest paid officers of the Company or its subsidiaries whose direct aggregate remuneration exceeded $40,000, and (3) all Directors and Officers of the Company and its subsidiaries as a group and (b) estimated annual benefits upon retirement at age 65 of persons indicated:

Name of Individual or Identity of Group and Capacity in Which Remuneration was Received	Direct Aggregate Remuneration for Fiscal Year	Estimated Annual Benefits Upon Retirement at Age 65*
Jack L. Gobble Director of the Company and President of Safety Railway Service Corp.	$ 55,200	$10,620
Harold V. Pate Director and Vice President of the Company	60,200	(See Note)
Robert B. Seidel Director and Vice President of the Company and President of Automatic Timing & Controls, a Division of the Company	56,224	25,989
Robert L. Stanton Director and Vice President of the Company	60,200	(See Note)
All directors and officers as a group:	515,956	87,895
18 persons
7 persons
*The amounts stated above are based on assumed continuous employment until age 65 under contributory pension plans.

The Company adopted in 1966 a profit-sharing savings plan effective January 1, 1966 for regular salaried employees in its Cordage Division. The Plan is of a contributory nature and provides for yearly contributions by the Company, based upon earnings of that division with a minimum contribution by the Company in each year of not less than $14,000 irrespective of earnings, credited to participants in proportion to their salaries and their contributions effected through payroll deduction. For the calendar year 1976 the contribution of the Company to the Plan was $87,572 of which $4,586 and $4,586 were allocated to Messrs. Pate and Stanton, respectively, and $7,212 were allocated to other officers of the Company employed in its Cordage Division.

Based upon the status of the Plan as at January 1, 1977 amounts allocated to Messrs. Pate and Stanton out of Company contributions made since the date of the Plan’s inception (including earnings thereon and net increments in market values of securities purchased therewith) were $48,227 and $46,972, respectively. On that basis, amounts allocated to other officers of the Company employed in its Cordage Division amounted to approximately $64,391. There is no way to compute estimated annual benefits on retirement due to variability of earnings, forfeitures, withdrawals and other factors inherent in the nature of the Plan.

Neither Mr. Gurdon W. Wattles nor Mr. Robert Pulleyn are participants in the Plan.

STOCK OPTIONS

The following tabulation shows as to certain directors and officers and as to all directors and officers as a group the amount of shares subject to all unexercised options held as of February 9, 1977 and the changes, if any, since December 31, 1975:

The following tabulation shows the high and low market prices of the Common Stock of the Company on the American Stock Exchange for each calendar quarter, commencing from January 1, 1976:

Calendar Quarter Ended	High	Low
March 31, 1976	51 3/8	36
June 30, 1976	50 3/8	44
September 30, 1976	51½	46¼
December 31, 1976	51	44

The closing price on February 9, 1977 was $50.00.

RAPID AMERICAN CORPORATION PROXY STATEMENT

Remuneration

The table on the following page sets forth certain information as to all direct remuneration paid, on an accrual basis, by Rapid and its subsidiaries during the fiscal year ended January 31, 1976 to (A) each person who was a director of Rapid during the fiscal year, and each of the three highest paid executive officers of Rapid during the fiscal year, whose aggregate direct remuneration exceeded $40,000, and (B) all persons who were either directors or executive officers of Rapid during that fiscal year, as a group. Information with respect to estimated annual retirement benefits at January 31, 1976 is also set forth for all named persons and all current directors and executive officers as a group.

The agreement between Rapid and McCrory, whereby Rapid agreed to render management assistance and services to McCrory and McCrory agreed to compensate Rapid for such assistance and services, was terminated as of January 31, 1976. During the year ended January 31, 1976, McCrory paid or accrued to Rapid approximately $900,000 pursuant to the management services agreement. It is intended by Rapid that all executives will be compensated by the particular subsidiary of Rapid to which they devote the principal portion of their business time. Accordingly, certain of these executives (including Meshulam Riklis) who were not compensated by McCrory in its fiscal year ended January 31, 1976, are now receiving their salaries from McCrory.

Employment Agreements

Effective November 20, 1972, Rapid entered into a five year employment contract with Meshulam Riklis, as chief executive officer, automatically renewable for an additional period of five years unless six months’ prior notice of intention not to renew is given by either party, which provides for an annual salary of not less than $375,000, plus incentive compensation at the rate of 1% of Rapid’s Consolidated After-Tax Operating Earnings (as defined) in each fiscal year beginning February 1, 1973, in excess of $20,000,000, up to a maximum of $100,000,000 per year. Such $375,000 annual salary is payable in any event, even if Mr. Riklis’ employment is terminated by death, disability or discharge with or without cause. This contract superseded all previous contracts, with the exception of a contract with McCrory dated August 1, 1970, a contract with Rapid dated October 29, 1965 (both of which are described hereafter), and accruals under a contract with Rapid dated August 1, 1970. The contract provides for deferred compensation to be earned at the rate of not less than $50,000 per year, payable following the termination of Mr. Riklis’ employment. The contract also provides for the payment of a retirement allowance for life following the termination of Mr. Riklis’ employment at the rate of $100,000 per year, and upon Mr. Riklis’ death, payments will continue to his surviving widow, if any, at the rate of $50,000 per year for her life; any pension plan benefits are deducted, and payments are subject to other limits and restrictions on competition with Rapid, are reduced by the receipt of disability payments and are subject to Mr. Riklis’ availability to render certain advisory services to Rapid. In the event of the termination of his employment because of his incapacity, Mr. Riklis is to receive disability benefits at the rate of $100,000 per year for life, less any amounts earned from other employment; in the event of his death, his widow or his surviving children or his estate is to receive death benefits of $500,000, plus one year’s incentive compensation (in addition to the incentive compensation earned by, but not yet paid to, Mr. Riklis prior to his death) payable over a ten year period. Mr. Riklis was also granted a non-qualified option to purchase 150,000 shares of Rapid Common Stock, at $25 per share, expiring at the earlier of (1) 90 days after the termination of Mr. Riklis’ employment for any reason other than his death, or (2) February 7, 1978, unless Mr. Riklis is in the employ of Rapid on November 21, 1977, in which event the expiration date is extended to February 7, 1983.

On October 29, 1965, Old Rapid entered into an agreement with Mr. Riklis whereunder Rapid is required to keep in force policies of key-man life insurance on Mr. Riklis’ life having an aggregate face value of approximately $1,035,000 and, whether or not Mr. Riklis is still employed by Rapid at the time of his death, to offer to use the proceeds of such insurance policies to purchase, pro tanto, shares of Common Stock of Rapid at that time owned by him or his estate at its then market price (averaged over the 30 days prior to date of death.) Effective April 10, 1973, this agreement was amended so as to include an additional $2,500,000 of such insurance which had been carried by Glen Alden. The offer, which may be accepted in whole or in part by his legal representative, shall be enforceable only to the extent that, at the date of Mr. Riklis’ death or within one year thereafter, Rapid shall be under no legal disability or restriction which would prevent such purchase. This agreement has not been superseded by any subsequent employment contract, and remains in effect.

On April 1, 1965, McCrory entered into an employment contract with Mr. Riklis, then its Chairman of the Board and President, which provided, inter alia, for the payment of a retirement allowance for life beginning with the later of (1) Mr. Riklis’ 55th birthday, or (2) the termination of his employment. Such allowance is to be paid in equal monthly installments at the rate of $15,000 per year; any pension plan benefits shall be deducted, and payments are subject to other limits and restrictions on competition with McCrory, receipt of disability payments, etc. Effective August 1, 1970, Mr. Riklis’ employment under such contract was terminated; only his retirement rights remain in effect. It is a condition to the payment of Mr. Riklis’ retirement rights that he shall be available to render advisory services to McCrory if requested by the Board of Directors of McCrory, subject to certain limitations. In 1974, Mr. Riklis relinquished his right to receive any retirement allowance from McCrory, so long as he continues to be employed and paid by Rapid and Rapid continues to have a substantial interest in McCrory. During the year ended January 31, 1976, Mr. Riklis did not receive any compensation from McCrory or any of its subsidiaries. See “Remuneration” above.

Effective as of August 1, 1975, Isidore A. Becker entered into a five-year employment contract (the “Schenley Contract”) with Schenley Industries, Inc., a subsidiary of Rapid (“Schenley”). The Schenley Contract is automatically renewable for an additional period of five years unless six months prior notice of intention not to renew is given by either party and supersedes all other employment contracts between Mr. Becker and Rapid or McCrory, including the contract which Mr. Becker entered into with Rapid on November 20, 1972 (the “Rapid Contract”). The Rapid Contract provided for an annual salary of not less than $275,000, plus incentive compensation at the rate of 1% of Rapid’s Consolidated After Tax Operating Earnings (as defined) in each fiscal year beginning February 1, 1973, in excess of $20,000,000, up to a maximum of $100,000,000 per year and, among other things, provided for deferred compensation to be earned by Mr. Becker at the rate of not less than $50,000 per year, payable following the termination of Mr. Becker’s employment. The Schenley Contract provides for an annual salary of not less than $350,000 per annum, has no provision for incentive or deferred compensation and it is Mr. Becker’s intention to waive his previously accumulated deferred compensation (approximately $250,000). The Schenley Contract also provides for the payment of a retirement allowance for life following the termination of Mr. Becker’s employment at the rate of $115,000 per year; upon Mr. Becker’s death, the retirement payments will continue to his surviving widow, if any, at the rate of $57,500 per year for her life. Any pension plan benefits are deducted from these retirement payments. The payments to Mr. Becker are subject to his availability to render advisory services to Schenley and are reduced by receipt of disability payments. In the event of the termination of Mr. Becker’s employment because of his incapacity, he is to receive disability benefits at the rate of $75,000 per annum for life. Additionally, his widow or his estate is to receive payments at the rate of $37,500 per year for 10 years after his death. Under the Rapid Contract, Mr. Becker was also granted a non-qualified option, which remains outstanding, to purchase 150,000 shares of Rapid Common Stock at $25 per share, expiring at the earlier of (1) 90 days after the termination of Mr. Becker’s employment for any reason other than his death, or (2) February 7, 1978 unless Mr. Becker is in the employ of Rapid from November 21, 1977, in which event the expiration date is extended to February 7, 1983.

On April 1, 1965, McCrory entered into an employment contract with Mr. Becker, then its Financial Vice President and Treasurer, which provided, inter alia, for the payment of a retirement allowance for life beginning with the later of (1) Mr. Becker’s 55th birthday, or (2) the termination of his employment. Such allowance is to be paid in equal monthly installments at the rate of $15,000 per year; any pension plan benefits are deducted and payments are subject to other limits and restrictions on compensation with McCrory, receipt of disability payments, etc. Effective August 1, 1970, Mr. Becker’s employment under such contract was terminated; only his retirement rights remain in effect. It is a condition to the payment of Mr. Becker’s retirement rights that he be available to render advisory services to McCrory if requested by the Board of Directors of McCrory, subject to certain limitations. In 1974, Mr. Becker relinquished his right to receive any retirement allowance from McCrory, so long as he continues to be employed and paid by Rapid and Rapid continues to have a substantial interest in McCrory. Pursuant to the Schenley Contract, Mr. Becker terminated his right to receive any retirement allowance from McCrory. Mr. Becker does not currently receive any compensation from McCrory or any of its subsidiaries.

On April 24, 1974, the Board of Directors of Rapid confirmed an opinion of counsel to Rapid that the determination of Rapid’s Consolidated After-Tax Operating Earnings (as defined) under Mr. Riklis’ and Mr. Becker’s November 20, 1972 employment contracts should be made on the basis of generally accepted accounting principles existing at November 20, 1972. Thus, items (whether positive or negative) such as the $7,423,000 charge in the year ended January 31, 1974 for the write-off of excess of cost of investment over related equity, which would have been an extraordinary item on November 20, 1972 but which are no longer so treated, are not taken into account in determining Mr. Riklis’ and Mr. Becker’s incentive compensation.

Leonard C. Lane, Executive Vice President and a director of Rapid, is employed by Rapid as a senior executive officer under a five year employment contract effective February 1, 1974, automatically renewable for an additional period of five years unless six months’ prior notice of intention not to renew is given by either party, which provides for an annual salary of not less than $240,000. The contract provides for deferred compensation to be earned at the rate of at least $45,000 per year, payable over a period of not more than 60 months following the termination of his employment. The contract also provides for the payment of a retirement allowance for life following the termination of his employment at the rate of $50,000 per year if he shall have been employed by Rapid and/or any of its subsidiaries or affiliates for less than five years from the date of the contract or $60,000 if he shall have been so employed for more than five years; certain pension plan benefits are deducted, and payments are subject to other limits and restrictions on competition with Rapid, and are reduced by receipt of disability payments, etc. As a condition to such retirement payments, Mr. Lane must be available for advisory services to the extent permitted by his health for a period of not more than 12 business days a year. Mr. Lane forfeits his retirement benefits if, within one year after termination of employment, he engages directly or indirectly in any activity competitive with the business of Rapid or any division or subsidiary thereof. In the event that Mr. Lane becomes incapacitated for twelve consecutive months, Mr. Lane’s employment may be terminated, in which event, he is to receive disability benefits at the rate of $60,000 per year for life, less any amounts earned from other employment; in the event of his death, his widow or his surviving children, if any, or his estate is to receive death benefits of $335,000, payable over a ten year period. Mr. Lane is authorized to devote a reasonable amount of business time to his personal investments and to consultation in the public or private educational field. Mr. Lane has been receiving the sum of $15,182 semi-annually from McCrory since February 1, 1971, pursuant to the terms of a prior employment agreement; such payments terminated August 1, 1975.

Haim Bernstein, a Vice President and a director of Rapids, is employed by Rapid as a senior executive officer under a five year employment contract effective February 1, 1973, automatically renewable for an additional period of five years unless six months’ prior notice of intention not to renew is given by either party, which provides for an annual salary of not less than $87,500 through January 31, 1974 and not less than $117,500 thereafter (to be reduced by any compensation in excess of $12,500 paid by any employee benefit trust of Rapid or any of its subsidiaries). The contract provides for accrual of deferred compensation at the rate of at least $30,000 per year accrued from August 1, 1970 through January 31, 1974, payable in no more than 42 monthly payments following the termination of his employment. The contract also provides for the payment of a retirement allowance for life following the termination of his employment at the rate of $12,000 per year if his employment with Rapid shall terminate prior to January 31, 1975 and at the rate of $13,000 per year if he shall be employed through January 31, 1975, which sum shall increase at the rate of $1,000 for each additional year he shall be employed by Rapid up to a maximum of $20,000 if he is employed through January 31, 1983; any pension plan benefits (other than pursuant to any profit sharing plan) are deducted, and payments are subject to other limits and restrictions on receipt of disability payments, etc. As a condition to such retirement payments, Mr. Bernstein must be available for advisory services to the extent permitted by his health for a period of not more than 12 business days a year. Mr. Bernstein forfeits his retirement benefits if, within one year after termination of employment, he engages directly or indirectly in any activity competitive with the business of Rapid or any division or subsidiary thereof. In the event that Mr. Bernstein becomes incapacitated for a period of twelve consecutive months, his employment may be terminated, in which event Mr. Bernstein is to receive disability benefits at the rate of $12,000 per year for life, less any amounts earned from other employment; in the event of his death, his widow or his estate is to receive death benefits of $100,000 payable at the rate of $2,000 per month. Mr. Bernstein is also Vice President—Administration of McCrory. Mr. Bernstein currently spends substantially all of his time on McCrory matters and, since February 1, 1976, McCrory has been paying Mr. Bernstein’s salary. See “Remuneration” above and “Certain Transactions” below.

On June 7, 1974, Lorence A. Silverberg became Executive Vice President of McCrory and has entered into an employment contract with McCrory, to be employed as a senior executive through May 31, 1979. The contract, which is automatically renewable through May 31, 1984, unless six months’ prior notice of intention not to renew is given by either party, provides for (1) an annual salary of not less than $200,000; (2) deferred compensation of $25,000 for each year or portion thereof in which Mr. Silverberg renders services under the contract, payable in 60 monthly installments commencing on termination of his employment thereunder; (3) incentive compensation equal to 1% of the Operating Earnings (as defined) in excess of $7,500,000 of the Variety Store Division of McCrory, commencing with the fiscal year beginning February 1, 1974; and (4) deferred compensation of $50,000 per year, payable monthly (the “Retirement Sum”), until Mr. Silverberg’s death, commencing upon the termination of his employment. In the event that Mr. Silverberg becomes incapacitated for a period of twelve consecutive months, his employment may be terminated. In the event that Mr. Silverberg dies while he is entitled to receive the Retirement Sum, Mr. Silverberg’s widow is to receive 50% of the Retirement Sum during her lifetime. Mr. Silverberg’s right to receive the Retirement Sum is extinguished if Mr. Silverberg, within one year of termination of employment, without McCrory’s consent, engages, directly or indirectly, in any activity competitive with the business of McCrory. In accordance with the terms of the contract, McCrory acquired, for $5,702, from Mr. Silverberg’s previous employer, an insurance policy on Mr. Silverberg’s life. McCrory is required to keep such policy and a further insurance policy, aggregating $300,000 of insurance, in effect until termination of Mr. Silverberg’s employment and to pay, on Mr. Silverberg’s behalf, all premiums on the policies. Mr. Silverberg has agreed to reimburse McCrory for its acquisition costs of, and the premiums paid on, the policies and has assigned the policies to McCrory to secure such obligation; in the event of Mr. Silverberg’s death, McCrory is entitled to receive, from the death benefits provided under the policies, an amount equal to Mr. Silverberg’s unpaid obligation with respect thereto. Mr. Silverberg also has been receiving the sum of $3,000 quarterly from McCrory since July 1972, pursuant to the terms of a prior employment agreement and will continue to receive such payments until April 1, 1983.

The aggregate amounts of deferred compensation under the above-described employment contracts accrued, as at January 31, 1976, for the account of the following individuals, who are the only current directors or executive officers of Rapid who have deferred compensation arrangements with Rapid or any of its subsidiaries, were: Meshulam Riklis—$188,666; Haim Bernstein—$80,412; Leonard C. Lane—$238,750; and Lorence A. Silverberg—$127,569. (These accruals, except for Messrs. Silverberg and Lane, assume that the employee will retire at normal retirement age of 65 and are discounted to present value at interest rates of 6% to 8%.)

CERTAIN TRANSACTIONS

American Manufacturing and Eltra transactions with insiders have been insignificant, as is shown in the following American Manufacturing proxy statement:

Company Transactions with Eltra Corporation

During the year ended December 31, 1976, the Company and its subsidiaries made purchases from Eltra Corporation in the amount of $33,839 and Eltra paid the Company an aggregate of $55,795 for sales commissions and for purchases of products. Purchases from and sales to Eltra were made at competitive prices. The Company has a controlling interest in Eltra Corporation. Messrs. Lonegren, G. B. Wattles and G. W. Wattles were re-elected as Directors of Eltra Corporation at its annual meeting on February 8, 1977.

Contrast the above with “Item 18. Interest of Management and Others in Certain Transactions” taken from Part II of the Medallion Group 10-K ¹¹⁷ for the year ended December 31, 1977, where it would appear that insiders may conceivably be entering into transactions with the company for a principal purpose of creating tax shelter for the insiders. However, it is difficult for us to understand the financial and economic implications of many of the transactions described in Item 18 of the Medallion 10-K.

MEDALLION GROUP 10-K

Item 18. Interest of Management and Others in Certain Transactions.

Reference is made to Item 4 for information concerning transactions related to the acquisition of control of the Registrant by Messrs. Speiser, Hyman, and Baker and other transactions of the Registrant involving its management and principal stockholders.

As a result of several transactions, the real estate occupied by Capitol, which serves as its primary manufacturing and warehouse facility in Chicago, Illinois (the “Real Estate”), was transferred from Harris Trust and Savings Bank as Trustee (“Trust”) (of which Eugene L. Young, president of Capitol and president and a director of Medallion, is a beneficial owner to the extent of approximately 11%) to Messrs. Speiser, Hyman and Baker, and Eugene L. Young as tenants-in-common (the “Transferees”).

On April 6, 1966, Capitol and the Trust entered into a net-net lease (“Lease”) pursuant to which the Trust leased the Real Estate to Capitol on a net-net basis at a rental of $5,500 per month for the period from June 1, 1966 until December 31, 1982. This Lease was assigned as additional security on an institutional loan secured by a first mortgage in the original amount of $300,000. The loan was for 15 years at 6¼% interest and self-liquidating by the payment of $2,573 per month. Under the terms of this Lease, Capitol deposited $76,000 as a security for its performance under the Lease.

On June 2, 1975, Capitol entered into a contract to purchase the Real Estate from the Trust pursuant to a Real Estate Sale Contract (“Contract”). Pursuant to this Contract, Capitol agreed to pay $587,625.42 as the purchase price for the Real Estate payable as follows:

a. $155,765.70 by taking subject to the first mortgage

b. $355,856.72 by taking subject to the second mortgage and

c. assuming the obligation to repay the $76,000 security deposit under the Lease with interest at the rate of 4% per annum.

The Lease, pursuant to which Capitol occupies the premises, continues in all respects exactly as it did prior to any of the transactions described herein. Capitol’s Lease rent of $5,500 per month is sufficient only to pay the second mortgage which Capitol is authorized to pay directly to the Trust which is now the mortgagee under the second mortgage. The Transferees have the obligation of paying $2,573 per month on the first mortgage until July 1, 1981. Since the Lease has been assigned to secure payment of the first mortgage in the event that the Transferees fail to make payment under the first mortgage, then the first mortgagee would have a prior lien on Capitol’s rent of $5,500 per month to the extent of $2,573 per month leaving a potential obligation of $2,927 per month to be repaid on the second mortgage. However, should Capitol be called upon to make up this deficiency, it would have a right of offset and a claim against the Transferees and their equity in the Real Estate to that extent.

Upon the expiration of the Lease a potential conflict of interest may arise between Messrs. Young, Speiser, and Baker as the owners of the Real Estate and Capitol relating to future rent. It is the intention of the parties to have an independent appraisal made at the expiration of the Lease to determine a fair and equitable rental for the premises, if it is decided that it would be in the best interest of Capitol to continue to occupy the premises rather than to incur the expense of relocating its very heavy equipment and machinery.

As part of the settlement agreement referred to in Item 5 hereof, on March 11, 1977, Mr. Hyman transferred his interest in the Land Trust to Messrs. Baker, Speiser and Young in consideration of their assuming his obligations with respect thereto.

Although no attempt was made to consummate the transactions described above with non-affiliated third parties, in the opinion of the management of the Registrant, such transactions were as fair to the Registrant as if such transactions had been consummated with non-affiliated third parties.

On June 27, 1975, Capitol sold substantially all of its machinery and equipment to a group of tenants-in-common consisting of Messrs. Speiser, Hyman, Baker, and Young and two persons not affiliated with the Registrant (the “Buyers”) for $1,600,000, the market value as determined by independent appraisal. The purchase price was paid as follows:

a. $50,000 in cash

b. the delivery of two promissory notes each in the amount of $30,000 payable July 1, 1976 and July 1, 1977 and

c. the delivery of a non-recourse note (“Note”) secured by a Security Agreement covering the machinery and equipment which was sold to the Buyers in the amount of $1,490,000 which bears interest at the rate of 12% per annum and is payable in 39 equal semi-annual installments of $15,700 each, and a final payment of $312,157 on January 1, 1995.

The Buyers also paid in cash to Capitol $43,000 as an advance payment of interest.

The Buyers leased the machinery and equipment on a net-net lease to Capitol for a term of 19 years and 6 months terminating December 31, 1994 at an annual rental of $297,600 for the year 1976 (the first rent not being due until 1976) and $203,400 per annum from 1977 through 1994 and a final rental payment of $7,500 in 1995 (“Equipment Lease”).

Insofar as Messrs. Baker, Speiser and Young are associated with Capitol and Registrant, there is a possible conflict of interest in the event that the final payment under the Note is not made relating to whether Capitol should foreclose its lien on the machinery and equipment. If the final payment is made, a conflict might exist as to the terms and conditions of any further lease or the price of a sale of the machinery and equipment to Capitol.

Registrant has guaranteed the performance of Capitol under the Equipment Lease.

As a result of the sale of the machinery and equipment, Capitol and Medallion Leisure Corporation (which corporation was merged into the Registrant on November 6, 1975; “MLC”) realized taxable income in the taxable year ending June 30, 1975; however, such income was deferred at June 30, 1975 in MLC’s and the Registrant’s affiliates’ consolidated financial statements and recognized as income over the term of the Lease on a pro rata basis. The Registrant, Health Med, and Briarcliff Candy Corporation (“Briarcliff”) are parties to a tax-sharing agreement (as described below) which provides for the Registrant to pay to Health Med an amount equal to the federal income taxes it would have paid had it filed a consolidated return with only its subsidiaries. In accordance with an understanding among MLC, Health Med, and Briarcliff, the amount of taxes resulting from the sale of the machinery and equipment will be payable over a period of three years commencing with the taxable year ending June 30, 1976.

On March 11, 1977, Mr. Hyman sold his interest in the above-described equipment and machinery to the Registrant effective as of January 1, 1978 for $24,000.

Although no attempt was made to consummate the transactions with non-affiliated third parties, the management of the Registrant is of the opinion that the transactions were as fair to the Registrant as if they had been consummated with non-affiliated third parties.

On June 27, 1975, Perfection sold substantially all of its production machinery and equipment to a group of tenants-in-common consisting of George W. Gable—½ interest, Leon C. Baker—1/6 interest, Seymour Hyman—1/6 interest, and Marvin M. Speiser—1/6 interest (the “Purchasers”) for $293,500, the market value of the machinery and equipment as determined by an independent appraisal. The purchase price was paid as follows:

a. $8,500 in cash

b. the delivery of two promissory notes each in the amount of $5,000 payable January 2, 1976 and January 3, 1977, and

c. the delivery of a non-recourse note (“Note”) secured by a Security Agreement covering the machinery and equipment which was sold to the Purchasers in the amount of $275,000. The Note bears interest at the rate of 12% per annum and is payable $20,160 on January 2, 1976, and in semi-annual installments of $17,675 commencing July 1, 1976, through January 1, 1995 and $55,000 on January 15, 1995.

The Purchasers also paid in cash to Perfection $8,000 as an advance payment of interest.

The Purchasers leased the machinery and equipment on a net-net lease to Perfection for a term of 19 years and 6 months terminating December 31, 1994 at an annual rental of $55,040 for the year 1976 (the first rent not being due until 1976) and $37,760 per annum for 1977 through 1994 and a final rental payment of $1,600 in 1995 (“Lease”).

The relationship between the Purchasers (as officers or directors of Perfection, Health-Chem and Registrant) may constitute a possible conflict of interest in the event that the final payment under the Note is not made relating to whether Perfection should foreclose its lien on the machinery and equipment. If the final payment is made, a conflict might exist as to the terms and conditions of any further lease or the price of a sale of the machinery and equipment to Perfection.

Health-Chem and Registrant have guaranteed the performance of Perfection under its Lease.

As a result of the sale of the machinery and equipment, Perfection and Health-Chem realized taxable income in the taxable year ending June 30, 1975; however, such income was deferred at June 30, 1975 in Health-Chem’s and the Registrant and affiliates’ consolidated financial statements and recognized as income over the term of the Lease on a pro rata basis. Health-Chem, Health Med and Briarcliff are parties to a tax-sharing agreement as described below which provides for Health-Chem to pay to Health Med an amount equal to the federal income taxes it would have paid had it filed a consolidated return with only its subsidiaries. In accordance with an understanding among Health-Chem, Health Med and Briarcliff, the amount of taxes resulting from the sale of the machinery and equipment will be payable over a period of three years commencing with the taxable year ending June 30, 1976.

As of March 11, 1977, Mr. Hyman sold his interest in the above-described machinery and equipment to Health-Chem for $3,600.

LITIGATION

American Manufacturing and Eltra have been almost free of the commencement of stockholder litigation since 1963, as is noted above. In contrast, various parties have felt aggrieved by Medallion Group or Medallion Group insiders. It ought to be noted that in our litigious society the filing of lawsuits is a commonplace occurrence, and the fact that Medallion and its principals have been involved in much litigation should in no way imply culpability or wrongdoing on the part of management, controlling stockholders or the company itself. Rather, as we stated before, we think the presence or absence of litigation should be an important factor for outside investors seeking to make investment decisions.

MEDALLION GROUP 10-K

Item 5. Pending Legal Proceedings.

On June 9, 1969, two stockholders commenced a derivative lawsuit (Mathes v. Ault) in the Supreme Court of the State of New York against the Registrant and its directors seeking to rescind certain stock subscription agreements and Registrant’s acquisition of Herculite on the grounds that the purchase price under the stock subscription agreements was inadequate, that the consideration paid by Registrant for HS Protective Fabrics Corporation was excessive and that both transactions were undertaken for an improper purpose. Registrant believes that the stock subscription agreements (which have been ratified by the stockholders) were a proper way of compensating the officers and directors involved. The stock subscriptions were terminated in connection with the extension of the maturity date of Registrant’s 7% Convertible Notes held by Messrs. Baker and Speiser as described in Item 18. With regard to the acquisition of Herculite (the terms of which have also been ratified by the stockholders) management believes that, based upon the relative past and potential earnings of Herculite and Registrant, their relative balance sheet positions, and the market price of Registrant’s Common Stock, the consideration to be paid for the Herculite operation was both fair and reasonable to Registrant. For these reasons, management regards the suit to be without merit. Counsel for Registrant believes, although it is not possible at this time to predict accurately the outcome of this action, that, on the basis of information presently available, Registrant is not subject to any substantial liability.

The Puerto Rican Treasury Department has asserted a claim of $92,000 plus interest against Registrant’s former Puerto Rican subsidiary. A petition to reconsider is currently pending. Registrant’s former Puerto Rican subsidiary has made a claim for a tax refund of $138,630 which is also currently pending.

On December 21, 1976, a judgment was entered in the United States District Court for the Eastern District of Michigan, Southern Division, in favor of Harry Berman against the Registrant. The judgment requires Registrant to pay $36,463.50 plus interest at the rate of $4.81 per day from December 1, 1976 and upon payment Mr. Berman is required to deliver to the Registrant 6,154 shares of its Common Stock. Registrant is currently appealing this judgment.

On December 23, 1976, Seymour Hyman formerly Chairman of the Board and President of Health-Chem, commenced an action in the Supreme Court of the State of New York, County of New York, against the Registrant and its affiliated companies, Health Med, Herculite, HS Protective Fabrics Corporation, and Marvin M. Speiser, presently Chairman of the Board of the Registrant and Chairman of the Board of Health-Chem, and Leon C. Baker, Director and General Counsel of the Registrant and Health-Chem. The action alleged damages in the amount of $2,000,000 against the corporate defendants and $4,000,000 against each of the individual defendants.

On March 11, 1977 all of the parties agreed to a settlement of the action. The settlement involved (i) Mr. Hyman’s cancellation of the balance on his employment contracts with Health-Chem and its wholly-owned subsidiary, Herculite (the employment agreement with Health-Chem was to continue until December 31, 1978 at a salary of $108,000 per annum and the agreement with Herculite was to continue until December 31, 1980 at a salary of $78,000 per annum plus a bonus based upon profits), (ii) the payment by Mr. Hyman of $25,000 in settlement of certain claims which Health-Chem had against Mr. Hyman, (iii) the issuance by Health-Chem of 1,565 shares of its newly-created Series “B” Convertible Preferred Stock (“Series B”) to Mr. Hyman in exchange for 689,579 shares of the Registrant’s Common Stock owned by Mr. Hyman (Series B is redeemable at $1,000 per share, has a cumulative annual dividend of $50.00 per share, has one vote per share, has a sinking fund requirement of $137,500 semi-annually less accumulated dividends for the prior six months, and is convertible into 125 shares of Health-Chem’s Common Stock for each share of Series B), (iv) the purchase by Health-Chem from Mr. Hyman of his 7% Note in the amount of $168,750 (Health-Chem paid Mr. Hyman the face amount thereof, plus $8,220 of accrued interest), (v) the release by Mr. Hyman of the Registrant and Health-Chem from any obligations to him under options to purchase shares from either company (Mr. Hyman held Non-Qualified Stock Options to purchase 75,000 shares of Health-Chem’s Common Stock and 100,000 shares of the Registrant’s Common Stock), and (vi) the release by the Registrant of Mr. Hyman of obligations under a subscription agreement to purchase an additional 22,000 shares of the Registrant’s Common Stock. In addition, as further consideration for the settlement, Health-Chem transferred to Mr. Hyman the automobile it had previously provided to him for $5,000.

Various other insubstantial matters between the parties were also compromised and settled.

At Mr. Hyman’s insistence, Marvin M. Speiser and Leon C. Baker granted Mr. Hyman a Put to expire on April 30, 1977 to sell the 1,565 shares of Series B to them for a purchase price of $1,150,000. On April 30, 1977, the Put was exercised and at a closing held on May 4, 1977, the 1,565 shares of Series B were purchased by Mr. Baker, Mr. Baker’s brother, Mr. Speiser and Mr. Speiser’s wife.

On June 2, 1977 an action entitled Marcel Goldberger and Robert S. Krauser on behalf of Health-Chem, Perfection Paint and Color Company, Inc., Time and Custom Spray, plaintiffs, v. Leon C. Baker, Marvin M. Speiser, Marvin S. Caligor, Sy Baskin, George W. Gable, Gerald Chige, Roy Marcus, Melvin Shore, Walter C. Drost, Eugene L. Young, John J. Blumers, Health-Chem, Health Med, the Registrant, Perfection Paint and Color Company, Inc., Time, and Custom Spray, defendants, was commenced in the United States District Court for the Southern District of New York. In their complaint, plaintiffs alleged that, commencing in December 1973, the individual and corporate defendants (except Health-Chem, Perfection, Time and Custom Spray) embarked upon an overall fraudulent and secret scheme to use their control of Health-Chem and its subsidiaries for their own ends and private gains to the detriment of Health-Chem. Specifically, plaintiffs alleged wrongdoing in connection with loans by Health-Chem to Health Med and the Registrant, the issuance and redemption by Health-Chem of its junior preferred stock held by Health Med, sale-leaseback transactions involving Health-Chem, Perfection, Time and Custom Spray and certain of the individual defendants and unrelated third parties and the failure to make proper disclosure of these and certain other matters to Health-Chem’s shareholders. Plaintiffs claimed that the defendants’ conduct represented a violation of Sections 10b and 14 (a) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14a-9 promulgated thereunder. In the action, plaintiffs asked the court to (a) set aside all actions taken at the Annual Meetings of Shareholders of Health-Chem held in 1973, 1974, 1975, 1976, and 1977, (b) require all of the defendants except Health-Chem and its subsidiaries to make restitution to Health-Chem and its shareholders of all salaries, bonuses, stock options and all other compensation, benefits, contract benefits and perquisites conferred upon the individual defendants, in their roles as officers of Health-Chem, since January 1, 1973 and (c) award damages in an unspecified amount for the alleged wrongs set forth in the complaint. On August 12, 1977, all of the defendants moved to dismiss the complaint on the ground that it failed to state a claim under the applicable Federal Securities Statutes. On October 20, 1977, the defendants’ motion was granted and the plaintiff’s complaint was dismissed with leave to file an amended complaint. On February 14, 1978 the court dismissed the complaint.

On November 4, 1977, an action entitled Health-Chem Corporation, Herculite Protective Fabrics Corp., Leon C. Baker, and Marvin M. Speiser v. Seymour Hyman, a/k/a Sy Hyman, was commenced in the United States District Court for the Southern District of New York. The complaint alleges that the defendant Hyman violated the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, by failing to disclose that at the time the defendant, the plaintiffs and others entered into the settlement of the action described above (a) he knew that the stockholders derivative suit described above would be brought, and (b) he intended to violate the terms of the settlement by causing the same stockholders derivative suit to be brought; for each of which violations Health-Chem is alleged to be entitled to recover damages of $1,117,000. The complaint also alleges that, while an officer and director of Health-Chem and of Herculite, the defendant charged improper expenses to them for which he was reimbursed, and for which Health-Chem and Herculite should recover more than $200,000; and, in addition, that had the defendant disclosed these improper charges and reimbursements, Health-Chem’s Board of Directors would not have ratified certain employment agreements between the defendant, Health-Chem, and Herculite, with resulting damage to Health-Chem and Herculite of $300,000. The complaint also asks recovery on behalf of Health-Chem of $10,000, representing the difference between the amount Mr. Hyman paid Health-Chem for and the fair market value of an automobile transferred by Health-Chem to Mr. Hyman as further consideration for the settlement described above, alleged to have been fraudulently entered into by the defendant. Finally, on behalf of the individual plaintiffs, Messrs. Baker and Speiser, the complaint alleges that the defendant’s failures to disclose the material facts outlined above, in violation of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, injured them in the amounts of (a) $195,625, the value of the Put granted by Messrs. Speiser and Baker to the defendant which is described above and (b) $500,000, the damage caused them by the defendant’s exercise of the Put. The complaint demands that Baker and Speiser be entitled to offset their recovery above against amounts they owe to the defendant as payment for the Health-Chem Series B purchased by them when the defendant exercised the Put, and to cancel certain letters of credit which they delivered to secure payment therefor.

In January 1977, Noel Hyman started a lawsuit in the Supreme Court of the State of New York, County of New York, against the Registrant and Marvin M. Speiser, its Chairman of the Board. The complaint alleges that Noel Hyman, brother of Seymour Hyman, former president of Health-Chem, received 40,000 shares of the Registrant’s Common Stock as a finder’s fee in connection with the acquisition of Union Broach. The complaint further alleges an oral arrangement between the defendants and the plaintiff pursuant to which he was allegedly guaranteed a price of $5.00 per share. The complaint seeks to recover the difference between the fair market price of the stock and $5.00 per share, or in the alternative to return the shares and receive payment in cash. Registrant’s management believes the claim to be without merit.

On or about January 6, 1977, an Involuntary Petition in Bankruptcy was filed against Registrant’s subsidiary, Medallion Pool Corporation (“Pool”). The action entitled, “In Re Medallion Pool Corporation”, is pending in the United States District Court for the Eastern District of New York. On or about September 15, 1976, Registrant, through its attorneys, proposed to all of Pool’s trade creditors a guarantee of payment in full of their proven claims against Pool on the basis of 36 equal monthly payments commencing September 1, 1978 and provided that 90% of the eligible creditors accepted the proposal. At the time of the filing of the Involuntary Petition in Bankruptcy, less than 90% of the creditors had accepted the proposal. Registrant on February 1, 1977, through its attorneys, proposed to purchase the claims against Medallion Pool Corporation by those trade creditors who had accepted the prior proposal before the filing of the Involuntary Petition in Bankruptcy, provided that this proposal was accepted before February 28, 1977. The purchase price to be paid was the same as in the prior proposal which was payment of 100% of the claim in 36 equal monthly installments commencing September 1, 1978. As a result of this proposal, through December 31, 1977 Registrant has purchased claims in the approximate amount of $272,631.00 (including $81,524 from affiliated companies).

On March 6, 1978, an action entitled Albert Sacklow, Trustee in Bankruptcy of Medallion Pool Corporation, v. Medallion Group, Inc., Health Med Corporation, Health-Chem Corporation, Herculite Protective Fabrics Corp., Factory Lease Co. Division of Capitol Hardware Mfg. Co., Inc., Marvin M. Speiser, Eugene L. Young, Leon C. Baker, Melvin Shore, Manufacturers Hanover Trust Company and Long Island Trust Company was commenced in the United States District Court for the Eastern District of New York. The Complaint alleges three causes of action. The first cause of action alleges that a certain secured loan to Pool from its corporate parent, Registrant, was in actuality a capital contribution and that transactions undertaken to satisfy the loan constituted a fraudulent transfer designed to defraud creditors in favor of Registrant. It is further alleged that all the corporate and individual defendants knew of the plan and agreed to it. The first cause of action seeks recovery against all defendants in the sum of $1,036,560 which was allegedly paid out of Pool’s assets to satisfy the loan.

The second cause of action alleges that on or about September 6, 1976, Registrant caused Pool to discontinue operations and thereafter “dissipated” Pool’s inventory which had a value of $804,000. It seeks recovery of that amount from Registrant and the individual defendants.

The third cause of action alleges that on or about September 30, 1976, Registrant caused inventory of Pool valued at approximately $86,000 to be transferred to Herculite and Factory Leasing Co. Division of Capitol. The complaint alleges that this was a preference and demands recovery against Herculite and Capitol in the sum of $86,000.

Defendants have not as yet answered the complaint.

In the opinion of management of the Registrant the action is without merit.

On or about March 21, 1978 an action entitled Ralph Limmer v. Medallion Group, Inc., Marvin M. Speiser, Leon C. Baker, Eugene L. Young, John J. Blumers, Melvin Shore, Seymour Baskin, Walter C. Drost, George W. Gable, George H. Cohen, Walter Kutler, William P. Willey, Seymour Hyman, J. K. Lasser & Co., Touche Ross & Co., Health Med Corp. and Health-Chem Corp. was commenced in the Supreme Court of the State of New York for the County of New York. The complaint alleges, among other things, that the individual defendants caused Registrant, its subsidiaries and affiliates to enter into certain sale-leaseback transactions which served no corporate purpose and were designed only to benefit the individual defendants. The complaint alleges that these transactions were a waste of the assets of Registrant, its subsidiaries and affiliates, and that the individuals’ conduct represents a breach of their fiduciary duty as officers and directors.

The complaint also alleges that the individual defendants breached their fiduciary duties by causing Registrant and its subsidiaries to pay to the individual defendants excessive salaries, expenses and stock option benefits. The complaint further alleges that all defendants conspired to conceal this information from Registrant’s stockholders.

For his relief, plaintiff seeks damages for the breaches of fiduciary duty described above as well as a judgment cancelling the sale-leaseback transactions; removing the individuals from corporate office; appointing a receiver to operate Registrant, Health-Chem Corporation and Health Med Corporation; cancelling certain stock options awarded to the individual defendants; requiring the individual defendants to dispose of their shares of Registrant and its subsidiaries and affiliates; enjoining the individual defendants from entering into certain transactions with or on behalf of Registrant and its subsidiaries and affiliates; and rescinding an earlier settlement agreement between Registrant and its subsidiaries and Seymour Hyman, and other relief, as well as the costs and disbursements of the action.

Defendants have not as yet answered the complaint.

In the opinion of management of Registrant the action is without merit.

As a result of a fire which occurred in the Maury County Jail located in Columbia, Tennessee on or about June 26, 1977, it is reported that approximately 42 persons died and many were injured.

Allegations have been made that Herculite manufactured a product which was present in the jail at the time of the fire.

Litigation has been commenced and claims made by numerous parties seeking to recover damages from Herculite and various other defendants. The damages sought include both compensatory and punitive damages. The pending litigation, claims made and anticipated claims and litigation including the very large claims for punitive damages, exceed Herculite’s insurance coverage.

At this time Registrant’s management is unable to ascertain whether or not its product was present in the jail or involved in the fire. In any event, Registrant, based upon advice of special counsel handling these matters, believes Herculite has a meritorious defense against any and all claims that may be made and that there is adequate insurance to cover any liability that may ultimately result from these claims.

On April 7, 1978 an action entitled B. W. Drennan Ltd. v. Vincent Lippe Incorporated, Medallion Leisure Corporation and Medallion Group, Inc. was commenced in the Supreme Court of the State of New York for the County of New York. The complaint alleges that plaintiff had a sales representation agreement with the defendants and that defendants failed to live up to the terms of the sales representation agreement. Plaintiff requests damages in the amount of $500,000. Defendants have not as yet answered the complaint. Registrant’s management is of the opinion that the action is without merit.

Except for litigation arising in the normal course of business against which Registrant or its operating affiliates are insured, there are no other legal proceedings pending which might subject Registrant to any substantial liability.

Reasonably Understandable Information

Both American Manufacturing and Eltra are relatively straighforward going-concern manufacturers’ operations. The businesses are described in considerable detail in SEC filings and stockholder mailings. In the interests of brevity, these materials are not duplicated here.

Chemex Corporation, in sharp contrast, was, in May 1978, a business that would be extremely difficult to understand unless one were a cancer researcher with access to various scientific studies. As such, Chemex common stock would not be viewed by us as an attractive security for an outside investor under the financial-integrity approach, regardless of the price at which it was selling. The situation at Chemex was described in the “Inside Wall Street” column of the May 8, 1978, issue of Business Week:

CHEMEX RIDES HIGH ON ITS CANCER DRUG ¹¹⁹

Since it was issued about three years ago, the stock of Chemex Corp.—a Riverton (Wyo.) company with no earnings, virtually no revenues, and a troubled past with the Securities & Exchange Commission—has multiplied 100-fold: from 10¢ to $10 a share. Chemex, traded over the counter, is valued at roughly $60 million because the company is working with an investigative drug, one that it claims has produced encouraging results in the treatment of cancer.

Chemex’s drug is derived from the Larrea divaricata (creosote bush), an evergreen that grows in the Western U.S. Indians prized the bush for its medical qualities, and early settlers used it to brew “Mormon tea.” Chemex’s research with the compound includes the prevention of plaque formation on teeth, control of acne, and the treatment of ulcers and osteomyelitis. The major emphasis, however, is on control of cancer in humans and animals. Success story. Since December 1976, Chemex has treated 55 human cancer patients in Italy and Costa Rica with its creosote drug. It is applied topically on patients with skin cancer or taken orally by patients with other kinds of cancer. Dr. Russell T. Jordon, director of research for Chemex, cites the case of a 34-year-old man with a rapidly growing brain tumor that had failed to respond to conventional treatment. The compound, according to Jordon, caused the grapefruit-size tumor to wall itself off from the brain and become operable. He says the patient was operated on a year ago and that there has been no evidence of new tumor growth.

Jordon also claims that 24 patients treated for skin cancer have had no recurrence of the cancer. “In every instance where we could get the drug to the tumor, we have had a favorable long-term response,” Jordon says. He notes that the drug does not cause the side effects of chemotherapy, but he says most patients complain of pain in the area that is treated.

Chemex is negotiating with a group of Costa Rican businessmen and doctors who expect to establish a Central American marketing operation. Chemex President Charles E. Hamilton says that the company will take a 10% cut of the gross receipts. Hamilton says Chemex hopes to apply to the Federal Food and Drug Administration for approval to test the drug on humans here within a year.

Curiously, Chemex is better known among investors than among scientists. One source at a major cancer research institute in New York, who is unfamiliar with Chemex, says: “If something interesting is developing, a scientist usually rushes to present it in a paper or publish an article about it. Major developments just don’t sit around.” Jordon says he has not written any articles for medical journals because he wants to secure patents first.

To be sure, Chemex’s stock is being actively promoted by several brokers. “I like its potential,” says Michael D. Hayes, a broker at Denver’s First Colorado Investment & Securities Inc., a firm whose partners have been to Europe, Costa Rica, and Nevada to check on Chemex’s research. “It is a very emotional stock,” Hayes says, “but I do not see any risk.” Adds Stuart Kobrovsky of Fairmeadow Securities Inc. of Allentown, Pa., “The prospects are phenomenal.”

Closed offering. Neither broker seems bothered by SEC charges stemming from a 1975 stock issue. The commission charged Chemex with failing to make a bona fide public offering, with the shares sold to friends and relatives of the founders rather than to the public. Chemex did not fight the charges, Hamilton says, because it did not want to waste the company’s resources. Thus the company cannot make a Regulation A offering (using an abbreviated registration) for five years, and it must make a full registration if it makes another public offering.

Down the road, Hamilton says his plans call for Chemex to be acquired by a pharmaceutical firm. For now, though, Hamilton and two other officers and directors have each sold 60,000 Chemex shares since January. The three, however, still own 2.7 million of the 6.4 million shares outstanding.

COMMON-STOCK PRICE REPRESENTS A SUBSTANTIAL DISCOUNT FROM ESTIMATES OF NET ASSET VALUE

A reconstruction of the American Manufacturing balance sheet as of December 31, 1977, satisfies us that when the common stock was selling around 50 in early 1978, that price represented a substantial discount from our estimate of net asset value.

Our usual reconstruction is to first determine working capital, and then deduct from working capital all indebtedness in order to determine “net net working capital.” After this figure is determined, other assets are added to net net working capital in order to determine an estimated net asset value before deferred income credits. Deferred income credits are then deducted to determine a net asset value. In estimating net asset value, we give free rein to our judgments, valuing assets (and sometimes liabilities) at book values, at market values, or at discounts to present value, with or without allowance for potential tax liabilities or tax benefits. Our reconstruction of the American Manufacturing balance sheet was as follows:

	(000)	Per Common Share 1,219,241 Shares
Cash and equivalent	$ 4,837
Receivables	6,481
Inventories	9,208
Other current	505
Current assets	$ 21,031
Current liabilities	5,720
Working capital	$ 15,310	$12.56
Long-term debt	$2,861
Net net working capital	$ 12,449	$10.21
Property, plant, net	$7,714
Other assets	603
Subtotal	$ 20,766	17.03
Investment in 3,215,748 shares of Eltra common (at market)	$ 83,609^(A)
Subtotal	$ 104,375	85.61
Less deferred income items	727
Net asset value	$ 103,648	$85.01
^(A)At carrying value, Eltra investment would be $94,209,000, or $8.70 per American Manufacturing share in excess of stock market value.

AMERICAN MANUFACTURING COMPANY

8. Litigation

MANAGEMENT AND CONTROL GROUP OBJECTIVES

Remuneration

Eltra Proxy Statement Remuneration and Other Transactions with Management and Others

STOCK OPTIONS AND STOCK APPRECIATION RIGHTS

AMERICAN MANUFACTURING ANNUAL REPORT FOOTNOTE

5. Stock Option Plan

AMERICAN MANUFACTURING PROXY STATEMENT

Remuneration

STOCK OPTIONS

RAPID AMERICAN CORPORATION PROXY STATEMENT

Remuneration

Employment Agreements

CERTAIN TRANSACTIONS

Company Transactions with Eltra Corporation

MEDALLION GROUP 10-K

Item 18. Interest of Management and Others in Certain Transactions.

LITIGATION

MEDALLION GROUP 10-K

Item 5. Pending Legal Proceedings.

Reasonably Understandable Information

CHEMEX RIDES HIGH ON ITS CANCER DRUG ¹¹⁹

COMMON-STOCK PRICE REPRESENTS A SUBSTANTIAL DISCOUNT FROM ESTIMATES OF NET ASSET VALUE

LACK OF ENCUMBRANCES

HASKINS & SELLS

INTERNATIONALLY DELOITTE, HASKINS & SELLS 100 GARDEN CITY PLAZA GARDEN CITY, NEW YORK 11530

TOUCHE ROSS & CO.

LACK OF ENCUMBRANCES

HASKINS & SELLS

INTERNATIONALLY DELOITTE, HASKINS & SELLS 100 GARDEN CITY PLAZA GARDEN CITY, NEW YORK 11530

TOUCHE ROSS & CO.

AMERICAN MANUFACTURING COMPANY

8. Litigation

MANAGEMENT AND CONTROL GROUP OBJECTIVES

Remuneration

Eltra Proxy Statement Remuneration and Other Transactions with Management and Others

STOCK OPTIONS AND STOCK APPRECIATION RIGHTS

AMERICAN MANUFACTURING ANNUAL REPORT FOOTNOTE

5. Stock Option Plan

AMERICAN MANUFACTURING PROXY STATEMENT

Remuneration

STOCK OPTIONS

RAPID AMERICAN CORPORATION PROXY STATEMENT

Remuneration

Employment Agreements

CERTAIN TRANSACTIONS

Company Transactions with Eltra Corporation

MEDALLION GROUP 10-K

Item 18. Interest of Management and Others in Certain Transactions.

LITIGATION

MEDALLION GROUP 10-K

Item 5. Pending Legal Proceedings.

Reasonably Understandable Information

CHEMEX RIDES HIGH ON ITS CANCER DRUG119

COMMON-STOCK PRICE REPRESENTS A SUBSTANTIAL DISCOUNT FROM ESTIMATES OF NET ASSET VALUE

CHEMEX RIDES HIGH ON ITS CANCER DRUG ¹¹⁹