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allen electric
and equipment
company

534 BROAD HOLLOW ROAD, MELVILLE, LONG ISLAND, NEW YORK 11746 • TELEPHONE (516) 293-5500

news
release

FOR IMMEDIATE RELEASE

ALLEN ELECTRIC & ROHE GROUP ANNOUNCE MERGER PLANS

Walter B. Kissinger, President of Allen Electric and Equipment Company (AMEX), Melville, New York, and Adam Rohe, the Managing Partner of Adam Rohe KG, Offenbach/Main and Adam Rohe KG, Munich, West Germany, today announced that an agreement in principle had been reached on a plan for the acquisition by Allen of the Rohe Companies for an undisclosed purchase price payable partly in cash, partly in notes and partly in shares of Allen common stock. Additional shares would be issued if the earnings of the Rohe Companies reach certain specified earnings levels in the years 1973, 1974 and 1975. Sales of the Rohe Companies in the 12 months ended March 31, 1970 aggregated 28.6 MM DM ($7.8MM).

It was stated that the acquisition is subject to the execution of a formal definitive agreement, approval by the stockholders of Allen if required in the opinion of counsel, compliance with the regulations of the Office of Foreign Direct Investments of the U.S. Department of Commerce and other legal requirements, a favorable tax ruling from the appropriate West German tax authorities with respect to the reorganization of the Rohe Companies into a single Limited Liability Company, and treatment of the acquisition as a part pooling of interests.

The Rohe Companies are engaged principally in the production and distribution of car wash equipment consisting of both "rollover", or bay size, units and conveyor systems; the engineering and installation of pumps and tank equipment for gasoline stations and providing maintenance services to such stations in West Germany

- more -

For further information call MONROE B. SCHARFF & COMPANY, INC., 415 Madison Ave., New York, N. Y. 10017 — (212) PLaza 2-6210
618 So. Spring St., Los Angeles, Calif. 90014 Tel: 213-629-2163

- 2 -

under contracts with various major oil companies. The group headquarters are in Offenbach, West Germany, part of the metropolitan area of Frankfurt/Main. The principal manufacturing and production facilities are located in Schoellkrippen.

The major markets of the Rohe Companies for car wash equipment are in West Germany and other western European countries, including France, Italy, Denmark, Scandinavia and Switzerland; other markets include South Africa and Brazil. Majority owned English and Australian subsidiaries manufacture in England and Australia under license from the Rohe Companies.

Messrs. Kissinger and Rohe stated that engineering, production and marketing factors make the proposed joining of the Rohe Companies with Allen a most logical development; that both share similar long range views with respect to the rapidly growing overseas market for the car wash equipment business and will bring together a compatibility of direction, facilities and resources which they believe have great mutual potential.

Allen Electric is a manufacturer of products for the automotive after market including radiators, accessories and diagnostic and car wash equipment, and of special vehicles and automation material handling and communications equipment.

# # #

700625

TELEPHONE (516) 293-5500

news
release

June 19, 1970

ALLEN ELECTRIC AND EQUIPMENT COMPANY DECLARES
THREE PER CENT STOCK DIVIDEND

The board of directors of Allen Electric and Equipment Company (AMEX), New York, today (June 19) declared a three per cent stock dividend on the common stock presently outstanding. The stock dividend is payable August 7, 1970 to stockholders of record July 16, 1970.

Cash will be paid for fractional share interests based on the last sale price of Allen common stock on the AMEX on the record date. July 23, 1970 has been fixed as the cut-off date until which the transfer agent will accept instructions from brokers regarding their requirements for full shares and cash with respect to stock registered in their names as nominees.

TELEPHONE (516) 293-5500

news
release

June 19, 1970

PROFILE OF CAR WASH MARKET

DRAFT

Summary - Allen Strategy for the Car Wash Business

Allen Electric has established as one of its major corporate goals the achievement of a leading position in the international car wash equipment business. The company views this as an extremely attractive growth market which will move forward rapidly during the first half of the 1970's through increased participation on the part of the international oil companies. The company's intention is to achieve a significant share of the equipment manufacturing business both in the United States and abroad, and become clearly recognized as the international industry leader.

The first step in this program was the revitalization of its Califor-
nia Car Wash Subsidiary through a change of management and a redirection
of business efforts to focus on the major oil companies. The second step
was a careful study of the growth opportunity in the car wash business and
the strengthening of the company's relationship with its international licensees.
The third step is the recently announced agreement to merge between Allen
and its European Licensee, A. Rohe K. G.

Allen's intention is to continue to move aggressively in pursuit of
its objectives in the car wash equipment manufacturing business both through
internal growth and where appropriate by acquisition.

## Section I

### The Car Wash Equipment Market

The world market for automatic car wash equipment amounted to between $100 and $125 million in 1969 and has been growing at a rate of approximately 20% per year over the last few years. The United States represents the largest market with an estimated volume of $80 million dollars.

Western Europe is the second largest market with a volume of between $15 and $20 million dollars; the Far East, primarily Japan, accounted for between $10 and $15 million and all other areas perhaps $10 million. The industry is composed of a large number of marginal operations and a few more stable companies which are now emerging as the industry leaders. These larger companies have generally grown at rates in excess of the 20% estimated for the total market. In some cases, including A. Rohe, the growth has exceeded 35% per year.

The automatic car wash equipment industry as discussed here includes all types of automatic machinery for the washing of passenger cars, trucks and buses, including brush type system and water and chemical spray systems, but excluding "do it yourself" type operations. The market includes only the equipment itself and does not count the actual washing of the car which is estimated to have been a $1.5 billion business last year in the United States.

There are basically three types of equipment -- conveyorized brush systems wherein the automobile is pulled past a series of brushes and spray units by a conveyor; roll-over brush units, wherein a car remains stationary and spinning brushes are moved back and forth over the car; and spray systems

wherein high pressure sprays of water and chemicals are directed at the auto-
mobile.

Generally, car wash operators have found that brush systems are
more effective in cleaning the automobile and this experience has provided a
faster growth rate for brush systems than for spray units. In recent years
many spray type units have been converted to brush systems and spray equip-
ment manufacturers have begun to add brushes to their systems. Allen's
participation in the conveyor and roll-over brush type equipment.

Total car wash installations are estimated at approximately
18,000 in the United States, 5,000 to 8,000 in Western Europe, about 8,000 in
Japan and the Far East and 3,000 elsewhere in the world. The fewer number
of installations in Western Europe and the Far East notwithstanding, these
markets are relatively new and their development has been extremely rapid. The
two leading manufacturers, A. Rohe in Germany and Takeuchi in Japan (both of
which are Allen licensees marketing under the California name) did not enter the
car wash business until 1966, but they have already made important contributions
to the industry's technology and have brought this industry to a level of penetration
of their potential markets that equals or surpasses the United States.

Allen management believes that the key reason for the rapid
development of these foreign markets has been the strong interest of major oil
companies in using the car wash as part of their overall gasoline marketing
strategy, a development which is only now becoming evident in the United States.

# Section II

## Market Potential

The total market potential for car wash equipment will ultimately be determined by the size of the vehicle population and by the frequency with which car owners wash their cars in automatic facilities. Assuming that an automobile might be washed once every ten days, if there were sufficient number of car washes to make this convenient, the existing United States car population would generate about 75 million washes per week which is a volume sufficient to provide attractive profit levels to at least 75,000 car wash facilities (based on industry estimate of 1,000 washes per week required by an "average" installation. Roll-over units require less volume; sophisticated conveyor lines somewhat more). The 18,000 United States installations represent less than 1/4 of this potential. In Western Europe where the vehicle population is about 60 million (versus the 100 million in the U.S) and in the Far East where the vehicle population is about 20 million, the untapped market potential is also very large.

Since the automatic car wash is increasingly becoming identified with the retailing of gasoline, the number of gasoline stations is also significant in estimating the size of the potential market. In the United States there are over 200,000 gasoline service stations of which only about 5% have automatic car wash equipment. Western Europe has 145,000 gas stations with about the same percentage of car washes. In Japan, it is estimated that there are ______ gas stations with ______ car washes, representing a market penetration of about ______ %.

Section III

Factors Influencing Growth

Of key importance to the future growth of this market is the relationships between the washing of automobiles and the marketing of gasoline. Both car wash and petroleum marketing experts agree that the gasoline station is the natural home of the automatic car wash. Gasoline station operators with the ability to give a quick, inexpensive, and good car wash to their gasoline customers have found this capability adds to their operations in three ways. It provides an extra source of revenue through fees charged for car washes; it provides a means of maintaining price margins on gasoline sales as a more effective alternate to the many existing "give away" programs; and most importantly it has proven to be of major benefit in stimulating gasoline sales and increasing market share. Experience in the industry indicates that stations which install automatic car washing equipment and which operate and merchandise properly are able to increase gasoline sales by large amounts, in many cases double or triple the existing volume.

A second important factor is the rapidly growing interest of the major oil companies in car wash equipment. In the past, the great majority of domestic sales have taken place through independent equipment distributors who directed their sales efforts to private investors. The focus of activity was on automobile washing as an independent service not necessarily associated with gasoline marketing. Even today, after many of the existing car wash installations have added gasoline pumps, a large percentage, perhaps 25% to 35%, of United States car washes do not retail gasoline.

In Europe and the Far East the pattern has been quite different. From the very beginning car wash was viewed as a logical extension of gasoline station activity and marketing efforts were directed heavily at the international

oil companies. The overwhelming majority of car wash equipment sales abroad have been made to the oil companies with the result that virtually all foreign car wash installations are associated with gasoline marketing activity.

Allen management believes that the roll played by the international oil companies is the chief reason for the more rapid development of non United States markets and that the continuing interest of these customers and their developing interest in the United States will provide an important stimulus to realizing the untapped market potential. Car wash equipment has a double appeal to the oil company in that it not only offers a way for improving the economic position of the service operator and improving the return on gas station investments, it also can become a necessary investment to defend against competitive inroads. into gasoline market shares.

A third factor of significance is the growth of the car wash industry itself. This has had two effects. First the manufacturers themselves have become larger and more sophisticated - capable of producing better, longer-lasting equipment and of providing the service and systems support that are required by the car wash/gasoline operator. Second, the rapidly increasing number of car wash installations has itself stimulated the demand for car washing. The improved accessibility of installations due to their increasing number, and the convenience of "one stop shopping" for car wash and gasoline have increased the public awareness of this service and stimulated increased use and habit formation.

The tendency of increases in the number of car wash installations to stimulate the consumer demand for car washing, and of participation by one gasoline market to provoke a defensive reaction from his competitors, combined

with the enormous untapped market potential gives the car wash market "explosive growth characteristics.

# Section IV

## The Significance of the International Oil Company

In the judgement of Allen's management, the large international oil companies will play an increasingly significant role in the car wash industry and will represent the major influence which will shape the activity of the industry in the next few years.

This judgement is based upon a number of factors: First, the automatic car wash offers an excellent way of improving the economic return on existing gasoline facilities. With its low labor content, low variable costs, and very high capacity, modern car wash installations offer potential after tax returns of 20% to 30% on invested capital. The "breakeven" point for the car wash installation represents only a very small percentage of the equipment's car washing capacity. For example, Allen's new German subsidiary, A. Rohe, manufacturers a machine which washes and drys a car in five minutes and whose "breakeven" point is approximately 300 cars per month. This is only ten per day which is one hour of washing time. Car wash installations are of particular interest to oil companies who already have a major investment in the land and buildings for gasoline stations which further improves the potential incremental return for these companies. Second, the concern of the oil companies in maintaining their share of petroleum markets combined with the excellent results obtained from car wash/gasoline combinations in stimulating gasoline sales can create a strong pressure on oil companies and their distributors to make investments in car wash equipment simply to protect their marketing position.

These factors have been clearly recognized by the international oil companies and they have developed aggressive car wash programs in Western Europe and the Far East. We are beginning to see similar action in the United States where historical factors associated with the car wash business and complicated marketing/ownership patterns in the oil industry have retarded the development of this trend.

The growing importance of the oil companies is significant in its implications for the requirements for success of the car wash equipment business. Oil company purchasers are interested in high caliber suppliers who are reliable manufacturers and who can provide service and systems support to their car wash programs. Unlike private investors whose key interest is in something that will provide a fast economic return, the oil company must be concerned with its position as a petroleum producer and marketer. Equipment that does not operate properly because of poor design and manufacturing, or at all because of inadequate after-sale service, represents not only a loss of income to the oil company, but also a mark on its reputation and a threat to its carefully established customer loyalty.

These factors have created a clear need for a high caliber equipment manufacturer with the business capability and integrity to warrant the confidence of oil company customers both in the United States and abroad. The growth of the oil company as the major customer for car wash equipment has already begun to put pressure on marginal and regional manufacturers and will continue to offer an opportunity for the industry leader to increase their market share.

Allen believes that the worldwide car wash market will grow very rapidly in the next five years and by 1975 should have a sales level of several hundred million dollars. The major portion of this market will go to those companies which are capable of responding to oil company needs on a worldwide basis.

## Section V

### Allen's Position in the Car Wash Market

The acquisition of A. Rohe, K.G. of Frankfurt/Offenbach and Munich, will bring Allen to a leadership position in the international car wash field. With facilities in Western Germany, Australia and the United Kingdom, Rohe compliments Allen's previous activities carried on by its California Car Wash subsidiary in Sun Valley, California and Canadian Car Wash subsidiary in Toronto, Canada. All of these companies, as well as Allen's Japanese licensee, Takeuchi, market under the California brand name.

Allen management estimates that total sales of car wash equipment under the "California" brand name could represent 15% of the market during 1970 making this name the best known brand in the world.

In Western Europe Rohe has become the largest, or possibly second largest, car wash equipment manufacturer in a very short period of time. After beginning production less than 4 years ago, the company now accounts for about 35% of European car wash sales and occupies a particularly strong position for roll-over type units. Their present backlog for this type of equipment represents more than last year's entire sales. The roll-over unit, named the "combi" because it both washes and dries the automobile, is a proprietary design of the

Rohe Group and represents a valuable addition to Allen's technological
position. Allen believes this design may have potential application in the
United States market.

Rohe began the manufacture of car wash equipment with conveyor
type systems under license from California Car Wash in 1966. Since that time
its sales have grown at a rate of more than 30% per year and give every
indication of continuing to grow at this rate for the next few years. Rohe's
remarkable success has been stimulated by its existing connection with the
European oil industry through its role as a service and construction contractor
for gasoline stations, in Western Germany, through the strong oil company
interest in car wash that has marked the development of the industry in
Europe, and through the introduction of the combi roll-over unit. Allen views
the acquisition of Rohe as a significant step in its program of becoming the
dominant company in the car wash business.

In Canada, Allen's share of a considerably smaller market is also
between 30% and 40%. Manufacturing operations are carried on in Toronto and the
company's history has been marked by sales growth in excess of 25%. As in
Europe, sales have been primarily directed to international oil companies.

In the Far East Allen does not as yet have a major direct participation
in the car wash market, but its licensee, Takeuchi, Ltd. accounts for more
than 40% of the Japanese market and is the leading car wash equipment manu-
facturer in that area. Consequently the California name is the best known in
the Far East. Through the Rohe acquisition Allen has now acquired a majority
position in a new car wash manufacturing company in Australia.

(19)

In the United States manufacturing and marketing activities are conducted by the California Car Wash Company which occupies a smaller portion of the United States market than its foreign associates do of theirs. Despite its current size California Car Wash is one of the leaders in its market by virtue of its long established reputation, the large number of existing installations, the high quality of its equipment, its strong international connections, and its aggressive approach to stimulating oil company interest in the car wash field.

In the past year, California Car Wash has made a major effort to penetrate the oil company car wash market. The management of the company was changed in mid 1969 and efforts were directed at improving equipment design and manufacturing quality to meet oil company requirements. A new direct sales team was assembled and the distributor sales organization revamped to stress reliability and modified to include only those independent distributors with a high degree of financial capability and reliability. Increased emphasis has been placed on service capability and Cal Car now has a national service team capable of installing and maintaining car wash installations for national accounts. These new programs have encountered a very favorable response from the oil company customers and California Car Wash Sales to these customers in the first five months of 1970 exceeded total sales to these accounts in all of 1969.

a profile of
the markets of
allen electric
and equipment
company

PROFILE II

ALLEN

Allen Electric and Equipment Co.

April 1, 1970

Synopsis

The Allen Electric and Equipment Company is a manu-
facturing concern whose sales are 90% in certain selected
areas of the automotive industry and 10% in the mobile
communication industry. The specific markets Allen has
focused on are areas of the industry which show unusually
good growth characteristics and opportunities. The Com-
pany's course of action in these areas has been determined
by a clear understanding of our individual markets. They are:

1. Car Wash

2. Automotive Diagnostic and Service Equipment

3. Vehicular Heat Transfer

4. Truck Cabs and Van Interiors

5. Automotive Accessories

6. Mobile Communications

7. Automation and Material Handling

These seven marketing groups are the building blocks of
Allen.

We are either significant in these markets or are focusing on
becoming a principal factor. Walter Kissinger, Allen's Presi-
dent and Chief Executive Officer, has set a goal of 'in depth
market penetration' and a 'dominant position' in each of
these marketing areas. This analysis describes each of the
seven markets as to the products, the characteristics, the
past growth, the projected future rate of growth and Allen's
position in relation to these factors.

Car Wash Market

Industry sources estimate that the manufacture of equip-

ment, accessories and supplies for all types of automatic car
washes is about an $80 million market and has been grow-
ing at 18% to 20% per year during the last few years.
All indications are that it will continue to grow at this rate to
1975 and reach $250 million. The Company's participation
in this market is through our California Car Wash subsidiary
which produces car wash equipment for conveyorized lane
systems and rollover bay systems.

At the end of 1969 approximately 18,000 automatic car
wash installations existed in the United States. The installa-
tions are divided about 40% bay type and 60% conveyor-
ized lane type but the number of car washes performed by
a conveyorized system far exceeds those in a bay unit. Be-
cause bay systems require a small amount of space they can
be used by a large portion of the gasoline service stations
(there are presently about 220,000) and many other limited
space operations.

The potential growth of this market is generated by the fol-
lowing: the vehicle population (approximately 100,000,000)
is increasing each year; air pollution and road salt usage are
making cars dirtier; people are becoming more aware of car
wash facilities and getting into the habit of having regular
car washes; and the car wash itself has become an excellent
promotional tool for service stations. Other installations in
locations such as apartment houses, hotels, parking lots and
large commercial and industrial plants are strong possibili-
ties for new markets.

It has been suggested that a vehicle should be washed every
7 to 14 days. If the present number of vehicles were washed
once every 10 days, facilities would be needed to handle

75,000,000 car washes per week. Industry association sources estimate that car washes are now performing about 15,000,000 washes per week.

By 1975 there should be about 125,000,000 registered vehicles which will make the needed car wash capability about 90,000,000 washes per week. The difference between the 18,000 existing installations and the 100,000 necessary to supply 90,000,000 washes per week makes this an exciting market.

Considering the enormous growth potential of this market, Allen's present situation as one of the original producers of car wash equipment; the excellent trade acceptance of the California Car Wash name; and, above all, our Corporate commitment to move strongly in this market until we have achieved a dominant position makes this one of the most exciting growth areas of the Company.

## Automotive Diagnostic and Service Equipment Market

This increasingly important market is made up of equipment for the repair and service of an automobile. It includes the products for auto maintenance, auto testing, special hand tools, lifts and hoists. Management estimates that the size of the market is about $300 million and has been growing at about 10% to 15% per year during the last few years. It should continue to grow at this rate for the next five or six years and by 1975 the market should reach $600 million.

The portion of the market in which we do business consists of the equipment for automotive testing and maintenance and accounts for about one half of the total market or about $150 million. This part of the market has also been increasing at 10% to 15% per year during the last few years and should continue to do so until 1975 when the market size should approximate $275 to $300 million. The Company's participation in this market is through our Allen Test-products Division (which makes diagnostic equipment and battery chargers) and our Canadian subsidiary, National Rubber (which makes tire repair equipment).

There are many factors influencing the growth of this market in addition to the increasing number of vehicles. There is a personal and public awareness of the problems of safety and pollution and the need to take corrective action thru diagnosis and repair. The availability of experienced and capable mechanics has declined considerably as there has been no material increase in the number of automotive mechanics today over the number five years ago, while the vehicle population has increased by more than 10 million. In addition, the vehicle itself has become far more complex. New sophisticated diagnostic and service equipment is necessary to help solve the qualified mechanic shortage. Many states have or are now putting into effect state inspection laws. Possible federal legislation in this area could move the market

forward at a much faster rate than has been projected and the probability of this needed legislation being passed is high.

Many of the large mass merchandisers, such as J. C. Penney, Sears and Wards, have been installing large automotive service facilities at multiple locations. These operations use diagnostic equipment to determine car problems and have complete facilities where the actual repair work is done. There are over 400,000 outlets, such as gasoline service stations, auto repair shops, new car dealers, and fleet headquarters that are potential users of diagnostic and service equipment making this a broad market with excellent growth potential.

The Company is in an ideal position to capitalize on this growth potential. We have a solid position in this industry, good trade acceptance and are best known for our excellent engineering capability and innovative design. Plans to broaden the Company line and increase our market penetration could, we believe, result in an even greater growth rate for Allen than the anticipated 10% to 15% for the industry.

## Vehicular Heat Transfer Market

This basic market is made up of products which provide heating and/or cooling equipment for all or part of a vehicle such as autos, trucks, off the road equipment, locomotives and aircraft.

The specific products which make up this billion dollar market are radiator cores, heaters, air coolers, and air conditioners. Industry sources indicate that the market has been growing at about 8% to 10% per year during the last three years and it appears that it should continue to grow at this rate.

The part of the market in which we operate includes radiators, radiator cores, heaters and air coolers for the aftermarket. The aftermarket volume is estimated to be $80 million and to have grown at about 10% to 15% per year during the last few years. It should continue to grow at this rate for the next 5 or 6 years and by 1975 reach $160 million. Allen's participation in this market is through our G & O, Pathfinder and Strangi operations which represent a leading position in the aftermarket. (We also do a limited volume in the O.E.M. market. This is not our primary thrust but it does provide us the immediate knowledge and ability to take advantage of technological improvements.)

The growth in the market is due to many factors. The vehicle population has been and should continue to increase at the rate of approximately 4% to 5% per year. The front end accident rate (which almost always affects the radiator) has been increasing and the rising use of anti-freeze has generated greater radiator core damage. The step up in the amount of heating and cooling required and the decrease in the amount of copper used in the O.E.M. radiator

core, which increases potential core failure, augment the growth of the replacement market. In addition, new types of heat transfer products for rocket engines and other sophisticated power plants are being developed and produced.

Because of the need for fast delivery of replacement cores this business is regional in nature. When a vehicle has radiator trouble, it cannot be used, and a core must be supplied immediately. The cores are provided by local radiator repair shops (about 5,000), which in turn buy from regional distribution points. With plants presently in Chicago, Illinois—Peru, Illinois—New Haven, Conn.—Jackson, Miss.—Dallas, Texas—Atlanta, Georgia and plans for operations elsewhere in the United States, Allen is a truly national producer of radiator cores for the aftermarket and a major factor in the industry. The Company has good distribution and trade acceptance and the present structure will provide the means to a much deeper and more complete penetration. Allen's basic capabilities of excellent engineering and high production capacity and its national distribution position indicate an estimated growth for the Company during the next several years, considerably in excess of the market's growth rate.

## Truck Cabs and Van Interiors Market

The design engineering and production of customized cabs, cab components, van interiors and utility bodies for trucks, delivery vans, farm equipment, construction equipment and off the road vehicles is thought to be a $265 million market. Management estimates that it has been growing at the rate of 10% to 12% per year during the last few years and should continue at this rate for the next five or six years.

The portion of this important O.E.M. market in which the Company is involved is estimated to be about $210 million and is broken down as follows: 90% cabs and cab components, 5% utility bodies and 5% van interiors. The products are made of steel, fiberglass or aluminum and sold to O.E.M. accounts such as Ford and International Harvester, to national fleet accounts such as Western Electric and Sears and to various specialty body and interior users. Allen's involvement in this market is through our Crown Steel and Crown Fiberglass divisions, which provide a leadership position in truck cabs, both steel and fiberglass, and a dominant position in van interiors.

New demand for special or customized cabs is on the upswing. Comfort and convenience are becoming a necessity in cabs for heavy duty equipment (partly motivated by organized labor pressures) and consequently this market should grow somewhat faster than the new truck market.

The utility body and van interior markets should grow at a rate significantly faster than new truck sales. There is a growing awareness of the need for specialized interiors for various service industries. Electricians, plumbers, painters, gardeners and other mobile service operators are finding

they can perform jobs more efficiently with a van interior designed to meet their specified needs. It is believed that presently less than 2% of the vans produced are equipped with custom interiors. The potential market is estimated to be at least 30% to 40% of the approximately 130,000 vans produced per year. In the van interior area the Company does approximately 55% of the market volume.

For the past 15 years we have been manufacturing and developing technology for making cab components and parts of fiberglass. Fiberglass is becoming a more significant part of the market and its growth rate is considerably higher than the rest of the industry. We are one of the few fiberglass manufacturers in our marketing area and consequently we are in an excellent position to capitalize on the high growth rate over the next several years.

Management estimates that the growth rate for the total market will exceed 10% during the next several years and expects, in addition, to increase its market penetration.

## Automotive Accessories Market

This highly diverse, rapidly changing market is made up of consumer merchandise sold in the aftermarket for use on vehicles for customizing, convenience and/or utility but not necessarily of an essential nature for car functioning. Industry sources estimate the total market size to be about one billion dollars and growing at the rate of 10% to 15% per year during the last few years.

We are involved in only a part of this market. Some of the product categories included in our market area are: ornaments and decorations, gauges, license plate frames, lights, mirrors, speed and custom accessories, chrome wheels, ta-chometers, testers, wheel covers, sun visors and exotic paints. It is estimated that by 1975 this should be an $800 million market. The Company's activity in the market is through Orion Industries Inc., which markets its products under the names: Hollywood Accessories, Cal Custom, Bandachrome, Hanson/Hawk and Matco; and also through part of our Pathfinder Division.

The automobile is usually the second largest expenditure made in a lifetime; second only to a home. Consequently the car is an object of care and pride and a place for accessory display of a personal nature. The growing need for personal identification and expression is a major growth factor in this market. The rising number of vehicles on the road, the increase in the amount of disposable income, and the increase in the amount of free or leisure time are also major factors in the rapid growth of the market.

Most of the products in our market are traditionally sold in "home and auto stores." While these outlets still account for a large portion of the business, the mass merchandising outlets are taking a growing share. These mass merchandising

outlets with their wide exposure and high traffic are bringing about a greater awareness of the many customizing and convenience items that are available and this factor in itself adds to market growth.

The rapidly changing desires of the consumer make it necessary for us to be aware of new buying habits. The need for more centralized purchasing makes large merchandisers look for broad line suppliers in this market. Our position is that of a leader in the industry. Our wide line of products and our strong distribution set-up, which has put some of our items in most of the 50,000 outlets which sell our type of products, provides us with a close touch with the market. By broadening our line even further and maintaining our strong position in the trade we expect to grow at a higher rate than the industry.

## Mobile Communications Market

This market is made up of all the equipment needed for mobile communications for both industrial and commercial use including such products as two-way communication sets (base station electronics and mobile units) antennas and accessories. Today it is estimated as a $450 million market that has been growing at about 8% per year during the last few years. It appears to be in a good position to increase its growth rate to about 10% to 12% per year during the next several years.

The part of the market in which we are involved consists of the antenna and related accessory products for mobile communications, excluding the transmitters, receivers, towers and wave guide. This portion of the market is thought to be about $35 million. Our participation in it is through our Antenna Specialists Division. The estimated growth rate of our part of the market has also been about 8% per year and it too should increase to 10% or 12% per year during the next several years. By 1975, the market should be about $65 million. It is basically divided between Land Mobile, Citizens Band, Aviation, and Marine.

Mobile communications are becoming a major factor in our personal and business lives. There has been a substantial increase in the use of mobile communications by public services such as law enforcement, fire, highway, forestry, local government and medical units. Private business use is also growing rapidly as the importance of quick accurate communication has become more evident to cab companies, utility companies (especially for service), oil and pipe line companies and the railroads.

Awareness and knowledge of mobile communications is growing steadily and as it does usage increases rapidly. New programs such as REACT (Radio Emergency Associated Citizens Team), which are designed to provide personal safety on the highways through two-way radio communica-

tion from private automobiles are augmenting the growth rate. At present there is a great deal of overcrowding on citizen radio. There is a strong possibility that additional spectrum will be opened up for mobile communication which would be a positive factor in the growth rate.

Allen's position in the market is quite strong as we are a significant factor. We do over 20% of the business. Our in-depth market penetration, creative packaging and product innovation has placed us in a position of continued leadership and we anticipate a growth rate of 10% to 15% per year during the next several years.

## Automation and Material Handling Market

The market covers a broad area of activity which includes specially designed production equipment for material handling and automated systems for production testing, assembly and quality control. It is a "billion dollar plus" market which has had an estimated growth rate of about 5% per year during the last few years.

The section of the market in which we operate includes all the equipment mentioned above but is basically confined to the automotive, farm equipment, off the road vehicle, tire and aircraft power plant industries. This part of the market has been estimated to amount to $300 million. It should continue to grow at its recent past rate for the next five or six years in which case it would reach $400 million by 1975. Allen participates in this market through our Conveyor Engineering Company, Inc. and Starr-Kap Engineering and Wilson Engineering and its various divisions. Our combined volume in this market is $15 million.

As the need grows for cost reduction, increased productivity and better controls, more use of automation and sophisticated material handling techniques becomes necessary. The in-plant moving of materials is generally recognized to be a high cost operation and specially designed conveyor systems can substantially reduce these costs. Manufacturing techniques are constantly being changed and improved, thereby creating a growing demand for new kinds of automated production testing and assembly equipment, as well as quality control systems. Industry sources indicate that there will be a constantly growing need for even more sophisticated systems.

The basics in this market are engineering and design. The requirement is for specially designed systems and equipment to solve particular problems. The Company's operations in this market have as their greatest strength "in depth" design and engineering capability. Many of the country's well known companies such as Ford, Chevrolet and Caterpillar Tractor Company use our systems. Consequently we anticipate a growth rate substantially greater than that of the market during the next few years.

a profile of
questions and
answers about
allen electric
and equipment
company

PROFILE III

Allen Electric and Equipment Co.
534 Broad Hollow Road
Melville, New York 11746
June 1, 1970

SYNOPSIS

Allen Electric and Equipment Company made major
changes in 1969 to effect a basic transition in the Company's
way of doing business. During this period, management has
been asked numerous questions about the Company, about
the changes and about the future. These questions have
come from the investment analysts, our shareholders, pros-
pective employees and many other sources. Allen has de-
cided to compile those most commonly asked questions in
this one profile so that all interested parties can have access
to this information.

QUESTION: What basic changes in management structure have taken place in Allen during the past 15 months?

ANSWER: Allen has undergone a fundamental transition in its management structure. This commenced with the appointment of Mr. Kissinger as President and Chief Executive Officer. He has developed a central operating staff, vigorously grouped related businesses under capable executives, implemented operational management changes where required and instituted a financial controls program related to formal business and profit planning. The investment in these management resources, by the Company, is now reflecting itself in major operating and profit improvements.

QUESTION: What redirection of Allen's operations and corporate objectives has taken place recently?

ANSWER: Allen's principal areas of corporate strength have been identified and focused upon as prime business interests of the Company. These relate to automotive servicing, maintenance equipment and specialty automotive products. Those businesses which were unrelated to the

Company's basic orientation, which were marginal, or un-
profitable (without an acceptable outlook), were closed or
sold.

Management emphasis has been to strengthen Allen in-
ternally in a number of dimensions, including management
reporting and control, planning and communication. Ac-
quisitions have been tailored to strengthen designated busi-
nesses rather than further broaden and potentially dilute
the Company's basic resources.

Details of both Allen's philosophies and current action pro-
grams are available in the Company's most recent Annual
Report.*

QUESTION: Allen has been described by some analysts
as a "Turnaround" situation. What is meant by this char-
acterization?

ANSWER: Allen has undergone a major transition, the highlights of which are mentioned above.

First quarter results indicate that the many new programs introduced in the second half of 1969 and most particularly in the fourth quarter, are beginning to take effect. The Company expects that the strong upward profit trend that developed during the first quarter will continue through the first half. Over half of the first quarter's earnings were derived from March operations, confirming the direction of this trend.

QUESTION: What areas of Allen will produce the most significant positive changes in earnings from 1969 to 1970?

ANSWER: Allen Testproducts, California Car Wash and Crown Steel Products should contribute major profit improvements to Allen. All three of these companies are being

* Available upon request

led by new management teams; and profit improvement is
being accomplished through improved planning, better cost
control or reduction, and a more efficient utilization of
assets.

**QUESTION:** Are there any areas of the company that lost money in 1969 and are not being divested? Why?

**ANSWER:** The Allen Testproducts Division and California Car Wash are the two major ones. Management feels that large profit improvements can be developed in these companies, and that the position of these companies in two expanding and related markets, make them important in Allen's long range plans.

**QUESTION:** What is Allen's management structure?

**ANSWER:** Allen operates with a corporate staff directed toward the planning and control of the organization. The staff does not become involved in daily operations; but instead reviews capital expenditures, business and financial plans, and operating strategies. The company has divided the operating companies into groups who report to group vice presidents. Each group vice president (along with the divisional management) is responsible for making Allen a leader in a particular market. This can be done by increasing penetration and performance of existing companies, by seeking acquisitions which could achieve this goal, or some combination of these strategies. Group controllers have been appointed in each group with the primary responsibility of helping the operating companies develop a control system suitable for managing their business. A more detailed profile of Allen's management is being prepared.

**QUESTION:** What is Allen's present acquisition policy?

**ANSWER:** Allen's acquisition policy will be internally motivated and directed toward one of the seven market areas management has identified. A more detailed explanation will be issued independently explaining Allen's acquisition policy both as to our procedure and our direction.

**QUESTION:** Describe the company's divestment program.

**ANSWER:** It is Mr. Kissinger's operating philosophy that a company should be in a leading position in its markets. Where a company's business was marginal in its market and the resources needed to achieve a leadership position were disproportionate to the potential benefits, a divestment was made. In some cases the divestment was only a small portion of an acquired company where the main thrust of that company was in one of Allen's identified markets.

A continuing assessment of all Allen companies is being conducted, and when companies or products are unprofitable, unable to grow, or require an inordinate amount of management time or resources, a divestment will be considered. One company is currently identified for divestment and a reserve was established in 1969 for the possible loss on this divestment.

**QUESTION:** What type of growth rate can be expected at Allen once profit margins are improved?

**ANSWER:** Profile II "A Profile of the Markets of Allen Electric and Equipment Company"* estimates the growth rates for various segments of Allen's business. It is projected that Allen will enjoy significant internal growth augmented by strategic acquisitions.

**QUESTION:** What is Allen's position outside of the U.S. and Canada?

**ANSWER:** Generally speaking Allen has a very weak position outside of the U.S. and Canada; although certain Allen companies have done a reasonable job in developing exports.

In the recent appointment of Mr. E. G. Simonsen as Vice President-International Operations, Allen has, as a corporation, taken a significant step toward development of a stronger and broader international corporate position with plans for full utilization in each of the key world markets of our extensive range of products and of merchandising experience in these product categories.

Since the automobile population of Europe and Japan has, for instance, been growing twice as fast as in America, and since Allen has technology, products and marketing know-how available for export in these fields, Mr. Simonsen has been given initial responsibility for establishing new corporate markets in these areas. Management looks to the international market as a source of rapidly increased sales and profits.

**QUESTION:** Who are Allen's major competitors?

**ANSWER:** Because Allen is currently directing itself to seven different market areas, the competitors change from one market to another.

In the automotive, diagnostic and service equipment market, Allen receives major competition from Sun Electric Company, Marquette Corporation and Autoscan.

The car wash industry is led by Sherman Car Wash Equipment Company and Hana Enterprises, as well as Allen.

The major competition in the vehicular heat transfer business is General Radiator and several regional companies.

There are many companies in the automotive accessories business that compete with Allen's Orion Industries. None of these companies has as complete a line as Orion, and each one will compete with only a portion of Orion's products.

In the area of automation and material handling, a few large companies such as Jeffrey Manufacturing and the Jervis B. Webb Company and many smaller companies compete with the Allen subsidiaries.

In the mobile communications field, Allen competes with Hy-Gain, Communications Products, and Shakespeare.

In the truck cab and van interior market, Allen competes with McLaughlin Body Company, Chicago Manufacturing

* Available upon request

Company and Adrian Steel Products, in addition to other specialty manufacturers.

**QUESTION:** Why was Orion formed and what are Allen's future plans for it?

**ANSWER:** Orion was organized to include, within one enterprise all of the Allen subsidiaries and divisions which are engaged in the mass merchandising of moderately priced automobile accessories. This allows for a better utilization of common talents and a deeper penetration of common markets and customers.

Allen arranged a secondary public offering of a portion of Allen's shares in Orion to increase public recognition and knowledge of this consistently misunderstood portion of Allen. It was felt that a separate publicly held company would more fully provide the entrepreneurial spirit necessary in this type of business. These separately traded shares of Orion should prove to be important for further acquisitions in the automotive accessory market.

Allen does not at this time plan on selling any further interest in Orion Industries and presently owns 81%. The objectives for the sale of Orion have been attained.

**QUESTION:** How does the Allen Test Division market its products? How can Allen Testproducts with its small revenue base support the type of service backup necessary to compete in this industry?

**ANSWER:** The Allen Testproducts are sold through automotive jobber distributors who look to Allen zone managers for assistance. The zone managers are commissioned salesmen and are supervised by Allen's own regional managers. The limited market/service coverage and product line are the two major problems in this company. The correcting of this situation is one of the major corporate goals for 1970. To this extent, four technical service centers have already been opened across the country during the first quarter of 1970.

**QUESTION:** How much of Allen Test's revenues are attributable to the Ford Rotunda program?

**ANSWER:** The Ford program accounts for about 15% of Allen Testproducts business.

**QUESTION:** Why was the automotive computer not a success?

**ANSWER:** Allen was not able to develop a sufficient market for its computer diagnostic equipment and took it off the market. Among the reasons for poor market acceptance were:

a. The cost is too high for many small customers; b. The amount of training required to operate the computer is quite extensive; c. The unwillingness or inability of many mechanics to use the equipment; d. Breakdowns of early models following incomplete field testing.

**QUESTION:** Why has the Army given Allen an R & D contract for a diagnostic computer? What is the significance of this contract?

**ANSWER:** The Army feels that a diagnostic computer would be invaluable in their motor pools to reduce vehicle downtime. Allen's work in this field was found to be advanced beyond that of competition, and the R & D contract was awarded to it. Even though the 1280 computer was not commercially successful, the technology it contained was an important foundation for the development of the Army computer.

Management views this contract as a bridge in the development of a diagnostic computer acceptable in the commercial market. The R & D contract enables Allen to improve its technology, increase the reliability of its products, and utilize the time for further market development work in the market place.

**QUESTION:** Why does Allen contemplate being successful in the car wash business?

**ANSWER:** The car wash business has grown up in the hands of manufacturers who in many instances were also operators of car washes. The industry has been predominantly regional in nature with many small and marginal operators. This should change with the entry of the major oil companies into this market. As has already been seen in Canada, Europe and Japan, a car wash is a good promotion to be used in selling gasoline. As this tie-in to gasoline merchandising continues to increase in this country, Allen with its financial capabilities, its foreign licensing arrangements and its corporate commitment will be in a position to share in the rapid growth.

**QUESTION:** Does Allen franchise car washes?

**ANSWER:** As a basic manufacturer of car wash equipment, Allen does not franchise its systems. Allen does sell equipment to people who franchise. The franchising field is of great interest to Allen as it is a means to reach the small investor. It is felt, however, that a successful franchiser should have a proven record of success in the actual operation of a system. Before embarking on a franchising program, Allen will take steps to obtain this experience.

**QUESTION:** Why did Allen take a more significant position in the radiator aftermarket?

**ANSWER:** Allen has been in the aftermarket radiator business in a marginal way through its Pathfinder Division for a number of years. As a result of Allen's new philosophy it was decided that the company would either become a significant factor in this business or it would get out. A study of the market found it to be highly fragmented geographically with a limited number of small companies such as Pathfinder. Allen liked the future prospects and characteristics of this market. G & O and Strangi were acquired to materially expand its position.

**QUESTION:** What type of growth can be expected from the replacement radiator market: How will this compare with Allen's growth?

**ANSWER:** Profile II provides details on this market. We expect that Allen, under the management umbrella offered by G & O (an industry leader), will be able to grow significantly faster than the 8% to 10% estimated for the industry by developing national distribution. Historically G & O and Strangi have grown faster than has the industry.

**QUESTION:** What effect will the increasing use of aluminum radiators have on Allen's business?

**ANSWER:** The aluminum radiators currently being sold are experiencing a failure rate twice that of the copper radiators. If this trend continues the replacement radiator business will increase significantly. The advent of aluminum radiators will give Allen a major competitive advantage as they are one of the few radiator manufacturers to have the necessary resources to get into aluminum fabrication. This new technology will tend to eliminate many of the marginal radiator companies, if it increases in acceptance. It is presently not clear how important aluminum radiators will become.

**QUESTION:** Does Antenna Specialists supply the OEM or the replacement market? What type of distribution system do they use?

**ANSWER:** Antenna Specialists sells to both the OEM market and the replacement market. They use their own salesmen to contact the OEM's and national accounts. They also utilize a long established group of representatives who market to electronics distributors and communication specialists. While in the beginning, A/S sold exclusively to OEM's, the representative organization has developed the replacement business to a point where it is now greater than the sales to the OEM's. This makes A/S the leading manufacturer in both markets.

**QUESTION:** Aren't the automation and material handling companies greatly influenced by OEM cycles?

**ANSWER:** This group of companies is dependent on the major OEM's in the automotive industry for a significant portion of their business. When the OEM's started reducing expenditures, these companies were affected. This downturn in sales is still continuing. Because these Allen companies produce specialized machines and equipment for material handling and quality control, they are somewhat protected from OEM cutbacks.

**QUESTION:** Is Crown Steel closely tied to the OEM's business cycle?

**ANSWER:** Crown Steel's business should be closely related to truck sales. At this point Crown has noticed no downturn in their business in spite of the slowdown in the economy.

**QUESTION:** Where will Crown's growth come from in the short term and long term?

**ANSWER:** Crown is expected to benefit in the short term with an increase in profits due to increased plant efficiency and more productive utilization of assets. In the long term, considerable growth should come from the van interiors, fiberglass parts, and special cabs for off-the-road and utility vehicles.

**QUESTION:** What is Allen's dividend policy?

**ANSWER:** Allen's management has not formulated a specific dividend policy. The question of dividends will constantly be reviewed.

**QUESTION:** What is Allen's financial position?

**ANSWER:** As of December 31, 1969, Allen had $7 million cash, a current ratio of 3:1, and minimal short term borrowing.

**QUESTION:** Is Allen's business seasonal?

**ANSWER:** Many of Allen's companies have definite seasonal patterns. These major groups are shown in the table below. Because some of these patterns overlap and some companies have no seasonal pattern, Allen's pattern is not as pronounced. Management estimates that for 1970, Allen's seasonal pattern will be as shown below.

<table><thead><tr><th></th><th>1st QTR.</th><th>2nd QTR.</th><th>3rd QTR.</th><th>4th QTR.</th></tr></thead><tbody><tr><td>Orion</td><td>22.3%</td><td>26.9%</td><td>27.2%</td><td>23.6%</td></tr><tr><td>Radiator</td><td>20.2%</td><td>22.2%</td><td>28.4%</td><td>29.2%</td></tr><tr><td>Crown</td><td>25.3%</td><td>28.9%</td><td>23.4%</td><td>22.4%</td></tr><tr><td>O.E.M.</td><td>21.0%</td><td>24.3%</td><td>29.4%</td><td>25.3%</td></tr><tr><td>Allen</td><td>22.2%</td><td>25.6%</td><td>26.6%</td><td>25.6%</td></tr></tbody></table>

**QUESTION:** What is the potential future dilution from the 1½ million common shares that are reserved for future use?

**ANSWER:** Of the 1½ million shares reserved 330,000 were included in the 1969 earnings per share and 205,000 are reserved for stock options which have not been issued. The options, warrants and convertible debentures are not expected to amount to more than 12% dilution. This EPS dilution would be incurred over a 4 to 5 year period and at a rate which is not anticipated to exceed 4% in any year. Any of the shares reserved for contingent issuances under acquisition agreements that are issued (and as many as 140,000 shares might be issued) should be issued for an average of $8 of earnings. These would normally be antidilutive in nature.

**QUESTION:** What were Allen's earnings by quarter in 1969?

**ANSWER:** Allen's 1969 earnings by quarter are restated in the first quarter report of 1970. Available upon request.

KISSINGER, HENRY A.

TELEPHONE (516) 293-5500

news
release

August 4, 1970

ALLEN ELECTRIC AND EQUIPMENT COMPANY REPORTS
FIRST HALF SALES AND EARNINGS

Allen Electric and Equipment Company (AMEX), Melville, N.Y., today announced sales and earnings for the first half and second quarter of 1970. Earnings were higher for both periods despite lower sales caused by a truck strike and by the divestment of several marginal operations. Sales for the six months ended June 30, 1970 were $53,160,000 as compared with $54,997,000 in the first half of 1969. Net income amounted to $1,586,000 or $.60 per share versus the 1969 half's loss of $721,000 or ($.28) per share. For the second quarter of 1970, sales were $27,353,000 with net income of $920,000 or $.35 per share compared to sales of $29,152,000 and a net loss of $163,000 ($.06 per share) in the second quarter of 1969.

The results for 1969 were restated to reflect poolings of interest as well as operational change write-offs and extraordinary charges taken at the end of 1969. The figures also reflect a 3% stock dividend payable on August 7, 1970 to shareholders of record on July 16, 1970.

Commenting on the first half results, Walter B. Kissinger, President and Chief Executive Officer of Allen observed that, "We are pleased with the continued improvement in operations. The second quarter's sharp gain in income over the first quarter ($.35 versus $.25) was achieved despite a serious truck strike and lockout which adversely affected regional operations. We look forward to continued improvement during the balance of the year."

Allen is a manufacturer of products for the automotive after-market including radiators, accessories, and diagnostic and car wash equipment, and of special vehicles and automation, material handling and communications equipment.

RECEIVED

AUG 1 2 1970

CENTRAL FILES

NOTES TO FINANCIAL STATEMENTS

NOTE (A)

The results of operations for the first half of 1969 have been restated to include acquisitions subsequently completed which are accounted for as poolings of interests, for the change to percentage of completion method of accounting for long-term contracts, and for the pro rata effect of year-end adjustments for certain companies owned throughout the period. In addition, research and development costs which were deferred under the previous accounting policy at December 31, 1968 in the amount of $2,595,00 (net of related federal income tax) have been written off in 1969 by an equal extraordinary charge to each quarter. All research and developments costs incurred during 1969 and 1970 are charged to operations as incurred. A more complete description of this accounting change is contained in the Company's 1969 Annual Report.

NOTE (B)

Write-offs related to operational changes and extraordinary charges for 1969 (amounting to $715,000 and $2,810,000 net of taxes respectively) are being charged to the appropriate quarter where specific period identification is possible and pro rata equally to each quarter where such period identification could not be made. The sales and income for 1969, as restated on a quarterly basis, were shown in the interim report to shareholders for the first quarter of 1970 which is available on request.

NOTE (C)

Income for 1970 is net of minority interest of $125,000 ($0.05 per share) for the six months ending June 30 and of $53,000 ($0.02 per share) for the three months ended June 30. Before deduction of minority interest and operational change write-offs, income for the 6 months ending June 30, was $1,711,000 in 1970 compared to $1,569,000 in 1969 and income for the 3 months ending June 30 was $973,000 in 1970 compared to $922,000 in 1969.

NOTE (D)

Earnings per share of common stock are based upon the weighted average number of common shares outstanding during each quarter after giving retroactive effect to shares issued in connection with poolings of interests (including as common stock equivalents the shares of Series A preferred stock issued in the acquisition of G & O Corp.) Additionally included are the number of shares issuable under acquisition agreements and the common stock equivalents of options and warrants (after adjustment for assumed use of proceeds based upon the treasury stock method). There was no dilution of 1970 and 1969 earnings per share under the full dilution calculation.

## Mediterranean

In addition to fulfilling their mission of obtaining information on the whereabouts and activities of the Soviet ships, COMFAIRMED planes regularly bring back photographs of innocent activities: Soviet sailors doing calisthenics or enjoying swim call. Some photographs show Russians taking photographs of Americans taking photographs of Russians.

The proximity of the two fleets has led inevitably to incidents. Soviet ships sometimes intrude on the screen of destroyers around U.S. carriers, creating navigation hazards. The Russians send up international colored flares to signal U.S. observation planes that a ship is about to practice firing, but often it is only a ruse.

Soviet-built TU-16 planes from Egyptian fields have flown over carriers engaged in launching and receiving jets, obliging the carrier aircraft to alter their flight patterns and creating dangers of collision. American commanders dismiss some Soviet actions as pranks or bad seamanship. In other cases, they say the Russians

have deliberately violated the rules of the sea.

In testimony before congressional committees, U.S. admirals cite dangers posed by Soviet naval expansion as justification for appropriations requests. Rear Admiral Allan F. Fleming, whose Mediterranean commands include the air surveillance units, believes that

one can't discount the naval threat that exists today. The Soviets have a tremendous number of submarines. Some are always in the Mediterranean. Yet, the Soviet fleet does not inhibit our freedom of movement. Their threat is more political than military. They are trying to extend their influence through the deployment of naval forces. A fleet is a good way of extending spheres of influence. Historically, this has always been a part of sea power. Just look at the record of our friends the British. We too have used the navy as an instrument of national policy—remember the Great White Fleet and Perry sailing into Tokyo Bay?

One responsible proposal has been made that both fleets get out of the Mediterranean in the interests of lessening tensions in the region. The suggestion was made by Spanish Foreign Minister Fernando Maria Castiella y Maiz in a conversation on November 19, 1968, with Secretary of State Dean Rusk. He urged that an agreement be negotiated between Moscow and Washington for simultaneous and mutual withdrawal. The Mediterranean would fall under the control of the coastline countries. The American reaction was unfavorable, and the Russians were silent. The idea died, but if the new "SALT Spirit" should flourish, it is conceivable that negotiations might at some point reach this subject, too.

## Sail away?

Withdrawal would not be without advantages to the United States. It would remove two potentially hostile forces from a region where geography and tensions make for constant risk of incident and accidental confrontation. An American naval withdrawal from the Mediterranean cannot be equated with a ground force pullout from Europe. American troops, once removed from Europe, would be separated from the Continent by an ocean in the event of war. Geographically the Russians would be at an advantage because they

could move back in quickly. The situation is not analogous for fleets. American warships based at an expanded Rota base in Spain or at other European Atlantic ports could return to the Mediterranean as quickly as the Russians. The Russians would have to sail through Turkish straits controlled by a nation friendly to the United States. In fact, the Montreux Convention empowers Turkey to close the straits to warships when it is at war or threatened by aggression.

Furthermore, the dominant naval forces in the Mediterranean belong to pro-American nations, including three NATO countries, Italy, Greece, and Turkey, not to mention France and Spain. If both Russia and the United States withdrew, the resultant balance of power in the area would favor America.

A withdrawal might, however, have an inflammatory effect on the Middle East. It would remove the Soviet presence that may, in fact, be restraining Egypt. It would relieve Israel of the restraining fear of accidentally hitting Soviet ships.

In the view of a White House adviser on national security matters, the presence of the Soviet fleet in the Mediterranean may be desirable in a Byzantine way. He regards the Russian fleet as "hostage to us." In the event of Soviet pressures on Berlin or on other points where the United States is at a disadvantage, the United States could retaliate against the Russian Navy in the Mediterranean.

The superior Sixth Fleet could deny the Soviet fleet entrance to ports for refueling and supply and could even block its return routes to Soviet ports. The Russians would become floating captives. Of course, this raises the question of violation of international law in general and in particular of the Montreux Convention governing passage through the Dardanelles Strait, the Sea of Marmara, and the Bosporus Strait. But the White House adviser conceded that one international violation (such as of American access rights to Berlin) simply might beget another violation (such as Soviet rights in the straits).

Even if the idea of a mutual withdrawal of fleets were acceptable to the United States, there is no reason to believe it would be to Russia. Having acquired a new role in a strategic

Overlooking Boston's famous Public Garden... minutes from theaters and shops; a hotel in the European tradition.

THE RITZ

CARLTON

BOSTON

## GLOVE CLEANING BY MAIL

$1.25 per pair

Free glove mailing envelope

ROBIN LEATHER CARE

190 Glen Cove Avenue

Glen Cove, New York 11542

## ADVENTURE in CREATIVITY

Art • Music

Writing

Theatre

Dance • Film

Summer residential

program. Coed

Ages 14-19

June 28-Aug. 9

H. J. Motley, Jr., CRANBROOK SCHOOL, Box 0
520 Lone Pine Rd., Bloomfield Hills, Mich. 48013

THE ATLANTIC

FEBRUARY 1970 (47)

jlb:4/2/71

Denver, Colorado 80505
100 Security Life Building
International Resources Ltd.
Mr. Richard V. Allen, Vice President

Henry V. Kissinger

Warm regards,

drop by.
When will you be in Washington again? Please

thinking of me.
and thoughtful reading and I appreciated your
Center Conference. It makes for interesting
paper from the National Strategy Information

Dear Dick:

APR 3 1971

KISSINGER, HENRY V.

Wars of National Liberation
and United States Public Opinion

When the last contingents of United States armed forces withdraw from Vietnam, there will be a reckoning of accounts. We shall ask ourselves, endlessly and to the point of tedium, "What have we learned from our bitter experiences there?" "Was it worth the cost in resources and in lives?" "Would, or should, we ever do it again?"

It is not necessary to anticipate in detail the questions or the answers; Vietnam will be behind us, and the consequences of our involvement will have become clear.

There is a likelihood that hostilities will continue, and the fate of South Vietnam will hang in the balance. If "Vietnamization" succeeds in withstanding the Communist onslaught from the North, and if the South Vietnamese regime maintains its political credibility, Southeast Asia may gain a respite from the long years of continuous warfare and death, and our policy may be said to have been correct. If, on the other hand, Saigon crumbles in the face of continued pressure and combat, the long-term prospects for the entire region will be glum indeed.

- 2 -

Many will argue that the United States had "no
business" being in South Vietnam; that the war there was
not simply one between Communists and non-Communists, but
one of a less complicated revolutionary nature; that the
United States may finally have recognized that it cannot
organize the world to its own liking; and that its national
interest was in no way affected by the outcome. Others may
agree with these views, but argue that once committed, the
United States ought to have fought to decisive victory,
even if this required the application of military measures
more dramatic than those employed.

II

But in any conflict there are two sides, and
each side will draw its own conclusions from the outcome,
and will in large measure base its future actions upon the
experience acquired in the most recent past.

Win, lose or draw, the patience of American
citizens has been put to a severe test by the Vietnam war.
The "credibility gap," a product of and carry-over from a
previous administration, seems to be afflicting the present
administration--this despite President Nixon's continued
withdrawal of American military forces from combat operations.

A major contributing factor to the perpetuation
of the so-called credibility gap has been the breakdown of

bipartisanship in the conduct of United States foreign policy. Traditionally, Congress has joined forces with United States presidents in the prosecution of foreign wars; and, while individual legislators have from time to time dissented from presidential leadership, the bipartisan spirit has by and large prevailed.

Never before has the country witnessed such opened and sustained attacks on Administration policy, a development not lost on other peoples. On a daily basis, Presidents Johnson and Nixon have been subjected to bitter and partisan criticism, which is in turn communicated to the American people in the shorthand of the mass media of communication. Recent strikes at Communist sanctuaries in Laos and Cambodia have further heightened tensions, and fan the flames of criticism from all sides.

Thus, while American combat participation in Vietnam continues to decline--in accordance with President Nixon's promises during the 1968 Presidential Campaign-- the appearance of an inexorably wider war is created.

Public opinion, while not subject to precise measurement, is seriously divided on both the validity of the war itself and the extent to which the Administration communicates its war policies to the nation. In one important respect, public opinion is unanimous: it would be better for this war to be terminated. The argument

- 4 -

centers principally on how it should be terminated and
on the consequences for Asia.

The disintegration of bipartisanship has brought
forth two recurring issues: (1) the extent to which the
Executive Branch should be allowed to commit United States
military power in the pursuit of basic foreign policy and
national security objectives, and (2) a discussion of
United States national interests, with the ultimate pur-
pose of providing some yardstick of measurement for those
interests.

The lack of more decisive results in the Vietnam
war has been an important factor in the resurgence of
isolationist sentiment in our country at precisely the
wrong time. It is true that there are serious problems
at home that must be dealt with--the cities, the environ-
ment, education, health, and a host of other problems.
But the new isolationists, themselves the internationalists
of recent years, now argue that the primary conditions of
our "survival" will be dictated by our handling of these
issues, and not by ill-defined and badly conducted foreign
ventures. Regrettably, some of these new isolationists
have extended their reasoning to apply to the area of
international trade, arguing that the United States must
protect itself against competition from abroad. This,
too, has a significant impact on domestic public opinion,

- 5 -

especially in a period of economic slowdown and dislocation, although much of the malaise is but the reflection of a decline in defense spending for Vietnam and in associated defense expenditures.

### III

How does the United States understand Vietnam? How do our citizens view the war? During the initial phases of increased American involvement, most Americans believed that our involvement would be of short duration, and that the application of modern mechanized warfare would more than adequately cope with poorly equipped and untrained "partisan guerrillas." This thinking was compatible with the belief that the world's most sophisticated and efficient fighting machine would, with typical dispatch, solve a localized revolutionary war. After all, had not contingents of marines solved lesser problems, and had not at times the mere presence of American military power served as an effective deterrent to war?

As the United States became increasingly involved, and as the costs both in terms of lives and dollars mounted to unexpected levels, opinion began to shift and doubts increased. The staying power of the enemy was undiminished, thanks to increased support from the major Communist powers, and it was not possible to seal the country from continuous

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invasion through contiguous states. Something was going
wrong, it appeared, and the remedy for that something was
not close at hand. The war had been identified as a
temporary action in a limited area, not as a drain upon
our strength.

By late 1965 and early 1966, it became clear
that we were facing a new and unique kind of warfare, one
with whose dimensions we were not equipped to understand,
much less fight.

For their part, the Communist countries identi-
fied Vietnam as a "war of national liberation," a just
war, one designed to defeat and humiliate the West in
general and the United States in particular. The moral
and material support of the North Vietnamese effort by
the Soviet Union and China increased, demonstrating that
a "victory" meant very much to the Communist world, and
that they had no intention of suffering a setback in what
was to most Americans a remote corner of the world.

In other words, both the Soviet Union and China
perceived the continuation of the war to be in *their*
national interests, and clearly not in ours. The war
developed as a battleground, albeit remote and by proxy,
between the "two systems."

If South Vietnam ultimately falls to domination
by the North, such a development will serve to validate

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the strategy of supporting wars of national liberation, and will represent the second decisive defeat (including the French experience of 1954) for Western powers by means of attrition.

Above all, national liberation warfare is a long-term proposition. It has dual targets--on the one hand, it seeks to subvert and topple the existing regime against which the offensive is directed, and on the other hand, seeks to attract sympathy and support for its cause from abroad. Within this second category, particular attention is paid to the developed countries of the West, chiefly Western Europe and the United States.

From the Communist point of view, Vietnam represents the highest and most successfully violent stage of this type of war. It has in fact destabilized the ruling powers in the South, has prevented true political unification of the South, and has disrupted the economy, the lines of communication and, in general, life. It has moreover, by continued emphasis upon Social violence and widespread intimidation against the indigenous populations, succeeded in creating sanctuaries within the target country itself. This is a unique advantage brought about by the systematic creation of heretofore external sanctuaries in adjacent countries.

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Without relative freedom of movement within
the target country, coupled with acquiescence of the
rural population, national liberation warfare cannot
succeed. At best, it must operate on a hit-and-run
basis, but can never threaten the central authority of
the rulers.

President Nixon, unlike his predecessor, has
taken the initiative to strike at the key sanctuary areas
in Laos and Cambodia, arguing that these actions are
necessary for his strategy of Vietnamization, and are a
requirement if Vietnamization is to proceed with a mini-
mum loss of American lives. His critics disagree, some-
times violently, and focus almost exclusively upon the
"widening" of the war.

Air strikes in Laos and Cambodia do not repre-
sent a widening of the war itself, but are, in my view,
an indispensable ingredient of systematic United States
withdrawal. Measured against the medium-term benefits
of weakening the enemy offensive and a prolonged "breath-
ing space" for the South Vietnamese, I believe they are
worth the cost.

But what does the public believe? After so
long a period of misleading optimistic reports, public
confidence in governmental information efforts is, to
put it charitably, somewhat eroded. The President,

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therefore, confronts an essentially impossible task of
"educating" domestic public opinion to accept his explana-
tions, and with no "assistance" from the indefatigable
communications media (which exhibits its own brand of
skepticism regarding his policies), is forced to take his
case directly to the people. There is, of course, an
inherent danger of over-exposure of the President on the
war issue; the Chief Executive cannot be the only spokes-
man for his policies.

Consequently, through public appearances by
the members of the Cabinet, and through "backgrounders"
by his Assistants, the President must get the word across
to the public at large. The task is difficult, since he
must develop a coherent and easily understandable policy
posture.

IV

President Nixon has often emphasized that, while
it is of critical importance to terminate the war in
Vietnam as soon as possible, and on honorable terms, it is
yet more important that it be terminated in a way which will
insure that there will not be any new"Vietnams."

Some accuse the President of masquerading an in-
tent to achieve a decisive military victory by putting the
proposition this way. They believe that he is striking a
pose of sanctity while prolonging the war for more obscure

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reasons. They do not accept his view that precipitous withdrawal will lead not only to the collapse of South Vietnam and neighboring countries, but also to another outbreak of hostilities.

In my view, this is the most difficult position the President can take, because it is an educational task as well as a process of policy communication. The present shape of public opinion is such that it is not very receptive to the argument, although it shows signs of patience, recognizing that it is the President who will ultimately decide.

Politically, this course is also difficult, because the President knows that it must show signs of definite progress if he is to be given the chance to implement his long-range policies. Thus, in a highly charged political atmosphere, the "long pull" strategy becomes vulnerable to partisan attack, especially from a Congress which is controlled by an opposition seeking to remove an incumbent Chief Executive in a forthcoming election.

At the same time, and as a direct consequence of the Executive's conduct of this long war, the Congress is restless, and seeks to capture a more direct role in the formulation and execution of the country's foreign policy. As the news media treat the challenge to executive leadership and prerogatives in the foreign policy

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field, one gains the impression that Congress is attempt-
ing to regain prerogatives that have been lost or have
been eroded over a period of years. Frequently, the fact
that those politicians leading the drive for greater
Congressional authority have traditionally defended the
preponderant executive power, and have, in fact, argued
for a strong presidential authority in foreign affairs as
a necessary function of our governmental structure.

The public, removed from the center of action,
hears that the President has become too powerful, and
that "Vietnam" is the direct consequence of this dangerous
accumulation of power. It is the intention of the critics
to convey the impression that the concentration of power
in Presidential hands has reached the point of being a
de facto abuse of power. To such charges the President is
virtually powerless to respond; on the one hand, he cannot
honor the charge by calling attention to it and refuting
it (i.e., he cannot say, "It is not true that I am too
powerful in the field of foreign policy, and it is equally
untrue that I am abusing my Constitutional powers."); on
the other hand, he cannot afford to allow the argument to
stand unchallenged. Thus, he is forced to increase the
volume and the frequency of his direct appeals to the
public, emphasizing that the responsibility for maintaining
peace is uniquely his, and that he would welcome Congressional

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support in the discharge of these weighty responsibilities.

In an era such as ours, such debates are particularly dangerous, for they add an element of confusion in the public mind. Whether the President is too powerful is a matter to be settled after we have extricated ourselves from the present problems, not during the process itself. What public opinion does not, and perhaps cannot, appreciate fully is the fact that Congress is incapable, by its very structure and methods of doing business, of devoting daily, even hourly, systematic attention to the formulation and implementation of a consistent foreign policy. Congress is a deliberative body and, as the adjective implies, of necessity less structured and more time consuming in its consideration of national policy. In fact, the legislative body does have an important and direct mechanism to participate in foreign policy and national security formulation and execution, namely, the power to approve or deny funds for the pursuit of specific policy goals.

The President, elected by the nation, is, and must be, responsive to the nation as a whole, and he alone is in the unique position of having available to him the requisite information to shape the nation's foreign and national security policies.

These factors are of immediate importance to his 200 million constituents, yet they are too complex to com-

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municate effectively. His political and policy opponents
also recognize this, and therefore enjoy greater freedom
to go on the attack. Such arguments clearly attract wide-
spread public attention, and therefore contribute directly
to shaping public opinion.

V

Wars of national liberation, we have seen, are
complex by nature, and those who wage them have both in-
ternal and external goals. Vietnam is the most dramatic
example of national liberation warfare, and one in which
we have become heavily involved.

The Communist side has the direct internal goal
of abolishing the present regime in Saigon, and establishing
in its place a government which is responsive to, and
aligned with, the other Communist states. The clear
preference is to be able to achieve power by less violent
means, but the application of broad-scale violence will
always be determined by the degree of resistance of the
rulers and their allies. Violence has a demonstrative
effect not only on the object population, but on the "out-
side world" as well.

The impact of the violence in Vietnam has had
a profound effect in the West, and particularly in the

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United States. Front-line media coverage of the war has brought to every living room the close-up horror of war, and to a public which appears not to comprehend the purpose of the war, the violence is revolting. As in all past wars, innocent civilian populations suffer death and destruction, and violence visited upon the confused and very plain people of Vietnam--particularly women and children--takes on an added dimension.

War is essentially strategic violence, and has been experienced by most of Europe, the Soviet Union, China and many other countries. During World War II, when United States public opinion overwhelmingly understood the need for dramatic violence in order to win the war, humanitarian concern for the innocents was secondary to the public goal of winning decisively. But with respect to the Vietnam war, whose purpose is not widely understood, the violence takes precedence over the strategic objective. The question then becomes absurd in the extreme: "If you are against killing, stop this war; if you continue this war, you are for the killing." It is an undeniable fact that a small but highly articulate segment of the population has taken the extreme position and has had an impact on public opinion in this country and elsewhere. When the proposition is put in this fashion, accompanied by great emotion, the possibilities for rational discourse fade away.

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The Communist leadership in Hanoi--along with its allies in and out of power around the world--quite early on in the course of the war perceived that the revulsion against personal violence was a factor to be exploited and subsequently turned against the President and his policies. A quite skilful job has been done in this regard, and, I believe, has been a significant contributing factor to dividing public opinion in the United States.

In addition, the Communists have sought to exploit the opposition to the war expressed by public officials, although factors other than a mere abhorrence of violence may have caused such opposition. Who, for instance, would have thought it possible that a Member of Congress belonging nominally to the President's party could call for his impeachment over the conduct of the war? Who would believe that a newly-elected Member of the same body could erect an "American Atrocity Exhibition" in his Capitol Hill office, and invite members of the press to attend its grand opening?

The aggregate effect of the many new and different factors of the war in Vietnam has caused the United States to adopt an apologetic stance in explaining its view of the purpose behind the American involvement in Vietnam. Two successive Administrations have faced the

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problem of divided public opinion, the present Administra-
tion with greater success than the previous Administration.

The psychological offensive mounted in connection
with the prisoner of war issue during recent months served
to focus public opinion on the fact that "inhumanity" is
not a one-sided affair, and has succeeded in generating
widespread sympathy for the Administration's policies.
Mistreatment of American prisoners of war is a live issue
for most Americans, and attracts attention. But the validity
of the war cannot be decided on this peripheral issue.

VI

The central issue in national liberation warfare
remains the seizure of power. It is equally important to
recognize that the "national liberation movement" does not
require the application of revolutionary violence, and
that progress can be achieved by other means as well.

In 1963, "Che" Guevara noted that

The real capacity of a revolutionary is
measured by his ability to find adequate
revolutionary tactics in every change of
situation. By keeping all tactics in
mind, he will exploit them to the maxi-
mum. It would be an unpardonable error
to underestimate the gain that a revolu-
tionary program can make through a given
electoral process. At the same time it
would be unpardonable to look only to
elections and to neglect other forms of
struggle, including armed struggle, to

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to win power, which is the indispensable instrument for applying and developing the revolutionary program. If this power is not won, all other conquests, however advanced they appear, are unstable, insufficient, and incapable of producing necessary solutions.

Similarly, it is not required that all elements of the national liberation movement be controlled or even led by Communists.* The movement as a whole is taken to consist of a conglomerate assortment of anti-capitalist forces which adopt militant positions vis-a-vis the developed countries, and hence is of varying utility to the Communists in the broad anti-imperialist struggle.

Recognizing that it is both impractical and impossible to exercise control over this loose association of forces, the Soviets and the Chinese merely support them materially and morally. The object is not to "possess" all the elements of strength at any one time, but to utilize existing factors for broad Communist purposes, and to create the impression that a "correlation of forces" is shifting to the Communist side, away from the Capitalist countries.

During the first phase of the Soviet Union's dispute with Communist China, the Soviet Communist Party

* Elsewhere, I have defined the national liberation movement as comprising the"revolutionary and anti-Western forces operating in underdeveloped countries and in colonial areas which are frequently, but not always, led by Communists. Peace or Peaceful Coexistence?, (Chicago: The American Bar Association), 1966.

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organ Kommunist explained the Soviet view of these developments: "The nature and meaning of the world revolutionary process in our times are determined by merging into a single stream the struggle against imperialism on the part of the peoples building socialism and communism, the revolutionary movements of the workers' class in the capitalist countries, the national liberation struggles of oppressed peoples, and the general democratic movements." (Kommunist, No. 11, July 1963)

Two years later, an editorial in Pravda provided a succinct statement on the transition of the national liberation movement to a global force:

> The national-liberation movement has ceased to be a movement which is "local," fulfilling partial functions, however important they may be, which are of no great significance for other streams of revolutionary forces. Today the national liberation movement has been united with those streams, with all the detachments of fighters struggling on various fronts against imperialist reaction. . . More and more the tight bond between the various streams of anti-imperialist, revolutionary struggle becomes a mutual one. World socialism is assisting the national liberation of the oppressed peoples; the liberation struggle of these peoples is contributing substantially to the struggle for socialism. (Pravda editorial, June 27, 1965)

Such high-sounding proclamations do not mean that the national liberation movement even remotely resembles such a cohesive "global force," merely saying so does not make it true. But such statements do indicate the purpose

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to which the Communist countries would like to put local-
ized revolutionary situations, whether or not the "revo-
lution" fits the specific mold of typical "proletarian
revolutions."

In my view, national liberation "warfare,"
whether of the violent or non-violent type, does not
presently occupy a central place in Soviet strategy. From
all available evidence, the Soviet Union is concentrating
its attention on the accumulation of decisive strategic
superiority over the United States, and would view any new
involvement, direct or indirect, in a remote place as
counterproductive to the immediate goal. The support of
North Vietnam may indeed be expensive to the USSR in
absolute terms, but it is a cheap price to pay to keep the
United States otherwise occupied while Soviet strategic
power grows. Should the strategic balance shift signi-
ficantly to the Soviet side, to the detriment of the United
States, we could expect renewed activity in the global
"countryside," with perhaps a willingness of the Soviet
Union to become involved on the side of its clients.

It is this more distant prospect that will, I
believe, educate American public opinion to the rigors of
wars of national liberation. If, on the basis of the
Vietnam experience, the American public cannot perceive
a direct challenge to our national interests, will it

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take the threat of a direct confrontation with a Soviet
Union whose power clearly outmatches ours?

That would be an unfortunate and perhaps disastrous
way to learn. Clearly, the possibility of learning in such
a fashion must be avoided.