Newsweek

ASAHIBUILDING (9TH FLOOR), 6-7, GINZA 6 CHOME, CHUO-ku, TOKYO (104)

December 10, 1973

Bernard Krisher
Bureau Chief
Phone 573-2836

Mr. Walter Kissinger
c/o Okura Hotel
Tokyo

Dear Walter:

Thank you for a most delightful lunch today. I hope to be able to reciprocate--so please call if you have a free moment.

Here is the prediction for next year for Henry by
my favorite Japanese fortune teller, Kototome Fujita.

Krisher: And what do you predict about Henry Kissinger?

Fujita: He still has a strong fortune, but he should be careful. There may be some incident involving his subordinates and there may also be some problems with a new post he may be given. It is also possible that women may become the cause of his troubles next year. He must be careful for women could terminate his good fortunes. He should therefore consult with me as to whether he should go out with this woman or that one. Big things can be affected by the single word from a woman which could suddenly turn out for the good or bad. Americans, especially, should be careful about this.

This may appear in our year-end overseas editions so I'd appreciate if it were not publicized. And, I hope Henry will be careful!!

## Table of Contents

<table><tr><td>Chairman's Letter</td><td>4</td></tr><tr><td>Operations Review</td><td>6</td></tr><tr><td>Business and Financial Review</td><td>16</td></tr><tr><td>Sources of Sales and Income</td><td>18</td></tr><tr><td>Consolidated Financial Statements</td><td>19</td></tr><tr><td>Management's Discussion and Analysis of the Summary of Operations</td><td>27</td></tr><tr><td>Five-Year Summary of Operations</td><td>28</td></tr><tr><td>Directors and Officers</td><td>29</td></tr><tr><td>Notice of Annual Meeting</td><td>30</td></tr></table>

## The Year at a Glance

<table><thead><tr><th></th><th>1975</th><th>1974</th><th>% Change</th></tr></thead><tbody><tr><td>Net Sales</td><td>$227,125,000</td><td>$218,306,000</td><td>+ 4%</td></tr><tr><td>Pre-Tax Income</td><td>$ 6,360,000</td><td>$ 4,273,000</td><td>+ 49%</td></tr><tr><td>Income Before Extraordinary Item</td><td>$ 3,820,000</td><td>$ 2,870,000</td><td>+ 33%</td></tr><tr><td>Net Income</td><td>$ 3,820,000</td><td>$ 3,600,000</td><td>+ 6%</td></tr><tr><td>Net Income Per Share, Primary</td><td>$1.22</td><td>$1.15</td><td>+ 6%</td></tr><tr><td>Working Capital</td><td>$ 61,546,000</td><td>$ 60,785,000</td><td></td></tr><tr><td>Current Ratio</td><td>3.0</td><td>2.4</td><td></td></tr><tr><td>Book Value Per Common Share</td><td>$17.19</td><td>$16.33</td><td></td></tr><tr><td>Return on Stockholders' Equity</td><td>7.2%</td><td>7.1%</td><td></td></tr><tr><td>Common Shares Outstanding at Year End</td><td>2,865,000</td><td>2,870,000</td><td></td></tr><tr><td>Number of Registered Holders of Common Stock</td><td>4,200</td><td>4,250</td><td></td></tr><tr><td>Number of Employees at End of Year</td><td>5,330</td><td>5,150</td><td></td></tr></tbody></table>

## Description of Company

The Allen Group Inc. (NYSE) is an international manufacturer and marketer of automotive aftermarket products and a designer and producer of OEM truck components for the North American market. Approximately 47% of the Company's 1975 revenue was generated through the sale of consumer automotive products, which include antennas for citizens band and mobile radio applications, auto accessories, replacement parts, tools and test instruments. Automotive test and servicing equipment, which includes engine performance and emission analyzers, car wash systems, lifts, wheel balancers, alignment equipment, garage tools and automotive replacement radiators, accounted for 40% of total sales in 1975. Truck products, which made up the remaining 13% of sales, include truck cabs and bodies, specialized sheet metal and fiberglass fabrications and heavy-duty radiators and heat exchangers for truck and off-highway vehicles.

2

## Chairman's Letter to the Stockholders

Dear Stockholder:

With sales for the full year 1975 increasing modestly to $227 million, pre-tax income increased almost 50% over the previous year. Reflecting our rapid recovery from the recession, approximately three quarters of our 1975 income was earned during the second half of the year. The annualized rate of our $.92 per share second half earnings was more than 25% ahead of our peak earnings year in 1973.

In addition to the earnings recovery evident in these figures, the year also saw a significant improvement in the Company's overall financial position. A strong emphasis on improving cash flow throughout the company has put Allen in its most liquid position in recent years. Short-term debt, which peaked at $18 million in 1974, was eliminated completely by 1975 year end, and our current ratio of 3 to 1 is a record level for the company. During 1976, we expect to continue to reduce our overall debt level, notwithstanding the anticipated growth of our business and the 25% boost in the dividend approved by the Directors in December.

The improvement in our earnings and financial picture reflects, in part, the overall pattern of the recovery of our markets from the 1974-1975 recession. The downturn was first felt in our automotive accessory area in the summer of 1974 and in our test and service and, particularly, truck products segments late in

1974. While the accessories area has now recovered, the test and service and truck areas continue to be depressed, although some early signs of an upturn are now evident.

In a broader perspective, however, our "turnaround" reflects programs stretching back into the latter part of 1973 and the beginning of 1974. At that time we began to act on two important judgments as to the strategic direction of our business: First, that the rapid growth of our business during 1971-1973 (during which time sales grew approximately 60%) had overtaxed our management and financial resources requiring a slowdown in our growth rate; second, that the impact of the energy crisis and, subsequently, of the inflation followed by recession required careful rethinking of certain of our market strategies. For both these reasons, we began in early 1974 to slow the Company's growth, to carefully pace new investments, and to examine the rationale of our participation in certain markets.

As a result of this reassessment, we have already either withdrawn from, or developed plans and made financial provision to withdraw from, certain markets and investments, particularly in the international test and service equipment field. We have also restructured our ongoing North American car wash, Canadian automotive accessories, and European test and service businesses, as well as two of our

4

[L]

domestic automotive accessory companies.

At the same time, we have supported vigorously those areas of our business where the record of performance and the market outlook indicates the potential for good returns on our investment. Assets committed to the mobile communications area more than doubled in the past year.

The performance of our business in the second half of 1975 represents, in my judgment, the initial payback on our investment in these programs. By concentrating our resources in our strongest business areas, while eliminating and/or shrinking the marginal areas as we indicated we would do in our Profile 17 published in mid-1975, I believe we have significantly altered the direction of our business toward a higher return on assets and investment that will become increasingly evident during 1976.

The chart on Strategic Development appearing on Page 17 of the Annual Report provides a good perspective of these changes now emerging within the company in the context of 1971-1977 sales growth. At the beginning of this period, automotive accessory and mobile communication products accounted for only 33% of total sales. By 1977 we expect this consumer related business to account for 55% of total sales. Conversely, the test and service business, which accounted for almost half of our sales in 1971, is forecasted to represent less than

one-third of 1977 sales. Truck products sales will also decrease as a percentage of the total. The Company's experience has been that its best returns have usually been earned in its consumer related business. Consequently, the growth of this area as a percentage of our total business will be a key factor in achieving increased profitability during the next several years.

The most notable area of change in our business during 1975 was the growth of the citizens band antenna product line from a relatively minor portion of our total business to a very major one, which now accounts for approximately 25% of sales. Developments in the CB product line are covered in some depth in this Annual Report. While the financial benefits to the Company during 1975 were particularly welcome during a year of recession, the approach we have taken to this market has been to emphasize long-range strategy rather than short-range opportunities. I am confident that the CB radio market will continue to develop as a significant consumer market. Substantial energy and funds were expended in 1975 in the development of new facilities, new products, new people, and new market strategies in order to insure our competitive position in the years ahead. We are particularly encouraged by the prospects of our new manufacturing facility in Puerto Rico and the expansion of our facilities and manufacturing

capability in Cleveland. Our return on these investments should be excellent.

During 1976, we will continue our program of maximizing return on assets consistent with our philosophy of supporting that which is strong while eliminating or strengthening that which is marginal or weak. I am confident that the continuation of this program, the continued strength of the CB market, and the gradual recovery of our other markets, will combine to produce excellent results for the Company. As indicated in the enclosed Profile entitled, "The Outlook for 1976," I believe that the 1975 second half earnings performance is indicative of the earnings levels that may be anticipated during 1976. Earnings will increase very dramatically over the full year 1975 level, assuming that our perspective of continued business recovery materializes.

I wish to thank the Company's management and employees for their commitment and effort during the year and you, our stockholders, for your support. Our outlook is excellent, and I am sure that your confidence will be rewarded.

Sincerely,

Walter B. Kissinger
Chairman and President

5

## Consumer Automotive Products—Mobile Communications
The Emergence Of The CB Market

During the course of 1975, mobile communications emerged as the Company's most profitable and fastest growing product area. Important developments within this marketplace have caused expansion from a relatively minor position in Allen's overall business (about 9% of total sales during the first half of 1974) to a very major segment, accounting for approximately 25% of sales during the fourth quarter of 1975.

Allen is involved in the mobile communications field through the Antenna Specialists Division, located in Cleveland, Ohio. Historically, Antenna Specialists has produced a broad line of two-way communications antennas primarily for the citizens band radio and professional two-way communications markets with lesser involvements in the marine, monitor, amateur and private aviation markets. The Company is recognized as the leader in its field and has achieved an excellent reputation in trade and customer circles for state-of-the-art technology and high-quality standards.

During 1974 and 1975 impor-

tant changes within the citizens band radio field dramatically transformed the nature of Allen's antenna business. Citizens band radio refers to a frequency spectrum set aside by the FCC in 1958 to provide a relatively low-cost means of two-way communication for the general public with modest licensing and training requirements. During the first fifteen years of its existence, usage of CB radios primarily appealed to a relatively small group of hobbyists in much the same way that amateur radio spectrums and equipment appealed to ham radio operators. During 1972-1975, however, this hobbyist-oriented CB radio market has been transformed into a product area with very broad consumer appeal. As one example of the tremendous interest in citizens band radio, during the year 1975 the FCC processed as many licenses for use of CB radio sets as it had previously processed in the entire seventeen year history of CB radio.

Even those intimately familiar with the electronic industry can-

not define precisely the causes for this broadening of consumer interest, but among the factors most frequently cited are the exposure given by the 1973 nationwide truckers' strike which was controlled with the use of CB radio, the rapid growth of recreational vehicle use in the United States, coupled with the desire of recreational vehicle owners camping or driving in out-of-the-way areas to keep in contact with "civilization," and the imposition of the 55-mile per hour speed limit which has made CB radio a useful tool for those wishing to keep track of "Smokey the Bear"—the traffic patrol car.

Whatever the origins of the boom, however, it is now clear that the wide usage of CB radios and general public awareness has led to participation by many people whose primary interest is relieving boredom while traveling, getting useful traffic reports and route directions, and having a safety device in case of accidents. The Allen Group management believes the pattern of usage of CB radio has be-

### MOBILE COMMUNICATIONS SALES

(Amounts in $ Millions)

(Amounts in $ Millions)

<table><thead><tr><th></th><th>1971</th><th>1972</th><th>1973</th><th>1974</th><th>1975</th></tr></thead><tbody><tr><td>CB</td><td>$ 4.8</td><td>$ 5.2</td><td>$ 7.5</td><td>$14.3</td><td>$43.3</td></tr><tr><td>Professional and Other</td><td>3.7</td><td>4.5</td><td>6.2</td><td>7.0</td><td>7.2</td></tr><tr><td>TOTAL</td><td>$ 8.5</td><td>$ 9.7</td><td>$13.7</td><td>$21.3</td><td>$50.5</td></tr></tbody></table>

6

[LC]

The red and black stripes (below) are the mark of quality on all Antenna Specialists mobile communications products. The co-phased Antenna Specialists Citizens Band "ears" (bottom left) are a familiar sight on trucks across the nation.

come so widespread and established that CB must now be recognized as an accepted consumer product with an important long-term future.

The broadened usage of CB transceivers has a special significance to Allen as an antenna supplier since we are primarily an "aftermarket" supplier. The major portions of our sales are *not* made in connection with the original radio sale. Our experience has been that anywhere from two to six antennas are normally purchased by a radio user during the life of his radio in order that he may use the same radio in several different applications (car, camper, boat), to replace damaged or vandalized antennas, and to upgrade his antenna system for better reception/transmission. The size of Allen's market, therefore, is more closely tied to the number of radios in use, rather than to the rate of sale of new radios.

The rapid growth of our citizens band radio involvement in 1975 has brought with it important fi-

7

[LC]

Consumer Automotive Products—Mobile Communications (Cont.)

nancial rewards. Sales within this product group during 1975 were more than $50 million. The mobile communications product line provided the major portion of Allen's total earnings in 1975 as rapidly expanding demand provided good margins while recession conditions elsewhere depressed results in certain of our other product areas.

The growth of the CB market has also necessitated many changes to which the company has responded during the course of the year and to which further response is being planned for implementation in 1976. The immediate need during the course of 1975 was to expand production capabilities to meet market demand. The Company twice expanded its Cleveland-based facilities, effectively tripling production capability between the beginning and the end of 1975. Accomplishment of this goal was one of the most significant developments within The Allen Group during the course of the year.

Numerous competitors entered the CB antenna field during the

past year and broadening consumer interest has stimulated awareness and participation of new channels of distribution, including mass merchandisers, discount stores and heavy truck manufacturers. Even the major automobile manufacturers and their dealer networks are beginning to show interest in CB. We responded in 1975 to these emerging factors in a variety of ways.

A new product line was engineered and introduced through our accessories group to service mass merchandisers under the Cal Comm® name with brand identity and merchandising methods that will augment, rather than compete with, the well-known Antenna Specialists brand.

Coordination programs have been developed with heavy truck and certain automotive manufacturers to assist them in their long-range product planning and to support their dealer networks with CB antennas as an automotive/truck accessory.

Important programs were launched to reduce costs at existing manufacturing facilities

and plans were developed for a new manufacturing facility in Puerto Rico designed to mass produce certain high-volume antenna items to more effectively compete with foreign imports now entering the United States. We expect initial production to begin in the second quarter of 1976. Our objective is to maintain our position of leadership and product variety and to serve all segments of this market in a meaningful way. New product designs are now being tested and programs established with major CB transceiver manufacturers to ensure our continuation as the market leader.

As the citizens band radio market continues its expansion and transition from a hobbyist to a broadly accepted consumer product, we anticipate that there will be many changes in the industry.

We believe the Allen Group occupies a unique position relative to potential competition in the antenna field. We now have a major share of the market several times the size of that of our nearest competitor. Through other business segments we have strong distribution channels to the two key emerging markets—the mass merchandiser and the automotive/truck manufacturers. We command a depth of manufacturing know-how, technology, product breadth and brand identity that is well recognized in the industry. As we look forward to 1976, we believe that the challenges posed by the rapid growth of this industry will be translated into great opportunities for our Company.

MOBILE COMMUNICATIONS
AS A PERCENT OF ALLEN SALES

MOBILE COMMUNICATIONS
ANNUALIZED SALES RATES

8

Consumer Automotive Products - Accessories

Through its Hollywood Acces-
sories, Cal Custom/Hawk, Path-
finder and Cal Chrome brand
names, The Allen Group is one of
the largest suppliers of custom
and convenience automotive
accessory products in North
America. A line of approximately
3,000 individual items is distrib-
uted in the United States. Por-
tions of the product line are also
distributed in Canada and Europe
through Company subsidiaries
and in Japan and the Far East
through our affiliate, Banzai, Ltd.
The Company's traditional
strengths in distribution, pack-
aging, point-of-sale merchan-
dising and innovative product
design have been key factors in
the growth of sales from about
$32 million in 1971 to a level
approaching $60 million in 1975.

In the second half of 1974 a
slowdown in consumer spending,
coupled with drastic reductions
in purchases by major mass mer-
chandisers to reduce their own
inventory positions was followed
by the nationwide recession.
These factors interrupted a steady
pattern of sales growth in Allen's
automotive accessory group and
created a depressed market

environment that lasted into the
first half of 1975. Demand accel-
erated rapidly in the second half
with order input during December
hitting a record level 69% above
the same month a year earlier.
Thus, while the overall pattern of
results for 1975 was very similar
to that of 1974, the trends within
the years were significantly dif-
ferent. 1974 began strong with
the Company expanding its activ-
ities and ended weak with sharp
contractions in sales, employ-
ment, plant activity and profits.
These trends continued into early
1975 and then were reversed as
the year finished on a strong note.
While total 1975 sales were only
1% ahead of 1974, the fourth
quarter 1975 was 29% above the
similar period in 1974.

Of particular significance
during the year was the excellent
progress made at the Cal Chrome
and Pathfinder divisions. A major
restructuring launched at Cal
Chrome in 1974 resulted in sub-
stantial 1975 improvement as
sales increased despite the re-
cession and a good return on
sales was achieved after several
years of losses. At Pathfinder
losses incurred in 1974 were

reduced in 1975 with the second
half loss only a fraction of that
incurred during the second half
of the previous year. Of more
importance, asset commitments
in the Pathfinder division were
substantially reduced and the
division generated cash for the
first time in many years.

Our auto accessory group
exhibited over 100 new products
at the 1976 APAA show in Chi-
cago and indications are that
market demand, which has been
improving throughout 1975, will
be quite strong in 1976. Following
the trend of recent years, product
development activity continues
to be focused on automotive do-
it-yourself type items both for re-
pair and diagnosis. The major
thrust of our activity for 1976 will
be to maintain tight control over
inventory and receivable invest-
ments in this area of Allen's
business so that margin improve-
ments effected during 1975 and
the stronger sales outlook can be
translated into improved return
on our investment.

PRODUCT LINE SALES — CONSUMER AUTOMOTIVE PRODUCTS

(Amounts in $ Millions)

<table>
  <thead>
    <tr>
      <th></th>
      <th>1971</th>
      <th>1972</th>
      <th>1973</th>
      <th>1974</th>
      <th>1975</th>
    </tr>
  </thead>
  <tbody>
    <tr>
      <td>Auto Accessories</td>
      <td></td>
      <td></td>
      <td></td>
      <td></td>
      <td></td>
    </tr>
    <tr>
      <td>Convenience Items</td>
      <td>$14.5</td>
      <td>$17.4</td>
      <td>$21.7</td>
      <td>$26.3</td>
      <td>$22.2</td>
    </tr>
    <tr>
      <td>Customizing Items</td>
      <td>10.9</td>
      <td>13.5</td>
      <td>18.4</td>
      <td>17.1</td>
      <td>19.0</td>
    </tr>
    <tr>
      <td>Repair Tools and Instruments</td>
      <td>4.8</td>
      <td>8.0</td>
      <td>10.8</td>
      <td>12.3</td>
      <td>14.8</td>
    </tr>
    <tr>
      <td>Other</td>
      <td>1.6</td>
      <td>1.5</td>
      <td>1.3</td>
      <td>1.4</td>
      <td>1.9</td>
    </tr>
    <tr>
      <td>Total Auto Accessories</td>
      <td>$31.8</td>
      <td>$40.4</td>
      <td>$52.2</td>
      <td>$57.1</td>
      <td>$57.9</td>
    </tr>
    <tr>
      <td>Total Mobile Communications</td>
      <td>8.5</td>
      <td>9.7</td>
      <td>13.7</td>
      <td>21.3</td>
      <td>50.5</td>
    </tr>
    <tr>
      <td>Total Consumer Auto Products</td>
      <td>$40.3</td>
      <td>$50.1</td>
      <td>$65.9</td>
      <td>$78.4</td>
      <td>$108.4</td>
    </tr>
  </tbody>
</table>

10

Automotive Test and Service

Customers for our engine performance and emission analyzers, diagnostic equipment, car wash and other garage equipment consist primarily of automotive dealer networks, service station outlets of international oil companies, and independent garages and repair facilities. The worldwide recession and its particularly heavy impact on these customer groups led to severely depressed market conditions for these product lines throughout 1975. Despite significant cost reduction and restructuring programs, a loss was incurred in this area of the Company's business.

In North America, sales of our Allen brand diagnostic equipment and California® car wash equipment both showed declines for the year as did aftermarket operations in Canada. Our Wilson line of automated test and transfer equipment which is principally sold to automotive manufacturers had an excellent year because of its high backlog position at the beginning of 1975. However, results here also softened in the second half of the year and will

remain weak during the first half of 1976 until the pickup in new order activity now being experienced is translated into finished production. Aftermarket radiator operations began the year with rather weak demand, but market conditions improved rapidly leading to excellent results in the second half.

Overall activity in this area began to pick up in the second half of 1975, although not as rapidly as in the automotive accessory group business. As stronger automotive sales and clarification of gasoline marketing practices become apparent during 1976 we expect demand to strengthen.

In our international divisions the program of restructuring the company's activities continued. European operating losses were substantially reduced and several actions taken to disengage from our equity positions in certain peripheral markets. Our Australian subsidiary was shut down, the phasing out of our Italian division continued, and discussions are

in progress for the sale of our South African operations. In early 1976 we began negotiations to sell our U.K. car wash and test equipment operations.

Notwithstanding the profit limitations imposed on this area of the Company's business by prevailing world wide market conditions, our program of reducing assets and generating cash was most successful. The test and service equipment group generated more than $4.9 million of cash, and assets committed to this business were reduced by more than $13 million, or about 22%. The reduced level of asset commitment, coupled with our restructuring and margin improvement activities, are designed to create the opportunity for a better return on investment as the economy continues to recover.

SALES
(Amounts in $ Millions)

PRODUCT LINE SALES (Amounts in $ Millions)

<table><thead><tr><th></th><th>1971</th><th>1972</th><th>1973</th><th>1974</th><th>1975</th></tr></thead><tbody><tr><td>Aftermarket Test &amp; Garage Equipment</td><td>$11.8</td><td>$13.4</td><td>$20.3</td><td>$23.6</td><td>$22.5</td></tr><tr><td>Turnkey and Service</td><td>6.9</td><td>7.9</td><td>13.8</td><td>14.6</td><td>17.3</td></tr><tr><td>Car Wash Equipment</td><td>12.7</td><td>16.2</td><td>16.5</td><td>13.8</td><td>8.2</td></tr><tr><td>Aftermarket Radiators</td><td>10.7</td><td>11.4</td><td>12.8</td><td>12.7</td><td>14.6</td></tr><tr><td>Automotive Rubber Products</td><td>5.1</td><td>8.1</td><td>13.6</td><td>12.0</td><td>11.9</td></tr><tr><td>Automated Test Equipment</td><td>5.2</td><td>7.3</td><td>7.4</td><td>9.5</td><td>7.6</td></tr><tr><td>Other</td><td>2.9</td><td>5.0</td><td>6.1</td><td>7.6</td><td>8.0</td></tr><tr><td>TOTAL</td><td>$55.3</td><td>$69.3</td><td>$90.5</td><td>$93.8</td><td>$90.1</td></tr></tbody></table>

12

Truck Products

As a major supplier of cabs, bodies, components and radiators for trucks, Allen serves the OEM truck manufacturers in North America from a network of nine plants located throughout the United States and Canada. A major portion of our product line is directed toward the heavy-duty truck segment, with lesser participation in the medium and light truck field, primarily in the areas of special bodies and van interiors.

During 1975 the heavy-duty truck industry suffered its most precipitous decline in modern history as total unit production fell by more than 40% compared to 1974. Allen was similarly affected as total sales dropped from $46 million to $29 million. Despite vigorous action on cost and personnel reduction, this area of the Company's business reported a loss in 1975. Among the programs initiated to provide relief were major cuts in personnel approximating 28%, and the temporary closing of several facilities for periods of time up to three months.

Although some recovery in the truck industry is expected in 1976, we are budgeting our operations on the assumption that it will be slow and that normal operating levels will not be evident until late 1976 or early 1977. Fortunately, we are engaged in several important new programs which require relatively short lead times, modest capital investment, and the expectation of good returns. These programs should begin to make an impact in the second half of 1976.

During the second half of 1975, we successfully launched a new cab program to supply White Motor Corporation with their requirements for both aluminum and steel heavy-duty truck cabs.

This program significantly increases our share of White's total requirements and, as their sales recover in 1976, we expect to derive considerable benefit. Later in 1976 we will be starting production of Ford Motor Company's North American tractor cab requirements and fiberglass panels for General Motors' new

inter-city bus program. Both the Ford and GM projects involve only modest capital investments and offer the potential for better utilization of existing facilities.

During the past several years, The Allen Group has made a significant investment in new facilities and technology to improve our position in the heavy truck industry. It is unfortunate that the 1974-75 recession has served to delay the realization of the benefits of this commitment. We are confident that the heavy truck industry, which is a basic and growing segment of the U.S. transportation industry, will recover and that, as it does, Allen will again see satisfactory returns in this area.

SALES

(Amounts in $ Millions)

<table><thead><tr><th></th><th>1971</th><th>1972</th><th>1973</th><th>1974</th><th>1975</th></tr></thead><tbody><tr><td>Truck Cabs, Bodies and Van Interiors</td><td>$13.7</td><td>$16.0</td><td>$22.4</td><td>$23.7</td><td>$13.9</td></tr><tr><td>Truck Radiators</td><td>7.3</td><td>9.6</td><td>12.8</td><td>18.0</td><td>11.0</td></tr><tr><td>Other Fabricated Metal Products</td><td>4.5</td><td>4.4</td><td>5.0</td><td>4.5</td><td>3.7</td></tr><tr><td>TOTAL</td><td>$25.5</td><td>$30.0</td><td>$40.2</td><td>$46.2</td><td>$28.6</td></tr></tbody></table>

14

Business and Financial Review

The Company's basic objective
during 1975 was to emerge from
the recession in an improved busi-
ness position characterized by:

☐ a stronger financial position with greater liquidity and reduced debt levels,

☐ a more effective employment of assets with a higher percentage of total assets concentrated in areas that are capable of yielding the highest returns,

☐ improved profitability as a function of better margins and a concentration of sales in our most profitable product areas.

Very substantial progress was
made during the year in all three
areas.

Financial Position

Beginning in the third quarter of 1974, operational attention was firmly concentrated on cash flow as the number one priority. Programs were launched throughout the Company to sell unneeded inventory and fixed assets and to scale back or shut down operations and product lines which were unproductive. During the period between October, 1974 and year end 1975, a net positive cash flow of $17 million was achieved and applied to debt reduction. Short-term debt was entirely repaid, total debt reduced by 30% and commercial bank debt cut by 50%. At 1975 year end, all remaining debt was bor-

rowed under long-term agree-
ments with modest maturities over
the next several years. Our cur-
rent ratio of 3 to 1 is the highest in
the Company's history. These
trends are summarized graphic-
ally in the accompanying chart.
As we continue our debt reduction
program in 1976, we are confi-
dent that our strengthening bal-
ance sheet position will emerge
as one of The Allen Group's im-
portant corporate resources and
will provide us with the flexibility
to take advantage of new busi-
ness opportunities.

Asset Redeployment

Progress in restructuring asset commitments has been equally dramatic. Total assets were reduced by over $12 million, or approximately 9%, with inventory reductions providing most of the decrease, despite the fact that fourth quarter sales, a key element affecting our year-end asset position, increased 7% on a year-to-year basis. Within this framework of overall asset reductions, the impact on individual segments of our business has been much more dramatic. In the truck and test and service areas, where losses were incurred in 1975, total assets were reduced by about $18 million (22%). Conversely, assets committed to the mobile communications area nearly doubled as the Company supported rapid growth in this high profit area.

These results reflect the impact
of a company-wide program of
permitting sales/asset growth
only in areas where there is a
clear indication of high return,
while forcing business commit-
ments that have not demonstrated
good profitability to scale back.
In a number of instances, deci-
sions were made to withdraw
from markets, sell assets, or close
down businesses in order to turn
assets of marginal potential into
cash. During the year, we with-
drew, or made financial provision
for withdrawal, from investments
in Australia, South Africa, Italy,
two replacement parts businesses
in the U.S. and Canada, several

ALLEN
GROUP

BALANCE
SHEET
TRENDS

EARNINGS
PER SHARE BEFORE
EXTRAORDINARY ITEM

WORKING CAPITAL
& BOOK VALUE
PER SHARE

[L]

16

marginal plants, and a large number of low-profit product lines. In early 1976 we began negotiations to sell our U.K. car wash and test and service equipment operations.

Implementation of these decisions involved significant income charges. Those that can be specifically identified are shown in the income statement as "charges related to restructuring of operations"; however, additional costs not clearly identifiable (such as depressed margins on the sale of inventory of dropped product lines and unabsorbed overhead due to plant shutdowns) were also incurred and adversely affected

gross margins. On balance, your management believes these costs were modest in comparison with the greatly improved potential for higher return on investment created by the reduction and redeployment of asset commitments.

## Profitability

Despite the costs described above, progress toward our objective of improving the company's profitability was clearly evident during the year. Pretax income before restructuring costs exceeded 1974 by approximately 40%. More importantly, the second half of 1975 was a record for the company with pretax income before restructuring costs more

than five times that of the 1974 second half. (The favorable earnings trend that developed during 1975 is summarized graphically on page 27.)

As the Company continues its program of asset redeployment in 1976 and pursues its objective of further debt reduction, additional restructuring costs may be incurred. However, your company's management is encouraged by the success of this strategy that is already evident in the 1975 second half and believes that a significant long-term improvement in profitability will result and become increasingly apparent as 1976 progresses.

STRATEGIC DEVELOPMENT 1971-1977* SALES

*Excluding sales of divested companies of $2 million in 1971

INTERNATIONAL DEVELOPMENT 1971-1977 SALES

*Estimated non-consolidated shares of Banzai, Ltd. sales

ALLEN
GROUP

ASSET REDEPLOYMENT PROBLEM BUSINESSES

ALLEN
GROUP

MOBILE COMMUNICATIONS ASSETS

17

The Allen Group Inc.

Consolidated Statements of Changes in Financial Position

For the Years Ended December 31, 1975 and 1974 (Amounts in Thousands)

<table><thead><tr><th></th><th>1975</th><th>1974</th></tr></thead><tbody><tr><td><strong>CASH WAS<br>GENERATED BY</strong></td><td></td><td></td></tr><tr><td>Income before extraordinary item</td><td>$ 3,820</td><td>$ 2,870</td></tr><tr><td>Charges (credits) to income not affecting cash generation:</td><td></td><td></td></tr><tr><td>Depreciation and amortization</td><td>3,909</td><td>4,189</td></tr><tr><td>Deferred income taxes</td><td>(386)</td><td>548</td></tr><tr><td>Other</td><td>283</td><td>(518)</td></tr><tr><td>Cash provided by operations before extraordinary item</td><td>7,626</td><td>7,089</td></tr><tr><td>Gain on exchange of debentures, net of income taxes</td><td>-</td><td>(730)</td></tr><tr><td>Reduction of (additions to) inventories</td><td>9,382</td><td>(5,784)</td></tr><tr><td>Incurrence (reduction) of income tax liability</td><td>1,229</td><td>(2,190)</td></tr><tr><td>Sale of fixed assets</td><td>1,132</td><td>2,538</td></tr><tr><td>Reduction of installment notes receivable</td><td>1,076</td><td>-</td></tr><tr><td>Reduction of (additions to) prepaid expenses</td><td>726</td><td>(585)</td></tr><tr><td>Reduction of accounts receivable</td><td>52</td><td>116</td></tr><tr><td></td><td>21,223</td><td>454</td></tr><tr><td><strong>CASH WAS<br>USED FOR</strong></td><td></td><td></td></tr><tr><td>Reduction of (additions to) accounts payable and accrued liabilities</td><td>4,390</td><td>(2,179)</td></tr><tr><td>Capital expenditures</td><td>3,978</td><td>4,250</td></tr><tr><td>Investments in affiliates</td><td>315</td><td>2,226</td></tr><tr><td>Purchase of minority interest</td><td>-</td><td>2,757</td></tr><tr><td>Purchase of preferred and treasury stock</td><td>-</td><td>215</td></tr><tr><td>Other, net</td><td>61</td><td>518</td></tr><tr><td>Increase (decrease) of cash balance</td><td>(209)</td><td>386</td></tr><tr><td></td><td>8,535</td><td>8,173</td></tr><tr><td><strong>CASH<br>AVAILABLE<br>(REQUIRED)</strong></td><td></td><td></td></tr><tr><td>For dividends and net debt reduction (borrowing)</td><td>$12,688</td><td>$(7,719)</td></tr><tr><td>Repayment of debt (long and short-term)</td><td>$11,266</td><td>$ 6,777</td></tr><tr><td>Long-term borrowing (including issue of debt for minority interest purchase)</td><td>-</td><td>(15,829)</td></tr><tr><td>Payments of dividends</td><td>1,422</td><td>1,333</td></tr><tr><td></td><td>$12,688</td><td>$(7,719)</td></tr></tbody></table>

The Notes are an integral part of these statements.

21

[L]

The Allen Group Inc.
Notes to Consolidated Financial Statements

## NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Accounting policies followed by the Company that materially affect the determination of financial position and results of operations are disclosed below.

**Basis of Consolidation:**

The consolidated financial statements include those of the Company and all significant subsidiaries.

Goodwill relates to acquisitions accounted for as purchases. Amounts applicable to acquisitions prior to October 31, 1970 ($11,150,000) are not being amortized. Amounts applicable to acquisitions subsequent to October 31, 1970 ($2,259,000) are being amortized (straight-line) over periods not exceeding 40 years.

**Translation of Foreign Currencies (Note 2):**

Foreign currencies are translated at appropriate rates of exchange, as follows: current assets and liabilities at current exchange rates; non-current assets and liabilities at historical rates; and sales, costs and expenses at the average exchange rate for the period, except that depreciation charges are translated at applicable historical rates.

Unrealized gains (to the extent they are not deemed necessary as reserves against future losses) and losses are included in income. Unrealized gains and losses on forward exchange contracts (to the extent they represent offsets to conversion fluctuations) are deemed part of the exchange adjustment. Realized gains or losses on forward exchange contracts are recognized on the settlement date.

**Valuation of Inventories:**

The Company values inventories at the lower of cost (principally first-in, first-out) or market. Depreciation:

The Company provides for depreciation of land improvements, buildings and equipment over their estimated useful lives on the straight-line method. Provision for amortization of leasehold improvements is based upon the term of the lease or the estimated useful life of the improvements, whichever is shorter. Gains and losses on the disposition of fixed assets are recognized at the time of disposition.

**Deferred Charges:**

Expenses of research and development projects are charged to operations when incurred. Expenses incurred in 1975 and 1974 were not significant.

Debt expense is amortized on a straight-line basis over the original life of the related debt. Income Taxes:

The Company uses accelerated depreciation for income tax purposes and provides for deferred income taxes applicable thereto and to other timing differences.

Investment tax credits are recorded as a reduction of income tax expense in the year in which the assets that give rise to the credit are placed in service.

**Pension Cost:**

The Company's policy is to fund pension cost accrued. Restatement of Prior Year Statements:

The Consolidated Statement of Income and Retained Earnings for 1974 has been restated to account for a gain on exchange of debentures as extraordinary income in accordance with a recent pronouncement of the Financial Accounting Standards Board (Note 6).

Certain amounts in the 1974 financial statements have been reclassified to conform to the 1975 presentation.

## NOTE 2: FOREIGN SUBSIDIARIES AND EXCHANGE TRANSACTIONS

Translated amounts for foreign operations included in the consolidated financial statements are as follows:

<table><thead><tr><th></th><th>1975</th><th>1974</th></tr></thead><tbody><tr><td>Current Assets</td><td>$25,800,000</td><td>$32,300,000</td></tr><tr><td>Current Liabilities</td><td>10,300,000</td><td>15,400,000</td></tr><tr><td>Net Assets</td><td>25,900,000</td><td>23,500,000</td></tr><tr><td>Net Sales</td><td>57,100,000</td><td>59,300,000</td></tr><tr><td>Net Income (loss)</td><td>(1,155,000)</td><td>800,000</td></tr></tbody></table>

In 1975, exchange adjustments and their effect on income were not significant. Total foreign exchange adjustments during 1974 resulted in pretax income credits of $659,000, including $309,000 of gain deferred in 1973 and $430,000 of exchange gain realized on the sale of property in West Germany (Note 3), which contributed $886,000 to net income in 1974 with related tax benefits.

Long-term receivables and payables of foreign operations are not significant.

The Financial Accounting Standards Board has recently issued a statement pertaining to translation of foreign currencies which will be effective for years beginning after January 1, 1976. This statement, if adopted earlier, would not have had a significant effect on net income in 1975 or prior years.

22

The Allen Group Inc.
Notes to Consolidated Financial Statements (Cont.)

[Lc]

NOTE 3:
NET CHARGES
RELATED
TO
RESTRUCTURING
OF OPERATIONS

During 1975, the Company continued its programs for phasing out of certain markets, cur-
tailing operations at other locations and liquidating assets not needed in continuing businesses.
In this connection, the Company incurred or identified certain costs and expenses aggregating
$2,426,000 of which $1,245,000 was incurred in the fourth quarter. Costs incurred in 1974
amounted to $1,980,000, which is net of an exchange gain of $430,000 (Note 2) resulting from
the sale of property in West Germany.

NOTE 4:
INVENTORIES

Inventories consisted of the following:

<table><thead><tr><th></th><th>1975</th><th>1974</th></tr></thead><tbody><tr><td>Raw materials</td><td>$25,989,000</td><td>$25,679,000</td></tr><tr><td>Work in process</td><td>13,581,000</td><td>18,841,000</td></tr><tr><td>Finished goods</td><td>13,038,000</td><td>17,470,000</td></tr></tbody><tfoot><tr><td></td><td>$52,608,000</td><td>$61,990,000</td></tr></tfoot></table>

NOTE 5:
OTHER ASSETS

Other assets consisted of the following:

<table><thead><tr><th></th><th>1975</th><th>1974</th></tr></thead><tbody><tr><td>Installment notes receivable</td><td>$ 704,000</td><td>$1,781,000</td></tr><tr><td>Investments in and advances to unconsolidated subsidiary and partially owned companies</td><td>4,489,000</td><td>3,688,000</td></tr><tr><td>Deferred start-up costs</td><td>—</td><td>384,000</td></tr><tr><td>Unamortized debt expense</td><td>619,000</td><td>580,000</td></tr><tr><td>Tax effect of operating losses (Note 12)</td><td>280,000</td><td>887,000</td></tr><tr><td>Other</td><td>1,004,000</td><td>1,416,000</td></tr></tbody><tfoot><tr><td></td><td>$7,096,000</td><td>$8,736,000</td></tr></tfoot></table>

Included in net income is the Company's equity share of earnings of an unconsolidated sub-
sidiary and partially owned companies, principally Banzai Ltd., a 20% owned company,
amounting to $325,000 in 1975 and $170,000 in 1974.

NOTE 6:
FINANCING

At December 31, 1975, long-term debt consisted of the following:

<table><thead><tr><th></th><th>Current</th><th>Noncurrent</th></tr></thead><tbody><tr><td>6½% Senior Notes, due April 1, 1984, less related unamortized debt discount of $258,000</td><td>$1,000,000</td><td>$ 7,742,000</td></tr><tr><td>Eurodollar Revolving Credit Facility Notes</td><td>1,000,000</td><td>3,000,000</td></tr><tr><td>Revolving Credit Facility Notes</td><td>—</td><td>12,000,000</td></tr><tr><td>Miscellaneous obligations</td><td>172,000</td><td>649,000</td></tr><tr><td>9% Subordinated Notes, due 1978-1988</td><td>—</td><td>15,000,000</td></tr><tr><td>11½% Convertible Subordinated Debentures, due July 1, 1994, less related unamortized debt discount of $1,639,000</td><td>—</td><td>4,239,000</td></tr><tr><td>6% Convertible Subordinated Debentures, due July 1, 1987</td><td>—</td><td>1,617,000</td></tr></tbody><tfoot><tr><td></td><td>$2,172,000</td><td>$44,247,000</td></tr></tfoot></table>

During 1975, the Company retired all its short-term debt. The Company's short-term debt, while outstanding, and certain long-term debt bear, or did bear, interest at rates based on prime or Eurodollar equivalent. The weighted average rate of interest on such borrowing was 8 3/4% in 1975 and 11 1/2% in 1974.

The 6 1/2% Senior Notes are payable in annual installments of $1,000,000. The Company may prepay the notes, in whole or in part, at a premium. The notes were issued with detachable warrants. Considering discount applicable to the warrants as additional interest, the effective rate is 7.2%.

The Eurodollar Revolving Credit Facility Notes bear interest at 1% above the interbank Euro-
dollar rate; at December 31, 1975, the rate in effect was 7 2/3%. The notes are payable in quar-
terly installments of $250,000 through 1979, at which time the agreement expires.

The Revolving Credit Agreement provides for a revolving credit facility of $15,000,000 until the term loan conversion date on November 1, 1976 (or November 1, 1977 when extended at the Company's option in accordance with the terms of the agreement), at prime rate until November 1, 1976 and at 1/4% over prime thereafter; at December 31, 1975, the rate in effect was 7 1/4%. Such borrowing may be converted at the term loan conversion date into a term loan payable in twenty equal quarterly installments with interest at 1/2% over prime for three years and 3/4% over prime for the last two years. The Company is required to pay a commitment fee through the term loan conversion date, at the annual rate of 1/2% of the unused portion of the revolving credit line.

The 9% Subordinated Notes are payable in ten annual installments of $1,350,000 commenc-
ing in 1978 and the remaining balance in 1988. The notes are prepayable at a declining premium.

23

10

NOTE 6:
Continued

The 11½% Convertible Subordinated Debentures issued in 1974, were recorded at a discount of 30% (resulting in an effective interest rate of 16%) based upon fair value at date of issuance. The debentures are currently convertible into common stock of the Company at a price of $14.00 per share. Commencing in 1985, the debentures are payable through annual sinking fund payments of 10% of principal amount calculated to retire 90% of the issue prior to maturity. The debentures may be redeemed at the Company's option in or after 1978 at 100%, provided that until 1985 they are redeemable only if the average market value of Allen common stock has been at least double the current conversion price then in effect during a period of 20 consecutive trading days after January 1, 1978. These debentures were issued, in part, in exchange for outstanding 6% Convertible Subordinated Debentures resulting in an extraordinary gain in 1974 of $1,404,000 ($730,000 after tax provision).

The 6% Convertible Subordinated Debentures are currently convertible into common stock of the Company at a price of $23.24 per share. The debentures are payable through annual sinking fund payments; however, credits arising from retirement are available to offset such annual payments through 1986. The debentures may be redeemed at the Company's option, in whole or in part, at a declining premium through July 1981, and thereafter at par.

Certain agreements relating to long-term debt contain, among other things, various restrictive covenants as to amount and type of indebtedness, leasing, maintenance of working capital, acquisition or disposition of shares or assets of other companies and disposition of assets of the Company. The agreements also contain restrictions relating to the purchase or redemption of the Company's common stock and the payment of dividends, other than stock dividends. At December 31, 1975, $1,365,000 of retained earnings was free of such restrictions.

In connection with the revolving credit agreements, the Company has agreed informally to maintain compensating balances based upon total borrowing available to the Company under the agreements and actual borrowings outstanding. These balances, which are not subject to legal restrictions, aggregated $3,800,000 at December 31, 1975. Compliance with these informal agreements is based upon the average cash balances for a year. The compensating balance levels are not considered to be significantly in excess of the Company's normal operating funds.

NOTE 7:
PREFERRED
STOCK

The Company is authorized to issue 3,000,000 shares of voting preferred stock without par value, in one or more series. Pursuant thereto, an initial series consisting of 365,990 shares, designated as $1.00 Cumulative Convertible Preferred Stock, Series A, was created in 1969, of which 274,290 shares are authorized at December 31, 1975. The Series A stock is convertible into common stock of the Company at the rate of 1.3265 shares of common for each share of preferred. The shares have a liquidation preference of $25 per share and may be redeemed at the option of the Company after December 31, 1975, in whole or in part, at a redemption price of $25 per share. Pursuant to a 1969 acquisition agreement, 80,643 Series A Preferred shares were issued in 1974 and 19,782 shares were repurchased and retired upon exercise of an option by the Company.

NOTE 8:
COMMON STOCK
AND
PAID-IN
CAPITAL

Changes in common stock and paid-in capital during 1975 were as follows:

<table><thead><tr><th rowspan="2"></th><th colspan="2">Common Stock</th><th>Paid-in Capital</th></tr><tr><th>Number of Shares</th><th>Amount</th><th>Amount</th></tr></thead><tbody><tr><td>Balance, December 31, 1974</td><td>3,108,909</td><td>$3,108,909</td><td>$30,745,000</td></tr><tr><td>Exercise of stock option</td><td>71</td><td>71</td><td>—</td></tr><tr><td>Costs related to prior year acquisition</td><td>—</td><td>—</td><td>(94,000)</td></tr><tr><td>Cancellation of restricted stock agreement with officer</td><td>—</td><td>—</td><td>(33,000)</td></tr><tr><td>Balance, December 31, 1975</td><td>3,108,980</td><td>$3,108,980</td><td>$30,618,000</td></tr></tbody></table>

Transactions in Treasury Stock during 1975 were as follows:

<table><thead><tr><th></th><th>Number of Shares</th><th>Amount</th></tr></thead><tbody><tr><td>Balance, December 31, 1974</td><td>238,754</td><td>$2,619,000</td></tr><tr><td>Cancellation of restricted stock agreement with officer</td><td>5,250</td><td>61,000</td></tr><tr><td>Balance, December 31, 1975</td><td>244,004</td><td>$2,680,000</td></tr></tbody></table>

NOTE 9:
STOCK
OPTIONS

The Company has two stock option plans (qualified and non-qualified) under which key employees are granted options at market price. All non-qualified options granted contain a provision which permits the Company, with the concurrence of the optionee, to purchase the ex-

24

LC

**NOTE 9: Continued**

excised options at a price equal to the difference between the option price and the fair market value of the shares covered by the exercised option, in lieu of consummating the sale of shares covered by the notice of exercise.

Stock option activity for the year is summarized as follows:

<table><thead><tr><th></th><th>Number of Shares</th><th>Option Prices</th></tr></thead><tbody><tr><td>Outstanding, December 31, 1974</td><td>467,520</td><td>$4.25 to $22.55</td></tr><tr><td>Granted</td><td>247,953</td><td>$5.88 to $10.63</td></tr><tr><td>Exercised</td><td>(71)</td><td>$7.00</td></tr><tr><td>Terminated and cancelled</td><td>(276,493)</td><td>$4.44 to $22.55</td></tr><tr><td>Outstanding, December 31, 1975 exercisable<br>at various dates through 1985</td><td>438,909</td><td>$4.25 to $15.88</td></tr></tbody></table>

During the year, the Company offered certain key executives the right to exchange existing options with exercise prices of $9.00 or more per share for new options at the then current market price, $6.31, with the provision that 10% of the old options be forfeited and that the exercise dates of the new options be extended. All the old options were tendered and new options for 141,703 shares were granted.

At December 31, 1975, options to purchase 99,178 shares were exercisable and 108,925 shares were reserved for the granting of future options.

**NOTE 10: COMMON SHARES RESERVED AND EARNINGS PER SHARE**

At December 31, 1975, shares of common stock were reserved for the following:

<table><thead><tr><th></th><th>Number of Shares</th></tr></thead><tbody><tr><td>Stock purchase warrants:<br>$14.88 and $17.56 per share, expiring July 16, 1981</td><td>59,556</td></tr><tr><td>$23.42 per share, expiring April 1, 1980</td><td>218,063</td></tr><tr><td>Employee stock options</td><td>547,834</td></tr><tr><td>Conversion of 11½% Convertible Subordinated Debentures</td><td>419,920</td></tr><tr><td>Conversion of 6% Convertible Subordinated Debentures</td><td>69,578</td></tr><tr><td>Conversion of Series A Preferred stock</td><td>268,181</td></tr></tbody><tfoot><tr><td></td><td>1,583,132</td></tr></tfoot></table>

The primary earnings per share calculations are based upon average number of Common shares outstanding during the year, and for both 1974 and 1975, also reflect the additional shares issuable to the Preferred stockholders as if the Preferred had been converted into Common. The calculations have not included the assumed exercise of warrants or options since the average price of Allen Common stock during both years was sufficiently less than the average aggregate warrant and option prices to make the effect of possible exercise anti-dilutive on a pro-forma basis. The calculation of fully diluted earnings per share begins with the primary calculation but further reflects the pro-forma effect of the conversion of the two outstanding issues of convertible subordinated debentures into Common stock at the beginning of the year (or date of issuance, if later), together with the reduction of interest expense that would result.

**NOTE 11: COMMITMENTS AND CONTINGENCIES**

Annual rental expense entering into the determination of results of operations amounted to $6,134,000 in 1975 and $5,310,000 in 1974. The minimum rental commitments under non-cancellable leases (principally real property) as of December 31, 1975 are as follows:

<table><thead><tr><th>Year</th><th></th></tr></thead><tbody><tr><td>1976</td><td>$ 5,669,000</td></tr><tr><td>1977</td><td>4,737,000</td></tr><tr><td>1978</td><td>3,731,000</td></tr><tr><td>1979</td><td>3,342,000</td></tr><tr><td>1980</td><td>3,294,000</td></tr><tr><td>5 Years<br>Ending</td><td></td></tr><tr><td>1985</td><td>13,967,000</td></tr><tr><td>1990</td><td>8,527,000</td></tr><tr><td>1995</td><td>5,357,000</td></tr><tr><td>1996 and thereafter</td><td>1,320,000</td></tr></tbody></table>

A number of lease agreements provide for renewal and purchase options; however, such rentals are not expected to change significantly during the next several years.

Certain of the Company's lease arrangements are considered financing leases. The present value of the minimum lease commitments calculated using interest rates implicit in the terms of each lease (ranging from 7% to 10½%; weighted average of 9%), aggregate approximately $9,900,000 at December 31, 1975. The effect upon net income if these leases had been cap-

25

[LC]

NOTE 11:
Continued

italized would be less than 3% of the average net income for the most recent three years.

The Company is contingently liable to financing institutions, principally for obligations of its customers, aggregating $5,000,000 at December 31, 1975. Losses, if any, under these arrangements are not expected to be significant. In addition, the Company has commitments under open letters of credit aggregating $4,300,000 at December 31, 1975.

Based upon the opinion of counsel, the Company believes that the outcome of existing litigation will have no material adverse effect on financial condition.

The Company has various pension plans covering certain employees. Total pension expense was $596,000 in 1975 and $599,000 in 1974, which amounts include current costs and, as to certain of the plans, amortization of past service costs over periods ranging from 12 to 30 years. The actuarially computed value of vested benefits for two plans exceeded the value of the total of the pension funds by $1,041,000 at December 31, 1975. The Company has not yet calculated the effect, if any, of the Employee Retirement Income Security Act of 1974 on all of its existing plans.

In 1976, the Board of Directors, subject to approval by stockholders and regulatory authorities, adopted retirement plans for non-union salaried and administrative hourly North American employees, except those covered by certain existing plans. The new plans, if approved, will increase overall pension costs by approximately $600,000 in 1976.

NOTE 12:
INCOME
TAXES

The provision for taxes on income before extraordinary item, consisting of federal, state and local and foreign taxes, is as follows:

<table><thead><tr><th></th><th>1975</th><th>1974</th></tr></thead><tbody><tr><td>Current</td><td>$2,319,000</td><td>$1,013,000</td></tr><tr><td>Deferred</td><td>(386,000)</td><td>548,000</td></tr><tr><td>Tax effect of current operating loss</td><td>—</td><td>(406,000)</td></tr><tr><td>Tax benefit from previously recognized operating losses of certain foreign subsidiaries</td><td>607,000</td><td>—</td></tr><tr><td></td><td>$2,540,000</td><td>$1,155,000</td></tr></tbody></table>

Investment tax credits earned in 1975 and 1974, amounting to $440,000 and $165,000, respectively, have been deducted from income taxes currently payable.

The effective income tax rate was 40% in 1975 and 27% (before extraordinary item) in 1974. These rates differ from the federal statutory rate of 48% principally because of lower foreign tax rates, investment and DISC tax credits and, in 1974, from unrealized foreign exchange gains which are not subject to tax. The effective tax rate for the fourth quarter 1975 was 30%, which is lower than the Company's effective tax rate for the year, because of higher investment tax credits earned than expected during the quarter and a favorable tax benefit received at a foreign subsidiary.

Federal income taxes have not been provided on undistributed earnings of foreign subsidiaries aggregating approximately $6,900,000 at December 31, 1975 because the Company considers such earnings to be permanently reinvested in the respective subsidiaries.

The Company's income tax returns are currently under examination for various periods through 1972. It is expected that any final assessment will not significantly affect stockholders' equity.

ACCOUNTANTS'
REPORT

To the Board of Directors and
Stockholders of The Allen Group Inc.:

We have examined the consolidated balance sheet of The Allen Group Inc. as of December 31, 1975 and the related consolidated statements of income and retained earnings and changes in financial position for the year then ended. Our examination was made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. We previously examined and reported upon the 1974 consolidated financial statements.

In our opinion, the aforementioned financial statements present fairly the consolidated financial position of The Allen Group Inc. at December 31, 1975 and 1974, and the consolidated results of operations and changes in financial position for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis after restatement for the change, with which we concur, in the method of reporting the gain on exchange of debentures as described in Note 1 to the financial statements.

Coopers & Lybrand

New York, N.Y.
February 17, 1976.

26

[LC]

# Trends of Financial Results 1974-1975

ALLEN
GROUP

## COMPARISON OF
1975 AND 1974 FIRST
AND SECOND HALVES

<table><thead><tr><th rowspan="2"></th><th colspan="2">First Half</th><th colspan="2">Second Half</th></tr><tr><th>1975</th><th>1974</th><th>1975</th><th>1974</th></tr></thead><tbody><tr><td>Sales ($ millions)</td><td>104.3</td><td>107.6</td><td>122.8</td><td>110.7</td></tr><tr><td>Income before taxes, restructuring costs, and extraordinary item ($ millions)</td><td>2.2</td><td>5.0</td><td>6.6</td><td>1.3</td></tr><tr><td>Income per share before extraordinary item</td><td>.30</td><td>.78</td><td>.92</td><td>.14</td></tr><tr><td>Net income per share, primary</td><td>.30</td><td>.78</td><td>.92</td><td>.37</td></tr><tr><td>Net income per share, fully diluted</td><td>.30</td><td>.77</td><td>.88</td><td>.35</td></tr></tbody></table>

ALLEN
GROUP

## PRIMARY EARNINGS PER SHARE
BY QUARTER*

<table><thead><tr><th></th><th>1975</th><th>1974</th></tr></thead><tbody><tr><td>1st Qtr.</td><td>$ .01</td><td>$ .30</td></tr><tr><td>2nd Qtr.</td><td>.29</td><td>.48</td></tr><tr><td>3rd Qtr.</td><td>.42</td><td>.18</td></tr><tr><td>4th Qtr.</td><td>.50</td><td>.19</td></tr><tr><td>Year</td><td>$1.22</td><td>$1.15</td></tr></tbody></table>

*Including extraordinary item in 1974

## Management's Discussion and Analysis of the Summary of Operations

The Company had an overall sales increase of 4% in 1975, but product sales mix and lines of business profitability changed dramatically versus 1974. Sales in the Consumer Automotive Products line of business increased by approximately $30 million (38%) and profits increased very significantly, attributable primarily to the growth in mobile communications products (specifically citizens band radio antennas) which accounted for the major portion of the Company's 1975 earnings. Conversely, sales in the Truck Products line of business declined sharply, by $17.5 million (38%), due to the depressed levels of new truck production in the United States during 1975, and a loss was incurred. Automotive Test and Service sales declined slightly and also resulted in a loss as markets remained depressed during all of 1975. In the previous year, markets in the Truck Products and Automotive Test and Service businesses had been strong domestically until the fourth quarter when they were adversely affected by the economic recession. Overall sales levels in 1974 increased by 11% versus 1973 levels despite a sharp drop of order inflow during the second half of 1974, which resulted from the general economic recession, customer inventory level cutbacks and temporary shutdowns of various customers' operating facilities affecting all of the Company's lines of business.

On a company-wide basis, gross margins ranged from 27% in 1973 to 25.8% in 1975 which management believes is within a normal range of fluctuation and not indicative of any trends.

Interest and financing expenses, which increased sharply in 1974 due both to higher interest rates and higher borrowing levels, decreased in 1975 due principally to reduction in debt levels as well as declining interest rates.

Net charges related to restructuring of operations for 1974 and 1975 are discussed in Note 3 to the consolidated financial statements. Similar costs incurred in 1973 resulted from $250,000 applicable to write-downs of investments in affiliates and $650,000 representing write-downs of inventory and unusual operating costs incurred at the Company's domestic car wash division.

Earnings in 1973 and 1974 benefited from foreign exchange gains amounting to $450,000 in 1973 and $456,000 in 1974, together with related tax benefits. Such gains were not significant in 1975 (see Note 2 to the consolidated financial statements). Tax rates varied from 42% in 1973 to 27% in 1974 to 40% in 1975 for reasons described in Note 12 to the consolidated financial statements.

The decrease in minority interest charge in 1974 and the elimination of the charge in 1975 resulted directly from the acquisition of the minority interest in Orion Industries, Inc. in 1974.

For additional information pertaining to 1975 operating results, see the Chairman's Letter, Operations Review and the Financial and Business Review elsewhere in this Annual Report.

27

The Allen Group Inc.

Five Year Summary of Operations

Five Years Ended December 31, 1975 (Amounts in Thousands)

<table><thead><tr><th></th><th>1975</th><th>1974</th><th>1973</th><th>1972</th><th>1971</th></tr></thead><tbody><tr><td colspan="6"><strong>OPERATING RESULTS</strong></td></tr><tr><td>Net sales</td><td>$227,125</td><td>$218,306</td><td>$196,522</td><td>$149,472</td><td>$123,255</td></tr><tr><td>Cost of sales</td><td>168,466</td><td>160,960</td><td>143,510</td><td>109,360</td><td>88,708</td></tr><tr><td>Operating expenses</td><td>44,070</td><td>44,476</td><td>39,070</td><td>30,081</td><td>25,527</td></tr><tr><td>Interest and financing expenses</td><td>5,803</td><td>6,617</td><td>3,959</td><td>2,209</td><td>2,042</td></tr><tr><td>Income before net charges related to restructuring of operations</td><td>8,786</td><td>6,253</td><td>9,983</td><td>7,822</td><td>6,978</td></tr><tr><td>Net charges related to restructuring of operations</td><td>2,426</td><td>1,980</td><td>900</td><td>—</td><td>—</td></tr><tr><td>Income before taxes and minority interest</td><td>6,360</td><td>4,273</td><td>9,083</td><td>7,822</td><td>6,978</td></tr><tr><td>Provision for taxes on income</td><td>2,540</td><td>1,155</td><td>3,780</td><td>3,390</td><td>3,202</td></tr><tr><td>Minority interest</td><td>—</td><td>248</td><td>678</td><td>583</td><td>334</td></tr><tr><td>Income before extraordinary item</td><td>3,820</td><td>2,870</td><td>4,625</td><td>3,849</td><td>3,442</td></tr><tr><td>Gain on exchange of debentures (net of taxes of $674,000)</td><td>—</td><td>730</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Net income</td><td>$ 3,820</td><td>$ 3,600</td><td>$ 4,625</td><td>$ 3,849</td><td>$ 3,442</td></tr><tr><td>Income before extraordinary item</td><td>$1.22</td><td>$ .92</td><td>$1.44</td><td>$1.18</td><td>$1.06</td></tr><tr><td>Gain on exchange of debentures</td><td>—</td><td>.23</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Net income per share, primary</td><td>$1.22</td><td>$1.15</td><td>$1.44</td><td>$1.18</td><td>$1.06</td></tr><tr><td>Net income per share, fully diluted</td><td>$1.18</td><td>$1.12</td><td>$1.41</td><td>$1.16</td><td>$1.05</td></tr><tr><td>Return on sales</td><td>1.7%</td><td>1.6%</td><td>2.4%</td><td>2.6%</td><td>2.8%</td></tr><tr><td colspan="6"><strong>FINANCIAL POSITION</strong></td></tr><tr><td>Working capital</td><td>$ 61,546</td><td>$ 60,785</td><td>$ 48,591</td><td>$ 40,312</td><td>$ 33,905</td></tr><tr><td>Short-term debt, including current portion of long-term debt</td><td>2,172</td><td>10,141</td><td>15,685</td><td>10,536</td><td>12,237</td></tr><tr><td>Long-term debt</td><td>44,247</td><td>47,393</td><td>34,233</td><td>25,351</td><td>21,754</td></tr><tr><td>Stockholders' equity</td><td>54,301</td><td>51,936</td><td>49,987</td><td>47,104</td><td>41,763</td></tr><tr><td>Return on stockholders' equity</td><td>7.2%</td><td>7.1%</td><td>9.5%</td><td>8.7%</td><td>8.6%</td></tr><tr><td>Current ratio</td><td>3.0</td><td>2.4</td><td>2.0</td><td>2.2</td><td>2.1</td></tr></tbody></table>

See Management's Discussion and Analysis of the Summary of Operations on page 27.

28

## Directors

**WADE W. ALLEN**
Executive Vice President, Schoeffel
Instrument Corp. Manufacturer of
Scientific Instruments
Westwood, New Jersey

**PHILIP W. COLBURN**
Executive Vice President
The Allen Group Inc.

**WILLIAM G. ERICSSON**
President, American National Bank
and Trust Company of Chicago, Illinois

**ALBERT H. GORDON**
Chairman of the Board, Kidder,
Peabody & Co. Incorporated
Investment Bankers New York, N.Y.

**WALTER B. KISSINGER**
Chairman of the Board, President
and Chief Executive Officer
The Allen Group Inc.

**HENRY KOHORN**
Chairman Emeritus
The Allen Group Inc.
Business Consultant

**J. CHISHOLM LYONS**
Partner, Smith, Lyons, Torrance,
Stevenson & Mayer Attorneys
Toronto, Ontario, Canada

**LEWIS SCHIMBERG**
Partner, Aaron, Aaron, Schimberg &
Hess, Attorneys, Chicago, Illinois

**WILLIAM M. WEAVER, JR.**
Partner, Alex. Brown & Sons
Investment Bankers, New York, N.Y.

## Senior Management

### Operating Executives

**BARRY R. BANDUCCI**
Vice President and President
of Heat Transfer Operations

**SHELDON GROSS**
Vice President and President
of National Rubber Co. Ltd.

**KLAUS J. RATH-NAGEL**
President of European
Operations

**V. JAMES RICE**
Vice President and President
of The Antenna Specialists Co.

**ROBERT T. SULLIVAN**
Vice President and President
of Wilson Engineering Div.

### Staff Executives

**WILLIAM J. BENNINGTON**
Vice President-
Communications

**R. MICHAEL BRIGGS**
Vice President-Corporate
Development

**FREDERICK D. HEIMAN**
Vice President and
Controller

**JOHN F. McNIFF**
Vice President-Finance

**IVAR W. MITCHELL**
Vice President-Taxation

**ROBERT G. PAUL**
Vice President and
Treasurer

**LEWIS SCHIMBERG**
Secretary

Executive Management of The Allen Group Inc. includes: (seated left) Walter B. Kissinger, (seated right) Philip W. Colburn, (standing left to right) Barry R. Banducci, Klaus J. Rath-Nagel, V. James Rice, Robert T. Sullivan, Sheldon Gross, John F. McNiff, Robert G. Paul, Frederick D. Heiman, Ivar W. Mitchell, R. Michael Briggs, and William J. Bennington.

29

The Allen Group Inc. / Profile 18

MARCH 30, 1976

A special report to
stockholders

In keeping with our past practice, we
are again publishing our performance
expectations, as well as stating our
corporate objectives for 1976. In
addition, this Profile contains our annual
critique of performance against last
year's objectives.

(Profile 13, Our Policy on Forecasting Earnings, is available through the Vice President of Communications, The Allen Group Inc., 534 Broad Hollow Road, Melville, New York 11746.)

1976 earnings
outlook

A very strong operating performance
was achieved in the second half of 1975
as net income reached a record $.92
per share. We believe that our perfor-
mance during the second half of 1975
is indicative of the results that will be
achieved during 1976.

We expect first quarter sales to
exceed $60 million, as compared to
$47 million in the first quarter of 1975,
and earnings per share to exceed $.50
per share, compared to $.01 per share in
last year's first quarter. For the full year
1976, sales should increase 15% to 20%,
reaching approximately $270 million.
Based on our strong earnings perfor-
mance of the past three quarters, we
expect earnings per share for the full
year of at least $2.00 per share and
possibly reaching double the 1975 level.

This forecast represents our best
judgment based upon present business
conditions and operating trends.

Achievement of this earnings level is
dependent upon a number of factors as
described below. Our forecast will be
changed during the course of the year,
should circumstances warrant.

1. We assume that overall business activity in the U.S., Canada and Western Europe will continue to improve as the year progresses.

2. Within this overall perspective, we anticipate strong consumer demand at the retail level and modest recovery of the heavy truck market.

3. We anticipate continued rapid growth of the citizens band radio market which will result in higher sales for the company and no significant margin erosion, notwithstanding the entry of many competitors in the field during the past year.

4. We do not anticipate major inflationary cost pressures or major upward movements of interest rates.

Based on present conditions, our
forecast of sales and earnings growth
appears to management to adequately
reflect both the risks and opportunities.
We expect 1976 to be an excellent year
in which the efforts focused on profit
improvement throughout the company
during the past 18 months will be
rewarded with significant earnings gains.

1976 corporate
objectives

For the past several years, management publicly stated its goals for the year during the first quarter and criticized its performance against these goals the following year. Our critique of performance against last year's objectives is contained in the section following the 1976 objectives below:

1. Continue to improve the company's financial posture by reducing our debt to equity ratio through a strong emphasis on cash generation throughout the company.

2. Carefully monitor and control new investments and the pace of the business recovery as it impacts our business while continuing to shift assets away from marginal areas and into the most promising product lines. Selectively restrict sales in order to achieve this objective.

3. Improve returns for the company as a whole and within each business segment through a focus of management effort on improving margins. Concurrently continue the tough corporate address to low return areas through restructuring programs and sale or liquidation of investments as necessary.

4. Support the growth of our mobile communications product line in a way that maximizes the longer term opportunities afforded by the rapid growth of our citizens band market. Specific programs will include new marketing approaches, new antenna product introductions, improved manufacturing methods, the development of new channels of distribution, and the successful launching of our new operation in Puerto Rico.

5. Anticipate the growth of Allen to more than $300 million of annual sales in 1977 and the changes in product mix taking place within the company by developing and effectively organizing the management talent necessary to continue our successful growth.

6. Broaden and strengthen employee identification with the company through better communication and greater involvement on the part of employees and through appropriate financial programs, most particularly the employee stock purchase plan and the new pension plan.

7. Significantly expand effort to communicate the many exciting developments within the company to the investment community so that the company's emerging growth and profit trends can be clearly reflected in the valuation of our publicly-held securities.

8. Further the spirit of community service among employees at all levels and build upon the achievements of our employees over the past several years.

9. Develop more fully the pool of knowledge and capability available to Allen through its operations in Europe and North America and through our Banzai affiliate in Japan in order to foster the development of our business in all three areas.

LC

## review of 1975: performance vs. objectives

Setting of specific goals at all levels within the company is a key element in the conduct of business at Allen and performance is measured in terms of these objectives. Just as the individual manager or the division is reviewed within the company, your corporate management annually reviews progress toward our stated objectives.

It is the philosophy of this management to communicate to our stockholders the picture of this company as it unfolds—our successes and our set-backs. It is axiomatic that every company has problems and that management's objective is to confront problems and to respond to opportunities. We believe the difference among companies lies in the degree of candor with which they disclose problems to their stockholders, the courage with which they confront problems, and the imagination and energy which are applied to the solution of their problems.

**OBJECTIVE 1:** Continue the company's aggressive program to reduce debt and minimize short-term obligations by generating significant positive cash flow from internal operations.

**PERFORMANCE:** During the 14-month period ending December 31, 1975, the company's total debt was reduced by $17 million, representing a total elimination of short-term debt, a 30% reduction in total debt, and a 50% reduction in bank debt. The current ratio improved to a record 3 to 1 and working capital to over $60 million. We believe performance in this critical area was excellent and represents one of the company's most meaningful achievements in 1975.

**OBJECTIVE 2:** Respond to the problems of recession and inflation through reductions of personnel and expense levels, tight control of working capital and capital expenditures, and prompt pricing responses to cost increases.

**PERFORMANCE:** The effectiveness of the company's response is evident in the earnings pattern for the year. Cost reductions and personnel cutbacks during the winter of 1974-1975 permitted essentially a breakeven in the first quarter in the face of a 25% decline in sales between October and February.

Earnings improved to $.29 per share in the second quarter, $.42 per share in the third quarter and $.50 per share in the fourth quarter. The second half earnings of $.92 per share represent an annualized rate 25% ahead of Allen's previous record year in 1973.

**OBJECTIVE 3:** Eliminate marginal products, operations and assets that cannot generate an acceptable long-term return. Convert the related investments into cash as rapidly as possible through sale or liquidation.

**PERFORMANCE:** Significant progress was achieved against this objective both through the sale or liquidation of assets and through the redirection of a number of problem operations. During the year, we withdrew or prepared to withdraw from investments in Australia, South Africa and Italy, as well as two replacement parts businesses in the U.S. and Canada. We also closed several marginal plants and terminated a large number of low margin product lines. In March 1976 we sold our U.K. car wash and test and service equipment operations.

**OBJECTIVE 4:** Improve inventory turnover through better control of inventories and reduction of excess inventories wherever they exist.

**PERFORMANCE:** Total inventories were reduced by approximately $10 million—a decrease of 15%, despite an anticipated 30% growth in 1976 first quarter sales. Inventory turnover improved substantially from a five months level to about 3.5 months by year end.

**OBJECTIVE 5:** Consolidate and protect the company's position in its major market areas and develop sound plans for responding to the anticipated turnaround.

**PERFORMANCE:** The Annual Report covers in some detail the programs enacted during the year in each of our major market areas. In mobile communications, we have dramatically expanded capacity and introduced new programs to compete more effectively in this rapidly growing market. In the automotive accessory area, we have successfully trimmed product lines and costs, while improving margins, and are now experiencing significant profit improvement as consumer spending on accessory products has accelerated. In the truck products and test and service areas, we have cut back cost levels very significantly, keeping operating losses under control as volume levels have remained depressed. In both areas, we

are in a posture to capitalize on expected improvements in market conditions during 1976. Considering the diversity of the timing and extent of impact of the recession on each of our businesses, we believe that a good job has been done in achieving the right balance between maintaining business capabilities and motivation on the one hand and dealing with the realities of depressed demand levels on the other hand.

**OBJECTIVE 6:** Focus new business development on opportunities which result in better utilization of existing productive capability, thus minimizing capital requirements.

**PERFORMANCE:** Very few expansion programs outside of the mobile communications area were committed to during 1975. Two new programs committed to in our truck business will utilize existing facilities with minimal capital investment relative to expected sales levels. A number of programs that would have required new facilities with significant capital investment were deferred.

**OBJECTIVE 7:** Improve the management depth and planning and control capabilities as required through the company.

**PERFORMANCE:** Good progress was made in improving control systems, particularly in the cash and working capital control area. A major effort on strategic and operational planning was launched through visits of corporate management to every division of the company during the course of the summer. Several key personnel appointments were then made, including two new vice presidents. During a year of retrenchment in most areas, we believe the quality and capability of our management group and the effectiveness of our control systems were greatly strengthened.

**OBJECTIVE 8:** Continue to build operating relationships with Banzai to stimulate the opening of Far Eastern markets to Allen's products.

**PERFORMANCE:** In the face of worldwide recessionary conditions, we were unable to make the kind of progress toward this objective which we had hoped for and which we continue to believe possible. However, the groundwork for meaningful progress was laid through the establishment of international committees to focus on product development and market expansion. Both companies introduced or evaluated for introduction a number of products to each other's markets.

Silver Spring, Maryland.
8201 16th Street,
Mr. Niasim Kivity,

Personal Assistant
Susan S. McFarlane

Sincerely,

thanks to Ma. Hirach if you have the opportunity,
tary would appreciate your transmitting his sincere
epecially good shots they are, and I know the Secre-
hearing. Several people have commented on what
sending him the other pictures taken at the Senate
He would also like to thank Ma. Hirach for
closed picture taken by Ma. Hirach.

Secretary Klaninger was happy to sign the en-


Dear Mr. Kivity:

June 30, 1976