oversight

Comments on a Magazine Article

Published by the Government Accountability Office on 1971-04-23.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 COMiCxmROULR GIRAJ"I. OF THC UNITED sTATes
                            WApINI'TOt CZ. SO.C


  ~.A   3o                                                    OAPR 23 97n


 Dear Senator Irooke:

       This is in response to your referral
                                              dated }arch ;4, 19T1, with
 ernclosure, requesting our findings and
                                          views concerning a comment
 from Mr. Ronald Wohen of Cambridge, Massachusetts.
 an article published in The ,New Repullic,             On the tasis of
                                             Mr. Cohen urged you to do
 everything in your Dower to see that
                                       the General Accounting Office
 fulfills its resporslibilities concerning
                                            the Lockhe.d Aircraft Cor-
 poration and the contract It has with
                                        the Air Force to produce C-5A
 aireraft.

      The article stated that the General Accounting
 quiesced to a plan proposed by the Department          Office had ac-
 Lockheed of much of its contractual liability of Defense to absolve
                                                  for cost overruns on
 the C-5A aircraft and other procurements.
                                             The article also indicated
that the Department of Defense contemplatped
85-804 which provides authority to enter       the use of Public Law
                                           into contracts or to make
amendments without regard to other provisions
making, performanee, amendment, or m#,dificat of law relating to the
such action wuuld facilitate the national       on of contracts whenever
                                            defern-..  The article ques-
tioned the use of this law for Lockheed
                                         and stated that the legisla-
tive history of Yublic I.-v 85-804 indicated
                                              that it had been written
to aid small defense contractors.

     The article also implied that the investigative
                                                      efforts o' the
General Accounting Office were being
                                     directed and controlled either
by the Department of Defense or by the
                                        Chairmen of the Committees on
Armed Services and Appropriations. Consequently,
fulfilling its responsibility of remaining         the Office was not
tive departments and investigating all      independent of the execu-
                                        matters relating to the receipt,
disbursement, and application of pub2ic
                                         fands.
     Concerning the questJon of whether
vehicle for resolving Lockheed's problemsPuolic Law 85-804 is the proper
                                           on the C-5A aircraft contract
with the Air F.crce, we have reviewed
                                      the legislative history of Pub].ic
Law 85-804 and have concluded that the
                                        proposed action is riot precluded
by the law and is within the intent of
                                        the legislative history.
     The floor debates of the law seem to
                                          answer in the negativt thle
q.:stion of %tether the act should be
                                      limited tc sm. Ll claims. During




                   50TH ANNIVERSARY 1921-1971



                         a IS    7-7(
 these debates it ,as brought out that the law would be applicable
 to contracts for aircraft, missile construction, rockets,
                                                            and ship-
 building. Procurements of this nature generally are not within
                                                                  the
 production cal.bilities of small business concerns. For
                                                           additional
 information on the applicability of Public law 85-804, see
 of the enclosed report on the financial capability          page !0
                                                    of Lockheed to-
 proo:lce C-5A aircraft.

       With respect to the efforts of the General Accountxig Office,
 the breadth and depth of our Government-wide audit interest
                                                              and re-
 sponsibility in relation to our resources requires the most
                                                              efficient
 utilization of available staff both in assignments undertaken
                                                                and in
 the conduct of those assignments. Our basic audit policy,
                                                             except as
 otherwise required by statute, external request, or other
                                                            factors
 beyond our control, is to'direct available resources uad
                                                           talents to
 the areas in which they can be most effectively used to fulfill
                                                                  the
 greatest apparent need and to achieve the greatest benefit
                                                             to the
 Government.

      In all cases, our work must be sufficiently intensive to ensure
 the validity and usefulness of our findings and must be sufficiently
 extensive to fully support our opinions, conclusions, and
                                                           recommnendations.
      Specific factors considered in reaching decisions on the nature,
direction, and intensity of audit effort include: specific
                                                             statutory
requirements for audits; congressional requests; expressions
                                                              or indica-
tions of congressional interest; potential adverse findings
                                                             of si&ilf-
icance; and importance of programs or activities, judged
                                                          by such measures
a:. size of expenditures, investment in assets, amount of revenues,
                                                                    and
other special factors.

     The weight to be given these kinds of factors varies from
                                                                agency
to agency and from progln  to program. Decisions in each cnse repro-
sent a composite Judgment of all pertinent factors, the overriding
factor being constructive contribution to improved rmanagement
                                                               of
Government operations.

      Concerning the lim.it.tions on our review of the financial
                                                                   inf'or-
mation which Lockheed furns-hed to the Department of Defense,
                                                                  we beiieve
that considering all factors, the acceptance of the .imitations
                                                                    in this
particular case did not adversely affect the performance of
                                                                our work.
We previously had been requested tc determine the financial
                                                                capability
of Lock:heed to.anufacture and delJi r C-5A aircraft. To
                                                              perform such
a study, we needed access to financial %.nfornation concerning
                                                                  Lockheed's
Civernment and conmmere-i.l (non-Govemsmnent) programs and to
                                                               other data
related to the financial structure of the corporation.

     Generally, pursuant to 10 U.S.C. 2313(b), the
Office is entitled to examine any books, documents, CGeneral Accounting
                                                     tapers, or records



                                                                    -2-
  that directly pertain to, and involve transactions relating
                                                                to, con-
  tracts negotiated with the Government.
                                           TJe, however, do not have the
  right to require a contractor to furnish
                                            us with data on its commercial
  prograln or its overall financial condition.

       We requested officials of the Depurtment
 available for our review informstion the        of Defense to make
                                            Department had relating to
 Lockheed's financial condition, including
 commercial programs. We were informed that, information on Lockheed's
                                                although the Department
 did have certain financial information pertaintng
 information could not be made available             to Lockheed, the
                                          to us since it had been fur-
 nished to the Department in confidence and
 iot be made public.
                                              on the basis that it would
                       While under 31 U.S.C. 54 the General Accounting
 Office has a right of access to exit records
                                               of any Government depart-
 ment, as a practical matter, there is no
                                           sanction available tc compel.
 enforcement of our right.

      To avoid a time-eonsuming exchange of correspondence
 ctr right of access to information in the                  regarding
                                            hands of the Department of
 Defense, we inquired of Department officials
                                               whether we could review
 the information at the Department if we
                                          refrained from copying or
 reporting it. We egreed that we would furnish
                                                 to those requesting
 our review only our opinion as to whnether
                                            Lockheed had the financia].
 capability to complete and deliver C-5A aircraft.

      Initially Defense officials declined our
                                                suggested approach;
however, during subseouent discussions they
                                              agreed to permit us to
review, under the abov -stipulated conditions,
matiool which Lockheed hat furnisried to the     tho financial infor-
                                             Dpdartmen,.
     The enclosed copy oi the report is the result
See page 19 for more information on the scope      cf the above review.
                                              of our review.
      We are returning tIe enctosare to your rcferram
                                                        as you requested.

                                           Sincerely yours,




                                  ..w;.;   Comptroller Genera l
                                           of the United States
Enc osu res


the Honorable Edward W. LBrooie
United Statf:s Senate
                              ENCL.OSUREI




Financial Capability Of
Lockheed Aircraft Corporation
To Produce C-5A Aircraft ,,,          169o



Department of Defense




BYTill..I ('('),8II".I(,!flR('"'""'          ,.J
(OF.'
   T'ttE 1,'.\'17't:,'! St/'.;.%'
TO THEREADEiR:
     SEVERA L PARES OF THE FOLOWINt; MA TEKRI.4L
     MA Y BE ILLE;iBLE BECAUSE OF THE POOR
     Q.A:4LITY OF THE COPY SUBMITTED FOR
     MIC:ROkILMING;
                            Cnn t en t s

CHAPTER
   1         INTRODUCTION
   2       r C-5A AIRCRAFT PROGRAM                           4
       '    _0 HsIsto-y ......
               Contract provisions .
               -Curre       tatus                            81
                 Pulblic Lawr 8S-804                        10
                 Estimated additional custs to the cov-
                   ermernt                                  12
                 Estimated program coats'                   12
   3         DEPAfE     T OF DEFENSE EFFORTS TO RESOLVE
             LOCKHEED' S FINANCIAL PROBILES                 14
   4         GENERAL ACCOUNTING OFFICE REVIE rF FXFINAN-      '
             CIAL DATA SUBHITTED BY 7.-OCKHEED AIRCRAFT
             CORFORATION                                    18
                 Pork performed by the Genera. Accounting
                   Office                                   19
   5         CONCLUSIONS AND RECQMMENDATICNS                22
                 Recounendations                            23
APPENDIX

   I         Letter dated March 2, 1970, from the chair.
               mar, of the bodrd, Lockheed Aircraft Cor-
               poration, to the Deputy Secretary of De-
               fense                                        27
  II         Section 504 of Public law 91-441 dated
               October 7, 1970                              32
 III         Letter dated December 30, 1970, from the
               Deputy Secretary of Defense to the Chair-
               man, S(nate Armed Services Committee         33
 APPENDIX                                                  age
   IV     Letter dated February 2, 1971, from the
            Deputy Secretary of Defense to the
            Chairman, Senate kArmed Services Commit-
            tee with enclosure                            41
       V    Status of funding for C-SA aircraft program   46
   VI       Public Law 85-804                             47
 -VI-      7E--xe  veI Order1      s mene- Septem-
              ber 27, 1962                                49
 VIII      Letter dated January 5, 1971, from the
             chairman of the board, Lockheed Aircraft
             Corporation to the Deputy Secretary of
            Defense                                       53
   IX      Letter dated January 27, 19;1, from the
             Deputy Secretary of Defense to the chair-
            man of the board, Lockheed Aircraft Cor-
            poration                                      57
   X       Letter dated February 1., 1971, from the
             chairman of the board, Lockheed Aircraft
             Corporation, to the Deputy Secretary of
             Defense                                      59
  XI       Letter with attachment dated February 17,
             1971, from the president, Lockheed Air-
             craft Corporation to the U.S. General Ac-
             counting Office                              61.
 XII       List of officials responsible for the admin-
              eitration of activities discusseo in this
             report                                       70
                         ABBREVIATTIONS
DCAA       Defense Contract Audit Agency
DMT&E      design, development, test, and evaluation
GAO        General AccouJating Office
LMSC       Lockheed Missiles and Srace Company
                         CHAPTEI   1

                       INTRODiCTION

     The General Accounting Office has reviewed the finan-
cial data submitted to the Office of the Secretary of De-
fense by the Lockheed Aircraft Corporation in support of its
request for financial assistance. The objective of -the re-
view was to ex amine into the- financial capability of[
Lockheed to manufacture and deliver C-A airctraft.

     Senators William Proanire and Richard S. Schweiker re-
quested the General Accounting Office in September 1970 to
conduct a study of Iockheed's financial capability to com-
plete and deliver C-5A aircraft. In addition, Congressman
William S. Moorhead raised certain questions regarding the
Departrent of Defense plan to settle the disputes with
Lockheed in colmection with the C-SA aircraft contract.

     tockheed's financial troubles were disclosed in a
letter dated March 2, 1970, from the chairman of-the board
of the Lockheed Aircraft Corporation to the Deputy Secre-
tary of Defense in which he cited the firm's problems on
four major defense programs, Navy shipbuilding, the motor
for the Short Range Attack Missile, the AH-56A (Cheyenne)
helicopter, and the C-5A aircraft. He asserted that the
unprecedented magnitude of the differences to be resolved
on these programs would make it financially impossible for
the company to complete performance of these programs if
Lockheed has to await the outcome of litigation before re-
ceiving further financing from the Department of Defense.
(See app. I.)

     Lockheed indicated that, in its opinion, the cause of
its difficulty was related to the fact that three of the
above programs were awarded under the total package procure-
ment concept. This method of procurement envisions procur-
ing the design, development, production, and support at the
outset of the acquisition phase to introduce And maintain a
weapon system in the inventory under a single contract. The
concept requires price, performance, and schedule commit-
ments on the part of the contractor. The C-5A aircraft pro-
gram was the first major weapon system on which the total
  package procurement concep. was used. Additional
  the C-5A aircraft program -re discussed in chapter details on
                                                      2 of this
  report.

      The Deputy Secretary of Defense informed
 of the situation and askei that it appropriate the Cong.ess
                                                 an additional
 $230 million over the requested appropriation for the
 aircraft as ai interim measure to permit Lockhe,.d to   C-5A
                                                        con.-
 tinue production of the aircraft during fiscal year
    On October 7, 1970, the Consress, under Public Law 1971.
                                                       91-441,
---   authorizedfto -be- IpropLatd $22 --   o=     u
 tingency fund in the procurement of C-5A aircraft during-__a
 fiscal year 1971, subject to.certain restrictions
                                                   and
 trols. This amount was appropriated by the Ccngress con-
                                                      on
 January 11, 1971, under Public Law 91-668.

      Prior to any expenditures from the fund, the law
 quires the Secretary of Defense to submit to the       re-
                                                  House
 Senate Committees on Armed Services a plan to describe and
                                                         the
 controls established by the Department to ensure
                                                  that expen-
 ditures from the fund will only be used for reasonable
 allocable costs incurred by Lockheed for the production and
                                                          of
 C-5A aircraft. (See app. II.)

     'The Department of Defense considers that the letters
dated December 30, 197C, from the Deputy Secretary
                                                    of De-
fense to the Chairmen, House And Senate Armed Services
mittees, which outlfned the ,epa:tment's proposals      Co;-
                                                    for re-
solving the difficulti.s on Loekheed's defense programs
met the requirement of the lab -or submission of
                                                  a plan.
(See app. III.) le have teen advised that as of
                                                  April 1,
1971, the Department cf Defn-se has not executed
                                                  any
tractuzl documents releting to the restructured C-5A con-
                                                      air-
craft contract.
     The deti'Prd procedures to be employed by the Depart-
ment of the Air Fortce in implementing the law were
                                                     forwarded
to the Chairman of the Senate Armed Services Committee
February 2, 1971. (See app. IV.)                         on
                                     'e have reviewed these
detailed procedures and they appeared to be adequate;
ever, we plan to examine as to whether these procedureshow-
sult in the fund being e:pe 'ed only for reasonable       re-
                                                      and al-
locable costs incurred by t. c ontractor du.ring our
                                                      audit
of payments made from the fund,.
     'ne law also prescribes that the fund cannot be used to.
reimburse Lockheed for
     --costs incurred'on any other contract or activity,
     -- intel   ompany profits,

     --bid and proposa-i iosts, independent restarch and de-
       velopment costs, and the costs of other unsponsored
       technical efforts, or
     --depreciation and amortization costs on property,
       plant, and equipmen t .,
     The . iw requires that all payments made from the-
$200 million 2ppropriated as an interim measure to permit
Lockheed to continue production shall be audited by the De-
fense Contract aidit Agency. The law also requires the.Gen-
eral Accounting Office to audit paments from the fund on-a
quarterly basis and to submit a report to the Congress within
30 days from the close of each quarter on the results of its
audits.




                                  3
                           CHAPTER 2

                     C-5A AIRCRAFT PROGRAM
       The C-5A aircraft system is to provide a longrng
                                                          e
 airlift capability at high subsonic speeds. The
                                                    aircraft
  is designed to be capable of transportingall sqiIpment-and
 supplies assigned to combat and supportuntits, including
 items which are too big for any other type of airrrat.-
 aircraft is being acquired for use by the M                 The-
                                                   .-
 Conmand.
      Presented below is3 a brief description of the h.nstory,
 contractual provisions, and current status of the
                                                    C-5A air-
 craft program.

HISTORY

     The requirement for a heavy logistic system, which-
later became the C-5A aircraft, was first recognized
                                                      by the
Military Airlift Command in October 1961. An Air
                                                   Force
study during the summer of 1963 strongly supported
                                                    a re-
quirement for a logistic aircraft to replace the
                                                 C-133 air-
craft.

     In October 1964, the Air Force prepared a technical
development plan for the heavy logistic system which
                                                        in-
cluded an estimate of program cost of $3.423 billion
                                                        for
120 aircraft, engines, initial spares, preparation
nical and cost proposals for the manufacture of the  of  tech-
                                                      system,
and some miscellaneous items. This plan was submitted
the Department of Defense arid approval was received      to
                                                      to pro-
ceed with the program.

     The Air Force requested the Boeing Company, the
Aircraft Corporation, and the Lockheed Aircraft        Douglas
                                                 Corporation
in December 1964 to prepare detailed technical and
                                                    cost pro-
posals for the manufacture of the system, by then
                                                   identified
as the C-5A aircraft. Each contract was a fixed-price
                                                         con-
tract in the amount of $7.125 million to perform
Similar contracts were awarded to General Electricthis  work.
                                                    Company
and Pratt & Whitney Aircraft Division, United Aircraft
poration, to prepare proposals for the engines.          Cor-

                              4
      Incorporated in these requests for ptoposals was a re-
 quirement that the competitors submit bids under a new
                                                         con-
 cept of contracting called total package procurement.
                                                         Un-
 der this concept, the Air Force envisioned that both devel-
 opment and production of the system, togethe, with as
                                                        much
support cs feasible, be procured under a single contrac,:
containing a ceiling price as well as performance
ments. This would permit the Government to make acommit-
                                                     choice
between competitors for the development and production
the aircraft. Hopefully, cost savings would be achievedof
and the Government would benefit by acquiring a reliable
product, - at the: low stpr           ve.hro"
                                       competititon fora-ma-
jor portion of its requirements.

     These technical and cost proposals were submitted to
the Air Force in April 1965. They were evaluated and in
October 1965 the Air Force awarded contracts to Lockheed
                                                          and
General JElectric for development and production of the
                                                        air-
plane and engines.

CONTRACT PROVISIONS

     The contracts awarded to Lockheed and General Electric
were of the incentive type and included options which,
                                                        if
exercised, would cover a 10-year per:Lod of production.

     Although the Air Force 1964 estimate was based on 120
airplanes, Loekheed's contract covered the design, develop-
ment, test, and evaluation (DDT&E) of five airplanes;
                                                       the
production of 53 airplanes identified as run A, and certain
spare parts and aerospace ground equipment. The contract
also contained options for quantities not to exceed 57
planes identified as run B and 85 airplanes identified air-
                                                        as
run C. The estimated or target price ,f the Lockheed
                                                       con-
tract for 115 airplanes in DDT&E, run A tnd run B, was
$1.945 billion.

     General Electric had a similar contract for the engines
and the target price was $62' million including $165 million
for the run B option. Accov.di]Lg to the contracts, the
prices for the run C option would be based on projections
of run B costs.




                             S
        The target prices included a 10-percent
  contractors were to share with the Government,profit and the
  ment to profit, in any underrun or overrun       by adjust-
  cost. Each contract included a sharing      of  the target.
                                           arrangement whereby,
  if actual cost was less than target cost,
                                             the contractor's
 profit would increase by 15 percent of
 underrun. If actual cost was higher than the amount of this
                                             target cost, the
 profit of each contractor would be reduced
                                              by 15 percent of
 the amount of this overrun. lTe contracts
 for a ceiling price of 130 percent of targetalso provided
                                                cost.
       The contract with Lockheed included
                                            a clauseewhereby
 the Government had the right to adjust the sharing ratio
 increase Lockheed's participation                        to
                                   in any underAn to 50 per-
 cent and 30 percent, respectively, with
 target cost, target price, and ceiling the stipulation that
                                         price would be in-
 creased by about 3.2 percent.   The sharing arrangement and
 the targets were changed soo-a after contract
                                               award in accor-
 dance with this clause.

     Each contract also contains a clause permitting
vision to the target cost and ceiling                   a re-
                                        price each year be-
ginning with calendar year 1968, to recognize
fluctuations in the price levels                 abnormal
                                  of labor, materials, equip_
ment, and subcontracts, Each contract
                                         contains a repricing
clause which permits the ceiling price
ward if actual costs of producing run A to be adjusted up-
                                          exceed the target
cost of run A by 30 percent. A formula
                                          is included in the
contracts to compute the amocunt of this
                                          adjustment.
      The contract with Lockheed required that
for run B be exercised 24 months prior           the option
livery of the first run B unit. The Air  to the  scheduled de-
                                           Force issued Sup-
plemental Agreement 235, effective January
duction.run B which gives the Air Force       14, 1969, for pro-
to the 57 aircraft included ixn the optionthe  right to buy up
                                            quantity. On No-
vember 26, 1969, the
which stated that the Air Force issued Change
                       Goverrment had allottedNotice   521
                                                 funds for the
fiscal year 1970 increment of 23 C-5A
                                       aircraft.
     By letter dated December 3, 1969, Lockheed
contracting officer that the issuance           advised the
                                      of Change Notice 521
unilaterally changed the contract terms.
                                          Lockheed contended
that the Air Force had previously exercised
                                            its option for

                               6
57 C-5A aircraft and that Change Notice 521, in effect, was
a partial termination for convenience entitling Lockheed to
receive appropriate reimbursement of its cQsts. In re-
spznse, on December 22, 1969, zhe contracting officer denied
Lockheed's claim and advised the contractor that the deci-
sion was a final decision under the :'Disputes" procedure.
On December 31, 1969, Lockheed advised the Secretary of the
Air Force that it was appealing the contracting officer's
decision to the Armed Services Board of Contract Appeals.
Lockheed's complaint to the Board was filed on March 23,
1970.




                            7
CIURRET STATUS
     For fiscal year 1971, the Congress appropriated
$622.3 million for the C-5A aircraft pr.ogram, including
$544.4 million for production, as shovm below.
                  Funds                           Ama.unt


Research and development                                $ 11.6
    Aircrait (production)                     $344.4
    Interim funding for Lockheed               200. 0    544,4

    Initial spares                                          64.8
Military construction                                        1.3
        Total (difference due to rounding)              $622.3

     Concerning the funding of the C-SA aircraft program
for fiscal year 1971, the Deputy Secretary of Defense testi-
fied on May 27, 1_970, before the Conmittee on Armed Services,
United States Senate, that "Of the $544.4 million required
for the C-5A in fiscal year 1971, $344.4 million is required
for prior year unfunded production obligations. Of this
amount, $296 million is for Lockheed." A schedule showing
amounts appropriated, obligated and expended by fiscal year
for the C-5A aircraft program is shown in appendix V. We
have been advised that, in addition to funds previously ap-
propriated, the Air Force intends to request from the Con-
gress for fiscal year 1972 and subsequent years an addi.
tional $544.0 million to complete the acquisition of 81 C-5A
aircraft.
     The Air Force originally estimated that Lockheed would
exhaust the $296 million shortly after the end of December
1970 and that the $200 million would be required for work
to be done in the remainder of fiscal year 1971. However,
Lockheed has not incurred costs at the rate anticipated when
the Department of Defense requestec the Congress to provide
the interim funding for the contractor. Consequently, the
Air Force believes that it will not be necessary to start
payment from the $200 million until about mid-May 1971.
     The Air Force is considering changing the present C-5A
aircraft contract from a fixed-price incentive type to a
cost reimbursement type with the Air Force providing the
funds to complete the program except for Lockheed absorbing
a fixed loss of $200 million. In addition, Lockheed would
not receive paynment for certain types of -osts listed in
Public Law 91-441. The settlement also would preclude any
performance incentive fees, or profits on initial spares
and on added work related to the scope of the contract which
Lockheed otherwise might have earned,,




                            9
 PUBLIC LAW 85-804

     Public Law 85-804, enacted in 1958, provides that the
President may authorize any department or agency of the
Government which exercises functions in connection with the
national defense:

          "*** to enter into contracts or into amled-
     ments or modifications of contracts heretofore
     or hereafter made *** without regard to other
     provisions of law relating to the making, per-
     formance, amendment, or modification of con-
     tracts, whenever he deems that such action would
     facilitate the national defense."

This authority is quite broad and the 1President has autho-
rized the Department of Defense and certain other agencies
to exercise that authority. See appendix VI for Public Law
85-804 and appendix VII for Executive Order No. 10789 which
implements the law.

     We have reviewed the legislative history of Public
Law 85-804 and the proposed action is not precluded by the
act and is within the intent of the legislative history.

     The floor debates in the legislative history of Public
Law 85-804, seem to answer in the negative the question
whether the act should be limited to small claims. The fol-
lowing colloquy from the legislative history deals with the
application of the act:

           "Mr. Robsion of Kentucky. Mr. Speaker,
     there seems to be considerable misunderstanding
     in the minds of some,. including perhaps the gen-
     t'leman from Missouri, about the necessity of
     this legislation. Of course, we should always
    be striving to improve our methods of procurement
    and the making of Government contracts, espe-
    cially defense contracts. But there will always
    be a field where legislation such as this will
    be needed to take care of unusual situations that
    wAil arise in providing for the weapons for na-
    tional defense. I will give you one example,
    that of a contract to build a ship. Suppose you


                             10
 get half through the construction of the ship and
 something goes wrong, perhaps through bad manage-
ment, perhaps through something unavoidable, nev-
 ertheless, the shipyard finds that it cannot con-
 tinue under the terms of the contract and com-
plete the ship. The question then arises whether
or not the Defense Department should rescind the
contract, sue the contractor for damages, and
take the ship over to some other yard for comple-
tion. But, of course, it cannot work that way.
As a practical matter, national defense would re-
quire the ship to be completed in that yard, even
though it might require the renegotiation of the
contract. Writing new laws relating to Govern-
ment contracts will not take care of a situation
such as this. The Defense Department must hav'e
the special powers provided by this legislation,
where, under the supervision of Congress, they
would have leeway to go ahead and get the ship
completed, even if, unhappily, in some instances
it would require more money.


     "Mr. McDonough. In other words, the gentle-
man is informing us that there are many contracts
such as contracts for aircraft, to which it ap-
plied, missile construction, rockets, as well as
shipbuilding.
        "Mr. Robsion of Kentucky.   Yes.
    *            *         *          *     *

     "Mr. Robsion of Kentucky. Yes. Now, there
arp several reasons why you need this legislation.
For example, sometimes the Government must n:ene-
gotiate a contract without legal consideration,
such as in the completion of ships, the case
that I mentioned; secondly, there are instances
of mutual mistakes that must be corrected in these
large and extremely complicated defense contracts;
thirdly, of course, you have peculiar situations
which must be met from time to time in large de-
fense programs where existing statutory authority
is inadequate." (See pp. 14156 and 14157 of the
Congressional Record, House, July 29, 1958.)
  ESTIMATED ADDITIONAL
  COST TO THE GOVERNMENT

      The actions proposed by the Department
 resolve the difficulties being encountered of Defense to
 aircraft contract will result in additional with the C-5A
 Government.                                  costs to the
              The following schedule which shows
 costs of about $496.4 million is based           additional
                                        on the assumption
 that all disputes and disagreements
                                     existing between the
 Air Force and Lockheed on the C-5A aircraft
                                              contract would
 be decided in favor of the Air Force.
                                                   Amount
                                               (millions)
 Estimated cost for Lockheed to
   complete 81 C-5A aircraft
   (only alLowable costs as defined
   in section XV of Armed Services
   Procurement Regulation)
 Air Force estimate of ceiling price                     $3,248.2
   of existing contract
                                                         2,528.8
 Additional cost in excess of
   estimated ceiling of existing
   contract
                                                            719.4
 Less:
     Proposed settlement loss to be
       absorbed by Lockheed               $200.0
     Estimated amount of costs
       disallowed by Public Law 91-441
       and under restructured contract
                                           23.0            223.0
Estimated additional costs to
  the Government.
                                                     $     496.4

ESTIMATED PROGRAI COSTS

     The following
of the costs of 81 presentation shows the current estimate
                   C-5A aircraft at completion of the pro-
gram. These estimates, as those of
                                    the added costs to the
Government above, have not been audited
counting Office.                        by the General Ac-


                             12
                     Total C-SA Aircraft Progtram Costs
                          as of December 31, 1970
               Based on Air Force and Contractors' Estimates

                                                             Amount

                                                           (millions)
Lockheed Aircraft Corporation:
    Estimated cost for 61 aircraft                                    $3,248.2
    Initial spares and ground equipment                                  389.9

                                                                          3,638.1
General Electric Company                                                    848.2
Military construction                                                        17.b
Other costs:
    Precontract awards                            $58.0
    Ground equipment                               54.7
    Testing                                        24.7
    Miscellaneous                                  29.0                     166.4
Total acquisition cost                                                    4,670.3
Less:    Proposed settlement loss to be absorbed by
           Lockheed                                                         200.0
Net acquisition cost                                                      4,470.3   a


Additional system (operating) costs programmed
 through fiscal. year 1976 (modifications, replenish-
 ment spares, etc.)                                                         339.5
Total cost of program                                                 $4,809.8

                   Reconciliation of Program Costs with
         Estimate of. Additional Appropriations Needed to Complete
                      Acquisition of 81 C-5A Aircraft

                                                               Amount

                                                             (millions)
Total program costs                                                   $4,809.8

Less:   Funds programmed as of 12-31-70                 $4,026.3
        Additional systems costs programmed through
          fiscal year 1976                                 339.5          4,365.8

                                                                            444.0
Add:    Funds to be provided to Lockheed which it must repay
          to the Government beginning in 1974                               100.0
Funds needed to cory..lete acquisition of 81 aircraft                 $     544.0(
aThis amount will be reduced to the extent that costs, estimated at
 $23 million, are disallowed under Public Law 91-441 and the restruc-
 tured contract.                   13
                          CHAPTER 3

                DEPARTMENT OF DEFENSE EFFORTS

         TO RESOLVE LOCKHEED'S FINANCIAL PROBLEM1S

      After the Department of Defense received Lockheed's
 letter in March 1970 requesting financial assistance, a
special group was established within the Office of the Sec-
retary of Defense to compile and analyze data relative to
Lockheed's financial problems and to furnish information to
the Deputy Secretary of Defense. Also, this group was re-
sponsible for determining the reliability of information
submitted by Lockheed. We were advised that particular at-
tention was directed by this group to making a comparison
of the quantities, types, and schedules of various Govern-
ment programs shown in Lockheed's data with known and pro-
jected Government requirements, since these programs were
the bases for a significant portion of the contractor's
forecasted sales, costs and profits.

     Lockheed was requested to provide additional data to
support, by specific time periods and programs, its short-
term cash needs. The following requested information was
provided.

     1. A 5-year financial forecast.

     2. Data relative to extraordinary contractual actions
        to facilitate the national defense on:

        a. The C-5A aircraft program.

        b. The AH-56A helicopter phase II development pro-
           gram.

        c. The AH-56A helicopter phase III production pro-
           gram.

     The financial forecast was based on estimated sales,
costs, profits, capital requirements, and similar financial
information for the 5-year period 1970 through 1974, The
information was developed from Lockheed's budget and fore-
cast system and was based on certain assumptions with regard

                             14
to schedule, cost,and delivery of selected military and
commercial programs. We were advised that Lockheed's as-
sumptions concerning Government programs (quantity and
schedule) in which it is participating were reviewed by De-
partment of Defense officials. Assumptions regarding Lock-
heed's commercial activity were based on the judgment of
Lockheed management.

     The data submitted by Lockheed for the C-5A aircraft
and the AH-56A helicopter were prepared under the financial
relief provisions of Public Law 85-804 as mptlenented by
section 17 of the Armed Services Procurement Regulation.
Section 17 requires the contractor's submission to include,
in addition to other data, (1) a history and current status
of the programs, (2) costs for which it has made payment and
those for which it was indebted, (3) estimated costs to com-
plete, and (4) the efforts Lockheed made to obtain funds
from conmmercial sources to enable completion of the programs.

     To assist in the analysis, the Defense Contract Audit
Agency (DCAA) was requested to review Lock;.eed's 5-year fi-
nancial forecast and the contractor's submissions for action
under Public Law 85-804. DCAA reviewed the data provided
by selected divisions and subsidiaries to Lockheed Aircraft
Corporation headquarters which consolidated the information.
On a selective basis, forecast rates and factors were
checked to Lockheed's accounting records and/or compared
with available audit data. in addition, contract amounts
and forecasted cash receipts were compared to contract
terms and delivery schedules on a sample basis. DCAA also
verified the financial data included in the three submis-
sions covering the C-5A aircraft program and the AH-56A
helicopter programs for developmen- and production.

      The Defense Contract Audit Agency submitted a report
on January 13, 1971, to the Office of the Assistant Secre-
tary of Defense (Installations and Logistics) which stated
that it had found that (1) historical date used in the com-
putation of the forecast and/or contained in the three pro-
gram submissions were in agreement with Lockheed's account-
ing records, (2) forecast data contained in the submissions
were derived from data developed under Lockheed's budget
a-id forecast system, and (3) there were no significant dis-
crepancies in Lockheed's forecasting techniques.

                             i5
     DCAA's report also stated that the financial forecast
reviewed supported Lockheed's computation of cash require-
ments which are expected to peak in 1971. Further, Jt
stated that, unless Lockheed could find other means to sat-
isfy its requirements for cash in 1971 over the amount
which may be available from banks and airline customera,
Lockheed would be uniable to complete performance on the
C-5A aircraft and the AH-56A helicopter programs with--%
Government financing of costs exceeding the Government's in-
terpretation of existing contract ceilings. DCAA stated,
however, that it could not express an overall opinion on the
5-year forecast, since its realization was subject to many
complex factors involving considerable uncertainty.

     By letters dated December 30, 1970, to the Chairmen,
House and Senate Armed Services Coumittees, the Deputy Sec-
retary of Defense outlined his proposals for resolving the
disputes and claims surrounding the various military pro-
grams in which Lockheed was participating. A copy of the
letter sent to the Chairman, Senate Armed Services Committee
is shown in appendix III. A similar letter was sent to the
Chairman, House Armed Services Committee.

     He stated that the dispute concerning the motor for
the Short Range Attack Missile was considered resolved and
that the ship claims under five completed contracts had been
settled. The remaining ship claims totaling $159.8 million
were still subject to negotiation.

      With respect to the AH-56A helicopter research and
development program, he proposed that the fixed-price type
of contract be converted to a cost-reimbursement type. Un-
der this arrangement, the Army will assume future costs of
the program and will reimburse Lockheed for about $25 mil-
lion in costs which have been incurred since Decembez 29,
1969.

     Under the AH-56A helicopter production program termi-
nated for default in May 1969, the Deputy Secretary pro-
posed to settle the dispute by authorizing the Army to pay
$36 million or the actual amount of the settlement of the
claims of unpaid suppliers and subcontractors, whichever is
lesser.


                            16
     The proposal for settlement of the C-5A aircraft dis-
pute consisted of converting the contract to a cost-
reimbursement type with the Air Force providing the funds
to complete the program except for Lockheed's absorbing a
fixed loss of $200 million. In addition, Lockheed would not
receive payment for certain types of costs listed in Public
Law 91-441. The settlement also would preclude any perfor-
mance incentive fees or profits on initial spares and on
added work related to the scope of the contract which Lock-
heed otherwise might have earned.

     The Deputy Secretary stated .:hat the ace; o proposed
by the Department of Defense gould not guarantee that bank-
ruptcy of Lockheed would be precluded.

     Lockheed responded on January 5, 1971, to the settle-
ment proposed on Decembefr 30, 1970, by the Deputy Secretary
of Defense. (See app. VIII.) Lockheed agreed that the
dispute concerning the motor for the Short Range Attack
Missile had been resolved anca accepted the proposals on the
AH-56A helicopter development and production programs. The
contractor Was not prepared to accept the Navy's offer of
S;8 million in settlement of the ship claims and indicated
that the continuation of negotiations was preferable. Sub-
sequently, Lockheed has reached a tertative agreement to
accept $62 million in full settlement of the ship claims.

     Initially, Lockheed declined to accept the amount of
loss on the C-5A aircraft program proposed by the Deputy
Secretary of Defense, but the company has changed its posi-
tion and has agreed to settle for a fixed loss amounting to
$200 million. Lockheed will forfeit $100 million which it
has already provided toward C-5A aircr.ft costs and will re-
pay the second $100 million with interest at the prime rate
starting January 1, 1974. Repayments wil' -..at the rare
of $10 million or 10 percent of before-tax profits each
year, whichever is larger, with an upward adjustment in the
event of dividend payments. (See apps. IX and X.)

     As security for the $100 million, the Department will
require the contractor to pledge its land, buildings, and
personal property located at the Lockheed-Georgia plant.
In addition, Lockheed agreed to withdraw from litigation
all its claims on the above program.
                         CHAPTER 4

             GENERAL ACCOUTING ·OFFICE REVIEW

                OF FINANCIAL DATA SUBMITTED

             BY LOCKHEED AIRCRAFT CORPORATION

     On September 14, 1970, Senator William Proxmire and
Sc   or Richard S. Scnweiker requested the General Account-
i - lfice to (1) review Lockheed's financial capability to
c - Ate and deliver various quantities of C-5A aircraft and
(2) ascertain the total amount which would have to be ex.-
pended to ensure completion and delivery of such aircraft.

     We advised Senator Proxmire and Senator Schweiker on
November 19, 1970, that the Air Force estimated that the
total program of 81 C-SA aircraft would cost about $4.6 bil-
lion for development, production, initial spares, and di-
rectly related construction. Tht Air Force had not prepared
a cost estimate for the 42 C-5A aircraft which are to be de-
livered by June 30, 1971. On the basis of the rate of expen-
ditures, however, the Air Force believed that about $4.1 bil-
lion would be expended on the total program of 81 aircraft
by +rietime the 42d aircraft is delivered. Included in the
$4,. billion were costs applicable to aircraft that would be
delivered (work-in-progress) subsequent to aircraft number
42.

     With respect to Lockheed's financial capability to com-
plete the C-5A aircraft contract, it should be recognized
that, pursuant to 10 U.S.C. 2313(b), the General Accounting
Office has the authority to examine records which directly
pertain to the C-5A aircraft contract and other negotiated
Government contracts; huwever, we do not have the right to
require lockheed to fur ,ish us data on its commercial pro-
grams or overall financial condition.




                             18.
     We requested officials of the Department of Defense to
make available for our review any information that the De-
partment had relating to Lockheed's financial condition,
including information on Lockheed's comue-i ial programs.
We were informed that, although the Department did have
certain financial information pertaining to Lockheed,   it
could not be made available to us since the information had
been furnished to the Department in cc nfidence and on the
basis that it would not be made public. Although under
31 U.S.C .54 the General Accounting Office has a right of
access to any records of any Government department, as a
practical atter, there is-no sanction availalbe to compel
enforcement of our right.

     To avoid a time-consuming negotiation regarding our
right of access to the information in the hands of the De-
partment of Defense, we inquired of Department officials
whether we could review the information at the Department
and refrain from copying or reporting it.  We agreed that
we would furnish to those requesting our review only our
opinion is to whether Lockheed had the financial capability
to complete and deliver C-SA aircraft. Initially, Depart-
ment officials declined our suggested approach; however,
during subsequent discussions agreement was reached to per-
mit us to review, under the above stipulated conditions,
the financial information which Lockheed had furnished the
Department.

     The Deputy Secretary of Defense advised us on Decem-
ber 9, 1970, that Lockheed was preparing comprehensive fi-
nancial information in the form required by the Armed Ser-
vices Procurement Regulation to substantiate actions under
Public Law 85-804. It was estimated that the additional
data would be submitted in late December and would be au-
dited by DCAA. The Deputy Secretary requested the General
Accounting Office to participate in the review of this in-
formation.

WORK PERFORMED BY THE
GENERAL ACCOUNTING OFFICE

     Our work was principally performed at the Office of
the Secretary of Defense, corporate headquarters of the
Lockheed Aircraft Corporation, and three of its major

                             19
divisions during the period December 28, 1970, to Janu-
ary 29, 1971. At contractor locations our effort was basi-
cally directed toward evaluating tha audit procedures and
techniques employed by DCAA.

     The following statements describe in more detail the
work performed by the Gereral Accounting Office at each lo-
cation.

     1. The Office of the Secretary of Defense. Washing-
ton, D.C.--At the Office of the Secretary of Defense, we
verified the quantity and schedule of Department of Defense
programs used as a basis for projecting future sales, costs,
and profits tc the Department's 5-year defense program. In
addition, we Determined significant financial ratios from
the financial forecast and compared these with similar
ratios derived fro; Lockheed's financial statements from
prior years. We also discussed with Department officials
the work they had performed to satisfy themselvcq of the
validity of financial data submitted by Lockheed.

     2. Lockheed Aircraft Corporation, Burbank, California--
At this location we reviewed the study performed by DCAA of
the corporate office consolidations and adjustments of bud-
getary data submitted by operating divisions and subsid-
iaries. We performed such tests of the study as time per-
mitted and discussed the results with DCAA personnel. We
also reviewed records relating to major financing arrange-
ments between Lockheed and the Bank of California National
Association. Matters relating to the above areas and to
extraordinary actions taken by Lockheed to conserve cash and
to find additional sources of revenue were discussed with
corporate officials.

     3. Lockheed-California Company, Burbank, California--
We examined in detail the work accomplished by DCAA in con-
firming the validity of the financial forecast with respect
to the AH-56A helicopter program, the P-3C aircraft and the
S-3A aircraft. We examined the data obtained by DCAA and
made such independent tests of the data as time permitted.
We also discussed these matters with DCAA and Lockheed of-
ficials.



                            20
     4. Lockheed-Georgia Company, Marietta. Georgia--At the
Georgia facility, we obtained a schedule of.expenditures
and receipts showing the amount of cash required to support
the C-5A aircraft program and Lockheed's investment in the
program. In addition, we compared the August 1970 joint
Air Force/Lockheed cost estimate with Lockheed's i,'ternal
management budgets. We also compared the Air Force and
Lockheed interpretations of the contract ceiling price.
Further, we examined the scope and quality of DCAA's audit
of the joint Air Force/Loc.iceed cost estimate and the sub-
mission by Lockheed as rf ired by the Armed Services Pro-
curement Regulation, setLon 17, implementing Public
Law 85-804

     5. Lockheed Missile and Space Company, Sunnyvale, Cal-
ifornia--At the Lockheed Missile and Space Company (LMSC),
we examined forecast sales of IMSC and the company's meth-
odology for computing cash requirements on the basis of
forecast source and application of funds. We also discussed
with LMSC officials the forecast profit. Although we can-
not express an opinion on the accuracy of the forecast
profit, we believe that LMSC used sound procedures in de-
veloping its cash requirements.




                            21
                          CHAPTER 5

               CONCLUSIONS AND RECOMMENDATIONS
     We are unable to express an npinion as to the accuracy
and reliability of the company-wide financial forecast sub-
mitted by Lockheed because of the uncertainty of future
transactions and the possibility of encountering unforeseen
technological difficulties. Subject to this qualification,
the data that we reviewed indicate that Lockheed does not
have sufficient financial resources to complete the C-5A air-
craft program without Government assistance in financing the
costs expected to be incurred in excess of the existing con-
tract ceiling.

     Our review of the financial data furnished by Lockheed
was completed on January 29, 1971. Subsequently, it was dis-
closed that Rolls-Royce, Ltd., the manufacturer of the en-
gine for Lockheed's commercial aircraft, the   -O1011, had
gone into receivership. The full effect of this action on
either Lockheed's financial position or Government programs
managed by Lockheed cannot be determined at this time.

     We agree with the statement made by the Deputy Secre-
tary of Defense in his letters dated December 30, 1970, to
the Chairmen, House and Senate Armed Services Committees,
that the actions proposed by the Department of Defense will
not guarantee that bankruptcy of Lockheed will be precluded.
In this respect, since the full effect on Lockheed's finan-
cial position of problems presently being experienced by
Rolls-Royce cannot be determined, we believe that action
should be taken to ensure that the use of funds made avail-
able for the C-5A aircraft program will continue to be used
on that program even in the event of bankruptcy of the con-
tractor.

     Lockheed has indicated that it is taking aggressive
management actions to conserve cash and to make the opera-
tions of the company more economical. On February 17, 1971,
Lockheed officials provided us with a schedule of actions
that it had taken to conserve cash. (See app. XI.) We be-
lieve that the Department of Defense should take a more ac-
tive role in confirming the effectiveness of these actions
and in identifying additional actions that may be warranted.

                             22
      In this connection and in support of the above conclu-
sion, we found that, during our comparison of the joint Air
Force/Lockheed cost estimate with Lockheed's internal budgets,
the cost estimate was about $172 millVfn higher than the
budgets to complete the program. We were informed that this
difference of $172 million was considered by Lockheed to be
a management reserve and was a part of Lockheed's manage-
ment control system since the internal budgets were based
on the concept of optimum performance. To the extent that
Lockheed meets this optimum performance, the estimated ad-
ditional cost of $496.4 million shown on page 12 of this
report will be decreased.

RECOMMENDATIONS

      We recommend that the Department of Defense establish
close surveillarnce over Lockheed's activities to ensure that
conditions which resulted in previous cost growth and finan-
cial difficulties have, to the extent possible, been cor-
rected and are not likely to recur. We recommend also that
the Department conduct a review of the "should cost" type
of Lockheed's operations concerning the production of C-5A
aircraf'     The purpose of these recommendations is to give
the Government greater assurance that Lockheed's future op-
erations are conducted in an efficient and economical man-
ner and that only necessary costs are incurred in complet-
ing the C-5A aircraft.




                             23
APPENDIXES




 25



             .0
                                                                                          APPENDIX I
                                                                                              Page 1
                     Loc       l~l~:)3Pi     I~l~COUP                        TI:a1ON




                                                                                       Alfruc 2, 1970

 Ihr Iflicaobhle Daivcf Ptic1-rd
 Depuly Sccrcac)' of Defense
 1ho rPteCI3oZo
 Mmhsthioaon, D. C. 20301

 Dear i/er. Secretory:

We hove c.inplcdc a revicw of tlic currcnit status of a nu!nl,,r of our rt.rajor
Doporlaitcnt of DLcmnse rrzran~s in crrectkon wrilia whickh our coprcmc!bon has
filed claim$ or ha:cs  bocon compVI1ecd indo conticucvl dJitpucs vi~tllotc rte        !
                                                                                     Mory
services. It hcas hvccpte vbunctbnll. clear to us lhat Ilth unrpecedmnledcc.llc;r
mognivlec C! the cliffctcncm to be rc%.lvced. Ltuvccn Lochcei airc the a-i-ilcry
scrvicrs UInaIe ; flinancially impassibk. fcr.Lockhlced to co.cple!o pcrfe:r.anco
of tlieec proirornis if we rnuot await 1 c·g.utcci.en of I0iioiion hcfo:e recefvin3
h'rlher Iincncino firan Ihl Dvpao:n.-;:it of 0:4·msn. We conmidr.il imn.ro:;vo
that sogii ahrecrtle
              k         mnlctha of -rol  vio:n o! tIhe4t; rrefcr.icc-1 b6 irn:cietcr    y
and scriotisly pumtur.cd in wicrr to overt irof;~airmct the co.tinvcc piufcra:roncc
of prc'jc, ns C          to the rialiorlol c'efense.

We rclixe thot tee inhfitary sorviaccs ncr;rmoliy expcet thieir co:,trackrrs to co:nlinu
pcircnruonce, e;nclkeaing einrncine, pnndiseg cerninistruatve review. and resr!cu1 ;on
of any cliteul'lIc c:altcr. in the presnr insktcncics, hoxcvcr, ,6 cv:e1ulativC
imnpeCtl o'! fltht' itigcccalvnts c. fat; pro-mcmii Creotes a critical finvonckul pFoblvci
WvhcI      ccrerea' b~c wiscppe1d ovt of cur current and projectcd (.5!cts cn.:! :'ccune.
We ino intew:i:ified our            fcie  on 0ffrc:,, hove cliinincd           viic'-nc
                                                                               c
                                                                             dcJ         to v.,r
Sto.!.Iei.k'ers     fvw- ruc..-V d rcesLiCm]!y c.r plC:cned c~.:j;!ainl;:urcS for fiyc'd us!ets,
ald irevteid to rCj!vCc. C:Lmo'rhcc1 cCs cud cu. discretionury outfeys in CI1 other
          orercts.    V/C al:o irncudi to coli-Oi         pursuitf"    aol pcesiSili:;es c
Irfaoi tle- pi ;wle    tc'r. Dcspilc tliz!: efrc;;s, we rrmust state Ithat vie cmcrnat
ndntlo'n uvainlestcrr p':cd cc;amance on Ith.- pregroreis v*hout rcceivir-3 s7'nificcm
firforacin' cessiloc..e from the Dcp'rr:e;eec-n o f Del'ensv. Also, in obsclu.e conkcer,
we du      cotl       IIanr
                         II oc!:hced, even ;f it were copcrblc of so ceimo, shlould ba
C.L     ttJir UO:aLc tIu strtcin for un inrfieeie period   lice finiaceciaI burden while
        t   ~ir
              .h o        of li::S:;c.:.
                          Occ:.          rcsl       Icucgety fion Croslic innovcteor.in
                                                  1:1El
prtceercirecnr procvolures utiliLed by 1le,. mililcry strvices,




                      I    o    :   Io     0C CI   I trI IC,.   I IA   tfISIIF



                                                   27
APPENDIX I
    Page 2

   Ile lloactlllc ie vid            J.,,rd                           /Mocld                               2, 1770

   Ilowevcr, if c¢l-l,lutlelv mIcccssJry tbe
                                         the. partic.s may    forcc d tc hevel their major
   dclsaprcem-nts involved in tlh:se prooruns s,^1ltcd Ihrough litihloIion. Ind-c;:. ou
   ol©ilg;;:o.slo our stocl:h.:.l:is vill lequir.. us to Iell. Itli: coentse of action ;f tlhe
   only stillk:imel pro-osvls vRilchi can bc evolved would ruinously c!.'plele our
   corporoe;c rcsomurces.      M't:vrecorr, it shrould L.; reccgnized Ilcitrconhltociua!
   disagroec-tct:ls ot su.chl er.mnous nmoanitude represent a brecl:do.vn in tlie
   grocurceractt irocesses.

   W;ithout disrcCarding     .ourown deficencles, Ite ccMlmoan ingredient in tlfrc of
   the four |to.ramns v.'|ich cause- our pros.nt difficully, naoncely, tIe C-5A, Ilm SRAM,
   and Ihn Al:-56, is tlh fiet thaIt under thlr iotal Package Procuremernl pro-cedure
   Jcveloipmecn was recqu;rctl to be un'Jertol:cn unc'er a fixed price type contrctcl wi:h
   concurrent prJluclilonl cc',milrments with rcer.et            to price, .schecul, and pcrfermoanec.
   Allhoutha   ;I wtas ossu;,ecl 1;lot s:ote-of-tllh-ot advances wvrce not tcequtrod in these
   proDrmrns, It is f cnerally c!'milt:ctl hut these csskmplions were ineorrect. Allhough
   indeusry .jir:mi ally, includinm, our com:pany, pl. rhips erred in comnpc.et;n for ccntracts
   under tIlis sys.al',, the syscnm itself and its use were tfle rcsponsibility of ftei militnry
   dc-p rlrnictts.
   dcp:-rtmcnts                              .

   '.c believe lthrt lbth
                       ih lr, !mdoltof today showss ts .hot the procurement p:ocec'Jre
   utilized for Ih.ese pro.,roms wvos ir.mprudent cn d cdverse to our respective interests.
   V/e didJ noG conlrt.;ipfctc, i or do we bl"iev. c-nyone In Ihe Dcporlrmenl               of Diefens
   ever conl:Celaoled, Ithcit Ilhe.e contracts could generate diffrcences of Cpinion
   involvinlj such vast monc:ary Ormouhts as, for (.xomple, exisl on the C-5,\ proroamn.
   Nor dlid ei:llor porly cppreeciee the ojclior hozards involved in uctertaking
   produc;ion on the Cl:cyenn:e proroam beffo     ltcclnicol pro'.lems on the dcvcelcrnent
   prCrrcmn Icl,d blcn solved. Consicd,1in6 tlha tthese problems were krnovn to tlh Army
   at Ihe til;e hll letchlrro'!rct for production v. s issued in January 196V,, and thol
   the porlse:. subv!:     til y I.:dLceen unable to reach agreemenl on a dflinitit,
                        ia:t                                                         contract,
   Ihe vunirececP.!Jal c,            r
                            oclitcn t,, terminaoltin   thlis Ic:ler conractl under o fixecd prIc.
   dc·fault clctr: is citificult lo understand-.

   Despic t11-.£!rov.n. owvare       hncss      the too!ol pclc.;e nmelheodl utilicd!in Ithcser pro~grams
                                                Ihat
   is virhu:lly lt,.er!-:oble, lecre sc.cins to be little disosilion to correct cxlstis-.
   col.tiocls on rmnis wllic;i most conlroclors can acce)pt or to recontli' e that li:io:a'ion
   Is a s.r'i::,:,sly icidec'::uoic. vcenve. Even ;ontle shipyaord contracts v;herc thc total
   painck e cuoncept vwos ,IC.: ihvolved, tlh focl Iti bLulk of Ihe s!,ipbuilcdinl       ilrc;l;':ry
   has encc.:-nterec! s rcv       tfrJbleJ a: indicotcd by the mo;e than a billi.n dollc::s in
   conrtrcJcl clui:.:s s',aes:s t:oat tiie syst:um, roellir Ilthn solely ircividu.;l deficiencies,
   was a rlijcr contributor to Ihec prohlem.                           ·

   Apa:rl frCoz tlCe ci:stmrcus p.,'entital for our own company and its effrect on              t:;porlrment
   of Dcfelis': fro,c,-.s, lili :l,;c., of thc:e pro!.lcrns r,.lay vwell have Grcve c¢;.cquerr            ces
   oCrthe D);;. rt:cn:      c.' D    ,cl..: -'scbility to secure the indu:.rial supp;;:;l v.'!ic'l   it




                                                       28
                                                                                       APPENDIX I
                                                                                           Page 3
 .Ilae I             I .c'r.d.c?L'urd
                                                                                    Mtrcle'      I

 trodtt;onally livs rccquired, rc, ioido 55 of *.-ho ulfih;;tfcly Ain$. With tillb
                                                                                   in r:intd,
 Ovitem~.tc~r sltip   .)' bc'ytCaC:ou
                                   tO olleyAkf. oi r in.(mcic.tc
                                                       r          finonc.al C!elr.s iI nh
 to urce tlkc.1 the        be kft o;icn to     l i:.i(- s,           Which
                      ,.i
                                                                       v   ore vwihin tho
 olaility . fthe cco:poi:clat   to absorb.
 Altlhcov?0h I ho     cr urc Cenrcally fcmiliar vlh Cs,; frc.r,"cntioflomd pro5,-u'.;, I
  mould lilhe bic-fly lo rfm-pilulatev ii: crictil fi1.i                    tl;cy ccu-t end to
                                                                -::l -rolrais
 vrva Interim hircmnch:; acolious which sho.,lr' [v t .en
                                                      1
                                                          h.i..u.~cc:;atlcly to evoil im"pair-
 mert of ontinut-el performancr .

 C--5A

On Jonuary 1',, 1970, omr c,:);):,lMfron t:Ie Coeitroctlint Officcr's 6c
                                                                              .%ioncanccrmdinj
tle C-5/A mitrod dis~ulto was c0cl1c~ ri by thc' ASt:C/- onmd our cmn.-Ioait
                                                                                  frs bc-en
filed. All r-artko: ore cococ-lutill townid the-.: c'rlikst poisibk- resolution
by tli. oard, butI raci oatinstilcnly it would uppcor flils Caimot be            or  ftls; issues
                                                                           occorrnplishcc
before late 1w/I.

 Inacditkl.nr, tlbvre isa cjsthir&cl p.-smsi1b lity
                                                 tll the ctcdisio,; of the Coord ct*y be oapp-Oclc
to thse Court ot Cloainm, amt Cc*,scvnsuerv  tly a final d          oy ro: b- wu:lC L'ntil IS~';3
or 1974. 12 /Air rotcc hasbidicco:cd it %iual no' provideta funds        re. Ihis conerucl VAMc-h
will -xcced Iiv~custiaatcd co:fitoct proe as tOe Al i orcc interprc.s tills
                                                                                    cc.,.t·c'.
LI.der  thesu mr'nciticlns, Ilth Air Force fv'rdir.j wcuildI at bst be c',!:cquoteovl'
                                                                                            unfil
near the coid of tbiL )-ccr. I I ~cvcr,     In orec. Ica co:uuplto the rt.eŽivCty of Li ciircror;
and m-doled i'un cturinjj 19/I and W77 an crdlitonul $435 nmllioa *to
                                                                                 $!,3 r..flhi
will be rccruird to cover jrc-rluclkrn cxfienJilurms. locLiccce ccnano:
                                                                                proviW?- such
fundinj oaid L'elycs Ithe Air Force !.hotIc cC' jCnCClb . nCcessur." f~nis
                                                             0                    ptcllicrj Ith
outlcoin of Ihe li-ii o:ion. II.is could be accc,-irplW)rcI by an (ilencn;u.cnt
controct whjich ccntr'! co:Jmin cpprocriiOte rofquartrdl for both panickC:           to thv curuent
                                                                               Wih FIeC-.Oct
to prcservmh,, thlicr rfiohts in li:;jitlon.

Sh2.pyordI Claimns

At flth present tirnio, the Locidaccl 5lapluifldinag cnd Constrilction Ccmnpoa)n
                                                                                     bzs pmrfe.nr:d,
or Is pftrtominni, a:) 9 conrecufs for st.vceral clus,-c;s of new ship;. Mre th.un W1Y5 roilion
of contwoctlu!l adjustmcr.A cloimns hav. breen pu::nitecd to the2 NoIvy to cie:e
                                                                                      As c.f
Decembcnr 29, 1S69, amonints cxpenc%-d Ly Lor.lveed onatheses cluirts
                                                                             &YcitcJ $101 mnill Gc;
ondaroc cxv'ctvcl to -eintiuiO a rotc of $3 lo S millio:n per monnh.
bove been u                                                                    lifi·i claitsr
                    cc niccrat ko for fnony rmcntlis with provisionalci prre.res o" ,.i'y $14
                    cicier
million raaee to ce.           -.




We believe tile solution to this pro'.   i li-s n n immed'i. ft mi:c
                                          .                          cre:e in prc.'i:,o'!l
poymerdts to oo cmi~ctc:   of $S5 uiill.       VA ui.dc:s'cmd the DFp:%:,fre:t cftt. NI'vy
plans to se: IIth rtojer;ty of thes_.Eciuiris evr;.:f the: last three mom:hcCf 1f O
                                                                                ];c/"




                                              29
APPENDIX I
    Page 4

  1he I Icniva 411i. DwidtP'-CA::O                                                                14a1c1   2, 1970


   $hc,".W Ilui"atl IhI, ;':'Yricrt of hl1c. b:It1ie.0 of ilIc. etmot-ts cuw Locld:h'          SMds;,,uih::inq
    l:,cICC.;:s~tuc~ii'nl Cc:;,;w..y by t!:. c*.c c! tis
                                                       tI;m.y       :r. ·        I. -tI.'Lc'nye &cf y in t'
        N.,t'           !'CI)l(t
                        serel.    all oChjiIiC-.-II (.    C-'Ji ` P.~ov.i,.lpyel              woud b
   rcu'Jircci. Imecli:ety inicrc-c-min'j Froirsi         -aI psit-rdts IC'$E5 rnillick-n              sub-
                                    1
   Sicl:;oIlly cvaI-. lh.. (in:cicin   L-.;can el tII S!Vio*'wuilcinj Com:eny on,;,'rtn on:p1wiid
   wVtt:Il t'*jc? the c'noh tior, c. the 1)' 1052 old I.PD ckiss -61hys noo., in r..ocoss. In
  .u~l t tkc
           i,    ci;ronqw'crt ccon L, nmcck-              w;iII not '-pr- the riUhl1 of c;;h- c'hc;     I.o;lh
   Suiijlucl~i;al c'zI: Co:v:trueiio:a Coriqj':.ny or the Nkivy with rL. ipci to noCoi k'ion cir*.'
         . ~·I..
       It...           Cof Iw
                           lc.t3 clocm..
  Al-I-56A, Ph'has      III

  On       i.y 19, 1%9, Illh Army Cor:rycctino Officr imiLccl O finacl c!:.ci;ion Ioriiinclin:
  this kttcr       confro:? fr- dd-cilt. Loe!"::1'r-'s crp;eolflcu1 ihis clocitic-n W.s mruca to tb-
  ASM.CA oi MIty 22, 1S969, cmd'i Lvc't L-c-t,'ec' (ved tle Army are proctcc-rve in vco:.ec'neo
  vuiih I.r· I-:s C4! IL*                     I., is widi.cly th:'. the F           .ill  I.Cjr thiNcc ? bdfore
                                                                                    ic'.a;ci
  riiccc      on
               a,-1 I;c't Cfigil~ctl
                             ci           c:2cln CC:f Ii * rani"oe  Lrnc1r' thc first cvai rcrof 19S1. A' co
   Ilic ,r,-I('         1'., tc'¶c't
                                 0 cc*'., inct.rrc.lby Loc',lhecd                pio'h cnclh sA!'sezvuentl to I'm1
                                                                                 pior
   Co.':rcc 0n,. O,.Iict *-is e::cisior) cfflc;in to c CIco:         iro,¶I-aC;Iy'ric
                                                                                tc                         o tP tche
   Cc rcrcliinn o:fic i's C!.- ision 1!.t. Air'. I d m                   I~ro~ c:s pny0crt co .m:.ialO to
                                                                 n-Cd p'c.
   $f'.3 .Fr milion!1. V/c' I.i,'c rc'cclOC un cu.rc',;t-nt vwIth tic Army Il;hs'hr                v.lci     thcs~
   pro:!ci S::yi"ntrlt      s r~icxy L'. r:ieAoi;cct by ivs pentom, a c!-e.-cocn by             I'
                                                                                                AiS.     .A. 1o%-I-ove;r,
   ew- int ::        co!l        . c 1S'7I
                                        I     , owo icv:,- t.' l we -     rac oot.t      I        iw I S Io
   rcqc'rinr a lutcllC',-I! psalicilpt-Ifoc. t I ocAiK( Cf SC.,n                    60 to $1,51t lir'n %vhjt'llh
   mo>l)' L inrnircsifi 'I' Iloc neccssily of I 1:).lent by IcCd-icrd tCo sLoc-.C:%rc.c:Ic.s or
   cickii:;.ioa c:niourl-S.
                   II               Voe stL-::owt tO,-t. thNArmy incrccme thu c~mco'r;ot cfr                 s'
   pcyi·:~cnris to a i,.llo'r et       oi S45?,' f tcu .LC4-' iiicurrcd, ornd cw.linuC %'-Clo
   until .iso!u:ion of Ir1 toser I-y the                   I of Ce:otlct t.yIlsor I iz Cc:rt c.' Clcir..
   Iihe snwc cq·cr-oncmrt v-t:'er 'olirch Lu:cl-h-cct is cm:rently rc ?, 1bo:j Otct $53. -r illioro
   0; prc,-irms p-tcr:er·s cc..ld       I pjt!y to tl: sc! cvd:!Miconot pc'-visionil F,')mcrlts.



                    rrc'Pu
  TLc: L.c!'o: Iecd Pcrf    .l C                t: prorpul! ivn s'/-tcm sribcc:n ( tdC- to thle C- r~i-3
                                               t".
  Ccon-cpany vndctzr it'         contract v.': 'l t11IAir Force for DDI t.L' of t'ic S?.w t Reor-;c
  Ailcoc?~: M7fe . (G.;M-69A).         Ole                           LCCo. r'ecp'urlicr, CooTpon)
                                                     erc.,c 19.I9 Locbiced
  andl 1e. rFniro~l CoC<-,my prcr:'ntcmd Ci Cc-rvdrc-ct Acouwtnivngr, Claim t.o thbeI~~~~~~~~~~~~~
                                                                                         Air force tin.%r
  Con'rcoct AF 3:4(61:',- 15'li:     in thc- c~c'.:.t of SI-0 rmillion. At Ot'i p'(ui!F li;-le,
  Loccd    ,c ; c. .Ol :"o Cc '. p"'y is cc-.? u;Omnp   isiprrforiirr~ce. of itss .4 c::?fc     C.:
   ikcs incu, cItd Cols 1 .xcit       M"i   .i                intC:c-s: Lc'tlIu    $16.9 i,,Ul
                                                                                            F,-       rcc IvCcf
  to (:I: Ci. Cc,? afLi.c! pcdcrn:.oncc%c-*i ;!.        1970 i; cIxp cC'( c to oC,
                                                                                CdtIe tI :n $15 nJillOre.
  N~..tia:;:iomis of il.~. ilrc'.,c0in'.L         in cur cl.;iali cre curient!'/ bcit:. scJ!i? jointly
  hy I            N:e.I.,r
                      Nrro'!Ui:SICc:;.:-,y c-rc P:ir'r wibt;h Oa- Air Force. It is po..hle
  tlh:. .':; O.; ci! of th:            w.'ill I': cc, :i- . .r..o'.jcct1 of on ASIPCA cast i:n I'.C n.:...




                                                           30
                                                                                        APPENDIX I
                                                                                            Page 5


i'c lloncro.lo Davik! I       ord                                                   /ar:ch 2, It,'

fey, monli;. VWo     bllcivo Ihat a pvt;!iono:l I<'',r1enl lo i.oct;lIcecl Pr iuli;c, Cc.:;..ln)'
of $25 mill;n           4
            :      !,ICul  Ie o',lltoriztdl unmt:r lthl C:c.inl pr;nie c.ohllrccl pcna!ir. fir.csl
reso!ul;on cf the issues. As is liae caoe    .:ilh 11i,
                                                      t AIl-5A
                                                          I          cnc' Ie C-S p:o=:.:-.,
suialoblo (trra 'je;nelnls prcokcltih1 lb rgl:::
                                              :    of. I IpuiCi
                                                           .th        . ouJc: be itcl,..

In suirdnnoy, In the ab;^ncw oT pro:npl nr Go:ico:cl s-t:lllrnchts lhro is c cri:iccl
nced for intcrin, finoncilj to overl ihl.;puirmcnt of co.tinl:dl ptrron.norcc. W'C
urgen:ly solicit tIlh asis'encci of Ihb Dcp.rll:cirt of I[?)rens. in pro.vdihg such
finoncinD.

                                                Very Iruiy yours,

                                                I.OCIKHEED AIRCM.SFT CO.:PO?T.-'I



                                                D. J. Iugjhod                  .'
                                                Choirnion of tho Do:id




                                                     31
APPENDIX II


                                      SECTION 504

                                PUBLIC lAW 91-441
                                  OCAOBER 7, 1970

           ' SE. 504. (a) Of the total amount authorized to be nppropriated by
          this Act for the procurement of the C-5A nireraft. $2l00.f00,0(0 of
          :;chll mount may nolt he olligated or expended u:til fter the expirr-
          tion of 30 daysv fmo the date upln which the Secretary of Dtefens.
          submits to the Committees on Armed Senrvies of tle Senate and the
          House of Represellttives a plinn for the expenditure of sueh $2Io,-
          000,000. In no *vent may all or any part of such $2flt000,000 be ob-
          ligtted or esxlendedexeept in aceo'rdan e with such plan.
             (b) The S2_00.0O,000 referred to in subeection (a) of this section,
          following the submission of a plan ptursurnt to such slh's*tion, may
          be expended only for the reasonable ani allocable direct a d indirect
          costs incurred Ihy the prime contractor under a contract enterld it.
          witl the UInited States to carry out the C-5A aircraft program. No
          part of such amount may be used for-
                   (1) direct cost of any other contract or activity ..f the prime
                contractor;
                   (2) prmfit on any materials. supplies, or services which are .ild
                or transferred between any division, subsidiary, or affiliate of the
                prime contractor under the common control of the prime con.
                tractor and surh division, sulidiaRrY, or affiliate:
                   (3) bid and proposal costs, indeplendent research ;and develop-
                ment costs, and the cost of other similar unsplns.ored teehnical
                effort: or
                   ;4) depreciation and nmortirationl cois on property, plant, or
                equipment.
         Any of the costs referred to in the pre!eding       rsentenre whlich mwind
         otherwise be allocnble to any work funded Ibv sulch $2tti0.0,0 may
         not be allocated to other portions of the C-0i5 aircraft contract or to
         any other contract with the 1:nited States, but payllmets to C-iA Air-
         eraft subcontractors shall not Ihe subject to the restrictions referred
         to in such sentence.
             (c) Any ipavnlent fnroi siuch $20,t)0,000 shalll be mlie to tile Ilprime
            ontrainctor tlhrliti a slj ial Ionk aicounit from which sul'h coirutnltoir
         nmay withdinw finlls -;only afttr iI wlquest containing a detailed jisti-
         ftictioll of the atulloult nlnitted Inblbs   lwen sublmitted to indl approved
         by the contranting officer for tile U6ited States. All panmelnts made
          frln sucih sleciail lbatk account shiall be audited by the I efeise ('oiu-
         tract Audit A.ges'v of the l)epalitnent of D)efense and, ont a quarterlv
         liasis, by tIhe (;en.rnl Actrolllting O)ftice. tile ('oinpirolhl r (;enelll
         siall suilhmiti to the (tongre;, not mnore than thirty davy. after the
         close of ent h quarter a report. oil t lie a(l;t for silch quarter ierformedl
         by tlhe (;nieral .e Aurlmtim:! r Oflice pIrsulant to this subsection.
             (d) Tile restrictions altd controls provided for in this sectimo with
          t-slect to thefli    o,pt'ut3l) referred to ifn sulsections (a) nld (b) of
         thiii sct ion slhal I* in add it ioi to snc hkother restrirt ions ani'i controlsi
         as naiy I* prescriitd by the .eclretary of l)efenlse or tihe Sereitary of.
         the Air Force.




                                               32
                                                                                     APPENDIX III
                                                                                           Page 1
'/,;~ .....                           TI;L'-ElA',UTY SECl.T;.r.Y'    orF DL'eP'gSE
              ·   @~~~c~   -~~~~~'d           WAS11114al6C0 O. D,.   F0301



      loaorable 3.t,!,, Stennis
     Chairman, Sca.te Armed
        Services Committee
     United States Senate
     A'iashington, D. C. 20510

    Dear Mr. Chairman:

   As you k-nov'. on March Z; 1970,
                                        Mr. Danicl llaughton, 'Clhirman
   the Board of Lockheed Aircraft                                              of
                                      Corporation, submitted a lt ter
   Dcpartment of Defense citing his                                         to tlhe
                                        compi.ny's contra.clual and fintncial
   problems 'on four major (dcfensc
                                       programs: Navy shipbuilding, the
  SRAM Missile Motor, thc Cheyenne
                                            helicopter, and the C-5A. Mr.
   Haughton's letter asscrtced that
                                     "the unprecedetl<!ed dollar m-.gnitude"'
  of the claims and disputes in which
                                           these progr;ians were tL)o:i involved
  would "make it financially impossible
                                              for Lochidecd to complete per-
  formancc of thecse programs if
                                    vwe n usl await the outcjunel   of ltitation
  before rtcciving further financing
                                         from 'the Dc)part.sen;t of 1D:1fcn£ec."
  Mr. Itaughton emphasized the urgent
                                             need for a cettlemcnt, or for som'.e
  viable alternative to our procedure
                                          of requiring a contractor to c¢ontinue
  performance with its own financing
                                          during resIolution of d.isputed matter;s.
  Immediately upon receiving' this
                                      letter, the Department of Dcfcnsc
 took; an intensive independent determination                                  undcr-
                                                   of the nature and mnagnitk:de
 of the managerial and financial
                                    problems
 letter. Each of the military departments presented by Mr. Ilaughton's
                                                 undertook to negotiate settle-
 ments of their individual programs.
                                             My staff compiled and analyzed
 data relating to tlhe total corporate
                                         entity, including corporate financial
 fo:ecaLts prepared by Locldecd
                                     at our request and avdited by the
 Contract Audit Agency. It was                                               Dcfelse
                                   necessary to dotermine the financial
 viability of the corporation and
                                   to examine
 credi't to nmeet the company's obligations. the availability of cornmcrchizl

Of utmost importance was our necd to assure the continued
                                                                availabilit
of weapons sysltlens urgently needed
                                     for our nalional security. Scver'al
programs for which LIocl;!ccd Aircraft
                                         Corpiorltio.i is a. cont;-:ctor wi.i;
the Deparlment of Defense ar' pairlicul
                                        arly critical to the nalion's dc r.
                                                                                                    .


                                                     33
  APPENDIX III
        Page 2
l'hcsc include (:he 1.0oiedonl mi.:;ilc system, the S-3A aircraft:, the
Choeyenne h'licoptcr, and the C..-A aircraft, ln addition, it clearly is
in tile v'tal natlioll defense inttcerst that tile Navy ships currently being
built under contract with the corporation be continmed to completion.

The time has now come when we must move promptly toward a settle-
ment of Lcckhcbed-DoD contract disputes at minimum cost to the U. S.
Government and with minimum impact on third parties such as Lockheed
employees, supplier , subcontractors and their employees.

It is my responsibility as Dcputy Sccretary of Defense to seek and to find
a solution. I have learned over the years that prolonged procrastination
in the face of difficult problems.; an unsatisfactory stance that too oft:en
brings not solutions but added problems. Nothing is to be gained by
wishing that these probclms wlhich arcse in the ),astwould go away;
instead we must face present facts aind move on to future needs. I
therefore wish to present to you, as I promised to do, nmy plan to re-
solve thesc disputes.

To briefly re.cap, the defense contracts .whicll have contributed to Lock-
heedts financial problem we:cre cxeculcd beforc this administration took
office. The C-5A contract was awarded to Loc;heed in October 1965.
The supljlcriiental a'greemcnt to the contract, which con'nitted funds
for .3 ;tdi¢l;mna.l ;iirc.rafl ;ndcl wh'lich is claimcd lIy LJockheedd to have
cxorcised an option for 57 aircraft, was enteredl into during the 1tst
wveek of thle previous admlinistration. It is the principal dispute over
the C-SA contract.

The contract for devclopoment of the AH-56A (Chcyenne) was awarded by
the Army to Loclhhecd iri March 1966. It containced an option for pro..
duction quantities which was execrcised in7 January 1968.

The contract: for the SRAMI missile developmnent was, awarded to Boeing
in November 1966, with Lockhiced participating as the subcontractor
for tile roclkct motor.

The nine Navy ship contracts out of which Lockliceed's claims arose
wcrC award:d to Lochheed from 1961 through 1965.

Shortly after taking office in Janlary 1969, Secretary Laird and I
became  aware of the difficultics being encountcrc:. on these prograrns.




                                    34
                                                                       APPENDIX I II
                                                                             Page 3

In fact, tleh probl]ens we found ii ctscec:t.cio   wvith
                                                    w;i't.] these    r;cls led
to re-cxamlination of and chll;nles ill L]th vic!>apons aqqtisit'ion pirocess to
bring both technical and cost prolile:ns under belikc control.

We re-evaluated operational requiremelnt     s and loo;:ed at the C-56A cost
growth in view of our budgetary constraiits and decided not to cxtend
that prograi- beyond the 81 aircraft on orderr. 1ccause of unresolved
tcchnical problems and a general fa;ilurc to make progress;, we ma]dc
the decision to terminate the Chcycmnne :,roductiunr contract for defautlt.
On the SRAMd, we responde.d to tc-chlical and cosl plrollelms inl develop-
ment by not exercising our option for prodluctioin and by continuing the
emphasis on testing and developmenc      ':.

Since last March we have been wor:king on a virt'Fally daily basis on
resolution of these Locldeed claii;ls and dis.poulcs. N',merou. l discuss;ions
also h. 'c bcen held witL, tfie banking comimninity on fulure fiJw-:cing .c:eclds.
of tihe corporation.

Our review established thUa normal proccedures for resolving, those
dispu!tes would recluire an cxtLcndcd period of time fo'r whic:b lockhled .
'would have insufficient cash            nl.md inc1d:qlutce conlniercial crccdit to finance
the continued operation of vital dtefense prog. ailis. We al]o found that
wvit';Caut l]: - :o.v;zion c, a-':':i:- : -1.    f'rl: by !1" T-'.;::tsecnt of     f.I:e
and itJhout continued bank sulpprti, banilru'llcy c,f the Lockileed Cooricraionl
was and is inevitable. It was then nccessary to detexrnine whlethcr
banklruptcy and corporate reorganii7,aticlon under    le-BInkruptcy Act wvas
or was not in the intercst of natiolnal defense. We futnd that wlhile such
banklruptcy proceedings        v'uhlld, if institiuted,   prin-arily apply to Lock;heed,
th:at comrnpany's operations are so cntwijcd with many other conlpanics
which also contribute to our naLiona] defense effort that it was necessary
for us to consider the chain rea:ction Up)Oll otllcr clomparnie  s wel.    Blased
on extensive discussions with banl-ers and other dcfensde cotractors, 1
have concluded that the conscque.c!dcs of Lockrhcd banlkruptcy at this time
would be so far-reac:lling tllat several other clcfcnsc suppliers; .,ould be
placed in such a precarious financial conditio that tlcheir cal;alility for
future operations would b1(:jeop. rdized.           Further, several senior mcnmlers
of the banking commniunity lave ,,:visse1 nc that. lnkrul)tc              of Locklc.d ;lo'
would cause themn to reassess th;eir credit algreciments with mlany other
comnpanies   lwhich supply ess;enhtia decfense equipmat.




                                            35
APPENDIX III
      Page 4
The extact ralnifications of a ]ail:kruiltcy proceoeding rcmain uncertain, but,
in my judgment, the pocntial consequcences are of such a grave nature tIlat
all reasconsable step. should be taken to avoid prceipitatinlt a bankliuptcy by
our actions on defensec progrUms.l     In tle event of Lockheed's bankruptcy,
the Departmrent   of Defcnse would   be faced with trubstantial uncertaintics
and risks about the degree to   which   several  key nkitional defense programs
would or could be continued. Decisions on suchl matters would be subject
to the discretion of the bankruptcy court, whlich would be required to tazke
into consideration the interests of all creditors of the corporation. Serious
delays would necessarily ensue. At a mini.num, it is almost certain that
an accolmncdation would have to be reached with the bankruptcy court to
arrange to continut performance of the C-SA contract, among others, and
1 see no way whiclh such an accomnmodation ,vould enable the Dcpartmcnt of
Defense to obtain the C-5A and other needed cquipmcnt at a cost,lowecr than
ulder the course I am rccomn-ie.nding.

Withl this baclkgroumnd on the dispultes an:d my judgment regarding bankruptcy,
I want to provide the Committee my 1plan.

I want to manak it quite clear in prcsclting this pi:-n tlhat, while we have had
acccss to extensive financial cdat.a prepared by Loclheecd and audited by the
DCAA, we have only recently rieceived Lochbhecdls current formantl fino1ical
sub:nittas. I'The plan I aln proposing, therefore, is continllent upan Joc:k-
hlced's being compleiely responsive to our continuing data .ciu-;c.. . s arid.c
our satisfactory analysis and audit of .he data submnitted.

                                                       .
I have coUcludCed that our normal, cst:ablisbed procctlue.s are ade(lUate to
resolve two of tlhe four issues.

On the S$.,AM, ior which Lockheed is a subcontractor,          the Air Force.throtug
its establishlcd procedures has. negotiated a settlelnente     with l.ocing (the primec
contractor).   Tweniity im-illion dollars   nas paid in full settlenment of thie $54
million claim which ]oeinzg subhmitted on behalf of Lol;:k,ced. This setlcl..
mcnt specifically provided that the entire .20 million would be applied to
increase the ceiling price: of Lockheed's subcontract. This problem can
therefore be considered resolved.

Ship claims of $46 million for work vnnder five completed contracts wev:cre
settled for $17. 9 milliohi in JJune of 1970. This settlement was reached
thlroulgh the cst:iblihced 1},rrclcirutrcs for ncgotiating slip claiinms. The
remnaining, claniss, totaling $1 59. 8 million have ).c:en time sul)jcct of
int)clsive ncgctiations bttwccn thle Nlsvy and LTocl.eld. To settlc] thesc




                                      36
                                                                        APPENDIX III
                                                                              Page 5
claimrs,   IIt.l Navy has offrcled J,r'c::lleced :58 Irillii.,:. I aw       lhperu1l Ihl).t
a   ttllemcllnt of these claims can le rv acled.             SpeCl;til, a.ll'
                                                             C;Gll-erllly
negotiations rceardling tIhis program lhave alt,bucn conclueald. The
siiglc remalinin', issue is Lockled'.; accclt;:nc; or tllis offer.

The two rom;ainingl issues, therefore, are the Cheyrcme program for the
Army and t]he C-5A for the Air Forcec.

With regard to the Cheyenne progranl, it is imy decision tlh.-t it is in the
best int:cre:sit of thc governmcnt to conlilecte tc : dceveloprl'clt
                                                                  l efort so,
that we can deternine .lcwhlther tle Cheycnne will be a viable candidate
to provide close air support for thle Armly, and so that we can rcalize
some valuc from tlle investment we have already mnade. The ceiling
price of thc exist:ing coirvict is aplpr o:;xnatcly $95 mnillion, of whicii
about. $,O9 i)flii.<in has ir.l.l   dy been (lislburscd by the'Army.          In an
attlcml!t to com;plete tlhc dtevcl¢ppmcnt prctg ral,          Loc.hcecd lasts expoended
to dlatc sul:itautially more thllan the c:li-iI          price an(l1 ablout. $100 million
more thian it ]1Sr. bcen rcinlmlursed. We beliOve 'that a realigned devel(opmcn't
pro,cram canl b1e com)p!:eed larglcly within ihle n:et year, but 'ie have con-
cluded t.l:t tI,: coin')'i,y hlcl' tyhe clcpacity to fil,: icc this ,proram to a
point of comlplction sati:fa.ctory for thle Arnmy to, detlermini      tOhe aircraft
sy.Ml.cm feasibility.

For this reason, wc propoe-c to convert the Cheyenne rcscarch and
developll'ctl contract to a cost rci mblurf;semnt formn cffecltive as of
Dccmnher Z9, 1 969,.     The de:signalion of thel effective d;ate is bas<!d on
an evaiuat.ii  of all llh relevant faclors bcaring    on thec progranm and
upon analyfsi      of Loclheccld's overall        financiaLl condition, as 'iown'by
data rccoix d from ILoclhcc:d to date. Under this arrangenent, the
Arimy will assumne   fuuticre costs oif the program aild will rcimlb\rse
Locl;l)ced for appi oxi.-atcly $25 Imlilli     il cost:, Vshlich have bccn incurred
on the development prloraml          since 1).ccclnmblr 29, 19(9.

The Chc)y.ennc production "lctter contract" whlich was executed by the
Army in January 1966, and tcrminated for deraullt inl May 1969, is now'
il tlhe early sltagcs of lili ration. Ioclho)eed' v cO:ts for this plhase of the
program app)ro::imnate $9'. million ag.;inst ilichll tlhey reccivcd $53. 8
million froim, t]lc Army inl progress paymai:ts pr:ior to dccfaill. Suppliers
and sll)c.olitrac!:olr for Olht Chey enle pJroldulcti n progranm have subJnil.tld
Settcllenent )rio)CSals in (!::ces.s c"f $4 mIl li)lon.




                                             37
 APPENDIX 11I
       Page 6

We have decic;
             ,1    to setl.c: tle Cheyenne production contraci by
authorizincg flwh Army to pay $36 million or tlhe actual amount of the
sel.l.lnellcIJt   or( the   c']ails   of unpaid suppliers and subcontracts under
this letter contract, wlhichevcr. is lesser. The settlement agreement
will ilclucle coaltrols and audit procedures to assure that any funds
actually paid will be used solely for tllis purpose. The Arm-; will
audit and monitor the Fettlemcnt of the clainms of suppliers and sub-
contractors before r-_jment. Lockllchd, pursuant to this settlement,
will have to agrce to withdraw from litigation their related claim now
before the Armed Services Board of Contract Appeals.

On t.he C--SA program I have, after tlhe most c¢.reful consideration of
all relevant factors, rarrowed the range !or resolution to two alternatives,

        i. One alternative is to reduce the number of peripheral
        issues in dispute by negotiation and to allow the core of the
        disagreemecnts to proceed through litigation. The litigation
        wvould be basically concer2ied, therefore, .with tl-e question
        of v.lether the Air Force exercised an optior for 81 airplanes
        or for 115 airplanes and the correFponding application of the
        repricing formula. The Air Force and Locl:heed, over several
         .'eeks of discussion, have concluded that the litigable disagrce-
        meiats \viould result in a financial range from approximately
        plus $25 million recovery by Lockheed against the United
        States to about $480 million liability or lorss by.Locklhecd.

       2,. The other alternative woiuld settle the entire dislpute by
       clilninating    all issues and iml,,..ing a fixed loss on Lockheed.
       In addlition, .such a settlement wo, Id preclude any performance
       incc;.tive fees, or profits on initial spares and on added work
       related to the scope of the contract which Lockhled otherwise
       might have earned.

Our analysis of Lockhleed's financial situation has led us to the conclusion
that after the Air Force has paid Lockhleed up to the Air Force's interpre-
tation of ceiling price, the comlpany will lack the funds or resources to
firnance continued prodtuction of the C.-5A program. Moreover, under
cithler alternative we mu-n:t achieve a worl;able cont:ractual arrangcnment




                                               38
                                                                             APPENDIX III
                                                                                   Page 7

whch will permllit tlm Ai Forre       o      a         c.ix' c role in I,;,':a!t:t;, J', ! ,,f 1he
program. A.lso, tind¢,r cither alt:crl tivc, if will h;e -:c¢e::::a;ry               for the
Air Force to pr'ovide ll11 the funds to co:nlplcte the C-SA prlv,; am.
(AlthlioulL, ',;tlc, :; t!,c
                          ': fir.:t. altfnlr ;u.
                                               ':qi
                                                ', i..          i,                 r tl,c
second alterlnative a portion woulldl- .-be rcpay:l.bh:. to ilthe Air Iorce          .
                                                                                         . ) l,
any event, .stil:l;:tionr under citllcr lhtcrnativc would inclt,cle a rcp:tynl:cent
provision and intrest chrargcs o'n the unpaicd l laInces, w;Ih an accel.,ration
clause in the evceit of iiitiatioii of bztllkrupt:cy.

A fixed loss sc:ttlctc.mnt i!ternativc wouild remove oncc and for all tle
contentions of both pa.-rtics. Such fi:;cd1 setl.c m)t         lo:s cwould col:si.;t
entircly of "allowalllc" costs, an'd %would    b)e tlbove ald in ;'ddition to
los:.cs due to ccrlai, cost.b inct, rrcd by the cort).tactor which ;arc: ici('jl)r
allowcal nor paid iby lue rgovcrnimclt. (Tiicse co::ts, rf(crl(wu to a:;
:UmllowabLle., " rare proje(:ct.d by Ilocl;      - to c:.:ced $;i0n m,;I. oM
                                                cd                               e (ion
this program. In; ak'(1it;on, p::¥'y:,.t!: i(' l.oc:l]'.c
                                                      ,      ' .ill .. :l,.iti
                                                                            c   o.1-cr..:::
a]iowall.c cost.i to ti!c c:tcnt S.;ch cost:: fa.1l in. .!,t: 3,'tfour II'lcEtl r:cal. -
gories listed in Section 504(b) of tIh 3DcP       rpf:nc.t of Deft:l1;c ]'roctlrcl:ncut
and Res.carch Authori,:ation .te,     1971 (P. l.. 9.:'!41). )

 in dctc 1ninill  the 0lo:.;ta' al:noul,t¢o.f t!c, fi::cd mss t1 a. : .1.,(,'1d b1 the
basis for the settleirnet of tile C;-5A ditsl.)I,           I tool: ;:.f;. rcle.n1::      ,,C    S
inlto con(sideration. AJlc;,g the factors cc,:.iclcred in ari;iv;g.                    a.t I.i::
figure werc: Ilic rang, of fina;lncal results which would restult from) tte
lit.iation, the apparcnt         i        I e leal      n'gn¢.wigts
                                                         re               of t    l:rtics
                                                                                   -c
the issuoes i. di:;!knte anld Loc!.Le-,d':; plcenltial ;,biliiy to rf:sp)lld to a
judllmcnt in favor of tle Uniteed l;tatcs,          lshovltl o.nc rceult.         . ft¢.r wci-,!,ing
all the many cOmpl)].x factort:,      a .$200 unillioni fiigure rcfprci:.cr:i:t my :st;i:
ju dl icnit. I 1do not expect it to meet w'.ilil tl;niioius      toU encdorsellcecit; :'ni,c
will thlil: it too low, ot¢huers too hitgh-- ,ut it rcl;;ain; rmy Lbeat iudIgllrcut
aft'r mont.h: of cona:iderat,;on of             is .ihllote .Wha;t
                                                                doub':    th m,-:ost coinpil:
manaiagclnent auid cntra;tctual displlte 1 or any of he'.'ibcil;plsc                   CvV.r Iavc
encouwitc reld.

Afier w:eigling both of these allorlativecs I lave conclurled that the fi::cd
loss sct-tlcemiet altcrnaivec is prcefcrablec. It l]is the aldvl):ut;e of fi l;;lity,
and would facilitate nman:lm emcin impiovcment.            tlhc renl;aiindcr of tIle
prograim. I reco[gnize the possibility      ta Lotl,c;1liecd       de;'
                                                                   declilec
                                                                        l    to :e;t(tl
for this fixcd loss aned p:refer litig:.tion.

As I inc;tioncl earlie r, l,ocl:heel's Il-e.7t fiinancia;l iallfl;,               tion   i:: Ic'ij "
comnpilc:l andl will le ;audited by I l. J)vfecnse C:ra.: ct: Aundtll                       . W. Wn.Ct¢c




                                              39
 APPENDIX III
       Page 8

have also anl;cti that the Gceneral Accou;nting Office review tUlis data with
us prior to thl, c:ecution of our decisions.

Tihe $?.00 million "contingency" fund , which we have requestiod to bce
authorized altd appropriated for FY 1971 for tile C-SA, will necessarily
be utilized to continue the production of the aircraft beginning in February,
and will be expancded in the context of the settlement outlined above.

We are aware that thc course of action which we propose to follow does
not guarantec that banlkruptcy of Lockhccd is precluded; nevcrtheless,
this course is, in our opinion, the necessary one based on the national
defense intercst. The uncertainty exists because overall financial
stability of Lolckheed is contingent not only on the financing of its defense
programs, but also on further financial support from the private sector
for its commercial programs, particularly the L-1011 airtus.

Our actions in settling tile disputes onl the four defense prolgrams will
ter.olvo contingent liabilitie<s of Lockhhced and,'wc hbose," thereby provide
a degree of ccrtalinty to thel overall fi:atrfcial af.:irs of J..ocklhced thl;d: will
permit tile b)anls to continuc to finn.cc the commercial progr;.r;r,           and
avoid banllrulp:.cy. I will continue to closely maon;:or thle filnancial anld
managemcnt ci:ttal:;on of loch;hed as these plans are irnplen-erted. It:
i.s also mny intc:,t to insure t.lat all possible controls arc cxerciso&[ by
Defcllne over our financial 7ela.LiJnshlips with Lockhecd to assure thie
satisfactory p rformance on D)cense programs and the protection of
Defense interc:sts,.

This sumnnlarizes the alternatives and the action we inlte.nd to take to
resolvc these very difficult contractual matters. The final details of
the settlemennt and the documents necessary to implement tils plk1n are
now Leing prepared, and will be completed by the end of January 1971.

I will bc availablle to revicew this plan in detail with your Commitl:cc at
your conveiicnce, and will be glad to have your views on tlhe alternatives.




                                              40rc




                                      40
                                                                           APPENDIX IV
                                                                                Page 1


6';i.                              Y1 4liEDEPUTY SECI;LTA.;Y OF DO.FFNSt
':'-       !;
         " n                                 WASsI·t4GTOI. I) C 21030


                                                                FEB 2 1971




        Honor ble John Stcrnis
        Chairman, Senate Armed
            Services Committec
        United Sty.tes Senate
        Washiugton, D.C. ;20510

        Dear Mtr. Chairman:

               This is in further response to your request for additional
                                                                                infornmar-ion
        in connection wi':h tl;e plan I described to yonl in rny lcter
                                                                          of Dccember 30,
        1970 for the rcso)utioa of the contract diplutles bltwcen
                                                                        the Departmcnt of
        Defclsc arnd the Loc.Kheed Aircrafl Corporation amn for
                                                                       the expcnditure
        of the $00) m'11i;n auil,-.:i i:zcd for a;ipropriation by I'ullic
                                                                           Law 91 -. 41l
        which is subject to t'!e provisions of section 504 1herein.

             I am enclosing iherewith additional ilforlna(tion conc(f rni:ng thec
                                                                                  dcttilcd
        procedures i.o be cneployed by the Department of Jic Air
                                                                   Force in making
        payments froln thosc: funds.

                If I can be of any further assistance,      plearsc let me hnow.

                                                    Sill g/        ''




        Einclo:;ure




                                              41
AJI'EJ''DIX 1;
       Page 2

                             FOCt Ol'l'llCAlJ. liSI, ONLY




         AlR lO(CE PROCElDU)RES FOI MAKING PAYMENT UNILlln
                        THE RESTRICTIONS OF
                   SECTION 50.1, IPUBLIC LAW 91-441


           The Air Force intends to initiate bligatilons from the $200 .illio.,
  contingcncy fund (hereinafter referred to as the "continge:ncy fuld") pro-
  vided for in Section 5041 approximately Mid-May 1')971 to provide expenditux
                                                                                 ·
  authority to allow paynments to be made for work called for by the C-SA
  rcestructured contract. 'It is anticilpated that by said Jate the estinmated
  Lockheed portion of the C-5A program included in the FiRial'Year 1971
  appropriation (other thant the contingency f';nd) arnc applicable prior year
  appr,:i.rti;tio: s will ha1ve cbecn made available for the current contract or
  tlh restructured contract. The procedures prescribed herein are in
  implementation of Section 5-04 and will apply to payments made fro:n the
  contingency fund and shall apply to any other payrr.ents mnade under the
  restructur¢ed C-SA contract with Lockheed from and after the date of
  initiation of payments from the contingency fund. The implementation
  of tlhec procedurcs will be acconplished by appr¢,priato provisions
  inclded in the restrLctured C-5A contract. Payments will be ma'e in
  aceordancte therewith.

         In order to insvre that the rcstrictions and limitations contained
  in Section 50s are comnpied with in respect to the contingency fund and
  to flutds hereafter mrnade available tb the C-5A restructured contract, the
  following actions will be taken:

        1. The contract will provide that no direct costs on any other
  contract or activity of the prime contractor wll be allowable costs under
  the C-5A restructured contract.

         Z. Thrl contract will provide that no profit on any materials,
  supplies, or services which are sold or transferretd betwecn any division,
  subsidliary, or affiliate of Lockheed unJer the con:-lon control of L.ockhled
  or suchi divirion. suh.;iidiary. or affiliate, will be an allowable co';t io
                                                                               be
  paid out of sa id cuntlilgency fund and fundls hereafter mnle available
                                                                             for
  paymelnt nlcder Ihe contract and buch disallowed profit will not be recouped
  u'tder any otl.ler contract with tlhe Govcrnmicnt.




                           FO1: OI''l(:IAL U.;i;l ONLY



                                        42
                                                                      APPENDIX IV
                                                                           Page 3
                            FOlt Ol'1:ICIAL. USI:T' O;LY




        3. The contract will also provide tl:at bid and proposal
                                                                    costs,
 indelpendcnt research andl .levelopmnent co:!., tile
                                                      costs of other sile.ilar
lan:ponsorcl   techllical uffortl, and deprecation and arnortizatinn
on property, pl;.nt, or equipment of Ihe contractor,                  costs
                                                         as dctcrmined by
negotiation betweea lihe contractor and the Gvernmnent
                                                            and which would
othervwise bC. allocable to work funded by said contingency
                                                               fund and by
funds made available hc reafter for payment runder
                                                       the contract, will not
b) allowed under that contract-a'td such disallowed
                                                        cost will not be
recouped under any o.her contract with the Coverrment.

       In order to acccmplish the actions called for by
                                                              subparagraph 3
above, speciel billing rates will be established which
                                                              will be lower than
the gencrally applicablc cat t rcimbursement rates.
                                                             These special
billing rates swill bl. dcesigned to exclude thle unallo',vable
                                                                costs specified
in subparagraph 3 abotve. The final negotialetd
                                                     ovcrhead rates; i.e.,
tlhose bascd on tht actual cos.ts for overhead for
                                                       1')71, will then be
adj.usted to reflect the exclusion o r the actual unreimbursable
re[erred to abovc. The contract will provide that                      costs
                                                          such unallowablt over-
head costs will bc ex;hledcd commecncing with the
                                                        obligation of the con-
tingency fund.

       4.   a. A Special Bank Account, as prescribed ly
will be established. This will be -a. agreemelnt               Scction 50-(c)
                                                     bcvween tile Air Force,
 Locklheed Aircraft Corporation and.the bank selected
                                                            to maintain tl:e
S!pecial Banh; Account. it will prescribe: (1) All
                                                       paync.n!s made l,vrsulant
to Section !;01 and from funds subsequently appropriated
                                                               shall be mnde ilito
the .S;pecial Bank Account; (Z) The Governnlnt
                                                     sha1ll have a lien u1.ron the
balalice of the accouint: (3) The lirni:aitions of
                                                   the ba):'f. liability in
connection w.ith th!: acc:uuI:; (4) The specific procedures
                                                                for vithldrawal
of [uncds fronl the accounl; and (5) The right of
                                                    the Governimint to inspect
tho bank's records of such accoutnt.

            b. InI order to make the Special Bank Account
                                                                 operative within
tile C-SA contract structure, ceriain new provisions
                                                            will be req',ircd in
the resCrIuctlred C-5A contracl. Thcsc proposed
                                                        provisions will provide
for (a) the c-tablis)illent of the account, ib) t1c
                                                     tise of the funds ill tIhe
Special lIanik Account. (c) tlOe metlhod of wiiltldrawal
                                                          of frinds from the
account, (d) thle (ovcrnnarlit's rilht to the bI;alance
                                                         in tile accomnt ill the
event cof batnkruptcy or other advcrse actions against
                                                            the contractor, and




                          rFO   Oi' 'lC:IAl.    USE ON:.Y


                                           43
*tPPENDIX IV
      Page 4

                            F OR OFF'JCIAL, USE ON LY



   ,e) the pre hihition ag!:tillt assigllncat of the contract to any other parties
   and subordination of any assignments previously made.

             C. The Special Batik Account will be established in a commercial
   banl;. Lochlhced will be asked to dcesignate a ban)l located in the Atlanta,.
   Georgia, ar -a as mut:ally agrod upon by the Contracting Officer for this
   purpose and the Spe,:ial Bank Accouit will be designated "Lockheed-Georgia
   Comlpany/Air Force $peccil 13ank Account." Piyments to Lockhleed will be
   processed as set fol tIl bolow:

             d. All requests.for payment will be asnt to the Administrative
  Contracting Of;ice (A.CO) for approval. The ACO will exclude costs which
  are held to be unallowable under thile limitations aInd restrictions specified
  in Section 504 prior to approval and forwarding to the Disbursing Officer
  designated to make p)ayments under the contract.

             e. The Disbursing Officer will set up a separate record to.
  control a11 expenditures from the contingency fur.d. Upon receipt of the
  approved paymcnt request and after detcrmining that it is a propo.r charge,.
  the Disbursing Officer will issUe a check in payneant of the an;uur.t rnde
  to the order of "Lorklhe-ld-Georgia Company/Air rorce Spccial )3.nk
  Account." This check will then be deposited in the Special Blank Accuunt.

               I. Withdrawals from the Special lank Account will require tl:h
   siglnature of both the contractor and the Contracting Officer. Section 504
   requires that these funds "be expended only for the reasonable asid allocable
  direct and indirect costs incurred by the prime contractor... to carry out
  the C-5A aircraft p:rogram." To satisfy this recuirenteit and the provisions
  of tile rectrueturcd contract. it wvill be necessary for locl;heed to subsnmi a
  detailcd justification to the ACO to support requc.sts for withdrna.al of funris
  from thic Special :Banlt Account. W:ithdrawals from the Special ?Bank Accoisnt
  will nori,:ally be rel;ltod to vouc hers which fornmed the basis for t!,e deposit
  in the Special l.ankl Account. Lockhbeeds detailed justification will usually
  be suhnmi:cd weekly in the formi of a listing of pnyrolln, Mnaterial rcccips/t
  invoices uandother c.rts vhich have been incurred in support of the C-SA
  program, and whiclh are due for paynment during a reasonable periol of tilnm.
  After review of thir. ju.ltific.tio:n, the ACO will (letermine the amoqu.t of
  funds which may iproprly be released fronm the Special Blank Account to
  Locl:hkcdl's   gencrnal bank account. The contractor will theni pay its creditors
  and en1lmplyees by *raw.ing checks on its general ha;nk account.




                            FOIR OF'4ICIAI, :t';l' ON!,'



                                       44
                                                                 APPENDIi, IV
                                                                      Page 5
                          FOR OI rrCIAL USEI ONLY




            g. Sect:on 504(c) provides that "all paymenits made
                                                                     fromn such
 bank account sh;;ll Ie audited biy the Dlefeose Contract
                                                           Audlit Agency... "
and the terms of the restructured contr-.ct will
                                                   likewise so require
during the perforrnance thcrr-of. To avoid any
                                                  uwCue delays in releasinjg
cash from the Spe-ial 1uank Account, DCAA audits
                                                       will gI:ecrally be con-
ducted after the ACO has approved the voucher
                                                   or detailed justification
for withdrawal of funils. The ACO may request
                                                    a DCAA audit prior to
approval cf any l.aymcnt if he believes a significart
                                                        portion of the voucher
submission is questio.lable. If any audit adjustments
                                                          are indicated, cost
offsets will be made -by the ACO agp.inst current
                                                    or future vouchers or
requcsts for withdrawals submitted by Lockheed.

           h. Section 504(c) provides that "'il payments
                                                            made from such
Special flank Account slhall he atudited... on a
                                                 quarterly bsis,  by the
General Accounting Cffice. The Comptroller
                                                 General shall submit to the
Congress not more than thirty days after the
                                                closc of each quarter a
report on the audi,' or such quarter performed
                                                  by the General Accounting
Office pursuant to thle subsection.'   The Air Force will cooperate fully
with the GAO in the accomplitin-ment of its audit.




                         FOli OI'JICIAI, U;;l: )ONI.Y



                                    4S
 APPENDIX V


                 STATUS OF FUNDINC FOR C-5A AIRCRAFT PROGRAM




                                               Repro-
                     Program       Appro-     gramming Current
                       year        priated    (+ or -) proram            Obligated   Evpended
                               ~-
                                ----                     (millions)
 RDT&E
                      1971     S     li.6 $   -              $    11.6       2.3     $
                      19,70                                                                0.2
                                     34.2     -                   34.2      30.9          24.0
                      1969          128.0    -2.0                126.0     124.8
                      1968                                                               120.7
                                    305.2   +36.7                341.9     341.5         340.9
                      1967          258.2   +20.4                278.6     277.8
                      1966                                                               277.8
                                    157.0    +1.9                158.9     158.7         154.7
                      1965             7.0  +35.0                 42.0      42.0
                      1964                                                                42.0
                                     -      +10.0                 10.0      10.0
     Total                          901.2     +1C2.O         1,003.2       988.0         970.3
Procurement (In-
  cluding i;;itial
  spares)
                      1971          609.2    -                   609.2     400.2
                      1970                                                               350.9
                                    865.8.   -                   865.8     577.8         576.0
                      1969          625.9    -                   625.9     604.4
                      1968                                                               538.9
                                    492.8  +16.6                 509.4     504.3         482.6
                      1967          415.3 -20.1                  395.2     392.7         393.1
     Total                     3,009.0            -3.5       3,005.5     2,579.4     2,341.5
Const. uctior.
                     1971             1.3                         1.3
                     1970             9.4                         9.4        7.5
                     1969                                                                  .8
                                       .1                          .1         .1           .1
                     1968             6.8          -              6.8        6.8          6.8
    Total                           17.6     17.6  -   14.4       7.7
    T tal               $927.8
                         2       $ 98.5 5$1.263 S3581.8      S    5
Note: The total amount shown as expended is
                                            as of December 31, 1970.




                                             46
                                                                      APPENDIX VI
                                                                           Page 1
                              Public Law 85-804
                                (as amended)
                              50 U.S.C. 1431 - 1435

 Be it enacted b the Senate and House of Representatives of the United
States of America in Congress assembled, That the President may authorize
ay department or agency of the Glovernment which exercises functions
in -connection with the national defense, tctin g In accordance -4th
  regulations prescribed by the President fo       the   0e   tcti     of
Oovernment- to enterIrnto contracts or          to amendments        r mad!&ca      Ions
o: contrkates ier-etofore or reftire        :act and to I- akev
                                                             iance          yment
 akings perfora,     amendmea, or modiiatouf             ct    whenever
he deems that such action would facilitate the natienal defense. The
authority conferred by this section shall not be utilized to obligate
the United States in an amount in excess of $50,000 vithout approval
by an o-ticial at or above the level of an Assistant Secretanr or his
 eputy, or -an-aista he         or his depu - oment-
                                                 sueb deput                 or
agency, or by a Contract Adjustment Board established therein.
     SEC. 2. Nothing in this Act shk1! be construed to constitute
authorization hereunder for--

           (a) the use of the cost-plus-a-percentage-of-cost system of
       contracting;
          (b) any contract in violation of existing law relating to
       limitation of profits;
          (c) the negotiation of purchases of or contracts for
       property or services required by'law to be procured by forial
       advertising and competitive bidding;
          (d) the waiver of ary bid, payment, performance, or other
       bond required by law;
          (e) the amendment of a contract negotiated under section
       2304(a)(15), title 10, United States Code, Or under section
        3M2(c)(13) of the Federal Property end Administrative Services
       Act of 1949, as amended (63 Stat. 377,394), to increase the
       contract price to an anount higher than the lowest reJected
       bid of any responsible bidder; or
           (f) the formalization of an informal conltment, unless it
        is found that at the time the commitment was made it was
        impracticable to use normal procurement procedures.
     SEC. 3 (a) All actions under the authority of this Act shall be
made a matter of public record uLer regulations prescribed by the
President and when deemed by him not to be detrimental to the national
security.
     (iT)All conatrens entered into, amended, or modified pursuant to
authority contain.d in this Act shall in-.lude a clause to the effect
tant the Comptroller General of the United States or any of his duly
authorized rcpresentatives snall, until the expiration of three years




                                       47
APPENDfIX VI
     Page 2

after final payment, have access to and the ri*gt to examine any
directly pertinent books, documents, papers, and records of the
contractor or any of his subcontractors engaged in the performance
of and involving transactions related to such contracts or sub-
contracts. Under regulations to be prescribed by the President,
however, such clauses may be omitted fro eontrac-Gs with foreign
contractors or foreign subcontractors if the agency head determines,
with the concurrence of the Coptrollr General of the Mbitot States.
or his designee, that the omission i3ll mr-e the bslt ntelsests of
the United StateS. Howeor, the concurrce of thbe
General of the aited States or his d     nee Is not reqired r the
cmission of such clause -
     (1) where the. contracto or     c     t    a al forseign o£erm-
  ment or agency thereof or is precluded by the lmat of the country
  involved from making its books, documetst palers, or records
  available for examination; and
     (2) iboere the agency hea determine,
                                   fe      after taking into ac
  count the price and avai'ability cf the property or servi&ces frc
  United States sources, that the lplic interest would be best
  served by the omission of the clause.
If the clause is omitted based on a determination under clause (2),
a written report shall be furnished to the Congress.
     SEC. I (a) Every department and agency acting under authority of
this Act shall, by Miarch 15 of each year, report to Congress all such
actions taken by that department or agency during the preceding calendar
year. With respect to actions which involve actual or potential cost
to the United States in excess of $50,000, the report shall --
          (1) name the contractor;
           2) state the actual cost or estimated potential cost involved;
           3) describe the property or services involved; and
           4) state further the circumstances 3ustifying the action taken.
      With res; -:. to (1), (2), (3), and (M), above, and under regulations
 prescribed by the President, there may be omitted any information the
·disclosure of wi,.ch would be detrimental to the national security.
     (b) The C'e.k of the House and the Secretary of the Senate shall
cause to be putAished in the Congressional Record all reports submitted
pursuant to thib section.
     SEC. 5. 1.ts Act shall be effective only durlng a national emergency
declared by uom rtess or the President and for six months after the
termination thereof or until such earlier time as Congress, by concurrent
resolution, may designate."



                                  48
                                                           APPENDIX VII
                                                                   Page 1
                      Executive Order No. 1078?
               of Movember 14, 1958 (23 Fed. Reg. 8897)
                 As Amended by Executive Order 11051,-
                       dated September 27, 1962

  AUTiiORIZIIG AE'CICES OF T{E GOVER=TIT TO EXERCISE
 AUMORITY INJ COIC7OIN FtlIlH ITATIONtAL DEFENSE        CERTAIN CONRACTINm
                                                 F.NITIONS AND PRESCRNBING
 REGUIATIONS GOVE.1II;OG THE EXRCISE OF SUCH
      By virtue of the authority vested in meAUTHORITY
                                                by the act of Auust 28,
 1958, 72 Stat. 972, hereinafter called the act, and
 the.United States, and in view of the existing         as President of
                                               r tional        ergency
 declared by Proclamation No. 2914 of Decer-Ner 1 6 , 1950,
                                                            anda eerg
 ordered as follows:

                       Part I--Departmuent of Defense
      Under such regulations, which shall be
 practicable, as may be prescribed or approveduniform  to the extent
                                                by the Secretary of
 Defense:
      1. The Department of Defense is authorized, within
 the amounts appropriated end the contract                   the limits of
                                           authorization    provided
 to enter into contracts and into amendments or modifications        therefor,
heretofore or hereafter made, and to make advance                of contracts'
                                                    pa)ments thereon,
without regard to the provisions of law relating to
formance, amendment, or modification of contracts, the maki'ng, per-
 judcaent of the Secretary of Defense, the Secretary vhenever, in the
Secretary of the Navy, or the Secretary of the Air of the Army, the
                                                     Force, or the duly
authorized representative of any such:Secretary, the
will be facilitated thereby.                            national defense
      2. The Secretaries of Defense, the amynr, the navy,
Air Force, respectively, may exercise the authority          and the
and, in their discretion and by their direction,       herein  conferred
                                                   =my
authority to any.other military or civilian officers    delegate  such
their respective dcpartments,                           or officials of
                              and may confer upon
civilian officers or officials the power to make any such military or
of such authority within their respective commandsfurther delegations
Provided, that the authority herein conferred shall or organizations:
obligate the Unitcd States in an amount in excess not be utilized to
                                                    of $50,000 without
approval by an official at or above the level
                                                of an Assistant Secretary
or his Deputy, or by a departmental Contract Adjustment
       3. The contracts hereby authorized to be made shallioard.
agreements of all kinds (vhe.her in .he form of letters      include
purchase orders, or otherwise) for all types and kinds    of  intent,
services necessary, appropriate, or convenient           of  property or
or for the invention, development, or productionfor the national defense,
                                                   of,
cerninu,  any such Property or services, including, butornot
                                                          research con-
aircraft, mrissiles, buildings, vessels, a.ms, armennt,       limited to,
                                                          equirpment or


                                   49
APPENDIX VII
      Page 2

supplies of any kind, or any'po.-tion thereof, including planr, spare
parts and equipmen. therefor, materialc, supplies, facilities, utilities,,
machincry, machine tools, and any other equipmen' wd.ithout any restriction
of any k~in as to type, character, lacion, or fonm.
      4. The Depart.nt, of Defense may by agreement modify or amend or
settle claims under contracts heretofore or hereafter made, may make
advance payments upon such contracts of any portion of the contract
price, and may enter into agreements with contractors or 'bLigcors
modifying or releasing accrued obligations of any sort, includiug accrued
liquidated damages or liability under surety or other bonds. 4Amezrments
or modifications of contracts my be with or without consideration and
may be utli zed to aeeomplish-the Lae thinga as -anyoriginaIeontract
  ould have
          -acec   p      tisbe
                             hereunder -rresp-eet-weof the tie=or cu -
stances of the making, or the form, of the contract aecnded or modified,
or of the amending or modifying contract, and irrempective of rights
which my have accrued under the contract or the amerments or modifica-
tions thereof.
      5. Proper records of al actions taken under the authority of the
act shall be maintained within the Department of Defense. The Secretaries
of Defense, the Army, the Javy, and the Air Force shall make such records
available for public inspection except to the extent that they, or their
duly authorized representatives, may respectively deem the disclosure
of autromation therein to be detrimental to the national security.
      6. The Department of Defense shall, by 1l.rch 15 of each year,
report to the Congrcss all actions taken within that departtment under
the authority of the act during the preceding calendar year. With
respect to actions which involve actual or potential cost to the United
States in excess of $50,000, the report shall (except as the disclosure
of such information may be deemed to be detrimental to the national
security)--
         a) name the contractor;
         b state the actual cost or estimated potential cost involved;
         c describe the property or services involved; and
        (d) state further the circumstances justifying the action taken.
      7. There shall be no discrimination in any act performed here-
under against any person on the groun4 of race, religion, color; or
national origin, and all contracts entered into, amended, or modified
hereunder shall contain such nondiscrimination provision as otherwise
may be required by statue or Executive order.
      8. No claim against the United States arising under any purchase
or contract made under the authority of the act and this order shall
be assigncd except in accordance with the Assignment of Claims Act of
1940 (54 Stat. 1029), as amended.
      9. Advance payments shall be made hereu;der only upon obtaining
adequate security.
     10. Every contract entered into, amended, or modified pursuant to
this order shall contain a warranty by the contractor in substantially
the following terms:



                                50
                                                            APPENDIX VII
                                                                  Page 3
             The Contractor Warrants that no person or scleia agency has
       been employed or retained to solicit or secure this contract
                                                                          upon
       an agreement or undcrstanding for a co=3isslon, pcr-entar.e,
       brokerage, or contingent fee, except bona-f'de ernpoyees or bona-
       fide established co.mercial or sellin- agencies aintainec by
                                                                            the
       Contractor for the purpose of securing business. For breach
                                                                          or
       violation of this warranty the Government shall have the right
                                                                             to
       annul this contract without liability or, in its discretion,
                                                                          to
       deduct from the contract price or consideration, or otherwice
       recover, the full amount of such commission, percentage, brokerage,
       or contingent fee.
       11. All contracts entered into, amended, or modified pursuant
                                                                             to
   uthorty of:this oraer shall:iTnclude a lause to the effe.t that
                                                                          the
 Comptroller Jeneral of the United States or any of his dully authorized
 representatives      1hall, until the expiration of three years after final
 payment, have access to ami the right to examine eny directly
                                                                     pertinent
 books, documents, papers, and records of the contractor or any
                                                                      of his
 subcontractors engaeed in the perfom-.ance of, and involving transactions
 related to, such contracts or subcontracts.
       12. Nothing herein contained shall be construed to constitute
 authorization hereunder for--
          (a) the use of the cost-plus .a-percentage-of-cost system of
              contracting;
          (b) any contract .n violation of existing Lav relatin to
              limitation or profits or fees;
          (c) the negotiation of purchases of or contracts for property
              or services required by law to be procured by formal
              advertising and competitive bidding;
         (d) the waiver of any bid, payment, performance, or other bond
              required by law;
         (e) the amendment of a contract negotiated under section 2304(a)
              (15) of title   10 of the United States Code to increase the
              contract price to an amount higher than the lowest rejected
              bid of any responsible bidder; or
         (f) the formalization of an informal commitment, unless the
              Secretary of Defense, the Secretary of the Army, the Secretary
              of the Navy, or the Secretary of the Air Force, or the duly
              authorized representative of any such Secretary, finds that
              at the time the co=nitmcnt was made it u.s nipracticable to
              use nor-nl procurement procedures.
      13. The provisions of the JWalsh-Healey Act (49 Stat. 2036),
                                                                         as
amended, the Davic-Bacon Act (49 Stat. 1011), as amended, the
                                                                    Copeland
Act (48 Stat. 948), as amended, and the Eight Hour Law (37 Stat.
                                                                        137),
as amended, if otherwise applicable, shall apply to contracts
                                                                    rmade and
performed under the authority of this order.
     14.   Nothing herein contained shall prejudice anything heretofore
done under Executive Order JNo. 9001 of Decembocer 27, 191, or Executive
Order No. 10210 of February 2, 1951, or any amenedents or extensions
thereof, or the continuance in force of an action heretofore
                                                             taken
under those orders or any amendments or extensions thereof.


                                    SI
APPENDIX VII
      Page 4

     15. Nothinr hercin contained shall prejudice any other authority
which Wtc Dcxpart.nc:at of Defcnse may have to enter inzo, amend, or
modify contracts, and to make advance payments.
         Part II--Extension of Provisions of Paragraphs 1-14

      21. SubJect to the limitations and regulations contained in
paragraphs 1 to 14, inclusive, hereof, and under any rcgulations pro-
scribed by him in pursuance of the provisions of paragraph 22 hereof,
the head of each of the foloving-name-d agencies is authorized to per-
form or exercise as to his agency, independently of any Secretary
referred to in the said pararraphs 1 to i4, all the functions and
authority vesnted by those paragraphs in the Secretaries mentioned
therein:
       Department of the Treasury
       Department of the Interior
       Department of Agriculture
       Department of Commerce
        Department of Transportation
       Atomic Energy Comnnssion
       General Services Administration
       National Aeronautics and Space Administration
       Tennessee Valley Authority
        Government Printing Office
     22. The head of each a.ency named in para.raf21l hereof is
authorized to prcscribe reculations gov-ernin- the carrying out or the
functions rcd authority vested vith respect to his arency by the pro-
visions of pragrcph 21 hereof. Such reaulations shall, to the extent
practicablec be unifor- midth tht -egulations prescribed or approved by
the Secrctary of Defense under the provisions of Part I of this order.
     23. I;othinC cont:inci herein shall prcjudice any other authority
%hich any agency nw-.od in para-raph 21 hereof may have to enter into,
amend, or :odify ccntrae'ts ani to make advance paynents.
     24. :othing contained in this Part shal- constitute authoriza-
tion therctuncer for thn r_-.end-zent of a contract negotiated under
section 3"2(c)(14) of the Fedcral Property and AdMinistrative Services
Act of 1949 (63 stat. 394), as amended by section 2(b) of.the act of
August 28, 1953, 72 Stat. 966, to increase the contract price to an
amount hicr than the lowest rejected bid of any responsible bidder.
                                                   DWIGIT D.' EIS1.nlI0W.%0R"




                                   52
                                                                     APPENDIX VIII
                                                                            Page 1

              LOCICIIEED AIIICIZAFT CORl'OlATION'
                        SURANKC, CALIftrONIA       0IS03




                                                               January 5, 1971

The Honorable David Packard
Deputy Secretary of Defense
The Pentagon
Washington, D. C. 20301

Dear Mr. Packard:

I wish to acknowledge your letter of December 30, 1970, and the copy of your
letter to Senator Stennis, Chairman of the Senate Armed Services Committee.
Your proposed plan of action and comm.;nts have received careful study and
deliberation by our Board of Directors and management, and our response to
the elternotiv approaches is our considered judgment on these complex and
difficult matters.

While I agree with you that the time has come to move promptly tovward a
resolution of our disputes at minimum cost to the government and with minimum
impact on third parties, such as our employees and subcontractcrs, I would like
to think it is equally important to seek a resolution that also is fuir to the more
than 55,000 Lockheed shareholders.

We recognize that Lockheed's first responsibility is one we must share with the
Deportment of Defense -- to establish contractual and working agreements that
will help assure the continued delivery of defense articles that are important to
our notion's security. We accept unreservedly our part of this responsibility
and will cooperate fully with the DoD in finalizing such agreements.

Now I should like to respond to the various proposals as you have stated them
In your letter to Senator Stennis. I want to assure you that we int nd to carry
out to successful completion all the programs in which Lockheed is engaged --
not only those for the government but also those for our commercial customers.
We will continue to be responsive to your data requirements. And we will
continue working closely with you to improve all aspects of our programs.

We agree that the $20 million settlement we hove negotiated with Boeing
resolves the claim Boeing submitted to the Air rcrce on our behalf for the
short range attack missile (SRAM) motor program.




               LOOK    ro   tOCKHLF        FORt   LEtAOIRSHI


                                      53
APPENDIX VIII
          Page 2


    The Honorable David Packard
                                                                         January 5, 1971

    With reference to ship construction claims, we are not
                                                             prepared to accept the Navy
    offer of Sf[ million. It is our belief, however, that if
                                                             both parties continue to pursue
    negotiation. diligently a mutually acceptable solution con
                                                                 be achieved within a
    reasonrable period of time.

   We accept your proposals regarding the AH-56A Cheyenne
                                                             development and production
   contracts. In consideration of the Department of Defense
                                                            offer we will withdraw from
   lltigation our claim regardingthe Cheyenne production
                                                          controct, ollthugh w constder
   that we hove a sound case before the Armed Services Board
                                                             of Contract Appeals
   challenging the default cancellation of that contract.

   With regard to the C-SA you offered us two alternatives.
                                                                  One was to reduce the
   number of peripherol issues in dispute by negotiaotion and
                                                                to'allow tSte core of the
   disagreements to proceed through litigation. The other
                                                              alternative waso settle the
   entire dispute by eliminating all issues and imposing a
                                                            fixed loss on Lockheed.
   Although you are familiar with the position we have tlken
   should like to cutline it briefly once again so that you     on the C-5A contract, I
                                                            will appreciate the reasoning
   behind our choice between the proposed alternatives.

  We entered into the C-SA program in 1965, fully aware
  first controct under the total package procurement concept. that It was the government's
                                                                   At that time we recognized
  the vwor:tlwhile objective of putting the total programn --
                                                              development, testing, and
  several yecrs of production -- under controct at one time.

  This fixed price type contract was deliberately constructed
  designed to prevent so-called windfall profits and provide with a repricing formula
                                                                protection against catastrophic
  losses. This repricing formula w.v; a necessary element
                                                            of the otherwise inflexible
  nature of this new long temo total package procurement plan. The Air Force included
  the repricing formula in the contract it offered to all three
                                                                of the final competitors.
  We would not have signed the contract without this essential
                                                                  provision or some
  comparable protection.

  The repricing clcuse has been misunderstood
 even been falsely labeled as a "boil-out' or and  in some cases distorted. It has
                                               "get well" clause. Such charges ignore
 the purpose of the controct as discussed obove -- that
                                                         of providing for a single long
 term procurement and attempting to proviae some sort
                                                        of protection to both the
 government and the contractor.

 You hove aclnowledged that your department
 controct asn fc!fective procurement method. has   now discarded the ototl package
                                                Our experience under this form of
 procurement on the C-5A proro.rT. would certainly Iced
                                                         us to agree that it properly
 should hevce been obandoned. Unfortunately, Lockhedcc
                                                          has been left witl the
 consequnces of a procuirerrcnt system that has proved to
                                                          be comnpletcly unwvorkable.




                                          54
                                                                         APPENDIX VIII
                                                                                Page 3


The Honorable David rockord                                         '   January 5, 1971


As finalized in December 1965 the C-5A contract was for on initial quantity of 58
aircraft with options for additional quantities. It was bilaterally amended in January
1969 by Supplemental Agreement No. 235 to exercise the option for 57 Production
Run B aircraft, making it a contract for 115 aircraft. Supplemental Agreement No.
235 mode other changes in the contract including establishing target and ceiling
prices for 115 aircraft. This oamendment brought the repricing formula into play,
Congress wao notified by the DoD of the option exercise.

In November 1969 the Air Force unilaterally issued Change Order No. 521 in which
It said it was placing a "final order" for 23 ;ilrcraft of the 57 Production Run Baircraft
which Supp;icmntal Agreement No. 235 had already ordered by exercise of the opt, .n.
Choage Ordcr No. 521 eveni purported to unilaterally establish new prices for an 81
aircraft contract.

In our judgment the Air Force action in issuing Chon,. Order No. 521 constituted
a portial terrinotion of thle contract for the convenience of the governrment. As a
unilateral oct the chonge orc.rr could not reduce th7 amount of the contract price
adjustment to which Locl;lhc.d would be entitled under the repricing clause,. We are
convinced our cose is a sound one based both on Iclal interprntOtion of the contract
and on considera:ions of equity. We believe adjudicc ion of the case should ultimately
permit Lockhced to substantially recover its costs expended ,on th- ~,cram -- with
even the possibility of a profit for our nearly eight years of major e aort.

Despite subs.quent critici:-n, we believe the C-SA pro3ram has been managed well.
With the benefit of hindsirit, there rno) be a nuar.cer ao things we end the Air Force
might have Ilandled more refcclively on the C-5A program. Costs, i;npre:sive
becouse of tl:e mc¢.itudc of Ihe prozra;:, have been a difficult probl.-n. A sig-
nificont por:ion of the co:l gro-lh v/os occasioned by tnhe inflcxibility of contract
terms and interpretntion tlhat prevented specification and cost traodc-offs.

Neither porty to thle contract expocied the massive escolation of the war in Soulheast
Asia. Neither of us forecast the unc.ntrolled infletio. end rising costs that look
place in 1%.5 and subse'lucnt years. We hoad not onticip;:ed thli s're: of ccr'rnerciol
transport orders h1 -:t aofected the corospoce industry in those years, turning a buyer's
markl     . a seller's marlt:ct aOs
                                 '   e sought suppliers and subcontractors, and
restricting thile availability of engineers and other trained people.

Our product is a guod one, neec"dI for the security of this country. We are
providino the goverri'ent vwithl an aircraft that -- almost uniquely aomcng aircraft
weapon systems -- is meeting evc 'y one of its original performance cg:rantees
and is demonstroting exceptional copcabilities in its initial year of operation.




                                           55
APPEiDIX VIII
       Page 4
   The Honorable David Packard                                         Jonary 5, 1971.

    In dctermining cur'rcsponse tu your proposed alternatives for resolution of the C-5A
   disputes v:e have token irto consideration all the aforementioned factors. High
   among the f.-ctors ccnsid-red were the soundness of our legal position with respect
   to the C-5A contract, the inequity of our being required to accept a $200 million
   fixed loss to resolve all outstanding legal issues, and the responsibility we owe to
   out company and our shareholders.

   We understand your view that the fixed loss settlement alternative is preferable since
   it has the advantage cffinolity and permits program continuation in a more favorable
   contractua! environment. We do not consider, however, that under the circumsltnces
   of our C-5A dispute, Lockheed can accept a compromise which entails such an
   excessive and unwarranted penalty to Lockheed as S200 million. We must therefore
   decline to settle for a fixed loss of $203 mill:on, and we elect to proceed with
   litigation in accordance with the basic guidelines posed in the first alternotive in
   your leoiter. We ore confident we con arrive at a satisfactory agreement with the
   Air Force regarding the issues to be involved in the litigation and the conduct of the
   litigation so as to minimize its impact on day-to-day operation of tZhe prozram. The
   moajor issues remaining in litigation would include the dispute regarding option exerci?-
   and the related applicotion of the repricing formula but would not be limited to the.
   singlc issue within the financial range mentioned in your letter.

   You laid particular stress upon the impact that your proposals might ..,ve upon Lockheed's
   financial status. It should be pointed out that we ore in the process of restructurinZ oJr
   finoncial plan with our lcndinm benks. W/e believe we will be successful in ccncluding
   such arrnncm.-nnts. In this connection your comment to Senator Stennis that "under
   either alternative, it will be necessary for the Air Force to provid: all the funds to
   complete the C-5A proram" and that "in any event, stipulations under either
   alternotive would inclucr a r:pJyment provision and interest charges on the unpaid
   baolanccs" vill ploy anii important role. It therefore becomes imperaotive that an
   undcrs:andir.3 b. arrived at prcnptly on the provisions for such Foyments, to or from
   Loc:lhced, depending on the outcome of the litigation. We sholl continue to work with
   your office to completl    thcse f.rovisions.

   We opprecatle the tho;culhriress with which you hove stated your position and the
   reasons for it. I hovo tried to be eqvclly thorough in outlining the reasons behind
   our decisicn to chrose the allernative of litigation of the C-5A issues.

  We shlore your desire to finl;i/e details of your plan of action by the end of January.
  We slor d ready to tla,. e w;ih your representatives en an expcditld schedule to resolve
  the rcmainmirr. d:aoils in arrivirg. ot final solutions that may best and cquilcbly :erve
  oll inercsts.

                                                          Sincerely,




                                                          D. J. Iluu.?h:on
                                                          Cholirman of the Board

                                             56
                                                              APPENDIX IX
                                                                   Page 1

                          THE DEPUTY SECRETARY OF DEFENSE
g;I'-T,~..!/, B!                WASHINGTON. . C.Z0o01



                                                            January 27, 1971
                                            C
  Mr. D. J. Haughton                              p
  Chairman of the Board                                 y
  Lockheed Aircraft Corporation
  Burbank, California 91503

 Dear Mr. Haughton:

         Your letter of January 5, 1971 relating to the methods of resolving
 the disputes between Lockheed and the Department of Defense on the Ship
 procurements, and the AH-56 (CHEYENNE) and C-5A programs has been
 carefully reviewed and considered.

          You indicated that Lockheed had made a decision to litigate the dis-
 pute on the C-5A prograrr, which is the right of Lockheed. You also
  ind-.ated that Lockheed could not agree to limit the litigation to the single
 issue of the option exercise and the related application c! the repricing
 formula, as I had contemnplated in posing possible alternatives for resolu-
 tion of the dispute in my letter of December 30, 1970 to the Chairmen of
 the Armed Services Committees of the Senate and House of Representatives.

        Since receipt of your letter, considerable consideration has been
given to the course of action which you propose. I have found that there
is no precedent in the Department of Defense for advancing funds beyond
those specified in a contract during the course of litigation between the
contracting parties. After very careful evaluation of all related factors,
I have determined that under such circumstances, the Department of
Defense could not agree to payments to Lockheed in excess of the ceiling
on the contract during the litigation process, or to restructure the existing
contract. In addition, the prospect for litigation of long duration in which
the issues in litigation are not limited would make extremely difficult the
administration and management of the continuing program under a re-
structured contract. A restructured contract under such circumstances
would also potentially confuse and complicate the litigation.

        In the event you should decide to reconsider your decision to litigate,
it would be my intent to settle the entire C-5A program dispute on the basis
of Lockheed accepting a fixed loss of $200 million for the entire program.


                                     57
 APPENDIX IX
      Page 2

                                                   C
                                                       0
                                                           Y
 The fixed loss would consist entirely of "allowable" costs, and would be
 above and in addition to certain costs incurred by Lockheed which are
 neither allowed nor paid by the Government. Under this arrangement,
tlhe existing contract would be restructured to a cost type contract. The
 restructured contract would, of course, exclude payment for those four
 categories of costs listed in section 504(b) of the Department of Defense
Procurement and Research Authorization Act, 1971 (P.-L. 91-441) from
the point at which payme'nts to Lockheed are commenced to be paid from
the last $200 million appropriated for the program in fiscal year 1971.
Such categories of costs would also be excluded throughout the remainder
of the restru,:tured contract. It wzuld further provide for repayment by
Lockheed to the United States of that amount paid by the Air Force for
allowable costs which is in excess of the amount of such costs less the
$200 million. This repayment would begin on January 1, 1974. Terms
of repayment would be in line with our previous discussions, that is, the
greater of $10 mrllion or 10/o of net profits before taxes per year, with
interest at the prime rate ani with repayments to be adjusted upward in
the event of payment of dividends by Lockheed. In the event 'f ba.;";ruptcy,
the unpaid balance would become immediately payable. Thf repayment
would also be secured by a lien to the Department of the Air Force on the
Lockheed Marietta Plant.

       This proposal is based or. the assumption, of course, tlat the banks
and Lockheed proceed to execute and carry out the latest financing plan
which Lockheed and the banks have under discussion.

       Should Lockheed elect to reconsider and accept this fixed loss
settlement offer on the C-5A program, we would then be prepared to
proceed with the resolution of the CHEYENNE program as outlined in
my letterof December 30, 1970 to ihe Chairmen of the Armed Services
Committees, of which you have a copy. Resolution of the dispute on the
Ship procurements would be left to normal procedures for resolution.

       Should you desire to review the details of the restructured contract
which my offer contemplates fo- the C-5A program, we will be pleased to
make it available.

                                      Sincerely,

                                       /s/   David Packard

                                 58
                                                                                                        APPENDIX X
                                                                                                            Page 1

                              LCCI;Ei1:rD            AII-CIA.J'T      ;COUt 1'JORATION
                                          tUPtAN,.       CALlroRa.^     Ot.,O3



                                                                                                   Fctruwry 1, 1971
  Th), !.!r.orra3c I.vi. Pckie;;nr
  liJbl;a,';    ecettry c.Cf  kietfLe                                                  C
  Theu }e.   n;on
  Wat'ihinaton, D.C. t0"03                                                                 0
                                                                                               P
  De'ttr Yz.                                                                                       Y
               Pckrrc.:

  After careful           ,.tudy of Y     .cvr
                                           lettcr of Jrvuaryn 27, 1971, c LaccOpt ycur pro.sal
  th;  t7.c crtirce C-5A                    e.-i,ltr
                                             ir Ctc be settled on the bt:iu of .eur bsor
                                                                                          it;, a.
  los: of $200 r';ili/onl p1us          'i..llUo:ed costs.
 In r.,' 3vetcr Lo y.u datcd J,-uary 5, ;511,
                                                       w'e chose to liticLate th} a dis7.te attcr
 nheot.tat'...: t.he i:.sr'c=. 'iou have r:mow fo..Lid, hr.ever, thr?. the
  .itsno ;,rec.eent for fud-t:W                                              rfcrns Dcp-r;a:.zt
                                     a econtr;.et. c,:rr., litiUtatlon. Tnis deciclor
 rluctl us in th!) poT::Itio:                                                               thel
                                      ,erec
                                          V c:.r cx( rci:e oCr r4!1ht tJ lti:,;te cnl3,
 p:c.:'_!,'sI uoil,:r IWJcL:.ur   L!i:hcIc,                                                  if  e.
         .
                                                          ru
                                                    '.lJoln
                                                    ,'-,1        ol              a.1itzll 1%0o
                                                                                             *qr
 vthe CU-!A    o,'orri for the cr.oUaztz in. d.t,.t.

 We mridefit knowvi in n- .lcto.                            1
                                             to you orn t.rch     2, 1970, ar1, sub ccp.ntly, thai. L_-:;-
 hled %'uJ'a.     niot hzave the c         'p; i.il':: to Pand cor-peti(,n of th: C-5,:
  the fir Forcc I t:rprettiun cf t..e con r,r".                                         pP;orarL %Vl:der
                                                                   Your Junu..y 27 letter,      plt;cxin
  tie   hri,4l!n&, .!t,.rcrr.,      O.n , '-"u, in rc.rc-t closes the cr
 we 'r.
      I                                                                              to    .y w.a   i:i. :hc:,
               ;urr.     en -           ;          or curtrt racvics of the r.-ritt. of the C-iA cc.:',_.
 di'r.L;te.      :e ubi. lut'  rs:;       :. c:. your Ictt-Lr thnt o.n3.after we atccpt
 , Xlion Io..n cni th': C-".', -'                                                                 the .2C¢
                                     v;      yo; tcrhe; be pr.c-;.retd to r=ccac with recoluticn
 the C!hy.i.t, p-;rw¢:,: aacof.eCreCd in yc:r lcutcer                                                     of
                                                                   of Deccomer 30, 1l70.
 Under all of these circumstances, Lockheed really
                                                      has no choice.  Other alterna-
 tives would jeopardize the interests of our
                                                stockholders, eeployees, subcontractors
 and suppliers, airlines and other carercial
                                                 custmers, the banks who have supported
 ut, and who base additional credit availability
                                                   upon an agreement for resolving our
 disputed contracts -- and certainly the interests
 iern!r.ds upon Lockhecd for continued production cr of  the Government itself which
                                                      programs that you have described
 as 'purticularly critical to the nation's defense.

'Thorcforc :. rro::t rc.-t                        -' aCvcc.?t lyo*i req;: rC-nt that we nbo:rb -. $.0o)
                                                                                                              n-ll-..·i
  c;:Gr.          thhe C-         t:h.-: tL,   : -. ':idelinc- i. y'our Jc;nu-tl    2'1 lcrt. r. We   acce pt
                                -:;';: .t: . P.Lcr        3- .ctter *o:' r:eVlirZ the *;-56A h*.?.icc;tir the
  i:' ir,:c.         L;t *;,:. rr-r : ,.:      ;.::.u: ve r'..cL.e. t. t't.tttve     eIre'-lcnt %:;itl the hx- to
re, olv, the fjp¢,co;, t.rutio:l clai .-                     s . haivc Usir:.tLteJ.
 .'ijh r;.,-rd to ithe a'dltio:.ai c.'all :._ne.r                     of erert.in conts ic:lot.d by I1,1lic
],,
  .          .-I!.l,
                  '        e r.t:o,.2y is.: sit          th:t thle C-.'. cc-.t.-Lct(lf provislros chotl.li
 i      ,:      .... :.I.it; e.                                                                               not
                                    '       '.iJ::.e
                                             ,::i     rz.ci-rca by ';c statute.       W;, voild aprcj.-Le rll
O :.j''':lty to                  'isu:z                ~
                                           i.hi: -il. .!/:;crIll.59




                                                               59
APPENDIX X
    Page 2



Our     o'rce:set' if imr3)O-r.ol  it Ile
                                      tL firaiciny
                                            uo       plan tf     we
                                                                 v   uuad t-)' b 'r. now are
dder.,!n*:,~2& qiv A-.A- ttivxctoary.       Wis eCxroct to S iVi1S*C ftho agcr;· -at I'.LO Lionth.
)IOV01%or, you rrc.*r--3 ze thctt. oW, nblalty toavail ouwirglrel        or the totnCw cro-.it is
co03tJi.ri,-t Uaprj calr rucolvvir- our defcnsc contract Oacputen.

We ain-  j rcyvicek to) Leotlkith   your reprf-sentoativac at your cip-liest convenience te
)1ero1.ALit   I;~~L; dt·t.!tln or the !'estructurzcd C-5A conew* c1f ta,' to complete an ot"-or
rcrdninr~r     &t~tils i±n regtra      to t'mi   Chvytnno and cbll) krogrP.'no.
We   iopc,   fin--!ut;ttlemnt       of tseae diputcfscook be uchlc-ve         very quicU.   lie
bc'lie-ve ve Ihucv   len    suoceCstfcl' in not allowinu       the ditlptou to Intcirfero with

inil-rpunt to or-Jnr  iud~nl u&ocurity. We plcd.7o 14,0alccd'. CullO= coopvutio i
vorithig with the rilitary cervices to mact thic contiarking responisibilt4.

                                                                   Sincerely,

                                                                      /3/

                                                                   D. :.    Hfkwhtono
                                                                   Oairnoimi cC tho Board




                                                     60
                                                                                 APPENDIX :I
                                                                                      Page 1
                         LOCKHEBD AlRC'I1AI'1
                                              CORPORA1'TIO,
                                  BURBANK,.    CALIO.0IINA   1503




                                        February 17, 1971



  Mr, M.o W!etofku
               ;               Moger
  U. S. General Accounting Office
  Federal Building, Room 7068
  300 North Los Angeles Street
  Lao Angeles, Colifornia 90012

  Dear Mr. Wietstock:.

 During recent discussions, you
                                 requestod additional information
 management to curtail expenses                                   onacon       taken by Lockheed
                                  and minimize cash requirements.
 was made to special efforts directed                                 In particular, reference
                                      toward these objectivesby Lockheed
 recognition of the Impact of potential                                       mnoagenent in
 grams.                                 losses which rright accrue from
                                                                          th problem DoD pro-

 Attached is a brief summary of considerations
 part from special emphasis and attention       and actions of management
 to comment briefly on our normal          to cash conservation. However, which resulted in
                                   progrom to conrrol expenditures           I also would like
 This program, which has been utilized                              and cash requirements.
                                        for many years, is based
                                and includes a number of pecificon a formal managenant
 approach to financial planning
 ciol and monagemerit control.                                     activities providing finan-

 For example, short term operations
 only set forth goals for soles and are based on approved management budgets which not
                                     profits, but also include integrated
 fixed asset expenditures, overhead                                       management plans for
mon:e, in re:otionship to monodement   targets, independent R&D effort
                                                                         and cash flow. Perfor-
                                           budgots, is monitored en a continuing
planned mid-year and year-end                                                      basis with
                                   performance reviews at the corporate
ore held for consideration of capital                                      level. Specific reviews
development programs to assure           expenditure proposals and indepetndent
                                   integrated programs with maximum              research and
expenditure on a co:porote-wide
                                    basis. Management budgets and benefit and minimum
plemented at various orgonizotional                                    operating plnrs are wp-
                                        levels with targets and controls
focility utilization aor d her manogement                                for macnpower, overhead,
monogemert reviews of or.going                objectives. In addition to project
                                  programs, reviews of significant                and company
held at the corporate level.                                         and criticul programs are




                                          6t
    APPENDIX XI
         Page 2

     Mr. Milo Wietstock                                                      Februory 17, 1971




     For the longer term, management planning and control is implemented through development
     and consideration of formal long range plans, semi-annual 10 year monagement forecasts
     and 5 year financial forecasts. These nclude considertion of long term capitol oxpordi-
     ture plans and capability development programs.

    During 1969 and 1970, we have stressed thu Importance of our financial objectives to all
_   - veof              -and-
                   gemoen~     ;nnt-troumgr1I :irn
                           G~ It                                                ' n_                _
    This matter has been given close attention at senIot management meetings ond in "cre-
    spondence and association with operating organizations. On November 11, 1969,
    Mr. Houghton wrote to all members of supervision on the subject, "Monoging for Profits",
    emphasizing our environment, our responsibilities and the' need for a now spirit of involve-
    ment and achievement. Each of the Lockheed companies has followed with various spocicl
    programs and efforts -to increase prodwctivity to improve performanc*,       curirlI expeni-
    tures, to conserve cash - in essence, to do a better job in view of our environment.

     The attached summary of co.siderations and actions of management is not oll-inclusive
     However, it should provide insight into our efe. s to develop and maintain the most favor-
     able financial environment consistent with ti    iks confronting us and the resources oi4tl-
     able to us.

                                                          Sincerely,



                                                         A. Cori Kotchian
                                                          President



    Attachments




                                                62
                                                                             APPENDIX XI
                                                                                  Page 3
                     LOCKHEED AIRCRAFT CORPORATION



                             EFFORTS TO CURTAIL
                        EXPENDITURES ANID MINIMIZE
                            CASH REQUIREMENTS



The following is a brief summary of aclions taken throughout
Adrcraft Crorationto-ur                                            the Lockheed
                            l
                            -ml  xpc         s          m;        .esshqutremonts...
itIs not all-;nclusive. In particular, it. does not include                        =..
                                                             aoll those potential
actions (such os disposition of ssets, mergers, etc.)
by management, but determined not to be appropriateconsidered and explored
                                                         nor in the best intoerest
of stockholders, creditors, customers or employees.
                                                        This summary Is presented
in categories but not necessarily in order of importance.



FACILITIES

    Capital Expenditures

    Following a series of detailed management reviews,
                                                           1970 capital expendi-
    tures were budgeted at $100 million. This represented
    ment of $38 million after deducting funds provided       a net cash Invest-
                                                         through depreclotien,
    Through deferral, substitution and eliminotion of items,
    plans were reduced in all companies to the minimum         capital expcnditurkV
                                                           level consic:dered pru-
    dent for continuing operations. Actual expenditures
                                                           for the year were $63
    million wilth net cosh investment after depreciation
                                                         amounting to $7 million.
    Cash requirements were $31 million less than originally
                                                              planned.
    Sole of Assets

    In addition to the normal program of disposing of obsolete
                                                                 or nonproductive
    property, special studies wore mode in 1970 to consider
                                                               disposition of assets
    not required for current and oanticipcted operations
                                                         in the near tc.nm. Con-
   siderelion was given to moaket:obility - timeliness
                                                        cnd value as well as
   potential to generate cash. As an alternative,
                                                      consideration was given to
   requirements for security in support of borrowings.
                                                         Resulting act:ons include
   the disposition of unused land "t Nlewport Beach,
                                                        California, and the sole
   of a 50 yoear land lease in Polo Alto, California.
                                                        Maonaement will continue
   to review the possibilities of raising cash through
                                                       the sole of assets not recuired
   in operations.




                                        63
APPENDIX XI
     Page 4

    Efforts to Curtail Expenditures
    and Minimize Ca.:l RcqJiremonts




         Deactivation and Reduction of Facilities

        Special reviews of marginal facilities enab;ed several companies to deactl-
        vote or mothball their facilities in order to reduce operating costs. The
        Georgia Company's Dowsonville facility was shut down and efforts are under-
:: X--wytodisposeofanda -aal                               mpt a       delvoteds:       =::
        Oxnard base for the AH-56A Flight Test activity.

        Actions to reduce leased space have resulted in temiinating or subleasing
        218,000 square feet at the Georgia Company during 1970 with plans for an
        additional 172,000 in 1971. In January 1969, the Missiles and Space Company
        had 35 short term (five years or less) lease buildings wWtc- accounted-or
        approximately 26% of its Bay Area builoing space. Today, Missiles and Space
        Company has 19 such buildings accounting for 16% of Its Bay Area building
        space. This reduction of 16 buildings represents a 41% decrease in short tena
        leased space within two years, and a reduction from January 1969 of approxi-
        mately $700,000 in annual rental costs, plus approximately $600,000 in annual
        other operating costs.

        Improved Facility/Equipment Utilization

        To achieve further reductions in capital expenditures and conserve related
        cash, a corporate-wide effort was made to encourage the transfer of property
        between companies where better utilization will result. For example, the
        California Company acquired 220 items from other companies. In addition,
        eignt mach:ne tools and other equipment were rebuilt at a cost of $443,000.
        Replacement cost for equivalent items was $960,000, representing a cost
        avoidance of over S500,003.

    CONTRACT ADMINISTRATION

        Cash flow was significantly Improved during 1970 through efforts of the
        companies to negotiate tnmely contract modifications for faster collection
        of receivables. The cash pull-ahead ranged from two weeks to two years
        earlier than anticipated and involved over $60 million. Impartant examples
        include: (1) timely billing of performonce incentives on the Poseidon program;
         (2) weekly billing cycle to replace biweekly billings on certair classified
        contracts; (3) expedited settlement of disputed claims and final pricing of
        C-141 contracts at the Georgia Company, allowing collection of accrued
        price increases; (4) pursuit of provisional bill ng amendmen;t vn und..!inlttzed
        contract orders where woric was completed; (5) evaluation of negoti;tion and
        definitization of billing omendmunt 60 days .soner than novmal procedure for
        the P-3C program; (6) incremental billings .. '-3C contracts rothe. eltan one
        lump sum payment at conpletiorn; and (7)ecc-lerLion of Navy certlificatoru
           S-3A cantrci mnitltones.
                                            64
                                                                                APPENDIX XI
                                                                                     Pa~ge 5


  Etforts to Curtail Expenditures
  and Minimize Co , Requirements



  FINANCING THROUGH VENDORS

     Efforts to shift more of the financing
                                             to suppliers during 1970 have bean
     successfi,l. These include: (1) negotiation
    ment to suppliers for L-1011 equipment;          of extended or deferred p)-
    deferral of progress payments to             (2) ot the -Californi Compny,
                                       major suppliers until collections
    received under prime contracts; (3)                                   are
                                           instituting a policy not to accept
    pay for moterials ahead of schedule;                                       'ond
    arrangements wit:hvendors for a         and (4) estoblishirg mke-aond-hold
                                       variety of materials, reducing
    through larger runs and deferring                                   unit cost
                                        payment until rater:ols ore actually
                                                                                needed.
 ACCOUNTS RECEIVABLE
      Receivables at the end of 1970
                                     were down $45 million from year-ond
      and were $27 million under budget.                                      1969,
                                             The amount of receivables outstanding
      over three months declined by $44
                                          million during 1970. This was
     of actions token to negotiate improved                               the result
     billing procedures. For example,          billing modifications and improved
     special efforts were made to close at the Missiles and Space Company,
                                         completed contracts in 1969 and
     resulting in collection of approximotely                               1970
     nominal amounts in preceding years.        $3 million each year compared
                                                                                to
    mail checks directly to the ElectronicsAt the Electronics Company, customers
                                              Compony's bank which reduces
    collection cycle. In addition,                                             the
                                     precontractual
    from $20 rrillion at 'eoar-end 1969                expenditures were reduced
                                         to less than $3 million at year-end
    the lowest level in several years.                                        1970,
                                         To
    Improved during 1970 as the number summarize, the turnover of receivables
    declined to 42 days - 12 days less of days of cash receipts in net receivables
                                        than at December 1969.
INVENTORIES

    Actions were taken during the
                                   year to improve inventory management.
    Inventory turnover increased at
    Georgia Company, 1970 turnover  nearly all companies. For example,
                                       was 6.1 or 1.4 better than 1969, at the
    the Californio Company, material                                      and at
                                       inventory turnover improved from
    in 1969 to 6. 1 in 970. At the Missiles                               5.4 time:
                                              and Space Compony compony-
   owned inventories at year-end
                                   1970 represented the lowest year-end
   since 1962. JetStar fobrication
                                     and assembly was stopped in order balance
   Inventories from increasing and current                              to kecp
                                            inventory will be substontially
   liquidated before production is
                                   resumed.




                                        65
APPENDIX XI
     Page 6



    Efforts to Curtail Expenditures
    and Minimize Cash Requirements




    PERFORMANCE TO BUDGET

        Overhead Expense

       As a result of reductions in personnel and several separate monogemen;
       goals to reduce sopport costs, overhead spending was approximately
       $50 million less than the approved plan established at the beginning of
       1970. Favorable oa..,iheod expense performance was accomplished by
       strict attention to each individual account and as a result, nearly every
       account was under budget. In addition, all companies except two were
       under their budgeted overhead rates by impressive margins despite lowor
       than planned direct labor bases.

       Accounts with significant underruns were primarily labor related. In
       March, all companies dropped their indirect/direct. personne| ratios
       below budget and maintained this achievement throughout the year.
       Despite a decline in the total population of 13%, the indirect ratio
       declined from 1969 by 1.7 percentage points to 28.6% by yeor-end
       1970, the lowest ratio in the Corporation's history.

       New Business Expense (IR&ID/B&P)

       1970 new business expenditures were the lowest since 1966. Intensive
       management reviews cut initial allocations by $27 million. In addition,
       strict controls enforced at each compoanj held expenditures to $5 million
       below the revised budget and $4.5 million under the 1969 level.

   PERSONNEL REDUCTIONS

      Total personnel decreased from 97,600 at yenr-cnd 1:69 to 84,400 at
      year-end 1970, a total reduction of 13,200. While %'.ect     personnel
      declined 12%, indirect personnel were reduced by 17%. This was achieved
      with only minimal changes in the indirect work load and reflects the extreme
      measures taken to reduce overhead. The cost savings resulting from the
      reduced personnel level substantially contributed to the reduction of $31
      million in indirect labor, labor benefits and retirement plan costs from the
      1970 budgeted level. Reduced personnel also had a far reaching effect on
      occupancy and other administrative costs during 1970.




                                         66
                                                                   APPENDIX XI
                                                                        Page 7

L: .. s to Curtc.;. Expenditures
ano I/;nimize Cash Requirements




EMPLOYEE COMPENSATION

    Executive Compensation

    The Management Incentive Plan was eliminated for all companies for
    1969 and 1970, thereby reducing-rvnunerotion -to key-officials of the
    Corporation by approximately 25%1A in each of these years.

    Salary and \Wage Rates

    This area was subjected to special management attention and control in
    1970, and effective results were ochievcd despite continued increaoss
    In cost of living and the substential decline in the work force. For
    example, both the Georgia Company and the Missiles and Space Cort. ony
   set internal organization targets for such items as annucl salary rate
    increases, salary rates, hourly rates arnd salaory-hourly mix. Although
    1970 hourly pay increases were established by a previously negotictec
   Union-Company agreement, continual scrutiny and extra controls over
   hourly classification mix limited the rote increase. Salary rate increases
   were minimized as a result of concentrated management efforts to (1)
   release higher paid but loss effective employees, and (2) effect demotions.
   There were 1,372 demrotions of solory personnel at the Georgia Company
   with reduction in roles amounting to $1.8 million per year. Thore were
    1, 155 position audits conducted at the Missiles and Space Company
   resultir.g in over 300 downYgracin3s with an annual solary reduction of
   $233,030. In addition to oill other actions, salary merit or.d promotioncl
   increases were held to approximately 4.0% of the corparote-wide salaried
   payroll compared with 6.2% in 1969 and 6.7% in 1968.

   Overtine

   Overtime was closely scrutinized throughout the Corporation, with many
   companies streng:hening controls and effecting chonqes in salaried over-
   time payment policy. Salaried ovcrtimc payment was virtually eliminated
   at the Georgia Company except for extraordinary circumstances which
   resulted in the fourth euorter of 197) shLwing a 75°% reduction of premium
   costs at the Georgia Company compared to 1969.




                                   67
APPENDIX XI
     Page 8

    Efforts to Curtitl Expenditures
    and Minimize Cash Requirements




    MANAGEMENT

       Strict control over the manogecment/organizationol structure resulted in
       tIh improvement in t;e supervisory ratio (salaried supervisors and managers)
       at nearly oll companies during 1970 despite a 13% reduction in total
       employment. This was achieved through reorganizctlons and consol!dotions
       at each compoany, which also resulted In other reduced operating costs. At
       the Georgia Company, 691 monagement positions were eliminoted, a 27%
       reduction from 1969, leading to improvement in the supervisory ratio.
       Timely management actions enabled the Mssiles and Space Company to
       maintain its supervisory ratio at a relatively sta:oblelevel for the post three
       years despite a 35% decline in employment since 1967.

    PRODUCTIV.TY

       Although difficult to quantify in a meonirgful composite statistic, there
       is strong evidence that productivity throughout the Corporotion improved
       in 1970. For example, at the Georgia Compaony, where total osserrn!y
       and fabrication effort is by for the most significant port of their total 1970
       activitics, standard hours per 40-hour man improved by 33% in c;sserbly
       and 5% in foabriction. At the California Company, P-3C standard hours
       per O0-hour mon improved '5%.

       The Missiles and Space Company cstablished a 1970 objective to achieve a
        15% improvement in factors offectin 3 overall productivity and cost reduction.
       All managers were directed to take eisht specific steps to achieve the pro-
       ductivity improvement program. This objective was achieved to the satis-
       faction of the Missiles and Space Company President.

   DATA PP.OCESSI;.G EXPENSE

       A Task Force was cstabl;she6 in 1970, under the direction of a Corporate
       Executive Vice Prcsident, to determine future computer and EDP system.s
       activities throurl;out the Corporation in order to significaa.ly reduce this
       expense. A study was also mcde of centralizing computer operations for
       small Lock!.ecd co.nponics in Califorrnia. The results of these e.forts cre
       being evaluated. At thx M;ssiles and Space Company, there vwcs a net
       reduction of seven computers, resulting in cnnucli:ed savings of opproxi-
       mately $500,000 in equipment costs. Similar oc;iens in 1971 wv:'l result
       In dditionaol savings of r. ore hon $903, 0: onnuaolly. Thc Gcmogia Co.,;ory
       has developed plans to ulimrinoto euip.ment at on cnnurl sav;r.:s of S$32,0^3
       in 1971.




                                         68
                                                                        APPENDIX XI
                                                                             Page 9

Ei:      , Curtail Expenditurcs
and ..     ...ze Cash Requirements




COST REDUCTION PRiOGRAM

     The Corporation greatly intensified its cost reduction progrcm activities
     In 1970. Startin3 the year off, the highest dollar goal in the ten ycar
    history of the program was established by corporate marnager. ent. As a
    result of this goal and cotporm:t monagement direction, company mencga-
    ment attention cnd promotion of the cost reduction effort were r.oticcc!ly
    Increased. At the Georgia Companj, for example, a series of "cost
    reduction and casl conrservation" meetings were held during the year by
    the company President and his finnr.cial staff with several hundred mc.nacers
    and supervisors from all functional oroanizations. Largely due to this pu.suit
    by management in thnt one conpany alone, there was an increase of 60'.
    in the actual number of cost reduction actions taocen during 1970 compared
    to 1969, and dollar sovings reported in 1970 were 52'% lh,':cr than t:e
    year before.

    For the Corporation cs a whole, the dollar goal was mect and there wcs a
    35% increase in the nhw ber of actions implemented in 1970 co.mpaored to
    1969.

MANIAG E NT MEMOS

    Special Management Memos were issued during 1970 conveying top rmcr,c-c-
   mcnt's concern for controlling expendJitres and minimizin cash roquirc-ents.
                                                              3
    In Novcmber. 1969, D. J. Haughton issued a corporate-wide m.emo to all
   members of supervision on "Monaging for Profits". A. C. Kotchian cskclJ
   the company Presidents for their personal attention to cost reduction for
                                                                             19i 1.
   The Missiles and Space Comnpny President, S. W. Burriss, established for
   each of his organizations eight objectives to achieve increased productiv;ty
   in 1970. The Electronics Company President, G. L. Scelig, wrote to
                                                                           all
   members of supervision cbou: cost inprovements for 1970. The Coliforn;a
   Company President, C. S. S. cgner's report to Executive Vice President
   William R;io'e, on the Californio Company cash r,~ono.cment was also
                                                                          sent
   to the Missiles and Space Compcny and the Georgia Company for possible
   Implementation.




                                     69
APPENDIX XII
      Page 1

           LIST OF HFFICIALS RESPONSIBLE FOR THE

               .ADMINISTRATION OF ACTIVITIES

                  DISCUSSED IN THIS REPORT


                                        Tenure of office
                                        From          To

                   DEPARTMENT OF DEFENSE

SECRETARY OF DEFENSE:
    Melvin R. Laird                 Jan.     1969    Present
    Clark M. Clifford               Mar.     1968-   Jan. 1969
    Robert S. McNamara              Jan.     1961    Feb. 1968
ASSISTANT SECRETARY OF DEFENSE
  (INSTALLATIONS AND LOGISTICS):
     Barry J. Shillito              Jan.     1969    Present
     Thomas D. Morris               Sept.    1967    Jan. 1969
     Paul R. Ignatius               Dec.     1964    Aug. 1967
     Thomas D. Morris               Jan.     1961    Dec. 1964


                  DEPARTMENT OF THE ARMY

SFECRETARY OF THE ARMY:
     Stanley R. Resor               July     1965    Present
     Stephen Ailes                  Jan.     1964    July 1965
ASSISTANT SECRETARY OF DEFENSE
  (INSTALLATIONS AND LOGISTICS):
    J..Ronald Fox                   June     1969    Present
    Vincent P. Huggard (acting)     Mar.     1969    June 1969
    Dr. Robert A. Brooks            Oct.     1965    Feb. 1969
    Daniel i'.Luevano               July     1964    Oct. 1965
    A. Tyler Port (acting)          Mar.     1964    June 1964
    Paul R. Ignatius                May      1961    Feb. 1964




                          70
                                                            APPENDIX XII
                                                                  Page 2
                                                   Tenure of office

                           DEPARTMENT OFTIE NAVY
  SECRETARY OF THE NAVY:
      John H. Chafee                         Jan.
      Paul R. Ignatius                               1969    Present
                                             Aug.    1967    Jan. 1969
      Charles F. Baird (acting)              Aug.
      Robert H. B. Baldwin (acting)                  1967    Aug. 1967.
                                             July    1967    Aug. 1967
      Paul H. Nitze                          Nov.
      Fred Korth                                     1963    June 1967
                                             Jan.    1962    Nov. 1963
 ASSISTANT SECRETARY OF THE NAVY
   (INSTALLATIONS AND LOGISTICS):
     Frank Sanders                          Feb.
     Barry J. Shillito                               1969    Present
                                            Apr.     1968    Jan. 1969
     Vacant                                 Feb.
     Graeme C. Bannerman                             1968    Mar. 1968
                                            Feb.     1965    Feb. 1968
     Kenneth E. BeLieu                      Feb.     1961    Feb. 1965

                        DEPARTMENT OF THE AIR FORCE
SECRETARY OF THE AIR FORCE:
    Dr. Robert C. Seamans, Jr.              Feb.     1969   Present
    Dr. Harold Brown                        Oct.
    Eugene H. Zuckert                                1965   Jan. 1969
                                            Jan.     1961   Sept. 1965
ASSISTANT SECRETARY OF THE AIR
  FORCE (INSTALLATIONS AND LOGIS.
  TICS):
    Philip N. Uhittaker                     May     1969    Present
    Robert H. Charles                       Nov.    1963    Apr. 1969

                       DEFENSE CONTRACT AUDIT AGENCY
DIRECTOR:
    William B. Petty                       July     1965    Present



U.S. GAO Wash.. D.C.


                                     71