oversight

Financial Capability of Lockheed Aircraft Corporation To Produce C-5A Aircraft

Published by the Government Accountability Office on 1971-04-12.

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

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                                     1



                                                           ENCLOSURE
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                                                                  LM095589




Financial Capability Of
Lockheed Aircraft Corporation
To Produce MA Aircraft                                             8-169300




Department   of Defense




BYTHECOMPTROLLERGENERAL
OFTHE UNITED STATES



                                                            APRlLlZJ971
                        Contents
                                                           Page

CHAPTER

       1   INTRODUCTION                                      1

       2   C-5A AIRCRAFT PROGRAM                             4
               History                                       4
               Contract provisions                           5
               Current status                                8
               Public Law 85-804                            10
               Estimated additional  costs   to the Gov-
                  ernment                                   12
               Estimated program costs                      12

       3   DEPARTMENTOF DEFENSEEFFORTSTO RESOLVE
           LOCKHEED'SFINANCIAL PROBLEMS                     14

       4   GENERALACCOUNTINGOFFICE REVIEW OF FINAN-
           CIAL DATA SUBMITTED BY LOCKHEEDAIRCRAFT
           CORPORATION                                      18
               Work performed by the General Accounting
                 Office                                     19
       5   CONCLUSIONSAND RECOMMENDATIONS                   22
              Recommendations                               23

APPENDIX

       I   Letter dated March 2, 1970, from the chair-
             man of the board, 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, Senate Armed Services Committee           33
      APPENDIX                                                           Page
        IV     Letter dated February 2, 1971, from the
                 Deputy Secretary of Defense to the
                 Chairman, Senate Armed Services Commit-
                 tee with enclosure                                       41

             v   Status     of funding   for   C-5A aircraft   program    46

         VI      Public     Law 85-804                                   47

 1     VII       Executive Order 10789 as amended Septem-
                   ber 27, 1962                                          49

      VIII       Letter dated January 5, 1971, from the
  I                chairman of the board, Lockheed Aircraft
,-I                Corporation to the Deputy Secretary of
  i
                   Defense                                               53

         Ix      Letter dated January 27, 1971, 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-
                    istration  of activities    discussed in this
                    report                                               70
                                   ABBREVIATIONS
      DCAA       Defense    Contract Audit Agency
      DDT&E      design,    development,   test, and evaluation
      GAO        General    Accounting Office
      LMSC       Lockheed    Missiles   and Space Company
                                  CHAPTER1

                               INTRODUCTION

      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 examine into the financial                     capability   of
Lockheed ,,,_
          to.,,,manufacture
             _I.~-,-I~_,..
                        5,."_..-i'.'---' and deliver,  G-5A,.aircraft,

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

       Lockheed'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 G-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 G-5A aircraft    pro-
gram was the first    major weapon system on which the total

                                         1
package procurement    concept was used.              Additional     details  on
the C-5A aircraft   program are discussed              in chapter     2 of this
report.

         The Deputy Secretary       of Defense informed           the Congress
of the situation          and asked that it appropriate             an additional
$200 million         over the requested     appropriation         for the C-5A
aircraft      as an interim     measure to permit         Lockheed to con-
tinue     production     of the aircraft     during     fiscal      year 1971.
On October       7, 1970, the Congress,        under Public         Law 91-441,
authorized       to be appropriated      $200 million         for use as a con-
tingency      fund in the procurement        of C-5A aircraft           during
fiscal     year 1971, subject       to certain     restrictions         and con-
trols.       This amount was appropriated          by the Congress on
January      11, 1971, under Public       Law 91-668.

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

        The Department       of Defense considers        that the letters
dated December 30, 1970, from the Deputy Secretary                     of De-
fense to the Chairmen,           House   and Senate    Armed   Services     Com-
mittees,      which outlined      the Department's       proposals     for re-
solving     the difficulties        on Lockheed's     defense programs
met the requirement          of the law for submission         of a plan.
(See app. III.)           We have been advised      that as of April        1,
1971, the Department          of Defense has not executed           any con-
tractual      documents relating       to the restructured         C-5A air-
craft    contract.
       The detailed       procedures    to be employed by the Depart-
ment of the Air Force in implementing              the law were forwarded
to the Chairman of the Senate Armed Services                  Committee     on
February     2, 1971.       (See app. IV.>     We have reviewed         these
detailed     procedures      and they appeared      to be adequate;        how-
ever, we plan to examine as            to whether     these    procedures     re-
sult    in the fund being expended only for reasonable                  and al-
locable    costs    incurred     by the contractor       during    our audit
of payments made from the fund.

                                         2
      The law also prescribes         that   the fund cannot be used to
reimburse Lockheed for

      --costs   incurred      on any other    contract    or activity,

     --intercompany        profits,

     --bid and proposals costs, independent research and de-
        velopment costs, and the costs of other unsponsored
        technical efforts, or

     --depreciation  and amortization           costs    on property,
        plant, and equipment.

       The law requires      that all payments made from the
$200 million     appropriated     as an interim measure to permit
Lockheed to continue production         shall be audited by the De-
fense Contract Audit Agency.          The law also requires the Gen-
eral Accounting Office to audit payments 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
                             CHAPTER2

                      C-5A AIRCRAFT PROGRAM
        The C-5A aircraft    system is to provide a long-range
airlift    capability   at high subsonic speeds,     The aircraft
is designed to be capable of transporting        all equipment and
supplies assigned to combat and support units,         including
items which are too big for any other type of aircraft,             The
aircraft    is being acquired for use by the Military       Airlift
Command,

      Presented below is a brief description        of the history,
contractual   provisions, and current status       of the C-58 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   of tech-
nical and cost proposals for the manufacture of the system,
and some miscellaneous   items,  This plan was submitted to
the Department of Defense and approval was received to pro-
ceed with the program.

       The Air Force requested the Boeing Company, the Douglas
Aircraft   Corporation,   and the Lockheed Aircraft     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 this work.
Similar contracts     were awarded to General Electric      Company
and Pratt & Whitney Aircraft      Division,   United Aircraft    Cor-
poration,   to prepare proposals for the engines.

                                  4
        Incorporated       in these requests            for proposals         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,          together      with as much
support     as feasible,        be procured         under a single         contract
containing       a ceiling      price     as well as performance              commit-
ments.      This would permit           the Government          to make a choice
between competitors           for the development             and production        of
 the aircraft,         Hopefully,       cost savings         would be achieved
and the Government           would benefit          by acquiring        a reliable
product,      at the lowest        price,       through     competition       for a 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   Electric    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 lo-year   period of production.

       Although       the Air Force 1964 estimate             was based on 120
airplanes,       Lockheed'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 air-
planes     identified        as run B and 85 airplanes          identified       as
run C. The estimated              or target        price of the Lockheed con-
tract    for 115 airplanes           in DDI'&E, run A and run B, was
$1.945 billion.

       General  Electric  had a similar    contract     for the engines
and the target     price was $624 million     including     $165 million
for the run B option.      According    to the contracts,       the
prices   for the run C option     would be based on projections
of run B costs.




                                            5
       The target      prices      included    a lo-percent        profit      and the
contractors      were to share with the Government,                   by adjust-
ment to profit,        in any underrun         or overrun       of the target
cost e Each contract           included      a sharing     arrangement        whereby,
if actual     cost was less than target              cost,    the contractores
profit    would increase         by 15 percent       of the amount of this
underrun.      If actual      cost was higher         than target         cost,   the
profit    of each contractor            would be reduced by 15 percent               of
the amount of this overrun.                 The contracts       also provided
for a ceiling      price     of 130 percent        of target       cost.

       The contract     with Lockheed included            a clause whereby
the Government      had the right        to adjust     the sharing     ratio    to
increase    Lockheed's     participation         in any underrun     to 50 per-
cent and 30 percent,         respectively,        with the stipulation        that
target   cost,   target    price,      and ceiling     price would be in-
creased by about 3.2 percent.              The sharing      arrangement      and
the targets     were changed soon after            contract    award in accor-
dance with this      clause.

         Each contract     also contains       a clause     permitting      a re-
vision     to the target      cost and ceiling       price     each year be-
ginning      with calendar      year 1968, to recognize          abnormal
fluctuations       in the price      levels    of labor,     materials,       equip-
ment, and subcontracts.             Each contract     contains       a repricing
clause which permits          the ceiling      price  to be adjusted         up-
ward if actual       costs of producing         run A exceed the target
cost of run A by 30 percent.               A formula     is included      in the
contracts       to compute the amount of this            adjustment.

        The contract    with Lockheed required        that the option
for run B be exercised         24 months prior     to the scheduled     de-
livery    of the first     run B unit.     The Air Force issued Sup-
plemental     Agreement    235, effective    January     14, 1969, for pro-
duction    run B which gives the Air Force the right              to buy up
to the 57 aircraft       included    in the option      quantity.    On No-
vember 26, 1969, the Air Force issued Change Notice                 521
which stated      that the Government      had allotted      funds for the
fiscal    year 1970 increment      of 23 C-5A aircraft.

        By letter      dated December 3, 1969, Lockheed advised        the
contracting       officer    that the issuance     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 costs.           In re-
sponse,    on December 22, 1969, the contracting                 officer       denied
Lockheed's      claim and advised       the contractor        that the deci-
sion was a final        decision    under the l'Disputesl'         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.
     CURRENT STATUS

             For fiscal       year 1971, the Congress appropriated
      $622.3 million        for the C-5A aircraft   program,   including
      $544.4   mill ion     for production,   as shown below,

                                   Funds                                     Amount

                                                                          (millions)

     Research      and development                                                 $ 11,6
     Procurement,       aircraft:
          Aircraft      (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-5A aircraft         program
     for fiscal        year 1971, the Deputy Secretary                 of Defense testi-
     fied on May 27, 1970, before                 the Committee        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 GSA
     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 requested            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 payment for certain       types of costs 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 whic‘h exercises      functions    in connection   with the
    national     defense:
i
i                 ‘j-k**to enter    into contracts        or into amend-
           ments or modifications         of contracts      heretofore
           or hereafter      made **yc 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 Fresident       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-
          tleman 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
          will   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
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 have
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.
          B'Mr. Robsion     of Kentucky.          Yes.
      *               *               *               *              *

         sQMr. Robsion of Kentucky.            Yes.      Now, there
are several      reasons     why you need this           legislation.
For example,       sometimes     the Government          must rene-
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.sa         (See pp. 14156 and 14157 of the
Congressional       Record,     House, July 29, 1958.)

                                          II
 ESTIMATEDADDITION&
 COST TO THE GOVERNMENT

       The actions proposed by the Department of Defense to
resolve the difficulties      being encountered with the C-5A
aircraft   contract will result     in additional  costs to the
Government,     The following    schedule which shows additional
costs of about $496.4 million       is based 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)                                      $3,248.2
Air Force estimate of ceiling     price
   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 PROGRAMCOSTS

       The following presentation         shows the current estimate
of the costs of 81 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 by the General Ac-
counting Office.

                                     12
                               Total
                               C-5A Aircraft Program Costs
                              as of December 31, 1970
                  Based on Air Force and Contractors'  Estimates
                                                                                     Amount

                                                                                  (millions)

Lockheed Aircraft      Corporation:
     Estimated    cost for 81 aircraft                                                         $3,248.2
     Initial   spares and ground equipment                                                         389.9

                                                                                                  3,638-l

General Electric         Company                                                                    848.2
Military      construction                                                                           17.6
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                                                                      4,470.3a

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 complete acquisition      of 81 aircraft              $ 544.0a
a
  This 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                     PROBLEMS

         After     the Department        of Defense received            Lockheed%
 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 Co5A 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 Lockheedqs        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 implemented           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 commercial       sources    to enable completion        of the programs.

        To assist      in the analysis,          the Defense Contract          Audit
Agency (DCAA) was requested                to review Lockheed'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.           DCA4 also
verified      the financial         data included        in the three submis-
sions covering         the C-5A aircraft           program and the AH-56A
helicopter       programs for development              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              data 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
and forecast    system,   and (3) there were no significant                dis-
crepancies    in Lockheed's    forecasting       techniques.

                                           15
       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,                  it
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        customers,
Lockheed would be unable to complete performance on the
C-5A aircraft    and the AH-56A helicopter          programs without
Government financing      of costs exceeding the Governmentss 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 Committees, 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 December 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 Lockheedss            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 that the actions                 proposed
by the Department    of Defense would not guarantee                 that bank-
ruptcy   of Lockheed would be precluded.

        Lockheed responded       on January     5, 1971, to the settle-
ment proposed       on December 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      and accepted      the proposals    on the
AH-56A helicopter        development      and production    programs.      The
contractor      was not prepared      to accept the Navy@s offer          of
$58 million      in settlement     of the ship claims       and indicated
that the continuation          of negotiations     was preferable.        Sub-
sequently,      Lockheed has reached a tentative          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 aircraft         costs and will     re-
pay the second $100 million               with interest      at the prime rate
starting        January     1, 1974.    Repayments will       be at the rate
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.

                                         17
                                     CHAPTER 4

                   GENERAL ACCOUNTING OFFICE REVIEW

                       OF FINANCIAL        DATA SUBMITTED

                   BY LOCKHEED AIRCRAFT CORPORATION

      On September     14, 1970, Senator William                Proxmire      and
Senator   Richard    S. Schweiker      requested       the     General Account-
ing Office    to (1) review       Lockheed's      financial        capability     to
complete   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-5A aircraft              would cost about $4.6 bil-
lion     for development,           production,      initial       spares,     and di-
rectly      related      construction.          The 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 the time the 42d aircraft                  is delivered.          Included     in the
$4.1 billion         were costs applicable             to aircraft        that would be
delivered        (work-in-progress)           subsequent       to aircraf:       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;       however,    we do not have the right          to
require     Lockheed to furnish         us data on its commercial           pro-
grams or overall         financial     condition.
        We requested       officials       of the Department         of Defense to
make available        for our review         any information         that the De-
partment     had relating         to Lockheedss       financial      condition,
including     information         on LockheedOs commercial             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 confidence        and on the
basis that it would not be made public.                       Although      under
31 U.S.C. 54 the General Accounting                   Qffice     has a right         of
access to any records             of any Government          department,      as a
practical     matter,      there is no sanction            available      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     as to whether Lockheed had the financial                        capability
to complete      and deliver        C-5A 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
GFaJNERALACCOUNTING 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     the audit procedures and
techniques employed by DCAA.

       The following statements describe in more detail the
work performed by the General 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    to 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 from LockheedIs financial            statements from
prior years.      We also discussed with Department officials
the work they had performed to satisfy          themselves 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 AJJ-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.
      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 LockheedIs internal
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/Lockheed         cost estimate and the sub-
mission by Lockheed as required by the Armed Services Pro-
curement Regulation,       section 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 LMSC 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 opinion       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 L-1011,     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 LockheedDs      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    costestimatewith     Lockheed's internal    budgets,
the cost estimate was about $172 million         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.

RECOMHENDATIONS

       We recommend that the Department of Defense establish
close surveillance       over Lockheedjs 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
aircraft.      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
                                                                                                                                                       APPENDIX I
                                                                                                                                                           Page 1




                                                                           .
WC rccllizc               fhOf     the     military                scrvircs         nor;ally            expect         flleir      contractors                to coztinuc
pcrformoncc,                 including                   finzncirig,             pc:nding        ac.?ninisfruf           ive      rcvic-v:      crncl rc-so!ufion
of any          dis;jufOble             mOffc:r .             In the prcsznf                  insfclnccs,         ho;:cvcr,            fhc       cuxulcrfivc
impoc:          of fhe cli...<,
                           ~~7rC!firiCnfs                          on   fCJUi      pr02rcms           creates         Ct criticof           finctncial          prOtilCr;i
which        cannof          be su;>p01 fed                   0tJf of cur            currcnf          and piojcc!cd                 c~ssc:s cd           incc:nc.
WC h.Ivc      infcn:iFi?cl                  our coit                rcc!uclion           cf:c’:ls,       hnvc         cl imincj:ccl          cSvic’:ncls           to wr
        .
Sfcd:hc~Ic!3rs,       hnve                rcduccd                  ckosf iwIly           ozr plannd               c;:pentlifurCs               for    fir.4       055Cl5,
OrA     in:c;d            to r&cc               cxri GVd , XiCl cocrs ant!                           cut cliscrcfionury                    oufloy:       in cll        other
pssiblc           Orcw..           V!c 01 50 infcndio                           co::finuc        pursuit         OF all         possibilities            of financing
from      fhz pi ivufc                 xc10r.              Despite             fl~csc- ciforfs,          v:e must          stoic      that       wc      connOt
fnclinfain         lJninfC;rU;>fCd                  ~)CrfOi~iClnCe                 Gn fh2: c programs                   \vif houf rcccivir:>                    slgnificanf
firroncins           ussi:fulicc            from            the      Dcpclrfrrlcnf            of Dcfcnsc.                Also,        in c~bsolufc              candor,
WC do nGf ccxi5iCcr                       thcif          loc!:hccd,              cvc-n        if if v:erC ca+blc                   of so CfOirq,                sllould L2
eXpCcliG            al0:1e         to svsfciin              for an iii:YflinifC                  period         the     finc:ncia!           bUiC!cn          v:hilc
    . .
as21f     Ins      ih::     o$co;,;c              oh r    li(&3fiG:l             ri;su!iirg          fc!rgcly     frox          clrus!ic       innovofionj             in
piocurirllcnf              proccdurcs                    ufili;d          by fhc milifcry                  sc’rviccs,




                                                                                       27
    APPENDIX                    I
         Page 2




        vi”1
           II lout              disrcgcli-dins      our w/n deficiencies,                                     ihc     ccwmon             ingrcdicnt              in fhrcc          of
        the         four        j)rc~~fi~~r~s v;I~iclh ccius e our prcwnt                                   difficuliy,            nclmcly,          i11c C-52,               the SRAP,,
        and          ihc: AlI--56,                is the         fuci      il~al under            fl~c ‘lo!al          Faclqc              Procurcrnenl              procc&rc
        dCVelO~3:liCiil                      v/ils rcquirccl             fo be undcrfcil:cn                   undnr         cI fix4        price         iyi>”     confrclct            with
         concurrcnf                   prcJuciion                co:llrOiimcnts              v:ith     rCS;l?Ct            to price,            scl-~:ciulz,       clncl perfPir;inncc:.
i
        A!ihou:;h                   ii v:as      os~~tmt:d          ihn:       sialc-.oi-the-art                    c~dvances           wi:rc      not     rcquircd           in the:2
        pr03rUillS,                  ii is gcncrcllly               clcJnif:cd         ih3i         fhnsc        clssuriipiions            were        incorrcr-t.            k!ihOUCJl

         indusiiy               <;?r~CiOlly, including                         our cor~ipooy,                  pcrhnps           erred         in c.o:npcting            fw       contrar:s
        w&r             tlli,        sysicr,~,          the     sys:crcI itself         and          its USC were                the     responsibility              of th:: rliilitclry
        depclrtmcnts.


        We Lclicvc:    thai ihe hirld:i~I~i     of to&y    sho\~;s us thni the procurcmenl      p:oc?c!urc
        Lf iiized Cc,- il1~52 prqrorn:      vcos imprudent    cl!~cl odvcrse to GUi  respective    intircsis.
        We did no: co:~lf’,,,p1~1tc,                                    [-Ior do VI2 bt?litw                   ca:iyone          in ihc         Dcporfr~eni            of DiTcns2
        ever          coii:cii~plolcd,                    il-iclt ihcsc          contracts            could         gcncrufc             diffcrfnces             oi cyinicln
        involving                   SIJCI~     vast      monclary              crmoui~ts a,,            for caxumplc,                   exisl      on ih2        C-5,2        progrflm,
         Nor          did       ci:licr        ptirty         apprcciclte           the rnctjor             hazards         involved             in undcrto.king
        produciion                    o;i the          Ch~yCni~C            prngrcm           bzforc           icclhnical              problems          on thn        dzvc.lc:?rncnt
        pr~,roili               I-10(1 b2cn            solved.            Considcrini               tl;,s: these            pro’Jlenis          wcrc      krhovln        to ih2 Arrllj
        at ihc          iimc           f41 e leitcr            contract         for production                   v;as issued             in .lanuory             1968,        o::cl 111:::
        tllc        pclrtics          sIJ5szcIuzr~tly              I,xd been          unable           to      reach        agrc~mcnt              on a Jpfini:             iv:      cc~:,~~; ct,
        ihe         unprccech~frd                       oc;ion          of ierminuling                fllis      Iciter         conlracl         under        a fixci:        1: ict
        Ckfuult              cl(It~sc          is difficult             to irnderstcincf.

        Daspitc      tl,c gowing       awareness                                 that fhe total packuq . e mcfhod   utilizcil                                          in th?sc              programs
        is virtually      unv;orkablc,      iherc                               sewn: to be little  disposition   to correct                                           existing
        contrads                    on terms           which        most        contractors              can accept                or to rccognirz                   that        liiigation
        is 0 scriwsly                        inutfqwfc2             ctvcnui?.          Even          on the          shipyard            contracts            v;hcre        the     io:al

        package                 co;lccpf              was no;           involved,           the      f0c.l     thy bulk            of the        stlipbuilcling             inclusfry
        hots cnco:rntcred                         s:c;*c        trsgble         a: indicated                  by the moie               than      a billion            dollc::s         in
        confracl                c.lclir::s sug~es!s                thut      the sy:tem,              ruthor         than         solely        ir,c!iviclucll         deficiencies,
        was a rlloi:)r                    contributor             to fhc pr0Sleh.                                                          A


        Apart          from           the      disosircus           p~tcntiul          for our o3.z~ company                             and      its effect           on tk?ortment
        of Defcns,                   progrclms,                Iiii~c~tioi-~      of these           pro’blcms             may v:cll            have      yrcvc         cor~:c~uenccs
        on the              Dc;>c,r:rncnt               of Dcfl-nsc’s             ability           to secure             the     inc!ustrizl          suppc~-t        v;!iich          it




                                                                                                       28
                                                                                                                                                         APPENDIX I
                                                                                                                                                             Page 3




In addition,             ihcrc          is a distinct          possi!)iiity       tl;at     the d:cisioiI           of the      Csgrcl          locry      bc ap;,rolcc!
fo     the   Court       of        Claims,         and     coxcx;ucntly           o final      dzcisio,~        may      no:     b:: rn:1;1: until    Ii”73
                                                                                                                                     .
or 1974.    Tho Air rorce has indicated         it \*/ill r-lo: provid, 0 fill-Ids f0:                                           this cwltrcct      v:!iich
will exceed    11lc c:s:iiilatccl coniract price as ihc /iii Force. interprets                                                     tllis cc.ntract.
1JIid2r       thc3::  condiii6n;    , the- Air Force furldir:g   :-:oulcl of bcsi bc c~c!:ciuafe cnly    un!il
neclr      the crud or this )‘ccr.        kwwcr,     iii o;?;r  to co:np!cfs     th2 dzlivcry   0’ Cl ciircraft
und       Iclaicd    iielnr. during    1971 and 15’73 tin o:!clitional     $435 m;lIio;-1 to $530 r,;il\io;,
will      be rcquircd                to cover        prcduciicn            cxp?nditurcs.             Locklhccd           conno~          provic!z           such
Cunding        arid     hlicvi.s             ih    c Air    Force     sho:~Id      c&,wncc          thn     necessary           funds       pwc!iny            th?
outcome          of ih2            litiso:ion,
                                     This could hc occox:pIishcd                                            by cm rr:ncnck;cnt                       to thy    current
contract     wllich    could contain     cppropriatc :gfcgu:lrdj                                      for both         parties          viith        rcrpcct         .
f0  prcservinz      thair risks   in litigation.


 Shipyurd         Claims
--.--_____

At      fhe present            time,         the     Lockheed         Shipbuiiding            ond     Construction              Company                  I-leesp,orformed,
or     is perfwming,                  on 9 conlrccts             for several           cfc~sscs of new          ship;.          NIOi?           it13i-1 $175         miilion
 of contractu::l               acljustlncnt           claims        have      b can p;s;~ntcd              to tha      I\‘avy     to dale.                 As of
 Dzccmber             29,          1969,     amounts         expended           by Lockheed               or1 ihcs!z     claims          excwJ             $103      million
and are oxpcctcd                      to ccntinuz            at a rate of $3 to $4 million   per month.    Thcs-, claims
have b.zcn under                     ccnsideration             for many months v;ith provisional   payments    of o:ily $14
miilion        muck           to date.                *.


 We bolievc             the         solution        to this prcb!em             lies      in an immedia’tc             incrLase           in prc,;islonll
 payments             to an agsrqclfe                 of $85 million.                  V!e undr:rsiand   the Dcprtme;,t                                 of the I&IV)
 plans       to sc:~lc         ihc      majority           or thcsc: claims            during   the lost three months                           cf       1770 v;Ilich




                                                                                  29
APPENDIX I
   Page 4




 At-l-W\                 Phosz           III
 ______            -‘--------

  On         k’\~y       19,       1967,         the Army              Contrcc’iing   Ofriccr issued cl finrll tl2ciSion      tcilnincliing
 this        lctlcr       contracf               fc:       dcfoult.       Lockl~c~cl’s crppcnl f~-o,-~ this dccisiox     \‘K,s n;:i&      lo i!is
 ASCC/\               on M:iy          22,          1969,        crnd both             Lo‘kheecl            CUIC~the Army                are proccrc!ing                    in acco:c’zncc
  v/ith       t1.e rtlles           of the             L+xrrl.         It is unlil:cly              th(!I     the     &rcI        will      Iwr          this    cosp before
  rnidycar             and tl;crt          cl    fiilol       decision          can tw rri:idc               b, -,forc     ihc     first     c~:lwicr           of 1971 * As 0:
  the        end      of 1969,             tc~ic~l cozts              incurred           Isy ILockhwd
                                                                                           su!xc:iucnt    to the      c>oth PI ior and
  Conlrociin~        OXccr’s    decision)    omo~ni   lo c;~pf0.:imafely        $89 million.       Prior to the
  Cnnl roci ing 0 ;fiwr’s       clzc ision the Arni )’ had rr,vrlz pr0cJi‘ess pcl)‘:n c:if: or;: xl: 1:irind to
  $53 ,8 miliion.        V/c t,zve reocltcd    on c13rccment      v;lth the Army uIj:!zr v:liich I!~CSZ
  proJrcss    p:lyli?entS r,;cmy b2 rc:(lincd   by I’S pending      a tlxisioll    by fliti ASI’.Ch.      HO\‘.‘C\‘Ci,

  dLlrin3          ihe        cci!ly     llcr:            of 197@,       c&s            incurrc>d        may rc’och            0 total        of z.cinc: Sl 10 million
  requiring              cl lo:01          ccl;: particiji:,tioq                     tjy ILockhced               of   scmc        $60 to $65 tnillio:?                     v:hich
 may Ix               inct-ccrsec I by 11-1~necessity of p:l)‘“ent by lockhced     to subccxitroctczs   of
 addi:iwal                 c:mourlfs.  WC su,ngcst th:lt ihe Army increase     ihc omowt      of pqrzss
  pnyr!3cnfs             tn     c1 rnil-~i:;lil:n           OF 90%        of     f!ic.riGs           incurred,             and     coniinuc              such       pa)wcnts
  U!lfi!       rcSO!uiiO:l             Or i!hiS            COST’ by       ihZ        C!Yird     of COi~~trClCt            k\iIilCUlS        Oi tTi2        CGllrt         CJ~ Clc,\r,;s.
  lhe        swne        agi-ccmcnt                 under        which          Loc.‘r:h5rd          is cuirently     rctcri:iing                  the $53. F I ,i:‘i>.,
  or prosrcss                 poymcnts                could       oqp!y         to tll:se          nck!ilionnl    provisionul                     po;‘mcr,:r .




  The Lockheed                      Propulsion                Co:npony               is the     prcpulsion               system        SubCorltrtrCtor               to    the      Ea,cing
  Compuny                Llnclzr        i1.z prim&            coatroct           wiih         Ihs Air        Force        for DDlGE               of     the     SIloit       P\nnge
  Affc~cl:            Missile          (AG!v\--63A).                     On Dzcember                  29,        1969,       Lockheed                  Propulsion           Compon)
  and        the       Gocing          Co:i~;,crny            pwscntcd               u Contract              Adjustrlient          Claim           to the Air              Force        under
  Contract    AF :13(657)-~16!X-~  in the amo:rn:                                                  of $50 mitlio:?.                    At the          present        time,
  Lo&h ccc c I lIoi.lu
               ‘I. - 1sion Company    is CO:ltii:LJiilg                                               its periormoncc                    of its si&cc:;;rclc:                    c.xl
  has incurred                   costs cp;x-oxfrncrtirq                         90       million         in cscess           of,thc        $16.9          million          rcccivcd
 fo date.                Continued                  peiiornlc:?ce               during         1970         is expected           to odd          more          t!-.an $15 million.
 Nqotioiions                 of Ilie issvcs in\;olvcd    in our clairrl are currcnily being sought jointly
 by 1 ockhrcd                Prc,~ulsiw   Coxpsny     clnd Lozing v,ilh thct Air Force.    It iS FoSsibie
 thc:t       I,;o;:      0; ~111 of thz isxcs will b:co,,:>     the suSiei   of an ASK4     cos3 ix t!,c no::




                                                                                                    30
                                 APPENDIX I
                                     Page 5




\/cry   ir uly   yours,




‘Chairman        Of the   bird




        31
          APPENDIX II

                                                        SECTION 504

                                                PUBLIC LAW 91-441
                                                   OCTOBER7, 1970

  .
                       - S&z. 501. (a) Of the totnl amount authorized                 to be n qmopriated            by
      I              this Act for the procurement              of the C-5.4 aircraft,           I 200,01)0,000 of
                     such amount, may-not be obligated              or expended until after the expira-
                     tion of 30 dars from the date unon which the Secretarv                            of I)cfense
      i
                     submits to the Committees             on A’rmed Serriree of the Senate and the
  I
                     House of Reprrseutntires             a plan for the esprnditure              of such $200,-
,.?
                     000,000. In no event may all or any part of such @OO,OW!,OOO be ob-
                     ligated or expended except in accordance ITit such plan.
                         (b) The $200,000,000         referred    to in subsection         (a) of this section,
                     follo\vinp     the submission      of a plan pursuant         to such sd~sectiou, may
                     be expended only for the reasonable and allocable direct and indirect
                     costs incurred       by the prime contractor          under a contract entered-i%
                     with the United States to carrv out the C-5.2 aircraft                        program.        No
                     part of such amount may be used for-
                                (1) direct cost of any other contract             or activity       of the lwime
                            contractor     ;
                                (2) profit on any materials,        snnplies, nr services &ich              are sold
                            or transferred     between anv division,         subsidiarv,      or affiliate of the
                            prime contractor       under the common            control ‘of the prime con-
                            trartor and such division, subsidiary,          or affil iate;
                                (3) bid and proposal costs, independent               research and develol,-
                            ment costs, and the cost of other similar                unsponsbred          technical
                            effort: or
                                (4) depreciation     and amortization         costs on property,          plant,, or
                            equipment.
                     Any of the costs referred           to in the preceding         sentence which \v-onld
                    othcr~risc be allocable        to anv work fnnded hy snch !$2OO,WO,OOD may
                    not be allocated to other portions of the C-5.4 aircraft                      contract or th
                    any other contract, with the Vnited States, but payments                        to C-5-4 air-
                    craft subcont,ractors        shall not be subject to the restrictions                  referred
                    to in such sentence.
                         (c) Any payment from such $SOO,OOO,OOOshall be made to the prime
                     wntratitor     through     a special bank account from which such rontractot
                     may withdraw         funds only after a request containin             a detailed jnsti-
                    tication of the nnlount reouested has been submitte d to and nlmroved
                     by the~rontracting         kicer’for     the United    States. All paymel;&       made
                     from such sl)ecial bank account shall be audited bv the Defense Con-
                     tract Audit :4genc,v of the Department              of Defense&d,       on a qunrterlv
                     basis. bv the Grnkal            Accountinn      O&e.    The Comotroller         General
                     shall’s&~it        to the Congress         nor more than thirti        days after the
                    close of each quarter a report on the audit for such quarter performed
                    by the (irneral        ,4ceounting     Office pursuant     to this subsection.
                         (d) The restrictions        and controls provided       for in this section with
                    respect to the $2OO,OttO,WO referred             to in subsections     (a) and (b) of
                    this section shall be in addition           to such other restrictions     and controls
                    IS mny be prescribed           by the Secretary     of Defense or t.he Secretary of
                    theAir      Force.




                                                                   32
                                                                                      APPENDIX        III
                                                                                                 Page 1




  Chairman,         Sc!?stc       PLrmcd
      Se   rvkes    (;cJmmittee

  United StatC.5         Scnatc
  VlrashingtoIi,        D. C. 20510

  Dear       Mr.   Chairman:

    As you know,         on March       2; 1370, All>*. Daniel IIaughton,              Chairman         of
:, the Board of J-,ockheed Aircraft                  Corporation,        submitted     a letter     to the
    Dcl~~artrnent     df Defense       citing his compzny’s            co~!trzctual     and financial
    problems      on four major          defcn si programs          : Navy ship?~ujlding,         the
    SRAM Missile          Motor,     the Cheycnnc          helicopter,       and the C-5&          &lr.
    Haughton’s      letter    asscrteci       that “the unpyecedcnted            do&r     magnitude”
   .of the claims       and disputes         in which these programs              WC re thr:n iI?;-olvccl
    WOUICI   “make it financially           impossible        for Locl~heccl to complete            per-
    formance      of these programs              if we must a1l.rai.t the oulcomc          of litigation
   ‘before    rkcciving     further      financing      from ‘the Departmc;:t           of lkfcn:gic.     I’
    Mr.    Haughton      emphasized          the urgent     need for a settlcmcnt,             or for some
    viable alternative         to our procedure           of requiring       a contractor       to continue
    performance         with its own financing            during     resolution     of d,isputcd      mattc;*s.

  .Imn~ec~iatcly     upon receiving’       this letter,        the Depart-merit        of Dcfcnse     undcr-
   took an intensive        independent      determination             of the nature     and magnitxk
   of the managerial         and financial      problems         p’resented     by h/Ir. Haughton’s
   letter.     Each of the military         departments           undertook      to negotiate     scttle-
   ments of their individual          programs.           h4y staff compiled           and analyzed
   data relating      to the total corporate           entity,      including    corporate     financial
   forecasts     prepa.red’by      Lockheed        at our request          and audit-ed by the Defense
   Contract     Audit Agency.        It was necessary              to determine       the financial
   viability    of the corporation       and to esamine              the availability     of commcrcia.1
                                                                              *
   credit    to meet the company’s            obligations.

  Of utmost   importance      was our neccl to C.ssure
                                                    3          the continuccl     availabi3ity
  of weapons    systems    urgently    needed for our nalional          security.        Sevc 1x1
  programs    for which Locl~?lcccl Aircraft          Corporation     is a contYac’ior         \Vitli
  the Department      of Defense    ar6 part-icula,*ly     critical   to the    nation’s     dcfctnsc.



                                                      33
   APPENDIX III
        Page 2




The tinlc ha:; now come when v:e n~~st move promptly             toward   5 scttlc-
ment of Loc?rl-~ccd~- DoD contract    disputes    at mini.mum    cost to the U. S.
Government     and with minimum      impact    on third parties    such as Lockheed
cmpJoyccs,    suppliers,  ~xbconli~accto~*s    and their   employees.

It i.s my responsibility       as Deputy Secretary         of Defense to SC&         and to find
a solution.       I have learned    over the years that prolonged            procrastincztion
in Idle fact of cliificu1.t problems       is c7.nunsatisfactory       stance that- too Oflf_i:CJl
brings     not solutions   but added prol~lems.         Nothing     is to be gained by
wishing     that tllesc problems      which a1-0 se in the past \vould go away;
instead     we must fact prcs cnt facts and move on to future needs.                     I
tllercfore     wish to present    to you, as I promised          to do, my plan to re-
 solve t11cse disputes.

 To briefly         r e-cap, the dcfcnse                   contracts     .whicli hnvc contributc~d      to Lock-
heed’s financial              problem            v:cre cxecutcd          before    this admi.nist ration took
office,        The C-5-4. contraci:                    was awarded        to LocI;l~cecl in October        1965.
iYli sup~~lc~~~c:-~lal a’~reemcnt                        to the contract,.       whSch committed        funds
fnr   3.3 CI(ldi-i   ir)7l;il  2 j.7*c:1.*;1FI    271~3   v.:hich is claimed       by J,ocl:hccd    to have
cxcrciscd          an option for 57 zircraft,                       was entered       into during the lct st
weck of the previous                        administration.           It is the principal      dispute    ovcs
the C-5A contract.

The contract      for development     of the AH-56A    (Cheyenne)   VT:‘:: F ,arded                            by
the Army    to Lockheed      in March    1966. It contained an op:io~ c.)r pro-
duction  quantities    which wa,s exercised     in January    1968.

The contract         for the SRAM missi1.e development                       was, awarded    to Boeing
in November          1966, with Lockheed   participating                    as the subcontractor
for the rock&          motor.

The nine Navy ship contracts     out of which Lockheed’s                              claims      arose
were awarded  to Lockheed    from    1961 through  1965.

Shortly     after taking office in January   1969, Secretary    Lsird                           and I
became      aware of the difficulties  being cncountcrcd     on thcsc                          programs,




                                                      34
                                                                                                                        APPENDIX              III
                                                                                                                                      Page 3




    WC rc-c-Jal.uatc:d        operation~~.l   rc:quii-ci71~:1lt s and too!;cd at the C-5h cost
.   growfh      in vicvl of our budge’cary         constraints         and tlecided not to cxtcntl
    that program         beyond the 81 aircraft              on order.      LSccausc of unrcsolvctl
    technical      problcnls      and a general       failure      to ITdcc   p)rogress,     \vc msdc!
    the decision       to tcrrninate     ihc Cllcyc~lnr:        production     contract   for dcfa1llt.
    On the SRAM,          we responded        to tcchnic:tl        and co51 problcn~s       in  dcvclop-
    merit   by not excrci sing our option ior product-ion                    a-ncl by continuing       tllc
    emphasis       on tcstjng      and clcvclopn~ci~t~.




                                                                       :            .


    Our review             cstablishcd              tha? normal              procedures                fos* resolving                 i:!lese
    disl)utcs        would require                 an <:sI.eildcd period                    of t-in>c: for \\rhich Lockheed
    &ould have insufficient                        c--J
                                                     ,,,Sh     Zll;ld il~2.d(~~ilZltf2        comm’rrcial                 credit          to final,cc:         .,
    the continued              operc’ tiol; df vital c’!cfcnsc                        progra;~As~              We       also        found tllat
    yyj.tl: <,?lf.
               I ,,(1; ‘_ i-‘:     .
                               O‘,‘; :,
                                      -jog     c-f   ;:$,Jji-:,.-:-!      Jl3.rf.j::   by    t!,,    ‘-‘Or?    rtmc11?:          of    IJefe.? SC
                                                                                                                                                h
    and without            continued           banl: supporl,                 bankruptcy                of  the LockhCcd                    COi*pOl’?~tioll
    was and is inevitab1.c.                        It was then ncccssary                          to dctcrminc                 wl~cthcr
    bankruptcy            and corporate                   reorganization                 under Jhc B~nkrul?tcy                            Act was           ’
    ox    was    JIO’C in      the interest               of nrttiolial        del’cnse.             We ion~xl that while such
    bankruptcy            proceedings                would,           if instituI-eel,           priillarily          apply to Loclrhccd,
    that company’s                operation             s are so entwined                    with rnany other companies
    which also contribute                      to our national                 dcfcnsc            effort      that it was necessary
    for us to consider                     the chain reaction                  upon other companies                              as well.             ISascd
    on extensive              discussions               with bankers               and other dcfens’e contr;:ctors,                                     J
    have concluded                that the conseque.nccs                          of Lockbecd               bankruptcy                  at this tilnc
    would be so far-rcxhing                              tllat several            othdr dcfcnsc                  suppliers              would be
    placed in such a prccsrious                               financial          condition           that their             capability            for
    futur c operation              s would be jeopardized.                               Further,            several             senior        members
     of the bsn?<ing community                            have advised               me that bankruptcy                          of Lockheed              no\v
    would cause them to rcasscss                                    their     credit        agreemcut.5               with many other
     companies           .which supply c:sscntial                         defense           equiplncnt.




                                                                             35
36
APPENDIX      III
           Page 5
 APPENDIX       III
          Page        6




On the C--5.A program          I have,      after the most        cc?.rcful collsjtlcration    of
all. relevanl- facCor5,       narrovJcd       tllc range for      resolution     to two alternaiives.

         1. One alternative         is to reduce t&e number                 of peripheral
        issues    in clispuic by neg@tjk:t~on          and to al.lov: the core of the
        disagrectnlcnts       to proceed     t&rough        liiigation.       The iii-i.gation
        \vou!d .be basically       concerned,       therefore,          .with the question
        of whetller     the Air Force       exercised           an option for 81. airplanes
        or for 115 airplanes          and the corresponding                npplicatiol~    of the
        repricing     formula.        The Air Force            and .Locl:hcctl,       cwer scvcral
        weeks of di.scussion,          have concluded            that the litigable       disagree-
        ments would result          in a financial        range from approximz,t1:-ly             3
        plus $25 n>il.lion recovery          by Lockheed             against    the United
        States to about $480 million            liability        or loss by.LocHlccd.
                                                                             l




        2. The other alternative          w&ld      scttlc the entire      dispute    by
        eliminating      all issues    and imposing       a fixed loss on Lockheed.
        In addition,     .such a settlement      would preclude       any performance
        incentive     fees,   or profits   on initi.al    spares  and on added work
        related     to the scope of the contract          which Lockheed        otherwise
        might have earned.                                               i

Our analysis        of LocI~hced’s    financial   situation    has led us to the coilclusio~~
that after the Air Force ha,s paid Lockheed                 up to the Air Force’s       interyre-
tation  of ceiling     price,    the company     will lack the funds or resources             to
finance    continued     production      of the C-5A program.           Moreover,     under
either   alternative      we must achieve       a workal$c      contractual    arrangcmcnt




                                                   38
APPENDIX   III
       Page      7
 APPENDIX III
      Page 8




M7e are aware that the course                   of act.ion which are propose                  to follow dots
not       guarantee     i-hat bCt21klYlptCjT    of LoclAccd        is precluded;           nevc?*thelcss,
this course         j-s, in our opinion,          the nccessxry          One    ?2ascd on t?lc national
defense intcrcst,             The unccr’1zGnty           exists bccausc          ovcrnll       fjnancinl
stability        of Lockheed         is contingent       not: only on t-he financing               of ii.s dcfcansc
p 1‘0 g I’ am s , hut also 021 further           financja.1. SLi~J~IOLTt frown        t.J,c p."Jv;~tc      scci01:
for its co?wrlcrcinJ            progrcl~ms,       pztrl-icularly     the     L- ] 01 1 ;tj.rl.)~~s.




This summarizes      the alternattivcs      and the action we inl-end to take to
resolve   these very difficult     contractual    matters,      The final details    of
the settlement   and the documeni-s        necessary     to implement    i-his plan are
now being prepared,     and will bc completed          by tllc end of January      1371.

I will   be available        to rc5Gex.v th5s @an in detail with your Commjf.tec    at
yous     convenience,         and will he glad to have your views on the altcrnativcs.




                                                     40
                                                                                 APPENDIX IV
                                                                                     Page 1




                                                                   FE3    2 1971




Honorable      John Stcnnis
Chairman,       Senat-e A rmcd
    Services     Committee
United    States Senate
Washiilgkon,      D. C. 20510

Dear    Mr.    Chairman:

        This is in further           response       to your request        for additional     information
in con.nection    with the plan I described                to you in rny letter        of December        30,
 1970 for the resolutioil           of the contract        disputes    btttwcen     the Department        of
Defense     and the LocKheed              Aircraft     Corporation     and for ihe expenditure
of *EC
    .I   c;?Or) L3111i07 :*Vt:!~~i~iZCc'i
         \*                                     ior appropriation       Ly I’LibliC    Law   91-4~11
which is subLjcct to the provisions                  of section     504 {herein.

        I am enclosing    herewith additional  illforrl-Jation   col~<.<.rning   the dctrti1c.d
procedures     i.0 he emplo ycd by the Department         of khe Air Force     in malxng
payments    from those. funds.

        If I can be of any further            assistance,       pleas<-, let mc know.




                                                  41
APPENDIX IV
    Page 2




             AIR         FORCE       PROCEDURES                   FOR      MAKING                    PAYl~dJ:NT     UNFIX
                                            TIIE             1~I3S’~l7IC’~IOi~S                 OF
                                     sixnoN             50.1, PUULIC                    I,A~J        91-441


             The     Air     Force        intends       to    initiate         obligations           from     the   $200 million
  contingency          fund        (hereinafter            referred           to as the          “contingency         fund”)   pro-
  vidcd    for      in Section          50-1 xl~J~roximntcly                Mid-h4ny            l’J71 to provide           cvl~cncliture
  authority       to allow           payments           to be made            for work           called   for by the C-5A
  rcstructurcd           contraci.              .Jt is anticipated              that by said date the estimated
   Lockheed        portioli         of the C-5A             program         included           in the Fiscal         Year       1971
  appropriation             (other        than the contingency                    fund)      an6 apl~licable         prior       year
  appropriations              will     have been            made      available           for the current           contract          or
  the restructured                 contract.           The prdcedurcs                   prescribed        herein      are in
  implementation               of Section            504 and will          apply         to payments          made      from       the
  contingency          fund        and shall         apply       to any other             payments        made      under       the
  rcstructurcd            C-5R         contract         with      Lockheed           from       and after      the date        of
  initiation       of payments               frown     the contingency                 fund.        The implementation
  of these       procedures              will      be accomplished                 by appropriate            provisions
  included       in tllc restrxctured                    C-5A       contract.             Payments        will    be made          in
  accordance          therewith.

            In order     to insure    tllat the                 restrictions     and limititions                      contained
  in Section      504 are colnplicd         with                 in respect    to the contingency                       fund    and
  to funds     hereafter      made    available                    to the C-5A     restructured                     contract,       the
  following     actions     will   bc taken:

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

            2. The contract                 mill     provide       that no profit           on           any materials,
  supplies,          or services          which        arc sold         or transferred                   bctwccn       any division,
  subsidiary,            or affiliate        of Lockheed             under     the common                     control      of Lockheed
  Or   such      division,         subsidiary,            or affiliate,        will    be an              allowable        cost to be
  paid    out of said         contingency             fund and funds            hereafter                 made      available     for
  payment         under     the contract              and such disallowed                 profit             will   not bc rccoupcd
  under       any otlier       contract          with    the Government.




                                              F-01:     OFI~ICJAL               IJ;‘X     ONLY




                                                                         42
                                                                                                                                        APPENDIX IV
                                                                                                                                            Page 3
                                                             FG!t       Ol,‘I;‘!CIA        L US!,:   OILTJ.,Y




                3.   e   T11e        contract           will        also         provide      thnl   bid    and      proposal           costs,
inclcpc!ndent                   rcse;lrch             ant1      dc:vclopl~~ent             ~0215,     the    costs        of    other       siniilal

rlnsponsorcr!                     Iecl~nicnl            effort,     ailtl          dcprccintiori      and         anlot-Iizatinn            costs
on property,                       pln~~t,      01’      cquiI)mcnt                of the contractor,               as tlctcrminctl             L)
negotiation        bctwccn       t!le contractor             and the Govcrnlnent         and which       \vould
OtllcrvJisC     l,ca allocable         lo work         funded     by said cont!ngcncy         fund   and by
funds     mndc     availnblc         hereafter           for pnymcnl      11nder the contract,         will    not
)JC  allowed      under      that colltr~act          alit1   such d~~allowcc~      cost will     not be
recouped       under      any o&her          contract        with   the Goverrmcnt.

           In order            to accomplish                the actions             called       for by subparagraph                      3
above,          special         billing        rates      will      be establisllcd              which       will      be lower         than
the generally              apl~lical~lc             cost rcilnburscment                     rates.          These         special
billing        rates     \vill       be designed             to exclude            the unallo\vablc               costs       specified
in subparagraph                     3 abo\yc.           The final         negotiated             ovcrhcad           rates;      i. e. ,
those      based        on the actual                 costs     for overhead               for 1’171,          will      then be
adjusted          to reflect            the exclusion               of the actual            unreimbursable                  costs
referred           to above.              The contract               will   provide           that     such unallowable                  over          -
head     costs        will      be      ex;:luclctl      commencing                 wi’;!l   the     obligation           of the con-
tingency          fund.

           4.      a.      A Special        Bank       Ackount,      as prescrilled          by Section          50;(c)
will    be cstnblishetl.              This      will     be an agreement            behvecn      the Air        Force,
 Lockheed         Aircraft         Corporation             and-the   bank     selected      to maintain           t?:c
Special       Bank        Account.         It will       prescribe:       (1) All paymcnls              made       pursuant
to Section         50-J- and from           funds       subsequently        appropriated          shall      be made        into
the Special           Dank     Account;          (2)      The Government             shall   have     a lien      upon the
balance       of t?lc account;              (3)      The limitations         of. the bank’s        liability        in
 connection          v.,ith the accoant;               (4) The specific          procedures          for witlldrawal
of   funds     from        the account;         and (5) The right             of the Government                to inspect
the bank’s          records        of such account.

                  b.      In order       to make        the Special       l3anlc Account            operative             within
the C-5A         contracl        structure,         ccriain       new provisions            will    be required                 in
the restructured               C-5A      contract.          These     proposed        provisions              will    p~‘ovidc
for   (a) tliC     c~~:tal~lishmcnt          of the account,           (b) ihc use of tllc funds                   in llle
Special      13a~lc Account,             (c) 11lc method           of withdrawal          of fulltls        from        the
account,        (d) tllc Govcrumcnt’s                 right    to the balance          in    111~  accouzlt          in     the
event    of    bankruptcy           or other       aclvcrsc      actions      against       the eontractor,                   ant?
APPENDIX IV
    Page 4




                     c.   The Sl)ecinl         I3aiil; Account         mill bc established           in a commcrcinl
   bank.     Locl;l1cc!d      \+il!  I,i: asked        to de:, ignntc        a ban];  located     in the Atlanta,
   Georgia,       area     as ml~t~;ally        agreed     upon      by tlrc Contracting           Officer     for this
   purpose     :,nci tile Spc(:ial         Canl; Account          will     be designated        “Locltheecl-Ceorl;ix
   Company       ,‘l’,ir Force      Spccinl        13ank Account.           ” P<rymcnts       to Lockheed            will 1,~
   processed          as set iOIl        below:

                       d.   All rrqn.ests        for payment        will  be sent to the Administrative
   Contractin;,          Office    (.jCO)     for approval.           The AC0     lvill exclude costs      whic?r
   are held         to be unallowable           untlcr    the limitations      and restrictions      specified
   in Section         5C4 prior       to approval        and forwarding       to the Disbursing       Officer
   designatccl         to make      pa)*ments        unddr    the contract.

                    e.   The Disbursing              Officer     will     set up a separate            record       to
   control    all expenditures             from      the contingency           futd.        Upon    receipt      of the
   approvccl      ljayment       request       and after       determining           that it is a proper             charge,
   the Disbursing          Officer       will    issue     a check      in paynrent         of the anr.ou:;t       made
   to the order        of “Locl:?lced-Gee             rgia   Company/Air              Force      Special      13anI:
   ACCOUilt.     ” This      check       will   then be deposited             in the Special          Bank     ~~ccounL.

                         f.     Withdrawals               from       the Special            I3anlc Account              will     rcquirc       the
    signature           of both        the contractor                and the Contracting                     Officer.           Section       50.1
   requires           that      these       funds       “be expended              only for the reasonable                         and allocable
   direct       and indirect               costs       incurred          by the prime                contractor..            . to carry          out
   the C-5h            aircraft          program.            ‘I To satisfy            this      requirement               and the pro-.-isions
    of the restructured                     contract,           it will     be ncccasary                for Lockhcctl               to submit        a
   detailid         j;stific       ation        to the AC0            to support           requcasts          for mithdral::al            of funds
   from       this      Special         13auk Account.                  Withdrawals               from       the Special            Rank Account
   will     normally             be related           to vouchers            wliich        formed          the basis          for the deposit
    in the Special               Ranli      Account.             Lockheed’s             detailed         justification            will   usually
   be submittc~d               weckl~~         in the form            of a listing           of payrolls,              material        receil>ts/
   invoices          :lnd other           costs       which        have been           incurred           in support            of the C-5A
   progranr,             and v:hicll           arc due for payment                     during         a rcasonablc              period      of time.
   After       review          of tlris justification,                  the AC0
                                                                              .           will      determine            the amount           of
   funds       wlrich        may       properly          be rclcased            front        the Special             I3nnlc Account           to
    Locl~hcctl’s             gcncral         lxtnl;    account.           The contractor                  will      then pay its creditors
   and cmployccs                   by drnxvirlg           cllccks       on its general                bank account.
                                                                                                                   APPENDIX IV
                                                                                                                       Page 5




                   E*       Section       50-?(c)     pro~,*ides       that “all       paynlcnts           made        frown      such
tank     account           shall    I)c autlitcd        by t!lc Dcfcl~sc:            Contract        AIl(lit     Agency,          . . I’
and tllc Icrnls              of t!ic i.cLtrcciurcd               contract       will     likewise         so rcquirc
durilly,    the pcrformnncc                  thcrcof.           ‘fo avoid       nuy unSric          dolays        in rclensing
casll    from       the Spoc’ial           Dank Account,               DCAA       audits       will    gonerally             1~~. con-
ductcd      aftor       tllc AC0         leas approvccl            the voucher           or dctailccl          justific.n:ion
for withdra\val               of fli~~tls.       The AC0           may rcqucst             a DCAA          audit       prior      to
approval         of any p<aynlc:nt             if hc hlicves              a significar        t portion          of thr voucher
subrnissiou           is qucstic~~~able.               If any audit          adjustments            arc: indicatctl,               cost
offsets      will     be mndc          l)y .the AC0           against       current         or future        voucl~ers           or
rcqucsts        for withdrawals                  submitted           by Lockllced.

                 h.    Section       50+(c)       provides       that “all    payments       made     from      such
Special      Bank    Account         shall      bc nuditcd..        . on a quarterly        basis,      by I!IC
General       Accounting         Office.          Tllc Cc~n~l~trollcr        General      shall    submit     to t?le
Congress        not more        tllan     thirty      days   after    the close      of each quarter         a
report      on the audit       fcr such          quarter      performed        by the General         Accounting
Office     pursuant       to the subsection.               ” The Air       Force     will   cooperate      fully
with    the GAO in the accomplishment                          of its audit.




                                               1’01;     OI*‘J;‘ICIA      I, US12 ON I,Y




                                                                   45
APPENDIX V


                    STATUSOF FUNDING FOR C-5A AIRCRAFT PROGRAM



                                                 Repro-
                       Program   Appro-         gramming       Current
                         year    priated        (+ or ->       program        Obligated      Expended

                                                         (millions)

RDT&E
                         1971    $      11.6 $     -          $      11.6     $     2.3      $     0.2
                         1970           34.2       -                 34.2          30.9           24.0
                         1969          128.0     -2.0               126.0         124.8          120.7
                         1968          305.2   +36.7                341.9         341.5          340.9
                         1967          258.2   -t20.4               278.6         277.8          277.8
                         1966          157.0     +1.9               158.9         158.7          154.7
                         1965            7.0   335.0                 42.0          42.0           42.0
                         1964                  -I-1o;o               10.0          10.0           10.0
     Total                             901.2'   +102.0            1,003.2         988.0          970.3

Procurement (In-
  cluding initial
  spares)
                         1971          609.2        -               609.2         400.2          350.9
                         1970          865.8.       -               865.8         677.8          576.0
                         1969          625.9        -               625.9         604.4          538.9
                         1968          492.8     +16.6              509.4         504.3          482.6
                         1967          415.3    ,-20.1              395.2         392.7          393.1

     Total                           3,009.o      -3.5            3,005.5      2,579.4        2,341.5

Construction
                         1971                                          1.3         -
                         1970                                          9.4             7.5           .8
                         1969                                            .l                          .l
                         1968            6:;         -                 6.8             6::         6.8

     Total                              17.6         -                17.6         14.4            7.7
      Total                    $3.927.8 $ 98.5                 $4.026.3 $3.581.8  $3.319.5
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, 431 - 435

  Be it enacted by the Senate an.3 House of Representatives                     of the United
States of America in Congress assembled,                 That the President        IXLY authorize
any deprtmnt          or agmcy of theQ Government which exe-rciscs Pmctions
in connccti.on with the nstionai            defense,     acting    in accordance with
regulations      prescribed     by the President       for the protecticn         of the
Government,      to enter into contracts          or into amendments or ncdlfications
of contracts       heretofore     or hereafter      msde and to I-E~E advance payments
thereon,     without     regsrd to other provisions           of la;: relating     to the
making, performance,          amendment, or modification           of contracts,      whenever
he deems that such action            wozld facilitate       the naticml      defense.      The
authority     conferred      Sy this section      shail not be utilized         to obliczte
the United States in az snomt in excess of $5@,090 without                         npprmzl
by an official        at or above the level of an Assistzllt             Secretary     or his
Deputy, cr an assistant           head or his deputy,         of such departneat       or
agency, or by a Contract           Adjustment     B0ard established       therein.
        SEC. 2. Nothing in this Act 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          in violation         of existing       la>r relating       to
           limitation      of profits;
                (c) the negotiation            of purchases        of or contracts         for
           property     or services         required      bylaw      to be procured by formal
           advertising       and competitive           bidding;
                (d) the kziver         of any bid, payment, performance,                   or other
           bond required         by law;
                (e) the amenLmert of a ccntract                   negotiated       under sectlon
           2304(a)(l5),        title     IO, United States Code, or under section
           302(c)(13)      of the Federal Property                and Administrative           Services
           Act of 1949, as amended (63 Stat.                     377:394),     -to increase       the
           contract     price to an amount higher than the lovest rejected
           bid of any rcsp0nsible              bidder;      or
                (f) the formalization             of an informal         commitment, 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 &hall be
made a matter of public               record under regulations              prescribed       by the
President       and when deemed by him not to be detrime~+tal                         to the national
security.
        (b) Al.1 contracts           entered 35&o, amended, or modified                  pursuant          to
authority       contained      in this Act shall include                a clause to the effect
that the Comptroller              General o f the United States or any of his duly
authorized        re?resentati.ves         shall,    until     the expiration         of three years



                                                       47
APPENDIX VI
    Page 2

after    final     payment, have access to and the right 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 from contracts                with foreign
contractors       or foreign     subcontractors    if the agency head determines,
with the concurrence          of the Comptroller      General of the United States
or his designee,        that the omission will        serve the best interests     of
the United States.          However, the concurrence        of the Comptroller
General of the United States or his designee is not required                   for the
omission of such clause -

      (1) where the contractor      or subcontractor is a foreign govern-
  ment or agency thereof      or is precluded by the laws of the country
  involved  from making its books, documents, papers, or records
  available   for examination;     and

       (2) where the agency head determines,  after taking into ac-
   count the price and availability   of the property  or services  from
   United States sources, that the public interest    would be best
   served by the omission of the clause.

If the clause is omitted based on a determination   under              clause   (21,
a written  report shall be furnished to the Congress.

        SEC. 4 (a) Every department  and agency acting under authority     of
this Act shall,     by March 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    justifying     the action taken.

       With   respect to (l),    (2), (3), and (4), above, and under regulations
prescribed     by the President,     there may be omitted any information    the
disclosure      of which would be detrimental    to the national   security.

      (b) The Clerk of the House and the Secretary  of the Senate shall
cause to be published   in the Congressional Record all reports submitted
pursuant to this section.

        SEC. 5. This Act shall be effective     only during a national  emergency
declared by Congress or the President       and for six months after the
termination    thereof  or until such earlier   time as Congress, by concurrent
resolution,    may designate."
                                                                                         APPENDIX ?I1
                                                                                                Page 1
                               Executive Order lie. 1oyG?
                      of JJo;rembcr l& 1-35tI (23 Fed. "ne,;. %97)
                        As Amended by Executive    Order liO51,
                                dated September 2'1, 1952




        By virtueof the author ity vested in me by the act                                 of August 28,
1958, 72 Stat.   972, hereinafter     called tkLe act, and as                            President    of
the United States,    and in vietr of the existin,-    natio?21                            emergency
declared by Proclamation     !To. 2914 of December 16, 1959,                               an.3 deeming
that such action 7,ill facilitate      the national   defense,                           it is hereby
ordered as follows:      ,

                              Part     I--Department         of Defense

        Under such regulations,                 which shall be unifo,rm to the extent
practicable,           as may be prescribed            or approved by the Secretary                   of
Defense:                                ..
         1. The Dcpzrtment             of Defense is authorized,                 within     the limits         of
the amounts aDDropriz.ted                and the contract            authorization        provided        therefor,
to enter into-contracts                and into amendments or modifications                       of c ontmcts
heretofore          or hereafter       rze,      and to make advance pz,v;l?rnts thereon,
without       regard to the provisions                of law relating           to zhe making9 per-
formance,         amendment, or modification                of codxa.cts,          whenever,       in the
judgment of the Secretary                   of Defense,       the Secretary         of the Army, the
Secretary         of the ii'avy, or the Secretary                of the Air Force, or the duly
authorized          representative          of any such.Secretary,              the national         defense
will be facilitated              thereby.
         2. The Secretaries               of Defense,       the Army, the F?evy, and the
Air l?orce, respectively,                may exercise         the authority         herein conferred
and, in their           discretion       and by their         direction,        nay delegate         such
authority         to any 0th er military             or civilian        officers      or officials          o.-
their      respective       departments,         and   may    confer     upon     any   such   milits~:;        c-~;-
civilian        officers      or officials         the powor to make further                dele;etl~2s
of sv_ch authority            within      their    respective         commands or organizations:
Provided,         that the authority            herein conferred            shall not be utilized               to
obligate        the United S+,ates in an amount in excess of $50,000 I.-ithout
approval by an official                at or above the level of an Assistant                         Secretary
or his Peputy, or by a departmental                       Contract       Adjustment       Board.
         3- The contracts             hereby authorized             to be made shall include
agreements of ail kinds (whether in the fom of letters                                     of intent,
purchase orders,             or otherwise)         for all types and kinds of property                        or
services        necessary,       appropriate,         or convenient          for the national            defense,
or for the invention,                development,        or prtiuction          of, or research            con-
cerning,        any such property             or services,        iocludiq,        but not limited            to,
aircraft,         missiles,      buildings,        vessels,      arms, anzament, equipment                  or



                                                     49
APPENDIX VII
       Page 2

 supplies        of my kind, or any per-ticn thereof',                     including       plans,      spzre
p3rts      an3 equipment therefor,             materials,        supplies,        facilities,          utilities9
 nachinery,         clnchine tools,        and any other ec,uipment hi,thout any restriction
  of any kind as to type: character,                   location,         or form.
          4. The Department            of Defense may by agreement modify or amend or
  settle     claims under contacts             heretofore        or hereafter           mzde, may make
 advance yqments              upon such contracts          of any portion           of the contract
 price,      rind may enter into agreements wit-n contractors                           or obligers
 mo3ifyiw         or releasing       accrued obligations              of any sort,         including         accrued
 liquidstei         damages or liability           under surety or other bonds.                      Amendments
 or modifications             of contracts     may be with or without consideration                            and
 may be utilized            to acco:qlish      the same things             as any original           contract
 could have acccqlished                hereunder,      irrespective           of the time or circum-
 stances of the making, or the form, of the contract                               zmended or modified,
 QI- of the a;?ending or modifying                 contract,       and irrespective            of rights
 which may have accrued under the contract                         or the amendments or mcxlifica-
 tions thereof.
          5* Proper records of all actions                   taken under the authority                     of the
 act shall be maintained               within    the Department            of Defense.         The Secretaries
 of Defense, the Army, the IJavy, 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 information           therein    to be detrimental           to the national             security.
         6. The Department             of Defense shall,           by I4arch 15 of each year,
 report      to the Congress all actions               taken within           that department           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 detriment-alto                      the national
 security)--
             (a) name the contractor;
             (b) state t‘ne actual cost or estimated                      potential        cost involved;
             (c) describe        the property       or services         involved;        and
             (d) &ate f'u-rther the circumstances                    justifytig        the action         taken.
         T* There s‘hall be no discrimination                      in any act performed                here-
under against any person on the ground of race, religion,                                     color,       or
national        origin,      and all contracts         entered       into, amerded, or modified
hereunder         shall contiin        such nondiscrimination               provision       as otherwise
may be rquired             by statue or Executive            order.
         8. MO claim against              the United States arising                under any purchase
or contact           made under the authority             of the act and this order shall
be assigned except in accordance with the Assignment of Claims Act of
1940 (54 Stat.            1029), as amended.
         9. Advance -payTents shall be made hereunder only upon obtaining
adequate security.
        10. Every contract            entered into,         amended, or modified               pursuant         to
thfs otier         shall contain a warranty             by the contractor              in subs%antially
the folloi;ing          terms:




                                                    50
                                                                                             MPENDIX    VII
                                                                                                    Page 3

                 The Contrwtor           ml-rants         that no t)crscn 0:' selling               agency has
         been employed or ret.lin~d                   to solicit‘or            Sfc'dl‘t t:':is contract          upen
         an agreement or understanding                        for a coc~ission ,, pcrzentage,
         brokerage,         or contin<zent fee, excqt                     bo:Lx-ffrie     cn?Lcyres       or bona-
         fide established             commercial or sellin                   agencies xxintained             by the
         Contractor         for the purpose of securin,;                     business.        For breach or
         violation        of this warranty              the Government shall 'r,ave the right                       to
         annul this contract                without       liabiii-by        or, in its discretion,               to
         deduct from the contract                   price or consideration,                  cr otherwise
         recover,       the full amo:nt of such commission,                            percentage,        brokerage,
         or contingent          fee.
         11. All contracts                eEtered into,            amended, or modified              pursuant        to
authority         of this order shall include a clause to the effect                                    that the
 Comptroller         General of the United States or ay of his 5uly authorized
 representatives            shall,     until      the expiration             of three y~rs          after      fin.21
payment, have access to and the ri&t                               to e>;7--nine any dlrcctly             pertinent
books, documents,              papers, ad records of the contractor                             cr any of his
 subcontractors           engaged in the perfo,rmance                     of, end involving           transactions
 related       to, such contracts               or subcontrxts.
         12. Prothing herein contained                        s‘hall be construed to constitute
authorization           hereunder         for--
             (a) the use of the cost-plus-a-percentage-of-cost                                    systen of
                   contracting;
             (b) any contract             in violation            of existing         lau relating        to
                   limitation         or profits          or fees;
             (c) the negotiation                of pxchases            of or contracts          for g-operty
                   or services          required        by law to be Frocured by formal
                   advertising:         and competitive              bidding;
             (d) the waiver of any bid, payment,.                           performxxe,         or other bond
                   required        by law;
             (e) the amendment of a contract                         negotiated         under section        23&(a)
                    (15) of title           10 of the United States Code to increase                             the
                   contract        price to an amount higher than the lotrest rejected
                   bid of any responsible                   bidder;       or
             (f) the formalization                 of an informal            commitment, unless i.l:-
                   Secretary        of Defense, the Secretary                     of the Army, tht -'.::!-etary
                   of the Kavy, or the Secretary                         of the Air Force? or ti.e duly
                   authorized         representative              of any such Secretary,              finds       that
                   at the time the commitment 'GB?Smade it ~2s impmcticable                                           to
                   use normal procurement                   procedures.
         13. The provisions                 of the Walsh-Healey                Act (49 Stat,         2O36), as
amended, the Davis-&con                     Act (49 Stat.            lOll>,     as axetied,        the Copeland
Act (48 stat. 9'+8); as amended, and the Eif;ht Hour &w (37 Stat. 13'7),
as amended, if otherwise                    applicable,           shall apply to contracts                made and
performed under the authority                        of this order.
         14. IIothinC herein contain&                         shall pcJzdice             anythins     heretofore
done under Executive                Order Ido. 9001 of December 27, l$l,                           or Executive
Order No. 10210 of RbrJary                       2, 1351, or any amendments or extensions
thereof,         or the continuance              in force of an. action                 heretofore      taken
l.u.drr those orders or any amendments or e;,-tcnsions                                   thereof.


                                                         51
 APPENDIX VII
       Page 4




              ,Part   II--Extension         of Provisions         of Paragraphs        l-14

         21. Subject to the limitations                 and regulations          contained        in
 paraSra?hs 1 to 14, inclusive,                hereof,     and wdcr any re,qllations                  pre-
 scribed by bin in pursu3xe               of the provisions            of paragraph 22 hereof,
 the head of each of the folio-ding-named                   agencies       is authorized         to per-
 S'orn or exercise        as to his agency, independently                 of any Secretary
 referred      to in the said para.gn?hs             1 to 14, all the functions                and
 authority       vested bY those pxqraphs               in the Secretaries           mentioned
 therein:
           Department of the Treasury
           Department of the Interior
           Department of Agriculture
           Department of Commerce                b
           Department of Transportation
           Atomic Energy Commission
           General Services Administration
           National     Aeronautics      and Space Administration
           Tennessee Valley Authority
           Government Printing          Office
        22. The head of eech            qency rcued in para3ra&21                   hereof     is
authorized        to prescribe      regulations        governing      the carrying        out of the
functions       md authority        vested 15th respect            to his agency by the pro-
      .
visions      of Taragrq'n       21 hereof.       Such regulations            shall,    to the extent
practicable,         be unifor;I1 ttith the regulations              prescribed      or approved           by
the Secretzry         of Defense under the provisions                 of Part I of this             order.
        230 Eothing contained             herein s&all prejudice              any other authority
which any agency nax3 in pzrqraph                      21 hereof r;l~~ kve to enter into,
amend, or rtiify          ccntrrcts     and to make advance pqments.
        24. Nothing contained             in this Part shall constitute                  authorizs-
tion thercunZer         for the =e,ndment          of   a contract       negotiated       under
section      302(c)(14)      of tlhe Federal Pronerty            and Administrative            Services
Act of 7-949 (63 stat.            3911)) as amended by section 2(b) of.the                     act of
August 2C, 1958, 72 Stat.              956, to increase          the contract        price to an
amount higher than the lolqest rejected                   bid of any responsible              bidder.
                                                                        DWIGITr D. EISE?lHO:GR"




                                                   52
                                                                                                                                              APPENDIX VIII
                                                                                                                                                    Page 1




                                                                                                                               January         5,     1971



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


Dear        Mr.       Packard:

I wish        to acknowledge                        your     leiicr of December  30, 1970, and the copy of your
letter       to Senator               Stcnnis,             Ch airman of the Senate Armed Services  Commi!tce.
Your        proposed            plan        of action              and           comments          have      received          careful         s:udy     and
deliberation                 by our         Board of Directors                        and malagemcnt,                     and      our response               to
the alternative                    approaches                is our considered                     judgment            on these          complex         and
difficult           matters.

While      I agree with you that the time                                           has come to move promptly   totvurd  a
resolution      of our disputes at minimum                                          cost to the government  and v,ith minimum
impact   on third parties,     such as our employees     and                                                    subcontroctcrs,                 I would            like
to think   it is equally   importan t to ;eek a resolution                                                      ihat      also     is fair      to the more
than 55,000      Lockheed    shareholders.


We recognize                   that        Lockheed’s                    first    reiponsibility             is one we must               shore        with        the
Department                  of Defense              --     to establish                  contractual           and working               agreements                that
will        help      assure         the     continued                   delivery          of defense          articles         that     are important                   to
our      nation’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                 proposols           as you have             s:ated      them
in your            letter      to Senator                Stennis.                 I want     to assure          you     that     we intend              to curry
out      to successful                   comp!etion                all      the programs              in which          Lockheed              is engaged            --
not only             those         for the government                            but also      those         for our commercial                     cusio;ners.
We will             continue              to be responsive                        to your      data       requirements.                 And     we vJill
continue             working              closely          v;ith         you      to improve           all    aspects       of our programs.


We agree               that        the     920 million                   settlement          we have           negotiated              with     8ocing
resolves            the      claim         Boeing          submitted                to the Air          Force      on our behalf                for the
                                                                                                                           .
short        range          attack         missile          (SRAM)               motor      program.




                                   LOOK             TO       LOCKHEED                        FOR          LEADERSHIP




                                                                                     53
APPENDIX          VIII
               Page              2



    The       tionoroljle            David       Packard                                                                                      Jonuary        5,      1971



    With       reference             to ship        construction    claims,   we are not prepared     to accept    the Navy
    offer      of $.5& million.                   It is our belief,     however,   that if both parties   continue    to pursue
    negotiations               diligently           a mutuclly              acceptable           solution           can be achieved                     within       a
    reasonoblc              period       of time.


    We accept               your proposals              regarding             the AH-56A   Cheyenne                           development                ond production
    contracts.               In consideration              of the            Department  of Defense                         offer we will               withdraw   from
    litigation           our claim            regarding            the Cheyenne                production               contract,         although           we consider
    that      we hcve           a sound          case before               the Armed           Services           Roard         of Contract             Appeals
    challenging                the default           cancellation                of that       contract.


    With       regard          to the        C-5A      you offered               us two alternatives.                       One        wos to reduce               the
    number           of peripheral               issues in dispute                by negotiation                 and to allow             the      core      of the
    disagreements                 to proceed           through             litigation.           The other              alternative           was to settle               the
    entire       dispute          by eliminating                  all     issues and          imposing           a fixed         loss on Lockheed.


    Although             you are         fomiliar        with           the position          we have            taken      on the        C-5A          contract,              I
    should        like      to cutline           it briefly             once     again        so that         you will          appreciate          the reasoning
    behind our choice                      between the proposed alternatives.

    We       entered        into      the     C-5A        program              in 1965,        fully      aware          that     it was the government’s
    first     contract          under        the total            package         procurement                 concept.            At thot       time       we recognized
    the     worthwhile               objective         of putting              the total        program            --     development,              testing,             and
    several         years       of production                --     under       .contract       at one time.


    This     fixed       price        type     contract            was deliberately                  constructed                with   a repricing               formula
    designed           to prevent            so-called             windfall         profits      and          provide       protection           against          catastrophic
    losses.          This      repricing          formula          was a necessary                element               of the      otherwise           inflexible
    nature   of this new long tern] 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      hove       signed      the contract               without            this     essentiol         provision         or some
    cornparable             protection.


    The repricing  clcuse has been misunderstood                                               and      in some cases distorted.                           It has
    even been falsely    labeled as a “bail-out”                                        or “get wel I” clause.                          Such charges                 ignore
    the     purpose         of the       contract            as discussed            above -- that of providing                           for o single                long
    term      procurement               and attempting                    to proviae          some sort of protection                         to both       the
    government              and       the contractor.


    You      hove        acknowledged                 that        your     department            hos now           discarded            the     total      package
    contract    as an effective procurement    method.       Our experience    under this form of
    procurement     on the C-5A   program   would   certainly    lead us to agree that it properly
    should       have       been        abandoned.                  Unfortunately,             Lockheed    has been left                          with the
    consequences                of a procurement                    system        that     has proved   to be completely                            unworkable.




                                                                                     54
                                                                                                                                            APPENDIX VIII
                                                                                                                                                  Page 3


The      HonoraLlc              David        Packard                                                                                   January           5,      1971




As finalized                in December                1965     the C-M         contract    was for an initial    quantity    of 58
aircraft          with       options        for additional            quantitie:.        It was bilaterally    amer,ded    in January
1969        by Su~\i,l~mentcll                Agrecrnent             NO. 235 to exercise the option for 57 Production
Run B aircrcfi,                 making          it a contract             for   115 aircraft.               Supplcmenfol                 Agreement                No.
235      made        other       changes          in tt,c co;ltract             including            establishing             target      ond         ceiling
prices       for         115 aircraft.            This amenLl’;?cnt              brought        the       repricing           formulc          info     play.
Congress            was 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  u “final ardor”   for 23 aircraft  of the 57 Production    Run B aircraft
which   Supplemental   Agreement   No. 235 had already       ordered   by exercise  of the option.
Change             Order        No.       521 even            purported         to unilaterally             establish           nc\v      prices         fcr an 81
aircraft          contract.

In our judgment                   the Air      Force action                in issuing Change                    Order   No. 521 constituted
a partial           termination             of th e ccntract              fo: the convenience                     of the government.      As a
unilateral               act the change   order could not reduce                                    the amount   of the                 con:ract              price
adjustment                to which  Lockhczd   would be eniitled                                    under the repricing                   clause.               Il’e are
convinced                our case         is a sound           cne based          both      on leTal         interpretation                 of the contract
and      on considerations                    of equity.              M’e believe           adjudication               of the        case       should          ultimately
permit        Lockheed             to substantially                  recover      its costs expended                    on the prosram                   --      with
even        the      possibility           of a profit          for our nearly              eight      years      of major            eCfort.


Despite            subsequent             criticirm,          we believe             the    C-5A        program          has been           managed              well.
With        the      benefit           of hindsis!?:,          there      may be a number                   of things          WC and           the Air           Force
might        have          [landled        more        cf:ecfively         on the          C-514      program.            Costs,         irr.pressive
because            of the mcsnitude                    of the progra-?,               have     been        a difficult              problzm.            A sig-
nificant           po:tion         of the      co:t       growth       was occasioned                  by the inflexibilify                     of contract
ferms       and          infcrpretation           that        prevented         specification              and     cost       trade-offs.

Neither            party       to the       contract          expected          the massive             escalation            of the war               in Southeast
Asia.         Neither            of us forecast               the uncontrolled                inflation          end     rising        cos:s that             took
place        in     1955 and             suhsequcnt           years.        We hod not               anticipafed              the     surge      of ccvmercial
transport            orders       that     affected         th e aerospace              industry         in those years,    turning   a buyer’s
market            into      a scl ler’s      market         as we sought              suppliers         and subcontractors,       and
restricting               the avnilability               of engineers            and o;her            troined       people.


Our        product           is a c~ood one,          needed  for the security    of this country.                                          We are
providing                the government            with an aircraft   that -- almost uniquely                                          amcng aircraft
weopon             systems        --      is meeting    every one of ifs original     performance                                       CvIrantees
and        is demonstrating                 exceptional               copabilities           in its initial            year     of operation.




                                                                                      55
APl?FNDIX VIII
        Page 4



    In dctcrmining               our rcsponsc to your propnscd     olternctives    for resolution      of the C-54
    dis,wt+5          V.‘C ilr~ve taken into consid~rotion     all the afcrtmPn!icned         factors.      High
    among           the ; ctors consid;lred     \*iere the soundniss     of our leg01 position      v;ith respect
    to the       C-M            contract,            the      inequity            of our being           required to accept      a $200 n-<illion
    fixed        lass ia resolve              all      outstanding                legal      issues,      and the responsibility     we owe to
    our      cor,lpany           and our shareholders,


    We understand                   your     view           that     the fixed            loss settlement               alternative           is preferable             since
    it f~as the advantage                     cffinality
                                               and permits program    continuation     in a more fovorabIe
    c-~rrtractual    environment.        We d o not consider,    however,      that under the circumstances
    of ou: C-54       dispute,    Locl:l iced can accept     a compromise     which   entails such an
    excessive     arrd unwarrcnted        penalty  to LocIheed    as $200 million.       We must therefore
    decline          to settle           for a fixed               loss of $203 million,                    and we elect               to proceed             with
    litigation            in accordance                 v:ith       the basic             guidelines          posed       in the first         alternative             in
    your      Icttcr.            We ore        confident              we can arrive                 at o satisfactory                agreement            with       the
    Air      Force        regarding          the issues to be involved                              inthe        litigotion          and     the      conduct         of the
    litigation            so OS to minimize       its impact on cloy-to-dcy     operation                                               of the program.                  The
    mojor        iSJeS       remaining    in litigation    would include    the dispute                                               regarding   option               exercise
   ond       the related              application               of the repricing                 formulc         but would             not be limited                to that
    single       issue within               the      financial            range       mentioned             in your        letter,


   You       laid        particular          stress upon              the        impact      that      your      prc?osals           might      l,,ge     upon        Lockheed’s
    financial            status.          It should           be p ainted            out     that      we are in the               process         of restructuring                olur
   financial             plan      with      our lending               bcnks:             Vie believe           we will         be successful                 in concluding
   such      arrangcmcnts.                    In this         connection              your       comment             to Senator          Stennis        that      “under
   either        alternative,               it wil I be necessary                      for the Air             Force       to provid           all      fhe    funds        to
   complete              the     C-5A        prosram”               and that         “in     any event,               stipulations           under      either
   alternative              would         inclucla          a repayment               provision          and         interest        charges         cn the unpaid
   balonccs”     will               play an impartont   role,    It therefore   becomes    imperative  the t an
   understanding                   be arrived at promptly     on the provisions     for such payments,    to or frcm
   Lockhoed,               depending                on the olutcome                 of the       litigation.              We shall           continue          to work           with
   your      office         to complete               these         provisions.

   We appreciate                   the      thoroughness                  with      which        you have            stated     your       position           and the
   reasons          for it.         I have          tried       to be equally               thorough           in outlining            the     reusons         behind
   our decision                 to choose           the alternative                  of litigation             of the         C-5A      issues.


   We       share        your      desire     to finclize                 details         of your      plan      of action            by the end of Jonuory.
   We stand              ready      to m eet with                  your     representatives                 on an expediied                  schcc!ulc          to resolve
   the remaining                 details          in arriving             at final         solutions          that     may      best and        equitably             serve
   al I interes!s.


                                                                                                                      Sincerely,




                                                                                                                     D.    J,   tlaughton
                                                                                                                     Chairman          of the         Board


                                                                                            56
                                                                                     APPENDIX IX
                                                                                         Page 1

                                    THE   DEPUTY   SECRETARY        OF   DEFENSE
                                             WASHINGTON,   8. C. 20301




                                                                                   January     27,    1971

                                                            C
                                                                0
Mr. D. J. Haughton
                                                                     P
Chairman  of the Board
                                                                         Y
Lockheed Aircraft   Corporation
Burbank, California     9 1503


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 program,            which is the right of Lockheed.              You also
indicated   that Lockheed       could not agree to limit      the litigation        to the single
issue of the option exercise         and the related    application      of the repricing
formula,    as I had contemplated         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 propo’se.                        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
                                                                             c.
                                                                                  0
                                                                                      P
                                                                                          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,
     the 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 payments                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 restructured            contract.       It would further        provide      for repayment            “7
     Lockheed        to the United States of that amount paid by the Air Force                             frr
    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 million         or 10% of net profits          before     taxes per year,          with
    interest      at the prime       rate and with repayments               to be adjusted          upward      in
    the event of payment             of dividends        by Lockheed.         In   the  event     of  bankruptcy,
    the unpaid balance would become                     immediately       payable.         The repayment
    would also be secured              by a lien to the Department               of the Air Force           on the
    Lockheed        Marietta      Plant.

            This proposal   is based on the assumption,     of course,   that 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 letter     of December      30, 1970 to the Chairmen        of the Armed       Services
x   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      for the C-5A program,     we will be pleased     to
    make    it available.

                                                             Sincerely,

                                                              /s/    David        Packard

                                                      58
                                                                                                        -   -   _-.   A




                                                                                        APPENDIX X
                                                                                            Page 1




Under all of these circumstances,                Lockheed really     has no choice.   Other alterna-
tives would jeopardize            the ir;.terests   of our stockholders,     employees, subcontractors
and suppliers,      airlines        and other commercial customers, the banks who have supported
us and who base additional             credit availability       upon an agreement for resolving      our
disputed    contracts       -- and certainly       the interests     of the Government itself    which
depends upon Lockheed for continued production                   on programs that you have descrlted
as "particularly        criticalto        the nation's     defense."




                                                      59
APPENDIX X
   Page 2




             SincercILy,
                                                                                                                            APPENDIX XI
                                                                                                                                Page 1




                                                             February        17,     1971




Mr. Milo Wirtstock,       Audit Manager
U. S. General     Accounting    Office
Federal Building,    Room 7068
303 North    Los Angeles                Street
Los Angeles,    California                 90012

Dear     Mr.    Wietstock:


During      recent      discussions,          you    requested         additional       information         on action      taken      by Lockheed
manage,ment           to curtcil        expenses       and minimize           cash     rquirements.            In pcrricdlar,         rei,rcnce
was made        to special         efforts      directed      toward       these     objectives       by Lockheed          managcmcnt,             in
recognition          of the     impact        of potential       losses which          might      accrue     from    the p:oblem           Go3     pro-
grams.


Attached        is a brief       summary         of considerations            and actions           of mancgement          which      resulted         in
part     from   special        emphasis        and attention         to cash        conservation,           However,        I also    would       like
to comment           briefly     on our normal             program       to control         expenditures      and cash       requires-,ents.
This program,     which            has been         utilized  for many years,                  is based     on a formal       management
approach    to financial             planning        and includes   a number                  of specific     activities      providir,g         finan-
cial and management                 control.

For example,            short    term     operations         are based       on approved            management          budgets      which       nst
only   set forth goals for sales and profits,           but also include       integrcted   management        ~lcns for
fixed   asset expenditures,      overhecd      targets,    independent        R&D effort   and cash flovl.        Pcr’or-
mance,     in relationship    to management         budgets,      is monitored      on a continuing     basis with
planned     mid-year     and year-end     performance        reviews     at the corporate      level.    Specific    reviews
arc held for consideration        of capital     expenditure        proposals    and independent      research     and
development           programs   to assure  integrated      programs    with maximum        benefit   and mini;;um
expenditure          on a corporate-wide      basis.     Management       budgets     and opercting     plans cre sup-
plemented      at various    organizational        levels with targets and controls          for manpower,       overhecd,
facility  utilization      and other management           objectives.       In addition    to project    and company
management         reviews   of ongoing     programs,      reviews    of significant     and critical    programs are
held     at the corporate            level.




                                                                         61
APPEWIX                   XI
            Page 2

 MN.      Mile      Wictstock                                                                                              February       17,        1971




 For the         longer        term,      managemen:        planning         and    control   is implemented    through                development
 and      consideration                of formal    long    range plans,           semi -annual    1 C year moncgenent                   fOiCCC5!S

 and 5 year financial    forecasts.                        These include           consideration         of long    term     ccpital      expendi-
 ture plans and capability     development                            programs.

 During          1969 and         1970,       we have      stressed     the importance             of our financicl         objectives          to cll
 levels of manogen~cnt     and                     in turn to all employees      throughout   the Lockheed     orgonizction.
 This matter  has been given                        close attention  at senior management        meetings   and in cor<e-
 spondence   and association                       with operating   organizations.         On November     11, 1969,
 Mr.      Haughton             wrote      to all   members of supervision               on the subject,  “Managing   for PI-oiirs”,
 emphasizing       our environment,                   our responsibilities              and the need for a new spirit of involve-
 ment      and achievement.       Etch                 of the Lockheed             companies         has followed      with      variotis       :;jccicl
 programs         and      efforts        - to increase      productivity,           to improve        performance,          to curtcil         cxpenci-
 tures,      to conserve               cash   - in essence,       to do a better          job      in view   of our environment.


 The attached     summary of considerations                            and actions   of management               is not all-inclusive.
 However,     it should provide insight    into                        our efforts to develop   and             maintain    the mos: favor-
 able     financial            environment          consistent    with       the tasks     confronting       us and        the resources             avail-
 able     to us.


                                                                                           Sincerely,



                                                                                           *fy;yjzysJG
                                                                                           President




 Attachments




                                                                             62
                                                                                                                                            APPENDIX XI
                                                                                                                                                Page 3

                                     LOCl;ti’EED            AIKClY\FT             CORPOZATION




                                                      EFFORTS         TO       CU?.TAIL
                                            EXPENDITURES  AKD  KINMIZE
                                                CASH REQUIKEMENTS




The following                is a brief       summoty     of acfioris    taken throughout     the Lock:;c&
Aircraft          Corporation             to curtail   expzna ‘itures 0r.d minimize        cash re-puiicments.
It is not all-inclusive.                     In particular,      it c’ocs not include     all those po:cn!icl
actions   (such as disgosi:ion                        of CJsSe:S, merscrs,               etc.)       considered             and e):plorec’
by monagernent,                    but determined             no: to be cppropriate                    nor in t!-,e best               ir,tc;cst
of stockholders,                 creditors,          customers        or c;nployecs.                 This summary              is present&
in categories             ijut     not    necessarily           in aider       of impoitcnce.




FACILITIES


           Capital       Expendiiurcs


           Following          a series        of detailed         mancgement              reviews,             1970     capital         cxpendi-
       tures         were budgeted             at $100 million.                   This rcprcscnted       a net c&l      invest-
       ment          of $33 million            after deducting                 funds provided      through    depreciation.
           Through  deferral, SulJstitution and elinination    of items,    ca,oiial exp>ndi:ure
           plans were reduced   in all companies    to the minimum     lever consic’ercc’    pro-
       dent          for continuing            operations.            Actual          expenditure;              for the year            were       $63
           million      with       net cash         investment         after       depreciation               arnountir,g         to $7 millior,.
           Cash      requirements             were     $31 million             less than         originally           planned.

                                                                                                                                              .
           Sale      of Assets


           In addition           to the     normal          proSrcm        of disposing           of ob;oletc             or nor,?roductivc
           property,         special        studies      were      made        in 1970          to consider           disposition            of cssi-ts
           not    required         for current         and      anticipc       :ed operctions             in the necr             te;m.            Con-
           sideration         ‘*vas given        to marketability                - timeliness           end       value      as well          0s
           potential         to generate            cash.    As an alternative,     considera:ion                              wcs given to
           requirements             for security         in suppor: of bsrrowir,gs.      IZesulti:S                           cct;sns  Include
           the disposition               of unused       land     at Newport             Beach,         California,              end        the sale
           of CI 50 yeor           land     lcasc      in Palo      kiito,        California.            h”,anascment               v:ilI     continus
           to review         the     possibilities          of raising         cash     through         the sole          of osscts         not rec,uired
           in operations.




                                                                             63
APPENDIX XI
     Page 4




      Deactivation        and    Reduction      of Facilities

      Special     reviews    of marginal       facilities        enabled     sevemf companies      to deacti-
      vate or    mothball     their facilities         in order to reduce operating         costs.     The
      Georgia       Company’s      Dawsonville          facility     was shut down and efforts are under-
      way to     dispose of land at this site.                The California      Company   deactivated       its
      Oxnard      base for the AH-56.A           Flight       Test activity.

      Actions     to reduce leased space have resulted                 in terminating     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 Spze Company
      had 35 short term (five years or less), lease buildings                    which accounted       for
      approximately        26% of its Bay Area building              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 term
      leased space within           two years,     and a reduction        from January      1969 of approxi-
      mately     $7CO,OOO in annual rental             costs, plus apprcximately          $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
      Cal!fornia    Company      acquired     220 items from other companies.            In addition,
      eight machine       tools and other equipment       were rebuilt     at a cost of $443,000.
      Replacement       cost for equivalent      items was $960,00Q,        representing     a cost
      avoidance     of over $500,003.

  CONTRACT        ADMINISTRATION

      Cash flow was significantly                   improved     during      1970 through        efforts of the
      companies        to negotiate         timely     contract     modifications         for faster collectton
      of receivables.            The cash pull-ahead             ranged from two weeks to two years
      earlier    than anticipated             and involved        over $60 million.             Important     examples
      include:      (1) timely      billing       of performance        incentives       on the Poseidon program;
      (2) weekly        billing    cycle to replace           biweekly        billings   on certain       classified
      contracts;      (3) expedited           sefflemenf      of dispu!ed        claims and final pricing            of
      C-141      contracts       at the Georgia           Company,        allowing      collection      of accrued
      price increases;          (4) pursuit of provisional             billing      amendments        on undtbfinitized
      contract       orders where work was completed;           (5) evaluation   of negotiation    and
      definitization       of bi!ling     amendment     60 days szoner than normal procedure          for
      the P-3C program;            (6) incremental    billings cj“ ?-3C contracts    rathc, tt\an one
      lump sum payment           at completion;     ond (7)acceleration        of Navy certifications
        r S-3A contrcct        milestones.

                                                                64
                                                                                                          APPENDIX           XI
                                                                                                                      Page        5




Eiforts to Curtail    Expenditures
and Minimize       CGSI~ Requirements




FINANCING          THROUGH          VENDORS

     Efforts to shift more of the financing           to suppliers       during     1970 huve been
     successful.       These include:     (1) ne g o t’ ra t’Ion of extended        or deferred     pay-
     ment to suppliers      for L-1011    equipment;          (2j at the California        Company,
     deferral    of progress payments       to major suppliers          until coilections       ore
     received      under prime contracts;      (3) instituting         o policy    not to accept and
     pay for materials      ahead of schedule;        and (4) establishing           mal:e-and-hold
     arrongements       with vendors for a variety           of materials,      reducing     unit cost
     through     larger runs and deferring       payment         until moteriols      ore actually     needed.

ACCOUNTS          RECEIVABLE

      Receivables        at the end of 1970 were down $45 million                      from year-end        1969,
      and were $27 million           under budget.          The amount         of receivables       outstanding
      over three months declined              by $44 million         during     1970.      This wos the result
      of actions      token to negotiote        improved       billing     modifications       and improved
      billing    procedures.        For example,         at the Missiles and Space Company,
      special    efforts were mode to close completed                    contracts      in 1969 and 1970
      resulting     in collection      of approximately          $3 million       each yeor compared            to
      nominal      amounts in preceding           years.     At the Electronics           Company,        customers
      moil checks directly          to the Electronics         Compony’s         bank which reduces the
      collection       cycle.     In addition,      precontractuol          expenditures       were reduced
      from $20 million         at year-end       1969 to less than $3 million               ot yeor-end       1970,
      the lowest level in several years.                  To summorize,         the turnover       of receivables
      improved       during    1970 OS the number of days of cash receipts                      in net receivables
      declined      to 42 days - 12 days less than ot December                       1969.

INVENTORIES

      Actions     were token during            the yeor to improve          inventory     management.
      inventory     turnover       increased       at nearly all companies.             For example,    ot the
      Georgia      Company,          1970 turnover        was 6.1 or 1.4 better than 1969, ond ot
      the California        Company,         material     inventory     turnover      improved   from 5.4 times
      in 1969 to 6.1 in T970.               At the Missiles        and Space Compony,           compony-
      owned inventories           at year-end         1970 represented        the lowest year-end       balance
      since 1962.         JetStar     fabrication       and assembly was stopped in order to keep
      inventories      from increasing           and current     inventory      will be substantially
      liquidated     before production             is resumed.
APTENDTX   XI
       Page 6



      Efforts      to Curtail                 Expenditures
      and   Minimize               Cash          Requirenenrs




      PERFORK‘INCE                        TO      BUDGET


                Overhead                Expense


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


                Accounts               with     significant               underruns               were     primarily         labor         related.            In
                March,           all     companies                dropped           their         indirect/direct               personnel             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 28.8%             by year-end
                1970,       the         lowest          ratio         in the Corporation’s                     history.


                New       Business             Expense            (IRRID/B&P)


                1970      new          business           expenditures               were          the lowest           since       1956.         Intensive
                management                    reviews           cut     initial      allocations               by $27 million.                   In addition,
                strict     controls             enforced              at each        company              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 year-end                1969       to 84,400            at
                year-end               1970,       a total            reduction          of       13,200.           While         direct       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
                meosures           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

t     ,c to C~rlc..~            Zxpenditures
anu   ij,inimizc          Cosh     Requirements




EMPLOYEE             COMPENSATION


      Executive            Compensotion


      The Management                     Incentive            Plan    wos elimincted               for 01 I companies                 for
       1969      and       1970,       thereby        reducir,g         remuneration              to key      officiuls         of the
      Corporation              by approximately                   25%      in each      of these          years.


       Salary       and     Wage         Rates

       This orea          was subjected               to special         management               attention          ans’ cont:ol             in
       1970,        ond     effective         results         were    achieved          despite        continued             increcscs
       incost        of living         ond the         substanticl          decline       in the work              force.        For
       example,            both    the       Georgio          Compcny         and the Missiles                 and     Spc;ce         Con;sc;ny
       set internal            0rgcnizat;on             tcrgnts       for such        items     as     onnucl        SS!Giy     rcte
       increases,      salary rates,         hourly    rates und salary-hourly        n;ix.   Althougll
       1970 hourly         pay ir,crecses       were c:.*+oSlisheci     by a previous!\/    negakictcil
       Union-Company             cgrefjnent,        continucl    scrutiny   and extra controls       over
       hourly     classification        mix limited       the rcte increase.       Solar-y rate increases
       were        minimized           cs a result            of concentrated            management                efforts      to (1)
       release         higher      paid       but     less effective           enployees,              and     (2) effect         demotions.
       There        were       1,372      dcrr,otions           of salary        personnel         at the Gcorgiu                Company
       with        reduction         in rates amounting                  to $1.8        million        per year.              Thsre         vJerc
        1,155        position       audits       conducted            ct the      Missiles         and       Space      Co;r,pany
        resulting          in over       300 downgradings                  with     cn onnual            solcry       reduction             of
        $233,003.               In addition           to cl1 othe:          actions,          salary      merit      ar.d p:omotionai
        increases          were      held     to opproximatcly                  4.0 $6 of the            corparate-wide                 salaried
       payroll         compared           with       6.2%        in 1969      and      6.7%        in 1968.


        Overtime                                                                                                                             .

        Overtime            was closely             scrutinized          throughout   the Corporation,       with                           mar;y
        companies            strengthening              controls        and effecting    changes    in solcricd                             over-
        time       payment         palicy.           Soloiied         overtime         payment           wos virtually            elimincted
        at the Georgia                 Company           except         for extrao:dinary                circumstances              which
        resulted          in the     fourth         quarter       of 1970       showing         a 75%         reduction          of premium
        costs      at the Georgio                Company             compared          to 1969.




                                                                      67
APPENDIX XI
     Page 8




           Strict control   ovci the mana~a~ent/organiizationc;l         structu:e                                                  resulted       in
           the improvcmcnt        in the suporvisary    ratio (salaried supervisors                                                  and managers)
           at nearly   all co;;;;,anies   du:ing    1970 despite   a 13% reduction                                                   in total
           employment             Ti jis was achievtd
                                  .                     through    reorganizations                                         ar.d consolidations
           at each         company,      which alsa rcsultcd    in other reduced                                          operctins           costs.          At
           the Georgia      Compcny,                      691 management       positions    were eliminctcd,        a 27%
           reduction   fro;,, 1959,                    leading    to improvement       in the supervisory    ratio.
           Timely         mar-z~cment                actiozs   cr,&lec!   the Missiles and Spccc Ccr.;pcny            to
           maintain          its supervisory                ratio     at a relatively             stable      level         for the past              three
           years       despite         a 35%         decline         in cmp\oyment               since      1967.


    PRODUCTIVITY


           Although          difficult           to quantify            in a meaningful              composite              statistic,          there
           is strong        evidence             that    productivity              throughout            the Corparation                 improved
           in 1970.           For excrr,ple,                at the      Georgia            Company,         where           total      csscn~bly
           and     fabrication              efrort      is by far the most significant                        part        of their        total        1973
           activities,           standard            hours        per 49-hour         man       improved        by 33%               in CjsexSly
           and 5%          in fabrication                    At     the California            Company,           P-3C          stcndard           hodrs
           per do-hour                man     imp;dved’.S%.


           The h’iissiles             and     Space         Company          established           a 1970      objective               to achieve               a
           15%       improvement               in factors            affecting        overall       productivity              and        cost     reduction.
           All     managers            were      directed           to take        eight     specific       steps to achieve                    the      prs-
           ductivity          improvement                program.            This objective               was achieved                 to the satis-
           faction        of the Missiles               and         Space     Compcny            President.


    DATA         PROCESSING                  EXPENSE

           A Task         Force        was established                in 1970,         under       the direction              of o Corporote
           Executive           Vice         President,          to determine    future               computer      and              ED? systems
           activities         throughout              the      Corporation   in order               to significantly                 reduce   this
           expense.           A study            WCS also           mcde     of centralizing               computer            operations              for
           small        Lock!-iecd          companies             in California.              The results           of these          efforts         cre
           being         evaluated.             At the Missiles    and                 Space Company,                  there          v:as a net
           reduction          of seven           computers,   resulting                 in annualized                savings           of opprcxi-
           mately     $533,003      in equipment                         costs.        Similor      actions          in     197:      v:ill     result
           in additional      sovin- js of mare                       than       $90?,033         annually,               Ths Georgia                 Coa)ony
           ha5 dcvclopcd                 plans       to climir~stc           equipment           at on cnnuat                savir.gs         of $C32,CZ3
           in 1971.




                                                                              68
                                                                                                                                             APPENDIX XI
                                                                                                                                                 Page 9

Ed :               Curtail       Expcnditurcs
ant. I ii’,        ,IZC Cash          F,cquircnents




COST          REDUCTION                PROGXAM

        The Corporation       grzatly     inter,sified     its cost reduction     progrcn      activities
        in 1970.    Startin;       the year off,       the highest   dollcr   gou! in the ten ycor
        histo;y  of tl-,c p;ogrG:”     vfas es:cLli:hed        by corpol-ate   rnc;r.c,-cmcn:.        AS                                          c

         result     of this goal          and corporate            mancsc,nen:     direction,      cornpacy    monc~c-
         ment      attention          crld p;oi;,otion          of the cos: reduction       eifor;   were r,o;icccbiy
         incrcoscd.             At    the Geo;aia             Company,     for example,       a series of “cost
         reduction   and ccsh conservation”       mcctlngs      v/2re he!d iu;Ing     the yet;      by
         the com~x~ny President       and his fincr,cial    staff with sevexl     hunc’:cd      n-.cl:c=d:s
         and supervisors   fror;~ all functional    orgonizctions.        Largely dJe    i0 t!;iS    ~.,;;I1

         by management                  in thct     one       cozlpany       alone,            there     was       cn      increase          oi GZ’,a
         in the actual               number       of cost      :eduction             actions        taken      during             1970     co-;?;rid
         to 1963,            and dollor       savings         reportec!         in    1970 were              52%        hisl;c;      ti,an      t,>e
         year      before.

         For the       Corporation            as a whole,             the dollar             goal      was me: and                 the:e      WCS c
         35%       increase          in ti-,e nu,xber          of ccticns            implemented               in 1970            co;?ared             :o
          1969,


 MANAGEMENT                      MEN,OS                   .


          Special       Management                Memos        were       issued        during         1973        conveying               top mcrqc-
         merit’s      concern           for controlling           expenditures                 and minimizin;                     ccsh     require.zenis.
         In November    1969,    D. J. Houghton                                 issued a corporate-wide                             memo        to ~111
         members  of supervision    on “!&ancging                                 for Profits”.   A. C.                       Kotchian           cskcd

          the     company            Presidents      for thei:        personal           attention            to cost         reduction           for       19%.
          The Missiles            and     Space      Company             President,            S. W.          Burriss,            est&Iis!ied            far
          each      of his organizations                  eight    objectives                to achieve            increased             produc:iv;:y
          in 1970.            The Elec:ronics             Company           President,              G.        L. Seelig,              wrote       to cII
         members             of supervision         cSou k cost           improvcmenfs                 for     1970.              The CaIifo:n;o
          Company         President,   C. S. Wcsr,er’s   rcpor:                                to Executive  Vice President
          William        Rieke,   on the California   Company                                  cash management    wcs also scr8:
          to the Missiles              and    Space       Compc~y           and        the     Georgia          Company               for possible
          implementation.




                                                                           69
    APPENDIX XII
          Page 1

                 LIST    OF OFFICIALS    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

    SECRETARY OFTHE ARMY:
        Stanley R. Resor                        July     1965       Present
        Stephen Ailes                           Jan.     1964       July    1965

i   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   M. 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
                                                         From                   To
                                                                                -

                                    DEPARTMENT OF THE NAVY

SECRETARY OF THE NAVY:
    John II. Chafee                                  Jan.    1969      Present
    Paul R. Ignatius                                 Aug.    1967      Jan.          1969
    Charles  F. Baird (acting)                       Aug.    1967      Aug.          1967
    Robert H. B. Baldwin    (acting)                 July    1967      Aug.          1967
    Paul H. Nitze                                    Nov.    1963      June          1967
    Fred Korth                                       Jan.    1962      Nov.          1963

ASSISTANT SECRETARY OF THE NAVY
  (INSTALLATIONS AND LOGISTICS):
     Frank Sanders                                   Feb.    1969       Present
     Barry J. Shillito                               Apr.    1968       Jan.         1969
     Vacant                                          Feb.    1968       Mar.         1968
     Graeme C. Bannerman                             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.   1965       Jan.    1969
    Eugene M. Zuckert                                 Jan.   1961       Sept.   1965

ASSISTANT SECRETARY OF THE AIR
  FORCE (INSTALLATIONS AND LOGIS-
  TICS):
     Philip N. Whittaker                              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