oversight

Implementation of Emergency Loan Guarantee Act

Published by the Government Accountability Office on 1977-04-25.

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

                         DCCUMENT RESUME

01922 -   A1172175]

Implementation of Emergency Loan Guarantee   ct. PSAD-77-101;
B-169300. April 25, 1977. 17 pp.
Report to the Congress; by   Elmer B. Staats, Comptrc.ler General.

Issue Area: Accounting and Financial Rep3rting 2800).
Contact: Procurement and Systems cqgu   ition Div.
Budget Function: National Defense: Deportment of Defense -
    Procurement    Contracts (058); General Government: Central
    Fiscal OFerationu (803).
Organizaticn Concerned: Lockheed Corp.; Department of the
    Treasu) y; Department of Defense.
Congressional Relevance: House Committee on Banking, Finance and
    Urban Affairs; Senate Committee on Banking, Dousing and
    Urban Affairs; Ccngress.
Authority: Emergency Loan Guarantee Act of 1971 (15 U.S.C.
    1846(b) (Supp. I)).

         Lockheed Cocrporation is the only hclder of a guaranteed
loan and has $80 million outstanding. The Government's
commitment terminates at yearend unless terinated earlier by
the lending banks' voluntary release, but the commitment can
also be extended. Firdings/Conclusions: Lockheed plans to have
the guaranteed loan terminated at yearend and then switch to a
normal revolving line of bank credit. Corporate assets, totaling
$178.7  illion in 1975, were pledged as security for the
guaranteed loans, and the lending anks have agreed to
subordinate their interest to those of the Government. The
emergency loan guarantee fund, used to pay expenses and fulfill
board obligaticns, had accrued up to $6,607,152 in September
1976. Lockheed and its lending banks consummated a financial
restructuring program to improve its equity position and extend
the period of nonguaranteed bank loans. Lockbeed's management
policy, established in October 1975, to institute more effective
controls over foreign payrtant practices, offers reasonable
assurances against company payments t    foreign officials but
cannot control all external factors. (SS)
          REPORT TO TIlE CONGRESS

  ;, --   BY THE COMPTROL LER GENERAL
,.' a:    OF TIHE UNITED STATES




          Implementation Of Emergency
          Loan Guarantee Act
          Lockheed Aircraft Corporation
          Emergency Loan Guarantee Board

          This is the current status of ockheed's finan-
          ci31 position and its ability to repay the Gov-
          ernment guaranteed loans. GAO evaluated the
          collateral securing those loans and assessed
          the impact of the disclosure of questionable
          commission payment; on current and future
          foreign sales.




                                                            APRIL 25, 1977
          PSAD-77 -101
                @MPTIL
                    UR    GINIW AL OF THE UNIED tATWS
                         WASWINOIWN DA LW




B-169300




To the President of the Senate and the
Speaker of the House of Rpresentatives
     This is our fifth report on the implementation of the
Emergency Loan Guarantee Act administered by the Emergency
Loan Guarantee Board.
     This review was made pursuant to the Emergency Loan
Guarantee Act, 1971 (15 U.S.C. 1846(b), supp. I, 1971); the
Budget and Accounting Act, 1921 (31 U.S.C. 53)v and the
Accounting and Auditing Act of 1950 (31 U.S.C. 67).
     Copies of this report are being sent to the Director,
Office of Management and Budget, and to the Chairman,
Emergency Lan Guarantee Board.




                              Comptroller General
                              of the United States
COMPTROLLER GENERAL'S          IMPLEMENTATION OF EMERGENCY
REPORT TO THE CONGRESS         LOAN GUARANTEE ACT
                               Lockheed Aircraft Corporation
                               Emerqency Loan Guarantee Board


      DIGEST

      This is GAO's fifth report on activities of Lock-
      heed Aircraft Corporation, the only company to
      apply for a guaranteed loan under the Emergency
      Loan Guarantee Act of 1971. As of February 18,
      1977, quaranteed loans to Lockheed totaled $80
      million. The Government's guarantee commitment
      is scheduled to terminate t yearend unless
      terminated earlier by the lnd1ing banks' volun-
      tary release.   H-owever, the-Emergency Loan
      Guarantee Board  has statutory authority to e tend
      Lockheed's guaranteed loans until December 31,
      1978.

      Corporate assets--the outstanding shares of five
      wholly owned subsidiaries and certain machinery
      and equipment--are pledged as security for the
      guaranteed loans. The Government has been placed
      in a preferred position with respect to the col-
      lateral. Based on current bovk valuations and
      certain known market values of the pledged assets,
      the Government's interests appear to be adequately
      protected.   (ee p. 3.)

      Although there are uncertainties associated with
      the L-1011 TriStar aircraft program (see p. 13)
      and some proposed foreign sales due to the
      disclosure of the company's foreign commission
      payment practices (see p. 7), Lockheed expects
      to realize sufficient revenues to liquidate its
      guaranteed loans by yearend 1978 if the posi-
      tive premises in its July 1976 forecast materialize.
      However, in its December 1976 forecast, Lockheed
      changed its premise to provide that the guaranteed
      loans be terminated at yearend 1977 and any un-
      liquidated balance be replaced by a normal revolving
      line of bank credit.   (See p. 3.)

       After receiving the required approvals, Lockheed
       and its lending banks consummated a financial
       restructuring program on October 27, 1976. The
       plan has been basically designed to improve




  ' Lm4shou   bnoted   e   "    i                PSAD-77-101
     Lockheed's equity position and extend the period
     of its nonguaranteed bank loans. (See p. 5.)

      In October 1975, Lockheed established a manage-
      ment policy to institute more effective controls
      over the selection and approval of international
      marketing consultants and related payment pro-
      cedures. GAO believes that Lockheed's policy
      and procedures contain controls that pirvide
      a reasonable degree of assurance that the com-
      pany itself will not make payments to foreign
      Governmental, military, or customer officials
      for their influence in securing sales. However,
       there are some external factors in the foreign
      market beyond Lockheed's control and the com-
      pany's actions alone may not necessarily preclude
       the possibility of money ultimately flowing to
       such officials. (See p. 8.)




                              ii
Tur Sht
                    C on t    n t




DIGEST                                             i

CHAPTER
   1       INTRODUCTION                            1

   2       LOANS UNDER GOVERNMENT GUARANTEE        2
               Corporate assets pledged as
                 collateral                        3
               Emergency loan guarantee fund       4

   3       NEW FINANCIAL RESTRUCTURING PLAN        5

   4       SALES IMPACT RESULTING FROM QUESTION-
             ABLE PAYMENTS TO FOREIGN OFFICIALS     7
               Effect on potential foreign sales    7
               Revised management policy            8
               Other matters                       10

   5       FINANCIAL OUTLOOK                       12
               TriStar production and sales
                 perspective                       13
               Financial forecast                  15


APPENDIX
      I    Officials of Emergency Loan Guarantee
             Board responsible for administering
             activities discussed in this report   17

                      ABBREVIATIONS

SEC        Securities and. Exchange Commiss ion
GAO        General Accounting Office
LTU        Lufttransport Unternehmen
                          CHAPTER 1
                        INTPODUCTION


     This is our fifth report on activities of the Lockheed
Aircraft Corporation, Burbank, California, the only business
to apply for a guaranteed can under the Emergency Loan As of
Guarantee Act. 1971 (15 U.S.C. 1846(b). supp. I, 1971).
February 18, 1977.'1 guaranteed loans to Lockheed totaled $80
million. Since the inception of the act, we have reviewed
and reported to the Congress on the company's ability to re-
                                                     we have
pay Government-guranteed loans. For this report,commission
developed certain    information concerning foreign
payments made by Lockheed during the 5-1/2 year period ended
June 30, 1975.
     We reviewed corporate actions which iLave had a material
effect on Lockheed's financial structure and examined theand
bases for the comr-nv's  financial forecasts. We tested
relied on the examiLI.tL ans performed by Lockheed's indepen-
dent external auditors as well as its internal auditors     and
the Defense Contract Audit    Agency, particularly in those
areas related to activities involving cash flow, revenues,
and commission payments.      e also reviewed audit activities
related to the integrity   of  assets pledged as collateral
for the company's outstanding loans.
                               CHAPTER 2
                LOANS UNDER GOVERNMENT GUARANTEE
     Since Lockheed repaid $20 million of guaranteed loans
on February 18, 1977, its bank borrowings now total $430
million, $80 million of which is guaranteed by the Govern-
Ment. The company's best loan repayment record was accom-
plished in 1976 through payments of $95 million to the
lending banks. The Government-guaranteed loans are to be
repaid before those without a guarantee. According to its
latest financial forecast, the company projects to repay
an additional $15 million by yearend 1977. A listing of
yearend loan balances guaranteed by the Government since
the inception of the Emergency Loan Guarantee Act is shown
below:
                             RepaYents
Year   Borrowings       orecas____t  Actu         earend balances

       (millions)              (millions)           (millions)

1971      $75            $ -                $-             75
1972       55                          -                  130
1973       70             30                  -           200
1974       45             50                 50         a/195
1975        -             47                  -           195
1976        -             75                 95           100
1977        -             35               b/20          b/80

     The provisions of the credit agreement, negotiated in
1971 by the Emergency Loan Guarantee Board and a 24-bank
consortium, enabled Lockheed to borrow up to $250 million
under Government guarantee. Guaranteed loans were to be
repaid by yearend 1975 unless extended by joint action of
the Board and the lending banks. The act permits renewals
of the Government-guarantee commitment for a maximum of
3 years or, as in the case of Lockheed's borrowings,
through 1978. Because of the company's inability to ful-
fill the initial repayment obligation by 1975, the Board
agreed to an amendment in the credit agreement extending
the Government's commitment for 2 years or through 1477.

a/In September 1974, Lockheed's bank borrowings guaranteed
  by the Government reached a maximum of $245 million.
b/As of February 18, 1977.



                                   2
     In its July 1976 inancial forecast Lockheed antici-
pated that the guaranteed loans would not be fully repaid
until yearend 1978. Under these circumstances, the Board
may be asked to grant a further extension of the repayment
schedule. However, in its newly released December 1976
forecast, Lockheed cheaged its premise to provide that the
guaranteed loans be terminated t yearend 1977 and that
the anticipated $65 million guaranteed loan balance would
be replaced by a normal revolving Line of bank credit.
Corporate assets pled   d as collateral
     Corporate assets--the outstanding shares of five
wholly owned subsidiaries and certain machinery and equip-
nent located in Los Angeles County, California--were
pledged as security for the guaranteed loans. The lend-
ing banks have agreed to subordinate their interests in
the pledged collateral to Government's interests.
      The cumulative book value of the pledged assets totaled
$178.7 million at yearend 1975 or about $34 million less
than at program inception at yearend 1971. This reduction
resulted principally from the operating losses sustained
byv the Lockheed Shipbuilding and Construction Company ($24.5
million) and depreciation charges and disposals related to
real property and equipment ($48.8 million).
     Although book values for real property and equipment
totaled only $75.1 million at yearend 1975, fiscal year
1976 property Lax bills showed a total market value of
$231.2 million. Although we recognize that market estimates
may not be realized in the event of forced liquidation, we
believe that current property aesessments, in addition to
the very favorable earnings record of the company's most
viable pledged subsidiary, Lockheed Missiles and Space
Company, Inc., (5-year total through 1975: $153 million),
are positive indicators that the Government's interests
are protected.
     The company is currently endeavoring to dispose of one
of its pledged assets, the Hollywood-Burbank Airport, owned
and operated by Lockheed Air Terminal, Inc., a wholly owned
subsidiary. Negotiations are in progress for a group of
local governments to purchase t   airport and continue its
operaion, but a final resolution is not expected in the
near future. Independent appraisals of the value of dis-
posable airport property have been obtained by the potential
buyer and by Lockheed. These assessments valued the property
at $35 and $55 million, respectively. Sale of the airport


                               3
will require Board approval to transfer title of the pledged
property.
Emergency loan guarantee fund
     The emergency loan guarantee fund--set up as a deposi-
tory for guarantee and commitment fees earned--is used by the
Board to pay expenses and fulfill its obligations. This
fund totaled $25,909,044 as of September 30, 1976. For the
period August 1, 1975, through September 30, 1976, the Board
earned guarantee and commitment fees of $6,607,152, while its
expenses totaled $198,226. The fund, except for small
amounts to cover current operating expenses, has been in-
vested in U.S. Government obligations.




                            4
                         CHAPTER 3

            NEW FINANCIAL RESTRUCTURING PLAN


     As described in our January 30, 1976, report (PSAD-76-63),
Lockheed's efforts to improve its financial structure had cul-
minated i negotiations with its lending banks in April 1975
on a three-phase financing and recapitalization program.
Although the three-phase program was approved by the Emer-
gency Loan Guarantee Board in May 1975, only the first phase
of the plan was actually implemented. A principal provision
of the initial phase of the plan was the reduction in the
interest rate to 4 percent per annum on the $400 million of
non-guaranteed bank loans.
     Approval and implementation of the second and third
phases of the program were deferred for a extended period
due to negotiations between Lockheed and the Securities
and Exchange Commission (SEC) regarding the extent of public
disclosure of the company's foreign commission payments.
An agreement satisfactory to both SEC and Lockheed was
approved by the U.S. District Court of the District of
Columbia in April 1976.
     Due to changed conditions, Lockheed and its lending
banks negotiated a revised financial restructuring program
in 1976. Tha new financial plan was approved by the Board as
well as the company's stockholders an. debentureholders,
and was implemented on October 27, 1976. The principal
parts of the new financial plan are described below:
     -- $50 million of the company's nonguaranteed bank
        loans was converted into a new series of prefer-
        red stock with a par value of $100 per share,
       mandatory redemption provisions, and a 9.5-percent
       dividend rate payable semiannually on a cumulative
       basis, 'beginning February 1, 1977. (However,
       Lockheed is prohibited from paying any dividends
       until after the loan guarantee program Is termi-
       nated.) Commencing December 31, 1979, the pre-
       ferred stock provides for a fixed annual sinking
       fund amounting to 15 percent of the original
       issue of 500,000 shares for redemption purposes
       at an 8-percent premium, or $108 per share.
     -- The remaining $350 million of nonguaranteed loans
        was converted to a term loan extending into 1981.
        The nonguaranteed loans had been 90-day revolving
        notes. The term loan will bear a 4-percent interest

                              5
      rate through December 31, 1976, the prime rate plus
      1 percent until termination of the guarantee, then
      prime plus 1.25 percent. Principal payments
      on the term loan will be made in eight quarterly
      installments of $20 million, commencing March 31,
      1979, plus one lump payment of $190 million at
      loan maturity on March 31, 1981.
    -- The lending banks will be issued 10-year warrants
       to purchase an additional 1.75 million shares of
       Lockheed common stock. Under phase I of the pre-
       vious program, 1.75 million warrants had been
       issued to the banks. The exercise price for the
       first 3 million warrants is $7 per share; for the
       remaining 500,000 warrants, $10 per share.
     In consideration for the consummation of the revised
agreement, the company agreed to pay the lending banks a fee
of $5.3 million.
     Also during 1976, the $75 million credit agreement be-
tween Lockheed and its lending banks, negotiated in 1974 for
nonguaranteed short-term loans, was canceled without being used.
This credit was available to assist the company over pericds
between completion and delivery of L-1011 TriStars during
1974 and 1975.




                             6
                         CHAPTER 4

          SALES IMPACT RESULTING FROM QUESTIONABLE
                PAYMENTS TO FOREIGN OFFICIALS


     Lockheed publicly disclosed in July 1975 that about $147
million in foreign commission payments were made from January
1970 through June 1975. Of this amount, the company reported
that about $24 million of the payments were known or sus-
pected to have been received by foreign officials and polit-
ical organizations.

     Since the disclosures of the questionable commissions,
the legislative and executive branches of the U.S. Government
and several foreign governments have made numerous inquiries
and investigations of the company's foreign payment practices.
In February 1976 testimony before the Subcommittee on Multi-
national Corporations of the Senate Foreign Relations Commit-
tee, Lockheed officials disclosed certain data identifying
regions where kw    or suspected payments were made, and in
some cases, the names of public officials.

     In April 1976, Lockheed entered a consent decree with
SEC, requiring that the company's Board of Directors estab-
lish a Special Review Committee to investigate and report
on past practices relating to commissions and other payments
made in connection with the company's foreign sales activi-
ties. The consent decree ,cquired the investigation to be
completed by August 1976, or such further time as approved
by the SEC. Subsequently, the completion date was extended
and a final report is not anticipated before spring 1977.
     The Emergency Loan Guarantee 3oard, through amendments
to the 1971 Guarantee Agreement, required that Lockheed dis-
continue its improper payment practices. The amendments
provide that the making of such payments or tie company's
failure to comply with its new policy on the selection and
use of international consultants (see p. 8) are events
which may constitute a default on the part of Lockheed,
causing the termination of the guaranteed loans.
Effect on eotential foreign sales

     Lockheed's July 1976 financial forecast projected total
foreign sales to be about 31 percent of total sales from
1976 through 1978. In the past, company officials believed
that if all details of their foreign commission payments



                              7
were fully disclosed to public scrutiny, the company's
foreign market potential would be seriously impaired. Pre-
sent indications are that, with the exception of uncertain-
ties associated with certain Japanese sales, the disclosure
of Lockheed's commission payment practices has not adversely
affected current or future sales to foreign customers.
However, Lockheed officials believe that the final asezss-
ment of the impact will not be known until after the Special
Review Committee report is released.

     Japan's political climate, resulting from the dis-
closure of questionable payments, has created uncertainty
as to the realization of certain potential sales to that
country. During the course of Japanese government investi-
gations, several government and business officials have been
indicted in connection with circumstances surrounding the
purchase of Lockheed arcraft.
     In one marketing circumstance, Lockheed reported that
the disclosure may have adversely affected the market
potential of a P-3 Orion antisubmarine warfare aircraft
program. Over a 10-year period the program would provide
some $300 million in sales revenues generated from a pro-
duction and licensing arrangement. The disclosure has also
contributed to a delay in the consummation of three firm
orders for the L-1011 TriStar aircraft, which requires the
approval of the Japanese government. Even if the orders,
valued at about $78 million, are ultimately canceled,
Lockheed does not anticipate a negative impact on cash flow
significant enough to adversely affect its ability to repay
the Government-guaranteed loans.

     It appears that the public disclosure may not have
caused an unfavorable Impact on potential Lorkheed sales to
other foreign countries. In one geographic area, for in-
stance, where questionable payments were known or suspected
to have been made, the company has already consummated a
significant part of its projected sales.

Revised management policy
     Shortly after disclosure of the commission payments,
Lockheed took action to institute more effective controls
over the selection and approval of international marketing
consultants and related payment procedures. The policy,
established in October 1975, prescribed the following
restrictions:

     1.   No consultant shall be an official or employee
          of the government or an active member of the

                              8
         armed forces of the country in which services
         ar'e to be rendered. unless such dual activity
         is permissible in the country involved and is
         approved in writing by the head of the govern-
         ment agency or senior officer of the armed
         services.

         No consultant shall be an officer. director.
         employee, or "affiliate" of any customer unless
         such dual activity is permissible in the country
         involved and is approved in writing by the
         chief executive officer of such customer.

    3.   Payments shall only be made by check or bank
         transfer to the order of the consultants.

    4.   No consultant shall make payments to third par-
         ties in connection with performance under the
         agreement if such payments would (1) not consti-
         tute a deduction by Lockheed for U.S. tax PL:poses.
         (2) be in violation of applicable U.S. and cus-
         tomer country la .. or (3) be for political
         purposes.

    5.   Consultants shall comply with applicable laws
         of the United States and the customer country.

    6.   Written consultant certifications are required
         in connection with 4 and 5 above.

     We found that Lockheed's policy and procedures contain
controls that provide a reasonable assurance that the company
itself will not make payments to foreign governmental. mili-
tary. or customer officials for their influence in securing
sales. However, there are some external factors in the
foreign market beyond Lockheed's control and the company's
actions alone may not necessarily preclude the possibility of
money ultimately flowing to such officials.
     The first consideration is the amount of Honey paid to
consultants for their services in securing sales for companies
they represent. The amounts paid are not controlled or deter-
mined by Lockheed alone, but rather by prevailing rates in
a foreign country and in an industry. It seems that the prob-
ability of consultants offering payments to unauthorized
third parties in influential positions and such third parties
accepting the offers increases as the amount of money in-
volved increases.
     A second consideration is the accepted business customs
and practices in the foreign countries. In the past. it was

                              9
the practice in some countries to make payments to officials
of the government, military, or customers for their influence
in securing sales.
     Thirdly, while Lockheed consultants contractually agree
not to make payments to unauthorized third parties and cer-
tify that they are not doing so, it should be recognized that
Lockheed has no means of its own to determine what a consult-
unt ultimately does with money received from the company.

     It i possible that a greater degree of assurance on
the ultimate disposition of moneys paid to consultants would
result from country-to-country agreements on ethical business
practices and vigorous enforcement by participating countries.
Such agreements probably would require political and diplo-
matic involvement and accordingly would be beyond the purview
of Lockheed or any other corporation doing business in foreign
countries.

     We found that Lockheed's policy implementation was gener-
ally adequate except for the procedure of reviewing certain
individuals' or firms' qualifications to serve in a consultant
capacity. Lockheed established a committee to review consultant
qualifications; however, certain consultants under agreements
predating the policy were not reviewed.
     Lockheed's policy does not specifically require a retro-
active review and approval of those consultants serving under
pre-existing areemen1 ,,. In our opinion, however, it seems
reasonable that the ommittee would have undertaken a com-
prehensive evaluation to determine if these consultants meet
the new policy restrictions. Lockheed stated that appropri-
ate reviews had been made by their International Marketing
organization. Our review, however, did not disclose adequate
documentary evidence to that effect. The company agreed
to have th, committee review these conuiltants' qualifica-
tions.
Other matters

     Lockheed reported that as of Juie 30, 1975, it had out-
standing commitments to international consultants for sales
commissions totaling about $48 million. The company advised
that $4.7 million of this amount represented a contingent
liability to an official of a government-owned company. The
customer official requested payment of the sales commission
but Lock!heed has refused because of restrictions in the
company's current management policy. Lockheed's general
counsel indicated that the consultant has initiated foreign
legal proceedings to recover the unpaid commissions. In


                            10
spite of the legal action taken, there has been no apparent
sales impact in the region involved.
     The Emergency Loan Guarantee Board reviewed the possible
aftermath of Lockheed's disclosure of foreign commission pay-
ments in conjunction with the company's December 1975 finan-
cial forecast. Based on its analysis, the Board belieid that
Lockheed could survive the effects of disclosure. It reported
that should a negative cash flow impact cause a small portion
of the guaranteed borrowings to remain outstanding by yearend
                                            is otherwise met,
1978, and if Loc:heed's financial forecast extend
it is likely that the lending banks would         the maturity
of the loans without the benefit of a Government guarantee.
     We were advised by the company's internal auditors that
periodic reviews of commission payments are planned. Lock-
heed's external auditors made a selective review of 1975 pay-
ments. The audit groups have coordinated their efforts in
reviewing the 1976 implementation of the company's management
policy, but have not yet formulated complete plans for such
examinations subsequent to 1976.




                              11
                        CHAPTER 5
                    FINANCIAL OUTLOOK


     Lockheed's financial restructuring program has improved
the company's equity position by the conversion of $50 million
of nonguaranteed bank loans to preferred stock.  (See p. 5.)
Lockheed's reported net worth at the ed of December 1974 was
down to a low of only $26.5 million after the $448 million
retroactive writeoff of research and development costs for the
L-011 TriStar program under a Financial Accounting Standards
Board pronouncement. Since then, the implementation of the
financial restructuring plan and operating profits have
improved the company's equity position on its financial state-
ments. Thus, the unaudited corporate equity at yearend 1976
totaled $166.7 million.
     Close examination of the composition of the company's
net worth, however, reveals that at yearend 1976 there remains
as an asset $453.3 million of L-1011 TriStar deferred charges,
described as initial planning and tooling costs and unre-
covered-production startup costs. However, recovery of
these costs is subject to uncertainties and therefore, they
are being amlortized at a rate of $50 million annually, start-
ing in the fourth quarter of 1975.
     After amortizing $12.5 million of deferred charges, the
company's reported net earnings for 1975 were $45.3 million
on sales of about $3.4 billion. This was almost double the
prior year's profits of $23.2 million on sales of about $3.3
billion. The more favorable 1975 profit picture resulted
principally from a substantial decrease in interest expense
on long-term borrowings (see p. 5) and significant increases
in profits on two military aircraft programs.
     The unaudited 1976 earnings totaled $38.7 million on
sales of $3.2 billion. The decline in 1976 earnings from
the 1975 figures was due mainly to (1) increased provision
for Federal income taxes and (2) increased L-1011 program
losses over those of the prior year. The 1976 L-1011 losses
were anticipated in budgetary projections and resulted from
lower sales activity and the amortization of the deferred
ctarges.
     Lockheed's largest customer has been the U.S. Government,
with annual sales averaging 64 percent of total sales during
the 4-year period 1973-1976. As long as these revenues are
sustained at or near that pace, this income will represent a

                             12
major contribution to the company's working capital needs.
Lockheed'd cash flow has been significantly dependent on
Government military purchases. In spite of the company's
good loan repayment record in 1976, there still remains a
need for Lockheed to conserve its available   cash to the
greatest possible extent. Lockheed must   now  meet sizable
loan and interest obligations in addition  to  the sinking fund
payments required for preferred stock redemption under    the
terms of the financial restructuring program.     (See p. 5.)

TriStar production and sales perspective
      As of December 31, 1976, firm orders for the L-1011 Tri-
Star aircraft totaled 162. Of these, 138 have been delivered
and the remaining 24 were forecast for delivery   through 1980.
TriStar customers have also made commitments  for  46 optional
second-buys, 41 of which are projected to  be delivered  through
1985.
      In February 1975, the company projected 300 TriStar deliv-
eries through 1984. In subsequent forecasts, the delivery
                                                            the
Schedule for the projected program quantity extended into does
late 19808. For the years 1977 through 1980,   the  company
not project delivery of more than an average of 12 TriStars
annually. An average of 15 deliveries per year is required
 to achieve the program goal.
      To maintain the viability of the L-1011 program, the
company has maintained a manufacturing capability and has re-
 tained a minimum of engineering and production personnel in
 excess of the needs of the current production level. About
 $38 million of such standby costs were incurred in 1976.
These expenditures are treated as expenses in the period
 incurred rather than being capitalized as inventory costs.
     The financial outlook for the airline industry's replace-
ment of aging aircraft fleets remains uncertain. Another con-
tingent problem concerns the potential impact of recent inves-
tigations into Lockheed's questionable commission payments
on its foreign sales. (See p. 7.) About 45 percent of the
L-1011 backlog at December 31, 1976, related to foreign air-
lines.
      Lockheed received an initial order for the L-1011-500 Air-
 (Dash 500) long-range version os the TriStar from British
 ways in August 1976. This order (six firm and six options)
 replaced earlier customer commitments for nine L-l01ll's with
 lesser range capabilities. The first Dash 50C aircraft
 delivery is scheduled for 1979.

                              13
     The Emergency Loan Guarantee Board and the lending insti-
tutions comprising the "majority banks" agreed to permit pro-
duction of the Dash 500 version under certain conditions,
including the following:
     -- Lockheed had to obtain a firm order for at ladt
        six Dash 500 aircraft through conversion of exist-
        ing orders for L-1011's of lesser range.

     -- The company had to have an option agreement with the
        same purchaser for the sale of at least six additional
        Dash 500 aircraft.

     --The company had to receive outside financing for any
       additional nonrecurring development costs to assure
       that the Dash 500 program would not affect repayment
       of the guaranteed loans.

     AltN   In the terms of the sale to British Airways fall
within Board restrictions, the sales contract provides that
the customer may not be obligated to exercise its option com-
mitments. Under the sales agreement, the customer may cancel
its sir o-tional second-buys to the extent that Dash 500 sales
to other customers are later consummated.

     In October 1976, Lockheed announced that three new
L-lOll's would be sold to Lufttransport Ur rnehmen (LTU), a
charter tour airline basod in West Germany. The LTU purchase
represents a replacement order for the three L-1011's origi-
nally ordered and ater refused by Pacific Southwest Airlines.
Delivery to LTU was scheduled to begin in March 1977. The
agreement, however, provides for Lockheed to accept tuo used
L-lOll's owned and operated by LTU. As a result, the yearend
backlog for L-1011's was not greatly improved since the begin-
ning of 1976.
     One of the two L-1011's to be traded in by LTU was ac-
quired from Lockheed; the other was originally purchased by
Eastern Airlines, then sold by Eastern to LTU. There have
been other instances of sales competition from Lockheed's
customers. In 1975, Eastern Airlines sold two L-1011's to
Cathay Pacific. Also, Trans World Airlines sold two of its
aircraft to Saudi Arabian Airlines before the aircraft were
put into domestic service.
     Overall, the L-1011 production program obviously hinges
on the company's ability to obtain new orders. If Lockheed's
program goal is not achieved, the resulting loss could have a
serious effect on the company's reported financial position.
Lockheed is currently writing off $50 million annually over

                             14
                                                    and tool-
a 10-year period to amortize the initial planning    of the
ing costs and unrecovered  production startup costs
                                                   of Decem-
program, now classified as deferred charges. As remain to
ber 31, 1976, deferred charges of $453.3 million      terminated
be amortized. If the L-1011 program is prematurely      of the
during the amortization period, the remaining portion
                                                 corporate
deferred charges will have to be offset against
equity.
                                                           for
        We have reviewed Lockheed's accounting treatment
                                                  that they are
 its L-1011 TriStar program costs and we believe of  SEC a:;
 in compliance with the rules and pronouncements
                                                       Public
well as those of the American Institute of Certified
Accountants.

Financial forecast
     In Lockheed's July 1976 financial forecast, Government
                                                           of
military and space programs represented about two-thirds wen
                                                   1978,
the projected sales for the 3-year period through           of
the loan guarantee program expires.   However, projections
                            are subject to congressional au-
future Governtment business
thorization of proposed procurements.
                                                      Defense have
     Our current inquiries at the Department of included
                        two Government    programs               in the
revealed that at least
company's July 1976 near-term forecast have       been either canceled
                     firms.   However,   the  company   does not fore-
or awarded to other                                               by the
cast a negative cash flow impact through 1978 occasioned  revenues
elimination of these programs    because  anticipated
                                                        Even though
would have been offset by startup expenditures.           still pro-
these programs were deleted, Government      sales  are
                             of  total  sales  during   the   3-year
jected at about 65 percent
period 1976-1978.
                                                                 the
      In July 1976, the company executed a contract with
                                                          airciaft
Canadian government for the purchase of 18 CP-140 The CP-140
with a total program value of    about  $700  million.
 is a derivative or Lockheed's P-3 Orion     antisubmarine warfare
 aircraft. The cash flow generated     by  this  sale through 1978,
                            of  contract   implementation,     is
during the initial stages                                no  effect
                                      with  little   or
 estimated by Lockheed as minimal,
 on its ability to liquidate the guaranteed loans.
                                                         interest
      Other than the repayment of bank borrowings and largest
                                    through  1978, the
 fcrecast for the 2-year near-term
                                                       L-1011
 drain on Lockheed's cash reserves is projected for $228 million
 Tri-Star operations in which net  outlays  of about
 are projected for the period.   (See p. 13 for discus-ion of
                                                     atr  expected
 TriScar sales perspectives.) Sufficient revenues

                                 15
to be realized from non-L-1011 operations to provide enough
cashto liquidate the guaranteed loans by the inal maturity
date in 1978, if the loans have not already been terminated
as prescribed in Lockheed's most current forecast. This will
materialize only if the premises in the company's forecast
relating to inward cash flow materialize.




                             16
                                                      APPENDIX I
APPENDIX I

                        OFFICIALS OF

              EMERGENCY LOAN GUARANTEE BOARD
              RESPONSIBLE FOR ADMINISTERING
             ACTIVITIES DISCUSSED IN THIS REPORT

                                          Tenure of Office
                                          From              ---
                                                        To-----

SECRETARY OF THE TREASURY AND
  CHAIRMAN OF THE BOARD:                      1977     Present
     W. Michael Blumenthal             Jan.
                                       May    1974     Jan. 1977
     William E. Simon                         1972     May   1974
     George P. Shultz                  June
                                       Aug.   1971     June 1972
     John B. Connallyv

CHAIRMAN OF THE BOARD OF GOVERNORS
  OF THE FEDERAL RESERVE SYSTEM:              1971     Present
     Arthur F. Burns                   Aug.

 CHAIRMAN OF THE SECURITIES AND
   EXCHANGE COMMISSION:                        1977     Present
      Harold M. Williams               Apr.
                                       Oct.    1975     Apr.  1977
      Roderick M. Hills (note a'                        Oct. 1975
      Ray Garrett, Jr.                 Aug.    1973
                                       Mar.    1973     May   1973
      G. Bradford Coo.                         1971     Feb. 1973
      William J. Casey                 Auq.

                                          participation to
 a/Mr. Hills refrained from active Board    situations because
   avoid any possible conflict-of-interest foreign marketing
   of the SEC investigation of Lockheed's
   practices.




                                17