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
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)