Pacifc Southwest Airlines, a San Diego-based intrastate airline in Califronia, is the major subsidiary of a holding company also engaged in providing engine maintenance and services and in training pilots for other airlines.
In the early 1970s, PSA was one of many airlines pinpointed by officials of Lockheed Aircraft Corp. as potential customers for a new, wide-bodied commercial jet called the L-1011 or TriStar.Lockheed was moving from one crisis to another at the time, and PSA helped Lockheed in marketing the planes to other airlines around the world.
In exchange for this help, which included a traveling tour to promote the TriStar, Lockheed officials arranged for the gift of an expensive boat to PSA. But the gift never was recorded on the troubled aerospace company's books. And, PSA officials never saw the boat.
According to a court-ordered report made public last week by directors of Lockheed in response to a Securities and Exchange Commission lawsuit, the PSA incident was one of many improper uses of Lockheed money involving checks purchased iwth company funds in transactions improperly documented so as to shield them from customary financcial controls. Both the original transaction and the subsequent payment of funds were covered up.
Some of these improper checks resulted in cash in a safe deposit box, available to certain Lockheed officials. The money was used in connection with Lockheed's efforts to market the L-1001 to an unnamed foreign airline and to PSA, "which trained the foreign airline's pilots and had a close working relationship with it."
The commitment made to PSA, for example, was to buy the airline a "sportfishing boat" for $400,000, "in partial consideration for PSA's assistance in marketing the L-1011 . . . in a manner which could not be identified."
Bearer checks were purchased in Hong Kong, delivered to a Lockheed executive in Tokyo, returned to the U.S. and given to a senior official of the boat manufacturer.
The payments, as well as air fares from California to the Orent and back, were charged in the company's account books as commission expenses.
Ironically, as an official of PSA noted last week, "We didn't get the boat."
In January 1975, an electrical fire destroyed the boat while it was under construction. Lockheed officers decided against the purchase of another boat for PSA and insurance proceeds were dropped in another safe deposit box in a Swiss bank.
Relations between PSA and Lockheed today are not quite what they were in the early 1970s, when the aerospace firm was struggling frantically to stay afloat. Lockheed's continuing series of crises were spelled out in last week's report by directors who are not ofsicers of the company.
PSA got overloaded with L-1011s it didn't need and now is engaged in a legal battle with Lockheed over three planes ordered and built but which PSA says it cannot accept.
The TriStars, decorated with PSA symbols, sit on a runway outside Lockheed's factory in Palmdale, Calif.
Although PSA never took delivery of the sportsboat either, the incident is typical of the bribery, extortion, shady accounting and other questionable activities that took hold of Lockheed's top management at a time when they saw their company faced with bankruptcy. Most of the practices uncovered in the recent investigation dealt with sales to some 40 foreign countries. No evidence of illegal political contributions in the U.S. was found.
But the new report leaves many questions unanswered. For example, what foreign airline did PSA have a "close relationship" with? Lockheed's directors apparently know, but they aren't saying. An appendix to the report on Lockheed's overseas payoff practices was withheld from the SEC and U.S. District Court here. In that appendix are spelled out the details of what Lockheed money was used to promote what project in what country.
In the case of PSA, available public information suggests that the foreign airline which participated in hidden foreign money exchanges could have been Lufthansa, the West German airline. In PSA's 1976 annual report, the San Diego firm notes that a center in Litchfield, Ariz., trains pilots for Lufthansa. But the report states that PSA also trains pilots for other airlines.
In refusing to divulge details that would clear up such questions, Lockheed's committee of directors said disclosure might cause "grave damage" to Lockheed in the future.
"Publication of the names of Lockheed's foreign consultants would lay bare for the benefit of its competitors its foreign marketing structure. The publication of names and actions of high officials of foreign governments, even if based on direct evidence, would involve Lockheed in controversies, contentions, charges and harmful publicity that would gravely damage its goodwill and jeopardize valuable existing contracts and injure, perhaps in some cases fatally, its prospects for future sales," said the committee, headed by retired Dun & Bradstreet chairman J. Wilson Newman.
A relieved Robert W. Haack, the former New York Stock Exchange chairman who was installed as chairman last year in the wake of the payments scandal, said he was unaware ahead of time that the special committee hads decided against disclosing names. But he obviously was pleased.
In essence, the directors' report found that Lockheed's senior officers began a program of overseas payments to government officials and others to win business for the aerospace firm, currently the second largest U.S. defense contractor. The payoffs were concealed from Lockheed's board and totaled up to $38 million between 1970 and the end of 1975.
The report claimed that the questionable payments "gain perspective if set in the context of the (company's) business and financial vissitudes" in the late 1960s and early 1970s when Lockheed was "on the verge of bankruptcy."
With cost overruns mounting, Lockheed was caught in fixed-price contracts with the Defense Department to produce the C-5A Galaxy transport, the AH-56A Cheyenne rigid motor helicopter, the SHRAM missile motor and in a group of nine ship construction contracts.
The result was a loss by the company in 1969 of $32 million against a profit of $44 million a year earlier.
Even as its problems grew on military contracts, LOckheed plunged into the civilian market with the ill-fated L-1011 wide-bodied commercial airliner. Then Rolls-Royce, the English firm which was producing engines for the L-1011, itself went into receivership.
All these woes and more caused Lockheed to turn to the federal government as the creditor of last resort.
In 1971, Congress passed the Emergency Loan Guarantee Act, which allowed Lockheed to establish a $650 million line of credit with banks, of which up to $250 million would be guaranteed by the U.S. taxpayers.
At the very same time, Lockheed was unloading its cash abroad in a series of payoffs and bribes designed to win more business.
The question now facing officials of the SEC is whether the details of Lockheed's overseas largesse in past years are of material value to stockholders. "We are making no improper payments aborad now," said Haack last week. That development, and changes being made at Lockheed, are the most important factors today, he added.
"Except for showing the scope of the practices and filling in certain details, the report showes that there was little of a nature that had not previously become public knowledge," the Lockheed chairman said. And, Haack went on, it is "clear" that only a small group of persons among a total work force that numbered as high as 100,000 during the period involved was aware of the payments practices.
The directors' report made a number of recommendations, some of which already have been acted upon by Lockheed management. The major suggestions included:
An improvement in the role of Lockheed's directors as overseers, with at least two-thirds of the directors from the "outside," not tied in any way to Lockheed management. Nominating, audit and compensation committees of the board should be composed entirely of the outside directors, the report said.
Internal auditing procedures should be improved to prevent a recurrence of the situation during the years under study, when Lockheed cut its auditing personnel in a rush to shave spending.
Lockheed should estbalish a set of politices that will permit open and constructive communication and not the sort of recrimination that faced employees who questioned the overseas payments in previous years. In this regard, the committee noted that Lockheed announced on May 2 a statement of "principles of business conduct," detailing the aeorspace firm's goal of complying with laws and ethical standards.
Haack said he believes the report has placed Lockheed in a position to put its past in the history books and move ahead. Earnings are at high levels with record sales abroad. Lockheed's U.S.-guaranteed loans were reduced by $115 million last year and now stand at $80 million compared with a high $245 million. Within a few months, Lockheed's banks may agree to accept total liability for the remaining guaranteed debt, thus wiping out the company's involvement with government aid, he added.
The prospects are, however, that the Newman report is not the last word on what happened to Lockheed in 1970-1975. The investigation took 14 months to complete, including interviews with 250 persons. The committee accumulated more than 135,000 pages of documents for study. It described typical incidents in unnamed countries.
But the questions about what Lockheed did in Saudi Arabia, Germany, Holland, Spain, Japan and other countries are not answered. It will be up to the courts to decide if these answers are of any value. If Lockheed is ordered to make public its now-secret appendix on foreign transactions, the company's problems could escalate once again.