MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S.. LERACH (68581)
ALAN SCHULMAN (128661)
DARREN J. ROBBINS (168593)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
619/231-7423 (fax)
LAW OFFICES OF BRUCE G. MURPHY
BRUCE G. MURPHY
265 Llwyds Lane
Vero Beach, FL 32963
Telephone: 561/231-4202
561/231-4042 (fax)
SCHIFFRIN & BARROWAY, LLP
RICHARD S. SCHIFFRIN
ANDREW L. BARROWAY
Three Bala Plaza East
Suite 400
Bala Cynwyd, PA 19004
Telephone: 610/667-7706
610/667-7056 (fax)
Attorneys for Plaintiffs
(Additional counsel appear on signature page.)
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
WESTERN DIVISION
MOHAMMAD YOUSEFI and DAVID KANE, On ) No. [99-00372-LGB(RNBx)]
Behalf of Themselves and All Others )
Similarly Situated, ) CLASS ACTION
)
Plaintiffs, )
) COMPLAINT FOR VIOLATION OF
vs. ) THE SECURITIES EXCHANGE ACT
) OF 1934
LOCKHEED MARTIN CORPORATION, VANCE ) [filed Jan. 14, 1999]
COFFMAN, MARCUS BENNETT, NORMAN )
AUGUSTINE, VINCENT MARAFINO, JAMES )
BLACKWELL and THOMAS CORCORAN, )
)
Defendants. ) Plaintiffs Demand A
___________________________________ ) Trial By Jury
INTRODUCTION AND OVERVIEW
1. This is an action on behalf of purchasers of Lockheed
Martin Corporation ("Lockheed" or the "Company") stock between
8/13/98 and 12/23/98 (the "Class Period"), against Lockheed and six
of its top officers and directors.
2. During the 90's, business conditions for defense
contractors like Lockheed became more difficult, as government
defense spending declined and the industry entered a period of
consolidation. Part of Lockheed's strategy to deal with this
environment was to attempt to grow through acquisitions. As part
of Lockheed's growth-by-acquisition strategy, in 97 Lockheed
announced it was acquiring Northrop Grumman Corp. ("Northrop") for
Lockheed stock -- the largest acquisition ever undertaken by
Lockheed and which would result in Lockheed becoming the largest
defense contractor in the United States. Lockheed anticipated that
the Northrop merger would be completed in the spring of 98, would
boost Lockheed's revenues and allow Lockheed to achieve synergistic
benefits and operating efficiencies which would enable it to
achieve at least 5% revenue growth, 10% earnings per share ("EPS")
growth and cash flow exceeding $1 billion during 98.
3. However, shortly after the Lockheed and Northrop share-
holders had approved the proposed merger in late 2/98, it was
revealed that the government opposed the merger on antitrust
grounds and would take legal action to prevent the acquisition. By
3/98, Lockheed faced a substantial problem. It could not complete
the Northrop merger as hoped, was denied the hoped-for benefits of
that combination and thus had to locate another acquisition
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candidate which was not in the defense industry. One analyst noted
Lockheed's predicament:
Lockheed Needs A New Growth Plan
[I]n 1988 to date, LMT shares have risen only 1% versus
the S&P 500's gain of almost 7%. Consolidation allowed
the defense companies to grow via acquisition. However,
the U.S. government's objection to Lockheed Martin's
acquisition of Northrop spelled the end of consolidation
for top-tier defense firms . . . . Lockheed must find an
alternative means of growth. It must do so in the
aforementioned low-growth defense environment, with a low
relative multiple, making stock acquisition costly and
with $11 billion in debt (nearly 70% debt to total
capital). Lockheed also needs to do so on a scale that
will make a difference for a company [that] will generate
$27.5 billion in revenue in 1998.
4. When Lockheed formally abandoned its attempt to acquire
Northrop, on 7/20/98, The Wall Street Journal reported:
The failure to consummate the Northrop deal
undoubtedly marks a setback for Lockheed. Chief
Executive Officer Vance Coffman put a brave face on the
news Thursday evening, after announcing that the
company's directors had agreed to scuttle the
merger. . . .
But Lockheed itself disclosed some concerns about
problems it could face as a result of the merger's
collapse, in documents filed in the case three months
ago. Lockheed suggested in the documents that it would
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be at a long-term competitive disadvantage in several
areas to rivals Boeing . . . and Raytheon . . . ."
5. Because Lockheed already had debt of $11.8 billion and
lacked sufficient liquid assets to pay for a large acquisition in
cash, any acquisition would necessarily involve Lockheed issuing
shares of its stock. This put pressure on Lockheed's top
executives to keep Lockheed's stock price trading at a high level
so that any acquisition could be made on a non-dilutive basis.
However, to keep Lockheed's stock price at high levels, it was
indispensable for Lockheed to report operating results during 98
which were consistent with its representations that it would
achieve 98 EPS growth of 10% with cash flow over $1 billion.
6. When Lockheed reported its 1stQ 98 results in 4/98 and
its 2ndQ 98 results in 7/98, it stated that those results were
"consistent" with its expectations and put Lockheed "on track" to
achieve 10% EPS growth in 98 with over $1 billion in cash flow as
Lockheed forecast very strong EPS and cash flow growth in the 3rdQ
and 4thQ of 98. However, financial reporters and analysts noted
that Lockheed's 1stQ and 2ndQ 98 results benefited from non-
recurring adjustments which boosted Lockheed's reported operating
results, that Lockheed's net income had not increased in the 1stQ
and 2ndQ 98, but had declined by between 5% and 10% from the net
income reported in the 1stQ and 2ndQ 97 and that Lockheed had
achieved EPS growth only because a transaction with General
Electric in 97 had retired the large number of Lockheed shares
owned by GE. As a result of the poor "quality" of Lockheed's 1stQ
and 2ndQ 98 EPS and the negative comments surrounding them,
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Lockheed's stock declined from its all-time high of $117-7/8 in
3/98 to $94-5/8 by early 8/98 -- a decline of 20%.
7. By 7/98, Lockheed's insiders realized that Lockheed could
not overcome the government's opposition to the Northrop merger and
that the merger would have to be abandoned. By then, Lockheed had
located another potential acquisition, COMSAT, a publicly owned
commercial satellite company. Because of Lockheed's large debt
burden, Lockheed could only acquire COMSAT by using a combination
of cash and common stock. Lockheed's executives knew that an
acquisition of COMSAT could be successfully completed on a non-
dilutive basis only if Lockheed stock appeared to be an attractive
investment for COMSAT's existing shareholders and this could be
achieved only by making it appear that Lockheed's business was
succeeding and meeting the 98-99 EPS and cash flow growth forecasts
Lockheed was making and Lockheed's stock price continued to trade
at a high level. Also by 8/98, Lockheed's top executives knew that
certain foreign defense contractors -- including General Electric
of Britain -- were interested in acquiring Lockheed. To make that
takeover more difficult, i.e., expensive, and to assure themselves
that if a takeover came they would maximize their own personal
profit upon the acceleration of their unvested stock options and
stock appreciation rights upon this "change of control," the
defendants were determined to keep Lockheed's stock trading at as
high a price as possible.
8. Thus, in early 8/98, Lockheed's insiders began a
concerted publicity campaign to overcome investors'/analysts'
skepticism about Lockheed's 1stH 98 performance and to boost its
stock price. On 8/13/98, Lockheed hosted an analyst meeting at
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which it stated its C-130-J aircraft project was on track, Lockheed
expected four 4thQ 98 Proton satellite launches, Lockheed would
deliver 30 C-130-J aircraft in the 3rdQ and 4thQ 98, would sign
large -- an 80 plane -- F-16 purchase contract with the United Arab
Emirates in the 4thQ 98, Lockheed's LM21 project was resulting in
operational efficiencies and cost savings which would benefit
Lockheed's cash flow and EPS and affirmed that Lockheed anticipated
strong 3rdQ and 4thQ 98 results, which would yield 10% 98 EPS
growth with 4thQ and 98 EPS of $2.05-$2.15 and $6.65-$6.75,
respectively, and 98 cash flow over $1 billion, to be followed by
99 EPS of $7.30-$7.50 and cash flow exceeding $1.5 billion.
9. On 9/20/98, Lockheed announced it would acquire COMSAT in
a transaction where half the purchase price would be paid in cash
and half would be paid in Lockheed stock with each COMSAT share to
be exchanged for one-half of a share of Lockheed stock. The value
of this proposed merger to COMSAT's shareholders depended in
significant part upon the price of Lockheed's stock. When
Lockheed's stock fell sharply on the announcement of the COMSAT
deal on 9/21/98, Lockheed's top executives held a call for analysts
to re-affirm the positive condition of Lockheed's business and the
98-99 cash flow and EPS forecasts made during the 8/13/98 analyst
meeting.
10. On 10/20/98, Lockheed reported its 3rdQ 98 results.
Because these results were announced during the COMSAT acquisition
effort and because Lockheed had been assuring analysts that its
3rdQ and 4thQ 98 results would be much stronger than those in the
1stH of 98 and enable Lockheed to reach its cash flow and EPS
forecasts for 98, Lockheed's insiders knew that it was imperative
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that these 3rdQ 98 results look good, show the strength of
Lockheed's business operations and be well received in the invest-
ment community. Accordingly, when the results were announced,
Lockheed represented that the reported EPS of $1.67 were
"consistent with expectations" and that "we are on track" for 10%
EPS growth in 98 with $1 billion in cash flow. Lockheed assured
analysts that it had achieved very strong 3rdQ 98 operating margins
due to strong business operations and that it was "on target" to
achieve 10% EPS growth for 98, with 4thQ 98 EPS of about $2.06-
$2.10, resulting in 4thQ 98 cash flow of $150 million. However,
Lockheed concealed that $78 million of the $318 million in net
income Lockheed reported for the 3rdQ 98 was generated by a secret
accounting adjustment by which Lockheed reduced reserves it had
maintained for years in connection with its Atlas rocket launch
program by $120 million. In other words, $.41 of Lockheed's
reported $1.67 EPS for the 3rdQ -- 25% of its EPS -- and most of
its strong profit margins came not from its current operations, but
rather from a secret accounting adjustment. Had this adjustment
not been made, Lockheed's reported 3rdQ 98 EPS, net income and
operating margins would have been far below the levels Lockheed had
been forecasting. Based on Lockheed's strong 3rdQ results as
reported and its forecasts of continued strong 4thQ 98 EPS and cash
flow and further growth in 99, Lockheed's stock recovered from the
low of $93-3/8 it had fallen to shortly after the announcement of
the COMSAT acquisition in 9/98, to $113-1/8 by 11/2/98, its highest
price in months.
11. On 11/3/98, Lockheed held an analyst conference at which
its top executives made presentations regarding its business and
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made forecasts for the balance of 98 and for 99-2000. The
presentations were very bullish with Lockheed's executives
representing that the LM21 program was already producing benefits,
the C-130-J aircraft ramp-up was going very well with deliveries of
over 30 planes to occur in the 3rdQ and 4thQ 98, explicitly
reaffirmed that Lockheed would achieve 10% EPS growth in 98,
including 4thQ EPS of $2.09-$2.13, 98 and 99 EPS of $6.70-$6.72 and
$7.30-$7.40, and 4thQ and 98 cash flow of $750 million and $1+
billion, respectively, even if Lockheed did not sign the F-16
contract with the United Arab Emirates by year-end. They also
assured analysts they would sell Lockheed's 87%-owned, money-losing
CalComp subsidiary, rid Lockheed of these losses and that the
CalComp write-off would be about $60 million. However, during this
conference, a few analysts uncovered the accounting trick that had
been utilized to inflate Lockheed's reported 3rdQ results and they
advised their clients of this subterfuge in negative terms. Then,
on 11/11/98, The Wall Street Journal ran a scathing piece about
Lockheed's 3rdQ 98 EPS manipulation, giving widespread publicity to
what Lockheed's executives had done, accusing Lockheed of
concealing that information in Lockheed's 3rdQ press release and
the conference call following it. Several analysts were quoted on
and after 11/11/98 in a very negative fashion about what Lockheed
had done. Lockheed's stock plummeted from $108-13/16 on 11/10/98
to as low as $100-13/16 on 11/11/98.
12. Lockheed's top executives were very upset over this
negative publicity and the sharp decline in Lockheed's stock which
jeopardized the ongoing COMSAT acquisition attempt. So they
extended the COMSAT tender offer and began to communicate
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aggressively with analysts to assure then that notwithstanding the
3rdQ 98 debacle, Lockheed still expected 4thQ 98 EPS and cash flow
results very close to the levels previously forecasted even if the
F-16 jet contract with the United Arab Emirates was not actually
signed during 98. In early 12/98, Lockheed's stock again
plummeted, falling from $107 to $96 in a few days, as rumors
circulated that Lockheed was having serious problems with its 4thQ
98. On 12/11/98 and 12/14/98, Lockheed executives again assured
analysts that Lockheed's 4thQ was going fine, the C-130-J program
was in good shape with 4thQ deliveries of 25 planes on track and
that Lockheed would achieve its forecasted 4thQ 98 and 98 EPS and
cash-flow.
13. The positive statements about Lockheed's business during
the Class Period were false or misleading when issued. They also
failed to disclose the true facts, which were:
(a) Lockheed was having serious production problems with
its C-130-J aircraft and, as a result, would not be able to deliver
30 C-130-J aircraft in 98 or 25 C-130-J aircraft in the 4thQ 98;
(b) Because certain of Lockheed's military customers,
including the Australian military, insisted that the C-130-J
aircraft they ordered, which were scheduled for delivery in late
98, contain special features that Lockheed could not produce and
include in aircraft for delivery during 98, delivery of several
C-130-J aircraft would be delayed -- perhaps even beyond 99;
(c) Lockheed's C-130-J aircraft program was in serious
trouble due to a lack of sufficient firm production orders from
foreign governments to sustain the C-130-J production line in light
of the U.S. Air Force's refusal to order more C-130-Js and, as a
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result, Lockheed would likely have to shut down the C-130-J product
line between 2000-2004;
(d) Because of disputes and difficulties with the United
Arab Emirates, especially over the inclusion of certain classified
avionics in the F-16 jets to be purchased by the United Arab
Emirates relating to its F-16 "order," a firm contract for the 80
F-16 jets could not be signed by-year-end 98 which would adversely
impact Lockheed's 4thQ 98 and 98 cash flow and EPS;
(e) Because Lockheed's CalComp business was performing
much worse than had been publicly disclosed, Lockheed likely would
not be able to sell its interest in CalComp, CalComp would have to
be shut down and, as a result, Lockheed would have to take a much
larger write-down -- $150-$200 million -- than the $60 million
write-down it had disclosed it would take;
(f) Virtually all of the Proton satellite launches
scheduled for the 2ndH of 98 would be delayed, not due to launch
pad constraints, but rather to Lockheed's inability to successfully
complete the manufacture of the needed satellites due to defective
parts provided by a supplier. However, due to launch pad
constraints, those lost launches would likely not be able to be
made up during 99;
(g) Lockheed's space imaging satellite launch for the
U.S. Air Force would be delayed to 99;
(h) Lockheed's LM21 program was not having any material
beneficial impact on Lockheed's 98 results and would have only a
very minimal impact on Lockheed's 99 results; and
(i) As a result of these adverse conditions which were
negatively impacting Lockheed's business, each of the individual
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defendants herein knew that Lockheed could not achieve 5% revenue
growth in 98, $750 million in 4thQ 98 cash flow, $1 billion in 98
cash flow, 4thQ 98 EPS of $2.05-$2.15, 98 EPS of $6.65-$6.75 or 99
EPS of $7.30-$7.50 and cash flow of $1.5 billion.
14. On 12/23/98, Lockheed shocked investors by revealing
that, due to, inter alia, shortfalls in the delivery of C-130-J
aircraft and Proton satellite launches and a much larger than
earlier disclosed CalComp write-off, Lockheed's 4thQ 98 and 98
results would be far below the levels previously forecast,
resulting in a major EPS and cash flow shortfall, and that
Lockheed's 99 results would be much lower than earlier forecast as
well. Lockheed executives admitted to analysts that it would
deliver at least five and as many as 10 less C-130-Js in the 4thQ
98 than earlier forecast because of production delays and because
military customers, including the Australian military, had insisted
on including special features in planes that Lockheed was not able
to produce in time to ship those planes in the 4thQ 98. Worse yet,
Lockheed admitted that, due to a lack of U.S. Air Force orders for
C-130-Js, Lockheed did not have enough foreign C-130-J orders to
keep its production line going and might have to close down the
production line between 2000-2004 -- destroying the profitability
of that program. Lockheed also admitted that it had launched only
one Proton satellite in the 4thQ 98 not the four forecast --
because the needed satellites could not be manufactured due to
defective and faulty parts from a Lockheed supplier. Lockheed also
had delayed launching its space imaging satellites until 99. As a
result, Lockheed's 4thQ 98 EPS would be at least 10% lower than its
4thQ 97 EPS of $1.79 or about $1.60-$1.61, compared to the $2.05-
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$2.15 forecast during the Class Period, that Lockheed's 98 revenue
would be flat with its 97 revenues of $28 billion, its 98 net
income would decline from its 97 net income of $1.3 billion and
that Lockheed's 98 EPS would be well below the levels forecast
during the Class Period and would show little increase over
Lockheed's 97 EPS of $6.09. Lockheed's forecasted 99 EPS were also
reduced sharply from the $7.30-$7.50 forecast during the Class
Period. Lockheed's stock collapsed immediately from $95-3/4 to
$82, its lowest price during 98 on volume of 3.5 million shares --
the largest one-day absolute or percentage price decline and the
second largest one-day stock volume for Lockheed in its history!
In late 12/98, after Lockheed's stock had fallen to its lowest
levels in two years, it was publicly reported that General Electric
of Britain was interested in acquiring Lockheed and had had
discussions with Lockheed about this earlier in 98.
15. Public investors who invested based on Lockheed's
positive representations and its forecasts of strong EPS and cash
flow growth in 98-99 and thus paid as high as $117-7/8 for
Lockheed's stock during the Class Period have suffered millions in
damage. However, the Individual Defendants, who knew the truth
about Lockheed's business, did not fare nearly so poorly. Before
the startling revelations of 12/23/98, Individual Defendants
Bennett, Augustine, Marafino, Blackwell and Corcoran unloaded
268,659 shares of their Lockheed stock at artificially inflated
prices as high as $109.97, pocketing over $28 million in illegal
insider-trading proceeds! All told, these five Individual
Defendants sold between 54% and 91% of the Lockheed stock they
owned -- in the aggregate, 70% of their Lockheed stock, while the
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stock was selling at artificially inflated levels resulting from
their positive but false statements about Lockheed. This illegal
insider selling during the Class Period is summarized below:
% of
Shares Holdings Total
Defendants Sold Sold Proceeds
Bennett 33,000 54% $ 3,410,376
Augustine 97,998 91% $10,058,928
Marafino 102,690 61% $11,292,070
Blackwell 4,971 80% $ 510,472
Corcoran 30,000 79% $ 3,110,100
Totals: 268,659 70% $28,381,945
This insider selling was unusual in timing and amount for, as the
graph below shows, these insiders had sold no Lockheed stock during
the eight months prior to the Class Period. During the four month
Class Period, defendants sold 70% of the Lockheed stock they owned
and these sales came just before the revelations of 12/23/98 and
Lockheed's sharp stock price decline:
Lockheed Martin Corp.
Individual Defendant's Insider Sales Monthly Share Volume
January 1998 - December 1998
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16. The artificial inflation of Lockheed stock, defendants'
illegal insider trading during the Class Period and the later
collapse of Lockheed's stock price when the true facts about
Lockheed's business and its greatly diminished prospects for future
growth were disclosed, are graphically displayed below:
Lockheed Martin Corp.
August 1, 1997 - January 4, 1999
Daily Stock Prices
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JURISDICTION AND VENUE
17. Plaintiffs' claims arise under §§10(b) and 20(a) of the
1934 Act and Rule 10b-5. Jurisdiction is conferred by §27 of the
1934 Act. Venue is proper pursuant to §27 of the 1934 Act.
Lockheed was headquartered in this District for many years. It
currently has major operations in this District and California.
Lockheed has a major office facility at Westlake Village, CA and
owns and leases several other facilities in California:
Square Footage
Location Owned Leased
Sunnyvale and
Palo Alto 6,300,000 700,000
San Jose 500,000
Ontario 900,000
Palmdale 2,200,000
Lockheed also owns several large tracts of land in California,
including 9,100 acres at Potrero Creek, 2,800 acres at Beaumont
Gateway and 650 acres at Palmdale. Lockheed is involved in
numerous litigations in California, including suits in this
district. Defendants Coffman and Marafino own California property
and Marafino lives in California. Many Lockheed shareholders live
in this District and many Class members purchased stock in this
District during the Class Period.
THE PARTIES
18. (a) Plaintiff Mohammad Yousefi purchased 100 shares of
Lockheed stock on 11/30/98 at $104-5/8 per share and was damaged
thereby.
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(b) Plaintiff David Kane purchased 60 shares of Lockheed
stock on 8/20/98 at $96.43 per share and 10 shares on 11/12/98 at
$107 per share, and was damaged thereby.
19. Lockheed is a large defense contractor. During the Class
Period, Lockheed's common stock traded in an efficient market on
the New York Stock Exchange.
20. (a) Vance Coffman ("Coffman") was, during the Class
Period, Chief Executive Officer and Vice Chairman and a member of
the Executive Committee of Lockheed.
(b) Marcus Bennett ("Bennett") was, during the Class
Period, Executive Vice President, Chief Financial Officer and a
director of Lockheed. During the Class Period, Bennett sold 33,000
shares of Lockheed stock, pocketing over $3.4 million in illegal
insider-trading proceeds -- 54% of the Lockheed stock he actually
owned. Bennett's stock sales during the Class Period were unusual
in timing and amount as set forth below:
Lockheed Martin Corp.
M. Bennett Insider Sales Monthly Share Volume
January 1998 - December 1998
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(c) Norman Augustine ("Augustine") was, during the Class
Period, a director and a member of the Executive Committee of
Lockheed. Until 4/24/98, Augustine was the Chairman of Lockheed,
and was CEO of Lockheed until 8/1/97. During the Class Period,
Augustine sold 97,998 shares of Lockheed stock, pocketing over $10
million in illegal insider-trading proceeds -- 91% of the Lockheed
stock he actually owned. Augustine's stock sales during the Class
Period were unusual in timing and amount as set forth below:
Lockheed Martin Corp.
N. Augustine Insider Sales Monthly Share Volume
January 1998 - December 1998
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(d) Vincent Marafino, ("Marafino") was, during the Class
Period, a retired Executive Vice President, a director and a member
of the Executive Committee of Lockheed. Marafino was an executive
officer of Lockheed from 1971-1995; Vice Chairman and CFO from
1988-1995; Vice President and CFO from 1983-1988; and Executive
Vice President from 3/95-12/95 and a director since 1980. Marafino
also performs consulting services for Lockheed with respect to
providing representation in connection with the sale or merger of
certain properties, serving on the boards of directors of various
joint venture companies and/or subsidiaries of the Company,
providing administrative and other services and advice and counsel
to senior management of the Company. Marafino's consulting agree-
ment provides for an annual retainer of $250,000. During the Class
Period, Marafino sold 102,690 shares of Lockheed stock, pocketing
over $11.2 million in illegal insider-trading proceeds -- 61% of
the Lockheed stock he actually owned. Marafino's stock sales
during the Class Period were unusual in timing and amount as set
forth below:
//
//
//
//
//
//
//
//
//
//
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Lockheed Martin Corp.
V. Marafino Insider Sales Monthly Share Volume
January 1998 - December 1998
(e) James Blackwell ("Blackwell") was, during the Class
Period, Vice President of Lockheed and President and COO of
Lockheed's Aeronautics Sector. During the Class Period, Blackwell
sold 4,971 shares of Lockheed stock, pocketing over $510,000 in
illegal insider-trading proceeds -- 80% of the Lockheed stock he
actually owned. Blackwell's stock sales during the Class Period
were unusual in timing and amount as set forth below:
//
//
//
//
//
//
//
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Lockheed Martin Corp.
J. Blackwell Insider Sales Monthly Share Volume
January 1998 - December 1998
(f) Thomas Corcoran ("Corcoran") was, during the Class
Period, Vice President of Lockheed and COO of Lockheed's Space and
Strategic Missiles Sector. During the Class Period, Corcoran sold
30,000 shares of Lockheed stock, pocketing over $3.1 million in
illegal insider-trading proceeds -- 79% of the Lockheed stock he
actually owned. Corcoran's stock sales during the Class Period
were unusual in timing and amount as set forth below:
//
//
//
//
//
//
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Lockheed Martin Corp.
T. Corocan Insider Sales Monthly Share Volume
January 1998 - December 1998
(g) The above individuals are the "Individual
Defendants." The Individual Defendants are liable for the false
statements pleaded at ¶¶43, 45, 50, 60 and 70, as those statements
were each "group-published" information.
FRAUDULENT SCHEME AND SCIENTER
SCHEME
21. Each defendant is liable for making false statements, for
selling Lockheed stock without disclosing material adverse informa-
tion known to them and as participants in a scheme that operated as
a fraud or deceit on purchasers of Lockheed stock. Defendants'
actions (i) artificially inflated Lockheed's stock; (ii) permitted
defendants to sell off 268,659 shares of their Lockheed stock,
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pocketing $28+ million in illegal insider-trading proceeds; and
(iii) allowed Lockheed to proceed with the COMSAT transaction.
KNOWLEDGE
22. The Individual Defendants, other than Marafino, were top
executives of Lockheed. They ran Lockheed as "hands-on" managers,
dealing daily with the most important issues facing Lockheed's
business, including F-16 jet and C-130-J aircraft programs, its
Proton satellite launch business, and its investment in -- and the
performance of -- its 87% owned CalComp subsidiary.
23. Marafino was much more involved in the day-to-day opera-
tions of Lockheed than would be the case with an ordinary director
because he was a retired Executive VP of Lockheed who was an active
member of Lockheed's Executive Committee and a highly paid
consultant to the Company. Thus, Marafino was actively involved in
Lockheed's management and in constant contact with Coffman and
Bennett and received the same reports and information as the other
Individual Defendants.
24. Because shipping at least 30 C-130-J aircraft in the 3rdQ
and 4thQ 98 while obtaining significant new C-130-J orders from the
U.S. Air Force, signing a large F-16 jet order with the United Arab
Emirates prior to year-end 98, launching at least four Proton
satellites in the 4thQ 98 and selling off CalComp were important
elements to Lockheed meeting its internally budgeted and publicly
disseminated 98-99 cash flow and EPS forecasts, defendants
constantly monitored each of these key factors affecting Lockheed's
business.
25. Because of the importance of these aspects of Lockheed's
business, Lockheed's top executives received periodic reports on
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them. They closely monitored the performance of Lockheed's
business via reports which Lockheed's Finance Department generated
on a monthly basis. There were "order reports" and "backlog
reports" that summarized sales orders and shipments. The Finance
Department also distributed monthly reports comparing Lockheed's
actual financial results to projected results. Thus, each
defendant was apprised of the status of orders for and sales of
Lockheed's most important products so that they knew where Lockheed
stood in terms of current sales of and demand for its products as
well as orders and Lockheed's actual results compared to budget.
26. Because of their positions with Lockheed and involvement
in the day-to-day management of its business, each Individual
Defendant actually knew from internal corporate documents and
conversations with other corporate officers and employees and their
attendance at management and/or Board of Directors' meetings, the
adverse non-public information about Lockheed's C-130-J program,
its hoped-for signing of an F-16 jet contract with the United Arab
Emirates, its Proton satellite launch program, its CalComp
subsidiary and Lockheed's deteriorating cash flow and EPS
prospects. They knew as a result of these negative conditions
impacting Lockheed's business that Lockheed would not be able to
achieve the 98-99 revenue, cash flow and EPS growth being forecast
by and for it. Thus, each Individual Defendant actually knew that
the public statements pleaded at ¶¶40-77 were false or misleading
when made, and each of them actually knew the adverse facts
specified herein were being concealed. Notwithstanding their duty
to refrain from selling Lockheed stock while in possession of such
- 22 -
material non-public information, the Individual Defendants sold
shares of their Lockheed stock.
MOTIVE AND OPPORTUNITY
27. Each Individual Defendant had the opportunity to commit
and participate in the violations of law described herein. They
were top officers and directors of Lockheed and they controlled its
press releases, corporate reports, SEC filings and its communica-
tions with analysts. Thus, they controlled the public dissemin-
ation of, and could falsify, the information about Lockheed that
reached the public and impacted Lockheed's stock.
28. Each of the Individual Defendants also had motives to
commit the violations of law alleged herein. Lockheed's insiders
were intimately familiar with Lockheed's business and the industry
in which it operated and thus knew the nature and extent of the
problems that were afflicting Lockheed's business by 8/98 and what
they portended for the future of Lockheed's business. These defen-
dants wanted to and did make it appear that Lockheed would achieve
sustained revenue and EPS growth with strong growing cash flow so
its stock price would trade at artificially inflated levels and
they could sell off large amounts of their Lockheed stock,
pocketing large sums for themselves before the truth about
Lockheed's business became known and the stock fell. They also
wanted to keep Lockheed's stock price at artificially inflated
levels so that Lockheed would be able to acquire COMSAT on a non-
dilutive basis using Lockheed stock and also so Lockheed could
avoid being taken over by another company at too low a price.
29. The Individual Defendants were fixated on the performance
of Lockheed's stock and each day received reports during the day of
- 23 -
the trading activity and volume of Lockheed's stock. Defendants'
false statements artificially inflated Lockheed's stock and enabled
Lockheed's insiders to sell off 268,659 shares of their Lockheed
stock, pocketing over $23 million in illegal insider-trading
proceeds.
30. By 7/98, Lockheed's insiders realized that Lockheed could
not overcome the government's opposition to the Northrop merger and
that that merger would have to be abandoned. By 7/98, Lockheed had
located another potential acquisition, COMSAT, a publicly owned
commercial satellite company. Because of Lockheed's large debt
burden, Lockheed could only acquire COMSAT by using a combination
of cash and common stock. Lockheed's executives knew that an
acquisition of COMSAT could be successfully completed on a non-
dilutive basis only if Lockheed stock appeared to be an attractive
investment for COMSAT's existing shareholders and that this could
be achieved only by making it appear that Lockheed's business was
succeeding and meeting the 98-99 EPS and cash flow growth forecasts
Lockheed was making and Lockheed's stock price continued to trade
at a high level.
31. Also by 7/98, Lockheed's top insiders knew that certain
large foreign defense contractors, including General Electric of
Britain, were interested in acquiring Lockheed and had had
preliminary contacts with them or their representatives. A
takeover of Lockheed would have a dramatic impact on Lockheed's top
executives as, due to "change of control" provisions in Lockheed's
executive compensation programs, an acquisition would trigger and
accelerate all of their stock option and stock appreciation rights
-- vested and unvested -- as well as other employment benefits and
- 24 -
likely cost them their jobs. Thus, these executives wanted to keep
Lockheed's stock at high and artificially inflated levels as this
would make a takeover more difficult (expensive) and thus protect
these executives' positions of power, prestige and profit with
Lockheed and also assure them that if a takeover did take place,
they would maximize their own personal profit from the transaction
as the acceleration of their unvested stock options and
appreciation rights would take advantage of Lockheed's artificially
inflated stock price.
32. Lockheed's executive compensation structure also provided
an additional motive for the Individual Defendants to participate
in the fraud.
The Corporation's executive compensation structure
includes three elements. These are base salary and
annual incentive compensation, which constitute an
executive's annual compensation, and stock options which
constitute long-term compensation . . . two of the three
elements (annual incentive compensation and stock
options) are at risk as their value is entirely dependent
upon individual and company performance.
* * *
ANNUAL COMPENSATION-INCENTIVE. The Corporation
maintains an incentive plan known as the Lockheed Martin
Corporation Management Incentive Compensation Plan
(MICP). . . . All of the executive officers of the
Corporation participate in the plan. . . . Adjustments
or performance are based upon consideration of the
achievement of targeted goals which include standard
- 25 -
measures of financial performance such as orders, sales,
earnings, earnings per share, return on equity, cash
generation, and backlog . . . . These goals are
established at the beginning of each plan year and are
based in part upon the Corporation's Long Range Plan.
. . . Under the MICP, if the maximum adjustments
. . . are made, the maximum amount that the Chief
Executive Officer would receive is approximately 137
percent of base salary.
* * *
For purposes of determining awards under the MICP
for [Augustine, Coffman, Bennett, Blackwell and
Corcoran], the Committee measured the Corporation's or
business unit's performance against the various
financial, business development and operations goals
discussed above. In addition, the Committee considered
other significant accomplishments such as the continued
successful execution of the Corporation's consolidation
plans and the agreement reached with Northrop Grumman to
acquire Northrop Grumman. . . . Dr. Coffman's annual
incentive of $1,100,000 represented approximately 105
percent of base salary or approximately 51 percent of
total cash compensation. . . . With respect to the
remaining four named executive officers as a group, on
average, annual awards represented approximately 99
percent of base salary . . . .
* * *
- 26 -
Relationship of Awards to Corporate Performance
The Corporation had an outstanding year in 1997 and
compensation awarded to the Corporation's executive
officers . . . reflects this. Lockheed Martin's stock
price appreciation, plus reinvested dividends, produced
a 9.5 percent return in the year 1997 . . . . The
Corporation exceeded both the earnings and cash
generation estimates contained in the Corporation's Long
Range Plan. . . . The Corporation is on track to
achieve, by 1999, projected steady state annual savings
of nearly $2.6 billion from consolidation initiatives
. . . .
* * *
The following tables show annual and long-term
compensation awarded, earned or paid for services in all
capacities to the Corporation of [Coffman, Augustine,
Bennett, Corcoran and Blackwell] for the fiscal year
ended December 31, 1997. . . .
* * *
Names and
Principal Position Year Salary Bonus Options/SARs
Augustine, Chairman 1997 $ 919,099 $1,000,000 140,000
1996 $1,137,500 $1,600,000 120,000
1995 $ 983,846 $1,300,000 100,000
Coffman, CEO & 1997 $ 899,744 $1,100,000 100,000
Vice Chairman 1996 $ 695,961 $ 890,000 45,000
1995 $ 459,904 $ 448,200 30,000
Bennett, Ex. VP & 1997 $ 596,750 $ 614,100 45,000
CFO 1996 $ 525,942 $ 556,700 33,000
1995 $ 464,615 $ 443,500 30,000
Corcoran, VP, Sector 1997 $ 490,750 $ 523,400 60,000
Pres.-Electronics 1996 $ 457,500 $ 443,500 30,000
1995 $ 424,705 $ 370,000 30,000
Blackwell, VP, Sector 1997 $ 474,510 $ 470,500 30,000
Pres.-Aeronautics 1996 $ 430,000 $ 394,700 30,000
1995 $ 371,154 $ 345,300 25,000
- 27 -
33. Thus, the Individual Defendants who were executive
officers of Lockheed stood to collect huge cash bonuses (100% or
more of their annual salaries) and be awarded very valuable stock
options and stock appreciation rights in 98 and 99, if, but only
if, Lockheed stock performed well, Lockheed came up with a large
acquisition to replace the abandoned Northrop deal and Lockheed met
its internal 98-99 EPS and cash flow targets. Because Lockheed met
its internal 97 EPS and cash flow goals and appeared to make
progress on its growth-by-acquisition plan by agreeing to acquire
Northrop, Coffman, Bennett, Blackwell and Corcoran received 97 cash
incentive bonuses of $1.1 million, $600,000, $470,000 and $523,000,
respectively. Had Lockheed met its internal 98-99 EPS and cash
goals, each of them would have received 98 and 99 cash incentive
bonuses at least equal to their 97 bonuses.
BACKGROUND TO THE CLASS PERIOD
34. For 97, Lockheed reported net income of $1.3 billion
compared to $1.35 billion in 96 and flat EPS of $6.09. However,
Lockheed's top insiders assured analysts and the investment
community that in 98-99 Lockheed would achieve 10% EPS growth and
generate cash flow of approximately $1.0-$1.5 billion, due to
strengthening business fundamentals.
35. Because of these reassurances and forecasts, in 3/98
Lockheed's stock hit its all-time high of $117-7/8. Then, on
4/21/98, Lockheed reported its 1stQ 98 results. While Lockheed
claimed its net income of $269 million and EPS of $1.42 "are right
in line with our expectations," and Coffman publicly forecast "at
least" 10% EPS growth for 98, The Wall Street Journal pointed out
that Lockheed's net income had actually declined from the 1stQ 97,
- 28 -
Lockheed had suffered negative cash flow for the quarter and EPS
were up only because of a complex 97 transaction with General
Electric that eliminated General Electric as a Lockheed shareholder
and reduced Lockheed's outstanding shares. Thus, despite
Lockheed's positive statements and forecasts, Lockheed's stock
declined to $109 by the end of 4/98 and continued to fall to as low
as $99-15/16 by late 6/98.
36. On 5/21/98, Lockheed issued a release headlined and
stating:
UNITED ARAB EMIRATES ANNOUNCES DECISION TO PURCHASE 80
F-16s
The government of the United Arab Emirates today
announced that it has selected Lockheed Martin's new
"Block 60" F-16 as its advanced fighter aircraft.
* * *
"This decision is outstanding news for Lockheed
Martin . . ." said Vance D. Coffman, chairman and chief
executive officer of Lockheed Martin.
* * *
A contract with the U.A.E. is expected to be signed
later this year.
On 5/13/98, The Wall Street Journal reported:
Lockheed Beats Out Rivals for UAE Order for 80 Fighter
Jets
. . . [T]he United Arab Emirates will buy 80 U.S.-
made F-16 fighter jets built by Lockheed Martin Corp. in
a deal valued at as much as $8 billion . . . .
- 29 -
37. On 6/22/98, Lockheed announced LM21, a new cost/
productivity program to increase profit margins, EPS growth and
cash flow by improving Lockheed's competitive position, reducing
receivables, increasing inventory turns and reducing costs.
Defendants told analysts this program would reduce Lockheed's costs
by $2.5-$3.0 billion over the next four years, benefiting cash flow
and EPS.
38. On 7/16/98, Lockheed abandoned its ongoing attempt to
acquire Northrop due to governmental opposition to the merger. On
7/21/98, Lockheed reported its 2ndQ 98 results -- EPS of $1.52 --
which Coffman again assured analysts "'are on track with our
expectations. . . . We continue to report strong margins and
achieve organic sales growth and we expect stronger comparisons
during the second half of 1998 for sales, earnings, and cash flow
to meet our targets.'" Coffman also told analysts that Lockheed
would achieve "low double-digit earnings per share growth and sales
growth of 5% [in 98]" and "[w]e expect stronger comparisons during
the second half of 1998 for sales, earnings, and cash flow to meet
our targets."
39. However, The Wall Street Journal reported that Lockheed's
actual net income for its 2ndQ 98 had declined from the 2ndQ 97,
that Lockheed had suffered negative cash flow for the quarter and
some analysts noted that Lockheed's results were aided by certain
non-operating items, including a lowered tax rate. Thus, despite
Lockheed's positive statements and forecasts, Lockheed's stock fell
from $102-13/16 on 7/27/98, to $94-5/8 on 8/13/98. Lockheed's
stock had now fallen from its all-time high of $117-7/8 on 3/18/98,
to $94-5/8 on 8/13/98. Thus, in early 8/98, Lockheed's insiders
- 30 -
began a concerted publicity campaign to overcome
investors'/analysts' skepticism about Lockheed's 1stH 98
performance and to boost or maintain its stock price.
CLASS PERIOD FALSE STATEMENTS
40. On 8/13/98, Lockheed held an investors conference in New
York City at which Coffman and Bennett told analysts, money and.
portfolio managers, institutional investors and Lockheed
shareholders that:
* Lockheed's business was performing consistent with plan
and its 2ndQ 98 results were consistent with management's
expectations.
* Lockheed's LM21 program to lower costs and improve cash
flow was already showing positive results, and would enable
Lockheed to save $2.5-$3.0 billion in costs by 2002.
* Lockheed expected to sign a large F-16 order from the
United Arab Emirates by year-end 98 which would boost
Lockheed's 98 operating results and cash flow and push
Lockheed's 98 book-to-bill ratio to or over 1.0.
* Lockheed's C-130-J program was poised for success, as
Lockheed expected to make its first C-130-J delivery in the
next few months to be followed by robust deliveries of these
planes going forward -- with delivery of more than 30 C-130-Js
during the 3rdQ and 4thQ 98 which would enable Lockheed to
reach its 98 EPS and cash flow targets.
* Lockheed's C-130-J program was secure with 83 orders in
hand, enabling Lockheed to project a profitable C-130-J
program.
- 31 -
* Lockheed's 1stQ 98 results put it on track to achieve 10%
EPS growth in 98-99. Lockheed expected very strong 3rdQ and
4thQ 98 results, with the 4thQ 98 to be the strongest quarter
of the year.
* Lockheed was on track to achieve $1 billion in free cash
flow for 98, with 4thQ 98 cash flow of $750 million, followed
by 99 cash flow of $1.5 billion.
* Lockheed was forecasting 4thQ 98 EPS of $2.13-$2.15, 98
EPS of $6.70-$6.75 and 99 EPS of $7.30-$7.50.
41. On 8/13/98, First Boston issued a report on Lockheed by
Aseritis, which was based on and repeated information provided at
the 8/13/98 investor conference. The report forecast 4thQ 98, 98
and 99 EPS of $2.13, $6.75 and $7.40, respectively. It also
stated:
Off this morning's meeting with analysts, we
reaffirm our Strong Buy investment rating for three
reasons: 1) LMT's second half 1998 sales, earnings, new
order bookings, and free cash flow results should show
solid gains over the first half . . . [and] LMT is
initiating a cost-cutting program called LM21 that will
implement identified "best practices" across the
corporation and save $2.5-$3.0 billion annually . . . by
2002.
42. On 8/14/98, PaineWebber issued a report on Lockheed by
Modzelewski, which was based on and repeated information provided
at the 8/13/98 investor conference. The report forecast 99 EPS of
$7.35 (up from $7.25). It also stated:
- 32 -
Yesterday, Lockheed Martin held a meeting with
analysts in New York City . . . . The meeting covered
several key points:
1. New Cost-Cutting Initiative to save up to $3.0
billion by 2002.
Mr. Coffman discussed a new plan to increase
productivity across all business divisions of LMT
(designated "LM 21" -- Lockheed Martin for the 21st
century). . . . Management believes that by using the
best processes of each division, $2.5 to $3.0 billion
($2.6 billion point estimate . . .) in additional cost
savings can be achieved by 2002.
* * *
2. We are increasing our 1999 EPS to $7.35 (from
$7.25). Due to the additional cost savings anticipated
with the LM 21 initiative . . . .
3. Management expects free cash flow to reach $1.5
billion in 1999. Management anticipates 1998 free cash
flow to be approximately $1 billion . . . .
43. On 8/24/98, Lockheed issued a press release headlined and
stating:
Lockheed Martin Delivers First C-130J
Lockheed . . . delivered the first new C-130J
Hercules -- a C-130J-30 model -- to the United Kingdom
today.
* * *
The C-130J was originally developed to meet customer
requirements for more efficient operation of the
- 33 -
versatile Hercules. While the exterior looks very much
like previous C-130s, the C-130J flight station and
propulsion systems have been completely redesigned.
Primary features of the C-130J include a new engine/
propeller combination, digital avionics architecture,
twin head-up pilot displays certified as primary flight
instruments, and dual mission computers which automate
many functions, allowing the aircraft to be operated by
only two pilots and a loadmaster.
The net effect of these improvements is enhanced
performance of the aircraft, and greater reliability of
the systems and components. For instance, when compared
with C-130E models, the C-130J provides 40 percent
greater range, 40 percent higher cruising ceiling, 50
percent C-130J delivery, in time-to-climb, 21 percent
increase in maximum speed, and 41 percent decrease in
maximum effort takeoff run.
"When we launched the C-130J program, we predicted
a market for 700 C-130Js based on the retirement of 30-
year-old Hercules alone," [the President of Lockheed
Martin Aeronautical Systems] said. "We said if we could
nail 400 of those, we would consider the J program to be
a tremendous success. I now believe we are going to get
all 700 -- and more -- because today, more than at any
other time, only a Hercules can replace a Hercules."
To date, the company has orders for 83 aircraft,
with options for 63 more.
- 34 -
As a result of defendants' favorable publicity campaign, by 9/17-
18/98, Lockheed stock had recovered from $94-5/8 on 8/13 and traded
as high as $105-$106.
44. The positive statements issued between 8/13/98 and
8/24/98 were each false or misleading when made. The true but
concealed facts were that:
(a) Lockheed was having serious production problems with
its C-130-J aircraft and, as a result, would not be able to deliver
30 C-130-J aircraft in 98 or 25 C-130-J aircraft in the 4thQ 98;
(b) Because certain of Lockheed's military customers,
including the Australian military, insisted that the C-130-J
aircraft they ordered, which were scheduled for delivery in late
98, contain special features that Lockheed could not produce and
include in aircraft for delivery during 98, delivery of several
C-130-J aircraft would be delayed -- perhaps even beyond 99;
(c) Lockheed's C-130-J aircraft program was in serious
trouble due to a lack of sufficient firm production orders from
foreign governments to sustain the C-130-J production line in light
of the U.S. Air Force's refusal to order more C-130-Js and, as a
result, Lockheed would likely have to shut down the C-130-J product
line between 2000-2004;
(d) Because of disputes and difficulties with the United
Arab Emirates, especially over the inclusion of certain classified
avionics in the F-16 jets to be purchased by the United Arab
Emirates relating to its F-16 "order," a firm contract for the 80
F-16 jets could not be signed by year-end 98, which would adversely
impact Lockheed's 4thQ 98 and 98 cash flow and EPS;
- 35 -
(e) Because Lockheed's CalComp business was performing
much worse than had been publicly disclosed, Lockheed would have to
take a much larger write-down -- $150-$200 million -- than the $60
million write-down it had disclosed it would take;
(f) Virtually all of the Proton satellite launches
scheduled for the 2ndH 98 would be delayed, not due to launch pad
constraints, but rather to Lockheed's inability to successfully
complete the manufacture of the needed satellites due to defective
parts provided by a supplier. However, due to launch pad
constraints, those lost launches would likely not be able to be
made up during 99;
(g) Lockheed's space imaging satellite launch for the
U.S. Air Force would be delayed to 99;
(h) Lockheed's LM21 program was not having any material
beneficial impact on Lockheed's 98 results and would have a very
minimal impact on Lockheed's 99 results; and
(i) As a result of these adverse conditions which were
negatively impacting Lockheed's business, each of the Individual
Defendants knew that Lockheed could not achieve 5% revenue growth
in 98, $750 million in cash flow in its 4thQ 98, $1 billion in cash
flow in 98, 4thQ 98 EPS of $2.13-$2.15, 98 EPS of $6.70-$6.75 or 99
EPS of $7.30-$7.50 and cash flow of $1.5 billion.
45. On 9/20/98, Lockheed announced it was going to acquire
COMSAT. Lockheed's release stated:
The boards of directors of Lockheed Martin
Corporation and COMSAT corporation jointly announced
today their two companies have entered into a definitive
- 36 -
merger agreement providing for the combination of COMSAT
with Lockheed Martin in a two-phase transaction . . . .
In the first phase of the transaction, Lockheed
Martin within five business days will begin a cash tender
offer to purchase up to 49% of the outstanding common
stock of COMSAT, at a price of $45.50 per share in cash,
with an estimated value of $1.3 billion. . . . Lockheed
Martin anticipates funding the tender offer through
monetization of a portion of its portfolio of equity
securities . . . .
* * *
The transaction's second phase . . . will be accomp-
lished by an exchange of Lockheed Martin common stock for
COMSAT common stock at a ratio of 0.5. This phase of the
transaction is valued at approximately $1.4 billion,
based on recent market prices for Lockheed Martin common
stock.
46. After Lockheed announced its proposed acquisition of
COMSAT its stock fell sharply to $93-3/8 on 9/21/98 on fears that
Lockheed was overpaying for COMSAT and the acquisition would be
dilutive to Lockheed's EPS in the future. This decline in
Lockheed's stock price lowered the value of the proposed trans-
action to COMSAT's shareholders and made it less likely that the
tender offer would succeed. It was thus extremely important to
Lockheed's insiders that they halt this decline in Lockheed's stock
and push it back up higher again.
47. On 9/21/98, to try to reassure investors and support
Lockheed's stock, Lockheed held a telephonic conference call for
- 37 -
analysts, money and portfolio managers, institutional investors,
large Lockheed shareholders, brokers and stock traders to discuss
Lockheed's business and its prospects. During the call and in
follow-up conversations with analysts, Bennett and other executives
stated:
* Lockheed's business was performing consistent with plan
and its 3rdQ 98 results appeared to be consistent with
management's expectations. Lockheed's operating margins were
strong and improving. The COMSAT acquisition would not be
dilutive, in part because of the ongoing strength of
Lockheed's core businesses.
* Lockheed's new LM21 program to lower costs and improve
cash flow was already showing positive results, and would
enable Lockheed to save $2.5-$3.0 billion in costs by 2002.
* Lockheed expected to sign the large F-16 order from the
United Arab Emirates by year-end 98 which would boost 98
operating results and cash flow and push Lockheed's 98 book-
to-bill ratio to or over 1.0.
* Lockheed's C-130-J program was poised for success, as
Lockheed had delivered the first C-130-J to the United Kingdom
and expected robust deliveries of these planes going forward
-- with delivery of more than 25 C-130-Js during the 4thQ 98
which would enable Lockheed reach its 98 EPS and cash flow
targets.
* Lockheed's C-130-J program was secure with 83 orders-in
hand, enabling Lockheed to project a profitable C-130-J
program.
- 38 -
* Lockheed's results to date in 98 put it on track to
achieve 10% EPS growth in 98-99. Lockheed expected strong
3rdQ and 4thQ 98 results, with the 4thQ 98 to be the strongest
quarter of the year.
* Lockheed was on track to achieve $1 billion in cash flow
for 98, with 4thQ 98 cash flow of $750 million, followed by 99
cash flow of $1.5 billion.
* Lockheed was forecasting 3rdQ 98 EPS of $1.67, 4thQ 98
EPS of $2.10-$2.15, 98 EPS of $6.70-$6.75 and 99 EPS of $7.30-
$7.50.
48. Lockheed's executives were successful in stabilizing
Lockheed's stock and halting its decline. By 9/23/98, Lockheed's
stock was back up over $100 and reached $107 by 10/19/98. As
Lockheed's stock stabilized and recovered, Corcoran, Marafino,
Bennett, Blackwell and Augustine unloaded large portions their
Lockheed stockholdings, selling 173,459 shares between 9/17/98-
10/8/98 for between $101.06-$109.95, pocketing $21.2 million in
illegal insider-trading proceeds.
49. On 10/19/98, an article about defense contractors
appeared in The Wall Street Journal. It stated:
[R]obust deliveries of military aircraft, including the
latest C-130J transports, should make for "the best
quarter they've had in quite some time," said Credit
Suisse First Boston Corp.'s Peter Aseritis. . . .
However, analysts said the company recently guided
them down by two cents to a consensus earnings projection
of $1.67 a diluted share, or net income of about $318
million. Some even suggested that the guidance may have
- 39 -
been designed to make the company look good by eventually
topping many Wall Street projections. Lockheed spokesman
Charles Manor III disputed those comments. "We told them
that '98 would be similar to '97," in which payment
milestones and delivery schedules for certain government
contracts would help boost fourth-quarter earnings, Mr.
Manor said.
50. Lockheed was to report its 3rdQ 98 results on 10/20/98.
Because of defendants' prior forecasts that Lockheed would achieve
3rdQ EPS of $1.67 and because the COMSAT acquisition attempt was
ongoing, it was imperative that Lockheed report 3rdQ 98 results
with EPS meeting forecasted levels to avoid a sharp decline in
Lockheed's stock. It was also very important that it appear to
investors that Lockheed's EPS come from the strength of its ongoing
operations and not from non-operating items like non-recurring
adjustments, tax rate adjustments, etc. On 10/20/98, Lockheed
reported its 3rdQ 98 results via a release headlined and stating:
Lockheed Martin Reports 11 Percent Increase In Third
Quarter Earnings Per Share
Lockheed Martin Corporation today reported third
quarter 1998 earnings per share of $1.67 on a diluted
basis, compared to third quarter 1997 diluted earnings
per share of $1.51.
* * *
"Results-year-to-date are consistent with expecta-
tions," said Vance Coffman, Lockheed Martin chairman and
chief executive officer, "and as we have said all year,
- 40 -
sales, earnings, and cash flow for 1998 are heavily
weighted in the fourth quarter."
Coffman added, "We also continue to win new
business at an outstanding rate, reflecting our on-going
concentration on performance and costs."
Even though Lockheed's 3rdQ 98 net income and revenues declined
from the 3rdQ 97, its EPS jumped dramatically from $1.57 to $1.67.
Lockheed's 10/20/98 release indicated that one reason for its 3rdQ
98 results was a "significant improvement related to the Atlas
launch vehicle program."
51. However, Lockheed concealed that $78 million of the $318
million in net income it reported for the 3rdQ 98 was generated by
a secret accounting adjustment. Lockheed had reduced reserves it
had maintained for many years in connection with its Atlas rocket
launch program by $120 million, net of taxes. In other words, $.41
of Lockheed's reported $1.67 EPS for the 3rdQ and its strong profit
margins came not from its current operations, but rather from a
secret accounting adjustment. Had this accounting adjustment not
been secretly made, Lockheed's operating margins for the 3rdQ would
have been much lower than represented and Lockheed's net income and
EPS would have been far below the levels Lockheed had been
forecasting.
52. On 10/20/98, subsequent to the release of its 3rdQ 98
results, Lockheed held a telephonic conference call for analysts,
money and portfolio managers, institutional investors and Lockheed
shareholders to discuss Lockheed's 3rdQ results, its business and
its prospects. During the call, Bennett and other Lockheed
executives made presentations and answered questions. During the
- 41 -
call -- and in follow-up conversations with analysts -- they
stated:
* Lockheed's business was performing consistent with plan
and its 3rdQ 98 results were consistent with management's
expectations. Lockheed's 3rdQ 98 operating margins were
strong and had improved to 11.5%, due to efficiency gains.
* Lockheed's new LM21 program to lower costs and improve
cash flow was already showing positive results, and would
enable Lockheed to save $2.5-$3.0 billion in costs by 2002.
* Lockheed expected to receive a large F-16 order from the
United Arab Emirates by year-end 98 which would boost 98
operating results and cash flow and push Lockheed's 98 book-
to-bill ratio to or over 1.0.
* Certain Proton satellite launches scheduled for the 3rdQ
98 had been deferred until the 4thQ 98 due to launch pad
constraints and this would benefit 4thQ results with eight
launches occurring.
* Lockheed's C-130-J program was poised for success.
Lockheed had delivered the first C-130-J to the United Kingdom
and expected robust deliveries of these planes going forward
-- with delivery of more than 25 C-130-Js during the 4thQ 98
which would enable Lockheed to reach its 98 EPS and cash flow
targets.
* Lockheed's C-130-J program was secure with 83 orders in
hand, enabling Lockheed to project a profitable C-130-J
program based on annual deliveries of about 25 planes.
* Lockheed's current period results put it on track to
achieve 10% EPS growth in 98-99. Lockheed expected very
- 42 -
strong 3rdQ and 4thQ 98 results, with the 4thQ 98 to be the
strongest quarter of the year.
* Lockheed was on track to achieve $1 billion in free cash
flow for 98, with 4thQ 98 cash flow of $750 million, followed
by 99 cash flow of $1.5 billion.
* Lockheed was now forecasting 4thQ 98 EPS of $2.09-$2.10,
98 EPS of $6.61-$6.72 and 99 EPS of $7.30-$7.50.
53. On 10/21/98, Cowen issued a report on Lockheed by Von
Rumhor, which was based on and repeated information provided him in
the 10/20/98 conference call and in follow-up conversations with
Bennett. The report forecast 4thQ 98, 98 and 99 EPS of $2.09,
$6.70 and $7.50, respectively, and said 10% "baseline" EPS growth
was "In Prospect" for 99-2000. It also stated:
Q4 should be the strongest of the year driven by about
eight space launches (add est. $450MM in revs. vs. Q3),
higher C-130J deliveries . . . . However, management
cautions that there has been some slippage in full year
revenue since space launches are launch pad constrained
. . . . As a result, while LMT still predicts a 10%+ EPS
gain, we sense that it's unlikely to deliver much more.
Hence, we've pared our 1998 estimate by a nickel to
$6.70/share.
54. On 10/21/98, Prudential issued a report on Lockheed by
Ernst, which was based on and repeated information provided him in
the 10/20/98 conference call and in follow-up conversations with
Bennett. The report forecast 4thQ 98, 98 and 99 EPS of $2.10,
$6.71 and $7.40, respectively. It also stated:
- 43 -
Our Fundamental Outlook For Lockheed Martin Has Not
Changed.
Lockheed Martin's reported third quarter results are
about what we expected. EPS was $1.67, a 11% increase
over third quarter 1997 . . . . Our EPS estimate for
1998 remains $6.71. . . .
. . . Operating profit margin improved slightly to
11.5% from third quarter 1997 margins of 11.3% . . . .
Year-to-date, backlog is $43.9 billion down from $47.1 at
end of 1997, however, backlog should increase in the
fourth quarter, according to the company, due to expected
closures of pending contracts, especially if the company
is able to close the $5 billion UAE F-16 fighter deal.
* * *
We expect 26 C-130J's to be delivered in 4Q98, up from 4
in 3Q98 (less than 25 aircraft on an accounting basis due
to previous revenue recognition). C-130J deliveries in
4Q should have a very favorable affect on working
capital. Looking forward, we believe annual deliveries
will likely be 24 aircraft.
55. On 10/21/98, PaineWebber issued a report on Lockheed by
Modzelewski, which was based on and repeated information provided
him in the 10/20/98 conference call and in follow-up conversations
with Bennett or Duke. The report forecast 4thQ 98, 98 and 99 EPS
of $2.09, $6.70 and $7.35, respectively.
56. On 10/21/98, Oppenheimer issued a report on Lockheed by
Bregman, which was based on and repeated information provided in
the 10/20/98 conference call and in follow-up conversations with
- 44 -
Bennett. The report forecast 98 and 99 EPS of $6.61 and $7.30,
respectively. It also stated:
The company just reported third quarter results that
were in line with expectations that were recently
adjusted to shift revenues and EPS to the fourth quarter.
The company indicated that it remains on target to meet
expectations. . . . A slightly negative book/bill ratio
is expected to reverse in the fourth quarter yielding a
positive ratio for the year as a whole.
. . . The company's operating results are impressive
in absolute terms as well as its expectations for 5% top
line growth and double-digit EPS comparisons. . . .
From a longer term prospective, the company remains
well positioned to generate strong cash flow from
operations . . . .
COMPANY UPDATE
Reported Third quarter results in line with expect-
ations. The company reported 3Q/98 earnings per share of
$1.67, in line with the street's estimate . . . . The
just announced results are in line with our thesis that
near term earnings growth are 2H98 loaded and are
dependent on the on going negotiations with the Govern-
ment. . . . We also note that further growth in terms of
revenues, earnings, and cash flow is expected for the
remainder of the calendar year.
Strong bookings should further improve to exhibit a
positive book/bill ratio. The company continues to win
new business at an impressive pace. . . . A strong
- 45 -
aircraft order to the UAE is likely to result in strong
fourth quarter revenues yielding a positive book/bill
ratio.
57. On 10/21/98, First Boston issued a report on Lockheed,
written by Aseritis, which was based on and repeated information
provided him in the 10/20/98 conference call and in follow-up
conversations with Bennett. The report forecast 98 and 99 EPS of
$6.72 and $7.40, respectively. It also stated:
LMT's 3Q'98 . . . strong operating margins delivered
consensus diluted EPS of $1.67 . . . . [O]perating
earnings of $730 million approximated our $733 million
estimate, largely because of strong Electronics earnings.
. . . Operating margin of 11.5% exceeded our forecast of
10.9% . . . . Free cash flow from operations totaled
$650 million during 3Q'98, with another $750 million
expected during 4Q'98. We are fine tuning our 1998 EPS
forecast to $6.72 (from $6.75), while maintaining our
1999-2001 estimates of $7.40, $8.05, and $8.65,
respectively.
58. In reaction to Lockheed's positive 3rdQ 98 results and
conference call, Lockheed's stock moved higher, reaching $113-1/8
on 11/2/98, its highest price in months.
59. The statements issued between 9/20/98 and 10/20/98 were
each false and misleading when made. The true but concealed facts
were:
(a) Lockheed was having serious production problems with
its C-130-J aircraft and, as a result, would not be able to deliver
30 C-130-J aircraft in 98 or 25 C-130-J aircraft in the 4thQ 98;
- 46 -
(b) Because certain of Lockheed's military customers,
including the Australian military, insisted that the C-130-J
aircraft they ordered, which were scheduled for delivery in late
98, contain special features that Lockheed could not produce and
include in aircraft for delivery during 98, delivery of several C-
130-J aircraft would be delayed -- perhaps even beyond 99;
(c) Lockheed's C-130-J aircraft program was in serious
trouble due to a lack of sufficient firm production orders from
foreign governments to sustain the C-130-J production line in light
of the U.S. Air Force's refusal to order more C-130-Js and, as a
result, Lockheed would likely have to shut down the C-130-J product
line between 2000-2004;
(d) Because of disputes and difficulties with the United
Arab Emirates, especially over the inclusion of certain classified
avionics in the F-16 jets to be purchased by the United Arab
Emirates relating to its F-16 "order," a firm contract for the 80
F-16 jets could not be signed by year-end 98 which would adversely
impact Lockheed's 4thQ 98, and 98 cash flow and EPS;
(e) Because Lockheed's CalComp business was performing
much worse than had been publicly disclosed, Lockheed would have to
take a much larger write-down -- $150-$200 million -- than the $60
million write-down it had disclosed it would take;
(f) Virtually all of the Proton satellite launches
scheduled for the 2ndH 98 would be delayed, not due to launch pad
constraints, but rather to Lockheed's inability to successfully
complete the manufacture of the needed satellites due to defective
parts provided by a supplier. However, due to launch pad
- 47 -
constraints, those lost launches would, likely not be able to be
made up during 99;
(g) Lockheed's space imaging satellite launch for the
U.S. Air Force would be delayed to 99;
(h) Lockheed's LM21 program was not having any material
beneficial impact on Lockheed's 98 results and would have a very
minimal impact on Lockheed's 99 results; and
(i) As a result of these adverse conditions which were
negatively impacting Lockheed's business, each of the Individual
Defendants knew that Lockheed could not achieve 5% revenue growth
in 98, $750 million in cash flow in its 4thQ 98, $1 billion in cash
flow in 98, 4thQ 98 EPS of $2.09-$2.10, 98 EPS of $6.61-$6.72 or 99
EPS of $7.30-$7.50 and cash flow of $1.5 billion.
60. On 11/2 or 11/3/98, Lockheed filed its 3rdQ 10-Q with the
SEC. Buried in the 10-Q was the following:
In September 1998, the Corporation recorded an
adjustment in the Space & Strategic Missiles segment
which resulted from a significant improvement in the
Atlas II launch vehicle program related to the retirement
of program and technical risk based upon a current
evaluation of the program's historical performance. This
change in estimate increased pretax earnings by $120
million, net of state income taxes, and increased net
earnings by $78 million, or $0.41 per diluted share.
61. On 11/3/98, Lockheed held an all-day meeting to brief
analysts, money and portfolio managers, institutional investors and
large Lockheed stockholder in Ft. Worth, Texas. During the
meeting, Coffman, Bennett and other Lockheed executive made
- 48 -
presentations and answered questions. They also told the assembled
security analysts, money and portfolio managers, institutional
investors, brokers and stock traders that:
* Lockheed's business was performing consistent with plan
and its 3rdQ 98 results were consistent with management's
expectations. Lockheed's operating margins were strong and
improving.
* Lockheed's new LM21 program to lower costs and improve
cash flow was already showing positive results, and would
enable Lockheed to save $2.5-$3.0 billion in costs by 2002.
* Lockheed's C-130-J program was now poised for success, as
Lockheed had delivered the first C-130-J to the United Kingdom
and expected robust deliveries of these planes going forward
-- with delivery of more than 25 C-130-Js during the 4thQ 98
which would enable Lockheed reach its 98 EPS and cash flow
targets.
* Lockheed's C-130-J program was secure with 83 orders in
hand, enabling Lockheed to project a profitable C-130-J
program based on delivery of 25 planes per year.
* Lockheed expected to dispose of its interest in CalComp,
which would result in a $60 million write-off in the 4thQ 98.
* Lockheed's current period results put it on track to
achieve 10% EPS growth in 98-99. Lockheed expected very
strong 3rdQ and 4thQ 98 results, with the 4thQ 98 to be the
strongest quarter of the year. The large F-16 order from the
United Arab Emirates might not be signed by year-end 98;
however, Lockheed would still achieve its 98 EPS and cash flow
targets.
- 49 -
* Lockheed was on track to achieve $1 billion in free cash
flow for 98, with 4thQ 98 cash flow of $750 million, followed
by 99 cash flow of $1.5 billion.
* Lockheed was forecasting 4thQ 98 EPS of $2.09-$2.13, 98
EPS of $6.61-$6.72 and 99 EPS of $7.30-$7.50.
62. On 11/3/98, PaineWebber issued a report on Lockheed by
Modzelewski, which was based on and repeated information provided
during the analyst conference. The report forecast 4thQ 98, 98 and
99 BPS of $2.09, $6.70 and $7.35, respectively. It also stated:
* Phil Duke (will become CFO in January 1999 replacing
Marc Bennett) summarized financial projections:
Next five years
1. Revenue growth: 5+%/year
2. Margin improvement: 100 basis points
3. EPS growth: 10+%/year
4. Cash flow: $8-9 billion
* * *
1. Revenue growth of 5+% annually
Overall, revenue should increase 5+% annually as the
Global Telecommunications and Information Services
divisions experience strong growth.
* * *
2.10+% EPS growth as margins improve 100 basis
points over the next five years.
Lockheed Martin's LM21 cost reduction program
should improve operating margins . . . . Margin
expansion should support EPS growth of 10+%.
- 50 -
63. On 11/3/98, First Boston issued a report on Lockheed by
Aseritis, which was based on and repeated information provided at
the analyst conference. The report forecast 4thQ 98, 98 and 99 EPS
of $2.13, $6.72 and $7.40, respectively. It also stated:
LMT presented a detailed review of the company's business
outlook, while also providing financial guidance. Sales
should increase at a 5% annual rate over the next few
years, with upside from increased defense spending and
commercial telecommunications possible. Continued cost
savings from consolidation activities and the LM 21 "best
practices" initiative should bolster operating profit
margins to 11.5% over the next year or two versus 10.4%
today. Annual EPS growth of 10-12% . . . should result,
while also generating annual free cash flow of around $1
billion over the near term.
64. The statements issued on 11/2/98-11/3/98 were each false
or misleading when made. The true but concealed facts were that:
(a) Lockheed was having serious production problems with
its C-130-J aircraft and, as a result, would not be able to deliver
30 C-130-J aircraft in 98 or 25 C-130-J aircraft in the 4thQ 98;
(b) Because certain of Lockheed's military customers,
including the Australian military, insisted that the C-130-J
aircraft they ordered, which were scheduled for delivery in late
98, contain special features that Lockheed could not produce and
include in aircraft for delivery during 98, delivery of several
C-130-J aircraft would be delayed -- perhaps even beyond 99;
(c) Lockheed's C-130-J aircraft program was in serious
trouble due to a lack of sufficient firm production orders from
- 51 -
foreign governments to sustain the C-130-J production line in light
of the U.S. Air Force's refusal to order more C-130-Js and, as a
result, Lockheed would likely have to shut down the C-130-J product
line between 2000-2004;
(d) Because of disputes and difficulties with the United
Arab Emirates, especially over the inclusion of certain classified
avionics in the F-16 jets to be purchased by the United Arab
Emirates relating to its F-16 "order," a firm contract for the 80
F-16 jets could not be signed by year-end 98 which would adversely
impact Lockheed's 4thQ 98, and 98 cash flow and EPS;
(e) Because Lockheed's CalComp business was performing
much worse than had been publicly disclosed, Lockheed would likely
be unable to sell its interest in CalComp, would have to shut down
CalComp and thus have to take a much larger write-down -- $150-$200
million -- than the $60 million write-down it had disclosed it
would take;
(f) Virtually all of the Proton satellite launches
scheduled for the 2ndH of 98 would be delayed, not due to launch
pad constraints, but rather to Lockheed's inability to successfully
complete the manufacture of the needed satellites due to defective
parts provided by a supplier. However, due to launch pad
constraints, those lost launches would likely not be able to be
made up during 99;
(g) Lockheed's space imaging satellite launch for the
U.S. Air Force would be delayed to 99;
(h) Lockheed's LM21 program was not having any material
beneficial impact on Lockheed's 98 results and would have a very
minimal impact on Lockheed's 99 results; and
- 52 -
(i) As a result of these adverse conditions which were
negatively impacting Lockheed's business, each of the Individual
Defendants knew that Lockheed could not achieve 5% revenue growth
in 98, $750 million in cash flow in its 4thQ 98, $1 billion in cash
flow in 98, 4thQ 98 EPS of $2.09-$2.13, 98 EPS of $6.61-$6.72 or 99
EPS of $7.30-$7.50 and cash flow of $1.5 billion.
65. During the Ft. Worth analyst conference, two analysts --
Von Rumhor from Cowen and Rubel from Goldman Sachs -- learned how
Lockheed had boosted its 3rdQ 98 results announced on 10/20/98 by
including a large one-time reserve reverse relating to the Atlas
missile launch program in Lockheed's operating results, and issued
reports to their clients on 11/3-4/98 disclosing this and being
very critical of Lockheed's management for engaging in such a
subterfuge, i.e., claiming its 3rdQ results met expectations, while
concealing the very large reserve reversal. As a result,
notwithstanding the positive information disseminated at Lockheed's
11/3/98 analyst conference, Lockheed's stock declined from $113-1/8
on 11/2/98, to $105-1/4, before recovering to close at $109-5/16 on
11/4/98. On 11/6/98, Marafino unloaded 65,200 shares of his
Lockheed stock at $109.97, pocketing $7.1 million in illegal
insider-trading proceeds.
66. On 11/11/98, The Wall Street Journal ran an article on
Lockheed in the influential "Heard On The Street" column which
stated:
Lockheed Martin Buries Nuggets in Fine Print: Big
Adjustment Boosted Third-Quarter Profit
- 53 -
Investors in Lockheed Martin, take note: Quarterly
earnings reports by the defense contractor are required
reading. And keep the magnifying glass handy.
Buried in Lockheed's third-quarter [10-Q) filed Nov.
2 with the Securities and Exchange Commission is the
disclosure that 41 cents of the $1.67 per diluted share
that it earned for the quarter came from an accounting
adjustment due to a reduced "risk estimates" in its Space
and Strategic Missiles segment.
* * *
What is eye-catching about the latest accounting
adjustment . . . is its size. "It's a big one," says
Merrill Lynch analyst Byron Callon, who downgraded
Lockheed to accumulate from buy on Nov. 3. The adjust-
ment reflects the reduction of reserves set aside for
Lockheed's Atlas-launch program as a result of lower
"risk estimates." In other words, successful satellite
launches under the Atlas program have allowed Lockheed to
take back into earnings some of the reserves it had set
aside for the program.
And here is the kicker: The fact that the
accounting adjustment contributed nearly one-quarter of
its total earnings for the period wasn't disclosed in the
Oct. 20 press release reporting Lockheed's quarterly
results. The release mentioned in a routine footnote
near the bottom that third-quarter results include a
"significant improvement related to the Atlas-launch
vehicle program," but gave no details.
- 54 -
Nor was the size of the accounting item disclosed
during Lockheed's conference call with analysts held to
discuss the earnings report the same day. One analyst
apparently asked about the Atlas accounting adjustment
during the conference call, but the company didn't reveal
the size of the accounting change in its response.
. . . "I was really surprised this wasn't dealt with
on the conference call," says Mr. Callon.
* * *
But analysts and investors are miffed about the
omission of details until two weeks after the earnings
report. Indeed, even with the accounting item, Lockheed
barely met Wall Street's per-share estimates for its
third quarter, which were hovering in the $1.67 to $1.68
range, even after the company guided a few analysts lower
in their estimates early in October.
* * *
"This is one of those situations where the company
says its results are consistent with expectations. But
it's a joke," say Howard Rubel, a Goldman Sachs analyst.
67. On 11/11/98, Bloomberg ran an item about Lockheed's 3rdQ
1998 EPS:
Analysts and investors said they're annoyed that the
company wasn't more up front about the accounting adjust-
ment. The change wasn't disclosed in Lockheed Martin's
third-quarter earnings press release . . . or in a
conference call with analysts and selected investors.
- 55 -
"It's the magnitude of it, and the fact they didn't
talk about it during the conference call," said Jose
Romero, an analyst at Safeco Asset Management, which owns
676,740 Lockheed Martin shares.
* * *
The company has lost some of its credibility . . . .
"The loss of confidence shows in the stock price," said
Todd Ernst, an analyst at Prudential Securities . . . .
"They're going to have [to] rebuild some credibility
right now."
The company now says it should have handled the
matter differently.
"Clearly in hindsight, we should have been more
sensitive," Lockheed Martin spokesman Jim Fetig said.
68. On 11/12/98, PaineWebber issued a report on Lockheed,
stating:
Yesterday, Lockheed Martin's stock declined $5 to
$101-15/16 after the Wall Street Journal reported that
third quarter EPS results included a $120 million pre-tax
"adjustment" ($0.41 per share) for the reduction of
reserves associated with the Atlas II launch program.
The information was disclosed in the company's 10-Q, but
was not disclosed a) in the third quarter earnings press
release, b) during the third quarter conference call, or
c) at an analyst conference held in Fort Worth, Texas on
November 2-3.
* * *
- 56 -
* The company's reluctance to disclose the amount of
the Atlas benefit has been very damaging to investors'
confidence in Lockheed Martin's reporting practices.
* * *
This adjustment . . . is the largest we have seen without
any disclosure during earnings release process.
* * *
INVESTOR CONFIDENCE HAS BEEN ERODED
We expect investor confidence in Lockheed Martin's
EPS to remain low for several quarters as the company
regains credibility.
69. As a result of the exposure of -- and criticism of -- how
Lockheed's top executives had "fudged" Lockheed's 3rdQ 98 results,
Lockheed stock fell sharply from $113-1/8 the day before the Ft.
Worth analyst conference to $107 by 11/10/98 and then to as low as
$101-15/16 on 11/11/98.
70. Lockheed's stock-price decline in the wake of the
11/11/98 revelations and publicity put tremendous pressure on
Lockheed's top executives, as they desperately needed to support
Lockheed's stock price as Lockheed was in the middle of the COMSAT
tender offer and only a relatively small number of shares had thus
far been tendered to Lockheed. On 11/17/98, Lockheed announced an
extension of its COMSAT tender offer until 1/14/99 as only 5.4
million Comsat shares had been tendered by 11/16/98. Then, on
11/17/98, subsequent to the extension of its COMSAT tender offer,
Lockheed held a telephonic conference call for analysts, money and
portfolio managers, institutional investors, Lockheed shareholders,
brokers and stock traders to discuss Lockheed's business and its
- 57 -
prospects. During the call, Bennett and Phil Duke made
presentations and answered questions. During the call -- and in
follow-up conversations with analysts, they stated:
* Lockheed's business was performing consistent with plan
and its 4thQ results to date were consistent with management's
expectations.
* Lockheed's new LM21 program to lower costs and improve
cash flow was already showing positive results, and would
enable Lockheed to save $2.5-$3.0 billion in costs by 2002.
* Lockheed expected to achieve $1 billion in cash flow in
98 even without the large F-16 order from the United Arab
Emirates. This was a stronger performance than Lockheed had
earlier expected, as it had been anticipating at least $150
million in cash when the F-16 contract was signed with the
United Arab Emirates.
* Lockheed's C-130-J program was succeeding and Lockheed
was on track for delivery of more than 25 C-130-Js during the
4thQ 98, which would enable Lockheed reach its 98 EPS and cash
flow targets.
* Lockheed's C-130-J program was secure with 83 orders in
hand, enabling Lockheed to project a profitable C-130-J
program.
* Lockheed was slightly trimming its 4thQ 98 and 98 EPS
forecasts by $.05-$.06, due to a satellite launch delay.
71. On 11/18/98, First Boston issued a report on Lockheed,
written by Aseritis, which was based on and repeated information
provided in the 11/17/98 conference call. The report forecast 4thQ
- 58 -
98, 98 and 99 EPS of $2.05, $6.66 and $7.33, respectively. It also
stated:
Lockheed Martin hosted a short conference call with
analysts on November 17, 1998, to discuss accounting
issues and provide revised financial guidance. As a
result, we are trimming our EPS forecast for 1998 from
operations by $0.06 to $6.66, while also reducing 1999
estimates by $0.07 to $7.33. Despite these fine tuning
reductions and some increase of investor uncertainty
given recent cutbacks/delays, we believe LMT remains the
best positioned among the largest U.S. aerospace firms
with respect to breadth and depth of technology and
future growth potential. Thus, we reaffirm our Strong
Buy investment rating . . . .
* * *
Basic Business Outlook Remains Solid for LMT
Based on yesterday's Lockheed Martin conference
call, we are making a number of financial adjustments to
our earnings models. . . [D]ue to overall business
drag related to deferred space launches and a
renegotiated Indonesian satellite program, we are cutting
our fourth quarter 1998, 1998 and 1998 EPS forecasts to
$2.05, $6.66, and $7.33, respectively. Our prior
estimates had totaled $2.11, $6.72, and $7.40. . . .
With respect to free cash flow, management stated
that 1998 results should come in at $1 billion, even
without any contribution from the UAE F-16 program. This
would be a stronger performance than expected, because
- 59 -
previous guidance of $1 billion included a $150 to $170
million contribution from the UAE F-16 program.
72. On 11/18/98, Prudential issued a report on Lockheed,
written by Ernst, which was based on and repeated information
provided him in the 11/17/98 conference call. The report forecast
4thQ 98, 98 and 99 EPS of $2.05, $6.66 and $7.30, respectively. It
also stated:
As a result of information obtained during Lockheed
Martin's conference call on November 17th, we are
lowering our 1998 EPS estimate to $6.66 from $6.71
and our 1999 to $7.30 . . . from $7.40. Our fourth
quarter estimate has decreased from $2.10 back down to
$2.05 (we originally estimated $2.05, but increased it to
$2.10 at the end of the third quarter).
* * *
The conference call yielded or confirmed the
following information:
* We are lowering our 1998 revenue estimate for
Missiles and Space (the company's highest margin
businesses) from $8.0 billion to $7.9 billion . . . due
to expected launch delays discussed on the call. . . .
The net effect of this change in Lockheed Martin's EPS,
we estimate, is about $0.05 in 1998.
* * *
Fourth Quarter Free Cash Flow Will Be A Key Catalyst
We think that the key catalyst for Lockheed Martin
stock will be its fourth quarter free cash flow results.
The company maintains that they will achieve their $1
- 60 -
billion free cash target (though management indicated
that they were close to their cash flow target even if
the UAE deal does not close in 1998). We believe that at
this time, management's confidence in achieving this
number is one of the main, if not the main, supports for
the stock at this time.
73. The statements issued on 11/17/98 were each false and
misleading when made. The true but concealed facts were:
(a) Lockheed was having serious production problems with
its C-130-J aircraft and, as a result, would not be able to deliver
30 C-130-J aircraft in 98 or 25 C-130-J aircraft in the 4thQ 98;
(b) Because certain of Lockheed's military customers,
including the Australian military, insisted that the C-130-J
aircraft they ordered, which were scheduled for delivery in late
98, contain special features that Lockheed could not produce and
include in aircraft for delivery during 98, delivery of several C-
130-J aircraft would be delayed -- perhaps even beyond 99;
(c) Lockheed's C-130-J aircraft program was in serious
trouble due to a lack of sufficient firm production orders from
foreign governments to sustain the C-130-J production line in light
of the U.S. Air Force's refusal to order more C-130-Js and, as a
result, Lockheed would likely have to shut down the C-130-J product
line between 2000-2004;
(d) Because of disputes and difficulties with the United
Arab Emirates, especially over the inclusion of certain classified
avionics in the F-16 jets to be purchased by the United Arab
Emirates relating to its F-16 "order," a firm contract for the 80
- 61 -
F-16 jets could not be signed by year-end 98 which would adversely
impact Lockheed's 4thQ 98 and 98 cash flow and EPS;
(e) Because Lockheed's CalComp business was performing
much worse than had been publicly disclosed, Lockheed would likely
be unable to sell its interest in CalComp, would have to shut down
CalComp and thus have to take a much larger write-down -- $150-$200
million -- than the $60 million write-down it had disclosed it
would take;
(f) Virtually all of the Proton satellite launches
scheduled for the 2ndH 98 would be delayed, not due to launch pad
constraints, but rather to Lockheed's inability to successfully
complete the manufacture of the needed satellites due to defective
parts provided by a supplier. However, due to launch pad
constraints, those lost launches would likely not be able to be
made-up during 99;
(g) Lockheed's LM21 program was not having any material
beneficial impact on Lockheed's 98 results and would have a very
minimal impact on Lockheed's 99 results; and
(h) As a result of these adverse conditions which were
negatively impacting Lockheed's business, each of the Individual
Defendants knew that Lockheed could not achieve 5% revenue growth
in 98, $750 million in cash flow in its 4thQ 98, $1 billion in cash
flow in 98, 4thQ 98 EPS of $2.05-$2.08, 98 EPS of $6.65-$6.66 or 99
EPS of $7.30-$7.50 and cash flow of $1.5 billion.
74. In early 12/98, Lockheed's shares again fell sharply,
this time due to rumors that Lockheed's 4thQ 98 results would be
below the levels being forecast by and for Lockheed. The stock
fell from $108-7/16 on 12/1/98 to $98-7/8 on 12/3/98, and to as low
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as $96 on 12/11/98. Again, Lockheed executives took steps to try
to halt the decline in Lockheed's stock and push it higher.
75. On 12/11/98, subsequent to the close of trading on the
NYSE, Lockheed held a telephonic conference call for analysts.
During the call, Bennett stated that Lockheed's business was
performing consistent with plan and its 4thQ 98 results to date
were consistent with management's expectations. Lockheed's
guidance for the 4thQ 98 and 98 had not changed. The C-130-J
aircraft deliveries for the 4thQ were on target and Lockheed's 98
EPS would increase by 9%-11%.
76. On 12/14/98, First Boston issued a report on Lockheed by
Aseritis, which was based on and repeated information provided him
in the 12/11/98 conference call. It stated:
* Management stated on the evening of December 11 that
guidance with respect to financial results had not
changed, and that F-16 and C-130J aircraft shipments
would be made over the last two weeks of 1998.
* Annual sales growth of 3-5% is expected to translate
into 9-11% annual gains in EPS. Our 4Q'98, 1998 and 1999
EPS forecasts from operations remain $2.05, $6.66 and
$7.33, respectively.
77. Lockheed's stock continued to fall to under $93 on
12/15/98. On 12/14/98, Bennett or Duke spoke with Aseritis of
First Boston. On 12/16/98, First Boston issued a report on
Lockheed by Aseritis, which repeated information provided him in
the 12/14/98 call. It stated:
During a December 15, 1998, telephone conversation
with LMT management, the company continued to support
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guidance with respect to financial performance provided
to analysts during the November 17, 1998, conference
call. . . .
With respect to free cash flow, management stated
that 1998 results should come in at $1 billion, even
without any contribution from the UAE F-16-program.
As a result of the reassurances of 12/11/98 and 12/14/98, the
decline in Lockheed's stock was halted, the stock stabilized and
closed at $95 on 12/16/98. The statements of 12/11/98 and 12/14/98
were each false or misleading when made for the reasons stated in
¶73.
78. On 12/23/98, Lockheed shocked investors by revealing its
98 and 99 results would be far worse than Lockheed had been
forecasting. Lockheed's release stated:
Fourth quarter 1998 net sales are expected to be
down compared to fourth quarter last year . . . . Sales
declines in commercial space activities delayed space
launches and delayed C-130J deliveries from 1998 into
1999, were cited as the primary reasons for the fourth
quarter sales and earnings shortfall.
"We are redoubling our efforts to aggressively
reduce our cost base, improve margins, and increase free
cash flow through rapid implementation of our LM21 Best
Practices program. . . ." stated Vance Coffman, chairman
and CEO of Lockheed Martin.
79. Also on 12/23/98, Lockheed further revealed that, due to,
inter alia, shortfalls in the delivery of C-130-J aircraft and
Proton satellite launches and a much larger than earlier disclosed
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CalComp write-off, Lockheed's 4thQ 98 and 98 results would be far
below the levels previously forecast, resulting in a major EPS and
cash flow shortfall and that Lockheed's 99 results would be much
lower than earlier forecast as well. Lockheed executives admitted
to analysts that it would deliver at least five and as many as 10
less C-130-Js in the 4thQ 98 than earlier forecast because of
production delays and because military customers, including the
Australian military, had insisted on including special features in
planes that Lockheed was not able to produce in time to ship those
planes in the 4thQ 98. Worse yet, Lockheed admitted that, due to
a lack of U.S. Air Force orders for C-130-Js, Lockheed did not have
enough foreign C-130-J orders to keep its production line going and
might have to close down the production line between 2000-2004 --
destroying the profitability of that program. Lockheed also
admitted that it had launched only one Proton satellite in the 4thQ
98 not the three or four forecast -- because the satellites
needed could not be manufactured due to defective and faulty parts
from a Lockheed supplier. Lockheed also had delayed launching its
space imaging satellites until 99. As a result, Lockheed's 4thQ 98
EPS would be at least 10% lower than its 4thQ 97 EPS of $1.79, or
about $1.60-$1.61, compared to the $2.05-$2.15 forecast during the
Class Period, that Lockheed's 98 revenue would be flat with its 97
revenues of $28 billion, its 98 net income would decline from its
97 net income of $1.3 billion, and that Lockheed's 98 EPS would be
well below the levels forecast during the Class Period and would
show little, if any, increase compared to Lockheed's 97 EPS of
$6.09. Lockheed's forecasted 99 EPS were also reduced sharply from
the $7.30-$7.50 forecast during the Class Period. Lockheed's stock
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collapsed immediately from $95-3/4 to $82, its lowest price during
98 on volume of 3.5 million shares -- the largest one-day absolute
or percentage price decline and the second largest one-day stock
volume for Lockheed in history!
80. On 12/24/98, The Wall Street Journal reported:
Lockheed Warns of 22% Profit Shortfall
Estimate of 4th-Period Net Below Street's Forecasts Sends
Stock Down 11%
Lockheed Martin Corp., citing slumping sales and
production problems in its defense and commercial
operations, projected that fourth-quarter earnings would
be 22% below Wall Street's expectations.
* * *
The company said it now expects earnings for all of
1998 to climb only between 2% and 4% from last year's
$6.05 a share, excluding all special charges and gains.
It projected fourth-quarter profit of about $1.61 a
share, compared with $1.79 in the year-earlier quarter,
again excluding one-time adjustments.
* * *
Until yesterday's announcement, the company had
maintained that various cost-cutting and other moves
would yield low double-digit earnings growth for 1998.
In fact, just two months ago, Chairman and Chief
Executive Vance Coffman assured critics that anticipated
fourth-quarter upturns in sales, earnings and cash flow
would help the world's No. 1 defense contractor meet
performance targets.
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* * *
"Investors weren't happy with the way the third
quarter was handled, and the fourth quarter is a deep
disappointment," Lehman Brothers analyst Joseph Campbell
said.
* * *
Lockheed attributed much of its 1998 difficulties to
a nearly one-third cut from the 30 C-130J cargo aircraft
it had expected to deliver to the Air Force and the
Australian government. The company blamed certification
delays and customer-order changes. Meanwhile, Lockheed
said, replacing certain defective parts has delayed until
next year three of four launches of company-built
satellites planned in a Russian joint venture.
* * *
Questions also linger about the timing and ultimate
size of the Air Force's purchase of C-130s. Likewise,
Mr. Bennett acknowledged that some of the deferred
satellite launches "aren't easily recoverable" in later
quarters, because of a shortage of launch-pad
availability.
81. In late 12/98, after Lockheed's stock had fallen to its
lowest levels in two years, it was publicly reported that General
Electric of Britain was interested in acquiring Lockheed and had
had discussions with Lockheed about this earlier in 98.
INSIDER SELLING
82. While they were issuing favorable statements about
Lockheed, the Individual Defendants sold 268,659 shares of their
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Lockheed stock for more than $28.3 million over 70% of their
collective ownership -- to personally profit from the artificial
inflation in Lockheed's stock their fraudulent scheme had caused.
Defendants' insider selling is detailed below:
PRICE SHARES
DATE SHARES PER PROCEEDS ACQUIRED OPTION
NAME SOLD SOLD SHARE FROM SALE BY OPTION PRICE
Augustine 10/02/98 5,000 $101.50 $ 507,500
10/02/98 5,000 $103.19 515,950
10/02/98 10,000 $103.00 1,030,000
10/02/98 10,000 $101.94 1,019,400
10/02/98 10,000 $103.06 1,030,600
10/02/98 5,000 $103.81 519,050
10/02/98 5,000 $102.19 510,950
10/02/98 5,000 $102.44 512,200
10/02/98 5,000 $103.31 516,550
10/02/98 15,000 $102.94 1,544,100
10/02/98 7,998 $101.06 808,278
10/02/98 5,000 $103.25 516,250
10/02/98 10,000 $102.81 1,028,100
Totals: 97,998 $10,058,928
Percent of shares actually owned sold: 91%
Bennett 09/28/98 2,000 $103.01 $ 206,020
09/28/98 18,300 $103.45 1,893,135
09/28/98 3,000 $103.14 309,420
09/28/98 7,100 $103.39 734,069
09/28/98 200 $103.26 20,652
09/28/98 2,400 $102.95 247,080
09/28/98 33,000 $74.13
Totals: 33,000 $3,410,376 33,000
Percent of shares actually owned sold: 54%
Blackwell 09/28/98 2,363 $102.69 $ 242,656
09/28/98 2,608 $102.69 267,816
09/28/98 2,364 $28.53
09/28/98 2,608 $22.45
Totals: 4,971 $ 510,472
Percent of shares actually owned sold: 80%
Corcoran 09/17/98 30,000 $103.67 $3,110,100
09/17/98 30,000 $44.88
Totals: 30,000 $3,110,100
Percent of shares actually owned sold: 79%
Marafino 10/08/98 37,490 $109.95 $4,122,026
10/08/98 37,490 $28.53
11/06/98 65,200 $109.97 7,170,044
11/06/98 65,200 $22.47
Totals: 102,690 $11,292,070
Percent of shares actually owned sold: 61%
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83. This insider selling was unusual in timing and amount.
These insiders had sold no Lockheed stock during the eight months
prior to the Class Period. During the four month Class Period,
collectively, they sold off 268,659 shares -- 70% of their Lockheed
stock. Bennett, Blackwell, Corcoran and Marafino sold 100% of the
Lockheed stock they acquired by option during the Class Period,
exercising options to acquire Lockheed stock at below market prices
and then immediately selling those shares. These sales took place
just two to three months prior to the shocking revelations of
12/23/98 and Lockheed's sharp stock-price decline to its lowest
levels in two years.
CLAIM FOR RELIEF
84. Defendants violated §§10(b) and 20(a) of the 1934 Act and
Rule 10b-5 in that they or persons they controlled:
(a) Employed devices, schemes, and artifices to defraud;
(b) Made untrue statements of material facts or omitted
to state material facts necessary in order to make statements made,
in light of the circumstances under which they were made, not
misleading; or
(c) Engaged in acts, practices, and a course of business
that operated as a fraud or deceit upon Class members in connection
with their purchases of Lockheed stock.
85. Class members were damaged as, in reliance on the
integrity of the market, they paid artificially inflated prices for
Lockheed stock.
CLASS ACTION ALLEGATIONS
86. Plaintiffs bring this action on behalf of all purchasers
of Lockheed stock during the Class Period (the "Class").
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87. The members of the Class are so numerous that joinder of
all members is impracticable. Lockheed had more than 100 million
shares of stock outstanding.
88. Questions of law and fact common to the Class exist and
predominate, including whether the 1934 Act was violated; whether
defendants made false or misleading statements, or acted with
scienter; whether Lockheed stock was artificially inflated; and
the extent and appropriate measure of damages.
89. Plaintiffs' claims are typical because they sustained
damages from defendants' wrongful conduct.
90. Plaintiffs will adequately protect the interests of the
Class. Notice to Class members can be provided by mail as is
customary in securities class actions.
91. A class action is superior to other available methods for
the fair and efficient adjudication of this controversy.
92. Prosecution of separate actions by Class members would
create a risk of inconsistent and varying adjudications.
STATUTORY SAFE HARBOR
93. The statutory safe harbor provided for forward-looking
statements under certain circumstances does not apply to any of the
allegedly false forward-looking statements pleaded in this
Complaint. None of the particular oral forward-looking statements
pleaded herein were identified as a "forward-looking statement"
when made. None of the written forward-looking statements made
were identified as forward-looking statements. Nor was it stated
as to either type of forward-looking statement that actual results
"could differ materially from those projected." Nor did meaningful
cautionary statements identifying important factors that could
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cause actual results to differ materially from those in the
forward-looking statements accompany those forward-looking state-
ments. Each of the forward-looking statements alleged herein was
authorized by an executive officer of Lockheed, and was actually
known by each of the Individual Defendants to be false when made.
BASIS OF ALLEGATIONS
94. Because the PSLRA, §21D(c) of the 1934 Act [15 U.S.C.
§78u-4(c)], requires complaints to be pleaded in conformance with
Federal Rule 11, plaintiffs have alleged the foregoing based upon
the investigation of their counsel, which included a review of
Lockheed's SEC filings, securities analysts' reports and advisories
about the Company, press releases issued by the Company, media
reports about the Company and discussions with consultants, and,
pursuant to Rule 11(b)(3), believe that after reasonable oppor-
tunity for discovery, substantial evidentiary support will likely
exist for the allegations set forth at ¶¶13, 44, 59, 64 and 73.
PRAYER FOR RELIEF
WHEREFORE, plaintiffs pray for a judgment awarding:
1. Damages and costs;
2. Equitable or injunctive relief, including the imposition
of a constructive trust upon defendants' insider-trading proceeds;
3. Other just and proper relief.
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JURY DEMAND
Plaintiffs demand a trial by jury.
DATED: January 13, 1999
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH
ALAN SCHULMAN
DARREN J. ROBBINS
/s/
_______________________________
WILLIAM S. LERACH
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
619/231-7423 (fax)
LAW OFFICES OF BRUCE G. MURPHY
BRUCE G. MURPHY
265 Llwyds Lane
Vero Beach, FL 32963
Telephone: 561/231-4202
561/231-4042 (fax)
SCHIFFRIN & BARROWAY, LLP
RICHARD S. SCHIFFRIN
ANDREW L. BARROWAY
Three Bala Plaza East
Suite 400
Bala Cynwyd, PA 19004
Telephone: 610/667-7706
610/667-7056 (fax)
THE CUNEO LAW GROUP, P.C.
JONATHAN W. CUNEO
317 Massachusetts Avenue, N.E.
Suite 300
Washington, D.C. 20002
Telephone: 202/789-3960
202/789-1813 (fax)
Attorneys for Plaintiffs
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CERTIFICATION OF NAMED PLAINTIFF
PURSUANT TO FEDERAL SECURITIES LAWS
MOHAMMAD YOUSEFI ("Plaintiff") declares:
1. Plaintiff has reviewed a complaint and authorized its
filing.
2. Plaintiff did not purchase the security that is the
subject of this action at the direction of plaintiff's counsel or
in order to participate in this private action or any other
litigation under the federal securities laws.
3. Plaintiff is willing to serve as a representative party
on behalf of the class, including providing testimony at deposition
and trial, if necessary.
4. Plaintiff has made no transaction(s) during the Class
Period in the debt or equity securities that are the subject of
this action except those set forth below:
Price
Security Transaction Date Per Share
Common Stock Purchased 100 shares 11/30/98 $104-5/8
5. During the three years prior to the date of this
Certificate, Plaintiff has sought to serve or served as a repre-
sentative party for a class in the following actions filed under
the federal securities laws:
6. The Plaintiff will not accept any payment for serving as
a representative party on behalf of the class beyond the
Plaintiff's pro rata share of any recovery, except such reasonable
costs and expenses (including lost wages) directly relating to the
representation of the class as ordered or approved by the court.
I declare under penalty of perjury that the foregoing is true
and correct. Executed this 11th day of Jan., 1999.
/s/
_______________________________
MOHAMMAD YOUSEFI
Source: Scanned paper copy of court-stamped document