Lockheed Martin 2008 Annual Report Download - page 27

some instances, impose added costs on our business. A violation of specific laws and regulations could result in the
imposition of fines and penalties, the termination of our contracts, or debarment from bidding on contracts.
In some instances, these laws and regulations impose terms or rights that are more favorable to the government than
those typically available to commercial parties in negotiated transactions. For example, the U.S. Government may terminate
any of our government contracts and, in general, subcontracts, at its convenience, as well as for default based on
performance. Upon termination for convenience of a fixed-price type contract, we normally are entitled to receive the
purchase price for delivered items, reimbursement for allowable costs for work-in-process and an allowance for profit on the
contract or adjustment for loss if completion of performance would have resulted in a loss. Upon termination for convenience
of a cost reimbursement contract, we normally are entitled to reimbursement of allowable costs plus a portion of the fee.
Such allowable costs would include our cost to terminate agreements with our suppliers and subcontractors. The amount of
the fee recovered, if any, is related to the portion of the work accomplished prior to termination and is determined by
negotiation.
A termination arising out of our default could expose us to liability and have a material adverse effect on our ability to
compete for future contracts and orders. In addition, on those contracts for which we are teamed with others and are not the
prime contractor, the U.S. Government could terminate a prime contract under which we are a subcontractor, irrespective of
the quality of our services as a subcontractor.
In addition, our U.S. Government contracts typically span one or more base years and multiple option years. The U.S.
Government generally has the right to not exercise option periods and may not exercise an option period if the agency is not
satisfied with our performance on the contract.
Our business could be adversely affected by a negative audit by the U.S. Government.
U.S. Government agencies, including the Defense Contract Audit Agency and various agency Inspectors General,
routinely audit and investigate government contractors. These agencies review a contractor’s performance under its contracts,
cost structure and compliance with applicable laws, regulations, and standards. The U.S. Government also reviews the
adequacy of, and a contractor’s compliance with, its internal control systems and policies, including the contractor’s
management, purchasing, property, estimating, compensation, accounting, and information systems. Any costs found to be
misclassified may be subject to repayment. If an audit or investigation uncovers improper or illegal activities, we may be
subject to civil or criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits,
suspension of payments, fines, and suspension or prohibition from doing business with the U.S. Government. In addition, we
could suffer serious reputational harm if allegations of impropriety were made against us.
The nature of our business involves significant risks and uncertainties that may not be covered by indemnity or
insurance.
Elements of our business provide products and services where insurance or indemnification may not be available,
including:
• Designing, developing, integrating, producing, sustaining and supporting products using:
• advanced and unproven technologies,
• explosive or other inherently dangerous components,
• systems such as spacecraft, satellites, intelligence systems and homeland security applications that operate in
extreme, high demand or high risk conditions;
• Designing, developing, integrating, producing, sustaining and supporting products to collect, archive, retrieve, fuse,
distribute and analyze various types of information;
• Deploying employees in countries with unstable or competing governments, in areas subject to peacekeeping or
humanitarian missions, in areas of armed conflict, at military installations, or accompanying armed forces in the
field; and
• Training others to operate or repair advanced technology products or provide security or other homeland security-
related services.
Failure of these products and services could result in extensive loss of life or property damage. Sometimes these
products and services are controversial and our role in providing them could subject us to criticism or harm our reputation.
Certain products and services may raise questions with respect to issues of civil liberties, intellectual property, trespass,
conversion and similar concepts. The legal obligations of those working with developing technologies and the resulting
products and services may raise issues of first impression and the legal decisions that do deal with these questions may differ
from jurisdiction to jurisdiction on a global basis.
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