Chairman Cites Cost Arising From Withheld Funds : General Dynamics to Pentagon: We’ll Bill You

General Dynamics Chairman David Lewis said Thursday that $244 million in allegedly improper overhead charges withheld recently by the Pentagon has forced the firm to increase its bank borrowing and that interest charges on those funds will be billed to the government.

The Pentagon withheld the $244 million--believed to be the largest such payment suspension ever--because of such contested charges to taxpayers as personal travel by General Dynamics executives and even kennel fees for an executive’s dog.

Lewis, speaking at General Dynamics’ annual meeting at the firm’s Pomona division, acknowledged that the contractor had submitted some improper charges, which he said was “extremely embarrassing” to the company.

But he added that such improper charges represent less than 1% of the firm’s overhead billings and that its “reputation for integrity” has been damaged by a “long campaign against General Dynamics.”

Nevertheless, Lewis said he expects that the “great majority” of the $244 million in withheld payments eventually will be paid back to the firm and that the matter will have “no material impact” on financial performance.

Indeed, Lewis announced at the meeting that General Dynamics’ first-quarter profits shot up 20% to $92.7 million on sales of $2 billion. Total backlog stood at $22.4 billion, a jump of $4 billion since the close of the first quarter in 1984.

The St. Louis-based firm posted 1984 earnings of $382 million on sales of $7.8 billion, a 33% improvement in profit during a year when the firm became enmeshed in five federal and congressional investigations into its ethics and practices.

Pentagon spokesman Jim Turner said he could not respond directly to Lewis’ plan to bill the Pentagon for interest costs, but he said that, under federal regulations, interest charges are not considered allowable overhead expenses.

An investigator for the House subcommittee on oversight and investigations, which has been a key player in the disclosures of alleged improper billing by General Dynamics, took exception to Lewis’ plan on interest charges.

The investigator said that General Dynamics had already received the $244 million in improper overhead payments and that the government was only recouping its interest-free loan to General Dynamics.

In a wide-ranging series of statements and disclosures during the meeting and after the meeting to reporters, Lewis also said:

- The company’s board has authorized management to initiate a court fight if the Defense Department acts to bar Lewis and Gorden E. MacDonald, executive vice president, from future involvement in Pentagon contracting.

Defense Inspector General Joseph H. Sherick is expected to recommend that Defense Secretary Caspar W. Weinberger bar Lewis and MacDonald, which would force them out or subject the firm to a loss of its defense contracts. Lewis said such action is “completely unwarranted and completely unfair to this company and to us, personally.”

General Dynamics “will do everything we can” to prevent Northrop from launching its F-20 fighter into production. The F-20, developed by Northrop at its own expense, is being offered to the U.S. Air Force as an alternative to General Dynamics’ F-16.

General Dynamics, which builds the F-16 in Fort Worth, has doggedly fought Northrop around the world and has won every foreign marketing contest.

Lewis also said that recent statements by members of Congress supporting Air Force procurement of the F-20 are a “spillover” from the political and legal problems that surround General Dynamics.

- The company plans to reduce its reliance on defense contracting by making a “large acquisition.” But Lewis said the company will not bid for Hughes Aircraft, which is for sale, and will not enter a new line of business. He ruled out buying a service-oriented company or a grocery store chain.

- General Dynamics will invest about $500 million in new facilities and equipment in 1985, about double its 1984 capital spending.

- Allegations “have seemingly been put to rest” that General Dynamics officials committed fraud in the preparation of claims associated with Navy submarine contracts and that the firm deliberately withheld information to boost the price of its stock. However, there are believed to be several continuing investigations into those matters.

- General Dynamics has been unfairly treated with respect to its efforts to respond to various allegations of wrongdoing.

“I can think of no single case where any reporter gave our responses to his questions fair treatment in his story,” Lewis told shareholders. “In all stories there has been heavy emphasis on any charges or allegations against us, no matter how unsubstantiated or exaggerated.”