B-75609, JUL. 2, 1962

B-75609: Jul 2, 1962

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TO THE SECRETARY OF COMMERCE: REFERENCE IS MADE TO LETTER DATED MAY 10. THE PROPOSED MODIFICATION WAS ADVANCED BY FEDERAL BARGE LINES. THE CONTRACT WAS MODIFIED IN OCTOBER 1958 TO PROVIDE FOR THE PAYMENT OF THE THEN EXISTING BALANCE OF $6. THE GOVERNMENT'S PRIMARY SECURITY FOR PAYMENT OF THE PURCHASE PRICE IS ITS RIGHT. THE EXISTING PROVISION (ARTICLE IV (A) (1) ( SPECIFIED THAT FBL WILL PAY NO DIVIDENDS UNTIL THE ENTIRE PURCHASE PRICE AND ACCRUED INTEREST IS PAID TO THE GOVERNMENT. FBL STATES THAT THE PROPOSED MODIFICATION IS DESIRABLE TO FACILITATE A PUBLIC STOCK OFFERING BY ITS PARENT COMPANY. ACCORDING TO THE LATEST FINANCIAL STATEMENTS OF FBL THAT HAVE BEEN SUBMITTED TO THE INLAND WATERWAYS CORPORATION.

B-75609, JUL. 2, 1962

TO THE SECRETARY OF COMMERCE:

REFERENCE IS MADE TO LETTER DATED MAY 10, 1962, WITH ENCLOSURES FROM THE UNDER SECRETARY OF COMMERCE FOR TRANSPORTATION REQUESTING OUR VIEWS ON A PROPOSED MODIFICATION OF THE CONTRACT OF SALE DATED JULY 24, 1953, UNDER WHICH THE SECRETARY OF COMMERCE SOLD THE FACILITIES AND OPERATING RIGHTS OF THE INLAND WATERWAYS CORPORATION TO FEDERAL BARGE LINES, INC. (THE NAMED FEDERAL WATERWAYS CORPORATION OF DELAWARE), A WHOLLY OWNED SUBSIDIARY OF THE ST. LOUIS SHIPBUILDING AND STEEL COMPANY. THE PROPOSED MODIFICATION WAS ADVANCED BY FEDERAL BARGE LINES, INC. (FBL) TO THE CHAIRMAN OF THE BOARD, INLAND WATERWAYS CORPORATION BY LETTERS DATED FEBRUARY 1 AND 23, 1962.

THE ORIGINAL AGREEMENT BETWEEN FBL AND THE GOVERNMENT PROVIDED FOR THE PURCHASE PRICE OF $9 MILLION TO BE PAID AS FOLLOWS: $444,000 ON OR BEFORE JUNE 30, 1954; $400,000 ON OR BEFORE JUNE 30 OF EACH YEAR THEREAFTER FOR 9 YEARS; AND THE BALANCE OF ABOUT $5,000,000 ON OR BEFORE JUNE 30, 1964, WITH INTEREST ON THE UNPAID BALANCE AT 3 3/4 PERCENT PER YEAR FROM JULY 1, 1953. AT THE REQUEST OF THE PURCHASER, TO ENABLE IT TO MAINTAIN A PROGRAM OF REHABILITATING FACILITIES AND TO RENDER SERVICE COMPARABLE TO THAT IN EXISTENCE UNDER FEDERAL OPERATION, THE CONTRACT WAS MODIFIED IN OCTOBER 1958 TO PROVIDE FOR THE PAYMENT OF THE THEN EXISTING BALANCE OF $6,956,000 AS FOLLOWS: $706,000 ON OR BEFORE JUNE 30, 1959, AND 10 INSTALLMENTS OF $625,000 ON OR BEFORE JUNE 30 OF EACH YEAR THEREAFTER THROUGH JUNE 30, 1969, WITH INTEREST AT 4 PERCENT ON THE UNPAID BALANCE THROUGH JUNE 30, 1964, AND AT 5 PERCENT THEREAFTER THROUGH THE EXTENDED FINAL PAYMENT DATE OF JUNE 30, 1969. THE INCREASED ANNUAL PAYMENTS TO THE GOVERNMENT PRIOR TO 1964 AND THE INCREASED INTEREST RATE BETWEEN 1964 AND 1969 AFFORDED THE GOVERNMENT ADEQUATE CONSIDERATION IN SUPPORT OF THE MODIFICATION. 137576, OCTOBER 8, 1958.

THE CONTRACT OF SALE CONTAINS SEVERAL PROVISIONS INTENDED TO ASSURE PAYMENT OF THE PURCHASE PRICE AND FULFILLMENT OF THE SERVICE REQUIREMENTS BY FBL. THE GOVERNMENT'S PRIMARY SECURITY FOR PAYMENT OF THE PURCHASE PRICE IS ITS RIGHT, IN THE EVENT OF DEFAULT IN PAYMENT BY FBL, TO DEMAND THE RECONVEYANCE OF THE PROPERTIES TRANSFERRED UNDER THE CONTRACT AND THE CONVEYANCE OF FBL'S EQUITY IN ANY OTHER PROPERTIES ACQUIRED FOR USE IN CARRYING OUT THE SERVICE REQUIREMENTS OF THE CONTRACT.

FBL'S PROPOSAL WOULD MODIFY ONE OF THE CONTRACT PROVISIONS INTENDED TO PROVIDE ASSURANCE OF PAYMENT OF THE AMOUNT DUE THE GOVERNMENT. THE EXISTING PROVISION (ARTICLE IV (A) (1) ( SPECIFIED THAT FBL WILL PAY NO DIVIDENDS UNTIL THE ENTIRE PURCHASE PRICE AND ACCRUED INTEREST IS PAID TO THE GOVERNMENT, UNLESS FAILURE TO PAY DIVIDENDS WOULD RESULT IN THE IMPOSITION BY LAW OF PENALTIES OR LIABILITIES. THE PROPOSED MODIFICATION WOULD PERMIT FBL TO DECLARE AND PAY STOCK DIVIDENDS AND TO DECLARE AND PAY CASH DIVIDENDS OUT OF NOT MORE THAN 50 PERCENT OF ITS NET EARNINGS ACCUMULATED AFTER DECEMBER 31, 1961. IN ITS LETTER OF FEBRUARY 1, 1962, FBL STATES THAT THE PROPOSED MODIFICATION IS DESIRABLE TO FACILITATE A PUBLIC STOCK OFFERING BY ITS PARENT COMPANY, ST. LOUIS SHIPBUILDING AND STEEL COMPANY. FBL ASSERTS THAT, IN VIEW OF THE IMPROVED EQUITY POSITION OF FBL SINCE 1953 AND THE REDUCED BALANCE OF ITS OBLIGATION TO THE GOVERNMENT ($5,000,000), THE GOVERNMENT NO LONGER REQUIRES THE SAME MEASURE OF PROTECTION AS AT THE TIME OF THE SALE. THE CORRESPONDENCE FROM FBL TO THE INLAND WATERWAYS CORPORATION DOES NOT INDICATE ANY BENEFIT WHICH WOULD ACCRUE TO THE GOVERNMENT AS A RESULT OF THE PROPOSED MODIFICATION, AND IT DOES NOT APPEAR THAT ANY SUCH BENEFIT WOULD EXIST.

ACCORDING TO THE LATEST FINANCIAL STATEMENTS OF FBL THAT HAVE BEEN SUBMITTED TO THE INLAND WATERWAYS CORPORATION, THE DEPRECIATED BOOK VALUE OF PROPERTY OWNED BY FBL WHICH WOULD BE SUBJECT TO CONVEYANCE TO THE GOVERNMENT IN THE EVENT OF DEFAULT, AMOUNTED TO $13,369,745 AT DECEMBER 31, 1960. OF THIS AMOUNT, $5,515,294 REPRESENTED PROPERTY WHICH WAS TRANSFERRED TO FBL UNDER THE 1953 CONTRACT OF SALE. THE REMAINDER, $7,854,451, REPRESENTED PROPERTY ACQUIRED BY FBL SINCE 1953 WHICH, AT DECEMBER 31, 1960, WAS PLEDGED AS SECURITY FOR THE BALANCE OF A LONG-TERM DEBT IN THE AMOUNT OF $5,375,779, ARISING OUT OF PURCHASE OF THE PROPERTY. THUS, AT DECEMBER 31, 1960, FBL'S EQUITY IN THE NET BOOK VALUE OF PROPERTY SUBJECT TO CONVEYANCE TO THE GOVERNMENT IN THE EVENT OF DEFAULT AMOUNTED TO $7,993,966. WE HAVE NO KNOWLEDGE CONCERNING THE MARKET VALUE OF THE PROPERTY OR WHETHER IN THE EVENT OF DEFAULT SUFFICIENT FUNDS COULD BE OBTAINED BY SALE OF THE PROPERTY TO COVER THE BALANCE OF THE DEBT DUE THE GOVERNMENT WHICH, AT DECEMBER 31, 1960, WAS $5,625,000.

FBL'S FINANCIAL STATEMENTS SHOW THAT AFTER TAX ADJUSTMENTS, IT SUFFERED A LOSS OF $498,162 IN CALENDAR YEAR 1959. NET INCOME IN 1960 AMOUNTED TO $116,468, OF WHICH $57,300 REPRESENTED ADJUSTMENTS ATTRIBUTABLE TO PRIOR YEARS' OPERATIONS. BASED ON INFORMATION CONTAINED IN FBL'S LETTER OF FEBRUARY 23, 1962, IT APPEARS THAT IT HAD NET INCOME AFTER TAXES OF ABOUT $408,000 IN 1961.

IT APPEARS THAT THE CONTRACT RESTRICTION ON DIVIDENDS WAS INTENDED TO AFFORD THE GOVERNMENT PROTECTION AS LONG AS ANY PORTION OF THE PURCHASE PRICE OR ACCRUED INTEREST REMAINS UNPAID. THE RELATIVELY LOW RATIO OF FBL'S EQUITY IN THE NET BOOK VALUE OF ITS PROPERTIES TO THE BALANCE OF THE PURCHASE PRICE DUE THE GOVERNMENT, TOGETHER WITH FBL'S EARNINGS RECORD IN RECENT YEARS, INDICATES THAT MODIFICATION OF THE CONTRACT IN ACCORDANCE WITH FBL'S PROPOSAL WOULD NOT BE IN THE INTERESTS OF THE GOVERNMENT. IS WELL ESTABLISHED THAT NO OFFICER OF THE GOVERNMENT HAS AUTHORITY TO GIVE AWAY OR SURRENDER VESTED RIGHTS OR AMEND OR MODIFY THE TERMS OF AN EXISTING CONTRACT EXCEPT IN THE INTERESTS OF THE UNITED STATES. 35 COMP. GEN. 56; 22 ID. 260; 19 ID. 48.

ACCORDINGLY, WE CONCLUDE THAT THERE IS NO LEGAL AUTHORITY FOR THE CONTRACT TO BE MODIFIED AS PROPOSED.