BNUMBER: B-275908.2
DATE: July 14, 1997
TITLE: Premier Security, B-275908.2, July 14, 1997
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Matter of:Premier Security
File: B-275908.2
Date:July 14, 1997
Lawrence J. Sklute, Esq., for the protester.
Alan M. Grayson, Esq., Victor A. Kubil, Esq., and Michael A. Lewis,
Esq., Alan M. Grayson and Associates, for Lyons Security Service,
Inc., an intervenor.
Michael Cameron, Esq., Immigration and Naturalization Service,
Department of Justice, for the agency.
Aldo A. Benejam, Esq., and Christine S. Melody, Esq., Office of the
General Counsel, GAO, participated in the preparation of the decision.
DIGEST
Agency improperly awarded contract for security guard services to low
bidder's successor in interest where, after bid opening and before
award, the bidder was sold in its entirety, but the evidence in the
record does not establish that, apart from the low bid, the assets
transferred pursuant to the sale were of more than negligible value.
Since the sale of the business thus was tantamount to the improper
sale of the bid, low bidder's successor in interest may not receive
award of the contract.
DECISION
Premier Security protests the award of a contract to Lyons Security
Service, Inc. (LSSI) as the successor in interest to Lyons Security
Service, the low bidder under invitation for bids (IFB) No.
ACL-6-B-0003, issued by the Immigration and Naturalization Service
(INS) for unarmed guard services at the San Pedro Service Processing
Center, California. Premier contends that INS improperly awarded the
contract to LSSI, because, apart from its low bid, Lyons's assets were
negligible, and thus, the sale of the business was tantamount to the
improper sale of the bid.
We sustain the protest.
BACKGROUND
The IFB, issued May 13, 1996 as a total small business set-aside,
contemplated the award of a fixed-price requirements contract, for a
base year and four 1-year option periods. Sixty firms, including
Lyons and Premier, responded to the IFB by the time set on July 3 for
bid opening; bids, including all option periods, ranged from
$25,598,235 to $50,500,923. After rejecting several lower-priced bids
as nonresponsive, the contracting officer informed Lyons that it had
submitted the apparent low bid ($29,769,313) and requested that the
Defense Contract Management Command (DCMC) conduct a pre-award survey
on Lyons. On October 31, DCMC recommended that Lyons not be awarded
the contract based primarily on Lyons's weak financial condition.
DCMC's report further noted that effective October 1, after bid
opening, Lyons had been sold to Kathleen E. Guidice, the wife of the
owner of United International Investigative Services (UIIS). UIIS is
the incumbent large business firm and was ineligible to compete under
the IFB.
After learning of the sale of Lyons, in a letter dated November 4, INS
rejected Lyons's bid, citing Federal Acquisition Regulation (FAR) sec.
14.404-2(l), which states as follows:
"After submitting a bid, if all of a bidder's assets or that part
related to the bid are transferred during the period between the
bid opening and the award, the transferee may not be able to take
over the bid. Accordingly, the contracting officer shall reject
the bid unless the transfer is effected by merger, operation of
law, or other means not barred by 41 U.S.C. sec. 15 or 31 U.S.C. sec.
3727."[1]
On November 25, in response to an agency-level protest challenging the
rejection, the contracting officer reinstated Lyons as the low bidder.
By this time, however, Lyons had been incorporated, thus becoming
LSSI, and had moved its offices to a new location at the same street
address as UIIS. As a result of these events, and since the IFB was
set aside for small businesses, the contracting officer questioned
whether LSSI remained eligible for award. In addition, aware that
Lyons's new owner is the wife of the owner of UIIS, the contracting
officer questioned whether Mrs. Guidice's relationship to UIIS had any
impact on LSSI's eligibility for award. Accordingly, by letter dated
December 19, INS requested that the Small Business Administration
(SBA) determine the awardee's business size status and eligibility for
award.
On January 24, 1997, the SBA determined that Lyons had properly
self-certified that it was a small business as of bid opening.[2] The
SBA also found that negotiations regarding the sale of Lyons had not
been entered into prior to bid opening and that Mrs. Guidice was not
the owner of Lyons as of bid opening. As such, the SBA concluded that
any issues arising from Mrs. Guidice's relationship with Mr. Guidice
or her affiliation with UIIS were not germane to its analysis.[3]
Accordingly, the SBA found that LSSI was a small business eligible for
award.
DCMC then conducted a pre-award survey on LSSI at the firm's new
address. The Defense Contract Audit Agency (DCAA) also audited LSSI's
accounting system. Based primarily on LSSI's financial condition,
DCMC concluded that the firm did not have the capital required to
finance the start-up costs of the contract and recommended no award to
LSSI. Further, based on perceived weaknesses in LSSI's accounting
system and related internal control policies and procedures, DCAA
concluded that LSSI's system was inadequate for the accumulation and
reporting of costs under government requirements for progress
payments, and thus questioned LSSI's ability to adequately support
public vouchers. The contracting officer then rejected the firm as
nonresponsible, and referred the matter to the SBA for consideration
under the certificate of competency (COC) procedures. On February 28,
the SBA issued a COC to LSSI, and on March 27, INS awarded the
contract to LSSI.
Following a debriefing by the agency, Premier filed this protest in
our Office, arguing that the award was improper because, apart from
its low bid, Lyons had no assets to transfer to its new owner and,
thus, the sale of the business was tantamount to the improper sale of
the bid.[4]
DISCUSSION
The transfer or assignment of rights and obligations arising out of a
bid or proposal is generally not permitted; exceptions to this general
rule are allowed only where the transfer is to a legal entity which is
the complete successor in interest to the bidder or offeror by virtue
of a merger, corporate reorganization, the sale of an entire business,
or the sale of an entire portion of a business embraced by the bid or
proposal. J.I. Case Co., B-239178, Aug. 6, 1990, 90-2 CPD para. 108 at 3;
see FAR sec. 14.404-2(l). As with the anti-assignment statutes, 41
U.S.C. sec. 15 and 31 U.S.C. sec. 3727, which restrict the assignment of
government contracts and claims, the restriction on the transfer of
bids reflects a policy of ensuring the accountability of vendors to
the government and of discouraging vendors from acquiring speculative
interests in government contracts for the purpose of trading in them.
See Mil-Tech Sys. Inc. v. United States, 6 Cl. Ct. 26, 33-35 (Cl. Ct.
1984); Ionics Inc., B-211180, Mar. 13, 1984, 84-1 CPD para. 290 at 5.
Because of these policy concerns, the exceptions to the general
prohibition on the transfer of bids have been narrowly interpreted.
Thus, we have found that a bid transfer could be improper where the
bid was the primary asset being transferred, even where the transfer
occurred as the result of a business combination that would arguably
place the transfer within the scope of one of the exceptions to the
rule; in those cases, we have examined whether the assets transferred,
other than the bid, were of negligible value or purchased for nominal
consideration, in which case the bid transfer would be improper. J.I.
Case Co., supra, at 4; Mil-Tech Sys. Inc., and The Dept. of The
Army--Recon., B-212385.4; B-212385.5, June 18, 1984, 84-1 CPD para. 632 at
5-6; Information Servs. Indus., B-187536, June 15, 1977, 77-1 CPD para.
425 at 4.
Here, the protester does not dispute that LSSI is the complete
successor in interest to Lyons. In this regard, the sale of Lyons was
memorialized in a sales agreement entered into on September 30, 1996,
between Mrs. Guidice and Juanita L. Lyons, the sole proprietor of
Lyons. Under the terms of that agreement, effective October 1, 1996,
in addition to assuming specified liabilities, Mrs. Guidice acquired
all of the seller's rights, title, and interest in Lyons's assets, all
equipment, licenses, inventory, accounts receivable, goodwill,
trademarks, trade names, copyrights, and all other tangible and
intangible assets owned by Ms. Lyons. Subsequent to the sale, Lyons
was incorporated under California law, thus becoming LSSI.
Premier contends that the award here was improper because the value of
the transferred assets, other than the low bid, was negligible. In
this regard, Premier argues that the value of Lyons's assets should be
viewed from the buyer's perspective, which in Premier's opinion is
UIIS, a large business which had little incentive other than the
benefit of the low bid to acquire Lyons, whose assets were
insignificant when compared to UIIS's.
The protester's suggestion that we should compare Mrs. Guidice's
assets or her financial interests in UIIS with Lyons's assets is
misplaced. The test is not whether the transferred assets are
comparable in value to the buyer's. Rather, the test is whether the
negligible value of the assets or their nominal purchase price
indicates that nothing of real value apart from the winning bid was
transferred. Mil-Tech Sys. Inc., and The Dept. of The Army--Recon.,
supra, at 6. By examining certified financial statements, audited
balance sheets, and other relevant, reliable evidence documenting the
financial position of the firm being acquired (and excluding the value
of the bid or proposal at issue), this test captures those cases
where, for instance, although a transaction is described as a sale of
an entire business, in actuality the transaction is tantamount to the
improper assignment of a low bid or winning proposal.
We have reviewed the documents prepared contemporaneously with the
sale and other evidence in the record showing Lyons's financial
position as of the time immediately preceding and leading up to the
sale. These documents include an attachment to the sales agreement;
the pre-award survey report DCMC initially prepared on Lyons
explaining the firm's financial condition, including its assets,
liabilities, and net worth; and information Mrs. Guidice submitted to
DCMC during the pre-award survey of Lyons. Based on our review, we
think that these documents fail to establish that, apart from the low
bid, the assets transferred pursuant to the sale were of more than
negligible value.
Attachment to the Sales Agreement
This document, "EXHIBIT A, PURCHASE AGREEMENT OF LYONS SECURITY
SERVICE," lists the assets transferred and liabilities assumed by Mrs.
Guidice as a result of the sale. Under the main heading, "ASSETS
ACQUIRED," the document lists "intangible assets" and "tangible
assets." Intangible assets include fictitious business name,
trademarks, logos and art, customer lists, goodwill, and business
licenses, valued at $101,585. Tangible assets listed include accounts
receivable, office supplies, uniforms, two 1994 Toyota pickup trucks,
a 1975 Jeep, five radios and a computer, with a total balance sheet
value of $104,330. This document also lists "LIABILITIES ASSUMED" by
Mrs. Guidice totaling $82,485.
The document is not dated or signed and is not accompanied by a
narrative explanation of the basis or methodology used for assessing
the value of the assets listed, raising serious questions about the
values listed for some of the items. Most importantly, we question
the basis for valuing the "intangible assets" at $101,585. While
intangible assets such as goodwill often can be of considerable value,
there is no explanation or supporting evidence of any kind for the
value listed for Lyons here.[5] In addition to the absence of any
affirmative support, the valuation is inconsistent with the overall
condition of the company. For example, DCMC's pre-award survey found
that Lyons's current ratios (current assets/liabilities) and quick
ratios (current assets less inventory/liabilities), which compared
unfavorably to the industry averages, indicated excessive debt burdens
and less income flow than desirable. DCMC's conclusion was further
buttressed by comparing Lyons's 38.7 debt/net worth ratio to the
industry average of 8.1, leading DCMC's evaluators to conclude that
Lyons had very little equity available to discharge its debts in the
event of a crisis. DCMC further noted that while by the end of 1995
Lyons had an equity of $13,946, by August 1996 that figure had slipped
to $3,362--Lyons's net worth as of September 30, 1996, 1 day before
the sale became effective. In short, although Lyons may have been a
viable concern at one time, its business was clearly failing by the
time of the sale.
Similarly with respect to tangible assets, there is nothing in the
record indicating whether these figures are based on audited balance
sheets or certified financial statements prepared by an objective
third party, disinterested in the transaction between Mrs. Guidice and
Ms. Lyons, raising serious questions as to their reliability and
accuracy.[6] Even assuming that the total value of the tangible
assets listed ($104,330) is accurate, when adjusted by the total of
liabilities assumed ($82,485), and discounting the value listed for
the intangible assets, the net result is that except for Lyons's
winning bid, little of value was transferred to Mrs. Guidice as a
result of the sale.
In sum, in the absence of a narrative explanation of the basis or
methodology used to arrive at the values for the assets listed, and
without the benefit of a current, audited balance sheet or a certified
financial statement of Lyons, this document cannot reasonably be
relied upon to conclude that the assets transferred were of more than
negligible value.
Information Submitted During DCMC's Pre-award Survey, October 31,
1996.
In response to DCMC's request, Mrs. Guidice provided DCMC with a
document entitled "COMPILED BALANCE SHEETS and STATEMENTS OF INCOME,
Juanita L. Lyons [d/b/a] Lyons Security Service, August 31, 1996 and
December 31, 1995." For each period, the information contained on
that document is divided into several categories and subcategories
similar to the attachment to the purchase agreement discussed above.
A signed cover letter, dated October 7, 1996, written on a certified
public accountant's letterhead, accompanies this document. The letter
explains that while the information was compiled in accordance with
accepted accounting standards, a "compilation" is limited to
presenting the information as represented by management. The signer
expressly states that he had "not audited or reviewed the accompanying
financial statements or other financial information and, accordingly,
do[es] not express an opinion or any other form of assurance on them."
The letter goes on to explain, that "[m]anagement has elected to omit
the statements of cash flows and all of the disclosures required by
generally accepted accounting principles," which, if included in the
compilation, "might influence the user's conclusions about the
company's financial position . . . ."
Given these disclaimers and conditions, the document submitted by Mrs.
Guidice clearly does not constitute the kind of evidence--for example,
certified financial statements or audited balance sheets--that can
reasonably be relied on to establish the value of the company's
assets. Even assuming that this document accurately reflects Lyons's
financial position, it clearly supports a conclusion that--except for
the low bid--nothing of significant value was transferred to Mrs.
Guidice. For instance, as of August 31, 1996, the latest reported
period, the document lists "ASSETS," including current assets and
property and equipment, valued at $133,333 and total current and
long-term liabilities as $129,971, leaving a negligible net worth of
only $3,362--the value of the assets transferred as a result of the
sale.
CONCLUSION AND RECOMMENDATION
Based on our review, we think there is no reasonable basis in the
record to conclude that the assets transferred pursuant to the sale
were of more than negligible value. Since the sale of the business
thus was tantamount to the improper sale of the bid, LSSI, the
successor in interest, may not receive award of the contract.
Mil-Tech Sys. Inc. v. United States, 6 Cl. Ct. at 33-35; Mil-Tech Sys.
Inc., and The Dept. of The Army--Recon., supra.[7]
We recommend that INS terminate the contract awarded to LSSI and award
the contract to Premier, the next low bidder, if it is otherwise
eligible for award. Additionally, we recommend that the protester be
reimbursed its costs of filing and pursuing the protest, including
reasonable attorneys' fees. 4 C.F.R. sec. 21.8(d)(1) (1997). The
protester should submit its certified claim for costs to the
contracting agency within 60 days of receiving this decision. 4
C.F.R. sec. 21.8(f)(1).
The protest is sustained.
Comptroller General
of the United States
1. 41 U.S.C. sec. 15(a) (1994) provides in pertinent part:
"No contract or order, or any interest therein, shall be
transferred by the party to whom such contract or order is
given to any other party, and any such transfer shall
cause the annulment of the contract or order transferred,
so far as the United States is concerned. All rights of
action, however, for any breach of such contract by the
contracting parties, are reserved to the United States."
31 U.S.C. sec. 3727 is the companion statute applicable to the assignment
of claims.
2. 13 C.F.R. sec. 121.404 (1997) generally provides that SBA determines
the size status of a concern as of the date of its written
self-certification as a small business. See also FAR sec. 19.301(a) (FAC
90-32); Vantex Serv. Corp., B-251102, Mar. 10, 1993, 93-1 CPD para. 221 at
2.
3. Subsequently, in connection with a different procurement, SBA
concluded that LSSI was not a small business concern. On October 30,
1996, the General Services Administration (GSA) issued solicitation
No. GS-11P96-MPC-0512 as a small business set-aside for security guard
services at Crystal Plaza #6, in Arlington, VA. UIIS was the incumbent
providing those guard services. On November 27, in response to GSA's
solicitation, LSSI self-certified that it was a small business concern
and GSA's contracting officer questioned that certification. After
analyzing several factors concerning affiliation, including LSSI's and
UIIS's common interests, their respective ownership, and office
location, on March 10, 1997, the SBA determined that LSSI was not a
small business concern eligible for award under GSA's solicitation.
This result is consistent with SBA's regulations, since LSSI
self-certified that it was a small business concern after Mrs. Guidice
had acquired Lyons.
4. In its protest, Premier also argued that INS had "failed to
evaluate proposals in accordance with the stated evaluation scheme."
However, INS conducted the procurement using the sealed bid procedures
prescribed in FAR part 14, which generally require that award be made
to the responsible bidder whose responsive bid is deemed to be most
advantageous to the government, considering only price and
price-related factors. FAR sec. 14.408-1(a). Consequently, except for
calculating total price (including options), and determining that
LSSI's bid was responsive, INS did not "evaluate proposals" as that
concept is applied in negotiated procurements. Premier also
maintained that in issuing a COC to LSSI, the SBA improperly
disregarded vital information bearing on LSSI's responsibility. In
its comments on the agency report, Premier withdrew this allegation.
Premier further argued that the awardee's bid failed to satisfy
definitive responsibility criteria in the IFB. Since we sustain the
protest and recommend that LSSI's contract be terminated, we need not
address this contention.
5. We note that the "balance sheets and statements of income"
submitted to DCMC during the pre-award survey, discussed further
below, make no reference to any intangible assets, casting further
doubt on the reliability of the valuation in the attachment to the
purchase agreement.
6. Interestingly, the bottom margin of all pages of the sales
agreement contain what appear to be the hand-written initials of the
seller ("J.L." for Juanita Lyons) and the purchaser ("K.G." for
Kathleen Guidice), indicating their acknowledgment of the terms and
conditions contained in the agreement. This attachment, however,
which was presumably prepared contemporaneously with the sales
agreement, contains two spaces at the bottom of the page marked "INT:
INT: " for the parties to initial. However, both of these spaces
are blank, suggesting that the parties either did not agree as to its
contents or its accuracy, or that neither party intended for it to be
part of the transaction.
7. Our decision in Mil-Tech was issued in response to a request from
the United States Claims Court. Mil-Tech had filed suit in the Claims
Court seeking to bar the contracting agency from making award to
another bidder, following two decisions by our Office concluding that
Mil-Tech was eligible for award. In the cited decision, we concluded
that Mil-Tech was not eligible for award because the sale of its stock
to another company essentially constituted a prohibited bid transfer.
In considering this issue, the Claims Court reached the same
conclusion.