TITLE: Global Crossing Telecommunications, Inc.
BNUMBER: B-288413.6; B-288413.10
DATE: June 17, 2002
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Global Crossing Telecommunications, Inc., B-288413.6; B-288413.10, June 17,
2002
DOCUMENT FOR PUBLIC RELEASE
The decision issued on the date below was subject to a GAO Protective
Order. This redacted version has been approved for public release.
Decision
Matter of: Global Crossing Telecommunications, Inc.
File: B-288413.6; B-288413.10
Date: June 17, 2002
John G. Horan, Esq., Jason A. Carey, Esq., and Stanton D. Anderson, Esq.,
McDermottt, Will & Emery, for the protester.
Carl L. Vacketta, Esq., Kevin P. Mullen, Esq., and David E. Fletcher, Esq.,
Piper Rudnick, for MCI WorldCom Communications, Inc., the intervenor.
William L. Mayers, Esq., Department of Defense, for the agency.
Henry J. Gorczycki, Esq., and James A. Spangenberg, Esq., Office of the
General Counsel, GAO, participated in the preparation of the decision.
DIGEST
Agency reasonably determined that the protester was nonresponsible, even
though the agency had determined the firm to be responsible before it filed
for bankruptcy, where the updated pre-award survey, on which the contracting
officer relied in making her nonresponsibility determination, included a
detailed financial analysis reasonably concluding that the firm's poor
financial condition made the firm a high financial risk and that the
bankruptcy action created unacceptable contract performance risks.
DECISION
Global Crossing Telecommunications, Inc. protests an award to MCI WorldCom
Communications, Inc. under request for proposals (RFP) No. DCA200-01-R-5008,
issued by the Department of Defense, Defense Information Technology
Contracting Organization (DITCO), for the Defense Research Engineering
Network (DREN).[1] Global Crossing challenges the agency's determination
that it is not a responsible prospective contractor.
We deny the protest.
The RFP, issued January 5, 2001, contemplated the award of a fixed-price,
indefinite?delivery/indefinite-quantity contract for a 3-year base period
with 7 option years. The RFP stated that award would be made on a
"best-value" basis, considering technical, management, price, and past
performance factors. DITCO received and evaluated proposals from five
offerors, all large companies in the long-distance telecommunications
industry. After discussions and the submission of revised proposals, the
agency determined that Global Crossing's proposal was the highest?rated and
lowest-priced. On July 9, DITCO awarded the contract to Global
Crossing.[2]
Protests of the award were then filed by all of the other offerors. The
agency took corrective action in response to the protests. It amended the
solicitation, canceled the award to Global Crossing, and reopened the
competition. After the recompetition, Global Crossing's proposal was again
evaluated as the highest-rated and lowest-priced.[3]
In December 2001, while contemplating re-award of the contract to Global
Crossing, the contracting officer became aware of news reports reflecting
negatively on the firm's financial position, as well as of other adverse
financial information, such as a drop in the firm's Standard & Poor's (S&P)
credit rating to the lowest non-default rating. As a result, the
contracting officer requested that the Defense Contract Management Agency
(DCMA) conduct a pre-award survey of Global Crossing's financial
capability. Agency Report, Tab 17, Determinations of Responsibility,
at 000107-08.
DCMA's first pre-award survey, issued January 10, 2002, consisted of a
review of financial statements dated September 30, 2001 submitted by Global
Crossing.[4]
The review included consideration of the firm's working capital from its own
resources, net worth, current assets, current liability, current ratio
(i.e., ratio of current assets to current debt), "acid test" ratio (an
indicator of immediate liquidity), and debt to equity ratio. DCMA
determined that the financial ratios reviewed "are satisfactory and fall
between the median and low range of industry standards when compared to
other businesses in the same industry." Id. at 000085, 000088. The survey
also stated that the firm had a large line of secured credit that it had
drawn down completely, and that this was reflected in the firm's liquidity
under cash assets on its balance sheet. Id. at 000087. The survey rated
Global Crossing's financial capability as "satisfactory," and concluded:
The analyst's evaluation has determined that Global Crossing has the
financial resources to perform this solicitation based on having sufficient
working capital on hand and the signed Corporate Guaranty from the parent
company. As a result, an award is recommended. However, considering that
they have a large amount of long term debt . . . and a shortage of liquid
funds to offset that debt, it may be prudent to request another financial
capability review, perhaps from [the Defense Contract Audit Agency (DCAA)],
in the future and prior to award of any option years. This area of
liquidity could make them a moderate financial risk in the out years of the
contract, but overall, for the present, the analyst considers them a low
risk in regards to cost.
Id. at 000083, 000088. On January 14, the contracting officer made an
affirmative determination of responsibility based on DCMA's pre-award
survey. Id. at 000080-81. The agency then notified Global Crossing that it
would be awarded the contract.
On January 23, prior to the planned award, the agency received a letter from
Global Crossing stating that the firm was about to announce a material
development with respect to its financial condition and suggested that the
agency may want to delay award until after that announcement. Id. at
000079. On January 28, Global Crossing announced that it was filing for
reorganization under Chapter 11 of the Bankruptcy Act. Id. at 000076-78.
On January 29, the contracting officer requested from DCMA an updated
pre-award survey in light of the bankruptcy proceedings. The contracting
officer notified Global Crossing of her request.
DCMA prepared an updated pre-award survey. Id. at 000039-72. The updated
pre?award survey was based on a detailed financial assessment performed by a
team from DCMA's Industrial Analysis Center consisting of a financial
analyst, an economist, an industrial analyst, a lawyer and contracting
personnel. The review examined Global Crossing's quarterly and annual
revenue figures from the second quarter of 1998 through the third quarter of
2001 (i.e., the quarter ending
September 30, 2001), and also identified the unaudited revenue estimates for
the fourth quarter of 2001.[5] This analysis included consideration of the
financial indicators that were the focus of the first pre-award survey, as
well as a detailed analysis of the firm's corporate financial health over
the prior 3 years, including analyses in the areas of profitability, debt
management, cash flow, liquidity, shareholder value, and bankruptcy
potential. The analysis determined that the firm was in a "critical plus"
financial condition and had a "high" financial risk, and concluded:
All financial indicators are weak with negative trends.
The Sales trend is unfavorable with declining demand, multiple competitors,
and a large overcapacity throughout the industry resulting in declining
prices. The Company has been unprofitable throughout its existence. Their
balance sheet is weak with long-term debt that doesn't appear to be
manageable. Operating cash flow is not sufficient to meet the current cash
requirements and pay down debt. Access to credit and equity markets appears
to have been exhausted with a current S&P Issuer Credit rating of "D" which
is a "default" rating. Industry comparisons for profitability and debt
management are unfavorable. The Company has sought bankruptcy protection.
Id. at 000061.
In addition, the review identified risks to the government in awarding the
contract to Global Crossing after Chapter 11 bankruptcy had commenced.
Among the identified risks was that, should the agency need to terminate the
contract during the proceedings, delays in termination were likely. Also,
in the event the firm's attempts to reorganize are unsuccessful and the firm
is forced into Chapter 7 liquidation, the agency risks not receiving
performance under the contract, not being able to terminate the contract
without permission from the bankruptcy court, and not being able to recover
overpayments made to the firm prior to liquidation. Id. at 000062.
The review also identified other adverse considerations, including possible
opposition to the proposed reorganization plan by current shareholders, an
investigation by the Securities and Exchange Commission (SEC) of Global
Crossing's accounting practices, unofficial reports of an investigation by
the Federal Bureau of Investigation (FBI), numerous post-bankruptcy
class-action suits against Global Crossing and its auditors, an S&P
"Relative Strength Rank" of 1 (lowest rating on a scale of 1?99), a report
of cost-cutting measures being implemented that could reduce the firm's U.S.
employees, and concern that the company's bankruptcy status would adversely
affect the firm's ability to retain and attract employees.
Id. at 000063-64. The stated conclusion of the review was as follows:
Poor financial performance, unfavorable trends of key financial indicators
and legal consequences associated with bankruptcy and possible liquidation
exposes the Government to significant risks in entering into any contracts
with Global Crossing.
Id. at 000065.
On March 6, DCMA issued the updated pre-award survey. It restated the
conclusion of the review team (quoted above) and recommended against making
an award to Global Crossing. Id. at 000044. On March 7, the contracting
officer issued a determination of nonresponsibility that adopted and briefly
summarized the DCMA financial review findings as the basis for her
determination. Id. at 000037-38.
Also on March 7, the contracting officer received a letter from Global
Crossing.
The letter stated that, for the purposes of affirmatively demonstrating the
firm's financial responsibility and in light of the firm's recent Chapter 11
bankruptcy proceedings, Global Crossing was proposing to deposit $6 million
in an escrow account to fund the working capital needs of the contract. Id.
at 00035. Attached to the letter was a letter from the financial
institution that agreed to act as the escrow agent. Id. at 00036. The
agency subsequently analyzed whether $6 million would be sufficient to cover
initial performance costs. Id. at 00021-26. The analysis relied on certain
assumptions and concluded that $6 million was sufficient. Id. at 000021,
000024. The contracting officer concluded, after consulting with DCMA, that
the findings of DCMA's latest pre-award survey, and the nonresponsibility
determination that relied upon it, were not changed by the creation of the
escrow account. Agency Report at 26-27; Contracting Officer's Statement at
4.
On March 26, DCAA issued an audit report on Global Crossing's parent and its
affiliates, which had been previously requested by DCMA. Agency Report, Tab
17, Determinations of Responsibility, at 000001-19. The report stated that,
due to significant uncertainties arising from the bankruptcy proceedings,
DCAA was not able to, and did not, express an opinion on whether the company
had adequate financial resources to perform government contracts in the next
year. Id. at 000003. The report included a response from Global Crossing
dated March 22, stating that it was performing government contracts and had
sufficient resources to continue to perform in the near-term, that it had
prepared an operating plan that reduces the risk of liquidation of its
assets, and that the $6 million escrow account demonstrated that the firm
has the necessary working capital to perform the DREN contract. Id.
at 000017-19. The firm's response concluded by requesting that the
contracting agency delay action under the RFP in order to observe
developments of the firm's recent actions. Id. at 000019. DCAA's report
and Global Crossing's response had no impact on the contracting officer's
nonresponsibility decision. Agency Report at 28.
Concurrent with finding Global Crossing nonresponsible, the contracting
officer requested DCMA to conduct a pre-award survey on MCI, the offeror
whose proposal was next in line for award. On March 19, DCMA recommended
award to MCI based on a satisfactory finding of financial capability.
Agency Report, Tab 17, Determinations of Responsibility, at 000124. The
pre-award survey was based on the same financial assessment model used for
the latest financial review of Global Crossing.[6] Though shorter than the
review for Global Crossing, and performed by a single analyst rather than a
team, the assessment reviewed and analyzed the same basic financial
information for MCI over the past 3 years, including profitability, debt
management, cash flow, liquidity, shareholder value, and bankruptcy
potential.
Id. at 000130-35. The assessment found that the firm was in a generally
sound financial position within the industry, and stated the following
conclusion:
Satisfactory financial performance, generally favorable trends of key
financial indicators and very unlikely chance of bankruptcy does not expose
the Government to significant risks in entering into any contracts with
[MCI], with the parent company . . . serving as Guarantor.
Id. at 000135.
On March 25, the contracting officer made an affirmative determination of
responsibility for MCI. Id. at 000141-42. The determination referenced the
DCMA pre-award survey, as well as other information, including an S&P rating
for MCI of "BBB+ in its capacity to meet its financial commitments, which
means the company has adequate capacity to meet financial commitments, but
may be subject to adverse economic conditions." Id. at 000141. After the
agency prepared and documented a revised source selection, MCI was awarded
the contract on April 4. Global Crossing's protest, challenging the
nonresponsibility determination and the award to MCI, followed.[7]
A contract may only be awarded to a responsible prospective contractor.
FAR � 9.103(a). No award can be made unless the contracting officer makes
an affirmative determination of responsibility; in the absence of
information clearly indicating that the prospective contractor is
responsible, the contracting officer is required to make a determination of
nonresponsibility. FAR � 9.103(b). A finding of responsibility requires,
among other things, that the potential contractor have adequate financial
resources to perform the contract or the ability to obtain them. FAR
� 9.104-1(a). In making a responsibility determination, the contracting
officer may rely on the results of a pre-award survey, and we will consider
the accuracy of the survey information in judging whether a contracting
officer's determination of nonresponsibility was reasonable. Harvard
Interiors Mfg. Co., B-247400, May 1, 1992, 92-1 CPD � 413 at 3. Since the
agency must bear the brunt of any difficulties experienced in obtaining the
required performance, contracting officers have broad discretion and
business judgment in reaching nonresponsibility determinations, and we will
not question such a determination unless a protester can establish that it
lacked any reasonable basis or was made in bad faith. Id. at 3-4;
Computervision Corp., B-257141, Aug. 12, 1994, 94-2 CPD � 73 at 3. Here,
the protester has not established that the nonresponsibility determination
was unreasonable or made in bad faith.
The protester does not challenge the accuracy of the facts presented in the
updated pre-award survey, which concludes that there are unacceptable risks
to the government because of the firm's poor financial condition, and on
which the contracting officer relied in making her nonresponsibility
determination. Instead, the protester asserts that this determination was
unreasonable because it was based on the same information upon which the
earlier pre-award survey and the contracting officer previously determined
Global Crossing to be responsible. It is true that both surveys considered
and analyzed much of the same information and factors, with both recognizing
that Global Crossing had a liquidity problem and ultimately reaching
opposite conclusions about Global Crossing's financial capability to perform
this contract. It is also true that not much time separated the first and
second pre-award surveys.
However, between the two surveys Global Crossing had commenced bankruptcy
proceedings. While the mere fact that a bidder files a petition in
bankruptcy under Chapter 11 of the Bankruptcy Act does not require a finding
of nonresponsibility, bankruptcy may nevertheless be considered as a factor
in determining that a particular bidder is nonresponsible. Wallace &
Wallace, Inc.; Wallace & Wallace Fuel Oil, Inc.--Recon., B-209859.2,
B-209860.2, July 29, 1983, 83-2 CPD � 142 at 5. Indeed, while not required,
a contracting officer may reasonably view bankruptcy as something other than
a favorable development. Id. at 5, n.1; see Harvard Interiors Mfg. Co.,
supra, at 6 (proposed reorganization plan that is unapproved at the time of
award, and financial projections based on the plan, do not necessitate an
affirmative responsibility determination). The risks to the government
arising from the firm's bankruptcy proceedings were a significant part of
the contracting officer's stated justification for her nonresponsibility
determination. The protester has not shown that these risks were not
significant or that the agency's consideration of the risks associated with
the protester's bankruptcy proceedings was unreasonable.
In addition, the second DCMA survey analysis, upon which the contracting
officer based her nonresponsibility determination, was more extensive,
considered additional information not previously available, and examined
risks more critically. For example, DCMA had Global Crossing's estimates of
its fourth quarter revenue figures and information about the firm's
bankruptcy proceedings, neither of which was previously available. Also,
the detailed financial review in the final pre-award survey produced much
more information analyzing the firm's financial position, including
unfavorable trends over several years. While the previous pre?award survey
assessed the financial risk for Global Crossing as moderate at that time,
and judged the risk low in comparison to the contemplated contract cost,
DCMA qualified its assessment as being subject to change on future review,
which was recommended. Here, the additional information and analysis in the
second pre?award survey was significant and supported the agency's actions.
In addition to the firm's financial indicators placing the firm at the
bottom of a distressed industry, there were now uncertainties associated
with bankruptcy that posed unacceptable risks to the agency as outlined
above. Since the updated pre-award survey provided the contracting officer
with a reasonable basis to change her judgment about whether the firm is
responsible, her prior determinations that Global Crossing was responsible
cannot be viewed as precluding the subsequent nonresponsibility
determination. See Microdyne Corp., B?171108, Apr. 6, 1971, at 2 (a
determination of responsibility is not necessarily defective because it is
inconsistent with a contrary determination concerning the same firm); see
also Harvard Interiors Mfg. Co., supra, at 9; Firm Erich Bernion GmbH,
B-234680, B?234681, July 3, 1989, 89-2 CPD � 1 at 6.
Global Crossing also contends that the agency did not properly consider the
$6 million escrow account in making its nonresponsibility
determination--indeed, it was not mentioned in the determination because it
was submitted after the determination was made.[8] We disagree. Contrary
to the protester's contentions, the record shows that the escrow account was
specifically considered prior to rejecting Global Crossing's proposal and
making award to MCI. While the agency's analysis of the account indicated
that it would be sufficient to cover the firm's initial working capital
needs, that analysis was based on several assumptions due to insufficient
information. Agency Report, Tab 17, Determinations of Responsibility, at
000021-26; Tab 19, Addendum to Narration of Procurement (Mar. 28, 2002), at
1-2 (approved by contracting officer). Due to the unsupported assumptions,
the contracting officer considered the analysis inconclusive. Moreover, the
establishment of the account did not offset the factors prompting the
nonresponsibility determination in that it did not assuage the impact of the
firm's poor financial performance with unfavorable trends identified by the
financial review. Also, the contracting officer did not know whether the
escrow account would be protected under a future bankruptcy reorganization
plan. Moreover, even if the account is protected, the contracting officer
found that the other risks to the agency associated with the firm's
bankruptcy and possible liquidation would remain. Agency Report, Tab 19,
Addendum to Narration of Procurement, at 2. On this record, we find the
contracting officer adequately considered the proposed escrow account in
determining that Global Crossing was not responsible.[9]
The protester also alleged that the nonresponsibility determination for
Global Crossing and the affirmative determination of responsibility for MCI
reflect unequal treatment by the agency. We disagree. The record shows
that the long distance telecommunications industry is in a general state of
economic distress and all of the offerors responding to this RFP have
financial indicators that reflect distressed circumstances. Agency Report,
Tab 17, Determinations of Responsibility, 000065, 000069-72. However, the
record shows that Global Crossing's indicators reflected the worst financial
position of all the offerors. Id. at 000065.
The protester contends that the agency treated Global Crossing and MCI
unequally by considering information adverse to Global Crossing, such as
investigations by the SEC and the FBI, in reviewing its responsibility,
while not considering similar information for MCI. However, in making this
allegation, the protester shows neither that the unique information
considered for Global Crossing was inaccurate, nor that similar information
exists for MCI (and that the agency knew or should have known of such
information). Nor does the record otherwise evidence unequal treatment.
Rather, the record shows that the pre-award surveys of both firms considered
similar types of information and the conclusions were based on similar
analyses. These analyses show that MCI maintains a significantly stronger
financial position without the same risks arising from bankruptcy that exist
for Global Crossing. Thus, the
agency had a reasonable basis to make differing responsibility
determinations for these two offerors; the difference is not evidence of
unequal treatment. See Acquest Dev. LLC, B-287439, June 6, 2001, 2001 CPD
� 101 at 4-5.
The protest is denied.
Anthony H. Gamboa
General Counsel
-------------------------
[1] The DREN is a telecommunications network that enables over 6,000
scientists and engineers at laboratories, test centers, universities and
industry sites throughout the United States to use the computer resources of
the High Performance Computing Modernization Office.
[2] When the agency awarded a contract to Global Crossing in July 2001, the
contracting officer did not prepare a specific determination of
responsibility; rather, pursuant to Federal Acquisition Regulation (FAR)
� 9.105-2(a)(1), her signature on the contract constituted an affirmative
determination of responsibility.
[3] Global Crossing's price was significantly lower than the others
submitted.
[4] Global Crossing submitted the consolidated financial statements for its
parent corporation, Global Crossing, Ltd. In order to permit DCMA to base
the pre-award survey on this information, it requested and received a
corporate guarantee from the parent company whereby the parent corporation
agreed to provide the necessary resources, including financial support, for
the satisfactory performance of the contract, if awarded to its subsidiary.
Agency Report, Tab 17, Determinations of Responsibility, at 000085.
[5] The updated survey stated that Global Crossing had intended to release
fourth quarter and year-end financial results for 2001 in February 2002, but
instead the firm only released unaudited estimates of revenue due to
continued review of the financial statements by its auditor, Arthur
Andersen, LLP. Id. at 000040.
[6] As with Global Crossing, MCI submitted the financial statements of its
parent corporation, WorldCom, Inc., and DCMA received a corporate guarantee
from the parent corporation permitting it to consider the financial status
of the parent corporation for MCI's pre-award survey. Id. at 000126.
[7] Two other competitors also protested the award to MCI. However, after
the agency submitted a report, these protests were withdrawn.
[8] If the contracting officer is presented with new information prior to
award that would make a nonresponsibility determination unreasonable, the
agency can and should change the earlier determination. American Tech. &
Analytical Servs., Inc.,
B-28277.5, May 31, 2000, 2000 CPD � 98 at 3.
[9] We note that the DCAA audit report on Global Crossing was also issued
after the contracting officer's nonresponsibility determination. The report
stated that, due to significant uncertainties associated with the bankruptcy
proceedings, DCAA could not express an opinion on whether Global Crossing
had adequate financial resources to perform government contracts in the next
year. The contracting officer considered this to corroborate the
conclusions of the updated pre-award survey. Agency Report, Tab 19,
Addendum to Narration of Procurement, at 2. Thus, the DCAA report did not
affect the contracting officer's nonresponsibility determination.