STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

STORAGE TECHNOLOGY )

CORPORATION, )

)

Petitioner, )

) CASE NO. 86-2229BID

)

BOARD OF REGENTS, )

)

Respondent )

and )

)

MEMOREX CORPORATION, )

)

Intervenor. )

)

RECOMMENDED ORDER

Pursuant to notice, a formal evidentiary hearing was conducted in this case on July 7, 1986, at Tallahassee, Florida, before Michael M. Parrish, a duly designated Hearing Officer of the Division of Administrative Hearings. The parties were represented at the hearing by:

FOR PETITIONER: F. Perry Odom, Esquire

ERVIN, VARN, JACOBS, ODOM AND KITCHEN

305 South Gadsden Street Tallahassee, Florida 32301

FOR RESPONDENT: Patti A. Jackson, Esquire

Assistant General Counsel Board of Regents

107 West Gaines Street Tallahassee, Florida 32301-8033

FOR INTERVENOR: Carolyn S. Raepple, Esquire

HOPPING BOYD GREEN & SAMS

First Florida Bank Building

215 South Monroe Street, Suite 420 Tallahassee, Florida 32301

Following the hearing all parties were allowed two weeks from the filing of the transcript within which to submit proposed recommended orders. All parties filed timely proposed recommended orders, which have been carefully considered in the preparation of this Recommended Order. A specific ruling on each proposed finding of fact submitted by the parties is contained in the Appendix which is attached to and incorporated into this Recommended Order.

ISSUE

The issue in this case is whether StorageTek or Memorex was the lowest responsive and responsible bidder for the BOR's Invitation to Bid No. K-1178-3, issued as agent for the Northwest Regional Data Center for the purchase of certain data processing equipment.

FINDINGS OF FACT

1. Based on the stipulations of the parties, the testimony of the witnesses, and the exhibits admitted into evidence, I make the following findings of fact:

   
   

2. The Florida State University Purchasing Department, acting as agent for the Northwest Regional Data Center ("NWRDC") issued an Invitation to Bid for a contract to supply and service certain computer memory storage equipment to NWRDC. NWRDC is a data processing center under the direct jurisdiction of the BOR.

   
   

3. StorageTek and Memorex are both vendors of data processing equipment such as that specified in the BOR's Invitation to Bid No. K-1178-3 ("the ITB"). StorageTek is presently operating --its business as a going concern and a debtor- in-possession under Chapter 11 of the Bankruptcy Code. Memorex is a wholly owned subsidiary of the Burroughs Corporation.

   
   

4. In addition to the specification of certain data processing equipment, the ITB required 5 years of maintenance for the equipment to be supplied by the vendor.

   
   

5. StorageTek and Memorex both filed timely responses to the ITB which were responsive to the technical portions of the ITB. Both bids contained a warranty of the bidder's ability to perform.

   
   

6. The total prices of the StorageTek and Memorex bids were $892,293.00 and $1,026,919.00, respectively.

   
   

7. The BOR preliminarily disqualified the StorageTek bid for failure to satisfy the financial capability requirements of the ITB and proposed to award the contract to Memorex.

   
   

8. StorageTek timely filed its Notice of Protest and Formal Written Protest, asserting it met the financial capability requirements of the ITB and challenging the responsiveness of the Memorex bid to those same requirements.

   
   

9. Section II, Paragraph B, of the ITB provides with regard to financial capability:

   
   

   Financial Capability of Prospective Vendors:

   
   

   The successful vendor must be financially sound and well managed, in accordance with Paragraph I. of this section.

   
   

   Prospective vendors are required to supply certified annual report(s) or statement(s) of their financial position for the last two years as part of their bids. These

   statements must be certified by an independent auditor's report as to their completeness and accuracy. Any other relevant references or documentation may also be supplied.

   
   

   Paragraph I, which is incorporated by reference in this financial capability provision of the ITB, provides:

   
   

   Vendor Warranty of Ability to Perform:

   
   

   Vendor warrants that there is no action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, governmental agency, public board or body, pending or, to the best of vendor's knowledge, threatened which would in any way prohibit, restrain or enjoin the execution or delivery of the vendor's obligations or diminish the vendor's financial ability to perform the terms of the proposed contract.

   
   

   In addition, the ITB makes it the responsibility of each vendor to "provide adequate documentation to substantiate all claims for . . . compliance" with the specifications and requirements of the ITB.

   
   

10. In response to the request for statements of their financial position in the financial capability portion of the ITB, StorageTek supplied the Form 10- K Annual Reports filed with the Securities and Exchange Commission for the fiscal years ended December 28, 1984, and December 27, 1985, ("the 1984 and 1985

    10 K Reports").

    
    

11. Although StorageTek had more current information than that contained in the 1984 and 1985 10-K Reports regarding the status of its Chapter 11 proceeding and other pending legal actions at the time it submitted its bid to the BOR, StorageTek chose not to supply that information in its bid even though such information could have been included pursuant to Section II, B.1, of the ITB.

    
    

12. The 1984 and 1985 10-K Reports were prepared by StorageTek management and included consolidated financial statements of StorageTek and its subsidiaries. These financial statements, which were certified by the Denver, Colorado, office of Price Waterhouse, indicate:

    
    

    1. StorageTek has incurred net losses over the last three fiscal years aggregating $603,758,000.

    2. As of December 27, 1985, StorageTek had an accumulated deficit of $318,413,000.

    3. StorageTek is presently operating its business as a going concern and a debtor in possession under Chapter 11 of the Bankruptcy Act.

    4. StorageTek is involved in a number of legal proceedings, several of which "could have a material adverse effect on the Company's financial position and operations" if the plaintiffs' claims are sustained.

    5. The Securities and Exchange Commission is

       conducting a private investigation to determine whether StorageTek or any of its officers, directors or agents engaged in fraudulent or deceptive acts, practices or courses of business in connection with the issuance of any of its securities, the filing or publication of any of its periodic reports to stockholders or reports filed with the Securities and Exchange Commission or the keeping and maintaining of its books and records.

    6. The Internal Revenue Service ("IRS") is examining StorageTek's federal income tax returns for the years 1979 through 1984. If all issues presently under discussion between the IRS and StorageTek were to result in assessments, and if such assessments were ultimately sustained, the resulting liability for additional tax and interest would be substantially higher than the recorded liabilities. Also, any IRS claims that are ultimately sustained would be priority claims pursuant to Section 507 of the Bankruptcy Code.

    7. As a result of StorageTek's "financial diffi- culties" and its Chapter 11 proceedings, StorageTek may be subject to additional lawsuits or governmental proceedings, the effect of which cannot be determined at this time.

    8. The consolidated financial statements were prepared on the basis of generally accepted accounting principles applicable to a going concern, which assume realization of assets and payment of liabilities in the normal course of business.

    9. There are a number of "significant uncertainties" that threaten StorageTek's continued existence and, therefore, its ability to realize its assets and to discharge its liabilities in the ordinary course of business.

    
    

13. Using generally accepted auditing standards, Price Waterhouse rendered an opinion on February 28, 1986, which provides in pertinent part:

    
    

    As shown in the consolidated financial state- ments, during the three years ended December 27, 1985 the Company incurred net losses aggregating $603,758,000 and at December 27, 1985 had an accumulated deficit of

    $318,413,000. These factors, among others including those discussed in the preceding paragraph, indicate that the Company may be unable to continue in existence.

    
    

14. In rendering the above-quoted opinion, Price Waterhouse considered all of the information contained in the 1985 10-K Report, including the fact that the information in that report did not reflect the effects of the Chapter 11 proceedings. Price Waterhouse also considered other factors made known to it, such as:

    1. Certain financial information regarding StorageTek from its operations in early 1986;

    2. StorageTek's 1985 fourth quarter profits;

    3. StorageTek's unencumbered cash balance of $202 million at the end of 1985;

    4. StorageTek's ability to generate cash from its various operations;

    5. The lack of a formulated and confirmed plan for StorageTek's reorganization in its Chapter 11 bankruptcy proceedings; and

    6. The fact that it would be fairly difficult for StorageTek to obtain long-term financing given its present financial condition.

    
    

15. Although the directors' and officers' liability insurance and partnership liability insurance may diminish the impact on StorageTek of several of the pending legal actions, the existence of those insurance policies is reflected in the 1985 10-K Report and was considered by Price Waterhouse when rendering its opinion that the company may be unable to continue in existence. Also, StorageTek admits that it cannot give an assurance that the pending litigation will not have a material adverse effect on its financial position and operations.

    
    

16. The most significant uncertainty which formed a basis for the opinion of Price Waterhouse quoted in paragraph 12 above is that StorageTek's historical information results in uncertainty as to whether StorageTek will be able to return to profitable operations.

    
    

17. If StorageTek did not continue to exist, the 5 years of maintenance required by the ITB could not be performed by StorageTek and spare parts for the data processing equipment may not be available.

    
    

18. In response to the request for statements of its financial position in the financial capability portion of the ITB, Memorex supplied annual reports of its parent, the Burroughs Corporation, for 1984 and 1985 (the "1984 and 1985 Annual Reports").

    
    

19. The 1984 and 1985 Annual Reports contain consolidated financial statements of Burroughs Corporation, and its subsidiaries, including Memorex. These financial statements, which were certified by the Detroit, Michigan, office of Price Waterhouse, indicate:

    
    

    1. Burroughs and its subsidiaries have earned net income over the last three fiscal years aggregating $690,000,000.

    2. As of December 31, 1985, Burroughs and its subsidiaries had accumulated retained earnings of

       $1,872,400,000.

    3. There are no outstanding legal actions or claims that are material to the consolidated financial position of Burroughs and its subsidiaries.

    
    

20. Using generally accepted auditing standards, Price Waterhouse rendered the following opinion on January 20, 1986:

    
    

    In our opinion, the accompanying consolidated financial statements [in the 1985 Annual

    Report] present fairly the financial position of Burroughs Corporation and subsidiary

    companies . . . in conformity with generally accepted accounting principles consistently applied.

    
    

21. Memorex is a substantial subsidiary of the Burroughs Corporation.

    
    

22. If there were any pending or threatened legal actions or claims against Memorex, the outcome of which would threaten Memorex's ability to perform under the contract described in the BOR's Invitation to Bid No. K-1178- 3, Price Waterhouse would have been required by generally accepted auditing standards to ensure that appropriate disclosure was made of that contingency in the consolidated financial statements of the Burroughs Corporation and its subsidiaries, unless the auditors were satisfied that the contingency was provided for otherwise, such as through a guaranty by the parent corporation.

    
    

23. Financial statements for Memorex, other than in consolidated form with Burroughs Corporation and its subsidiaries, are usually confidential and not available to the public.

    
    

24. The ITB expressly instructs vendors not to submit confidential information since bid responses become public documents after the bid opening.

    
    

25. It is a common practice in the industry for a wholly owned subsidiary to submit the consolidated financial statements of its parent when an invitation to bid requests the subsidiary vendor to provide financial information.

    
    

    CONCLUSIONS OF LAW

    
    

26. Based on the foregoing findings of fact and on the applicable statutes, rules and court decisions, I make the following conclusions of law:

    
    

27. The Division of Administrative Hearings has jurisdiction over the subject matter of and the parties to this proceeding. Sec. 120.53 and 120.57, Fla. Stat. (1985).

    
    

28. Bid responses may not be modified after bid opening. Rule 13-A- 1.02(11), Fla. Admin. Code. Accordingly, the Hearing Officer and the BOR are limited to examining the StorageTek and Memorex bid responses in determining whether each of these vendors is the lowest responsive and responsible bidder.

    
    

29. Petitioner, StorageTek, and Intervenor, Memorex, are substantially affected parties and have standing in this proceeding.

    
    

30. This is a de novo hearing for the purpose of formulating agency action, not to review preliminary agency action taken earlier. McDonald v. Department of Banking and Finance, 346 So.2d 569, 584 (Fla. 1st DCA 1977), Capeletti Bros. v. State Dept. of Gen. Serv., 432 So.2d 1359 (Fla. 1st DCA 1983); Fla. Dept. of Transp. v. J.W.C. Co., Inc., 396 So.2d 778, 786-787 (Fla. 1st DCA 1981). Proceedings under Section 120.57(1), Florida Statutes, are designed to give affected parties an opportunity to change the agency's mind, and enable the agency to inform itself of the facts of a dispute, through presentation of evidence and argument. Capeletti Bros., 432 So.2d at 1363; Couch Construction Co. v. Department of Transp., 361 So.2d 172, 176 (Fla. 1st DCA 1978).

    
    

31. By requiring the successful vendor to be financially sound and well- managed in accordance with Section II, Paragraph I, of the ITB and requiring the

    submittal of certified statements of the vendor's financial position for the last two years, the clear intent of Section II, Paragraph B.1, is for vendors to demonstrate through their certified financial statements that there are no pending or threatened legal actions or claims which would "in any way prohibit, restrain or enjoin the execution or delivery of the vendor's obligations or diminish the vendor's financial ability to perform the terms of the proposed contract."

    
    

32. If a vendor's certified financial statements fail to accurately represent the vendor's current status with regard to pending or threatened legal actions or claims as of the time the bid response is submitted, Section II, Paragraph B.1, authorizes the vendor to supply "any other relevant references or documentation."

    
    

33. The ITB expressly makes it the vendor's responsibility "to insure that its bid meets all applicable rules, regulations, specifications and requirements of this ITB, and to provide adequate documentation to substantiate all claims for such compliance." (emphasis added) Section II, Paragraph I, of the ITB, which requires the vendor to warrant that there are no pending or threatened legal actions or claims which would in any way prohibit, restrain or enjoin the execution or delivery of the vendor's obligations or diminish the vendor's financial ability to perform the terms of the proposed contract, does not negate the vendor's obligation under Section II, Paragraph B.1, to demonstrate that there are no such legal actions or claims. This is particularly true when, as here, other documentation submitted with the bid discloses a plethora of unresolved litigation.

    
    

34. Other relevant references or documentation regarding pending or threatened legal actions or claims cannot properly be submitted for consideration after the bids have been opened. Such a post-opening submission of additional materials would constitute an unauthorized and improper bid modification. See Rule 13-A1.02(11), Fla. Admin. Code.

    
    

35. The 1984 and 1985 10-K Reports in StorageTek's bid response establish that there are numerous pending and threatened legal actions that reasonably have the potential to "prohibit, restrain or enjoin the execution or delivery of the vendor's obligations or diminish the vendor's financial ability to perform the terms of the proposed contract."

    
    

36. StorageTek's unsubstantiated warranty that there are no pending or threatened legal actions or claims that would diminish its ability to perform the terms of the proposed contract is insufficient to overcome the documentation of the existence of such legal actions and claims contained in its own 1984 and 1985 10-K Reports. This is particularly so since the ITB expressly made it StorageTek's responsibility to provide adequate documentation to substantiate its warranty.

    
    

37. Accordingly, StorageTek's bid response demonstrated that StorageTek was not a responsible bidder because the information submitted by StorageTek raises serious doubts about the ability of StorageTek to remain in business long enough to fulfill its obligations under the proposed contract.

    
    

38. StorageTek argues that a rejection of its bid would constitute a violation of Section 525(a) of the Bankruptcy Code, which prohibits certain forms of discrimination against bankrupts and former bankrupts "solely because" of their present or prior status as bankrupt debtors. Upon careful consideration of the cited portion of the Bankruptcy Code and of the cases

    interpreting and applying that provision of the Code, it does not appear to be a violation of Section 525(a) of the Bankruptcy Code for a state agency to disqualify a bidder on the basis of well founded concerns about the bidder's ability to remain in business long enough to fulfill its obligations under the proposed contract.

    
    

39. Due to Memorex being a substantial subsidiary of Burroughs Corporation, as reflected in the 1984 and 1985 Annual Reports, the consolidated financial statements of Burroughs Corporation and its subsidiaries would indicate the existence of any pending or threatened legal actions or claims which "would in any way prohibit, restrain or enjoin the execution or delivery of [Memorex's] obligations or diminish [Memorex's] financial ability to perform the terms of the proposed contract."

    
    

40. Accordingly, Memorex's bid response was responsive to the mandatory requirements of Section II, Paragraph B.1, of the ITB.

    
    

41. Memorex was the lowest responsive and responsible bidder with the lowest price for the commodities described in BOR Invitation to Bid No. K-1178-3 and, therefore, should be awarded the contract. See Rule 13-A1.01(19), Fla. Admin. Code.

RECOMMENDATION

Based on all of the foregoing, I recommend the entry of a Final Order awarding the contract for BOR Invitation to Bid No. K-1178-3 to Memorex.

APPENDIX TO RECOMMENDED ORDER, CASE NO. 86-2229BID

The following are my specific rulings on each of the proposed findings of fact submitted by each of the parties.

Rulings on findings proposed by Petitioner

Paragraphs 1, 2, 3, 4, 5, 6, 11, and 16: The findings proposed in these paragraphs have all been accepted.

Paragraph 7: Accepted in part and rejected in part. Rejected portions are irrelevant and subordinate details that are unnecessary to the disposition of this case.

Paragraph 8: Rejected as constituting irrelevant and subordinate details that are unnecessary to the disposition of this case.

Unnumbered paragraph between paragraphs 8 and 9: Accepted.

Paragraph 9 and the two unnumbered paragraphs between paragraphs 9 and 10: The majority of the findings proposed in this paragraph are rejected as irrelevant and subordinate to the extent they deal with matters not incorporated into Petitioner's bid response.

Paragraph 10: Rejected as constituting irrelevant and subordinate details that are unnecessary to the disposition of this case.

Paragraph 12: Accepted in substance.

Paragraph 13: Rejected as constituting irrelevant and subordinate details that are unnecessary to the disposition of this case.

Paragraphs 14 and 15 and intervening unnumbered paragraph: Rejected as constituting irrelevant and subordinate details that are unnecessary to the disposition of this case. Also rejected in large part because it incorporates inferences not warranted by the greater weight of the evidence.

Paragraph 17: Rejected as constituting irrelevant and subordinate details that are unnecessary to the disposition of this case. Also rejected in large part because it incorporates inferences not warranted by the greater weight of the evidence.

Paragraph 18: Rejected as irrelevant and unnecessary. Rulings on findings proposed by Respondent

The Respondent adopted the proposed findings of fact submitted by the Intervenor and did not propose any additional findings.

Rulings on findings proposed by Intervenor

All of the proposed findings of fact submitted by the Intervenor have been accepted with a few minor editorial modifications.

DONE AND ORDERED this 4th day of September, 1986, at Tallahassee, Florida.

MICHAEL M. PARRISH, Hearing Officer Division of Administrative Hearings The Oakland Building

2009 Apalachee Parkway

Tallahassee, Florida 32399-1550

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 4th day of September, 1986.

COPIES FURNISHED:

F. Perry Odom, Esquire ERVIN, VARN, JACOBS, ODOM

& KITCHEN

P. O. Drawer 1170 Tallahassee, Florida 32302

Patti A. Jackson, Esquire Assistant General Counsel Board of Regents

107 West Gaines Street Tallahassee, Florida 32301-8033

Carolyn S. Raepple, Esquire HOPPING BOYD GREEN & SAMS

Post Office Box 6526 Tallahassee, Florida 32314-6526

Mr. Charles Reed, Chancellor Board of Regents

107 West Gaines Street Tallahassee, Florida 32301-8033

Mr. George Bedell Executive Vice-Chancellor Board of Regents

107 West Gaines Street Tallahassee, Florida 32301-8033

================================================================= AGENCY FINAL ORDER

=================================================================

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

STORAGE TECHNOLOGY CORPORATION,

Petitioner,

vs. CASE NOS. 86-2229BID

BOARD OF REGENTS,

Respondent,

and

MEMOREX CORPORATION,

Intervenor.

/

FINAL ORDER

The Board of Regents of the State University System of Florida, having received the Recommended Order (reproduced herein) entered in this case by Hearing Officer Michael M. Parrish, dated September 4, 1986, DOAH Case Number 86-2229BID, and having received no timely filed written exceptions to that Recommended Order, hereby adopts the findings of fact and conclusions of law contained in the Recommended Order.*

* NOTE: The remaining Agency Final Order text, if any, was not filed with this Division and therefore is not a part of this ACCESS document. October 4, 1976 has been used for the Agency FO Issue Date in the ACCESS Index.

Docket for Case No: 86-002229BID

Orders for Case No: 86-002229BID