TITLE:  XO Communications, Inc., B-290981, October 22, 2002
BNUMBER:  B-290981
DATE:  October 22, 2002
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XO Communications, Inc., B-290981, October 22, 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:    XO Communications, Inc.
    
File:             B-290981
    
Date:              October 22, 2002
    
John E. Jensen, Esq., Jack Y. Chu, Esq., and Steven McLain, Esq., Shaw
Pittman, for the protester.
David W. Burgett, Esq., Michael J. Vernick, Esq., and S. Gregg Kunzi,
Esq., Hogan & Hartson, for Qwest Corporation, an intervenor.
Michael J. Ettner, Esq., General Services Administration, for the agency.
Paul I. Lieberman, Esq., and Michael R. Golden, Esq., Office of the
General Counsel, GAO, participated in the preparation of the decision.
DIGEST
    
Agency reasonably determined that protester was nonresponsible where, in
making the nonresponsibility determination immediately prior to the
protester's bankruptcy filing, the contracting officer performed a
detailed financial review which established that the firm's unsatisfactory
and deteriorating financial condition made it an unacceptable financial
risk; the contracting officer had recognized the implications of an
anticipated bankruptcy filing and reasonably concluded that it was
unlikely that the bankruptcy reorganization plan would significantly
reduce the financial risk, and that, even if successful, the bankruptcy
reorganization was itself likely to create contract performance risk.
DECISION
    
XO Communications, Inc. protests an award to Qwest Corporation under
request for proposals (RFP) No. TQD-SC-01-1027, issued by the General
Services Administration for telecommunications services for federal
agencies and other authorized users in the Salt Lake City metropolitan
area.  XO objects to the agency's determination that XO is not a
responsible prospective contractor.
    
We deny the protest.
    
The RFP, issued electronically on August 6, 2001, contemplated the award
of one or more contracts for a 4-year base period with four 1-year
options.  The RFP provided for one award to the responsible offeror
submitting the technically acceptable proposal with the lowest total
offered price, and for the possible consideration of additional awards
based on the next lowest total offered price.  XO and Qwest were the only
offerors to submit proposals by the September 24 closing date.  After a
competitive range determination, the conduct of discussions, and the
submission of proposal revisions, final proposal revisions were requested
on February 28, 2002, and were received from both offerors on March 7.  In
a post-negotiation memorandum (PNM) executed on June 11, the contracting
officer stated that both proposals had been evaluated as technically
acceptable with fair and reasonable prices, and that XO's proposal
represented the lower total offered price.  However, the contracting
officer recommended that award be made to Qwest, which was the only
responsible offeror. The contracting officer determined that XO was not
responsible on the basis of its financial condition, because XO lacked
adequate financial resources to perform the contract, or the ability to
obtain them.  Agency Report (AR), Tab 133, PNM, at 21‑-22.  The
source selection authority adopted this recommendation and, on
June 17, determined to make a single award to Qwest.  The contract with
Qwest was fully executed on July 9.  XO was notified that it was an
unsuccessful offeror on
July 10, and after receiving a debriefing, timely filed this protest with
our Office.
    
The only issue presented by this case is the propriety of the agency's
nonresponsibility determination.[1]  A contract may be awarded only to a
responsible prospective contractor.  FAR S: 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 S: 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 S: 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 reviewing whether the contracting officer's
nonresponsibility determination was reasonable.  Harvard Interiors Mfg.
Co., B-247400, May 1, 1992, 92-1 CPD P: 413 at 3.  Since the agency must
bear the brunt of any difficulties experienced in obtaining the required
performance, contracting officers are vested with a wide degree of
discretion and business judgment in reaching a nonresponsibility
determination, and our Office will not question such a determination
unless a protester can establish that it lacked a reasonable basis. 
Computervision Corp., B-257141, Aug. 12, 1994, 94-2 CPD P: 73 at 3.
    
Here, the contracting officer based his nonresponsibility determination on
multiple pre-award surveys (GSA Credit and Finance Surveys), filings by XO
with the Securities and Exchange Commission, financial information
provided directly to the agency by XO, and XO press releases and other
information reported in the media.  AR, Contracting Officer's Statement,
at 2.  In making this determination, the contracting officer shared
information with and adopted the findings of the GSA contracting officer
for a companion procurement for substantially similar telecommunications
services for the Seattle area.  That information and those findings (which
are summarized below) were memorialized in an April 4, 2002, 
determination that XO was not responsible under the Seattle procurement.  
    
The information that had been considered by the Seattle contracting
officer included an initial pre-award survey report dated August 16, 2001,
which indicated that XO had marginal financial resources.  The report
noted that XO had *a low ten-figure negative tangible net worth, a
ten-figure deficit retained earnings, and a high
ten-figure heavy debt.*  AR, Tab 133, PNM, at 8.  In addition XO reported
a high
nine-figure loss in its interim June 2001 financial statements and losses
at fiscal year‑end 2000, 1999 and 1998, all of which appeared to
exceed the sales revenues at each reporting period.  Thus, it appeared
that XO had never made a profit in its three years of business and the
pre-award survey team found XO unsatisfactory as to finances.  Id.
    
In November 2001, XO announced a preliminary equity investment agreement
with Forstmann Little & Company (Forstmann) and TELMEX for a total
investment of $800 million.  GSA's pre-award survey team reviewed the
documents associated with this agreement and, on December 17, 2001, issued
a report finding that XO remained unsatisfactory as to finances.  The
investment was contingent on XO successfully completing a restructuring of
its existing balance sheet and upon regulatory approvals, and the
agreement term sheet mentioned a possible Chapter 11 bankruptcy filing. 
In addition, XO's updated submissions to GSA indicated a pending default,
and that XO had elected not to pay interest on unsecured notes as part of
an overall restructuring, equity infusion and exchange offer.  Id. at 9. 
    
On January 16, 2002, XO announced that it had reached a definitive
agreement for this equity investment plan.  However, the investment was
contingent on completion of a debt restructuring and required that XO's
debt and preferred stock obligations be reduced from $6.9 billion to $1
billion.  XO indicated that it had reached a forbearance agreement with
the lenders under its secured credit facility until April 15 to provide XO
an opportunity to reach agreement with its creditors regarding the
restructuring.  The pre-award survey team reviewed this information and
advised the contracting officer that XO's definitive agreement did not
change its financial picture.  The team noted that investors might invest
if debt was reduced by April 15, but that neither investor had yet
financially involved itself with XO.  Id.
    
On March 1, at the contracting officer's request, XO submitted updated
financial information which acknowledged that XO had pending lawsuits, no
bank line of credit, and was either in default or contemplating default on
obligations.  Pending lawsuits against XO in various states had increased
from 27 as of December 13, 2001, to 41 as of February 28, 2002, one of
which was a U.S. District Court class action suit on behalf of XO's
investors, alleging that certain XO officers violated federal securities
law by issuing a series of materially false and misleading statements
about XO's liquidity and cash flow problems, as a result of which the
price of XO common stock was artificially inflated, and that the debt
restructuring agreement with Forstmann and TELMEX would result in XO
common stockholders losing their equity in the corporation.  In addition,
XO's updated consolidated statements of operations show year-end revenues
increasing by 73 percent from December 31, 2000 ($723,826.000) to December
31, 2001 ($1,258,567,000).  However, the net loss identified for the same
period increased by 89 percent from $1,101,299,000 to $2,086,125,000.  
Id.
    
The Seattle contracting officer also noted that the restructuring
agreement with Forstmann and TELMEX faced numerous contingencies and
obstacles, that XO's next alternative was to file for Chapter 11
bankruptcy reorganization, which also faced likely opposition, and that if
Chapter 11 reorganization failed, XO would file for Chapter 7 bankruptcy
liquidation.  AR, Tab 104, Nonresponsibility Determination, at 3. 
    
The contracting officer here considered and adopted this information from
the Seattle contracting officer's nonresponsibility determination as an
accurate summary relating to XO's present responsibility, and further
determined that in the two months since the information had been
assembled, XO's condition had continued to decline.  In this regard, the
contracting officer noted that in May 2002, a proposed infusion of $550
million by a different investment group had been withdrawn, concurrent
with which the head of that investment group was quoted as stating that XO
*is on the brink of meltdown.*  Id. 
XO does not dispute the specifics contained in this determination, and has
not contested the finding under the Seattle procurement, with respect to
which XO had received notice of the nonresponsibility determination and of
award to Qwest on May 14, 2002.  Rather, XO alleges that the current
nonresponsibility determination lacks a reasonable basis because the
contracting officer failed to consider subsequent developments that were
relevant and publicly reported.  In particular XO points to an alternative
*stand-alone* restructuring plan submitted in conjunction with a Chapter
11 bankruptcy petition that XO filed on June 17, 2002.  Protest at 6-7. 
XO explains that this stand-alone alternative was included because
Forstmann and TELMEX are seeking to terminate the investment agreement
under the primary plan (the plan that was considered above by the
contracting officer), which required that XO meet certain conditions that
Forstmann and TELMEX have stated will not be met.  Id. at 6. 
    
This stand-alone restructuring alternative, as described by XO's press
release provides for:
    
the conversion of the $1 billion in loans under the secured credit
facility into common equity and $500 million of pay-in-kind junior secured
debt.  The informal steering committee of lenders under the secured credit
facility has indicated that it is prepared to support, and recommend that
the lenders under the secured credit facility approve, the stand-alone
restructuring subject to the preparation of definitive documentation and
the completion of customary internal bank approval processes.
    
Protester's Comments at 6-7. 
The press release further states: 
    
The stand-alone plan permits the Company to seek to obtain additional
funding needed for its business plan by issuing common equity through a
$250 million rights offering to be made to the Company's senior unsecured
creditors, and to the extent that the offer is not fully subscribed . . .
to the holders of the Company's subordinated debt and preferred and common
stock.  Additionally it permits any shortfall to be covered by up to $200
million in new senior secured loans ranking senior to the new
junior-secured debt, although no agreements for this financing have been
reached.
    
    Id. at 7. 
    
XO takes the position that the contracting officer's failure to consider
the favorable impact of this stand-alone plan renders the
nonresponsibility determination unreasonable because it establishes that
the contracting officer failed to satisfy the
FAR requirement that information on financial resources and performance
capability be obtained or updated on as current a basis as is feasible up
to the date of award.  Id.
    
In our view, this information regarding XO's possible alternative
stand-alone restructuring plan under bankruptcy does not provide any basis
to call into question the reasonableness of the contracting officer's
nonresponsibility determination.   While the CO did not take the specific
June 17 bankruptcy filing and the alternative restructuring plan into
account, the record establishes that he was aware that a Chapter 11
bankruptcy filing by XO was an ongoing pending possibility, and viewed
this as essentially confirming his negative financial assessment without
raising the likelihood of imminent financial improvement.  AR, Contracting
Officer's Statement, at 6.  Notwithstanding XO's optimistic perspective,
the possibility of reorganization under Chapter 11 bankruptcy is not, as
the protester would have it, a panacea that automatically cures a
nonresponsibility determination.  On the contrary, while the mere fact
that an offeror files a Chapter 11 petition for bankruptcy does not
require a finding of nonresponsibility, a contracting officer may
reasonably view bankruptcy as something other than a favorable
development, and as a legitimate factor in finding the offeror
nonresponsible.  Global Crossing Telecomm., Inc., B-288413.6,
B‑288413.10, June 17, 2002, 2002 CPD P: 102 at 7.  
    
Here, it is beyond dispute that the contracting officer had a reasonable
basis to find XO nonresponsible prior to the bankruptcy filing.  The only
new element to which XO points with respect to the bankruptcy filing is
the stand-alone plan.  This was an alternative, fallback plan to the long
promised and long-delayed Forstmann and TELMEX plan, a plan which the
contracting officer, in his nonresponsibility determination, had
reasonably concluded was unlikely to succeed.  Further, the fallback
stand-alone plan on its face depends on a series of uncertain
contingencies and approvals.  In this regard, it is noteworthy that to
date, nearly four months after the filing, XO's bankruptcy reorganization
plan has not yet been approved. 
    
In our view, the contracting officer was not obligated to parse the
financial minutiae of XO's fallback bankruptcy restructuring plan as part
of his nonresponsibility determination.  On the contrary, where the record
reflects that the contracting officer is cognizant of the alleged effects
of a proposed reorganization plan and does not reference them as part of
his nonresponsibility determination, we view this as merely indicating
that the contracting officer gives the plan little weight.  Harvard
Interiors Mfg. Co., supra, at 6.  Further, where, as here, the court has
not yet given approval to the plan, and there is no indication of when, or
if, the court would approve any of the proposed reorganization plans, the
agency may reasonably give little or no weight to the proposed plan and to
any associated favorable financial projections by the offeror.  Id. 
Accordingly, the bankruptcy filing including the
alternative stand-alone fallback restructuring plan provides no basis to
call into question the reasonableness of the contracting officer's
nonresponsibility determination.   
    
The protest is denied.
    
Anthony H. Gamboa
General Counsel
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

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   [1] XO also protested the agency's determination that Qwest is
responsible.  Under our current Bid Protest Regulations, our Office will
not review an affirmative determination of responsibility absent a showing
of possible bad faith on the part of government officials or the
misapplication of definitive responsibility criteria.  4 C.F.R. S: 21.5(c)
(2002).  Because neither exception is applicable or even alleged here,
this issue is not for consideration on the merits by our Office.  Sprint
Communications Co. LP; Global Crossing Telecomms., Inc.--Protests and
Recon., B‑288413.11, B-288413.2, Oct. 8, 2002, 2002 CPD P: __ at 4. 
In particular, XO's sole basis for objection is that the contracting
officer failed to consider readily available current information about
various ongoing investigations of Qwest pertaining to financial practices
and possible criminal matters, which XO alleges raise questions as to
Qwest's integrity and are relevant to determining Qwest's responsibility. 
In XO's view, this constitutes a violation of the requirement at Federal
Acquisition Regulation (FAR) S: 9.105-1(a) that before making a
responsibility determination, the contracting officer shall possess or
obtain information sufficient to be satisfied that a prospective
contractor currently meets the applicable standards.  In sum, XO does not
allege bad faith; rather it simply contends that *this case involves a
plain violation of the FAR, not a question of business judgment, and
therefore is susceptible to reasoned review.*  Protester's Comments at
15.  The express terms of XO's protest allegation do not provide any basis
for our Office to review the agency's affirmative determination under our
current regulations.