USi wins funding, but loses control

Deal for $100 million to cede controlling interest to Mass. firm

October 12, 2001|By Stacey Hirsh | Stacey Hirsh,SUN STAFF

USinternetworking Inc. - the Annapolis software company that saw its losses widen, its work force dwindle and its stock price tumble this year - announced yesterday that it reached a deal to receive $100 million in financing from a Boston investment firm in exchange for a controlling interest in the company.

"At the end of this, they're going to control the company, but the exact percentages haven't been determined yet," said Dave Miller, vice president of finance for USinternetworking.

Bain Capital Partners LLC has executed a letter of intent for the equity investment. The money is expected to come in an initial chunk of $75 million once USinternetworking has met several conditions. One of these is a restructuring of the balance sheet that is likely to happen in the first quarter of 2002, the company said.

Another $25 million will be available if USinternetworking meets business milestones that have yet to be determined.

Andrew A. Stern, USinternetworking's chief executive officer, said the deal would not mean more layoffs at the 850-employee company, which has let go more than 150 workers this year.

"Where this will leave USi when we're done is with a very strong business," Stern said. "We will have a very stable, clean balance sheet. There will be no questions about our long-term viability."

The company's current debt includes $125 million in convertible bonds, which trade at 18 cents on the dollar, $85 million in capital leases and about $50 million in mortgages and other debt, Stern said.

In July, USinternetworking reported a net loss of $51.5 million, or 37 cents per share, on revenue of $32.2 million for the second quarter. That compares with a net loss of $42 million, or 43 cents per share, on revenue of $26.2 million in the second quarter of 2000. Third-quarter earnings will be released this month.

The investment from Bain Capital is expected to underwrite the company until the business creates enough cash to finance its operations, Stern said.

USinternetworking leases business management software over the Internet.

But Charles Trafton, an analyst at Adams, Harkness & Hill in Boston, was skeptical that the cash-infusion would save the company. Trafton dropped coverage of USinternetworking this year.

"They really need to change their whole business model," he said. "The business as it stands today is not a viable business."

USinternetworking's stock price tumbled to a 52-week low of 22 cents last month, from a high of $6.22 in December. The shares gained 8 cents yesterday to close at 34 cents on the Nasdaq stock market.

Larry Berlin, an equity analyst who covers the company for First Analysis Securities in Chicago, said yesterday's announcement was positive for USinternetworking.

"I've always thought that somehow, they're going to make it. I'm not really sure how," Berlin said, adding that the company has had good clients, solid products and a well-known name.

"There's a lot more work that has to be done," Berlin said, "but this might give [Stern] a chance to do that work."

Andrew Balson, a managing director at Bain Capital, said in a statement yesterday that, "Bain Capital invests in growing companies with strong management teams and competitive advantages in promising industry sectors. Based upon our experience in the [application service provider] industry, we are excited about the prospects for USi."

Stern called the investment an endorsement of the business, despite the harsh economic environment, particularly for technology companies: "It stands us on our feet, and it puts us back on the path to growth. And we're going to come out of the economic downturn in an extraordinarily strong position."

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