|Without deals, cash crisis looms at Divine|
Singed: Divine CEO Andrew "Flip" Filipowski and his team still need to cool the firm's current "burn rate."
August 26, 2002
By Julie Johnsson
It's crunch time for Chicago's Divine Inc., the Internet incubator turned software developer and professional services company.
After racking up total net losses of more than $1 billion since 1999, Divine now faces a cash shortage.
Unless it can close two pending transactions that would give it $73.6 million in additional funds, the company is on pace to run out of cash next month, recent federal filings show.
Even if those deals are consummated, Divine is racing the clock.
While sales are growing — the company tallied revenues of $163.6 million during the second quarter, a 12% gain over the previous quarter — it must jam the brakes on spending this fall to remain in business. If spending continues at its present pace, Divine would run through the funds it anticipates receiving through the two pending deals by early next year.
But CEO Andrew "Flip" Filipowski and his management team have shown little inclination to ratchet down costs during the company's brief history.
They couldn't be reached for interviews. But a spokeswoman insists Divine is on pace to achieve positive cash flow, for the first time, by early 2003. She notes that the second-quarter operating loss was $20 million lower than the first-quarter loss of $70.4 million, adding that the company expects to "significantly reduce" operating losses over the next two quarters.
"We have a solid strategy in place to ensure that we achieve our goal of profitability by the first quarter (of) 2003, and are executing that plan," she adds.
Shareholders are less sanguine. Divine's shares were trading at $2.87 as of noon Friday, down 85% for the year. The stock price would have to top $200 for those who bought shares at its July 2000 initial public offering to recoup their original investment, factoring in the firm's recent 1-for-25 reverse stock split.
"It's pretty disappointing," says Paul Foster, a strategist at Chicago's Mercury Trading Inc., an options derivative trading house. A bargain hunter who scouts distressed companies, Mr. Foster invested in Divine in April. "Is there going to be a bottom where shareholders get anything, or will it just go to zero?"
As of June 30, Divine had $55.1 million in cash and short-term securities, but only $29.9 million of that amount was unrestricted cash. The software company spent, on average, $21.5 million per month on operating activities during the second quarter. Unless it significantly lowered this "burn rate" over the summer, Divine will deplete its existing cash in September.
Counting on Oak
However, the company is counting on a $38.5-million infusion from Palo Alto, Calif.-based Oak Investment Partners, which would control a 45% stake in Divine. Oak invested $22.9 million in May, paying $6 per share for 22,941 shares of convertible preferred stock.
That price proved steep as Divine's stock slid sharply over the summer, causing Oak to postpone the planned closing for a second such placement as it negotiated a lower conversion price to reflect the stock drop.
And Divine's cash stash will swell to about $100 million if it also closes a long-awaited purchase of Boston e-consultancy Viant Inc. by the end of September, as planned.
That deal has been renegotiated twice since it was announced last spring, with much of the windfall that Divine had initially anticipated now going to Viant shareholders, a new filing with the Securities and Exchange Commission reveals.
The filing reports that Divine was forced to sweeten its terms after other bidders offered to pay Viant shareholders multiples of the $24-million cash dividend originally promised by Divine. The Chicago company would have pocketed about $92 million of Viant's cash.
Recovery in time?
Under the latest terms, Viant shareholders will receive a $72.5-million cash distribution from their company, while Divine's take shrinks to $35.1 million. Industry observers say that Divine likely won' t see much of a boost from the Viant deal beyond the cash infusion since other consulting mergers have proven difficult to integrate and have provided poor returns.
"It's still a tough market for software and consulting services, (though) it's getting better," says Tom Rodenhauser, a consulting industry analyst based in Keene, N.H. "But will it get better in time for these people to pull out of a tailspin? It's hard to say."
©2002 by Crain Communications Inc.