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Technology Stocks : divine interVentures, Inc. (DVIN)

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To: stockman_scott who wrote (217)1/17/2003 2:01:20 PM
From: Glenn Petersen  Read Replies (1) of 246
Divine unit suit: Libraries may lose $50 million

Robert Manor and Rob Kaiser, Tribune staff reporters

January 17, 2003

Thousands of libraries across the country may be out $50 million after a subsidiary of Chicago-based Divine Inc. accepted their money last year to buy periodicals but failed to pay the publishers.

Public, corporate and university libraries could soon see their subscriptions to magazines--ranging from Time to the Journal of Solid State Chemistry--cut off.

Divine executives said Thursday that the subscription service collected money from at least 3,500 libraries but spent the cash on operating costs and debt payments at the subsidiary. There was not enough left to pay the publishers and Divine could not get a loan to keep the subscriptions coming, executives said.

The Divine subsidiary, called RoweCom or sometimes referred to by its former name, Faxon, aggregates periodical subscriptions from libraries and orders them from publishers. A large library can order as many as 40,000 different publications.

The service in December told the libraries it could not supply them with the publications they had ordered, and said its corporate parent, Divine, would not support the business going forward, according to a RoweCom announcement.

"This is unconscionable, unethical and moving rapidly toward grand larceny," said Susan Davis, head of periodical acquisitions at the State University of New York at Buffalo. Her e-mail, sent to a RoweCom sales representative last month, is part of a lawsuit filed against the company by the New York State attorney general's office.

The university's library had paid RoweCom $1.3 million to subscribe to various periodicals. Asked where the money had gone, a spokesman for the attorney general's office replied, "We are trying to figure that out ourselves."

The university has recovered $500,000 and is demanding the rest of the money.

Thousands of other libraries remain in limbo, with little hard information available.

"What they have been told is RoweCom cannot place their orders for 2003," said Jude Sullivan, general counsel for Divine. He said Divine is trying to sell RoweCom to competitors, which might resolve the problem.

Sullivan gave this explanation for RoweCom's problems: The company would typically receive periodical orders from customers, pay the publishers, and later collect from the libraries. To carry it through, the company would borrow against future payments by the libraries.

But just a year after Divine took over RoweCom, no one would advance the struggling company money. "We were not able to get a line of credit," Sullivan said.

Sullivan said the money the libraries paid to RoweCom was used in other Divine operations having nothing to do with the subscription business, but said other Divine money was used to fund RoweCom.

"We have multiple subsidiaries," Sullivan said. "Was RoweCom money used to fund those operations? I suppose the answer to that is sure, because cash is cash."

On balance, he said, RoweCom received a $10 million subsidy from Divine.<?b>

In its most recent report to the Securities and Exchange Commission, for the quarter ending Sept. 30, 2002, Divine said it had $61 million in cash. Jeff Schultz, chief marketing officer for Divine, would not say whether Divine had considered repaying the libraries itself.

"If the implication is that Divine bought RoweCom for the purpose of taking a lot of orders, not placing them and just siphoning off the cash, that would be absolutely incorrect," Schultz said.

Both men declined to say how RoweCom's problems could affect Divine, which has burned through tens of millions of dollars and never earned a profit.

Many of the libraries consider the expensive, obscure journals, which detail subjects ranging from advances in neurosurgery to sociology, a necessity for professors, students and researchers. Some libraries could be forced to cut other spending to replace needed journals.

"One of the things it may mean for us and other libraries is that we cannot buy as many books this year," said Peter S. Graham, head librarian at Syracuse University, which used RoweCom. He would not disclose his school's losses.

Due to the rising costs of journals, Syracuse trimmed its list of publications from 22,000 to 11,000 over the past 11 years.

"What we're left with is the bare bones of journals that are essential," Graham said. "This is not a matter of casual choice. It's a matter of what's at the center of the faculty's needs."

Without a resolution, many large libraries could be out hundreds of thousands or millions of dollars. But smaller libraries, such as those at hospitals, might be the most affected because of their limited budgets.

"Some of them are afraid this is going to be the end of their libraries," said Ruth Holst, associate Midwest director of the National Network of Libraries of Medicine.

Some libraries were luckier than others.

Doreen Roberts, who runs the library at St. Luke's Hospital in Duluth, Minn., had sent RoweCom $37,000 for subscriptions to 142 publications, then learned of the firm's problems.

"We had sent our check late and I had it stopped," Roberts said.

Kathy Biel, deputy commissioner of finance at the Chicago Public Library, said the library was close to paying RoweCom $1.6 million for the 20,000 periodicals it orders each year.

She said the library was still examining its order with RoweCom on Dec. 18, when the company disclosed it would not be forwarding payments to publishers.

"They didn't get any money from us," Biel said.

Divine did not start out in the subscription business.

The brainchild of entrepreneur Andrew "Flip" Filipowski and with backers like Michael Jordan and Microsoft Corp., Divine was originally called Divine Interventures and sought to propel start-up Internet companies into rich initial public offerings. The company went public in July 2000, but abandoned its business model after the collapse of the dot-com bubble.

It has gone in several directions since then, mainly trying to reposition itself as a software concern that distributes electronic content.

Divine bought RoweCom for stock worth $10 million in November 2001.

Copyright © 2003, Chicago Tribune
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