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Technology Stocks : divine interVentures, Inc. (DVIN)

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To: Sr K who wrote (222)2/4/2003 6:19:43 PM
From: Glenn Petersen  Read Replies (1) of 246
Nice call. This is going to have a very ugly ending.

Divine intervention gone bad

February 3, 2003

BY HOWARD WOLINSKY Business Reporter

Time has stopped for the Roosevelt University library.

So has the Chronicles of Higher Education, a newspaper for college faculty members and administrators. And subscriptions to 800 other academic journals, popular magazines and newspapers, essential to Roosevelt's teaching and research, are in limbo because of a financial mess involving Divine Inc., the Chicago technology company, and RoweCom Inc., its Westwood, Mass.-based magazine subscription subsidiary.

Roosevelt has loads of company.

Tens of thousands of subscriptions worth tens of millions of dollars for 3,500 RoweCom customers--including academic, public, corporate and government libraries, and these organizations' staffers--are jeopardized because RoweCom and possibly Divine itself took their money to cover their own slumping operations instead of buying subscriptions from publishers.

"This is the library world's Enron," said one distraught library expert.

Mary Beth Riedner, Roosevelt University librarian, lamented, "We have no idea what's going to happen with our collection, but if we do not receive the journals, it will be felt by the students and the faculty who need them for teaching."

RoweCom on Jan. 24 filed for Chapter 11 protection in the U.S. Bankruptcy Court in Boston. Creditors in a lawsuit charged that Divine raided RoweCom, transferring $73 million into Divine coffers before leaving the business.

Divine denies the charge, saying that RoweCom owes Divine $60 million.

Jeff Schultz, chief marketing officer at Divine, said Friday, "We put more than $10 million more into RoweCom than we ever took out."

In connection with the bankruptcy, RoweCom filed a lawsuit against Divine on Tuesday, charging Divine had accepted responsibility for its debts, had deepened its insolvency and later bankrupted RoweCom by fraudulently and wrongfully transferring funds from RoweCom to itself in repayment of RoweCom's intercompany loans from Divine. Divine denies the charges, but confirms that the company accepted at least $50 million for library subscriptions that were not fulfilled.

Schultz said, "We are working first and foremost to make sure all the customers get all the subscriptions. The current status is that all the largest publishers have agreed to ship subscriptions at least through February. The vast majority of subscriptions are shipping now."

Schultz said he expects the matter to be resolved as Divine completes the previously reported sale of RoweCom to EBSCO Industries, Birmingham, Ala., one of its rivals in the more than $3 billion magazine subscription-management business.

Divine's actions have created a firestorm in the library business.

Leigh Watson Healy, chief analyst for Outsell Inc., an information industry consultancy, said, "This is the worst behavior we have seen in our industry. This is the library world's Enron."

She said libraries only now are starting to feel the impact as colleges are back in session, and January subscriptions are starting to drop off.

"Many libraries placed their entire subscription renewals in the hands of Divine," she said. "I could imagine a company living without an issue of BusinessWeek, but scientific and technical publications are critical to the research agenda of many organizations."

The nation's premier health research organization, the National Institutes of Health, is the largest creditor, having paid RoweCom $2.4 million in subscriptions for medical and scientific journals. The U.S. Department of Energy's Lawrence Livermore National Laboratory near San Francisco, where much of the country's weapons research is done, was hit. Other creditors include the Library of Congress, the National Academy of Science, Johns Hopkins University, Marquette University and Ohio University.

Seven of Illinois' 12 state university libraries were affected, with Western Illinois University and Illinois State University making the list of the top 40 creditors.

James Huesmann, dean of libraries at Western Illinois in Macomb, said so far only the Peoria Journal Star, the largest paper in his region, has cut off the university.

"We're still getting the Sun-Times and Tribune. But unless something happens, we expect to lose more subscriptions: First the dailies, then the weeklies, then the monthlies, then the quarterlies," he said.

Huesmann said other libraries have offered to take up the slack by sending WIU tables of contents so students and faculty can see what's been published. Then, copies of articles could be ordered through inter-library loan.

Healy said, "Maybe that helps in the short run, but that's no way to have to run a library. It's not sustainable."

Huesmann said some publishers have extended the grace period on subscription renewals. "They're hoping to get their money if a buyout occurs. But if there is no buyout, we'll lose our money and there will be gaps in our [paper] collections."

He said the state of Illinois' precarious financial situation is only complicating matters. "Libraries could be in bad financial straits," he said. Many of his library's 2,500 subscriptions can't be read online. And loss of paper subscriptions also will result in publishers turning off access to data bases online.

WIU paid RoweCom $740,000 for subscriptions for 2003 and has confirmed that $514,000 in orders were not placed. It is awaiting an accounting of the rest.

Divine, which was founded by Chicago entrepreneur Andrew J. "Flip" Filipowski in 1999, picked up RoweCom in 2001 for $14 million in Divine stock. Divine purchased about 30 companies, many troubled, at bargain prices to build its business of providing communications services to companies and their suppliers and partners.

Divine's Schultz said, "RoweCom was in some pretty severe financial trouble. We purchased it for all the right reasons. It fit with our strategy of delivering digital content and providing online subscription management for print content." He said Divine planned to cross-sell its products with the RoweCom offerings.

Healy said, "Divine had a great vision. It was one of the strongest visions we've seen to get content to the desktop."

Divine aimed to "strip out" much of the human element to make it easier for libraries and people within organizations to order subscriptions. But she said the idea failed because it turned out that subscription management is a service that still required "human beings to solve fulfillment problems. Technology alone is not able to do that. Divine misread the challenge."

Schultz said RoweCom operated on low margins, accumulated large debts and was dependent on obtaining year-end credit lines to pay the publishers, which it failed to do last year.

Huesmann said RoweCom notified the libraries on Dec. 13 that its computer records did not correctly show subscriptions.

Then just a week later, RoweCom said: "Due to financial constraints, RoweCom has not been able to place or make payments for the substantial majority of its customer orders for 2003 subscriptions."

RoweCom said in December it wasn't able to get financing to pay the publishers for subscriptions fees for customers' 2003 orders, and was selling its European operations to EBSCO. Divine indicated it was quitting the business.

Huesmann remains concerned because the letter of agreement to sell RoweCom to EBSCO is not binding.

"They took our money and didn't deliver," he said. "RoweCom had been the leader in the business, but they have gone downhill over the past decade. Divine's purchase of the company made a lot of us uncomfortable. We had been getting rumblings that something was going very wrong."

Divine chief on board of affected school

Like thousands of other customers of RoweCom Inc., Divine Inc.'s magazine subscription subsidiary, Illinois Institute of Technology paid its money and is anxious about getting its journals now that school is back in session.

Unlike other RoweCom subscribers, IIT has an in, an inside track, a flip side: Andrew J. "Flip" Filipowski, the flamboyant, pony-tailed entrepreneur who founded Divine in 1999 as an Internet holding company, is on IIT's board.

Filipowski, 52, who dropped out of the University of Illinois at Chicago to make a mark in technology, has been on the IIT board for years and was just renewed for another three-year term. David Baker, IIT vice president of external affairs, said, "He's everything you'd want a board member to be."

The RoweCom row is causing heartburn at IIT, which paid $150,000 for 177 subscriptions, including paper copies and electronic access to back issues of some publications.

Baker said IIT is concerned about not receiving its journals: "The pain points are the graduate student working on a dissertation that to refers to articles in the literature and the assistant professor trying to get tenure who is preparing an article for a peer-review journal who won't be able to do his research."

He separated Filipowski from the RoweCom problem, which he described as "a business deal."

Still, why not ask Flip to help the libraries out anyway? "It may come to that," Baker said.

Howard Wolinsky

Copyright © The Sun-Times Company

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