| To: Glenn Petersen who wrote (213) | 5/25/2002 7:13:14 AM | | From: Glenn Petersen | | | | Divine board approves 1-25 reverse stock split
CHICAGO, May 23 (Reuters) - Technology roll-up firm Divine, Inc., <DVIN.O> said on Thursday that its board authorized a 1-to-25 reverse stock split to take effect on May 29.
The company, which specializes in acquiring other companies to consolidate their technology, said it took the action to satisfy the Nasdaq minimum bid price requirement since it is subject to delisting from The Nasdaq National Market.
Divine said it received a Nasdaq Staff Determination letter on May 16, indicating that Divine's Class A common stock does not comply with the $1.00 minimum bid price requirement for continued listing on The Nasdaq National Market. The stock was trading at 24 cents on Thursday.
Divine has requested a hearing before a Nasdaq Listing Qualifications Panel to review the Staff Determination. A date for this hearing has not yet been established.
The company's stockholders approved the reverse stock split during the annual meeting on May 21.
05/23/02 16:48 ET |
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| To: Glenn Petersen who wrote (214) | 5/30/2002 4:13:27 PM | | From: stockman_scott | | | | Big names in Divine bailout
By James Evans
Crain's Business Chicago
May 30, 2002
Some well-known investors, including Fidelity's Peter Lynch and Oak Investment Partners, are bailing out cash-strapped Divine Inc. by ponying up about $70 million in venture capital funding.
"One hundred percent of these funds will be utilized to make sure that . . . Divine will be around," said Andrew "Flip" Filipowski, chairman and CEO of the struggling Chicago-based Internet consultancy and software firm.
In addition to the cash infusion, Mr. Filipowski said Divine made another round of jobs cuts during the past few weeks in order to slash its annual expenses by an additional $40 million. About 300 jobs were eliminated this time, following 700 layoffs—nearly 18% of its total employees—which Divine made earlier this year so it could cut $45 million in annual expenses (ChicagoBusiness.com, May 2.)
The company now has about 3,000 employees, about 600 less than it reported at the beginning of the year. The number of total employees hasn't dropped more this year because of Divine's many acquisitions, a spokeswoman said.
Mr. Filipowski says Divine will receive a total of $61 million in two installments from a group led by Connecticut-based venture capital firm Oak Investment Partners. The investors agreed to immediately purchase $23 million in Divine preferred stock that can later be converted into 3.8 million shares of common stock. Those same investors will purchase an additional $38 million in stock, or 6.3 million shares, pending shareholder approval.
After that, the investors will receive warrants to purchase another $9.5 million in stock, or 1.5 million shares.
In addition to Oak Investment Partners, Peter Lynch, vice-chairman of Boston-based Fidelity Management & Research Co., and other unnamed investors will contribute several million dollars more. Mr. Filipowski declined to say how much money he personally would funnel into Divine.
The money will be used to help shore up operations and help Divine reach its goal of recording a profit by the fourth quarter—something it's never done.
The investments could be risky, particularly given heavy losses at the company since its inception in 1999. Divine's first-quarter loss rose 8% to $70.8 million, compared with $65.5 million for the same period last year. For 2001, the company posted a loss of $369.8 million.
As of March 31, the firm had $39.96 million in cash and cash equivalents, and $38.1 million in restricted cash.
Oak Investment Partners and the other investors will now control a 30% ownership stake in Divine, Mr. Filipowski said, adding that Oak Investment Partners gets a spot on Divine's 12-seat board, with the option to take another board position at a later date.
Following the venture capital announcement, Divine shares were up $1, or 24%, to $5.15 in afternoon trading Thursday. Yesterday, the first trading day following Divine's 1-for-25 reverse stock split, shares closed at $4.15. |
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| To: stockman_scott who wrote (215) | 7/24/2002 12:04:33 PM | | From: Glenn Petersen | | | | DVIN alters the terms of the Viant deal; less cash to DVIN. less dilution. If I were a DVIN shareholder, I would want the cash.
Divine, Viant alter terms of proposed deal
By Barbara Rose
Tribune staff reporter
Published July 24, 2002
chicagotribune.com
Divine Inc. announced revised terms Tuesday for a pending buyout of Viant Corp. that would distribute the bulk of Viant's cash directly to Viant shareholders, increasing the likelihood they will approve the deal.
Viant shares rose 29 cents on the news, to $1.38, Tuesday. Divine's shares fell 11 cents, to $2.36, reflecting the Nasdaq stock market's broad sell-off.
The proposed new terms would mean far less dilution for shareholders of Divine, a Chicago-based software and services company, and a much larger cash payout for investors in Viant, an Internet consultancy based in Boston.
The 4-month-old deal, a marriage between two former Internet highfliers, was renegotiated after Divine's shares continued to decline--increasing the likelihood Viant shareholders would reject the offer--and Divine turned to private investors for cash.
In May, Divine announced a $61 million commitment from venture capital firm Oak Investment Partners and other investors, who will own more than 30 percent of the company.
The private investment "gave us the opportunity to restructure the deal with Viant so we won't have to issue as many shares," said Anne Schmitt, a spokeswoman for Divine.
Under the new terms, Viant shareholders would get $72.5 million in cash, or about $1.46 per share, plus Divine shares. Divine has agreed to issue shares worth between $2.5 million and $3.69 million, based on a formula that takes into account Divine's stock price prior to closing.
The earlier deal called for a larger number of Divine shares and a $24 million cash dividend, or about 46 cents per share.
That proposal angered some Viant shareholders who said they preferred that the company liquidate, a move that Chief Executive Robert Gett said in April would have yielded between $1.80 and $1.85 per share.
Calls to Viant on Tuesday were not returned, but in a memo to employees Gett wrote: "This long period of uncertainty and anxiety is coming to a close and we should look forward to a new chapter for Viant."
The deal is expected to close in mid-September.
Copyright © 2002, Chicago Tribune |
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| To: Glenn Petersen who wrote (216) | 7/31/2002 5:20:56 PM | | From: stockman_scott | | | | Divine delays profit expectations
By Kay Riley
Crain’s Chicago Business
July 31, 2002
Divine Inc. pushed back the timeline for making its first-ever profit to the first quarter of 2003, as it reported a second-quarter loss. Previously, the company expected to make it into the black by fourth-quarter 2002.
The Chicago-based Internet consultancy and software firm late Tuesday posted a net loss of $51.2 million, or $2.74 per share, compared with a loss of $38.6 million, or $6.67 per share in the year-ago quarter.
At the same time, revenues—fueled by a spate of acquisitions—jumped to $163.6 million compared with $61.3 million in the second quarter 2001.
In a statement, CEO Andrew “Flip” Filipowski acknowledged that Divine is operating in "an extremely challenging economic climate and one of the worst technology recessions," but said he remains optimistic.
The company said it would continue cost-cutting measures. Divine has eliminated $85 million in annual expenses since the beginning of the year—including a significant number of job cuts—and it plans to slash another $25 million in expenses in the current quarter, Chief Financial Officer Michael Cullinane said in a statement. Details of those cuts were not available.
Divine also is looking to complete its acquisitions of Boston-based tech consultancy Viant Corp. and Canadian e-mail services company Delano Technology Corp. Once those deals close and the company finalizes a second round of financing from Oak Investment Partners, Divine expects its cash balance to increase to about $100 million, from the $55 million it had at the end of the second quarter, Mr. Cullinane said.
However, a sharp drop in Divine shares, which were trading at $2.67 on Wednesday, down from about $5 in May, has forced the company to revise its financing deal with Oak Investment Partners.
Instead of paying $6 per share for Divine preferred stock, as Oak did with the first, $22.9-million, round of its $61.6-million investment, Palo Alto, Calif.-based Oak will purchase its second round of preferred stock at market rates. That means that unless Divine’s stock shoots back to $5 or so, Oak will be getting a larger stake of Divine for its remaining $38.6-million investment. Oak's preferred shares can be converted to common. |
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| To: stockman_scott who wrote (217) | 8/17/2002 8:58:19 AM | | From: Glenn Petersen | | | | More cash out the door:
Divine buys stock from top shareholder in option deal
chicagotribune.com
By Barbara Rose
Tribune staff reporter
August 17, 2002
Divine Inc.'s biggest shareholder sold about one-third of his holdings to Divine shareholders two months ago at $13.25 per share--well above the fair-market price at the time--under an agreement negotiated when Divine bought his publicly traded software company last year.
Former eShare Communications Inc. Chief Executive Aleksander Szlam, now an officer at Divine, exercised "put" options in June to sell 455,520 of his Divine shares back to the company for $6.24 million, according to Divine's recent quarterly report with the Securities and Exchange Commission.
Divine's stock, which closed Friday at $2.76, traded between $2.87 and $5.21 during June.
Szlam's options were a way for the former CEO, whose partnership owned 49 percent of eShare, to hedge against a drop in Divine's stock price. A put option gives the holder the right to sell at a designated price during a designated period.
Szlam's agreement--disclosed last year when shareholders of both companies approved the buyout--allowed him to begin exercising his options as early as December and to sell the remainder within 12 months starting in April.
Divine, in turn, had "call" options to buy Szlam's shares on favorable terms to Divine if the company's stock price had risen instead of fallen.
Divine's shares plummeted 57 percent, from $34 to $14.50 on a split-adjusted basis, from the time the eShare buyout was announced in July 2001 to when shareholders approved the deal last October. Since the buyout's approval Oct. 19, they've fallen an additional 81 percent.
Divine's payment to Szlam--a longtime associate of Divine founder and CEO Andrew "Flip" Filipowski--comes at a time when the Chicago-based software and services firm can ill afford the cash outlay.
Divine spent $24.9 million more on operations than it took in during the second quarter, reducing its cash on hand to $55.1 million as of June 30, including $22.9 million in cash infusions in May and June from private equity firm Oak Investment Partners.
A pending merger with Internet consultancy Viant Corp. is expected to bring in about $20 million from Viant's treasury, and Oak has a pending agreement to provide Divine an additional $38 million.
Divine originally expected to break even by June, but the software industry's continuing slump in sales coupled with costs associated with Divine's acquisition spree last year have produced more red ink.
Divine reported a $50.3 million operating loss in the second quarter on revenue of $163.6 million.
"The biggest challenge we have is to get customers to commit," Chief Financial Officer Michael Cullinane said Friday. "
The former eShare is among Divine's bigger revenue generators. The firm, based in Norcross, Ga., specializes in customer relationship software including systems that operate call centers.
Before Szlam exercised his put options in June, he owned about 1.4 million Divine shares, split-adjusted, or 7.6 percent of the company--about twice the holdings of Filipowski, who owns 3.7 percent, according to Divine's proxy report in April.
Szlam, a chief strategy officer, couldn't be reached Friday at his office in Georgia.
Szlam and Filipowski served on one another's boards at eShare and at Divine's predecessor, Divine Interventures, where they sat on one another's compensation committees. Such relationships, while not uncommon, are frowned on by shareholder advocates.
Copyright © 2002, Chicago Tribune |
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| To: stockman_scott who wrote (217) | 8/26/2002 3:33:56 PM | | From: Glenn Petersen | | | | 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
chicagobusiness.com
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. |
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| To: stockman_scott who wrote (217) | 1/17/2003 2:01:20 PM | | From: Glenn Petersen | | | | Divine unit suit: Libraries may lose $50 million
chicagotribune.com
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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| To: Glenn Petersen who wrote (220) | 1/26/2003 5:47:28 AM | | From: Glenn Petersen | | | | New buyer in Divine unit talks
Library-service fees negotiated
chicagotribune.com
By Rob Kaiser and Robert Manor
Tribune staff reporters
January 25, 2003
A Dutch company has pulled out of talks to buy a library subscription service owned by Chicago-based Divine Inc., but another firm reportedly is close to striking a deal that would help thousands of libraries get needed periodicals.
Swets Blackwell, of Lisse, The Netherlands, said Friday that the company has withdrawn its bid to acquire RoweCom, a subsidiary of Divine, after the groups couldn't come to terms.
But another firm, EBSCO Information Services of Birmingham, Ala., is close to reaching a deal to buy the unit, according to a source familiar with the talks.
RoweCom accepted at least $50 million from 4,000 libraries last year to arrange subscriptions for essential periodicals, but never paid the publishers.
Negotiators for Swets Blackwell had tried for an arrangement in which their company and Divine would put up part of the money for the subscriptions, and publishers would offer a one-year discount to make up the remainder.
"The liability issues seemed too great," said Alan J. Hess, vice president of sales and marketing for Swets Blackwell in the United States.
A spokeswoman for EBSCO declined to comment, saying, "We have a confidentiality agreement." Divine officials did not respond to calls for comment.
RoweCom creditors have sought to separate negotiations with EBSCO from those with Divine.
Under the agreement currently being negotiated, EBSCO would come up with between $10 million and $14 million to cover RoweCom obligations and buy the company. The publishers would discount subscription prices for 2003, likely by more than half, and then inherit claims that the libraries currently have against Divine, according to the source familiar with the talks.
Exact figures on how much EBSCO will pay and how much the publishers will discount prices would be determined only after thousands of libraries and publishers decide whether to participate.
The libraries would still suffer some losses because not all publishers are expected to participate in the arrangement. A second set of negotiations would then deal with Divine, which collected at least $50 million in subscription payments that it didn't forward to publishers.
The two options are to get a cash payment from Divine and have a lien against the company's future earnings or immediately seek all of the money from Divine and "punish the villains," the source said.
RoweCom has already been sued by the New York State attorney general's office, which wants to recover subscription money paid by the state university system.
Originally called Faxon, RoweCom was a major player in the subscription aggregation business. The company would put together periodical requests from corporate, public and university libraries in North America and Europe.
Many of the periodicals are scientific, technical or medical in nature, and are vital to many users.
Divine purchased RoweCom in 2001, after several years in which the company lost money. Divine executives say they spent the libraries' $50 million on RoweCom's operating expenses and repaying its debts. Divine says now that it is getting out of the subscription aggregation business.
EBSCO is a 60-year-old company with offices in 19 countries, a business relationship with 60,000 publishers and maintains a database of more than 282,000 publications.
Copyright © 2003, Chicago Tribune |
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| To: Sr K who wrote (108) | 1/31/2003 11:22:50 PM | | From: Sr K | | | | Bullseye.
... I'd hope they get the offering off, and then I'll follow it closely - it has the potential to be one of the all-time great shorts. |
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| To: Sr K who wrote (222) | 2/4/2003 6:19:43 PM | | From: Glenn Petersen | | | | Nice call. This is going to have a very ugly ending.
suntimes.com
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
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