Unable to secure new funding in the current investment market, netLibrary , an e-book wholesaler and distributor, and Reciprocal, a DRM technology firm, appear to be in jeopardy. Both firms were considered to be significant players in the nascent e-publishing industry.

In a letter sent to its customers and publishing partners October 15, netLibrary said that it has accelerated its search for a buyer after it was unable to secure a new round of financing. According to the letter, signed by president and CEO Rob Kaufman and executive v-p Rich Rosy, the prospect for additional funding "looked extremely positive a few weeks ago," but the prospective investors had had a change of heart "based on several factors, including overall economic conditions."

At press time, the majority of netLibrary's 230 employees had opted to accept the company's offer to stay on at a salary of $360 per week. The letter noted, however, that "future employment would be dependent on identifying an interested buyer and related bridge financing." Marge Gammon, senior director of marketing, said the company is still making access to its inventory of 39,000 e-books available to its library customers. "We're still functioning," Gammon told PW. She said there was no timetable on how long netLibrary could continue to operate without an infusion of funds. The company has already put some services on hold.

NetLibrary began operations in July 1998 and sold its first e-book in May 1999. In August 2000, the company filed a registration statement with the Securities and Exchange Commission in hopes of raising $82 million through an IPO. The company withdrew the offering as the Internet bubble burst. At the time of the filing, the company said it had previously raised $110 million and estimated that those funds, plus proceeds from the IPO, would be enough to keep the company operating for another year.

Question of Cash

Reciprocal's operations also appear to be threatened after Microsoft called in a $10-million bridge loan that it made to the technology firm earlier this year.

Calls to Reciprocal were not returned at press time. Microsoft said the company is not commenting on rumors.

According to sources, Microsoft pulled the loan after Reciprocal failed to find additional outside funding by a Microsoft-imposed deadline. The lack of cash forced the company to layoff all but key employees. Reciprocal executives are hopeful of securing new capital soon, after which they are expected to rehire a portion of their former employees.

An internal memo that was posted on FuckedCompany. com, a Web site that focuses on Internet firms, has a slightly different take on what's in store for Reciprocal, although it concludes that the company will keep operating.

According to the memo, Microsoft intends to create a new company using Reciprocal's DRM technology and its current business agreements. The memo also said that, effective last week, all Reciprocal employees were laid off, "except for a small group needed to wind down the business."

The memo explains that Microsoft plans to restructure Reciprocal assets immediately into a new company and will rehire a "majority" of the laid-off employees. The new company will own, according to the memo, "client contracts, software assets and other intellectual property, and the Reciprocal brand. It may take over our existing physical assets that are required to carry on with the service." Reciprocal specializes in copyright protection for digital content, secure e-commerce services and digital content distribution. Reciprocal's publishing clients include Random House, John Wiley, McGraw-Hill.

These developments come on the heels of a restructuring of Reciprocal this past spring (News, May 7) in which 47 people, or about 30% of its work force, were laid off.