Complete 2012 forensic audit documents - Kansas Bioscience ...

One of the companies targeted for acquisition by Divine was RoweCom, Inc. RoweCom was a
financially distressed company, having operated at a loss for several years. Based on
RoweCom’s business model, vendor payments in the fourth quarter were routinely in excess of
customer payments, and would require funding by Divine. Divine’s on-going cash flow
problems and a lack of synergy between RoweCom and Divine’s business, led some within
Divine to question the acquisition of RoweCom. However, Divine completed the transaction on
November 6, 2001 and arguably entered the “zone of insolvency” 36 on November 30, 2001.
Nevertheless, Divine’s CEO remained steadfast in his acquisition strategy, acquiring eight
additional companies.
Divine continued to suffer from severe cash flow problems and in July 2002 disbanded its
Merger and Acquisitions unit. By the third quarter of 2002, Divine’s cumulative operating losses
totaled $683.7 million since its IPO in July 2000. In the fourth quarter of 2002, RoweCom’s
usual, fourth quarter cash need arose. However, Divine did not have sufficient cash or available
financing to meet RoweCom’s cash needs. Furthermore, Divine had used cash paid to
RoweCom by customers throughout the first three quarters of the year to fund its own operations
rather than accumulating those payments to meet the large payments due RoweCom’s vendors in
the fourth quarter for services provided RoweCom’s customers throughout the year. Through the
fourth quarter of 2002, Divine unsuccessfully attempted to sell RoweCom. By mid-December
2002, Divine determined that it was not able to continue to support RoweCom and was not in a
position to finance the RoweCom year-end vendor payments. On January 27, 2003, RoweCom
filed bankruptcy.
Once in bankruptcy, RoweCom filed an adversary proceeding against Divine seeking $73
million in damages, for, among other things, “looting” RoweCom. Thereafter, the United States
Department of Justice and the Securities and Exchange Commission began investigating the
management of RoweCom and Divine. In addition, prior to RoweCom’s bankruptcy, Divine’s
auditors informed the company that it would issue a “going concern” qualification in the absence
of a definite operating plan for 2003. Divine explored several strategic alternatives, including
the sale of its entire business or various divisions, but could not secure a buyer. Divine filed
bankruptcy on February 25, 2003.
BKD interviewed Jude Sullivan and his recounting of what led to the downfall of divine
interVentures closely approximated that detailed in the bankruptcy filings. Sullivan indicated
that divine interVentures was an incubator and early-stage venture capital fund that focused on
Internet-enabled businesses. Sullivan was originally the legal director of the Partner
Development Group of which Mr. Thornton was one of three managing partners. In April 2000,
the Internet bubble burst and divine interVentures subsequently restructured its business model
to be less of an Internet-enabled company incubator and more of an acquisition company to buy
Internet and software companies that could not get funding elsewhere. In the restructuring of
Divine, Sullivan became General Counsel. During this process, Divine significantly dismissed
the Partner Development Group. Thornton took over the Skyscraper Fund, which was basically
a very early stage venture capital fund. It was the “garage fund” for Divine, making investments
of $300,000 to $500,000. Thornton left Divine in May 2001 and Sullivan indicated his
recollection was that the Skyscraper Fund only made a few investments before Thornton left.
36 Zone of Insolvency is a legal term used when a company is in danger of going bankrupt.
39