(continued from previous page)
Furniture.com a case study for e-tail problems
The long trail of complaints has led directly to Brooks, the 37-year-old chief executive who came to Furniture.com just before Christmas 1998. The former marketing star at German conglomerate Bertelsmann was recruited to transform a local furniture store, Empire Furniture Showroom, into a pure-play online venture.
Steve Rothschild, whose family founded Empire 50 years ago, was banking that it could operate more cost-effectively than brick-and-mortar rivals. It was a familiar plan: The Web would eliminate costly inventory buildup, the thinking went, because Furniture.com could transmit orders directly to the manufacturers and arrange for goods to be shipped straight to customers.
Brooks appeared to be the perfect candidate to lead the charge. His resume listed a Harvard MBA as well as management positions at music mail-order company BMG Direct and teen media firm Channel One Network. He was hired as Furniture.com's vice president of marketing and became CEO after only a month.
Early on, Brooks seemed organized, supportive and accessible, if not a little bookish, one former executive said.
Brooks takes charge
"Brooks was fabulous. He listened, he was supportive, and he turned the team into a family," said one executive who left the company last month. Another described the CEO as "a process man...a numbers kind of guy who likes working from charts and diagrams."
MotherNature's Barach, who first suggested that Furniture.com hire Brooks, cites many positive moves by the chief executive. He was instrumental, for instance, in sealing a deal to buy the Furniture.com domain name for $1 million--a steep price but one deemed well worth paying for marketing, identification and other benefits.
Brooks also was able to persuade several large furniture manufacturers to allow the company to sell their products on its Web site at a time when many were openly hostile toward Internet companies. Initially, the manufacturers had feared that online merchants would undercut traditional retailers on price.
"He is a fine leader, a great guy," Barach said of Brooks, who is also a member of the board. "He's probably aged 10 years in the last four months. I think he's ethical and logical."
By the summer of 1999, Furniture.com was in a groove. It had signed up many of the top furniture makers and had stuffed its coffers with $35 million in third-round financing.
The company's board included members who at the time were considered Net stars, such as Barach and CDNow founder and CEO Jason Olim.
Furniture.com was ready to execute a strategy favored by CMGI, one that was typical of many Internet companies: seize market share quickly through marketing blitzes and go public as soon as possible.
The company announced that it had launched a $5 million national advertising program in June of last year. But somewhere along the way, spending for the campaign ballooned to nearly $30 million. Expensive print and TV ads were bought, including spots on CBS' "60 Minutes" and Fox's "Ally McBeal."
It also began looking for underwriters to help lead it into public markets.
Furniture.com tallied 2 million unique visitors to its site and net sales of $10.9 million in 1999, according to documents filed with the Securities and Exchange Commission in January for an IPO that it was hoped would raise $50 million. By that time, the company had sold $7 million of products in a single month and expected $20 million in sales for the first quarter of 2000, former executives said.
The IPO that didn't happen
Five months later, Goldman bowed out of the undertaking altogether when the stock markets plunged in March--just when Furniture.com had run out of money.
"Brooks said they told us that we weren't ready," a former executive said. "They had heard about our back-end problems and told us to fix them before we went out...and that was it."
Suddenly, Furniture.com found itself without an underwriter when it needed investors badly. It had burned up much of the $76.5 million it received from investors in building brand recognition, and the prospects for an IPO weren't looking any better.
Sources say he isolated himself, issuing orders mostly through senior vice president Carl Prindle and vice president of marketing Kirsten von Hassel. Many believe that this behavior contributed to the division between him and some executive staff members, and some employees complained to their managers that he rarely talked to the rank and file.
As the company's situation worsened, he became increasingly worried about leaks, ordering all paper and computer printouts shredded at the end of the day, according to former members of his executive staff.
"He worried a lot about competitors getting their hands on secrets and talked a lot about loyalty," one former manager said.
Since the beginning of the year, Furniture.com has gone through two rounds of layoffs.
Last month, sources say, the company was preparing to shutter the business. Executives had already met with bankruptcy attorneys and ordered severance checks for the entire staff, former employees said.
Then, in an eleventh-hour miracle, Furniture.com persuaded initial backers to fork over an estimated $27 million by initiating what is known as a "cram-down"--an arrangement that allows companies to attract new investors by making it cheaper to buy a piece of the business. But this practice also dilutes the stakes held by original investors, who must decide whether to pony up more cash or watch their existing holdings shrink.
So CMGI and the other backers decided to invest once again.
Unfortunately, Barach and others said, the $27 million infusion included a loan of between $8 million and $10 million that Furniture.com had already spent. In addition, they estimate that the company still owes manufacturers and other creditors about $10 million. CMGI and the other investors are doling out portions of the money in weekly or biweekly sums, former executives say, and many employees are worried that they can cut off the company at any time.
The last-minute investment apparently wasn't enough to keep high-level executives from resigning last month. Some said they left partly because senior management had intended to lump together customer deposits for products with funds used to pay operating expenses--even though they knew Furniture.com might go out of business, a move that would have frozen all the company's assets.
"Brooks said at a managers' meeting that the customers could get their deposits back from the credit card (companies)," one former executive said. "It's not illegal, but it's highly questionable behavior. Some of us didn't want to be part of it."
When asked about such concerns, Brooks and former board member Joanna Strobe told News.com that they took pains to protect their customers' money in consultation with company attorneys.
A company is allowed to combine operating expenses with money customers offered as deposits in most states, said attorney Keith Shapiro, president of the American Bankruptcy Institute. But the rules change when companies are at risk of closing.
"A company that is going out of business and takes deposits raises serious questions concerning deceptive trade practices," Shapiro said.
Regardless of how it handles its accounting, the bottom line for Furniture.com's future remains unclear. The company has fewer than 100 employees, down from a peak of 248, and has seen so much turnover that it recently contacted people who had been laid off to see if they would come back to work, a source said.
"The whole industry should have been pulling for Furniture.com. It would have brought new excitement and aggressive growth to a kind of stodgy business," this source said. "Now, the whole industry is saying, 'See, I told you so.'"
| Furniture.com faces
Risk Returns With a Vengeance
Interview with Furniture.com CEO Andrew Brooks