News

Cash Crunch Led To Sale of Fatbrain.com
Jim Milliot -- 10/16/00

With an accumulated deficit of $66.8 million as of July 31, 2000, and restricted access to additional forms of funding, Fatbrain.com management believed the company was in danger of running out of money before the end of October unless it could find an external source of funds, documents filed in connection with Barnes & Noble.com's pending purchase of the online retailer show. For its part, bn.com has enough cash on hand to continue operating through the fourth quarter of 2001 and beyond.

The filing shows that at an early June board meeting, Fatbrain's directors instructed management to pursue strategic alternatives for the company because of the difficulty the company was having in raising adequate funding due to changing market conditions and the negative impact of a delay in financing the spin0ff of MightyWords. After bn.com's $20 million investment in MightyWords, Fatbrain executives hired J.P. Morgan to help the company find a suitable candidate for a possible business combination. In late June, Morgan began contacting potential suitors for Fatbrain and on July 14, bn.com and Fatbrain entered into a confidentiality agreement. While preliminary discussions were continuing between bn.com and Fatbrain over the course of the early summer, Fatbrain's management held numerous meetings about the acquisition process and the company's declining cash position and financing prospects. After holding discussions with other interested parties, Fatbrain reached a preliminary agreement to be acquired by bn.com in early September and completed the purchase agreement on September 13.

As part of the purchase agreement, Fatbrain president Dennis Capovilla will remain in that position under a two-year contract that will pay him an annual base salary of $325,000. He will also be entitled to receive a bonus of 100% of his salary for achieving, within six months after the merger is completed, certain "integration targets" that will be established by a transition team. Kim Orumchian, executive v-p of business development, will also receive a two-year contract with a base salary of $285,000 and the same bonus incentives as Capovilla.