CDNow Battles Back

After a pessimistic auditor’s report sparked a wave of negative publicity and a broad stock sell-off, Internet music retailer CDNow (Nasdaq: CDNW) said today that it will implement a new operating plan to “significantly reduce” its cash burn rate.

The beleaguered company, whose troubles began after a planned merger with Columbia House went by the boards, attempted to soothe investor fears by saying in a statement that its leadership position in the Internet economy and its prospects for future investments still offer “a bright future.”

Auditor’s Report Sparks Concern

The statement came one day after auditing firm Arthur Andersen issued a “going concern” notice, which it is required to do whenever it finds that a company does not have enough cash or equivalent resources to continue operations for its next fiscal year. Based on the report, CDNow’s stock price dropped 30 percent Wednesday to an all-time low of $3.50 (US$).

Fearing that the Andersen report was being misinterpreted, CDNow attempted to defuse concerns that it was going out of business by explaining that the report was not more bad news, but merely a legal requirement to confirm what CDNow had already disclosed — that it needed to raise more money.

The company also reiterated its earlier announcement of a commitment by Time Warner and Sony to provide an additional $21 million in cash as an equity investment and to convert an existing $30 million short-term loan into long-term convertible debt.

Accentuate the Positive

CDNow CEO Jason Olim said Thursday that the company has an 8.1 percent reach among all Web users and that users are staying on the site longer. Some 3.5 million unique customers visited the site in February, up from 3.2 million at the end of 1999.

The Fort Washington, Pennsylvania-based company said that according to Media Metrix, its unique visitor traffic increased to 5.7 million in February, making it the fifth-largest e-commerce shopping site.

Acquisition Likely

Olim said the company is confident that a consulting firm it hired two weeks ago to explore its “strategic options” will identify an “appropriate strategic partner.”

Many industry insiders believe that the message between the lines is that the company has resigned itself to a takeover of some sort. By all accounts, its large customer base and increased revenue performance make it a viable target for a company that can absorb some of its losses.

CDNow has lost $175 million in three years, including $119 million last year alone. It booked revenues of $147.2 million in 1999, up from $43.9 million in 1998.

After the merger with Columbia House — which is owned by Sony and Time Warner — was called off two weeks ago, Olim said the company would reduce marketing and promotion costs in an effort to slash losses from an expected $20 to $25 million a quarter to $15 million.

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