The music may be over for CDNow

Accountant has "substantial doubt" about online music retailer's ability to continue

Online music retailer CDNow's independent public accountant, Arthur Andersen has expressed "substantial doubt" about the US company's ability to continue as a going concern.

According to its annual report filed late Tuesday with the Securities and Exchange Commission, CDNow believes its current cash and cash equivalents are sufficient to meet its payment obligations until about 30 September.

However, CDNow concedes in the filing that it can't assure that it will be able to obtain the financing necessary to continue to support its business.

The filing indicated that the going concern issue was broached in connection with CDNow's terminated merger agreement with Sony and Time Warner.

On 13 March, Time Warner and Sony scrapped a plan to acquire CDNow and merge it with the media giants' Columbia House music-marketing venture.

Under the termination agreement, Sony and Time Warner purchased $21m (£13.2m) of CDNow's common stock, and replaced a $30m short-term loan commitment with $30m of long-term convertible debt, which is convertible at the option of the holders into CDNow common stock at $10 a share.

Since its inception in February 1994, CDNow has incurred significant losses and by 31 December 1999, had accumulated losses of $174.3m. For the years ended 31 December 1999, 1998 and 1997, CDNow's net losses applicable to common shareholders were $119.2m, $43.9m and $11.2m, respectively. In addition, CDNow had a working capital deficit of $37.2m as of 31 December 1999.

The company added that it will continue to incur substantial operating losses for the foreseeable future, and Arthur Andersen noted in its report that the company has "significant payments due in 2000 related to marketing agreements".

CDNow has previously said it plans to reduce quarterly operating expenses by $10m to $12m, with an ongoing quarterly cash-burn rate of less than $15m. Over the next quarter, CDNow also plans to reduce costs by almost one-third, by cutting marketing expenses and making other cost reductions.

On 13 March, the company also announced it has retained Allen & Co to explore strategic options and alternative financing arrangements. CDNow is also seeking third-party financing or another merger transaction, though the company conceded in the filing it can't assure that it will be able to obtain the needed financing.

CDNow is currently financing its working capital needs with cash derived from revenue, funds from the equity investment of $21m by Sony and Time Warner and the long-term convertible debt facility available from Sony and Time Warner.

CDNow, which was formed by the merger of CDNow and N2K about a year ago, had hoped the deal with Sony and Time Warner would allow it to cut costs and boost its customer base by using Sony's and Time Warner's advertising and other resources. The assets of Sony and Time Warner, two of the world's largest media companies, include record labels, movie and television production and distribution companies, cable and broadcast networks, and magazine and book publishers.

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