CDNow narrows loss, seeks funding

The Internet music company, whose shares have dropped 90 percent from their high, says its loss narrowed in the first quarter as the retailer added more customers.

FORT WASHINGTON, Penn.--CDNow, an Internet music seller whose shares have dropped 90 percent from their high, said its loss narrowed in the first quarter as the retailer added more customers.

The company said it will cut marketing spending, part of a plan to reduce operating expenses by more than $12 million a quarter and slow the rate it's using cash. CDNow also said on a conference call that it expected to complete a merger or obtain a significant investment partner by the end of the second quarter.

CDNow, which began business in 1994, is searching for new capital after losing a cumulative $212 million and its auditor in March expressed "substantial doubt" about the company's ability to stay in business. The Web retailer hired investment bank Allen to explore options, including a sale or new financing.

"While CDNow does face a financing challenge now, the opportunities ahead are tremendous," said chief executive Jason Olim. He said the company will reach profitability in the fourth quarter of 2002 if it obtains more funding and cuts costs as planned.

Its loss in the latest quarter narrowed to $37.8 million, or $1.23 a share, from $38.2 million, or $1.28 cents, a year earlier.

Sales rose 27 percent to $43.6 million from $34.4 million. BancBoston Robertson Stephens analyst Lauren Cooks Levitan had forecast $45 million in sales.

The results have been adjusted as if CDNow owned N2K, which it acquired, at the start of last year.

The company said it had cash and equivalents of $28.7 million and $10 million available on a credit line. It has talked with a number of potential partners about funding, Olim said.

CDNow said it lost 92 cents a share before items such as the amortization of goodwill and the writeoff of Cosmic Music Network, which was shut down. Levitan had forecast a loss of 88 cents a share.

Gross margin, or the percentage of sales that remains after product costs are subtracted, rose to17.2 percent from 14.2 percent in the fourth quarter. Analyst Robert Martin of Friedman Billings Ramsey had forecast a 20 percent gross margin.

The Fort Washington, Penn.-based retailer added 440,000 customers in the latest quarter, bringing its count to 3.7 million. Some of the new customers came from a CD promotion with Tricon Global's Pizza Hut chain that was more successful than anticipated and cost CDNow $2.4 million more than planned, the company said.

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