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CDNow prepares to go public

CDNow, one of the largest online music sellers, is gearing up to raise $54 million in an initial public offering.

CDNow, one of the largest online music sellers, is gearing up to raise $54 million in an initial public offering.

The company wants to float out 3.6 million shares, and has set an initial pricing range of $13 to $15 a share, according to a recent filing with the Securities and Exchange Commission. The company plans to trade under the ticker "CDNW."

Average daily visits to the CDNow Web site grew to about 132,000 in December 1997, up from the 12,000 visits recorded in January 1996, according to the filing.

In the December quarter, CDNow posted sales of $7.9 million, up from $3.9 million reported during the previous quarter. The company's net sales for last year grew to $17.4 million, compared with $6.3 million in 1996. Repeat customers accounted for 50 percent of 1997 sales.

The company posted a net loss of $6.8 million for the quarter, and posted a net loss of $10.7 million for the year, compared with $1.8 million the previous year.

The company intends to invest heavily in marketing and promotion, Web site development and technology, and development of its administrative organization. As a result, it believes that it will incur substantial operating losses for the foreseeable future, and that the rate at which such losses will be incurred will increase significantly from current levels, according to the SEC filing.

The company said its early entry into the online music sales business positions it to take advantage of the Internet's many data-management and multimedia features, which enable consumers to listen to sound samples; search for music by genre, title, or artist; and access music reviews, related articles, music history, news, and recommendations.

The company has been building its brand through strategic alliances with other major online companies, such as Yahoo (YHOO). In August, Yahoo announced that CDNow would be the premier music seller featured on its popular Net directory. Under the terms of the deal, Yahoo will offer Netizens direct links to related CDNow music products. CDNow also will be integrated into Yahoo's content and will receive extensive promotional exposure throughout its search site.

CDNow also has forged alliances with both GeoCities and Excite's (XCIT) WebCrawler service, giving it exclusive rights to place music banner ads and integrated links to the CDNow store on certain music-related or other specified pages.

In addition, the company advertises in traditional mediums, such as radio and music-related print publications, including Rolling Stone, Spin, and Variety. The company intends to get involved in television advertising as well, and has purchased national advertising spots from CBS that make it the exclusive online retailer of recorded music during the 1998 Grammy Awards. CDNow also has purchased national advertising during the 1998 American Music Awards.

After the offering, the company will have 15,036,128 shares outstanding, giving it a market capitalization of $225.54 million based on an offering price of $15 per share. The funds generated from the offering will go toward funding CDNow's sales and marketing strategies, repaying short-term debts, and improving the company's Web site, among other general corporate purposes.

The company was established as a sole proprietorship in February 1994. Its commercial operations commenced in August 1994.