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CDnow backpedals on offering

The online music retailer terminates its proposed secondary offering, one of the most tangible signs yet of waning confidence in high-flying Net stocks.

Online music retailer CDnow today said it is terminating its proposed secondary stock offering, one of the most tangible signs yet of waning confidence in high-flying Net stocks.

Like most other Net companies, CDnow--a leader in the burgeoning online music business that went public only four months ago--is a money-loser. But that hasn't stopped a slew of Net companies from filing for secondary stock offerings, and many of them have been successful. One example: online travel company Preview Travel.

CDnow's secondary offering, however, never made it out of the gate.

"We felt that the recent decline in the market for Internet stocks made our pursuit of the offering undesirable," said CDnow chief executive Jason Olim. "In light of the company's current capital resources and liquidity, the completion of the offering at this time was not required."

On May 11, CDnow filed with the Securities and Exchange Commission for a secondary public offering of 2.5 million shares, valued on that day at $71.5 million. All of the shares would be sold by the company, with proceeds from the offering to be used for sales and marketing expenditures, capital expenditures, working capital, and general corporate purposes.

The company's stock, which has traded as high as 39 and as low as 17 during the past 52 weeks, closed at 17.75, up .5. The shares have been falling sharply since mid-April.

CDnow went public with a bang in February, with its shares rising almost 40 percent. The company raised $65.6 million with 4.1 million shares.

Shortly after its IPO, CDnow was swept along in a run-up of Net stocks that saw some companies, such as and Yahoo, crack the $100-per-share milestone. The steep run-up amazed many longtime market-watchers, who predicted it would not last.

Indeed, many Net stocks have retreated recently, largely on market volatility.

CDnow has dropped further than many, however. The company faces intense competition in the online music business, and outlined a host of risks it faces in the regulatory filing for its proposed secondary offering.

"Since inception, the company has incurred significant losses, and as of March 31, 1998, had accumulated losses of $22 million," the filing said. "The company believes that it will incur substantial operating losses for the foreseeable future, and that the rate at which such losses will be incurred may increase significantly from current levels."

The filing alluded to steep competition. "According to [industry research consultant] Jupiter [Communications], there were approximately 100 online music retailers as of June 1997," it said. "In addition, the broader retail music industry is intensely competitive."

CDnow's competitors include N2K's Music Boulevard, SonicNet, and K-Tel, whose stock soared much higher than expected when it announced plans to migrate to the Web. The surge in K-Tel's stock has come to symbolize Wall Street's infatuation with Net stocks--despite their high risk.

But some analysts warned against drawing too many sweeping conclusions from any one company's failure to complete a secondary offering. They continue to be bullish on the Net, and say Net stocks must be analyzed on a case-by-case basis.