UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended : March 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number: 0-23753
CDnow, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2979814
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
1005 Virginia Drive, Fort Washington, PA 19034
(Address of principal executive offices and Zip Code)
(215) 619-9900
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of May 9, 2000: 32,805,598 shares of common stock, no par value.
2
CDnow, Inc.
INDEX
Page
----
Part I - Financial Information
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999....................................................3
Unaudited Consolidated Statements of Operations for the three months
ended March 31, 2000 and 1999........................................4
Unaudited Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and 1999........................................5
Notes to Unaudited Consolidated Financial Statements.................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk........14
Part II - Other Information
ITEM 1. Legal Proceedings...........................................15
ITEM 2. Changes in Securities and Use of Proceeds...................16
ITEM 3. Defaults Upon Senior Securities.............................16
ITEM 4. Submission of Matters to a Vote of Security Holders.........16
ITEM 5. Other Information...........................................16
ITEM 6. Exhibits and Reports on Form 8-K............................16
Signatures....................................................................17
3
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CDNOW, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
March 31, 2000 December 31, 1999
----------------- -----------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 28,697,041 $ 20,612,706
Accounts receivable, net 4,044,191 4,809,931
Prepaid expenses and other 3,906,483 5,580,241
----------------- -----------------
Total current assets 36,647,715 31,002,878
----------------- -----------------
Property and equipment, net 15,072,250 17,216,980
Goodwill and other intangibles, net 61,855,131 70,121,321
Other assets 985,903 1,201,809
----------------- -----------------
$ 114,560,999 $ 119,542,988
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,681,548 $ 1,670,838
Accounts payable 34,853,551 46,431,122
Accrued N2K, Inc. merger costs 3,120,414 4,300,117
Accrued expenses and other current liabilities 19,774,220 15,753,572
---------------- -----------------
Total current liabilities 59,429,733 68,155,649
---------------- -----------------
Long-term debt 2,184,995 2,629,359
Deferred rent and other long-term liabilities 1,813,491 992,696
Long-term convertible debt 20,000,000 --
Common stock subject to put rights 2,999,995 2,999,995
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, 50,000,000 and 20,000,000
shares authorized, no shares issued and outstanding -- --
Common stock, no par value, 200,000,000 and 50,000,000
shares authorized, 32,789,876 and 30,355,948 issued
and outstanding 225,714,264 204,573,908
Additional paid-in capital 14,613,729 14,589,814
Deferred compensation (45,184) (61,905)
Accumulated deficit (212,150,024) (174,336,528)
---------------- -----------------
Total stockholders' equity 28,132,785 44,765,289
---------------- -----------------
$ 114,560,999 $ 119,542,988
================ =================
The accompanying notes are an integral part of these statements.
4
CDNOW, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31,
------------------------------
2000 1999
------------- -------------
Net sales $ 43,583,149 $ 21,930,361
Cost of sales 36,104,016 17,983,574
------------- -------------
Gross profit 7,479,133 3,946,787
Operating expenses:
Operating and development 10,589,380 3,726,182
Sales and marketing 23,521,878 17,138,674
General and administrative 2,949,508 1,371,356
Amortization of goodwill and other intangibles 8,197,023 1,337,626
------------- -------------
Total operating expenses 45,257,789 23,573,838
------------- -------------
Operating loss (37,778,656) (19,627,051)
Interest and other income 322,098 628,122
Interest expense (356,938) (104,620)
------------- -------------
Net Loss (37,813,496) (19,103,549)
============= =============
Basic and diluted loss per common share:
Net loss per common share $ (1.23) $ (0.96)
============= =============
Weighted average number of shares outstanding $ 30,742,241 $ 19,826,161
============= =============
The accompanying notes are an integral part of these statements.
5
CDNOW, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
--------------------------------
2000 1999
-------------- --------------
Operating Activities:
Net loss $ (37,813,496) $ (19,103,549)
Adjustments to reconcile net loss to
net cash used in operating activities;
Depreciation and amortization 9,989,478 2,245,317
Net loss on fixed asset disposals 1,310,488 --
Common stock options issued for services rendered 23,915 --
Increase (decrease) in operating assets and liabilities:
Accounts receivable 765,740 (981,141)
Prepaid expenses and other 1,989,639 94,196
Accounts payable (11,577,571) 1,197,544
Accrued expenses 3,046,433 1,816,890
Deferred revenue 513,704 49,691
Deferred rent liability 70,795 316,128
-------------- -------------
Net cash used in operating activities (31,680,875) (14,364,924)
-------------- -------------
Investing Activities:
Purchases of property and equipment (941,492) (544,009)
Cash acquired in acquisition -- 27,783,893
-------------- -------------
Net cash provided by (used in) investing activities (941,492) 27,239,884
-------------- -------------
Financing Activities:
Payments on term loans payable (13,267) (14,482)
Proceeds from the sale of stock 21,000,000 --
Proceeds from convertible debt 20,000,000 --
Payments on capitalized lease obligations (420,387) (231,347)
Proceeds from warrants exercised -- 102,352
Proceeds from options exercised 140,356 204,312
-------------- -------------
Net cash provided by financing activities 40,706,702 60,835
-------------- -------------
Increase in cash and cash equivalents 8,084,335 12,935,795
Cash and cash equivalents, beginning of period 20,612,706 49,041,370
-------------- -------------
Cash and cash equivalents, end of period $ 28,697,041 $ 61,977,165
============== =============
The accompanying notes are an integral part of these statements.
6
CDNOW, INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements are presented in
accordance with the requirements for Form 10-Q and do not include all the
disclosures required by generally accepted accounting principles for complete
financial statements. Reference should be made to the Form 10-K as of and for
the year ended December 31, 1999 for CDnow, Inc. and subsidiaries for additional
disclosures including a complete summary of CDNOW's accounting policies.
In the opinion of management, the consolidated financial statements contain all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the consolidated financial position of CDNOW for the periods presented.
The interim operating results of CDNOW may not be indicative of operating
results for the full year or for any other interim period.
NOTE 2 -- THE COMPANY
CDNOW is a leading electronic commerce retailer of pre-recorded music, including
compact discs (CDs), digital downloads and other entertainment-related products.
CDNOW's revenues are derived from the sale of pre-recorded music, other
entertainment-related products and advertising on the cdnow.com site. CDNOW
contracts with outside vendors for fulfillment services to deliver its products
to customers.
Since inception (February 12, 1994), CDNOW has incurred significant losses, and
as of March 31, 2000 had accumulated losses of $212.2 million. For the three
months ended March 31, 2000 and 1999, CDNOW's net losses were $37.8 million and
$19.1 million, respectively. In addition, CDNOW had a working capital deficit of
$22.8 million as of March 31, 2000. CDNOW believes it will continue to incur
substantial operating losses for the foreseeable future. Because CDNOW has
relatively low product gross margins, achieving profitability depends upon its
ability to generate and sustain substantially increased revenue and gross
margins. There can be no assurance that CDNOW will be able to generate
sufficient revenues or gross margins to achieve or sustain profitability in the
future. In addition, CDNOW has significant payments due in 2000 related to
marketing agreements.
CDNOW is currently financing its working capital needs with cash derived from
revenues, funds from the equity investment of $21 million by Sony Music
Entertainment, Inc. ("Sony Music") and Time Warner, Inc. ("Time Warner") on
March 16, 2000, and the long-term convertible debt facility available from Sony
Music and Time Warner. CDNOW is actively pursuing other financing arrangements
and has retained Allen & Company and Deutsche Bank Alex. Brown to assist in
exploring its strategic options and alternative financing arrangements. CDNOW
believes that its current cash and cash equivalents are sufficient to meet its
payment obligations until approximately September 30, 2000. CDNOW is actively
seeking third party financing or another merger transaction. However, CDNOW
cannot assure that it will be able to obtain the financing necessary to continue
operating its business.
NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include the
accounts of CDnow, Inc. and its wholly owned subsidiaries. All inter-company
balances and transactions have been eliminated.
Reclassifications. The consolidated financial statements for prior periods have
been reclassified to conform to the current period's presentation.
Beginning in the first quarter of 2000, CDNOW has elected to classify the
amount of coupons redeemed to purchase merchandise as a reduction to revenue
rather than the past practice of classifying coupons as a sales and marketing
expense. This change was made based on management's determination that
classifying coupons as a reduction to revenue was generally more consistent with
the treatment of coupons by internet retailers. Accordingly, CDNOW made a
reclassification between net revenues and sales and marketing expense for the
quarter ended March 31, 1999. Promotional coupons were approximately $2.8
million and $913,000 for the three months ended March 31, 2000 and 1999,
respectively. This adjustment had no effect on net loss.
Management's Use of Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Net Loss Per Common Share. CDNOW has presented net loss per common share amounts
for the three months ended March 31, 2000 and March 31, 1999 pursuant to
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per
Share."
7
Basic and diluted loss per common share was computed by dividing net loss
by the weighted average number of shares of common stock outstanding. Diluted
loss per share is the same amount as basic loss per share because the impact on
loss per share using the treasury stock method is anti-dilutive due to CDNOW's
losses.
Prepaid Expenses. CDNOW follows the American Institute of Certified Public
Accountants Statement of Position 93-7 "Reporting for Advertising Costs" ("SOP
93-7") to account for its marketing agreements. Under SOP 93-7, CDNOW amortizes
the costs associated with its marketing agreements over the contract terms, with
the amortization method primarily based on the rate of delivery of a guaranteed
number of impressions to be received during the contract term. To the extent
additional payments are required to be made based on factors such as
click-throughs and new customers generated, such payments are charged to expense
as incurred. CDNOW evaluates the realizability of assets recorded, and if
necessary, writes-down the assets to its net realizable value. As of March 31,
2000 no such write-down was required.
Prepaid expenses include approximately $2.0 million and $3.9 million at
March 31, 2000, and December 31, 1999, respectively, related to marketing
agreements (see Note 6). Other assets include the long-term portion of marketing
agreements of approximately $554,000 and $804,000 at March 31, 2000, and
December 31, 1999, respectively.
Internally Developed Systems and Software. CDNOW has adopted Statement of
Position 98-1 "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"), effective for fiscal years beginning
after December 15, 1998. Accordingly, the costs of computer software developed
or obtained for internal use have been capitalized and amortized over the
estimated useful life of three years. At March 31, 2000 and December 31, 1999,
net capitalized computer software developed or obtained for internal use was
approximately $530,000 and $1.4 million, respectively. In the first quarter of
2000, CDNOW wrote-off approximately $1.3 million of previously capitalized
software costs related to the development of the Cosmic Music Network, a
content-oriented site associated with the CDNOW store, which focused on unsigned
bands and the promotion of their music. The decision to discontinue the Cosmic
Music Network was made as part of CDNOW's plan to prioritize its spending
following the termination of its proposed merger with Columbia House.
Common Stock Subject to Put Rights. America Online, Inc. ("AOL") and N2K,
Inc.("N2K") a predecessor-in-interest to and, as of the merger of CDNOW and N2K
a wholly-owned subsidiary of CDNOW, entered into an agreement pursuant to which
AOL agreed to purchase at N2K's initial public offering price per share of
$19.00 (less underwriting discounts and commissions) an aggregate amount of
approximately $3.0 million or 169,779 shares of N2K's common stock (the "AOL
Purchase"). Subsequent to the merger of CDNOW and N2K, the price per share
converted to $22.89 and the number of shares converted to 140,916 shares of
CDNOW common stock. N2K granted AOL certain shelf and other registration rights
with respect to the shares purchased by AOL, including the right to require N2K
to register such shares for resale, to have such registration statement declared
effective on or before April 16, 1998 and to maintain the effectiveness of such
registration statement for a period of two years from the consummation of the
AOL Purchase. As N2K had not caused such registration statement to be declared
effective by April 16, 1998, AOL has the right to require CDNOW, as a
successor-in-interest to N2K, to repurchase such shares for cash at a price
equal to the greater of the original purchase price or the then current fair
market value. Accordingly, the value of these shares is not included in
stockholders' equity. Presently, these shares have not been registered and AOL
has not exercised its put right. The common stock subject to put rights on
CDNOW's consolidated balance sheets will be accreted to its fair market value
based upon the price of CDNOW's common stock at each reporting date. The fair
market value will be recorded as a charge to retained earnings at each reporting
date and will reduce earnings available to common shareholders. The fair market
value of CDNOW's common stock as of March 31, 2000 was $3.78 per common share.
As of March 31, 2000, there was no charge as the market value of CDNOW's common
stock was below $22.89 per common share.
Revenue Recognition. Net sales, which consist primarily of pre-recorded music
and other entertainment-related products sold via the Internet, include shipping
and handling charged to customers, and are recognized net of promotional
discounts and coupons when the products are shipped. CDNOW records a reserve for
estimated returns and customer credit, which is based on historical rates.
Revenue from the sale of advertising on the cdnow.com site is recognized as the
advertising is run.
CDNOW includes the revenue associated with barter advertising transactions
in net sales. The total amount of barter revenue included in net sales was
approximately $630,000 and $390,000 for the three months ended March 31, 2000
and 1999, respectively.
Operating and Development. Operating and development expense consists primarily
of payroll and related expenses for store management, design, development and
network operations personnel, systems and telecommunications infrastructure and
fees for licensing of ratings, reviews, sound samples and other information.
Store maintenance costs are charged to expense as incurred.
8
Sales and Marketing. Sales and marketing expense includes expenses related to
marketing agreements, advertising and promotions, payroll and related expenses
for personnel engaged in marketing, selling, and customer service activities,
including internal and external commissions and service fees on advertising
revenue, and credit card processing fees. The expense associated with barter
advertising revenue is also included in sales and marketing expense. Advertising
costs are included in sales and marketing expenses and are charged to expense as
incurred. Advertising costs were approximately $9.8 million and $13.4 million,
for the three months ended March 31, 2000 and 1999, respectively. CDNOW pays
commissions in the form of merchandise credit or cash to the affiliate members
of its Cosmic Credit and C2 Programs. Expenses related to these programs are
included in sales and marketing expenses.
Comprehensive Income. In June 1997, the Financial Accounting Standards Board
("FASB") issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130").
This statement requires companies to classify items of other comprehensive
income by their nature in a financial statement and display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in-capital in the equity section of a statement of financial
position. SFAS 130 is effective for financial statements issued for fiscal years
beginning after December 15, 1997. CDNOW adopted SFAS 130 in the first quarter
of 1998. CDNOW has had no other comprehensive income items to report.
Segment and Geographic Information. In June 1997, the FASB issued SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information" ("SFAS
131"). This statement establishes additional standards for segment reporting in
the financial statements and is effective for fiscal years beginning after
December 15, 1997. CDNOW operates in one principal business segment across
domestic and international markets. No foreign country or foreign geographic
area accounted for more than 10% of net sales in any of the periods presented.
Substantially all of CDNOW's operating results and identifiable assets are in
the United States.
New Accounting Pronouncements. In December 1999, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"). SAB 101 summarizes certain of the Staff's
views in applying generally accepted accounting principles to recognition,
presentation and disclosure of revenue in financial statements. Compliance with
SAB 101 was required no later than the first quarter of the fiscal years
beginning after December 15, 1999. CDNOW determined that its revenue recognition
policies are in accordance with SAB 101.
NOTE 4 - LONG-TERM CONVERTIBLE DEBT
In connection with CDNOW's Agreement of Merger and Contribution ("Merger
Agreement") with Sony Corporation of America ("Sony") and Time Warner, CDNOW
received a short-term loan commitment from Sony Music and Time Warner. The
short-term loan commitment was to provide CDNOW with $30 million in working
capital financing, drawable, based on cash balance minimums, on or after
December 16, 1999. On March 13, 2000, Sony, Time Warner and CDNOW mutually
consented to terminate the Merger Agreement and entered into a Termination
Agreement. Under the Termination Agreement, Sony Music and Time Warner converted
the $30 million short-term loan commitment into long-term convertible debt.
Borrowings under the convertible loan bear interest at the six-month London
interbank offered rate in effect two days prior to the borrowing plus 3%.
Principal and interest on the borrowings are due no later than January 15, 2003.
CDNOW can make voluntary prepayments at any time, without penalty. Prepayments
are mandatory from the proceeds of any sale, lease, transfer or disposition of
property or equity securities, except under certain defined exceptions,
including permitted interim financing involving the issuance of up to 19.9% of
outstanding shares of CDNOW common stock. Sony Music and Time Warner may at any
time convert any portion of the borrowings and accrued interest under the
convertible loan into CDNOW common stock at a conversion price of $10 per share.
As collateral, Time Warner and Sony Music have a first security interest in all
of the assets of CDNOW. CDNOW had made borrowings of $20 million and $0 as of
March 31, 2000 and December 31, 1999, respectively. As of March 31, 2000,
neither Sony Music nor Time Warner had converted any portion of the borrowings
or accrued interest into CDNOW common stock.
NOTE 5 - STOCKHOLDERS' EQUITY
As provided by the Termination Agreement, Sony Music and Time Warner purchased
2,405,500 shares of CDNOW's common stock, no par value, for $21 million on March
16, 2000.
9
On March 20, 2000, CDNOW re-priced issued and outstanding options to
purchase its common stock, no par value, held by its employees, officers and
certain members of its Board of Directors. Options having an exercise price
greater than $5.625, the closing price of CDNOW common stock on March 20, 2000,
were re-priced to an exercise price of $5.625. According to FASB Interpretation
No. 44, "Accounting for Certain Transactions involving Stock Compensation",
reductions to the exercise price of a fixed option award must be accounted for
as variable from the date of the modification to the date the award is
exercised, forfeited or expires unexercised. Under variable accounting, a
compensation cost must be recorded based on the intrinsic value of the award
(i.e. the difference between the exercise price and the fair value of CDNOW's
common stock on the date of the re-pricing). Thereafter, an additional
compensation cost must be recorded or reversed based on the difference between
the value of the option at the beginning and end of the accounting period. The
reversal of compensation cost will not be larger than accumulated compensation
expense incurred. No compensation cost was recognized at the date of the
re-pricing because the new exercise price equaled the market value of CDNOW's
stock at the date of the re-pricing on March 20, 2000. No compensation expense
was recognized at March 31, 2000 because CDNOW's stock price at March 31, 2000
of $3.7812 was below the new exercise price of $5.625.
NOTE 6 -- COMMITMENTS AND CONTINGENCIES
As of March 31, 2000, CDNOW's principal commitments consisted of obligations
under its marketing agreements and obligations associated with leased office
space and capital financing arrangements.
Payments Under Marketing Agreements. CDNOW is required to pay aggregate minimum
fixed fees of approximately $9.6 million and $2.8 million during the remaining
nine months of 2000 and the year ending December 31, 2001, respectively, under
its existing marketing agreements. These minimum fixed fees primarily relate to
CDNOW's marketing agreement with America Online, Inc. and the commitment to
purchase a minimum amount of advertising from MTV Networks. Depending on the
type of marketing agreement, CDNOW expenses advertising purchased under
marketing commitments when the advertising is run or amortizes the costs
associated with its marketing commitments over the contract terms, with the
amortization method primarily based on the rate of delivery of a guaranteed
number of impressions to be received during the contract term.
Several of CDNOW's agreements contain provisions, which may require
additional payments to be made by CDNOW based on factors such as click-throughs
and new customers generated. To date, the amount of such payments has not been
material. Such payments are charged to expense as incurred. CDNOW continues to
evaluate the realizability of assets recorded under the agreements above and
other agreements, and, if necessary, will write down the assets to realizable
value. As of March 31, 2000 no such write-down was required.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Quarterly Report contain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical and anticipated results or other expectations expressed in CDNOW's
forward-looking statements. Such forward-looking statements may be identified by
the use of certain forward-looking terminology, such as "may," will," "expect,"
"anticipate," "intend," "estimate," "believe," "goal," or "continue" or
comparable terminology that involves risks or uncertainties. Actual future
results and trends may differ materially from historical and anticipated
results, which may occur as a result of a variety of factors including, but not
limited to, those set forth under the "Overview" and "Liquidity and Capital
Resources" sub-sections included in the Management's Discussion and Analysis of
Financial Condition and Results of Operations section of this document and in
the "Risk Factors" section of CDNOW's Registration Statement on Form S-4 (File
No. 333-72463), which was filed with the Securities and Exchange Commission
("SEC") on February 16, 1999. Particular attention should be paid to the
cautionary statements involving CDNOW's limited operating history, the
unpredictability of its future revenues, the unpredictable and evolving nature
of its key markets, the intensely competitive online commerce and entertainment
environments, CDNOW's dependence on its marketing agreements and key suppliers
and distributors, and the risks associated with capacity constraints, systems
development, relationships with artists and the management of growth. Except as
required by law, CDNOW undertakes no obligation to update any forward-looking
statement, whether as a result of new information, future events or otherwise.
Readers should carefully review the factors set forth in other reports or
documents that CDNOW files from time-to-time with the SEC and matters generally
affecting online commerce and online sale of entertainment-related products,
including, but not limited to, music retailing.
Recent Developments
On July 12, 1999, CDNOW entered into a Merger Agreement with Sony and Time
Warner to combine its business with that of Columbia House, which is owned
equally by Sony and Time Warner. On March 13, 2000, Sony, Time Warner and CDNOW
mutually consented to terminate the Agreement and entered into a Termination
Agreement. Under the Termination Agreement, Sony Music and Time Warner purchased
$21 million of CDNOW's common stock (2,405,500 shares), no par value, on March
16, 2000, and replaced a $30 million short-term loan commitment with $30 million
of long-term convertible debt, which is convertible at the option of the holder
into CDNOW common stock at $10 per share. Sony, Time Warner, Columbia House and
CDNOW also agreed to explore the possibilities of a number of strategic
relationships. On March 14, 2000, CDNOW filed a report on Form 8-K with the
Securities and Exchange Commission concerning the termination of the proposed
merger with Columbia House.
Following execution of the Termination Agreement, CDNOW retained Allen & Company
and Deutsche Bank Alex. Brown to assist in exploring its strategic options and
alternative financing arrangements. CDNOW believes that its current cash and
cash equivalents are sufficient to meet its payment obligations until
approximately September 30, 2000. CDNOW is actively seeking third party
financing or another merger transaction. However, CDNOW cannot assure that it
will be able to obtain the financing necessary to continue operating its
business.
Overview.
CDNOW is a leading electronic commerce retailer of pre-recorded music, including
CDs, digital downloads and other entertainment-related products. Its early entry
into the online music retailing industry has helped CDNOW gain a well-recognized
brand and a large customer base. CDNOW strives to combine the advantages of
online commerce with superior customer focus in order to be the authoritative
source for the online purchase of music. CDNOW's Internet site, cdnow.com,
offers broad selection, informative content, easy-to-use navigation and search
capabilities, a high level of customer service, competitive pricing and
personalized merchandising and recommendations. Due to CDNOW's retail focus,
revenues are primarily derived from the sale of pre-recorded music and related
products. CDNOW also sells advertising space and sponsorships to companies
interested in promoting their own goods and services to CDNOW's customer base
and the large number of visitors to CDNOW's Internet site.
CDNOW has grown rapidly since its founding in 1994. Since inception,
approximately 3.7 million customers have made purchases from either CDNOW or
from Music Boulevard, the Internet music retail store previously operated by
N2K, which was integrated into the cdnow.com Internet site on May 17, 1999.
Approximately 440,000 customers made their initial purchase during the three
months ended March 31, 2000. CDNOW's net sales grew to $43.6 million during the
three months ended March 31, 2000, compared to $21.9 million during the three
months ended March 31, 1999.
11
In addition to the rapid acquisition of new customers, CDNOW has also generated
significant sales from existing customers. Repeat customers accounted for
approximately 66% of net sales during the three months ended March 31, 2000, up
from approximately 60% during the three months ended March 31, 1999.
CDNOW believes that the key factors affecting its long-term financial success
include its ability to secure financing arrangements, obtain new customers at
reasonable costs, retain customers and encourage repeat purchases. CDNOW seeks
to expand its customer base through multiple marketing channels, which include
(i) marketing campaigns using a combination of online and traditional offline
marketing, consisting of print, television and radio advertising, (ii)
continuing marketing agreements with one or more Internet content and service
providers, (iii) entering into linking arrangements with other Internet sites as
part of its affiliate website programs, and (iv) using direct marketing
techniques to target new and existing customers with personalized
communications. CDNOW periodically enters into marketing agreements with various
Internet portals and online content providers. CDNOW presently has marketing
agreements in place with, among others, AOL and MTV/VH1.
Since inception, CDNOW has incurred significant net losses and, as of March 31,
2000, had accumulated losses of $212.2 million. CDNOW expects that it will
continue to incur losses and generate negative cash flow from operations for the
foreseeable future. Since it has relatively low product gross margins, the
ability of CDNOW to generate and enhance profitability depends upon its ability
to substantially increase its net sales. To the extent that significantly higher
net sales and/or alternative financing arrangements are not realized, CDNOW will
be materially adversely affected. There can be no assurance that CDNOW will be
able to generate sufficient revenues to achieve or maintain profitability on a
quarterly or annual basis or that CDNOW will secure adequate funding to continue
its operations.
Results of Operations.
Net Sales. Net sales primarily reflect the sale of pre-recorded music and other
entertainment-related products, including outbound shipping and handling
charges. Net sales are net of a reserve for estimated returns and customer
credits, promotional discounts and coupons. Revenues from the sale of both cash
and barter advertising on CDNOW's Internet site are also included in net sales.
Net sales were $43.6 million for the three months ended March 31, 2000,
representing an increase of 99% over the three months ended March 31, 1999. Net
sales for the three months ended March 31, 2000 include the sales to Music
Boulevard customers as a result of the acquisition of N2K on March 17, 1999. The
increase in net sales is also attributable to continued growth of CDNOW's
customer base, increased sales from repeat customers and increased advertising
revenue. For the three months ended March 31, 2000, CDNOW added approximately
440,000 new customers, compared to 420,000 new customers that were added during
the three months ended March 31, 1999. The addition of approximately 440,000 new
customers for the three months ended March 31, 1999 brings the total number of
customers who have made purchases at either CDNOW or Music Boulevard since each
site's respective inception to approximately 3.7 million as of March 31, 2000.
During the first quarter of 2000, CDNOW continued to devote a substantial
portion of its marketing efforts to the retention of existing customers. Repeat
customer purchases represented approximately 66% of product sales for the three
months ended March 31, 2000, compared to approximately 60% for the three months
ended March 31, 1999. Advertising revenue was $3.0 million for the three months
ended March 31, 2000, representing an increase of 236% from approximately
$897,000 for the three months ended March 31, 1999.
Beginning in the first quarter of 2000, CDNOW has elected to classify the
amount of coupons redeemed to purchase merchandise as a reduction to revenue
rather than the past practice of classifying coupons as a sales and marketing
expense. This change was made based on management's determination that
classifying coupons as a reduction to revenue was generally more consistent with
the treatment of coupons by internet retailers. Accordingly, CDNOW made a
reclassification between net revenues and sales and marketing expense for the
quarter ended March 31, 1999. Promotional coupons were approximately $2.8
million and $913,000 for the three months ended March 31, 2000 and 1999,
respectively. This adjustment had no effect on net loss.
CDNOW also includes the revenue associated with barter advertising
transactions in net sales. As a percentage of net sales, barter revenue was 1.5%
and 1.8% for the three months ended March 31, 2000 and 1999, respectively. The
total amount of barter revenue included in net sales was approximately $630,000
and $390,000 for the three months ended March 31, 2000 and 1999, respectively.
12
International sales represented 16% of net sales for the three months
ended March 31, 2000 compared to 22% for the three months ended March 31, 1999.
The decrease in international sales as a percentage of net sales is primarily
due to a proportionally larger increase in U.S. sales resulting from sales and
marketing efforts focused on the U.S. domestic market, such as CDNOW's
sponsorship of the 2000 Grammy Awards and a custom CD promotion with Pizza Hut.
The decrease is also due to a proportionally larger increase in U.S. sales from
Music Boulevard customers obtained as a result of the acquisition of N2K, which
derived a smaller percentage of its sales from international customers than
CDNOW, and to increased competition in international markets.
Cost of Sales. Cost of sales consists primarily of the cost of merchandise sold
to customers, including product fulfillment and outbound shipping and handling
charges. Cost of sales increased 101%, to $36.1 million for the three months
ended March 31, 2000, from $18.0 million for the three months ended March 31,
1999. The increase in percentage terms is in proportion to the 99% increase in
net sales. CDNOW's gross margin remained relatively consistent at 17.2% for the
three months ended March 31, 2000 compared to 18.0% for the three months ended
March 31, 1999. During the first quarter of 2000, product margins were lower
compared to the first quarter of 1999 due to a combination of more competitive
pricing and the mix of lower margin products, which resulted from the launch of
CDNOW's expanded video and DVD store. The effect of lower product margins, was
offset by the increase in advertising revenue, which has a higher margin than
product sales.
Operating and Development Expense. Operating and development expense consists
primarily of payroll and related expenses for store management, design,
development and network operations personnel, systems and telecommunications
infrastructure and fees for licensing of ratings, reviews, sound samples and
other information. Store maintenance costs are charged to expense as incurred.
Operating and development expense increased by $6.9 million, or 184%, to $10.6
million for the three months ended March 31, 2000, compared to $3.7 million for
the three months ended March 31, 1999. As a percentage of net sales, operating
and development expense was 24.3% for the three months ended March 31, 2000,
compared to 17.0% for the three months ended March 31, 1999. The increase in
both dollar and percentage terms is attributable to increased staffing and
associated costs related to maintaining the features and functionality of
CDNOW's online site and transaction-processing. The increase is also
attributable to the write-off in the first quarter of 2000 of previously
capitalized software costs in the amount of $1.3 million related to the Cosmic
Music Network, a content-oriented site associated with the CDNOW store, which
focused on unsigned bands and the promotion of their music. The decision to
discontinue the Cosmic Music Network was made as part of CDNOW's plan to
prioritize its spending following the termination of its proposed merger with
Columbia House.
Sales and Marketing Expense. Sales and marketing expense includes expenses
related to marketing agreements, advertising and promotions, payroll and related
expenses for personnel engaged in marketing, selling, and customer service
activities, including internal and external commissions and service fees on
advertising revenue, and credit card processing fees. Sales and marketing
expense increased by $6.4 million to $23.5 million for the three months ended
March 31, 2000 compared to $17.1 million for the three months ended March 31,
1999. As a percentage of net sales, sales and marketing expense was 54.0% for
the three months ended March 31, 2000 compared to 78.2% for the three months
ended March 31, 1999. The increase in absolute dollars was primarily
attributable to the costs of the custom CD promotion with Pizza Hut. In
addition, CDNOW incurred increased staffing and related costs in connection with
the implementation of its marketing and sales strategy and customer service
activities necessary to support its increased customer base and increased credit
card processing fees related to the growth of revenues. The decrease as a
percentage of sales is primarily attributable to the increased percentage of
CDNOW's sales from repeat customer purchases, which are relatively less
expensive than the cost of acquiring new customers, marketing efficiencies
gained from the merger with N2K, and the termination after the first quarter of
1999 of a number of high fixed-cost marketing agreements with other internet
sites.
General and Administrative Expense. General and administrative expense consists
of payroll and related expenses for executive and administrative personnel,
insurance, professional fees and other general and corporate expenses. General
and administrative expense increased by $1.6 million, or 115%, to $2.9 million
for the three months ended March 31, 2000, compared to $1.4 million for the
three months ended March 31, 1999. As a percentage of net sales, general and
administrative expense increased to 6.8% for the three months ended March 31,
2000 compared to 6.3% for the three months ended March 31, 1999. The increase in
both dollar and percentage terms is primarily due to the hiring of additional
personnel to support the overall growth of CDNOW, increased professional fees,
and approximately $126,000 incurred in connection with the termination of the
proposed merger with Columbia House.
Amortization of Goodwill and Other Intangibles. Amortization of goodwill and
other intangibles related to the acquisition of N2K and superSonic Boom, Inc.
were approximately $8.2 million for the three months ended March 31, 2000
compared to $1.3 million for the three months ended March 31, 1999. The first
quarter of 1999 only included 15 days of amortization of goodwill and other
intangibles related to the acquisition of N2K, since the merger was not
completed until March 17, 1999.
13
Liquidity and Capital Resources.
At March 31, 2000, CDNOW's cash and cash equivalents were $28.7 million compared
to $20.6 million at December 31, 1999. In March 2000, CDNOW sold 2,405,500
shares of common stock to Sony Music and Time Warner for $21 million. In
February 1998, CDNOW consummated its initial public offering by selling an
aggregate of 4,561,250 shares of common stock and raising net proceeds of
approximately $67.1 million. In July 1998, CDNOW consummated a second public
offering by selling an aggregate of 1,250,000 shares of common stock and raising
net proceeds of approximately $21.5 million. Prior to February 1998, CDNOW
primarily financed its operations through private sales of capital stock (which,
through December 31, 1997, totaled $10.5 million, including $9.3 million raised
in July and August of 1997), the private sale of $5.8 million of Series A Notes
in November 1997, internally generated cash flows, advances from related parties
and certain other short-term loans.
Net cash used in operating activities of $31.7 million for the three months
ended March 31, 2000, was primarily attributable to a net loss of $37.8 million,
of which $10.0 million was a non-cash charge for depreciation and amortization
and $1.3 million was a write-off of capitalized software costs related to the
Cosmic Music Network. Additional uses of cash included a net $8.5 million
decrease in accounts payable and accrued expenses due to payments to
distributors related to sales in the fourth quarter of 1999. These uses of cash
were partially offset by a $2.0 million decrease in prepaid expenses and other
assets primarily due to the expense of prepaid marketing agreements, a $766,000
decrease in accounts receivable and a $584,000 increase in deferred revenue and
deferred rent liability. Net cash used in operating activities of $14.4 million
for the three months ended March 31, 1999, was primarily attributable to a net
loss of $19.1 million and an increase of $981,000 in accounts receivable
partially offset by a $3.0 million increase in accounts payable and accrued
expenses and depreciation and amortization expenses of $2.2 million. The changes
in working capital for the three months ended March 31, 1999, exclude the impact
of the acquisition of the assets acquired and liabilities assumed as a result of
the acquisition of N2K on March 17, 1999.
Net cash used in investing activities was approximately $941,000 for the three
months ended March 31, 2000, and related to the purchases of equipment and
leasehold improvements. Net cash provided by investing activities was $27.2
million for the three months ended March 31, 1999, which consisted of $27.8
million in net cash acquired from the acquisition of N2K, partially offset by
purchases of equipment and leasehold improvements of approximately $544,000.
Net cash provided by financing activities was $40.7 million for the three months
ended March 31, 2000. During the first quarter of 2000, Sony Music and Time
Warner purchased $21 million of CDNOW common stock and CDNOW borrowed $20
million under the long-term convertible debt agreement with Sony Music and Time
Warner. In addition, proceeds from the exercise of options amounted to
approximately $140,000. These increases in cash were partially offset by
approximately $434,000 of payments under capital lease and term loan
obligations. Net cash provided by financing activities was approximately $61,000
for the three months ended March 31, 1999, and consisted primarily of proceeds
of approximately $307,000 from the exercise of options and warrants, partially
offset by approximately $246,000 of payments under capital lease and term loan
obligations.
As of March 31, 2000, CDNOW's principal commitments consisted of obligations
under its marketing agreements and obligations associated with leased office
space and capital financing arrangements. CDNOW is required to pay aggregate
minimum fixed fees under its marketing agreements of $9.6 million and $2.8
million during the remaining nine months of 2000 and the year ending December
31, 2001.
CDNOW is actively seeking a merger transaction or investor and has retained
Allen & Company and Deutsche Bank Alex. Brown to assist in exploring its
strategic options and alternative financing arrangements. CDNOW believes that
its current cash and cash equivalents are sufficient to meet its payment
obligations until approximately September 30, 2000. However, CDNOW cannot assure
that it will be able to obtain the financing necessary to continue operating its
business.
14
Factors Affecting CDNOW's Business and Prospects.
CDNOW expects to experience significant fluctuations in its future quarterly
operating results due to a variety of factors, many of which are outside its
control. Factors that may affect CDNOW's quarterly operating results include:
(i) its ability to secure alternative financing arrangements, (ii) its ability
to retain existing customers, attract new customers and maintain customer
satisfaction, (iii) its competitors, (iv) price competition or higher wholesale
prices, (v) the level of use of the Internet and consumer acceptance of the
Internet for the purchase of CDNOW's products, (vi) seasonal fluctuations in
sales of CDNOW's products, (vii) its ability to maintain its systems and
infrastructure and attract qualified personnel, (viii) technical difficulties,
system downtime or Internet performance problems not attributable to CDNOW, (ix)
the amount and timing of operating costs relating to the maintenance of CDNOW's
business, operations and infrastructure, (x) the timing of CDNOW promotions and
sales programs, (xi) the level of merchandise returns experienced by CDNOW,
(xii) government regulation and (xiii) general economic conditions and economic
conditions specific to the Internet, the online sale of products and the
entertainment industry.
Seasonality.
CDNOW expects that it will experience seasonality in its business, reflecting a
combination of seasonal fluctuations in Internet usage and traditional retail
seasonality patterns affecting sales of pre-recorded music and other
entertainment-related products. Sales in the traditional retail music industry
are significantly higher in the fourth calendar quarter of each year, which
corresponds to the holiday season, than in the preceding three quarters.
Additionally, retail music sales are traditionally hits-driven through popular
releases by well-known and emerging artists. The presence or absence of hits in
any one quarter tends to affect music sales.
Risks Associated with the Year 2000.
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. In other words,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. CDNOW's computer systems and those of its key suppliers and
service providers may fail, which could result in system failures or
miscalculations causing disruptions to operations, including, among others, a
temporary inability to process transactions, create and send invoices or engage
in similar normal business activities, which may adversely affect it. CDNOW has
developed detailed plans for resolving problems related to the Year 2000 issue.
To date, CDNOW has not experienced any Year 2000 problems in computer systems or
operations. However, latent Year 2000 problems could be experienced.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Foreign Currency Risk.
CDNOW's revenues and expenses are denominated in United States dollars, with the
exception of revenues and expenses related to its Japanese Internet site.
Therefore, the only current exposure to foreign currency risk relates to
international sales. For the three months ended March 31, 2000 and 1999,
international sales accounted for approximately 16% and 22% of net sales,
respectively. To the extent that the value of the United States dollar increases
relative to foreign currencies, it may be more costly for international
customers to make purchases. Therefore, changes in exchange rates may impact the
amount of CDNOW's international sales.
Interest Rate Risk.
CDNOW's exposure to market risk as a result of changes in interest rates relates
primarily to its investment portfolio. CDNOW invests its funds in instruments
that meet high credit quality standards, as specified in its investment policy.
This policy also limits the amount of credit exposure to any one issue, issuer
and type of investment.
As of March 31, 2000, all of CDNOW's investments were cash equivalents. Due to
the average maturity and conservative nature of its investment portfolio, a
sudden change in interest rates would not have a material effect on the value of
the portfolio. Management estimates that had the average yield of CDNOW's
investments decreased by one percent, its interest income for the three months
ended March 31, 2000 would have decreased by approximately $245,000. This
estimate assumes that the decrease occurred on the first day of 2000 and reduced
the yield of each investment instrument by one percent. The impact on CDNOW's
future interest income from future changes in investment yields will depend
largely on the gross amount of its investments.
15
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
N2K and its directors were defendants in a consolidated purported class action
in the U.S. District Court for the Southern District of New York entitled In re
N2K Inc. Securities Litigation (Docket No. 98 CIV 3304 (HB)). The action
consolidated two purported class actions, entitled Kuhn v. N2K Inc. et al.
(Docket No. 98 CIV 4360 (HB)) and Bender v. Rosen et al. (Docket No. 98 CIV 3304
(HB)) that were previously discussed in N2K's Quarterly Reports on Form 10-Q for
the quarterly periods ended September 30, 1998, June 30, 1998 and March 31,
1998, CDNOW's Quarterly Report on Form 10-Q for the quarterly periods ended
March 31, June 30, and September 30, 1999, and CDNOW's Annual Report on Form
10-K for the twelve month period ending December 31, 1999, respectively. The
consolidated action was a purported class action on behalf of common
shareholders and sought to recover unspecified damages and other relief, as well
as costs and expenses, stemming from alleged violations of the Securities Act of
1933 in connection with the public offering of the shares of N2K's common stock
in April 1998. The consolidated action alleged that, among other things, the
defendants failed to disclose N2K's first quarter financial results in the
registration statement for the April 1998 public offering. The defendants moved
to dismiss the complaint on August 31, 1998 for failure to state a claim and/or
for failure to plead fraud with the requisite particularity. On May 21, 1999,
Judge Baer dismissed the plaintiff's complaint with prejudice. On June 22, 1999,
plaintiffs filed a Notice of Appeal to the U.S. Court of Appeals for the Second
Circuit, which is located in New York City. On February 7, 2000, the Second
Circuit upheld Judge Baer's dismissal of the plaintiff's complaint.
On or about November 4, 1998, an action entitled Ticketmaster Ticketing Co. v.
N2K Inc. (Docket No. BC200194) was filed against N2K in California Superior
Court for the County of Los Angeles. The Ticketmaster action alleges that N2K
breached a marketing and advertising contract dated April 23, 1998 between
Ticketmaster and N2K, which N2K terminated effective October 31, 1998, based on
alleged breaches of the agreement by Ticketmaster as well as other tortious
conduct. Ticketmaster seeks damages in an amount not less than $8,000,000, plus
pre- and post-judgment interest, as well as fees and costs. N2K filed a
cross-complaint for affirmative relief. The parties are in the process of
conducting discovery in preparation for trial.
N2K and 17 other entities have been named as defendants in a civil action
entitled Interactive Gift Express v. Compuserve, Inc., et al. (Docket 95 CV 6871
(BSJ)), which is pending in the U.S. District Court for the Southern District of
New York. The plaintiffs consented to entry of judgment against them in order to
speed their appeal of the court's ruling. The parties have appealed the matter
to the U.S. Court of Appeals for the Second Circuit.
N2K has been named as defendant in a civil action entitled Parsec Sight/Sound,
Inc. v. N2K Inc. (Docket 98 CV 0118), which is pending in the U.S. District
Court for the Western District of Pennsylvania. The plaintiff alleges
infringement of intellectual property rights, and seeks treble damages and costs
in an unspecified amount, as well as other declaratory and injunctive relief. In
this matter, discovery is ongoing. Additionally, Parsec has joined CDnow Online,
Inc. as a defendant. CDnow Online has requested that Liquid Audio indemnify
CDnow Online, Inc. against these claims by Parsec, pursuant to the
indemnification provisions of the Order Fullfillment Agreement entered into
between CDnow Online, Inc and Liquid Audio, Inc as of October 20, 1999, and
Liquid Audio has agreed to assume control of the costs of the defense with
reservation of certain rights. CDnow Online, Inc. expects to seek
indemnification from other parties that presently or will provide content or
services, which may be allegedly infringing the Parsec patents. N2K Inc. and
CDnow Online, Inc. are wholly-owned sister subsidiaries of CDnow, Inc. CDnow
Online, Inc. operates the cdnow.com Internet site.
CDNOW and N2K have been named defendants in an action brought by BPW Rhythmic
Records, L.L.C. for breach of contract and other related claims arising out of a
label agreement entered into between N2K Inc. and Rhythmic Records on March 27,
1998. The plaintiff, Rhythmic Records, seeks direct, punitive and exemplary
damages, costs, including attorney's fees, and a constructive trust against
CDNOW's assets. Plaintiff originally filed the action in a Texas state court.
CDNOW and N2K removed the action to the U.S. District Court for the Northern
District of Texas, and filed a motion to have the case dismissed or moved to the
federal trial court in New York City. Subsequently, the federal court in Texas
transferred the action to the U.S. District Court for the Southern District of
New York in New York City. The parties are in the process of conducting
discovery in preparation for trial.
16
On July 14, 1999, CDNOW filed a complaint against Lycos, Inc. and its
wholly-owned subsidiary Tripod, Inc., in the U.S. District Court located in
Philadelphia, Pennsylvania. The complaint alleges that Lycos and Tripod breached
their respective obligations to CDNOW as specified in the linking agreement
entered into among CDNOW, Lycos and Tripod on March 26, 1998. CDNOW seeks
damages in excess of $75,000 and a declaratory judgment terminating the linking
agreement. On November 15, 1999, Lycos and Tripod filed an answer and
counterclaim alleging breach of contract, quantum meruit and restitution, breach
of implied covenant of good faith and fair dealing and unfair and deceptive acts
and practices. Lycos and Tripod seek dismissal of the complaint, attorneys' fees
and damages as established at trial. The parties are in the process of
conducting discovery in preparation for trial.
CDNOW is a party to other lawsuits and proceedings arising in the ordinary
course of its business, none of which, in CDNOW's opinion, is likely to have a
material adverse effect on operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 12, 1999, CDNOW entered into the Merger Agreement with Sony and Time
Warner to combine its business with that of Columbia House. On March 13, 2000,
Sony, Time Warner and CDNOW mutually consented to terminate the Merger Agreement
and entered into a Termination Agreement. Under the Termination Agreement, Sony
Music and Time Warner purchased $21 million of CDNOW's common stock (2,405,500
shares), no par value, on March 16, 2000, and replaced a $30 million short-term
loan commitment with $30 million of long-term convertible debt, which is
convertible at the option of the holder into CDNOW common stock at $10 per
share. The common stock and the convertible debenture, related to these events
are currently unregistered. As of March 31, 2000, CDNOW had borrowed $20 million
under the convertible debenture. CDNOW is currently using the proceeds to fund
working capital requirements. As of March 31, 2000, neither Sony Music nor Time
Warner had converted any portion of the borrowings or accrued interest into
CDNOW common stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Form Item # Description Filing Date
- ---- ------ ----------- -----------
Form 8-K 5, 7 Report on the termination March 13, 2000
of the proposed merger between
CDnow, Inc. and Columbia House
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CDnow, Inc.
Date: May 15, 2000 /s/ Jason Olim
-------------------------------------
Jason Olim
President &
Chief Executive Officer
/s/ Joel Sussman
-------------------------------------
Joel Sussman
Vice President, Treasurer
and Chief Financial Officer