January 19, 2001, 12:00 AM

CDNow Faces Critics--and the Music

Responding to reports calling its viability into question, CDnow says it's implementing a new operating plan to pare back its losses. The online music retailer was rocked again yesterday by a auditor's report expressing doubt about the company's ability to survive past Sept. 30, sending its already-slipping stock into a freefall. CDnow shares fell 31% yesterday, closing at 3 1/2. News concerning the accountant's report followed CDnow's aborted merger with Columbia House and a Barron's story contending the e-retailer has less than a month's cash remaining.

CDNow issued a statement today insisting it still has a "bright future" and reiterating earlier disclosures that Columbia House parents Time Warner and Sony Corp. have pledged $51 million via an equity investment and long-term loan. What's more, the company says the comments by independent auditor Arthur Andersen, which were included in CDnow's annual report filed with the Securities Exchange Commission, were not more bad news but a legal requirement to confirm that it needs to raise money or find partners. "As the company cannot state at this time that it has sufficient cash to at least carry it through Dec. 31, 2000, Arthur Andersen was required to issue its qualified opinion," the statement reads.

CDNow has lost $175 million in three years, including $119 million last year.

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