<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-25723
LAUNCH MEDIA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4465753
(STATE OR JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2700 PENNSYLVANIA AVENUE
SANTA MONICA, CALIFORNIA 940404
(Address of principal executive offices)
TELEPHONE: (310) 526-4300
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 issuer's classes
of common stock, as of the latest practicable date.
COMMON STOCK, PAR VALUE OF $0.001 PER SHARE, 12,667,924 SHARES OUTSTANDING
AS OF AUGUST 5, 1999.
================================================================================
<PAGE> 2
================================================================================
LAUNCH MEDIA, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets
December 31, 1998 and June 30, 1999 (unaudited) 1
Consolidated Statements of Operations (unaudited)
Six and three months ended June 30, 1998 and 1999 2
Consolidated Statements of Cash Flows (unaudited)
Six and three months ended June 30, 1998 and 1999 3
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8K 18
Signatures 19
Exhibit 27 Financial Data Schedule 20
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LAUNCH MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
A S S E T S:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,735,000 $ 1,079,000
Short-term investments 4,993,000 79,654,000
Accounts receivable, net 569,000 2,551,000
Inventory 124,000 307,000
Prepaids and other current assets 590,000 2,007,000
----------- ------------
Total current assets 8,011,000 85,598,000
Property and equipment, net 2,587,000 4,460,000
Intangible and other assets 2,566,000 21,699,000
----------- ------------
$13,164,000 $111,757,000
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY):
Current liabilities:
Accounts payable $ 1,619,000 $ 3,471,000
Accrued expenses 784,000 2,024,000
Deferred revenue 482,000 2,715,000
Notes payable and accrued interest 530,000 458,000
Capital lease obligations, current portion 230,000 371,000
----------- ------------
Total current liabilities 3,645,000 9,039,000
Notes payable 201,000 180,000
Capital lease obligations, net of current portion 438,000 616,000
----------- ------------
Total liabilities 4,284,000 9,835,000
----------- ------------
Commitments and contingencies
Series A, B, C and D mandatory redeemable
convertible preferred stock 36,707,000 --
Stockholders' equity (deficiency):
Common stock, $.001 par value, authorized
75,000,000 shares; shares issued and
outstanding, 934,333 (1998) and 12,662,861
(1999) 1,000 13,000
Additional paid-in capital 986,000 143,802,000
Unearned compensation (1,208,000) (965,000)
Accumulated deficit (27,606,000) (40,928,000)
----------- ------------
Total stockholders' equity (deficiency) (27,827,000) 101,922,000
----------- ------------
Total liabilities and stockholders' equity $13,164,000 $111,757,000
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE> 4
LAUNCH MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For The Three Months Ended For The Six Months Ended
June 30, June 30,
--------------------------- -----------------------------
1998 1999 1998 1999
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net revenues:
Advertising $ 554,000 $ 3,124,000 $ 851,000 $ 3,835,000
Subscription 514,000 227,000 765,000 435,000
Merchandise and other 42,000 131,000 105,000 459,000
----------- ----------- ----------- ------------
1,110,000 3,482,000 1,721,000 4,729,000
Operating expenses:
Cost of goods sold and distribution 647,000 827,000 1,064,000 1,478,000
Sales and marketing 2,219,000 5,720,000 3,734,000 8,550,000
Content and product development 1,103,000 2,637,000 1,727,000 3,952,000
General and administrative 405,000 1,020,000 762,000 1,620,000
Depreciation and amortization 70,000 2,121,000 118,000 2,724,000
----------- ----------- ----------- ------------
Loss from operations (3,334,000) (8,843,000) (5,684,000) (13,595,000)
Interest income, net 172,000 265,000 134,000 285,000
----------- ----------- ----------- ------------
Loss before provision for income taxes (3,162,000) (8,578,000) (5,550,000) (13,310,000)
Provision for income taxes -- 2,000 3,000 12,000
----------- ----------- ----------- ------------
Net loss (3,162,000) (8,580,000) (5,553,000) (13,322,000)
Accretion of mandatory redeemable
preferred stock (615,000) (150,000) (895,000) (765,000)
----------- ----------- ----------- ------------
Net loss attributed to common stockholders $(3,777,000) $(8,730,000) $(6,448,000) $(14,087,000)
=========== =========== =========== ============
Basic and diluted net loss per share $ (4.04) $ (0.87) $ (6.91) $ (2.49)
=========== =========== =========== ============
Weighted average common shares used in per
share calculations 934,000 10,015,000 933,000 5,652,000
=========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 5
LAUNCH MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For The Three Months Ended For The Six Months Ended
June 30, June 30,
---------------------------------- ----------------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (3,162,000) $ (8,580,000) $(5,553,000) $(13,322,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 416,000 2,382,000 463,000 2,985,000
Non-cash charges for issuance of
equity securities 167,000 377,000 282,000 723,000
Allowance for sales returns (390,000) (14,000) (1,016,000) (107,000)
Amortization of deferred compensation 29,000 124,000 32,000 243,000
Changes in operating assets and
liabilities:
Decrease (increase) in accounts
receivable 270,000 (1,466,000) 383,000 (1,748,000)
Decrease (increase) in inventory 29,000 (130,000) (125,000) (183,000)
Decrease (increase) in prepaids and
other current assets 18,000 (600,000) (379,000) (1,314,000)
Increase (decrease) in accounts
payable (570,000) 961,000 (276,000) 1,725,000
Increase in accrued expenses 27,000 869,000 553,000 1,157,000
Increase in deferred revenue 129,000 1,844,000 413,000 2,234,000
----------- ----------- ----------- -----------
Net cash used in operating activities (3,037,000) (4,233,000) (5,223,000) (7,607,000)
----------- ----------- ----------- -----------
Cash flows used from investing activities:
Purchase of property and equipment (143,000) (221,000) (336,000) (387,000)
Purchases of securities (4,443,000) (79,654,000) (17,340,000) (79,654,000)
Maturities of securities 5,031,000 -- 5,031,000 4,993,000
Increase in security deposits (133,000) (51,000) (146,000) (57,000)
Acquisition of business -- -- -- (302,000)
----------- ----------- ----------- -----------
Net cash used in investing activities 312,000 (79,926,000) (12,791,000) (75,407,000)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Payments under capital lease
obligations (20,000) (82,000) (30,000) (137,000)
Payments under notes payable (13,000) (9,000) (128,000) (10,000)
Proceeds from notes payable -- -- 500,000 1,500,000
Proceeds from issuance of
mandatory redeemable convertible
preferred stock 3,400,000 -- 18,271,000 --
Proceeds from issuance of common
stock -- 80,816,000 -- 80,816,000
</TABLE>
3
<PAGE> 6
<TABLE>
<S> <C> <C> <C> <C>
Proceeds from exercise of stock
options 1,000 158,000 2,000 189,000
----------- ----------- ----------- -----------
Net cash provided by financing activities 3,368,000 80,883,000 18,615,000 82,358,000
----------- ----------- ----------- -----------
Increase (decrease) in cash and cash
equivalents 643,000 (3,276,000) 601,000 (656,000)
Cash and cash equivalents, beginning of
period 606,000 4,355,000 644,000 1,735,000
----------- ----------- ----------- -----------
Cash and cash equivalents, end of period $ 1,249,000 $ 1,079,000 $ 1,245,000 $ 1,079,000
=========== =========== =========== ===========
</TABLE>
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
For The Three Months Ended For The Six Months Ended
June 30, June 30,
--------------------------- -----------------------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash paid during the period for:
Interest $ 7,000 $ 30,000 $ 11,000 $ 53,000
Taxes $ -- $ 2,000 $ 3,000 $ 6,000
Supplementary disclosure of noncash transactions:
Equipment acquired under capital leases $139,000 $ 108,000 $ 261,000 $ 410,000
Issuance of common stock for partnership interests in
Musicvideos.com $ -- $ -- $ -- $ 8,931,000
Issuance of Series D Stock through conversion of
notes payable $ -- $ -- $3,400,000 $ --
Issuance of Series D Stock under strategic alliances $ -- $ -- $3,500,000 $ --
Issuance of common stock for purchase of
SW Networks, Inc. $ -- $14,300,000 $ -- $14,300,000
</TABLE>
See accompanying notes to these consolidated financial statements.
4
<PAGE> 7
LAUNCH MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
Launch Media, Inc., was incorporated in Delaware in February 1994 as
2Way Media, Inc. and changed its name to Launch Media, Inc., in March 1998. In
February 1999, a reorganization was completed in which a new Delaware
corporation acquired all outstanding securities of Launch Media, Inc., and
changed its name to Launch Media, Inc. The old Launch Media, Inc. became a
subsidiary of this corporation and changed its name to Launch Networks, Inc.
On February 26, 1999, Launch Media, Inc. acquired all of the
partnership interests in Musicvideos.com. In addition, on April 28, 1999, the
Company issued common stock and acquired all of the outstanding stock of SW
Networks, Inc. (subsequently renamed as Launch Radio Networks, Inc.). Launch
Media, Inc., together with Launch Networks, Inc. and SW Networks, Inc. are
referred to collectively as the "Company" or as "Launch". Launch is a digital
media company dedicated to creating the premier Internet destination for
discovering new music. Leveraging the inherent advantages of digital media,
Launch offers a compelling music discovery experience for consumers and provides
a valuable marketing platform for record labels, artists, advertisers and
merchants. The Company delivers its product via multiple broadband and
narrowband platforms, all under the brand name Launch. Products under the Launch
banner include Launch delivered on the web at www.launch.com and via CD-ROM and
broadband networks.
2. INITIAL PUBLIC OFFERING
On April 23, 1999 Launch effected an initial public offering ("IPO") of
3,500,000 shares of its common stock at a price of $22 per share. On May 19,
1999, the underwriters exercised their over-allotment to purchase an additional
510,000 shares of common stock. The net proceeds to the Company, after deducting
underwriting discounts and commissions and offering expenses, were $80.8
million.
Upon the closing of the IPO all of the then outstanding shares of the
Company's Mandatory Redeemable Convertible Preferred Stock automatically
converted into shares of common stock on a one-for-one basis. In addition, on
February 15, 1999, Launch entered into a note purchase agreement in which it
agreed to issue a convertible subordinated promissory note in the amount of $1.0
million to Avalon Technology LLC, a stockholder, and a convertible subordinated
promissory note in the amount of $500,000 to Goran Enterprises Limited, a
stockholder. The notes accrued interest at 8.5% per annum from the issuance date
and were due February 29, 2000. The notes automatically converted into shares of
Launch common stock upon the Company's IPO.
In addition, in connection with the IPO, the Company effected a
one-for-five reverse stock split. All share and per share information in the
accompanying financial statements have been retroactively restated to reflect
the effect of this stock split.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Launch
Media, Inc. and its wholly owned subsidiaries. All intercompany balances and
transactions have been eliminated.
5
<PAGE> 8
UNAUDITED INTERIM FINANCIAL INFORMATION
The unaudited interim consolidated financial statements of the Company
included herein have been prepared in accordance with the instructions for Form
10-Q under the Securities Exchange Act of 1934, as amended, and Article 10 of
Regulation S-X under the Securities Act of 1933, as amended. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations relating to interim financial
statements.
In the opinion of management, the accompanying unaudited interim
consolidated financial statements reflect all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial position
of the Company at June 30, 1999, and the results of its operations and cash
flows for the three and six months ended June 30, 1998 and 1999. The results for
the three and six months ended June 30, 1999 are not necessarily indicative of
the expected results for the full fiscal year or any future period. These
financial statements should be read in conjunction with the consolidated
financial statements and related footnotes included in the Company's Form SB-2
registration statement, as amended, filed with the Securities and Exchange
Commission ("SEC") in connection with the Company's IPO.
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 and
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. On an
ongoing basis, management reviews its estimates based on currently available
information. Changes in facts and circumstances may result in revised estimates.
REVENUE RECOGNITION
Through June 30, 1999, the Company's revenues have been derived primarily
from the sale of advertising and sponsorships, including the sale of advertising
on commercial radio broadcasts, annual subscriptions relating to Launch on
CD-ROM and single copy retail sales of Launch on CD-ROM. Revenues for
sponsorships across the Launch media properties are recognized ratably over the
sponsorship term which is typically one month. Revenues from advertisements for
Launch on CD-ROM are recognized upon the release date of the issue in which the
advertisement appears. With respect to launch.com, revenues from advertisements
are recognized ratably in the period in which the advertisement is displayed,
provided that no significant Launch obligations remain. Revenues from
advertisements on commercial radio networks are recognized, net of agency fees,
when the radio advertisement is broadcast.
Advance payments for Launch on CD-ROM subscriptions are deferred and
recognized over the term of the related subscription, typically 12 months.
The Company recognizes revenue from retail and other merchandise sales upon
shipment. Estimated product return reserves are provided when shipments are made
to reflect the net estimated sell-through.
Advertising revenues also include barter revenues, which represent an
exchange by Launch of advertising space on Launch on CD-ROM for reciprocal
advertising space on third-party Web sites. Revenues and expenses from barter
transactions are recorded at the lower of estimated fair value of the
advertisements received or delivered based on advertising rates currently in
effect. Barter revenues are recognized when the advertisements are run on the
Launch media properties. Barter expenses are recognized when Launch's
advertisements are run on the reciprocal Web sites or other advertising medium,
which is typically in the same period as when the advertisements are run on the
Launch media properties. Revenues and expenses recognized from barter
transactions, were approximately $231,000 and $270,000 for the three months
ended June 30, 1998 and 1999, respectively, or 41.7% and 8.6% of advertising
revenues, respectively, and were approximately $381,000 and $478,000 for the six
months ended June 30, 1998 and 1999, respectively, or 44.8% and 12.5% of
advertising revenue, respectively.
6
<PAGE> 9
RECENT ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which establishes standards for the
recognition and measurement of derivatives and hedging activities. This standard
is effective for all fiscal quarters of all fiscal years beginning after June
15, 1999. The Company does not expect the adoption of this statement to have a
significant impact on its financial statements.
COMPUTATION OF NET LOSS PER SHARE
In accordance with SFAS No. 128, "Computation of Earnings Per Share", basic
earnings per share is computed using the weighted average number of shares
outstanding during the period and diluted earnings per share is computed using
the weighted average number of common and dilutive common equivalent shares
outstanding during the period. Common equivalent shares consist of the
incremental common shares issuable upon the conversion of the Mandatory
Redeemable Convertible Preferred Stock (using the if-converted method) and
shares issuable upon exercise of outstanding stock options and warrants, using
the treasury stock method. Common equivalent shares are excluded from the
calculation if their effect is anti-dilutive. Pursuant to SEC Staff Accounting
Bulletin No. 98, common stock and convertible preferred stock issued for nominal
consideration, prior to the anticipated effective date of an IPO, are required
to be included in the calculation of basic and diluted net loss per share as if
they were outstanding for all periods presented. To date, the Company has not
had any issuances or grants for nominal consideration.
Diluted net loss per share for the three and six months ended June 30, 1998
and 1999, does not include the effect of options and warrants to purchase
772,296 and 544,496 shares of common stock, respectively, due to the net losses
incurred.
4. RELATED PARTY TRANSACTIONS
In April 1999, Launch entered into a 12-month sponsorship agreement
with Intel Corporation to promote their Intel Pentium III processing chip. The
total sponsorship agreement was for $2,980,000. Revenue is being recognized on a
straight-line basis over the term of the agreement. For the three months ended
June 30, 1999, the total revenue recognized was approximately $745,000. This
revenue is included in advertising and sponsorship revenues in the consolidated
statement of operations. Accounts receivable and deferred revenue included in
the consolidated balance sheet under this agreement as of June 30, 1999 were
$500,000 and $1,555,000, respectively.
In November 1998, Launch entered into an architectural development and
assistance agreement with Intel Corporation. Pursuant to the terms of this
agreement, Launch agreed to develop a product which is designed to use the
capabilities of a processor developed by Intel. In consideration, Intel has
agreed to pay Launch certain amounts and to provide technical assistance, and
Launch has agreed to pay Intel a portion of revenues derived from the developed
product. Revenue has been recognized using the percentage of completion method
on a cost to cost basis and for the three months ended June 30, 1999 was $0 and
for the six months ended June 30, 1999 was $300,000. The development revenue is
included in merchandise and other revenues in the consolidated statement of
operations. At June 30, 1999, $150,000 due from Intel is included in accounts
receivable and deferred revenue.
On February 15, 1999, Launch entered into a note purchase agreement in
which it agreed to issue a convertible subordinated promissory note in the
amount of $1.0 million to Avalon Technology LLC, a stockholder, and a
convertible subordinated promissory note in the amount of $500,000 to Goran
Enterprises Limited, a stockholder. The notes accrued interest at 8.5% per annum
and contained an original issue discount. During the three months ended March
31, 1999, the Company received $1.5 million in proceeds from the convertible
subordinated promissory notes. The notes and accrued interest were automatically
converted into 85,525 shares of common stock upon the closing of the Company's
IPO on April 28, 1999. As a result of the conversion of the promissory notes,
the Company recognized approximately $378,000 in non-cash interest expense
during the three months ended June 30, 1999 to reflect the original issue
discount between the conversion price and offering price of the common stock.
7
<PAGE> 10
5. INCOME TAXES
The Company's income tax provision consists of minimum state franchise
taxes.
6. CAPITAL LEASE LINE OF CREDIT
The Company has a capital lease line of credit for $1.0 million,
expiring in November 1999. The Company has borrowed approximately $849,000 under
this line of credit as of June 30, 1999. Payments for each borrowing are made
monthly over a thirty-six month period and include interest and principal. This
facility bears interest at the bank's prime rate (8.00% at June 30, 1999). The
leased assets collateralize any borrowings under this line of credit.
7. BUSINESS ACQUISITIONS
Acquisition of Musicvideos.com
On February 26, 1999, the Company acquired all of the partnership
interests of Areohvee Online Partnership, d.b.a. Musicvideos.com.
Musicvideos.com is a provider of music videos over the Internet. The acquisition
was accounted for using the purchase method of accounting and, accordingly, the
purchase price has been allocated to the tangible and intangible assets acquired
and liabilities assumed on the basis of their respective fair values on the
acquisition date.
The total purchase price of approximately $9.4 million is comprised of
875,553 shares of the Company's common stock with an estimated fair value of
approximately $8.9 million, a cash payment of approximately $300,000 and assumed
liabilities and transaction costs of approximately $200,000. For purposes of the
following pro forma combined statement of operations, the excess purchased price
over net tangible assets acquired was approximately $9.2 million and is being
amortized over an average useful life of 30 months.
Launch Radio Networks (formerly SW Networks, Inc.)
On April 28 1999, concurrently with it's IPO, the Company acquired all
of the outstanding shares of Launch Radio Networks, an entertainment
information/news content provider to radio stations and Internet-based
entertainment companies. The Company paid Sony Music Entertainment, Inc., the
sole stockholder of Launch Radio Networks, $12.0 million in shares of the
Company's common stock. In accordance with the purchase agreement the shares
issued to Sony Music were valued at 80% of the IPO price. Accordingly, the
Company issued 681,818 shares of common stock to Sony Music at an effective
discount of 20% from the initial public offering price. Sony Music has the right
to require registration of such shares beginning September 28, 1999. Absent
registration, Sony Music must hold such shares for a minimum of one year from
April 28, 1999. For accounting purposes, the Company computed the per share
value to equal the IPO price less 5%, due to the restrictions on resale or
$20.90 per share. Accordingly, for accounting purposes, the Company recorded the
purchase price of Launch Radio Networks of $14.3 million. The acquisition was
accounted for using the purchase method of accounting and, accordingly, the
purchase price was allocated to the tangible and intangible assets acquired on
the basis of their respective fair values on the acquisition date. For purposes
of the following pro forma combined financial information, the excess purchase
price over net tangible assets acquired was approximately $12.7 million and is
being amortized over an average useful life of 4 years.
8
<PAGE> 11
<TABLE>
<CAPTION>
MUSICVIDEOS.COM SW NETWORKS
--------------- -----------
<S> <C> <C>
Total consideration:
Common stock $8,931,000 $14,250,000
Cash 302,000 --
Other 36,000 --
---------- -----------
9,269,000 14,250,000
Less net assets (99,000) (1,556,000)
---------- -----------
Total intangibles $9,170,000 $12,694,000
========== ===========
</TABLE>
The allocations of the purchase prices are as follows:
<TABLE>
<CAPTION>
MUSICVIDEOS.COM SW NETWORKS
--------------- -----------
<S> <C> <C>
Membership database $6,770,000 $ --
Fixed assets -- 1,556,000
Goodwill and other 2,400,000 11,138,000
---------- -----------
Total intangibles $9,170,000 $12,694,000
========== ===========
</TABLE>
The following unaudited pro forma statement of operations gives effect
to these acquisitions as if they had occurred at the beginning of each period
presented by combining the results of operations of Musicvideos.com and SW
Networks Inc. with the results of operations of the Company for the three and
six months ended June 30, 1998 and 1999.
The unaudited pro forma statement of operations is not necessarily
indicative of the operating results that would have been achieved had the
transactions been in effect as of the beginning of the periods presented and
should not be construed as being representative of future operating results.
9
<PAGE> 12
PRO FORMA RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
For The Three Months Ended For The Six Months Ended
June 30, June 30,
------------------------------- ---------------------------------
1998 1999 1998 1999
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net revenues:
Advertising and sponsorship $ 1,347,000 $ 3,488,000 $ 2,236,000 $ 5,222,000
Subscription 514,000 227,000 765,000 435,000
Merchandise and other 225,000 198,000 432,000 697,000
----------- ----------- ------------ ------------
2,086,000 3,913,000 3,433,000 6,354,000
Operating expenses:
Cost of goods sold and distribution 647,000 827,000 1,064,000 1,477,000
Sales and marketing 2,539,000 5,826,000 4,317,000 8,979,000
Content and product development 2,072,000 2,925,000 3,736,000 5,102,000
General and administrative 969,000 1,164,000 1,843,000 2,156,000
Depreciation and amortization 2,031,000 2,213,000 4,042,000 4,319,000
----------- ----------- ------------ ------------
Loss from operations (6,172,000) (9,042,000) (11,569,000) (15,679,000)
Interest income, net 172,000 267,000 133,000 267,000
----------- ----------- ------------ ------------
Loss before provision for income taxes (6,000,000) (8,775,000) (11,436,000) (15,412,000)
Provision for income taxes -- (2,000) -- (12,000)
----------- ----------- ------------ ------------
Net loss $(6,000,000) $(8,777,000) $(11,436,000) $(15,424,000)
----------- ----------- ------------ ------------
Pro forma basic and diluted net loss per
common share $ (0.74) $ (0.76) $ (1.59) $ (1.54)
----------- ----------- ------------ ------------
Weighted average shares outstanding used in
pro forma per share calculation(1) 8,113,000 11,557,000 7,187,000 9,996,000
----------- ----------- ------------ ------------
</TABLE>
(1) Pro forma weighted average shares outstanding assumes the acquisitions
of Launch Radio Networks and Musicvideos.com as of the beginning
periods presented. In addition, the weighted average shares outstanding
assumes the conversion of the mandatory redeemable convertible
preferred stock at the beginning of the periods presented or on the
issue date if later.
10
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company has included in this filing certain "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995
concerning the Company's business, operations and financial condition. The words
or phrases "can be", "expects", "may affect", "may depend", "believes",
"estimates", "projects", and similar words and phrases are intended to identify
such forward-looking statements. Such forward-looking statements are subject to
various known and unknown risks and uncertainties, and the Company cautions you
that any forward -looking information provided by or on behalf of the Company is
not a guarantee of future performance. Actual results could differ materially
from those anticipated in such forward-looking statements due to a number of
factors, some of which are beyond the Company's control, in addition to those
discussed in the Company's other public filings, press releases and statements
by the Company's management, including (i) the volatile and competitive nature
of the Internet and music industries, (ii) changes in domestic and foreign
economic and market conditions, (iii) the effect of federal, state and foreign
regulation on the Company's business, (iv) failure of the Company, its vendors
or other third parties to achieve Year 2000 compliance and (v) the effect of any
future acquisitions. All such forward-looking statements are current only as of
the date on which such statements were made. The Company does not undertake any
obligation to publicly update any forward-looking statement to reflect events or
circumstances after the date on which any such statement is made or to reflect
the occurrence of unanticipated events.
The Company's fiscal year ends on December 31 of each calendar year.
RECENT EVENTS
On April 23, 1999 Launch effected an initial public offering ("IPO") of
3,500,000 shares of its common stock at a price of $22 per share. On May 19,
1999, the underwriters exercised their over-allotment to purchase an additional
510,000 shares of common stock. The net proceeds from to the Company, after
deducting underwriting discounts and commissions and estimated offering
expenses, were $80.8 million.
On February 28, 1999, Launch completed the acquisition of
Musicvideos.com. As a result of this acquisition, Launch has significantly
expanded its content by offering streaming music videos on launch.com. In
addition, on April 28, 1999, Launch completed the acquisition of Launch Radio
Networks from Sony Music. Launch Radio Networks produces editorial content and
news features focused primarily on music. Launch Radio Networks distributes this
content for radio broadcast and Internet syndication. We intend to continue to
distribute Launch Radio Networks' content to traditional media and to make this
content available on launch.com. We believe that this acquisition will enhance
the content available on launch.com, and that it will increase awareness of the
Launch brand. As part of this acquisition transaction, Sony purchased shares in
the IPO with an aggregate purchase price of $1.0 million.
OVERVIEW
Launch is a digital media company focused on music. Launch leverages
the inherent advantages of digital media to offer consumers a compelling music
discovery experience while providing record labels, artists, advertisers and
merchants a valuable marketing platform. Our content is delivered on the
Internet at www.launch.com and on the monthly Launch on CD-ROM.
Launch was incorporated in February 1994, and we published the first
issue of Launch on CD-ROM in May 1995. Through July 1998, we distributed Launch
on CD-ROM bi-monthly, and since that time, we have distributed it monthly.
Launch.com was first made available in October 1997. As of June 30, 1999,
launch.com had approximately 1.65 million registered members, and Launch on
CD-ROM had approximately 265,000 subscribers. Doubleclick, Inc. our third party
ad server, reported that in June 1999, there were approximately 1.7 million
unique visitors to launch.com.
11
<PAGE> 14
Launch has incurred significant net losses and negative cash flows from
operations since its inception, and as of June 30, 1999, had an accumulated
deficit of approximately $40.9 million. Launch intends to continue to make
significant financial investments in marketing and promotion, content
development and technology and infrastructure development. As a result, Launch
believes that it will incur operating losses and negative cash flows from
operations for the foreseeable future, and that such losses and negative cash
flows will increase for at least the next year.
To date, Launch's revenues have been derived primarily from the sale of
advertising, including sponsorships, and, to a lesser extent, from annual
subscriptions relating to Launch on CD-ROM. Launch derives revenue from
advertising sales against the total audience viewing content on both launch.com
and Launch on CD-ROM. Historically, Launch on CD-ROM has accounted for the
majority of Launch's audience, and, accordingly, Launch has derived the majority
of its revenues from advertising sales against the Launch on CD-ROM audience.
Launch expects that future growth, if any, in advertising revenue will largely
depend upon increasing the launch.com audience. Revenues for sponsorships across
the Launch media properties are recognized ratably over the sponsorship term,
which is typically one month. Revenues from advertisements for Launch on CD-ROM
are recognized upon the release date of the issue in which the advertisement
appears. With respect to launch.com, revenues from advertisements are recognized
ratably in the period in which the advertisement is displayed, provided that no
significant Launch obligations remain. With respect to Launch Radio Networks'
business, Launch obtains on-air radio advertising inventory in exchange for
music news content. Launch sells this inventory for cash and recognizes revenue
when the radio stations broadcast the advertisement.
We derive subscription revenues from annual subscription fees for
Launch on CD-ROM. Advance payments for Launch on CD-ROM subscriptions are
recorded as deferred revenue and recognized as revenue ratably over the term of
the subscription.
Advertising revenues also include barter revenues, which represent an
exchange of advertising space on Launch on CD-ROM for reciprocal advertising
space on third parties' Web sites or for rights under online distribution
agreements. Revenues from these barter transactions are recorded as advertising
revenues at the lower of estimated fair value of the advertisements received or
delivered and are recognized upon publication of the advertisements on Launch on
CD-ROM. Barter expenses are also recorded at the lower of estimated fair value
of the advertisements received or delivered and are recognized when Launch's
advertisements run on the reciprocal media property, which is typically in the
same period in which the advertisements run on Launch on CD-ROM. Although Launch
believes these barter transactions have been important in the marketing of the
Launch brand, we expect these transactions will significantly decrease as a
percentage of total net revenues in the future.
We have entered into various license arrangements, strategic alliances
and business acquisitions in order to build our audience, provide music-specific
content, generate additional online traffic, increase subscriptions and
memberships and establish additional sources of revenue. These acquisitions,
arrangements and alliances have resulted in a variety of non-cash charges that
will affect our operating results over the next several fiscal periods. The
acquisition of Musicvideos.com has been accounted for using the purchase method
of accounting and, accordingly, the purchase price of $9.3 million, has been
allocated to net tangible and intangible assets acquired. The excess purchase
price over net tangible assets was $9.2 million and is being amortized over an
expected estimated average useful life of 30 months. The acquisition of Launch
Radio Networks has been accounted for using the purchase method of accounting
and, accordingly, the purchase price of $14.3 million, has been allocated to net
tangible and intangible assets acquired. The excess purchase price over net
tangible assets was $12.7 million and will be amortized over an average useful
life of 4 years. The consideration for the NBC.com and NBC Interactive
Neighborhood strategic alliance and content agreement was series D mandatory
redeemable convertible preferred stock valued at $3.0 million. This non-cash
amount is being amortized over the 26-month term of the agreement. We expect
that we will continue to enter into such arrangements. Because Internet business
acquisitions typically involve significant amounts of intangible assets, future
operating results may be adversely affected by amortization of the intangible
assets acquired.
12
<PAGE> 15
RESULTS OF OPERATIONS
Net Revenues:
Net revenues increased 214% from $1.1 million for the three months
ended June 30, 1998 to $3.5 million for the three months ended June 30, 1999.
For the six-month period ending June 30, 1999, net revenues increased 175% from
$1.7 million to $4.7 million. The increase in net revenues was attributable
primarily to an increase in advertising revenues.
Advertising Revenues. Advertising revenues increased 464% from
$554,000, or 49.9% of net revenues, for the three months ending June 30, 1998 to
$3.1 million, or 89.7% of net revenues, for the three months ending June 30,
1999. Advertising revenues increased 351% from $851,000, or 49.5% of net
revenues, for the first six months of 1998 to $3.9 million, or 81.1% of net
revenues, for the first six months of 1999. Advertising revenues increased
primarily as a result of an increased number of advertisers and number of
advertisements sold in all of the Launch properties, revenue from Intel's
advertising sponsorship, as well as the addition of revenues from the sale of
radio advertising time from Launch Radio Networks. During 1998 and the first six
months of 1999, Launch increased its sales efforts principally by expanding its
sales force. In addition to increased sales efforts, the inventory of
impressions available on the Company's web site increased as registered and
unique users on launch.com increased. Launch expects advertising revenue will
continue to represent the most significant portion of its net revenues for the
foreseeable future. Included in advertising revenues are revenues recognized
from barter transactions of $231,000, or 41.7% of advertising revenues, for the
three months ended June 30, 1998 and $270,000, or 8.6% of advertising revenues,
for the three months ending June 30, 1999. For the six months ending June 30,
1998, $381,000 or 44.8% of advertising revenues were recognized as barter
transactions, compared to $478,000 or 12.5% of advertising revenues, for the six
months ending June 30, 1999.
Subscription Revenues. Subscription revenues decreased 56% from
$514,000, or 46.3% of net revenues, for the three months ending June 30, 1998 to
$227,000, or 6.5% of net revenues, for the three months ending June 30, 1999.
Subscription revenue decreased 43% from $765,000, or 44.5% of revenues for the
first six months of 1998 to $435,000, or 9.2% of revenues during the first six
months of 1999. Subscription revenues decreased primarily as a result of a
reduction in the yearly price of a subscription for Launch on CD-ROM, which
occurred in the second quarter of 1998. We intend to phase out Launch on CD-ROM,
as more efficient broadband distribution systems achieve widespread consumer
acceptance. As a result, Launch anticipates that subscription revenues from
Launch on CD-ROM will decline substantially over time.
Other Revenues. Other revenues increased 212% from $42,000, or 3.8% of
net revenues, during the three months ended June 30, 1998 to $131,000, or 3.8%
of net revenues, during the three months ended June 30, 1999. Other revenues
increased during the three months ended June 30, 1999 primarily due to the
inclusion of additional revenues from the licensing of Launch Radio Networks
content. Licensing revenues from the Launch Radio Networks content was partially
offset by a decrease in single copy retail sales of Launch on CD-ROM. This
decrease was due to our focus on maintaining circulation of Launch on CD-ROM
through subscriptions and the de-emphasis of single copy retail sales. Other
revenue increased 337% from $105,000, or 6.1% of revenues for the first six
months of 1998 to $459,000, or 9.7% of revenues during the first six months of
1999. Other revenue for the first six months of 1999 increased primarily as a
result of $300,000 earned under a nonrecurring development agreement with Intel.
The total amount to be paid to Launch under the Intel agreement is approximately
$1.0 million of which $550,000 has been recognized through June 30, 1999.
Excluding this development agreement revenue, merchandise and other revenues
were $159,000 for the first six months of 1999, reflecting a 51.4% increase from
the first six months of 1998. At June 30, 1999, Launch had deferred revenues of
$2.7 million, consisting primarily of development projects and prepaid
subscriptions for Launch on CD-ROM.
Operating Expenses
Cost of Goods Sold and Distribution. Cost of goods sold and
distribution consists primarily of Launch on CD-ROM manufacturing and packaging
costs and related subscription distribution costs. Cost of goods sold and
distribution increased 28% from $647,000, or 58.3% of net revenues, during the
three months ended June 30, 1998 to $827,000, or 23.8% of net revenues, during
the three months ended June 30, 1999. For the first six
13
<PAGE> 16
months of 1999, cost of goods sold and distribution increased 39%, from $1.1
million, or 61.8% of revenues in the first six months of 1998, to $1.5 million,
or 31.3% or revenue. As a percentage of net revenues, cost of goods sold and
distribution decreased during the three months and six months ended June 30,
1999; however, cost of goods sold increased in absolute dollars due primarily to
the production and distribution of five issues of Launch on CD-ROM versus four
issues during the first six months of 1998. We expect cost of good sold as a
percentage of net revenues and in absolute dollars to decrease as Launch on
CD-ROM is phased out.
Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of advertising and marketing costs, promotional costs and the cost of
the direct marketing, radio affiliate sales and advertising sales force.
Beginning with the quarter ended June 30, 1999 as a result of the acquisition of
Launch Radio Networks, sales and marketing expenses also includes commissions
paid to the media representative firms which sell our radio advertising time.
Sales and marketing expenses increased 158% from $2.2 million, or 199.9% of net
revenues, during the three months ended June 30, 1998 to $5.7 million, or 164.3%
of net revenues, during the three months ended June 30, 1999. For the first six
months of 1999, sales and marketing expenses increased 129%, from $3.7 million,
or 217.0% of revenues, to $8.5 million, or 180.8% of revenues. The increase in
sales and marketing expenses occurred primarily due to the cost of acquiring new
registered users on launch.com including distribution agreements and promotions,
advertising for Launch on other websites, the hiring of additional sales and
marketing personnel, and increased marketing to promote the Launch brand. In
addition, we undertook a print and outdoor advertising campaign beginning in
March 1999 in order to promote the Launch brand and increase the audience on
Launch's media properties. We expect sales and marketing expenses to increase
significantly in absolute dollars as we pursue an aggressive marketing campaign
and enters into additional distribution agreements to increase the audience on
launch.com, expand marketing of the Launch brand and hire additional sales and
marketing personnel.
Content and Product Development Expenses. Content and product
development expenses consist primarily of editorial expenses, which includes
video production and editorial writers, programming costs for Launch Radio
Networks, art production, bandwidth, software, and Web development costs.
Content and product development expenses increased 139% from $1.1 million, or
99.4% of net revenues, during the three months ended June 30, 1998 to $2.6
million, or 75.7% of net revenues, during the three months ended June 30, 1999.
For the first six months of 1999, content and product development expenses
increased 129%, from $1.7 million, or 100.4% of revenues, to $4.0 million, or
83.6% of revenues. Content and product development expenses increased in the
three months ending June 30, 1999 due to costs of further developing and
enhancing the launch.com Web site, including significant additions to personnel,
equipment, and software. We believe that significant investments in content and
product development are required to remain competitive. Therefore, we expect
that content and product development expenses will continue to increase in
absolute dollars for the foreseeable future.
General and Administrative Expenses. General and administrative
expenses consist primarily of salaries and related costs for general corporate
functions, including finance, legal, human resources and accounting. Also
included are facilities costs and fees for professional services. General and
administrative expenses increased 152% from $405,000, or 36.5% of net revenues,
during the three months ended June 30, 1998 to $1.0 million, or 29.3% of net
revenues, during the three months ended June 30, 1999. For the first six months
of 1999, general and administrative expenses increased 112.6%, from $762,000, or
44.2% of revenues, to $1.6 million, or 34.3% of revenues. The absolute dollar
increase in general and administrative expenses in the three months ending June
30, 1999 was primarily attributable to salary and related expenses for
additional personnel and increases in facilities costs. Launch anticipates
hiring additional personnel, incurring additional costs for integration of
acquisitions and incurring additional costs related to being a public company,
including costs related to investor relations programs and professional service
fees. Accordingly, Launch anticipates that general and administrative expenses
will continue to increase in absolute dollars.
Depreciation and Amortization. Depreciation and amortization was $2.1
million during the three months ended June 30, 1999 and primarily consisted of
$996,000 of amortization of excess purchase price over tangible net assets
acquired arising from its acquisition of Musicvideos.com and $604,000 of excess
purchase price over tangible net assets acquired arising from its acquisition of
Launch Radio Networks during the three months ended June 30, 1999. For the first
six months of 1999, depreciation and amortization was $2.7 million.
14
<PAGE> 17
Interest Income (Expense). Net interest income (expense), net consists
of interest earned on cash and cash equivalents and short-term investments,
offset by interest expense on borrowings. Net interest income was $172,000
during the three months ended June 30, 1998 compared to net interest income of
$265,000 during the first three months of 1999. For the six months ended June
30, 1998, net interest income was $134,000 compared to net interest income of
$285,000 during the six months ended June 30, 1999.
On February 15, 1999, Launch entered into a note purchase agreement in
which it agreed to issue a convertible subordinated promissory note in the
amount of $1.0 million to Avalon Technology LLC, a stockholder, and a
convertible subordinated promissory note in the amount of $500,000 to Goran
Enterprises Limited, a stockholder. The notes accrued interest at 8.5% per annum
and contained an original issue discount. During the three months ended March
31, 1999, the Company received $1.5 million in proceeds from the convertible
subordinated promissory notes. The notes and accrued interest were automatically
converted into 85,525 shares of common stock upon the closing of the Company's
IPO on April 28, 1999. As a result of the conversion of the promissory notes,
the Company recognized approximately $378,000 in non-cash interest expense
during the three months ended June 30, 1999 to reflect the original issue
discount between the conversion price and offering price of the common stock.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Launch has financed its operations primarily
through a public issuance of common stock, private placements of preferred stock
and, to a lesser extent, from the revenues generated by operations. As of June
30, 1999, Launch had approximately $81 million in cash and cash equivalents and
short term investments.
Net cash used in operating activities increased to $7.6 million for the
first six months of 1999 from $5.2 million for the first six months of 1998. The
increase in net cash used in operating activities is substantially attributable
to the increased net loss.
Net cash used in investing activities was $75.4 million for the first
six months of 1999, as compared to net cash used by investing activities of
$12.8 million for the first six months of 1998. The increase in net cash used in
investing activities resulted primarily from the significant purchase of
securities which took place during the first six months of 1999 as a result of
the cash raised in the Company's IPO. This cash is predominantly invested in
instruments that are highly liquid, are of high quality investment grade, and
predominantly have maturities of less than one year with the intent to make such
funds readily available for operating purposes.
Net cash provided by financing activities increased to $82.4 million
for the first six months of 1999, from $18.6 million for the first six months of
1998, due principally to the proceeds from the sale of common stock via the
Company's IPO in 1999.
Launch has a capital lease line of credit for $1.0 million. At June 30,
1999, $849,000 was outstanding under this line of credit. This facility bears
interest at the bank's prime rate, 8.00% at June 30, 1999. The leased assets
collateralize any borrowings under this line of credit.
The Company has experienced a substantial increase in its capital
expenditures and operating lease arrangements since its inception, consistent
with the growth in Launch's operations and staffing, and anticipates that this
will continue for the foreseeable future. Additionally, Launch will continue to
evaluate possible investments in businesses, products and technologies, and
plans to expand its sales and marketing programs and conduct more aggressive
brand promotions. Launch currently expects that the net proceeds from its IPO,
together with its existing capital lease line of credit and available funds,
will be sufficient to meet its anticipated needs for working capital and capital
expenditures for at least the next 12 months. There can be no assurance,
however, that the underlying assumed levels of revenues and expenses will prove
to be accurate. Launch may seek additional funding through public or private
financings or other arrangements prior to such time. Adequate funds may not be
available when needed or may not be available on terms favorable to Launch. If
additional funds are raised through the issuance of equity securities, dilution
to existing stockholders may result. If funding is insufficient at any time in
the future, Launch may be unable to develop or enhance its products or services,
take advantage of business opportunities or respond to competitive pressures,
any of which could have a material adverse effect on Launch's business,
financial condition and results of operations.
15
<PAGE> 18
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to comply with such Year 2000 requirements or risk system
failure or miscalculations causing disruptions of normal business activities.
STATE OF READINESS
The Company has made an assessment of the Year 2000 readiness of its
operating, financial and administrative systems, including the hardware and
software that support the Company's systems. The Company's assessment plan
consists of: quality assurance testing of its internally developed proprietary
software; contacting third-party vendors and licensors of material hardware,
software and services that are both directly and indirectly related to the
delivery of the Company's services to its users; contacting vendors of
third-party systems; assessing repair and replacement requirements; implementing
repair or replacement; and creating contingency plans in the event of Year 2000
failures.
The Company's Year 2000 task force has conducted an inventory of and
developed testing procedures for all software and other systems that it believes
might be affected by Year 2000 issues. Since third parties developed and
currently support many of the systems that the Company uses, a significant part
of this effort will be to ensure that these third-party systems are Year 2000
compliant. The Company plans to confirm this compliance though a combination of
the representation by these third parties of their products' Year 2000
compliance, as well as specific testing of these systems. The Company plans to
complete this process prior to the end of the third quarter of 1999. Until such
testing is completed and such vendors and providers are contacted, the Company
will not be able to completely evaluate whether its systems will need to be
revised or replaced.
COSTS
To date, the Company has spent approximately $50,000 on Year 2000
compliance issues but expects to incur an additional $100,000 to $200,000 in
connection with identifying, evaluating and addressing Year 2000 compliance
issues. Most of the Company's expenses have related to, and are expected to
continue to relate to, the operating costs associated with time spent by
employees in the evaluation process and Year 2000 compliance matters generally.
Such expenses, if higher than anticipated, could have a material adverse effect
on the Company's business, results of operations and financial condition.
RISKS
The Company is not currently aware of any Year 2000 compliance problems
relating to its systems that would have a material adverse effect on the
Company's business, results of operations and financial condition, without
taking into account the Company's efforts to avoid or fix such problems. There
can be no assurance that the Company will not discover Year 2000 compliance
problems in its systems that will require substantial revision. In addition,
there can be no assurance that third-party software, hardware or services
incorporated into the Company's material systems will not need to be revised or
replaced, all of which could be time-consuming and expensive. The failure of the
Company to fix or replace its internally developed proprietary software or
third-party software, hardware or services on a timely basis could result in
lost revenues, increased operating costs, the loss of customers and other
business interruptions, any of which could have a material adverse effect on the
Company's business, results of operations and financial condition. Moreover, the
failure to adequately address Year 2000 compliance issues in its internally
developed proprietary software could result in claims of mismanagement,
misrepresentation, or breach of contract and related litigation, which could be
costly and time-consuming to defend.
The Company is heavily dependent on a significant number of third-party
vendors to provide both network services and equipment. A significant Year
2000-related disruption of the network, services or equipment that third-party
vendors provide to the Company could cause the Company's registered members and
visitors to consider seeking alternate providers or cause an unmanageable burden
on its technical support, which in turn could materially and adversely affect
the Company's business, financial condition and results of operations.
16
<PAGE> 19
In addition, there can be no assurance that governmental agencies,
utility companies, Internet access companies, third-party service providers and
others outside of the Company's control will be Year 2000 compliant. The failure
by such entities to be Year 2000 compliant could result in a systemic failure
beyond the control of the Company, such as a prolonged Internet,
telecommunications or electrical failure, which could also prevent the Company
from delivering its services to its customers, decrease the use of the Internet
or prevent users from accessing its Web site which could have a material adverse
effect on the Company's business, results of operations and financial condition.
CONTINGENCY PLAN
As discussed above, the Company is engaged in an ongoing Year 2000
assessment and has not yet developed any contingency plans. The results of the
Company's Year 2000 simulation testing and the responses received from
third-party vendors and service providers will be taken into account in
determining the nature and extent of any contingency plans.
SEASONALITY OF BUSINESS AND QUARTERLY RESULTS
The Company believes that advertising sales in traditional media are
generally lower in the first and third calendar quarters of each year than in
respective preceding quarters and that advertising expenditures fluctuate
significantly with economic cycles. Depending on the extent to which the
Internet is accepted as an advertising medium, seasonality and cyclicality in
the level of internet advertising expenditures could become more pronounced. The
forgoing factor could have a material adverse effect on the Company's business,
results of operations and financial condition.
RISKS THAT MAY AFFECT RESULTS
The Company has a limiting operating history that makes an evaluation
of our business difficult. We have a history of losses, and we anticipate that,
at least in the short term our operating expenses will grow faster than our
revenues, and therefore we expect increased losses. In addition to these risks,
the Company's quarterly operating results may fluctuate significantly in the
future as a result of a variety of factors, many of which are outside the
Company's control. Factors that may adversely affect the Company's quarterly
operating results include the level of use of the Internet, demand for Internet
advertising, seasonal trends in both Internet use and advertising placements,
the addition or loss of advertisers, advertising budgeting cycles of individual
advertisers, the level of traffic on the Company's Internet sites, the amount
and timing of capital expenditures and other costs relating to the expansion of
the Company's Internet operations, the introduction of new sites and services by
the Company or its competitors, price competition or pricing changes in the
industry, technical difficulties or system downtime, general economic conditions
and economic conditions specific to the Internet and Internet media. In
addition, the popularity of the Company's websites may be affected by changes in
the digital music industry, including limitations on the availability or cost of
music content, failure of new technologies for distribution and increased
competition from traditional music companies entering the digital music arena.
Further, the size and demographic characteristics of the Company's audience may
be adversely affected by the popularity of competing websites.
Due to all of the foregoing factors, our quarterly results may
fluctuate, and the Company's operating results may fall below the expectations
of the Company, securities analysts or investors in some future quarter. In such
event, the trading price of the Common Stock would likely be adversely affected.
17
<PAGE> 20
ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate sensitivity: We currently maintain a capital lease line of
credit which bears interest at the bank's prime rate, and can therefore
fluctuate with changes in the prime rate. In addition, the principal value of
our short term investments, which are all invested in highly liquid, highly
rated investment grade securities predominantly with maturities of one year or
less, can fluctuate with changes in the interest rate environment.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
"Not applicable."
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,010,000 shares
of Common Stock in the Company's initial public offering (Registration Statement
No. 333-72433 and No. 333-76871), effective April 22, 1999, including the
underwriter's exercised of their over-allotment on May 18, 1999, were
approximately $81,000,000 after deducting underwriting discounts and commissions
and other offering expenses. From the date of receipt through June 30, 1999,
approximately $2.5 million of the net proceeds were used for promoting the
Company's brand, expanding the Company's sales and marketing, and for other
working capital purposes with the remainder of the proceeds invested in
short-term, interest-bearing, investment-grade securities. None of the net
proceeds of the offering were paid by the Company, directly or indirectly, to
any director, officer or general partner of the Company or any of their
associates, or to any persons owning ten percent or more of any class of the
Company's equity securities, or any affiliates of the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
"Not applicable."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
"Not applicable."
ITEM 5. OTHER INFORMATION
"Not applicable."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) EXHIBITS:
(27) Financial Data Schedule
(b) Reports on Form 8-K
No reports were filed on form 8-K during the quarter for which this
report is filed.
18
<PAGE> 21
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.
Dated August 11, 1999
----------------
LAUNCH MEDIA, INC.
(Registrant)
/s/ JEFFREY M. MICKEAL
-----------------------------------------
Jeffrey M. Mickeal
Chief Financial Officer and Secretary
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 1,079
<SECURITIES> 79,654
<RECEIVABLES> 2,551
<ALLOWANCES> (242)
<INVENTORY> 307
<CURRENT-ASSETS> 85,598
<PP&E> 4,460
<DEPRECIATION> (1,128)
<TOTAL-ASSETS> 111,757
<CURRENT-LIABILITIES> 9,039
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 142,837
<TOTAL-LIABILITY-AND-EQUITY> 111,757
<SALES> 0
<TOTAL-REVENUES> 3,482
<CGS> 0
<TOTAL-COSTS> 12,325
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 417
<INCOME-PRETAX> (8,578)
<INCOME-TAX> 2
<INCOME-CONTINUING> (8,580)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,580)
<EPS-BASIC> (0.87)
<EPS-DILUTED> (0.87)
</TABLE>
