LAUNCH MEDIA INC, 10-Q, 2000-11-14

LAUNCH MEDIA INC
10-Q, 2000-11-14
COMMUNICATIONS SERVICES, NEC

Previous: SEQUENOM INC, 10-Q, EX-27.1, 2000-11-14

Next: LAUNCH MEDIA INC, 10-Q, EX-27, 2000-11-14

<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 SEPTEMBER 30, 2000

[ ] 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 90404
(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, 14,412,140 SHARES OUTSTANDING
AS OF NOVEMBER 8, 2000.

================================================================================

<PAGE> 2

LAUNCH MEDIA, INC. AND SUBSIDIARIES
TABLE OF CONTENTS

PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1999
and September 30, 2000 (unaudited) 3
Consolidated Statements of Operations and Comprehensive
Loss for the Three and Nine Months Ended
September 30, 1999 and 2000 (unaudited) 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and 2000 (unaudited) 5
Notes to 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 26

PART II. OTHER INFORMATION

Item 1. Legal Proceedings 26
Item 2. Changes in Securities 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8K 26
Signatures 26

Exhibit 27 Financial Data Schedule 27

</TABLE>

--------------------------------------------------------------------------------
Page 2

<PAGE> 3

LAUNCH MEDIA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)

DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -----------
(UNAUDITED)
ASSETS:
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................. $ 878 $ 2,318
Short-term investments ..................................... 55,007 27,151
Securities available for sale .............................. 1,684 206
Accounts receivable ........................................ 4,027 7,047
Inventory .................................................. 273 122
Prepaid and other current assets ........................... 2,293 1,735
--------- ---------
Total current assets ................................... 64,162 38,579

Property and equipment, net ....................................... 7,404 15,366
Intangible and other assets ....................................... 22,652 27,986
--------- ---------
Total assets ........................................... $ 94,218 $ 81,931
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable ........................................... $ 2,767 $ 5,859
Accrued expenses ........................................... 2,357 6,653
Deferred revenue ........................................... 1,197 758
Notes payable, current portion ............................. 60 707
Capital lease obligation, current portion .................. 796 1,104
--------- ---------
Total current liabilities .............................. 7,177 15,081

Notes payable, net of current portion ............................. 160 2,086
Capital lease obligation, net of current portion .................. 839 1,086
--------- ---------
Total liabilities ...................................... 8,176 18,253

Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value, shares authorized
75,000; shares issued and outstanding,
12,850 (1999) and 14,350 (2000) ........................ 13 14
Additional paid-in capital ................................. 151,221 167,076
Other comprehensive income (loss) .......................... 684 (520)
Unearned compensation ...................................... (765) (596)
Accumulated deficit ........................................ (65,111) (102,296)
--------- ---------
Total stockholders' equity ............................. 86,042 63,678
--------- ---------
Total liabilities and stockholders' equity ............. $ 94,218 $ 81,931
========= =========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

--------------------------------------------------------------------------------
Page 3

<PAGE> 4

LAUNCH MEDIA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS

(in thousands, except per share data)

FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------- ----------------------------
1999 2000 1999 2000
------------- ---------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues:
Advertising and transaction fees .............. $ 2,545 $ 6,169 $ 5,107 $ 14,938
Content licensing ............................. 2,028 2,070 3,378 6,456
Subscription and other ........................ 704 313 1,522 1,412
-------- -------- -------- --------
5,277 8,552 10,007 22,806
Operating expenses:
Cost of revenue ............................... 965 1,511 2,442 3,958
Sales and marketing ........................... 6,904 8,044 15,453 23,504
Content and product development ............... 3,759 5,314 7,711 14,691
General and administrative .................... 1,472 2,695 3,089 7,277
Depreciation and amortization ................. 2,356 4,497 5,085 12,665
-------- -------- -------- --------
Loss from operations .......................... (10,179) (13,509) (23,773) (39,289)
Interest income and other, net ..................... 892 459 1,177 2,110
-------- -------- -------- --------
Loss before provision for income taxes ........ (9,287) (13,050) (22,596) (37,179)
Provision for income taxes ......................... -- -- 12 6
-------- -------- -------- --------
Net loss ...................................... (9,287) (13,050) (22,608) (37,185)
Accretion of mandatory redeemable convertible
Preferred stock ............................... -- -- (765) --
-------- -------- -------- --------
Net loss attributable to common
stockholders .................................. $ (9,287) $(13,050) $(23,373) $(37,185)
======== ======== ======== ========

Basic and diluted net loss
per common share ................................. $ (0.73) $ (0.94) $ (2.92) $ (2.74)
======== ======== ======== ========

Weighted average shares outstanding
used in per share calculation ...................... 12,672 13,817 8,017 13,577
======== ======== ======== ========

Comprehensive loss:
Net loss ........................................... $ (9,287) $(13,050) $(23,373) $(37,185)

Other Comprehensive income:
Unrealized gain (loss) on
securities available for sale ................. 625 (324) 625 (1,204)
-------- -------- -------- --------
Comprehensive loss ................................. $ (8,662) $(13,374) $(22,748) $(38,389)
======== ======== ======== ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

--------------------------------------------------------------------------------
Page 4

<PAGE> 5

LAUNCH MEDIA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------------
1999 2000
----------- -----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities
Net ................................................................... $(22,608) $(37,185)
loss
Adjustments to reconcile net loss to net cash used in
Operating activities
Depreciation and amortization ...................................... 6,127 12,665
Non-cash charges for issuance of equity securities ................. 377 22
Loss on disposal of assets .........................................
Allowance for sales returns ........................................ (110)
Amortization of deferred compensation .............................. 346 169
Gain on sale of securities ......................................... (488)
Changes in operating assets liabilities
Accounts receivable ............................................ (2,547) (2,254)
Inventory ...................................................... (205) 151
Prepaid and other current assets ............................... (2,640) 543
Accounts payable ............................................... 1,937 2,401
Accrued expenses ............................................... 1,480 4,097
Deferred revenue ............................................... 2,378 (439)
-------- --------
Net cash used in operating activities ...................... (15,465) (20,318)
-------- --------
Cash flows from investing activities
Purchase of securities available for sale ............................. (1,000) (200)
Purchase of property and equipment .................................... (1,623) (9,195)
Purchase of securities ................................................ (79,654) (44,353)
Maturities of securities .............................................. 15,725 75,357
Increase in other assets .............................................. (65) 35
Proceeds from sale of securities ...................................... 968
Proceeds from sale of property and equipment .......................... 12
Acquisition of businesses ............................................. (905) (3,155)
-------- --------
Net cash (used in) provided by investing
activities ................................................. (67,522) 19,469
-------- --------
Cash flows from financing activities
Payments under capital lease obligations .............................. (247) (672)
Payments under notes payable .......................................... (20) (297)
Proceeds from capital lease obligations ............................... 515
Proceeds from notes payable ........................................... 1,500 2,998
Purchase of treasury stock ............................................ (834)
Proceeds from issuance of common stock ................................ 80,816
Proceeds from exercise of stock options ............................... 202 209
Proceeds from employee stock purchase plan ............................ 370
-------- --------
Net cash provided by financing activities .................. 82,251 2,289
-------- --------
Increase (decrease) in cash and equivalents .................... (736) 1,440
Cash and cash equivalents, beginning of
period ......................................................... 1,735 878
-------- --------
Cash and cash equivalents, end of
period ......................................................... $ 999 $ 2,318
======== ========
Supplemental disclosure of cash paid during the period for:
Interest ....................................................... $ 81 $ 222
Income taxes ................................................... $ 6 $ 6

Supplemental disclosure of non-cash transactions:
Equipment acquired under capital leases ........................ $ 683 $ 544
Issuance of common stock for acquisitions ...................... $ 24,131 $ 16,112
Issuance of common stock in conversion of notes
payable ........................................................ $ 1,500
Treasury stock issued to employees relating to the
employee stock purchase plan ................................... $ 834
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

--------------------------------------------------------------------------------
Page 5

<PAGE> 6

LAUNCH MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

Launch Media, Inc. was incorporated in Delaware in February 1994 and is a
digital media company dedicated to creating the premier Internet music site,
launch.com, by providing music fans with the broadest array of music and
music-related editorial content. Launch Media, Inc. and its subsidiaries are
collectively referred to as the "Company". The Company operates in one
reportable industry segment. Leveraging the inherent advantages of digital
media, the Company provides visitors with a wide selection of streaming audio,
one of the Web's largest collection of music videos, exclusive artist features
and music news covering substantially all genres of music. The music content is
delivered on the Internet at www.launch.com and on Launch on CD-ROM. Both
launch.com and Launch on CD-ROM are advertiser supported and include original
content that takes advantage of the personal computer's interactive multimedia
technology.

On April 23, 1999 the Company 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 option 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 approximately $80.9 million.

2. 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.

UNAUDITED INTERIM FINANCIAL INFORMATION

The unaudited interim consolidated financial statements of the Company for
the three and nine months ended September 30, 1999 and 2000, 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 September 30, 2000, and the results of its operations and its
cash flows for the nine months ended September 30, 1999 and 2000. The results
for the three and nine months ended September 30, 2000 are not necessarily
indicative of the expected results for the full fiscal year or any future
period.

BASIS OF PRESENTATION

These financial statements should be read in conjunction with the
consolidated financial statements and related footnotes included in the
Company's Annual Report on Form 10-K, filed with the Securities and Exchange
Commission ("SEC").

--------------------------------------------------------------------------------
Page 6

<PAGE> 7

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

The Company derives its revenues primarily from the sale of advertising,
content licensing, transaction fees and annual subscriptions relating to Launch
on CD-ROM. Advertisement revenue includes the sale of banner and sponsorship
advertisements as well as advertisements on Launch on CD ROM. To date, the
duration of the Company's advertising commitments has ranged from one week to
two years. Sponsorship advertising contracts have longer terms (ranging from
three months to two years) than standard banner advertising contracts and also
involve more integration with Launch media properties, such as the placement of
buttons that provide users with direct links to the advertiser's Web site or
off-line concert series. Advertising revenues on both banner and sponsorship
contracts are recognized as "impressions", or times that an advertisement
appears in pages viewed by users of the Company's online properties, are
delivered. Furthermore, advertising revenue is recognized provided that no
significant Company obligations remain at the end of a period and collection of
the resulting receivable is probable. Company obligations typically include
guarantees of minimum number of impressions; to the extent minimum guaranteed
impressions are not met, the Company defers recognition of the corresponding
revenues until the remaining guaranteed impression levels are achieved. Revenues
from advertisements for Launch on CD-ROM are recognized upon the release date of
the issue in which the advertisement appears.

Content licensing revenue includes revenue resulting from Launch's
business-to-business content licensing. Launch obtains on-air radio advertising
in exchange for music news content. Launch sells this inventory to advertisers
for cash and recognizes revenue when the radio stations broadcast the
advertisement. In addition, revenue from syndication of Launch content is
recognized ratably over the contract term, which is typically one year.

Advance payments for Launch on CD-ROM subscriptions are deferred and
recognized over the term of the related subscription, typically 12 months.
Advance payments for sponsorships are deferred and recognized over the term of
the sponsorship.

Advertising revenues also include barter revenues, which represent an
exchange by Launch of advertising space on the Company's media properties for
advertising space on other 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
Company's 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
Company's media properties. Revenues and expenses recognized from barter
transactions were approximately $320,000 and $1,014,000 for the three months
ended September 30, 1999 and 2000, respectively, or 12.6% and 16.4% of
advertising and transaction fees, respectively, and were approximately $798,000
and $1,847,000 for the nine months ended September 30 1999 and 2000,
respectively, or 15.6% and 12.4% of advertising, respectively.

RECLASSIFICATIONS

Certain reclassifications have been made to the 1999 amounts to conform to
the 2000 presentation. These reclassifications did not change the previously
reported net loss or the total assets of the Company.

--------------------------------------------------------------------------------
Page 7

<PAGE> 8

RECENT ACCOUNTING PRONOUNCEMENTS

On September 26, 2000, the SEC staff issued SAB 101B to provide registrants
with additional time to implement guidance contained in SAB 101B, Revenue
Recognition in Financial Statements. SAB 101B delays the implementation date of
SAB 101 until no later than the fourth fiscal quarter of fiscal years beginning
after December 15, 1999. Management does not believe that the adoption of SAB
101B will have a significant impact on the Company's consolidated financial
position, results of operations or cash flows.

In September 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement, which is effective for the year beginning January 1, 2001,
establishes accounting and reporting standards for derivative instruments and
for hedging activities. SFAS No. 133 requires a company to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Management does not
believe that the adoption of SFAS No. 133 will have a significant impact on the
Company's consolidated financial position, results of operations or cash flows.

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 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 nine months ended September
30, 2000, does not include the effect of options and warrants to purchase
2,151,112 and 946,496 shares of common stock, respectively.

3. RELATED PARTY TRANSACTIONS

In April 1999, the Company and another corporate shareholder entered into a
sponsorship and content license agreement and a music video license agreement
effective upon the closing of the IPO. Advertising revenues for the three and
nine months ended September 30, 2000 were approximately $239,000 and $900,000,
respectively. This revenue is included in advertising and transaction fees in
the consolidated statement of operations.

4. INCOME TAXES

The Company's income tax provision consists of minimum state franchise
taxes.

--------------------------------------------------------------------------------
Page 8

<PAGE> 9

5. CAPITAL LEASE LINE OF CREDIT AND FINANCING FACILITY

The Company has a revolving capital lease line of credit for $2.0 million.
At September 30, 2000, $1.9 million was outstanding under this line of credit.
This facility bears interest at the bank's prime rate (9.5% at September 30,
2000). The leased assets collateralize any borrowings under this line of credit.

The Company has an additional line of credit for $3.0 million to finance
capital expenditures. The line of credit accrues interest at 15% per annum and
requires monthly interest and principal payments. At September 30, 2000, $2.8
million was outstanding under this line. The acquired assets collateralize any
borrowings under this facility.

6. BUSINESS ACQUISITION

On August 31, 2000, the Company purchased the entire membership interest in
C.C.R.L., LLC d.b.a. The Warped Tour. The Warped Tour is a popular summer
concert series where musicians, athletes and fans interact and participate in
day-long events. The acquisition was accounted for under the purchase method of
accounting and accordingly, the purchase price has been allocated to assets
acquired and liabilities assumed based on the estimated values on the
acquisition date.

The purchase price of approximately $7.8 million was comprised of 788,474
shares of the Company's common stock with an estimated fair value of $5.5
million, cash payments of $2.0 million and transaction costs of approximately
$250,000. The excess purchase price over net tangible assets acquired and
liabilities assumed is estimated to be $7.5 million and is being amortized over
an estimated useful life of 5 years. The terms of acquisition also include
contingent future purchase payments to the sellers in either stock or cash,
aggregating an amount not to exceed $23.5 million, based on annual and
cumulative performance targets set for the operations of the Warped Tour over
the next five years.

7. PRO FORMA RESULTS

Pro forma results of operations for the nine months ended September 30,
1999 and 2000, presented by combining the results of operations of the Company
and The Warped Tour are as follows (in thousands, except per share data):

FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
1999 2000
---- ----
(UNAUDITED)
<S> <C> <C>
Net revenues.................................... $ 15,760 $ 28,798
============ ===========
Net loss............................ $ (23,908) $ (37,574)
============ ===========
Basic and diluted net loss per share............ $ (2.72) $ (2.63)
============ ===========

</TABLE>

--------------------------------------------------------------------------------
Page 9

<PAGE> 10

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, web casts 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, and (iv) 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.

OVERVIEW

Launch Media, Inc. was incorporated in Delaware in February 1994 and is a
digital media company dedicated to creating the premier Internet music site,
www.launch.com, by providing music fans the broadest array of music and
music-related content. Launch Media, Inc. and its wholly owned subsidiaries are
collectively referred to herein as the "Company." The Company operates in one
reportable industry segment. Leveraging the inherent advantages of digital
media, the Company offers a compelling music discovery experience from new and
established artists for consumers and provides a valuable marketing platform for
record labels, artists, advertisers and merchants. The music content is
delivered on the Internet at www.launch.com and on Launch on CD-ROM. Both
launch.com and Launch on CD-ROM are advertiser supported and include original
content that takes advantage of the personal computer's interactive multimedia
technology.

As of September 30, 2000, launch.com had approximately 5.0 million
registered members, and Launch on CD-ROM had approximately 265,000 subscribers.
DoubleClick, Inc., our third party ad server, reported that in the month of
September of 2000 there were approximately 9.9 million unique visitors to
launch.com.

Launch has incurred significant net losses and negative cash flows from
operations since its inception, and as of September 30, 2000, had an accumulated
deficit of approximately $102.3 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 at least the next year.

To date, the Company has derived its revenues primarily from the sale of
advertising, content licensing, transaction fees and annual subscriptions
relating to Launch on CD-ROM. Advertisement revenue includes the sale of banner
and sponsorship advertisements as well as advertisements on Launch on CD ROM. To
date, the duration of the Company's advertising commitments has ranged from one
week to two years. Sponsorship advertising contracts have longer terms (ranging
from three months to two years) than standard banner advertising contracts and
also involve more integration with Launch media properties, such as the
placement of buttons that provide users with direct links to the advertiser's
Web site or off-line concert series. Advertising revenues on both banner and
sponsorship contracts are recognized as "impressions", or times that an
advertisement appears in pages viewed by users of the Company's online
properties, are delivered. Furthermore, advertising revenue is recognized
provided that no significant Company obligations remain at the end of a

--------------------------------------------------------------------------------
Page 10

<PAGE> 11

period and collection of the resulting receivable is probable. Company
obligations typically include guarantees of minimum number of impressions; to
the extent minimum guaranteed impressions are not met, the Company defers
recognition of the corresponding revenues until the remaining guaranteed
impression levels are achieved. 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 the majority of Launch's
business-to-business content licensing, 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.

The Company derives 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 are recognized as revenue ratably over the term
of the subscription.

We have entered into various license arrangements, strategic alliances and
business acquisitions in order to increase our music-specific content, generate
additional online traffic, increase subscriptions and memberships and establish
additional sources of revenue. Primarily our business acquisitions have resulted
in a non-cash amortization charges that will affect our operating results over
the next several fiscal periods.

RESULTS OF OPERATIONS

Net Revenues:

Net revenues increased 62.1% from $5.3 million for the three months ended
September 30, 1999 to $8.6 million for the three months ended September 30,
2000. Net revenues increased 127.9% from $10.0 million for the nine months ended
September 30, 1999 to $22.8 million for the nine months ended September 30,
2000. The increase in net revenues was attributable primarily to an increase in
advertising and transaction fees and content licensing revenues.

Advertising And Transaction Fees. Advertising and transaction fees
increased 142.6% from $2.5 million or 48.2% of net revenues, for the three
months ended September 30, 1999 to $6.2 million, or 72.1% of net revenues, for
the three months ended September 30, 2000. Advertising and transaction fees
increased 192.5% from $5.1 million or 51.0% of net revenues for the nine months
ended September 30, 1999 to $14.9 million or 65.5% of net revenues for the nine
months ended September 30, 2000. Advertising revenues increased primarily as a
result of an increased number of new advertisers and sponsors on the Company's
media properties. During 1999 and the nine months ended September 30, 2000,
Launch continued to expand its advertising sales force, in particular focusing
its sales efforts on sponsorships or advertisements that covered all of Launch's
media properties. In addition, the inventory of impressions available on our web
site increased as registered and unique users on launch.com increased. Launch
expects advertising and transaction revenue will continue to represent a
significant portion of our net revenues for the foreseeable future. Included in
advertising revenues are revenues recognized from barter transactions of
$320,000, or 12.6% of advertising revenues, for the three months ended September
30, 1999 and $1,014,000 or 16.4% of advertising revenues, for the three months
of 2000. Revenues recognized from barter transactions were $798,000 or 15.6% of
advertising revenues for the nine months ended September 30, 1999 and $1,847,000
or 12.4% of advertising revenues for the nine months ended September 30, 2000.

--------------------------------------------------------------------------------
Pge 11

<PAGE> 12

Content Licensing. Content licensing revenues rose slightly from $2.0
million for the three months ended September 30,1999 to $2.1 million for the
three months ended September 30, 2000 and were 38.4% and 24.2% of net revenues
for the periods respectively. Content licensing revenues increased 91.1% from
$3.4 million or 33.8% of net revenues for the nine months ended September 30,
1999 to $6.5 million or 28.3% of net revenues for the nine months ended
September 30, 2000. Content licensing revenue is primarily generated by
providing news and information to radio stations in exchange for advertising
radio spots. These radio spots are sold through a third-party advertising agency
and recognized as revenue when the radio station broadcasts the advertisement.

Subscriptions and Other Revenues. Subscriptions and other revenues
decreased 55.5% from $704,000 or 13.3% of total net revenues for the three
months ended September 30, 1999 to $313,000, or 3.7% of total net revenues for
the three months ended September 30, 2000. Subscriptions and other revenues
decreased 7.2% from $1.5 million or 15.2% of net revenues for the nine months
ended September 30, 1999 to $1.4 million or 6.2% of net revenues for the nine
months ended September 30, 2000. In July 2000 we accelerated the phasing out of
our Launch on CD-ROM and are in the process of migrating the subscription base
to non-paid circulation. Therefore, subscription revenues will continue to
decrease as a percentage of total revenue going forward, and we anticipate that
they will reach immaterial levels by the end of the first quarter 2001.

Operating Expenses

Cost of Revenues. Cost of revenues consists primarily of Online Music Group
(OMG) inventory purchases, Launch on CD-ROM manufacturing and packaging costs
and related subscription distribution costs. Cost of revenues increased 56.6%
from $965,000, or 18.3% of net revenues, during the three months ended September
30, 1999 to $1.5 million, or 17.7% of net revenues, during the three months
ended September 30, 2000. Cost of revenues increased 62.1% from $2.4 million or
24.4% of net revenues for the nine months ended September 30, 1999 to $4.0
million or 17.4% of net revenues for the nine months ended September 30, 2000.
The increase in cost of revenues during the three and nine months ended
September 30, 2000 was primarily the result of increased purchases of banner
inventory relating to OMG. We also expect cost of revenue as a percentage of net
revenues 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, customer
acquisition costs, syndication selling and advertising sales force expenses.
Sales and marketing expenses increased 16.5% from $6.9 million, or 130.8% of net
revenues, during the three months ended September 30, 1999 to $8.0 million, or
94.1% of net revenues, during the three months ended September 30, 2000. Sales
and marketing expenses increased 52.1% from $15.5 million or 154.4% of net
revenues for the nine months ended September 30, 1999 to $23.5 million or 103.1%
of net revenues for the nine months ended September 30, 2000. 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 and the hiring of additional sales and
marketing personnel. We expect sales and marketing expenses to increase in
absolute dollars as we pursue marketing campaigns to increase our audience on
launch.com and hire additional sales personnel.

Content and Product Development Expenses. Content and product development
expenses consist primarily of editorial expenses, video production, art
production, hosting, bandwidth, software and content licenses, and Web
development costs. Content and product development expenses increased 41.4% from
$3.8 million, or 71.2% of net revenues, during the three months ended September
30, 1999 to $5.3 million, or 62.1% of net revenues, during the three months
ended September 30, 2000. Content and product development expenses increased
90.5% from $7.7 million or 77.1% of net revenues for the nine months ended
September 30, 1999 to $14.7 million or 64.4% of net revenues for the nine months
ended September 30, 2000. Content and product development expenses increased in
the three and nine months ended September 30, 2000 due to costs of further
developing and enhancing the launch.com Web site, including consulting costs,
software license costs and additions to personnel. We believe that significant
investments in product development are required to remain competitive.

--------------------------------------------------------------------------------
Pge 12

<PAGE> 13

Therefore, we expect that 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, investor relations, and accounting.
Also included are facilities costs and fees for professional services. General
and administrative expenses increased 83.1% from $1.5 million, or 27.8% of net
revenues, during the three months ended September 30, 1999 to $2.7 million, or
31.5% of net revenues, during the three months ended September 30, 2000. General
and administrative expenses increased 135.6% from $3.1 million or 30.9% of net
revenues for the nine months ended September 30, 1999 to $7.3 million or 31.9%
of net revenues for the nine months ended September 30, 2000. The absolute
dollar increase in general and administrative expenses in the three and nine
months ending September 30, 2000 was primarily attributable to increases in
facilities and related general and administrative costs. In addition, during the
three months ended September 30, 2000, we incurred a one-time office relocation
cost and increased our allowance for doubtful accounts due to a customer
experiencing financial difficulties during this period. Launch believes our
infrastructure to be primarily in place and general and administrative expenses
are anticipated to decline as a percentage of net revenues.

Depreciation and Amortization. Depreciation and amortization was $4.5
million during the three months ended September 30, 2000 and primarily consisted
of $3.5 million of amortization of excess purchase price over tangible net
assets acquired arising from the Company's acquisitions and $996,000 of
depreciation. Depreciation and amortization was $12.7 million for the nine
months ended September 30, 2000.

Interest Income And Other, Net. Interest income and other, net, consists of
interest earned on cash and cash equivalents and short-term investments, offset
by interest expense on borrowings and net gains or losses from the sale of
securities held for sale. Net interest income and other decreased 48.5% from
$892,00 during the three months ended September 30, 1999 to $459,000 during the
three months ended September 30, 2000. This decrease is due primarily to a
decrease in the amount of short-term investments and increase in outstanding
capital lease obligations and notes payable. Net interest income and other
increased 79.3% from $1.2 million during the nine months ended September 30,
1999 to $2.1 million during the nine months ended September 30, 2000. This
increase is due to a larger average balance of short-term investments in the
nine months ended September 30, 2000 than in the nine months ended September 30,
1999.

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 September 30,
2000, Launch had approximately $29.5 million in cash, cash equivalents, and
short-term investments.

Net cash used in operating activities increased to $20.3 million for the
nine months ended September 30, 2000 from $15.5 million for the nine months
ended September 30, 1999. The increase in net cash used in operating activities
is substantially attributable to increased net loss, excluding non-cash charges.

Net cash provided by investing activities increased to $19.5 million for
the nine months ended September 30, 2000, as compared to net cash used by
investing activities of $67.5 million for the nine months ended September 30,
1999. The increase in cash provided by investing activities is due to increased
maturities and decreased purchases of short term investments during the nine
months ended September 30, 2000 than in the nine months ended September 30, 1999
as cash has been used to fund operating activities and to a lesser extent, the
purchase of property and equipment.

--------------------------------------------------------------------------------
Pge 13

<PAGE> 14

Net cash provided by financing activities was $2.3 for the nine months
ended September 30, 2000, compared to $82.3 million for the nine months ended
September 30, 1999. The net cash provided by financing activities during the
nine months ended September 30, 1999 was attributable to the Company's IPO.

We have a revolving capital lease line of credit for $2.0 million. At
September 30, 2000, $1.9 million was outstanding under this line of credit. This
facility bears interest at the bank's prime rate (9.5% at September 30, 2000).
The leased assets collateralize any borrowings under this line of credit. We
also have an additional line of credit for $3.0 million to finance capital
expenditures. The line of credit accrues interest at 15% per annum and requires
monthly interest and principal payments. At September 30, 2000, $2.8 million was
outstanding under this line. The acquired assets collateralize any borrowings
under this facility.

We have experienced a substantial increase in our capital expenditures and
operating lease arrangements since the beginning of 1999, which is consistent
with the growth in our operations and staffing, and anticipate 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 customer acquisition programs. Launch currently
expects that its current cash and cash equivalents, together with its existing
revolving lines 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.

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 cyclically in the
level of Internet advertising expenditures could become more pronounced. In
addition, the Company anticipates experiencing additional seasonality as a
result of The Warped Tour operations, which are primarily during the third
calendar quarter of the year. The forgoing factors could have a material adverse
effect on the Company's business, results of operations and financial condition.

--------------------------------------------------------------------------------
Pge 14

<PAGE> 15

RISKS THAT MAY AFFECT RESULTS

WE HAVE A HISTORY OF LOSSES AND BECAUSE WE ANTICIPATE THAT OUR OPERATING
EXPENSES WILL BE HIGHER THAN OUR REVENUES, AT LEAST IN THE SHORT TERM, WE EXPECT
CONTINUED LOSSES

We incurred net losses of $6.7 million in 1997, $13.4 million in 1998 and
$37.5 million in 1999 and $37.2 million for the nine months ended September 30,
2000. As of September 30, 2000, our accumulated deficit was $102.3 million. We
have not achieved profitability and expect to incur operating losses at least
through 2001. Although we have implemented plans designed to generate positive
cash flow for the quarter ended December 31, 2001, we cannot assure you that we
will achieve our objective. If we are not successful and if our operating losses
increase above current levels, then we may be required to materially alter or
curtail our operating plans or seek additional financing, which may not be
available on reasonable terms, or at all. We will need to generate significant
revenues to achieve and maintain a cash flow positive position, and we cannot
assure you that we will be able to do so. Even if we do achieve a cash flow
positive position, we cannot assure you that we can sustain or increase cash
flow on a quarterly or an annual basis in the future. If our revenues grow more
slowly than we anticipate or if our operating expenses exceed our expectations,
our financial performance will likely be adversely affected.

OUR QUARTERLY OPERATING RESULTS ARE VOLATILE AND MAY CAUSE OUR STOCK PRICE TO
FLUCTUATE

Our future revenues and operating results are likely to vary significantly
from quarter to quarter due to a number of factors, many of which are outside of
our control. Accordingly, you should not rely on quarter-to-quarter comparisons
of our results of operations as an indication of future performance. It is
possible that in some future periods our operating results will be below the
expectations of public market analysts and investors. In this event, the price
of our common stock will likely decline. Factors that may cause our revenues and
operating results to fluctuate include the following:

- our ability to attract and retain advertisers;

- our ability to increase the registered membership of launch.com and
the new web sites, services or products introduced by us or by our
competitors;

- the timing and uncertainty of sales cycles;

- mix of online advertisements sold;

- seasonal declines in advertising sales, which typically occur in the
first and third calendar quarters;

- the seasonal nature of The Warped Tour operations which are primarily
during the third calendar quarter of the year;

- the level of Web and online services usage;

- our ability to successfully integrate operations and technologies from
acquisitions or other business combinations;

- technical difficulties or system downtime affecting the Internet
generally or the operation of launch.com; and

- general economic conditions, as well as economic conditions specific
to digital media and the music industry.

To attract and retain a larger audience, we plan to increase our
expenditures for sales and marketing, content development, and technology
and infrastructure development. Many of these expenditures are planned or
committed in advance in anticipation of future revenues. Because
advertising orders are typically short term and subject to cancellation
without penalty until shortly before the

--------------------------------------------------------------------------------
Page 15

<PAGE> 16

advertisement runs, our quarterly operating results are difficult to
forecast. If our revenues in a particular quarter are lower than we
anticipate, we may be unable to reduce spending in that quarter. As a
result, any shortfall in revenues would likely adversely affect our
quarterly operating results.

BECAUSE WE DEPEND PRINCIPALLY UPON ADVERTISING REVENUES, IF WE DO NOT INCREASE
ADVERTISING SALES, OUR BUSINESS MAY NOT GROW OR SURVIVE

Our revenues for the foreseeable future will depend substantially on
sales of advertising. In 1999 advertising sales accounted for 53.9% of our net
revenues, and for the three months ended September 30, 2000 they accounted for
65.5%. If we do not increase advertising revenues, our business may not grow or
survive. Increasing our advertising revenues depends upon many factors,
including our ability to do the following:

- conduct successful selling and marketing efforts aimed at advertisers;

- increase the size of the launch.com audience;

- increase the amount of revenues per advertisement;

- aggregate our target demographic group of 12 to 34 year old active
music consumers, and, in particular, the Generation Y segment of this
group;

- increase awareness of the Launch brand among advertisers;

- target advertisements to appropriate segments of our audience;

- make Launch available through evolving broadband distribution
channels; and

- accurately measure the size and demographic characteristics of our
audience.

Our failure to achieve one or more of these objectives could adversely
affect our business.

Advertising revenues are difficult to forecast, especially because the
market for advertising on digital media has emerged relatively recently. We have
historically entered into barter transactions with advertisers that we do not
believe would pay cash for such advertisements. In each quarterly period, we
derive a significant portion of our revenues from sales of advertising to a
limited number of customers. Accordingly, the loss of a key advertising
relationship or the cancellation or deferral of even a limited number of orders
could adversely affect our quarterly performance.

IF WE FAIL TO INCREASE THE SIZE OF OUR AUDIENCE, WE MAY NOT BE ABLE TO ATTRACT
ADVERTISERS OR STRATEGIC PARTNERS

Increasing the size of our audience is critical to selling advertising and
to increasing our revenues. If we cannot increase the size of our audience, then
we may be unable to attract new or retain existing advertisers. In addition, we
may be at a relative disadvantage to other digital media companies with larger
audiences that may be able to leverage their audiences to access more
advertisers and significant strategic alliances. To attract and retain our
audience, we must do the following:

- continue to offer compelling music content;

- encourage our users to become part of our community;

- conduct effective marketing campaigns to acquire new members;

- develop new and maintain existing distribution relationships with
other Web sites;

--------------------------------------------------------------------------------
Page 16

<PAGE> 17

- update and enhance the features of launch.com;

- increase awareness of the Launch brand;

- make Launch available through broadband distribution channels as they
achieve widespread consumer acceptance; and

- offer targeted, relevant products and services.

Our failure to achieve one or more of these objectives could adversely
affect our business, and we cannot assure you that we will be successful in
these efforts.

A significant element of our strategy is to build a loyal community of
registered members on launch.com because we believe community features help
retain actively engaged users. The concept of developing such a community on the
Web is unproven, and if it is not successful, then it may be more difficult to
increase the size of our audience.

We also depend on establishing and maintaining distribution relationships
with high-traffic Web sites to increase our audience. There is intense
competition for placements on these sites, and we may not be able to enter into
such relationships on commercially reasonable terms or at all. Even if we enter
into distribution relationships with these Web sites, they themselves may not
attract significant numbers of users. Therefore, launch.com may not obtain
additional users from these relationships. Moreover, we have paid in the past,
and may pay in the future, significant fees to establish these relationships.

We also intend to increase our financial expenditures on marketing the
Launch brand because we believe brand awareness will be critical to increasing
our audience, especially because there are few barriers to entry for Internet
businesses. If we do not increase our revenues as a result of our branding and
other marketing efforts or if we otherwise fail to promote our brand
successfully, our business could be adversely affected.

SALES CYCLES VARY FOR ADVERTISING AND MAY CAUSE OUR OPERATING RESULTS TO
FLUCTUATE

Our dependence on advertising subjects us to additional risks because the
sales cycles for these sales vary significantly. The time between the date of
initial contact with a potential advertiser or sponsor and receipt of a purchase
order from the advertiser may range from as little as nine weeks to up to nine
months. During these sales cycles, we may expend substantial funds and
management resources but not obtain advertising revenues. Therefore, if these
sales are delayed or do not otherwise occur, our operating results for a
particular period may be adversely affected.

Advertising sales are subject to delays over which we have little or no
control, including the following:

- advertisers' budgetary constraints;

- internal acceptance reviews by advertisers and their agencies;

- the timing of completion of advertisements by advertisers; and

- the possibility of cancellation or delay of projects by advertisers or
sponsors.

WE MAY NEED ADDITIONAL FINANCING TO ACHIEVE OUR BUSINESS OBJECTIVES, AND SUCH
FINANCING MAY NOT BE AVAILABLE BECAUSE OF THE CONDITION OF OUR BUSINESS OR THE
UNCERTAIN NATURE OF THE FINANCIAL MARKETS

We currently anticipate that our available cash resources will be
sufficient to meet our anticipated working capital and capital expenditure
requirements for at least the 12 months following the date of this Report on
Form 10-Q.

--------------------------------------------------------------------------------
Page 17

<PAGE> 18

If we raise additional funds by issuing equity or convertible debt
securities, the percentage ownership of our then-current stockholders will be
reduced, and such securities may have rights, preferences or privileges senior
to those of such stockholders. We cannot assure you that additional financing
will be available on terms favorable to us, or at all. If adequate funds are not
available or are not available on acceptable terms, our ability to fund our
expansion, take advantage of unanticipated opportunities, develop or enhance
services or products or otherwise respond to competitive pressures would be
significantly limited. This limitation could adversely affect our business.

We may need to raise additional funds in order to do the following:

- fund more rapid expansion;

- develop new or enhance existing services or products;

- fund distribution relationships;

- respond to competitive pressures; or

- acquire complementary products, businesses or technologies.

See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" for a discussion of
our working capital and capital expenditures.

WE HAVE A LIMITED OPERATING HISTORY THAT MAKES AN EVALUATION OF OUR BUSINESS
DIFFICULT

We incorporated in February 1994 and published the first issue of Launch on
CD-ROM in May 1995. We first made launch.com available over the Internet in
October 1997. Because we have a limited operating history, you must consider the
risks and difficulties frequently encountered by early-stage companies such as
Launch in new and rapidly evolving markets, including the market for advertising
on the Internet and other digital media. Prior to 1999, Launch on CD-ROM had
accounted for the majority of Launch's audience. Accordingly, Launch had derived
its revenues principally from advertising sales against the Launch on CD-ROM
audience and, to a lesser extent, from subscriptions for Launch on CD-ROM.
Future growth in our business will depend substantially upon our ability to
increase the size of the launch.com audience, to increase advertising sales
against that audience and to meet the challenges described in the risk factors
below.

FAILURE TO CONTINUE TO DEVELOP COMPELLING CONTENT THAT ATTRACTS OUR TARGET
AUDIENCE COULD CAUSE OUR AUDIENCE SIZE TO DECREASE OR CHANGE THE DEMOGRAPHICS OF
OUR AUDIENCE

Our future success depends on our ability to continue to develop content
that is interesting and engaging to our target audience. If our audience
determines that our content does not reflect its tastes, then our audience size
could decrease or the demographic characteristics of our audience could change.
Either of these results would adversely affect our ability to attract
advertisers. Our ability to develop compelling content depends on several
factors, including the following:

- quality of our editorial staff;

- technical expertise of our production staff;

- access to recording artists; and

- access to content controlled by record labels, publishers and artists.

Further, consumer tastes change, particularly those of Generation Y, and we
maybe unable to react to those changes effectively or in a timely manner.

--------------------------------------------------------------------------------
Page 18

<PAGE> 19

LIMITATIONS ON THE AVAILABILITY OR INCREASES IN THE PRICE OF MUSIC CONTENT
DEVELOPED BY THIRD PARTIES COULD ADVERSELY AFFECT OUR BUSINESS

Because much of our content, including recording artist interviews, audio
and video performances and music, are provided to us by record labels and
artists at minimal or no charge, we depend on our good relations with record
labels and artists to offer compelling content. We cannot assure you that they
will continue to make their content available to us on reasonable terms or at
all. If record labels, music publishers or artists charge significant fees for
their content or discontinue their relationships with us, then our content
offering could be adversely affected.

A significant portion of the music content available on Launch is licensed
from publishers, record labels and artists. We frequently either do not have
written contracts or have short-term contracts with copyright owners, and,
accordingly, our access to copyrighted content depends upon the willingness of
such parties to continue to make their content available. Further, the parties
who license material to us may face increasing costs to develop or acquire that
material as a result of evolving laws regarding intellectual property, and these
licensors may pass any such additional costs on to us. If the fees for music
content increase substantially or if significant music content becomes
unavailable, our ability to offer music content could be materially limited. We
currently use certain content without first obtaining a license because we
believe that a license is not required under existing law. However, this area of
law remains uncertain and may not be resolved for a number of years. When this
area of law is resolved, we may be required to obtain licenses for such content.
Licenses may not be available on reasonable terms, if at all. Any limit on our
content offering could adversely affect our business.

WE NEED NEW DISTRIBUTION TECHNOLOGIES TO INCREASE ACCESSIBILITY OF OR OUR
CONTENT, AND FAILURE OF SUCH TECHNOLOGIES TO ACHIEVE CONSUMER ACCEPTANCE COULD
LIMIT OUR GROWTH

To experience the full extent of our high-quality audio and full-motion
video content, consumers must access such content either from a CD-ROM, DVD-ROM
or over a high-bandwidth connection, such as cable or digital subscriber line
modem or satellite data broadcast. If such broadband distribution networks do
not achieve widespread consumer acceptance, we may be unable to effectively
distribute our audio and video content in its most compelling format. We cannot
assure you that broadband distribution networks will ever achieve consumer
acceptance, and if they do not, our growth may be limited.

WE DEPEND ON A LIMITED NUMBER OF ADVERTISERS, AND THE LOSS OF A NUMBER OF THESE
ADVERTISERS COULD ADVERSELY AFFECT OUR OPERATING RESULTS

Historically, a limited number of advertisers have accounted for a
significant percentage of our revenues in each period. We anticipate that our
results of operations in any given period will continue to depend to a
significant extent upon revenues from a small number of advertisers. In
addition, particularly because few advertisers are contractually obligated to
purchase any advertising in the future, we anticipate that the mix of
advertisers in each fiscal period will continue to vary. In order to increase
our revenues, we will need to attract additional significant advertisers on an
ongoing basis. Our failure to sell a sufficient number of advertisements or to
engage a sufficient number of advertisers during a particular period could
adversely affect our results of operations.

WE MUST MAINTAIN AND ESTABLISH STRATEGIC ALLIANCES TO INCREASE OUR AUDIENCE AND
ENHANCE OUR BUSINESS

In an attempt to increase audience, build brand recognition and enhance
content, distribution and commerce opportunities, we have entered into strategic
alliances with various media and Internet-related companies such as Sony Music,
Inc., America Online, Inc., Microsoft Corporation and Intel Corporation. Our
failure to maintain or renew our existing strategic alliances or to establish
and capitalize on new strategic alliances could have an adverse affect on our
business. Our future success depends to a significant extent upon the success of
such alliances. Occasionally, we enter into agreements with strategic partners
that may prohibit us from entering into similar arrangements with competitors of
our strategic partners.

--------------------------------------------------------------------------------
Page 19

<PAGE> 20

Such exclusivity provisions may limit our ability to enter into favorable
arrangements with complementary businesses and thereby limit our growth. We
cannot assure you that we will achieve the strategic objectives of these
alliances, that any party to a strategic alliance agreement with Launch will
perform its obligations as agreed upon or that such agreements will be
specifically enforceable by Launch. In addition, some of our strategic alliances
are short term in nature and may be terminated by either party on short notice.

COMPETITION FROM TRADITIONAL AND ONLINE MEDIA AND OTHER COMPANIES FOCUSED ON
MUSIC COULD REDUCE OUR ADVERTISING SALES OR MARKET SHARE

Competition among media companies seeking to attract the active music
consumer is intense. Increased competition could result in advertising price
reduction, reduced margins or loss of market share, any of which could adversely
affect our business. Traditional media companies, such as television
broadcasters, magazine publishers and radio stations, are constantly refining
their content and strategies to increase their audiences and advertising
revenues. Further, the number of Web sites competing for the attention and
spending of members, users and advertisers has increased, and we expect it to
continue to increase, particularly because there are so few barriers to entry on
the Web. We compete for members, users and advertisers with the following types
of companies:

- publishers and distributors of traditional media, such as television,
radio and print, including MTV, Clear Channel, CMT, Rolling Stone and
Spin, and their Internet affiliates;

- online services or and Web sites targeted at music consumers, such as
mp3.com, Artistdirect, MTVi, emusic.com and musicmaker.com;

- Web retrieval and other Web "portal" companies, such as Excite@Home,
Inc., Infoseek Corporation, Lycos, Inc. and Yahoo, Inc.; and

- online music retailers, such as CDNow, Inc. and Amazon.com, Inc.

Because we compete for advertisers with traditional advertising media, our
business could be adversely affected if advertisers do not view digital media as
effective for advertising. Competition is likely to increase significantly as
new companies enter the market and current competitors expand their services.
Many of these potential competitors are likely to enjoy substantial competitive
advantages, including the following:

- larger audiences;

- larger technical, production and editorial staffs;

- greater name recognition;

- better access to content;

- more established Internet presence;

- larger advertiser bases; and

- substantially greater financial, marketing, technical and other
resources.

If we do not compete effectively or if we experience any pricing pressures,
reduced margins or loss of market share resulting from increased competition,
our business could be adversely affected.

THE LOSS OF OUR CHIEF EXECUTIVE OFFICER, OUR PRESIDENT OR OTHER KEY PERSONNEL
COULD ADVERSELY AFFECT OUR BUSINESS BECAUSE THESE OFFICERS ARE IMPORTANT TO OUR
CONTINUED GROWTH

Our future success depends to a significant extent on the continued
services of our senior management and other key personnel, and particularly
David B. Goldberg, Launch's chief executive officer, and Robert D. Roback,
Launch's

--------------------------------------------------------------------------------
Page 20

<PAGE> 21

president. The loss of either of these individuals or certain other key
employees would likely have an adverse effect on our business. We have an
employment agreement with only one of our executive officers, and we do not
anticipate that other executive officers or key personnel will enter into
employment agreements. We expect that we will need to hire additional personnel
in all areas during 2000. Competition for personnel throughout our industry is
intense. We may be unable to retain our current key employees or attract,
integrate or retain other highly qualified employees in the future. We have in
the past experienced, and we expect to continue to experience, difficulty in
hiring and retaining highly skilled employees with appropriate qualifications.
If we do not succeed in attracting new personnel or retaining and motivating our
current personnel, our business could be adversely affected.

GROWTH IN OUR OPERATIONS, PARTICULARLY OUR SALES, MARKETING, FINANCIAL AND
ADMINISTRATIVE ORGANIZATIONS, IS PLACING A STRAIN ON OUR RESOURCES, AND FAILURE
TO MANAGE GROWTH EFFECTIVELY COULD HARM OUR BUSINESS

We have experienced and are currently experiencing a period of significant
growth in our operations. This growth has placed, and our anticipated future
growth in our operations will continue to place, a significant strain on our
resources. As part of this growth, we will have to implement new operational
systems and procedures and controls to expand, train and manage our employee
base and to maintain close coordination among our technical, accounting,
finance, marketing, sales and production staffs. We will also need to continue
to attract, retain and integrate personnel in all aspects of our operations. To
the extent we acquire new businesses, we will also need to integrate new
operations, technologies and personnel. Failure to manage our growth effectively
could adversely affect our business.

ACCEPTANCE AND EFFECTIVENESS OF DIGITAL MEDIA FOR ADVERTISING ARE UNPROVEN,
WHICH MAY DISCOURAGE SOME ADVERTISERS FROM ADVERTISING ON LAUNCH

Our future is highly dependent on an increase in the use of the Internet
and other forms of digital media for advertising. If the Internet advertising
market fails to develop or develops more slowly than we expect, then our
business could be adversely affected. Moreover, the market for advertising on
other forms of digital media, such as broadband distribution, is even less
developed than Internet advertising, and if that market does not develop, then
our growth may be limited.

The Internet advertising market is new and rapidly evolving, and we cannot
yet gauge the effectiveness of advertising on the Internet as compared to
traditional media. As a result, demand for Internet advertising is uncertain.
Many advertisers have little or no experience using the Internet for advertising
purposes. The adoption of Internet advertising, particularly by companies that
have historically relied upon traditional media for advertising, requires the
acceptance of a new way of conducting business, exchanging information and
advertising products and services. Such customers may find advertising on the
Internet to be undesirable or less effective for promoting their products and
services relative to traditional advertising media.

Different pricing models are used to sell Internet advertising. It is
difficult to predict which, if any, will emerge as the industry standard. This
uncertainty makes it difficult to project our future advertising rates and
revenues. Any failure to adapt to pricing models that develop or respond to
competitive pressures could adversely affect our advertising revenues. Moreover,
"filter" software programs that limit or prevent advertising from being
delivered to an Internet user's computer are available. Widespread adoption of
this software could adversely affect the commercial viability of Internet
advertising.

TRACKING AND MEASUREMENT STANDARDS FOR ADVERTISING ARE EVOLVING AND CREATE
UNCERTAINTY ABOUT THE VIABILITY OF OUR BUSINESS MODEL

There are currently no standards for the measurement of the effectiveness
of advertising on the Internet and other digital media, and the industry may
need to develop standard measurements. The absence or insufficiency of these
standards could adversely impact our ability to attract and retain advertisers.
We cannot assure you that such standard measurements will develop. In addition,
currently available

--------------------------------------------------------------------------------
Page 21

<PAGE> 22

software programs that track Internet usage and other tracking methodologies are
rapidly evolving. We cannot assure you that the development of such software or
other methodologies will keep pace with our information needs, particularly to
support the growing needs of our internal business requirements and advertising
clients. For instance, DoubleClick, Inc., our third party ad server, reported
that there were 9.9 million unique visitors in September 2000 to Launch.com
properties. Our advertisers may rely on this data or other similar data to
determine whether to advertise on Launch, and adverse data from this or other
sources in any particular period may cause advertisers not to advertise on
Launch.

It is important to our advertisers that we accurately measure the
demographics of our user base and the delivery of advertisements on our Web
site. We depend on third parties to provide certain of these measurement
services. If they are unable to provide these services in the future, we would
need to perform them ourselves or obtain them from another provider, if
available. This could cause us to incur additional costs or cause interruptions
in our business during the time we are replacing these services. Companies may
choose to not advertise on Launch or may pay less for advertising if they do not
perceive our measurements or measurements made by third parties to be reliable.

WE MAY HAVE LIABILITY FOR NEGLIGENCE, DEFAMATION OR OTHER MATTERS FOR CONTENT
POSTED ON LAUNCH.COM OR TO CONSUMERS FOR PRODUCTS SOLD THROUGH LAUNCH.COM

Because users of our Web site may distribute our content to others, third
parties might sue us for defamation, negligence, copyright or trademark
infringement or other matters. These types of claims have been brought,
sometimes successfully, against online services in the past. Others could also
sue us for the content that is accessible from our Web sites through links to
other Web sites or through content and materials that may be posted by
launch.com members. Such claims might include, among others, that by directly or
indirectly hosting the personal Web sites of third parties, we are liable for
copyright or trademark infringement or other wrongful actions by such third
parties through such Web sites. It is also possible that if any third-party
content information provided on launch.com contains errors, third parties could
make claims against us for losses incurred in reliance on such information.

We may also enter into agreements that entitle us to receive a share of
revenue from the purchase of goods and services through direct links from our
Web sites to their Web sites. Such arrangements may subject us to additional
claims, including potential liabilities to consumers of such products and
services, based on the access we provide to such products or services, even if
we do not provide such products or services ourselves. While our agreements with
these parties may provide that we will be indemnified against such liabilities,
such indemnification, if available, may not be adequate. Our insurance may not
adequately protect us against these types of claims and, even if such claims do
not result in liability, we could incur significant costs in investigating and
defending against such claims.

WE EXPECT TO MAKE ACQUISITIONS THAT MAY DILUTE OUR STOCKHOLDERS' INTERESTS IN
LAUNCH OR RESULT IN AMORTIZATION OF SIGNIFICANT AMOUNTS OF INTANGIBLE ASSETS

As part of our business strategy, we expect to review acquisition prospects
that would complement our current content offerings, increase our market share
or otherwise offer growth opportunities. Such acquisitions could cause our
operating results or the price of our common stock to decline. We may acquire
businesses, products or technologies in the future. Because business
acquisitions typically involve significant amounts of intangible assets, future
operating results may be adversely affected by amortization of intangible assets
acquired. In the event of such future acquisitions or business combinations, we
could do the following:

- issue equity securities that would dilute current stockholders'
percentage ownership in us;

- incur substantial debt; or

- assume contingent liabilities.

--------------------------------------------------------------------------------
Page 22

<PAGE> 23

WE MAY BE UNABLE TO EFFECTIVELY INTEGRATE BUSINESSES WE ACQUIRE IN THE FUTURE,
AND ANY SUCH FAILURE COULD DIMINISH THE VALUE OF AN ACQUIRED BUSINESS OR CAUSE
DISRUPTIONS IN OUR ONGOING OPERATIONS

Acquisitions and business combinations entail numerous operational risks,
including the following:

- difficulties in the assimilation of acquired operations, technologies
or products;

- diversion of management's attention from other business concerns;

- risks of entering markets in which we have no or limited experience;
and

- potential loss of key employees of acquired organizations.

We cannot assure you that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might acquire in the
future, and our failure to do so could damage our business.

We may not be able to effectively integrate the operations of acquired
businesses with our ongoing operations. Such failure could harm our business by
diverting management and other resources. Further, the personnel of acquired
businesses may elect not to continue with Launch after completion of any
acquisition, which could diminish the value of any acquisition. In that regard,
we cannot assure you that the personnel of acquired businesses will continue as
employees of Launch.

WE NEED TO ADAPT TO RAPID TECHNOLOGICAL CHANGE IN SOFTWARE AND DISTRIBUTION
SYSTEMS TO REMAIN COMPETITIVE

Our market is characterized by rapidly changing technologies, frequent new
product and service introductions and evolving industry standards. The recent
growth of digital media, and in particular, the Internet, and intense
competition in our industry exacerbate these market characteristics. To achieve
our goals, we need to effectively integrate the various software programs and
tools required to enhance and improve our product offerings and manage our
business. Our future success will depend on our ability to adapt to rapidly
changing technologies by continually improving the performance features and
reliability of our products and services. We may experience difficulties that
could delay or prevent the successful development, introduction or marketing of
new products and services. In addition, new enhancements must meet the
requirements of our current and prospective users and must achieve significant
market acceptance. We could also incur substantial costs if we need to modify
our service or infrastructures or adapt our technology to respond to these
changes.

GOVERNMENTAL REGULATION OF THE WEB RELATED TO COMMUNICATION, COMMERCE, SALES TAX
AND OTHER ISSUES MAY LIMIT THE GROWTH OF OUR BUSINESS AND DECREASE OUR MARKET
OPPORTUNITY

There are currently few laws or regulations that specifically regulate
communications or commerce on the Web. Laws and regulations may be adopted in
the future, however, that address issues such as user privacy, pricing, and the
characteristics and quality of products and services. For example, the
Telecommunications Act sought to prohibit transmitting certain types of
information and content over the Web. Several telecommunications companies have
petitioned the Federal Communications Commission to regulate Internet service
providers and online services providers in a manner similar to long distance
telephone carriers and to impose access fees on these companies. Any imposition
of access fees could increase the cost of transmitting data over the Internet.
Moreover, it may take years to determine the extent to which existing laws
relating to issues such as property ownership, libel and personal privacy are
applicable to the Web. Any new laws or regulations relating to the Web could
adversely affect our business.

--------------------------------------------------------------------------------

Page 23

<PAGE> 24

Launch generally does not collect sales or other taxes in respect of
goods sold to users on launch.com. However, one or more states may seek to
impose sales tax collection obligations on out-of-state companies, such as
Launch, which engage in or facilitate online commerce. A number of proposals
have been made at the state and local level that would impose additional taxes
on the sale of goods and services through the Internet. Such proposals, if
adopted, could substantially impair the growth of electronic commerce and could
adversely affect our opportunity to derive financial benefit from electronic
commerce. Moreover, if any state or foreign country were to successfully assert
that Launch should collect sales or other taxes on the exchange of merchandise
on its system, our results of operations could be adversely affected.
Legislation limiting the ability of states to impose taxes on Internet-based
transactions has been proposed in the U.S. Congress. We cannot assure you that
this legislation will ultimately become law or that the tax moratorium in the
final version of this legislation will be ongoing. Failure to enact or renew
this legislation, once enacted, could allow various states to impose taxes on
Internet-based commerce, which could adversely affect our business.

WE RELY ON THIRD PARTIES FOR OUR WEB SITE HOSTING FACILITIES AND INTERNET
CONNECTIVITY. IF THESE SYSTEMS FAIL, THEY COULD DISRUPT OR DELAY USER TRAFFIC,
WHICH COULD IMPAIR OUR BUSINESS

Substantially all of our launch.com communications and computer hardware
are located at PSINet's facilities in Marina del Rey, California. PSINet
provides Web site hosting services. In addition, we utilize the audio and video
streaming services of iBEAM Broadcasting. iBEAM Broadcasting has a proprietary
network which delivers streaming audio and video over the Internet. Fire,
floods, earthquakes, power loss, telecommunications failures, break-ins and
similar events could damage these systems and cause interruptions in our
services. Computer viruses, electronic break-ins or other similar disruptive
problems could result in reductions or termination of our services by our
customers or otherwise adversely affect our Web site. Our business could be
adversely affected if our systems were affected by any of these occurrences. Our
insurance policies may not adequately compensate us for any losses that may
occur due to any failures or interruptions in our systems. We do not presently
have any backup systems or a formal disaster recovery plan.

Our Web site must be able to accommodate a high volume of traffic and
deliver frequently updated information. Our Web site has experienced in the past
and may in the future experience slower response times or decreased traffic for
a variety of reasons. In addition, our users depend on Internet service
providers, online service providers and other Web site operators for access to
our Web site. Many of them have experienced significant outages in the past, and
could experience outages, delays and other difficulties due to system failures
unrelated to our systems. Moreover, the Internet network infrastructure may not
be able to support continued growth. Any of these problems could adversely
affect our business.

BECAUSE OUR USERS PROVIDE US WITH PRIVATE INFORMATION, WE MAY BE SUBJECT TO
LIABILITY IF THIS INFORMATION WERE MISUSED

Our privacy policy provides that we will not willfully disclose any
individually identifiable information about any user to a third party without
the user's consent unless required by law. This policy is displayed to users of
our personalized services when they initially register and is easily accessible
on launch.com. Despite this policy, however, if third persons were able to
penetrate our network security or otherwise misappropriate our users' personal
information or credit card information, we could be subject to liability. We
also rely on a third-party provider for our e-commerce services. If we
experience service problems with our e-commerce transactions, we could also be
subject to liability. This liability could include claims for unauthorized
purchases with credit card information, impersonation or other similar fraud
claims. It could also include claims for other misuses of personal information,
such as for unauthorized marketing purposes. These claims could result in
litigation. In addition, the Federal Trade Commission, the European Union and
certain state and local authorities have been investigating certain Internet
companies regarding their use of personal information. We could incur additional
expenses if new regulations regarding the use of personal information are
introduced or if these authorities choose to investigate our privacy practices.

--------------------------------------------------------------------------------
Page 24

<PAGE> 25

Like most Web sites, we typically place certain information commonly
referred to as cookies on a user's hard drive without the user's knowledge or
consent. We use cookies for a variety of reasons, including enabling us to limit
the frequency with which a user is shown a particular advertisement. Certain
currently available Internet browsers allow users to modify their browser
settings to remove cookies at anytime or to prevent cookies from being stored on
their hard drives. In addition, some Internet commentators, privacy advocates
and governmental bodies have suggested limiting or eliminating the use of
cookies. Any reduction or limitation in the use of cookies could limit the
effectiveness of this technology.

WE MAY EXPEND SIGNIFICANT RESOURCES TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS
OR TO DEFEND CLAIMS OF INFRINGEMENT BY THIRD PARTIES, AND IF WE ARE NOT
SUCCESSFUL WE MAY LOSE RIGHTS TO USE SIGNIFICANT MATERIAL OR BE REQUIRED TO PAY
SIGNIFICANT FEES

Copyrighted material that Launch develops internally, as well as trademarks
relating to the Launch brand and other proprietary rights, are important to our
success and our competitive position. We seek to protect our copyrights,
trademarks and other proprietary rights, but these actions may be inadequate.
Launch has trademark applications pending in several jurisdictions, but we
cannot guarantee that we will be able to register our trademarks in all
jurisdictions in which we intend to do business. We generally enter into
confidentiality or license agreements with our employees, consultants and
corporate partners, and generally control access to and distribution of our
proprietary information. We cannot assure you that the steps we have taken will
prevent misappropriation of our proprietary rights, particularly in foreign
countries where laws or law enforcement practices may not protect our
proprietary rights as fully as in the United States. If third parties were to
use or otherwise misappropriate our copyrighted materials, trademarks or other
proprietary rights without our consent or approval, our competitive position
could be harmed, or we could become involved in litigation to enforce our
rights.

In addition, we rely on a third party to provide services enabling our
e-commerce transactions. We could become subject to infringement actions by
third parties based upon our use of intellectual property provided by our
third-party provider. There is no provision for indemnification of Launch by the
third-party provider. It is also possible that we could become subject to
infringement actions based upon the content licensed from third parties. Any
such claims or disputes could subject us to costly litigation and the diversion
of our financial resources and technical and management personnel. Further, if
our efforts to enforce our intellectual property rights are unsuccessful or if
claims by third parties against Launch are successful, we may be required to
change our trademarks, alter the content and pay financial damages. We cannot
assure you that such change of trademarks; alteration of content or payment of
financial damages will not adversely affect our business.

--------------------------------------------------------------------------------
Page 25

<PAGE> 26

ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We maintain investment portfolio holdings of various issuers, types and
maturities whose values are dependent upon short-term interest rates, which are
classified as short-term investments. We also invest in certain equity
securities, which are classified as securities available for sale, and
consequently record them on the balance sheet at fair value with unrealized
gains and losses being recorded as a separate part of stockholders' equity. We
do not currently hedge these interest rate exposures.

Given Launch's current profile of interest rate exposures and the
maturities of its investment holdings, we believe that an unfavorable change in
interest rates would not have a significant negative impact on our investment
portfolio or statement of operations through December 31, 2000.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

"Not applicable."

ITEM 2. CHANGES IN SECURITIES

On August 31, 2000 Launch issued 788,474 shares of common stock in
connection with its acquisition of the Warped Tour pursuant to the exemption
from registration provided by Section 3(a)(10) of the Securities Act of 1933, as
amended.

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

(a) EXHIBITS:

(27) Financial Data Schedule

(b) Reports on Form 8-K

The Company filed Form 8-K on August 31, 2000, related to our
acquisition of C.C.R.L., LLC (d.b.a. The Warped Tour).

--------------------------------------------------------------------------------
Page 26

<PAGE> 27

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 November 13, 2000
-------------------

LAUNCH MEDIA, INC.
(Registrant)

/s/ JEFFREY M. MICKEAL
--------------------------------------------
Jeffrey M. Mickeal
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)

--------------------------------------------------------------------------------
Page 27