**U.S. SECURITIES ANDEXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

| **ý**                                                                                                                              |   | **QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                    |   |                                                                                          |
| **For the quarterly period  ended December 31, 2003**                                                                                   |
|                                                                                                                                    |   |                                                                                          |
| **OR**                                                                                                                                  |
|                                                                                                                                    |   |                                                                                          |
| **o**                                                                                                                                   |   | **TRANSITION REPORT PURSUANT  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                    |   |                                                                                          |
| **For the transition  period from          to        ** |
|                                                                                                                                    |   |                                                                                          |
| **Commission File Number:  0-27556**                                                                                                    |

 

**YOUTHSTREAM MEDIANETWORKS, INC.**

(Exact Name of Registrant as Specified inIts Charter)

 

| **Delaware**                                                    |   | **13-4082185**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or Other Jurisdiction of  Incorporation of Organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **244 Madison Avenue, PMB  #358 New York, NY**                  |   | **10016**                             |
| (Address of Principal Executive Offices)                        |   | (Zip Code)                            |
|                                                            |   |                                  |
| **(212) 622-7300**                                              |
| (Registrant’s Telephone Number, Including  Area Code)      |

 

Checkwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days.

 

Yes   ý   No   o

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). o

 

At March 5,2004, there were 39,242,000 shares of Common Stock, $.01 par value outstanding.

 

 

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YOUTHSTREAM MEDIA NETWORKS, INC.

 

FORM 10-Q

 

INDEX

 
| **PART I—FINANCIAL INFORMATION** |
|---------------------------------------|
|                                  |
| ITEM 1.                               | FINANCIAL STATEMENTS |
|                                  |
|                                  | Condensed  Consolidated Balance Sheets—   December 31, 2003 (unaudited), September 30, 2003 |
|                                  |
|                                  | Unaudited  Condensed Consolidated Statements of Operations —   Three Months Ended December 31, 2003 and 2002 |
|                                  |
|                                  | Unaudited  Condensed Consolidated Statements of Cash Flows —   Three Months Ended December 31, 2003 and 2002 |
|                                  |
|                                  | Unaudited  Condensed Consolidated Statement of Stockholders’ Deficiency —   Three Months Ended December 31, 2003 |
|                                  |
|                                  | Notes  to Condensed Consolidated Financial Statements as of December 31, 2003  (Unaudited) |
|                                  |
| ITEM  2.                              | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
|                                  |
| ITEM  3.                              | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
|                                  |
| ITEM 4.                               | CONTROLS AND  PROCEDURES |
|                                  |
| **PART II—OTHER INFORMATION**    |   |
|                                  |
| ITEM 1.                               | LEGAL PROCEEDINGS |
|                                  |
| ITEM 6.                               | EXHIBITS AND  REPORTS ON FORM 8-K |
|                                  |
| SIGNATURES                            |
|                                       |  |  |  |  |

 

2

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PARTI

 

FINANCIAL INFORMATION

 

ITEM1.  FINANCIAL STATEMENTS

 

YOUTHSTREAM MEDIA NETWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

 
|                                                                                                                                                                                                                                                                                                                    |   | **December 31,  2003** |   | **September 30,  2003** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|-------------------------|--------|
|                                                                                                                                                                                                                                                                                                                    |   | **(Unaudited)**        |   |                    |   |
|                                                                                                                                                                                                                                                                                                                    |   |                   |   |                    |   |
| ASSETS                                                                                                                                                                                                                                                                                                                  |   |                   |   |                    |   |
| Current assets:                                                                                                                                                                                                                                                                                                         |   |                   |   |                    |   |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                               |   | $                      | 303    |                    | $      | 1,490 |   |
| Accounts receivable, net                                                                                                                                                                                                                                                                                                |   | 4                      |   | 518                     |   |
| Inventories, net                                                                                                                                                                                                                                                                                                        |   | 1,870                  |   | 2,098                   |   |
| Prepaid expenses                                                                                                                                                                                                                                                                                                        |   | 133                    |   | 250                     |   |
| Other current assets                                                                                                                                                                                                                                                                                                    |   | 66                     |   | 62                      |   |
|                                                                                                                                                                                                                                                                                                                    |   |                   |   |                    |   |
| Total current assets                                                                                                                                                                                                                                                                                                    |   | 2,376                  |   | 4,418                   |   |
|                                                                                                                                                                                                                                                                                                                    |   |                   |   |                    |   |
| Property and equipment, net                                                                                                                                                                                                                                                                                             |   | 1,396                  |   | 1,536                   |   |
| Other assets                                                                                                                                                                                                                                                                                                            |   | 125                    |   | 125                     |   |
|                                                                                                                                                                                                                                                                                                                    |   |                   |   |                    |   |
| Total assets                                                                                                                                                                                                                                                                                                            |   | $                      | 3,897  |                    | $      | 6,079 |   |
|                                                                                                                                                                                                                                                                                                                    |   |                   |   |                    |   |
| LIABILITIES AND STOCKHOLDERS’  DEFICIENCY                                                                                                                                                                                                                                                                          |   |                   |   |                    |   |
| Current liabilities:                                                                                                                                                                                                                                                                                                    |   |                   |   |                    |   |
| Accounts payable                                                                                                                                                                                                                                                                                                        |   | $                      | 1,567  |                    | $      | 2,019 |   |
| Accrued employee compensation                                                                                                                                                                                                                                                                                           |   | 256                    |   | 507                     |   |
| Accrued expenses                                                                                                                                                                                                                                                                                                        |   | 1,092                  |   | 1,910                   |   |
| Current liabilities of discontinued  operations                                                                                                                                                                                                                                                                         |   | 2,164                  |   | 2,160                   |   |
| Total current liabilities                                                                                                                                                                                                                                                                                               |   | 5,079                  |   | 6,596                   |   |
|                                                                                                                                                                                                                                                                                                                    |   |                   |   |                    |   |
| Long-term debt                                                                                                                                                                                                                                                                                                          |   | 4,913                  |   | 4,913                   |   |
| Preferred stock subject to  mandatory redemption; issued and outstanding at December 31, 2003 and  September 30, 2003 – 1,000 shares of Series A 4% cumulative, non-convertible,  redeemable preferred stock, mandatory redemption and liquidation value of  $4.00 per share, plus cumulative dividends, or $5,269 |   | 5,269                  |   | 5,269                   |   |
| Total liabilities                                                                                                                                                                                                                                                                                                       |   | 15,261                 |   | 16,778                  |   |
|                                                                                                                                                                                                                                                                                                                    |   |                   |   |                    |   |
| Commitments and contingencies                                                                                                                                                                                                                                                                                           |   |                   |   |                    |   |
|                                                                                                                                                                                                                                                                                                                    |   |                   |   |                    |   |
| Stockholders’ Deficiency                                                                                                                                                                                                                                                                                           |   |                   |   |                    |   |
| Preferred stock, $0.01 par value,  authorized-5,000 shares; issued and outstanding at December 31, 2003 - 1,000  shares of Series A preferred stock (classified in long-term liabilities as  preferred stock subject to mandatory redemption)                                                                           |   | —                 |   | —                  |   |
| Common stock, $0.01 par value,  100,000 shares authorized, 39,850 shares issued at December 31, 2003 and  September 30, 2003, respectively                                                                                                                                                                              |   | 398                    |   | 398                     |   |
| Additional paid-in capital                                                                                                                                                                                                                                                                                              |   | 331,200                |   | 331,200                 |   |
| Accumulated deficiency                                                                                                                                                                                                                                                                                                  |   | (342,133               | )      | (341,468                | )      |
| Treasury stock, 608 shares, at cost                                                                                                                                                                                                                                                                                     |   | (829                   | )      | (829                    | )      |
| Total stockholders’ deficiency                                                                                                                                                                                                                                                                                     |   | (11,364                | )      | (10,699                 | )      |
|                                                                                                                                                                                                                                                                                                                    |   |                   |   |                    |   |
| Total liabilities and stockholders’  deficiency                                                                                                                                                                                                                                                                    |   | $                      | 3,897  |                    | $      | 6,079 |   |

 

See notes to condensed consolidatedfinancial statements

 

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YOUTHSTREAM MEDIA NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)(UNAUDITED)

 

 
|                                                          |   | **Three months ended  December 31,** |   |
|---------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                          |   | **2003**                             |   | **2002** |   |
|                                                          |   |                                 |   |   |   |
| Net revenues                                                  |   | $                                    | 1,053  |   | $ | 1,956 |   |
| Cost of sales                                                 |   | 393                                  |   | 444 |   |
| Gross profit                                                  |   | 660                                  |   | 1,512 |   |
| Selling, general and administrative  expenses                 |   | 1,192                                |   | 1,565 |   |
| Corporate expenses                                            |   | 476                                  |   | 1,227 |   |
| Depreciation and amortization                                 |   | 140                                  |   | 147 |   |
| (Gain)  loss on closing of retail stores                      |   | (500                                 | )      | 989 |   |
| Loss from operations                                          |   | (648                                 | )      | (2,416 | ) |
| Interest income                                               |   | —                               |   | 28 |   |
| Interest expense                                              |   | (11                                  | )      | (721 | ) |
| Loss before provision for income  taxes                       |   | (659                                 | )      | (3,109 | ) |
| Provision for income taxes                                    |   | 1                                    |   | — |   |
| Loss from continuing operations                               |   | (660                                 | )      | (3,109 | ) |
| Gain (loss) from discontinued  operations                     |   | (5                                   | )      | 136 |   |
| Net loss attributable to common  shares                       |   | $                                    | (665   | ) | $ | (2,973 | ) |
| Per share of common stock-basic and  diluted                  |   |                                 |   |   |   |
| Loss from continuing operations                               |   | $                                    | (0.02  | ) | $ | (0.09 | ) |
| Gain from discontinued operations                             |   | —                               |   | 0.01 |   |
| Net loss per basic and diluted  common share                  |   | $                                    | (0.02  | ) | $ | (0.08 | ) |
| Weighted average basic and diluted  common shares outstanding |   | 39,242                               |   | 35,257 |   |

 

See notes to condensed consolidatedfinancial statements

 

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YOUTHSTREAM MEDIA NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS

(IN THOUSANDS)

(UNAUDITED)

 
|                                                                         |   | **Three months ended  December 31,** |   |
|------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                         |   | **2003**                             |   | **2002** |   |
|                                                                         |   |                                 |   |   |   |
| CASH FLOWS FROM OPERATING  ACTIVITIES                                        |   |                                 |   |   |   |
| Net loss                                                                     |   | $                                    | (665   | ) | $ | (2,973 | ) |
| Adjustments to reconcile net loss  to net cash used in operating activities: |   |                                 |   |   |   |
| Loss (gain) from discontinued  operations                                    |   | 5                                    |   | (136 | ) |
| Net change in assets and  liabilities of discontinued operations             |   | (2                                   | )      | 155 |   |
| Bad debt expense (recovery)                                                  |   | (11                                  | )      | 39 |   |
| Depreciation and amortization                                                |   | 140                                  |   | 147 |   |
| (Gain) loss on closing of retail  stores                                     |   | (500                                 | )      | 989 |   |
| Gain on disposal of fixed assets                                             |   | —                               |   | (172 | ) |
| Gain on debt extinguishment                                                  |   | —                               |   | (46 | ) |
| Amortization of deferred financing  costs                                    |   | —                               |   | 190 |   |
| Amortization of original issue  discount on Subordinated Notes               |   | —                               |   | 31 |   |
| Deferred rent                                                                |   | —                               |   | (346 | ) |
| Changes in assets and liabilities,  net of acquisitions and dispositions:    |   |                                 |   |   |   |
| Accounts receivable                                                          |   | 524                                  |   | 650 |   |
| Inventory                                                                    |   | 228                                  |   | 628 |   |
| Other current assets                                                         |   | 113                                  |   | 699 |   |
| Accounts payable                                                             |   | (451                                 | )      | (845 | ) |
| Accrued expenses                                                             |   | (568                                 | )      | (76 | ) |
| Net cash used in operating  activities                                       |   | (1,187                               | )      | (1,066 | ) |
|                                                                         |   |                                 |   |   |   |
| CASH FLOWS FROM INVESTING  ACTIVITIES                                        |   |                                 |   |   |   |
| Capital expenditures                                                         |   | —                               |   | (32 | ) |
| Proceeds from the sale of fixed  assets                                      |   | —                               |   | 106 |   |
| Net cash provided by investing  activities                                   |   | —                               |   | 74 |   |
|                                                                         |   |                                 |   |   |   |
| CASH FLOWS FROM FINANCING  ACTIVITIES                                        |   |                                 |   |   |   |
| Repayment of capitalized lease  obligations                                  |   | —                               |   | (44 | ) |
| Repayment of long-term debt                                                  |   | —                               |   | (470 | ) |
| Net cash used in financing  activities                                       |   | —                               |   | (514 | ) |
|                                                                         |   |                                 |   |   |   |
| Decrease in cash and cash  equivalents                                       |   | (1,187                               | )      | (1,506 | ) |
| Cash and cash equivalents at  beginning of period                            |   | 1,490                                |   | 9,067 |   |
| Cash and cash equivalents at end of  period                                  |   | $                                    | 303    |   | $ | 7,561 |   |
|                                                                         |   |                                 |   |   |   |
| Supplemental cash flow information:                                          |   |                                 |   |   |   |
| Cash paid for income taxes                                                   |   | $                                    | — |   | $ | — |   |
|                                                                         |   |                                 |   |   |   |
| Noncash financing activities:                                                |   |                                 |   |   |   |
| Issuance of common stock in  connection with acquisitions                    |   | $                                    | — |   | $ | 114 |   |

 

See notes to condensed consolidatedfinancial statements

 

5

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YOUTHSTREAM MEDIA NETWORKS, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’DEFICIENCY

FOR THE PERIOD OCTOBER 1, 2003 TO DECEMBER31, 2003

(IN THOUSANDS)

(UNAUDITED)

 
|                          |   | **Common  Stock** |   | **APIC** |   | **Accumulated********Deficit** |   | **Treasury********Stock** |   | **Total** |     |
|-------------------------------|--------|-------------------|--------|----------|--------|--------------------------------|--------|---------------------------|--------|-----------|----------|
| **Shares**                    |   | **Amount**        |
|                          |   |              |   |     |   |                           |   |                      |   |      |     |   |   |
| Balances at October 1, 2003   |   | 39,850            |   | $        | 398    |                           | $      | 331,200                   |   | $         | (341,468 | ) | $ | (829 | ) | $ | (10,699 | ) |
| Net loss                      |   | —            |   | —   |   | —                         |   | (665                      | )      | —    |     | (665 | ) |
| Balances at December 31, 2003 |   | 39,850            |   | $        | 398    |                           | $      | 331,200                   |   | $         | (342,133 | ) | $ | (829 | ) | $ | (11,364 | ) |

 

See notes to condensed consolidated financial statements

 

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YOUTHSTREAM MEDIA NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS

DECEMBER 31, 2003

(Unaudited)

 

1.  ORGANIZATION AND BASIS OF PRESENTATION

 

The accompanying consolidated financial statements include the accountsof YouthStream Media Networks, Inc. (“YouthStream”), and its wholly-ownedsubsidiaries, Network Event Theater, Inc. (“NET”), American PassageMedia, Inc. (“American Passage”), Beyond the Wall, Inc. (“Beyond theWall”), and W3T.com, Inc. (“Teen.com”), (collectively, the “Company”).

 

In December 2000, the Company discontinued the operations ofCommonPlaces, LLC (“CommonPlaces”), sixdegrees, inc. (“sixdegrees”),CollegeWeb.com, Inc. (“CollegeWeb”), and Invino Corporation (“Invino”). InDecember 2001, the Company sold substantially all of its media assets andassigned certain liabilities of its NET and American Passage subsidiaries toAlloy, Inc. and ceased operating the media segment. The Company, throughits Beyond the Wall subsidiary, is now primarily a retail company that targetsteenagers and young adults ages 12 to 24.

 

**FINANCIAL STATEMENT PRESENTATION**

 

The Company has incurred recurring operating losses since itsinception. As of December 31, 2003, the Company had an accumulated deficitof $342,133,000, a stockholders’ deficiency of $11,364,000, a working capitaldeficiency of $2,703,000, and a net loss and negative cash flows from operatingactivities for the three months ended December 31, 2003 of $665,000 and$1,187,000, respectively, and expects to have insufficient capital to fund allof its obligations. In August and September 2002, the Company defaulted onapproximately $18,000,000 of its long-term debt, which was restructured inJanuary 2003. In addition, the Company’s retail sales have been on the decline.These conditions raise substantial doubt about the Company’s ability tocontinue as a going concern. The financial statements do not include anyadjustments to reflect the possible future effect of the recoverability andclassification of assets or the amounts and classifications of liabilities thatmay result from the outcome of this uncertainty.

 

# **Saleof Beyond the Wall**

# ** **

EffectiveFebruary 25, 2004, the Company’s wholly-owned subsidiary, Beyond the Wall, Inc.(“BTW”), sold substantially all of its assets and operations to a groupunaffiliated with the Company (which included certain former management ofBTW), for $1,920,000, consisting of a cash payment of $820,000 and asubordinated secured promissory note (the “Note”) for $1,100,000, with interestat 10% per annum, due October 31, 2006. If certain optional principal pre-payments on the Note are made by June30, 2004, the principal balance of the Note will be adjusted downward, inexcess of such principal pre-payments, based on an agreed-upon sliding scale asset forth in the Note.

 

TheCompany estimates that it will recognize a loss between $200,000 and $300,000in the second quarter of fiscal year 2004 with respect to this transaction.

 

Asa result of the sale of the BTW assets in February 2004, the Company no longerhas any active business operations. The Company’s management is consideringvarious strategic alternatives, including the acquisition of one or more newbusiness opportunities, which may be from related or unrelated parties.  However, there can be no assurances thatsuch efforts will ultimately be successful. The Company may finance any acquisitions through a combination of debtand/or equity securities.

 

**Sale of Media Assets**

 

In response to its liquidity issues and declining earnings, onAugust 5, 2002, following the close of the Company’s then fiscal year ofJune 30, 2002, the Company sold substantially all of its Media assets andassigned certain liabilities to Cass

 

7

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Communications, Inc., a subsidiary of Alloy, Inc. forproceeds of $7,000,000, which approximated the carrying value of the Mediasegment at the time of sale. As of June 30, 2002 the Media segment’sassets and liabilities were classified as held and used as the criteria to beheld for sale under Statement of Financial Accounting Standards (“SFAS”)No. 144 were not met prior to June 30, 2002. As a result of the sale,the Media segment operations were discontinued during the three months endedSeptember 30, 2002.

 

The financial statements and notes to the financial statements havebeen reclassified for Discontinued Operations as a result of all businessesdisposed of through December 31, 2003, including the sale of the media segmentoperations to Alloy, Inc. on August 5, 2002.

 

Thefollowing is a summary of the major classes of assets and liabilities as ofDecember 31, 2003 and September 30, 2003 that remain from the Media segment:

 
|                          |   | **December  31, 2003** |   | **September 30, 2003** |   |
|-------------------------------|--------|------------------------|--------|------------------------|--------|
|                          |   | **(In thousands)**     |   | **(In thousands)**     |   |
|                          |   | **(unaudited)**        |   |                   |   |
| Current assets, net           |   | $                      | -0-    |                   | $      | -0- |   |
| Current liabilities           |   | (2,109                 | )      | (2,105                 | )      |
| Capitalized lease obligations |   | (55                    | )      | (55                    | )      |
| Net book value                |   | $                      | (2,164 | )                      | $      | (2,160 | ) |

 

**Store Closing Cost**

 

In early fiscal 2003 the Company followed through on its previouslyannounced plans to close a number of under performing retail stores within itsBeyond the Wall chain. For the three months ended December 31, 2002, theCompany incurred approximately $989,000 of expenses, relating to the closing ofretail store operations, including $81,000 for the write-off of fixed assets,$432,000 for the write-off of inventory, $460,000 of additional accruals forcosts relating to the early termination of store leases and $16,000 for otherexpenses.  During the three months endedDecember 31, 2003, the Company negotiated with landlords to reach settlementswith respect to certain Beyond the Wall store leases for amounts  below what had been originally accrued,which resulted in a reduction in the related accrual and a gain of$500,000.  Closing costs have beenclassified as a separate line item in the condensed consolidated statements ofoperations as part of continuing operations.

 

**Debt Restructuring and Amendments**

 

In January 2003, the Company reached an agreement with the holders ofall of its and its Network Event Theater subsidiary’s outstanding notes (NETNotes, YSTM Notes & YSTM 2 Note), in the aggregate principal amount of$18 million, to cancel those notes. In exchange for cancellation of all ofthe principal and interest due on the old notes, the note holders received inaggregate $4.5 million in cash, redeemable preferred stock with a facevalue of $4 million, and 3,985,000 shares of common stock, valued at$255,000, and $4 million aggregate principal amount of promissory notesissued by the Company’s retail subsidiary, Beyond the Wall, Inc., securedby the Company’s pledge of all of its stock in Beyond the Wall.

 

At the closing of the January 2003 debt restructuring, all of theCompany’s previous directors and officers resigned, and three new directorswere appointed. Jonathan V. Diamond, who previously had been a director andinterim Chief Executive Officer of the Company, was appointed as Chairman ofthe Board of Directors, and Hal G. Byer and Robert Scott Fritz were appointedas directors of the Company. Mr. Diamond was appointed as Chief ExecutiveOfficer and Robert N. Weingarten was appointed as Chief Financial Officer.

 

During May 2003, the Company issued options to the three new directorsto purchase an aggregate of 700,000 shares of common stock exercisable at thefair market value of $0.04 per share for a period of seven years. In addition,the three new directors paid an aggregate of $7,500 ($0.04 per share) in cashto acquire options from the holder of the shares of

 

8

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preferred stock that were issued in the January 2003 restructuringto purchase an aggregate of 187,500 shares of such holder’s preferred stock,exercisable at $0.36 per share.

 

The terms and conditions of the January 2003 debt restructuringagreement qualified as a troubled debt restructuring for accounting purposes inaccordance with SFAS No. 15 “Accounting by Debtors and Creditors forTroubled Debt Restructurings”. In determining the proper accounting treatment,the Company evaluated the nature of the economic consequences of each of thethree separate transactions for purposes of determining the gain, if any, inconnection with the extinguishment of the NET Notes, YSTM Notes and YSTM 2 Notein accordance with SFAS No. 15.

 

The cancellation of the NET Notes qualified as a full debt settlementwhereby in exchange for the extinguishment of the $5 million note andcancellation of accrued interest, the holders received $3,000,000 cash. As ofthe settlement date, the adjusted carrying value of the NET Notes, net ofaccrued interest, unamortized original issue discount and unamortized closingcosts, was $5,448,000. The settlement resulted in a gain of $2,448,000.

 

The cancellation of the YSTM Notes was accounted for as a combinationof a partial debt settlement and a continuation of debt with modified terms. Inexchange for the extinguishment of the YSTM Notes, the holder received cash of$1,500,000, 3,486,875 shares of common stock with a fair value of $223,000,1,000,000 shares of 4% redeemable preferred stock, face value of $4,000,000,including cumulative dividends, totaling $5,269,000, due December 31, 2010and a $3,000,000 promissory note bearing interest at 4% per annum withprincipal and cumulative interest due December 31, 2010. As of thesettlement date, the adjusted carrying value of the YSTM Notes, net of accruedinterest, unamortized original issue discount and unamortized closing costs,was $11,251,000. After adjusting for the fair value of the cash and commonstock exchanged, the carrying value of the YSTM Notes was $9,528,000. Forpurposes of determining the gain on the extinguishment of the YSTM Notes, theredeemable preferred stock was accounted for as a debt instrument given themandatory redemption features of the security. The issuance of the $3,000,000promissory note and the 1,000,000 shares of redeemable preferred stockconstituted a continuation of debt with modified terms. Given that theundiscounted future value of the promissory note and the redeemable preferredstock, including accrued interest and cumulative dividends, was less than theadjusted carrying value of the YSTM Notes extinguished, the Company recognizeda gain totaling $306,000 and recorded the value of the promissory note and theredeemable preferred stock at the undiscounted future value of $3,953,000 and$5,269,000, respectively, with no interest expense or accretions in value to berecognized over the remaining life of the promissory note and preferred stock.

 

The cancellation of the YSTM 2 Note was accounted for as a combinationof a partial debt settlement and a continuation of debt with modified terms. Inexchange for the extinguishment of the YSTM 2 Note, the holder received 498,125shares of the Company’s common stock with a fair value of $32,000 and a$1,000,000 promissory note bearing interest at 4% per annum with principal andaccrued interest due December 31, 2010. As of the settlement date, theadjusted carrying value of the YSTM 2 Note, net of accrued interest,unamortized original issue discount and unamortized closing costs, was$991,000. After adjusting for the fair value of the common shares exchanged,the carrying value of the YSTM 2 Note was $960,000. The issuance of the $1,000,000promissory note constituted a continuation of debt with modified terms. Giventhat the undiscounted future value of the promissory note, including principaland interest, was greater than the adjusted carrying value of the YSTM 2 Noteextinguished, the Company recognized no gain. The promissory note was revaluedat the adjusted carrying value of the YSTM 2 Note surrendered, resulting in animputed discount of $41,000.

 

In total, the Company recognized a gain from the troubled debtrestructuring totaling $2,754,000. The gain was classified as part ofcontinuing operations in accordance with SFAS No. 145, “Rescission of SFASNos. 4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections asof April 2000.”

 

During June 2003, the Company amended the original provisions ofthe $4,000,000 of promissory notes issued in conjunction with theJanuary 24, 2003 restructuring to provide for the following:

 

1.                                       Beyond the Wallwas replaced by the Company as the issuer of the notes, and was released fromany liability with respect to the notes.

 

2.                                       The note holdersagreed to convert the notes from secured to unsecured, and to release theirsecurity interest in all of the outstanding common stock of Beyond The Wall.

 

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3.                                       The note holdersagreed to delete all provisions in the notes requiring the issuer of the notesto make mandatory prepayments based on the occurrence of certain events.

 

4.                                       The note holdersagreed to delete provisions in the notes prohibiting the issuer from:(i) incurring any indebtedness for borrowed money; (ii) selling, orentering into any agreement to sell, all or substantially all of the assets orall or substantially all of the capital stock of the issuer; or(iii) entering into any transaction with an affiliate, other thantransactions with the Company, Network Event Theater, Inc. and/or theirsuccessors, that have fair and reasonable terms which are no less favorable tothe issuer than would be obtained in a comparable arms-length transaction witha person or entity that is not an affiliate.

 

**RECLASSIFICATIONS**

 

Certain amounts in the prior periods’ consolidated financial statementshave been reclassified to conform to the current period’s presentation.

 

2.  DISCONTINUED OPERATIONS

 

On August5, 2002 the Company sold substantially all of its media assets and assignedcertain liabilities to Cass Communications, Inc., a subsidiary of Alloy, Inc.,for gross proceeds of $7,000,000 plus a working capital adjustment of anadditional $283,000, which resulted in a gain of approximately $246,000 at thetime of sale, which was included in the total gain on disposal of discontinuedoperations for the period ended September 30, 2002. 

 

As a resultof the sale, the media segment operations were discontinued during the threemonths ended September 30, 2002.

 

In December2001, the Company discontinued its Teen.com website. In connection with thediscontinuance of that business, the Company incurred a charge of $348,000,related primarily to the write-off of property and equipment and an accrual forseverance.

 

Netrevenues and loss from discontinued operations are as follows (in thousands): 

 
|                                                |   | **Three months ended  December 31,** |   |
|-----------------------------------------------------|--------|--------------------------------------|--------|
|                                                |   | **2003**                             |   | **2002** |   |
|                                                |   |                                 |   |   |   |
| Net revenues                                        |   | $                                    | — |   | $ | – |   |
| Gain (loss) from discontinued operations            |   | (5                                   | )      | 136 |   |
| Gain (loss) on disposal of  discontinued operations |   | —                               |   | – |   |
| Net gain/(loss) from discontinued  operations       |   | $                                    | (5     | ) | $ | 136 |   |

 

As of December 31, 2003and September 30, 2003, the Company has accrued liabilities of$2.2 million remaining from its discontinued businesses. The accrualprimarily consists of severance, lease payments and other miscellaneousexpenses.

 

3.  STOCK-BASED COMPENSATION

 

Stock-based compensation is accounted for by using theintrinsic value-based method in accordance with the provisions of AccountingPrinciples Board (“APB”) Opinion No. 25, “Accounting for Stock Issued toEmployees,” and related interpretations, and the Company is in compliance withthe disclosure provisions of SFAS No. 123, “Accounting for Stock-BasedCompensation.”  Accordingly, the Companyonly records compensation expense for any stock options granted with anexercise price that is less than the fair market value of the underlying stockat the date of

 

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grant.  TheCompany does not record compensation expense for rights to purchase sharesunder its ESOP because it satisfies certain conditions under APB 25.

 

During May 2003, the Companyissued options to purchase 175,000 shares of common stock to its ChiefFinancial Officer, exercisable at $0.04 per share, which was the fair marketvalue on the date of issuance.

 

The following table details the effect on net income and earnings pershare had stock-based compensation expense been recorded based on the fairvalue method under SFAS No. 123, as amended.

 

(In Thousands, Except Per Share Amounts)

 
|                                                                                                        |   | **3 Months Ended December 31,** |       |
|-------------------------------------------------------------------------------------------------------------|--------|---------------------------------|------------|
|                                                                                                        |   | **2003**                        |       | **2002** |   |
|                                                                                                        |   |                            | ** ** |   | ** ** |
| Net loss attributable to common shares, as  reported                                                        |   | $                               | (665       | ) | $ | (2,973 | ) |
| Deduct: Total  stock-based employee compensation expense determined under fair value method  for all awards |   | (1                              | )          | — |   |
| Net loss, pro forma                                                                                         |   | $                               | (666       | ) | $ | (2,973 | ) |
| Basic and diluted net  loss per common share, as reported                                                   |   | $                               | (0.02      | ) | $ | (0.08 | ) |
| Basic and diluted net  loss per common share, pro forma                                                     |   | $                               | (0.02      | ) | $ | (0.08 | ) |

 

4.  LEGAL

 

During fiscal 2003, the Company was involved in an arbitration filed inNew York by the Company’s former President and Chief Executive Officer seekingdamages for alleged breach of his employment agreement, among other things. TheCompany reached an agreement in October 2003 with its former CEO to settlethe dispute for nominal consideration.

 

The Company and/or its Beyond the Wall subsidiary are also defendantsin various other lawsuits and claims from creditors of the Company seekingdamages aggregating approximately $465,000. These matters have been brought byvarious trade creditors of the Company. The Company evaluates its response ineach situation based on the particular facts and circumstances of a claim.Accordingly, the ultimate outcome of these matters cannot be determined at thistime and may ultimately result in judgments and liens against the Company, itsreal estate or its other assets. The Company has made sufficient accruals forthe exposure related to such matters that have been deemed probable andreasonably estimable at December 31, 2003. In December 2003, Beyondthe Wall was notified that a trade creditor, whose claim is already in the$465,000 described above, had received a favorable court judgment thatpermitted the creditor to place a lien against the Beyond the Wall’s realproperty for $139,000.  This obligationwas settled in conjunction with the sale of Beyond the Wall in February 2004.

 

In addition, certain landlords of stores which Beyond the Wall hasvacated in advance of the expiration dates of the store leases or failed to payrent when due have commenced litigation against the Company. The Companyintends to negotiate with the landlords to settle the lease terminationliabilities and has sufficiently accrued for the exposure from leasetermination costs.

 

Given the Company’s currentfinancial situation, the costs of defending these proceedings and diversion ofmanagement’s attention to these matters, the outcome of such proceedings couldhave a material adverse effect on the Company’s financial condition oroperating results, including its ability to restructure its debts withoutseeking bankruptcy protection or being the subject of an involuntary bankruptcypetition, or its ability to continue as a going concern.

 

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ITEM 2.               MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion of the financial condition and results ofoperations of the Company should be read in conjunction with the consolidatedfinancial statements and related notes thereto. The following discussioncontains certain forward-looking statements that involve risks anduncertainties. The Company’s actual results could differ materially from thosediscussed herein. Factors that could cause or contribute to such differencesinclude, but are not limited to, the Company’s ability to discharge itsliabilities and restructure its debt, changing consumer tastes and generaleconomic conditions. The Company undertakes no obligation to publicly releasethe results of any revisions to these forward-looking statements that may bemade to reflect any future events or circumstances.

 

The Company has incurred recurring operating losses since itsinception. As of December 31, 2003, the Company had an accumulated deficitof approximately $342,133,000 and expects to have insufficient capital to fundall of its obligations. In January 2003 the Company completed a debtrestructuring transaction with the holders of $18 million of itssubordinated notes. In addition, the Company’s retail sales have beendeclining. These conditions raise substantial doubt about the Company’s abilityto continue as a going concern. The financial statements do not include anyadjustments to reflect the possible future recoverability and classification ofassets or the amounts and classifications of liabilities that may result fromthe outcome of this uncertainty.

 

The Company’s new management intends to continue efforts to settle theCompany’s outstanding obligations and reduce operating costs.  The Company believes that its current cashresources will be adequate to fund its operations at current levels during theremainder of fiscal 2004. However, to the extent the Company’s estimates andassumptions are inaccurate and/or the Company is unable to successfully settleoutstanding obligations at reduced amounts, the Company may not have sufficientcash resources to fund such obligations and maintain its operations.  In such event, the Company may be requiredto consider a formal or informal restructuring or reorganization.   The Company is also considering a widerange of business opportunities, which may require additional capital toacquire and/or operate.

 

# **Saleof Beyond the Wall**

# ** **

EffectiveFebruary 25, 2004, the Company’s wholly-owned subsidiary, Beyond the Wall, Inc.(“BTW”), sold substantially all of its assets and operations to a groupunaffiliated with the Company (which included certain former management ofBTW), for $1,920,000, consisting of a cash payment of $820,000 and asubordinated secured promissory note (the “Note”) for $1,100,000, with interestat 10% per annum, due October 31, 2006. If certain optional principal pre-payments on the Note are made by June30, 2004, the principal balance of the Note will be adjusted downward, inexcess of such principal pre-payments, based on an agreed-upon sliding scale asset forth in the Note.

 

TheCompany estimates that it will recognize a loss between $200,000 and $300,000in the second quarter of fiscal year 2004 with respect to this transaction.

 

Asa result of the sale of the BTW assets in February 2004, the Company no longerhas any active business operations. The Company’s management is consideringvarious strategic alternatives, including the acquisition of one or more newbusiness opportunities, which may be from related or unrelated parties.  However, there can be no assurances thatsuch efforts will ultimately be successful. The Company may finance any acquisitions through a combination of debtand/or equity securities.

 

**Investment in KES Holdings**

 

In September 2003, the Company announced thatit made a capital contribution of $125,000 for a 1.00% membership interest inKES Holdings, LLC, a Delaware limited liability company (“KES Holdings”), whichwas formed to acquire certain assets of Kentucky Electric Steel, Inc., aDelaware company (“KES”), consisting of a steel mini-mill located in Ashland,Kentucky (the “Acquired Assets”).  On September 2, 2003, KESHoldings, through its subsidiary, KES Acquisition Company, LLC, a Delawarelimited liability company (“KES Acquisition”), completed the acquisition of theAcquired Assets pursuant to Section 363 of the United States BankruptcyCode for cash consideration of $2,650,000.  KES ceased production on orabout December 16, 2002 and filed for a voluntary petition for reliefunder Chapter 11 of the United States Bankruptcy Code on February 5, 2003.

 

In addition to the Company, investors in KESHoldings include, among others, affiliates of Libra Securities, LLC, a Delawarelimited liability company, which is a broker-dealer registered with theSecurities and Exchange Commission and an NASD member (“Libra”), consisting ofLibra’s parent entity, certain employees of Libra and the Ravich RevocableTrust of 1989 (Jess M. Ravich, Trustee) (the “Ravich Trust”).  RobertScott Fritz, one of the directors of the Company, is also an investor in KESHoldings.  Jess M. Ravich, the President and Chief Executive Officer ofLibra and the principal stockholder of Libra’s parent entity, is the manager ofKES Holdings, but does not have a controlling equity interest in KESHoldings.  The contributions of the members of KES Holdings were used inpart to fund the purchase price of the Acquired Assets, with the balanceintended to be used for start-up costs, working capital purposes and deferredmaintenance of the Acquired Assets. 

 

The Company has had preliminary discussionswith KES Holdings to acquire KES Acquisition.  Although there are presentlyno understandings, agreements or commitments between KES Holdings and theCompany pursuant to which KES Holdings would be obligated to sell KESAcquisition to the Company, or pursuant to which the Company would be obligatedto purchase KES Acquisition from KES Holdings, it is presently contemplatedthat, should such a transaction occur, it would involve the delivery by theCompany to KES Holdings of a subordinated note for all or substantially all ofthe purchase consideration.  Such a transaction would be subject tosubstantial risks, contingencies and uncertainties, including, among others,satisfactory completion of due diligence, preparation of definitive transactiondocuments, compliance with state and federal securities laws and regulations,additional debt and/or equity financing, and possibly, approval by theCompany’s stockholders.  Accordingly, there can be no assurances that anytransaction between the Company and KES Holdings ultimately will occur, or thatif a transaction does occur, future operations of the steel mini-mill will besuccessful.  The Company may alsoconsider acquiring a majority, but less than 100%, interest in KES Acquisition.

 

The Ravich Trust currently owns 1,000,000shares of redeemable preferred stock and 1,860,000 shares of common stock ofthe Company.  The Ravich Trust also owns warrants to purchase 500,000shares of common stock of the Company, as described under the sub-heading“Affiliate Loans” above. 

 

TheCompany’s Board of Directors consists of Jonathan V. Diamond, Hal G. Byer andRobert Scott Fritz.  Hal G. Byer is a Senior Vice President of Libra, andby virtue of his employment agreement with Libra, Mr. Byer has an economicinterest in the investment in KES Holdings made by Libra’s parent entity. The Company’s three directors have each paid $2,500 ($0.04 per share) toacquire an option from the Ravich Trust to purchase 62,500 shares at $0.36 pershare of the Company’s preferred stock issued to the Ravich Trust inJanuary 2003, exercisable until December 31, 2006 or earlier upon theoccurrence of certain events, as described above in Footnote 1 under thesub-heading “Debt Restructuring and Amendments”.   

 

**Critical Accounting Policies**

 

The Company prepared the financial statements in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires the use of estimates and assumptionsthat affect the reported amounts of assets and liabilities and the disclosureof contingent assets and liabilities at the date of the financial statementsand the reported amount of revenues and expenses during the reporting period.Management periodically evaluates the estimates and judgments made. Managementbases its estimates and judgments on historical experience and on various

 

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factors that are believed to be reasonable under the circumstances.Actual results may differ from these estimates as a result of differentassumptions or conditions.

 

The following critical accounting policies affect the more significantjudgments and estimates used in the preparation of the Company’s financialstatements.

 

**Inventories**

 

Inventories are stated at the lower of cost or market. Cost isdetermined on a last-in, first-out basis. Inventories consist primarily ofposters and related products. The Company periodically reviews its inventoryand records adjustments to reflect shortages and obsolete, damaged, slow-movingor overstocked items.

 

**Revenue Recognition**

 

The Company’s primary source of revenue is from retail sales recordedby its Beyond the Wall subsidiary from the sale of merchandise to consumers oncollege campuses and in stores. Retail revenue is recognized at the time of thesale to the consumer.

 

**Impairment of Assets**

 

The Company periodically evaluates its non-current assets for potentialimpairment indicators. The Company’s judgments regarding the potentialimpairment are based on legal factors, market conditions and operationalperformance indicators, among others. Future events could cause us to concludethat impairment indicators exist and that such assets (primarily investmentsand fixed assets) are impaired.

 

**Accounts Receivable**

 

Accounts receivable consist primarily of amounts due to the Companyfrom the college campus activities of the Company’s Beyond the Wall subsidiary.The Company periodically updates its allowance for doubtful accounts to reflectthe expected uncollectibility of accounts receivable based on past collectionhistory and specifically identified risk.

 

**Income Taxes**

 

The Company records a valuation allowance to reduce its deferred taxassets to the amount that is more likely than not to be realized. In the eventthe Company was to determine that it would be able to realize its deferred taxassets in the future in excess of its recorded amount, an adjustment to thedeferred tax assets would be credited to operations in the period suchdetermination was made. Likewise, should the Company determine that it wouldnot be able to realize all or part of its deferred tax assets in the future, anadjustment to the deferred tax assets would be charged to operations in theperiod such determination was made.

 

**RESULTS OF OPERATIONS**

**(in thousands)**

 

The Company’s only business operations for the three months ended December31, 2003 and 2002 consisted of the operations of Beyond the Wall.  As a result of the sale of the assets ofBeyond the Wall in February 2004, the operating categories related to Beyondthe Wall as discussed below for the three months ended December 31, 2003 willnot continue after February 2004.

 

For the three months ended December 31, 2003, net revenues were$1,053 as compared to $1,956 for the three months ended December 31, 2002.The decrease of $903 was attributable to comparable same stores sales declineas well as the closing of retail stores.

 

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For the three months ended December 31, 2003, cost of goods soldwere $393 as compared to $444 for the three months ended December 31, 2002. Thedecrease of $51 was due a decline in same store retail sales and a reduction innumber of retail stores.

 

For the three months ended December 31, 2003, selling, general andadministrative expenses were $1,192 as compared to $1,565 for the three monthsended December 31, 2002. The decrease of $373 was due to occupancy andpayroll related savings attributable to the reduction in the number of retailstores in operation.

 

For the three months ended December 31, 2003, corporate expenses were$476 as compared to $1,227 for the three months ended December 31, 2002.  The decrease of $751 was due to overheadsavings attributable to the sale the media business during the three monthsended September 30, 2002.

 

For the three months ended December 31, 2003, depreciation and amortizationexpenses were $140 as compared to $147 for the three months endedDecember 31, 2002. The $7 decrease was due primarily to a reduction incapital expenditures following the plan to close a number of retail stores inearly fiscal 2003.

 

For the three months ended December 31, 2003, interest income waszero as compared to $28 for the three months ended December 31, 2002. Thedecrease of $28 was due to lower interest income earned on decreased cashbalances.

 

For the three months ended December 31, 2003, interest expense was$11 as compared to $721 for the three months ended December 31, 2002. Thedecrease of $710 was primarily related to the decrease in long-term debt as aresult of the debt restructuring in January 2003.

 

For the three months ended December 31, 2003, loss fromdiscontinued operations was $5 as compared to a gain of $136 for the threemonths ended December 31, 2002.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

To date, the Company has financed its operations primarily through thesale of equity securities and debt. As of December 31, 2003, the Companyhad $303,000 in cash, a decrease of $1,187,000 from September 30, 2003.The Company has never been profitable and expects to continue to incuroperating losses in fiscal 2004. The Company’s consolidated financialstatements have been prepared on the assumption that the Company will continueas a going concern. The Company’s independent auditors have issued their reportdated January 5, 2004 that includes an explanatory paragraph stating thatthe Company’s recurring losses and accumulated deficit, working capitaldeficiency and negative cash flow, among other things, raise substantial doubtabout the Company’s ability to continue as a going concern. The Company’shistorical sales have never been sufficient to cover its expenses and it hasbeen necessary to rely upon financing from the sale of equity securities anddebt to sustain operations. The Company may find it necessary to rely uponfinancing from debt, if made available, or on the sale of equity securities tocontinue to sustain its operations, acquire or develop new operations, and tobe able to meet its cash demands. There can be no assurance that the Companywill be able to obtain sufficient additional capital under acceptable terms orconditions. These conditions raise substantial doubt about the Company’sability to continue as a going concern.

 

During the three months ended December 31, 2003, the Company used$1.2 million cash in operating activities related primarily to its$665,000 loss for the three months ended December 31, 2003, which included netloss from discontinued operations of $5,000 and non-cash activities $140,000for depreciation and amortization. During the three months endedDecember 31, 2002, the Company used $1.1 million cash in operatingactivities related primarily to its $2.9 million loss during the threemonths ended December 31, 2002, which included net gain of $136,000 relating todiscontinued operations and non-cash activities $147,000 for depreciation andamortization, and $989,000 in loss on disposal of assets.

 

For the three months ended December 31, 2002, the Companygenerated $74,000 from investing activities primarily relating to proceeds of$106,000 from the sale of fixed assets, offset by $32,000 of capital expenditures.

 

For the three months ended December 31, 2002, the Company used$514,000 in financing activities, relating primarily to the $470,000 payment tosettle the Wells Fargo Equipment Note.

 

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The Company’s principal commitments consist of obligations outstandingunder operating leases totaling approximately $733,000.

 

The Company does not have any material commitments for capitalexpenditures at December 31, 2003.

 

**Off-Balance Sheet Arrangements**

 

The Company does not have any transactions, obligations orrelationships that could be considered off-balance sheet arrangements atDecember 31, 2003.

 

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ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK

 

**Market Risk**

 

The Company does not have any market risk with respect to such factorsas commodity prices, equity prices, and other market changes that affect marketrisk sensitive investments.

 

The Company does not have any foreign currency risk, as its revenuesand expenses, as well as its debt obligations, are denominated and settled inUnited States dollars.

 

**Interest Rate Risk**

 

The Company’s investments areclassified as cash and cash equivalents and debt securities with originalmaturities of three months or less. Therefore, changes in the market’s interestrates do not affect the value of the investments as recorded by the Company.

 

ITEM4.  CONTROLS AND PROCEDURES

 

Under the supervision and withthe participation of the Company’s management, including its Chief ExecutiveOfficer and its Chief Financial Officer, the Company conducted an evaluation ofits disclosure controls and procedures as such term is defined underRule 13a-15(e) promulgated under the Securities Act of 1934, as amended,as of the end of the reporting period. Based on such evaluation, the Company’sChief Executive Officer and Chief Financial Officer concluded that theCompany’s disclosure controls and procedures are effective. There have been nosignificant changes (including corrective actions with regard to significantdeficiencies or material weaknesses) in the Company’s internal controls or inother factors that could significantly affect these controls subsequent to thedate of the evaluation referenced above.

 

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PARTII

 

OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

During fiscal 2003, the Company was involved in an arbitration filed inNew York by the Company’s former President and Chief Executive Officer seekingdamages for alleged breach of his employment agreement, among other things. TheCompany reached an agreement in October 2003 with its former CEO to settlethe dispute for nominal consideration.

 

The Company and/or its Beyond the Wall subsidiary are also defendantsin various other lawsuits and claims from creditors of the Company seekingdamages aggregating approximately $465,000. These matters have been brought byvarious trade creditors of the Company. The Company evaluates its response ineach situation based on the particular facts and circumstances of a claim.Accordingly, the ultimate outcome of these matters cannot be determined at thistime and may ultimately result in judgments and liens against the Company, itsreal estate or its other assets. The Company has made sufficient accruals forthe exposure related to such matters that have been deemed probable andreasonably estimable at December 31, 2003. In December 2003, Beyondthe Wall was notified that a trade creditor, whose claim is already in the$465,000 described above, had received a favorable court judgment thatpermitted the creditor to place a lien against the Beyond the Wall’s realproperty for $139,000.  This obligationwas settled in conjunction with the sale of Beyond the Wall in February 2004.

 

In addition, certain landlords of stores which Beyond the Wall hasvacated in advance of the expiration dates of the store leases or failed to payrent when due have commenced litigation against the Company. The Companyintends to negotiate with the landlords to settle the lease terminationliabilities and has sufficiently accrued for the exposure from leasetermination costs.

 

Given the Company’s currentfinancial situation, the costs of defending these proceedings and diversion ofmanagement’s attention to these matters, the outcome of such proceedings couldhave a material adverse effect on the Company’s financial condition oroperating results, including its ability to restructure its debts withoutseeking bankruptcy protection or being the subject of an involuntary bankruptcypetition, or its ability to continue as a going concern.

 

ITEM6.  EXHIBITS AND REPORTS ON FORM 8-K

 

(a)          Exhibits

 

A list of exhibits required to be filed as part ofthis report is set forth in the Index to Exhibits, which immediately precedessuch exhibits, and is incorporated herein by reference.

 

(b)         Reports on Form 8-K:none.

 

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SIGNATURES

 

Inaccordance with the requirements of the Securities Exchange Act of 1934, theregistrant has caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
| March  5, 2004 |                                    |
|----------------|-----------------------------------------|
|           |                                    |
|           |                                    |
|           | YOUTHSTREAM  MEDIA NETWORKS, INC.       |
|           |                                    |
|           |                                    |
|           | BY:                                     |
|           |  /s/ Jonathan  V. Diamond          |   |
|           | Jonathan  V. Diamond                    |
|           | Chairman  & Chief Executive Officer |
|           |                                    |
|           |                                    |
|           | BY:                                     |
|           |  /s/ Robert N.  Weingarten         |   |
|           | Robert  N. Weingarten                   |
|           | Chief  Financial Officer                |

 

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INDEX TO EXHIBITS

 
| 31.1   |   | Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 - Jonathan Diamond  |
|--------|--------|----------------------------------------------------------------------------------------------|
|   |   |                                                                                         |
| 31.2   |   | Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 - Robert Weingarten |
|   |   |                                                                                         |
| 32     |   | Certification pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                     |

 

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