**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 March 31, 2004**                                                                                        |
|                                                                                                                                      |
| **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 Number) |
|                                                            |   |                                     |
| **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 April30, 2004, there were 39,242,000 shares of Common Stock, $.01 par valueoutstanding.

 

 

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YOUTHSTREAM MEDIA NETWORKS, INC. ANDSUBSIDIARIES

 

FORM 10-Q

 

INDEX

 
| **PART  I—FINANCIAL INFORMATION**                                                                                                |                                                                                        |
|---------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|
|                                                                                                                                  |                                                                                        |
| ITEM 1.                                                                                                                               | FINANCIAL STATEMENTS                                                                        |   |
|                                                                                                                                  |                                                                                        |
| Condensed  Consolidated Balance Sheets—    March 31, 2004 (Unaudited) and September 30, 2003                                |                                                                                        |
|                                                                                                                                  |                                                                                        |
| Condensed  Consolidated Statements of Operations (Unaudited) —    Three Months and Six Months Ended March 31, 2004 and 2003 |                                                                                        |
|                                                                                                                                  |                                                                                        |
| Condensed  Consolidated Statement of Stockholders’ Deficiency (Unaudited)—    Six Months Ended March 31, 2004          |                                                                                        |
|                                                                                                                                  |                                                                                        |
| Condensed  Consolidated Statements of Cash Flows (Unaudited) —    Six Months Ended March 31, 2004 and 2003                  |                                                                                        |
|                                                                                                                                  |                                                                                        |
| Notes  to Condensed Consolidated Financial Statements -   Three Months and Six Months Ended March 31, 2004 and 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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PART I

 

FINANCIAL INFORMATION

 

ITEM1.  FINANCIAL STATEMENTS

 

YOUTHSTREAM MEDIA NETWORKS, INC. ANDSUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

 
|                                                                                                                                                                                                                                                                                                                 |   | **March 31,  2004** |   | **September  30,  2003** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|--------------------------|--------|
|                                                                                                                                                                                                                                                                                                                 |   | **(Unaudited)**     |   |                     |   |
|                                                                                                                                                                                                                                                                                                                 |   |                |   |                     |   |
| ASSETS                                                                                                                                                                                                                                                                                                               |   |                |   |                     |   |
| Current assets:                                                                                                                                                                                                                                                                                                      |   |                |   |                     |   |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                            |   | $                   | 697    |                     | $      | 531 |   |
| Prepaid expenses                                                                                                                                                                                                                                                                                                     |   | 41                  |   | 188                      |   |
|                                                                                                                                                                                                                                                                                                                 |   |                |   |                     |   |
| Total current assets                                                                                                                                                                                                                                                                                                 |   | 738                 |   | 719                      |   |
|                                                                                                                                                                                                                                                                                                                 |   |                |   |                     |   |
| Property and equipment, net                                                                                                                                                                                                                                                                                          |   | 35                  |   | 45                       |   |
| Note receivable, including accrued interest                                                                                                                                                                                                                                                                          |   | 854                 |   | —                   |   |
| Investment in KES Holdings                                                                                                                                                                                                                                                                                           |   | 125                 |   | 125                      |   |
| Assets from discontinued operations                                                                                                                                                                                                                                                                                  |   | —              |   | 5,190                    |   |
|                                                                                                                                                                                                                                                                                                                 |   |                |   |                     |   |
| Total assets                                                                                                                                                                                                                                                                                                         |   | $                   | 1,752  |                     | $      | 6,079 |   |
|                                                                                                                                                                                                                                                                                                                 |   |                |   |                     |   |
| LIABILITIES AND STOCKHOLDERS’ DEFICIENCY                                                                                                                                                                                                                                                                        |   |                |   |                     |   |
| Current liabilities:                                                                                                                                                                                                                                                                                                 |   |                |   |                     |   |
| Accounts payable                                                                                                                                                                                                                                                                                                     |   | $                   | 881    |                     | $      | 858 |   |
| Accrued employee compensation                                                                                                                                                                                                                                                                                        |   | 257                 |   | 266                      |   |
| Accrued expenses                                                                                                                                                                                                                                                                                                     |   | 691                 |   | 613                      |   |
| Current liabilities of discontinued  operations                                                                                                                                                                                                                                                                      |   | 2,446               |   | 4,859                    |   |
| Total current liabilities                                                                                                                                                                                                                                                                                            |   | 4,275               |   | 6,596                    |   |
|                                                                                                                                                                                                                                                                                                                 |   |                |   |                     |   |
| Long-term debt                                                                                                                                                                                                                                                                                                       |   | 4,913               |   | 4,913                    |   |
| Preferred stock subject to mandatory  redemption; issued and outstanding at March 31, 2004 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                                                                                                                                                                                                                                                                                                    |   | 14,457              |   | 16,778                   |   |
|                                                                                                                                                                                                                                                                                                                 |   |                |   |                     |   |
| Commitments and contingencies                                                                                                                                                                                                                                                                                        |   |                |   |                     |   |
|                                                                                                                                                                                                                                                                                                                 |   |                |   |                     |   |
| Stockholders’ Deficiency                                                                                                                                                                                                                                                                                        |   |                |   |                     |   |
| Preferred stock, $0.01 par value,  authorized - 5,000 shares; issued and outstanding at March 31, 2004 and  September 30, 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 and 39,242 outstanding at March 31, 2004 and  September 30, 2003, respectively                                                                                                                                                       |   | 398                 |   | 398                      |   |
| Additional paid-in capital                                                                                                                                                                                                                                                                                           |   | 331,200             |   | 331,200                  |   |
| Accumulated deficit                                                                                                                                                                                                                                                                                                  |   | (343,474            | )      | (341,468                 | )      |
| Treasury stock, 608 shares, at cost                                                                                                                                                                                                                                                                                  |   | (829                | )      | (829                     | )      |
| Total stockholders’ deficiency                                                                                                                                                                                                                                                                                  |   | (12,705             | )      | (10,699                  | )      |
|                                                                                                                                                                                                                                                                                                                 |   |                |   |                     |   |
| Total liabilities and stockholders’  deficiency                                                                                                                                                                                                                                                                 |   | $                   | 1,752  |                     | $      | 6,079 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

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YOUTHSTREAM MEDIA NETWORKS, INC. ANDSUBSIDIARIES

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

 
|                                                                           |   | **Three  months ended  March 31,** |   | **Six months  ended  March 31,** |   |
|--------------------------------------------------------------------------------|--------|------------------------------------|--------|----------------------------------|--------|
|                                                                           |   | **2004**                           |   | **2003**                         |   | **2004** |   | **2003** |   |
|                                                                           |   |                               |   |                             |   |   |   |   |   |
| General and administrative expenses –  corporate                          |   | $                                  | 371    |                             | $      | 621 |   | $ | 700 |   | $ | 1,528 |   |
| Depreciation and amortization                                                  |   | 5                                  |   | 5                                |   | 10 |   | 10 |   |
| Loss from operations                                                           |   | (376                               | )      | (626                             | )      | (710 | ) | (1,538 | ) |
| Interest income                                                                |   | 11                                 |   | 7                                |   | 11 |   | 34 |   |
| Interest expense                                                               |   | (10                                | )      | (185                             | )      | (20 | ) | (905 | ) |
| Gain on debt settlement                                                        |   | —                             |   | 2,754                            |   | — |   | 2,800 |   |
| Income (loss) before provision for income  taxes                               |   | (375                               | )      | 1,950                            |   | (719 | ) | 391 |   |
| Provision for income taxes                                                     |   | (12                                | )      | 5                                |   | (12 | ) | 4 |   |
| Income (loss) from continuing operations                                       |   | (363                               | )      | 1,945                            |   | (707 | ) | 387 |   |
| Loss from discontinued operations                                              |   | (156                               | )      | (1,217                           | )      | (477 | ) | (2,632 | ) |
| Loss on disposal of discontinued operations                                    |   | (822                               | )      | —                           |   | (822 | ) | — |   |
| Net income (loss) attributable to common  shares                               |   | $                                  | (1,341 | )                                | $      | 728 |   | $ | (2,006 | ) | $ | (2,245 | ) |
| Per share of common stock - basic and  diluted                                 |   |                               |   |                             |   |   |   |   |   |
| From continuing operations                                                     |   | $                                  | (0.01  | )                                | $      | 0.05 |   | $ | (0.02 | ) | $ | 0.01 |   |
| From discontinued operations                                                   |   | —                             |   | (0.03                            | )      | (0.01 | ) | (0.07 | ) |
| From disposal of discontinued operations                                       |   | (0.02                              | )      | —                           |   | (0.02 | ) | — |   |
| Net income (loss) per common share - basic  and diluted                        |   | $                                  | (0.03  | )                                | $      | 0.02 |   | $ | (0.05 | ) | $ | (0.06 | ) |
| Weighted average number of common shares  outstanding – basic and diluted |   | 39,242                             |   | 38,224                           |   | 39,242 |   | 36,724 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

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YOUTHSTREAM MEDIA NETWORKS, INC. ANDSUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OFSTOCKHOLDERS’ DEFICIENCY

FOR THE SIX MONTHS ENDED MARCH 31, 2004

(IN THOUSANDS)

(UNAUDITED)

 
|                        |   | **Common Stock** |   | **Additional  Paid-in  Capital** |   | **Accumulated  Deficit** |   | **Treasury  Stock** |   | **Total** |     |
|-----------------------------|--------|------------------|--------|----------------------------------|--------|--------------------------|--------|---------------------|--------|-----------|----------|
| **Shares**                  |   | **Amount**       |
|                        |   |             |   |                             |   |                     |   |                |   |      |     |   |   |
| Balances at October 1, 2003 |   | 39,850           |   | $                                | 398    |                     | $      | 331,200             |   | $         | (341,468 | ) | $ | (829 | ) | $ | (10,699 | ) |
| Net loss                    |   | —           |   | —                           |   | —                   |   | (2,006              | )      | —    |     | (2,006 | ) |
| Balances at March 31, 2004  |   | 39,850           |   | $                                | 398    |                     | $      | 331,200             |   | $         | (343,474 | ) | $ | (829 | ) | $ | (12,705 | ) |

 

See accompanying notes to condensed consolidated financial statements.

 

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YOUTHSTREAM MEDIA NETWORKS, INC. ANDSUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS

(IN THOUSANDS)

(UNAUDITED)

 
|                                                                         |   | **Six months  ended  March 31,** |   |
|------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                         |   | **2004**                         |   | **2003** |   |
|                                                                         |   |                             |   |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES                                         |   |                             |   |   |   |
| Net loss                                                                     |   | $                                | (2,006 | ) | $ | (2,245 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |   |                             |   |   |   |
| Loss from discontinued operations                                            |   | 477                              |   | 2,632 |   |
| Loss on disposal of discontinued operations                                  |   | 822                              |   | — |   |
| Net change in assets and liabilities of  discontinued operations             |   | (197                             | )      | 85 |   |
| Provision for doubtful accounts                                              |   | —                           |   | 15 |   |
| Depreciation and amortization                                                |   | 10                               |   | 10 |   |
| Gain on disposal of fixed assets                                             |   | —                           |   | (172 | ) |
| Gain on debt extinguishment                                                  |   | —                           |   | (2,800 | ) |
| Amortization of deferred financing costs                                     |   | —                           |   | 239 |   |
| Amortization of original issue discount on  Subordinated Notes               |   | 1                                |   | 38 |   |
| Deferred rent                                                                |   | —                           |   | (346 | ) |
| Changes in assets and liabilities, net of  acquisitions and dispositions:    |   |                             |   |   |   |
| Accounts receivable                                                          |   | —                           |   | 291 |   |
| Other current assets                                                         |   | 146                              |   | 498 |   |
| Accounts payable                                                             |   | 23                               |   | 30 |   |
| Accrued expenses                                                             |   | 70                               |   | 533 |   |
| Net cash used in operating activities                                        |   | (654                             | )      | (1,192 | ) |
|                                                                         |   |                             |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                         |   |                             |   |   |   |
| Proceeds from the sale of BTW assets                                         |   | 820                              |   | — |   |
| Proceeds from the sale of fixed assets                                       |   | —                           |   | 106 |   |
| Net cash provided by investing activities                                    |   | 820                              |   | 106 |   |
|                                                                         |   |                             |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                         |   |                             |   |   |   |
| Repayment of capitalized lease obligations                                   |   | —                           |   | (43 | ) |
| Repayment of long-term debt                                                  |   | —                           |   | (4,970 | ) |
| Net cash used in financing activities                                        |   | —                           |   | (5,013 | ) |
|                                                                         |   |                             |   |   |   |
| Increase (decrease) in cash and cash  equivalents                            |   | 166                              |   | (6,099 | ) |
| Cash and cash equivalents at beginning of  period                            |   | 531                              |   | 6,483 |   |
| Cash and cash equivalents at end of period                                   |   | $                                | 697    |   | $ | 384 |   |
|                                                                         |   |                             |   |   |   |
| Supplemental cash flow information:                                          |   |                             |   |   |   |
| Cash paid for income taxes                                                   |   | $                                | — |   | $ | — |   |
| Cash paid for interest                                                       |   | $                                | — |   | $ | — |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

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YOUTHSTREAM MEDIA NETWORKS, INC. ANDSUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS

THREE MONTHS AND SIX MONTHS ENDED MARCH 31,2004 AND 2003

(UNAUDITED)

 

1.  ORGANIZATION AND BASIS OF PRESENTATION

 

The accompanying condensedconsolidated financial statements include the accounts of YouthStream MediaNetworks, Inc. (“YouthStream”), and its wholly-owned inactivesubsidiaries, 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, theCompany discontinued the operations of CommonPlaces, LLC (“CommonPlaces”),sixdegrees, inc. (“sixdegrees”), CollegeWeb.com, Inc. (“CollegeWeb”),and Invino Corporation (“Invino”). In December 2001, the Company soldsubstantially all of its media assets and assigned certain liabilities of itsNET and American Passage subsidiaries to Alloy, Inc. and ceased operatingthe media segment. Until the recent sale as described below, the Company,through its Beyond the Wall subsidiary, was primarily a retail company thattargeted teenagers and young adults ages 12 to 24.

 

As of March 31, 2004, theCompany did not have any revenue-generating business operations.

 

**FINANCIALSTATEMENT PRESENTATION**

 

The Company has incurredrecurring operating losses since its inception. As of March 31, 2004, theCompany had an accumulated deficit of $343,474,000, a stockholders’ deficiencyof $12,705,000, a working capital deficiency of $3,537,000, and a net loss andnegative cash flows from operating activities for the six months endedMarch 31, 2004 of $2,006,000 and $654,000, respectively.  The Company also sold its remainingoperating business during the three months ended March 31, 2004.  These conditions raise substantial doubtabout the Company’s ability to continue as a going concern. The condensedconsolidated financial statements do not include any adjustments to reflect thepossible future effect of the recoverability and classification of assets orthe amounts and classifications of liabilities that may result from the outcomeof this uncertainty.  The Company’sindependent auditors, in their report dated January 5, 2004, included anexplanatory paragraph stating that the Company’s recurring losses andaccumulated deficit, working capital deficiency and negative cash flow, amongother things, raise substantial doubt about the Company’s ability to continueas a going concern.

 

The Company’s managementintends to continue efforts to settle the Company’s outstanding obligations andreduce operating costs.  The Company believesthat its current cash resources will be adequate to fund its operations atcurrent levels during the remainder of fiscal 2004. However, to the extent theCompany’s estimates and assumptions are inaccurate and/or the Company is unableto successfully settle outstanding obligations at reduced amounts, the Companymay not have sufficient cash resources to fund such obligations and maintainits operations.  In such event, theCompany may be required to consider a formal or informal restructuring orreorganization.

 

As a result of the sale of the assets andoperations of Beyond the Wall in February 2004, the Company no longer has anyrevenue-generating 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 ofBeyond the Wall**

 

Effective February 25, 2004, the Company’swholly-owned subsidiary, Beyond the Wall, Inc. (“BTW”), sold substantiallyall of its assets and operations to a group unaffiliated with the Company(which included certain former management of BTW), for $1,920,000, consistingof a cash payment of $820,000 and a subordinated secured promissory note (the“Note”) for $1,100,000, with interest at 10% per annum, due October 31, 2006.  The buyer had the right to make certainoptional principal pre-payments on the Note by June 30, 2004, which wouldresult in the 

 

7

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principal balance of the Note being adjusteddownward, in excess of such principal pre-payments, based on an agreed-uponsliding scale as set forth in the Note.

 

On April 30, 2004, the buyer made an optionalprincipal pre-payment on the Note of $400,000. Accordingly, under the provisions of the sale agreement, the buyerreceived a credit of $107,000 against the $1,100,000 note (in excess of the$400,000 payment), as well as an additional $150,000 back-end credit on theNote.

 

The Company recognized a loss of $565,000during the three months ended March 31, 2004 with respect to this transactionbefore taking into consideration of the effect of the $400,000 principalpre-payment made on April 30, 2004. Inclusive of such payment, the effect of the accelerated payment creditand the back end credit resulted in an additional loss of $257,000, whichdecreased the carrying value of the note receivable from $1,100,000 to $843,000and increased the loss on the BTW sale from $565,000 to $822,000 for the threemonths ended March 31, 2004.  Managementhas elected to recognize the additional loss of $257,000 and to adjust thecarrying value of the note receivable resulting from the $400,000 principalpre-payment on April 30, 2004 in the Company’s condensed consolidated financialstatements at March 31, 2004.

 

**Saleof Media Assets**

 

In response to its liquidityissues and declining earnings, on August 5, 2002, following the close ofthe Company’s then fiscal year of June 30, 2002, the Company sold substantiallyall of its Media assets and assigned certain liabilities to CassCommunications, Inc., a subsidiary of Alloy, Inc. for proceeds of$7,000,000, which approximated the carrying value of the Media segment at thetime of sale. As of June 30, 2002, the Media segment’s assets andliabilities were classified as held and used, as the criteria to be held forsale under Statement of Financial Accounting Standards (“SFAS”) No. 144were not met prior to June 30, 2002. As a result of the sale, the Mediasegment operations were discontinued during the three months endedSeptember 30, 2002.

 

The condensed consolidatedfinancial statements and notes thereto have been reclassified for DiscontinuedOperations as a result of all businesses disposed of through March 31,2004, including the sale of the media segment operations and the BTW segmentoperations.

 

Thefollowing is a summary of the major classes of assets and liabilities thatremain from the Media and BTW operating segments as of March 31, 2004 andSeptember 30, 2003 (in thousands):

 
|                          |   | **March 31,  2004** |   | **September 30,  2003** |   |
|-------------------------------|--------|---------------------|--------|-------------------------|--------|
|                          |   | **(unaudited)**     |   |                    |   |
| Assets, net                   |   | $                   | 0      |                    | $      | 5,190 |   |
| Current liabilities           |   | (2,391              | )      | (4,804                  | )      |
| Capitalized lease obligations |   | (55                 | )      | (55                     | )      |
| Net book value                |   | $                   | (2,446 | )                       | $      | 331 |   |

 

**DebtRestructuring and Amendments**

 

In January 2003, the Companyreached an agreement with the holders of all of its and its Network EventTheater subsidiary’s outstanding notes (NET Notes, YSTM Notes and YSTM 2Note), in the aggregate principal amount of $18 million, to cancel thosenotes. In exchange for cancellation of all of the principal and interest due onthe old notes, the note holders received in aggregate $4.5 million incash, redeemable preferred stock with a face value of $4 million, and3,985,000 shares of common stock, valued at $255,000, and $4 millionaggregate principal amount of promissory notes issued by the Company’s retailsubsidiary, Beyond the Wall, Inc., secured by the Company’s pledge of allof its stock in Beyond the Wall.

 

At the closing of theJanuary 2003 debt restructuring, all of the Company’s previous directorsand officers resigned, and three new directors were appointed. Jonathan V.Diamond, who previously had been a director and interim Chief Executive Officerof the Company, was appointed as Chairman of the Board of Directors, and Hal G.Byer and Robert 

 

8

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Scott Fritz were appointed asdirectors of the Company. Mr. Diamond was appointed as Chief ExecutiveOfficer and Robert N. Weingarten was appointed as Chief Financial Officer.

 

During May 2003, theCompany issued options to the three new directors to purchase an aggregate of700,000 shares of common stock exercisable at the fair market value of $0.04per share for a period of seven years. In addition, the three new directorspaid an aggregate of $7,500 ($0.04 per share) in cash to acquire options fromthe holder of the shares of preferred stock that were issued in theJanuary 2003 restructuring to purchase an aggregate of 187,500 shares ofsuch holder’s preferred stock, exercisable at $0.36 per share.

 

The terms and conditions of theJanuary 2003 debt restructuring agreement qualified as a troubled debtrestructuring for accounting purposes in accordance with SFAS No. 15“Accounting by Debtors and Creditors for Troubled Debt Restructurings”. Indetermining the proper accounting treatment, the Company evaluated the natureof the economic consequences of each of the three separate transactions forpurposes of determining the gain, if any, in connection with the extinguishmentof the NET Notes, YSTM Notes and YSTM 2 Note in accordance with SFASNo. 15.

 

The cancellation of the NETNotes qualified as a full debt settlement whereby in exchange for theextinguishment of the $5 million note and cancellation of accruedinterest, the holders received $3,000,000 cash. As of the settlement date, theadjusted carrying value of the NET Notes, net of accrued interest, unamortizedoriginal issue discount and unamortized closing costs, was $5,448,000. Thesettlement resulted in a gain of $2,448,000.

 

The cancellation of the YSTMNotes was accounted for as a combination of a partial debt settlement and acontinuation of debt with modified terms. In exchange for the extinguishment ofthe YSTM Notes, the holder received cash of $1,500,000, 3,486,875 shares ofcommon stock with a fair value of $223,000, 1,000,000 shares of 4% redeemablepreferred stock, face value of $4,000,000, including cumulative dividends,totaling $5,269,000, due December 31, 2010 and a $3,000,000 promissorynote bearing interest at 4% per annum with principal and cumulative interestdue December 31, 2010. As of the settlement date, the adjusted carryingvalue of the YSTM Notes, net of accrued interest, unamortized original issuediscount and unamortized closing costs, was $11,251,000. After adjusting forthe fair value of the cash and common stock exchanged, the carrying value ofthe YSTM Notes was $9,528,000. For purposes of determining the gain on theextinguishment of the YSTM Notes, the redeemable preferred stock was accountedfor as a debt instrument given the mandatory redemption features of thesecurity. The issuance of the $3,000,000 promissory note and the 1,000,000shares of redeemable preferred stock constituted a continuation of debt withmodified terms. Given that the undiscounted future value of the promissory noteand the redeemable preferred stock, including accrued interest and cumulativedividends, was less than the adjusted carrying value of the YSTM Notesextinguished, the Company recognized a gain totaling $306,000 and recorded thevalue of the promissory note and the redeemable preferred stock at the undiscountedfuture value of $3,953,000 and $5,269,000, respectively, with no interestexpense or accretions in value to be recognized over the remaining life of thepromissory note and preferred stock.

 

The cancellation of the YSTM 2Note was accounted for as a combination of a partial debt settlement and acontinuation of debt with modified terms. In exchange for the extinguishment ofthe YSTM 2 Note, the holder received 498,125 shares of the Company’s commonstock with a fair value of $32,000 and a $1,000,000 promissory note bearinginterest at 4% per annum with principal and accrued interest dueDecember 31, 2010. As of the settlement date, the adjusted carrying valueof the YSTM 2 Note, net of accrued interest, unamortized original issuediscount and unamortized closing costs, was $991,000. After adjusting for thefair value of the common shares exchanged, the carrying value of the YSTM 2Note was $960,000. The issuance of the $1,000,000 promissory note constituted acontinuation of debt with modified terms. Given that the undiscounted futurevalue of the promissory note, including principal and interest, was greaterthan the adjusted carrying value of the YSTM 2 Note extinguished, the Companyrecognized no gain. The promissory note was revalued at the adjusted carryingvalue of the YSTM 2 Note surrendered, resulting in an imputed discount of$41,000.

 

In total, the Companyrecognized a gain from the troubled debt restructuring totaling $2,754,000. Thegain was classified as part of continuing operations in accordance with SFASNo. 145, “Rescission of SFAS Nos. 4, 44 and 64, Amendment of SFASNo. 13, and Technical Corrections as of April 2000.”

 

During June 2003, theCompany amended the original provisions of the $4,000,000 of promissory notesissued in conjunction with the January 24, 2003 restructuring to providefor the following:

 

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1.                                       Beyondthe Wall was replaced by the Company as the issuer of the notes, and wasreleased from any liability with respect to the notes.

 

2.                                       Thenote holders agreed to convert the notes from secured to unsecured, and torelease their security interest in all of the outstanding common stock ofBeyond the Wall.

 

3.                                       Thenote holders agreed to delete all provisions in the notes requiring the issuerof the notes to make mandatory prepayments based on the occurrence of certainevents.

 

4.                                       Thenote holders agreed to delete provisions in the notes prohibiting the issuerfrom: (i) incurring any indebtedness for borrowed money; (ii) selling,or entering into any agreement to sell, all or substantially all of the assetsor all 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 priorperiod’s consolidated financial statements have been reclassified to conform tothe current period’s presentation.

 

2.  DISCONTINUED OPERATIONS

 

Effective February 25, 2004, the Company’swholly-owned subsidiary, Beyond the Wall, Inc. (“BTW”), sold substantiallyall of its assets and operations to a group unaffiliated with the Company(which included certain former management of BTW).   The Company recognized an aggregate loss on the BTW transactiontotaling $822,000.  The loss on the BTWsale was reported as a loss on the disposal of discontinued operations for theperiod ended March 31, 2004.  As aresult of the sale, the BTW segment operations were discontinued during thethree months ended March 31, 2004.

 

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 result of the sale,the media segment operations were discontinued during the three months endedSeptember 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):

 
|                                        |   | **Six Months  Ended  March 31,** |   |
|---------------------------------------------|--------|----------------------------------|--------|
|                                        |   | **2004**                         |   | **2003** |   |
|                                        |   |                             |   |   |   |
| Net revenues                                |   | $                                | 2,513  |   | $ | 3,320 |   |
| Loss from discontinued operations           |   | (477                             | )      | (2,632 | ) |
| Loss on disposal of discontinued operations |   | (822                             | )      | — |   |
| Loss from discontinued operations           |   | $                                | (1,299 | ) | $ | (2,632 | ) |

 

As of March 31, 2004 andSeptember 30, 2003, the Company has accrued liabilities of $2,446,000 and$4,859,000, respectively, remaining from its discontinued businesses. Theaccrued liabilities consist primarily of severance, lease payments and othermiscellaneous expenses.

 

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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 grant.  The Company doesnot record compensation expense for rights to purchase shares under its ESOPbecause it satisfies certain conditions under APB 25.

 

Thefollowing table details the effect on net income (loss) and earnings (loss) 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)

 
|                                                                                                       |   | **Three  Months Ended March 31,** |   | **Six Months  Ended March 31,** |   |
|------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                                                                       |   | **2004**                          |   | **2003**                        |   | **2004** |   | **2003** |   |
| Net income/(loss) attributable to common  shares, as reported                                              |   | $                                 | (1,341 | )                               | $      | 728 |   | $ | (2,006 | ) | $ | (2,245 | ) |
| Add: Total stock-based employee  compensation expense included in reported net income/(loss)               |   | —                            |   | —                          |   | — |   | — |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value method for all awards |   | (2                                | )      | (540                            | )      | (3 | ) | (1,255 | ) |
| Net income/(loss), pro forma                                                                               |   | $                                 | (1,343 | )                               | $      | 188 |   | $ | (2,009 | ) | $ | (3,500 | ) |
| Basic and diluted net income/(loss) per  common share, as reported                                         |   | $                                 | (0.03  | )                               | $      | 0.02 |   | $ | (0.05 | ) | $ | (0.06 | ) |
| Basic and diluted net loss per common  share, pro forma                                                    |   | $                                 | (0.03  | )                               | $      | — |   | $ | (0.05 | ) | $ | (0.10 | ) |

 

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ITEM2.     MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion of thefinancial condition and results of operations of the Company should be read inconjunction with the consolidated financial statements and related notesthereto. The following discussion contains certain forward-looking statementsthat involve risks and uncertainties. The Company’s actual results could differmaterially from those discussed herein. Factors that could cause or contributeto such differences include, but are not limited to, the Company’s ability todischarge its liabilities and restructure its debt, acquire one or morenew businesses and general economic conditions. The Company undertakesno obligation to publicly release the results of any revisions to theseforward-looking statements that may be made to reflect any future events orcircumstances.

 

The Company has incurredrecurring operating losses since its inception. As of March 31, 2004, theCompany had an accumulated deficit of $343,474,000, a stockholders’ deficiencyof $12,705,000, a working capital deficiency of $3,537,000, and a net loss andnegative cash flows from operating activities for the six months endedMarch 31, 2004 of $2,006,000 and $654,000, respectively.  The Company also sold its remaining operatingbusiness during the three months ended March 31, 2004.  These conditions raise substantial doubtabout the Company’s ability to continue as a going concern. The financialstatements do not include any adjustments to reflect the possible future effectof the recoverability and classification of assets or the amounts andclassifications of liabilities that may result from the outcome of thisuncertainty.  The Company’s independentauditors, in their report dated January 5, 2004, included an explanatoryparagraph stating that the Company’s recurring losses and accumulated deficit,working capital deficiency and negative cash flow, among other things, raisesubstantial doubt about the Company’s ability to continue as a going concern.

 

The Company’s managementintends to continue efforts to settle the Company’s outstanding obligations andreduce operating costs.  The Companybelieves that its current cash resources will be adequate to fund itsoperations at current levels during the remainder of fiscal 2004. However, tothe extent the Company’s estimates and assumptions are inaccurate and/or theCompany is unable to successfully settle outstanding obligations at reducedamounts, the Company may not have sufficient cash resources to fund suchobligations and maintain its operations. In such event, the Company may be required to consider a formal orinformal restructuring or reorganization.

 

As a result of the sale of the assets andoperations of Beyond the Wall in February 2004, the Company no longer has anyrevenue-generating 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 ofBeyond the Wall**

 

Effective February 25, 2004, the Company’swholly-owned subsidiary, Beyond the Wall, Inc. (“BTW”), sold substantiallyall of its assets and operations to a group unaffiliated with the Company(which included certain former management of BTW), for $1,920,000, consistingof a cash payment of $820,000 and a subordinated secured promissory note (the“Note”) for $1,100,000, with interest at 10% per annum, due October 31,2006.  The buyer had the right to makecertain optional principal pre-payments on the Note by June 30, 2004, whichwould result in the principal balance of the Note being adjusted downward, inexcess of such principal pre-payments, based on an agreed-upon sliding scale asset forth in the Note.

 

On April 30, 2004, the buyer made an optionalprincipal pre-payment on the Note of $400,000. Accordingly, under the provisions of the sale agreement, the buyerreceived a credit of $107,000 against the $1,100,000 note (in excess of the$400,000 payment), as well as an additional $150,000 back-end credit on theNote.

 

The Company recognized a loss of $565,000during the three months ended March 31, 2004 with respect to this transactionbefore taking into consideration of the effect of the $400,000 principalpre-payment made on April 30, 2004. Inclusive of such payment, the effect of the accelerated payment creditand the back end credit resulted in an additional loss of $257,000, whichdecreased the carrying value of the note receivable from $1,100,000 to $843,000and increased the loss on the BTW sale from $565,000 to $822,000 for the threemonths ended March 31, 2004.  

 

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Management has elected to recognize theadditional loss of $257,000 and to adjust the carrying value of the notereceivable resulting from the $400,000 principal pre-payment on April 30, 2004in the Company’s financial statements at March 31, 2004.

 

**Investmentin KES Holdings**

 

In September 2003, the Companyannounced that it made a capital contribution of $125,000 for a 1.00%membership interest in KES Holdings, LLC, a Delaware limited liability company(“KES Holdings”), which was formed to acquire certain assets of KentuckyElectric Steel, Inc., a Delaware company (“KES”), consisting of a steelmini-mill located in Ashland, Kentucky (the “Acquired Assets”).  OnSeptember 2, 2003, KES Holdings, through its subsidiary, KES AcquisitionCompany, LLC, a Delaware limited liability company (“KES Acquisition”),completed the acquisition of the Acquired Assets pursuant to Section 363of the United States Bankruptcy Code for cash consideration of$2,650,000.  KES ceased production on or about December 16, 2002 andfiled for a voluntary petition for relief under Chapter 11 of the United StatesBankruptcy Code on February 5, 2003.

 

In addition to the Company,investors in KES Holdings include, among others, affiliates of LibraSecurities, LLC, a Delaware limited liability company, which is a broker-dealerregistered with the Securities and Exchange Commission and an NASD member(“Libra”), consisting of Libra’s parent entity, certain employees of Libra andthe Ravich Revocable Trust of 1989 (Jess M. Ravich, Trustee) (the “RavichTrust”).  Robert Scott Fritz, one of the directors of the Company, is alsoan investor in KES Holdings.  Jess M. Ravich, the President and ChiefExecutive Officer of Libra and the principal stockholder of Libra’s parententity, is the manager of KES Holdings, but does not have a controlling equityinterest in KES Holdings.  The contributions of the members of KESHoldings were used in part to fund the purchase price of the Acquired Assets,with the balance intended to be used for start-up costs, working capitalpurposes and deferred maintenance of the Acquired Assets.

 

The Company has had preliminarydiscussions with KES Holdings to acquire KES Acquisition.  Although thereare presently no understandings, agreements or commitments between KES Holdingsand the Company 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 the Company’sstockholders.  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 owns1,000,000 shares of redeemable preferred stock and 1,860,000 shares of commonstock of the Company.  The Ravich Trust also owns warrants to purchase500,000 shares of common stock of the Company exercisable through August 31,2008, 400,000 of which are exercisable at $0.11 per share and 100,000 of whichare exercisable at $0.16 per share.

 

The Company’s Board ofDirectors consists of Jonathan V. Diamond, Hal G. Byer and Robert ScottFritz.  Hal G. Byer is a Senior Vice President of Libra, and by virtue ofhis employment agreement with Libra, Mr. Byer has an economic interest in theinvestment in KES Holdings made by Libra’s parent entity.  The Company’sthree directors have each paid $2,500 ($0.04 per share) to acquire an optionfrom the Ravich Trust to purchase 62,500 shares at $0.36 per share of theCompany’s preferred stock issued to the Ravich Trust in January 2003,exercisable until December 31, 2006 or earlier upon the occurrence ofcertain events, as described above in Note 1 under the sub-heading “DebtRestructuring and Amendments”.

 

**CriticalAccounting Policies**

 

The Company prepared thefinancial statements in accordance with accounting principles generallyaccepted in the United States. The preparation of these financial statementsrequires the use of estimates and assumptions that affect the reported amountsof assets and liabilities and the disclosure of contingent assets and liabilitiesat the date of the 

 

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financial statements and thereported amount of revenues and expenses during the reporting period.Management periodically evaluates the estimates and judgments made. Management basesits estimates and judgments on historical experience and on various factorsthat are believed to be reasonable under the circumstances. Actual results maydiffer from these estimates as a result of different assumptions or conditions.

 

The following criticalaccounting policies affect the more significant judgments and estimates used inthe preparation of the Company’s financial statements.

 

**Impairmentof Assets**

 

The Company periodicallyevaluates its non-current assets for potential impairment indicators. TheCompany’s judgments regarding the potential impairment are based on legalfactors, market conditions and operational performance indicators, amongothers. Future events could cause us to conclude that impairment indicatorsexist and that such assets (primarily investments and fixed assets) areimpaired.

 

**IncomeTaxes**

 

The Company records a valuationallowance to reduce its deferred tax assets to the amount that is more likelythan not to be realized. In the event the Company was to determine that itwould be able to realize its deferred tax assets in the future in excess of itsrecorded amount, an adjustment to the deferred tax assets would be credited tooperations in the period such determination was made. Likewise, should theCompany determine that it would not be able to realize all or part of itsdeferred tax assets in the future, an adjustment to the deferred tax assetswould be charged to operations in the period such determination was made.

 

**RESULTSOF OPERATIONS**

 

The Company’s only businessoperations for the three and six months ended March 31, 2004 and 2003 consistedof the operations of Beyond the Wall, which are presented as discontinuedoperations in the accompanying financial statements.  As a result of the sale of the assets of Beyond the Wall inFebruary 2004, the operating categories related to Beyond the Wall as discussedbelow for the three and six months ended March 31, 2004 will not continue afterFebruary 2004.

 

For the three months endedMarch 31, 2004, corporate general and administrative expenses were $371,000 ascompared to $621,000 for the three months ended March 31, 2003.  The decrease of $250,000 was due to variouscost reductions, including reduced corporate personnel, in 2004 as compared to2003.

 

For the six months ended March31, 2004, corporate expenses were $700,000 as compared to $1,528,000 for thesix months ended March 31, 2003.  Thedecrease of $828,000 was due to various cost reductions, including reducedcorporate personnel, in 2004 as compared to 2003.

 

For the three months endedMarch 31, 2004 and 2003, depreciation and amortization expense was $5,000.

 

For the six months endedMarch 31, 2004 and 2003, depreciation and amortization expense was$10,000.

 

For the three months endedMarch 31, 2004, interest income was $11,000, as compared to $7,000 for thethree months ended March 31, 2003.

 

For the six months endedMarch 31, 2004, interest income was $11,000, as compared to $34,000 forthe six months ended March 31, 2003.  The decrease of $23,000 was primarily due to reduced cash balances in2004 as compared to 2003.

 

For the three months endedMarch 31, 2004, interest expense was $10,000, as compared to $185,000 forthe three months ended March 31, 2003. The decrease of $175,000 wasprimarily related to the decrease in long-term debt as a result of the debtrestructuring in January 2003.

 

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For the six months endedMarch 31, 2004, interest expense was $20,000, as compared to $905,000 forthe six months ended March 31, 2003. The decrease of $885,000 wasprimarily related to the decrease in long-term debt as a result of the debtrestructuring in January 2003.

 

For the three months endedMarch 31, 2004, loss from discontinued operations was $156,000, ascompared to a loss of $1,217,000 for the three months ended March 31,2003.  The decrease was attributableprimarily to the net operating results of BTW, which was reported as adiscontinued operation as a result of the sale of its assets and operations inFebruary 2004.   The decrease of$1,061,000 was primarily due to an increase in revenues, savings fromoccupancy-related expenses and payroll-related expenses in connection with theclosing of retail stores in fiscal 2003, and a decrease in one-time charges inconnection with the closing of retail stores during the three months endedMarch 31, 2003.

 

For the six months endedMarch 31, 2004, loss from discontinued operations was $477,000, ascompared to a loss of $2,632,000 for the six months ended March 31,2003.  The decrease was attributableprimarily to the net operating results of BTW, which was reported as adiscontinued operation as a result of the sale of its assets and operations inFebruary 2004.   The decrease of $2,155,000was primarily due to savings from payroll-related expenses in connection withthe closing of retail stores in fiscal 2003, a decrease in one-time charges inconnection with the closing of retail stores during the six months ended March31, 2003, and a gain recognized from the reversal of an accrual for leasetermination costs during the three months ended December 31, 2003, offset inpart by a decrease in net revenues and an increase in insurance costs for thesix months ended March 31, 2004.

 

For the three months and sixmonths ended March 31, 2004, loss on disposal of discontinued operationswas $822,000.  This loss represents thenet loss on the sale of the BTW assets completed in February 2004.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

To date, the Company hasfinanced its operations primarily through the sale of equity securities anddebt. As of March 31, 2004, the Company had $697,000 in cash, an increaseof $166,000 from September 30, 2003, and had no revenue-generatingoperations.  Subsequently, on April 30,2004, the Company received a $400,000 principal pre-payment on the note that itreceived in conjunction with the sale of the BTW assets in February 2004.

 

The Company’s managementintends to continue efforts to settle the Company’s outstanding obligations andreduce operating costs.  The Companybelieves that its current cash resources will be adequate to fund itsoperations at current levels during the remainder of fiscal 2004. However, tothe extent the Company’s estimates and assumptions are inaccurate and/or theCompany is unable to successfully settle outstanding obligations at reducedamounts, the Company may not have sufficient cash resources to fund suchobligations and maintain its operations. In such event, the Company may be required to consider a formal orinformal restructuring or reorganization.  The Company is also considering a wide range of business opportunities,which may require additional capital to acquire and/or operate.

 

During the six months endedMarch 31, 2004, excluding discontinued operations, the Company used $654,000of cash in operating activities, as compared to $1,192,000 of cash for the sixmonths ended March 31, 2003.  Thereduction in cash utilized in operating activities in 2004 as compared to 2003was primarily a result of a reduction in corporate general and administrativeexpenses.

 

During the six months endedMarch 31, 2004, the Company generated $820,000 from investing activitiesrelating to proceeds from the sale of the BTW assets.  During the six months ended March 31, 2003, the Company generated$106,000 from investing activities relating to proceeds from the sale of fixedassets.

 

During the six months endedMarch 31, 2003, the Company used $5,013,000 in financing activities,relating primarily to the $470,000 payment to settle the Wells Fargo EquipmentNote and the aggregate $4,500,000 payment as part of the debt restructuringcompleted in January 2003.

 

As a result of the sale of theBTW assets and operations in February 2004, the Company does not have anymaterial principal commitments relating to operating leases at March 31, 2004.

 

The Company does not have anymaterial commitments for capital expenditures at March 31, 2004.

 

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**Off-BalanceSheet Arrangements**

 

The Company does not have anytransactions, obligations or relationships that could be considered off-balancesheet arrangements at March 31, 2004.

 

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ITEM3.     QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

**MarketRisk**

 

The Company does not have anymarket risk with respect to such factors as commodity prices, equity prices,and other market changes that affect market risk sensitive investments.

 

The Company does not have anyforeign currency risk, as its revenues and expenses, as well as its debtobligations, are denominated and settled in United States dollars.

 

**InterestRate 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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PART II

 

OTHER INFORMATION

 

ITEM1.     LEGAL PROCEEDINGS

 

The Company and/or its Beyondthe Wall subsidiary are also defendants in various other lawsuits and claimsfrom creditors of the Company seeking damages aggregating approximately$326,000. These matters have been brought by various trade creditors of theCompany. The Company evaluates its response in each situation based on theparticular facts and circumstances of a claim. Accordingly, the ultimateoutcome of these matters cannot be determined at this time and may ultimatelyresult in judgments and liens against the Company, its real estate or its otherassets. The Company has made sufficient accruals for the exposure related tosuch matters that have been deemed probable and reasonably estimable atMarch 31, 2004.

 

In addition, certain landlordsof stores which Beyond the Wall had previously vacated in advance of theexpiration dates of the store leases or failed to pay rent when due havecommenced litigation against the Company. The Company intends to negotiate withthe landlords to settle the lease termination liabilities and has sufficientlyaccrued for the exposure from lease termination 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.

 

**ITEM 2.  CHANGES INSECURITIES AND USE OF PROCEEDS**

 

None

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES.**

 

None.

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.**

 

None

 

**ITEM5. OTHER INFORMATION.**

 

None

 

**ITEM 6. EXHIBITS ANDREPORTS 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:

 

On March 11, 2004, theCompany filed a Current Report on Form 8-K reporting the sale of the assets ofits Beyond the Wall, Inc. subsidiary.

 

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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.

 

 
|                     | YOUTHSTREAM  MEDIA NETWORKS, INC.     |
|--------------------------|---------------------------------------|
|                     |                                  |
|                     |                                  |
| DATE:  May 14, 2004 | BY:                                   |
|                     |  /s/ Jonathan  V. Diamond        |   |
|                     | Jonathan  V. Diamond                  |
|                     | Chairman  and Chief Executive Officer |
|                     |                                  |
|                     |                                  |
|                     | BY:                                   |
| DATE:  May 14, 2004 |  /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 V. Diamond  |
|--------|--------|-------------------------------------------------------------------------------------------------|
|   |   |                                                                                            |
| 31.2   |   | Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 - Robert N. Weingarten |
|   |   |                                                                                            |
| 32     |   | Certification pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                        |

 

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