**U.S. SECURITIES AND EXCHANGE 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, 2002** |
|                                                  |   |                                                                                          |
| **OR**                                                |
|                                                  |   |                                                                                          |
| ** ̈**                                            |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transitionperiod from               to               **

 

**Commission FileNumber: 0-27556**

 

**YOUTHSTREAM MEDIA NETWORKS, INC.**

(Exact Name of Registrant asSpecified in Its 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)      |

 

 

Check whether the registrant (1) has filedall reports required to be filed bySection 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12months (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  ̈

 

At December 31, 2002, there were 35,865,000shares of Common Stock, $.01 parvalueoutstanding.

 

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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, 2002 (Unaudited) and June  30, 2002 |
|                                   |   |
|                                   | Unaudited  Condensed Consolidated Statements of Operations—Three Months and Six Months  Ended December 31, 2002 and 2001 |
|                                   |   |
|                                   | Unaudited  Condensed Consolidated Statements of Cash Flows—Six Months Ended  December 31, 2002 and 2001 |
|                                   |   |
|                                   | Unaudited  Condensed Consolidated Statement of Stockholders’ Equity—Six Months Ended  December 31, 2002 |
|                                   |   |
|                                   | Notes  to Condensed Consolidated Financial Statements |
|                                   |   |
| 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 3.                                | DEFAULTS OF SENIOR  SECURITIES |
|                                   |   |
| 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.

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT PER SHAREAMOUNTS)

 
|                                                                                                                                                    |   | **December  31,** |   | **June 30,**      |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|--------|-------------------|--------|
|                                                                                                                                                    |   | **2002**          |   | **2002**          |   |
|                                                                                                                                                    |   | **(Unaudited)**   |   | **(See Note  1)** |   |
|                                                                                                                                                    |   |              |   |              |   |
| ASSETS                                                                                                                                                  |   |              |   |              |   |
| Current assets:                                                                                                                                         |   |              |   |              |   |
| Cash and cash  equivalents                                                                                                                              |   | $                 | 7,561  |              | $      | 597 |   |
| Accounts  receivable, net                                                                                                                               |   | 43                |   | 2,667             |   |
| Inventories, net                                                                                                                                        |   | 2,562             |   | 2,584             |   |
| Prepaid expenses                                                                                                                                        |   | 211               |   | 180               |   |
| Other current  assets                                                                                                                                   |   | 91                |   | 195               |   |
| Restricted cash                                                                                                                                         |   | —            |   | 768               |   |
| Total current  assets                                                                                                                                   |   | 10,468            |   | 6,991             |   |
|                                                                                                                                                    |   |              |   |              |   |
| Property and  equipment, net of accumulated depreciation of $1,138 and $1,918 at December  31, 2002 and June 30, 2002, respectively                     |   | 2,003             |   | 2,749             |   |
| Deferred  financing costs, net of accumulated amortization of $2,273 and $1,884 at  December 31, 2002 and June 30, 2002, respectively                   |   | 2,176             |   | 2,565             |   |
| Assets of  discontinued operations                                                                                                                      |   | —            |   | 7,682             |   |
|                                                                                                                                                    |   |              |   |              |   |
| Total assets                                                                                                                                            |   | $                 | 14,647 |              | $      | 19,987 |   |
|                                                                                                                                                    |   |              |   |              |   |
| LIABILITIES AND  STOCKHOLDERS’ DEFICIT                                                                                                             |   |              |   |              |   |
| Current  liabilities:                                                                                                                                   |   |              |   |              |   |
| Accounts payable                                                                                                                                        |   | $                 | 2,696  |              | $      | 1,800 |   |
| Accrued employee  compensation                                                                                                                          |   | 419               |   | 704               |   |
| Accrued expenses                                                                                                                                        |   | 4,587             |   | 3,411             |   |
| Current  liabilities of discontinued operations                                                                                                         |   | —            |   | 592               |   |
| Deferred  Revenues                                                                                                                                      |   | —            |   | 127               |   |
| Current portion  of deferred purchase price                                                                                                             |   | —            |   | 375               |   |
| Current portion  of capitalized lease obligations                                                                                                       |   | 82                |   | 165               |   |
| Current  maturities of long-term debt in default (see Note 4)                                                                                           |   | 17,748            |   | 18,184            |   |
| Total current  liabilities                                                                                                                              |   | 25,532            |   | 25,358            |   |
|                                                                                                                                                    |   |              |   |              |   |
| Non current  liabilities of discontinued operations                                                                                                     |   | —            |   | 45                |   |
| Capitalized  lease obligations                                                                                                                          |   | 33                |   | 106               |   |
| Other  liabilities                                                                                                                                      |   | —            |   | 358               |   |
| Commitments and  contingencies                                                                                                                          |   |              |   |              |   |
|                                                                                                                                                    |   |              |   |              |   |
| Stockholders’  Deficit                                                                                                                             |   |              |   |              |   |
| Preferred stock,  $0.01 par value, 5,000 shares authorized, no shares issued and outstanding                                                            |   | —            |   | —            |   |
| Common stock,  $0.01 par value, 100,000 shares authorized, 35,865 shares and 33,591 shares  issued at December 31, 2002 and June 30, 2002, respectively |   | 359               |   | 336               |   |
| Additional  paid-in capital                                                                                                                             |   | 330,865           |   | 330,774           |   |
| Accumulated  deficit                                                                                                                                    |   | (341,313          | )      | (336,161          | )      |
| Treasury stock,  607 shares at December 31, 2002 and June 30, 2002, respectively                                                                        |   | (829              | )      | (829              | )      |
| Total  stockholders’ deficit                                                                                                                       |   | (10,918           | )      | (5,880            | )      |
|                                                                                                                                                    |   |              |   |              |   |
| Total  liabilities and stockholders’ deficit                                                                                                       |   | $                 | 14,647 |              | $      | 19,987 |   |

 

 

See notes to condensed consolidatedfinancial statements

 

3

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YOUTHSTREAM MEDIA NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS

(IN THOUSANDS, EXCEPT PER SHAREAMOUNTS)

(UNAUDITED)

 
|                                                          |   | **Three  months ended** |   | **Six months  ended** |   |
|---------------------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
|                                                          |   | **December  31,**       |   | **December  31,**     |   |
|                                                          |   | **2002**                |   | **2001**              |   | **2002** |   | **2001** |   |
|                                                          |   |                    |   |                  |   |   |   |   |   |
| Net revenues                                                  |   | $                       | 1,956  |                  | $      | 2,831 |   | $ | 8,402 |   | $ | 10,952 |   |
| Cost of sales                                                 |   | 444                     |   | 665                   |   | 1,632 |   | 2,127 |   |
| Gross profit                                                  |   | 1,512                   |   | 2,166                 |   | 6,770 |   | 8,825 |   |
| Selling,  general, administrative and corporate expenses      |   | 2,792                   |   | 4,347                 |   | 8,687 |   | 9,453 |   |
| Depreciation and  amortization                                |   | 147                     |   | 208                   |   | 316 |   | 306 |   |
| Loss on closing  of retail stores                             |   | 989                     |   | —                |   | 1,458 |   | — |   |
| Loss from  operations                                         |   | (2,416                  | )      | (2,389                | )      | (3,691 | ) | (934 | ) |
| Interest income                                               |   | 28                      |   | 126                   |   | 51 |   | 311 |   |
| Interest expense                                              |   | (721                    | )      | (754                  | )      | (1,452 | ) | (1,528 | ) |
| Loss before  provision for income taxes                       |   | (3,109                  | )      | (3,017                | )      | (5,092 | ) | (2,151 | ) |
| Provision for  income taxes                                   |   | —                  |   | 38                    |   | 95 |   | 44 |   |
| Loss from  continuing operations                              |   | (3,109                  | )      | (3,055                | )      | (5,187 | ) | (2,195 | ) |
| Gain (loss) from  discontinued operations                     |   | 136                     |   | (460                  | )      | (447 | ) | (1,044 | ) |
| Gain (loss) on  disposal of discontinued operations           |   | —                  |   | (291                  | )      | 482 |   | (291 | ) |
| Net loss                                                      |   | $                       | (2,973 | )                     | $      | (3,806 | ) | $ | (5,152 | ) | $ | (3,530 | ) |
| Per share of  common stock basic and diluted                  |   |                    |   |                  |   |   |   |   |   |
| Loss from  continuing operations                              |   | $                       | (0.09  | )                     | $      | (0.10 | ) | $ | (0.15 | ) | $ | (0.07 | ) |
| Gain (loss) from  discontinued operations                     |   | 0.01                    |   | (0.02                 | )      | (0.01 | )  | (0.03 | ) |
| Gain (loss) on  disposal of discontinued operations           |   | —                  |   | (0.01                 | )      | 0.01 |   | (0.01 | ) |
| Net loss per  basic and diluted common share                  |   | $                       | (0.08  | )                     | $      | (0.13 | ) | $ | (0.15 | ) | $ | (0.12 | ) |
| Weighted average  basic and diluted common shares outstanding |   | 35,257                  |   | 30,270                |   | 34,133 |   | 30,092 |   |

 

 

See notes to condensed consolidatedfinancial statements

 

4

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YOUTHSTREAM MEDIA NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

 

 
|                                                                                       |   | **Six months  ended** |    |
|--------------------------------------------------------------------------------------------|--------|-----------------------|---------|
|                                                                                       |   | **December  31,**     |    |
|                                                                                       |   | **2002**              |    | **2001** |   |
|                                                                                       |   |                  |    |   |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES                                                      |   |                  |    |   |   |
| Net loss                                                                                   |   | $                     | (5,152  | ) | $ | (3,530 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |   |                  |    |   |   |
| Loss from  discontinued operations                                                         |   | 447                   |    | 1,044 |   |
| Loss (gain) on  disposal of discontinued operations                                        |   | (482                  | )       | 291 |   |
| Net change in  assets and liabilities of discontinued operations                           |   | (419                  | )       | (3,363 | ) |
| Bad debt expense                                                                           |   | 39                    |    | — |   |
| Depreciation and  amortization                                                             |   | 316                   |    | 306 |   |
| Loss on closing  of retail stores                                                          |   | 1,458                 |    | — |   |
| Loss on disposal  of fixed assets                                                          |   | 316                   |    | — |   |
| Gain on debt  extinguishment                                                               |   | (46                   | )       | — |   |
| Amortization of  deferred financing costs                                                  |   | 389                   |    | 384 |   |
| Amortization of  original issue discount on Subordinated Notes                             |   | 60                    |    | 61 |   |
| Deferred rent                                                                              |   | (358                  | )       | 3 |   |
| Changes in  operating assets and liabilities, net of acquisitions and dispositions:        |   |                  |    |   |   |
| Accounts  receivable                                                                       |   | 2,585                 |    | (112 | ) |
| Inventories                                                                                |   | (410                  | )       | (1,331 | ) |
| Other current  assets                                                                      |   | 785                   |    | (79 | ) |
| Accounts payable                                                                           |   | 867                   |    | (442 | ) |
| Accrued expenses                                                                           |   | 32                    |    | (1,743 | ) |
| Deferred  revenues                                                                         |   | (127                  | )  | 3 |   |
| Net cash  provided by (used in) operating activities                                       |   | 300                   |    | (8,508 | ) |
|                                                                                       |   |                  |    |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                                      |   |                  |    |   |   |
| Capital  expenditures                                                                      |   | (74                   | )       | (782 | ) |
| Proceeds from  the sale of fixed assets                                                    |   | 106                   |    | — |   |
| Sale of  investments in marketable debt securities                                         |   | —                |    | 2,881 |   |
| Sale of Media  Assets to Alloy                                                             |   | 7,283                 |    | — |   |
| Other assets                                                                               |   | —                |    | (250 | ) |
| Payment for  business acquisitions                                                         |   | (25                   | )       | (600 | ) |
| Net cash  provided by investing activities                                                 |   | 7,290                 |    | 1,249 |   |
|                                                                                       |   |                  |    |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                                      |   |                  |    |   |   |
| Common stock  repurchase                                                                   |   | —                |    | (591 | ) |
| Repayment of  capitalized lease obligations                                                |   | (156                  | )       | (36 | ) |
| Repayment of  long-term debt                                                               |   | (470                  | )       | (538 | ) |
| Net cash used in  financing activities                                                     |   | (626                  | )       | (1,165 | ) |
|                                                                                       |   |                  |    |   |   |
| Increase  (decrease) in cash and cash equivalents                                          |   | 6,964                 |    | (8,424 | ) |
| Cash and cash  equivalents at beginning of period                                          |   | 597                   |    | 14,927 |   |
| Cash and cash  equivalents at end of period                                                |   | $                     | 7,561   |   | $ | 6,503 |   |
|                                                                                       |   |                  |    |   |   |
| Noncash  financing activities:                                                             |   |                  |    |   |   |
| Issuance of  common stock in connection with acquisitions                                  |   | $                     | 114     |   | $ | 1,251 |   |

 

 

See notes to condensed consolidatedfinancial statements

 

5

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YOUTHSTREAM MEDIA NETWORKS, INC.

CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ DEFICIT

FOR THE PERIOD JULY 1, 2002 TODECEMBER 31, 2002

(IN THOUSANDS)

(UNAUDITED)

 
|                                                            |   | **Common  Stock** | ** ** | **Additional  Paid in  Capital** |   | **Accumulated  Deficit** |   | **Treasury  Stock** |   | **Total** |     |
|-----------------------------------------------------------------|--------|-------------------|------------|----------------------------------|--------|--------------------------|--------|---------------------|--------|-----------|----------|
| **Shares**                                                      |   | **Amount**        |
|                                                            |   |              |       |                             |   |                     |   |                |   |      |     |   |   |
| Balances at July  1, 2002                                       |   | 33,591            |       | $                                | 336    |                     | $      | 330,774             |   | $         | (336,161 | ) | $ | (829 | ) | $ | (5,880 | ) |
| Issuance of  common stock in connection with Invino acquisition |   | 2,274             |       | 23                               |   | 91                       |   | —              |   | —    |     | 114 |   |
| Net loss                                                        |   | —            |       | —                           |   | —                   |   | (5,152              | )      | —    |     | (5,152 | ) |
| Balances at  December 31, 2002                                  |   | 35,865            |       | $                                | 359    |                     | $      | 330,865             |   | $         | (341,313 | ) | $ | (829 | ) | $ | (10,918 | ) |
|                                                            |   |              |       |                             |   |                     |   |                |   |      |     |   |   |   |   |   |   |   |

 

6

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YOUTHSTREAM MEDIA NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

DECEMBER 31, 2002

(Unaudited)

 

1. ORGANIZATION AND BASIS OF PRESENTATION

 

The accompanying consolidated financialstatements include the accounts ofYouthStreamMedia Networks, Inc. (“YouthStream”) and its wholly-ownedsubsidiaries,Network Event Theater, Inc. (“NET”), American Passage Media, Inc. (“AmericanPassage”), Beyond the Wall, Inc. (“Beyond the Wall”), and W3T.com, Inc.(“Teen.com”), (collectively, the “Company”). On August 5, 2002 the Company sold substantially all of its media assetsand assigned certain liabilities of its NET and American Passage subsidiariesto Alloy, Inc. and ceased operating the media segment. In December 2001, theCompany discontinued its Teen.com operations and closed its Hotstamp collegebusiness. In December 2000, the Company discontinued the operations ofCommonPlaces, LLC (“CommonPlaces”), sixdegrees, inc. (“sixdegrees”),CollegeWeb.com, Inc. (“CollegeWeb”), and Invino Corporation (“Invino”).YouthStream, through its Beyond the Wall subsidiary, is now primarily a retailcompany that targets teenagers and young adults ages 12 to 24.

 

The accompanying consolidated financialstatements have been prepared inaccordancewith accounting principles generally accepted in the United States for interimfinancialinformation and with the instructions to Form 10-Q. Accordingly,they do notinclude all the information and footnotes required by generallyacceptedaccounting principles for complete financial statements. In theopinion ofmanagement, all adjustments (including normal recurringaccruals) considerednecessary for a fair presentation have been included. Operatingresults for theinterim period are not necessarily indicative of the resultsthat may beexpected for the year ending June 30, 2003. The balance sheet atJune 30, 2002 has been derived from the audited financial statements at thatdate but does not include all of the information and footnotes required bygenerally accepted accounting principles for complete financial statements. Forfurther information, refer to the consolidated financial statements andfootnotes thereto included in the Company’sForm 10-K for the fiscal year ended June 30, 2002.

 

Thepreparation of the financial statements in conformity with generally acceptedaccounting principles in the United States requires management to makeestimates and assumptions that affect the amounts reported in the financialstatements and accompanying notes. Actual results could differ from thoseestimates.

 

FINANCIAL STATEMENT PRESENTATION

 

The Company has incurred recurringoperating losses since its inception. As of December 31, 2002 the Company had an accumulateddeficit of approximately $341,000,000 and expects to have insufficient capitalto fund all of its obligations.  InJanuary 2003 the Company completed a debt restructuring transaction with theholders of $18 million of its subordinated notes (described below).  In addition, the Company’s retail sales havebeen declining. These conditions raise substantial doubt about the Company’sability to continue as a going concern. The financial statements do not includeany adjustments to reflect the possible future recoverability andclassification of assets or the amounts and classifications of liabilities thatmay result from the outcome of this uncertainty. The Company is also exploringstrategic alternatives with respect to its business, which could includeseeking to dispose of some or all of its remaining assets. The Company may alsoconsider a wide range of other business opportunities, some of which may beunrelated to the Company's current business.

 

In fiscal 2003 the Company followed throughon its previously announced plans to close a number of under performing retailstores within its Beyond the Wall chain. For the six months ended December 31, 2002, the Company incurredapproximately $1.5 million of expenses, relating to the closing of 20 retailstore operations, including $81,000 for the write-off of fixed assets, $432,000for the write-off of inventory, $916,000 of accruals for costs relating to theearly termination of store leases and $29,000 of other expenses.  The total closing costs were classified as aseparate line item in the income statement as part of continuing operations.

 

RECLASSIFICATIONS

 

Certain amounts in the prior periodfinancial statements have been reclassifiedto conformto the current period presentation.

 

7

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2. DISCONTINUED OPERATIONS

 

On August 5, 2002 the Company soldsubstantially all of its media assets and assigned certain liabilities to CassCommunications, Inc., a subsidiary of Alloy, Inc., for gross proceeds of$7,000,000 plus a working capital adjustment of an additional $283,000, whichresulted in a gain of approximately $246,000 at the time of sale, which isincluded in the total gain on disposal of discontinued operations.

 

As a result of the sale, the media segmentoperations were discontinued in the first quarter of fiscal 2003.

 

In December 2001, the Company discontinuedits Teen.com website. In connectionwith thediscontinuance of that business, the Company incurred a charge of$348,000,related primarily to the write-off of property and equipment and anaccrualfor severance.

 

 

Net revenues and loss from discontinuedoperations are as follows (in thousands):

 
|                                                |   | **Three  months ended December 31,** |   | **Six months  ended December 31,** |   |
|-----------------------------------------------------|--------|-------------------------------------------|--------|-----------------------------------------|--------|
|                                                |   | **2002**                                  |   | **2001**                                |   | **2002** |   | **2001** |   |
|                                                |   |                                      |   |                                    |   |   |   |   |   |
| Net revenues                                        |   | $                                         | -0-    |                                    | $      | 5,757 |   | $ | 433 |   | $ | 9,848 |   |
| Gain/(loss) from  discontinued operations           |   | 136                                       |   | (460                                    | )      | (447 | ) | (1,044 | ) |
| Gain/(loss) on  disposal of discontinued operations |   | —                                    |   | (291                                    | )      | 482 |   | (291 | ) |
| Net gain/(loss)  from discontinued operations       |   | $                                         | 136    |                                    | $      | (751 | ) | $ | 35 |   | $ | (1,335 | ) |
|                                                     |        |                                           |        |                                         |        |  |  |  |  |  |  |  |  |  |

 

3. RECENT ACCOUNTING PRONOUNCEMENTS

 

In April 2002, the FASB issued SFAS No.145, “Recision of SFAS Nos. 4, 44 and64,Amendment of SFAS 13, and Technical Corrections as of April 2000”. SFASNo.145 revises the criteria for classifying the extinguishment of debt asextraordinaryand the accounting treatment of certain lease modifications. SFAS145was effective on May 15, 2002, and is not expected to have a material impactonthe Company’s consolidated financial statements other than the classificationof any gains or losses related to the early extinguishment of debt.

 

In July 2002, the FASB issued SFAS No. 146“Accounting for Costs Associated withExit orDisposal Activities.” SFAS No. 146 provides guidance on the timing oftherecognition of costs associated with exit or disposal activities. The newguidancerequires costs associated with exit or disposal activities to berecognizedwhen incurred. Previous guidance required recognition of costs at thedateof commitment to an exit or disposal plan. The provisions of the statementareto be adopted prospectively after December 31, 2002. Although SFAS No. 146mayimpact the accounting for costs related to exit or disposal activities the

 

8

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Company may enter into in the future,particularly the timing of the recognitionof thesecosts, the adoption of the statement will not have a material impact on theCompany’spresent financial condition or results of operations.

 

In December 2002, theFASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transitionand Disclosure-an amendment of FAS 123" ("SFAS 148"). Thisstatement amends SFAS No. 123, "Accounting for Stock-BasedCompensation" ("SFAS 123"), to provide alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based employee compensation and amends the disclosure requirements toSFAS 123 to require prominent disclosures in both annual and interim financialstatements about the method of accounting for stock-based employee compensationand the effect of the method used on reported results. The transition andannual disclosure to provisions of SFAS 148 are effective for interim periodsbeginning after December 15, 2002. Accordingly, the Company will adopt thedisclosure requirements of SFAS 148 for the quarter ended March 31, 2003.Management is currently assessing the impact of this pronouncement.

 

4. LONG-TERM DEBT (IN DEFAULT AS OFDECEMBER 31, 2002)

 

Long-term debt consists of the following(in thousands):

 
| ** **                                                                  |   | **December  31,**

**2002** |   | **June 30,**

**2002** |   |
|-----------------------------------------------------------------------------|--------|-----------------------------|--------|------------------------|--------|
|                                                                        |   |                        |   |                   |   |
| Subordinated  Notes—Private Placement (A)                              |   | $                           | 5,000  |                   | $      | 5,000 |   |
| Note Payable to  Finance Company (B)                                        |   | —                      |   | 496                    |   |
| Subordinated  Notes—Private Placement (C)                              |   | 12,000                      |   | 12,000                 |   |
| Subordinated  Notes—Private Placement (D)                              |   | 1,000                       |   | 1,000                  |   |
| Other                                                                       |   | 1                           |   | 1                      |   |
|                                                                        |   | 18,001                      |   | 18,497                 |   |
| Less:  Unamortized original issue discount attributed to subordinated notes |   | 253                         |   | 313                    |   |
|                                                                        |   | 17,748                      |   | 18,184                 |   |
| Less:  Current portion of long-term debt                               |   | $                           | 17,748 |                   | $      | 18,184 |   |
|                                                                        |   |                        |   |                   |   |
| Non-current  portion of long-term debt                                      |   | $                           | — |                   | $      | — |   |

 

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(A) In July 1998, theCompany issued subordinated notes to accredited investors in the aggregateamount of $5,000,000 less an original discount of $188,000 (“NET Notes”). Thesenotes bore interest at 11% per annum and were due in July 2003. In connectionwith the issuance of the subordinated notes, the Company issued 375,000warrants to the accredited investors for $188,000, and 150,000 warrants to theplacement agent. Each warrant, which expires in July 2003, entitles the holderto purchase one share of the Company’s common stock for $4.125, the marketprice of the Company’s common stock at the date of issuance. Based on anindependent appraisal conducted at that time, the 525,000 warrants were valuedat $740,000. The value of the warrants and closing costs of $314,000 have beenrecorded as deferred financing costs and are being amortized over the term ofthe subordinated notes. The original issue discount of $188,000 is also beingamortized over the term of the related debt. On September 8, 2002, NET failedto make the interest payment due on the NET Notes, constituting an event ofdefault under the terms of the NET Notes, and as a result, the holder of amajority of the NET Notes declared these notes due and payable under the termsof the NET Notes. In January 2003, the Company reached an agreement with theholders of the NET Notes to cancel all the principal of and interest on the NETNotes in exchange for an aggregate of $3,000,000 (60% of the aggregateprincipal amount of the NET Notes outstanding with no payment of accruedinterest). (see Note 9).

 

(B) In March 2000, the Company issued anote to a finance company in the amountof$1,971,000 (“Equipment Note”). The note bore interest at the rate of 11.95%perannum and was payable in 36 equal monthly payments commencing in March 2000.Thenote was secured by certain equipment owned by NET. NET failed to makepaymentsof approximately $65,000 due on August 1, 2002 and $65,000 due onSeptember1, 2002, in connection with the Equipment Note. On September 6, 2002,NETreceived notice from the finance company holding the Equipment Note statingthatthe entire outstanding indebtedness ($496,000) under the Equipment Note was due and payable pursuant to the terms ofthe note. On September 16, 2002, the holder of the Equipment Note commencedlitigation against NET seeking repayment of the note.  In December 2002 the Company reached an agreement with the holderof the Equipment Note and (a) paid $470,000 in exchange for the cancellation ofthe principal of and interest on the Equipment Note, totaling $516,000, and (b)transferred title of the equipment securing the Equipment Note.

 

(C) In June 2000, the Company issuedsubordinated notes to an accreditedinvestor inthe amount of $12,000,000, less an original issue discount of$420,000(“YSTM Notes”). The notes bore interest at 11% per annum and were due in

 

9

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June 2005. In connection with the issuanceof the subordinated notes, the Companyissued 1,020,000warrants to accredited investors in exchange for $420,000.Eachwarrant, which expires in June 2005, entitles the holder to purchase oneshareof the Company’s common stock for $5.9375, the market price of theCompany’scommon stock at the date of issuance. Based on an independentappraisalat that time, the 1,020,000 warrants were valued at $3,346,000. Thevalueof the warrants and closing costs of $494,000 were recorded as deferredfinancingcosts and are being amortized over the term of the subordinated note.Theoriginal issue discount of $420,000 is being amortized over the term of therelateddebt. On August 31, 2002, the Company failed to make interest paymentsdueon the YSTM Notes, constituting an event of default under the terms of theYSTMNotes. On September 9, 2002, the holders of the YSTM Notes declared these notesdueand payable under the terms of the YSTM Notes. In January 2003 theCompany reached an agreement with the holders of the YSTM Notes to cancel allthe principal of and interest on the YSTM Notes in exchange for (a) $1,500,000;(b) 1,000,000 shares of preferred stock of the Company; (c) 3,486,875 shares ofcommon stock of the Company (760,000 shares of which were issued to the formerYSTM 2 Note holder and the remainder issued to third parties); and (d) a$3,000,000 promissory note issued by Beyond the Wall and secured by a pledge ofthe Company’s stock in Beyond the Wall (see Note 9).

 

(D) In July 2000, the Company issued asubordinated note to an accreditedinvestor inthe amount of $1,000,000, less an original issue discount of $35,000(“YSTM2 Note”). The note bore interest at 11% per annum and was due in July2005.In connection with the issuance of the subordinated note, the Companyissued60,000 warrants to an accredited investor in exchange for $35,000. Eachwarrant,which expires in July 2005, entitles the holder to purchase one shareofthe Company’s common stock for $3.75, the market price of the Company’scommonstock at the date of issuance. Based on an independent appraisal at thattime,the 60,000 warrants were valued at $197,000. The value of the warrants wasrecordedas deferred financing costs and is being amortized over the term of thesubordinatednote. The original issue discount of $35,000 is being amortizedoverthe term of the related debt. On August 31, 2002 the Company failed to makeaninterest payment due on the YSTM 2 Note, constituting an event of defaultunderthe terms of the YSTM 2 Note, and the holder of the note had the right todeclare this note immediately due and payable. In January2003 the Company reached an agreement with the holder of the YSTM 2 Note tocancel all the principal of and interest on the YSTM 2 Note in exchange for (a)a $1,000,000 promissory note issued by Beyond the Wall and secured by a pledgeof the Company’s stock in Beyond the Wall; and (b) 498,125 shares of theCompany’s common stock (see Note 9).

 

5. REORGANIZATION

 

The Company announced its plan to move theSeattle operations to the New Yorkoffice inMarch 2002. In April 2002, the Company finalized its transition plan,whichresulted in the termination of 30 employees, and completed the transitioninJune 2002. The Company recorded a restructuring charge, which is included inselling,general and administrative expenses, in fiscal 2002 of approximately$519,000relating to this decision, which included severance costs of $186,000,leasecosts of $126,000 for a lease expiring November 2002, and $207,000relatingto the abandonment of certain fixed assets. As of December31, 2002,the Company has remaining accruals of approximately $126,000 forleaseobligation costs.

 

During the three months ended December 31,2002, the Company wrote off approximately $316,000 of fixed assets, net ofproceeds from equipment sales, relating to theclosing ofits corporate office in New York in November 2002.

 

6. STOCKHOLDER’S EQUITY

 

 

In September 2002, the Company issuedapproximately 2.3 million common shares and made a $25,000 cash payment,representing the final quarterly installment payment on the unpaid purchaseprice pursuant to the 1999 merger agreement between the Company andInvino.  The quarterly stock and cashpayment resulted in a gain of $236,000, the amount for which is included in theoverall gain on disposal of discontinued operations for the six months endedDecember 31, 2002.

 

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7. SEGMENT INFORMATION

 

Prior to August 2002 the Company had tworeporting segments: media and retail. The media segment represented the Company’smedia, marketing and promotional services provided to advertisers by NET andAmerican Passage. On August 5, 2002 the Company sold substantially all of theassets and certain liabilities from this segment and discontinued itsoperation. The retail segment consists of on-campus, online and retail storeposter sales provided by Beyond the Wall.

 

The following is a summary of the majorclasses of assets and liabilities as of December 31, 2002 that remain from theMedia segment:

 
|                           |   | **December  31, 2002** |   |
|--------------------------------|--------|------------------------|--------|
|                           |   | **(In  thousands)**    |   |
| Current assets,  net           |   | $                      | -0-    |   |
| Current  liabilities           |   | (1,983                 | )      |
| Capitalized  lease obligations |   | (41                    | )      |
| Net book value                 |   | $                      | (2,024 | ) |

 

8. LEGAL

 

The Company is a party to certain legalproceedings commenced against it byformeremployees of the Company’s subsidiaries. These actions include: (a) alitigationpending in the District Court of Travis County, Texas by a formeremployeeof the Company’s CommonPlaces, LLC (“CP”) subsidiary claiming that heisentitled to receive, without cost, an aggregate of 215,083 shares ofYouthStreamcommon stock; and (b) an arbitration filed in New York by the Company’s formerPresident and Chief Executive Officer seeking damages for alleged breach of hisemployment agreement, among other things. The Company is currently defendingthese actions and has asserted counterclaims in the action against its formerCEO.

 

In addition, certain creditors of theCompany and its subsidiaries and certainholders ofthe Company’s and its NET subsidiary’s debt have asserted or havethreatenedclaims against the Company and its subsidiaries, which are the resultofthe Company’s failure to pay certain debts and liabilities as they came due.

 

In addition, certain landlords of storeswhich Beyond the Wall has vacated inadvance ofthe expiration dates of the store leases or failed to pay rent whenduehave commenced litigation against Beyond the Wall.

 

Among the claims was a litigation filed inNew York State Court by Wells Fargo in connection with the Wells Fargo Loan,seeking past due payments and futurepayments,late charges and interest costs and expenses, and certain collateralinconnection with NET’s failure to make certain payments owed under the WellsFargoLoan. On November 18, 2002, a temporary restraining order was issued by theSupreme Court of New York to prevent the Company from removing, transferring,pledging or assigning funds constituting the assets of NET and APMI, up to$500,000.  In December 2002 the Companyreached a settlement with the note holder whereby a total of $470,000 was paidin full settlement of the outstanding liability.

 

Given the Company’s current financialsituation, the costs of defending theseproceedings,diversion of management’s attention to these matters, or theoutcomeof such proceedings could have a material adverse effect on theCompany’sfinancial condition or operating results, including its ability torestructureits debts without seeking bankruptcy protection or being the subjectofan involuntary bankruptcy petition, or its ability to continue as a goingconcern.

 

9. SUBSEQUENTEVENTS

 

In January2003, the Company reached an agreement with the holders of all of its and itsNetwork Event Theater subsidiary’s outstanding notes (NET Notes, YSTM Notes& YSTM 2 Notes), in the aggregate principal amount of $18 million, tocancel those notes.  In exchange forcancellation of all of the principal and interest due on the old notes, thenote holders received $4.5 million in cash, preferred stock with a face valueof $4 million, and 3,985,000 shares of common stock-equal to ten percent of thenumber of shares of the Company to be outstanding after the issuance of thoseshares, and $4 million aggregate principal amount of promissory notes issued bythe Company’s retail subsidiary, Beyond the Wall, Inc., secured by theCompany’s pledge of all of its stock in Beyond the Wall.

 

At theclosing of the transaction, all of the Company’s previous directors andofficers, including the chairman of the board and the acting chief financialofficer, resigned and three new directors were elected.  Jonathan V. Diamond, who previously had beena director and Interim CEO of YouthStream, returned as the Company’sChairman.  In addition, Hal Byer andRobert Scott Fritz were elected as directors of the new board.

 

On February6, 2003 Robert Weingarten was appointed as the Company’s Chief FinancialOfficer and Jonathan V. Diamond was appointed as the Company’s Chief ExecutiveOfficer.

 

 

ITEM 2.          MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion of the financialcondition and results of operations ofthe Companyshould be read in conjunction with the consolidated financial

 

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statements and related notes thereto.

 

CRITICAL ACCOUNTING POLICIES

 

Our discussion and analysis of ourfinancial condition and results of operations is based upon our consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States.  The preparation of these financial statements requires us to makeestimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities.  On an on-going basis,we evaluate our estimates.  We base ourestimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources.  Actual results may differ from theseestimates under different assumptions or conditions.  We believe the following critical accounting policies affect ourmore significant judgments and estimates used in the preparation of theseconsolidated financial statements.

 

INVENTORIES

 

Inventories are stated at the lower of costor market. Cost is determined on afirst-in,first-out basis. Inventories consist primarily of posters and relatedproducts.

 

REVENUE RECOGNITION

 

Revenue is derived from the sale ofmerchandise to consumers on college campuses, online and in stores. Retailrevenue is recognized at the time of the sale to theconsumer.

 

ACCOUNTSRECEIVABLE

 

Accountsreceivable consist primarily of amounts due to the Company from normalbusinessactivities. The Company maintains an allowance for doubtful accounts to reflectthe expected uncollectibility of accounts receivable based on past collectionhistory and specific risk identified in the portfolio.

 

RESULTS OFOPERATIONS

(Inthousands)

 

The Company’s consolidated financialstatements reflect reclassifications forpriorperiods due to the discontinued operation of the Company’s online segmentandsale of its media assets. On August 5, 2002, the Company sold substantiallyallof its media assets and discontinued its media segment. The only remainingsegmentis retail. The following analysis incorporates reclassifications ofpriorperiods due to discontinued operations and revision of the reportingsegments.The following financial analysis compares the three months and six months endedDecember31, 2002 (unaudited) to the three months and six months ended December 31, 2001(unaudited).

 

YouthStreamgenerated revenues primarily from the sale of decorative wallposters,targeting teens and young adults, through on-campus sales events,retailstores and Internet sales.

 

Revenuesdecreased to $2.0 million for the three months ended December 31, 2002from$2.8 million for the three months ended December 31, 2001. The revenue declinewasattributable to negative same store sales and a reduction in the numberofstores.

 

Revenuesdecreased to $8.4 million for the six months ended December 31, 2002

 

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from $11.0million for the six months ended December 31, 2001. The revenue declinewasattributable to negative same store sales and a reduction in the numberofstores.

 

Cost ofsales consists of the cost of decorative wall posters sold. Cost ofsalesas a percentage of revenues remained relatively consistent at approximately 23%for the three months ended December 31, 2002 and for the three months endedDecember 31, 2001.

 

Cost of sales as a percentage of revenues was 19% for the six monthsended December 31, 2002 and the six months ended December 31, 2001.

 

StoreClosing Costs

 

For thethree months ended December 31, 2002, the Company incurred expenses ofapproximately $989,000 relating to the closing of retail stores. This amountincludes $460,000 of expenses for the early termination of existing storeleases, $432,000 of expenses for the write-down of inventory, $81,000 ofexpenses for the write-off of fixed assets deemed impaired as of the storeclosing dates and $16,000 of moving costs.

 

For the sixmonths ended December 31, 2002, the Company incurred expenses of approximately$1.5 million related to the closing of retail stores.  This amount includes $916,000 of expenses relating to the earlytermination of existing store leases, $432,000 of expenses relating to thewrite-down of inventory, $81,000 of expenses relating to the write-off of fixedassets deemed impaired as of the store closing dates and $29,000 of movingcosts.

 

For thethree months ended December 31, 2002, selling, general, administrativeandcorporate expenses, were $2.8 million as compared to $4.3 million for the threemonths ended December 31, 2001. The decrease of $1.5 million was due tocorporate overhead cost savings, resulting from the sale of the media businessin the first quarter of fiscal 2003, occupancy and payroll related expensesavings due to the reduction of the number of retail stores in operation infiscal 2003, and a gain from the write-off of deferred rent relating to thetermination of the New York City office lease.

 

For the sixmonths ended December 31, 2002, selling, general, administrative and corporate expenses, were $8.7million as compared to $9.5 million for the six months ended December 31, 2001.The decrease of $800,000 was due primarily to corporate overhead cost savings,resulting from the sale of the media business, occupancy and payroll relatedexpense savings due to the reduction of the number of retail stores inoperation in fiscal 2003, and a gain from the write-off of deferred rentrelating to the termination of the New York City office lease, offset by higheroperating costs in connection with Beyond the Wall colleges events business inthe first quarter of fiscal 2003.

 

For thethree months ended December 31, 2002 and 2001, depreciation andamortizationexpense was $147,000 and $208,000, respectively.

 

For the sixmonths ended December 31, 2002 and 2001, depreciation andamortizationexpense was $316,000 and $306,000, respectively

 

For thethree months ended December 31, 2002, interest income was $28,000 ascomparedto $126,000 for the three months ended December 31, 2001. The decreaseof$98,000 was due to lower cash balances and declining interest rates.

 

For the sixmonths ended December 31, 2002, interest income was $51,000 ascomparedto $311,000 for the six months ended December 31, 2001. The decreaseof$260,000 was due to lower cash balances and declining interest rates.

 

For thethree months ended December 31, 2002 and 2001, interest expense was $721,000 and $754,000, respectively.

 

For the six months ended December 31, 2002 and 2001, interest expensewas $1.5 million.

 

For thethree months ended December 31, 2002, gain from discontinued operationswas$136,000 as compared to a loss of $460,000 for the three months ended

 

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December31, 2001. The gain from discontinued operations in fiscal 2003representsthe net gain from the Media operations.

 

For the sixmonths ended December 31, 2002, loss from discontinued operationswas$447,000 as compared to a loss of $1.0 million for the six months endedDecember31, 2001. The loss from discontinued operations in fiscal 2003 and2002represents the net loss from the Media operations.

 

For the sixmonths ended December 31, 2002, gain on disposal of discontinuedoperationswas $482,000. The gain for the period ended December 2002 wasattributableto the gain on the sale of the Media segment to Alloy, Inc.,totaling$246,000, and the gain on the settlement of an Invino purchaseliabilitythrough the issuance of common shares, totaling $236,000.

 

For the three months and six months ended December 31, 2001, loss ondisposal of discontinued operations was $291,000.

 

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LIQUIDITYAND CAPITAL RESOURCES

 

To date, theCompany has financed its operations primarily through the sale ofequitysecurities and debt. As of December 31, 2002, the Company hadapproximately$7.6 million in cash and equivalents (a substantial portion of which was paidto creditors in the restructuring described below under “SubsequentEvents”).  The Company has never beenprofitable and expects to continue to incur operating losses in the future. TheCompany’s historical sales have never been sufficient to cover its expenses andit has been necessary to rely upon financing from the sale of equity securitiesand debt to sustain operations.  Therecan be no assurance that the Company will obtain such additional capital orthat such additional financing will be sufficient for the Company’s continuedexistence.  There can be no assurancesthat the Company will be able to generate sufficient revenues fromtheoperation of the retail business to meet the Company’s obligations. Theseconditionsraise substantial doubt about the Company’s ability to continue as agoingconcern.

 

For the sixmonths ended December 31, 2002, the Company generated $300,000 of cash from operating activities.For the six monthsended December 31, 2001, the Company used $8.5 million inoperating activities.

 

For the sixmonths ended December 31, 2002, the Company generated $7.3millionfrom investing activities primarily relating to the $7.3 million sale oftheMedia business to a subsidiary of Alloy, Inc. Forthe sixmonths ended December 31, 2001, the Company generated $1.2 million ininvestingactivities primarily relating to the sale of investments in marketabledebtsecurities, offset by $782,000 for capital expenditures.

 

Net cashused in financing activities was $626,000 for the six months endedDecember31, 2002 and $1.2 million for the six months ended December 31, 2001.

 

TheCompany’s principal commitments consist of obligations outstanding underoperatingleases totaling approximately $1.3 million. The operating lease commitments declined from $5.4 millionas of June 30, 2002, owing primarily to the settlement to terminate the leaseobligation for approximately $2.1 million in future rent on the New York Cityoffice.

 

TheCompany’s capital requirements depend on its revenue growth, operatingstructureand the amount of resources devoted to the retail operations.

 

The Companydoes not have any material commitments for capital expenditures.

 

The Company has incurred recurringoperating losses since its inception. As of December 31, 2002 the Company had an accumulateddeficit of approximately $341,000,000 and expects to have insufficient capitalto fund all of its obligations.  InJanuary 2003 the Company completed a debt restructuring transaction with theholders of $18 million of its subordinated notes (described below).  In addition, the Company’s retail sales havebeen declining. These conditions raise substantial doubt about the Company’sability to continue as a going concern. The financial statements do not includeany adjustments to reflect the possible future recoverability andclassification of assets or the amounts and classifications of liabilities thatmay result from the outcome of this uncertainty. The Company is also exploringstrategic alternatives with respect to its business, which could includeseeking to dispose of some or all of its remaining assets. The Company may alsoconsider a wide range of other business opportunities, some of which may beunrelated to the Company's current business.

 

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, combined with revenues from continuing operations, will be adequateto fund its operations during the remainder of fiscal 2003.  However, to the extent the Company'sestimates are inaccurate and/or the Company is unable to successfuly settleoutstanding obligations and reduce operating costs, the Company may not havesufficient cash resources to maintain operations.  In such event, the Company may be required to consider a formalor informal restructuring or reorganization. 

 

TheCompany’s ability to improve its operations will be subject to prevailingeconomicconditions and to legal, financial, business, regulatory, industry andotherfactors, many of which are beyond the Company’s control. To the extentthatthe Company finances its requirements through the issuance of additionalequitysecurities, any such issuance would result in dilution to the interestsofthe Company’s stockholders.

 

In December2002 the Company was delisted from NASDAQ because it did not comply with theminimum $2,000,000 net tangible asset requirement or the alternative minimum$2,500,000 stockholders’ equity requirement necessary for continued listing onNASDAQ’s SmallCap Market.

 

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SUBSEQUENTEVENTS

 

In January2003, the Company reached an agreement with the holders of all of its and itsNetwork Event Theater subsidiary’s outstanding notes (NET Notes, YSTM Notes& YSTM 2 Notes), in the aggregate principal amount of $18 million, tocancel those notes.  In exchange forcancellation of all of the principal and interest due on the old notes, thenote holders received $4.5 million in cash, preferred stock with a face valueof $4 million, and 3,985,000 shares of common stock-equal to ten percent of thenumber of shares of the Company to be outstanding after the issuance of thoseshares, and $4 million aggregate principal amount of promissory notes issued bythe Company’s retail subsidiary, Beyond the Wall, Inc., secured by theCompany’s pledge of all of its stock in Beyond the Wall.

 

At theclosing of the transaction, all of the Company’s previous directors andofficers, including the chairman of the board and the acting chief financialofficer, resigned and three new directors were elected.  Jonathan V. Diamond, who previously had beena director and Interim CEO of YouthStream, returned as the Company’s Chairman.  In addition, Hal Byer and Robert Scott Fritzwere elected as directors of the new board.

 

On February6, 2003 Robert Weingarten was appointed as the Company’s Chief FinancialOfficer and Jonathan V. Diamond was appointed as the Company’s Chief ExecutiveOfficer.

 

 

ITEM 3.          QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

MARKET RISK

 

TheCompany’s accounts receivable are subject, in the normal course of business tocollectionrisks. The Company regularly assesses these risks and has established policieson business practices to protect against the adverse effects of collectionsrisks.

 

ITEM 4.          CONTROLSAND PROCEDURES

 

Inaccordance with Item 307 of Regulation S-K promulgated under the SecuritiesActof 1933, as amended, and within 90 days of the date of this Quarterly ReportonForm 10-Q, the Chief Executive Officer and Chief FinancialOfficerof the Company (the “Certifying Officers”) have conducted evaluations oftheCompany’s disclosure controls and procedures. As defined under Sections13a-14(c)and 15d-14(c) of the Securities Exchange Act of 1934, as amended (the“ExchangeAct”), the term “disclosure controls and procedures” means controlsandother procedures of an issuer that are designed to ensure that informationrequiredto be disclosed by the issuer in the reports that it files or submitsunderthe Exchange Act is recorded, processed, summarized and reported, withinthetime periods specified in the Commission’s rules and forms. Disclosurecontrolsand procedures include, without limitation, controls and proceduresdesignedto ensure that information required to be disclosed by an issuer in thereportsthat it files or submits under the Exchange Act is accumulated andcommunicatedto the issuer’s management, including its principal executiveofficeror officers and principal financial officer or officers, or personsperformingsimilar functions, as appropriate to allow timely decisions regardingrequireddisclosure. The Certifying Officers have reviewed the Company’sdisclosurecontrols and procedures and have concluded that those disclosurecontrolsand procedures are effective in causing information to be recorded, processed,summarized and reported by management of the Company to ensure that the qualityand timeliness of the Company’s public disclosures complies with its SECobligations. In compliance with Section 302 of the Sarbanes-Oxley Act of 2002,(18U.S.C. 1350), each of the Certifying Officers executed anOfficer’sCertification included in this Quarterly Report on Form 10-Q.

 

As of thedate of this Quarterly Report on Form 10-Q, there have not been anysignificantchanges in the Company’s internal controls or in other factors thatcouldsignificantly affect these controls subsequent to the date of theirevaluation,including any corrective actions with regard to significantdeficienciesand material weaknesses.

 

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PARTII

 

OTHER INFORMATION

 

ITEM 1.          LEGALPROCEEDINGS

 

The Companyis a party to certain legal proceedings commenced against it byformeremployees of the Company’s subsidiaries. These actions include: (a) alitigationcommenced in the District Court of Travis County, Texas by a former employee ofthe Company’s CommonPlaces, LLC (“CP”) subsidiary claiming that, based on aprior agreement, he is entitled to receive, without cost, an aggregate of215,083 shares of YouthStream common stock; and (b) an arbitration filed in NewYork by the Company’s former President and Chief Executive Officer seekingdamages for alleged breach of his employment agreement, among other things. TheCompany is currently defending these actions and has asserted counterclaims inthe action against its former CEO.

 

Inaddition, certain creditors of the Company and its subsidiaries and certainholdersof the Company’s and its NET subsidiary’s debt have asserted or havethreatenedclaims against the Company and its subsidiaries, which are the resultofthe Company’s failure to pay certain debts and liabilities as they came due.

 

Among theclaims is a litigation filed in New York State Court by Wells Fargo inconnectionwith the Wells Fargo Loan, seeking past due payments and futurepayments,late charges and interest costs and expenses, and certain collateralinconnection with NET’s failure to make certain payments owed under the WellsFargoLoan. On November 18, 2002, the Company was issued a temporary restrainingorderby the Supreme Court of New York to prevent the Company from removing,transferring,pledging or assigning funds constituting the assets of NET and APMI, up to $500,000.  In December 2002 the Company reached anagreement with the note holder and paid $470,000 in exchange for thecancellation of the Equipment Note and the transfer of the title of theequipment securing the note.

 

Inaddition, certain landlords of stores, which Beyond the Wall has vacated inadvanceof the expiration dates of the Store leases or failed to pay rent whendue,have commenced litigation against Beyond the Wall.

 

Given theCompany’s current financial situation, the costs of defending theseproceedings,diversion of management’s attention to these matters, or theoutcomeof such proceedings could have a material adverse effect on theCompany’sfinancial condition or operating results, including its ability torestructureits debts without seeking bankruptcy protection or being the subjectofan involuntary bankruptcy petition, or its ability to continue as a goingconcern.

 

ITEM 3.          DEFAULTSOF SENIOR SECURITIES

 

Asdiscussed in Footnote 4 to the notes to the Company’s financial statements, theCompany failed to make scheduled interest payments in the first quarter offiscal 2003 on its long-term debt notes, which resulted in a default on its NETNotes due 2003, YSTM Notes due 2005, YSTM 2 Note due 2005 and Equipment Notedue 2003.

 

ITEM 6.          EXHIBITSAND REPORTS ON FORM 8-K

 

Reports onForm 8-K:

 

CurrentReport on Form 8-K dated January 20, 2003, regarding the execution of aRestructuring Agreement dated as of January 20, 2003 among the Company, and itssubsidiary, Network Event Theater, Inc., the United States Small BusinessAdministration as Receiver for Interequity Capital Partners, LP, TCW SharedOpportunity Fund II, L.P., Shared Opportunity Fund IIB, LLC, The Charles andAdele Thurnher Living Trust Dated December 7, 1989, The Morrish CommunityProperty Trust Dated April 15, 1998, and Jean Smith, Stanley J. Schrager,Richard Coppersmith, Rand Ravich and Jess M. Ravich, individually, and theconsummation of the transactions contemplated by the Restructuring Agreement.

 

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Exhibits:

 

99.1                            Certificate of Chief Executive Officer and Chief FinancialOfficerpursuant to section 18 U.S.C. section 1350 dated February 24,2003.

 

 

SIGNATURES

 

Inaccordance with the requirements of the Securities Exchange Act of 1934, theregistranthas caused this report to be signed on its behalf by the undersigned,thereuntoduly authorized.

 
| February  24, 2003 |                                    |                     |
|--------------------|-----------------------------------------|--------------------------|
|               |                                    |                     |
|               |                                    |                     |
|               | YOUTHSTREAM  MEDIA NETWORKS, INC.       |
|               |                                    |
|               |                                    |                     |
|               | BY:                                     | /s/  Jonathan V. Diamond |
|               | Jonathan  V. Diamond                    |
|               | Chairman  & Chief Executive Officer |
|               |                                    |                     |
|               |                                    |                     |
|               | BY:                                     | /s/ Robert  Weingarten   |
|               | Robert  Weingarten                      |
|               | Chief  Financial Officer                |

 

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Certification

 

I, JonathanV. Diamond, Chief Executive Officer and Chairman of the Board of Directors ofYouthStream MediaNetworks, Inc., certify that:

 

1.                                       I have reviewed this quarterly report on Form 10-Q ofYouthStream Media Networks, Inc.;

 

2.                                       Based on my knowledge, this quarterly report does not containany untrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisquarterly report;

 

3.                                       Based on my knowledge, the financial statements, and otherfinancial information included in this quarterly report, fairly present in allmaterial respects the financial condition, results of operations and cash flowsof the registrant as of, and for, the periods presented in this quarterlyreport;

 

4.                                       The registrant’s other certifying officers and I are responsiblefor establishing and maintaining disclosure controls and procedures (as definedin Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a)                                      designed such disclosure controls and procedures to ensure thatmaterial information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

 

b)                                     evaluated the effectiveness of the registrant’s disclosurecontrols and procedures as of a date within 90 days prior to the filing date ofthis quarterly report (the “Evaluation Date”); and

 

c)                                      presented in this quarterly report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

 

5.                                       The registrant’s other certifying officers and I have disclosed,based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent function):

 

a)                                      all significant deficiencies in the design or operation ofinternal controls which could adversely affect the registrant’s ability torecord, process, summarize and report financial data and have identified forthe registrant’s auditors any material weaknesses in internal controls; and

 

b)                                     any fraud, whether or not material, that involves management orother employees who have a significant role in the registrant’s internal controls;and

 

6.                                       The registrant’s other certifying officers and I have indicatedin this quarterly report whether there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 

Date:February 24, 2002

 

 
|   | /s/  Jonathan V. Diamond                |
|--------|-----------------------------------------|
|   | Jonathan  V. Diamond                    |
|   | Chairman  & Chief Executive Officer |

 

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Certification

 

I, RobertWeingarten, Chief Financial Officer of YouthStream Media Networks,Inc.,certify that:

 

1.                                       I have reviewed this quarterly report on Form 10-Q ofYouthStream MediaNetworks, Inc.;

 

2.                                       Based on my knowledge, this quarterly report does not containany untruestatement of a material fact or omit to state a material factnecessary tomake the statements made, in light of the circumstances underwhich suchstatements were made, not misleading with respect to the periodcovered bythis quarterly report;

 

3.                                       Based on my knowledge, the financial statements, and otherfinancialinformation included in this quarterly report, fairly present inallmaterial respects the financial condition, results of operationsand cashflows of the registrant as of, and for, the periods presented inthisquarterly report;

 

4.                                       The registrant’s other certifying officers and I are responsibleforestablishing and maintaining disclosure controls and procedures(as definedin Exchange Act Rules 13a-14 and 15d-14) for the registrant andwe have:

 

a)                                      designed such disclosure controls and procedures to ensure thatmaterialinformation relating to the registrant, including itsconsolidatedsubsidiaries, is made known to us by others within thoseentities,particularly during the period in which this quarterlyreportis being prepared;

 

b)                                     evaluated the effectiveness of the registrant’s disclosurecontrolsand procedures as of a date within 90 days prior to the filingdate ofthis quarterly report (the “Evaluation Date”); and

 

c)                                      presented in this quarterly report our conclusions about theeffectivenessof the disclosure controls and procedures based on ourevaluationas of the Evaluation Date;

 

5.                                       The registrant’s other certifying officers and I have disclosed,based onour most recent evaluation, to the registrant’s auditors and theauditcommittee of registrant’s board of directors (or personsperforming theequivalent function):

 

a)                                      all significant deficiencies in the design or operation ofinternalcontrols which could adversely affect the registrant’s abilitytorecord, process, summarize and report financial data and haveidentifiedfor the registrant’s auditors any material weaknesses ininternalcontrols; and

 

b)                                     any fraud, whether or not material, that involves management orotheremployees who have a significant role in the registrant’sinternalcontrols; and

 

6.                                       The registrant’s other certifying officers and I have indicatedin thisquarterly report whether there were significant changes ininternalcontrols or in other factors that could significantly affectinternalcontrols subsequent to the date of our most recent evaluation,includingany corrective actions with regard to significant deficienciesand materialweaknesses.

 

Date:February 24, 2002

 

 
|   | /s/  Robert Weingarten  |
|--------|-------------------------|
|   | Robert  Weingarten      |
|   | Chief Financial Officer |

 

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