** **

**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 June 30, 2003**                                                                                       |
|                                                                                                                                    |
| **OR**                                                                                                                                  |
|                                                                                                                                    |
| **o**                                                                                                                                   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                    |
| **For the transition  period from          to        ** |
|                                                                                                                                    |
| **Commission File Number:  0-27556**                                                                                                    |

 

**YOUTHSTREAM MEDIANETWORKS, INC.**

(Exact Name of Registrant as Specified inIts Charter)

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

 

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

 

Yes ý   No  o

 

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

 

At June 30,2003, there were 39,850,000 shares of Common Stock, $.01 par value outstanding.

 

 

----

 

YOUTHSTREAM MEDIA NETWORKS, INC.

 

FORM 10-Q

 

INDEX

 
| **PART  I—FINANCIAL INFORMATION** |
|----------------------------------------|
|                                   |
| ITEM 1.                                | FINANCIAL STATEMENTS |
|                                   |
|                                   | Condensed Consolidated Balance  Sheets—  June 30, 2003 (unaudited), September 30, 2002 (unaudited) and June 30, 2002 |
|                                   |   |
|                                   | Unaudited  Condensed Consolidated Statements of Operations —  Three Months and Nine Months Ended June 30, 2003 and 2002 |
|                                   |   |
|                                   | Unaudited  Condensed Consolidated Statements of Cash Flows —  Nine Months Ended June 30, 2003 and 2002 |
|                                   |   |
|                                   | Unaudited  Condensed Consolidated Statement of Stockholders’ Deficiency —  Nine Months Ended June 30, 2003 |
|                                   |   |
|                                   | Notes  to Condensed Consolidated Financial Statements as of June 30, 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

----

 

PART I

 

FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

YOUTHSTREAM MEDIA NETWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

 

 
|                                                                                                                                                                                                                                                                           |   | **June 30,  2003** |   | **September 30,  2002** |   | **June 30,  2002** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|-------------------------|--------|--------------------|--------|
|                                                                                                                                                                                                                                                                           |   | **(Unaudited)**    |   | **(Unaudited)**         |   |               |   |
|                                                                                                                                                                                                                                                                           |   |               |   |                    |   |               |   |
| ASSETS                                                                                                                                                                                                                                                                         |   |               |   |                    |   |               |   |
| Current assets:                                                                                                                                                                                                                                                                |   |               |   |                    |   |               |   |
| Cash and cash equivalents                                                                                                                                                                                                                                                      |   | $                  | 549    |                    | $      | 9,067              |   | $ | 597 |   |
| Accounts receivable, net                                                                                                                                                                                                                                                       |   | —             |   | 732                     |   | 2,667              |   |
| Inventories, net                                                                                                                                                                                                                                                               |   | 2,078              |   | 3,622                   |   | 2,584              |   |
| Prepaid expenses                                                                                                                                                                                                                                                               |   | 282                |   | 254                     |   | 180                |   |
| Other current assets                                                                                                                                                                                                                                                           |   | 79                 |   | 148                     |   | 195                |   |
| Restricted cash                                                                                                                                                                                                                                                                |   | —             |   | 655                     |   | 768                |   |
|                                                                                                                                                                                                                                                                           |   |               |   |                    |   |               |   |
| Total current assets                                                                                                                                                                                                                                                           |   | 2,988              |   | 14,478                  |   | 6,991              |   |
|                                                                                                                                                                                                                                                                           |   |               |   |                    |   |               |   |
| Property and equipment, net of  accumulated depreciation of $1,317, $940 and $1,918 at June 30, 2003,  September 30, 2002 and June 30, 2002, respectively                                                                                                                      |   | 1,630              |   | 2,134                   |   | 2,749              |   |
| Deferred financing costs, net of  accumulated amortization $2,083 and $1,884 at September 30, 2002 and June 30,  2002, respectively                                                                                                                                            |   | —             |   | 2,366                   |   | 2,565              |   |
| Other assets                                                                                                                                                                                                                                                                   |   | 10                 |   | —                  |   | —             |   |
| Assets from discontinued operations                                                                                                                                                                                                                                            |   | —             |   | —                  |   | 7,682              |   |
|                                                                                                                                                                                                                                                                           |   |               |   |                    |   |               |   |
| Total assets                                                                                                                                                                                                                                                                   |   | $                  | 4,628  |                    | $      | 18,978             |   | $ | 19,987 |   |
|                                                                                                                                                                                                                                                                           |   |               |   |                    |   |               |   |
| LIABILITIES AND STOCKHOLDERS’  DEFICIENCY                                                                                                                                                                                                                                 |   |               |   |                    |   |               |   |
| Current liabilities:                                                                                                                                                                                                                                                           |   |               |   |                    |   |               |   |
| Accounts payable                                                                                                                                                                                                                                                               |   | $                  | 2,498  |                    | $      | 3,527              |   | $ | 1,800 |   |
| Accrued employee compensation                                                                                                                                                                                                                                                  |   | 279                |   | 389                     |   | 704                |   |
| Accrued expenses                                                                                                                                                                                                                                                               |   | 2,583              |   | 4,289                   |   | 4,003              |   |
| Deferred revenues                                                                                                                                                                                                                                                              |   | —             |   | —                  |   | 127                |   |
| Current portion of deferred  purchase price                                                                                                                                                                                                                                    |   | —             |   | —                  |   | 375                |   |
| Current portion of capitalized  lease obligations                                                                                                                                                                                                                              |   | 55                 |   | 121                     |   | 165                |   |
| Current portion of long-term debt                                                                                                                                                                                                                                              |   | —             |   | 18,213                  |   | 18,184             |   |
| Total current liabilities                                                                                                                                                                                                                                                      |   | 5,415              |   | 26,539                  |   | 25,358             |   |
|                                                                                                                                                                                                                                                                           |   |               |   |                    |   |               |   |
| Capitalized lease obligations                                                                                                                                                                                                                                                  |   | —             |   | 38                      |   | 151                |   |
| Long-term debt                                                                                                                                                                                                                                                                 |   | 4,912              |   | —                  |   | —             |   |
| Other liabilities                                                                                                                                                                                                                                                              |   | —             |   | 346                     |   | 358                |   |
|                                                                                                                                                                                                                                                                           |   |               |   |                    |   |               |   |
| Redeemable Preferred Stock  (See Note 6)                                                                                                                                                                                                                                  |   |               |   |                    |   |               |   |
| Series A, 4% cumulative,  non-convertible, redeemable preferred stock, mandatory redemption and  liquidation value of $4 per share, plus cumulative dividends, or $5,269 at  December 31, 2010; no par value; 1,000 authorized; 1,000 issued and  outstanding at June 30, 2003 |   | 5,269              |   | —                  |   | —             |   |
|                                                                                                                                                                                                                                                                           |   |               |   |                    |   |               |   |
| Commitments and contingencies                                                                                                                                                                                                                                                  |   | —             |   | —                  |   | —             |   |
|                                                                                                                                                                                                                                                                           |   |               |   |                    |   |               |   |
| Stockholders’ Deficiency                                                                                                                                                                                                                                                  |   |               |   |                    |   |               |   |
| 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, 39,850 shares, 35,865 shares and 33,591 shares  issued at June 30, 2003, September 30, 2002 and June 30, 2002, respectively                                                                                         |   | 398                |   | 359                     |   | 336                |   |
| Additional paid-in capital                                                                                                                                                                                                                                                     |   | 331,080            |   | 330,865                 |   | 330,774            |   |
| Accumulated deficiency                                                                                                                                                                                                                                                         |   | (341,617           | )      | (338,340                | )      | (336,161           | )      |
| Treasury stock, 607 shares, at cost                                                                                                                                                                                                                                            |   | (829               | )      | (829                    | )      | (829               | )      |
| Total stockholders’ deficiency                                                                                                                                                                                                                                            |   | (10,968            | )      | (7,945                  | )      | (5,880             | )      |
|                                                                                                                                                                                                                                                                           |   |               |   |                    |   |               |   |
| Total liabilities and stockholders’  deficiency                                                                                                                                                                                                                           |   | $                  | 4,628  |                    | $      | 18,978             |   | $ | 19,987 |   |

 

See notes to condensed consolidatedfinancial statements

 

3

----

 

YOUTHSTREAM MEDIA NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)

 
|                                                          |   | **Three months ended  June 30,** |   | **Nine months ended  June 30,** |   |
|---------------------------------------------------------------|--------|----------------------------------|--------|---------------------------------|--------|
|                                                          |   | **2003**                         |   | **2002**                        |   | **2003** |   | **2002** |   |
|                                                          |   |                             |   |                            |   |   |   |   |   |
| Net revenues                                                  |   | $                                | 682    |                            | $      | 1,438 |   | $ | 3,967 |   | $ | 6,839 |   |
| Cost of sales                                                 |   | 164                              |   | 1,072                           |   | 977 |   | 2,285 |   |
| Gross profit                                                  |   | 518                              |   | 366                             |   | 2,990 |   | 4,554 |   |
| Selling, general, administrative  and corporate expenses      |   | 1,500                            |   | 10,993                          |   | 6,191 |   | 19,649 |   |
| Depreciation and amortization                                 |   | 63                               |   | 68                              |   | 359 |   | 471 |   |
| Loss  on closing of retail stores                             |   | 8                                |   | —                          |   | 1,790 |   | — |   |
| Loss from operations                                          |   | (1,053                           | )      | (10,695                         | )      | (5,350 | ) | (15,566 | ) |
| Interest income                                               |   | 1                                |   | 9                               |   | 35 |   | 265 |   |
| Interest expense                                              |   | —                           |   | (794                            | )      | (907 | ) | (2,294 | ) |
| Gain on debt settlement                                       |   | —                           |   | —                          |   | 2,800 |   | — |   |
| Loss before provision for income  taxes                       |   | (1,052                           | )      | (11,480                         | )      | (3,422 | ) | (17,595 | ) |
| Provision for income taxes                                    |   | 4                                |   | 46                              |   | 8 |   | 178 |   |
| Loss from continuing operations                               |   | (1,056                           | )      | (11,526                         | )      | (3,430 | ) | (17,773 | ) |
| Gain (loss) from discontinued  operations                     |   | 24                               |   | (2,222                          | )      | 153 |   | (3,892 | ) |
| Gain on disposal of discontinued  operations                  |   | —                           |   | 865                             |   | — |   | 877 |   |
| Net loss attributable to common  shares                       |   | $                                | (1,032 | )                               | $      | (12,883 | ) | $ | (3,277 | ) | $ | (20,788 | ) |
| Per share of common stock-basic and  diluted                  |   |                             |   |                            |   |   |   |   |   |
| Loss from continuing operations                               |   | $                                | (0.03  | )                               | $      | (0.37 | ) | $ | (0.09 | ) | $ | (0.59 | ) |
| Loss from discontinued operations                             |   | —                           |   | (0.07                           | )      | — |   | (0.13 | ) |
| Gain on disposal of discontinued  operations                  |   | —                           |   | 0.02                            |   | — |   | 0.03 |   |
| Net loss per basic and diluted  common share                  |   | $                                | (0.03  | )                               | $      | (0.42 | ) | $ | (0.09 | ) | $ | (0.69 | ) |
| Weighted average basic and diluted common  shares outstanding |   | 39,242                           |   | 30,969                          |   | 37,564 |   | 30,113 |   |

 

See notes to condensed consolidatedfinancial statements

 

4

----

 

YOUTHSTREAM MEDIA NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS

(IN THOUSANDS)

(UNAUDITED)

 
|                                                                                   |   | **Nine months ended  June 30,** |   |
|----------------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                                   |   | **2003**                        |   | **2002** |   |
|                                                                                   |   |                            |   |   |   |
| CASH FLOWS FROM OPERATING  ACTIVITIES                                                  |   |                            |   |   |   |
| Net loss                                                                               |   | $                               | (3,277 | ) | $ | (20,788 | ) |
| Adjustments to reconcile net loss  to net cash used in operating activities:           |   |                            |   |   |   |
| Loss (gain)  from discontinued operations                                         |   | (153                            | )      | 3,892 |   |
| Gain on disposal of discontinued  operations                                           |   | —                          |   | (877 | ) |
| Net change in assets and  liabilities of discontinued operations                       |   | 95                              |   | 5,070 |   |
| Bad debt expense                                                                       |   | 39                              |   | (4 | ) |
| Depreciation and amortization                                                          |   | 359                             |   | 471 |   |
| Loss on closing of retail stores                                                       |   | 1,790                           |   | — |   |
| Gain on disposal of fixed assets                                                       |   | (137                            | )      | — |   |
| Gain on debt extinguishment                                                            |   | (2,800                          | )      | — |   |
| Amortization of deferred financing  costs                                              |   | 239                             |   | 623 |   |
| Amortization of original issue  discount on Subordinated Notes                         |   | 38                              |   | 93 |   |
| Deferred rent                                                                          |   | (346                            | )      | (9 | ) |
| Changes in assets and liabilities,  net of acquisitions and dispositions:              |   |                            |   |   |   |
| Accounts receivable                                                                    |   | 693                             |   | (935 | ) |
| Inventory                                                                              |   | 909                             |   | 625 |   |
| Other current assets                                                                   |   | 560                             |   | 446 |   |
| Accounts payable                                                                       |   | (1,024                          | )      | 714 |   |
| Accrued expenses                                                                       |   | (541                            | )      | (2,760 | ) |
| Deferred revenues                                                                      |   | —                          |   | 1,500 |   |
| Net cash used in operating  activities                                                 |   | (3,556                          | )      | (11,939 | ) |
|                                                                                   |   |                            |   |   |   |
| CASH FLOWS FROM INVESTING  ACTIVITIES                                                  |   |                            |   |   |   |
| Capital expenditures                                                                   |   | (40                             | )      | (498 | ) |
| Proceeds from the sale of fixed  assets                                                |   | 106                             |   | — |   |
| Sale of investments in marketable  debt securities                                     |   | —                          |   | 3,284 |   |
| Other assets                                                                           |   | (10                             | )      | — |   |
| Payment for business acquisitions                                                      |   | —                          |   | (1,050 | ) |
| Net cash provided by investing  activities                                             |   | 56                              |   | 1,736 |   |
|                                                                                   |   |                            |   |   |   |
| CASH FLOWS FROM FINANCING  ACTIVITIES                                                  |   |                            |   |   |   |
| Common stock repurchase                                                                |   | —                          |   | (291 | ) |
| Repayment of capitalized lease  obligations                                            |   | (48                             | )      | (44 | ) |
| Repayment of long-term debt                                                            |   | (4,970                          | )      | (1,411 | ) |
| Net cash used in financing  activities                                                 |   | (5,018                          | )      | (1,746 | ) |
|                                                                                   |   |                            |   |   |   |
| Decrease in cash and cash  equivalents                                                 |   | (8,518                          | )      | (11,949 | ) |
| Cash and cash equivalents at  beginning of period                                      |   | 9,067                           |   | 12,546 |   |
| Cash and cash equivalents at end of  period                                            |   | $                               | 549    |   | $ | 597 |   |
|                                                                                   |   |                            |   |   |   |
| Supplemental cash flow information:                                                    |   |                            |   |   |   |
| Cash paid for income taxes                                                             |   | $                               | 95     |   | $ | 97 |   |
|                                                                                   |   |                            |   |   |   |
| Noncash financing activities:                                                          |   |                            |   |   |   |
| Issuance of common stock in  connection with acquisitions                              |   | $                               | — |   | $ | 569 |   |
| Issuance of common stock in  connection with troubled debt restructuring               |   | $                               | 254    |   | $ | — |   |
| Issuance of promissory notes in  connection with troubled debt restructuring           |   | $                               | 4,912  |   | $ | — |   |
| Issuance of redeemable preferred  stock in connection with troubled debt restructuring |   | $                               | 5,269  |   | $ | — |   |

 

See notes to condensed consolidatedfinancial statements

 

5

----

 

YOUTHSTREAM MEDIA NETWORKS, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’DEFICIENCY

FOR THE PERIOD OCTOBER 1, 2002 TO JUNE 30,2003

(IN THOUSANDS)

(UNAUDITED)

 
|                                                            |   | **Common  Stock** |   | **APIC**   |   | **Accumulated********Deficit** |   | **Treasury********Stock** |   | **Total** |     |
|-----------------------------------------------------------------|--------|-------------------|--------|------------|--------|--------------------------------|--------|---------------------------|--------|-----------|----------|
|                                                            |   | **Shares**        |   | **Amount** |   |                           |   |                      |   |
|                                                            |   |              |   |       |   |                           |   |                      |   |      |     |   |   |
| Balances at October 1, 2002                                     |   | 35,865            |   | $          | 359    |                           | $      | 330,865                   |   | $         | (338,340 | ) | $ | (829 | ) | $ | (7,945 | ) |
| Issuance of common stock in  connection with debt restructuring |   | 3,985             |   | 39         |   | 215                            |   |                      |   |      |     | 254 |   |
| Net loss                                                        |   | —            |   | —     |   | —                         |   | (3,277                    | )      | —    |     | (3,277 | ) |
| Balances at June 30, 2003                                       |   | 39,850            |   | $          | 398    |                           | $      | 331,080                   |   | $         | (341,617 | ) | $ | (829 | ) | $ | (10,968 | ) |

 

 

See notes to condensed consolidated financial statements

 

6

----

 

YOUTHSTREAM MEDIA NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2003

(Unaudited)

 

1.  ORGANIZATION AND BASIS OF PRESENTATION

 

Theaccompanying consolidated financial statements include the accounts ofYouthStream Media Networks, Inc. (“YouthStream”), and its wholly-ownedsubsidiaries, Network Event Theater, Inc. (“NET”), American Passage Media, Inc.(“American Passage”), Beyond the Wall, Inc. (“Beyond the Wall”), and W3T.com,Inc. (“Teen.com”), (collectively, the “Company”). On August 5, 2002 the Companysold substantially all of its media assets and assigned certain liabilities ofits NET and American Passage subsidiaries to Alloy, Inc. and ceased operatingthe media segment. In December 2001, the Company discontinued its Teen.comoperations and closed its Hotstamp college business. In December 2000, theCompany discontinued the operations of CommonPlaces, LLC (“CommonPlaces”),sixdegrees, inc. (“sixdegrees”), CollegeWeb.com, Inc. (“CollegeWeb”), andInvino Corporation (“Invino”). YouthStream, through its Beyond the Wallsubsidiary, is now primarily a retail company that targets teenagers and youngadults ages 12 to 24.

 

Theaccompanying consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States for interimfinancial information and with the instructions to Form 10-Q. Accordingly, theydo not include all the information and footnotes required by generally acceptedaccounting principles for complete financial statements. In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included. Operatingresults for the interim period are not necessarily indicative of the resultsthat may be expected for the fiscal year ending September 30, 2003. The balancesheet at June 30, 2002 has been derived from the audited financial statementsat that date but does not include all of the information and footnotes requiredby generally accepted accounting principles for complete financial statements.For further information, refer to the consolidated financial statements andfootnotes thereto included in the Company’s Form 10-K for the fiscal year endedJune 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 those estimates.

 

EffectiveJune 27, 2003, the Company changed its fiscal year end from June 30 toSeptember 30.  Accordingly, the interimconsolidated financial statements included herein are as of and for the threemonths and nine months ended June 30, 2003 and 2002.

 

FINANCIALSTATEMENT PRESENTATION

 

The Companyhas incurred recurring operating losses since its inception, which has resultedin an accumulated deficit of approximately $342,000,000. As of June 30,2003, the Company had a working capital deficiency of approximately $2,427,000and a stockholders’ deficiency of approximately $10,968,000 and expects to haveinsufficient capital to fund all of its obligations.  In January 2003, the Company completed a debt restructuringtransaction with the holders of $18 million of its subordinated notes(described below).  In addition, theCompany’s retail sales have been declining. These conditions raise substantialdoubt about 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 is also exploring strategic alternatives with respectto its business, which could include seeking to dispose of some or all of itsremaining assets. The Company may also consider a wide range of other businessopportunities, some of which may be unrelated to the Company’s currentbusiness.

 

StoreClosing Costs

 

In fiscal2003 the Company followed through on its previously announced plans to close anumber of under performing retail stores within its Beyond the Wall chain.  For the nine months ended June 30, 2003, theCompany incurred approximately $1.8 million of expenses, relating to theclosing of 25 retail store operations, including $214,000 for the write-off offixed assets, $635,000 for the write-off of inventory, $879,000 of accruals forcosts relating to the early termination of store leases and $62,000 for otherexpenses.  The total closing costs were

 

7

----

 

classified asa separate line item in the statement of operations as part of continuingoperations.

 

**Debt Restructuring**

 

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 Note), in the aggregate principal amount of $18 million, to cancelthose notes.  In exchange forcancellation of all of the principal and interest due on the old notes, thenote holders received in aggregate $4.5 million in cash, preferred stock with aface value of $4 million, and 3,985,000 shares of common stock, 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 all ofits stock in Beyond the Wall.

 

At the closing of the January2003 debt restructuring, all of the Company’s previousdirectors and officers resigned, and three new directors were appointed.  Jonathan V. Diamond, who previously had beena director and interim Chief Executive Officer of the Company, was appointed asChairman of the Board of Directors, and Hal G. Byer and Robert Scott Fritz wereappointed as directors of the Company. Mr. Diamond was appointed as Chief Executive Officer and Robert N.Weingarten was appointed as Chief Financial Officer.

 

During February 2003, theCompany issued options to the three new directors to purchase an aggregate of750,000 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 directors acquired options from the holder ofthe shares of preferred stock that were issued in the January 2003restructuring to purchase an aggregate of $750,000 of such holder’spreferred stock, exercisable at estimated fair value.

 

The termsand conditions of the January 2003 debt restructuring agreement qualified as atroubled debt restructuring 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 for purposesof determining the gain, if any, in connection with the extinguishment of theNET Notes, YSTM Notes and YSTM 2 Note in accordance with SFAS No. 15.

 

Thecancellation of the NET Notes qualified as a full debt settlement whereby inexchange for the extinguishment of the $5 million note and cancellation ofaccrued interest, the holders received $3,000,000 cash.  As of the settlement date, the adjustedcarrying value of the NET Notes, net of accrued interest, unamortized originalissue discount and unamortized closing costs, was $5,448,000.  The settlement resulted in a gain of$2,448,000.

 

Thecancellation of the YSTM Notes was accounted for as a combination of a partialdebt settlement and a continuation of debt with modified terms.  In exchange for the extinguishment of theYSTM Notes, the holder received cash of $1,500,000, 3,486,875 shares of commonstock 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 promissory notebearing interest at 4% per annum with principal and cumulative interest dueDecember 31, 2010 (see Note 5e).  As ofthe settlement date, the adjusted carrying value of the YSTM Notes, net ofaccrued interest, unamortized original issue discount and unamortized closingcosts, was $11,251,000.  After adjustingfor the fair value of the cash and common stock exchanged, the carrying valueof the YSTM Notes was $9,528,000.  Forpurposes of determining the gain on the extinguishment of the YSTM Notes, theredeemable preferred stock was accounted for as a debt instrument given themandatory redemption features of the security (see Note 6). The issuance of the$3,000,000 promissory note and the 1,000,000 shares of redeemable preferredstock constituted a continuation of debt with modified terms. Given that theundiscounted future value of the promissory note and the redeemable preferredstock, including accrued interest and cumulative dividends, was less than theadjusted carrying value of the YSTM Notes extinguished, the Company recognizeda gain totaling $306,000 and recorded the value of the promissory note and theredeemable preferred stock at the undiscounted future value of $3,953,000 and$5,269,000, respectively, with no interest expense or accretions in value to berecognized over the remaining life of the promissory note and preferred stock.

 

Thecancellation of the YSTN 2 Note was accounted for as a combination of a partialdebt settlement and a continuation of debt with modified terms.  In exchange for the extinguishment of theYSTM 2 Note, the holder received 498,125 shares of the Company’s common stockwith a fair value of $32,000 and a $1,000,000 promissory note bearing interestat 4% per annum with principal and accrued interest due December 31, 2010 (seeNote 5f).  As of the settlement date,the adjusted carrying value of the YSTM 2 Note, net of accrued interest,unamortized original issue discount and unamortized closing costs, was $991,000.  After adjusting for the fair value of thecommon shares exchanged, the carrying value of the YSTM 2 Note was$960,000.  The issuance of the$1,000,000 promissory note constituted a continuation of debt with modifiedterms. Given that the undiscounted future value of the promissory note,including principal and interest, was greater than the adjusted carrying valueof the YSTM 2 Note extinguished, the Company recognized no gain.  The promissory note

 

8

----

 

wasrevalued at the adjusted carrying value of the YSTM 2 Note surrendered,resulting in an imputed discount of $41,000.

 

In total,the Company recognized a gain from the troubled debt restructuring totaling$2,754,000.  The gain was classified aspart of continuing operations in accordance with SFAS No. 145, “Rescission ofSFAS Nos. 4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections asof April 2000.”  The gain from thetransaction resulted in increasing basic and diluted income per common share by$0.07 and $0.08 for the three months and nine months ended June 30, 2003,respectively.

 

During June 2003, the Companyamended the original provisions of the $4,000,000 of promissory notes issued inconjunction with the January 24, 2003 restructuring to provide for thefollowing:

 

1.  Beyond the Wall was replacedby the Company as the issuer of the notes, and was released from any liabilitywith respect to the notes.

2.  The note holders agreed toconvert the notes from secured to unsecured, and to release their securityinterest in all of the outstanding common stock of Beyond The Wall.

3.  The note holders agreed todelete all provisions in the notes requiring the issuer of the notes to makemandatory prepayments based on the occurrence of certain events.

4.  The note holders agreed todelete provisions in the notes prohibiting the issuer from: (i) incurring anyindebtedness for borrowed money; (ii) selling, or entering into any agreementto sell, all or substantially all of the assets or all or substantially all ofthe capital stock of the issuer; or (iii) entering into any transaction with anaffiliate, other than transactions with the Company, Network Event Theater,Inc. and/or their successors, that have fair and reasonable terms which are noless favorable to the issuer than would be obtained in a comparable arms-lengthtransaction with a person or entity that is not an affiliate.

 

RECLASSIFICATIONS

 

Certainamounts in the prior period financial statements have been reclassified toconform to the current period presentation.

 

2.  DISCONTINUED OPERATIONS

 

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

 

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

 

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

 

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

 
|                                                |   | **Three months ended June 30,** |   | **Nine months ended June 30,** |   |
|-----------------------------------------------------|--------|---------------------------------|--------|--------------------------------|--------|
|                                                |   | **2003**                        |   | **2002**                       |   | **2003** |   | **2002** |   |
|                                                |   |                            |   |                           |   |   |   |   |   |
| Net revenues                                        |   | $                               | — |                           | $      | 2,614 |   | $ | — |   | $ | 13,427 |   |
| Gain (loss) from discontinued  operations           |   | 24                              |   | (2,222                         | )      | 153 |   | (3,892 | ) |
| Gain (loss) on disposal of  discontinued operations |   | —                          |   | 865                            |   | — |   | 877 |   |
| Net gain/(loss) from discontinued  operations       |   | $                               | 24     |                           | $      | (1,357 | ) | $ | 153 |   | $ | (3,015 | ) |

 

3.  RECENT ACCOUNTING PRONOUNCEMENTS

 

In April 2002, the FASB issuedSFAS No. 145, “Rescission of SFAS Nos. 4, 44 and 64, Amendment of SFAS 13, andTechnical Corrections as of April 2000”. SFAS No. 145 revises the criteria forclassifying the extinguishment of debt as extraordinary and the accountingtreatment of certain lease modifications. SFAS 145 was effective May 15,2002,and is not expected to have a material impact on the Company’s consolidatedfinancial statements other than the classification of any gains or lossesrelated to the early extinguishment of debt.

 

In July2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exitor Disposal Activities.” SFAS No. 146 provides guidance on the timing of therecognition of costs associated with exit or disposal activities. The newguidance requires costs associated with exit or disposal activities to berecognized when incurred. Previous guidance required recognition of costs atthe date of commitment to an exit or disposal plan. The provisions of thestatement are to be adopted prospectively after December 31, 2002. AlthoughSFAS No. 146 may impact the accounting for costs related to exit or disposalactivities the

 

9

----

 

Company mayenter into in the future, particularly the timing of the recognition of thesecosts, the adoption of the statement will not have a material impact on theCompany’s present financial condition or results of operations.

 

In December2002, the FASB issued SFAS No. 148, “Accounting for Stock-BasedCompensation-Transitionand Disclosure-an amendment of FAS 123” (“SFAS 148”). This statement amends SFAS No.123, “Accounting for Stock-Based Compensation” (“SFAS 123”), to providealternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation andamends the disclosure requirements to SFAS 123 to require prominentdisclosures in both annual and interim financial statements about the methodof accounting for stock-based employee compensation and the effect of themethod used on reported results. The transition and annualdisclosure to provisions of SFAS 148 are effective for interim periodsbeginning after December 15, 2002. Accordingly, the Company has adopted thedisclosure requirements of SFAS 148 for the quarter ended March 31, 2003.

 

In April 2003, the FASB issuedSFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and HedgingActivities”.  SFAS No. 149 amends and clarifies under what circumstances acontract with an initial net investment meets the characteristics of aderivative and when a derivative contains a financing component.  Theclarification provisions of SFAS No. 149 require that contracts with comparablecharacteristics be accounted for similarly.  SFAS No. 149 is effective forcontracts entered into or modified after June 30, 2003.  The Company doesnot expect that the adoption of SFAS No. 149 will have a significant effect onthe Company’s financial statement presentation or disclosures.

 

In May 2003, the FASB issuedSFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity”.  SFAS No. 150 establishesstandards for how an issuer classifies and measures in its statement offinancial position certain financial instruments with characteristics of bothliabilities and equity.  SFAS No. 150 requires that an issuer classify afinancial instrument that is within its scope as a liability (or an asset insome circumstances) because that financial instrument embodies an obligation ofthe issuer.  SFAS No. 150 is effective for financial instruments enteredinto or modified after May 31, 2003 and otherwise is effective at the beginningof the first interim period beginning after June 15, 2003.  SFAS No. 150is to be implemented by reporting the cumulative effect of a change inaccounting principle for financial instruments created before the issuance dateof SFAS No. 150 and still existing at the beginning of the interim period ofadoption.  Restatement is not permitted.  The Company does not expectthat the adoption of SFAS No. 150 will have a significant effect on theCompany’s financial statement presentation or disclosures.

 

4.  STOCK-BASED COMPENSATION

 

Stock-based compensation is accounted forby using the intrinsic value-based method in accordance with the provisions ofAccounting Principles Board (“APB”) Opinion No. 25, “Accounting for StockIssued to Employees,” and related interpretations, and the Company is incompliance with the disclosure provisions of SFAS No. 123, “Accounting forStock-Based Compensation.”  Accordingly,the Company only records compensation expense for any stock options grantedwith an exercise price that is less than the fair market value of theunderlying stock at the date of grant. The Company does not record compensation expense for rights to purchaseshares under its ESOP because it satisfies certain conditions under APB 25.

 

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

 

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

 

(In Thousands, Except Per Share Amounts)

 
|                                                                                                        |   | **3 Months Ended June 30,** |    | **9 Months Ended June 30,** |   |
|-------------------------------------------------------------------------------------------------------------|--------|-----------------------------|---------|-----------------------------|--------|
|                                                                                                        |   | **2003**                    |    | **2002**                    |   | **2003** |   | **2002** |   |
|                                                                                                        |   |                        |    |                        |   |   |   |   |   |
| Net loss attributable to common shares, as  reported                                                        |   | $                           | (1,032  | )                           | $      | (12,883 | ) | $ | (3,277 | ) | $ | (20,788 | ) |
| Deduct: Total  stock-based employee compensation expense determined under fair value method  for all awards |   | (632                        | )  | —                      |   | (1,886 | ) | (1,177 | ) |
| Net loss, pro forma                                                                                         |   | $                           | (1,664  | )                           | $      | (12,883 | ) | $ | (5,163 | ) | $ | (21,965 | ) |
| Basic and diluted net  loss per common share, as reported                                                   |   | $                           | (0.03   | )                           | $      | (0.42 | ) | $ | (0.09 | ) | $ | (0.69 | ) |
| Basic and diluted net  loss per common share, pro forma                                                     |   | $                           | (0.04   | )                           | $      | (0.42 | ) | $ | (0.14 | ) | $ | (0.73 | ) |

 

5.  LONG-TERM DEBT

 

Long-termdebt consists of the following (in thousands):

 
|                                             |   | **June 30,  2003** |   | **September 30,  2002** |   | **June 30,  2002** |   |
|--------------------------------------------------|--------|--------------------|--------|-------------------------|--------|--------------------|--------|
|                                             |   | **(unaudited)**    |   | **(unaudited)**         |   |               |   |
|                                             |   |               |   |                    |   |               |   |
| Subordinated Notes — Private  Placement (A) |   | $                  | — |                    | $      | 5,000              |   | $ | 5,000 |   |
| Note Payable to Finance Company (B)              |   | —             |   | 496                     |   | 496                |   |
| Subordinated Notes — Private  Placement (C) |   | —             |   | 12,000                  |   | 12,000             |   |
| Subordinated Notes — Private  Placement (D) |   | —             |   | 1,000                   |   | 1,000              |   |
| Promissory Notes — Private  Placement (E)   |   | 3,953              |   | —                  |   | —             |   |
| Promissory Notes — Private  Placement (F)   |   | 1,000              |   | —                  |   | —             |   |
| Other                                            |   | —             |   | 1                       |   | 1                  |   |
|                                             |   | 4,953              |   | 18,497                  |   | 18,497             |   |
| Less:                                            |   |               |   |                    |   |               |   |
|                                             |   |               |   |                    |   |               |   |
| Unamortized original issue discount              |   | 41                 |   | 284                     |   | 313                |   |
|                                             |   |               |   |                    |   |               |   |
|                                             |   | 4,912              |   | 18,213                  |   | 18,184             |   |
| Less:  Current portion of long-term debt    |   | $                  | — |                    | $      | 18,213             |   | $ | 18,184 |   |
|                                             |   |               |   |                    |   |               |   |
| Long-term debt total                             |   | $                  | 4,912  |                    | $      | —             |   | $ | — |   |

 

10

----

 

----

(A)  In July 1998, the Company issuedsubordinated notes to accredited investorsin theaggregate amount of $5,000,000 less an original discount of $188,000 (“NETNotes”). These notes bore interest at 11% per annum and were due in July2003.In connection with the issuance of the subordinated notes, the Company issued375,000 warrants to the accredited investors for $188,000, and 150,000 warrants tothe placement agent. Each warrant, which expires in July 2003, entitlesthe holder to purchase one share of the Company’s common stock for $4.125, themarket price 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 wasrecorded as deferred financing costs and was amortized over the term of thesubordinated notes. The original issue discount of $188,000 was also amortizedover the term of the related debt. On September 8, 2002, NET failed tomake the interest payment due on the NET Notes, constituting an event of defaultunder the terms of the NET Notes, and as a result, the holder of a majority ofthe NET Notes declared these notes due and payable under the terms of the NETNotes. In January 2003the Company reached an agreement with the holders of the NET Notes to cancelall the principal of and interest on the NET Notes in exchange for aggregatecash payments of $3,000,000. The settlement of the NET Notes resulted in a gaintotaling $2,448,000.

 

(B)  In March 2000, the Company issued a note toa finance company in the amount of $1,971,000 (“Equipment Note”). The note boreinterest at the rate of 11.95% per annum and was payable in 36 equal monthlypayments commencing in March 2000. The note was secured by certain equipmentowned by NET. NET failed to make payments of approximately $65,000 due onAugust 1, 2002 and $65,000 due on September 1, 2002, in connection with theEquipment Note. On September 6, 2002, NET received notice from the financecompany holding the Equipment Note stating that the entire outstandingindebtedness ($496,000) under the Equipment Note was due and payable pursuantto the terms of the note. On September 16, 2002, the holder of the EquipmentNote commenced litigation against NET seeking repayment of the note.  In December 2002 the Company reached anagreement with the holder of the Equipment Note and (a) paid $470,000 inexchange for the cancellation of the principal of and interest on the Equipment Note, totaling $516,000, and(b) transferred title of the equipment securing the Equipment Note to thefinance company. This transaction resulted in a gain of $46,000.

 

(C)  In June 2000, the Company issuedsubordinated notes to an accreditedinvestor in the amount of$12,000,000, less an original issue discount of $420,000 (“YSTM Notes”). The notesbore interest at 11% per annum and were due in June 2005. In connection withthe issuance of the subordinated notes, the Company issued 1,020,000 warrantsto accredited investors in exchange for $420,000. Eachwarrant, which expires in June 2005, entitles the holder to purchase one shareof the Company’s common stock for $5.9375, the market price of the Company’scommon stock at the date of issuance. Based on an independent appraisalat that time, the 1,020,000 warrants were valued at $3,346,000. The value ofthe warrants and closing costs of $494,000 was recorded as deferred financingcosts and was amortized over the term of the subordinated note. Theoriginal issue discount of $420,000 was amortized over the term of the relateddebt. On August 31, 2002, the Company failed to make interest payments due on theYSTM Notes, constituting an event of default under the terms of the YSTM Notes.On September 9, 2002, the holders of the YSTM Notes declared this note

 

11

----

 

due andpayable under the terms of the YSTM Notes. In January 2003, as part of the debtrestructuring, the Company reached an agreement with the holders of the YSTMNotes to cancel all the principal of and interest on the YSTM Notes in exchangefor (a) cash of $1,500,000; (b) 1,000,000 shares of redeemable preferred stockof the Company; (c) 3,486,875 shares of common stock of the Company; 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.

 

(D)  In July 2000, the Company issued a subordinated note to anaccredited investor in the amount of $1,000,000, less an original issuediscount of $35,000 (“YSTM 2 Note”). The note bore interest at 11% per annumand was due in July 2005. In connection with the issuance of the subordinatednote, the Company issued 60,000 warrants to an accredited investor in exchangefor $35,000. Each warrant, which expires in July 2005, entitles the holder topurchase one share of the Company’s common stock for $3.75, the market price ofthe Company’s common stock at the date of issuance. Based on an independentappraisal at that time, the 60,000 warrants were valued at $197,000. The valueof the warrants was recorded as deferred financing costs and was amortized overthe term of the subordinated note. The original issue discount of $35,000 wasamortized over the term of the related debt. On August 31, 2002 the Companyfailed to make an interest payment due on the YSTM 2 Note, constituting anevent of default under the terms of the YSTM 2 Note, and the holder of the notehad the right to declare this note immediately due and payable. In January 2003the Company reached an agreement with the holder of the YSTM 2 Note to cancelall 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 pledge ofthe Company’s stock in Beyond the Wall; and (b) 498,125 shares of the Company’scommon stock.

 

(E)  In January 2003, as part of the debtrestructuring the Company issued a promissory note to an accredited investorwith a face amount of $3,000,000 and total future interest payments of$953,000.  The note bears interest at 4%per annum with accrued interest and principal due December 31, 2010.  This note was issued as part of the January2003 debt restructuring whereby the YSTM Notes were extinguished in exchangefor a $1,500,000 cash payment, issuance of 3,486,875 shares of common stock,issuance of 1,000,000 shares of redeemable preferred stock and issuance of$3,000,000 promissory note secured by the Company’s pledge of all of its stockin its subsidiary, Beyond the Wall. The transaction was accounted for as atroubled debt restructuring involving a combination of a partial debtsettlement and a continuation of debt with modified terms. As the total undiscountedfuture cash payments from the promissory note were less than the adjustedcarrying value of the YSTM Notes, the promissory note was recorded at theundiscounted future cash value of $3,953,000 with no interest expense to berecognized over the remaining life of the new note.  The restructuring of the YSTM Notes resulted in a gain totaling$306,000.

 

(F)  In January 2003, the Company issued apromissory note to an accredited investor with a face value of $1,000,000 andtotal future interest payments of $318,000. The note bears interest at 4% per annum with accrued interest andprincipal due December 31, 2010.  Thisnote was issued as part of the January 2003 debt restructuring in connectionwith which the YSTM 2 Note was extinguished in exchange for issuance of 498,125shares of common stock and issuance of the promissory note secured by theCompany’s pledge of all of its stock in its subsidiary, Beyond the Wall. Thetransaction was accounted for as a troubled debt restructuring involving acombination of a partial debt settlement and a continuation of debt withmodified terms. As the total undiscounted future cash payments from thepromissory note, including principal and accrued interest, were greater thanthe adjusted carrying value of the YSTM 2 Note, the promissory note issued wasrecorded at the adjusted carrying value of the YSTM 2 Note surrendered,resulting in an imputed discount of $41,000.

 

6.  REDEEMABLE PREFERRED STOCK

 

Inconnection with the January 2003 debt restructuring agreement with the holdersof the YSTM Notes, the Company authorized and issued 1,000,000 shares of SeriesA Preferred Stock with the following characteristics:

 

•                  *Dividend Rights*.  The holders of the shares of preferred stockare entitled to receive, when and as declared by the Company’s board ofdirectors, out of funds legally available for that purpose, cumulativepreferential dividends

 

12

----

 

in cash at the rate of 4% a year on theface amount of $4 per share payable quarterly.

•                  *Redemption*.  The Company shall redeem all of thepreferred stock outstanding as of December 31, 2010 at $4 per share, plus allaccrued and unpaid dividends thereon. As of June 30, 2003, the redemption value of the total issued andoutstanding shares of redeemable preferred stock totaled $5,269,000.  The Company has the option in 2003 torepurchase all or a portion of preferred stock outstanding for 50% of its faceamount plus 100% of accrued and unpaid dividends thereon, and during 2004 theCompany has the option to repurchase all or a portion of the preferred stock at75% of its face amount plus accrued and unpaid dividends thereon.

•                  *Convertibility and Voting Rights*. TheSeries A Preferred Stock is not convertible into any other security of theCompany, and the holders thereof have no voting rights except with respect toany proposed changes in the preferences and special rights of such stock orexcept as granted to holders by law.

 

Because thepreferred stock is mandatorily redeemable and was issued in connection with atroubled debt restructuring, it is classified as a long term liability inaccordance with SFAS 150 at the future redemption value of $5,269,000,including cumulative dividends, with no future accretion adjustments to thebalance to be taken against stockholders’ equity (deficit) in subsequentperiods.

 

7.  REORGANIZATION

 

The Companyannounced a plan to move its Seattle operations to its New Yorkoffice inMarch 2002. In April 2002, the Company finalized its transition plan, which resultedin the termination of 30 employees, and completed the transition in June2002. The Company recorded a restructuring charge, which is included inselling, general and administrative expenses, during the fiscal year ended June30, 2002 of approximately $519,000 relating to this decision, whichincluded severance costs of $186,000, lease costs of $126,000 for a leaseexpiring November 2002, and $207,000 relating to the abandonment ofcertain fixed assets. As of June 30, 2003, the Company has remaining accruals ofapproximately $126,000 for lease obligation costs.

 

For thenine months ended June 30, 2003, the Company wrote off approximately $316,000of fixed assets, net of proceeds from the equipment sales, relating to theclosing of its corporate office in New York in November 2002.

 

8.  STOCKHOLDER’S EQUITY

 

In January2003, the Company completed a debt restructuring transaction wherebyapproximately 3,985,000 common shares were issued to the holders of the YSTMNotes and YSTM 2 Note, in accordance with the terms of the debt restructuringto extinguish the YSTM Notes and YSTM 2 Note. The additional common shares were valued using the three-day averagetrading price one day before and one day after the effective date of the debtrestructuring.

 

9.  SEGMENT INFORMATION

 

Prior toAugust 2002, the Company had two reporting segments: media and retail. Themedia segment represented the Company’s media, marketing and promotionalservices provided to advertisers by NET and American Passage. On August 5,2002, the Company sold substantially all of the assets and certain liabilitiesfrom this segment and discontinued its operation. The retail segment consistsof on-campus, online and retail store poster sales provided by Beyond the Wall.

 

13

----

 

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

 
|                          |   | **June 30, 2003**  |   |
|-------------------------------|--------|--------------------|--------|
|                          |   | **(In thousands)** |   |
|                          |   | **(unaudited)**    |   |
| Current assets, net           |   | $                  | -0     | -  |
| Current liabilities           |   | (1,913             | )      |
| Capitalized lease obligations |   | (41                | )      |
| Net book value                |   | $                  | (1,954 | ) |

 

10.  LEGAL

 

The Companyis a party to certain legal proceedings commenced against it by formeremployees of the Company’s subsidiaries. These actions include a litigationpending in the District Court of Travis County, Texas by a former employee ofthe Company’s CommonPlaces, LLC (“CP”) subsidiary claiming that he is entitledto receive, without cost, an aggregate of 215,083 shares of YouthStream commonstock.  The Company reached a settlementwith the former employee in January 2003. As part of the settlement agreement, the Company made a $90,000 cashpayment and issued a non-interest bearing promissory note for $250,000 due inJanuary 2004 in the event that the Company should file for reorganization under Chapter 11 ofthe federal bankruptcy laws within one year and, as a result, the former employeewould be required to return the $90,000 payment.  The Company has not recorded the issuance of the promissory note,given that it has been deemed improbable that all of the conditions requiredunder the settlement agreement would be fulfilled which would cause thepromissory note to take effect.  TheCompany is also involved in an arbitration filed in New York by the Company’sformer President and Chief Executive Officer seeking damages for alleged breachof his employment agreement, among other things. The Company is currentlydefending these actions and has asserted counterclaims in the action againstits former CEO.

 

Inaddition, certain creditors of the Company and its subsidiaries and certainholders of the Company’s and its NET subsidiary’s debt have asserted or havethreatened claims against the Company and its subsidiaries, which are theresult of the Company’s failure to pay certain debts and liabilities as theycame due.

 

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

 

Given theCompany’s current financial situation, the costs of defending these proceedingsand diversion of management’s attention to these matters, the outcome of suchproceedings could have a material adverse effect on the Company’s financialcondition or operating results, including its ability to restructure its debtswithout seeking bankruptcy protection or being the subject of an involuntarybankruptcy petition, or its ability to continue as a going concern.

 

14

----

 

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

 

Thefollowing discussion of the financial condition and results of operations ofthe Company should be read in conjunction with the consolidated financialstatements and related notes thereto.

 

CRITICALACCOUNTING POLICIES

 

Ourdiscussion and analysis of our financial condition and results of operations isbased upon our consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the UnitedStates.  The preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities.  On an on-going basis, we evaluate our estimates.  We base our estimates on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from these estimates under differentassumptions or conditions.  We believethe following critical accounting policies affect our more significantjudgments and estimates used in the preparation of these consolidated financialstatements.

 

In April 2002, the FASB issuedSFAS No. 145, “Rescission of SFAS Nos. 4, 44 and 64, Amendment of SFAS 13, andTechnical Corrections as of April 2000”. SFAS No. 145 revises the criteria forclassifying the extinguishment of debt as extraordinary and the accountingtreatment of certain lease modifications. SFAS 145 was effective May 15, 2002,and is not expected to have a material impact on the Company’s consolidatedfinancial statements other than the classification of any gains or lossesrelated to the early extinguishment of debt.

 

In July2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exitor Disposal Activities.” SFAS No. 146 provides guidance on the timing of therecognition of costs associated with exit or disposal activities. The newguidance requires costs associated with exit or disposal activities to berecognized when incurred. Previous guidance required recognition of costs atthe date of commitment to an exit or disposal plan. The provisions of thestatement are to be adopted prospectively after December 31, 2002. AlthoughSFAS No. 146 may impact the accounting for costs related to exit or disposalactivities the Company may enter into in the future, particularly the timing ofthe recognition of these costs, the adoption of the statement will not have amaterial impact on the Company’s present financial condition or results ofoperations.

 

In December2002, the FASB issued SFAS No. 148, “Accounting for Stock-BasedCompensation-Transitionand Disclosure-an amendment of FAS 123” (“SFAS 148”). This statement amends SFAS No.123, “Accounting for Stock-Based Compensation” (“SFAS 123”), to providealternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation andamends the disclosure requirements to SFAS 123 to require prominentdisclosures in both annual and interim financial statements about the methodof accounting for stock-based employee compensation and the effect of themethod used on reported results. The transition and annualdisclosure to provisions of SFAS 148 are effective for interim periodsbeginning after December 15, 2002. Accordingly, the Company has adopted thedisclosure requirements of SFAS 148 for the quarter ended March 31, 2003.

 

In April 2003, the FASB issuedSFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and HedgingActivities”.  SFAS No. 149 amends and clarifies under what circumstances acontract with an initial net investment meets the characteristics of aderivative and when a derivative contains a financing component.  Theclarification provisions of SFAS No. 149 require that contracts with comparablecharacteristics be accounted for similarly.  SFAS No. 149 is effective forcontracts entered into or modified after June 30, 2003.  The Company doesnot expect that the adoption of SFAS No. 149 will have a significant effect onthe Company’s financial statement presentation or disclosures.

 

In May 2003, the FASB issuedSFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity”.  SFAS No. 150 establishesstandards for how an issuer classifies and measures in its statement offinancial position certain financial instruments with characteristics of bothliabilities and equity.  SFAS No. 150 requires that an issuer classify afinancial instrument that is within its scope as a liability (or an asset insome circumstances) because that financial instrument embodies an obligation ofthe issuer.  SFAS No. 150 is effective for financial instruments enteredinto or modified after May 31, 2003 and otherwise is effective at the beginningof the first interim period beginning after June 15, 2003.  SFAS No. 150is to be implemented by reporting the cumulative effect of a change inaccounting principle for financial instruments created before the issuance dateof SFAS No. 150 and still existing at the beginning of the interim period ofadoption.  Restatement is not permitted.  The Company does not expectthat the adoption of SFAS No. 150 will have a significant effect on theCompany’s financial statement presentation or disclosures.

 

INVENTORIES

 

Inventoriesare stated at the lower of cost or market. Cost is determined on a first-in,first-out basis. Inventories consist primarily of posters and related products.

 

REVENUERECOGNITION

 

Revenue isderived from the sale of merchandise to consumers on college campuses, onlineand in stores. Retail revenue is recognized at the time of the sale to theconsumer.

 

RESULTS OFOPERATIONS

(Inthousands)

 

TheCompany’s consolidated financial statements reflect reclassifications for priorperiods due to the discontinued operation of the Company’s online segment andsale of its media assets. On August 5, 2002, the Company sold substantially allof its media assets and discontinued its media segment. The only remainingsegment is retail. The following analysis incorporates reclassifications ofprior periods due to discontinued operations and revision of the reportingsegments. The following financial analysis compares the three months and ninemonths ended June 30, 2003 (unaudited) to the three months and nine monthsended June 30, 2002 (unaudited).

 

YouthStreamgenerated revenues primarily from the sale of decorative wall posters,targeting teens and young adults, through on-campus sales events, retail storesand Internet sales.

 

Revenuesdecreased to $682,000 for the three months ended June 30, 2003 from $1.4million for the three months ended June 30, 2002. The revenue decline wasattributable to negative same store retail sales and a reduction in the numberof retail stores.

 

Revenuesdecreased to $3.9 million for the nine months ended June 30, 2003 from $6.8million for the nine months ended June 30, 2002. The revenue decline was

 

15

----

 

attributableto negative same store retail sales and a reduction in the number of retailstores.

 

Cost ofsales consists of the cost of decorative wall posters sold. Cost of sales as apercentage of revenues was 24% and 75% for the three months ended June 30, 2003and for the three months ended June 30, 2002, respectively.  The variance in the cost of sales ratio wasattributable to the one-time write-off of inventory against cost of salesduring the three months ended June 30,2002.

 

Cost of sales as a percentageof revenues was 25% and 33% for the nine months ended June 30, 2003 and for thenine months ended June 30, 2002, respectively. The variance in the cost of sales ratio was attributable to theone-time write-off of inventory against cost of sales during the three monthsended June 30,2002.

 

StoreClosing Costs

 

For thethree months ended June 30, 2003, the Company incurred expenses ofapproximately $8,000 relating to the closing of retail stores. This amountincludes $5,000 of expenses for the early termination of existing store leasesand $3,000 of other costs.

 

For the ninemonths ended June 30, 2003, the Company incurred expenses of approximately $1.8million related to the closing of retail stores.  This amount includes $879,000 of expenses relating to the earlytermination of existing store leases, $635,000 of expenses relating to thewrite-down of inventory, $214,000 of expenses relating to the write-off offixed assets deemed impaired as of the store closing dates and $62,000 of othercosts.

 

For thethree months ended June 30, 2003, selling, general, administrative and corporateexpenses, were $1.5 million as compared to $11.0 million for the three months ended June 30, 2002.The decrease of $9.5 million was due to corporate overhead cost savings,resulting from the sale of the media business in the first quarter of fiscal2003, occupancy and payroll related expense savings due to the reduction of thenumber of retail stores in operation in fiscal 2003 and the one-time write-offof Beyond The Wall goodwill in fiscal 2002.

 

For thenine months ended June 30, 2003, selling, general, administrative andcorporate expenses, were $6.2 million as compared to $20.0 million for the ninemonths ended June 30, 2002. The decrease of $13.8 million was due primarily tocorporate overhead cost savings, resulting from the sale of the media business,occupancy and payroll related expense savings due to the reduction of thenumber of retail stores in operation in fiscal 2003 and the one-time write-off of BeyondThe Wall goodwill in fiscal 2002.

 

For thethree months ended June 30, 2003 and 2002, depreciation and amortizationexpense was $63,000 and $68,000, respectively.

 

For thenine months ended June 30, 2003 and 2002, depreciation and amortization expensewas $359,000 and $471,000, respectively.

 

For thethree months ended June 30, 2003, interest income was $1,000 as compared to$9,000 for the three months ended June 30, 2002. The decrease of $8,000 was dueto lower cash balances and declining interest rates.

 

For thenine months ended June 30, 2003, interest income was $35,000 as compared to$265,000 for the nine months ended June 30, 2002. The decrease of $230,000 wasdue to lower cash balances and declining interest rates.

 

For the threemonths ended June 30, 2002, interest expense was $794,000.

 

For the ninemonths ended June 30, 2003, interest expense was $907,000 as compared to $2.3million for the nine months ended June 30, 2002. The decrease of $1.4 millionwas attributable to a lower average debt balance in fiscal 2003 versus fiscal2002, as a result of the debt settlement reached between the Company and itsnote holders in January 2003.

 

16

----

 

For thethree months ended June 30, 2003, gain from discontinued operations was $24,000as compared to a loss of $2.2 million for the three months ended June 30, 2002.The loss from discontinued operations represents the net loss from the Mediaoperations.

 

For thenine months ended June 30, 2003, gain from discontinued operations was $153,000as compared to a loss of $3.9 million for the nine months ended June 30, 2002.The loss from discontinued operations in fiscal 2003 and 2002 represents thenet loss from the Media operations.

 

For the three months ended June 30, 2002,gain on disposal of discontinued operations was $865,000.

 

For thenine months ended June 30, 2002, gain on disposal of discontinued operationswas $877,000.

 

17

----

 

LIQUIDITYAND CAPITAL RESOURCES

 

To date,the Company has financed its operations primarily through the sale of equitysecurities and debt. As of June 30, 2003, the Company had approximately$549,000 in cash and equivalents.  TheCompany has never been profitable and expects to continue to incur operatinglosses in the future under its current business model. The Company’s historicalsales have never been sufficient to cover its expenses and it has beennecessary to rely upon financing from the sale of equity securities and debt tosustain operations.  There can be noassurance that the Company will obtain such additional capital or that suchadditional financing will be sufficient for the Company’s continuedexistence.  There can be no assurancesthat the Company will be able to generate sufficient revenues from currentoperations to meet the Company’s obligations. These conditions raisesubstantial doubt about the Company’s ability to continue as a going concern.

 

For the nine months ended June 30, 2003, the Company used approximately$3.6 million of cash in operating activities. For the nine months ended June30, 2002, the Company used $11.9 million in operating activities.

 

For thenine months ended June 30, 2003, the Company generated $56,000 in investingactivities.  For the nine months endedJune 30, 2002, the Company generated $1.7 million in investing activitiesprimarily relating to the sale of investments in marketable debt securities,offset by $498,000 for capital expenditures.

 

Net cash used in financing activities was $5.0 million for the ninemonths ended June 30, 2003 and $1.7 million for the nine months ended June 30,2002.  The Company’s principalcommitments consist of obligations outstanding under operating leases totalingapproximately $868,000. The operating lease commitments declined from $5.4million as of June 30, 2002, owing primarily to the settlement to terminate thelease obligation for approximately $2.1 million in future rent on the New YorkCity office.

 

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

 

The Companydoes not have any material commitments for capital expenditures.

 

The Companyhas incurred recurring operating losses since its inception. As of June 30,2003 the Company had an accumulated deficit of approximately $342,000,000 andexpects to have insufficient capital to fund all of its obligations.  In January 2003 the Company completed a debtrestructuring transaction with the holders of $18 million of its subordinatednotes (described below).  In addition,the Company’s retail sales have been declining. These conditions raisesubstantial doubt about the Company’s ability to continue as a going concern.The financial statements do not include any adjustments to reflect the possiblefuture recoverability and classification of assets or the amounts andclassifications of liabilities that may result from the outcome of thisuncertainty. The Company is also exploring strategic alternatives with respectto its business, which could include seeking to dispose of some or all of itsremaining assets. The Company may also consider a wide range of other businessopportunities, some of which may be unrelated to the Company’s currentbusiness.

 

TheCompany’s new management intends to continue efforts to settle the Company’soutstanding obligations and reduce operating costs.  The Company believes that its current cash resources, combinedwith revenues from continuing operations and borrowings from related parties(as described below), will be adequate to fund its operations during theremainder of fiscal 2003.  However, tothe extent the Company’s estimates are inaccurate and/or the Company is unableto successfuly settle outstanding obligations and reduce operating costs, theCompany may not have sufficient cash resources to maintain operations.  In such event, the Company may be requiredto consider a formal or informal restructuring or reorganization.

 

During August 2003, theCompany's subsidiary borrowed $100,000 each from its Chairman and from arelated party/shareholder to fund its operations.  The notes are due December 31, 2003 and are secured by the realestate owned by the subsidiary.  Asconsideration for the loan, the company issued to each lender warrants topurchase 400,000 shares of common stock, exercisable through August 31, 2008 at$0.11 per share, which was the fair market value on the date of the loan.  The Company may borrow additional amountsfrom such lenders in the future on terms to be determined.

 

TheCompany’s new management is exploring various strategic alternatives, includingthe sale of the Company’s remaining business operations and the acquisition ofone or more new business opportunities. However, there can be no assurancesthat such efforts will be successful. The Company may finance any acquisitions through a combination of debtand/or equity securities.

 

18

----

 

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.

 

19

----

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK

 

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.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

(a)  Evaluation of Disclosure Controls and Procedures

 

Disclosure controls andprocedures are designed to ensure that information required to be disclosed inthe reports filed or submitted under the Exchange Act of 1934 is recorded,processed, summarized and reported, within the time periods specified in therules and forms of the Securities and Exchange Commission.  Disclosurecontrols and procedures include, without limitation, controls and proceduresdesigned to ensure that information required to be disclosed in the reportsfiled under the Exchange Act of 1934 is accumulated and communicated to theCompany’s management, including its principal executive and financial officers,as appropriate, to allow timely decisions regarding required disclosure.

 

The Company carried out anevaluation, under the supervision and with the participation of the Company’smanagement, including its principal executive and financial officers, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures as of the end of the fiscal quarter.  Based upon and as ofthe date of that evaluation, the Company’s principal executive and financialofficers concluded that the Company’s disclosure controls and procedures areeffective to ensure that information required to be disclosed in the reportsthe Company files and submits under the Exchange Act of 1934 is recorded,processed, summarized and reported as and when required.

 

(b)  Changes in Internal Controls

 

There were no changes in theCompany’s internal controls or in other factors that could have significantlyaffected those controls subsequent to the date of the Company’s most recentevaluation.

 

20

----

 

PART II

 

OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

The Companyis a party to certain legal proceedings commenced against it by formeremployees of the Company’s subsidiaries. These actions include a litigationcommenced 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. The Company reached a settlement with the former employee in January2003.  As part of the settlementagreement, the Company made a $90,000 cash payment and issued a non-interestbearing promissory note for $250,000 due in January 2004 in the event that theCompany should file for reorganizationunder Chapter 11 of the federal bankruptcy laws within one year and, as a result,the former employee would be required to return the $90,000 payment.  The Company has not recorded the issuance ofthe promissory note, given that it has been deemed improbable that all of theconditions required under the settlement agreement would be fulfilled whichwould cause the promissory note to take effect.  The Company is also involved in an arbitration filed in New Yorkby the Company’s former President and Chief Executive Officer seeking damagesfor alleged breach of his employment agreement, among other things. The Companyis currently defending these actions and has asserted counterclaims against theplaintiffs in two of these actions.

 

Inaddition, certain creditors of the Company and its subsidiaries and certainholders of the Company’s and its NET subsidiary’s debt have asserted or havethreatened claims against the Company and its subsidiaries, which are theresult of the Company’s failure to pay certain debts and liabilities as theycame due.

 

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

 

Given theCompany’s current financial situation, the costs of defending these proceedingsand diversion of management’s attention to these matters, the outcome of suchproceedings could have a material adverse effect on the Company’s financialcondition or operating results, including its ability to restructure its debtswithout seeking bankruptcy protection or being the subject of an involuntarybankruptcy petition, or its ability to continue as a going concern.

 

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

 

(a)   Exhibits

 

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

 

(b)   Reportson Form 8-K

 

The Company filed the following Current Reports onForm 8-K during or related to the three months ended June 30, 2003: 

 

Effective June 9, 2003, the Company restructured theaggregate $4,000,000 principal balance of notes payable issued in conjunctionwith the January 2003 restructuring.

 

Effective June 27, 2003, the Company terminated Ernst& Young LLP as its independent accountant and approved the retention ofWeinberg & Co, P.A. as its new independent accountant

 

Effective June 27, 2003, the Company changed itsfiscal year end from June 30 to September 30.

 

Effective July 26, 2003, the Company retained Weinberg& Co., P.A. as its new independent accountant.

 

21

----

 

SIGNATURES

 

In accordancewith the requirements of the Securities Exchange Act of 1934, the registranthas caused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
| August  18, 2003 |                                    |
|------------------|-----------------------------------------|
|             |                                    |
|             | YOUTHSTREAM  MEDIA NETWORKS, INC.       |
|             |                                    |
|             |                                    |
|             | BY:                                     |
|             |  /s/ Jonathan  V. Diamond          |   |
|             | Jonathan  V. Diamond                    |
|             | Chairman  & Chief Executive Officer |
|             |                                    |
|             |                                    |
|             | BY:                                     |
|             |  /s/ Robert N.  Weingarten         |   |
|             | Robert  N. Weingarten                   |
|             | Chief  Financial Officer                |

 

22

----

 

INDEX TO EXHIBITS

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

 

 

23

----