**U.S. SECURITIES ANDEXCHANGE COMMISSION**

**WASHINGTON, D.C.20549**

 

**FORM 10-Q**

 
| **ý**                                                                                                                                                                                                                                    | **QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                          |
| **For the quarterly  period ended March 31, 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 asSpecified in Its Charter)

 

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

 

Check whether the registrant (1) has filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

 

Yes  ý      No   o

 

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

 

At March 31, 2003, there were 39,850,000shares of Common Stock, $.01 par value outstanding.

 

 

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YOUTHSTREAM MEDIA NETWORKS, INC.

 

FORM 10-Q

 

INDEX

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

 

2

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PARTI

 

FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

YOUTHSTREAM MEDIA NETWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT PER SHAREAMOUNTS)

 
|                                                                                                                                                                                                                                                                        |   | **March 31,  2003** |   | **June 30,  2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|--------------------|--------|
|                                                                                                                                                                                                                                                                        |   | **(Unaudited)**     |   |               |   |
|                                                                                                                                                                                                                                                                        |   |                |   |               |   |
| ASSETS                                                                                                                                                                                                                                                                      |   |                |   |               |   |
| Current  assets:                                                                                                                                                                                                                                                            |   |                |   |               |   |
| Cash and  cash equivalents                                                                                                                                                                                                                                                  |   | $                   | 1,484  |               | $      | 597 |   |
| Accounts  receivable, net                                                                                                                                                                                                                                                   |   | —              |   | 2,667              |   |
| Inventories,  net                                                                                                                                                                                                                                                           |   | 2,056               |   | 2,584              |   |
| Prepaid  expenses                                                                                                                                                                                                                                                           |   | 413                 |   | 180                |   |
| Other  current assets                                                                                                                                                                                                                                                       |   | 58                  |   | 195                |   |
| Restricted  cash                                                                                                                                                                                                                                                            |   | —              |   | 768                |   |
|                                                                                                                                                                                                                                                                        |   |                |   |               |   |
| Total  current assets                                                                                                                                                                                                                                                       |   | 4,011               |   | 6,991              |   |
|                                                                                                                                                                                                                                                                        |   |                |   |               |   |
| Property  and equipment, net of accumulated depreciation of $1,254 and $1,918 at March  31, 2003 and June 30, 2002, respectively                                                                                                                                       |   | 1,723               |   | 2,749              |   |
| Deferred  financing costs, net of accumulated amortization $1,884 at June 30, 2002                                                                                                                                                                                     |   | —              |   | 2,565              |   |
| Assets  from discontinued operations                                                                                                                                                                                                                                        |   | —              |   | 7,682              |   |
|                                                                                                                                                                                                                                                                        |   |                |   |               |   |
| Total  assets                                                                                                                                                                                                                                                               |   | $                   | 5,734  |               | $      | 19,987 |   |
|                                                                                                                                                                                                                                                                        |   |                |   |               |   |
| LIABILITIES  AND STOCKHOLDERS’ DEFICIT                                                                                                                                                                                                                                 |   |                |   |               |   |
| Current  liabilities:                                                                                                                                                                                                                                                       |   |                |   |               |   |
| Accounts  payable                                                                                                                                                                                                                                                           |   | $                   | 2,322  |               | $      | 1,800 |   |
| Accrued  employee compensation                                                                                                                                                                                                                                              |   | 382                 |   | 704                |   |
| Accrued  expenses                                                                                                                                                                                                                                                           |   | 2,669               |   | 3,411              |   |
| Current  liabilities of discontinued operations                                                                                                                                                                                                                             |   | —              |   | 592                |   |
| Deferred  revenues                                                                                                                                                                                                                                                          |   | —              |   | 127                |   |
| Current  portion of deferred purchase price                                                                                                                                                                                                                                 |   | —              |   | 375                |   |
| Current  portion of capitalized lease obligations                                                                                                                                                                                                                           |   | 115                 |   | 165                |   |
| Current  portion of long-term debt                                                                                                                                                                                                                                          |   | 1                   |   | 18,184             |   |
| Total  current liabilities                                                                                                                                                                                                                                                  |   | 5,489               |   | 25,358             |   |
|                                                                                                                                                                                                                                                                        |   |                |   |               |   |
| Non  current liabilities of discontinued operations                                                                                                                                                                                                                         |   | —              |   | 45                 |   |
| Capitalized  lease obligations                                                                                                                                                                                                                                              |   | —              |   | 106                |   |
| Long-term  debt                                                                                                                                                                                                                                                             |   | 4,912               |   | —             |   |
| Other  liabilities                                                                                                                                                                                                                                                          |   | —              |   | 358                |   |
| Commitments  and contingencies                                                                                                                                                                                                                                              |   |                |   |               |   |
|                                                                                                                                                                                                                                                                        |   |                |   |               |   |
| 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 accrued interest, or  $5,269 at December 31, 2010; no par value; 1,000 authorized; 1,000 issued and  outstanding at March 31, 2003 |   | 5,269               |   | —             |   |
|                                                                                                                                                                                                                                                                        |   |                |   |               |   |
| Stockholders’  Deficit                                                                                                                                                                                                                                                 |   |                |   |               |   |
| Preferred  stock, $0.01 par value, 5,000 shares authorized, no shares issued and  outstanding                                                                                                                                                                               |   | —              |   | —             |   |
| Common  stock, $0.01 par value, 100,000 shares authorized, 39,850 shares and 33,591  shares issued at March 31, 2003 and June 30, 2002, respectively                                                                                                                        |   | 398                 |   | 336                |   |
| Additional  paid-in capital                                                                                                                                                                                                                                                 |   | 331,080             |   | 330,774            |   |
| Accumulated  deficit                                                                                                                                                                                                                                                        |   | (340,585            | )      | (336,161           | )      |
| Treasury  stock, 607 shares, at cost                                                                                                                                                                                                                                        |   | (829                | )      | (829               | )      |
| Total  stockholders’ deficit                                                                                                                                                                                                                                           |   | (9,936              | )      | (5,880             | )      |
|                                                                                                                                                                                                                                                                        |   |                |   |               |   |
| Total  liabilities and stockholders’ deficit                                                                                                                                                                                                                           |   | $                   | 5,734  |               | $      | 19,987 |   |

 

See notes to condensed consolidatedfinancial statements

 

3

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YOUTHSTREAM MEDIA NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS

(IN THOUSANDS, EXCEPT PER SHAREAMOUNTS)

(UNAUDITED)

 
|                                                          |   | **Three months ended  March 31,** |   | **Nine months ended  March 31,** |   |
|---------------------------------------------------------------|--------|-----------------------------------|--------|----------------------------------|--------|
|                                                          |   | **2003**                          |   | **2002**                         |   | **2003** |   | **2002** |   |
|                                                          |   |                              |   |                             |   |   |   |   |   |
| Net  revenues                                                 |   | $                                 | 1,329  |                             | $      | 2,570 |   | $ | 9,731 |   | $ | 13,522 |   |
| Cost of  sales                                                |   | 369                               |   | 549                              |   | 2,001 |   | 2,676 |   |
| Gross  profit                                                 |   | 960                               |   | 2,021                            |   | 7,730 |   | 10,846 |   |
| Selling,  general, administrative and corporate expenses      |   | 2,322                             |   | 4,308                            |   | 11,055 |   | 13,761 |   |
| Depreciation  and amortization                                |   | 149                               |   | 195                              |   | 465 |   | 501 |   |
| Loss on  closing of retail stores                             |   | 324                               |   | —                           |   | 1,782 |   | — |   |
| Loss from  operations                                         |   | (1,835                            | )      | (2,482                           | )      | (5,572 | ) | (3,416 | ) |
| Interest  income                                              |   | 7                                 |   | 130                              |   | 58 |   | 441 |   |
| Interest  expense                                             |   | (186                              | )      | (747                             | )      | (1,638 | ) | (2,275 | ) |
| Gain on  debt settlement                                      |   | 2,754                             |   | —                           |   | 2,800 |   | — |   |
| Imputed  interest on promissory notes                         |   | —                            |   | —                           |   | — |   | — |   |
| Income/(loss)  before provision for income taxes              |   | 740                               |   | (3,099                           | )      | (4,352 | ) | (5,250 | ) |
| Provision  for income taxes                                   |   | 5                                 |   | 94                               |   | 100 |   | 138 |   |
| Income/(loss)  from continuing operations                     |   | 735                               |   | (3,193                           | )      | (4,452 | ) | (5,388 | ) |
| Loss from  discontinued operations                            |   | (7                                | )      | (1,209                           | )      | (454 | ) | (2,254 | ) |
| Gain on  disposal of discontinued operations                  |   | —                            |   | 303                              |   | 482 |   | 13 |   |
| Net  income/(loss) attributable to common shares              |   | $                                 | 728    |                             | $      | (4,099 | ) | $ | (4,424 | ) | $ | (7,629 | ) |
| Per share  of common stock basic and diluted                  |   |                              |   |                             |   |   |   |   |   |
| Gain  (loss) from continuing operations                       |   | $                                 | 0.02   |                             | $      | (0.10 | ) | $ | (0.12 | ) | $ | (0.18 | ) |
| Loss from  discontinued operations                            |   | —                            |   | (0.04                            | )      | (0.01 | ) | (0.07 | ) |
| Gain on  disposal of discontinued operations                  |   | —                            |   | 0.01                             |   | 0.01 |   | — |   |
| Net  income/(loss) per basic and diluted common share         |   | $                                 | 0.02   |                             | $      | (0.13 | ) | $ | (0.12 | ) | $ | (0.25 | ) |
| Weighted  average basic and diluted common shares outstanding |   | 38,224                            |   | 30,505                           |   | 35,477 |   | 30,228 |   |

 

See notes to condensed consolidatedfinancial statements

 

4

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YOUTHSTREAM MEDIA NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS

(IN THOUSANDS)

(UNAUDITED)

 

 
|                                                                                   |   | **Nine months ended  March 31,** |   |
|----------------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                                   |   | **2003**                         |   | **2002** |   |
|                                                                                   |   |                             |   |   |   |
| CASH  FLOWS FROM OPERATING ACTIVITIES                                                  |   |                             |   |   |   |
| Net loss                                                                               |   | $                                | (4,424 | ) | $ | (7,629 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities:           |   |                             |   |   |   |
| Loss from  discontinued operations                                                     |   | 454                              |   | 2,254 |   |
| Gain on  disposal of discontinued operations                                           |   | (482                             | )      | (13 | ) |
| Net  change in assets and liabilities of discontinued operations                       |   | (442                             | )      | (5,486 | ) |
| Bad debt  expense                                                                      |   | 39                               |   | — |   |
| Depreciation  and amortization                                                         |   | 465                              |   | 501 |   |
| Loss on  closing of retail stores                                                      |   | 1,782                            |   | — |   |
| Loss on  disposal of fixed assets                                                      |   | 316                              |   | — |   |
| Gain on  debt extinguishment                                                           |   | (2,800                           | )      | — |   |
| Amortization  of deferred financing costs                                              |   | 438                              |   | 576 |   |
| Amortization  of original issue discount on Subordinated Notes                         |   | 68                               |   | 91 |   |
| Deferred  rent                                                                         |   | (358                             | )      | 4 |   |
| Changes  in assets and liabilities, net of acquisitions and dispositions:              |   |                             |   |   |   |
| Accounts  receivable                                                                   |   | 2,628                            |   | (47 | ) |
| Inventory                                                                              |   | (107                             | )      | (1,023 | ) |
| Other  current assets                                                                  |   | 535                              |   | 33 |   |
| Accounts  payable                                                                      |   | 522                              |   | 633 |   |
| Accrued  expenses                                                                      |   | 219                              |   | (3,930 | ) |
| Deferred  revenues                                                                     |   | (127                             | )      | 603 |   |
| Net cash  used in operating activities                                                 |   |                             | (1,274 | ) | (13,433 | ) |
|                                                                                   |   |                             |   |   |   |
| CASH  FLOWS FROM INVESTING ACTIVITIES                                                  |   |                             |   |   |   |
| Capital  expenditures                                                                  |   | (77                              | )      | (922 | ) |
| Proceeds  from the sale of fixed assets                                                |   | 106                              |   | — |   |
| Sale of  investments in marketable debt securities                                     |   | —                           |   | 3,613 |   |
| Sale of  Media Assets to Alloy                                                         |   | 7,283                            |   | — |   |
| Other  assets                                                                          |   | —                           |   | (250 | ) |
| Payment  for business acquisitions                                                     |   | (25                              | )      | (600 | ) |
| Net cash  provided by investing activities                                             |   | 7,287                            |   | 1,841 |   |
|                                                                                   |   |                             |   |   |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES                                                  |   |                             |   |   |   |
| Common  stock repurchase                                                               |   | —                           |   | (591 | ) |
| Repayment  of capitalized lease obligations                                            |   | (156                             | )      | (52 | ) |
| Repayment  of long-term debt                                                           |   | (4,970                           | )      | (1,481 | ) |
| Net cash  used in financing activities                                                 |   | (5,126                           | )      | (2,124 | ) |
|                                                                                   |   |                             |   |   |   |
| Increase/(Decrease)  in cash and cash equivalents                                      |   | 887                              |   | (13,716 | ) |
| Cash and  cash equivalents at beginning of period                                      |   | 597                              |   | 14,927 |   |
| Cash and  cash equivalents at end of period                                            |   | $                                | 1,484  |   | $ | 1,211 |   |
|                                                                                   |   |                             |   |   |   |
| Supplemental  cash flow information:                                                   |   |                             |   |   |   |
| Cash paid  for income taxes                                                            |   | $                                | 95     |   | $ | 132 |   |
|                                                                                   |   |                             |   |   |   |
| Noncash  financing activities:                                                         |   |                             |   |   |   |
| Issuance  of common stock in connection with acquisitions                              |   | $                                | 114    |   | $ | 1,462 |   |
| 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

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YOUTHSTREAM MEDIA NETWORKS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’DEFICIT

FOR THE PERIOD JUNE 30, 2002 TO MARCH31, 2003

(IN THOUSANDS)

(UNAUDITED)

 
|                                                                |   | **Common  Stock** |   |       |   | **Accumulated** |   | **Treasury** |   |      |     |
|---------------------------------------------------------------------|--------|-------------------|--------|------------|--------|-----------------|--------|--------------|--------|-----------|----------|
|                                                                |   | **Shares**        |   | **Amount** |   | **APIC**        |   | **Deficit**  |   | **Stock** |     | **Total** |   |
|                                                                |   |              |   |       |   |            |   |         |   |      |     |   |   |
| Balances  at June 30, 2002                                          |   | 33,591            |   | $          | 336    |            | $      | 330,774      |   | $         | (336,161 | ) | $ | (829 | ) | $ | (5,880 | ) |
| Issuance of common stock in  connectionwith Invino acquisition      |   | 2,274             |   | 23         |   | 91              |   | —       |   | —    |     | 114 |   |
| Issuance  of common stock in connection with the debt restructuring |   | 3,985             |   | 39         |   | 215             |   |         |   |      |     | 254 |   |
| Net loss                                                            |   | —            |   | —     |   | —          |   | (4,424       | )      | —    |     | (4,424 | ) |
| Balances  at March 31, 2003                                         |   | 39,850            |   | $          | 398    |            | $      | 331,080      |   | $         | (340,585 | ) | $ | (829 | ) | $ | (9,936 | ) |

 

6

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YOUTHSTREAM MEDIA NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS

MARCH 31, 2003

(Unaudited)

 

1. ORGANIZATION AND BASIS OF PRESENTATION

 

The accompanying consolidatedfinancial statements include the accounts of YouthStream Media Networks, Inc.(“YouthStream”), and its wholly-owned subsidiaries, 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 Company sold substantially all of its mediaassets and assigned certain liabilities of its NET and American Passagesubsidiaries to Alloy, Inc. and ceased operating the media segment. In December2001, the Company discontinued its Teen.com operations and closed its Hotstampcollege business. In December 2000, the Company discontinued the operations ofCommonPlaces, LLC (“CommonPlaces”), sixdegrees, inc., (“sixdegrees”),CollegeWeb.com, Inc. (“CollegeWeb”), and Invino Corporation (“Invino”).YouthStream, through its Beyond the Wall subsidiary, is now primarily a retailcompany that targets teenagers and young adults ages 12 to 24.

 

The accompanying consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States for interim financialinformation and with the instructions to Form 10-Q. Accordingly, they do notinclude 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) considerednecessary for a fair presentation have been included. Operating results for theinterim period are not necessarily indicative of the results that may beexpected for the year ending June 30, 2003. The balance sheet at June 30, 2002has been derived from the audited financial statements at that date but doesnot include all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements. For furtherinformation, refer to the consolidated financial statements and footnotesthereto included in the Company’s Form 10-K for the fiscal year ended June 30,2002.

 

The preparation of the financialstatements in conformity with generally accepted accounting principles in theUnited States requires management to make estimates and assumptions that affectthe amounts reported in the financial statements and accompanying notes.  Actual results could differ from thoseestimates.

 

FINANCIAL STATEMENT PRESENTATION

 

The Company has incurred recurringoperating losses since its inception. As of March 31, 2003 the Companyhad an accumulated deficit of approximately $341,000,000 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.

 

Store Closing 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 March 31, 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, $874,000 of accruals forcosts relating to the early termination of store leases and $59,000 for otherexpenses.  The total closing costs were

 

7

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

 

**Debt Restructuring**

 

In January 2003, the Company reached anagreement with the holders of all of its and its Network Event Theatersubsidiary’s outstanding notes (NET Notes, YSTM Notes & YSTM 2 Note), inthe aggregate principal amount of $18 million, to cancel those notes.  In exchange for cancellation of all of theprincipal and interest due on the old notes, the note holders received inaggregate $4.5 million in cash, preferred stock with a face value of $4million, and 3,985,000 shares of common stock, and $4 million aggregateprincipal amount of promissory notes issued by the Company’s retail subsidiary,Beyond the Wall, Inc., secured by the Company’s pledge of all of its stock inBeyond the Wall.

 

At the closing ofthe January 2003 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 February2003, the Company issued options to the three new directors to purchase anaggregate of 750,000 shares of common stock exercisable at the fair marketvalue of $0.04 per share for a period of seven years.  In addition, the three new directors acquired options from theholder of the shares of preferred stock that were issued in the January 2003restructuring to purchase an aggregate of 750,000 shares of such holder’spreferred stock, exercisable at estimated fair value.

 

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

 

The cancellation of the NET Notesqualified as a full debt settlement whereby in exchange for the extinguishmentof the $5 million note and cancellation of accrued interest, the holdersreceived $3,000,000 cash.  As of thesettlement date, the adjusted carrying value of the NET Notes, net of accruedinterest, unamortized original issue discount and unamortized closing costs,was $5,448,000.  The settlement resultedin a gain of $2,448,000.

 

The cancellation of the YSTM Noteswas accounted for as a combination of a partial debt settlement and acontinuation of debt with modified terms. In exchange for the extinguishment of the YSTM Notes, the holderreceived cash of $1,500,000, 3,486,875 shares of common stock with a fair valueof $223,000, 1,000,000 shares of 4% redeemable preferred stock, face value of$4,000,000, including cumulative dividends, totaling $5,269,000, due December31, 2010 and a $3,000,000 promissory note bearing interest at 4% per annum withprincipal and cumulative interest due December 31, 2010.  As of the settlement date, the adjustedcarrying value of the YSTM Notes, net of accrued interest, unamortized originalissue discount and unamortized closing costs, was $11,251,000.  After adjusting for the fair value of thecash and common stock exchanged, the carrying value of the YSTM Notes was$9,528,000.  For purposes of thedetermining the gain on the extinguishment of the YSTM Notes, the redeemablepreferred stock was accounted for as a debt instrument given the mandatory redemptionfeatures of the security (see Note 6). The issuance of the $3,000,000promissory note and the 1,000,000 shares of redeemable preferred stockconstituted a continuation of debt with modified terms. Given that theundiscounted future value of the promissory note and the redeemable preferredstock, including cumulative interest and dividends, was less than the adjustedcarrying value of the YSTM Notes extinguished, the Company recognized a gaintotaling $306,000 and recorded the value of the promissory note and theredeemable preferred stock at the undiscounted future value of $3,953,000 and$5,269,000, respectively, with no interest expense or accretions in value to berecognized over the remaining life of the promissory note and preferred stock.

 

The cancellation of the YSTN 2 Notewas accounted for as a combination of a partial debt settlement and acontinuation of debt with modified terms. In exchange for the extinguishment of the YSTM 2 Note, the holderreceived 498,125 shares of the Company’s common stock with a fair value of$32,000 and a $1,000,000 promissory note bearing interest at 4% per annum withprincipal and cumulative interest due December 31, 2010.  As of the settlement date, the adjustedcarrying value of the YSTM 2 Note, net of accrued interest, unamortizedoriginal 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

 

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was revalued at the adjusted carryingvalue of the YSTM 2 Note surrendered, resulting in an imputed discount of$41,000.

 

In total, the Company recognized again from the troubled debt restructuring totaling $2,754,000.  The gain was classified as part ofcontinuing operations in accordance with SFAS No. 145, “Recision of SFAS Nos.4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections as of April2000.”  The gain from the transactionresulted in increasing basic and diluted income per common share by $0.07 and$0.08 for the three months and nine months ended March 31, 2003, respectively.

 

RECLASSIFICATIONS

 

Certain amounts in the prior periodfinancial statements have been reclassified to conform to the current periodpresentation.

 

2. DISCONTINUED OPERATIONS

 

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

 

As a result of the sale, the mediasegment operations were discontinued during the three months ended September30, 2002.

 

In December 2001, the Companydiscontinued its Teen.com website. In connection with the discontinuance ofthat business, the Company incurred a charge of $348,000, related primarily tothe write-off of property and equipment and an accrual for severance.

 

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

 
|                                          |   | **Three months ended March 31,** |   | **Nine months ended March 31,** |   |
|-----------------------------------------------|--------|----------------------------------|--------|---------------------------------|--------|
|                                          |   | **2003**                         |   | **2002**                        |   | **2003** |   | **2002** |   |
|                                          |   |                             |   |                            |   |   |   |   |   |
| Net  revenues                                 |   | $                                | 0      |                            | $      | 5,056 |   | $ | 433 |   | $ | 14,644 |   |
| Loss from  discontinued operations            |   | (7                               | )      | (1,209                          | )      | (454 | ) | (2,254 | ) |
| Gain on  disposal of discontinued operations  |   | —                           |   | 303                             |   | 482 |   | 13 |   |
| Net  gain/(loss) from discontinued operations |   | $                                | (7     | )                               | $      | (906 | ) | $ | 28 |   | $ | (2,241 | ) |

 

3. RECENT ACCOUNTING PRONOUNCEMENTS

 

In April 2002, the FASBissued SFAS No. 145, “Recision of SFAS Nos. 4, 44 and 64, Amendment of SFAS 13,and Technical Corrections as of April 2000”. SFAS No. 145 revises the criteriafor classifying 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 July 2002, the FASB issued SFAS No. 146“Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No.146 provides guidance on the timing of the recognition of costs associated withexit or disposal activities. The new guidance requires costs associated withexit or disposal activities to be recognized when incurred. Previous guidancerequired recognition of costs at the date of commitment to an exit or disposalplan. The provisions of the statement are to be adopted prospectively afterDecember 31, 2002. Although SFAS No. 146 may impact the accounting for costsrelated to exit or disposal activities the

 

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Company may enter into in the future,particularly the timing of the recognition of these costs, the adoption of thestatement will not have a material impact on the Company’s present financialcondition or results of operations.

 

In December 2002, the FASB issued SFAS No.148, “Accounting for Stock-BasedCompensation-Transition andDisclosure-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.

 

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.

 

Thefollowing table details the effect on net income and earnings per share hadstock-based compensation expense been recorded based on the fair value methodunder SFAS No. 123, as amended.

 

(InThousands, Except Per Share Amounts)

 
|                                                                                                       |   | **3 Months Ended March 31,** |   | **9 Months Ended March 31,** |   |
|------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|------------------------------|--------|
|                                                                                                       |   | **2003**                     |   | **2002**                     |   | **2003** |   | **2002** |   |
| Net income/(loss) attributable to common shares, as reported                                               |   | $                            | 728    |                         | $      | (4,099 | ) | $ | (4,424 | ) | $ | (7,629 | ) |
| Add: Total stock-based employee compensation expense included in  reported net income/(loss)               |   | —                       |   | —                       |   | — |   | — |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value method for all awards |   | (540                         | )      | (1,177                       | )      | (1,882 | ) | (4,512 | ) |
| Net income/(loss), pro forma                                                                               |   | $                            | 188    |                         | $      | (5,276 | ) | $ | (6,306 | ) | $ | (12,141 | ) |
| Basic and diluted net  income/(loss) per common share, as reported                                         |   | $                            | 0.02   |                         | $      | (0.13 | ) | $ | (0.12 | ) | $ | (0.25 | ) |
| Basic and diluted net loss per  common share, pro forma                                                    |   | $                            | — |                         | $      | (0.17 | ) | $ | (0.18 | ) | $ | (0.40 | ) |

 

5. LONG-TERM DEBT

 

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

 
|                                             |   | **March 31,  2003** |   | **June 30,  2002** |   |
|--------------------------------------------------|--------|---------------------|--------|--------------------|--------|
|                                             |   |                |   |               |   |
| Subordinated  Notes — Private Placement (A) |   | $                   | — |               | $      | 5,000 |   |
| Note  Payable to Finance Company (B)             |   | —              |   | 496                |   |
| Subordinated  Notes — Private Placement (C) |   | —              |   | 12,000             |   |
| Subordinated  Notes — Private Placement (D) |   | —              |   | 1,000              |   |
| Promissory  Notes — Private Placement (E)   |   | 3,953               |   | —             |   |
| Promissory  Notes — Private Placement (F)   |   | 1,000               |   | —             |   |
| Other                                            |   | 1                   |   | 1                  |   |
|                                             |   | 4,954               |   | 18,497             |   |
| Less:                                            |   |                |   |               |   |
|                                             |   |                |   |               |   |
| Unamortized  original issue discount             |   | 41                  |   | 313                |   |
|                                             |   |                |   |               |   |
|                                             |   | 4,913               |   | 18,184             |   |
| Less:  Current portion of long-term debt    |   | $                   | 1      |               | $      | 18,184 |   |
|                                             |   |                |   |               |   |
| Long-term  debt total                            |   | $                   | 4,912  |               | $      | — |   |

 

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(A) In July 1998, the Company issued subordinated notes to accreditedinvestorsin the aggregate amount of $5,000,000 less an original discountof $188,000 (“NET Notes”). These notes bore interest at 11% per annum andwere due in July 2003. In connection with the issuance of the subordinated notes,the Company issued 375,000 warrants to the accredited investors for$188,000, and 150,000 warrants to the placement agent. Each warrant, which expires inJuly 2003, entitles the holder to purchase one share of the Company’scommon stock for $4.125, the market price of the Company’s common stock at thedate of issuance. Based on an independent appraisal conducted at that time, the525,000 warrants were valued at $740,000. The value of the warrants and closingcosts of $314,000 was recorded as deferred financing costs and was amortized overthe termof the subordinated 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 anote to a finance company in the amount of $1,971,000 (“Equipment Note”). Thenote bore interest at the rate of 11.95% per annum and was payable in 36 equalmonthly payments commencing in March 2000. The note was secured by certainequipment owned by NET. NET failed to make payments of approximately $65,000due on August 1, 2002 and $65,000 due on September 1, 2002, in connection withthe Equipment 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 issued subordinated notes to an accreditedinvestorin the amount of $12,000,000, less an original issue discount of $420,000(“YSTM Notes”). The notes bore interest at 11% per annum and were due in June2005. In connection with the issuance of the subordinated notes, the Companyissued 1,020,000 warrants to 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

 

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due and payable under the terms of the YSTMNotes. InJanuary 2003, as part of the debt restructuring, the Company reached anagreement with the holders of the YSTM Notes to cancel all the principal of andinterest on the YSTM Notes in exchange for (a) cash of $1,500,000; (b)1,000,000 shares of redeemable preferred stock of the Company; (c) 3,486,875shares of common stock of the Company; and (d) a $3,000,000 promissory noteissued by Beyond the Wall and secured by a pledge of the Company’s stock inBeyond the Wall.

 

(D) In July 2000, the Company issued a subordinated note to an accreditedinvestorin the amount of $1,000,000, less an original issue discount of $35,000 (“YSTM 2Note”). The note bore interest at 11% per annum and was due in July 2005. Inconnection with the issuance of the subordinated note, the Company issued60,000 warrants to an accredited investor in exchange for $35,000. Each warrant,which expires in July 2005, entitles the holder to purchase one share of theCompany’s common stock for $3.75, the market price of the Company’s commonstock at the date of issuance. Based on an independent appraisal at thattime,the 60,000 warrants were valued at $197,000. The value of the warrants wasrecordedas deferred financing costs and was amortized over the term of the subordinatednote. The original issue discount of $35,000 was amortized over theterm of the related debt. On August 31, 2002 the Company failed to make an interestpayment due on the YSTM 2 Note, constituting an event of default under theterms of the YSTM 2 Note, and the holder of the note had the right to declarethis note immediately due and payable.In January 2003 the Company reached an agreement with the holder of the YSTM 2Note to cancel all the principal of and interest on the YSTM 2 Note in exchangefor (a) a $1,000,000 promissory note issued by Beyond the Wall and secured by apledge of the Company’s stock in Beyond the Wall; and (b) 498,125 shares of theCompany’s common 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 cumulative 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 totalundiscounted future cash payments from the promissory note were less than theadjusted carrying value of the YSTM Notes, the promissory note was recorded atthe undiscounted 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 a promissory note to an accreditedinvestor with a face value of $1,000,000 and total future interest payments of$318,000.  The note bears interest at 4%per annum with cumulative interest and principal due December 31, 2010.  This note was issued as part of the January2003 debt restructuring in connection with which the YSTM 2 Note wasextinguished in exchange for issuance of 498,125 shares of common stock andissuance of the promissory note secured by the Company’s pledge of all of itsstock in its subsidiary, Beyond the Wall. The transaction was accounted for asa troubled debt restructuring involving a combination of a partial debtsettlement and a continuation of debt with modified terms. As the totalundiscounted future cash payments from the promissory note, including principaland cumulative interest, were greater than the adjusted carrying value of theYSTM 2 Note, the promissory note issued was recorded at the adjusted carryingvalue of the YSTM 2 Note surrendered, resulting in an imputed discount of$41,000.

 

6. REDEEMABLE PREFERRED STOCK

 

In connection with the January 2003 debtrestructuring agreement with the holders of the YSTM Notes, the Companyauthorized and issued 1,000,000 shares of Series A Preferred Stock with thefollowing 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

 

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in cash atthe rate of 4% a year on the face 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 March 31, 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 outside of permanent equity atthe future redemption value of $5,269,000, including cumulative dividends, withno future accretion adjustments to the balance to be taken againststockholders’ equity (deficit) in subsequent periods.

 

7. REORGANIZATION

 

The Company announced a plan to move its Seattleoperations to its New Yorkoffice in March 2002. In April 2002, theCompany finalized its transition plan, which resulted in the termination of30 employees, and completed the transition in June 2002. The Company recorded arestructuring charge, which is included in selling, general and administrativeexpenses, during the fiscal year ended June 30, 2002 of approximately $519,000relating to this decision, which included severance costs of $186,000, lease costsof $126,000 for a lease expiring November 2002, and $207,000 relating tothe abandonment of certain fixed assets. As of March 31, 2003, the Companyhas remaining accruals of approximately $126,000 for lease obligationcosts.

 

For the nine months ended March 31, 2003,the Company wrote off approximately $316,000 of fixed assets, net of proceedsfrom the equipment sales, relating to the closing of its corporate office inNew York in November 2002.

 

8. STOCKHOLDER’S EQUITY

 

In September 2002, the Company issued2,273,531 common shares and made a $25,000 cash payment, representing the finalquarterly installment payment on the unpaid purchase price adjustment pursuantto the 1999 merger agreement between the Company and Invino.  The quarterly stock and cash paymentresulted in a gain of $236,000, the amount for which is included in the overallgain on disposal of discontinued operations for the nine months ended March 31,2003.

 

In January 2003, the Company completed adebt restructuring transaction whereby approximately 3,985,000 common shareswere issued to the holders of the YSTM Notes and YSTM 2 Note, in accordancewith the terms of the debt restructuring to extinguish the YSTM Notes and YSTM2 Note.  The additional common shareswere valued using the three-day average trading price one day before and oneday after the effective date of the debt restructuring.

 

9. SEGMENT INFORMATION

 

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

 

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The following is a summary of the majorclasses of assets and liabilities as of March 31, 2003 that remain from theMedia segment:

 
|                           |   | **March 31, 2003** |   |
|--------------------------------|--------|--------------------|--------|
|                           |   | **(In thousands)** |   |
| Current  assets, net           |   | $                  | -0-    |   |
| Current  liabilities           |   | (1,900             | )      |
| Capitalized  lease obligations |   | (41                | )      |
| Net book  value                |   | $                  | (1,941 | ) |

 

10. LEGAL

 

The Company is a party to certain legalproceedings commenced against it by former employees of the Company’ssubsidiaries. These actions include a litigation pending in the District Courtof Travis County, Texas by a former employee of the Company’s CommonPlaces, LLC(“CP”) subsidiary claiming that he is entitled to receive, without cost, anaggregate of 215,083 shares of YouthStream common stock.  The Company reached a settlement with theformer employee in January 2003.  Aspart of the settlement agreement, the Company made a $90,000 cash payment andissued a non-interest bearing promissory note for $250,000 due in January 2004in 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.

 

In addition, certain creditors of theCompany and its subsidiaries and certain holders of the Company’s and its NETsubsidiary’s debt have asserted or have threatened claims against the Companyand its subsidiaries, which are the result of the Company’s failure to paycertain debts and liabilities as they came due.

 

In addition, certain landlords of storeswhich Beyond the Wall has vacated in advance of the expiration dates of thestore leases or failed to pay rent when due have commenced litigation againstthe Company.

 

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

 

 

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ITEM 2.      MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion of the financialcondition and results of operations of the Company should be read inconjunction with the consolidated financial statements and related notesthereto.

 

CRITICAL ACCOUNTING 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.

 

INVENTORIES

 

Inventories are stated at the lower of costor market. Cost is determined on a first-in, first-out basis. Inventoriesconsist primarily of posters and related products.

 

REVENUE RECOGNITION

 

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

 

ACCOUNTS RECEIVABLE

 

Accounts receivable consist primarily ofamounts due to the Company from normal business activities. The Companymaintains an allowance for doubtful accounts to reflect the expecteduncollectibility of accounts receivable based on past collection history andspecific risk identified in the portfolio.

 

RESULTS OF OPERATIONS

(In thousands)

 

The Company’s consolidated financialstatements reflect reclassifications for prior periods due to the discontinuedoperation of the Company’s online segment and sale of its media assets. OnAugust 5, 2002, the Company sold substantially all of its media assets anddiscontinued its media segment. The only remaining segment is retail. Thefollowing analysis incorporates reclassifications of prior periods due todiscontinued operations and revision of the reporting segments. The followingfinancial analysis compares the three months and nine months ended March 31,2003 (unaudited) to the three months and nine months ended March 31, 2002(unaudited).

 

YouthStream generated revenues primarilyfrom the sale of decorative wall posters, targeting teens and young adults,through on-campus sales events, retail stores and Internet sales.

 

Revenues decreased to $1.3 million for thethree months ended March 31, 2003 from $2.6 million for the three months endedMarch 31, 2002. The revenue decline was attributable to a decline in collegesevents sales, negative same store retail sales and a reduction in the number ofretail stores.

 

Revenues decreased to $9.7 million for thenine months ended March 31, 2003 from $13.5 million for the nine months endedMarch 31, 2002. The revenue decline was

 

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attributable to a decline in collegesevents sales, negative same store retail sales and a reduction in the number ofretail stores.

 

Cost of sales consists of the cost ofdecorative wall posters sold. Cost of sales as a percentage of revenues was 28%and 21% for the three months ended March 31, 2003 and for the three monthsended March 31, 2002, respectively.  Theincrease in the cost of sales ratio for the three months ended March 31, 2003was attributable to the promotional discounting of poster sales prices inJanuary 2003.

 

Cost of salesas a percentage of revenues was 21% and 20% for the nine months ended March 31,2003 and for the nine months ended March 31, 2002, respectively.

 

Store Closing Costs

 

For the three months ended March 31, 2003,the Company incurred expenses of approximately $324,000 relating to the closingof retail stores. This amount includes $21,000 of expenses for the earlytermination of existing store leases, offset by a gain of $62,000 fromsettlements with certain landlords, $203,000 of expenses for the write-down ofinventory, $133,000 of expenses for the write-off of fixed assets deemedimpaired as of the store closing dates and $29,000 of other costs.

 

For the ninemonths ended March 31, 2003, the Company incurred expenses of approximately$1.8 million related to the closing of retail stores.  This amount includes $874,000 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 $59,000 of othercosts.

 

For the three months ended March 31, 2003,selling, general, administrative and corporate expenses, were $2.3 million ascompared to $4.3 million for the three months ended March 31, 2002. The decrease of $2.0 millionwas due to corporate overhead cost savings, resulting from the sale of themedia business in the first quarter of fiscal 2003, occupancy and payrollrelated expense savings due to the reduction of the number of retail stores inoperation in fiscal 2003.

 

For the nine months ended March 31, 2003,selling, general, administrative and corporate expenses, were $11.0million as compared to $13.8 million for the nine months ended March 31, 2002.The decrease of $2.8 million was due primarily to corporate overhead costsavings, resulting from the sale of the media business, occupancy and payrollrelated expense savings due to the reduction of the number of retail stores inoperation in fiscal 2003, and a gain of $346,000 from the write-off of deferredrent expense relating to the termination of the New York City office lease,offset by higher operating costs in connection with the Colleges eventsbusiness in the first quarter of fiscal 2003.

 

For the three months ended March 31, 2003and 2002, depreciation and amortization expense was $149,000 and $195,000,respectively.

 

For the nine months ended March 31, 2003and 2002, depreciation and amortization expense was $465,000 and $501,000,respectively.

 

For the three months ended March 31, 2003,interest income was $7,000 as compared to $130,000 for the three months endedMarch 31, 2002. The decrease of $123,000 was due to lower cash balances anddeclining interest rates.

 

For the nine months ended March 31, 2003,interest income was $58,000 as compared to $441,000 for the nine months endedMarch 31, 2002. The decrease of $383,000 was due to lower cash balances anddeclining interest rates.

 

For the threemonths ended March 31, 2003, interest expense was $186,000 as compared to$747,000 for the three months ended March 31,2002. The decrease of $561,000 wasdue to the debt settlement reached between the Company and its noteholders inJanuary 2003.

 

For the ninemonths ended March 31, 2003, interest expense was $1.6 million as compared to$2.2 million for the nine months ended March 31,2002. The decrease of $600,000was due to the debt settlement reached between the Company and its noteholdersin January 2003.

 

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For the three months ended March 31, 2003,loss from discontinued operations was $7,000 as compared to a loss of $1.2million for the three months ended March 31, 2002. The loss from discontinuedoperations represents the net loss from the Media operations.

 

For the nine months ended March 31, 2003,loss from discontinued operations was $454,000 as compared to a loss of $2.3million for the nine months ended March 31, 2002. The loss from discontinuedoperations in fiscal 2003 and 2002 represents the net loss from the Mediaoperations.

 

For the three months ended March 31, 2002,gain on disposal of discontinued operations was $303,000.

 

For the nine months ended March 31, 2003,gain on disposal of discontinued operations was $482,000. The gain for theperiod ended March 2003 was attributable to the gain on the sale of the Mediasegment to Alloy, Inc., totaling $246,000, and the gain on the settlement of anInvino purchase liability through the issuance of common shares, totaling$236,000.  For the ninemonths ended March 31, 2002, gain on disposal of discontinued operations was$13,000.

 

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LIQUIDITY AND CAPITAL RESOURCES

 

To date, the Company has financed itsoperations primarily through the sale of equity securities and debt. As ofMarch 31, 2003, the Company had approximately $1.5 million in cash andequivalents.  The Company has never beenprofitable and expects to continue to incur operating losses in the future. TheCompany’s historical sales have never been sufficient to cover its expenses andit has been necessary to rely upon financing from the sale of equity securitiesand debt to sustain operations.  Therecan be no assurance that the Company will obtain such additional capital orthat such additional financing will be sufficient for the Company’s continuedexistence.  There can be no assurancesthat the Company will be able to generate sufficient revenues from theoperation of the retail business to meet the Company’s obligations. Theseconditions raise substantial doubt about the Company’s ability to continue as agoing concern.

 

Forthe nine months ended March 31, 2003, the Company used approximately $1.3million of cash in operating activities. For the nine months ended March 31,2002, the Company used $13.4 million in operating activities.

 

For the nine months ended March 31, 2003,the Company generated $7.3 million in investing activities primarily relatingto the $7.3 million sale of the Media business to a subsidiary of Alloy, Inc.For the nine months ended March 31, 2002, the Company generated $1.8 million ininvesting activities primarily relating to the sale of investments inmarketable debt securities, offset by $922,000 for capital expenditures.

 

Netcash used in financing activities was $5.1 million for the nine months endedMarch 31, 2003 and $1.2 million for the nine months ended March 31, 2002.  The Company’s principal commitments consistof obligations outstanding under operating leases totaling approximately $1.0million. The operating lease commitments declined from $5.4 million as of June30, 2002, owing primarily to the settlement to terminate the lease obligationfor approximately $2.1 million in future rent on the New York City office.

 

The Company’s capital requirements dependon its revenue growth, operating structure and the amount of resources devotedto the retail operations.

 

The Company does not have any materialcommitments for capital expenditures.

 

The Company has incurred recurringoperating losses since its inception. As of March 31, 2003 the Company had anaccumulated deficit of approximately $341,000,000 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 futurerecoverability and classification of assets or the amounts and classificationsof liabilities that may result from the outcome of this uncertainty. TheCompany is also exploring strategic alternatives with respect to its business,which could include seeking to dispose of some or all of its remaining assets.The Company may also consider a wide range of other business opportunities,some of which may be unrelated to the Company’s current business.

 

The Company’s new management intends tocontinue efforts to settle the Company’s outstanding obligations and reduceoperating costs.  The Company believesthat its current cash resources, combined with revenues from continuingoperations, will be adequate to fund its operations during the remainder offiscal 2003.  However, to the extent theCompany’s estimates are inaccurate and/or the Company is unable to successfulysettle outstanding obligations and reduce operating costs, the Company may nothave sufficient cash resources to maintain operations.  In such event, the Company may be requiredto consider a formal or informal restructuring or reorganization.

 

The Company's new management is exploringvarious strategic alternatives, including the sale of the Company's remainingbusiness operations and the acquisition of one or more new businessopportunities. However, there can be no assurances that such efforts will besuccessful.  The Company may finance anyacquisitions through a combination of debt and/or equity securities.

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In December 2002 the Company was delistedfrom NASDAQ because it did not comply with the minimum $2,000,000 net tangibleasset requirement or the alternative minimum $2,500,000 stockholders’ equityrequirement necessary for continued listing on NASDAQ’s SmallCap Market.

 

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK

 

MARKET RISK

 

The Company’s accounts receivable aresubject, in the normal course of business to collection risks. The Companyregularly assesses these risks and has established policies on businesspractices to protect against the adverse effects of collections risks.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

In accordance with Item 307 of RegulationS-K promulgated under the Securities Act of 1933, as amended, and within 90days of the date of this Quarterly Report on Form 10-Q, the Chief ExecutiveOfficer and Chief Financial Officer of the Company (the “Certifying Officers”)have conducted evaluations of the Company’s disclosure controls and procedures.As defined under Sections 13a-14(c) and 15d-14(c) of the Securities ExchangeAct of 1934, as amended (the “Exchange Act”), the term “disclosure controls andprocedures” means controls and other procedures of an issuer that are designedto ensure that information required to be disclosed by the issuer in thereports that it files or submits under the Exchange Act is recorded, processed,summarized and reported, within the time periods specified in the Commission’srules and forms. Disclosure controls and procedures include, withoutlimitation, controls and procedures designed to ensure that informationrequired to be disclosed by an issuer in the reports that it files or submitsunder the Exchange Act is accumulated and communicated to the issuer’smanagement, including its principal executive officer or officers and principalfinancial officer or officers, or persons performing similar functions, asappropriate to allow timely decisions regarding required disclosure. TheCertifying Officers have reviewed the Company’s disclosure controls andprocedures and have concluded that those disclosure controls and procedures areeffective in causing information to be recorded, processed, summarized andreported by management of the Company to ensure that the quality and timelinessof the Company’s public disclosures complies with its SEC obligations. Incompliance with Section 302 of the Sarbanes-Oxley Act of 2002, (18 U.S.C. 1350),each of the Certifying Officers executed an Officer’s Certification included inthis Quarterly Report on Form 10-Q.

 

As of the date of this Quarterly Report onForm 10-Q, there have not been any significant changes in the Company’sinternal controls or in other factors that could significantly affect thesecontrols subsequent to the date of their evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 

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PARTII

 

OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

The Company is a party to certain legalproceedings commenced against it by former employees of the Company’ssubsidiaries. These actions include a litigation commenced in the DistrictCourt of Travis County, Texas by a former employee of the Company’sCommonPlaces, LLC (“CP”) subsidiary claiming that, based on a prior agreement,he is entitled to receive, without cost, an aggregate of 215,083 shares ofYouthStream common stock.  The Companyreached a settlement with the former employee in January 2003.  As part of the settlement agreement, theCompany made a $90,000 cash payment and issued a non-interest bearingpromissory note for $250,000 due in January 2004 in the event that the Companyshould 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.

 

In addition, certain creditors of theCompany and its subsidiaries and certain holders of the Company’s and its NETsubsidiary’s debt have asserted or have threatened claims against the Companyand its subsidiaries, which are the result of the Company’s failure to paycertain debts and liabilities as they came due.

 

In addition, certain landlords of stores,which Beyond the Wall has vacated in advance of the expiration dates of thestore leases or failed to pay rent when due, have commenced litigation againstthe Company.

 

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

 

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

 

Reports on Form 8-K:

 

Current Report on Form 8-K datedJanuary 20, 2002, regarding the execution of a Restructuring Agreement dated asof January 20, 2003 among the Company, and its

 

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subsidiary, Network Event Theater, Inc.,the United States Small Business Administration as Receiver for Inter equityCapital Partners, LP, TCW Shared Opportunity Fund II, L.P., Shared OpportunityFund IIB, LLC, The Charles and Adele Thurnher Living Trust Dated December 7,1989, The Morrish Community Property Trust Dated April 15, 1998, and JeanSmith, Stanley J. Schrager, Richard Coppersmith, Rand Ravich and Jess M.Ravich, individually, and the consummation of the transactions contemplated bythe Restructuring Agreement.

 

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Exhibits:

 
| 99.1 |   | Certificate of Chief Executive Officer  and Chief Financial Officer pursuant to section 18 U.S.C. section 1350 dated  May 15, 2003. |
|------|--------|------------------------------------------------------------------------------------------------------------------------------------------|

 

SIGNATURES

 

In accordance with the requirements of theSecurities Exchange Act of 1934, the registrant has caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 
| May 15, 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                |

 

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Certification

 
| I, Jonathan V. Diamond, Chief Executive  Officer and Chairman of the Board of Directors of YouthStream Media |                                                                                                                                                                                                                                                                                                                                                                                         |
|--------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Networks,  Inc., certify that:                                                                               |                                                                                                                                                                                                                                                                                                                                                                                         |
|                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
| 1.                                                                                                           | I have reviewed this quarterly report on  Form 10-Q of YouthStream Media Networks, Inc.;                                                                                                                                                                                                                                                                                                     |
|                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                         |   |
| 2.                                                                                                           | Based on my knowledge, this quarterly  report does not contain any untrue statement of a material fact or omit to  state a material fact necessary tomake the statements made, in light  of the circumstances under which such statements were made, not misleading  with respect to the period covered by this quarterly report;                                                            |
|                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                         |   |
| 3.                                                                                                           | Based on my knowledge, the financial  statements, and other financialinformation included in this  quarterly report, fairly present in all material respects the financial  condition, results of operations and cash flows of the registrant as of, and  for, the periods presented in this quarterly report;                                                                               |
|                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                         |   |
| 4.                                                                                                           | The registrant’s other certifying  officers and I are responsible forestablishing and maintaining  disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and  15d-14) for the registrant and we have:                                                                                                                                                             |
|                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                         |   |
|                                                                                                         | a)                                                                                                                                                                                                                                                                                                                                                                                           | designed such disclosure controls and  procedures to ensure thatmaterial information relating to the  registrant, including its consolidated subsidiaries, is made known  to us by others within those entities, particularly during the period  in which this quarterly report is being prepared; |
|                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                         |   |
|                                                                                                         | b)                                                                                                                                                                                                                                                                                                                                                                                           | evaluated the effectiveness of the  registrant’s disclosure controlsand procedures as of a date within  90 days prior to the filing date of this quarterly report (the “Evaluation  Date”); and |
|                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                         |   |
|                                                                                                         | c)                                                                                                                                                                                                                                                                                                                                                                                           | presented in this quarterly report our  conclusions about the effectiveness of the disclosure controls and procedures  based on ourevaluation as of the Evaluation Date; |
|                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                         |   |
| 5.                                                                                                           | The registrant’s other certifying  officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the  audit  committee of registrant’s board of  directors (or persons performing the  equivalent function):                                                                                                            |
|                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                         |   |
|                                                                                                         | a)                                                                                                                                                                                                                                                                                                                                                                                           | all significant deficiencies in the  design or operation of internalcontrols which could adversely  affect the registrant’s ability to record, process, summarize and  report financial data and have identified for the registrant’s auditors  any material weaknesses in internal controls; and |
|                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                         |   |
|                                                                                                         | b)                                                                                                                                                                                                                                                                                                                                                                                           | any fraud, whether or not material, that  involves management or other employees who have a significant role in the  registrant’s internal controls; and |
|                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                         |   |
| 6.                                                                                                           | The registrant’s other certifying  officers and I have indicated in this quarterly report whether there were  significant changes in internal controls or in other factors that could  significantly affect internal controls subsequent to the date of our most  recent evaluation, including any corrective actions with regard to  significant deficiencies and material weaknesses. |
|                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                              |  |  |  |  |  |  |

 
| Date: May 15, 2003 |                                   |
|--------------------|----------------------------------------|
|               |                                   |
|               | /s/ Jonathan  V. Diamond               |
|               | Jonathan V. Diamond                    |
|               | Chairman & Chief Executive Officer |

 

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Certification

 
| I, Robert N. Weingarten, Chief Financial  Officer of YouthStream Media Networks, Inc., certify that: |
|------------------------------------------------------------------------------------------------------|
|                                                                                                 |   |   |   |
| 1.                                                                                                   | I have reviewed this quarterly report on  Form 10-Q of YouthStream Media Networks, Inc.; |
|                                                                                                 |   |   |
| 2.                                                                                                   | Based on my knowledge, this quarterly  report does not contain any untrue statement of a material fact or omit to  state a material fact necessary to make the statements made, in light of the  circumstances under which such statements were made, not misleading with  respect to the period covered by this quarterly report; |
|                                                                                                 |   |   |
| 3.                                                                                                   | Based on my knowledge, the financial  statements, and other financial information included in this quarterly  report, fairly present in all material respects the financial condition,  results of operations and cash flows of the registrant as of, and for, the  periods presented in this quarterly report; |
|                                                                                                 |   |   |
| 4.                                                                                                   | The registrant’s other certifying  officers and I are responsible for establishing and maintaining disclosure  controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)  for the registrant and we have: |
|                                                                                                 |   |   |
|                                                                                                 | a) | designed such disclosure controls and  procedures to ensure that material information relating to the registrant,  including its consolidated subsidiaries, is made known to us by others within  those entities, particularly during the period in which this quarterly report  is being prepared; |
|                                                                                                 |   |   |
|                                                                                                 | b) | evaluated the effectiveness of the  registrant’s disclosure controls and procedures as of a date within 90 days  prior to the filing date of this quarterly report (the “Evaluation Date”);  and |
|                                                                                                 |   |   |
|                                                                                                 | c) | presented in this quarterly report our  conclusions about the effectiveness of the disclosure controls and procedures  based on our evaluation as of the Evaluation Date; |
|                                                                                                 |   |   |
| 5.                                                                                                   | The registrant’s other certifying  officers and I have disclosed, based on our most recent evaluation, to the  registrant’s auditors and the audit committee of registrant’s board of  directors (or persons performing the equivalent function): |
|                                                                                                 |   |   |
|                                                                                                 | a) | all significant deficiencies in the  design or operation of internal controls which could adversely affect the  registrant’s ability to record, process, summarize and report financial data  and have identified for the registrant’s auditors any material weaknesses in  internal controls; and |
|                                                                                                 |   |   |
|                                                                                                 | b) | any fraud, whether or not material, that  involves management or other employees who have a significant role in the  registrant’s internal controls; and |
|                                                                                                 |   |   |
| 6.                                                                                                   | The registrant’s other certifying  officers and I have indicated in this quarterly report whether there were  significant changes in internal controls or in other factors that could  significantly affect internal controls subsequent to the date of our most  recent evaluation, including any corrective actions with regard to  significant deficiencies and material weaknesses. |
|                                                                                                      |  |  |  |  |  |

 
| Date: May 15, 2003 |                      |
|--------------------|---------------------------|
|               | /s/ Robert N.  Weingarten |
|               | Robert N. Weingarten      |
|               | Chief Financial Officer   |

 

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