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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] 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 MEDIA NETWORKS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-4082185
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation of Organization) Identification No.)
244 Madison Avenue, PMB #358 New York, NY 10016
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(Address of Principal Executive Offices) (Zip Code)
[(212) 622-7300]
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(Registrant's Telephone Number, Including Area Code)
28 West 23rd Street, New York, New York 10010
(Registrant's Former Address)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
----- -----
At September 30, 2002, there were 35,865,000 shares of Common Stock, $.01 par
value outstanding.
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YOUTHSTREAM MEDIA NETWORKS, INC.
FORM 10-Q
INDEX
PAGE
NUMBER
------
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets -- September 30, 2002
(Unaudited) and June 30, 2002 ...................................... 1
Unaudited Condensed Consolidated Statements of Operations --
Three Months Ended September 30, 2002 and 2001 ..................... 2
Unaudited Condensed Consolidated Statements of Cash Flows --
Three Months Ended September 30, 2002 and 2001 ..................... 3
Unaudited Condensed Consolidated Statement of Stockholders' Equity --
Three Months Ended September 30, 2002 .............................. 4
Notes to Condensed Consolidated Financial Statements ................. 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ......................................... 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ........ 13
ITEM 4. CONTROLS AND PROCEDURES ........................................... 13
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ................................................. 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ................................... 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .................................. 14
SIGNATURES ................................................................ 15
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
YOUTHSTREAM MEDIA NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
September 30, June 30,
2002 2002
-------------- ---------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ............................................................... $ 9,067 $ 597
Accounts receivable, net ................................................................ 732 2,667
Inventories, net ........................................................................ 3,622 2,584
Prepaid expenses ........................................................................ 254 180
Other current assets .................................................................... 148 195
Restricted cash ......................................................................... 655 768
--------- ---------
Total current assets ...................................................................... 14,478 6,991
Property and equipment, net of accumulated depreciation of $940 and $1,918 at
September 30, 2002 and June 30, 2002, respectively ...................................... 2,134 2,749
Deferred financing costs, net of accumulated amortization of $2,083 and $1,884 at
September 30, 2002 and June 30, 2002, respectively ...................................... 2,366 2,565
Assets from discontinued operations ....................................................... -- 7,682
--------- ---------
Total assets .............................................................................. $ 18,978 $ 19,987
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ........................................................................ $ 3,527 $ 1,800
Accrued employee compensation ........................................................... 389 704
Accrued expenses ........................................................................ 4,289 3,411
Current liabilities of discontinued operations .......................................... -- 592
Deferred Revenues ....................................................................... -- 127
Current portion of deferred purchase price .............................................. -- 375
Current portion of capitalized lease obligations ........................................ 121 165
Current maturities of long-term debt in default (see Note 4) ............................ 18,213 18,184
--------- ---------
Total current liabilities ................................................................. 26,539 25,358
Non current liabilities of discontinued operations ........................................ -- 45
Capitalized lease obligations ............................................................. 38 106
Other liabilities ......................................................................... 346 358
Commitments and contingencies ............................................................. -- --
Stockholders' Deficit
Preferred stock, $0.01 par value, 5,000 shares authorized, no shares issued and
outstanding ........................................................................... -- --
Common stock, $0.01 par value, 100,000 shares authorized, 35,865 shares
and 33,591 shares issued at September 30, 2002 and June 30, 2002, respectively ........ 359 336
Additional paid-in capital .............................................................. 330,865 330,774
Accumulated deficit ..................................................................... (338,340) (336,161)
Treasury stock, 607 shares at September 30, 2002 and June 30, 2002, respectively ........ (829) (829)
--------- ---------
Total stockholders' deficit ............................................................... (7,945) (5,880)
--------- ---------
Total liabilities and stockholders' deficit ............................................... $ 18,978 $ 19,987
========= =========
See notes to condensed consolidated financial statements
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YOUTHSTREAM MEDIA NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three months ended
September 30,
-----------------------
2002 2001
-------- --------
Net revenues ................................................. $ 6,446 $ 8,121
Cost of sales ................................................ 1,188 1,462
-------- --------
Gross profit ............................................... 5,258 6,659
Selling, general, administrative and corporate expenses .. 6,364 5,105
Depreciation and amortization ............................ 169 98
-------- --------
Income (loss) from operations ................................ (1,275) 1,456
Interest income .............................................. 23 184
Interest expense ............................................. (731) (774)
-------- --------
Income (loss) before provision for income taxes .............. (1,983) 866
Provision for income taxes ................................... (96) (6)
-------- --------
Income (loss) from continuing operations ..................... (2,079) 860
Loss from discontinued operations .......................... (582) (584)
Gain on disposal of discontinued operations ................ 482 --
-------- --------
Net income (loss) ............................................ $ (2,179) $ 276
======== ========
Income (loss) per share of common stock basic and diluted
Continuing operations ...................................... $ (0.06) $ 0.03
Discontinued operations .................................... (0.01) (0.02)
-------- --------
Net income (loss) per basic and diluted common share ......... $ (0.07) $ 0.01
======== ========
Weighted average basic common shares outstanding ............. 33,008 29,922
======== ========
Weighted average diluted common shares outstanding ........... 33,008 30,027
======== ========
See notes to condensed consolidated financial statements
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YOUTHSTREAM MEDIA NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three months ended
September 30,
-----------------------
2002 2001
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ............................................................ $ (2,179) $ 276
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Loss from discontinued operations .......................................... 582 584
(Gain) on disposal of discontinued operations .............................. (482) --
Net change in assets and liabilities of discontinued operations ............ (574) (1,733)
Bad debt expense ........................................................... -- 4
Depreciation and amortization .............................................. 169 98
Loss on disposal of equipment .............................................. 488 --
Amortization of deferred financing costs ................................... 199 192
Deferred rent .............................................................. (12) 1
Amortization of original issue discount on Subordinated Notes .............. 29 29
Changes in assets and liabilities, net of acquisitions:
Accounts receivable ...................................................... 1,935 (1,722)
Inventory ................................................................ (1,038) (603)
Other current assets ..................................................... 86 (509)
Accounts payable ......................................................... 1,727 306
Accrued expenses ......................................................... 563 (612)
Deferred revenues ........................................................ (127) 124
-------- --------
Net cash provided (used in) operating activities ............................. $ 1,366 (3,565)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ......................................................... (42) (543)
Sale of investments in marketable debt securities ............................ -- 2,371
Sale of Media Assets to Alloy ................................................ 7,283 --
Payment for business acquisitions ............................................ (25) --
-------- --------
Net cash provided by investing activities .................................... 7,216 1,828
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock repurchase ...................................................... -- (299)
Repayment of capitalized lease obligations ................................... (112) (19)
Repayment of long-term debt .................................................. -- (326)
-------- --------
Net cash (used in) provided by financing activities .......................... (112) (644)
Decrease in cash and cash equivalents ........................................ 8,470 (2,381)
Cash and cash equivalents at beginning of period ............................. 597 14,927
-------- --------
Cash and cash equivalents at end of period ................................... $ 9,067 $ 12,546
======== ========
Noncash financing activities:
Capitalized lease obligations .............................................. -- $ 35
======== ========
Issuance of common stock in connection with acquisitions ................... $ 114 $ 893
======== ========
Accrued earn-out ........................................................... -- $ 600
======== ========
See notes to condensed consolidated financial statements
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YOUTHSTREAM MEDIA NETWORKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD JUNE 30, 2002 TO SEPTEMBER 30, 2002
(IN THOUSANDS)
(UNAUDITED)
Common Stock
---------------- Accumulated Treasury
Shares Amount APIC Deficit Stock Total
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Balances at June 30, 2002 ................ 33,591 $ 336 $ 330,774 $ (336,161) $ (829) $ (5,880)
Issuance of common stock in connection
with Invino acquisition ................ 2,274 23 91 -- -- 114
Net loss ................................. -- -- -- (2,179) -- (2,179)
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Balances at September 30, 2002 ........... 35,865 359 330,865 (338,340) (829) (7,945)
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YOUTHSTREAM MEDIA NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
YouthStream Media Networks, Inc. ("YouthStream"), and its wholly-owned
subsidiaries (collectively, the "Company"). The Company's operations consist of
Network Event Theater, Inc. ("NET"), American Passage Media, Inc. ("American
Passage"), Trent Graphics, Inc. ("Trent"), and W3T.com, Inc. ("Teen.com"). On
August 5, 2002 the Company sold substantially all of its media assets and
certain liabilities in its NET and American Passage subsidiary to Alloy, Inc.
and ceased operating the media segment. In December 2001, the Company
discontinued its Teen.com operations and closed its Hotstamp college business.
In December 2000, the Company discontinued the operations of CommonPlaces, LLC
("CommonPlaces"), sixdegrees, inc., ("sixdegrees"), CollegeWeb.com, Inc.
("CollegeWeb"), and Invino Corporation ("Invino"). See Note 2 - Discontinued
Operations. YouthStream, through its subsidiaries, is now primarily a retail
company that targets teenagers and young adults ages 12 to 24.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q. Accordingly, they do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
interim period are not necessarily indicative of the results that may be
expected for the year ending June 30, 2003. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's Form 10-K for the fiscal year ended June 30, 2002.
FINANCIAL STATEMENT PRESENTATION
The Company has incurred recurring operating losses since its inception, as of
September 30, 2002 had an accumulated deficit of $338,000,000 and expects to
have insufficient capital to fund all of its obligations. In August and
September 2002, the Company defaulted on approximately $18,000,000 of its
long-term debt (see Note 4 -- Long-Term Debt). In addition, the Company's retail
sales have been on the decline. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. The financial statements
do not include any adjustments to reflect the possible future effect of the
recoverability and classification of assets or the amounts and classifications
of liabilities that may result from the outcome of this uncertainty. The Company
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 believes that consummation of disposition of all or substantially all of
the assets associated with the retail business segment, would require a vote of
the Company's shareholders.
RECLASSIFICATIONS
Certain amounts in the prior period financial statements have been reclassified
to conform to the current period presentation.
2. DISCONTINUED OPERATIONS
In response to its liquidity issues and declining earnings, on August 5, 2002
the Company sold substantially all of its Media assets and assigned certain
liabilities to Cass Communications, Inc., a subsidiary of Alloy, Inc. for gross
proceeds of $7,000,000 plus a working capital adjustment of an additional
$283,000, which resulted in a gain of approximately $246,000 at the time of
sale, the amount for which is included in the total gain on disposal of
discontinued operations.
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As a result of the sale, the Media segment operations were discontinued in the
first quarter of fiscal 2003.
In December 2001, the Company discontinued its Teen.com website. In connection
with the discontinuance of this business, the Company incurred a charge of
$348,000, related primarily to the write-off of property and equipment and an
accrual for severance.
In December 2000, the Company discontinued the operations of CommonPlaces, LLC
("CommonPlaces"), sixdegrees, inc., ("sixdegrees"), CollegeWeb.com, Inc.
("CollegeWeb"), and Invino Corporation ("Invino"). Pursuant to the merger
agreement between Invino Corporation ("Invino") and the Company, the Company
paid the final installment of $375,000 by issuing 2,273,531 shares of common
stock and paying $25,000 in cash. For accounting purposes, the value of the
shares issued has been determined on the three-day average trading price one day
before and one day after the date of issuance. The difference between the use of
the 30-day and three-day average trading prices of the stock issued as well as
the payment resulted in a gain of $236,000. This has been accounted for as a
gain on disposal of discontinued operations because effective December 2000 the
Company discontinued the Invino operations.
Net revenues and loss from discontinued operations are as follows (in
thousands):
Three Months Ended
September 30,
---------------------
2002 2001
------- -------
Net revenues ....................................... $ 399 $ 4,689
======= =======
Loss from discontinued operations .................. (582) (584)
Gain on disposal of discontinued
operations ....................................... 482 --
======= =======
Net loss from discontinued operations .............. $ (100) $ (584)
======= =======
3. RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations for a disposal of a
segment of a business. The Company elected early adoption of SFAS No. 144 as of
July 1, 2001. As a result of the adoption of SFAS No. 144, the disposal of
Teen.com, which was not a separate segment of the Company, qualified as a
discontinued operation. The Company was not otherwise significantly impacted by
the adoption of SFAS No. 144.
In April 2002, the FASB issued 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 criteria for classifying the extinguishment of debt as
extraordinary and the accounting treatment of certain lease modifications. SFAS
145 is effective in fiscal 2003, and is not expected to have a material impact
on the Company's consolidated financial statements.
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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 with exit or disposal activities. The new
guidance requires costs associated with exit or disposal activities to be
recognized when incurred. Previous guidance required recognition of costs at the
date of commitment to an exit or disposal plan. The provisions of the statement
are to be adopted prospectively after December 31, 2002. Although SFAS No. 146
may impact the accounting for costs related to exit or disposal activities the
Company may enter into in the future, particularly the timing of the recognition
of these costs, the adoption of the statement will not have an impact on the
Company's present financial condition or results of operations.
4. LONG-TERM DEBT (IN DEFAULT)
Long-term debt consists of the following (in thousands):
September 30, June 30,
2002 2002
------------- -------
Subordinated Notes -- Private Placement (A) ........ 5,000 5,000
Note Payable to Finance Company (B) ................ 496 496
Subordinated Notes -- Private Placement (C) ........ 12,000 12,000
Subordinated Notes -- Private Placement (D) ........ 1,000 1,000
Other .............................................. 1 1
------ ------
18,497 18,497
Less: Unamortized original issue discount
attributed to subordinated notes ................. 284 313
------ ------
18,213 18,184
Less: Current portion of long-term debt ........... 18,213 18,184
------ ------
Long-term debt total ............................... -- --
====== ======
(A) In July 1998, the Company issued subordinated notes to accredited investors
in the aggregate amount of $5,000,000 less an original discount of $188,000
("NET Notes"). These notes bear interest at 11% per annum and are 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 in July 2003,
entitles the holder to purchase one share of the Company's common stock for
$4.125, the market price of the Company's common stock at the date of issuance.
Based on an independent appraisal conducted at that time, the 525,000 warrants
were valued at $740,000. The value of the warrants and closing costs of $314,000
have been recorded as deferred financing costs and are being amortized over the
term of the subordinated notes. The original issue discount of $188,000 is also
being amortized over the term of the related debt. On September 8, 2002 NET
failed to make the interest payment due on the NET Notes, constituting an event
of default under the terms of the NET Notes. In September 2002, the holder of a
majority of the NET Notes declared these notes due and payable under the terms
of the NET Notes.
(B) In March 2000, the Company issued a note to a finance company in the amount
of $1,971,000 ("Equipment Note"). The note bears interest at the rate of 11.95%
per annum and is payable in 36 equal monthly payments commencing in March 2000.
The note is secured by certain equipment owned by NET. NET failed to make
payments of approximately $65,000 due on August 1, 2002 and $65,000 due on
September 1, 2002, in connection with the Equipment Note. On September 6, 2002,
NET received notice from the finance company holding the Equipment Note stating
that the entire outstanding indebtedness ($496,000) under the Equipment Note is
due and payable pursuant to the terms of the
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note. On September 16, 2002, the holder of the Equipment Note commenced
litigation against NET seeking repayment of the note.
(C) In June 2000, the Company issued a subordinated note to an accredited
investor in the amount of $12,000,000, less an original issue discount of
$420,000 ("YSTM Note"). The note bears interest at 11% per annum and is due in
June 2005. In connection with the issuance of the subordinated note, the Company
issued 1,020,000 warrants to an accredited investor in exchange for $420,000.
Each warrant, which expires in June 2005, entitles the holder to purchase one
share of the Company's common stock for $5.9375, the market price of the
Company's common stock at the date of issuance. Based on an independent
appraisal at that time, the 1,020,000 warrants were valued at $3,346,000. The
value of the warrants and closing costs of $494,000 were recorded as deferred
financing costs and are being amortized over the term of the subordinated note.
The original issue discount of $420,000 is being amortized over the term of the
related debt. On August 31, 2002, the Company failed to make an interest payment
due on the YSTM Note, constituting an event of default under the terms of the
YSTM Note. On September 9, 2002, the holder of the YSTM Note declared this note
due and payable under the terms of the YSTM Note.
(D) In July 2000, the Company issued a subordinated note to an accredited
investor in the amount of $1,000,000, less an original issue discount of $35,000
("YSTM 2 Note"). The note bears interest at 11% per annum and is due in July
2005. In connection with the issuance of the subordinated note, the Company
issued 60,000 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 the Company's common stock for $3.75, the market price of the Company's
common stock at the date of issuance. Based on an independent appraisal at that
time, the 60,000 warrants were valued at $197,000. The value of the warrants was
recorded as deferred financing costs and is being amortized over the term of the
subordinated note. The original issue discount of $35,000 is being amortized
over the term of the related debt. On August 31, 2002 the Company failed to make
an interest payment due on the YSTM 2 Note, constituting an event of default
under the terms of the YSTM 2 Note. Under the terms of the YSTM 2 Note, the
holder of the note has the right to declare this note immediately due and
payable.
5. REORGANIZATION
The Company announced its plan to move the Seattle operations to the New York
office in March 2002. In April 2002, the Company finalized its transition plan,
which resulted in the termination of 30 employees, and completed the transition
in June 2002. The Company recorded a restructuring charge, which is included in
selling, general and administrative expenses, in fiscal 2002 of approximately
$519,000 relating to this decision, which included severance costs of $186,000,
lease costs of $126,000 for a lease expiring November 2002, and $207,000
relating to the abandonment of certain fixed assets. As of September 30, 2002,
the Company has remaining accruals of approximately $126,000 for lease
obligation costs.
The Company wrote off approximately $488,000 of fixed assets relating to the
closing of its corporate office on November 7, 2002 which was located in New
York since such assets were deemed to be impaired as of September 30, 2002.
6. STOCKHOLDER'S EQUITY
In May 2001, the Board of Directors authorized the Company to make open market
purchases of the Company's common stock aggregating up to $2 million. As of
September 30, 2002, the Company had completed purchases, on the open market,
607,000 shares at a cost of $829,000. These purchases were completed in the
fourth quarter of fiscal 2001 and the first and second quarters of fiscal 2002.
In May 2001, the Company approved a Voluntary Stock Option Exchange Program to
be carried out under the Company's 2000 Stock Incentive Plan. Employees were
given the option to exchange all or a
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portion of their options on July 20, 2001, with an exercise price equal to or
greater than $9.00. In exchange, employees were eligible to receive, six months
and one day after cancellation, new options for 80% of the number of shares
covered by the cancelled options, with an exercise price equal to the fair
market value of the Company's stock on the date of the new grant. On July 20,
2001, 743,800 options were cancelled, and 518,319 options were reissued on
January 22, 2002.
In September 2002, the Company issued approximately 2.3 million common shares in
connection with the Invino acquisition.
7. SEGMENT INFORMATION
The Company had two reporting segments: media and retail. The media segment
represented the Company's media, marketing and promotional services provided to
advertisers by NET and American Passage. On August 5, 2002 the Company sold
substantially all of the assets and certain liabilities from this segment and
discontinued its operation. The retail segment consists of on-campus and retail
store poster sales provided by Trent.
The following is a summary of the major classes of assets and liabilities as of
September 30, 2002 that remain from the Media segment:
September 30, 2002
(In thousands)
------------------
Current assets, net ........................ $ 311
Current liabilities ........................ (2,172)
Capitalized lease obligations .............. (79)
-------
Net book value ............................. $(1,940)
=======
8. LEGAL
The Company is a party to certain legal proceedings commenced against it by
former employees of the Company's subsidiaries. These actions include: (a) a
litigation pending in the District Court of Travis County, Texas by a former
employee of the Company's CommonPlaces, LLC ("CP") subsidiary claiming that he
is entitled to receive, without cost, an aggregate of 215,083 shares of
YouthStream common stock; (b) a litigation filed in the U.S. District Court for
the District of Massachusetts, by a former CP employee seeking damages based on
claims for breach of his employment contract, breach of implied covenants of
good faith, and violation of the Massachusetts unfair and deceptive trade
practices act; and (c) an arbitration filed in New York by the Company's former
President and Chief Executive Officer seeking damages for alleged breach of his
employment agreement, among other things. The Company is currently defending
these actions and has asserted counterclaims against the plaintiffs in two of
these actions.
In addition, certain creditors of the Company and its subsidiaries and certain
holders of the Company's and its NET subsidiary's debt have asserted or have
threatened claims against the Company and its subsidiaries, which are the result
of the Company's failure to pay certain debts and liabilities as they came due.
Among the claims is a litigation filed in New York State Court by Wells Fargo in
connection with the Wells Fargo Loan, seeking past due payments and future
payments, late charges and interest costs and expenses, and certain collateral
in connection with NET's failure to make certain payments owed under the Wells
Fargo Loan. On November 18, 2002, the Company was issued a temporary restraining
order by the Supreme Court of New York to prevent the Company from removing,
transferring, pledging or assigning funds constituting the assets of NET and
APMI, up to $500,000.
In addition, certain landlords of stores which Beyond the Wall has vacated in
advance of the expiration dates of the Store leases or failed to pay rent when
due have commenced litigation against Beyond the Wall.
Given the Company's current financial situation, the costs of defending these
proceedings, diversion of management's attention to these matters, or the
outcome of such proceedings could have a material adverse effect on the
Company's financial condition or operating results, including its ability to
restructure its debts without seeking bankruptcy protection or being the subject
of an involuntary bankruptcy petition, or its ability to continue as a going
concern.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the consolidated financial
statements and related notes thereto.
The Company's consolidated financial statements reflect reclassifications for
prior periods due to the discontinued operation of the Company's online segment
and sale of its media assets. On August 5, 2002, the Company sold substantially
all of its media assets and discontinued its media segment. The only remaining
segment is retail. The following analysis incorporates reclassifications of
prior periods due to discontinued operations and revision of the reporting
segments. The following financial analysis compares the three months ended
September 30, 2002 (unaudited) to the three months ended September 30, 2001
(unaudited).
CRITICAL ACCOUNTING POLICIES
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined on a
first-in, first-out basis. Inventories consist primarily of posters and related
products.
REVENUE RECOGNITION
Revenue is derived from the sale of merchandise to consumers on college campuses
and in stores. Retail revenue is recognized at the time of the sale to the
consumer.
USE OF ESTIMATES
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
ACCOUNTS RECEIVABLE
Accounts receivable consist primarily of amounts due to us from our normal
business activities. We maintain an allowance for doubtful accounts to reflect
the expected uncollectibility of accounts receivable based on past collection
history and specific risk identified in the portfolio.
RESULTS OF OPERATIONS
(In thousands)
YouthStream generated revenues primarily from the sale of decorative wall
posters, targeting teens and young adults, through on-campus sales events,
retail stores and Internet sales. On August 5, 2002, the Company sold
substantially all of its media assets and discontinued its Media segment.
Revenues decreased to $6.4 million for the three months ended September 30, 2002
from $8.1 million for the three months ended September 30, 2001. Revenue decline
was attributable to a negative same store sales and a reduction in the number
of stores.
Cost of sales consists of the cost of decorative wall posters sold. Cost of
sales as a percentage of revenues remained relatively consistent at
approximately 18% for the three months ended September 30, 2002 and for the
three months ended September 30, 2001.
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For the three months ended September 30, 2002, selling, general, administrative
and corporate expenses were $6.4 million as compared to $5.1 million for the
three months ended September 30, 2001. The increase of $1.3 million was due
primarily to higher insurance costs, higher severance expense and losses from
the write-offs of fixed assets, offset by overhead cost savings, resulting from
various cost cutting measures implemented by management.
For the three months ended September 30, 2002 and 2001, depreciation and
amortization expense was $169,000 and $98,000, respectively.
For the three months ended September 30, 2002, interest income was $23,000 as
compared to $184,000 for the three months ended September 30, 2001. The decrease
of $161,000 was due to lower cash balances and declining interest rates.
For the three months ended September 30, 2002 and 2001, interest expense was
$731,000 and $774,000, respectively.
For the three months ended September 30, 2002, loss from discontinued operations
was $582,000 as compared to loss of $584,000 for the three months ended
September 30, 2001. The loss from discontinued operations in fiscal 2003 and
2002 represents the net loss from the Media operations.
For the three months ended September 30, 2002, gain on disposal of discontinued
operations was $482,000. The gain for the period ended September 2002 was
attributable to the gain on the sale of the Media segment to Alloy, Inc.,
totaling $246,000, and the gain on the settlement of an Invino purchase
liability through the issuance of common shares, totaling $236,000.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its operations primarily through the sale of
equity securities and debt. As of September 30, 2002, the Company had
approximately $9.1 million in cash and equivalents. The Company will require
additional capital to fund its operations and settle outstanding liabilities
through June 30, 2003. The Company has never been profitable and expects to
continue to incur operating losses in the future. The Company's historical sales
have never been sufficient to cover its expenses and it has been necessary to
rely upon financing from the sale of equity securities and debt to sustain
operations. The Company must obtain financing from debt, if made available, or
on the sale of equity securities to continue to sustain its operations and to be
able to meet its cash demands. There can be no assurance that the Company will
obtain such additional capital or that such additional financing will be
sufficient for the Company's continued existence. Furthermore, there can be no
assurances that the Company will be able to generate sufficient revenues from
the operation of the retail business to meet the Company's obligations. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern.
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For the three months ended September 30, 2002, the Company generated
approximately $1.4 million of cash in operating activities. For the three months
ended September 30, 2001, the Company used $3.6 million in operating activities.
For the three months ended September 30, 2002, the Company generated $7.2
million in investing activities primarily relating to the $7.3 million sale of
the Media business to Cass Communications, Inc., a subsidiary of Alloy, Inc. For
the three months ended September 30, 2001, the Company generated $1.8 million in
investing activities primarily relating to the sale of investments in marketable
debt securities, offset by $543,000 for capital expenditures.
Net cash used in financing activities was $112,000 for the three months ended
September 30, 2002 and $644,000 for the three months ended September 30, 2001.
The Company's principal commitments consist of obligations outstanding under
operating leases totaling approximately $3.3 million. The operating lease
commitments declined from $5.4 million as of June 30, 2002, owing to a
settlement to terminate the lease obligation for future rent on the New York
City office lease, totaling $2.1 million.
The Company's capital requirements depend on its revenue growth, operating
structure and the amount of resources devoted to the retail operations.
The Company does not have any material commitments for capital expenditures.
The Company's ability to improve its operations will be subject to prevailing
economic conditions and to legal, financial, business, regulatory, industry and
other factors, many of which are beyond the Company's control. To the extent
that the Company finances its requirements through the issuance of additional
equity securities, any such issuance would result in dilution to the interests
of the Company's stockholders.
SUBSEQUENT EVENTS
In October, 2002 the Company received notice from NASDAQ that it did not comply
with either the minimum $2,000,000 net tangible asset requirement or the
alternative minimum $2,500,000 stockholders' equity requirement necessary for
continued listing on NASDAQ's SmallCap Market, and that the Company's common
stock was subject to delisting.
The Company requested a hearing before a NASDAQ Listings Qualifications Panel
but cannot provide assurance that the Panel will grant the Company's request for
continued listing. Under NASDAQ rules, delisting will be stayed pending the
outcome of the hearing. The hearing is scheduled for December 2002.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
Our accounts receivable are subject, in the normal course of business to
collection risks. We regularly assess these risks and have established policies
on business practices to protect against the adverse effects of collections
risks.
ITEM 4. CONTROLS AND PROCEDURES
In accordance with Item 307 of Regulation S-K promulgated under the Securities
Act of 1933, as amended, and within 90 days of the date of this Quarterly Report
on Form 10-Q, the Interim Chief Executive Officer and Acting 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 Exchange Act of 1934, as amended (the
"Exchange Act"), the term "disclosure controls and procedures" means controls
and other procedures of an issuer that are designed to ensure that information
required to be disclosed by the issuer in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Commission's rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by an issuer in the
reports that it files or submits under the Exchange Act is accumulated and
communicated to the issuer's management, including its principal executive
officer or officers and principal financial officer or officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure. The Certifying Officers have reviewed the Company's
disclosure controls and procedures and have concluded that those disclosure
controls and procedures are effective as of the date of this Quarterly Report on
Form 10-Q. In compliance 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 in this Quarterly Report on Form 10-Q.
As of the date of this Quarterly Report on Form 10-Q, there have not been any
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to certain legal proceedings commenced against it by
former employees of the Company's subsidiaries. These actions include: (a) a
litigation pending in the District Court of Travis County, Texas by a former
employee of the Company's CommonPlaces, LLC ("CP") subsidiary claiming that he
is entitled to receive, without cost, an aggregate of 215,083 shares of
YouthStream common stock; (b) a litigation filed in the U.S. District Court for
the District of Massachusetts, by a former CP employee seeking damages based on
claims for breach of his employment contract, breach of implied covenants of
good faith, and violation of the Massachusetts unfair and deceptive trade
practices act; and (c) an arbitration filed in New York by the Company's former
President and Chief Executive Officer seeking damages for alleged breach of his
employment agreement, among other things. The Company is currently defending
these actions and has asserted counterclaims against the plaintiffs in two of
these actions.
In addition, certain creditors of the Company and its subsidiaries and certain
holders of the Company's and its NET subsidiary's debt have asserted or have
threatened claims against the Company and its subsidiaries, which are the result
of the Company's failure to pay certain debts and liabilities as they came due.
Among the claims is a litigation filed in New York State Court by Wells Fargo in
connection with the Wells Fargo Loan, seeking past due payments and future
payments, late charges and interest costs and expenses, and certain collateral
in connection with NET's failure to make certain payments owed under the Wells
Fargo Loan. On November 18, 2002, the Company was issued a temporary restraining
order by the Supreme Court of New York to prevent the Company from removing,
transferring, pledging or assigning funds constituting the assets of NET and
APMI, up to $500,000.
In addition, certain landlords of stores which Beyond the Wall has vacated in
advance of the expiration dates of the Store leases or failed to pay rent when
due have commenced litigation against Beyond the Wall.
Given the Company's current financial situation, the costs of defending these
proceedings, diversion of management's attention to these matters, or the
outcome of such proceedings could have a material adverse effect on the
Company's financial condition or operating results, including its ability to
restructure its debts without seeking bankruptcy protection or being the subject
of an involuntary bankruptcy petition, or its ability to continue as a going
concern.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As discussed in Footnote 4, the Company failed to make schedule interest
payments in the first quarter of fiscal 2003 on its long-term debt notes, which
resulted in a default on its NET Notes due 2003, YSTM Note due 2005, YSTM 2 Note
due 2005 and Equipment Note due 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Reports on Form 8-K:
Current Report on Form 8-K dated August 20, 2002, regarding the sale of the
Company's Media segment to Cass Communications, Inc., a subsidiary of Alloy,
Inc.
Current Report on Form 8-K/A dated September 4, 2002, attaching a press
release and the asset purchase agreement regarding the sale of the Company's
Media segment to Cass Communications, Inc., a subsidiary of Alloy, Inc.
Current Report on Form 8-K dated September 11, 2002 regarding the Company's
and Network Event Theater, Inc.'s failure to make interest and deferred interest
payments on the $12,000,000 subordinated note due June 30, 2005, $1,000,000
subordinated note due July 31, 2005, $5,000,000 subordinated note due July 8,
2003 and the note in the aggregate principal amount of $1,971,000.
Current Report on Form 8-K attaching the certifications required by 18
U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002 in connection with the Company's Annual Report on Form 10-K.
Exhibits:
99.1 Certificate of Chief Executive Officer and Chief Financial Officer
pursuant to section 18 U.S.C. section 1350 dated November 20, 2002.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
November 20, 2002
YOUTHSTREAM MEDIA NETWORKS, INC.
BY:
-----------------------------------------
Jonathan Diamond
Interim Chief Executive Officer
BY:
-----------------------------------------
Wesley Ramjeet
Acting Chief Financial Officer
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Certification of CEO Pursuant to
Securities Exchange Act Rules 13a-14 and 15d-14
as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Jonathan Diamond, Interim Chief Executive 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: November 20, 2002
-------------------------------
Jonathan Diamond
Interim Chief Executive Officer
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Certification of CEO Pursuant to
Securities Exchange Act Rules 13a-14 and 15d-14
as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Wesley Ramjeet, Acting 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: November 20, 2002
-------------------------------
Wesley Ramjeet
Acting Chief Financial Officer
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CERTIFICATION OF CEO AND CFO PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of YouthStream Media
Networks, Inc. (the "Company") for the quarterly period ended September 30, 2002
as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), Jonathan Diamond, as Interim Chief Executive Officer of the Company,
and Wesley Ramjeet, as Acting Chief Financial Officer of the Company, each
hereby certifies, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss. 906
of the Sarbanes-Oxley Act of 2002, to the best of his and her knowledge,
respectively, that:
(1) The Report fully complies with the requirements of Section 13(a)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
-------------------------------------
Name: Jonathan Diamond
Title: Interim Chief Executive Officer
Date: November 20, 2002
-------------------------------------
Name: Wesley Ramjeet
Title: Acting Chief Financial Officer
Date: November 20, 2002
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