**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington D.C. 20549**

 

**FORM 10-QSB**

 

| **QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-----------------------------------------------------------------------------------------|
|                                                                                    |
| **For the quarterly period ended December  31, 2003**                                   |
|                                                                                    |
| **Commission File Number 000-29433**                                                    |

 

**USA BROADBAND, INC.**

(Exact name of registrant as specifiedin its charter)

 

| **Delaware**                                                                         |   | **84-1592698**                    |
|--------------------------------------------------------------------------------------|--------|-----------------------------------|
| (State or other jurisdiction of  incorporation or organization)                      |   | (IRS Employer Identification No.) |
|                                                                                 |   |                              |
| **10012 Norwalk Blvd. Ste. 150  Santa Fe Springs, California**                       |   | **90670**                         |
| (Address of Principal Executive  Offices)                                            |   | (Zip Code)                        |
|                                                                                 |   |                              |
| **(562) 941-5957**                                                              |
| (Issuer’s telephone number,  including area code)                               |
|                                                                                 |   |                              |
| **121 Broadway, Ste. 638  San Diego, California 92101**                              |
| (Former Name, Former Address, and  Former  Fiscal Year if Changed Since Last Report) |

 

State the number of shares outstanding of each of theissuer’s classes of common equity, as of the latest practicable date:

 

The issuer had 16,146,484 shares of common stockoutstanding as of February 17, 2004.

 

 

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**INFORMATION REGARDING FORWARD-LOOKING STATEMENTS**

 

This report on Form 10-QSB containsforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995. The forward-looking statements are containedprincipally in the section entitled “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.” These statements involve knownand unknown risks, uncertainties and other factors which may cause theCompany’s actual results, performance or achievements to be materiallydifferent from any future results, performances or achievements expressed orimplied by the forward-looking statements.

 

In some cases, you can identifyforward-looking statements by terms such as “may,” “will,” “should,” “could,”“would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”“projects,” “predicts,” “potential” and similar expressions intended toidentify forward-looking statements. These statements reflect the Company’scurrent views with respect to future events and are based on assumptions andsubject to risks and uncertainties. Given these uncertainties, you should notplace undue reliance on these forward-looking statements. Actual results coulddiffer materially from those anticipated in any forward-looking statements as aresult of a number of factors, including but not limited to those described inthe Company’s filings with the Securities and Exchange Commission, particularlythe Company’s annual report on Form 10-KSB for the year ended June 30, 2003 andthe quarterly report on Form 10-QSB for the period ended September 30, 2003.These forward-looking statements represent the Company’s estimates andassumptions only as of the date of this report, and we do not assume anyobligation to update any of these statements.

 

2

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**PART I—FINANCIAL INFORMATION**

 

**ITEM 1—FINANCIAL STATEMENTS**

 

**USA BROADBAND, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEETS**

 

**($ in 000s, except per share data)**

 
|                                       |   | **December  31, 2003** |   | **June 30,  2003** |   |
|--------------------------------------------|--------|------------------------|--------|--------------------|--------|
|                                       |   | **(unaudited)**        |   |               |   |
| ASSETS:                                    |   |                   |   |               |   |
|                                       |   |                   |   |               |   |
| Current Assets                             |   |                   |   |               |   |
| Cash                                       |   | $                      | 1,318  |               | $      | 79 |   |
| Accounts receivable, net                   |   | 78                     |   | 16                 |   |
| Prepaid expenses and other  current assets |   | —                 |   | 42                 |   |
| Total current assets                       |   | 1,396                  |   | 137                |   |
|                                       |   |                   |   |               |   |
| Property and Equipment                     |   |                   |   |               |   |
| Cable properties                           |   | 2,010                  |   | 2,740              |   |
| Cable equipment                            |   | 775                    |   | 775                |   |
| Leasehold improvements                     |   | 2                      |   | 2                  |   |
| Furniture and equipment                    |   | 34                     |   | 34                 |   |
| Computer software and  equipment           |   | 119                    |   | 114                |   |
| Vehicles                                   |   | 7                      |   | 7                  |   |
|                                       |   | 2,947                  |   | 3,672              |   |
|                                       |   |                   |   |               |   |
| Less accumulated  depreciation             |   | (1,322                 | )      | (1,242             | )      |
| Net property and equipment                 |   | 1,625                  |   | 2,430              |   |
|                                       |   |                   |   |               |   |
| Assets held for sale, net                  |   | 98                     |   | 239                |   |
| Investment in Cable  California            |   | —                 |   | 6,006              |   |
| Other Assets                               |   | 19                     |   | 256                |   |
| Total Assets                               |   | $                      | 3,138  |               | $      | 9,068 |   |

 

See accompanying notes to thesefinancial statements.

 

3

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|                                                                                                                                           |   | **December  31,  2003** |   | **June 30,  2003** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|--------------------|--------|
|                                                                                                                                           |   | **(unaudited)**         |   |               |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY:                                                                                                    |   |                    |   |               |   |
|                                                                                                                                           |   |                    |   |               |   |
| Current Liabilities:                                                                                                                           |   |                    |   |               |   |
| Current portion of  long-term debt, capital lease obligations and notes payables                                                               |   | $                       | 7,337  |               | $      | 4,481 |   |
| Accounts payable                                                                                                                               |   | 2,875                   |   | 3,737              |   |
| Accrued liabilities                                                                                                                            |   | 1,500                   |   | 1,362              |   |
| Notes payable to  shareholders                                                                                                                 |   | 327                     |   | 130                |   |
| Deferred revenues                                                                                                                              |   | 43                      |   | 94                 |   |
| Total current liabilities                                                                                                                      |   | 12,082                  |   | 9,804              |   |
|                                                                                                                                           |   |                    |   |               |   |
| Commitments and  contingencies (Note 5)                                                                                                        |   |                    |   |               |   |
|                                                                                                                                           |   |                    |   |               |   |
| Stockholders’ Deficit:                                                                                                                    |   |                    |   |               |   |
| Preferred stock, $.01 par  value; 50,000,000 shares authorized                                                                                 |   |                    |   |               |   |
| Series A convertible  preferred stock; 7,000,000 shares designated; 3,499,534 and 3,811,387  outstanding, liquidation preference of $6,684,000 |   | 5,457                   |   | 5,458              |   |
| Series B preferred stock;  2,625,000 shares designated; 2,625,000 outstanding, liquidation preference of  $3,353,000                           |   | 2,391                   |   | 2,391              |   |
| Series C preferred stock;  7,875,000 shares designated; 7,875,000 outstanding, liquidation preference of  $7,875,000                           |   | 7,875                   |   | 7,875              |   |
| Common stock, $.01 par  value; 100,000,000 shares authorized; 16,146,484 and 13,609,925 outstanding                                            |   | 16                      |   | 14                 |   |
| Additional paid in capital                                                                                                                     |   | 23,983                  |   | 19,881             |   |
| Deferred option expense                                                                                                                        |   | (157                    | )      | (315               | )      |
| Accumulated deficit                                                                                                                            |   | (48,509                 | )      | (36,040            | )      |
|                                                                                                                                           |   |                    |   |               |   |
| Total stockholders’  deficit                                                                                                              |   | (8,944                  | )      | (736               | )      |
| Total Liabilities and  Stockholders’ Deficit                                                                                              |   | $                       | 3,138  |               | $      | 9,068 |   |

 

See accompanying notes to thesefinancial statements.

 

4

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**USA BROADBAND, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 

**($ in 000s, except per share data)**

 
|                                                              |   | **For the  Three Month  Period Ended  December 31, 2003** |   | **For the  Three Month  Period  Ended  December 31, 2002** |   | **For the Six  Month   Period  Ended  December 31, 2003** |   | **For the Six  Month   Period  Ended  December 31, 2002** |    |
|-------------------------------------------------------------------|--------|-----------------------------------------------------------|--------|-----------------------------------------------------------------|--------|----------------------------------------------------------------|--------|----------------------------------------------------------------|---------|
|                                                              |   | **(unaudited)**                                           |   | **(unaudited)**                                                 |   | **(unaudited)**                                                |   | **(unaudited)**                                                |    |
|                                                              |   |                                                      |   |                                                            |   |                                                           |   |                                                           |    |
| Revenues                                                          |   | $                                                         | 234    |                                                            | 179    |                                                           | $      | 461                                                            |    | $ | 344 |   |
| Cost of revenues                                                  |   | 50                                                        |   | 141                                                             |   | 90                                                             |   | 230                                                            |    |
| Gross profit                                                      |   | 184                                                       |   | 38                                                              |   | 371                                                            |   | 114                                                            |    |
|                                                              |   |                                                      |   |                                                            |   |                                                           |   |                                                           |    |
| Operating Expenses:                                               |   |                                                      |   |                                                            |   |                                                           |   |                                                           |    |
| Selling, general and  administrative                              |   | 1,411                                                     |   | 1,182                                                           |   | 3,942                                                          |   | 2,084                                                          |    |
| Depreciation                                                      |   | 98                                                        |   | 272                                                             |   | 258                                                            |   | 365                                                            |    |
| Impairment of long lived  assets                                  |   | 5,585                                                     |   | —                                                          |   | 5,868                                                          |   | —                                                         |    |
| Total operating expenses                                          |   | 7,094                                                     |   | 1,454                                                           |   | 10,068                                                         |   | 2,449                                                          |    |
| Loss from operations                                              |   | (6,910                                                    | )      | (1,416                                                          | )      | (9,697                                                         | )      | (2,335                                                         | )       |
|                                                              |   |                                                      |   |                                                            |   |                                                           |   |                                                           |    |
| Other Income (Expenses):                                          |   |                                                      |   |                                                            |   |                                                           |   |                                                           |    |
| Interest expense, net                                             |   | (1,681                                                    | )      | (210                                                            | )      | (1,972                                                         | )      | (353                                                           | )       |
| Equity in loss of Cable  California                               |   | (439                                                      | )      | —                                                          |   | (844                                                           | )      | —                                                         |    |
| Other income (expenses),  net                                     |   | —                                                    |   | 17                                                              |   | —                                                         |   | 25                                                             |    |
| Net loss from continuing  operations                              |   | (9,030                                                    | )      | (1,626                                                          | )      | (12,513                                                        | )      | (2,688                                                         | )       |
|                                                              |   |                                                      |   |                                                            |   |                                                           |   |                                                           |    |
| Discontinued Operations:                                          |   |                                                      |   |                                                            |   |                                                           |   |                                                           |    |
| Income from discontinued  operations                              |   | —                                                    |   | 439                                                             |   | —                                                         |   | 554                                                            |    |
| Income/(loss) from  disposal of assets                            |   | —                                                    |   | (2,505                                                          | )      | 44                                                             |   | (3,984                                                         | )       |
| Net Loss                                                          |   | $                                                         | (9,030 | )                                                               | $      | (3,675                                                         | )      | $                                                              | (12,469 | ) | $ | (6,093 | ) |
|                                                              |   |                                                      |   |                                                            |   |                                                           |   |                                                           |    |
| Accrued cumulative  preferred stock dividends                     |   | 321                                                       |   | 116                                                             |   | 410                                                            |   | 232                                                            |    |
| Net loss applicable to  common shareholders                       |   | $                                                         | (9,352 | )                                                               | $      | (3,791                                                         | )      | $                                                              | (13,827 | ) | $ | (6,325 | ) |
| Net loss per common share  (primary and diluted)                  |   | $                                                         | (0.60  | )                                                               | $      | (0.58                                                          | )      | $                                                              | (0.91   | ) | $ | (0.98 | ) |
| Weighted average common  shares outstanding (primary and diluted) |   | 15,512,983                                                |   | 6,520,000                                                       |   | 15,201,001                                                     |   | 6,464,000                                                      |    |

 

See accompanying notes to thesefinancial statements.

 

5

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**USA BROADBAND, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

**($ in 000s, except per share data)**

 
|                                                                         |   | **For the Six  Month Period  Ended December   31, 2003** |    | **For the Six  Month Period  Ended December   31, 2002** |   |
|------------------------------------------------------------------------------|--------|----------------------------------------------------------|---------|----------------------------------------------------------|--------|
|                                                                         |   | **(unaudited)**                                          |    | **(unuadited)**                                          |   |
| OPERATING ACTIVITIES                                                         |   |                                                     |    |                                                     |   |
| Net loss                                                                     |   | $                                                        | (12,469 | )                                                        | $      | (6,093 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities: |   |                                                     |    |                                                     |   |
| Impairmant of long lived  assets                                             |   | 5,868                                                    |    | —                                                   |   |
| Depreciation                                                                 |   | 258                                                      |    | 601                                                      |   |
| (Gain) Loss on disposal of  fixed assets                                     |   | (44                                                      | )       | 3,984                                                    |   |
| Amortization of deferred  financing costs                                    |   | —                                                   |    | 34                                                       |   |
| Stock based compensation                                                     |   | 1,082                                                    |    | —                                                   |   |
| Amortization of note  discount                                               |   | 1,352                                                    |    | —                                                   |   |
| Bad debt expense                                                             |   | 1                                                        |    | —                                                   |   |
| Equity in loss of  unconsolidated subsidiary                                 |   | 844                                                      |    | —                                                   |   |
| Changes in operating  assets and liabilities:                                |   |                                                     |    |                                                     |   |
| Accounts receivables                                                         |   | (63                                                      | )       | 58                                                       |   |
| Prepaid expenses                                                             |   | 3                                                        |    | 6                                                        |   |
| Accounts payable                                                             |   | 215                                                      |    | 98                                                       |   |
| Accrued liabilities                                                          |   | 132                                                      |    | 124                                                      |   |
| Deferred revenues                                                            |   | (51                                                      | )       | (185                                                     | )      |
| Other assets                                                                 |   | —                                                   |    | —                                                   |   |
| Other liabilities                                                            |   | 1,061                                                    |    | 329                                                      |   |
| Net cash used in operating  activities                                       |   | (1,811                                                   | )       | (1,044                                                   | )      |
|                                                                         |   |                                                     |    |                                                     |   |
| INVESTING ACTIVITIES                                                         |   |                                                     |    |                                                     |   |
| Proceeds from sale of note  receivable                                       |   | 105                                                      |    | —                                                   |   |
| Net proceeds from sale of  assets                                            |   | 44                                                       |    | —                                                   |   |
| Purchases of property and  equipment                                         |   | (57                                                      | )       | —                                                   |   |
| Advances to Las Americas                                                     |   | —                                                   |    | (240                                                     | )      |
| Net cash provided by (used  in) investing activities                         |   | 92                                                       |    | (240                                                     | )      |
|                                                                         |   |                                                     |    |                                                     |   |
| FINANCING ACTIVITIES                                                         |   |                                                     |    |                                                     |   |
| Proceeds from issuance of  common stock                                      |   | —                                                   |    | 306                                                      |   |
| Payments on debt                                                             |   | (1,142                                                   | )       | (45                                                      | )      |
| Borrowing of debt                                                            |   | 4,100                                                    |    | 960                                                      |   |
| Net cash provided by  financing activities                                   |   | 2,958                                                    |    | 1,221                                                    |   |
|                                                                         |   |                                                     |    |                                                     |   |
| Net increase/(decrease) in  cash                                             |   | 1,239                                                    |    | (63                                                      | )      |
| Cash, at beginning of  period                                                |   | 79                                                       |    | 88                                                       |   |
| Cash, at end of period                                                       |   | $                                                        | 1,318   |                                                     | $      | 25 |   |
|                                                                         |   |                                                     |    |                                                     |   |
| SUPPLEMENTAL DISCLOSURE OF  CASH FLOW INFORMATION                            |   |                                                     |    |                                                     |   |
| Cash paid for interest                                                       |   | 65                                                       |    | 24                                                       |   |
| Conversion of promissory  note to payables                                   |   | 799                                                      |    | —                                                   |   |
| Conversion of accounts  payable to equity                                    |   | 728                                                      |    | —                                                   |   |
| Conversion of accounts  payable to note                                      |   | 260                                                      |    | 600                                                      |   |
| Common Stock issue for  note sale                                            |   | 500                                                      |    | —                                                   |   |

 

Seeaccompanying notes to these financial statements.

 

6

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**1.**                                      **INTERIM FINANCIAL INFORMATION:**

 

The accompanying interim financialstatements are unaudited. However, in the opinion of management, the interimdata includes all adjustments, consisting of normal recurring adjustments,necessary for a fair presentation of the results for the interim period. Theresults of operations for the interim periods presented are not necessarilyindicative of those to be expected for the fiscal year.

 

The financial statements includedherein have been prepared by the Company pursuant to the rules and regulationsof the Securities and Exchange Commission. Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith generally accepted accounting principles have been condensed or omittedpursuant to such rules and regulations.

 

Management believes the disclosures madeare adequate to make the information not misleading and suggest that thesecondensed financial statements be read in conjunction with the financialstatements and notes thereto included in the Company’s Form 10-KSB for thefiscal year ended June 30, 2003.

 

*STOCK OPTIONS*

 

The Company accounts for stock optionsusing the intrinsic value method wherein compensation expense is recognized onstock options granted only for the excess of the market price of the Company’scommon stock over the option exercise price on the day of grant.

 

Some companies also recognizecompensation expense for the fair value of the option right itself. The Companyhas elected not to adopt this accounting method because it requires the use ofsubjective valuation models which the Company believes are not representativeof the real value of the option to either the Company or the optionees.However, the Company is required to disclose the pro forma effect of accountingfor stock options using such a valuation for all options granted. The fairvalue of the options was estimated at the date of grant using a Black-Scholesoption pricing model with the following assumptions:

 
|                    |   | **2004**    |   | **2003**    |   |
|-------------------------|--------|-------------|--------|-------------|--------|
| Risk free interest rate |   | 2.00%-3.51% |   | 2.85%-3.85% |   |
| Expected dividend yield |   | —      |   | —      |   |
| Expected life           |   | 5-10 years  |   | 5-10 years  |   |
| Expected volatility     |   | 99%-238%    |   | 109%-138%   |   |

 

To estimate option lives for thisvaluation, it was assumed that all options vest initially and then areexercised one year subsequent to vesting. Cumulative compensation costrecognized in pro forma net income or loss with respect to options that areforfeited prior to vesting is shown as a reduction of pro forma compensationexpense in the period of forfeiture. Fair value computations are highlysensitive to the assumed volatility factor—the greater the volatility, thehigher the computed fair value of options granted.

 

The total fair value of optionsgranted was computed to be approximately $1,104,000 and $1,084,000for the quarters ended December 31, 2003 and 2002, respectively. These amountsare amortized ratably over the vesting periods of the options or recognized atthe date of grant if no vesting period is required.

 

The following table sets forth theproforma effects of the stock option expense:

 
|                                                      |   | **Six-Months  Ended December 31,** |    |
|-----------------------------------------------------------|--------|------------------------------------|---------|
|                                                      |   | **2003**                           |    | **2002** |   |
|                                                      |   |                               |    |   |   |
| Net loss applicable to  common shareholders - as reported |   | $                                  | (13,827 | ) | $ | (6,325 | ) |
| Effect of stock-based  compensation per SFAS 123          |   | (1,104                             | )       | (1,084 | ) |
| Net loss applicable to  common stockholders - pro forma   |   | $                                  | (14,931 | ) | $ | (7,409 | ) |
|                                                      |   |                               |    |   |   |
| Basic and diluted:                                        |   |                               |    |   |   |
| Loss per share - as  reported                             |   | $                                  | (0.91   | ) | $ | (0.98 | ) |
| Effect of stock-based  compensation per SFAS 123          |   | 0.07                               |    | 0.17 |   |
| Net loss applicable to  common stockholders - pro forma   |   | $                                  | (0.98   | ) | $ | (1.15 | ) |

** **

 

**2.**                                      **LIQUIDITY**

 

TheCompany’s financial statements have been presented on the going concern basis,which contemplates the realization of assets and liquidation of liabilities inthe normal course of business. At December 31, 2003, the Company had a workingcapital deficit of $10,686,000 and a stockholders’ deficit of $8,944,000. TheCompany’s net loss for the six months ended December 31, 2003 was$12,469,000.  These factors raise substantial doubt about the Company’sability to continue as a going concern. At December 31, 2003, the Company wasin default on certain of the terms of its debt and its capital leaseobligations. (See Note 4)

 

TheCompany’s ability to continue as a going concern is dependent upon its abilityto significantly increase its revenue, raise capital necessary to implementits business strategy and ultimately to achieve profitableoperations.  Management’s plans in this regard areset forth below.

 

7

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The Company plans toincrease revenue by pursuing additional right of entry agreements with MDUproperties and by expanding its service offerings, including Internetservices.  The Company has initiateddiscussions with an Internet service provider that uses wireless technology toprovide Internet service.  In addition tothe foregoing plans to increase revenue, the Company has increased its salesand marketing efforts in order to increase subscriber penetration at itsexisting properties.  Until resolutionsto the Company’s disputes related to the asset purchase agreement and itsinvestment in Cable California can be reached, the Company intends to focus ondeveloping its cable assets in the United States, located primarily inCalifornia, subject to the rights of the lender who holds our core assets ascollateral.

 

**3.****                                     ****ACQUISITION OF MINORITY INTEREST IN CABLE CALIFORNIA**

 

**History.**  Since 2002, the Company has pursued astrategy to develop a cable television system in Baja, Mexico.  As part of this strategy, the Companyintended to divest its operating assets in the United States in order to reduceits debt and enhance its balance sheet to enable the Company to achieve itsstrategic goal.  Following extendednegotiations, the Company entered into an asset purchase agreement on January 9,2003, with, among others, dick clark international cable ventures, ltd., aTurks and Caicos entity (“dcicv”), and Las Americas Broadband, Inc., a Coloradocorporation (“Las Americas”), to purchase certain shares of Cable California,S.A. de C.V., a Mexican corporation (“Cable California”), and to acquirecertain assets used in Cable California’s operations.  Cable California possesses a 30-year advanced telecommunicationsbroadband concession from the Mexican government to construct, operate andcommercialize a 750-MHz fiber-optic network providing multi-channel cabletelevision services to residents and businesses in the greater Tijuana, Mexicometropolitan area. Cable California plans to construct a 1,300-mile broadbandnetwork and has completed the first phase of this cable build, including itshead-end, central operations center and cable that serves approximately 1,000customers.

 

Pursuant to the terms of the asset purchaseagreement, dcicv was obligated to deliver to the Company 49% of the votingstock of Cable California, as well as shares representing 90% of the economicinterest in Cable California, and Las Americas was obligated to deliver, amongother things, certain tangible and intangible assets used in Cable California’soperations and to assign to the Company its rights under a $5.0 millionpromissory note issued by Cable California to Las Americas.  In consideration for the shares and assets,the Company issued 2,500,000 shares of its common stock to dcicv, 2,250,000shares to Las Americas, and 250,000 shares to Carlos Bustamante.  The Company also paid Las Americas $250,000in cash.  In addition, the Companyagreed to assume a total of $1,250,000 of debt, liabilities and other financialobligations of Cable California and Las Americas.  Further, the Company took action to reduce the outstandingprincipal amount of a promissory note issued by Las Americas to the Companyfrom $890,276 to $500,000.  The amended note remains collateralized byassets of Las Americas, including its cable television system in Tehachapi,California.  On March 25, 2003, theCompany assigned its rights under the amended note and issued 300,000 shares ofits common stock to a third party in exchange for $500,000.  The Company guaranteed the payment of up to$250,000 under the amended note if Las Americas fails to pay the note and thethird party has fully prosecuted all of its rights and remedies under theamended note and related security agreement.

 

Subsequent to receiving all of the Class Bshares of Cable California, which represent 49% of the voting stock, from dcicvin exchange for the consideration described above, the Company discovered thatthe Class B shares were not properly registered by dcicv with the MexicanFederal Telecommunications Commission (the *ComisionFederal de Telecomunicaciones* or “COFETEL”) and the Secretary ofCommunications and Transportation of Mexico (the *Secretaria de Comunicaciones y Transportes* or “SCT”) asrequired under Mexican law.  The Companynotified dcicv and the other parties to the asset purchase agreement that theClass B shares were not registered appropriately in Mexico.  The Company formed USA Broadband Mexico,S.A. de C.V., a Mexican corporation (“USA Broadband Mexico”), a wholly-ownedsubsidiary of the Company, and requested that the Class B shares be registeredin the name of USA Broadband Mexico. Despite numerous discussions with the parties to the asset purchaseagreement, the Company has been unable to effectuate the registration of theClass B shares in USA Broadband Mexico’s name.

 

The Company also has been unable to acquirethe Class N shares of Cable California, which represent 90.0% of the economicinterest in Cable California, from dcicv pursuant to the terms of the assetpurchase agreement.

 

8

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On December 24, 2003, the Company demandedpayment from Cable California in connection with the terms of the $5.0 millionpromissory note issued by Cable California, which was assigned to the Companyby Las Americas pursuant to the asset purchase agreement.  The Company has not received any funds fromCable California relating to the $5.0 million note, but intends to pursue itsrights under the note to the fullest extent permitted by law.

 

**Legal Proceedings.**  OnDecember 16, 2003, dcicv and Las Americas, filed a complaint against theCompany, its chief financial officer, principal shareholders and others in theSuperior Court of the State of California, County of San Diego, CentralDivision.  In the complaint, Las Americas and dcicv allege that theCompany breached certain terms of the asset purchase agreement.  LasAmericas and dcicv also allege in the complaint that the Company and the otherdefendants made fraudulent representations, and that the Company negligentlymisrepresented certain information related to its ability to purchase andoperate its interest in Cable California.  Las Americas and dcicv allegedamages, in the aggregate, in excess of $11,250,000.  On January 21, 2004, the Company filed a motion to dismiss the complaintfiled by Las Americas and dcicv, arguing that any lawsuit relating to the assetpurchase agreement must be filed in Delaware pursuant to the terms of the assetpurchase agreement.  A court hearing theCompany’s motion to dismiss is scheduled on February 27, 2004.

 

On January 21, 2004, the Company filed a complaint against dcicv, LasAmericas, Cable California, Richard Lubic, Martin Weisberg, Dick Clarkand Mr. Bustamante (collectively, the “Defendants”), in the Court ofChancery of the State of Delaware, in and for New Castle County.  Each ofthe claims set forth in the complaint arise out of or in connection with theasset purchase agreement.

 

In its complaint, the Company alleges, among other things, that each ofthe Defendants committed common law fraud and conspired to commit fraud againstthe Company by carrying out a scheme which was intended to and did: (i) deceivethe Company with respect to many issues material to the asset purchaseagreement; (ii) artificially inflate the business prospects of CableCalifornia; and (iii) cause the Company to enter into the asset purchaseagreement.  Further, the Company alleges that each of the Defendantsengaged in a continuous course of conduct to conceal adverse materialinformation about the business, operations and future prospects of Cable California. The Company also alleges that the Defendants’ conduct was in violation of theDelaware Securities Act and constituted negligent misrepresentation.

 

In addition to the foregoing, the Company alternatively alleges in itscomplaint that each of dcicv, Cable California, Las Americas and Mr. Bustamantebreached the terms of the asset purchase agreement and the implied covenant ofgood faith and fair dealing.  The Company bases its allegations on, amongother things, that the Company did not receive an unqualified interest in 49%of the voting stock and did not receive 90% of the economic interest in CableCalifornia and that each of the named Defendants: (i) refused to take actionsnecessary or appropriate to comply with the terms of the asset purchase agreement;(ii) refused to cooperate with the Company’s efforts to have 49% of CableCalifornia’s voting stock registered in the Company’s or USA Broadband Mexico’sname with COFETEL and the SCT; and (iii) interfered with the Company’s effortsto secure financing to be used to expand Cable California’s operations.

 

Because of the Defendants’ alleged wrongful conduct and unlawful acts,the Company has asked the Delaware Court of Chancery to rescind the assetpurchase agreement and put the Company in the position it would have been inhad it not entered into the asset purchase agreement or, in the alternative, toaward it damages in excess of $15 million. The Company intends to prosecute vigorously the case and its rights underthe asset purchase agreement.

 

Based on the allegations made in the complaints related to the assetpurchase agreement, the Company has determined that any further expendituresrelating to Cable California and its operations would not be in the Company’sbest interest.  Therefore, the Companyhas determined to cease any further involvement in Cable California’soperations.

 

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The Company’s investment in Cable Californiais accounted for on the equity method.  The difference between the basis ofthe Company’s investment and its proportional interest in the Company’s netequity of approximately $2,502,000is being amortized over seven years and resulted in an expense adjustment toequity income for the three months ended December 31, 2003 of $152,000.  The Company’sestimated share of the net deficit for the three months ended December 31, 2003was approximately $440,000.  (See Note 8 – Impairment of Assets.)

 

**4.****                                     ****NOTES PAYABLE**

 

As of December 31, 2003, the Companyhad secured debt financing in the amount of $4,000,000 and accrued interest of $782,000 from a private investor. Thefinancing is evidenced by a convertible promissory note and secured by a firstpriority lien in all or substantially all of the Company’s assets and theassets of its subsidiaries.  The promissory note bears interest at a rateequal to the prime rate plus 2% and matures on March 4, 2004, subject tothe Company’s ability to extend the maturity for up to 60 days, provided,however, that if the Company extends the maturity date, the interest rateincreases 1% each month the loan is outstanding after March 4, 2004, up to amaximum of 12%. The outstanding principal and accrued interest under the noteis convertible, in whole or in part, at the election of the lender, into that numberof shares of common stock equal to the outstanding principal and accruedinterest divided by $1.00.

 

Between October 2002 and July 2003,the Company issued bridge notes having a total principal amount of $2,050,000to sophisticated investors.  In connection with the bridge loans evidencedby these notes, the Company issued to the bridge note investors, warrants topurchase a total of 1,025,000 shares of the Company’s common stock. Eachwarrant expires five years from its date of issuance. Each bridge note bearsinterest at 18% per annum and matures on the earlier of: (i) the last day ofthe sixth month following the signing of the promissory note or (ii) on thedate the Company receives permanent financing in the amount of at least$3,000,000. If the Company obtains permanent financing, each note holder hasthe right to convert all, but not part, of the outstanding principal andaccrued interest on the note into shares of the Company’s common stock orpreferred stock issued in connection with the permanent financing at a discountof 10% to the offering price. Additionally, for every month that any principalpayment is overdue, each note holder will receive an additional warrant topurchase 10,000 shares of the Company’s common stock per $100,000 in principalamount, outstanding under the note, or pro-rata portion thereof, having anexercise price of the lesser of $1.00 or the average bid price of the Company’scommon stock for the preceding 20 trading days. These warrants have not beenissued. The interest rate increases to 24% per annum  on the outstanding principal balance after the note matures.  Remaining principal balance on these notesat December 31, 2003 was $975,000and accrued interest on the notes is approximately $137,000. The indebtedness evidenced by the bridge notes issecured by certain of the Company’s assets and the assets of the Company’ssubsidiaries. This security interest is subordinated to the $4 million secureddebt financing.

 

As of December 31, 2003 the Companyhad an unsecured note payable outstanding in the principal amount of $130,000.The holder of this note, Theodore Swindells, beneficially owns over 5% of theCompany’s common stock. The note was issued on March 4, 2002 and boreinterest at a rate of 10% per year with a due date of October 31, 2002. OnOctober 18, 2002, the Company entered into a new loan agreement with Mr.Swindells, which extended the due date to April 30, 2003, under the sameterms and conditions as the original note.  In September 2003, the Companyand Mr. Swindells agreed to extend the due date of this loan agreement to April30, 2004 under the same terms and conditions as the original note.

 

As ofDecember 31, 2003, the Company owed a total of approximately $1,417,000 to Geneva AssociatesMerchant Banking Partners, an entity in which Russell Myers, one of theCompany’s directors, has an interest.  The amount owed to GenevaAssociates Merchant Banking Partners and its associates is due under areimbursement agreement under which Geneva Associates Merchant Banking Partnersand its associates, through a financial institution, issued a letter of creditto a bank to be used as security for a line of credit the Company had with thebank.  Of this amount owed, $1,050,000represents principal on the two lines of credit, and $367,000 represents accrued and unpaid interest and fees. The outstanding balance

 

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under the reimbursement agreementbears interest at a rate of 16% per year.  The Company is currently indefault under the reimbursement agreement.  Geneva Associates MerchantBanking Partners has agreed to convert the outstanding principal and interestof the debt into shares of common stock, subject to the Company agreeing toconvert the Series B and Series C preferred stock of the Company owned byGeneva Associates Merchant Banking Partners and its affiliates into shares ofthe Company’s Series A preferred stock.  The Company and Geneva AssociatesMerchant Banking Partners are currently negotiating the terms of theconversions.

 

On September 29, 2000, two of theCompany’s indirect subsidiaries, Direct Digital Midwest, Inc. (DDM) and CPDakotas MDU, LLC (CPD), borrowed an aggregate of $2 million from LaSalle BankNational Association.  The loan was evidenced by a promissory note andsecured by the assets of each of DDM and CPD.  Additionally, as additionalcollateral for the loan, Cable Concepts pledged all of the stock of DDM toLaSalle Bank. Neither the Company nor Cable Concepts guaranteed the loan toLaSalle Bank. After DDM and CPD defaulted on the loan, LaSalle foreclosed onall of the assets of DDM and CPD and the stock of DDM to satisfy the loan. OnMay 9, 2003, LaSalle Bank auctioned all of the shares of DDM to satisfy theloan. LaSalle Bank was the highest bidder at auction. The price wasundisclosed. The value of the collateral securing the loan was insufficient tocover the entire amount then due under the loan. To date, LaSalle Bank has notpursued any action or made any claim against the Company or Cable Concepts forthe amount of any shortfall.

 

At December 31, 2003, the Company hada promissory note to an individual in the principal amount of $376,000 andaccrued interest of $11,000 issued in connection with the sale of Right ofEntry Agreements to Digital Services Inc., an unrelated entity. The note bearsinterest in the amount of 6% per annum and is due the earlier of twelve monthsfrom the date of the loan of March 20,2003, consummation of permanent financing exceeding $3,000,000, or saleof the security interest when the proceeds exceed $2,000,000.

 

On November 21, 2003, the Companyconverted $188,000 of accounts payable owed to Maroon Bells Capital, LLC into asecured promissory note. The one-year note due on November 20, 2004 bearsinterest at the rate of 8% per annum. The note is secured by all of the assets of Cable Concepts, Inc. and allof the assets of USAB Video Corp II. The security interest in the collateral issubordinate to any prior perfected security interest in the collateral.  Maroon Bells Capital is a financial advisorto the Company that is controlled by Paul Moore, a shareholder with greaterthan 5% interest in the common shares of the Company.

 

At December 31, 2003, the Company owed$614,000 in aggregate principal and interest on several equipment leases. Theleases are secured by equipment and the Company is in default on the leases.

 

At December 31, 2003, the Company hada note payable to a vendor in the amount of $124,000, including principal and interest. Interest on the noteis 18% per annum.

 

**5.****                                     ****COMMITMENTS AND CONTINGENCIES:**

 

On December 3, 2003, Richard G. Lubic and DLCommunications, Inc., a Nevada corporation (“DL Communications”), filed acomplaint against USA Broadband in the Superior Court of the State ofCalifornia, County of San Diego, Central Division.  In the complaint, Mr.Lubic and DL Communications allege that the Company breached certain terms ofthe Management Services Agreement dated February 12, 2003 (the “ManagementAgreement”), among Mr. Lubic, DL Communications and the Company.  Mr. Lubic and DL Communications alsoallege that the Company is indebted to them in an amount in excess of $750,000and that the Company was unjustly enriched by a like amount.  As disclosedin a Form 8-K dated August 12, 2003, the Company’s board of directorsvoted to terminate the Management Agreement and Lubic’s services to the Companyon August 12, 2003 because Mr. Lubic failed to cure breaches of theManagement Agreement within the cure period specified in the Management Agreement. The Company intends to defend against the suit vigorously and answered thecomplaint, asserted numerous affirmative defenses to the claims being pursuedby Mr. Lubic and DL Communications and issued discovery requests in earlyJanuary 2004.

 

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On December 16, 2003, dcicv and Las Americas filed a complaintagainst the Company, its chief financial officer, principal shareholders andothers in the Superior Court of the State of California, County of San Diego,Central Division.  In the complaint, Las Americas and dcicv allege thatthe Company breached certain terms of the asset purchase agreement.  LasAmericas and dcicv also allege in the complaint that the Company and the otherdefendants made fraudulent representations, and that the Company negligentlymisrepresented certain information related to its ability to purchase andoperate its interest in Cable California.  Las Americas and dcicv allegedamages, in the aggregate, in excess of $11,250,000.  On January 21, 2004, the Company filed a motion to dismiss thecomplaint filed by Las Americas and dcicv, arguing that any lawsuit relating tothe asset purchase agreement must be filed in Delaware pursuant to the terms ofthe asset purchase agreement.  A courthearing the Company’s motion to dismiss is scheduled for February 27, 2004.

 

On January 21, 2004, the Company filed a complaint against dcicv, LasAmericas, Cable California, Richard Lubic, Martin Weisberg, Dick Clarkand Mr. Bustamante (collectively, the “Defendants”), in the Court ofChancery of the State of Delaware, in and for New Castle County.  Each ofthe claims set forth in the complaint arise out of or in connection with theasset purchase agreement.

 

In its complaint, the Company alleges, among other things, that each ofthe Defendants committed common law fraud and conspired to commit fraud againstthe Company by carrying out a scheme which was intended to and did: (i) deceivethe Company with respect to many issues material to the asset purchase agreement;(ii) artificially inflate the business prospects of Cable California; and (iii)cause the Company to enter into the asset purchase agreement.  Further,the Company alleges that each of the Defendants engaged in a continuous courseof conduct to conceal adverse material information about the business,operations and future prospects of Cable California.  The Company alsoalleges that the Defendants’ conduct was in violation of the DelawareSecurities Act and constituted negligent misrepresentation.

 

In addition to the foregoing, the Company alternatively alleges in itscomplaint that each of dcicv, Cable California, Las Americas and Mr. Bustamantebreached the terms of the asset purchase agreement and the implied covenant ofgood faith and fair dealing.  The Company bases its allegations on, amongother things, that the Company did not receive an unqualified interest in 49%of the voting stock and did not receive 90% of the economic interest in CableCalifornia and that each of the named Defendants: (i) refused to take actionsnecessary or appropriate to comply with the terms of the asset purchaseagreement; (ii) refused to cooperate with the Company’s efforts to have 49% ofCable California’s voting stock registered in the Company’s or USA Broadband Mexico’sname with COFETEL and the SCT; and (iii) interfered with the Company’s effortsto secure financing to be used to expand Cable California’s operations.

 

Because of the Defendants’ alleged wrongful conduct and unlawful acts,the Company has asked the Delaware Court of Chancery to rescind the assetpurchase agreement and put the Company in the position it would have been inhad it not entered into the asset purchase agreement or, in the alternative, toaward it damages in excess of $15 million. The Company intends to prosecute vigorously the case and its rightsunder the asset purchase agreement.

 

Based on the allegations made in the complaints related tothe asset purchase agreement, the Company has determined that any furtherexpenditures relating to Cable California and its operations would not be inthe Company’s best interest.  Therefore,the Company has determined to cease any further involvement in CableCalifornia’s operations.

 

On December 23, 2003, the Company received notice that onDecember 10, 2003, a decision was issued in a binding arbitration hearing thatwas held on November 10, 2003, in Denver, Colorado, to mediate a disputebetween Cable Concepts and Archstone Communities Trust (“Archstone”).  Thearbitration decision upheld Archstone’s request to terminate an agreementbetween Cable Concepts and Archstone under which Cable Concepts provided cableservices to Ashton Place, a condominium complex in San Jose, CA, owned byArchstone, pursuant to a disputed revenue share payment of less than $2,000allegedly paid late by the Company to Archstone.  In December 2003, CableConcepts serviced

 

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approximately390 subscribers at Ashton Place. On February 4, 2004, the arbitrator rendered afinal award terminating the right of entry agreement between Cable Concepts andArchstone under which Cable Concepts provided cable services to Ashton Placeand requiring Cable Concepts to pay attorneys and other fees in connection withthe arbitration of approximately $47,000. (See Note 8-Impairment of Assets)

 

On November 25, 2003, James Froisland,a former consultant to the Company, filed a lawsuit against the Company in KaneCounty, Illinois.  Mr. Froisland seeksbreach of contract damages in the amount of $65,000 plus pre-judgment interestat the rate of 5% per annum and 15,000 vested options in the Company’sstock.  In addition, the lawsuit allegesbreach of an alleged oral promise by the Company to provide Mr. Froisland50,000 to 75,000 additional stock options. The Company believes that it has meritorious defenses to the allegationsand is attempting to negotiate with the plaintiff to resolve the matter.

 

In February 2004, the Company agreedto pay Grant Miller approximately $65,000 and provide his health benefits forone year in connection with his resignation from the Company.

 

On November 5, 2003, Cable Conceptssettled a lawsuit filed by L.A. Commercial Group, Inc. in February 2003.  L.A. Commercial Group had obtained a defaultjudgment against Cable Concepts in the amount of approximately $67,000.  Pursuant to the terms of the settlement,Cable Concepts agreed to pay L.A. Commercial Group a total of $40,000, with$1,000 payments due in monthly installments beginning in November 2003.

 

On October 22, 2003, a complaint wasfiled against the Company in the Superior Court of California, County of SanDiego, by the Company’s landlord for its former office space located inCoronado, California. The complaint alleges that the Company breached theoffice lease by vacating the leased premises prior to expiration of the term ofthe lease and for alleged damages to the leased premises.  The plaintiffrequests damages in the aggregate amount of $434,500 to be awarded, an amountthat reflects rental fees on the remaining term of the lease of approximatelyfour years.  The Company believes that it has meritorious defenses to theallegations and is attempting to negotiate with the plaintiff to resolve thematter.

 

In March 2002, USAB Video Corp. II,Inc., a wholly-owned subsidiary of the Company, entered into an asset purchaseagreement with Verizon Media Ventures, Inc. and GTE Southwest Incorporated.After purchasing a portion of the assets pursuant to the agreement, in June2002, USAB Video Corp. II did not complete the purchase of the remainingassets. In connection therewith, the Company accrued a $250,000 liability onits financial statements, representing the amount of a deposit securingperformance under the purchase agreement.  On September 24, 2003, VerizonMedia Ventures, Inc. and GTE Southwest incorporated filed a complaint againstthe Company and USAB Video Corp. II in the Supreme Court of the State of NewYork, County of New York. In the complaint, Verizon and GTE allege that USABVideo Corp. II breached the purchase agreement and that the Company, byguaranteeing USAB Video Corp. II’s performance under the agreement, was alsoliable for USAB Video Corp. II’s breach. The complaint further alleges thatVerizon and GTE suffered losses and damages in excess of $1.023 million. TheCompany and USAB Video Corp. II have retained counsel in this matter.  TheCompany intends to vigorously defend against the allegations made.

 

**6.****                                     ****STOCKHOLDERS’ EQUITY:**

 

As of December31, 2003, a vendor of the Company, converted accounts payable in the amount of$54,000 into 68,517 shares of common stock, at the rate of $0.92 per share.

 

As of December23, 2003, a vendor of the Company converted a debt amount of $150,000 into163,043 shares of common stock, at the rate of $0.92 per share.

 

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As of December16, 2003, Edward Mooney, a related party of the Company, converted an accountspayable in the amount of $25,000 into 27,174 shares of common stock, at therate of $0.92 per share.

 

On November21, 2003, Maroon Bells Capital LLC, a financial advisor to the Company that iscontrolled by Paul Moore who is a shareholder with greater than 5% of theCompany’s outstanding common stock, converted accounts payable in the amount of$500,000 into 454,550 shares of common stock, at the rate of $1.10 pershare.  In addition, the Companyconverted a liability owed to Maroon Bells Capital into a secured one-yearnote, with a principal amount of $188,000, bearing interest at 8% perannum.  (See Notes Payable)

 

As of December31, 2003, the Company issued 15,000 shares of common stock at the rate of $1.00per share to a consultant in exchange for services provided to the Company. Theconsultant was also issued warrants to purchase 15,000 shares of common stock atthe rate of $1.00 per common share.

 

On October 8, 2003, the Companyconverted a note payable due to its outside counsel in connection with unpaidlegal fees and expenses in the aggregate amount of $630,000.  The Company converted the note into 686,000shares of common stock at a rate of $0.92 per share.

 

**7.****                                     ****ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS:**

 

As a result of the Company’s businessdecision to focus on providing video, data and Internet service in California,the Company decided to divest itself of assets in other regions. In the fiscalperiod ended June 30, 2002, the Company reclassified the properties to be soldas Assets Held for Sale. Income from these properties is classified as “Incomefrom Discontinued Operations.”  In the three and six-month period endedDecember 31, 2003 there was no income or loss recognized on discontinuedoperations. The losses for the three- and six-month period ended December 31,2002 were $439,000 and $554,000, respectively.

 

**8.****                                     ****IMPAIRMENT OF ASSETS:**

 

Impairment of Long-LivedAssets—In the event that facts and circumstances indicate that the cost ofassets may be impaired, an evaluation of recoverability is performed. If anevaluation is required, the estimated future undiscounted cash flows associatedwith the asset is compared to the asset’s carrying amount to determine if awrite-down to market or discounted cash flow value is required.

 

During the six-month periodended December 31, 2003, due to the uncertainty and litigation with respect tothe Company’s investment in Cable California, the Company reduced the carryingvalue of the asset to zero and wrote-off its intercompany receivable balancewith Cable California. The total impairment loss and loss from reducing thereceivable to fair value less cost to sell for the six months ended December31, 2003 was $5,127,000.

 

In November, 2003 upon theinitiation of the arbitration of Ashton Place, the Company reduced the carryingvalue of Ashton Place to fair value less cost to sell. The total impairment ofthe Right of Entry Agreement was $461,000. (See Commitments and Contingencies)

 

The Company reduced thecarrying value of several Right of Entry Agreements to fair value less cost tosell during the six-month period ended December 31, 2003. The impairment onother Right of Entry Agreements was approximately $142,000.

 

Fair value was determinedbased on established sales contracts for similar assets. The total impairmentloss and loss from reducing assets held for sale to the fair value less cost tosell for the six-months ended December 31, 2003 was $142,000

 

Total impairment of longlived assets for the six-months ended December 31, 2003 was approximately$5,868,000.

 

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**9.****                                     ****SUBSEQUENT EVENTS:**

 

On February 12, 2004, the Board ofDirectors appointed Mr. Bhasker Panchal Interim Chief Executive Officer andInterim Chief Financial Officer of the Company.  Prior to assuming these positions, from November 2001 untilFebruary 2004 Mr. Panchal served as a managing director of Cable Concepts andas a controller to the Company and Cable Concepts.  During the period 1998-2001, Mr. Panchal worked for L-3Communications Inc., where he served as Director of Finance and Administrationfor the Prime Wave Communications division and as a controller for the EMPSystems division.  Prior to beginningwork at L-3 Communications, Mr. Panchal worked for four years at Ceridian Inc.,where he was responsible for managing tax filings and tax deposits for Fortune100 clients.

 

Grant Miller resigned from hisposition as chief financial officer effective January 15, 2004.

 

Daniel Villanueva, who was elected tothe board of directors on November 17, 2003, submitted his resignation as amember of the board of directors effective January 20, 2004.

 

Jack Kemp, who was elected to theboard of directors on November 17, 2003, submitted his resignation as a memberof the board of directors effective January 30, 2004.

 

Arturo Alemany resigned from hispositions as chief executive officer, director and chairman of the board ofdirectors effective January 31, 2004.

 

Margot Ritcher resigned from herposition as controller effective February 19, 2004.

 

On February 5, 2004, Quorum Properties, a California corporation, QWST,LLC, a California limited liability company, and The Westgate LLC, a Californialimited liability company, named Cable Concepts, Direct Digital, DigitalServices, Inc., Digital Direct, form of entity unknown, and individuals GaryLangendoen and Jay Gordon, who are former employees of Cable Concepts, in acomplaint for breach of contract and damages in the amount approximately$36,000.  The Company intends to defendagainst the suit vigorously.  Further,the Company intends to file a cross complaint against Gary Langendoen, JayGordon, Digital Services, Inc. Digital Direct, and Trevor Owns, another formeremployee of Cable Concepts.

 

The loanof $4,000,000 received by the Company in September 2003 is secured bysubstantially all of the Company’s assets. Attorneys for the lender informed the Company that they areinvestigating whether recent events involving the Company constitute a defaultunder the terms of the applicable loan documents and, if so, how thelender’s rights may be protected.  Amongother matters, they have advised the Company that they are analyzing thearbitration decision issued on December 10, 2003 in Denver, Colorado, to upholdArchstone’s request to terminate an agreement between Cable Concepts andArchstone under which Cable Concepts provided cable services to Ashton Place, acondominium complex in San Jose, California, owned by Archstone.

 

**ITEM 2—MANAGEMENT’S DISCUSSION ANDANALYSIS OR PLAN OF OPERATION**

 

**General**

 

USA Broadband, Inc. (OTC: USBU)through its subsidiary Cable Concepts Inc. (dba Direct Digital Communications,“DDC”) provides “private cable” television services to subscribers residing inmultiple dwelling units (MDUs) such as apartments, condominiums and othershared housing facilities. Unless otherwise indicated, throughout this Form10-QSB references to “its,” “the Company,” “USAB” or “USA Broadband” shall meancollectively USA Broadband, Inc. and its subsidiaries.  References to“Cable Concepts,” “Direct Digital” or “DDC” shall mean its subsidiary, CableConcepts, Inc., dba Direct Digital Communications.

 

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**Acquisition of Assets of Cable CaliforniaS.A. de C.V.**

 

**History.**  Since 2002, the Company has pursued astrategy to develop a cable television system in Baja, Mexico.  As part of this strategy, the Companyintended to divest its operating assets in the United States in order to reduceits debt and enhance its balance sheet to enable the Company to achieve itsstrategic goal.  Following extendednegotiations, the Company entered into an asset purchase agreement on January9, 2003, with, among others, dick clark international cable ventures, ltd., aTurks and Caicos entity (“dcicv”), and Las Americas Broadband, Inc., a Coloradocorporation (“Las Americas”), to purchase certain shares of Cable California,S.A. de C.V., a Mexican corporation (“Cable California”), and to acquirecertain assets used in Cable California’s operations.  Cable California possesses a 30-year advanced telecommunicationsbroadband concession from the Mexican government to construct, operate and commercializea 750-MHz fiber-optic network providing multi-channel cable television servicesto residents and businesses in the greater Tijuana, Mexico metropolitan area.Cable California plans to construct a 1,300-mile broadband network and hascompleted the first phase of this cable build, including its head-end, centraloperations center and cable that serves approximately 1,000 customers.

 

Pursuant to the terms of the asset purchaseagreement, dcicv was obligated to deliver to the Company 49% of the votingstock of Cable California, as well as shares representing 90% of the economicinterest in Cable California, and Las Americas was obligated to deliver, amongother things, certain tangible and intangible assets used in Cable California’soperations and to assign to the Company its rights under a $5.0 millionpromissory note issued by Cable California to Las Americas.  In consideration for the shares and assets,the Company issued 2,500,000 shares of its common stock to dcicv, 2,250,000shares to Las Americas, and 250,000 shares to Carlos Bustamante.  The Company also paid Las Americas $250,000in cash.  In addition, the Companyagreed to assume a total of $1,250,000 of debt, liabilities and other financialobligations of Cable California and Las Americas.  Further, the Company took action to reduce the outstandingprincipal amount of a promissory note issued by Las Americas to the Companyfrom $890,276 to $500,000.  The amended note remains collateralized by assetsof Las Americas, including its cable television system in Tehachapi,California.  On March 25, 2003, theCompany assigned its rights under the amended note and issued 300,000 shares ofits common stock to a third party in exchange for $500,000.  The Company guaranteed the payment of up to$250,000 under the amended note if Las Americas fails to pay the note and thethird party has fully prosecuted all of its rights and remedies under theamended note and related security agreement.

 

Subsequent to receiving all of the Class Bshares of Cable California, which represent 49% of the voting stock, from dcicvin exchange for the consideration described above, the Company discovered thatthe Class B shares were not properly registered by dcicv with the MexicanFederal Telecommunications Commission (the*Comision Federal de Telecomunicaciones* or “COFETEL”) and theSecretary of Communications and Transportation of Mexico (the*Secretaria de Comunicaciones y Transportes*or “SCT”) as required under Mexican law. The Company notified dcicv and the other parties to the asset purchaseagreement that the Class B shares were not registered appropriately inMexico.  The Company formed USABroadband Mexico, S.A. de C.V., a Mexican corporation (“USA Broadband Mexico”),a wholly-owned subsidiary of the Company, and requested that the Class B sharesbe registered in the name of USA Broadband Mexico.  Despite numerous discussions with the parties to the assetpurchase agreement, the Company has been unable to effectuate the registrationof the Class B shares in USA Broadband Mexico’s name.

 

The Company also has been unable to acquirethe Class N shares of Cable California, which represent 90.0% of the economicinterest in Cable California, from dcicv pursuant to the terms of the assetpurchase agreement.

 

On December 24, 2003, the Company demandedpayment from Cable California in connection with the terms of the $5.0 millionpromissory note issued by Cable California, which was assigned to the Companyby Las Americas pursuant to the asset purchase agreement.  The Company has not received any funds fromCable California relating to the $5.0 million note, but intends to pursue itsrights under the note to the fullest extent permitted by law.

 

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**Legal Proceedings.**  OnDecember 16, 2003, dcicv and Las Americas filed a complaint against theCompany, its chief financial officer, principal shareholders and others in theSuperior Court of the State of California, County of San Diego, CentralDivision.  In the complaint, Las Americas and dcicv allege that theCompany breached certain terms of the asset purchase agreement.  LasAmericas and dcicv also allege in the complaint that the Company and the otherdefendants made fraudulent representations, and that the Company negligently misrepresentedcertain information related to its ability to purchase and operate its interestin Cable California.  Las Americas and dcicv allege damages, in theaggregate, in excess of $11,250,000.  OnJanuary 21, 2004, the Company filed a motion to dismiss the complaint filed byLas Americas and dcicv, arguing that any lawsuit relating to the asset purchaseagreement must be filed in Delaware pursuant to the terms of the asset purchaseagreement.  A court hearing the Company’smotion to dismiss is scheduled for February 27, 2004.

 

On January 21, 2004, the Company filed a complaint against dcicv, LasAmericas, Cable California, Richard Lubic, Martin Weisberg, Dick Clarkand Mr. Bustamante (collectively, the “Defendants”), in the Court ofChancery of the State of Delaware, in and for New Castle County.  Each ofthe claims set forth in the complaint arise out of or in connection with theasset purchase agreement.

 

In its complaint, the Company alleges, among other things, that each ofthe Defendants committed common law fraud and conspired to commit fraud againstthe Company by carrying out a scheme which was intended to and did: (i) deceivethe Company with respect to many issues material to the asset purchaseagreement; (ii) artificially inflate the business prospects of CableCalifornia; and (iii) cause the Company to enter into the asset purchaseagreement.  Further, the Company alleges that each of the Defendantsengaged in a continuous course of conduct to conceal adverse materialinformation about the business, operations and future prospects of CableCalifornia.  The Company also alleges that the Defendants’ conduct was inviolation of the Delaware Securities Act and constituted negligentmisrepresentation.

 

In addition to the foregoing, the Company alternatively alleges in itscomplaint that each of dcicv, Cable California, Las Americas and Mr. Bustamantebreached the terms of the asset purchase agreement and the implied covenant ofgood faith and fair dealing.  The Company bases its allegations on, among otherthings, that the Company did not receive an unqualified interest in 49% of thevoting stock and did not receive 90% of the economic interest in CableCalifornia and that each of the named Defendants: (i) refused to take actionsnecessary or appropriate to comply with the terms of the asset purchaseagreement; (ii) refused to cooperate with the Company’s efforts to have 49% ofCable California’s voting stock registered in the Company’s or USA BroadbandMexico’s name with COFETEL and the SCT; and (iii) interfered with the Company’sefforts to secure financing to be used to expand Cable California’s operations.

 

Because of the Defendants’ alleged wrongful conduct and unlawful acts,the Company has asked the Delaware Court of Chancery to rescind the assetpurchase agreement and put the Company in the position it would have been inhad it not entered into the asset purchase agreement or, in the alternative, toaward it damages in excess of $15 million. The Company intends to prosecute vigorously the case and its rightsunder the asset purchase agreement.

 

Based on the allegations made in the complaints related to the assetpurchase agreement, the Company has determined that any further expendituresrelating to Cable California and its operations would not be in the Company’sbest interest.  Therefore, the Companyhas determined to cease any further involvement in Cable California’soperations.

 

**Critical Accounting Policies and Estimates**

 

The Company’s condensed financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States, which require us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosures. The estimates the Company uses are basedupon its historical experiences combined with management’s

 

17

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understanding of current facts and circumstances. Some ofthe Company’s accounting policies are considered critical because they are importantto the portrayal of the Company’s financial condition and the results of theCompany’s operations and because they require significant or complex judgmentson the part of management. The Company believes that its critical accountingpolicies are those relating to deferred income taxes, allowances for doubtfulaccounts and recoverability of long-lived assets.

 

Deferred income taxes are recognizedfor the expected tax consequences in future years stemming from differencesbetween the values of assets and liabilities for tax and financial reportingpurposes, based upon enacted tax laws and statutory tax rates applicable to theperiods in which the differences are expected to affect taxable income. Oursignificant deferred tax assets relate to net operating loss carry forwards,allowance for bad debts and deferred revenue. The Company has established avaluation allowance to reduce deferred tax assets to the net amount expected tobe recovered in future periods. The estimates for deferred tax assets and thecorresponding valuation allowance require management to exercise complexjudgments. The Company periodically reviews and adjusts those estimates basedupon the most current information available. However, because therecoverability of deferred tax assets is directly dependent upon its futureoperating results, actual recoverability of deferred tax assets may differmaterially from its estimates.

 

The Company’s allowance for doubtfulaccounts reflects a reserve that reduces customer accounts receivable to thenet amount estimated to be collectible. Estimating the credit worthiness ofcustomers and the recoverability of customer accounts requires us to exerciseconsiderable judgment. In estimating uncollectible amounts, the Companyconsiders factors such as general economic and industry-specific conditions,historical customer performance and anticipated customer performance. While theCompany considers its processes to be adequate to effectively quantify itsexposure to doubtful accounts, changes in economic, industry or specificcustomer conditions may require the Company to adjust its allowance fordoubtful accounts.

 

The Company’s long-lived assets willfrom time to time be analyzed for impairment when events and conditionsindicate that an analysis is needed. Factors that the Company considers inperforming an impairment analysis are current and historical agreements to sellcomparable assets, its current business strategy and its expectations of futurecash flows for the asset or asset group being analyzed. Future changes in theeconomic conditions, the regulatory environment and the Company’s strategiesmay materially affect its estimate of the recoverability of fixed assets.During the six-month period ended December 31, 2003, the Company reduced the carryingvalue of long lived assets to the fair-market value less selling expenses inthe amount of approximately $5,868,000. (See Item 5)

 

The Company accounts for stock optionsusing the intrinsic value method, under which compensation expense isrecognized on stock options granted only for the excess of the market price ofits common stock over the option exercise price on the day of grant. All of theCompany’s options are granted at amounts equal to or higher than the fair valueof its stock, so no compensation expense is recorded.

 

The Company uses the Black-Scholesoption pricing model to compute the estimated fair market value ofoptions.  To estimate option lives for this valuation, it was assumed thatall options vest initially and then are exercised one year subsequent tovesting. Cumulative compensation cost recognized in pro forma net income orloss with respect to options that are forfeited prior to vesting is shown as areduction of pro forma compensation expense in the period of forfeiture. Fair valuecomputations are highly sensitive to the assumed volatility factor the greaterthe volatility, the higher the computed fair value of options granted. The Company discloses the pro forma effect of the compensation expense in thenotes to the financial statements (See Note 1)

 

The following table sets forth theCompany’s selected operations data for the three-month periods ended December31, 2003 and 2002.

** **
|                                          |   | **Three  Months  Ended December  31, 2003** |       | **% of  Revenues** |       | **Three  Months  Ended December  31, 2002** |       | **% of Revenues** |       | **% Change  from  December 31, 2002  to December 31,  2003** |       |
|-----------------------------------------------|--------|---------------------------------------------|------------|--------------------|------------|---------------------------------------------|------------|-------------------|------------|--------------------------------------------------------------|------------|
|                                          |   | **(unaudited)**                             |       |               |       | **(unaudited)**                             |       |              |       |                                                         |       |
|                                          |   |                                        | ** ** |               | ** ** |                                        | ** ** |              | ** ** |                                                         | ** ** |
| Revenues                                      |   | $                                           | 234        |               | 100        | %                                           | $          | 344               |       | 100                                                          | %          | (32 | )% |
| Cost of revenues                              |   | 50                                          |       | 21                 | %          | 230                                         |       | 67                | %          | (78                                                          | )%         |
| Gross profit                                  |   | 184                                         |       | 79                 | %          | 114                                         |       | 33                | %          | 61                                                           | %          |
| Selling, general and  administrative expenses |   | 1,411                                       |       | 603                | %          | 2,084                                       |       | 606               | %          | (32                                                          | )%         |
| Depreciation and  amortization                |   | 98                                          |       | 42                 | %          | 365                                         |       | 106               | %          | (73                                                          | )%         |
| Impairment of Long Lived  Assets              |   | 5,585                                       |       | 11,170             | %          | —                                      |       | —            |       | —                                                       |       |
| Total operating expense                       |   | 7,094                                       |       | 3,032              | %          | 2,449                                       |       | 712               | %          | 190                                                          | %          |
| Loss from operations                          |   | $                                           | (6,910     | )                  | (2,953     | )%                                          | $          | (2,335            | )          | (679                                                         | )%         | 196 | % |

 

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The increase in the Company’s revenuefor the three-month period ended December 31, 2003 compared to the comparableperiod in 2002 was due, in part, to anincrease in the revenue per subscriber due to the improved collections programand shifts in subscriber composition.

 

The decrease in the Company’s cost ofrevenue for the three-month period ended December 31, 2003 to the comparableperiod in 2002 was primarily due the Company’s decision to utilize internalresources for customer service and billing services rather than outsourcing theservices.

 

The Company’s selling, general andadministrative expenses were generally consistent with the three-month periodended December 31, 2003 the three-month period ended December 31, 2002.

 

The following table sets forth theCompany’s selected operations data for the six-month periods ended December 31,2003 and 2002.

 
|                                          |   | **Six  Months Ended  December 31, 2003** |       | **% of  Revenues** |       | **Six  Months Ended  December  31, 2002** |       | **% of  Revenues** |       | **% Change  from   December  31, 2002  to December 31,  2003** |       |
|-----------------------------------------------|--------|-----------------------------------------------|------------|--------------------|------------|-----------------------------------------------------|------------|--------------------|------------|---------------------------------------------------------------------|------------|
|                                          |   | **(unaudited)**                               |       |               |       | **(unaudited)**                                     |       |               |       |                                                                |       |
|                                          |   |                                          | ** ** |               | ** ** |                                                | ** ** |               | ** ** |                                                                | ** ** |
| Revenues                                      |   | $                                             | 461        |               | 100        | %                                                   | 179        |               | 100        | %                                                                   | 158        | % |
| Cost of revenues                              |   | 50                                            |       | 11                 | %          | 141                                                 |       | 79                 | %          | (65                                                                 | )%         |
| Gross profit                                  |   | 184                                           |       | 40                 | %          | 38                                                  |       | 21                 | %          | 384                                                                 | %          |
| Selling, general and  administrative expenses |   | 3,942                                         |       | 855                | %          | 1,182                                               |       | 660                | %          | 234                                                                 | %          |
| Depreciation and  amortization                |   | 258                                           |       | 56                 | %          | 272                                                 |       | 152                | %          | (5                                                                  | )%         |
| Impairment of Long Lived  Assets              |   | 5,868                                         |       | 11,736             | %          | —                                              |       | —             |       | —                                                              |       |
| Total operating expense                       |   | 10,068                                        |       | 2,184              | %          | 1,454                                               |       | 812                | %          | 592                                                                 | %          |
| Loss from operations                          |   | $                                             | (6,911     | )                  | (1,499     | )%                                                  | $          | (1,416             | )          | (791                                                                | )%         | 388 | % |
|                                               |        |                                               |            |                    |            |                                                     |            |                    |            |                                                                     |            |  |  |

 

The increase in the Company’s revenuefor the six-month period ended December 31, 2003 compared to the comparableperiod in 2002 was due, in part, to theincreased revenue per subscriber due to an improved collections program andshifts in subscriber composition.

 

The decrease in the Company’s cost ofrevenue for the six-month period ended December 31, 2003 to the comparableperiod in 2002 was primarily due to the Company’s decision to utilize internalresources for customer service and billing services rather than outsourcing theservices.

 

The Company’s selling, general and administrative expenses were higherfor the six-month period ended December 31, 2003 than for the comparable periodin 2002 primarily due to non-cash compensation expense recognized in theissuance of options, warrants and equity and due to increased legal andconsulting fees.

 

This information should be read inconjunction with the Company’s financial statements in Item 1 of thisForm 10-QSB.

 

**Liquidity and Capital Resources**

 

The Company’s financial statements are presented on agoing-concern basis. This contemplates the realization of assets andliquidation of liabilities in the normal course of business. At December 31,2003, the Company had a working capital deficit of approximately $10,686,000and a stockholders’ deficit of $8,944,000. TheCompany’s net loss for the six-month period ended December 31, 2003 was$12,469,000.  These factors raise substantial doubtabout the Company’s ability to continue as a going concern.  At December 31, 2003, the Company was indefault on certain of its debt and capital lease obligations. (See “Part II,Item 3” herein.)

 

Inrecent periods, the Company has had limited access to investment capital tosupport working capital deficits or to expand existing operations.Consequently, the financial conditions of the Company’s operating subsidiariesdeteriorated in the three months ended December 31, 2003 and have continued todeteriorate since then.

 

Previouslythe Company had pursued a strategy to develop a cable television system inBaja, Mexico, and to divest operating assets in the United States in order toreduce debt and enhance its balance sheet. As a result of the allegations made in the complaintsrelated to the asset purchase agreement and Cable California’s operations inMexico, the Company has determined that any further expenditures to Cable Californiaover the course of the lawsuit would not be in the best interest of the Companyand, therefore, the Company has determined to cease further involvement inCable California’s operations.

 

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TheCompany’s ability to continue as a going concern is dependent upon its abilityto significantly increase its revenue, raise the capital necessary toimplement its business strategy and ultimately to achieve profitableoperations.  Management’s plans in this regard areset forth below.

 

The Company plans to increase revenueby pursuing additional right of entry agreements with MDU properties and byexpanding its service offerings, including Internet services.  The Company has initiated discussions withan Internet service provider that uses wireless technology to provide Internetservice.  In addition to the foregoingplans to increase revenue, the Company has increased its sales and marketingefforts in order to increase subscriber penetration at its existing properties.  Until resolutions to the Company’s disputesrelated to the asset purchase agreement and its investment in Cable Californiacan be reached, the Company intends to focus on developing its cable assets inthe United States, located primarily in California, subject to the rights ofthe lender who holds our core assets as collateral.

 

The Company is in continueddiscussions with some of its creditors, including key advisors and consultants,for the conversion of liabilities owed to them.  In October 2003, theCompany converted $630,000 of liabilities owed to its outside counsel,consisting of accounts payable and a note payable, into 686,000 commonshares.  In November 2003, the Company converted a $500,000 liability witha consultant into common shares at the conversion ratio of $1.10 pershare.  In addition, the Company is indiscussions or is negotiating with creditors to convert additionalliabilities.  However, there is no guarantee that these negotiations ordiscussions will lead to a reduction in the Company’s liabilities.

 

**Cash Flows from Operating Activities**

 

The Company’s operations utilized netcash of approximately $1,811,000for the six-month period ended December 31, 2003 compared to $1,044,000 for the same period in2002. In the six-month period ended December 31, 2003, the increase wasprimarily attributed to adjustments to cash for a net loss of $12,469,000, offset by items noteffecting cash of depreciation, impairment of long lived assets, andamortization of the discount on notes payable.  In the same period in2002, the Company had a net loss of $6,093,000.

 

**Cash Flows from Investing Activities**

 

During the six-month period endedDecember 31, 2003, investing activities generated cash in the amount of $92,000 compared to a utilization of $240,000 during the comparable periodin 2002.  The primary source of cash in 2003 was from the sale of a notereceivable previously reported and proceeds from the sale of a Right of EntryAgreement offset by the purchase of fixed assets. The cash utilized in 2002 wasattributable to the initial funding of a note receivable from the CableCalifornia acquisition.

 

**Cash Flows from Financing Activities**

 

During the six-month period endedDecember 31, 2003, financing activities generated cash of approximately $2,958,000 versus $1,221,000 for the comparable periodin 2002.  The primary source of cash in2003 was the funding of a bridge financing evidenced by promissory notes in theamount of $4,100,000 offset by repayments on promissory notes of approximately$1,142,000. The primary source of funding for the same period in 2002 wasbridge financing in the amount of $960,000 offset by payments on promissorynotes in the amount of $45,000.

 

**Impact of Recently Issued AccountingPrinciples**

 

There are no new accounting pronouncementsthat are expected to have a material effect on the Company.

 

**ITEM 3—CONTROLS AND PROCEDURES**

 

Based on evaluations by the Company’schief executive officer and the Company’s controller of the effectiveness of the Company’s disclosurecontrols and procedures conducted as of a date within 90 days of thefiling date of this quarterly report, it was concluded that, as of theevaluation date, (i) there were no significant deficiencies or materialweaknesses in the Company’s disclosure controls and procedures, (ii) therewere no significant changes in the internal controls or in other factors thatcould significantly affect internal controls after the evaluation date and(iii) no corrective actions were required to be taken. There were nosignificant changes in the Company’s internal controls or in other factors that

 

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could significantly affect the Company’s internal controlsafter the date of this evaluation of the controls. We continue to monitor ourcontrols and procedures on an on-going basis and will make any adjustmentsnecessary to produce effective disclosure.

 

**PART II—OTHER INFORMATION**

 

**ITEM 1—LEGAL PROCEEDINGS**

 

The Company is involved in variousproceedings and subject to various claims as described in its Annual Report onForm 10-KSB for the year ended June 30, 2003, and its Quarterly Report onForm 10-QSB for the three-month period ended September 30, 2003. Thisreport describes only proceedings instituted or claims arising during or subsequentto the quarter ended December 31, 2003, or material events that occurred duringor subsequent to the quarter in connection with previously-reported proceedingsor claims.

 

On December 3, 2003, Richard G. Lubic and DLCommunications, Inc., a Nevada corporation (“DL Communications”), filed acomplaint against USA Broadband, Inc. in the Superior Court of the State ofCalifornia, County of San Diego, Central Division.  In the complaint, Mr.Lubic and DL Communications allege that the Company breached certain terms ofthe Management Services Agreement dated February 12, 2003 (the “ManagementAgreement”), among Mr. Lubic, DL Communications and the Company.  Mr. Lubic and DL Communications alsoallege that the Company is indebted to them in an amount in excess of $750,000and that the Company was unjustly enriched by a like amount.  As disclosedin the Company’s Form 8-K dated August 12, 2003, the Company’s board ofdirectors voted to terminate the Management Agreement and Lubic’s services tothe Company on August 12, 2003 because Mr. Lubic failed to cure breachesof the Management Agreement within the cure period specified in the ManagementAgreement.  The Company intends to defend against the suit vigorously andanswered the complaint, asserted numerous affirmative defenses to the claimsbeing pursued by Mr. Lubic and DL Communications and issued discovery requestsin early January 2004.

 

On December 16, 2003, dcicv and Las Americas filed a complaintagainst the Company, its chief financial officer, principal shareholders andothers in the Superior Court of the State of California, County of San Diego,Central Division.  In the complaint, Las Americas and dcicv allege thatthe Company breached certain terms of the asset purchase agreement.  LasAmericas and dcicv also allege in the complaint that the Company and the otherdefendants made fraudulent representations, and that the Company negligentlymisrepresented certain information related to its ability to purchase andoperate its interest in Cable California.  Las Americas and dcicv allegedamages, in the aggregate, in excess of $11,250,000.  On January 21, 2004, the Company filed a motion to dismiss thecomplaint filed by Las Americas and dcicv, arguing that any lawsuit relating tothe asset purchase agreement must be filed in Delaware pursuant to the terms ofthe asset purchase agreement.  A courthearing the Company’s motion to dismiss is scheduled for February 27, 2004.

 

On January 21, 2004, the Company filed a complaint against dcicv, LasAmericas, Cable California, Richard Lubic, Martin Weisberg, Dick Clarkand Mr. Bustamante (collectively, the “Defendants”), in the Court ofChancery of the State of Delaware, in and for New Castle County.  Each ofthe claims set forth in the complaint arise out of or in connection with theasset purchase agreement.

 

In its complaint, the Company alleges, among other things, that each ofthe Defendants committed common law fraud and conspired to commit fraud againstthe Company by carrying out a scheme which was intended to and did: (i) deceivethe Company with respect to many issues material to the asset purchaseagreement; (ii) artificially inflate the business prospects of CableCalifornia; and (iii) cause the Company to enter into the asset purchaseagreement.  Further, the Company alleges that each of the Defendantsengaged in a continuous course of conduct to conceal adverse materialinformation about the business, operations and future prospects of CableCalifornia.  The Company also alleges that the Defendants’ conduct was inviolation of the Delaware Securities Act and constituted negligentmisrepresentation.

 

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In addition to the foregoing, the Company alternatively alleges in itscomplaint that each of dcicv, Cable California, Las Americas and Mr. Bustamantebreached the terms of the asset purchase agreement and the implied covenant ofgood faith and fair dealing.  The Company bases its allegations on, amongother things, that the Company did not receive an unqualified interest in 49%of the voting stock and did not receive 90% of the economic interest in CableCalifornia and that each of the named Defendants: (i) refused to take actionsnecessary or appropriate to comply with the terms of the asset purchaseagreement; (ii) refused to cooperate with the Company’s efforts to have 49% ofCable California’s voting stock registered in the Company’s or USA BroadbandMexico’s name with COFETEL and the SCT; and (iii) interfered with the Company’sefforts to secure financing to be used to expand Cable California’s operations.

 

Because of the Defendants’ alleged wrongful conduct and unlawful acts,the Company has asked the Delaware Court of Chancery to rescind the assetpurchase agreement and put the Company in the position it would have been inhad it not entered into the asset purchase agreement or, in the alternative, toaward it damages in excess of $15 million. The Company intends to prosecute vigorously the case and its rightsunder the asset purchase agreement.

 

Based on the allegations made in the complaints related tothe asset purchase agreement, the Company has determined that any furtherexpenditures relating to Cable California and its operations would not be inthe Company’s best interest.  Therefore,the Company has determined to cease any further involvement in CableCalifornia’s operations.

 

On December 23, 2003, the Company received notice that onDecember 10, 2003, a decision was issued in a binding arbitration hearing thatwas held on November 10, 2003, in Denver, Colorado, to mediate a disputebetween Cable Concepts and Archstone Communities Trust (“Archstone”).  Thearbitration decision upheld Archstone’s request to terminate an agreementbetween Cable Concepts and Archstone under which Cable Concepts provided cableservices to Ashton Place, a condominium complex in San Jose, CA, owned byArchstone, pursuant to a disputed revenue share payment of less than $2,000allegedly paid by the Company to Archstone three days late.  In December2003, Cable Concepts serviced approximately 390 subscribers at AshtonPlace.  On February 4, 2004, thearbitrator rendered a final award terminating the right of entry agreementbetween Cable Concepts and Archstone under which Cable Concepts provided cableservices to Ashton Place and requiring Cable Concepts to pay attorneys andother fees in connection with the arbitration of approximately $47,000.  (See Item 5)

 

On November 25, 2003, James Froisland,a former consultant to the Company, filed a lawsuit against the Company in KaneCounty, Illinois.  Mr. Froisland seeksbreach of contract damages in the amount of $65,000 plus pre-judgement interestat the rate of 5% per annum and 15,000 vested options in the Company’s stock.  In addition, the lawsuit alleges breach ofan alleged oral promise by the Company to provide Mr. Froisland 50,000 to75,000 additional stock options.  TheCompany believes that it has meritorious defenses to the allegations and isattempting to negotiate with the plaintiff to resolve the matter.

 

On November 5, 2003, Cable Conceptssettled a lawsuit filed by L.A. Commercial Group, Inc. in February 2003.  L.A. Commercial Group had obtained a defaultjudgment against Cable Concepts in the amount of approximately $67,000.  Pursuant to the terms of the settlement,Cable Concepts agreed to pay L.A. Commercial Group a total of $40,000, withpayments due in monthly installments beginning in November 2003.

 

On October 22, 2003, the Company’sformer landlord filed a complaint against the Company in the Superior Court ofCalifornia, County of San Diego, regarding former office space located inCoronado, California. The complaint alleges that the Company breached theoffice lease by vacating the leased premises prior to expiration of the term ofthe lease and for alleged damages to the leased premises.  The plaintiffrequests damages in the aggregate amount of $434,500 to be awarded, an amountthat reflects rental fees on the remaining term of the lease of approximatelyfour years.  The Company believes that it has meritorious defenses to theallegations and is attempting to negotiate with the plaintiff to resolve thematter.

 

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**ITEM 2—CHANGES IN SECURITIES**

 

As of December31, 2003, a vendor of the Company, converted accounts payable in the amount of$54,000 into 68,517 shares of common stock, at the rate of $0.92 per share.

 

As of December23, 2003, a vendor of the Company converted a debt amount of $150,000 into163,043 shares of common stock, at the rate of $0.92 per share.

 

As of December 16, 2003, Edward Mooney, arelated party of the Company, converted an accounts payable in the amount of$25,000 into 27,174 shares of common stock, at the rate of $0.92 per share.

 

As of November20, 2003, Maroon Bells Capital LLC, a financial advisor to the Company that iscontrolled by Paul Moore who is a shareholder with greater than 5% of theCompany’s outstanding common stock, converted accounts payable in the amount of$500,000 into 454,550 shares of common stock, at the rate of $1.10 per share.  In addition, the Company converted aliability owed to Maroon Bells Capital into a secured one-year note, with aprincipal amount of $188,000, bearing interest at 8% per annum.

 

As of December31, 2003, the Company issued 15,000 shares of common stock at the rate of $1.00per share to a consultant in exchange for services provided to the Company. Theconsultant was also issued warrants to purchase 15,000 shares of common stockat the rate of $1.00 per common share.

 

As of December31, 2003, the Company issued 15,000 shares of common stock at the rate of $1.00per share to a consultant in exchange for services provided to the Company. Theconsultant was also issued warrants to purchase 15,000 shares of common stockat the rate of $1.00 per common share.

 

On October 8, 2003, the Companyconverted a note payable due to its outside counsel in connection with unpaidlegal fees and expenses in the aggregate amount of $630,000.  The Company converted the note into 684,000shares of common stock at a rate of $0.92 per share.

 

No underwriting commissions or discounts were paid inconnection with any of the above transactions. The Company relied upon theexemption from the registration requirements of the Securities Act underSection 4(2) of the Securities Act with respect to the offer and sale ofthe unregistered securities described above. We conducted no generalsolicitation or advertising in connection with any of the transactionsdescribed above. Each of the persons that acquired unregistered securities had apreexisting relationship with us or one of our placement agents or founders. Inaddition, each purchaser was required to complete a subscription document andconfirm his or her status as a “sophisticated investor.” The Company providedeach potential investor with an opportunity to meet with, and ask questions of,our management.

 

**ITEM 3—DEFAULTS UPON SENIOR SECURITIES**

 

Pursuant to the Certificate ofDesignation for our preferred stock, the Company is required to use 10% of thenet proceeds of sales or grants of equity (other than certain grants toemployees, directors, officers or consultants or grants in connection withcertain acquisitions or transactions) from July 2001 through July 2004, towardpayment of a note payable held by Geneva Associates Merchant Banking Partners,then for redemption of the Series B Preferred Stock, followed byredemption of the Series C Preferred Stock. The Company is not currentlyin compliance with this requirement as it relates to either the note payable orthe preferred stock.

 

The Company is also in default toGeneva Associates Merchant Banking Partners for both principal and interest dueon notes totaling approximately $1,417,000.As of December 31, 2003, the Company had not made a payment of either principalor interest on our obligations to the entity. Prior to December 31, 2003,Geneva Associates Merchant Bank committed to convert the outstanding principaland

 

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interest of the debt into shares of common stock. As describedin the footnotes to the financial statements, the Company is currently workingwith Geneva Associates Merchant Banking to finalize the conversion.

 

On April 18, 2003, the Companyreceived a notice from US Bancorp that Cable Concepts was in default under aloan agreement with US Bancorp. The amount due under the loan agreement is $576,000. The Company is innegotiations with US Bancorp to transfer certain assets in exchange for arelease from the Company’s obligations under the loan agreement.

 

**ITEM 4—SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

None.

 

**ITEM 5—OTHER INFORMATION**

 

The loanof $4,000,000 received by the Company in September 2003 is secured bysubstantially all of the Company’s assets. Attorneys for the lender informed the Company that they areinvestigating whether recent events involving the Company constitute a defaultunder the terms of the applicable loan documents and, if so, how thelender’s rights may be protected.  Amongother matters, they have advised the Company that they are analyzing thearbitration decision issued on December 10, 2003 in Denver, Colorado, to upholdArchstone’s request to terminate an agreement between Cable Concepts andArchstone under which Cable Concepts provided cable services to Ashton Place, acondominium complex in San Jose, California, owned by Archstone.

 

**ITEM 6—EXHIBITS AND REPORTS ON FORM 8-K**

 

(a)  Exhibits List

 
| **Number** |   | **Description of Document**                                                                                                                          |
|------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                 |
| 31.1       |   | Certification of the interim chief executive officer and  interim chief financial officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 |
|       |   |                                                                                                                                                 |
| 32.1       |   | Certification of interim chief executive officer and  interim chief financial officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.    |

 

(b)  Reports onForm 8-K

 

On December 24, 2003, the Company filed a Form 8-K toreport a complaint filed against the Company by Richard Lubic and DLCommunications, Inc. on December 3, 2003 regarding allegations that the Companybreached a management consulting agreement among Mr. Lubic, DL Communicationsand theCompany.

 

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**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 
| Dated: February 17, 2003 | **USA BROADBAND, INC.** |
|--------------------------|------------------------------|
|                     |                         |
|                     |                         |
|                     | By:                          | /s/  Bhasker Panchal |   |
|                     |                         |   |
|                     |                         |   |
|                     | Its:                         | Interim Chief Executive Officer and Interim Chief  Financial Officer |

 

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