**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington D.C. 20549**

 

**FORM 10-QSB**

 

**QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterlyperiod ended September 30, 2003**

 

**Commission FileNumber 000-29433**

 

**USA BROADBAND, INC.**

(Exact name of registrant as specified in its charter) 

 

| **Delaware**                                                    |   | **84-1592698**                    |
|-----------------------------------------------------------------|--------|-----------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (IRS Employer Identification No.) |
|                                                            |   |                              |
| **121 Broadway, Ste. 638  San Diego, California**               |   | **92101**                         |
| (Address of Principal Executive Offices)                        |   | (Zip Code)                        |

 

**(619) 239-1488**(Issuer’s telephone number, including area code)

 

 

(Former Name, Former Address, and FormerFiscal Year if Changed Since Last Report)

 

State the number of sharesoutstanding of each of the issuer’s classes of common equity, as of the latestpracticable date:

 

The issuer had 14,732,204shares of common stock outstanding as of November 14, 2003.

 

 

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**INFORMATION REGARDINGFORWARD-LOOKING STATEMENTS**

 

This report onForm 10-QSB contains forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995. The forward-lookingstatements are contained principally in the section entitled “Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”These statements involve known and unknown risks, uncertainties and otherfactors which may cause the Company’s actual results, performance orachievements to be materially different from any future results, performancesor achievements expressed or implied by the forward-looking statements.

 

In some cases,you can identify forward-looking statements by terms such as “may,” “will,”“should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,”“estimates,” “projects,” “predicts,” “potential” and similar expressionsintended to identify forward-looking statements. These statements reflect theCompany’s current views with respect to future events and are based onassumptions and subject to risks and uncertainties. Given these uncertainties,you should not place undue reliance on these forward-looking statements. Actualresults could differ materially from those anticipated in any forward-lookingstatements as a result of a number of factors, including but not limited tothose described in the Company’s filings with the Securities and ExchangeCommission, particularly the Company’s annual report on Form 10-KSB forthe year ended ending June 30, 2003. These forward-looking statementsrepresent the Company’s estimates and assumptions only as of the date of thisreport, and we do not assume any obligation to update any of these statements.

 

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**PART I—FINANCIALINFORMATION**

 

**ITEM 1—FINANCIALSTATEMENTS**

 

**USA BROADBAND, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEETS**

 

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

 
|                                      |   | **September  30,  2003** |   | **June  30,2003** |   |
|-------------------------------------------|--------|--------------------------|--------|-------------------|--------|
|                                      |   | **(unaudited)**          |   |              |   |
| ASSETS:                                   |   |                     |   |              |   |
|                                      |   |                     |   |              |   |
| Current Assets                            |   |                     |   |              |   |
| Cash                                      |   | $                        | 2,228  |              | $      | 79 |   |
| Accounts receivable, net                  |   | 69                       |   | 16                |   |
| Prepaid expenses and other current assets |   | —                   |   | 42                |   |
| Deposits                                  |   | 19                       |   | —            |   |
| Total current assets                      |   | 2,316                    |   | 137               |   |
|                                      |   |                     |   |              |   |
| Property and Equipment                    |   |                     |   |              |   |
| Cable properties                          |   | 2,514                    |   | 2,740             |   |
| Cable equipment                           |   | 775                      |   | 775               |   |
| Leasehold improvements                    |   | 2                        |   | 2                 |   |
| Furniture and equipment                   |   | 34                       |   | 34                |   |
| Computer software and equipment           |   | 114                      |   | 114               |   |
| Vehicles                                  |   | 7                        |   | 7                 |   |
|                                      |   | 3,446                    |   | 3,672             |   |
|                                      |   |                     |   |              |   |
| Less accumulated depreciation             |   | (1,318                   | )      | (1,242            | )      |
| Net property and equipment                |   | 2,128                    |   | 2,430             |   |
|                                      |   |                     |   |              |   |
| Note receivable                           |   | —                   |   | —            |   |
| Assets held for sale, net                 |   | 99                       |   | 239               |   |
| Investment in Cable California            |   | 5,578                    |   | 6,006             |   |
| Other Assets                              |   | 236                      |   | 256               |   |
| Total Assets                              |   | $                        | 10,357 |              | $      | 9,068 |   |

 

Seeaccompanying notes to these financial statements.

 

3

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**USA BROADBAND, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEETS**

 

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

 
|                                                                                                                                           |   | **September  30, 2003** |   | **June  30,2003** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|-------------------|--------|
|                                                                                                                                           |   | **(unaudited)**         |   |              |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY:                                                                                                     |   |                    |   |              |   |
|                                                                                                                                           |   |                    |   |              |   |
| Current Liabilities:                                                                                                                           |   |                    |   |              |   |
| Current portion of long-term debt, capital lease obligations and notes  payables                                                               |   | $                       | 6,434  |              | $      | 4,481 |   |
| Accounts payable                                                                                                                               |   | 3,846                   |   | 3,737             |   |
| Accrued liabilities                                                                                                                            |   | 1,342                   |   | 1,362             |   |
| Notes payable to shareholders                                                                                                                  |   | 134                     |   | 130               |   |
| Deferred revenues                                                                                                                              |   | 53                      |   | 94                |   |
| Total current liabilities                                                                                                                      |   | 11,809                  |   | 9,804             |   |
|                                                                                                                                           |   |                    |   |              |   |
| Commitments and contingencies (Notes [])                                                                                                       |   |                    |   |              |   |
|                                                                                                                                           |   |                    |   |              |   |
| 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 $6,912,000 |   | 5,457                   |   | 5,458             |   |
| Series B preferred stock; 2,625,000 shares designated; 2,625,000  outstanding, liquidation preference of $3,582,000                            |   | 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;  14,732,204 and 13,609,925 outstanding                                            |   | 15                      |   | 14                |   |
| Additional paid in capital                                                                                                                     |   | 22,604                  |   | 19,881            |   |
| Deferred option expense                                                                                                                        |   | (314                    | )      | (315              | )      |
| Accumulated deficit                                                                                                                            |   | (39,479                 | )      | (36,040           | )      |
|                                                                                                                                           |   |                    |   |              |   |
| Total stockholders’ deficit                                                                                                               |   | (1,452                  | )      | (736              | )      |
| Total Liabilities and Stockholders’ Deficit                                                                                               |   | $                       | 10,357 |              | $      | 9,068 |   |

 

Seeaccompanying notes to these financial 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  September 30,  2003** |       | **For the  Three  Month Period  Ended  September 30,  2002** |       |
|------------------------------------------------------------------|--------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
|                                                             |   | **(unaudited)**                                              |       | **(unaudited)**                                              |       |
|                                                             |   |                                                         | ** ** |                                                         | ** ** |
| Revenues                                                         |   | $                                                            | 227        |                                                         | $          | 165 |   |
| Cost of revenues                                                 |   | 40                                                           |       | 89                                                           |       |
| Gross profit                                                     |   | 187                                                          |       | 76                                                           |       |
|                                                             |   |                                                         |       |                                                         |       |
| Operating Expenses:                                              |   |                                                         |       |                                                         |       |
| Selling, general and administrative                              |   | 2,531                                                        |       | 2,381                                                        |       |
| Depreciation                                                     |   | 160                                                          |       | 93                                                           |       |
| Impairment of long lived assets                                  |   | 283                                                          |       | —                                                       |       |
| Total operating expenses                                         |   | 2,974                                                        |       | 2,474                                                        |       |
| Loss from operations                                             |   | (2,787                                                       | )          | (2,398                                                       | )          |
|                                                             |   |                                                         |       |                                                         |       |
| Other Income (Expenses):                                         |   |                                                         |       |                                                         |       |
| Interest expense, net                                            |   | (291                                                         | )          | (143                                                         | )          |
| Equity earnings (loss) of Cable California                       |   | (405                                                         | )          |                                                         |       |
| Other income (expenses), net                                     |   | —                                                       |       | 8                                                            |       |
| Net loss from continuing operations                              |   | (3,483                                                       | )          | (2,533                                                       | )          |
|                                                             |   |                                                         |       |                                                         |       |
| Discontinued Operations:                                         |   |                                                         |       |                                                         |       |
| Income from discontinued operations                              |   | —                                                       |       | 115                                                          |       |
| Income/(loss) from disposal of assets                            |   | 44                                                           |       | —                                                       |       |
| Net Loss                                                         |   |                                                         | (3,439     | )                                                            |       | (2,418 | ) |
|                                                             |   |                                                         |       |                                                         |       |
| Accrued cumulative preferred stock dividends                     |   | (89                                                          | )          | (116                                                         | )          |
| Net loss applicable to common shareholders                       |   | $                                                            | (3,528     | )                                                            | $          | (2,534 | ) |
| Net loss per common share (primary and diluted)                  |   | $                                                            | (0.24      | )                                                            | $          | (0.38 | ) |
| Weighted average common shares outstanding (primary and diluted) |   | 14,494,390                                                   |       | 6,613,000                                                    |       |

 

Seeaccompanying notes to these financial statements.

 

5

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**USA BROADBAND, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

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

 
|                                                                     |   | **For the  Three  Month Period  Ended  September 30,  2003** |   | **For the  Three  Month Period  Ended  September 30,  2002** |   |
|--------------------------------------------------------------------------|--------|--------------------------------------------------------------|--------|--------------------------------------------------------------|--------|
|                                                                     |   | **(unaudited)**                                              |   | **(unaudited)**                                              |   |
| OPERATING ACTIVITIES                                                     |   |                                                         |   |                                                         |   |
| Net loss                                                                 |   | $                                                            | (3,439 | )                                                            | $      | (2,418 | ) |
| Adjustments to reconcile net loss to net cash from operating  activities |   |                                                         |   |                                                         |   |
| Impairment of long lived assets                                          |   | 283                                                          |   | —                                                       |   |
| Depreciation                                                             |   | 160                                                          |   | 329                                                          |   |
| (Gain) Loss on disposal of fixed assets                                  |   | —                                                       |   | 1,482                                                        |   |
| (Gain) Loss on sale of asset                                             |   | (44                                                          | )      | —                                                       |   |
| Amortization of deferred financing costs                                 |   | —                                                       |   | 17                                                           |   |
| Amortization of note discount                                            |   | 423                                                          |   | —                                                       |   |
| Loss on investment in subsidiary                                         |   | 323                                                          |   | —                                                       |   |
| Expense for common stock issued for note receivable sale                 |   | 472                                                          |   | —                                                       |   |
| Expense for warrants issued for subordination                            |   | 18                                                           |   | —                                                       |   |
| Expense for warrants issued for service                                  |   | 305                                                          |   | —                                                       |   |
| Expense for options issued for service                                   |   | 82                                                           |   | —                                                       |   |
| Expense for stock issued for service                                     |   | 27                                                           |   | —                                                       |   |
| Changes in operating assets and liabilities:                             |   | —                                                       |   | —                                                       |   |
| Accounts receivables                                                     |   | (53                                                          | )      | 7                                                            |   |
| Restricted cash                                                          |   | —                                                       |   | —                                                       |   |
| Prepaid expenses                                                         |   | 3                                                            |   | 6                                                            |   |
| Accounts payable                                                         |   | 230                                                          |   | 113                                                          |   |
| Accrued liabilities                                                      |   | 270                                                          |   | 225                                                          |   |
| Deferred revenues                                                        |   | (40                                                          | )      | (143                                                         | )      |
| Other assets                                                             |   | (66                                                          | )      | —                                                       |   |
| Net cash used in operating activities                                    |   | (1,046                                                       | )      | (381                                                         | )      |
|                                                                     |   |                                                         |   |                                                         |   |
| INVESTING ACTIVITIES                                                     |   |                                                         |   |                                                         |   |
| Proceeds from sale of note receivable                                    |   | 105                                                          |   | —                                                       |   |
| Net proceeds from sale of assets                                         |   | 44                                                           |   | —                                                       |   |
| Advances to Las Americas                                                 |   | —                                                       |   | (338                                                         | )      |
| Net cash used by investing activities                                    |   | 149                                                          |   | (338                                                         | )      |
|                                                                     |   |                                                         |   |                                                         |   |
| FINANCING ACTIVITIES                                                     |   |                                                         |   |                                                         |   |
| Proceeds from issuance of common stock                                   |   | —                                                       |   | 271                                                          |   |
| Proceeds from exercise of warrants                                       |   | 46                                                           |   | —                                                       |   |
| Payments on debt                                                         |   | (1,100                                                       | )      | (27                                                          | )      |
| Borrowing of debt                                                        |   | 4,100                                                        |   | 420                                                          |   |
| Net cash provided by financing activities                                |   | 3,046                                                        |   | 664                                                          |   |
|                                                                     |   |                                                         |   |                                                         |   |
| Net increase/(decrease) in cash                                          |   | 2,149                                                        |   | (55                                                          | )      |
| Cash, at beginning of period                                             |   | 79                                                           |   | 88                                                           |   |
| Cash, at end of period                                                   |   | $                                                            | 2,228  |                                                         | $      | 33 |   |
|                                                                     |   |                                                         |   |                                                         |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                         |   |                                                         |   |                                                         |   |
| Cash paid for interest                                                   |   | $                                                            | 65     |                                                         | $      | 143 |   |
| Expense for common stock issued for note receivable sale                 |   | 472                                                          |   | —                                                       |   |
| Expense for warrants issued for subordination                            |   | 18                                                           |   | —                                                       |   |
| Expense for warrants issued for service                                  |   | 305                                                          |   | —                                                       |   |
| Expense for options issued for service                                   |   | 82                                                           |   | —                                                       |   |
| Expense for stock issued for service                                     |   | 27                                                           |   | —                                                       |   |
| Expense for detachable warrants on promissory note                       |   | 1,174                                                        |   | —                                                       |   |
| Conversion of promissory note to payables                                |   | 50                                                           |   | —                                                       |   |
| Conversion of accounts payable to note                                   |   | $                                                            | 72     |                                                         | — |   |

 

Seeaccompanying notes to these financial statements.

 

6

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1.                                       **INTERIM FINANCIAL INFORMATION:**

 

The accompanying interimfinancial statements are unaudited. However, in the opinion of management, theinterim data includes all adjustments, consisting of normal recurringadjustments, necessary for a fair presentation of the results for the interimperiod. The results of operations for the interim periods presented are notnecessarily indicative of those to be expected for the fiscal year.

 

The financial statementsincluded herein have been prepared by the Company pursuant to the rules andregulations of the Securities and Exchange Commission. Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles have been condensed oromitted pursuant to such rules and regulations.

 

Management believes thedisclosures made are adequate to make the information not misleading andsuggest that these condensed financial statements be read in conjunction withthe financial statements and notes thereto included in the Company’sForm 10-KSB for the fiscal year ended June 30, 2003.

 

*STOCK OPTIONS*

 

The Company accounts forstock options using the intrinsic value method wherein compensation expense isrecognized on stock options granted only for the excess of the market price ofthe Company’s common stock over the option exercise price on the day of grant.

 

Some companies alsorecognize compensation expense for the fair value of the option right itself.The Company has elected not to adopt this accounting method because it requiresthe use of subjective valuation models which the Company believes are notrepresentative of the real value of the option to either the Company or theoptionees. However, the Company is required to disclose the pro forma effect ofaccounting for stock options using such a valuation for all options granted.The fair value of the options was estimated at the date of grant using aBlack-Scholes option pricing model with the following assumptions: 

 

|                    |   | **2003**    |   | **2002**    |   |
|-------------------------|--------|-------------|--------|-------------|--------|
| Risk free interest rate |   | 2.49%-3.51% |   | 2.85%-3.85% |   |
| Expected dividend yield |   | —      |   | —      |   |
| Expected life           |   | 5-10  years |   | 5-10  years |   |
| Expected volatility     |   | 108%-129%   |   | 109%-138%   |   |

 

To estimate option lives forthis valuation, 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 ofoptions granted was computed to be approximately $628,000 and $198,000 for thequarters ended September 30, 2003 and 2002, respectively. These amounts areamortized ratably over the vesting periods of the options or recognized at thedate of grant if no vesting period is required.

 

The following table setsforth the proforma effects of the stock option expense:

 

7

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|                                                     |   | **For the  Period Ended Sept. 30,** |   |
|----------------------------------------------------------|--------|-------------------------------------|--------|
|                                                     |   | **2003**                            |   | **2002** |   |
|                                                     |   | **(unaudited)**                     |   | **(unaudited)** |   |
| Net loss applicable to common shareholders - as reported |   | $                                   | (3,528 | ) | $ | (2,534 | ) |
| Effect of APB 25 expense included in income              |   | 857                                 |   | — |   |
| Effect of stock-based compensation per SFAS 123          |   | (1,485                              | )      | (198 | ) |
| Net loss applicable to common stockholders - pro forma   |   | $                                   | (4,156 | ) | $ | (2,732 | ) |
|                                                     |   |                                |   |   |   |
| Basic and diluted:                                       |   |                                |   |   |   |
| Loss per share - as reported                             |   | $                                   | (0.24  | ) | $ | (0.38 | ) |
| Effect of APB 25 expense included in income              |   | 0.06                                |   | — |   |
| Effect of stock-based compensation per SFAS 123          |   | (0.10                               | )      | (0.03 | ) |
| Net loss applicable to common stockholders - pro forma   |   | $                                   | (0.28  | ) | $ | (0.41 | ) |

 

2.                                       **LIQUIDITY**

 

The Company’s financialstatements have been presented on the going concern basis, which contemplatesthe realization of assets and liquidation of liabilities in the normal courseof business. At September 30, 2003, the Company had a working capital deficitof $9,493,000 and a stockholders’ deficit of $1,452,000. The Company’s net lossfor the three months ended September 30, 2003 was $3,439,000.  At September 30, 2003, the Company was indefault on certain of the terms of its debt and its capital lease obligations.

 

The Company’s ability tocontinue as a going concern is dependent upon its ability to significantlyincrease its revenue and raise the capital necessary to successfully implementits business plan, and ultimately to achieve profitable operations.Management’s plans in this regard are set forth below.

 

As a result of the Company’sacquisition of a 49% interest in Cable California, S.A. de C.V., the Company’sefforts will be concentrated on concession-based cable services in Baja, Mexico(Note 3). Tijuana, with a population of 2.2 million, is the largestmetropolitan area in Baja, represents one of the fastest growing cities inNorth America, and is one of the last “Greenfield” cable opportunities of itssize and density in the world.  TheCompany anticipates that it will require approximately $10 million inadditional capital in order for the Company to implement the initial part ofthis plan.

 

The Company is seekingadditional equity and debt financing.

 

On September 8, 2003, theCompany was loaned $4,000,000 by an individual (Note 4). The Companyanticipates that this loan will allow the Company to begin implementation ofits initial business plan to invest in cable plant in Baja, Mexico.  Management believes that current funds aresufficient to allow the Company to initiate with the early stages of its plansto expand the cable plant of Cable California. There can be no assurances, however, that the Company will be able togenerate increased revenues or obtain additional necessary funding on favorableterms and conditions, if at all.  If theCompany does not have sufficient funds to complete the cable build in Mexico,the Company may not be able to implement its business plan or become cash flowpositive.

 

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

 

CableCalifornia possesses a 30-year advanced telecommunications broadband concessionfrom the Mexican government to construct, operate and commercialize a 750-MHzfiber-optic network providing multi-channel cable television services toresidents and businesses in the greater Tijuana, Mexico metropolitan area. Effective October 7, 2003, the Secretary ofCommunications and Transportation of Mexico (*Secretaria de Comunicaciones yTransportes* or “SCT”)extended the licenses of cable companies (including that of Cable California)to include provision of Internet services. This extension will enable Cable California to increase its serviceofferings to include Internet services without applying to add services to itsconcession.  Cable Californiaplans to construct a 1,300-mile broadband network and has completed the firstphase of this cable build, including its head-end, central operations centerand cable that serves approximately 1,500 customers.

 

On January 10,2003, the Company entered into an Asset Purchase Agreement with, among others,dick clark international cable ventures, ltd., a Turks & Caicos entity(“dick clark international cable ventures”), and Las Americas Broadband, Inc.,a Colorado corporation (“Las Americas”), to purchase 100% of the Class B andClass N shares of Cable California, S.A. de C.V., a Mexican corporation (“CableCalifornia”) from dick clark international cable ventures, as well as varioustangible and intangible assets related to Cable California’s operations inMexico and certain other rights from Las Americas.  The Class B sharesrepresent 49.0% of the voting and economic interest in Cable California, whilethe Class N shares would bring the Company’s economic interest in CableCalifornia to 90.0%.

 

8

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**Class B Shares. **On March 7, 2003, the Company purchasedall of the Class B shares of Cable California, which represent 49% of thevoting and economic interest in the company.  In addition, the Companyacquired various tangible and intangible assets, including office and computerequipment, vehicles, machinery and satellite equipment from Las Americas.

 

As consideration for this acquisition, the Company issued 2,500,000shares of its common stock to dick clark international cable ventures,2,250,000 shares to Las Americas, and 250,000 shares to Mr. Bustamante. In addition,the Company assumed a total of $1,250,000 of debt, liabilities and otherfinancial obligations of Cable California and Las Americas and reduced theoutstanding principal amount of a promissory note issued by Las Americas to theCompany from $890,276 to $500,000.  The amended note will remaincollateralized by assets of Las Americas, including its cable television systemin Tehachapi, California.  The Company also paid Las Americas $250,000 incash.

 

Subsequent toMarch 7, 2003, the Company formed USA Broadband Mexico, S.A. de C.V., a Mexicancorporation (“USA Broadband Mexico”), which is a wholly-owned subsidiary of theCompany.  Under the laws of Mexico, the transfer of the Class B shares ofCable California must be registered with appropriate governmental authoritiesin Mexico.  The Company intends to register the Class B shares in the nameof USA Broadband Mexico.  To register the Class B shares to USA BroadbandMexico, the Company and parties to the Asset Purchase Agreement must make appropriatefilings with the Mexican Federal Telecommunications Commission (the *ComisionFederal de Telecomunicaciones*or“COFETEL”) and the SCT.

 

The Companyand other parties to the Asset Purchase Agreement are currently in discussionsto effectuate a registration of the Class B Shares to USA Broadband Mexico andhave initiated the registration process with COFETEL.  If the Class B Shares are not registered to the Company or USABroadband Mexico as contemplated by the Asset Purchase Agreement, the Companyand USA Broadband Mexico are prepared to enforce any and all rights availableto them to secure the registration of the Class B shares in Mexico.

 

**Class N Shares. **Asdiscussed above, pursuant to the Asset Purchase Agreement, the Companyalso acquired Las Americas’s rights and obligations under an agreement dated asof September 26, 2002, among Las Americas, Cable California, Mr. CarlosBustamante, Sr. and LABN Mexico, S.A. de C.V., a Mexico corporation, pursuantto which, among other things, Las Americas possessed the right to receive ClassN shares from Cable California.  Ownership of the Class N shares wouldbring the Company’s economic interest in Cable California to 90.0%.  Mr.Bustamante, however, has informed the Company that he terminated this agreementwith Las Americas based on an alleged breach of the agreement, and, therefore,Las Americas never obtained the Class N Shares.  Accordingly, no Class Nshares have been issued.  As a result,the Company currently is involved in discussions with Mr. Bustamante to purchaseadditional interests in Cable California. There can be no assurance, however,that the Company’s negotiations with Mr. Bustamonte will be successful or thatthe Company’s ownership, economic or other interests in Cable California willincrease beyond the 49.0% that the Company owns through its purchase of theClass B Shares.

 

This investment is accountedfor on the equity method.  Thedifference between the basis of the Company’s investment and its proportionalinterest in the Company’s net equity of approximately $2,500,000 is beingamortized over seven years and resulted in an expense adjustment to equityincome for the three months ended September 30, 2003 was $152,000.  The Company’s share of the net deficit forthe three months ended September 30, 2003 was approximately $253,000.

 

4.                                       **NOTES PAYABLE**

 

On September 8, 2003, theCompany obtained secured debt financing in the amount of $4,000,000 from aprivate investor. The financing is evidenced by a convertible promissory noteand secured by a first priority lien in all or substantially all of theCompany’s assets and the assets of its subsidiaries. As additionalconsideration for the $4,000,000 financing, the Company issued to the lender awarrant to purchase 525,000 shares of common stock at $.01 per share and awarrant to purchase up to 1,250,000 shares of common stock at $1.10 pershare.  The promissory note bears interest at a rate equal to the primerate plus 2% and matures on March 4, 2004, subject to the Company’sability to extend the maturity for up to 60 days, provided, however, that ifthe Company extends the maturity date, the interest rate increases 1% eachmonth the loan is outstanding after March 4, 2004, up to a maximum of 12%. Theoutstanding principal and accrued interest under the note is convertible, inwhole or in part, at the election of the lender,

 

9

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into that number of shares ofcommon stock equal to the outstanding principal and accrued interest divided by$1.00. The documents executed in connection with the financing generallycontain customary covenants including, among others, provisions:

 

•                  relating to the maintenance of the Company’sassets and the assets of its subsidiaries securing the indebtedness;

 

•                  restricting the Company’s ability to sell ortransfer its assets or create other liens on its assets securing the debt(other than in the ordinary course of business);

 

•                  restricting the Company from authorizing orpaying any dividends;

 

•                  restricting the Company from paying any bonusor making extraordinary payments to any of the Company’s employees, officers ordirectors or otherwise increasing compensation or benefits paid to any of theCompany’s employees, officers or directors (other than increases resulting froma cost of living adjustment or changes of benefits applicable to all of theCompany’s employees);

 

•                  restricting the Company and the Company’ssubsidiaries from granting any lien, security interest, pledge or otherencumbrance on the Company’s interests in Cable California, or the assets ofCable California; and restricting the Company’s use of any proceeds receivedfrom any additional funding, regardless of whether any additional funding isstructured as debt or equity, received from the exercise of options or warrantsor arising from the sale of its assets outside the ordinary course of business.

 

The Company used $1,046,000of the proceeds of the financing to repay a portion of the outstandingprincipal and accrued interest owed to the Company’s existing bridge noteholders (described below), and paid $155,000 to a note holder in exchange forits agreement to subordinate its security interest in assets of itssubsidiary.  The Company intends to use the remaining proceeds of thefinancing as working capital to fund its cable build in Mexico.

 

Pursuant tothe $4,000,000 financing, the Company’s existing bridge note holderssubordinated their security interests in certain of the Company’s assets andthe assets of its subsidiaries. As consideration for the subordination, theCompany issued to the holders of bridge notes warrants to purchase up to390,000 shares of common stock at a price of $1.10 per share.

 

Between October 2002 andJuly 2003, the Company issued bridge notes having a total principal amount of$2,050,000 to sophisticated investors.  In connection with the bridgeloans evidenced by these notes, the Company issued to the bridge noteinvestors, warrants to purchase a total of 1,025,000 shares of the Company’scommon stock. Each warrant expires five years from its date of issuance. Eachbridge note bears interest at 18% per annum and matures on the earlier of: (i)the last day of the sixth month following the signing of the promissory note or(ii) on the date the Company receives permanent financing in the amount of atleast $3,000,000. If the Company obtains permanent financing, each note holderhas the 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.  Remaining principalbalance on these notes at September 30, 2003 was $975,000 after giving effectto the payment made from the proceeds of the $4 million financing (describedabove). The indebtedness evidenced by the bridge notes is secured by certain ofthe Company’s assets and the assets of the Company’s subsidiaries. Thissecurity interest is subordinated to the $4 million secured debt financing.

 

As of September 30, 2003 theCompany had an unsecured note payable outstanding in the principal amount of$130,000. The holder of this note, Theodore Swindells, beneficially owns over5% of

 

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the Company’s common stock. Thenote was issued on March 4, 2002 and bore interest at a rate of 10% peryear with a due date of October 31, 2002. On October 18, 2002, theCompany entered into a new loan agreement with Mr. Swindells, which extendedthe due date to April 30, 2003, under the same terms and conditions as theoriginal note.  In September 2003, theCompany and Mr. Swindells agreed to extend the due date of this loan agreementto April 30, 2004 under the same terms and conditions as the original note.

 

As of September 30, 2003,the Company owed a total of approximately $1,378,000 to Geneva AssociatesMerchant Banking Partners, an entity in which Russell Myers, one of theCompany’s directors, has an interest. The $1,378,000 owed to Geneva Associates Merchant Banking Partners andits associates is due under a reimbursement agreement under which GenevaAssociates Merchant Banking Partners and its associates, through a financialinstitution, issued a letter of credit to a bank to be used as security for aline of credit the Company had with the bank. Of this $1,378,000, $1,050,000 represents principal on the two lines ofcredit, and $328,000 represents accrued and unpaid interest and fees.  The outstanding balance under thereimbursement agreement bears interest at a rate of 16% per year.  The Company is currently in default underthe reimbursement agreement.  GenevaAssociates Merchant Banking Partners has agreed to convert the outstandingprincipal and interest of the debt into shares of common stock, subject to theCompany agreeing to convert the Series B and Series C preferred stock of theCompany owned by Geneva Associates Merchant Banking Partners and its affiliatesinto shares of the Company’s Series A preferred stock.  The Company andGeneva Associates Merchant Banking Partners are currently negotiating the termsof the conversions.

 

As at September 30, 2003,the Company had a note payable to its outside counsel in connection with unpaidlegal fees and expenses in the aggregate amount of approximately $630,000.  On October 8, 2003, the Company and theoutside counsel converted the note into 684,000shares of common stock at a rate of $0.92 per share. The note was issued inSeptember 2002, bore interest at a rate of 10% per year, and was secured by allof the assets of USAB Video Corp. II, Inc., one of the Company’s subsidiaries.(See Subsequent Events).

 

On September 29, 2000, twoof the Company’s indirect subsidiaries, Direct Digital Midwest, Inc. (DDM) andCP Dakotas MDU, LLC (CPD), borrowed an aggregate of $2 million from LaSalleBank National Association.  The loan wasevidenced by a promissory note and secured by the assets of each of DDM andCPD.  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 was undisclosed.The value of the collateral securing the loan was insufficient to cover theentire amount then due under the loan. To date, LaSalle Bank has not pursuedany action or made any claim against the Company or Cable Concepts for theamount of any shortfall.

 

In April 2003, the Companyissued a promissory note to an individual in the amount of $376,000 inconnection with the sale of Right of Entry Agreements to Digital Services Inc.,an unrelated entity. The note bears interest in the amount of 6% per annum andis due the earlier of twelve months from the date of the loan, consummation ofpermanent financing exceeding $3,000,000, or sale of the security interest whenthe proceeds exceed $2,000,000.

 

5.                                       **COMMITMENTS AND CONTINGENCIES:**

 

In March 2002, USAB VideoCorp. II, Inc., a wholly-owned subsidiary of the Company, entered into an assetpurchase agreement with Verizon Media Ventures, Inc. and GTE SouthwestIncorporated. After purchasing a portion of the assets pursuant to theagreement, in June 2002, USAB Video Corp. II did not complete the purchase ofthe remaining assets. In connection therewith, the Company accrued a $250,000liability on its financial statements, representing the amount of a depositsecuring performance under the purchase agreement.  On September 24, 2003, Verizon Media Ventures, Inc. and GTESouthwest incorporated filed a complaint against the Company and USAB Video Corp.in the Supreme Court of the State of New York, County of New York. In thecomplaint, Verizon and GTE allege that USAB Video

 

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Corp. II breached the purchaseagreement and that the Company, by guaranteeing USAB Video Corp. II’sperformance under the agreement, was also liable for USAB Video Corp. II’sbreach. The complaint further alleges that Verizon and GTE suffered losses anddamages in excess of $1.023 million. The Company and USAB Video Corp. II haveretained counsel in this matter. Neither the Company nor USAB Video Corp. II has yet to file an answer tothe complaint, but the Company intends to vigorously defend against theallegations made.

 

6.                                       **STOCKHOLDERS’ EQUITY:**

 

On September 8, 2003, inconnection with the $4,000,000 bridge financing (Note 4), the Company issued tothe lender a warrant to purchase up to 525,000 shares of common stock at $0.01per share and a warrant to purchase up to 1,250,000 shares of common stock at$1.10 per share.

 

Pursuant tothe $4,000,000 financing, on September 8, 2003, the Company’s existing bridgenote holders subordinated their security interests in certain of the Company’sassets and the assets of its subsidiaries. As consideration for thesubordination, the Company issued to the holders of bridge notes warrants topurchase up to 390,000 shares of common stock at a price of $1.10 per share.

 

In September, 2003, theCompany agreed to issue two consultants warrants to purchase up to 20,000 and5,000 shares of common stock at $1.10 per common share, respectively.

 

In September 2003, two ofthe Company’s warrant holders each exercised warrants to purchase up to 33,333common shares of the Company’s common stock at price equal to $0.01 pershare.  Another warrant holder exerciseda warrant to purchase 50,000 shares of the Company’s common stock at $0.90 percommon share.  In connection with theseexercises, the Company issued 116,666 shares of common stock.

 

In August 2003, the Companyissued warrants to purchase 50,000 shares of the Company’s stock at a $1.00 percommon share in connection with a promissory note.

 

In August 2003, two bridge noteholders elected to convert the outstanding principal and accrued interest owedunder the bridge notes into shares of the Company’s common stock. A note with aface amount of $50,000 and accrued interest and fees of $9,590 was converted to74,938 shares of common stock at a conversion rate of $.80 per share and a notewith a face amount of $50,000 and accrued interest and fees of $9,590 wasconverted to 67,360 shares of common stock at a conversion rate of $0.89.

 

In August 2003, a vendoragreed to accept 57,741 shares of the Company’s stock for $50,000 of debt. TheCompany issued the shares of stock at rate of approximately $0.87 per commonshare.

 

On July 1, 2003, the Companyissued stock options to its officers and directors as compensation for their serviceto the Company. In the aggregate, the Company issued options to purchase1,350,000 shares of common stock at a price equal to $1.10 per share. Of theseoptions, options to purchase 925,000 shares vested immediately and theremainder vests in equal installments over a period of three years.

 

In July 2003, in connectionwith a consulting arrangement with Alemany & Associates, the Companygranted Mr. Arturo Alemany options to purchase 300,000 shares of common stockat $1.10 per common share.  Of this amount,75,000 shares vested immediately. The remaining shares vest in three equalinstallments over the next three quarters.

 

In July 2003 nine holders ofSeries A Preferred Stock elected to convert their shares of Series A Preferredstock plus their accumulate dividends to shares of common stock. An aggregateof 311,853 shares of Series A Preferred stock where converted into 425,844shares of common stock.

 

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In July 2003, two of theCompany’s warrant holders each exercised warrants to purchase 20,000 commonshares of the Company’s common stock at price equal to $0.01 per share.  Another warrant holder exercised a warrantto purchase 10,000 shares of the Company’s common stock at $0.01 per commonshare. In connection with these exercises, the Company issued 50,000 shares ofcommon stock.

 

On July 31, 2003, theCompany issued 300,000 shares of common stock as additional consideration forthe sale of a note receivable to six investors.  Additionally, the Company issued 15,000 shares of common stock asa commission related to this sale.

 

On May 1,2003, the Company entered into a consulting agreement with an entity which hasagreed to provide investor relations services. The term of the agreement is forfour three-month periods unless terminated. In connection with this agreement,the Company agreed to issue the consultant 15,000 restricted shares of itsstock at the beginning of each three-month period that the agreement is ineffect. In addition, the Company agreed to issue to the consultant, uponexecution of the agreement, warrants to purchase 300,000 shares of its commonstock, in four equal portions, each to purchase 75,000 shares, with exerciseprices of $1.00, $1.50, $2.00 and $2.50 per share, respectively. The contractmay be terminated by either party upon 30 days’ written notice.  On September 3, 2003, the Company issued15,000 shares of its common stock in connection with this agreement.

 

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

 

As a result of the Company’sbusiness decision to focus on providing video, data and internet service in theNorthern Baja region of Mexico, the Company decided to divest itself of assetsin other regions. In the fiscal period ended June 30, 2002, the Company reclassifiedthe properties to be sold as Assets Held for Sale. Income from these propertiesis classified as “Income from Discontinued Operations”.  Losses from discontinued operations for thethree months ended September 30, 2003 and September 30, 2002 were $0.00 and$115,000, respectively.

 

8.                                       **SALE OF ASSETS**

 

In July 2003, the Companyconsummated a sale of a Right of Entry Agreement for a complex based in NewOrleans, LA for a sale price of $44,000. The property had no book value and theCompany recorded a gain on this sale of $44,000.

 

9.                                       **SUBSEQUENT EVENTS:**

 

The Company had a notepayable to its outside counsel in connection with unpaid legal fees in theaggregate amount of approximately $630,000.  In October 2003, the Companyconverted $630,000 of liabilities owed to its outside counsel consisting ofaccounts payable and a note payable into 686,000 common shares at a conversionrate of $0.92 per share.

 

On October 22, 2003, acomplaint was filed against the Company in the Superior Court of California,County of San Diego, by the Company’s landlord for its former office spacelocated in Coronado, California. The complaint alleges that the Companybreached the office lease by vacating the leased premises prior to expirationof the term of the lease and for alleged damages to the leased premises.  The plaintiff requests damages in theaggregate amount of $434,500 to be awarded, an amount that reflects rental feeson the remaining term of the lease of approximately four years.  The Company believes that it has meritoriousdefenses to the allegations and is attempting to negotiate with the plaintiffto resolve the matter.

 

In October 2003, each ofEdward Mooney and Doug Cole resigned from his position as a member of ourboard of directors. As previously announced, the Company’s board ofdirectors has formally appointed Mr. Jack Kemp and Mr. Daniel Villanuevato serve on the board of directors effective November 17, 2003.

 

Mr. Kemp isco-founder and co-director of Empower America, a public policy and advocacyorganization.  Mr. Kemp receivedthe Republican Party’s nomination for Vice President in August 1996.  Prior to founding Empower America, Mr. Kempserved for four years as Secretary of Housing and Urban Development, and for 18years as a member of the United States House of Representatives. Mr.Kemp served for seven years inthe Republican Leadership as Chairman of the House Republican Conference.  Before his election to Congress in 1970, Mr.Kemp played 13 years as a professional football quarterback with the San DiegoChargers and the Buffalo Bills.  Mr. Kemp serves as a memberof the board of directors of several companies, including Oracle and IDTCorporation.

 

Mr. Villanuevais a Managing Director of Bastion Management Corporation and Bastion CapitalCorporation, a Los Angeles-based venture capital firm that targets investmentsin minority-owned businesses.  Bastion Capital invests in U.S. and Mexicancompanies and was an early investor in Telemundo, a national Spanish-language television network,which was sold to NBC for $2billion.  From 1960 until 1968, Mr.Villanueva played professional football with the Los Angeles Rams and theDallas Cowboys.  Mr. Villanueva hasserved as a member of the board of directors of several companies, includingIntegrated Water Resources and Telemundo Network.

 

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**ITEM 2—MANAGEMENT’S DISCUSSION AND ANALYSISOR PLAN OF OPERATION**

 

**General**

 

USA Broadband,Inc. (OTC: USBU) through its subsidiary Cable Concepts Inc. (dba Direct DigitalCommunications, “DDC”) provides “private cable” television services tosubscribers residing in multiple dwelling units (MDUs) such as apartments,condominiums and other shared housing facilities. Unless otherwise indicated,throughout this Form 10-QSB references to “its”, “the Company”, “USAB” or “USABroadband” shall mean collectively USA Broadband, Inc. and itssubsidiaries.  References to “Cable Concepts”, “Direct Digital” or “DDC”shall mean its subsidiary, Cable Concepts, Inc. dba Direct Digital Communications.

 

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

 

CableCalifornia possesses a 30-year advanced telecommunications broadband concessionfrom the Mexican government to construct, operate and commercialize a 750-MHzfiber-optic network providing multi-channel cable television services toresidents and businesses in the greater Tijuana, Mexico metropolitan area. Effective October 7, 2003, the Secretary ofCommunications and Transportation of Mexico (*Secretaria de Comunicaciones yTransportes* or “SCT”)extended the licenses of cable companies (including that of Cable California)to include provision of Internet services. This extension will enable Cable California to increase its serviceofferings to include Internet services without applying to add services to itsconcession.  Cable Californiaplans to construct a 1,300-mile broadband network and has completed the firstphase of this cable build, including its head-end, central operations centerand cable that serves approximately 1,500 customers.

 

On January 10,2003, the Company entered into an Asset Purchase Agreement with, among others,dick clark international cable ventures, ltd., a Turks & Caicos entity(“dick clark international cable ventures”), and Las Americas Broadband, Inc.,a Colorado corporation (“Las Americas”), to purchase 100% of the Class B andClass N shares of Cable California, S.A. de C.V., a Mexican corporation (“CableCalifornia”) from dick clark international cable ventures, as well as varioustangible and intangible assets related to Cable California’s operations inMexico and certain other rights from Las Americas.  The Class B sharesrepresent 49.0% of the voting and economic interest in Cable California, whilethe Class N shares would bring the Company’s economic interest in CableCalifornia to 90.0%.

 

**Class B Shares.  **On March 7, 2003, the Company purchasedall of the Class B shares of Cable California, which represent 49% of thevoting and economic interest in the company.  In addition, the Companyacquired various tangible and intangible assets, including office and computerequipment, vehicles, machinery and satellite equipment from Las Americas.

 

As consideration for this acquisition, the Company issued 2,500,000shares of its common stock to dick clark international cable ventures,2,250,000 shares to Las Americas, and 250,000 shares to Mr. Bustamante. Inaddition, the Company assumed a total of $1,250,000 of debt, liabilities andother financial obligations of Cable California and Las Americas and reducedthe outstanding principal amount of a promissory note issued by Las Americas tothe Company from $890,276 to $500,000.  The amended note will remaincollateralized by assets of Las Americas, including its cable television systemin Tehachapi, California.  The Company also paid Las Americas $250,000 incash.

 

Subsequent toMarch 7, 2003, the Company formed USA Broadband Mexico, S.A. de C.V., a Mexicancorporation (“USA Broadband Mexico”), which is a wholly-owned subsidiary of theCompany.  Under the laws of Mexico, the transfer of the Class B shares ofCable California must be registered with appropriate governmental authoritiesin Mexico.  The Company intends to register the Class B shares in the nameof USA Broadband Mexico.  To register the Class B shares to USA BroadbandMexico, the Company and parties to the Asset Purchase Agreement must makeappropriate filings with the Mexican Federal Telecommunications Commission (the*ComisionFederal de Telecomunicaciones*or“COFETEL”) and the SCT.

 

The Companyand other parties to the Asset Purchase Agreement are currently in discussionsto effectuate a registration of the Class B Shares to USA Broadband Mexico andhave initiated the registration process with COFETEL.  If the Class B Shares are not registered to the Company or USABroadband Mexico as contemplated by the Asset Purchase Agreement, the Companyand USA Broadband Mexico are prepared to enforce any and all rights availableto them to secure the registration of the Class B shares in Mexico.

 

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**Class N Shares. **Asdiscussed above, pursuant to the Asset Purchase Agreement, the Companyalso acquired Las Americas’s rights and obligations under an agreement dated asof September 26, 2002, among Las Americas, Cable California, Mr. CarlosBustamante, Sr. and LABN Mexico, S.A. de C.V., a Mexico corporation, pursuantto which, among other things, Las Americas possessed the right to receive ClassN shares from Cable California.  Ownership of the Class N shares wouldbring the Company’s economic interest in Cable California to 90.0%.  Mr.Bustamante, however, has informed the Company that he terminated this agreementwith Las Americas based on an alleged breach of the agreement, and, therefore,Las Americas never obtained the Class N Shares.  Accordingly, no Class Nshares have been issued.  As a result,the Company currently is involved in discussions with Mr. Bustamante topurchase additional interests in Cable California. There can be no assurance,however, that the Company’s negotiations with Mr. Bustamonte will be successfulor that the Company’s ownership, economic or other interests in CableCalifornia will increase beyond the 49.0% that the Company owns through itspurchase of the Class B Shares.

 

**Critical Accounting Policies and Estimates**

 

The Company’scondensed financial statements have been prepared in accordance with accountingprinciples generally accepted in the United States, which require us to makeestimates and judgments that affect the reported amounts of assets, liabilities,revenues and expenses, and related disclosures. The estimates the Company usesare based upon its historical experiences combined with management’sunderstanding of current facts and circumstances. Some of the Company’saccounting policies are considered critical because they are important to theportrayal of the Company’s financial condition and the results of the Company’soperations and because they require significant or complex judgments on thepart of management. The Company believes that its critical accounting policiesare those relating to deferred income taxes, allowances for doubtful accountsand recoverability of long-lived assets.

 

Deferredincome taxes are recognized for the expected tax consequences in future yearsstemming from differences between the values of assets and liabilities for taxand financial reporting purposes, based upon enacted tax laws and statutory taxrates applicable to the periods in which the differences are expected to affecttaxable income. Our significant deferred tax assets relate to net operatingloss carry forwards, allowance for bad debts and deferred revenue. The Companyhas established a valuation allowance to reduce deferred tax assets to the netamount expected to be recovered in future periods. The estimates for deferredtax assets and the corresponding valuation allowance require management toexercise complex judgments. The Company periodically reviews and adjusts thoseestimates based upon 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’sallowance for doubtful accounts reflects a reserve that reduces customeraccounts receivable to the net amount estimated to be collectible. Estimatingthe credit worthiness of customers and the recoverability of customer accountsrequires us to exercise considerable judgment. In estimating uncollectibleamounts, the Company considers factors such as general economic andindustry-specific conditions, historical customer performance and anticipatedcustomer performance. While the Company considers its processes to be adequateto effectively quantify its exposure to doubtful accounts, changes in economic,industry or specific customer conditions may require the Company to adjust itsallowance for doubtful accounts.

 

The Company’slong-lived assets will from time to time be analyzed for impairment when eventsand conditions indicate that an analysis is needed. Factors that the Companyconsiders in performing an impairment analysis are current and historicalagreements to sell comparable assets, its current business strategy and itsexpectations of future cash flows for the asset or asset group being analyzed.Future changes in the economic conditions, the regulatory environment and theCompany’s strategies may materially affect its estimate of the recoverabilityof fixed assets.

 

The Companyaccount for stock options using the intrinsic value method, under whichcompensation expense is recognized on stock options granted only for the excessof the market price of its common stock over the option exercise price on theday of grant. All of the Company’s options are granted at amounts equal to orhigher than the fair value of its stock, so no compensation expense isrecorded.

 

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The Companyuses the Black-Scholes option pricing model to compute the estimated fairmarket value of options.  To estimateoption lives for this valuation, it was assumed that all options vest initiallyand then are exercised one year subsequent to vesting. Cumulative compensationcost recognized in pro forma net income or loss with respect to options thatare forfeited prior to vesting is shown as a reduction of pro formacompensation expense in the period of forfeiture. Fair value computations arehighly sensitive to the assumed volatility factor—the greater the volatility,the higher the computed fair value of options granted.  The Company discloses the pro forma effectof the compensation expense in the notes to the financial statements (Note 1).

 

The followingtable sets forth the Company’s selected operations data for the three-monthperiods ended September 20, 2003 and 2002.

 
|                                         |   | **Three  Months  Ended September 30,  2003** |   | **%****of  Revenues** |   | **Three  Months  Ended  September 30,  2002** |   | **%****of  Revenues** |   | **%****Change from   September 30,  2002 to  September 30,  2003** |   |
|----------------------------------------------|--------|----------------------------------------------|--------|-----------------------|--------|-----------------------------------------------|--------|-----------------------|--------|--------------------------------------------------------------------|--------|
|                                         |   | **(unaudited)**                              |   |                  |   | **(unaudited)**                               |   |                  |   |                                                               |   |
| Revenues                                     |   | $                                            | 227    |                  | 100    | %                                             | $      | 165                   |   | 100                                                                | %      | 38 | % |
| Cost of revenues                             |   | 40                                           |   | 18                    | %      | 89                                            |   | 54                    | %      | (55                                                                | )%     |
| Gross profit                                 |   | 187                                          |   | 82                    | %      | 76                                            |   | 46                    | %      | 146                                                                | %      |
| Selling, general and administrative expenses |   | 2,531                                        |   | 1115                  | %      | 2,381                                         |   | 1443                  | %      | 6                                                                  | %      |
| Depreciation and amortization                |   | 160                                          |   | 70                    | %      | 93                                            |   | 56                    | %      | 72                                                                 | %      |
| Impairment of Long Live Assets               |   | 283                                          |   | 708                   | %      | —                                        |   | 0                     | %      | 100                                                                | %      |
| Total operating expense                      |   | 2,974                                        |   | 1310                  | %      | 2,474                                         |   | 1499                  | %      | 20                                                                 | %      |
| Loss from operations                         |   | $                                            | (2,787 | )                     | (1228  | )%                                            | $      | (2,398                | )      | (1453                                                              | )%     | 16 | % |

 

 

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This datashould be read in conjunction with the Company’s financial statements in Item 1of this Form 10-QSB.

 

The increasein the Company’s revenue for the three-month period ended September 30, 2003compared to the comparable period in 2002 was due to shifts in subscriber composition.  In addition, we recognized revenue that hadbeen deferred.

 

The decreasein the Company’s cost of revenue for the three-month period ended September 30,2003 to the comparable period in 2002 was primarily due to the Company’sdecision to utilize internal resources for customer service and billingservices rather than outsourcing these services.

 

The Company’sselling, general and administrative expenses were higher for the three monthsended September 30, 2003 than for the comparable period in 2002 primarily dueto non-cash compensation expense recognized in the issuance of options,warrants and equity.

 

**Liquidity and Capital Resources**

 

TheCompany’s financial statements are presented on a going-concern basis. Thiscontemplates the realization of assets and liquidation of liabilities in thenormal course of business. At September 30, 2003, the Company had a workingcapital deficit of approximately $9,493,000 and a stockholders’ deficit of $1,452,000.The Company’s net loss for the three months ended September 30, 2003 was$3,439,000.  The Company’s ability to continue as a going concern depends onits ability to increase revenues, raise the capital necessary to successfullyimplement its business plan and ultimately achieve profitable operations.  AtSeptember 30, 2003, the Company was in default on certain of its debt andcapital lease obligations. (See“Part II, Item 3” herein.)

 

In recentperiods, the Company have had limited access to investment capital to supportworking capital deficits or to expand existing operations. Consequently, thefinancial conditions of the Company’s operating subsidiaries deteriorated inthe three months ended September 30, 2003 and have continued to deterioratesince then. The Company has been focused on negotiations with prospectivelenders and investors as the Company seek to refinance all outstanding loansand liabilities in order to provide working capital. These negotiations arecontinuing. The Company requires working capital for existing operationspending their sale or disposition and in connection with the purchase of assetsof Cable California. The Company is actively seeking to raise additional fundsthrough an offering of debt or equity, and has entered into severalnon-exclusive agreements with individuals or entities that would receive a feefor assisting us in obtaining financing. There are no assurances that theCompany will be able to obtain additional financing.

 

The Companyhas previously announced its focus to develop a cable television system in Baja,Mexico, and to divest operating assets in the United States in order to reducedebt and enhance its balance sheet.  Inaddition, the Company is in continued discussions with some of its creditors,including key advisors and consultants, for the conversion of liabilities owedto them into its common stock in exchange for negotiated cash settlements.  In October 2003, the Companyconverted $630,000 of liabilities owed to its outside counsel consisting ofaccounts payable and a note payable into 686,000 common shares.  In addition, the Company is indiscussions or is negotiating with creditors to convert into common sharesadditional liabilities totaling approximately $2 million.  However, there is no guarantee that thesediscussions will lead to a reduction in our liabilities.

 

On September8, 2003, the Company obtained secured debt financing in the amount of$4,000,000 from a private investor. The financing is evidenced by a convertiblepromissory note and secured by a first priority lien in all or substantiallyall of its assets and the assets of its subsidiaries. As additional

 

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consideration for the$4,000,000 financing, the Company issued to the lender a warrant to purchase525,000 shares of common stock at $0.01 per share and a warrant to purchase upto 1,250,000 shares of common stock at $1.10 per share.  The promissorynote bears interest at a rate equal to the prime rate plus 2% and matures onMarch 4, 2004, subject to the Company’s ability to extend the maturity for upto 60 days, provided, however, that if the Company extend the maturity date,the interest rate increases 1% each month the loan is outstanding after March4, 2004, up to a maximum of 12%. The outstanding principal and accrued interestunder the note is convertible, in whole or in part, at the election of thelender, into that number of shares of common stock equal to the outstandingprincipal and accrued interest divided by $1.00. The documents executed inconnection with the financing generally contain customary covenants including,among others, provisions:

 

•                  relating to themaintenance of the Company’s assets and the assets of its subsidiaries securingthe indebtedness;

 

•                  restricting theCompany’s ability to sell or transfer its assets or create other liens on itsassets securing the debt (other than in the ordinary course of business);

 

•                  restricting theCompany from authorizing or paying any dividends;

 

•                  restricting theCompany from paying any bonus or making extraordinary payments to any of theCompany’s employees, officers or directors or otherwise increasing compensationor benefits paid to any of the Company’s employees, officers or directors(other than increases resulting from a cost of living adjustment or changes ofbenefits applicable to all of the Company’s employees);

 

•                  restricting theCompany and the Company’s subsidiaries from granting any lien, securityinterest, pledge or other encumbrance on the Company’s interests in CableCalifornia, or the assets of Cable California; and

 

•                  restricting theCompany’s use of any proceeds received from any additional funding, regardlessof whether any additional funding is structured as debt or equity, receivedfrom the exercise of options or warrants or arising from the sale of its assetsoutside the ordinary course of business.

 

The Companyused $1,046,000 of the proceeds of the $4,000,000 financing to repay a portionof the outstanding principal and accrued interest owed to the Company’sexisting bridge note holders (described below), and paid $155,000 to a noteholder in exchange for its agreement to subordinate its security interest inassets of its subsidiary.  The Company intends to use the remainingproceeds of the financing as working capital to fund its cable build in Mexico.

 

Pursuant tothe $4,000,000 financing, on September 8, 2003, the Company’s existing bridgenote holders subordinated their security interests in certain of the Company’sassets and the assets of its subsidiaries. As consideration for thesubordination, the Company issued to the holders of bridge notes warrants topurchase up to 390,000 shares of common stock at a price of $1.10 per share.

 

BetweenOctober 2002 and July 2003, the Company issued bridge notes having a totalprincipal amount of $2,050,000 to sophisticated investors.  In connectionwith the bridge loans evidenced by these notes, the Company issued to thebridge note investors, warrants to purchase a total of 1,025,000 shares of theCompany’s common stock. Each warrant expires five years from its date ofissuance. Each bridge note bears interest at 18% per annum and matures on theearlier of: (i) the last day of the sixth month following the signing of thepromissory note or (ii) on the date the Company receives permanent financing inthe amount of at least $3,000,000. If the Company obtains permanent financing,each note holder has the right to convert all, but not part, of the outstandingprincipal and accrued interest on the note into shares of the Company’s commonstock or preferred stock issued in connection with the permanent financing at adiscount of 10% to the offering price. Additionally, for every month that anyprincipal payment is overdue, each note holder will receive an additionalwarrant to purchase 10,000 shares of the Company’s common stock per $100,000 inprincipal amount, outstanding under the note, or pro-rata portion thereof,having an

 

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exercise price of the lesser of$1.00 or the average bid price of the Company’s common stock for the preceding20 trading days.  Remaining principal balance on these notes atSeptember 30, 2003 was $975,000 after giving effect to the payment madefrom the proceeds of the $4 million financing described above. The indebtednessevidenced by the bridge notes is secured by certain of the Company’s assets andthe assets of the Company’s subsidiaries. This security interest issubordinated to the secured debt financing entered into in September.

 

As of September 30, 2003 theCompany had an unsecured note payable outstanding in the principal amount of$130,000. The holder of this note, Theodore Swindells, beneficially owns over5% of the Company’s common stock. The note was issued on March 4, 2002 andbore interest 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 same termsand conditions as the original note.  InSeptember 2003, the Company and Mr. Swindells agreed to extend the due date ofthis loan agreement to April 30, 2004 under the same terms and conditions asthe original note.

 

As ofSeptember 30, 2003, the Company owed a total of approximately $1,378,000 toGeneva Associates Merchant Banking Partners, an entity in which Russell Myers,one of the Company’s directors, has an interest.  The $1,378,000 owed to Geneva Associates Merchant BankingPartners and its associates is due under a reimbursement agreement under whichGeneva Associates Merchant Banking Partners and its associates, through afinancial institution, issued a letter of credit to a bank to be used assecurity for a line of credit the Company had with the bank.  Of this $1,378,000, $1,050,000 representsprincipal on the two lines of credit, and $328,000 represents accrued andunpaid interest and fees.  Theoutstanding balance under the reimbursement agreement bears interest at a rateof 16% per year.  The Company iscurrently in default under the reimbursement agreement.  Geneva Associates Merchant Banking Partnershas agreed to convert the outstanding principal and interest of the debt intoshares of common stock, subject to the Company agreeing to convert the Series Band Series C preferred stock of the Company owned by Geneva Associates MerchantBanking Partners and its affiliates into shares of the Company’s Series Apreferred stock.  The Company and Geneva Associates Merchant BankingPartners are currently negotiating the terms of the conversions.

 

On September 29, 2000, twoof the Company’s indirect subsidiaries, Direct Digital Midwest, Inc. (DDM) andCP Dakotas MDU, LLC (CPD), borrowed an aggregate of $2 million from LaSalleBank National Association.  The loan wasevidenced by a promissory note and secured by the assets of each of DDM andCPD.  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.

 

In April, 2003 the Companyissued a promissory note to an individual in the amount of $376,000 inconnection with the sale of Right of Entry Agreements to Digital Services Inc.,an unrelated entity. The note bears interest in the amount of 6% per annum andis due the earlier of twelve months from the date of the loan, consummation ofpermanent financing exceeding $3,000,000, or sale of the security interest whenthe proceeds exceed $2,000,000.

 

On September24, 2003, Verizon Media Ventures, Inc. and GTE Southwest Incorporated filed acomplaint against the Company and USAB Video Corp II. In the Supreme Court ofthe State of New York, County of New York. In the complaint, Verizon and GTEallege that USAB Video Corp. II breached the purchase agreement and that the Company,by guaranteeing 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 USA Video Corp. II have

 

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retained counsel to representthem in this matter. Neither the Company nor USAB Video Corp. II has yet tofile an answer to the complaint, but the Company intends to defend itself vigorouslyagainst the lawsuit.

 

**Cash Flows from Operating Activities**

 

The Company’soperations utilized net cash of approximately $1,046,000 for the three-monthperiod ended September 30, 2003 compared to $381,000 for the same period in2002. In the three-month period ended September 30, 2003, the increase wasprimarily attributed to adjustments to cash for a net loss of $3,439,000,offset by items not effecting cash of depreciation, impairment of long livedassets, and amortization of the discount on notes payable.  In the same period in 2002, the Company hada net loss of $2,418,000.

 

**Cash Flows from Investing Activities**

 

During thethree-month period ended September 30, 2003, investing activities generatedcash in the amount of $149,000 compared to a utilization of $338,000 in2002.  The primary source of the cash in2003 was from the sale of a note receivable previously reported and proceedsfrom the sale of a Right of Entry Agreement. The cash utilized in 2002 was attributableto the initial funding of a note receivable from the Cable Californiaacquisition.

 

**Cash Flows from Financing Activities**

 

During thethree-month period ended September 30, 2003, financing activities generatedcash of approximately $3,046,000 versus $664,000 for the same period in 2002.This was primarily due to bridge loan financings in the amount of $4.1 millionand proceeds from the exercise of warrants of $46,000, offset by repayment ofpromissory notes in the amount of $1,100,000. In 2002 the source of cash fromfinancing activities was from borrowings of approximately $420,000 and issuanceof common stock.

 

**Impact of Recently Issued AccountingPrinciples**

 

There are nonew accounting pronouncements that are expected to have a material effect onthe Company.

 

**ITEM 3—CONTROLS AND PROCEDURES**

 

Based onevaluations by the Company’s chief executive officer, the Company’s chieffinancial officer, of the effectiveness of the Company’s disclosure controlsand procedures conducted as of a date within 90 days of the filing date ofthis quarterly report, it was concluded that, as of the evaluation date,(i) there were no significant deficiencies or material weaknesses in theCompany’s disclosure controls and procedures, (ii) there were nosignificant changes in the internal controls or in other factors that couldsignificantly 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 thatcould significantly affect the Company’s internal controls after the date ofthis evaluation of the controls. We continue to monitor our controls andprocedures on an on-going basis and will make any adjustments necessary toproduce effective disclosure.

 

**PARTII—OTHER INFORMATION**

 

**ITEM 1—LEGAL PROCEEDINGS**

 

The Company isinvolved in various proceedings and subject to various claims as described inits Annual Report on Form 10-KSB for the year ended June 30, 2003,and its Quarterly Report on Form 10-QSB for the three-month period endedSeptember 30, 2003. This report describes only proceedings instituted orclaims arising during or subsequent to the quarter ended September 30,2003, or material events that occurred during or subsequent to the quarter inconnection with previously-reported proceedings or claims.

 

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On September24, 2003, Verizon Media Ventures (Verizon) and GTE Southwest Incorporated (GTE)filed a complaint against the Company and USAB Video Corp. II in the SupremeCourt of the State of New York, county of New York.  In the complaint,Verizon and GTE allege that USAB Video Corp. II breached an asset purchaseagreement and that the Company, by guaranteeing USAB Video Corp.’s performanceunder the agreement, was also liable for USAB Video Corp. II’s breach. The complaint further alleges that Verizon and GTE suffered losses and damagesin excess of $1.023 million.  The Company and USAB Video Corp. IIhave retained counsel to defend against this matter.  Neither the Company nor USAB Video Corp. II has yet to file ananswer to the complaint, but the Company intends to vigorously defend againstthe lawsuit.

 

In February2003, in connection with a lawsuit filed against Cable Concepts, Inc. in August2002 by L.A. Commercial Group, Inc., Cable Concepts received notice of theentry of a default judgment against Cable Concepts in the amount ofapproximately $67,000, which includes the money allegedly owed, plus interest,costs and attorneys’ fees. On November 5, 2003, this suit was settled for$40,000 with payments due in monthly installments of $1,000 on the first of themonth with the first installment due on November 1, 2003.

 

On October 22,2003, a complaint was filed against the Company in the Superior Court ofCalifornia, County of San Diego, by the Company’s landlord for its formeroffice space located in Coronado, California. The complaint alleges that theCompany breached the office lease by vacating the leased premises prior toexpiration of the term of the lease and for alleged damages to the leasedpremises.  The plaintiff requestsdamages in the aggregate amount of $434,500 to be awarded, an amount thatreflects rental fees on the remaining term of the lease of approximately fouryears.  The Company believes that it hasmeritorious defenses to the allegations and is attempting to negotiate with theplaintiff to resolve the matter.

 

 

**ITEM 2—CHANGES IN SECURITIES**

 

On September 8, 2003, theCompany issued to the lender of the $4,000,000 secured debt financing, a warrantto purchase 525,000 shares of common stock at $0.01 per share and a warrant topurchase up to 1,250,000 shares of common stock at $1.10 per share.

 

On September 8, 2003, theCompany issued warrants to its then-exisiting bridge note holders asconsideration for subordinating their security interests in the Company assetsin connection with $4,000,000 bridge financing described immediatelyabove.  The Company issued warrants topurchase up to an aggregate of 390,000 shares of common stock at $1.10 percommon share.

 

In September 2003, theCompany agreed to issue two consultants warrants to purchase up to 20,000 and5,000 shares of common stock at $1.10 per common share, respectively.

 

In September 2003, two ofthe Company’s warrant holders each exercised warrants to purchase up to 33,333common shares of the Company’s common stock at price equal to $0.01 pershare.  Another warrant holder exerciseda warrant to purchase 50,000 shares of the Company’s common stock at $0.90 percommon share.  In connection with theseexercises, the Company issued 116,666 shares of common stock.

 

In August 2003, the Companyissued warrants to purchase 50,000 shares of the Company’s common stock at a$1.00 per common share in connection with a promissory note.

 

In August 2003, two bridgenote holders elected to convert the outstanding principal and accrued interestowed under bridge notes into shares of the Company’s common stock. A note witha face amount of $50,000 and accrued interest and fees of $9,590 was convertedto 74,938 shares of common stock at a conversion rate of $0.80 per share.  A note with a face amount of $50,000 andaccrued interest and fees of $9,590 was converted to 67,360 shares of commonstock at a conversion rate of $0.89.

 

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In August 2003, the Companyissued 57,741 shares of common stock for a share price of $0.87 to a vendor inpartial payment of a note payable. The vendor converted $50,000 of debt for theshares of common stock.

 

On August 12, 2003, the Company’sboard of directors voted to terminate a management services agreement withRichard Lubic.  At that date, Mr. Lubichad 1,000,000 stock options outstanding. The options were valued at theirintrinsic value.  The Company recognizedcompensation expense for the fair market value of Mr. Lubic’s 250,000 vestedstock options.

 

On July 31, 2003, theCompany issued 300,000 shares of common stock as additional consideration forthe sale of a note receivable to six investors.  Additionally, the Company issued 15,000 shares of common stock asa commission related to this sale.

 

In July 2003, two of theCompany’s warrant holders each exercised warrants to purchase 20,000 commonshares of the Company’s common stock at price equal to $0.01 per share.  Another warrant holder exercised a warrantto purchase 10,000 shares of the Company’s common stock at $0.01 per commonshare. In connection with these exercises, the Company issued 50,000 shares ofcommon stock.

 

On July 1, 2003, the Companyissued stock options to its officers and directors as compensation for theirservice to the Company. In the aggregate, the Company issued options topurchase 1,350,000 shares of common stock at a price equal to $1.10 per share.Of these options, options to purchase 925,000 shares vest immediately and theremainder vest in equal installments over a period of three years.

 

In July 2003, in connectionwith a consulting arrangements with Alemany & Associates, the Companygranted Mr. Arturo Alemany 300,000 options to purchase common stock at $1.10per common share. 75,000 of these shares vested immediately. The remainingshares vest in three equal trenches over the next three quarters.

 

In July 2003 nine holders ofSeries A Preferred Stock elected to convert their shares of Series A Preferredstock plus their accumulate dividends to shares of common stock.  An aggregate of 311,853 shares of Series APreferred stock where converted into 425,844 shares of common stock.

 

On May 1,2003, the Company entered into a consulting agreement with an entity which hasagreed to provide investor relations services. The term of the agreement is forfour three-month periods unless terminated. In connection with this agreement, the Company agreed to issue theconsultant 15,000 restricted shares of our stock at the beginning of eachthree-month period that the agreement is in effect. In addition, the Companyagreed to issue to the consultant, upon execution of the agreement, warrants topurchase 300,000 shares of our common stock, in four equal portions, each topurchase 75,000 shares, with exercise prices of $1.00, $1.50, $2.00 and $2.50per share, respectively. The contract may be terminated by either party upon30 days written notice.  OnSeptember 3, 2003, the Company issued 15,000 shares of its common stock inconnection with this agreement.

 

Nounderwriting commissions or discounts were paid in connection with any of theabove transactions. The Company relied upon the exemption from the registrationrequirements of the Securities Act under Section 4(2) of the SecuritiesAct with respect to the offer and sale of the unregistered securities describedabove. We conducted no general solicitation or advertising in connection withany of the transactions described above. Each of the persons that acquiredunregistered securities had a preexisting relationship with us or one of ourplacement agents or founders. In addition, each purchaser was required tocomplete a subscription document and confirm his or her status as a“sophisticated investor.” The Company provided each potential investor with anopportunity to meet with, and ask questions of, our management.

 

**ITEM 3—DEFAULTS UPON SENIOR SECURITIES**

 

Pursuant tothe Certificate of Designation for our preferred stock, the Company is requiredto use 10% of the net proceeds of sales or grants of equity (other than certaingrants to employees, directors, officers or consultants or grants in connectionwith certain acquisitions or transactions) from July 2001 through July 2004,toward payment of a note payable held by Geneva Associates Merchant BankingPartners, then for redemption of the Series B

 

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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 isalso in default to Geneva Associates Merchant Banking Partners for bothprincipal and interest due on notes totaling approximately $1,378,000. As ofSeptember 30, 2003, the Company had not made a payment of either principal orinterest on our obligations to the entity. Prior to September 30, 2003,Geneva Associates Merchant Bank committed to convert the outstanding principaland interest of the debt into shares of common stock. As described in thefootnotes to the financial statements, the Company is currently working withGeneva Associates Merchant Banking to finalize the conversion.

 

OnApril 18, 2003, the Company received a notice from US Bancorp that CableConcepts was in default under a loan agreement with US Bancorp. US Bancorp hasstated that the total amount owed under the agreement is $649,227. The Companybelieves that the actual amount owed is approximately $400,000.  The Company is in negotiations with USBancorp to obtain a waiver of the default and otherwise to resolve this debt.

 

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

 

None.

 

**ITEM 5—OTHER INFORMATION**

 

The Board ofDirectors elected Arturo Alemany, President and Chief Executive Officer ofAlemany & Associates, Inc., to the Board of Directors and as Chairman ofthe Board and Chief Executive Officer, effective September 16, 2003. Under anarrangement with the Company, Alemany & Associates will provide managementconsulting support to the Company. Consulting fees accrue at the rate of$25,000 a month with $12,500 due and payable monthly in cash, and the remainingbalance due the earlier of six months or upon the Company’s completion ofsignificant financing. In connection with this arrangement, the Company grantedMr. Alemany options to purchase 300,000 shares of common stock at $1.10 pershare, of which 75,000 vested in July and the remainder vests in three equalinstallments over the next three quarters.

 

In October 2003, each ofEdward Mooney and Doug Cole resigned from his position as a member of ourboard of directors. As previously announced, the Company’s board ofdirectors has formally appointed Mr. Jack Kemp and Mr. Daniel Villanuevato serve on the board of directors effective November 17, 2003.

 

Mr. Kemp isco-founder and co-director of Empower America, a public policy and advocacyorganization.  Mr. Kemp receivedthe Republican Party’s nomination for Vice President in August 1996.  Prior to founding Empower America, Mr. Kempserved for four years as Secretary of Housing and Urban Development, and for 18years as a member of the United States House of Representatives. Mr.Kemp served for seven years inthe Republican Leadership as Chairman of the House Republican Conference.  Before his election to Congress in 1970, Mr.Kemp played 13 years as a professional football quarterback with the San DiegoChargers and the Buffalo Bills.  Mr. Kemp serves as a memberof the board of directors of several companies, including Oracle and IDTCorporation.

 

Mr. Villanuevais a Managing Director of Bastion Management Corporation and Bastion CapitalCorporation, a Los Angeles-based venture capital firm that targets investmentsin minority-owned businesses.  Bastion Capital invests in U.S. and Mexicancompanies and was an early investor in Telemundo, a national Spanish-language television network,which was sold to NBC for $2billion.  From 1960 until 1968, Mr.Villanueva played professional football with the Los Angeles Rams and theDallas Cowboys.  Mr. Villanueva hasserved as a member of the board of directors of several companies, includingIntegrated Water Resources and Telemundo Network.

 

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

 

(a)

Exhibits List

 
| **Number** |   | **Description  of Document**                                                                         |
|------------|--------|------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                 |
| 10.1       |   | Employment  Agreement dated July 1, 2003, by and between USA Broadband, Inc. and Grant  Miller       |
|       |   |                                                                                                 |
| 31.1       |   | Certification  of chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002 |
|       |   |                                                                                                 |
| 31.2       |   | Certification  of chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002 |

 

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| 32.1   |   | Certification  of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002. |
|--------|--------|-------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                  |
| 32.2   |   | Certification  of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002. |

 

(b)  Reports on Form 8-K

 

On August 18, 2003, the Company filed a Form8-K to report the Company’s decision to terminate the Service Agreement by andbetween the Company and Mr. Richard Lubic.

 

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**SIGNATURES**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
| Dated:  November 14, 2003 | USA  BROADBAND, INC. |
|---------------------------|---------------------------|
|                      |                      |
|                      | By:                       | /s/  ARTURO  ALEMANY |   |
|                      |                      |   |
|                      | Its:                      | Chief  Executive Officer |
|                      |                      |
|                      |                      |
| Dated:  November 14, 2003 | USA  BROADBAND, INC. |
|                      |                      |
|                      | By:                       | /s/  GRANT  MILLER |   |
|                      |                      |   |
|                      | Its:                      | Chief  Financial Officer |
|                           |                           |  |  |  |

 

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