**(Mark One**

 

| **o**                                          | **ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|------------------------------------------------|-------------------------------------------------------------------------------------------|
|                                           |                                                                                      |   |
| **For the fiscal year ended June 30, 2003**    |                                                                                      |   |
|                                           |                                                                                      |   |
| **Commission File  Number  0-29433** |
|                                                |                                                                                           |  |  |

 

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| **USA BROADBAND,  INC.**                                                                                   |
|------------------------------------------------------------------------------------------------------------|
| (Name of small business issuer in  its charter)                                                            |
|                                                                                                       |   |   |
| **Delaware**                                                                                               |   | **84-1592698** |
| (State or other jurisdiction of  incorporation or organization)                                            |   | (IRS Employer Identification No.) |
|                                                                                                       |   |   |
| **121 Broadway Ste.  624,   San Diego, California**                                                        |   | **92101** |
| (Address of principal executive  offices)                                                                  |   | (Zip Code) |
|                                                                                                       |   |   |
| Issuer’s telephone number, including area  code:   **(619)   435-2929** |
|                                                                                                       |   |   |
| Securities registered under Section 12(b)  of the Exchange Act:     **None**      |
| Securities registered under Section 12(g)  of the Exchange Act:                                            |
|                                                                                                       |   |   |
| **13,866,383  Shares of Common Stock, par value $.001**                                                    |
| (Title  of class)                                                                                          |

 

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Check whether the issuer (1) filed allreports required to be filed by Section 13 or 15(d) of the Exchange Actduring the past 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90days.     Yes     ý     No     o

 

Check ifdisclosure of delinquent filers in response to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.

 

Revenue for the year ended June 30,2003: $1,539,187

 

As of October 14, 2003, the aggregatemarket value of the voting and non-voting common equity held by non-affiliateswas $5,289,702

 

As of October 14, 2003, the number ofshares outstanding of the registrant’s common stock was 13,866,383

 

 

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**TABLE OFCONTENTS**

 
| Information  Regarding Forward-Looking Statements                                                                   |
|---------------------------------------------------------------------------------------------------------------------|
| Part I                                                                                                              |
| **Item  1.   Description Of Business**                                                               |
| **Item 2.     Description Of Property**                                                              |
| Item  3.   Legal Proceedings                                                                         |
| **Item  4.   Submission Of Matters To A Vote Of Securities Holders**                                 |
| Part II                                                                                                             |
| **Item  5.   Market Price For Registrant’s Common Equity And Related  Stockholder Matters**     |
| **Item  6.   Management’s Discussion And Analysis Or Plan Of Operation**                        |
| Asset Sales                                                                                                         |
| **Item 7.   Financial  Statements**                                                                  |
| **Item  8.   Changes In And Disagreements With Accountants On  Accounting And Financial Disclosure** |
| Part  III                                                                                                           |
| **Item  9.   Directors And Executive Officers Of The Registrant**                                    |
| **Item  10.  Executive Compensation**                                                                     |
| **Item  11.  Security Ownership Of Certain Beneficial Owners And Management**                             |
| **Item  12.  Certain Relationships And Related Transactions**                                             |
| **Item  13.  Exhibits And Reports On Form 8-K**                                                           |
| **Item  14.  Controls And Procedures**                                                                    |
| **Exhibit  21:**List of Subsidiaries                                                                                |
| Exhibit 31: Certification                                                                                           |
| Exhibit 32: Certification                                                                                           |

 

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INFORMATION REGARDING FORWARD-LOOKINGSTATEMENTS

 

This Annual Report on Form 10-KSBcontains forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. The forward-looking statements arecontained principally in the sections entitled “Description of Business” and“Management’s Discussion and Analysis or Plan of Operation.” These statementsinvolve known and unknown risks, uncertainties and other factors which maycause the Company’s actual results, performance or achievements to bematerially different from any future results, performances or achievementsexpressed or implied by the forward-looking statements.

 

In some cases, you can identifyforward-looking statements by terms such as “may,” “will,” “should,” “could,”“would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,”“predict,” “potential” and similar expressions intended to identifyforward-looking statements. These statements reflect the Company’s currentviews with respect to future events and are based on assumptions and subject torisks and uncertainties. Given these uncertainties, you should not place unduereliance on these forward-looking statements. The Company discusses many of these risks in greater detail under theheading “Factors Affecting Future Performance” in Item 6 of this Form 10-KSB.These forward-looking statements represent the Company’s estimates andassumptions only as of the date of this report, and the Company does not assumeany obligation to update any of these statements.

 

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PARTI

ITEM1. DESCRIPTION OF BUSINESS

 

**General**

 

USA Broadband,Inc. (OTC:USBU) through its subsidiary Cable Concepts Inc. (dba Direct DigitalCommunications, “DDC”) (The Company) provides “private cable” televisionservices to subscribers residing in multiple dwelling units (MDUs) such asapartments, condominiums and other shared housing facilities. Unless otherwiseindicated, throughout this Form 10-KSB references to “its”, “the Company”,“USAB” or “USA Broadband” shall mean USA Broadband, Inc. and itssubsidiaries.  References to “CableConcepts”, “Direct Digital” or “DDC” shall mean our subsidiary, Cable Concepts,Inc. dba Direct Digital Communications.

 

**Acquisition of Assets of Cable California S.A. de C.V.**

 

On January 10, 2003, the Company entered into an AssetPurchase 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”), topurchase 100% of the Class B and Class N shares of Cable California, SA deC.V., a Mexican corporation (“Cable California”) from dick clark internationalcable ventures, as well as various tangible and intangible assets related toCable California’s operations in Mexico and certain other rights from LasAmericas.  The Class B shares represent49.0% of the voting and economic interest in Cable California, while the ClassN shares would bring the Company’s economic interest in Cable California to90.0%.  Cable California possesses a30-year advanced telecommunications broadband concession from the Mexicangovernment to construct and operate a 750-MHz fiber-optic network providingmulti-channel cable television (including the right to seek approval to providehigh-speed internet, telephone and data services) to residents and businessesin the greater Tijuana, Mexico metropolitan area. Cable California isconstructing a 1,300-mile broadband network and has completed the first phaseof this cable build, including its head-end, central operations center andapproximately 100 miles of cable plant now serving approximately 1,500customers.

 

On March 7, 2003, the Company purchased all of theClass B shares of Cable California.  Inaddition, the Company acquired various tangible and intangible assets,including office and computer equipment, vehicles, machinery and satelliteequipment from Las Americas.  TheCompany intends to use these assets in a similar manner to the way they wereused by Las Americas.  The Company alsoacquired Las Americas’s rights and obligations under an agreement dated as ofSeptember 26, 2002, among Las Americas, Cable California, Mr. CarlosBustamante, Sr. and LABN Mexico, SA de C.V., a Mexico corporation, pursuant towhich, among other things, Las Americas possessed the right to receive Class Nshares from Cable California.  Theagreement also entitled the Company to purchase Mr. Bustamante’s ownershipinterest in Cable California.  However,Mr. Bustamante has informed the Company that he terminated this agreement withLas Americas based on an alleged breach of the agreement.  Accordingly, no Class N shares in CableCalifornia have been issued.  TheCompany currently is involved in negotiations with Mr. Bustamante to purchasethe remaining interests in Cable California. See “Factors Affecting Future Performance.”

 

As consideration for the above acquisitions, theCompany issued 2,500,000 shares of its common stock to dick clark internationalcable 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 other financial obligations of Cable California and LasAmericas and reduced the outstanding principal amount of a promissory noteissued by Las Americas to the Company from $890,276 to $500,000.  The amended note will remain collateralizedby assets of Las Americas, including its cable television system in Tehachapi,California.  The Company also paid Las Americas $250,000 in cash.  The Company intends to operate and managethe proposed cable system in Tijuana while continuing to manage theapproximately 3,300 MDU subscribers the Company presently serves in Californiaand Texas.

 

Subsequent to March 7, 2003, the Company formed USABroadband Mexico, SA de C.V., a Mexican corporation (“USA Broadband Mexico”),which is a wholly-owned subsidiary of the Company.  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 toregister the Class B shares in the name of USA Broadband Mexico.  To register the Class B shares to USABroadband Mexico, the Company and dick clark international cable ventures mustmake appropriate filings with the Mexican Federal Telecommunications Commission(Comision Federal de Telecomunicaciones) and the Secretary of Communicationsand Transportation (Secretaria de Comunicaciones y Transportes).  The Company currently is working to makethese filings.  If dick clarkinternational cable ventures does not effectuate the registration ascontemplated by the Asset Purchase Agreement, the Company and USA BroadbandMexico are prepared to enforce any and all rights available to them to securethe registration of the Class B shares in Mexico.

 

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**DDC’s Operations**

 

The Company acquired Cable Concepts,Inc., which does business under the name DDC, in July 2001. DDC markets itsservices to apartment owners and condominium developments. In some areas, DDCprovides “private cable” television services to MDUs.

 

DDC generates revenue via arevenue-sharing agreement with DIRECTV as well as through the delivery of its ownlocal programming and related  services. DDC secures the right to deliver its service to MDUcustomers   through exclusive Right ofEntry marketing agreements. DDC deploys its in-building systems using afiber/coaxial hybrid distribution infrastructure, which offers up to 3,000Megahertz of bandwidth, coupled with interdiction and Ethernetconnectivity.  The Company believes thatthis allows for a cost effective “last mile” delivery of services, includingdigital television and high-speed data that are in high demand by customers.DDC typically has provided system design and installation, systems management,and ongoing customer service. In most cases, once a system is installed in amulti-tenant building, DDC markets its television services directly to buildingresidents.

 

During the past fiscal year, theCompany has divested DDC’s MDU operating assets in areas other than its coremarkets of California and Northern Baja, Mexico. As of December 31, 2001, DDChad 12,393 subscribers that it serviced and 665 subscribers that were managedby an unaffiliated party. As of June 30, 2002, DDC was a party to 127 Right ofEntry Agreements and was operating, or in the process of installing, 127 cablenetwork systems in approximately 21,052 apartment units in seven states and hadapproximately 10,008 subscribers. At June 30, 2003 DDC was party to 27 Right ofEntry Agreements in California with approximately 5,598 apartment units and hadapproximately 3,043 subscribers. Additionally, the Company has Right of EntryAgreements on another six properties in Texas with 877 units and 210subscribers. These properties are managed on a contract basis by DigitalServices, Inc., an unaffiliated entity.

 

From time to time DDC receivesnotices from owners of properties for which it has Right of Entry Agreementsclaiming that it is in default of the  agreements. DDC attempts to respond to these default notices as promptlyas possible, and to cure any defaults described in the notices. However, thedefault notices sometimes lead to a termination of service.  DDC lost approximately 2,700 subscribers and968 subscribers, in 2003 and 2002, respectively, as a result of terminations ofservice resulting from alleged defaults under this Right of Entry Agreements.

 

DDC receives direct payments fromsubscribers for local and community programming and revenue-sharing paymentsfrom DIRECTV for premium programming. Approximately three-quarters of DDC’s MDUproperties have been “takeovers” from previous system operators, includingcable television system operators, and “overbuilds” of existing cable systems;the remaining one-quarter have been new installations of intra-buildingbroadband infrastructure.

 

**Competition**

 

The Company competes with othermulti-channel programming distributors, including other direct broadcastsatellite operators, cable operators, wireless cable operators, Internetproviders and local and long-distance telephone companies, which may be able tooffer more competitive packages or pricing than the Company. In addition, the directbroadcast satellite industry is still evolving and recent or future competitivedevelopments could adversely affect the Company. Franchise cable operatorstypically have an exclusive franchise to provide wire-line cable televisionwithin a particular municipality. The average franchise cable offering hasbetween 50 and 70 channels and is dominated by large competitors such as

 

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AT&T/TCI, Time Warner, Cox Cable, MediaOne and Comcast.  Historically, thefranchise cable offerings have been delivered via a 550Mhz, one-way coaxialwire that limited the number of channel offerings and prohibited the franchisecable companies from offering other value added services, such as high-speedInternet access, telephone service and video offerings. Digital cable servicesoffer broader channel line-ups and premium services.

 

Franchise cableoperators have not historically focused on the MDU market and also have beenreluctant to offer a revenue-sharing program. However, despite the lack offocus on the MDU market and the general reluctance to embrace theprofit-sharing business model, the Company believes that franchise cableoperators, due to their financial resources, may provide a significant sourceof competition in the Company’s MDU markets.

 

**Employees**

 

As of September29, 2003 the Company had nine full-time employees, in customer support,administration and finance, and field operations.

 

**History**

 

USABroadband, Inc. was originally incorporated in 1985 for the purposes ofacquiring business entities or other investment activities. In early 2001, theCompany adopted a new business strategy to become a provider of digitaltelevision, data and broadband interactive services. In July 2001, the Companychanged its name from Optika Investment Company, Inc. to USA Broadband, Inc.

 

ITEM 2. DESCRIPTION OF PROPERTY

 

TheCompany currently leases office space in Coronado, California and Santa FeSprings, California. The Company also leases property in Texas that is nolonger occupied by the Company.

 

ITEM 3. LEGAL PROCEEDINGS

 

The Company is involvedin various proceedings and subject to various claims as described in theCompany’s Annual Report for the nine months ended June 30,2002 on Form 10-KSBand in the Company’s Quarterly Reports on Form 10-QSB for the quarters endedSeptember 30, 2002, December 31, 2002, and March 31, 2003. This reportdescribes only proceedings instituted or claims arising during or subsequent tothe year ended June 30, 2003, or material events that occurred during orsubsequent to the year-end in connection with previously-reported proceedingsor claims. Many of the actions described in this Section have been filedagainst Cable Concepts, Inc., the Company’s subsidiary, (dba Direct DigitalCommunications).

 

CableConcepts Proceedings

 

InSeptember 2001 Van Raden Properties, Inc., Greystone Manor Limited Partnershipand Southmoor Limited Partnership filed an action against the Company’ssubsidiary, Cable Concepts, Inc., in the District Court, County of Cass, Stateof North Dakota. The plaintiffs, who own and operate apartment buildings andmobile homes throughout North Dakota and Minnesota, entered into severalcontracts with Cable Concepts for provision of satellite television services.The plaintiffs sought a declaratory judgment that, due to Cable Concept’salleged failure to provide quality service, the contracts should be terminated.On August 13, 2002, the court issued an order terminating the contracts betweenDirect Digital and the plaintiffs and ordered that Cable Concepts pay a totalof approximately $81,000, consisting of damages and costs and expenses, to theplaintiffs.

 

In June 2002, OnePath Networks filed an action against Direct Digital

 

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in New Jersey state courtlocated in Essex County, New Jersey, seeking the sum of $138,000 in connectionwith an alleged breach of contract.

 

OnSeptember 7, 2002 default judgment was entered against Cable Concepts in favorof Amerilink for $33,000, ($28,000 for services rendered and $5,000 for feesand costs), in the Superior Court of the State of Washington for servicespreviously rendered by Amerilink by Cable Concepts.

 

In January 2003 Cable Concepts received notice of a default judgment inthe amount of $89,000 entered against Cable Concepts in connection with alawsuit originally filed in July 2002 by The Telecom Group. Cable Concepts isseeking to negotiate a payment plan with The Telecom Group in connection withthis judgment.

 

In February 2003, in connection with a lawsuit filed against CableConcepts in August 2002 by L.A. Commercial Group, Inc., Cable Concepts receivednotice of the entry of a default judgment against Cable Concepts in the amountof approximately $67,000, which includes the money allegedly owed, plusinterest, costs and attorneys’ fees.

 

On January 13, 2003,Chateau Marina LP filed an action against Cable Concepts in the Superior Courtfor the State of California, Los Angeles County, for breach of contract andintentional and negligent interference with contractual relations in connectionwith a contract under which Cable Concepts agreed to provide satellite videoand audio programming to residents of Chateau Marina. In the complaint ChateauMarina is seeking termination of the contract, damages for the alleged breachof the contract in the amount of approximately $25,000, injunctive relief andcancellation of a cloud on the title of properties covered by the agreement.Cable Concepts has negotiated a tentative settlement to this dispute andexpects to have the definitive settlement agreement signed by the parties inthe near future.

 

On February 11, 2003Archstone Properties, owners of Ashton Place, gave notice of termination of theRight of Entry Agreement to Cable Concepts. The alleged reason for the termination was lack of payment to the ownersof the quarterly revenue share. Archstone sent a notice of default in January 8, 2003 with a 30-day cureperiod.  Cable Concepts sent paymentwithin the cure period to the original address per the contract, but Archstonehad moved to a new location.  A newcheck was sent to Archstone but it did not arrive until February 13, 2003.  Archstone contends that, since it did notreceive the money until after the cure period had expired, it has the right toterminate the agreement.  The matter isscheduled for arbitration through the American Arbitration Association inDenver, Colorado on November 14, 2003. Cable Concepts has continued to provide services to this property andbelieves it will prevail in the arbitration.

 

OnFebruary 12, 2003, Federal Express Corp. filed a complaint against CableConcepts in the Superior Court of the State of California, Los Angeles County,for past due services, interest and fees. The amount sought by Federal Expressin the complaint is $30,000.

 

OnFebruary 17, 2003, in Texas state court, a default judgment was entered againstCable Concepts in the amount of approximately $87,000, including $70,000 indamages and $17,000 in attorneys’ fees, in favor of Tri-Tek Communications,Inc.

 

OnFebruary 24, 2003, Volt Management, Inc. filed a complaint against CableConcepts in the Superior Court for the State of California, Los Angeles County,alleging breach of contract in connection with its hiring of temporaryemployees through Volt Management, and seeking damages of approximately$21,000.

 

OnApril 8, 2003, Protocol Communications, Inc. filed a complaint against CableConcepts in the Superior Court of the State of California, Los Angeles County,seeking damages of approximately $208,000 and attorneys’ fees in the amount ofapproximately $4,000. In the complaint, Protocol Communications alleges thatCable Concepts breached the contract with Protocol relating to the marketingprovisions in the contract.

 

OnApril 30, 2003, Gunhus Grinnell Klinger Swenson filed a complaint against CableConcepts, the Company’s subsidiary, for $16,015.43 for unpaid legal feesrelating to its defense of the Van Raden Properties filed in the District CourtState of North Dakota.

 

OnMarch 10, 2003, there was a default judgment entered for QPC Fiber Optic, Inc.for $29,177 against Cable Concepts, Inc. filed in the Superior Court of OrangeCounty California.  Cable Concepts isnegotiating for a debt

 

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for stock conversion.

 

USABroadband Proceedings

 

OnMay 30, 2003, Thomas Breen filed a complaint in the Superior Court of San Diegoagainst USA Broadband and all of its subsidiaries for $29,209.80 for servicesnot paid.

 

OnJune 30, 2003, USA Broadband served Richard G. Lubic notice that he was inbreach of certain material terms of the Management Services Agreement dated asof February 12, 2003, between the Company and Mr. Lubic (the “Agreement”).  The Company informed Mr. Lubic that,pursuant to the terms of the Agreement, he had thirty (30) business days inwhich to cure the breach, otherwise the Agreement would be terminated.  Mr. Lubic failed to cure the breach withinthe thirty (30) business days.  As such,on August 12, 2003, the Company’s board of directors voted to terminate theAgreement and Mr. Lubic’s services to the Company. To date, no litigation hasbeen filed relating to this matter.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OFSECURITIES HOLDERS

 

None.

 

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PARTII

ITEM 5. MARKET PRICE FOR REGISTRANT’SCOMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

The Company’s shares are traded on theOver-the-Counter Bulletin Board or “OTCBB,” under the symbol USBU.OB. The tablebelow shows the high and low closing prices for each fiscal quarter during thefiscal year ended June 30, 2003 and the twelve month period ended June 30,2002.

 

Fiscal Year Ended June 30, 2003

 

| **Quarter Ended** |   |   |   | **Share Price** |   |
|-------------------|--------|--------|--------|-----------------|--------|
| 6/30/03           |   | High   |   | $               | 1.14   |   |
|              |   | Low    |   | $               | 0.66   |   |
|              |   |   |   |            |   |
| 3/31/03           |   | High   |   | $               | 1.55   |   |
|              |   | Low    |   | $               | 0.67   |   |
|              |   |   |   |            |   |
| 12/31/02          |   | High   |   | $               | 1.83   |   |
|              |   | Low    |   | $               | 1.05   |   |
|              |   |   |   |            |   |
| 9/30/02           |   | High   |   | $               | 2.70   |   |
|              |   | Low    |   | $               | 1.65   |   |

 

Twelve Months Ended June 30, 2002

 

| **Quarter Ended** |   |   |   | **Share Price** |   |
|-------------------|--------|--------|--------|-----------------|--------|
| 6/30/02           |   | High   |   | $               | 3.20   |   |
|              |   | Low    |   | $               | 2.05   |   |
|              |   |   |   |            |   |
| 3/31/02           |   | High   |   | $               | 3.45   |   |
|              |   | Low    |   | $               | 2.60   |   |
|              |   |   |   |            |   |
| 12/31/01          |   | High   |   | $               | 3.75   |   |
|              |   | Low    |   | $               | 3.00   |   |
|              |   |   |   |            |   |
| 9/30/01           |   | High   |   | $               | 4.50   |   |
|              |   | Low    |   | $               | 3.50   |   |

 

As of September 29, 2003, the Company hadapproximately 308 record holders of the Company’s shares of common stock. TheCompany has not declared any cash dividends on its common stock since inceptionand the Company’s board of directors has no present intention of declaring anydividends. For the foreseeable future, the Company intends to retain allearnings, if any, to develop and expand the Company’s business.

 

**Recent Sales of Unregistered Securities**

 

**Below is a summary of the Company’s recent sales ofunregistered securities that have not been reported previously in the Company’sSEC reports.**

 

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In September 2002, theCompany issued a warrant to purchase up to 100,000 shares of common stock at aprice equal to $2.00 per share to an individual who performed consultingservices for the Company.

 

In October 2002, theCompany issued warrants to purchase up to 200,000 shares of common stock at aprice equal to $1.10 per share to each of two individual shareholders inconsideration for their extension of the maturity date of their respectivepromissory notes for $150,000.

 

In January 2003, theCompany renewed a consulting agreement with Maroon Bells Capital, L.L.C. One ofthe Company’s significant stockholders, Mr. Paul Moore, is a member of MaroonBells. In connection with the renewal of the consulting agreement, a warrant topurchase up to 500,000 shares of common stock at a price equal to $1.10 pershare was issued to Maroon Bells.

 

In June 2003, two noteholders elected to convert the outstanding principal and accrued interest owedunder the bridge note into shares of the Company’s common stock. A total of$239,800 (consisting of $200,000 in principal and $39,800 in accrued interestand other fees) was converted into 275,739 shares of common stock (a conversionrate of $1.10 per share).

 

As the Company previouslyreported in its Quarterly Report on Form 10-QSB for the quarter ended March 31,2003, between October 2002 and May 2003, the Company issued bridge notes havinga total principal amount of $1,750,000 to sophisticated investors.  In June and July 2003, the Company offeredadditional bridge notes to sophisticated investors. As of June 30, 2003, theCompany had issued bridge notes having an aggregate principal amount equal to$2,050,000.  In connection with thebridge loans 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. The indebtedness evidenced by the bridge notes is secured bycertain of the Company’s assets and the assets of its subsidiaries. For moreinformation regarding the notes and warrants issued in connection with thenotes, see “Management’s Discussion and Analysis Or Plan Of Operation-FinancingOperations”.

 

In August 2003, twobridge note holders elected to convert the outstanding principal and accruedinterest owed under the bridge notes into shares of the Company’s commonstock.  In particular, a note with aface amount of $50,000 and accrued interest and fees of $9,590 was converted to74,938 shares of common stock (a conversion rate of $0.80 per share), and anote with a face amount of $50,000 and accrued interest and fees of $9,590 wasconverted to 67,360 shares of common stock (a conversion rate of $0.89).

 

On September 8, 2003, the Company obtainedsecured debt financing in the amount of $4,000,000 from a privateinvestor.  The financing is evidenced bya convertible promissory note and secured by a first priority lien in all orsubstantially all of the Company’s assets. In connection with this financing, the Company asked the Company’sexisting bridge note holders to subordinate their security interest in certainof the Company’s assets and the assets of the Company’s subsidiaries. Asconsideration for the subordination, the Company issued to the holders ofbridge notes warrants to purchase shares of the Company’s common stock. A totalof 390,000 warrants having an exercise price of $1.10 per common share wereissued. As additional consideration for the $4,000,000 financing, the Companyissued to the lender a warrant to purchase 525,000 shares of common stock at$.01 per common share and a warrant to purchase up to 1,250,000 shares ofcommon stock at $1.10 per share. See “Management’s Discussion and Analysis orPlan of Operation – Subsequent Events.”

 

In June 2003,several vendors agreed to convert outstanding account payable balances due theminto shares of the Company’s common stock. A total of $1,267,800 of accountspayable was converted at the rate of $1.10 per common share. In connection withthe conversion, the Company issued a total

 

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of 1,152,550 common shares. Of thattotal, $1,128,206 and 1,025,242 shares of commons stock represents the amountof debt and the number of shares of commons stock converted by related parties.

 

In June 2003, a $166,667promissory note including principal and interest due to a shareholder wasconverted into 151,515 shares of common stock at the rate of $1.10 per commonshare.

 

In June 2003 a $170,300promissory note including $20,700 of accrued interest due to a shareholder wasconverted to 154,820 shares of common stock at the rate of $1.10 per commonshare.

 

On July 1 2003, theCompany issued stock options to its officers and directors as compensation fortheir service 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.

 

On July 25, 2003, one ofthe Company’s warrant holders exercised his warrant to purchase 10,000 sharesof the Company’s common stock at a price equal to $0.01 per share.  In connection with the exercise, the Companyissued the 10,000 shares of common stock.

 

On August 13, 2003, twoof the Company’s warrant holders exercised their warrant to purchase 20,000shares of the Company’s common stock at a price equal to $0.01 per share. Inconnection with the exercises, the Company issued 40,000 shares of commonstock.

 

No underwriting commissions or discountswere paid in connection with any of the above transactions. The Company reliedupon the exemption from the registration requirements of the Securities Actunder Section 4(2) of the Securities Act with respect to the offer andsale of the unregistered securities described above. The Company conducted nogeneral solicitation or advertising in connection with any of the transactionsdescribed above. Each of the persons that acquired unregistered securities hada pre-existing relationship with the Company or one of the Company’s placementagents or founders. In addition, each purchaser was required to complete asubscription document and confirm his or her status as a “sophisticatedinvestor.” The Company provided each potential investor with an opportunity tomeet with, and ask questions of, the Company’s management.

 

ITEM 6. MANAGEMENT’S DISCUSSION ANDANALYSIS OR PLAN OF OPERATION

 

The following discussion and analysisshould be read in conjunction with the Company’s Consolidated FinancialStatements and Notes included elsewhere in this Annual Report on Form 10-KSB.This discussion contains certain “forward-looking statements” that involverisks and uncertainties, such as statements of its plans, objectives,expectations and intentions. The Company’s actual results could differmaterially from those discussed here. Factors that could cause or contribute tothese differences include those discussed under the heading “Factors AffectingFuture Performance,” as well as those discussed elsewhere in this report.

 

**General**

 

USABroadband, Inc. (OTC:USBU) through its subsidiary Cable Concepts Inc. (dbaDirect Digital Communications, “DDC”) provides “private cable” televisionservices to subscribers residing in multiple dwelling units (MDUs) such asapartments, condominiums and other shared housing facilities.

 

**Acquisition of Assets of Cable California S.A. de C.V.**

 

OnJanuary 10, 2003, the Company entered into an Asset Purchase Agreement with,among others, dick clark international cable ventures, and Las Americas, topurchase 100% of the Class B and Class N shares of Cable California from dickclark international cable ventures, as well as various tangible and intangibleassets related to Cable California’s operations in Mexico and certain otherrights from Las Americas.  The Class Bshares represent 49.0% of the voting and economic interest in Cable California,while the Class N shares would bring the Company’s economic interest in CableCalifornia to 90.0%.  Cable Californiapossesses a 30-year advanced telecommunications broadband concession from theMexican government to construct and operate a 750-MHz fiber-optic networkproviding multi-channel cable television (including the right to seek approvalto provide high-speed internet, telephone and data services) to residents andbusinesses in the greater Tijuana, Mexico metropolitan area. Cable Californiais constructing a 1,300-mile broadband network and has completed the firstphase of this cable build, including its head-end, central operations centerand approximately 100 miles of cable plant now serving approximately 1,500customers.  

 

OnMarch 7, 2003, the Company purchased all of the Class B shares of CableCalifornia.  In addition, the Companyacquired various tangible and intangible assets, including office and computerequipment, vehicles, machinery and satellite equipment from Las Americas.  The Company intends to use these assets in asimilar manner to the way they were used by Las Americas.  The Company also acquired Las Americas’srights and obligations under an agreement dated as of September 26, 2002, amongLas Americas, Cable California, Mr. Carlos Bustamante, Sr. and LABN Mexico, SAde C.V., a Mexico corporation, pursuant to which, among other things, LasAmericas possessed the right to receive Class N shares from CableCalifornia.  The agreement also entitledthe Company to purchase Mr. Bustamante’s ownership interest in CableCalifornia.  However, Mr. Bustamante hasinformed the Company that he terminated this agreement with Las Americas basedon an alleged breach of the agreement. Accordingly, no Class N shares in Cable California have beenissued.  The Company currently isinvolved in negotiations with Mr. Bustamante to purchase the remaininginterests in Cable California.  See“Factors Affecting Future Performance.”

 

Asconsideration for the above acquisitions, the Company issued 2,500,000 sharesof its common stock to dick clark international cable ventures, 2,250,000shares to Las Americas, and 250,000 shares to Mr. Bustamante. In addition, theCompany assumed a total of $1,250,000 of debt, liabilities and other financialobligations of Cable California and Las Americas and reduced the outstandingprincipal amount of a promissory note issued by Las Americas to the Companyfrom $890,276 to $500,000.  The amendednote will remain collateralized by assets of Las Americas, including its cabletelevision system in Tehachapi, California. The Company also paid Las Americas $250,000 in cash.  The Company intends to operate and managethe proposed cable system in Tijuana while continuing to manage theapproximately 3,300 MDU subscribers the Company presently serves in Californiaand Texas.

 

Subsequentto March 7, 2003, the Company formed USA Broadband Mexico, which is a wholly-ownedsubsidiary of the Company.  Under thelaws of Mexico, the transfer of the Class B shares of Cable California must beregistered with appropriate governmental authorities in Mexico.  The Company intends to register the Class Bshares in the name of USA Broadband Mexico. To register the Class B shares to USA Broadband Mexico, the Company anddick clark international cable ventures must make appropriate filings with theMexican Federal Telecommunications Commission (Comision Federal deTelecomunicaciones) and the Secretary of Communications and Transportation(Secretaria de Comunicaciones y Transportes). The Company currently is working to make these filings.  If dick clark international cable venturesdoes not effectuate the registration as contemplated by the Asset PurchaseAgreement, the Company and USA Broadband Mexico are prepared to enforce any andall rights available to them to secure the registration of the Class B sharesin Mexico.

 

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The Company isseeking to position itself as an industry leader in providing digitaltelevision, entertainment, data, Internet and broadband services in Mexico andSouthern California. The Company’s current operations consist of providingvideo service to MDU subscribers through Cable Concepts, which the Companyacquired in July 2001. The Company receives revenues from subscriber fees andrevenue-sharing payments from DIRECTV.

 

**Critical Accounting Policies**

 

***Principlesof Consolidation***.          Theaccompanying financial statements include the accounts of USA Broadband and itswholly-owned subsidiaries, Cable Concepts, Inc., Direct Digital Midwest andUSAB Video Corp II, Inc. All material intercompany transactions and accountshave been eliminated in the consolidation.

 

***RevenueRecognition***.          TheCompany recognizes revenues as services are provided, generally on a monthlybasis.

 

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***Costof Revenues***.          TheCompany’s costs of revenues consist primarily of programming fees the Companypays to the providers of local television signals and costs of installingequipment for new subscribers.

 

***Propertyand Equipment***.          TheCompany states property and equipment at its historical cost.  The Company capitalizes significantadditions and improvements, and expense repairs and maintenance as they areincurred. Upon disposition of equipment, gains or losses are reflected in theCompany’s statement of operations.

 

***Depreciation.          *** TheCompany computes depreciation on property and equipment using the straight-linemethod over the following estimated useful lives:

 
| Cable  equipment:                 |   | 3 to 7 years                                                 |   |
|-----------------------------------|--------|--------------------------------------------------------------|--------|
|                              |   |                                                         |   |
| Furniture  and equipment:         |   | 3 to 7 years                                                 |   |
|                              |   |                                                         |   |
| Computer  software and equipment: |   | 3 to 5 years                                                 |   |
|                              |   |                                                         |   |
| Vehicles:                         |   | 5 years                                                      |   |
|                              |   |                                                         |   |
| Leasehold  improvements:          |   | Life of lease (generally 5-10 years)                         |   |
|                              |   |                                                         |   |
| Cable  properties:                |   | Life of Right of Entry Agreement  (generally 10 to 12 years) |   |

 

***Impairmentof Long-Lived Assets***.          Inthe event that facts and circumstances indicate that the stated value of anasset may be impaired, the Company evaluates the recoverability of the asset.If an evaluation is required, the Company compares the estimated futureundiscounted cash flows associated with the asset to the asset’s carryingamount to determine if a write-down to market or discounted cash flow value isrequired.

 

***DeferredRevenue***.          Deferredrevenues arise from the commissions earned from installation and operation ofsystems providing video services. These commissions are amortized into incomeon the straight-line basis over three years, which represents the estimateduseful life of the related assets.

 

***Statementof Cash Flows***.          Forpurposes of the Company’s statements of cash flows, the Company considers all highlyliquid debt instruments purchased with an original maturity of three months orless to be cash equivalents.

 

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**Results of Operations**

Information presented in the financialstatements included herein is for the year ended June 30, 2003 and thenine-month period ended June 30, 2002. For purposes of the chart below, the Company believes that it is moremeaningful to present the information on comparative basis for a period oftwelve months.  The Company hastherefore combined the nine-month period ended June 30, 2002 and the threemonth period ended September 30, 2001 to arrive at comparative periods.Additionally, the twelve-month period ended June 30, 2002 has been adjusted forthe effect of discontinued operations.

 

The selected financial information whichfollows includes selected pro forma combined operations data for the Companyand DDC for the year ended June 30, 2003 and the twelve month period ended June30, 2002.

 

Additionally, thedata was adjusted for the effect of discontinued operations on revenue andcosts.

 

SelectedFinancial Information for the Year Ended June 30, 2003 and twelve month periodended June 30, 2002:

 
|                                            |   | **(In Thousands)**        |   |
|-------------------------------------------------|--------|---------------------------|--------|
|                                            |   | **Year  Ended  06/30/03** |   | **% of  Revenues** |   | **Twelve  Months Ended  06/30/02 (Pro  Forma  Combined)** |   | **% of  Revenues** |   | **% Change  from 2002  to 2003** |   |
| Revenues                                        |   | $                         | 1,539  |   | 100.0 | % | $ | 2,966 |   | 100.00 | % | (48.1 | )% |
| Cost of Revenues                                |   | 674                       |   | 43.8 | % | 1,126 |   | 37.96 | % | (40.1 | )% |
| Gross Profit                                    |   | 865                       |   | 56.2 | % | 1,840 |   | 62.04 | % | (52.9 | )% |
| Selling, general  & administrative expenses |   | 8,351                     |   | 542.6 | % | 10,883 |   | 366.92 | % | (23.3 | )% |
| Impairment of  Long Lived asset                 |   | 80                        |   | 5.2 | % | 9,850 |   | 332.09 | % | (99.1 | )% |
| Depreciation and  Amortization                  |   | 1,012                     |   | 65.8 | % | 1,314 |   | 44.30 | % | (9.7 | )% |
| Total Operating  Expenses                       |   | 9,443                     |   | 613.6 | % | 22,047 |   | 743.32 | % | (57.2 | )% |
| Loss from  Operations                           |   | (8,578                    | )      | (557.4 | )% | (20,207 | ) | (681.2 | )% | 57.6 | % |
|                                                 |        |                           |        |  |  |  |  |  |  |  |  |  |  |

 

The decline in the Company’s revenues inthe fiscal year ended June 30, 2003 resulted from the termination of Right ofEntry Agreements for 20 properties and the sale of Right of Entry Agreementsfor 74 properties. The Company’s subscriber count declined by 68% resulting inthe corresponding decline in revenue. Cost of revenues was lower as apercentage of the Company’s revenues because its more costly fixed contractswere terminated.

 

The Company’s selling, general andadministrative expenses declined from the prior year because the Companyreduced its staffing and because the Company brought customer service, billingand installation in-house.

 

**Liquidity and Capital Resources**

 

The Company’s financial statements arepresented on a going-concern basis. This contemplates the realization of assetsand liquidation of liabilities in the normal course of business. At June 30,2003, the Company had a working capital deficit of approximately $9,667,000. Intheir opinion,

 

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theCompany’s independent auditors, Hein & Associates, LLP, have expressedsubstantial concern regarding the Company’s ability to continue as a goingconcern. The Company’s ability to continue as a going concern depends on itsability to increase revenues, raise the capital necessary to successfullyimplement its business plan and ultimately achieve profitable operations.

 

**Asset Sales**

 

During its fiscalyear ended June 30, 2003, the Company focused on cutting its costs and sellingcertain of its non-core assets. To increase operational efficiency, focus ongeographic concentration of its operations to Mexico and California, anddispose of assets that are not consistent with its business plan, the Companyused the proceeds of asset sales to repay debt and other obligations, and toreinvest the remaining net proceeds, if any, in existing or new assets. Duringthe fiscal year the Company disposed of the following assets:

 

**DSI Sale**

 

On December 23, 2002 Cable Concepts enteredinto a contract for the sale of certain Rights of Entry Agreements to DigitalService, Inc. (DSI). The transaction was effective as of December 1, 2002, andcovered 55 cable properties in several states with approximately 1,900subscribers.

 

The aggregate purchase price for the rightof entry agreements was $1,995,000 which is comprised primarily of debtassumption by DSI. DSI assumed its note payable to Pacifica Bank in the amountof $1,592,000, and assumed a credit card debt in the amount of $15,000. Theyalso assumed other liabilities and assets relating to the operations of theproperties which netted to approximately $116,000. Due to a decrease in thenumber of subscribers under the Right of Entry Agreements, the Company issued apromissory note to DSI in the amount of $376,000 in April, 2003.In addition,Cable Concepts Inc. (CCI) transferred a property in Washington to DSI inexchange for the assumption of a debt to a third party in the amount of$121,000. The carrying amount of the assets relating to this sale was$2,435,000.

 

**Dakotas**

 

InJanuary 2003, Cable Concepts sold several Right of Entry Agreements for cableproperties located in North Dakota, which had a total of 129 basic subscribers.The sale was for a total of $129,000 and the net proceeds were used to pay downbank debt. The carrying value of the assets sold was $266,000, resulting in anet loss of $179,000.

 

**Belmont**

 

TheCable Concepts sold Right of Entry Agreements for a small bulk property locatedin Memphis, TN for $32,000 and the proceeds were used as working capital. Thecarrying value of the assets sold was $46,000.

 

**Memphis Properties**

 

OnApril 7, 2003 Cable Concepts completed a sale of assets consisting of threeRight of Entry Agreements, serving 352 private cable subscribers in Memphis,Tennessee to Time Warner Cable for $432,000 in cash, or $1,207 per subscriber.Adjusted carrying value of this property was $499,000.

 

**La Salle Acquires Direct DigitalMidwest**

 

On September 29, 2000, two of our indirectsubsidiaries, Direct Digital Midwest, Inc. (DDM) and CP Dakotas MDU, LLC (CPD)borrowed an aggregate of $2 million from LaSalle Bank NationalAssociation.  The loan

 

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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 value of thecollateral securing the loan was insufficient to cover the entire amount thendue under the loan. To date, LaSalle Bank has not pursued any action or madeany claim against the Company or Cable Concepts for the amount of anyshortfall.

 

**Sale of Notes Receivable**

 

In April 2003, USAB completed a sale of a $500,000 note receivable fromLas Americas collateralized by all of the assets of Las Americas, Inc. A firmpurchased the note for $500,000. The note assigns the security interest of allof the assets of Las Americas Broadband that were held by the Company. Intereston the note is for one year at 15%. Additionally the Company is liable for upto $250,000 if Las Americas defaults on the note and there are not sufficientassets to cover the note.  The Companyissued 300,000 shares of common stock as additional consideration for this noteand paid $50,000 and issued 1,500 shares of common stock as a commission.

 

**Financing Operations**

 

The Company has had limited access toinvestment capital to support working capital deficits or to expand existingoperations. Consequently, the Company’s financial condition has deteriorated.As a result the Company has focused on negotiations with prospective lenders andinvestors as the Company seeks to refinance all outstanding loans andliabilities and to seek new investments in order to provide working capital.

 

Between October 2002 and July 2003, theCompany issued bridge notes having a total principal amount of $2,050,000 tosophisticated 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 exercise price of the lesser of $1.00 or the average bid price of theCompany’s common stock for the preceding 20 trading days.  The indebtedness evidenced by the bridgenotes is secured by certain of the Company’s assets and the assets of theCompany’s subsidiaries.  See“Management’s Discussion and Analysis Or Plan Of Operation – Subsequent Events.”

 

Belowis a summary of the bridge note transactions as of June 30, 2003:

 

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| **Date of  Loan**      |   | **Principal  Amount** |    | **Warrant Issued** |                                                                    |
|------------------------|--------|-----------------------|---------|--------------------|-------------------------------------------------------------------------|
| October  30, 2002 (1)  |   | $                     | 500,000 |               | Warrant  to purchase 250,000 shares of common stock at $1.00 per share. |   |
|                   |   |                  |    |               |                                                                    |   |
| November  4, 2002      |   | $                     | 25,000  |               | Warrant  to purchase 12,500 shares of common stock at $1.00 per share.  |   |
|                   |   |                  |    |               |                                                                    |   |
| January  22, 2003      |   | $                     | 200,000 |               | Warrant  to purchase 100,000 shares of common stock at $1.00 per share. |   |
|                   |   |                  |    |               |                                                                    |   |
| February  25, 2003 (1) |   | $                     | 100,000 |               | Warrant  to purchase 50,000 shares of common stock at $1.00 per share.  |   |
|                   |   |                  |    |               |                                                                    |   |
| March  6, 2003         |   | $                     | 400,000 |               | Warrant  to purchase 200,000 shares of common stock at $0.80 per share. |   |
|                   |   |                  |    |               |                                                                    |   |
| March  13, 2003        |   | $                     | 100,000 |               | Warrant  to purchase 50,000 shares of common stock at $0.80 per share.  |   |
|                   |   |                  |    |               |                                                                    |   |
| April  2, 2003 (2)     |   | $                     | 50,000  |               | Warrant  to purchase 25,000 shares of common stock at $0.80 per share.  |   |
|                   |   |                  |    |               |                                                                    |   |
| May  2, 2003           |   | $                     | 100,000 |               | Warrant  to purchase 50,000 shares of common stock at $0.80 per share.  |   |
|                   |   |                  |    |               |                                                                    |   |
| May  2, 2003           |   | $                     | 25,000  |               | Warrant  to purchase 12,500 shares of common stock at $0.80 per share.  |   |
|                   |   |                  |    |               |                                                                    |   |
| May  14, 2003 (2)      |   | $                     | 50,000  |               | Warrant  to purchase 25,000 shares of common stock at $0.80 per share.  |   |
|                   |   |                  |    |               |                                                                    |   |
| May  21, 2003          |   | $                     | 100,000 |               | Warrant  to purchase 50,000 shares of common stock at $0.90 per share.  |   |
|                   |   |                  |    |               |                                                                    |   |
| June  2, 2003          |   | $                     | 200,000 |               | Warrant  to purchase 100,000 shares of common stock at $0.90 per share. |   |
|                   |   |                  |    |               |                                                                    |   |
| June  9, 2003          |   | $                     | 100,000 |               | Warrant  to purchase 50,000 shares of common stock at $0.90 per share.  |   |
|                   |   |                  |    |               |                                                                    |   |
| June  12, 2003         |   | $                     | 75,000  |               | Warrant  to purchase 37,500 shares of common stock at $0.90 per share.  |   |
|                   |   |                  |    |               |                                                                    |   |
| June  12, 2003         |   | $                     | 25,000  |               | Warrant  to purchase 12,500 shares of common stock at $0.90 per share.  |   |

 

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(1)           This bridge loan was made by Mr.Theodore Swindells, one of the Company’s significant stockholders. See “StockOwnership of Certain Beneficial Owners and Management and Related StockholderMatters.”

 

(2)           In August 2003, the holders of thesenotes elected to convert outstanding principal and accrued interest into sharesof common stock. See “Recent Sales of Unregistered Securities.” Therefore,these notes are no longer outstanding.

 

OnSeptember 8, 2003, the Company obtained secured debt financing in an amount of$4 million. The financing is evidenced by a promissory note and

 

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secured by substantially allof the Company’s assets. A portion of the proceeds of the financing were usedto repay a portion of the outstanding principal and accrued interest owed onthe above-described bridge notes.  See“Subsequent Events” included in this Section for a more detailed description ofthis financing and partial repayment of the bridge notes

 

Inaddition to the bridge loans, the Company is subject to the followingobligations:

 

As of June 30, 2003 the Company had anunsecured note payable outstanding in the amount of $130,000. The holder ofthis note, Theodore Swindells, beneficially owns over 5% of the Company’scommon stock. The note was issued on March 4, 2002 and bore interest at a rateof 10% per year 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 June 30, 2003 the Company owed atotal of approximately $1,376,000 to Geneva Associates Merchant BankingPartners, an entity in which Russell Myers, one of the Company’s directors, hasan interest. The $1,376,000 owed to Geneva Associates Merchant Banking Partnersis due under a reimbursement agreement under which Geneva Associates MerchantBanking Partners, through a financial institution, issued a letter of credit toa bank to be used as security for a line of credit the Company had with thebank. Of this $1,376,000, $1,050,000 represents principal on the two lines ofcredit, and $326,000 represents accrued and unpaid 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. In July 2003, GenevaMerchant Bank committed to convert $1,247,310 of the debt into shares of commonstock. The Company is negotiating an agreement to convert Series B Preferredand Series C Preferred shares into Series A Preferred shares.

 

As of June 30, 2003 the Company had a notepayable and accounts payable to its outside counsel in connection with unpaidlegal fees in the aggregate amount of approximately $630,000. The note wasissued in September 2002 and bears interest at a rate of 10% per year. The noteis secured by all of the assets of USAB Video Corp. II, Inc., one of theCompany’s subsidiaries. Subsequent to year end the Company’s counsel agreed toconvert the outstanding debt to shares of common stock, subject to the outsidecounsel’s ability to sell such shares without disrupting the market place asdetermined by an independent advisor to the Company. (See Subsequent Events.)

 

The Company’scontractual obligations as of June 30, 2003 and the periods in which paymentsare due are set forth below:

 
|                                              |   | **Less than One  Year** |      | **1-3 Years** |   | **4-5  Years** |   | **After  5  Years** |   | **Total** |   |
|---------------------------------------------------|--------|-------------------------|-----------|---------------|--------|----------------|--------|---------------------|--------|-----------|--------|
| Current Portion Long Term Debt and  Notes Payable |   | 4,191,000               |      | —        |   | —         |   | —              |   | 4,191,000 |   |
| Capital Lease Obligations                         |   | 420,000                 |      | —        |   | —         |   | —              |   | 420,000   |   |
| Operating Lease Obligations                       |   | 156,500                 |      | 360,200       |   | 0              |   |                |   | 516,700   |   |
| Total Contractual Cash Obligations                |   | $                       | 4,767,500 | (1)           | $      | 360,200        |   | $                   | 0      |      | $      | 0 |   | $ | 5,127,700 |   |
|                                                   |        |                         |           |               |        |                |        |                     |        |           |        |  |  |  |  |  |

 

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This table does not include the $4million secured debt funding obtained by the Company in September 2003. (SeeSubsequent Events)

 

**Obligations**

 

In March 2002,USAB Video Corp. II, Inc., a wholly-owned subsidiary of the Company, enteredinto an asset purchase agreement with Verizon Media Ventures, Inc. and GTESouthwest Incorporated. After purchasing a portion of the assets pursuant tothe agreement, in June 2002, USAB Video Corp. did not complete the purchase ofthe remaining assets. In connection therewith, the Company accrued a $250,000liability on its financial statements for the fiscal year ending June 30,2003.

 

**Cash Flows from Operating Activities**

 

The Company’s most liquid asset is cash and cashequivalents which consist of cash and short-term investments. Cash and cashequivalents at June 30, 2003 and June 30, 2002, were $79,000 and $88,000,respectively.  Income generated from theCompany’s provision of cable services is its primary source of cash. Othersources of cash include amounts raised from the sale of its assets, sales ofits common or preferred stock and other debt or equity financings. TheCompany’s operations utilized net cash of approximately $1,547,000 for the yearended June 30, 2003. The use of cash was related primarily to funding the netlosses from its operations and changes in deferred assets offset by adjustmentsfor non-cash expenses of depreciation, stock based compensation, impairment oflong lived assets and losses on disposal of assets.

 

The Company’soperations utilized net cash of approximately $1,589,000 for the nine-monthperiod ended June 30, 2002.  The use ofcash was related primarily to funding the net losses from its operations,reduction of accounts receivable and other liabilities and reduction ofdeferred revenues, offset by adjustments for non-cash expenses such asimpairment of long-lived assets, loss on disposal of fixed assets, stock-basedcompensation, depreciation, amortization and allowance for bad debt and anincrease in accounts payable and accrued liabilities.

 

**Cash Flows from Investing Activities**

 

During the yearended June 30, 2003, investing activities resulted in a reduction of cash ofapproximately $249,000. Cash was utilized in the purchase of the investment inCable California and in funding of operating expenses evidenced by a notereceivable from Las Americas  Broadband. These investment outflows were offset by the sale of the notereceivable to a third party.

 

During thenine-month period ended June 30, 2002, investing activities resulted in areduction of cash of approximately $477,000. This was the result of theCompany’s purchases of property and equipment and 

 

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payment of a note receivable during the period, offsetby net proceeds of asset sales.

 

**Cash Flows from Financing Activities**

 

During the yearended June 30, 2003, financing activities generated cash of approximately$1,787,000. This resulted from net proceeds from the issuance of common stock,the issuance of options and warrants, and advance on bridge notes. This wasoffset by payments made on long term debt and notes payable.

 

During thenine-month period ended June 30, 2002, financing activities generated cash ofapproximately $1,973,000.  This resultedfrom proceeds from the sale of stock and from net borrowings on long-term capital,offset by reductions in a line of credit and reductions in principal onlong-term debt and capital lease obligations. On September 8, 2003, the Companyobtained secured debt financing in an amount of $4 million.  The financing is evidenced by a promissorynote and secured by substantially all of its assets.  See “Subsequent Events” included in this Section for a moredetailed description of this financing.

 

**Impact of Recently Issued Accounting Principles**

 

In July 2002, theFASB issued Statement of Financial Accounting Standards No. 146, Accounting forCosts Associated with Exit or Disposal Activities (“SFAS 146”). SFAS 146requires a company to recognize costs associated with exit or disposalactivities when they are incurred rather than when the company makes acommitment to an exit or disposal plan. Examples of costs covered by SFAS 146include lease termination costs and certain employee severance costs that areassociated with a restructuring, discontinued operation, plant closing, orother exit or disposal activity. SFAS 146 is to be applied prospectively toexit or disposal activities initiated after December 31, 2002. The Company doesnot expect the adoption of SFAS 146 to have a material effect on the financialposition or results of operations.

 

In August 2002,the FASB issued Statement of Financial Accounting Standards No. 147,“Acquisitions of Certain Financial Institutions” (SFAS 147). SFAS 147 requiresfinancial institutions to follow the guidance in SFAS 141 and SFAS 142 forbusiness combinations and goodwill and intangible assets, as opposed to thepreviously applied accounting literature. This statement also amends SFAS 144to include in its scope long-term customer relationship intangible assets offinancial institutions. The provisions of SFAS 147 do not apply to the Company.

 

In December 2002,the FASB issued Statement of Financial Accounting Standards No. 148,“Accounting for Stock-Based compensation-Transition and Disclosure-an amendmentof FASB Statement 123” (SFAS 123). For entities that change their accountingfor stock-based compensation from the intrinsic method to the fair value methodunder SFAS 123, the fair value method is to be applied prospectively to thoseawards granted after the beginning of the period of adoption. This is known asthe “prospective method.” The amendment permits two additional transitionmethods for adoption of the fair value method. In addition to the prospectivemethod, the entity can choose to either restate all periods presented, which isknown as the “retroactive restatement method” or recognize compensation costfrom the beginning of the fiscal year of adoption as if the fair value methodhad been used to account for awards, which is known as the “modifiedprospective method.” For fiscal years beginning December 15, 2003, theprospective method will no longer be allowed. the Company currently account for its stock-based compensation using theintrinsic value method as prescribed by Accounting Principles Board Opinion No.25, “Accounting for Stock Issued to Employees” and plan on 

 

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continuing using this method to account for stockoptions. Therefore, the Company does not intend to adopt the transitionrequirements as specified in SFAS 148.  The Company adopted the new disclosure requirements in these financialstatements.

 

SFAS No. 149, Amendment of Statement 133 on “Derivative Instruments andHedging Activities,” was issued in April 2003 and amends and clarifiesaccounting for derivative instruments, including certain derivative instrumentsembedded in other contracts, and for hedging activities under SFAS No. 133.SFAS No. 149 is effective for contracts entered into or modified after June 30,2003, and for hedging relationships designated after June 30, 2003. The Companydoes not believe that the adoption of SFAS No. 149 will have a materialimpact on the Company’s financial position or results of operations.

 

SFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of Both Liabilities and Equity,” was issued in May 2003 andrequires issuers to classify as liabilities (or assets in some circumstances)three classes of freestanding financial instruments that embody obligations forthe issuer. SFAS No. 150 is effective for financial instruments entered into ormodified after May 31, 2003 and is otherwise effective at the beginning of thefirst interim period beginning after June 15, 2003. The Company believes theadoption of SFAS No. 150 will have no immediate impact on the Company’sfinancial position or results of operations.

 

The FASB issued Interpretation (“FIN”) No. 45, Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others, in November 2002 and FIN No. 46, Consolidation ofvariable Interest Entities, in January 2003. FIN No. 45 is applicable on aprospective basis for initial recognition and measurement provisions toguarantees issued after December 2002; however, disclosure requirements areeffective immediately. FIN No. 45 requires a guarantor to recognize, at theinception of a guarantee, a liability for the fair value of the obligationsundertaken in issuing the guarantee and expands the required disclosures to bemade by the guarantor about its obligation under certain guarantees that it hasissued. The adoption of FIN No. 45 did not have a material impact on theCompany’s financial position or results of operations. FIN No. 46 requires thata company that controls another entity through interest other than votinginterest should consolidate such controlled entity in all cases for interimperiods beginning after June 15, 2003. The Company does not believe the adoption of FIN No. 46 will have amaterial impact on the Company’s financial position or results of operations.

 

**Subsequent Events**

 

The Board ofDirectors elected Arturo Alemany, President of MIR International, to the Boardof Directors and as Chairman of the Board and Chief Executive Officer,effective September 16, 2003. MIR has been contracted by the Company to providemanagement consulting support to the Company to assist with legal andoperational matters in Mexico. Consulting fees accrue at the rate of $25,000 amonth with $12,500 due and payable monthly, and the remaining balance due theearlier of six months or upon significant financing. In connection with thisagreement the Company granted Mr. Alemany 300,000 options to purchase commonstock at $1.10 per share, 75,000 of these shares vest immediately and theremainder vest in three equal traunches over the next three quarters.

 

On July 1,2003 the Board of Directors granted options under the Directors CompensationPlan to the following Directors

 

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| **Last Name** |   | **First Name** |   | **No. of  shares** |   | **Exercise  Price** |   | **Date of   Grant** |     | **Term** |    |
|---------------|--------|----------------|--------|--------------------|--------|---------------------|--------|---------------------|----------|----------|---------|
| Cole          |   | Douglas        |   | 100,000            |   | $                   | 1.10   |                | 1-Jul-03 |     | 5 years |   |
| Landry        |   | Jon  Eric      |   | 100,000            |   | $                   | 1.10   |                | 1-Jul-03 |     | 5 years |   |
| Mooney        |   | Edward         |   | 100,000            |   | $                   | 1.10   |                | 1-Jul-03 |     | 5 years |   |
| Myers         |   | Russell        |   | 100,000            |   | $                   | 1.10   |                | 1-Jul-03 |     | 5 years |   |
| Spears        |   | Ronald         |   | 100,000            |   | $                   | 1.10   |                | 1-Jul-03 |     | 5 years |   |
| Spears        |   | Ronald         |   | 50,000             |   | $                   | 1.10   |                | 1-Jul-03 |     | 5 years |   |

 

On September 8, 2003, the Company obtainedsecured debt financing in the amount of $4,000,000 from a private investor. Thefinancing is evidenced by a convertible promissory note and secured by a firstpriority lien in all or substantially all of its assets. 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 bearsinterest at a rate equal to the prime rate plus 2% and matures on March 4,2004, subject to the Company’s ability to extend the maturity for up to 60days, provided, however, that if the Company extend the maturity date, theinterest rate increases 1% each month the loan is outstanding after March 4,2004, 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:

 

•                  relatingto the maintenance of the Company’s assets and the assets of its subsidiariessecuring the indebtedness;

 

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

 

•                  restrictingthe Company from authorizing or paying any dividends;

 

•                  restrictingthe Company from paying any bonus or making extraordinary payments to any ofthe Company’s employees, officers or directors or otherwise increasingcompensation or benefits paid to any of the Company’s employees, officers ordirectors (other than increases resulting from a cost of living adjustment orchanges of benefits applicable to all of the Company’s employees);

 

•                  restrictingthe Company 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

 

•                  restrictingthe Company’s use of any proceeds received from any additional funding,regardless of whether any additional funding is structured as debt or equity,received from the exercise of options or warrants or arising from the sale ofits assets outside the ordinary course of business.

 

In connection with this financing, theCompany’s existing bridge note holders subordinated their security interests incertain of its assets 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.

 

The Company used $1,046,000 of the proceeds ofthe financing to repay 

 

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a portion of the outstanding principal and accruedinterest owed to the Company’s existing bridge note holders, and paid $155,000to a note holder in exchange for its agreement to subordinate its securityinterest in assets of its subsidiary. The Company intends to use the remaining proceeds of the financing asworking capital to fund its cable build in Mexico. See “Factors AffectingFuture Performance.”

 

The Company had a note payable and accountspayable to its outside counsel in connection with unpaid legal fees in theaggregate amount of approximately $630,000. In October 2003, the outside counsel agreed to convert the note payableand account payable due to the outside counsel into approximately 686,000shares of common stock, subject to the outside counsel’s ability to sell suchshares without disrupting the market place as determined by an independentadvisor to the Company.

 

OnSeptember 24, 2003, Verizon Media Ventures, Inc. and GTE Southwest Incorporatedfiled a complaint against the Company and USAB Video Corp. in the Supreme Courtof the Sate of New York, County of New York. In the complaint, Verizon and GTEallege that USAB Video Corp. breached the purchase agreement and that theCompany, by guaranteeing USAB Video Corp.’s performance under the agreement,was also liable for USAB Video Corp.’s breach. The complaint further allegesthat Verizon and GTE suffered losses and damages in excess of $1.023 milliondollars. Neither the Company nor USAB Video Corp. has yet to file an answer tothe complaint, but the Company intends to vigorously defend against thelawsuit.

 

**Factors Affecting Future Performance**

 

**The Company’s financial condition raises substantial doubtabout its ability to continue as a going concern.  The Company may not have sufficient resources to operate itsbusiness in the future.**

 

As of June 30,2003, the Company had a net working capital (current assets minus currentliabilities) deficit of $9,467,000.  Asthe Company’s capital needs are greater than the current working capital, theCompany must raise additional capital in order to implement its businessplan.  In September 2003, the Companyobtained a secured debt financing in the amount of $4 million from a private investor,the proceeds of which the Company used to repay certain indebtedness and asworking capital to implement its business plan in Mexico through CableCalifornia.  The $4 million investmentin the Company will not be sufficient to complete its business plan in Mexico.The Company will need additional financing in the future to meet its operatingneeds. No assurance can be given that the Company will be able to organize debtor equity financing, or that, if available, it will be available on terms andconditions satisfactory to the Company and might dilute current shareholders.

 

**The Company’sfinancial statements are prepared assuming that the Company will continue as agoing concern.  There is substantialdoubt that the Company may continue to operate as a going concern.**

 

The Company’sconsolidated financial statements have been prepared assuming that the Companywill continue as a going concern. However, The Company’s independent auditors, in their most recentreport, stated that “the Company has suffered recurring losses from operationsand has a working capital deficiency” which raises substantial doubt about itsability to continue as a going concern. The Company’s consolidated financial statements do not include anyadjustments that might result from the outcome of that uncertainty. If theCompany are not sufficiently successful in generating cash from its operatingactivities, the Company may need to sell additional common stock or othersecurities, or the Company may need to sell assets outside the ordinary courseof business, or obtain additional financing. If the Company needs to dispose ofassets outside of the ordinary course of business to generate cash, the Companymay not be able to realize the carrying values of those assets uponliquidation. If the Company is unable to generate the necessary cash, theCompany could be unable to continue its operations.

 

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**As a result of theCompany’s incurring indebtedness, the Company is obligated to comply withfinancial and other covenants that could restrict its future operatingactivities.**

 

On September 8,2003, the Company received a loan from a private investor of $4 million (the“Financing”). The Financing is evidenced by a promissory note and secured bysubstantially all of its assets including the assets of its subsidiaries.  The promissory note bears interest at a rateequal to the prime rate plus 2% and matures on March 4, 2004, subject to theCompany’s ability to extend the maturity for up to 60 days, provided, however,that if the Company extend the maturity date, the interest rate increases 1%each month the loan is outstanding after March 4, 2004, up to a maximum of12%.  The Financing documents generallycontain customary covenants including, among others, provisions:

 

•              relating to the maintenance of theCompany’s assets and the assets of its subsidiaries securing the indebtedness;

•              restricting the Company’s abilityto sell or transfer its assets or create other liens on its assets securing thedebt (other than in the ordinary course of business);

•              restricting the Company fromauthorizing or paying any dividends;

•              restricting the Company frompaying any bonus or making extraordinary payments to any of the Company’semployees, officers or directors or otherwise increasing compensation orbenefits paid to any of its employees, officers or directors (other thanincreases resulting from a cost of living adjustment or changes of benefitsapplicable to all of its employees);

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

•              restricting the Company’s use ofany proceeds received from any additional funding, regardless of whether any additionalfunding is structured as debt or equity, received from the exercise of optionsor warrants or arising from the sale of its assets outside the ordinary courseof business.

 

In addition to theFinancing, from October 2002 to June 2003, the Company obtained bridge loanstotaling approximately $2,000,000 from other investors. See “ManagementDiscussion and Analysis on Plan of Operation”.

 

The covenantscontained in the Financing documents, as well as those covenants contained inthe bridge loans and other loan documents to which the Company are a party, mayrestrict its operations and ability to pursue potentially advantageous businessopportunities. The Company’s failure to comply with these covenants could alsoresult in an event of default that, if not cured or waived, could result in theacceleration of all or a substantial portion of its indebtedness.

 

**The Company’s ability to repay indebtedness when due, willdepend upon its ability to generate sufficient revenues or to renegotiate orreplace any such****indebtedness on terms and conditions favorable to theCompany.**

 

If the Company areunable to repay or replace the indebtedness when due, its creditors will bepermitted to exercise their rights under security agreements securing theindebtedness and take possession of all or substantially all of its assets anddispose of such assts to satisfy the indebtedness.

 

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**The Company has continued to incur substantial losses and ifthe Company fails to reduce its costs or increase its revenues, the Companywill be unable to achieve and maintain profitability and may be unable tocontinue its operations.**

 

The Company hasincurred significant losses since its inception and expects to incur losses inthe future. As of June 30, 2003, the Company had an accumulated deficit of$35.84 million.  The Company’s revenueshave decreased to $1.055 million in the twelve months ended June 30, 2003 from$2.082 million for the nine months ended June 30, 2003.  The Company cannot be certain that theCompany will be successful in reducing its costs, that the Company will be ableto increase its revenues or that the Company will achieve sufficient revenuesto become profitable. The Company expects to continue to incur expenses in orderto, among other things, fund Cable California’s construction of the cable buildin Mexico, and maintains its equipment and infrastructure in California andMexico and to attract and retain customers. As a result, the Company will needto generate significantly higher revenues to achieve and maintainprofitability. If the Company fails to significantly reduce its costs or togenerate higher revenues, the Company may continue to incur operating lossesand net losses and may be unable to continue its operations.

 

**Implementation ofthe Company’s business plan depends upon the ability of Cable California tocomplete the cable build in Mexico and to provide multi-channel cabletelevision to residents and businesses in the greater Tijuana, Mexico area.**

 

On March 7, 2003,the Company acquired all of the class B stock of Cable California.  The class B stock represents 49.0% of thevoting and economic interests in Cable California.  Cable California possesses a 30-year advanced telecommunicationsbroadband concession (the “Concession”) from the Mexican government toconstruct and operate a 750 MHz fiber optic network providing multi-channelcable television (the “Cable Services”) to residents and businesses in thegreater Tijuana, Mexico metropolitan area.  In connection with the Company’s acquisition of an ownership interest inCable California, the Company has changed its business plan to focus onproviding Cable Services solely within its core market – California andMexico.  The success of its businessplan is dependent upon Cable California’s ability to complete the cable buildin Mexico, comply with the terms and conditions of the Concession, andsuccessfully market and provide Cable Services to residents and businesses inMexico. If Cable California is unable to successfully complete these items, theCompany may not be able to implement its business plan which will have amaterial adverse effect on its business, business prospects, financialcondition and results of operations.

 

**The Company has a minority ownership interest in CableCalifornia and, therefore, the Company does not control Cable California.**

 

The Company’sbusiness plan is dependent upon the success of Cable California.  The Company owns a 49.0% economic and votinginterest in Cable California.  The remainingeconomic and voting interest in Cable California is owned by Mr. CarlosBustamante. Accordingly, currently the Company is unable to exercise controlover Cable California. While the Company is currently involved in negotiationswith Mr. Bustamante to purchase from Mr. Bustamante his interests in CableCalifornia, there can be no assurance that the Company will reach an agreementwith Mr. Bustamante or, if the Company reach an agreement, that the Companywill have sufficient funds or be able to acquire funds sufficient to purchasesuch interests. As a minority owner of Cable California, the Company may beunable to appoint management, determine or implement policies, implementbusiness strategies, acquire or liquidate assets, select or terminate businessrelationships or liquidate, dissolve, sell or re-capitalize Cable California onsuch terms and conditions favorable to the Company, if at all.

 

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**Cable California’s Mexican concession is regulated by theMexican government.**

 

While the Companyis unaware of any similar concessions granted to other parties for the Tijuana,Mexico area, the Mexican government could grant similar concessions to theCompany’s competitors, or take other actions to affect the value of theConcession. In addition, the Mexican government also has (1) the authority totemporarily seize all assets related to the Concession in the event of anatural disaster, war, significant public disturbance and/or threats tointernal peace and for other reasons of economic or public order in Mexico, and(2) the statutory right to expropriate any concession and claim all relatedassets for public interest reasons. Although Mexican law provides forcompensation in connection with losses and damages related to temporary seizureor expropriation, there can be no assurance that the compensation will beadequate or timely. There can be no assurance that:

 

•                  CableCalifornia will be able to obtain sufficient financing to complete the Mexicancable build;

 

•                  If CableCalifornia obtains financing, it will be in a timely manner or on favorableterms; or

 

•                  CableCalifornia will be able to comply with the terms and conditions of the MexicanConcession.

 

If CableCalifornia cannot obtain funds sufficient to complete the Mexican cable build,it will have a material adverse effect on its business, business prospects,financial condition and results of operations. Additionally, if CableCalifornia fails to comply with the terms of the Concession, the Mexican governmentmay terminate the Concession without compensation to Cable California. Atermination of the Concession would prevent the Company from completing itsbusiness plan and engaging in its proposed business.

 

**Regulators in Mexico may challenge Cable California’scompliance with laws and regulations causing considerable expense and possiblyleading to a temporary or permanent shut down of Cable California’s operations**

 

Governmentenforcement and interpretation of the telecommunications laws and licenses isunpredictable and is often based on informal views of government officials andministries in Mexico. This means that Cable California’s compliance withMexican laws may be challenged. It could be very expensive to defend this typeof challenge and the Company might not be successful in such challenges. IfCable California was found to have violated the laws that govern CableCalifornia’s business, Cable California could be fined or denied the right tooffer Cable Services.

 

**Cable California’s operations may be affected by politicalchanges in Mexico.**

 

The Company’sbusiness plan focuses on its ability to provide, through Cable California,Cable Services in Mexico. The political and economic climate in Mexico is moreuncertain than in the United States and unfavorable changes could have a directimpact on the Company’s operations in Mexico. The Mexican government exercisessignificant influence over many aspects of the Mexican economy. For example, anewly elected set of government officials could decide to quickly reverse thederegulation of the Mexican cable and telecommunications industry economy andtake steps such as seizing the Company’s property, revoking its licenses, ormodifying its contracts. Furthermore, a period of poor economic performancecould reduce the demand for Cable Services in Mexico.  The Mexican government might decide to restrict the conversion ofpesos into dollars or restrict the transfer of dollars out of Mexico into U.S.entities. These types of changes, whether they occur or are only threatened,could have a material adverse effect on the Company’s business, financialcondition, results of 

 

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operations and would also make it more difficult forthe Company to obtain financing in the United States.

 

**If Cable California begins providing cable services inMexico, fees for such services will be collected in Mexican Pesos.**

 

If the value ofthe Mexican peso declines relative to the dollar, the Company will havedecreased revenues as stated in dollars. Under the Company’s current businessplan, it expects a significant amount of its revenues to be derived fromresidents and businesses in Mexico. Revenue collected in Mexico will be inMexican pesos. If the value of the peso relative to the dollar declines, thatis, if pesos are convertible into fewer dollars, then its revenues, which arestated in dollars, will decline. The Company does not expect to engage in anytype of hedging transactions to minimize this risk and do not intend to do so.

 

**The market for the Company’s common stock is limited andprice changes may be volatile.**

 

The shares of theCompany’s common stock are not traded on an exchange or through the NasdaqNational Market or the Nasdaq SmallCap Market. Instead, the Company’s sharesare traded over-the-counter and the market for these shares is not as developedas it would be if the Company’s shares were listed on an exchange or includedin the NASDAQ National or SmallCap markets.

 

The market priceof the Company’s common stock is expected to be volatile for the foreseeablefuture. Factors such as quarterly fluctuations in results of operations, theannouncement of new contracts or changes in either earnings estimates orinvestment recommendations by stock market analysts, among others, may causethe market price of the Company’s common stock to fluctuate, perhapssubstantially. In addition, in recent years the stock market in general, andthe shares of companies in the technology sector in particular, haveexperienced extreme price fluctuations which may continue for the foreseeablefuture. These broad market and industry fluctuations may adversely affect themarket price of the Company’s common stock. Further, a share of the Company’scommon stock currently falls within the SEC’s definition of a “penny stock.”The SEC has special disclosure requirements which broker-dealers must followfor most transactions in penny stocks. In addition, many broker-dealers willnot deal in penny stocks. These factors may further limit the market for theCompany’s common stock.

 

**The Company’s substantial indebtedness could adversely affectany investment in securities outstanding from time to time**

 

The Company hasincurred significant indebtedness and may incur significant additional amountsof indebtedness in acquiring other assets or companies. The Company’soperations do not provide enough cash to service its indebtedness. TheCompany’s indebtedness could have important consequences. For example, itcould:

•                  make it more difficult for the Company to payits obligations;

 

•                  increase The Company’s vulnerability togeneral adverse economic and industry conditions;

 

•                  require the Company to dedicate a substantialportion of The Company’s cash flow from operations to payments on itsindebtedness, thereby reducing the availability of its cash flow to fundworking capital, capital expenditures, acquisitions and other activities;

 

•                  limit the Company’s flexibility in planningfor, or reacting to,

 

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changesin its business and the industries in which the Company operate; and

 

•                  place the Company at a competitivedisadvantage compared to its competitors that have less debt.

 

The Company’sability to make payments on and to refinance its indebtedness or preferredstock and to fund capital expenditures and other activities depends on itsability to generate cash either from operations or from investing or otherfinancing activities. To date, the Company has generated the bulk of its cashflow from the sale of securities or by borrowing money. There is no assurancethat the Company will be able to continue generating cash in this fashion,particularly if its operating subsidiaries do not begin generating cash. TheCompany’s ability to generate cash is subject to general economic, financial,competitive, legislative, regulatory and other factors that are beyond itscontrol.  The Company may need torefinance all or a portion of its indebtedness on or before maturity.  The Company cannot assure you that theCompany will be able to refinance any of its indebtedness, including its creditfacilities, on commercially reasonable terms, if at all.

 

**A change of control may be difficult**

 

The Company’scertificate of incorporation contains, among other things, provisions authorizingthe issuance of “blank check” preferred stock. The Company is also subject to provisions of Delaware law which affectmerger and other change of control transactions. These provisions could delay,deter or prevent a merger, consolidation, tender offer, or other businesscombination or change of control involving the Company that its stockholdersmay consider to be in their best interests.

 

**The sale of a substantial number of shares of The Company’scommon stock in the public market could adversely affect the market price ofits common stock**

 

As of October 10,2003, a total of approximately 14 million shares of the Company’s common stockwere issuable on exercise of options or warrants previously issued by theCompany or on conversion of outstanding preferred stock or reserved forissuance under the Company’s Stock Grant Plan approved by its board ofdirectors in June 2002. See the information under the heading “Long-TermIncentive, Director Option, and Stock Grant Plans” in Item 10 of this Form10-KSB. Sales or the expectation of sales of a substantial number of shares ofthe Company’s common stock, including shares issuable upon exercise orconversion of outstanding options, warrants or preferred stock, likely wouldhave an adverse effect on the prevailing trading price of the Company’s commonstock.

 

**Satellite and direct broadcast satellite technology couldfail or be impaired**

 

Direct broadcastsatellite technology is highly complex and is still evolving. As with anysimilar product or system, this technology might not function as expected ormay not last for its expected life. If any of the DIRECTV satellites aredamaged or stop working partially or completely for any of a number of reasons,DIRECTV customers would lose programming. In turn, the Company likely wouldlose customers, which could materially and adversely affect the Company’soperations, financial performance and the trading price of its common stock.

 

**The Company does not control DIRECTV**

 

The Company is anintermediary for DIRECTV and does not control DIRECTV or have any input on itsprogramming. DIRECTV generally purchases its programming from third parties.DIRECTV’s success, and therefore the 

 

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Company’s, depends in large part onDIRECTV’s making good judgments about programming sources and ability to obtainprogramming on favorable terms.  TheCompany has no control or influence over DIRECTV.

 

**Increases in programming costs could adversely affect theCompany’s direct broadcast satellite business**

 

Programmers couldincrease the rates that DIRECTV pays for programming. As a result, theCompany’s costs would increase.  TheCompany would be faced with either increasing its rates and potentially losingcustomers or suffering a reduction in its margins. Further, the rulesimplementing the law requiring programming suppliers that are affiliated withcable companies to provide programming to all multi-channel distributors,including DIRECTV, on nondiscriminatory terms are scheduled to expire in 2002.If these rules are not extended, these programmers could increase DIRECTV’scosts, and therefore the Company’s costs. If the Company’s costs increase andthe Company therefore increase its rates, the Company may lose customers. Ifthe Company does not increase its rates, its costs, revenues and financialperformance could be adversely affected.

 

**Replacement of the current DIRECTV satellites could adverselyaffect the Company’s business**

 

The Company may ormay not be able to continue in the direct broadcast satellite business afterthe current DIRECTV satellites are replaced. If the Company can continue, theCompany cannot predict what it will cost the Company to do so. The Company’srevenues and financial performance would be adversely affected if the Companyis not able to continue in the direct broadcast business or if the Companycannot locate suitable replacement programming for its customers.

 

**The Company could lose money because of signal theft.**

 

Each year, theunauthorized receipt of direct broadcast or cable signals, or “signal theft,”costs the industry significant revenues. To date, signal theft has beencontained. If, however, signal theft becomes widespread, the Company’s revenueslikely would suffer. DIRECTV uses encryption technology in an effort to preventpeople from receiving programming without paying for it. However, thetechnology is not foolproof, and there is no assurance that the Company will beprotected from signal theft.

 

**Direct broadcast satellite equipment shortages could adverselyaffect the Company’s direct broadcast business**

 

There have beenperiodic shortages of direct broadcast satellite equipment. These shortages mayoccur in the future. During periods of shortage, the Company may be unable toaccept new subscribers and, as a result, potential revenue could be lost. Ifthe Company is unable to obtain direct broadcast satellite equipment in thefuture, or if the Company cannot obtain this equipment on favorable terms, theCompany’s business and results of operations could be adversely affected.

 

**The Company faces significant competition; the competitivelandscape changes constantly**

 

The Companycompetes with other multichannel programming distributors, including otherdirect broadcast satellite operators, direct-to-home distributors, cableoperators, wireless cable operators, Internet providers and local andlong-distance telephone companies. These competitors 

 

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may be better capitalized than theCompany are and may be able to offer more competitive packages or pricing thanthe Company or DIRECTV can offer. Many of the Company’s competitors havesubstantially greater financial, technical and marketing resources, largercustomer bases, longer operating histories, greater name recognition and moreestablished relationships in the industry. In addition, a number of thesecompetitors may combine or form strategic partnerships. As a result, theCompany’s competitors may be able to offer, or bring to market earlier,products and services that are superior to the Company’s own in terms offeatures, quality, pricing or other factors. The Company’s failure to competesuccessfully with any of these companies would have a material adverse effecton its business and the trading price of its common stock.

 

Increasedcompetition also may result in reduced commissions and loss of market share.Further, as a strategic response to changes in the competitive environment, theCompany may from time to time make certain pricing, service or marketing decisionsor acquisitions that could have a material adverse effect on the Company’sbusiness and the trading price of its common stock.

 

**The Company hasrecently changed its strategy to focus on a limited number of markets, whichincreases the its regulatory risk and will cause any downturn in these marketsto have a greater adverse effect on its operations than is currently the case.**

 

The Company haschanged its strategy to focus on providing video, data and Internet service inthe State of California and in the Northern Baja region of Mexico. As part ofthis strategy, the Company has sold assets located in the Pacific Northwest,Midwest and Southeastern United States. As a result, the Company’s success willbe tied more closely to the economic prospects of a relatively small number ofregions. If the economies of these regions experience difficulties, this willhave a greater adverse effect on its operations and financial condition thanwould be the case if the Company continued to serve more markets. In addition,the Company has not previously operated in Mexico, and operating there involvesregulatory hurdles not present in the United States and with which the Companyare not familiar. If the Company is unable to overcome these hurdles, theCompany will not be able to achieve its anticipated revenues from itsoperations in Mexico, which will have a material adverse effect on itsfinancial condition and results of operations.

 

ITEM 7. FINANCIAL STATEMENTS

 

(a)           (1) the following financialstatements of the Company and its subsidiaries have been filed as part of thisreport:

 
| Independent Auditors’  Report                                                                                                    |
|---------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                  |
| Consolidated Balance Sheet  as of June 30, 2003                                                                                       |
|                                                                                                                                  |
| Consolidated Balance Sheet  as of June 30, 2002                                                                                       |
|                                                                                                                                  |
| Consolidated  Statements of Operations for the year ended June 30, 2003 and the nine-month  period ended June 30, 2002                |
|                                                                                                                                  |
| Consolidated  Statements of Stockholders’ Equity (Deficit) for Year Ended June 30, 2003 and  the Nine Months Ended June 30, 2002 |
|                                                                                                                                  |
| Consolidated  Statements of Cash Flows for the Year Ended June 30, 2003 and the Nine Months  Ended June 30, 2002                      |
|                                                                                                                                  |
| Notes to  Consolidated Financial Statements                                                                                           |

 

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Schedules areomitted because of the absence of conditions under which they are required orbecause the required information is given in the financial statements or notesthereto.

 

ITEM 8. CHANGES IN AND DISAGREEMENTSWITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

Not Applicable.

 

PART III

ITEM 9.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

The Company’s Management

 

The following tablesets forth information regarding the Company’s officers and directors as ofJune 30, 2003:

 
| **NAME**         |   | **AGE** |   | **POSITION**                                                 |
|------------------|--------|---------|--------|--------------------------------------------------------------|
| Grant Miller     |   | 47      |   | Chief Financial Officer and Interim Chief  Executive Officer |
| Margot Ritcher   |   | 53      |   | Controller                                                   |
| Douglas D. Cole  |   | 48      |   | Director                                                     |
| Jon Eric Landry  |   | 56      |   | Director                                                     |
| Edward P. Mooney |   | 44      |   | Director                                                     |
| Russell R. Myers |   | 43      |   | Director                                                     |
| Ronald E. Spears |   | 55      |   | Director                                                     |

 

*GrantMiller.     *Mr. Miller became the Company’sInterim Chief Executive Officer in September 2002. Mr. Miller joined USA Broadband,Inc. as its Chief Financial Officer in June 2002. From April 1999 to October2001, Mr. Miller was a managing director in charge of financial services atAlitum, Inc., which provides application hosting and business managementservices. From October 1997 to November 1998, Mr. Miller was InternationalChief Financial Officer of WorldxChange Corporation, which providesinternational and local telephone service. From December 1995 to October 1997,Mr. Miller was the Director of International Development for Spain for TimeWarner Cable and from 1985 to 1994 held various senior management positionswith Time Warner Cable including Vice President of Finance.

 

*Margot Ritcher*.*     *Ms.Ritcher has served as the Company’s Controller since February 2003. Prior tothat, Ms. Ritcher served as Vice President of Business Operations for DIRECTVInternational Technology where she worked on projects including DIRECTV andDigiTV in South America, Mexico, Europe, and the United States and she servedas Controller for DIRECTV Domestic and Galaxy Latin America, where she directedall accounting, treasury, and customer billing. Ms. Ritcher served as CorporateController and Vice President of Management Information Systems for IntermediaPartners, a subsidiary of TCI (Tele-Communications Incorporated). Ms. Ritcheralso has a strong public accounting background, having spent more than sixyears with Deloitte and Touche and Coopers & Lybrand.

 

*Douglas D. Cole*.*     *Mr.Cole has been a director since October 2001. Since August 2002 Mr. Cole hasbeen Chairman and Chief Executive Officer of Trinity Companies, Inc. whichprovides technology-enabled learning, training and accreditation services toindustry. Mr. Cole has served as Interim President and Chief Executive Officerof Cable Concepts, Inc., the Company’s subsidiary, since November 2001. FromAugust 1998 to June 2000, Mr. Cole served as a director of RateXchangeCorporation and as a director of two of RateXchange’s subsidiaries; RateXchangeI, Inc. and PolarCap,

 

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Inc. Mr. Cole served as Chairman,Chief Executive Officer, President and Principal Accounting Officer ofRateXchange from April 1999 to February 2000. He served as the Chief ExecutiveOfficer of PolarCap, Inc. from its inception in 1995 until August 1998. From1995 to 1996, Mr. Cole served as President and Chief Executive Officer ofStarpress, Inc. after Great Bear Technology Company, a publicly-held Californiacompany, acquired Starpress. He served as President and Chief Executive Officerof Great Bear from 1993 through 1996.

 

*Jon Eric Landry*.*     *Mr.Landry has served as a director of USA Broadband, Inc. since September 2001.Since 1974, he has served as President and Chief Executive Officer of LandryMontana Partners, Inc., a firm that specializes in the development of humancapital and leadership teams for emerging, high growth companies. Mr. Landryspecializes in providing client companies with long-term organizationalplanning, executive management and board member identification and placement,and coordinates the engagement of local and regional recruiting firms to meetthe ongoing human resource needs of client companies. Additionally, from timeto time, Mr. Landry has provided consulting services in connection with humancapital and leadership building to Maroon Bells Capital, L.L.C. Mr. Landry isnot an officer, director or shareholder of Maroon Bells Capital, L.L.C.

 

*Edward P.Mooney.     *Mr. Mooney has served as a directorsince April 2001. He served as the Company’s Executive Vice President fromApril 2001 and as its Interim President and Interim Chief Executive Officerfrom December 2001 through September 2002 while the Company recruitedadditional executive management. Mr. Mooney has served as a director of TrinityCompanies, Inc. since August 2002. Since October 2002, Mr. Mooney has served asPresident of Trinity Companies, Inc. Mr. Mooney also served as a director ofCategory 5 Technologies, Inc. during 2001 and 2002 through that Company’smerger with Mind Arrow, Inc., another public company. Prior to becoming theCompany’s Executive Vice President, Mr. Mooney was self-employed as a corporatedevelopment consultant. Mr. Mooney served as Executive Vice President (April1999 to April 2000) and director (November 1998 to April 2000) of RateXchangeCorporation. Mr. Mooney has also served as President (September 1996 to April1997) and as a director (September 1996 to May 1998) of WorldPortCommunications, Inc. From September 1993 to November 1998, Mr. Mooney was ananalyst for Maroon Bells Capital Partners, Inc.  Additionally, since 1998, Mr. Mooney has provided consultingservices to Maroon Bells Capital, L.L.C. Mr. Mooney is not an officer, directoror shareholder of Maroon Bells Capital, L.L.C.

 

*Russell R. Myers*.*     *Mr.Myers has been a director since July 2001. Currently, Mr. Myers serves as VicePresident and as a director of Geneva Corporation. Mr. Myers is also a generalpartner of Blue Ridge Investors Limited Partnership, a private equity fundfounded in 1993. Additionally, Mr. Myers is a manager of Geneva AssociatesMerchant Banking Partners Group I, LLC, which is the manager of GenevaAssociates Merchant Banking Partners, a private equity fund founded in 1999.

 

*Ronald E. Spears*.*     *Mr.Spears has served as a director since June 2002. Since March 2002, Mr. Spearshas been President, Global Accounts of AT&T Corporation. From March 2000 toJanuary 2002, Mr. Spears was the Chairman and Chief Executive Officer ofVaultus, formerly Mobile Logic, Inc., where he focused on strategic businessplanning, marketing, communications, financing and business alliances. Mr.Spears joined Vaultus after serving as the President and Chief ExecutiveOfficer of CMGI Solutions from May 1999 to March 2000. Before joining CMGI Solutions,Mr. Spears served as President and Chief Operating Officer of e.spireCommunications from February 1998 to April 1999. From June 1995 to January1998, he was corporate vice president at Citizens Utilities, managing thatcompany’s independent telephone company operations in 13 states. Mr. Spearsalso serves as a director of RateXchange Corporation.

 

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**Section 16(a) Beneficial Ownership Reporting Compliance**

 

Ownership of, and transactions in, the Company’sstock by its executive officers and directors are required to be reported tothe SEC pursuant to Section 16(a) of the Securities Exchange Act of 1934, asamended. Based solely upon a review of Forms 3 and 4 and amendments theretofurnished to the Company under Rule 16a-3(e) during the Company’s last fiscalyear, the Company believe that all filings required under Section 16(a) weretimely filed during the transaction period, except for a Form 4 filed byDouglas Cole for one transaction occurring in April 2002 was filed six dayslate and a Form 4 for Russell Myers for a transaction occurring in April 2002was also filed late.

 

**ITEM 10.**    **Executive Compensation**

 

**Executive Officer Compensation**

 

The table setforth below describes the compensation paid to the Company’s Chief ExecutiveOfficer and its other most highly compensated executive officers for the fiscalyear ended June 30, 2003, the twelve months ended June 30, 2002, and the fiscalyear ended September 30, 2001. For purposes of the chart “2003” means thetwelve month period beginning July 1, 2002 and ended June, 30, 2003, “2002”means the period July 1, 2001 to June 30, 2002, (not the nine month transitionperiod of October 1, 2001 to September 30, 2002, to enhance comparability), and“2001” means the period October 1, 2000 to September 30, 2001. As a result,compensation information for the three months ended September 30, 2001 isincluded both in year “2002 and year “2001”.

 
| **Name  and  Principal  Position****(1)** |   | **Year** |   | **Salary  ($)** |    | **Other  Annual  Compensation  ($)** |   | **Bonus** |   | **Restricted  Stock  Award(s)** |   | **Securities  Underlying  Options/SARS** |   | **All  Other  Compensation  ($)** |   |
|-------------------------------------------|--------|----------|--------|-----------------|---------|--------------------------------------|--------|-----------|--------|---------------------------------|--------|------------------------------------------|--------|-----------------------------------|--------|
|                                      |   |     |   |            |    |                                 |   |      |   |                            |   |                                     |   |                              |   |
| Grant Miller  (2)                    |   |     |   |            |    |                                 |   |      |   |                            |   |                                     |   |                              |   |
| Chief Financial                           |   | 2003     |   | $               | 220,000 |                                 |   |      | $      | 100,000                         |   |                                     |   | 500,000                           | (2)    |   |   |
| Officer and Interim                       |   | 2002     |   | —          |    | —                               |   | —    |   | —                          |   | —                                   |   | —                            |   |
| Chief Executive                           |   | 2001     |   | —          |    | —                               |   | —    |   | —                          |   | —                                   |   | —                            |   |
| Officer                                   |   |     |   |            |    |                                 |   |      |   |                            |   |                                     |   |                              |   |
|                                      |   |     |   |            |    |                                 |   |      |   |                            |   |                                     |   |                              |   |
| David M. Lerten                           |   |     |   |            |    |                                 |   |      |   |                            |   |                                     |   |                              |   |
| Chief Executive                           |   | 2003     |   | —          |    | —                               |   | —    |   | —                          |   | —                                   |   | —                            |   |
| Officer and                               |   | 2002     |   | —          |    | —                               |   | —    |   | —                          |   | —                                   |   | —                            |   |
| President                                 |   | 2001     |   | 217,806         | (3)     | —                               |   | —    |   | —                          |   | —                                   |   | 125,000                           | (3)    |
|                                      |   |     |   |            |    |                                 |   |      |   |                            |   |                                     |   |                              |   |
| Edward P. Mooney                          |   |     |   |            |    |                                 |   |      |   |                            |   |                                     |   |                              |   |
| Interim President and                     |   | 2003     |   | —          |    | —                               |   | —    |   | —                          |   | —                                   |   | —                            |   |
| Chief Executive                           |   | 2002     |   | 135,000         | (4)     | —                               |   | 120,000   |   |                            | (5)    | 125,000                                  |   | —                            |   |
| Officer                                   |   | 2001     |   | 71,500          |    | —                               |   | —    |   | —                          |   | —                                   |   | —                            |   |
|                                           |        |          |        |                 |         |                                      |        |           |        |                                 |        |                                          |        |                                   |        |  |  |

 

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(1) Other than Messrs. Mooney, Miller and Lerten, the Company does not haveany other executive officers who received compensation in excess of $100,000during the 2001, 2002, or 2003

 

(2)  Mr. Miller has served as the Company’s Chief Financial Officersince June, 2002 and served as its Interim Chief Executive Officer fromSeptember, 2002 to September, 2003 when Arturo Alemany was appointed to 

 

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serve as the Company’s ChiefExecutive Officer. Mr. Miller was awarded 500,000 options under his employmentcontact, 225,000 are vested as of June 30, 2003.

 

(3)  Mr. Lerten served as the Company’s Chief Executive Officer andPresident from April 2001 to December 2001, when he resigned to pursue otherinterests. Rather than paying Mr. Lerten a salary, Mr. Lerten billed theCompany monthly for his services and expenses incurred in connection withserving as the Company’s Chief Executive Officer and President. Accordingly,the salary listed in the above table includes amounts paid to Mr. Lerten forservices provided to the Company from April 2001 to December 2001 andreimbursement for business expenses incurred by Mr. Lerten in connection withacting as the Company’s Chief Executive Officer and President during the sameperiod. In connection with Mr. Lerten’s resignation in December 2001, theCompany entered into a separation agreement with Mr. Lerten. Pursuant to theseparation agreement, on December 19, 2001, the Company granted Mr. Lerten an optionto purchase 235,000 shares of Common Stock. Additionally, to offset certainfees and expenses owed by the Company to Mr. Lerten, the Company reduced theprincipal and accrued interest amount of the promissory note delivered to theCompany by Mr. Lerten for his purchase of 166,667 shares of Series A PreferredStock from $252,500 to $127,500, effective January 2, 2002.

 

(4)  Mr. Mooney served as the Company’s Executive Vice President fromApril 2001 to December 2001, when he served as the Company’s Interim ChiefExecutive Officer and President until September 2002. Pursuant to the Company’semployment agreement with Mr. Mooney, Mr. Mooney’s annual salary for fiscalyear 2001 was $120,000. Beginning in April 2002, Mr. Mooney’s salary increasedto $180,000. The Company’s board of directors also authorized the payment toMr. Mooney of a bonus in the amount of $120,000. The amounts included in thetable represent amounts received by Mr. Mooney or owed by the Company to Mr.Mooney, including reimbursement of expenses.

 

(5)  In June 2002, the Company’s board of directors approved theissuance of 150,000 shares of stock to Mr. Mooney under a Stock Grant Plan. Thegrant of these shares is subject to approval by an authorizing agent for theplan, and Mr. Mooney has not yet has been granted any shares. See theinformation under the heading “Long-Term Incentive, Director Option, and StockGrant Plans” below.

 

**Long-Term Incentive, Director Option and Stock Grant Plans**

 

Effective July 9,2001, the Company adopted the Long-Term Incentive Plan of USA Broadband, Inc.for its key employees and any subsidiary and consultants providing services toit or any of its subsidiaries. The plan authorizes the grant of incentive stockoptions, non-qualified stock options, stock appreciation rights, restrictedstock, performance shares and dividend equivalents. The total number of sharesof common stock authorized for awards under the plan is 1,500,000 shares. Theplan was adopted with the intent to promote the Company’s success by aligningthe personal interests of its key employees and consultants to those of theCompany’s stockholders and by providing its key employees and consultants withan incentive for outstanding performance. The Company has issued options to purchase approximately 5,900,000shares of the Company’s common stock to employees and consultants.Approximately 3,400,000 of those options were issued outside of the Company’sLong-Term Incentive Plan and therefore are considered non-qualified options.

 

On May 29,2001 the Company’s Director Option Plan became effective. The Director OptionPlan provides for the grant of nonstatutory stock options to its non-employeedirectors under an automatic, non-discretionary

 

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grantmechanism. A total of 1,000,000 shares of the Company’s common stock have beenreserved for issuance under the Director Option Plan. On July 1, 2003 theCompany granted the following options to its Directors:

 
| **Last Name** |   | **First Name** |   | **No. of  shares** |   | **Exercise  Price** |   | **Date of  Grant** |     | **Term** |    |
|---------------|--------|----------------|--------|--------------------|--------|---------------------|--------|--------------------|----------|----------|---------|
| Cole          |   | Douglas        |   | 100,000            |   | $                   | 1.10   |               | 1-Jul-03 |     | 5 years |   |
| Landry        |   | Jon  Eric      |   | 100,000            |   | $                   | 1.10   |               | 1-Jul-03 |     | 5 years |   |
| Mooney        |   | Edward         |   | 100,000            |   | $                   | 1.10   |               | 1-Jul-03 |     | 5 years |   |
| Myers         |   | Russell        |   | 100,000            |   | $                   | 1.10   |               | 1-Jul-03 |     | 5 years |   |
| Spears        |   | Ronald         |   | 100,000            |   | $                   | 1.10   |               | 1-Jul-03 |     | 5 years |   |
| Spears        |   | Ronald         |   | 50,000             |   | $                   | 1.10   |               | 1-Jul-03 |     | 5 years |   |

 

Only non-employeedirectors are eligible to participate in the Director Option Plan. The exerciseprice of options granted to outside directors under the plan must be 100% ofthe fair market value of the Company’s common stock on the date of grant. TheDirector Option Plan provides that each newly appointed or elected outsidedirector, who was not a current director on the date on which the directoroption Plan became effective, will be granted an option to purchase 25,000shares of the Company’s common stock on January 1 of each year after his or herappointment, if the director has served as a director for at least six monthsas of this date and remains an outside director. Alternatively, the DirectorOption Plan allows for other grants as may be approved by the Company’s boardof directors.

 

The DirectorOption plan allows for cashless exercise of options granted, using the value ofthe options themselves or previously-owned shares of the Company’s commonstock. Options granted to the outside directors expire after ten years, or upontermination of the individual’s tenure as a director, whichever is earlier.Options granted to the outside directors become fully vested three months afterthey are granted.

 

The sharesissuable upon exercise of options granted under the Director Option Plan willbe adjusted for stock splits, stock dividends, and similar transactions. In theevent of a propose dissolution or liquidation, to the extent that an option hasnot been previously exercised, it will terminate immediately prior to theconsummation of the proposed action. In the event of the merger or sale ofsubstantially all of the Company’s assets, all outstanding options will beassumed or substituted by the successor corporation, or if they are not assumedor substituted, will become fully vested, unless the Company’s board ofdirectors determines otherwise.

 

With twoexceptions, the Company’s board of directors may amend the Director Option Planat any time or may terminate it without approval of the shareholders. The firstexception is that the board of directors may not unilaterally alter or impairany option previously granted under the Director Option Plan without theconsent of the holder of the option. The second exception is that the board ofdirectors may not amend the term of the plan, which is ten years.

 

On June 6, 2002,the Company’s board of directors approved a Stock Grant Plan under which up to1,000,000 shares of its common stock could be issued to employees, consultantsor other individuals providing services to the Company. Under the plan, eachindividual to whom shares are granted under the plan would not be able toacquire such shares until the expiration of a waiting period of a minimum ofsixty days. In addition, the plan would require the Board to appoint anindividual who has a financial background and is knowledgeable about the stockmarket as an authorizing agent. The authorizing agent would approve thedistribution of shares from the plan after the waiting period only if he or shebelieves that the additional shares would not have a material negative affecton the market for the 

 

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Company’s common stock. Withoutauthorization from the authorizing agent, no shares may be distributed from theplan.

 

Under the StockGrant Plan, if the authorizing agent determines that a certain number of sharesmay be distributed from the Plan without a material negative effect on themarket for the Company’s in a material way, the authorizing agent will sendnotice to each of the individuals to whom shares may be granted under the Plan.The shares from the Plan that are authorized to be distributed will be grantedon a first come-first served basis to those individuals that notify theauthorizing agent of their desire to acquire the shares at that time. If lessthan all of the shares that are authorized to be distributed at that time areactually distributed pursuant to the first come-first served opportunity, theremaining shares will be distributed on a pro rata basis among each individualeligible to receive shares of the Company’s common stock under the plan.

 

Under the StockGrant Plan, if the authorizing agent determines that shares may be distributedfrom the Plan, those shares may be distributed only to individuals who continueto be employees, officers or directors of the Company or who continue tomaintain a consulting relationship with the Company at the time ofdistribution. The shares to be distributed under the Plan will have piggybackregistration rights associated with them. The Company’s board has approved theissuance of a total of 1,000,000 shares under the plan to various officers,directors and consultants of the Company. See the information contained underthe heading “Executive Officer Compensation” in Item 10 of this Form 10-KSB.

 

**Compensation of Directors**

 

The Companycompensated its Directors by granting them stock options.

 
| **Last Name** |   | **First Name** |   | **No. of shares** |   | **Exercise Price** |   | **Date of  Grant** |     | **Term** |    |
|---------------|--------|----------------|--------|-------------------|--------|--------------------|--------|--------------------|----------|----------|---------|
| Cole          |   | Douglas        |   | 100,000           |   | $                  | 1.10   |               | 1-Jul-03 |     | 5 years |   |
| Landry        |   | Jon  Eric      |   | 100,000           |   | $                  | 1.10   |               | 1-Jul-03 |     | 5 years |   |
| Mooney        |   | Edward         |   | 100,000           |   | $                  | 1.10   |               | 1-Jul-03 |     | 5 years |   |
| Myers         |   | Russell        |   | 100,000           |   | $                  | 1.10   |               | 1-Jul-03 |     | 5 years |   |
| Spears        |   | Ronald         |   | 100,000           |   | $                  | 1.10   |               | 1-Jul-03 |     | 5 years |   |
| Spears        |   | Ronald         |   | 50,000            |   | $                  | 1.10   |               | 1-Jul-03 |     | 5 years |   |

 

**Employment and Change in Control Severance Agreements**

 

On July 1, 2003, the Board of Directorsentered into an employment agreement with Mr. Grant Miller, the Company’s ChiefFinancial Officer. The agreement is for a term of three years. Pursuant to theagreement, Mr. Miller is entitled to receive a base salary of $240,000 per yearand a bonus of up to 100% of his salary as directed by the Board. In connectionwith the agreement, Mr. Miller was granted an option to purchase 500,000 sharesof common stock at $1.10 per share, of which, the option to purchase 125,000shares vests immediately with the remaining 375,000 shares vesting in equalinstallments over the next three years. The agreement provides for a one yearseverance should Mr. Miller be terminated without cause.

 

On March 18, 2003,Lewis Suders resigned as the Company’s chief operating officer, effectiveFebruary 15, 2003.  In connection withhis resignation, the Company entered into a severance agreement with Mr. Sudersunder which the Company agreed to pay Mr. Suders, in addition to back pay andreimbursement of expenses, a total of $25,000 in resolution of all claims Mr.Suders may have with regard to a signing bonus, severance pay, or any othercompensation.

 

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During the year ended June 30,2003, an option to purchase 500,000 shares was granted to theCompany’s Chief Financial Officer. The option had an exercise price of$2.00 per share.  Subsequent to the issuance of the option, the Companyagreed to change the exercise price of the option to $1.33 per share to moreaccurately reflect the then-current market price of the Company’s commonstock.  The change of the exercise price is subject to ratificationby the Company’s board of directors.  No compensation cost was required tobe recognized as the stock price was less than the modified exerciseprice.  However, variable accounting will apply to these options andcompensation expense may be required to be recognized in the future.

 

ITEM11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

EquityCompensation Plan Information:

 
| **Plan Category**                                           |   | **Number of  Securities to  be Issued Upon  Exercise  of Outstanding  Options,  Warrants and  Rights** |   | **Weighted  Average  Exercise Price  of  Outstanding  Options,  Warrants and  Rights** |   | **Number of  Securities  Remaining  Available for  Future Issuance** |      |
|-------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------|-----------|
| Equity  compensation plans approved by security holders     |   | 1,500,000                                                                                              | (1)    | $                                                                                      | 1.49   |                                                                 | 0         |   |
| Equity  compensation plans not approved by security holders |   | 3,402,075                                                                                              | (2)    | $                                                                                      | 2.99   |                                                                 | 1,000,000 | (3) |
| Total                                                       |   | 5,902,075                                                                                              |   |                                                                                   |   |                                                                 |      |

 

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(1)                                  Consists of shares issued under the Company’sLong-Term Incentive Plan.

 

(2)                                  Consists of options granted pursuant to theDirector Option Plan and options issued outside any formal plan.

 

(3)                                  Consists of shares remaining available forissuance under a Stock Grant Plan approved by the Company’s board of directorsin June 2002.

 

**StockOwnership of Certain Beneficial Owners and Management and Related StockholderMatters**

 

The following table setsforth information as of September 26, 2003 regarding the beneficial ownershipof (1) each person known by the Company to be the beneficial owner of more thanfive percent of any class of the Company’s voting securities and (2) theCompany’s directors, each named executive officer and its directors andexecutive officers as a group. As of October 14, 2003, the Company had13,866,383 shares of common stock outstanding, and 3,811,167 shares of Series APreferred Stock outstanding.

 

Each share of the Company’s Series APreferred Stock is convertible into one share of the Company’s common stock,subject to adjustment as provided in the Certificate of Designations for theSeries A Preferred Stock. Unless otherwise indicated, the address of eachperson listed in the table is 121 Broadway Ste. 624, San Diego, California,92101.

 

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**Beneficial Ownership of Company**

 

**Officers, Directors,5% Shareholders**

 
| **Name**                                 |   | **Common********Stock** |       | **Series A  Preferred  Stock** |       | **% of  Series A  Preferred  Stock** |       | **Aggregate  Options and  Warrants** |   | **Total Common  Beneficially  Owned (2)** |   | **% Benefical  Ownership  Of Common  Stock(1)** |   |
|------------------------------------------|--------|-------------------------|------------|--------------------------------|------------|--------------------------------------|------------|--------------------------------------|--------|-------------------------------------------|--------|-------------------------------------------------|--------|
|                                     |   |                    |       |                           |       |                                 |       |                                 |   |                                      |   |                                            |   |
| dick clark international cable  ventures |   | 2,500,000               |       | 0                              |       | 0.00                                 | %          | 0                                    |   | 2,500,000                                 |   | 11.00                                           | %      |
| Las Americas Broadband, Inc.             |   | 2,250,000               |       | 0                              |       | 0.00                                 | %          | 0                                    |   | 2,250,000                                 |   | 9.90                                            | %      |
| Paul Moore / Maroon Bells(3)             |   | 834,841                 |       | 196,894                        |       | 5.55                                 | %          | 1,200,000                            |   | 2,231, 735                                |   | 9.82                                            | %      |
| Theodore H. Swindells (4)                |   | 501,515                 |       | 292,050                        |       | 8.23                                 | %          | 566,667                              |   | 1,360,232                                 |   | 5.98                                            | %      |
| Jon Eric Landry (5)                      |   | 363,017                 |       | 35,388                         |       | 1.00                                 | %          | 350,000                              |   | 748,405                                   |   | 3.29                                            | %      |
| Russell Meyers (7)                       |   | 164,257                 |       | 366,667                        |       | 9.62                                 | %          | 150,000                              |   | 680,924                                   |   | 3.00                                            | %      |
| Edward Mooney (6)                        |   | 316,250                 |       | 0                              |       | 0.00                                 | %          | 325,000                              |   | 641,250                                   |   | 2.82                                            | %      |
| Doug Cole                                |   | 52,727                  |       | 0                              |       | 0.00                                 | %          | 325,000                              |   | 377,727                                   |   | 1.66                                            | %      |
| Grant Miller(10)                         |   | 0                       |       | 0                              |       | 0.00                                 | %          | 100,000                              |   | 100,000                                   |   | 0.44                                            | %      |
| Ron Spears(8)                            |   | 0                       |       | 0                              |       | 0.00                                 | %          | 150,000                              |   | 150,000                                   |   | 0.66                                            | %      |
| Arturo Alemany(9)                        |   | 0                       |       | 0                              |       | 0.00                                 | %          | 300,000                              |   | 300,000                                   |   | 0.66                                            | %      |
| Margot Ritcher(11)                       |   | 0                       |       | 0                              |       | 0.00                                 | %          | 100,000                              |   | 100,000                                   |   | 0.11                                            | %      |
|                                     |   |                    |       |                           |       |                                 |       |                                 |   |                                      |   |                                            |   |
| Total                                    |   | **6,982,607**           | ** ** | **890,999**                    | ** ** |                                 | ** ** | **3,566,667**                        |   | **11,440,273**                            |   |                                            |   |

 

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(1)                                  Includesonly shares issuable upon exercise of options or warrants that may be currentlyexercised or will become exercisable within 60 days of October 10, 2003.

 

(2)                                  Includes outstanding common stock at October10, 2003 and outstanding Series A Preferred Stock at October 10, 2003 (assumingthe Series A Preferred Stock is converted on a 1:1 basis), plus shares issuableupon exercise of all options or warrants.

 

(3)                                  Consists of 631,841 shares of common stock, 196,894 shares of Series A PreferredStock and warrants to purchase 200,000 shares of common stock owned by Mr.Moore, and 203,000 shares of common stock and warrants to purchase 500,000shares of common stock and options to purchase 500,000 shares of common stockowned by Maroon Bells Capital, L.L.C. Mr. Moore is a principal of Maroon BellsCapital, L.L.C. and, therefore, he may be deemed to beneficially own sharesowned by, or issuable upon exercise of warrants held by, Maroon Bells Capital,L.L.C. Mr. Moore shares voting and dispositive power with Maroon Bells Capital,L.L.C. with respect to all shares.  Mr.Moore disclaims beneficial ownership of shares owned by or issuable upon theexercise of warrants held by Maroon Bells Capital,  L.L.C. Maroon Bells is a merchant banking firm. Mr. Moore’smailing address is 269 Market Square, Lake Forest, Illinois 60045.

 

(4)                                  Mr. Swindell’s business address is c/o FairwayWestern, 11400 Southeast 8th Street, Bellevue, WA 98004.

 

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(5)                                  Mr. Landry’s mailing address is Landry MontanaPartners, Inc., 269 Market Street, Lake Forest, IL 60045.

 

(6)                                  Mr. Mooney’s mailing address is 921 TransportWay, Suite 4, Petaluma, California 94954.

 

(7)                                  Consists of 1,405 shares of common stock ownedby Geneva Associates Advisors, LLC, 2,504 shares of common stock owned by GenevaAssociates, LLC, 132,235 shares of common stock owned by Blue Ridge InvestorsII, LP, and 28,113 shares of common stock and 366,667 shares of Series APreferred Stock owned by Geneva Associates Merchant Banking Partners I, LLC.Mr. Meyers may be deemed to beneficially own Shares owned by Geneva AssociatesAdvisors, LLC, Geneva Associates, LLC, Blue Ridge Investors II, LP, and GenevaAssociates Merchant Banking Partners I, LLC as a result of his relationship tothese Entities. Mr. Myers also may be considered the beneficial owner of1,150,000 shares of Series B Preferred Stock owned by Geneva associatesMerchant Banking Partners I, LLC, 134,074 shares of Series C Preferred Stockowned by Geneva Associates Advisors, LLC, 2,816,762 shares of Series C PreferredStock owned by Blue Ridge Investors II, LP, 1,533,468 shares of Series CPreferred Stock owned by Geneva Associates Merchant Banking Partners I, LLC,and 238,992 shares of Series C Preferred Stock owned by Geneva Associates, LLC.  Mr. Myers’ mailing address is c/o GenevaMerchant Banking Partners, 300 North Greene Street, Greensboro, NC 27401.

 

(8)                                  Mr. Spears’ mailing address is 390 OenokeRidge, New Canaan, CT 06840.

 

(9)                                  Mr. Arturo Alemany was appointed to serve asChairman of the Board and Chief Executive Officer, effective September 16,2003. Mr. Alemany has an option to purchase up to 300,000 shares of commonstock at $1.10 per share, of which Mr. Alemany may purchase immediately (orwithin 60 days of October 10, 2003) up to 150,000 shares. The remaining sharesmay be purchased in equal installments over the next two quarters.

 

(10)         Mr. Miller has the following twooptions to purchase shares of common stock: (a) an option to purchase up to500,000 shares of common stock at $1.33 per shares, of which Mr. Miller maypurchase immediately (or within 60 days of October 10, 2003) up to 250,000shares and the remaining shares may be purchased in equal installments over thenext two years; and (b) an option to purchase up to 500,000 shares of commonstock at $1.10 per share, of which Mr. Miller may purchase immediately (orwithin 60 days of October 10, 2003) up to 125,000 shares and the remainingshares may be purchased in equal installments over the next three years.

 

(11)         Ms. Ritcher has an option to purchaseup to 100,000 shares of common stock at $1.10 per share, of which Ms. Ritchermay purchase immediately (or within 60 days of October 10, 2003) 25,000 sharesand the remaining shares may be purchased in equal installments over the nextthree years.

 

ITEM 12. CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS

 

On January 29, 2003, theCompany renewed an advisory agreement with Maroon Bells Capital, L.L.C., amerchant banking firm, to provide certain advisory and business developmentservices in exchange for a monthly advisory fee. The term of the agreement istwenty-four months with an automatic twelve-month renewal. Maroon Bells is oneof the Company’s significant stockholders. Mr. Paul Moore, another one ofsignificant stockholders, is a principal of Maroon Bells. See the informationunder the caption “Stock Ownership of Certain Beneficial Owners and Managementand Related Stockholder Matters” in Item 11 of this Form 10-KSB. In addition,Maroon Bells earned a fee in connection with the Company’s acquisition of CableConcepts, Inc. The board granted 500,000 warrants in connections with therenewal of the agreement. In 2001, Maroon Bells was granted 500,000 options topurchase common stock at $1.50 per share in connection with the prioragreement.

 

During the year endedJune 30, 2003, Mr. Paul Moore advanced the Company approximately $214,500 inconnection with the Company’s acquisition of Cable California. The Companyrecognized that it owes $315,000 in management advisory service fees under theMaroon Bells Consulting Agreement and approximately $196,000 in reimbursableout of pocket expenses incurred by Mr. Moore in connection with the Company’sbusiness.  Maroon Bells Capital earned$205,000 in finder’s fees in connection with the Company’s funding efforts. Mr.Moore converted approximately $475,000 of indebtedness into 431,818 shares ofcommon stock at the rate of $1.10 per share of this amount. The $475,000 ofindebtedness that was converted into shares consisted of $107,300 of a note and$367,700 of accounts payable. At June 30, 2003, the Company owed Mr. Mooreapproximately $925,000.  Maroon BellsCapital and Mr. Moore are currently in final negotiations with the Company toconvert up to $750,000 of this debt to equity.

 

The Company previously agreed to compensateDouglas D. Cole, who is one of the Company’s directors, for consultingservices. Mr. Cole has and continues to provide these services, and as of June30, 2002 the Company owed him a total of $25,000 for services rendered andreimbursement of expenses. In June 2003, Mr. Cole converted $58,000 of amountsowed to him into common stock at a conversion rate of $1.10 per commonshare.  He received 52,727 common sharesin connection with the conversion.  Inconsideration for similar services and Mr. Cole’s deferring payment for pastservices rendered, in June 2002 the Company’s board approved the issuance of100,000 shares of its common stock to Mr. Cole under the Company’s Stock GrantPlan. The grant of these shares is subject to approval by an authorizing agentfor the plan, and Mr. Cole has not yet been granted any 

 

39

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shares.See the information under the heading “Long-Term Incentive, DirectorOption and Stock Grant Plans” in Item 10 of this Form 10-KSB.

 

In consideration for his agreeing to jointhe Company’s board of directors, in June 2002 the Company’s board approved theissuance to Mr. Spears of 25,000 shares of the Company’s common stock under itsStock Grant Plan. The grant of these shares is subject to approval by anauthorizing agent for the plan, and Mr. Spears has not yet has been granted anyshares. See the information under the heading “Long-Term Incentive, DirectorOption and Stock Grant Plans” in Item 10 of this Form 10-KSB.

 

On March 4, 2002, the Company issued twounsecured notes payable in the amount of $150,000 each to Theodore Swindellsand Paul Moore, both of whom beneficially own over 5% of the Company’s commonstock. These notes bear interest at the rate of 10% per year and had a due dateof October 31, 2002. In July 2002 the Company agreed to issue warrants to Mr.Moore and Mr. Swindells, in connection with various loans and advances made bythese individuals to the Company. Mr. Moore and Mr. Swindells each were grantedwarrants to purchase 200,000 shares of the Company’s common stock. In June2003, Mr. Moore converted the outstanding principal of his note of $150,000plus accrued interest of $20,300 for a total amount of $170,300 conversion to154,818 common shares at the rate of $1.10 per common share. A portion of Mr.Swindell’s note was paid along with accrued interest of approximately $20,000resulting in an outstanding balance due in April 2004 to Mr. Swindells ofapproximately $130,000.

 

In consideration for advances of funds to theCompany, and services provided to the Company, including assistance withfinancings, in June 2002 the Company’s board approved the issuance of 350,000shares of its common stock to Mr. Paul Moore under the Company’s Stock GrantPlan. The grant of these shares is subject to approval by an authorizing agentfor the plan, and Mr. Moore has not been granted any shares. See theinformation under the heading “Long-Term Incentive, Director Option and StockGrant Plans” in Item 10 of this Form 10-KSB. 

 

In October 2002 the Company obtained abridge loan from Mr. Theodore Swindells in the amount of $500,000 and inFebruary 2003 the Company obtained a bridge loan in the amount of $100,000 fromMr.Swindells. The loans are evidenced by promissory notes. The holder of thesenotes, Mr. Swindells, beneficially owns over 5% of the Company’s common stock.The promissory notes issued bear interest at a rate of 18% per year with a duedate of due six months from the date of issue. In addition, in connection withthese loans, the Company issued the shareholder warrants to purchase 300,000and 50,000 shares of the Company’s common stock at an exercise price of $1.00per share expiring in 2008.

 

On April 15, 2003, the Company entered intoan advisory agreement with Jon Eric Landry, who is one of the Company’sdirectors, under which Mr. Landry agreed to provide advice in connection withthe Company’s corporate finance strategy, business plan and investor relationsand other matters. The agreement has a 36-month term. In consideration for Mr.Landry’s services, the Company agreed to pay him $1.00 per year. In addition,if the Company secures permanent financing of $5,000,000 or more, or if asignificant financing event occurs that allows us to realize sufficientliquidity to satisfy current operating expenses, Mr. Landry will be entitled toadditional compensation, in an amount to be agreed upon between the Company andMr. Landry and approved by the Company’s board of directors.

 

In June 2003 several of the Company’sdirectors and investors forgave amounts owed to them in exchange for issuanceof common stock. Mr. Mooney exchanged $182,875 in accounts payable for 166,250shares of common stock at the rate of $1.10 per share. Mr. Swindells exchangedpromissory notes with an aggregate of principal and interest of $166,667 for151,515 shares of common stock at the rate of $1.10 per share. Mr. Coleexchanged accounts

 

40

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payableowed to him in the amount of $58,000 for 52,727 shares of common stock at therate of $1.10 per share. Mr. Landry exchanged accounts payable due to LandryMountain Partners of $239,819 for 218,017 shares of common stock at the rate of$1.10 per share. Mr. Moore converted accounts payable in the amount of $304,700to 277,000 shares of common stock at the rate of $1.10 per common share. Mr.Moore also converted a note payable with balance of $170,300 includingprincipal and interest to Mr. Moore.

 

ITEM13.         Exhibits andReports on Form 8-K

 

**(a)**     Exhibit Index

 
| **Exhibit No.** |   | **Description**                                                                                                               |
|-----------------|--------|-------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                          |
| **21**          |   | **List of Subsidiaries**                                                                                                      |
|            |   |                                                                                                                          |
| **31**          |   | **Certification**                                                                                                             |
|            |   |                                                                                                                          |
| **32**          |   | **Certification pursuant to 18 U.S. C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** |
|            |   |                                                                                                                          |
| **(b)**         |   | **Reports****on Form 8-K**                                                                                                    |

 

On March 7, 2003, theCompany filed an amendment on form 8K/A amending a Form 8-K that the Companypreviously filed on March 21, 2003. On the Form 8-K/A,the Company reported updated information regarding its acquisition of interestsin Cable California S. A. de S.V., a Mexican corporation.

 

ITEM 14.         CONTROLS AND PROCEDURES

 

The Company’s management conducted anevaluation of the effectiveness of disclosure controls and procedures asrequired by paragraph (b) of the Exchange Act Rule 13a-15 as of the end of theperiod covered by this report. Based on that evaluation, management concludedthat the disclosure controls and procedures are effective in ensuring that allmaterial information required to be filed in this report has been made known tothem in a timely fashion. There has been no change in the Company’s internalcontrol over financial reporting that occurred during the fiscal period coveredby this report that has materially affected, or reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 934, the Registrant has duly caused this Reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 
|   | USA BROADBAND, INC. |
|--------|---------------------|
|   |                |   |   |
|   | By:                 |   | /s/ GRANT MILLER |
|   | Its:                |   | Chief Financial Officer |

 

Dated: October 14, 2003

 

Pursuant to the requirements of the SecuritiesExchange Act of f1934, this report has been signed below by the followingpersons on behalf of the Registrant and in the capacities and on the datesindicated.

 
| **SIGNATURE**              |   | **TITLE**                             |   | **DATE**         |
|----------------------------|--------|---------------------------------------|--------|------------------|
| /s/ ARTURO ALEMANY         |   | Chief Executive Officer  and Director |   | October 14, 2003 |
| /s/ GRANT MILLER           |   | Chief Financial Officer               |   | October 14, 2003 |
| /s/ RONALD E. SPEARS       |   | Director                              |   | October 14, 2003 |
| /s/ JON ERIC (RIC)  LANDRY |   | Director                              |   | October 14, 2003 |

 

41

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INDEX TO FINANCIALSTATEMENTS

 
| USA BROADBAND, INC. AND SUBSIDIARIES                                                                                                      |
|-------------------------------------------------------------------------------------------------------------------------------------------|
| Independent Auditor’s  Report                                                                                                        |
| Consolidated Balance  Sheets—June 30, 2003 and June 30, 2002                                                                         |
| Consolidated  Statements of Operations—For Year Ended Ended  June 30, 2003 and Nine Month Period Ended June 30, 2002                 |
| Consolidated  Statements of Stockholders’ Equity— For Year Ended Ended  June 30, 2003 and Nine Month Period Ended June 30, 2002 |
| Consolidated  Statements of Cash Flows— For Year Ended Ended  June 30, 2003 and Nine Month Period Ended June 30, 2002                |
| Notes to  Consolidated Financial Statements                                                                                               |

 

F1

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INDEPENDENTAUDITOR’S REPORT

 

Boardof Directors

USABroadband, Inc.

Coronado,California

 

We have audited theaccompanying consolidated balance sheets of USA Broadband, Inc. andSubsidiaries as of June 30, 2003 and June 30, 2002, and the relatedconsolidated statements of operations, stockholders’ equity, and cash flows forthe year ended June 30, 2003 and nine months ended June 30, 2002. Theseconsolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

We conducted our auditsin accordance with auditing standards generally accepted in the United Statesof America. Those standards require that we plan and perform the audits toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of USA Broadband, Inc. andSubsidiaries as of June 30, 2003 and June 30, 2002, and the results of theiroperations and their cash flows for the year ended June 30, 2003 and the ninemonths ended June 30, 2002, in conformity with accounting principles generallyaccepted in the United States of America.

 

The accompanyingconsolidated financial statements have been prepared assuming that the Companywill continue as a going concern. As discussed in Note 3 to the financialstatements, the Company has suffered recurring losses from operations and has aworking capital deficiency. These factors raise substantial doubt about theCompany’s ability to continue as a going concern. Management’s plans in regardto these matters are also described in Note 3. The financial statements do notinclude any adjustments that might result from the outcome of this uncertainty.

 

 

Hein+ Associates LLP

Denver,Colorado

August20, 2003

 

F2

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USA BROADBAND, INC. ANDSUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

($ in 000’s, except pershare data)

 
|                            |   | **June 30,  2003** |   | **June 30,  2002** |   |
|---------------------------------|--------|--------------------|--------|--------------------|--------|
| ASSETS                          |   |               |   |               |   |
| Current Assets:                 |   |               |   |               |   |
| Cash                            |   | $                  | 79     |               | $      | 88 |   |
| Restricted cash                 |   | 0                  |   | 500                |   |
| Accounts receivable, net        |   | 16                 |   | 171                |   |
| Prepaid expenses and other      |   | 42                 |   | 15                 |   |
| Total current assets            |   | 137                |   | 774                |   |
| Property and Equipment:         |   |               |   |               |   |
| Cable properties                |   | 2,740              |   | 9,831              |   |
| Cable equipment                 |   | 775                |   | 975                |   |
| Leasehold improvements          |   | 2                  |   | 2                  |   |
| Furniture and equipment         |   | 34                 |   | 34                 |   |
| Computer software and equipment |   | 114                |   | 113                |   |
| Vehicles                        |   | 7                  |   | 7                  |   |
|                            |   | 3,672              |   | 10,962             |   |
| Less accumulated depreciation   |   | (1,242             | )      | (1,472             | )      |
| Net property and equipment      |   | 2,430              |   | 9,490              |   |
| Note Receivable                 |   | —             |   | 504                |   |
| Assets Held for Sale, net       |   | 239                |   | 925                |   |
| Investment in Cable California  |   | 6,006              |   | —             |   |
| Other Assets                    |   | 256                |   | 87                 |   |
| Total Assets                    |   | 9,068              |   | $                  | 11,780 |   |
|                                 |        |                    |        |                    |        |  |  |

 

Seeaccompanying notes to these financial statements.

 

F3

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USA BROADBAND, INC. ANDSUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

($ in 000’s, except pershare data)

 
|                                                                                                                                            |   | **June 30,  2003** |   | **June 30,  2002** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|--------------------|--------|
| LIABILITIES AND STOCKHOLDERS’  EQUITY                                                                                                      |   |               |   |               |   |
| Current Liabilities:                                                                                                                            |   |               |   |               |   |
| Line-of-credit                                                                                                                                  |   | —             |   | $                  | 100    |   |
| Current portion of long-term debt,  capital lease obligations, and notes payable                                                                |   | $                  | 4,481  |               | 5,096  |   |
| Accounts payable                                                                                                                                |   | 3,737              |   | 4,036              |   |
| Accrued liabilities                                                                                                                             |   | 1,362              |   | 735                |   |
| Note Payable Shareholder                                                                                                                        |   | 130                |   | —             |   |
| Deferred revenues                                                                                                                               |   | 94                 |   | 11                 |   |
| Total current liabilities                                                                                                                       |   | 9,804              |   | 9,978              |   |
| Deferred Revenues                                                                                                                               |   | —             |   | 457                |   |
| Other Liabilities                                                                                                                               |   | —             |   | 15                 |   |
| Commitments and Contingencies,  (Notes 10 and 14)                                                                                               |   |               |   |               |   |
|                                                                                                                                            |   |               |   |               |   |
| Stockholders’ Equity:                                                                                                                      |   |               |   |               |   |
| Preferred stock, $.001 par value;  50,000,000 shares authorized                                                                                 |   |               |   |               |   |
| Series A convertible preferred  stock; 7,000,000 shares designated; 3,811,387 and 3,873,015 outstanding,  liquidation preference of $6,331,000; |   | 5,458              |   | 5,550              |   |
| Series B preferred stock; 2,625,000  shares designated; outstanding, 2,625,000 liquidation preference of  $3,126,000;                           |   | 2,391              |   | 2,391              |   |
| Series C preferred stock; 7,875,000  shares designated; outstanding, liquidation preference of $7,875,000                                       |   | 7,875              |   | 7,875              |   |
| Common stock, $.001 par value;  100,000,000 shares authorized; 13,609,925 and 6,299,316 outstanding                                             |   | 14                 |   | 6                  |   |
| Additional paid in capital                                                                                                                      |   | 19,881             |   | 6,790              |   |
| Deferred Option Compensation                                                                                                                    |   | (315               | )      | —             |   |
| Accumulated deficit                                                                                                                             |   | (36,040            | )      | (21,282            | )      |
|                                                                                                                                            |   |               |   |               |   |
| Total stockholders’ equity (deficit)                                                                                                       |   | (736               | )      | 1,330              |   |
| Total Liabilities and Stockholders’  Equity                                                                                                |   | $                  | 9,068  |               | $      | 11,780 |   |

 

See accompanying notes to these financialstatements.

 

F4

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USA BROADBAND,INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFOPERATIONS($ in 000’s, except per share data)

 
|                                                               |   | **For the  year  Ended****June 30, 2003** |    | **For the  Nine  Months Ended****June 30, 2002** |   |
|--------------------------------------------------------------------|--------|-------------------------------------------|---------|--------------------------------------------------|--------|
|                                                               |   |                                      |    |                                             |   |
| Revenues                                                           |   | $                                         | 1,539   |                                             | $      | 2,082 |   |
| Cost of Revenues                                                   |   | 674                                       |    | 612                                              |   |
| Gross profit                                                       |   | 865                                       |    | 1,470                                            |   |
| Operating Expenses:                                                |   |                                      |    |                                             |   |
| Selling, general and administrative                                |   | 8,351                                     |    | 6,611                                            |   |
| Depreciation                                                       |   | 1,012                                     |    | 1,314                                            |   |
| Impairment of long-lived assets                                    |   | 80                                        |    | 9,850                                            |   |
|                                                               |   |                                      |    |                                             |   |
| Total operating expenses                                           |   | 9,443                                     |    | 17,775                                           |   |
| Loss from operations                                               |   | (8,578                                    | )       | (16,305                                          | )      |
| Other Income (Expense):                                            |   |                                      |    |                                             |   |
| Interest expense, net                                              |   | (1,312                                    | )       | (403                                             | )      |
| Equity in earnings of Cable  California                            |   | (833                                      | )       | —                                           |   |
|                                                               |   |                                      |    |                                             |   |
| Other income (expense), net                                        |   | —                                    |    | 4                                                |   |
| Net  Loss from continuing operations                               |   | (10,723                                   | )       | (16,704                                          | )      |
| Discontinued Operations                                            |   |                                      |    |                                             |   |
| Income from Discontinued Operations                                |   | 505                                       |    | 768                                              |   |
| Income/ (Loss) from Disposal of  Assets                            |   | (4,540                                    | )       | —                                           |   |
| NET LOSS                                                           |   | $                                         | (14,758 | )                                                | $      | (15,936 | ) |
| Accrued Cumulative Preferred Stock  Dividends                      |   | 826                                       |    | 614                                              |   |
| Net Loss Applicable to Common  Shareholders                        |   | $                                         | (15,584 | )                                                | $      | (16,550 | ) |
| Net Loss per Common Share, (primary  and diluted)                  |   | $                                         | (1.35   | )                                                | $      | (3.09 | ) |
| Weighted Average Common Shares  Outstanding, (primary and diluted) |   | 11,531,000                                |    | 5,360,000                                        |   |

 

See accompanying notes to these financialstatements.

 

F5

----

 

USA BROADBAND,INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITYFOR THE YEAR ENDED JUNE 30, 2003 AND THE NINE MONTHS ENDED JUNE 30, 2002($ in 000’s except per share data)

 
|                                                               |         |         |              |   |       |       |      |       |       |      |       |      |   |      |   |   |       | **Additional  Paid In  Capital** |   | **Accumulated****Deficit** |   | **Deferred  Compensation** |   | **Total  Stockholders’  Equity** |   |
|--------------------------------------------------------------------|--------------|--------------|-------------------|--------|------------|------------|-----------|------------|------------|-----------|------------|-----------|--------|-----------|--------|--------|------------|----------------------------------|--------|----------------------------|--------|----------------------------|--------|---------------------------------------|--------|
| **Series A**                                                       | **Series B** | **Series C** | **Common  Stock** |
| **Shares**                                                         |         | **Amount**   | **Shares**        |   | **Amount** | **Shares** |      | **Amount** | **Shares** |      | **Amount** |
|                                                               |         |         |              |   |       |       |      |       |       |      |       |      |   |      |   |   |       |                             |   |                       |   |                       |   |                                  |   |
| Balance September 30, 2001                                         |         | 3,283,899    |              | $      | 4,733      |       | 2,625,000 |       | $          | 2,391     |       | 7,875,000 |   | $         | 7,875  |   | 4,963,000  |                             | $      | 5                          |   | $                          | 4,611  |                                  | $      | (5,346 | ) | $ | — |   | $ | 14,269 |   |
|                                                               |         |         |              |   |       |       |      |       |       |      |       |      |   |      |   |   |       |                             |   |                       |   |                       |   |                                  |   |
| Proceeds from sale of former directors shares                      |         | —       |              | — |       | —     |      | —     |       | —    |       | —    |   | —    |   | — |       | 110                              |   | —                     |   | —                     |   | 110                                   |   |
| Proceeds from sale of Series A Preferred                           |         | 521,515      |              | 782    |       | —     |      | —     |       | —    |       | —    |   | —    |   | — |       | —                           |   | —                     |   | —                     |   | 782                                   |   |
| Series A Preferred issued for services                             |         | 44,268       |              | — |       | —     |      | —     |       | —    |       | —    |   | —    |   | — |       | —                           |   | —                     |   | —                     |   | —                                |   |
| Options issued to employees                                        |         | —       |              | — |       | —     |      | —     |       | —    |       | —    |   | —    |   | — |       | 455                              |   | —                     |   | —                     |   | 455                                   |   |
| Options issued to non employees                                    |         | —       |              | — |       | —     |      | —     |       | —    |       | —    |   | —    |   | — |       | 84                               |   | —                     |   | —                     |   | 84                                    |   |
| Fair value of warrants issued for services                         |         | —       |              | — |       | —     |      | —     |       | —    |       | —    |   | —    |   | — |       | 72                               |   | —                     |   | —                     |   | 72                                    |   |
| Shares issued in exercise of warrants                              |         | —       |              | — |       | —     |      | —     |       | —    |       | —    |   | 528,022   |   | — |       | 5                                |   | —                     |   | —                     |   | 5                                     |   |
| Shares issued in payment of liability                              |         | 23,333       |              | 35     |       | —     |      | —     |       | —    |       | —    |   | —    |   | — |       | —                           |   | —                     |   | —                     |   | 35                                    |   |
| Proceeds from sale of Common Stock                                 |         | —       |              | — |       | —     |      | —     |       | —    |       | —    |   | 720,869   |   | 1      |       | 1,441                            |   | —                     |   | —                     |   | 1,442                                 |   |
| Offering costs                                                     |         | —       |              | — |       | —     |      | —     |       | —    |       | —    |   | —    |   | — |       | (123                             | )      | —                     |   | —                     |   | (123                                  | )      |
| Shares issued for conversion of notes payable                      |         | —       |              | — |       | —     |      | —     |       | —    |       | —    |   | 50,000    |   | — |       | 100                              |   | —                     |   | —                     |   | 100                                   |   |
| Fair value of warrants issued as consideration for debt retirement |         | —       |              | — |       | —     |      | —     |       | —    |       | —    |   |      |   | — |       | 35                               |   | —                     |   | —                     |   | 35                                    |   |
| Net loss                                                           |         | —       |              | — |       | —     |      | —     |       | —    |       | —    |   |      |   | — |       | —                           |   | (15,936                    | )      | —                     |   | (15,936                               | )      |
| Shares issued for option exercise                                  |         | —       |              | — |       | —     |      | —     |       | —    |       | —    |   | 37,425    |   | — |       | —                           |   | —                     |   | —                     |   | —                                |   |
|                                                               |         |         |              |   |       |       |      |       |       |      |       |      |   |      |   |   |       |                             |   |                       |   |                       |   |                                  |   |
| Balance, June 30, 2002                                             |         | 3,873,015    |              | 5,550  |       | 2,625,000  |      | 2,391      |       | 7,875,000 |       | 7,875     |   | 6,299,316 |   | 6      |       | 6,790                            |   | (21,282                    | )      | —                     |   | 1,330                                 |   |
|                                                               |         |         |              |   |       |       |      |       |       |      |       |      |   |      |   |   |       |                             |   |                       |   |                       |   |                                  |   |
| Conversion of A to Common Stock                                    |         | (61,628      | )                 | (92    | )          | —     |      | —     |       | —    |       | —    |   | 61,628    |   | — |       | 92                               |   | —                     |   | —                     |   | —                                |   |
| Shares issued in payment of liability                              |         | —       |              | — |       | —     |      | —     |       | —    |       | —    |   | 1,208,112 |   | 2      |       | 1,479                            |   | —                     |   | —                     |   | 1,481                                 |   |
| Shares issued for conversion of notes payable                      |         | —       |              | — |       | —     |      | —     |       | —    |       | —    |   | 597,554   |   | 1      |       | 406                              |   | —                     |   | —                     |   | 407                                   |   |
| Discount on notes payable                                          |         | —       |              | — |       | —     |      | —     |       | —    |       | —    |   | —    |   | — |       | 1,237                            |   | —                     |   | —                     |   | 1,237                                 |   |
| Shares issued for services                                         |         | —       |              | — |       | —     |      | —     |       | —    |       | —    |   | 53,161    |   | — |       | 40                               |   | —                     |   | —                     |   | 40                                    |   |
| Fair value of options issued for service                           |         | —       |              | — |       | —     |      | —     |       | —    |       | —    |   | —    |   | — |       | 1,401                            |   | —                     |   | (315                       | )      | 1,086                                 |   |
| Warrant exercise                                                   |         | —       |              | — |       | —     |      | —     |       | —    |       | —    |   | 43,333    |   | — |       | —                           |   | —                     |   | —                     |   | —                                |   |
| Proceeds from sale of Common Stock                                 |         | —       |              | — |       | —     |      | —     |       | —    |       | —    |   | 346,821   |   | — |       | 266                              |   | —                     |   | —                     |   | 266                                   |   |
| Shares issued for purchase of subsidiary                           |         | —       |              | — |       | —     |      | —     |       | —    |       | —    |   | 5,000,000 |   | 5      |       | 5,995                            |   | —                     |   | —                     |   | 6,000                                 |   |
| Fair value of warrants issued for services                         |         | —       |              | — |       | —     |      | —     |       | —    |       | —    |   | —    |   | — |       | 2,175                            |   | —                     |   | —                     |   | 2,175                                 |   |
| Net deficit                                                        |         | —       |              | — |       | —     |      | —     |       | —    |       | —    |   | —    |   | — |       | —                           |   | (14,758                    | )      | —                     |   | (14,758                               | )      |
|                                                               |         |         |              |   |       |       |      |       |       |      |       |      |   |      |   |   |       |                             |   |                       |   |                       |   |                                  |   |
| Balance, June 30, 2003                                             |         | 3,811,387    |              | $      | 5,458      |       | 2,625,000 |       | $          | 2,391     |       | 7,875,000 |   | $         | 7,875  |   | 13,609,925 |                             | $      | 14                         |   | $                          | 19,881 |                                  | $      | (36,040 | ) | $ | (315 | ) | $ | (736 | ) |

 

See accompanying notes to these financialstatements.

 

F6

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USABROADBAND, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OFCASH FLOWS$000

 
|                                                                               |   | **For the year  Ended June 30,****2003** |    | **For the Nine  Months Ended June 30,****2002** |   |
|------------------------------------------------------------------------------------|--------|------------------------------------------|---------|-------------------------------------------------|--------|
| OPERATING ACTIVITIES:                                                              |   |                                     |    |                                            |   |
| Net loss                                                                           |   | $                                        | (14,758 | )                                               | $      | (15,936 | ) |
| Adjustments to reconcile net loss  to net cash from operating activities:          |   |                                     |    |                                            |   |
| Impairment of long-lived assets                                                    |   | 80                                       |    | 9,850                                           |   |
| Depreciation                                                                       |   | 1,012                                    |    | 1,314                                           |   |
| Loss on disposal of fixed assets                                                   |   | 3,489                                    |    | 1,724                                           |   |
| Loss on sale of asset                                                              |   | 955                                      |    | —                                          |   |
| Amortization of deferred financing  costs                                          |   | —                                   |    | 51                                              |   |
| Options and warrants issued for  service                                           |   | 3,261                                    |    | 611                                             |   |
| Amortization of note discount                                                      |   | 627                                      |    | —                                          |   |
| Bad Debt Expense                                                                   |   | 63                                       |    | 37                                              |   |
| Loss on Investment in subsidiary                                                   |   | 833                                      |    |                                            |   |
| Commons Stock issued for interest                                                  |   | 40                                       |    | —                                          |   |
| Common Stock issued for service                                                    |   | 40                                       |    | —                                          |   |
| Warrants issued for consideration  of Debt retirement                              |   | —                                   |    | 35                                              |   |
| Changes in operating assets and  liabilities:                                      |   |                                     |    |                                            |   |
| Accounts receivable                                                                |   | (195                                     | )       | 109                                             |   |
| Restricted Cash                                                                    |   | 500                                      |    | —                                          |   |
| Prepaid expenses                                                                   |   | (7                                       | )       | 1                                               |   |
| Accounts payable                                                                   |   | 1,612                                    |    | 314                                             |   |
| Accrued liabilities                                                                |   | 1,504                                    |    | 424                                             |   |
| Deferred revenues                                                                  |   | (374                                     | )       | (207                                            | )      |
| Other assets                                                                       |   | (229                                     | )       | 153                                             |   |
| Other liabilities                                                                  |   | —                                   |    | (69                                             | )      |
| Net cash used in operating  activities                                             |   | (1,547                                   | )       | (1,589                                          | )      |
| INVESTING ACTIVITIES:                                                              |   |                                     |    |                                            |   |
| Proceeds from sale of note  receivable                                             |   | 350                                      |    |                                            |   |
| Net proceeds from sale of assets                                                   |   | 42                                       |    | 412                                             |   |
| Purchases of property and equipment                                                |   | (1                                       | )       | (389                                            | )      |
| Advances to Las Americas                                                           |   | (386                                     | )       | (500                                            | )      |
| Investment in Cable California                                                     |   | (254                                     | )       |                                            |   |
| Net cash used in investing  activities                                             |   | (249                                     | )       | (477                                            | )      |
| FINANCING ACTIVITIES:                                                              |   |                                     |    |                                            |   |
| Payments on debt                                                                   |   | (899                                     | )       | (1,007                                          | )      |
| Borrowing of debt                                                                  |   | 2,420                                    |    | 764                                             |   |
| Proceeds from issuance of common  stock                                            |   | 266                                      |    | 1,324                                           |   |
| Proceeds from preferred stock  issuance, net of costs                              |   | —                                   |    | 782                                             |   |
| Proceeds from sale of former  director’s shares                               |   | —                                   |    | 110                                             |   |
| Net cash provided by financing  activities                                         |   | 1,787                                    |    | 1,973                                           |   |
| NET INCREASE (DECREASE) IN CASH                                                    |   | (9                                       | )       | (93                                             | )      |
| CASH, at beginning of year                                                         |   | 88                                       |    | 181                                             |   |
| CASH, at end of period                                                             |   | $                                        | 79      |                                            | $      | 88 |   |
| SUPPLEMENTAL DISCLOSURE OF CASH  FLOW INFORMATION:                                 |   |                                     |    |                                            |   |
| Cash paid for interest                                                             |   | $                                        | 2       |                                            | $      | 230 |   |
|                                                                               |   |                                     |    |                                            |   |
| NON-CASH TRANSACTIONS:                                                             |   |                                     |    |                                            |   |
| Conversion of A/P to Note Payable                                                  |   | 600                                      |    | 235                                             |   |
| Warrants issued as discount on  Notes Payable                                      |   | 1,237                                    |    |                                            |   |
| Bridge Note Converted to Stock                                                     |   | 240                                      |    | —                                          |   |
| Conversion of A/P to Stock                                                         |   | 1,311                                    |    | —                                          |   |
| Stock issued as Investment in Cable  California                                    |   | 6,000                                    |    | —                                          |   |
| Conversion of long term debt to  stock                                             |   | 947                                      |    |                                            |   |
| Stock issued in payment of  Liabilities                                            |   | —                                   |    | 135                                             |   |
| Cable equipment exchanged for  Accounts Payable                                    |   | —                                   |    | 592                                             |   |
| Conversion of Shareholder debt to  common stock                                    |   | 337                                      |    |                                            |   |
| Conversion of Series A to Common  Stock                                            |   | 92                                       |    |                                            |   |
| Accounts Receivable sold with cable  properties                                    |   | 287                                      |    |                                            |   |
| Liabilities transferred relieved in  conjunction with the sale of cable properties |   | 204                                      |    |                                            |   |
| Note payable relieved in  conjunction with the sale of cable properties            |   | 2,479                                    |    |                                            |   |

 

See accompanying notes tothese financial statements.

 

F7

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USA BROADBAND, INC. ANDSUBSIDIARIES

 

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

 

YEAR ENDED JUNE 30, 2003AND THE NINE MONTHS ENDED JUNE 30, 2002

 

1.                             **Organization and Nature of Operations:**

 

USA Broadband, Inc.(“USAB” or the “Company”) was originally incorporated in 1985 for the purposesof acquiring business entities or other investment activities. In early 2001,the Company adopted a new business strategy to become a provider of digitaltelevision, data and broadband interactive services. In July 2001, the Companychanged its name from Optika Investment Company, Inc. to USA Broadband, Inc.

 

On July 18, 2001, theCompany acquired all of the outstanding common stock of Cable Concepts, Inc.(dba Direct Digital Communications, Inc.) (“DDC”), as more fully described inNote 3. DDC is in the business of constructing and managing cable systems forboth owned properties and for real estate developers and cable operatorsthroughout the United States. DDC, under a DIRECTV Master System OperatorAgreement, installs and manages DIRECTV systems, as well as acting as acommissioned sales representative for DIRECTV programming packages.

 

The Company is subject torisks inherent in any business enterprise. These risks include, but are notlimited to, regulatory requirements, technology changes, increasing competitionand changes in customer demand.

 

2.**                             Summaryof Significant Accounting Policies:**

 

Principles ofConsolidation—The accompanying financial statements include the accounts of theCompany and the Company’s wholly owned subsidiaries, Cable Concepts, Inc., USABVideocorp II Inc., and Direct Digital Midwest. Investments in which the Companyowns 20% to 50% and exercises significant influence over operating andfinancial policies are accounted for using the equity method of accounting. Allmaterial intercompany transactions and accounts have been eliminated inconsolidation.

 

RevenueRecognition—Operations revenues are recognized as services are earned,generally on a monthly basis. The Company receives commissions on certain newsubscribers, which are recognized into revenue over the estimated term of therelationship.

 

Cost of Revenues—Cost ofrevenues consists primarily of programming fees paid to local and premium cablesignal providers, which may include costs of installing equipment for newsubscribers.

 

Property andEquipment—Property and equipment is stated at historical cost. Significantadditions and improvements are capitalized. Repairs and maintenance areexpensed as incurred. Upon disposition of equipment, gains or losses arereflected in the statement of operations.

 

Depreciation is computedon property and equipment using the straight-line method over the followingestimated useful lives:

 
| **Cable  properties**            |   | **Life of Right of Entry Agreement (generally 10  to 12 years)** |   |
|----------------------------------|--------|------------------------------------------------------------------|--------|
| Cable  equipment                 |   | 3 to 7 years                                                     |   |
| Furniture  and equipment         |   | 3 to 7 years                                                     |   |
| Computer  software and equipment |   | 3 to 5 years                                                     |   |
| Vehicles                         |   | 5 years                                                          |   |
| Leasehold  improvements          |   | Life of lease (generally 5-10 years)                             |   |

 

F8

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In accordance with theCompany’s divestiture of operating assets in non-core markets, the Companyreclassified assets that it plans to divest as assets held for sale on thebalance sheet and they are recorded at the lower of carrying amount or fairvalue.

 

Impairment of Long-LivedAssets—In the event that facts and circumstances indicate that the carryingvalue of assets may be impaired, an evaluation of recoverability would beperformed. If an evaluation were required, the estimated future undiscountedcash flows associated with the asset would be compared to the asset’s carryingamount to determine if a write-down to market or discounted cash flow value isrequired.

 

The Company recognized$80,000 in impairment loss for the year ended June 30, 2003. The Company wrotedown the value of the Company’s Right of Entry Agreement’s for four cableproperties to fair market value due to a reduced subscriber count on the properties.  During the nine months ended June 30, 2002,as a result of the Company’s changed business strategies and decision to sell aportion of its non-strategic assets, the Company recognized an impairment lossrelated to the recorded goodwill and cable properties. Fair value wasdetermined based on established sales contracts for similar assets. The totalimpairment loss and loss from reducing assets held for sale to the fair valueless cost to sell for the nine months ended June 30, 2002 was $9,850,000.

 

CashEquivalents—The Company considers all highly liquid debt instruments purchasedwith an original maturity of three months or less to be cash equivalents.

 

Income Taxes—The Company accounts forincome taxes under the liability method whereby deferred tax assets andliabilities are determined based on differences between financial reporting andtax bases of assets and liabilities measured using enacted tax rates and lawsthat will be in effect when the differences are expected to reverse.

 

Use of Estimates—The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates.

 

The Company’s financial statements arebased on a number of significant estimates, including the useful lives of fixedassets, the collectibility of receivables, the fair value of options andwarrants issued, and the fair value of long-lived assets for purposes ofmeasuring impairment. Due to the uncertainties inherent in the estimationprocess, it is at least reasonably possible that its estimates in connectionwith these items could be materially revised within the near term.

 

Earnings Per Share—Basic EPS is calculatedby dividing the income or loss available to common shareholders by the weightedaverage number of common shares outstanding for the period. Diluted EPSreflects the potential dilution that could occur if securities or othercontracts to issue common stock were exercised or converted into common stock.Diluted EPS does not include options, warrants, convertible notes, andconvertible Series A preferred stock representing 11,888,608 common sharesbecause they would have been antidilutive.

 

Stock-Based Compensation – As permittedunder the Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,”the Company accounts for its stock-based compensation for

 

F9

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options issued to employees in accordance with theprovisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”(“APB 25”). As such, for options granted to employees and directors,compensation expense is recorded on a straight-line basis over the shorter ofthe period that the services are provided or the vesting period, only if thecurrent market price of the underlying stock exceeds the exercise price.Certain pro forma net income and earnings per share disclosures for employeestock option grants are also included in the notes to the financial statementsas if the fair value method as defined in SFAS 123 had been applied.Transactions in equity instruments with non-employees for goods or services areaccounted for by the fair value method.

 

Hadcompensation cost been determined based upon the fair value at the grant datefor options granted, consistent with the provisions of SFAS 123, the Company’snet loss and net loss per share would have been increased to the pro formaamounts indicated below:

 
|                                                              |   | **2003**   |        | **2002**   |   |
|-------------------------------------------------------------------|--------|------------|-------------|------------|--------|
|                                                              |   |       |        |       |   |
| Net loss  applicable to common shareholders - as reported         |   | $          | (15,584,000 | )          | $      | (16,550,000 | ) |
| Effect of  stock-based compensation included in reported net loss |   | 103,000    |        | 80,000     |   |
| Effect of  stock-based compensation per SFAS 123                  |   | (1,087,000 | )           | (1,181,000 | )      |
| Net loss  applicable to common stock - pro forma                  |   | $          | (16,568,000 | )          | $      | (17,651,000 | ) |
|                                                              |   |       |        |       |   |   |   |
| Basic and  Diluted:                                               |   |       |        |       |   |
| Loss per  share - as reported                                     |   | $          | (1.35       | )          | $      | (3.09 | ) |
| Effect of  stock-based compensation included in reported net loss |   | .01        |        | .01        |   |
| Effect of  stock-based compensation per SFAS 123                  |   | (0.10      | )           | (0.21      | )      |
| Net loss  applicable to common stock - pro forma                  |   | $          | (1.44       | )          | $      | (3.29 | ) |

 

Thefair value of each option grant is estimated on the date of grant using theBlack-Scholes option-pricing model with the following assumptions:

 
|                 |   | **2003**     |   | **2002**     |   |
|----------------------|--------|--------------|--------|--------------|--------|
|                 |   |         |   |         |   |
| Risk-free  interest  |   | 2.85%-3.85%  |   | 4.65%-5.21%  |   |
| Expected  life       |   | 5 - 10 years |   | 5 - 10 years |   |
| Expected  volatility |   | 109% - 138%  |   | 82% - 88%    |   |
| Expected  dividend   |   | —       |   | —       |   |

 

Theexpected lifewas determined based on the option’s vesting period and exercise behavior ofthe employees.

 

All options are initiallyassumed to vest. Cumulative compensation cost recognized in pro forma netincome or loss until forfeiture actually occurs, are shown as a reduction ofpro forma compensation expense in the period of forfeiture. Fair valuecomputations are highly sensitive to the assumed volatility factor—the greaterthe volatility, the higher the computed fair value of options granted. Thetotal fair value of options granted was computed to be approximately $5,512,000and $455,000 for the year ended June 30, 2003 and the nine months ended June30, 2002 respectively. These amounts are amortized ratably over the vestingperiods of the options or recognized at the date of grant if no vesting periodis required.

 

F10

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Impact of RecentlyIssued Accounting Principles

 

In July 2002, the FASBissued Statement of Financial Accounting Standards No. 146, Accounting forCosts Associated with Exit or Disposal Activities (“SFAS 146”). SFAS 146requires a company to recognize costs associated with exit or disposalactivities when they are incurred rather than when the company makes acommitment to an exit or disposal plan. Examples of costs covered by SFAS 146include lease termination costs and certain employee severance costs that areassociated with a restructuring, discontinued operation, plant closing, orother exit or disposal activity. SFAS 146 is to be applied prospectively toexit or disposal activities initiated after December 31, 2002. We do not expectthe adoption of SFAS 146 to have a material effect on our financial position orresults of operations.

 

In August 2002, the FASBissued Statement of Financial Accounting Standards No. 147, “Acquisitions ofCertain Financial Institutions” (SFAS 147). SFAS 147 requires financialinstitutions to follow the guidance in SFAS 141 and SFAS 142 for businesscombinations and goodwill and intangible assets, as opposed to the previouslyapplied accounting literature. This statement also amends SFAS 144 to includein its scope long-term customer relationship intangible assets of financialinstitutions. The provisions of SFAS 147 do not apply to us.

 

In December 2002, theFASB issued Statement of Financial Accounting Standards No. 148, “Accountingfor Stock-Based compensation-Transition and Disclosure-an amendment of FASBStatement 123” (SFAS 123). For entities that change their accounting forstock-based compensation from the intrinsic method to the fair value methodunder SFAS 123, the fair value method is to be applied prospectively to thoseawards granted after the beginning of the period of adoption. This is known asthe “prospective method.” The amendment permits two additional transitionmethods for adoption of the fair value method. In addition to the prospectivemethod, the entity can choose to either restate all periods presented, which isknown as the “retroactive restatement method” or recognize compensation costfrom the beginning of the fiscal year of adoption as if the fair value methodhad been used to account for awards, which is known as the “modifiedprospective method.” For fiscal years beginning December 15, 2003, theprospective method will no longer be allowed. We currently account for our stock-basedcompensation using the intrinsic value method as prescribed by AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees” andplan on continuing using this method to account for stock options. Therefore,we do not intend to adopt the transition requirements as specified in SFAS148.  We adopted the new disclosurerequirements in these financial statements.

 

SFAS No. 149, Amendmentof Statement 133 on “Derivative Instruments and Hedging Activities,” was issuedin April 2003 and amends and clarifies accounting for derivative instruments,including certain derivative instruments embedded in other contracts, and forhedging activities under SFAS No. 133. SFAS No. 149 is effective for contractsentered into or modified after June 30, 2003, and for hedging relationshipsdesignated after June 30, 2003. We do not believe that the adoption of SFASNo. 149 will have a material impact on our financial position or resultsof operations.

 

F11

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SFAS No. 150, “Accountingfor Certain Financial Instruments with Characteristics of Both Liabilities andEquity,” was issued in May 2003 and requires issuers to classify as liabilities(or assets in some circumstances) three classes of freestanding financialinstruments that embody obligations for the issuer. SFAS No. 150 is effectivefor financial instruments entered into or modified after May 31, 2003 and isotherwise effective at the beginning of the first interim period beginningafter June 15, 2003. We believe the adoption of SFAS No. 150 will have noimmediate impact on our financial position or results of operations.

 

The FASB issuedInterpretation (“FIN”) No. 45, Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers, in November 2002 and FIN No. 46, Consolidation of variable InterestEntities, in January 2003. FIN No. 45 is applicable on a prospective basis forinitial recognition and measurement provisions to guarantees issued afterDecember 2002; however, disclosure requirements are effective immediately. FINNo. 45 requires a guarantor to recognize, at the inception of a guarantee, aliability for the fair value of the obligations undertaken in issuing theguarantee and expands the required disclosures to be made by the guarantorabout its obligation under certain guarantees that it has issued. The adoptionof FIN No. 45 did not have a material impact on our financial position orresults of operations. FIN No. 46 requires that a company that controls anotherentity through interest other than voting interest should consolidate suchcontrolled entity in all cases for interim periods beginning after June 15,2003. We do not believe the adoption of FIN No. 46 will have a material impacton our financial position or results of operations.

 

3.**                             Liquidityand Basis of Presentation–**

 

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 June 30, 2003, the Company had a working capital deficit of$9,667,000 and a stockholders’ deficit of $736,000. The Company’s net loss forfiscal 2003 was $14,758,000.  At June30, 2003, the Company was in default of the terms of its debt and its capitallease obligations.

 

The Company’s ability tocontinue as a going concern is dependent upon its ability to raise the capitalnecessary to successfully implement its business plan, and ultimately toachieve profitable operations. Management’s plans in this regard are set forthbelow.

 

Asa result of the Company’s acquisition of a significant interest in CableCalifornia, S.A. de C.V., the Company’s efforts will be concentrated onconcession-based cable services in Baja, Mexico (Note 4). Tijuana, with apopulation of 2.2 million, is the largest metropolitan area in Baja, andrepresents one of the fastest growing cities in North America and one of thelast “greenfield” cable opportunities of its size and density in the world.Management believes this will provide the Company with the opportunity toimprove significantly its operations. The Company anticipates that it willrequire approximately $10 million in additional capital in order for theCompany to implement the initial part of this plan.

 

The Company anticipatesobtaining additional equity and debt financing.

 

F12

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On September 8, 2003, the Company was loaned$4,000,000 by an individual.  TheCompany anticipates that this loan will allow the Company to beginimplementation of its business plan. See “Subsequent Events”. Managementbelieves that these measures will be sufficient to allow the Company to proceedwith its business plan.  There can be noassurances, however, that the Company will be able to obtain necessary fundingon favorable terms and conditions, if at all. If sufficient funding is not available, the Company may not be able toimplement its business plan or become cash flow positive.

 

4.**                            ****Acquisition of Minority****Interest in CableCalifornia**

 

On January 10, 2003, theCompany entered into an Asset Purchase Agreement with, among others, dick clarkinternational cable ventures, and Las Americas, to purchase 100% of the Class Band Class N shares of Cable California from dick clark international cableventures, as well as various tangible and intangible assets related to CableCalifornia’s operations in Mexico and certain other rights from LasAmericas.  The Class B shares represent49.0% of the voting and economic interest in Cable California, while the ClassN shares would bring the Company’s economic interest in Cable California to90.0%.  Cable California possesses a30-year advanced telecommunications broadband concession from the Mexicangovernment to construct and operate a 750-MHz fiber-optic network providingmulti-channel cable television (including the right to seek approval to providehigh-speed internet, telephone and data services) to residents and businessesin the greater Tijuana, Mexico metropolitan area. Cable California isconstructing a 1,300-mile broadband network and has completed the first phaseof this cable build, including its head-end, central operations center andapproximately 100 miles of cable plant now serving approximately 1,500 customers.  

 

On March 7, 2003, theCompany purchased all of the Class B shares of Cable California.  In addition, the Company acquired varioustangible and intangible assets, including office and computer equipment,vehicles, machinery and satellite equipment from Las Americas.  The Company intends to use these assets in asimilar manner to the way they were used by Las Americas.  The Company also acquired Las Americas’srights and obligations under an agreement dated as of September 26, 2002, amongLas Americas, Cable California, Mr. Carlos Bustamante, Sr. and LABN Mexico, SAde C.V., a Mexico corporation, pursuant to which, among other things, LasAmericas possessed the right to receive Class N shares from CableCalifornia.  The agreement also entitledthe Company to purchase Mr. Bustamante’s ownership interest in CableCalifornia.  However, Mr. Bustamante hasinformed the Company that he terminated this agreement with Las Americas basedon an alleged breach of the agreement. Accordingly, no Class N shares in Cable California have beenissued.  The Company currently isinvolved in negotiations with Mr. Bustamante to purchase the remaininginterests in Cable California.  See“Factors Affecting Future Performance.”       

 

As consideration for theabove acquisitions, the Company issued 2,500,000 shares of its common stock todick clark international cable ventures, 2,250,000 shares to Las Americas, and250,000 shares to Mr. Bustamante. In addition, the Company assumed a total of$1,250,000 of debt, liabilities and other financial obligations of CableCalifornia and Las Americas and reduced the outstanding principal amount of apromissory note issued by Las Americas to the 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 Companyalso paid Las Americas $250,000 in cash. The Company intends to operate and manage the proposed cable system inTijuana while continuing to manage the approximately 3,300 MDU subscribers theCompany presently serves in California and Texas.

 

Subsequent to March 7,2003, the Company formed USA Broadband Mexico, which is a wholly-ownedsubsidiary of the Company.  Under thelaws of Mexico, the transfer of the Class B shares of Cable California must beregistered with appropriate governmental authorities in Mexico.  The Company intends to register the Class Bshares in the name of USA Broadband Mexico. To register the Class B shares to USA Broadband Mexico, the Company anddick clark international cable ventures must make appropriate filings with theMexican Federal Telecommunications Commission (Comision Federal deTelecomunicaciones) and the Secretary of Communications and Transportation(Secretaria de Comunicaciones y Transportes). The Company currently is working to make these filings.  If dick clark international cable venturesdoes not effectuate the registration as contemplated by the Asset PurchaseAgreement, the Company and USA Broadband Mexico are prepared to enforce any andall rights available to them to secure the registration of the Class B sharesin Mexico. Now that the asset purchase has been completed, the Company intendsto operate and manage the proposed cable system in Tijuana while continuing tomanage the approximately 3,043 MDU subscribers the Company presently serves inCalifornia and 211 subscribers in Texas.

 

This investment isaccounted for 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 during the year ended June 30, 2003 of $175,000. Cable California’sfiscal year ends on December 31.  Belowis summarized unaudited financial information of Cable California for theperiod of March 7, 2003 to June 30, 2003.

 
|                                                 |   | **March 7,  2003  To****June  30,2003** |       |
|------------------------------------------------------|--------|-----------------------------------------|------------|
|                                                 |   |                                    |       |
| **Selected  Financial Information Cable California** |   |                                    |       |
| Cable California                                     |   | **In USD**                              |       |
| Current assets                                       |   | $                                       | 295,000    |   |
| Working capital deficit                              |   | $                                       | (7,762,000 | ) |
| Total assets                                         |   | $                                       | 8,058,000  |   |
|                                                 |   |                                    |       |
| Revenues                                             |   | $                                       | 588,500    |   |
| Net income                                           |   | $                                       | 31,241     |   |
|                                                      |        |                                         |            |  |  |

 

F13

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5.                             **Assets****Held For Sale And Discontinued Operations**:

 

Duringthe year ended June 30, 2003, the Company changed its business strategy tofocus on providing video, data and internet service in the state of California and inthe Northern Baja region of Mexico.   Asa result of this change in strategy, the Company sold most of its assets inregions outside of California and the Northern Baja region of Mexico. Theremaining properties have been classified as Assets Held for Sale at the lowerof carrying amount or net realizable value. The results of operations arepresented as discontinued operations. Revenues from discontinued operations forthe year ended June 30, 2003 and the nine months ended June 30, 2002 were$507,000 and $708,000, respectively. Income from discontinued operations hasbeen reclassified for the nine months ended June 30, 2002 to be consistent withthe classification for the fiscal year ended June 30, 2003.

 

6.                             **Sale of Notes Receivable**

 

In April 2003, USABcompleted a sale of a $500,000 note receivable from Las Americas Broadbandcollateralized by all of the assets of Las Americas, Inc. A firm purchased thenote for $500,000. The note assigns the security interest of all of the assetsof Las Americas Broadband that were held by the Company. Interest on the noteis for one year at 15%. Additionally the Company is liable for up to $250,000if Las Americas defaults on the note and there are not sufficient assets tocover the note.  The Company issued300,000 shares of common stock as additional consideration for this note andpaid $50,000 and issued 1,500 shares of common stock as a commission.

 

7.                             **Sale of Assets**

 

During the fiscal year ended June 30, 2003,the Company focused on cutting its costs and selling certain of its non-coreassets. During the fiscal year the Company disposed of the following assets:

 

**DSISale**

 

On December 23, 2002 the Company enteredinto a contract for the sale of certain Rights of Entry Agreements to DigitalService, Inc. (DSI). The transaction was effective as of December 1, 2002, andcovered 55 cable properties in several states with approximately 1,900subscribers.

 

The aggregate purchase price for the Rightof Entry Agreements was $1,995,000 which is comprised primarily of debtassumption by DSI. DSI assumed the Company’s note payable to Pacifica Bank inthe amount of $1,592,000, and assumed a credit card debt in the amount of15,000. They also assumed other liabilities and assets relating to theoperations of the properties which netted to an approximately $116,000liability. Due to a decrease in the number of subscribers in the Right of EntryAgreement, the Company issued a promissory note to the owner of DSI in theamount of $376,000 in April, 2003. In addition, Cable Concepts transferred aproperty in Washington to DSI in exchange for the assumption of a debt to athird party in the amount of $121,000. The carrying amount of the assetsrelating to this sale was $2,435,000. The Company recognized a loss on the saleof approximately $440,000.

 

**Dakotas**

 

In January 2003, theCompany sold several rights of entry agreements for cable properties located inNorth Dakota, which had a total of 129 basic subscribers. The sale was for atotal of $129,000 and the net proceeds were

 

F14

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used to pay down bank debt. The carrying value of theassets sold was $266,000, resulting in a net loss of $179,000.

 

**Belmont**

 

The Company sold right ofentry agreements for a small bulk property located in Memphis, Tennessee. for$32,000 and the proceeds were used as working capital. The carrying value ofthe assets sold was $46,000.

 

**Sale of Memphis Properties**

 

On April 7, 2003 USABcompleted a sale of assets consisting of three Rights of Entry Agreementsserving 352 private cable subscribers in Memphis, Tennessee to Time WarnerCable for $432,000 in cash, or $1,207 per subscriber. Adjusted carrying valueof this property was $499,000.

 

**La Salle Acquires Direct DigitalMidwest**

 

On September 29, 2000, two of its indirectsubsidiaries, Direct Digital Midwest, Inc. (DDM) and CP Dakotas MDU, LLC (CPD)borrowed an aggregate of $2 million from LaSalle Bank NationalAssociation.  The loan was evidenced bya promissory note and secured by the assets of each of DDM and CPD.  Additionally, as additional collateral forthe loan, Cable Concepts pledged all of the stock of DDM to LaSalle Bank.Neither the Company nor Cable Concepts guaranteed the loan to LaSalle Bank.After DDM and CPD defaulted on the loan, LaSalle foreclosed on all of theassets of DDM and CPD and the stock of DDM to satisfy the loan. On May 9, 2003,LaSalle Bank auctioned all of the shares of DDM to satisfy the loan. LaSalleBank was the highest bidder at auction. The price was undisclosed. The value ofthe collateral securing the loan was insufficient to cover the entire amountthen due under the loan. To date, LaSalle Bank has not pursued any action ormade any claim against the Company or Cable Concepts for the amount of anyshortfall.

 

8.                             **Note Payable toShareholders**

 
| A Note Payable to shareholder with face  amount of $130,000. Interest is paid in full. The Note bears interest of 10%  and is due April 2004. |   | $ | 130,000 |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|---|---------|--------|

 

F15

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9.                             **Current portion of LongTerm Debt and Notes Payable Consists of:**

 

Long-term debt consists of the following:

 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | **June 30,  2003** |       |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |               | ** ** |
| Various convertible promissory notes,  “Bridge Notes”, in the aggregate principal amount of approximately $1,900,000  net of unamortized discount of approximately $600,000 plus accrued interest  of approximately $143,000 collateralized by all of the assets of USAB and its  subsidiary Cable Concepts, Inc. Notes bear an interest rate equal to 18% per  annum. Notes mature the earlier of six months from the note date or the  consummation of debt or equity financing in an amount equal to or greater  than $3,000,000 from July 2003 to December 2003. Lenders are granted warrants  to purchase common stock for $1.10 per common share at the ratio of 1 warrant  for each two dollars of the face of the note. (See Subsequent Events for  subordination of collateral) |   | $                  | 1,443,000  |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |               |       |
| Note payable to a financial institution, with interest at prime plus  2% per annum.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | 79,000             |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |               |       |
| Two subordinated notes payable, related party, principal and interest  at 11% per annum and 18% per annum due December 2001, unsecured. In July  2003, the related party committed to convert $1,247,310 of the notes into  shares of common stock. The notes are subordinate to any subsequently issued  senior debt. The payments under these notes are past due. Currently in  default under the Note Agreement and is seeking a waiver of the financial.  Accrued interest and fees on this note is approximately $299,300 at June  30,2003 and principal is $1,076,700.                                                                                                                                                                                                                       |   | 1,376,000          |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |               |       |
| Note payable to a vendor, principal and interest at 18% per annum due  in monthly installments with the final payment due March 2003,  unsecured.  The payments due under  this note are past due and the Company is currently in default under the Note  Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | 228,000            |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |               |       |
| Promissory note to outside counsel collateralized by all of the assets  of VideoCorp II. Interest accrues at the rate of 10% per annum. Accrued  interest at June 30, 2003 is approximately $72,000. This note was converted  to common stock subsequent to year end (Note 16).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | 542,000            |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |               |       |
| Non-interest bearing promissory note to vendor. The amount is past due  under the note.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | 11,000             |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |               |       |
| Note Payable to owner of DSI dated March, 2003 bearing interest at 6%  per annum.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | 382,000            |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |               |       |
| Capital leases (Note 10)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | 420,000            |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |               |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | 4,481,000          |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |               |       |
| Less current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | (4,481,000         | )          |
| Long-term portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | $                  | —     |   |

 

 

10.                       **Commitments andContingencies**:

 

TheCompany leases equipment under capital leases. The liabilities under capitalleases are recorded at the present value of the minimum lease payments which isincluded in the current portion of long term debt in the accompanying balancesheet and consist of the following:

 

F16

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|                                                                                                                                                                                                                                                 |   | **June 30,  2003** |    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|
|                                                                                                                                                                                                                                                 |   | **Principal**      |    | **Interest** |   |
|                                                                                                                                                                                                                                                 |   |               |    |   |   |
| Capital lease obligations, collateralized by capital assets purchased,  payable in monthly 11% per annum, the Company is currently in default under  the agreement and the required payments are past due.                                           |   | $                  | 388,000 |   | $ | 4,000 |   |
|                                                                                                                                                                                                                                                 |   |               |    |   |   |
| Capital lease obligations, collateralized by telephone equipment,  payable in monthly installments of $1,841, including interest at 14% per  annum, the Company is currently in default under the agreement and the  required payments are past due. |   | 17,300             |    | 700 |   |
|                                                                                                                                                                                                                                                 |   |               |    |   |   |
| Capital lease obligations, primarily for computer and equipment,  payable in monthly installments of $541, including interest at 22.91% per  annum, the Company is currently in default under the agreement and the  required payments are past due. |   | 5,300              |    | 700 |   |
|                                                                                                                                                                                                                                                 |   |               |    |   |   |
| Capital lease obligations, for a vehicle payable in monthly installments  of $270,including interest at 14.34% per annum, the Company is currently in  default under the agreement and the required payments are past due.                           |   | 3,600              |    | 400 |   |
|                                                                                                                                                                                                                                                 |   |               |    |   |   |
|                                                                                                                                                                                                                                                 |   | 414,200            |    | 5,800 |   |
|                                                                                                                                                                                                                                                 |   |               |    |   |   |
| Less current portion                                                                                                                                                                                                                                 |   | (414,200           | )       | (5,800 | ) |
|                                                                                                                                                                                                                                                 |   |               |    |   |   |
| Long-term portion                                                                                                                                                                                                                                    |   | $                  | —  |   | $ | — |   |

 

Thecost of leased property recorded in property and equipment is $40,340 andaccumulated depreciation related to these assets is $23,000. The Companyrecognized $11,000 and $9,000 of depreciation expense related to leased propertyin the year ended June 30, 2003 and the nine months ended June 30, 2002,respectively.

 

OperatingLeases—The Company leases certain facilities and equipment under operatingleases expiring at various dates through 2007.

 

Thefuture minimum payments required under operating leases are as follows:

 
| **Years  Ended June 30,** |   | **Amount** |    |
|---------------------------|--------|------------|---------|
| 2004                      |   | $          | 156,400 |   |
| 2005                      |   | 147,700    |    |
| 2006                      |   | 110,600    |    |
| 2007                      |   | 102,000    |    |
|                      |   | $          | 516,700 |   |

 

F17

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Rent expense for the year ended June 30,2003 and nine months ended June 30, 2002 was $252,000 and $174,000respectively.

 

Commitments— OnJuly 1, 2003 the Board of Directors entered into an employment agreement withGrant Miller, the Company’s Chief Financial Officer. The agreement is for threeyears with a base salary of $240,000 per year and a bonus of up to 100% asdirected by the Board. An additional option grant was made of 500,000 shares ofcommon stock at $1.10 with 125,000 shares vesting immediately with theremaining 375,000 vesting annually over three years. The agreement calls for aone year severance should Mr. Miller be terminated without cause.. During the year ended June 30, 2003, an optionto purchase 500,000 shares was granted to the Company’s Chief FinancialOfficer. The option had an exercise price of $2.00 per share.  Subsequent to the issuance of the option,the Company agreed to change the exercise price of the option to $1.33 pershare to more accurately reflect the then-current market price of the Company’scommon stock.  The change of theexercise price is subject to ratification by the Company’s board ofdirectors.  No compensation cost wasrequired to be recognized as the stock price was less than the modifiedexercise price.  However, variableaccounting will apply to these options and compensation expense may be requiredto be recognized in the future. At June 30, 2003, 225,000 shares of that grantwere vested.

 

In March 2002,USAB Video Corp. II, Inc., a wholly-owned subsidiary of the Company, enteredinto an asset purchase agreement with Verizon Media Ventures, Inc. and GTESouthwest Incorporated. After purchasing a portion of the assets pursuant tothe agreement, in June 2002, USAB Video Corp. did not complete the purchase ofthe remaining assets. In connection therewith, the Company accrued a $250,000liability on its financial statements for the fiscal year ending June 30, 2003.

 

On January 29,2003, the Company renewed an advisory agreement with Maroon Bells Capital, amerchant banking firm, to provide certain advisory and business developmentservices in exchange for a monthly advisory fee of $20,000. The term of theagreement is twenty-four months with an automatic twelve-month renewal. MaroonBells is one of the Company’s significant stockholders.  The total expense recognized under theagreement was $240,000 in advisory fees and $129,000 in expense reimbursementfor the year ended June 30, 2003.

 

On April 15, 2003,the Company entered into an advisory agreement with Jon Eric Landry, who is oneof the Company’s directors, under which Mr. Landry agreed to provide advice inconnection with the Company’s corporate finance strategy, business plan andinvestor relations and other matters. The agreement has a 36-month term. Inconsideration for Mr. Landry’s services, the Company agreed to pay him $1.00per year. In addition, if the Company secures permanent financing of $5,000,000or more, or if a significant financing event occurs that allows us to realizesufficient liquidity to satisfy current operating expenses, Mr. Landry will beentitled to additional compensation, in an amount to be agreed upon between theCompany and Mr. Landry and approved by the Company’s board of directors.

 

11.                       **Stockholders’ Equity:**

 

PreferredStock—The Company has authorized 50,000,000 shares of preferred stock, parvalue $.001 per share, with 7,000,000 shares designated as

 

F18

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SeriesA Convertible Preferred Stock; 2,625,000 shares designated as Series BPreferred Stock; and 7,875,000 shares designated as Series C Preferred Stock.

 

Series AConvertible Preferred Stock—The Series A Convertible Preferred Stock holdersshall be entitled to receive cumulative dividends of 8% per year, payablequarterly when and if declared by the Board of Directors. The dividends arepayable in cash or shares of Series A Convertible Preferred Stock, at theelection of the Board of Directors. The Series A Convertible Preferred Stockhas a preference in liquidation of $1.50 per share plus any unpaid dividends,over common stock and any other series of preferred stock. Each share of SeriesA Convertible Preferred Stock is convertible into one share of common stock, atthe option of the holder, at any time. The Series A Convertible Preferred Stockshall automatically be converted into common stock upon the closing of a publicoffering of common stock with proceeds in excess of $15,000,000 at not lessthan $10.00 per share.

 

Series B Preferred Stock—The Series B Preferred Stockis redeemable at the option of the Company at rates ranging from 80% of theliquidation preference during 0-6 months after issuance to 110% of theliquidation preference after 19 months. If the Series B Preferred Stock is not redeemed within 24 months of issuance, theholders shall be entitled to receive cumulative dividends of $0.14 per shareper year, payable in cash when and if declared by the Board of Directors. TheSeries B Preferred Stock has a preference in liquidation of $1.00 per shareplus any unpaid dividends, over the Series C Preferred Stock and common stock,but after the Series A Preferred Stock.

 

Series C PreferredStock—The Series C Preferred Stock is redeemable at the option of the Companyat rates ranging from 80% of the liquidation preference during 0-6 months afterissuance to 110% of the liquidation preference after 19 months. No shares ofSeries C Preferred may be redeemed until all of the Series B Preferred Stockhas been redeemed. If the Series B Preferred Stock is not redeemed within 24months of issuance, the holders shall be entitled to receive cumulativedividends of $0.14 per share per year, payable in cash when and if declared bythe Board of Directors. If the Series B Preferred Stock has not been redeemed,no dividends on the Series C Preferred Stock or common stock shall be declaredor paid. The Series C Preferred Stock has a preference in liquidation of $1.00per share plus any unpaid dividends over common stock, but after the Series APreferred Stock and the Series B Preferred Stock. Holders of the Series CPreferred Stock may exchange a portion of their shares for common stock.

 

As of June 30,2003, the Company was obligated to pay approximately $750,000 of the notepayable based upon equity sold to that date. The Company has not made therequired payments.

 

In July 2002, theCompany commenced an offering of up to $10,000,000 of common stock. To date theCompany has raised approximately $229,353 through the offering through the saleof 114,676 shares at a price of $2.00 per share. The price per share of theshares sold in the offering, was intended to be at a discount to the marketvalue of the Company’s common stock, and may be reduced below $2.00.Additionally in relation to this private placement of common stock, the Companyagreed to grant piggyback registration rights to the investors in the offeringand to register the shares sold in the offering within nine months of theoffering. The Company did not register the shares, in accordance with theprivate placement agreement. Accordingly the Company revalued the shares ofcommon stock to $1.60 per common share under this agreement and issued a 5%premium to the investors. An additional 35,836 shares of common stock wereissued under this agreement resulting in a total of 150,512 shares of commonstock issued at a price of $1.60 per share.

 

In July 2002, theCompany issued a total of 23,161 shares of common stock to RateXchangeCorporation, the parent company of RTX Securities who acted as the placementagent in a prior offering. Of the shares issued, 9,200 shares

 

F19

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wereissued as compensation for the services of RTX Securities, and the remaining13,961 shares were issued in lieu of an $18,000 commission, which the Companyhad agreed to pay RTX Securities in connection with the offering. In addition,on September 15, 2002, the Company issued a warrant to RTX for 100,000 commonshares for financial advisory services for the year ended June 30, 2003. Theexercise price is $1.50 per share.

 

In September 2002, the Company agreed to issue 30,000common shares to The Research Works as consideration for research services. Inaddition, in September 2002 the Company issued to Corporate Capital Managementwarrants to purchase 300,000 shares of common stock in consideration for financialadvisory services. In October 2002, the Company issued a total of 21,843 sharesof its stock to three individuals. The shares were sold at a price of $1.60 pershare and the Company raised a total of $39,950 from the transactions.

 

FromOctober 29, 2001, through December 29, 2001, the Company issued an aggregate of419,268 shares of the Company’s Series A Preferred Stock to a total of ninepersons for cash consideration totaling $277,500 plus a promissory note for$252,500.  The Company issued: (i) 185,000shares to a total of five persons in connection with a private placement of theCompany’s Series A Preferred Stock for cash consideration totaling $277,500;(ii) 23,333 shares valued at $1.50  pershare to one person in lieu of paying for services rendered to DDC and theCompany us; (iii) an aggregate of 44,268 shares valued at $1.50 per share to atotal of two persons in lieu of paying finder’s fees that the Company owed inconnection with the private placement of the Company’s Series A Preferred Stock;and   (iv) 166,667 shares to David M.Lerten, the Company’s former President and Chief Executive Officer, inconnection with his separation agreement in exchange for a promissory note inthe amount of $252,500, which matured on December 31, 2002 and bears interestat the rate of 6% per annum. To offset certain fees and expenses owed by us toMr. Lerten, on January 2, 2002, the Company reduced the principal and accruedinterest amount of the promissory note from $252,500 to $127,500. Each share ofSeries A Preferred Stock is convertible at any time, at the holder’s option,into one share of the Company’s common stock for no additional consideration.

 

From July 31,through December 19, 2001, the Company issued options to purchase an aggregateof 335,000 shares of its common stock to a total of two persons in connectionwith separation agreements that the Company entered into with them. The optionshave exercise prices ranging from $1.50 to $3.50 per share and expire eitherfive or ten years after they were issued. Each option entitles its holder topurchase one share of the Company’s common stock.

 

From October 31,2001, through November 20, 2001, the Company issued warrants to purchase anaggregate of 74,000 shares of the Company’s common stock to a total of sevenpersons in separate transactions.  TheCompany issued warrants to purchase: (i) 25,000 shares of the Company’s commonstock at the exercise price of $3.50 per share to one person in considerationfor an extension of time to repay certain indebtedness of DDC and (ii) anaggregate of 49,000 shares of the Company’s common stock at an exercise priceof $1.50 per share to a total of six persons in lieu of paying finder’s feesthat the Company owed in connection with the private placement of the Company’sSeries A Preferred Stock. Each warrant expires five years from the date it wasissued and entitles its holder to purchase one share of the Company’s commonstock.

 

On November 30,2001, the Company issued options to purchase an aggregate of 36,000 shares ofits common stock to a total of thirty-six former or current employees of DDC inconsideration for remaining employed by DDC from the date that the Companyacquired DDC (July 18, 2001) through November 30, 2001. The options have anexercise price of $1.50 per share, which the Company believed to be the fairmarket value of the options at the transaction date as the shares of theCompany’s common stock underlying the options are not freely tradable.  Each option expires five years after theywere issued and entitles its holder to purchase one share of the Company’scommon stock.

 

F20

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No underwritingcommissions or discounts were paid in connection with any of the abovetransactions.

 

In March 2003, inconnection with the acquisition of the Class B stock of Cable California, SA deC.V., and assets from Las Americas Broadband, Inc.(Las Americas), described inPart I, Item 2, the Company issued 2,500,000 shares of the Company’s commonstock to dick clark international cable ventures, Ltd., 2,250,000 shares to LasAmericas Broadband, Inc., and 250,000 shares to Carlos Bustamante, Sr. In April2003, the Company issued 104,110 shares of the Company’s common stock to anindividual in consideration for services rendered to the Company.  The Company has the right, until April 7,2004, to repurchase these shares at a price of $1.00 per share.

 

In fiscal yearended June 30, 2003 the Company issued bridge notes with an aggregate principalvalue of $1,900,000 to various individuals and entities. In connection with thebridge loans evidenced by these notes, the Company issued to the investors,warrants to purchase a total of 950,000 shares of its common   stock. The exercise prices of the warrantsare between $0.70 and $1.00 per share. (Note 10)

 

In June 2003,several vendors agreed to convert outstanding account payable balances due theminto shares of the Company’s common stock. A total of $1,267,800 of accountspayable was converted at the rate of $1.10 per common share. In connection withthe conversion, the Company issued a total of 1,152,550 common shares. Of thattotal, $1,128,206 and 1,025,242 shares of common stock represents the amount ofdebt and the number of shares of common stock converted by related parties.

 

In June 2003 a$166,667 promissory note including principal and interest due to a shareholderwas converted to 151,515 shares of common stock at the rate of $1.10 per commonshare.

 

In June 2003 a$170,300 promissory note including $20,700 of accrued interest due to ashareholder was converted to 154,820 shares of common stock at the rate of$1.10 per common share.

 

In June 2003 twobridge loan holders converted promissory notes to equity as was their rightunder the terms of the convertible promissory note. A total of $239,800consisting of $200,000 in principal and $39,800 in interest and other fees wasconverted at the rate of $1.10 per share 275,739 common shares.

 

In June 2003,10,000 warrants were converted to common stock.

 

In January 2003,the Company renewed a consulting agreement with Maroon Bells. In connectionwith the renewal of the consulting agreement, 500,000 warrants to purchaseCompany stock at $1.10 per common share were issued.

 

In September 2002, warrants to purchase 100,000shares of common stock at $2.00 per common shares were issued to an individualwho performed consulting services for the Company.

 

In October 2002 warrants to purchase 200,000 sharesof common stock at $1.10 per common share were issued to each of two individualshareholders in consideration for their renewal of their respective promissorynotes for $150,000.

 

Stock OptionPlans—In 2001, the Company adopted the Long-Term Incentive Plan (the “IncentivePlan”). The Incentive Plan provides for the granting of options, restrictedstock, stock appreciation rights, or other stock-based awards to employees. ThePlan reserved 1,500,000 shares for future issuance of awards. In 2001, theCompany adopted the 2001 Director Option Plan, which provides for the grantingof non-qualified stock options to the Company’s outside directors. The DirectorOption Plan reserved 1,000,000 shares for future issuance.

 

F21

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Following is a summary of stock option activity:

 
|                        |   | **Non-Employee  Options  Outstanding** |   | **Employee  Options  Outstanding** |   | **Range of  Exercise  Prices** |   | **Weighted  Average  Exercise  Price** |   |
|-----------------------------|--------|----------------------------------------|--------|------------------------------------|--------|--------------------------------|--------|----------------------------------------|--------|
|                        |   |                                   |   | **Low**                            |   | **High**                       |   |                                   |
| Balances, September 1, 2001 |   | 590,000                                |   | 250,000                            |   | $                              | .50    |                                   | $      | 1.50 |   | $ | 1.12 |   |
| Granted                     |   | 350,000                                |   | 544,500                            |   | 1.50                           |   | 3.50                                   |   | 2.53 |   |
| Exercised                   |   | —                                 |   | —                             |   | —                         |   | —                                 |   | — |   |
| Terminated/Canceled         |   | —                                 |   | —                             |   | —                         |   | —                                 |   | — |   |
|                        |   |                                   |   |                               |   |                           |   |                                   |   |   |   |
| Balances, June 30, 2002     |   | 940,000                                |   | 794,500                            |   | .50                            |   | 3.50                                   |   | 2.53 |   |
| Granted                     |   | 2,220,000                              |   | 600,000                            |   | .97                            |   | 1.10                                   |   | 1.30 |   |
| Exercised                   |   | —                                 |   | —                             |   | —                         |   | —                                 |   | — |   |
| Terminated/Canceled         |   | —                                 |   | —                             |   | —                         |   |                                   |   |   |   |
| Balances,  June 30, 2003    |   | 3,060,000                              |   | 1,494,500                          |   | .50                            |   | 3.50                                   |   | 1.59 |   |
|                        |   |                                   |   |                               |   |                           |   |                                   |   |   |   |
| Vested options              |   | 1,785,500                              |   | 1,094,500                          |   | $                              | .50    |                                   | $      | 3.50 |   | $ | 1.85 |   |

 

If notpreviously exercised, options expire as follows:

 
| **Year  Ending June 30,** |   | **Number of  Shares** |   | **Weighted Average  Exercise Price** |   |
|---------------------------|--------|-----------------------|--------|--------------------------------------|--------|
| 2006                      |   | 819,000               |   | $                                    | 1.78   |   |
| 2007                      |   | 1,815,000             |   | 1.44                                 |   |
| 2008                      |   | 1,100,000             |   | .98                                  |   |
| 2011                      |   | 303,000               |   | 1.01                                 |   |
| 2012                      |   | 17,500                |   | 2.29                                 |   |
| 2013                      |   | 500,000               |   | 1.10                                 |   |
|                      |   | 4,554,500             |   |                                 |   |
|                           |        |                       |        |                                      |        |  |

 

If notcancelled or forfeited employee options outstanding at June 30,2003 will vest as follows:

 
| **Year**                |   | **Options** |   | **Vested Average  Exercise Price** |   |
|-------------------------|--------|-------------|--------|------------------------------------|--------|
| Vested at June 30, 2003 |   | 1,194,500   |   | 1.79                               |   |
| 2004                    |   | 137,500     |   | 1.28                               |   |
| 2005                    |   | 137,500     |   | 1.28                               |   |
| 2006                    |   | 25,000      |   | 1.10                               |   |
|                    |   | 1,494,500   |   |                               |   |

 

F22

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If not cancelledor forfeited non-employee options outstanding at June 30, 2003 will vest asfollows:

 
| **Year**                |   | **Options** | ** ** | **Vested Average  Exercise Price** | ** ** |
|-------------------------|--------|-------------|------------|------------------------------------|------------|
| Vested at June 30, 2003 |   | 1,685,500   |       | 1.50                               |       |
| 2004                    |   | 466,500     |       | 1.33                               |       |
| 2005                    |   | 454,000     |       | 1.33                               |       |
| 2006                    |   | 454,000     |       | 1.33                               |       |
|                    |   | 3,060,000   |       | $                                  | 1.43       |   |
|                         |        |             |            |                                    |            |  |

 

Duringthe year ended June 30, 2003 and the nine months ended June 30, 2002, theCompany recognized compensation expense of approximately $100,000 and $455,000,respectively, related to employee options.

 

TheCompany issued 100,000 options and 819,500 options to employees with anexercise price less than the market price with the weighted average fair marketvalue of $1.97 and $3.21 for the year ended June 30, 2003 and the nine monthsended June 30, 2002, respectively. All other employee options were granted atexercise prices that approximated market on the dates of the grant. Theweighted average fair value of options granted during fiscal 2003 were $0.90and $0.00, respectively for those options issued with exercise pricesapproximating stock price at the date of the grant.

 

Stock PurchaseWarrants—The Company has granted warrants, which are summarized as follows forthe year ended June 30, 2003 and the nine months ended June 30, 2003:

 
|                         |   | **Warrants  Outstanding** |   | **Weighted Average  Exercise Price** |   |
|------------------------------|--------|---------------------------|--------|--------------------------------------|--------|
| Balances, September 30, 2001 |   | 1,554,666                 |   | 0.50                                 |   |
| Granted                      |   | 109,000                   |   | 2.23                                 |   |
| Exercised                    |   | (528,226                  | )      | 0.01                                 |   |
| Balances, June 30, 2002      |   | 1,135,440                 |   | 0.89                                 |   |
| Granted                      |   | 2,897,500                 |   | 1.39                                 |   |
| Exercised                    |   | (10,000                   | )      | 0.46                                 |   |
| Terminated/Canceled          |   | —                    |   | —                               |   |
|                         |   |                      |   |                                 |   |   |
| Balances, June 30, 2003      |   | 4,022,940                 |   | $                                    | 1.22   |   |

 

Warrantsoutstanding at June 30, 2003 have exercise prices ranging from $.01 to $3.50 asfollows:

 

F23

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| **Shares** |   | **Exercise  Price** |   | **Expiration Date** |      |
|------------|--------|---------------------|--------|---------------------|-----------|
| 506,440    |   | $                   | 0.01   |                | July 2006 |   |
| 94,000     |   | 2.00                |   | Oct.-Dec. 2006      |      |
| 15,000     |   | 3.50                |   | Jan.-Mar. 2006      |      |
| 300,000    |   | 3.00                |   | April-June 2006     |      |
| 883,500    |   | 1.41                |   | Oct.- Dec. 2006     |      |
| 1,539,000  |   | 1.00                |   | Jan.-Mar. 2007      |      |
| 585,000    |   | 0.95                |   | Mar. June 2007      |      |
| 100,000    |   | 2.99                |   | February 2012       |      |
| 4,022,940  |   |                |   |                |      |
|            |        |                     |        |                     |           |  |

 

The fair value ofeach warrant granted was estimated on the date of grant, using theBlack-Scholes option-pricing model with the following assumptions:

 
|                      |   | **Year  Ended  June 30,  2003** |   | **Period  Ended  September  30, 2001** | ** ** |
|---------------------------|--------|---------------------------------|--------|----------------------------------------|------------|
| Expected volatility       |   | 82%-88%                         |   | 88%                                    |       |
| Risk-free interest rate   |   | 4.12%-4.37%                     |   | 4.96%                                  |       |
| Expected dividends        |   | —                          |   | —                                 |       |
| Expected terms (in years) |   | 5.0                             |   | 5.0                                    |       |

 

Stock GrantPlan—On June 6, 2002, the Board of Directors approved a stock grant plan underwhich up to one million (1,000,000) shares of common stock could be issued toemployees, consultants or other individuals providing services to the Company.As the Company has not formally adopted the plan at this time, no shares havebeen issued.

 

12.                       **Income Taxes:**

 

As of June 30,2003, the components of the deferred tax asset were as follows:

 
|                              |   | **2003**    |      |
|-----------------------------------|--------|-------------|-----------|
| Net operating loss                |   | $           | 9,800,000 |   |
| Carryforward Warrants and options |   | 1,500,000   |      |
| Allowance for bad debts           |   | 30,000      |      |
| Deferred revenue and other        |   | 100,000     |      |
| Valuation allowance               |   | (11,430,000 | )         |
|                              |   |        |      |
| Net deferred tax asset            |   | $           | —    |   |

 

Due to the recentoperating losses incurred by the Company and the uncertainties regarding futuretaxable income, the Company has recorded a valuation allowance equal to netdeferred tax assets. The increase in the valuation allowance of $4,920,000 fromJune 30, 2002 through June 30, 2003 and

 

F24

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$5,170,000from September 30, 2001 to June 30, 2002 was due primarily to the increase inthe net operating loss carry forward. Net operating loss carry forwards totaledapproximately $26,000,000 at June 30, 2003, and expire from 2005 through 2023.Usage of the net operating loss carry forward will be restricted due to thechange in ownership of DDC and the Company in 2001 and other ownership changes

 

13.                       **Litigation:**

 

From time to time,the Company is involved in various legal matters arising in the normal courseof business. In the opinion of management, the ultimate resolution of thesematters is not expected to have a material adverse effect on these financialstatements.

 

Certain judgmentswere entered against the Company during the year ended June 30, 2003. TheCompany accrued for the amounts of these judgments within the financialstatements.

 

OnSeptember 24, 2003, Verizon Media Ventures and GTE Southwest Incorporated filed a complaintagainst the Company and USABVideo Corp. in the Supreme Court of the State of New York, county of New York.  In the complaint, Verizon andGTE allege that USAB Video Corp.breached the purchase agreement and that the Company, by guaranteeing USAB Video Corp.’s performance under theagreement, was also liable forUSAB Video Corp.’s breach.  The complaint further  alleges that Verizon and GTE suffered losses and damages in excess of $1.023 million dollars.  Neither the Company nor USAB Video Corp. has yet to file an answer to the complaint, but the Company intendsto vigorously defend against thelawsuit.

 

14.                       **Fair Value Of FinancialInstruments:**

 

The estimated fair values for financial instrumentsare determined at discrete points in time based on relevant market information.These estimates involve uncertainties and cannot be determined with precision.The carrying amounts of the accounts receivable, accounts payable,line-of-credit, and accrued liabilities approximate fair value because of theshort-term maturities of these instruments. The fair value of notes payable,line-of-credit, and notes receivable are not determinable.

 

15.                       **Related Parties:**

 

The Company had outstanding payables to variousofficers and significant shareholders in the amount of approximately $652,000as of June 30, 2003.

 

On January 29, 2003, the Company renewed an advisoryagreement with Maroon Bells Capital, L.L.C., a merchant banking firm, toprovide certain advisory and business development services in exchange for amonthly advisory fee. The term of the agreement is twenty-four months with anautomatic twelve-month renewal. Maroon Bells is one of the Company’ssignificant stockholders. Mr. Paul Moore, another significant stockholder, is aprincipal of Maroon Bells. In addition, Maroon Bells earned a fee in connectionwith the acquisition of Cable Concepts, Inc. The board granted 500,000 warrantsin connection with the renewal of the agreement. In 2002, Maroon Bells wasgranted 500,000 options to purchase common stock at $1.50 per share inconnection with the prior agreement in 2001.

 

Duringthe year ended June 30, 2003, Mr. Paul Moore advanced the Company approximately$214,500 in connection with the Company’s acquisition of Cable California. TheCompany recognized that it owes $315,000 in management advisory service feesunder the Maroon Bells Consulting Agreement and approximately $196,000 inreimbursable out of pocket expenses incurred by Mr. Moore in connection withthe Company’s business.  Maroon BellsCapital earned $205,000 in finder’s fees in connection with the Company’sfunding efforts. Mr. Moore converted approximately $475,000 of indebtednessinto 431,818 shares of common stock at the rate of $1.10 per share of thisamount. The $475,000 of indebtedness that was converted into shares consistedof $107,300 of a note and $367,700 of accounts payable. At June 30, 2003, theCompany owed Mr. Moore approximately $925,000. Maroon Bells Capital and Mr. Moore are currently in final negotiationswith the Company to convert up to $750,000 of this debt to equity.

 

In considerationfor advances of funds to the Company, and services provided to the Company,including assistance with financings, in June 2002 the Company’s board approvedthe issuance of 350,000 shares of its common stock to Mr. Paul Moore under theCompany’s Stock Grant Plan. The grant of these shares is subject to approval byan authorizing agent for the plan, and Mr. Moore has not been granted anyshares.

 

On April 15, 2003,the Company entered into an advisory agreement with Jon Eric Landry, who is oneof the Company’s directors, under which Mr. Landry agreed to provide advice inconnection with the Company’s corporate finance strategy, business plan andinvestor relations and other matters. The agreement has a 36-month term. Inconsideration for Mr. Landry’s services, the Company agreed to pay him $1.00per year. In addition, if the Company secures permanent financing of $5,000,000or more, or if a significant financing event occurs that allows us to realizesufficient liquidity to satisfy current operating expenses, Mr. Landry will beentitled to additional compensation, in an amount to be agreed upon between theCompany and Mr. Landry and approved by the Company’s board of directors.

 

F25

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The Company previously agreed to compensate DouglasD. Cole, who is one of the Company’s directors, for consulting services. InJune 2003, Mr. Cole converted $58,000 of amounts owed to him by the Companyinto common stock at a conversion rate of $1.10 per common share.  He received 52,727 common shares. As of June30, 2003 the Company owed him a total of $25,000 for services rendered andreimbursement of expenses. In consideration for similar services and Mr. Cole’sdeferring payment for past services rendered, in June 2002 the Company’s boardapproved the issuance of 100,000 shares of its common stock to Mr. Cole underthe Company’s Stock Grant Plan. The grant of these shares is subject to approvalby an authorizing agent for the plan, and Mr. Cole has not yet been granted anyshares.

 

On March 4, 2002, the Company issued two unsecurednotes payable in the amount of $150,000 each to Theodore Swindells and PaulMoore, both of whom beneficially own over 5% of the Company’s common stock.These notes bore interest at the rate of 10% per year and had a due date ofOctober 31, 2002.  In July 2002 theCompany agreed to issue warrants to Mr. Moore and Mr. Swindells, in connectionwith various loans and advances made by these individuals to us. Mr. Moore andMr. Swindells each were granted warrants to purchase 200,000 shares of theCompany’s common stock. In June 2003, Mr. Moore converted theoutstanding principal of his note of $150,000 plus accrued interest of $20,300for a total amount of $170,300 conversion to 154,818 common shares at the rateof $1.10 per common share. A portion of Mr. Swindell’s note was paid along withaccrued interest of approximately $20,000 resulting in an outstanding balance dueto Mr. Swindells of approximately $130,000. Mr. Swindells’ note is due in April2004.

 

In June 2003 several of the Company’s directors andinvestors forgave amounts owed to them in exchange for issuance of commonstock. Mr. Mooney exchanged $182,875 in accounts payable into 166,250 shares ofcommon stock at the rate of $1.10 per share. Mr. Swindells exchanged promissorynotes with an aggregate of principal and interest of $166,667 to 151,515 sharesof common stock at the rate of $1.10 per share. Mr. Cole exchanged accountspayable owed to him in the amount of $58,000 in to 52,727 shares of commonstock at the rate of $1.10 per share. Mr. Landry exchanged accounts payable dueto Landry Mountain Partners of $239,819 for 218,017 shares of common stock at therate of $1.10 per share. Mr. Moore converted accounts payable in the amount of$304,700 to 277,000 shares of common stock at the rate of $1.10 per commonshare. Mr. Moore also converted a note payable with a balance of $170,300 to154,819 shares of common stock at the rate of $1.10 per common share.

 

In October 2002 the Company obtained a loan from ashareholder in the amount of $500,000. In February 2003 the Company obtained another loan in the amount of$100,000 from the shareholder. Both of these loans were evidenced by promissorynotes. The holder of these notes, Theodore Swindells, beneficially owns over 5%of the Company’s common stock. The promissory notes issued, bear interest at arate of 18% per year with due dates six months from the date of issue. Inaddition, the Company issued shareholder warrants to purchase 300,000 and50,000, respectively, shares of the Company’s common stock at an exercise priceof $1.00 per share expiring in 2008.

 

16.                       **Subsequent Events:**

 

The Board ofDirectors appointed Arturo Alemany, President of MIR International to the Boardof Directors and as Chairman of the Board and Chief Executive Officer,effective September 16, 2003. MIR has been contracted by the Company to providemanagement consulting support to the Company to assist with legal andoperational matters in Mexico. Consulting fees accrue at the rate of $25,000 amonth with $12,500 due and payable monthly, and the remaining balance due theearlier of six months or upon significant financing. In connection with thisagreement the Company granted Mr. Alemany 300,000 options to purchase commonstock at $1.10 per share, 75,000 of these shares vest immediately and theremainder vest in three equal traunches over the next three quarters.

 

F26

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On July 1, 2003,the Company served Richard G. Lubic notice that he was in breach of certainmaterial terms of the Management Services Agreement dated as of February 12,2003, between the Company and Mr. Lubic (the “Agreement”).  The Company informed Mr. Lubic that,pursuant to the terms of the Agreement, he had thirty (30) business days inwhich to cure the breach, otherwise the Agreement would be terminated.  Mr. Lubic failed to cure the breach withinthe thirty (30) business days.  As such,on August 12, 2003, the Company’s board of directors voted to terminate theAgreement and Mr. Lubic’s services to the Company.

 

In July 2003 warrants were exercised for 114,160shares of common stock.

 

In July 2003 the Company obtained loans from anindividual in the amount of $100,000 evidenced by a promissory note. Thepromissory notes issued bear interest at a rate of 18% per year with a due dateof due six months from the date of issue. In addition, the Company issued theshareholder warrants to purchase 50,000 shares of the Company’s common stock atan exercise price of $1.00 per share expiring in 2008.

 

InJuly 2003 the Company authorized stock options for officers and directors. Atotal of 1,350,000 options were issued for purchase of the Company’s commonstock at $1.10 per share.  925,000 ofthese shares vest immediately.

 

In August 2003, two individuals elected to convertthe outstanding principal and accrued interest owed under the bridge loanevidenced by promissory notes into shares of the Company’s common stock.  In particular, a note with a face amount of$50,000 and accrued interest and fees of $9,590 was converted to 74,938 sharesof common stock (a conversion rate of $0.80 per share), and a note with a faceamount of $50,000 and accrued interest and fees of $9,590 was converted to67,360 shares of common stock (a conversion rate of $0.89).

 

On September 8,2003, the Company obtained secured debt financing in the amount of $4,000,000from a private investor. The financing is evidenced by a convertible promissorynote and collateralized by a first priority lien in all or substantially all ofthe Company’s assets. As additional consideration for the $4,000,000 financing,the Company issued to the lender a warrant to purchase up to 525,000 shares ofcommon stock at .01 and a warrant to purchase up to 1,250,000 shares of commonstock at $1.10 per share.  Thepromissory note bears interest at a rate equal to the prime rate plus 2% andmatures on March 4, 2004, subject to the Company’s ability to extend thematurity for up to 60 days, provided, however, that if the Company extend thematurity date, the interest rate increases 1% each month the loan isoutstanding after March 4, 2004, up to a maximum of 12%. The outstandingprincipal and accrued interest under the note is convertible, in whole or inpart, at the election of the lender, into that number of shares of common stockequal to the outstanding principal and accrued interest divided by $1.00. Thedocuments executed in connection with the financing generally contain customarycovenants relating to operations and maintenance of the security assets.

 

In connection withthis financing, the Company’s existing bridge note holders subordinated theirsecurity interests in certain of its assets and the assets of its subsidiaries.As consideration for the subordination, the Company issued to the holders ofbridge notes warrants to purchase up to 390,000 shares of common stock at aprice of $1.10 per share. The Company used $1,046,000 of the proceeds of thefinancing to repay a portion of the outstanding principal and accrued interestowed to the Company’s existing bridge note holders, and paid $155,000 to a noteholder in exchange for his agreement to subordinate his security interest inassets of its subsidiary.

 

The Company had a note payable and accounts payableto its outside

 

F27

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counsel in connection withunpaid legal fees in the aggregate amount of approximately $630,000.  In October 2003, the outside counsel agreedto convert the note payable and account payable due to the outside counsel intoapproximately 686,000 shares of common stock, subject to the outside counsel’sability to sell such shares without disrupting the market place as determinedby an independent advisor to the Company.

 

F28

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