NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED AUGUST 31, 2012
(Unaudited)
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1.
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Description of Business and Basis of Presentation
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United
States Basketball League, Inc. (“USBL”), incorporated in Delaware on May 29, 1984, has operated a professional summer
basketball league through franchises located in the United States. Its wholly owned subsidiary Meisenheimer Capital Real Estate
Holdings, Inc. (“MCREH”) owns a commercial building in Milford, Connecticut.
USBL cancelled its 2008, 2009,
2010, 2011 and 2012 seasons.
At August 31, 2012, USBL and
MCREH (collectively, the “Company”) had negative working capital of $2,260,697, a stockholders’ deficiency of
$2,031,675, and accumulated losses of $4,715,658. These factors, as well as the Company’s reliance on related parties (see
Notes 7 and 9), raises substantial doubt as to the Company’s ability to continue as a going concern.
The Company is making efforts
to raise equity capital, revitalize the league and market new franchises. However, there can be no assurance that the Company will
be successful in accomplishing its objectives. The consolidated financial statements do not include any adjustments that might
be necessary should the Company be unable to continue as a going concern.
The accompanying unaudited consolidated
financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, they may not include all of the information and footnotes required by accounting principles generally accepted in
the United States for complete financial statements. In the opinion of management, the unaudited financial statements reflect all
adjustments, which include only normal recurring adjustments, necessary for a fair presentation. Operating results for the six-month
period ended August 31, 2012 may not necessarily be indicative of the results that may be expected for the year ending February
28, 2013. The notes to the consolidated financial statements should be read in conjunction with the notes to the consolidated financial
statements contained in the Company’s Form 10-K for the year ended February 29, 2012.
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2.
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Summary of Significant Accounting Policies
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Principles of consolidation
- The accompanying consolidated financial statements include the accounts of USBL and MCREH. All significant intercompany accounts
and transactions have been eliminated.
Fair value disclosures
–
The carrying amounts of the Company’s financial instruments, which consist of cash and cash equivalents,
marketable equity securities, due from related parties, accounts payable and accrued expenses, credit card obligations, and due
to related parties, approximate their fair value due to their short term nature or based upon values of comparable instruments.
Cash and cash equivalents
-
The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash
equivalents.
Marketable equity securities
–
Marketable equity securities are recorded at fair value with unrealized gains and losses included in income. The Company
has classified its investment in marketable equity securities as trading securities. The change in net unrealized holding gain
(loss) included in earnings for the three months ended August 31, 2012 and 2011 and the six months ended August 31, 2012 and 2011
was $29,253, $(86,599), $39,629, and $16,433, respectively.
Inventory -
Inventory
consists of USBL trading cards, basketball uniforms, sporting equipment and printed promotional material and is stated at the lower
of cost or market. Certain inventory was obtained through barter transactions whereby the USBL granted suppliers various advertising
space (print) and airtime (television) in return for the supplier’s products. These transactions were accounted for based
upon the fair values of the assets and services involved in the transactions.
Depreciation expense -
Depreciation is computed using the straight-line method over the building’s estimated useful life (30 years).
Revenue recognition -
The
Company generally uses the accrual method of accounting. However, due to the uncertainty of collecting royalty and franchise fees
from the franchisees, USBL records these revenues upon receipt of cash consideration paid or the performance of related services
by the franchisee. Franchise fees earned in nonmonetary transactions are recorded at the fair value of the franchise granted or
the service received, based on which value is more readily determinable. Upon the granting of the franchise, the Company has performed
essentially all material conditions related to the sale
The Company generated advertising
revenue from fees for arena signage, tickets, and program and yearbook advertising space. Advertising revenue was recognized over
the period that the advertising space was made available to the user.
Fees charged to teams to allow
them to relocate were recognized as revenue upon collection of the fee. Souvenir sales, which were generated on the Company’s
web site, were recorded upon shipment of the order. Essentially all orders were paid by credit card.
Income taxes
-
Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and
liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to
reverse. A valuation allowance has been fully provided for the deferred tax asset (approximately $875,000 at February 29, 2012)
attributable to the USBL net operating loss carryforward.
As of February 29, 2012, USBL
had a net operating loss carryforward of approximately $2,500,000 available to offset future taxable income. The carryforward expires
in varying amounts from 2019 to 2032. Current United States income tax laws limit the amount of loss available to offset against
future taxable income when a substantial change in ownership occurs. Therefore, the amount available to offset future taxable income
may be limited.
Estimates
–
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Advertising costs
- Advertising costs are expensed as incurred.
Stock-based compensation
– Stock-based compensation is accounted for at fair value in accordance with Accounting Standards Codification (“ASC”)
718, “Compensation – Stock Compensation.” No stock options were granted during 2012 and 2011 and none are outstanding
at August 31, 2012.
Earnings
(loss) per share
– ASC 260, “Earnings Per Share”, establishes standards
for computing and presenting earnings (loss) per share (EPS). ASC 260 requires dual presentation of basic and diluted EPS. Basic
EPS excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if stock options or convertible
securities were exercised or converted into common stock. The Company did not include the 1,105,679 shares of convertible preferred
stock in its calculation of diluted loss per share for the three and six months ended August 31, 2012 and 2011 as the result would
have been antidilutive.
Comprehensive income
– Other comprehensive income (loss) refers to revenues, expenses, gains and losses that under generally accepted accounting
principles are included in comprehensive income but are excluded from net income (loss) as these amounts are recorded directly
as an adjustment to stockholders’ deficiency. Comprehensive income (loss) was equivalent to net income (loss) for all periods
presented.
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3.
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Marketable Equity Securities
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At August 31, 2012 (unaudited), marketable equity securities
consisted of:
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Fair
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Value and
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Carrying
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Security
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Shares
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Cost
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Value
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Seafarer Exploration Corp. (SFRX)
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4,302,064
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$
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57,928
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$
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30,114
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Other
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45,307
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1,920
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Total
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$
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103,235
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$
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32,034
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At February 29, 2012, marketable equity securities
consisted of:
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Fair
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Value and
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Carrying
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Security
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Shares
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Cost
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Value
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Seafarer Exploration Corp. (SFRX)
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7,252,064
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$
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97,642
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$
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58,017
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Pacific Rim Mining Corp. (PMV)
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350,000
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83,458
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47,950
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Caledonia Mining Corp. (CALVF)
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410,000
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34,099
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47,150
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Other
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82,399
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33,651
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Total
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$
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297,598
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$
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186,768
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As discussed in Note 2, the Company has classified
its investment in marketable equity securities as trading securities. All fair value measurements are based on Level 1 inputs (i.e.,
closing trading prices of respective marketable equity securities).
Gain (loss) on marketable equity securities consisted
of:
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Six Months Ended August 31,
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(Unaudited)
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2012
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2011
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Realized net gain (loss)
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$
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(93,186
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)
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$
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5,607
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Unrealized net gain (loss)
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39,629
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16,433
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Net gain (loss)
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$
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(53,557
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)
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$
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22,040
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Commencing March 2012, the Company
began the process of selling its marketable equity securities pursuant to a plan to liquidate substantially all of such securities
as market conditions allow.
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4.
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Due from Related Parties
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Due from related parties consist
of:
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August 31,
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February 29,
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2012
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2012
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(Unaudited)
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USBL receivable from Meisenheimer Capital, Inc.
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(“MCI”) controlling stockholder of USBL,
non-interest bearing, due on demand
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$
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31,231
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$
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24,927
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Total
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$
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31,231
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$
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24,927
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Property, net, consists of:
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August 31,
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February 29,
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2012
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2012
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(Unaudited)
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Land
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$
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121,253
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$
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121,253
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Building
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155,747
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155,747
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Total
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277,000
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277,000
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Less accumulated depreciation
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(47,978
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(45,382
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)
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Property, net
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$
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229,022
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$
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231,618
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The property is a commercial
building owned by MCREH located in Milford, Connecticut. From June 2008 to December 2010, MCREH had no tenants at the property.
In 2011, Spectrum Associates,
Inc. (“Spectrum”), a corporation controlled by the two officers of USBL, entered into an informal agreement to rent
available space from MCREH for the purpose of storing surplus material. Under this agreement, Spectrum paid MCREH a total of $12,000
rent for the year ended February 29, 2012.
On February 1, 2012, MCREH executed
a Lease Agreement with an unrelated entity (the “Tenant”) to rent the property (on a Net Lease basis) for a term of
11 months from February 1, 2012 to December 31, 2012 at a monthly rent of $3,000. The Tenant has an option to renew the lease for
two additional periods of one year each at monthly rates of $3,150 (for the year ended December 31, 2013), and $3,300 (for the
year ended December 31, 2014).
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6.
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Credit Card Obligations
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USBL uses credit cards of related
parties to pay for certain travel and promotion expenses. USBL has agreed to pay the credit card balances, including related interest.
The credit card obligations bear interest at rates ranging up to 30% and are due in monthly installments of principal and interest.
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7.
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Due to Related Parties
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Due to related parties consists
of:
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August 31,
2012
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February 29,
2012
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(Unaudited)
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USBL loans payable to Spectrum Associates, Inc. (“Spectrum”), a corporation controlled by the two officers of USBL, interest at 6%, due on demand
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$
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1,232,289
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$
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1,224,789
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USBL loans payable to the two officers of USBL, interest at 6%, due on demand
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607,490
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511,450
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USBL loan payable to Genvest, LLC (“Genvest”), an entity controlled by the two officers of USBL
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20,000
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20,000
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USBL loans payable to Daniel T. Meisenheimer, Jr. Trust, a trust controlled by the two officers of USBL, non-interest bearing, due on demand
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44,100
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44,100
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MCREH note payable to trusts for the benefit of the two officers of USBL, interest at 6%, due December 31, 2011
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50,000
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50,000
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MCREH note payable to Spectrum, interest at 7%, due on demand, secured by MCREH property
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25,000
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25,000
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MCREH note payable to president of USBL, interest at 7%, due on demand, secured by MCREH property
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45,000
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45,000
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MCREH note payable to the two officers of USBL, interest at 7%, due on demand, secured by MCREH property
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70,000
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70,000
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MCREH note payable to a trust for the benefit of the two officers of USBL, interest at 4%, due October 22, 2009, secured by MCREH property
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70,000
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70,000
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MCREH loan payable to president of Spectrum, non-interest bearing, due on demand
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4,500
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4,500
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MCREH loan payable to president of USBL, non-interest bearing, due on demand
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4,000
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4,000
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Total
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2,172,379
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2,068,839
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Less current portion
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(2,172,379
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)
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(2,068,839
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)
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Non current portion
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$
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-
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$
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-
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For the six months ended August
31, 2012 and 2011, interest due under the USBL loans were waived by the respective lenders.
At August 31, 2012 and February
29, 2012, accounts payable and accrued expenses included accrued interest payable on MCREH notes payable to related parties totaling
$65,887 and $61,987, respectively.
Each share of common stock has
one vote. Each share of preferred stock has five votes, is entitled to a 2% non-cumulative annual dividend, and is convertible
at any time into one share of common stock.
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9.
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Related
Party Transactions
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In the three months ended August
31, 2012 and 2011 and the six months ended August 31, 2012 and 2011, USBL included in other operating expenses, rent to Genvest,
LLC of $3,000, $3,000, $6,000, and $6,000, respectively.
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10.
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Commitments and Contingencies
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Occupancy
Agreement
In September 2007, the Company
moved its office from the MCREH building to a building owned by Genvest LLC, an organization controlled by the two officers of
USBL. Improvements to the Company’s space were completed in February 2008. Pursuant to a verbal agreement, the Company is
to pay Genvest monthly rentals of $1,000 commencing March 2008. At August 31, 2012 and February 29, 2012, accounts payable and
accrued expenses included accrued rent payable to Genvest totaling $54,000 and $48,000, respectively.
Cancellation of 2008, 2009,
2010, 2011 and 2012 Seasons
USBL cancelled its 2008, 2009,
2010. 2011 and 2012 seasons. These cancellations may result in claims and legal actions from franchisees.
Litigation
On June 30, 2008, a legal action
was commenced by Albany Patroons, Inc., a franchisee of USBL, against the Company in the United States District Court for the Northern
District of New York. The complaint alleges breach of contract by USBL due to the suspension of the 2008 season and seeks total
damages of $285,000. On September 5, 2008, the Company answered the complaint and asserted a counter-claim against plaintiff for
breach of franchise agreement and/or memorandum of agreement. This action was discontinued and the parties agreed to proceed with
binding arbitration. The Company believes that it has a meritorious defense to the action and does not expect the ultimate resolution
of this matter to have a material adverse effect on its consolidated financial condition or results of operations.