a) History
United States Basketball League (“USBL”, “we” or the “Company”) was incorporated in Delaware in May, 1984 as a wholly-owned subsidiary of Meisenheimer Capital, Inc. (“MCI”). MCI is a publicly owned company having made a registered public offering of its common stock in 1984. Since 1984, MCI has been under the control of the Meisenheimer family consisting of Daniel T. Meisenheimer III, his brother, Richard Meisenheimer, and their father and mother, Daniel Meisenheimer, Jr. and Mary Ellen Meisenheimer. Daniel Meisenheimer, Jr. died in September, 1999; Mary Ellen Meisenheimer died in August, 2008. Members of the Meisenheimer family also have a controlling interest in Spectrum Associates, Inc. (“Spectrum”), a company engaged in the manufacture of helicopter parts. From time to time, Spectrum has loaned money to us and has engaged in other revenue generating transactions with us.
b) Operations
We were incorporated by MCI for the purpose of developing and managing a professional basketball league, the United States Basketball League (the “League”). The League was originally conceived to provide a vehicle for college graduates interested in going professional with an opportunity to improve their skills and to showcase their skills in a professional environment. This approach affords the players an opportunity to perhaps be selected by one of the teams comprising the National Basketball Association (“NBA”) and to attend summer camp sponsored by that team. Today our players also consist of free agents seeking to join an NBA team. USBL’s season (April through June of each year) was specifically designed to afford our League players the chance to participate in the various summer camps run by the teams in the NBA, which summer camps normally start in August each year. Since 1984 and up to the present time there have been approximately 150 players from our League who also have been selected to play for teams in the NBA. A sizable number of our players were eventually selected to play in NBA all star games. Additionally, a total of approximately 75 players were previously selected to play in the Continental Basketball Association (“CBA”) and the National Basketball Development League (the “NBDL”), the official developmental league of the NBA.
Since the inception of our League, we have been primarily engaged in selling franchises and managing the League. From 1985 and up to the present time, we have sold a total of approximately forty active franchises (teams), a vast majority of which were terminated for non- payment of their respective franchise obligations. The 2008, 2009, 2010, 2011, and 2012 seasons have been canceled. USBL is considering new team participation in a 2013 season along with some of the old teams such as Salina, Kansas; Dodge City, Kansas; Enid, Oklahoma; Brooklyn, New York; and Pennsylvania.
As the League is normally constituted, each team within the League maintains an active roster of eleven players during the season and each team plays thirty games per season. We have playoffs at the conclusion of the regular season. Under the terms of our Franchise Agreements, each franchise is limited to a $47,500 salary cap for all players for each season. No player can receive more than $1,000 a week as salary.
Since the inception of the League to the present time, the number of active franchises has fluctuated from a low of seven to a high in the 1999 season of 13 franchises. There are no current active franchises since the USBL has cancelled its 2012 season in order to restructure its operations. Many of the teams may return next year, but we do not know which ones.
At the present time we are offering franchises for $50,000. Our last sale was in 2007 at a price of $50,000, $10,000 as a down payment and the balance was to be paid over two years. We have been unable to receive more than $50,000 for a down payment on expansion teams and we require royalties be paid prior to the year-end. This does not always allow us to receive all of the installments due on time. We therefore work with our franchisees to allow them to meet their local market obligations and carry their balance with the League until they can make payments. This is in the best interest of the USBL and its teams. The stronger the teams are in their markets the stronger the League becomes.
Since 1984, we have sold franchises at various prices ranging from as little as $25,000 to $300,000. The price for the franchises has varied depending on the location of the franchise, the prior history, if any, and the location of existing franchises. Because historically most of the franchises have not operated profitably, the asking price has been negotiated and in addition we have extended highly favorable installment plans. Nearly all of the franchises sold by us since the beginning of our operations in 1984 and up to the present time have been sold on an installment basis and at times the purchasers of the franchises have not been able to meet the installment terms and as a result the franchises were terminated. Based on the uncertainty of collecting franchise fees, we record those revenues upon receipt of cash consideration paid or the performance of related services by the franchisee. Discussions are now being held for new expansion teams for 2013, with a limit of 10 teams for the 2013 season.
The franchise agreement affords us the right to terminate franchises for failure to pay the annual royalty fee, but in an effort to maintain the continuity of the League we have periodically elected not to do so in certain instances. In addition and because of our desire to have the League expand, historically, we have from time to time adjusted annual royalty fees in certain situations where the individual franchise has not been operating profitably. Our franchise agreement also entitles us to receive television revenues on a sharing basis with the teams in connection with the broadcasting of regional or national games. While in the past we have broadcasted on a regional basis, we have not received any significant revenues. We are also entitled to receive a percentage from the sale of team and league merchandise which is directly sold by us, primarily over the Internet. Revenues earned by us from merchandise have also been insignificant. Revenues from the sale by a team of its own merchandise are retained by the selling team. These sales have contributed to the individual team's revenues.
Our franchise agreements also require us to use our best efforts to obtain sponsorships for each team and the League. Such sponsorships are generally from local or national corporations. The sponsorships which have been negligible generally take the form of free basketballs, uniforms, airline tickets and discount accommodations for teams when they travel. During the 2003 season we did receive discounted air fares for team travel from American Airlines in exchange for advertising in team programs and signage at the arenas as well as advertising on our web site. The sponsorships generated by us are shared by all of the teams in the League. The individual teams comprising the league are also free to seek sponsorship for their own individual franchise. Some of the teams have been successful in attracting local sponsorships in the form of merchandise and cash and it is these sponsorships that have helped support the ongoing operations of the individual teams. Other teams have not been successful. The success of obtaining sponsorship is generally a function of good attendance and good media exposure. In some instances particular franchises cannot generate any meaningful attendance because of a lack of media exposure. The Franchise Agreement also requires us to provide scheduling of all games and officiating for all games. We also print a full roster book as well as a weekly newsletter which provides information regarding the League as well as individual players and their personal statistics.
As previously stated, very few of our franchises have operated profitably. This is primarily due to the fact that attendance and sponsorship has not been sufficient to sustain a team's expenses. When a season is in effect, we estimate that annual expenses for each team average approximately $250,000. The general lack of marketing by the League and the teams is primarily due to insufficient capital to properly promote and market the League, which has resulted in our inability and the individual team's inability to attract any meaningful sponsorships. As a result, the sale of additional franchises either to maintain a constant number of franchises or to expand the League has historically proven difficult for us.
From the inception of the League, USBL has generally operated at a loss. This has been due to the poor sale of franchises and the inability of most of the franchises to generate sufficient revenues to pay their respective annual royalty fees. Because of the poor historical record, we have been dependent on loans from the principals and their affiliated companies to defray the cost of operations. See “Item 13 – Certain Relationships and Related Transactions, and Director Independence.” Additionally and because of our poor performance for at least the last five years, our auditors have rendered qualified opinions based on their concerns as to our ability to continue as a going concern
c) Employees
We have three full-time employees consisting of the chairman and League commissioner, Daniel Meisenheimer III, a director of administration, and a director of public relations. When a season is in effect, we also employ referees as independent contractors who are paid on a per game basis. From time to time we have also used independent contractors for consulting work.
d) Future Plans
We have, as an ultimate goal, the establishment of at least forty (40) franchises throughout the United States, consisting of ten (10) teams in four regional divisions. This would result in regional play-off games and then a final championship series. We have been attempting to develop a formal association with the National Basketball Association (“NBA”). During fiscal 1998, the NBA selected us to handle a pre-draft camp for the Korean Basketball League for which we received a nominal fee. We believe that a formal association with the NBA would enhance the value of our franchises and attract more significant gate attendance, but there can be no assurances that we will ever be able to develop a formal working relationship. Currently, the NBA has its own development league, the NBDL. The NBDL competes against the reformed Continental Basketball Association. Neither of these leagues competes with the USBL’s season.
Item 1A. Risk Factors.
Prospective investors as well as shareholders should be aware that an investment in USBL involves a high degree of risk. Accordingly, you are urged to carefully consider the following Risk Factors as well as all of the other information contained in this Annual Report and the information contained in the Financial Statements and the notes thereto.
Forward Looking Statements
When used in this report, the words “may”, “will”, “expect”, “anticipate”, “estimate” and “intend” and similar expressions are intended to identify forward looking statement within the meaning of Section 21E of the Securities Exchange Act of 1934 regarding events, conditions, and financial trends that may affect our future plan of operations, business strategy, operating results and financial position. Prospective investors are forewarned and cautioned that any forward looking statements are not guarantees of future performance and are subject to risks and uncertainties and that actual results may differ materially from those included within any such forward looking statements.
Our Operating History Does Not Reflect Profitable Operations
Our operating history does not reflect a history of profitable operations. Since our inception we have been attempting to develop the League. Our operations have not been profitable and unless and until we can increase the sale of franchises, schedule a season, and at the same time attract franchisees who are able or willing to incur start-up costs to develop their respective franchises, we may continue to operate at a loss. There can be no assurance that we will be successful.
We May Not Be Able to Continue as a Going Concern
Because of our historically poor revenues and earnings, our auditors have for at least the last five years qualified their opinions and expressed their concern as to our ability to continue to operate as a going concern. Shareholders and prospective shareholders should weigh this factor carefully in considering the merits of our company as an investment vehicle.
We Have Not Been Able to Realize the Full Sales Value of a Franchise
Generally speaking, we have not been able to collect what we perceive to be true value for a franchise because of the League's overall weak performance. As such we have sold franchises for less than we believe the true value to be and additionally have extended terms for payment as an additional inducement to the franchisees to purchase the franchise. As a result, our revenues have been affected and will continue to be affected until such time as we are able to realize the full value for franchises.
Our Established Guidelines in Connection with the Sale of Franchises May Not be Sufficient to Ensure the Viability of a Franchise Over the Long Term
Historically in our dealings with prospective franchisees and in our desire to sell franchises, we did not establish adequate guidelines to insure that prospective franchisees have sufficient capital to properly finance a franchise and to be able to absorb losses until such time as the franchise would become profitable. Starting with the 1999 season, we have established rigorous standards to ensure the viability of the franchise over the long term; however, there is still no assurance that in view of our inability to schedule a season, and have any meaningful expansion we will be able to attract qualified franchisees or that our established guidelines will ensure the viability of a franchise over the long term.
We Have Been Dependent on Loans and Revenues from Affiliates to Sustain Our Operations
Because our revenues from third parties have been insufficient to sustain our operations, we have been historically dependent on revenues, loans and advances from the Meisenheimer family as well as companies affiliated with the Meisenheimers to assist in financing. If members of the Meisenheimer family elected not to continue to advance loans to us, our operations could be drastically impaired.
We Are Dependent on Corporate Sponsorships Which Have Been Negligible
In the event we have a season, the financial success of the individual franchises is dependent to a large degree on corporate sponsorship to help defray costs. To date, corporate sponsorship in some cities has been negligible and as a result, some of the franchises have been required to absorb expenses, which would otherwise have been supported by corporate sponsorship. As a result, profits of some of the franchises have been affected and many of the franchises have operated at a loss. Until such time as the League can attract meaningful sponsorship, earnings, if any, of the individual franchises will be impacted.
When We Have a, Season, It Competes with Other Professional Sporting Events
Our season from April to June is designed to afford players with the opportunity to showcase their professional ability to the teams comprising the National Basketball Association (“NBA”) and to be possibly selected to participate in NBA team’s summer camps in the latter part of July and August. As such, when we have a season our schedule competes with other sporting events such as the NBA playoffs, baseball, golf and tennis. Additionally, our season comes at a time when spectators might normally prefer to be outdoors rather than indoors in an arena. These factors have had some impact on the League’s overall attendance.
We Lack Sufficient Capital to Promote the League
In order for the League to become successful, we have to promote the League and a schedule a season. Historically and up to the present time, we have lacked sufficient capital to develop a national promotion for the League and have been forced to cancel our last five seasons. Promotion will achieve two objectives: (i) create more fan interest, and (ii) franchise interest. Until such time that we can properly promote the League we do not anticipate any significant change in the overall fan interest, and consequently no significant change in sales of franchises or our ability to schedule a season. Attendance has been rather small and is not enough to support a team's operations. Without real promotional efforts, we do not anticipate any significant increase in franchises. We do occasional advertising in Barron’s.
The Meisenheimer Family Exercises Significant Control over Us
The Meisenheimer family, consisting of Daniel T. Meisenheimer III and Richard C. Meisenheimer and entities they control own approximately 80% of our outstanding common stock and as such control the daily affairs of the business as well as significant corporate actions. Additionally, the Meisenheimer family controls the Board of Directors and as such shareholders have little or no influence over the affairs of the Company.
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Dependence upon Key Individual
Our success is dependent upon the activities of Daniel T. Meisenheimer III. The loss of Mr. Meisenheimer through death, disability or resignation would have a material and adverse effect on our business. Mr. Meisenheimer recently suffered a stroke and has been unable to devote any material amount of time to the affairs of the Company.
We Have a Limited Public Market for Our Stock
There are approximately 700,000 shares held by approximately 300 public shareholders and as such there is a limited public market for our stock. As such, holders of our stock may have difficulty in selling their shares.
Penny Stock Regulation
Broker-dealer practices in connection with transactions in “penny stocks” are regulated by certain penny stock rules adopted by the SEC. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ System). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information regarding penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson must disclose this fact and the broker-dealer’s presumed control over the market, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, broker-dealers, who sell such securities to persons other than established customers and accredited investors, must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. Consequently, these requirements may have the effect of reducing the level of activity, if any, in the market for our common stock.
Item 2. Properties.
Meisenheimer Capital Real Estate Holdings Inc. (“MCRE”), our wholly owned subsidiary, owns the property at 46 Quirk Road, Milford, Connecticut, the former location of our corporate offices. Such property consists of three-quarters of an acre of real property and an office building of approximately 6,000 square feet. In the years ended February 29, 2008 and February 28, 2007 MCRE rented this property to USBL, Cadcom, Inc., a corporation controlled by the two officers of USBL, and other tenants under month to month agreements.
From June 2008 to December 2010, MCRE had no tenants at the property. In 2011, MCRE rented the property to Spectrum Associates, Inc., a corporation controlled by the two officers of USBL, under an informal agreement.
On February 1, 2012, MCRE 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 rents of $3,150 (for the year ended December 31, 2013), and $3,300 (for the year ended December 31, 2014).
The Company currently leases general office space located at 183 Plains Road, Suite 2, Milford, Connecticut.
Item 3. Legal Proceedings.
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 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.
Item 4. Mine Safety Disclosures
Not applicable.
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
(a) Our Common Stock trades on the Over-the-Counter Bulletin Board under the symbol “USBL”. The following is the range of high and low closing bid prices for the Common Stock for each quarter for the Company’s fiscal years ended February 28, 2011 and February 29, 2012.
The foregoing range of high-low closing bid prices represents quotations between dealers without adjustments for retail markups, markdowns or commissions and may not represent actual transactions. The information has been provided by the National Association of Securities Dealers Composite Feed or other qualified inter-dealer quotation medium.
Approximately 700,000 shares of our Common Stock are held by nonaffiliates as of May 31, 2012. The shares held by members of the public were issued by us in connection with a private placement over ten years ago and also in connection with an offering in 1995 under Rule 504 of Regulation D of the Securities Act of 1933. The existing holders of shares issued pursuant to the private placement would have available to them the exemption provided by Rule 144 and thus would be able to sell all of their shares if they so elected.
We have not paid any dividends and do not anticipate paying dividends in the future.
Our Preferred Stock is held by our officers and directors and affiliates. No member of the public holds any Preferred Stock.
EQUITY COMPENSATION PLAN INFORMATION
Item 6. Selected Financial Data.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Overview
It is anticipated that the Company will continue to operate at a loss for the next twelve months. The Company anticipates continued reliance on financial assistance from affiliates. The Meisenheimer family is fully committed to making the Company a profitable operation and also making the League a viable one. Given the current lack of capital, the Company has not been able to develop any new programs to revitalize the League, nor has it been able to hire additional sales and promotional personnel or schedule a season. As a result, the Company is currently dependent on the efforts of Daniel Meisenheimer, III and two other employees for all marketing efforts. Their efforts have not resulted in any substantial increase in the number of franchises. The NBA has established a developmental basketball league known as the National Basketball Development League ("NBDL"). The Company believes that the establishment of this league, consisting of eight teams, will have no effect on the Company's ability to schedule a season, since the NBDL season as presently constituted runs from November through March. Further, nothing prohibits an NBDL player from playing in the USBL. Accordingly, and as of the present time, the Company does not perceive the NBDL as a competitor. However, with the establishment of the NBDL it is unlikely that at least for the present time the Company can develop any meaningful working relationship with the NBA.
CRITICAL ACCOUNTING POLICIES
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, the 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.
In the past, the Company has generated advertising revenue from fees for area signage, tickets and program and yearbook advertising space. Advertising revenue is recognized over the period that the advertising space is made available to the user.