orthwest Industries ofAmerica, Inc. SEATTLE PUBLIC LIBRARY BusIness B( E~onornlcs Rl::.,..: ........ ~l\j-...;t:: cor>Y 1971 ANNUAL REPORT To Our Shareholders: December 1, 1971 Our grosses shattered all of our previous records. We had ten sell outs. We averaged more than 9,300 customers a game - better than every other team, except the multimillion population cities, New York, Los Angeles and Chicago, and the champion Milwaukee Bucks. Fortunately, the massive outlay of monies in legal expenses to get our great new player is not a re­ curring cost. The addition of this superstar insures future success and gives all of us the confidence that this will be by far the Sonics' biggest box office and team performance year. We are enthusi­ astic over what this year's great collection of exciting basketball players will do for us. Nothing should dampen the sunny statistics we compiled last year, especially considering the fact that we missed both the playoffs and a win­ ning percentage. Despite the loss of Bob Rule and the illness of Don Smith, the fans proved loyal and understanding. Here's how our four-year momentum is already shaping up for the 1971-72 season: We'll be receiving a quarter million dollars from local radio and television, which is $25,000 more than before, plus $325,000 for national TV rights. Our season ticket sales this year are 56% higher than they were for the 1970-71 season. If our ball club stays reasonably healthy, we won't need a miracle to achieve a winning season and enter the playoffs, or even challenge for the championship. We're also happy that our neighborhood competition, in Portland, has so quickly developed a super­ star in their first year, plus a likely candidate for 1971-72 rookie-of-the-year. This guarantees a hot rivalry and high attendance figures whenever our two teams meet. If present plans and efforts materialize according to the aims of virtually every thinking person in professional basketball, a merger of the NBA and ABA will become a reality this year. In addition to expanding the excitement of broader competition it will create, as in football and baseball, a truly "World Championship" between the two league winners. In my very sober appraisal of both the season behind us and the season just ahead, we couldn't anticipate a brighter picture. I hope you share my enthusiasm, and that it will all be proved warrant­ ed at this time next year. ,/ Sincerely, Samuel Schulman, President First Northwest Industries of America, Inc. and Subsidiary CONSOLIDATED BALANCE SHEET May 31,1971 and 1970 ASSETS 1971 1970 CURRENT ASSETS Cash (including certificates of deposit at May 31,1970) . $ 55,735 $ 57,211 Accounts receivable Ticket sales . 2,005 526 Employees . 13,767 4,723 Other . 65,072 81,806 80,844 87,055 Contracts receivable - current portion (Note B) 262,515 205,418 Prepaid expenses . 11,570 19,737 Total current assets . 410,664 369,421 INVESTMENTS - AT COST (Note C) 1,000 201,000 FIXED ASSETS - AT COST Office equipment, training equipment and lease- hold improvements . 19,849 16,877 Less accumulated depreciation and amortization of leasehold improvements . 5,398 3,552 14,451 13,325 OTHER ASSETS Contracts receivable, less current portion (Notes B and C) . 406,831 356,022 Player contracts and bonuses, less amortization ($469,195 and $503,357, respectively) (Note B) 792,271 711,146 League franchise (Note B) . 150,000 150,000 League capital contribution (Note D) . 13,002 14,031 Prepaid salary expense, less current portion .. 41,667 Other . 1,112 943 1,404,883 1,232,142 $1,830,998 $1,815,888 The accompanying notes are an integral port of this statement LIABILITIES 1971 1970 CURRENT L1ABI L1TI ES Notes payable to bank ($100,000 secured by television contract) . $ 200,000 $ Current maturities of long-term debt . 81,629 201,498 Accounts payable . 263,849 46,659 Accrued liabi lities Salaries, wages and bonuses . 60,375 31,167 Interest . 7,383 7,497 Payroll and other taxes . 1,646 3,192 Season tickets sold in advance . 99,765 59,884 Total current liabi lities 714,647 349,897 DEFERRED COMPENSATION (Note E) . 82,546 10,375 LONG-TERM DEBT (Note F) Note payable to bank . 350,000 400,000 Contracts payab Ie . 150,000 150,000 Contracts payab Ie . 17,187 18,685 517,187 568,685 Less current maturities . 81,629 201,498 435,558 367,187 COMMITMENTS AND CONTINGENCI ES (Note G) STOCKHOLDERS' EQUITY (Note A) Common stock - authorized, 1,000,000 shares of $.20 par value; issued, 554,000 shares . 110,800 110,800 Capital contributed in excess of par value . 984,544 984,544 Deficit in retained earnings . (286,362) (6,915) 808,982 1,088,429 Less 45,726-Y2 shares of common stock in treasury - at cost . 210,735 598,247 1,088,429 $1,830,998 $1,815,888 First Northwest Industries of America, Inc. and Subsidiary CONSOLIDATED STATEMENT OF OPERATIONS Year ended May 31 1971 1970 REVENUE Gate receipts (less admission taxes & discounts) $1,033,006 $ 861,081 Exhibition games ...••................. 31,507 38,136 Radio and television •................... 543,824 312,500 Program ....•.................•..... 20,000 20,000 Novelties. ............ 4,048 5,663 League income .•••..•........•.....•.. 21,306 62,359 1,653,691 1,299,739 EXPENSES Team . 586,095 399,253 Game. ..... ..••......•.. 363,123 315,000 Administration .................•... 311,820 283,694 Publicity . 66,240 58,947 Promotion nights . 14,139 5,607 Player procurement and scouting ....•..•.... 28,867 42,325 Training . 39,929 36,842 1,410,213 1,141,668 Profit from operations before amortization. 243,478 158,071 OTHER EXPENSE Interest - net . 14,021 38,438 Earnings before amortization, income taxes and extraordinary items . 229,457 119,633 Amorti zati on of player contracts and bonu ses (Note B) . 255,322 216,495 Loss before income taxes and extraordinary items . 25,865 96,862 Income taxes (Note I) Reduction income tax on extraordinary items 37,777 Loss before extraordinary items 25,865 59,085 EXTRAORDINARY ITEMS Gain (loss) from league expansion and other player transactions and adjustments, net of income tax (Note B) . (253,582) 473,271 Reduction of income taxes ari sing from caryforward of prior years' operating losses (Note I) 146,872 (253,582) 620,143 NET EARNINGS (LOSS) $ (279,447) $ 561,058 Per share of common stock (Note A) Loss before extraordinary items. $(.05) $(.11 ) Extraordinary items . (.49) 1.12 Net earnings (loss) . $(.54) $1.01 The accompanying notes are an integral part of this statement. First Northwest Industries of America, Inc. and Subsidiary CONSOLIDATED STATEMENT OF DEFICIT IN RETAINED EARNINGS Year ended May 31, 1971 1970 Deficit in retained earnings - beginning of year .••. $ 6,915 $ 567,973 Net earnings (loss) for the year ...•.........•. (279,447) 561,058 Deficit in retained earnings - end of year . $ 286,362 $ 6,915 The accompanying notes are an integral part of this statement. First Northwest Industries of America, Inc. and Subsidiary CONSOLIDATED STATEMENT OF CHANGES IN WORKING CAPITAL Year ended May 31 1971 1970 SOURCES OF WORKING CAPITAL From operations Earnings (loss) before extraordinary items .. Add expenses not requiring outlay of working capital Depreciation of fixed assets ....•••. 1,846 1,519 Amortization of player contracts and bonuses 255,322 216,495 Provision for deferred compensation •..• 72,171 10,375 Working capital provided from operations before extraordi nary items .....• Extraordinary Items Gain (loss) from league expansion and other player transactions and adjustments, net of income tax •••...•••••.•..•.. (11,007) 473,271 Reducti on of income taxes ari sing from carry­ forward of prior operating losses ..•.•. 146,872 Litigation costs in connection with acquisition of a player •..•...••..•..•••••• (242,575) Add expense included in extraordinary items not requiring outlay of working capital Adjustment of basis of player contracts. 16,743 Working capital provided by earnings 49,892 806,190 Sale or trade of players ••••.••.•.••.•••• 112,007 146,934 Reduction of noncurrent notes receivable •...•. 149,191 152)32 Additions to long-term debt. 150,000 18,685 Sale of investment ••.•..••••••.•. 200,000 661,090 1,124,041 APPLICATION OF WORKING CAPITAL Additions of noncurrent notes receivable. 200,000 429,282 Purchase of fixed assets .. 2,972 4,287 Reduction of long-term debt . 81,629 201,498 Acquisition of players •...• 448,454 239,709 Purchase of treasury stock .. 210,735 Other ••••••••.••.•••••.•..• 40,807 7,034 984,597 881,810 INCREASE (DECREASE) IN WORKING CAPITAL (323,507) 242,231 Working capital at beginning of year •••••••. 19,524 (222,707) Working capital at end of year •••• $ (303,983) $ 19,524 The accompanying notes are an integral part of this statement. First Northwest Industries of America, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31,1971 NOTE A- REORGANIZATION On October 10, 1969, the Seattle SuperSonics Corporation changed its name to First Northwest Industries of America, Inc. On October 27, 1969, all of the assets comprising the basketball operations were transferred to a newly formed wholly-owned subsidiary with the name of Seattle SuperSonics Corporation. The accounts of this subsidiary are consolidated in these statements. The company's equity in the net assets of the subsidiary exceed its investment by $403,416, which is recorded as a reduction of deficit in retained earnings. Per share items are calculated on the basis of a weighted average of shares outstanding. NOTE B - PLAYER CONTRACTS AND BONUSES AND LEAGUE FRANCHISE On January 24, 1967, a predecessor partnership entered into a franchise agreement with the previous members of the National Basketball Association, which agreement was transferred to the company upon its formation. Under the terms of this agreement, $150,000 was paid for the franchise and the right to play professional basketball as a member of the National Basketball Association.