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. The amount paid for player contracts (including bonuses) is being amortized over a five-year period. In May of 1968, the National Basketball Association was expanded by the addition of two teams. The amount allocated to the company as its share of the expansion proceeds was applied (less interest) to reduce the initial cost of player contracts obtained. During the year ended May 31, 1971, certain legal and other costs were incurred arising from the acquisition of a player amounting to $668,029: $425,454 of these costs have been capitalized as cost of the player contract and are being amortized over the period of the player's contract (note E); $242,575 of these costs are considered to be non-recurring company expenses and have been in­ cluded in extraordinary loss. In May, 1970, the National Basketball Association was further expanded by the addition of three teams. The company's share of the proceeds (less inter­ est) in excess of the unamortized costs of players drafted was recorded as extra­ ordinary income. Amounts receivable under the expansion agreements bear 4% interest and are due as follows: Currently payable $113,324 May 1, 1972 149,191 May 1, 1973 105,230 May 1, 1974 101,601 $469,346

NOTE C- INVESTMENTS The company has invested $1,000 in NBA Properties, Inc. the agent for the licensing of the promotional rights for the National Basketball Association. In addition, the company purchased 27,750 shares of Shoshoni, Inc. for $200,000 on May 1, 1969. This stock was sold on contract August 15, 1970 for $222,000, due August 15, 1975. No gain or interest will be recognized on this sale prior to receipt of payment. The amount, less unearned income, is included in contracts receivable.

NOTE D- LEAGUE CAPITAL CONTRIBUTION The company is a member of a joint venture consisting of all teams which comprise the National Basketball Association. The company's share of the league operating expenses for the years ended May 31, 1971 and May 31, 1970 was $86,534 and $57,883, respectively. These amounts are charged to game expense.

NOTE E- DEFERRED COMPENSATION The company has entered into employment contracts with several players (including a contract entered into subsequent to May 31, 1971) providing for compensation payments deferred until future dates. Provision is made for the deferred compensation over the period service is to be performed, with payments discounted at 6% (the rate paid by the company on short-term borrowings at May 31, 1971) to an amount which, with interest, would enable the company to make the necessary payments at the times designated in the various contracts.

NOTE F- LONG-TERM DEBT Long-term obligations at May 31, 1971 are as follows: Note payable to bank in quarterly installments of $12,500 with a final maturity at july 1, 1973, and interest at ~% over the prime rate. In the event of a disaster to the team such that the company cannot perform its duties under the contract and if, as a result of such dis­ aster, insurance proceeds are paid to the company, the note becomes immediately payable. The proceeds from certain advertising contract rights are also assigned as security. In addition, a stockholder guarantees 52% of the unpaid balance due. The loan agreement con- tains certain restrictions, including the payment of dividends $350,000

Contracts payable in annual payments of $1,786 and $1,347; final payments due july, 1974 and july, 1986, respectively. These pay- ments were discounted to May 31, 1970 at the then current interest rate paid by the company 17,187

Contract payable to Ringsby Truck Lines in connection with acqui­ sition of player. The contract is payable in five installments of $30,000 plus interest at 1% over the prime rate. Final payment due April 1976. The contract is personally guaranteed by a major stock­ holder 150,000 $517,187

NOTE G- COMMITMENTS AND CONTINGENCIES The company, as a member of the National Basketball Association (NBA), is a defendant in various lawsuits as follows: 1. The NBA, together with j. Walter Kennedy, Commissioner, and various members of the NBA, including the company, are defendants in separate anti-trust actions instituted by 4 individuals (Roger W. Brown, U.S. District Court, Southern District of Ohio, Western Division, Civil Action (continued) No. 7322, instituted in November 1%9; Douglas E. Moe, U.S. District Court, Northern District of Georgia, Atlanta Division, Civil Action No. 13324, instituted in December 1969; Alphra Saunders, U.S. District Court, Northern District of Illinois, Eastern Division, Cause No. 69C2477, instituted in December 1969; and Tony B. Jackson, instituted a suit in New York several years ago naming, as defendants, the NBA, together with J. Walter Kennedy, Commissioner, and various members of the NBA by serving only the NBA, the New York Knicks and Commissioner Kennedy; no service was made upon the company and the company has no further information concerning this suit). In these actions, plaintiffs allege that the defendants conspired to restrain and monopolize trade and commerce in major league professional basketball among the several states in violation of the anti-trust laws and that defendants by their concerted action have denied plaintiffs an opportunity to achieve player status in the NBA and that, as a result, plaintiffs have been deprived of earnings as major league basketball players and of earnings incident to the playing of major league basketball. Plaintiffs seek an aggregate of $8,500,000 in damages, plus plaintiffs' attorneys' fees. 2. The NBA, its members, including the company, and the members of its Board of Governors, are the defendants, together with the American Basketball Association (ABA), in an action brought by Oscar Robertson and others, (U.S. District Court, Southern District of New York. File No. 70 Civ 1526, instituted in April 1970). The action purports to have been brought on behalf of a class consisting of all current and future players in the NBA. The complaint alleges that the defendants other than the ABA have engaged in a conspiracy to monopolize and restrain trade in major league professional basketball in violation of the anti­ trust laws. Defendants are also charged with conspiring in violation of the anti-trust laws to effect a merger or other combination of the NBA with the ABA and with having entered into a non-competition agree­ ment pending effectuation of such a merger.Plaintiffs seek an injunction barring defendants from, among other things, compelling players to execute the Association Uniform Players Contract, enforcing the so­ called "reserve clause", selling and trading players against their wishes, and utilizing the college "player draft" to divide the supply of basketball talent. Plaintiffs also seek an injunction against consum­ mation of the merger and against effectuation of the alleged non­ competition agreement. Plaintiffs also seek an unspecified amount of treble damages and attorneys' fees. The answers filed on behalf of the defendants deny the substantive allegations of the complaint. On May 4, 1970, an order was entered on the consent of certain defendants prelim­ inarily enjoining defendants from, among other things, reaching agree­ ment on effectuating or consummating any merger, consolidation, ac­ quisition or combination of the NBA and the ABA, and from entering into or implementing any form of non-competition agreement. The in­ junction permits defendants to negotiate and agree upon a proposal of consolidation for the purpose of petitioning Congress for exempting legislation.

While it is impossible for Counsel for the NBA to make any prediction wi th certainty concerning the actions brought against the NBA in G-(l) and (2) herein, it is their opinion that (apart from the fees and dis- (continued) bursements of defendants' counsel, and assuming that each of the 17 members of the NBA will pay its proportionate share, i.e., 1/17th of the liability, if any), there is no substantial probability that the aggregate judgments in the above actions combined will subject anyone member of the NBA to a liability greater than $150,000. It should be noted, however, that representatives of several of the members of the NBA, in­ cluding the company, have written to Counsel for the NBA expressing their views that they should not in any event be called upon to contri­ bute to any share of the liability, if any, of the NBA, because most of the allegations alleged in the above lawsuits relate to occurrences prior to the time the company was formed and became a member of the NBA. 3. On March 28,1969, an action was instituted by the ABA and its members against the NBA and its members, (U.S. District Court, Northern District of California, Docket No. 69 Civ 51055, instituted in March 1969). In that action, the plaintiffs allege violations of the anti-trust laws and seek an injunction to prevent the NBA from continuing certain of its present activities. The plaintiffs also seek an unspecified amount of treble damages and attorneys' fees. An answer was filed on behalf of the NBA denying the substantive allegations ofthe complaint and assert­ ing a counterclaim alleging violations of the anti-trust laws by the plaintiffs. In the opinion of counsel for the NBA, the NBA has a valid and meritorious defense to the action. As of May 7, 1971, the NBA and certain of its members entered into an agreement with the ABA and certain of its members whereby they agreed upon a proposal of merger, consolidation, acquisition or com­ bination for the purpose of petitioning Congress for an exemption from the anti-trust laws with respect to such proposal, Paragraph 6 of such agreement deals, among other things, with the circumstances under which the complaint in the above described action will be voluntarily dismissed with prejudice by certain of the plaintiffs as against certain of the defendants in that action, and the counterclaim will be voluntari­ ly dismissed wi th prejudice by certain of the defendants against certain of the plaintiffs therein. 4. In the Denver Rockets, et al, v. All-Pro Management, Inc., Spencer Haywood, et al, (U.S. District Court, Central District of California, Docket No. Civil 70-2575-F), the NBA, the company, and the Denver Rockets were named cross-defendants in a cross-claim brought by Hay­ wood. The cross-claim alleged that the NBA and its members were engaged in a conspiracy to restrain and monopolize commerce in major league professional basketball and by their concerted action have denied Haywood an opportunity to achieve status as a player on the playing roster of the Seattle SuperSonics, a member of the NBA, thereby causing him damage. Haywood sought to enjoin the NBA from preventing or interfering with his playing basketball for the Seattle SuperSonics and damages of $6,150,000, plus attorneys' fees. On February 2, 1971, an order was entered enjoining the NBA from preventing or interfering wi th Haywood's playing basketball for the Seattle SuperSonics. On March 22, 1971, that injunction was continued in full force and effect pending final determination of all matters raised by the cross-claim and an additional order was entered declaring Sections 2.05 and 6.03 (continued) of the By Laws of the NBA illegal. On March 23, 1971, the Board of Governors of the NBA voted 11 to 6 to approve a settlement whereby, among other things, all aspects of the lawsuit involving Haywood and the NBA would be dismissed with prejudice. Thereafter, the Buffalo Braves, another member of the NBA, applied to the court for a dis­ solution of the injunction of February 2, 1971, or for certain alternative relief contending that the aforesaid action taken by the Board of Gover­ nors on March 23, 1971, was illegal and did not effect a settlement of the controversy. The application of the Buffalo Braves is still pending. 5. In connection with an agreement made in a prior year with Cornelius Hawkins, the NBA is obligated to pay (1) $25,000 a year through July 1974 and (2) annual premiums of $18,861 payable until and including 1986 under a contract issued by an insurance company. The NBA has made all the required payments provided for in this agreement. See Note F for the company's liability. See Note E with respect to deferred compensation payable to players. These" no cut" contracts (for periods up to six years) require payments as long as all reasonable efforts are made to perform services. Approximately $2,000,000 is payable under these contracts over various periods up to 15 years. On May 24, 1971, the company entered into a five-year lease for office space at an annual rate of approximately $6,000.

NOTE H- PENSION PLAN The members of the team roster are included in the National Basketball Association's non-contributory pension plan. The company contributed $19,186 and $18,047 to this plan for the 1970-71 and 1969-70 seasons respectively. The unfunded initial past service costs amounted to approximately $14,000 at May 31, 1971. The initlai past service costs are being funded over a twenty-year period.

NOTE I - INCOME TAXES The company adopted a fiscal year ending October 31, 1967 (which has been changed to May 31) and the cash method of accounting for tax purposes. The return filed for the period ended October 31, 1967 has been examined and accepted as filed. Returns for subsequent years are presently under examination. These statements are prepared on the accrual basis. No provision for de­ ferred income tax was required for the year ended May 31, 1970 by reason of available operating loss carryforwards. BOARD OF DIRECTORS FIRST NORTHWEST INDUSTRIES OF AMERICA, INC. We have examined the consolidated balance sheet of First Northwest Industries of America, Inc. and subsidiary as of May 31, 1971, and the related consolidated statements of operations, deficit in retained earnings and changes in work­ ing capital for the year then ended. Our exami­ nation was made in accordance with generally accepted auditing standards and accordingly in­ cluded such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. We have previous­ ly examined and reported on the financial state­ ments for the preceding year. In our opinion, subject to the effect of any adjustments that may result from the litigation mentioned in Note G, the accompanying consoli­ dated balance sheet and consolidated statements of operations, deficit in retained earnings and changes in working capital present fairly the financial position of First Northwest Industries of America, Inc. and subsidiary at May 31, 1971, and the consolidated results of their operations for the year then ended, in conformity with general­ ly accepted accounting principles applied on a basis consistent with that of the preceding year.

ALEXANDER GRANT & COMPANY Seattle, Washington July 16, 1971 OFFICERS:

PRESIDENT SAMUEL SCHULMAN

VICE PRESIDENT ZOLLIE VOLCHOK

VICE PRESIDENT - TREASURER IRVING H. LEVIN

SECRETARY HAROLD A. LIPTON

ASSISTANT SECRETARY MELVILLE MONHEIMER, JR.

DIRECTORS:

SALLY S. BEHNKE

IRVING H. LEVIN

MELVILLE MONHEIMER, JR.

WALTER SCHOENFELD

SAMUEL SCHULMAN

ZOLLIE VOLCHOK