SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
FOR QUARTERLY REPORTS UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarter Ended August 31, 1998 Commission file number - 1-10635
NIKE, Inc.
(Exact name of registrant as specified in its charter)
OREGON 93-0584541
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Bowerman Drive, Beaverton, Oregon 97005-6453
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (503) 671-6453
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days
Yes X No .
___ ___
Common Stock shares outstanding as of August 31, 1998 were:
_________________
Class A 101,387,108
Class B 184,930,119
-----------
286,317,227
===========
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
NIKE, Inc.
CONDENSED CONSOLIDATED BALANCE SHEET
Aug. 31, May 31,
1998 1998
________ _______
(in millions)
ASSETS
Current assets:
Cash and equivalents $ 167.8 $ 108.6
Accounts receivable 1,755.0 1,674.4
Inventories (Note 4) 1,160.1 1,396.6
Deferred income taxes 158.2 156.8
Prepaid expenses 168.0 196.2
________ ________
Total current assets 3,409.1 3,532.6
Property, plant and equipment 1,879.3 1,819.6
Less accumulated depreciation 702.1 666.5
________ ________
1,177.2 1,153.1
Identifiable intangible assets and goodwill 436.5 435.8
Deferred income taxes and other assets 281.8 275.9
________ ________
$5,304.6 $5,397.4
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1.3 $ 1.6
Notes payable 348.3 480.2
Accounts payable 432.5 584.6
Accrued liabilities 638.5 608.5
Income taxes payable 112.3 28.9
________ ________
Total current liabilities 1,532.9 1,703.8
Long-term debt 375.7 379.4
Deferred income taxes and other liabilities 46.6 52.3
Commitments and contingencies (Note 6) -- --
Redeemable Preferred Stock 0.3 0.3
Shareholders' equity:
Common Stock at stated value (Note 3):
Class A convertible-101.4 and
101.5 shares outstanding 0.2 0.2
Class B-184.9 and 185.5 shares
outstanding 2.7 2.7
Capital in excess of stated value 267.7 262.5
Accumulated other comprehensive income (52.3) (47.2)
Retained earnings 3,130.8 3,043.4
________ ________
3,349.1 3,261.6
________ ________
$5,304.6 $5,397.4
======== ========
The accompanying Notes to Condensed Consolidated Financial Statements are
an integral part of this statement.
NIKE, Inc.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
Three Months Ended
August 31,
__________________
1998 1997
____ ____
(in millions, except per share data)
Revenues $2,504.8 $2,766.1
________ ________
Costs and expenses:
Cost of sales 1,562.6 1,665.5
Selling and administrative 652.6 658.9
Interest 14.2 16.9
Other expense (income) 4.6 13.2
________ ________
2,234.0 2,354.5
________ ________
Income before income taxes 270.8 411.6
Income taxes 107.0 158.5
________ ________
Net income $ 163.8 $ 253.1
======== ========
Basic earnings per common share(Note 3)$ 0.57 $ 0.87
======== ========
Diluted earnings per common share
(Note 3) $ 0.56 $ 0.85
======== ========
Dividends declared per common share $ 0.12 $ 0.10
======== ========
The accompanying Notes to Condensed Consolidated Financial Statements are
an integral part of this statement.
NIKE, Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended
August 31,
_________________
1998 1997
____ ____
(in millions)
Cash provided (used) by operations:
Net income $163.8 $253.1
Income charges (credits) not
affecting cash:
Depreciation 57.2 43.8
Deferred income taxes (1.7) 3.9
Amortization and other (0.6) 4.6
Changes in other working capital
components 150.2 (168.0)
_______ _______
Cash provided by operations 368.9 137.4
_______ _______
Cash (used) provided by investing activities:
Additions to property, plant and
equipment (85.6) (108.7)
Disposals of property, plant and
equipment 3.6 3.9
Increase in other assets (9.6) (40.2)
Decrease in other liabilities (6.4) (1.0)
_______ _______
Cash used by investing activities (98.0) (146.0)
_______ _______
Cash provided (used) by financing activities:
Additions to long-term debt - 101.9
Reductions in long-term debt
including current portion (0.4) (0.4)
Decrease in notes payable (131.9) (124.5)
Proceeds from exercise of options 6.4 14.2
Repurchase of stock (43.3) -
Dividends - common and preferred (34.4) (28.9)
_______ ______
Cash used by financing activities (203.6) (37.7)
_______ _______
Effect of exchange rate changes on cash (8.1) 4.0
Net increase (decrease) in cash and equivalents 59.2 (42.3)
Cash and equivalents, May 31, 1998 and 1997 108.6 445.4
_______ _______
Cash and equivalents, August 31, 1998
and 1997 $167.8 $403.1
======= =======
The accompanying Notes to Condensed Consolidated Financial Statements are
an integral part of this statement.
NIKE, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Summary of significant accounting policies:
___________________________________________
Basis of presentation:
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments (consisting of normal recurring accruals) which
are, in the opinion of management, necessary for a fair presentation of
the results of operations for the interim period(s). The interim financial
information and notes thereto should be read in conjunction with the
Company's latest annual report to shareholders. The results of operations
for the three (3) months ended August 31, 1998 are not necessarily
indicative of results to be expected for the entire year.
Year 2000 costs:
Costs associated with the Company's efforts around Year 2000 issues are
expensed as incurred, unless they relate to the purchase of hardware and
software, and software development, in which case they are capitalized.
Capitalized software and hardware costs are depreciated from three to five
years.
NOTE 2 - Accounting changes:
__________________
In the first quarter of fiscal 1999, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income".
This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is generally defined as all changes
in shareholders' equity except those resulting from investments by and
distributions to shareholders. Comprehensive income, net of taxes, is as
follows:
Three months ended
August 31,
__________________
1998 1997
____ ____
(in millions)
Net Income $163.8 $253.1
Foreign Currency Translation Adjustment (52.3) (39.9)
_______ _______
Total Comprehensive Income $111.5 $213.2
======= =======
NOTE 3 - Net income per common share:
___________________________
SFAS 128, "Earnings per Share," replaces primary and fully diluted
earnings per share with basic and diluted earnings per share. Under the new
requirements, the dilutive effect of stock options is excluded from the
calculation of basic earnings per share. Diluted earnings per share is
calculated similarly to fully diluted earnings per share as required under
APB 15. SFAS 128 became effective for the Company's fiscal 1998 financial
statements. All prior period earnings per share data presented have been
restated to conform to the provisions of this statement. The following
represents a reconciliation from basic earnings per share to diluted earnings
per share:
Three Months Ended
August 31,
__________________
1998 1997
____ ____
(in millions, except per share data)
Determination of shares:
Average common shares outstanding 286.7 289.9
Assumed conversion of stock options 5.3 7.6
______ ______
Diluted average common shares outstanding 292.0 297.5
====== ======
Basic earnings per common share $0.57 $0.87
====== ======
Diluted earnings per common share $0.56 $0.85
====== ======
NOTE 4 - Inventories:
___________
Inventories by major classification are as follows:
Aug. 31, May 31,
1998 1998
________ ________
(in millions)
Finished goods $1,091.1 $1,303.8
Work-in-progress 32.8 34.7
Raw materials 36.2 58.1
________ ________
$1,160.1 $1,396.6
======== ========
NOTE 5 - Restructuring charge:
_____________________
During the fourth quarter of fiscal 1998 the Company recorded a
restructuring charge of $129.9 million as a result of certain of the Company's
actions to better align its cost structure with expected revenue growth rates.
The restructuring activities (shown below in tabular format) primarily related
to: 1) the elimination of job responsibilities company-wide, resulting in
costs to sever employees and related asset write-downs and lease abandonments
related to the affected employees; 2) the relocation of, and elimination of,
certain job responsibilities of the Asia Pacific headquarters in Hong Kong,
resulting in reduction in workforce, lease abandonments and other costs of
downsizing the Hong Kong headquarters; 3) the downsizing of the Company's
Japan distribution center, resulting in the write-down of assets no longer in
use; 4) the cancellation of certain non-strategic long-term endorsement
contracts, resulting in one-time termination fees; and 5) the decision to exit
certain manufacturing operations of the Bauer subsidiary, resulting in the
reduction in manufacturing related jobs, the write-down of assets no longer in
use and the estimated loss on divestiture of certain manufacturing plants.
No increases to the original estimated restructuring charge were made
during the first quarter of fiscal 1999. All activity during the quarter
related to cash payments to settle severance agreements, lease commitments,
endorsement contracts and other various items.
As of August 31, 1998, there were a total of 1,208 employees terminated,
with 1,135 having left the Company as of that date.
Detail of the restructuring charge is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
(in millions)
DESCRIPTION CASH/NON- RESTRUCTURING ACTIVITY RESERVE ACTIVITY RESERVE
CASH CHARGE BALANCE AT BALANCE AT
5/31/98 8/31/98
______________________________________________________________________________________________________________
ELIMINATION OF JOB
RESPONSIBILITES COMPANY-
WIDE $(49.8) $18.8 $(31.0) $17.9 $(13.1)
Severance packages
Severance packages cash (29.1) 9.0 (20.1) 13.9 (6.2)
Lease cancellations &
commitments cash (10.8) 0.2 (10.6) 3.9 (6.7)
Write-down of assets non-cash (9.6) 9.6 - - -
Other cash (0.3) - (0.3) 0.1 (0.2)
______________________________________________________________________________________________________________
DOWNSIZING THE ASIA PACIFIC
HEADQUARTERS IN HONG KONG $(13.1) 5.4 $(7.7) $2.0 $(5.7)
Severance packages cash (4.6) 2.3 (2.3) 0.9 (1.4)
Lease cancellations &
commitments cash (5.5) 0.1 (5.4) 1.1 (4.3)
Write-down of assets non-cash (3.0) 3.0 - - -
______________________________________________________________________________________________________________
DOWNSIZING THE JAPAN
DISTRIBUTION CENTER $(31.6) $25.4 $(6.2) $0.9 $(5.3)
Write-off of assets non-cash (12.5) 12.5 - - -
Software development costs cash/non (19.1) 12.9 (6.2) 0.9 (5.3)
cash
______________________________________________________________________________________________________________
CANCELLATION OF ENDORSEMENT
CONTRACTS cash $(5.6) $0.6 $(5.0) $3.2 $(1.8)
______________________________________________________________________________________________________________
EXITING CERTAIN MANUFACTURING
OPERATIONS AT BAUER $(22.7) $19.9 $(2.8) $0.2 $(2.6)
Write-down of assets non-cash (14.7) 14.7 - - -
Divestiture of manufacturing
facilities non-cash (5.2) 5.2 - - -
Lease cancellations &
commitments cash (1.6) - (1.6) 0.1 (1.5)
Severance packages cash (1.2) - (1.2) 0.1 (1.1)
______________________________________________________________________________________________________________
OTHER $(7.1) 2.4 $(4.7) $0.3 $(4.4)
Cash cash (0.6) - (0.6) 0.1 (0.5)
Non-cash non-cash (6.5) 2.4 (4.1) 0.2 (3.9)
______________________________________________________________________________________________________________
Effect of foreign currency
translation - $1.8 $1.8 $(0.3) $1.5
______________________________________________________________________________________________________________
______________________________________________________________________________________________________________
TOTAL $(129.9) $74.3 $(55.6) $24.2 $(31.4)
______________________________________________________________________________________________________________
</TABLE>
NOTE 6 - Commitments and contingencies:
_____________________________
There have been no other significant subsequent developments
relating to the commitments and contingencies reported on the
Company's most recent Form 10-K.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Operating Results
_________________
Net income for the first quarter of fiscal year 1999 was $163.8 million, a
35% decrease compared to the $253.1 million in the prior year's first quarter.
Results for the first quarter were driven by a 9% decrease in consolidated
revenues, a gross margin percentage drop of 220 basis points, and selling and
administrative expenses, that while decreased in terms of absolute dollars,
increased as a percentage of revenue. Operations continue to be affected by
the economic crisis in the Asia Pacific region. In order to better align its
overall cost structure and organization with planned revenue levels, the
Company plans on making certain cost cutting measures, including the
elimination of an additional 300 positions throughout its Asia Pacific region in
fiscal 1999.
Consolidated revenues for the quarter decreased 9%, or $261.3 million.
U.S. brand revenues declined $152.5 million, or 10%, with a 13% decrease in
footwear and a 5% decrease in apparel revenues. The $138.6 million decline in
U.S. footwear revenues was a result of an 11% decrease in pairs sold and a 3%
reduction in average selling price. Most core footwear categories showed
decreases for the quarter, however, Brand Jordan was up 104%, and outdoor was
up 35%. U.S. apparel revenues decreased $20.0 million for the quarter. While
the core category of basketball was down 20%, men's training and women's
fitness were up 21% and 61%, respectively.
Total revenues in Europe were up 12%, or $71.1 million. Had the dollar
remained constant, revenues would have increased 9%. Apparel revenues
increased 42% over last year, where footwear revenues were down 8%. France,
Italy, Spain and Germany all had double digit increases in the quarter.
Revenues in the Asia Pacific region decreased 46%, or $168.4 million.
Had the dollar remained constant, revenues would have decreased 35%. Footwear
and apparel revenues were down 58% and 20%, respectively. Revenues in Japan
declined 53% (45% on a constant dollar basis).
The Americas region, which includes Canada, Mexico and South America,
decreased 15% compared to last year. The strengthening of the dollar,
primarily in Canada, had a significant effect on the quarter, as revenues
would have decreased 10% on a constant dollar basis.
Other Brands, which includes Bauer Inc., Cole Haan, Sports Specialties,
and NIKE IHM (which includes what was formally Tetra Plastics), increased 12%
to $132.1 million. The increase was primarily due to Bauer's increase in ice
hockey sales.
The breakdown of revenues follows:
Three months ended
August 31,
__________________
%
1998 1997 change
____ ____ ______
U.S.A. REGION
FOOTWEAR $917.4 $1,056.0 -13%
APPAREL 405.2 425.2 -5%
EQUIPMENT AND OTHER 25.2 19.1 32%
_______________________
TOTAL U.S.A. 1,347.8 1,500.3 -10%
EUROPE REGION
FOOTWEAR 354.2 384.0 -8%
APPAREL 310.8 218.3 42%
EQUIPMENT AND OTHER 15.9 7.5 112%
_______________________
TOTAL EUROPE 680.9 609.8 12%
ASIA PACIFIC REGION
FOOTWEAR 111.1 264.1 -58%
APPAREL 82.0 103.0 -20%
EQUIPMENT AND OTHER 6.0 0.4 1400%
_______________________
TOTAL ASIA PACIFIC 199.1 367.5 -46%
AMERICAS REGION
FOOTWEAR 97.8 121.5 -20%
APPAREL 44.3 45.6 -3%
EQUIPMENT AND OTHER 2.8 3.3 -15%
_______________________
TOTAL AMERICAS 144.9 170.4 -15%
_______________________
TOTAL NIKE BRAND 2,372.7 2,648.0 -10%
OTHER BRANDS 132.1 118.1 12%
_______________________
TOTAL REVENUES $2,504.8 $2,766.1 -9%
======== ======== ===
The Company's gross margin percentage for the first quarter was 37.6%,
down from 39.8% in the prior year. Margins were adversely affected by
continued efforts to liquidate the Company's closeout inventories around the
world, particularly in Asia and in U.S. apparel. In Europe margins were also
affected by increased sales of lower priced product and the effect of the
strengthening US dollar, inhibiting the Company's ability to price product
competitively.
Selling and administrative expenses decreased 1% from last year's
first quarter, but were up as a percentage of revenues, to 26.1% compared to
23.8%. While sports marketing expenses increased with significant
expenditures surrounding the World Cup event in France, wage-related
expenses were up less than 1% and advertising spending was down, more than
offsetting the increase in sports marketing expenses. Selling and
administrative spending reflects management's continuing efforts to control
expenditures in a changing industry and general economic environment while not
jeopardizing long-term growth objectives. Selling and administrative expenses
for the full year are expected to be slightly higher than last year's levels
as a percentage of revenue.
Interest expense decreased in the first quarter compared to last year
as less short term debt was needed to finance lower levels of inventories
and accounts receivable. Other expense also decreased from the prior
year, mainly due to less foreign currency transaction losses, offset by
decreased profit sharing expense and lower interest income.
The Company's effective tax rate for the quarter was 39.5% compared to
38.5% in the prior year. The increase in the rate was primarily due to the
non-deductibility of certain foreign entity losses.
Worldwide futures and advance orders for NIKE brand athletic footwear and
apparel scheduled for delivery from September 1998 through January 1999
totaled $3.2 billion, 15% lower than such orders for the same period last
year. These orders and the percentage change in these orders are not
necessarily indicative of the change in revenues which the Company will
experience for subsequent periods. This is due to potential shifts in the mix
of advance orders in relation to at once orders and varying cancellation
rates. Finally exchange rate fluctuations will also cause differences in the
comparisons.
During the fourth quarter of fiscal 1998, the Company recorded a
restructuring charge of $129.9 million as a result of certain of the Company's
actions to better align its overall cost structure and organization with
planned revenue levels. The restructuring activities (shown below in tabular
format) primarily related to: 1) the elimination of job responsibilities
company-wide, resulting in costs to sever employees and related asset write-
downs and lease abandonments related to the affected employees; 2) the
relocation of, and elimination of, certain job responsibilities of the Asia
Pacific headquarters in Hong Kong, resulting in reduction in workforce, lease
abandonments and other costs of downsizing the Hong Kong headquarters; 3) the
downsizing of the Company's Japan distribution center, resulting in the write-
down of assets no longer in use; 4) the cancellation of certain non-strategic
long-term endorsement contracts, resulting in one-time termination fees;
and 5) the decision to exit certain manufacturing operations of the Bauer
subsidiary, resulting in the reduction in manufacturing related jobs, the
write-down of assets no longer in use and the estimated loss on divestiture of
certain manufacturing plants.
A total of 1,208 employees were terminated due to the above activities,
1,135 of which have left the Company as of August 31, 1998.
No increases to the original estimated restructuring charge were made
during the first quarter of fiscal 1999. All activity during the quarter
related to cash payments to settle severance agreements, lease commitments,
endorsement contracts and other various items. Future cash outlays are
anticipated to be completed by the end of this fiscal year, excluding certain
lease commitments that will continue through July 2001.
Detail of the restructuring charge is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
(in millions)
DESCRIPTION CASH/NON- RESTRUCTURING ACTIVITY RESERVE ACTIVITY RESERVE
CASH CHARGE BALANCE AT BALANCE AT
5/31/98 8/31/98
______________________________________________________________________________________________________________
ELIMINATION OF JOB
RESPONSIBILITES COMPANY-
WIDE $(49.8) $18.8 $(31.0) $17.9 $(13.1)
Severance packages cash (29.1) 9.0 (20.1) 13.9 (6.2)
Lease cancellations &
commitments cash (10.8) 0.2 (10.6) 3.9 (6.7)
Write-down of assets non-cash (9.6) 9.6 - - -
Other cash (0.3) - (0.3) 0.1 (0.2)
______________________________________________________________________________________________________________
DOWNSIZING THE ASIA PACIFIC
HEADQUARTERS IN HONG KONG $(13.1) 5.4 $(7.7) $2.0 $(5.7)
Severance packages cash (4.6) 2.3 (2.3) 0.9 (1.4)
Lease cancellations &
commitments cash (5.5) 0.1 (5.4) 1.1 (4.3)
Write-down of assets non-cash (3.0) 3.0 - - -
______________________________________________________________________________________________________________
DOWNSIZING THE JAPAN
DISTRIBUTION CENTER $(31.6) $25.4 $(6.2) $0.9 $(5.3)
Write-off of assets non-cash (12.5) 12.5 - - -
Software development costs cash/non (19.1) 12.9 (6.2) 0.9 (5.3)
cash
______________________________________________________________________________________________________________
CANCELLATION OF ENDORSEMENT
CONTRACTS cash $(5.6) $0.6 $(5.0) $3.2 $(1.8)
______________________________________________________________________________________________________________
EXITING CERTAIN MANUFACTURING
OPERATIONS AT BAUER $(22.7) $19.9 $(2.8) $0.2 $(2.6)
Write-down of assets non-cash (14.7) 14.7 - - -
Divestiture of manufacturing
facilities non-cash (5.2) 5.2 - - -
Lease cancellations &
commitments cash (1.6) - (1.6) 0.1 (1.5)
Severance packages cash (1.2) - (1.2) 0.1 (1.1)
______________________________________________________________________________________________________________
OTHER $(7.1) 2.4 $(4.7) $0.3 $(4.4)
Cash cash (0.6) - (0.6) 0.1 (0.5)
Non-cash non-cash (6.5) 2.4 (4.1) 0.2 (3.9)
______________________________________________________________________________________________________________
Effect of foreign currency
translation - $1.8 $1.8 $(0.3) $1.5
______________________________________________________________________________________________________________
______________________________________________________________________________________________________________
TOTAL $(129.9) $74.3 $(55.6) $24.2 $(31.4)
______________________________________________________________________________________________________________
</TABLE>
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
instruments and Hedging Activities" (FAS 133). FAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999 (June 1, 2000
for the Company). This statement will require the Company to recognize all
derivatives on the balance sheet at fair value. Changes in the fair value of
derivatives will be recorded in current earnings or other comprehensive income,
depending on the intended use of the derivative and the resulting designation.
The ineffective portion of all hedges will be recognized in current-period
earnings. Management of the Company has not yet determined the impact that the
adoption of FAS 133 will have on the Company's results from operations or its
financial position.
Year 2000 issue
_______________
The year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year. Such software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in system failures or miscalculations leading to disruptions in the Company's
activities and operations (the "year 2000" or "Y2K" issue). If the Company or
its significant suppliers or customers fail to make necessary modifications,
conversions, and contingency plans on a timely basis, the year 2000 issue
could have a material adverse effect on NIKE's business, operations, cash
flow, and financial condition. However, the effect cannot be quantified at
this time because NIKE cannot accurately estimate the magnitude, duration, or
ultimate impact of noncompliance by suppliers, customers, and third parties
that have no direct relationship to NIKE. The Company believes that its
competitors face a similar risk. Although not quantifiable, the disclosure
below is intended to summarize NIKE's actions to minimize that risk.
In May 1997, the Company established a corporate-wide project team to
identify non-compliant software and complete the corrections or plans required
to mitigate the year 2000 issue. NIKE has identified three categories of
software and systems that require attention:
(1) information technology ("IT") systems, such as mainframes, PCs,
networks, and production control system,
(2) non-IT systems, such as equipment, machinery, climate control, and
security systems, which may contain microcontrollers with embedded
technology, and
(3) partner (supplier and customer) IT and non-IT systems.
The Company intends to fix or replace non-compliant IT and non-IT
software and systems through the following project phases:
(1) inventory systems,
(2) assess risks and impact,
(3) prioritize projects,
(4) fix, replace, or develop contingency plans for non-compliant
systems,
(5) test and on-going quality control, and
(6) audit results.
Currently, NIKE's remediation projects are at different phases of completion.
Remediation and testing activities are underway on all of the Company's core
business applications. NIKE engages the services of independent consultants to
analyze and develop testing standards, quality assurance, and contingency
plans. NIKE's internal auditing department audits the process and remediation
testing, and NIKE's independent auditors, PricewaterhouseCoopers LLP, will,
in turn, audit those results.
NIKE's assessments have identified 121 major internal I.T. remediation
projects worldwide. Forty-three of them have been completed (including
testing). NIKE has performed approximately 50 percent of the work believed to
be required on the remaining projects. The Company's current target is to
resolve compliance issues in critical business information systems by December
31, 1998. This target date has not changed since NIKE's previous statement on
the year 2000 issue in its 1998 Form 10-K.
The Company is also assessing the compliance of its major customers and
suppliers. NIKE has relationships with certain significant suppliers and
customers in most of the locations in which it operates. The level of
preparedness of significant suppliers and customers can very greatly from
country to country. These relationships are material to many local operations
and, in the aggregate, are material to the Company. NIKE relies on suppliers to
timely deliver a broad range of goods and services worldwide, including raw
materials, footwear, apparel, accessories, equipment, advertising,
transportation services, banking services, telecommunications and utilities.
Moreover, NIKE's suppliers rely on countless other suppliers, over which NIKE
may have little or no influence regarding year 2000 compliance. NIKE believes
that suppliers and customers presents the area of greatest risk to the Company
in part because of the Company's limited ability to influence actions of third
parties, and in part because of the Company's inability to estimate the level
and impact of noncompliance of third parties throughout the extended supply
chain.
NIKE is sending surveys to and conducting formal communications with its
significant suppliers and customers to determine the extent to which it may be
affected by those third parties' Y2K preparedness plans. Some of NIKE's
significant suppliers and customers have not responded to inquiries from NIKE,
have refused to respond for liability reasons, or have not responded with
sufficient detail for NIKE to determine (a) whether the supplier or customer is
or timely will be Y2K compliant, or (b) if any noncompliance will have a
material adverse effect on NIKE's business or financial condition. In the
absence of adequate responses and disclosures, NIKE is attempting to make
independent assessments of significant vendors and customers. However, a
compliance failure by a major supplier or customer, or one of their suppliers or
customers, could have a material adverse effect on NIKE's business or financial
condition. The size of that effect cannot be quantified at this time because of
variables such as the type and importance of the non-responding suppliers and
customers, the unknown level and duration of noncompliance of suppliers and
customers (and their suppliers and customers), the possible effect on NIKE's
operations, and NIKE's ability to respond. Thus, there can be no assurance that
there will not be a material adverse effect on the Company if third party
governmental or business entities do not convert or replace their systems in a
timely manner and in a way that is compatible with the Company's systems.
As a result, in some cases NIKE will develop contingency plans that
assume some estimated level of noncompliance by, or business disruption to,
suppliers and customers. The Company intends to have contingency plans
developed by mid-1999 for significant suppliers and customers determined to be
at high risk of noncompliance or business disruption. The contingency plans
will be developed on a case-by-case basis, and may include booking orders and
producing products before anticipated business disruptions, manual intervention,
or finding alternative suppliers. Even so, judgments regarding contingency
plans - such as how to develop them and to what extent - are themselves subject
to many variables and uncertainties. There can be no assurance that NIKE will
correctly anticipate the level, impact or duration of noncompliance by suppliers
and customers that provide inadequate information, or that its contingency plans
will be sufficient to mitigate the impact. Thus, some material adverse effect
to NIKE may result from one or more third parties regardless of defensive
contingency plans.
Costs related to the year 2000 issue are funded through operating cash
flows. Through the first quarter of fiscal 1999, the Company expended
approximately $23 million in remediation efforts, including the cost of new
software and modifying the applicable code of existing software. Approximately
$6.4 million of these expenditures was for new hardware and software, and has
been capitalized. The remainder has been expensed as incurred. The Company
estimates total costs related to the year 2000 issue will be in the range of
$45 to $50 million, approximately $10 million of which will be capitalized. The
Company presently believes that the total cost of achieving year 2000 compliant
systems is not expected to be material to NIKE's financial condition, liquidity,
or results of operations.
Estimates of time, cost, and risk estimates are based on currently
available information. Developments that could affect estimates include, but
are not limited to, the availability and cost of trained personnel; the ability
to locate and correct all relevant computer code and systems; cooperation and
remediation success of the Company's suppliers and customers (and their
suppliers and customers); and the ability to correctly anticipate risks and
implement suitable contingency plans in the event of system failures at NIKE or
its suppliers and customers (and their suppliers and customers).
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial position remained strong at August 31, 1998.
Compared to May 31, 1998, total assets decreased 2%, or $92.8 million, to
$5.3 billion. Shareholder's equity increased $87.5 million, or 2.7%,
remaining at $3.3 billion. Working capital increased $47.4 million, to
$1.9 billion, and the Company's current ratio was 2.22:1 at August 31, 1998
compared to 2.07:1 at May 31, 1998.
Despite lower net income compared with the first quarter of fiscal 1998,
cash provided by operations increased by $231.5 million to $368.9 million for
the quarter ended August 31, 1998. The most significant affect on cash
provided by operations was the change in the Company's working capital. At
August 31, 1998, cash provided by operations was positively affected by changes
in working capital, primarily the liquidation of inventory since May 31, 1998.
The decreased inventory levels reflect the Company's continued effort to
reduce overall quantities, particularly closeout product. Footwear closeout
levels fell in nearly all regions, which more than offset the slight buildup
of closeout apparel inventories in the U.S. and Europe.
Additions to property, plant and equipment for the first quarter of fiscal
1999 were $85.6 million, split evenly between the U.S. and non-U.S.
operations, compared to $108.7 million for the first three months of fiscal
1998. Additions in the U.S. were comprised primarily of U.S. headquarters
expansion, customer service distribution facilities, ongoing investment in
systems infrastructure, and retail expansion. Outside the U.S., the majority
of the increase related to expansion of the customer service distribution
center in Europe and retail expansion in all regions.
Management believes that significant funds generated by operations,
together with access to sufficient sources of funds, will adequately meet its
anticipated operating, global infrastructure expansion and capital needs.
Significant short- and long-term lines of credit are maintained with banks
which, along with cash on hand, provide adequate operating liquidity.
Liquidity is also provided by the Company's commercial paper program, under
which there was $0.3 million outstanding at August 31, 1998.
Dividends per share of common stock for the first quarter of fiscal 1999
was $.12 per share compared to $.10 per share for the first quarter of fiscal
1998.
As of August 31, 1998, the Company has purchased a total of 2.5 million
shares of NIKE's Class B common stock for $105.9 million in the open market
since the $1 billion share repurchase program was approved in December
1997. During the first quarter, the Company purchased a total of 1.3 million
shares for $52.0 million. Funding has, and is expected to continue to, come
from operating cash flow in conjunction with short-term borrowings. The
timing and the amount of shares purchased will be dictated by working
capital needs and stock market conditions.
Special Note Regarding Forward-Looking Statements
and Reports Analyst Reports
Certain written and oral statements made or incorporated by reference
from time to time by NIKE or its representatives in this report, other
reports, filings with the Securities and Exchange Commission, press releases,
conferences, or otherwise, are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 ("the Act"). Forward-
looking statements include, without limitation, any statement that may predict,
forecast, indicate, or imply future results, performance, or achievements, and
may contain the words "believe," "anticipate," "expect," "estimate," "project,"
"will be," "will continue," "will result," or words or phrases of similar
meaning. Forward-looking statements involve risks and uncertainties which may
cause actual results to differ materially from the forward-looking statements.
The risks and uncertainties are detailed from time to time in reports filed by
NIKE with the S.E.C., including Forms 8-K, 10-Q, and 10-K, and include, among
others, the following: international, national and local general economic and
market conditions (including the current Asian economic problems); the size and
growth of the overall athletic footwear, apparel, and equipment markets; intense
competition among designers, marketers, distributors and sellers of athletic
footwear, apparel, and equipment for consumers and endorsers; demographic
changes; changes in consumer preferences; popularity of particular designs,
categories of products, and sports; seasonal and geographic demand for NIKE
products; the size, timing and mix of purchases of NIKE's products; fluctuations
and difficulty in forecasting operating results, including, without limitation,
the fact that advance "futures" orders may not be indicative of future revenues
due to the changing mix of futures and at-once orders; the ability of NIKE to
sustain, manage or forecast its growth and inventories; new product development
and introduction; the ability to secure and protect trademarks, patents, and
other intellectual property; performance and reliability of products; customer
service; adverse publicity; the loss of significant customers or suppliers;
dependence on distributors; business disruptions; disruptions due to Year 2000
noncompliance by NIKE, its suppliers or customers (or their suppliers or
customers); increased costs of freight and transportation to meet delivery
deadlines; changes in business strategy or development plans; general risks
associated with doing business outside the United States, including, without
limitation, import duties, tariffs, quotas and political and economic
instability; changes in government regulations; liability and other claims
asserted against NIKE; the ability to attract and retain qualified personnel;
and other factors referenced or incorporated by reference in this report and
other reports.
The risks included here are not exhaustive. Other sections of this
report may include additional factors which could adversely impact NIKE's
business and financial performance. Moreover, NIKE operates in a very
competitive and rapidly changing environment. New risk factors emerge from
time to time and it is not possible for management to predict all such risk
factors, nor can it assess the impact of all such risk factors on NIKE's
business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in any forward-
looking statements. Given these risks and uncertainties, investors should not
place undue reliance on forward-looking statements as a prediction of actual
results.
Investors should also be aware that while NIKE does, from time to time,
communicate with securities analysts, it is against NIKE"s policy to disclose
to them any material non-public information or other confidential commercial
information. Accordingly, shareholders should not assume that NIKE agrees with
any statement or report issued by any analyst irrespective of the content of
the statement or report. Furthermore, NIKE has a policy against issuing or
confirming financial forecasts or projections issued by others. Thus, to the
extent that reports issued by securities analysts contain any projections,
forecasts or opinions, such reports are not the responsibility of NIKE.
Part II - Other Information
.
Item 1. Legal Proceedings:
There have been no material changes from the information previously
reported under Item 3 of the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 1998.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of shareholders was held on September 23,
1998. The shareholders elected for the ensuing year all of management's
nominees for the Board of Directors and ratified the appointment of Price
WaterhouseCoopers LLP as independent accountants for fiscal 1999. Shareholder
proposal 3 regarding independence standard and shareholder proposal 4 regarding
executive compensation were defeated.
The voting results are as follows:
Election of Directors
Votes Cast
For Withheld Broker Non-Votes
Directors
Elected by holders of
Class A Common Stock:
Ralph D. DeNunzio 95,587,426 -0- -0-
Richard K. Donahue 95,587,426 -0- -0-
Douglas G. Houser 95,587,426 -0- -0-
John E. Jaqua 95,587,426 -0- -0-
Philip H. Knight 95,587,426 -0- -0-
Kenichi Ohmae 95,587,426 -0- -0-
Charles W. Robinson 95,587,426 -0- -0-
A. Michael Spence 95,587,426 -0- -0-
John R. Thompson, Jr. 95,587,426 -0- -0-
Elected by holders of
Class B Common Stock:
William J. Bowerman 157,194,260 3,705,820 -0-
Thomas E. Clarke 157,599,867 3,300,213 -0-
Jill K. Conway 157,791,013 3,109,067 -0-
Delbert J. Hayes 157,588,017 3,312,063 -0-
Broker
For Against Abstain Non-Votes
Proposal 2 -
Ratify the appointment
of PricewaterhouseCoopers
as independent accountants:
Class A and Class B
Common Stock Voting
Together 255,530,472 632,688 363,177 -0-
Proposal 3 -
Shareholder proposal
independence standard:
Class A and Class B
Common Stock Voting
Together 33,355,696 182,910,111 1,605,329 38,655,201
Proposal 4 -
Shareholder proposal
executive compensation
Class A and Class B
Common Stock Voting
Together 5,653,217 208,378,770 3,839,149 38,655,201
Item 6. Exhibits and Reports on Form 8-K:
(a) EXHIBITS:
3.1 Restated Articles of Incorporation, as amended (incorporated by
reference from Exhibit 3.1 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended August 31, 1995).
3.2 Third Restated Bylaws, as amended (incorporated by reference
from Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended August 31, 1995).
4.1 Restated Articles of Incorporation, as amended (see Exhibit 3.1).
4.2 Third Restated Bylaws, as amended (see Exhibit 3.2).
4.3 Form of Indenture between the Company and The First National Bank
of Chicago, as Trustee (incorporated by reference from Exhibit
4.01 to Amendment No. 1 to Registration Statement No. 333-15953
filed by the Company on November 26, 1996.
10.1 Credit Agreement dated as of September 15, 1995 among NIKE, Inc.,
Bank of America National Trust & Savings Association,
individually and as Agent, and the other banks party thereto
(incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended August 31, 1995).
10.2 Form of non-employee director Stock Option Agreement (incorporated
by reference from Exhibit 10.3 to the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1993).*
10.3 Form of Indemnity Agreement entered into between the Company and
each of its officers and directors (incorporated by reference from
the Company's definitive proxy statement filed in connection with
its annual meeting of shareholders held on September 21, 1987).
10.4 NIKE, Inc. Restated Employee Incentive Compensation Plan
(incorporated by reference from Registration Statement No. 33-29262
on Form S-8 filed by the Company on June 16, 1989).*
10.5 NIKE, Inc. 1990 Stock Incentive Plan (incorporated by reference
from the Company's definitive proxy statement filed in connection
with its annual meeting of shareholders held on September 22, 1997).*
10.6 NIKE, Inc. Executive Performance Sharing Plan (incorporated
by reference from the Company's definitive proxy statement filed
in connection with its annual meeting of shareholders held on
September 18, 1995).*
10.7 NIKE, Inc. Long-Term Incentive Plan (incorporated by reference
from the Company's definitive proxy statement filed in connection
with its annual meeting of shareholders held on September 22, 1997).*
10.8 Collateral Assignment Split-Dollar Agreement between NIKE, Inc.
and Philip H. Knight dated March 10, 1994 (incorporated by
reference from Exhibit 10.7 to the Company's Annual Report on
Form 10-K for he fiscal year ended May 31, 1994).*
12.1 Computation of Ratio of Earnings to Charges.
27 Financial Data Schedule.
* Management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
NIKE, Inc.
An Oregon Corporation
BY:/s/Robert E. Harold
________________________
Robert E. Harold
Interim Chief Financial Officer
DATED: October 15, 1998
NIKE, INC.
COMPUTATION OF RATIO OF EARNINGS TO CHARGES
Three Months Ended
August 31,
__________________
1998 1997
____ ____
(in millions)
Net income $163.8 $253.1
Income taxes 107.0 158.5
______ ______
Income before income taxes 270.8 411.6
______ _____
Add fixed charges
Interest expense (A) 15.6 17.2
Interest component of leases (B) 10.4 10.1
______ ______
Total fixed charges 26.0 27.3
______ ______
Earnings before income taxes and
fixed charges (C) $295.4 $438.6
====== ======
Ratio of earnings to total fixed
charges 11.36 16.07
====== =======
(A) Interest expense includes both expensed and capitalized.
(B) Interest component of leases includes one-third of rental expense,
which approximates the interest component of operating leases.
(C) Earnings before income taxes and fixed charges is exclusive of
capitalized interest.
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
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REFERENCE TO SUCH FINANCIAL STATEMENTS.
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