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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
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(Mark
One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED MAY 31, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD
FROM TO .
COMMISSION FILE NO. 1-10635
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NIKE, Inc.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
OREGON 93-0584541
(State or other jurisdiction of
incorporation) (IRS Employer Identification No.)
</TABLE>
One Bowerman Drive
Beaverton, Oregon 97005-6453
(Address of principal executive offices) (Zip Code)
(503) 671-6453
Registrant's Telephone Number, Including Area Code:
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SECURITIES REGISTERED PURSUANT TO SECTION 12 OF THE ACT:
<TABLE>
<CAPTION>
(Title of each class) (Name of each exchange on which registered)
--------------------- -------------------------------------------
<S> <C>
Class B Common Stock New York Stock Exchange
Pacific Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12 OF THE ACT:
None
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 [_]
As of July 23, 1999, the aggregate market value of the Registrant's Class A
Common Stock held by nonaffiliates of the Registrant was $204,814,959 and the
aggregate market value of the Registrant's Class B Common Stock held by
nonaffiliates of the Registrant was $9,995,049,838.
As of July 23, 1999, the number of shares of the Registrant's Class A
Common Stock outstanding was 100,691,171 and the number of shares of the
Registrant's Class B Common Stock outstanding was 181,531,604.
DOCUMENTS INCORPORATED BY REFERENCE:
Parts of Registrant's Proxy Statement dated August 13, 1999 for the annual
meeting of shareholders to be held on September 22, 1999 are incorporated by
reference into Part III of this Report.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
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<PAGE>
NIKE, INC.
ANNUAL REPORT
ON FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I
ITEM 1. BUSINESS..................................................... 1
General...................................................... 1
Products..................................................... 1
Sales and Marketing.......................................... 2
United States Market......................................... 2
International Markets........................................ 3
Significant Customers........................................ 3
Orders....................................................... 4
Product Research and Development............................. 4
Manufacturing................................................ 4
Trade Legislation............................................ 5
Competition.................................................. 6
Trademarks and Patents....................................... 6
Employees.................................................... 7
Executive Officers of the Registrant......................... 7
ITEM 2. PROPERTIES................................................... 9
ITEM 3. LEGAL PROCEEDINGS............................................ 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS..................................................... 9
ITEM 6. SELECTED FINANCIAL DATA...................................... 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 11
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS... 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA................... 24
PART III (Except for the information set forth under "Executive
Officers of the Registrant" in Item I above, Part III is
incorporated by reference from the Proxy Statement for the
NIKE, Inc. 1999 annual meeting of shareholders.)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 47
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........... 47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.................................................... 48
SIGNATURES.............................................................. S-1
</TABLE>
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PART I
Item 1. Business
General
NIKE, Inc. was incorporated in 1968 under the laws of the state of Oregon.
As used in this report, the terms "we", "us", "NIKE" and the "Company" refer
to NIKE, Inc. and its predecessors, subsidiaries and affiliates, unless the
context indicates otherwise.
Our principal business activity involves the design, development and
worldwide marketing of high quality footwear, apparel, equipment, and
accessory products. NIKE is the largest seller of athletic footwear and
athletic apparel in the world. We sell our products to approximately 20,000
retail accounts in the United States and through a mix of independent
distributors, licensees and subsidiaries in approximately 110 countries around
the world. Virtually all of our products are manufactured by independent
contractors. Most footwear products are produced outside the United States,
while apparel products are produced both in the United States and abroad.
Products
NIKE's athletic footwear products are designed primarily for specific
athletic use, although a large percentage of the products are worn for casual
or leisure purposes. We place considerable emphasis on high quality
construction and innovative design. Running, basketball, children's, cross-
training and women's shoes are currently our top-selling product categories
and we expect them to continue to lead in product sales in the near future.
However, we also market shoes designed for outdoor activities, tennis, golf,
soccer, baseball, football, bicycling, volleyball, wrestling, cheerleading,
aquatic activities, auto racing, and other athletic and recreational uses.
We sell active sports apparel covering each of the above categories, as
well as athletic bags and accessory items. NIKE apparel and accessories are
designed to complement our athletic footwear products, feature the same
trademarks and are sold through the same marketing and distribution channels.
We often market footwear, apparel and accessories in "collections" of similar
design or for specific purposes.
We sell a line of performance equipment under the NIKE brand name,
including sport balls, timepieces, eyewear, skates, bats, and other equipment
designed for sports activities.
We also sell a line of dress and casual footwear and accessories for men,
women and children under the brand name Cole Haan(R) through our wholly-owned
subsidiary, Cole Haan Holdings Incorporated, headquartered in Maine. We market
a line of headwear with licensed team logos under the brand name "Sports
Specialties", through our wholly-owned subsidiary, NIKE Team Sports, Inc.
(formerly known as Sports Specialties Corporation). We also sell small amounts
of various plastic products to other manufacturers through our wholly-owned
subsidiary, NIKE IHM, Inc.
Our wholly-owned subsidiary, Bauer NIKE Hockey Inc., headquartered in
Montreal, manufactures and distributes ice skates, skate blades, in-line
roller skates, protective gear, hockey sticks, and hockey jerseys and
accessories under the Bauer(R) and NIKE(R) brand names. Bauer also offers a
full selection of products for street, roller and field hockey.
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Sales and Marketing
The table below shows certain information regarding NIKE's United States
and international (non-U.S.) revenues for the last three fiscal years.
<TABLE>
<CAPTION>
May 31, 1999 % CHG 1998 % CHG 1997
- ------- -------- ----- -------- ------ --------
(in millions)
<S> <C> <C> <C> <C> <C>
USA Region
Footwear........................... $3,244.6 (7.3)% $3,498.7 (6.8)% $3,753.6
Apparel............................ 1,385.3 (11.0)% 1,556.3 10.6% 1,406.6
Equipment and other................ 93.8 11.1% 84.4 103.9% 41.4
-------- ----- -------- ------ --------
Total USA......................... 4,723.7 (8.1)% 5,139.4 (1.2)% 5,201.6
-------- ----- -------- ------ --------
Europe Region
Footwear........................... 1,182.7 (6.6)% 1,266.6 5.8% 1,197.1
Apparel............................ 1,005.1 26.3% 795.9 34.4% 592.0
Equipment and other................ 68.0 102.4% 33.6 4700.0% 0.7
-------- ----- -------- ------ --------
Total Europe...................... 2,255.8 7.6% 2,096.1 17.1% 1,789.8
-------- ----- -------- ------ --------
Asia Pacific Region
Footwear........................... 455.3 (42.4)% 790.7 (8.0)% 859.0
Apparel............................ 366.0 (19.3)% 453.4 18.4% 382.8
Equipment and other................ 23.2 136.7% 9.8 9700.0% 0.1
-------- ----- -------- ------ --------
Total Asia Pacific................ 844.5 (32.7)% 1,253.9 1.0% 1,241.9
-------- ----- -------- ------ --------
Americas Region
Footwear........................... 335.8 (16.7)% 403.0 20.3% 334.9
Apparel............................ 158.4 (14.9)% 186.2 66.0% 112.2
Equipment and other................ 12.9 31.6% 9.8 366.7% 2.1
-------- ----- -------- ------ --------
Total Americas.................... 507.1 (15.3)% 599.0 33.3% 449.2
-------- ----- -------- ------ --------
Total NIKE brand.................... 8,331.1 (8.3)% 9,088.4 4.7% 8,682.5
-------- ----- -------- ------ --------
Other brands........................ 445.8 (4.1)% 464.7 (7.8)% 504.0
-------- ----- -------- ------ --------
Total Revenues...................... $8,776.9 (8.1)% $9,553.1 4.0% $9,186.5
======== ===== ======== ====== ========
</TABLE>
Financial information about geographic and segment operations appears in
Note 16 of the consolidated financial statements on page 43.
We experience moderate fluctuations in aggregate sales volume during the
year. However, the mix of product sales may vary considerably from time to
time as a result of changes in seasonal and geographic demand for particular
types of footwear and apparel.
Because NIKE is a consumer products company, the relative popularity of
various sports and fitness activities and changing design trends affect the
demand for our products. We must therefore respond to trends and shifts in
consumer preferences by adjusting the mix of existing product offerings,
developing new products, styles and categories, and influencing sports and
fitness preferences through aggressive marketing. This is a continuing risk.
Failure to timely and adequately respond could have a material adverse affect
on our sales and profitability.
United States Market
During fiscal 1999, sales to our approximately 20,000 retail accounts in
the United States accounted for approximately 57 percent of total revenues,
compared to 57 percent in fiscal 1998 and 62 percent in fiscal 1997. The
domestic retail account base NIKE brand includes a mix of department stores,
footwear stores, sporting
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goods stores, skating, tennis and golf shops, and other retail accounts.
During fiscal year 1999, our three largest customers accounted for
approximately 26 percent of sales in the United States.
We make substantial use of our "futures" ordering program, which allows
retailers to order five to six months in advance of delivery with the
guarantee that 90 percent of their orders will be delivered within a set time
period at a fixed price. In fiscal year 1999, 91 percent of our domestic
footwear shipments (excluding Cole Haan and Bauer) were made under the futures
program, compared to 85 percent in fiscal 1998 and 93 percent in fiscal 1997.
In fiscal 1999, 80 percent of our domestic apparel shipments were made under
the futures program, compared to 84 percent in fiscal 1998, and 86 percent in
1997.
We utilize 19 NIKE sales offices to solicit sales in the United States. We
also utilize 35 independent sales representatives to sell specialty products
for golf, cycling, water sports and outdoor activities. In addition, we
operate the following retail outlets in the United States:
<TABLE>
<CAPTION>
Retail Stores Number
------------- ------
<S> <C>
NIKE factory stores (which carry primarily B-grade and close-out
merchandise)....................................................... 74
NIKE stores......................................................... 2
NIKETOWNs (designed to showcase NIKE products)...................... 13
Employee-only stores................................................ 3
Cole Haan stores (including factory and employee stores)............ 31
---
Total............................................................. 123
</TABLE>
NIKE's domestic distribution centers for footwear are located in Beaverton,
Oregon, Wilsonville, Oregon, Memphis, Tennessee, and Greenland, New Hampshire.
Apparel products are shipped from the Memphis distribution center and from
Greenville, North Carolina. Cole Haan footwear and Bauer NIKE Hockey products
are distributed primarily from Greenland, New Hampshire, and Sports
Specialties headwear is shipped from Irvine, California.
International Markets
We currently market our products in approximately 110 countries outside of
the United States through independent distributors, licensees, subsidiaries
and branch offices. We operate 18 distribution centers in Europe, Asia,
Canada, Latin America, and Australia, and also distribute through independent
distributors and licensees. We estimate that our products are sold through
more than 30,000 retail accounts outside the United States. Non-U.S. sales
accounted for 43 percent of total revenues in fiscal 1999, compared to 43
percent in fiscal 1998 and 38 percent in fiscal 1997. In many countries and
regions, including Japan, Canada, Asia, South America, and Europe, we have a
futures ordering program for retailers similar to the United States futures
program described above. We are developing the program in other countries.
NIKE's three largest customers outside of the U.S. accounted for approximately
8 percent of non-U.S. sales.
International branch offices and subsidiaries of NIKE are located in
Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, Denmark,
Finland, France, Germany, Hong Kong, Indonesia, India, Italy, Japan, Korea,
Malaysia, Mexico, New Zealand, The Netherlands, Norway, Peoples Republic of
China, The Philippines, Portugal, Singapore, South Africa, Spain, Sweden,
Switzerland, Taiwan, Thailand, the United Kingdom, and Vietnam.
We operate 52 retail outlets outside the United States, which are comprised
of NIKETOWNs, factory stores, employee stores, and Cole Haan stores.
Significant Customers
Venator Group Inc., which operates a chain of retail stores specializing in
athletic footwear and apparel, accounted for approximately 10 percent of
global net sales of NIKE brand products during fiscal 1999. No other customer
accounted for 10 percent or more of our net sales during fiscal 1999.
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Orders
As of May 31, 1999, our worldwide futures orders for NIKE brand athletic
footwear and apparel totaled $4.2 billion, compared to $4.1 billion as of May
31, 1998. These orders are scheduled for delivery from June through November
of 1999. Based upon historical data, we expect that approximately 95 percent
of these orders will be filled in that time period, although the orders may be
cancelable.
Product Research and Development
We believe that our research and development efforts are a key factor in
our past and future success. Technical innovation in the design of footwear,
apparel, and athletic equipment receive continued emphasis as NIKE strives to
produce products that reduce or eliminate injury, aid athletic performance and
maximize comfort.
In addition to NIKE's own staff of specialists in the areas of
biomechanics, exercise physiology, engineering, industrial design and related
fields, we also utilize research committees and advisory boards made up of
athletes, coaches, trainers, equipment managers, orthopedists, podiatrists and
other experts who consult with us and review designs, materials and concepts
for product improvement. Employee athletes wear-test and evaluate products
during the design and development process.
In fiscal 1999, we spent approximately $97.5 million on product research,
development and evaluation, compared to $106.7 million in 1998, and $73.2
million in 1997.
Manufacturing
In fiscal 1999, approximately 49 percent of total NIKE brand apparel
production for sale to the United States market was manufactured in the United
States by independent contract manufacturers, most of which are located in the
southern states. The remainder was manufactured by independent contractors
located in 34 countries. Most of this apparel production occurred in
Bangladesh, China, Hong Kong, Indonesia, Malaysia, Mexico, The Philippines,
Singapore, Sri Lanka, Taiwan, and Thailand. Substantially all of our apparel
production for sale to the international market was manufactured outside the
U.S.
Virtually all of our footwear is produced outside of the United States. In
fiscal 1999, contract suppliers in the following countries manufactured the
following percentages of total NIKE brand footwear:
<TABLE>
<CAPTION>
Country Percent
------- -------
<S> <C>
People's Republic of China........................................... 40
Indonesia............................................................ 30
Vietnam.............................................................. 12
Thailand............................................................. 11
Italy................................................................ 2
The Philippines...................................................... 2
Taiwan............................................................... 2
South Korea.......................................................... 1
</TABLE>
We also have manufacturing agreements with independent factories in Argentina,
Brazil, and Mexico, to manufacture footwear for sale within those countries.
Our largest single supplier accounted for approximately 8 percent of total
fiscal 1999 footwear production.
The principal materials used in our footwear products are natural and
synthetic rubber, vinyl and plastic compounds, foam cushioning materials,
nylon, leather, canvas, and polyurethane films used to make AIR-SOLE
cushioning components. The principal materials used in our apparel products
are natural and synthetic fabrics and threads, plastic and metal hardware, and
specialized performance fabrics designed to repel rain, retain heat, or
efficiently transport body moisture. NIKE and its contractors and suppliers
buy raw materials in bulk. Most raw materials are available in the countries
where manufacturing takes place. We have thus far experienced little
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<PAGE>
difficulty in satisfying our raw material requirements. NIKE IHM, Inc., a
wholly-owned subsidiary of NIKE, is our sole supplier of the AIR-SOLE
cushioning components used in footwear.
Our international operations are subject to the usual risks of doing
business abroad, such as possible revaluation of currencies, export duties,
quotas, restrictions on the transfer of funds and, in certain parts of the
world, political instability. See "Trade Legislation" below. We have not, to
date, been materially affected by any such risk, but cannot predict the
likelihood of such developments occurring. We believe that we have the ability
to develop, over a period of time, adequate alternative sources of supply for
the products obtained from its present suppliers outside of the United States.
If events prevented us from acquiring products from our suppliers in a
particular country, our footwear operations could be temporarily disrupted and
we could experience an adverse financial impact. However, we believe that we
could eliminate any such disruption within a period of no more than 12 months,
and that any adverse impact would, therefore, be of a short-term nature. We
believe that our principal competitors are subject to similar risks.
All of our products manufactured overseas and imported into the United
States and other countries are subject to duties collected by customs
authorities. Customs information submitted by us is routinely subject to
review by customs authorities. We are unable to predict whether additional
customs duties, quotas or other restrictions may be imposed on the importation
of our products in the future. The enactment of any such duties, quotas or
restrictions could result in increases in the cost of our products generally
and might adversely affect the sales or profitability of NIKE and the imported
footwear and apparel industry as a whole.
Since 1972, Nissho Iwai American Corporation ("NIAC"), a subsidiary of
Nissho Iwai Corporation, a large Japanese trading company, has performed
significant financing and export-import services for us. NIAC currently
provides logistics and buying agency services, including trade financing, in
connection with more than 80 percent of all of the athletic footwear and
apparel imported into the United States and other countries around the world.
Any failure of NIAC to provide these services could disrupt our ability to
acquire products from our suppliers and to deliver products to our customers
in a timely manner, possibly resulting in cancelled orders that would
adversely affect sales or profitability. We believe that any such disruption
would be short term in duration due to the ready availability of alternative
sources of services and financing at competitive rates. Our current agreements
with NIAC expire on May 31, 2001.
Trade Legislation
Our non-U.S. operations are subject to the usual risks of doing business
abroad, such as the imposition of import quotas or anti-dumping duties. In
1994, the European Commission imposed quotas on certain types of footwear
manufactured in China. These quotas replaced national quotas that had
previously been in effect in several Member States. Footwear designed for
athletic use, meeting certain technical criteria and having a CIF price above
9 euros ("Special Technology Athletic Footwear" or "STAF"), is excluded from
the quotas. As a result of the STAF exclusion, and the amount of quota made
available to us, the quotas have not had a material effect on our business.
In 1995, the EU Commission, at the request of European footwear
manufacturers, initiated two anti-dumping investigations covering footwear
imported from the People's Republic of China, Indonesia and Thailand. As a
result, in October 1997 the Commission imposed definitive anti-dumping duties
on certain textile upper footwear imported from China and Indonesia. In
February 1998, the Commission imposed definitive anti-dumping duties on
certain synthetic and leather upper footwear originating in China, Indonesia
and Thailand. In the case of textile upper footwear, the anti-dumping duties
do not cover sports footwear. In the case of synthetic and leather upper
footwear, the anti-dumping duties do not cover footwear meeting the STAF
technical criteria and with a CIF price above 5.7 euros. As a result, the
anti-dumping duties for synthetic and leather upper footwear apply only to low
cost footwear. In our case, these duties primarily impact children's shoes and
low cost sandals. While the exclusions are subject to some interpretation by
customs authorities, we believe that most of our footwear sourced in the
target countries for sale in the EU fits within the exclusions. Accordingly,
our business has not been materially affected by the anti-dumping duties.
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While we have no reason to believe that the sports footwear exclusions from
the quotas and anti-dumping duties will be eliminated, we are aware that the
European Commission has in the past considered, and continues to consider,
certain revisions to the exclusions. These revisions generally seek to clarify
the scope of the exclusions by the addition of specified technical criteria.
We are unable at this time to predict the outcome of these discussions, but
will closely monitor further developments and will seek, by individual action
and through relevant trade associations, to prevent imposition of exclusions
that would subject a greater portion of our products to the quotas and anti-
dumping duties. If the exclusions were made more restrictive, we would
consider, in addition to its possible legal remedies, shifting the production
of such footwear to other countries in order to maintain competitive pricing.
We believe that we are prepared to deal effectively with any such change of
circumstances and that any adverse impact would be of a temporary nature. We
continue to closely monitor international restrictions and maintain our multi-
country sourcing strategy and contingency plans. We believe that our major
competitors stand in much the same position regarding these trade measures.
In June 1999, President Clinton extended to June 2000 non-discriminatory
"normal trade relations" ("NTR", formerly "most favored nation") trading
status to the People's Republic of China ("China"), and Congress supported the
President's decision. Under U.S. law, NTR status for China is extended
annually. The United States has extended NTR status to China each year since
1980. China is a material source of footwear production for NIKE. A revocation
of NTR status would result in a substantial increase in tariff rates on goods
imported from China, and, therefore could adversely affect our operations.
While the United States continues to have foreign policy as well as human
rights concerns with China, the Clinton Administration and the Congress have
opposed using China's NTR status as a means of addressing these concerns.
However, even if NIKE's Chinese sources were affected by a change in China's
NTR status, we believe that the impact of such change would not have a long
term, material adverse impact on our business.
In 1995, President Clinton officially restored diplomatic relations between
the United States and Vietnam. The President's action is a step toward
restoration of full trade relations including the United States granting non-
discriminatory NTR trading status to Vietnam which would result in lower
tariffs between the two countries. In July of 1999 the United States and
Vietnam reached an agreement in principle on a comprehensive bilateral trade
agreement, which would, amongst other things, provide reciprocal NTR between
the two countries. Once the agreement is signed and approved by the U.S.
Congress and the Vietnamese National Assembly, the United States will grant an
annual extension of NTR to Vietnam, which must be renewed annually by the
President. Although we are currently unable to predict the likely timing of
Congressional consideration of the trade agreement, it is likely to occur
within fiscal year 2000. We are currently sourcing footwear and apparel
products from factories in Vietnam. If Congress approves the trade agreement,
the granting of NTR trading status for Vietnam could expand our production and
marketing opportunities in Vietnam.
Competition
The athletic footwear, apparel and equipment industry is keenly competitive
in the United States and on a worldwide basis. We compete internationally with
an increasing number of athletic and leisure shoe companies, athletic and
leisure apparel companies, sports equipment companies, and large companies
having diversified lines of athletic and leisure shoes, apparel and equipment,
including Reebok, Adidas and others. The intense competition and the rapid
changes in technology and consumer preferences in the athletic and leisure
footwear and apparel and athletic equipment markets constitute significant
risk factors in our operations.
NIKE is the largest seller of athletic footwear and athletic apparel in the
world. Performance and reliability of shoes, apparel, and equipment, new
product development, price, product identity through marketing and promotion,
and customer support and service are important aspects of competition in the
athletic footwear, apparel and equipment industry. We believe that we are
competitive in all of these areas.
Trademarks and Patents
We utilize trademarks on nearly all of our products and believe that having
distinctive marks that are readily identifiable is an important factor in
creating a market for our goods, in identifying the Company, and in
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distinguishing our goods from the goods of others. We consider our NIKE(R) and
Swoosh(R) design trademarks to be among our most valuable assets and we have
registered these trademarks in over 100 countries. In addition, we own many
other trademarks which we utilize in marketing our products. We continue to
vigorously protect our trademarks against infringement.
NIKE has an exclusive, worldwide license to make and sell footwear using
patented "Air" technology. The process utilizes pressurized gas encapsulated
in polyurethane. Some of the early NIKE Air patents expired in 1997, which may
enable competitors to use certain types of NIKE Air technology. Subsequent
NIKE Air patents will not expire for several years. We also have a number of
patents covering components and features used in various athletic and leisure
shoes. We believe that our success depends upon skills in design, research and
development, production and marketing rather than upon our patent position.
However, we have followed a policy of filing applications for United States
and foreign patents on inventions, designs and improvements that we deem
valuable.
Employees
We had approximately 20,700 employees at May 31, 1999. Management considers
its relationship with employees to be excellent. With the exception of Bauer
NIKE Hockey Inc., our employees are not represented by a union. Of Bauer NIKE
Hockey's North American employees, approximately 55 percent, or fewer than
700, are covered by three union collective bargaining agreements with three
separate bargaining units, and all of Bauer NIKE Hockey's approximately 160
employees in Italy are covered by three collective bargaining agreements. The
collective bargaining agreements expire on various dates from 1999 through
2003. There has never been a material interruption of operations due to labor
disagreements.
Executive Officers of the Registrant
The executive officers of NIKE as of July 31, 1999 are as follows:
Philip H. Knight, Chief Executive Officer--Mr. Knight, 61, a director since
1968, is Chief Executive Officer and Chairman of the Board of Directors of
NIKE. Mr. Knight is a co-founder of NIKE and, except for the period from June
1983 through September 1984, served as its President from 1968 to 1990. Prior
to 1968, Mr. Knight was a certified public accountant with Price Waterhouse
and Coopers & Lybrand and was an Assistant Professor of Business
Administration at Portland State University.
Jeffrey M. Cava, Vice President, Global Human Resources--Mr. Cava, 47, has
been employed by NIKE since 1996, with primary responsibility for NIKE's
Global Human Resources. Previous to NIKE, Mr. Cava held the position of Vice
President, Human Resources, Walt Disney Consumer Products, Burbank,
California.
Thomas E. Clarke, President and Chief Operating Officer--Dr. Clarke, 48, a
director since 1994, joined NIKE in 1980. Dr. Clarke has held various
positions with NIKE, primarily in research, design, development and marketing.
He was appointed divisional vice president in charge of marketing in 1987. He
was elected Vice President in 1989 and appointed General Manager in 1990. Dr.
Clarke holds a Doctorate degree in biomechanics.
Martin P. Coles, Vice President and General Manager of Europe Region--Mr.
Coles, 44, has been employed by NIKE since October 1992. Mr. Coles joined NIKE
as Director of Logistics/Customer Service Europe. He was appointed Vice
President and General Manager of Western Europe in February 1994, and elected
Corporate Vice President Europe Region in May 1997. Prior to joining NIKE, he
was Vice President, Operations, Pepsi-Cola Central in Chicago.
Gary M. DeStefano, Vice President and General Manager of Asia Pacific--Mr.
DeStefano, 42, has been employed by NIKE since 1982, with primary
responsibilities in sales and customer service. Mr. DeStefano was appointed
Director of Domestic Sales in 1990, divisional Vice President in charge of
domestic sales in 1992, Vice President of Global Sales in 1996, and Vice
President and General Manager of Asia Pacific in March 1997.
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Robert E. Harold, Interim Chief Financial Officer--Mr. Harold, 52, joined
NIKE as Controller, Footwear Division in 1984. He was appointed Controller,
Footwear and Apparel in 1989 and Global Brand Controller in 1996. Mr. Harold
became Interim Chief Financial Officer in January 1998. Prior to joining NIKE,
he was a Senior Manager with Price Waterhouse, and Vice President of Finance
for Northwest Marine Iron Works in Portland, Oregon. Mr. Harold is a certified
public accountant.
Timothy J. Joyce, Vice President, Global Sales--Mr. Joyce, 43, has been
employed by NIKE since 1980, with primary responsibilities in Sales. He was
appointed Regional Sales Manager in 1987, Director of USA Footwear Sales in
1990 and Director of European Sales in 1994. Mr. Joyce was appointed
Divisional Vice President in charge of Global Sales in 1997.
Andrew P. Mooney, Vice President Global Apparel--Mr. Mooney, 44, has been
employed by NIKE since 1979. He began as Financial Controller for NIKE in
Great Britain, relocating to the United States in 1984 to join the U.S.
marketing team. Since 1992, he has served as Vice President of Brand
Marketing, Equipment, and Global Brand Management. In 1999, he was elected
Vice President of Global Apparel.
Mark G. Parker, Vice President and General Manager, Consumer Product
Marketing--Mr. Parker, 42, has been employed by NIKE since 1979 with primary
responsibilities in product research, design and development. Mr. Parker was
appointed divisional Vice President in charge of development in 1987, elected
Vice President in 1989, appointed General Manager in 1993, and Vice President
of Global Footwear in 1998.
Lindsay D. Stewart, Vice President Legal and Corporate Affairs and
Assistant Secretary--Mr. Stewart, 52, joined NIKE as Assistant Corporate
Counsel in 1981. Mr. Stewart became Corporate Counsel in 1983. He was elected
Vice President and General Counsel in 1991. Prior to joining NIKE, Mr. Stewart
was in private practice and an attorney for Georgia-Pacific Corporation.
Ian T. Todd, Vice President, Global Sports Marketing--Mr. Todd, 52, joined
NIKE in June 1998. He was formerly Senior Vice President and Managing Director
of IMG Europe, Africa and the Middle East.
Kevin G. Wulff, Vice President and General Manager, USA Region--Mr. Wulff,
48, has been employed by NIKE since 1993. He has served as General Manager of
NIKE International, General Manager of Canada, Vice President and General
Manager of The Americas Region, and in 1998 was elected Vice President and
General Manager of the USA Region. Prior to joining NIKE, Mr. Wulff was
employed as an executive with Miller Brewing Company and was President and
General Manager of Miller Brands of the East Bay.
8
<PAGE>
Item 2. Properties
Following is a summary of principal properties owned or leased by NIKE. Our
leases expire at various dates through the year 2017.
<TABLE>
<S> <C>
U.S. Administrative Offices: Wilsonville, Oregon
Beaverton, Oregon (18 Memphis, Tennessee (2 locations)--1 leased
locations)--17 leased Irvine, California--leased
Wilsonville, Oregon Canada (2 locations)--leased
Memphis, Tennessee (2 Latin America (3 locations)--leased
locations)--1 leased Europe (3 locations)--2 leased
Yarmouth, Maine Asia Pacific (10 locations)--leased
Charlotte, North Carolina--leased
Irvine, California--leased International Production Offices:
International Administrative Asia Pacific (12 locations)--leased
Offices: Latin America (3 locations)--leased
Canada (5 locations)--leased Europe (1 location)--leased
Europe (16 locations)--leased
Asia Pacific (15 locations)-- Manufacturing Facilities:
leased United States (9 locations)--leased
Latin America (7 locations)-- Canada (3 locations)--2 leased
leased Europe (3 locations)
Africa (2 locations)--leased Asia Pacific (1 location)--leased
Sales Offices and Showrooms: Retail Outlets:
United States (21 locations)-- United States (123 locations)--120 leased
leased Canada (6 locations)--leased
Canada (4 locations)--leased Europe (27 locations)--leased
Europe (21 locations)--leased Asia Pacific (17 locations)--leased
Asia Pacific (14 locations)-- Latin America (2 locations)--leased
leased
Latin America (7 locations)--
leased
Africa (2 locations)--leased
Distribution Facilities:
Greenland, New Hampshire--leased
</TABLE>
Item 3. Legal Proceedings
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to our business, to which we are a party or of
which any of our property is the subject.
Item 4. Submission Of Matters To A Vote Of Security Holders
No matter was submitted during the fourth quarter of the 1999 fiscal year
to a vote of security holders, through the solicitation of proxies or
otherwise.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
NIKE's Class B Common Stock is listed on the New York Stock Exchange and
the Pacific Stock Exchange and trades under the symbol NKE. At July 23, 1999,
there were 16,822 holders of record of our Class B Common Stock and 31 holders
of record of our Class A Common Stock. These figures do not include beneficial
owners who hold shares in nominee name. The Class A Common Stock is not
publicly traded but each share is convertible upon request of the holder into
one share of Class B Common Stock.
We refer to the table entitled "Selected Quarterly Financial Data" in Item
6, which lists, for the periods indicated, the range of high and low closing
sales prices on the New York Stock Exchange, as adjusted to reflect the 2-for-
1 stock split that became effective in October of 1990, the 2-for-1 stock
split that became effective in October of 1995 and the 2-for-1 stock split
that became effective in October 1996. That table also describes the amount
and frequency of all cash dividends declared on our common stock for the 1998
and 1999 fiscal years.
9
<PAGE>
Item 6. Selected Financial Data
FINANCIAL HISTORY
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
--------- --------- --------- --------- -------- -------- -------- -------- -------- -------- --------
(in millions, except per share data and financial ratios)
Year Ended May
31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues......... $ 8,776.9 $ 9,553.1 $ 9,186.5 $ 6,470.6 $4,760.8 $3,789.7 $3,931.0 $3,405.2 $3,003.6 $2,235.2 $1,710.8
Gross margin..... 3,283.4 3,487.6 3,683.5 2,563.9 1,895.6 1,488.2 1,544.0 1,316.1 1,153.1 851.1 636.0
Gross margin %... 37.4% 36.5% 40.1% 39.6% 39.8% 39.3% 39.3% 38.7% 38.4% 38.1% 37.2%
Restructuring
charge, net..... 45.1 129.9 -- -- -- -- -- -- -- -- --
Net income....... 451.4 399.6 795.8 553.2 399.7 298.8 365.0 329.2 287.0 243.0 167.0
Basic earnings
per common
share........... 1.59 1.38 2.76 1.93 1.38 1.00 1.20 1.09 0.96 0.81 0.56
Diluted earnings
per common
share........... 1.57 1.35 2.68 1.88 1.36 0.99 1.18 1.07 0.94 0.80 0.56
Average common
shares
outstanding..... 283.3 288.7 288.4 286.6 289.6 298.6 302.9 301.7 300.4 299.1 297.7
Diluted average
common shares
outstanding..... 288.3 295.0 297.0 293.6 294.0 301.8 308.3 306.4 304.3 302.7 300.6
Cash dividends
declared per
common share.... 0.48 0.46 0.38 0.29 0.24 0.20 0.19 0.15 0.13 0.10 0.07
Cash flow from
operations...... 961.0 517.5 323.1 339.7 254.9 576.5 265.3 435.8 11.1 127.1 169.4
Price range of
common stock
High............ 65.500 64.125 76.375 52.063 20.156 18.688 22.563 19.344 13.625 10.375 4.969
Low............. 31.750 37.750 47.875 19.531 14.063 10.781 13.750 8.781 6.500 4.750 2.891
At May 31,
Cash and
equivalents..... $ 198.1 $ 108.6 $ 445.4 $ 262.1 $ 216.1 $ 518.8 $ 291.3 $ 260.1 $ 119.8 $ 90.4 $ 85.7
Inventories...... 1,199.3 1,396.6 1,338.6 931.2 629.7 470.0 593.0 471.2 586.6 309.5 222.9
Working capital.. 1,818.0 1,828.8 1,964.0 1,259.9 938.4 1,208.4 1,165.2 964.3 662.6 561.6 419.6
Total assets..... 5,247.7 5,397.4 5,361.2 3,951.6 3,142.7 2,373.8 2,186.3 1,871.7 1,707.2 1,093.4 824.2
Long-term debt... 386.1 379.4 296.0 9.6 10.6 12.4 15.0 69.5 30.0 25.9 34.1
Redeemable
Preferred
Stock........... 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3
Shareholders'
equity.......... 3,334.6 3,261.6 3,155.9 2,431.4 1,964.7 1,740.9 1,642.8 1,328.5 1,029.6 781.0 558.6
Year-end stock
price........... 60.938 46.000 57.500 50.188 19.719 14.750 18.125 14.500 9.938 9.813 4.750
Market
capitalization.. 17,202.2 13,201.1 16,633.0 14,416.8 5,635.2 4,318.8 5,499.3 4,379.6 2,993.0 2,942.7 1,417.4
Financial Ratios:
Return on
equity.......... 13.7% 12.5% 28.5% 25.2% 21.6% 17.7% 24.5% 27.9% 31.7% 36.3% 34.5%
Return on
assets.......... 8.5% 7.4% 17.1% 15.6% 14.5% 13.1% 18.0% 18.4% 20.5% 25.3% 21.8%
Inventory turns.. 4.2 4.4 4.8 5.0 5.2 4.3 4.5 3.9 4.1 5.2 5.1
Current ratio at
May 31.......... 2.3 2.1 2.1 1.9 1.8 3.2 3.6 3.3 2.1 3.1 2.9
Price/Earnings
ratio at May 31
(Diluted)....... 38.8 34.1 21.5 26.6 14.5 14.9 15.3 13.5 10.5 12.2 8.6
Geographic
Revenues:
United States.... $ 5,042.6 $ 5,460.0 $ 5,538.2 $ 3,964.7 $2,997.9 $2,432.7 $2,528.8 $2,270.9 $2,141.5 $1,755.5 $1,362.2
Europe........... 2,255.8 2,096.1 1,789.8 1,334.3 980.4 927.3 1,085.7 919.8 664.7 334.3 241.4
Asia/Pacific..... 844.5 1,253.9 1,241.9 735.1 515.6 283.4 178.2 75.7 56.2 29.3 32.0
Americas
(exclusive of
United States).. 634.0 743.1 616.6 436.5 266.9 146.3 138.3 138.8 141.2 116.1 75.2
--------- --------- --------- --------- -------- -------- -------- -------- -------- -------- --------
Total Revenues... $ 8,776.9 $ 9,553.1 $ 9,186.5 $ 6,470.6 $4,760.8 $3,789.7 $3,931.0 $3,405.2 $3,003.6 $2,235.2 $1,710.8
========= ========= ========= ========= ======== ======== ======== ======== ======== ======== ========
</TABLE>
All per common share data has been adjusted to reflect the 2-for-1 stock
splits paid October 23, 1996, October 30, 1995 and October 5, 1990. The
Company's Class B Common Stock is listed on the New York and Pacific Exchanges
and trades under the symbol NKE. At May 31, 1999, there were approximately
170,000 shareholders.
10
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(in millions, except per share data)
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------------ ------------------ ------------------ ------------------
1999 1998 1999 1998 1999 1998 1999 1998
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $2,504.8 $2,766.1 $1,913.0 $2,255.3 $2,176.8 $2,224.0 $2,182.3 $2,307.7
Gross margin............ 942.2 1,100.6 683.4 845.8 811.9 795.1 845.9 746.1
Gross margin %.......... 37.6% 39.8% 35.7% 37.5% 37.3% 35.8% 38.8% 32.3%
Restructuring charge.... -- -- 20.9 -- 0.8 -- 23.4 129.9
Net income.............. 163.8 253.1 68.9 141.1 124.2 73.1 94.5 (67.7)
Basic earnings per
common share........... 0.57 0.87 0.24 0.49 0.44 0.25 0.33 (0.23)
Diluted earnings per
common share........... 0.56 0.85 0.24 0.48 0.44 0.25 0.33 (0.23)
Average common shares
outstanding............ 286.7 289.9 283.0 290.3 281.3 287.6 282.1 287.1
Diluted average common
shares outstanding..... 292.0 297.5 287.7 296.7 286.1 293.2 287.3 292.6
Cash dividends declared
per common share....... 0.12 0.10 0.12 0.12 0.12 0.12 0.12 0.12
Price range of common
stock
High................... 52.250 64.125 46.000 56.500 54.063 50.063 65.500 48.750
Low.................... 34.688 52.688 31.750 45.000 35.938 37.750 50.750 42.750
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Highlights
. In fiscal year 1999, net income increased 13% to $451.4 million, or
$1.57 per diluted share. Net income included a net pre-tax restructuring
charge of $45.1 million, $27.3 million after taxes, or $0.10 per diluted
share.
. Excluding fiscal years 1999 and 1998 restructuring charges, fiscal 1999
net income remained constant with the prior year.
. Fiscal year 1999 revenues declined for the first time in five years,
dropping 8% to $8.78 billion.
. Gross margins as percentage of revenues improved to 37.4%, compared to
36.5% in the prior year.
. Selling and administrative expenses dropped by nearly $200 million or
7.5%, and were 27.6% of revenues compared with 27.5% in the prior year.
11
<PAGE>
Results of Operations
Fiscal 1999 Compared to Fiscal 1998
Despite an overall revenue decline, net income increased 13% over the prior
year. An improved gross margin percentage, reduced selling and administrative
expenses, along with a lower net restructuring charge in fiscal 1999 compared
to the prior year, primarily drove this increase. Excluding both the 1999 and
1998 restructuring charges, our net income was relatively flat year on year.
Continued cost control activities and the effect of improved inventory levels
on our margins were key factors that offset the effects of reduced revenues.
Revenues decreased for the first time in five years. In the United States,
revenues declined by 8%, Asia Pacific's revenues reduced by over a third
compared to last year, while Europe revenues increased 8%. We put a
considerable amount of effort into improving product buying patterns and, as a
result, the composition and levels of inventory resulted in improved gross
margins relative to a year ago. The activities associated with the fiscal 1998
restructuring charge helped to reduce selling and administrative expenses in
fiscal 1999 by nearly $200 million. We continue to evaluate our cost structure
in light of existing and planned revenue levels. In fiscal 1999, we took
specific action to improve operating efficiencies and reduce costs. Some of
these actions resulted in a restructuring charge in fiscal year 1999 (see
below and Note 13 for a more complete analysis of this charge).
Total NIKE brand revenues decreased 8% compared to fiscal 1998. Had this
decrease been measured in dollars constant with that of the prior year, the
net decrease would not have been materially different. The U.S., which
represents our largest market segment, experienced the largest dollar
reduction, decreasing $415.7 million, or 8%. Sales of U.S. footwear decreased
7.3%, representing a decrease in pairs sold of 6.3% and a decrease in average
selling price of 2.6%. The reduction in sales was primarily attributable to
the continued soft retail environment as retailers adjusted their buying
patterns to avoid inventory build-ups. Revenues from nearly all customer
accounts and distribution channels were down. However, certain product
categories improved over the prior year. Running, which is the largest U.S.
footwear category, increased 3%, and Brand Jordan improved by 23%. Basketball
and Training (which together with Running and Brand Jordan comprise over 56%
of the total U.S. footwear business) decreased 30% and 26%, respectively.
Apparel revenues in the U.S. decreased 11%. Three of the top five apparel
categories experienced revenue decreases, including: Branded Athletic (down
20%); Accessories (down 30%); and Special Make-Up product (down 12%). Tee
shirt revenues increased 5%, while Kids remained flat with last year.
Non-U.S. NIKE brand revenues decreased $341.6 million, or 8.7%, an 8.0%
decrease had the dollar remained constant with that of the prior year. Sales
outside the USA now represent 43% of total NIKE brand revenues. Revenues in
Europe increased 8% (6% in constant dollars), driven by a 26% increase in
Apparel. Apparel sales in Europe surpassed the $1 billion mark for the first
time. During the last four years, Europe has experienced a 23% compounded
annual revenue growth rate. Asia Pacific declined 33% in total revenues (29%
in constant dollars), due to the continued weak market conditions in that
region. However, as discussed further below, increasing futures orders in that
region, compared with the previous year, would indicate an improvement in this
trend. The Americas region, including the start up operations of the Africa
region, decreased 15%, (10% in constant dollars). The countries outside the
U.S. that represent the largest percentage of our total international
businesses are: the United Kingdom, which increased 4% in real and constant
dollars; Japan, which decreased 37% in real and constant dollars; France,
which increased 16% (14% in constant dollars); Italy, which increased 13% (11%
in constant dollars); Spain, which increased 8% (6% in constant dollars);
Canada, which decreased 22%, (16% in constant dollars); and Germany, which
increased 7% (4% in constant dollars).
The decrease in other brands is predominately due to reduced sales of in-
line skating and roller hockey categories at Bauer NIKE Hockey. Other brands
include Cole Haan, Bauer NIKE Hockey Inc. (formerly Bauer Inc.), Sports
Specialties Corp. (NIKE Team Sports Inc. effective June 1, 1999), and NIKE
IHM, Inc. (formerly Tetra Plastics, Inc.). We currently expect that revenues
in fiscal year 2000 will be up slightly compared to fiscal 1999. Futures
orders (see further discussion below) is one indication of revenue trends over
the next two quarters. Footwear futures orders are trending up in every
region, and are positive in every region except the Americas. Apparel futures
orders are mixed. In the U.S., apparel futures have trended down for seven
straight quarters. In Europe apparel futures orders are strong, and they are
significantly improved in Asia Pacific.
12
<PAGE>
The breakdown of revenues follows:
<TABLE>
<CAPTION>
May 31, 1999 % CHG 1998 % CHG 1997
------- -------- ----- -------- ------ --------
(in millions)
<S> <C> <C> <C> <C> <C>
USA Region
Footwear........................ $3,244.6 (7.3)% $3,498.7 (6.8)% $3,753.6
Apparel......................... 1,385.3 (11.0)% 1,556.3 10.6% 1,406.6
Equipment and other............. 93.8 11.1% 84.4 103.9% 41.4
-------- ----- -------- ------ --------
Total USA...................... 4,723.7 (8.1)% 5,139.4 (1.2)% 5,201.6
-------- ----- -------- ------ --------
Europe Region
Footwear........................ 1,182.7 (6.6)% 1,266.6 5.8% 1,197.1
Apparel......................... 1,005.1 26.3% 795.9 34.4% 592.0
Equipment and other............. 68.0 102.4% 33.6 4700.0% 0.7
-------- ----- -------- ------ --------
Total Europe................... 2,255.8 7.6% 2,096.1 17.1% 1,789.8
-------- ----- -------- ------ --------
Asia Pacific Region
Footwear........................ 455.3 (42.4)% 790.7 (8.0)% 859.0
Apparel......................... 366.0 (19.3)% 453.4 18.4% 382.8
Equipment and other............. 23.2 136.7% 9.8 9700.0% 0.1
-------- ----- -------- ------ --------
Total Asia Pacific............. 844.5 (32.7)% 1,253.9 1.0% 1,241.9
-------- ----- -------- ------ --------
Americas Region
Footwear........................ 335.8 (16.7)% 403.0 20.3% 334.9
Apparel......................... 158.4 (14.9)% 186.2 66.0% 112.2
Equipment and other............. 12.9 31.6% 9.8 366.7% 2.1
-------- ----- -------- ------ --------
Total Americas................. 507.1 (15.3)% 599.0 33.3% 449.2
-------- ----- -------- ------ --------
Total NIKE brand................. 8,331.1 (8.3)% 9,088.4 4.7% 8,682.5
-------- ----- -------- ------ --------
Other brands..................... 445.8 (4.1)% 464.7 (7.8)% 504.0
-------- ----- -------- ------ --------
Total Revenues................... $8,776.9 (8.1)% $9,553.1 4.0% $9,186.5
======== ===== ======== ====== ========
</TABLE>
Gross margins increased to 37.4% of revenues in fiscal 1999, up 90 basis
points from the previous year. The increase over the prior year can be
attributed to reduced levels of closeout product sales. In addition, we are
selling a much greater percentage of our closeout product through our own
factory outlets, which has resulted in improved gross margins on close-out
sales and lower reserves against our overall inventory. While sales of in-line
product decreased 7%, our closeout sales decreased by 14%. As a result,
despite the decline in our in-line business in fiscal 1999, in-line sales
increased to 92.2% of our overall business, an increase of 60 basis points
over the prior year. Reducing our inventory levels was a key initiative for
NIKE in fiscal year 1999. Our finished goods inventory decreased in all
regions, most notably in Asia Pacific, which decreased 31%, Europe, which
decreased 26%, and the U.S., which decreased 4%. Aggressive selling of U.S.
apparel closeout inventories, and the effects of the foreign exchange rates on
non-U.S. sales, predominately in Europe, negatively affected gross margins.
Gross margins as a percentage of revenues should improve slightly in fiscal
2000, primarily due to a much improved inventory position going into the year
compared with the same period last year.
Selling and administrative expenses decreased nearly $200 million compared
to fiscal year 1998, and totaled 27.6% of revenues, up slightly from 27.5% in
the prior year. Key drivers of this reduction were the actions taken in fiscal
year 1998 to reduce our overall cost structure, which resulted in a
restructuring charge in quarter four of fiscal year 1998. Although total NIKE
brand salaries and wages increased 2% over the prior year, wholesale business
salaries and wages decreased 7%, driven by the headcount reductions which
occurred as part of the restructuring activities. Offsetting this were
increases in salaries and wages of Retail operations, given the addition of 44
NIKE factory stores and 5 NIKETOWNs over the last two years. Other significant
reductions to
13
<PAGE>
selling and administrative expenses were advertising costs, which were down
19%, and sports marketing expenses, which were down 4%. As a percentage of
revenues, selling and administrative costs in fiscal 2000 should be consistent
with that of fiscal 1999. Although we have taken action to further align our
costs with expected revenue levels (see fiscal 1999 Restructuring Charge
below), expenses in fiscal year 2000 will be affected by investments in a new
company-wide system development project, planned start up activities around
new NIKE Retail stores, increased spending for demand creation, and the
transition into expanded headquarters in Oregon.
The reduction in interest expense of $15.9 million (or 26.5%) compared to
last year is due primarily to lower levels of short term borrowings given
decreased working capital throughout the year. See further discussion under
Liquidity and Capital Resources below.
Other income/expense was a net expense of $21.5 million in fiscal 1999.
Included in this amount is a credit of $15.0 million related to the change in
accounting for substantially all inventories in the U.S. from the last-in,
first-out (LIFO) method to the first-in, first-out (FIFO) method. The change
was effected in the fourth quarter of fiscal 1999 and was not considered
significant to show the cumulative effect or to restate comparable income
statements as dictated by Accounting Principles Board Opinion No. 20. This
change was predicated on the fact that the LIFO method no longer matches the
realities of how we do business. Exclusive of this credit, other
income/expense was a net expense of $36.5 million, an increase over the prior
year of $20.9 million. The increase is primarily attributable to the losses
incurred on the disposal of assets of $14.3 million, most significantly
related to production and planning software development costs that were
abandoned. The majority of the remainder of other income/expense is comprised
of interest income, profit sharing expense, foreign exchange conversion gains
and losses, and the amortization of goodwill, which remained relatively
consistent with prior year amounts.
Worldwide futures and advance orders for NIKE brand athletic footwear and
apparel scheduled for delivery from June through November 1999 totaled $4.2
billion, 4% higher than such orders booked in the comparable period of fiscal
1999. The orders and percentage growth in these orders is not necessarily
indicative of our expectation of revenue growth in subsequent periods. This is
because the mix of orders can shift between advance/futures and at-once
orders. In addition, exchange rate fluctuations as well as differing levels of
order cancellations can cause differences in the comparisons between futures
orders and actual revenues.
Fiscal 1998 Compared to Fiscal 1997
Decreasing revenue growth, a lower gross margin percentage and higher
selling and administrative expenses, as well as a fourth quarter restructuring
charge, all contributed to fiscal 1998's decrease in net income compared to
the prior year. The Asian economic crisis and declining revenues in the United
States were the primary reasons for the lower earnings. Consumer spending
declined considerably in Asia during fiscal 1998 as a result of macroeconomic
issues facing that region. As a result, revenue growth in the Asia Pacific
region fell well short of our expectations, resulting in excess inventory
levels and increased levels of discounted product sales, both having a
negative impact on that region's gross margin percentage. Additionally,
spending did not adjust as quickly as the sudden decline in revenue growth,
resulting in significantly higher selling and administrative costs as a
percentage of revenues in that region.
Revenues increased 4% over fiscal 1997, and would have increased 7% had the
dollar remained constant with that of the prior year. Despite the economic
issues facing the Asian markets, total non-U.S. revenues increased 12%, 21% on
a constant dollar basis, and represented 43% of total NIKE revenues. Revenue
increases were experienced in every region except the U.S. The countries
outside the U.S. that represented the largest percent of our total
international business were: Japan, which increased 4% (13% in constant
dollars); the United Kingdom, which increased 11% (10% in constant dollars);
Canada which increased 32% (36% in constant dollars); France, which increased
15% (25% in constant dollars); Italy, which increased 35% in both real and
constant dollars; and Spain, which increased 40% (54% in constant dollars).
Notable countries that experienced revenue reductions were Korea which
decreased 29% (7% in constant dollars) and Germany, which decreased 6% (but
increased 7% in constant dollars).
14
<PAGE>
U.S. revenues decreased 1% compared to the prior year. U.S. footwear and
apparel revenues decreased 2% compared to the prior year. U.S. footwear,
representing NIKE's largest market segment, decreased over $255 million in
sales, or 7%, representing a decrease in pairs sold of 3%, and a decrease of
4% in average selling price. The reduction in sales was primarily attributable
to the glut of inventory at retail, which reduced customer order volumes and
increased order cancellation rates. The decrease in average selling price was
due to increased mix of lower priced product, given the higher volume of
close-out sales. U.S. apparel increased $150 million, or 11%, over the prior
year. Nearly all categories experienced revenue increases, the largest
individual categories being Training (up 10%), Accessories (up 6%), Kids (up
41%), Tee-shirts (up 5%) and Golf (up 57%).
Gross margins declined to 36.5% of revenues in fiscal 1998, down 360 basis
points from the previous year. Significant to this decline were the increased
levels of close-out sales at greatly reduced selling prices, and increased
levels of inventory reserves against higher close-out inventory levels,
particularly in the U.S. and Asia. The combination of these two factors
reduced annual margins by more than 200 basis points. Other reasons for the
reduced gross margin percentage were the strengthening of the U.S. dollar,
which can inhibit our ability to price products competitively in international
markets, fixed costs associated with distribution facilities, increasing
royalty costs associated with athlete endorsement contracts, and increased
levels of research and development costs.
Selling and administrative expenses increased $320.1 million over the prior
year, representing 27.5% of revenues compared to 25.1% in the prior year. The
most significant increases were in the wage base, which was up 14% overall,
led principally by the U.S. and Asia Pacific, endorsement contract-related
costs, which were up 47% primarily as a result of significant new contracts in
Soccer and Golf categories, along with enhanced arrangements with the NFL,
WNBA, and NBA, and rent and depreciation, which were up 54% and 33%,
respectively, relating principally to expanded Retail outlets and NIKEtown
stores, along with capital projects in the distribution and computer
infrastructure areas.
Interest expense increased $7.7 million, or 14.6%, compared to the prior
year. The increase was due to the addition of long-term debt of approximately
$100 million in June 1997, to fund capital projects, offset by lower levels of
short-term borrowings.
Other income/expense was a net expense of $20.9 million in fiscal year
1998, compared with $32.3 million in 1997. The majority of the decrease is
attributable to an $18.1 million restructuring charge incurred in 1997 with
corresponding amounts in 1998 included in the 1998 restructuring charge. Other
amounts include profit share expense, which decreased due to lower earnings,
interest income, which decreased compared with the prior year given the lower
average levels of cash on hand throughout the year, and foreign exchange
conversion gains and losses.
As further explained in Note 1 to the Consolidated Financial Statements,
prior to fiscal year 1997, certain of our non-U.S. operations reported their
results of operations on a one month lag which allowed more time to compile
results. Beginning in the first quarter of fiscal year 1997, the one month lag
was eliminated and the May 1996 charge from operations for these entities of
$4.1 million was recorded to retained earnings. This change did not have a
material effect on the annual results of operations.
Fiscal 1999 Restructuring Charge
During fiscal 1999, a $60.1 million restructuring charge was incurred as a
result of certain actions taken to better align our cost structure with
expected revenue growth rates. As a result of the plans detailed below, we
expect to remove approximately $36 million from our cost structure in future
years. Some of the savings will not be experienced for one to two years as
personnel transitions are scheduled to occur over time.
The charge (shown below in tabular format) was primarily for costs of
severing employees, including severance packages, lease abandonments and the
write down of assets no longer in use. Two major areas that were affected by
the reduction in force include our information technology functions, primarily
in the U.S., as we shifted to an outsource agreement for certain areas, and
European customer service and accounting, where we are in the process of
consolidating functions from individual countries to our European
headquarters. Outside of these
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two areas, employees were terminated from various other areas around the
Company, including our Asia Pacific region. The total number of employees
terminated was 1,291, with 630 having left NIKE as of May 31, 1999.
The second major component of the 1999 charge was a write-off of certain
equipment, hardware and software development costs at one of our U.S.
distribution centers due to a change in strategy around how we flow product
for a specific type of business.
There are no significant costs that have not been recognized with relation
to the above plans. Future cash outlays are anticipated to be completed by
early fiscal year 2001.
<TABLE>
<CAPTION>
FY99 Reserve
Restructuring Balance
Description Cash/Non-Cash Charge Activity at 5/31/99
----------- ------------- ------------- -------- ----------
(in millions)
<S> <C> <C> <C> <C>
Elimination of Job
Responsibilities
Company-Wide.............. $(39.9) $21.9 $(18.0)
Severance packages....... cash (28.0) 11.7 (16.3)
Lease cancellations &
commitments............. cash (2.4) 1.6 (0.8)
Write-down of assets..... non-cash (7.8) 7.8 --
Other.................... cash/non-cash (1.7) 0.8 (0.9)
Change in warehouse
distribution strategy..... (20.2) 20.2 --
Write-down of assets..... non-cash (20.2) 20.2 --
------ ----- ------
Effect of foreign currency
translation............... -- 0.1 0.1
------ ----- ------
Total...................... $(60.1) $42.2 $(17.9)
====== ===== ======
</TABLE>
Fiscal 1998 Restructuring Charge
During the fourth quarter of fiscal 1998, we recorded a restructuring
charge of $129.9 million as a result of certain of our actions to better align
our overall cost structure and organization with planned revenue levels. As a
result of the specific plans described below, we were able to remove
approximately $100 million from our cost structure in fiscal 1999 and beyond.
These savings were predominately due to reduced wage-related costs, reduced
carrying cost of property, plant and equipment, reduced rent charges
(associated with office and expatriate housing) and other miscellaneous
savings.
During fiscal 1999, it was determined that a total of $15 million of the
restructuring accrual was not required due to changes in estimates related to
severance payments of $4 million, a $3.6 million change in estimated vendor
software costs related to Japan's software development, lease commitments of
$3 million due to changes in sub-leasing arrangements, and other changes of $4
million. The $15 million is included as an offset in the restructuring charge
on the income statement. The restructuring activities (shown below in tabular
format) primarily related to the following:
The elimination of job responsibilities company-wide. Employees were
terminated from all regions and almost all areas of NIKE, including marketing,
sales and administrative areas. Related charges include severance packages,
both cash payments made directly to terminated employees as well as
outplacement services, lease cancellations and commitments, for both excess
office space and expatriate employee housing, and write-down of assets no
longer in use. Such assets, which include office equipment and expatriate
employee housing and furniture have been sold or abandoned as of May 31, 1999.
A total of 1,039 employees were terminated as part of the plan, of which 1,034
have been paid and have left NIKE as of May 31, 1999. The remaining five will
receive their severance packages and leave during the first quarter of fiscal
year 2000.
Downsizing of the Asia Pacific Headquarters in Hong Kong. We made the
decision to reduce the size of the Asia Pacific headquarters' operations and
to relocate the regional headquarter responsibilities to our worldwide
headquarters in the U.S. Included in the restructuring charge are costs
associated with the termination of employees, lease cancellations and
commitments and the write-down of assets no longer in use. Such assets
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<PAGE>
have been sold or abandoned as of May 31, 1999. A total of 118 employees were
terminated as part of the plan. All of them have left and been paid their
severance as of May 31, 1999.
Downsizing of the Japan distribution center. We are in the process of
constructing a new distribution center in Japan. Due to the economic downturn
in the Asia Pacific region and the impact on our business in Japan, the
forecasted volume of inventories and product flow decreased significantly from
the original plans. Because of this, we redesigned the distribution center to
efficiently accommodate new forecasted volumes of inventories and product
flow. The remaining amount of the accrual is a payment due to the software
vendor involved and payment is expected to be made during the first quarter of
fiscal year 2000.
Cancellation of endorsement contracts. As a result of the downturn in our
business, we have refocused our marketing along core product categories. We
went through a process of reviewing all endorsement contracts in non-core
product categories and the charge included the final settlements for those
contracts where termination agreements with endorsees were reached, releasing
the endorsees from all contractual obligations. The final outstanding payment
is expected to be made in the first quarter of fiscal year 2000.
Exiting certain manufacturing operations at Bauer NIKE Hockey
subsidiary. The charge related to the decision to exit certain manufacturing
operations at Bauer NIKE Hockey and consisted of machinery and equipment that
has been sold or abandoned as of May 31, 1999, as well as the disposal of two
operating plants. The two operating plants have been disposed of as of May 31,
1999. As a result of the reduced level of manufacturing operations, 51
employees were terminated, all of which have left as of May 31, 1999, however
some severance payments have yet to be made and are expected to be paid in the
first quarter of fiscal year 2000.
<TABLE>
<CAPTION>
FY98 Reserve
Restructuring Balance
Description Cash/Non-Cash Charge Activity at 5/31/99
- ----------- ------------- ------------- -------- ----------
(in millions)
<S> <C> <C> <C> <C>
Elimination of Job
Responsibilities Company-
Wide......................... $ (49.8) $ 46.5 $(3.3)
Severance packages.......... cash (29.1) 28.2 (0.9)
Lease cancellations &
commitments................ cash (10.8) 8.4 (2.4)
Write-down of assets........ non-cash (9.6) 9.6 --
Other....................... cash (0.3) 0.3 --
------- ------ -----
Downsizing the Asia Pacific
Headquarters In Hong Kong.... (13.1) 13.0 (0.1)
Severance packages.......... cash (4.6) 4.6 --
Lease cancellations &
commitments................ cash (5.5) 5.4 (0.1)
Write-down of assets........ non-cash (3.0) 3.0 --
------- ------ -----
Downsizing the Japan
Distribution Center.......... (31.6) 30.5 (1.1)
Write-off of assets......... non-cash (12.5) 12.5 --
Software development costs.. cash/non-cash (19.1) 18.0 (1.1)
------- ------ -----
Cancellation of Endorsement
Contracts.................... cash (5.6) 5.3 (0.3)
------- ------ -----
Exiting Certain Manufacturing
Operations at Bauer NIKE
Hockey....................... (22.7) 21.7 (1.0)
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) 0.9 (0.7)
Severance packages.......... cash (1.2) 0.9 (0.3)
------- ------ -----
Other......................... (7.1) 6.4 (0.7)
Cash........................ cash (0.6) 0.6 --
Non-cash.................... non-cash (6.5) 5.8 (0.7)
------- ------ -----
Effect of foreign currency
translation.................. -- 0.2 0.2
------- ------ -----
Total......................... $(129.9) $123.6 $(6.3)
======= ====== =====
</TABLE>
17
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Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of the European
Union established permanent, fixed conversion rates between their existing
currencies and the European Union's new common currency, the euro. During the
transition period ending December 31, 2001, public and private parties may pay
for goods and services using either the euro or the participating country's
legacy currency. Beginning January 1, 2002, euro denominated bills and coins
will be issued, with the legacy currencies being completely withdrawn from
circulation on June 30, 2002.
We have had a dedicated project team working on euro strategy since January
1998. We are in the process of making modifications to information technology
systems including marketing, order management, purchasing, invoicing, payroll,
and cash management. Many of our systems are already euro compliant. Our plan
is to have most systems converted to euro compliance by the end of calendar
year 2000, well ahead of the end of the transitional period.
We believe the introduction of the euro may create a move towards a greater
level of price harmonization although differing country costs and value added
tax rates will continue to result in price differences at a retail level. We
have a process in place to analyze price trends among countries. Currency
exchange and hedging costs will typically be reduced, due to the introduction
of the euro.
The costs of implementing the euro are generally related to modification of
existing systems, and are estimated to be approximately $14 million. These
costs will be expensed as incurred. NIKE believes that the conversion to the
euro will not be material to our financial condition or results of operations.
Year 2000
The Year 2000 issue (the "Year 2000" or "Y2K" 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 or some
other year, rather than the year 2000. This could result in system failures or
miscalculations leading to disruptions in NIKE's activities and operations. If
we, our 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 our financial condition,
results of operations or liquidity.
State of Readiness
Project Categories. In May 1997, NIKE established a corporate-wide project
team to oversee, monitor and coordinate the Company-wide Year 2000 effort. Our
Year 2000 project focuses on three areas: (1) information technology (IT)
systems, such as application software, mainframes, PCs, networks and
production control systems; (2) non-IT systems, such as equipment, machinery,
climate control and security systems, which may contain microcontrollers with
embedded technology; and (3) suppliers and customers.
NIKE uses a four-phase approach to fix or replace non-compliant IT systems:
(1) inventory, assessment of risks and impact and prioritization of
projects:
Tier 1--critical (vital to business operations)
Tier 2--high priority (important to business operations)
Tier 3--moderate priority (minor disruption to operations expected if
non-Compliant)
Tier 4--low priority (will not disrupt operations even if non-
compliant);
(2) remediation (fix, replace or develop contingency plans for non-
compliant systems);
(3) testing (validation) and implementation; and
(4) completion and auditing results where appropriate.
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<PAGE>
When appropriate, we have engaged the services of independent consultants
to analyze and develop testing standards, quality assurance and contingency
plans. We use our internal auditing department to review Year 2000 compliance
and have consulted with external independent consultants to evaluate and
review those results.
IT Projects. By early 1999, we had identified 148 major internal IT
remediation projects worldwide. We have completed our assessment and
prioritization of all of our IT projects. Of the 148 projects, we have
completed and tested 125 as Year 2000 compliant as of May 31, 1999. Of the
remaining 23 projects, we have classified four as Tier 1, 11 as Tier 2, and
eight as Tier 3. We expect that all Tier 3 projects will be completed as Year
2000 compliant by July 31, 1999, all Tier 1 by August 31, 1999, and all Tier 2
by October 31, 1999. NIKE plans to continue integrated testing through the end
of the year. In addition, we will halt (or "freeze") new installations and
upgrades of all operational systems beginning on October 1, 1999 and
continuing through January 2000 or until we determine the risk for system
failure has passed.
Non-IT Projects. By early 1999, we had identified 27 major internal non-IT
remediation projects worldwide. We have completed our assessment and
prioritization of all of our major non-IT systems. We have designated all 27
of these projects as high priority. These include facilities that are critical
to NIKE's business operations, potentially including equipment, machinery,
climate control and security systems at regional headquarters, key
distribution centers, and in countries with significant sales. We are
currently remediating these priority non-IT projects and expect to complete
them all as Year 2000 compliant by August 31, 1999. All other non-IT projects
are classified as non-priority non-IT projects, which include climate control,
security and mechanical systems in all other facilities. To the extent that
these non-priority, non-IT projects may not be completed by December 31, 1999,
we do not expect that any non-compliance or failure of these systems,
individually or in the aggregate, will have a material adverse effect on
NIKE's manufacturing, distribution, inventory control or the management and
collection of our accounts receivable. For this reason, we have not set a
completion date for remediation of the remaining non-priority non-IT systems.
Suppliers and Customers. We have focused our Year 2000 compliance efforts
on our significant suppliers and customers-those that are material to our
business-and are assessing the Year 2000 readiness of these significant
suppliers and customers. We have assessed the Year 2000 readiness of 469 of
our suppliers, 163 of which we consider to be significant suppliers. We have
also assessed the Year 2000 readiness of 151 customers, 59 of which we
consider to be significant customers. We have relationships with significant
suppliers and customers in most of the locations in which we operate. The
level of preparedness of our significant suppliers and customers varies
greatly from operation to operation and country to country. 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, our suppliers rely on countless other suppliers, over
which we may have little or no influence regarding Year 2000 compliance.
We have sent surveys to all of our significant suppliers and customers to
determine the extent to which we may be affected by those third parties' Y2K
preparedness plans. A substantial majority of our significant suppliers and
customers have not responded to our surveys, have not provided assurance of
their Year 2000 readiness, or have not responded with sufficient detail for us
to determine their Year 2000 readiness. In the absence of adequate responses,
we are making independent assessments of our significant suppliers and
customers and the countries in which they operate. These assessments include
direct contact and discussions with persons coordinating Y2K compliance
efforts for our significant suppliers and customers. We also research
regulatory filings and other public information available to NIKE provided by
our significant suppliers and customers and, in general, countries in which
they operate. We have identified as higher risk many of the countries that
have been widely identified by government agencies and public reports as being
significantly behind in their Y2K status.
Contingency Plans. Having completed our identification and assessment of
major projects, our "worst-case scenario" would be a failure of multiple
significant suppliers to supply merchandise or services for a prolonged period
of time that would materially impair our ability to ship product in a timely
and reliable manner
19
<PAGE>
to our customers. Although the occurrence of this scenario could have a
material adverse effect on NIKE, we do not have a basis to determine at this
time whether such a scenario is reasonably likely to occur. We believe that
suppliers and customers present the area of greatest risk to disruption of our
operations because of our limited ability to influence actions of third
parties or to estimate the level and impact of their noncompliance throughout
the extended supply chain.
We are currently developing contingency plans for our significant suppliers
and customers, which we expect to finalize by September 30, 1999. In addition,
we are developing contingency plans that assume some estimated level of non-
compliance by, or business disruption to, certain other suppliers and
customers on a case-by-case basis. We will continue to develop on an as-needed
basis throughout 1999. We are also developing contingency plans for our Tier 1
IT systems, which we expect to finalize by August 31, 1999.
The contingency plans for our suppliers and customers include, where
appropriate, (1) booking orders and manufacturing and shipping products before
anticipated business disruptions, (2) shifting production capacity from
facilities that NIKE determines to be at high risk of noncompliance or
business disruption, (3) consolidating finance vendors, and (4) temporarily
discontinuing business with suppliers determined to be high risk of
noncompliance or business disruption and finding alternative suppliers.
The contingency plans for our Tier 1 IT systems include, where appropriate,
(1) manual work processes, (2) storing additional sets of backup data before
critical process dates, (3) off-site system recovery, and (4) temporarily
shifting production software from one hardware system to another. In addition,
personnel we deem essential to system operation and recovery are scheduled to
be available during high-risk periods.
We continually update our assessments and revise our contingency plans for
our significant suppliers and customers as we receive additional information
from them concerning their Y2K preparedness. However, judgments regarding
contingency plans-such as how to develop them and to what extent-are subject
to many variables and uncertainties. There can be no assurance that NIKE will
correctly anticipate the level, impact or duration of noncompliance by its
suppliers and customers. As a result, there is no certainty that our
contingency plans will be sufficient to mitigate the impact of noncompliance
by suppliers and customers and some material adverse effect to NIKE may result
from one or more third parties regardless of our contingency plans. The
failure of any contingency plans could have a material adverse effect on
NIKE's financial condition, results of operations or liquidity.
Cost. Costs associated with our 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. As of
May 31, 1999, NIKE estimates that total costs related to the Year 2000 issue
will be approximately $110 to $120 million, of which approximately $91 million
have been incurred. Of the $91 million, approximately $34 million are external
expenses, $15 million internal costs and $42 million replacement projects.
Approximately $10 million of the non-replacement expenses will be capitalized;
the remainder has been expensed as incurred. NIKE funds Year 2000 costs
through operating cash flows. We presently believe that the total cost of
achieving Year 2000 compliant systems will not be material to our 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
Year 2000 readiness of our 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 with our
suppliers and customers (and their suppliers and customers).
The above section, even if incorporated by reference into other documents
or disclosures, is a Year 2000 Readiness Disclosure as defined under the Year
2000 Information and Readiness Disclosure Act of 1998.
20
<PAGE>
Recenty Issued Accounting Standard
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). In May 1999, the Financial Accounting
Standards Board delayed the required implementation date by one year, making
it effective for all fiscal quarters of fiscal years beginning after June 15,
2000 (June 1, 2001 for NIKE). This statement will require us 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 has not yet determined the impact that the
adoption of FAS 133 will have on NIKE's results from operations or financial
position.
Liquidity and Capital Resources
NIKE's financial position remains strong at May 31, 1999. Shareholders'
equity increased $73 million and remained at $3.3 billion. Compared to May 31,
1998 total assets decreased 3%, or $149.7 million. Working capital decreased
$10.8 million to remain at $1.8 billion, and NIKE's current ratio was 2.26:1
at May 31, 1999 compared to 2.07:1 at May 31, 1998.
Cash provided by operations reached nearly $1 billion, an increase of
$443.5 million over the prior year, primarily due to increased net income and
a significant reduction in working capital. Inventories decreased
$197 million, or 14%, as we focused on reducing the levels of excess and slow-
moving inventory relative to a year ago. Accounts receivable decreased $134
million, or 8%, primarily due to lower revenue levels as well as a slight
improvement in our receivable collection days.
Additions to property, plant and equipment for fiscal year 1999 were $384
million compared to $506 million for fiscal year 1998. The largest single
project was the expansion of our world headquarters. Other expenditures in the
U.S. were for warehouse expansions, retail store additions and ongoing
investments in systems infrastructure. Approximately $144 million of the total
additions occurred outside of the U.S. and were due mostly to warehouse and
retail expansions. We expect fiscal year 2000 capital expenditures to be
approximately $200 million more than fiscal year 1999 levels, primarily due to
the fact that we have, subsequent to the date of the financial statements,
consummated a purchase of a distribution facility in Japan. Until recently we
had intended to lease the facility. As part of the purchase, certain long-term
debt obligations were assumed in the amount of approximately $106 million. The
remainder of the purchase was financed by short term borrowings.
Long term debt levels have remained consistent with that of prior year. In
fiscal year 1997, we filed a shelf registration with the Securities and
Exchange Commission (SEC) for the sale of up to $500 million of debt
securities. Under this program, we have issued $300 million of medium-term
notes, $200 million in fiscal 1997, maturing December 1, 2003, and $100
million in fiscal year 1998, maturing in three to five years. The proceeds
were swapped into Dutch Guilders to obtain medium-term fixed rate financing to
support the growth of our European operations. In February of 1999, we filed a
shelf registration with the SEC for again, the sale of up to $500 million in
debt securities, of which $200 million had been previously registered but not
issued under the fiscal year 1997 registration discussed above.
In addition, during fiscal year 1999 we have used cash to reduce notes
payable, fund property, plant and equipment additions, repurchase stock, and
pay dividends.
Management believes that significant funds generated by operations,
together with access to sufficient sources of funds, will adequately meet our
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. Our
commercial paper program, under which there was $179 million and $92 million
outstanding at May 31, 1999 and 1998, respectively, also provides liquidity.
21
<PAGE>
Dividends per share of common stock for fiscal 1999 rose $.02 over fiscal
1998 to $.48 per share. Dividend declaration in all four quarters has been
consistent since February 1984. Based upon current projected earnings and cash
flow requirements, we anticipate continuing a dividend and reviewing its
amount at the November Board of Directors meeting. Our policy continues to
target an annual dividend in the range of 15% to 25% of trailing twelve-month
earnings.
In the fourth quarter, NIKE purchased a total of 0.6 million shares of our
Class B common stock for approximately $37 million under the $1 billion four-
year program approved in December 1997. During all of fiscal 1999, we
purchased 7.4 million shares for a total of $302 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.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to the impact of foreign currency fluctuations and interest
rate changes due to our international sales, production, and funding
requirements. In the normal course of business, we employ established policies
and procedures to manage exposure to fluctuations in the value of foreign
currencies and interest rates using a variety of financial instruments. It is
our policy to utilize financial instruments to reduce risks where internal
netting and other strategies cannot be effectively employed. Foreign currency
and interest rate transactions are used only to the extent considered
necessary to meet our objectives and we do not enter into foreign currency or
interest rate transactions for speculative purposes.
In addition to product sales and costs, we have foreign currency risk
related to debt that is denominated in currencies other than the U.S. dollar.
Our foreign currency risk management objective is to protect cash flows
resulting from sales, purchases and other costs from the adverse impact of
exchange rate movements. Foreign exchange risk is managed by using forward
exchange contracts and purchased options to hedge certain firm commitments and
the related receivables and payables, including third party or intercompany
transactions. Purchased currency options are used to hedge certain anticipated
but not yet firmly committed transactions expected to be recognized within one
year. By policy, we maintain hedge coverage between minimum and maximum
percentages. Cross-currency swaps are used to hedge foreign currency
denominated payments related to intercompany loan agreements. Hedged
transactions are denominated primarily in European currencies, Japanese yen
and Canadian dollar.
We are exposed to changes in interest rates primarily as a result of our
long-term debt used to maintain liquidity and fund capital expenditures and
international expansion. Our interest rate risk management objective is to
limit the impact of interest rate changes on earnings and cash flows and to
reduce overall borrowing costs. To achieve our objectives we maintain fixed
rate debt as a percentage of aggregate debt and finance working capital needs
through our payables agreement with Nissho Iwai American Corporation, various
bank loans, and commercial paper.
Market Risk Measurement
We monitor foreign exchange risk and related derivatives use using a
variety of techniques including a review of market value, sensitivity
analysis, and Value-at-Risk (VaR). The VaR determines the maximum potential
one-day loss in the fair value of foreign exchange rate-sensitive financial
instruments. The VaR model estimates assume normal market conditions and a 95%
confidence level. There are various modeling techniques that can be used in
the VaR computation. Our computations are based on interrelationships between
currencies and interest rates (a "variance/co-variance" technique). We
determined these interrelationships by observing foreign currency market
changes and interest rate changes over the preceding 90 days. The value of
foreign currency options does not change on a one-to-one basis with changes in
the underlying currency rate. We adjusted the potential loss in option value
for the estimated sensitivity (the "delta" and "gamma") to changes in the
underlying currency rate. The model includes all of our forwards, options,
cross-currency swaps and yen-denominated debt (i.e., our market-sensitive
derivative and other financial instruments as defined by the SEC).
22
<PAGE>
Anticipated transactions, firm commitments and accounts receivable and payable
denominated in foreign currencies, which certain of these instruments are
intended to hedge, were excluded from the model.
The VaR model is a risk analysis tool and does not purport to represent
actual losses in fair value that we will incur, nor does it consider the
potential effect of favorable changes in market rates. It also does not
represent the maximum possible loss that may occur. Actual future gains and
losses will differ from those estimated because of changes or differences in
market rates and interrelationships, hedging instruments and hedge
percentages, timing and other factors.
The estimated maximum one-day loss in fair value on NIKE's foreign currency
sensitive financial instruments, derived using the VaR model, was $10.9
million and $11.7 million at May 31, 1999 and May 31, 1998, respectively. We
believe that this amount is immaterial and that such a hypothetical loss in
fair value of our derivatives would be offset by increases in the value of the
underlying transactions being hedged.
Our interest rate risk is also monitored using a variety of techniques.
Notes 5 and 14 to the Consolidated Financial Statements outline the principal
amounts, weighted average interest rates, fair values and other terms required
to evaluate the expected cash flows and sensitivity to interest rate changes.
Special Note Regarding Forward-Looking Statements and 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 likely 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
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.
23
<PAGE>
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.
Item 8. Financial Statements and Supplemental Data
Management of NIKE, Inc. is responsible for the information and
representations contained in this report. The financial statements have been
prepared in conformity with the generally accepted accounting principles we
considered appropriate in the circumstances and include some amounts based on
our best estimates and judgments. Other financial information in this report
is consistent with these financial statements.
Our accounting systems include controls designed to reasonably assure that
assets are safeguarded from unauthorized use or disposition and which provide
for the preparation of financial statements in conformity with generally
accepted accounting principles. These systems are supplemented by the
selection and training of qualified financial personnel and an organizational
structure providing for appropriate segregation of duties.
An Internal Audit department reviews the results of its work with the Audit
Committee of the Board of Directors, presently consisting of three outside
directors. The Audit Committee is responsible for recommending to the Board of
Directors the appointment of the independent accountants and reviews with the
independent accountants, management and the internal audit staff, the scope
and the results of the annual examination, the effectiveness of the accounting
control system and other matters relating to the financial affairs of NIKE as
they deem appropriate. The independent accountants and the internal auditors
have full access to the Committee, with and without the presence of
management, to discuss any appropriate matters.
24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of NIKE, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(A)(1) on page 48 present fairly, in all material
respects, the financial position of NIKE, Inc. and its subsidiaries at May 31,
1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended May 31, 1999, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedules listed in the index appearing under Item
14(A)(2) on page 48 present fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedules are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Portland, Oregon
June 29, 1999
25
<PAGE>
NIKE, INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended May 31,
--------------------------
1999 1998 1997
-------- -------- --------
(in millions, except per
share data)
<S> <C> <C> <C>
Revenues............................................ $8,776.9 $9,553.1 $9,186.5
Costs and expenses:
Costs of sales.................................... 5,493.5 6,065.5 5,503.0
Selling and administrative........................ 2,426.6 2,623.8 2,303.7
Interest expense (Notes 4 and 5).................. 44.1 60.0 52.3
Other income/expense, net (Notes 1, 10 and 11).... 21.5 20.9 32.3
Restructuring charge, net (Note 13)............... 45.1 129.9 --
-------- -------- --------
8,030.8 8,900.1 7,891.3
-------- -------- --------
Income before income taxes.......................... 746.1 653.0 1,295.2
Income taxes (Note 6)............................... 294.7 253.4 499.4
-------- -------- --------
Net income.......................................... $ 451.4 $ 399.6 $ 795.8
======== ======== ========
Basic earnings per common share (Notes 1 and 9)..... $ 1.59 $ 1.38 $ 2.76
======== ======== ========
Diluted earnings per common share (Notes 1 and 9)... $ 1.57 $ 1.35 $ 2.68
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of this statement.
26
<PAGE>
NIKE, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
May 31,
------------------
1999 1998
-------- --------
(in millions)
Assets
<S> <C> <C>
Current Assets:
Cash and equivalents..................................... $ 198.1 $ 108.6
Accounts receivable, less allowance for doubtful accounts
of $73.2 and $71.4...................................... 1,540.1 1,674.4
Inventories (Note 2)..................................... 1,199.3 1,396.6
Deferred income taxes (Notes 1 and 6).................... 120.6 156.8
Income taxes receivable.................................. 15.9 --
Prepaid expenses (Note 1)................................ 190.9 196.2
-------- --------
Total current assets................................... 3,264.9 3,532.6
-------- --------
Property, plant and equipment, net (Note 3)................ 1,265.8 1,153.1
Identifiable intangible assets and goodwill (Note 1)....... 426.6 435.8
Deferred income taxes and other assets (Notes 1 and 6)..... 290.4 275.9
-------- --------
Total assets........................................... $5,247.7 $5,397.4
======== ========
<CAPTION>
Liabilities and Shareholders' Equity
<S> <C> <C>
Current Liabilities:
Current portion of long-term debt (Note 5)............... $ 1.0 $ 1.6
Notes payable (Note 4)................................... 419.1 480.2
Accounts payable (Note 4)................................ 373.2 584.6
Accrued liabilities...................................... 653.6 608.5
Income taxes payable..................................... -- 28.9
-------- --------
Total current liabilities.............................. 1,446.9 1,703.8
-------- --------
Long-term debt (Notes 5 and 14)............................ 386.1 379.4
Deferred income taxes and other liabilities (Notes 1 and
6)........................................................ 79.8 52.3
Commitments and contingencies (Notes 12 and 15)............ -- --
Redeemable Preferred Stock (Note 7)........................ 0.3 0.3
Shareholders' equity:
Common Stock at stated value (Note 8):
Class A convertible--100.7 and 101.5 shares
outstanding........................................... 0.2 0.2
Class B--181.6 and 185.5 shares outstanding............ 2.7 2.7
Capital in excess of stated value........................ 334.1 262.5
Accumulated other comprehensive income................... (68.9) (47.2)
Retained earnings........................................ 3,066.5 3,043.4
-------- --------
Total shareholders' equity............................. 3,334.6 3,261.6
-------- --------
Total liabilities and shareholders' equity............... $5,247.7 $5,397.4
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of this statement.
27
<PAGE>
NIKE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended May 31,
----------------------
1999 1998 1997
------ ------ ------
(in millions)
<S> <C> <C> <C>
Cash provided (used) by operations:
Net income............................................. $451.4 $399.6 $795.8
Income charges (credits) not affecting cash:
Depreciation......................................... 198.2 184.5 138.0
Non-cash portion of restructuring charge............. 28.0 59.3 --
Deferred income taxes................................ 37.9 (113.9) (47.1)
Amortization and other............................... 30.6 49.0 30.3
Changes in certain working capital components:
Decrease (increase) in inventories................... 197.3 (58.0) (416.7)
Decrease (increase) in accounts receivable........... 134.3 79.7 (485.6)
Decrease (increase) in other current assets and
income taxes receivable............................. 53.7 (12.6) (56.9)
(Decrease) increase in accounts payable, accrued
liabilities and income taxes payable................ (170.4) (70.1) 365.3
------ ------ ------
Cash provided by operations........................ 961.0 517.5 323.1
------ ------ ------
Cash provided (used) by investing activities:
Additions to property, plant and equipment............. (384.1) (505.9) (465.9)
Disposals of property, plant and equipment............. 27.2 16.8 24.3
Increase in other assets............................... (60.8) (87.4) (43.8)
Increase (decrease) in other liabilities............... 1.2 (18.5) (10.8)
------ ------ ------
Cash used by investing activities.................. (416.5) (595.0) (496.2)
------ ------ ------
Cash provided (used) by financing activities:
Additions to long-term debt............................ -- 101.5 300.5
Reductions in long-term debt including current
portion............................................... (1.5) (2.5) (5.2)
(Decrease) increase in notes payable................... (61.0) (73.0) 92.9
Proceeds from exercise of options...................... 54.4 32.2 26.3
Repurchase of stock.................................... (299.8) (202.3) --
Dividends--common and preferred........................ (136.2) (127.3) (100.9)
------ ------ ------
Cash (used) provided by financing activities....... (444.1) (271.4) 313.6
------ ------ ------
Effect of exchange rate changes on cash................ (10.9) 12.1 (0.2)
Effect of May 1996 cash flow activity for certain
subsidiaries (Note 1)................................. -- -- 43.0
------ ------ ------
Net increase (decrease) in cash and equivalents........ 89.5 (336.8) 183.3
Cash and equivalents, beginning of year................ 108.6 445.4 262.1
------ ------ ------
Cash and equivalents, end of year...................... $198.1 $108.6 $445.4
====== ====== ======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest............................................. $ 47.1 $ 52.2 $ 44.0
Income taxes......................................... 231.9 360.5 543.1
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of this statement.
28
<PAGE>
NIKE, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
----------------------------- Capital In Accumulated
Class A Class B Excess of Other
-------------- -------------- Stated Comprehensive Retained
Shares Amount Shares Amount Value Income Earnings Total
------ ------ ------ ------ ---------- ------------- -------- --------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at May 31,
1996................... 51.1 $0.2 92.5 $2.7 $154.8 $(16.5) $2,290.2 $2,431.4
----- ---- ----- ---- ------ ------ -------- --------
Stock options
exercised.............. 1.5 55.8 55.8
Conversion to Class B
Common Stock (0.3) 0.3 --
Two-for-one Stock Split
October 23, 1996....... 50.9 93.3
Dividends on Common
Stock.................. (108.2) (108.2)
Comprehensive income:
Net income............. 795.8 795.8
Net income for the
month ended May 1996,
due to the change in
fiscal year-end of
certain non-U.S.
operations (Note 1)... (4.1) (4.1)
Foreign currency
translation (net of
tax benefit of $4.1).. (14.8) (14.8)
----- ---- ----- ---- ------ ------ -------- --------
Comprehensive income.... (14.8) 791.7 776.9
----- ---- ----- ---- ------ ------ -------- --------
Balance at May 31,
1997................... 101.7 0.2 187.6 2.7 210.6 (31.3) 2,973.7 3,155.9
----- ---- ----- ---- ------ ------ -------- --------
Stock options
exercised.............. 2.1 57.2 57.2
Conversion to Class B
Common Stock........... (0.2) 0.2 --
Repurchase of Class B
Common Stock........... (4.4) (5.3) (197.0) (202.3)
Dividends on Common
Stock.................. (132.9) (132.9)
Comprehensive income:
Net income............. 399.6 399.6
Foreign currency
translation (net of
tax benefit of $4.4).. (15.9) (15.9)
----- ---- ----- ---- ------ ------ -------- --------
Comprehensive income.... (15.9) 399.6 383.7
----- ---- ----- ---- ------ ------ -------- --------
Balance at May 31,
1998................... 101.5 0.2 185.5 2.7 262.5 (47.2) 3,043.4 3,261.6
----- ---- ----- ---- ------ ------ -------- --------
Stock options
exercised.............. 2.7 80.5 80.5
Conversion to Class B
Common Stock........... (0.8) 0.8 --
Repurchase of Class B
Common Stock........... (7.4) (8.9) (292.7) (301.6)
Dividends on Common
Stock.................. (135.6) (135.6)
Comprehensive income:
Net income............. 451.4 451.4
Foreign currency
translation (net of
tax benefit of $6.1).. (21.7) (21.7)
----- ---- ----- ---- ------ ------ -------- --------
Comprehensive income.... (21.7) 451.4 429.7
----- ---- ----- ---- ------ ------ -------- --------
Balance at May 31,
1999................... 100.7 $0.2 181.6 $2.7 $334.1 $(68.9) $3,066.5 $3,334.6
===== ==== ===== ==== ====== ====== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of this statement.
29
<PAGE>
NIKE, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of consolidation:
The consolidated financial statements include the accounts of NIKE, Inc.
and its subsidiaries (the Company). All significant intercompany transactions
and balances have been eliminated. Prior to fiscal year 1997, certain of the
Company's non-U.S. operations reported their results of operations on a one
month lag which allowed more time to compile results. Beginning in the first
quarter of fiscal year 1997, the one month lag was eliminated. As a result,
the May 1996 charge from operations for these entities of $4.1 million was
recorded directly to retained earnings in the first quarter of fiscal year
1997.
Recognition of revenues:
Revenues recognized include sales plus fees earned on sales by licensees.
Sales are recognized upon shipment of product.
Advertising and Promotion:
Advertising production costs are expensed the first time the advertisement
is run. Media (TV and print) placement costs are expensed in the month the
advertising appears. Accounting for endorsement contracts, the majority of the
Company's promotional expenses, is based upon specific contract provisions.
Generally, endorsement payments are expensed uniformly over the term of the
contract after giving recognition to periodic performance compliance
provisions of the contracts. Contracts requiring prepayments are included in
prepaid expenses or other assets depending on the length of the contract.
Total advertising and promotion expenses were $978.6 million, $1.13 billion
and $978.3 million for the years ended May 31, 1999, 1998 and 1997,
respectively. Included in prepaid expenses and other assets was $152.2 million
and $175.9 million at May 31, 1999 and 1998, respectively, relating to prepaid
advertising and promotion expenses.
Cash and equivalents:
Cash and equivalents represent cash and short-term, highly liquid
investments with original maturities of three months or less.
Inventory valuation:
Inventories are stated at the lower of cost or market. All non-U.S.
inventories are valued on a first-in, first-out (FIFO) basis. In the fourth
quarter of fiscal year 1999, the Company changed its method of determining
cost for substantially all of its U.S. inventories from last-in, first-out
(LIFO) to FIFO. See Note 11.
Property, plant and equipment and depreciation:
Property, plant and equipment are recorded at cost. Depreciation for
financial reporting purposes is determined on a straight-line basis for
buildings and leasehold improvements and principally on a declining balance
basis for machinery and equipment, based upon estimated useful lives ranging
from two to forty years.
Identifiable intangible assets and goodwill:
At May 31, 1999 and 1998, the Company had patents, trademarks and other
identifiable intangible assets with a value of $213.0 million and $220.7
million, respectively. The Company's excess of purchase cost over the fair
value of net assets of businesses acquired (goodwill) was $324.8 million and
$321.0 million at May 31, 1999 and 1998, respectively.
30
<PAGE>
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Identifiable intangible assets and goodwill are being amortized over their
estimated useful lives on a straight-line basis over five to forty years.
Accumulated amortization was $111.2 million and $105.9 million at May 31, 1999
and 1998, respectively. Amortization expense, which is included in other
income/expense, was $19.4 million, $19.8 million and $19.8 million for the
years ended May 31, 1999, 1998 and 1997, respectively. Intangible assets are
periodically reviewed by the Company for impairments to assess if the fair
value is less than the carrying value.
Foreign currency translation:
Adjustments resulting from translating foreign functional currency
financial statements into U.S. dollars are included in the currency
translation adjustment, a component of accumulated other comprehensive income
in shareholders' equity.
Derivatives:
The Company enters into foreign currency contracts in order to reduce the
impact of certain foreign currency fluctuations. Firmly committed transactions
and the related receivables and payables may be hedged with forward exchange
contracts or purchased options. Anticipated, but not yet firmly committed,
transactions may be hedged through the use of purchased options. Premiums paid
on purchased options and any gains are included in prepaid expenses or accrued
liabilities and are recognized in earnings when the transaction being hedged
is recognized. Gains and losses arising from foreign currency forward and
option contracts, and cross-currency swap transactions are recognized in
income or expense as offsets of gains and losses resulting from the underlying
hedged transactions. Hedge effectiveness is determined by evaluating whether
gains and losses on hedges will offset gains and losses on the underlying
exposures. This evaluation is performed at inception of the hedge and
periodically over the life of the hedge. Occasionally, hedges may cease to be
effective or may be terminated prior to recognition of the underlying
transaction. Gains and losses on these hedges are deferred and included in the
basis of the underlying transaction. Hedges are terminated if the underlying
transaction is no longer expected to occur and the related gains and losses
are recognized in earnings. Cash flows from risk management activities are
classified in the same category as the cash flows from the related investment,
borrowing or foreign exchange activity. See Note 15 for further discussion.
Income taxes:
Income taxes are provided currently on financial statement earnings of non-
U.S. subsidiaries expected to be repatriated. The Company intends to determine
annually the amount of undistributed non-U.S. earnings to invest indefinitely
in its non-U.S. operations. The Company accounts for income taxes using the
asset and liability method. This approach requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and the tax bases of other
assets and liabilities. See Note 6 for further discussion.
Earnings per share:
Basic earnings per common share is calculated by dividing net income by the
average number of common shares outstanding during the year. Diluted earnings
per common share is calculated by adjusting outstanding shares, assuming
conversion of all potentially dilutive stock options. On October 23, 1996 the
Company issued additional shares in connection with a two-for-one stock split
effected in the form of a 100% stock dividend on outstanding Class A and Class
B common stock. The per common share amounts in the Consolidated Financial
Statements and accompanying notes have been adjusted to reflect the stock
split.
31
<PAGE>
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Management estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates,
including estimates relating to assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
Reclassifications:
Certain prior year amounts have been reclassified to conform to fiscal year
1999 presentation. These changes had no impact on previously reported results
of operations or shareholders' equity.
NOTE 2--INVENTORIES:
Inventories by major classification are as follows:
<TABLE>
<CAPTION>
May 31,
-----------------
1999 1998
-------- --------
(in millions)
<S> <C> <C>
Finished goods............................................. $1,132.7 $1,303.8
Work-in-progress........................................... 44.8 34.7
Raw materials.............................................. 21.8 58.1
-------- --------
$1,199.3 $1,396.6
======== ========
</TABLE>
The excess of replacement cost over LIFO cost was $5.6 million and $21.9
million at May 31, 1999 and May 31, 1998 respectively. As stated in Note 1,
the Company changed its inventory valuation method for substantially all U.S.
inventories in fiscal year 1999.
NOTE 3--PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment includes the following:
<TABLE>
<CAPTION>
May 31,
-----------------
1999 1998
-------- --------
(in millions)
<S> <C> <C>
Land...................................................... $ 99.6 $ 93.0
Buildings................................................. 374.2 337.3
Machinery and equipment................................... 923.3 887.4
Leasehold improvements.................................... 273.4 253.7
Construction in process................................... 330.8 248.2
-------- --------
2,001.3 1,819.6
Less accumulated depreciation............................. 735.5 666.5
-------- --------
$1,265.8 $1,153.1
======== ========
</TABLE>
Capitalized interest expense was $6.9 million, $6.5 million and $2.8
million for the fiscal years ended May 31, 1999, 1998 and 1997, respectively.
32
<PAGE>
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4--SHORT-TERM BORROWINGS AND CREDIT LINES:
Notes payable to banks and interest bearing accounts payable to Nissho Iwai
American Corporation (NIAC) are summarized below:
<TABLE>
<CAPTION>
May 31,
---------------------------------------------
1999 1998
---------------------- ----------------------
Interest Interest
Borrowings Rate Borrowings Rate
------------- -------- ------------- --------
(in millions) (in millions)
<S> <C> <C> <C> <C>
Banks:
Non-U.S. Operations.......... $239.8 3.87% $368.4 6.47%
U.S. Operations.............. 179.3 4.85% 111.8 5.64%
------ ------
$419.1 $480.2
====== ======
NIAC........................... $ 98.0 5.30% $280.1 5.99%
====== ======
</TABLE>
The Company has outstanding loans at interest rates at various spreads
above the banks' cost of funds for financing non-U.S. operations. Certain of
these loans are secured by accounts receivable and inventory. U.S. operations
were funded principally with commercial paper.
Ratings for the Company to issue commercial paper, which is required to be
supported by committed and uncommitted lines of credit, are A1 by Standard and
Poor's Corporation and P1 by Moody's Investor Service. At May 31, 1999 there
was $179.3 million outstanding and at May 31, 1998 there was $91.6 million
outstanding under these arrangements.
The Company purchases through NIAC substantially all of the athletic
footwear and apparel it acquires from non-U.S. suppliers. Accounts payable to
NIAC are generally due up to 120 days after shipment of goods from the foreign
port. Interest on such accounts payable accrues at the ninety day London
Interbank Offered Rate (LIBOR) as of the beginning of the month of the invoice
date, plus .30%.
At May 31, 1999, the Company had no outstanding borrowings under its $500
million unsecured multiple option facility with 10 banks, which matures on
October 31, 2002, and on May 31, 1999 the Company had no outstanding
borrowings under its $250 million unsecured multiple option facility with 8
banks, which matures on May 18, 2000. These agreements contain optional
borrowing alternatives consisting of a committed revolving loan facility and a
competitive bid facility. The interest rate charged on both the $500 million
and the $250 million agreements is determined by the borrowing option and,
under the committed revolving loan facility, is either the LIBOR rate plus
.19% or the higher of the Fed Funds rate plus .50% or the Prime Rate. The
$500 million and the $250 million agreements provide for annual fees of .07%,
and .045% respectively, of the total commitment. Under these agreements, the
Company must maintain, among other things, certain minimum specified financial
ratios with which the Company was in compliance at May 31, 1999.
33
<PAGE>
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5--LONG-TERM DEBT:
Long-term debt includes the following:
<TABLE>
<CAPTION>
May 31,
-------------
1999 1998
------ ------
(in millions)
<S> <C> <C>
6.375% Medium term notes, payable December 1, 2003............ $199.5 $199.3
4.30% Japanese yen notes, payable June 26, 2011............... 84.6 77.1
6.51% Medium term notes, payable June 16, 2000................ 50.0 50.0
6.69% Medium term notes, payable June 17, 2002................ 50.0 50.0
Other......................................................... 3.0 4.6
------ ------
Total....................................................... 387.1 381.0
Less current maturities....................................... 1.0 1.6
------ ------
$386.1 $379.4
====== ======
</TABLE>
In December of 1996, the Company filed a $500 million shelf registration
with the Securities and Exchange Commission (SEC) and issued $200 million
seven-year notes, maturing December 1, 2003. In June of 1997, the Company
issued an additional $100 million medium-term notes under this program with
maturities of June 16, 2000 and June 17, 2002. Interest on these notes is paid
semi-annually. The proceeds were subsequently exchanged for Dutch Guilders and
loaned to a European subsidiary. The Company entered into swap transactions to
hedge the foreign currency exposure related to the repayment of the
intercompany loan. In February of 1999, the Company filed a shelf registration
with the SEC for the sale of up to $500 million in debt securities, of which
$200 million had been previously registered but not issued under the December
1996 registration.
In June of 1996, the Company's Japanese subsidiary borrowed 10.5 billion
Japanese Yen in a private placement with a maturity of June 26, 2011. Interest
is paid semi-annually. The agreement provides for early retirement after year
ten.
The Company's long-term debt ratings are A by Standard and Poor's
Corporation and A1 by Moody's Investor Service. Amounts of long-term
maturities in each of the five fiscal years 2000 through 2004 are $1.0
million, $51.0 million, $0.4 million, $50.2 million and $199.6 million,
respectively.
34
<PAGE>
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6--INCOME TAXES:
Income before income taxes and the provision for income taxes are as
follows:
<TABLE>
<CAPTION>
Year Ended May 31,
-------------------------
1999 1998 1997
------- ------ --------
(in millions)
<S> <C> <C> <C>
Income before income taxes:
United States.................................. $ 598.7 $648.2 $1,008.0
Foreign........................................ 147.4 4.8 287.2
------- ------ --------
$ 746.1 $653.0 $1,295.2
======= ====== ========
Provision for income taxes:
Current:
United States
Federal...................................... $ 210.2 $258.4 $ 359.4
State........................................ 34.3 43.1 74.7
Foreign........................................ 50.1 69.4 112.7
------- ------ --------
294.6 370.9 546.8
------- ------ --------
Deferred:
United States
Federal...................................... (7.6) (40.2) (21.1)
State........................................ 4.0 (8.8) (5.1)
Foreign........................................ 3.7 (68.5) (21.2)
------- ------ --------
0.1 (117.5) (47.4)
------- ------ --------
$ 294.7 $253.4 $ 499.4
======= ====== ========
</TABLE>
A benefit was recognized for foreign loss carryforwards of $313.4 million at
May 31, 1999 of which $74.3 million, $42.4 million, $18.2 million and $23.4
million expire in fiscal years 2003, 2004, 2005, and 2006, respectively.
Foreign loss carryforwards of $155.1 million do not expire.
As of May 31, 1999 the Company had utilized all foreign tax credits.
35
<PAGE>
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred tax liabilities (assets) are comprised of the following:
<TABLE>
<CAPTION>
May 31,
----------------
1999 1998
------- -------
(in millions)
<S> <C> <C>
Undistributed earnings of foreign subsidiaries............ $ 9.8 $ 2.1
Other..................................................... 16.1 12.3
------- -------
Gross deferred tax liabilities.......................... 25.9 14.4
------- -------
Allowance for doubtful accounts........................... (16.2) (18.8)
Inventory reserves........................................ (17.8) (41.5)
Deferred compensation..................................... (33.2) (30.8)
Reserves and accrued liabilities.......................... (59.0) (68.1)
Tax basis inventory adjustment............................ (17.8) (19.5)
Depreciation.............................................. (33.7) (17.3)
Foreign loss carryforwards................................ (94.6) (89.6)
Other..................................................... (18.4) (19.9)
------- -------
Gross deferred tax assets............................... (290.7) (305.5)
------- -------
Net deferred tax assets................................... $(264.8) $(291.1)
======= =======
</TABLE>
A reconciliation from the U.S. statutory federal income tax rate to the
effective income tax rate follows:
<TABLE>
<CAPTION>
Year Ended May 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
U.S. Federal statutory rate............................ 35.0% 35.0%
State income taxes, net of federal benefit............. 3.3 3.4
Other, net........................................... 1.2 0.4
--------- ---------
Effective income tax rate.............................. 39.5% 38.8%
========= =========
</TABLE>
NOTE 7--REDEEMABLE PREFERRED STOCK:
NIAC is the sole owner of the Company's authorized Redeemable Preferred
Stock, $1 par value, which is redeemable at the option of NIAC at par value
aggregating $0.3 million. A cumulative dividend of $.10 per share is payable
annually on May 31 and no dividends may be declared or paid on the Common
Stock of the Company unless dividends on the Redeemable Preferred Stock have
been declared and paid in full. There have been no changes in the Redeemable
Preferred Stock in the three years ended May 31, 1999. As the holder of the
Redeemable Preferred Stock, NIAC does not have general voting rights but does
have the right to vote as a separate class on the sale of all or substantially
all of the assets of the Company and its subsidiaries, on merger,
consolidation, liquidation or dissolution of the Company or on the sale or
assignment of the NIKE trademark for athletic footwear sold in the United
States.
NOTE 8--COMMON STOCK:
The authorized number of shares of Class A Common Stock no par value and
Class B Common Stock no par value are 110.0 million and 350.0 million,
respectively. In fiscal year 1997 the Company announced a two-for-one stock
split which was effected in the form of a 100% stock dividend on outstanding
Class A and Class B Common Stock, paid October 23, 1996. Each share of Class A
Common Stock is convertible into one share of
36
<PAGE>
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Class B Common Stock. Voting rights of Class B Common Stock are limited in
certain circumstances with respect to the election of directors.
The Company's Employee Incentive Compensation Plan (the "1980 Plan") was
adopted in 1980 and expired on December 31, 1990. The 1980 Plan provided for
the issuance of up to 13.4 million shares of the Company's Class B Common
Stock in connection with the exercise of stock options granted under such
plan. No further grants will be made under the 1980 Plan.
In 1990, the Board of Directors adopted, and the shareholders approved, the
NIKE, Inc. 1990 Stock Incentive Plan (the "1990 Plan"). The 1990 Plan provides
for the issuance of up to 25.0 million shares of Class B Common Stock in
connection with stock options and other awards granted under such plan. The
1990 Plan authorizes the grant of incentive stock options, non-statutory stock
options, stock appreciation rights, stock bonuses, and the sale of restricted
stock. The exercise price for incentive stock options may not be less than the
fair market value of the underlying shares on the date of grant. The exercise
price for non-statutory stock options and stock appreciation rights, and the
purchase price of restricted stock, may not be less than 75% of the fair
market value of the underlying shares on the date of grant. No consideration
will be paid for stock bonuses awarded under the 1990 Plan. The 1990 Plan is
administered by a committee of the Board of Directors. The committee has the
authority to determine the employees to whom awards will be made, the amount
of the awards, and the other terms and conditions of the awards. As of May 31,
1999, the committee has granted substantially all non-statutory stock options
at 100% of fair market value on the date of grant under the 1990 Plan.
In addition to the option plans discussed above, the Company has several
agreements outside of the plans with certain directors, endorsers and
employees. As of May 31, 1999, 8.0 million options with exercise prices
ranging from $0.417 per share to $53.625 per share had been granted. The
aggregate compensation expenses related to these agreements is $21.3 million
and is being amortized over vesting periods from October 1980 through December
2001. The outstanding agreements expire through December 2009.
During 1995, the Financial Accounting Standards Board issued SFAS 123,
"Accounting for Stock Based Compensation," which defines a fair value method
of accounting for an employee stock option or similar equity instrument and
encouraged, but does not require, all entities to adopt that method of
accounting. Entities electing not to adopt the fair value method of accounting
must make pro forma disclosures of net income and earnings per share, as if
the fair value based method of accounting defined in this statement has been
applied.
The Company has elected not to adopt the fair value method; however, as
required by SFAS 123, the Company has computed for pro forma disclosure
purposes, the value of options granted during fiscal years 1999, 1998 and 1997
using the Black-Scholes option pricing model. The weighted average assumptions
used for stock option grants for 1999, 1998 and 1997 were a dividend yield of
1%, expected volatility of the market price of the Company's common stock of
34% for 1999, 32% for 1998 and 30% for 1997, a weighted-average expected life
of the options of approximately five years and interest rates of 5.48% and
4.93% for fiscal 1999, 4.38% and 4.28% for fiscal 1998 and 6.42% and 6.56% for
fiscal 1997. These interest rates are reflective of option grant dates made
throughout the year.
Options were assumed to be exercised over the 5 year expected life for
purposes of this valuation. Adjustments for forfeitures are made as they
occur. For the years ended May 31, 1999, 1998 and 1997, the total value of the
options granted, for which no previous expense has been recognized, was
computed as approximately $61.6 million, $31.9 million and $29.1 million
respectively, which would be amortized on a straight-line basis over the
vesting period of the options. The weighted average fair value per share of
the options granted in 1999, 1998 and 1997 are $17.33, $18.54 and $17.39
respectively.
37
<PAGE>
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
If the Company had accounted for these stock options issued to employees in
accordance with SFAS 123, the Company's pro forma net income and pro forma net
income per share would have been reported as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- -------------------- --------------------
Net Diluted Basic Net Diluted Basic Net Diluted Basic
Income EPS EPS Income EPS EPS Income EPS EPS
------ ------- ----- ------ ------- ----- ------ ------- -----
(in millions, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
As reported.. $451.4 $1.57 $1.59 $399.6 $1.35 $1.38 $795.8 $2.68 $2.76
Pro Forma.... 434.3 1.51 1.53 388.7 1.32 1.35 788.7 2.66 2.73
</TABLE>
The pro forma effects of applying SFAS 123 may not be representative of the
effects on reported net income and earnings per share for future years since
options vest over several years and additional awards are made each year.
The following summarizes the stock option transactions under plans
discussed above (adjusted for all applicable stock splits):
<TABLE>
<CAPTION>
Weighted
Average Option
Shares Price
-------------- ------
(in thousands)
<S> <C> <C>
Options outstanding May 31, 1996...................... 12,186 $13.67
Exercised........................................... (2,012) 11.28
Surrendered......................................... (55) 23.50
Granted............................................. 1,692 48.93
------
Options outstanding May 31, 1997...................... 11,811 19.05
Exercised........................................... (2,132) 11.28
Surrendered......................................... (270) 23.50
Granted............................................. 1,964 55.83
------
Options outstanding May 31, 1998...................... 11,373 26.30
Exercised........................................... (2,665) 15.25
Surrendered......................................... (399) 46.70
Granted............................................. 3,556 48.76
------
Options outstanding May 31, 1999...................... 11,865 $34.97
======
Options exercisable at May 31,
1997................................................ 5,219 $11.33
1998................................................ 6,826 15.98
1999................................................ 5,991 22.13
</TABLE>
The following table sets forth the exercise prices, the number of options
outstanding and exercisable and the remaining contractual lives of the
Company's stock options at May 31, 1999:
<TABLE>
<CAPTION>
Number of Weighted Weighted Average Number of Weighted
Options Average Contractual Life Options Average
Exercise Price Outstanding Exercise Price Remaining Exercisable Exercise Price
-------------- -------------- -------------- ---------------- -------------- --------------
(in thousands) (years) (in thousands)
<S> <C> <C> <C> <C> <C>
$ 5.1013 - $14.9375 3,601 $12.73 3.48 3,601 $12.73
18.0313 - 48.2500 3,592 34.97 6.83 1,985 31.70
48.4375 - 48.4375 3,030 48.44 9.13 -- --
48.6875 - 74.8750 1,642 58.92 8.29 405 58.83
</TABLE>
38
<PAGE>
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9--EARNINGS PER 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:
<TABLE>
<CAPTION>
Year Ended May 31,
-----------------------
1999 1998 1997
------- ------- -------
(in millions,
except per share data)
<S> <C> <C> <C>
Determination of shares:
Average common shares outstanding................. 283.3 288.7 288.4
Assumed conversion of stock options............... 5.0 6.3 8.6
------- ------- -------
Diluted average common shares outstanding........... 288.3 295.0 297.0
======= ======= =======
Basic earnings per common share..................... $ 1.59 $ 1.38 $ 2.76
Diluted earnings per common share................... $ 1.57 $ 1.35 $ 2.68
</TABLE>
NOTE 10--BENEFIT PLANS:
The Company has a profit sharing plan available to substantially all
employees. The terms of the plan call for annual contributions by the Company
as determined by the Board of Directors. Contributions of $12.8 million, $11.2
million and $18.5 million to the plan are included in other expense in the
consolidated financial statements for the years ended May 31, 1999, 1998 and
1997, respectively. The Company has a voluntary 401(k) employee savings plan.
The Company matches a portion of employee contributions with Common Stock,
vesting that portion over 5 years. Company contributions to the savings plan
were $7.4 million, $8.1 million and $6.3 million for the years ended May 31,
1999, 1998 and 1997, respectively, and are included in selling and
administrative expenses.
NOTE 11--OTHER INCOME/EXPENSE, NET:
Included in other income/expense for the years ended May 31, 1999, 1998 and
1997, was interest income of $13.0 million, $16.5 million and $20.1 million,
respectively. In addition, included in other income/expense was income of
$15.0 million related to the change in accounting for inventories in the U.S.
from the LIFO to the FIFO method. The change was effected in the fourth
quarter of fiscal 1999 and was not considered significant to show the
cumulative effect or to restate comparable income statements as dictated by
Accounting Principles Board Opinion No. 20. The Company's subsidiary, Bauer
NIKE Hockey, recognized a one-time restructuring charge in fiscal year 1997 of
$18.1 million for a plan which entailed, among other things, moving certain
products to offshore production and closing certain facilities.
NOTE 12--COMMITMENTS AND CONTINGENCIES:
The Company leases space for its offices, warehouses and retail stores
under leases expiring from one to eighteen years after May 31, 1999. Rent
expense aggregated $129.5 million, $129.6 million and $84.1 million for the
years ended May 31, 1999, 1998 and 1997, respectively. Amounts of minimum
future annual rental commitments under non-cancelable operating leases in each
of the five fiscal years 2000 through 2004 are
39
<PAGE>
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
$96.1 million, $86.9 million, $75.9 million, $69.3 million, $58.8 million,
respectively, and $368.2 million in later years. Lawsuits arise during the
normal course of business. In the opinion of management, none of the pending
lawsuits will result in a significant impact on the consolidated results of
operations or financial position.
NOTE 13--RESTRUCTURING CHARGE:
1999 Charge. During fiscal 1999, a $60.1 million charge was incurred as a
result of certain actions taken to better align the Company's cost structure
with expected revenue growth rates. The charge (shown below in tabular format)
was primarily for costs of severing employees, including severance packages,
lease abandonments and the write down of assets no longer in use. Employees
were terminated in Europe, Asia Pacific, and in the United States, and
included employees affected by the Company's shift to outsourcing certain of
its information technology functions. The total number of employees terminated
was 1,291, with 630 having left the Company as of May 31, 1999.
Also included was a write-off of $20.2 million of certain equipment,
hardware and software development costs that are no longer in use at one of
the Company's U.S. distribution centers due to a change in strategy around how
the Company flows product for a specific type of business. The accrual balance
at May 31, 1999 will be relieved throughout fiscal 2000 and early 2001, as
leases expire and severance payments are completed.
Detail of the 1999 restructuring charge is as follows:
<TABLE>
<CAPTION>
FY99 Reserve
Restructuring Balance at
Description Cash/Non-Cash Charge Activity 5/31/99
----------- ------------- ------------- -------- ----------
(in millions)
<S> <C> <C> <C> <C>
Elimination of Job
Responsibilities
Company-Wide.............. $(39.9) $21.9 $(18.0)
Severance packages....... cash (28.0) 11.7 (16.3)
Lease cancellations &
commitments............. cash (2.4) 1.6 (0.8)
Write-down of assets..... non-cash (7.8) 7.8 --
Other.................... cash/non-cash (1.7) 0.8 (0.9)
------ ----- ------
Change in warehouse
distribution strategy..... (20.2) 20.2 --
Write-down of assets..... non-cash (20.2) 20.2 --
------ ----- ------
Effect of foreign currency
translation............... -- 0.1 0.1
------ ----- ------
Total...................... $(60.1) $42.2 $(17.9)
====== ===== ======
</TABLE>
1998 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 relate 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 NIKE Hockey
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.
40
<PAGE>
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Employees were terminated from almost all areas of the Company, including
marketing, sales and administrative areas. The total number of employees
terminated was 1,208, with 1,203 having left the Company as of May 31, 1999.
During fiscal year 1999, it was determined that a total of $15.0 million of
the restructuring accrual was not required due to changes in estimates related
to severance payments of $4.0 million, a $3.6 million change in estimated
vendor software costs related to Japan's software development, lease
commitments of $3.2 million due to changes in sub-leasing arrangements, and
other changes of $4.2 million. The $15.0 million is included in "Activity" in
the table below and as an offset in the restructuring charge on the income
statement.
The remaining accrual will be relieved throughout fiscal year 2000, as
leases expire and severance payments, some of which are paid on a monthly
basis, are completed.
Detail of the restructuring charge is as follows:
<TABLE>
<CAPTION>
Reserve
FY98 Balance
Restructuring at
Description Cash/Non-Cash Charge Activity 5/31/99
----------- ------------- ------------- -------- -------
(in millions)
<S> <C> <C> <C> <C>
Elimination of Job
Responsibilities
Company-Wide................. $ (49.8) $ 46.5 $(3.3)
Severance packages.......... cash (29.1) 28.2 (0.9)
Lease cancellations &
commitments................ cash (10.8) 8.4 (2.4)
Write-down of assets........ non-cash (9.6) 9.6 --
Other....................... cash (0.3) 0.3 --
------- ------ -----
Downsizing the Asia Pacific
Headquarters in Hong Kong.... (13.1) 13.0 (0.1)
Severance packages.......... cash (4.6) 4.6 --
Lease cancellations &
commitments................ cash (5.5) 5.4 (0.1)
Write-down of assets........ non-cash (3.0) 3.0 --
------- ------ -----
Downsizing the Japan
Distribution Center.......... (31.6) 30.5 (1.1)
Write-off of assets......... non-cash (12.5) 12.5 --
Software development costs.. cash/non-cash (19.1) 18.0 (1.1)
------- ------ -----
Cancellation of Endorsement
Contracts.................... cash (5.6) 5.3 (0.3)
------- ------ -----
Exiting Certain Manufacturing
Operations at
Bauer NIKE Hockey............ (22.7) 21.7 (1.0)
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) 0.9 (0.7)
Severance packages.......... cash (1.2) 0.9 (0.3)
------- ------ -----
Other......................... (7.1) 6.4 (0.7)
Cash........................ cash (0.6) 0.6 --
Non-cash.................... non-cash (6.5) 5.8 (0.7)
------- ------ -----
Effect of foreign currency
translation.................. -- 0.2 0.2
------- ------ -----
Total......................... $(129.9) $123.6 $(6.3)
======= ====== =====
</TABLE>
41
<PAGE>
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 14--FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts reflected in the consolidated balance sheet for cash
and equivalents and notes payable approximate fair value as reported in the
balance sheet due to the short maturities. The fair value of long-term debt is
estimated using discounted cash flow analyses, based on the Company's
incremental borrowing rates for similar types of borrowing arrangements. The
fair value of the Company's long-term debt, including current portion, is
approximately $384.8 million, compared to a carrying value of $387.1 million
at May 31, 1999 and $384.4 million, compared to a carrying value of $381.0
million at May 31, 1998. See Note 15 for fair value of derivatives.
NOTE 15--FINANCIAL RISK MANAGEMENT AND DERIVATIVES:
The purpose of the Company's foreign currency hedging activities is to
protect the Company from the risk that the eventual dollar cash flows
resulting from the sale and purchase of products in foreign currencies will be
adversely affected by changes in exchange rates. In addition, the Company
seeks to manage the impact of foreign currency fluctuations related to the
repayment of intercompany transactions, including intercompany borrowings. The
Company does not hold or issue financial instruments for trading purposes. It
is the Company's policy to utilize derivative financial instruments to reduce
foreign exchange risks where internal netting strategies cannot be effectively
employed. Fluctuations in the value of hedging instruments are offset by
fluctuations in the value of the underlying exposures being hedged.
The Company uses forward exchange contracts and purchased options to hedge
certain firm purchases and sales commitments and the related receivables and
payables including other third party or intercompany foreign currency
transactions. Purchased currency options are used to hedge certain anticipated
but not yet firmly committed transactions expected to be recognized within one
year. Cross-currency swaps are used to hedge foreign currency denominated
payments related to intercompany loan agreements. Hedged transactions are
denominated primarily in European currencies, Japanese yen and Canadian
dollars. Premiums paid on purchased options and any realized gains are
included in prepaid expenses or accrued liabilities and recognized in earnings
when the underlying transaction is recognized. Deferred option premiums paid,
net of realized gains, were $4.0 million and $21.7 million at May 31, 1999 and
1998, respectively. Gains and losses related to hedges of firmly committed
transactions and the related receivables and payables are deferred and are
recognized in income or as adjustments of carrying amounts when the offsetting
gains and losses are recognized on the underlying transaction. Net realized
and unrealized gains on forward contracts deferred at May 31, 1999 and 1998
were $31.5 million and $12.0 million, respectively.
The estimated fair values of derivatives used to hedge the Company's risks
will fluctuate over time. The fair value of the forward exchange contracts and
cross-currency swaps are estimated by obtaining quoted market prices. The fair
value of option contracts is estimated using option pricing models widely used
in the financial markets. These fair value amounts should not be viewed in
isolation, but rather in relation to the fair values of the underlying hedged
transactions and the overall reduction in the Company's exposure to adverse
fluctuations in foreign exchange rates. The notional amounts of derivatives
summarized below do not necessarily represent amounts exchanged by the parties
and, therefore, are not a direct measure of the exposure to the Company
through its use of derivatives. The amounts exchanged are calculated on the
basis of the notional amounts and the other terms of the derivatives, which
relate to interest rates, exchange rates or other financial indices.
42
<PAGE>
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the aggregate notional principal amounts,
carrying values and fair values of the Company's derivative financial
instruments outstanding at May 31, 1999 and 1998.
<TABLE>
<CAPTION>
May 31,
---------------------------------------------------
1999 1998
------------------------- -------------------------
Notional Notional
Principal Carrying Fair Principal Carrying Fair
Amounts Values Values Amounts Values Values
--------- -------- ------ --------- -------- ------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Currency Swaps........... $ 300.0 $44.3 $ 32.1 $ 300.0 $30.8 $30.3
Forward Contracts........ 2,206.8 29.1 73.2 2,453.1 3.0 62.3
Purchased Options........ 220.0 7.2 3.8 232.4 7.7 1.9
-------- ----- ------ -------- ----- -----
Total.................... $2,726.8 $80.6 $109.1 $2,985.5 $41.5 $94.5
======== ===== ====== ======== ===== =====
</TABLE>
At May 31, 1999 and May 31, 1998, the Company had no contracts outstanding
with maturities beyond one year except the currency swaps which have maturity
dates consistent with the maturity dates of the related debt. All realized
gains/losses deferred at May 31, 1999 will be recognized within one year.
The counterparties to derivative transactions are major financial
institutions with high investment grade credit ratings and, additionally,
counterparties to derivatives three years or greater are all AAA rated.
However, this does not eliminate the Company's exposure to credit risk with
these institutions. This credit risk is generally limited to the unrealized
gains in such contracts should any of these counterparties fail to perform as
contracted and is immaterial to any one institution at May 31, 1999 and 1998.
To manage this risk, the Company has established strict counterparty credit
guidelines which are continually monitored and reported to Senior Management
according to prescribed guidelines. The Company utilizes a portfolio of
financial institutions either headquartered or operating in the same countries
the Company conducts its business. As a result, the Company considers the risk
of counterparty default to be minimal.
NOTE 16--OPERATING SEGMENTS AND RELATED INFORMATION:
Operating Segments. Effective June 1, 1998, the Company adopted SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information".
SFAS No. 131establishes new standards for the way public business enterprises
report information about operating segments, and also requires certain
disclosures about products and services, geographic areas of business and
major customers. The adoption of SFAS No. 131 did not affect the Company's
consolidated financial position or results of operations, but did change
business segment information previously disclosed.
The Company's major operating segments are defined by geographic regions
for subsidiaries participating in NIKE brand sales activity. Other brands as
shown below represent activity for non-NIKE brand subsidiaries (Cole Haan
Holdings Inc., Bauer NIKE Hockey Inc., NIKE Team Sports, Inc., and NIKE IHM,
Inc.) and are considered immaterial for individual disclosure. Where
applicable, "Corporate" represents items necessary to reconcile to the
consolidated financial statements which generally include corporate activity
and corporate eliminations. The segments are evidence of the structure of the
enterprise's internal organization. Each NIKE brand geographic segment
operates predominantly in one industry: the design, production, marketing and
selling of sports and fitness footwear, apparel, and equipment.
Net revenues as shown below represent sales to external customers for each
segment. Intercompany revenues have been eliminated and are immaterial for
separate disclosure. The Company centrally manages substantially all interest
expense activity. Operating segment interest activity is primarily the result
of intercompany lending, which is eliminated for consolidated purposes. The
Company evaluates performance of
43
<PAGE>
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
individual operating segments based on Contribution Profit before Corporate
Allocations, Interest Expense and Income Taxes. On a consolidated basis, this
amount represents Income Before Taxes less Interest Expense as shown in the
Consolidated Statement of Income. Other reconciling items related to
Contribution Profit represent corporate costs that are not allocated to the
operating segments for management reporting and intercompany eliminations for
specific income statement items.
Additions to long-lived assets predominantly represent capital
expenditures, which are shown below by operating segment. At the start of
fiscal year 1999, certain corporate costs, assets and liabilities were
segregated from the U.S. region. Therefore, breakout of capital expenditures
and depreciation activity between United States and Corporate is not available
for years prior to fiscal year 1999. Other additions to long-lived assets
represent additions to identifiable intangibles and goodwill, which are
managed as a corporate expense and are not attributable to any specific
operating segment. See Note 1 for further discussion on identifiable
intangible assets and goodwill.
Accounts receivable, inventory, and fixed assets for operating segments are
regularly reviewed by management and are therefore provided below.
<TABLE>
<CAPTION>
Year Ended May 31,
----------------------------
1999 1998 1997
-------- -------- --------
(in millions)
<S> <C> <C> <C>
Net Revenue
United States................................ $4,723.7 $5,139.4 $5,201.6
Europe....................................... 2,255.8 2,096.1 1,789.8
Asia/Pacific................................. 844.5 1,253.9 1,241.9
Americas..................................... 507.1 599.0 449.2
Other brands................................. 445.8 464.7 504.0
-------- -------- --------
$8,776.9 $9,553.1 $9,186.5
======== ======== ========
Contribution Profit
United States................................ $ 882.3 $ 978.8 $1,411.7
Europe....................................... 338.4 281.2 254.5
Asia/Pacific................................. 78.8 (26.8) 227.4
Americas..................................... 57.6 110.6 74.3
Other brands................................. 22.4 (13.1) 34.7
Corporate.................................... (589.3) (617.7) (655.1)
-------- -------- --------
$ 790.2 $ 713.0 $1,347.5
======== ======== ========
Capital Expenditures
United States................................ $ 48.5
Corporate.................................... 161.7
--------
United States and Corporate.................. $ 210.2 $ 246.8 $ 266.4
-------- -------- --------
Europe....................................... 87.7 121.0 90.0
Asia/Pacific................................. 43.7 103.5 69.7
Americas..................................... 12.5 12.6 6.4
Other brands................................. 30.0 22.0 33.4
-------- -------- --------
$ 384.1 $ 505.9 $ 465.9
======== ======== ========
</TABLE>
44
<PAGE>
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Year Ended May 31,
--------------------------
1999 1998 1997
-------- -------- --------
(in millions)
<S> <C> <C> <C>
Depreciation
United States.................................. $ 22.0
Corporate...................................... 73.3
--------
United States and Corporate.................... $ 95.3 $ 96.8 $ 75.9
-------- -------- --------
Europe......................................... 40.6 37.8 27.0
Asia/Pacific................................... 20.8 23.4 13.8
Americas....................................... 6.8 4.7 2.6
Other brands................................... 34.7 21.8 18.7
-------- -------- --------
$ 198.2 $ 184.5 $ 138.0
======== ======== ========
Accounts Receivable, net
United States.................................. $ 574.4 $ 716.9 $ 844.6
Europe......................................... 551.6 531.9 362.2
Asia/Pacific................................... 141.5 165.9 305.7
Americas....................................... 119.2 125.5 96.3
Other brands................................... 108.8 109.6 114.7
Corporate...................................... 44.6 24.6 30.6
-------- -------- --------
$1,540.1 $1,674.4 $1,754.1
======== ======== ========
Inventory, net
United States.................................. $ 544.6 $ 561.6 $ 528.7
Europe......................................... 316.3 424.5 329.6
Asia/Pacific................................... 81.5 118.5 182.6
Americas....................................... 73.1 79.9 67.6
Other brands................................... 144.6 185.1 188.3
Corporate...................................... 39.2 27.0 41.8
-------- -------- --------
$1,199.3 $1,396.6 $1,338.6
======== ======== ========
Property, Plant and Equipment, net
United States.................................. $ 290.4 $ 322.7 $ 227.5
Europe......................................... 271.4 244.8 177.0
Asia/Pacific................................... 148.0 143.4 92.5
Americas....................................... 21.5 16.9 11.1
Other brands................................... 114.3 119.1 125.1
Corporate...................................... 420.2 306.2 289.2
-------- -------- --------
$1,265.8 $1,153.1 $ 922.4
======== ======== ========
</TABLE>
45
<PAGE>
NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenues by Major Product Lines. Footwear, Apparel and Equipment revenues
are defined as sales to external customers for NIKE brand products. Other
brands revenues includes external sales by the non-NIKE brand subsidiaries.
<TABLE>
<CAPTION>
Year Ended May 31,
--------------------------
1999 1998 1997
-------- -------- --------
(in millions)
<S> <C> <C> <C>
Footwear.......................................... $5,218.4 $5,959.0 $6,144.5
Apparel........................................... 2,914.7 2,991.8 2,493.5
Equipment......................................... 197.9 137.6 44.4
Other brands...................................... 445.9 464.7 504.1
-------- -------- --------
$8,776.9 $9,553.1 $9,186.5
======== ======== ========
</TABLE>
Revenues and Long-Lived Assets by Geographic Area. Geographic information
is similar to that shown above under operating segments with the exception
that Other brands activity is derived predominantly from activity in the
United States and Americas. Revenues derived in the United States were $5.04
billion, $5.46 billion, and $5.54 billion during the year ended May 31, 1999,
1998, and 1997, respectively. Long-lived assets, which are comprised of net
property, plant and equipment and net identifiable assets and goodwill,
attributable to operations in the United States were $1.11 billion, $1.07
billion, and $1.69 billion at May 31, 1999, 1998, and 1997, respectively.
Major Customers. During fiscal 1999, 1998 and 1997, revenues derived from
one customer represented 10%, 11% and 12% respectively of the Company's
consolidated revenues. Sales to this customer are included in all segments of
the Company.
46
<PAGE>
PART III
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
There has been no change of accountants nor any disagreements with
accountants on any matter of accounting principles or practices or financial
statement disclosure required to be reported under this Item.
Item 10. Directors and Executive Officers of the Registrant
We have filed with the Securities and Exchange Commission our definitive
Proxy Statement dated August 13, 1999 for the annual meeting of shareholders
to be held on September 22, 1999. The information required by this Item with
respect to our directors is incorporated by reference into this report from
pages 2 through 5, 9 and 10 of that Proxy Statement. Information called for by
this Item with respect to our executive officers is described under "Executive
Officers of the Registrant" in Item 1 of this Report.
The information required by Items 11-13 of Part III is incorporated by
reference into this report from the indicated pages of our definitive Proxy
Statement dated August 13, 1999 for its 1999 annual meeting of shareholders.
<TABLE>
<CAPTION>
Proxy
Statement
Page No.
---------
<S> <C>
Item 11. Executive Compensation..................................... 7, 10-19
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 7-9
Item 13. Certain Relationships and Related Transactions............. 19-21
</TABLE>
47
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(A) The following documents are filed as part of this report:
<TABLE>
<CAPTION>
Form
10-K
Page
No.
----
<S> <C>
1. FINANCIAL STATEMENTS:
Report of Independent Accountants....................................... 25
Consolidated Statement of Income for each of the three years ended May
31, 1999............................................................... 26
Consolidated Balance Sheet at May 31, 1999 and 1998..................... 27
Consolidated Statement of Cash Flows for each of the three years ended
May 31, 1999........................................................... 28
Consolidated Statement of Shareholders' Equity for each of the three
years ended May 31, 1999............................................... 29
Notes to Consolidated Financial Statements.............................. 30
2. FINANCIAL STATEMENT SCHEDULES:
II--Valuation and Qualifying Accounts................................... F-1
IX--Short-Term Borrowings............................................... F-2
</TABLE>
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
48
<PAGE>
3. 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 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 the fiscal
year ended May 31, 1994).*
12.1 Computation of Ratio of Earnings to Fixed Charges.
18 Letter re: Change in Accounting Principles.
21 Subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers LLP, independent certified public
accountants (set forth on page F-3 of this Annual Report on Form 10-K).
- --------
* Management contract or compensatory plan or arrangement.
Upon written request to Investor Relations, NIKE, Inc., One Bowerman Drive,
Beaverton, Oregon 97005-6453, NIKE will furnish shareholders with a copy of
any Exhibit upon payment of $.10 per page, which represents our reasonable
expenses in furnishing Exhibits.
(B) The following reports on Form 8-K were filed by NIKE during the last
quarter of fiscal 1999:
None.
49
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in millions)
<TABLE>
<CAPTION>
Balance at Charged to Charged Write-Offs Balance at
Beginning Costs and to Other Net of End of
Description of Period Expenses Accounts Recoveries Period
- ----------- ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
For the year ended May
31, 1997:
Allowance for doubtful
accounts................ $43.4 $25.5 $ 1.7 $(13.4) $57.2
Other assets............. 0.0 0.0
----- ----- ----- ------ -----
$43.4 $25.5 $ 1.7 $(13.4) $57.2
===== ===== ===== ====== =====
For the year ended May
31, 1998:
Allowance for doubtful
accounts................ $57.2 $39.8 $(7.0) $(18.6) $71.4
Other assets............. 0.0 0.0
----- ----- ----- ------ -----
$57.2 $39.8 $(7.0) $(18.6) $71.4
===== ===== ===== ====== =====
For the year ended May
31, 1999:
Allowance for doubtful
accounts................ $71.4 $ 7.8 $ 1.8 $ (7.8) $73.2
Other assets............. 0.0 0.0
----- ----- ----- ------ -----
$71.4 $ 7.8 $ 1.8 $ (7.8) $73.2
===== ===== ===== ====== =====
</TABLE>
F-1
<PAGE>
SCHEDULE IX
NIKE, INC.
SHORT-TERM BORROWINGS(1)
(In millions)
<TABLE>
<CAPTION>
Maximum Average Weighted
Weighted Amount Amount Average
Balance Average Outstanding Outstanding Interest Rate
at End Interest During the During the During the
of Period Rate Period(2) Period(3) Period(3)
--------- -------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
For the year ended May
31, 1997:
Notes payable to banks:
U.S. Operations....... $ -- --% $158.2 $ 45.6 5.38%
Non-U.S. Operations... 553.2 4.08 553.2 436.6 3.61
------ ------ ------
$553.2 $711.4 $482.2
====== ====== ======
Interest bearing
accounts payable to
NIAC(4)................ $414.1 6.14% $414.1 $294.9 5.93%
====== ====== ======
For the year ended May
31, 1998:
Notes payable to banks:
U.S. Operations....... $111.8 5.64% $328.5 $ 82.9 6.32%
Non-U.S. Operations... 368.4 6.47 574.7 364.5 6.19
------ ------ ------
$480.2 $903.2 $447.4
====== ====== ======
Interest bearing
accounts payable to
NIAC................... $280.1 5.99% $353.9 $285.4 6.05%
====== ====== ======
For the year ended May
31, 1999:
Notes payable to banks:
U.S. Operations....... $179.3 4.85% $255.3 $155.5 5.97%
Non-U.S. Operations... 239.8 3.87% $407.5 $303.6 3.88
------ ------ ------
$419.1 $662.8 $459.1
====== ====== ======
Interest bearing
accounts payable to
NIAC................... $ 98.0 5.30% $271.4 $183.5 5.67%
====== ====== ======
</TABLE>
- --------
Notes:
(1) For information pertaining to the general terms of short-term borrowings,
see Note 4 to the Consolidated Financial Statements.
(2) Represents the maximum amount of short-term borrowing outstanding at a
month-end during the respective period.
(3) The average amount outstanding during the period is calculated by dividing
the total of principal outstanding at each month-end by 12. The weighted
average interest rate during the period is calculated by dividing the
interest expense for the year by the average amount outstanding.
(4) NIAC refers to Nissho Iwai American Corporation, a subsidiary of Nissho
Iwai Corporation, a Japanese trading company.
F-2
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference, in the documents listed
below, of our report dated June 29, 1999 relating to the financial statements
and financial statement schedules, which appears in this Form 10-K:
1. Registration Statement on Form S-8 (No. 2-81419) of NIKE, Inc.;
2. Registration Statement on Form S-8 (No. 33-29262) of NIKE, Inc.;
3. Registration Statement on Form S-3 (No. 33-43205) of NIKE, Inc.;
4. Registration Statement on Form S-3 (No. 33-48977)of NIKE, Inc.;
5. Registration Statement on Form S-3 (No. 33-41842) of NIKE, Inc.;
6. Registration Statement on Form S-8 (No. 33-63995) of NIKE, Inc.;
7. Registration Statement on Form S-3 (No. 333-15953) of NIKE, Inc.; and
8. Registration Statement on Form S-3 (No. 333-71975)of NIKE, Inc.
/s/ PricewaterhouseCoopers LLP
Portland, Oregon
August 26, 1999
F-3
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: August 26, 1999
By /s/ Philip H. Knight
_____________________________________
Philip H. Knight
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
Principal Executive Officer and Director:
<S> <C> <C>
/s/ Philip H. Knight Chairman of the Board and August 26, 1999
____________________________________ Chief Executive Officer
Philip H. Knight
Principal Financial and Accounting Officer:
/s/ Robert E. Harold Interim Chief Financial August 26, 1999
____________________________________ Officer
Robert E. Harold
Directors:
/s/ Thomas E. Clarke Director August 26, 1999
____________________________________
Thomas E. Clarke
/s/ Jill K. Conway Director August 26, 1999
____________________________________
Jill K. Conway
/s/ Ralph D. Denunzio Director August 26, 1999
____________________________________
Ralph D. Denunzio
/s/ Richard K. Donahue Director August 26, 1999
____________________________________
Richard K. Donahue
/s/ Delbert J. Hayes Director August 26, 1999
____________________________________
Delbert J. Hayes
/s/ Douglas G. Houser Director August 26, 1999
____________________________________
Douglas G. Houser
</TABLE>
S-1
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ John E. Jaqua Director August 26, 1999
____________________________________
John E. Jaqua
/s/ Charles W. Robinson Director August 26, 1999
____________________________________
Charles W. Robinson
/s/ A. Michael Spence Director August 26, 1999
____________________________________
A. Michael Spence
/s/ John R. Thompson, Jr. Director August 26, 1999
____________________________________
John R. Thompson, Jr.
</TABLE>
S-2
<PAGE>
EXHIBIT 12.1
NIKE, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Year Ended May 31,
----------------------
1999 1998 1997
------ ------ --------
(in millions)
<S> <C> <C> <C>
Net income.............................................. $451.4 $399.6 $ 795.8
Income taxes............................................ 294.7 253.4 499.4
------ ------ --------
Income before income taxes............................ 746.1 653.0 1,295.2
------ ------ --------
Add fixed charges
Interest expense(A)................................... 51.0 66.5 55.1
Interest component of leases(B)....................... 43.2 43.2 28.0
------ ------ --------
Total fixed charges................................. 94.2 109.7 83.1
------ ------ --------
Earnings before income taxes and fixed charges(C)....... $833.4 $756.2 $1,375.5
====== ====== ========
Ratio of earnings to total fixed charges................ 8.85 6.89 16.55
====== ====== ========
</TABLE>
- --------
(A) Interest expense includes interest 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.
<PAGE>
EXHIBIT 18
- -------------------------------------------------------------------------------
PricewaterhouseCoopers LLP
121 SW Morrison
Street Suite 1800
Portland, OR 97204
Telephone (503)
478-6000
Facsimile (503)
276-7099
June 29, 1999
To the Board of Directors
of NIKE, Inc.
Dear Directors:
We are providing this letter to you for inclusion as an exhibit to your Form
10-K filing pursuant to Item 601 of Regulation S-K.
We have audited the consolidated financial statements included in NIKE, Inc.'s
Annual Report on Form 10-K for the year ended May 31, 1999 and issued our
report thereon dated June 29, 1999. Note 2 to the consolidated financial
statements describes a change in the Corporation's method of determining the
cost of inventories from the last-in, first-out to the first-in, first-out
method. Management has advised us that they believe the change is to a
preferable method in your circumstances because it will result in a better
match of the cost of inventory sold with revenues.
It should be understood that the preferability of one acceptable method of
inventory accounting over another has not been addressed in any authoritative
accounting literature and in arriving at our opinion expressed below, we have
relied on management's business planning and judgment. Based on our
discussions with management and the stated reasons for the change, we believe
that such change represents, in your circumstances, the adoption of a
preferable alternative accounting principle for inventories in confirmity with
Accounting Principles Board Opinion No. 20.
Yours very truly,
/s/ PricewaterhouseCoopers LLP
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
NIKE, Inc. has 36 wholly-owned subsidiaries, 6 of which operate in the
United States, and 31 of which operate in foreign countries. All of the
subsidiaries, except for NIKE IHM, Inc., carry on the same line of business,
namely the design, marketing, distribution and sale of athletic and leisure
footwear, apparel, accessories, and related equipment. NIKE IHM, Inc., a
Missouri corporation, manufactures plastics and Air-Sole shoe cushioning
components.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE MAY 31,1999 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-END> MAY-31-1999
<CASH> 198
<SECURITIES> 0
<RECEIVABLES> 1,613
<ALLOWANCES> 73
<INVENTORY> 1,199
<CURRENT-ASSETS> 3,265
<PP&E> 2,001
<DEPRECIATION> 736
<TOTAL-ASSETS> 5,248
<CURRENT-LIABILITIES> 1,447
<BONDS> 386
0
0
<COMMON> 3
<OTHER-SE> 3,332
<TOTAL-LIABILITY-AND-EQUITY> 5,248
<SALES> 8,777
<TOTAL-REVENUES> 8,777
<CGS> 5,494
<TOTAL-COSTS> 5,494
<OTHER-EXPENSES> 2,473
<LOSS-PROVISION> 20
<INTEREST-EXPENSE> 44
<INCOME-PRETAX> 746
<INCOME-TAX> 295
<INCOME-CONTINUING> 451
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 451
<EPS-BASIC> 1.59
<EPS-DILUTED> 1.57
</TABLE>
