| 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 the Company and its subsidiaries. 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: 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. Total advertising and promotion expenses were $1.13 billion, $978.3 million and $642.5 million for the years ended May 31, 1998, 1997 and 1996, respectively. Included in prepaid expenses and other assets was $175.9 million and $111.9 million at May 31, 1998 and 1997, 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. Cost is determined using the last-in, first-out (LIFO) method for substantially all U.S. inventories. Non-U.S. inventories are valued on a first-in, first-out (FIFO) basis. 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, 1998 and 1997, the Company had patents, trademarks and other identifiable intangible assets with a value of $220.7 million and $219.2 million, respectively. The Company's excess of purchase cost over the fair value of net assets of businesses acquired (goodwill) was $321.0 million and $326.3 million at May 31, 1998 and 1997, respectively. 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 $105.9 million and $81.2 million at May 31, 1998 and 1997, respectively. Amortization expense, which is included in other income/expense, was $19.8 million, $19.8 million and $21.8 million for the years ended May 31, 1998, 1997 and 1996, respectively. Intangible assets are periodically reviewed by the Company for impairments where the fair value is less than the carrying value. Other liabilities: Other liabilities include amounts with settlement dates beyond one year, and are primarily composed of long-term deferred endorsement payments of $9.5 million and $15.8 million at May 31, 1998 and 1997, respectively. Deferred payments to endorsers relate to amounts due beyond contract termination, which are discounted at various interest rates and accrued over the contract period. Endorsement contracts: Accounting for endorsement contracts 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. Foreign currency translation: Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are included in the currency translation adjustment 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 and October 30, 1995, the Company issued additional shares in connection with two-for-one stock splits 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 these stock splits. 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 1998 presentation. These changes had no impact on previously reported results of operations or shareholders' equity. |
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