MANAGEMENT DISCUSSION AND ANALYSIS

• In fiscal 1998, net income decreased for the first time in four years, dropping 49.8% to $399.6 million (or $1.35 per diluted share). Net income included a pre-tax restructuring charge of $129.9 million, or $79.5 million after taxes (or $0.27 per diluted share).

• Fiscal 1998 revenues increased 4% to a record $9.6 billion, coming off annual revenue increases of 42% and 36% in the prior two years, respectively. Despite the economic crisis in Asia, total revenues generated outside the United States grew 21% in constant dollars, and now represent 41% of total revenues.

• Gross margins dropped to 36.5% of revenues, compared to 40.1% and 39.6% in the prior two years, respectively.

• Selling and administrative expenses grew to 27.5% of revenues, compared to 25.1% and 24.6% in the prior two years, respectively.

RESULTS OF OPERATIONS

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 the Company's 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 in the United States declined for the first time in four years, as demand for Nike product slowed compared to record sales in the prior year, again resulting in excess inventory levels and an increase in the level of discounted product sales. Despite the issues facing Asian markets, management believes there is tremendous opportunity for growth in markets outside the United States. The Company continues to invest in infrastructure and local marketing and advertising to capitalize on these opportunities. The Company believes there are growth opportunities in all regions in which it does business, however, until the economies in the Asia Pacific region show signs of recovery, the Company may not realize those growth opportunities.

During the fourth quarter of fiscal 1998, the Company took specific actions to reduce its overall cost structure in light of slower near-term growth rates. Certain of these actions resulted in a pre-tax restructuring charge in the fourth quarter of fiscal 1998 of $129.9 million, (see below and Note 13 for a more complete analysis of this charge).

Revenues increased 4% over fiscal year 1998, 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. footwear and apparel revenues increased 12%, 21% on a constant dollar basis, and now represent 41% of total Company revenues. Revenue increases were experienced in every region except the United States. Outside the U.S., Europe increased 15% (24% in constant dollars), with footwear and apparel increasing 6% and 35%, respectively, (14% and 44% in constant dollars, respectively), Asia-Pacific revenues were flat compared with the prior year (11% increase in constant dollars) with footwear down 8% and apparel increasing 34%, respectively, (2% increase and 50% increase, in constant dollars, respectively), and the Americas increased 32% (35% in constant dollars), with footwear and apparel increasing 20% and 78%, respectively, (23% and 83% in constant dollars, respectively).

The countries outside the U.S. that represent the largest percent of the Company's total international business are: Japan, which increased 4% (13% in constant dollars), 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).

U.S. footwear and apparel revenues decreased 2% compared to the prior year. U.S. footwear, representing the Company'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 is due to increased mix of lower priced product, given the higher volume of close-out sales. The five largest footwear categories are Training, Running, Basketball, Kids and Brand Jordan. These represent approximately 80% of the total U.S. footwear business, and all but Brand Jordan experienced revenue declines of between 4% and 17% compared to the prior year. Brand Jordan increased 57%. In addition, Golf and Soccer showed healthy increases over the prior year, improving 71% and 74%, respectively. Outdoor and Tennis experienced revenue reductions, down 7% and 14%, respectively. U.S. apparel increased $150 million, or 11%, over the prior year. Nearly all apparel 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%). Team Sports Apparel was the only category to show any significant decrease compared with the prior year, down 8%.

Other Revenues, which includes U.S. and non-U.S. Nike branded Equipment business, Bauer Inc., Cole Haan, Sports Specialties Corp., and Tetra Plastics, Inc., increased $53.8 million, or 10%, to $602.3 million. Nike branded Equipment increased over $90 million, representing growth from new product introductions, while the non-Nike branded subsidiaries all experienced revenue reductions.

The Company expects that revenue growth in fiscal year 1999 will be slightly down compared to fiscal 1998. During the first half of fiscal 1999, retail should experience a sell through of the large quantities of close-out inventories that have flooded the U.S. market in the last two to three quarters. As a result, the Company expects revenue shortfalls in the U.S. for the first half of fiscal 1999 compared to very strong sales in the comparable periods of fiscal year 1998. However, revenues should increase slightly in the second half of the year. In Europe, revenue growth is expected to be just slightly less than fiscal year 1998, led principally by growth in the apparel business. In Asia, the ultimate effect of the economic crisis on consumer spending is difficult to forecast. However, the Company's business model would suggest that regional revenues could be down by as much as 30% compared to fiscal 1998.

The breakdown of revenues follows:
(in millions)

Gross margins declined to 36.5% of revenues in fiscal year 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 the Company's 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. The Company expects that overall margins will continue to compare unfavorably through the first six months of fiscal 1999, but recover to positive comparisons in quarters three and four. Margins in the first six months of fiscal 1999 will be affected by the continued management of high close-out inventory levels in certain segments of the business, most notably in U.S. apparel, as the U.S. apparel retail environment remains glutted, Europe's footwear segment, as orders soften slightly through the first six months of fiscal 1999, and virtually all segments of the Asia Pacific business. The Company currently believes that gross margins as a percentage of revenues should improve slightly over fiscal 1998, in part due to the improved inventory position at the beginning of the fiscal year.

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. Management believes fiscal 1999 selling and administrative spending will support the level of business to be driven throughout the year, with the goal of building momentum for the brand going into fiscal year 2000. Given the slightly decreased revenue scenario, selling and administrative spending should be in the 27.5% to 28.0% range of revenues, with a target for future years closer to 25%.

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 given decreased working capital requirements. See further discussion under liquidity and capital resources below.

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 the prior year 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.

Worldwide futures and advance orders for Nike brand athletic footwear and apparel scheduled for delivery from June through November 1998, totaled approximately $4.2 billion, 13% lower than such orders booked in the comparable period of fiscal 1998. The orders and percentage growth in these orders is not necessarily indicative of the anticipated growth in revenues which the Company expects to experience for subsequent periods. This is because the mix of orders can shift between advance/futures and at-once orders. In addition, exchange rate fluctuations can cause differences in the comparisons between futures orders and actual revenues.

As further explained in Note 1 to the Consolidated Financial Statements, prior to fiscal year 1997, certain of the Company's 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 1998 Restructuring Charge
During the fourth quarter of fiscal 1998, the Company recorded a restructuring charge of $129.9 million as a result of certain of the Company's actions to better align its overall cost structure and organization with planned revenue levels. The Company is continuing to evaluate all areas of the business. However, as a result of the specific plans described below, the Company expects to remove approximately $100 million from its cost structure in fiscal 1999 and beyond. These savings are predominantly 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. There are no significant costs that have not been recognized related to these plans. The restructuring activities (shown below in tabular format) primarily relate to the following:

The elimination of job responsibilities company-wide. Employees were terminated from all regions and almost all areas of the Company, 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 are being held for sale as of May 31, 1998. A total of 1,039 employees were terminated as part of the plan, of which 845 have been paid and left the Company as of May 31, 1998. The remaining 194 will receive their severance packages and leave the Company in the first quarter of fiscal 1999.

Downsizing of the Asia Pacific Headquarters in Hong Kong. The Company made the decision to reduce the size of the Asia Pacific Headquarters' operations and to relocate the regional headquarter responsibilities to its 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 have been sold or are being held for sale as of May 31, 1998. A total of 118 employees were terminated as part of the plan to downsize and relocate the headquarters. Of the 118, 106 have been paid and left the Company as of May 31, 1998. The remaining 12 will receive their severance packages and leave the Company in the first quarter of fiscal 1999.

Downsizing of the Japan distribution center. The Company is 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 the Company's business in Japan, the forecasted volume of inventories and product flow has decreased significantly from the original plans. Because of this, management is in the process of redesigning the distribution center to efficiently accommodate new forecasted volumes of inventories and product flow. The costs included in the restructuring charge are costs incurred to date on the construction of the distribution center that will have no use under the redesigned facility.

Cancellation of endorsement contracts. As a result of the downturn in the Company's business, the Company has refocused its marketing along core product categories. The Company is in the process of reviewing all endorsement contracts in non-core product categories. The charge includes the final settlements for the those contracts where termination agreements with endorsees have been reached, releasing the endorsees from all contractual obligations. Final payment of the termination settlements will be made in the first quarter of fiscal 1999.

(in millions)

Exiting certain manufacturing operations at the Company's Bauer subsidiary. The charge related to the decision to exit certain manufacturing operations consists of machinery and equipment that is no longer in use and being held for sale, as well as the planned disposal of two operating plants. These costs represent the write-down of those facilities to their estimated fair value less costs to sell. The Company is currently actively negotiating sales agreements. As a result of the reduced level of manufacturing operations, 51 employees were terminated, 33 of which had left the Company as of May 31, 1998.

Future cash outlays are anticipated to be completed by the end of fiscal 1999, excluding certain lease commitments that will continue through July 2001. The Company will continue to evaluate its cost structure and adjust its organization to reflect changing business environments around the world.

Import Quotas and Anti-Dumping Duties
The Company's 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 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.

Nevertheless, the textile footwear anti-dumping duties do not cover sports footwear and, in the case of synthetic/leather footwear, so-called "special technology" footwear for use in sporting activities are expressly excluded from the duties. The Company has no reason to believe that these sports footwear exclusions will be changed and, while the exclusions are subject to some interpretation by customs authorities, the Company believes that most of its footwear sourced in the target countries for sale in the EU fits within the exclusions and, therefore, the Company will not be materially affected by the anti-dumping duties. If there were changes in the exclusions, the Company would consider, in addition to its possible legal remedies, shifting the production of such footwear to other countries in order to maintain competitive pricing. The Company believes that it is prepared to deal effectively with any such change of circumstances and that any adverse impact would be of a short-term nature. The Company continues to closely monitor international restrictions and maintains its multi-country sourcing strategy and contingency plans. The Company believes that its major competitors stand in much the same position regarding such trade measures.

Year 2000
The year 2000 issue is the result of computer programs using two digits rather than four to define the applicable year. Such software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations leading to disruptions in the Company's activities and operations. If the Company, its significant customers, or suppliers fail to make necessary modifications and conversions on a timely basis, the year 2000 issue could have a material adverse effect on Company operations. However, the impact cannot be quantified at this time. The Company believes that its competitors face a similar risk.

In May 1997, the Company established a corporate-wide project team to identify non-compliant software and complete the corrections required by the year 2000 issue. The Company intends to fix or replace non-compliant internal software with code or software that is year 2000 compliant. While a plan is in place, significant work remains to be done. The Company's current target is to resolve compliance issues in important business information systems by December 31, 1998. Remediation and testing activities are underway on the Company's core business applications first, and the Company is implementing plans for smaller computer systems. The Company is also focusing on major customers and suppliers to assess their compliance. Nevertheless, there can be no absolute assurance that there will not be a material adverse effect on the Company if third party governmental or business entities do not convert or replace their systems in a timely manner and in a way that is compatible with the Company's systems.

Costs related to the year 2000 issue are funded through operating cash flows. Through fiscal 1998, the Company expended approximately $20 million in remediation efforts, including the cost of new software and modifying the applicable code of existing software. The Company estimates remaining costs to be between $20 and $25 million. The Company presently believes that the total cost of achieving year 2000 compliant systems is not expected to be material to Nike's financial condition, liquidity, or results of operations.

Time and cost 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; and remediation success of the Company's customers and suppliers.

Fiscal 1997 Compared To Fiscal 1996
Significant growth in worldwide revenues and improved gross margin percentage were the primary factors contributing to record earnings for fiscal 1997 as compared to 1996. In the United States, footwear revenues increased $1 billion, or 36%, demonstrating continued market share gains and industry growth. U.S. apparel exceeded $1 billion in revenues for the first time, increasing $588.5 million, or 70%, over the previous year. Revenues from international (non-U.S.) markets increased 49% over the previous year, and now represent 38% of total revenues.

The Company experienced revenue growth in fiscal 1997 in all breakout categories (see chart). U.S. footwear represented the largest increase in total dollars, improving by almost $1 billion, or 36%, as a result of 28% more pairs sold and a 6% increase in average selling price. The increase in average selling price was due to a change in product mix as well as increased prices in effect during the second half of the fiscal year in certain categories. Men's Basketball, Men's Running, Men's Cross-Training, Kids, and Women's Fitness comprise approximately 79% of the total U.S. footwear business, and individually increased 35%, 59%, 26%, 53% and 51%, respectively. Brand Jordan and Golf categories increased significantly over the prior year, improving 133% and 111%, respectively. Two categories experienced revenue reductions, Men's Court and Outdoor, down 22% and 24%, respectively. U.S. apparel experienced growth in all categories, demonstrating the strength of the Nike brand. Brand revenues outside of the U.S. increased $1.1 billion, or 49%. The U.S. dollar strengthened against nearly all currencies. Had the U.S. dollar remained constant with that of the prior year, non-U.S. revenues would have increased $1.4 billion, or 59%. By region, Asia Pacific increased $511 million, or 70% (84% on a constant dollar basis), Europe increased $497 million, or 38% (48% on a constant dollar basis) and the Americas (which includes Canada and Latin America) increased $137 million, or 44% (46% on a constant dollar basis). The most significant increases were in Japan, Korea, United Kingdom, Italy, and Canada. Other Brands which includes Bauer Inc., Cole Haan, Sports Specialties, Corp., and Tetra Plastics, Inc., decreased 3% to $504 million.

Gross margins increased to 40.1% of revenues in fiscal 1997, exceeding 40% for the first time in Company history. The improved percentage was principally driven by price increases in certain U.S. footwear categories in effect the second half of the year. This was offset by slight reductions in gross margin percentages from increased close-out sales as a percentage of total sales, most predominantly at Bauer, due to the softening of the in-line skate market and liquidation of non-Bauer brand product to consolidate to a single Bauer brand.

Selling and administrative expenses represented 25.1% of revenues compared with 24.6% in the prior year. Nike brand expenses increased $353 million in the U.S. and $355 million outside the U.S. Increases were largely driven by increased sales and marketing spending, as well as infrastructure-related costs to support growth outside the U.S.

Interest expense increased $12.8 million due to increased short-term and new long-term borrowings needed to fund the increased level of operations, including increased working capital requirements and infrastructure.

Other income/expense was a net expense of $32.3 million in fiscal 1997, compared with $36.7 million in 1996. The majority of the reduction was attributable to increased interest income, higher gain on disposal of assets and income from a new promotional event staged in Japan, offset by a one-time Bauer non-recurring charge of $18.1 million, which includes, among other things, moving certain products to offshore production and the closing of certain facilities.

LIQUIDITY AND CAPITAL RESOURCES

The Company's financial position remains strong at May 31, 1998. Compared to May 31, 1997, total assets increased less than 1%, or $36.2 million, and remained at $5.4 billion. Shareholders' equity increased $105.7 million, or 3.3% to $3.3 billion. Working capital decreased $135 .2 million, to $1.8 billion, and the Company's current ratio was 2.07:1 at May 31, 1998 compared to 2.05:1 at the end of the prior fiscal year.

Despite significantly lower net income compared with fiscal 1997, cash provided by operations increased by $194.4 to $517.5 million for the year ended May 31, 1998. This was primarily due to lower working capital at May 31, 1998 compared to the previous year end as a result of a lower revenue growth rate. Of the major components comprising working capital, inventories increased $58.0 million, or 4%, accounts receivable decreased $79.7 million, or 4.5%, and accounts payable decreased $102.5 million or 15%. The increase in inventories compared with a year ago is due most significantly to increased levels of excess and slow-moving inventory. Due to the sudden and significant downturn in consumer spending during the second half of the fiscal year, most notably in the Asian markets, as well as the slow-down in the U.S. market given the glut of inventory at retail, the Company has experienced higher levels of order cancellations in fiscal 1998 as compared to the prior year. As a result, management implemented plans in fiscal 1998 to reduce the high levels of excess inventory. As of May 31, 1998, overall inventory levels, including close-out inventory levels, are consistent with expected order volumes, except for close-out inventory in Asia Pacific which will require further liquidation through fiscal 1999. The Company expects cash provided by operations during fiscal 1999 to be positively affected by the aggressive management of key working capital components.

Additions to property, plant and equipment for fiscal 1998 were $506 million, split fairly evenly between the U.S. and non-U.S. operations, compared to $466 million in fiscal 1997. Additions in the U.S. were comprised primarily of the U.S. headquarters expansion, customer service distribution facilities, ongoing investment in systems infrastructure, and retail expansion. Outside the U.S., the majority of the increase is related to expansion of customer service distribution centers in Europe, Japan and Korea. The Company expects fiscal 1999 capital expenditures to be in similar areas and are estimated to be slightly higher than 1998.

Additions to long-term debt totaled approximately $100 million in fiscal 1998, used primarily to replace short-term notes payable.

In fiscal 1997, the Company filed a shelf registration with the Securities and Exchange Commission for the sale of up to $500 million of debt securities. The filing has enabled the Company to issue debt from time to time during the next several years. Under this program, the Company has issued $300 million of medium-term notes, $100 million in the first quarter of fiscal 1998, which mature in three to five years, and $200 million in the prior year, maturing December 1, 2003. The proceeds were swapped into Dutch Guilders to obtain medium-term fixed rate financing to support the growth of the Company's European operations. In addition, the Company used excess cash to reduce notes payable outside the U.S., and 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 its anticipated operating, global infrastructure expansion, and capital needs. Significant short- and long-term lines of credit are maintained with banks which, along with cash on hand, provide adequate operating liquidity. Liquidity is also provided by the Company's commercial paper program, under which there was $92 million and $0 outstanding at May 31, 1998 and 1997, respectively.

Dividends per share of common stock for fiscal 1998 rose $.08 over fiscal 1997 to $.46 per share. Dividend declaration in all four quarters has been consistent since February 1984. Based upon current projected earnings and cash flow requirements, the Company anticipates continuing a dividend and reviewing its amount at the November Board of Directors meeting. The Company's policy continues to target an annual dividend in the range of 15% to 25% of trailing twelve-month earnings.

In the fourth quarter, the Company purchased a total of 0.9 million shares of Nike's Class B common stock for $38.9 million under the new $1 billion four-year program approved in December 1997. During all of fiscal year 1998, the Company purchased 1.2 million shares for a total of $53.9 million under the new program. Additionally, during fiscal year 1998, the Company completed the previous $450 million share repurchase program approved in July 1993, by purchasing a total of 3.2 million shares for $148.4 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.

MARKET RISK

The Company is exposed to the impact of foreign currency fluctuations and interest rate changes due to its international sales, production, and funding requirements. In the normal course of business, the Company employs established policies and procedures to manage its exposure to fluctuations in the value of foreign currencies and interest rates using a variety of financial instruments. It is the Company's 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 the Company's objectives and the Company does not enter into foreign currency or interest rate transactions for speculative purposes.

In addition to product sales and costs, the Company has foreign currency risk related to debt that is denominated in currencies other than the U.S. dollar. The Company's 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, the Company maintains 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.

The Company is exposed to changes in interest rates primarily as a result of its long-term debt used to maintain liquidity and fund capital expenditures and international expansion. The Company's interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives the Company maintains fixed rate debt as a percentage of aggregate debt and finances working capital needs through its payables agreement with Nisslo Iwai American Corporation, various bank loans, and commercial paper.

Market Risk Measurement
Foreign exchange risk and related derivatives use is monitored 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 were made assuming normal market conditions and a 95% confidence level. There are various modeling techniques that can be used in the VaR computation. The Company's computations are based on interrelationships between currencies and interest rates (a "variance/co-variance" technique). These interrelationships were determined 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. The potential loss in option value was adjusted for the estimated sensitivity (the "delta" and "gamma") to changes in the underlying currency rate. The model includes all of the Company's forwards, options, cross-currency swaps and yen-denominated debt (i.e., the Company's market-sensitive derivative and other financial instruments as defined by the SEC). 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 will be incurred by the Company, 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 the Company's foreign currency sensitive financial instruments, derived using the VaR model, was $11.7 million at May 31, 1998. The Company believes that this amount is immaterial and that such a hypothetical loss in fair value of its derivatives would be offset by increases in the value of the underlying transactions being hedged.

The Company's 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.