Last year this section was as exuberant as the Chicago Bulls' locker room after Game Six. In hindsight, fiscal 1997 was the last year in our "3-peat", a string that took us from revenues of $3.8 billion to $9.2 billion faster than even we thought possible.

Fiscal 1998 provides a counterpoint to the past three years. Ask a reporter, a financial analyst, a competitor, a chat room, a shareholder for their opinion on "why" and you might get a different answer from each.

"It was the 'brown shoes' that did them in... Kids are hanging up their basketball shoes in favor of boots... Athlete endorsements no longer sell shoes... Price points are too high. (How many $150 shoes do they think we need?) ... They're in a competitive vacuum... They're not in a competitive vacuum... The labor issue is finally affecting consumers' opinion of Nike." It reminds us a bit of the film Rashomon, where a number of people witness the same incident but afterward tell very different accounts of what they saw.

We won't dispute that any and all of these factors may have adversely impacted our financial performance this past year. To what degree? That's a tougher question. Suffice it to say that there is some validity to each charge, though none carry the weight that our media would indicate.

So, with the First Amendment firmly in hand, we offer our own opinion on how we took such dead aim and missed the target as widely as we did. In the USA region, we sailed into the year after a 43 percent increase in sales in fiscal '97. While that was extraordinary – particularly in light of the 32 percent and 24 percent increases in fiscal '96 and '95, respectively – in hindsight, it was too much.

As we were celebrating the exceptional year, retail channels were trying to digest a huge amount of product. As a result, the level of promotional or close-out product compared to the prior year increased. This put pressure on gross margins. So, with the top-line facing difficult comparisons, and the level of close-outs creeping up, profitability in the USA region suffered significantly by comparison in fiscal '98.

But that's not the whole story. If the USA problems were solid body blows, the panic that devoured Asian economies coupled with a big drop in consumer spending was a roundhouse left that we didn't see coming. We rode into fiscal '98 with Asia Pacific futures orders up a remarkable 55 percent. Our business appeared to be continuing on a tear that started in the early 1990s. The first quarter of the fiscal year saw huge growth in the region with revenues increasing 68 percent and futures up another 33 percent. Then came the Asian economic crisis. Markets across Asia saw sharp devaluations in currencies and significant drop-offs in consumer spending. After the 33 percent increase in futures orders at the end of the first quarter, three months later orders were down 12 percent.

This rapid deterioration in the Asian Pacific marketplace hit us particularly hard, and we could not react quickly enough to adjust production levels to reflect consumer demand. Compounding the problem, we were unable to adjust our spending to compensate for the velocity of the order slowdown.

Additionally, while the USA region has an established channel to efficiently move close-out product, the Asia Pacific region does not, making the movement of close-out product a more arduous and costly task.

So, halfway through the year we were facing some serious issues. We asked some difficult questions of ourselves, about what kind of changes we needed to make, what revisions in our strategies we should consider, and how we could best address both the short- and long-term challenges ahead.

At the top of the agenda was the organization. After years of rapidly adding to the ranks, we needed to stop and take a look at where we were and where we needed to be. Over the last three years, we had grown from 9,500 employees to 21,800. The structure was essentially the same, just a lot bigger. Those three years of unchecked growth likely obscured our ability to look at our business objectively. The revenue growth was there for the taking, and our response was to add human resources to enable that growth to occur.

Soon after, in the face of slowing top-line growth, the time came to shift focus away from adding employees and toward assimilating and training the many new team members.

We also began to think about redundancies and inefficiencies in the structure. In developing our business outside the U.S., we built strong regional headquarters designed to support the fledgling country businesses. However, as many of these countries had grown into substantial businesses, we decided to reduce the size of the regional headquarters and bolster the country organizations, thereby reducing regional overhead and more closely aligning costs with country revenues. In turn, we will be better able to focus on profitability at the country level.

Unfortunately, as part of this, the company announced a layoff of approximately 1,600 positions, or seven percent of the workforce. That was part of a larger restructuring effort as we began to look at other areas in the cost and capital structures.

After seeing the sharp declines in the Asian economies, Japan and Korea in particular, we elected to make some changes in the planned warehouses in the region. In Japan, we had planned to build two separate facilities; one to handle footwear and the other for apparel. In light of the sharp slowdown in volume growth, we decided to put footwear and apparel together within the existing facility.

All these measures – the reduction in workforce, the downsizing of regional headquarters, the consolidation of warehouses – along with the impact of continued plans to exit certain Bauer manufacturing operations, resulted in a restructuring charge of $129.9 million in the fourth quarter. In the face of all these changes, our belief in the long-term strength of the Nike business model, and its ability to generate strong cash flow remained strong. This belief led us to implement a four-year, $1 billion share repurchase program in the third quarter of fiscal '98.

IT'S THE PRODUCT, STUPID

While we spent a lot of time on inventory and organizational issues, we didn't forget the most important tasks at hand, the reasons every Nike employee comes to work every day – to create great product, to lead the athletic industry in innovation, and to serve the athlete. With this in mind, and despite all the self-flagellation, fiscal '98 did hold some successes.

In October, the launch of the new, signature JORDAN brand marked an extension of MJ's intimate association with the product creation process at Nike. Back in 1984, that process and the resulting product revolutionized the industry when Nike introduced the Air Jordan shoe.

Today, JORDAN is a pure, authentic basketball brand of premium, high-performance basketball footwear and apparel inspired by the performance, vision and direct involvement of Michael Jordan. The brand was clearly the story of the basketball footwear business in the year, adding yet another successful chapter to this unique partnership. We believe the man and the product can show similar market strength into the next century.

Nike's soccer business was booted to a new level in fiscal '98 with the launch of the Mercurial. After working with athletes like the two-time FIFA Player of the Year, Ronaldo, we introduced our best soccer boot to date. The Mercurial is engineered to be extremely light while enhancing the players' touch and control of the ball.

Four years ago, our presence at the World Cup was limited. At World Cup '98, six teams – Brasil, Holland, Italy, Nigeria, South Korea and the United States – competed in uniforms designed by Nike. Our commitment to "the beautiful game" is stronger than ever this year, with new partnerships announced with U.S. Soccer and top European club teams such as FC Barcelona and Inter-Milan.

Roaming the streets of Paris during World Cup, a Nike employee noticed someone had painted the windows of a small cafe with images of soccer players, all wearing Nike footwear. That artist's perception of Nike as a legitimate contender in soccer is a vivid illustration of our growth in the world's biggest sport.

In the spring, we introduced the first line of Tiger Woods' footwear and apparel, helping expand our target consumer group in the golf category. For the year, the golf business posted a healthy global increase of 81 percent.

In October, Nike presented its first product in the Sport Timing category, the Triax running watch. Designers worked with world-class athletes like Lynn Jennings, Alberto Salazar and Bob Kennedy to gain a fresh perspective on ergonomics, durability, display and function. The two years of design and development work paid off, with watches selling out in the U.S. and several countries around the world.

While we will never refer to this past year as our championship season, it was a year of great achievement for Nike-clad teams. In the U.S. alone, the Denver Broncos finally hoisted the Super Bowl trophy, the Detroit Red Wings swept to their 2nd straight Stanley Cup, and the University of Kentucky took home NCAA men's basketball honors. Cynthia Cooper grabbed the first WNBA MVP award. Marion Jones posted some of the fastest times in history. And the Chicago Bulls were, well, the Chicago Bulls.

We continued to make strides in growing our women's business, with a new footbed design set to hit the market in fall '98 and the opening of our women's concept shops within retail partners such as Dick's and The Finish Line.

And, while it may not be as thrilling to talk about, the USA region's ability to move through a large level of close-out footwear product was testament to the strong operational organization in the region. Although the new fiscal year begins with US footwear orders continuing negative comparisons, the much improved shape of the inventory bodes well for improved margins in USA footwear in fiscal '99.

Finally, the clear winner in fiscal '98 was European apparel. Closing the year up 35 percent in revenues, our European apparel group excelled in product creation, sourcing and distribution, and worked closely with retail partners to improve the retail presentation in Europe.

So, you ask, did we learn anything this year? Sure. The world ain't flat, trees don't grow to the sky and by no means do we do everything right. We're a big company now, and we've retained the capacity to make big mistakes. We must be more disciplined and more reckless; disciplined in our fiscal management and forecasting, audacious in our efforts to innovate the next great running shoe. We must be more deliberate in our definition of success, adventurous in our search for greatness.

Everybody's got an opinion. Here's ours: The things that make us who we are remain strong, true and in place. We are passionate about sports and passionate about doing our best. We hate our results for fiscal '98. We love the challenges they present. They will make us a better company.

See note regarding forward looking statements.