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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.
|MAY 31||1999||1998||% CHG||1997||% CHG|
|Equipment and other||93.8||84.4||11.1%||41.4||103.9%|
|Equipment and other||68.0||33.6||102.4%||0.7||4700.0%|
|Asia Pacific Region|
|Equipment and other||23.2||9.8||136.7%||0.1||9700.0%|
|Total Asia Pacific||844.5||1,253.9||(32.7)%||1,241.9||1.0%|
|Equipment and other||12.9||9.8||31.6%||2.1||366.7%|
|Total Nike brand||8,331.1||9,088.4||(8.3)%||8,682.5||4.7%|
| 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 totalled 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 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.
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).
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.
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 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.
|Activity||Reserve Balance at 5/31/99|
|Elimination of Job Responsibilities|
|Change in warehouse distribution strategy||(20.2)||20.2||-|
|Effect of foreign currency translation||-||0.1||0.1|
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 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. Thetwo 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.
|Elimination of Job Responsibilities Company-Wide||$(49.8)||$46.5||$(3.3)|
|Lease cancellations & commitments||cash||(10.8)||8.4||(2.4)|
|Write-down of assets||non-cash||(9.6)||9.6||-|
|Downsizing the Asia Pacific Headquarters In Hong Kong||(13.1)||13.0||(0.1)|
|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)|
|Effect of foreign currency translation||-||0.2||0.2|
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.
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.
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:
(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.
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.
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.
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.
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.
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 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.
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.
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.
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.
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.
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.
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). 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 sensitivefinancial 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.
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.