Nike 2006 Annual Report Download - page 66

NIKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In the ordinary course of its business, the Company is involved in various legal proceedings involving
contractual and employment relationships, product liability claims, trademark rights, and a variety of other
matters. The Company does not believe there are any pending legal proceedings that will have a material impact
on the Company’s financial position or results of operations.
Note 15 — Acquisitions
In September 2003, the Company acquired 100 percent of the equity shares of Converse. Converse designs,
distributes, and markets high performance and casual athletic footwear and apparel. The acquisition was
accounted for under the purchase method of accounting in accordance with SFAS No. 141, “Business
Combinations” (“FAS 141”). The cash purchase price, including acquisition costs, was approximately $310
million. All assets and liabilities of Converse were initially recorded in the Company’s Consolidated Balance
Sheet based on their estimated fair values at the date of acquisition. The results of Converse’s operations have
been included in the consolidated financial statements since the date of the acquisition as part of the Company’s
Other operating segment. The pro forma effect of the acquisition on the combined results of operations was not
significant.
In August 2004, the Company acquired 100 percent of the equity interests in Official Starter LLC and
Official Starter Properties LLC (collectively “Official Starter”). The Exeter Brands Group LLC, a wholly-owned
subsidiary of the Company, was formed soon thereafter to develop the Company’s business in retail channels
serving value-conscious consumers and to operate the Official Starter business. The acquisition was accounted
for under the purchase method of accounting in accordance with FAS 141. The cash purchase price, including
acquisition costs net of cash acquired, was $47.2 million. All assets and liabilities of Exeter Brands Group were
initially recorded in the Company’s Consolidated Balance Sheet based on their estimated fair values at the date
of acquisition. The results of Exeter Brands Group’s operations have been included in the consolidated financial
statements since the date of acquisition as part of the Company’s Other operating segment. The pro forma effect
of the acquisition on the combined results of operations was not significant.
Note 16 — Risk Management and Derivatives
The Company is exposed to global market risks, including the effect of changes in foreign currency
exchange rates and interest rates. The Company uses derivatives to manage financial exposures that occur in the
normal course of business. The Company does not hold or issue derivatives for trading purposes.
The Company formally documents all relationships between hedging instruments and hedged items, as well
as its risk-management objective and strategy for undertaking hedge transactions. This process includes linking
all derivatives to either specific assets and liabilities on the balance sheet or specific firm commitments or
forecasted transactions.
Substantially all derivatives outstanding as of May 31, 2006 and 2005 are designated as either cash flow or
fair value hedges. All derivatives are recognized on the balance sheet at their fair value. Unrealized gain
positions are recorded as other current assets or other non-current assets, depending on the instrument’s maturity
date. Unrealized loss positions are recorded as accrued liabilities or other non-current liabilities. All changes in
fair values of outstanding cash flow hedge derivatives, except the ineffective portion, are recorded in other
comprehensive income, until net income is affected by the variability of cash flows of the hedged transaction.
Fair value hedges are recorded in net income and are offset by the change in fair value of the underlying asset or
liability being hedged.
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