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ANNUAL REPORT 1998

Table of contents

  • Page 1
    ANNUAL REPORT 1998

  • Page 2

  • Page 3
    ...Group adidas Mavic Salomon Taylor Made The Share Outlook 4 5 11 15 16 17 19 20 adidas-Salomon Integration Making Good Progress 22 Committed to Social Responsibility 24 In the Sports Arena 26 Supervisory Board and Executive Board 36 Consolidated Financial Statements 37 Auditors' Report 65...

  • Page 4
    ... makes me stronger". As a company we have a similar philosophy. When it comes to showcasing our brands, 1998 was truly exceptional. Early in the year the Winter Olympics focused the attention of sports enthusiasts on Nagano. In summer the Soccer World Cup in France attracted more spectators than any...

  • Page 5
    ... Taylor Made and Mavic. And it is also within our power to expertly market our products in order to gain further market share, as in the USA and in certain European countries, or not to lose any ground in countries like Germany where we have a strong market share position. In Asia we see first signs...

  • Page 6
    ... acquisition â- and by one-off items â- Further increase in tax rate â- Net income (before special effect) down 13% to DM 401 million â- Earnings per share (before special effect) DM 8.84 INTEGRATION OF SALOMON GROUP MAKING GOOD PROGRESS â- Salomon Worldwide being dissolved â- Headquarter...

  • Page 7
    ...SALOMON COULD NOT BE OFFSET BY CORRESPONDING CONTRIBUTIONS TO THE RESULT BY THE NEWLY ACQUIRED BRANDS. ONE-OFF NEGATIVE IMPACTS ON THE FINANCIAL RESULT AND AN INCREASED TAX RATE CAUSED NET INCOME (BEFORE SPECIAL EFFECT) TO FALL BELOW THE PRIOR YEAR'S LEVEL. MODERATE GROWTH IN SPORTING GOODS MARKETS...

  • Page 8
    ..., bindings, ski boots, cross-country ski equipment and in-line skates marketed under the Salomon brand name, Taylor Made golf clubs and accessories, and Mavic bike wheels INCOME FROM OPERATIONS (DM m / %) 900 800 and rims. 9 8 â...¢ â...¢ â...¢ STRONGEST SALES GROWTH IN NORTH AMERICA In terms of...

  • Page 9
    ... relating to the Salomon acquisition. PROFIT MARGIN ON TURNOVER (%) 10 9 8 7 6 5 4 3 2 1 1994 1995 1996 1997 1998* SLIGHT IMPROVEMENT IN ROYALTY AND COMMISSION INCOME Royalty and commission income increased 2.5% to DM 87 million in line with licensee sales. The companies contributing to...

  • Page 10
    ... years, the team of employees is now working out of many different buildings. In order to remedy this situation, it was decided to take over and convert a site in Herzogenaurach and develop it into a new global headquarters, the adidas-Salomon "World of Sports". To this end, adidas-Salomon acquired...

  • Page 11
    ... the adidas-Salomon group, as well as European and global sourcing activities, adidas International Trading B.V., a newly founded subsidiary based in Amsterdam, has been capitalized by way of a contribution in kind. This was achieved through the transfer of the shares in the company responsible for...

  • Page 12
    ...needed in the operating sector. Takeover of distribution in Japan following the expiry of former licensee agreements accounted for 113 additional employees. READY FOR THE YEAR 2000 In order to avoid performance problems in the group's operations due to the Year 2000 issue, adidas-Salomon set up, in...

  • Page 13
    adidas SALES AND EARNINGS OF THE adidas BRAND AGAIN SHOWED DYNAMIC DEVELOPMENT IN 1998. VIGOROUS GROWTH IN THE USA, THE WORLD'S KEY SPORTING GOODS MARKET, LED TO SIGNIFICANT INCREASES IN MARKET SHARE, OFFSETTING CRISIS-RELATED DECLINES IN ASIA. THE adidas BRAND AGAIN INCREASED INCOME FROM OPERATIONS...

  • Page 14
    ... APPAREL Net sales 1998, split by region adidas' strong presence as main sponsor of the 1998 Soccer World Cup in France underlined the brand's heritage and competence in this sports category. Despite a share Asia 6.1% Americas 29.5% Europe 64.4% of the soccer boot market of around 40%, coupled...

  • Page 15
    ..., five adidas subsidiaries will assume responsibility for distribution of Taylor Made products. adidas' expertise in sales and marketing will be used to leverage the golf business in these countries. LATIN AMERICA SHOWED STRONG GROWTH In Latin America net sales of adidas brand products increased 30...

  • Page 16
    ...distributors. Forward order buying programs for key accounts have now been introduced in all major markets, substantially limiting the risks on the product purchasing side. Factory outlets will provide new means of controlling inventory levels and the setting up of adidas-owned image shops will help...

  • Page 17
    ... was the quality of the innovative products coupled with the successes and popularity of promotional partners such as top racing teams Crédit Agricole and Post Swiss. MAVIC Net sales 1998, split by region Americas 18.6% Europe 79.1% Asia 2.3% POSITIVE OPERATING RESULT Mavic contributed to the...

  • Page 18
    ...in all winter and summer sports product categories. Gross margin across all product categories improved 6.6 percentage points to 39.0%. This improvement reflects lower costs, better average sales prices, the stabilization of inventories and a particularly strong winter season at the end of 1998. 16...

  • Page 19
    ...the medium term Salomon is seeking to achieve an operating margin in line with the current adidas level. TAYLOR MADE 1998 WAS A BAD YEAR FOR THE GOLF INDUSTRY. GLOBAL SALES DECREASED SIGNIFICANTLY, ALSO IMPACTING TAYLOR MADE. THE USA AND JAPAN, THE TWO LARGEST GOLF MARKETS IN THE WORLD, EXPERIENCED...

  • Page 20
    ...PARTNERS FOR A BETTER FUTURE For 1999 Taylor Made rounded off its product range with newly developed golf balls. This means Taylor Made is now represented in most major golf-related equipment categories. At the same time a new generation of innovative golf clubs to be marketed under the product name...

  • Page 21
    ... overall stock market. In July, during the Soccer World Cup, the share price began to decline. The golf business was not meeting the high expectations, the integration of Salomon was progressing slowly at this point and sales and order backlogs no longer showed the traditional high growth rates. The...

  • Page 22
    KEY PER SHARE DATA (in B/DM, except for number of shares) 1998 v Year end price High Low Net income** Dividend Cash flow*** Number of shares outstanding (m) 1998 DM 1997 DM FINANCIAL INFORMATION ON THE INTERNET Financial information and information on the adidas-Salomon share is now available on ...

  • Page 23
    ... in 1999. The development of the result is, however, not expected to be driven predominantly by the top line where, in light of the market forecasts discussed above, adidas-Salomon anticipates single-digit percentage growth. As the industry, in particular in the USA, is currently in a period of...

  • Page 24
    ... of headquarter functions, sales organizations and sourcing activities. adidas is able to benefit from Salomon's high level of technical innovation, while Salomon in turn is able to profit from adidas' marketing expertise. All integration steps follow the overall principle to realize cost synergies...

  • Page 25
    ... product development activities will help to increase sales and earnings within both units. Further opportunities to leverage promotional assets and sponsorship programs will be exploited. As part of the reorganization of the Business Unit Golf, adidas Golf America has merged with the Taylor Made...

  • Page 26
    ... adidas-Salomon products. All suppliers are obliged to adhere to the corporate Standards of Engagement (SOE) confirming the policy on minimum requirements for labor, health, safety and environmental issues. The SOE is based on the World Federation of the Sporting Goods Industry model Code of Conduct...

  • Page 27
    ...and sustainable policies. Approaches developed at the Center are being used to improve conditions in factories down the supply chain. An Environmental Statement for 1998 has been published detailing these activities. APPOINTMENT OF GLOBAL DIRECTOR A coordinated and consistent approach to social and...

  • Page 28
    ... an element of prophecy in last year's Annual Report. The headline on page 20 read: "Zinedine Zidane aims to lead France to the top of world soccer in 1998". On the next page you see "Zizou" holding the Official Matchball of FIFA World Cup France '98, the adidas Equipment Tricolore. Zidane lived up...

  • Page 29
    ... ever, provided an outstanding opportunity for adidas to showcase the brand and its commitment to soccer. For the first time, adidas was an Official Sponsor, Supplier and Licensee of the tournament. Six participating teams were outfitted by adidas, including the Champions. This combination ensured...

  • Page 30

  • Page 31
    ... WINTER GAMES - A HUGE SUCCESS FOR adidas AND SALOMON As the 1998 Nagano Winter Olympics came to a close, the "balance sheet" for adidas and Salomon showed a total of 70 Olympic medals for the two brands. Among the heroes of the Games we find athletes representing both brands. The most successful...

  • Page 32
    ...are the most advanced line of clubs to be introduced by Taylor Made in more than a decade. O'Meara's input has proven to be invaluable to Taylor Made researchers who rely on his expertise as they move through the development processes. The new products introduced by Taylor Made in 1999 are designed...

  • Page 33
    PLAYER OF THE YEAR - MARK O'MEARA WITH TAYLOR MADE

  • Page 34
    The New York Yankees are far more than just a baseball team and have long been the symbol of authenticity in America. Baseball is generally referred to as "America's pastime". That would make the "Bronx Bombers", the Yankees nickname over the last 70 years, baseball's ambassador to the world. At ...

  • Page 35
    In the Sports Arena 33

  • Page 36
    ... as the way cycling is marketed. Jan Ullrich represents a new generation of young adidas athletes who will dominate tomorrow's sporting scene. In 1997 Jan Ullrich won the Tour de France in dominating style. He was the first German ever to win cycling's most prestigious race. At only 25 years of age...

  • Page 37
    ... was a sharp contrast to the 1998 Tour de France doping scandal. He rose above the scandal and undoubtedly helped save the race. For Jan's team, Team Telekom, it was a highly successful season, as several team members, all endorsing the 3-stripes, won international road races. Jan Ullrich is...

  • Page 38
    SUPERVISORY BOARD AND EXECUTIVE BOARD SUPERVISORY BOARD Henri Filho, Paris, France (Chairman) Dr. Hans Friderichs, Mainz, Germany (Deputy Chairman) Georg Beer, Herzogenaurach, Germany*) until November 30, 1998 Jean-François Gautier, Gerold Brandt, Gräfelfing, Germany David Bromilow, Bangkok, ...

  • Page 39
    adidas-Salomon AG AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS (INTERNATIONAL ACCOUNTING STANDARDS) 37

  • Page 40
    ...only adidas group without the direct and indirect effects of the Salomon acquisition 1997 comparatives are restated due to the application of IAS 12 (revised 1996) 'Income Taxes' and to improve comparability See accompanying notes to the consolidated financial statements 38 Consolidated Financial...

  • Page 41
    ... amortization Income from operations Royalty and commission income Financial result Extraordinary income Income before taxes Income taxes Net income before minority interests Minority interests Net income before special effect Acquired in-process research and development - expensed Net income/(loss...

  • Page 42
    .../losses on sales of property and equipment, net Operating profit before working capital changes Increase in receivables and other current assets Increase in inventories Decrease/increase in accounts payable and other current liabilities Cash provided by operations Interest paid Income taxes paid Net...

  • Page 43
    ...) and are designed and manufactured in France and Italy. In recent years the business was expanded into summer activities such as hiking boots and in-line skates. TAYLOR MADE develops and assembles or manufactures high-quality golf clubs and golf equipment. MAVIC products include rims and wheels for...

  • Page 44
    ...costs and benefits and given the non-trading nature of the caps, to amortize the cap premiums over the lifetime of the caps. The resulting adjustment (income of DM 11.2 million) is included in the determination of the net profit for the year ending December 31, 1998. If the Company's 1997 accounting...

  • Page 45
    ... transferred to adidas-Salomon AG. Eight subsidiaries have not been included in the consolidated financial statements in 1997 and 1998, since they have no or little active business and are insignificant to the financial position. The shares in these companies are accounted for at the lower-of-cost...

  • Page 46
    ... the short product life cycle of sporting goods. The Company spent approximately DM 127 million (including the Salomon group) and DM 49 million on product research and development for the years ended December 31, 1998 and 1997, respectively. The value of acquired in-process research and development...

  • Page 47
    ... all risks and rewards associated with an asset are transferred to the Company, the asset and a corresponding liability is recognized in the amount of the fair value of the asset or the lower net present value of the minimum lease payments. LIABILITIES AND PROVISIONS: Liabilities and provisions are...

  • Page 48
    ... subsidiary adidas Belgium through the acquisition of the remaining interest. The purchase price totaled DM 65 million. The purchase costs in excess of the proportionate shares of the acquired net assets of DM 55 million were allocated to goodwill. Effective December 22, 1997 the Company acquired...

  • Page 49
    ... licensee. adidas International Trading B.V., Netherlands, a wholly-owned subsidiary, was founded on September 7, 1998. This company becomes operative effective January 1, 1999 and will be responsible for European inventory management and global sourcing activities through its subsidiary adidas Asia...

  • Page 50
    ... December 31, 1998 adidas(in DM 000) Prepaid expenses - current Taxes receivable Security deposits Receivables from unconsolidated affiliates Premiums for derivative financial instruments Sundry Other current assets - gross less: provisions Other current assets 1998 adidas 1997 adidas (restated) 104...

  • Page 51
    ... to the shares in adidas Salomon France S.A. (see note 3). These shares are accounted for at cost in the year 1997 and the comparable statement for 1998. Cash deposits with maturities exceeding 12 months refer to adidas Korea. Prepaid expenses and other non-current assets mainly include prepayments...

  • Page 52
    ... Marketing Payroll, commissions and employee benefits Outstanding invoices Returns, allowances, warranty Taxes, other than income taxes Other Accrued liabilities and provisions 1998 adidas 1997 adidas (restated) 21,038 80,640 80,507 57,719 43,016 5,555 52,468 340,943 Salomon (comparable...

  • Page 53
    ..., 1998 and 1997, respectively. The Company sponsors and contributes to a defined benefit plan in Germany. The employee benefits of this plan are based on years of service. Pension costs are funded currently, subject to German regulatory funding limitations. The pension accruals of adidas-Salomon AG...

  • Page 54
    ...of granting shares to employees and to members of the Executive Board of adidas AG and of its affiliates, is cancelled and amended to read as follows: "The Executive Board shall be entitled for the duration of two years from the date of the registration of § 4 para. 4 of the Articles of Association...

  • Page 55
    ...effects of these adjustments At the annual general meeting of the Company held on May 7, 1998, the Company's shareholders approved the distribution of a dividend of DM 1.65 per share. Earnings available for dividend distributions are determined by reference to the retained earnings of adidas-Salomon...

  • Page 56
    ... from the Company's headquarters at Herzogenaurach, Germany. The Company is subject to currency exposure, primarily due to an imbalance of its global cash flows caused by the high share of product sourcing from suppliers in the Far East, which invoice in USD, and the majority of sales being invoiced...

  • Page 57
    ... course of 1998. Since 1998, the Company charges premiums regarding discontinued currency options to financial expenses. Until 1997, they had been charged to cost of goods sold. The amount of such charges was DM 61.7 million in 1998 and DM 25.4 million in 1997. The offsetting benefit is the renewal...

  • Page 58
    ...exchange contracts and currency options was determined on the basis of the market conditions on the reporting date. The fair value of the interest rate caps on the reporting date was assessed by the financial institutions through which these caps had been arranged. CREDIT RISK: The Company arranges...

  • Page 59
    ... Since 1998, the Company charges premiums regarding discontinued currency options to financial expenses. In 1997, such amounts had been charged to cost of goods sold. The amount of such charges in 1997 was DM 25.4 million. 22. INCOME TAXES In general, adidas-Salomon AG and its German subsidiaries...

  • Page 60
    ... rate for corporation tax on distributed earnings for the measurement of deferred tax assets and liabilities related to its German operations. Deferred taxes of the Company are attributable to the items detailed in the table below: December 31, 1998 adidas(in DM 000) Deferred tax assets Non-current...

  • Page 61
    ... differences across the companies of the group. The reconciliation of the effective tax rate of the adidas-Salomon group to the statutory German corporate tax rate is as follows: Year ended December 31, 1998 adidasSalomon (in DM 000) Expected income tax expense Tax rate differential Non-deductible...

  • Page 62
    ... taxes as of December 31, 1998 and 1997, respectively. 23. SEGMENTAL INFORMATION The Company operates predominately in one industry segment, the design, wholesale and marketing of athletic and lifestyle products. The Company is currently managed on the basis of a regional reporting structure...

  • Page 63
    ...result and income from operations in the income statements totaling DM 82 million (adidas-Salomon group), DM 69 million (adidas comparable) and DM 0 million in 1998 and 1997, respectively, is due to certain non-operational items, such as amortization of goodwill, gains and losses on fixed assets and...

  • Page 64
    ... long-term assets Minority interests Accounts payable and other liabilities Short-term borrowings Long-term bank borrowings Acquired in-process research and development Total acquisition cost Less: cash acquired Less: purchase price paid in 1997 Cash flow on acquisition net of cash acquired Salomon...

  • Page 65
    ... the acquisition of Salomon S.A. this stock option plan was linked with a fixed rate of 0.73 to the price of the shares of adidasSalomon AG. The effect of this exercise was treated as additional acquisition cost for adidas Salomon France S.A. 28. OTHER INFORMATION EMPLOYEES: The average numbers of...

  • Page 66
    ... share price and exercise price for options exercised by board members under the special reward and incentive plan - see note 27) for the group. For the period ended December 31, 1998 remuneration for former members of the Board of Directors amounted to DM 11.994 million including group companies...

  • Page 67
    ... REPORT To the Board of Directors and the Supervisory Board adidas-Salomon AG Herzogenaurach, Germany We have audited the accompanying consolidated balance sheets of adidas-Salomon AG and subsidiaries (the "Company") as of December 31, 1998 and 1997, and the related consolidated statements of income...

  • Page 68
    SHAREHOLDINGS OF adidas-Salomon AG, HERZOGENAURACH As at December 31, 1998 Company and domicile Germany 1 GEV Grundstücksgesellschaft Herzogenaurach mbH & Co. KG Herzogenaurach (Germany) 2 GEV Grundstücks-Beteiligungsgesellschaft Herzogenaurach mbH Herzogenaurach (Germany) 3 erima Sportbekleidungs...

  • Page 69
    ... (Hungary) 32 adidas (Ireland) Ltd. 3) Dublin (Ireland) 33 Fortstewart Ltd.3) 12) Dublin (Ireland) 34 Three Stripes Export Ltd. 3) 12) Dublin (Ireland) 35 adidas Israel Ltd. Tel Aviv (Israel) 36 adidas Lebanon SAL 10) 12) Beirut (Lebanon) 37 adidas Middle East SAL Beirut (Lebanon) USD USD USD IEP...

  • Page 70
    ... (South Africa) 43 adidas Spor Malzemeleri Satis ve Pazarlama A.S. Istanbul (Turkey) 44 SC adidas Ukraine Kiev (Ukraine) 45 erima France S.a.r.l. Schiltigheim (France) 46 Le Coq Sportif International S.A.10) 12) Schiltigheim (France) 47 Sarragan S.A. Fribourg (Switzerland) 48 adidas Salomon France...

  • Page 71
    ...12) Portland, Oregon (USA) 67 adidas Retail Outlets Inc.4) Portland, Oregon (USA) 68 adidas Sales Inc.4) Portland, Oregon (USA) 69 adidas (Canada) Ltd. Toronto (Canada) 70 Taylor Made Golf USA Carlsbad, California (USA) 71 Salomon North America, Inc. Georgetown, Massachusetts (USA) 72 Salomon Design...

  • Page 72
    ..., 1997) 83 Guangzhou adi Sporting Goods Ltd. Guangzhou (China) 84 Guangzhou Adi Trade & Development Co. Ltd. Guangzhou (China) 85 adidas Hong Kong Ltd. Hong Kong (China) 86 adidas India Private Ltd.6) New Delhi (India) 87 adidas India Trading Private Ltd. New Delhi (India) 88 P.T. Trigaris Sportindo...

  • Page 73
    ... 31, 1998) Sub-group Ireland Sub-group USA Sub-group LCS/Sarragan America Sub-group India Sub-group Mexico Sub-group Venezuela Sub-group Salomon UK Eight companies have not been included in the consolidated financial statements of adidas-Salomon AG due to their insignificance Associated company; due...

  • Page 74
    adidas-Salomon AG AND SUBSIDIARIES STATEMENT OF MOVEMENTS OF PROPERTY AND EQUIPMENT (in DM 000) Software, patents, trademarks and Goodwill Acquisition cost December 31, 1996 Currency effect Additions Changes in companies consolidated Transfers Disposals December 31, 1997 Currency effect Additions ...

  • Page 75
    ... Notes Other Technical Land, land rights and buildings equipment and machinery equipment, furniture and fittings Advance payments/ Construction in progress Total tangible assets Shares in group companies Participations Other financial assets Total financial assets 228,574 2,670 10,941 - (16) (857...

  • Page 76
    ... Ihle was appointed a member of the Executive Board effective July 1, 1998. At the same meeting the Supervisory Board discussed the business situation of the Company in the past and current financial year, expressing its approval of the main objectives being pursued 74 Report of the Supervisory...

  • Page 77
    ... 1998. Furthermore, the Supervisory Board members reviewed the current status of the World of Sports project, expressing their approval of the Executive Board's plans with respect to expansion of the Company's global headquarters in Herzogenaurach. At the same meeting the Supervisory Board expressed...

  • Page 78
    adidas-Salomon AG AND SUBSIDIARIES SELECTED FINANCIAL DATA (INTERNATIONAL ACCOUNTING STANDARDS) (DM million) Net sales Gross profit Net margin (%) Income from operations Income from operations (% of net sales) Royalty and commission income Financial result Income before taxes and minority interests ...

  • Page 79
    ... 1-2 91074 Herzogenaurach Germany Internet Address: www.adidas.de Investor Relations: Tel.: Fax: e-mail: +49 (9132) 84-2471 /-2920 +49 (9132) 84-3127 [email protected] adidas-Salomon is a member of DIRK (German Investor Relations Association) Conception: adidas-Salomon Design and...

  • Page 80