Adidas 1998 Annual Report Download - page 10

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8Management Discussion and Analysis
SECOND-BEST RESULT IN COMPANY HISTORY Due to the negative
impact of the financial result, income before taxes was down DM 53 million or 8% year-
over-year to DM 624 million.
Net income before the special effect totaled DM 401 million (DM 8.84 per share).
This is a deterioration of DM 62 million (DM 1.37 per share) or 13.4% year-over-year and
additionally reflects the negative impact of an increased tax rate of 33.0% (1997: 27.5%).
Nevertheless, this is the second-best result in the history of the Company.
As already reported in the first quarter, the result is impacted by a special charge of
DM 723 million. In purchasing Salomon, adidas also acquired a number of promising prod-
ucts and processes which were still in the development phase and had not yet reached
technological or commercial feasibility. In line with adidas-Salomon’s accounting and
valuation policy to expense research and development as it is incurred, the fair value
of this in-process research and
development, which was independently determined at
DM 723 million, was fully expensed
in 1998.
After inclusion of this special effect, adidas-Salomon reports a net loss of DM 322
million for the year.
SALOMON ACQUISITION CHANGED SCOPE AND STRUCTURE OF
BALANCE SHEET The acquisition of the Salomon group was completed at the end of
March 1998. The purchase was 100% debt-financed, significantly changing the scope
and structure of the balance sheet.
On the liabilities side, the acquisition led to an increase in short-term bank borrowings
in the remaining amount of the purchase price paid in 1998.
On the assets side, as a result of the acquisition, there was an increase of DM 132 mil
-
lion in fixed assets, DM 1,136 million in goodwill and DM 109 million in other intangible
assets. The special charge of DM 723 million was fully expensed.
Total assets increased 44% to DM 6,270 million.
SIGNIFICANT INCREASE IN INVESTMENTS Investments in property and
equipment within the group totaled DM 233 million (1997: DM 91 million). This significant
increase is partly related to the decision to expand the group’s headquarters in Herzogen-
aurach. As a result of the group’s strong growth over the past few 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, for a purchase price of DM 44 million, GEV
Grundstücksgesellschaft, the company that owned the land and buildings. Additionally,
DM 25 million was invested in renovation and conversion in 1998.
The World of Sports is based on a modular construction plan comprising several
development stages which can be completed according to requirements. The complex
may ultimately include a central administration building, employee restaurant, conference
and educational center, research and development center and numerous sports facilities.