adidas AG Herzogenaurach 09 Financial Statements for the Year Ended December 31, 2009 and Management Report CONTENTS 3 Balance Sheet 4 Profit and Loss Statement 5 Notes 38 Statements of Changes in Fixed Assets 40 Supervisory Board and Executive Board 45 List of Shareholdings 53 Management Report 112 Auditors’ Report 114 Responsibility Statement 115 Supervisory Board Report The Financial Statements and The Financial Statements and Management Report of adidas AG as well as the Management Report of adidas AG for List of Shareholdings of adidas AG are also available for download on the the financial year 2009 are filed with Internet at and published in the electronic Federal Gazette. > www.adidas-group.com/en/investorrelations/reports/annualreports.aspx 2 FINANCIAL STATEMENTS of adidas AG BALANCE SHEET (euros in thousands) Note 31.12.2009 31.12.2008 A S S E T S FIXED ASSETS (1) Intangible assets (2) 166,142 57,569 Tangible assets (2) 171,339 141,382 Financial assets (3) 3,305,605 3,299,090 3,643,086 3,498,041 CURRENT ASSETS Inventories (4) 19,192 21,428 Receivables and other assets (5) 1,670,602 1,318,875 Securities (6) 3,825 3,675 Cash and cash equivalents (7) 232,078 1,593 1,925,697 1,345,571 PREPAID EXPENSES (8) 48,324 125,664 5,617,107 4,969,276 E Q U I T Y A N D L I A B I L I T I E S EQUITY Subscribed capital (9) 209,216 193,516 Contingent capital 1999 1.278 Contingent capital 2003 20.314 Contingent capital 2006 20.000 Capital reserves (9) 1,145,075 830,037 Revenue reserves 652,752 652,752 Retained earnings (10) 284,555 237,409 2,291,598 1,931,714 UNTAXED RESERVE (11) 6,007 6,329 ACCRUALS (12) 239,815 235,240 LIABILITIES (13) 3,079,687 2,813,972 DEFERRED INCOME 021 5,617,107 4,969,276 3 FINANCIAL STATEMENTS of adidas AG STATEMENT OF INCOME (euros in thousands) Note 2009 2008 Sales (15) 1,399,182 860,577 Change in inventory -205 -689 Total operating profit 1,398,977 859,888 Other operating income (16) 753,497 809,695 Cost of materials (17) -427,981 -441,078 Personnel expenses (18) -249,939 -241,090 Depreciation and amortization of tangible and intangible assets (19) -55,908 -36,169 Other operating expenses (20) -1,211,360 -899,611 INCOME FROM OPERATIONS 207,286 51,635 Income from investments in related companies (21) 72,151 105,748 Profit/ Loss received under a profit - positive transfer agreement (22) 0 133,340 - negative transfer agreement -7,918 0 Depreciation on financial assets (23) -3,958 0 Interest result (24) -67,515 -68,417 INCOME FROM ORDINARY ACTIVITIES 200,046 222,306 Taxes on income (25) -55,928 -14,054 Other taxes -214 -329 NET INCOME 143,904 207,923 Retained earnings brought forward 140,651 29,486 Earnings appropriated to earned surplus 0 409,387 Earnings appropriated to reduction of subscribed capital 0 10,182 Transfer to capital reserves 0 -10,182 Offset with Retirement of treasury shares 0 -409,387 RETAINED EARNINGS 284,555 237,409 4 Notes to the Financial Statements of adidas AG for the Year Ended December 31, 2009 In the interest of providing a clearer overall picture, certain items in the balance sheet and income statement have been combined as permitted in § 265 (7) German Commercial Code (Handelsgesetzbuch, "HGB"), and have been disclosed and explained separately under the numerical text reference indicated below. The list of shareholdings in adidas AG as required by § 287 HGB is filed with the electronic Federal Gazette. Accounting Policies The annual financial statements have been prepared in accordance with the following accounting policies. Acquired intangible fixed assets are recognized at cost and subject to periodic straight-line amortization. Tangible fixed assets are recognized at cost. All recognizable direct and overhead costs are included in production costs. Items with a limited life are depreciated/amortized over their expected useful lives. Buildings are subject to straight-line amortization at adidas AG. The estimated useful life of business premises is 50 years maximum and from two to ten years for technical equipment and machinery, other equipment, and operating and office equipment. The refurbishment costs of buildings comprising the World of Sports headquarters, owned by GEV Grundstücksgesellschaft Herzogenaurach mbH & Co. KG, a company within the adidas AG Group, are being written down over 20 years. The factory outlet building is being depreciated over 33 years. By virtue of a use agreement between the property owner GEV Grundstücksgesellschaft Herzogenaurach mbH & Co. KG and adidas AG, adidas AG is the beneficial owner of the office building under construction on the World of Sports premises. As with the other buildings, these buildings will be depreciated over 33 years upon completion. Chattel assets are depreciated on a straight-line basis. Minor-value assets worth less than € 150 are written off in full in the year of their acquisition and are shown as disposals in the statement of changes in fixed assets. Omnibus items are recognized for assets worth between € 150 and 5 € 1,000. These are depreciated on a straight-line basis over five years. 20 % is written off in the year of acquisition. Write-downs to the lower fair value are also recognized if an impairment is anticipated to be other than temporary. Long-term financial assets are recognized at cost. To the extent necessary, write-downs are made to their lower fair value. If the reasons for the write- down no longer apply, a reversal is recognized. Inventories are measured at the lower of cost or market. Manufacturing costs comprise direct costs that must be recognized and recognizable overhead costs. Allowances are taken for discernable fashion and technical risks, age structure, and marketability. Receivables and other assets are generally recognized at nominal values. Individual adjustments and allowances for doubtful accounts are taken to cover discernible risks. Securities classified as current assets are recognized at cost. If the market price or fair value is lower at the balance sheet date, this is recognized. Derivative financial transactions entered into with banks by Group Treasury (primarily forward currency and currency option transactions) are generally related to underlying transactions with group companies. Hedge accounting is applied if there is a direct hedging relationship between these transactions. Unrealized losses are recognized in profit or loss if they are not covered by unrealized gains in the hedge accounting. Derivative transactions that are not recognized using hedge accounting are measured individually at fair value. Any resulting losses are recognized in profit or loss. The fair value of interest rate swaps and cross currency swaps used for hedging purposes is calculated using generally accepted models. Hedge accounting is applied if interest rate swaps and cross currency swaps are entered into for the purpose of hedging currency and interest rate risk from existing liabilities and there is a direct hedging relationship between these transactions. Unrealized losses are recognized in profit or loss if they are not covered by unrealized gains in the hedge accounting. 6 Subscribed capital is recognized at the nominal amount. The special tax-allowable reserve is recognized for the amounts allowed under tax law provided that tax law requires the establishment of this reserve on the balance sheet. Provisions for pensions at adidas AG are recognized based on actuarial opinions using the present value under the German entry age normal method (Teilwertverfahren) pursuant to § 6a German Income Tax Act (Einkommensteuergesetz, "EStG") and applying a 6% discount rate (previous year: 6%). The 2005 G mortality tables published in July 2005 by Prof. Klaus Heubeck were used for this purpose. Other provisions cover all discernible risks and uncertain obligations and have been recognized in the amount required based on prudent business judgment. Liabilities are recognized at their nominal amount or their higher repayment amount. Receivables and liabilities denominated in foreign currencies are translated using the end-of-month rate prevailing for the month prior to the transaction posting date. Exchange rate losses are recognized at the balance sheet date unless there is a closed position. The contingent liabilities from payment guarantees and warranties reported correspond to the borrowings and obligations of subsidiaries as of the balance sheet date. Revenues are then recognized once the price risk has been transferred to the purchaser. This generally occurs upon delivery of the merchandise. Licensing revenues are recognized in accordance with the underlying contractual agreements. Claims and revenues generally arise whenever the licensee generates sales revenue with adidas products. 7 1. Fixed assets Please see Appendix 1 to the notes on the financial statements for the statement of changes in fixed assets pursuant to § 268 (2) HGB. 2. Intangible fixed assets and tangible fixed assets In € thousands 12/31/2009 12/31/2008 Balance as of 01/01 198.951 153.538 Additions 197.068 83.045 Reebok, ASL residual carrying amount 1.097 0 Disposals 3.727 1.463 Depreciation, amortization and write-downs 55.908 36.169 Balance as of 12/31 337.481 198.951 The significant additions primarily concern acquired intangible fixed assets (€ 114,000 thousand) due to the transfer of the brand management function (such as trademarks, slogans, patents, design etc.) from adidas International Marketing B.V., Amsterdam, the Netherlands, to adidas AG and, under assets under construction, a new administration building on third-party land (€ 34,842 thousand), as well as licenses for standard software, fixtures and fittings for adidas shops and hardware. The merger of Reebok Deutschland GmbH and ASL-American Sports and Leisure Vertriebs GmbH with adidas AG resulted in € 3,187 thousand in additions from historical cost and € 2,090 thousand in cumulative depreciation/amortization.