Management Stock Option Plan (MSOP)

[11] Resolution on the creation of contingent capital for the purpose of issuing stock options to members of the Executive Board of adidas-Salomon AG and to the Managing Directors/Senior Vice Presidents of its affiliated companies as well as to further senior executives and executives of adidas-Salomon AG and of its affiliated companies; amendment of section 4 of the Articles of Association

The Executive Board and the Supervisory Board propose to resolve as follows:

(a) The Company's registered stock capital shall be increased conditionally by up to Euro 3,500,000 through the issue of not more than 1,367,187 no-par-value shares (contingent capital). The contingent capital increase shall serve exclusively the grant of up to 1,367,187 stock options to members of the Executive Board, as well as to the Managing Directors/Senior Vice Presidents of its affiliated companies as well as to further senior executives and executives of adidas-Salomon AG and of its affiliated companies.

Each individual stock option shall entitle the holder of the stock option ("Beneficiary") to subscribe to a new no-par-value share in the Company pursuant to the terms and conditions set forth hereinafter. The contingent capital increase shall only be implemented to the extent the stock options are exercised.

1. Authorization of the Executive Board and Supervisory Board

The Executive Board is hereby authorized to grant to the Beneficiaries – until expiration of a period of five years following the entry into force of this contingent capital through entry in the Commercial Register - stock options in tranches which shall not exceed 25 % of the total volume for each fiscal year.
The Supervisory Board shall be exclusively responsible for granting stock options to the Company's Executive Board members.

2. Group of Beneficiaries

The Beneficiaries shall include the members of the Company's Executive Board (Group 1), as well as the Managing Directors/Senior Vice Presidents of its affiliated companies domestically and abroad as well as further senior executives and executives of adidas-Salomon AG and of its affiliated companies (Group 2). The Beneficiaries of Group 2 include (a) the senior executives directly beneath the Executive Board level of the Company and also the Managing Directors/Senior Vice Presidents of its affiliated companies and similar executive personnel, and (b) the executives on the management levels which are in each case directly subordinate to the management levels set forth in (a) or who report directly to the persons of Group 1, as well as further executives who hold important executive positions in the Company or its affiliates.

3. Allocation of Stock Options

The Beneficiaries of Group 1 shall collectively receive a maximum of 10% and the Beneficiaries of Group 2 shall collectively receive a maximum of 90% of the total volume of stock options.

4. Acquisition Periods

The individual tranches of the stock options shall in each case be issued within a period of twelve weeks following the Company's Ordinary Shareholders' Meeting. In the first fiscal year (1999) the options issue shall take place within twelve weeks following entry of the contingent capital in the Commercial Register.

5. Waiting Period and Exercise Periods

The stock options may first be exercised following expiration of the waiting period. The waiting period shall commence upon issue of the stock options and end after two years of the options issue.

Stock options may be exercised only during certain exercise periods. The exercise periods shall commence respectively on the 13th trading day of the stock market (1) following presentation of the report on the 1st quarter, (2) following presentation of the report on the half-yearly results and (3) following presentation of the report on the 3rd quarter. Each exercise period shall encompass 30 trading days of the stock market. In the event the waiting period expires during an exercise period, the stock options may first be exercised during the subsequent exercise period.

Stock options may be exercised during any exercise period in which the prerequisites for exercise have been met. The stock options shall be forfeited without substitution, if they are not/cannot be exercised by the end of their term.

6. Term

The term of such stock options shall commence upon issue of the stock options and end upon expiration of the third exercise period following expiration of the waiting period. Should the waiting period end during an exercise period, then such exercise period shall not form part of the calculation.

7. Performance Objectives

The stock options may be exercised only subject to the attainment of at least one of the following performance objectives: (a) during the period between the issue and exercise of the stock options, the stock market price for the Company's shares (calculated on the Total Shareholder Return basis) has increased by an annual average of at least 8 % (absolute performance) or (b) during the period between the issue and exercise of the stock options, the stock market price for the Company's shares has developed by an annual average of 1 % more favorably than the stock market prices of the major competitors of the adidas-Salomon Group globally and in absolute terms may not have dropped (relative performance).

7.1 Stock Market Performance of the Company's Shares

The stock market performance of the Company's shares shall be calculated by comparing (1) the arithmetic mean of the closing prices of the Company's shares in an electronic trading system of the Deutsche Börse AG in Frankfurt am Main (hereinafter referred to as the "Average Closing Price of the Share of the Company") from the 5th to the 25th stock exchange trading day following the Ordinary Shareholders' Meeting which immediately precedes the stock options issue ("Reference Period 1") with (2) the Average Closing Price of the Share of the Company from the 12th to the 3rd stock exchange trading day immediately preceding the period during which the stock options are exercised ("Reference Period 2"). For the period between the commencement of Reference Period 1 and the end of Reference Period 2, the value of dividend distributions, stock options and other special rights shall be added (Total Shareholder Return base data) to the Average Closing Price of the Share of the Company during Reference Period 2, in accordance with the valuation method applied with respect to the Dow Jones STOXX Index (as Performance Index). This comparison serves to establish the percentage by which the Average Closing Price of the Share of the Company during Reference Period 2 deviates from the Average Closing Price of the Share of the Company during Reference Period 1. This percentage forms the stock market performance of the Company's shares (hereinafter referred to as the "Stock Market Performance")

7.2 Absolute Performance

Absolute performance shall be achieved upon attaining at least 8 % in terms of the average annual Stock Market Performance as calculated for the period between the end of Reference Period 1 and the end of Reference Period 2. The percentage points by which the Stock Market Performance exceeds the average annual absolute performance of 8 % shall be used as absolute performance components for the calculation of the exercise price, as more fully described under the following provisions (the "Absolute Performance Component").

7.3 Relative Performance

The Stock Market Performance as compared with the stock market performance of the major competitors of the adidas-Salomon Group globally (hereinafter referred to as "Competitor Group" ) shall be used to establish relative performance.

The Competitor Group consists of important domestic and foreign publicly-quoted companies which are determined by the Executive Board, with the approval of the Supervisory Board, for each respective tranche before issue of such tranche of stock options in accordance with the following principles and taking into account possible changes of the business:

- The largest (domestic or foreign) publicly-quoted competitors from the most significant business branches of the Company are to be considered;

- For each business branch no less than two but no more than four competitors are to be considered;

- A competitor may be considered for more than one business branch, if appropriate. The weighting shall be in line with the significance of the competitor. The weighting of each individual competitor may, however, not exceed 50 %.

- The selection of competitors shall take account of the globality of the business.

The initial step for establishing the Competitor Group's performance shall be the arithmetic mean of the stock market prices of each individual company (hereinafter referred to as the "Average Stock Market Price") during the Reference Period 1 as made available by Datastream (or by a similar system).

In the second step, the Average Stock Market Price of each individual company included in the Competitor Group during Reference Period 2 shall be established. In the third step, the percentage rate shall be calculated with respect to the performance of the Average Stock Market Price between Reference Period 1 and Reference Period 2 of each individual company included in the Competitor Group. Hereby the stock market prices are to be adjusted in accordance with generally accepted methods for the calculation of the total shareholder return base data. The respective (either positive or negative) percentage shall be taken into account in accordance with the weight given to it. The sum of the weighted percentage points divided by the number of companies in the Competitor Group represents the performance of the stock market prices of the Competitor Group.

The relative performance shall have been attained when the Company's Stock Market Performance betters by an annual average of 1% the stock market performance of the Competitor Group and further when the development of the Company's Stock Market Performance (calculated pursuant to 7.1) is positive.

The percentage points by which the Stock Market Performance betters by an annual average of 1 % the stock market performance of the Competitor Group shall be applied as the relative performance component in the determination of the exercise price (hereinafter referred to as "Relative Performance Component"), as more fully described under the following provisions.

8. Exercise Price

The stock options may be exercised only upon payment of the exercise price. The exercise price per share corresponds to the Average Closing Price of the Share of the Company over the last 20 trading days of the relevant exercise period, less a performance discount to be calculated as follows:

If there is an Absolute Performance Component, it shall be multiplied by 1.75 and rounded to one figure after the decimal point. Should there be a Relative Performance Component, it shall only be rounded to one figure after the decimal point. If there are both Performance Components, the percentage rates calculated according to the above rules are added up thereafter. The performance discount shall be established by multiplying the percentage rate thus ascertained in each case with the Average Closing Price of the Share of the Company during Reference Period 2. The performance discount will be represented by the absolute amount resulting from aforementioned computation, rounded to one figure after the decimal point. § 9 para 1 of the German Stock Corporation Act ("AktG") shall remain unaffected.

9. Non-Transferability/Employment Relationship

The stock options are not transferable. They may be exercised only provided that at the time of exercise the Beneficiary was in the service or employment of the Company or an affiliate of such Company and provided that notice of termination of such employment relationship had not been given. Special arrangements may be made in the case of death, retirement on pension, retirement, and in any other special cases of withdrawal including the withdrawal of companies or business operations from the adidas-Salomon Group.

10. Dividend Rights of the New Shares

The new shares shall carry dividend rights from the commencement of the fiscal year in which the shares are issued.

11. Further Exercise Conditions

Insofar as the members of the Company's Executive Board are affected, the individual details with respect to the granting of the stock options and any further conditions for the exercise thereof shall be determined by the Supervisory Board. Otherwise, the fixing of such details shall be the responsibility of the Company's Executive Board, which, to the extent required under statute, shall decide in agreement with the executive bodies of the affiliated companies responsible for the remuneration of the Beneficiaries. These details shall include, in particular, the selection of individual Beneficiaries from the respective group of Beneficiaries, the granting of stock options to individual Beneficiaries, stipulating rules for the implementation and procedure with respect to the granting and exercise of the stock options, and the issue of new shares as well as the arrangements concerning the treatment of stock options in special cases. The terms and conditions governing the exercise of a tranche of stock options may limit the number of exercise periods to two. In such case, the term of the options ends with the expiration of the second exercise period. The terms and conditions governing the exercise of stock options may also provide the possibility that stock options are serviced with old shares of the Company, and may further provide the possibility that, instead of supplying new shares, the Company will pay the performance discount in cash, either in whole or in part.

12. Amendment of the Articles of Association

The Supervisory Board is hereby authorized to amend the Articles of Association in accordance with the respective issue of new shares offered under subscription.

(b) The former paras 5, 6, 7 and 8 of § 4 of the Articles of Association shall become paras 6, 7, 8 and 9.

(c) The following provision shall be inserted as new § 4 para. 5 of the Articles of Association:

"5. The Company's stock capital shall be increased conditionally by up to Euro 3,500,000 through the issue of not more than 1,367,187 no-par-value shares (contingent capital). The contingent capital increase shall serve exclusively to grant up to 1,367,187 stock options to members of the Executive Board, as well as to Managing Directors/Senior Vice Presidents of its affiliated companies as well as further senior executives and executives of adidas-Salomon AG and of its affiliated companies as more fully described in the provisions of the authorization resolution adopted by the Ordinary Shareholders' Meeting on 20 May, 1999. It shall be implemented only to the extent these stock options are exercised. The new shares shall carry dividend rights from the commencement of the fiscal year in which the shares are issued."

(d) The former para. 6 (or new para. 7) of § 4 of the Articles of Association shall be revised to read as follows:

"The Supervisory Board shall be authorized to amend the Articles of Association according to the size of the respective capital increase either from authorized capital or contingent capital pursuant to paras 2 to 5."



Report by the Executive Board and Supervisory Board regarding Agenda Item 11

The granting of stock options to members of the Executive Board and executive employees is an internationally recognized method of compensation and one which has been gaining acceptance also in Germany in recent years. Under these stock option plans, such aforementioned persons are entitled to purchase stock in their company on specified terms and conditions. The granting of stock options is intended to provide executives with an incentive to perform in a manner that further increases the company's value. Such a performance incentive also serves the interests of the company and its stockholders. It has particular relevance for adidas-Salomon AG which does business around the world. The launch of such a stock option plan should also create opportunities for matching the main international competitors in the race to recruit top-level executives and for tying in the current executives to adidas-Salomon AG.

Based on the foregoing considerations, the Executive Board and the Supervisory Board drafted a stock option plan that will be presented for adoption at the Ordinary Shareholders' Meeting. The proposed resolution does already contain a number of details. The following explanations therefore focus on the significant aspects:

In order to grant stock options (subscription rights or "rights") to executives, the Company shall increase its stock capital through a contingent capital increase. The new common stock shall be issued only after the beneficiaries exercise their options in accordance with the conditions set forth in the shareholder resolution.

Given the aforementioned purpose for the stock option plan (performance incentive), the right to acquire new common stock will, of course, be granted only to those persons who, based on their area of responsibility or job, can significantly contribute to an increase in the Company's value. This includes the members of the Executive Board of adidas-Salomon AG (Group 1) as well as individuals on the second executive tier (Group 2) as specifically set forth in the proposed resolution. The group of beneficiaries currently includes a group of approx. 450 persons. Both the number and detailed composition of the group of beneficiaries may change as a result of new hiring or of reorganizations.

Given the purpose of the contingent stock capital, shareholders will not have a right to subscribe to the newly issued common stock. That no shareholder pre-emptive rights exist in this case need not be stated explicitly in the shareholder resolution: it derives directly from the code.

Since the total amount of contingent capital (Euro 3,500,000) will be only 3% of the Company's current stock capital, the dilution of the stock of the current shareholders remains within narrow limits, even if all options can be exercised. Moreover, the total volume will be allocated into 4 to 5 annual tranches. Additionally, the slight dilution effects are compensated inasmuch as the options may be exercised only if at least one of the two performance targets is reached during the approx. 3-year terms of the individual options. The executives must have achieved either an absolute increase in company value (absolute performance) or an above-average value maintenance (relative performance).

The absolute performance target is achieved only if the Company's stock market price (calculated on the basis of the total shareholder return criteria) increases annually by an average of at least 8%.

The relative performance target is achieved only if the Company's stock market price betters by an annual average of 1% the stock market prices of adidas-Salomon Group's significant world-wide competitors, and the Company's stock market price (according to the total shareholder return criteria) has not dropped in absolute terms. Regarding the determination of whether the executives of the adidas-Salomon Group have achieved above-average performance compared to the Company's competitors, a reference back to an available market index could not be made. The Executive Board and the Supervisory Board therefore propose relying on criteria that is specifically tailored to the Company's competitors. The competitive environment however may change in the course of time and also the Company's business does not necessarily have to remain the same during the 5-year entitlement period. It is therefore intended that the shareholders' meeting does not decide on the actual composition of the competitor group but on the main guidelines according to which the competitor group is to be composed for each new tranche. The actual determination of the relevant competitor group shall be made by the Executive Board with the consent of the Supervisory Board.

According to the opinion of the Executive Board and Supervisory Board and pursuant to the principles set forth in the proposed resolution, the relevant competitor group for the first tranche of rights to be issued in 1999 shall be made up as follows:

In order to promptly and reliably calculate the valuation of the relevant competitor group which is made up primarily of foreign, publicly-listed enterprises, one must fall back on a generally available recognized data system. In order to compare the foregoing with the total shareholder return criteria for the Company's stock market price, the growth in the relevant competitor group’s value shall ultimately be adjusted in accordance with recognized methods.

The determination of the exercise price will be based on the current stock market price at the time of exercise. A discount from this stock market price should be made, the amount of which will be dependent upon the extent to which one or both performance targets have been exceeded. The following example demonstrates the mechanism by which the exercise price is determined. For reasons of simplification, dividend payments and other special rights are not considered in the exemplary calculation hereafter.

Initial Sample Facts:

Average closing price of the share of the Company in reference period 1 = Euro 100, Value of the relevant competitor group in reference period 1 = 1,000.

Corresponding value in reference period 2 (e.g. 2½ years following the rights issue):

Average closing price of the share of the Company = Euro 135;
Value of the relevant competitor group 1,250;

Examination of the exercise conditions:

1. The stock market price of the share of the Company has increased compared to the price in reference period 1.

2. The absolute performance target is achieved: the stock market price increased by 35% over a period of 2.5 years. The exercise condition of an average annual growth of 8% means a total growth of 21% over a period of 2.5 years. This condition has therefore been exceeded by 14 percentage points.

3. The relative performance target is achieved: the stock market price of the relevant competitor group increased by 25% over a period of 2.5 years. The development of the stock market price of the Share of the Company exceeds this increase by 10 percentage points, i.e. by more than the minimum threshold of approx. 2.5 percentage points (this corresponds to an average of 1%/year over a period of 2.5 years). The relative performance component therefore equals 10 percentage points less the minimum threshold of 2.5 percentage point, i.e. 7.5 percentage points.

Determination of the exercise price:

The starting point for the determination of the exercise price is the average closing price in the reference period 2 (i.e. 135). The performance discount shall be calculated as follows: the difference between the absolute increase in price of 35% and the absolute performance target of 21% (i.e. 14 percentage points) will be weighted with a value of 1.75. This yields a percentage of 24.5. The relative performance component of 7.5 percentage points shall be weighted with a value of 1 only.

The performance discount is yielded by adding both figures. It therefore amounts to 24.5 percentage points plus 7.5 percentage points, equals 32 percentage points. The percentage rate of 32, yielded by the above addition, is then multiplied by the stock market price of Euro 135. The amount generated thereby of Euro 43.2 corresponds to the absolute discount per share.

If one were to assume that the average closing price of the share of the Company on the last 20 stock exchange trading days of the exercise period was also Euro 135 , then the executives would be entitled to purchase the newly issued company stock at an exercise price of Euro 91.8 (closing price less discount). If the average closing price of the share of the Company on the last 20 stock exchange trading days of the exercise period is higher or lower than Euro 135, the exercise price increases or decreases accordingly, as the specific pecuniary benefit for the executives of Euro 43.2 for each share purchased remains the same.

In determining the increase in the Company's stock market price and the increase in market price of the competitors’ shares, the reference is made not to a specific date but to an ascertainable time period. This serves to avoid that the determination of whether performance targets are met and the establishment of the exercise price will be influenced by accidental fluctuations of the stock market price.

The terms of the exercise should provide an opportunity for the Company to service the option exercise through old shares or by paying out, either in whole or in part, a cash amount that represents the performance discount (instead of issuing new stock). The aforementioned options should give the Company the flexibility to meet its obligation with respect to the subscription rights. As to whether such opportunities should be used, the competent bodies shall render a decision in the interests of the Company and its shareholders about the time that the transaction occurs. The first alternative mentioned above may be employed only if the Company holds previously issued shares at the time that the rights are exercised (e.g., on the basis of the authorization to purchase its own shares).

The Executive Board and the Supervisory Board are of the opinion that the recommended stock option plan is reasonable and that it serves the interests of the Company and its shareholders. Subscription rights may only be exercised if the stock market price of the Company has significantly increased in absolute terms or if the stock market price has developed significantly better than the stock market prices of the major competitors. The amount of the compensation granted to the executives on the basis of the stock option program is directly dependent on the extent to which these performance targets have been exceeded.

 back to top