-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M1rtoMbRZj7jCD91BqadXljejwWmja4+bJoTMVVE+YwlGYrNwFXFs2jdvP7oeGtV Sv67L8YRRoxtiu60Vp0GUA== 0000950123-99-002945.txt : 19990403 0000950123-99-002945.hdr.sgml : 19990403 ACCESSION NUMBER: 0000950123-99-002945 CONFORMED SUBMISSION TYPE: 6-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990401 FILED AS OF DATE: 19990401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAP AKTIENGESELLSCHAFT SYSTEMS APPLICATIONS PRODUCTS IN DATA CENTRAL INDEX KEY: 0001000184 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 000000000 STATE OF INCORPORATION: I8 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 6-K SEC ACT: SEC FILE NUMBER: 001-14251 FILM NUMBER: 99585185 BUSINESS ADDRESS: STREET 1: NEUROTTSTRABE 16 STREET 2: WALLDORF, FEDERAL REPUBLIC OF GERMAN CITY: NEW YORK STATE: NY ZIP: 69190 BUSINESS PHONE: 0114962277 MAIL ADDRESS: STREET 1: NEUROTTSTRASSE 16 CITY: WALLDORF D 69190 STATE: I8 6-K 1 SAP AKTIENGESELLSCHAFT 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 6-K REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report: April 1, 1999 SAP AKTIENGESELLSCHAFT SYSTEME, ANWENDUNGEN, PRODUKTE IN DER DATENVERARBEITUNG (Exact name of registrant as specified in its charter) SAP CORPORATION SYSTEMS, APPLICATIONS AND PRODUCTS IN DATA PROCESSING (Translation of registrant's name into English) Neurottstrasse 16 69190 Walldorf Federal Republic of Germany (Address of principal executive office) Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F. Form 20-F [X] Form 40-F [ ] Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934. Yes [ ] No [X] If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-_______. 2 SAP AKTIENGESELLSCHAFT SYSTEME, ANWENDUNGEN, PRODUKTE IN DER DATENVERARBEITUNG FORM 6-K The following material has been distributed to holders of American Depositary Receipts representing the preference shares of SAP Aktiengesellschaft Systeme, Anwendungen, Produckte in der Datenverarbeitung, a stock corporation organized under the laws of the Federal Republic of Germany (the "Company"): (i) Invitation to Annual General Meeting of the Company to be held on May 6, 1999, attached as Exhibit 99.1 hereto and incorporated by reference herein; and (ii) Abridged Version of the 1998 Annual Report of the Company, attached as Exhibit 99.2 hereto and incorporated by reference herein. Any statements contained in the Exhibits hereto that are not historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Words such as "believe," "expect," and "project," as they relate to the Company, are intended to identify such forward-looking statements. The Company undertakes no obligation publicly to update or revise any forward-looking statements. All forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. The factors that could affect the Company's future financial results are discussed more fully in the Company's filings with the Securities and Exchange Commission (the "SEC"), including its most recently filed Form 20-F and Form F-1, as filed with the SEC on June 22, 1998, and the Company's Form 20-F for 1998 that is expected to be filed with the SEC in April 1999. 3 EXHIBITS Exhibit No. Exhibit - ----------- ------- 99.1 Invitation to Annual General Meeting of the Company to be held on May 6, 1999. 99.2 Abridged Version of the 1998 Annual Report of the Company. 4 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SAP AKTIENGESELLSCHAFT SYSTEME, ANWENDUNGEN, PRODUKTE IN DER DATENVERARBEITUNG (Registrant) By: /s/ Prof. Dr. Henning Kagermann _____________________________________ Name: Prof. Dr. Henning Kagermann Title: Co-Chairman and CEO By: /s/ Volker Merk _____________________________________ Name: Volker Merk Title: Head of Corporate Controlling Date: April 1, 1999 5 EXHIBIT INDEX Exhibit No. Exhibit - ----------- ------- 99.1 Invitation to Annual General Meeting of the Company to be held on May 6, 1999. 99.2 Abridged Version of the 1998 Annual Report of the Company. EX-99.1 2 INVITATION TO ANNUAL GENERAL MEETING 1 INVITATION TO THE TWELFTH ANNUAL GENERAL SHAREHOLDERS' MEETING of SAP Aktiengesellschaft Systeme, Anwendungen, Produkte in der Datenverarbeitung of Walldorf, Germany Security Identification Numbers: Ordinary Shares: 716 460 and 716 461 Preference Shares: 716 463 and 716 464 Shareholders in our Company are invited to attend the Company's twelfth annual general shareholders' meeting at ROSENGARTEN CONGRESS CENTER, ROSENGARTENPLATZ 2, 68161 MANNHEIM, GERMANY, THURSDAY, MAY 6, 1999 AT 10 A.M. AGENDA 1. PRESENTATION OF THE AUDITED ANNUAL FINANCIAL STATEMENTS AND ANNUAL CONSOLIDATED FINANCIAL STATEMENTS, THE EXECUTIVE BOARD'S REVIEW OF OPERATIONS AND GROUP REVIEW OF OPERATIONS, AND THE SUPERVISORY BOARD'S REPORT, FOR THE FISCAL YEAR 1998 2. RESOLUTION: APPROPRIATION OF RETAINED EARNINGS FOR THE FISCAL YEAR 1998 The Executive Board and the Supervisory Board propose that retained earnings amounting to DM 325,582,340.34, or Euro 166,467,607.20, be appropriated as follows: Euro 1.57 dividend per no-par ordinary share carrying dividend rights: EURO 95,770,000.00 Euro 1.60 dividend per no-par preference share carrying dividend rights: EURO 69,703,198.40 Transfer to retained earnings: Euro 994,408.80 The dividend will be distributed on or after May 7, 1999. 3. RESOLUTION: FORMAL RATIFICATION OF THE ACTS OF THE EXECUTIVE BOARD IN THE FISCAL YEAR 1998 The Executive Board and the Supervisory Board propose that the acts of the Executive Board be formally ratified. 4. RESOLUTION: FORMAL RATIFICATION OF THE ACTS OF THE SUPERVISORY BOARD IN THE FISCAL YEAR 1998 The Executive Board and the Supervisory Board propose that the acts of the Supervisory Board be formally ratified. 1 2 5. APPOINTMENT OF AN AUDITOR FOR THE FISCAL YEAR 1999 The Supervisory Board proposes that ARTHUR ANDERSEN Wirtschaftspruefungsgesellschaft Steuerberatungsgesellschaft mbH, Eschborn/Frankfurt, be appointed auditor of the Financial Statements and Consolidated Financial Statements for the fiscal year 1999. 6. RESOLUTION: AMENDMENT TO SECTION 23 (2) OF THE COMPANY'S ARTICLES OF ASSOCIATION TO REFLECT THE PROVISIONS OF THE SUPERVISION AND TRANSPARENCY IN THE AREA OF ENTERPRISE ACT The Executive Board and the Supervisory Board propose that Section 23(2) of the Articles of Association be amended to read as follows, to reflect the provisions of the Supervision and Transparency in the Area of Enterprise Act: "The Executive Board shall prepare the Financial Statements and the Review of Operations for the previous fiscal year and submit them to the Supervisory Board and to the Auditor in the first three months of each fiscal year. At that time the Executive Board shall submit to the Supervisory Board the proposal it wishes to make to the Annual General Meeting concerning the appropriation of retained earnings." *** Holders of PREFERENCE SHARES or ORDINARY SHARES are entitled to participate in the annual general shareholders' meeting, and holders of ordinary shares ARE ENTITLED TO EXERCISE VOTING RIGHTS, only if they deposit their shares no later than April 29, 1999 during customary business hours at the Company or at a branch in the Federal Republic of Germany of one of the financial institutions listed below and leave them so deposited until the end of the annual general shareholders' meeting: - - DG BANK Deutsche Genossenschaftsbank - - Deutsche Bank Aktiengesellschaft - - Dresdner Bank Aktiengesellschaft - - Bayerische Hypo- und Vereinsbank Aktiengesellschaft - - BHF-BANK Aktiengesellschaft - - Commerzbank Aktiengesellschaft - - SGZ-Bank Suedwestdeutsche Genossenschafts-Zentralbank AG Deposit at one of the institutions listed above is also considered to have been effected if, with the consent and on behalf of a depository institution, the shares are deposited with another financial institution and blocked until the end of the annual general shareholders' meeting. The shares may also be deposited with a German notary public or a securities clearing and deposit bank. In this case we ask that a certificate issued by the notary public or the securities clearing and deposit bank be submitted to the Company no later than April 30, 1999. The receipt issued to shareholders for the deposited shares will serve the holders of ordinary shares as identification for the exercise of their voting rights. HOLDERS OF PREFERENCE SHARES DO NOT HAVE VOTING RIGHTS. Walldorf, March 26, 1999 SAP Aktiengesellschaft Systeme, Anwendungen, Produkte in der Datenverarbeitung The Executive Board 2 EX-99.2 3 ABRIDGED VERSION OF 1998 ANNUAL REPORT 1 [ PICTURE - SAP Logo ] ANNUAL REPORT 1998 [ PICTURE - Scenes from the [ PICTURE - SAP AG Corporate Frankfurt Stock Exchange ] Headquarters ] The software works the way I do 2 [ PICTURE - SAP Customers ] 3 CONTENTS [ PICTURE - SAP AG Corporate Headquarters ] 2 Selected Financial Highlights 3 Profile 4 Introduction [ PICTURE - Scenes from SAP AG Lobby ] 6 Review of Operations 1998 6 Overview 10 Investment for Future Growth 12 Profit Performance 13 Research and Development 16 Financial Statements of SAP AG 18 Development in the Regions 19 Development by Industry Sectors 20 Development of the Consolidated Balance Sheets 22 Outlook [ PICTURE - Scenes from the Frankfurt Stock Exchange ] 26 Report of Independent Auditors 27 Consolidated Income Statements 28 Consolidated Balance Sheets 29 Consolidated Statements of Cash Flows 30 Consolidated Statements of Changes in Shareholders' Equity 31 Notes to Consolidated Financial Statements 66 Supervisory Board and Executive Board 68 Subsidiaries, Joint Ventures, and Associated Companies 70 Five-Year Summary 72 Addresses and Financial Calendar Contents 1 4 SELECTED FINANCIAL HIGHLIGHTS
(in millions of DM, unless otherwise indicated) (in millions 1994 1995 1996 1997 1998 of EUR 1998 ------- ------- ------- ------- ------- ---------- SALES REVENUES 1,831.1 2,696.4 3,722.2 6,017.5 8,465.3 4,328.2 thereof product revenues as a % 71.2 71.9 70.7 68.1 62.1 average per employee (in thousands of DM/EUR) 414 419 455 521 489 250 EMPLOYEE AT YEAR-END 5,229 6,857 9,202 12,856 19,308 PERSONNEL EXPENSES 675.2 956.7 1,338.5 2,074.9 3,043.6 1,556.1 as a % of sales revenues 36.9 35.5 36.0 34.5 36.0 RESEARCH AND DEVELOPMENT EXPENSES 369.6 438.2 505.5 701.8 1,121.7 573.5 as a % of sales revenues 20.2 16.3 13.6 11.7 13.3 NET INCOME 281.2 404.8 567.5 925.4 1,052.3 538.1 as a % of sales revenues 15.4 15.0 15.2 15.4 12.4 INCOME ACCORDING TO DVFA/SG 3) 280.3 403.3 566.2 923.0 1,049.3 536.5 CASH FLOW ACCORDING TO DVFA/SG 3) 386.5 559.0 782.7 1,230.1 1,337.7 683.9 as a % of sales revenues 21.1 20.7 21.0 20.4 15.8 SHAREHOLDERS' EQUITY 1,236.2 1,529.5 2,211.3 3,062.4 3,756.4 1,920.6 (in DM) (in EUR) EARNINGS PER SHARE ACC. TO DVFA/SG 3) 2.77 3.98 5.47 8.85 10.04 5.13 DIVIDENDS PER ORDINARY SHARE 0.85 1.30 1.80 1) 2.80 1.57 2) DIVIDENDS PER PREFERENCE SHARE 0.90 1.35 1.85 1) 2.85 1.60 2)
1) 1996 includes a 25th anniversary bonus of DM 0.50 per ordinary and preference share 2) 1998 proposed dividend 3) German Association For Financial Analysts and Investment Consultants 2 Selected Financial Highlights 5 Profile SAP has more than 25 years' experience in developing forward-looking information management software solutions in continuous dialog with its customers, who are companies and organizations of all sizes and in all sectors. Starting from raw data and facts, SAP's products and services create information that supports strategic action for business success. The Company orients its efforts strictly to the practical needs of customers, and has an emphatic worldwide market and technology lead in Enterprise Resource Planning software. An analysis by prominent researcher AMR shows SAP's world market segment share is 33% - bigger than the next four competitors combined. According to a study by Gartner Group, a noted market research institute in the field of information technology, SAP is the only ERP vendor qualifying as a "leader", scoring ahead of all competitors both for completeness of vision and ability to execute. Constant innovation is SAP's recipe for further strengthening its market position. The Company continuously improves existing products, and is fast to market with products from new development initiatives and technologies. The driving forces behind this process are the employees (approximately 19,300 worldwide) and research and development investment (DM 1.12 billion, corresponding to 13% of 1998 sales revenue). For SAP, the education, training, and motivation of employees is just as important as product development. There is no other sector where the market position of vendors is so dependent on employees' creativity and enthusiasm for innovation as in the software industry. The foundation of SAP's worldwide success is the R/3 System. It is in use in more than 107 countries, and is today recognized as the industry standard. Since the introduction of R/3 in 1992, SAP and its partners have installed approximately 20,000 R/3 Systems. This broad customer base opens wide avenues for SAP growth, for example by orienting software development to specific industry sectors. This removes the distinction between standard systems and industry software, and accomplishes the step from a standardized solution to a family of individual solutions. The New Dimension product offensive is penetrating additional growth markets outside the core R/3 area. For example, SAP Supply Chain Management answers customers' growing demands for efficient control of logistics processes across company boundaries. The worldwide EnjoySAP initiative focuses on the needs of software users. The goal of EnjoySAP is to further improve the user-friendliness of SAP products, including the ability to tailor solutions to individual users' procedures. Successful continued development of the R/3 product, orientation to industry sectors, and the New Dimension initiative have combined to give SAP a promising outlook for future growth. Today and in the future, SAP solutions control value processes across company and sector boundaries to support the work of ever more users in ever more organizations. Profile 3 6 TO OUR SHAREHOLDERS, PARTNERS, AND CUSTOMERS: [ PICTURE - Co-Chairmen and CEOs of SAP AG: Hasso Plattner and Henning Kagermann ] This year's Annual Report is more than just an account of another successful year in SAP's 26 years of thriving business. We hope it will provide you with insight into the variety of environments in which our customers use our products, and the benefits they - and in turn their customers - derive from them. SAP's recipe for success includes more than good business results: The quality and variety of our products and the innovative spirit of our employees are essential ingredients. Our ambition is to help everyone who uses our products gain more satisfaction from their work and from the results of their work. A strict orientation to the needs of our customers is our incentive. Future development will be driven not by what is technically achievable, but by what will benefit our customers. The EnjoySAP initiative channels all our efforts toward this goal. EnjoySAP is much more than a regular product development project: It expresses the vision and culture of SAP as a company. We reached some important milestones this year: SAP co-founders Dietmar Hopp and Klaus Tschira became Supervisory Board members, signaling a new phase for the company. SAP's debut on Wall Street was the biggest new listing in the history of the New York Stock Exchange. Quotation on the NYSE was a natural step for us as a global organization. One of our most significant accomplishments in fiscal 1998 was the recruitment of nearly 6,500 highly qualified new employees worldwide. This sizeable investment creates the right conditions for our continued success, enabling us to reach out to new customers and offer existing customers new products. We needed efficient human resources management to manage recruitment on that scale: We are developing Advanced HR, a software platform for optimizing differentiated utilization of all resources, for our own use -and soon for the benefit of our customers. In the past we've demonstrated our speed and reliability in responding to customer and market issues like the euro changeover and year 2000. Our job now is to exploit our lead with new initiatives and developments. Global business conditions were challenging in 1998 and we're pleased to have met our target sales revenue growth of 40%. We also increased profit before taxes and before creation of STAR program accruals by 18%, although this was short of our target. This shortfall was caused by unanticipated sales delays in Japan at the end of the 1998 fiscal year. These challenges notwithstanding, we again grew our share of the big five competitors' market by 2% to just under 60%. In fact, SAP's software sales revenues are four times 4 Introduction 7 greater than the software sales revenues of all four biggest competitors combined. According to a study by Gartner Group, a noted U.S. market researcher in the field of information technology, SAP is the only Enterprise Resource Planning software vendor with both a complete vision of new software solutions as well as the ability to execute them. Industry Business Units and Solution Maps of complete business processes support our successful orientation toward industry sectors. We are expanding our indirect marketing to small and medium-sized enterprises - in the Value Added Resellers field alone we doubled our installed base during 1998. New Dimensions is the initiative behind our drive to become a multi-product vendor. We anticipate that in five years or less, Supply Chain Management, Customer Relationship Management, and Business Intelligence will account for a third of SAP's sales revenues. In 1999 we will be able to achieve greater profitability by focusing more on expenses, particularly the cost of buying services, and by improving the efficiency of our sales, marketing, and development operations. Our productivity will receive an extra boost with new employees "going live" in 1999. Our target for sales revenue growth this year is 20% to 25%, and we aim to double sales over the coming three years. This will strengthen our position as market leader. Thank you all for your continued confidence in SAP's business and technological vision. We look forward to achieving sustained success together. /s/ Hasso Plattner /s/ Henning Kagermann Hasso Plattner Henning Kagermann Co-Chairman and CEO, SAP AG Co-Chairman and CEO, SAP AG Introduction 5 8 Review of Operations 1998 SAP 1998:OVERVIEW [ PICTURE - SAP AG Corporate Headquarters ] FORWARD-LOOKING STATEMENTS Any statements contained in this document that are not historical facts are forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995. Words such as "believe", "expect" and "project" as they relate to the Company are intended to identify such forward-looking statements. The Company undertakes no obligation publicly to update or revise any forward-looking statements. All forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. The factors that could affect the Company's future financial results are discussed more fully in the Company's filings with the Securities and Exchange Commission, including the Company's Form 20-F for 1998 that is expected to be filed in April 1999. Pictures and graphs are included for illustrative purposes only and are not part of the Review of Operations. 1998 - A SUCCESSFUL YEAR DESPITE CHALLENGES In 1998, the SAP Group built important foundations for the future. It was a successful year, even though in some areas the Company did not achieve its targets. The strategy for the year was to win more market share by accelerating the pace of innovation and continuing to broaden SAP's edge over its competition, while also focusing on the core competency, pursuing massive investment in refining products and extending the product range. It proved highly successful. SAP put even more ground between itself and the competition in the enterprise software market, where the Company leads by a big margin. SAP's impressive growth in 1998 (as reported by prominent market research institute International Data Corporation - IDC) won more market share for the Company. An analysis by another leading researcher, Advanced Manufacturing Research, shows SAP's market share in the enterprise software market in 1998 was 33%, a gain of two percentage points over 1997. In addition, by pursuing its expansion and investment strategy, SAP laid the foundations for the Company's growth in the future. The main engines for this growth in the future are: - - Constantly expanding and improving the R/3 family of Enterprise Resource Planning software products - - Developing and marketing complete, specialized industry solutions based on the R/3 System 6 Review of Operations 9 [ PICTURE - SAP AG Corporate Headquarters ] - - Broadening the product offering with New Dimension products. The New Dimension products shown below are business solutions that are independent of R/3 and span system platform, enterprise, and organizational boundaries: - Supply Chain Management software - Customer Relationship Management software - Business Intelligence software Reorganizing the development function into Core Development plus 13 independent Industry Business Units (IBUs) contributed to the growth of sales volume, as did intensification of marketing efforts through direct and indirect channels. The creation of the 13 IBUs, where currently 17 complete industry-specific software solutions are under development, underlines the focus of the Company's business on the requirements of selected industry sectors. With the exception of Japan, all the Company's major markets contributed to realizing the goal set by SAP of increasing revenue by approximately 40% in 1998. SAP's actual sales grew by 41% in 1998. A shortfall of approximately DM 200 million in anticipated software sales revenue from Japan and Russia in the fourth quarter of 1998 was unexpected, and did not become apparent until the end of the year. The problems in Japan and Russia represented the major reasons for the Company's failure to achieve the targeted 30% to 35% increase in pretax profits before the creation of accruals for the employees' STAR (Stock Appreciation Rights) program in 1998. Pretax profits before accruals for the STAR program grew 18% to DM 1.97 billion. REVENUES INCREASE BY 41% As expected, SAP consolidated sales increased 41% to DM 8.47 billion. Excluding the negative foreign exchange effect, the growth in sales was even higher at 45%. Product sales (software and maintenance) grew 28% to DM 5.26 billion, accounting for the largest portion of revenue. Under the assumption that 50% of the maintenance revenues are related to the distribution of new software releases and the other 50% to service-related maintenance, software sales, comprising sales of new software licenses and of new software releases, increased 25% to DM 4.68 billion. Revenue from service related maintenance increased 68% to DM 573 million. Overall, the percentage of product sales in the total sales figure declined to 62% from 68% in the previous year. The SAP R/3 System was the biggest contributor to product sales, increasing by 31% to DM 5.05 billion. The R/2 System, introduced in 1979 for mainframe computers, contributed DM 176 million to SAP sales. R/2 is no longer actively marketed, and most of the R/2 revenue was from sales of new releases and maintenance. Consulting sales grew 75% to Review of Operations 7 10 [ PICTURE - Scenes from SAP AG Corporate Headquarters ] SAP GROUP SALES in DM millions 1998................... 8,465 +41% 1997................... 6,017 +62% 1996................... 3,722 +38% 1995................... 2,696 +47% 1994................... 1,831
R/3 PRODUCT SALES in DM millions 1998................... 5,055 +31% 1997................... 3,865 +63% 1996................... 2,376 +44% 1995................... 1,652 +69% 1994................... 975
DM 2.19 billion. The reason for this steep rise was the launch of TeamSAP, a concept that involves the Company taking a more active role in supporting customers' SAP software implementation projects. Training revenue increased by 54% to DM 893 million. Miscellaneous revenues, principally income from customer events, increased by 37% to DM 122 million. PROBLEMS IN JAPAN IMPACT RESULTS In general, the global economic situation in 1998 remained, to a large degree, without particular influence on SAP's business. However, the specific circumstances in Japan and Russia significantly impacted SAP's results for 1998. At the beginning of the year, it appeared the Company's operations in Japan would not be significantly influenced by the economic and financial crisis in that country. Not until late in the second quarter did the crisis in Japan begin to impact SAP's business. Japanese businesses began to scale down planned SAP software implementation projects or to schedule projects over a longer period than first anticipated. These developments led to lower product sales revenue than SAP Japan had planned. Although at that time SAP assumed the situation in Japan would not improve quickly, and consequently adjusted internal expectations more than once, the worsening of the crisis and its effects on SAP, 8 Review of Operations 11 [ PICTURE - SCENES FROM SAP AG CORPORATE HEADQUARTERS ] in particular at the end of the final quarter, took the Company by surprise. A reorganization of the Japanese sales operation was carried out immediately, from which SAP expects a marked improvement in the accuracy and quality of sales forecasting, as well as improved orientation to the altered purchasing behavior of major companies in Japan. The financial crisis in Russia and the other countries of the former Soviet Union meant companies operating in the area were confronted with ever-worsening solvency problems. SAP has made allowances for this in the Consolidated Financial Statements resulting in a reduction in 1998 pretax profits by approximately DM 40 million. EXCEPTIONAL BOOM RECEDES The boom in ERP software sales related to year 2000 issues weakened during the course of 1998. From the mid-1990s through the first half of 1998, many companies invested heavily in the renewal of their software landscape, replacing noncompliant legacy systems in anticipation of year 2000. This caused an exceptional demand for SAP software from late 1996 to mid-1998. SAP GROUP SALES BREAKDOWN in DM millions [ GRAPHIC ]
PRODUCT SALES ........................ 5,257 (62%) +28% over 1997 CONSULTING ........................... 2,193 (26%) +75% over 1997 TRAINING ............................. 893 (11%) +54% over 1997 MISCELLANEOUS ........................ 122 (1%) +37% over 1997 TOTAL SALES .......................... 8,465
Review of Operations 9 12 INVESTMENT FOR FUTURE GROWTH [ PICTURE - SAP CUSTOMERS ] With the approach of the millennium now imminent, the feasibility of replacing noncompliant legacy systems with enterprise systems became limited given the long lead-time to plan or install such systems. Moreover, in the second half of the year, many companies held back new investment in business software while they began to focus on their internal efforts to meet the millennium challenge. This trend affected the whole Enterprise Resource Planning (ERP) software market, which is the market in which SAP's operations are concentrated. According to an analysis by investment bankers Goldman Sachs, the combined software licensing revenue of the five leading ERP software vendors increased 18% overall in 1998, compared to 43% in 1997. In the first quarter, the rate of growth was still 37%. In the next two quarters, the rate of increase declined to 31% and then to 23%. Goldman Sachs reports that the five major vendors' combined software licensing revenue decreased 4% in the final quarter. It is not clear at this point when this trend in purchasing behavior will be reversed. Estimates vary from mid-1999 to the end of 1999 and beyond. The Company is adjusting to the new reality, continuing to focus on additional offerings of products and services to sustain revenues and grow market share. SAP's expansion and investment strategy had its biggest impact in the development of employee numbers. The build-up of headcount worldwide (up 50% to 19,308 at the end of 1998, compared with 12,856 at the end of 1997) was concentrated in the research and development area. The number of research and development employees increased 68% to 4,818 in 1998 from 2,876 in 1997. This means 25% of all employees were working in research and development (1997: 22%). The number of employees in sales and marketing grew by 45% to 3,503 (1997: 2,423). There were 3,013 new positions in service and support, an increase of 46% to 9,570 employees (1997: 6,557) in this area. Sales per employee declined to DM 489 thousand from DM 521 thousand in the previous year based on an average number of employees for the year of 17,323. The 6% downturn was caused by the significant rise in the number of employees, which SAP regards as an investment in the future, and by the negative effect of foreign exchange. Sales per employee is an important industry measure, in which SAP retains its leading position among its competitors. In addition, the Company's continued commitment to accelerate penetration and consolidate international markets required relatively steep growth in employee numbers outside Germany. In the Americas region, SAP increased staff numbers by 58% to 5,984 (1997: 3,785). In the Europe, Middle East, and Africa region 10 Review of Operations 13 [ PICTURE - SCENES FROM CEBIT ] (EMEA), the number of employees grew 46% to 10,960 (1997: 7,485). In Germany alone the number of employees increased to 7,679, 39% more than at the end of 1997 (5,516). In the Asia-Pacific region, the number of staff increased 49% to 2,364 (1997: 1,586). As a result, personnel expenses increased 47% to DM 3.04 billion. As a percentage of sales, personnel expenses grew from 34% to 36%. The personnel expenses include DM 48 million for the employees' stock appreciation rights program (STAR). Disregarding the expense for the STARs, the increase in personnel expenses would have been 44%. The STAR program was implemented in 1998 to compensate as many SAP employees as possible based on the performance of SAP preference shares over an approximately one-year span (May 1998 to April 1999). The program is an additional value-based component in SAP's performance-oriented compensation concept. STARs were generally allocated to employees who had permanent employment contracts on June 30, 1996. The size of the allocation depended on the individual's potential performance and ability. Eligible employees are rewarded for share price SAP GROUP COST / NET INCOME BREAKDOWN in DM millions [ GRAPHIC ] PERSONNEL COSTS ...................... 3,044 (36%) +47% over 1997 OTHER EXPENSES/INCOME ................ 2,050 (24%) +39% over 1997 COST OF SERVICES AND MATERIALS ....... 1,180 (14%) +95% over 1997 NET INCOME ........................... 1,052 (13%) +14% over 1997 TAXES ................................ 868 (10%) +17% OVER 1997 DEPRECIATION AND AMORTIZATION ........ 271 (3%) +39% OVER 1997 ----- TOTAL 8,465
Review of Operations 11 14 PROFIT PERFORMANCE [ PICTURE - SAP EMPLOYEES ] growth in accordance with predetermined rates. Accruals were created for the expense of this STAR program. The initial program is for approximately one year, and the Company plans to extend it in a slightly modified form in the future. While somewhat tempering SAP's results for 1998, the Executive Board believes that the investment by SAP in continuing to build a strong global infrastructure is essential to its continued growth and prospects in 1999 and beyond. Pretax profits before creation of accruals for the employees' STAR program increased 18% to DM 1.97 billion. After creation of accruals for the STAR program, pretax profits were up 15% to DM 1.92 billion, representing a pretax margin of 23% as compared with 28% in 1997. Foreign exchange negatively impacted pretax profits by three percentage points in 1998, while they contributed positively 12 percentage points to pretax profits in 1997. The 51% rise in costs to DM 6.76 billion in part reflects the Company's growth strategy and the associated intensification of recruitment: The number of employees rose by 50%. Another factor that contributed to the higher costs was the exceptional increase in purchased services for TeamSAP. The TeamSAP initiative was launched at the end of 1997 to further improve the quality of R/3 implementation projects. This initiative was the main reason for the increase in the cost of purchased consulting services, up 134% to DM 728 million. These costs were passed on to the customers. In 1998 there was a net loss from investments of DM 32 million compared to net income of DM 4 million in 1997. This loss includes SAP's share, DM 37 million, of a start-up loss at Pandesic, a joint venture with Intel Corp. Pandesic offers complete solutions for commerce via the Internet. Net interest income grew to DM 61 million from DM 53 million last year, due to increased liquidity. 12 Review of Operations 15 RESEARCH AND DEVELOPMENT [ PICTURE - SAP PRODUCTS ] INCREASED EARNINGS PER SHARE The total tax rate increased slightly to 45.2% from 44.5% in 1997, resulting in a net income growth (14% to DM 1.05 billion) that was slightly less than that of pretax income. The margin on net income fell to 12.4% from 15.4% in 1997. Earnings per share, based upon the DVFA/SG (German Association of Financial Analysts and Investment Consultants) method, grew from DM 8.85 to DM 10.04. The number of no-par shares outstanding increased from 104.3 million as of December 31, 1997 to 104.6 million as of December 31, 1998 due to the partial conversion of the 1988 and 1994 employee convertible bonds. If all convertible bond rights were to be exercised, the number of shares issued and outstanding would increase to 105.25 million. TRENDS IN EARNINGS in DM millions 1998................... 1,052 +14% 1997................... 925 +63% 1996................... 568 +40% 1995................... 405 +44% 1994................... 281
Expenditures for research and development, consisting largely of personnel expenses, increased 60% to DM 1.12 billion (1997: DM 702 million). As a percentage of sales, research and development expenses increased from 12% to 13%, which once again was among the highest in the industry. The main center for R&D is at the Company's headquarters in Walldorf, Germany. Of SAP's 4,818 worldwide R&D headcount at the end of the year, 3,799 were employed in Germany. The Company's other development centers, which include Palo Alto, USA, Tokyo, Japan, Bangalore, India, and Sophia-Antipolis, France will be developed further as its research and development work is increasingly decentralized. As of the end of 1998, SAP had 3,984 R&D employees in the Europe, Middle East, and Africa region (including Germany), 458 in America, and 376 in the Asia-Pacific area. The constant strengthening of the Company's efforts in research and development is a reflection of its determination to lead in innovation, and to answer customers' increasing demands for better and more efficient products. The Executive Board is convinced that through its R&D efforts SAP will broaden the range of its products and so sustain its leading position in the market, creating further benefits for its customers, employees, and shareholders. In 1998, SAP's strategy of expansion and investment focused on developing new product lines, and the Review of Operations 13 16 [ PICTURE - SAP Customers ] Company was right on target with deliveries and sales of the new products. The first of the New Dimension products are already established in the market. The Company already recorded more than 300 sales of the Business Information Warehouse (BW), the analytical management decision support solution, since the first shipment in August 1998. More than 100 orders were taken for the Advanced Planner and Optimizer (APO), which is the planning software for the SAP Supply Chain Management initiative that was first shipped in December 1998. The development of sales support products was extended in 1998 to create a new Customer Relationship Management initiative. There will be three offerings in this program: SAP Sales, SAP Service and SAP Marketing. ENJOYSAP INITIATIVE LAUNCHED In 1998, SAP launched a development initiative named EnjoySAP with the express goal of concentrating efforts on the needs of users. The aim is to help current and future SAP software users become more productive. Another benefit will be to further improve the usability of SAP software. For example, design optimization will make the Company's products easier to learn, faster to use, and more adaptable to the ways particular users work. The Company is convinced that this initiative will extend the potential usership of SAP software, and so strengthen sales. COMPREHENSIVE INTERNET OFFERING SAP recognized early the potential of the Internet for business processes. By the end of 1996, the Company had already become the first enterprise software vendor to market with applications in its R/3 core product designed for Internet use. Since that time, many innovative products have been shipped or announced by the Company. Today SAP's employee self-service applications based on Internet technology, such as internal purchase requisition processing, have nearly three million users. The Company has also already shipped Internet products that control business processes between vendors and retail customers, such as SAP Online Store, SAP Retail Store, and Pandesic. At the end of the first quarter of 1999, SAP plans to release the SAP B2B Procurement (Business-to-Business Procurement) product for handling business processes between companies and their suppliers. With SAP B2B Procurement, companies will be able to control their procurement of materials and components via the Internet. In 1999 SAP will release an enhanced Web Graphical User Interface, and R/3 functions that are 14 Review of Operations 17 [ PICTURE - Scenes from SAP Training Facilities ] suitable for using in a browser will be made available on the Internet via this new interface. SAP launched an initiative at the beginning of 1999 to bundle its know-how on Internet-based business and its many different Internet-based product lines. The Internet initiative is centered on role-specific support for SAP software users, and on exploiting the potential for creating innovative business processes using the Internet. The initiative leverages SAP's many years of global experience in the design and development of business solutions for multinational enterprises as well as medium- and small-sized companies. EXPENDITURES FOR RESEARCH AND DEVELOPMENT in DM millions 1998................... 1,122 +60% 1997................... 702 +19% 1996................... 589 +34% 1995................... 438 +18% 1994................... 370
Review of Operations 15 18 FINANCIAL STATEMENTS OF SAP AG In line with increasing internationalization, the main focus of reporting has moved to the Consolidated Financial Statements. However, it is the SAP AG Financial Statements that are relevant for the shareholders' dividend, and these are summarized in this section. SAP AG sales increased 33% to DM 3.13 billion. The growth strategy described in respect of the Group was reflected in a 44% increase in SAP AG's expenses. Net income for the year rose 17% to DM 525 million. The total assets increased 11% to DM 2.75 billion. The equity ratio was 72%, compared with 69% in the previous year. DIVIDEND INCREASE PROPOSED SAP remains committed to returning value to its shareholders. At the Annual General Meeting, the Executive Board and the Supervisory Board will propose that the dividend per no-par ordinary share be Euro 1.57 (1997: Euro 1.43*, DM 2.80) and the dividend per no-par preference share be Euro 1.60 (1997: Euro 1.46*, DM 2.85). Together with tax credits of Euro 0.67 and Euro 0.69 respectively, those shareholders entitled to a tax credit will receive in total Euro 2.24 (1997: Euro 2.05*, DM 4.00) and Euro 2.29 (1997: Euro 2.08*, DM 4.07) respectively, per share. Subject to approval at the Annual General Meeting, total dividend payments will rise by 10%, to DM 323.6 million. *)The 1997 per-share dividends paid in DM have been translated at Euro 1 = DM 1.95583 and rounded to the nearest cent.
SAP AG FINANCIAL STATEMENTS (DM millions) INCOME STATEMENTS 1998 1997 ----- ----- SALES REVENUES 3,132 2,359 Increase in inventory of unfinished services 10 2 Other operating income 114 47 3,256 2,408 Operating expenses -2,393 -1,661 OPERATING RESULTS 863 747 FINANCIAL RESULTS 66 65 RESULTS FROM ORDINARY OPERATIONS 929 812 Taxes -404 -365 ----- ----- NET INCOME 525 447 ===== =====
16 Review of Operations 19
SAP AG FINANCIAL STATEMENTS (DM MILLIONS) BALANCE SHEETS 12/31/1998 12/31/1997 ---------- ---------- Intangible assets 44 12 Property, plant, and equipment 578 404 Financial assets 825 730 FIXED ASSETS 1,447 1,146 Inventories 18 5 Account receivable and other assets 1,011 853 Liquid assets 0 139 Cash and cash equivalents 264 329 CURRENT ASSETS 1,293 1,326 DEFERRED TAXES 0 2 PREPAID EXPENSES AND DEFERRED CHARGES 10 8 ----- ----- TOTAL ASSETS 2,750 2,482 ----- ----- SHAREHOLDERS' EQUITY *) 1,975 1,718 SPECIAL RESERVE WITH ACCRUAL CHARACTER 0 3 RESERVES AND ACCRUED LIABILITIES 397 505 OTHER LIABILITIES 375 254 DEFERRED INCOME 3 2 ----- ----- TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 2,750 2,482 ===== =====
*) Contingent capital DM 3,428 thousand The complete Financial Statements and unqualified auditors' report for SAP AG are published in the Bundesanzeiger (German Federal Gazette) and deposited with the Commercial Registry of the Heidelberg Municipal Court. They can be obtained from SAP AG on request. Review of Operations 17 20 DEVELOPMENT IN THE REGIONS [ PICTURE - SAP Employees ] The contribution of sales outside Germany to total sales rose slightly from 81% in 1997 to 82% in 1998. The most dynamic growth was again seen in the Americas region, which reported a 51% increase over last year to DM 3.93 billion. Sales in the Europe, Middle East, and Africa region (EMEA) climbed 44% to DM 3.80 billion, notwithstanding the problems in Russia. In the Asia-Pacific region (APA) sales declined 6% to DM 740 million due to the disappointing results from Japan and negative foreign exchange effects. In Germany, sales grew 36% to DM 1.57 billion. The German market remains SAP's second largest after the United States of America, where sales increased 46% for the year to DM 3.07 billion.
BREAKDOWN OF SALES REVENUES BY DESTINATION 1997 1998 PERCENTAGE % INCREASE (DM MILLIONS) (DM MILLIONS) OF TOTAL SALES OVER 1997 ------------- ------------- -------------- ---------- Germany 1,149 1,565 18 36 Rest of EMEA 1) region 1,488 2,234 27 50 EMEA 1) REGION 2,637 3,799 45 44 U.S.A. 2,106 3,068 36 46 Rest of Americas region 489 858 10 75 AMERICAS REGION 2,595 3,926 46 51 ASIA-PACIFIC REGION 785 740 9 -6 ----- ----- --- --- SALES REVENUES 6,017 8,465 100 ===== ===== ===
1) Europe/Middle East/Africa 18 Review of Operations 21 DEVELOPMENT BY INDUSTRY SECTORS [ PICTURE - SAP Employees ] In 1998, SAP allocated product sales by Industry Business Units for the first time. The industry solution figures are shown in six major groupings to provide meaningful revenue information. Among the most successful contributors to SAP's product sales are Discrete Manufacturing Industry (27%), Process Industries (23%), and Financial Services and Service Providers (19%). Fast Moving Consumer Goods contributed 15% of total product sales, Utilities & Communication 10%, and sales to Public Sector customers 6%. BREAKDOWN OF PRODUCT SALES REVENUES by sector [ GRAPHIC ]
DISCRETE MANUFACTURING .................... 27% SAP Engineering & Construction SAP High Tech SAP Aerospace & Defense SAP Automotive PROCESS INDUSTRIES ......................... 23% SAP Oil & Gas SAP Chemicals SAP Pharmaceuticals SAP Mill Products FINANCIAL SERVICES AND SERVICE PROVIDERS ... 19% SAP Banking SAP Insurance SAP Service Provider FAST MOVING CONSUMER GOODS ................. 15% SAP Consumer Products SAP Retail UTILITIES & COMMUNICATION .................. 10% SAP Media SAP Utilities SAP Telecommunications PUBLIC SECTOR .............................. 6% SAP Public Sector SAP Higher Education & Research SAP Healthcare
Review of Operations 19 22 DEVELOPMENT OF THE CONSOLIDATED BALANCE SHEETS [ PICTURE - SAP Employees ] CONSOLIDATED BALANCE SHEET BREAKDOWN in DM millions [ GRAPHIC ] ASSETS - 1997 - Short- and medium-term assets 3,908 - Long-term assets 1,162 - Total 5,070 ASSETS - 1998 - Short- and medium-term assets 4,639 - Long-term assets 1,658 - Total 6,297 SHAREHOLDERS' EQUITY AND LIABILITIES - 1998 - Short-term liabilities 2,388 - Long-term debts 152 - Shareholders' equity 3,756 - Total 6,297 SHAREHOLDERS' EQUITY AND LIABILITIES - 1997 - Short-term liabilities 1,868 - Long-term debts 140 - Shareholders' equity 3,062 - Total 5,070
Total assets rose by DM 1.23 billion to DM 6.30 billion, due mainly to increases in fixed assets. Facility expansion was the chief factor in the rise in capital spending by 32% to DM 760 million. Other expenditures were aimed at improving SAP's physical infrastructure and extending computer capacity. Depreciation and amortization increased by 39% to DM 271 million. Both the equity to fixed assets ratio (227% in 1998), and the fact that no long-term debt was needed to fund capital expenditures, speak for SAP's strong capital and asset structure. As a result, SAP funded capital expenditures with cash flows from ordinary operations during 1998. EFFECTIVE RECEIVABLES MANAGEMENT Current assets rose 19% to DM 4.51 billion. The 21% growth of receivables to DM 3.16 billion was much smaller than the 41% rise in sales, mainly as a result of the Company's successful receivables management. The allowance for doubtful accounts, totaling DM 157 million in 1998 (DM 92 million in 1997), accounted for foreseeable individual and country risks. Liquidity (liquid assets and marketable securities) grew 13% to DM 1.31 billion. Due to the Group's strong performance, shareholders' equity increased by DM 694 million to DM 3.76 billion. Subscribed capital increased by 0.3% to DM 523 million as employee bond conversion rights 20 Review of Operations 23 [ PICTURE - SAP Employees] were exercised. In relation to the total assets of DM 6.30 billion (an increase of 24% from DM 5.07 billion in 1997), the equity ratio is unchanged at 60%. The return on equity after taxes decreased to 31% in 1998 from 35% in 1997. Accrued liabilities increased 13% to DM 1.31 billion. This increase was not significant when measured against the sales growth, and is mainly explained by the reduction in accrued taxes. FOREIGN CURRENCY MANAGEMENT SAP is active worldwide with more than 80% of total sales outside the domestic market. The Group is therefore subject to exchange fluctuation risks in the ordinary course of business. To reduce these risks, SAP uses derivative financial instruments as part of its foreign exchange management policy. MINOR DIFFERENCES UNDER U.S. GAAP REPORTING The listing of SAP's preference shares on the New York Stock Exchange in August 1998 succeeded in clearly increasing SAP's profile in the U.S.A., the world's biggest market for information technology. In preparation for its listing on the New York Stock Exchange, SAP had been changing the basis of its financial reporting to comply with the U.S. Generally Accepted Accounting Principles (U.S. GAAP) instead of GAAP under the German Commercial Code. The conversion was largely completed during 1998, and as of fiscal 1999 the Consolidated Financial Statements will be prepared exclusively in compliance with U.S. GAAP. There are only minor differences between the Group's revenues and pretax profits measured using U.S. and German GAAP. A detailed reconciliation of German to U.S. GAAP is shown in the Notes to the Consolidated Financial Statements.
CAPITAL EXPENDITURES in DM millions [ GRAPHIC ] 1998 ........................... 760 +32% 1997 ........................... 575 +160% 1996 ........................... 221 -14% 1995 ........................... 256 +32% 1994 ........................... 194
Review of Operations 21 24 OUTLOOK [ PICTURE - SAP Employees ] SALES AND PRETAX PROFITS GROWTH OF 20% TO 25% EXPECTED IN 1999 Against the backdrop of the risks mentioned throughout this review of operations, the Executive Board believes that sales growth of between 20% and 25% can be achieved in 1999. Pretax profit growth should also be of this order, so that the target pretax profit as a percentage of sales revenue is up to one percentage point higher than last year's 23%. SAP will continue new recruitment in 1999. The growth in employee numbers will, however, be very closely tied to the quarterly performance figures. The percentage rise in employee numbers will not be as high as 1998's 50% increase. The Company will remain committed to its policy of returning value to shareholders with a dividend reflecting success in 1999. DOUBLING SALES IN THREE YEARS The Executive Board believes that sales can be approximately doubled in the next three years with the help of the initiatives that it has set up successfully, and the considerable investment in nearly 6,500 new employees in 1998. MAJOR CHALLENGES IN ACHIEVING TARGETS In order to achieve the target of doubled sales over the next three years, and 20% - 25% sales and pretax profit growth in 1999, SAP will face a number of challenges, a few of which are summarized below: - - Acceptance of New Products SAP's New Dimension products represent a tremendous opportunity for SAP to become a market leader in business software products - Supply Chain Management, Customer Relations Management, and Business Intelligence. These now reside on the periphery of the enterprise software market, but they have significant potential for market growth. SAP's projections for 1999, and three-year sales growth target, assume that these new products will be successful in the market. However, this success cannot be assured. - - Revenue Mix As indicated above, ERP industry-wide growth in software licensing revenues has exhibited a declining trend since the middle of 1998. At the same time, industry growth in revenues generated from services continues to accelerate. On average, revenues derived by the Company from services historically require a higher level of expenditures as a percentage 22 Review of Operations 25 [ PICTURE - SAP Products ] of revenues when compared with revenues derived by the Company from licensing of its software products. To the extent that the percentage of the Company's total revenues derived from software licensing is lower than the percentage projected by management, the Company's overall profit margins, and targeted pretax profit growth, may be adversely affected. - - Year 2000 Issues Industry analysts have expressed competing views regarding the anticipated effects of the millennium change on purchasing behavior in the Enterprise Resource Planning software market. The Executive Board believes that customers will return to focusing on updating internal systems and implementing Enterprise Resource Planning software once they are comfortable that their existing legacy systems will function following the change of millennium, and that this shift in customer behavior should begin to occur during the second half of 1999. This would have the effect of increasing demand for ERP software toward the end of 1999. There can be no assurance, however, that this shift in customer behavior will occur during 1999 as expected. A failure of this anticipated shift in customer behavior to occur during 1999 could result in sales and pretax profit growth below expectations in 1999, and could also require more substantial sales growth in 2000 and 2001 in order for SAP to reach its target to double sales over the next three years. - - Global Economic Climate In 1998, SAP directly witnessed some of the effects of the economic and financial crises in Japan and the former Soviet Union. Because SAP relies upon activities outside of Germany for a substantial majority of its sales, SAP's financial performance is subject to changes in the global economy. While SAP continues to take into account the economic circumstances around the world in setting its projections and targets, significant changes in the global economic climate could impact SAP's future sales and performance. RESEARCH AND DEVELOPMENT SAP expects to spend a total of about 13% of its sales revenues on research and development in 1999. Approximately 20% of R&D expenditures is expected to be used for continued development of the New Dimension products. The remaining 80% will be invested in the further development of the R/3 System, including specialized functions for individual industries. The main focus of this work will be improving the usability of SAP software, whereas the emphasis last year was on Review of Operations 23 26 [ PICTURE - SAP Products ] introducing new functions. More than half of the Company's core R/3 development capacity will be dedicated to the EnjoySAP initiative, which was launched for this purpose. COMPREHENSIVE RISK MANAGEMENT Beside the currency fluctuation risks to ordinary operations (transaction risks) that SAP addresses with its foreign exchange management policy, currency fluctuation also implies risks in translating foreign revenues and profits (translation risks). SAP is assuming negative translation effects will adversely affect its sales growth in fiscal 1999 by approximately five percentage points. The market in which SAP is active is highly competitive and dynamic, and is characterized by rapid technological progress. This means SAP faces some risks that are inseparable from its entrepreneurial dealings. Moreover, current financial and economic trends in general, and particularly the situation in markets such as Latin America and Asia, which are of growing importance for SAP, bear significant risks. SAP will analyze developments in these regions very closely. SAP trusts its ongoing benchmarking of all relevant business processes and the sustained strengthening of its innovative ability to contain the business risks. The Company's controlling and internal audit functions provide the necessary controls that continuously test the suitability and effectiveness of the management tools used. EURO CHANGEOVER ON TARGET The inauguration of Economic and Monetary Union with the introduction of the euro on January 1, 1999 is another important step toward the creation of the common market in Europe. SAP, seeing the important opportunities for business as well as the challenges, was prepared well in advance. The Company shipped euro-compliant software to its customers ahead of the advent of the euro. This means SAP customers can use the euro as their transaction and local currency. Among the first to benefit were all nine central banks of the German federal states, which carried out problem-free changeovers to the euro on January 3, 1999. As of January 1, 1999, SAP is ready to conduct business with all its business partners in euros. SAP's Group currency will retroactively be converted to the euro effective January 1, 1999. WELL-PREPARED FOR YEAR 2000 As the leading vendor of enterprise software, SAP was early in recognizing the challenge and importance of the year 2000 issue. Year 2000 compliance was specified when the R/3 system was developed in the late 24 Review of Operations 27 [ PICTURE - SAP Material ] 1980s, and the older R/2 System was also made compliant. Both systems have been tested and certified by TUV, a German compliance authority. Naturally, SAP uses its own software to drive its internal business processes, and so does not envision any problem with year 2000 compliance. Nonetheless, the Company's business processes also rely on third-party products, including network technology, telecommunications, and other software and hardware that could possibly be noncompliant. SAP established a task force to test all of these products for year 2000 compliance, identify any noncompliant products, and adapt or replace them, with the goal of securing year 2000 compliance for the Company's internal business processes. SAP cannot guarantee such compliance where, for example, vendors fail to deliver compliant products in time. The task force will have substantially completed the project by September 1999. SAP is conscious of its responsibility to customers, business partners, shareholders, and employees, and it expects to achieve continuity of its business, its internal business processes, and the functionality of its products, systems, and services into the new millennium. Review of Operations 25 28 REPORT OF INDEPENDENT AUDITORS We have audited the consolidated financial statements (consolidated balance sheet, consolidated income statement, notes to the consolidated financial statements including the consolidated statement of cash flows and the consolidated segment reporting) of SAP Aktiengesellschaft Systeme, Anwendungen, Produkte in der Datenverarbeitung and the management's review of group operations as well as the reconciliation of consolidated shareholders' equity and consolidated net income from German GAAP to U.S. GAAP as of and for the years ended December 31, 1998. Company management is responsible for the preparation and content of the German GAAP consolidated financial statements and the management's review of group operations. Our responsibility is to express an opinion on these consolidated financial statements and the management's review of group operations based on our audit. We conducted our audit following Article 317, German Commercial Code, in accordance with professional standards prescribed by the German Institute for Certified Public Accountants. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements and the management's review of group operations as well as the reconciliation of consolidated shareholders' equity and consolidated net income from German GAAP to U.S. GAAP are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements and the management's review of group operations. The audit also includes stating an opinion on the financial statements of the consolidated subsidiaries, the definition of the group of consolidated subsidiaries, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements and management's review of group operations. We believe that our audit provides a reasonable basis for our opinion. Our audit did not raise any qualifications. In our opinion, the consolidated financial statements, as well as the reconciliation of consolidated shareholders' equity and consolidated net income from German GAAP to U.S. GAAP and the statement of changes in shareholders equity in accordance with U.S. GAAP referred to above present fairly, in all material respects, the consolidated financial position and the results of operation of SAP Aktiengesellschaft Systeme, Anwendungen, Produkte in der Datenverarbeitung and subsidiaries in conformity with generally accepted accounting principles. Management's review of group operations gives a true and fair view of the position of the Group as well as risks related to future developments. ARTHUR ANDERSEN Wirtschaftsprufungsgesellschaft Prof. Dr. Weber Steuerberatungsgesellschaft mbH Klein Auditor Auditor Eschborn/Frankfurt am Main, February 26, 1999 26 Report of Independent Auditors 29 Consolidated Income Statements SAP GROUP in thousands of DM
Note* 1998 1997 SALES REVENUES 7 8,465,294 6,017,466 Increase in inventory of unfinished services 20,300 2,472 Other operating income 8 169,271 79,966 ---------- ---------- 8,654,865 6,099,904 Cost of services and materials 9 -1,180,143 -605,719 Personnel expenses 10 -3,043,564 -2,074,920 Depreciation and amortization -271,348 -195,321 Other operating expenses 11 -2,266,660 -1,611,728 ---------- ---------- OPERATING EXPENSES -6,761,715 -4,487,688 ---------- ---------- OPERATING RESULT 1,893,150 1,612,216 Loss / Income from investments 12 -31,522 3,500 Income from marketable securities and loans of financial assets 1,874 1,469 Write-down of financial assets 13 -4,096 -2,811 Net interest income 14 60,816 52,562 ---------- ---------- RESULTS FROM ORDINARY OPERATIONS 1,920,222 1,666,936 ---------- ---------- Taxes on income 15 -822,706 -708,354 Other taxes -45,168 -33,228 ---------- ---------- TOTAL TAXES -867,874 -741,582 ---------- ---------- NET INCOME 1,052,348 925,354 Minority interests -3,023 -2,372 ---------- ---------- GROUP INCOME 1,049,325 922,982 ---------- ---------- Beginning retained earnings - SAP AG 294,328 240,698 Distribution of dividends to SAP AG shareholders -294,213 -240,192 Transfer to revenue reserves -723,858 -629,160 ---------- ---------- GROUP RETAINED EARNINGS (RETAINED EARNINGS OF SAP AG) 325,582 294,328 ========== ==========
*) See Notes to Consolidated Financial Statements Consolidated Financial Statements 27 30 Consolidated Balance Sheets SAP Group ASSETS in thousands of DM
Note* 12/31/1998 12/31/1997 INTANGIBLE ASSETS 16 151,354 81,299 PROPERTY, PLANT AND EQUIPMENT 17 1,262,317 853,312 FINANCIAL ASSETS 18 244,379 227,794 --------- --------- FIXED ASSETS 1,658,050 1,162,405 INVENTORIES 19 36,893 7,515 Accounts receivable 20 2,964,629 2,435,699 Accounts due from related companies 643 6,030 Other assets 21 194,387 167,152 --------- --------- ACCOUNTS RECEIVABLE AND OTHER ASSETS 3,159,659 2,608,881 MARKETABLE SECURITIES 22 0 167,092 LIQUID ASSETS 23 1,310,831 997,420 --------- --------- CURRENT ASSETS 4,507,383 3,780,908 DEFERRED TAXES 90,981 89,978 PREPAID EXPENSES AND DEFERRED CHARGES 24 40,364 36,969 --------- --------- TOTAL ASSETS 6,296,778 5,070,260 ========= ========= SHAREHOLDERS' EQUITY AND LIABILITIES SUBSCRIBED CAPITAL 1) 25 522,822 521,513 CAPITAL RESERVE 26 452,854 428,469 REVENUE RESERVES 2,440,986 1,803,510 GROUP RETAINED EARNINGS 325,582 294,328 MINORITY INTERESTS 14,147 14,552 --------- --------- SHAREHOLDERS' EQUITY 3,756,391 3,062,372 --------- --------- SPECIAL RESERVES FOR CAPITAL INVESTMENT SUBSIDIES AND ALLOWANCES 27 265 418 Pension reserves and similar obligations 28 42,122 41,461 Other reserves and accrued liabilities 29 1,266,149 1,120,114 --------- --------- RESERVES AND ACCRUED LIABILITIES 1,308,271 1,161,575 Bonds 30 3,428 4,713 Other liabilities 31 1,114,697 814,239 --------- --------- OTHER LIABILITIES 1,118,125 818,952 DEFERRED INCOME 32 113,726 26,943 --------- --------- TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 6,296,778 5,070,260 ========= =========
* See Notes to Consolidated Financial Statements 1) Contingent capital DM 3,428 thousand 28 Consolidated Financial Statements 31 Consolidated Statements of Cash Flows SAP GROUP in thousands of DM
Note* 1998 1997 Net income before minority interest 1,049,325 922,982 Minority interests 3,023 2,372 --------- ------- Net income 1,052,348 925,354 Depreciation and amortization 271,348 195,321 Write-up of property, plant and equipment 0 -102 Gain on disposal of property, plant and equipment -1,353 -2,067 Write-downs of financial assets 4,096 2,811 Write-up of financial assets -1,081 -863 Increase in pension reserves 661 11,935 Decrease / increase in other long-term reserves and accrued liabilities -55,497 55,340 Increase in deferred taxes -1,003 -52,516 Increase / decrease in inventories -29,378 284 Increase in accounts receivable and other assets -550,778 -997,117 Increase in short-term reserves and accrued liabilities 201,532 459,914 Increase in other liabilities 252,554 319,600 Increase in prepaid expenses and deferred charges -3,395 -18,249 Increase in deferred income 86,783 8,654 --------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 33 1,226,837 908,299 --------- ------- Purchase of intangible assets and property, plant and equipment -760,013 -574,709 Purchase of financial assets -75,961 -79,106 Proceeds from disposal of property, plant and equipment 68,471 85,384 Decrease / increase in special reserves for capital investment subsidies and allowances -153 352 Decrease / increase in liquid assets (maturities greater than 90 days) 275,160 -58,511 --------- ------- NET CASH USED BY INVESTING ACTIVITIES 34 -492,496 -626,590 --------- ------- Dividends paid -294,213 -240,193 Proceeds from premium on convertible bonds 24,385 75,125 Proceeds from the increase in capital stock from the exercise of the conversion rights 1,309 3,976 Payments made on the conversion of the convertible bonds -1,285 -3,956 Proceeds from the issuance of long-term debt 48,106 316 Principal payments made on long-term debt -202 -59 --------- ------- NET CASH USED IN FINANCING ACTIVITIES 35 -221,900 -164,791 --------- ------- Effect of foreign exchange rates on cash -90,962 86,798 NET INCREASE IN CASH AND CASH EQUIVALENTS 421,479 203,716 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 792,810 589,094 --------- ------- CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 36 1,214,289 792,810 ========= =======
* See Notes to Consolidated Financial Statements Consolidated Financial Statements 29 32 Consolidated Statements of Changes in Shareholders' Equity SAP GROUP in thousands of DM
Number of in thousands of DM shares issued and Subscribed Capital Revenue Group Minority Total outstanding capital reserves reserves retained interests (000) earnings January 1, 1997 103,507 517,537 353,344 1,095,491 240,698 4,242 2,211,312 Net income 925,354 925,354 Convertible bonds exercised 795 3,976 75,125 79,101 Dividends -240,192 -240,192 Transfer to revenue reserves 624,082 -624,082 0 Minority interests -2,372 2,372 0 Currency translation adjustment 88,118 88,118 Other -4,181 -5,078 7,938 -1,321 ------- ------- ------- --------- --------- ------ --------- DECEMBER 31, 1997 104,302 521,513 428,469 1,803,510 294,328 14,552 3,062,372 ======= ======= ======= ========= ========= ====== ========= Net income 1,052,348 1,052,348 Convertible bonds exercised 262 1,309 24,385 25,694 Dividends -294,213 -294,213 Transfer to revenue reserves 699,108 -699,108 0 Minority interests -3,023 3,023 0 Effect of excluding companies from consolidation 24,354 -24,168 186 Currency translation adjustment* -87,866 -87,866 Other 1,880 -582 -3,428 -2,129 ------- ------- ------- --------- --------- ------ --------- DECEMBER 31, 1998 104,564 522,822 452,854 2,440,986 325,582 14,147 3,756,391 ======= ======= ======= ========= ======= ====== =========
* The cumulative translation adjustment resulting from the translation of foreign subsidiaries financial statements was a negative DM 15,913 thousand as of December 31, 1998. See Notes to Consolidated Financial Statements. 30 Consolidated Financial Statements 33 Notes to Consolidated Financial Statements a GENERAL INFORMATION 1 APPLICATION OF THE GERMAN LEGAL REGULATIONS The consolidated financial statements of SAP Aktiengesellschaft Systeme, Anwendungen, Produkte in der Datenverarbeitung ("SAP AG"), together with its subsidiaries (collectively, "SAP", "Group" or "Company"), are prepared in accordance with the German Commercial Code and Stock Corporation Act. In line with the ongoing internationalization of the Group's accounting policies, since January 1, 1998 the SAP consolidated Financial Statements have also been prepared in compliance with U.S. Generally Accepted Accounting Principles in the United States of America (U.S. GAAP), as far as permissible under German GAAP. As a result, there have been changes from 1997 in the treatment of currency translation and pension reserves. The impact of adopting these changes was less than 1% on the 1998 consolidated net income. In addition the 1997 consolidated statement of cash flows has been modified to reconcile to cash and cash equivalents for comparative purposes. In all other respects, the accounting and consolidation methods employed are unchanged since the previous year. In Section C of these notes, "Significant Differences between German GAAP and U.S. GAAP", there is a detailed reconciliation showing the effect of applying U.S. GAAP on net income and shareholders' equity where to have done so in the consolidated financial statements would have led to noncompliance with German commercial regulations. In the interests of clarity, the notes to the financial statements include both the disclosures required by law on the individual items of the balance sheets and income statements, and the information which may optionally be included either on the balance sheets and income statements or in the notes to the financial statements. In situations where additional information is required to be disclosed it has been done in the notes to the financial statements. b SIGNIFICANT ACCOUNTING POLICIES 2 CONSOLIDATED COMPANIES The consolidated financial statements include, in addition to SAP AG, all major subsidiaries in which SAP AG holds, directly or indirectly, a majority of the voting rights. German GAAP enabled the Company to not consolidate three subsidiaries, as their impact on the Group's net worth, financial position, and results of operations is immaterial (their balance sheet totals amount to 0.1% of the consolidated balance sheet total). The investments in unconsolidated subsidiaries are recorded at cost and included in the investment in affiliated companies. Notes to Consolidated Financial Statements 31 34 The following table summarizes the change of companies included in the consolidated financial statements:
Domestic Foreign Total 12/31/1997 7 42 49 Additions 1 4 5 Retirements 1 1 2 ------ ----- ----- DECEMBER 31, 1998 7 45 52 ===== ===== =====
One joint venture, SRS Software- und Systemhaus Dresden GmbH, Dresden/Germany, in which SAP AG holds a 50% interest, is consolidated on a proportional basis. Four companies of which SAP AG directly holds between 20% and 50% ("Associated Companies") are consolidated by the equity method. The effect of including new companies in the consolidated financial statements during 1998 did not limit comparability of the annual financial statements with those of the previous year. All subsidiaries, joint ventures, and associated companies are listed on pages 68 and 69 with ownership percentages, sales, net income, equity, and numbers of employees. 3 CONSOLIDATION POLICIES The Consolidated Financial Statements include the financial statements of individual subsidiaries in accordance with German GAAP and in conformity with the accounting and valuation policies of SAP. The book value method of consolidation has been used, which is substantially equivalent to the purchase method under U.S. GAAP. Under such method, differences between acquisition costs and attributable shareholders' equity are first allocated to identifiable assets acquired or liabilities assumed to the extent of their fair market values. Any remaining goodwill is capitalized as an intangible asset and amortized using the straight-line method over its expected useful life of five years. Intercompany receivables, payables, revenues, expenses, and profits among the consolidated companies are eliminated. Deferred taxes are calculated for consolidation entries affecting income, when it is expected that the difference in the tax expense will be reversed in a future year. Minority interest is identified for subsidiaries not wholly owned by the parent company. Goodwill arising from associated companies' equity is calculated based upon the same principles. The retained earnings of the Group, as shown in the consolidated financial statements, are the retained earnings of SAP AG. The retained earnings of the subsidiaries are included in the Group's revenue reserves. 32 Notes to Consolidated Financial Statements 35 4 CURRENCY TRANSLATION Effective January 1, 1998 the financial statements of the fully consolidated foreign subsidiaries are translated according to the functional currency method. Since all subsidiaries are economically independent and thus their functional currency is their local currency, their balance sheets are translated into DM at median rates on the balance sheet date ("closing rate") and their income statements are translated at annual average rates. Differences from the prior year's translation of assets and liabilities and translation differences between the balance sheet and the income statement do not affect income. These currency translation differences are disclosed in the "Consolidated Statement of Changes in Shareholders' Equity" on page 30. Further in fiscal 1997, fixed assets (excluding loans), shareholders' equity, depreciation, and amortization of foreign subsidiaries were translated using the historical exchange rate. The remaining assets and liabilities were translated at the closing rate. Differences arising from the translation of balance sheet items were charged directly to the revenue reserves, without affecting income for the year. In fiscal 1997, with the exception of depreciation and amortization, which are translated at historical rates, expense and income items are translated at the average rate for the year. The net income for the year is translated at the closing rate at December 31. The translation difference from the income statements is charged to income. During 1997, the financial statements of the individual companies include accounts receivable in foreign currencies, which were translated at the lower of the exchange rate on the transaction date or the buying rate on the balance sheet date. Losses arising from movements in exchange rates were recorded. Accounts payable in foreign currencies were valued at the higher of the applicable rates. Effective January 1, 1998 the valuation of foreign accounts receivable and liabilities are translated at the closing rate. The significant exchange rates of key currencies affecting the Consolidated Group changed as follows:
Currency ISO Code Median exchange rate to Average exchange rate to the the DM at December 31 DM for the year 1998 1997 1998 1997 1 U.S. Dollar USD 1.6730 1.7921 1.7469 1.7371 100 Japanese Yen JPY 1.4505 1.3838 1.3250 1.4309 1 British Pound GBP 2.7980 2.9820 2.8924 2.8493 1 Canadian Dollar CAD 1.0770 1.2445 1.1687 1.2506 1 Australian Dollar AUD 1.0230 1.1725 1.0820 1.2805
Notes to Consolidated Financial Statements 33 36 5 ACCOUNTING AND VALUATION POLICIES INTANGIBLE ASSETS AND PROPERTY, PLANT AND EQUIPMENT Purchased intangible assets are shown at cost and amortized on a straight-line basis over a maximum of five years. All existing goodwill included in the financial statements is derived from the acquisition of software companies and is amortized on a straight-line basis over its estimated life of five years. Property, plant and equipment is shown at cost less accumulated depreciation, where appropriate, based on its expected useful life. Where permanent impairments were incurred, unplanned write-downs have been made.
Useful life of property, plant and equipment Buildings (placed in service before 1990) 50 years Buildings (placed in service after 1991) 25 years Leasehold improvements Based upon the lease contract IT equipment 3 to 5 years Office equipment 4 to 15 years Automobiles 5 years
Buildings and leasehold improvements are depreciated using the straight-line method. Other fixed assets with an expected useful life of up to three years are depreciated using the straight-line method. For property, plant and equipment with an expected useful life of more than three years the declining balance method is generally used, and the depreciation method is changed to the straight-line method in the year in which the amount of depreciation under the straight-line method exceeds that calculated under the declining balance method. Low-value assets are expensed in the year of acquisition. FINANCIAL ASSETS Financial assets are shown at cost. A write-down in the value of financial assets, at the balance sheet date, only occurs if there is a permanent impairment. Interest-free loans to employees and to third parties are discounted to their present value. CURRENT ASSETS Inventories are shown at the lower of purchase / production cost or market value. Production costs consist of direct salaries, indirect salaries, and materials. Other costs are not included in inventories. 34 Notes to Consolidated Financial Statements 37 Accounts receivable from software sales are posted on the basis of the number of authorized users, provided that the customer has legally signed an irrevocable contract with the Company, and the software has been delivered in full. Maintenance revenues are recognized proportionally over the term of the maintenance contract. Accounts receivable for consulting and training services are recognized after performance of these services. Accounts receivable are stated at their nominal value, which approximates fair market value. Receivables with foreseeable individual and country risks are written down on a case-by-case basis. Interest-free loans with a remaining term exceeding one year are discounted to their present value using interest rates effective locally. Marketable securities are valued at the lower of cost or market as of the balance sheet date. Gains on marketable securities are recognized when realized. Other assets are shown at their nominal value, which approximates fair value. PREPAID EXPENSES AND DEFERRED CHARGES Prepaid expenses and deferred charges are determined by allocating expenses to the periods to which they are attributable. DEFERRED TAXES On the consolidated balance sheet, deferred taxes are established for temporary differences, which are expected to reverse in the future, between assets, liabilities, and net income calculated for tax purposes and for financial reporting purposes. Moreover, deferred taxes are established on the consolidated balance sheet for temporary differences resulting from consolidation measures. Deferred taxes are computed by the deferral method, under which the enacted tax rate applicable to the local subsidiaries is applied. Deferred tax amounts are shown net on the consolidated balance sheet. RESERVES AND ACCRUED LIABILITIES Effective January 1, 1998 provisions for pensions of domestic and foreign subsidiaries are based on actuarial computations according to the "Projected Unit Credit Method". These assumptions used to calculate the provision for pensions are shown in note 28 - "Pension Reserves and Similar Obligations." Until the end of 1997, reserves for pension obligations in Germany were stated at the highest amounts allowable for tax purposes, in accordance with German tax law. An interest rate of 6% per annum was applied. Foreign subsidiaries recorded their pension reserves in accordance with similar principles. The relief fund of SAP Altersvorsorge e.V. has assumed indirect pension commitments towards employees of SAP AG. SAP AG, as the sponsor of the relief fund, established a reserve for indirect pension obligations until 1997. Accrued taxes are calculated on the basis of the planned distribution of income. The other reserves and accrued liabilities take into account foreseeable risks and contingent obligations which are probable and reasonably estimable. Notes to Consolidated Financial Statements 35 38 LIABILITIES Liabilities are shown at the amounts payable, which approximates their fair value. DERIVATIVE FINANCIAL INSTRUMENTS The SAP Group uses derivative financial instruments for hedging purposes. Forward exchange contracts, and to a lesser extent currency options, are employed to reduce currency risk that results from engaging in international transactions. The hedges cover risk from potential currency fluctuations arising from existing as well as forecasted underlying transactions. Existing underlying transactions represent transactions that have been already recorded in the financial statements. The forecasted underlying transactions reflect budget assumptions, which historically have approximated actual results. The derivatives used to hedge existing transactions are treated together with the ordinary operations as one valuation unit, and the contracts are grouped in portfolios for each currency. The derivative instruments used to hedge forecasted transactions are marked to market individually at the end of the accounting period. In accordance with German commercial valuation regulations, for a portfolio with a negative valuation a provision for anticipated losses is recorded currently in income. By contrast, positive valuations are not recognized into income. CONSOLIDATED STATEMENTS OF CASH FLOWS The Consolidated Statements of Cash Flows show the effect of inflows and outflows in the course of the fiscal year on the group's liquid assets, and have been prepared in accordance with Statement of Financial Accounting Standards No. 95 - Statement of Cash Flows ("SFAS 95"). The statements distinguish between cash flows from operating activities, investing activities, and financing activities. The liquid assets are comprised of cash and cash equivalents with an original maturity of less than three months and time deposits with maturities exceeding three months. Liquid assets are reconciled to cash and cash equivalents in note 36 of Section F - "Information on the Consolidated Statements of Cash Flows". USE OF ESTIMATES The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent amounts at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 36 Notes to Consolidated Financial Statements 39 c SIGNIFICANT DIFFERENCES BETWEEN GERMAN GAAP AND U.S. GAAP 6 RECONCILIATION TO U.S. GAAP The consolidated financial statements of the Company have been prepared in accordance with German GAAP as prescribed by the German Commercial Code and the German Stock Corporation Act. The effect of the application of U.S. GAAP to net income and shareholders' equity as of and for the years ended December 31, 1998 and 1997 are set out in the tables below: RECONCILIATION OF NET INCOME FROM GERMAN GAAP TO U.S. GAAP
1998 1997 Note DM (000) DM (000) NET INCOME AS REPORTED IN THE CONSOLIDATED FINANCIAL STATEMENTS UNDER GERMAN GAAP 1,052,348 925,354 Minority interests a) -3,023 -2,371 NET INCOME AS REPORTED IN THE CONSOLIDATED FINANCIAL STATEMENTS UNDER --------- -------- GERMAN GAAP AFTER MINORITY INTERESTS 1,049,325 922,983 --------- -------- Revenue recognition b) -49,393 -77,491 Pension provisions c) -5,363 1,901 Business combinations (goodwill & in-process R&D) d) -2,148 -10,568 Income taxes e) 12,623 -2,296 STAR program f) 15,641 0 Other g), h) -11,052 10,122 Tax effect of U.S. GAAP adjustment e) 20,966 28,796 Minority interests a) 14 127 --------- -------- NET INCOME IN ACCORDANCE WITH U.S. GAAP 1,030,613 873,574 ========= ========
Notes to Consolidated Financial Statements 37 40
RECONCILIATION OF SHAREHOLDERS' EQUITY FROM GERMAN GAAP TO U.S. GAAP 1998 1997 Note DM (000) DM (000) SHAREHOLDERS' EQUITY AS REPORTED IN THE CONSOLIDATED BALANCE SHEETS UNDER GERMAN GAAP 3,756,391 3,062,372 Less: minority interests a) -14,147 -14,552 --------- --------- EQUITY OF SAP AG SHAREHOLDERS 3,742,244 3,047,820 --------- --------- Revenue recognition b) -445,222 -395,829 Pension provisions c) 0 5,363 Business combinations (goodwill & in-process R&D) d) -5,436 -3,288 STAR program f) 15,641 0 Unrealized gains on-available-for- sale marketable securities g) 68,041 5,472 Other e), h) 18,927 37,461 Tax effect of U.S. GAAP adjustment e) 162,026 141,060 --------- --------- SHAREHOLDERS' EQUITY UNDER U.S. GAAP 3,556,221 2,838,059 ========= =========
CHANGES IN SHAREHOLDERS' EQUITY IN ACCORDANCE WITH U.S. GAAP 1998 1997 DM (000) DM (000) U.S. GAAP SHAREHOLDERS' EQUITY (BEGINNING OF YEAR) 2,838,059 2,031,869 Net income 1,030,613 873,574 Dividends paid -294,213 -240,193 Exercise of convertible bonds 25,693 79,101 Tax benefit of convertible bond program 2,814 2,296 Change in unrealized gains on available-for- sale marketable securities, net of tax 62,569 4,865 Currency translation adjustment -104,061 95,933 Other -5,253 -9,386 --------- --------- SHAREHOLDERS' EQUITY (END OF YEAR) 3,556,221 2,838,059 ========= =========
38 Notes to Consolidated Financial Statements 41 EXPLANATORY NOTES TO THE RECONCILIATION a) MINORITY INTERESTS In contrast to the position under the applicable German law, under U.S. GAAP minority interests are not included in net income or shareholders' equity. Minority interests are shown as liabilities on the balance sheet. b) REVENUE RECOGNITION The Company recognizes software revenue for U.S. GAAP in compliance with the American Institute of Certified Public Accountants Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"). Under SOP 97-2, software revenue is recognized when a noncancellable contract is signed, delivery has occurred, the license fee is fixed and determinable, and the collection of the fee is probable. Revenues for licenses with extended payment terms are recognized as payments become due. Under certain license arrangements, customers agree to license additional groups of users at prescribed future dates on a noncancellable basis. Under German GAAP, the Company recognizes revenue for such additional users at the dates on which they are authorized to access the System. Under U.S. GAAP, the Company recognizes software revenues when the criteria for recognition set forth in SOP 97-2 have been achieved. Generally, software maintenance agreements are concluded in conjunction with the software license agreement. Maintenance fees are mostly based upon a standard percentage of the related software license fee and commence the month immediately following software delivery. SOP 97-2 regards deviations from standard maintenance agreements as discounts to be considered in recognizing software revenue. The value from nonstandard maintenance arrangements reduces the related software license revenue and is recognized as maintenance revenue in subsequent periods. Under German GAAP, future costs under maintenance agreements are accrued based on estimated cost when a free-of-charge service period is provided. By contrast, under U.S. GAAP, the relative fair market of the free service period is reduced from the related software license revenue. c) PENSION BENEFITS Until 1997, reserves for pension obligations in Germany were determined by the ongoing-concern method applying an interest rate of 6% per annum, in accordance with German tax law. In 1998 the Company adopted the projected unit credit method, which is required under U.S. GAAP and permitted under German tax law. By contrast to the ongoing-concern method, the projected unit credit method makes allowance for projected compensation and pension increases and is based on actual rates of interest derived from the long-term borrowing rates in the countries concerned. Notes to Consolidated Financial Statements 39 42 d) BUSINESS COMBINATIONS (GOODWILL, IN-PROCESS RESEARCH AND DEVELOPMENT) In accordance with German GAAP, the difference between the purchase price and the aggregate fair value of tangible and identifiable intangible assets and liabilities acquired in a business combination may either be charged directly to shareholders' equity or capitalized as goodwill and amortized over its estimated useful life. Under U.S. GAAP, direct goodwill charges to shareholders' equity are prohibited. For acquisitions prior to January 1, 1997, the Company has elected to record goodwill as a direct reduction to shareholders' equity. Goodwill arising from business combinations consummated thereafter is capitalized and amortized through the income statement over its estimated useful life, generally five years. Under German GAAP, the in-process research and development costs of companies acquired are not identified separately. Under U.S. GAAP these costs are separately determined at the time of acquisition and charged to expense. e) DEFERRED TAXES Under German GAAP, deferred tax assets are not recorded for net operating losses. Under U.S. GAAP, deferred tax assets are recorded for net operating losses. A valuation allowance is established when it is more likely than not that deferred tax assets will not be realized. In addition, the tax effect of U.S. GAAP adjustments is included in the reconciliation. f) STOCK APPRECIATION RIGHTS PROGRAM ("STAR") A pro-rata reserve reflecting the one-year valuation period was created December 31, 1998 for expenses anticipated in relation to the STAR program. STAR amounts will be paid in three installments over a twenty-six month payment period. Under U.S. GAAP, the expense is recognized over the payment period. g) MARKETABLE SECURITIES Under German GAAP, marketable debt and equity securities are valued at the lower of acquisition cost or market value at the balance sheet date. Under U.S. GAAP, marketable debt and equity securities are categorized as either trading, available-for-sale or held to maturity. The Company's securities are considered to be available-for-sale and, therefore, are valued under U.S. GAAP at fair market value at the balance sheet date. Unrealized gains and losses are excluded from earnings and reported in a separate component of shareholders' equity. h) OTHER Other items consist primarily of foreign currency translation differences, unrealized foreign currency transaction gains and expenses for the employee share program under German GAAP which are recorded as a direct reduction in shareholders' equity under U.S. GAAP. 40 Notes to Consolidated Financial Statements 43 d NOTES TO THE CONSOLIDATED INCOME STATEMENTS 7 SALES REVENUES Sales revenues by types of activity were as follows:
1998 1997 DM (000) DM (000) Product 5,256,941 4,097,117 Consulting 2,193,276 1,251,128 Training 893,360 579,928 Other 121,717 89,293 --------- --------- TOTAL 8,465,294 6,017,466 ========= =========
Other revenues are derived mainly from marketing events. Further revenue informations is disclosed in note 41. 8 OTHER OPERATING INCOME Other operating income comprises:
1998 1997 DM (000) DM (000) Exchange gains 127,680 43,401 Employee contributions for company cars 12,965 9,923 Gain on disposal of fixed assets 5,838 4,958 Gain on sale of marketable securities 4,551 1,640 Cafeteria sales 2,496 1,633 Rental income 2,121 3,553 Income from prior periods 806 1,666 Other income 12,814 13,192 ------- ------ TOTAL 169,271 79,966 ======= ======
The significant change in exchange gains resulted from the high volatility of foreign currencies and income from hedging transactions. Notes to Consolidated Financial Statements 41 44 9 COST OF SERVICES AND MATERIALS Cost of services and materials consists of the following:
1998 1997 DM (000) DM (000) Raw materials and supplies, purchased goods 23,604 16,485 Purchased services 1,156,539 589,234 --------- ------- TOTAL 1,180,143 605,719 ========= =======
The change in purchased services resulted from additional purchases of consulting services, which have been reinvoiced to SAP customers. 10 PERSONNEL EXPENSES / NUMBER OF EMPLOYEES Personnel expenses comprise:
1998 1997 DM (000) DM (000) Salaries 2,615,945 1,786,980 Social security 336,106 217,988 Pension expense 91,513 69,952 --------- --------- TOTAL 3,043,564 2,074,920 ========= =========
The average number of employees, excluding apprentices and interns, was as follows:
1998 1997 Employees 17,323 11,558
The 1998 figures include 362 employees of the consolidated joint venture company, determined on a proportional basis. The corresponding number of employees for 1997 was 330. 42 Notes to Consolidated Financial Statements 45 11 OTHER OPERATING EXPENSES Other operating expenses comprise the following:
1998 1997 DM (000) DM (000) Travel 424,008 292,029 Marketing 391,518 279,871 Licences and commissions 322,363 209,215 Rent 280,213 202,067 Additional personnel expenses 165,143 96,398 Telecommunication / postage 118,130 84,905 Bad debt expense 110,978 52,034 Consulting / administration 108,955 89,195 Exchange rate differences 101,380 83,305 Service costs / maintenance 85,296 63,003 Entertainment 46,479 48,988 Documentation 35,150 28,320 Other third-party services 25,322 21,402 Computer supplies 10,492 6,453 Insurance 9,340 8,254 Other 31,893 46,289 --------- --------- TOTAL 2,266,660 1,611,728 ========= =========
Major changes in other operating business expenses resulted from increased business transactions as well as the increased number of employees. 12 LOSS / INCOME FROM INVESTMENTS
1998 1997 DM (000) DM (000) Income from investments 863 591 - - thereof from affiliated companies (863) (591) Result of associated companies -32,385 2,909 ------- ----- TOTAL -31,522 3,500 ======= =====
The negative result from associated companies in 1998 includes a DM 36,549 thousand start-up loss at Pandesic, held jointly with Intel Corp. Notes to Consolidated Financial Statements 43 46 13 WRITE-DOWN OF FINANCIAL ASSETS The write-down of financial assets includes the discounting to present value of interest-free loans to employees. 14 NET INTEREST INCOME
1998 1997 DM (000) DM (000) Other interest and similar income 67,739 56,344 Interest and similar expenses 6,923 3,782 ------ ------ 60,816 52,562 ====== ======
Interest income is derived primarily from cash and cash equivalents, marketable securities, long-term investments and other loans. 15 TAXES ON INCOME Income tax expense is as follows:
1998 1997 DM (000) DM (000) Domestic corporation tax on income (including solidarity surcharge) 283,283 228,570 Domestic trade tax on income 126,962 107,949 Foreign income taxes 442,301 417,161 ------- ------- 852,546 753,680 ------- ------- Deferred taxes -29,840 -45,326 ------- ------- TOTAL TAXES ON INCOME 822,706 708,354 ======= =======
44 Notes to Consolidated Financial Statements 47 The income before income taxes is attributable to the following geographic locations:
1998 1997 DM (000) DM (000) Domestic 908,576 785,122 Foreign 966,478 848,586 --------- --------- INCOME BEFORE INCOME TAXES 1,875,054 1,633,708 ========= =========
The effective tax rate, before other taxes, of the SAP Group for the years ended December 31, 1998 and 1997 was 42.8% and 42.5% respectively. The table below shows the reconciliation of the current German statutory retained earnings corporate income tax rate of 45% and the effective tax rate. Because of the lower German tax rate for income distributed to shareholders, the domestic corporation tax is reduced according to the Executive Board's proposal for income appropriation. The corporation tax reduction applies to the year that gives rise to dividend distribution. In addition, shareholders tax-resident in Germany receive a credit of the full corporation tax against their personal income tax liability. A solidarity surcharge of 5.5% is imposed in respect of German corporation tax liability. The effective domestic trade tax rate, before other taxes, for the years ended December 31, 1998 and 1997 was 14.3% and 13.5%, respectively.
1998 1997 DM (000) DM (000) Corporation tax on income 785,198 686,907 German trade tax on income 130,169 107,249 Solidarity surcharge 12,799 15,927 Tax reduction for dividend payment -69,351 -63,046 Foreign tax rate differential, net -92,779 -51,098 Utilization of loss carryforwards -929 -613 Tax on non-deductible expenses 19,041 11,092 Tax effect on current year losses 53,326 1,701 Consolidation effects -7,701 1,990 Other -7,067 -1,755 ------- ------- TAXES ON INCOME 822,706 708,354 ======= =======
Notes to Consolidated Financial Statements 45 48 In accordance with the deferral method, the differences between assets, liabilities and net income calculated for tax purposes and for financial reporting purposes that are expected to reverse in the future are shown below. In contrast to U.S. GAAP, net operating losses are not recorded as a deferred tax asset under German GAAP. Based upon past results of subsidiaries and expectations of similar performance in the future, the taxable income of these subsidiaries will more likely than not be sufficient to fully recognize the net deferred asset related to these subsidiaries.
1998 1997 DM (000) DM (000) Deferred tax assets Accounts receivable 22,434 23,791 Other loans 3,489 2,822 Pension provisions 0 5,486 Other provisions 105,561 100,678 Other 2,836 2,310 ------- ------- DEFERRED TAX ASSETS 134,320 135,087 ======= ======= Deferred tax liabilities Fixed assets -13,305 -19,842 Pension provision -5,518 0 Deferred income -24,516 -25,267 ------- ------- DEFERRED TAX LIABILITIES -43,339 -45,109 ------- ------- NET DEFERRED TAX ASSET 90,981 89,978 ======= =======
Certain foreign subsidiaries of the Company had net operating loss carryforwards at December 31, 1998 and 1997, totaling approximately DM 125,973 thousand and DM 17,283 thousand, respectively. The increase in net operating loss carryforwards resulted principally from losses in Japan in the amount of DM 110,226 thousand. The majority of these carryforward losses will expire between three and five years. 46 Notes to Consolidated Financial Statements 49 e NOTES TO THE CONSOLIDATED BALANCE SHEETS 16 INTANGIBLE ASSETS
in thousands of DM Trademarks, Goodwill TOTAL similar rights, and assets Purchase cost 1/1/98 61,799 55,006 116,805 Foreign currency exchange rate changes 3,119 0 3,119 Additions 46,622 65,206 111,828 Retirements 13,851 0 13,851 Transfers 34 0 34 ------ ------- ------- 12/31/98 97,723 120,212 217,935 ------ ------- ------- Accumulated depreciation 1/1/98 31,465 4,041 35,506 Foreign currency exchange rate changes 2,499 0 2,499 Additions 20,205 22,136 42,341 Retirements 13,769 0 13,769 Transfers 4 0 4 ------ ------- ------- 12/31/98 40,404 26,177 66,581 ------ ------- ------- BOOK VALUE 12/31/98 57,319 94,035 151,354 ====== ======= ======= Book value 12/31/97 30,334 50,965 81,299
The additions to trademarks, similar rights and assets relate to software programs. The additions to goodwill in the Group relate to the capitalization of goodwill arising from consolidation. Notes to Consolidated Financial Statements 47 50 17 PROPERTY, PLANT AND EQUIPMENT
in thousands of DM Land, leasehold Other Advance TOTAL improvements and property, payments buildings, plant and and including equipment construction buildings on in progress third-party land Purchase cost 1/1/98 609,679 747,028 99,076 1,455,783 Foreign currency exchange rate changes 4,361 442 -165 4,638 Additions 154,387 256,580 237,218 648,185 Retirements 7,230 148,539 0 155,769 Transfers 81,801 11,473 -93,308 -34 ------- ------- ------- --------- 12/31/98 842,998 866,984 242,821 1,952,803 ------- ------- ------- --------- Accumulated depreciation 1/1/98 103,009 499,462 0 602,471 Foreign currency exchange rate changes 780 3,155 0 3,935 Additions 48,838 180,169 0 229,007 Retirements 4,832 140,091 0 144,923 Transfers -220 216 0 -4 ------- ------- ------- --------- 12/31/98 147,575 542,911 0 690,486 ------- ------- ------- --------- BOOK VALUE 12/31/98 695,423 324,073 242,821 1,262,317 ======= ======= ======= ========= Book value 12/31/97 506,670 247,566 99,076 853,312
The additions in other property, plant and equipment comprise primarily the purchase of computer hardware. 48 Notes to Consolidated Financial Statements 51 18 FINANCIAL ASSETS
in thousands of DM Shares in Invest- Other Long-term Other TOTAL affiliated ments in invest- invest- loans companies associated ments ments companies Purchase cost 1/1/98 11,984 18,773 50,920 109,499 50,154 241,330 Foreign currency exchange rate changes 940 0 -542 -571 3 -170 Additions 12,902 7,085 41,822 331 13,821 75,961 Retirements 13,229 156 29,090 2,335 17,744 62,554 ------ ------ ------ ------- ------ ------- 12/31/98 12,597 25,702 63,110 106,924 46,234 254,567 ------ ------ ------ ------- ------ ------- Accumulated depreciation 1/1/98 4,966 0 0 0 8,570 13,536 Foreign currency exchange rate changes 0 0 0 0 1 1 Additions 891 0 0 0 3,205 4,096 Retirements 5,756 0 0 0 608 6,364 Write-ups 0 0 0 0 1,081 1,081 ------ ------ ------ ------- ------ ------- 12/31/98 101 0 0 0 10,087 10,188 ------ ------ ------ ------- ------ ------- BOOK VALUE 12/31/1998 12,496 25,702 63,110 106,924 36,147 244,379 ====== ====== ====== ======= ====== ======= Book value 12/31/1997 7,018 18,773 50,920 109,499 41,584 227,794
Financial assets include long-term investments at December 31, as follows:
1998 1997 Book Market Un- Book Market Un- values values realized values values realized gains gains DM (000) DM (000) DM (000) DM (000) DM (000) DM (000) Securities with fixed maturities 100,000 107,850 7,850 100,000 104,750 4,750 Other securities 6,924 6,924 0 9,499 9,499 0 ------- ------- ----- ------- ------- ----- 106,924 114,774 7,850 109,499 114,249 4,750 ======= ======= ===== ======= ======= =====
Notes to Consolidated Financial Statements 49 52 Securities with fixed maturities mature in more than five years. The other loans include interest bearing and non-interest bearing loans to employees and third parties. 19 INVENTORIES Inventories primarily consist of work in process of DM 31,472 thousand which are services performed on consulting contracts, and office supplies and documentation of DM 5,421 thousand. 20 ACCOUNTS RECEIVABLE Amounts shown on the consolidated balance sheets are net of allowance for bad debts of DM 157,201 thousand and DM 92,362 thousand at December 31, 1998 and 1997, respectively. At December 31, 1998 and 1997, accounts receivable having a remaining term greater than one year and less than two years are DM 56,140 thousand and DM 86,732 thousand, respectively. Concentrations of operating risks are limited due to the Company's large customer base and its dispersion across many different industries and countries worldwide. No single customer accounted for 10% or more of revenues for fiscal year 1998 and 1997. 21 OTHER ASSETS
1998 1997 DM (000) DM (000) Other assets 194,387 167,152 - - thereof with a remaining term greater than one year (110,950) (95,927)
Other assets include interest receivable for the period, tax refund claims, notes receivable, cash surrender value of insurance policies and rental deposits. 50 Notes to Consolidated Financial Statements 53 22 MARKETABLE SECURITIES During the fiscal year, SAP AG acquired 39,402 of its own shares, representing 0.04% of the capital stock, at an average market price of DM 829, for the purpose of offering them to its employees (Article 71 (1) no. 2 of the German Stock Corporation Act). Such shares were transferred to employees during the year at an average price of DM 824 per share. The Company did not hold any of its own shares as of the balance sheet closing date. The foreign subsidiaries of the Company purchased 196,225 American Depository Receipts ("ADRs"), at an average price of USD 45.94 and were distributed by an administrator to employees. Twelve ADRs are equivalent to one preference share. 23 LIQUID ASSETS As in the previous year, this balance sheet item includes cash and cash equivalents and time deposits at banks. Liquid assets are as follows:
1998 1997 DM (000) DM (000) Cash at banks 313,304 213,220 Time deposits with original maturities of 3 months or less 900,985 579,590 --------- ------- CASH AND CASH EQUIVALENTS 1,214,289 792,810 --------- ------- Time deposits with maturities greater than 3 months and less than 1 year 26,542 123,710 Time deposits with maturities exceeding 1 year 70,000 80,900 --------- ------- LIQUID ASSETS 1,310,831 997,420 ========= =======
Liquid assets in the consolidated balance sheets are reconciled to cash and cash equivalents shown on the consolidated statements of cash flows, in section F, note 36. 24 PREPAID EXPENSES AND DEFERRED CHARGES This balance sheet line item is mainly comprised of prepayments for rental contracts, leases and maintenance contracts. Notes to Consolidated Financial Statements 51 54 25 SUBSCRIBED CAPITAL At December 31, 1998, the subscribed capital of the Company was comprised as follows:
Number and type of shares DM 61,000,000 no-par ordinary shares 305,000,000 43,564,499 no-par preference shares 217,822,495 ----------- 522,822,495 ===========
By resolution of the Annual General Meeting held May 7, 1998, the Executive Board was authorized, subject to the approval of the Supervisory Board, to issue additional no-par bearer preference shares which may be issued through the period ending May 15, 2003. If all of these shares are issued they will increase capital stock by DM 10,000 thousand. The new shares are to be offered to shareholders for subscription. This right was not exercised during the fiscal year. The subscribed capital increased only to the extent holder exercised their conversion rights under convertible bonds. As conversion rights under the 1988/1998 convertible bond issue were exercised, DM 28 thousand of contingent capital (corresponding to 4,450 no-par ordinary shares and 1,120 no-par preference shares) was converted into capital stock. As conversion rights under the 1994/2004 convertible bond issue were exercised in 1998, DM 1,281 thousand of contingent capital (corresponding to 256,260 no-par preference shares) was converted into capital stock. As a result, contingent capital decreased by DM 1,309 thousand, and totaled DM 3,428 thousand on December 31, 1998. Subsequent to the conversion of these bonds, there were 685,501 approved preference shares remaining that had not yet been converted at December 31, 1998. Refer to the "Consolidated Statement of Changes in Shareholders' Equity" in the "Financial Statements." 26 CAPITAL RESERVE Of the increase in the capital reserve, DM 40 thousand resulted from the premium necessary to cover the exercise of conversion rights for the 1988/1998 convertible bonds, and DM 24,345 thousand from the premium necessary to cover the exercise of conversion rights for the 1994/2004 convertible bonds. 27 SPECIAL RESERVES FOR CAPITAL INVESTMENT SUBSIDIES AND ALLOWANCES The consolidated balance sheets include special reserves for capital investment subsidies and allowances pursuant to regional development programs. 52 Notes to Consolidated Financial Statements 55 28 PENSION RESERVES AND SIMILAR OBLIGATIONS The accrued pension and other similar obligations consist of the following:
1998 1997 DM (000) DM (000) Domestic pension plans reserves 35,974 15,059 Other pension plans and similar obligations 6,148 26,402 ------ ------ 42,122 41,461 ====== ======
Reserves for pension obligations are established on the basis of benefit plans that promise old age, disability, and survivors' benefits. In most cases, the benefit plans are performance-oriented, based on the length of service and compensation of employees. Effective January 1, 1998, the German pension plans and their respective costs are determined using the projected unit credit method in accordance with U.S. GAAP as defined by SFAS No. 87, "Employers' Accounting for Pensions". Current pensions and remunerations prevailing on the balance sheet date as well as forecast future increases in these parameters are included in the valuation. In 1997, similar obligations contained an amount of DM 19,726 thousand that corresponds to the difference between the admissible value under commercial law of the obligations computed in accordance with the German Income Tax Act, and the value of the assets held by the relief fund. As a result of the adoption of U.S. GAAP this obligation is included in pension reserves in 1998. The following disclosure as of December 31, 1997 does not correspond to the values included in the balance sheet, and is included only for comparative purposes in accordance with U.S. GAAP. DOMESTIC PLANS The pension plans in Germany are performance-oriented and the related plan assets are held in accordance with the Company's policies by SAP Altersvorsorge e.V., a legally independent relief fund sponsored by SAP AG. Members of the Executive Board are covered by individual, performance-oriented benefit plans, for which reserves have been established. Notes to Consolidated Financial Statements 53 56 The change of the pension obligation and the change in plan assets for the German plans are as follows:
1998 1997 DM (000) DM (000) CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of the year 151,599 122,449 Service cost 21,799 18,327 Interest cost 9,861 7,963 Actuarial (gain) / loss 3,938 2,970 Benefits paid -139 -110 ------- ------- BENEFIT OBLIGATION AT END OF YEAR 187,058 151,599 ------- ------- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of the 79,260 59,547 year Actual return on plan assets 6,253 4,684 Employer contribution 24,187 19,483 Life/disability insurance premiums and expenses -3,533 -4,344 Benefits paid -139 -110 ------- ------- FAIR VALUE OF PLAN ASSETS AT END OF THE YEAR 106,028 79,260 ------- ------- Funded status 81,030 72,339 Unrecognized net actuarial gain -31,803 -24,611 Unrecognized transition (obligation) asset -27,121 -29,076 ------- ------- ACCRUED BENEFIT COST 22,106 18,652 ======= =======
Included in the 1998 benefit cost (DM 22,106 thousand) is the fair value of plan assets in the amount of DM 14,868 thousand for the Board of Directors plan. In the consolidated balance sheets the amount is included in other assets. 54 Notes to Consolidated Financial Statements 57 The following assumptions were used to develop the change in pension obligation and the change in plan assets of the German plans:
1998 1997 % % Discount rate 6.0 6.5 Expected return on plan assets 6.5 6.5 Rate of compensation increase 4.0 5.0
Components of net periodic benefit cost:
1998 1997 DM (000) DM (000) Service cost 21,799 18,327 Interest cost 9,861 7,963 Expected return on plan assets -6,619 -5,137 Net amortization 2,600 2,564 ------ ------ NET PERIODIC PENSION COST 27,641 23,717 ====== ======
Notes to Consolidated Financial Statements 55 58 FOREIGN PLAN SAP has a noncontributory defined benefit plan for certain of its foreign employees who are at least 21 years old and have been employed by the Company for at least one year. The plan provides benefits based upon compensation levels, age, and years of service. The change of the pension obligation and the change in plan assets for the foreign plan are as follows:
1998 1997 DM (000) DM (000) CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of the year 22,477 9,725 Service cost 13,356 6,975 Interest cost 1,626 1,392 Actuarial (gain) / loss 2,907 2,516 Foreign currency exchange rate changes -2,380 1,868 ------ ------ BENEFIT OBLIGATION AT END OF THE YEAR 37,986 22,476 ====== ====== CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of the 20,913 5,293 year Actual return on plan assets 2,200 1,441 Employer contribution 18,022 12,866 Foreign currency exchange rate changes -2,394 1,312 ------ ------ FAIR VALUE OF PLAN ASSETS AT END OF THE YEAR 38,741 20,912 ====== ====== Funded status -757 1,565 Unrecognized net actuarial gain -5,830 -3,628 ------ ------ PREPAID BENEFIT COST -6,587 -2,063 ====== ======
The following assumptions were used to develop the change in pension obligation and the change in plan assets of the foreign plan:
1998 1997 % % Discount rate 6.75 7.0 Expected return on plan assets 8.0 8.0 Rate of compensation increase 6.0 6.0
56 Notes to Consolidated Financial Statements 59 Components of net periodic benefit cost:
1998 1997 DM (000) DM (000) Service cost 13,356 6,975 Interest cost 1,626 1,392 Expected return on plan assets -1,981 -900 Net amortization and deferral 115 59 ------ ----- NET PERIODIC BENEFIT COST 13,116 7,526 ====== =====
29 OTHER RESERVES AND ACCRUED LIABILITIES
1998 1997 DM (000) DM (000) Accrued taxes 298,813 489,676 Other reserves and accrued liabilities 967,336 630,438 --------- --------- 1,266,149 1,120,114 ========= =========
Accrued taxes comprise liabilities for the current fiscal year and for prior years. Other reserves and accrued liabilities at December 31 are as follows:
1998 1997 DM (000) DM (000) Obligations to employees 575,372 397,601 Obligations to suppliers 173,918 81,777 Vacation entitlement 112,334 77,954 STAR program obligation 47,581 0 Warranty and service costs 24,126 50,297 Contribution to employees' accident insurance account 5,445 4,003 Financial statement preparation costs 3,673 2,435 Other 24,887 16,371 ------- ------- 967,336 630,438 ======= =======
Notes to Consolidated Financial Statements 57 60 SAP accrues only for obligations when they are probable and reasonably estimable. Obligations to employees relate primarily to variable bonus payments tied to earnings performance, paid out after the balance sheet date. Obligations to suppliers represent services received or goods purchased which SAP has not yet been invoiced. Warranty and service costs accruals represent estimated future warranty obligations for maintenance free periods. 30 BONDS This item comprises the outstanding portion of the SAP AG 6% 1994/2004 convertible bond issue, which amounts to DM 3,428 thousand (DM 4,709 thousand as of December 31, 1997). The portion of the 1988/1998 floating-rate convertible bond issue outstanding on December 31, 1997 (DM 4 thousand) was comprised of DM 50 registered convertible bonds, and carried a right, exercisable up until October 20, 1998, to convert to SAP ordinary and preference shares. The exercise of the conversion right resulted in 4,450 ordinary shares totaling DM 22 thousand as a proportion of the capital stock, and 1,120 preference shares totaling DM 6 thousand as a proportion of the capital stock. The 1994/2004 convertible bond issue is comprised of 4,000,000 registered convertible bonds with a value of DM 5 each. These convertible bonds carry a right, which can be exercised on June 30, July 31, August 31, September 30, October 31, or November 30 of any year up until June 30, 2004, to convert to preference shares. The exercise of this conversion right would result in 685,501 no-par preference shares. 31 OTHER LIABILITIES The information on liabilities required by German law is included in the following summary. The liabilities are unsecured, except for retention of title and similar rights, as is customary in the industry.
Term less Term Term more 12/31/98 12/31/97 than 1 year between 1 than 5 years and 5 years DM (000) DM (000) DM (000) DM (000) DM (000) Bank loans and overdrafts 188,326 48,255 62 236,643 163,547 Advance payments received 98,809 0 0 98,809 30,972 Accounts payable 450,181 0 0 450,181 318,309 Payables due to unconsolidated affiliates 8,447 0 0 8,447 8,815 Taxes 181,708 0 0 181,708 157,132 Social security 58,971 0 0 58,971 42,193 Other liabilities 55,442 71 24,425 79,938 93,271 --------- ------ ------ --------- ------- 1,041,884 48,326 24,487 1,114,687 814,239 ========= ====== ====== ========= =======
58 Notes to Consolidated Financial Statements 61 The bank loans and overdrafts relate primarily to loans taken out in Japan due to the low interest rates prevailing in that country (DM 200,169 thousand). In the previous year, liabilities with a remaining term not exceeding one year amounted to DM 809,701 thousand and those with a remaining term exceeding five years amounted to DM 4,151 thousand. 32 DEFERRED INCOME This balance is comprised mainly of deferred maintenance revenue. f INFORMATION ON THE CONSOLIDATED STATEMENTS OF CASH FLOWS 33 NET CASH PROVIDED BY OPERATING ACTIVITIES The increase in net cash provided by operating activities resulted from an increase in the Company's net income and a smaller increase in the accounts receivable due to effective receivables management. Interest payments in 1998 and 1997 were DM 6,107 thousand and DM 3,803 thousand respectively. Income taxes paid in fiscal 1998 and 1997 were DM 881,249 thousand and DM 360,125 thousand respectively, net of refunds. 34 NET CASH USED BY INVESTING ACTIVITIES The higher financial requirement was caused by greater investment in property, plant and equipment, necessary because of growth in the business and increased employee numbers. The investments were financed wholly from ordinary operations. 35 NET CASH USED FOR FINANCING ACTIVITIES Financing activities used cash of DM 221,91 thousand for dividend payments and provided proceeds from the issuance of debt. 36 CASH AND CASH EQUIVALENTS The following table shows the reconciliation of liquid assets, shown in the consolidated balance sheets to cash and cash equivalents, shown in the consolidated statements of cash flows:
1998 1997 DM (000) DM (000) Liquid assets 1,310,831 997,420 Time deposits greater than 3 months 96,542 204,610 --------- ------- CASH AND CASH EQUIVALENTS 1,214,289 792,810 ========= =======
Notes to Consolidated Financial Statements 59 62 g Additional Information 37 CONTINGENT LIABILITIES
1998 1997 DM (000) DM (000) Notes receivable sold 41 13,128 Guarantees and endorsements 3,015 364 Guarantees for unused lines of credits and other commitments 437,529 162,639 Extension of collateral for third-party liabilities 55,238 6,570 ------- ------- 495,823 182,701 ======= =======
38 OTHER FINANCIAL COMMITMENTS Commitments under rental and operating leasing contracts:
DM (000) Due 1999 198,072 Due 2000 140,193 Due 2001 95,136 Due 2002 65,700 Due 2003 48,630 Due thereafter 149,602
Purchase commitments amounting to DM 168,061 at December 31, 1998 are within the limit of authorized capital expenditures. 60 Notes to Consolidated Financial Statements 63 39 LITIGATION AND CLAIMS The bankruptcy trustee of the American company FoxMeyer Corp. ("FoxMeyer") has instituted legal proceedings against SAP America, Inc., the American subsidiary of SAP AG, and SAP AG, claiming damages in the amount of U.S. $ 500 million. FoxMeyer was a pharmaceutical wholesaler that filed for bankruptcy protection in 1996. FoxMeyer's bankruptcy trustee has alleged that, during the implementation phase of the R/3 System, which began in 1993, SAP America, Inc. made false assurances concerning the functionality of its software. The case is currently in the discovery phase. While the ultimate outcome of this matter cannot be determined presently with certainty, the Company believes that FoxMeyer's claims in this action are without merit. The Company is vigorously defending against the claims, and believes that this action is not likely to have a material effect on its results of operations, financial condition, or cash flows. SAP is subject to legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. Although the outcome of these proceedings and claims cannot be predicted with certainty, management does not believe that the outcome of any of these matters will have a material adverse effect on the Company's results of operations, financial condition or cash flows. Any litigation, however, involves potential risk and potentially significant litigation costs, and therefore there can be no assurance that any litigation which is now pending or which may arise in the future will not have a material adverse effect on the Company's results of operations, financial condition, or cash flows. 40 DERIVATIVE FINANCIAL INSTRUMENTS As an internationally active company, the SAP Group is subject to risks from currency and interest-rate fluctuations in its ordinary operations. The derivative financial instruments employed by the Group to reduce such risks are exclusively marketable instruments with sufficient liquidity. To avoid counterparty risks in the use of derivative financial instruments, the Group conducts business exclusively with major financial institutions. The use of derivative financial instruments is governed by consistent guidelines and strict controls, and is limited to hedging against risks in ordinary operations, including the related financial investments and financing transactions. Derivative financial instruments are not employed for speculative purposes, but only for hedging purposes. As of December 31, 1998, all derivatives have maturity less than one year. Notes to Consolidated Financial Statements 61 64 The notional values and market values (beyond valuation units) of the derivative financial instruments as of December 31, 1998 and 1997 were as follows:
1998 1997 Notional Market Notional Market value value value value Currency-related contracts DM (000) DM (000) DM (000) DM (000) Forward exchange contracts 614,385 607 339,560 426 Currency options 0 0 25,600 562
The market values of the currency and interest rate-related contracts are computed on the basis of the market values of contracts having the same conditions as of the same effective date. Forward exchange contracts and currency options are employed exclusively to protect existing and/or expected foreign currency claims and liabilities. The goal of the hedging transactions entered into by the SAP Group is to reduce the risks associated with its claims and liabilities denominated and/or expected in foreign currencies. Currency-hedging transactions are effected mainly with the currencies of the following major industrialized countries: United States, Australia, United Kingdom, Switzerland and Japan. 41 SEGMENT INFORMATION SAP is a leading international developer and supplier of integrated business application software designed to provide cost-effective comprehensive solutions for businesses. The Company's primary product, the R/3 System, is designed to provide customers with a palette of standard business solutions arranged in applications that provide integrated enterprise-wide processing of business work flows. Additionally, the Company provides independent industry-specific solutions, independent business solutions, custom components, and the necessary technological infrastructure to support complementary software solutions. The Company has many strategic partners that offer complementary software, services, and hardware. The Company's services include consulting, support, and training. Customers range in size from large multinational enterprises to medium- and smaller-sized companies. SAP operates in one industry segment, the design, development, marketing, licensing, and support of client/server and mainframe standard business application software. The Company markets its products and services through its subsidiaries and distributors throughout the world. The majority of software development occurs in Germany although the Company maintains development facilities at certain of its foreign locations. SAP does not have a structure of operational segments for which separate financial data could be prepared. 62 Notes to Consolidated Financial Statements 65 The following table presents a summary of operations by geographic region. The following amounts are based upon consolidated data. Therefore, the total of each of the following categories reconciles to the consolidated financial statements.
Sales by destination Sales by operation 1998 1997 1998 1997 DM (000) DM (000) DM(000) DM (000) Germany 1,565,088 1,149,078 1,726,544 1,262,552 Rest of EMEA 1) 2,233,644 1,488,449 2,107,651 1,451,065 --------- --------- --------- --------- TOTAL EMEA 3,798,732 2,637,527 3,834,195 2,713,617 --------- --------- --------- --------- United States 3,068,493 2,105,573 3,073,749 2,053,307 Rest of Americas 858,379 489,181 851,513 504,808 --------- --------- --------- --------- TOTAL AMERICAS 3,926,872 2,594,754 3,925,262 2,558,115 --------- --------- --------- --------- ASIA-PACIFIC 739,690 785,185 705,837 745,734 --------- --------- --------- --------- TOTAL 8,465,294 6,017,466 8,465,294 6,017,466 ========= ========= ========= =========
Results from Total assets ordinary operations 1998 1997 1998 1997 DM (000) DM (000) DM (000) DM (000) Germany 911,134 792,819 1,874,280 1,659,477 Rest of EMEA 1) 385,328 313,262 1,543,812 1,200,026 --------- --------- --------- --------- TOTAL EMEA 1,296,462 1,106,081 3,418,092 2,859,503 --------- --------- --------- --------- United States 513,547 357,551 1,880,495 1,317,033 Rest of Americas 135,184 104,368 421,331 310,244 --------- --------- --------- --------- TOTAL AMERICAS 648,731 461,919 2,301,826 1,627,277 --------- --------- --------- --------- ASIA-PACIFIC -24,971 98,936 576,860 583,480 --------- --------- --------- --------- TOTAL 1,920,222 1,666,936 6,296,778 5,070,260 ========= ========= ========= =========
1) Europe/Middle East/Africa Notes to Consolidated Financial Statements 63 66
Property, plant and Depreciation equipment 1998 1997 1998 1997 DM (000) DM (000) DM (000) DM(000) Germany 675,074 484,855 119,647 95,829 Rest of EMEA 1) 255,123 187,943 47,260 30,578 TOTAL EMEA 930,197 672,798 166,907 126,437 United States 255,952 106,928 27,185 28,648 Rest of Americas 30,558 29,934 15,434 10,945 TOTAL AMERICAS 286,510 136,862 42,619 39,593 ASIA-PACIFIC 45,610 43,652 19,481 17,422 --------- ------- ------- ------- TOTAL 1,262,317 853,312 229,007 183,442 ========= ======= ======= =======
Capital expenditures Employees 1998 1997 12/31 12/31 DM (000) DM (000) 1998 1997 Germany 318,343 193,242 7,679 5,516 Rest of EMEA 1) 112,159 153,033 3,281 1,969 TOTAL EMEA 430,502 346,275 10,960 7,485 United States 176,276 90,657 4,463 2,906 Rest of Americas 17,893 21,989 1,521 879 TOTAL AMERICAS 194,169 112,646 5,984 3,785 ASIA-PACIFIC 23,514 28,441 2,364 1,586 ------- ------- ------ ------ TOTAL 648,185 487,362 19,308 12,856 ======= ======= ====== ======
1) Europe/Middle East/Africa 64 Notes to Consolidated Financial Statements 67 The six major groups of Industry Business Units generated the following sales revenues:
1998 DM (000) Process Industries 1,910,980 Discrete Manufacturing 2,275,050 Fast Moving Consumer Goods 1,274,163 Utilities and Communication 886,901 Financial Service and Service Providers 1,621,530 Public Sector 496,670 --------- TOTAL 8,465,294 =========
42 SUPERVISORY BOARD AND EXECUTIVE BOARD Subject to the adoption of the dividend resolution by the shareholders at the Annual General Meeting on May 6, 1999, the total annual remuneration of the Supervisory Board will amount to DM 1,096 thousand. The total annual remuneration of the Executive Board will amount to DM 7,988 thousand. Interest-free loans granted to members of the Executive Board and outstanding in the amount of DM 9 thousand on December 31, 1997 were fully repaid in 1998. A pension accrual has been made for former Board Members in the amount of DM 2,420 thousand for 1998. The members of the Supervisory Board and Executive Board of SAP AG are listed on pages 66 and 67. Walldorf, February 26, 1999 SAP Aktiengesellschaft Systeme, Anwendungen, Produkte in der Datenverarbeitung Walldorf, Germany The Executive Board Plattner Kagermann Heinrich Oswald Zencke Notes to Consolidated Financial Statements 65 68 SUPERVISORY BOARD Elected at the Elected by Annual General Meeting: the employees: DIETMAR HOPP BOTHO VON PORTATIUS HELGA CLASSEN Walldorf Cologne St. Leon-Rot Chairperson until May 7, 1998 Deputy Chairperson as of May 7, 1998 PROF. DR. AUGUST-WILHELM WILLI BURBACH DR. WILHELM HAARMANN SCHEER Ratingen Kronberg/Taunus Saarbrucken RA WP StB HAARMANN, Director of the Institute for RUDIGER GERBER HEMMELRATH & PARTNER Information Systems Bad Schoenborn Frankfurt am Main Saarland University until May 7, 1998 Saarbrucken DR. HEINRICH HORNEF until May 7, 1988 BERNHARD KOLLER Weinheim Walldorf until May 7, 1998 DR. DIETER SPORI Backnang DR. GERHARD MAIER KLAUS-DIETER LAIDIG DaimlerChrysler AG Wiesloch Boblingen Berlin Management Consultant as of May 7, 1998 DR. BARBARA SCHENNERLEIN Laidig Business Consulting GmbH Dresden DR. BERND THIEMANN as of May 7, 1998 HARTMUT MEHDORN Kronberg/Taunus Heidelberg Chairman of the Executive Board ALFRED SIMON Chairman of the of DG BANK Malsch Executive Board Frankfurt am Main of Heidelberger until May 7, 1998 Druckmaschinen AG Heidelberg DR. H. C. KLAUS TSCHIRA as of May 7, 1998 Heidelberg as of May 7, 1998
66 Supervisory Board 69 EXECUTIVE BOARD EXTENDED MANAGEMENT BOARD PROF. DR. H. C. HASSO PLATTNER DIETMAR HOPP MICHAEL GIOJA Schriesheim/Altenbach Walldorf Stutensee Co-Chairman and CEO Administration, Sales and Human Resources Development Basis, Technology Consulting Germany, until October 27, 1998 and Industry Corporate Communications Solutions Development, until May 7, 1998 KARL-HEINZ HESS Marketing, Stutensee Corporate Communications, Basis Development Americas Region GERHARD OSWALD Wiesloch PROF. DR. HENNING KAGERMANN R/3 Corporate Services, DIETER MATHEIS Hockenheim IT Infrastructure Muhlhausen Co-Chairman and CEO Chief Financial Officer Financials, Human Resources and Industry Solutions DR. H. C. KLAUS TSCHIRA Development, Heidelberg KEVIN S. McKAY Administration, Human Resources Doylestown, PA, U.S.A. Europe Region Development SAP America, Inc. (CEO) until May 7, 1998 as of September 3, 1998 DR. CLAUS E. HEINRICH Walldorf PAUL WAHL PAUL NEUGART Logistics, Industry Solutions Wilhelmsfeld Hockenheim and Human Resources SAP America, Inc. (CEO), Head of Sales in Germany Development Marketing until June 30, 1998 until September 3, 1998 DR. PETER ZENCKE Weinheim Logistics and Industry Solutions Development Asia-Pacific
Executive Board 67 70 Subsidiaries, Joint Ventures, and Associated Companies SAP AG AND THE GROUP as of 12/31/1998, figures in DM (000), except for % and employee information
Name and location of company Ownership Sales Net income/ Equity Number of % revenue (loss) as of employees as in 1998 1) for 1998 1) 12/31/98 1) of 12/31/98 2) I. AFFILIATED COMPANIES GERMANY SAP Retail Solutions GmbH & Co., St. Ingbert 5) 100 101,007 16,853 37,198 491 SRS Software- und Systemhaus Dresden GmbH, Dresden 50 88,532 7,718 14,816 382 SAP Systems Integration GmbH, Alsbach-Hahnlein 60 58,223 5,654 32,965 214 SAP Labs GmbH Mannheim, Mannheim 4) 80,2 52,162 2,151 2,455 226 Steeb Anwendungssysteme GmbH, Abstatt 100 45,824 3,732 9,498 125 AsseT GmbH Assessment & Training Technologies, 75 4,451 728 1,897 16 Immenstaad SAP Retail Solutions Beteiligungsgesellschaft mbH, 100 0 -2 48 0 Walldorf DACOS Software Holding GmbH, St. Ingbert 100 0 -3,505 10,324 0 REST OF EUROPE, MIDDLE EAST AND AFRICA SAP (UK) Limited, Feltham/United Kingdom 100 438,418 17,075 134,966 500 SAP FRANCE SYSTEMES APPLICATIONS ET PROGICIELS S.A., Paris/France 100 277,029 14,432 72,248 415 SAP (Schweiz) AG Systeme, Anwendungen und Produkte der Datenverarbeitung, Biel/Switzerland 100 238,502 48,052 220,768 252 SAP Svenska Aktiebolag, Stockholm/Sweden 100 169,321 39,521 66,148 231 SAP Nederland B.V., 's Hertogenbosch/The Netherlands 100 163,768 26,109 60,062 269 S.A.P. Italia Sistemi Applicazioni Prodotti in Data Processing S.p.A., Milan/Italy 100 154,282 22,192 43,337 177 SAP ESPANA Y PORTUGAL SISTEMAS APLICACIONES Y PRODUCTOS EN LA INFORMATICA, S.A., Madrid/Spain 100 151,538 17,080 39,892 195 SAP Danmark A/S, Brondby/Denmark 100 129,074 11,477 49,302 241 SAP Osterreich, Systeme, Anwendungen und Produkte in der Datenverarbeitung Gesellschaft m.b.H., Vienna/Austria 100 119,404 17,361 53,174 178 NV SAP BELGIUM SA, Brussels/Belgium 100 105,834 15,107 38,206 143 SYSTEMS APPLICATIONS PRODUCTS (SOUTHERN AFRICA) (PTY) LTD, Woodmead/South Africa 100 91,780 9,358 19,950 210 SAP CR, spol. s.r.o., Prague/Czech Republic 100 46,617 2,163 18,574 124 SAP Polska Sp. z.o.o., Warsaw/Poland 100 34,912 3,311 9,460 83 SAP Hungary Rendszerek, Alkalmazasok es Termekek az Adatfeldolgozasban Informatikai Kft., Budapest/Hungary 100 22,140 6,076 7,989 47 SAP Consult C.I.S., Moscow/Russia 100 11,953 455 1,090 86 SAP Slovensko s.r.o., Bratislava/Slovakia 4) 100 11,139 27 1,812 38 SAP Retail Solutions Nederland B.V., 's Hertogenbosch/The Netherlands 5) 100 6,272 170 393 0 SAP Service and Support Centre (Ireland) Limited, Dublin/Ireland 100 6,012 1,410 3,502 45 OFEK-tech Software Industrie Ltd., Tel Aviv/Israel 3) 51 4,804 783 2,004 33 K & V Information Systems Ltd. i.L.., Buckinghamshire/UK 3), 5) 100 2,883 -686 296 0 SAP Labs France S.A., Paris/France 4) 100 164 -251 3,477 8 DACOS Software S.A., Vaumarcus (NE) /Switzerland 3), 5) 52 0 -179 435 1 SAP Ireland Ltd., Dublin/Ireland 100 0 4,020 70,012 6
68 Subsidiaries, Joint Ventures, and Associated Companies 71
Name and location of company Ownership Sales Net income/ Equity Number of % revenue (loss) as of employees in 1998 1) for 1998 1) 12/31/98 1) as of 12/31/98 2) AMERICAS SAP America, Inc., Newtown Square/USA 100 3,074,045 302,607 947,878 3,823 SAP Canada Inc., North York/Canada 100 280,468 5,153 48,180 571 SAP BRASIL COMERCIO E REPRESENTACOES LTDA., Sao Paulo/Brazil 100 271,793 25,768 41,697 405 SAP Labs, Inc., Palo Alto/U.S.A. 5) 100 154,034 4,060 13,930 433 SAP MEXICO S.A. DE C.V., Mexico City/Mexico 100 127,948 26,453 34,917 222 SAP Public Sector and Education, Inc., Washington DC/U.S.A. 5) 100 126,649 -6,463 -6,222 172 SAP Andina y del Caribe C.A., Caracas/Venezuela 100 96,100 11,920 14,453 160 SAP ARGENTINA S.A., Buenos Aires/Argentina 100 91,655 16,013 31,115 163 SAP International, Inc., Miami/U.S.A. 5) 100 11,061 -1,940 -1,411 35 SAP Investment Inc., Wilmington, Delaware/ U.S.A. 4),5) 100 0 23 83,673 0 ASIA-PACIFIC SAP AUSTRALIA PTY LTD, Sydney/Australia 100 293,782 16,899 52,296 344 SAP Japan Co., Ltd., Tokyo/Japan 100 175,954 -103,898 -1,521 921 SAP Asia Pte. Ltd., Singapore 100 90,305 -1,537 10,185 269 SAP India Systems, Applications and Products in Data Processing Private Limited, Bangalore/India 5) 100 63,208 9,581 13,309 116 SAP (Malaysia) Sdn. Bhd., Kuala Lumpur/Malaysia 100 33,070 2,035 7,814 74 SAP Taiwan Co. Ltd.,Taipei/Taiwan 100 32,120 6,679 11,499 73 SAP New Zealand Limited, Auckland/New Zealand 100 31,974 4,843 11,792 41 SAP Korea Limited, Seoul/Korea 100 31,634 4,973 18,316 100 SAP (Beijing) Software System Co., Ltd., Beijing/China 100 22,895 -405 5,042 160 SAP HONG KONG CO. LIMITED, Taikoo Shing/Hong Kong 100 20,574 3,753 9,007 41 SAP SYSTEMS, APPLICATIONS AND PRODUCTS IN DATA PROCESSING (THAILAND) LTD., Bangkok/Thailand 100 12,802 2,603 7,059 50 SAP Philippines, Inc., Makati City/Philippines 100 9,902 582 2,228 42 SAP Labs India Pvt. Ltd. Bangalore/India 4) 100 2,379 257 1,866 120 PT SAP Asia, Jakarta/Indonesia 100 1,577 -1,703 -1,071 13 SAP India (Holding) Pte. Ltd., Singapore 100 0 -8 712 0 II. ASSOCIATED COMPANIES IDS Prof. Scheer Gesellschaft fur integrierte Datenverarbeitungssysteme mbH, Saarbrucken/Germany 25,2 101,420 6,519 62,871 575 SAP Solutions GmbH, Freiberg/Germany 40 60,441 10,390 13,521 217 Schmidt, Vogel und Partner Consult, Gesellschaft fur Organisation und Managementberatung mbH, Bielefeld/Germany 25,2 50,300 858 3,827 241 Pandesic LLC, Santa Clara, California/U.S.A. 4) 50 620 -72,056 2,447 143
1) These figures do not include eliminations resulting from consolidation and therefore do not reflect the contribution of these companies included in the consolidated financial statements. 2) As of December 31, 1998, including managing directors 3) Not consolidated according to Article 296 (2) of the German Commercial Code 4) Consolidated for the first time in 1998 5) Represents a wholly owned entity of a subsidiary Subsidiaries, Joint Ventures, and Associated Companies 69 72 Five-Year Summary SAP GROUP
(in millions of DM, unless otherwise stated) (in millions of EUR) 1994 1995 1996 1997 1998 1998 SALES REVENUES 1,831.1 2,696.4 3,722.2 6,017.5 8,465.3 4,328.2 % generated by foreign subsidiaries 62% 67% 73% 79% 80% % product revenue 71% 72% 71% 68% 62% per employee (in thousands of DM/EUR) 414 419 455 521 489 250 NET INCOME 281.2 404.8 567.5 925.4 1,052,3 538.1 Return on equity (net income as a % of average equity) 25% 29% 30% 35% 31% Results from operations 471.3 674.0 967.2 1,666.9 1,920.2 981.8 % return on sales (results from operations as a % of sales revenues) 26% 25% 26% 28% 23% Income according to DVFA/SG 280.3 403.3 566.2 923.0 1,049.3 536.5 Earnings per share according to DVFA/SG (in DM/EUR) 2.77 3.98 5.47 8.85 10.04 5.13 TOTAL ASSETS 1,749.7 2,218.2 3,367.0 5,070.2 6,296.8 3,219.5 FIXED ASSETS 689.4 752.0 789.0 1,162.4 1,658.1 847.7 Intangible assets 12.3 7.5 5.7 81.3 151.4 77.4 Property, plant and equipment 514.5 575.0 621.9 853.3 1,262.3 645.4 Financial assets 162.6 169.5 161.4 227.8 244.4 124.9 CURRENT ASSETS (INCL.PREPAID EXPENSES/DEFERRED CHARGES) 1,060.3 1,466.2 2,578.0 3,907.8 4,638.7 2,371.8 Inventories 4,9 5,6 7,8 7,5 36,9 18.9 Accounts receivable 708.2 1,062.9 1,832.8 2,902.9 3,291.0 1,682.7 Liquid assets 347.2 397.7 737.4 997.4 1,310.8 670.2 SHAREHOLDERS' EQUITY 1,236.2 1,529.5 2,211.3 3,062.5 3,756.3 1,920.6 as % of fixed assets 179% 203% 280% 263% 227% Subscribed capital 506.2 506.2 517.5 521.5 522.8 267.3 Reserves 639.5 886.5 1,448.9 2,232.0 2,893.9 1,479.6 Group retained earnings 88.1 133.8 240.7 294.4 325.6 166.5 Minority interests 2.4 3.0 4.2 14.6 14.1 7.2 LIABILITIES (INCL. DEFERRED CHARGES) 513.5 688.7 1,155.7 2,007.7 2,540.4 1,298.9 Long-term debt 51.8 42.3 74.5 139.9 152.4 77.9 Short-term liabilities 461.7 646.4 1,081.2 1,867.8 2,388.0 1,221.0 %OF TOTAL ASSETS Property, plant and equipment 39% 34% 23% 23% 26% Current assets 61% 66% 77% 77% 74% Shareholders' equity 71% 69% 66% 60% 60% Liabilities 29% 31% 34% 40% 40%
70 Five-Year Summary 73 SAP GROUP
(in millions of DM, unless otherwise stated) (in millions of EUR) 1994 1995 1996 1997 1998 1998 FINANCIAL LIABILITIES 69.1 80.2 99.1 168.2 240.1 122.7 Long-term 21.9 20.5 8.8 5.1 51.8 26.4 Short-term 47.2 59.7 90.3 163.1 188.3 96.3 Net interest income +22.1 +22.2 +27.8 +52.6 +60.8 31.1 CASH-FLOW ACCORDING TO DVFA/SG 3) 386.5 559.0 782.7 1,230.1 1,337.7 683.9 as % of sales revenue 21% 21% 21% 20% 16% INVESTMENTS/DEPRECIATION AND AMORTIZATION Investments in property, plant and equipment and intangible assets 194.1 255.6 220.6 574.7 760.0 388.6 Depreciation and amortization 88.7 144.5 164.6 195.3 271.3 138.7 Depreciation/investments (depreciation as a % of investments) 46% 57% 75% 34% 36% NUMBER OF EMPLOYEES at year-end 5,229 6,857 9,202 12,856 19,308 annual average 4,596 6,443 8,177 11,558 17,323 Personnel expenses 675.2 956.7 1,338.5 2,074.9 3,043.6 1,556.1 RESEARCH AND DEVELOPMENT EXPENSES 369.6 438.2 505.5 701.8 1,121.7 573.5 as a % of sales revenues 20% 16% 14% 12% 13% SAP AG Net income 122.9 189.8 304.5 447.3 525.5 268.7 Transfer to reserves 35.5 56.0 64.0 153.5 200.0 102.3 Dividend distributions 88.1 133.6 240.2 294.2 323.6 165.5 (in DM) (in EUR) Dividend per ordinary share 0.85 1.30 1.80 1) 2.80 1.57 2) Dividend per preference share 0.90 1.35 1.85 1) 2.85 1.60 2) Stock prices at year-end: Ordinary share 102.50 222.00 210.50 545.50 720.00 368.13 Stock prices at year-end: Preference share 88.40 217.80 211.80 584.20 799.50 408.78 Number of shares at year-end (in thousands) 101,231 101,233 103,507 104,303 104,565 Thereof ordinary share 60,985 60,986 60,991 60,996 61,000 Thereof preference share 40,246 40,247 42,516 43,307 43,565 Market capitalization (in billion DM/billion EUR) 9.8 22.3 21.8 58.6 78.7 40.3
1) For 1996 plus a 25th anniversary bonus of DM 0.50 per ordinary and preference share 2) 1998 proposed dividend 3) German Association For Financial Analyst and Investment Consultants Five-Year Summary 71 74 Addresses and Financial Calendar HEADQUARTERS ADDRESS SAP AG Neurottstrasse 16 D-69190 Walldorf, Germany TELEPHONE +49 6227 747474 FAX +49 6227 757575 INTERNET www.sap.com E-MAIL press@sap-ag.de All international subsidiaries and sales partners are listed at www.sap.com under "Contact us". INTERNATIONAL SUBSIDIARIES AND SALES PARTNERS IN THE EUROPE/MIDDLE EAST/AFRICA REGION: Greece, Ireland, Israel, Italy, Kazakhstan, Kenya, Luxembourg, The Netherlands, Norway, Poland, Romania, Russia, Saudi Arabia, South Africa, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, Hungary, Ukraine, United Arab Emirates, United Kingdom, Zimbabwe INTERNATIONAL SUBSIDIARIES AND SALES PARTNERS IN THE AMERICAS REGION: Argentina, Brazil, Canada, Colombia, Chile, Mexico, Puerto Rico, Peru, Venezuela, U.S.A. INTERNATIONAL SUBSIDIARIES AND SALES PARTNERS IN THE ASIA-PACIFIC REGION: Australia, China, India, Indonesia, Japan, Korea, Malaysia, New Zealand, Philippines, Singapore, Thailand, Taiwan FINANCIAL CALENDAR 1999 APRIL 28 Interim report: January - March 1999 MAY 6 Annual General Meeting, Mannheim MAY 7 Payment of dividends JULY 28 Interim report: January - June 1999 OCTOBER 27 Interim report: January - September 1999 2000 JANUARY 26 Preliminary figures for fiscal 1999 MAY 4 Annual General Meeting 72 Addresses and Financial Calendar 75 SAP ANNUAL REPORT DESIGN AND ART SIGNUM communication GmbH, Mannheim ORIGINAL PHOTOGRAPHY Sabine Kress, Mannheim LITHOS Repro Braun, Neuhofen & Extrabyte GmbH, Mannheim PRINT Color-Druck, Leimen BINDING Thalhofer, Schonaich PICTURE SOURCES Wolfram Scheible, Stuttgart Klaus Geiss, Sandhausen SAP Picture Archive Bavaria, Munchen COPYRIGHT(C)1999 SAP AG Neurottstrasse 16 69190 Walldorf, Germany OVERALL RESPONSIBILITY SAP AG Corporate Communications This English translation is intended for information purposes only. In the event of any conflict in interpretation, reference should be made to the original German version. 73 76 SAP AG Neurottstrasse 16 69190 Walldorf Germany [ PICTURE SAP Customers ] -----END PRIVACY-ENHANCED MESSAGE-----