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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 20-F
(MARK ONE)
[X] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED:
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
--------------- TO
---------------
COMMISSION FILE NUMBER: [ ]
------------------------
SAP AKTIENGESELLSCHAFT
SYSTEME, ANWENDUNGEN, PRODUKTE IN DER DATENVERARBEITUNG
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FEDERAL REPUBLIC OF GERMANY
(JURISDICTION OF INCORPORATION OR ORGANIZATION)
------------------------
NEUROTTSTRASSE 16
69190 WALLDORF
FEDERAL REPUBLIC OF GERMANY
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<S> <C>
American Depositary Shares, each New York Stock Exchange
Representing One-Twelfth of One Non-Voting
Preference Share, without nominal value
</TABLE>
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE
ACT: None
SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO SECTION
15(d) OF THE ACT: None
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock at the close of the period covered by the
registration statement:
<TABLE>
<S> <C>
Ordinary Shares, without nominal value...................... 60,996,050
Non-Voting Preference Shares, without nominal value......... 43,307,249
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ ] No [X]
Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 [ ] Item 18 [X]
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TABLE OF CONTENTS
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PAGE
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PRESENTATION OF FINANCIAL INFORMATION....................... 1
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE............. 1
GLOSSARY OF CERTAIN DEFINED TERMS........................... 3
PART I...................................................... 5
Item 1. Description of Business.......................... 5
Item 2. Description of Property.......................... 18
Item 3. Legal Proceedings................................ 18
Item 4. Control of Registrant............................ 19
Item 5. Nature of Trading Market......................... 21
Item 6. Exchange Controls and Other Limitations Affecting
Security Holders....................................... 23
Item 7. Taxation......................................... 24
Item 8. Selected Consolidated Financial Data............. 30
Item 9. Management's Discussion and Analysis of Financial
Condition and
Results of Operations....................... 34
Item 9A. Quantitative and Qualitative Disclosure About
Market Risk............................................ 44
Item 10. Directors and Officers of Registrant............. 46
Item 11. Compensation of Directors and Officers........... 48
Item 12. Options to Purchase Securities from Registrant or
Subsidiaries........................................... 48
Item 13. Interest of Management in Certain Transactions... 50
PART II..................................................... 51
Item 14. Description of Securities to be Registered....... 51
PART III.................................................... 63
Item 15. Defaults Upon Senior Securities*................. 63
Item 16. Changes in Securities and Changes in Security for
Registered Securities and
Use of Proceeds*............................ 63
PART IV..................................................... 63
Item 17. Financial Statements**........................... 63
Item 18. Financial Statements............................. 63
Item 19. Financial Statements and Exhibits................ 63
</TABLE>
- ---------------
* Omitted because the Item is inapplicable or the answer is negative.
** The Registrant has responded to Item 18 in lieu of this Item.
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SAP Aktiengesellschaft Systeme, Anwendungen, Produkte in der
Datenverarbeitung ("SAP" and, together with its subsidiaries, the "Company") was
incorporated under the laws of the Federal Republic of Germany ("Germany") in
1972. Where the context requires, "SAP" refers to its predecessors,
Systemanalyse und Programmentwicklung GdbR (1972-1976) and SAP, Systeme,
Anwendungen, Produkte in der Datenverarbeitung GmbH (1976-1988). SAP became a
stock corporation (Aktiengesellschaft) in 1988. The Company's principal
executive offices are located at NeurottstraSSe 16, 69190 Walldorf, Germany. Its
telephone number is 49-6227-7-47474.
"SAP," "ABAP/4," "SAP EarlyWatch," "SAP Business Workflow," "R/2," "R/3,"
"ABAP," "TeamSAP," "BAPI," "SAP SCOPE," "AcceleratedSAP," "ALE," "IBU,"
"SAPNet," "SAP Aerospace & Defense," "SAP Automotive," "SAP Banking," "SAP
Chemical," "SAP Consumer Products," "SAP Engineering & Construction," "SAP
Healthcare," "SAP High Tech & Electronics," "SAP Insurance," "SAP Media," "SAP
Oil & Gas," "SAP Pharmaceuticals," "SAP Public Sector," "SAP Retail," "SAP
Telecommunications" and "SAP Utilities" are trademarks of the Company. This
document also contains trademarks of companies other than the Company.
Unless the context otherwise requires, references in this Registration
Statement on Form 20-F ("Form 20-F") to "Ordinary Shares" are to SAP's ordinary
shares, without nominal value, and references to "Preference Shares" are to
SAP's non-voting preference shares, without nominal value. From August 4, 1988
to July 17, 1995, SAP's share capital consisted of ordinary shares, nominal
value DM 50 per share (the "DM 50 Ordinary Shares"), and (on and after June 7,
1990) non-voting preference shares, nominal value DM 50 per share (the "DM 50
Preference Shares"). From July 18, 1995 through June 16, 1998, SAP's share
capital consisted of: (i) DM 50 Ordinary Shares and ordinary shares, nominal
value DM 5 per share (the "DM 5 Ordinary Shares"); and (ii) DM 50 Preference
Shares and non-voting preference shares, nominal value DM 5 per share (the "DM 5
Preference Shares"). Generally, the DM 50 Ordinary Shares were treated as ten DM
5 Ordinary Shares and the DM 50 Preference Shares were treated as ten DM 5
Preference Shares. On May 7, 1998, SAP's shareholders passed a resolution
converting SAP's share capital to no nominal value shares in accordance with
recently enacted amendments to the German Stock Corporation Act. This resolution
took effect on June 16, 1998, when it was recorded in the commercial register in
Heidelberg, Germany.
PRESENTATION OF FINANCIAL INFORMATION
In this Form 20-F, references to "U.S.$" or "Dollars" are to United States
Dollars and references to "DM" or "Marks" are to German Deutsche Marks. Certain
amounts which appear in this Form 20-F may not sum because of rounding
adjustments. In this Form 20-F, except as otherwise specified, financial
information with respect to the Company has been expressed in Marks or in
Dollars; however, the operations of the Company are based primarily in Germany
and the Company's consolidated financial statements included herein are
expressed in Marks.
Unless otherwise specified herein, all constant Mark financial data that
have been converted into Dollars have been converted at the noon buying rate in
New York City for cable transfers in foreign currencies as certified for customs
purposes by the Federal Reserve Bank of New York (the "Noon Buying Rate") on
December 31, 1997, which was DM 1.7991 per U.S.$1.00. No representation is made
that such Mark amounts actually represent such Dollar amounts or that such Mark
amounts could have been or could be converted into Dollars at that or any other
exchange rate on such date or on any other dates. For information regarding
recent rates of exchange between Marks and Dollars, see "Item 8. Selected
Consolidated Financial Data -- Exchange Rates." At June 18, 1998, the Noon
Buying Rate was DM 1.7927 per U.S.$1.00.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
This Form 20-F contains forward-looking statements that involve risks and
uncertainties. When used in this Form 20-F, the words "anticipate," "believe,"
"estimate," "intend," "may," "will" and "expect" and similar expressions as they
relate to the Company or its business are intended to identify such
forward-looking
<PAGE> 4
statements. The Company undertakes no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise. Actual results, performances or achievements could differ
materially from those expressed or implied in such forward-looking statements.
Factors that could cause or contribute to such differences include those
described under the heading "Risk Factors" in SAP's Registration Statement on
Form F-1, filed with the United States Securities and Exchange Commission (the
"SEC") on June 22, 1998, Registration Number ________ (the "Form F-1"), as well
as the factors discussed elsewhere in this Form 20-F. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of their dates.
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GLOSSARY OF CERTAIN DEFINED TERMS
"ABAP Objects" extends the current ABAP/4 Workbench with object technology and
delivers a new extended, virtual machine capable of running both new
applications, implemented using ABAP Objects, and all existing ABAP/4
applications.
"Activity Based Costing" or "ABC" allows the benchmarking of processes to be
based not only on time requirements but also on costs.
"Advanced Business Application Programming" or "ABAP" is the Company's
fourth-generation programming language, which is specifically designed for
integrated standard software applications. It also supports all of the
steps involved in improving the client/server solution, from prototyping
through implementation and testing, to final optimization.
"Application" refers to software designed for a specific purpose to be used by
an individual, such as a spreadsheet, which performs mathematical
operations, or a planning program that allocates tasks to a timetable.
"Application Link Enabling" or "ALE" enables expanded use of the R/3 System
within a company and within a company's business partners and provides the
R/3 System with distribution models and technologies for linking business
applications across technically independent systems by enabling, among
other things, multiple database servers to share transaction update
information.
"Business Framework" is offered by the Company as an integrated, open,
component-based product architecture that has the flexibility to accept new
business processes and is open to other technologies and applications.
"Business Application Programming Interfaces" or "BAPIs" are interfaces to link
SAP components to one another and SAP components to third party components.
"Component" is a grouping of applications that work together to perform specific
tasks. A component can be implemented separately as an element of a user's
company-wide software.
"Distributed Component Object Model" or "DCOM" provides a means for users to
simultaneously integrate objects (e.g., blocks of information from a
spreadsheet, a graphic from a drawing program or an audio clip from a sound
program, and blocks of code) from diverse applications.
"Graphical user interface" or "GUI" refers to the display of software on a
screen using graphics, symbols and icons rather than text alone. An example
of a GUI is Microsoft Corporation's "Windows" format.
"Integration" allows data to flow freely from one corporate area to another
without having to pass through time-consuming and trouble prone interfaces.
Integration also permits companies to maintain the same data from various
sites.
"Open architecture" means that a software product's components can conform to
non-proprietary standards of other software suppliers, thus permitting
multi-tiered functioning on database servers, application servers, personal
computers, workstations or Web-browsers.
"Point Solutions" are one or more functional components such as a general ledger
or accounts receivable.
"Real-time" refers to the immediate access to a given piece of data by multiple
users throughout the different departments or divisions of a company.
"Relational Database Management Systems" or "RDBMS" allows the R/3 System to
have fully integrated products and to utilize the full functionality
provided by each of the RDBMSs.
"Scalable architecture" permits a company to size its computer systems based on
actual needs and to continually add users and enhance business/decision
processes.
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"Systems" are the Company's primary products, the R/3 System and the R/2 System,
which are designed to provide customers with a palette of standard business
solutions arranged in applications which provide integrated enterprise-wide
processing of business work flows.
"Three-tier client/server architecture," consisting of the database, the
applications and the presentation logic, may run simultaneously on three
different physical computers. Distributing these functions among several
computers enhances scalability and performance.
"Web" is the Worldwide Web on the Internet.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Certain terms used in this "Description of Business" have been given
specific meanings or abbreviations set forth in "Glossary of Certain Terms."
OVERVIEW
The Company is a leading international developer and supplier of integrated
business application software designed to provide cost-effective comprehensive
solutions for businesses. The Company's mission is to market products and
provide services that improve user productivity and add value to its customers
by decreasing the total cost of ownership of business application software. The
Company believes that its products provide the technological infrastructure to
enhance customers' growth and organizational agility. The Company's products
include enterprise resource planning software and both complementary and
independent business application components. The Company's services include
consulting, support and training.
The Company's primary products are the R/3 System for client/server
(distributed) architectures and the R/2 System (together with the R/3 System,
the "Systems") for mainframe data processing systems. The Systems are designed
to provide customers with a palette of standard business solutions arranged in
applications which provide integrated enterprise-wide processing of business
workflows. Additionally, the Company provides 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.
On December 31, 1997, the Company had more than 13,000 System installations
in over 8,500 customers ranging in size from multinational enterprises to
medium- and smaller-sized companies. For the year ended December 31, 1997, the
Company's sales revenues were approximately DM 6.02 billion as compared to DM
3.72 billion for the year ended December 31, 1996, with net income after taxes
of DM 925.4 million and DM 568 million, respectively. The Company consists of
SAP and its network of approximately 50 operating subsidiaries and has a
presence or a representative in approximately 90 countries.
STRATEGY
The Company's business strategy is to increase its profitability and market
share by offering software products and services through its business framework
approach to enterprise systems. In implementing this strategy, the Company has
focused on three primary initiatives: (i) continuous enhancement and improvement
of enterprise software that offers customers a total enterprise solution; (ii)
providing consulting and support services that effectively meet the customer's
needs and reduce the customer's total cost of ownership; and (iii) increasing
market penetration of the Company's products.
Enhancing and Improving Products
The Company's product strategy is to offer customers both total enterprise
software solutions and point solutions. The Company seeks to achieve this by (i)
enhancing its R/3 System with updated releases which incorporate best business
practices and new business processes, (ii) the creation of industry-specific
software solutions tailored to meet the functionality needs of targeted vertical
industries, (iii) the creation of the necessary technical infrastructure to
support the interoperability of complementary software solutions, (iv) the
creation of custom components to address specific customer requirements, and (v)
the introduction of the Company's independent business components.
R/3 System Enhancements. The Company continually enhances the R/3 System to
run with new database systems and new hardware and software technologies. To
this end, the Company is a party to joint development and cooperation agreements
with leading hardware and software vendors. In addition, the Company's product
development effort is also focused on allowing the R/3 System to process
business content provided by third parties and to expand its Internet-enabled
applications.
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Industry-Specific Solutions. Industry-specific solutions are designed to
address the unique functionality requirements of the Company's targeted vertical
industries. These requirements are defined by the Company in conjunction with
its partners and its customers in the targeted industries and allow for the
specific enhancement of the R/3 System to effectively match the specialized
needs of such industries.
Complementary Software Products. In addition to the R/3 System and the
specific industry solutions, the Company has developed a comprehensive
technological infrastructure to provide for the interfacing of complementary
software products to the Company's underlying R/3 System solution. The Company
has developed within the R/3 System more than 400 currently available standard
business application programming interfaces ("BAPIs"), which enable multiple
outside parties' application components to function with the R/3 System. Through
its own distribution channels, the Company also offers its customers certain
complementary software products in conjunction with the Company's products.
Custom Components. In furthering its goal of providing a complete
enterprise solution, the Company offers customized software components to
address specific functional requirements which are not otherwise addressed by
the Company's R/3 System, industry solutions or complementary software
infrastructure.
Independent Business Components. The Company, through various initiatives,
intends to offer a number of independent business components. Such components
can be utilized in conjunction with the R/3 System or on a stand-alone basis.
The Company anticipates that the component family within the SAP Supply Chain
Optimization, Planning and Execution ("SAP SCOPE") initiative initially will
consist of the SAP Business Information Warehouse, SAP Advanced Planner and
Optimizer and the SAP Sales Force Automation Solution. The SAP SCOPE initiative
is ongoing and there can be no assurance that the Company will be able to
complete or implement the enhancements contemplated by this initiative. It is
anticipated that the Company may develop and offer other independent business
components based on market requirements.
Consulting and Support Services
The Company offers a range of consulting and support services, both
directly and through partnerships with third parties. A current focus of the
Company's efforts is to reduce a customer's total cost of ownership of its
enterprise systems. To simplify and speed implementation and use of the R/3
System, the Company seeks to provide increasingly flexible, component-based
installation options. The Company has established AcceleratedSAP, a Company-wide
initiative that comprises a basket of accelerators, tools, templates and
services. The Company believes that AcceleratedSAP has significantly reduced
installation times. AcceleratedSAP became available in English to customers
worldwide in June 1997, and the Company released French, German and Spanish
versions of AcceleratedSAP in the first quarter of 1998. The Company expects to
release industry-specific versions of AcceleratedSAP in the future. The Company
has an initiative to develop an accelerated upgrade program. The Company intends
to design the accelerated upgrade program to include accelerators, tools,
templates and services to allow for cost-effective and timely upgrades of R/3
Systems to future R/3 System releases. There can be no assurances that the
accelerated upgrade program will be developed or that it will meet its design
goals.
The Company has also established the TeamSAP initiative, which is designed
to coordinate the personnel, products and processes necessary for the
implementation of the R/3 System. TeamSAP plays an ongoing role in maintaining
customers' R/3 Systems even after implementation. As part of the TeamSAP
initiative, the Company certifies third-party hardware and software vendors
involved in the R/3 System implementation process.
While the Company generally handles its own marketing, sales, distribution
and technical support training, it supplements certain of its consulting and
support services through "alliance partnerships" with hardware and software
vendors, systems integrators and third-party consultants. The Company also
establishes alliance partnerships with smaller systems integrators and
third-party consultants with the goal of providing customers with a wide
selection of third-party competencies. The role of the alliance partners in the
support of the Company's products ranges from pre-sales consulting about
business re-engineering to implementation of the R/3 System within the
customer's business, to project management and end-user training for customers,
and in the case of certain hardware and software vendors, to technology support.
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Market Penetration
The Company's initial marketing and product development efforts focused on
large, multinational concerns, including large companies based in Germany and
elsewhere in Europe. The Company has expanded its marketing strategy to include
medium- and smaller-sized companies. The Company believes that its products and
consulting and support services meet important needs of rapidly growing and
resource-constrained mid- and small-sized companies. The Company has introduced
the Certified Business Solutions ("CBS") program, through which a group of
authorized independent distributors markets the R/3 System to small businesses
(i.e., generally those with annual revenues of up to U.S.$200 million per year).
At December 31, 1997, over 38% of the Company's installed Systems were in small
companies. The Company also believes that it can increase market penetration by
building upon its experience and expertise in providing business software
solutions for a variety of industries.
The Company currently has a presence or a representative in approximately
90 countries. The Company began operating in the United States in 1988 through
SAP America, Inc., a wholly-owned subsidiary. The fastest growing geographic
market for the R/3 System has been the United States, where businesses have
readily accepted client/server systems. The Company believes that Asia, Eastern
Europe and Latin America present opportunities for further growth. However,
there can be no assurance that macroeconomic events in these countries or
regions, including recent economic and currency exchange turmoil in Asia or
elsewhere, will not adversely affect or delay these opportunities.
BACKGROUND
In the early 1970s, mainframe computer systems had limited data storage
capacity. "Batch operation" and "sequential data storage media" (e.g., magnetic
tapes or punch-cards) were the norm. Software applications for a given company
had to be custom designed to achieve the functionality necessary to address that
company's business. It was in this environment that the five founders (the
"Founders") established SAP in 1972 with the goal of developing multi-functioned
application software as a standard (rather than customized) product designed for
real-time, online data processing. The Founders' objective was to allow
immediate and continuous updating of computer-stored information by offering
multiple users direct access in an easy-to-use format. SAP's first generation of
software was introduced in 1973 and consisted of a modest financial accounting
application. The Company believes that this initial system represented the first
real-time standard software application ever produced. Gradually, over the next
several years, new applications such as "Materials Management" and "Asset
Management" were added to the initial system and enhancements expanded the
functionality of existing applications. At the same time, SAP began to work on
integrating various applications within the initial system.
In 1981, the Company introduced its second generation of application
software, the R/2 System. The R/2 System had the capacity to be installed on an
enterprise-wide basis, without requiring substantial customization. The R/2
System also reduced bottlenecks by improving and accelerating user access to
data. In 1988, the Company anticipated growth in the use of a new hardware
technology -- client/server architecture. The three-tier client/server
architecture, consisting of the database, the applications and the presentation
logic, may run simultaneously on three different physical computers.
Distributing these functions among several computers enhances scalability and
performance. During this period, the Company designed the initial version of the
R/3 System to offer the functionality of the R/2 System in a client/server
environment. The R/3 System was brought to the market in the early 1990s.
PRODUCTS
Integrated Business Processes in Distributed Environments
The Company's R/3 System and R/2 System currently consist of a number of
major functional components, each of which contains numerous business process
applications. The Systems integrate all of the business application processes
through a central logical database, which is designed to eliminate data
redundancy and protect data consistency and integrity. Certain multiple country
versions of the business
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process functions, which include multiple languages, currencies, legal
regulations and accounting systems, can run on the same database server, which
helps to extend a company's functional components beyond national borders. Each
of the components is designed to permit separate installation, thereby
complementing solutions already in place from other vendors or installation with
other components of the Company to form an integrated enterprise-wide
information and data processing system. Both the R/3 System and the R/2 System
include integrated functions designed to have multilingual capacity (currently
more than 22 languages) and the capacity to handle multiple currencies as well
as multiple national legal, tax and accounting structures.
R/2 System
In 1997, the Company introduced Release 6.1 to the R/2 System, which was
intended, among other things, to enable the R/2 System to support the latest IBM
mainframe architecture. The Company also provides tools to facilitate the
migration of R/2 System users to the R/3 System. The Company is subject to
contractual obligations with certain customers to provide support for the R/2
System for varying lengths of time. Although the Company is under no obligation
to provide such support once such contracts have expired, the Company currently
intends to provide support for the R/2 System until the year 2004.
The R/2 System is based on the 370 computer architecture and is designed to
operate on IBM and Siemens hardware platforms. The R/2 System is designed to
operate with a variety of operating systems (i.e., MVS/E2SA, VSE/ESA and
BS2000), databases (i.e., IMS-DB, DL/1, VSAM, ISAM, DB2 and ADABAS D) and
terminals (i.e., character terminal, PS/2 (Presentation Manager)), UNIX
Workstation (Motif) and MS DOS PC (Windows)). It utilizes the Assembler and ABAP
languages.
R/3 System
The R/3 System was brought to the market in the early 1990s. The Company
offered it as a standard, integrated, real-time, enterprise-wide business
solution which was usable on a wide variety of hardware platforms, with a
variety of databases and software systems. The Company believes that the R/3
System enables companies to maximize their enterprise computing power by tying
together disparate functions such as financial management, sales and
distribution, logistics, manufacturing and human resources. Integration also
permits companies to reduce their investment in relatively expensive hardware
resources by allowing real-time access to data by multiple users. The R/3
System's architecture is intended to provide two significant benefits to users:
(i) creating highly flexible and scalable systems that can be expanded to meet
user's needs and to adopt technological changes; and (ii) optimizing data
processing capacity, enabling wider simultaneous use of a company's systems by
multiple users.
The R/3 System is designed to fit all major UNIX platforms and Windows NT
platforms. The R/3 System operates with a number of databases (i.e., ORACLE,
Informix-Online, IBM DB2 Common Server, IBM DB2 for AS/400, IBM DB2 for OS/390
Microsoft SQL Server, ADABAS D) and the GUIs Microsoft Windows 95/NT and
Microsoft Windows 3.1. Currently, the Apple Macintosh, IBM OS and UNIX OSF/MOTIF
frontend platforms are supported with native GUI implementations which will be
phased out in favor of the modern Java implementations which support network
computers and Web browsers as well. The R/3 System utilizes the ABAP, C, C++,
HTML and Java languages.
COMPONENTS OF THE R/3 SYSTEM
Logistics Applications
Within the Logistics functional area, the Product Data Management, Sales
and Distribution, Production Planning, Project System, Material Management,
Quality Management, Plant Maintenance and Service Management applications form
an integrated suite of applications for procurement, manufacturing and sales and
distribution of goods and services.
The Product Data Management application supports the creation and
management of product data throughout the product life cycle and contains a
Computer Aided Design/Computer Aided Manufacturing interface. The Sales and
Distribution application combines sales and distribution workflows, providing
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companies with online real-time information to facilitate, among other things,
product sales, credit management, sales simulation analysis and multiple orders.
The Production Planning application is designed to facilitate all major tasks
within an integrated production planning chain, including production scheduling,
production resources planning, and monitoring and improving efficiency in the
production process. The Project System application defines the sequential course
of a project through time in the form of activities, to which detailed dates,
costs and resources are assigned. The Project System checks and monitors the
availability of funds, capacities and materials, permitting the user to
determine that appropriate resources are available for the project to be carried
out. As with other applications, the user can employ SAP Business Workflow, a
Web-enabled application for planning and tracking workflow, to improve
communications within large projects. For example, one can use SAP Business
Workflow to ensure that the purchasing department is immediately notified of any
changes in schedule or quantity requirements. The Material Management
application focuses on facilitating the full range of transactions and functions
within the areas of material requirements planning, material procurement,
inventory management, invoice verification and material valuation. For example,
the business processes included within the application can automatically compare
the prices, service and quality of suitable vendors and determine the most
favorable vendor for each purchase. The Quality Management application assists
customers in planning and implementing procedures for inspecting and controlling
quality within the logistics chain. The Plant Maintenance application supports
all the activities associated with planning and processing plant maintenance
tasks ranging from the scheduling of maintenance and inspection tasks to issuing
repair orders when breakdowns occur. The Service Management application helps a
customer manage its installed base (regardless of whether it is a customer's or
a competitor's installed base), including its configuration, history and service
or warranty circumstances.
Financial Applications
The Company's suite of integrated financial applications and components
encompasses a broad range of financial accounting, investment management,
controlling, treasury management, asset management and enterprise controlling
functions.
The Financial Accounting component gives customers the ability to track
financial accounting data within an international framework of multiple
companies, languages, currencies and books of accounts. The Company believes
that the Financial Accounting component complies with International Accounting
Standards as well as various national generally accepted accounting principles
and that it currently satisfies local legal requirements of 36 countries and
reflects the legal and accounting changes resulting from the anticipated
European currency unification. Further, the application utilizes Application
Link Enabling ("ALE"), a feature which permits the linking of business
applications across technically independent systems. This is intended to enable
users to implement decentralized accounting functions while at the same time
maintaining a centralized enterprise-wide master general ledger. Within the
Treasury Management component, the Cash Management application is designed to
provide the information relevant to liquidity for analysis purposes, creating a
basis for cash management decisions. Bank account management, electronic banking
and control functions provide support for managing and monitoring bank accounts.
The Treasury Management component also offers functions for managing financial
transactions and positions, from trading through to transferring data to the
Financial Accounting component. The Treasury Management component also supports
flexible reporting and evaluation structures for analyzing financial
transactions, positions and portfolio allocations. The Treasury Management
component includes a risk management function involving a complex feedback loop
encompassing data collection, risk measurement, analysis, and simulation as well
as planning with respect to financial instruments. The Controlling application
is designed to integrate external and management accounting systems to control
and monitor overhead, product and production cost. A wide variety of production
methods are supported, and analysis functions are designed, to enhance
decision-making processes. Inherent in the Controlling application is activity
based costing ("ABC"), which allows the benchmarking of processes to be based
not only on time requirements but also on costs. ABC underlies the Profitability
Analysis application, which is designed to permit customers to examine the
sources of their returns. As a sales controlling component, Profitability
Analysis is the last step in cost and revenue accounting, where revenues are
assigned to costs according to profitability segment, or to a segment of
customer operations.
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The Project System application is designed to combine project workflows on
a real-time basis to facilitate the planning, controlling and monitoring of
company projects. The Asset Management application is intended to assist
companies in managing their fixed assets by providing parallel recording of book
depreciation, tax depreciation and cost accounting depreciation. The Capital
Investment Management application provides tools for the management and
oversight of general appropriations budgets and carries out bookkeeping
functions associated with assets under construction on capital investment
projects and orders. The Enterprise Controlling component is designed to allow
companies automatically to generate consolidated financial statements, including
necessary eliminations, such as intercompany transactions and currency
translation. The Executive Information System application permits companies to
take financial data from any R/3 System application and combine it with external
sources (e.g., market data or industry benchmarks) or data from non-SAP
applications to build a company-specific comprehensive enterprise information
system.
Human Resources Business Applications
The Human Resources ("HR") components encompass substantially all facets of
HR management: organizational management, personnel management, travel
management, benefits administration, time management, payroll accounting and
personnel development.
The HR Organizational Management application is designed to assist
companies in maintaining an accurate picture of their organization's structure.
Planning features include: graphical organization charts; staffing schedules by
headcount, percentage and working hours; job and work center descriptions; and
job tasks and descriptions. The HR Personnel Administration application contains
a centralized database that allows companies to store any amount of information
they need about employees from numerous online sources. The HR Travel Management
application allows companies to process a business trip from the initial travel
request through to posting in the Financial Accounting and Controlling
application. The HR Benefits Administration application is designed to provide
companies with the capability to manage benefits programs for diverse employee
populations. The HR Time Management application manages work schedules by
automating schedule generation and allows for a flexible definition of time
models and schedules on a location and organization level, consistent with
varying regulatory requirements. The HR Payroll Accounting application provides
connectivity to third-party systems and is designed to permit companies to
centralize their payroll processing or to decentralize the data based on country
or legal entities. The Company currently offers the Payroll Accounting
application for over 20 countries and is constantly adding new country-specific
components. The HR Personnel Development application contains three principal
components: (i) HR Qualifications; (ii) Requirements/Career and Succession
Planning; and (iii) HR Training and Event Management. HR Qualifications enables
companies to profile predefined tasks and prerequisites of each position in
their organization. HR Career and Succession Planning provides organizations
with a method of modeling suitable career opportunities for employees within the
company. HR Training and Event Management assists companies with planning,
application versus component managing, and analyzing their scheduled seminars,
training courses and business events.
Industry Solutions
The Company believes that the R/3 System's initial acceptance in various
markets was due to a software architecture that was industry-neutral and that
contained standardized software with cross-industry components. While the
Company has focused on integrating business processes from many different
industry sectors into a standard software solution, it has also developed
industry-unique software components known as Industry Solutions ("IS"). As part
of its initiative, the Company works with "alliance partners" who have strengths
in certain industries as well as with its customers. The Company combines the
expertise of its alliance partners and its customers with the Company's
applications, thereby expanding the breadth of the R/3 System to meet
industry-specific requirements. The IS process applications are designed to
reduce the need for customization and to extend the R/3 System to meet specific
industry needs. The Company recently established Industry Business Units
("IBUs") in order to focus on key industries and to provide best-business
practices and integrated business solutions. The IBUs, and the Company's related
IS applications, currently include the following: SAP Aerospace & Defense; SAP
Automotive; SAP Banking; SAP Chemical; SAP
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Consumer Products; SAP Engineering & Construction; SAP Healthcare; SAP High Tech
& Electronics; SAP Insurance; SAP Media; SAP Oil & Gas; SAP Pharmaceuticals; SAP
Public Sector; SAP Retail; SAP Telecommunications; and SAP Utilities.
IBUs are intended to globally facilitate "best-in-class" industry
solutions, while utilizing the R/3 System's core technology and providing
pre-sales, sales and post-sales support. Each IBU is responsible for planning,
initiating and coordinating relevant development projects for an individual
industry solution, which is based on an "SAP Solution Map." The IBU represents
the "intelligence unit" for all relevant information concerning a specific
industry segment. It manages the quality, timeliness, completeness and cost
efficiency of an IS -- both the development of, and services related thereto and
the marketability of IS to customers.
Complementary Software Program
In order to offer its customers enhanced flexibility, the Company has
introduced the CSP to promote the integration of third-party software with the
R/3 System through standard, high-quality and proven interfaces. Through the
CSP, the Company offers the technological infrastructure which allows the
interfacing of complementary software products to the Company's underlying
solutions. The Company has developed within the R/3 System more than 400
currently available BAPIs, which enable multiple outside parties' application
components to function with the R/3 System. Through its own distribution
channels, the Company also offers its customers certain complementary software
products in conjunction with the Company's products.
Custom Components
In furthering its goal of providing a complete enterprise solution, the
Company offers customized software components to address specific functional
requirements which are not otherwise addressed by the Company's R/3 System, IS
solutions or complementary software infrastructure.
Independent Business Components
The SAP SCOPE initiative was established in August 1997 to enhance planning
and supply chain logistics. The SAP SCOPE initiative combines advanced planning
and scheduling products and technologies, third-party products, Internet
capabilities and the SAP Business Information Warehouse. As part of the SAP
SCOPE initiative, the Company is developing a new memory resident data
processing technology to ensure high-speed processing. Products that are
currently in development under the SAP SCOPE Initiative are SAP Advanced Planner
and Optimizer, which will be a complete suite of supply chain planning
functions, SAP Sales Force Automation, which will permit a company to provide
its mobile sales force with customer information, cost data and automated
customer order generation, and SAP Business Information Warehouse, which will
serve to collect, assemble and organize selected data, and make it available on
a real-time basis. The products that will be made available under the SAP SCOPE
Initiative are designed to be integrated with the R/3 System, but will also be
designed to run independently from any of the Company's Systems. All of the new
programs will be designed to be "backward compatible" to certain R/3 releases.
The SAP SCOPE initiative is ongoing and there can be no assurance that the
Company will be able to complete or implement the enhancements contemplated by
this initiative. It is anticipated that the Company may develop and offer other
independent business components based on market requirements.
EUROPEAN MONETARY UNION AND YEAR 2000 CAPABILITIES
Beginning in January 1999, a new currency called the "EURO" is scheduled to
be introduced in certain European Economic and Monetary Union ("EMU") countries.
By June 30, 2002 at the latest, all participating EMU countries are expected to
be operating with the EURO as their single currency. As a result, in less than
one year, computer software used by many companies headquartered or maintaining
a subsidiary in a participating EMU country is expected to be EURO-enabled, and
in less than four years all companies headquartered or maintaining a subsidiary
in a participating EMU country will need to be EURO-enabled. The transition to
the EURO will involve changing budgetary, accounting and fiscal systems in
companies and
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public administration, as well as the simultaneous handling of parallel
currencies and conversion of legacy data. The R/3 System and the R/2 System are
designed to fully accommodate the implementation of the EURO. The SAP EURO
component offers functionality which converts existing R/3 and R/2 System
environments to the EURO and handles the dual currency phase-in (occurring from
1999-2002) by enabling applications to present values in both the EURO and the
customer's national currency.
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than two years, computer systems and/or
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements. The Company has performed extensive testing to
validate that the R/3 System and the R/2 System are Year 2000 compliant. This
testing process was monitored and certified by the Technischer Uberwachungs
Verein e.V. (TUV) to verify that such testing processes were sufficient to
determine that the software is Year 2000 compliant.
R/3 SYSTEM ARCHITECTURE
The R/3 System's client/server architecture is based on a functionality
that permits many users to process data cooperatively. Furthermore, the
architecture is "scalable," which permits a company to continually add users and
decision processes. The architecture is also "open" in that its components can
conform to non-proprietary standards of other software suppliers, thus
permitting multi-tiered functioning on database servers, application servers,
personal computers, workstations or Web browsers. The SAP Business Framework is
a key to the integration of SAP software and non-SAP software. The SAP Business
Framework allows the Company to offer new solutions that are either tightly
integrated with the R/3 System or independent. The SAP Business Framework
utilizes existing SAP components, interface technologies and integration
technologies to provide a seamless computing environment. In each successive
release of the R/3 System, the Company has utilized the SAP Business Framework
to integrate the Company's products with available technologies.
The R/3 Technology Infrastructure comprises a database server along with a
third-party relational database management system. The application/presentation
servers provide the user's workstation or personal computer with the ability
both to draw down business applications (in order to enter and format the data
and present it logically to other parties within the organization) and to take
data from various users and format such data (for processing by the database
server). Other users' workstations, personal computers or Web browsers in the
various departments of the business organization then perform the tasks related
to the presentation of the data to these users.
The Company believes that the R/3 System architecture permits a company to
maximize the portability of Company software across a broad range of hardware
platforms. The advantage of such portability is that customers have the ability
to efficiently design their computing environments and maximize the value of
their information technology investments. The R/3 System utilizes standard
interfaces to permit implementation of internal and external links, harmonizes
communication between users working on different models of computers and
facilitates its use with new hardware and software technologies, even in
differing industry-standardized environments. The efficiency gained through the
scalability of the R/3 System permits customers to realize significant hardware
and maintenance cost savings by using local area networks and microcomputers
rather than mainframes.
With Release 3.1 of the R/3 System, the Company made its whole suite of
business applications compatible with the Web. With Release 4.0 of the R/3
System, the Company has achieved progress in implementing the standard GUI in
Java, the new hardware platform-independent programming language, thus
supporting cost saving network computer- and networked PC-environments and
extending the access of the R/3 System to every Java-enabled Web browser.
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Advanced Business Application Programming ("ABAP") Workbench and ABAP Objects
Workbench
The Company's fourth-generation programming language, ABAP, is specifically
designed for integrated standard software applications. ABAP is designed to
support all of the steps involved in improving the client/server solution, from
prototyping through implementation and testing, to final optimization. All
applications that are written with the "ABAP Workbench" can be integrated into
the standard functions provided by the R/3 System to develop customer-specific
solutions which can be run, without further adjustments, on the various
computers, databases, networks and GUIs supported by the R/3 System. "ABAP
Objects" extends the current ABAP/4 Workbench with object technology. ABAP
Objects delivers a new extended, virtual machine capable of running both new
applications, implemented using ABAP Objects, and all existing ABAP/4
applications.
Relational Database Management Systems ("RDBMS")
The R/3 System is designed to be used in conjunction with a variety of
RDBMSs, allowing the R/3 System to have fully integrated products and to utilize
the full functionality provided by each of the RDBMSs. A fully integrated system
provides convenient access to shared data such as general ledger information
and/or customer order and inventory purchasing, without requiring users to
maintain this information redundantly. Having to collect and capture information
only once helps ensure that all data is consistent, readily available and easier
to maintain.
Application Link Enabling ("ALE")
Release 3.0 of the R/3 System contains ALE, which enables expanded use of
the R/3 System within a company and within a company's business partners. ALE
provides the R/3 System with distribution models and technologies for linking
business applications across technically independent systems by enabling, among
other things, multiple database servers to share transaction update information.
This feature allows for central management and coordinated production between
R/3 Systems and non-Company software, and between R/3 System applications and
legacy R/2 System mainframe applications. ALE, for example, permits an R/3
System customer to offer access to its affiliates, dealers, distributors or
suppliers that use non-Company software. Distributed applications can also
process information at geographically remote locations and deliver the results
to a central system for enterprise-wide management and control within a single
company. With ALE, a company can centralize management of enterprise-wide sales
in a decentralized production and distribution environment or distribute
purchasing contracts over a number of R/3 and R/2 Systems, with individual
plants and locations releasing purchase orders within their local systems. The
purchase orders are then communicated to a central system where the master
contract is maintained.
RESEARCH AND DEVELOPMENT
In order to meet the changing requirements of its customers and to keep
abreast of technological developments, the Company must continue to enhance,
develop and improve its business software solutions and other products and
services. Since its inception, the Company has devoted significant resources to
research and development. Research and development expenses for the years ended
December 31, 1997, 1996, and 1995 were DM 813.3 million, DM 589.0 million and DM
438.2 million, respectively. Research and development expenses as a percentage
of total sales revenues were 13.5%, 15.8% and 16.3% for the years ended December
31, 1997, 1996 and 1995, respectively. During 1997, 1996 and 1995, the
percentage of total employees devoted to research and development was 22.4%,
22.4% and 24.0%, respectively. A major focus of the research and development
effort has been to anticipate and use technological changes in the data
processing industry to develop new business solutions.
The Company has also entered into agreements with a number of leading
computer software and hardware vendors and telecommunications providers jointly
to research and develop the compatibility of certain of the software and
hardware products produced by such vendors with the Company's products.
Significant areas of research and development expenditures include: (i)
developing enhancements to the R/3 System by adding new components and expanding
existing applications with broader functionality;
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(ii) developing new and enhanced productivity tools and decision support
products; (iii) developing industry-specific solutions; (iv) enhancing the
flexibility and openness of the R/3 System architecture through broader
integration capabilities with distributed business systems and through access to
business content provided by third-parties; and (v) developing and enhancing
common interfaces for conducting business transactions over the Internet.
The Company maintains research and development facilities in Germany, the
United States, India and Japan. The Company intends to open additional research
and development facilities in order to diversify the locations of its research
and development facilities, to maximize efficient use of localized resources and
to leverage access to industry expertise and customers.
SERVICES
The Company has refocused and expanded its consulting and training
organization over the last several years. At December 31, 1997, approximately
47% of the Company's employees were committed to consulting and support
services. Release 4.0 of the R/3 System provides customers with broader online
access to information and new implementation tools that assist customers in
trouble-shooting as well as customizing the R/3 System to specific business
needs. Along with its integrated software products, the Company offers, and
charges separately for, consulting and training services which include (i)
business consulting, (ii) implementation services, (iii) customer employee
training, and (iv) ongoing information services and maintenance.
Business Consulting
After licensing a System to a customer, Company employees with specialized
knowledge advise the customer's "project team" and support the customer in
project planning, usage tests, analyses, organizational consulting, system
adaptation, system optimization, release change, system implementation and
interface setup.
Implementation Services
Recently, the Company undertook several initiatives designed to assist
customers in achieving faster, less costly and more efficient implementation of
their R/3 System. AcceleratedSAP, designed to speed the implementation of the
R/3 System, became available in English to customers worldwide in June 1997, and
the Company released French, German and Spanish versions of AcceleratedSAP in
the first quarter of 1998. The Company expects to release industry-specific
versions of AcceleratedSAP in the future. The Company has also established the
TeamSAP initiative, which is designed to coordinate the personnel, products and
processes necessary for the implementation of the R/3 System. TeamSAP plays an
ongoing role in maintaining customers' R/3 Systems even after implementation. As
part of the TeamSAP initiative, the Company certifies third-party hardware and
software vendors involved in the R/3 System implementation process. The Company
offers its SAP GoLive Check and SAP Early Watch Services to facilitate
implementation and efficient utilization of the Company's solutions.
Training of Customers' Employees and Partners
For successful implementation of the Company's products, knowledge of their
scope and functionality is essential. The Company has expanded and enhanced its
training services and considers its training services to be a strategic element
of its core business. The Company believes that revenues from this line of
business will play an increasing role in the Company's future growth. There can
be no assurance that the Company's objective of increasing revenue from training
services will be achieved.
Generally, the Company focuses on training project team members of its
customers. Project team members typically train end users, frequently with the
support of the Company's implementation partners. The Company's primary training
facility is located in Walldorf, Germany, with an additional 60 training
facilities available globally. Training is also provided at customer locations,
at the option of the customer.
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The Company has expended substantial resources to expand its training
curriculum, to employ technology to enhance effectiveness of its training
services, and to offer more flexibility in the delivery of its training
services. While the Company continues to offer "traditional" R/3 System training
curriculum in its classrooms, it has begun to offer additional training services
that include IS and CSP software. The Company has also expanded its curriculum
to include workshops for customers and for partners addressing business
functions as they relate to the R/3 System. To enhance the effectiveness of
training, the Company has developed new technologies such as multi-media and
interactive training modules and direct customer access to an R/3 System
information database. In order to offer customers more flexibility in training,
the Company has begun to offer its customers "portable classrooms" which permit
training to be accomplished at customers' or other designated locations, and it
is planning to enhance its Internet-accessible training components.
Information Services and Maintenance
The Company performs maintenance services which provide the customer with
technical support, including telephone hotline and remote online support for the
Company's products, assistance in resolving problems, the provision of user
documentation, updates for software products, and new releases, versions and
correction levels. The Company also provides its customers with an online
software system supported in a "bulletin board" format, permitting customers to
monitor the progress of their requests for assistance, to access information
about the solutions provided to other customers and to obtain information such
as release planning, application descriptions, SAP publications and training
course dates. Access to information about the Company and its solutions are
available on the Company's home-page on the Web, which is found at
"www.SAP.com." Portions of SAPNet, the Company's company-wide intranet, is
accessible by partners, vendors and customers of the Company.
As part of the maintenance for every R/3 System and R/2 System, each
customer is provided with a telephone hotline number which project team members
can use to ask questions or to receive assistance when experiencing difficulties
with the Company's Systems. Trained personnel are available 24-hours a day,
seven days a week. If a customer is experiencing difficulties which cannot be
solved over the telephone, the customer may "dial-in" his organization's
computer system to provide the Company's technicians with online access to the
customer's computer system.
MARKETING AND DISTRIBUTION
The Company seeks to market its solutions to a broadening customer base. In
implementing its marketing strategy, the Company has expanded its distribution
channels to meet the increased demand for its solutions. The Company markets its
solutions through its direct sales organization as well as through other
distribution channels.
Direct Sales Organizations
In Germany, the Company markets its products and services primarily through
its own direct sales and support force. The Company's primary sales and support
groups are based in the Company's headquarters in Walldorf and in field offices
located in Berlin and Hamburg and in suburban Munich and Dusseldorf. Outside of
Germany, the Company primarily utilizes its network of approximately 50
operating subsidiaries to market and distribute its products. Most of the
subsidiaries have entered into license agreements with SAP pursuant to which the
subsidiary acquires the exclusive right to sublicense the Company's products to
customers within a specific territory and agrees to provide primary support to
those customers. Under these agreements, the subsidiaries retain a certain
percentage of the revenues generated by the sublicensing activity. In certain
countries, including Greece, Saudi Arabia and Turkey, the Company has
established distribution agreements with independent resellers rather than with
subsidiaries.
Other Distribution Channels
The Company has developed an independent sales and support force through
the establishment of resellers who assume responsibility for the implementation
and support of the Systems licensed by them,
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including ongoing telephone hotline support. The Company provides these
third-party distributors with product information, a project demonstration
system license, a second tier of customer hotline support and certain other
product resources, including, for a separate fee, Systems consultants. The
resellers are primarily used to market the Systems to small businesses not
currently serviced by the Company's direct sales force. The Company has
introduced the CBS program, through which a group of authorized independent
distributors markets the Company's solutions to small businesses (i.e.,
generally those with annual revenues below U.S.$200 million per year).
COMPETITIVE ENVIRONMENT
There are many other companies engaged in the research, development and
marketing of standard application software and associated applications
development tools and decision support products. The Company has global,
regional and local competitors. The Company's primary global competitors include
Oracle Corporation, PeopleSoft, Inc., Baan B.V., Systems Software Associates,
Inc. and J.D. Edwards. Historically, most of these competitors provided
solutions which covered certain functional areas, offering the customer a
software application product designed for a specific business or manufacturing
process. Such products compete with individual functions offered by the Company.
The Company's competitors have already broadened, or are implementing plans to
broaden, the scope of their business activities into other areas of the market.
The Company believes that its products can be installed as efficiently as
comparable software offered by its competitors. Nevertheless, certain of the
Company's competitors have alleged that implementation of the R/3 System is
generally more costly and takes longer than that of their comparable systems.
However, because of the substantial business re-engineering that the Systems
enable, installations often coincide with expensive and time-consuming
restructuring of customers' businesses. While business re-engineering is an
important part of the value that enterprise-wide programs provide, it is not
necessary in all cases. Further, because the Company's initial customers were
large, global multinational companies with complex IT infrastructures, multiple
currencies and multiple languages, the Company believes implementations in those
environments were inherently more time-consuming than implementations made by
smaller customers or by customers that elect to implement point solutions. The
Company believes that its recent initiatives to offer accelerated installation
support, such as AcceleratedSAP, will counter the perception that the Company's
competitors have sought to create.
Some of the Company's competitors devote more resources to customer
implementation, preferring to use their own employees as consultants rather than
using third parties to service their customers and implement their software
systems. In addition, some of the Company's competitors and many of the
Company's potential competitors are involved in a wider range of businesses, and
some such competitors and potential competitors have a larger installed customer
base for their products than the Company, enhancing their ability to compete
with the Company.
The Company believes that the principal competitive factors affecting the
market for the Company's products include vendor and product reputation,
architecture, functionality and features, ease of implementation and use,
continuous adaption to changes in business processes, quality of customer
support, product quality, performance and price. Performance in these areas
depends upon the Company's ability to attract and retain highly qualified
technical and sales personnel in a competitive market for experienced and
talented software developers, sales representatives and managers.
INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS AND LICENSES
The Company relies on a combination of the protections provided by
applicable trade secret, copyright, patent and trademark laws, license and
nondisclosure agreements, confidentiality agreements and technical measures to
establish and protect its rights in its software products. There can be no
assurance that these protections will be adequate or that the Company's
competitors will not independently develop technologies that are substantially
equivalent or superior to the Company's technology. Despite the Company's
efforts, it may be possible for third parties to copy certain portions of the
Company's products or reverse-engineer or obtain and use information that the
Company regards as proprietary. In addition, the laws of certain countries do
not protect the Company's proprietary rights to the same extent as do the laws
of the United States or
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Germany. Accordingly, there can be no assurance that the Company will be able to
protect its proprietary software against unauthorized third-party copying or
use, which could adversely affect the Company's competitive position.
The Company generally licenses its products to customers on a "right to
use" basis pursuant to a perpetual license. The license agreements are generally
in standard form, although each license is individually negotiated and may
contain variations. The licenses generally restrict the use of the Company's
products to specific named users, which may include (usually on a screen-only
basis) access by customer's dealers, distributors and suppliers, and prohibit a
customer from disseminating or distributing the Company's products to any
unauthorized person. The licenses are generally non-transferable or, if
transferable, the transfer is subject to the Company's reasonable approval. The
Company's products are licensed to end-users not only by the Company but also by
independent third-party distributors. Although the Company seeks to establish
the conditions under which its products are licensed by such distributors, there
can be no assurance that such distributors do not use other conditions. Some of
the Company's products contain third-party intellectual property that the
Company licenses or otherwise acquires.
The Company's products are generally provided to end-users in object code
and certain source code. In addition, licensed end-users of the Company's
products can be beneficiaries of a master source code escrow for its products,
pursuant to which the source code will be released to end users upon the
occurrence of certain events, such as the commencement of bankruptcy or
insolvency proceedings by or against the Company, or certain material breaches
of the license. The Company has the right to object to the release of source
code in any such circumstance, and to submit the matter to dispute resolution
procedures. In the event of any release of the source code from escrow, the
end-user's license is limited to use of the source code to maintain, support and
customize the Company's products.
The Company actively pursues trademark registrations in countries in which
its software products are licensed and used. The Company believes that, except
as disclosed below, the trademarks which are material to its business are
registered in the countries in which the Company has significant sales. SAS
Institute, Inc. ("SAS"), a United States software company located in North
Carolina, has opposed SAP's effort to register the "SAP" trademarks in the
United States, claiming possible confusion between the SAP trademarks and SAS's
previously registered trademarks. SAP disagrees with this contention and, in
addition, has filed counterclaims relating to certain registered trademarks held
by SAS. While there can be no assurance that SAP will be successful in its
efforts to register the SAP trademarks in the United States, the Company
believes that an adverse determination in this matter will not have a material
adverse effect upon the Company's business, results of operations, financial
condition or cash flows. See "Item 3. Legal Proceedings." The Company has
received a notice from SCOPE Consulting GmbH ("SCOPE"), a German computer,
software and consultancy company located in Mannheim, Germany, that the
Company's use of the "SAP SCOPE" trademark in Germany may be in violation of a
registered trademark belonging to SCOPE. To the knowledge of the Company, no
legal proceedings have been initiated as of yet with respect to this claim. The
Company has not registered or applied for registration of the trademark "SAP
SCOPE" in Germany. The Company believes that an adverse determination in this
matter will not have a material adverse effect upon the Company's business,
result of operations, financial condition or cash flows. The Company has a
patent program; however, no patents have yet issued, although the Company has a
number of patent applications pending for inventions claimed by the Company. The
Company is not presently aware of any claims of infringement by its products of
third-party proprietary rights that it believes will have a material adverse
effect upon the Company's business, results of operations, financial condition
or cash flows. However, the Company expects that its software products will
increasingly be subject to such claims as the number of products and competitors
in the Company's industry segment grows and the functionality of products
overlap. Any such claim, with or without merit, could be time-consuming, result
in costly litigation, or require the Company to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company. In the event of a successful claim
against the Company and the failure of the Company to develop or license a
substitute technology, the Company's business and operating results may be
materially adversely effected.
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EMPLOYEES
At December 31, 1997, the Company employed 12,856 persons worldwide, of
which 7,309 (56.9%) were in Europe, 3,785 (29.4%) were in the Americas and 1,762
(13.7%) were in Asia-Pacific/Africa. Of such employees, 6,014 (46.8%) were in
customer service, 2,876 (22.4%) were in research and development, 2,423 (18.8%)
were in sales and marketing and 788 (6.1%) were in general and administrative.
Sales revenues per average employee exceeded DM 521,000 for the year ended
December 31, 1997, up from DM 455,000 for the year ended December 31, 1996.
None of the Company's employees is subject to a collective bargaining
agreement. The Company has never experienced a work stoppage and believes that
its employee relations are excellent. The Company's success depends upon its
ability to attract and retain highly skilled managerial, research and
development, technical (e.g., customer service) and marketing personnel. There
can be no assurance that the Company will be successful in attracting and
retaining such personnel, and the failure to attract and retain such personnel
could have a material adverse effect on the Company's business, results of
operations and financial condition.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's principal administrative, marketing and sales, training,
customer service and research and development facilities are located in
Walldorf, Germany, 60 miles south of Frankfurt. The Company owns its principal
Walldorf facility and plans to expand this facility in the near future. The
Company is in the process of building a new headquarters, which it will own, for
its North and South American operations in Newtown Square, Pennsylvania. The
building is expected to be completed in June 1999 and will be approximately
400,000 square feet. The Company owns sufficient undeveloped land to expand the
facilities in Newtown Square as required.
The location of each of the Company's other facilities in excess of 40,000
square feet, all of which are leased (unless otherwise indicated), is set forth
below.
<TABLE>
<CAPTION>
UNITED STATES GERMANY AUSTRIA BRAZIL
------------- ------- ------- ------
<S> <C> <C> <C>
Lester, PA Alsbach (owned) Vienna Sao Paulo
Palo Alto, CA Ratingen
Waltham, MA St. Ingbert (owned)
Chicago, IL St. Leon-Rot (owned)
Foster City, CA
Tinicum, PA
Atlanta, GA
CANADA FRANCE ITALY JAPAN
- ------------------- -------------------- -------------- -------------------
North York, Ontario Paris Agrate Brianza Tokyo
THE NETHERLANDS SINGAPORE SOUTH AFRICA SWITZERLAND
- ------------------- -------------------- -------------- -------------------
's-Hertogenbosch Singapore Woodmead Biel (owned)
UNITED KINGDOM
- -------------------
Feltham (owned)
</TABLE>
The Company believes that its facilities are in good operating condition
and adequate for their present usage.
ITEM 3. LEGAL PROCEEDINGS.
On September 8, 1992, SAS initiated proceedings with the United States
Patent and Trademark Office in Washington, D.C. in opposition to SAP's
application to register the "SAP" trademark. SAS argues in its petition that
there is a likelihood of confusion by consumers between its trademark, "SAS",
and the "SAP"
18
<PAGE> 21
trademark. SAP disagrees with this contention and, in addition, has filed
counterclaims relating to certain registered trademarks held by SAS. To date,
the SAS opposition action as well as SAP's counterclaims are pending with the
Trademark Trial and Appeal Board. While there can be no assurance that SAP will
be successful in its efforts to register the "SAP" trademark in the United
States, the Company believes that an adverse determination in this matter would
not have a material adverse effect on the Company's business, results of
operations, financial condition or cash flows.
In 1994, the Company sponsored an employee convertible bond program (the
"1994 Program") by issuing 400,000 bonds, each with a nominal amount of DM 50
and convertible into DM 50 Preference Shares (the "1994 DM 50 Bonds"). On July
17, 1995, SAP effected a 1:10 stock split with respect to 1,950,000 DM 50
Preference Shares to reflect the reduction in the nominal value of such DM 50
Preference Shares from DM 50 to DM 5. See "Item 14. Description of Securities to
be Registered -- Share Capital." The 1994 DM 50 Bonds were split accordingly
into 4,000,000 bonds, each with a nominal amount of DM 5 (the "1994 Bonds"). In
late July 1996, a lawsuit was filed by a German shareholders' advocacy group,
Schutzgemeinschaft der Kleinaktionare e.V. ("SdK"), against SAP in the trial
court in Heidelberg, Germany. The SdK was seeking the voidance of two
resolutions of SAP's 1996 annual general shareholders' meeting regarding the
general approval of the Executive Board's actions during the previous business
year (Entlastung) and the authorization of the Executive Board to convert the
1994 Bonds from registered to bearer form. In its complaint, the SdK alleged,
among other things, that: (i) the parties to the Pooling Agreement (see "Item 4.
Control of Registrant") constituted an entity controlling SAP pursuant to the
provisions of the German Stock Corporation Act; (ii) the shareholders of SAP
were misled by its Executive Board in connection with the resolution authorizing
the Executive Board to convert the 1994 Bonds from registered to bearer form and
the authorization for such conversion allowed principal shareholders and
Executive Board members to profit from such conversion at the expense of the
minority shareholders and Company employees; and (iii) the Executive Board did
not completely answer shareholders' questions at the 1996 annual general
shareholders' meeting and thereby violated its duty to provide information. On
September 24, 1997, the Heidelberg trial court dismissed the suit. SdK has since
filed an appeal with the appeals court in Karlsruhe, Germany. While there can be
no assurance that SAP will be successful on appeal, SAP believes that an adverse
determination in this matter would not have a material adverse effect on the
Company's business, results of operations, financial condition or cash flows.
In December 1996, certain employees of SAP became the subject of
independent insider trading investigations by the German Federal Supervisory
Office for Securities Trading (Bundesaufsichtsamt fur den Wertpapierhandel) and
the Frankfurt criminal prosecutor's office. Such investigations remain ongoing.
Further investigations by both the Federal Supervisory Office for Securities
Trading and the Frankfurt criminal prosecutor's office with regard to other
persons, including employees and non-employees of SAP, are also pending. To the
Company's knowledge, the Company has never been the target of any such
investigations. The Company is cooperating with all such investigations.
Although the outcome of such investigations and claims cannot be predicted with
certainty, the Company believes that any resulting adverse judgments against one
or more of the persons under investigation would not have a material adverse
effect on the Company's business, results of operations, financial condition or
cash flows.
The Company is also subject to other 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 business, 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 would not have such a material adverse effect on the Company's business,
results of operations, financial condition or cash flows.
ITEM 4. CONTROL OF REGISTRANT.
The share capital of SAP consists of the Ordinary Shares and the Preference
Shares. At June 18, 1998, the issued share capital of SAP amounted to DM
521,516,495, consisting of 60,996,050 Ordinary Shares and 43,307,249 Preference
Shares. See "Item 14. Description of Securities to be Registered -- Share
Capital."
19
<PAGE> 22
The Ordinary Shares and the Preference Shares are issued only in bearer
form. Accordingly, SAP generally has no way of determining who its shareholders
are or how many shares a particular shareholder owns. However, under Section 21
of the German Securities Trading Act (Wertpapierhandelsgesetz), which became
effective on January 1, 1995, holders of voting securities of a German company
admitted to official trading on a stock exchange within the European Union or
the European Economic Area are obligated to notify a company of the level of
their holdings whenever such holdings reach, exceed or fall below certain
thresholds, which have been set at 5%, 10%, 25%, 50% and 75% of a company's
outstanding voting rights.
To its knowledge, SAP is not owned or controlled directly or indirectly by
any government or by any other corporation. The following table sets forth
certain information regarding the beneficial ownership of the Ordinary Shares
and the Preference Shares at June 18, 1998 of (i) each person or group known by
SAP to own beneficially 10% or more of the outstanding Ordinary Shares or
Preference Shares and (ii) the beneficial ownership of all members of the
Supervisory Board and all members of the Executive Board, as a group, in each
case as reported to SAP by such persons.
<TABLE>
<CAPTION>
ORDINARY SHARES PREFERENCE SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
-------------------------- --------------------------
% OF % OF
PRINCIPAL SHAREHOLDERS NUMBER OUTSTANDING NUMBER OUTSTANDING
---------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Dietmar Hopp
Chairman, Supervisory Board............. 15,297,600(1) 25.1% -- --
Dietmar Hopp Stiftung GmbH(2)............. 9,339,100 15.3% -- --
Prof. Dr. h.c. Hasso Plattner
Co-Speaker, Executive Board............. 12,507,200 20.5% -- --
Dr. h.c. Klaus Tschira
Member, Supervisory Board............... 11,592,350(3) 19.0% * *
Klaus Tschira Stiftung gGmbH(4)........... 7,051,600 11.6% -- --
Pooling Shareholders(5)................... 30,500,100 50.003% ** **
Executive Board Members and Supervisory
Board Members, as a group (18
persons)................................ 39,401,028 64.6% 2,088,704 4.8%
</TABLE>
- ---------------
* Less than 10%.
** Not applicable. See note (5) below.
(1) Includes (i) 4,038,000 Ordinary Shares owned in the aggregate by Mr. Hopp's
immediate family and (ii) 9,339,100 Ordinary Shares owned by Dietmar Hopp
Stiftung GmbH, as to which Mr. Hopp exercises sole voting power. Mr. Hopp
disclaims beneficial ownership with respect to such Ordinary Shares. Mr.
Hopp is a party to the Pooling Agreement described in note (5) below.
(2) Effective January 1, 1996, Mr. Hopp transferred 9,339,100 Ordinary Shares to
the Dietmar Hopp Stiftung GmbH, a newly established non-profit foundation.
The Dietmar Hopp Stiftung GmbH is a party to the Pooling Agreement described
in note (5) below.
(3) Includes (i) 705,000 Ordinary Shares owned in the aggregate by Dr. Tschira's
immediate family and (ii) 7,051,600 Ordinary Shares owned by Klaus Tschira
Stiftung gGmbH, as to which Dr. Tschira exercises sole voting power. Dr.
Tschira disclaims beneficial ownership with respect to such Ordinary Shares.
Dr. Tschira is a party to the Pooling Agreement described in note (5) below.
(4) Effective January 1, 1996, Dr. Tschira transferred 7,051,600 Ordinary Shares
to the Klaus Tschira Stiftung gGmbH, a newly established non-profit
foundation. The Klaus Tschira Stiftung gGmbH is a party to the Pooling
Agreement described in note (5) below.
(5) The Company has been informed that certain shareholders of SAP (the "Pooling
Shareholders"), who in the aggregate hold over 60% of the Ordinary Shares,
have entered into a pooling agreement (the "Pooling Agreement") with respect
to Ordinary Shares owned by them that constitute in the aggregate 50.003% of
the outstanding Ordinary Shares (the "Pooled Shares"). Pursuant to the
Pooling Agreement, the Pooling Shareholders have agreed to vote their Pooled
Shares jointly with respect to certain matters coming before SAP's general
shareholders' meetings, including the election of the members of the
Supervisory Board elected by SAP's shareholders (who comprise 50% of the
members of the Supervisory Board). The Pooling Agreement contains
restrictions on the transfer of the Pooled Shares to non-Pooling
Shareholders and provides for a right of first refusal in the event a
Pooling Shareholder wishes to transfer its Pooled Shares. Any Pooling
Shareholder may terminate its participation in the Pooling Agreement by
giving 12 months' notice prior to the end of a calendar year, with effect at
the earliest on December 31, 1999.
20
<PAGE> 23
ITEM 5. NATURE OF TRADING MARKET.
GENERAL
The Ordinary Shares and the Preference Shares are listed on each of the
Frankfurt Stock Exchange, the Berlin Stock Exchange and the Stuttgart Stock
Exchange. The Ordinary Shares are also listed on each of the Geneva Stock
Exchange and the Zurich Stock Exchange. In addition, the Ordinary Shares and the
Preference Shares are traded in the over-the-counter markets (Freiverkehr) in
each of Dusseldorf, Munich, Bremen, Hamburg and Hannover. The principal trading
market for the Ordinary Shares and the Preference Shares is the Frankfurt Stock
Exchange. The Ordinary Shares and the Preference Shares are issued only in
bearer form.
The Preference Shares currently trade in the United States in the form of
American Depositary Shares evidenced by American Depositary Receipts. SAP
currently has three sponsored American Depositary Receipt facilities with
respect to the Preference Shares in the United States: (i) a facility (the
"Unrestricted Facility") established pursuant to a Deposit Agreement dated
September 12, 1995 among SAP, The Bank of New York (the "Unrestricted
Depositary") and the owners and holders of the American Depositary Receipts (the
"Unrestricted ADRs") issued thereunder evidencing American Depositary Shares
(the "Unrestricted ADSs"); (ii) a facility (the "1995 Rule 144A Facility")
established pursuant to a Deposit Agreement (the "1995 Rule 144A Deposit
Agreement") dated May 31, 1995 among SAP, The Bank of New York (the "1995 Rule
144A Depositary") and the owners and beneficial owners of the American
Depositary Receipts (the "1995 Rule 144A ADRs") issued thereunder evidencing
American Depositary Shares (the "1995 Rule 144A ADSs"); and (iii) a facility
(the "1996 Rule 144A Facility") established pursuant to a Deposit Agreement (the
"1996 Rule 144A Deposit Agreement") dated August 14, 1996 among SAP, The Bank of
New York (the "1996 Rule 144A Depositary") and the owners and beneficial owners
of the American Depositary Receipts (the "1996 Rule 144A ADRs") issued
thereunder evidencing American Depositary Shares (the "1996 Rule 144A ADSs"). As
used herein, (a) the "Rule 144A Facilities" means the 1995 Rule 144A Facility
and the 1996 Rule 144A Facility; (b) the "Rule 144A Depositaries" means the 1995
Rule 144A Depositary and the 1996 Rule 144A Depositary; (c) the "Rule 144A ADRs"
means the 1995 Rule 144A ADRs and the 1996 Rule 144A ADRs; (d) the "Rule 144A
ADSs" means the 1995 Rule 144A ADSs and the 1996 Rule 144A ADSs; and (e) the
"Rule 144A Deposit Agreements" means the 1995 Rule 144A Deposit Agreement and
the 1996 Rule 144A Deposit Agreement. Each Rule 144A ADS and each Unrestricted
ADS represents one-third of one Preference Share. The 1995 Rule 144A Facility
was closed to new deposits of Preference Shares as of January 26, 1995. See
"Item 14. Description of Securities to be Registered -- Description of
Preference Shares -- Rule 144A Facilities and Unrestricted Facility."
The Company intends to conduct an exchange offer (the "Exchange Offer"),
whereby it will offer to exchange four American Depositary Shares (each, an
"ADS"), each representing one-twelfth of one Preference Share and evidenced by
an American Depositary Receipt (an "ADR"), for each outstanding Rule 144A ADS.
The ADSs issued pursuant to the Exchange Offer will be registered with the SEC
pursuant to the Form F-1. The ADSs will be substantially identical to the Rule
144A ADSs except that (i) the Rule 144A ADSs are only accepted for quotation in
the United States on the Private Offerings, Resales and Trading through
Automated Linkages ("PORTAL") system of the National Association of Securities
Dealers, Inc. whereas the ADSs may be eligible for listing on a United States
national securities exchange or quotation on a United States inter-dealer system
and (ii) resale of the ADSs will not be subject to the restrictions contained in
the Rule 144A Deposit Agreements. Upon commencement of the Exchange Offer, the
Company intends to direct the Rule 144A ADS Depositary to terminate each of the
Rule 144A Deposit Agreements in accordance with its terms, which will adversely
affect the trading market for Rule 144A ADSs that are not tendered in the
Exchange Offer.
TRADING ON THE FRANKFURT STOCK EXCHANGE
The Frankfurt Stock Exchange is the largest of the eight German stock
exchanges. The aggregate annual turnover of the Frankfurt Stock Exchange in 1997
of DM 6.9 trillion (based on the Frankfurt Stock Exchange's practice of
separately recording the sale and purchase components involved in any trade) for
both equity and debt instruments made it the fifth largest stock exchange in the
world behind the New York Stock Exchange, the Nasdaq Stock Market, the London
Stock Exchange and the Tokyo Stock Exchange in terms of
21
<PAGE> 24
turnover. At December 31, 1997, the equity securities of 1,461 corporations,
including 1,011 foreign corporations, were traded on the Frankfurt Stock
Exchange.
Prices are continuously quoted on the Frankfurt Stock Exchange floor each
business day between 10:30 a.m. and 1:30 p.m. Central European Time for the
Ordinary Shares and the Preference Shares as well as for other actively traded
shares. Beginning July 1, 1998, the Frankfurt Stock Exchange intends to extend
trading hours to between 8:30 a.m. and 5 p.m. For all shares, an official daily
quote (Einheitspreis) is determined by auction around mid-session of each
trading day. For some less actively traded shares, this official daily quotation
is the only price determined, and for such shares the trading time of between
10:30 a.m. and 1:30 p.m. will remain unchanged after July 1, 1998. Markets in
listed securities are generally of the auction type, but listed securities also
change hands in inter-bank dealer markets off the Frankfurt Stock Exchange.
Price formation is determined by open outcry by state-appointed specialists
(amtliche Makler) who are themselves exchange members, but who do not, as a
rule, deal with the public. Transactions on the Frankfurt Stock Exchange are
settled on the second business day following trading. Transactions off the
Frankfurt Stock Exchange (which may be the case if one of the parties to the
transaction is foreign) are generally also settled on the second business day
following trading (although a different period may be agreed upon by the
parties). Under German law, customers' orders to buy or sell listed securities
must be executed on a stock exchange unless the customer gives other specific
instructions for an individual transaction or an indeterminate number of
transactions. A quotation can be suspended by the Frankfurt Stock Exchange if
orderly stock exchange trading is temporarily endangered or if a suspension is
necessary in order to protect the public interest.
The Ordinary Shares and the Preference Shares are traded on XETRA, a
computerized trading system of the Frankfurt Stock Exchange. Securities traded
on XETRA include the securities of the 30 companies comprising the Deutsche
Aktienindex ("DAX"), the leading index of trading on the Frankfurt Stock
Exchange, as well as other high-volume shares, equity warrants, government
obligations and government agency securities. The Preference Shares have been
included in the DAX since September 15, 1995.
The table below sets forth, for the periods indicated, the high and low
closing sales prices for the Preference Shares on the Frankfurt Stock Exchange,
as reported by the Deutsche Borse AG, together with the high and low of the DAX.
See the discussion under "Item 8. Selected Consolidated Financial Data --
Exchange Rates" with respect to rates of exchange between the Dollar and the
Mark applicable during the periods set forth below.
<TABLE>
<CAPTION>
PRICE PER
PREFERENCE SHARE(1) DAX(2)
------------------- ------------------
HIGH LOW HIGH LOW
-------- ------- ------- -------
(DM) (DM)
<S> <C> <C> <C> <C>
1996
First Quarter...................................... 238.50 198.00 2525.42 2284.86
Second Quarter..................................... 228.70 182.00 2573.69 2457.49
Third Quarter...................................... 262.80 202.00 2666.55 2447.80
Fourth Quarter..................................... 284.00 191.80 2909.91 2655.73
1997
First Quarter...................................... 286.00 210.90 3460.59 2848.77
Second Quarter..................................... 363.20 268.50 3805.29 3215.24
Third Quarter...................................... 472.00 358.00 4438.93 3819.85
Fourth Quarter..................................... 596.00 479.10 4347.24 3567.22
1998
First Quarter...................................... 807.00 562.00 5095.79 4094.54
Second Quarter (through June 18, 1998)............. 1208.00 759.50 5779.09 5018.67
</TABLE>
- ---------------
(1) On May 7, 1998, SAP's shareholders passed a resolution converting SAP's
share capital to no nominal value shares, in accordance with recently
enacted amendments to the German Stock Corporation Act. This resolution took
effect on June 16, 1998, when it was recorded in the commercial register in
Heidelberg, Germany. For periods set forth in this table prior to June 16,
1998, the Preference Share price data assumes that each DM 50 Preference
Share equals ten DM 5 Preference Shares. See "Item 14. Description of
Securities to be Registered -- Share Capital."
(2) The DAX is a continuously updated, capital-weighted performance index of 30
German blue chip companies. The shares included in the DAX were in principle
selected by the Frankfurt Stock Exchange on the basis of their stock
exchange turnover and the issuer's market capitalization. Adjustments to the
DAX are made by the Frankfurt Stock Exchange for capital changes,
subscription rights and dividends.
22
<PAGE> 25
The average daily volumes of Preference Shares traded on the Frankfurt
Stock Exchange during the years 1996 and 1997 were approximately DM 198.0
million and DM 321.6 million, respectively. These numbers are based on total
yearly turnover statistics quoted by the Deutsche Borse AG.
On June 18, 1998, the closing sale price per Preference Share was DM
1208.00, as reported by the Borsenzeitung.
PRINCIPAL UNITED STATES TRADING MARKET
The Rule 144A ADSs are traded in the PORTAL system of the National
Association of Securities Dealers, Inc. Price information with respect to Rule
144A ADS transactions conducted in PORTAL is not publicly available. The
Unrestricted ADSs trade in secondary transactions published in inter-dealer
quotations in the so-called "pink-sheets." The table below sets forth, for the
periods indicated, high and low trading prices for the Unrestricted ADSs.
<TABLE>
<CAPTION>
PER UNRESTRICTED ADS(1)
-------------------------
HIGH U.S. $ LOW U.S. $
----------- ----------
<S> <C> <C>
1996
First Quarter...................................... 54.75 45.50
Second Quarter..................................... 50.00 39.75
Third Quarter...................................... 57.88 44.50
Fourth Quarter..................................... 61.75 42.00
1997
First Quarter...................................... 56.50 45.50
Second Quarter..................................... 71.88 52.50
Third Quarter...................................... 89.25 69.50
Fourth Quarter..................................... 114.00 89.00
1998
First Quarter...................................... 149.50 99.00
Second Quarter (through June 18, 1998)............. 226.5 140.00
</TABLE>
- ---------------
(1) Data provided by The Bank of New York.
On June 18, 1998, the closing price per share of the Unrestricted ADSs was
U.S.$ 226.50.
At June 18, 1998, 1,833,258 Preference Shares were held in the form of
Unrestricted ADSs (representing approximately 4.2% of the then outstanding
Preference Shares) and 250,868 Preference Shares were held in the form of Rule
144A ADSs (representing less than 1% of the then outstanding Preference Shares).
Based on information provided by the Rule 144A ADS Depositaries and the
Unrestricted ADS Depositary, at June 18, 1998, there was approximately one
registered holder of Rule 144A ADSs and approximately 1,484 registered holders
of Unrestricted ADSs and, based on information received by the Company, 110
holders of Preference Shares are in the United States. At June 18, 1998, there
were 752,604 Rule 144A ADSs, 5,500,324 Unrestricted ADSs and 6,169,150
Preference Shares (totaling 8,253,459.3 Preference Shares) held of record by
1,483 record holders with United States addresses (representing approximately
19% of the then outstanding Preference Shares).
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS.
At the present time, Germany does not restrict the export or import of
capital, except for investments in areas like Iraq and Libya in accordance with
applicable resolutions adopted by the United Nations and the
23
<PAGE> 26
European Union. However, for statistical purposes only, every individual or
corporation residing in Germany ("Resident") must report to the German Central
Bank (Deutsche Bundesbank), subject only to certain immaterial exceptions, any
payment received from or made to an individual or a corporation resident outside
of Germany ("Non-resident") if such payment exceeds DM 5,000 (or the equivalent
in a foreign currency). In addition, Residents must report any claims against or
any liabilities payable to Non-residents if such claims or liabilities, in the
aggregate, exceed DM 3 million (or the equivalent in a foreign currency) during
any one month. Residents must also report any direct investment outside Germany
if such investment exceeds DM 100,000. For a discussion of the treatment of
remittance of dividends, interest or other payments to nonresident holders of
Preference Shares or ADSs, see "Item 7. Taxation -- German Taxation of Holders
of Preference Shares or ADSs."
There are no limitations imposed by German law or the Articles of
Association (Satzung) of SAP (the "Articles of Association") on the right of
Non-residents or foreign holders to hold or vote the Preference Shares or the
ADSs. For a discussion of the voting rights of holders of Preference Shares, see
"Item 14. Description of Securities to be Registered -- Description of
Preference Shares -- Voting Rights."
ITEM 7. TAXATION.
GENERAL
The following discussion summarizes certain German tax and United States
federal income tax consequences of the acquisition, ownership and disposition of
Preference Shares or ADSs evidenced by ADRs. Although the following discussion
does not purport to describe all of the tax considerations that may be relevant
to a prospective purchaser of ADSs, such discussion (i) in the opinion of
Haarmann, Hemmelrath & Partner, special German tax counsel to SAP, summarizes
the material German tax consequences to a holder of Preference Shares or ADSs
and (ii) in the opinion of Morgan, Lewis & Bockius LLP, special United States
tax counsel to SAP, summarizes the material United States federal income tax
consequences, to a United States Holder (as hereinafter defined) of Preference
Shares or ADSs that is not resident (in the case of an individual) or domiciled
(in the case of a legal entity), as the case may be, in Germany (in either case,
referred to herein as "not resident" or as a "nonresident") and does not have a
permanent establishment or fixed base located in Germany through which such
Preference Shares or ADSs are held. Dr. Wilhelm Haarmann, a partner in Haarmann,
Hemmelrath & Partner, is a member of SAP's Supervisory Board.
GERMAN TAXATION OF HOLDERS OF PREFERENCE SHARES OR ADSS
The following discussion generally summarizes the principal German tax
consequences of the acquisition, ownership and disposition of ADSs or Preference
Shares to a beneficial owner. This summary is based on the laws that are in
force at the date hereof and is subject to any changes in German law, or in any
applicable double taxation conventions to which Germany is a party, occurring
after such date. It is also based, in part, on representations of the Depositary
and assumes that each obligation of the Deposit Agreement and any related
agreements will be performed in accordance with its terms.
The following discussion is not a complete analysis or listing of all
potential German tax consequences to holders of ADSs or Preference Shares and
does not address all tax considerations that may be relevant to all categories
of potential purchasers or owners of ADSs or Preference Shares. In particular,
the following discussion does not address the tax consequences for (i) a person
that owns, directly or indirectly, 10% or more of SAP's shares, (ii) a holding
which forms part of a German permanent establishment of a person not resident in
Germany or (iii) a person that is resident in Germany and at the same time
resident in another country. Prospective purchasers of ADSs or Preference Shares
are urged to consult their own tax advisors concerning the overall German tax
consequences of the acquisition, ownership and disposition thereof.
For purposes of applying German tax law and the double tax conventions to
which Germany is a party, a holder of ADSs will be treated as owning the
Preference Shares represented thereby.
24
<PAGE> 27
German Taxation of Dividends
Under German domestic income tax laws, German corporations are required to
withhold tax on dividends in an amount equal to 25% of the gross amount paid to
resident and nonresident shareholders. A 5.5% surtax on the German withholding
tax is currently levied on dividend distributions paid by a German corporation,
such as SAP. The surtax equals 1.375% (5.5% x 25%) of the gross amount of a cash
dividend. Certain persons resident in Germany (e.g., qualifying investment funds
or tax-exempt organizations) may obtain a partial or full refund of such taxes.
For a holder of ADSs or Preference Shares that is resident in Germany,
according to German income tax law, dividends are subject to German income tax
or corporation tax. For such a holder, the taxable amount will be the sum of (i)
the cash payment by SAP, (ii) the taxes withheld and (iii) 3/7 of the sum of (i)
and (ii). Subject to certain conditions, the tax withheld and the gross-up of
3/7 will be eligible for credit against the holder's income or corporation tax.
If the dividend is paid out of tax-exempt foreign income, there will be neither
the 3/7 gross-up of the income nor a credit for this amount. For holders subject
to German Trade Tax, such tax is also imposed on the dividends received
(including any gross-up).
Refund of German Tax to United States Holders
A partial refund of the 25% withholding tax equal to 10% of the gross
amount of the dividend and a full refund of the surtax can be obtained by a
United States Holder (as that term is defined under "United States Taxation of
United States Holders of Preference Shares or ADSs") under the United
States-Germany income tax treaty (Convention between the Federal Republic of
Germany and the United States of America for the Avoidance of Double Taxation
and the Prevention of Fiscal Evasion with respect to taxes on Income (German
Federal Law Gazette (BGBI.) 1991 II. 355)) (the "Treaty"). In addition, so long
as the German imputation system provides German resident individual shareholders
with a tax credit for corporate taxes with respect to dividends paid by German
corporations, the Treaty provides that United States Holders are entitled to a
further refund equal to 5% of the gross amount of the dividend. Thus, for each
U.S.$100 of gross dividends paid by SAP to a United States Holder, the dividends
after partial refund of the 25% withholding tax and a refund of the surtax under
the Treaty will be subject to a German withholding tax of U.S.$15. If the United
States Holder also applies for the additional 5% refund, then the German
withholding tax is effectively reduced to U.S.$10. Thus, the cash received per
U.S.$100 of gross dividends is U.S.$90 after refund of German withholding tax
from the German tax authorities.
To claim the refund of amounts withheld in excess of the Treaty rate, a
United States Holder must submit (either directly or, as described below,
through the Depositary) a claim for refund to the German tax authorities, with,
in the case of a direct claim, the original bank voucher (or certified copy
thereof) issued by the paying entity documenting the tax withheld, within four
years from the end of the calendar year in which the dividend is received.
Claims for refund are made on a special German claim for refund form, which must
be filed with the German tax authorities: Bundesamt fur Finanzen, 53221 Bonn,
Germany. The German claim for refund form may be obtained from the German tax
authorities at the same address where applications are filed, or from the
Embassy of the Federal Republic of Germany, 4645 Reservoir Road, N.W.,
Washington, D.C. 20007-1998.
United States Holders must also submit to the German tax authorities
certification of their most recently filed United States federal income tax
return (IRS Form 6166). Certification is obtained from the office of the
Director of the Internal Revenue Service Center by filing a request for
certification with the Internal Revenue Service, AC/I-FIRPTA, DR 543, P.O. Box
16347, Tax Treaty Division, Philadelphia, PA 19114-0447. Requests for
certification are to be made in writing and must include the United States
Holder's name, social security number or employer identification number, tax
return form number, and tax period for which certification is requested. This
certification is valid for three years and need only be resubmitted in a fourth
year in the event of a subsequent application for refund.
In accordance with arrangements under the Deposit Agreement, the Depositary
(or a custodian as its designated agent) will hold the Preference Shares and
receive and distribute dividends to the United States Holders. The Depositary
has agreed that, to the extent practicable, it will perform administrative
functions
25
<PAGE> 28
necessary to obtain the refund of amounts withheld in excess of the Treaty rate
for the benefit of United States Holders who supply the necessary documentation.
The Depositary will send to the United States Holders of ADSs a notice
explaining how to claim a refund, the form required to obtain the IRS Form 6166
certification and the German claim for refund form. The notice will describe how
to obtain the certification on IRS Form 6166. In order to claim a refund, the
United States Holder should deliver the certification provided to it by the IRS
to the Depositary along with the completed claim for refund form. In the case of
ADSs held through a broker or other financial intermediary, the required
documentation should be delivered to such broker or financial intermediary for
forwarding to the Depositary. In all other cases, the United States Holders
should deliver the required documentation directly to the Depositary. The
Depositary will file the required documentation with the German tax authorities
on behalf of the United States Holders.
The German tax authorities will issue the refunds, which will be
denominated in Marks, in the name of the Depositary. The Depositary will convert
the refunds into Dollars and issue corresponding refund checks to the United
States Holders or their brokers.
Refund of German Tax to Holders of ADSs or Preference Shares in Other Countries
A holder of ADSs or Preference Shares resident in a country other than
Germany or the United States that has a double taxation convention with Germany
may obtain a partial refund of German withholding taxes. Rates and procedures
may vary according to the applicable treaty. For details, such holders are urged
to consult their own tax advisors.
Taxation of Capital Gains
A capital gain derived from the sale or other disposition by a holder
resident in Germany of ADSs or Preference Shares is taxable if the ADSs or
Preference Shares are held as part of his or her trade or business or if the
ADSs or Preference Shares are sold within a period of six months after
acquisition.
A holder resident in a country other than Germany is not subject to German
income or corporation tax on the capital gain derived from the sale or other
disposition of ADSs or Preference Shares.
Other German Taxes
There are no German net worth, transfer, stamp or similar taxes on the
holding, purchase or sale of ADSs or Preference Shares.
German Estate and Gift Taxes
A transfer of ADSs or Preference Shares by gift or by reason of death of a
holder will be subject to German gift or inheritance tax, respectively, if one
of the following persons is resident in Germany: the donor or transferor or his
or her heir, or the donee or other beneficiary. If one of the aforementioned
persons is resident in Germany and another is resident in a country having a
treaty with Germany, regarding gift or inheritance taxes, different rules may
apply. If none of the aforementioned persons is resident in Germany the transfer
is not subject to German gift or inheritance tax. For persons giving up German
residence, special rules apply during the first five years, and under specific
circumstances, during the first ten years, after the end of the year in which
the person left Germany.
In general, in the case of a United States Holder, a transfer of ADSs or
Preference Shares by gift or by reason of death that would otherwise be subject
to German gift or inheritance tax, respectively, will not be subject to such
German tax by reason of the current estate tax treaty between the United States
and Germany unless the donor or transferor, or the heir, donee or other
beneficiary, is domiciled in Germany for purposes of the current estate tax
treaty between the United States and Germany at the time of the making of the
gift or at the time of the donor's or transferor's death.
26
<PAGE> 29
In general, the United States-Germany estate tax treaty provides a credit
against United States federal estate and gift tax liability for the amount of
inheritance and gift tax paid in Germany, subject to certain limitations, in a
case where the ADSs or Preference Shares are subject to German inheritance or
gift tax and United States federal estate or gift tax.
UNITED STATES TAXATION OF UNITED STATES HOLDERS OF PREFERENCE SHARES OR ADSS
The following discussion generally summarizes certain United States federal
income tax consequences of the acquisition, ownership and disposition of ADSs or
Preference Shares to a beneficial owner (i) who is an individual citizen or
resident of the United States or a corporation organized under the laws of the
United States or any political subdivision thereof, (ii) who is not resident in
Germany for German tax purposes, (iii) whose holding of ADSs or Preference
Shares does not form part of the business property or assets of a permanent
establishment or fixed base in Germany and (iv) who is fully entitled to the
benefits of the Treaty in respect of such ADSs or Preference Shares (a "United
States Holder").
This summary deals only with ADSs and Preference Shares that are held as
capital assets and does not address tax considerations applicable to United
States Holders that may be subject to special tax rules, such as dealers or
traders in securities, financial institutions, life insurance companies,
tax-exempt entities, United States Holders that hold Preference Shares or ADSs
as a part of straddle, conversion transaction or other arrangement involving
more than one position, United States Holders that own (or are deemed for United
States tax purposes to own) 10% or more of the total combined voting power of
all classes of voting stock of SAP, United States Holders that have a principal
place of business or "tax home" outside the United States or United States
Holders whose "functional currency" is not the United States Dollar.
The discussion below is based upon the United States Internal Revenue Code
of 1986, as amended (the "Code"), the Treaty and regulations, rulings and
judicial decisions thereunder at the date hereof. Any such authority may be
repealed, revoked or modified, perhaps with retroactive effect, so as to result
in federal income tax consequences different from those discussed below.
Opinions of tax counsel have no binding effect or official status of any kind;
no assurance can be given that the conclusions set out below would be sustained
by a court if challenged by the Internal Revenue Service (the "IRS"). The
discussion below also is based upon representations made by SAP, which in turn
rely upon certain significant assumptions as to facts and circumstances in the
future. It is also based, in part, on representations of the Depositary, and
assumes that each obligation in the Deposit Agreement and any related agreements
will be performed in accordance with its terms.
THE DISCUSSION SET OUT BELOW IS INTENDED ONLY AS A SUMMARY OF CERTAIN
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF AN INVESTMENT IN ADSs OR
PREFERENCE SHARES. PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS AS TO THE APPLICATION TO THEIR PARTICULAR SITUATION OF THE TAX
CONSIDERATIONS DISCUSSED BELOW, AS WELL AS THE APPLICATION OF STATE, LOCAL OR
FOREIGN TAX LAW. THE STATEMENTS OF UNITED STATES TAX LAW SET OUT BELOW ARE BASED
ON THE LAWS IN FORCE AND INTERPRETATIONS THEREOF AT THE DATE OF THIS FORM 20-F
AND ARE SUBJECT TO ANY CHANGES OCCURRING AFTER THAT DATE.
ADSs and Preference Shares
For United States federal income tax purposes, a United States Holder of
ADSs will be considered to own the Preference Shares represented thereby.
Distributions
Subject to the discussion below under "Passive Foreign Investment Company
Considerations," distributions made by SAP with respect to Preference Shares
(other than distributions in liquidation and certain distributions in redemption
of stock), including the amount of German tax deemed to have been withheld in
respect of such distributions, will be taxed to United States Holders as
ordinary dividend income to the extent
27
<PAGE> 30
that such distributions do not exceed the current and accumulated earnings and
profits of SAP as computed for United States federal income tax purposes. As
discussed above, a United States Holder may obtain a refund of German
withholding tax to the extent that the German withholding tax exceeds 10% of the
amount of the associated distribution. However, for United States federal income
tax purposes, the net cash distribution (equal to 90%) will be treated as if it
had been subject to a 15% German withholding tax and will be "grossed up"
accordingly. The total amount of the distribution therefore will be equal to the
sum of (i) the actual cash distribution net of the 10% withholding tax, (ii) the
10% tax actually withheld and (iii) an amount equal to 5.88% of the sum of (i)
and (ii). For example, if SAP distributes a cash dividend equal to U.S.$100 to a
United States Holder, the distribution currently will be subject to German
withholding tax of U.S.$25 plus U.S.$1.375 surtax, and the United States Holder
will receive U.S.$73.625. If the United States Holder obtains the Treaty refund,
he will receive an additional U.S.$16.375 from the German tax authorities. For
United States tax purposes, such United States Holder will be considered to have
received a total distribution of U.S.$105.88, which will be deemed to have been
subject to German withholding tax of U.S.$15.88 (15% of U.S.$105.88).
Distributions, if any, in excess of SAP's current and accumulated earnings
and profits will constitute a non-taxable return of capital to a United States
Holder and will be applied against and reduce the United States Holder's tax
basis in its Preference Shares. To the extent that such distributions exceed the
tax basis of the United States Holder in its Preference Shares, the excess
generally will be treated as capital gain.
In the case of a distribution in Marks, the amount of the distribution
generally will equal the Dollar value of the Marks distributed (determined by
reference to the spot currency exchange rate on the date of receipt of the
distribution (receipt by the Depositary in the case of a distribution on ADSs)),
regardless of whether the holder in fact converts the Marks into Dollars, and
the United States Holder will not realize any separate foreign currency gain or
loss (except to the extent that such gain or loss arises on the actual
disposition of foreign currency received).
Dividends paid by SAP generally will constitute "portfolio income" for
purposes of the limitations on the use of passive activity losses (and,
therefore, generally may not be offset by passive activity losses) and as
"investment income" for purposes of the limitation on the deduction of
investment interest expense. Dividends paid by SAP will not be eligible for the
dividends received deduction generally allowed to United States corporations
under Section 243 of the Code.
Under certain circumstances, a United States Holder may be deemed to have
received a distribution for United States federal income tax purposes upon an
adjustment, or the failure to make an adjustment, to the conversion price of the
1988 Bonds (see Item 12. "Options to Purchase Securities from Registrant or
Subsidiaries -- 1988 Program") or the 1994 Bonds.
Sale or Exchange
In general, assuming that SAP at no time is a passive foreign investment
company, upon a sale or exchange of Preference Shares to a person other than
SAP, a United States Holder will recognize gain or loss in an amount equal to
the difference between the amount realized on the sale or exchange and the
United States Holder's adjusted tax basis in the Preference Shares. Such gain or
loss will be capital gain or loss. Upon a sale of Preference Shares to SAP, a
United States Holder may recognize capital gain or loss or, alternatively, may
be considered to have received a distribution with respect to the Preference
Shares, in each case depending upon the application to such sale of the rules of
Section 302 of the Code.
Deposit and withdrawal of Preference Shares in exchange for ADSs by a
United States Holder will not result in its realization of gain or loss for
United States federal income tax purposes.
Foreign Tax Credit
In general, in computing its United States federal income tax liability, a
United States Holder may elect for each taxable year to claim a deduction or,
subject to the limitations on foreign tax credits generally, a credit for
foreign income taxes paid or accrued by it. For United States foreign tax credit
purposes, subject to
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<PAGE> 31
the applicable limitations under the foreign tax credit rules, the 15% German
tax that is treated as having been withheld from dividends paid to a United
States Holder will be eligible for credit against the United States Holder's
federal income tax liability. Thus, in the numerical example set out above, a
United States Holder who receives a cash distribution of U.S.$90 from SAP
(U.S.$100 of the initial distribution net of U.S.$25 of German withholding tax
and U.S.$1.375 of surtax plus the Treaty refund of U.S.$16.375) will be treated
as having been subject to German withholding tax in the amount of U.S.$15.88
(15% of U.S.$105.88) and will be able to claim the United States foreign tax
credit, subject to applicable foreign tax credit limitations, in the amount of
U.S.$15.88.
For United States foreign tax credit purposes, dividends paid by SAP
generally will be treated as foreign-source income and as "passive income" (or
in the case of certain holders, as "financial services income"). Gain realized
by a United States Holder on the sale or exchange of Preference Shares generally
will be treated as United States-source income.
The IRS is authorized to issue regulations to govern the source of losses
recognized on the sale of personal property (such as the Preference Shares).
Relevant legislative history suggests that the regulations generally should
treat a loss recognized by a United States Holder on the sale or exchange of
Preference Shares as United States-source loss. In connection with recently
proposed regulations, the IRS has stated that the sourcing of a loss from the
sale or exchange of portfolio stock (generally stock held by a less than 10%
shareholder) will be reviewed in the context of a broader regulations project.
The proposed regulations suggest that, in the interim, a loss on the sale or
exchange of Preference Shares generally would be treated as foreign-source loss.
At present, it is unclear whether these proposed regulations will be adopted
and, if adopted, whether they will be adopted in their present form. United
States Holders are encouraged to consult their own tax advisors regarding the
proper treatment of these losses for foreign tax credit purposes.
The availability of foreign tax credits depends on the particular
circumstances of each United States Holder. United States Holders are advised to
consult their own tax advisors.
Foreign Personal Holding Company Considerations
SAP does not believe that it or any of its subsidiaries currently is a
"foreign personal holding company" (an "FPHC") for United States federal income
tax purposes. SAP is not aware of any changes that would affect this conclusion
in the foreseeable future. A foreign corporation is an FPHC for a taxable year
if (i) at any time, more than 50% of its stock (by vote or by value) is owned
(directly, indirectly or by attribution) by or for not more than five
individuals who are citizens or residents of the United States (the "ownership
requirement") and (ii) at least 60% (50% in certain cases) of its gross income
is FPHC income, which generally includes dividends, interest, royalties (except
certain active business computer software royalties) and other types of
investment income (the "income requirement"). If SAP or one of its subsidiaries
were treated as an FPHC, then each United States Holder owning ADSs or
Preference Shares on the last day in the taxable year on which the ownership
requirement with respect to SAP or its subsidiary is met would be required to
include currently in taxable income as a dividend a pro rata share of SAP's or
the subsidiary's undistributed FPHC income, which is, generally, SAP's or the
subsidiary's taxable income with certain adjustments and after reduction for
certain dividend payments.
SAP does not believe that the ownership requirement is met at the date
hereof with respect to SAP or any of its subsidiaries. However, there can be no
assurance that the ownership requirement will not be met at some later time.
Whether the income requirement would be met with respect to SAP or any of its
subsidiaries at any such later date would depend on the nature and sources of
SAP's and each subsidiary's income at that time.
Passive Foreign Investment Company Considerations
Classification as a PFIC. Special and adverse United States tax rules apply
to a United States Holder that holds an interest in a "passive foreign
investment company" (a "PFIC"). In general, a PFIC is any non-United States
corporation, if (i) 75% or more of the gross income of such corporation for the
taxable year is passive income (the "income test") or (ii) the average
percentage of assets (by value) held by such
29
<PAGE> 32
corporation during the taxable year that produce passive income (e.g.,
dividends, interest, royalties, rents and annuities) or that are held for the
production of passive income is at least 50% (the "asset test"). A corporation
that owns, directly or indirectly, at least 25% by value of the stock of a
second corporation must take into account its proportionate share of the second
corporation's income and assets in applying the income test and the asset test.
Based on current projections concerning the composition of the SAP income
and assets, SAP does not believe that it will be treated as a PFIC for its
current or future taxable years. However, because this conclusion is based on
the Company's current projections and expectations as to its future business
activity, SAP can provide no assurance that it will not be treated as a PFIC in
respect of its current or any future taxable years.
Consequences of PFIC Status. If SAP is treated as a PFIC for any taxable
year during which a United States Holder holds Preference Shares, then, subject
to the discussion of the QEF and "mark-to-market" rules below, such United
States Holder generally will be subject to a special and adverse tax regime with
respect to any gain realized on the disposition of the Preference Shares and
with respect to certain "excess distributions" made to it by SAP. The adverse
tax consequences include taxation of such gain or excess distribution at
ordinary-income rates and payment of an interest charge on tax which is deemed
to have been deferred with respect to such gain or excess distributions. Under
the PFIC rules, excess distributions include dividends or other distributions
received with respect to the Preference Shares, if the aggregate amount of such
distributions in any taxable year exceeds 125% of the average amount of
distributions from SAP made during a specified base period.
In some circumstances, a United States Holder may avoid certain of the
unfavorable consequences of the PFIC rules by making a qualified electing fund
("QEF") election in respect of SAP. A QEF election effectively would require an
electing United States Holder to include in income currently its pro rata share
of the ordinary earnings and net capital gain of SAP. However, a United States
Holder cannot elect QEF status with respect to SAP unless SAP complies with
certain reporting requirements and there can be no assurance that SAP will
provide such information.
Effective for taxable years beginning after December 31, 1997, a United
States Holder that holds "marketable" stock in a PFIC may, in lieu of making a
QEF election, also avoid certain unfavorable consequences of the PFIC rules by
electing to mark the PFIC stock to market at the close of each taxable year. SAP
expects that the Preference Shares will be "marketable" for this purpose. A
United States Holder that makes the mark-to-market election will be required to
include in income each year as ordinary income an amount equal to the excess, if
any, of the fair market value of the stock at the close of the year over the
United States Holder's adjusted tax basis in the stock. If, at the close of the
year, the United States Holder's adjusted tax basis exceeds the fair market
value of the stock, then the United States Holder may deduct any such excess
from ordinary income, but only to the extent of net mark-to-market gains
previously included in income. Any gain from the actual sale of the PFIC stock
will be treated as ordinary income, and any loss will be treated as ordinary
loss to the extent of net mark-to-market gains previously included in income.
TAXATION OF HOLDERS OF ADSS OR PREFERENCE SHARES IN OTHER COUNTRIES
Holders or potential holders of ADSs or Preference Shares who are resident
or otherwise taxable in countries other than Germany and the United States are
urged to consult their own tax advisors concerning the overall tax consequences
of the acquisition, ownership and disposition of ADSs or Preference Shares.
ITEM 8. SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected consolidated financial information of the Company is
derived from, and is qualified by reference to, the Company's consolidated
financial statements included herein and notes thereto audited, in respect of
1997, 1996 and 1995, by ARTHUR ANDERSEN Wirtschaftsprufungsgesellschaft
Steuerberatungsgesellschaft mbH and, in respect of 1994 and 1993, by AW Treuhand
Andersen & Wipfler GmbH Wirtschaftsprufungsgesellschaft (a subsidiary of ARTHUR
ANDERSEN Wirtschaftsprufungsgesellschaft Steuerberatungsgesellschaft mbH), each
independent auditors. The audited consolidated income
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<PAGE> 33
statements for the years ended December 31, 1997, 1996 and 1995, consolidated
statements of fixed assets for the years ended 1997 and 1996 and consolidated
balance sheets at December 31, 1997 and 1996 are included under "Item 18.
Financial Statements." The Company's consolidated financial statements included
herein have been prepared in accordance with generally accepted accounting
principles in Germany ("German GAAP").
The selected consolidated financial data in accordance with generally
accepted accounting principles in the United States ("U.S. GAAP") at and for the
years ended December 31, 1997 and 1996 have been derived from the Company's
consolidated financial statements included in "Item 18. Financial Statements."
German GAAP differs in certain significant respects from U.S. GAAP. A
reconciliation of the differences between German GAAP and U.S. GAAP which
materially affect the determination of net income for the years ended December
31, 1997 and 1996, and shareholders' equity at December 31, 1997 and 1996 is set
forth in note 40 to the Company's consolidated financial statements included
herein.
The selected financial data set forth below should be read in conjunction
with, and are qualified by reference to, the related consolidated financial
statements of the Company included herein and notes thereto and "Item 9.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(in thousands, except share and per share data and
employee numbers and where otherwise indicated)
---------------------------------------------------------------------
1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- ---------
U.S.$(1) DM DM DM DM DM
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Amounts in accordance with
German GAAP
Product revenues................ 2,277,315 4,097,117 2,630,512 1,933,811 1,304,470 685,760
Consulting and training
revenues...................... 1,017,762 1,831,056 1,041,404 724,134 493,885 387,074
Other........................... 49,632 89,293 50,234 38,436 32,788 28,900
--------- --------- --------- --------- --------- ---------
TOTAL SALES REVENUES....... 3,344,709 6,017,466 3,722,150 2,696,381 1,831,143 1,101,734
--------- --------- --------- --------- --------- ---------
Other operating income(2)....... 45,822 82,438 74,673 54,789 31,918 34,491
Cost of services and materials
and operating expenses:
Cost of services and
materials.................. 336,679 605,719 394,384 300,647 187,822 100,667
Personnel expenses............ 1,153,310 2,074,920 1,338,473 956,744 675,212 466,161
Depreciation and
amortization............... 108,566 195,321 164,591 144,456 88,662 61,785
Other operating expenses...... 895,852 1,611,728 955,746 697,455 462,126 279,852
--------- --------- --------- --------- --------- ---------
Total cost of services and
materials and operating
expenses................. 2,494,407 4,487,688 2,853,194 2,099,302 1,413,822 908,465
--------- --------- --------- --------- --------- ---------
Operating results............... 896,124 1,612,216 943,629 651,868 449,239 227,760
Financial results(3)............ 30,416 54,720 23,584 22,198 22,016 28,959
--------- --------- --------- --------- --------- ---------
Results from ordinary
operations.................... 926,540 1,666,936 967,213 674,066 471,255 256,719
Taxes on income................. 393,727 708,354 382,414 258,665 176,160 101,311
Other taxes..................... 18,469 33,228 17,263 10,573 13,921 9,094
--------- --------- --------- --------- --------- ---------
Total taxes................ 412,196 741,582 399,677 269,238 190,081 110,405
--------- --------- --------- --------- --------- ---------
Net income...................... 514,344 925,354 567,536 404,828 281,174 146,314
Earnings per share(4)........... 4.93 8.87 5.48 4.00 2.78 1.46
</TABLE>
31
<PAGE> 34
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(in thousands, except share and per share data and
employee numbers and where otherwise indicated)
---------------------------------------------------------------------
1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- ---------
U.S.$(1) DM DM DM DM DM
<S> <C> <C> <C> <C> <C> <C>
Amounts in accordance with U.S.
GAAP
Total sales revenues............ 3,285,017 5,910,073 3,552,365 N/A N/A N/A
Net income...................... 485,564 873,574 452,151 N/A N/A N/A
Earnings per share:............. N/A N/A N/A
Basic
DM 50 Ordinary Shares and DM 5
Ordinary Shares............ 4.66 8.38 4.40 N/A N/A N/A
DM 50 Preference Shares and DM
5 Preference Shares........ 4.70 8.46 4.47 N/A N/A N/A
Diluted
DM 5 Ordinary Shares and DM 50
Ordinary Shares............ 4.61 8.30 4.29 N/A N/A N/A
DM 5 Preference Shares and DM
50 Preference Shares....... 4.61 8.30 4.31 N/A N/A N/A
OTHER DATA:
Ratio of earnings to combined
fixed charges and preferred
dividends in accordance
with German GAAP(5)........ N/A 23.97x 23.55x 21.90x 24.55x 18.09x
Ratio of earnings to combined
fixed charges and preferred
dividends in accordance
with U.S. GAAP(5).......... N/A 23.24x 20.81x N/A N/A N/A
BALANCE SHEET DATA:
Amounts in accordance with
German GAAP
Cash and cash equivalents and
marketable securities......... 647,274 1,164,512 902,285 397,755 347,225 433,873
Total assets.................... 2,818,221 5,070,260 3,367,104 2,218,162 1,749,729 1,306,185
Shareholders' equity............ 1,702,169 3,062,372 2,211,312 1,529,520 1,236,206 1,008,618
Short-term bank loans and
overdrafts.................... 90,675 163,134 90,272 59,686 47,189 25,442
Long-term financial debt(5)..... 2,849 5,126 8,825 20,546 21,946 1,000
Amounts in accordance with U.S.
GAAP
Total assets.................... 2,909,248 5,234,028 3,467,803 N/A N/A N/A
Shareholders' equity............ 1,577,489 2,838,059 2,031,869 N/A N/A N/A
</TABLE>
- ---------------
(1) Amounts in the column are unaudited and translated at DM 1.7991 to
U.S.$1.00, the Noon Buying Rate on December 31, 1997. See "-- Exchange
Rates" for recent exchange rates between the Mark and the Dollar.
(2) Other operating income includes increases in inventory of unfinished
services.
(3) Financial results include income from investments, net interest income,
write-down on financial assets, and income from marketable securities and
loans of financial assets.
(4) Earnings per share have been calculated in accordance with the guidelines
established by the German Association of Financial Analysts (Deutsche
Vereinigung fur Finanzanalyse und Anlageberatung e.V.). Such amounts are
equal to net income divided by (a) the total number of DM 50 Ordinary Shares
and DM 5 Ordinary Shares outstanding at year end and (b) the total number of
DM 50 Preference Shares and DM 5 Preference Shares outstanding at year end.
Historical earnings per share and dividends per share have been calculated
assuming that (i) each DM 50 Ordinary Share equaled ten DM 5 Ordinary Shares
and (ii) each DM 50 Preference Share equaled ten DM 5 Preference Shares.
Earnings per share amounts are computed on a DM 5 per share basis. On May 7,
1998, SAP's shareholders passed a resolution converting SAP's share capital
to no nominal value shares, in accordance with
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<PAGE> 35
recently enacted amendments to the German Stock Corporation Act. This
resolution took effect on June 16, 1998, when it was recorded in the
commercial register in Heidelberg, Germany. See "Item 14. Description of
Securities to be Registered -- Share Capital."
(5) In calculating the ratio of earnings to fixed charges, earnings consist of
income before income taxes plus fixed charges. Fixed charges consist of
interest expense plus one-third of rental expense under operating leases
(the portion that has been deemed by the Company to be representative of an
interest factor).
(6) Long-term financial debt represents financial liabilities with a remaining
life beyond one year. Most of the Company's long-term financial debt
represents outstanding 1988 Bonds (See "Item 12. Options to Purchase
Securities from Registrant or Subsidiaries -- 1988 Program") and 1994 Bonds
issued to Company employees. See "Item 12. Options to Purchase Securities
from Registrant or Subsidiaries."
EXCHANGE RATES
The Mark is part of the European Monetary System ("EMS") exchange rate
mechanism. Within the EMS, exchange rates may fluctuate within permitted
margins, controlled by central bank intervention. Against currencies outside the
EMS, the Mark has, in theory, free floating exchange rates, although central
banks sometimes try to confine short-term exchange rate fluctuations by
intervening in foreign exchange markets. Beginning in January 1999, the EURO is
scheduled to be introduced in certain EMU countries. By June 30, 2002 at the
latest, all participating EMU countries will need to be operating with the EURO
as their single currency.
Fluctuations in the exchange rate between the Mark and the Dollar will
affect the Dollar equivalent of the Mark price of the Preference Shares traded
on the German stock exchanges and, as a result, will affect the price of the
ADSs in the United States. Such fluctuations will also affect the Dollar amounts
received by the holders of ADSs on the conversion into Dollars of cash dividends
paid in Marks on the Preference Shares represented by the ADSs. See "Item 14.
Description of Securities to be Registered -- Description of ADSs."
A substantial portion of SAP's revenues and expenses is denominated in
currencies other than the Mark. Therefore, results of operations and cash flows
may be materially affected by movements in the exchange rate between the Mark
and the respective currencies to which SAP is exposed. The effect of the planned
adoption of the EURO on SAP's operations is difficult to predict with certainty
at this stage because of the complexity of the relevant factors and the
uncertain timing of such adoptions. For a discussion of the effect exchange rate
fluctuations have on SAP's business and operations, as well as the hedging
techniques used to manage SAP's exposure to such fluctuations, see "Item 9.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The following table sets forth, for the periods and dates indicated, the
average, high, low and period-end Noon Buying Rates for Marks expressed in Marks
per Dollar.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, PERIOD-END AVERAGE(1) HIGH LOW
------------ ---------- ---------- ------ ------
<S> <C> <C> <C> <C>
1993..................................... 1.7395 1.6610 1.7405 1.5675
1994..................................... 1.5495 1.6119 1.7627 1.4920
1995..................................... 1.4345 1.4261 1.5612 1.3565
1996..................................... 1.5387 1.5049 1.5655 1.4354
1997..................................... 1.7991 1.7371 1.8913 1.5389
1998 (through June 18, 1998)............. 1.7927 1.8067 1.8542 1.7590
</TABLE>
- ---------------
(1) The average of the Noon Buying Rates on the last day of each month during
the relevant period.
On, June 18, 1998, the Noon Buying Rate was DM 1.7927 per U.S.$1.00.
DIVIDENDS
Dividends are jointly proposed by SAP's Supervisory Board and Executive
Board based on the Company's year-end financial statements, subject to approval
by holders of Ordinary Shares, and are officially declared in respect of the
prior year at SAP's annual general shareholders' meeting. SAP's annual general
shareholders' meeting is usually convened during the second quarter of each
year. Historically, SAP has declared and paid its dividends in Marks. Since
Ordinary Shares and Preference Shares are in bearer form,
33
<PAGE> 36
dividends are either remitted to the custodian bank on behalf of the shareholder
within one business day following the annual general shareholders' meeting or,
in the case of shareholders holding physical certificates, available promptly
following the annual general shareholders' meeting upon submission of the
dividend coupon to the paying agent therefor. See "Item 14. Description of
Securities to be Registered -- Description of Preference Shares -- Dividend and
Liquidation Rights." Record holders of the ADSs on the dividend record date will
be entitled to receive payment in full of the dividend declared in respect of
the year for which it is declared. Cash dividends payable to such holders will
be paid to the Depositary in Marks and, subject to certain exceptions, will be
converted by the Depositary into Dollars. See "Item 14. Description of
Securities to be Registered -- Description of ADSs." The amount of dividends
received by holders of ADSs may be affected by fluctuations in exchange rates.
See "-- Exchange Rates." Dividends paid to holders of the ADSs or Preference
Shares may be subject to German withholding tax. See "Item 7. Taxation."
The following table sets forth the annual dividends paid per Ordinary Share
and Preference Share in Marks in respect of each of the years indicated.
<TABLE>
<CAPTION>
YEAR ENDED DIVIDEND PAID PER DIVIDEND PAID PER
DECEMBER 31, ORDINARY SHARE(1) PREFERENCE SHARE(1)
------------ ------------------ --------------------
DM U.S.$(2) DM U.S.$(2)
<S> <C> <C> <C> <C>
1993...................................... 0.44 0.27 0.48 0.30
1994...................................... 0.85 0.62 0.90 0.65
1995...................................... 1.30 0.85 1.35 0.88
1996...................................... 2.30(3) 1.35 2.35(3) 1.38
1997...................................... 2.80 1.58 2.85 1.61
</TABLE>
- ---------------
(1) Adjusted to reflect (i) the capital increase from reserves which took effect
on August 9, 1994, pursuant to which holders of Ordinary Shares and
Preference Shares received four additional shares for each such share owned
by such holders, and (ii) a 1:10 stock split with respect to 706,000 DM 50
Ordinary Shares and 1,950,000 DM 50 Preference Shares to reflect the
reduction in the nominal value of such DM 50 Ordinary Shares and DM 50
Preference Shares from DM 50 to DM 5. On May 7, 1998, SAP's shareholders
passed a resolution converting SAP's share capital to no nominal values
shares. This resolution took effect on June 16, 1998, when it was recorded
in the commercial register in Heidelberg, Germany. See "Item 14. Description
of Securities to be Registered -- Share Capital."
(2) Translated into Dollars at the Noon Buying Rate on the dividend payment
date.
(3) Includes anniversary bonus in the amount of DM 0.5.
The amount of dividends paid on the Preference Shares depends on the amount
of profits to be distributed by SAP, which depends in part upon the performance
of the Company. A holder of Preference Shares is entitled to a cumulative annual
preferred dividend which exceeds the annual dividend paid to holders of Ordinary
Shares by an amount equal to DM 0.05 per Preference Share but in any event no
less than a minimum dividend equal to DM 0.05 per Preference Share. See "Item
14. Description of Securities to be Registered -- Description of Preference
Shares -- Dividend and Liquidation Rights." Although SAP expects to continue to
pay dividends on the Preference Shares, the timing and amount of future dividend
payments will depend upon the Company's future earnings, its capital needs and
other relevant factors.
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Investors are cautioned that this Item 9 contains forward-looking
statements that involve risks and uncertainties. When used in this Item 9, the
words "anticipate," "believe," "estimate," "intend," "will" and "expect" and
similar expressions as they relate to the Company or its business are intended
to identify such forward-looking statements. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events, or otherwise. Actual results,
performances or achievements could differ materially from those expressed or
implied in such forward-looking statements. Factors that could cause or
contribute to such differences include those described under the heading "Risk
Factors" in the Form F-1, as well as the factors discussed elsewhere in this
Form 20-F. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of their dates. The following
discussion and analysis should be read in conjunction with the Company's
consolidated financial statements included herein and notes thereto.
34
<PAGE> 37
ACCOUNTING PRINCIPLES
The consolidated financial statements of the Company included herein have
been prepared in accordance with German GAAP, which varies in certain
significant respects from U.S. GAAP. The following discussion is based upon
financial information prepared in conformity with German GAAP. For a discussion
of significant German accounting principles used in preparation of the
consolidated financial statements, see the notes to the Company's consolidated
financial statements included herein. Application of U.S. GAAP would have
affected net income for each of the two years ended December 31, 1997 and 1996
to the extent shown in note 40 to the Company's consolidated financial
statements included herein.
OVERVIEW
The Company 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 products, the R/3 System and the
R/2 System, are designed to provide customers with a palette of standard
business solutions arranged in applications which 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.
On December 31, 1997, the Company had more than 13,000 System installations
in over 8,500 customers ranging in size from multinational enterprises to
medium- and smaller-sized businesses. For the year ended December 31, 1997, the
Company's sales revenues were approximately DM 6.02 billion as compared to DM
3.72 billion for the year ended December 31, 1996, with net income after taxes
of DM 925.4 million and DM 568 million, respectively. The Company consists of
SAP and its network of approximately 50 operating subsidiaries and has a
presence or a representative in approximately 90 countries.
The Company's principal sources of revenue are product revenues and
consulting and training revenues. Product revenues consist primarily of license
fees and maintenance fees. License fees are derived from the licensing of the
R/3 System and the R/2 System to customers. The Company provides optional
maintenance services for a fixed fee calculated on the basis of the initial
license fee paid by the customer. The maintenance services entitle the customer
to upgrades and enhancements through new System releases, versions and
correction levels, telephone support on the use of the products and assistance
in resolving problems, remote support, access to online bulletin board support
services and, if purchased separately, SAP EarlyWatch, a world-wide remote
monitoring and diagnosis service for the R/3 System. The Company's consulting
and training revenues are derived primarily from the services it renders with
respect to implementation, consulting and training of customer project teams and
end users in connection with the installation of the Systems in customers'
enterprises, as well as training third-party consultants with respect to the
Company's products.
The Company generally licenses its products to customers on a "right to
use" basis pursuant to a perpetual license. These license agreements are
generally in standard form, although each license is individually negotiated and
may contain variations. The license is generally non-transferable or, if
transferable, the transfer is subject to the Company's reasonable approval. The
standard end user license agreement for the R/3 System provides for an initial
license fee based on the number and types of identified users. Additional
licensing fees are charged when the designated number of users is increased. The
standard end user license agreement for the R/2 System provides for an initial
fee based on the number and nature of functions and applications licensed by the
customer and on the type of mainframe computer class being used. This standard
license agreement provides that the R/2 System, as configured, can be used in
perpetuity by the specified users on a limited number of central processing
units. Additional R/2 System licensing fees are charged when additional
functions or applications are licensed or when the type of mainframe computer
class being used is changed.
The Company recognizes software license fee revenues when the customer has
legally signed an irrevocable contract with the Company and the software has
been delivered in full. Under certain license agreements, customers may agree to
license additional groups of users at prescribed future dates on a non-
35
<PAGE> 38
cancelable basis. License agreements with customers seeking to implement the
Systems with a large number of users sometimes provide for increases in the
number of users over a period of time. Under these circumstances, the Company
recognizes revenue for such additional users at the date on which the customer's
commitments with respect to such additional users become effective.
Maintenance fees are generally payable in advance at the beginning of each
maintenance period and maintenance revenues are recognized pro rata over the
duration of the maintenance period. Virtually all of the Company's customers
elect to receive maintenance services from the Company. Few of the Company's
customers have terminated such services.
Consulting and training fees are recognized at the time the service is
rendered and are typically calculated at the Company's list price for such
services.
SAP intends to convert all of SAP's share capital and its financial
accounting and reporting currency into the EURO by January 1, 1999.
EXCHANGE RATE EXPOSURE
A significant portion of the Company's business is conducted in currencies
other than the Mark. International sales are primarily made through the
Company's subsidiaries in the respective regions and are generally denominated
in the local currency. Expenses incurred by the subsidiaries are also
denominated in the local currency. Accordingly, the functional currency of the
Company's subsidiaries is the local currency. Of the Company's consolidated
revenues in 1997 and 1996, approximately 81% and 75%, respectively, were
attributable to non-German operations and translated into Marks. As a
consequence, period to period changes in the average exchange rate in a
particular currency can significantly affect revenues and operating income
denominated in that currency. In general, appreciation of the Mark relative to
another currency has an adverse effect on revenues and operating income
denominated in that currency, while depreciation of the Mark has a positive
effect on revenues and operating income denominated in the non-Mark currency.
The principal non-Mark currencies in which SAP's subsidiaries conduct
business that are subject to the risks described in the immediately preceding
paragraph are the U.S. Dollar, the Japanese Yen, the Swiss Franc, the British
Pound Sterling, the Canadian Dollar and the Australian Dollar. The effect of
depreciation in the value of the Mark relative to such currencies on the
Company's consolidated revenues, results from ordinary operations and net income
was in each case approximately DM 423.1 million, DM 117.2 million and DM 85.5
million, respectively, for 1997 and DM 58.9 million, DM 17.7 million and DM 15.3
million, respectively, for 1996. The Company utilizes foreign currency forward
contracts and foreign currency options to manage currency exchange rate risks as
further discussed in "Item 9A. Quantitative and Qualitative Disclosure About
Market Risk."
INTEREST RATE EXPOSURE
The Company invests its cash primarily in bank time deposits and fixed and
variable rate marketable debt securities. The majority of such investments are
denominated in Marks. Cash held by foreign subsidiaries is generally held in
short-term time deposits denominated in the local currency.
Net interest income increased to DM 52.6 million in 1997 compared to DM
27.8 million and DM 22.2 million in 1996 and 1995, respectively. The increases
in net interest income for fiscal 1997 and fiscal 1996 are primarily the result
of a larger average portfolio of cash and cash equivalents and marketable
securities. See note 34 to the Company's consolidated financial statements
included herein.
While the Company is exposed generally to fluctuations in the interest
rates of many of the world's leading industrialized countries, the Company's
interest income and expense is most sensitive to fluctuations in the level of
German interest rates. The fair market values of both fixed and variable rate
investments are exposed to such interest rate risk. To the extent that interest
rates rise, fixed interest securities may be adversely impacted whereas a
decline in interest rates may decrease the anticipated interest income for
variable rate investments. The Company utilizes interest rate swaps to manage
interest rate risks as further discussed in "Item 9A. Quantitative and
Qualitative Disclosure About Market Risk."
36
<PAGE> 39
INFLATION
During the years 1997, 1996 and 1995, the effects of inflation on the
Company's operations have not been material.
QUARTERLY RESULTS OF OPERATIONS
The Company's net revenues and operating results can vary, sometimes
substantially, from quarter to quarter, causing significant variations in
operating results during certain quarters. The Company's revenues in general,
and in particular its license revenues, are difficult to forecast for a number
of reasons, including (i) the relatively long sales cycles for the Company's
products, (ii) the size and timing of individual license transactions, (iii) the
timing of the introduction of new products or product enhancements by the
Company or its competitors, (iv) the potential for delay or deferral of customer
implementations of the Company's software, (v) changes in customer budgets, (vi)
seasonality of technology purchases and (vii) other general economic conditions.
Historically, the Company's business, as is common in the software industry, has
experienced its highest revenues in the fourth quarter of each year, due
primarily to year-end capital purchases by customers. Such factors have resulted
in 1997, 1996 and 1995 first quarter revenues being lower than revenues in the
prior year's fourth quarter. The Company believes that this trend will continue
and expects that its operating results will peak in the fourth quarter of each
year and decline from that level in the first quarter of the following year.
Because the Company's operating expenses are based upon anticipated revenue
levels and because a high percentage of the Company's expenses are relatively
fixed in the near term, any shortfall in anticipated revenue or delay in
recognition of revenue could result in significant variations in the operating
results from quarter to quarter. In addition, the Company may not be able to
confirm any such shortfalls until late in the quarter or following the end of
the quarter because license agreements are often executed late in a quarter.
YEAR 2000
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than two years, computer systems and/or
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements. The Company has performed extensive testing to
validate that the R/3 System and the R/2 System are Year 2000 compliant. This
testing process was monitored and certified by the Technischer Uberwachungs
Verein e.V. (TUV) to verify that such testing processes were sufficient to
determine that the software is Year 2000 compliant.
The Company utilizes third-party vendor network equipment,
telecommunication products and other third party software products which may or
may not be Year 2000 compliant. The Company has in place a plan which identifies
the third-party software products which must be upgraded and provides for a
timetable with respect to completion of these upgrades. Such plan contemplates
system upgrades from existing vendors. The Company has requested assurances from
such third-party software vendors that plans are in process to make necessary
modifications to achieve compliance with Year 2000 processing requirements. The
Company does not expect that the cost of such upgrades will be material and does
not anticipate a material disruption in its operations, capital resources or
cash flows as a result of such upgrades. However, there can be no assurance that
the software products supplied to the Company by such third-party vendors will
achieve Year 2000 compliance in a timely manner. Failure of any critical
technology components to operate properly in the Year 2000 may have an adverse
impact on the business, operations, financial condition or cash flows of the
Company.
37
<PAGE> 40
REVENUE BY GEOGRAPHIC LOCATION
The Company operates its business in three principal geographic locations,
namely Europe, North and South America (the "Americas") and Asia-Pacific/Africa.
The Company allocates revenue amounts to the region in which the customer is
located. The following table sets forth, for the periods indicated, the sales
revenues allocated to each of the Company's three principal geographic
locations.
<TABLE>
<CAPTION>
(in millions of DMs)
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Europe.......................................... 2,544.5 1,799.7 1,422.5
Americas........................................ 2,594.8 1,385.7 947.9
Asia-Pacific/Africa............................. 878.2 536.8 325.8
------- ------- -------
Total................................. 6,017.5 3,722.2 2,696.2
======= ======= =======
</TABLE>
Europe. Approximately 42.3% of the Company's 1997 revenues were derived
from Europe compared to 48.3% and 52.8% in 1996 and 1995, respectively. The
Company's revenues from Europe are derived primarily from Germany, the United
Kingdom, France, Switzerland, the Netherlands and Austria.
Americas. Revenues from the United States represent approximately 81.1% of
the Company's total Americas market, with the majority of the remaining balance
from Canada, Brazil, Mexico, Argentina, and Venezuela. Approximately 43.1% of
the Company's 1997 revenues was derived from the Americas, compared to 37.2% in
1996 and 35.2% in 1995. The shift of the net revenue percentages to the Americas
from other regions from year to year reflects the Company's continued expansion
in the United States.
Asia-Pacific/Africa. Approximately 14.6% of the Company's 1997 revenues
were derived from this region, compared to 14.4% and 12.1% in 1996 and 1995,
respectively. The Company's revenues from the Asia-Pacific/Africa region derive
primarily from Japan, Australia, South Africa, South Korea, Singapore and
Malaysia.
The Company has reassessed, and continues to closely monitor, its
international business risks due to recent economic and political conditions in
the Asian-Pacific region. During 1997, 1.7% of the Company's revenues were
derived from Asian-Pacific countries that the Company believes to be subject to
significant economic and currency exchange risks (Indonesia, Thailand, Malaysia,
the Philippines and Korea). Other Asian-Pacific countries (Japan, Australia, New
Zealand, Singapore, India, China and Taiwan) accounted for 11.7% of the
Company's revenues during 1997. Although the Company does not believe that the
conditions in the Asian-Pacific region will materially impact its business based
upon management's most current evaluation of the present situation, there can be
no assurance that the current economic or political conditions in the
Asian-Pacific region will not worsen or that the situation will not negatively
affect the Company's financial condition or results of operations.
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Revenues
Total sales revenues increased from DM 3,722.2 million for 1996 to DM
6,017.5 million for 1997, representing an increase of DM 2,295.3 million or
61.7%. The primary revenue items contributing to the increase in total sales
revenues were increases in product and consulting and training revenues.
Product Revenues. Product revenues increased from DM 2,630.5 million for
1996 to DM 4,097.1 million for 1997, representing an increase of DM 1,466.6
million or 55.8%. Aggregate product revenues as a percentage of total sales
revenues were 70.7% in 1996 and 68.1% in 1997. The primary reason for this
growth in product revenue was an increase in the number of software licenses for
new and existing customers, the expansion of the Company's operations,
particularly in North America, Latin America and Asia-Pacific and growth in
vertical markets through the Company's industry solutions program. The growth in
product revenue is also attributable to demand for software that complies with
"Year 2000" requirements and with the EMU's
38
<PAGE> 41
conversion to the EURO, including business processing during the dual-currency
phase. In addition, increased demand within the application software industry
was driven by continued globalization of businesses and the need for an
increased level of integration between businesses and their partners in the
areas of collaboration, supply chain and electronic commerce. Furthermore, a
general increase in information technology spending results from companies'
desires to obtain better data more quickly, thus allowing for faster responses
to increased levels of industry competition. There can be no assurance that
these positive effects on product revenues will continue in the future.
Product revenues attributable to the R/2 System declined by 9% from DM
242.5 million in 1996 to DM 222.6 million in 1997. This decline was due
primarily to the general shift in computer hardware from mainframe-oriented data
processing to the client/server model of computing. The Company believes that
R/2 System product revenues will continue to decline.
Consulting and Training Revenues. Consulting revenues increased from DM
735.3 million in 1996 to DM 1,251.2 million in 1997, representing an increase of
70.2%. Consulting revenues as a percentage of total sales revenues increased
from 19.8% in 1996 to 20.8% in 1997.
Training revenues increased by 89.4% from DM 306.1 million in 1996 to DM
579.9 million in 1997. This increase was primarily due to the increase in the
number of installations, significant capital investments that were made in the
infrastructure of the training operations during 1996 and increased customer
satisfaction. Additionally, during 1997 customers were able to purchase training
materials that allowed the training application to be customized for their
internal training needs.
Consulting and training fee revenues attributable to the R/2 System
declined by 32.1% from DM 235.4 million in 1996 to DM 159.9 million in 1997. The
Company believes that these revenues will continue to decline.
Costs of Services and Materials and Operating Expenses
Cost of services and materials and operating expenses increased from DM
2,853.2 million for 1996 to DM 4,487.7 million for 1997, representing an
increase of DM 1,634.5 million, or 57.3%. The primary expense items contributing
to the increase in these expenses are outlined below.
Cost of Services and Materials. Cost of services and materials consists
primarily of fees paid to independent contractors assisting the Company in
supporting its customers and in developing enhancements to the Company's
products. The cost of services and materials also consists of telephone hotline
support of customers and the cost of multilingual product documentation. The
cost of services and materials increased by 53.6% from DM 394.4 million for 1996
to DM 605.7 million for 1997. The primary reason for this increase is the
continuing growth of purchased services for third-party consulting.
Personnel Expenses. Personnel expenses represent the costs of the salary
and benefits payable to personnel. Personnel expenses increased by 55.0% from DM
1,338.5 million for 1996 to DM 2,074.9 million for 1997. The overall number of
employees increased from 9,202 to 12,856 at December 31, 1996 and 1997,
respectively. The number of sales and marketing employees increased from 1,735
to 2,423 at December 31, 1996 and 1997, respectively, representing an increase
of 39.7%.
Depreciation and Amortization. Depreciation charges relate primarily to the
depreciation of buildings, computer hardware and equipment and other tangible
fixed assets owned by the Company. Amortization arises primarily from the
amortization of the cost of software purchased by the Company and goodwill
arising from business acquisitions consummated in 1997. Depreciation and
amortization increased from DM 164.6 million for 1996 to DM 195.3 million for
1997, representing an increase of 18.7%.
Other Operating Expenses. Other operating expenses include marketing,
travel, license fees paid to third parties for databases and the CSPs, rental
and leasing, communications, administration and entertainment expenses. Other
operating expenses increased from DM 955.8 million for 1996 to DM 1,611.7
million for 1997, representing an increase of 68.6%. This increase is
attributable to increased marketing, license, travel and rent expenses to
support the continued growth of operations. The Company continued to lease
computer
39
<PAGE> 42
hardware and equipment in 1997 to keep pace with the rapid advancement of
computer hardware technology, which in turn increased rent expenses in 1997.
Operating Results
Operating results, which reflect total revenues less operating expenses,
increased from DM 943.6 million for 1996 to DM 1,612.2 million for 1997, or
70.9%. Operating results as a percentage of total sales revenues increased from
25.4% in 1996 to 26.8% in 1997.
Financial Results
Financial results are comprised primarily of net interest and similar
income, write-down of financial assets, income from marketable securities and
loans of financial assets. Financial results increased from DM 23.6 million for
1996 to DM 54.7 million for 1997, an increase of 132%. The continuing
improvement in financial results was due to a larger average portfolio of cash
and cash equivalents and marketable securities.
Taxes
The Company's effective income tax rate on results from ordinary operations
increased from 39.5% for 1996 to 42.5% for 1997. This increase was due primarily
to differing local tax treatments associated with the 1996 conversions and
distributions under the 1994 Program. The deductions taken for the 1997
distribution related to the 1994 Program were not significant.
Net Income
Net income increased from DM 567.5 million in 1996 to DM 925.4 million in
1997, or 63.1%. Net income as a percentage of total sales revenues increased
from 15.2% for 1996 to 15.4% for 1997.
Research and Development Expenses
The Company expenses research and development expenses on a current basis
when incurred. The Company does not present research and development expenses
separately in its financial statements. The Company considers its research and
development expenses to include those personnel expenses related to research and
development employees, expenditures on computer hardware used in research and
development and expenditures on independent contractors retained by the Company
to assist in its research and development. Research and development expenses
increased by DM 224.3 million, or 38.1%, from DM 589.0 million in 1996 to DM
813.3 million in 1997. As a percentage of total sales revenues, research and
development expenses decreased from 15.8% for 1996 to 13.5% for 1997. The reason
for the decline in research and development expense as a percentage of total
revenues was the continued rapid growth rate of revenues related to sales of the
R/3 System. Of the Company's total research and development expenses for 1996
and 1997, 43.3% and 47.1%, respectively, constituted personnel expenses. The
number of research and development employees increased from 2,059 in 1996 to
2,876 in 1997, representing an increase of 39.7%.
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
Revenues
Total sales revenues increased from DM 2,696.4 million in 1995 to DM
3,722.2 million in 1996, representing an increase of DM 1,025.8 million or 38%.
The primary revenue items contributing to the increase in total sales revenues
were increases in product revenues and consulting and training revenues.
Product Revenues. Product revenues increased from DM 1,933.8 million in
1995 to DM 2,630.5 million in 1996, representing an increase of DM 696.7 million
or 36.0%. Aggregate product revenues as a percentage of total sales revenues
were 71.7% in 1995 and 70.7% in 1996. The increase in product revenues was due
primarily to a significant increase in licensing fees attributable to the R/3
System. System licensing fee revenues increased significantly in most of the
countries in which the Company operated. The greatest
40
<PAGE> 43
increase with respect to such revenues occurred in the United States. See
"-- Revenue by Geographic Location."
Consulting and Training Revenues. Consulting revenues increased from DM
499.1 million in 1995 to DM 735.3 million in 1996, representing an increase of
47.3%, due primarily to increases in the licensing of the R/3 System. Consulting
revenues as a percentage of total sales revenues increased from 18.5% in 1995 to
20% in 1996. The rate of consulting revenue increases, however, was slower than
the rate of increases in total sales revenues during the corresponding periods
as a result of the Company's strategy of supplementing its customer support
services through cooperation with third-party consultants, while concentrating
on marketing the R/3 System to a broadening customer base and promoting the
development and enhancement of the R/3 System.
Training revenues increased from DM 225.0 million in 1995 to DM 306.1
million in 1996, representing an increase of 36.0%. The rate of growth in
training revenues increased in 1996, due primarily to the large number of R/3
Systems licensed and the release of the training curriculum with respect to
Release 3.0 of the R/3 System.
Cost of Services and Materials and Operating Expenses
Cost of services and materials and operating expenses increased from DM
2,099.3 million for 1995 to DM 2,853.2 million for 1996, representing an
increase of DM 753.9 million, or 35.9%. The primary expense items contributing
to the increase in these expenses are outlined below.
Cost of Services and Materials. The cost of services and materials
increased from DM 300.6 million in 1995 to DM 394.4 million in 1996,
representing an increase of 31.2%. The increase in cost of services and
materials in 1996 compared to 1995 was due primarily to the Company's
investments in infrastructure and a new training curriculum, the development and
testing of Release 3.0 of the R/3 System as well as an increased use of
independent contractors to reduce the need to further increase the Company's own
work force.
Personnel Expenses. Personnel expenses increased from DM 956.7 million in
1995 to DM 1,338.5 million in 1996, representing an increase of 39.9%. The
increase was due primarily to an increase in the number of employees and
salaries (including benefits) and social security payments during the periods.
The Company increased the number of its employees concurrently with the
substantial growth in licensing over this period. The number of employees
increased from 6,857 to 9,202 at December 31, 1995 and 1996, respectively,
representing an increase of 34.2%.
Depreciation and Amortization. Depreciation and amortization increased from
DM 144.5 million in 1995 to DM 164.6 million in 1996, representing an increase
of 13.9%. The increase was due primarily to increased capital expenditures in
1996, comprised mainly of personal computers and other hardware and a shorter
useful life of the personal computers and new building construction.
Other Operating Expenses. Other operating expenses increased from DM 697.5
million in 1995 to DM 955.8 million in 1996, representing an increase of 37.0%.
The increase in other operating expenses in 1996 compared to 1995 was due
primarily to an increase in marketing expenses, travel expenses, building rent
and computer hardware leasing expenses. Due to the fast rate at which computer
hardware technology continued to change, there was an effort to increase the
percentage of electronic data processing equipment which was leased, rather than
purchased, in 1996. Overall, however, other operating expenses as a percentage
of total sales revenues for such period remained relatively constant.
Operating Results
Operating results increased from DM 651.9 million in 1995 to DM 943.6
million in 1996, or 44.7%. The increase in operating results was due primarily
to the significant increase in product revenues, the generation of which entails
lower personnel costs and a correspondingly higher profit margin than is
associated with the Company's other sources of revenues. Operating results as a
percentage of total sales revenues increased from 24.2% in 1995 to 25.4% in
1996. The increase in 1996 was primarily due to expenses for purchased services,
infrastructure costs (particularly in new geographic markets such as China and
Brazil), depreciation and other operating expenses increasing at a higher rate
in 1995 than total revenues.
41
<PAGE> 44
Financial Results
Financial results remained approximately the same in 1995 and 1996 at DM
22.2 million and DM 23.6 million, respectively.
Taxes
The Company's effective income tax rate on results from ordinary operations
increased marginally from 38.4% in 1995 to 39.5% in 1996. The increase in the
effective rate from 1995 to 1996 was due primarily to the increase in operating
losses in 1996 from subsidiaries that began operations in 1995. The Company was
unable to utilize these losses to reduce taxes in 1996. This increase in the
1996 effective tax rate was partially offset by differing local tax treatments
associated with the 1996 conversions and distributions under the 1994 Program.
Net Income
Net income increased from DM 404.8 million in 1995 to DM 567.5 million in
1996, or 40.2%. Net income as a percentage of total sales revenues increased
from 15.0% in 1995 to 15.2% in 1996.
Research and Development Expenses
The Company's research and development expenses increased from DM 438.2
million in 1995 to DM 589.0 million in 1996, representing an increase of 34.4%.
As a percentage of total sales revenues, however, research and development
expenses decreased from 16.3% in 1995 to 15.8% in 1996. The decrease in such
percentages over the periods was due primarily to the faster growth in revenues
relating to the R/3 System. Of the Company's total research and development
expenses in 1995 and 1996, 45% and 43.3%, respectively, constituted personnel
expenses. The number of research and development employees increased from 1,643
at year-end 1995 to 2,059 at year-end 1996, representing an increase of 25.3%.
The portion of the increase in research and development expenses not
attributable to the number of research and development employees relates to
increases in salaries for existing employees, increases in expenditures on
computer hardware and increases in the number of independent contractors
retained by the Company to assist in research and development.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has funded most of its growth internally from
cash flow from operations and the sale of equity securities. Over the past
several years, the Company's principal use of cash was to support continuing
operations and capital additions resulting from the Company's growth. At
December 31, 1997, the Company's liquid assets provided by operations amounted
to DM 835.3 million, an increase of DM 351.8 million from DM 483.5 million at
December 31, 1996. Accounts receivable increased from DM 1,555.9 million at
December 31, 1996 to DM 2,435.7 million at December 31, 1997, representing an
increase of 56.5%. The increase in accounts receivable during the period is
attributable generally to the increased level of licensing of the R/3 System and
the relatively large monetary commitment of customers who are parties to such
license agreements. Customers committing to a large licensing fee often
negotiate payment terms over a longer period than the term contained in the
Company's standard licensing agreement. Accounts payable during the same period
increased at a rate of 60.0% or DM 119.9 million to DM 318.3 million from DM
198.9 million at December 31, 1996. The increase in accounts payable was due
primarily to the large increase in the amount of fixed assets, including
buildings, computer hardware and third-party customer support services purchased
by the Company, generally to support the growth in licensing of the R/3 System.
Investing activities used DM 570.1 million of liquid assets in 1997, an
increase of DM 363.1 million from DM 207.0 million in 1996. Capital expenditures
of the Company during 1997 were DM 487.4 million, an increase of DM 271.2
million from DM 216.2 million in 1996. Most of the capital expenditures in 1997
related to the construction of buildings and to the purchase of computer
hardware and other business equipment to support the increased number of
employees. Additions to intangible assets totaled DM 87.3 million, up DM 82.9
million from 1996 additions of DM 4.4 million, due primarily to the
capitalization of goodwill
42
<PAGE> 45
associated with 1997 acquisitions. In addition, the Company plans to spend
approximately DM 395.0 million during fiscal 1998, primarily to fund the
development of additional corporate campuses in Walldorf, Germany, and in the
Commonwealth of Pennsylvania.
In 1994, the Company acquired a 52% interest in DACOS Software GmbH. In
1997, DACOS Software GmbH became a wholly-owned subsidiary when the Company
purchased 100% of DACOS Holding GmbH, which held the remaining 48% interest in
DACOS Software GmbH, and the subsidiary was renamed SAP Retail Solutions GmbH &
Co. In the third quarter of 1997, the Company acquired a 25.2% interest in IDS
Prof. Scheer Gesellschaft fur integrierte Datenverarbeitungssysteme mbH ("IDS").
The principal shareholder of IDS is Professor Dr. August Wilhelm Scheer, who was
a member of SAP's Supervisory Board at the time of such acquisition. In the
fourth quarter of 1997, the Company acquired a 50% interest in Kiefer &
Veittinger GmbH; in the second quarter of 1998, it acquired an additional 30.2%
and has an option to acquire the remaining 19.8% until March 31, 1999.
Acquisitions individually and in the aggregate do not materially affect the
comparability of the current financial information with that of prior years.
Financing activities used liquid assets of DM 77.9 million in 1997, a
decrease of DM 24.6 million from DM 102.5 million in 1996. At December 31, 1997,
the Company had outstanding long-term financial debt of DM 5.1 million,
consisting primarily of outstanding 1988 Bonds and 1994 Bonds, and short-term
financial debt of approximately DM 163.1 million, consisting primarily of money
borrowed by SAP Japan Co., Ltd., a wholly-owned subsidiary, and guaranteed by
the Company.
Certain of the Company's foreign subsidiaries have lines of credit
available which allow them to borrow in the local currency, to the extent SAP
has guaranteed the repayment of amounts borrowed. At December 31, 1997, the
Company had approximately DM 151.4 million available through such arrangements
under which the Company may borrow on an overdraft or short-term basis. In
addition, the Company has a DM 89.6 million line of credit available for which
no guarantee is required. Interest under these lines of credit is determined at
the time of borrowing based on current market rates.
The Company's Stock Appreciation Rights Plan (the "SAR Plan") provides for
the grant of stock appreciation rights ("SARs") to Executive Board members and
eligible employees of SAP and its wholly-owned subsidiaries. See "Item 12.
Options to Purchase Securities from Registrant or Subsidiaries -- Stock
Appreciation Rights Plan." On May 1, 1998, the Executive Board granted 1.1
million SARs to employees who were employed by the Company on or prior to June
30, 1996 (the "May 1998 Awards"). The May 1998 Awards entitle the eligible
employee to receive a portion of the appreciation in the price of Preference
Shares during the measuring period that begins when the grant price is set and
ends when the end price is set approximately one year later. The grant price is
DM 785 (which was the average closing price of a Preference Share over the 10
business days beginning on March 27, 1998 and ending on April 8, 1998). The end
price is the average closing price of a Preference Share over the 10 business
days immediately following the date of the announcement of SAP's first quarter
earnings in 1999. For each SAR awarded under the May 1998 Awards, the eligible
employee will be entitled to receive cash equal to 100% of the first DM 100
increase, 50% of the next DM 100 increase and 25% of any additional increase in
the value of the Preference Shares over the measuring period. Payment of the May
1998 Awards will be made in three equal installments in July 1999, January 2000
and July 2000, provided that (subject to certain exceptions) the eligible
employee continues to be actively employed on such dates. Any amounts accrued
under the SAR Plan will be recorded as compensation expense in the Company's
consolidated income statements and may negatively impact the Company's results
of operations, earnings per share and cash flows.
The Company believes that cash flow from operations, existing cash and cash
equivalents and short-term marketable securities will be sufficient to meet the
Company's working capital needs and currently planned capital expenditure
requirements for the next twelve months. However, there can be no assurance that
a downturn in the economy worldwide, or for a particular region, or for the
Company's products and services in general, will not change this outlook.
The Company may from time to time consider acquisitions of complementary
businesses, products or technologies, which could require additional financing.
In addition, continued growth in the Company's business may from time to time
require additional capital. There can be no assurance that additional capital
43
<PAGE> 46
will be available to the Company if and when required, or that such additional
capital will be available on acceptable terms to the Company.
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
FOREIGN CURRENCY RISK
Most SAP subsidiaries have entered into license agreements with SAP
pursuant to which the subsidiary acquires the right to sublicense the Company's
products to customers within a specific territory. Under these agreements, the
subsidiaries generally are required to pay SAP a royalty equivalent to a
percentage of the product fees paid to them by their customers within 90 days
following the end of the month in which the subsidiary recognizes the revenue.
These inter-company royalties payable to SAP are generally denominated in the
respective subsidiary's local currency in order to centralize foreign currency
risk with SAP in Germany. The delay between the date when the subsidiary records
product revenue and the date when payment is made to SAP by such subsidiary
exposes SAP to foreign exchange risk.
The Company enters into foreign exchange forward contracts and currency
options to protect the existing and/or expected foreign currency inter-company
claims and liabilities. Specifically, these foreign exchange contracts offset
existing and anticipated inter-company receivables in the countries with
significant operations, including the United States, Japan, the United Kingdom,
Switzerland and Canada. Anticipated receivables represent expected inter-company
amounts resulting from revenues generated within the next 12 months from the
purchase date of the derivative instrument. Management believes the use of
foreign currency derivative financial instruments reduces the risks that arise
from doing business in international markets and holds such instruments for
purposes other than trading. Generally, the maturities of such derivative
instruments do not exceed 12 months from the date of purchase.
The table below provides information about the Company's derivative
financial instruments that are sensitive to foreign currency exchange rates,
including foreign exchange forward and option contracts. The table presents fair
values, notional amounts (at the contract exchange rates) and the respective
weighted average contractual foreign currency exchange rates. The fair values do
not reflect any foreign exchange gains or losses on the underlying inter-company
receivables and payables. In addition, the table below does not include foreign
currency risks associated with third-party receivables and payables denominated
in currencies other than the functional currency of the reporting subsidiary.
See notes to the consolidated financial statements included in "Item 18.
Financial Statements" for further information on the Company's foreign exchange
derivative instruments.
<TABLE>
<CAPTION>
DM FUNCTIONAL CURRENCY
---------------------------------------------
CONTRACT FAIR VALUE
FOREIGN CURRENCY RISK (VALUE IN DM (000)) NOTIONAL AMOUNTS DECEMBER 31, 1997(1)
- ----------------------------------------- ---------------------- --------------------
Expected Maturity Date
1998
<S> <C> <C>
DERIVATIVES USED TO MANAGE BALANCE SHEET TRANSACTIONS
FOREIGN CURRENCY FORWARD CONTRACTS
(Receive DMs, Sell Local Currency)
U.S. Dollars............................................ 168,956 4,023
Weighted Average Contractual Exchange Rate.............. 1.79
Japanese Yen............................................ 39,541 (1,008)
Weighted Average Contractual Exchange Rate.............. 0.014
British Pounds.......................................... 41,311 1,001
Weighted Average Contractual Exchange Rate.............. 2.92
Swiss Francs............................................ 5,913 (78)
Weighted Average Contractual Exchange Rate.............. 1.25
Canadian Dollars........................................ 12,400 45
Weighted Average Contractual Exchange Rate.............. 1.24
</TABLE>
44
<PAGE> 47
<TABLE>
<CAPTION>
DM FUNCTIONAL CURRENCY
---------------------------------------------
CONTRACT FAIR VALUE
FOREIGN CURRENCY RISK (VALUE IN DM (000)) NOTIONAL AMOUNTS DECEMBER 31, 1997(1)
- ----------------------------------------- ---------------------- --------------------
Expected Maturity Date
1998
<S> <C> <C>
DERIVATIVES USED TO MANAGE ANTICIPATED TRANSACTIONS
FOREIGN CURRENCY FORWARD CONTRACTS
(Receive DMs, Sell Local Currency)
Japanese Yen............................................ 27,199 (693)
Weighted Average Contractual Exchange Rate.............. 0.014
British Pounds.......................................... 25,152 534
Weighted Average Contractual Exchange Rate.............. 2.92
Swiss Francs............................................ 19,088 (273)
Weighted Average Contractual Exchange Rate.............. 1.25
CURRENCY OPTIONS (PURCHASED PUTS)
British Pounds.......................................... 11,200 --
Weighted Average Contractual Exchange Rate.............. 2.80
Japanese Yen............................................ 14,400 (562)
Weighted Average Contractual Exchange Rate.............. 0.014
</TABLE>
- ---------------
(1) Equivalent to the unrealized gain or (loss) on existing contracts.
INTEREST RATE RISK
The Company invests its cash primarily in bank time deposits and fixed and
variable rate marketable debt securities denominated in Marks. The Company does
not expect changes in the quoted market prices of time deposits to have a
material effect on income or cash flows. The Company enters into interest rate
swaps to better manage the interest income on its cash equivalents and
marketable securities and to partially mitigate the impact of German interest
rate fluctuations on these investments. The Company holds such derivative
instruments for purposes other than trading. No swaps were outstanding at
December 31, 1997.
The table below presents principal (or notional) amounts, respective fair
values at December 31, 1997 and related weighted average interest rates by year
of maturity for the Company's investment portfolio. Average variable interest
rates are based on rates at December 31, 1997 and may change significantly,
affecting future cash flows. The fair value of derivatives generally reflects
the estimated amounts the Company would pay or receive to terminate the
contracts at the reporting date, thereby considering unrealized gains or losses
of open positions. See notes to the Company's consolidated financial statements
included in "Item 18. Financial Statements" for further information on the
Company's interest rate derivative instruments.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
------------------------------------------------------ FAIR VALUE
1998 1999 2000 2001 2002 THEREAFTER TOTAL DECEMBER 31, 1997
----- ------ ------ ------ ------ ---------- ------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST RATE RISK
Value in DM(000)
Marketable Securities (DM)
Floating Rate....................... 5,000 35,000 25,000 30,000 30,413 125,413 128,139
Average Interest Rate............. 3.79% 4.88% 4.63% 4.46% 6.83%
Fixed Rate.......................... 15,000 20,000 5,000 40,000 39,903
Average Interest Rate............. 3.77% 3.77% 3.71%
----- ------ ------ ------ ------ ------- ------- -------
Total Marketable Securities....... 5,000 50,000 20,000 25,000 30,000 35,413 165,413 168,042
----- ------ ------ ------ ------ ------- ------- -------
Long Term Investments (DM)
Fixed Rate.......................... 42 8,575 -- -- -- 100,881 109,498 114,248
Average Interest Rate............. 3.66% 5.30% 6.19%
Other Instruments (DM)
Fixed Rate.......................... 10,000 10,000 10,000
Average Interest Rate............. 3.66%
----- ------ ------ ------ ------ ------- ------- -------
Total Investments................... 5,042 58,575 30,000 25,000 30,000 136,294 284,911 292,290
----- ------ ------ ------ ------ ------- ------- -------
</TABLE>
45
<PAGE> 48
To ensure the adequacy and effectiveness of the Company's foreign exchange
hedge positions, and to monitor the risks and opportunities of the non-hedge
portfolios, the Company continually monitors its foreign forward and option
positions. In addition, the Company monitors its interest rate swap positions,
both on a stand-alone basis and in conjunction with its underlying foreign
currency and interest rate exposures, from an economic and an accounting
perspective. However, there can be no assurance that the aforementioned programs
with respect to the management of currency exchange and interest rate risk will
offset more than a portion of the adverse financial impact resulting from
unfavorable movements in either the foreign exchange rates or interest rates.
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT.
GENERAL
In accordance with the German Stock Corporation Act (Aktiengesetz), SAP has
a Supervisory Board (Aufsichtsrat) and an Executive Board (Vorstand). The two
Boards are separate and no individual may serve simultaneously as a member of
both Boards.
The Executive Board is responsible for managing the day-to-day business of
SAP in accordance with the German Stock Corporation Act and the Articles of
Association. The Executive Board is authorized to represent SAP and to enter
into binding agreements with third parties on behalf of SAP. The principal
function of the Supervisory Board is to supervise the Executive Board. It is
also responsible for appointing and removing the members of the Executive Board.
The Supervisory Board may not make management decisions, but may determine that
certain types of transactions require its prior consent. In carrying out their
duties, the members of the Supervisory Board and the Executive Board must
exercise the standard of care of a diligent and prudent business person. In
complying with such standard of care, the members must take into account a broad
range of considerations, including the interests of SAP and its shareholders,
employees and creditors. In addition, the members of the Executive Board and the
Supervisory Board are personally liable for certain violations of the German
Stock Corporation Act by SAP.
SUPERVISORY BOARD (AUFSICHTSRAT)
The Supervisory Board of SAP consists of 12 members, of which six members
are elected by SAP's shareholders at a general shareholders' meeting and six
members are elected by SAP's employees pursuant to the German Co-determination
Act of 1976 (Mitbestimmungsgesetz). Any Supervisory Board member elected by the
shareholders at the general shareholders' meeting may be removed by two-thirds
of the votes cast at a general shareholders' meeting. Any Supervisory Board
member elected by the employees may be removed by three-quarters of the votes
cast by the employees.
The Supervisory Board chooses a Chairman and a Vice Chairman from among its
members by a majority vote of its members. If such majority is not reached on
the first vote, the Chairman will be chosen solely by the members elected by the
shareholders and the Vice Chairman will be chosen solely by the members elected
by the employees. Unless otherwise provided for by law, the Supervisory Board
acts by simple majority. In the case of any deadlock, the Chairman has the
deciding vote.
The members of the Supervisory Board are each elected for the same fixed
term of approximately five years. The term expires at the end of the annual
general shareholders' meeting after the fourth fiscal year following the year in
which the Supervisory Board was elected. Reelection is possible. The term of a
member of the Supervisory Board appointed by a court to cure a deficiency in the
composition of the Supervisory Board ends at the time when such deficiency is
cured. The term of a member of the Supervisory Board elected by the shareholders
to succeed a departing member ends at the time when the term of the original
member would have ended. A substitute member of the Supervisory Board may be
elected by the shareholders at the same time as a member to replace such member
in case he or she departs. The term of a substitute member who replaces a
departing member ends with the conclusion of the next general shareholders'
meeting where members of the Supervisory Board are elected or, at the latest, at
the time when the term of the original member would have ended. The remuneration
of the members of the Supervisory Board is determined by the Articles of
Association.
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<PAGE> 49
The Supervisory Board may appoint committees from among its members and
may, to the extent permitted by law, vest committees with the authority to make
decisions. Currently, two committees exist: the Audit Committee
(Bilanzprufungsausschuss) and the Executive Committee (Ausschuss fur
Vorstandsangelegenheiten).
The current members of the Supervisory Board of SAP, each such member's
principal occupation, the year in which each was first elected, and the year in
which the term of each expires, respectively, are as follows:
<TABLE>
<CAPTION>
YEAR FIRST YEAR TERM
NAME PRINCIPAL OCCUPATION ELECTED EXPIRES
---- -------------------- ---------- ---------
<S> <C> <C> <C>
Dietmar Hopp, Chairman(1)(2)...... Former Co-speaker of SAP's 1998 2003
Executive Board
Dr. Wilhelm Haarmann(1)........... Attorney, Haarmann, Hemmelrath & 1988 2003
Partner
Klaus-Dieter Laidig(1)............ Managing Partner, Laidig Business 1996 2003
Consulting GmbH
Hartmut Mehdorn(1)................ Chairman of Executive Board, 1998 2003
Heidelberger Druckmaschinen AG
Dr. Dieter Spori(1)............... Partner, Baumgartner & Partner 1998 2003
Unternehmensberatung GmbH
Dr. h.c. Klaus Tschira(1)(3)...... Former Member of SAP's Executive 1998 2003
Board
Helga Classen, Vice Chairman(4)... Employee 1993 2003
Willi Burbach(4).................. Employee 1993 2003
Bernhard Koller(4)................ Employee 1989 2003
Dr. Gerhard Maier(4).............. Employee 1989 2003
Dr. Barbara Schennerlein(4)....... Employee 1998 2003
Alfred Simon(4)................... Employee 1993 2003
</TABLE>
- ---------------
(1) Elected by SAP's shareholders on May 7, 1998.
(2) Mr. Hopp is a party to the Pooling Agreement. See "Item 4. Control of
Registrant."
(3) Dr. Tschira is a party to the Pooling Agreement. See "Item 4. Control of
Registrant."
(4) Elected by SAP's employees on April 3, 1998.
EXECUTIVE BOARD (VORSTAND)
Pursuant to the Articles of Association, SAP's Executive Board must consist
of at least two members. Any two members of the Executive Board or one member of
the Executive Board and the holder of a procuration (a power of attorney) may
legally represent SAP. Each member of the Executive Board is appointed by the
Supervisory Board for a maximum term of five years and is eligible for
reappointment thereafter. Under certain circumstances, such as a serious breach
of duty or a vote of no confidence (Vertrauensentzug) by a majority of the
holders at a general shareholders' meeting, a member of the Executive Board may
be removed by the Supervisory Board prior to the expiration of such term. A
member of the Executive Board may not vote on matters relating to certain
contractual agreements between such member and the Company and may be liable to
SAP if such member has a material interest in any contractual agreement between
the Company and a third party which was not disclosed to, and approved by, the
Supervisory Board.
47
<PAGE> 50
The current members of the Executive Board, the year in which each such
member was first appointed, and the year in which the term of each expires,
respectively, are as follows:
<TABLE>
<CAPTION>
YEAR CURRENT
YEAR FIRST TERM
NAME APPOINTED(1) EXPIRES
---- ------------- ------------
<S> <C> <C>
Prof. Dr. h.c. Hasso Plattner, Co-Speaker.......... 1988 2002
Prof. Dr. Henning Kagermann, Co-Speaker............ 1991 2002
Dr. Peter Zencke................................... 1993 2002
Dr. Claus Heinrich................................. 1996 2000
Gerhard Oswald..................................... 1996 2000
Paul Wahl.......................................... 1996 2000
</TABLE>
- ---------------
(1) SAP became a stock corporation (Aktiengesellschaft) with an Executive Board
in 1988.
The members of the Executive Board and a description of their management
responsibilities and backgrounds are as follows:
Prof. Dr. h.c. Hasso Plattner, Co-Speaker, 54 years old, engineering
graduate. Prof. Dr. h.c. Plattner is one of the Founders of SAP. He became Vice
Chairman of the Executive Board in 1988 and Co-Speaker in 1997. He is
responsible for basis development and technology, several industry solutions and
corporate communications.
Prof. Dr. Henning Kagermann, Co-Speaker, 51 years old, mathematics and
physics graduate. Prof. Dr. Kagermann joined SAP in 1982. He became a member of
the Executive Board in 1991 and Co-Speaker in 1998. He is responsible for
financial development and accounting applications, several industry solutions,
international business development and human resources development. He also
oversees finance and administration and the management of the European region
including Germany.
Dr. Peter Zencke, 48 years old, mathematics and economics graduate. Dr.
Zencke joined SAP in 1984 and became a member of the Executive Board in 1993. He
is responsible for the R/3 System's logistic applications, development and
implementation tools and several industry solutions. He also oversees the
Company's operations in Asia-Pacific.
Dr. Claus Heinrich, 43 years old, business management and operations
research graduate. Dr. Heinrich joined SAP in 1987. He is responsible for the
R/3 System logistic applications as well as several industry solutions and has
been involved in logistics development for SAP since 1987.
Gerhard Oswald, 45 years old, economics graduate. Mr. Oswald joined SAP in
1981. Mr. Oswald is responsible for R/3 System services and internal business
consulting.
Paul Wahl, 45 years old, is the Chief Executive Officer of SAP America,
Inc. Mr. Wahl joined SAP in 1991. He is the member of the Executive Board
responsible for operations in the Americas region as well as for worldwide
marketing and partner relationships.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS.
The total remuneration of all members of the Supervisory Board for the year
1997 amounted to DM 1,086,750. In addition to reimbursement of out-of-pocket
expenses, members of the Supervisory Board receive an annual fixed payment,
which amounts to DM 20,000 for the Chairman, DM 15,000 for the Vice Chairman and
DM 10,000 for all other members of the Supervisory Board, plus a variable
payment that depends on the dividends based on capital stock paid to SAP's
shareholders, i.e., DM 3,500 for each percentage of SAP's share capital
constituted by such dividends. Notwithstanding the foregoing, the Chairman, the
Vice Chairman and the other members of the Supervisory Board will not receive
annual remuneration in excess of DM 280,000, DM 157,500 and DM 70,000,
respectively. The total remuneration of all members of the Executive Board for
the year 1997 amounted to DM 15,972,681.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES.
1988 PROGRAM
In 1988, the Company sponsored an employee convertible bond program (the
"1988 Program") to provide an opportunity for its employees to participate in
the appreciation in the value of the Ordinary Shares
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<PAGE> 51
by issuing 20,000 bonds, each with a nominal amount of DM 50 (the "1988 Bonds")
in the aggregate nominal amount of DM 1 million to its employees. Each 1988 Bond
accrues interest at a floating rate and is convertible into four Ordinary Shares
and one Preference Share. The conversion rights with respect to approximately
99% of the 1988 Bonds have been exercised as of December 31, 1997. At June 18,
1998, 3,950 Ordinary Shares and 990 Preference Shares would be issued upon the
conversion of the remaining outstanding 1998 Bonds. The conversion rights of the
holders of 1988 Bonds will expire on October 20, 1998.
1994 PROGRAM
In 1994, the Company sponsored the 1994 Program to provide an opportunity
for its worldwide employees to participate in the appreciation of the value of
the DM 50 Preference Shares by issuing 400,000 1994 DM 50 Bonds in the aggregate
nominal amount of DM 20 million. On July 17, 1995, SAP effected a 1:10 stock
split with respect to 1,950,000 DM 50 Preference Shares to reflect the reduction
in the nominal value of such DM 50 Preference Shares from DM 50 to DM 5. The
1994 DM 50 Bonds were split accordingly into 4,000,000 1994 Bonds. Each 1994
Bond accrues interest at the rate of 6% per annum and is convertible into one
Preference Share at the conversion price of DM 100. Under the 1994 Program, the
Company issued 1994 Bonds in the aggregate nominal amount of approximately DM
11.4 million (the "German 1994 Bonds") to Volksbank Wiesloch eG, which holds
such German 1994 Bonds as a trustee for the Company's German employees
participating in the 1994 Program. The conversion rights with respect to the
German 1994 Bonds became exercisable for the first time on September 30, 1996
and may be exercised thereafter on each June 30, July 31, August 31, September
30, October 31, and November 30, until June 30, 2004. In respect of the
Company's non-German employees participating in the 1994 Program, the Company
issued 1994 Bonds in the aggregate amount of approximately DM 8.6 million (the
"Non-German 1994 Bonds") to Volksbank Wiesloch eG, which acts as trustee for a
special purpose vehicle (the "Administrator"), whereupon the Administrator
issued to such employees participation rights (the "Rights") related to the
Preference Shares into which the Non-German 1994 Bonds are convertible. Upon an
employee's exercise of his or her Rights, an appropriate number of Non-German
1994 Bonds would be converted into Preference Shares and those Preference Shares
promptly sold on the open market in order to obtain cash to pay the value of the
exercised Right. The Rights became exercisable for the first time on September
30, 1996 and may be exercised thereafter on each June 30, July 31, August 31,
September 30, October 31 and November 30, until June 30, 2004. The cash payout
price approximates the market price of the Preference Shares sold, less DM 100
per Preference Share and certain other costs. At June 18, 1998, 23.5% of the
1994 Bonds remained outstanding and 941,761 Preference Shares would be issued
upon the conversion thereof.
STOCK APPRECIATION RIGHTS PLAN
The Company's SAR Plan provides for the grant of SARs to Executive Board
members and eligible employees of SAP and its wholly-owned subsidiaries. The SAR
Plan is administered by SAP's Executive Board with respect to eligible employees
and by the Supervisory Board with respect to Executive Board members. The
Executive Board or the Supervisory Board, as applicable, has the authority to
determine (i) the persons to whom grants may be made under the SAR Plan,
provided that, except for the May 1998 Awards, they have been employed by the
Company for two years as of the date of grant, (ii) the size and other terms and
conditions of each grant, (iii) the time when the grants will be made and the
duration of any applicable exercise or restriction period, including the
criteria for vesting and the acceleration of vesting, and (iv) any other matters
arising under the SAR Plan.
On May 1, 1998, the Executive Board granted the May 1998 Awards, consisting
of 1.1 million SARs, to employees who were employed by the Company on or prior
to June 30, 1996. The May 1998 Awards entitle the eligible employee to receive a
portion of the appreciation in the price of Preference Shares during the
measuring period that begins when the grant price is set and ends when the end
price is set approximately one year later. The grant price is DM 785 (which was
the average closing price of a Preference Share over the 10 business days
beginning on March 26, 1998 and ending on April 8, 1998). The end price is the
average closing price of a Preference Share over the 10 business days
immediately following the date of the announcement of SAP's first quarter
earnings in 1999. For each SAR awarded under the May 1998 Awards, the eligible
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employee will be entitled to receive cash equal to 100% of the first DM 100
increase, 50% of the next DM 100 increase and 25% of any additional increase in
the value of the Preference Shares over the measuring period. Payment of the May
1998 Awards will be made in three equal installments in July 1999, January 2000
and July 2000, provided that (subject to certain exceptions) the eligible
employee continues to be actively employed on such dates. Any amounts accrued
under the SAR Plan will be recorded as compensation expense in the Company's
consolidated income statements and may negatively impact the Company's results
of operations, earnings per share and cash flows.
GERMAN EMPLOYEE STOCK PURCHASE PLAN
SAP maintains two employee stock purchase plans for its German employees:
(i) an ongoing payroll deduction plan (the "German Payroll Deduction Plan"); and
(ii) an annual purchase plan (the "German Annual Plan"). Under the German
Payroll Deduction Plan, eligible German employees are able to purchase
Preference Shares or Ordinary Shares through payroll deductions of up to 10% of
the gross monthly salary of an employee and Company contributions of 15% of the
Preference Share or Ordinary Share purchase price as well as the assumption of
ancillary purchase expenses. As soon as the amount available for an employee is
sufficient together with the Company contribution to purchase a Preference Share
or an Ordinary Share, such purchase is effected at the market price and credited
to the employee's account. The acquired shares are not subject to a holding
period. Under the German Annual Plan, eligible German employees may buy a
determined number of Preference Shares per year on a set date from the Company's
shareholding, with a Company contribution and the participating employee's
contribution, which for 1998 amounted to DM 500 (as well as the assumption of
ancillary purchase expenses) and DM 249.30, respectively. The acquired shares
are transferred to a special account of the participating employee, where they
are subject to a holding period of six years. Employees must elect each year to
participate in the German Annual Plan.
UNITED STATES EMPLOYEE STOCK PURCHASE PLAN
United States employees of the Company are entitled to participate in an
employee stock purchase plan (the "U.S. Stock Purchase Plan"), pursuant to which
an administrator makes open market purchases of Unrestricted ADSs for the
accounts of participating employees on a semi-monthly basis. Such purchases are
made out of amounts deducted from each participating employee's salary. The
Company does not make any contributions in connection with the U.S. Stock
Purchase Plan.
The Company is currently considering introducing an employee stock purchase
plan for its non-German employees similar to the German Payroll Deduction Plan.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.
For the years ended December 31, 1997, 1996 and 1995, certain members of
the Executive Board had interest-free loans outstanding from the Company in the
amount of DM 8,500, DM 274,000 and DM 414,500, respectively. At December 31,
1997, these loans had a maturity of four to five years. In addition, for the
years ended December 31, 1997, 1996 and 1995, certain members of the Executive
Board had loans bearing interest at 6% per annum outstanding from the Company in
the amount of DM 0, DM 75,000 and DM 200,000, respectively. Members of the
Supervisory Board had interest-free loans outstanding from the Company of DM
66,750, DM 44,000 and DM 23,000 at December 31, 1997, 1996 and 1995,
respectively.
In the third quarter of 1997, the Company acquired a 25.2% interest in IDS
from IDS's existing shareholders and directly from IDS pursuant to a capital
increase. The principal shareholder of IDS is Prof. Dr. August Wilhelm Scheer,
who was a member of SAP's Supervisory Board at the time of such acquisition.
In October 1997, the Company entered into a consulting agreement with a
company controlled by Klaus-Dieter Laidig, a member of SAP's Supervisory Board.
In April 1998, the Company entered into a software license agreement with
Golfplatzbeteiligung AG, a company controlled by Dietmar Hopp, who is Chairman
of SAP's Supervisory Board. In March 1998, the Company entered into a software
license agreement with St. Leon Rot GmbH & Co., a company controlled by Prof.
Dr. h.c. Hasso Plattner, who is
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Co-Speaker of SAP's Executive Board. The Company believes that the terms of each
of the three agreements described above are on terms no less favorable than are
included in similar agreements with unaffiliated third parties.
Dr. Wilhelm Haarmann, a member of SAP's Supervisory Board, is a partner in
Haarmann Hemmelrath & Partner, which serves as special German tax counsel to the
Company and counsels the Company with regard to other legal matters.
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED.
The following general description of the share capital of SAP and
description of the material terms of the Preference Shares does not purport to
be complete and is qualified in its entirety by reference to SAP's
organizational documents, including the Articles of Association. For information
with respect to the Deposit Agreement pursuant to which Preference Shares will
be held on behalf of U.S. shareholders, see "-- Description of ADSs."
SHARE CAPITAL
The share capital (Grundkapital) of SAP consists of the Ordinary Shares and
the Preference Shares. At June 18, 1998, the issued share capital of SAP
amounted to DM 521,516,495, consisting of (i) 60,996,050 Ordinary Shares and
(ii) 43,307,249 Preference Shares. All of the issued Ordinary Shares and
Preference Shares are in bearer form. Prior to July 17, 1995, the share capital
of SAP consisted only of DM 50 Ordinary Shares and DM 50 Preference Shares. On
that date, pursuant to an amendment of the German Stock Corporation Act
(Aktiengesetz) which permitted stock corporations to lower the minimum nominal
value of their share capital to DM 5, SAP effected a 1:10 stock split with
respect to 706,000 DM 50 Ordinary Shares and 1,950,000 DM 50 Preference Shares
to reflect the reduction in the nominal value of such DM 50 Ordinary Shares and
DM 50 Preference Shares from DM 50 to DM 5. On May 7, 1998, SAP's shareholders
passed a resolution converting SAP's share capital to no nominal value shares,
in accordance with recently enacted amendments to the German Stock Corporation
Act. This resolution took effect on June 16, 1998, when it was recorded in the
commercial register in Heidelberg, Germany.
Generally, SAP's share capital may be increased and new shares
corresponding to the increased share capital may be issued in consideration of
contributions in cash or in property and upon prior approval at a general
shareholders' meeting. If SAP plans to issue new Ordinary Shares against a
contribution in cash or kind, a resolution approving such increase must be
passed by the holders of two-thirds of the Ordinary Shares present at the annual
general shareholders' meeting scheduled to vote on the subject. If SAP plans to
issue new Preference Shares against a contribution in cash or kind, a resolution
approving such increase must be passed by the holders of three-fourths of the
Ordinary Shares and Preference Shares present at the annual general
shareholders' meeting scheduled to vote on the subject.
The Articles of Association provide for: (a) a conditional increase of
SAP's share capital (bedingtes Kapital), pursuant to which such share capital
increase will become effective and Ordinary Shares and Preference Shares will be
issued, if and to the extent that the holders of the 1988 Bonds exercise their
conversion rights; and (b) a conditional increase of SAP's share capital
(bedingtes Kapital), pursuant to which such share capital increase will become
effective and Preference Shares will be issued, if and to the extent that the
holders of the 1994 Bonds exercise these conversion rights. On May 7, 1998,
SAP's shareholders approved resolutions: (i) authorizing the Executive Board,
with the Supervisory Board's approval, to increase SAP's share capital up to a
total of DM 10 million by issuing Preference Shares by May 15, 2000, subject to
the preemptive rights of existing holders of Preference Shares; (ii) converting
from DM to EURO the share capital of SAP as well as other provisions of the
Articles of Association referring to DM, to take effect as soon as the legal
requirements therefor are met and the rate for the conversion from DM to EURO is
fixed; and (iii) authorizing SAP to acquire and cancel up to 10 million
Preference Shares and Ordinary Shares prior to October 31, 1999.
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DESCRIPTION OF PREFERENCE SHARES
Voting Rights
Holders of Preference Shares are generally not entitled to vote at general
meetings of SAP's shareholders. Under the German Stock Corporation Act, the
holders of Preference Shares (i) are entitled to vote on matters affecting their
preferential rights, such as changes in the rate of the preferential dividend or
the issuance of additional Preference Shares or other share capital that rank
equal to or above the Preference Shares and (ii) will have the same voting
rights as the holders of Ordinary Shares if (x) the preferential dividend is not
paid in full for a year and (y) the shortfall is not made up in the following
year or the following year's preferential dividend is not paid in full. The
voting rights will remain effective until the shortfall and all preferential
dividends that fall due prior to the payment of the shortfall have been paid in
full. Any vote taken on matters adversely affecting the preferential rights of
the holders of Preference Shares requires a majority of 75% of votes cast in the
meeting of holders of Preference Shares at which the vote is taken.
Each Ordinary Share and, in the circumstances described above, each
Preference Share entitles the holder thereof to one vote at a general
shareholders' meeting. Resolutions are passed at a general shareholders' meeting
by a majority of the votes cast, unless a larger majority is required by law, in
which case the Articles of Association provide that (unless the size of the
larger majority so required by law is mandated by applicable law) a majority of
two-thirds of the represented share capital is required. Neither the German
Stock Corporation Act nor the Articles of Association have any minimum quorum
requirements applicable to general shareholders' meetings.
Dividend and Liquidation Rights
Dividends are jointly proposed by the Supervisory Board and the Executive
Board, based on the Company's year-end financial statements, subject to approval
by holders of Ordinary Shares, and are officially declared in respect of the
prior year at the annual general shareholders' meeting. SAP's annual general
shareholders' meeting is usually convened during the second quarter of each
year. Historically, SAP has declared and paid its dividends in Marks. Since
Ordinary Shares and Preference Shares are in bearer form, dividends are either
remitted to the custodian bank on behalf of such shareholder, generally within
one business day following the annual general shareholders' meeting, or, in the
case of shareholders holding physical certificates, available promptly following
the annual general shareholders' meeting upon submission of the dividend coupon
to the paying agent therefor. Record holders of the ADSs on the dividend record
date will be entitled to receive payment in full of the dividend declared in
respect of the year for which it is declared. Cash dividends payable to such
holders will be paid to the Depositary in Marks and, subject to certain
exceptions, will be converted by the Depositary into Dollars. See
"-- Description of ADSs." The amount of dividends received by holders of ADSs
may be affected by fluctuations in exchange rates. See "Item 8. Selected
Consolidated Financial Data -- Dividends." Dividends paid to holders of the ADSs
or Preference Shares may be subject to German withholding tax. See "Item 7.
Taxation." The amount of dividends paid on the Preference Shares depends on the
amount of profits to be distributed by SAP.
For each fiscal year, the Supervisory Board and the Executive Board ratify
the financial statements and recommend the disposition of all unappropriated
profits of the Company, including the amount of net profits which will be
distributed in the form of dividends among the holders of Ordinary Shares and
Preference Shares, subject to (i) the requirements of law regarding the amounts
to be attributed to SAP's reserves (gesetzliche Rucklage) and (ii) the
entitlement of the Supervisory Board and the Executive Board to allocate net
profits to SAP's earned surplus (Gewinnrucklage) (subject to a ceiling as
provided in the Articles of Association).
A holder of Preference Shares is entitled to a cumulative annual preferred
dividend which exceeds the annual dividend paid to a holder of Ordinary Shares
by an amount equal to DM 0.05 per Preference Share but in any event no less than
DM 0.05 per Preference Share.
In accordance with the German Stock Corporation Act, upon a liquidation of
SAP, any liquidation proceeds remaining after paying off all of the Company's
liabilities will be distributed among the holders of
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Ordinary Shares and Preference Shares in proportion to the amount of the share
capital represented by the shares held by each holder. The Ordinary Shares and
the Preference Shares rank pari passu with respect to their rights to
liquidation proceeds.
Preemptive Rights
Under the German Stock Corporation Act, an existing shareholder in a stock
corporation, including a holder of non-voting preferred stock, such as the
Preference Shares, has a preemptive right to subscribe for issues by such
corporation of shares, debt instruments convertible into shares and
participating debt instruments in proportion to the shares held by such
shareholder in the existing capital of such corporation. Preemptive rights can
only be excluded by a shareholder resolution passed at the same time as the
resolution authorizing the capital increase by a majority of at least three
quarters of the voting stock present at the meeting. Holders of non-voting
preferred stock also must approve an exclusion of preemptive rights with a
separate vote by a majority of at least three quarters of the non-voting
preferred stock present at the meeting, unless such exclusion relates only to
the preemptive rights of the holders of common stock. In addition, the Executive
Board must provide a written report to the shareholders containing a material
justification for the exclusion of preemptive rights by showing that the
Company's interest in the exclusion of the preemptive rights outweighs the
shareholders' interest in exercising their preemptive rights. No specific
justification is necessary if: (i) the share capital is increased for cash
contributions, (ii) the amount of such increase does not exceed 10% of the
issued share capital, and (iii) the shares are sold at a price which is not
substantially lower than the current quoted share price. Preemptive rights are
generally transferable and are traded on the German stock exchanges for a
limited period of time prior to the final date for the exercise of such rights.
Rule 144 Facilities and Unrestricted Facility
In 1995, SAP sponsored the 1995 Rule 144A Facility and the Unrestricted
Facility. In 1996, SAP sponsored the 1996 Rule 144A Facility. The Bank of New
York is the depositary for all three facilities. The 1995 Rule 144A Facility was
created in connection with an offering on May 31, 1995 pursuant to Rule 144A
under the Securities Act by four of the Founders to certain "qualified
institutional buyers" in the United States of ADSs representing 100,000
Preference Shares. The 1996 Rule 144A Facility was created in connection with an
offering on August 14, 1996 pursuant to Rule 144A under the Securities Act by a
principal shareholder of SAP to certain "qualified institutional buyers" in the
United States of ADSs representing 1,128,485 Preference Shares. The Rule 144A
ADSs are eligible for trading in the PORTAL System of the National Association
of Securities Dealers, Inc. The 1995 Rule 144A Facility was closed to new
deposits of Preference Shares on January 26, 1996. The Unrestricted Facility is
open to holders of unrestricted ADRs. The Unrestricted ADRs were registered with
the SEC, thereby enabling such holders to trade in the over-the-counter market
and on the Nasdaq bulletin board. See "Item 5. Nature of Trading Market."
The Company intends to conduct the Exchange Offer, whereby it will offer to
exchange four ADSs for each outstanding Rule 144A ADS. The ADSs issued pursuant
to the Exchange Offer will be registered with the SEC pursuant to the Form F-1.
The ADSs will be substantially identical to the Rule 144A ADSs except that (i)
the Rule 144A ADSs are only accepted for quotation in the United States on the
PORTAL System of the National Association of Securities Dealers, Inc. whereas
the ADSs may be eligible for listing on a United States national securities
exchange or quotation on a United States inter-dealer system and (ii) resale of
the ADSs will not be subject to the restrictions contained in the Rule 144A
Deposit Agreements. Upon commencement of the Exchange Offer, the Company intends
to direct the Rule 144A ADS Depositary to terminate the respective Rule 144A
Deposit Agreements, in accordance with their terms, which will adversely affect
the trading market for Rule 144A ADSs that are not tendered in the Exchange
Offer.
DESCRIPTION OF ADSs
ADSs relating to Preference Shares will be evidenced by ADRs and will be
issuable pursuant to a Deposit Agreement among SAP, The Bank of New York, as
depositary (the "Depositary"), and the owners and holders of ADRs (the "Deposit
Agreement"). As used herein, "ADR Owner" means the person in whose name an ADR
is registered on the books of the Depositary and "ADR Holder" means any person
who has a
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beneficial interest in any ADR or ADS. The following is a summary of material
provisions of the Deposit Agreement. It does not purport to be a complete
statement of all the terms and conditions of the Deposit Agreement and is
therefore qualified in its entirety by reference to the Deposit Agreement. The
Deposit Agreement will also govern the Unrestricted ADSs and, accordingly, the
Deposit Agreement is filed as an exhibit to a post-effective amendment to the
Form F-6 pursuant to which the Unrestricted ADSs were registered under the
Securities Act. Copies of the Deposit Agreement will be available for inspection
at the Corporate Trust Office of the Depositary, currently located at 101
Barclay Street, New York, New York 10286. The Depositary's principal executive
office is located at 48 Wall Street, New York, New York 10286.
American Depositary Receipts
ADRs evidencing ADSs will be executed and delivered by the Depositary
pursuant to the Deposit Agreement. Each ADS represents one-twelfth of one
Preference Share, or evidences the right to receive one-twelfth of one
Preference Share. The Preference Shares represented by the ADSs will be held in
the account of the Depository at the Frankfurt/Main office of DG Bank Deutsche
Genossenschaftsbank, as custodian and agent of the Depositary (the "Custodian")
or at Deutsche Borse Clearing AG and are, together with any additional
Preference Shares at any time deposited or deemed deposited under the Deposit
Agreement and any and all other securities and/or cash received by the
Depositary or the Custodian in respect or in lieu of such Preference Shares,
considered as the "Deposited Securities". Only persons in whose names ADRs are
registered on the register of the Depositary will be treated by the Depositary
and SAP as owners of such ADRs.
ADSs will represent Preference Shares in bearer form. Pursuant to the terms
of the Deposit Agreement and under German law, ADR Owners and ADR Holders will
be subject to any applicable disclosure requirements regarding acquisition and
ownership of Preference Shares that are applicable to Preference Shares pursuant
to German law, as amended from time to time. See "Item 4. Control of
Registrant." Failure to comply with such disclosure requirements may, for so
long as such failure continues, result in the withholding of certain rights,
including voting, dividend and other rights relating to Deposited Securities. In
order to facilitate compliance with these notification requirements, an ADR
Owner or ADR Holder may deliver such notification to the Depositary with respect
to Preference Shares represented by ADSs and the Depositary shall, as soon as
practicable thereafter, forward such notification to SAP.
Deposit, Transfer and Withdrawal of Preference Shares and Issuance of ADRs
Upon deposit with the Custodian of Preference Shares or evidence of rights
to receive Preference Shares, accompanied by any appropriate instruments of
transfer or endorsement, and any dividend coupons for dividends to be paid in
the future or rights to receive in the future such dividend coupons, if any, and
upon payment of applicable fees, taxes and other charges, the Depositary will,
subject to the terms of the Deposit Agreement, execute and deliver an ADR or
ADRs registered in the name of the person depositing such Preference Shares or
as directed by such person for the number of ADSs representing such deposited
Preference Shares. Each deposit of Preference Shares will be accompanied by
evidence satisfactory to the Depositary that all conditions to such deposit
under German law will have been satisfied and that all necessary German
governmental approvals have been granted and, if required by the Depositary, an
agreement or assignment, or other instrument satisfactory to the Depositary
which will provide for the prompt transfer to the Custodian of any dividend,
right to subscribe for additional Preference Shares or any other securities or
right to receive other property or right to vote which any person depositing
Preference Shares may thereafter receive. Notwithstanding the foregoing, subject
to the terms and conditions described below, the Depositary may also issue ADRs
prior to receipt of Preference Shares by the Custodian.
Upon surrender of ADRs at the Corporate Trust Office of the Depositary for
the purpose of withdrawal of the Preference Shares represented by the ADSs
evidenced thereby, and upon payment of the fees of the Depositary and all taxes
and governmental charges, if any, payable in connection with such surrender and
withdrawal of the Deposited Securities, and subject to the terms and conditions
of the Deposit Agreement and the Articles of Association, the Deposited
Securities and applicable law, ADR Owners and ADR Holders are
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entitled to due assignment, transfer and delivery of all right, title, legal
ownership and interest, of such whole number of Deposited Securities requested
to be withdrawn at the time represented by the ADS or ADSs evidenced by such ADR
to the account of a German securities bank with Deutsche Borse Clearing AG or
through the facilities of Cedel S.A. or Morgan Guaranty Trust Company of New
York, Brussels office, as operator of the Euroclear System ("Euroclear"), or in
the form of certificated Preference Shares and delivery to the ADR Owner or as
ordered by it of any other securities, property and cash to which such ADR Owner
or ADR Holder is entitled in respect of the ADRs surrendered and a new ADR for
the number of ADSs representing any fractional Deposited Securities and any
Deposited Securities not being withdrawn, except that the Depositary may deliver
any dividends or distributions with respect to the Preference Shares represented
by the ADSs or any proceeds of sale of any dividends, distributions or rights,
which may at the time be held by the Depositary at its Corporate Trust Office.
Pre-Releases
Subject to the terms and conditions of the Deposit Agreement and any
limitations established by the Depositary, unless requested by SAP to cease
doing so, the Depositary may deliver ADRs prior to the receipt of Preference
Shares (a "Pre-Release"), may deliver Preference Shares upon the receipt and
cancellation of ADRs which have been Pre-Released whether or not such
cancellation is prior to the termination of such Pre-Release or the Depositary
knows that such ADR has been Pre-Released, and may receive ADRs in lieu of
Preference Shares in satisfaction of a Pre-Release of ADRs. In no event will the
Depositary deliver Preference Shares prior to the receipt and cancellation of
ADRs. Each Pre-Release must be (a) preceded or accompanied by a written
representation and agreement from the person to whom the Preference Shares or
ADRs are to be delivered (the "Pre-Releasee") that such Pre-Releasee, or its
customer, (i) owns the Preference Shares or ADRs to be remitted, as the case may
be, (ii) assigns all beneficial right, title and interest in such Preference
Shares or ADRs to the Depositary for the benefit of the owners of the Preference
Shares or ADRs, and (iii) will not take any action with respect to such
Preference Shares or ADRs, as the case may be, that is inconsistent with the
transfer of beneficial ownership (including, without the consent of the
Depositary, disposing of such Preference Shares or ADRs, as the case may be),
other than in satisfaction of such Pre-Release, (b) at all times fully
collateralized with cash, government securities or such other collateral as the
Depositary deems appropriate, (c) terminable by the Depositary on not more than
five business days' notice and (d) subject to such further indemnities and
credit regulations as the Depositary deems appropriate. The Company will not
incur any liability to any ADR Owner or ADR Holder as a result of any
Pre-Release transaction. The Depositary will also set dollar limits with respect
to Pre-Release transactions to be entered into under the Deposit Agreement with
any Pre-Releasee on a case-by-case basis as the Depositary deems appropriate.
The collateral referred to in clause (b) above shall be held by the Depositary
as security for the performance of the Pre-Releasee's obligations to the
Depositary in connection with a Pre-Release transaction, including the
Pre-Releasee's obligation to deliver Preference Shares or ADRs upon termination
of a Pre-Release transaction (and shall not, for the avoidance of doubt,
constitute Deposited Securities under the Deposit Agreement). The number of
Preference Shares not deposited but represented by ADRs outstanding at any time
as a result of Pre-Releases will not normally exceed 30% of the Preference
Shares deposited under the Deposit Agreement. The Depositary may retain for its
own account any compensation received by it in connection with the foregoing.
The Company shall have no liability to any Holder or Owner with respect to any
representations, actions or omissions by the Depositary, or any of its agents,
pursuant to the section of the Deposit Agreement regarding Pre-Releases.
Dividends, Other Distributions and Rights
Whenever the Depositary, or, on its behalf, its agent, receives any cash
dividend or other cash distribution on any Deposited Securities, which dividend
or distribution is denominated in currency other than Dollars ("Foreign
Currency"), the Depositary will, or will cause its agent, as promptly as
practicable after receipt of such dividend or distribution, to, convert such
Foreign Currency into Dollars; provided, however, that such Foreign Currency
can, in the reasonable judgment of the Depositary, be converted on a reasonable
basis into Dollars transferable to the United States. Upon conversion, the
amount received and subsequently converted will be distributed as promptly as
practicable (net of reasonable and customary expenses incurred by the
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Depositary in converting such Foreign Currency) to the ADR Owners entitled
thereto, in proportion to the number of ADSs representing Deposited Securities
evidenced by ADRs held by them respectively. The amount distributed will be
reduced by any amounts required to be withheld by SAP or the Depositary,
including amounts on account of any applicable taxes and certain other expenses.
For further details about applicable taxes, see "Item 7. Taxation -- German
Taxation of Holders of Preference Shares or ADSs -- German Taxation of
Dividends" and "Item 7. Taxation -- United States Taxation of United States
Holders of Preference Shares or ADSs -- Distributions." If the Depositary
determines in its judgement that any Foreign Currency received by it cannot,
pursuant to applicable law, be so converted on a reasonable basis into U.S.
Dollars transferable to the United States, or if any approval or license
necessary for conversion is denied or in the reasonable opinion of the
Depositary is not obtainable or if any such approval or license is not obtained
within a reasonable period as determined by the Depositary, the Depositary may
in its discretion distribute such Foreign Currency received by the Depositary
to, or may hold such Foreign Currency uninvested and without liability for
interest for the respective accounts of, the ADR Owners entitled to receive the
same. If any such conversion of Foreign Currency cannot be effected for
distribution in Dollars to some of the ADR Owners entitled thereto, the
Depositary may in its discretion make such conversion and distribution in U.S.
Dollars to the extent permissible to the ADR Owners entitled thereto, and may
distribute the balance of the Foreign Currency received by it to, or hold such
balance uninvested for the respective accounts of, the ADR Owners entitled
thereto.
If SAP declares a dividend in, or free distribution of, additional
Preference Shares, upon receipt by or on behalf of the Depositary of additional
Preference Shares, the Depositary may, and upon the request of SAP will,
distribute to ADR Owners, in proportion to the number of ADSs representing
Deposited Securities evidenced by ADRs held by them, additional ADRs for an
aggregate number of ADSs representing the number of Preference Shares so
received as such dividend or free distribution, in each case subject to the
terms and conditions of the Deposit Agreement, including the withholding of
taxes or any other governmental charges and the payment of fees required under
the Deposit Agreement. If such adjustments in the record of the Depositary are
not made or additional ADRs are not so issued, each ADS shall thereafter also
represent the additional securities distributed in respect of the Preference
Shares represented by such ADS prior to such dividend or free distribution. In
lieu of delivering ADRs for fractional ADSs in the event of any such
distribution, the Depositary will sell the amount of Preference Shares
represented by the aggregate of such fractions and will distribute the net
proceeds, converted into U.S. Dollars if in a Foreign Currency, to ADR Owners in
accordance with the terms and conditions of the Deposit Agreement. The
Depositary may withhold any such distribution of ADSs or ADRs if it has not
received satisfactory assurances from SAP that such distribution does not
require registration under the Securities Act or is exempt from registration
under the provisions of the Securities Act. If for any reason (including any
requirement that SAP or the Depositary withhold an amount on account of taxes or
other governmental charges or that such Preference Shares must be registered
under the Securities Act in order to be distributed to ADR Owners or ADR
Holders) the Depositary determines that it is not lawful and feasible to make a
distribution of Preference Shares to all ADR Owners or to certain ADR Owners,
the Depositary may adopt such method as it may deem lawful, equitable and
practicable for the purpose of effecting such distribution, including, but not
limited to, the public or private sale of the Preference Shares thus received,
or any part thereof, and the net cash proceeds of any such sale will be
distributed by the Depositary to the ADR Owners entitled thereto as in the case
of a distribution received in cash.
If SAP offers, or causes to be offered, to the owners of Deposited
Securities any rights to subscribe for additional Preference Shares or any
rights of any other nature, the Depositary will, following consultation with the
Company as to the procedure to be followed, (i) make such rights available to
ADR Owners, (ii) dispose of such rights on behalf of any ADR Owners and make the
net proceeds available in Dollars to such ADR Owners or (iii) allow the rights
to lapse if, by the terms of such rights offering or for any other reason, the
Depositary may not either make such rights available to any ADR Owner or dispose
of such rights and make the proceeds available to such ADR Owners. If at the
time of the rights offering the Depositary, following consultation with the
Company, determines it to be lawful and feasible to make such rights available
to all or to certain but not to other ADR Owners, the Depositary may make such
rights available to such ADR Owners to whom it determines such distribution,
following consultation with the Company, to be lawful and feasible
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<PAGE> 59
through the distribution in proportion to the number of ADSs evidenced by ADRs
held by such ADR Owners, of rights, warrants or other instruments therefor in
such form and upon such terms and representations as it may determine. If the
Depositary determines, following consultation with the Company, that it is not
lawful or feasible to make such rights available to all or certain ADR Owners,
it may sell the warrants or other instruments and allocate the net proceeds of
such sales (net of the fees of the Depositary as provided in the Deposit
Agreement and all taxes and governmental charges payable in connection with such
rights and subject to the terms and conditions of the Deposit Agreement),
converted into U.S. Dollars if in a Foreign Currency, for the account of such
ADR Owners otherwise entitled to such rights, warrants or other instruments as
in the case of a distribution received in cash, upon an averaged or other
practical basis without regard to any distinctions among such ADR Owners because
of exchange restrictions or the date of delivery of any ADR or otherwise.
The Depositary will not offer rights to ADR Owners unless both the rights
and the securities to which such rights relate either are exempt from
registration under the Securities Act with respect to a distribution to all ADR
Owners or are registered under the provisions of the Securities Act. If an ADR
Owner requests the distribution of warrants or other instruments,
notwithstanding that there has been no such registration under the Securities
Act, the Depositary will not effect such distribution unless it has received an
opinion from counsel in the United States for SAP upon which it may rely that
such distribution to such ADR Owner is exempt from such registration. The
Depositary will not be responsible for any failure to determine that it may be
lawful or feasible to make such rights available to ADR Owners in general or any
ADR Owner in particular.
If the Depositary has distributed warrants or other instruments for rights
to all or certain ADR Owners, then upon instruction of such ADR Owner pursuant
to such warrants or other instruments to the Depositary to exercise such rights,
upon payment by such ADR Owner to the Depositary for the account of such ADR
Owner of an amount equal to the purchase price of the Preference Shares
receivable upon exercise of such rights, and upon payment of the fees and
expenses of the Depositary and any other charges as set forth in such warrants
or other instruments, the Depositary shall, on behalf of such ADR Owner,
exercise the rights and purchase the Preference Shares, and SAP will cause the
delivery of such Preference Shares to the Depositary on behalf of such ADR
Owner. As agent for such ADR Owner, the Depositary will cause such Preference
Shares to be deposited as described above and execute and deliver ADRs to such
ADR Owner as described above. See "-- Description of American Depositary
Shares -- Deposit and Withdrawal of Shares and Issuance of Receipts."
Whenever the Custodian or the Depositary will receive any distribution
other than cash, Preference Shares or rights in respect of the Preference
Shares, the Depositary shall, as promptly as practicable, cause the securities
or property received by it or the Custodian to be distributed to the ADR Owners
entitled thereto, after deduction or upon payment of any fees and expenses of
the Depositary or any taxes or other governmental charges, in proportion to
their holdings, respectively, in any manner that the Depositary may deem
equitable and practicable for accomplishing such distribution; provided,
however, that if SAP so directs or in the reasonable opinion of the Depositary
such distribution cannot be made proportionately among the ADR Owners entitled
thereto, or if for any other reason (including any requirement that SAP or the
Depositary withhold an amount on account of taxes or other governmental charges
or that such securities must be registered under the Securities Act in order to
be distributed) the Depositary deems such distribution not to be lawful or
feasible, the Depositary may adopt such method as it may reasonably deem lawful,
equitable and practicable for the purpose of effecting such distribution,
including the sale (public or private) of the securities or property thus
received, or any part thereof, and the net cash proceeds of any such sale will
be distributed by the Depositary to the ADR Owners entitled thereto as in the
case of a distribution received in cash. To the extent such securities or
property or the net proceeds thereof are not effectively distributed to ADR
Owners as provided in this paragraph, each ADS shall thereafter also represent
the additional securities or property distributed in respect of the Preference
Shares represented by such ADS prior to such distribution.
If the Depositary determines that any distribution of property (including
Preference Shares and rights to subscribe therefor) is subject to any taxes or
governmental charges that the Depositary is obliged to withhold, the Depositary
may, by public or private sale, dispose of all or a portion of such property in
such amounts and
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in such manner as the Depositary deems necessary and practicable to pay such
taxes or governmental charges, and thereafter will distribute the net proceeds
of any such sale after deduction of such taxes or governmental charges to the
ADR Owners entitled thereto in proportion to the number of ADRs held by them
respectively.
Upon any change in nominal or par value, any split-up, consolidation or
other reclassification of Deposited Securities, or upon any recapitalization,
reorganization, merger or consolidation or sale of assets affecting SAP or to
which it is a party, any securities that shall be received by the Depositary or
the Custodian in exchange for, in conversion of or in respect of Deposited
Securities shall be treated as new Deposited Securities under the Deposit
Agreement, and ADSs shall thereafter represent the new securities so received in
exchange or conversion, unless additional ADSs are issued. In any such case the
Depositary may, and upon the request of SAP shall, execute and deliver
additional ADRs as in the case of a distribution in Preference Shares, or call
for the surrender of outstanding ADRs to be exchanged for new ADRs specifically
describing such new Deposited Securities. In the event that any securities so
received may not be lawfully distributed to some or all ADR Owners, the
Depositary may, and if SAP so requests shall, sell such securities at a public
or private sale and allocate the net proceeds of such sale for the account of
the ADR Owners otherwise entitled to such securities upon an averaged or other
practicable basis without regard to any distinctions among such ADR Owners and
distribute the net proceeds so allocated to the extent practicable as in the
case of a distribution received in cash.
Record Dates
Whenever any cash dividend or other cash distribution shall become payable
or any distribution other than cash shall be made, or whenever rights shall be
issued with respect to the Deposited Securities, or whenever for any reason the
Depositary causes a change in the number of Preference Shares that are
represented by each ADS, or whenever the Depositary shall receive notice of any
meeting of holders of Preference Shares or other Deposited Securities, or
whenever the Depositary finds that it is necessary or convenient in respect of
any matter, the Depositary shall fix a record date which shall be, to the extent
practicable, the same date as the record date for the Preference Shares or other
Deposited Securities, as the case may be, or as close thereto as practicable,
after consultation with SAP, (a) for the determination of the ADR Owners who
shall be (i) entitled to receive such dividend, distribution or rights or the
net proceeds of the sale thereof or (ii) entitled to exercise, or give
instructions for the exercise of, voting rights at any such meeting, or (b) for
fixing the date on or after which each ADS will represent the changed number of
Preference Shares.
Voting of Deposited Securities
Upon receipt of (a) notice from the Company of any meeting of holders of
Preference Shares or other Deposited Securities (the "Notice"), (b) the
statement of the Custodian or such other major commercial German bank as may be
reasonably chosen by the Depositary to act as a proxy bank (the "Proxy Bank"),
setting forth its recommendations with regard to voting of the Preference Shares
represented by ADSs as to any matter which is set forth in the notice from the
Company on which a vote is to be taken by holders of Preference Shares
represented by ADSs, together with an English translation thereof (the
"Recommendation"), unless otherwise requested by SAP, the Depositary shall, as
soon as practicable thereafter, mail to all ADR Owners a notice containing (i)
such information as is contained in the notice of such meeting sent by SAP to
the Depositary, (ii) a statement that each ADR Owner and Holder ("Voters")at the
close of business on a specified record date will be entitled, subject to any
applicable provisions of German law, the Articles of Association, the ADR and
the Deposited Securities, to exercise, or to give instructions for the exercise
of, the voting rights, if any, pertaining to the whole number of Preference
Shares or other Deposited Securities evidenced by such ADR Owner's ADSs, (c) the
Recommendation and (d) a statement as to the manner in which such instructions
may be given including an express indication that if no voting instructions are
received on or before the date established by the Depositary for such purpose in
accordance with the Deposit Agreement (the "Instruction Date") then the Holders
shall in each case be deemed to have instructed the Depositary to vote the
shares or cause the shares to be voted in accordance with the Recommendation.
See "-- Description of Preference Shares -- Voting Rights."
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Voting rights with respect to the ADRs representing ADSs may be exercised
only in respect of 12 ADSs or integral multiples thereof. Pursuant to the terms
of the Deposit Agreement, and under German law, holders and beneficial owners of
ADRs will be subject to any disclosure requirements regarding acquisition and
ownership of Preference Shares as are applicable to Preference Shares pursuant
to the terms of the Articles of Association of SAP or German law, as each may be
amended from time to time. Failure to comply with such disclosure requirements
will, for so long as such failure continues, disqualify such ADR Owner from
exercising voting rights.
Each ADR Owner who desires to exercise, or give instructions for the
exercise of, voting rights shall be required to execute and return to the
Depositary on or before the Instruction Date, a document provided by the
Depositary which (a) either (i) authorizes such Voter's ADSs to be delivered to
a blocked account established for such purpose at the Depository Trust
Corporation (the "DTC") (as provided below), or (ii) instructs the Depositary to
block the Preference Shares without delivering the ADSs to the Depositary or (b)
instructs the Depositary as to how the whole number of Preference Shares or
other Deposited Securities represented by the ADSs evidenced by such ADRs are to
be voted.
Upon the written request of a Voter, as applicable, on such record date,
received on or before the Instruction Date, the Depositary shall endeavor,
insofar as practicable and permitted under German law, the Articles of
Association and the ADRs, to vote or cause to be voted the amount of Preference
Shares or other Deposited Securities so represented in accordance with the
instructions set forth in such request. The Company agrees, without any
liability to the Voters arising hereunder, to provide notice, to the extent
practicable, of any meeting of Voters of Shares or other Deposited Securities
containing the requisite information, together with English translations, to the
Depositary within the twelve days following the publication of the invitation to
the shareholders meeting in the German Federal Gazette. Voting rights may be
exercised only in respect of twelve (12) ADSs, or integral multiples thereof.
The Depositary shall not vote or attempt to exercise the right to vote that
attaches to the Preference Shares or other Deposited Securities, other than in
accordance with such instructions or deemed instructions received from the
Voters, as applicable, as of such record date.
If no specific voting instructions are received by the Depositary from any
Voter (to whom Notice was sent by the Depositary) with respect to the Deposited
Securities represented by the ADSs evidenced by such ADRs on or before the
Instruction Date, such Voter shall be deemed, and the Depositary shall deem such
Holder, to have instructed the Depositary to vote such Deposited Securities or
to cause such Deposited Securities to be voted in accordance with the
Recommendation. In no event may the Depositary itself exercise any voting
discretion over any Shares or other Deposited Securities.
Anything in the Deposit Agreement to the contrary notwithstanding, in the
event that the Proxy Bank shall fail to supply the Recommendation to the
Depositary at least 21 calendar days prior to any meeting of holders of
Preference Shares represented by ADSs or other Deposited Securities with respect
to which the Depositary has received notice from the Company, the Depositary
shall mail the Notice (which in this case will not contain the Recommendation or
the indication concerning the proxy to be given to the Proxy Bank) to the Voters
as herein above provided, and, thereafter, in any case in which no specific
voting instructions are received by the Depositary from a Voter on or before the
Instruction Date with respect to the Deposited Securities represented by the
ADSs evidenced by such ADRs, no votes shall be cast at such meeting with respect
to such Deposited Securities.
Nothing in the Deposit Agreement shall be construed to grant to a Voter any
voting rights with respect to Deposited Securities to which, by their terms,
voting rights do not otherwise attach.
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Reports and Notices
The Depositary will make available for inspection by ADR Owners at its
Corporate Trust Office any reports, notices and other communications, including
any proxy soliciting material, received from SAP, which are both (a) received by
the Depositary as the holder of the Deposited Securities and (b) made generally
available to the holders of Deposited Securities by SAP. The Depositary will
also send to ADR Owners copies of such reports when furnished by SAP pursuant to
the Deposit Agreement. Any such reports and communications, including any such
proxy soliciting material, furnished to the Depositary by SAP shall be furnished
in English only to the extent that such materials are required to be translated
into English pursuant to any regulations of the SEC.
Disclosure of Interests
To the extent that provisions of, or governing, any Deposited Securities
(including the Articles of Association or applicable law) may require disclosure
of beneficial or other ownership of Deposited Securities, other Preference
Shares or other securities and may provide for blocking voting or other rights
to enforce such disclosure or limits, ADR Owners and ADR Holders agree to comply
with all such disclosure requirements. The Depositary agrees to comply with all
applicable laws.
Amendment and Termination of the Deposit Agreement
The form of the ADRs and any provision of the Deposit Agreement may at any
time and from time to time be amended by agreement between SAP and the
Depositary in any respect they may deem necessary or desirable without the
consent of the ADR Owners or ADR Holders. Any amendment that imposes or
increases any fees or charges (other than taxes and other governmental charges,
registration fees, cable, telex or facsimile transmission costs, delivery costs
or other such expenses) or that otherwise prejudices any substantial existing
right of ADR Owners or ADR Holders, will not take effect as to the outstanding
ADRs until the expiration of 30 days after notice of such amendment has been
given to the ADR Owners. Every ADR Owner and ADR Holder at the time such
amendment becomes effective will be deemed, by continuing to hold such ADR, to
consent and agree to such amendment and to be bound by the Deposit Agreement as
amended thereby. In no event shall any amendment impair the right of any ADR
Owner to surrender its ADRs and receive therefor the Deposited Securities
evidenced thereby, except in order to comply with mandatory provisions of
applicable law.
The Depositary shall at any time, at the direction of SAP, terminate the
Deposit Agreement by mailing notice of such termination to all ADR Owners of
ADRs then outstanding at least 30 days prior to the date fixed in such notice
for such termination. The Depositary may likewise terminate the Deposit
Agreement by mailing notice of such termination to SAP and ADR Owners if, at any
time 30 days after the Depositary shall have delivered to SAP a notice of its
election to resign, a successor depositary shall not have been appointed and
accepted its appointment as provided in the Deposit Agreement. On and after the
termination date, the ADR Owner will, upon (a) surrender of the ADR to the
Depositary, (b) payment of the Depositary's fee for surrender of ADRs and (c)
payment of any applicable taxes or governmental charges, be entitled to delivery
of the amount of Deposited Securities represented by the ADSs evidenced by such
ADR. If any ADRs remain outstanding after the date of termination, the
Depositary thereafter will discontinue the registration of transfers of ADRs
subject to the Deposit Agreement, will suspend the distribution of dividends and
other distributions to the holders thereof and will not give any further notice
or perform any further acts under such Deposit Agreement, except that the
Depositary shall continue (i) the collection of dividends and other
distributions pertaining to the Deposited Securities, (ii) the sale of rights
and other property as provided in the Deposit Agreement, and (iii) the delivery
of Deposited Securities, together with any dividends or other distributions
received with respect thereto and the net proceeds of the sale of any rights or
other property, in exchange for ADRs surrendered to the Depositary, subject to
the applicable terms of the Deposit Agreement, including the payment of the fees
and other charges of the Depositary. At any time after the expiration of one
year from the date of termination, the Depositary may sell the Deposited
Securities then held under the
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Deposit Agreement and may thereafter hold uninvested the net proceeds of any
such sale, together with any other cash then held by it under the Deposit
Agreement, unsegregated and without liability for interest, for the pro rata
benefit of the owners of ADRs that have not theretofore been surrendered, such
ADR Owners thereupon becoming general creditors of the Depositary with respect
to such net proceeds. After making such sale, the Depositary shall be discharged
from all obligations under the Deposit Agreement except to account for net
proceeds and other cash and its obligations to the Company regarding
indemnification under the Deposit Agreement. Upon termination of the Deposit
Agreement, SAP shall be discharged from all obligations thereunder, except for
certain obligations to the Depositary.
Charges of Depositary
Subject to the applicable law and the regulations of any exchange upon
which the ADSs are listed, the following charges, as applicable, shall be
incurred by any party depositing or withdrawing Preference Shares or by any
party surrendering ADRs or to whom ADRs are issued (including, without
limitation, issuance pursuant to a stock dividend or stock split declared by SAP
or an exchange of stock regarding the ADRs or Deposited Securities or a
distribution of ADRs pursuant to the Deposit Agreement): (i) taxes and other
governmental charges, (ii) registration fees as may from time to time be in
effect for the registration of transfer of Preference Shares generally
applicable to the transfer of Preference Shares to the name of the Depositary or
its nominee or the Custodian or its nominee on the making of deposits or
withdrawals of Preference Shares pursuant to the Deposit Agreement, (iii) such
air courier, cable, telex and facsimile transmission expenses as are expressly
provided in the Deposit Agreement, (iv) expenses as are incurred by the
Depositary in the conversion of Foreign Currency pursuant to the Deposit
Agreement, (v) a fee not in excess of U.S.$5.00 per 100 ADSs (or portion
thereof) for the execution and delivery of ADRs pursuant to the Deposit
Agreement and the surrender of ADRs pursuant to the Deposit Agreement, (vi) a
fee not in excess of U.S.$0.02 per ADS (or portion thereof) for any cash
distribution made pursuant to the Deposit Agreement except for any distribution
of cash dividends and (vii) a fee for the distribution of securities pursuant to
the Deposit Agreement in an amount equal to the fee for the execution and
delivery of ADRs which would have been charged as a result of the deposit of
such securities but which securities are instead distributed to ADR Owners.
Liability of ADR Owners or ADR Holders for Taxes or Other Charges
If any tax or other governmental charge shall become payable with respect
to any ADR or any Deposited Securities represented by the ADSs evidenced by any
ADR, such tax or other governmental charge shall be payable by the ADR Owner or
ADR Holder. The Depositary may and at the request of the Company shall refuse to
effect any transfer of such ADR (or any split-up or combination thereof) or any
withdrawal of the Deposited Securities represented by the ADSs evidenced by such
ADRs until such payment is made, and may withhold any dividends or other
distributions or may sell for the account of the beneficial owner thereof any
part or all of the Deposited Securities represented by the ADSs evidenced by
such ADRs and may apply such dividends or other distributions or the proceeds of
any such sale in payment of any such tax or other governmental charge and the
ADR Owner or ADR Holder shall remain liable for any deficiency.
To the extent practicable and in accordance with instructions from SAP, the
Depositary and the Custodian will take all practicable administrative actions
necessary to obtain all tax refunds and to reduce German withholding taxes on
dividends and other distributions on the Deposited Securities. See "Item 7.
Taxation -- German Taxation of Holders of Preference Shares or ADSs -- Refund of
German Tax to United States Holders."
Limitations on Execution, Delivery, Transfer and Surrender of ADRs
The ADRs are transferable on the books of the Depositary, and the
Depositary may close the transfer books, at any time and from time to time, when
transfer agents in New York City generally close their transfer books or when
deemed expedient by it or at the request of the Company. As a condition
precedent to the execution and delivery, registration of transfer, split-up,
combination or surrender of any Deposited Securities, or withdrawal of any
Deposited Securities, the Depositary, or the Custodian or Registrar may require
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(1) payment from the person presenting the ADR or the depositor of such
Preference Shares of a sum sufficient to reimburse it for any tax or other
governmental charge and, if applicable, any stock transfer or registration fee
with respect thereto and payment of any applicable fees payable to the
Depositary pursuant to the Deposit Agreement, (2) the production of proof
satisfactory to it as to the identity and genuineness of any signature and (3)
compliance with such regulations as the Depositary may establish consistent with
the provisions of the Deposit Agreement. The execution and delivery or transfer
of ADRs generally may be suspended during any period when the transfer books of
the Depositary are closed or if such action is deemed necessary or advisable by
the Depositary or the Company at any time or from time to time because of any
requirement or applicable law or any government or governmental body or
commission, or under any provisions of the Deposit Agreement or the Articles of
Association of the Company, or for any other reason, subject to the provisions
of the following sentence. Notwithstanding any other provision of the Deposit
Agreement or the ADRs, the surrender of outstanding ADRs and withdrawal of
Deposited Securities may not be suspended subject only to (i) temporary delays
caused by closing the transfer books of the Depositary or SAP or the deposit of
Preference Shares in connection with voting at a shareholders' meeting, or the
payment of dividends, (ii) the payment of fees, taxes and similar charges and
(iii) compliance with any U.S. or foreign laws or governmental regulations
relating to the ADRs or to the withdrawal of the Deposited Securities.
General
None of the Depositary, SAP or any of their respective officers, directors,
employees, agents or affiliates will be liable to any ADR Owner or other person
if by reason of any provision of any present or future law or regulation of the
United States, the Federal Republic of Germany or any other country, or of any
other governmental or regulatory authority or stock exchange or by reason of any
provision, present or future, of the Articles of Association of SAP, or by
reason of any provision of any securities issued or distributed by SAP or any
offering or distribution thereof, or by reason of any act of God or war or other
circumstance beyond its control, the Depositary, SAP or any of their respective
directors, employees, agents or affiliates shall be prevented, delayed or
forbidden from, or be subject to any civil or criminal penalty on account of,
doing or performing any act or thing which by the terms of the Deposit Agreement
or the Deposited Securities it is provided shall be done or performed; nor will
the Depositary, SAP or any of their respective officers, directors, employees,
agents or affiliates incur any liability to any ADR Owner or ADR Holder by
reason of any nonperformance or delay, caused as stated in the preceding clause,
in the performance of any act or thing which by the terms of the Deposit
Agreement it is provided shall or may be done or performed, or by reason of any
exercise of, or failure to exercise, any discretion provided for by the Deposit
Agreement.
None of the Depositary, SAP or any of their respective agents shall be
liable for any action or nonaction by it in reliance upon the advice or
information from legal counsel, accountants, any person presenting Preference
Shares for deposit, any ADR Owner or ADR Holder or any other person believed by
it in good faith to be competent to give such advice or information. The
obligations of the Depositary to ADR Owners and ADR Holders under the Deposit
Agreement are expressly limited to performing its obligations specified therein
without negligence or bad faith.
The Depositary will keep books at its Corporate Trust office, for the
registration and transfer of ADRs, which at all reasonable times will be open
for inspection by the ADR Owners or ADR Holders provided that such inspection
shall not be for the purpose of communicating with holders in the interest of a
business or object other than the business of SAP or a matter related to the
Deposit Agreement or the ADRs.
The Depositary may appoint one or more co-transfer agents approved by SAP
for the purpose of effecting transfers, combinations and split-ups of ADRs at
designated transfer offices on behalf of the Depositary. In carrying out its
functions, a co-transfer agent may require evidence of authority and compliance
with applicable laws and other requirements by beneficial owners of ADSs or
persons entitled to ADRs and will be entitled to protection and indemnity to the
same extent as the Depositary.
Governing Law
The Deposit Agreement will be governed by the laws of the State of New
York.
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PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES
AND USE OF PROCEEDS.
Not applicable.
PART IV
ITEM 17. FINANCIAL STATEMENTS.
The Company has responded to Item 18 in lieu of responding to this item.
ITEM 18. FINANCIAL STATEMENTS.
Reference is made to pages F-1 through F-42 and Item 19.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS.
(a) The following financial statements are filed as part of this Form 20-F:
Report of ARTHUR ANDERSEN Wirtschaftsprufungsgesellschaft
Steuerberatungsgesellschaft mbH.
Consolidated Balance Sheets as of December 31, 1997 and 1996 (audited).
Consolidated Income Statements for the years ended 1997, 1996 and 1995
(audited).
Consolidated Statement of Fixed Assets for the year ended 1997
(audited).
Consolidated Statement of Fixed Assets for the year ended 1996
(audited).
Notes to the Consolidated Financial Statements.
Schedule for the years ended December 31, 1997, 1996 and 1995.
Schedule II -- Valuation and Qualifying Accounts and Reserves.
(b) The following documents are filed as exhibits to this Form 20-F:
3.1 Articles of Association (Satzung), as amended to the date of filing
(English translation included) (Incorporated by reference to
Registration Statement on Form F-1 of SAP (Registration No______),
filed June 22, 1998.)
4.1 Form of Amended and Restated Deposit Agreement among SAP, The Bank
of New York, as Depositary, and all owners and holders from time to
time of American Depositary Receipts issued thereunder, including
the form of American Depositary Receipts (Incorporated by reference
to Registration Statement on Form F-1 of SAP (Registration
No.______), filed June 22, 1998.)
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SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant certifies that it meets all of the requirements for
filing this Registration Statement on Form 20-F and has duly caused this
Registration Statement 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: Member of the Executive
Board
Dated: June 22, 1998 By: /s/ Dieter Matheis
-----------------------------------
Name: Dieter Matheis
Title: Principal Financial Officer
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SAP AKTIENGESELLSCHAFT AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-1
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and
1996................................................... F-2
Consolidated Income Statements for the years ended
December 31, 1997, 1996 and 1995....................... F-3
Consolidated Statement of Fixed Assets for the year ended
December 31, 1997...................................... F-4
Consolidated Statement of Fixed Assets for the year ended
December 31, 1996...................................... F-5
Notes to Consolidated Financial Statements................ F-6
Schedule for the years ended December 31, 1997, 1996 and
1995
Schedule II -- Valuation and Qualifying Accounts and
Reserves............................................... F-39
</TABLE>
65
<PAGE> 68
REPORT OF INDEPENDENT ACCOUNTANTS
We have audited the accompanying consolidated balance sheets of SAP
Aktiengesellschaft Systeme, Anwendungen, Produkte in der Datenverarbeitung and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
income statements for each of the three years in the period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Germany which, as applied by us, are substantially the same as
those followed in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
SAP Aktiengesellschaft Systeme, Anwendungen, Produkte in der Datenverarbeitung
and subsidiaries as of December 31, 1997 and 1996 and the results of their
operations for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles in Germany.
Application of accounting principles generally accepted in the United
States would have affected shareholders' equity as of December 31, 1997 and 1996
and net income for each of the years in the two year period ended December 31,
1997 to the extent summarized in Note 40 to the consolidated financial
statements.
Eschborn/Frankfurt/M.
February 18, 1998
ARTHUR ANDERSEN
Wirtschaftsprufungsgesellschaft
Steuerberatungsgesellschaft mbH
<TABLE>
<S> <C> <C>
sig sig
Prof. Dr. Weber Klein
Wirtschaftsprufer Wirtschaftsprufer
</TABLE>
F-1
<PAGE> 69
SAP AKTIENGESELLSCHAFT
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
ASSETS
<TABLE>
<CAPTION>
1997(1) 1997 1996
NOTE $ (000) DM(000) DM(000)
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Intangible assets............................. (7) 45,189 81,299 5,742
Tangible fixed assets......................... (8) 474,299 853,312 621,903
Financial assets.............................. (9) 126,616 227,794 161,429
--------- --------- ---------
Fixed assets.................................. 646,104 1,162,405 789,074
--------- --------- ---------
Inventories................................... (10) 4,177 7,515 7,799
Accounts receivable........................... (11) 1,353,843 2,435,699 1,555,869
Accounts due from related parties............. 3,352 6,030 --
Other assets.................................. (12) 92,909 167,152 55,895
--------- --------- ---------
Accounts receivable and other assets..... 1,450,104 2,608,881 1,611,764
--------- --------- ---------
Marketable securities......................... (13) 92,875 167,092 164,891
Cash and cash equivalents..................... (14) 554,399 997,420 737,394
--------- --------- ---------
Current assets................................ 2,101,555 3,780,908 2,521,848
--------- --------- ---------
Deferred taxes................................ (15) 50,013 89,978 37,462
Prepaid expenses and deferred charges......... 20,549 36,969 18,720
--------- --------- ---------
Total assets.................................. 2,818,221 5,070,260 3,367,104
========= ========= =========
SHAREHOLDERS' EQUITY AND LIABILITIES
Subscribed capital(2)......................... (17) 289,875 521,513 517,537
Capital reserve............................... (17)(18) 238,157 428,469 353,344
Revenue reserves.............................. (17) 1,002,452 1,803,510 1,095,491
Retained earnings -- SAP AG................... (17) 163,597 294,328 240,698
Minority interests............................ 8,088 14,552 4,242
--------- --------- ---------
Shareholders' equity.......................... 1,702,169 3,062,372 2,211,312
--------- --------- ---------
Special reserves for capital investment
subsidies and allowances.................... (19) 232 418 66
Pension reserves and similar obligations...... (20) 23,045 41,461 29,526
Other reserves and accrued liabilities........ (21) 622,598 1,120,114 604,860
--------- --------- ---------
Reserves and accrued liabilities......... 645,643 1,161,575 634,386
--------- --------- ---------
Bonds......................................... (22) 2,620 4,713 8,669
Other liabilities............................. (23) 452,581 814,239 494,382
--------- --------- ---------
Other liabilities........................ 455,201 818,952 503,051
Deferred income............................... 14,976 26,943 18,289
--------- --------- ---------
Total shareholders' equity and liabilities.... 2,818,221 5,070,260 3,367,104
========= ========= =========
</TABLE>
- ---------------
(1) The 1997 figures have been translated solely for the convenience of the
reader at an exchange rate of DM 1.7991 to $1.00, the Noon Buying Rate on
December 31, 1997.
(2) Contingent capital DM 4,737 thousand and DM 8,713 thousand as of December
31, 1997 and 1996, respectively.
See Notes to Consolidated Financial Statements
F-2
<PAGE> 70
SAP AKTIENGESELLSCHAFT
CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1997 1996 1995
NOTE $ (000)(1) DM (000) DM (000) DM (000)
---- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Sales revenues........................ (27) 3,344,709 6,017,466 3,722,150 2,696,381
Increase in inventory of unfinished
services............................ 1,374 2,472 961 628
Other operating income................ (28) 44,448 79,966 73,712 54,161
---------- ---------- ---------- ----------
3,390,531 6,099,904 3,796,823 2,751,170
---------- ---------- ---------- ----------
Raw materials and supplies, purchased
goods............................... (9,163) (16,485) (13,967) (11,475)
Purchased services.................... (327,516) (589,234) (380,417) (289,172)
---------- ---------- ---------- ----------
Cost of services and materials........ (336,679) (605,719) (394,384) (300,647)
---------- ---------- ---------- ----------
Personnel expenses.................... (29) (1,153,310) (2,074,920) (1,338,473) (956,744)
Depreciation and amortization......... (30) (108,566) (195,321) (164,591) (144,456)
Other operating expenses.............. (31) (895,852) (1,611,728) (955,746) (697,455)
---------- ---------- ---------- ----------
Operating expenses.................... (2,157,728) (3,881,969) (2,458,810) (1,798,655)
---------- ---------- ---------- ----------
Operating results..................... 896,124 1,612,216 943,629 651,868
---------- ---------- ---------- ----------
Income from investments............... (32) 1,945 3,500 1,745 --
Income from marketable securities and
loans of financial assets........... 817 1,469 2,188 2,109
Write-down of financial assets........ (33) (1,562) (2,811) (8,192) (2,124)
Net interest income................... (34) 29,216 52,562 27,843 22,213
---------- ---------- ---------- ----------
Result from ordinary operations....... 926,540 1,666,936 967,213 674,066
Taxes on income....................... (15) (393,727) (708,354) (382,414) (258,665)
Other taxes........................... (18,469) (33,228) (17,263) (10,573)
---------- ---------- ---------- ----------
Total taxes........................... (412,196) (741,582) (399,677) (269,238)
---------- ---------- ---------- ----------
NET INCOME............................ 514,344 925,354 567,536 404,828
Minority interests.................... (1,318) (2,371) (1,317) (1,504)
Beginning retained earnings -- SAP
AG.................................. 133,788 240,698 133,784 88,081
Distribution of dividends of SAP AG
shareholders........................ (133,507) (240,193) (133,615) (88,058)
Transfer to revenue reserves.......... (349,708) (629,160) (325,690) (269,563)
---------- ---------- ---------- ----------
Ending retained earnings -- SAP AG.... 163,599 294,328 240,698 133,784
========== ========== ========== ==========
</TABLE>
(1) The 1997 figures have been translated solely for the convenience of the
reader at an exchange rate of DM 1.7991 to $1.00, the Noon Buying Rate on
December 31, 1997.
See Notes to Consolidated Financial Statements
F-3
<PAGE> 71
SAP AKTIENGESELLSCHAFT
CONSOLIDATED STATEMENT OF FIXED ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
DM (000)
<TABLE>
<CAPTION>
PURCHASE OR MANUFACTURING COST
-----------------------------------------------------------
1/1/97 ADDITIONS RETIREMENTS TRANSFERS 12/31/97
--------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
I. Intangible assets
1. Trademarks, similar rights
and assets ............... 29,426 32,342 85 116 61,799
2. Goodwill.................. -- 55,006 55,006
--------- ------- ------- ------- ---------
29,426 87,348 85 116 116,805
--------- ------- ------- ------- ---------
II. Tangible fixed assets
1. Land, leasehold rights
and buildings, including
buildings on third-party
land..................... 442,972 229,856 76,078 12,929 609,679
2. Other property, plant and
equipment................ 621,548 173,975 48,554 59 747,028
3. Advance payments and
construction in
progress................. 28,652 83,531 3 (13,104) 99,076
--------- ------- ------- ------- ---------
1,093,172 487,362 124,635 (116) 1,455,783
--------- ------- ------- ------- ---------
III. Financial assets
1. Shares in affiliated
companies................ 12,112 128 11,984
2. Loans due from affiliated
companies................ 228 228 --
3. Investments in associated
companies................ 2,947 15,826 18,773
4. Other investments........ 9,348 41,572 50,920
5. Shares in cooperatives... 1 1
6. Long-term investments.... 100,704 8,801 7 109,498
7. Other loans.............. 48,529 12,907 11,282 50,154
--------- ------- ------- ------- ---------
173,869 79,106 11,645 -- 241,330
--------- ------- ------- ------- ---------
FIXED ASSETS................... 1,296,467 653,816 136,365 -- 1,813,918
========= ======= ======= ======= =========
<CAPTION>
ACCUMULATED DEPRECIATION AND AMORTIZATION BOOK VALUE
------------------------------------------------------- --------------------------------
WRITE-
1/1/97 ADDITIONS RETIREMENTS TRANSFERS UPS 12/31/97 12/31/97 12/31/96
-------- --------- ----------- --------- ------ -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
I. Intangible assets
1. Trademarks, similar rights
and assets ............... 23,684 7,838 71 116 102 31,465 30,334 5,742
2. Goodwill.................. 4,041 4,041 50,965 --
------- ------- ------ ---- --- ------- --------- -------
23,684 11,879 71 116 102 35,506 81,299 5,742
------- ------- ------ ---- --- ------- --------- -------
II. Tangible fixed assets
1. Land, leasehold rights
and buildings, including
buildings on third-party
land..................... 78,109 33,656 8,756 103,009 506,670 364,863
2. Other property, plant and
equipment................ 393,160 149,786 43,368 (116) 499,462 247,566 228,388
3. Advance payments and
construction in
progress................. -- 99,076 28,652
------- ------- ------ ---- --- ------- --------- -------
471,269 183,442 52,124 (116) -- 602,471 853,312 621,903
------- ------- ------ ---- --- ------- --------- -------
III. Financial assets
1. Shares in affiliated
companies................ 4,802 164 4,966 7,018 7,310
2. Loans due from affiliated
companies................ 228 228 -- -- --
3. Investments in associated
companies................ -- 18,773 2,947
4. Other investments........ -- 50,920 9,348
5. Shares in cooperatives... -- 1 1
6. Long-term investments.... -- 109,498 100,704
7. Other loans.............. 7,410 2,647 624 863 8,570 41,584 41,119
------- ------- ------ ---- --- ------- --------- -------
12,440 2,811 852 -- 863 13,536 227,794 161,429
------- ------- ------ ---- --- ------- --------- -------
FIXED ASSETS................... 507,393 198,132 53,047 -- 965 651,513 1,162,405 789,074
======= ======= ====== ==== === ======= ========= =======
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE> 72
SAP AKTIENGESELLSCHAFT
CONSOLIDATED STATEMENT OF FIXED ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
DM (000)
<TABLE>
<CAPTION>
PURCHASE OR MANUFACTURING COST
--------------------------------------------------------------------------
CHANGES IN
CONSOLIDATED
1/1/96 COMPANIES ADDITIONS RETIREMENTS TRANSFERS 12/31/96
--------- ------------ --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
I. Intangible assets
1. Trademarks, similar
rights and assets..... 25,894 (78) 4,414 327 (477) 29,426
--------- ------ ------- ------ ------ ---------
25,894 (78) 4,414 327 (477) 29,426
--------- ------ ------- ------ ------ ---------
II. Tangible fixed assets
1. Land, leasehold rights
and buildings,
including buildings on
third-party land...... 411,309 (41) 33,000 2,755 1,459 442,972
2. Other property, plant
and equipment........ 539,409 (2,866) 153,223 69,179 961 621,548
3. Advance payments and
construction in
progress............. 850 30,001 256 (1,943) 28,652
--------- ------ ------- ------ ------ ---------
951,568 (2,907) 216,224 72,190 477 1,093,172
--------- ------ ------- ------ ------ ---------
III. Financial assets
1. Shares in affiliated
companies............ 15,379 288 3,555 12,112
2. Loans due from
affiliated
companies............ 228 228
3. Investments in
associated
companies............ -- 2,947 2,947
4. Other investments.... 2,500 6,848 9,348
5. Shares in
cooperatives......... 1 1
6. Long-term
investments.......... 100,499 205 100,704
7. Other loans.......... 58,755 6,020 16,246 48,529
--------- ------ ------- ------ ------ ---------
177,362 16,308 19,801 173,869
--------- ------ ------- ------ ------ ---------
FIXED ASSETS............... 1,154,824 (2,985) 236,946 92,318 1,296,467
========= ====== ======= ====== ====== =========
<CAPTION>
ACCUMULATED DEPRECIATION AND AMORTIZATION BOOK VALUE
--------------------------------------------------------------------- ------------------------------
CHANGES IN
CONSOLIDATED WRITE-
1/1/96 COMPANIES ADDITIONS RETIREMENTS TRANSFERS UPS 12/31/96 12/31/96 12/31/95
------- ------------ --------- ----------- --------- ------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
I. Intangible assets
1. Trademarks, similar
rights and assets..... 18,421 (57) 5,472 225 73 23,684 5,742 7,473
------- ------ ------- ------ --- ----- ------- ------- -------
18,421 (57) 5,472 225 73 23,684 5,742 7,473
------- ------ ------- ------ --- ----- ------- ------- -------
II. Tangible fixed assets
1. Land, leasehold rights
and buildings,
including buildings on
third-party land...... 57,195 (28) 26,200 3,133 12 2,137 78,109 364,863 354,114
2. Other property, plant
and equipment........ 319,359 (2,206) 132,919 56,827 (85) 393,160 228,388 220,050
3. Advance payments and
construction in
progress............. 28,652 850
------- ------ ------- ------ --- ----- ------- ------- -------
376,554 (2,234) 159,119 59,960 (73) 2,137 471,269 621,903 575,014
------- ------ ------- ------ --- ----- ------- ------- -------
III. Financial assets
1. Shares in affiliated
companies............ 351 6,591 2,140 4,802 7,310 15,028
2. Loans due from
affiliated
companies............ 228 228 -- --
3. Investments in
associated
companies............ 2,947 --
4. Other investments.... 9,348 2,500
5. Shares in
cooperatives......... 1 1
6. Long-term
investments.......... 100,704 100,499
7. Other loans.......... 7,319 1,601 721 789 7,410 41,119 51,436
------- ------ ------- ------ --- ----- ------- ------- -------
7,898 8,192 2,861 789 12,440 161,429 169,464
------- ------ ------- ------ --- ----- ------- ------- -------
FIXED ASSETS............... 402,873 (2,291) 172,783 63,046 2,926 507,393 789,074 751,951
======= ====== ======= ====== === ===== ======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE> 73
SAP AKTIENGESELLSCHAFT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. GENERAL INFORMATION
(1) BUSINESS AND BASIS OF PRESENTATION
BUSINESS
SAP Aktiengesellschaft Systeme, Anwendungen, Produkte in der
Datenverarbeitung ("SAP AG"), together with its subsidiaries (collectively,
"Company"), 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 products, the R/3 System and the
R/2 System, are designed to provide customers with a palette of standard
business solutions arranged in applications which 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.
Concentrations of operating and credit 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 1997, 1996 and 1995.
BASIS OF PRESENTATION
The consolidated financial statements of the Company have been prepared in
accordance with generally accepted accounting principles in Germany ("German
GAAP") as prescribed by the German Commercial Code and the German Stock
Corporation Act.
Application of certain items of United States generally accepted accounting
principles ("U.S. GAAP") would have resulted in a material difference to the net
income and shareholders' equity as of and for the years ended December 31, 1997
and 1996. See Note 40 for a summary of these differences.
All monetary amounts in the notes to the consolidated financial statements
are shown in Deutsche Marks ("DM" or "Marks"). All Mark financial data that have
been converted into United States Dollars ("$" or "Dollars") have been converted
at the noon buying rate in New York City for cable transfers in foreign
currencies as certified for customs by the Federal Reserve Bank of New York (the
"Noon Buying Rate") on December 31, 1997, which was 1.7991 Marks per Dollar.
B. SIGNIFICANT ACCOUNTING POLICIES
(2) CONSOLIDATED COMPANIES
The consolidated financial statements include, in addition to SAP AG, 8
domestic and 42 foreign subsidiaries in which SAP AG holds, directly or
indirectly, a majority of the voting rights. The following 9 companies were
established in 1997 and are fully consolidated in the financial statements for
the first time:
-- SAP Systems Integration GmbH, Alsbach-Haehnlein/Germany
-- DACOS Software Holding GmbH, St. Ingbert/Germany
-- SAP Hungary Rendszerek, Alkalmazasok es Termekek az Adatfeldolgozasban
Kft.,
Budapest/Hungary
-- SAP Retail Solutions Nederland B.V., 's Hertogenbosch/Netherlands
-- SAP Service and Support Center (Ireland) Limited, Dublin/Ireland
-- SAP America Public Sector, Inc., Washington, DC/USA
F-6
<PAGE> 74
SAP AKTIENGESELLSCHAFT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
-- PT SAP Asia, Jakarta/Indonesia
-- SAP Taiwan Co. Ltd., Taipei/Taiwan
-- SAP HONG KONG Co. Limited, Taikoo Shing/Hong Kong
The effect of including the above companies in the consolidated financial
statements does not limit comparability of the annual financial statements with
those of the previous year.
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. Balance sheet, income statement and cash flow amounts
recorded on a proportional basis are insignificant to the consolidated financial
statements.
Investments in associated companies in which the Company has the ability to
exercise significant influence are accounted for under the book value method as
described below. The following associated companies were consolidated by the
book value method:
-- SAP Solutions GmbH, Freiberg/Germany
-- IDS Prof. Scheer Gesellschaft fur integrierte Datenverarbeitungssysteme
mbH,
Saarbrucken/Germany ("IDS")
-- Schmidt, Vogel und Partner Consult, Gesellschaft fur Organisation und
Managementberatung mbH, Bielefeld/Germany
Two subsidiaries have not been consolidated, because their impact on the
Company's net worth, financial position and results of operations is immaterial
(their balance sheet totals amount to approximately 0.3% of the consolidated
balance sheet total). They have been excluded pursuant to Article 296 (2) of the
German Commercial Code and are included in "Shares in affiliated companies".
Please refer to the information relating to investments of SAP AG and the
Company on pages F-35 through F-38.
(3) CONSOLIDATION POLICIES
The book value method of consolidation has been used, unless otherwise
noted. 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 set off against the reserves as of December 31, 1996, thus reducing
equity, pursuant to Article 309 (1) sentence 3 of the German Commercial Code. On
January 1, 1997, the Company changed its policy and, prospectively, goodwill is
capitalized and amortized through the income statement over its estimated useful
life.
Inter-company receivables, payables, revenues, expenses and profits among
the consolidated companies are eliminated. Minority interest is identified for
subsidiaries not wholly owned by the parent company.
Equity investments consolidated by the book value method are recorded at
book value plus equity in their undistributed earnings since acquisition and are
included in "Investments in associated companies". Goodwill associated with
equity purchases is included in intangible assets.
The retained earnings of the Company, as shown in the consolidated
financial statements, are the retained earnings of SAP AG. The retained earnings
of the subsidiaries are included in the Company's revenue reserves.
(4) ACCOUNTING AND VALUATION POLICIES
The accounting and valuation policies of SAP AG also apply to the
consolidated financial statements. The financial statements of consolidated
subsidiaries whose accounting policies differ from those of the parent company
have been adjusted where material.
F-7
<PAGE> 75
SAP AKTIENGESELLSCHAFT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
FIXED ASSETS
Purchased intangible assets are shown at cost and amortized on a
straight-line basis over a maximum of 5 years. Goodwill is amortized on a
straight-line basis over its estimated useful life, generally 5 years.
Tangible fixed assets are shown at cost less accumulated depreciation.
Buildings are depreciated using the straight-line method over useful lives of 25
to 50 years. Computer equipment is depreciated using the straight-line method
over useful lives of 3 to 5 years. Leasehold improvements are depreciated using
the straight-line method over the term of the lease. Generally, other movable
fixed assets are depreciated using the declining-balance method. 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. The useful lives of other movable
fixed assets range between 2 and 20 years. Low-value assets are expensed in the
year of acquisition.
Long-term investments are shown at cost. Interest-bearing loans to
employees and to third parties are shown at their nominal value. Interest-free
loans to employees and to third parties are discounted to their present value
using an effective interest rate of approximately 6% per annum.
CURRENT ASSETS
Inventories are shown at the lower of cost or market.
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 the services. Accounts receivable are stated
at their nominal value, which approximates fair value. Interest-free accounts
receivable with remaining terms exceeding 1 year are discounted to their present
value using an effective interest rate of 6% per annum. Other assets equal to
the cash surrender value of insurance policies are capitalized at the value of
the insurance company's premium reserve, as shown in its general operational
plan.
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.
RELATED PARTY TRANSACTIONS
In 1997, the Company acquired a 25.2% interest in IDS from IDS's existing
shareholders and directly from IDS pursuant to a capital increase. The principal
shareholder of IDS was also a member of SAP AG's Supervisory Board at the time
of such acquisition. Approximately 16% of the aggregate purchase price for
F-8
<PAGE> 76
SAP AKTIENGESELLSCHAFT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
such 25.2% interest was paid to the selling shareholders and 84% was paid to
IDS. The majority of the purchase price was paid in 1997. Balances outstanding
as of December 31, 1997 were paid in 1998 and are included in other liabilities
in the 1997 balance sheet. The purchase price for IDS and the effect on net
income was not significant to the consolidated financial statements.
DEFERRED TAXES
On the consolidated balance sheet, deferred taxes are established for
temporary differences between assets, liabilities and net income calculated for
tax purposes and for financial reporting purposes which are expected to reverse
in the future. 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
Reserves for pension obligations in Germany are stated at the highest
amounts allowable for tax purposes, in accordance with Article 6a of the German
Income Tax Act. An interest rate of 6% per annum has been applied. Foreign
subsidiaries record 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, has established a reserve for indirect pension obligations, exercising its
option to establish accruals under Article 28(1) sentence 2 of the Introductory
Act to the German Commercial Code.
Accrued taxes are calculated on the basis of the planned distribution of
income. The other reserves and accrued liabilities take into account all
foreseeable risks and contingent obligations.
LIABILITIES
Liabilities are shown at the amounts payable, which approximate fair market
value.
DERIVATIVES
The Company uses derivative financial instruments to manage foreign
currency and interest rate risks and holds such instruments for purposes other
than trading. Unrealized losses associated with currency rate changes on forward
foreign exchange contracts and foreign currency options are recorded currently
in income and are included in other liabilities. Gains are recorded when
realized. For interest rate swaps, the net cash amounts paid or received are
accrued and recognized as an adjustment to interest income.
CREDIT ARRANGEMENTS
Certain of the Company's foreign subsidiaries have lines of credit
available which allow them to borrow in the local currency to the extent SAP AG
has guaranteed such amounts. At December 31, 1997, the Company had approximately
DM 151.4 million available through such arrangements under which the Company may
borrow on an overdraft or short-term basis. In addition, the Company has a DM
89.6 million line of credit available for which no guarantee is required.
Interest under all lines is determined at the time of borrowing based on current
market rates.
(5) CURRENCY TRANSLATION
The financial statements of the individual companies include accounts
receivable in foreign currencies, which are translated at the lower of the
exchange rate on the transaction date or the buying rate on the balance
F-9
<PAGE> 77
SAP AKTIENGESELLSCHAFT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
sheet date. Losses arising from movements in exchange rates are recorded.
Accounts payable in foreign currencies are valued at the higher of the
applicable rates.
Fixed assets (excluding loans), shareholders' equity, depreciation and
amortization of foreign subsidiaries are translated using the historical
exchange rate. The remaining assets and liabilities are translated at the median
exchange rates on the balance sheet date (closing rate).
Differences arising from the translation of balance sheet items are charged
directly to the revenue reserves, without affecting income for the year.
With the exception of depreciation and amortization, which are translated
at historical rates, expense and income items are translated at the average
exchange 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
statement is charged to income.
The exchange rates of key currencies changed as follows:
<TABLE>
<CAPTION>
CLOSING RATE TO
THE DM AT AVERAGE EXCHANGE RATE
DECEMBER 31, TO THE DM FOR THE YEAR
------------------ ----------------------
1997 1996 1997 1996
------ ------ -------- --------
<S> <C> <C> <C> <C>
1 USD..................................... 1.7921 1.5548 1.7371 1.5083
100 JPY................................... 1.3838 1.3408 1.4309 1.3811
1 GBP..................................... 2.9820 2.6267 2.8493 2.3689
1 CAD..................................... 1.2445 1.1356 1.2506 1.1050
1 AUD..................................... 1.1725 1.2405 1.2805 1.1848
</TABLE>
C. NOTES TO THE CONSOLIDATED BALANCE SHEETS
(6) FIXED ASSETS
Fixed assets activities during 1997 and 1996 are shown on pages F-4 and
F-5.
(7) INTANGIBLE ASSETS
The additions to trademarks, similar rights and assets relate to software
programs. The additions to goodwill relate to the first-time capitalization of
goodwill.
(8) TANGIBLE FIXED ASSETS
Additions to tangible fixed assets consist primarily of the construction of
office buildings, the acquisition of land and the purchase of computer hardware,
automobiles and other business equipment.
<TABLE>
<CAPTION>
ADDITIONS BOOK VALUE ADDITIONS BOOK VALUE
1997 12/31 1997 1996 12/31 1996
DM (000) DM (000) DM (000) DM (000)
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Geographic region:
Germany.............................. 193,242 484,854 130,012 389,186
Rest of Europe....................... 150,652 184,806 36,630 132,150
Americas............................. 112,646 136,862 25,854 64,961
Asia-Pacific/Africa.................. 30,822 46,790 23,728 35,606
------- ------- ------- -------
487,362 853,312 216,224 621,903
------- ------- ------- -------
</TABLE>
F-10
<PAGE> 78
SAP AKTIENGESELLSCHAFT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) FINANCIAL ASSETS
Financial assets include long-term investments at December 31, as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------- --------------------------------
BOOK MARKET UNREALIZED BOOK MARKET UNREALIZED
VALUES VALUES GAINS VALUES VALUES GAINS
DM (000) DM (000) DM (000) DM (000) DM (000) DM (000)
-------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Securities with fixed
maturities........... 100,000 104,750 4,750 100,000 100,750 750
Other securities....... 9,498 9,498 -- 704 704 --
------- ------- ------- ------- ------- -------
109,498 114,248 4,750 100,704 101,454 750
------- ------- ------- ------- ------- -------
</TABLE>
Financial assets also include interest-bearing and non-interest-bearing
loans to employees, to members of SAP AG's supervisory board and to third
parties, investments in associated companies, and other investments. Investments
in associated companies are equity investments. Other investments consist of
marketable equity securities which are recorded at the lower of cost or market.
Unrealized gains on marketable equity securities were not significant in 1997 or
1996.
(10) INVENTORIES
Inventories primarily consist of office supplies, documentation and work in
process for services performed on consulting contracts accounted for under the
completed contract method. Under the completed contract method, the cost of
services provided are recorded in inventory and the related gross profit is
recognized upon project completion and customer acceptance.
(11) ACCOUNTS RECEIVABLE
Amounts shown on the consolidated balance sheets are net of allowance for
bad debts of DM 92,362 thousand and DM 50,296 thousand at December 31, 1997 and
1996, respectively.
At December 31, 1997 and 1996, accounts receivable having a remaining term
greater than 1 year are DM 86,732 thousand and DM 90,837 thousand, respectively.
(12) OTHER ASSETS
<TABLE>
<CAPTION>
1997 1996
DM (000) DM (000)
-------- --------
<S> <C> <C>
Other assets........................................... 167,152 55,895
- -- thereof with a remaining term greater than 1 year... (95,927) (30,378)
</TABLE>
Other assets include interest receivable for the period, tax refund claims,
notes receivable, cash surrender value of insurance policies and rental
deposits.
(13) MARKETABLE SECURITIES
This item consists primarily of fixed-income securities.
F-11
<PAGE> 79
SAP AKTIENGESELLSCHAFT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The book values, market values and unrealized gains of the marketable
securities on the consolidated balance sheets as of December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------- --------------------------------
BOOK MARKET UNREALIZED BOOK MARKET UNREALIZED
VALUES VALUES GAINS VALUES VALUES GAINS
DM (000) DM (000) DM (000) DM (000) DM (000) DM (000)
-------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Securities with fixed
maturities........... 167,050 167,984 934 164,891 166,162 1,271
Other securities....... 42 58 16 -- -- --
------- ------- --- ------- ------- -----
167,092 168,042 950 164,891 166,162 1,271
------- ------- --- ------- ------- -----
</TABLE>
Marketable securities with fixed maturities as of December 31, are as
follows:
<TABLE>
<CAPTION>
NOMINAL VALUE
--------------------
1997 1996
DM (000) DM (000)
-------- --------
<S> <C> <C>
Due within 1 year...................................... 5,000 27,000
Due between 1 and 5 years.............................. 125,000 102,480
Due after 5 years...................................... 35,413 33,856
------- -------
165,413 163,336
------- -------
</TABLE>
During the fiscal year, SAP AG acquired 54,171 of its own ordinary shares
and preference shares, in each case with a nominal value of DM 5, representing
0.05% of the capital stock, at an average market price of DM 353 per share, 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 277 per share. SAP AG did not hold any of its
own shares as of the balance sheet date.
(14) CASH AND CASH EQUIVALENTS
Cash and cash equivalents in Postbank accounts and in banks are stated at
their nominal amounts. The Company has cash investment policies that limit
investments to investment grade securities.
Liquid assets consist of cash and cash equivalents less short-term bank
loans and overdrafts. The Company considers all time deposits as cash
equivalents.
Cash, cash equivalents and liquid assets at December 31, consists of the
following:
<TABLE>
<CAPTION>
1997 1996
DM (000) DM (000)
-------- --------
<S> <C> <C>
Cash at banks.......................................... 213,220 208,307
Time deposits with maturities of 3 months or less at
the date of acquisition.............................. 579,590 380,787
Time deposits with maturities greater than 3 months and
less than 1 year..................................... 123,710 138,300
Time deposits with maturities exceeding 1 year......... 80,900 10,000
-------- -------
Total cash and cash equivalents........................ 997,420 737,394
Short-term bank loans and overdrafts................... (163,134) (90,272)
-------- -------
Liquid assets.......................................... 834,286 647,122
-------- -------
</TABLE>
The Company paid income taxes of DM 560,725 thousand, DM 314,847 thousand
and DM 254,272 thousand in 1997, 1996 and 1995, respectively. Interest paid in
1997, 1996 and 1995 was DM 3,803 thousand, DM 2,864 thousand and DM 5,293
thousand, respectively.
F-12
<PAGE> 80
SAP AKTIENGESELLSCHAFT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(15) INCOME TAXES
Income tax expense for the years ended December 31, consists of the
following:
<TABLE>
<CAPTION>
1997 1996 1995
DM (000) DM (000) DM (000)
-------- -------- --------
<S> <C> <C> <C>
Current taxes
German corporation tax on income................... 228,570 139,099 64,974
German trade tax on income......................... 107,949 70,485 32,809
Foreign............................................ 417,161 207,443 169,923
------- ------- -------
753,680 417,027 267,706
Deferred taxes....................................... (45,326) (34,613) (9,041)
------- ------- -------
Total taxes on income...................... 708,354 382,414 258,665
------- ------- -------
</TABLE>
Income taxes in 1997 compared to 1996 increased mainly due to higher
earnings in 1997.
The income before income taxes is attributable to the following geographic
locations:
<TABLE>
<CAPTION>
1997 1996 1995
DM (000) DM (000) DM (000)
--------- -------- --------
<S> <C> <C> <C>
German............................................. 785,122 495,497 247,524
Foreign............................................ 848,586 454,453 415,969
--------- ------- -------
Income before income taxes......................... 1,633,708 949,950 663,493
--------- ------- -------
</TABLE>
In Germany, current year earnings are subject to a 45% corporate income
tax. Income distributed to shareholders is taxed at 30%; any excess paid over
30% is refunded. Additionally, there is a local trade tax levied on German
income and a solidarity surcharge based on the current year's domestic corporate
tax expense.
The reconciliation of the German statutory corporate income tax rate of 45%
and the effective tax rate in terms of DMs is as follows:
<TABLE>
<CAPTION>
1997 1996
DM (000) DM (000)
--------- --------
<S> <C> <C>
Income before income taxes............................ 1,633,708 949,950
German trade tax on income............................ 107,249 68,211
--------- -------
Profit after German trade tax on income............. 1,526,459 881,739
--------- -------
Corporation tax on income @45%........................ 686,907 396,782
Solidarity charge..................................... 15,927 9,556
Tax reduction for dividend payments................... (63,046) (51,470)
Foreign tax rate differential, net.................... (51,098) (43,661)
Other................................................. 12,415 2,996
Trade tax on German income............................ 107,249 68,211
--------- -------
708,354 382,414
--------- -------
</TABLE>
F-13
<PAGE> 81
SAP AKTIENGESELLSCHAFT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax assets and liabilities as of December 31, 1997 and 1996
are as follows:
<TABLE>
<CAPTION>
1997 1996
DM (000) DM (000)
-------- --------
<S> <C> <C>
Deferred tax assets
Accounts receivable.................................. 23,791 11,801
Other loans.......................................... 2,822 2,342
Pension provision.................................... 5,486 6,844
Other provisions..................................... 100,678 44,697
Other................................................ 2,310 -
------- -------
Deferred tax assets............................... 135,087 65,684
------- -------
Deferred tax liabilities
Fixed assets......................................... (19,842) (23,952)
Deferred income...................................... (25,267) (3,466)
Other................................................ -- (804)
------- -------
Deferred tax liabilities.......................... (45,109) (28,222)
------- -------
Net deferred tax asset............................ 89,978 37,462
------- -------
</TABLE>
At December 31, 1997, DM 94,535 thousand of deferred tax assets are
short-term and DM 40,552 thousand are long-term, while short-term deferred tax
liabilities amount to DM 25,267 thousand and long-term deferred tax liabilities
amount to DM 19,842 thousand. At December 31, 1996, DM 45,001 thousand of
deferred tax assets are short-term and DM 20,683 thousand are long-term, while
short-term liabilities amount to DM 4,270 thousand and long-term deferred tax
liabilities amount to DM 23,952 thousand.
Certain foreign subsidiaries of the Company have net operating loss
carryforwards at December 31, 1997 and 1996, totaling approximately DM 17,283
thousand and DM 10,897 thousand, respectively, which may be used to offset
future taxable income. The carryforward losses will expire at different dates
over the next five years.
(16) SHAREHOLDERS' EQUITY
The issued and outstanding share capital of the Company as of December 31,
1997 consists of the following:
5,393,555 ordinary shares, nominal value DM 50 each;
7,060,000 ordinary shares, nominal value DM 5 each;
2,074,888 nonvoting, participating, cumulative preference shares,
nominal value DM 50 each; and
22,558,239 nonvoting, participating, cumulative preference shares,
nominal value DM 5 each.
Preference shares rank equally with the ordinary shares with respect to
liquidation rights and pre-emptive rights. The annual dividend payable on the
preference shares exceeds the ordinary dividend by 1% of the preference shares'
nominal value (or DM 0.05, in the case of preference shares with DM 5 nominal
value, or DM 0.50, in the case of preference shares with DM 50 nominal value),
but no less than a minimum dividend equal to 1% of the preference shares'
nominal value. Holders of preference shares have no voting rights except in
limited instances. The preference shares are not entitled to a preference in
liquidation but rank pari passu with the ordinary shares.
By way of shareholder resolution in 1988 and 1994, the Company was
authorized to issue additional capital (contingent capital) to support the
conversion rights of the 1988 and 1994 convertible bonds program.
F-14
<PAGE> 82
SAP AKTIENGESELLSCHAFT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The contingent capital increases are carried out only to the extent to which the
holders of the convertible bonds exercise their rights of conversion. As
conversion rights for the 1988/1998 convertible bond issue were exercised, DM 24
thousand of contingent capital, corresponding to 385 ordinary shares, with a
nominal value of DM 50 each, and 96 preference shares, with a nominal value of
DM 50 each, was converted into capital stock. As conversion rights for the
1994/2004 convertible bond issue were exercised in 1997, DM 3,952 thousand of
contingent capital, corresponding to 790,424 preference shares, with a nominal
value of DM 5 each, was converted into capital stock. As a result, contingent
capital decreased by DM 3,976 thousand, to DM 4,737 thousand as of December 31,
1997. As of December 31, 1997, 4,450 ordinary shares and 942,881 preference
shares remain authorized but unissued under these convertible bond plans.
(17) CHANGES IN SHAREHOLDERS' EQUITY
DM (000)
<TABLE>
<CAPTION>
REVENUE
SHARES RESERVES/
ISSUED AND SUBSCRIBED CAPITAL RETAINED MINORITY
OUTSTANDING(1) CAPITAL RESERVE EARNINGS INTERESTS TOTAL
-------------- ---------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994............... 101,232 506,153 137,837 589,806 2,410 1,236,206
Net income............................... -- -- -- 403,324 1,504 404,828
Convertible bonds exercised.............. 2 10 14 -- -- 24
Dividends................................ -- -- -- (88,058) (862) (88,920)
Goodwill................................. -- -- -- (1,428) -- (1,428)
Currency translation adjustment.......... -- -- -- (21,190) -- (21,190)
------- ------- ------- --------- ------ ---------
BALANCE, DECEMBER 31, 1995............... 101,234 506,163 137,851 882,454 3,052 1,529,520
Net income............................... -- -- -- 566,219 1,317 567,536
Convertible bonds exercised.............. 2,273 11,374 215,493 -- -- 226,867
Dividends................................ -- -- -- (133,615) -- (133,615)
Other.................................... -- -- -- (924) (127) (1,051)
Goodwill................................. -- -- -- (1,078) -- (1,078)
Currency translation adjustment.......... -- -- -- 23,133 -- 23,133
------- ------- ------- --------- ------ ---------
BALANCE, DECEMBER 31, 1996............... 103,507 517,537 353,344 1,336,189 4,242 2,211,312
Net income............................... -- -- -- 922,983 2,371 925,354
Convertible bonds exercised.............. 795 3,976 75,125 -- -- 79,101
Dividends................................ -- -- -- (240,193) -- (240,193)
Other.................................... -- -- -- (9,259) 7,939 (1,320)
Currency translation adjustment.......... -- -- -- 88,118 -- 88,118
------- ------- ------- --------- ------ ---------
BALANCE, DECEMBER 31, 1997............... 104,302 521,513 428,469 2,097,838 14,552 3,062,372
------- ------- ------- --------- ------ ---------
</TABLE>
- ---------------
(1) Includes ordinary shares and preference shares. Assumes (i) each ordinary
share, nominal value DM 50 each, equals 10 ordinary shares, nominal value DM
5 each, and (ii) each preference share, nominal value DM 50 each, equals 10
preference shares, nominal value DM 5 each.
(18) CAPITAL RESERVES
Of the increase in the capital reserve in 1997, DM 35 thousand resulted
from the premium necessary to cover the exercise of conversion rights for the
1988/1998 convertible bonds, and DM 75,090 thousand from the premium necessary
to cover the exercise of conversion rights for the 1994/2004 convertible bonds.
F-15
<PAGE> 83
SAP AKTIENGESELLSCHAFT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(19) SPECIAL RESERVES FOR CAPITAL INVESTMENT SUBSIDIES AND ALLOWANCES
The consolidated balance sheets include special reserves for capital
investment subsidies and allowances pursuant to Article 1 of the German Capital
Investment Subsidy Act and the corresponding regional development programs.
(20) PENSION RESERVES AND SIMILAR OBLIGATIONS
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.
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. The payments of the
Company to the relief fund are recorded as current period expense. Members of
the Executive Board are covered by individual, performance-oriented benefit
plans, for which reserves have been established.
Pension reserves and similar obligations contain an amount of DM 19,726
thousand and DM 16,500 thousand as of December 31, 1997 and 1996, respectively,
which corresponds to the difference between the admissible value under German
commercial law of the obligations computed in accordance with Article 6a of the
German Income Tax Act, and the value of the assets held by the relief fund.
(21) OTHER RESERVES AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
1997 1996
DM (000) DM (000)
--------- --------
<S> <C> <C>
Accrued taxes......................................... 489,676 273,933
Other reserves and accrued liabilities................ 630,438 330,927
--------- -------
1,120,114 604,860
--------- -------
</TABLE>
Accrued taxes comprise liabilities for current and prior fiscal years.
Other reserves and accrued liabilities at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
DM (000) DM (000)
-------- --------
<S> <C> <C>
Obligations to employees............................... 397,601 183,642
Vacation entitlement................................... 77,954 54,533
Obligations to customers and suppliers................. 81,777 48,122
Warranty and service costs............................. 50,297 20,380
Professional fees...................................... 2,435 1,975
Other.................................................. 20,374 22,275
------- -------
630,438 330,927
------- -------
</TABLE>
Obligations to employees relate primarily to variable bonus payments tied
to earnings performance, paid out after the balance sheet date. "Other" mainly
comprises contributions to the employees' accident insurance association.
(22) BONDS
This item comprises the outstanding portion of the 6% 1994/2004 convertible
bond, which amounts to DM 4,709 thousand (DM 8,661 thousand as of December 31,
1996), and the outstanding portion of the
F-16
<PAGE> 84
SAP AKTIENGESELLSCHAFT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1988/1998 floating-rate convertible bond, which amounts to DM 4 thousand (DM 8
thousand as of December 31, 1996). The 1988/1998 convertible bond issue is
divided into DM 50 registered convertible bonds, and carries a right to convert
to SAP ordinary and preference shares at a ratio of 1:6.25 of the share's
nominal value. The conversion right can be exercised up until October 20, 1998.
The exercise of the conversion right related to the remaining 1988/1998
convertible bonds would result in 445 ordinary shares, with a nominal value of
DM 50 each, and 112 preference shares, with a nominal value of DM 50 each. The
1994/2004 convertible bond issue is divided into 4,000,000 registered
convertible bonds with a nominal value of DM 5 each. This convertible bond
carries the right to convert to preference shares at a ratio of 1:1 of the
share's nominal value. This conversion right can be exercised on June 30, July
31, August 31, September 30, October 31 and November 30 of every year up until
June 30, 2004. The exercise of this conversion right related to the remaining
1994/2004 convertible bonds would result in 941,761 preference shares, with a
nominal value of DM 5 each.
(23) OTHER LIABILITIES
The information on liabilities required by German law is included in the
following summary. The liabilities are unsecured, excluding retention of title
and similar rights as is customary in the industry.
<TABLE>
<CAPTION>
BALANCE ON REMAINING TERM REMAINING TERM BALANCE ON
12/31/1997 LESS THAN 1 YEAR MORE THAN 5 YEARS 12/31/1996
DM (000) DM (000) DM (000) DM (000)
---------- ---------------- ----------------- ----------
<S> <C> <C> <C> <C>
Bank loans and overdrafts..... 163,547 163,134 97 90,428
Advance payments received..... 30,972 30,972 -- 5,361
Accounts payable.............. 318,309 318,309 -- 198,862
Payables due to associated
companies................... 8,815 8,815 -- 5,514
Taxes......................... 157,132 157,132 -- 112,507
Social security............... 42,193 42,193 -- 35,431
Other liabilities............. 93,271 89,146 4,054 46,279
------- ------- ----- -------
814,239 809,701 4,151 494,382
------- ------- ----- -------
</TABLE>
The bank loans and overdrafts relate primarily to loans taken out in Japan
at an average interest rate of approximately 1%. In the previous year,
liabilities with a remaining term not exceeding 1 year amounted to DM 491,920
thousand, and those with a remaining term exceeding 5 years amounted to DM 2,426
thousand.
(24) CONTINGENT LIABILITIES
<TABLE>
<CAPTION>
1997 1996
DM (000) DM (000)
-------- --------
<S> <C> <C>
Notes receivable sold.................................. 13,128 --
Guarantees and endorsements............................ 364 1,019
Guarantees for unused lines of credit and other
commitments.......................................... 162,639 105,090
Liabilities from the extension of collateral securities
for others........................................... 6,570 --
------- -------
182,701 106,109
------- -------
</TABLE>
Contingent liabilities listed above have not been accrued because the
associated risk of loss is not probable.
The Company 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
F-17
<PAGE> 85
SAP AKTIENGESELLSCHAFT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
such a material adverse effect on the Company's results of operations, financial
condition or cash flows.
(25) OTHER FINANCIAL COMMITMENTS
Commitments under rental and leasing contracts:
<TABLE>
<CAPTION>
DM (000)
--------
<S> <C>
Due 1998.................................................... 184,743
Due 1999.................................................... 126,381
Due 2000.................................................... 81,855
Due 2001.................................................... 61,833
Due 2002.................................................... 49,008
Due thereafter.............................................. 175,631
</TABLE>
Purchase commitments amounting to DM 124,327 thousand at December 31, 1997
are within the limit of authorized capital expenditures.
(26) DERIVATIVE FINANCIAL INSTRUMENTS
As an internationally active enterprise, the Company is subject to risks
from interest-rate and currency fluctuations in its ordinary operations. The
Company utilizes derivative financial instruments to reduce such risks as
described below. The derivative financial instruments employed by the Company
are exclusively marketable instruments with sufficient liquidity. The Company
does not hold or issue derivative financial instruments for trading purposes.
The Company is exposed to credit-related losses in the event of
non-performance by counterparties to derivative financial instruments. To avoid
these counterparty risks, the Company conducts business exclusively with major
financial institutions. The credit exposure on interest rate, foreign exchange
forward and currency option contracts is represented by the fair value of
contracts with a positive fair value at year-end.
Foreign Exchange Risk Management
Most SAP AG subsidiaries have entered into license agreements with SAP AG
pursuant to which the subsidiary acquires the right to sublicense the Company's
products to customers within a specific territory. Under those agreements, the
subsidiaries generally are required to pay SAP AG a royalty equivalent to a
percentage of the product fees paid to them by their customers within 90 days
following the end of the month in which the subsidiary recognizes the revenue.
These inter-company royalties payable to SAP AG are generally denominated in the
respective subsidiary's local currency in order to centralize the foreign
currency risks with SAP AG in Germany. The delay between the date when the
subsidiary records product revenue and the date when payment is made to SAP AG
by such subsidiary exposes SAP AG to foreign exchange risk.
The Company closely monitors its foreign exchange exposure. The Company
enters into foreign exchange forward contracts and currency options to protect
the existing and/or expected foreign currency inter-company claims and
liabilities. Specifically, these foreign exchange contracts offset existing and
anticipated inter-company receivables in the countries with significant
operations including the United States, Japan, the United Kingdom, Switzerland
and Canada. Anticipated transactions represent expected inter-company amounts
resulting from revenues generated within the next 12 months from the purchase
date of the derivative instrument. Generally, the maturities of such derivative
instruments do not exceed 12 months from the date of
F-18
<PAGE> 86
SAP AKTIENGESELLSCHAFT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchase. Management believes the use of foreign currency derivative financial
instruments reduces the risks that arise from doing business in international
markets.
The notional values and fair values of the derivative financial instruments
as of December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
NOTIONAL NOTIONAL
VALUE FAIR VALUE VALUE FAIR VALUE
FOREIGN EXCHANGE DERIVATIVES DM (000) DM (000) DM (000) DM (000)
---------------------------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Forward exchange contracts
Gains................................. 247,820 5,603 18,497 985
Losses................................ 91,741 (2,052) 40,418 (952)
------- ------ ------ ----
Net gain.............................. 339,561 3,551 58,915 33
------- ------ ------ ----
Net foreign exchange losses on
underlying inter-company claims and
liabilities........................ (3,125) (32)
------ ----
426 1
------ ----
Foreign currency options................ 25,600 562 -- --
</TABLE>
See note (39) for additional fair value information.
Interest Rate Risk Management
The Company enters into interest rate swaps to better manage the interest
income on its cash equivalents, marketable securities and long-term investments
and to partially mitigate the impact of German interest rate fluctuations on
these investments. The Company holds such derivative instruments for purposes
other than trading. No swaps were outstanding at December 31, 1997.
The notional values and fair values of interest rate swaps as of December
31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
NOTIONAL NOTIONAL
VALUE FAIR VALUE VALUE FAIR VALUE
DM (000) DM (000) DM (000) DM (000)
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
INTEREST RATE DERIVATIVES
Interest rate swaps..................... -- -- 60,000 400
</TABLE>
See note (39) for additional fair value information.
D. NOTES TO THE CONSOLIDATED INCOME STATEMENTS
(27) SALES REVENUES
Sales revenues by types of activity for the years ended December 31, were
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
DM (000) DM (000) DM (000)
--------- --------- ---------
<S> <C> <C> <C>
Product revenues.................................. 4,097,117 2,630,512 1,933,811
Consulting and training........................... 1,831,056 1,041,404 724,134
Other............................................. 89,293 50,234 38,436
--------- --------- ---------
TOTAL............................................. 6,017,466 3,722,150 2,696,381
--------- --------- ---------
</TABLE>
F-19
<PAGE> 87
SAP AKTIENGESELLSCHAFT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(28) OTHER OPERATING INCOME
Other operating income for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
DM (000) DM (000) DM (000)
-------- -------- --------
<S> <C> <C> <C>
Foreign exchange gains............................. 43,401 27,962 20,436
Employee contributions for company cars............ 9,923 7,324 8,281
Sale of financial assets........................... -- 6,748 --
Rental income...................................... 3,553 2,944 3,134
Gain on sale of marketable securities.............. 1,640 1,826 6,431
Income from increase in cash surrender value of
insurance policies............................... 2,115 1,794 2,061
Income from prior periods.......................... 1,666 104 51
Other income....................................... 17,668 25,010 13,767
------ ------ ------
TOTAL.............................................. 79,966 73,712 54,161
------ ------ ------
</TABLE>
Other income mainly comprises gains on the disposal of fixed assets and
insurance refunds. The consolidated income statement contains income from the
reversal of the special reserve for capital investment subsidies in the amount
of DM 29 thousand.
(29) PERSONNEL EXPENSES/NUMBER OF EMPLOYEES
Personnel expenses for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
DM (000) DM (000) DM (000)
--------- --------- --------
<S> <C> <C> <C>
Salaries.......................................... 1,786,980 1,138,518 825,931
Social security................................... 217,988 143,630 102,691
Pension expense................................... 69,952 56,325 28,122
--------- --------- -------
TOTAL............................................. 2,074,920 1,338,473 956,744
--------- --------- -------
</TABLE>
Applying the calculation method prescribed by Article 267 (5) of the German
Commercial Code, the average number of employees was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Employees.......................................... 11,558 8,177 6,443
</TABLE>
The average number of employees of the joint venture company consolidated
on a proportional basis, in accordance with Article 310 of the German Commercial
Code, was 330 in 1997, compared with 322 in 1996 and 296 in 1995.
(30) DEPRECIATION AND AMORTIZATION
In accordance with the German Development Areas Act, additional
depreciation of DM 1,282 thousand applied in accordance with the German tax
rules has been charged to income with respect to the companies included within
the consolidated financial statements.
F-20
<PAGE> 88
SAP AKTIENGESELLSCHAFT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(31) OTHER OPERATING EXPENSES
Other operating expenses for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
DM (000) DM (000) DM (000)
--------- -------- --------
<S> <C> <C> <C>
Travel and entertainment expenses.................. 292,029 191,973 139,998
Marketing.......................................... 279,871 162,786 102,264
Rent............................................... 202,067 118,553 79,529
Licenses and commissions........................... 209,215 104,819 95,887
Additional personnel expenses...................... 96,398 58,038 52,195
Telecommunications/postage......................... 84,905 51,423 40,312
Repairs and maintenance............................ 63,003 42,642 35,241
Bad debt expense................................... 51,266 31,739 17,557
Warranty and service costs......................... 29,842 11,465 8,129
Consulting/administration.......................... 89,195 58,572 39,224
Documentation...................................... 28,320 20,633 17,391
Foreign exchange losses............................ 70,266 18,225 20,541
Translation differences from consolidation of
income statements................................ 13,039 10,371 2,793
Other.............................................. 102,312 74,507 46,394
--------- ------- -------
TOTAL.............................................. 1,611,728 955,746 697,455
--------- ------- -------
</TABLE>
(32) INCOME FROM INVESTMENTS
<TABLE>
<CAPTION>
1997 1996 1995
DM (000) DM (000) DM (000)
-------- -------- --------
<S> <C> <C> <C>
Income from unconsolidated affiliated companies........ 591 -- --
Results from associated companies...................... 2,909 1,745 --
----- ----- -----
TOTAL.................................................. 3,500 1,745 --
----- ----- -----
</TABLE>
Income from investments in the consolidated financial statements is derived
from the unconsolidated company WS Investment Holdings, L.P., Wilmington,
DE/USA. Results from associated companies represents income from equity
affiliates.
(33) WRITE-DOWN OF FINANCIAL ASSETS
This amount includes the discounting to present value of interest-free
loans to employees.
(34) NET INTEREST INCOME
<TABLE>
<CAPTION>
1997 1996 1995
DM (000) DM (000) DM (000)
-------- -------- --------
<S> <C> <C> <C>
Other interest and similar income...................... 56,344 30,461 27,450
Interest and similar expenses.......................... (3,782) (2,618) (5,237)
------ ------ ------
52,562 27,843 22,213
------ ------ ------
</TABLE>
F-21
<PAGE> 89
SAP AKTIENGESELLSCHAFT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
E. ADDITIONAL INFORMATION
(35) MEMBERS OF THE SUPERVISORY BOARD AND EXECUTIVE BOARD
The members of the Supervisory Board and Executive Board of SAP AG as of
February 18, 1998 are listed on page F-39.
(36) TOTAL REMUNERATION OF MEMBERS OF THE SUPERVISORY BOARD AND EXECUTIVE
BOARD, LOANS GRANTED
Subject to the adoption of the dividend resolution by the shareholders at
the Annual General Meeting, the total annual remuneration of the Supervisory
Board will amount to DM 1,087 thousand. The total annual remuneration of the
Executive Board will amount to DM 15,973 thousand. In addition, members of the
Executive Board had interest-free loans outstanding in the amount of DM 9
thousand as of December 31, 1997 (repayments of DM 266 thousand were made in
1997), with a remaining term to maturity of 4 to 5 years. Such amounts are
included in other financial assets on the consolidated balance sheet. All loans
extended to members of the Executive Board in 1996 and bearing interest at the
annual rate of 6% were repaid in 1997 (DM 75 thousand).
(37) PROPOSED APPROPRIATION OF RETAINED EARNINGS
A portion of the Company's retained earnings is appropriated for payment of
dividends. After the transfer of DM 153,500 thousand from 1997 net income to the
revenue reserves of SAP AG, retained earnings amount to DM 294,328 thousand.
SAP AG's Executive Board will propose at the Annual General Meeting that
this amount be appropriated as follows:
<TABLE>
<S> <C>
DM 2.80 dividend per ordinary share with a nominal value of
DM 5.00 carrying dividend rights and DM 28.0 dividend per
ordinary share with a nominal value of DM 50.00 carrying
dividend rights........................................... DM 170,788 thousand
DM 2.85 dividend per preference share with a nominal value
of DM 5.00 carrying dividend rights and DM 28.50 dividend
per preference share with a nominal value of DM 50.00
carrying dividend right................................... DM 123,425 thousand
To be carried forward....................................... D M 115 thousand
</TABLE>
Because the dividends are paid from appropriated retained earnings, they
qualify for a tax credit in the amount of 3/7 of the dividend value for German
tax residents.
F-22
<PAGE> 90
SAP AKTIENGESELLSCHAFT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(38) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31:
The consolidated statements of cash flows are classified by operating,
investing and financing activities pursuant to the principles applied in German
GAAP and U.S. GAAP. The cash flow statements reconcile amounts to changes in
liquid assets.
<TABLE>
<CAPTION>
1997 1996 1995
DM (000) DM (000) DM (000)
-------- -------- --------
<S> <C> <C> <C>
I. CASH FLOW FROM OPERATING ACTIVITIES
Net income for the year......................... 925,354 567,536 404,828
Depreciation and amortization................... 195,321 164,591 144,456
Write-ups of intangible and tangible fixed
assets....................................... (102) (2,137) --
Write-downs of financial assets................. 2,811 8,192 2,124
Write-ups of financial assets................... (863) (789) (635)
Increase in pension reserves.................... 11,935 19,000 723
Increase in medium- and long-term accounts
receivables and other assets................. (113,960) (71,377) (33,569)
Increase in medium- and long-term reserves and
liabilities.................................. 57,159 24,909 (8,746)
Increase in short-term assets................... (955,839) (630,811) (252,629)
Increase in short-term liabilities.............. 713,487 404,383 172,150
-------- -------- --------
835,303 483,497 428,702
-------- -------- --------
II. CASH FLOW FROM INVESTING ACTIVITIES
Additions to intangible assets and tangible
fixed assets................................. (574,710) (220,638) (255,619)
Additions to financial assets................... (79,106) (16,308) (11,829)
Change in companies subject to consolidation.... -- 694 (74)
Disposal of fixed assets, net................... 83,318 29,272 58,977
Change in special reserves for capital
investment subsidies and allowances.......... 352 (7) (105)
-------- -------- --------
(570,146) (206,987) (208,650)
-------- -------- --------
III. CASH FLOW FROM FINANCING ACTIVITIES
Dividends....................................... (240,193) (133,615) (88,058)
Premium on convertible bonds.................... 75,125 215,493 14
Increase in capital stock resulting from
exercise of conversion rights................ 3,976 11,374 10
Conversion of convertible bonds................. (3,956) (11,345) (2)
Increase/decrease in long-term bank debt........ 257 (376) (1,399)
Changes in shareholders' equity not affecting
liquidity(1)................................. 86,798 21,004 (23,480)
-------- -------- --------
(77,993) 102,535 (112,915)
-------- -------- --------
IV. CHANGE IN LIQUID ASSETS....................... 187,164 379,045 107,137
-------- -------- --------
V. LIQUID ASSETS AS OF JANUARY 1,................. 647,122 268,077 160,940
-------- -------- --------
VI. LIQUID ASSETS AS OF DECEMBER 31,.............. 834,286 647,122 268,077
-------- -------- --------
</TABLE>
- ---------------
(1) Consists primarily of currency effects on liquid assets.
F-23
<PAGE> 91
SAP AKTIENGESELLSCHAFT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(39) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company utilizes various types of financial instruments in the normal
course of business. These instruments include recorded assets and liabilities as
well as items that principally involve off-balance sheet risk. Detailed
information about the fair value of the Company's financial instruments is
included in notes (9), (13) and (26). A summary of the Company's financial
instrument fair values is presented below.
- -- Marketable Securities and Long-Term Investments: The fair values of
marketable securities and long-term investments are based upon available
quoted market prices on December 31.
- -- Accounts Receivable and Other Loans: The fair values of accounts receivables
and other loans approximate their carrying values. Differences between the
fair values and carrying values represent unrealized transaction gains
resulting from changes in foreign currency exchange rates.
- -- Short-Term Bank Loans and Overdrafts: The carrying value of short-term debt
approximates fair value because of the brief duration of time between the
origination of the borrowings and their maturities.
- -- Derivative Financial Instruments: The fair value of derivatives generally
reflects the estimated amounts the Company would pay or receive to terminate
the contracts at the reporting date, thereby considering unrealized gains or
losses of open positions. Carrying values, as required under German GAAP,
represent the lower of cost or market.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------
1997 1996
----------------------- -----------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
DM (000) DM (000) DM (000) DM (000)
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Accounts receivable................... 2,435,699 2,449,860 1,555,869 1,563,572
Marketable securities................. 167,092 168,042 164,891 166,162
Long-term investments................. 109,498 114,248 100,704 101,454
Other loans........................... 41,584 41,826 41,119 41,322
Derivative financial instruments
Forward exchange contracts.......... (2,052) 3,551 (952) 33
Foreign currency options............ -- 562 -- --
Interest rate derivatives........... -- -- -- 400
Short-term bank loans and
overdrafts.......................... 163,134 163,134 90,272 90,272
</TABLE>
F. SIGNIFICANT DIFFERENCES BETWEEN GERMAN GAAP AND U.S. GAAP
(40) 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
F-24
<PAGE> 92
SAP AKTIENGESELLSCHAFT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the application of U.S. GAAP to net income and shareholders' equity as of and
for the years ended December 31, 1997 and 1996 are set out in the tables below:
RECONCILIATION OF NET INCOME FROM GERMAN GAAP TO U.S. GAAP:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1997 1997 1996
NOTE $ (000)(1) DM (000) DM (000)
----------- ---------- ------------ ---------
<S> <C> <C> <C> <C>
NET INCOME AS REPORTED IN THE CONSOLIDATED
FINANCIAL STATEMENTS UNDER GERMAN
GAAP.................................... 514,344 925,354 567,536
Minority interests........................ (1,318) (2,371) (1,317)
--------- --------- ---------
NET INCOME AS REPORTED IN THE CONSOLIDATED
FINANCIAL STATEMENTS UNDER GERMAN GAAP
AFTER MINORITY INTERESTS................ 513,026 922,983 566,219
Revenue recognition....................... (a) (43,072) (77,491) (166,937)
Pension provisions........................ (b) 1,057 1,901 13,484
Business combinations (goodwill &
in-process R&D)......................... (c) (5,874) (10,568) (2,423)
Income taxes.............................. (d) (1,276) (2,296) (22,193)
Other..................................... (e),(f) 5,626 10,122 4,502
Tax effect of U.S. GAAP adjustments....... (d) 16,006 28,796 59,234
Minority interests........................ (g) 71 127 265
--------- --------- ---------
NET INCOME IN ACCORDANCE WITH U.S.
GAAP................................. 485,564 873,574 452,151
--------- --------- ---------
NET INCOME PER COMMON ORDINARY SHARE
UNDER U.S. GAAP
Basic................................ (m) 4.66 8.38 4.40
Diluted.............................. (m) 4.61 8.30 4.29
</TABLE>
RECONCILIATION OF SHAREHOLDERS' EQUITY FROM GERMAN GAAP TO U.S. GAAP:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1997 1997 1996
NOTE $ (000)(1) DM (000) DM (000)
----------- ---------- ------------ ---------
<S> <C> <C> <C> <C>
Shareholders' equity as reported in the
consolidated balance sheets under German
GAAP.................................... 1,702,169 3,062,372 2,211,312
Less: minority interest................... (g) (8,088) (14,552) (4,242)
--------- --------- ---------
Equity of SAP AG shareholders............. 1,694,081 3,047,820 2,207,070
Revenue recognition....................... (a) (220,015) (395,829) (318,338)
Pension provisions........................ (b) 2,981 5,363 3,462
Business combinations (goodwill &
in-process R&D)......................... (c) (1,828) (3,288) 7,280
Unrealized gains on available for sale
marketable securities................... (e) 3,042 5,472 607
Other..................................... (d),(f),(g) 20,822 37,461 19,524
Tax effect of U.S. GAAP adjustments....... (d) 78,406 141,060 112,264
--------- --------- ---------
Shareholders' equity under U.S. GAAP.... 1,577,489 2,838,059 2,031,869
--------- --------- ---------
</TABLE>
F-25
<PAGE> 93
SAP AKTIENGESELLSCHAFT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The changes in shareholders' equity in accordance with U.S. GAAP are as
follows:
<TABLE>
<CAPTION>
1997 1997 1996
$ (000)(1) DM (000) DM (000)
---------- --------- ---------
<S> <C> <C> <C>
U.S. GAAP shareholders' equity, beginning of
year............................................ 1,129,381 2,031,869 1,437,221(2)
Net income........................................ 485,564 873,574 452,151
Dividends paid.................................... (133,507) (240,193) (133,615)
Exercise of convertible bonds..................... 43,966 79,101 226,867
Tax benefit of convertible bond program........... 1,276 2,296 24,061
Change in unrealized gains on available for sale
marketable securities, net of tax............... 2,704 4,865 607
Currency translation adjustment................... 53,322 95,933 26,843
Other............................................. (5,217) (9,386) (2,266)
--------- --------- ---------
Shareholders' equity, end of year............... 1,577,489 2,838,059 2,031,869
--------- --------- ---------
</TABLE>
- ---------------
(1) The 1997 figures have been translated solely for the convenience of the
reader at an exchange rate of DM 1.7991 to $1.00, the Noon Buying Rate on
December 31, 1997.
(2) Includes the cumulative effects of the application of U.S. GAAP on prior
periods where applicable.
(A) REVENUE RECOGNITION
The Company recognizes 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"). SOP 97-2 was issued on October 27,
1997, and becomes effective for transactions entered into in fiscal years
beginning after December 15, 1997. Prior to the issuance of SOP 97-2, Statement
of Position 91-1 ("SOP 91-1") prescribed the accounting treatment for revenue
recognition under U.S. GAAP. Earlier application of SOP 97-2 is encouraged as of
the beginning of fiscal years or interim periods for which information or
financial statements have not been issued. Because the Company has not
previously issued information or financial statements on a U.S. GAAP basis, SOP
97-2 has been applied for all years reported under U.S. GAAP.
In accordance with SOP 97-2, software license fee revenues are recognized
when persuasive evidence of an arrangement exists, delivery has occurred, the
license fee is fixed and determinable and the collection of the fee is probable.
Generally, the Company's licensing arrangements do not provide for significant
production, modification or customization of software. Under U.S. GAAP, the
Company allocates a portion of its software revenues to post-contract support
activities or other services or products provided to the customer free of charge
or at nonstandard discounts when included under the licensing arrangement.
Amounts allocated are based upon standard prices charged for those services or
products. Under German GAAP, the Company accrues for estimated costs of
providing post-contract support activities or other services or products
provided to the customer free of charge when included under the licensing
arrangement. Under U.S. GAAP, such cost accruals of DM 29,902 thousand and DM
2,848 thousand are reversed in 1997 and 1996, respectively, since the associated
software revenue has been deferred.
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 to 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.
Under U.S. GAAP, revenues from post-contract support are recognized ratably
over the term of the maintenance contract on a straight-line basis. Consulting
and training services are generally recognized at the time the service is
performed.
F-26
<PAGE> 94
SAP AKTIENGESELLSCHAFT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A portion of the Company's allowance for doubtful accounts pertains to
estimated sales allowances granted in the ordinary course of business. Under
German GAAP, charges to establish and increase this part of the allowance are
included in bad debt expense. Under U.S. GAAP, the portions of the allowance
relating to sales allowances would be recorded as a direct reduction of sales
revenues. These classification differences do not impact net income and do not
have a material effect on sales revenues in 1997 or 1996.
(B) PENSION BENEFITS
Under German GAAP, the Company provides for pension costs in accordance
with Article 6a of the German Income Tax Act. Under U.S. GAAP, pension costs are
accounted for in accordance with Statement of Financial Accounting Standards No.
87, "Employers' Accounting for Pensions" ("SFAS 87"). SFAS 87 requires actuarial
computation of the pension costs for defined benefit plans using the projected
unit credit method and includes current service cost, interest cost, return on
plan assets and amortization of actuarial gains/losses and prior service cost.
Prior service cost is amortized over the future service period of active
employees. Unrecognized gains and losses exceeding 10% of the greater of the
projected obligation or the market-related value of the plan assets are
amortized over the average service period of active employees.
(C) 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, not to exceed 40 years. 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 5 years. Under U.S. GAAP, goodwill must be
capitalized and amortized through the income statement over its estimated useful
life, which may not exceed 40 years. The Company expects, and thus maintains,
consistent useful lives under German and U.S. GAAP.
Under German GAAP, in-process research and development costs are not
identified in connection with the allocation of the purchase price but rather
are treated as goodwill. U.S. GAAP requires the allocation of a portion of the
purchase price for acquired in-process research and development. The costs
associated with in-process research and development activities having no
alternative future uses must be charged to expense at the time of acquisition.
Under U.S. GAAP, the Company expensed DM 7.8 million in 1997 for acquired in-
process research and development relating to software products for which
technological feasibility had not yet been established at the date of
acquisition.
(D) INCOME TAXES
U.S. GAAP requires recognition of deferred tax assets and liabilities for
temporary differences using enacted tax rates in effect at year-end in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS 109"). Under SFAS 109, net operating loss carryforwards
that are available to reduce future taxes are recognized as deferred tax assets.
Such amounts are reduced by a valuation allowance to the extent that it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The valuation allowance is DM 5,133 thousand and DM 2,944 thousand for
1997 and 1996, respectively. Under German GAAP, deferred taxes are not recorded
for net operating losses.
Under both German GAAP and U.S. GAAP, deferred tax liabilities are not
reported for the unremitted earnings of non-German subsidiaries as management
considers such amounts to be permanently reinvested; however, under U.S. GAAP, a
deferred tax liability has been established for the small amount of earnings
that are expected to be remitted.
F-27
<PAGE> 95
SAP AKTIENGESELLSCHAFT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In August 1994, the Company established a convertible bond program for
certain of its foreign and domestic employees. Compensation expense for such
plans is treated differently for financial reporting and tax purposes in certain
countries. The tax effect of such differences is charged or credited directly to
the related components of shareholders' equity for U.S. GAAP purposes. Under
German GAAP, the tax benefit is recorded as a reduction to income taxes for
financial reporting.
(E) 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, other than investments accounted
for by the equity method, are categorized as either trading, available-for-sale
or held to maturity, depending on management's intent with respect to holding
such investments. 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 net of tax in a separate component of shareholders'
equity. Market values were obtained based on available market prices as of
December 31, 1997 and 1996. Gains or losses recognized on sales of securities
are based on specific identification.
The Company acquires its ordinary shares and preference shares for the
purpose of offering them to its employees. Under German GAAP, the Company
records purchases of its own shares at cost within marketable securities. Upon
distribution to its employees, the Company recognizes gains and losses based on
the differences in the fair market value of SAP shares on the date of purchase
and distribution. Under U.S. GAAP, purchases of Company stock are included in
treasury stock as a separate component of shareholders' equity. Differences
between the purchase and sale price of treasury stock are included in
shareholders' equity and have no impact on earnings. Differences between German
and U.S. GAAP resulting from treasury stock transactions did not materially
impact shareholders' equity or net income in 1996 or 1997.
(F) OTHER
Other differences consist of miscellaneous valuation differences that
individually are not material. These items include foreign currency translation
differences and unrealized foreign currency transaction gains that are
recognized for U.S. GAAP purposes.
(G) MINORITY INTERESTS
Under German GAAP, minority interest is included as a separate component of
shareholders' equity. Under U.S. GAAP, minority interest is shown as a
liability.
ADDITIONAL U.S. GAAP INFORMATION
(H) NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income" ("SFAS 130"), and Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"), each of which is effective for fiscal years beginning after December 15,
1997. SFAS 130 requires business enterprises to report comprehensive income and
its components. SFAS 131 requires business enterprises to report information
about operating segments and establishes standards for related disclosures about
products and services, geographic areas and major customers. As these statements
relate to additional disclosure, their adoption will not impact the Company's
financial position or results of operations.
F-28
<PAGE> 96
SAP AKTIENGESELLSCHAFT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(I) RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred under German GAAP.
The current U.S. accounting rule, Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed", does not materially affect the Company. Research and
development expenses for the years ended December 31, 1997, 1996 and 1995 are DM
813 million, DM 589 million and DM 438 million, respectively.
(J) SEGMENT AND GEOGRAPHIC AREAS
The Company 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 subsidiaries. Inter-company
revenues are generally based on a percentage of the subsidiaries' revenue from
unaffiliated customers. The following table presents a summary of operations by
geographic region. The Company allocates sales revenue by destination based on
the region in which the customer is located. Sales revenue by operation is based
upon the location of the Company's subsidiaries.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996
DM (000) DM (000)
---------- ----------
<S> <C> <C>
SALES REVENUE BY DESTINATION:(1)
Europe...................................................... 2,544,519 1,799,650
Americas.................................................... 2,594,754 1,385,654
Asia-Pacific/Africa......................................... 878,193 536,846
--------- ---------
TOTAL SALES REVENUE....................................... 6,017,466 3,722,150
--------- ---------
SALES REVENUE BY OPERATION:(1)
Europe...................................................... 2,633,219 1,853,452
Americas.................................................... 2,558,115 1,373,160
Asia-Pacific/Africa......................................... 826,132 495,538
--------- ---------
TOTAL SALES REVENUE....................................... 6,017,466 3,722,150
--------- ---------
RESULTS FROM ORDINARY OPERATIONS:(2)
Europe...................................................... 1,089,612 674,353
Americas.................................................... 461,919 225,366
Asia-Pacific/Africa......................................... 115,405 67,494
--------- ---------
TOTAL RESULTS FROM ORDINARY OPERATIONS.................... 1,666,936 967,213
--------- ---------
TOTAL ASSETS:
Europe...................................................... 2,834,561 2,190,258
Americas.................................................... 1,623,648 777,812
Asia-Pacific/Africa......................................... 612,051 399,034
--------- ---------
TOTAL ASSETS.............................................. 5,070,260 3,367,104
--------- ---------
</TABLE>
- ---------------
(1) Sales revenue for each geographic region represents revenue from
unaffiliated customers only.
(2) Amounts include inter-company royalties and cost allocations.
F-29
<PAGE> 97
SAP AKTIENGESELLSCHAFT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(K) MARKETABLE SECURITIES AND FINANCIAL ASSETS
Investments classified as available for sale include marketable securities,
financial assets and certain other investments. Amounts at December 31, 1997 and
1996, are as follows:
<TABLE>
<CAPTION>
1997
DM (000)
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Equity securities........................ 12,922 5,725 -- 18,647
Debt securities.......................... 286,914 5,805 429 292,290
------- ------ --- -------
TOTAL.................................... 299,836 11,530 429 310,937
------- ------ --- -------
</TABLE>
<TABLE>
<CAPTION>
1996
DM (000)
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Equity securities........................ 12,922 -- 911 12,011
Debt securities.......................... 275,974 2,022 99 277,897
------- ------ ----- -------
TOTAL.................................... 288,896 2,022 1,010 289,908
------- ------ ----- -------
</TABLE>
(L) EMPLOYEE BENEFITS
The Company sponsors various retirement plans for most full-time employees.
These plans, which are either defined benefit or defined contribution plans, are
offered by most German and foreign locations. The benefits offered vary
according to the legal, fiscal and economic conditions of each country.
In accordance with U.S. GAAP, pension plan benefits for defined benefit
plans are determined in accordance with SFAS 87. Under SFAS 87, pension plans
and their costs are determined using the projected unit credit method. The
information provided below is in accordance with SFAS 87.
German Plans
SAP AG has noncontributory defined benefit plans as described in note (20).
Plan assets consist of fixed income securities.
Net period pension expense for 1997 and 1996 for the German Plans is as
follows:
<TABLE>
<CAPTION>
1997 1996
DM (000) DM (000)
-------- --------
<S> <C> <C>
Service cost of benefits earned during the year............. 18,327 13,487
Interest cost on projected benefit obligation............... 7,963 6,080
Return on plan assets....................................... (5,137) (3,967)
Net amortization and deferral............................... 2,564 2,286
------ ------
Net periodic pension cost................................. 23,717 17,886
------ ------
</TABLE>
F-30
<PAGE> 98
SAP AKTIENGESELLSCHAFT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Assumptions used in developing the projected benefit obligation for the
German plans at December 31, were as follows:
<TABLE>
<CAPTION>
1997 1996
DM (000) DM (000)
-------- --------
<S> <C> <C>
Discount rate............................................... 6.5% 7.0%
Rate of increase in compensation............................ 5.0% 5.0%
Expected long-term rate of return on plan assets............ 6.5% 7.0%
</TABLE>
The following table sets forth the German plans' funded status at December
31, 1997 and 1996 in accordance with U.S. GAAP:
<TABLE>
<CAPTION>
1997 1996
DM (000) DM (000)
-------- --------
<S> <C> <C>
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS
Vested benefit obligations.................................. 66,671 52,278
Non-vested benefit obligations.............................. 18,200 14,852
------- -------
Accumulated benefit obligations........................... 84,871 67,130
------- -------
Projected benefit obligation................................ 151,599 122,449
Plan assets at fair value................................... 79,260 59,547
------- -------
Projected benefit obligation in excess of plan assets....... (72,339) (62,902)
Unrecognized net obligation................................. 29,076 31,361
Unrecognized cumulative loss................................ 24,611 17,122
------- -------
Accrued pension cost...................................... (18,652) (14,419)
------- -------
</TABLE>
A portion of the unrecognized net obligation for the German plans is
allocated directly to equity as of January 1, 1996, the Company's adoption date
of SFAS 87. Amounts allocated to equity are based on the ratio of the number of
years elapsed between 1987, the SFAS 87 effective date for foreign defined
benefit plans (or the plans' effective date if later), and the remaining service
period of employees expected to receive benefits as estimated at the adoption
date.
U.S. Plan
SAP America, Inc. has a noncontributory defined benefit plan for employees
who are least 21 years old and have been employed by the Company for at least 1
year. The plan provides benefits based upon compensation levels, age and years
of service. Contributions are based on actuarial valuations of benefits payable
under the plan. Plan assets consist primarily of investments in equity and fixed
income securities.
Net period pension expense for 1997 and 1996 for the U.S. plan is as
follows:
<TABLE>
<CAPTION>
1997 1996
DM (000) DM (000)
-------- --------
<S> <C> <C>
Service cost of benefits earned during the year............. 6,975 4,219
Interest cost on projected benefit obligation............... 1,392 658
Return on plan assets....................................... (900) (576)
Net amortization and deferral............................... 59 370
----- -----
Net periodic pension cost................................. 7,526 4,671
----- -----
</TABLE>
F-31
<PAGE> 99
SAP AKTIENGESELLSCHAFT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Assumptions used in developing the projected benefit obligation for the
U.S. plan at December 31, were as follows:
<TABLE>
<CAPTION>
1997 1996
DM (000) DM (000)
-------- --------
<S> <C> <C>
Discount rate............................................... 7.0% 7.5%
Rate of increase in compensation............................ 6.0% 6.0%
Expected long-term rate of return on plan assets............ 8.0% 8.0%
</TABLE>
The following table sets forth the U.S. plan's funded status at December
31, 1997 and 1996 in accordance with U.S. GAAP:
<TABLE>
<CAPTION>
1997 1996
DM (000) DM (000)
-------- --------
<S> <C> <C>
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS
Vested benefit obligations.................................. 5,936 1,953
Non-vested benefit obligations.............................. 14,365 7,026
------- ------
Accumulated benefit obligations........................... 20,301 8,979
------- ------
Projected benefit obligation................................ 22,477 9,726
Plan assets at fair value................................... 20,912 5,293
------- ------
Projected benefit obligation in excess of plan assets....... (1,565) (4,433)
Unrecognized cumulative loss................................ 3,628 1,426
Adjustment required to recognize minimum liability.......... -- (678)
------- ------
Prepaid (accrued) pension cost............................ 2,063 (3,685)
------- ------
</TABLE>
(M) EARNINGS PER SHARE
Earnings per ordinary share and preference share for the years ended
December 31, 1997 and 1996 has been calculated using the two-class method in
accordance with Statement of Financial Accounting Standards No. 128, "Earnings
per Share". Net income is allocated between ordinary shares and preference
shares in calculating earnings per share for each class of stock. This
allocation weights net income available (net income less dividends), to the
extent that each class of stock may share in the earnings as if all of the
earnings for the period had been distributed. Distributed earnings are allocated
to each class of stock based on the respective dividends paid. In arriving at
earnings per share, the total allocated earnings for each class of stock is
divided by the weighted average number of shares outstanding to which the
earnings are allocated. Because the Company's convertible bonds have a dilutive
effect, they were considered outstanding for the diluted earnings per share
calculation.
Ordinary shares with a nominal value of DM 50 have 10 voting rights,
whereas ordinary shares with a nominal value of DM 5 have 1 voting right.
Preference shares with a nominal value of DM 50 receive 10 times the dividends
received by preference shares with a nominal value of DM 5. For purposes of
basic and diluted earnings per ordinary share, ordinary shares with a nominal
value of DM 50 are increased by a factor of 10 to arrive at weighted average
number of ordinary shares outstanding. Similarly, preference shares are
"equalized" using a factor of 10 in arriving at weighted average number of
preference shares outstanding for basic and diluted earnings per preference
share.
F-32
<PAGE> 100
SAP AKTIENGESELLSCHAFT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
Net income applicable to basic and diluted EPS:(1) -------- -------
<S> <C> <C>
Net income applicable to basic and diluted EPS:............. 873,574 452,151
Less dividends:
Ordinary shares........................................... (140,281) (79,282)
Preference shares......................................... (99,912) (54,333)
-------- -------
Net income available to holders of ordinary shares and
preference shares......................................... 633,381 318,536
-------- -------
</TABLE>
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
ORDINARY PREFERENCE ORDINARY PREFERENCE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Allocated net income available.................... 370,841 262,540 189,277 129,259
Distributed earnings.............................. 140,281 99,912 79,282 54,333
------- ------- ------- -------
Total allocated earnings -- Basic EPS............. 511,122 362,452 268,559 183,592
Conversion of preference share bonds.............. (5,012) 5,012 (7,160) 7,160
------- ------- ------- -------
Total allocated earnings -- Diluted EPS........... 506,110 367,464 261,399 190,752
</TABLE>
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
WEIGHTED AVERAGE ORDINARY SHARES OUTSTANDING APPLICABLE ORDINARY PREFERENCE ORDINARY PREFERENCE
TO BASIC AND DILUTED EPS: -------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Weighted average shares -- Basic.................... 60,994 42,842 60,988 41,061
Conversion of preference share bonds................ 6 1,409 12 3,190
------- ------- ------- -------
Weighted average shares -- Diluted.................. 61,000 44,251 61,000 44,251
Earnings per share -- Basic....................... 8.38 8.46 4.40 4.47
Earnings per share -- Diluted..................... 8.30 8.30 4.29 4.31
</TABLE>
- ---------------
(1) Amounts are in (i) thousands, except for per share information, and (ii) DM,
except for share information.
F-33
<PAGE> 101
INVESTMENTS OF SAP AKTIENGESELLSCHAFT
AND THE COMPANY
As of December 31, 1997, figures in DM(000), except for % and employee
information
<TABLE>
<CAPTION>
NET INCOME/ NUMBER OF
OWNERSHIP (LOSS) EQUITY EMPLOYEES AS OF
NAME AND LOCATION OF COMPANY % FOR 1997(1) 12/31/1997(1) 12/31/1997(2)
---------------------------- --------- ----------- ------------- ---------------
<S> <C> <C> <C> <C>
I. AFFILIATED COMPANIES
GERMANY
SRS Software-und Systemhaus Dresden GmbH,
Dresden................................... 50 3,239 8,899 299
SAP Retail Solutions GmbH & Co., St.
Ingbert................................... 100 11,885 20,345 170
Steeb Anwendungessysteme GmbH, Abstatt...... 100 2,238 5,766 106
SAP Systems Integration GmbH, Alsbach-
Haehnlein................................. 60 (2,689) 27,311 105
AsseT GmbH Assessment & Training
Technologies, Friedrichshafen............. 75 446 1,169 12
SAP Retail Solutions
Beteiligungsgesellschaft mbH, Walldorf.... 100 (2) 50 0
STEEB-CAS Informationstechnik GmbH i.L.,
Abstatt................................... 100 116 885 0
DACOS Software Holding GmbH, St. Ingbert.... 100 (632) 13,830 0
REST OF EUROPE
SAP (UK) Limited, Feltham/UK................ 100 52,113 122,430 297
SAP France Systemes Applications et
Progiciels S.A., Paris/France............. 100 11,972 44,803 263
SAP (Schweiz) AG, Biel/Switzerland.......... 100 21,512 165,654 187
SAP Nederland B.V., 's Hertogenbosch/
Netherlands............................... 100 23,112 53,049 149
SAP Osterreich, Systeme, Anwendungen und
Produkte in der Datenverabeitung
Gesellschaft m.b.H., Vienna/Austria....... 100 15,471 35,808 120
SAP Danmark A/S, Brondby/Denmark............ 100 19,067 39,750 136
SAP Svenska Aktiebolag, Stockholm/Sweden.... 100 23,438 29,299 101
SAP ESPANA Y PORTUGAL SISTEMAS APLICACIONES
Y PRODUCTOS EN LA INFORMATICA, S.A.,
Madrid/Spain.............................. 100 9,179 23,516 116
S.A.P., Italia Sistemi Applicazioni Prodotti
in Data Processing S.p.A., Milan/Italy.... 100 7,611 21,257 110
NV SAP BELGIUM SA, Brussels/Belgium......... 100 10,793 32,977 97
SAP CR, s.r.o., Prague/Czech Republic....... 100 2,755 13,172 113
SAP Polska Sp. z.o.o., Warsaw/Poland........ 100 1,137 6,895 54
SAP Consult C.I.S., Moscow/Russia........... 100 941 2,411 53
SAP Service and Support Center (Ireland)
Limited, Dublin/Ireland................... 100 (392) 2,220 42
DACOS Software S.A., Vaumarcus
(NE)/Switzerland 3)....................... 52 (21) 384 1
STEEB-CAS Informationstechnik AG in Liq.,
Pieterlen/Switzerland..................... 100 0 0 0
SAP Ireland Ltd., Dublin/Ireland............ 100 2,494 82,291 6
SAP Retail Solutions Nederland B.V., 's
Hertogenbosch/Netherlands................. 100 0 222 0
</TABLE>
F-34
<PAGE> 102
INVESTMENTS OF SAP AKTIENGESELLSCHAFT
AND THE COMPANY -- (CONTINUED)
As of December 31, 1997, figures in DM(000), except for % and employee
information
<TABLE>
<CAPTION>
NET INCOME/ NUMBER OF
OWNERSHIP (LOSS) EQUITY EMPLOYEES AS OF
NAME AND LOCATION OF COMPANY % FOR 1997(1) 12/31/1997(1) 12/31/1997(2)
---------------------------- --------- ----------- ------------- ---------------
<S> <C> <C> <C> <C>
SAP Hungary Rendszerek, Alkalmazasok es
Termekek az Adatfeldolgozasban Kft.,
Budapest/Hungary.......................... 100 (12) 2,452 0
AMERICAS
SAP America, Inc., Wayne, PA/USA............ 100 199,588 702,937 2,580
SAP Canada Systems, Applications and
Products in Data Processing Inc., North
York, ONT/ Canada......................... 100 21,992 60,216 350
SAP BRASIL COMERCIO E REPRESENTACOES LTDA.,
Sao Paulo/ Brazil......................... 100 11,756 20,182 213
SAP Labs, Inc., formerly SAP Technology,
Inc., Palo Alto, CA/USA................... 100 4,333 10,826 258
SAP MEXICO S.A. DE C.V., Mexico City/
Mexico.................................... 100 15,230 23,080 125
SAP ARGENTINA S.A., Buenos Aires/
Argentina................................. 100 10,259 16,722 90
SAP Andina y del Caribe S.A, Caracas/
Venezuela................................. 100 (6,125) 4,565 101
SAP International, Inc., Miami, FL/USA...... 100 216 466 15
SAP America Public Sector, Inc., Washington,
DC/ USA................................... 100 (286) (257) 53
WS Investment Holdings, L.P., Wilmington,
DE/ USA(3)................................ 99 528 14,773 0
ASIA/PACIFIC
SAP Japan Co., Ltd., Tokyo/Japan............ 100 29,706 104,776 666
SAP AUSTRALIA PTY LTD, Sydney/Australia..... 100 12,797 40,986 249
SAP Asia Systems, Applications and Products
in Data Processing Pte. Ltd., Singapore... 100 (329) 12,355 202
SAP Korea Limited, Seoul/Korea.............. 100 2,622 5,415 69
SAP India Systems, Applications and Products
in Data Processing Private Limited,
Bangalore/ India.......................... 100 2,272 5,037 74
SAP Data Processing (Malaysia) Sdn Bhd,
Kuala Lumpur/Malaysia..................... 100 2,089 4,884 58
SAP New Zealand Limited, Auckland/New
Zealand................................... 100 1,794 8,500 24
SAP SYSTEMS, APPLICATIONS AND PRODUCTS IN
DATA PROCESSING (THAILAND) LTD.,
Bangkok/Thailand.......................... 100 (1,252) 1,277 39
SAP (Beijing) Software System Co., Ltd.,
Beijing/China............................. 100 (2,955) 6,207 91
SAP Taiwan Co. Ltd., Taipei/Taiwan.......... 100 1,424 5,347 38
SAP HONG KONG CO., LIMITED, Taikoo
Shing/Hong Kong........................... 100 1,148 5,758 27
</TABLE>
F-35
<PAGE> 103
INVESTMENTS OF SAP AKTIENGESELLSCHAFT
AND THE COMPANY -- (CONTINUED)
As of December 31, 1997, figures in DM(000), except for % and employee
information
<TABLE>
<CAPTION>
NET INCOME/ NUMBER OF
OWNERSHIP (LOSS) EQUITY EMPLOYEES AS OF
NAME AND LOCATION OF COMPANY % FOR 1997(1) 12/31/1997(1) 12/31/1997(2)
---------------------------- --------- ----------- ------------- ---------------
<S> <C> <C> <C> <C>
SAP PHILIPPINES SYSTEMS, APPLICATIONS AND
PRODUCTS IN DATA PROCESSING, INC., Makati
City/ Philippines......................... 100 (1,568) (523) 33
SAP India (Holding) Pte. Ltd., Singapore.... 100 (11) 794 0
PT SAP Asia, Jakarta/Indonesia.............. 100 (671) (167) 16
AFRICA
SYSTEMS APPLICATIONS PRODUCTS (SOUTHERN
AFRICA) (PTY) LTD, Woodmead/South
Africa.................................... 100 9,083 13,921 125
</TABLE>
- --------------------------------------------------------------------------------
(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, 1997, including managing directors.
(3) Not consolidated according to Article 296(2) of the German Commercial Code.
F-36
<PAGE> 104
INVESTMENTS OF SAP AKTIENGESELLSCHAFT
AND THE COMPANY -- (CONTINUED)
As of December 31, 1997, figures in DM(000), except for % and employee
information
<TABLE>
<CAPTION>
NET INCOME/ NUMBER OF
OWNERSHIP (LOSS) EQUITY EMPLOYEES AS OF
NAME AND LOCATION OF COMPANY % FOR 1997(1) 12/31/1997(1) 12/31/1997(2)
---------------------------- --------- ----------- ------------- ---------------
<S> <C> <C> <C> <C>
II. ASSOCIATED COMPANIES
IDS Prof. Scheer Gesellschaft fur
integrierte Datenverarbeitungssysteme
mbH, Saarbrucken/Germany(3)............ 25.2 1,653 56,352 513
SAP Solutions GmbH, Freiberg/Germany..... 40 8,362 11,432 299
Schmidt, Vogel und Partner Consult
Gesellschaft fur Organisation und
Managementberatung mbH,
Bielefeld/Germany(3)................... 25.2 1,081 1,450 127
</TABLE>
- --------------------------------------------------------------------------------
(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, 1997, including managing directors.
(3) Included in the consolidated financial statements for the first time.
F-37
<PAGE> 105
SUPERVISORY BOARD AND EXECUTIVE BOARD
SUPERVISORY BOARD
Elected at the Annual General Meeting:
Dr. Bernd Thiemann
Kronberg/Taunus
Chairman of the DG Bank
Frankfurt am Main
Chairperson
Dr. Wilhelm Haarmann
Kronberg/Taunus
RA WP StB HAARMANN, HEMMELRATH & PARTNER
Frankfurt am Main
Dr. Heinrich Hornef
Weinheim
Klaus-Dieter Laidig
Boblingen
Botho von Portatius
Cologne
Prof. Dr. August-Wilhelm Scheer
Saarbrucken
Director of the Institute for Information Systems
Saarland University
Saarbrucken
ELECTED BY THE EMPLOYEES:
Helga Classen
St. Leon-Rot
Deputy Chairperson
Willi Burbach
Dusseldorf
Rudiger Gerber
Bad Schonborn
Bernhard Koller
Walldorf
Dr. Gerhard Maier
Wiesloch
Alfred Simon
Malsch
EXECUTIVE BOARD
Dietmar Hopp
Walldorf
Co-Chairman and CEO
Administration, Sales and Consulting in Germany,
Corporate Communication
Prof. Dr. h. c. Hasso Plattner
Schriesheim/Altenbach
Co-Chairman and CEO
Basis Development, Technology, Industry Solutions
Dr. Claus E. Heinrich
Walldorf
Logistics Development, Industry Solutions
Prof. Dr. Henning Kagermann
Hockenheim
Development Financials, Human Resources, Industry Solutions
Gerhard Oswald
Wiesloch
R/3 Services, Training, Internal Systems
Dr. h. c. Klaus Tschira
Heidelberg
Human Resources Development
Paul Wahl
Wilhelmsfeld
SAP America, Inc. (CEO), Worldwide Marketing
Dr. Peter Zencke
Weinheim
Development Logistics, Industry Solutions
EXTENDED MANAGEMENT BOARD
Michael Gioja as of January 1, 1998
Stutensee
Human Resources Development
Karl-Heinz Hess
Stutensee
Basis Development
Dieter Matheis
Muhlhausen
Chief Financial Officer
Paul Neugart
Hockenheim
Head of Sales in Germany
Dr. Gerhard Rode until December 31, 1997
Ostringen
Basis Development
F-38
<PAGE> 106
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
DM (000)
<TABLE>
<CAPTION>
ADDITIONS
-----------------------------------
BEGINNING CHARGED TO COSTS CHARGED TO OTHER ENDING
DESCRIPTION BALANCE AND EXPENSES ACCOUNTS DEDUCTIONS BALANCE
- ----------- --------- ---------------- ---------------- ---------- -------
<S> <C> <C> <C> <C> <C>
Allowances for Doubtful Accounts:
Year ended December 31, 1995......... 20,560 17,557 14,560 23,557
Year ended December 31, 1996......... 23,557 31,739 5,000 50,296
Year ended December 31, 1997......... 50,296 51,266 9,200 92,362
</TABLE>
F-39
<PAGE> 107
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------- --------
<C> <S> <C>
3.1 Articles of Association (Satzung) of SAP as amended to the
date of filing (English translation included) (Incorporated
by reference to Registration Statement on Form F-1 of SAP
(Registration No. - ), filed June 22, 1998)
4.1 Form of Amended and Restated Deposit Agreement among SAP,
The Bank of New York, as Depositary, and all holders from
time to time of American Depositary Receipts issued
thereunder, including the form of American Depositary
Receipts (Incorporated by reference to Registration
Statement on Form F-1 of SAP (Registration No.
- ), filed June 22, 1998)
</TABLE>
