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