SECURITIES AND EXCHANGE COMMISSION
| (Mark One) | ||
o | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF |
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF | ||
For the fiscal year ended December 31, 2003
| For the fiscal year ended December 31, 2004 | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from to | ||
For the transition period from ______ to
Commission file number: 1-14251
| Title of each class | Name of each exchange on which registered | |
| American Depositary Shares, each representing one-fourth of one Ordinary Share, without nominal value | New York Stock Exchange | |
| Ordinary Shares, without nominal value | Frankfurt Stock Exchange New York Stock Exchange* |
| Ordinary Shares, without nominal value (as of December 31, | 316,003,600 |
Yes x No o
Yes þ | No o |
Item 17 o Item 18 x
Item 17 o | Item 18 þ |
| ** | Including |
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| Key Information | 3 | ||||||||
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| * | Omitted because the Item is not applicable or the answer is negative. |
| ** | The Registrant has responded to Item 18 in lieu of this Item. |
ii
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| • | general economic and business conditions; | |
| • | attracting and retaining personnel; | |
| • | competition in the software industry; | |
| • | implementing our business strategy; | |
| • | developing and introducing new services and products; | |
| • | regulatory and political conditions; | |
| • | obtaining and expanding market acceptance of our services and products; | |
| • | terrorist attacks or other acts of violence or war; | |
| • | integrating newly acquired businesses; | |
| • | meeting our requirements with customers; and | |
| • | other risks and uncertainties, some of which we describe under “Item 3. Key Information — Risk Factors.” |
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Not Applicable.
Not Applicable.ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLEItem 3.Key Information
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SELECTED FINANCIAL DATA
| Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands, except per share and exchange rate data) | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2003 | 2003 | 2002 | 2001 | 2000(2) | 1999 | 2004 | 2004 | 2003 | 2002 | 2001 | 2000(2) | |||||||||||||||||||||||||||||||||||||||
| € | U.S.$(1) | € | € | € | € | € | ||||||||||||||||||||||||||||||||||||||||||||
| U.S.$(1) | € | € | € | € | (in thousands, except per share and exchange rate data) | |||||||||||||||||||||||||||||||||||||||||||||
Income Statement Data: | Income Statement Data: | Income Statement Data: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total revenue | Total revenue | 8,848,896 | 7,024,606 | 7,412,838 | 7,340,804 | 6,264,595 | 5,110,213 | Total revenue | 10,173,121 | 7,514,493 | 7,024,606 | 7,412,838 | 7,340,804 | 6,264,595 | ||||||||||||||||||||||||||||||||||||
| Operating income | Operating income | 2,171,747 | 1,724,019 | 1,625,678 | 1,312,374 | 802,658 | 796,180 | Operating income | 2,732,484 | 2,018,381 | 1,724,019 | 1,625,678 | 1,312,374 | 802,658 | ||||||||||||||||||||||||||||||||||||
| Income before income taxes and extraordinary gain | 2,238,002 | 1,776,615 | 1,107,698 | 1,068,757 | 1,012,869 | 980,347 | ||||||||||||||||||||||||||||||||||||||||||||
| Income before income taxes, minority interest, and extraordinary gain | 2,805,943 | 2,072,642 | 1,776,615 | 1,107,698 | 1,068,757 | 1,012,869 | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | Net income | 1,356,776 | 1,077,063 | 508,614 | 581,136 | 615,732 | 601,001 | Net income | 1,774,183 | 1,310,521 | 1,077,063 | 508,614 | 581,136 | 615,732 | ||||||||||||||||||||||||||||||||||||
Earnings per share(3) | Earnings per share(3) | Earnings per share(3) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Basic | 4.37 | 3.47 | 1.62 | 1.85 | 1.96 | 1.92 | ||||||||||||||||||||||||||||||||||||||||||||
| Diluted | 4.36 | 3.46 | 1.62 | 1.85 | 1.95 | 1.90 | ||||||||||||||||||||||||||||||||||||||||||||
| Basic | 5.71 | 4.22 | 3.47 | 1.62 | 1.85 | 1.96 | ||||||||||||||||||||||||||||||||||||||||||||
| Diluted | 5.69 | 4.20 | 3.46 | 1.62 | 1.85 | 1.95 | ||||||||||||||||||||||||||||||||||||||||||||
Other Data: | Other Data: | Other Data: | ||||||||||||||||||||||||||||||||||||||||||||||||
Weighted average number of shares outstanding(3)(4) | Weighted average number of shares outstanding(3)(4) | Weighted average number of shares outstanding(3)(4) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Basic | 310,781 | 310,781 | 313,016 | 314,309 | 314,423 | 313,815 | Basic | 310,802 | 310,802 | 310,781 | 313,016 | 314,309 | 314,423 | |||||||||||||||||||||||||||||||||||||
| Diluted | 311,409 | 311,409 | 313,980 | 314,412 | 315,737 | 315,750 | Diluted | 312,156 | 312,156 | 311,409 | 313,980 | 314,412 | 315,737 | |||||||||||||||||||||||||||||||||||||
Balance Sheet Data: | Balance Sheet Data: | Balance Sheet Data: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets | Total assets | 7,968,692 | 6,325,865 | 5,608,463 | 6,195,604 | 5,618,971 | 4,826,889 | Total assets | 10,269,212 | 7,585,472 | 6,325,865 | 5,608,463 | 6,195,604 | 5,618,971 | ||||||||||||||||||||||||||||||||||||
| Shareholders’ equity | Shareholders’ equity | 4,672,788 | 3,709,445 | 2,872,091 | 3,109,513 | 2,517,081 | 2,559,355 | Shareholders’ equity | 6,219,700 | 4,594,253 | 3,709,445 | 2,872,091 | 3,109,513 | 2,517,081 | ||||||||||||||||||||||||||||||||||||
| Subscribed capital | Subscribed capital | 397,327 | 315,414 | 314,963 | 314,826 | 314,715 | 267,805 | Subscribed capital | 427,806 | 316,004 | 315,414 | 314,963 | 314,826 | 314,715 | ||||||||||||||||||||||||||||||||||||
| Short-term bank loans and overdrafts | Short-term bank loans and overdrafts | 23,988 | 19,043 | 22,657 | 458,266 | 146,877 | 24,600 | Short-term bank loans and overdrafts | 34,997 | 25,851 | 19,043 | 22,657 | 458,266 | 146,877 | ||||||||||||||||||||||||||||||||||||
Long-term financial debt(5) | Long-term financial debt(5) | 15,051 | 11,948 | 11,318 | 7,375 | 6,543 | 32,913 | Long-term financial debt(5) | 12,470 | 9,211 | 11,948 | 11,318 | 7,375 | 6,543 | ||||||||||||||||||||||||||||||||||||
| (1) | Amounts in the column are unaudited and translated for the convenience of the reader at€1.00 to U.S.$ |
| (2) | The 2000 figures have been adjusted for the effect of the change in the investment in Commerce One, Inc. (“Commerce One”) to the equity method. See Note 4 of “Item 18. Financial Statements.” |
| (3) | Amounts are adjusted for our one-for-one conversion of preference shares to ordinary shares in 2001 and the three-for-one stock split in 2000. |
| (4) | Includes preference and ordinary shares for periods prior to June 18, 2001, the effective date of the conversion of the preference shares into ordinary shares on a share-for-share basis. |
| (5) | Long-term financial debt represents financial liabilities with a remaining life beyond one year, which is comprised of bank loans and overdrafts and convertible bonds issued pursuant to stock-based compensation plans. See “Item 6. Directors, Senior Management and Employees — Share Ownership — Stock-Based Compensation Plans.” |
Exchange Rates
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The following table sets forth the average, high, low and period-end Noon Buying Rates for the euro expressed as dollars per€1.00.
| Year | Average(1) | High | Low | Period-End | Average(1) | High | Low | Period-End | ||||||||||||||||||||||||
| 1999 | 1.0588 | 1.1812 | 1.0016 | 1.0070 | ||||||||||||||||||||||||||||
| 2000 | 0.9207 | 1.0335 | 0.8270 | 0.9388 | 0.9207 | 1.0335 | 0.8270 | 0.9388 | ||||||||||||||||||||||||
| 2001 | 0.8909 | 0.9535 | 0.8370 | 0.8901 | 0.8909 | 0.9535 | 0.8370 | 0.8901 | ||||||||||||||||||||||||
| 2002 | 0.9495 | 1.0485 | 0.8594 | 1.0485 | 0.9495 | 1.0485 | 0.8594 | 1.0485 | ||||||||||||||||||||||||
| 2003 | 1.1411 | 1.2597 | 1.0361 | 1.2597 | 1.1411 | 1.2597 | 1.0361 | 1.2597 | ||||||||||||||||||||||||
| 2004 | 1.2478 | 1.3625 | 1.1801 | 1.3538 | ||||||||||||||||||||||||||||
| Month | Month | High | Low | Period-End | Month | High | Low | Period-End | ||||||||||||||||||
| 2003 | ||||||||||||||||||||||||||
| 2004 | 2004 | |||||||||||||||||||||||||
| July | 1.1580 | 1.1164 | 1.1231 | July | 1.2437 | 1.2032 | 1.2032 | |||||||||||||||||||
| August | 1.1390 | 1.0871 | 1.0986 | August | 1.2368 | 1.2025 | 1.2183 | |||||||||||||||||||
| September | 1.1650 | 1.0845 | 1.1650 | September | 1.2417 | 1.2052 | 1.2417 | |||||||||||||||||||
| October | 1.1833 | 1.1596 | 1.1609 | October | 1.2783 | 1.2271 | 1.2746 | |||||||||||||||||||
| November | 1.1995 | 1.1417 | 1.1995 | November | 1.3288 | 1.2703 | 1.3259 | |||||||||||||||||||
| December | 1.2597 | 1.1956 | 1.2597 | December | 1.3625 | 1.3224 | 1.3538 | |||||||||||||||||||
| 2004 | ||||||||||||||||||||||||||
| 2005 | 2005 | |||||||||||||||||||||||||
| January | 1.2853 | 1.2389 | 1.2452 | January | 1.3476 | 1.2954 | 1.3049 | |||||||||||||||||||
| February | 1.2848 | 1.2426 | 1.2441 | February | 1.3274 | 1.2773 | 1.3274 | |||||||||||||||||||
| March (through March 9, 2004) | 1.2431 | 1.2088 | 1.2428 | March (through March 8, 2005) | 1.3342 | 1.3127 | 1.3342 | |||||||||||||||||||
| (1) | The average of the applicable Noon Buying Rates on the last day of each month during the relevant period. |
On March 9, 2004,8, 2005, the Noon Buying Rate for converting euro to dollars was U.S.$1.24281.3342 per€1.00.
Dividends
DIVIDENDSDividends are jointly proposed by SAP AG’s Supervisory Board (Aufsichtsrat) and Executive Board (Vorstand) based on SAP AG’s year-end stand-alone financial statements, subject to approval by the shareholders, and are officially declared for the prior year at SAP AG’s Annual General Shareholders’ Meeting. Dividends paid to holders of the ADSs may be subject to German withholding tax. See “Item 8. Financial Information — Dividend Policy” and “Item 10. Additional Information — Taxation.”
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| Dividend Paid per | Dividend Paid per | Dividend Paid per | Dividend Paid per | |||||||||||||||||||||||||||||
| Year Ended December 31, | Ordinary Share | Preference Share | Ordinary Share | Preference Share | ||||||||||||||||||||||||||||
| € | U.S.$ | € | U.S.$ | € | U.S.$ | € | U.S.$ | |||||||||||||||||||||||||
| 1999 | 0.52 | 0.47 | (1)(4) | 0.53 | 0.48 | (1) | ||||||||||||||||||||||||||
| 2000 | 0.57 | 0.52 | (1)(4) | 0.58 | 0.53 | (1) | 0.57 | 0.52 | (1)(4) | 0.58 | 0.53 | (1) | ||||||||||||||||||||
| 2001 | 0.58 | 0.53 | (1)(4) | N/A | N/A | 0.58 | 0.53 | (1)(4) | N/A | N/A | ||||||||||||||||||||||
| 2002 | 0.60 | 0.69 | (1)(4) | N/A | N/A | 0.60 | 0.69 | (1)(4) | N/A | N/A | ||||||||||||||||||||||
| 2003 (proposed) | 0.80 | (2) | 0.99 | (2)(3)(4) | N/A | N/A | ||||||||||||||||||||||||||
| 2003 | 0.80 | 0.95 | (1)(4) | N/A | N/A | |||||||||||||||||||||||||||
| 2004 (proposed) | 1.10 | (2) | 1.47 | (2)(3)(4) | N/A | N/A | ||||||||||||||||||||||||||
| (1) | Translated for the convenience of the reader from euro into dollars at the Noon Buying Rate for converting euro into dollars on the dividend payment date. The depositary is required to convert any dividend payments received from SAP as promptly as practicable upon receipt. |
| (2) | Subject to approval of the Annual General Shareholders’ Meeting of SAP AG to be held on May |
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| (3) | Translated for the convenience of the reader from euro into dollars at the Noon Buying Rate for converting euro into dollars on March |
| (4) | One SAP |
The amount of dividends paid on the ordinary shares depends on the amount of SAP AG profits to be distributed by SAP AG, which depends in part upon our performance. For years prior to 2001, a holder of preference shares was entitled to a cumulative annual preferred dividend which exceeded the annual dividend paid to holders of ordinary shares by an amount equal to€0.01 per preference share, but in no event less than a minimum dividend equal to€0.01 per preference share. The timing and amount of future dividend payments will depend upon our future earnings, capital needs and other relevant factors in each case as proposed by the Executive Board and the Supervisory Board of SAP AG and approved at the Annual General Shareholders’ Meeting.
Substantial, prolonged declines in
Implementation of SAP software products can constitute a major portion of our customers’ overall corporate budget, and the amount customers are willing to invest in acquiring and implementing SAP products and the timing of our customers’ investment have tended to vary due to economic or financial crises or other business conditions. Prolonged economic slowdowns or slow or weak economic recoveries may result in customers requiring us to renegotiate existing contracts resulting in less advantageous terms than those currently in place. A recession, slow or weak economic recovery or other difficultiesvaried in the economies where we license our products, including Europe, the Americaspast, sometimes substantially, from quarter to quarter. Our revenue in general, and Asia, could have a material adverse effect on our business, financial position, operating results or cash flows. Inin particular our profitability and cash flows may be significantly adversely affected by a prolonged economic slowdown in Europe or the U.S. because we derive a substantial portion of oursoftware revenue, from software licenses and services in those geographic regions.
One important feature of our long-term strategyis difficult to forecast for growth is to increase our offerings for the small and mid-market segment. A recession, slow or weak economic recovery could inhibit the creation and financial strength of those businesses and thereby delay that element of our expansion.
Undetected errors or delays in new products and product enhancements may result in increased costs to us and delayed demand for our new products.
To achieve customer acceptance, our new products and product enhancements can require long development and testing periods, which may result in delays in scheduled introduction. Generally, first releases are licensed after a validation process to a controlled group of customers. Such new products and product enhancements may contain a number of undetected errors or “bugs” when they are first released. As a result, in the first year following the introduction of certain releases, we generally devote significant resources working with early customers to correct such errors. There can be no assurance, however, that all such errors can be corrected to the customer’s satisfaction, with the result that certain customers may bring claims for cash refunds, damages, replacement software or other concessions. The risks of errors and their adverse consequences may increase as we seek simultaneously to introduce a variety of new software products.
Although we test each new product and product enhancement release before introducing it to the market, there can be no assurance that significant errors will not be found in existing or future releases of SAP software products, with the possible result that significant resources and expenditures may be required in order to correct such errors or otherwise satisfy customer demands. In addition, the possibility cannot be excluded that customers may bring actions for damages, make claims for replacement of software, or demand other concessions from SAP. Significant undetected errors or delays in new products or product enhancements may affect market acceptance of SAP software products.
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We are subject to pricing pressure.
In response to competition, consolidation within the industries in which we operate and general adverse economic conditions, we have been required in the past, and may be required in the future, to furnish additional discounts to customers or otherwise modify our pricing practices. These developments have and may increasingly negatively impact our revenue and earnings. We generally license our products in individual software components or a suite of software components on a “right to use” basis pursuant to a perpetual license providing for an initial license fee based on the number and types of identified users or other applicable criteria. Subsequent maintenance fees are typically established based on a specified percentage of the initial license fee paid by the customer. Our customers typically prepay maintenance for periods of three to twelve months. Changes in our pricing model or any other future broadly-based changes to our prices and pricing policies could lead to a decline or delay in software sales and/or a decline or delay in maintenance fees as our sales force and our customers adjust to the new pricing policies.
We, together with certain business partners, offer certain SAP software products to small and midsize customers as a component of our hosted solutions or rental offerings, in which license and maintenance fees or rental payments may be paid to us on a per user, per month or similar subscription basis rather than an upfront license fee payment as under our standard pricing models. Our hosted solutions and rental programs have not generated significant revenues in 2003 and prior years. As part of our long-term strategy for growth, we expect that these programs will generate incremental revenue from small and midsize customers. There can be no assurance that such programs will be successful or, if successful, that they will not negatively impact our standard pricing models. The recent trend of outsourcing enterprise business applications or business processes could result in increased competition through the entry of systems integrators, consulting firms, telecommunications firms, computer hardware vendors and other application-hosting providers. We may be unable to offer an outsourcing model that customers demand, or competitors may offer better, lower priced or more desirable outsourcing models. In addition, the distribution of applications through application service providers may reduce the price paid for our products or adversely affect other sales of our products.
Terrorist attacks and risk of war or international hostilities could adversely impact our business.
The financial, political, economic and other uncertainties following terrorist attacks like those in the U.S. and Spain, and other acts of violence or war, such as the recent conflict in Iraq could damage the world economy and affect our investment and our customers’ investment decisions over an extended period of time. We believe that geopolitical uncertainties, including hostilities against the U.S., Europe or any other country, or war or any other international hostilities may lead to cautiousness by our customers in setting their capital spending budgets. Furthermore, such occurrences could make travel more difficult, thus interfering with customers’ decision making processes and our ability to sell products and provide services to them.
Consolidation in the software industry may result in instability of software demand and stronger peer companies in the long term.
The entire IT sector, including the software industry, is currently experiencing consolidation through mergers and acquisitions, particularly involving larger companies. Large companies continue to expand into related industries. Transactions in which we or our competitors participate could have a material adverse effect on us in a variety of ways, such as delaying sales due to customer uncertainty and subjecting us to competition from stronger established or new peer group companies with more resources, larger customer bases and a wider variety of products than we have.
We may not be able to protect our intellectual property rights, which may cause us to incur significant costs in litigation and erosion in the value of our brands and products.
We rely on a combination of the protections provided by applicable trade secret, copyright, patent and trademark laws, license and non-disclosure agreements and technical measures to establish and protect our rights in our products. Despite our efforts, there can be no assurance that these protections will be adequate or that our competitors will not independently develop technologies that are substantially equivalent or superior to our
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reasons, including:
Some of our competitors may have been more aggressive than us in applying for or obtaining patent protection for innovative proprietary technologies.
Although we have been issued patents under our patent program and have a number of patent applications pending for inventions claimed by us, there can be no assurance that, in the future, patents of third parties will not preclude us from utilizing a technology in our products or require us to enter into royalty and licensing arrangements on terms that are not favorable to us. Although we do not believe that we are infringing any proprietary rights of others, third parties have claimed and may claim in the future that we have infringed their intellectual property rights. We expect that our software products will increasingly be subject to such claims as the number of products in our industry segment grows, as we expand our products into new industry segments and as the functionality of products overlap. There can be no assurance that, in the future, a third party will not assert that our products violate its patents, copyrights or trade secrets. Any claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays, subject our products to an injunction, require a complete or partial re-design of the relevant product or require us to enter into royalty or licensing agreements. Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all.
Our encryption technology may be breached or compromised.
We rely on encryption, authentication technology and firewalls to provide the necessary security for the confidential information transmitted to and from us over the Internet. Anyone who circumvents our security measures could misappropriate proprietary information or cause interruptions in our services or operations. The Internet is a public network, and data is sent over this network from many sources. In the past, computer viruses, software programs that disable or impair computers, have been distributed and have rapidly spread over the Internet. Computer viruses could be introduced into our systems or those of our customers or suppliers, which could disrupt our network or make it inaccessible to customers or suppliers. Our security measures may be inadequate to prevent security breaches, and our business would be harmed if we do not prevent them. In addition, we may be required to expend significant capital and other resources to protect against the threat of security breaches or to alleviate problems caused by breaches.
Consumers have significant concerns about secure transmissions of confidential information, especially financial information, over public networks like the Internet. This remains a significant barrier to general acceptance of e-commerce and other aspects of SAP’s business. Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments could result in compromises or breaches of our security systems or those of other Web sites to protect proprietary information. If any compromises of security were to occur, it could have the effect of substantially reducing the use of the Web for commerce and communications and therefore could adversely impact our long-term strategy for growth.
We depend on technology licensed to us by third parties, and the loss of this technology could delay implementation of our products or force us to pay higher license fees.
We license numerous third-party technologies that we incorporate into our existing products, on which, in the aggregate, we may be substantially dependent. There can be no assurance that the licenses for such third-party technologies will not be terminated or that we will be able to license third-party software for future products. In addition, we may be unable to renegotiate acceptable third-party license terms to reflect changes in our pricing models. While we believe that no one individual technology we license is material to our business, changes in or the loss of third party licenses could lead to a material increase in the costs of licensing or to SAP software products becoming inoperable or their performance being materially reduced, with the result that we may need to incur additional development costs to ensure continued performance of our products.
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Our SAP NetWeaver integration and application platform may not succeed or may make certain of our products less desirable.
In 2003, we announced the introduction of SAP NetWeaver, our new, web-based technology and application platform. We have devoted a significant amount of resources to the development and marketing of SAP NetWeaver. SAP NetWeaver is a new and innovative solution serving as the basis of SAP’s current product strategy. While all components of SAP NetWeaver are already released, we expect to release the complete SAP NetWeaver solution to reference customers by the end of March 2004. It represents a technological shift to a web-based, open platform design that we believe will make it easier for customers to link non-SAP software related data with SAP software. There are no assurances that customers will accept this technology change or that our competitors will not develop and market more effective technology platforms that better suit the needs of customers. Further, as with the introduction of any new product, there may be errors in the SAP NetWeaver component technology that might require the devotion of a substantial amount of resources to correct. SAP NetWeaver’s failure to be accepted by customers, development by competitors of superior technology or significant errors in the solution could have a material adverse impact on our revenues, earnings and results of operations. In addition, as with any open platform design, the greater flexibility provided to customers to use data generated by non-SAP software may reduce customer demand to elect and use certain of our software products.
Because our products are critical to the operations of our customers’ businesses, we could incur substantial costs as a result of warranty or product liability claims.
The use of SAP software products by customers in business-critical applications and processes and the increased complexity of our software create the risk that customers or other third parties may pursue warranty, performance or other claims against us in the event of actual or alleged failures of SAP software products, the provision of services or application hosting. We have in the past been, and may in the future continue to be, subject to such warranty, performance or other claims. In addition, certain of our Internet browser-enabled products include security features that are intended to protect the privacy and integrity of customer data. Despite these security features, our products may be vulnerable to break-ins and similar problems caused by Internet users, such as hackers bypassing firewalls and misappropriating confidential information. Such break-ins or other disruptions could jeopardize the security of information stored in and transmitted through the computer systems of our customers. Addressing problems and claims associated with such actual or alleged failures could have a material adverse effect on our business, financial position and results of operations or cash flows.
Although our agreements generally contain provisions designed to limit our exposure as a result of actual or alleged failures of SAP software products, the provision of services or application hosting or security features, such provisions may not cover every eventuality or be effective under applicable law. Any claim, regardless of its merits, could entail substantial expense and require the devotion of significant time and attention by key management personnel. The accompanying publicity of any claim, regardless of its merits, could adversely affect the demand for our software.
Our failure to develop new relationships and enhance existing relationships with third-party distributors, software suppliers, system integrators and value-added resellers that help sell our services and products may adversely affect our revenues.
We have entered into agreements with a number of leading computer software and hardware suppliers and technology providers to cooperate and ensure that certain of the products produced by such suppliers are compatible with SAP software products. We have also supplemented our consulting and support services (in the areas of product implementation, training and maintenance) through “alliance partnerships” with third-party hardware and software suppliers, systems integrators, consulting groups formerly associated with major accounting firms and other consulting firms. Most of these agreements and alliances are of relatively short duration and non-exclusive. In addition, we have established relationships relating to the resale of certain of our software products by third parties. These third parties include value-added resellers and, in the area of application hosting services, certain computer hardware vendors, systems integrators and telecommunications providers.
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There can be no assurance that these third parties or business partners, most of whom have similar arrangements with our competitors and some of whom also produce their own standard application software in competition with us, will continue to cooperate with us when such agreements or partnerships expire or are up for renewal. In addition, there can be no assurance that such third parties or partners will provide high-quality products or services or that actions taken or omitted to be taken by such parties will not adversely affect us. There can be no assurance that slow or weak economic recovery will not affect such third parties or partners or the products and services that they provide pursuant to the agreements with us. The failure to obtain high quality products or services or to renew such agreements or partnerships could adversely affect our ability to continue to develop product enhancements and new solutions that keep pace with anticipated changes in hardware and software technology and telecommunications, or could adversely affect the demand for our software products.
Because we conduct our operations throughout the world, our results of operations may be affected by currency fluctuations.
Although the euro has been our financial and reporting currency since January 1, 1999, a significant portion of our business is conducted in currencies other than the euro. Approximately 59.3% of our consolidated revenue in 2003 was attributable to operations in non-EMU member states and translated into euro. As a consequence, period-to-period changes in the average exchange rate in a particular currency can significantly affect reported revenue and operating results. In general, appreciation of the euro relative to another currency has a negative effect on reported results of operations, while depreciation of the euro has a positive effect.
Because a significant portion of our revenue is from countries other than EMU member states and denominated in currencies other than the euro, we have significant exposure to the risk of currency fluctuations, especially to fluctuations in the value of the dollar, the Japanese yen, the British pound, the Swiss franc, the Canadian dollar, and the Australian dollar. As of March 9, 2004, the Noon Buying Rate for converting euro to dollars was U.S.$1.2428 per €1.00 a sharp decrease in the value of the dollar relative to the euro compared to the Noon Buying Rate of December 31, 2002 of 1.0485 U.S.$.. Conversely, increases in the value of currencies relative to the euro may positively affect earnings, although such positive effects may be only short-term in nature.
We continually monitor our exposure to currency risk and pursue a company-wide foreign exchange risk management policy and may hedge such risks with certain financial instruments. However, there can be no assurance that our hedging activities, if any, will be effective. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk — Foreign Currency Risk.”
If we are unable to keep up with rapid technological changes, we may not be able to compete effectively.
Our future success will depend in part upon our ability to:
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| • | the timing of the introduction of new products or product enhancements by us or our competitors; | |
| • | the potential for delay of customer implementations of SAP software products; |
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| • | changes in customer budgets; | |
| • | seasonality of a customer’s technology purchases; and | |
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We continue to transform our suite of business applications to reduce the total cost of IT ownership for our customers and to allow our customers to better integrate heterogeneous systems. In addition we provide industry-specific business solutions. There can be no assurance that we will be successful in anticipating and developing product enhancements or new solutions and services to adequately address changing technologies and customer requirements. Any such enhancements, solutions or services may not be successful in the marketplace or may not generate increased revenue. We may fail to anticipate and develop technological improvements, to adapt our products to technological change, changing country-specific regulatory requirements, emerging industry standards and changing customer requirements or to produce high-quality products, enhancements and releases in a timely and cost-effective manner in order to compete with applications offered by our competitors.
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Due to intense competition, our market share and financial performance could suffer.
The software industry
We compete with a wide range of global, regional and local competitors. Some of our competitors and many of our potential competitors are involved in a wider range of businesses, and some competitors and potential competitors have a larger installed customer base for their products and services, or have significantly greater financial, technical, marketing and other resources than we have, enhancing their ability to compete with us. There are many other companies engaged in the research, development and marketing of integrated web-based business solutions, standard business application software and associated applications development tools, decision support products and services. Some of these companies may develop (or may have already developed) an overall concept or individual product offering which may be perceived to be as good as or better than our product offerings.
New distribution methods (e.g. electronic channels) and opportunities presented by the Internet and electronic commerce have removed many of the barriers to entry to the segments in which we compete. Historically, most of our competitors provided solutions which covered certain functional areas offering the customer a software application product designed for a specific business or manufacturing process. Such products compete with individual functions offered by us. Our competitors have already broadened, or are implementing plans to broaden, the scope of their business activities. A competitor may be able to capitalize upon the success of a niche product by developing and marketing broader system applications in competition with us. Niche competitors may also benefit from alternative delivery systems, such as the Internet, to become more competitive with us.
Current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address customer needs. In addition, we believe that competition will increase as a result of industry consolidations among potential customers of our products as well as among our competitors. It is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant segment shares. There can be no assurance that our strategies will prove to be successful or that our competitors’ strategies will not be more successful than ours.
We believe that our experience with business process applications, our increasingly flexible, component-based installation options and our focus on flexible, open standards technologies and industry solutions give us a strong competitive position. However, there can be no assurance that our strategies will prove to be successful or that our competitors’ strategies would not be more successful than ours.
Our future revenue is dependent in part upon our installed customer base continuing to license additional products, renew maintenance agreements and purchase additional professional services.
Our large installed customer base has traditionally generated additional new software, maintenance, consulting and training revenues. In future periods, customers may not necessarily license additional products or contract for additional services or maintenance. After an initial term, maintenance is generally renewable annually at a customer’s option, and there are no mandatory payment obligations or obligations to license additional software. If our customers decide not to renew their maintenance agreements or license additional products or contract for additional services, or if they reduce the scope of their maintenance agreements, our revenues could decrease and our operating results could be adversely affected.
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Our revenue mix may vary and may negatively affect our profit margins.
From 2001 to 2003, our software revenue has decreased both in terms of absolute dollar value and as a percentage of total revenue while our maintenance revenue increased during the same period. Our service revenue increased from 2001 to 2002 but decreased from 2002 to 2003. Variances or slowdowns in our licensing activity may negatively impact our current and future revenue from services and maintenance since such services and maintenance revenue typically lag behind license fee revenue. In addition, growth in service revenue will depend on our ability to compete effectively in obtaining customer engagements to provide services related to SAP software products. Any decrease in the percentage of our total revenue derived from software licensing could have a material adverse effect on our business, financial position and results of operations or cash flows.
Customer implementation and installation involves significant resources and is subject to significant risks.
Implementation of SAP software is a process that often involves a significant commitment of resources by our customers and is subject to a number of significant risks over which we have little or no control. Some of our customers have incurred significant third-party consulting costs and experienced protracted implementation times in connection with the purchase and installation of SAP software products. We believe that these costs and delays were due in many cases to the fact that, in connection with the implementation of the SAP software products, these customers conducted extensive business re-engineering projects involving complex changes relating to business processes within the customer’s own organization. We offer accelerated installation support and/or fixed fees for certain SAP software products installation projects. However, criticisms regarding these additional costs and protracted implementation times have been directed at us, and there have been, from time to time, shortages of our trained consultants available to assist customers in the implementation of our products. In addition, the success of new SAP software products introduced by us may be adversely impacted by the perceived time and cost to implement existing SAP software products or the actual time and cost to implement such new products. We cannot provide assurances that protracted installation times or criticisms of us will not continue, that shortages of our trained consultants will not occur or that the costs of installation projects will not exceed the fixed fees being charged by us.
Business process outsourcing may adversely impact our business
Some of our customers offer other companies business process outsourcing (BPO) services, which involve the transfer by end user customers of all of or significant portions of their internal processes to third-party BPO providers. Some or all of our existing end user customers and potential customers may decide to shift business process systems to BPO providers rather than continue to run these systems themselves, especially in the areas of human resources, finance, accounting and supply chain. The perception of value created by our products among end user customers could be diminished to the extent BPO providers bundle our applications with their services. While most of our revenues are currently derived from contracts directly with end user customers, a general trend to outsourcing business processes to BPO providers could have a material adverse impact on our revenues, earnings and results of operations.
If we were to lose the services of members of management and employees or fail to attract new personnel who possess specialized knowledge and technology skills, we may not be able to manage our operations effectively or develop new products and services.
Our operations could be adversely affected if senior managers or other skilled personnel were to leave and qualified replacements were not available. Despite recent adverse economic trends, competition for managerial and skilled personnelcommon in the software industry, remains intense. Especially as we embark onour business has historically experienced its highest revenue in the introductionfourth quarter of neweach year, due primarily to year-end capital purchases by customers. Such factors have resulted in 2004, 2003 and innovative technology offerings to our client base such as our SAP NetWeaver platform initiative, we are relying on2002 first quarter revenue being able to build up and maintain a specialized workforce with deep technological know-how to ensure an optimal implementation of such new technologieslower than revenue in accordance to our clients’ demands. Such personnel in certain regions (including the U.S. and Europe) are in short supply.respective prior year’s fourth quarter. We expect continued increasesto experience a similar trend of seasonality in compensation coststhe future and expect that our revenue will peak in order to attractthe fourth quarter of each year and retain senior managersdecline from that level in the first quarter of the following year.
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Our internal risk management policies and procedures may not be sufficient for us to identify, analyze and respond appropriatelyrevenue could result in a timely manner.
We believe we have a system comprising multiple mechanisms across the SAP group to recognize and analyze risks early and respond appropriately. These mechanisms include recording, monitoring and controlling internal enterprise processes using internal reporting functions, a number of management and controlling systems and a planning process that is uniform throughout our group. We have created standard documentation of key business processes of SAP AG and its largest subsidiaries, which will be extended to all major subsidiariessignificant variations in 2004. Further elements of the system include a corporate-wide Code of Business Practice which was formalized in 2003, our internal audit function, comprehensive published reports and the work of the Supervisory Board in monitoring and controlling the Executive Board. In early 2003, we created a central dedicated Corporate Risk Management function tasked to consolidate and enhance SAP’s various existing risk management activities in accordance with a corporate-wide uniform methodology. SAP’s Principles of Corporate Governance, ratified by our Supervisory Board at the end of 2001 and updated in August 2002 and March 2004, constitute a further component in the system. They comprise, among others, standards and guidelines for the work of the Executive Board and Supervisory Board, and for the cooperation between them. In addition, SAP promptly started to implement measures in accordance with the Sarbanes-Oxley Act, a U.S. law on corporate governance and financial reporting that came into effect on July 30, 2002. Amongst other measures, we established a Disclosure Committee, whose main task is to monitor the quality of information released to the financial markets. For further information on the measures we have undertaken relating to the Sarbanes-Oxley Act, please refer to “Item 6. Directors, Senior Management and Employees” and “Item 15. Controls and Procedures.”
Although we believe our risk management policies and procedures are sufficient, there is no guarantee that all risks will be identified, analyzed or responded to appropriately in a timely manner, especially those which are outside of our control.
Future changes in financial accounting standards regarding the accounting for stock based compensation may have an adverse effect on our reported results of operation.
As part of its convergence project, the Financial Accounting Standards Board (FASB) is currently reconsidering U.S. GAAP rules for stock-based compensation accounting in light of the recent standard issued by the International Accounting Standards Board that will require the expensing of all stock-based compensation awards. Changes requiring SAP to record stock-based compensation expense in the income statements for our employee stock options using the fair market value method would have a significant negative effect on our reported operating results. Changes to other existing accounting standards or the questioning of current accounting practices by the SEC, analysts, or the investing public may also adversely affect our reported financial results. See “Item 5. Operating and Financial Review and Prospects — Critical Accounting Policies.”
Management’s use of estimates may affect our results of operations from quarter to quarter or year to year. We significantly increased in each year from 2002 through 2004, and financial position.
Our financial statements are based uponplan to continue to increase throughout 2005, the accounting policies as described in Note 3 of our consolidated financial statements and included in “Item 18. Financial Statements.” Such policies require management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Facts and circumstances which management uses in making estimates and judgments may change from time to time and may result in significant variations, including adverse effectsfollowing expenditures depending on our results of operationand outlook during 2005:
| • | expansion of our operations; | |
| • | research and development directed towards new products and product enhancements; and | |
| • | development of new distribution and resale channels, particularly for small and midsize businesses. |
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The market in which we compete continues to evolve and, if it does not grow rapidly in the longterm, our business will be adversely affected.
SAP is investing significant resources in further developing and marketing new and enhanced products and services. The areas of customer relationship management, supply chain management, technology integration solutions (including SAP NetWeaver) and solutions for the small and mid-market segment are expected to experience high growth rates. Demand and customer acceptance for recently introduced products and services are subject to a high level of uncertainty, especially where acquisition of SAP software products requires a large capital commitmentmay vary significantly from preceding or other significant commitment of resources. Moreover, the adoption of mySAP Business Suite solutions and newer offerings that allow greater levels of flexibility in software application and data utilization, particularly by those individuals and enterprises that have historically relied upon traditional means of commerce and communication, will require a broad acceptance of new and substantially different methods of conducting business and exchanging information. These products and services involve a new approach to the conduct of business and, as a result, we have invested in, and intend to continue to pursue, intensive marketing and sales efforts to educate prospective customers regarding the uses and benefits of these products and services in order to generate demand. Demand for these products and services may not develop, or SAP may not develop acceptable solutions in a timely or cost-effective manner. This could have a material adverse effect on our business, financial position and results of operations or cash flows.
subsequent periods.
We maintain extensive insurance coverage for protection against many risks of liability. The extent of insurance coverage is under continuous review and is modified if we deem it necessary. Our goal of insurance coverage is to ensure that the financial effects, to the largest extent possible, resulting from risk occurrences are excluded or at least limited considering the costs associated with the insurance coverage. Despite these measures, it is possible that claims may have a significant adverse impact on our financial position or results of operations. Also, adequate insurance coverage may not be available to us at all.
Our sales forecasts may not be accurate.
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If we acquire other companies, we may not be able to integrate their operations effectively and, if we enter into joint ventures, we may not work successfully with our alliance partners.
In order to complement or expand our business, SAP has made and expects to continue to make acquisitions of additional businesses, products and technologies, and has entered into, and expects to continue to enter into, a variety of transactions, including alliance arrangements. Our current strategy for growth includes, but is not limited to, the acquisition of companies as a key element of future growth, especially acquisitions of smaller companies that specifically aim at strengthening our geographic reach, broadening our offering in particular industries, or complementing our technology portfolio. Management’s negotiations of potential transactions, including acquisitions or alliances, and management’s integration of acquired businesses, products or technologies could divert its time and resources. In addition, risks commonly encountered in such transactions include:
In addition, acquisitions of additional businesses may require large write-offs of any in-process research and development costs related to companies being acquired and amortization costs related to certain acquired tangible and intangible assets. Ultimately, certain acquired businesses may not perform as anticipated, resulting in charges for the impairment of goodwill and/or other intangible assets. Such write-offs and amortization charges may have a significant negative impact on operating margins and net income in the quarter in which the business combination is completed and subsequent periods. In addition, we have entered and expect to continue to enter into alliance agreements for the purpose of developing new products and services. There can be no assurances that any such products or services will be successfully developed or that we will not incur significant unanticipated liabilities in connection with such arrangements. We may not be successful in overcoming these risks or any other problems encountered in connection with any such transactions and may therefore not be able to receive the intended benefits of those acquisitions or alliances.
Currency fluctuations may impact the value of our ADSs.
The currency in which our ordinary shares are traded is the euro. While the currency in which our ADSs are traded is the dollar, the trading price of our ADSs is expected to be largely based upon the trading price of the underlying ordinary shares in its principal trading market, the Frankfurt Stock Exchange. Cash dividends payable to holders of ADSs will be paid to the depositary pursuant to the Amended and Restated Deposit Agreement
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The market price for our ADSs and ordinary shares may remain volatile.
The trading prices of the ADSs and the ordinary shares have experienced and may continue to experience significant volatility. The current trading price of the ADSs and the ordinary shares reflect certain expectations about the future performance and growth of SAP, particularly on a quarterly basis. However, our revenue can vary, sometimes substantially, from quarter to quarter, causing significant variations in operating results and in growth rates compared to prior periods. Any shortfall in revenue or earnings from levels projected by us quarterly or other projections made by securities analysts could have an immediate and significant adverse effect on the trading price of the ADSs or the ordinary shares in any given period. Additionally, we may not be able to confirm our projections of any such shortfalls until late in the quarter or following the end of the quarter because license agreements are often executed late in a quarter. Finally, the stock prices for many companies in the software sector have experienced wide fluctuations, which have often not been directly related to individual companies’ operating performance. The trading price of the ADSs or the ordinary shares may fluctuate in response to such factors, including but not limited to:
Many of these factors are beyond our control. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. Any such securities class action litigation against us, with or without merit, could result in substantial costs and the diversion of management’s attention and resources.
We may incur losses in connection with strategic and venture capital investments.
SAP has acquired and expects to continue to acquire equity interests in or makes advances to technology-related companies, many of which currently generate net losses. Such activities may individually and in the aggregate involve significant capital outlay. Most of these companies are recently established. It is possible that changes in market conditions, the performance of companies in which we hold investments or to which we made advances or other factors will negatively impact our results of operations and financial position or our ability to recognize gains from the sale of marketable equity securities. Additionally, due to changes in German tax laws in 2000 effective January 2001 (“Steuersenkungsgesetz”), capital losses or write-downs of equity securities are no longer tax deductible, which may negatively impact our effective tax rate, cash flows and net income going forward. See Item 4. “Partnerships, Alliances and Acquisitions.”
Because we expect to continue to expand globally, we may face special economic and regulatory challenges that we may not be able to meet.
Our products and services are currently marketed in over 120 countries, with a focus on Europe, Middle East and Africa (“EMEA”), North and South America (“Americas”) and Asia-Pacific (“APA”) regions. In 2003,
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Other general risks associated with international operations include import and export licensing requirements, trade restrictions, changes in tariff and freight rates and travel and communication costs.instruments. There can be no assurance that our international operations will continue to be successful or that wehedging activities, if any, will be ableeffective. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk — Foreign Currency Risk.”
Principal shareholders may be ablein obtaining customer commitments for services related to exert control over our future direction and operations.
As of March 9, 2004, the beneficial holdings of SAP’s principal shareholders (not counting immediate family members) and/or the holdings of entities controlled by them constitutedSAP software products. Any decrease in the aggregate approximately 34.568% of the outstanding ordinary shares of SAP AG. If SAP’s principal shareholders and/or the holdings of entities controlled by them vote the shares held by them in the same manner, it may have the effect of delaying, preventing or facilitating a change in control of SAP or other significant changes to SAP or its capital structure. See “Item 7. Major Shareholders and Related Party Transactions — Major Shareholders.”
Sales of ordinary shares by principal shareholders could adversely affect the pricepercentage of our capital stock.
As stated above, SAP’s principal shareholders (not counting immediate family members) and/or related entities own beneficially approximately 34.568% of the outstanding ordinary shares of SAP AG as of March 9, 2004. The sale of a large number of ordinary shares by any of the principal shareholders and/or related entitiestotal revenue derived from software licensing could have a negativematerial adverse effect on the trading priceour business, financial position, results of the ADSsoperations or the ordinary shares. SAP is not aware of any restrictions on the transferability of the shares owned by the principal shareholders or any related entity.
cash flows.
Our revenue and operating results can vary, sometimes substantially, from quarter to quarter. Our revenue in general, and in particular our software revenue, is difficult to forecast for a number of reasons, including:
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As is common in the software industry, our business has historically experienced its highest revenue in the fourth quarter of each year, due primarily to year-end capital purchases by customers. Such factors have resulted in 2003, 2002 and 2001 first quarter revenue being lower than revenue in the prior year’s fourth quarter. We expect to experience a similar trend of seasonality in the future and that our revenue will peak in the fourth quarter of each year and decline from that level in the first quarter of the following year.
Because our operating expensesfinancial statements are based upon anticipated revenue levels and because a high percentagethe accounting policies as described in Note 3 of our expenses are relatively fixedconsolidated financial statements included in “Item 18. Financial Statements.” Such policies require management to make significant estimates and assumptions that affect the near term, any shortfallreported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Facts and circumstances which management uses in anticipated revenue or delay in recognition of revenue couldmaking estimates and judgments may change from time to time and may result in significant variations, inincluding adverse effects on our results of operations from quarter to quarter. We significantly increasedor financial position. See “Item 5. Operating and Financial Review and Prospects — Critical Accounting Policies.”
Such increasesof operations.
Increasing government regulationlight of the Internet could harm our business.standard issued by the International
As the Internet commerce evolves,8
Financial Review and Prospects — Critical Accounting Policies” for details.
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Priorquarter, causing significant variations in operating results and in growth rates compared to May 3, 2002, Arthur Andersen served as our independent auditors. On May 3, 2002, we dismissed Arthur Andersen and retained KPMG as our independent auditors for the fiscal years ended December 31, 2002. On August 31, 2002, Arthur Andersen LLP, an affiliate of Arthur Andersen, ceased practicing before the SEC.
Arthur Andersen did not participateprior periods. Any shortfall in the preparation of this report, reissue its audit report with respect to the consolidated financial statements included in this report,revenue or consent to the inclusion in this report of its audit report. As a result, investors in SAP may have no effective remedy against Arthur Andersen in connection with a material misstatementearnings from levels projected by us quarterly or omission in the financial statements to which its audit report relates. In addition, even if such investors were able to assert such a claim, Arthur Andersen may fail or otherwise have insufficient assets to satisfy claimsfrom projections made by investors that might arise under Federal securities laws or otherwise with respect to its audit report.
SEC rulesanalysts could have an immediate and regulations require us to present historical audited financial statements in various SEC filings, such as registration statements, along with Arthur Andersen’s consent to our inclusion of its audit report in those filings. In lightsignificant adverse effect on the trading price of the cessation of Arthur Andersen’s SEC practice,ADSs or the ordinary shares in any given period. Additionally, we willmay not be able to obtainconfirm our projections of any such shortfalls until late in the consentquarter or following the end of Arthur Andersenthe quarter because license agreements are often executed late in a quarter. Finally, the stock prices for many companies in the software sector have experienced wide fluctuations, which have often not been directly related to individual companies’ operating performance. The trading price of our ADSs and ordinary shares may fluctuate in response to various factors including, but not limited to:
| • | the announcement of new products or product enhancements by us or our competitors; | |
| • | technological innovation by us or our competitors; | |
| • | quarterly variations in our competitors’ results of operations; | |
| • | changes in revenue and revenue growth rates on a consolidated basis or for specific geographic areas, business units, products or product categories; | |
| • | speculation in the press or financial community; | |
| • | general market conditions specific to particular industries; | |
| • | general and country specific economic or political conditions (particularly wars, terrorist attacks etc.); and | |
| • | proposed and completed acquisitions or other significant transactions by us or our competitors. |
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| • | continue to enhance and expand our existing products and services; | |
| • | provide best-in-class business solutions and services; and | |
| • | develop and introduce new products and provide new services that satisfy increasingly sophisticated customer requirements, that keep pace with technological developments and that are accepted in the market. |
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| • | general economic or political conditions in each country or region; | |
| • | the overlap of differing tax structures; | |
| • | the management of an organization spread over various jurisdictions; | |
| • | exchange rate fluctuations; and | |
| • | regulatory constraints such as export restrictions, governmental regulations such as regulations of the Internet, and additional requirements for the design and for the distribution of software and services. |
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| • | inability to successfully integrate the acquired business; | |
| • | inability to integrate the acquired technologies or products with our current products and technologies; | |
| • | potential disruption of our ongoing business; | |
| • | inability to retain key technical and managerial personnel; | |
| • | dilution of existing equity holders caused by capital stock issuances to the stockholders of acquired companies or capital stock issuances to retain employees of the acquired companies; | |
| • | assumption of unknown material liabilities of acquired companies; | |
| • | incurrence of debt and/or significant cash expenditure; | |
| • | difficulty in maintaining controls, procedures and policies; | |
| • | potential adverse impact on our relationships with partner companies or third-party providers of technology or products; | |
| • | regulatory constraints; | |
| • | impairment of relationships with employees and customers; and | |
| • | problems with product quality, product architecture, legal contingencies, product development issues or other significant issues that may not be detected through the due diligence process. |
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Availability of this Report
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Description of the Business
DESCRIPTION OF THE BUSINESSOverview SAP is a leading provider of business software solutions, with headquarters in Walldorf, Germany and over 30,000 employees in more than 50 countries. Our principal activities are the development, marketing, sales and support of a variety of software solutions, primarily enterprise application software products for organizations including corporations, governmental agencies, and educational institutions. SAP solutions are designed to meet the demands of companies of all sizes — from small via midsize businesses to global enterprises. The SAP NetWeaver open integration and application platform aims at reducing the complexity and total cost of ownership (TCO) of a customer’s information technology landscape business process change and evolution. While SAP mySAP Business Suite solutions are helping enterprises around the world improve customer relationships, enhance partner collaboration, and create efficiencies across their supply chains and business operations. SAP’s solutions are designed to meet the demands of organizations of all sizes — from small and midsize businesses to global enterprises. The core business processes of various industries, from aerospace to utilities, are supported by SAP’s industry-specific solution portfolios. Today, more than 21,60026,000 customers in over 120 countries run more than 69,70088,700 installations of SAP software. With subsidiaries in more than 50 countries, the company is listed on several exchanges, including the Frankfurt Stock Exchange and NYSE under the symbol “SAP.”
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In 2003, we announced SAP NetWeaver, our open integration and application platform. In addition, we announced the successor to SAP R/3 called mySAP ERP. mySAP ERP provides organizations with a complete enterprise resource planning solution
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platform in 2004 further demonstrated SAP’s commitment to Enterprise Services Architecture.
One
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| • | We will focus on revenue growth and, in particular, on growth in software sales. | |
| • | We will focus on establishing ourselves as a leading player in the applistructure arena. We will seek to develop SAP NetWeaver from a technology platform into a platform for business processes |
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| (Business Process Platform). It is our aim to complete the transition of our complete solution portfolio to Enterprise Services Architecture by 2007, which means that our goal is for all of SAP’s applications to run on Business Process Platform by then. | ||
| • | In the small and mid-market segments, we want to extend our position as a leading supplier of solutions for these segments. | |
| • | Internally, we want to ensure that we operate as effectively and efficiently as possible so that we have more freedom to invest. |
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| * | For installed Customer Base |
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| mySAP CRM helps organizations manage virtually every aspect of their relationships with customers. It includes a complete set of capabilities that help maximize the value delivered to and the value derived from customers throughout the customer interaction cycle. |
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| Key functions of mySAP CRM include support for sales, marketing, channel management, interaction center, and service management. In addition, mySAP CRM offers analytics that allow |
| • | identify and engage potential customers; | |
| • | perform business transactions with customers; | |
| • | fulfill individual customer needs as contracted; and | |
| • | provide after-sales care such as customer service and product maintenance. |
mySAP ERP mySAP ERP is an enterprise resource planning (ERP) solution that aims at enabling organizations to run their core business functions, including analytics, human resources, financials, operations, corporate services, and planning. The solutions formerly sold under the names mySAP Financials and mySAP Human Resources have been renamed to mySAP ERP Financials and mySAP ERP Human Capital Management, respectively. They are now partcomponents of mySAP ERP. mySAP ERP runs on the SAP NetWeaver technology platform. mySAP ERP addresses customer needs for an expandable enterprise resource planning environment. As such, it is available as an individual solution or as a part of mySAP Business Suite. Customers can upgrade from mySAP ERP to the full mySAP Business Suite — either in a single step or incrementally as their business needs change. As a result, mySAP ERP offers an easya path to athe more comprehensive business solutions suite. The following capabilities are integrated into mySAP ERP runs on the SAP NetWeaver technology platform, as described below.ERP:
| mySAP ERP Financialsis a finance, analytics, and accounting solution that | |
| Key functional areas of mySAP ERP Financials include general ledger, special purpose ledger and subledger, cost management, and profitability analysis. |
| mySAP ERP |
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| managing employee capabilities all the way down to the line-management level. | |
| Key functional areas of mySAP ERP HCM include administration, payroll, benefits, legal reporting, online recruiting, blended learning, organizational management, compensation, manager self-services, employee collaboration, and workforce analytics. |
mySAP Product Lifecycle Management (mySAP PLM) mySAP PLM helps companiesis designed to help organizations manage the complete life cycle of a product, from initial concept, tothrough design and engineering, to production, to product change management, and to service and maintenance. It allows companiesaims at allowing organizations and their suppliers to collaborate in such key processes as engineering, custom product development, and project, asset,the management of projects, assets, and quality management.quality.
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| Key functional areas of mySAP PLM include product, project, and portfolio management; research and development (including: development collaboration and quality engineering); life-cycle data management; and corporate services (including audit management, | |
| We believe that mySAP PLM is particularly valuable to industries that require product innovation and rapid product development, such as high-tech, industrial manufacturing, construction, aerospace and defense, and automotive. Process, consumer products, and service industries can also benefit from the functions of mySAP PLM. |
mySAP Supply Chain Management (mySAP SCM) mySAP SCM helps companies manageis designed to help organizations in their need to become more adaptive in the overall management of materials, information, and finances alongprofitability within the entire supply chain which encompassesnetwork. It is designed to support the many processes involved in the sourcing, manufacturing, distribution, and distribution. Supply chain management involves coordinatingfulfillment of customer requirements. It also helps synchronize and integratingintegrate these processes both within an enterprise and among a network of suppliers, customers, and business partners. Key functions of mySAP SCM include supply chain planning, execution, collaboration, and coordination. Through these functions, mySAP SCM helps companiesaims at enabling organizations and their partners to easily view inventory levels, orders, supplier and customer allocations, forecasts, production plans, and key performance indicators so that they can work collaboratively toward an efficient supply chain. In addition,chain network. mySAP SCM supportsis also designed to support customer process needs for advanced planning, fulfillment, logistics, warehousing, and transportation processes. It is also designed to monitor these processes through availability checks, inventory management, and delivery. It also monitorswith sense-and-respond capabilities that can control the execution of supply chain activities, creatingand create alerts in the event of deviation from plans. ThisWe believe that this helps a company toan organization react quickly and remain flexible when faced with sudden changes in customer demand or production requirements. mySAP SCM runs on the SAP NetWeaver integration and application platform.
mySAP Supplier Relationship Management (mySAP SRM) mySAP SRM helpsis designed to help organizations manage their spending practices to achieve lower costs and higher profitability. It helpsis also designed to help organizations connect their suppliers through
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| automated bidding and procurement processes. It aims at allowing organizations to involve suppliers earlier in the sourcing cycle, so that they can provide more innovative and cost-effective solutions. As a result, it offers immediate insights into spending trends while helping to reduce the cost of goods and services organization-wide. | |
| From strategy to execution, mySAP SRM | |
| mySAP SRM aims at a full integration with other procurement-related business processes, including supply chain management, product life-cycle management, customer relationship management, and ERP. mySAP SRM runs on the SAP NetWeaver integration and application platform. |
Solution PortfoliosSAP R/3 EnterpriseSAP R/3 Enterprise is the last release of SAP R/3, succeeded by mySAP ERP. Standard maintenance will be provided until March 2009, extended maintenance will be provided until March 2012. SAP R/3 Enterprise is the final release of SAP R/3, the predecessor of mySAP ERP. Standard maintenance will be provided until March 2009, and extended maintenance will be provided until March 2012.SAP Industry-Specific Solutions Because different industries have different requirements and business processes, SAP has developed distinct industry-specific solutionssolution portfolios that contain tailored versions of mySAP Business Suite solutions. These industry-specific solutions draw on SAP’s extensive experience in serving the unique needs of each of these industries, and are frequently updated based on information derived through our close relationships with our customers and with various industry groups. We believe our focus on industry-specific solutions gives SAP a unique position in the marketplace over companies that offer “generic” business solutions.24Our different industry solutions are grouped into six industry sectors as shown below:
Process Industries | Services Industries | |
| • SAP for Chemicals | • SAP for Media | |
| • SAP for Mill Products | • SAP for Logistics Service Providers | |
| • SAP for Oil & Gas | • SAP for Postal Services | |
| • SAP for Pharmaceuticals | • SAP for Railways | |
| • SAP for Mining | • SAP for Telecommunications | |
| • SAP for Utilities | ||
Discrete Industries | • SAP for Professional Services | |
| • SAP for Aerospace & Defense | ||
| • SAP for Automotive | Financial Services | |
| • SAP for Engineering, Construction & Operations | • SAP for Banking | |
| • SAP for High Tech | • SAP for Insurance | |
| • SAP for Industrial Machinery & Components | • SAP for Financial Service Providers | |
Consumer Industries | Public Services | |
| • SAP for Consumer Products | • SAP for Healthcare | |
| • SAP for Retail | • SAP for Higher Education & Research | |
| • SAP for Wholesale Distribution | • SAP for Public Sector | |
| • SAP for Life Sciences | • SAP for Defense & Security | |
SAP NetWeaver
The technical foundation of our Enterprise Services Architecture is referred to as SAP NetWeaver. As discussed above, with it’s integration and application platform it allows users to integrate and process business information from disparate sources in a variety of ways.
SAP NetWeaver incorporates the integration capabilities of today’s flexible Web Services architecture and aims to be fully interoperable with two of the major development standards, Microsoft .NET and IBM WebSphere (J2EE). By doing so, SAP NetWeaver makes it easier for customers to link both non-SAP and SAP applications to work together. SAP NetWeaver also makes it easier for customers to evolve into a more flexible technology architecture while containing costs.
Through its ability to integration of data from different applications, SAP NetWeaver gives customers new ways of making use of all their current application investments while also allowing them to create new applications that are composed of components from older, pre-existing applications. For example, it brings together data from multiple SAP and non-SAP applications to be viewed through a Web-based portal. In addition, it enables analytical applications to gather the data from every other application and create a single, unified view for making better business decisions. SAP NetWeaver also aims at allowing the customer to organize multiple applications into an automated business process.
Because of its open platform design, we believe that SAP NetWeaver will permit customers to reduce the maintenance costs of all their IT systems. While all components of SAP NetWeaver are already released, we expect to release the complete SAP NetWeaver solution to reference customers by the end of March 2004. Sales for SAP NetWeaver alone are not expected to be significant as it is a value-added component of our products, and the majority of our existing customers will receive SAP NetWeaver as an upgrade to their current software packages. But SAP NetWeaver will make it easier for customers to upgrade older SAP applications and implement new ones.
2529
SAP NetWeaver currently includes the following components:
SAP Solutions for Small and Mid-Market Segments
Midsize Businesses
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will determine the solutions and channel by which our customers purchase and implement SAP solutions. The boundariesThese criteria include:
| • | company revenue; | |
| • | the number of employees; | |
| • | standardized versus more sophisticated solutions; and | |
| • | level of desired partner involvement. |
| • | First, at the lower end of the segment, are those organizations that require pre-packaged business solutions, and | |
| • | Second, at the higher end of the segment, are those organizations that require more sophisticated solutions. |
The small business market segment is served through a network of approved SAP business partners. Two families of solutions fall under this initiative: mySAP All-in-One and SAP Business One. Both offerings provide integrated application packages that are designed for quick implementation and pricedsegmentation, SAP’s solution offering for the small and mid-market segments. They are targeted primarily to independent small and midsize businesses but are also of interest to subsidiaries of larger corporations in which the corporate applications are from SAP.
segment consists of:
| • | two families of solutions (mySAP All-in-One and SAP Business One) that are specifically designed for small and midsize businesses. Both offerings provide integrated solutions that are designed for quick implementation and priced for the small and mid-market segments. They are targeted primarily to independent small and midsize businesses, but are also of interest to subsidiaries of larger corporations in which the corporate level applications are SAP solutions. SAP serves these solutions to the small and midsize businesses segment through a network of approved SAP business partners. SAP also collaborates with partners such as IBM, HP, American Express, and Dell, leveraging the distribution models of these companies to extend the customer and channel reach of mySAP All-in-One and SAP Business One solutions worldwide. | |
| • | my SAP Business Suite solutions which are predominantly delivered through SAP’s direct sales and support organization. |
SAP also collaborates with partners such as IBM, HP, American Express, and Dell, leveraging the distribution models of these companies to extend the customer and channel reach of mySAP All-in-One and SAP Business One solutions worldwide.
SAP solutions for the small and mid-market segments range in scope frommidsize businesses market include:
| mySAP All-in-One solutions are software applications created and delivered through a network of approved SAP business partners. These solutions meet the needs of companies that require a high degree of industry-specific functionality. mySAP All-in-One solutions are based on components of mySAP Business Suite solutions and incorporate pre-defined business process knowledge that can be tailored to the specific needs of a customer. There are currently over 350 mySAP All-in-One certified solutions available worldwide. |
| SAP Business One is an easy-to-use business |
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| In addition to mySAP All-in-One and SAP Business One, many small and midsize businesses organizations find that mySAP Business Suite offers scalable solutions that fit their requirements and budgets. These organizations are served predominantly through the SAP direct sales organization. | |
| In particular, mySAP ERP offers small and midsize businesses a complete enterprise resource planning solution that can be readily expanded to include extended capabilities — including the capabilities of other mySAP Business Suite solutions such as mySAP CRM, mySAP SCM, mySAP PLM, and mySAP SRM. |
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project management systems.
“xApp certified” packaged composite applications.
The two key functional areasunderlying technology which enables this capability is SAP Mobile Infrastructure, one of the components of SAP solutions for mobile business are mobile access and mobile applications. Mobile access can be provided through all popular devices in both wired and wireless formats. NetWeaver.
Packaged Solutions
investment for midsize organizations with limited IT budgets and resources.
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| SAP Business Intelligence is an information management component that includes a business intelligence platform, a set of data management tools, which we believe is comprehensive, and enterprise data warehousing capabilities. It is designed to enable organizations to access, analyze, and disseminate relevant and timely information. Key features of SAP Business Intelligence include data warehousing, online analytical processing of information, report design and creation, and business planning and simulation capabilities, as well as comprehensive data models for a variety of applications and industries. |
| SAP Enterprise Portal is a user-focused, Web-based solution designed to promote collaboration, speed information sharing, improve decision making, and enhance productivity. SAP EP brings together tools that include an open portal infrastructure, knowledge management for organizing, the ability to search and publish unstructured information, and real-time, team-based collaboration tools. | |
| SAP EP is designed to allow a wide range of users to access simultaneously many types of information and applications, including SAP, third-party, and legacy applications; databases and data warehouses; document repositories and desktop files; and collaboration and groupware tools. — This access is achieved through a unified and personalized user interface. |
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| SAP EP also includes patented “Drag and Relate” technology that aims at allowing users to access information from diverse software applications and data sources without the user experiencing any negative effects associated with using diverse sources. Packaged business content available with SAP EP allows faster deployment of portal-based business processes while reducing the need for custom software code development. |
| SAP Exchange Infrastructure is designed to provide open integration technologies that support SAP and non-SAP software components working together, whether those solutions are being run by the same or different organizations. |
| SAP Mobile Infrastructure is the foundation for all SAP solutions for mobile business. It provides an open and secure platform that permits mobile computing users to access software and data — in either a connected or disconnected mode. |
| SAP Master Data Management is a standardized offering designed to solve the challenges of data integration from multiple systems, physical locations, and vendors. SAP Master Data Management helps achieve information integrity across a network of suppliers and customers by allowing companies with different IT systems, including different software systems, to consolidate, harmonize, and centrally control data. |
| The SAP Auto-ID Infrastructure is a component of the SAP NetWeaver platform that utilizes real-time Radio Frequency Identification (RFID) data by converting it to human-readable business information, and automating all associated transactions and processes. RFID is a technology that incorporates the use of certain radio frequencies to uniquely identify an object, animal, or person. SAP Auto-ID provides the ability to manage large volumes of streaming RFID data, manage Electronic Product Code (EPC) number creation and commission RFID tags for items to be identified. It also allows integration of high-volume RFID data with back-end business processes. | |
| SAP Auto-ID includes features and functions to pick, pack, receive, track, and trace inventory, promoting improved inventory visibility, high-responsive replenishments, and improved returns and claims management. |
| SAP Web Application Server is the application platform of SAP NetWeaver. It is designed to allow an organization to gain more value from its existing IT assets by permitting the organization to deploy flexible solutions and develop new applications based on existing applications. It is also designed to facilitate the creation of Web-based services. This flexibility supports the exchange of data between different organizations, and the creation of business applications and processes that incorporate solutions from multiple entities’ IT systems with which the customer interfaces in its business. |
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technologies.
| SAP Consulting offers consulting, implementation, and optimization services | |
| SAP Consulting brings together SAP specialists, SAP product development professionals, and certified partners to provide a single point of contact for customers seeking assistance with their SAP | |
| SAP Consulting covers: |
SAP Consulting covers:
| • | strategic consulting services — to ensure that an organization’s IT infrastructure supports its business goals; | |
| • | solution delivery services — to get software up and running quickly and cost-effectively; | |
| • | operations services — to enable solutions to grow and adapt with changing customer needs; and | |
| • | life-cycle management services — to cover every phase of deploying and operating a customer’s solution. |
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SAP Education SAP Education provides training required forto assist SAP customers and partners to maximizein maximizing the benefits attained from SAP systems. SAP Education services include assessment,education needs analysis, education delivery, testingassessment and certification, and continuous improvement. SAP Education’s curriculum includes approximately 300 different courses, ranging from overview courses to expert courses. These courses are offered in more than 280 different courses, offered18 languages at more than 80 training centers worldwide, and onsite at customer locations.with more than 250,000 course participants per year.
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| SAP Active Global Support offers a broad range of services to cover planning, implementation, operations, upgrades, and continuous improvement. | |
| SAP Active Global Support aims at ensuring the optimum performance of customers’ SAP solutions | |
| Once a customer’s SAP solution is up and running, support and maintenance continue with help-desk services, online monitoring, remote maintenance, and on-site assistance. SAP Active Global Support can help customers spot bottlenecks, plan resources, and migrate to new releases and technologies. |
Hosting SAP Custom Development SAP Hosting aims at allowing organizations to move to SAP software solutions quickly, easily, and cost effectively. Its services include: • Application hosting: Provides infrastructure, implementation, operational, and ongoing support for selected applications that can be accessed by the customer through a Web browser. • Marketplace hosting: Includes hosting of marketplaces, private exchanges, auction sites, and specific, customized applications. • Application service provider (“ASP”) solutions: Combine software, infrastructure, service, support, and rapid implementation for turnkey solutions. These solutions are delivered to customers as services from a single provider. With ASP solutions, customers do not obtain a perpetual license, but subscribe to the application service for a periodic fee. SAP Business Process Outsourcing (BPO) In addition to its traditional direct license model and reseller channels, SAP engages with leading Business Process Outsourcing (BPO) providers that base the provisioning of their services to end customers on SAP solutions. These BPO providers typically enter into a global partner agreement with SAP that includes a term license permitting the use of SAP solutions in selected markets to support and augment various business services provided to the end customer, such as outsourced human resources services. As part of the license grant to a BPO provider, SAP seeks to have the SAP solutions branded as “Powered by SAP”. SAP does not offer BPO services itself, but contributes to the successful BPO-deployments of its customers and partners through marketing, pre-sales, and partner management as well as implementation and quality-assurance support. SAP Custom DevelopmentSAP Custom Development (formerly known as SAP Global Custom Development Services) aims at delivering custom designed solutions to solve our customers’a customer’s unique business needs. TheSAP Custom Development’s service portfolio includes not only full-scale custom development projects, but also
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| spot-services such as custom development strategic planning, project management, and quality and risk assessment services for those customers that may already have development teams at hand. The services portfolio also includes continuous improvement services, |
SAP Hosting
Seasonality As is common in the software industry, our business has historically experienced the highest revenue in the fourth quarter of each year, due primarily to year-end capital purchases by customers. Such factors have resulted in 2004, 2003 2002 and 20012002 first quarter revenue being lower than revenue in the prior year’s fourth quarter. We believe that this trend will continue in the future and that our revenue will continue to peak in the fourth quarter of each year and decline from that level in the first quarter of the following year.29RevenueBusiness by Geographic Region We operate our business in three principal geographic regions, namely EMEA, which represents Europe, Middle East and Africa, the Americas, which represents both North America and SouthLatin America, and Asia-Pacific, which represents Japan, Australia and parts of Asia. We allocate revenue amounts to the region in which the customer is located. See Note 3433 to our consolidated financial statements included in “Item 18. Financial Statements” for additional information with respect to operations by geographic region.
| 2003 | 2002 | 2001 | ||||||||||||||||||||||
| 2004 | 2003 | 2002 | ||||||||||||||||||||||
| (in€ millions) | (in€ millions) | |||||||||||||||||||||||
| Germany | 1,670.3 | 1,654.1 | 1,468.7 | 1,780.1 | 1,670.3 | 1,654.1 | ||||||||||||||||||
| Rest of EMEA | 2,299.6 | 2,394.1 | 2,317.5 | 2,443.4 | 2,299.6 | 2,394.1 | ||||||||||||||||||
| Total EMEA | 3,969.9 | 4,048.2 | 3,786.2 | 4,223.5 | 3,969.9 | 4,048.2 | ||||||||||||||||||
| United States | 1,736.4 | 1,969.7 | 2,084.1 | 1,893.7 | 1,736.0 | 1,969.7 | ||||||||||||||||||
| Rest of Americas | 479.8 | 531.9 | 640.0 | 530.1 | 480.2 | 531.9 | ||||||||||||||||||
| Total Americas | 2,216.2 | 2,501.6 | 2,724.1 | 2,423.8 | 2,216.2 | 2,501.6 | ||||||||||||||||||
| Japan | 441.5 | 485.9 | 444.1 | 387.4 | 441.5 | 485.9 | ||||||||||||||||||
| Rest of Asia-Pacific | 397.0 | 377.1 | 386.4 | 479.8 | 397.0 | 377.1 | ||||||||||||||||||
| Total Asia-Pacific | 838.5 | 863.0 | 830.5 | 867.2 | 838.5 | 863.0 | ||||||||||||||||||
Total revenue | 7,024.6 | 7,412.8 | 7,340.8 | 7,514.5 | 7,024.6 | 7,412.8 | ||||||||||||||||||
37 2004. 39 40 42 43 44 We operate worldwide and define the following three geographic regions: EMEA, the Americas and Asia-Pacific. We have three lines of business that constitute our reporting segments: products, consulting and training. Furthermore, SAP focuses on six industry sectors, namely process, discrete, consumer, service, financial and public services. For a discussion of our geographic regions and industry sectors, see “Item 4. Information about SAP — Description of the Business — 45 47 48 49 50 51 52 53 54 2003 Compared Revenue. 55 56 Expenses. Forma Operating Income. 57 primarily of: 58 primarily of: 59 Net. 60 Taxes. statements in “Item 18. Financial Statements”. Income. Discussion. current presentation. 61 62 2005. Forecast for the IT Industry 2005. medium term. We enter into derivative instruments, primarily foreign exchange forward contracts, to protect our anticipated cash flows from foreign subsidiaries from the effects of foreign currency exchange fluctuations. See also “Item 11. Quantitative and Qualitative Disclosures About Market Risk — Foreign Currency Risk” and Note 32 in Item 18 “Financial Statements”. 64 65 rights lapse. 66 There have been no significant changes in our accounting estimates related to our revenue recognition policies that had a material impact on the amount of our reported revenue, results of operations or our financial position in 2003. 67 68 69 70 2003. 2004. Cash Flow Statement 72 Lines are set forth below under “Contractual obligations.” 74 75 million and€85 million, which is within the range of contributions over the last 3 years (see Note 24 to our consolidated financial statements in “Item 18. Financial Statements”). 75 2004. The Employees — Executive Board”. Development Efforts 76 77 78 79 82 83 84 85 86 87 insurance. 2003 to 31,224 in 2004. 88 increased 5%. environment in some regions. 8, 2005. 89 90 91 121.87 is based upon the average fair market value of one ordinary share over the 20 business days from the day after the announcement of our 2004 preliminary results on January 26, 2005. 92 The bonds became void. 93 94 operations. Furthermore, the settlement amount was materially consistent with the amount we had previously accrued. York until December 2004, when it was succeeded by Deutsche Bank Trust Company Americas. 97 98 99 101 corporations under New York Stock Exchange Listing Standards according to Section 303A.11 of the New York Stock Exchange Corporate Governance Rules in 2004. Board. 102 Services” for details. See “Item 16A. Audit committee financial expert” for details. 103 if the individual investment amount exceeds certain specified limits. loans. Board. See “Item 16B. Code of Ethics” for details. Meeting. 105 106 108 country. 109 110 20007. United States Residency Certification. 111 112 113 114 115 116 117 fixed rate marketable debt securities. All time deposits and municipal bonds and most fixed rate marketable debt securities will mature or be able to be put back to the issuer in 2005. 119 Our Supervisory Board has determined that Wilhelm Haarmann, a member of the Supervisory Board and its Audit Committee, is an “audit committee financial expert.” 121 services, such as training. 122 123 127 its behalf. F-3 F-4 GENERAL and 2002 balances of cash and cash equivalents. See Note 20 for more information. SCOPE OF CONSOLIDATION F-6 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Currencies F-7 F-8 the periods presented. end-customer. The Company views its resellers as an extension of its direct sales force. Notwithstanding the resellers’ involvement, the Company generally enters into binding license agreements directly with the end-customer. If SAP is unable to enter into a binding license agreement directly with an end-customer, or if SAP becomes aware that a reseller has granted contingent rights to an end-customer, the Company defers revenue recognition until a valid license agreement has been entered into without contingencies or, if applicable, until the contingencies expire. If a maintenance customer is specifically identified as a bad debtor, the Company ceases recognizing maintenance revenue except to the extent that maintenance fees have already been collected. For time-based licenses, SAP allocates a portion of the arrangement fee to maintenance revenue based on the estimated fair value of the maintenance. F-9 reported separately from goodwill, and to the liabilities assumed. F-10 F-11 assets are comprised of Inventories, Accounts receivable, Other assets, Marketable securities and Liquid assets including amounts to be realized in excess of one year. The respective amounts to be realized in excess of one year are disclosed in the notes. nature. F-12 based on historical experience. F-13 F-14 20. F-15 hosting. In 2004, Commerce One filed for bankruptcy, sold all of its assets, and was renamed CO Liquidation, Inc. Revenue information by segment and geographic region is disclosed in Note Sales and marketing expense includes advertising costs, which amounted to€ Other operating income/expense for the years ended December 31 are as follows: Total provisions for allowances for doubtful accounts charged to the respective functional cost category of product or cost of service sold approximated€0 million,€12.3 million and€12.9 million during 2004, 2003, and 2002, respectively. F-17 Included in personnel expenses for the years ended December 31, 2004, 2003, 23. FINANCIAL INCOME/ EXPENSE, NET See Notes 16 and F-19 INCOME TAXES F-21 currency effects. F-22 EXTRAORDINARY GAIN EARNINGS PER SHARE F-23 F-24 F-25 (15) INVENTORIES ACCOUNTS RECEIVABLE, NET LIQUID ASSETS F-30 2002: F-31 2004. (2,473) thousand and€0 thousand, respectively. F-34 37 million (2003: 125 million, 2002:€9 million). F-35 STAR Program. F-36 F-37 1,395 thousand gain in connection with its LTI 2000 Plan for 2004. In 2003, the Company recorded compensation expenses for the LTI 2000 Plan in the amount of€89,378 thousand (2002:€8,418 F-38 F-39 28.83). F-40 F-41 F-42 2004 or 2003. Assumptions regarding discount rates, rates of increase in compensation, and long-term rates of return on plan assets used in calculating the projected benefit obligations vary according to the economic conditions of the country in which the benefit plans are situated. The following weighted average assumptions were used for the actuarial valuation of the Group’s foreign pension benefit obligation as of the respective measurement date. F-43 Generally, a long-term investment horizon has been adopted for all major foreign benefit plans. SAP’s policy is to invest in a risk-diversified portfolio consisting of a mix of assets within the above target asset allocation range. Foreign Plans Benefits 1 billion syndicated revolving credit facility agreement with an initial term of five years. The use of the facility is not restricted by any financial covenants. Borrowings under the facility bear interest of EURIBOR or LIBOR for the respective currency plus a margin ranging from 0.2 to 0.25% depending on the amount drawn. SAP is also required to pay a commitment fee of 0.07% per annum on the unused available credit. credit. 2003. deferral when the basic criteria in SOP 97-2 have been met (see Note 3). F-48 20. 24. Leases.” F-49 FoxMeyer was a pharmaceutical wholesaler and licensee of the Company’s SAP R/3 software. FoxMeyer’s bankruptcy trustee (“Trustee”) operations. Furthermore, the settlement amount was materially consistent with the amount SAP had previously accrued. 26. F-52 See Note SAP has three operating segments: “Product,” “Consulting,” and “Training.” F-53 F-55 Depreciation and amortization of long-lived assets are allocated based on general cost allocations. F-56 F-57 F-58 F-59 F-62 SAP SOP 2002. The Supervisory Board members do not receive any stock-based compensation for their services. As far as members who are employee representatives on the Supervisory Board receive stock-based compensation, such compensation is for their services as employees only and unrelated to their status as members of the Supervisory Board. 0). The projected benefit obligation as of December 31, F-63 2002, respectively. 22. S-1EMEA. In recent years EMEA was the source of SAP’s strongest revenue growth, but in 2003 revenue growth stalled in that region. In Germany, SAP’s home country, where double-digit growth percentages were achieved in the past, economic conditions were particularly difficult in 2003, and revenue increased only slightly, by 1% to€1,670.3 million from 2002. Quarterly revenues in Germany were also uneven during 2003. For the first three quarters, revenues in Germany were lower in 2003 than for each corresponding quarter in 2002, whereas revenues in the fourth quarter of 2003 were up 4% as compared with the fourth quarter of 2002. Approximately 56.5%56.2% of our 20032004 total revenue was derived from the EMEA region compared to 54.6%56.5% in 2002.2003. After a stalled revenue growth in 2003, we reached a significant revenue growth of 6.4% to€4,223.5 million in 2004 in the EMEA region. Also in Germany, SAP’s home country, we were able to resume higher revenue increases of 6.6% to€1,780.1 million from 2003. Approximately 42.1% of revenue for the EMEA region in 20032004 was derived from Germany which is stable compared to 40.9% in 2002.2003. The remainder of the revenue for the EMEA region in 20032004 was derived primarily from the United Kingdom, Switzerland, France, Italy and the Netherlands. The number of our employees in the EMEA region increased by 3.4%3.9% from 19,760 at December 31, 2002 to 20,428 at December 31, 2003.2003 to 21,230 at December 31, 2004. In Germany, the number of our employees increased by 3.6%4.1% to 14,023 at December 31, 2004 compared to 13,475 at December 31, 2003 compared to 13,002 at December 31, 2002.2003. See “Item 6. Directors, Senior Management and Employees — Employees.”Americas.Approximately 31.5%32.3% of our 20032004 total revenue was derived from the Americas region compared to 33.7%31.5% in 2002.2003. Revenues declinedincreased from 20022003 to 20032004 by 11.4%9.4% to€2,216.22,423.8 million. Revenue from the United States in 20032004 was€1,736.41,893.7 million, representing approximately 78.3%78.1% of SAP’s total revenue for the Americas30region compared with€1,969.71,736.0 million and 78.7%78.3% of SAP’s total for the Americas region for 2002, a decline2003. This equals an increase of 11.8%9.1%. Exchange rate fluctuations in favor of the euro had a particularly strong negative impact on revenue figures for the Americas region. SAP’s United States subsidiary reflected a 5%19.3% revenue growth figure on a constant currency basis. The 9.8% annual revenue declineAlso in the remaining Americas regions from 2002 to 2003 also resulted primarily from currency translation effects.effects had a strong impact on revenues growth. On a constant currency basis, SAP’s revenue for the Americas region excluding the U.S. increased 8%18.0% from 20022003 to 2003.2004. The non-U.S. countries of the Americas region recorded total revenues of€479.8530.1 million, a 9.8% decrease10.5% increase from 2002.2003. Most non-U.S. revenue for the Americas region was derived from Canada, Brazil, Mexico, Venezuela, Argentina, and Colombia.Chile. The number of employees in the Americas region decreasedincreased by 4.2%10.2% from 6,345 at December 31, 2002 to 6,080 at December 31, 2003.2003 to 6,703 at December 31, 2004.Asia-Pacific.Approximately 11.9%11.5% of our 20032004 total revenue was derived from the Asia-Pacific region, compared to 11.6%11.9% in 2002.2003. In 2003,2004, SAP’s revenue for the Asia-Pacific region was derived primarily from Japan, Australia, Singapore, India, China, South Korea and Malaysia.Singapore. Our revenue in the Asia-Pacific region decreasedincreased from 20022003 by 2.8%3.4% to€838.5867.2 million in 2003.2004. Revenue attributable to Japan decreased€44.454.1 million, or 9.1%12.3% from€485.9 million in 2002 to€441.5 million in 2003 to€387.4 million in 2004, and accounted for more than half44.7% of total revenues in the Asia-Pacific region. Exchange-rate fluctuations were a substantial factor innegatively influenced the revenue decline in Japan from 20022003 to 2003.2004. On a constant currency basis, revenues derived in Japan were essentially unchangeddecreased by 9.9% from 20022003 to 2003.2004. In the rest of the Asia/ PacificAsia-Pacific region, total revenue increased 5.3%20.9% from 20022003 to 2003 (16%2004 (24.9% increase on a constant currency basis). In the Asia-Pacific region, the number of employees increased by 14.5%30.1% from 3,2693,743 as ofDecember 31, 2003 to 4,869 as of December 31, 2002 to 3,743 as of December 31, 2003,2004, which is mainly due to the expansion of our research and development facilities in India and China.Software Revenue by SolutionIn 2001 we began to allocate software revenues to specific software solutions for internal reporting purposes. These allocations include revenues from contracts for specific solutions and for integrated solution contracts, which are mostly allocated based on the results of usage surveys provided by our customers for solutions that are licensed in a suite of business solutions. Such surveys reflect the customer’s expected use of the various solutions within their integrated contract, although customers’ actual use may differ from their expectations at the time they complete the surveys. We are only able to monitor the total number of seats deployed but we have no ability to monitor differences between a customer’s actual use of the specific software solutions and the usage reported in the surveys. Nevertheless, we allocate revenues for internal purposes, based upon the number of users and user type by solution as specified in the initial customer surveys. Revenues recognized are allocated to each applicable solution based upon weighted average values per solution resulting from the number of each user type per solution, as provided by the customer, multiplied by the respective price per user type as set forth in our standard price list. We then allocate the recognized revenue for the software license based upon each solution’s weighted average values. The remainder of revenues, which relate to R/3, industry solutions and software engines are specifically identified in the license if applicable, and are allocated to the specific software solutions at fixed ratios based upon the functional capabilities to which they relate. This methodology is applied to each individual mySAP Business Suite and mySAP ERP contract. Although we believe this methodology of allocating revenue to specific software solutions is reasonable, and we apply this methodology on a consistent basis, there can be no assurance that such calculated amounts reflect the amounts that would result had we individually licensed each specific software solution. 2003 2002 2001 (in€ millions) mySAP SCM 477.1 464.0 582.9 mySAP CRM 440.1 473.0 444.9 mySAP PLM 156.1 168.0 196.0 mySAP BI/mySAP Enterprise Portals/ mySAP SRM/mySAP Marketplaces 273.1 259.0 415.9 mySAP Financials/ mySAP Human Resources 801.2 927.0 940.8 Total software revenue 2,147.6 2,291.0 2,580.5 2004 2003 2002 (in€ millions) ERP 990.0 801.2 927.0 SCM 480.0 477.1 464.0 CRM 501.0 440.1 473.0 PLM 166.9 156.1 168.0 Business Intelligence/ Enterprise Portal/SRM/Marketplaces n/a 273.1 259.0 SRM 147.1 n/a n/a Other 76.0 n/a n/a Total software revenue 2,361.0 2,147.6 2,291.0 Beginning in 2004, we changed our usage surveys for determining software revenues by solution. The usage surveys no longer include certain technology components, including Business Intelligence and Portals, since all technology components are now integrated with SAP NetWeaver. Accordingly, prior year comparable figures are not available for certain solutions using the new method.3138Revenue by Industry SectorWe identified six industry sectors in order to focus our product development efforts on the key industries of our existing and potential customers and to provide best business practices and specific integrated business solutions to those industries. We allocate our customers at the outset of an initial arrangement to an industry. All subsequent revenues from a particular customer are recorded under that industry sector for that customer. The following table sets forth the total revenues attributable to each industry sector for the years ended December 31, 2004, 2003 2002 and 2001.2002. 2003 2002 2001 2004 2003 2002 (in€ millions) (in€ millions) Process Industries 1,381.3 1,537.0 1,524.3 1,469.1 1,381.3 1,537.0 Discrete Industries 1,659.4 1,764.1 1,807.5 1,807.9 1,659.4 1,764.1 Consumer Industries 1,243.8 1,299.7 1,186.8 1,349.8 1,243.8 1,299.7 Service Industries 1,664.5 1,765.9 1,849.8 1,673.9 1,664.5 1,765.9 Financial Services 474.1 514.8 448.2 519.1 474.1 514.8 Public Services 601.5 531.3 524.2 694.7 601.5 531.3 Total revenue 7,024.6 7,412.8 7,340.8 7,514.5 7,024.6 7,412.8 Despite currency effects Consistent with the overall growth in software and the difficult economy in 2003, total revenue from the public services sector increased 13.2% from 2002. In an environment impacted by significant exchange-rate fluctuations,maintenance revenues, revenue from all other sectors declinedincreased from 20022003 to 2003. Revenue2004. Revenues from the processdiscrete industries sector declinedrose the most, resulting in an overall declineincrease of that sector’s revenue compared to total revenue byof approximately 1%0.5%. As in 2002,2003, the service and discrete industries sectors generated the most revenue in 2003.Sales, Marketing and Distribution SAP AG primarily uses its worldwide network of subsidiaries to market and distribute SAP’s products and services locally. Those subsidiaries have entered into license agreements with SAP AG pursuant to which the subsidiary acquires the right to sublicense SAP AG’s products to customers within a specific territory and agrees to provide primary support to those customers. Under these agreements, the subsidiaries retain a certain percentage of the revenue generated by the sublicensing activity. We began operating in the U.S. in 1988 through SAP America, Inc., a wholly owned subsidiary of SAP AG. Since then, the U.S. has become one of our most important geographic regions. In certain countries, we have established distribution agreements with independent resellers rather than with subsidiaries, particularly with regard to the SAP Business One and mySAP All-in-One solutions. In addition to our subsidiaries’ sales forces, SAP has developed an independent sales and support force through value-added resellers who assume responsibility for the licensing, implementing and supporting of SAP solutions. We have also entered into alliances with major system integration firms, telecommunication firms and computer hardware providers to offer certain mySAP Business Suite solutions. We supplement certain of our consulting and support services through alliances with hardware and software suppliers, systems integrators and third-party consultants with the goal of providing customers with a wide selection of third-party competencies. The role of the alliance partner ranges from pre-sales consulting for e-businessbusiness solutions to the implementation of our software products to project management and end-user training for customers and, in the case of certain hardware and software suppliers, to technology support. SAP’s marketing efforts cover large, multinational groups of companies as well as smaller and midsize companies. We believe our solutions and services meet important needs of all kinds of customers and are not dependent on the size or industry of the customer. Capitalizing on the possibilities of the Internet, we actively make use of online marketing. Solutions such as the mySAP Enterprise Portal can be tested online via the Internet Demonstration and Evaluation System, which also offers special services to introduce customers and prospects to new solutions and services.32Partnerships, Alliances and Acquisitions Partnerships and strategic alliances are a key element of broadeningour efforts to broaden the solutions and services offered to SAP customers. SAP’s close collaboration with partners across the life cycle of a customer solution is a key element in enhancing customer satisfaction. We characterize our partnerships and strategic alliances into eight categories that together constitute what we refer to as the SAP Partner Services Network. Within most categories, our partners may achieve the status of a local or global partner. We expect our alliance partners to provide customers with joint strategic solutions. Our partners generally have a strong position in a particular line of business or cross-industry and complement the range of SAP solutions in these areas. The partner categories are: Services Partners, Technology Partners, Software Partners, Hosting Partners, Business Partners, Content Partners, Education Partners and Support Partners. Our partner network includes more than 1,500 companies across all partner categories. SAP has entered into agreements with a number of leading software, technology and services companies to cooperate and ensure that certain of the software, technology and/or services, products and solutions offered by such suppliers complement SAP’s software products. In 2001, we acquired the assets of TopTier, Inc. (“TopTier”) for approximately U.S.$ 379 million in cash excluding cash acquired. See Note 4 of “Item 18. Financial Statements,” for more information on the acquisition of TopTier. TopTier, which was renamed SAP Portals, Inc., specializes in technologies for creating enterprise portals. During 2002, SAP Portals and SAP Markets (another sub-group of SAP) and their subsidiaries were reintegrated and merged with and into SAP AG and certain subsidiaries of SAP AG. As discussed in Note 36 to our consolidated financial statements4 in “Item 18. Financial Statements,” on March 23, 2004, as part of our efforts to further integrate our global IT-consulting capabilities, we announced our intention to bid for all the outstanding shares of our then 70.03% owned and fully consolidated publicly traded subsidiary, SAP Systems Integration AG (SAP SI). From March 23, 2004 through August 2004, we acquired 7.7 million shares of SAP SI for cash increasing our ownership interest to 91.6%. In addition, effective October 1, 2004, SAP SI sold all of its interests in its wholly-owned subsidiaries SAP Systems Integration America Holding, Inc. and SAP Systems Integration (Schweiz) AG to other entities within the SAP Group. We believe the acquisition of the additional shares of SAP SI and the reorganization of that entity will help us strengthen our global capabilities for IT-strategy consulting offerings in the future. SAP SI, which remains a publicly traded entity, entered into cooperation agreements with several other German entities of the Group in late 2004 to further strengthen their cooperation in the areas of consulting and hosting. As discussed in Note 35 in “Item 18. Financial Statements,” the strategic alliance with Commerce One that we had entered into in 2000, expired in 2003, although certain terms of the strategic alliance agreement, which was entered into in 2000, as amended, survived expiration. The strategic alliance was focused on jointly delivering next-generation e-business marketplace solutions for the Internet economy. The agreement was amended in September 2003 to provide for various support and transition efforts in connection with the expiration. Our shareholdings in Commerce One were not impacted by the expiration of the strategic alliance agreement. Under the terms of the strategic alliance agreement that are still effective, SAP AG has certain registration rights and pro-rata rights to purchase additional shares of Commerce One’s common stock in the future, as well as the right to have a representative of SAP appointed to Commerce One’s board of directors. We have also agreed to certain limitations on our ability to transfer our shares ofTransactions with Commerce One, common stock, our abilitywhich filed for bankruptcy in 2004, were immaterial in 2004 and are expected to acquire more than 23% of Commerce One’s outstanding common stock orcontinue to attempt to acquire Commerce Onebe immaterial in a transaction not approved by Commerce One’s board of directors.subsequent periods. The carrying value of our investment in Commerce One was zero as of December 31, 2004 and 2003 and 2002 as a result ofdue to the recognition of an other than temporary impairment charge and the continued application of the equity method of accounting in 2002. See additional discussion under Note 4 and 16 of “Item 18. Financial Statements,” and “Item 5. Operating and Financial Review and Prospects — Operating Results.”We are not aware of any public takeover offers by third parties inwith respect ofto our shares that have occurred in either the last2004 or the current financial year. On March 23, 2004prior. In January 2005, we announced our intention to bidacquired TomorrowNow, a maintenance provider for all the shares not currently owned by us of SAP Systems Integration AG (SAP SI), our 70.3% owned subsidiary at a purchase price per share of€20.40. If all the shares not already owned by us are tenderedPeopleSoft applications based in the offer, we expect the total purchase price for those shares together with costs associated with the transaction to be approximately€230 million. The offer is expected to be completed in the first half of 2004.Bryan, Texas. We believe thethis acquisition of one of the additional sharesleading support and maintenance provider of PeopleSoft products will allow us to further strengthen our global capabilitiesposition in the US market. See also Note 37 in “Item 18. Financial Statements”. In February 2005, we purchased DCS Quantum, a vehicle dealer businessmanagement system, from DCS Automotive, a subsidiary of United Kingdom-based DCS Group PLC. We believe the purchase of DCS Quantum will enable us to expand our software offering in automotive sales and service and we will integrate DCS Quantum into the SAP for IT-strategy consulting offerings. In 2003Automotive industry solution set as SAP Dealer Business Management. Based on mySAP ERP, the solution is designed to enable vehicle importers, distributors, dealer groups, and throughindependent dealers to improve sales and service processes and to achieve more effective collaboration with business partners and vendors. On February 28, 2005, we entered into a definitive merger agreement to acquire all of the outstanding shares of Retek, Inc. (“Retek”), a provider of software solutions and services to the retail industry, for US$8.50 per share. The aggregate purchase price, including the cash settlement of Retek’s outstanding share-based awards and net of cash acquired, was expected to be approximately US$394 million. On March 23, 20048, 2005, Oracle Corporation (“Oracle”) made a hostile tender offer to acquire Retek’s outstanding shares at a price of US$9 per share and announced that it had accumulated approximately 10% of Retek’s outstanding shares already. On March 17, 2005, we didincreased our offer to US$11 per Retek share and Oracle increased its offer to US$11.25 per share. On March 22, 2005, we indicated that we would not make a public takeoverprovide an increased offer in respect of any other company’s shares other than in respect of SAP SI.for Retek’s outstanding shares. Retek then terminated the definitive merger agreement with us and we withdrew our tender offer for Retek. Part of our strategy involves growth through acquisitions and other transactions. We routinely evaluate various alternatives and engage in discussions and negotiations with potential parties to such transactions.33Intellectual Property, Proprietary Rights and Licenses We believe that none of the individual patent or technologies owned or licensed by us is material to our business. We may however be significantly dependent in the aggregate on technology that we license from third parties that is embedding those technologies into our products or reselling to our customers.We have and continue to license numerous third party software products that we incorporate into our existing products. The termination rights and term of these agreements vary. We try to protect us in the respective agreements by defining certain rights in case such agreements are terminated. The termination rights and terms of each license agreements vary, but the various protections generally include receiving maintenance for a certain period of time in maintenance after termination, the right to distribute the then-current software release for a certain period of time after termination and the right to transfer the relevant intellectual property to SAP if we desire. In many cases we agree on an escrow for the term of the agreement to allow us to provide maintenance in case we are unable to retain it from the third party licensor. In 2004, as part of SAP’s alliance with Microsoft Corp., which started more than ten years ago, the two companies entered into a patent cross-license agreement to provide a better environment for joint technical collaboration and solutions development.Internal Risk Management Policies and Procedures We believe we have a system comprising multiple mechanisms across the SAP group to recognize and analyze risks early and respond appropriately. These mechanisms include recording, monitoring and controlling internal enterprise processes and business risks using internal reporting functions, a number of management and controlling systems and a planning process that is uniform throughout our group. We have created standard documentation of key business processes of SAP AG and all of its major subsidiaries, which are routinely assessed and tested by dedicated “process champions” as well as our Global Internal Audit Services (GIAS) function as to their design and operating effectiveness to mitigate typical risks inherent in such processes in line with both German and U.S. requirements. SAP’s Principles of Corporate Governance, ratified by our Executive Board and our Supervisory Board at the end of 2001 and updated in August 2002 and March 2004, constitute a further component in the system. They comprise, among others,Organizational Structure41standards and guidelines for the work of the Executive Board and Supervisory Board, and for the cooperation between them. In addition, SAP promptly started to implement various additional measures to comply with requirements under the Sarbanes-Oxley Act. Amongst other measures, we established a Disclosure Committee, whose main task is to monitor the timing and content of information released to the financial markets. For further information on the measures we have implemented relating to the Sarbanes-Oxley Act, please refer to “Item 6. Directors, Senior Management and Employees” and “Item 15. Controls and Procedures.” Further elements of the system include a corporate-wide Code of Business Conduct which was formalized in 2003, comprehensive published reports and the work of the Supervisory Board in monitoring and controlling the Executive Board. In early 2003, we created a central dedicated Corporate Risk Management function along with a global network of risk management practitioners tasked to consolidate and enhance SAP’s various existing risk management activities in accordance with a corporate-wide uniform methodology. Pursuant to SAP’s Enterprise Risk Management program, various regular business activities including software development programs, customer implementation projects, internal IT system implementations and a variety of other corporate areas are continuously assessed against a range of predefined generic risk categories identified in a uniform corporate-wide Risk Catalog. Key risk factors identified and tracked via the Enterprise Risk Management program are summarized in “Item 3. Key Information — Risk Factors” in the same risk category structure as established by SAP’s internal risk management reporting system.ORGANIZATIONAL STRUCTURE As of December 31, 2003,2004, SAP AG was the holding company of 9688 subsidiaries whose main task is the distribution of SAP’s products and services on a local basis. Our primary research and development facilities, the overall group strategy and the corporate administration functions are concentrated at our headquarters in Walldorf, Germany.The following table illustrates our most significant subsidiaries based on revenues: Ownership Country of OwnershipCountry ofName of Subsidiary % %Incorporation Function IncorporationFunctionGermany SAP Deutschland AG & Co. KG, Walldorf 100 Germany Sales, consulting and training Rest of Europe / Europe/Middle East / East/Africa SAP (UK) Limited, Feltham 100
Great Britain Sales, consulting and training SAP (Schweiz) AG, Biel 100
Switzerland Sales, consulting and training SAP FRANCEFrance S.A., Paris 100
France Sales, consulting and training SAP ITALIA Sistemi, applicazioni, prodotti in data processing s.p.a.SISTEMI, APPLICAZIONI, PRODOTTI IN DATA PROCESSING S.P.A., Milan 100
Italy Sales, consulting and training SAP Nederland B.V.,’s-Hertogenbosch 100
The Netherlands Sales, consulting and training Americas SAP America, Inc., Newtown Square 100
USA Sales, consulting and training SAP Canada Inc., Toronto 100
Canada Sales, consulting and training Asia / Asia/Pacific SAP JAPAN Co., Ltd., Tokyo 100
Japan Sales, consulting and training, research and development DESCRIPTION OF PROPERTYOur principal executive, administrative, marketing and sales, consulting, training, customer support and research and development facilities are located in Walldorf and neighboring St. Leon-Rot, Germany,approximately 60 miles south of Frankfurt/ Main. We commenced major expansionsThe number of workplaces at these locations in 2000this combined location expanded by approximately 1,000 during 2004 to approximately 13,000 through increased occupancy and finished those enhancements in 2003 involving capital expendituresconversion of€129 million through 2003. This expansion resulted in additional 240 thousand square feet or approximately 955 workplaces in St. Leon-Rot and 192 thousand square feet or approximately 1,215 workplaces in Walldorf.In addition, during 2001, we expanded our data center in St. Leon-Rot involving capital expenditures of€62 million. internal training rooms. The expansion added 172 thousand square feet necessary for running SAP’s own IT system and IT equipment required to provide customer services such as support services. This expansion did not add material workspace for employees. Currently, we believe we have enough capacity in this data center for the next 5 years.34We commenced major expansionsongoing hiring activities at our owned researchdevelopment and development facilitysupport location in Bangalore, India during 2003. During 2003involved capital expenditures in 2004 of€5 million for further expansion. We spent€4 million in 2004 to complete a customer support building in Ireland, which is now fully functional. In 2005, we increased capacitywill commence construction activities at the facility by 750 workplaces. Additional expansion is expectedlocations Walldorf and St. Leon-Rot, where two new buildings with workplace capacities of 1,700 and 800, respectively, will be added. We currently estimate that the related expenses will amount to be finalized by June 2004 that will result in an additional 400 workplaces. Together the expansions are expected to add 79 thousand square feet and involve capital expenditures of approximately€20.4160 million, which we intend to finance out of our liquid assets. When construction activities finish, which we expect sometime between early 2006 and early 2007, certain current office leases will be terminated. As discussed in Note 30 under “Item 18. Financial Statements”, in 2004, SAP America, Inc. and SAP Properties, its wholly-owned subsidiary, sold a portion of the aggregate,€2.1 million for the land and€18.3 million for the building. Depending on demand and growth, we can add additional workspace in later modular phases if necessary. We own sufficient undeveloped land to expand the facilities by up to 4,000 workplaces. We ownUnited States headquarters property in Newtown Square, Pennsylvania, which we use asis partly occupied by SAP Americas, Inc, and partly by other subsidiaries. A portion of the property sold was subsequently leased back with different terms through 2014. The remaining owned property is used for our U.S. headquarters for the Americas and for regional operations for administration, marketing, sales, consulting, training, customer support and research and development. We own or lease sufficient undeveloped land to expand the facilities in Newtown Square. See Note 31 “Other Financial Commitments” of “Item 18. Financial Statements,” for details on an agreement to sell a portion of the United States headquarters property in Newtown Square, Pennsylvania. We have financed all expansions through working capital and existing credit facilities described herein under “Item 5. Operating and Financial Review and Prospects — Liquidity and Capital Resources.” While it is difficult to ascribe production capacity to office space, we generally assume that we need approximately 183 square feet per employee for research and development activities and administrative services, and approximately 140 square feet per employee for sales, training and consulting activities.35The location of each of our other facilities in excess of 40,000 square feet, all of which are leased (unless otherwise indicated), is set forth below: Country, City Facility Description Austria, Vienna Sales, consulting, training, marketing and customer support Belgium, Brussels Sales, consulting and training Brazil, São Paulo Sales, consulting and training Bulgaria, Sofia Sales and development Canada, Toronto, Ontario Sales, consulting, training and marketing China, Shanghai Research and development Czech Republic, Prague Sales, consulting and training Denmark, Copenhagen Sales, consulting, training and customer support France, Paris Sales, consulting, training and marketing Germany, Berlin Research and development, sales and consulting Germany, Dresden Consulting and customer support Germany, Freiberg Consulting Germany, Munich Research and development, sales and consulting Germany, Hamburg Sales, consulting and training Germany, Bensheim Sales and consulting Germany, Ratingen Sales and consulting Germany, St. Ingbert (owned) Research and development, sales and consulting Germany, St. Leon-Rot (owned) Research and development and customer support Hungary, Budapest Sales, consulting, training and customer support India, Bangalore (owned) Research and development Ireland, Dublin Customer support Israel, Ra’anana Research and development, sales and consulting Italy, Milan Sales, consulting and training Country, City Facility Description Japan, Tokyo Sales, marketing and training Mexico, Mexico CitySales, consulting, training and customer supportThe Netherlands, ’s-Hertogenbosch Hertogenbosch Sales, consulting and training Portugal, LisbonRussia, Moscow Sales and consulting Singapore, Singapore Sales, customer support and research and development South Africa, Johannesburg Sales, consulting, training, customer support, research and development South Korea, Seoul Sales and consulting Spain, Madrid Sales, consulting, training, research and development and customer support Sweden, Stockholm Sales, consulting, training, marketing and customer support Switzerland, Biel (owned) Sales and marketing Switzerland, Regensdorf Training United Kingdom, Feltham (owned) Sales, consulting, training and customer support United Kingdom, HayesTrainingUnited States, Palo Alto, California Research and development, sales and consulting United States, Waltham, Massachusetts Sales, consulting and training United States, Chicago, Illinois Sales, marketing, consulting, training and research and development United States, Newtown Square (owned and leased) Sales, consulting, training, research and development and customer support United States, New York Sales, marketing, and consulting United States, Foster City, California Training United States, Atlanta, Georgia Sales, marketing, consulting and training We believe that our facilities are in good operating condition and adequate for their present and anticipated usage. We are not aware of any environmental issue that may affect the utilization of our current facilities.Capital ExpendituresCAPITAL EXPENDITURESSAP’s capital expenditures for intangible assets and property, plant and equipment, were€275212 million for the year ended December 31, 2003,2004 (2003:€270 million, 2002:€309 million formillion). Principal areas of investment during 2004 related to the year ended December 31, 2002purchase of computer hardware and other business equipment to support the ongoing increases in employees and global operations. Cars contributed€37855 million fordue to the year ended December 31, 2001.increased number of eligible employees in Germany. Principal areas of investment during 2003 related to construction of buildings,36primarily in Germany and India, and to the purchase of computer hardware to support ongoingthe increases in employees and global operations. During 2004,2005, we expect to spend approximately€100 million for the purchase of computer hardware and other business equipment, and approximately€6145 million for the purchase of cars, as well as approximately another€120 million to fund the construction of additional facilities.facilities and certain leasehold improvements. See also “Description of the Property” above, “Item 5. Operating and Financial Review and Prospects — Liquidity and Capital Resources” and Note 3433 to our consolidated financial statements in “Item 18. Financial Statements,” for further details regarding capital expenditures, including information about capital expenditures by geographic region.ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTSOVERVIEWItem 5.Operating and Financial Review and ProspectsOverviewFor the year ended December 31, 2003, our revenue and income before income taxes, minority interests and extraordinary gain were approximately€7,024.6 million and€1,776.6 million, respectively, as compared to€7,412.8 million and€1,107.7 million, respectively, for the year ended December 31, 2002. Net income was€1,077.1 million and€508.6 million for the years ended December 31, 2003 and 2002, respectively. SAP consists of SAP AG and our network of 9688 operating subsidiaries and has a presence or a representation in over 120 countries.RevenueBusiness by Geographic Region,” “— Revenue by Industry Sector,” “— SAP Strategy — mySAP Business Suite”Strategy” and Note 3433 to our consolidated financial statements included in “Item 18. Financial Statements.” SAP’s principal sources of revenue are sales of products and services. Product revenue consists primarily of software license fees and maintenance fees. License fees are derived from the licensing of SAP software products to customers. SAP provides optional maintenance for a fixed percentage calculated on the basis of the initial license fee paid by the customer. Maintenance entitles the customer to updates, upgrades and enhancements through new product releases, versions and correction levels, telephone support on the use of the products and assistance in resolving problems, remote support, access to online bulletin board support services as well as a world-wide remote monitoring and diagnostics service for SAP solutions. Our service revenue consists of consulting and training revenue, which is derived primarily from the services rendered with respect to implementation of our software products and training of customer project teams and end-users, as well as training third-party consultants with respect to SAP software products. At the beginning of 2004, based on our prediction of growth in the economy as a whole and in the IT industry in particular, we set ambitious operational goals for the year with a priority on software revenue growth and a further increase in profitability. Our target was to increase software revenue by 10% over the 2003 number. We expected above-average growth rates in the United States and the Asia-Pacific region with an improvement in the EMEA region over the course of the year. We also expected significant growth of our business with small and mid-market customers. In order to meet the goal of increased profitability, we emphasized our intent to continue our stringent cost management measures despite giving priority to growth in 2004. Our goal at the outset of 2004 was to increase our operating margin and we provided guidance that our pro forma operating margin (excluding stock-based compensation and acquisition related changes) would increase by approximately one percentage point from the 27% achieved in 2003. In order to achieve the growth in revenue and earnings, we expected increases in headcount and investments in 2004 compared to the previous year, especially in sales, marketing, research, and development. We also expected a significant proportion of the new research and development jobs to be located in countries outside of Germany, such as India and China, without reducing headcount in other locations. We also expected the number of employees to increase in the United States. In fiscal year 2004, we achieved our goals for revenue and income growth. Software revenue increased from€2,147.6 million in 2003 to€2,361.0 million in 2004, representing an increase of€213.4 million or 9.9%. Our gross operating margin increased from 24.5% in 2003 to 26.9% in 2004 and our pro forma operating margin increased by approximately 1 percentage point from 27% in 2003 to 28% in 2004. For the year ended December 31, 2004, our revenue and income before income taxes and minority interests were approximately€7,514.5 million and€2,072.6 million, respectively, as compared to€7,024.6 million and€1,776.6 million, respectively, for the year ended December 31, 2003. Net income was€1,310.5 million and€1,077.1 million for the years ended December 31, 2004 and 2003, respectively. The following discussion is provided to enable a better understanding of our operating results for 2003,the periods covered, including: • key factors that impacted our performance during 2003;performance; • discussion of our operating results for 2004 compared to 2003 and for 2003 compared to 2002; and • our outlook for 2004, including certain risks that may impact us.2005.This executive summaryoverview should be read in connection with the more detailed discussion and analysis of our financial condition and results of operations in this Item 5, “Item 3. Key Information — Risk Factors,” and “Item 18. Financial Statements.”Key factorsSignsKEY FACTORSGlobal Economic Growth Stronger Than in Previous Years After the inertia of worldwide economic recovery For2003, there was noticeably more activity in the global economy 2003in 2004, but some momentum was notlost again as good as many had anticipated. Actualthe year progressed. Chief among the causes was the second-half deceleration in the United States and China. Nonetheless, 2004 saw approximately 5% real growth in the world economic growth was lower than expected. At the end of 2002, the World Bank forecasted overall economic growth of 2.5% for 2003. In September 2003, the World Bank revised that estimateeconomy, according to an even 2%analysis by the International Monetary Fund (IMF). Likewise,That is the Organizationbest annual rate of growth since 2000. Strong demand in Asia and the United States were the key drivers boosting economic activity. Among the key factors in the global economy in 2004 were the high prices for oil and other raw materials, which led to a sustained rise in costs and a significant reduction in disposable personal income. The Organisation for Economic Co-operation and Development (OECD) initially forecasted 1.8%also sees the oil price as the real brake on economic activity. In 2004, the industrialized countries’ contribution to the growth of gross world product (the value of all goods produced and services provided) was slightly smaller than that of the emerging countries. Indeed, growth was remarkably strong in the emerging markets in 2004. For example, the IMF estimates that China’s gross domestic product (GDP) rose at least 9%. The combined economies of eastern Asia grew 5.4% according to the annual “Fall Report” on the state of the global and German economies, published by the six major German economics research institutes. In Japan, the government reported national economic growth of 2.6% for 2004, a slight improvement on the previous year’s 2.5%, but well below observers’ expectations. Late in 2004, the OECD still expected the year’s growth in Japan to be 4%, but these hopes were dashed by a poor fourth quarter. According to the Fall Report, the Russian economy was highly dynamic, with 7% growth in 2004 (2003: 7.3%). The OECD’s numbers for the United States economy in 2004 show 4.4% growth; the figure for 2003 was just under 3.0%. The OECD also recorded resuscitated growth in the euro zone in 2004 — albeit at a rather modest level. According to the Fall Report, the increase in economic activity in the European Union in 2004 was 2.4%, whereas only 1% growth was achieved in the year before. The OECD’s estimate shows Germany still underperforming in comparison to other European economies, although with economic growth at 1.7% in 2004, Germany’s economy performed better in 2004 than in 2003 when the economy remained flat. While personal spending remained restrained under increasing pressure from fuel costs as the year progressed, advances elsewhere provided a welcome boost for German exporters.Global IT Industry Stronger Than in 2003 Research by U.S. investment bank Goldman Sachs showed that, as in the previous year, the information technology (IT) industry lacked impetus worldwide in 2004. Goldman Sachs estimates that in 2004 hardware and software spending was 3% to 4% higher than in 2003, failing to keep pace with the increase3746in global GDP but later downgraded its expectations and in February 2004 publishedimproving on the previous year’s 1% to 2% IT spending growth (also a final growth rate for the euro zone of just 0.4%Goldman Sachs estimate). Global development was hampered in the first few months of 2003 by the war in Iraq, the SARS outbreak, and other factors, but general economic production in the industrialized nations began to rise in the second quarter of 2003. However, growth was uneven. The U.S. led the improvement with a consumer-fueled recovery. Capital spending in the U.S. only began to increase toward the end of 2003. After more than a decade of recession, the Japanese economy experienced a long-awaited recovery. According to the OECD, the Japanese economy benefited in particular from a better investment climate in the process industries and the positive development of neighboring economies. In contrast, the economy of the euro zone remained relatively stagnant. In their expert report published in the fall of 2003, the six leading German institutesmarket researcher Gartner, Western Europe company budgets for economic research predicted zero gross domestic product (GDP) growth for GermanyIT services were only 0.3% higher than in 2003.IT market bottoms out The global IT market moved in parallel with the overall economy, and industry analysts also lowered their forecasts over the course of the year. SAP assumes that the reluctance to invest in IT, which emerged in 2002, continued into 2003 and many companies cut their Market intelligence specialist IDC believes IT budgets duringgrew 1.5% in Germany. On the year and lowered the average volume of their IT investments as they had doneother hand, in 2002. Industry analysts had varying opinions on the growth of the IT industry but there was a general tendency toward restraint in their forecasts for 2003. This restraint was inspired primarily by developments in Europe and Japan. International Data Corporation (IDC) analysts revised their figures downward; while in April 2003 they expected worldwide IT spending to grow 2.3% in 2003, they adjusted this figure to just 1% in July 2003. Forrester Research also lowered its growth estimate from 1.9% to 1.3% in the middle of 2003. According to a survey by AMR Research of 200 IT decision-makers, IT spending rose again in the second half of the year in the U.S.. In the third quarter for example, IT spending was up 4.3% over the previous year. IT decision-makers in the U.S. responded skeptically in a Merrill Lynch survey in the third quarter of 2003. Survey respondents indicated that spending on IT had stabilized in 2003 but would not increase noticeably in the short term. Based on IT spending in the first six months of 2003, IDC estimated growth of 8.6% for 2003 in the Asia/Pacific region, excluding Japan. IDC predicted that Japanese IT investment would decline 1%. IDC also reduced its forecast for Western Europe during the course of the year. In April, they had estimated that IT spending in western Europe would grow 2% in 2003, but by July they predicted less than 1% growth for the year. The European Information Technology Observatory (EITO) forecast that revenue would fall 0.7% in 2003. Andlate November 2004 the German Association for Information Technology, Telecommunications, and New Media (BITKOM) estimated zeroissued results of a membership survey pointing to an increase in IT spending in Germany of 2.5%. IT sales were rather livelier in Asia-Pacific than in Europe, in line with the generally more encouraging economic trend in that region. Gartner estimates that IT spending in Asia-Pacific increased 12% in 2004. But at 10%, growth in Japan was weaker than in the rest of the region. Gartner calculates that the United States’ IT spending grew 4% in 2004. Toward the end of 2004, the revenue outlook for GermanyIT companies began to improve. However, postponed investments from previous quarters were not yet released. Moreover, Oracle Corporation’s prolonged efforts to acquire competitor PeopleSoft, Inc. brought turbulence to the business software arena. AMR Research and Gartner were both of the view that the resultant uncertainty harmed the entire industry — companies were reluctant to spend while confusion reigned about products.OPERATING RESULTS2004 Compared with 2003Total Revenue. Total revenue increased from€7,024.6 million for 2003 to€7,514.5 million in 2004, representing an increase of€489.9 million or 7.0%. At constant currencies, total revenues increased by 10%. Compared to 2003, while services revenues also increased moderately, the overall growth in 2004 was primarily driven by product revenues. Both software and maintenance revenues each grew by 9.9% compared to 2003. This growth is in line with what we expected at the beginning of 2004, when we stated that our target was to increase software revenue by 10% compared to 2003. We were able to increase our revenues in accordance with our guidance despite the continued rise of the euro exchange rate compared to other major currencies in 2004. Compared to the dollar the exchange rate of the euro evolved as follows for the period-end Noon Buying Rate expressed as dollars per€1.00.Date Period-End December 2003 1.2597 March 2004 1.2292 June 2004 1.2179 September 2004 1.2417 December 2004 1.3538 March 8, 2005 1.3342 Ultimately the strength of the euro over the year reduced the euro value of revenues generated in other currencies. Foreign currency translation effects from the strengthening value of the euro during the year negatively impacted our total consolidated revenue by€235.8 million in 2004. In 2003, foreign currency translation effects from the strengthening value of the euro during 2003 negatively impacted our total consolidated revenue by€577.3 million.
The following discussion is based on how we allocate revenues for classification in our consolidated statements of income, which is dependent on the nature of the sales transaction regardless of the operating segment it was provided by:Product Revenue. Product revenue, which consists of software revenue and maintenance revenue, increased from€4,716.4 million in 2003 to€5,184.2 million in 2004, representing an increase of€467.8 million or 9.9% (13% on a constant currency basis). Software revenue increased from€2,147.6 million in 2003 to€2,361.0 million in 2004, representing an increase of€213.4 million or 9.9%. With the rise of the euro compared to other currencies continuing in 2004, this increase was again impacted by the related negative foreign currency translation effects. On a constant currency basis software revenue grew by 13.3% from 2003 to 2004. The biggest contributor to the software revenue growth in 2004 was the Americas region (and in particular the U.S.) where we accomplished a growth of 23% compared to 2003 (or 25% for the U.S). For a summary of software revenue by solution in 2004 see “Item 4. Information about SAP — Description of the Business — Software Revenue by Solution.” Based on orders received versus revenue recognized, the installed customer base accounted for 76% of SAP’s 2004 signed software contracts, with the remaining 24% coming from new customers (74% from installed customer base and 26% from new customers in 2003). As already seen in 2003, we continued to experience an industry-wide trend away from a lower volume of very large contracts to a higher volume of smaller contracts in 2004. In the small and midsize businesses segment, we achieved above-average software revenue growth and strengthened our market position in 2004. On the basis of orders received, 31% of software revenue was from small and midsize businesses, compared to 28% of our software revenue in 2003. Over Maintenance revenue increased from€2,568.8 million in 2003 to€2,823.2 million in 2004, representing an increase of€254.4 million or 9.9%. On a constant currency basis, maintenance revenue grew by 13.3% from 2003 to 2004. With our growing installed customer base, this change in maintenance revenue was primarily due to the coursegrowth of software sales throughout 2003 and by the additional software contracts closed during 2004. Accordingly maintenance revenues continued to increase constantly on a rolling four quarter basis. As a significant portion of our software sales are finalized in the last quarter of the year, the trend showing increases in the respective maintenance revenue that follows in subsequent quarters is expected to continue. The biggest contributor to the increase in maintenance revenues based on volume came from the sales region EMEA in 2004. The EMEA region is still the biggest contributor to software sales group wide and in addition, this region had lower foreign currency translation effects compared to other regions. Product revenue as a percentage of total revenue increased from 67.1% in 2003 to 69.0% in 2004, driven by the growth in software and maintenance revenues which both increased by 9.9% compared to 2003.Service Revenue. Service revenue increased from€2,252.8 million in 2003 to€2,273.0 million in 2004, representing an increase of€20.2 million or 0.9% (4% on a constant currency basis). Consulting revenue increased from€1,953.5 million in 2003 to€1,970.6 million in 2004, representing an increase of 0.9%. On a constant currency basis the increase would have been€82.5 million or 4.2%. This growth in consulting revenue resulted mainly from the increase in the consulting work force by approximately 7% in 2004. Despite a modest increase in the number of hours billed to our customers, the price pressure in the market environment that we experienced throughout 2003 continued in 2004 and hence adversely impacted the overall increase in consulting revenues. Consulting revenue as a percentage of total revenue decreased from 27.8% in 2003 to 26.2% in 2004, caused by the over-proportional growth of product revenue. Training revenue increased from€299.3 million in 2003 to€302.4 million in 2004, or 1.0%. At constant currencies, training revenues increased by 4.3%. As in 2003 there was a continuing trend noted in the customers demand behavior. Customers continued to restrict their spending on employee training courses and structurally, there was a continued shift in our customers’ demand away from traditional classroom training at our regional offices to requesting more customer specific on-site training and e-learning.Total Operating Expenses. Total operating expenses increased from€5,300.6 million in 2003 to€5,496.1 million in 2004, representing an increase of€195.5 million or 3.7%. On a constant currency basis the increase in total operating expenses was€350.8 or 6.6%, which means that foreign currency translation effects from the strengthening value of the euro during 2004 positively impacted our total operating expenses by€155.3 million, compared to a negative impact of€235.8 million on total revenues. In addition, our continued cost management measures throughout 2004 also contributed to the modest overall increase in total operating expenses compared to stronger revenue growth. We believe the increase is mainly attributable to the following:• We intentionally increased our sales and marketing expenses in 2004 to support our revenue growth targets. Sales and marketing costs increased by€112.7 million, or 8.0% compared to 2003. • Additional use of third parties: In 2004, we significantly expanded the use of third parties in our consulting and research and development departments on an interim basis to support our own resources with an associated increased cost of€33.3 million compared to 2003. • Our growing workforce resulted in an increase in personnel expenses, which went up from€2,936.6 million in 2003 to€2,968.0 million in 2004, or 1.1%. This moderate increase in personnel expenses was achieved even though the overall headcount increased from 29,610 full time equivalents as per December 31, 2003, to 32,205 full time equivalents as per December 31, 2004, an increase of 7.3%. We continued to keep a tight control on personnel expenses due to minimal fixed salary increases as well as by adding additional headcount primarily in low cost locations. The share of resources in low cost locations increased from 4.9% in 2003 to 8.2% in 2004. • The rise in the headcount and overall increase in business activity during 2004 resulted in higher travel expenses compared to 2003. As a result of the strong revenue growth and the modest increase in total operating expenses, operating income increased from€1,724.0 million in 2003 to€2,018.4 million in 2004, or 17.1%. Gross operating margin increased from 24.5% in 2003 to 26.9% in 2004.Pro Forma Operating Income. We have provided guidance and related information in 2004 and 2003 using pro forma operating income on a consolidated basis. We use this information internally and believe this pro forma measure provides meaningful information to our investors because we exclude acquisition related charges andsettlements of stock-based compensation plans to focus attention on the financial performance of our core operations. We exclude stock-based compensation expenses because we have no direct influence over the actual expense of these awards once we enter into stock-based compensation plans. This pro forma information is not prepared in accordance with U.S. GAAP and should not be considered a substitute for the historical financial information presented in accordance with U.S. GAAP. The pro forma measures used by us may be different from pro forma measures used by other companies. At the beginning of 2004 our target was to improve our pro forma operating margin (excluding expenses for stock-based compensation and acquisition-related charges) from the 27% achieved in 2003 by approximately 1 percentage point. We were moreable to reach this target in 2004 and the pro forma operating margin increased by 1 percentage point to 28%. Pro forma operating income (excluding expenses for stock-based compensation and acquisition-related charges) increased from€1,879,6 million in 2003 to€2,086.1 million in 2004. Pro forma operating expenses (excluding expenses for stock-based and acquisition-related charges) in 2004 increased by 5.5% to€5,428.4 million. A reconciliation from U.S. GAAP operating income to pro forma operating income is as follows: 2004 2003 (in millions of€) U.S. GAAP Operating income 2,018 1,724 Acquisition-related charges 30 26 LTI 2000 Plan/ STAR Plan 37 125 Settlement of stock-based compensation plans in the context of mergers and acquisitions 1 5 Total stock-based compensation 38 130 Pro forma operating income excluding stock-based compensation and acquisition-related charges 2,086 1,880 Cost of Product. Cost of product consists primarily of:• customer support costs (message handling and bug fixing — delivered by the Global Support Organization and Development Support); and • license fees and commissions paid to third parties for databases and the other complementary third-party products sublicensed by us to customers. Cost of product decreased from€839.0 million in 2003 to€804.3 million in 2004, or 4.1% (-2.2% on a constant currency basis). As a percentage of product revenue, cost of product decreased from 17.8% in 2003 to 15.5% in 2004. Apart from a positive foreign currency translation effect, the efficiency improvements in the support organization that we accomplished in 2004 also had a positive effect. Due to new and more indicatorsefficient processes the support organization could allocate more resources to support internal projects in other organizations such as the sales organization. Although the number of hesitant recoveryemployees increased during 2004, the related costs increased less due to a continuous effort of the support organization to move into cost effective locations and due to the continuous efforts to improve the efficiency of our processes.Cost of Services. Cost of services consists primarily of consulting and training personnel expenses as well as expenses for third party consulting and training resources. Cost of services increased from€1,694.1 million in 2003 to€1,783.5 million in 2004 or 5.3%. As a percentage of service revenue, cost of services increased to 78.5% in 2004 compared to 75.2% in 2003. One main reason for this increase was that we substantially increased the interim use of third party resources reflected in third party costs increasing by€33.3 million compared to 2003. Furthermore, the growth in consulting headcount by approximately 7% resulted in increased personnel expenses of€17.3 million or 1.5%. These newly employed consultants not yet being fully productive for the full year also negatively impacted the service profitability. Both the increase in third party resources and headcount are a reflection of stronger internal support provided by our service organization to support other internal projects such as sales and ramp-up of products. Foreign currency translation effects had a significant positive impact on cost of services. Cost of services increased by approximately 8.9% at constant currencies.Research and Development.Our research and development cost consists primarily of:• personnel expenses related to our research and development employees; • amortization of computer hardware used in our research and development activities; and • costs incurred for independent contractors retained by us to assist in our research and development activities. Research and development expenses increased from€995.9 million in 2003 to€1,020.0 million in 2004, or 2.4%. As a percentage of total revenue, research and development expenses decreased from 14.2% in 2003 to 13.6% in 2004. Overall, the number of research and development employees increased from 8,854 full time equivalents in 2003 to 9,882 full time equivalents in 2004, representing an increase of 11.6%. Due to an increased share of resources in low cost locations personnel expenses were kept nearly constant. The share of employees working in the IT industry. After three yearsresearch and development department as part of restrained purchasing,the total number of employees increased to 30.7% for 2004 from 29.9% for 2003. As in all other areas, foreign currency translation effects had a positive effect on the overall increase in research and development expenses.Sales and Marketing.Sales and marketing expenses increased from€1,411.0 million in 2003 to€1,523.7 million in 2004, or 8.0%. As a percentage of total revenue, sales and marketing expenses remained relatively constant, up slightly from 20.1% in 2003 to 20.3% in 2004. On a constant currency basis, sales and marketing expenses increased by approximately 11%. The increase in sales and marketing expenses in 2004 relates to the efforts to support our revenue growth targets for the year and mainly results from salaries for new sales personnel and higher bonus payments to sales and marketing employees. Overall employees in sales and marketing increased from 5,170 full time being, companies’ investment logjams peakedequivalents in 2003 to 5,583 full time equivalents in 2004, or 8.0%, and total personnel expenses increased accordingly from€660.1 million in 2003 to€699.1 million in 2004, or 5.9%. We also continued to increase variable parts of salaries in 2004.General and Administrative.General and administrative expenses increased from€354.0 million in 2003 to€366.4 million in 2004. This represents an increase of 3.5% or approximately 6% on a constant currency basis. The increase was mainly driven by an increase in travel expenses and the interim use of third party services. As percentage of total revenue, general and administrative expenses slightly decreased from 5.0% in 2003 to 4.9% in 2004.Other Operating Expenses, Net.Other operating expenses, net, reversed from a net operating expense of€6.5 million in 2003 to a net operating income of€1.8 million in 2004. The primary reason was the significant reduction in the amount of restructuring costs for unused lease space and severance payments for exit activities from€20.5 million in 2003 to€9.6 million in 2004. The 2004 restructuring activities particularly include organizational changes in some foreign subsidiaries, such as replacement of management and sales personnel mainly in the EMEA region, and the Nordic countries in particular. The following table summarizes the expenses incurred in connection with our exit activities, and the related obligations as of December 31, 2004, 2003, and 2002: 2004 Balance Balance as of 01/01 Expenses Payments Adjustments Currency as of 31/12 € (000) € (000) € (000) € (000) € (000) € (000) Unused lease space 17,691 2,625 (7,557 ) (1,415 ) (779 ) 10,565 Severance payments 3,529 6,972 (3,668 ) (1,176 ) 13 5,670 21,220 9,597 (11,225 ) (2,591 ) (766 ) 16,235 2003 Balance Balance as of 01/01 Expenses Payments Adjustments Currency as of 31/12 € (000) € (000) € (000) € (000) € (000) € (000) Unused lease space 7,577 17,164 (5,544 ) 0 (1,506 ) 17,691 Severance payments 11,159 3,384 (9,347 ) (1,001 ) (666 ) 3,529 18,736 20,548 (14,891 ) (1,001 ) (2,172 ) 21,220 2002 Balance Balance as of 01/01 Expenses Payments Adjustments Currency as of 31/12 € (000) € (000) € (000) € (000) € (000) € (000) Unused lease space 2,874 12,960 (7,262 ) 0 (995 ) 7,577 Severance payments 10,121 33,148 (30,739 ) 0 (1,371 ) 11,159 12,995 46,108 (38,001 ) 0 (2,366 ) 18,736 Customer credit loss risks based on aging of receivables are classified as general bad debt expense as a component of other operating expense, net. For the year ended December 31, 2004,€1.8 million was recorded as other operating expense. For the years ended December 31, 2003 and 2002,€5.4 million and€5.3 million were recorded as other operating income, respectively, due to our decreased days sales outstanding (meaning the average number of days that passed before we were paid by our customers following the delivery of our software or the rendering of services).Financial Income/ Expense, Net. Financial income/expense, net is comprised primarily of income/(losses) from associated companies, gains/(losses) on sales of equity investments securities and net interest income. Financial income/expense, net improved from financial income of€16.3 million in 2003 to net financial income of€41.0 million in 2004, an increase of€24.7 million. The increase mainly results from higher net interest income, which went up from€43.4 million in 2003 to€56.3 million in 2004. This improvement is related to the increase in liquid assets resulting from the higher cash flows generated from our operations in 2004. Further contributing to the overall increase were the gains on sales of equity securities, which went up from€2.2 million in 2003 to€14.0 million in 2004.Income Taxes. Our effective income tax rate decreased from 39.0% for 2003 to 36.5% in 2004. This decrease was primarily due to the impact of tax exempted income and fewer non-tax deductible losses on investments than in the year 2003. See Note 11 to our consolidated financial statements in “Item 18. Financial Statements”.Net Income. Net income increased from€1,077.1 million in 2003 to€1,310.5 million in 2004, representing an increase of€233.4 million or 21.7%. Net income as a percentage of total revenue increased from 15.3% for 2003 to 17.4% for 2004. This increase was primarily due to the overall increase in total revenues of€489.9 million or 7% compared to 2003, primarily driven by strong growth in software and maintenance revenues which both grew by 9.9%, combined with the proportionally lower increase in total operating expenses of€195.5, or 3.7% compared to 2003. Additionally, financial income/expense, net improved from financial income of€16.3 million in 2003 to net financial income of€41.0 million in 2004, an increase of€24.7 million. Basic earnings per share were€4.22 in 2004 compared to€3.47 in 2003. AccordingSegment Discussion. As described in Note 33 of “Item 18. Financial Statements,” we have three operating segments, product, consulting and training. Total revenue figures for each of our operating segments differ from the revenue figures classified in our consolidated statements of income because for segment reporting purposes, revenue is generally allocated to analyststhe segment that is responsible for the related project, regardless of the nature of the sales transaction. Segment contribution consists of total segment revenue offset only by expenses directly attributable to the segments. Depreciation and amortization of long-lived assets are allocated based on general cost allocations. Expenses such as general and administrative costs, research and development activities, stock based compensation, and other corporate costs, and, beginning in 2004, acquisition related charges, all of which are included in determining our consolidated operating income are not allocated to the operating segments and therefore are not included in segment contribution. In 2004 the total impact of stock based compensation and settlements of stock-based compensation plans included in total operating expenses in the consolidated financial statements was€38.1 million compared to€130.0 million in 2003. Therefore, segment contribution is not indicative of the actual profitability margin for the operating segments. In 2004,€3.9 million (2003:€6.0 million) of exit costs related to unused lease space and severance payments were not allocated to the segments. As discussed in Note 33 in “Item 18. Financial Statements”, through December 31, 2003, we accounted for internal sales and transfers between segments either on a cost basis or at Gartner,estimated market prices, depending on the type of service provided. Effective January 1, 2004, in order to best manage the utilization of our internal resources, we started recording all internal sales and transfers based on fully loaded cost rates. We adjusted the management reporting of internal revenues such that internal sales and transfers are now reported as a cost reduction rather than internal revenues. This change in segment measures resulted in lower revenues and costs for the operating segments. Due to the high volume of intercompany activity between certain group entities (mainly the German, US, and UK subsidiaries), the change also resulted in higher margins for the segments. We also adopted a new calculation of the segment contribution in 2004 such that acquisition related charges no longer burden a segment’s contribution. Although there have been no changes in the composition of operating segments or in reportable operating segments, our original segment disclosures for 2003 and 2002 have been presented along with revised information that conforms to the current presentation.Product segment.The product segment is primarily engaged in marketing and licensing of our software products and performing maintenance services. Maintenance services include technical support for our products, assistance in resolving software product issues, provision of user documentation, updates for software products, and new releases, versions and support packages. The product segment includes the linesof business sales, marketing and service and support reflecting internal management responsibilities within our organization:• line of business sales is a profit center organization that covers software revenue and the corresponding sales resources; • line of business marketing is a cost center organization; • line of business service and support is a profit and cost center organization, based on the activity. Product segment revenue increased by 10.3% from€4,797.8 million in 2003 to€5,292.9 million in 2004. On a constant currency basis, product segment revenue grew by 13.7%. Approximately 98% of revenues within the product segment are derived from software and maintenance revenue. Further external revenues in the product segment are derived from services revenue and other revenue. External software revenue as part of the total product segment revenue increased by 11% from€2,131.3 in 2003 million to€2,361.0 million in 2004. This corresponds to an increase of 14.3% based on constant currencies. External maintenance revenues increased by 10% from€2,565.9 million in 2003 to€2,817.4 million in 2004, an increase of 13.1% based on constant currencies. Product segment expenses increased by 10.5% from€1,862.7 million in 2003 to€2,058.1 million in 2004, an increase of 13.5% based on constant currencies. Expenses of the line of business sales account for roughly more than half of the entire product segment expenses. Expenses of the line of business marketing are roughly one fourth and expenses of the line of business service and support are roughly one fifth of overall product segment expenses. The increase of overall product segment expenses is driven by all three lines of business. The increase in sales and marketing expenses results mainly from the higher headcount and associated personnel-, travel- and other personnel related expenses as well as additional third party and marketing expenses. The growth in service and support expenses is driven primarily by the decision to strategically shift the organizational responsibility for the maintenance of mature product releases from the development organization to the service and support teams. Product segment contribution increased by 10.2% from€2,935.1 million in 2003 to€3,234.8 million in 2004, or 61.1% of total segment revenue compared to 61.2% of total segment revenue in 2003. On a constant currency basis, product segment contribution increased by 13.8%. While we were able to increase product segment revenues, primarily relating to the U.S. operations, the percentage increase in our product segment expenses was slightly higher, resulting in a slight decrease in product segment contribution as a percentage of total revenue. The proportionally higher increase in segment expenses results mainly from the additional expenses incurred in the service and support area.Consulting segment.The consulting segment is primarily engaged in the implementation of our software products. Consulting segment revenues increased by 1.4% from€1,884.8 million in 2003 to€1,910.3 million in 2004. In constant currency, external revenue increased by 5%. The market in the consulting segment continued to be very competitive in 2004 and our customers and partners remained very price-conscious throughout the year, adversely impacting the revenue growth in the consulting segment. In addition, our focus on growing product revenues also impacted the growth in consulting segment revenues. Consulting segment expenses increased by 2.9% from€1,442.4 million in 2003 to€1,484.0 million in 2004. In constant currency, segment expenses increased by 6%. In markets with strong growth, such as the Americas region, more consultants were hired and more third party services were engaged. The main contributing factor to the higher segment expenses was the increased headcount with the related increase in personnel and travel expenses. Consulting segment contribution decreased by 3.6% from€442.4 million in 2003 to€426.3 million in 2004. In constant currency, the segment contribution decreased by 1%. The consulting segment profitability was reduced by 1.2 percentage points. Consultants have been more engaged in supporting the productsegment, ramping up new products and supporting the sales cycle. The newly employed consultants not yet being fully productive for the full year also negatively impacted the consulting segment profitability.Training segment.The training segment is primarily engaged in providing educational services on the use of our software products and related topics for customers and partners. Training services include traditional classroom training at SAP training facilities, customer and partner specific training, end-user training as well as e-learning. Training segment revenues were€306.6 million in 2004, which represents a slight decrease from 2003 (€316.1 million). On a constant currency basis, training segment revenues would have been€316.8 million. Even though our customers continued to restrict their spending on employee training courses during the year, training segment revenues declined only modestly in 2004 due to an overall stabilization of the IT investment finally bottomed outtraining market and our ability to effectively execute on a more flexible service portfolio. This process began in 2003.Shifting Customer DemandIn 2003 the highest priority among IT decision-makersand is tailored to meet individual customer needs rather than standardized courses. As a result, there has been a continued decrease in traditional classroom training which was partially offset by additional customer specific, end-user training and e-learning. We expect that these trends will continue in 2005 as customers seek to optimize their IT landscapes and obtain additional valuetraining budgets. Training segment expenses decreased from existing systems. This was confirmed, for example, in April 2003 by IDC’s regularProject Barometer user survey about how the IT budget is spent. In the past, it was common for companies to fully reequip entire business areas with new software;€221.8 million in 2003 the trend was to add to existing IT€209.0 million in response to an isolated, immediate requirement. Companies focused mainly on tactical projects that brought quick-win and financial benefits with a rapid return on investment. As a result, customers sought2004, or 5.8%. Our training segment initiated certain measures to reduce the total cost of ownership of their IT systems and focused investment more on technologies to make IT systems more efficient with end-to-end, interenterprise business processes and to optimize existing system landscapes with future-proof technology and all-round integration.38 Falling demand put great pressure on pricescosts in the software industry. Moreover, faltering enterprise software investment led to further2003, which included consolidation of certain facilities and ceasing operations in certain geographic locations. A restructuring charge of approximately€9 million was incurred in 2003 for unused lease space. The cost reduction measures begun in 2003 had a positive impact in 2004 and contributed to the market.overall reduction in training segment expenses in 2004. Training segment contribution increased by 3.5% from€94.3 million in 2003 to€97.6 million in 2004. The acquisition of J.D. Edwards & Companytraining segment profitability increased by PeopleSoft, Inc., which was announced in July, altered2.0 percentage points. This is due primarily to the balance between the major vendors of enterprise software. Oracle Corp.’s attempted hostile takeover of PeopleSoft, Inc. led to considerable insecurity in the market and, in SAP’s opinion, increased the pressure on prices, particularly in the U.S. In SAP’s experience, it is now more evident than ever that stability and security of investment play a critical role when customers decide on a software vendor. Consequently, we believe customers increasingly opted for long-term vendor partnerships based on trust.The trend in the IT market was for companies to strive to simplify their IT structures. Talking to our customers, we also foundfact that the trend toward homogeneous system landscapes continues. This approach is seen above all as a waycost reduction of avoiding high integration costs.our training segment effectively met the customer demand shift from classroom training to customised training.Operating ResultsWithwith 2002Total RevenueAt the beginning of 2003, we expected revenue to grow modestly for the year. We did not expect the ratio of product revenue to change significantly compared to 2002 and did not plan to increase the share of total revenue earned from services through disproportionate growth in consulting. Additionally, we did not expect revenue from training to be a significant growth contributor given the difficult spending environment. Early in 2003, there was a steady rise of the euro exchange rate compared to other major currencies, and consequently the impact on our results was not foreseeable. Compared to the dollar the exchange rate of the euro evolved as follows for the period-end Noon Buying Rate expressed as dollars per€1.00. Date Period-End December 2002 1.0485 March 2003 1.0900 June 2003 1.1502 September 2003 1.1650 December 2003 1.2597 March 9, 2004 1.2428 Ultimately the strength of the euro over the year reduced the euro value of revenues generated in other currencies. Total revenue decreased from€7,412.8 million for 2002 to€7,024.6 million for 2003, representing a decrease of€388.2 million or 5.2%. Foreign currency translation effects from the strengthening value of the euro during 2003 negatively impacted our total consolidated revenue by€578.9577.3 million that is8.0% over 2002. The drop in 2003 total revenue was due to decreases in software revenue of 6.3%, consulting revenue of 11.4% and a decrease in training revenue of 27.7% compared to 2002. Following the trend of recent years, maintenance revenues increased by 6.0%, reducing the overall decrease in total revenues.
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The following discussion is based on how we allocate revenues for classification in our consolidated statements of income, which is dependent on the nature of the sales transaction regardless of the operating segment it was provided by:Product Revenue.Product revenue, which consists of software revenue and maintenance revenue, increased from€4,713.6 million in 2002 to€4,716.4 million in 2003, representing an increase of€2.8 million or 0.1%.Software revenue decreased from€2,290.8 million in 2002 to€2,147.6 million in 2003, representing a decrease of€143.2 million or 6.3%. This decrease is substantially impacted by the negative foreign currency translation effects resulting from the appreciation of the euro compared to other currencies. While software revenue decreased by 6.3%, based on a constant currency basis, software revenue grew by 1% from 2002 to 2003. For a summary of software revenue by solution in 2003 see “Item 4. Information about SAP — Description of the Business — Software Revenue by Solution.” Based on orders received versus revenue recognized, the installed customer base accounted for 74% of SAP’s 2003 signed software contracts, with the remaining 26% coming from new customers (77% from installed customer base and 23% from new customers in 2002). We experienced an industry-wide trend away from a lower volume of very large contracts to a higher volume of smaller contracts.Maintenance revenue increased from€2,422.8 million in 2002 to€2,568.8 million in 2003, representing an increase of€146.0 million or 6.0%. On a constant currency basis, maintenance revenue grew by 15% from 2002 to 2003. With our growing installed base, this change in maintenance revenue was due primarily to the growth of software sales throughout 2002 and by the additional software contracts closed during 2003. Accordingly, maintenance revenues continued to increase constantly on a rolling four quarter basis. As a significant portion of our software sales are finalized in the last quarter of the year, the trend showing increases in the respective maintenance revenue that follows in subsequent quarters is expected to continue. The biggest contributor to the increase in maintenance revenues came from the sales region EMEA in 2003 due to strong software sales and lower foreign currency translation effects compared to other sales regions. Product revenue as a percentage of total revenue continues to be relatively high at 67.1%. The increase from 63.6% in 2002 was due primarily to the 14.0% decline in our service revenue.Service Revenue.Service revenue decreased by€365.3 million, or 14.0%, from€2,618.1 million in 2002 to€2,252.8 million in 2003.Consulting revenue decreased from€2,204.2 million in 2002 to€1,953.5 million in 2003, representing a decrease of 11.4%, but only 4% on a constant currency basis. The adverse economic conditions led to an overall price pressure environment. We focused more on improving profitability than on revenue growth. As a consequence we cut third party consulting resources previously deployed, which led to fewer revenues out of re-billed activities. Furthermore, mainly through normal attrition, the consulting work force decreased by approximately 3.5% on average, which contributed into a decline ofin consulting revenues. Consulting revenue as a percentage of total revenue decreased from 29.7% in 2002 to 27.8% in 2003.Training revenue decreased by 27.7% from€413.9 million in 2002 to€299.3 million in 2003. At constant currency, training revenues decreased by 21%. As in 2002 there was a continuing trend noted in the customers demand behavior. Customers continued to reduce their spending on employee training courses. Structurally, our customers’ demand shifted from traditional classroom training at our regional offices to requesting more customer specific on-site training and e-learning. We expect that this trend will continue in 2004.Total Operating ExpensesTotal operating expenses decreased from€5,787.2 million in 2002 to€5,300.6 million in 2003, representing a decrease of€486.6 million or 8.4%. Foreign currency translation effects from the strengthening value of the euro during 2003 positively impacted our total operating expenses by€372.3 million that is 6.4% over 2002.Although total operating expenses declined, they were increased by expenses for stock-based compensation and settlements of stock-based compensation plans of€130.0 million in 2003 compared to€35.9 million in 2002.40Approximately€113.7 million of the overall reduction of€486.6 million was achieved through the continued expense savings measures and carefully spent investments. We believe the decline is mainly attributable to the following: • Our continued careful hiring policy: The overall headcount rose in the first half year of 2003 by 164, in the second half by 649 full time equivalents. Despite a growing workforce, we managed to keep a tight control on personnel expenses due to minimal fixed salary increases as well as by shifting headcount from high cost locations to low cost locations. This resulted in an overall modest growth of personnel expenses, that were overcompensated by positive currency effects. • Focus on improving profitability in consulting: third party expenses in consulting went down due to a priority of profitability over revenue growth in a smaller and more competitive consulting services segment. • Additional replacements of third parties: We continued to replace third parties in our support and development departments by deploying our own resources and renegotiated vendor contracts. • Other stringent continued expense savings measures: Due to tight cost management, other expense items including travel dropped also on a constant currency basis. Furthermore we faced much lower restructuring expenses with€18.2 million in 2003 compared to€46.1 million in 2002. Notwithstanding the decline in revenue and the impact of changes in foreign currency exchange rates from 2002 to 2003, due to our strict cost reduction measures, operating income increased by 6.0% in 2003 to€1,724.0 million. Gross operating margin increased to 24.5% in 2003 from 21.9% in 2002.Pro forma operating income We have provided guidance and related information in 2003 and 2002 using pro forma operating income on a consolidated basis. We use this information internally and believe this pro forma measure provides meaningful information to our investors because we exclude acquisition related charges andsettlements of stock-based compensation plans to focus attention on the financial performance of our core operations. We exclude stock-based compensation expenses because we have no direct influence over the actual expense of these awards once we enter into stock-based compensation plans. This pro forma information is not prepared in accordance with U.S. GAAP and should not be considered a substitute for the historical financial information presented in accordance with U.S. GAAP. The pro forma measures used by us may be different from pro forma measures used by other companies. At the beginning of 2003 our target was to improve our pro forma operating margin (excluding expenses for stock-based compensation and acquisition-related charges) from 23% by at least 1 percentage point. In October we increased our guidance to an increase of pro forma operating margin by 1 to 1.5 percentage points.In 2003 the pro forma operating margin increased 4 percentage points to 27% despite the poor economic environment in many countries. Pro forma operating income (excluding expenses for stock-based and acquisition-related charges) increased from€1,688 million in 2002 to€1,880 million in 2003. Pro forma operating expenses (excluding expenses for stock-based and acquisition-related charges) in 2003 were reduced by 10% to€5,144.6 million.41A reconciliation from U.S. GAAP operating income to pro forma operating income is as follows: 2003 2002 2003 2002 (in millions of €) (in millions of€) U.S. GAAP Operating incomeU.S. GAAP Operating income 1,724 1,626 U.S. GAAP Operating income 1,724 1,626 Acquisition-related chargesAcquisition-related charges 26 26 Acquisition-related charges 26 26 LTI 2000 Plan/STAR Plan 125 9 LTI 2000 Plan/ STAR Plan 125 9 Settlement of stock-based compensation plans in the context of mergers and acquisitions 5 27 Settlement of stock-based compensation plans in the context of mergers and acquisitions 5 27 Total stock-based compensationTotal stock-based compensation 130 36 Total stock-based compensation 130 36 Pro forma operating income excluding stock-based compensation and acquisition-related chargesPro forma operating income excluding stock-based compensation and acquisition-related charges 1,880 1,688 Pro forma operating income excluding stock-based compensation and acquisition-related charges 1,880 1,688 Cost of Product.Cost of product consists primarily: • customer support costs (message handling and bug fixing — delivered by the Global Support Organization and Development Support); and • license fees and commissions paid to third parties for databases and the other complementary third-party products sublicensed by us to customers. Cost of product decreased by 2.5% from€860.4 million for 2002 to€839.0 million for 2003. As a percentage of product revenue, cost of product decreased from 18.3% in 2002 to 17.8% in 2003.Apart from the positive foreign currency translation effect, additional reductions have been realized in the area of expenses for third party products and cost optimization efforts relating to personnel expenses. As for the third party products, the efficiency was mainly achieved through a reduction of commissions paid, as contracts were renegotiated. Although the number of employees increased during 2003, the related costs increased less due to a continuous effort of the support organization to move into cost effective locations. Expenses for stock based compensation increased from€1 million in 2002 to€10 million in 2003. Included in cost of product are€3.6 million and€0.8 million bad debt expenses for 2003 and 2002, respectively.Cost of Services.Cost of services consists primarily of consulting and training personnel expenses as well as expenses for third party consulting and training resources. Cost of services decreased by 13.4% from€1,955.8 million in 2002 to€1,694.1 million in 2003. As a percentage of service revenue, cost of services remained relatively stable with 75.2% in 2003 at 74.7% in 2002.Foreign currency translation had a significant impact on cost of services. Cost services decreased by approximately 7% at constant currencies. As noted above, we cut the external consulting resources previously deployed by 21%, approximately 14% or approximately€91 million at constant currencies. The shortfall was partly compensated for by increased resource sharing within our group. We reduced the services headcount by approximately 2%, however expenses for stock based compensation increased from€6 million in 2002 to€33 million in 2003. Included in cost of services are€4.9 million and€5.1 million bad debt expenses for 2003 and 2002, respectively.Research and Development.Our research and development consists primarily: • personnel expenses related to our research and development employees; • amortization of computer hardware used in our research and development activities; and • costs incurred for independent contractors retained by us to assist in our research and development activities. Research and development expenses increased by€86.6 million, or 9.5%, from€909.4 million in 2002 to€995.9 million in 2003. As a percentage of total revenue, research and development expenses increased from 12.3% in 2002 to 14.2% in 2003.42Overall, the number of research and development employees increased from 8,173 in 2002 to 9,100 in 2003, representing an increase of 11.3%. The share of employees working in the research and development department as part of the total number of employees increased to 30.1% for 2003 from 27.8% for 2002. Due to the ongoing replacement of outsourced development activities to our in-house resources, personnel expenses increased while expenses for subcontractors decreased. Furthermore, due to new and more efficient processes the development organization could allocate resources from development support due to new and more efficient processes to the support organization. Therefore more capacity in total was available for research and development projects. As in all other areas, the foreign currency translation had a positive effect, while expenses for stocked-based compensation increased from€10 million in 2002 to€43 million in 2003.Sales and Marketing.Sales and marketing expenses decreased by 13.3% from€1,627.2 million in 2002 to€1,411.0 million in 2003, representing 22.0% and 20.1% of total revenue for each year, respectively. At constant currencies, sales and marketing expenses decreased by approximating 9%.Overall headcount in sales and marketing increased slightly from€5,143 million in 2002 to€5,267 million in 2003. However, total personnel expenses decreased mainly due to the foreign currency translation, while personnel expenses increased slightly at constant currencies. We continued to increase variable parts of salaries, improved efficiencies in the sales organization and decreased the reliance on external services. In marketing we shifted our strategy by hosting and sponsoring fewer large events. Stock based compensation expenses increased from€5 million in 2002 to€30 million in 2003. Included in sales and marketing expenses are€3.4 million and€7.2 million bad debt expenses for 2003 and 2002, respectively.General and administrative.Administrative.General and administrative expenses decreased by 11.2 % from€398.6 million in 2002 to€353.9 million in 2003, representing 5.4% and 5.0% of total revenue for each year, respectively. On a constant currency basis, general and administrative expenses decreased by approximately 5%. The remaining decrease was mainly driven by a reduction in travel expenses and third party services. Stock-based compensation expenses increased from€13.7 million in 2002 to€14.7 million in 2003. Included in general and administrative expenses are€0.2 million and€0.8 million bad debt expenses for 2003 and 2002, respectively.Other operating expenses,Operating Expenses, Net.Other operating expenses, net decreased from€35.1 million in 2002 to€6.5 million in 2003. The primary reason was the reduction in the amount of restructuring costs for unused lease space and severance payments for exit activities from€46.1 million in 2002 to€20.5 million in 2003. The 2003 restructuring included the following key activities: • Reduction of our workforce across all segments, including reductions related to the consolidation of our sales force organization; and • consolidation of additional facilities, including ceasing operations in certain geographic locations, especially in the training segment. The following table summarizes the expenses incurred in connection with our 2002 and 2003 exit activities, and the related obligations as of December 31, 2002 and 2003: 2003 Balance Balance as of 01/01 Expenses Payments Adjustments Currency as of 31/12 € (000) € (000) € (000) € (000) € (000) € (000) Unused lease space 7,577 17,164 (5,544 ) 0 (1,506 ) 17,691 Severance payments 11,159 3,384 (9,347 ) (1,001 ) (666 ) 3,529 18,736 20,548 (14,891 ) (1,001 ) (2,172 ) 21,220 43 2002 Balance Balance as of 01/01 Expenses Payments Adjustments Currency as of 31/12 € (000) € (000) € (000) € (000) € (000) € (000) Unused lease space 2,874 12,960 (7,262 ) 0 (995 ) 7,577 Severance payments 10,121 33,148 (30,739 ) 0 (1,371 ) 11,159 12,995 46,108 (38,001 ) 0 (2,366 ) 18,736 Customer credit loss risks based on aging of receivables are classified as general bad debt expense as a component of other operating expense, net. For the years ended December 31, 2003 and 2002,€5.4 million and€5.3 million were recorded as other operating income, respectively, due to our decreased days sales outstanding.Financial Income/ Expense, NetFinancial income/expense, net is comprised primarily of (losses)/income from associated companies, (losses)/gains on sales of equity investments securities and net interest income. Financial income/expense, net improved from net financial expense of€555.3 million in 2002 to net financial income of€16.3 million in 2003, an increase of€571.6 million. A significant portion of the change pertains to the “other than temporary” impairment charge of€297.6 million recognized in the second quarter of 2002 to write-down the carrying value of our equity method investment in Commence One to its estimated realizable value. Our equity in the net losses of Commerce One was€92.0 million in 2002. The carrying value of our total investments in Commerce One was reduced to zero in 2002 as a result of the recognition of the impairment charge and through the continuing application of the equity method of accounting. In accordance with U.S. GAAP, the application of the equity method has been suspended and we will not recognize any additional losses related to our interest in Commerce One as we have not guaranteed any of their obligations nor are we otherwise committed to provide Commerce One with further financial support. Also during 2002 other minority investments were written down to their respective fair values since the decline in their respective values were also deemed to be other than temporary. The investments were made primarily from SAP’s venture capital activities. The amount of impairment charges plus our share in the net losses of these equity method investees other than Commerce One totaled€15.3 million in 2003 and€118.5 million in 2002.Income Taxes Our effective income tax rate decreased from 53.8% for 2002 to 39.0% in 2003. This decrease was primarily due to the impact on the tax rate in 2002 of the significant losses on investments, which are not deductible for tax purposes. Such losses were not significant in 2003. Adjusted for the effects of these and other unusual items, the adjusted effective tax rate for 2003 was 37.0%, which was 0.3% higher than the adjusted effective tax rate for 2002. See Note 11 to our consolidated financial statements.Net IncomeNet income increased from€508.6 million in 2002 to€1,077.1 million in 2003, representing an increase of€568.5 million or 111.8%. Net income as a percentage of total revenue increased from 6.9% for 2002 to 15.3% for 2003. This increase was primarily due to the impairment charge of€298 million in 2002 related to the write-down of the carrying value of our investment in Commerce One, our equity in the net losses of Commerce One of€92.0 million, impairment charges on equity investments plus our share in the net losses of equity method investees other than Commerce One of€128 million, approximately€114 million reduction of total operating expenses achieved through continued expense savings measures and carefully spent investments, the net decrease of€26 million from 2002 in restructuring costs, partially offset by negative foreign currency translation effects of approximately€151 million resulting from the strengthening euro and increased stock based compensation expenses of€94 million. Basic and diluted earnings per share were€3.47 in 2003 compared to€1.62 in 2002.44Segment DiscussionAs described in Note 3433 of “Item 18. Financial Statements,” we have three operating segments, product, consulting and training. Total revenue figurestraining, which are described in more detail above in the “Segment Discussion” for each of our operating segments differ from the revenue figures classified in our consolidated statements of income because for segment reporting purposes, revenue is generally allocated to the segment that is responsible for the related project, regardless of the nature of the sales transaction, and it also includes inter-segment revenue. Segment contribution consists of total segment revenue offset only by expenses directly attributable to the segments. Expenses such as general and administrative costs, research and development activities, stock based compensation and other corporate costs that are included in determining our consolidated operating income are not allocated to the operating segments and therefore are not included in segment contribution.2004 compared with 2003. In 2003 the total impact of stock based compensation and settlements of stock-based compensation plans included in total operating expenses in the consolidated financial statements was€130.0 million compared to€35.9 million in 2002. Therefore, segment contribution is not indicative of the actual profitability margin for the operating segments.In 2003,€6.0 million (2002:€34.2 million) of exit costs related to unused lease space and severance payments were not allocated to the segments.Product segment. The product segment is primarily engaged As discussed in marketingNote 33 in “Item 18. Financial Statements”, through December 31, 2003, we accounted for internal sales and licensingtransfers between segments either on a cost basis or at estimated market prices, depending on the type of service provided. Effective January 1, 2004, in order to best manage the utilization of our software productsinternal resources, we started recording all internal sales and performing maintenance services. Maintenance services include technical supporttransfers based on fully loaded cost rates. We adjusted the management reporting of internal revenues such that internal sales and transfers are now reported as a cost reduction rather than internal revenues. This change in segment measures resulted in lower revenues and costs for the operating segments. We also adopted a new calculation of the segment contribution in 2004 such that acquisition related charges no longer burden a segment’s contribution. Although there have been no changes in the composition of operating segments or in reportable operating segments, our products, assistance in resolving software product issues, provision of user documentation, updatesoriginal segment disclosures for software products,2003 and new releases, versions and support packages. The product segment includes2002 have been presented along with revised information that conforms to the lines of business sales, marketing and service and support reflecting internal management responsibilities within our organization:•line of business sales is a profit center organization that covers software revenue and the corresponding sales resources;•line of business marketing is a cost center organization;•line of business service and support is a profit and cost center organization, based on the activity.Product segment.Product segment external revenue decreased by 0.5%0.02% from€5,270.04,805.3 million in 2002 to€5,246.34,797.8 million in 2003. On a constant currency basis, product segment revenue grew by 8%. Approximately 90%98% of revenues within the product segment are derived from software and maintenance revenue. Further external revenues in the product segment are derived from services revenue and other revenue. As noted above external software revenue as part of the total product segment revenue decreased by 6% from€2,266.5 in 2002 million to€2,131.3 million in 2003, (an increase of 1%)based on constant currencies. External maintenance revenues increased by 6% from€2,419.8 million in 2002 to€2,565.9 million in 2003, (an increase of 15%) based on constant currencies. Internal product segment revenues are mainly due to charges from the marketing and service and support organization roughly on the same level in 2003 as in 2002.Product segment expenses decreased from€2,584.32,110.0 million in 2002 to€2,322.61,862.7 million in 2003. Expenses of the line of business sales account for roughly half of the entire product segment expenses. Expenses of the line of business marketing are roughly less than one fourth and expenses of the line of business service & support are roughly more than one fourth of overall product segment expenses. The reduction of overall product segment expenses is mainly due to currency translation effects. In addition, reductions in volume have been achieved by decreasing travel, marketing and commissions paid for third parties’ products, a decrease of overall marketing spending and shifts of support activities into low cost locations. Product segment expenses include restructuring charges of approximately€1 million (2002:€6 million), primarily for severance payments.Product segment contribution increased by 9%8.9% from€2,685.72,695.4 million in 2002 to€2,923.72,935.1 million in 2003, or 55.7%61.2% of total segment revenue compared to 51.0%56.1% of total segment revenue in 2002. Based on a constant currency basis, product segment contribution increased by 15%. While we were able to keep product segment revenues relatively constant with other currencies devaluating against the€, the currency impact helped us to decrease product segment expenses, primarily relating to the U.S. operations. Our achievements in real cost cuttings, mainly in the area of commissions paid for third parties’ products, impacted the product segment contribution directly.45Consulting segment. The consulting segment is primarily engaged in the implementation of our software products. Consulting segment revenue decreased by 10%12% from€2,654.22,141.2 million in 2002 to€2,392.01,884.8 million in 2003. On constant currency, consulting segment revenue decreased by 4%. In addition to the currency impact, the reduced revenues are a reflection of very competitive and price-conscious market conditions with less engagements in price competitive segments by us. Additionally, the consulting organization has partially shifted its resources to more internal development projects than in previous years.Consulting segment expenses decreased by 9.5%11.6% from€2,128.41,632.0 million in 2002 to€1,927.11,442.4 million in 2002,2003, in line with the decrease in revenues. As noted above, we decreased the use of third party resources were reduced. In the contrary we made more use of our global consulting organization by sharing resources across the local organizations and the currency impacted segment expenses accordingly. Consulting segment expenses include a restructuring charge of approximately€1 million (2002:€8 million) for severance payments and unused lease space.Consulting segment contribution decreased by 11.8%13.1% from€525.8509.2 million (19.8%(23.8% of total consulting revenue) in 2002 to€464.9442.4 million (19.4%(23.5% of total consulting revenue) in 2003. Based on a constant currency basis, consulting segment contribution decreased by 3%. The flexible adoption of the cost structure led to a consistent segment profitability with decreased revenues. Accordingly, the decrease in revenues could be absorbed by reducing external partner resources.Training segment. The training segment is primarily engaged in providing educational services on the use of our software products and related topics for customers and partners. Training services include traditional classroom training at SAP training facilities, customer and partner specific training, end-user training as well as e-learning. Training segment external revenue decreased by 27% from€435.0 million in 2002 to€316.1 million in 2003. On a constant currency basis, external revenue decreased by 23%. The decrease was a result of an overall shrinking market, with local prices remaining at a constant level. At the beginning of 2003, companies seemed more focused on cutting costs than growing and maintaining employee skills. Depressed economic conditions led customers to hold back on traditional classroom training and the travel it involved. This decline in classroom training was partially offset by additional customer specific, end-user training, and e-learning.Training segment expenses decreased by 24%24.2% from 376.4292.7 million in 2002 to€287.5221.8 million in 2003. With decreased demand, the education-specific high percentage of fixed costs (primarily rent and personnel expenses) could not be reduced in the same manner. In addition, training segment expenses include a restructuring charge of approximately€9 million (2002:€1 million) for unused lease space.Training segment contribution decreased over proportional, by 34%33.8% from€142.6142.4 million (27.5%(32.7% of total training revenue) in 2002 to€94.694.3 million (24.8%(29.8% of total consulting revenue) in 2003. This is dueprimarily to the fact that the cost reduction of our training segment could not entirely compensate for the decline in customer demand and the restructuring charges primarily for unused lease space.2002 Compared With 2001Total RevenueAt the beginning of 2002 SAP expected a revenue growth of 15%OUTLOOK 2005Forecast for the year with all sales regions and revenue types (software, maintenance, consulting and training revenues) contributing positively. DuringGlobal Economy Notwithstanding the year this expectation was reduced due tofears expressed among some commentators about the weak global economieshigh oil prices and the strengtheningfaltering of the euroboom in relation toeastern Asia, the local currencies in the major geographic areas in which we operate. Based on realized results of the second quarter of 2002, our 2002 annualized growth expectations were reduced to 5% — 10% and after our third quarter 2002 results we reduced our 2002 annualized growth even further. Consequently we focused on increasing our operating margin. Total revenue increased from€7,340.8 million for 2001 to€7,412.8 million for 2002, representing an increase of€72.0 million or 1.0%. Foreign currency translation effects from the strengthening value of the euro during 2002 negatively impacted our total consolidated revenue by€420.2 million or 5.7%. The growth in 2002 total revenue was due to increases in product revenue of 0.3%, consulting revenue of 5.8% and a decrease in training revenue of 11.2% compared to 2001.46
The following discussion is based on how we allocate revenues for classification in our consolidated statements of income, which is dependent on the nature of the sales transaction regardless of the operating segment it was provided by:Product Revenue. Product revenue increased from€4,701.8 million in 2001 to€4,713.6 million in 2002, representing an increase of€11.8 million or 0.3%. Software revenue decreased from€2,580.5 million in 2001 to€2,290.8 million in 2002, representing a decrease of€289.7 million or 11.2%. For a summary of software revenue by solution in 2002 see “Item 4. Information about SAP — Description of the Business — Software Revenue by Solution.” Based on orders received versus revenue recognized, the installed customer base accounted for 77% of SAP’s 2002 signed software contracts, with the remaining 23% coming from new customers (68% for installed customer base and 32% for new customers in 2001). SAP faced the industry-wide trend away from fewer contracts for very large capital projects to an increased volume of smaller contracts. Maintenance revenue increased from€2,121.3 million in 2001 to€2,422.8 million in 2002, representing an increase of€301.5 million or 14.2%. With the increase of our installed base, this strong growth in maintenance revenue was due primarily to the growth of the 2001 software sales and positively affected by the additional software contracts closed during 2002. As a significant portion of our software sales are entered in the last quarter, the trend related to the increase in the respective maintenance revenue that follows in subsequent quartersglobal economy is expected to continue. The biggest contributorcontinue steadily (if less steeply) on its upward path during 2005. Interest is not expected to become a burden because rates are not expected to move significantly. A declining dollar becoming an appreciable inflationary factor in the increaseUnited States could even represent a slightly deflationary risk in maintenance revenues came fromother major economies such as Europe. In the sales region EMEA in 2002, due to strong software sales and lower foreign currency translation impact due toeyes of the weakened euro. Product revenue as a percentage of total revenue still remained relatively high at 63.6% in 2002. The slight decrease from 64.1% in 2001 was due primarily to the 11.2% decline of software revenueOECD and the 5.8% growth in our consulting revenue.Service Revenue. Service revenue increased by€69.0 million, or 2.7%, from€2,549.1 million for 2001 to€2,618.1 million for 2002. Consulting revenue increased from€2,082.9 million in 2001 to€2,204.2 million in 2002, representing an increase of 5.8% compared toIMF, the extremely strong revenue growth of 27% in 2001 over 2000.opposing economic currents would broadly cancel one another out at the global level. The difference in growth results mainly from the different hiring pace. While our consulting workforce grew significantly in 2001, there was almost no growth in 2002. In regards to the subcontracting of third party consultants, the level as a percentage of sales remained in 2002 compared to 2001 relatively stable. Consulting revenue as a percentage of total revenue increased from 28.4% in 2001 to 29.7% in 2002. With decreasing rates in the consulting business, the increase was primarily due toIMF’s economists anticipate an increase in utilization ratesgross world product of our own consultant, supported by the establishment of a Global Consulting Organization, which addresses the consulting needs of major multinational corporations and leverages the utilization of consultants across countries and regions. The increase4.3% in software sales in 2001 also had a positive impact on consulting revenues in 2002. Furthermore, in 2002 a significant portion of our consulting revenue was generated by sub-contracted external consultants.Training revenue decreased by 11.2% from€466.2 million in 2001 to€413.9 million in 2002. This decrease was a result of an overall shrinking market and the changed demand structure. Customers were willing to invest less in classical classroom training and became more reluctant to travel to training facilities of classroom training providers. The strong decrease in classroom training was partly offset by customer specific and end user trainings.47Total Operating ExpensesTotal operating expenses decreased from€6,028.4 million for 2001 to€5,787.2 million for 2002, representing a decrease of€241.2 million or 4.0%. This was achieved by the stringent cost management measures that SAP introduced in 2001 and accelerated during 2002 as the growth expectations were reduced in order to achieve the targeted margin improvement. While total operating expenses in the first half of 2002 increased by 5%, they were reduced by 12% in the second half of 2002 compared to the same period of 2001 leading to the overall reduction of 4%. The reduction in overall costs was achieved without significant reduction in our employee workforce. Instead, the successful result was achieved by a restrained hiring policy, cuts in variable compensation, reassignment of outsourced development work to internal resources, and tight control of other expenses including travel expenses. We achieved further economies by simplifying our global infrastructure, renegotiating vendor contracts to improve efficiency, and general streamlining processes. As in previous years, the biggest component of our operating expenses was our personnel cost. In 2002, operating expenses of€9 million for stock-based compensation were 86% lower than in 2001. Total personnel expenses in 2002 including stock-based compensation were€2,965 million, a 2% increase over 2001. This moderate increase was primarily due to our restrained hiring policy and positive impact of foreign currency translation effects due to the strengthened euro. While in the first half of 2002 the number of full time equivalents increased by 944, the number of fulltime equivalents was reduced by 557 in the second half of 2002 following a cautious hiring policy in the first half versus a stringent hiring freeze in the second half of 2002.As a result of our strict cost reduction measures, operating income increased by 24% in 2002 to€1,626 million. The gross operating margin increased to 22% in 2002 from 18% in 2001.Pro forma operating incomeAt the beginning of 2002 SAP’s target was to improve its pro forma operating margin (excluding expenses for stock-based compensation and TopTier acquisition-related charges) from 20% to at least 21%. Pro forma operating income (excluding expenses for stock-based compensation and TopTier acquisition-related charges) rose 18% in 2002 to€1,686 million, resulting in a pro forma operating margin of 22.7% — significantly exceeding our target despite the poor economic environment. Pro forma operating expenses (excluding expenses for stock-based compensation and TopTier acquisition-related charges) in 2002 were reduced by 2% in comparison with the previous year, to€5,727 million.A reconciliation from U.S. GAAP operating income to pro forma operating income is as follows: 2002 2001 (in millions of€) U.S. GAAP Operating income 1,626 1,312 Amortization of intangible assets 24 18 In process research and development 0 6 Amortization of goodwill 0 37 Total TopTier related acquisition costs 24 61 STAR Plan 1 50 LTI 2000 Plan 8 14 Settlement of stock-based compensation plans in the context of mergers and acquisitions 27 34 Total stock-based compensation 36 98 Pro forma operating income excluding stock-based compensation and TopTier acquisition costs 1,686 1,471 Cost of Product.Cost of product decreased by 3.0% from€887.4 million for 2001 to€860.4 million for 2002. As a percentage of product revenue, cost of product decreased from 18.9% in 2001 to 18.3% in 2002. This efficiency was achieved through a reduction of commissions paid for third parties’ products as contracts were renegotiated. Although the number of installations steadily increased during 2002, the increase in product related48support was lower than in 2001. Included in cost of products are€0.8 million and€8.4 million bad debt expenses for 2002 and 2001, respectively.Cost of Services.Cost of services decreased by 0.5% from€1,965.0 million for 2001 to€1,955.8 million for 2002. As a percentage of service revenue, cost of services decreased to 74.7% in 2002 from 77.1% in 2001 as the overall service profitability increased. While third party expenses remained relatively stable, the average headcount in consulting increased only moderately. The increase in consulting revenue and utilization rates as noted above resulted in a profitability increase. Our training profitability decreased, because the shortfall in our training revenues as described above could not be completely offset by our reduction in our training infrastructure. Included in cost of services are€5.1 million and€4.8 million bad debt expenses for 2002 and 2001, respectively.Research and Development.Research and development expenses increased by€11.1 million, or 1.2%, from€898.3 million in 2001 to€909.4 million in 2002. As a percentage of total revenue, research and development expenses increased from 12.2% for 2001 to 12.3% for 2002. The number of research and development employees increased from 7,665 in 2001 to 8,173 in 2002, representing an increase of 6.6%. The percentage of employees working in the research and development department compared to total employees increased to 27.8% for 2002 from 26.5% in 2001. The primary reason for the increase of research and development expenses in 2002 compared to 2001 is the increase in headcount during 2002. The increase in expenses is lower than what could be expected due to the increase in employees because of our ongoing replacement of outsourced development activities to our in-house resources.Sales and Marketing.Sales and marketing expenses decreased by 9.5% from€1,797.6 million for 2001 to€1,627.2 million for 2002, representing 24.5% and 22.0% of total revenue, respectively. The primary reasons for the reduction were synergies caused by our reintegration of SAP Markets and SAP Portals operations, selected adjustments of the sales workforce which were dependent on the results achieved during the year, and cuts in advertising and sponsoring expenditures. The number of employees in sales and marketing grew by 1.4% from 5,071 in 2001 to 5,143 in 2002. Included in sales and marketing expenses are€7.2 million and€21.0 million bad debt expenses for 2002 and 2001, respectively.General and administrative.General and administrative expenses increased by 3.4% from€386.0 million for 2001 to€399.3 million for 2002, representing 5.3% and 5.4% of total revenue, respectively. During 2002 we took steps to substantially reduce our general and administrative costs, however, these savings were largely offset by additional charges for our internal restructuring measures. Included in general and administrative expenses are€0.8 million and€2.7 million bad debt expenses for 2002 and 2001, respectively.Other operating expenses, net.Other operating expenses, net decreased by 62.7% from€94.2 million for 2001 to€35.1 million for 2002. The primary reason for the decrease was the application of SFAS 142 in 2002. As a result of the adoption of SFAS 142, we no longer amortize goodwill and, therefore, unless goodwill is found to be impaired in the future, it no longer affects net income. In 2002, other operating expenses, net included restructuring charges of€46.1 million related to on-going employee termination costs in the United States. The majority of these termination costs were paid during 2002 and the remaining portion of these costs, approximating€13.0 million are expected to be paid in the first quarter of 2003.The following table summarizes the expenses incurred in connection with our 2001 and 2002 exit activities, and the related obligations as of December 31, 2001 and 2002: 2002 Balance Balance as of 01/01 Expenses Payments Currency as of 31/12 € (000) € (000) € (000) € (000) € (000) Unused lease space 2,874 12,960 (7,262 ) (995 ) 7,577 Severance payments 10,121 33,148 (30,739 ) (1,371 ) 11,159 in number of employees 768 Total 12,995 46,108 (38,001 ) (2,366 ) 18,736 49 2001 Balance Balance as of 01/01 Expenses Payments Currency as of 31/12 € (000) € (000) € (000) € (000) € (000) Unused lease space 0 2,840 (0 ) 34 2,874 Severance payments 0 10,796 (795 ) 120 10,121 in number of employees 322 Total 0 13,636 (795 ) 154 12,995 Customer credit loss risks based on aging of the receivables are classified as general bad debt expense as a component of other operating expense, net. For the year ended December 31, 2002 €5.3 million was recorded as other operating income due to our decreased days sales outstanding. In 2001,€14.7 million was recorded as other operating expense primarily due to adjustments in the allowance based on the length of time by considering trends within and ratios involving the age of the accounts receivable.Financial Expense, NetFinancial expense, net increased from€233.0 million for 2001 to€555.3 million for 2002, an increase of€322.3 million. The primary reason for this increase was the “other than temporary” impairment charge of€297.6 million recognized in the second quarter of 2002 to write-down the carrying value of our equity method investment in Commence One to its estimated realizable value. Our equity in the net losses of Commerce One was€161.6 million in 2001 and€92.0 million in 2002. The carrying value of our total investments in Commerce One has been reduced to zero as of December 31, 2002 as a result of the recognition of the impairment charge and through the subsequent continuing application of the equity method of accounting. In accordance with U.S. GAAP, the application of the equity method has been suspended and we will not recognize any additional losses related to our interest in Commerce One as we have not guaranteed any of their obligations nor are we otherwise committed to provide Commerce One with further financial support. Also during 2002 other minority investments were written down to their respective fair values since the decline in their respective values were also deemed to be other than temporary. The investments were made primarily from SAP’s venture capital activities. The amount of impairment charges on minority investments plus our share in the net losses of these equity method investees other than Commerce One totaled€128.1 million in 2002 and€72.5 million in 2001.Income TaxesOur effective income tax rate increased from 44.6% for 2001 to 53.8% in 2002. This increase was primarily attributable to the€389.6 million loss associated with our investment in Commerce One and€98.5 million loss of impairment charges for other investments, which are not deductible for tax-purposes. Further, as a result of new German tax legislation enacted in 2002, an incremental income tax charge of€1.6 million was recognized. Adjusted for the affects of these and other unusual items, the adjusted effective tax rate for 2002 was 36.7%, which was 1.3 percentage points lower than the adjusted effective tax rate for 2001. See Note 11 to our consolidated financial statements.Net IncomeNet income decreased from€581.1 million in 2001 to€508.6 million in 2002, representing a decrease of€72.5 million or 12.5%. Net income as a percentage of total revenue decreased from 7.9% for 2001 to 6.9% for 2002. This decrease was primarily due to the impairment charge of€297.6 million related to the write-down of the carrying value of our investment in Commerce One, the negative foreign currency translation effects resulting from the strengthening euro (€88.8 million) and the incremental restructuring costs (€32.5 million pretax) partially offset by cost reductions in our sales and marketing activities (€170.3 million pretax) and the net increase in foreign currency transactions gains (€41.0 million pretax). Basic and diluted earnings per share were€1.62 in 2002 compared to€1.85 in 2001. In accordance with the new U.S. accounting standard, SFAS 142, amortization of goodwill no longer affects our net income. If we had been able to apply this standard from January 1, 2001, our reported net income for502001 would have been€66.0 million higher and our reported basic and diluted earnings per share would have been increased by€0.21.Segment DiscussionIn 2002,€34.2 million (2001:€9.2 million) of exit costs related to unused lease space and severance payments were not allocated to SAP’s segments.Product-segment revenue decreased from€5,299.9 million in 2001 to€5,270.0 million in 2002, or 0.4%. This slight decline is primarily attributable to the decrease in our software product sales offset by the increase in maintenance revenue, as discussed above. Furthermore, foreign currency translation has affected our revenue negatively. Segment contribution increased from€2,424.1 million (45.7% of total segment revenue) in 2001 to€2,685.7 million (51.0% of total segment revenue) in 2002. This increase in contribution and in margin in 2002 was achieved through our reduction in expenses related to sales, marketing and commissions paid for third parties’ products.Consulting-segment revenue increased from€2,458.3 million in 2001 to€2,654.2 million in 2002, or 8.0%. The increase in software sales in 2001 had a positive impact on consulting revenue in 2002. Further, we were able to increase the utilization rates of our own consultants, which was supported by the establishment of our Global PSO as discussed above. Segment contribution increased from€424.2 million (17.3% of total consulting revenue) in 2001 to€525.8 million (19.8% of total consulting revenue) in 2002. This increase in contribution and in margin is primarily due to the increase in external revenues and the increase in utilization of our own consultants.Training-segment revenue decreased from€598.3 million in 2001 to€519.0 million in 2002, or 13.2%. This decrease was a result of an overall shrinking market and the changed customer demand structure. Customers became less willing to invest in traditional classroom training and were more reluctant to travel to training facilities. This decline in classroom training was partially offset by additional customer specific and end user training. Segment contribution decreased from€179.3 million (30.0% of total training revenue) in 2001 to€142.6 million (27.5% of total training revenue) in 2002. This decrease in contribution and in margin is due to the decrease in external revenues and the fact that the cost reduction of our training segment could not entirely compensate for this decline in customer demand.Outlook 2004Modest growth— Surveys by various industry analysts aboutIndustry researchers are expecting the modest growth in the IT investments planned for the yearsector to continue substantially unchanged through 2005. For example, U.S. investment bank Goldman Sachs’s study expects spending on hardware and software to grow by between 3% and 5% in 2005, which is a similar level of growth to that in 2004. The sector analysts at Gartner foresee a global increase in IT spending of around 5% in 2005.Focal areas — Morgan Stanley’s forecasts show that the small and midsize business software category is a special case. Small and midsize businesses as a class have a pressing need to make up ground, so IT industry is cautiously optimistic at the startanalysts are predicting 5% to 10% annual growth in that segment. However, IDC Research expects growth of the new year. Most surveys forecast an above-average increasestotal business software market to be limited to some 5% in spending on software and services in 2004.Experts predict a number of focal areas — Industry experts believe several specific solutions and technologies such as Business Intelligence (BI), Web Services, Analysis Software, Customer Relationship Management (CRM) and Project Lifecycle management (PLM) to have particular potential for growth in 2004.IT industry expected to consolidate further — The IT industry is expected to continue to consolidate in 2004. Smaller software vendors will increasingly function as providers of niche products. According to a study from December 2003, analysts at Gartner Group have calculated that, within the next two years, over half of the listed IT companies will be acquired by a few, large companies.Forecast for SAPStrategically positioned for 2005 — We believe we are well positioned as fiscal year 2005 gets under way. This is because in 2004 — We also believe thatour software revenue growth climbed back into double digits and we won peer group share, and because of our clearly defined solution strategy for the economy bottomed out in 2003 and expect a gradual improvement to the economic conditions and the investment climate in 2004.Five strategic priorities for 2004 — The Executive Board has set five strategic priorities for SAP in 2004. These priorities are based on the assumption that the economy bottomed out in 2003 and that a gradual improvement in the economy in which we operate and in the economy in general will occur during 2004.51•We will focus on growth and, in particular on growth in software sales. The aim is to make the most of the economic upturn.•We will focus in particular on SAP NetWeaver. We want to establish this solution as our main integration and application platform. The aim is to gain as many NetWeaver reference customers as possible in 2004.•mySAP ERP will be another focus. We want to make it clear to customers that mySAP ERP is a clear improvement on its predecessor SAP R/3.•The success of mySAP CRM in previous years should continue. We want to encourage strong sales of this solution and thus reinforce its leading position in the CRM segment.•In the small and mid-market segment, we want to increase the number of customers and expand our partner network for indirect sales. In particular, we want to grow our segment share in the EMEA and Americas regions and enlarge the partner network in the Asia/Pacific region.Operational goals of increasing software revenue and profitability — as discussed in Item 4. “Information about SAP — Strategy”, one of the strategic priorities for SAP in 2005 is a focus on revenue growth, and in particular, on growth in software sales.Anticipating growth both in the economy as a whole and in the IT industry in particular, and based on our strategic position, we have set the following operational goals for 2004.2005. We will strive to post double-digit software revenue growth for the second year in a row and thus win more peer group share again compared to 2004 — and outperform the growth of the overall IT industry. Our priority will be revenue growth — in particular software revenue — in 2004. We will work to increase software revenue 10% over2005. At the 2003 number. We expect above-average growth rates in the United States and the Asia/Pacific region with an improvement in the EMEA region over the coursebeginning of the year. The financial services and public services industries should see above-average growth. We also expects significant growth from business with small and mid-market customers.year, we published the following outlook for fiscal year 2005:• We expect software revenue to increase in a range of 10%-12% compared to 2004. The growth would be driven by the Americas and Asia-Pacific. • We expect the pro-forma operating margin, which excludes stock-based compensation and acquisition-related charges, to increase in a range of 0.0-0.5 percentage points compared to 2004. • We expect pro-forma earnings per share, which exclude stock-based compensation, acquisition-related charges, and impairment-related charges, to be in the range of€4.70 to€4.80 per share. We assume the effective tax rate will be under 36%. Although we are giving priority to growth in 2004, we want to continue with stringent cost management measures and further increase profitability. We provided guidance that we will work to increase pro forma operating margin (excluding stock-based compensation and acquisition related changes) to increase by one percentage point, compared to the 27% achieved in 2003.63 To achieve this growth in revenue and earnings, we plan to invest more in 20042005 than in the previous year. These investments will focus on driving forward development of our Business Process Platform and the product offering, continuing the alignment to volume business, and reinforcing sales and marketing. It is not intended that investment will cause pro forma operating margin to decline. As in previous years, the major portion of the planned investment is earmarked for new hires, who would be taken on as needed to meet actual requirements. If the year especially2005 unfolds as expected, some 3,000 full-time equivalents (FTEs) would be added to the total headcount. Some 20% of the new positions would be in sales, marketing, research, and development. Total headcount is predictedGermany, underscoring our dedication to grow approximately 5%, with growth rates being higher in countries other than Germany. To further optimize our cost structure, we expectGermany as a place to do business. We anticipate that a significant proportion of the new research and development jobs towill be located in India and China, without reducing headcountnumbers in other locations. The numberoutlook for revenue and earnings takes into account the likely developments in the different currencies that affect our business. We are working on the basis of employeesan average exchange rate of U.S.$1.30 =€1.00. The operational outlook is also expected to increase in the United States. These operational goals are basedpremised on the expected improvements toexpectations that the economic situation as well as a number of other assumptions. These include the expectationeconomy will be stable and that the buying behavior of customers will conform to the usual seasonal pattern, with revenue at its strongest in the fourth quarter. We also assume that, in 2004, customers will continue to invest in smaller projects with short implementation cycles rather than in large projects lasting several years. We do however expect average software contract order entry volumes to stabilize over the course of the year and thus not decrease as much as they did in 2003.The targets for revenue and earnings take into account the likely development of the different currencies that affect our business. We are working on the basis of an average exchange rate of U.S.$1.25 =€1.00.Strategy with regard to acquisitions — We view the acquisition of companies as a key element of future growth. In particular, we intend to acquire smaller companies with the specific aims of strengthening our geographic reach, broadening our offering in particular industries and complementing our technology portfolios.Risk Factors The stated revenue, income, and margin targets of SAP for fiscal year 20042005 are subject to a number of risks, over which we may have no influence or only limited influence. This outlook should be read in connection with the more detailed discussion and analysis of our financial condition and results of operations in this Item 5, “Item 3. Key Information — Risk Factors,” and “Item 18. Financial Statements.”52Foreign Currency Exchange Rate ExposureFOREIGN CURRENCY EXCHANGE RATE EXPOSURE Although our reporting currency is the euro, a significant portion of our business is nevertheless conducted in currencies other than the euro. International sales are primarily made through our subsidiaries in the respective regions and are generally denominated in the local currency, although in certain countries where foreign currency exchange rate exposure is considered high, some sales may be denominated in euro or U.S. dollars. Expenses incurred by the subsidiaries are generally denominated in the local currency. Accordingly, the functional currency of our subsidiaries is generally the local currency. Therefore, movements in the foreign currency exchange rates between the euro, and the respective local currencies to which our subsidiaries in countries that do not participate in the EMU are exposed, may materially affect our consolidated financial position, results of operations and cash flows. In general, appreciation of the euro relative to another currency has a negative effect on our results of operations, while depreciation of the euro has a positive effect. As a consequence, period-to-period changes in the average exchange rate in a particular currency can significantly affect our revenue, operating results and operating results.net income. The principal currencies in which our subsidiaries conduct business that are subject to the risks described in this paragraph are the U.S. dollar, the Japanese yen, the British pound, the Swiss franc, the Brazilian real, the Canadian dollar and the Australian dollar.Approximately 59.3%59.7% of our consolidated revenue in 20032004 and approximately 60.4%59.3% in 20022003 was attributable to operations in non-EMU participating countries and such revenues had to be translated into euros for financial reporting purposes. Fluctuations in the value of the euro had (negative)negative effects on our consolidated revenue of€(235.8) million, income before income taxes of€(87) million and net income of€(74.3) million for 2004 and consolidated revenue of€(577.3) million, income before income taxes of€(174.0) million and net income of€(151.1) million for 2003 and consolidated revenue of€(348.2) million, income before income taxes of€(109.9) million and net income of€(88.8) million for 2002.2003. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk — Foreign Currency Risk.”Critical Accounting PoliciesCRITICAL ACCOUNTING POLICIES Our consolidated financial statements are prepared based on the accounting policies described in Note 3 to our consolidated financial statements in “Item 18. Financial Statements” in this Annual Report on Form 20-F. The application of such policies may require management to make significant estimates and assumptions. We believe that the following are our more critical accounting estimates used in the preparation of our consolidated financial statements that could have a significant impact on our future consolidated results of operations and financial position: • Revenue Recognition; • Valuation of Accounts Receivable; • Accounting for Stock Based Compensation; • Accounting for Income Taxes and Other Income Tax Related Judgments; and • Realizability of Strategic and Venture Capital Investments. Please refer to Note 3 to the accompanying financial statements in “Item 18. Financial Statements” for further discussion of SAP’s accounting policies.Revenue Recognition Substantially all of our revenues are derived from the licensing of our software products and the sale of related maintenance, consulting, and training services. Our standard license agreement provides a perpetual license to use our products based on the number of licensed users. We may license our software in multiple element arrangements if the customer purchases any combination of maintenance, consulting, or training services in conjunction with the software license. We recognize revenue pursuant to the requirements of AICPA Statement of Position (“SOP”) 97-2 “Software Revenue Recognition” (“SOP 97-2”), as amended by SOP 98-9 “Software Revenue Recognition, With Respect to Certain Transactions,” “SOP 81-1,” “Accounting for Performance of Construction-type and53Certain Production-type Contracts,” the SEC’s Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” Emerging Issues Task Force (“EITF”) 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”), EITF 03-05, “Applicability of AICPA Statement of Position 97-2,” “Software Revenue Recognition”, to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software,” and other authoritative accounting guidance. We recognize revenue using the residual method when SAP-specific objective evidence of fair value exists for all of the undelivered elements in the arrangement, but does not exist for one or more delivered elements. We allocate revenue to each undelivered element based on its respective fair value determined by the price charged when that element is sold separately or, for elements not yet sold separately, the price established by SAP management if it is probable that the price will not change before the element is sold separately. We defer revenue for the undelivered elements and recognize the residual amount of the arrangement fee, if any, when the basic criteria in SOP 97-2 have been met. If an undelivered element is not sold separately and management has not yet established a price for the undelivered element that won’twill not change before the element is sold separately, revenues for all elements are deferred until the delivery criteria have been satisfied. Under SOP 97-2, provided that the arrangement does not require significant production, modification, or customization of the software, we recognize revenue when the following four criteria have been met:1.persuasive evidence of an arrangement exists;2.delivery has occurred;3.the fee is fixed or determinable; and4.collectibility is probable. 1. persuasive evidence of an arrangement exists; 2. delivery has occurred; 3. the fee is fixed or determinable; and 4. collectibility is probable. If at the outset of an arrangement we determine that the arrangement fee is not fixed or determinable, revenue is deferred until the arrangement fee becomes due and payable by the customer, assuming all other revenue recognition criteria have been met. If at the outset of an arrangement we determine that collectibility is not probable, revenue is deferred until payment is received. If an arrangement allows for customer acceptance of the software or services, we defer revenue recognition until the earlier of customer acceptance or when the acceptance right lapses. The Company occasionally licenses software for a specified time period. Revenue for short term time-based licenses, which generally include maintenance during the license period, is recognized ratably over the license term. Revenue for multi-year time-based licenses that include maintenance, whether separately priced or not, are recognized ratably over the license term unless a substantive maintenance renewal rate exists, in which case the residual amount is recognized as software revenue when the basic criteria in SOP 97-2 have been met. For arrangements with resellers, we consider the factors outlined in SOP 97-2 in assessing whether the fee is fixed or determinable and whether the collectibility criteria for revenue recognition have been met. We believe that transactions involving resellers that license software prior to having finalized non-contingent agreements with their ultimate customer, even if no contingencies exist in our license with the reseller, present a higher uncertainty regarding fixed or determinable fees and collectibility. As a result, we believe revenue recognition upon “sell-through” from the reseller to the end-user customer is appropriate for all agreements involving resellers. We view our resellers as an extension of our direct sales force. Notwithstanding our resellers’ involvement, we generally try to enter into binding license agreements directly with the end-user customer (i.e., the reseller’s role is similar to a salesperson’s role).customer. If we are unable to enter into a binding license agreement directly with an end-user customer, or if we become aware that a reseller has granted contingent rights to an end-user customer, we defer revenue recognition until a valid license agreement has been entered into without contingencies or, if applicable, until the contingencies expire. We recognize revenue when the software is delivered (assuming all other revenue recognition criteria have been met). Based on a few individual agreements with certain of our resellers, we, rather than the reseller may deliver the product directly to the end user. Depending on the country in which the maintenance agreement is executed, our initial maintenance term is generally in the range of one to three years, renewable by the customer on an annual basis thereafter. The maintenance fee, including the fee for subsequent renewals, is typically established based on a specified percentage of the license fee paid by the customer. Our customers typically prepay maintenance for periods of three to twelve months. Maintenance revenues are deferred and recognized ratably over the term of the maintenance contract. If a customer on maintenance is specifically identified as a bad debtor, we cease recognizing maintenance revenue except to the extent that maintenance fees have already been collected.54 Our For time-based licenses, SAP allocates a portion of the arrangement fee to maintenance revenue based on the estimated fair value of the maintenance. In multiple-element arrangements involving software and consulting, and training or other services that are not essential to the functionality of the software, the service revenues are accounted for separately fromthe license revenues in situations when the services are deemed not to be essential to the functionality of the software.software revenues. Consulting, training and trainingother service revenues are recognized as the services are performed, generally on a time and materials basis. Consulting revenues attributed to fixed price arrangements are recognized using the percentage of completion method based on direct labor costs incurred to date as a percentage of total estimated direct labor costs to complete the project. Consulting services primarily comprise implementation support related to the installation and configuration of our products and do not typically require significant production, modification, or customization of the software. In arrangements that require significant production, modification, or customization of the software and where services are not available from third party suppliers, the consulting and license fees are recognized, depending on the fee structure, on a time and materials basis or using the percentage of completion method. When total cost estimates exceed revenues in a fixed price arrangement, the estimated losses are recognized immediately based upon an average fully burdened daily cost rate applicable to the consulting organization delivering the services. The assumptions, risks, and uncertainties inherent in the application of the percentage of completion method affect the amounts and timing of revenue and related expenses reported. Numerous internal and external factors can affect estimates, including direct labor rates, utilization, and efficiency variances. For arrangements involvingwhere we provide software hosting services, when all other revenue recognition criteria have been met, we recognize productsoftware revenue upon delivery of a software license key and hosting revenue over the hosting period unless: • the customer cannot take possession of the software at any time during the hosting period without significant penalty; or • the customer cannot contract with another hosting provider without significant effort or expenditure; or • the software’s functionality is compromised by the termination of our hosting services. Under these circumstances, we recognize all revenue under the arrangement ratably over the longer of the hosting period or the maintenance period. Hosting revenues recognized to date have not been significant. We believe that our accounting estimates to applyused in applying our revenue recognition policies are critical because: • the determination that it is probable that the customer will pay for the products and services purchased is inherently judgmental; • the allocation of proceeds to certain elements in multiple-element arrangements is complex; • the determination of whether a service is essential to the functionality of the software is complex; • establishing company-specific fair values of elements in multiple-element arrangements requires adjustments from time-to-time to reflect recent prices charged when each element is sold separately; and • the determination of the stage of completion for certain consulting arrangements is complex. Changes in the aforementioned items could have a material effect on the type and timing of revenue recognized.20032004 and 2002. Historically, SAP-specific objective evidence of fair value for certain undelivered elements in multiple-element arrangements has been determined on an enterprise-wide or country-wide basis, depending on the nature of the undelivered element. As economic conditions change in certain geographic locations in which we operate, we may need to modify our business practices in individual locations or worldwide, and future SAP-specific objective evidence of fair value for such undelivered elements may deviate from historical fair values. Consequently, the percentages and the amounts of the different types of revenue recognized in thefuture for multiple-element arrangements involving software could differ significantly from historical trends and could materially impact our reported revenues, results of operations and financial position in the future.55Valuation of Accounts ReceivableTrade accounts receivable are recorded at the invoiced amount and do not bear interest. Total accounts receivable at December 31, 20032004 and 20022003 were€1,770.71,929.1 million and€1,967.11,770.7 million, respectively, which is net of an allowance for bad debts of€63.4 million in 2004 and€71.0 million and€92.5 million,in 2003, respectively. Included in accounts receivable are unbilled receivables related to costs and estimated earnings in excess of billings on uncompleted fixed fee consulting arrangements of€105.5135.2 million and€182.7105.5 million at December 31, 20032004 and 2002,2003, respectively. The allowance for doubtful accounts represents our best estimate of the amount of probable credit losses in our existing accounts receivable portfolio. We base our estimate on a systematic, ongoing review and evaluation which we perform every month. As part of this evaluation, we determine the allowance for doubtful accounts after giving consideration to specific customer risks, regional economic risks and the length of time certain accounts receivable have been outstanding. Account balances are charged off against the allowance after all reasonable means of collection have been exhausted and the potential for recovery is considered remote. If the financial condition of our customers deteriorates, impairing their ability to make payments, we may need to establish additional allowances in excess of our original estimates.Total provisions for allowances for doubtful accounts charged to earnings approximated net€1.7 million,€7.0 million and€7.6 million and€52.7 million during 2004, 2003 2002 and 2001,2002, respectively. Specific customer credit loss risks are charged to the respective functional cost category of product or cost of service sold. Customer credit loss risks based on aging of the receivables are classified as general bad debt expense, which is included in “Other operating income/(expense)” as disclosed in Note 7 of “Item 18. Financial Statements.”Total provisions Charges for allowances for doubtful accounts charged to the respective functional cost category of product or cost of service sold approximated€12.3 million,€12.9 million and€38.0 million during 2003, 2002, and 2001, respectively.The allowances for doubtful accounts based on total accounts receivable that are considered past due are recordedcredit loss risks were as a component of other operating expense, net. For the years ended December 31, 2003 and 2002,€5.4 million and€5.3 million were recorded as other operating income, respectively, due to our decreased days sales outstanding. In 2001,€14.7 million was recorded as other operating expense primarily due to adjustments in the allowance based on the length of time by considering trends within and ratios involving the age of the accounts receivable.follows: 2004 2003 2002 € (mio) € (mio) € (mio) Specific customer credit loss risks 0.0 12.4 12.9 Customer credit loss risks based on aging of the receivables 1.7 (5.4 ) (5.3 ) Total provisions for allowances for doubtful accounts charged to earnings 1.7 7.0 7.6 Accounts receivable written-off against the allowance for doubtful accounts approximated€7.7 million,€22.9 million, and€21.2 million and€19.2 million during 2004, 2003, and 2002, and 2001, respectively. We believe that the accounting estimate related to the establishment of the allowance for doubtful accounts is a critical accounting policy because the assessment of whether a receivable is collectible is inherently judgmental and requires the use of assumptions about customer defaults that could change significantly and because changes in our estimates about the allowance for doubtful accounts could materially impact the reported assets and expenses in our financial statements. However, the recognition of allowances for doubtful accounts initially has no impact on our reported cash flows, our liquidity and capital resources and netresources. Net income could be adversely affected if actual credit losses exceed our estimates.Accounting for Stock-Based Compensation As further explained in Note 2423 to the consolidated financial statements in “Item 18. Financial Statements”, SAP has several stock-based compensation plans. We currently apply the intrinsic-value-based method of accounting for employee stock-based compensation prescribed by Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations. Under this method we recognize compensation expense only if awards are granted with an exercise price that is not fixed or less thanbelow the fair value of our ordinary shares on the date of grant. Statement of FinancialAccounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) and SFAS No. 148, Accounting“Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123,” established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As permitted by existing accounting standards, we have elected to continue to apply the intrinsic-value-basedintrinsic- value-based method of accounting described above, and we have adopted the disclosure requirements of SFAS 123 and SFAS 148. The summary of significant accounting policies in Note 3 to our consolidated financial56statements provides the required pro forma effects on our reported net income for 2004, 2003 2002 and 20012002 as if the fair-value-based method was used to recognize compensation expense as follows:Net Income 2003 2002 2001 2004 2003 2002 €(000) €(000) €(000) € (mio) € (mio) € (mio) As reported 1,077,063 508,614 581,136 1,310,521 1,077,063 508,614 Add: Expense for stock-based compensation, net of tax according to APB 25 85,700 5,600 40,357 Deduct: Expense for stock-based compensation, net of tax according to FAS 123 205,109 138,203 131,272 Add: Expense for stock-based compensation, net of tax according to APB 25. 23,445 85,700 5,600 Deduct: Expense for stock-based compensation, net of tax according to FAS 123. 181,323 205,109 138,203 Pro forma 957,654 376,011 490,221 1,152,643 957,654 376,011 Earnings per sharePer Share 2003 2002 2001 2004 2003 2002 € € € € (mio) € (mio) € (mio) Basic — as reported 3.47 1.62 1.85 4,22 3.47 1.62 Diluted — as reported 3.46 1.62 1.85 4,20 3.46 1.62 Basic — pro forma 3.08 1.20 1.56 3,71 3.08 1.20 Diluted — pro forma 3.08 1.20 1.56 3,70 3.08 1.20 We use the Black-Scholes valuation model to estimate the fair value of itsour stock options. As described in Note 2423 to the consolidated financial statements, this valuation model requires that we use a number of assumptions, including expected future stock price volatility and expected option life (which represents our estimate of the average amount of time remaining until the options are exercised or expire unexercised). Expected future stock price volatility is estimated based upon historical stock price movements over the most recent period equal to the expected option life. Expected option life is based on the vesting period, the expected volatility of the underlying stock and on actual exercise activity related to previous option grants. Additionally, our share price on the date of grant influences the option value. Notwithstanding that the exercise price of most options equals or is connected to the quoted market price of our stock on the grant date, the higher the share price the higher the option value. In accordance with fixed-plan accounting under APB 25, changes in the option value after the grant date do not impact compensation expense. We intend to continue using stock-based compensation awards to attract and retain senior managers and selectedselect employees. Because it is expected that changesAs discussed in accounting standardsNote 3 in “Item 18. Financial Statements”, the adoption of SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”), in the third quarter of 2005 will eventually require that stock-based awards be accounted for at fair value, rather than intrinsic value, and because such changes wouldthis change will adversely affecteffect our results of operations, and because that adverse effect could be material, we believe the estimates to determine and disclose the pro forma effects of our stock based compensation arrangements in our consolidated financial statements are critical. The above presented pro forma effects on reported net income as if the fair-value-based method was used to recognize compensation expense are not necessarily indicative of the impact the adoption of SFAS 123R will have on our future reported net income. If our stock price, theGoldman Sachs Software Index and the US dollar to euro exchange rate remained unchanged in 2005 from the respective values at December 31, 2004, based on the share-based compensation awards issued and outstanding as of December 31, 2004 and the additional awards approved for grant as of March 1, 2005, we expect the adoption of SFAS 123R on July 1, 2005 would result in approximately€70 million of additional compensation expense in the second half of 2005 compared to what would be expensed under APB 25. For purposes of determining the estimated fair value of our stock options, we believe expected volatility is the most sensitive assumption. For our LTI 2000 Plan we used an expected volatility of 50% as a weighted average assumption, based on information that is specific to SAP provided by three independent financial institutions. Because the estimated life of awards under the SOP 2002 is shorter than under the LTI 2000 Plan, the fair value of awards granted under our SOP 2002 in 20032004 was calculated based on a expected volatility of 68%57%. Changes in the volatility assumption could significantly impact the estimated fair values calculated by the Black-Scholes valuation model and, consequently, the required pro forma information reported in our consolidated financial statements. Further, if accounting standards are changed to require that a different valuation model to be used to calculate the fair value of stock options, the pro forma information reported may prove to not be indicative of the actual expenses to be recognized in our consolidated financial statements.57The trading prices of our ordinary shares have experienced and may continue to experience significant volatility. The following table shows the income statement effect of certain assumed changes in the volatility covering all significant equity-award grants as of December 31, 2003,2004, on the pro forma net income of€957.61,152.6 million as disclosed in Note 3 to our consolidated financial statements: Assumed change in volatility in percentage-points -10% -5% +5% +10% -10% -5% +5% +10% (in millions of€) (in millions of€) Effect on pro forma net income for volatility assumption change 27 13 (13 ) (26 ) 26 13 (13 ) (25 ) Pro forma net income using revised volatility assumption 985 971 945 932 1,179 1,166 1,140 1,128 Accounting for Income Taxes and Other Income Tax Related Judgments We conduct operations and earn income in numerous foreign countries and are subject to changing tax laws in multiple jurisdictions within the countries in which we operate. In addition, there are numerous transactions where the ultimate tax outcome is uncertain such as those involving revenue sharing and cost reimbursement arrangements between SAP group companies. Significant judgments are necessary in determining our worldwide income tax accruals and provisions. Although we believe we have made reasonable estimates about the ultimate resolution of our tax uncertainties, no assurance can be given that the final tax outcome of these matters will be consistent with what is reflected in our historical income tax provisions and accruals. Such differences could have a material effect on our income tax provision and net income in the period in which such determinations are made.We currently have net deferred tax assets related to activities in various countries approximating€152.5141.4 million and€291.2152.5 million at December 31, 20032004 and 2002,2003, respectively, which are net of a valuation allowance of approximately€1.51.4 million and€3.01.5 million, respectively. We record a valuation allowance to reduce our deferred tax assets to the amount of future tax benefit that we believe will more likely than not be realized. The valuation allowance at January 1, 2002, was€3.6 million. The valuation allowance decreased in 20022003 by€0.61.5 million and in 20032004 by another€1.50.1 million. The reduction in valuation allowance for both 2002 and 2003 was primarily attributed to the utilization of net operating losses.losses, while the reduction in 2004 was mainly caused by currency effects. At December 31, 2003,2004, we have net operating loss carryforwards in certain foreign tax jurisdictions of approximately€90.965.9 million that may be used to offset future taxable income in those jurisdictions. Net operating loss carryforwards available in certain state tax jurisdictions in the U.S. approximate€32.619.1 million and will expire if not used in varying amounts over the next twenty years. Approximately€25.518.9 million of net operating loss carryforwards are available in other foreign tax jurisdictions that will expire if not used in varying amounts over the next threeto seven years. The remaining net operating loss carryforwards currently have no expiration period for usage. The carrying values and realization of our net deferred tax assets are principally dependent upon: • our ability to generate future taxable income; • management’s interpretation of applicable tax laws; • management’s assumptions and judgments regarding the use of tax planning strategies in certain tax jurisdictions; and • assumptions about whether our results of future operations will generate sufficient taxable income to utilize our remaining net deferred tax assets. We believe that our estimates pertaining to our accounting for income taxes are critical because: Our judgments regarding future taxable income are based upon expectations of market conditions and other facts and circumstances. Any adverse change to the underlying facts or our assumptions could require that we reduce the carrying value of our net deferred tax assets; Our use of different estimates, assumptions and judgments in connection with tax planning strategies and tax uncertainties could result in materially different carrying values of our income tax asset and liability amounts and therefore could adversely impact our recorded income tax amounts.58• Our judgments regarding future taxable income are based upon expectations of market conditions and other facts and circumstances. Any adverse change to the underlying facts or our assumptions could require that we reduce the carrying value of our net deferred tax assets. • Our use of different estimates, assumptions and judgments in connection with tax planning strategies and tax uncertainties could result in materially different carrying values of our income tax asset and liability amounts and therefore could adversely impact our recorded income tax amounts. As of December 31, 2003,2004, we have cumulative undistributed earnings from certain foreign subsidiaries of€1,716.11,824.3 million that are currently deemed to be permanently reinvested. A change in economic or other circumstances could impact our decision to repatriate some or all of these undistributed earnings which would result in the recognition of additional income tax liabilities. Changes in any of the aforementioned items could have a material impact on our financial position and results of operations. There were no significant changes in estimates about our ability to realize our deferred tax assets nor have we made any significant changes to our plans about whether to permanently reinvest undistributed earnings of foreign subsidiaries that had a material impact on our consolidated financial condition or results of operations during 20032004 and 2002.Realizability of Strategic and Venture Capital Investments In the past and as a continuing part of our business strategy, we have made significant investments in technology related companies, some of which are start-up companies that are currently reporting and that have historically reported net losses. Due to the limited historical information available about many of these companies, our estimates concerning our ability to recover the carrying value of these investments involve significant judgments. Specifically, the determination of the fair value of an investment and the amount we can expect to realize upon liquidation of an investment is judgmental, as is the determination of whether a decline in value of an investment is other-than temporary. Changes in our estimates could have a material impact on our financial position and results of operations. The carrying value of our venture capital investments at December 31, 2004 was€44.8 million. Although not significant in 2003,2004, impairments and other charges related to our investments have had in the past, and could again have in the future, a material impact on our financial position and results of operations. In 2004, 2003 2002 and 2001,2002, we recognized impairment charges relating to our strategic and venture capital investments of€5.1 million,€15.1 million, and€416.6 million (of which€297.6 million were for our investment in Commerce One) and€78.8 million,, respectively. As of December 31, 2003, the carrying value of these investments is€53.1��million.New Accounting Standards Adopted and to be Adopted71NEW ACCOUNTING STANDARDS NOT YET ADOPTEDSee Note 3 in our consolidated financial statements at “Item 18. Financial Statements.”Liquidity and Capital ResourcesLIQUIDITY AND CAPITAL RESOURCES In 2003,2004, as in 20022003 and 2001,2002, we have funded most of our growth internally from cash flow provided from operations. Over the past several years, our principal use of cash has been to support continuing operations and our capital expenditure requirements resulting from our growth, and to pay dividends on our shares and reacquire our shares in the open market. Cash and cash equivalents are primarily held in euro and U.S.$U.S dollars as of December 31, 2003. We believe that cash flows from operations, existing cash and cash equivalents, short-term marketable securities and available financing sources will be sufficient to meet our working capital needs and our currently planned capital expenditure requirements for the next twelve months. However, there can be no assurance that a downturn in the economy worldwide, in a particular region, or for our products and services in general, will not change this outlook. As discussed in Note 4 in “Item 18. Financial Statements”, in 2004 we acquired 7.7 million shares of SAP Systems Integration (SAP SI) utilizing our cash at banks. In order to complement or expand our business in the future, we expect to make further acquisitions of additional businesses, products and technologies, and to enter into joint venture arrangements. These acquisitions or joint venture arrangements may require additional financing. In addition, continued growth in our business may from time to time require additional capital. There can be no assurance that additional capital will be available to us if and when required, or that such additional capital will be available on acceptable terms to us.59The table below presents our liquid assets for the years ended December 31: 2003 2002 2004 2003 €(000) €(000) Cash at banks 326,305 279,920 458,909 326,305 Time deposits with original maturities of 3 months or less 1,014,086 841,788 Liquid investments with original maturities of 3 months or less 1,054,226 658,090 Cash and cash equivalents 1,340,391 1,121,708 1,513,135 984,395 Time deposits with original maturities exceeding 3 months and less than 1 year 680,891 26,281 Time deposits with original maturities exceeding 1 year 369 478 Liquid investments with original maturities exceeding 3 months and less than 1 year 546,272 588,472 Liquid investments with original maturities exceeding 1 year 1,137,135 448,784 Restricted cash with original maturity exceeding 1 year 74,305 89,430 0 74,305 2,095,956 1,237,897 3,196,542 2,095,956 Total net interest income increased to€56.3 million in 2004 compared to€43.4 million in 2003 compared toand€24.8 million in 2002 and€33.7 million in 2001.2002. The increase is primarily due to higher levels of liquidity. In addition to the foreign currency exposure, we are generally exposed to fluctuations in the interest rates of many of the world’s leading industrialized countries. Our interest income and expense is most sensitive to fluctuations in the level of U.S. and EMU interest rates.Liquid assets in the amount of approximately€860980 million are held in U.S.$ and approximately€7801,735 million are held in euro.As discussed in “Item 4. Information about SAP — Description of the Business — Partners’ Alliances and Acquisitions,” we announced our intention to bid for all the shares not currently owned by us of SAP System Integration AG (SAP SI). We intend to finance the costs associated with the transaction of approximately€230 million utilizing our cash at banks.Analysis of cash flow statementOperating cash flow for 20032004 was€1,826.9 million, representing a 21.4% increase from€1,504.9 million representing a 10% decrease from€1,680.5 million in 2002, when, due primarily to impairment charges on minority investments and write-down of financial assets, the difference between net income and operating cash flow was wider.2003. Accounts receivable decreasedincreased from€1,967.1 million at December 31, 2002 to€1,770.7 million at December 31, 2003 to€1,929.1 million atDecember 31, 2004, representing a decreasean increase of€196.4158.4 million or 11%8.9%. Days’This increase is consistent with the overall increase in revenues. We reduced our rolling 12-month average collection period, which is measured in days’ sales outstanding (meaning the average number of days that passed before we were paid by our customers following the delivery of our software or the rendering of services) decreased from 87 days in 2002 to 76 days in 2003 to 71 days in 2004 due primarily to our more stringent receivables management processes.In 2003,2004, net cash used in investing activities was€911.3886.6 million, an increasea decrease of 322%22.5% over 2002. However,€639.4 million of this was2003. The reduction is mainly attributable to the lower increase in liquid assets with maturities greater than 90 days.days and marketable securities (€580.7 million in 2004 compared to€868.7 million in 2003). Capital expenditures during 20032004 for intangible assets and property, plant and equipment were€275.3211.9 million, a decrease of€33.458.3 million from€308.7270.2 million in 2002.2003. This included€203.7 172.0 million in property, plant and equipment additions, mainly additional IT infrastructure and office facility constructioncompany cars during 20032004 to keep pace with the overall growth in employees and business activities.Net cash used in financing activities was€305.4372.2 million in 2003, a decrease2004, an increase of€630.566.8 million from the€935.9305.4 million of net cash used in 2002. During 2002 we repaid€428.9 million in long term debt and amounts borrowed under line of credit arrangements compared to repayments in 2003 of€3.9 million.2003. Dividend payments were€186.3248.7 million and€182.3186.3 million in 20032004 and 2002,2003, respectively. Additionally we spent approximately€88.2107.5 million in 20032004 to purchase 1,127 thousand of our own shares (2003:€88.2 million to purchase 1,049 thousand of our own shares (2002:€279.3 million to purchase 3,016 thousandshares), some of our own shares), which are held in treasury at December 31, 2003,2004, under our stock buy-back program in order to satisfy subscription rights granted under our various stock-based compensation plans.Credit linesAs of December 31, 2003,2004, we had outstanding long-term financial debt of€11.99.2 million and outstanding short-term financial debt of approximately€19.625.9 million, consisting primarily of amounts borrowed under lines60of credit. As In November 2004, we entered into a revolving€1 billion syndicated credit facility agreement with an initial term of 5 years. The use of the facility is not restricted by any financial covenants. Proceeds are for general corporate purposes. Borrowings under the facility bear interest of EURIBOR or LIBOR for the respective currency plus a margin ranging from 0.2 to 0.25% depending on the amount drawn. We are also required to pay a commitment fee of 0.07% per annum on unused amounts of the available credit. We entered into this credit facility to increase our financial flexibility. We did not, however, draw down the facility in 2004, nor do we currently intend to draw down the facility. Consequently, there were no borrowings outstanding under the facility as of December 31, 20032004. Additionally, as of December 31, 2004, our parent company SAP AG had available lines of credit totaling approximately€858622 million. In additionFurthermore, certain of our foreign subsidiaries have lines of credit available that allow them to borrow funds in their respective local currencies, generally to the extent SAP AG has guaranteed such amounts. As of December 31, 2003,2004, approximately€178204 million were available through such arrangements under which we may borrow on an overdraft or short-term basis. Interest under these lines of credit is determined at the time of borrowing based on current market rates. As of December 31, 2003,2004, SAP AG had no outstanding borrowings against theseits lines of credit. Our subsidiaries have aggregate borrowings under their lines of credit amounting to€21.527.8 million as of December 31, 2003.2004. SAP AG has provided guarantees for its subsidiaries’ lines of credit, including unused amounts, and other commitments of approximately€169.8187.6 million as of December 31, 2003.2004.Authorized Capital73AUTHORIZED CAPITAL We also have available sources of cash through authorized capital. SAP’s Articles of Incorporation authorize the Executive Board of SAP AG (the “Executive Board”), to increase the subscribed capital • up to a total amount of€60 million through the issuance of new ordinary shares in return for contributions in cash until May 1, 2006 (“Authorized Capital I”). The issuance of Authorized Capital I is subject to the statutory subscription rights of existing shareholders; • up to a total amount of€60 million through the issuance of new ordinary shares in return for contributions in cash or in kind until May 1, 2006 (“Authorized Capital II”). Subject to certain preconditions and the consent of the Supervisory Board, the Executive Board is authorized to exclude the shareholders’ statutory subscription rights for the issuance of Authorized Capital II; and • up to an aggregate amount of€15 million against contribution in cash by issuing new ordinary shares until May 1, 2007 (“Authorized Capital III”). The new shares may be subscribed by a credit institution only, and only to the extent that such credit institution, releasing SAP from its corresponding obligation, satisfies the conversion and subscription rights granted under the SAP AG 2000 Long Term Incentive Plan (“LTI 2000 Plan”) or SAP Stock Option Plan 2002 (“SAP SOP 2002”), respectively. The shareholders’ statutory subscription rights are excluded from this capital increase. The Executive Board may exercise this authorization only to the extent that the capital stock attributable to the new shares issued from this Authorized Capital III together with new shares from contingent capital and treasury shares issued or transferred for the purposes of satisfying subscription rights does not amount to more than 10% of the capital stock at the time of adoption of the authorization. Contractual obligationsThe table below presents our on- and off-balance sheet contractual obligations as of December 31, 2003: Payments due by period Contractual Obligation Total 2004 2005 2006 2007 2008 thereafter €(000) Off-balance sheet Operating Leases 619,543 141,891 105,366 80,685 60,901 50,749 179,951 Purchase Commitments 30,509 30,509 — — — — — Other Commitments 14,746 9,015 5,518 38 39 32 104 664,798 181,415 110,884 80,723 60,940 50,781 180,055 On-balance sheet Bonds 10,084 560 — — — 1,094 8,430 Other Liabilities 676,144 648,717 2,458 — — — 24,969 686,228 649,277 2,458 — — 1,094 33,399 Total 1,351,026 830,692 113,342 80,723 60,940 51,875 213,454 Our expected contribution in 2004 to our defined benefit pension plans is approximately€1,808 thousand for German plans and€35,963 thousand for non-German plans, all of which is expected to be paid as cash contributions.61OFF-BALANCE SHEET ARRANGEMENTSWe have entered into operating leases for office facilities for most of our subsidiaries, computer hardware and certain other equipment. These arrangements are oftentimes referred to as a form of off-balance sheet financing. Rental expense forexpenses under these operating leases in 2003 was€159 million (2002:€207 million; 2001:€209 million). The decrease in rental expense in 2003 is mainly based on the reduction of office space, especially in the U.S., currency effects and the global decision to purchase instead of lease computer hardware.Purchase commitments relate primarily to the construction of facilities, office equipment and car purchase commitments. Other commitments basically comprise food and security services and other facility commitments. During 2004, we expect to spend approximately€113 million for the purchase of computer hardware and other business equipment,€53 million for cars, and approximately€61 million primarily to further fund the construction of certain facilities, mainly in Germany. As described in Note 24 to our consolidated financial statements, bonds consist primarily of outstanding convertible bonds related to our LTI 2000 Plan. Additional amounts pertain to outstanding bonds issued in conjunction with our 1994/2004 convertible bond program. Please refer to Note 27 to our consolidated financial statements for a detailed description of our other liabilities. We have not entered into any transactions, arrangements or other relationships with unconsolidated, variable interest entities, nor do we use other forms of off-balance-sheet arrangements such as research and development arrangements.Contractual Obligations The table below presents our on- and off-balance sheet contractual obligations as of December 31, 2004: Contractual Obligation Total 2005 2006 2007 2008 2009 thereafter €(000) Off-balance sheet Operating Leases 563,479 134,085 100,856 72,400 58,473 51,255 146,410 Purchase Commitments 26,068 25,504 362 163 39 — — Other Commitments 27,752 20,053 6,986 203 148 112 250 On-balance sheet Bonds 7,277 — — — — — 7,277 Other Liabilities 728,838 695,345 2,680 — — — 30,813 Total 1,353,414 874,987 110,884 72,766 58,660 51,367 184,750 We have operating leases for office facilities for most of our subsidiaries, computer hardware and certain other equipment. Rental expense for operating leases in 2004 was€153 million (2003:€159 million; 2002:€207 million). Purchase commitments relate primarily to the construction of facilities, office equipment and car purchase commitments. Other commitments basically comprise food and security services and other facility commitments. Additionally, during 2005, we expect to spend approximately€100 million for the purchase of computer hardware and other business equipment, approximately€45 million for the purchase of cars, as well as another approximately€120 million to fund the construction of additional facilities. As described in Note 23 to our consolidated financial statements, in “Item 18. Financial Statements” bonds consist primarily of outstanding convertible bonds related to our LTI 2000 Plan. Please refer to Note 26 to our consolidated financial statements in “Item 18. Financial Statements” for a detailed description of our other liabilities.Benefit Plan Obligations under indemnifications and guaranteesCosts The obligations and expenses shown in our Consolidated Financial Statements for our benefit pension plans are not necessarily indicative of our future cash funding requirements. This is primarily due to deviations that can occur between the assumptions used in the actuarial valuation of our benefit plan obligations and costs and actual results of plan assets. In addition, although we currently do not expect to significantly increase cash contributions to our benefit plans in the near term, actual cash contributions may deviate from future funding requirements due to additional voluntary contributions to benefit plan assets. Our contributions in 2005 to our contribution plans are expected to be between€ Our contributions in 2005 to our defined benefit pension plans are expected to be approximately€2 million for German plans and€24 million for non-German plans, all of which is expected to be paid as cash contributions.Obligations Under Indemnifications and GuaranteesWe provide indemnifications of various scope to our customers against claims of intellectual property infringement made by third parties from the use of our products. Estimated losses for such indemnifications are evaluated under SFAS No. 5, Accounting“Accounting for Contingencies,Contingencies”, and liabilities are recorded or disclosed, depending on whether such losses are deemed probable and can be reasonably estimated. To date, we have not encountered material losses as a result of such obligations and have not accrued any liabilities in our financial statements.In addition, we occasionally grant function and/or performance guarantees in routine consulting contracts and/or customer development arrangements, standard guarantee provisions and other items, each of which are guarantees of SAP’s own product or service performance. Currently, we have several such agreements in place with various expiration dates. Based on historical experience and evaluation, we do not believe that any material loss is likely, and therefore no related liability has been recorded. We also generally provide a six to 12 month warranty period on itsour software. The related liability is included in other reserves and accrued liabilities (see Note 2625 to our consolidated financial statements)statements in “Item 18. Financial Statements”). As of December 31, 20032004 and 20022003 no guarantees were provided for third party performance or financial obligations of third parties.Research and DevelopmentRESEARCH AND DEVELOPMENTSince our inception, we have devoted significant resources to research and development. Research and development expenses for the years ending December 31, 2004, 2003 and 2002 and 2001 were€1,020.0 million,€995.9 million and€909.4 million, and€898.3 million, respectively. Research and development expenses as a percentage of revenue were 14.2%13.6%, 12.3%,14.2% and 12.2%12.3% for the years ended December 31, 2004, 2003, 2002, and 2001,2002, respectively. During 2004, 2003, 2002, and 2001,2002, the percentage of employees devoted to research and development was 30.1%30.9%, 27.8%,30.1% and 26.5%27.8%, respectively. A major focus of our research and development effort has been to anticipate and incorporate technological changes in the data processing industry to develop new business solutions. We have also entered into agreements with a number of leading computer software, technology and hardware suppliers and telecommunications providers to co-operate and enable certain of the products produced by such suppliers to be compatible with our solutions. These arrangements do not involve market or credit risk support on our behalf or by us, nor do they involve the issuance of our securities to provide the third party suppliers with needed liquid resources. We evaluate the financial strength of the third party suppliers with which we choose to cooperate, and we do not accept incremental financial risk through guarantees, loans, or other financial commitments. We anticipate that 20042005 activity under these arrangements will be consistent with 2003.62SCORE Reorganization In 2003, we reorganized our development activities under the project name SCORE — Strategic Cross-Organizational Realignment in an effort to strengthen the alignment between our development activities, our field organizations and our customers The reorganization is an important step in realizing the benefits of a services based development approach. SCORE is expected to strengthen our industry focused approach and lead to enhanced engagement from the SAP field executives with our developers. SCORE created newcustomers. We set up three Business Solution Groups (“BSGs”) which are responsible for the definition, development and market success of our products and solutions. Former business units have been bundled into the BSGs on the basis of their content. Three BSG’s were created:solutions: BSG Manufacturing, BSG Services and BSG Financial and Public Service.internal structurethree BSGs are now part of the BSGs contains a clear separation of solution management and development. Solution management employees are responsible for the rollProduct Technology Group, created in and roll outMarch 2005 as part of the overall solution. They have to ensure that the solutions are developed with the marketGOAL program. See “Item 6. Directors, Senior Management and our customers’ requirements in mind. Alongside the three new BSGs, a new department led by a member of our Executive Board has beenwas created in 2003, called Application Platform & Architecture. This separation of the front end from the back end and the reuse of business objects, processes, engines, and other software elements is expected to enable SAP to make the switch from client/server architecture to Enterprise Services Architecture successfully.
The detailed structure of SAP’s development organization is being further defined during a 100-day transition period that began upon the announcement of the GOAL Program on March 1, 2005.Areas of currentCurrent and future researchFuture Research and development efforts We intend to continue investing substantial resources in technological research and development. Our significant areas of current technological research and development efforts include: • The enablement of our solutions based on Enterprise Services Architecture; • The enhancement of our technology and application platform (SAP NetWeaver) towards a Business Process Platform; • SAP software solutions offering, including mySAP CRM, mySAP SCM, mySAP ERP, mySAP PLM, mySAP SRM, mySAP Enterprise Portal, and mySAP Mobile Business;•The enhancement of the flexibility and openness of our technology and application infrastructure (SAP NetWeaver);•New SAP software solutions likeBusiness, xApps, mySAP All-in-One and SAP Business One; • The continuous innovation of Industry Solutions; and • The focus on new and innovative technologies. 63SAP maintains research and development facilities in Germany, the United States, Japan, France, India, Israel, Bulgaria, Russia and China. Through this regional diversification, we maximize the efficient use of local resources and leverage access to industry expertise and customers.ItemITEM 6. Directors, Senior Management and EmployeesDIRECTORS, SENIOR MANAGEMENT AND EMPLOYEESSUPERVISORY BOARDThe current members of the Supervisory Board of SAP AG, each such member’s principal occupation, the year in which each was first elected and the year in which the term of each expires, respectively, are as follows: Year Year Year Year First Term First Term Name Age Principal Occupation Elected Expires Age Principal Occupation Elected Expires Prof. Dr. h.c. mult. Hasso Plattner, Chairperson(2)(3)(5)(7)(8) 60 Chairperson of the Supervisory Board 2003 2007 61 Chairperson of the Supervisory Board 2003 2007 Pekka Ala-Pietilä(1)(8) 47 President of Nokia Corporation 2002 2007 48 President of Nokia Corporation 2002 2007 Prof. Dr. Wilhelm Haarmann(1)(3)(4)(5)(9) 53 Attorney at Law, Certified Public Auditor and Certified Tax Advisor; Haarmann, Hemmelrath & Partner 1988 2007 54 Attorney at Law, Certified Public Auditor and Certified Tax Advisor; Haarmann, Hemmelrath & Partner 1988 2007 Dietmar Hopp(1)(6) 63 Managing Director, Dietmar Hopp Stiftung GmbH 1998 2007 64 Managing Director, Dietmar Hopp Stiftung GmbH 1998 2007 Dr. h.c. Hartmut Mehdorn(1)(7) 61 Chairperson of Executive Board, Deutsche Bahn AG 1998 2007 62 Chairperson of Executive Board, Deutsche Bahn AG 1998 2007 Prof. Dr. Dr. h.c. mult. August-Wilhelm Scheer(1)(6)(8) 62 Director of the Institute for Information Systems at the German Research Center of Artificial Intelligence (DFKI) 2002 2007 63 Director of the Institute for Information Systems at the German Research Center of Artificial Intelligence (DFKI) 2002 2007 Dr. Dieter Spöri(1)(5) 60 Head of Corporate Representation Federal Affairs, DaimlerChrysler AG 1998 2007 61 Head of Corporate Representation Federal Affairs, DaimlerChrysler AG 1998 2007 Dr. h.c. Klaus Tschira(1)(4) 63 Managing Director, Klaus Tschira Stiftung gGmbH 1998 2007 64 Managing Director, Klaus Tschira Stiftung gGmbH 1998 2007 Helga Classen, Vice Chairperson(5)(7)(10) 53 Employee, Development Architect 1993 2007 54 Employee, Development Architect 1993 2007 Willi Burbach(7)(8)(10) 41 Employee, Developer 1993 2007 42 Employee, Developer 1993 2007 Bernhard Koller(4)(10) 54 Employee, Manager of Idea Management 1989 2007 55 Employee, Manager of Idea Management 1989 2007 Christiane Kuntz-Mayr(5)(8)(10) 41 Employee, Development Manager 2002 2007 42 Employee, Development Manager 2002 2007 Lars Lamadé(6)(10) 32 Employee, Human Resources Consultant 2002 2007 33 Employee, Risk Manager Service & Support 2002 2007 Dr. Gerhard Maier(3)(6)(10) 50 Employee, Development Project Manager 1989 2007 51 Employee, Development Project Manager 1989 2007 Dr. Barbara Schennerlein(5)(10) 47 Employee, Principle Solution Consultant 1998 2007 48 Employee, Principal Consultant 1998 2007 Stefan Schulz(4)(8)(10) 34 Employee, Solution Architect 2002 2007 35 Employee, Development Project Manager 2002 2007 (1) Elected by SAP AG’s shareholders on May 3, 2002. (2) Elected by SAP AG’s shareholders on May 9, 2003. (3) Member of the Compensation Committee. (4) Member of the Audit Committee. (5) Member of the General Committee. (6) Member of the Finance and Investment Committee. (7) Member of the Mediation Committee. (8) Member of the Technology Committee. (9) Wilhelm Haarmann is a partner in Haarmann, Hemmelrath & Partner, which serves as special German tax counsel to SAP AG and counsels SAP with regard to other legal matters. Wilhelm Haarmann has been determined to be the Audit Committee’s financial expert. Please refer to “Item 16A. Audit Committee Financial Expert” for details. (10) Elected by SAP AG’s employees on April 9, 2002. 64 Klaus-Dieter Laidig resigned as a member of the Supervisory Board effective May 9, 2003. For detailed information on the Supervisory Board committees and their tasks, including the Audit Committee and Compensation Committee, please refer to “Item 10. Additional Information — Corporate Governance.” The current members of the Supervisory Board of SAP AG that are members on other supervisory boards and comparable governing bodies of enterprises, other than SAP AG’s, in Germany and other countries as of December 31, 20032004 are set forth in the Note 3534 to our consolidated financial statements included in “Item 18. Financial Statements.” Apart from pension obligations towards employees, SAP AG has not entered into contracts with any member of the Supervisory Board that provide for benefits upon a termination of the employment of service of the member.Pursuant to the German Co-determination Act of 1976 (Mitbestimmungsgesetz), in 2002 SAP AG was required to increase the number of members on the Supervisory Board from twelve to sixteen, comprised of eight representatives of the shareholders and eight representatives of the employees. German law requires this increase since the number of employees of SAP AG and its group companies exceeded 10,000 employees in Germany in 2001. This increase was reflected in an amendment to SAP’s Articles of Incorporation, which was approved at the Annual General Shareholders’ Meeting on May 3, 2002. AllOf the eight employee representatives, two must be nominated by the trade unions. The elected employees elected must be at least 18 years of age, must have been in the employment of SAP AG or one of its German subsidiaries for at least one year. They must also fulfill the other qualifications for election codified in Section 8 of the German Works Council Constitution Act. These qualifications, inter alia, include to be employed by SAP for not less than six months and not having been declared ineligible or debarred from holding public office by a court.SAP announced on March 13, 2003 that the Supervisory Board moved to propose the election of Hasso Plattner to the Supervisory Board at the Annual General Shareholders’ Meeting on May 9, 2003 as a shareholders’ representative. After being elected, Hasso Plattner resigned from the Executive Board effective the close of the Annual General Shareholders’ Meeting. The Co-CEO of the Executive Board, Henning Kagermann, then became sole CEO of the Executive Board. In the Supervisory Board meeting immediately following the Annual General Shareholders’ Meeting Hasso Plattner was elected as Chairperson of the Supervisory Board, replacing Dietmar Hopp, who continues to be an ordinary member of the Supervisory Board.Executive BoardEXECUTIVE BOARDThe current members of the Executive Board, the year in which each such member was first appointed and the year in which the term of each expires, respectively, are as follows: Year First Year Current Year First Year Current Name Appointed Term Expires Appointed Term Expires Prof. Dr. Henning Kagermann, CEO 1991 2007 1991 2007 Dr. Peter Zencke 1993 2006 1993 2006 Prof. Dr. Claus Heinrich 1996 2005 1996 2010 Gerhard Oswald 1996 2005 1996 2010 Dr. Werner Brandt 2001 2009 2001 2009 Shai Agassi 2002 2005 2002 2010 Léo Apotheker 2002 2005 2002 2010 On March 1, 2005, SAP announced a realignment of its management structure with immediate effect. The SAP Executive Board members’ responsibilities are now aligned along the SAP solutions value chain — spanning innovation, research and development, production, services, marketing, training, consulting, and sales.
A description of the management responsibilities before and after this realignment and backgrounds of the current members of the Executive Board are as follows:Henning Kagermann, CEO (Vorstandssprecher), 5657 years old, physics graduate. Henning Kagermann joined SAP AG in 1982. He became a member of the Executive Board in 1991 and Co-CEO in 1998. In May 2003 he became sole CEO of the Executive Board. He has overall responsibility for SAP’s strategy and business development, marketing, and global communications as well as for consulting and customer development. Further, he leads the Field Management Board and the Product Technology Board. He is also head of the Business Solutions Group (BSG) Financial & Public Services.65• Responsibilities before realignment: overall responsibility for SAP’s strategy and business development, marketing, global communications, consulting, customer development; Business Solutions Group (BSG) Financial & Public Services • Responsibilities since realignment: Overall responsibility for SAP’s strategy and business development, global communications, global intellectual property, internal audit, top talent management Shai Agassi, 3536 years old, computer science graduate.graduate and software entrepreneur. Shai Agassi joined SAP in 2001 as CEO of SAP Portals and became a member of the Executive Board in 2002 after the reintegration of SAP Portals and SAP Markets into SAP. As the head of the Technology Platform organization, he oversees the development of the integration and application platform SAP NetWeaver. Shai Agassi also manages two solution groups, mySAP SRM and SAP xApps. Further he co-leads the Suite Architecture Team with Peter Zencke.2002. Prior to joining SAP, Shai Agassi founded a number of software companies in Israel between 1990 and 1994, and served in various positions in those companies. He moved one of these companies to California and renamed it TopTier Software, Inc., where he served as Chairperson, CTO and eventually CEO. TopTier was acquired by SAP in 2001, after which Shai Agassi became the CEO of SAP Portals, at that time a fully owned subsidiary of SAP.• Responsibilities before realignment: development of the integration and application platform SAP NetWeaver, mySAP SRM and SAP xApps • Responsibilities since realignment: product development and technology, industry solutions, product and industry marketing Léo Apotheker, 5051 years old, business economist. Léo Apotheker first joined SAP in 1988 and became a member of the Executive Board in 2002. He is responsible for the activities of SAP Global Field Operations. He is also a member of the Field Management Board.• Responsibilities before realignment: global field operations, i.e. the sales, consulting, and education activities of the company. • Responsibilities since realignment: global field operations, global marketing, field marketing Werner Brandt 50, 51 years old, business administration graduate. Werner Brandt joined SAP in early 2001 as the Chief Financial Officer and member of the Executive Board. He is responsible for finance and administration. Prior to joining SAP, Werner Brandt was CFO and member of the Executive Board of Fresenius Medical Care AG since 1999. In this role, he was also responsible for labor relations. Before joining Fresenius Medical Care AG, Werner Brandt headed the finance function of the European operations of Baxter International.• Responsibilities before realignment: finance and administration, shared services, SAP Ventures • Responsibilities since realignment: unchanged Claus Heinrich 48, 49 years old, business management and operations research graduate. Claus Heinrich joined SAP in 1987 and became a member of the Executive Board in 1996. He is Head of the Business Solutions Group (BSG) Manufacturing Industries. In addition, he oversees SAP’s human resources and is the Executive Board member for labor relations.• Responsibilities before realignment: Business Solutions Group (BSG) Manufacturing Industries, human resources, labor relations. • Responsibilities since realignment: global human resources (including labor relations), quality management, internal IT, development labs (SAP Labs) Gerhard Oswald 50, 51 years old, economics graduate. Gerhard Oswald joined SAP in 1981 and became a member of the Executive Board in 1996. Gerhard Oswald is responsible for global support and the information-technology infrastructure. He is also a member of the Field Management Board.• Responsibilities before realignment: global support, IT infrastructure • Responsibilities since realignment: global service and support, custom development Peter Zencke 54, 55 years old, mathematics and economics graduate. Peter Zencke joined SAP in 1984 and became a member of the Executive Board in 1993. He is responsible for the development organization of SAP’s Enterprise Services platform and architecture as well as the coordination of SAP’s global research activities and development labs. In addition, Peter Zencke is a member of SAP’s Product and Technology Board.• Responsibilities before realignment: development of SAP’s Enterprise Services Architecture and platform, global research activities, development labs (SAP Labs) • Responsibilities since realignment: research, application platform The current members of the Executive Board of SAP AG that are members on other supervisory boards and comparable governing bodies of enterprises, other than SAP, in Germany and other countries as of December 31, 20032004 are set forth in Note 3534 to our consolidated financial statements in “Item 18. Financial Statements.” Apart from pension obligations, SAP AG has not entered into contracts with any member of the Executive Board that provide for benefits upon a termination of the employment of service of the member.To our knowledge, there are no family relationships among the Supervisory and Executive Board members.COMPENSATION, SHAREHOLDING, AND DEALINGS OF DIRECTORS AND OFFICERS This section outlines the principles that the Company applies to determine compensation for Executive Board and Supervisory Board members and sets out compensation levels and structures. This section also contains information about Executive Board members’ stock-based compensation plans, shares held by Executive Board and Supervisory Board members, and the directors’ dealings required to be disclosed in accordance with the German Securities Trading Act.Executive BoardExecutive Board Compensation The Executive Board compensation package is defined by the Compensation Committee of the Supervisory Board, of which the current members are Supervisory Board chairperson Prof. Dr. h. c. mult. Hasso Plattner, Prof. Dr. Wilhelm Haarmann, and Dr. Gerhard Maier. Executive Board members’ compensation is intended to reflect the Company’s size and global presence as well as its economic and financial standing. The level is intended to be internationally competitive to reward committed, successful work in a dynamic environment.Compensation80 The compensation of Directorsthe Executive Board as a body is performance-based. It has three elements: a fixed element, a variable directors’ profit-sharing bonus, and Officersa stock-based element. A compensation target is set for the total of fixed and directors’ profit-sharing elements. The Company reviews the compensation target every year in the light of SAP’s business and directors’ compensation at comparable companies on the international stage. Criteria applying to the elements of Executive Board compensation:• The fixed element is paid as a monthly salary. • The directors’ profit-sharing element depends on the SAP Group’s success in achieving its target for operating income before stock-based compensation expenses and acquisition-related charges and on software revenue growth. On February 9, 2005 the Supervisory Board’s Compensation Committee assessed the Company’s performance against the agreed target and determined how much directors’ profit-sharing was payable. The Company will make the payment after the Annual General Meeting of Shareholders in May. • Stock-based compensation takes the form of share options issued under SAP SOP 2002, a plan that the SAP Annual General Meeting of Shareholders approved on May 3, 2002. Details of the plan and the terms of options under it are set out in Note 23 to our consolidated financial statements in “Item 18. Financial Statements”. For options granted to members of the Executive Board in and from February 2004, the SAP SOP 2002 plan conditions provide for a potential limitation on the subscription rights to the extent that the Supervisory Board determines that, by exercising the rights, the option holder would make a profit that would be characterized as a windfall by, combined with the profit from earlier exercises of subscription rights issued to the option holder at the same issuing date, exceeding twice the product of (i) the number of subscription rights received by the option holder and (ii) the exercise price. Such profit is determined as the total of the differences, calculated individually for each exercised subscription right, between the closing price of the share on the exercise day and the exercise price. SAP AG undertakes to pay back to the option holders any expenses they may incur through fees, taxes, or deductions related to the limit on achievable income. The subscription rights shall only be limited if the Supervisory Board determines that the windfall results from significant extraordinary, unforeseeable developments that the Executive Board is not responsible for. • The number of stock options to be issued to each individual member of the Executive Board was decided by the Compensation Committee at its meeting on February 17, 2004 and reflected the fair value of the options. Executive Board members’ compensation in fiscal year 2004: 2004 Directors’ profit Salary sharing Others* Total 2003 €(000) Prof. Dr Henning Kagermann (CEO) 600 2,461 17 3,078 3,383 Shai Agassi 405 1,641 46 2,092 2,200 Léo Apotheker 400 1,641 0 2,041 2,246 Dr. Werner Brandt 350 1,436 15 1,801 1,864 Prof. Dr. Claus E. Heinrich 400 1,641 16 2,057 2,260 Gerhard Oswald 400 1,641 9 2,050 2,252 Dr. Peter Zencke 400 1,641 20 2,061 2,271 Prof. Dr. h. c. Hasso Plattner (Co-CEO and member until May 9, 2003) 1,450 15,180 17,926 * Payout pension contributions, insurance contributions, non-cash benefits (company cars). Under SAP AG’s articles81 For all members, in 2004 fixed salaries totaled€3,078 thousand (2003:€3,371 thousand) and variable components totaled€12,102 thousand (2003:€14,555 thousand). For members who joined or left the Executive Board during the fiscal year, the table shows only compensation for their time in membership. Another factor was the reduction in the number of incorporation,members from eight to seven in 2003. In addition to the reimbursementcompensation above, in 2004 Shai Agassi received€704 thousand (2003:€860 thousand) in cash from stock-based compensation entitlements that he received as a member of the management of TopTier Software, Inc. prior to the acquisition of TopTier by SAP. When it acquired TopTier in 2001, SAP agreed to pay these entitlements to all former employees and managers of TopTier who were still SAP employees after a certain period. During 2004, members of the Executive Board received the following stock options under SAP SOP 2002:Stock options Prof. Dr. Henning Kagermann (CEO) 50,000 Shai Agassi 28,000 Léo Apotheker 28,000 Dr. Werner Brandt 28,000 Prof. Dr. Claus E. Heinrich 28,000 Gerhard Oswald 28,000 Dr. Peter Zencke 28,000 218,000 At grant, the fair value of the stock options granted to the Executive Board members under SAP SOP 2002 was€43.61 per option. The term of the options is five years.Retirement Pension Plan On January 1, 2000, SAP AG introduced a contributory retirement pension plan. At that time the performance-based retirement plan was discontinued for Executive Board members. Entitlements accrued up to December 31, 1999 were unaffected. In 2004, pension benefits of€247 thousand (2003:nil) were paid to former Executive Board members. As of December 31, 2004, the projected benefit obligation for former Executive Board members was€10,819 thousand (2003:€10,255 thousand).Stock-based Compensation Awards Held by Executive Board Members Members of the Executive Board hold stock-based compensation awards granted to them in previous years under SAP SOP 2002 and LTI Plan 2000. Details and terms of the two plans are set out in Note 23 to the consolidated financial statements.SAP SOP 2002 The table below shows stock options held by members of the Executive Board on December 31, 2004, granted in 2003 and 2004 under SAP SOP 2002. The exercise prices listed in the table for SAP SOP 2002 stock options are 110% of the base price of an SAP AG ordinary share. The base price is the arithmetic mean SAP share closing auction price in the Frankfurt stock exchange Xetra trading system (or its successor system) over the five business daysimmediately before the issue date of that stock option. The exercise price is not less than the closing auction price on the day before the issue date. Vested as of Not vested as of December 31, 2004 December 31, 2004 Total Exercise Remaining Remaining Remaining price Number term Number term Number term (€) of options (years) of options (years) of options (years) Prof. Dr. Henning Kagermann (CEO) 90.37 — — 80,000 3.16 80,000 3.16 149.99 50,000 4.13 50,000 4.13 Shai Agassi 90.37 — — 30,000 3.16 30,000 3.16 99.13 — — 30,000 3.67 30,000 3.67 149.99 28,000 4.13 28,000 4.13 Léo Apotheker 90.37 — — 30,000 3.16 30,000 3.16 149.99 28,000 4.13 28,000 4.13 Dr. Werner Brandt 90.37 — — 30,000 3.16 30,000 3.16 149.99 28,000 4.13 28,000 4.13 Prof. Dr. Claus E. Heinrich 90.37 — — 45,000 3.16 45,000 3.16 149.99 28,000 4.13 28,000 4.13 Gerhard Oswald 90.37 — — 45,000 3.16 45,000 3.16 149.99 28,000 4.13 28,000 4.13 Dr. Peter Zencke 90.37 — — 45,000 3.16 45,000 3.16 149.99 28,000 4.13 28,000 4.13 — 553,000 553,000 LTI Plan 2000 Beneficiaries under LTI Plan 2000 could choose between convertible bonds and stock options. The chief difference was in the way the exercise or conversion price was determined. The bond conversion price depends on the closing price of the SAP share the day before the convertible bond was issued, while the stock option exercise price varies with the performance of the SAP share over time against the Goldman Sachs Software Index.LTI Plan 2000 Stock Options The table below shows stock options held by members of the Executive Board on December 31, 2004, granted in earlier years under LTI Plan 2000. The exercise prices listed for LTI Plan 2000 stock options reflect the prices payable by an Executive Board member for one SAP ordinary share upon exercise of the option on December 31, 2004. The exercise prices are variable. They vary with the performance of the SAP ordinary share over time against the Goldman Sachs Software Index. Vested as of Not vested as of December 31, 2004 December 31, 2004 Total Exercise Number Remaining Number Remaining Number Remaining price (€) of options term (years) of options term (years) of options term (years) Prof. Dr. Henning Kagermann (CEO) 70.90 28,032 5.14 0 — 28,032 5.14 86.16 25,987 6.14 13,388 6.14 39,375 6.14 Shai Agassi — — — — — — — Léo Apotheker 106.44 7,218 7.14 14,657 7.14 21,875 7.14 Dr. Werner Brandt 86.16 0 — 2,125 6.14 2,125 6.14 Prof. Dr. Claus E. Heinrich 70.90 20,532 5.14 0 — 20,532 5.14 86.16 18,150 6.14 9,350 6.14 27,500 6.14 Gerhard Oswald 86.16 0 — 9,350 6.14 9,350 6.14 106.44 — — 20,938 7.14 20,938 7.14 Dr. Peter Zencke 70.90 6,981 5.14 0 — 6,981 5.14 86.16 9,075 6.14 9,350 6.14 18,425 6.14 115,975 79,158 195,133 LTI Plan 2000 Convertible Bonds The table below shows convertible bonds held by members of the Executive Board on December 31, 2004, granted in earlier years under LTI Plan 2000. The exercise prices listed in the table for LTI Plan 2000 convertible bonds reflect the prices payable by an Executive Board member for one SAP ordinary share on conversion of the bond. The exercise prices are fixed and correspond to the quoted price of one SAP ordinary share on the business day immediately preceding the grant of the convertible bond. Vested as of Not vested as of December 31, 2004 December 31, 2004 Total Exercise Number Remaining Number Remaining Number Remaining price (€) of bonds term (years) of bonds term (years) of bonds term (years) Prof. Dr. Henning Kagermann (CEO) 290.32 22,425 5.14 0 — 22,425 5.14 191.25 20,790 6.14 10,710 6.14 31,500 6.14 151.50 29,700 7.14 60,300 7.14 90,000 7.14 Shai Agassi — — — — — — — Léo Apotheker 334.67 23,850 5.14 0 — 23,850 5.14 191.25 19,800 6.14 10,200 6.14 30,000 6.14 151.50 5,775 7.14 11,725 7.14 17,500 7.14 Dr. Werner Brandt 191.25 3,300 6.14 1,700 6.14 5,000 6.14 151.50 9,900 7.14 20,100 7.14 30,000 7.14 Prof. Dr. Claus E. Heinrich 290.32 16,425 5.14 0 — 16,425 5.14 191.25 14,520 6.14 7,480 6.14 22,000 6.14 151.50 16,500 7.14 33,500 7.14 50,000 7.14 Gerhard Oswald 290.32 16,425 5.14 0 — 16,425 5.14 191.25 14,520 6.14 7,480 6.14 22,000 6.14 151.50 8,250 7.14 16,750 7.14 25,000 7.14 Dr. Peter Zencke 290.32 16,425 5.14 0 — 16,425 5.14 191.25 14,520 6.14 7,480 6.14 22,000 6.14 151.50 16,500 7.14 33,500 7.14 50,000 7.14 269,625 220,925 490,550 Rights exercised by members of the Executive Board in 2004 under LTI Plan 2000 stock options and convertible bonds: Stock Options Convertible Bonds Weighted Weighted average average Number exercise price Number exercise price of options per option (€) of bonds per bond (€) Gerhard Oswald 26,368 88.02 — — Dr. Werner Brandt 4,125 76.56 — — 30,493 86.47 — — Executive Board Shareholdings No member of the Executive Board holds more than 1% of the subscribed capital of SAP AG. Members of the Executive Board held a total of 23,971 SAP shares on December 31, 2004. Please refer to “Item 7. Major Shareholders and Related Party Transactions” for information regarding shareholdings as of March 8, 2005. The table below shows Directors’ dealings transactions by Executive Board members and persons closely associated with them notified to SAP pursuant to the German Securities Trading Act, section 15a in 2004.Transactions in SAP Shares and ADRsNotifying party Transaction date Transaction Number Unit price Shai Agassi October 28, 2004 Purchase of ADRs 70,000 U.S.$42.5593 Dr. Werner Brandt July 30, 2004 Exercise of subscription right 4,125 €76.5640 July 30, 2004 Sale of shares 4,125 €132.4160 Gerhard Oswald May 17, 2004 Exercise of subscription right 6,981 €69.3009 May 17, 2004 Exercise of subscription right 10,312 €104.0341 May 17, 2004 Exercise of subscription right 9,075 €84.2106 May 17, 2004 Sale of shares 26,368 €122.63 Other Information In 2004, SAP did not grant any compensation advance or credit to, or enter into any commitment for the benefit of, any member of the Executive Board. We have entered into employment agreements with each member of our Executive Board that generally provide for a five year term of employment and that require Executive Board members to devote their expenses,entire working efforts to SAP. Included in the compensation described above, the employment agreements provide for certain benefits including the use of a company car, certain death and disability benefits and insurance coverage. Certain of the employment agreements contain non-compete obligations in favor of SAP that among other things and subject to certain exceptions prevent the executive from being employed by competitors of SAP for a year after leaving SAP in return for payment during that period of 50% of the executive’s final annual compensation. Those employment agreements further provide that, in the event the Executive Board member ceases to be a member of the Executive Board or is terminated by SAPother than for cause or if the Executive Board member voluntarily leaves the employment of SAP upon certain events including a change of control of SAP, the Executive Board member is entitled to receive a single payment consisting of the present value of his base salary and target variable compensation for the remainder of the term of the agreement. As far as the law permits, SAP AG and SAP AG’s affiliated companies in Germany and elsewhere indemnify and hold harmless their respective directors and officers against and from the claims of third parties. To this end the Company maintains group liability insurance for its directors and officers. The policy is annual and is renewed from year to year. The insurance covers the personal liability of the insured group for financial loss caused by its managerial acts and omissions. There is no deductible as envisaged in the German Corporate Governance Code, section 3.8, paragraph 2. SAP does not believe that the motivation and responsibility that the members of the SAP Executive and Supervisory Boards bring to their duties can be improved by such a deductible element. For this reason, SAP regards a deductible as unnecessary for the insured group.Supervisory BoardSupervisory Board receive remunerationCompensation SAP AG Supervisory Board compensation is governed by the Company’s Articles of Incorporation, section 16. It provides that each member of the Supervisory Board receives compensation composed of a fixed element and a variable element.element as well as reimbursement of his or her expenditure. The variable element depends onis linked to the distributed dividends. Bothdividend. The chairperson and deputy chairperson are paid more fixed compensation and more variable compensation than the other members. The fixed and the variable remuneration are higherelement is€50,000 for the chairperson, and€37,500 for the deputy chairperson, thanand€25,000 for other members of the Supervisory Board. The fixed element is paid after the end of the fiscal year. For each€0.01 by which the dividend distributed per share exceeds€0.40, the variable element is€2,000 for the chairperson,€1,500 for the deputy chairperson, and€1,000 for other members of the Supervisory Board. The variable element is paid on the first business day following the Annual General Meeting of Shareholders resolving upon the appropriation of the retained earnings for the relevant fiscal year. The aggregate compensation cannot exceed€100,000 for the chairperson,€75,000 for the deputy chairperson, and€50,000 for other members. Subject to resolutions of the Annual General Meeting of Shareholders on May 12, 2005, the compensation paid to Supervisory Board members in respect of fiscal year 2004 will be as set out in the table below. 2004 2003 Fixed Variable Total Total compensation compensation compensation compensation €(000) Prof. Dr. h. c. mult. Hasso Plattner (Chairperson) (Member and Chairperson since May 9, 2003) 50.0 50.0 100.0 66.7 Helga Classen (Deputy Chairperson) 37.5 37.5 75.0 75.0 Willi Burbach 25.0 25.0 50.0 50.0 Prof. Dr. Wilhelm Haarmann 25.0 25.0 50.0 50.0 Dietmar Hopp (Chairperson until May 9, 2003) 25.0 25.0 50.0 70.8 Bernhard Koller 25.0 25.0 50.0 50.0 Christiane Kuntz-Mayr 25.0 25.0 50.0 50.0 Klaus-Dieter Laidig (Member until May 9, 2003) 0 0 0 20.8 Lars Lamadé 25.0 25.0 50.0 50.0 Dr. Gerhard Maier 25.0 25.0 50.0 50.0 Dr. h. c. Hartmut Mehdorn 25.0 25.0 50.0 50.0 Pekka Ala-Pietilä 25.0 25.0 50.0 50.0 Prof. Dr. Dr. h. c. August-Wilhelm Scheer 25.0 25.0 50.0 50.0 Dr. Barbara Schennerlein 25.0 25.0 50.0 50.0 Stefan Schulz 25.0 25.0 50.0 50.0 Dr. Dieter Spöri 25.0 25.0 50.0 50.0 Dr. h. c. Klaus Tschira 25.0 25.0 50.0 50.0 Total 437.5 437.5 875.0 883.3 Supervisory Board compensation in respect of fiscal year 2003, totalingThe total annual remuneration€883.3 thousand, comprised fixed and variable elements in equal measure. In addition, SAP reimburses to members of the Supervisory Board the value-added tax payable on their compensation.Stock-based Compensation Contracts Held by Supervisory Board Members Members are not offered stock options or other stock-based compensation for their Supervisory Board work. Any stock options or other stock-based compensation received by employee-elected members forrelate to their position as SAP employees and not to their work on the year ended December 31, 2003, which is subjectSupervisory Board.Supervisory Board Shareholdings Note 22 to the adoption of the dividend resolution by the shareholders at the Annual General Shareholders’ Meeting on May 6, 2004, is outlined in Note 35 of our consolidated financial statements in “Item 18. Financial Statements” in this Annual Reportshows the shareholdings of Supervisory Board members Hasso Plattner (chairperson), Dietmar Hopp, and Klaus Tschira, and the companies they control, on Form 20-F. The total annual remunerationDecember 31, 2004. No other member of the Supervisory Board held more than 1% of SAP’s subscribed capital. On December 31, 2004, Supervisory Board members held 106,789,190 SAP shares. Please refer to “Item 7. Major Shareholders and Related Party Transactions” for information regarding shareholdings as of March 8, 2005. The table below shows Directors’ dealings transactions by Supervisory Board members and persons closely associated with them notified to SAP pursuant to the German Securities Trading Act, section 15a in 2004.Transactions in SAP Shares and ADRs Notifying party Transaction date Transaction Number Unit price Hasso Plattner Förderstiftung, gemeinnützige GmbH December 14, 2004 Sale of shares 745,546 €134.13 Dr. h.c. Klaus Tschira July 27, 2004 Security loan transfer of shares 1,500,000 July 27, 2004 Right and duty to accept return of shares 1,500,000 July 27, 2004 Purchase of single derivative instrument (Number = shares underlying) 1,125,000 €127.65 Other Information In 2004, SAP did not grant any compensation advance or credit to, or enter into any commitment for the year ended December 31, 2003, will amount to€1,016,800. This consistsbenefit of, an annual fixed payment, which amounts to€50,000 forany member of the Chairperson,€37,500 forSupervisory Board. Hasso Plattner, the Vice Chairperson and€25,000 for all other memberschairperson of the Supervisory Board, plusentered into a variable payment equal to€2,000 for the Chairperson,€1,500 for the Vice Chairperson and€1,000 for all other members ofconsulting contract with SAP after he joined the Supervisory Board in May, 2003. The contract does not provide for each€0.01 distributed66dividends per share exceeding a dividendany remuneration. The only cost incurred by SAP in 2004 under the contract was the reimbursement of€0.40 in relation to expenses. As far as the share capital outstanding. Notwithstanding the foregoing, the aggregate remuneration may not exceed€100,000 for the Chairperson,€75,000 for the Vice Chairperson and€50,000 for the other members of the Supervisory Board. In addition,law permits, SAP AG indemnifies Supervisory Board members are reimbursed for out-of-pocket expenses,against, and invoiced value-added taxes are paidholds them harmless from, claims brought by SAP tothird parties. To this end the Supervisory Board members for payment with the German tax authorities. For foreign Supervisory Board members SAP reduces the payment by a special withholding tax. The employee representatives on the Supervisory Board receive stock-based compensation, if any, for their services as employees only. Each employee representative owns less than one percent of the outstanding share capital.The total annual remuneration ofCompany maintains directors’ and officers’ group liability insurance. See “other information” in the Executive Board section above for more information about the year ended December 31, 2003 was€17,926 thousand. This amount includes€3,371 thousand fixed and€14,555 thousand variable remuneration. The accrued benefit liability as of December 31, 2003 for Executive Board members was approximately€3.3 million. For a detailed breakdown of the total fixed and all other variable remuneration, please see Note 35 to our consolidated financial statements.EMPLOYEESAs of December 31, 2003, 2002 and 2001, we did not provide any loans, warranties or guaranties to members of the Executive Board. Furthermore, Section 402 of the Sarbanes-Oxley Act, which came into effect on July 30, 2002, precludes SAP AG from granting most loans to members of the Supervisory Board or the Executive Board.EmployeesAs of December 31, 2003,2004, we employed 30,25132,802 people worldwide, which represented an increase of 3%8% from December 31, 2002.2003. Of the total employees, 13,47514,023 employees were based in Germany and 4,6375,156 in the U.S. The following table sets forth the number of employees at December 31, 2004, 2003 2002 and 2001:2002: Employees as of December 31, Employees as of December 31, 2003 2002 2001 2004 2003 2002 Total EMEA Americas Asia Total EMEA Americas Asia Total EMEA Americas Asia EMEA Americas Asia Total EMEA Americas Asia Total EMEA Americas Asia Total Customer Service & Support 12,713 8,111 2,881 1,721 12,939 8,318 3,014 1,607 13,014 8,159 3,311 1,544 8,500 3,144 2,029 13,673 8,111 2,881 1,721 12,713 8,318 3,014 1,607 12,939 Research & Development 9,100 7,042 1,084 974 8,173 6,277 1,194 702 7,665 5,849 1,122 694 7,412 1,091 1,626 10,129 7,042 1,084 974 9,100 6,277 1,194 702 8,173 Sales & Marketing 5,267 3,112 1,434 721 5,143 3,075 1,427 641 5,071 2,865 1,539 667 3,113 1,731 814 5,658 3,112 1,434 721 5,267 3,075 1,427 641 5,143 General & Administrative 3,171 2,163 681 327 3,119 2,090 710 319 3,128 1,987 778 363 2,205 737 400 3,342 2,163 681 327 3,171 2,090 710 319 3,119 SAP Group 30,251 20,428 6,080 3,743 29,374 19,760 6,345 3,269 28,878 18,860 6,750 3,268 21,230 6,703 4,869 32,802 20,428 6,080 3,743 30,251 19,760 6,345 3,269 29,374 Certain employees that are currently employed by SAP but that are currently not working or that work part time while finishing a university degree are excluded from the above figures. Also, certain temporary employees are not included in the above figures. The number of such temporary employees is not material. Expressed in average number of full-time equivalents (FTEs), we had slight increaseour workforce increased from 29,054 in 2002 to 29,098 in 2003.Sales revenue per employee equalledequaled€229,086 for the year ended December 31, 2004, down from€232,211 for the year ended December 31, 2003, down from€252,361 for the year ended December 31, 2002.2003. It was a declared aim of the Company to increase operatingmargin in 2003,2004, therefore, as in the previous year, SAP established a stringent and selective hiring policy. The majority of recruits joined research and development (R&D), which converted to FTEs, grew 11%. In other areas, only selected hiring was done. Sales and marketing employees in FTEs increased 2%7%, the number of employees in service and support employees in FTEs declined 2%increased 8%, and general and administration headcount in FTEs remained almost unchanged. Apart from selective measures, significant layoffs did not occur despite thea difficult economic environment. We consider our employees as our most important success factor and would therefore wish to recruit new highly qualified employees in the future. At the same time, SAP continues to actively train its employees. As in previous years, SAP University’s broad offering of classroom training and Web-based courses as well as SAP’s training line of business played a key role in 2003.2004. Through such measures, SAP ensures that its employees maintain and build on their high level of training.67None of our employees are subject to a collective bargaining agreement. We have never experienced a work stoppage and believe that our employee relations are excellent.Share OwnershipSHARE OWNERSHIPBeneficial Ownership of Shares The ordinary shares beneficially owned by Dietmar Hopp (member of the Supervisory Board), Hasso Plattner (Chairperson of the Supervisory Board) and Klaus Tschira (member of the Supervisory Board) and/or companies affiliated with aforementioned individuals are disclosed in “Item 7. Major Shareholders and Related Party Transactions — Major Shareholders.” We believe each of the other members of the Supervisory Board and the Executive Board beneficially owns less than 1% of the ordinary shares as of March 9, 2004.Stock-Based Compensation PlansSAP SOP 2002 At the 2002 annual general meeting of shareholders,Annual General Shareholders’ Meeting, our shareholders approved the SAP Stock Option Plan (“SAP SOP 2002”). The SAP SOP 2002, which provides for the issuance of stock options to the members of the Executive Board, members of subsidiaries’ boards as well as to eligible executives and other top performers of SAP AG and its subsidiaries, replaced the LTI 2000 Plan described below. Under the SAP SOP 2002, the Executive Board is authorized to issue, with the approval of the Supervisory Board, on or before April 30, 2007, up to 19,015,415 stock options. Each stock option granted under SAP SOP 2002 entitles its holder to subscribe to one SAP AG share, against the payment of an exercise price, which is composed of a base price and a premium of 10% on the base price. The base price is the average market price of the SAP AG share on the Frankfurt Stock Exchange during the five trading days preceding the issuance of the respective stock option, calculated on the basis of the arithmetic mean of the closing auction prices of the SAP AG share in the XETRA trading system. These provisions notwithstanding, the exercise price can not be less than the closing auction price on the day before the issue date. The term of the stock options is five years. Subscription rights cannot be exercised until a vesting period has elapsed. The vesting period of an option holder’s subscription rights ends two years after the issue date of that holder’s options. Stock options have a term of five years from the issue date, after which they become void. For options granted to members of the Executive Board in and from February 2004, the SAP SOP 2002 plan conditions provide for a potential limitation on the subscription rights to the extent that the Supervisory Board determines that, by exercising the rights, the option holder would make a profit that would be characterized as a windfall by, combined with the profit from earlier exercises of subscription rightsissued to the option holder at the same issuing date, exceeding twice the product of (i) the number of subscription rights received by the option holder and (ii) the exercise price. Such profit is determined as the total of the differences, calculated individually for each exercised subscription right, between the closing price of the share on the exercise day and the exercise price. SAP AG undertakes to pay back to the option holders any expenses they may incur through fees, taxes, or deductions related to the limit on achievable income. The subscription rights shall only be limited if the Supervisory Board determines that the windfall results from significant extraordinary, unforeseeable developments that the Executive Board is not responsible for. SAP SOP 2002 is generally considered a fixed plan under APB 25. Since the exercise price, which is fixed one day before grant, cannot be less than the share price on that date, no expenses are recorded for awards granted under SAP SOP 2002. As the number of stock options granted to the members of the Executive Board under SAP SOP 2002 is not known on grant date due to the above mentioned potential limitation on subscription rights, SAP SOP 2002 is not considered a fixed plan for those stock options. As such, compensation expense is recorded over the vesting period equal to the difference between the exercise price of the stock options and the market value of the ordinary share. As of March 9, 2004, 5,8428, 2005, 8,756 thousand options have been granted to participants under the SAP SOP 2002, none of which are exercisable at this time.68LTI Plan On January 18, 2000 SAP’s shareholders approved the LTI 2000 Plan (the “LTI Plan”). The LTI Plan is a stock-based compensation program, which provided members of the SAP AG Executive Board, members of subsidiaries’ boards and selected employees a choice between convertible bonds, stock options or 50% of each. Under the LTI Plan, 15 million convertible bonds or 18.75 million stock options were originally authorized, and a maximum of 18.75 million ordinary shares were authorized pursuant to a contingent capital increase for issuance upon conversion of the convertible bonds and exercise of the stock options granted under the LTI Plan. Upon conversion of the convertible bonds and exercise of the stock options, we will be required to provide ordinary shares in return for payment of the conversion or exercise price, as the case may be, which will be less than the market price for the ordinary shares at the time of such conversion or exercise. By resolution of the Annual General Shareholders’ Meeting on May 3, 2002, the authorization to issue convertible bonds and stock options under the LTI Plan, to the extent not yet made use of, was revoked. In addition, the contingent capital for issuance upon conversion of the convertible bonds and exercise of the stock options granted under the LTI Plan was reduced to the amount necessary to secure all convertible bonds and stock options already granted under the LTI Plan. As of March 14, 2002,In total SAP AG had issued approximately 8.68 million convertible bonds and approximately 3.63 million stock options under the LTI Plan.The conversion price of the convertible bonds for one SAP AG ordinary share will equal the closing price of the SAP AG ordinary share quoted in the XETRA trading system (or any successor system) of the Frankfurt Stock Exchange on the last trading day prior to the issue of the respective convertible bond (the day on which SAP AG or the credit institution managing the issue on behalf of SAP AG accepts the beneficiary’s subscription). Upon the exercise of the conversion rights, an additional payment is due for each share equal to the amount by which the conversion price of the share exceeds the nominal amount of the converted bond of€1 for each convertible bond, which was payable upon granting of the convertible bonds and which is mandatory according to German Stock Corporation Law. The exercise price of the stock options issued under the LTI Plan for one SAP AG ordinary share is calculated by reference to the outperformance. The outperformance is the percentage points by which the performance of the SAP AG ordinary share exceeds the performance of the reference index (GSTI Software Index). The initial value for determining the performance by the SAP AG ordinary shares is the closing price of the SAP AG ordinary shares quoted in the XETRA trading system (or any successor system) of the Frankfurt Stock Exchange on the last trading day prior to the issue of the stock option (the day on which SAPAG or the credit institution managing the issue for SAP AG accepts the beneficiary’s subscription). The initial value for determining the performance of the reference index is the last value recorded for the reference index on the same trading day on the Chicago Board Options Exchange. The final value for determining the performance of the SAP AG ordinary share is the closing price of SAP’s ordinary shares quoted in the XETRA trading system (or any successor system) of the Frankfurt Stock Exchange on the latest trading day prior to exercise of the subscription right attaching to the stock option. The final value for determining the performance of the reference index is the last value of the reference index on the same trading day on the Chicago Board Options Exchange. The initial value and the final value of the reference index will be translated from U.S.$ to euro using the spot mid cashpaper range rate on the Frankfurt interbank market. Performance is the price change measured between the initial value and the final value, expressed as percentage points. In calculating the performance of the SAP AG ordinary share, the same adjustment rules for dividend payments, subscription rights, and other special rights are applied to the stock exchange prices used as are applied in determining the relevant reference index. The exercise price for one stock option is calculated by reference to the outperformance. The outperformance is the percentage points by which the performance of the SAP AG share exceeds the performance of the reference index, as follows: The exercise price is the final value as determined above, less the product of the initial value as determined above and the outperformance. Beneficiaries under the LTI Plan may not exercise their conversion or subscription rights until a vesting period has elapsed. The vesting period for 33% of such rights ends two years after the issue date, for the next 33% three years after the issue date and for the balance four years after the issue date. Convertible bonds and stock options under the LTI Plan have a term of 10 years from the issue date, after which they become void.69 The convertible bond program is considered a fixed plan under APB 25, and will result in no compensation expense under the current terms of the LTI Plan. Under APB 25, the stock option program under the LTI Plan is a variable plan because the exercise price varies depending upon the criteria described above. As such, compensation expense is recorded over the vesting period equal to the difference between the exercise price of the stock options and the market value of the ordinary share. Stock options may negatively impact our results of operations and both stock options and convertible bonds may negatively impact our earnings per share. By resolution of the Annual General Shareholders’ Meeting held on May 9, 2003,6, 2004, the Executive Board was authorized to repurchase on or before October 31, 20042005 up to 30.0 million shares in SAP AG subject to the provisoprovision that the shares purchased by virtue of this authorization, together with any other shares already acquired and held by SAP, do not account for more than 10% of SAP AG’s capital stock. Such repurchased ordinary shares may be used to satisfy our obligations upon conversion of the convertible bonds or exercise of the stock options under the LTI Plan and our obligations upon the exercise of stock options under the SAP SOP 2002. This resolution replaced the resolution of the Annual General Shareholders’ Meeting of May 3, 2002,9, 2003, which authorized the Executive Board to acquire on or before October 31, 2003,2004, up to 30.0 million shares in SAP to satisfy our obligations upon conversion of the convertible bonds or exercise of the stock options under the LTI Plan and the exercise of stock options under the SAP SOP 2002. These repurchases of ordinary shares are expected to reduce the dilutive effects on earnings per share. As of March 9, 2004,8, 2005, we have repurchased 201518 thousand ordinary shares and issued them to stock option holders who have exercised stock options under the LTI Plan.STAR Plan The STAR Plan provides for the grant of stock appreciation rights (“STARs”) to eligible employees of SAP AG and our majority owned subsidiaries. The STAR Plan is administered by SAP AG’s Executive Board with respect to eligible employees. Beginning with the introduction of the LTI Plan in 2000, SAP SOP 2002 participants (and prior to the introduction of the SAP SOP 2002, LTI Plan participants) who are granted stock options generally may not receive STARs under the STAR Plan in the same fiscal year. The Executive Boardor the Supervisory Board, as applicable, has the authority to determine: (i) the persons to whom grants may be made under the STAR Plan; (ii) the size and other terms and conditions of each grant; (iii) the time when the grants will be made and the duration of any applicable exercise or restriction period, including the criteria for vesting and the acceleration of vesting; and (iv) any other matters arising under the STAR Plan.The valuation of each of the STARs is calculated quarterly, over a period of two years. Each quarterly valuation is weighted as follows in determining the final valuation of the respective STARs: Quarter Ended Weighting Factor Quarter Ended Weighting Factor March 31, Year 1 5 % March 31, Year 2 10 % June 30, Year 1 5 % June 30, Year 2 10 % September 30, Year 1 10 % September 30, Year 2 10 % December 31, Year 1 20 % December 31, Year 2 30 % 2005 STARs. In March 2005 the Supervisory Board approved the granting of approximately 4.7 million 2005 STARs to selected employees who are not granted stock options under the SAP SOP 2002 in the year 2005. The 2005 STARs grant value of€ Quarter Ended Weighting Factor Quarter Ended Weighting Factor March 31, Year 1 5 % March 31, Year 2 10 % June 30, Year 1 5 % June 30, Year 2 10 % September 30, Year 1 10 % September 30, Year 2 10 % December 31, Year 1 20 % December 31, Year 2 30 % The valuations of the 2005 STARs for the quarterly periods ending December 31 are based on the amount by which the grant price of€121.87 is exceeded by the average fair market value of one ordinary share as quoted on the XETRA trading system over the 20 consecutive business days commencing on the day after the announcement of our preliminary annual results for 2005 and 2006. The other quarterly valuations are based on the amount by which the grant price of€121.87 is exceeded by the average fair market value of an ordinary share quoted on the XETRA trading system over the five consecutive business days commencing on the day after the announcement of our quarterly results. Because each quarterly valuation is measured independently, it will be unaffected by any other quarterly valuation. The cash payout value of each 2005 STAR will be calculated quarterly as follows: (i) 100% of the first€50 value appreciation for such quarter; (ii) 50% of the next€50 value appreciation; and (iii) 25% of any additional value appreciation. Participants will, in the case such value appreciation occurred, receive payments with respect to the 2005 STARs on March 31, 2007 and January 31, 2008, each payment equal to 50% of the total payout amount. Participants will receive 2005 STAR payments provided that (subject to certain exceptions) they continue to be actively employed by us on the payment dates.2004 STARs. In March 2004 the Supervisory Board approved the granting of approximately 3.83.5 million 2004 STARs to selected employees who are not granted stock options under the SAP SOP 2002 in the year 2004. The 2004 STARs grant value of€134.35 is based upon the average fair market value of one ordinary share over the 20 business days from the day after the announcement of our 2003 preliminary results on January 22, 2004.The valuations of the 2004 STARs for the quarterly periods ending December 31 are based on the amount by which the grant price of€134.35 is exceeded by the average fair market value of one ordinary share as quoted on the XETRA trading system over the 20 consecutive business days commencing on the day after the announcement of our preliminary annual results for 2004 and 2005. The other quarterly valuations are based on the amount by which the grant price of€134.35 is exceeded by the average fair market value of an ordinary share quoted on the XETRA trading system over the five consecutive business days commencing on the day after the announcement of our quarterly results. Because each quarterly valuation is measured independently, it will be unaffected by any other quarterly valuation.70The cash payout value of each 2004 SARSTAR will be calculated quarterly as follows: (i) 100% of the first€50 value appreciation for such quarter; (ii) 50% of the next€50 value appreciation; and (iii) 25% of any additional value appreciation. Participants will, in the case such value appreciation occurred, receivepayments with respect to the 2004 STARs on March 31, 2006 and January 31, 2007, each payment equal to 50% of the total payout amount. Participants will receive 2004 STAR payments provided that (subject to certain exceptions) they continue to be actively employed by us on the payment dates.2003 STARs. In March 2003, we granted 3.8 million 2003 STARs to selected employees who were not granted stock options under the SAP SOP 2002 in the year 2003. The grant price of the 2003 STARs grant value ofwas€84.91 is based upon the average fair market value of one ordinary share over the 20 business days from the day after the announcement of our 2002 preliminary results on January 30, 2003.valuations of thefinal STAR 2003 STARs for the quarterly periods ending December 31 are based on the amount by which the grant price ofvalue was fixed in February 2004, at€84.91 is exceeded by the average fair market value of one ordinary share as quoted on the XETRA trading system over the 20 consecutive business days commencing on the day after the announcement of our preliminary annual results for 2003 and 2004. The other quarterly valuations are based on the amount by which the grant price of€84.91 is exceeded by the average fair market value of an ordinary share quoted on the XETRA trading system over the five consecutive business days commencing on the day after the announcement of our quarterly results. Because each quarterly valuation is measured independently, it will be unaffected by any other quarterly valuation.The cash payout value of each 2003 STAR will be calculated quarterly as follows: (i) 100% of the first€50 value appreciation for such quarter; (ii) 50% of the next€50 value appreciation; and (iii) 25% of any additional value appreciation.39.29. Participants will in the case such value appreciation occurred, receive payments with respect to the 2003 STARs on March 31, 2005 and January 31, 2006, each payment equal to 50% of the total payout amount. Participants will receive 2003 STAR payments provided that (subject to certain exceptions) they continue to be actively employed by us on the payment dates.2002 STARs. In February 2002, we granted 3.6 million 2002 STARs to selected employees who were not granted stock options or convertible bonds under the LTI Plan in the year 2002. Additional information regarding the 2002 STARs is included in Note 24 of “Item 18. Financial Statements.” Because the grant price of the 2002 STARs was higher than the price of the ordinary shares during the measurement period, no payments will be made with respect to the 2002 STARs.2001 STARs. In 2001, we granted 3.4 million 2001 STARs to selected employees who did not receive stock options or convertible bonds under the LTI Plan in the year 2001. Because the grant price of the 2001 STARs was higher than the price of the ordinary shares during the measurement period, no payments will be made with respect to the 2001 STARs.1994 Bonds SAP hashad outstanding convertible bonds issued in 1994 to eligible participants, each of which iswas convertible (after the 1:3 share split in 2000 and the conversion of preference shares into ordinary shares in 2001) into three preferenceordinary shares (the “1994 Bonds”). After the conversion of the preference shares into ordinary shares, each bond is convertible into three ordinary shares. The conversion rights of the 1994 Bonds became exercisable for the first time on September 30, 1996 and are thereafter exercisable on each June 30, July 31, August 31, September 30, October 31 and November 30.1996. The only remaininglast exercise date iswas June 30, 2004. As of December 31, 2003, 150,910 of the 1994 Bonds remainedAfter this date, all outstanding and 452,730 ordinary shares would be issued upon the conversion thereof.German Employee Stock Purchase Plans SAP AG maintains two employee stock purchase plans for our German employees: (i) an ongoing payroll deduction plan (the “German Payroll Deduction Plan”) and (ii) an annual purchase plan (the “German Annual Purchase Plan”). Under the German Payroll Deduction Plan, an eligible German employee is able to purchase ordinary shares through payroll deductions of up to 10% of the gross monthly salary of the employee and SAP contributions of 15% of the ordinary share purchase price as well as the assumption of ancillary purchase71expenses. As soon as the amount available for an employee is sufficient together with our contribution to purchase an ordinary share, such purchase is effected at the market price and credited to the employee’s account. The acquired shares are not subject to a holding period. Under the German Annual Purchase Plan, eligible German employees may buy a determined number of ordinary shares per year on a set date. Under such plan, SAP contributes€260 per year. The employee provides any additional amounts, if necessary, to avoid the purchase of fractional shares. The acquired shares are transferred to an individual account of the participating employee, and they are not subject to a holding period. Employees must elect each year to participate in the German Annual Purchase Plan.U.S. Employee Stock Purchase Plans We maintain three plans which allow for our U.S. employees to acquire equity securities of SAP AG as follows: (i) an Employee Discount Stock Purchase Plan (“U.S. Discount Plan”); (ii) an employee non-discount purchase plan (the “U.S. Non-discount Plan”); and (iii) the ADR Stock Fund (the “ADR Stock Fund”)available under the SAP America, Inc. 401(k) Plan (“401(k) Plan”). Under the U.S. Discount Plan, eligible employees are able to purchase ADRsADSs through semi-monthly payroll deductions of up to an annual aggregate of 10% of their annual compensation or $21,250, whichever is less, and we contribute 15% of the ADR’sADS’s purchase price as well as the assumption of ancillary purchase expenses. Under the U.S. Non-discount Plan, an administrator makes open market purchases of ADRsADSs for the accounts of participating employees on a semi-monthly basis. Such purchases are made out of amounts deducted from each participating employee’s eligible compensation. We do not make any contributions in connection with the U.S. Non-discount Plan. The ADR Stock Fund was introduced in 2000 as an investment option provided to certain U.S. employees under the 401(k) Plan. U.S. employees may contribute up to 15% for highly compensated employees and up to 25% for non-highly compensated employees of their pretax and after tax payroll under the 401(k) Plan, and we contribute 50% of the contributed amounts up to 6% of the pretax and after tax pay not to exceed $4,500 per year. Both employee and employer contributions are submitted to a plan administrator who provides various investment fund options at the election of each participant.Other Foreign Stock Purchase PlansAlthough we maintain and are in the process of introducing various employee stock purchase plans similar to our German and U.S. plans in the majority of our remaining foreign subsidiaries, the combined impact of these plans on our results of operations, net income and cash flows is not material.ItemITEM 7. Major Shareholders and Related Party TransactionsMAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONSMAJOR SHAREHOLDERS The share capital of SAP AG consists of ordinary shares, which are issued only in bearer form. Accordingly, SAP AG generally has no way of determining who our shareholders are or how many shares a particular shareholder owns. SAP’s ordinary shares are traded in the U.S. by means of American Depositary Shares (ADS). Each ADS represents one fourth of one ordinary share. On March 9, 2004,8, 2005, based upon information provided by the ADS depositary, the Deutsche Bank of New York,Trust Company Americas, there were 127,464,548102,180,096 ADSs, representing approximately 31,866,13725,545,024 ordinary shares, held of record by 2,3001,214 registered holders. The ordinary shares underlying such ADSs represented 10.1%8.1% of the then-outstanding ordinary shares (including treasury stock). Because SAP’s ordinary shares are issued in bearer form only, we are unable to determine the number of ordinary shares directly held by persons with U.S. addresses.However, under Section 21 of the German Securities Trading Act (Wertpapierhandelsgesetz), holders of voting securities of a German company admitted to official trading on a stock exchange within the European Union or the European Economic Area are obligated to notify a company of the level of their holdings whenever such holdings reach, exceed or fall below certain thresholds, which have been set at 5%, 10%, 25%, 50% and 75% of a company’s outstanding voting rights.72The following table sets forth certain information regarding the beneficial ownership of the ordinary shares as of March 9, 20048, 2005 of: (i) each person or group known by SAP AG to own beneficially 5% or more of the outstanding ordinary shares; and (ii) the beneficial ownership of all members of the Supervisory Board and all members of the Executive Board, individually and as a group, in each case as reported to SAP AG by such persons. Apart from the shares transfer as set forth in the footnotes to this table, there was, as far as we are able to tell given the nature of our shares, no significant change in the percentage ownership held by any major shareholder during the past three business years. None of the major shareholders have special voting rights. Ordinary Shares Beneficially Owned % of Principal Shareholders Number Outstanding Dietmar Hopp, Member Supervisory Board 32,828,795 (1) 10.406 % Dietmar Hopp Stiftung GmbH 28,017,300 8.881 % Prof. Dr. h.c. mult. Hasso Plattner, Chairperson Supervisory Board 37,239,740 (2) 11.804 % Hasso Plattner GmbH & Co. Beteiligungs-KG 31,239,740 (3) 9.902 % Hasso Plattner Förderstiftung gGmbH 6,000,000 1.902 % Dr. h.c. Klaus Tschira, Member Supervisory Board 38,987,460 (4) 12.358 % Dr. h.c. Tschira Beteiligungs GmbH & Co. KG 15,832,660 5.019 % Klaus Tschira Stiftung gGmbH 21,154,800 6.705 % Executive Board Members and Supervisory Board Members, as a group (24 persons) 109,063,087 34.570 % Options and convertible bonds that are vested and exercisable within 60 days of March 9, 2004, held by Executive Board Members and Supervisory Board Members, collectively 434,734 (5) N/A Ordinary Shares Beneficially Owned % of Principal Shareholders Number Outstanding Dietmar Hopp Stiftung GmbH 28,017,300 8.862 % Golf-Club St. Leon-Rot GmbH & Co. Betriebs oHG 4,811,495 1.522 % Dietmar Hopp, Member Supervisory Board, collectively(1) 32,828,795 10.384 % Hasso Plattner GmbH & Co. Beteiligungs-KG(2) 31,239,740 9.881 % Hasso Plattner Förderstiftung GmbH 5,254,454 1.662 % Hasso Plattner, Chairperson Supervisory Board, collectively(3) 36,494,194 11.544 % Dr. h.c. Klaus Tschira Beteiligungs GmbH & Co. KG 15,832,660 5.008 % Klaus Tschira Stiftung gGmbH 16,154,800 5.110 % Klaus Tschira, Member Supervisory Board 500,000 0.158 % Klaus Tschira, Member Supervisory Board, collectively(4) 32,487,460 10.276 % Executive Board Members as a group (7 persons)(5) 30,346 0.010 % Supervisory Board Members as a group (16 persons) 101,814,837 32.205 % Executive Board Members and Supervisory Board Members as a group (23 persons) 101,845,183 32.215 % Options and convertible bonds that are vested and exercisable within 60 days of March 8, 2005, held by Executive Board Members and Supervisory Board Members, collectively(5) 943,301 N/A (1) Includes: (i) 27,017,300 ordinary shares owned by Dietmar Hopp Stiftung GmbH, and (ii) 4,811,495 ordinary shares owned by Golfplatz St. Leon-Rot GmbH & Co. Beteiligungs-KG and as to which Dietmar Hopp exercises sole voting and dispositive power.power in Dietmar Hopp disclaims beneficial ownership with respect to 8,721,100 ordinary shares owned in the aggregate by Dietmar Hopp’s immediate familyStiftung GmbH and such shares are not included above.Golf-Club St. Leon-Rot GmbH & Co. Betriebs oHG. (2) Includes: (i) 31,239,740 ordinary shares owned by Hasso Plattner GmbH & Co. Beteiligungs-KG, as to which Hasso Plattner exercises sole voting and dispositive power; and (ii) 6,000,000 ordinary shares owned by Hasso Plattner Förderstiftung, gGmbH, as to which Hasso Plattner exercises sole voting and dispositive power. Hasso Plattner disclaims beneficial ownership with respect to 130,000 ordinary shares owned in the aggregate by Hasso Plattner’s immediate family and such shares are not included above.(3)Hasso Plattner owns a 100% partnership interest in and controls Hasso Plattner GmbH & Co. Beteiligungs-KG. (3) Hasso Plattner exercises sole voting and dispositive power in Hasso Plattner GmbH & Co. Beteiligungs-KG and in Hasso Plattner Förderstiftung gGmbH. (4) Includes 21,154,800 ordinary shares owned by Klaus Tschira Stiftung gGmbH, as to which Klaus Tschira exercises shared voting and dispositive power.power in Klaus Tschira disclaims beneficial ownership with respect to 2,133,840 ordinary shares owned in the aggregate by Klaus Tschira’s immediate familyStiftung gGmbH and such shares are not included above.Dr. h.c. Tschira Beteiligungs GmbH & Co. KG. (5) Includes 155,696529,202 stock options and 279,038414,099 convertible bonds.We at present have no knowledge about any arrangements, the operation of which may at a subsequent date result in a change in control of the company.Related Party Transactions Certain board members ofRELATED PARTY TRANSACTIONS In March 2005, SAP AG currently held or have held within the last year positions of significant responsibility with other entities as presented in Note 35 of “Item 18. Financial Statements.” The Company has relationships with certain of these entities in the ordinary course of business, whereby it buys and sells a wide variety of services and software at arm’s length. August-Wilhelm Scheer is the major shareholder and head of the supervisory board of IDS Scheer AG, a German software and IT services company. Until early 2004 SAP AG owned a minority stake in IDS Scheer (approximately 2.5% of IDS Scheer’s shares outstanding as of December 31, 2003). SAP AG sold this stake in February 2004. IDS Scheer and SAP AG have relationships in the ordinary course of business and at arm’s length, whereby mainly IDS Scheer provides services for SAP AG. In October 2003 SAP AG and IDS Scheer entered into a strategic relationship to jointly develop and market a software solution for Business Process73Management. As part of this strategic relationship SAP AG both acquired and licensed certain software related intellectual property rights from IDS Scheer. In February 2002, SAP AG started negotiationsagreements with DCW Software AGBesitzgesellschaft der Multifunktionsarena Mannheim mbH & Co. KG, (“DCW”) with regard to a possible investment of SAP AG in DCW. SAP AG acquired a controlling interest in DCW in November 2003 and increased this stake to 100% in January 2004. At the timecompany owned by members of the initial negotiations DCW had a credit facility agreement with Fancourt Flugcharter GmbH & Co KG, a company wholly owned by Hasso Plattner. There were no credit amounts drawn by DCW under this facility when SAP AG started the investment negotiations. The credit facility agreement was terminated without further drawings in May 2003. After his move from SAP AG’s Executive Board to SAP AG’s Supervisory Board, Hasso Plattner entered into a contract with SAP AG under which he provides consulting services for SAP for no fee butimmediate family of Dietmar Hopp, pursuant to which SAP has agreeda multi-purpose arena in Mannheim, Germany will be named “SAP Arena” (together with the right to reimburse his expenses in connection with such services.Haarmann, Hemmelrath & Partner is a partnership of lawyers, accountants and tax advisers, which holds stakes in other entities also carrying the name “Haarmann, Hemmelrath & Partner,” altogether referred to as “HHP” or “the firm.” The firm has more than 1,200 employees in 23 offices worldwide. HHP provided valuation services, tax and legal counsel services for entities ofuse the SAP group.logo for certain purposes) and SAP will receive the right to use certain reserved seating in the arena and to hold certain events in the arena. The total amount chargedfees required to SAP for those services in 2003 was€0.5 million (2002:€1.3 million; 2001:€0.3 million). Wilhelm Haarmann did not provide the services personally and was, if at all, only involved in a monitoring function. We were informed by HHP that revenues generated with SAP represented less than 1% of HHP’s revenue of the respective years. Additionally HHP is a customer of SAP. Amountsbe paid by HHPSAP pursuant to SAP for products and services were€0.02 million,€0.2 million and€0.2 millionthese agreements are immaterial to SAP. See Note 35 in the years 2003, 2002 and 2001, respectively. At no point in the years ended December 31, 2003, 2002 and 2001 the Company held note receivables from any member of the Executive Board or the Supervisory Board. During the years ended December 31, 2003, 2002 and 2001, there were no significant transactions between the Company and the major shareholders as outlined in Note 23 of “Item 18. Financial Statements.” In 2000, SAP commenced a strategic alliance relationship with Commerce One to jointly develop, market and sell Web-based software solutions. In connection with this relationship, SAP AG in its fiscal year 2000 acquired common stock of Commerce One and in 2001 increased its equity investment in the common stock of Commerce One to the point of exercising significant influence. As part of the acquisition arrangement SAP AG agreed to certain limitations that restrict SAP AG’s ability to transfer its common shares of Commerce One, to increase its ownership interest and to engage in certain take-over transactions involving Commerce One without approved by Commerce One’s Board of Directors. In 2002, SAP AG named a non-voting observer to attend Commerce One’s Board of Directors meetings. The cooperation agreements between the two companies were amended several times between 2001 and 2003. In 2003, SAP AG effectively ceased all transactions under the cooperation arrangements and ceased the jointly developed products or replaced such products with SAP products. As discussed in Note 4 of “Item 18. Financial Statements” the carrying value of SAP’s investment in Commerce One was reduced to zero as of December 31, 2002 and remained at zero throughout 2003. For the year ended December 31, 2003, transactions with Commerce One accounted for less than 1% of the Company’s total revenues and cost of revenues. For the year ended December 31, 2002 and 2001, transactions with Commerce One accounted for approximately 1% of the Company’s total revenues and less than 1% of the Company’s cost of revenues. Transactions involving Commerce One are expected to continue to be immaterial in periods beyond 2003.further information on related party transactions.As discussed in Note 16 of “Item 18. Financial Statements,” SAP has issued loans to employees other than to directors and officers with aggregate outstanding balances of€37.8 million and€32.6 million at December 31, 2003 and 2002, respectively. Loans granted to employees primarily consist of interest free or below market rate building loans which SAP discounts for financial reporting purposes based on prevailing market rates. SAP’s default experience on loans to employees has been insignificant. There have been no loans to employees or executives to assist them in exercising stock options. We have no loans outstanding to any directors or officers.7495ItemITEM 8. Financial InformationFINANCIAL INFORMATIONCONSOLIDATED FINANCIAL STATEMENTSSee “Item 18. Financial Statements” and pages F-1 through F-68F-66 and S-1.Other Financial InformationOTHER FINANCIAL INFORMATIONLegal ProceedingsThe German Federal Supervisory Office for Securities Trading (Bundesaufsichtsamt für den Wertpapierhandel) announced in January 1999 that it had initiated an investigation regarding possible insider trading by certain SAP AG employees prior to the release on January 5, 1999 of our preliminary results for 1998. We have cooperated with this investigation and believe that these investigations have been discontinued without seeking judgments against the persons under investigation. We have not received any further information that would lead us to believe the investigation is continuing. The bankruptcy trustee for the United States company FoxMeyer Corp. (“FoxMeyer”) instituted legal proceedings against SAP AG and SAP America, Inc., the U.S. subsidiary of SAP AG, in 1998. FoxMeyer was a pharmaceutical wholesaler and licensee of the SAP’sour R/3 system software. FoxMeyer’s bankruptcy trustee (“Trustee”) allegesalleged that the software failed to perform properly, damaging FoxMeyer’s business, and that such failure was a significant factor contributing to FoxMeyer’s bankruptcy in 1996 and its subsequent liquidation. The complaint asserts claims of breach of contract, breach of express On June 23, 2004, we reached a settlement agreement with FoxMeyer pursuant to which we were required to pay a specified amount to FoxMeyer and implied warranties, fraud, negligent misrepresentation,to which all outstanding disputes and promissory estoppel. The Trustee seeks unspecified compensatory and punitive damages, the award of costs, expenses and reasonable attorney’s fees, as well as pre-judgment and post-judgment interest. The discovery phaselitigation were dismissed by order of the proceedings is nearing completion and SAP AG intendsUnited States Bankruptcy Court for the District of Delaware dated August 30, 2004. We paid FoxMeyer the settlement amount on September 9, 2004. The terms of the settlement did not require us to file with SAP America, Inc., a motion for summary at the conclusion of discovery. While the ultimate outcome of this matter cannot be presently determined with certainty, we believe that the Trustee’s claims in this action are without merit. We are vigorously defending against the claims, and believe that this action ismake any changes to our business practices. The settlement amount did not likely to have a material effectimpact on our business,SAP’s financial position or result of operations, financial condition or cash flows.We are 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 our business, results of operations, financial position or cash flows. Any litigation, however, involves potential risk and potentially significant litigation costs, and therefore there can be no assurance that any litigation which is now pending or which may arise in the future would not have such a material adverse effect on our business, financial position, results of operations or cash flows.Dividend Policy Dividends are jointly proposed by SAP AG’s Supervisory Board and Executive Board based on SAP AG’s year-end stand-alone financial statements, subject to approval at the Annual General Shareholders’ Meeting and are officially declared for the prior year at SAP AG’s Annual General Shareholders’ Meeting. SAP AG’s Annual General Shareholders’ Meeting usually convenes during the second quarter of each year. Since ordinary shares are in bearer form, dividends are usually remitted to the custodian bank on behalf of the shareholder within one business day following the Annual General Shareholders’ Meeting. One SAP ADRADS represents one-fourth of SAP AG’s ordinary share. Accordingly, the final dividend per ADRADS is calculated as one-fourth of the dividend of one SAP AG share and is dependent on the euro/ U.S. dollar exchange rate. Record holders of the ADSs on the dividend record date will be entitled to receive payment of the dividend declared in respect of the year for which it is declared. Cash dividends payable to such holders will be paid to the Depositary in euro and, subject to certain exceptions, will be converted by the Depositary into U.S. dollars. The amount of dividends received by holders of ADSs may be affected by fluctuations in exchange rates. See “Item 3. Key Information — Exchange Rates.” The amount of dividends paid on the ordinary shares depends on the amount of distributable profits to be distributed byas reported in SAP AG,AG’s year-end stand-alone financial statements, which depends in part upon our performance. The timing and amount of future dividend payments will depend upon our future earnings, capital needs and other relevant factors.7596ItemITEM 9. The Offer and ListingTHE OFFER AND LISTINGGeneralGENERALThe ordinary shares are listed on each of the Frankfurt Stock Exchange, the Berlin Stock Exchange and the Stuttgart Stock Exchange andExchange. The ordinary shares were delisted from the Zürich Stock Exchange.Exchange on February 1, 2005. In addition, the ordinary shares are traded in the over-the-counter markets (Freiverkehr) in Germany. The principal trading market for the ordinary shares is the Frankfurt Stock Exchange. The ordinary shares are issued only in bearer form. Prior to June 18, 2001, SAP AG also had preference shares, which were then converted into ordinary shares on a share for share basis pursuant to resolutions adopted at our Annual General Shareholders’ Meeting and a special meeting of holders of the preference shares on May 3, 2001. The amount of subscribed capital for ordinary shares was therefore increased by the amount of preference shares converted on the effective date of the conversion. Due to the conversion, the ordinary shares are registered and listed on the various stock exchanges in Europe. Effective August 3, 1998, the ADSs were listed on the New York Stock Exchange (“NYSE”) originally representing a fraction of a preference share. Due to the conversion of preference shares into ordinary shares, the latter were registered with the NYSE as the underlying security for the ADSs. The ADSs trade on the NYSE under the symbol “SAP” and currently each represents one-fourth of one ordinary share. The Depositary for the ADSs pursuant to the Deposit Agreement iswas The Bank of New York.Trading on the Frankfurt Stock ExchangeThe Frankfurt Stock Exchange, operated by Deutsche Börse AG, is the largest of the eight German stock exchanges, accounting for approximately 90%86% of the turnover of all German stock exchanges. The aggregate annual turnover of the Frankfurt Stock Exchange (including XETRA) in 20032004 amounted to€2.8 trillion (based on the Frankfurt Stock Exchange’s practice of separately recording the sale and purchase components involved in any trade) for both equity and debt instruments. On December 31, 2003,2004, the equity securities of 5,7306,209 corporations, including 4,9015,393 non-German corporations, were traded on the Frankfurt Stock Exchange, including over-the-counter markets.Prices are continuously quoted on the Frankfurt Stock Exchange floor each business day between 9:00 a.m. and 8:00 p.m. Central European Time for the ordinary shares and for other actively traded securities. Markets in listed securities are generally of the auction type, but listed securities also change hands in inter-bank dealer markets both on and off the Stock Exchange. Price formation is determined by open outcry by state-appointed specialists (amtliche Kursmakler) who are themselves exchange members, but who do not, as a rule, deal with the public. The Stock Exchange continuously quotes prices for active stocks during Stock Exchange hours. Transactions on the Frankfurt Stock Exchange are settled on the second business day following trading. Transactions off the Frankfurt Stock Exchange (which may be the case if one of the parties to the transaction is foreign) are generally also settled on the second business day following trading (although a different period may be agreed upon by the parties). A quotation can be suspended if orderly stock exchange trading is temporarily endangered or if a suspension is necessary in order to protect the public interest. Under German law, customers’ orders to buy or sell listed securities must be executed on a stock exchange unless the customer gives other specific instructions for an individual transaction or an indeterminate number of transactions. In addition to the trading floor, the ordinary shares are also traded on XETRA, a computerized trading system of Deutsche Börse AG. XETRA matches buy and sell orders from licensed traders in a central,fully electronic order book. The system works independently of the location of the trader and provides insight into the order book. The trading hours for XETRA are from 9:00 a.m. until 5:30 p.m. Central European Time on each business day. Securities traded on XETRA include almost the full range of shares listed on the Frankfurt Stock Exchange and a number of additional warrants and certificates. XETRA is subject to the rules and regulations of the Frankfurt Stock Exchange. It now has a market share of 98% in the securities of the 30 companies comprising the Deutsche Aktienindex (“DAX”), the leading index of trading on the Frankfurt Stock Exchange. The SAP AG preference shares were included in the DAX beginning September 15, 1995 and were replaced by ordinary shares upon the conversion on June 18, 2001.76The table below sets forth, for the periods indicated, the high and low closing sales prices for the ordinary shares and for the preference shares, prior to June 18, 2001, on the Frankfurt Stock Exchange, as provided by the Deutsche Börse AG, together with the closing highs and lows of the DAX. Since January 4, 1999, the first official trading day of 1999, the share prices of shares traded on the German stock exchanges have been quoted in euro. Price per Price per Preference Ordinary Share(1) Share(1)(2) DAX(3) Price per Price per Ordinary Share(1) Preference Share(1)(2) DAX(3) High Low High Low High Low High Low High Low High Low (in€) (in€) (in€) (in€) Annual Highs and LowsAnnual Highs and Lows Annual Highs and Lows 1999 166.00 78.67 208.33 89.67 6,958.14 4,678.72 20002000 286.33 112.65 349.96 140.94 8,064.97 6,200.71 2000 286.33 112.65 349.96 140.94 8,064.97 6,200.71 20012001 180.90 100.00 N/A N/A 6,795.14 3,787.23 2001 180.90 100.00 N/A N/A 6,795.14 3,787.23 20022002 176.30 41.65 N/A N/A 5,462.55 2,597.88 2002 176.30 41.65 N/A N/A 5,462.55 2,597.88 20032003 134.00 67.65 N/A N/A 3,965.16 2,202.96 2003 134.00 67.65 N/A N/A 3,965.16 2,202.96 20042004 142.70 116.12 N/A N/A 4,261.79 3,646.99 Quarterly Highs and LowsQuarterly Highs and Lows Quarterly Highs and Lows 2002 First Quarter 176.30 143.18 N/A N/A 5,462.55 4,745.58 Second Quarter 164.50 90.40 N/A N/A 5,343.88 4,099.05 Third Quarter 95.59 46.34 N/A N/A 4,483.03 2,769.03 Fourth Quarter 90.99 41.65 N/A N/A 3,380.20 2,597.88 20032003 2003 First Quarter 93.74 67.65 N/A N/A 3,157.25 2,202.96 Second Quarter 112.30 70.50 N/A N/A 3,304.15 2,450.19 Third Quarter 126.26 97.36 N/A N/A 3,668.67 3,146.55 Fourth Quarter 134.00 105.95 N/A N/A 3,965.16 3,276.64 Monthly Highs and Lows 2003 July 108.76 97.36 N/A N/A 3,487.86 3,146.55 August 109.30 97.58 N/A N/A 3,565.47 3,331.89 September 126.26 104.88 N/A N/A 3,668.67 3,256.78 First Quarter 93.74 67.65 N/A N/A 3,157.25 2,202.96 October 129.37 105.95 N/A N/A 3,655.99 3,276.64 Second Quarter 112.30 70.50 N/A N/A 3,304.15 2,450.19 November 134.00 124.10 N/A N/A 3,797.40 3,638.04 Third Quarter 126.26 97.36 N/A N/A 3,668.67 3,146.55 December 133.79 129.99 N/A N/A 3,965.16 3,806.54 Fourth Quarter 134.00 105.95 N/A N/A 3,965.16 3,276.64 20042004 2004 January 142.70 132.41 N/A N/A 4,151.83 3,995.91 First Quarter 142.70 120.45 N/A N/A 4,151.83 3,726.07 February 137.37 127.00 N/A N/A 4,141.53 3,991.42 Second Quarter 138.31 122.44 N/A N/A 4,134.10 3,754.37 March (through March 9) 131.56 128.97 N/A N/A 4,145.99 4,054.43 Third Quarter 136.02 116.12 N/A N/A 4,035.02 3,646.99 Fourth Quarter 139.49 126.55 N/A N/A 4,261.79 3,854.41 Monthly Highs and LowsMonthly Highs and Lows 20042004 July 136.02 123.35 N/A N/A 4,035.02 3,752.59 August 132.03 116.12 N/A N/A 3,877.32 3,646.99 September 130.20 120.78 N/A N/A 3,991.02 3,817.62 October 133.53 126.55 N/A N/A 4,049.66 3,854.41 November 139.49 134.45 N/A N/A 4,183.41 4,012.64 December 137.20 130.00 N/A N/A 4,261.79 4,150.41 20052005 January 133.34 118.00 N/A N/A 4,316.40 4,201.81 February 125.28 118.60 N/A N/A 4,402.03 4,279.97 March (through March 8) 124.00 122.75 N/A N/A 4,428.09 4,373.27 (1) Since January 1, 2000, ordinary share prices are obtained from XETRA. Similarly, preference share prices between January 1, 2000 and June 18, 2001 were obtained from XETRA. (2) All amounts for the preference shares shown reflect the highs and lows through June 18, 2001 due to the conversion of preference shares to ordinary shares. (3) The DAX is a continuously updated, capital-weighted performance index of 30 German blue chip companies. In principle, the shares included in the DAX are selected on the basis of their stock exchange turnover and the issuer’s market capitalization. Adjustments to the DAX are made for capital changes, subscription rights and dividends. Subsequent to June 18, 1999, the highs and lows of the DAX are disclosed on XETRA. On March 9, 2004,8, 2005, the closing sales price per ordinary share on the Frankfurt Stock Exchange was€129.75,124.00, as provided by the Deutsche Börse AG.77Trading on the NYSE SAP AG’s ordinary shares are traded in the U.S. by means of American Depositary Shares (“ADS”ADSs”). Each ADS represents one fourth of one ordinary share. On March 9, 2004,8, 2005, based upon information provided by the ADS depositary, theDeutsche Bank of New York,Trust Company Americas, there were 127,464,548102,180,096 ADSs, representing approximately 31,866,13725,545,024 ordinary shares, held of record by 2,3001,214 registered holders. The ordinary shares underlying such ADSs represented 10.1%8.1% of the then-outstanding ordinary shares (including treasury stock). Because SAP’s ordinary shares are issued in bearer form only, we are unable to determine the number of ordinary shares directly held by persons with U.S. addresses.The table below sets forth, for the periods indicated, the high and low closing sales prices for the ADSs on the NYSE as reported on the NYSE Composite Tape. Price per ADS Price per ADS High Low High Low (in U.S.$) (in U.S.$) Annual Highs and LowsAnnual Highs and Lows Annual Highs and Lows 1999 53.75 23.81 20002000 83.94 31.75 2000 83.94 31.75 20012001 47.64 23.00 2001 47.64 23.00 20022002 38.84 10.05 2002 38.84 10.05 20032003 41.80 18.46 2003 41.80 18.46 20042004 45.45 35.50 Quarterly Highs and LowsQuarterly Highs and Lows Quarterly Highs and Lows 1999 First Quarter 37.00 23.81 Second Quarter 36.81 24.63 Third Quarter 39.25 30.31 Fourth Quarter 53.75 33.13 20002000 2000 First Quarter 83.94 44.87 First Quarter 83.94 44.87 Second Quarter 59.19 40.94 Second Quarter 59.19 40.94 Third Quarter 67.81 46.06 Third Quarter 67.81 46.06 Fourth Quarter 62.19 31.75 Fourth Quarter 62.19 31.75 20012001 2001 First Quarter 47.64 28.59 First Quarter 47.64 28.59 Second Quarter 40.99 24.39 Second Quarter 40.99 24.39 Third Quarter 37.73 23.00 Third Quarter 37.73 23.00 Fourth Quarter 34.80 25.09 Fourth Quarter 34.80 25.09 20022002 2002 First Quarter 38.84 32.41 First Quarter 38.84 32.41 Second Quarter 38.30 22.68 Second Quarter 38.30 22.68 Third Quarter 23.51 11.25 Third Quarter 23.51 11.25 Fourth Quarter 22.65 10.05 Fourth Quarter 22.65 10.05 20032003 2003 First Quarter 25.00 18.46 First Quarter 25.00 18.46 Second Quarter 33.40 19.18 Second Quarter 33.40 19.18 Third Quarter 34.50 27.56 Third Quarter 34.50 27.56 Fourth Quarter 41.80 31.13 Fourth Quarter 41.80 31.13 20042004 First Quarter 45.27 36.97 Second Quarter 41.95 36.71 Third Quarter 41.68 35.50 Fourth Quarter 45.45 39.20 Monthly Highs and LowsMonthly Highs and Lows 20042004 July 41.68 37.96 August 40.05 35.50 September 40.25 36.39 October 42.65 39.20 November 45.35 42.78 December 45.45 43.05 20052005 January 44.04 38.52 February 40.75 38.58 March (through March 8) 41.23 40.02 78100 Price per ADS High Low (in U.S.$) Monthly Highs and Lows 2003 July 30.70 27.59 August 29.94 27.56 September 34.50 30.41 October 38.55 31.13 November 38.98 36.47 December 41.80 39.42 2004 January 45.27 41.14 February 44.14 39.60 March (through March 9) 40.75 39.45 On March 9, 2004,8, 2005, the closing sales price per ADS on the NYSE was U.S.$40.00,41.23, as reported on the NYSE Composite Tape.ITEM 10. ADDITIONAL INFORMATIONItem 10.Additional InformationARTICLES OF INCORPORATIONOrganization and RegisterSAP AG is a stock corporation organized in the Federal Republic of Germany under the Stock Corporation Act (Aktiengesetz). SAP AG is registered in the Commercial Register (Handelsregister) maintained by court in Heidelberg, Germany, under the entry number “HRB 269-Wie.” SinceAs of January 1, 2003, SAP AG publishes its official notices in the Internet version of the Federal Gazette (www.ebundesanzeiger.de).Objectives and purposes Section 2 of SAP AG’s Articles of Incorporation states that our objectives involve, directly or indirectly, the development, production and marketing of products and the provisionsprovision of services in the field of information technology, including: • developing and marketing integrated product and service solutions for e-commerce; • developing software for information technology and the licensing of its use to others; • organization and deployment consulting, as well as user training, for e-commerce and other software solutions; • selling, leasing, renting and arranging the procurement and provision of all other forms of use of information technology systems and related equipment; and • making capital investments in enterprises active in the field of information technology to promote the opening and advancement of international markets in the field of information technology. SAP AG is authorized to act in all the business areas listed above and to delegate such activities to affiliated enterprises within the meaning of the German Stock Corporation Act; in particular SAP AG is authorized to delegate its business in whole or in part to such enterprises. SAP AG is authorized to establish branch offices in Germany and other countries, as well as to form, acquire or invest in other companies of the same or related kind and to enter into collaboration and joint venture agreements. SAP AG is further authorized to invest in enterprises of all kinds principally for the purpose of placing financial resources. SAP AG is authorized to dispose of investments, to consolidate the management of enterprises in which it participates, to enter into affiliation agreements with such enterprises, or to do no more than manage its shareholdings.79Corporate GovernanceIntroduction.Introduction The primary source of law relating to corporate governance of a German stock corporation is the German Stock Corporation Act, but other relevant rules with impact on corporate governance are also contained in the Security Trading Act, Securities Purchase and Takeover Act, Stock Exchange Admission Regulations, Commercial Code and other statutes. In addition to these mandatory rules, in February 2002, a government commission appointed by the German Minister of Justice adopted the German CorporateGovernance Code (“GCGC”), which has since been amended. The GCGC consists of recommended cooperate governance standards. The new Section 161 of the Stock Corporation Act, however, requires the Executive and the Supervisory Board of exchange- listedexchange-listed companies, such as SAP AG, to declare annually that the recommendations set forth in the GCGC have been and are being complied with, or which of the recommendations are not being applied. SAP AG disclosed deviations from the GCGC in 2002, 2003 and 20032004 in a declaration of compliance, which is available on our website (www.sap.com). In December 2001 SAP AG was one of the first German listed companies to publish its own corporate governance rules — “SAP’s Principles of Corporate Governance.” After the adoption of the GCGC in 2002, SAP adjusted its own principles according to those standards and an update of SAP’s Principles of Corporate Governance was published in August 2002 and March 2004. The purpose of “SAP’s Principles of Corporate Governance” which reflect the accepted standard of corporate governance for German stock corporations is to provide a framework of responsible, value oriented management and control policies for the SAP group of companiesour company according to or where necessary complementing the applicable provisions of law. SAP’s Principles of Corporate Governance are available on our website (www.sap.com). On the same website, we intend to makemade available a statement of how SAP’s corporate governance practices vary from those of U.S. corporations. The Sarbanes-Oxley Act, enacted into law in July 2002, strengthens protection of the shareholding publicshareholders by imposing new corporate governance and reporting requirements on publicly traded companies.companies in the U.S. As SAP AG is a publicly traded company listed on the New York Stock Exchange, SAP haswe have taken steps to comply with the applicable regulations of the Sarbanes-Oxley Act and the regulations of the Corporate Governance Rules of the New York Stock Exchange including establishing a Disclosure Committee and enhancing the monitoring of internal control processes. SAP amended in its Principles of Corporate Governance standards and guidelines that SAP Executive Board and Supervisory Board members must follow in carrying out their duties, including a number of guidelines that cover certain topics similar to those required by the New York Stock Exchange rules. On our website (www.sap.com), we intend to make available a statement of how SAP’s corporate governance practices vary from those required by the New York Stock Exchange.SAP AG, as a German stock corporation, is governed by three separate bodies: the Supervisory Board, the Executive Board and the Annual General Shareholders’ Meeting. Their rules are defined by German law and by SAP’s Articles of Incorporation (Satzung) and may be briefly summarized as follows:The Supervisory Board The Supervisory Board appoints and removes the members of the Executive Board and oversees and advises the management of the corporation. At regular intervals it meets to discuss current business as well as business development, and planning. The SAP Executive Board must consult with the Supervisory Board concerning the corporate strategy, which is developed by the Executive Board. The Supervisory Board must also approve the annual budget of SAP upon submission by the Executive Board and certain subsequent deviations from the approved budget. The Supervisory Board is also responsible for representing SAP AG in transactions between SAP AG and Executive Board members. The Supervisory Board, based on a recommendation by the Audit Committee, provides its proposal for the election of the independent public accountant to the Annual General Shareholders’ Meeting. Prior to submitting this proposal and as requested by SAP’s Principles of Corporate Governance, the SAP Supervisory Board must obtain a statement from the proposed independent public accountant stating its independence. The Supervisory Board is also responsible for monitoring the auditor’s continued independence.80The German Co-Determination Act of 1976 (Mitbestimmungsgesetz) requires supervisory boards of corporations with more than 2000 employees to be equally staffed by representatives of the shareholders and representatives of the employees. The minimum total number of Supervisory Board members, and thus the minimum number of shareholder representatives and employee representatives is legally fixed and depends on the number of employees employed by the corporation and its German subsidiaries. The SAPOur Supervisory Board currently consists of 16 members, of which 8 members have been elected by SAP AG’s shareholders at the Annual General Shareholders’ Meeting and 8 members which have been elected by SAP’s employees.Previously, the Supervisory Board consisted of 12 members, of which six6 were elected by the shareholders and six6 were elected by SAP employees. Since the number of employees of SAP AG and its affiliates in Germany exceeded 10,000 in 2001, the Supervisory Board was enlarged to 16 members subsequent to the Annual General Shareholders’ Meeting in May 2002. Any Supervisory Board member elected by the shareholders at the Annual General Shareholders’ Meeting may be removed by three-quarters of the votes cast at the Annual General Annual Shareholders’ Meeting. Any Supervisory Board member elected by the employees may be removed by three quarters of the votes cast by employees. The Supervisory Board elects a chairman and a deputy chairman among its members by a majority of vote of its members. If such majority is not reached on the first vote, the chairman will be chosen solely by the members elected by the shareholders and the deputy chairman will be chosen solely by the members elected by the employees. Unless otherwise provided for by law, the Supervisory Board acts by simple majority. In the case of any deadlock the chairman has the deciding vote. The members of the Supervisory Board are each elected for the same fixed term of approximately 5 years. The term expires at the close of the Annual General Shareholders’ Meeting of the fourth fiscal year following the year in which the Supervisory Board was elected unless the Annual General Shareholders’ Meeting specifies a shorter term of office when electing individual members of the Supervisory Board or the entire Supervisory Board. Re-election is possible. The Supervisory board normally meets four times a year. The remuneration of the members of the Supervisory Board is determined by the Articles of Incorporation. As stipulated in SAP’s Principles of Corporate Governance the shareholder representatives of the Supervisory Board are independent. In order to be considered for appointment to the Supervisory Board and for as long as they serve, members must comply with certain criteria concerning independence, conflict of interest and multiple memberships of management, supervisory and other governing bodies. They must be loyal to SAP in their conduct and must not accept appointment in companies that are in competition with SAP. Members are subject to SAP’s insider trading prohibition and the interested director dealing rules of the Securities Trading Act. The Supervisory Board may appoint committees from among its members and may, to the extent permitted by law, entrust committees with the authority to make decisions. Currently the Supervisory Board maintains the following committees:The focus of theAudit Committee (Bilanzprü(Bilanzprüfungsausschuss) is the discussion and the monitoring of the independent auditors reports about SAP companies and SAP AG financial statements as well as the summarized reviewReview of SAP companies and SAP AG operations.operations, a document required under German law. The Audit Committee proposes appointment of the auditor and its compensation to the Supervisory Board, determines special audit areas and discusses critical accounting policies with and reviews audit issues identified by the auditor and monitors the auditor’s independence. SAP’s Internal Audit Department reports upon request or at the occurrence of certain audit findings, but in any case at least once a year directly to the Audit Committee. The Audit Committee has established special procedures regarding the prior approval of all audit and non-audit services provided by our independent auditor. These procedures are codified in SAP’s “Principles of the engagement of the auditor regarding auditing —See “Item 16C. Principal Accountant Fees and non — audit services.” The Audit Committee is currently composed of 4 members: Bernhard Koller, Wilhelm Haarmann, Stefan Schulz and Klaus Tschira. The Supervisory Board has determined Wilhelm Haarmann to be a financial expert as defined in Section 407 of the Sarbanes-Oxley Act.81TheGeneral Committee(Präsidialausschuss) coordinates the Supervisory Board agenda, meetings and deals with corporate governance issues. Furthermore, it was assigned the authority to grant SAP SOP 2002 stock options to all recipients with the exception of Executive Board Members.TheCompensation Committee(Personalausschuss) was assigned the conclusion of employment contracts with and the determination of the remuneration of Executive Board Members. It also grants SAP SOP 2002 stock options to SAP AG Executive Board Members.TheFinance and Investment Committee (Finanz-(Finanz- und Investitionsausschuss) addresses general financing issues. Furthermore it is responsible forregularly discusses venture capital investments and other equity investments with the approvalExecutive Board and reports to the Supervisory Board on such investments. It is also responsible for the approval of venture capitalsuch investments above€7.5 million and other investments between€15.0 million and€100.0 million.Required by the German Determination Act of 1976 (Mitbestimmungsgesetz), theMediation Committee (Vermittlungsausschuss)(Vermittlungsausschuss) convenes only if the 2/3 majority required for appointing/revoking the appointment of Executive Board members is not attained. This committee has never held a meeting in SAP AG’s history.TheTechnology Committee (Technologieausschuss)(Technologieausschuss) monitors technology transactions and provides the Supervisory Board with in-depth technical knowledge. The duties, procedures and committees of the Supervisory Board are specified in bylaws and in SAP’s Principles of Corporate Governance, respectively. Major decisions of the Executive Board require Supervisory Board approval. According to the latest adjustments to SAP’s Principles of Corporate Governance as mentioned above, the granting of loans to Senior Management is not permitted. The Supervisory Board, according to SAP’s Principles of Corporate Governance, also can no longer approve such contracts.The Executive Board The Executive Board manages the corporation’s business, is responsible for preparing its strategy and represents it in dealings with third parties. The Executive Board reports regularly to the Supervisory Board about SAP operations and business strategies and prepares special reports upon request. A person may not serve inon the Executive Board and inon the Supervisory Board of a corporation at the same time. The Executive Board and the Supervisory Board must cooperate closely for the benefit of the company. Without being asked, the Executive Board must provide to the Supervisory Board regular, prompt and comprehensive information about all of the essential issues affecting the SAP group’s business progress and its potential business risks. Furthermore, the Executive Board must maintain regular contact with the chairperson of the Supervisory Board. The Executive Board must inform the chairperson of the Supervisory Board without delay if exceptional events occur that are of significance to SAP’s business. The chairperson must inform the Supervisory Board accordingly. Pursuant to the Articles of Incorporation, the Executive Board must consist of at least 2 members. Currently, SAP AG’s Executive Board is composed of 7 members. Any 2 members of the Executive Board jointly or one member of the Executive Board and the holder of a special power of attorney jointly may legally represent SAP AG. The Supervisory Board appoints each member of the Executive Board for a maximum term of 5 years, with the possibility of re-appointment thereafter. Under certain circumstances, a member of the Executive Board may be removed by the Supervisory Board prior to the expiration of that member’s term. A member of the Executive Board may not vote on matters relating to certain contractual agreements between such member and SAP AG, and may be liable to SAP AG if such member has a material interest in any contractual agreement between SAP and a third party which was not disclosed to and approved by the Supervisory Board. Further, as the compensation of the Executive Board members is set by the Supervisory Board, Executive Board members are unable to vote on their own compensation. Under German law SAP AG Supervisory Board Members and Executive Board Members have a duty of loyalty and care to SAP AG. They must exercise the standard of care of a prudent and diligent businessman and bear the burden of proving they did so if their actions are contested. Both bodies must consider the interest of SAP AG shareholders and our employees and, to some extent, the common interest. Those who violate their82104violate their duties may be held jointly and severally liable for any resulting damages, unless they acted pursuant to a lawful resolution of the Annual General Shareholders’ Meeting. SAP has implemented a Code of Business Conduct for employees covering the following topics: Conflict of interest, personnelpersonal gain, bribery and corruption, confidentiality, financial concerns, conduct with customers, ventures, competitors and partners and trading in shares (addressing insider trading concerns). The employee code and SAP’s Principles of Corporate Governance are equally applicable to managers and members of the Executive Board. Under the German law the Executive Board of SAP AG has to assess all major risks for the SAP group. In addition, all measures taken by the management to reduce and handle the risks have to be documented. Therefore, SAP’s management has adopted suitable measures such as implementing an enterprise-wide monitoring system to ensure that adverse developments endangering the corporate standing are recognized at a reasonably early point in time.The Annual General Shareholder MeetingThe Annual General Shareholders’ Meeting ratifies the actions of SAP AG’s Supervisory Board and the Executive Board. It approves the amount of the appropriation of retained earnings, the appointment of an independent auditor, the election of the members of the Supervisory Board and certain significant corporate transactions. Pursuant to the German Stock Corporation Act, any conditional capital increase or use of treasury shares to offer stock options or similar equity compensation to employees must be ratified by the shareholders. The shareholders have to approve any significant aspects of such a plan as well as the exercise threshold. The Annual General Shareholders’ Meeting must be called by the Executive Board within the first eight months of each fiscal year. If a meeting is not timely called, shareholders, which hold in the aggregate 5% of the issued share capital or shares with a nominal value of at least€500,000 may demand an Extraordinary General Shareholders’ Meeting.Share CapitalCapital.As of December 31, 20032004 the share capital of SAP AG was€315,413,553,316,003,600, consisting of 315,413,553316,003,600 no-par ordinary shares. The ordinary shares are issued only in bearer form. SAP AG’s shareholders approved at the Annual General Shareholders’ Meeting and a special meeting of holders of preference shares held on May 3, 2001 the conversion of each preference share into one ordinary share. The conversion was effective as of June 18, 2001. Some of the significant provisions under German law and SAP AG’s Articles of Incorporation relating to the capital stock of SAP AG may be summarized as follows: • Capital Increases.The capital stock may be increased in consideration of contributions in cash or in kind, or by establishing authorized capital or contingent capital or by an increase of the company’s capital reserves. Authorized capital provides the Executive Board with the flexibility to issue new shares for a period of up to five years, generally to preserve liquidity. The Executive Board must obtain the approval of the Supervisory Board before issuing new shares with regard to the authorized capital. Contingent capital allows the issuance of new shares for specified purposes, including employee stock option plans and the issuance of shares upon conversion of convertible bonds and exercise of stock options. The Executive Board may only issue new shares with regard to the contingent capital for the specified purposes by law. Capital increases of ordinary shares require an amendment of the Articles of Incorporation approvedapproval by 75% of the issued shares present at the Annual General Shareholders’ Meeting at which the increase is proposed. The Executive Board must also obtainproposed and require an amendment to the approvalArticles of the Supervisory Board before issuing new shares.Incorporation. • Authorized and Contingent Capital.Information regarding our authorized and contingent capital is included in Note 2322 in “Item 18. Financial Statements.” • Capital Reduction.The share capital may be reduced by an amendment of the Articles of Incorporation approved by 75% of the issued shares present at the Annual General Shareholders’ Meeting. • Preemptive Rights.Shareholders have preemptive rights to subscribe (Bezugsrecht) for any issue of additional shares in proportion to their shareholdings in the issued capital. The preemptive rights may be 83excluded under certain circumstances by a shareholders’ resolution (approved by 75% of the issued shares present at the Annual General Shareholders’ Meeting) or by the Executive Board authorized by such shareholders’ resolution and subject to the consent of the Supervisory Board. • Liquidation.If SAP AG were to be liquidated, any liquidation proceeds remaining after all of our liabilities were paid would be distributed to our shareholders in proportion to their shareholdings. • No Limitation on the right to own securities, including on Foreign Ownership.With the exception to buyof buying back treasury stock by a stock corporation, which is limited to 10% of the share capital, there are no limitations under German law or in SAP AG’s Articles of Incorporation on the right to own securities, including on the right of persons who are not citizens or residents of Germany to hold or vote ordinary shares. According to the German stock corporation law, the rights of shareholders can not be amended without shareholders’ consent. The Articles of Incorporation do not provide more stringent conditions than are required by German law.Voting RightsRights. Each ordinary share represents one vote. Cumulative voting is not permitted under German law. SAP AG’s Articles of Incorporation provide that resolutions are passed at general shareholders’ meetings by the majority as required by law. This means that resolutions could be passed by a majority of votes cast, unless the law requires a higher vote. Additionally, German law requires that the following matters, among others, be approved by the affirmative vote of 75% of the issued shares present at the general shareholders’ meeting at which the matter is proposed: • changing the objectives provision in the articles of incorporation; • capital increases and capital decreases; • excluding preemptive rights of shareholders to subscribe for new shares; • dissolution; • a merger into, or a consolidation with, another company; • a transfer of all or virtually all of the assets; and • a change of corporate form. Shareholder MeetingsMeetings.The Executive Board calls the Annual General Shareholders’ Meeting. The Supervisory Board or the Executive Board may call an extraordinary meeting of the shareholders, if the interests of the stock corporation so require. Additionally, shareholders of SAP AG holding in the aggregate at least 5% of SAP AG’s issued share capital or shares with a nominal value of at least€500,000 may call an extraordinary meeting of the shareholders. Among other things, the Annual General Shareholders’ Meeting isshareholders are asked to ratify the actions of the Executive Board and the Supervisory Board during the prior year, approve the distribution of the corporation’s profits and to appoint an independent auditor as well as amendments of our Articles of Incorporation. Shareholder representativesto the Supervisory Board are elected at the Annual General Shareholders’ Meeting for terms of approximately five years. The influence of the Shareholders’ Meeting is limited by applicable law. The Shareholders’ Meeting can only make management decisions if requested to do so by the Executive Board.Change in ControlControl. There are no provisions in the Articles of Incorporation of SAP AG that would have an effect of delaying, deferring or preventing a change in control of SAP AG and that would only operate with respect to a merger, acquisition or corporate restructuring involving it or any of its subsidiaries.On January 1, 2002, the German Securities Purchase and Takeover Act (Wertpapiererwerbs- und Übernahmegesetz) became effective. It requires, among other things, that a bidder seeking control of a company84with its corporate seat in Germany and traded on a European Union stock exchange must publish advance notice of a tender offer, submit a draft offer statement to the Financial Supervisory Authority(Bundesanstalt für Finanzdienstleistungsaufsicht) for review, and obtain certification from a qualified financial institution that adequate financing is in place to complete the offer. Once a bidder has acquired shares representing 30% of the voting power, it must make an offer for all remaining shares of the target. The Securities Purchase and Takeover Act requires the Executive Board of the target to refrain from taking any measures that may frustrate the success of the takeover offer. However, the target executive board is permitted to take any action that a prudent and diligent management of a company that is not the target of a takeover bid would also take. Moreover, the target executive board may search for other bidders and, with the prior approval of the supervisory board, may take other defensive measures, provided that both boards act within the parameters of their general authority under the German Stock Corporation Act. An Executive Board may also adopt specific defensive measures if such measures have been approved by the Supervisory Board and were specifically authorized by the shareholders no later than eighteen months in advance of a takeover bid by resolution of 75% of the votes cast.Disclosure of Share HoldingsHoldings.SAP AG’s Articles of Incorporation do not require shareholders to disclose their share holdings. The Securities Trading Act (Wertpapierhandelsgesetz), however, requires holders of voting securities of SAP AG to notify SAP AG and the Financial Supervisory Authority of the number or shares they hold if that number reaches, exceeds of falls below specified thresholds. These thresholds are 5%, 10%, 25%, 50% and 75% of the corporation’s outstanding voting rights.Currency Conversion — DividendsSee “Item 3. Key Information — Dividends” and “Item 8. Financial Information — Dividend Policy.”MATERIAL CONTRACTS This section provides a summary of all material contracts not in the ordinary course of business to which we are a party and that have been entered into during the fiscal year ended December 31, 2004. We did not enter into any such contracts for the fiscal year ended December 31, 2003. The agreement described below has been filed as an exhibit to this Annual Report on Form 20-F.Credit Facility Agreement On November 5, 2004, we entered into a Syndicated Multicurrency Revolving Credit Facility Agreement with an initial term of 5 years (the “Credit Agreement”) among SAP; the lenders named in theMaterial Contracts107Credit Agreement; ABN AMRO Bank N.V., BNP Paribas, Deutsche Bank AG and J.P. Morgan plc as Mandated Lead Arrangers; and ABN AMRO N.V. London Branch as Agent (the “Agent”). Under the Credit Agreement, we may borrow up to€1,000,000,000, and amounts borrowed and prepaid as described below may be reborrowed. We are required to pay a commitment fee of 0.07% per annum on unused amounts of the available credit. The use of the Credit Agreement is not restricted by any financial covenants. Any borrowings will bear interest at a rate per annum equal to the percentage rate per annum which is the aggregate of (1) 0.20 per cent. per annum; (2) the European interbank offered rate in relation to any loan in euro or the London interbank offered rate in relation to any loan in any currency other than euro; and (3) the percentage rate per annum calculated by the Agent in accordance with Schedule 4 to the Credit Agreement, if applicable. Interest is due on the last day of each applicable interest rate period and, if the interest rate period has a duration longer than six months, the business day that occurs every six months after the start of the applicable interest period. SAP may prepay at any time, at its option, in whole or in part (but not less than€20,000,000 at any time) any outstanding borrowings plus accrued interest upon up to five business days’ notice to the Agent. SAP is required to pay any related breakage costs in connection with prepaying. The Credit Agreement contains representations customary for credit facilities of this nature, including accuracy of financial statements; enforceability of the Credit Agreement documentation; no material adverse change since December 31, 2003, the date of SAP’s audited financial statements provided in connection with its Annual Report for the 2003 fiscal year on Form 20-F; absence of material litigation; no violation of laws or material agreements; power and authority to enter into Credit Agreement documentation and the related borrowings; and material accuracy of information. The Credit Agreement also contains certain events of default customary for credit facilities of this nature, including non-payment of principal or interest when due; breach of covenants; material incorrectness of representations when made; bankruptcy and insolvency; and cross-default of other material indebtedness. If any of these events of default occur and are not cured within applicable grace periods or waived, the Agent shall at the request, or may with the consent, of the lenders owed a majority of the then aggregate unpaid principal amount of the borrowings declare all amounts under the Credit Agreement immediately due and payable. As of December 31, 2004, SAP has not made any borrowings under the facility. This description is a summary of the Credit Agreement and is qualified in its entirety by the Credit Agreement, which is filed as Exhibit 4.11 to this report. In addition, please see Note 35 in “Item 18. Financial Statements” for a summary of contracts with certain of our related parties.We do not believe that any one particular contract, if terminated, would have a material adverse effect on our business, results of operations, financial condition or cash flows.Exchange Controls and Other Limitations Affecting Security HoldersEXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERSThe euro is a fully convertible currency. At the present time, Germany does not restrict the export or import of capital, except for investments in certain areas in accordance with applicable resolutions adopted by the United Nations and the European Union. However, for statistical purposes only, every individual or corporation residing in Germany (“Resident”) must report to the German Central Bank (Deutsche Bundesbank), subject only to certain immaterial exceptions, any payment received from or made to an individual or a corporation residing outside of Germany (“Non-Resident”) if such payment exceeds€12,500 (or the equivalent in a foreign currency). In addition, German Residents must report any claims against orany liabilities payable to Non-Residents if such claims or liabilities, in the aggregate, exceed€5 million (or the equivalent in a foreign currency) at the end of any calendar month. Residents are also required to report annually to the German Central Bank any shares or voting rights of 10% or more they hold in non-resident corporations with total assets of more than€3 million. Corporations residing in Germany with assets in excess of€3 million must report annually to the German Central Bank any shares or voting rights of 10% held by a Non-Resident. For a discussion of the treatment of remittance of dividends, interest or other payments to Non-Resident holders of ADSs or ordinary shares, see below “— Taxation — German Taxation of Holders of ADSs or Ordinary Shares.” There are no limitations imposed by German law or the Articles of Incorporation of SAP AG on the right of non-residents or foreign holders to hold the ADSs or ordinary shares or to receive dividends or other payments on such shares.85TaxationTAXATIONGeneral The following discussion summarizes certain German tax and U.S. federal income tax consequences of the acquisition, ownership and disposition of ADSs or ordinary shares. Although the following discussion does not purport to describe all of the tax considerations that may be relevant to a prospective purchaser of ADSs or ordinary shares, such discussion: (i) summarizes the material German tax consequences to a holder of ADSs or ordinary shares, and (ii) summarizes certain material U.S. federal income tax consequences to a U.S. Holder (as hereinafter defined) of ADSs or ordinary shares that is not resident (in the case of an individual) or domiciled (in the case of a legal entity), as the case may be, in Germany (in either case, referred to herein as “not resident” or as a “non-resident”) and does not have a permanent establishment or fixed base located in Germany through which such ADSs or ordinary shares are held.German Taxation of Holders of ADSs or Ordinary Shares The following discussion generally summarizes the principal German tax consequences of the acquisition, ownership and disposition of ADSs or ordinary shares to a beneficial owner. This summary is based on the laws that are in force at the date of this Annual Report on Form 20-F and is subject to any changes in German law, or in any applicable double taxation conventions to which Germany is a party, occurring after such date. This discussion is also based, in part, on representations of the Depositary and assumes that each obligation of the Deposit Agreement and any related agreements will be performed in accordance with its terms. The following discussion is not a complete analysis or listing of all potential German tax consequences to holders of ADSs or Ordinary Shares and does not address all tax considerations that may be relevant to all categories of potential purchasers or owners of ADSs or Ordinary Shares.ordinary shares. In particular, the following discussion does not address the tax consequences for: (i) a person that owns, directly or indirectly, 1% or more of SAP AG’s shares; (ii) a holding which forms part of a German permanent establishment of a person not resident in Germany; or (iii) a person that is resident in Germany and at the same time resident in another CAC-country. OWNERS AND PROSPECTIVE PURCHASERS OF ADSs OR ORDINARY SHARES ARE URGED TO CONSULT THEIR OWN TAX ADVISORS CONCERNING THE OVERALL GERMAN TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION THEREOF. For purposes of applying German tax law and the double taxtaxation conventions to which Germany is a party, a holder of ADSs will generally be treated as owning the ordinary shares represented thereby.German Taxation of Dividends With regard to the taxation of dividends, the half-income system applies. Under this system only half of the distributed profits of a corporation will be included in the personal income tax base of an individual shareholder resident in Germany. It is not possible to credit the corporation tax paid by the company against the shareholder’s income tax. Effectively, a portion of 95% of the dividends received in 2004 and subsequent taxable years by corporate shareholders domiciled in Germany will be tax-exempt in order to avoid double taxation. These rules have some exceptions, which especially apply to financial and certain insurance institutions. Based on these considerations the German taxation of dividends can be summarized as follows:Under German domestic income tax laws, German corporations are required to withhold tax on dividends in an amount equal to 20% of the gross amount paid to resident and non-resident shareholders. As the basis for deduction of the withholding tax is the gross amount, withholding tax will be deducted on the taxable and tax-exempt portion of the dividend received. A 5.5% solidarity surtax on the German withholding tax is currently levied on dividend distributions paid by a German corporation, such as SAP AG. The solidarity surtax equals 1.1% (5.5% of 20%) of the gross amount of a cash dividend. Certain persons resident in Germany (e.g., qualifying investment funds or tax-exempt organizations) may obtain a partial or full refund of such taxes. For an individual holder of ADSs or ordinary shares that is resident in Germany, according to German income tax law, half of the dividends received (which in the case of ADSs are calculated as one-fourth of the dividend on one SAP86AG ordinary share and are dependent on the euro/dollar exchange rate)rate at the time of payment) are subject to German income tax. For such a holder, the taxable amount will be the sum of: (i) half of the cash payment by SAP AG and (ii) half of the taxes withheld. For a corporate holder of ADSs or ordinary shares that is domiciled in Germany, according to German income tax law, dividends in principle are exempt from corporation tax. However, a portion of 5% of the dividends received is treated as non deductible expenses. Therefore, effectively a portion of 95% of dividends received in 2004 and subsequent taxable years by a corporate holder of ADSs or ordinary shares that is resident in Germany is exempt and a portion of 5% of the dividends received is subject to corporation tax. These rules as regards the (partial) exemption for dividends from corporation tax have some exceptions, which especially apply to financial and certain insurance institutions. Subject to certain conditions, the tax withheld on the gross amount will be eligible for credit against the holder’s income tax or corporation tax liability. Exceeding amounts are refunded upon filing and assessment of the tax return. For holders subject to German trade tax, such tax is imposed in general only on the amount of the dividends received, which is subject to income tax or corporation tax. On the portion of the dividends received which is exempt from income tax or corporation tax, trade tax will become due if the holder of ADSs or ordinary shares does not own at least 10% of the shares in the distributing corporation at the beginning of the tax year.Refund of German Tax to U.S. Holders A partial refund of the 20% withholding tax equal to 5% of the gross amount of the dividend and a full refund of the solidarity surtax can be obtained by a U.S. Holder (as hereinafter defined) under the U.S.-German income tax treaty (Convention between the Federal Republic of Germany and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on Income, German Federal Law Gazette 1991 II page 355) (the “Treaty”). Thus, for each U.S.$100 of gross dividends paid by SAP AG to a U.S. Holder, the dividends after partial refund of the 20% withholding tax and a refund of the solidarity surtax under the Treaty will be subject to a German withholding tax of U.S.$15. To claim the refund of amounts withheld in excess of the Treaty rate, a U.S. Holder must submit (either directly or, as described below, through the Depositary) a claim for refund to the German tax authorities, with, in the case of a direct claim, the original bank voucher (or certified copy thereof) issued bythe paying entity documenting the tax withheld, within four years from the end of the calendar year in which the dividend is received. Claims for refund are made on a special German claim for refund form, which must be filed with the German tax authorities: Bundesamt für Finanzen, 53221Friedhofstrasse 1, D-53221 Bonn, Germany.Germany; http://www.bff-online.de/. The German claim for refund form may be obtained from the German tax authorities at the same address where applications are filed, or from the Embassy of the Federal Republic of Germany, 4645 Reservoir Road, N.W., Washington, D.C. 20007-1998. U.S. Holders must also submit to the German tax authorities certification (IRS Form 6166) of their most recently filed U.S. federal income tax return (IRS Form 6166).return. Certification is obtained from the office of the Director of the Internal Revenue Service Center by filing a request for certification with the Internal Revenue Service (“IRS”), Philadelphia Service Center, ForeignU.S. Residency Certification Request, P.O. Box 16347, Philadelphia, PA 19114-0447. Requests for certification are to be made in writing and must include the U.S. Holder’s name, social security number or employer identification number, tax return form number, and tax periodby filing Form 8802 Application for which certification is requested. This certification is valid for three years and need only be resubmitted in a fourth year in the event of a subsequent application for refund. In accordance with arrangements under the Deposit Agreement, the Depositary (or a custodian as its designated agent) holds the ordinary shares and receives and distributes dividends to the U.S. Holders. The Depositary has agreed, to the extent practicable, to perform administrative functions necessary to obtain the refund of amounts withheld in excess of the Treaty rate for the benefit of U.S. Holders who supply the necessary documentation. Under the Deposit Agreement, the Depositary has agreed to send to the U.S. Holders of ADSs a notice explaining how to claim a refund, the form required to obtain the IRS Form 6166 certification and the German claim for refund form. The notice will describe how to obtain the certification on IRS Form 6166. In order to claim a refund, the U.S. Holder should deliver the certification provided to it by the IRS to the Depositary along with the completed claim for refund form. In the case of ADSs held through a broker or other financial87intermediary, the required documentation should be delivered to such broker or financial intermediary for forwarding to the Depositary. In all other cases, the U.S. Holders should deliver the required documentation directly to the Depositary. The Depositary will file the required documentation with the German tax authorities on behalf of the U.S. Holders. The German tax authorities will issue the refunds, which will be denominated in euro, in the name of the Depositary. The Depositary will convert the refunds into dollars and issue corresponding refund checks to the U.S. Holders or their brokers.Refund of German Tax to Holders of ADSs or Ordinary Shares in Other Countries A holder of ADSs or ordinary shares resident in a country other than Germany or the U.S. that has a double taxation convention with Germany may obtain a full or partial refund of German withholding taxes. Rates and procedures may vary according to the applicable treaty. For details, such holders are urged to consult their own tax advisors.Taxation of Capital Gains Half of a capital gain derived from the sale or other disposition by an individual holder resident in Germany of ADSs or ordinary shares is subject to income tax if the ADSs or ordinary shares are held as part of his or her trade or business or if the ADSs or ordinary shares held as part of his or her private assets are sold within a period of one year after acquisition. A capital gain derived from the sale or other disposition by a corporate holder domiciled in Germany of ADSs or ordinary shares in principle is exempt from corporation tax. However, a portion of 5% of a capital gain derived is treated as non-deductible business expenses. Therefore, effectively a portion of 95% of a capital gain derived from the sale or other disposition in 2004 and subsequent taxable years by a corporate holder domiciled in Germany of ADSs or ordinary shares is exempt and a portion of 5% of a capital gain derived is subject to corporation tax. Theserules as regards the (partial) exemption from corporation tax have some exceptions, which especially apply to financial and certain insurance institutions. Special rules apply for individual and corporate holders resident in Germany if the shares have been received in the course of a tax-exempt reorganization. For holders subject to German trade tax, such tax is imposed in general only on the portion of the capital gain, which is subject to income tax or corporation tax. Special rules may apply for shares held indirectly via trading partnerships. The above mentioned half-income system therefore in principle does apply to the income taxation of both dividends and capital gains. A holder resident or domiciled in a country other than Germany is generally not subject to German income or corporation tax on the capital gain derived from the sale or other disposition of ADSs or ordinary shares.Other German Taxes There are no German net worth, transfer, stamp or similar taxes on the holding, purchase or sale of ADSs or ordinary shares.German Estate and Gift Taxes A transfer of ADSs or ordinary shares by gift or by reason of death of a holder will be subject to German gift or inheritance tax, respectively, if one of the following persons is resident in Germany: the donor or transferor or his or her heir, or the donee or other beneficiary. If one of the aforementioned persons is resident in Germany and another is resident in a country having a treaty with Germany, regarding gift or inheritance taxes, different rules may apply. If none of the aforementioned persons is resident in Germany, the transfer is not subject to German gift or inheritance tax. For persons giving up German residence, special rules apply during the first five years, and under specific circumstances, during the first ten years, after the end of the year in which the person88left Germany. In general, in the case of a U.S. Holder, a transfer of ADSs or ordinary shares by gift or by reason of death that would otherwise be subject to German gift or inheritance tax, respectively, will not be subject to such German tax by reason of the U.S.-German estate tax treaty (Convention between the Federal Republic of Germany and the United States of America for the Avoidance of Double Taxation with respect to Estate, Gift and Inheritance Taxes, German Federal Law Gazette 1982 II page 847, amended by the Protocol of September 15, 2000, German Federal Law Gazette 2000 II, page 1170 and as published on December 21, 2000, German Federal Law Gazette 2001 II, page 65) (the “Estate Tax Treaty”) unless the donor or transferor, or the heir, donee or other beneficiary, is domiciled in Germany for purposes of the Estate Tax Treaty between the United States and Germany at the time of the making of the gift or at the time of the donor’s or transferor’s death. In general, the Estate Tax Treaty provides a credit against U.S. federal estate and gift tax liability for the amount of inheritance and gift tax paid in Germany, subject to certain limitations, in a case where the ADSs or ordinary shares are subject to German inheritance or gift tax and U.S. federal estate or gift tax.U.S. Taxation of U.S. Holders of Ordinary Shares or ADSs The following discussion generally summarizes certain U.S. federal income tax consequences of the acquisition, ownership and disposition of ADSs or ordinary shares to a beneficial owner: (i) who is an individual citizen or resident of the U.S. or a corporation organized under the laws of the U.S. or any political subdivision thereof, an estate whose income is subject to U.S. federal income tax regardless of its source or a trust, if a U.S. court can exercise primary supervision over its administration and one or more U.S. persons are authorized to control all substantial decisions of the trust; (ii) who is not resident inGermany for German tax purposes; (iii) whose holding of ADSs or ordinary shares does not form part of the business property or assets of a permanent establishment or fixed base in Germany; and (iv) who is fully entitled to the benefits of the Treaty in respect of such ADSs or ordinary shares (a “U.S. Holder”). This summary deals only with ADSs and ordinary shares that are held as capital assets and does not address tax considerations applicable to U.S. Holders that may be subject to special tax rules, such as dealers or traders in securities, financial institutions, insurance companies, tax-exempt entities, regulated investment companies, U.S. Holders that hold ordinary shares or ADSs as a part of a straddle, conversion transaction or other arrangement involving more than one position, U.S. Holders that own (or are deemed for U.S. tax purposes to own) 10% or more of the total combined voting power of all classes of voting stock of SAP AG, U.S. Holders that have a principal place of business or “tax home” outside the U.S. or U.S. Holders whose “functional currency” is not the dollar and U.S. Holders that hold ADSs or ordinary shares through partnerships or other pass-through entities. The discussion below is based upon the U.S. Internal Revenue Code of 1986, as amended (the “Code”), the Treaty and regulations, rulings and judicial decisions there under at the date of this Annual Report on Form 20-F. Any such authority may be repealed, revoked or modified, perhaps with retroactive effect, so as to result in U.S. federal income tax consequences different from those discussed below. No assurance can be given that the conclusions set out below would be sustained by a court if challenged by the IRS. The discussion below is based, in part, on representations of the Depositary, and assumes that each obligation in the Deposit Agreement and any related agreements will be performed in accordance with its terms. THE DISCUSSION SET OUT BELOW IS INTENDED ONLY AS A SUMMARY OF CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF AN INVESTMENT IN ADSs OR ORDINARY SHARES. PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE APPLICATION TO THEIR PARTICULAR SITUATION OF THE TAX CONSIDERATIONS DISCUSSED BELOW, AS WELL AS THE APPLICATION OF STATE, LOCAL OR FOREIGN TAX LAW. THE STATEMENTS OF U.S. TAX LAW SET OUT BELOW ARE BASED ON THE LAWS IN FORCE AND INTERPRETATIONS THEREOF AT THE DATE OF THIS ANNUAL REPORT ON FORM 20-F AND ARE SUBJECT TO ANY CHANGES OCCURRING AFTER THAT DATE. For U.S. federal income tax purposes, a U.S. Holder of ADSs will be considered to own the ordinary shares represented thereby. Accordingly, unless the context otherwise requires, all references in this section to ordinary shares are deemed to refer likewise to ADSs representing an ownership interest in ordinary shares.89Distributions Subject to the discussion below under “Passive Foreign Investment Company Considerations,” distributions made by SAP AG with respect to ordinary shares (other than distributions in liquidation and certain distributions in redemption of stock), including the amount of German tax deemed to have been withheld in respect of such distributions, will be taxed to U.S. Holders as ordinary dividend income to the extent that such distributions do not exceed the current and accumulated earnings and profits of SAP AG as computed for U.S. federal income tax purposes. As discussed above, a U.S. Holder may obtain a refund of German withholding tax to the extent that the German withholding tax exceeds 15% of the amount of the associated distribution. For example, if SAP AG distributes a cash dividend equal to U.S.$100 to a U.S. Holder, the distribution currently will be subject to German withholding tax of U.S.$20 plus U.S.$1.10 surtax, and the U.S. Holder will receive U.S.$78.90. If the U.S. Holder obtains the Treaty refund, he will receive an additional U.S.$6.10 from the German tax authorities. For U.S. tax purposes, such U.S. Holder will be considered to have received a total distribution of U.S.$100, which will be deemed to have been subject to German withholding tax of U.S.$15 (15% of U.S.$100) resulting in the net receipt of U.S.$85. Distributions, if any, in excess of SAP AG’s current and accumulated earnings and profits will constitute a non-taxable returnof capital to a U.S. Holder and will be applied against and reduce the U.S. Holder’s tax basis in his or her ordinary shares. To the extent that such distributions exceed the tax basis of the U.S. Holder in his or her ordinary shares, the excess generally will be treated as capital gain. In the case of a distribution in euro, the amount of the distribution generally will equal the dollar value of the euro distributed (determined by reference to the spot currency exchange rate on the date of receipt of the distribution (receipt by the Depositary in the case of a distribution on ADSs)), regardless of whether the holder in fact converts the euro into dollars, and the U.S. Holder will not realize any separate foreign currency gain or loss (except to the extent that such gain or loss arises on the actual disposition of foreign currency received). Dividends paid by SAP AG generally will constitute “portfolio income” for purposes of the limitations on the use of passive activity losses (and, therefore, generally may not be offset by passive activity losses) and as “investment income” for purposes of the limitation on the deduction of investment interest expense. Dividends paid by SAP AG will not be eligible for the dividends received deduction generally allowed to U.S. corporations under Section 243 of the Code. Dividends paid by SAP AG after December 31, 2002 are treated as qualified dividends subject to capital gains rates as provided by the Jobs and Growth Tax Reconciliation Act of 2003. Under certain circumstances, a U.S. Holder may be deemed to have received a distribution for U.S. federal income tax purposes upon an adjustment, or the failure to make an adjustment, to the conversion price of the 1994 Bonds.Sale or Exchange In general, assuming that SAP AG at no time is a passive foreign investment company, upon a sale or exchange of ordinary shares to a person other than SAP AG, a U.S. Holder will recognize gain or loss in an amount equal to the difference between the amount realized on the sale or exchange and the U.S. Holder’s adjusted tax basis in the ordinary shares. Such gain or loss will be capital gain or loss and will be long-term capital gain (taxable at a reduced rate for individuals) if the ordinary shares were held for more than one year. The deductibility of capital losses is subject to significant limitations. Upon a sale of ordinary shares to SAP AG, a U.S. Holder may recognize capital gain or loss or, alternatively, may be considered to have received a distribution with respect to the ordinary shares, in each case depending upon the application to such sale of the rules of Section 302 of the Code. Deposit and withdrawal of ordinary shares in exchange for ADSs by a U.S. Holder will not result in its realization of gain or loss for U.S. federal income tax purposes.Foreign Tax Credit In general, in computing its U.S. federal income tax liability, a U.S. Holder may elect for each taxable year to claim a deduction or, subject to the limitations on foreign tax credits generally, a credit for foreign income taxes paid or accrued by it. For U.S. foreign tax credit purposes, subject to the applicable limitations under the90foreign tax credit rules, the 15% German tax that is treated as having been withheld from dividends paid to a U.S. Holder will be eligible for credit against the U.S. Holder’s federal income tax liability. Thus, in the numerical example set out above, a U.S. Holder who receives a cash distribution of U.S.$85 from SAP AG (U.S.$100 of the initial distribution net of U.S.$20 of German withholding tax and U.S.$1.10 of surtax plus the Treaty refund of U.S.$6.10) will be treated as having been subject to German withholding tax in the amount of U.S.$15 (15% of U.S.$100) and will be able to claim the U.S. foreign tax credit, subject to applicable foreign tax credit limitations, in the amount of U.S.$15. For U.S. foreign tax credit purposes, dividends paid by SAP AG generally will be treated as foreign-source income and as “passive income” (or in the case of certain holders, as “financial services income”).Gains or losses realized by a U.S. Holder on the sale or exchange of ordinary shares generally will be treated as U.S.-source gain or loss. The availability of foreign tax credits depends on the particular circumstances of each U.S. Holder. U.S. Holders are advised to consult their own tax advisors.Foreign Personal Holding Company ConsiderationsSAP AG does not believe that it or any of its subsidiaries currently is a “foreign personal holding company” (an “FPHC”) for U.S. federal income tax purposes. SAP AG is not aware of any changes that would affect this conclusion in the foreseeable future. A foreign corporation is an FPHC for a taxable year if (i) at any time, more than 50% of its stock (by vote or by value) is owned (directly, indirectly or by attribution) by or for not more than five individuals who are citizens or residents of the U.S. (the “ownership requirement”) and (ii) at least 60% (50% in certain cases) of its gross income is FPHC income, which generally includes dividends, interest, royalties (except certain active business computer software royalties) and other types of investment income (the “income requirement”). If SAP AG or one of its subsidiaries were treated as an FPHC, then each U.S. Holder owning ADSs or ordinary shares on the last day in the taxable year on which the ownership requirement with respect to SAP AG or its subsidiary is met would be required to include currently in taxable income as a dividend, apro ratashare of SAP AG’s or the subsidiary’s undistributed FPHC income, which is, generally, SAP AG’s or the subsidiary’s taxable income with certain adjustments and after reduction for certain dividend payments. SAP AG does not believe that the ownership requirement is met at the date hereof with respect to SAP AG or any of its subsidiaries. However, there can be no assurance that the ownership requirement will not be met at some later time. Whether the income requirement would be met with respect to SAP AG or any of its subsidiaries at any such later date would depend on the nature and sources of SAP AG’s and each subsidiary’s income at that time. The American Jobs Creation Act of 2004 (the “2004 Act”) repeals the foreign personal holding company rules, effective for tax years of foreign corporations beginning after December 31, 2004, and tax years of U.S. shareholders with or within which such years of foreign corporations end. The 2004 Act excludes foreign corporations from the application of the personal holding company rules.Passive Foreign Investment Company ConsiderationsClassification as a PFIC.Special and adverse U.S. tax rules apply to a U.S. Holder that holds an interest in a “passive foreign investment company” (a “PFIC”). In general, a PFIC is any non-U.S. corporation, if (i) 75% or more of the gross income of such corporation for the taxable year is passive income (the “income test”) or (ii) the average percentage of assets (by value) held by such corporation during the taxable year that produce passive income (e.g., dividends, interest, royalties, rents and annuities) or that are held for the production of passive income is at least 50% (the “asset test”). A corporation that owns, directly or indirectly, at least 25% by value of the stock of a second corporation must take into account its proportionate share of the second corporation’s income and assets in applying the income test and the asset test. Based on current projections concerning the composition of SAP AG’s income and assets, SAP AG does not believe that it will be treated as a PFIC for its current or future taxable years. However, because this conclusion is based on our current projections and expectations as to its future business activity, SAP AG can provide no assurance that it will not be treated as a PFIC in respect of its current or any future taxable years.Consequences of PFIC Status.If SAP AG is treated as a PFIC for any taxable year during which a U.S. Holder holds ordinary shares, then, subject to the discussion of the qualified electing fund (“QEF”) and “mark-to-market” rules below, such U.S. Holder generally will be subject to a special and adverse tax regime91with respect to any gain realized on the disposition of the ordinary shares and with respect to certain “excessdistributions” made to it by SAP AG. The adverse tax consequences include taxation of such gain or excess distribution at ordinary-income rates and payment of an interest charge on tax, which is deemed to have been deferred with respect to such gain or excess distributions. Under the PFIC rules, excess distributions include dividends or other distributions received with respect to the ordinary shares, if the aggregate amount of such distributions in any taxable year exceeds 125% of the average amount of distributions from SAP AG made during a specified base period.In some circumstances, a U.S. Holder may avoid certain of the unfavorable consequences of the PFIC rules by making a QEF election in respect of SAP AG. A QEF election effectively would require an electing U.S. Holder to include in income currently itspro ratashare of the ordinary earnings and net capital gain of SAP AG. However, a U.S. Holder cannot elect QEF status with respect to SAP AG unless SAP AG complies with certain reporting requirements and there can be no assurance that SAP AG will provide such information. A U.S. Holder that holds “marketable” stock in a PFIC may, in lieu of making a QEF election, also avoid certain unfavorable consequences of the PFIC rules by electing to mark the PFIC stock to market at the close of each taxable year. SAP AG expects that the ordinary shares will be “marketable” for this purpose. A U.S. Holder that makes the mark-to-market election will be required to include in income each year as ordinary income an amount equal to the excess, if any, of the fair market value of the stock at the close of the year over the U.S. Holder’s adjusted tax basis in the stock. If, at the close of the year, the U.S. Holder’s adjusted tax basis exceeds the fair market value of the stock, then the U.S. Holder may deduct any such excess from ordinary income, but only to the extent of net mark-to-market gains previously included in income. Any gain from the actual sale of the PFIC stock will be treated as ordinary income, and any loss will be treated as ordinary loss to the extent of net mark-to-market gains previously included in income. The American Jobs Creation Act of 2004 repeals the passive foreign investment company rules related to the gain on foreign investment company stock and the election by foreign investment companies to distribute income currently. The provisions are effective for tax years of foreign corporations beginning after December 31, 2004, and tax years of U.S. shareholders with or within which such years of foreign corporations end.Taxation of Holders of ADSs or Ordinary Shares in Other CountriesHOLDERS OR POTENTIAL HOLDERS OF ADSs OR ORDINARY SHARES WHO ARE RESIDENT OR OTHERWISE TAXABLE IN COUNTRIES OTHER THAN GERMANY AND THE U.S. ARE URGED TO CONSULT THEIR OWN TAX ADVISORS CONCERNING THE OVERALL TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF ADSs OR ORDINARY SHARES.Documents on DisplayDOCUMENTS ON DISPLAYWe are subject to the informational requirements of the Securities Exchange Act of 1934, as amended. In accordance with these requirements, we file reports and other information as a foreign private issuer with the SEC. These materials, including this Annual Report on Form 20-F and the exhibits thereto, may be inspected and copied at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Room 1200, Washington, D.C. 20549. Copies of the materials may be obtained from the Public Reference Room of the SEC at 450 Fifth Street, N.W., Room 1200, Washington, D.C. 20549 at prescribed rates. The public may obtain information on the operation of the SEC’s Public Reference Room by calling the SEC in the U.S. at 1-800-SEC-0330.202-942-4320. The SEC also maintains a Web site at www.sec.gov that contains reports, proxy statements and other information regarding registrants that file electronically with the SEC. Our annual report and some of the other information submitted by us to the SEC may be accessed through this Web site. In addition, material filed by SAP can be inspected at the offices of the New York Stock Exchange at 20 Broad Street, New York, New York 10005.ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKItem 11.Quantitative and Qualitative Disclosures About Market Risk To ensure the adequacy and effectiveness of our foreign exchange hedge positions, and to monitor the risks and opportunities of our non-hedge portfolios, we continually monitor our foreign forward and option positions. In addition, we monitor our interest rate exposure, if any, both on a stand-alone basis and in conjunction with our underlying foreign currency risk, from an economic and an accounting perspective. However, there can be no assurance that the programs described below with respect to the management of currency exchange and interest rate risk will offset more than a portion of the adverse financial impact resulting from unfavorable movements in either the foreign exchange rates or interest rates. In addition, we have entered into in the past, and expect to enter92into in the future, derivative instruments to hedge all or a portion of the anticipated cash flows in connection with the STARsour stock appreciation rights plans STAR in the event cash payments to participants are required as a result of an increase in the market price of the ordinary shares. There can be no assurance that the benefits achieved from hedging our STAR Plans exceed the related costs.Foreign Currency RiskFOREIGN CURRENCY RISK Most of SAP AG’s subsidiaries have entered into license agreements with SAP AG pursuant to which the subsidiary has acquired the right to sublicense SAP software products to customers within a specific territory. Under these license agreements, the subsidiaries generally are required to pay SAP AG a royalty equivalent to a percentage of the product fees charged by them to their customers within 30 days following the end of the month in which the subsidiary recognizes the revenue. These intercompany royalties payable to SAP AG are generally denominated in the respective subsidiary’s local currency in order to centralize foreign currency risk with SAP AG in Germany. In certain countries, subsidiaries submit royalties to SAP AG in U.S.$. Because these royalties are denominated in the local currencies of the various subsidiaries or U.S.$, dollars, whereas the functional currency of SAP AG is the euro, SAP AG’s anticipated cash flows are subject to foreign currency exchange risks. In addition, the delay between the date when the subsidiary records revenue and the date when the subsidiary remits payment to SAP AG also exposes us to foreign exchange risk. See “Item 5. Operating and Financial Review and Prospects — Foreign Currency Exchange Rate Exposure.” We enter into derivative instruments, primarily foreign exchange forward contracts, to protect our anticipated cash flows from foreign subsidiaries from the effects of foreign currency exchange fluctuations. Specifically, these foreign exchange contracts offset risks associated with fluctuations in anticipated cash flows and existing intercompany receivables relating to subsidiaries in countries with significant operations, including the U.S., Japan, the United Kingdom, Switzerland, Australia and Canada. We use foreign exchange forwards that generally have maturities of twelve months or less, which are rolled over if necessary to provide continuing coverage until the applicable royalties are received. Generally, anticipated cash flows represent expected intercompany amounts resulting from revenue generated within the next twelve months from the purchase date of the derivative instrument. However, management infrequently extends the future periods being hedged for a period of up to two years from the purchase date of the derivative instrument based on our forecasts and anticipated exchange rate fluctuations in various currencies. The table below provides information about the derivative financial instruments we have entered into that are sensitive to foreign currency exchange rates. The table presents fair values, notional amounts (at the contract exchange rates) and the respective weighted average contractual foreign currency exchange rates. The fair values do not reflect any foreign exchange gains or losses on the underlying intercompany receivables and payables. In addition, the table below does not include foreign currency risks associated with third-party receivables and payables denominated in currencies other than the functional currency of the reporting subsidiary. See our93consolidated financial statements included in “Item 18. Financial Statements” for further information on our foreign exchange derivative instruments. €(000), except for exchange rate data Fair Value Contract December 31, Foreign Currency Risk Notional Amounts 2003(1) Expected Maturity Date 2004 Derivatives used to manage firm commitments Foreign Currency Forward Contracts (Receive Local Currency, Sell euro) Japanese Yen 63,910 (661 ) Weighted Average Contractual Exchange Rate 133.00 Foreign Currency Forward Contracts (Receive euro, Sell Local Currency) U.S. dollars 760,935 157,351 Weighted Average Contractual Exchange Rate 0.9946 Japanese Yen 15,117 282 Weighted Average Contractual Exchange Rate 132.30 British Pounds 13,943 59 Weighted Average Contractual Exchange Rate 0.7029 Swiss Franks 10,569 26 Weighted Average Contractual Exchange Rate 1.5517 Canadian dollars 72,900 (983 ) Weighted Average Contractual Exchange Rate 1.6461 Australian dollars 3,452 10 Weighted Average Contractual Exchange Rate 1.6800 Foreign Currency Forward Contracts (Receive British Pounds, Sell U.S. dollars) U.S. dollars 855 64 Weighted Average Contractual Exchange Rate 1.6385 Derivatives Used to Manage Anticipated Cash Flows Foreign Currency Forward Contracts (Receive euro, Sell Local Currency) U.S. dollars 342,080 17,728 Weighted Average Contractual Exchange Rate 1.1904 Japanese Yen 41,071 1,747 Weighted Average Contractual Exchange Rate 127.58 British Pounds 34,441 232 Weighted Average Contractual Exchange Rate 0.7084 Swiss Franks 36,500 286 Weighted Average Contractual Exchange Rate 1.5315 Canadian dollars 32,436 972 Weighted Average Contractual Exchange Rate 1.5785 Australian dollars 11,390 184 Weighted Average Contractual Exchange Rate 1.6856 Contract Notional Amounts Expected Fair Value Weighted Average Maturity Date December 31, Contractual Foreign Currency Risk 2005 2004(1) Exchange Rate €(000) Derivatives used to manage firm commitments Foreign Currency Forward Contracts (Receive Local Currency, Sell euro) U.S. dollars 33,826 (868 ) 1.3303 Japanese Yen 120,899 (3,914 ) 132.34 British Pounds 9,500 (5 ) 0.7047 Israeli Shekels 40,000 90 5.8900 Foreign Currency Forward Contracts (Receive euro, Sell Local Currency) U.S. dollars 629,511 65,314 1.2224 Japanese Yen 17,538 (38 ) 139.70 British Pounds 15,628 344 0.6911 Swiss Francs 9,928 64 1.5310 Canadian dollars 5,292 (5 ) 1.6439 Australian dollars 3,974 (25 ) 1.7615 Foreign Currency Forward Contracts (Receive British Pounds, Sell U.S. dollars) U.S. dollars 587 5 1.9150 Derivatives used to manage anticipated Cash Flows Foreign Currency Forward Contracts (Receive euro, Sell Local Currency) U.S. dollars 249,878 12,938 1.2966 Japanese Yen 78,829 3,415 131.88 British Pounds 94,798 2,420 0.6973 Swiss Francs 67,205 539 1.5177 Canadian dollars 43,559 802 1.6150 Australian dollars 28,068 577 1.7386 (1) Amounts included on SAP’s consolidated balance sheet. Interest Rate Risk WeINTEREST RATE RISK In order to maintain a liquid portfolio, we invest cash primarily in bank time deposits, marketable equity securitiesnotes and bonds, and fixed and variable rate marketable debt securities. See “Item 5. Operating and Financial Review and Prospects — Interest Rate Exposure.” In 2002 and 2001, we invested in funds (“the Funds”) created by three creditworthy financial94institutions in which such financial institutions independently trade securities, subject to guidelines prescribed by us. Such guidelines limited investments in equity securities to 20% of the total Fund value with remaining amounts invested in interest bearing securities. The quoted market prices of time deposits or fixed rate securities held within the Funds had no material effect on our results of operations or cash flows for any period. We liquidated these funds in 2002. We have in the past entered into, and in the future may enter into, interest rate swaps to better manage the interest income on our cash equivalents and marketable securities and to partially mitigate the impact of interest rate fluctuations on these investments. We hold such derivative instruments for purposes other than trading. No interest rate swaps were outstanding as of December 31, 2003.2004.The table below presents principal (or notional) amounts (in thousands118 As of euro unless otherwise indicated), respective fair values at December 31, 20032004, investments with limited exposure to interest rate risks consist of€905,559 thousand of time deposits with original maturities exceeding 3 months,€41,737 thousand of municipal bonds, and related weighted average interest rates by year€242 thousand of maturity for SAP’s investment portfolio. Expected Maturity Date € (000), unless otherwise indicated Fair Value December 31, Marketable debt securities 2004 2005 2006 2007 2008 Thereafter Total 2003 Fixed rate 51,129 — — — — — 51,129 52,781 Average interest rate 6.13 % — — — — — Variable rate 826 1 9 18 56 — 910 898 Total investments 51,955 1 9 18 56 — 52,039 53,679 We have lines of credit available that allow us to borrow money in the local currency. Interest under these lines of credit is determined at the time of borrowing based on current market rates. The table below presents principal amounts outstanding at December 31, 20032004 (in thousands of euro unless otherwise indicated), and related weighted average interest rates or the bank loans outstanding under lines of credit and overdrafts. Because the majority of the maturities areis short term and the amounts borrowed are rolled over as necessary at current market rates of interest at such time, fair values of bank loans and overdrafts approximate carrying values. Bank loans and overdrafts 20032004Fixed rate bank loans (€000) 16,64020,058 Average interest rate of fixed rate bank loans 6.186.14% Overdrafts (€000) 4,8277,727 Total bank loans and overdrafts 21,46727,785 Equity Price RiskEQUITY PRICE RISK We are exposed to equity price risks on the marketable portion of our equity securities. Our available for sale securities consist of investments in the high-technology industry, which historically have experienced high volatility. We typically do not attempt to reduce or eliminate market exposure on these securities. We hold such equity securities purchased through our venture operations and strategic global partnering programs. The purpose of venture investments is to provide funding to companies that, in the opinion of our management, have promising technologies. The venture funding represents an equity investment, and/or loans, and does not represent a commitment of further business development initiatives by us. Investments made in conjunction with strategic global partnering differ from those of the venture operations since such investments are made in software and service partners who are expected to complement our existing or future product and/or service offerings. Frequently, SAP and our partners may also enter into development or sublicense agreements to further align the strategies of SAP and the partner.In many instances, we invest in privately held companies. Such investments are recorded at cost and therefore do not expose us to equity price risk as long as they are privately owned, although such investments are subject to evaluation for impairment. We recognized in financial income net gains from the sale of marketable equity securities of approximately€14 million in 2004 and€2 million in 2003 and2003. In 2004, we recorded approximately€30.3 million of losses from associated companies due to the application of the equity method of accounting and impairment charges of€5.1 million for other equity securities due to an other than temporary decline in 2002.fair value. In 2003, we recorded approximately€0.2 million of losses from associated companies due to the application of the equity method of accounting and impairment charges of€15.1 million for other equity securities due to an other than temporary95decline in fair value. In 2002 we recorded approximately€394.6 million of losses from associated companies, of which€297.6 was due to an other-than-temporary impairment charge related to our investment in Commerce One and€113.6 was due to other-than-temporary impairment charges related to other equity securities. There can be no assurance that changes in market conditions, the performance of companies in which we hold investments or other factors will not negatively impact our ability to recognize gains from the sale of marketable equity securities on conditions similar to those existing in 2003,2004, or result in the loss of amounts invested.STAR Hedge To a certain extent SAP hedges anticipated cash flow exposures associated with unrecognized non-vested STARs (see Note 2423 in “Item 18. Financial Statements”) through the purchase of derivative instruments from an independent financial institution. We are therefore further exposed to equity price risks on SAP shares, which are the underlying forunderlie those derivative instruments.As of December 31, 20032004 the following derivative instruments were designated as a hedge for the STAR Plan 2003,2004, and STAR Plan 2002,2003, respectively: Hedge of 2.0 million 2003 STARs Hedge of 3.0 million 2004 STARs Number of call Number of call Buy/sell options Strike price options Strike price Buy 2.000.000 84.91 3,000,000 134.35 Sell 1.000.000 134.91 1,500,000 184.35 Sell 500.000 184.91 750,000 234.35 Fair value as of December 31, 2003 in€(000): 77,790 Fair value as of December 31, 2004 in€(000): 22,308 Hedge of 3.0 million 2002 STARs Hedge of 2.0 million 2003 STARs Number of call Number of call Buy/sell options Strike price options Strike price Buy 3.000.000 158.80 2,000,000 84.91 Sell 1.500.000 208.80 1,000,000 134.91 Sell 750.000 258.80 500,000 184.91 Fair value as of December 31, 2002 in€(000): 27 Fair value as of December 31, 2004 in€(000): 82,500 The terms of the derivative financial instruments are also designed to reflect the eight measurement dates and weighting factors applicable to the STAR Plan, as described in Note 2423 in “Item 18. Financial Statements”. The amount of options, which expire at each measurement date, reflect the respective weighting factor of that date. PaymentsPayment dates reflect payment terms of the STAR Plan, which is subject to the respective hedge. Viewed together, SAP will receive from the financial institution 100% of the first€50 in appreciation of SAP’s stock price above the strike price of the STAR, 50% of the next€50 in appreciation of SAP’s stock price above the strike price of the STAR, and 25% of any additional appreciation of SAP’s stock price above the strike price of the STAR.The terms of the derivative financial instruments require cash settlement and there are no settlement alternatives. These derivative financial instruments are accounted for as other assets on SAP’s Consolidated Balance Sheets.ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIESItem 12.Description of Securities Other than Equity Securities Not Applicable.96120PART IIItem 13.Defaults, Dividend Arrearages and DelinquenciesNot Applicable.ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIESItem 14.Material Modifications to the Rights of Security Holders and Use of ProceedsNot Applicable.ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDSItem 15.Controls and Procedures Not Applicable.ITEM 15. CONTROLS AND PROCEDURESAs of December 31, 2003,2004, SAP’s disclosure controls and procedures are designed to ensure that the material financial and non-financial information required to be disclosed in Form 20-F and filed with the SEC is recorded, processed, summarized and reported in a timely manner. SAP’s management conducted an evaluation of the effectiveness of SAP’s internal controls over financial reporting, and its disclosure controls and procedures, as of December 31, 2003.2004. The evaluation was performed with the participation of our key corporate senior management, senior management of each business group, and under the supervision of our Chief Executive Officer (“CEO”), Prof. Dr. Henning Kagermann, and our Chief Financial Officer (“CFO”), Dr. Werner Brandt. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, rather than absolute, assurances of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the foregoing, SAP’s management, including the CEO and CFO, concluded that as of December 31, 20032004 SAP’s internal controls over financial reporting anand its disclosure controls and procedures were effective.ITEM 16. [RESERVED]Item 16.[Reserved]ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT Item 16A.Audit committee financial expert Please refer to Note 35 of Item 18 “Financial Statements” for information regarding related party transactions between our company and Mr. Haarmann. Under applicable SEC and NYSE requirements, all members of SAP’s audit committee need to fulfill certain independence requirements from July 31, 2005 onwards. Due to the current business relationship between Mr. Haarmann and SAP, Mr. Haarmann does not fullfill these independence requirements. Mr. Haarmann will therefore cease being a member of the audit committee before July 31, 2005. Our supervisory board has not yet decided on a successor for Mr. Haarmann as a member of the audit committee. Consequently, it cannot be assured that our audit committee will include a financial expert after July 31, 2005.ITEM 16B. CODE OF ETHICSItem 16B.Code of Ethics In 2003 SAP adopted a Code of Business Conduct that applies to all employees (including all personnel in the accounting and controlling departments) and the members of SAP’s Executive Board (including our principal executive officer and principal financial officer). We believe that our Code of Business Conduct constitutes a “code of ethics” as defined by the SEC. The Code of Business Conduct sets standards for all dealings with customers, partners, competitors and suppliers and includes, among others, regulations withregard to confidentiality, loyalty and prevention of bribery. International differences in culture, language, and legal and social systems make the adoption of uniform Codes of Business Conduct across an entire global company somewhat difficult. As a result, SAP has set forth a master code containing minimum standards. In turn, each company within the SAP Group has been required to adopt a similar code that meets — as far as local legal requirements permit — at least these minimum standards, but may also include additional or more stringent rules of conduct. The “SAP’s Principles of Corporate Governance” which include the corporate governance standards and guidelines that SAP’s Executive Board and Supervisory Board follow in carrying out their duties also include ethical standards that apply to the members of the Executive Board. Please refer to the description under the heading “Corporate Governance” in “Item 10. Additional Information” for further information on “SAP’s Principles of Corporate Governance.” SAP has We have made theour Code of Business Conduct and itsour Principles of Corporate Governance publicly available by posting the full text of both documents on itsour website under www.sap.com/corpgovernance (section “Statutes”). The published Code of Business Conduct is the Code of theour parent company, SAP AG. It is identical with the master code.97ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICESItem 16C.Principal Accountant Fees and ServicesIn the annual meetingAnnual General Shareholders’ Meeting held on May 9, 2003,6, 2004, our shareholders appointed KPMG Deutsche Treuhand-Gesellschaft AG Wirtschaftsprüfungsgesellschaft (KPMG), Frankfurt am Main/Berlin, to serve as our independent auditors for the 20032004 fiscal year. KPMG billed the following fees to us for audit services for each of the last two fiscal years and for other professional services in each of the last two financial years: 2003 2002 2004 2003 (in millions of€) (in millions of€) Audit Fees 3.7 3.2 4.3 3.7 Audit-Related Fees 0.6 0.4 0.9 0.6 Tax Fees 0.1 3.8 1.2 0.1 All Other Fees 0.2 0.2 0.0 0.2 4.6 7.6 6.4 4.6 “Audit Fees” are the aggregate fees billed by KPMG for the audit of our consolidated annual financial statements as well as audits of statutory financial statements of SAP AG and its subsidiaries. Also included are amounts billed for attestation services in relation to regulatory filings and other compliance requirements. “Audit-Related Fees” are fees charged by KPMG for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit Fees.” This category comprises fees billed for accounting advice on actual or contemplated transactions and other agreed-upon procedures. “Tax fees” are fees for professional services rendered by KPMG for tax advice on group restructuring, transfer pricing and other actual or contemplated transactions, tax compliance, and employee related tax queries. The category “All Other Fees” include other support services.Audit Committee’s pre-approval policies and proceduresAUDIT COMMITTEE’S PRE-APPROVAL POLICIES AND PROCEDURES As required under German law, our shareholders appoint our independent auditors to audit our financial statements, based on a proposal that is legally required to be submitted by the Supervisory Board. The Supervisory Board’s proposal itself is based on a proposal by the Audit Committee. See also the description under the heading “Corporate Governance” in “Item 10. Additional Information.” In 2002 our Audit Committee adopted a policy with regard to the pre-approval of audit and non-audit services to be provided by our independent auditors. This policy, which is designed to assure that such engagements do not impair the independence of our auditors, was amended and expanded in 2003. The policy requires prior approval of the Audit Committee for all services to be provided by our independent auditors for any entity of the SAP group. With regard to non-audit services the policy distinguishes between three categories of services: 1. “Prohibited services:” This category includes services that our independent auditors must not be engaged to perform. These are services that are not permitted by applicable law or that would be inconsistent with maintaining the auditors’ independence. 2. “Services requiring universal approval:” Services of this category may be provided by our independent auditors up to a certain aggregate amount in fees per year that is determined annually by the Audit Committee. 3. “Services requiring individual approval:” Services of this category may only be provided by our independent auditors if they have been individually (specifically) pre-approved by the Audit Committee or an Audit Committee member who is authorized by the Audit Committee to make such approvals. Our ChiefHead of Corporate Financial OfficerReporting reviews all individual requests to engage our independent auditors as a service provider in accordance with this policy and determines the category to which the requested service belongs. All requests for engagements with expected fees over a specified limit are additionally reviewed by our Chief Financial Officer. Based on thisthe determination of the category the request is (i) declined if it is a “prohibited service,” (ii) approved if it is a “service requiring universal approval” and the maximum aggregate amount fixed by the Audit Committee has not been met or (iii) forwarded to the Audit Committee for individual approval if the “service requires individual98approval” or is a “service requiring universal approval” and the maximum aggregate amount fixed by the audit committee has been met.The Our Audit Committee’s pre-approval policies also include detailed information requirements to ensure the Audit Committee is kept aware of all engagements involving our independent auditors that were not individually pre-approved by the Audit Committee itself.ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEESItem 16D.Exemptions from the Listing Standards for Audit CommitteesNot Applicable.ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERSItem 16E.Purchases of Equity Securities by the Issuer and Affiliated PurchasersNot Applicable. The following table sets out information concerning purchases of our ordinary shares under our supported Employee Discount Stock Purchase programs, Long-Term Incentive Plan 2000, and Stock Option Plan 2002. (c) (d) (a) (b) Total Number of Shares Maximum Number of Total Number Average Price Purchased as Part of Shares that May Yet of Shares Paid per Publicly Announced Be Purchased Under Period Purchased Share Plans or Programs the Plans or Programs January 1/1/04 – 1/31/04 23,910 133.89 23,910 26,976,355 February 2/1/04 – 2/29/04 10,614 135.51 10,614 26,990,964 March 3/1/04 – 3/31/04 12,110 124.38 12,110 27,126,391 April 4/1/04 – 3/30/04 11,200 132.45 11,200 27,126,391 May 5/1/04 – 5/31/04 383,557 127.37 383,557 26,827,096 June 6/1/04 – 3/30/04 11,691 134.57 11,691 26,916,356 July 7/1/04 – 7/31/04 537,230 126.74 537,230 26,407,273 August 8/1/04 – 8/31/04 223,804 118.74 223,804 26,220,533 September 9/1/04 – 9/30/04 21,552 124.72 21,552 26,220,244 October 10/1/04 – 10/31/04 11,765 130.03 11,765 26,220,244 November 11/1/04 – 11/30/04 10,973 137.04 10,973 26,266,277 December 12/1/04 – 12/31/04 54,347 130.79 54,347 26,237,117 Total 1,312,753 126.11 1,312,753 All purchases were made in accordance with the authorization to acquire and use treasury shares granted at the general meeting of shareholders on May 6, 2004, pursuant to which the Executive Board was authorized to acquire, on or before October 31, 2005, up to 30 million shares of SAP subject to the provision that the shares to be purchased by virtue of this authorization, together with any other shares already acquired and held by SAP, do not account for more than 10% of the SAP’s capital stock. All purchases were made in market transactions effected on the Frankfurt Stock Exchange, with the exception of the purchases of ADSs shown in the table below, which were made in market transactions effected on the New York Stock Exchange.PART III124 The following table sets out information concerning purchases of our ADSs under our supported Employee Discount Stock Purchase programs.Item 17.Financial Statements (c) (d) (a) (b) Total Number of Shares Maximum Number of Total Number Average Price Purchased as Part of Shares that May Yet of Shares Paid per Publicly Announced Be Purchased Under Period Purchased Share Plans or Programs the Plans or Programs January 1/1/04 – 1/31/04 16,476 43.66 16,476 N/A February 2/1/04 – 2/29/04 22,728 41.88 22,728 N/A March 3/1/04 – 3/31/04 66,312 40.47 66,312 N/A April 4/1/04 – 3/30/04 18,960 40.05 18,960 N/A May 5/1/04 – 5/31/04 18,924 37.93 18,924 N/A June 6/1/04 – 3/30/04 17,834 40.81 17,834 N/A July 7/1/04 – 7/31/04 18,965 39.39 18,965 N/A August 8/1/04 – 8/31/04 33,752 37.45 33,752 N/A September 9/1/04 – 9/30/04 19,776 38.50 19,776 N/A October 10/1/04 – 10/31/04 18,338 41.27 18,338 N/A November 11/1/04 – 11/30/04 19,319 44.40 19,319 N/A December 12/1/04 – 12/31/04 18,464 44.67 18,464 N/A Total 289,848 40.61 289,848 N/A Not Applicable.125PART IIIItem 18.Financial StatementsITEM 17. FINANCIAL STATEMENTS Not Applicable.ITEM 18. FINANCIAL STATEMENTS Reference is made to pages F-1 through F-68,F-66, and to page S-1, incorporated herein by reference. The following consolidated financial statements are filed as part of this Annual Report on Form 20-F: Report of Independent Registered Public Accounting Firm. Consolidated Statements of Income for the years ended 2004, 2003, and 2002. Consolidated Balance Sheets as of December 31, 2004 and 2003. Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2004, 2003 and 2002. Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002. Notes to the Consolidated Financial Statements. Schedule for the years ended December 31, 2004, 2003 and 2002: Schedule II — Valuation and Qualifying Accounts and Reserves.Reports of Independent Auditors.Consolidated Statements of Income for the years ended 2003, 2002, and 2001.Consolidated Balance Sheets as of December 31, 2003 and 2002.Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2003, 2002 and 2001.Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001.Notes to the Consolidated Financial Statements.Schedule for the years ended December 31, 2003, 2002 and 2001:Schedule II — Valuation and Qualifying Accounts and Reserves.
126Item 19.ExhibitsITEM 19. EXHIBITS The following documents are filed as exhibits to this Annual Report on Form 20-F: 1 Articles of Incorporation (Satzung) of SAP AG, as amended to date (English translation). (1) 2.1 Form of global share certificate for ordinary shares (English translation). (1)(2) 2.2 Form of American Depositary Receipt. (2)(3) 4.1 Form of Amended and Restated Deposit Agreement among SAP AG, TheDeutsche Bank of New York,Trust Company Americas, as Depositary, and all owners and holders from time to time of American Depositary Receipts issued thereunder, including the form of American Depositary Receipts.(3)(4) 4.2 Share Purchase Agreement by and among Commerce One, Inc., New Commerce One Holding Inc. and SAP AG, dated as of June 28, 2001. (4)(5) 4.3 Amended and Restated Standstill and Stock Restriction Agreement by and among Commerce One, Inc., New Commerce One Holding, Inc. and SAP AG, dated as of June 28, 2001. (5)(6)99 4.4 Investor Rights Agreement by and among Commerce One, Inc., New Commerce One Holding, Inc. and SAP AG, dated as of June 28, 2001. (6)(7) 4.5 Strategic Alliance Agreement by and among Commerce One, Inc., SAP Markets, Inc. and SAP AG, dated as of September 18, 2000. (7)(8) 4.6 Strategic Alliance Agreement Amendment No. 2 by and among Commerce One, Inc., SAP Markets, Inc. and SAP AG, dated as of June 29, 2001. (8)(9) 4.7 Strategic Alliance Agreement Amendment No. 3 by and among Commerce One, Inc., SAP Markets, Inc. and SAP AG, dated as of June 29, 2001. (8)(9) 4.8 Strategic Alliance Agreement Amendment No. 4 by and among Commerce One, Inc., SAP Markets, Inc. and SAP AG, dated as of January 1, 2002. (9)(10) 4.9 Strategic Alliance Agreement Amendment No. 5 by and among Commerce One, Inc., SAP Markets, Inc. and SAP AG, dated as of December 20, 2002. (10)(11) 4.10 Strategic Alliance Agreement Amendment No. 6 by and among Commerce One, Inc., SAP Markets, Inc. and SAP AG, dated as of September 29, 2003. (11)(12)4.11 Credit Facility Agreement among SAP as Borrower; ABN AMRO Bank N.V., BNP Paribas, Deutsche Bank AG and J.P. Morgan plc as Mandated Lead Arrangers; ABN AMRO N.V. London Branch as Agent; and the lenders named in the Credit Agreement, dated as of November 5, 2004. 4.12 Agreement and Plan of Merger dated as of February 28, 2005, among SAP America, Inc., Sapphire Expansion Corporation and Retek Inc.(13) 4.13 Amendment dated as of March 16, 2005 to Agreement and Plan of Merger dated as of February 28, 2005 among SAP America, Inc., Sapphire Expansion Corporation and Retek Inc.(14) 4.14 Employment Contract for Executive Board Member Henning Kagermann, dated February 17, 2005. 4.15 Employment Contract for Executive Board Member Shai Agassi, dated April 17, 2002. 4.16 Employment Contract for Executive Board Member Leo Apotheker, dated July 25, 2002. 4.17 Employment Contract for Executive Board Member Werner Brandt, dated February 19, 2005. 4.18 Employment Contract for Executive Board Member Claus Heinrich, dated March 8, 1996. 4.19 Employment Contract for Executive Board Member Gerhard Oswald, dated March 8, 1996. 4.20 Employment Contract for Executive Board Member Peter Zencke, dated March 7, 2005. 4.21 Bonus Schedule Board Members 2004, dated February 17, 2004. 4.22 Supplement to Employment Contract for Executive Board Member Claus Heinrich, dated February 12, 2001. 4.23 Supplement to Employment Contract for Executive Board Member Gerhard Oswald, dated February 12, 2001. 8 Subsidiaries, Associated Companies and Other Investments of SAP AG. 12.1 10.1Independent Auditors’ Consent.10.2Statement regarding Auditors’ Consent.12.1Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a). 12.2 12.2Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a). 13 13Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 15 Consent of Registered Independent Public Accounting Firm. (1) Incorporated by reference to the Annual Report on Form 8-A12B20-F of SAP AG, filed on May 3, 2001.March 23, 2004. (2) Incorporated by reference to Form 8-A12B8-A of SAP AG, filed on May 3, 2001. (3) Incorporated by reference to Form 8-A12B8-A of SAP AG, filed on May 3, 2001. (4) Incorporated by reference to the Current Report on Form 8-K6-K of Commerce One, Inc.,SAP AG, filed on July 10, 2001.December 13, 2004. (5) Incorporated by reference to the Current Report on Form 8-K of Commerce One, Inc., filed on July 10, 2001. (6) Incorporated by reference to the Current Report on Form 8-K of Commerce One, Inc., filed on July 10, 2001. (7) Incorporated by reference to the Current Report on Form 8-K of Commerce One, Inc., filed on July 10, 2001. (8) Incorporated by reference to the Quarterly Report on Form 10-Q of Commerce One, Inc., filed on November 14, 2000. (8)(9)Incorporated by reference to the Quarterly Report on Form 10-Q of Commerce One, Inc., filed on August 14, 2001. (9)Incorporated by reference to the Annual Report on Form 10-K, filed April 1, 2002.(10) Incorporated by reference to the Annual Report on Form 10-K of Commerce One, Inc., filed April 1, 2002. (11) Incorporated by reference to the Annual Report on Form 10-K of Commerce One, Inc., filed March 31, 2003. (11)(12)Incorporated by reference to the Quarterly Report on Form 10-Q of Commerce One, Inc., filed on November 14, 2003. (13) Incorporated by reference to the Tender Offer Statement on Schedule TO, filed by SAP America, Inc. and Sapphire Expansion Corporation on March 4, 2005. (14) Incorporated by reference to Amendment No. 4 to Tender Offer Statement on Schedule TO filed on March 17, 2005 by SAP America, Inc. and Sapphire Expansion Corporation. 100128SIGNATURE Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on Form 20-F and has duly caused this Annual Report to be signed on our behalf by the undersigned, thereunto duly authorized. SAP AKTIENGESELLSCHAFT SYSTEME, ANWENDUNGEN, PRODUKTE IN DER DATENVERARBEITUNG (Registrant) By: /s//s/ HENNING KAGERMANNName: Prof. Dr. Henning Kagermann Title: Chief Executive Officer Name: Prof. Dr. Henning KagermannTitle: Chief Executive OfficerDated March 23, 200422, 2005 By: /s//s/ WERNER BRANDT Name: Dr. Werner Brandt Title: Chief Financial Officer Dated March 23, 200422, 2005101129SAP AKTIENGESELLSCHAFT AND SUBSIDIARIESINDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ReportsReport of Independent AuditorsPublic Accounting Firm F-1 Consolidated Financial Statements Consolidated Statements of Income for the years ended December 31, 2004, 2003 2002 and 20012002 F-3F-2 Consolidated Balance Sheets as of December 31, 2004, 2003 2002 and 20012002 F-4F-3 Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2004, 2003 2002 and 20012002 F-5F-4 Consolidated Statements of Changes in Cash Flows for the years ended December 31, 2004, 2003 2002 and 20012002 F-6F-5 Notes to Consolidated Financial Statements F-7F-6 Schedule for the years ended December 31, 2004, 2003 2002 and 2001:2002: Schedule II –— Valuation and Qualifying Accounts and Reserves S-1 102REPORT OF INDEPENDENT AUDITORS’ REPORTREGISTERED PUBLIC ACCOUNTING FIRMThe Supervisory BoardSAP Aktiengesellschaft Systeme, Anwendungen, Produkte in der Datenverarbeitung:We have audited the 2003 and 2002accompanying consolidated financial statementsbalance sheets of SAP Aktiengesellschaft and subsidiaries (“SAP AG” or “the company”) as listedof December 31, 2004 and 2003, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the years in the accompanying index.three-year period ended December 31, 2004. In connection with our audits of the 2003 and 2002 consolidated financial statements, we also have audited the 2003 and 2002 information contained in the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. The 2001 consolidated financial statements and the 2001 information contained in the financial statement schedule of SAP AG as listed in the accompanying index were audited by other auditors who have ceased operations. That auditors’ report, dated January 21, 2002, on those financial statements and financial statement schedule was unqualified, before the revisions described in Notes 14 and 21 to the consolidated financial statements, and included an explanatory paragraph that described the retroactive effect to the year ended December 31, 2000, for the change in accounting related to an investment that qualified for the equity method of accounting during the year ended December 31, 2001, as described in Note 4 to the consolidated financial statements.We conducted our audits in accordance with generally accepted auditingthe standards inof the United States of America.Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the 2003 and 2002 consolidated financial statements referred to above present fairly, in all material respects, the financial position of SAP AG as of December 31, 20032004 and 2002, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles in the United States of America. Also, in our opinion, the related 2003, and 2002 information contained in the financial statement schedule, when considered in relation to the 2003 and 2002 consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As described in Note 3 to the consolidated financial statements, the Company changed its method of accounting for goodwill and intangible assets in 2002. As described above, the 2001 consolidated financial statements of SAP AG as listed in the accompanying index were audited by other auditors who have ceased operations. As described in Note 14, these financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible Assets, which was adopted by the Company as of January 1, 2002. In our opinion, the disclosures for 2001 in Note 14 as it pertains to the adoption of SFAS 142 are appropriate. As described in Note 21, the Company adjusted the amounts reported in 2001 for cash and cash equivalents to exclude restricted cash. We audited the adjustments described in Note 21 that were applied to revise the 2001 consolidated financial statements. In our opinion, such adjustments are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2001 consolidated financial statements and financial statement schedule of SAP AG other than with respect to such disclosures and adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2001 consolidated financial statements and financial statement schedule taken as a whole.Mannheim, GermanyFebruary 27, 2004, except for Note 38 which is as of March 23, 2004KPMG Deutsche Treuhand-GesellschaftAktiengesellschaftWirtschaftsprüfungsgesellschaftF-1This is a copy of the audit report previously issued by Arthur Andersen Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft mbH in connection with SAP’s filing on Form 20-F for the year ended December 31, 2001. This audit report has not been reissued by Arthur Andersen Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft mbH in connection with this filing on Form 20-F. See Exhibit 10.2 for further discussion. The consolidated balance sheets as of December 31, 2001 and 2000, the consolidated statements of operations, stockholders’ equity and cash flows for the year ended December 31, 2000 and 1999 and the information in the schedule for 2000 and 1999 referred to in this report have not been included in the accompanying financial statements or schedule.REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS We have audited the accompanying consolidated balance sheets of SAP Aktiengesellschaft Systeme, Anwendungen, Produkte in der Datenverarbeitung and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SAP Aktiengesellschaft Systeme, Anwendungen, Produkte in der Datenverarbeitung and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001,2004, in conformity with generally accepted accounting principles generally accepted in the United States. As explainedStates of America. Also, in Note 2our opinion, the related financial statement schedule, when considered in relation to the financial statements, the Company has given retroactive effect to the year ended December 31, 2000, for the change in accounting related to an investment that qualifies for the equity method of accounting during the year ended December 31, 2001. Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in the index of financial statements is presented for the purpose of complying with the Securities and Exchange Commission’s rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion,whole, present fairly, states in all material respects, the financial data required to beinformation set forth therein in relation to the basic financial statements takentherein.Mannheim, GermanyMarch 9, 2005, except for Note 37 which is as a whole.Eschborn/Frankfurt am Mainof March 22, 2005January 21, 2002KPMG Deutsche Treuhand-GesellschaftARTHUR ANDERSENAktiengesellschaftWirtschaftsprüfungsgesellschaftSteuerberatungsgesellschaft mbH/s/ GrossWirtschaftsprüfer/s/ TurowskiWirtschaftsprüferF-2F-1CONSOLIDATED FINANCIAL STATEMENTSCONSOLIDATED STATEMENTS OF INCOMEfor the years ended December 31,(in thousands of euros (“€(000)”) except for per share and exchange rate data) Note 2003(1) 2003 2002 2001 Note 2004(1) 2004 2003 2002 € US$ (000) € (000) € (000) € (000) US$ € € Software revenue 3,196,338 2,361,012 2,147,591 2,290,834 Software revenue 2,705,321 2,147,591 2,290,834 2,580,518 Maintenance revenue 3,822,033 2,823,189 2,568,807 2,422,786 Maintenance revenue 3,235,926 2,568,807 2,422,786 2,121,250 Product revenue �� 7,018,371 5,184,201 4,716,398 4,713,620 Consulting revenue 2,667,807 1,970,606 1,953,459 2,204,191 Product revenue 5,941,247 4,716,398 4,713,620 4,701,768 Training revenue 409,447 302,443 299,331 413,904 Consulting revenue 2,460,772 1,953,459 2,204,191 2,082,855 Service revenue 3,077,254 2,273,049 2,252,790 2,618,095 Training revenue 377,067 299,331 413,904 466,224 Other revenue 77,496 57,243 55,418 81,123 Service revenue 2,837,839 2,252,790 2,618,095 2,549,079 Other revenue 69,810 55,418 81,123 89,957 Total revenue Total revenue (5) 8,848,896 7,024,606 7,412,838 7,340,804 Total revenue (5 ) 10,173,121 7,514,493 7,024,606 7,412,838 Cost of product (1,056,940 ) (839,041 ) (860,373 ) (887,429 ) Cost of product (1,088,878 ) (804,312 ) (839,041 ) (860,373 ) Cost of service (2,134,010 ) (1,694,062 ) (1,955,785 ) (1,965,000 ) Cost of service (2,414,438 ) (1,783,453 ) (1,694,062 ) (1,955,785 ) Research and development (1,254,587 ) (995,941 ) (909,390 ) (898,251 ) Research and development (1,380,906 ) (1,020,022 ) (995,941 ) (909,390 ) Sales and marketing (6) (1,777,441 ) (1,411,004 ) (1,627,235 ) (1,797,546 ) Sales and marketing (6 ) (2,062,733 ) (1,523,662 ) (1,411,004 ) (1,627,235 ) General and administration (445,988 ) (354,043 ) (399,269 ) (385,990 ) General and administration (496,066 ) (366,425 ) (354,043 ) (399,269 ) Other operating expense, net (7) (8,183 ) (6,496 ) (35,108 ) (94,214 ) Other operating expense, net (7 ) 2,385 1,762 (6,496 ) (35,108 ) Total operating expenses Total operating expenses (8) (6,677,149 ) (5,300,587 ) (5,787,160 ) (6,028,430 ) Total operating expenses (8 ) (7,440,636 ) (5,496,112 ) (5,300,587 ) (5,787,160 ) Operating income Operating income 2,171,747 1,724,019 1,625,678 1,312,374 Operating income 2,732,484 2,018,381 1,724,019 1,625,678 Other non-operating income/ expense, net (9) 45,738 36,309 37,319 (10,643 ) Financial income/ expense, net (10) 20,517 16,287 (555,299 ) (232,974 ) Other non-operating income/expense, net (9 ) 17,971 13,274 36,309 37,319 Financial income/expense, net (10 ) 55,488 40,987 16,287 (555,299 ) Income before income taxes, minority interest and extraordinary gain 2,238,002 1,776,615 1,107,698 1,068,757 Income before income taxes, minority interest, and extraordinary gain Income before income taxes, minority interest, and extraordinary gain 2,805,943 2,072,642 1,776,615 1,107,698 Income taxes (11) (872,519 ) (692,640 ) (598,705 ) (476,293 ) Income taxes (11 ) (1,025,191 ) (757,269 ) (692,640 ) (598,705 ) Minority interest (8,707 ) (6,912 ) (6,155 ) (11,328 ) Minority interest (6,568 ) (4,852 ) (6,912 ) (6,155 ) Income before extraordinary gain Income before extraordinary gain 1,356,776 1,077,063 502,838 581,136 Income before extraordinary gain 1,774,183 1,310,521 1,077,063 502,838 Extraordinary gain, net of tax (12) 0 0 5,776 0 Extraordinary gain, net of tax (12 ) 0 0 0 5,776 Net income Net income 1,356,776 1,077,063 508,614 581,136 Net income 1,774,183 1,310,521 1,077,063 508,614 Earnings per share — basic Earnings per share — basic (13) 4.37 3.47 1.62 1.85 Earnings per share — basic (13 ) 5,71 4,22 3,47 1,62 Earnings per share — diluted Earnings per share — diluted (13) 4.36 3.46 1.62 1.85 Earnings per share — diluted (13 ) 5,69 4,20 3,46 1,62 (1) The 2003 figures have been translated solely for the convenience of the reader at an exchange rate of€ 1 to US$1.2597, the Noon Buying Rate certified by the Federal Reserve Bank of New York on December 31, 2003.See Notes to Consolidated Financial Statements.F-3CONSOLIDATED BALANCE SHEETSas of December 31,(in thousands except for exchange rate data)Assets Note 2003(2) 2003 2002 € US$ € Intangible assets (14) 530,757 421,336 440,765 Property, plant and equipment (15) 1,284,462 1,019,657 1,034,217 Financial assets (16) 211,614 167,988 157,366 Fixed assets 2,026,833 1,608,981 1,632,348 Inventories (17) 13,069 10,375 10,729 Accounts receivable, net (18) 2,230,570 1,770,715 1,967,107 Other assets (19) 637,271 505,891 268,832 Accounts receivable and other assets 2,867,841 2,276,606 2,235,939 Marketable securities (20) 1,703 1,352 1,349 Liquid assets (21) 2,640,276 2,095,956 1,237,897 Non-fixed assets 5,522,889 4,384,289 3,485,914 Deferred taxes (11) 333,132 264,453 402,290 Prepaid expenses and deferred charges (22) 85,838 68,142 87,911 Total assets 7,968,692 6,325,865 5,608,463 thereof current assets 5,379,548 4,270,499 3,511,992 Shareholders’ Equity and Liabilities Subscribed capital(1) 397,327 315,414 314,963 Treasury stock (581,516 ) (461,631 ) (373,477 ) Additional paid-in capital 373,570 296,555 185,180 Retained earnings 4,737,840 3,761,086 2,871,106 Accumulated other comprehensive loss (254,433 ) (201,979 ) (125,681 ) Shareholders’ equity (23) 4,672,788 3,709,445 2,872,091 Minority interests 73,948 58,703 56,179 Pension liabilities and similar obligations (25) 122,865 97,535 83,573 Other reserves and accrued liabilities (26) 1,850,568 1,469,055 1,476,733 Reserves and accrued liabilities 1,973,433 1,566,590 1,560,306 Bonds 12,703 10,084 9,668 Other liabilities (27) 851,739 676,144 748,762 Other liabilities 864,442 686,228 758,430 Deferred income (28) 384,081 304,899 361,457 Total shareholders’ equity and liabilities 7,968,692 6,325,865 5,608,463 thereof current liabilities 2,836,031 2,251,354 2,405,351 (1)Contingent capital€ 55,837 thousand (2002:€ 56,288 thousand).(2)The 20032004 figures have been translated solely for the convenience of the reader at an exchange rate of€ 1.00 to US$1.2597 1.3538 the Noon Buying Rate certified by the Federal Reserve Bank of New York on December 31, 2003.2004.See Notes to Consolidated Financial Statements.StatementsF-4F-2CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITYfor the years endedBALANCE SHEETS Accumulated Number of other Additional shares issued Comprehensive comprehensive Retained paid-in Treasury Subscribed and outstanding income income/loss earnings capital stock capital Total (000) € (000) € (000) € (000) € (000) € (000) € (000) € (000) December 31, 2000 314,715 190,575 1,976,588 35,203 0 314,715 2,517,081 Net income 581,136 581,136 581,136 Other comprehensive income/loss, net of tax Unrealized losses on marketable securities (24,241 ) Currency translation adjustment 41,098 Additional minimum pension liability (3,142 ) Unrealized losses on cash flow hedges (25,529 ) Other comprehensive loss (11,814 ) (11,814 ) (11,814 ) Comprehensive income 569,322 Convertible bonds exercised 111 1,781 111 1,892 Dividends (180,414 ) (180,414 ) Share repurchase (94,212 ) (94,212 ) Effect of put option 170,232 152,177 322,409 Other (123 ) (26,442 ) (26,565 ) December 31, 2001 314,826 178,761 2,547,419 162,719 (94,212 ) 314,826 3,109,513 Net income 508,614 508,614 508,614 Other comprehensive income/loss,
net of tax Unrealized losses on marketable securities (3,946 ) Currency translation adjustment (289,750 ) Additional minimum pension liability (11,458 ) Unrealized gains on cash flow hedges 712 Other comprehensive loss (304,442 ) (304,442 ) (304,442 ) Comprehensive income 204,172 Stock-based compensation 29,709 29,709 Dividends (182,319 ) (182,319 ) Share repurchase (279,265 ) (279,265 ) Convertible bonds and stock options exercised 137 4,342 137 4,479 Other (2,608 ) (11,590 ) (14,198 ) December 31, 2002 314,963 (125,681 ) 2,871,106 185,180 (373,477 ) 314,963 2,872,091 Net income 1,077,063 1,077,063 1,077,063 Other comprehensive income/loss,
net of tax Unrealized gains on marketable securities 19,118 Currency translation adjustment (148,424 ) Additional minimum pension liability 16,283 Unrealized gains on cash flow hedges 12,729 Unrealized gains on STAR hedge 23,996 Other comprehensive loss (76,298 ) (76,298 ) (76,298 ) Comprehensive income 1,000,765 Stock-based compensation 101,173 101,173 Dividends (186,346 ) (186,346 ) Share repurchase (88,154 ) (88,154 ) Convertible bonds and stock options exercised 451 12,243 451 12,694 Other (737 ) (2,041 ) (2,778 ) December 31, 2003 315,414 (201,979 ) 3,761,086 296,555 (461,631 ) 315,414 3,709,445 See Notes to Consolidated Financial Statements.F-5CONSOLIDATED STATEMENTS OF CASH FLOWSfor the years endedas of December 31, Note 2004(2) 2004 2003 US$ (000) € (000) € (000) Assets Intangible assets (14 ) 710,600 524,893 421,336 Property, plant and equipment (15 ) 1,352,559 999,083 1,019,657 Financial assets (16 ) 135,897 100,382 167,988 Fixed assets 2,199,056 1,624,358 1,608,981 Inventories (17 ) 15,829 11,692 10,375 Accounts receivable, net (18 ) 2,611,615 1,929,100 1,770,715 Other assets (19 ) 727,864 537,645 505,891 Accounts receivable and other assets 3,339,479 2,466,745 2,276,606 Marketable securities (16 ) 13,760 10,164 1,352 Liquid assets (20 ) 4,327,479 3,196,542 2,095,956 Non-fixed assets 7,696,547 5,685,143 4,384,289 Deferred taxes (11 ) 278,342 205,601 264,453 Prepaid expenses and deferred charges (21 ) 95,267 70,370 68,142 Total assets 10,269,212 7,585,472 6,325,865 thereof total current assets 6,061,690 4,477,537 3,822,084 Note 2004 2004 2003 € US$ € Shareholders’ Equity and Liabilities Subscribed capital(1) 427,806 316,004 315,414 Treasury stock (770,537 ) (569,166 ) (461,631 ) Additional paid-in capital 436,817 322,660 296,555 Retained earnings 6,539,066 4,830,156 3,761,086 Accumulated other comprehensive loss (413,452 ) (305,401 ) (201,979 ) Shareholders’ equity (22 ) 6,219,700 4,594,253 3,709,445 Minority interests 29,744 21,971 58,703 Pension liabilities and similar obligations (24 ) 189,112 139,690 97,535 Other reserves and accrued liabilities (25 ) 2,394,498 1,768,723 1,469,055 Reserves and accrued liabilities 2,583,610 1,908,413 1,566,590 Bonds 9,851 7,277 10,084 Other liabilities (26 ) 986,701 728,838 676,144 Other liabilities 996,552 736,115 686,228 Deferred income (27 ) 439,606 324,720 304,899 Total shareholders’ equity and liabilities 10,269,212 7,585,472 6,325,865 thereof current liabilities 3,486,149 2,575,084 2,251,354 (in thousands except exchange rate data) Note 2003(1) 2003 2002 2001(2) € US$ € € Net income 1,356,776 1,077,063 508,614 581,136 Minority interest 8,707 6,912 6,155 11,328 Extraordinary gain 0 0 (5,776 ) 0 Income from operations 1,365,483 1,083,975 508,993 592,464 Adjustments to reconcile income from operations to net cash provided by operating activities: Depreciation and amortization 271,487 215,517 221,214 279,792 Losses from equity investments, net 295 234 394,589 165,499 In-process research and development from purchase of TopTier 0 0 0 5,596 Gains on disposal of property, plant and equipment and marketable equity securities, net (5,023 ) (3,987 ) (3,903 ) (22,678 ) Write-downs of financial assets, net 19,426 15,421 126,407 71,332 Impacts of hedging 3,738 2,967 58,909 82,279 Change in accounts receivable and other assets 69,819 55,425 138,181 (18,892 ) Changes in deferred stock compensation 127,448 101,173 23,949 (11,641 ) Change in reserves and liabilities (46,016 ) (36,529 ) 64,057 15,377 Change in deferred taxes 134,984 107,156 103,761 (144,642 ) Change in other non-fixed assets 25,348 20,122 60,278 (37,590 ) Change in deferred income (71,246 ) (56,558 ) (15,949 ) 11,950 Net cash provided by operating activities (29) 1,895,743 1,504,916 1,680,486 988,846 Purchase of intangible assets and property, plant and equipment (346,842 ) (275,337 ) (308,747 ) (377,844 ) Purchase of financial assets (36,919 ) (29,308 ) (43,491 ) (76,716 ) Change in the scope of consolidation (3,193 ) (2,535 ) 1,612 (4,591 ) Proceeds from disposal of fixed assets 44,436 35,275 45,003 65,572 Investment in Commerce One 0 0 (1,920 ) (304,037 ) Purchase of TopTier, net of cash acquired 0 0 0 (378,993 ) Change in liquid assets (maturities greater than 90 days) and marketable securities (805,426 ) (639,379 ) 91,703 10,678 Net cash used in investing activities (1,147,944 ) (911,284 ) (215,840 ) (1,065,931 ) Dividends paid (234,740 ) (186,346 ) (182,319 ) (180,414 ) Purchase of treasury stock (111,049 ) (88,154 ) (279,265 ) (94,212 ) Change in bonds, net 16,515 13,110 6,850 4,776 Other changes to additional paid-in capital (2,571 ) (2,041 ) (10,494 ) (4,682 ) Proceeds from line of credit and long-term debt 976 775 1,571 338,663 Principal payments made on line of credit and long-term debt (4,992 ) (3,963 ) (428,896 ) (2,052 ) Effect of 2000 STAR hedge, net 0 0 0 (119,931 ) Effect of 2001 STAR hedge 0 0 0 (68,440 ) Effect of 2002 STAR hedge 0 0 (43,331 ) 0 Effect of 2003 STAR hedge (48,876 ) (38,800 ) 0 0 Net cash used in financing activities (384,737 ) (305,419 ) (935,884 ) (126,292 ) Effect of foreign exchange rates on cash (87,587 ) (69,530 ) (162,005 ) (4,117 ) Net increase/ decrease in cash and cash equivalents 275,475 218,683 366,757 (207,494 ) Cash and cash equivalents at the beginning of the year 1,413,016 1,121,708 754,951 962,445 Cash and cash equivalents at the end of the year (21) 1,688,491 1,340,391 1,121,708 754,951 (1) Contingent capital€ 55,247 thousand (2003:€ 55,837 thousand) (2) The 20032004 figures have been translated solely for the convenience of the reader at an exchange rate of€ 1.00 to US$1.2597, 1.3538 the Noon Buying Rate certified by the Federal Reserve Bank of New York on December 31, 2003.2004.See Notes to Consolidated Financial StatementsCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITYfor the years ended Accumulated Number of other Additional shares issued Comprehensive comprehensive Retained paid-in Treasury Subscribed and outstanding income income/loss earnings capital stock capital Total (000) € (000) € (000) € (000) € (000) € (000) € (000) € (000) December 31, 2001 314,826 178,761 2,547,419 162,719 (94,212 ) 314,826 3,109,513 Net income 508,614 508,614 508,614 Other comprehensive income/loss, net of tax Unrealized losses on marketable securities (3,946 ) Currency translation adjustment (289,750 ) Additional minimum pension liability (11,458 ) Unrealized gains on cash flow hedges 712 Other comprehensive loss (304,442 ) (304,442 ) (304,442 ) Comprehensive income 204,172 Stock-based compensation 29,709 29,709 Dividends (182,319 ) (182,319 ) Change in treasury stock (279,265 ) (279,265 ) Convertible bonds and stock options exercised 137 4,342 137 4,479 Other (2,608 ) (11,590 ) (14,198 ) December 31, 2002 314,963 (125,681 ) 2,871,106 185,180 (373,477 ) 314,963 2,872,091 Net income 1,077,063 1,077,063 1,077,063 Other comprehensive income/loss, net of tax Unrealized gains on marketable securities 19,118 Currency translation adjustment (148,424 ) Additional minimum pension liability 16,283 Unrealized gains on cash flow hedges 12,729 Unrealized gains on STAR hedges 23,996 Other comprehensive loss (76,298 ) (76,298 ) (76,298 ) Comprehensive income 1,000,765 Stock-based compensation 101,173 101,173 Dividends (186,346 ) (186,346 ) Change in treasury stock (88,154 ) (88,154 ) Convertible bonds and stock options exercised 451 12,243 451 12,694 Other (737 ) (2,041 ) (2,778 ) December 31, 2003 315,414 (201,979 ) 3,761,086 296,555 (461,631 ) 315,414 3,709,445 Net income 1,310,521 1,310,521 1,310,521 Other comprehensive income/loss, net of tax Unrealized losses on marketable securities (7,678 ) Currency translation adjustment (70,723 ) Additional minimum pension liability (7,019 ) Unrealized losses on cash flow hedges (131 ) Unrealized losses on STAR hedges (15,398 ) Currency effects from intercompany long-term investment transactions (2,473 ) Other comprehensive loss (103,422 ) (103,422 ) (103,422 ) Comprehensive income 1,207,099 Stock-based compensation 186 186 Dividends (248,716 ) (248,716 ) Change in treasury stock (107,535 ) (107,535 ) Convertible bonds and stock options exercised 590 21,389 590 21,979 Other 7,265 4,530 11,795 December 31, 2004 316,004 (305,401 ) 4,830,156 322,660 (569,166 ) 316,004 4,594,253 See Notes to Consolidated Financial StatementsCONSOLIDATED STATEMENTS OF CASH FLOWSfor the years ended December 31, Note 2004(1) 2004 2003(2) 2002(2) US $(000) € (000) € (000) € (000) Net income 1,774,183 1,310,521 1,077,063 508,614 Minority interest 6,569 4,852 6,912 6,155 Extraordinary gain 0 0 0 (5,776 ) Net income before minority interests 1,780,752 1,315,373 1,083,975 508,993 Adjustments to reconcile income from operations to net cash provided by operating activities: Depreciation and amortization 283,850 209,669 215,517 221,214 Losses from equity investments, net (10 ) 463 342 234 394,589 Gains on disposal of property, plant and equipment and marketable equity securities, net (18,256 ) (13,485 ) (3,987 ) (3,903 ) Write-downs of financial assets, net 24,098 17,800 15,421 126,407 Impacts of hedging (10,056 ) (7,428 ) 2,967 58,909 Change in accounts receivable and other assets (223,104 ) (164,798 ) 55,425 138,181 Changes in deferred stock compensation 252 186 101,173 23,949 Change in reserves and liabilities 588,947 435,033 (36,529 ) 64,057 Change in deferred taxes 24,337 17,977 107,156 103,761 Change in other non-fixed assets (4,799 ) (3,545 ) 20,122 60,278 Change in deferred income 26,834 19,821 (56,558 ) (15,949 ) Net cash provided by operating activities (28 ) 2,473,318 1,826,945 1,504,916 1,680,486 Acquisition of minorities in subsidiaries (227,578 ) (168,103 ) (8,971 ) 0 Purchase of intangible assets and property, plant and equipment (286,820 ) (211,863 ) (270,202 ) (308,747 ) Purchase of financial assets (57,874 ) (42,749 ) (29,308 ) (43,491 ) Change in the scope of consolidation 0 0 (2,535 ) 1,612 Proceeds from disposal of fixed assets 158,036 116,735 35,275 45,003 Investment in Commerce One 0 0 0 (1,920 ) Change in liquid assets (maturities greater than 90 days) and marketable securities (786,095 ) (580,658 ) (868,721 ) (18,844 ) Net cash used in investing activities (1,200,331 ) (886,638 ) (1,144,462 ) (326,387 ) Dividends paid (336,711 ) (248,716 ) (186,346 ) (182,319 ) Change in treasury stock (145,581 ) (107,535 ) (88,154 ) (279,265 ) Change in bonds, net 25,955 19,172 13,110 6,850 Other changes to additional paid-in capital 6,133 4,530 (2,041 ) (10,494 ) Proceeds from line of credit and long-term debt 5,292 3,909 775 1,571 Principal payments made on line of credit and long-term debt (665 ) (491 ) (3,963 ) (428,896 ) Effect of STAR hedge (58,269 ) (43,041 ) (38,800 ) (43,331 ) Net cash used in financing activities (503,846 ) (372,172 ) (305,419 ) (935,884 ) Effect of foreign exchange rates on cash (53,333 ) (39,395 ) (65,694 ) (162,005 ) Net increase in cash and cash equivalents 715,808 528,740 (10,659 ) 256,210 Cash and cash equivalents at the beginning of the year 1,332,674 984,395 995,054 738,844 Cash and cash equivalents at the end of the year (20 ) 2,048,482 1,513,135 984,395 995,054 (1) The 2004 figures have been translated solely for the convenience of the reader at an exchange rate of€ 1.00 to US$ 1.3538, the Noon Buying Rate certified by the Federal Reserve Bank of New York on December 31, 2004. (2) See note 21.Note 20.See Notes to Consolidated Financial Statements.StatementsF-6F-5NOTES TO CONSOLIDATED FINANCIAL STATEMENTSA. BASIS OF PRESENTATION(1) General The accompanying Consolidated Financial Statements of SAP Aktiengesellschaft Systeme, Anwendungen, Produkte in der Datenverarbeitung (“SAP AG”), together with its subsidiaries (collectively, “SAP,” the “Group,” or the “Company”), have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). Certain amounts reported in previous years have been reclassified to conform to the 2004 presentation. In addition adjustments have been made to the 2003 presentation. SAP is exempt as outlined in the German Commercial Code (Handelsgesetzbuch — HGB), section 292a from preparing Consolidated Financial Statements in accordance with German GAAP since its Consolidated Financial Statements are prepared in accordance with U.S. GAAP.Amounts included in the Consolidated Financial Statements are reported in eurothousands of euros (“€(000)”) unless otherwise stated. All financial data that is presented in U.S. dollars (“US$”) has been converted, for the convenience of the reader, at the Noon Buying Rate certified by the Federal Reserve Bank of New York on December 31, 2003,2004, which was€1.00 per $1.2597.$1.3538. Financial data that has been presented in U.S. dollars is unaudited and presented solely for the convenience of the reader. SAP operates in a dynamic and rapidly changing environment that involves numerous risks and uncertainties, many of which are beyond the Company’s control. The Company derives a substantial portion of its revenue from software licenses and services sold to customers in Germany, the United States, Great Britain, and Japan (see Note 34)33). SAP’s future revenue and results of operations may be significantly adversely affected by a prolonged economic slow-downslowdown in any of these countries.countries or elsewhere. Further, a significant portion of the Company’s business is conducted in currencies other than the euro. SAP continually monitors its exposure to foreign currency exchange risk and has a Company-wide foreign currency exchange risk policy andunder which it may hedge such risks with certain financial instruments. However, fluctuations in foreign currency exchange rates, especially the value of the U.S. dollar, Japanese yen, British pound, Swiss franc, Canadian dollar, Brazilian real, and Australian dollar could significantly impact the Company’s reported financial position and results of operations.(2) Scope of Consolidation The Consolidated Financial Statements include SAP AG and all of its majority-owned subsidiaries. All significant intercompany transactions and balances relating to these majority-ownedconsolidated entities have been eliminated.The following table summarizes the change in the number of companies included in the Consolidated Financial Statements:Number of Companies Consolidated in the Financial Statements Number of companies consolidated in the Financial Statements German Foreign Total German Foreign Total December 31, 2002 18 73 91 December 31, 2003 21 75 96 Additions 5 5 10 0 2 2 Disposals 2 3 5 6 4 10 December 31, 2003 21 75 96 December 31, 2004 15 73 88 The impact of changes in the scope of companies included in the Consolidated Financial Statements during 20032004 did not have a significant effect on the comparability of the Consolidated Financial Statements presented. Five additions relate to the acquisitions presented in Note 4. All otherThe additions relate to newly founded companies. AllThe disposals are mainly due to mergers within the Group. Five companies, in which SAP does not have a controlling financial interest but has the ability to exercise significant influence over the operating and financial policies of the investeesinvestee (“associated companies”), are accounted for using the equity method. In 2003, SAP acquired two Under German law subsidiaries of a holding company are exempt from preparing standalone financial statements if they are included in the consolidated financial statements of their holding company and sold two investmentsthe use of this exemption is disclosed in associatedF-7companies. Neither the acquisitions nornotes to the disposals had a significant impact on SAP’s Consolidated Financial Statements.consolidated financial statements. Separate financial statements were not prepared for the following subsidiaries as allowed under the exemptions codified in HGB, section 264b: • SAP Hosting AG & Co. KG, St. Leon-Rot • SAP Retail Solutions GmbH & Co. KG, St. Ingbert•SAP Deutschland AG & Co. KG, Walldorf •DCW Software AG & Co. KG, Mannheim(3) Summary of Significant Accounting PoliciesBusiness Combinations The Company accounts for its business combinations using the purchase method. As of the date of acquisition, the purchase price is allocated to the fair values of the net assets acquired. The fair value of any identifiable in-process research and development (“in-process R&D”), which represents research and development efforts that have not reached technological feasibility, and research and development having no alternative future uses, is expensed immediately. Any excess purchase price over the fair value of the net assets acquired is capitalized as goodwill.Use of Estimates The preparation of the Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. In making its estimates, the Company may useconsiders historical and forecast information. Changes ininformation, as well as regional and industry economic conditions in which the Company and/or its customers participate, maychanges to which could negatively impact the estimates made by management, in particular when assessing the valuation and recoverability of receivables, investments and other assets.assets, and tax positions. Actual results could differ from thoseSAP’s estimates. SAP’s financial position, results of operations, and cash flows are subject to numerous risks and uncertainties. Factors that could affect the Company’s future financial statements and cause actual results to differ materially from current expectations include, but are not limited to, further adverse changes in the global economy, consolidation and intense competition in the software industry, decline in customer demand in the most important markets in Europe, the United States, and Asia, as well as fluctuations in currency exchange rates.Foreign Currency Translation and Transactions The assets and liabilities of foreign operations where the functional currency is not the euro are generally translated into euro using period-end closing exchange rates whilewhereas the statementsStatements of incomeIncome are translated into euros using average exchange rates during the respective periods. The resulting foreign currency translation adjustments are included in Otherother comprehensive income in the Consolidated Statements of Changes in Shareholders’ Equity. Assets and liabilities that are denominated in foreign currencies other than the functional currency are translated at the period-end closing rate with resulting gains and losses reflected in income.Other non-operating income/expense, net in the Consolidated Statements of Income. The exchange rates of key currencies affecting the Group are as follows:Exchange Rates Closing rate at Closing rate at Annual average exchange rate to December 31, Annual average exchange rate December 31, to€ 1.00 € 1.00 to€ 1.00 to€ 1.00 to€ 1.00 to€ 1.00 to€ 1.00 2003 2002 2003 2002 2001 2004 2003 2004 2003 2002 U.S. dollar US$ 1.2630 1.0494 1.1394 0.9499 0.8929 US$ 1.3621 1.2630 1.2490 1.1394 0.9499 Japanese yen JPY 135.05 124.49 130.98 118.83 108.85 JPY 139.65 135.05 134.73 130.98 118.83 British pound GBP 0.7048 0.6509 0.6936 0.6305 0.6207 GBP 0.7051 0.7048 0.6795 0.6936 0.6305 Canadian dollar CAD 1.6234 1.6536 1.5835 1.4906 1.3871 CAD 1.6416 1.6234 1.6163 1.5835 1.4906 Australian dollar AUD 1.6802 1.8600 1.7307 1.7425 1.7297 AUD 1.7459 1.6802 1.7003 1.7307 1.7425 Swiss franc CHF 1.5579 1.4549 1.5226 1.4672 1.5070 CHF 1.5429 1.5579 1.5421 1.5226 1.4672 F-8Revenue Recognition Substantially all of the Company’s revenues are derived from the sale or the license of the Company’s software products and the sale of related maintenance, consulting, and training services.services, etc. The Company’s standard license agreement provides a perpetual license to use the Company’s products based on the number of licensed users. The Company may license its software in multiple element arrangements if the customer purchases any combination of maintenance, consulting, or training services in conjunction with the software license. The Company recognizes revenue pursuant to the requirements of American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2, “Software Revenue Recognition”Recognition,” (“SOP 97-2”), as amended by SOP 98-9, “Software Revenue Recognition, With Respect to Certain Transactions”.amended. Revenue is recognized using the residual method when Company-specific objective evidence of fair value exists for all of the undelivered elements in the arrangement, but does not exist for one or more delivered elements. The Company allocates revenue to each undelivered element based on its respective fair value determined by the price charged when that element is sold separately or, for elements not yet sold separately, the price established by management if it is probable that the price will not change before the element is sold separately. The Company defers revenue for the undelivered elements and recognizes the residual amount of the arrangement fee, if any, when the basic criteria in SOP 97-2 have been met. Under SOP 97-2, provided that the arrangement does not require significant production, modification, or customization of the software, revenue is recognized when the following four criteria have been met: 1. Persuasive evidence of an arrangement exists 2. Delivery has occurred 3. The fee is fixed or determinable, and 4. Collectibility is probable. If at the outset of an arrangement the Company determines that the arrangement fee is not fixed or determinable, revenue is deferred until the arrangement fee becomes due.due and payable by the customer. If at the outset of an arrangement the Company determines that collectibility is not probable, revenue is deferred until payment is received. If an arrangement allows for customer acceptance of the software or services, the Company defers revenue until the earlier of customer acceptance or when the lapseacceptance rights lapse. The Company occasionally licenses software for a specified time period. Revenue for short-term time-based licenses, which generally include maintenance during the license period, is recognized ratably over the license term. Revenue for multi-year time-based licenses that include maintenance, whether separatelypriced or not, are recognized ratably over the license term unless a substantive maintenance renewal rate exists, in which case the amount allocated to software based on the residual method is recognized as software revenue when the basic criteria in SOP 97-2 have been met. Revenues from time-based licenses were not material in any of acceptance rights. The Company recognizes revenue from resellers upon sell-through to the end customer. Maintenance revenues are recognized ratably over the term of the maintenance contract. In situations when themultiple-element arrangements involving software and consulting, training or other services that are deemed not to be essential to the functionality of the software, consulting and trainingthe service revenues are accounted for separately from the licensesoftware revenues. Consulting, training, and trainingother service revenues are recognized as the respective services are performed, generally on a time and materials basis. Consulting revenues attributed to fixed price arrangements are recognized using the percentage of completion method based on direct labor costs incurred to date as a percentage of total estimated project costs required to complete the project. Consulting services primarily comprise implementation support related to the installation and configuration of the Company’s software products and do not typically requireinvolve significant production, modification, or customization of the software. ArrangementsRevenues for arrangements that require significant production, modification, or customization of the software and arrangementsthose in which services are not available from third party vendors, are recognized, depending on the fee structure, on a time and materials basis or using the percentage of completion method. When total cost estimates exceed revenues in a fixed price arrangement, the estimated losses are recognized immediately based upon an average fully burdened daily rate applicable to the consulting organization delivering the services. The assumptions, risks, and uncertainties inherent with the application of the percentage of completion method affect the timing and amounts of revenues and expenses reported. Numerous internal and external factors can affect estimates, including direct labor rates, utilization, and efficiency variances. The Company accounts for out-of-pocket expenses rebilled to customers as maintenance, consulting, and training revenues.F-9Research and Development Research and development costs are generally expensed as incurred. SFAS 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed”, requires the capitalization of researchResearch and development costs incurred upon achievingbetween the date technological feasibility until suchis established and when the related product is available-for-sale.available-for-sale should be capitalized. Historically, such costs have not been material and consequently have not been capitalized. The Company has entered into several joint development agreements with certain customers to leverage their industry expertise and to provide standard software solutions for selected vertical markets. These customers generally contribute cash, resources, and industry expertise in exchange for license rights for the future solution. The Company recognizes software revenue in conjunction with these arrangements based upon the percentage of completion method.Advertising Costs Advertising costs are expensed as incurred.Rental Expense SAP is a lessee of property, plant, and equipment, mainly buildings and vehicles, under operating leases that do not transfer to SAP the substantive risks and rewards of ownership. Rent expense on operating leases is recognized on a straight-line basis over the life of the lease. Some operating leases contain lessee incentives, such as up-front payments of costs or free or reduced periods of rent. Such incentives are amortized over the life of the lease such that the rent expense is recognized on a straight-line basis over the life of the lease.Sales of Newly Issued Subsidiary Shares Gains and losses resulting from the issuance of stock by a Group subsidiary which reducesto third parties that reduce SAP’s percentage ownership (“dilution gains and losses”) are recordedrecognized in the Group’s Consolidated Statements of Income in the line item Other non-operating income/expense, net.Earnings per Share Basic earnings per share is calculated by dividing consolidated Netnet income by the weighted average number of common shares outstanding. Diluted earnings per share reflect the potential dilution that would occur if all “in the money” securities and other contracts to issue common shares were exercised or converted.Goodwill and Other Intangible Assets SAP accounts for all business combinations using the purchase method. As of the date of acquisition, the purchase price is allocated to the fair values of the assets acquired and Property, Plantliabilities assumed. Goodwill represents the excess of the cost of an acquired entity over the fair values assigned to the tangible assets acquired, to those intangible assets that are required to be recognized and Equipment Purchased intangible assets other than goodwill,with estimable useful lives, are recorded at acquisition cost, and amortized on a straight-line basis over their estimated useful life, generally three to five years.years, and reviewed for impairment when significant events occur or there are changes in circumstances that indicate that the carrying amount of the asset or asset group may not be recoverable. All of SAP’s intangible assets, other thanwith the exception of goodwill and the aggregate minimum pension liability offset, have estimable useful lives and are therefore subject to amortization. With the adoption The fair value of SFAS 142, “Goodwillacquired identifiable in-process research and Other Intangible Assets”development (“SFAS 142”in-process R&D”) on January 1, 2002, goodwill arising from business combinations consummated prior to July 1, 2001, which represents acquired research and development efforts that have not reached technological feasibility and that have no alternative future use, is no longer amortized. Instead goodwillexpensed immediately. Goodwill is subject to an assessmentnot amortized, but is tested for impairment at least annually or when significant events occur or when there are changes in circumstances that indicate the fair value of a reporting unit of the Group is less than its carrying value. In 2001, goodwill arising from business combinations consummated prior to July 1, 2001 was amortized through December 31, 2001, using the straight-line method over its estimated useful life, which did not exceed five years. Goodwill resulting from business combinations after June 30, 2001, was accounted for in accordance with SFAS 142.Property, Plant, and EquipmentProperty, plant, and equipment is valued at acquisition cost less accumulated depreciation, where appropriate, based on its expected useful life. Interest incurred during the construction of qualifying assets is capitalized and amortized over the related assets’ estimated useful lives. Useful lives of property, plant, and equipment Buildings 25 to 50 years Leasehold improvements Based upon the lease contract Information technology equipment 3 to 5 years Office furniture 4 to 20 years Automobiles 5 years F-10 Generally, property, plant, and equipment are depreciated using the straight-line method. Certain assets with expected useful lives in excess of three years are depreciated using the declining balance method. Leasehold improvements are depreciated using the straight-line method over the shorter of the term of the lease or the useful life of the asset. If a renewal option exists, the depreciation period reflects the additional time covered by the option if SAP evaluates its long-livedintends to exercise the renewal option.Impairment of Long-Lived Assets Long-lived assets, (which consists ofsuch as property, plant, equipment, and acquired intangible assets excluding goodwill) in accordance with the provisions of SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). SFAS 144 requires that these long-lived assets besubject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be recoverable. Recoverability of assets to be held and used is assessed by comparing their carrying amount to the expected future undiscounted net cash flows they are expected to generate. If an asset or group of assets is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset or group of assets exceeds fair value. Long-lived assets meeting the criteria to be considered as held for saleheld-for-sale are reported at the lower of their carrying amount or fair value less anticipated disposal costs. In the years presented, the Company recognized no significant impairment charges on long-lived assets.Financial Assets In accordance with SFAS 115 “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”), marketableMarketable Securities Marketable debt and equity securities, other than investments accounted for by the equity method, are classified as trading, available for sale,available-for-sale, or held to maturity,held-to-maturity, depending on management’s intent with respect to holding such investments. TheIf it is readily determinable, marketable securities classified within financial assetsas trading or available-for-sale are considered to be availableaccounted for sale and, therefore, are valued at fair value at the balance sheet date.value. Realized and unrealized gains and losses on trading securities are included in earnings. Unrealized gains and losses on available for saleavailable-for-sale securities are excluded from earnings and reported net of tax as a component of other comprehensive income within shareholders’ equity. As of December 31, 2004, no marketable debt or equity until realized.securities are classified as trading. Investments in privately held companies for which the CompanySAP does not have the ability to exercise significant influence are accounted for under the cost method of accounting. An impairment charge is recordedrecognized in earnings in the line item Financial income/expense, net whenin the period a decline in realizable value of any available for sale or cost method security below costcarrying value is deemed to be other-than-temporary.other than temporary. Gains or losses realized on sales of securities are based on the average-cost method. Investments in associated companies are accounted for under the equity method. Such investmentsmethod are initially recorded at acquisition cost and are subsequently adjusted for the Company’sSAP’s proportionate share of the investees’ net income or loss,losses and reduced for amortization of any step up in the value of the acquired assets over the investees’ book value. With the adoption of SFAS 142, goodwill related to associated companies is no longer subject to amortization. An impairmentloss on SAP’s total investment in an associated companyequity method investments is recognized when the carrying value of the investment exceeds the realizable value on an other-than-temporary basis. The impairment of marketable debt and equity securities, cost method investments, and equity method investments, establishes a new cost basis for the security.investment. To determine whether an impairment is other-than-temporary, the CompanySAP considers whether it has the ability and intent to hold the investment until a market price recovery occurs and considers whether evidence indicating that the carrying value of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the decline in realizable value below cost, changes in value subsequent to year-end, andthe balance sheet date, as well as forecasted performance of the investee. Non-interest-bearing or below market rate loans to employees and to third parties are discounted to their present value. In the event of any delay or shortfall in payments due under employee or third party loans, SAP performs an individual loan review. The same applies if SAP becomes aware of any change in the debtor’s financial condition that indicates a delay or shortfall in payments may result. If it is probable that SAP will not be able to collect the amounts due according to the contractual terms of the loan agreement, an impairment charge is recorded based on SAP’s best estimate of the amount that will be recoverable. Dividend and interest income are recognized when earned.F-11Non-Fixed AssetsNon-fixed AssetsInventories Inventories are shownrecorded at the lower of purchase/purchase or production cost or market value. Production costs consist of direct salaries, materials, and production overhead. No write-downs of inventory were necessary in any periods presented. Trade accountsAccounts Receivable and Other Assets Accounts receivable are recorded at the invoiced amount and do not bear interest. Included in accountsAccounts receivable are unbilled receivables related to fixed fee consulting arrangements. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable.receivable portfolio. The Company determines the allowance for doubtful accounts after giving consideration to specific customer past due amounts based on due dates and regional economic risks. Account balances are charged off against the allowance after all collection efforts have been exhausted and the potential for recovery is considered remote. Non-interest-bearing receivables with a term exceeding one year are discounted to their present value using local interest rates. With the exception of Investments in insurance policies held for employee-financed pension plan, which are recorded at actuarially determined values, all Other assets are shownrecorded at their historical cost which approximates fair value due to their short-term nature, approximates fair value. Marketable securities within non-fixed assets are considered as trading. Accordingly, these securities are recorded at fair value in the Consolidated Financial Statements and unrealized holding gains and losses included in earnings. Recognized gains or losses are based on the average-cost method.Liquid Assets Liquid assets are comprised of cash and cash equivalents, time deposits with original maturities exceeding three months and less than one year,90 days, and restricted cash. Cash and cash equivalents for purposes of the Consolidated Statements of Cash Flows consist of cash at banks and highly liquid investments with original maturities of 90 days or less.Prepaid Expenses and Deferred Charges Prepaid expenses and deferred charges are primarily composed of prepayments of software royalties, operating leases, and maintenance contracts which will be charged to expense in the future periods as such costs are incurred.Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and on operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance to the extent that it is more likely than not that some portion or all of the deferred tax assets will not be realized.Prepaid ExpensesCommitments and Deferred Charges Prepaid expensesContingencies Liabilities for loss contingencies are recorded when it is probable that a liability to third parties has been incurred and deferred chargesthe amount can be reasonably estimated. Liabilities for loss contingencies are primarily composedregularly adjusted as further information develops or circumstances change. At the time of prepaymentsthe sale or license of SAP’s software, royalties, operating leases, and maintenance contracts which will be charged to expense in the future periods as suchincludes a warranty provision, SAP records an accrual for warranty costs are incurred.Pension Benefit Liabilities The measurement of pension-benefit liabilities is based on actuarial computations using the projected-unit-credit method in accordance with SFAS 87, “Employers’ Accounting for Pensions.Pensions,” (“SFAS 87”). The assumptions used to calculate pension liabilities and costs are shown in Note 25.24. Changes in the amount of the projected benefit obligation or plan assets resulting from experience different from that assumed and from changes in assumptions can result in gains or losses not yet recognized in the Group’s Consolidated Financial Statements. Amortization of an unrecognized net gain or loss is included as a component of the Group’s net periodic benefit plan cost for a year if, as of the beginning of the year, that unrecognized net gain or loss exceeds 10% of the greater of the projected benefit obligation or the fair value of that plan’s assets. In that case, the amount of amortization recognized by the Group is the resulting excess divided by the average remaining service period of the active employees expected to receive benefits under the plan.F-12 In addition, the The Company also records a liability for amounts payable under the provisions of its various defined contribution plans.Stock-Based Compensation The Company applies the intrinsic-value-based method prescribed by Accounting Principles Board Opinion (“APB”) 25, “Accounting for Stock Issued to Employees”Employees,” (“APB 25”) and related interpretations. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price or the exercise price is not fixed at the grant date. SFAS 123 “Accounting for Stock-Based Compensation”,Compensation,” (“SFAS 123”) and SFAS 148 “Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123”,123,” (“SFAS 148”) established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As permitted by existing accounting standards,SFAS 123 and SFAS 148, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS 123, as amended.currently effective. The following table illustrates the effect on net income if the fair-value-based method had been applied to all outstanding and unvested awards in each period.Net Income 2003 2002 2001 2004 2003 2002 € (000) € (000) € (000) Net income (in thousands of€) As reported 1,077,063 508,614 581,136 1,310,521 1,077,063 508,614 Add: Expense for stock-based compensation, net of tax according to APB 25 85,700 5,600 40,357 23,445 85,700 5,600 Deduct: Expense for stock-based compensation, net of tax according to SFAS 123 205,109 138,203 131,272 181,323 205,109 138,203 Pro forma 957,654 376,011 490,221 Pro-forma 1,152,643 957,654 376,011 Earnings per share (in€) Basic — as reported 4.22 3.47 1.62 Diluted — as reported 4.20 3.46 1.62 Basic — pro-forma 3.71 3.08 1.20 Diluted — pro-forma 3.70 3.08 1.20 Earnings per Share 2003 2002 2001 € € € Basic — as reported 3.47 1.62 1.85 Diluted — as reported 3.46 1.62 1.85 Basic — pro forma 3.08 1.20 1.56 Diluted — pro forma 3.08 1.20 1.56 Derivative Financial Instruments The Company primarily SAP uses forward exchange derivative financial instruments to reduce the foreign currency exchange risk, primarily of anticipated cash flows from transactions with subsidiaries denominated in currencies other than the euro. As discussed in Note 33,32, the Company uses call options to hedge its anticipated cash flow exposure attributable to changes in the market value of stock appreciation rights under various plans. The Company SAP accounts for derivatives and hedging activities in accordance with SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”,Activities,” (“SFAS 133”), as amended, which requires that all derivative financial instruments be recorded on the balance sheet at their fair value. The effective portion of the realized and unrealized gain or loss on derivatives designated as cash flow hedges is reported net of tax, as a component of other comprehensive income. The portion of gains or losses on derivatives is reclassified from other comprehensive income into earnings in the same period or periods during which the hedged forecasted transaction affects earnings.earnings, or in the period the derivative contract is terminated, if earlier. The ineffective portion of gains or losses on derivatives designated as cash flow hedges are reported in earnings when the ineffectiveness occurs. In measuring the effectiveness of foreign currency-related cash flow hedges, the CompanySAP excludes differences resulting from time value (that is, spot rates versus forward rates for forward contracts). Changes in value resulting from the excluded component areF-13recognized in earnings immediately. Foreign currency exchange derivatives entered into by the CompanySAP to offset exposure to anticipated cash flows that do not meet the conditions for hedge accounting are recorded at fair value in the consolidated balance sheetConsolidated Balance Sheets with changes in fair value included in earnings.Accumulated Other Comprehensive Income Comprehensive income is comprised of net income and other comprehensive income/loss. Other Accumulated other comprehensive income/loss includes foreign currency translation adjustments, changes in additional minimum pension liability, unrealized gains and losses from derivatives designated ascash flow hedges, unrealized gains onand losses resulting from STAR hedge,hedges, and unrealized gains and losses from marketable debt and equity securities classified as available-for-sale. Other comprehensive income/loss and comprehensive income are displayed separately in the Consolidated Statements of Changes in Shareholders’ Equity.Cash Flows The Consolidated Statements of Cash Flows illustrate the effect of inflows and outflows during the period on the Group’s cash and cash equivalents of the cash inflows and have been prepared in accordance with SFAS 95, “Statement of Cash Flows”. The Consolidated Statements of Cash Flows distinguish between cash flowsoutflows resulting from operating, activities, investing, activities, and financing activities.activities during the period. The Consolidated Statements of Cash Flows is reconciled to cash and cash equivalents, which are reconciled to liquid assets in Note 21.New Accounting Standards Not Yet Adopted And To Be Adopted In June 2001,November 2003 and March 2004, the FASB issued SFAS 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”). The statement applies to legal obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or the normal operation of a long-lived asset, except for certain obligations of lessees. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and subsequently allocated to expense over the asset’s useful life. The adoption of SFAS 143reached partial consensuses on January 1, 2003 did not have a material impact on SAP’s Consolidated Financial Statements. In July 2002, the FASB issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”), superseding Emerging Issues Task Force (“EITF”)(EITF) Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. The requirements under SFAS 146 are effective prospectively for exit or disposal activities initiated after December 31, 2002. SFAS 146 requires that a liability for costs associated with exit or disposal activities be recognized in the period in which the costs are incurred if a reasonable estimate of fair value can be made. Under prior accounting guidance, a liability could be recognized when management has committed to an exit plan. The adoption did not have a material impact on SAP’s Consolidated Financial Statements. Disclosures required by SFAS 146 are presented in Note 26. In November 2002, the FASB issued FASB Interpretation No. (“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others — an interpretation of FASB statements 5, 57, and 107 and rescission of FASB Interpretation 34” (“FIN 45”). FIN 45 elaborates on the disclosure to be made by a guarantor in its financial statements regarding obligations under certain guarantees that it has issued. FIN 45 also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the non-contingent portion of the obligation due to the issuance of the guarantee or, if higher, a probable loss under SFAS 5, “Accounting for Contingencies”. The initial recognition and initial measurement provisions were applied on a prospective basis to guarantees issued or modified after December 31, 2002, without significant impact to SAP’s consolidated financial statements. The disclosures about guarantees required by FIN 45 are included in Notes 26 and 30. In December 2002, the FASB issued SFAS 148, which amends SFAS 123 to provide alternative methods of transition for a voluntary change to the fair-value-based method of accounting for stock-based employeeF-14compensation. As described above, SAP applies APB 25, which uses an intrinsic-value-based approach to measure compensation expense. Under SFAS 123, compensation expense of a stock option plan is measured at the grant date based on the fair value of the award using an option-pricing model. Compensation expense under both APB 25 and SFAS 123 is recognized over the service period with an offsetting credit to equity (paid-in capital). If SAP adopts a fair value based method of measuring employee stock-based awards, additional compensation expense will be recognized in future statements of income dependent upon the number, price, and other significant terms of the stock options granted. In addition, SFAS 148 requires more prominent disclosures in both interim and annual financial statements about the method of accounting used for stock-based employee compensation and the effect of the method used on reported results. Disclosures required by this standard are included in Notes 3 and 24. In November 2002, the EITF reached a final consensus on EITF 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). The scope provisions of EITF 00-21 were slightly modified in May 2003. EITF 00-21 addresses certain aspects of the accounting of revenue arrangements with multiple deliverables by a vendor. EITF 00-21 outlines an approach to determine when a revenue arrangement for multiple deliverables should be divided into separate units of accounting and, if separation is appropriate, how the arrangement consideration should be allocated to the identified accounting units. On July 31, 2003, the EITF reached a consensus on EITF 03-05, “Applicability of AICPA Statement of Position 97-2, “Software Revenue Recognition’, to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software”, which clarifies the guidance in EITF 00-21. SAP adopted EITF 00-21 and EITF 03-5 prospectively to all transactions occurring after June 30, 2003. The adoption of EITF 00-21 and EITF 03-5 did not have a material impact on SAP’s Consolidated Financial Statements. In May 2003, the EITF reached a consensus on EITF 01-8, “Determining Whether an Arrangement Contains a Lease”. EITF 01-8 clarifies certain provisions of SFAS 13, “Accounting for Leases”, with respect to the identification of lease elements in arrangements that do not explicitly include lease provisions. Any lease element identified under the model of EITF 01-8 should be accounted for under current lease accounting literature. EITF 01-8 should be applied prospectively for lessees and lessors to arrangements newly agreed to, modified, or acquired in a business combination beginning with the first reporting period after May 28, 2003. SAP applied the provisions of EITF 01-8 beginning July 1, 2003, and it had no significant impact on its Consolidated Financial Statements. In May 2003, the FASB issued SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). SFAS 150 amends the accounting and classification for certain financial instruments, such as those used in most stock buy-back programs that previously were accounted for and classified as equity. SFAS 150 requires that certain types of freestanding financial instruments that have characteristics of both liabilities and equity be classified as liabilities with, in most cases, changes in fair value flowing through the income statement. SFAS 150 could affect companies’ ratios, performance measures and certain stock buy-back programs. SAP applied the provisions of SFAS 150 to all financial instruments entered into or modified after May 31, 2003. The adoption of SFAS 150 had no significant impact on SAP’s Consolidated Financial Statements. In October 2003, the FASB issued FASB Staff Position FIN 46-6 (“FSP FIN 46-6”), “Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest Entities”. FSP FIN 46-6 deferred the effective date for applying the provisions of FIN 46 for interests held by public entities in variable interest entities or potential variable interest entities created before February 1, 2003. In November 2003, the EITF reached a partial consensus on EITF 03-01,03-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments”Investments,” (“EITF 03-1”). EITF 03-1 addresses the meaning of other-than-temporary and its application to investments classified as either available-for-sale or held-to-maturity under SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities,” and investments accounted for under the cost method. EITF 03-1 requires that additional informationcertain quantitative and qualitative disclosures about unrealized losses pertaining to certain marketable debt and equity securities, and certain disclosures about non-marketable cost method investments be disclosed.investments. The recognition and measurement provisions of EITF 03-1 have been deferred until additional guidance is issued. SAP has included theseprovided the additional disclosures currently required by EITF 03-1 in Note 16. In December 2003,2004, the FASB issued FIN 46SFAS 123 (revised December 2003)2004), “Consolidation of Variable Interest Entities”“Share-Based Payment,” (“FIN 46R”SFAS 123R”),. SFAS 123R establishes accounting guidance for share-based payments and transactions in which addresses how a business enterprise should evaluate whether its has a controlling financial interest in an entity through means other than voting rightsexchanges its equity instruments for goods or services or incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. Equity-classified awards are measured at grant date fair value and accordingly should consolidateare not subsequently remeasured. Liability-classified awards are remeasured to fair value at each balance sheet date until the entity. FIN 46R replaces FASB Interpretation No. 46, “Consolidationaward is settled. SFAS 123R applies to all awards granted after July 1, 2005, and to awards modified, repurchased, or cancelled after that date using a modified version of Variable Interest Entities”,prospective application. The adoption of SFAS 123R in the third quarter of 2005 will result in additional compensation expense in SAP’s Consolidated Financial Statements. SAP is currently determining the effect of SFAS 123R on the Group’s Consolidated Financial Statements. If SAP’s stock price, the Goldman Sachs Software Index and the US dollar to euro exchange rate remained unchanged in 2005 from the respective values at December 31, 2004, based on the share-based compensation awards issued and outstanding as of December 31, 2004 and the additional awards approved for grant as of March 1, 2005, SAP expects the adoption of SFAS 123R on July 1, 2005 would result in approximately€70 million of additional compensation expense in the second half of 2005 compared to what would be expensed under APB 25. See Note 23 for information about the effects of applying the fair value method to account for stock-based employee compensation on the Group’s Consolidated Financial Statements.(4) ACQUISITIONS On March 23, 2004, as part of SAP’s efforts to further integrate its global IT-consulting capabilities, SAP announced its intention to bid for the outstanding shares of its 70.03% owned and fully consolidated publicly-traded subsidiary, SAP Systems Integration AG (“SAP SI”). The price offered for the outstanding SAP SI shares was€20.40 which wasrepresented a 35% premium over the SAP SI share price on the announcement date. SAP’sissuedoffer was made effective April 28, 2004, and expired May 27, 2004. From March 23, 2004, through August 2004, SAP acquired 7.7 million shares of SAP SI for cash increasing its ownership interest to 91.6%. The aggregate purchase price for the SAP SI shares acquired in January 2003 as well as FSP FIN 46-6.2004 was€168.1 million. SAP was requiredaccounted for the purchase of SAP SI minority shares using the purchase method. At the acquisition date, because the carrying value of most assets and liabilities of SAP SI approximated their respective fair values, SAP assigned€5.6 million of the aggregate purchase price to apply FIN 46R on December 31, 2003 for all entities previously consideredcustomer contracts with a useful life of six months and€120.5 million of the aggregate purchase price to goodwill of the Consulting segment, which is not expected to be “special purpose entities”.deductible for tax purposes. Effective October 1, 2004, SAP had no special purpose entities and therefore the adoptionSI sold all of this portion of FIN 46R had no impact on the Company’s Consolidated Financial Statements. The Company will be required to apply FIN 46R to all entities not considered to be “special purpose entities” as of March 31, 2004. The Company is evaluating the impact of applying this portion of FIN 46R and has not yet completed its analysis. However, SAP does not currently believe it has any significant variable interests in any variable interest entities. In December 2003, SFAS 132 (revised), “Employers’ Disclosures about Pensionsits wholly owned subsidiaries SAP Systems Integration America Holding, Inc. and Other Postretirement Benefits” (“SFAS 132 (revised)”) was issued. SFAS 132 (revised) prescribes employers’ disclosures about pension plans andSAP Systems Integration (Schweiz) AG to other postretirement benefit plans; it does not changesubsidiaries within the measurement or recognitionGroup. SAP SI, which remains a publicly traded entity, entered into a cooperation agreement with several other entities of those plans. The Statement retains and revises the disclosure requirements containedGroup in late 2004 to further strengthen the cooperation in the original Statement 132. It also requires additional disclosures about the assets, obligations, cash flows,areas of consulting and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. The Statement generally is effective for fiscal years ending after December 15, 2003. The Company’s disclosures in Note 25 incorporate the requirements of Statement 132 (revised).In December 2003, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition” (“SAB 104”), which supersedes SAB 101, “Revenue Recognition in Financial Statements”. SAB 104’s primary purpose is to rescind the accounting guidance contained in SAB 101 related to multiple-element revenue arrangements that was superseded as a result of the issuance of EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables”. Additionally, SAB 104 rescinds the SEC’s related “Revenue Recognition in Financial Statements Frequently Asked Questions and Answers” issued with SAB 101 that had been codified in SEC Topic 13, “Revenue Recognition”. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104, which was effective upon issuance. The adoption of SAB 104 did not have a material effect on SAP’s Consolidated Financial Statements. (4)Acquisitions Duringaddition, during the year ended December 31, 2003,2004, SAP completed the following fourtwo acquisitions, which are immaterial individually:•COPA GMBH, Wesel, Germany (“COPA”), specialized in providing IT architecture consulting services in Germany. SAP Systems Integration AG, Dresden, Germany (“SAP SI”) acquired the remaining 49.9% of the outstanding stock in January 2003. COPA was merged into SAP SI in January 2003.•DCW Software AG & Co. KG, Mannheim, Germany (“DCW”), a German software provider specialized in Enterprise Resource Planning software for the midsize market. SAP AG acquired a controlling financial interest in November 2003. In January 2004 SAP AG exercised an option to acquire the remaining outstanding shares.•SLI Consulting AG, based in Regensdorf, Switzerland (“SLI”), specialized in providing consulting services for medium-sized and large companies based in Switzerland. SAP SI acquired 100% of the outstanding stock in September 2003. SLI was merged into SAP Systems Integration (Schweiz) AG, Frauenfeld, Switzerland in November 2003.•SPM Technologies Deutschland GMBH, Berlin/ Germany (“SPM”), specialized in providing IT architecture consulting services in Germany. SAP SI acquired 100% of the outstanding stock in December 2003. • In additionJuly 2004, SAP AG increased its ownership interestacquired the technology and assets of A2i, Inc., California, USA (“A2i”). A2i specialized in providing product content management, cross-media catalogue publishing, and master data management capabilities. • In December 2004, SAP SI by approximately 2%acquired the technology and assets of iLytix Systems AS, a privately held software company based in March 2003.Oslo, Norway. All acquisitions have been accounted for using the purchase method and are included in SAP’s Consolidated Financial Statements since the date of acquisition. The purchase price allocation for iLytix is preliminary and a final determination of required purchase accounting adjustments will be made within a year of the acquisition date upon completion of the integration plan. The aggregate purchase price of theseall acquisitions in 20032004 was€ 63.2186.6 million, of which€ 7.122.8 million was assigned to identifiable intangible assets and€ 49.9127.3 million was recorded as goodwill, of which€ 101.7 million is expected to be fully deductible for tax purposes. The goodwill recognized in 20032004 was assigned to the product and consulting segments in the amounts of€ 13.51.7 million andF-16€ 36.4125.6 million, respectively. The aggregate purchase price related to the 20032004 acquisitions can increase by approximately€ 75 million if certain results are achieved subsequently by the acquired companies.The values assigned to identifiable intangible assets were as follows:Identifiable intangible assets Estimated useful life Identifiable intangible assets € million years Maintenance contracts 4.8 5 Customer relationships 1.5 3 In-process research and development 0.5 expensed at the
acquisition dateNon-compete agreements 0.3 1 Identifiable intangible assets acquired 7.1 Estimated useful € million life (in years) Customer contracts 9.9 0.5 - 6.5 Intellectual Property 12.4 3 - 5 In-process research and development 0.5 expensed at the acquisition date Identifiable intangible assets acquired22.8 During the year ended December 31, 2002,2003, SAP completed certain acquisitions, which are immaterial individually and in the aggregate. These acquisitions have been accounted for using the purchase method and are included in SAP’s Consolidated Financial Statements since the date of acquisition. The aggregate purchase price of these acquisitions in 20022003 was€ 36.863.2 million, of which€ 5.47.1 million was assigned to identifiable intangible assets and€ 20.549.9 million was recorded as goodwill. In April 2001, SAP acquired 100% of the outstanding shares of TopTier Software, Inc. (“TopTier”), for approximately US$379 million in cash excluding cash acquired. TopTier, renamed SAP Portals Inc., specialized in technologiesF-16 During 2000 and know-how for creating enterprise portals. The TopTier acquisition advanced SAP’s strategy to strengthen the position in the enterprise portal market. Providing a high quality portal as part of SAP’s software solution should permit SAP to offer a better product to customers. The TopTier acquisition also provided SAP with a strong engineering staff that was experienced in the portal market and goodwill that included a large installed base of enterprise customers. The acquisition was accounted for using the purchase method and accordingly the operating results have been included in the Groups’ consolidated results of operations from the date of acquisition.Based on their respective fair values, approximately€ 138 million of the purchase price was allocated to identifiable intangible assets including acquired technology, workforce, and trade names. In addition, approximately€ 6 million of the purchase price was allocated to acquired in-process R&D, which was expensed as of the acquisition date. Goodwill resulting from the purchase price allocation was approximately€ 278 million. Amounts paid to settle the portion of TopTier’s outstanding vested stock options are included in the purchase price. SAP agreed to compensate former TopTier employees for the unvested portion of such outstanding options based upon the original vesting schedule provided such employees remain continuously employed by the Company. These amounts are included as deferred compensation within shareholders’ equity and are recorded as compensation expense over the remaining vesting period.From the second quarter of 2000 through August 2001, SAP made several investments in Commerce One, Inc. (“Commerce One”) resulting in a cumulative ownership interest of approximately 22% of Commerce One’s outstanding voting shares and the ability to exercise significant influence. In August 2001 SAP retroactively applied the equity method. SAP allocated the purchase price for each step in the cumulative acquisition based on the ownership percentage of Commerce One’s recorded net equity at such time. The cumulative purchase price allocation resulted in acquired intangibles totaling approximately€ 44 million including primarily software and technology,€ 11 million for in-process R&D, and€ 300 million of goodwill. As of December 31, 2002, the carrying value of SAP’s investment in Commerce One was reduced to zero as of result of the recognition of SAP’s equity in the losses of Commerce One since the initial investment date and the recognition of an other-than-temporary impairment charge of approximately€298 million in 2002.F-17B. NOTES TO THE CONSOLIDATED STATEMENTS OF INCOME(5) REVENUE B.NOTES TO THE CONSOLIDATED STATEMENTS OF INCOME (5)Revenue34.33. Other revenue is derived mainly from marketing events.(6) SALES AND MARKETING (6)Sales and Marketing 161,543170,300 thousand,€ 151,300161,543 thousand, and€ 188,546151,300 thousand in 2004, 2003, and 2002, and 2001 respectively.(7) OTHER OPERATING EXPENSE, NET (7)Other Operating Expense, Net 2003 2002 2001 2004 2003 2002 € (000) € (000) € (000) € (000) € (000) € (000) Restructuring costs — severance obligations (5,796 ) (3,384 ) (33,148 ) Bad debt expense (1,791 ) 0 0 Expenses to obtain rental income (1,517 ) (3,297 ) (4,989 ) Restructuring costs — unused lease space Restructuring costs — unused lease space (17,164 ) (12,960 ) (2,840 ) (1,210 ) (17,164 ) (12,960 ) Restructuring costs — severance obligations (3,384 ) (33,148 ) (10,796 ) Expenses to obtain rental income (3,297 ) (4,989 ) (7,737 ) Amortization of goodwill 0 0 (62,884 ) Bad debt expense 0 0 (14,706 ) Other Other (835 ) (1,536 ) (6,667 ) (2,834 ) (835 ) (1,536 ) Other operating expense (13,148 ) (24,680 ) (52,633 ) Rental income 7,135 9,870 9,228 Receipt of insurance proceeds 4,318 2,002 2,246 Reductions of bad debt allowance 0 5,368 5,288 Other 3,457 944 763 Other operating income 14,910 18,184 17,525 Other operating expense (24,680 ) (52,633 ) (105,630 ) 1,762 (6,496 ) (35,108 ) Rental income 9,870 9,228 9,774 Reductions of bad debt allowance 5,368 5,288 0 Receipt of insurance proceeds 2,002 2,246 1,137 Other 944 763 505 Other operating income 18,184 17,525 11,416 (6,496 ) (35,108 ) (94,214 ) Charges to the allowance for doubtful accounts for bad debt expense isare based on a systematic, ongoing review, and evaluation of outstanding receivables that is performed every month. Specific customer credit loss risks are also included in the allowance for doubtful accounts, but are charged to the respective cost of product or cost of service sold.See Note 2625 for more detailed information about costs incurred in connection with exit activities. (8)Functional Costs and Other Expenses(8) FUNCTIONAL COSTS AND OTHER EXPENSES The information provided below is classified based upon the type of expense. The Consolidated Statements of Income include these amounts in various categories based upon the applicable line of business.Cost of Services and MaterialsCost of services and materials, which are included in various operating expense line items in the Consolidated Statements of Income for the years ended December 31 are as follows: 2003 2002 2001 2004 2003 2002 € (000) € (000) € (000) € (000) € (000) € (000) Raw materials and supplies, purchased goods 26,052 23,515 22,033 27,124 26,052 23,515 Purchased services 643,815 824,752 806,550 722,727 643,815 824,752 669,867 848,267 828,583 749,851 669,867 848,267 F-18Personnel Expenses/ Number of EmployeesPersonnel expenses, which are included in various operating expenses in the Consolidated Statements of Income for the years ended December 31 are as follows: 2003 2002 2001 2004 2003 2002 € (000) € (000) € (000) € (000) € (000) € (000) Salaries 2,479,416 2,519,054 2,497,261 2,513,791 2,479,416 2,519,054 Social costs 346,579 345,798 313,813 350,052 346,579 345,798 Pension expense 110,595 100,397 97,030 104,175 110,595 100,397 2,936,590 2,965,249 2,908,104 2,968,018 2,936,590 2,965,249 (9)Other Non-Operating Income/ Expense, NetOther non-operating income/ expense for the years ended December 31 are as follows: 2003 2002 2001 € (000) € (000) € (000) Foreign currency losses (255,749 ) (201,097 ) (145,318 ) Losses on disposal of fixed assets (3,474 ) (3,850 ) (4,419 ) Other (6,585 ) (7,552 ) (10,041 ) Other non-operating expenses (265,808 ) (212,499 ) (159,778 ) Foreign currency gains 284,288 236,401 139,589 Gains on disposal of fixed assets 5,237 4,696 3,465 Other 12,592 8,721 6,081 Other non-operating income 302,117 249,818 149,135 36,309 37,319 (10,643 ) 2002, and 2001,2002, are expenses associated with the stock-based compensation plans as described in Note 24.The average number of employees in full timefull-time equivalents was as follows: 2003 2002 2001 Employees in full-time equivalents 29,098 29,054 27,072 2004 2003 2002 Employees in full-time equivalents 31,224 29,098 29,054 Certain employees that are currently employed by SAP but that are not currently operational or that work part timepart-time while finishing a university degree are excluded from the above figures. Also, certain temporary employees are not included in the above figures. The number of such temporary employees is not material.F-19F-18(9) OTHER NON-OPERATING INCOME/ EXPENSE, NET Other non-operating income/expense for the years ended December 31 are as follows: 2004 2003 2002 € (000) € (000) € (000) Foreign currency losses (140,881 ) (255,749 ) (201,097 ) Losses on disposal of fixed assets (6,696 ) (3,474 ) (3,850 ) Other (8,830 ) (6,585 ) (7,552 ) Other non-operating expenses (156,407 ) (265,808 ) (212,499 ) Foreign currency gains 152,831 284,288 236,401 Gains on disposal of fixed assets 6,147 5,237 4,696 Other 10,703 12,592 8,721 Other non-operating income 169,681 302,117 249,818 13,274 36,309 37,319 (10) Financial Income/ Expense, NetFinancial income/expense, net for the years ended December 31 is as follows: 2003 2002 2001 2004 2003 2002 € (000) € (000) € (000) € (000) € (000) € (000) Interest and similar income 47,436 38,311 55,910 64,393 47,436 38,311 Interest and similar expenses (3,999 ) (13,524 ) (22,244 ) (8,122 ) (3,999 ) (13,524 ) Interest income, net 43,437 24,787 33,666 56,271 43,437 24,787 Gain/loss from investments, net 22 (394,039 ) (165,499 ) 1,842 22 (394,039 ) — thereof from associated companies (234 ) (394,589 ) (165,499 ) (342 ) (234 ) (394,589 ) Income from marketable securities and loans of financial assets 2,636 2,647 1,771 2,352 2,636 2,647 Write-down of financial assets (22,663 ) (133,098 ) (75,586 ) (20,403 ) (22,663 ) (133,098 ) Gains on sales of marketable equity securities 2,224 3,057 23,632 Gains on sales of equity securities 14,034 2,224 3,057 Unrealized losses on STAR hedge (15,213 ) (58,909 ) (50,901 ) (14,558 ) (15,213 ) (58,909 ) Other net 5,844 256 (57 ) 1,449 5,844 256 Other financial income/loss, net (27,172 ) (186,047 ) (101,141 ) Other financial gain/loss from investments, net (17,126 ) (27,172 ) (186,047 ) 16,287 (555,299 ) (232,974 ) 40,987 16,287 (555,299 ) Interest income is derived primarily from cash and cash equivalents, long-term investments, and other assets.The loss from associated companies in 2002 includes€389,630 thousand related to the Company’s investment in Commerce One, of which€297,632 thousand is due to an other-than-temporary impairment charge.2423 regarding write-downs of financial assets and unrealized losses on STAR hedge respectively.(11) Income TaxesIncome tax for the years ended December 31 is comprised of the following components: 2003 2002 2001 2004 2003 2002 € (000) € (000) € (000) € (000) € (000) € (000) Current taxes — Germany 382,786 302,533 461,890 470,473 382,786 302,533 Current taxes — Foreign 217,232 221,452 170,878 267,591 217,232 221,452 600,018 523,985 632,768 738,064 600,018 523,985 Deferred taxes — Germany 90,925 56,155 (124,552 ) 22,120 90,925 56,155 Deferred taxes — Foreign 1,697 18,565 (31,923 ) (2,915 ) 1,697 18,565 92,622 74,720 (156,475 ) 19,205 92,622 74,720 Income tax expense 692,640 598,705 476,293 757,269 692,640 598,705 In December 2003,2004, the German government enacted new tax legislation (“Gesetz zur Umsetzung der Protokollerklärung der Bundesregierungvon EU-Richtlinien in nationales Steuerrecht und zur Vermittlungsempfehlung zum Steuervergünstigungsabbaugesetz”Änderung weiterer Vorschriften”) effective January 1, 2004. A2005. This legislation does not include any significant change ischanges, which are of relevance for the limitationCompany. Therefore the effect of this and other changes in tax laws on the Consolidated Statements of Income in 2004 was not material. The effects of the German tax law changes that were enacted prior to 2004 are as follows: New tax legislation enacted in December 2003, and effective January 1, 2004, did limit the exemption from tax for domestic dividends and certain gains from the sale of shares in affiliated and unaffiliated companies. Beginning January 2004, only 95% of such dividends received and gains realized will beare tax-free while 5% will beare treated as non deductiblenon-deductible expenses. The effect of this and other changes in tax laws on the Consolidated Statements of Income in 2003 was not material. The effects of the German tax law changes that were enacted prior to 2003 are as follows: New tax legislation enacted in September 2002 and effective January 1, 2003 increased the statutory corporate income tax rate from 25% to 26.5% for 2003 only. This change in tax law affected the amount of deferred tax assets andF-20liabilities of German entities within the Group as of December 31, 2002 for temporary differences that were expected to be recovered or settled in 2003. The impact of this tax law change increasedin the deferred income tax expense in 2002 by€ 1,558 thousand.Consolidated Statements of Income 2003 was not material.Income before income tax, minority interest and extraordinary gain (see Note 12) consists of the following: 2003 2002 2001 2004 2003 2002 € (000) € (000) € (000) € (000) € (000) € (000) Germany 1,179,891 450,864 802,375 1,352,200 1,179,891 450,864 Foreign 596,724 656,834 266,382 720,442 596,724 656,834 1,776,615 1,107,698 1,068,757 2,072,642 1,776,615 1,107,698 The effective income tax rate for the years ended December 31, 2004, 2003, and 2002, was 36.5%, 39.0% and 2001 was 39.0%, 53.8% and 44.6% respectively. The following table reconciles the expected income tax expense computed by applying the Company’s combined German corporate tax rate of 37.71%36.20% in 2003 (2002:2004 (2003: 37.71%; 2002: 36.39%; 2001: 36.51%) to the actual income tax expense. The Company’s 20032004 combined German corporate tax rate includes a corporate income tax rate, after the benefit of deductible trade tax, of 21.66% (2003: 22.91% (2002: 21.60%; 2001: 21.56%2002: 21.60%) plus a solidarity surcharge of 5.5% thereon and trade taxes of 13.35% (2003: 13.54% (2002: 13.60%; 2001: 13.77%2002: 13.60%). 2003 2002 2001 € (000) € (000) € (000) Income before income taxes 1,776,615 1,107,698 1,068,757 Expected income taxes 37.71% in 2003 (36.39% in 2002, 36.51% in 2001) 669,961 403,091 390,203 Foreign tax rate differential (14,735 ) (4,316 ) 30,993 Tax on non-deductible expenses 28,564 11,450 5,705 Tax effect on losses (1,507 ) (130 ) 3,611 Tax effect on equity investments and securities 7,110 177,639 54,766 Other 3,247 10,971 (8,985 ) Income taxes 692,640 598,705 476,293 F-21F-20 2004 2003 2002 € (000) € (000) € (000) Income before income taxes 2,072,642 1,776,615 1,107,698 Expected income taxes 36.20% in 2004 (37.71% in 2003, 36.39% in 2002) 750,296 669,961 403,091 Foreign tax rate differential (7,800 ) (14,735 ) (4,316 ) Tax on non-deductible expenses 12,631 28,564 11,450 Tax effect on losses (471 ) (1,507 ) (130 ) Tax effect on equity investments and securities (7,795 ) 7,110 177,639 Other 10,408 3,247 10,971 Actual income tax expense 757,269 692,640 598,705 Deferred income tax assets and liabilities as of December 31, 20032004 and 20022003, are summarized (referring to the underlying item) as follows: 2003 2002 2004 2003 € (000) € (000) € (000) € (000) Deferred tax assets Property, plant & equipment and intangibles 87,127 172,051 Intangibles 34,181 90,286 Property, plant, and equipment 3,278 (3,159 ) Financial assets 14,125 22,249 7,206 14,125 Accounts receivable 7,761 22,177 4,099 7,761 Net operating loss carryforwards 17,914 25,874 11,993 17,914 Pension liabilities 12,337 28,028 Pension provisions 18,332 12,337 Stock-based compensation 12,099 0 8,371 12,099 Other liabilities 78,537 86,004 91,422 78,537 Deferred income 35,942 48,156 28,106 35,942 Other 115 762 61 115 207,049 265,957 265,957 405,301 Less: Valuation allowance (1,504 ) (3,011 ) (1,448 ) (1,504 ) Deferred tax assets 264,453 402,290 205,601 264,453 Deferred tax liabilities Property, plant & equipment and intangibles 3,215 35,417 Intangibles 0 1,096 Property plant, and equipment 7,718 2,119 Financial assets 21,396 5,774 8,944 21,396 Accounts receivable 86,490 35,918 44,204 86,490 Pension liabilities 0 5,537 Other liabilities 320 25,168 Other provisions 3,130 320 Deferred income 9 3,134 0 9 Other 550 147 206 550 Deferred tax liabilities 111,980 111,095 64,202 111,980 Net deferred tax assets/ liabilities 152,473 291,195 Net deferred tax assets/liabilities 141,399 152,473 With regard to their duration, deferred tax assets and liabilities as of December 31 are classified as follows: 2003 2002 2004 2003 € (000) € (000) € (000) € (000) Deferred tax assets Short-term 84,873 146,520 96,132 84,873 Long-term 179,580 255,770 109,469 179,580 264,453 402,290 205,601 264,453 Deferred tax liabilities Short-term 94,868 63,678 47,557 94,868 Long-term 17,112 47,417 16,645 17,112 111,980 111,095 64,202 111,980 On December 31, 2003,2004, certain foreign subsidiaries of the Company had net operating loss carryforwards amounting to€ 90,85465,907 thousand (2002:(2003:€ 140,45290,854 thousand), which may be used to offset future taxable income. Of this amount€ 32,58619,129 thousand relates to state net operating loss carryforwards in the United States, that willof which€17,299 thousand expire during the years 2021 and 2024, if not used earlier. The remaining amount is available to be used to offset state taxable income, if any, over the next 2016 years. Further€ 25,46718,950 thousand relates to other net operating loss carryforwards that will expire if not used within three to seven years. The remaining€ 32,80127,828 thousand relates to other net operating loss carryforwards that do not expire and therefore can be utilized indefinitely.Deferred tax assets as of December 31, 20032004 and 20022003, relating to net operating loss carryforwards have been reduced by a valuation allowance of€ 1,5041,448 thousand and€ 3,0111,504 thousand, respectively, to a net amount that management believes is more likely than not to be realized.F-22The decrease of this valuation allowance in 20032004 from€ 3,0111,504 thousand to€ 1,5041,448 thousand is mainly caused by the utilization of losses.The Company recorded tax liabilities of€ 8723,240 thousand (2002:(2003:€ 3,816872 thousand) for taxes on future dividend distributions from foreign subsidiaries, which is based on€ 48,000179,000 thousand (2002:(2003:€ 205,29848,000 thousand) of cumulative undistributed earnings of those foreign subsidiaries because such earnings are intended to be repatriated. The Company has not recognized an income tax liability on€ 1,716,1161,824,340 thousand (2002:(2003:€ 1,646,2581,716,116 thousand) of undistributed earnings of its foreign subsidiaries that arose in 20032004 and prior years because the Company plans to permanently reinvest the undistributed earnings. It is not practicable to estimate the amount of unrecognized tax liabilities for these undistributed foreign earnings.Total income taxes for the years ended December 31, 2004, 2003, 2002 and 20012002, including those not affecting the Consolidated Statements of Income (charged or credited to Other comprehensive income) were allocated as follows: 2003 2002 2001 2004 2003 2002 € (000) € (000) € (000) € (000) € (000) € (000) Income tax expense from continuous operations 692,640 598,705 476,293 757,269 692,640 598,705 Income tax expense (benefit) on other comprehensive income/loss 31,750 (5,486 ) (32,965 ) Tax on Other comprehensive income/loss (11,262 ) 31,750 (5,486 ) 724,390 593,219 443,328 746,007 724,390 593,219 See Note 2322 for the income tax impact of the components of accumulatedAccumulated other comprehensive income.(12) Extraordinary Gain In 2002, the Company recorded an extraordinary gain for negative goodwill that resulted from the acquisition of the outstanding shares of an associated company, which was subsequently merged into SAP AG. The excess of the fair value of the net assets acquired over the purchase price (that is, negative goodwill) primarily related to the recognition of deferred tax assets for acquired net operating loss carryforwards that SAP was able to utilize and realize immediately.(13) Earnings per Share Convertible bonds and stock options granted to employees under SAP’s stock-based compensation programs are included in the diluted earnings per share calculations to the extent they have a dilutive effect. The dilutive impact is calculated using the treasury stock method. The conversion feature of the convertible bonds has been “out of the money” for all periods presented. As such, because their effect would have been anti-dilutive, allF-23outstanding convertible bonds have been excluded from the computation of earnings per share for all periods presented. The number of outstanding stock options and convertible bonds is presented in Note 24.23. 2003 2002 2001 2004 2003 2002 (in thousands except per share data) In thousands, except per share data Net income before extraordinary gain (€)Net income before extraordinary gain (€) 1,077,063 502,838 581,136 Net income before extraordinary gain (€) 1,310,521 1,077,063 502,838 Extraordinary gain, net of tax (€)Extraordinary gain, net of tax (€) 0 5,776 0 Extraordinary gain, net of tax (€) 0 0 5,776 Net income (€)Net income (€) 1,077,063 508,614 581,136 Net income (€) 1,310,521 1,077,063 508,614 Weighted average shares — basicWeighted average shares — basic 310,781 313,016 314,309 Weighted average shares — basic 310,802 310,781 313,016 Stock options Stock options 628 964 103 Stock options 1,354 628 964 Weighted average shares — dilutedWeighted average shares — diluted 311,409 313,980 314,412 Weighted average shares — diluted 312,156 311,409 313,980 Earnings per share — basic Earnings per share — basic (€)Earnings per share — basic (€) Net income before extraordinary gain 3.47 1.60 1.85 Net income before extraordinary gain (€) 4.22 3.47 1.60 Extraordinary gain, net of tax (€) 0.00 0.02 0.00 Extraordinary gain, net of tax (€) 0.00 0.00 0.02 Net income (€) 3.47 1.62 1.85 Net income (€) 4.22 3.47 1.62 Earnings per share — diluted Earnings per share — diluted (€)Earnings per share — diluted (€) Net income before extraordinary gain (€) 3.46 1.60 1.85 Net income before extraordinary gain (€) 4.20 3.46 1.60 Extraordinary gain, net of tax (€) 0.00 0.02 0.00 Extraordinary gain, net of tax (€) 0.00 0.00 0.02 Net income (€) 3.46 1.62 1.85 Net income (€) 4.20 3.46 1.62 C. NOTES TO THE CONSOLIDATED BALANCE SHEETS(14) Intangible AssetsINTANGIBLE ASSETS Licenses, trademarks similar rights and other intangibles Goodwill Total € (000) € (000) € (000) Purchase cost 1/1/2003 231,611 437,261 668,872 Exchange rate differences (20,052 ) (42,289 ) (62,341 ) Changes in the scope of consolidation 1,715 0 1,715 Additions 21,739 49,908 71,647 Retirements/ disposals (2,430 ) 0 (2,430 ) Reclassifications 62 0 62 12/31/2003 232,645 444,880 677,525 Accumulated amortization 1/1/2003 121,961 106,146 228,107 Exchange rate differences (9,886 ) (6,387 ) (16,273 ) Changes in the scope of consolidation 1,266 0 1,266 Additions 45,505 0 45,505 Retirements/ disposals (2,416 ) 0 (2,416 ) 12/31/2003 156,430 99,759 256,189 Book value 12/31/2003 76,215 345,121 421,336 Book value 12/31/2002 109,650 331,115 440,765 Licenses, trademarks, similar rights and other intangibles Goodwill Total € (000) Purchase cost 1/1/04 232,645 444,880 677,525 Exchange rate differences (7,229 ) (19,512 ) (26,741 ) Additions 39,021 126,935 165,956 Retirements/disposals (2,426 ) 0 (2,426 ) Reclassifications 0 0 0 12/31/04 262,011 552,303 814,314 Accumulated amortization 1/1/04 156,430 99,759 256,189 Exchange rate differences (5,775 ) (4,163 ) (9,938 ) Additions 45,203 0 45,203 Retirements/disposals (2,033 ) 0 (2,033 ) Reclassifications 0 0 0 12/31/04 193,825 95,596 289,421 Book value 12/31/04 68,186 456,707 524,893 Book value 12/31/03 76,215 345,121 421,336 F-24 The additions to goodwill include additions resulting from the acquisitions discussed in Note 4 as well as certain minor purchase adjustments related to prior acquisitions.All of SAP’s intangible assets, other than goodwill and the aggregate minimum pension liability offset (€ 41625 thousand) included in other intangibles, are subject to amortization. Intangibles consist of two major asset classes: Licenses, Software and Licenses, trademarks, trademarks, database Acquired similar rights and Software and similar rights licenses technology Other other intangibles database Acquired and other licenses technology Other intangibles in thousands of€, except for amortization period (in thousands€ except amortization period) 2003 December 31, 2004 Purchase cost 125,056 96,422 11,167 232,645 139,533 110,036 12,442 262,011 Accumulated amortization 98,360 53,651 4,419 156,430 112,264 73,350 8,211 193,825 thereof additions in 2003 thereof additions in 2004 Purchase cost 14,266 0 7,473 21,739 16,699 12,402 9,920 39,021 Weighted average amortization period in years 3 — 4.1 — 2002 Weighed average amortization period in years 3.0 4.8 3.0 — December 31, 2003 Purchase cost 113,446 113,809 4,356 231,611 125,056 96,422 11,167 232,645 Accumulated amortization 81,139 38,781 2,041 121,961 98,360 53,651 4,419 156,430 Software During 2004, the Company acquired software and database licenses consistsfrom third parties. software and database licenses consist primarily of technology for internal use whereas acquired technology consists primarily of technology to be incorporated into the Group’s products. The additions to Software and database licenses in 2004 were acquired from third parties, whereas the additions to acquired technology and other result from the acquisitions discussed in Note 4.Other consists primarily of trademark licenses and customer listscontracts acquired. For further information refer to Note 4.The estimated aggregate amortization expense for intangible assets for each of the five succeeding years ending December 31 is as follows: € (000) € (000) 2004 34,701 2005 26,829 31,591 2006 12,239 17,897 2007 1,863 7,111 2008 167 3,480 2009 2,341 thereafter 5,741 The carrying amount of goodwill by reportable segment as of December 31, 2004, and2003, and 2002 is as follows (for further information see Note 34)33):Segment Thereof thereof thereof Thereof additions additions in additions in additions 2002 in 2002 31/12/2004 2004 31/12/2003 2003 2003 in 2003 € (000) € (000) € (000) € (000) € (000) € (000) Product 215,062 13,467 228,120 4,549 198,046 1,745 215,062 13,467 Consulting 119,921 36,441 95,779 15,761 252,675 125,190 119,921 36,441 Training 10,138 0 7,216 181 5,986 0 10,138 0 Total 456,707 126,935 345,121 49,908 345,121 49,908 331,115 20,491 The additions in 2004 include certain minor adjustments related to prior acquisitions. With the adoption of SFAS 142 in 2002 goodwill is no longer amortized. Net income and earnings per share for 2001, adjusted to exclude amortization expense, net of tax, is as follows:Net Income2001€ (000)Reported net income581,136Add back: Goodwill amortization62,884Add back: Goodwill amortization — equity investments1,069Add back: Workforce amortization2,025Adjusted net income647,114Earnings per Share2001€Basic earnings per share1.85Add back: Goodwill amortization0.20Add back: Goodwill amortization — equity investments0.00Add back: Workforce amortization0.01Adjusted basic earnings per share2.06Diluted earnings per share1.85Add back: Goodwill amortization0.20Add back: Goodwill amortization — equity investments0.00Add back: Workforce amortization0.01Adjusted diluted earnings per share2.06F-26Property, Plant and EquipmentPROPERTY, PLANT, AND EQUIPMENT Land, leasehold improvements and Payments buildings, including Other property, and buildings on plant and construction third-party land equipment in progress Total € (000) € (000) € (000) € (000) Purchase cost 1/1/2003 845,890 817,971 122,079 1,785,940 Exchange rate differences (42,628 ) (27,709 ) (1,318 ) (71,655 ) Changes in the scope of consolidation 583 7,541 0 8,124 Additions 44,263 146,312 13,115 203,690 Retirements/ disposals (10,653 ) (86,892 ) 0 (97,545 ) Reclassifications 91,390 29,764 (121,216 ) (62 ) 12/31/2003 928,845 886,987 12,660 1,828,492 Accumulated depreciation 1/1/2003 200,170 551,553 0 751,723 Exchange rate differences (10,259 ) (20,468 ) 0 (30,727 ) Changes in the scope of consolidation 335 5,703 0 6,038 Additions 43,401 126,611 0 170,012 Retirements/ disposals (8,767 ) (79,444 ) 0 (88,211 ) Reclassifications 124 (124 ) 0 0 12/31/2003 225,004 583,831 0 808,835 Book value 12/31/2003 703,841 303,156 12,660 1,019,657 Book value 12/31/2002 645,720 266,418 122,079 1,034,217 Land, leasehold improvements, and Payments buildings, including Other property, and con- buildings on third- plant, and struction in party land equipment progress Total € (000) € (000) € (000) € (000) Purchase cost 1/1/04 928,845 886,987 12,660 1,828,492 Exchange rate differences (11,819 ) (7,199 ) (82 ) (19,100 ) Additions 18,510 152,683 795 171,988 Retirements/disposals (21,836 ) (98,230 ) 0 (120,066 ) Reclassifications 5,207 4,289 (8,858 ) 638 12/31/04 918,907 938,530 4,515 1,861,952 Accumulated depreciation 1/1/04 225,004 583,831 0 808,835 Exchange rate differences (3,515 ) (6,374 ) 0 (9,889 ) Additions 42,587 121,879 0 164,466 Retirements/disposals (11,007 ) (90,174 ) 0 (101,181 ) Reclassifications 75 563 0 638 12/31/04 253,144 609,725 0 862,869 Book value 12/31/04 665,763 328,805 4,515 999,083 Book value 12/31/03 703,841 303,156 12,660 1,019,657 The additions in other property, plant, and equipment relate primarily to the purchase of computer hardware acquired in the normal course of business. Reclassifications Interest capitalized has not been material to any period presented.(16) FINANCIAL ASSETS AND MARKETABLE SECURITIES Fixed Assets Non-fixed Assets Total 2004 2003 2004 2003 2004 2003 € (000) € (000) € (000) € (000) € (000) € (000) Equity method investments 1,595 1,799 0 0 1,595 1,799 Marketable equity securities available-for-sale 17,328 24,457 0 0 17,328 24,457 Equity securities at cost 25,924 26,841 0 0 25,924 26,841 Equity securities 43,252 51,298 0 0 43,252 51,298 Debt securities available-for-sale 231 53,023 242 3 473 53,026 Investment fund securities 1,984 654 9,922 1,349 11,906 2,003 Loans 53,320 61,214 0 0 53,320 61,214 Total 100,382 167,988 10,164 1,352 110,546 169,340 Proceeds from sales of payments and constructionavailable-for-sale securities in progress2004 were€67.7 million (2003:€4.1 million; 2002:€0.7 million). Gross gains realized from sales of available-for-sale securities in 2003 relates to2004 were€13.7 million (2003:€2.2 million; 2002:€0.7 million). Gross losses realized from sales of available-for-sale securities are not material for the completion of certain facilities constructed in Germany.periods presented.F-27F-26 (16) Financial Assets Investments in associated Equity Debt companies securities securities Other loans Total € (000) € (000) € (000) € (000) € (000) Historical cost 1/1/2003 339,746 233,465 52,197 76,981 702,389 Adjusted cost basis as of 1/1/2003 251 49,714 52,197 76,981 179,143 Exchange rate differences 0 (634 ) (74 ) (226 ) (934 ) Additions 2,153 9,190 38 18,023 29,404 Retirements (605 ) (7,139 ) (146 ) (18,092 ) (25,982 ) 12/31/2003 1,799 51,131 52,015 76,686 181,631 Changes in fair value of marketable securities 1/1/2003 0 (5,122 ) 2,162 0 (2,960 ) Exchange rate differences 0 255 0 0 255 Changes in unrealized gains/ losses 0 20,169 (485 ) 0 19,684 12/31/2003 0 15,302 1,677 0 16,979 Write-offs 1/1/2003 0 0 6 18,811 18,817 Exchange rate differences 0 0 (3 ) (35 ) (38 ) Additions 0 15,137 10 7,516 22,663 Retirements 0 0 0 (3,578 ) (3,578 ) Write-ups 0 0 0 (7,242 ) (7,242 ) 12/31/2003 0 15,137 13 15,472 30,622 Carrying value 12/31/2003 1,799 51,296 53,679 61,214 167,988 Carrying value 12/31/2002 251 44,592 54,353 58,170 157,366 Historical cost represent the amount originally paid for the assets acquired. Under U.S. GAAP, the write-off of financial assets establishes a new cost basis. As of December 31, 2003, the adjusted cost basis of the Company’s investment in associated companies and equity securities are€1,799 thousand and€35,994 thousand, respectively.Equity Method Investments in Associated CompaniesAs described in Note 10, SAP recorded a loss of€389,630 thousand in 2002 due to an other-than-temporary impairment charge and equity method losses attributable to the investment in Commerce One. The market value and the carrying value of the Company’s investment in Commerce One as of December 31, 2004, were€0.7 million (based on the quoted share price of US$0.17) and€0, respectively, and as of December 31, 2003, were€5.9 million (based on the quoted share price of US$1.27) and€ 0, respectively, and as of December 31, 2002 were€ 15.4 million (based on the quoted share price of US$2.77) and€0, respectively. Because Commerce One had no effect on the Company’s Consolidated Statements of Income in 2004, and 2003, summarized consolidated financial information has not been provided for Commerce One for the yearyears ended December 31, 2003.2004 and 2003, respectively. The following table presents summarized consolidated financial information for Commerce One for the yearsyear ended December 31, 2002 and 2001, respectively.2002.2002 US$ (000) Net revenues 105,529 Loss from operations (594,216 ) Net loss (589,836 ) Current assets 125,189 Non-current assets 34,233 Total assets159,422 Current liabilities 64,781 Non-current liabilities 47,151 Shareholders’ equity 47,490 Total liabilities and equity159,422 F-28F-27 2002 2001 US$(000) US$(000) Net revenues 105,529 408,569 Loss from operations (594,216 ) (2,582,669 ) Net loss (589,836 ) (2,584,099 ) Current assets 125,189 343,792 Non-current assets 34,233 485,149 Total assets 159,422 828,941 Current liabilities 64,781 149,121 Non-current liabilities 47,151 56,005 Shareholders’ equity 47,490 623,815 Total liabilities and equity 159,422 828,941 Equity and Debt SecuritiesAmounts pertaining to marketable equity securities and debt securities as of December 31 are as follows: 2003 Gross Gross unrealized unrealized Carrying Cost gains losses value € (000) € (000) € (000) € (000) Marketable equity securities — available-for-sale 17,775 15,374 8,692 24,457 Other equity securities 33,356 0 6,517 26,839 Equity securities 51,131 15,374 15,209 51,296 Marketable debt securities — available-for-sale 52,015 1,677 13 53,679 103,146 17,051 15,222 104,975 Marketable securities in loss position Marketable securities for less than for more than not in loss position 12 months 12 months total Fair unrealized Fair unrealized Fair unrealized Fair unrealized value gains value losses value losses value losses € (000) € (000) € (000) € (000) € (000) € (000) € (000) € (000) 2004 Marketable equity securities (available-for-sale) 14,910 9,006 2,418 569 0 0 2,418 569 Marketable debt securities (available-for-sale) 0 0 473 133 0 0 473 133 Investment fund securities 1,984 31 9,922 77 0 0 9,922 77 2003 Marketable equity securities (available-for-sale) 23,864 15,374 593 73 0 0 593 73 Marketable debt securities (available-for-sale) 53,026 1,651 0 0 0 0 0 0 Investment fund securities 2,003 25 0 0 0 0 0 0 2002 Gross Gross unrealized unrealized Carrying Cost gains losses value € (000) € (000) € (000) € (000) Marketable equity securities — available-for-sale 21,947 1,788 12,485 11,250 Other equity securities 141,416 0 108,074 33,342 Equity securities 163,363 1,788 120,559 44,592 Marketable debt securities — available-for-sale 52,197 2,162 6 54,353 215,560 3,950 120,565 98,945 The gross unrealized losses of Other All marketable equity securities and€ 8,620 thousand (2002:€ 5,575 thousand) included in the gross unrealized losses of marketable equity all debt securities are recorded in income related to other than temporary impairments.Asevaluated for impairment whenever SAP becomes aware of an event that indicates the possibility of an impairment, and at regular intervals at least annually, even if no event occurs that indicates the possibility of an impairment. For the year ended December 31, 2003, there are no marketable securities with realizable values below carrying value for a period in excess of 12 months. As of December 31, 2003,2004, the realizable value of one marketable security is€ 72 thousand below carrying value for less than 12 months. The Company has determined that there are no other-than-temporary impairments of these securities based on the declineevaluations given the short duration of the respective declines in realizablevalue and the Company’s intent and ability to hold these investments for a reasonable period of time sufficient for a forecasted recovery. For the years ended December 31, 2003 and 2002, the Company recorded other-than-temporary impairment charges of€8.7 million and€12.5 million, respectively. During 2004,€51,129 thousand of debt securities available-for-sale, consisting of corporate debt securities, matured. The carrying value of this security below the respective carrying amount is not other-than-temporary and, as a consequence, no impairment charge was recognized in 2003. Otherall equity securities at cost were€25,924 thousand and€26,841 thousand as of December 31, 2004 and 2003, respectively. Equity securities at cost, which primarily include interests in privately held companies, primarily venture capital investments. Asinvestments, are not included in the above table as a market value for those securities is generally not readily obtainable, the cost method of accounting isF-29applied.obtainable. Impairments in value of equity securities at cost method investments that are considered to be other-than-temporary are recognized immediately as expense.expense and a new cost basis is established. During 2004, 2003, and 2002, the Company recorded€5.1 million,€6.1 million, and€101.2 million, respectively, in charges related to other-than-temporary impairments of equity securities at cost.Marketable debt securities consist primarily of corporate debt securities with a market value of€ 52,781 thousand (2002:€ 53,266 thousand), which mature in 2004.F-28Other LoansOther loans include interest-bearing and non-interest or below-market-interest loans to employees and third parties as follows: 2003 2002 2004 2003 € (000) € (000) € (000) € (000) Loans to employees 37,777 32,566 42,824 37,777 Loans to third parties 23,437 25,582 10,496 23,437 Loans to associated companies 0 22 61,214 58,170 53,320 61,214 Loans granted to employees primarily consist of interest freeinterest-free or below-market rate building loans. SAP discounts interest freeinterest-free or below marketbelow-market rate employee loans based on prevailing market rates. There have been no loans to employees or executivesmembers of the Executive Board and Supervisory Board to assist them in exercising stock options.(17) Inventories Inventories consist of costs for office supplies and documentation and services for which revenues have been deferred.(18) Accounts Receivable, NetAccounts receivable includedinclude costs and estimated earnings in excess of billings on uncompleted contracts of€ 105,525135,194 thousand and€ 182,686105,525 thousand as of December 31, 2004 and 2003, and 2002, respectively.Amounts presented in the Consolidated Balance Sheets are net of allowanceallowances for bad debts of€ 71,01163,362 thousand and€ 92,51171,011 thousand as of December 31, 20032004, and 20022003, respectively. Net Accounts receivable based on due dates as of December 31 are as follows: 2003 2002 2004 2003 € (000) € (000) € (000) € (000) Due within 1 year 1,761,195 1,952,758 1,928,557 1,761,195 Due between 1 and 5 years 9,520 14,349 543 9,520 1,770,715 1,967,107 1,929,100 1,770,715 Concentrations of credit risks are limited due to the Company’s large customer base and its dispersion across many different industries and countries worldwide. No single customer accounted for 5% or more of total RevenuesTotal revenues or net Accounts receivable in 2004, 2003, 2002, or 2001.2002.F-30F-29(19) Other AssetsOTHER ASSETS 2003 2002 2004 2003 € (000) € (000) € (000) € (000) Fair value of derivatives 256,758 40,561 Investments in insurance policies held for employee-financed pension plans, semiretirement and time accounts 94,407 60,664 Fair value of STAR hedge and other derivatives 191,716 256,758 Investments in insurance policies held for employee-financed pension plans, semiretirement, and time accounts 134,003 94,407 Income tax receivables 32,060 64,197 52,161 32,060 Prepaid pensions 27,221 3,526 32,035 27,221 Rent deposits 23,130 25,687 22,823 23,130 Others 72,315 74,197 104,907 72,315 Total other assets 505,891 268,832 537,645 505,891 — thereof with a remaining term greater than 1 year 166,634 108,327 224,829 166,634 Included in Others are interest receivable and short-term loans. Detailed information about SAP’s derivative financial instruments are presented in Note 33. The increase in prepaid pension assets is mainly related to additional cash contributions to benefit pension plans in the United States. The increase in investments32. Investments in insurance policies mainly reflectsrelate to the increase in pension liabilities for employee-financed pension plans as presented in Note 25.24. The corresponding liability for investments in insurance policies for semiretirement and time accounts is included in Other reserves and accrued liabilities (see Note 26)25).(20) Marketable SecuritiesAmounts pertaining to marketable securities within non-fixed assets as of December 31 are as follows: 2003 2002 € (000) € (000) Amortized cost 1,481 1,478 Unrealized gains 0 0 Unrealized losses 129 129 Carrying value 1,352 1,349 (21) Liquid AssetsLiquid assets as of December 31 consist of the following: 2003 2002 2004 2003 € (000) € (000) € (000) € (000) Cash at banks 326,305 279,920 458,909 326,305 Time deposits with original maturities of 3 months or less 1,014,086 841,788 Liquid investments with original maturities of 3 months or less 1,054,226 658,090 Cash and cash equivalents 1,340,391 1,121,708 1,513,135 984,395 Time deposits with original maturities exceeding 3 months and less than 1 year 680,891 26,281 Time deposits with original maturities exceeding 1 year 369 478 Liquid investments with original maturities exceeding 3 months and less than 1 year 546,272 588,472 Liquid investments with original maturities exceeding 1 year 1,137,135 448,784 Restricted cash with original maturity exceeding 1 year 74,305 89,430 0 74,305 2,095,956 1,237,897 3,196,542 2,095,956 Liquid assets with maturities exceeding one year are classified as non current in our consolidated balance sheets. Restricted cash iswas used until mid-2004 to collateralize the Company’s obligation under an operating lease arrangement with a financial institution in conjunction with capital expenditures made for SAP Properties, Inc. (“SAP Properties”). Amounts collateralized increase as the Company incurs additional obligations under the lease arrangement. Interest earned on restricted funds is substantially equal to amounts accrued as rent expense under the terms of the lease. See Note 31.F-31The Company30. In 2004, SAP eliminated restricted cash from cash and cash equivalents in the Consolidated Statements of Cash Flows for the year endedauction rate securities and began classifying them as liquid assets with original maturities “exceeding 3 months and less than 1 year” or “exceeding 1 year”. The December 31, 2001. The Company previously recorded this amount as cash2003 and cash equivalents2002 balances of liquid asset items and the 2003 and 2002 consolidated statements of cash flows have been adjusted accordingly. These adjustments have no effect on the amounts oftotal liquid assets, total assets, net income or cash flow from operations of the Company. The effects of this adjustment isare as follows for the yearyears ended December 31, 2001.2001€ (000)Changes in liquid assets — as previously reported36,581Adjustment(25,903)Changes in liquid assets — as adjusted10,678Net cash used in investing activities — as previously reported(1,040,028)Adjustment(25,903)Net cash used in investing activities — as adjusted(1,065,931)Net in cash and cash equivalents — as previously reported(181,591)Adjustment(25,903)Net decrease in cash and cash equivalents — as adjusted(207,494)Cash and cash equivalents at the beginning of the year — as previously reported1,042,909Adjustment(80,464)Cash and cash equivalents at the beginning of the year — as adjusted962,445Cash and cash equivalents at the end of the year — as previously reported861,318Adjustment(106,367)Cash and cash equivalents at the end of the year — as adjusted754,951 (22) Prepaid Expenses2003 and Deferred Charges 2003 2002 as previously as previously reported Adjustment as adjusted reported Adjustment as adjusted € (000) € (000) € (000) € (000) € (000) € (000) Change in liquid assets (maturities exceeding 3 months) and marketable securities (639,379 ) (229,342 ) (868,721 ) 91,703 (110,547 ) (18,844 ) Net cash used in investing activities (915,120 ) (229,342 ) (1,144,462 ) (215,840 ) (110,547 ) (326,387 ) Net increase in cash and cash equivalents 218,683 (229,342 ) (10,659 ) 366,757 (110,547 ) 256,210 Cash and cash equivalents at the beginning of the year 1,121,708 (126,654 ) 995,054 754,951 (16,107 ) 738,844 Cash and cash equivalents at the end of the year 1,340,391 (355,996 ) 984,395 1,121,708 (126,654 ) 995,054 Liquid investments with original maturities exceeding 3 months and less than 1 year 680,891 (92,419 ) 588,472 26,281 (9,515 ) 16,766 Liquid investments with original maturities exceeding 1 year 74,674 448,415 523,089 89,908 136,169 226,077 (21) PREPAID EXPENSES AND DEFERRED CHARGES Prepaid expenses and deferred charges are mainly comprised of prepayments for software royalties, operating leases, and maintenance contracts. (23) Shareholders’ Equity(22) SHAREHOLDERS’ EQUITYSubscribed CapitalAs of December 31, 2003,2004, SAP AG had 315,413,553316,003,600 no-par common shares issued (including treasury stock) with a calculated nominal value of€1 per share.The number of common shares increased by 450,947590,047 (corresponding to€ 450,947)590,047) as a result of the exercise of awards granted under certain stock-based compensation plans.F-32Shareholdings in SAP AG as of December 31, 20032004, are as follows: 2004 2003 2003 2002 Number of % of Number of % of Number of Subscribed Subscribed shares subscribed shares subscribed shares capital capital (000) capital (000) capital (000) % % Hasso Plattner GmbH & Co. Beteiligungs-KG 31,240 9.9 9.9 Hasso Plattner GmbH&Co. Beteiligungs-KG 31,240 9.9% 31,240 9.9% Dietmar Hopp Stiftung GmbH 28,017 8.9 8.9 28,017 8.9% 28,017 8.9% Klaus Tschira Stiftung gGmbH 21,155 6.7 6.7 21,155 6.7% 21,155 6.7% Dr. h.c. Tschira Beteiligungs GmbH & Co. KG 15,833 5.0 5.0 Immediate family of Dietmar Hopp 8,721 2.8 3.1 Dr. h.c. Tschira Beteiligungs GmbH&Co. KG 15,833 5.0% 15,833 5.0% Hasso Plattner Förderstiftung gemeinnützige GmbH 6,000 1.9 1.9 5,229 1.6% 6,000 1.9% Golfplatz St. Leon-Rot GmbH & Co. Beteiligungs-KG 4,811 1.5 1.6 4,811 1.5% 4,811 1.5% Immediate family of Dr. h.c. Klaus Tschira 4,134 1.3 1.3 Treasury Stock 4,565 1.5 1.1 5,363 1.7% 4,565 1.5% Free float 190,938 60.5 60.5 204,356 64.7% 203,793 64.6% 315,414 100.0 100.0 316,004 100.0% 315,414 100.0% Golfplatz St. Leon-Rot GmbH & Co. Beteiligungs-KG is wholly owned by Dietmar Hopp.Authorized Capital The Articles of Association authorize the Executive Board of SAP AG (the “Executive Board”) to increase the Subscribed capital•up to a total amount of€ 60 million through the issuance of new common shares in return for contributions in cash until May 1, 2006 (“Authorized Capital I”). The issuance is subject to the statutory subscription rights of existing shareholders.•up to a total amount of€ 60 million through the issuance of new common shares in return for contributions in cash or in kind until May 1, 2006 (“Authorized Capital II”). Subject to certain preconditions and the consent of the Supervisory Board, the Executive Board is authorized to exclude the shareholders’ statutory subscription rights.•up to an aggregate amount of€ 15 million against contribution in cash by issuing new common shares until May 1, 2007 (“Authorized Capital III”). The new shares may be subscribed by a credit institution only, and only to the extent that such credit institution, releasing SAP from its corresponding obligation, satisfies the conversion and subscription rights granted under the SAP AG 2000 Long Term Incentive Plan (“LTI 2000 Plan”) or SAP Stock Option Plan 2002 (“SAP SOP 2002”), respectively. The shareholders’ statutory subscription rights are excluded from this capital increase. The Executive Board may exercise this authorization only to the extent that the capital stock attributable to the new shares issued from this Authorized Capital III together with new shares from Contingent capital and treasury shares issued or transferred for the purposes of satisfying subscription rights does not amount to more than 10% of the capital stock at the time of adoption of the authorization. • up to a total amount of€60 million through the issuance of new common shares in return for contributions in cash until May 1, 2006 (“Authorized Capital I”). The issuance is subject to the statutory subscription rights of existing shareholders. • up to a total amount of€60 million through the issuance of new common shares in return for contributions in cash or in kind until May 1, 2006 (“Authorized Capital II”). Subject to certain preconditions and the consent of the Supervisory Board, the Executive Board is authorized to exclude the shareholders’ statutory subscription rights. • up to an aggregate amount of€15 million against contribution in cash by issuing new common shares until May 1, 2007 (“Authorized Capital III”). The new shares may be subscribed by a credit institution only, and only to the extent that such credit institution, releasing SAP from its corresponding obligation, satisfies the conversion and subscription rights granted under the SAP AG 2000 Long Term Incentive Plan (“LTI 2000 Plan”) or SAP Stock Option Plan 2002 (“SAP SOP 2002”), respectively. The shareholders’ statutory subscription rights are excluded from this capital increase. The Executive Board may exercise this authorization only to the extent that the capital stock attributable to the new shares issued from this Authorized Capital III together with new shares from Contingent capital and treasury shares issued or transferred for the purposes of satisfying subscription rights does not amount to more than 10% of the capital stock at the time of adoption of the authorization. No authorization to increase capital stock was exercised in fiscal year 2003.Contingent Capital SAP AG’s capital stock is subject to a contingent increase of common shares. The contingent increase shall be effected only to the extent that the holders of the convertible bonds and stock options that were issued by SAPF-33AG under certain stock-based compensation plans (see Note 24)23) exercise their conversion or subscription rights. The following table provides a summary of the changes in Contingent capital for 20022003 and 2003:2004: Contingent Contingent capital€ (000)12/31/2001 43,276capitalExercise(137)New authorized19,015Reduction(5,866) (000) 12/31/2002 56,288 Exercise (451 ) New authorized —0 Reduction —0 12/31/2003 55,837 Exercise (590 ) New authorized 0 Reduction 0 12/31/200455,247 The increase in Contingent capital in 2002 was authorized by the Annual General Meeting of Shareholders held on May 3, 2002 to satisfy the rights for stock options from the SAP SOP 2002. At the same time the reduction of Contingent capital, which was authorized to satisfy the exercise of conversions or subscription rights under the SAP AG 2000 Long Term Incentive Plan (“LTI 2000 Plan”), was resolved.F-32Treasury Stock By resolution of the Annual General Shareholders’ Meeting held on May 9, 2003,6, 2004, the Executive Board was authorized to acquire, on or before October 31, 2004,2005, up to 30 million shares in the Company on the condition that such share purchases, together with any previously acquired shares, do not account for more than 10% of the Company’s capital stock. Although treasury stock is legally considered outstanding, SAP has no dividend or voting rights associated with treasury stock. SAP may redeem or resell shares held in treasury or may use treasury stock for the purpose of servicing subscription rights and conversion rights under the Company’s stock-based compensation plans. Also, SAP may use the shares as consideration in connection with the acquisition of enterprises.As of December 31, 2003,2004, SAP had acquired 5,363 thousand (2003: 4,565 thousandthousand) of its own shares, representing€5,363 thousand (2003:€4,565 thousandthousand) or 1.4%1.7% (2003: 1.5%) of capital stock. In 2003,2004, 1,127 thousand (2003: 1,049 thousandthousand) shares in aggregate were acquired under the buyback program at an average price of approximately€ 84.06125.49 (2003:€84.06) per share, representing€1,127 thousand or 0.4% (2003:€1,049 thousand or 0.3%) of capital stock. In connection with stock-based compensation plans, SAP acquired in 20032004 an additional 186 thousand (2003: 331 thousandthousand) of its own shares, representing 0.06% (2003: 0.1%) of the total shares outstanding as of December 31, 2003 at an average market price of€ 101.50130.13 (2003:€101.50) per share. Such shares were transferred to employees during the year at an average price of€ 70.7199.61 (2003:€70.71) per share. See Note 2423 for further information. In 20032004, certain of SAP AG’s foreign subsidiaries purchased an additional 290 thousand (2003: 373 thousandthousand) American DepositoryDepositary Receipts (“ADRs”) (each ADR represents one-fourth of a common share), at an average price of $26.15US$40.61 (2003: US$26.15) per ADR. Such ADRs were distributed to employees during the year at an average price of $22.08US$34.57 (2003: US$22.08) per ADR by an administrator. The Company held no ADRs as of December 31, 2003.2004 and 2003, respectively.As of December 31, 2002, SAP had acquired 3,516 thousand of its own shares, representing€ 3,516 thousand or 1.1% of capital stock. In 2002, 3,016 thousand shares in aggregate were acquired under the buyback program at an average price of approximately€ 92.59 per share, representing€ 3,016 thousand or 1.0% of capital stock. In connection with stock-based compensation plans, SAP acquired in 2002 an additional 288 thousand of its own shares, representing 0.1% of the total shares outstanding as of December 31, 2002 at an average market price of€ 105.43 per share. Such shares were transferred to employees during the year at an average price of€ 79.20 per share. See Note 24 for further information. In 2002 certain of SAP AG’s foreign subsidiaries purchased an additional 568 thousand ADRs (each ADR represents one-fourth of a common share), at an average price of $24.54 per ADR. Such ADRs were distributed to employees during the year at an average price of $21.62 per ADR by an administrator. The Company held no ADRs as of December 31, 2002.F-34F-33Accumulated Other Comprehensive Income/LossAccumulated The changes in the components of other comprehensive income/loss consistsconsist of the following as of December 31: Additional Unrealized Currency minimum gains/losses translation pension Cash flow on securities adjustment liability hedges STAR hedge Total € (000) € (000) € (000) € (000) € (000) € (000) 12/31/2003 Before tax 16,979 (251,673 ) (5,847 ) 21,015 36,790 (182,736 ) Tax impact (1,000 ) 0 2,125 (7,574 ) (12,794 ) (19,243 ) Net amount 15,979 (251,673 ) (3,722 ) 13,441 23,996 (201,979 ) 12/31/2002 Before tax (2,960 ) (103,249 ) (33,096 ) 1,117 0 (138,188 ) Tax impact (179 ) 0 13,091 (405 ) 0 12,507 Net amount (3,139 ) (103,249 ) (20,005 ) 712 0 (125,681 ) 12/31/2001 Before tax (759 ) 186,501 (14,002 ) 0 0 171,740 Tax impact 1,566 0 5,455 0 0 7,021 Net amount 807 186,501 (8,547 ) 0 0 178,761 2004 2003 Pre-tax Tax (expense) Net Pre-tax Tax (expense) Net amount or benefit amount amount or benefit amount € (000) € (000) € (000) € (000) € (000) € (000) Unrealized gains (losses) on marketable securities: Unrealized holding gains (losses) (699 ) 774 75 14,365 (814 ) 13,551 Reclassification adjustments for (gains) losses included in net income (8,020 ) 267 (7,753 ) 5,574 (7 ) 5,567 Net unrealized gains (losses) on marketable securities (8,719 ) 1,041 (7,678 ) 19,939 (821 ) 19,118 Currency translation adjustments (70,723 ) 0 (70,723 ) (148,424 ) 0 (148,424 ) Additional minimum pension liability adjustments (9,089 ) 2,070 (7,019 ) 27,249 (10,966 ) 16,283 Unrealized gains (losses) on cash flow hedges: Unrealized cash flow hedge gains (losses) 11,691 1,681 10,010 20,261 7,300 12,961 Reclassification adjustments for (gains) losses included in net income (11,844 ) (1,703 ) (10,141 ) (363 ) (131 ) (232 ) Net unrealized cash flow hedge gains (losses) (153 ) 22 (131 ) 19,898 (7,169 ) 12,729 Unrealized gains (losses) on STAR hedge: Unrealized gains (losses) on STAR hedge (1,094 ) 378 (716 ) 36,790 (12,794 ) 23,996 Reclassification adjustments for (gains) losses included in net income (22,433 ) 7,751 (14,682 ) 0 0 0 Net unrealized gains (losses) on STAR hedge (23,527 ) 8,129 (15,398 ) 36,790 (12,794 ) 23,996 Currency effects from intercompany long-term investment transactions (2,473 ) 0 (2,473 ) 0 0 0 Other comprehensive income (loss) (114,684 ) 11,262 (103,422 ) (44,548 ) (31,750 ) (76,298 ) The As of December 31, 2004 and 2003, the net of tax amounts included in Accumulated other comprehensive income/loss for aggregate unrealized net gains on available-for-sale marketable securities in 2003 include gains and losses from marketable equity securities in the amount ofwere€ 15,3748,301 thousand and€ 7215,979 thousand, respectively as well as gains from marketable debt securities in the amount ofrespectively; accumulated currency translation adjustments were€ 1,677 thousand.In connection with sales of marketable equity securities, the Company reclassified(322,396) thousand and€ 28(251,673) thousand, of previouslyrespectively; aggregate additional minimum pension liabilities were€(10,741) thousand and€(3,722) thousand, respectively; accumulated unrealized gains in 2003,€ 130 thousand of previously unrealized losses in 2002 and€ 9,901 thousand of unrealized gains in 2001, from Accumulated other comprehensive income to Financial income/ expense, net. The Company reclassified€ 474 thousand of net foreign exchange losses relating to the Company’s anticipatedon cash flow hedges in 2003were€13,310 thousand and€ 12,48313,441 thousand, of net foreign exchangerespectively; and accumulated unrealized gains 2001, respectively,on STAR hedges were€8,598 thousand and€23,996 thousand, respectively; and accumulated currency effects from Accumulated other comprehensive income to Other non-operating income/ expenses, net.intercompany long-term investment transactions were€MiscellaneousUnder the German Stock Corporation Act (Aktiengesetz), the amount of dividends available for distribution to shareholders is based upon the earnings of SAP AG as reported in its statutory financial statements determined in accordance with the German Commercial Code (Handelsgesetzbuch). For the yearended December 31, 2003,2004, SAP management has proposed a distribution in 20042005 of€ 0.801.10 per share as a dividend to the shareholders relating to the earnings of SAP AG for the year ended December 31, 2003.2004. Dividends per share for 2003 and 2002, which were paid for 2002 and 2001in the immediately subsequent year, were as follows: 2003 2002 € € Dividend per common share 0.80 0.60 (23) STOCK-BASED COMPENSATION PLANS Total compensation expense recorded in connection with stock-based compensation plans for the year 2004 amounts to€ 2002 2001 € € Dividend per common share 0.60 0.58 (24) Stock-Based Compensation Plans€Employee Discounted Stock Purchase Programs The Company acquires SAP AG common shares and ADRs under various employee stock purchase plans and transfers the shares to employees. Discounts provided to employees through such plans do not exceed 15% and are treated as a direct reduction of equity.F-35Stock Appreciation Right (STAR) PlansIn February 20032004 and February 2002,2003, the Company granted approximately 3.83.5 million and 3.63.8 million stock appreciation rights (“20032004 STARs” and “2002“2003 STARs” respectively) to selected employees who are not participants in the LTI 2000 Plan or SAP SOP 2002. The 20032004 and 20022003 STAR grant values of€ 84.91134.35 and€ 158.80,84.91, respectively, are based upon the average fair market value of one common share over the 20 business days commencing the day after the announcement of the Company’s preliminary results for the preceding fiscal year. The valuation of the STARs is calculated quarterly, over a period of two years. Each quarterly valuation is weighted as follows in determining the final valuation: Weighting factor Weighting factor Weighting factor Quarter ended Quarter ended Quarter ended March 31 March 31 June 30 Sep. 30 Dec. 31 March 31 June 30 Sep. 30 Dec. 31 June 30 Sep. 30 Dec. 31 March 31 June 30 Sep. 30 Dec. 31 5% 5% 10% 20% 10% 10% 10% 30% 5% 5 % 10 % 20 % 10 % 10 % 10 % 30 % The valuations for the quarterly periods ending December 31 are based on the amount by which the grant price is exceeded by the average fair market value of one common share as quoted on Xetra, the trading system of the Frankfurt Stock Exchange, over the 20 consecutive business days commencing on the day after the announcement of the Company’s preliminary annual results. The other quarterly valuations are based on the amount by which the grant price is exceeded by the average fair market value of one common share quoted on Xetra over the five consecutive business days commencing on the day after the announcement of the Company’s quarterly results. Because each quarterly valuation is measured independently, it is unaffected by any other quarterly valuation.The cash payout value of each STAR will be calculated quarterly as follows: (i) 100% of the first€50 value appreciation for such quarter; (ii) 50% of the next€50 value appreciation; and (iii) 25% of any additional value appreciation. Participants will receive payments with respect to the 20032004 STARs as follows: 50% each on both, March 31, 20052006 and January 31, 2006.2007. Under the terms of the 20022003 STAR Plan,Program, participants were scheduled to receive an initial payment of 50% on March 31, 20042005 and a second installment on January 31, 2005.2006. Participants will receive STAR payments provided that, subject to certain exceptions, they continue to be actively employed by the Company on the payment dates. As SAP’s STAR Plans are settled in cash rather than by issuing equity instruments a liability is recorded for such plans, based on the current value of the STARs at the reporting date. Compensation expense —including effects of the changes in the value of the STAR — is accrued over the period the employee performs the related service (“vesting period”).As of December 31, 20032004, a STAR provision in the amount of€109 million (€51 million in 2003) is recorded.included in Other reserves and accrued liabilities in the consolidated balance sheet (see Note 25). The related STAR expense was reduced by the effects of the STAR hedge — as described in Note 3332 — and therefore totaled only€38 million (€36 million.million in 2003). The STAR provision as of December 31, 2004, as well as the related STAR expense solely result from the 2003 STAR Program. For the STARs granted in February 2004, no compensation expenses were recorded, as the grant price exceeded the fair market value of SAP shares on all relevant measurement dates in 2004. No compensation expenses were recorded in 2002, as the grant price of STARs outstanding in that period exceeded the average fair market value of SAP shares on all relevant measurement dates. Accordingly no accrual was recorded as of December 31, 2002, for the 2002 STAR.Stock Option Plan 2002 At the 2002 Annual General Shareholders’ Meeting, the Company’s shareholders approved the SAP SOP 2002. The SAP SOP 2002, which provides for the issuance of stock options to the members of the SAP AG Executive Board, members of subsidiaries’ Executive Boards as well as to eligible executives and other top performers of SAP AG and its subsidiaries, is designed to replace the LTI 2000 Plan, described below. Under the SAP SOP 2002, the Executive Board is authorized to issue, on or before April 30, 2007, up to 19,015,415 stock options. Each stock option granted under the SAP SOP 2002 entitles its holder to subscribe to one share of the Company, against the payment of an exercise price, which is composed of a base price and a premium of 10% thereon. The base price is the average market price of the SAP share on the Frankfurt Stock Exchange during the five trading days preceding the issue of the respective stock option, calculated on the basis of the arithmetic meanF-36of the closing auction prices of the SAP share in the Xetra trading system. These provisions notwithstanding, the exercise price should not be less than the closing auction price on the day before the issue date. The term of the stock options is five years. Subscription rights cannot be exercised until a vesting period has elapsed. The vesting period of an option holder’s subscription rights ends two years after the issue date of that holder’s options. For options granted to members of the Executive Board in and from February 2004, the SAP SOP 2002 plan conditions provide for a potential limitation on the subscription rights to the extent that the Supervisory Board determines that, by exercising the rights, the option holder would make a profit that would be characterized as a windfall by, combined with the profit from earlier exercises of subscription rights issued to the option holder at the same issuing date, exceeding twice the product of (i) the number of subscription rights received by the option holder and (ii) the exercise price. Such profit is determined as the total of the differences, calculated individually for each exercised subscription right, between the closing price of the share on the exercise day and the exercise price. SAP AG undertakes to pay back to the option holders any expenses they may incur through fees, taxes, or deductions related to the limit on achievable income. The subscription rights shall only be limited if the Supervisory Board determines that the windfall results from significant extraordinary, unforeseeable developments that the Executive Board is not responsible for. The SAP SOP 2002 is generally considered a fixed plan under APB 25. Since the exercise price, which is fixed one day before grant, exceedscannot be less than the share price on that date, no expenses are recorded for awards granted under the SAP SOP 2002. As the number of stock options granted to the members of the Executive Board under the SAP SOP 2002 is not known on grant date due to the above mentioned potential limitation on subscription rights, the SAP SOP 2002 is not considered a fixed plan for those stock options. As such, compensation expense is recorded over the vesting period equal to the difference between the exercise price of the stock options and the market value of the common share at each balance sheet date. Since the exercise price of the stock options granted from February 2004 exceeded the share price as of December 31, 2004, no compensation expenses were recorded in 2004.A summary of the SAP SOP 2002 Plan activity is as follows: Weighted Shares Number average Number of Weighted average available of options exercise price Shares available options exercise price for grant outstanding per option for grant outstanding per option (000) (000) € (000) (000) € 1/1/2002 — — — — — — Additional shares authorized 19,015 — — 19,015 — — Granted — — — — — — Exercised — — — — — — Forfeited — — — — — — 12/31/2002 19,015 — — 19,015 — — Additional shares authorized — — — Granted 3,737 3,737 90.48 Exercised — — — Forfeited — 109 90.37 12/31/2003 15,278 3,628 90.48 Additional shares authorized — — — — — — Granted 3,737 3,737 90.48 2,105 2,105 149.99 Exercised — — — — — — Forfeited — 109 90.37 — 99 105.86 12/31/2003 15,278 3,628 90.48 12/31/2004 13,173 5,634 112.44 The following table summarizes information about stock options outstanding as of December 31, 2003:2004: Outstanding options Exercisable options Weighted average Range of Number of remaining Weighted average Number of Weighted average exercise prices stock options contractual life exercise price stock options exercise price € (000) years € (000) € 90.37 – 99.13 3,628 4.17 90.48 — — Outstanding Exercisable Weighted Weighted Weighted average average average Number of remaining exercise Number of exercise Range of exercise prices stock options contractual life price stock options price € (000) years € (000) € 90.37-99.13 3,555 3.16 90.48 — — 149.99 2,079 4.13 149.99 — — 90.37-149.99 5,634 3.52 112.44 — — See Note 35compensation report for stock options awardedinformation related to members of the Executive Board.Long Term Incentive 2000 PlanOn January 18, 2000, the Company’s shareholders approved the LTI 2000 Plan. The LTI 2000 Plan is a stock-based compensation program providing members of the SAP AG Executive Board, members of subsidiaries’ executive boardsExecutive Boards and selected employees a choice between convertible bonds, stock options, or a 50% mixture of each. If stock options are chosen, the participant receives 25% more stock options than convertible bonds. Under the LTI 2000 Plan, each convertible bond having a€1 nominal value may be converted into one common share over a maximum of 10 years subject to service vesting requirements. The conversion price is equal to the market price of ana common share as quoted on the Xetra trading system the day immediately preceding the grant. Each stock option may be exercised in exchange for one common share over a maximum of 10 years subject to the same vesting requirements. The exercise price varies based upon the outperformance of the common share price appreciation versus the appreciation of the Goldman Sachs Software Index from the day immediately preceding grant to the day on which the exercise price is being determined. Both the convertible bonds and stock options vest as follows: 33% after two years from date ofgrant, 33% after three years and 34% after four years. Forfeited convertible bonds or stock options are disqualified and may not be reissued.F-37 Under APB 25, the CompanySAP records no expenses relating to the convertible bonds issued under its LTI 2000 Plan since the conversion price is equal to the market price of an SAP common share on the date of grant. Because the exercise price for stock options issued under the LTI 2000 Plan is variable, an expense is recorded over the vesting period based upon the stock options’ intrinsic value on the reporting date. In total, 12,305,271 conversion and subscription rights have been issued under the LTI 2000 Plan through March 14, 2002. At the 2002 Annual General Shareholders’ Meeting, the Company’s shareholders revoked the authorization to issue further convertible bonds and stock options under the LTI 2000 Plan.A summary of the LTI 2000 Plan activity for both convertible bonds and stock options is as follows: Stock options Convertible bonds Weighted Weighted Shares Number of average Number of average available options exercise price bonds exercise price for grant outstanding per option outstanding per bond (000) (000) € (000) € January 1, 2002 9,839 1,578 132.73 5,191 229.40 Additional shares authorized — — — — — Granted 4,807 1,787 81.39 3,020 151.50 Reduction due to option/bond ratio (25% of bonds issued) 755 — — — — Exercised 76 94.53 — — Forfeited 4,277 222 72.81 408 200.78 December 31, 2002 0 3,067 72.51 7,803 200.74 Additional shares authorized — — — — — Granted — — — — — Reduction due to option/bond ratio (25% of bonds issued) — — — — — Exercised — 217 73.93 — — Forfeited — 161 94.45 226 185.05 December 31, 2003 0 2,689 91.10 7,577 201.21 Additional shares authorized — — — — — Granted — — — — — Reduction due to option/bond ratio (25% of bonds issued) — — — — — Exercised — 511 90.11 — — Forfeited — 63 100.53 307 222.95 December 31, 2004 0 2,115 97.19 7,270 200.29 Due to the development of SAP’s common share price appreciation versus the appreciation of the Goldman Sachs Software Index in 2004, the Company recorded a€ Stock Options Convertible Bonds Shares Number of available options Weighted average Number of Weighted average for grant outstanding exercise price bonds exercise price (000) (000) per option outstanding per bond € (000) € 1/1/2001 15,010 656 166.91 2,162 289.43 Additional shares authorized — — — — — Granted 4,352 1,075 142.37 3,277 190.43 Reduction due to option/bond ratio (25% of bonds issued) 819 — — — — Exercised — — — — — Forfeited — 153 128.78 248 237.83 12/31/2001 9,839 1,578 132.73 5,191 229.40 Additional shares authorized — — — — — Granted 4,807 1,787 81.39 3,020 151.50 Reduction due to option/bond ratio (25% of bonds issued) 755 — — — — Exercised — 76 94.53 — — Forfeited 4,277 222 72.81 408 200.78 12/31/2002 0 3,067 72.51 7,803 200.74 Additional shares authorized — — — — — Granted — — — — — Reduction due to option/bond ratio (25% of bonds issued) — — — — — Exercised — 217 73.93 — — Forfeited — 161 94.45 226 185.05 12/31/2003 0 2,689 91.10 7,577 201.21 thousand; 2001:€ 13,776 thousand). The following tables summarize information about stock options and convertible bonds outstanding as of December 31, 2003:Stock Options2004: Outstanding stock options Exercisable stock options Weighted average Range of Number of remaining Number of Weighted average exercise prices stock options contractual life Weighted average stock options exercise price € (000) years exercise price (000) € 50.07 – 63.2 2 9 6.31 58.81 6 58.81 67.34 – 81.8 2 1,093 6.77 77.03 484 74.64 91.33 – 101. 09 1,587 8.08 100.98 6 91.33 50.07 – 101 .09 2,689 7.54 91.10 496 74.63 Outstanding stock options Exercisable stock options Weighted average Weighted Weighted Number of remaining average Number of average Range of exercise prices stock options contractual life exercise price stock options exercise price € (000) years € (000) € 52.72 – 59.15 3 5.50 59.15 3 59.15 66.57 – 86.16 775 5.88 81.59 500 79.10 96.17 – 106.44 1,337 7.82 106.32 323 106.12 52.72 – 106.44 2,115 7.11 97.19 826 89.61 Convertible Bonds Outstanding convertible bonds Exercisable convertible bonds Weighted average Range of Number of remaining Number of Weighted average exercise prices stock options contractual life Weighted average stock options exercise price € (000) years exercise price (000) € 131.81 – 183.6 7 2,863 8.07 151.65 21 158.45 191.25 – 247.0 0 2,849 7.08 191.84 962 192.41 290.32 – 334.6 7 1,865 6.09 291.61 1,243 291.61 131.81 – 334. 67 7,577 7.21 201.21 2,226 247.50 Outstanding convertible bonds Exercisable convertible bonds Weighted average Weighted Weighted Number of remaining average Number of average Range of exercise prices bonds contractual life exercise price bonds exercise price € € (000) years € (000) 131.81 – 183.67 2,783 7.15 151.68 945 151.95 191.25 – 247.00 2,748 6.16 191.72 1,824 191.96 290.32 – 334.67 1,739 5.17 291.65 1,739 291.65 131.81 – 334.67 7,270 6.30 200.29 4,508 222.02 See Note 35 for stock options and convertible bonds awarded to members of the Executive Board.Stock-Based Compensation Plan of SAP System Integrations AG (“SAP SI”) SAP SI, in which SAP AG holds a 70%91.6 % stake, is publicly listed at the German Stock Exchange. On August 16, 2000, by resolution of SAP SI’s shareholders, SAP SI introduced an employee stock option plan in the form of convertible bonds, which allows SAP SI to issue up to 2two million convertible bonds to members of the Executive Board and other employees of SAP SI and its subsidiaries. On May 14, 2002, SAP SI’s shareholders approved the issuance of an additional 1.6 million convertible bonds. In connection with SAP’s acquisition of additional SAP SI shares as discussed in Note 4, during 2004, SAP AG offered the plan participants a cash settlement for the outstanding convertible bonds. The majority of plan participants accepted the offer and the amount of the total cash settlement was approximately€9 million. As of December 31, 2003,2004, a total of 2,055,632 (2002: 1,209,647)7,440 (2003: 2,055,632) convertible bonds wereremained outstanding. Each participating employee can exchange his or her convertible bonds for an equal number of shares of SAP SI stock. The conversion price corresponds to the market price of SAP SI stock on the date they are granted. The bonds have a term of eight years. The convertible bonds vest as follows: 33% after two years from date of grant, 33% after three years and 34% after four years.Pro-Forma Information SFAS 123 requires disclosure of pro-forma information regarding net income and earnings per share as if the Company had accounted for its stock-based awards granted to employees using the fair value method. The fair value of the Company’s stock-based awards was estimated as of the date of grant using the Black-Scholes option-pricing model.The fair valuevalues of the Company’s stock-based awards granted under the LTI 2000 Plan wasand SAP SOP 2002 were calculated using the following weighted average assumptions: 2003 2002 2001 Expected life 2.5 years 4.5 years 4.5 years Risk free interest rate 2.61% 4.68% 4.96% Expected volatility 68% 50% 50% Expected dividends 0.73% 0.38% 0.30% 2004 2003 2002 Expected life (in years) 2.5 years 2.5 years 4.5 years Risk-free interest rate 2.65% 2.61% 4.68% Expected volatility 57% 68% 50% Expected dividends 0.45% 0.73% 0.38% The weighted average fair value of stock options granted under the SAP SOP 2002 Plan in 20032004 was€ 28.83.43.61 (2003:€The weighted average fair value of all stock options and convertible bonds granted under the LTI 2000 Plan during 2002 was€55.11 and€68.89, respectively (2001:€ 69.77 and€ 87.71).respectively. As of December 31, 2002, no awards were granted under SAP SOP 2002. For pro-forma purposes, the estimated fair value of the Company’s stock-based awards is amortized over the vesting period. The Company’s pro-forma information is presented in Note 3. (25) Pension Liabilities and Similar Obligations(24) PENSION LIABILITIES AND SIMILAR OBLIGATIONSThe Company maintains several defined benefit and defined contribution plans for its employees both in Germany and at its foreign subsidiaries, which provide for old age, disability, and survivors’ benefits. The measurement dates for the domestic and foreign benefit plans are principally December 31. Individual benefit plans have also been established for members of the Executive Board. The accrued liabilities on the balance sheet for pension and other similar obligations at December 31 consists of the following: 2003 2002 2004 2003 € (000) € (000) € (000) € (000) Domestic benefit plans 5,044 5,909 5,368 5,044 Foreign benefit plans 13,129 23,904 22,315 13,129 Employee financed plans 77,768 51,304 109,079 77,768 Other pension and similar obligations 1,594 2,456 2,928 1,594 97,535 83,573 139,690 97,535 Domestic Benefit Plans The Company’s domestic defined benefit plans provide participants with pension benefits that are based on the length of service and compensation of employees.The change of the benefit obligation and the change in plan assets for the domestic plans are as follows: 2003 2002 2004 2003 € (000) € (000) € (000) € (000) Change in benefit obligation Benefit obligation at beginning of year 28,351 27,289 30,349 28,351 Service costs 409 561 301 409 Interest costs 1,624 1,631 1,587 1,624 Settlement (300 ) 0 0 (300 ) Actuarial gain/loss 502 (908 ) 1,609 502 Benefits paid (237 ) (222 ) (610 ) (237 ) Benefit obligation at end of year 30,349 28,351 33,236 30,349 Change in plan assets Fair value of plan assets at beginning of year 25,761 23,658 Actual return on plan assets 199 1,175 Employer contributions 2,186 2,162 Benefits paid (492 ) (1,049 ) Assets transferred to defined contribution plan (118 ) (185 ) Fair value of plan assets at end of year 27,536 25,761 Funded status 5,700 4,588 Unrecognized transition assets (490 ) (532 ) Unrecognized net actuarial loss (7,239 ) (4,694 ) Net amount recognized (2,029 ) (638 ) Amounts recognized in the consolidated balance sheets: Accrued benefit liability 5,368 5,044 Intangible assets (25 ) (29 ) Accumulated other comprehensive income (7,372 ) (5,653 ) Net amount recognized (2,029 ) (638 ) F-40 2003 2002 € (000) € (000) Change in plan assets Fair value of plan assets at beginning of year 23,658 20,449 Actual return on plan assets 1,175 1,078 Employer contributions 2,162 2,279 Life/disability insurance premiums and expenses 0 407 Benefits paid (1,049 ) (222 ) Assets transferred to defined contribution plan (185 ) (333 ) Fair value of plan assets at end of year 25,761 23,658 Funded status 4,588 4,693 Unrecognized transition assets (532 ) (574 ) Unrecognized net actuarial loss (4,694 ) (3,583 ) Net amount recognized (638 ) 536 Amounts recognized in the consolidated balance sheets: Accrued benefit liability 5,044 5,909 Intangible assets (29 ) (33 ) Accumulated other comprehensive income (5,653 ) (5,340 ) Net amount recognized (638 ) 536 The following weighted average assumptions were used for the actuarial valuation of the Group’s domestic pension benefit obligation as of the respective measurement date: 2003 2002 2001 2004 2003 2002 % % % % % % Discount rate 5.3 5.8 6.6 5.0 5.3 5.8 Rate of compensation increase 3.9 3.9 4.0 2.7 3.9 3.9 The components of net periodic benefit cost of the Group’s domestic benefit plans for the years ended December 31 are as follows: 2003 2002 2001 2004 2003 2002 € (000) € (000) € (000) € (000) € (000) € (000) Service cost 409 561 590 301 409 561 Interest cost 1,624 1,631 1,657 1,587 1,624 1,631 Expected return on plan assets (1,529 ) (1,399 ) (1,303 ) (1,638 ) (1,529 ) (1,399 ) Net amortization 484 456 456 545 484 456 988 1,249 1,400 795 988 1,249 The weighted average assumptions used for determining the net periodic pension cost for the GroupsGroup’s domestic pension plans for 2004, 2003, 2002 and 2001,2002, were as follows: 2003 2002 2001 2004 2003 2002 % % % % % % Discount rate 5.8 6.6 6.5 5.3 5.8 6.6 Expected return on plan assets 5.9 6.5 6.5 6.0 5.9 6.5 Rate of compensation increase 3.9 4.0 4.0 3.9 3.9 4.0 SAP’s investment strategy in Germany is to invest all contributions into stable insurance policies. The expected rate of return on plan assets for the Group’s domestic benefit plans is calculated by reference to the expected returns achievable on the insured policies given the expected asset mix of the policies.F-41Foreign Benefit Plans The Company’s foreign defined benefit plans provide participants with pension benefits that are based upon compensation levels, age, and years of service.The change of the benefit obligation and the change in plan assets for the foreign plans, are as follows: 2003 2002 2004 2003 € (000) € (000) € (000) € (000) Change in benefit obligation Benefit obligation at beginning of year 159,402 96,370 174,792 159,402 Service costs 29,503 31,100 30,220 29,503 Interest costs 7,691 8,146 7,817 7,691 Plan transfer 0 42,614 Plan amendments 0 1,053 Curtailment 0 (5,772 ) Settlement 0 (4,594 ) Employee contributions 1,907 1,976 0 1,907 Actuarial loss 4,118 10,176 Actuarial loss/gain (11,722 ) 4,118 Benefits paid (5,036 ) (6,187 ) (5,710 ) (5,036 ) Foreign currency exchange rate changes (22,793 ) (15,480 ) (7,527 ) (22,793 ) Other changes 1,968 0 Benefit obligation at end of year 174,792 159,402 189,838 174,792 Change in plan assets Change in plan assets: Fair value of plan assets at beginning of year 130,191 77,803 157,449 130,191 Actual return on plan assets 11,858 (6,417 ) 8,994 11,858 Plan transfer 0 40,343 Settlement 0 (7,184 ) Employer contributions 39,490 41,704 30,095 39,490 Employee contributions 1,907 1,976 2,064 1,907 Benefits paid (4,359 ) (5,758 ) (4,519 ) (4,359 ) Foreign currency exchange rate changes (21,638 ) (12,276 ) (10,423 ) (21,638 ) Other changes 1,968 0 Fair value of plan assets at end of year 157,449 130,191 185,628 157,449 Funded status 17,342 29,211 4,210 17,343 Unrecognized transition assets (2,244 ) (2,619 ) (2,074 ) (2,242 ) Unrecognized prior service cost 1,519 1,993 1,281 1,519 Unrecognized net actuarial loss (30,919 ) (35,424 ) (20,099 ) (30,919 ) Net amount recognized (14,299 ) (6,839 ) (16,682 ) (14,299 ) Amounts recognized in the consolidated balance sheets Amounts recognized in the consolidated balance sheets: Prepaid benefit cost (26,847 ) (2,987 ) (31,547 ) (26,847 ) Accrued benefit liability 13,129 23,904 22,315 13,129 Intangible assets (387 ) 0 �� 0 (387 ) Accumulated other comprehensive income (194 ) (27,756 ) (7,450 ) (194 ) Net amount recognized (14,299 ) (6,839 ) (16,682 ) (14,299 ) SAP (Schweiz) AG (“SAP Switzerland”) maintains a defined There were no plan transfers, divestitures, curtailments, or settlements impacting SAP’s foreign benefit pension plan covering the majority of its employees and retireesplans in Switzerland. Due to changes in legislation, SAP Switzerland founded a trust in January 2002 and transferred the plan’s assets and liabilities from an insurance company to the trust. SAP increased the pension benefit obligation by€ 42,614 thousand and plan assets by€ 40,343 thousand, the fair value of the plan’s assets as of the date of the transfer. In accordance with the provisions of SFAS 88, “Employers’ accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”,F-42SAP Nederland B.V. implemented a defined contribution plan in 2002 that replaced the benefits of the existing defined benefit plan for certain eligible employees. 2003 2002 2001 2004 2003 2002 % % % % % % Discount rate 4.7 5.2 6.6 4.5 4.7 5.2 Rate of compensation increase 4.7 4.8 6.0 4.9 4.7 4.8 The components of net periodic benefit cost of the Group’s foreign benefit plans for the years ended December 31 are as follows: 2003 2002 2001 2004 2003 2002 € (000) € (000) € (000) € (000) € (000) € (000) Service cost 29,503 31,100 24,466 30,220 29,503 31,100 Interest cost 7,691 8,146 5,446 7,817 7,691 8,146 Expected return on plan assets (9,189 ) (8,020 ) (4,975 ) (11,959 ) (9,189 ) (8,020 ) Net amortization 1,646 674 596 849 1,646 674 29,651 31,900 25,533 26,927 29,651 31,900 The following weighted average assumptions were used to determine net periodic pension cost for the Groups foreign pension plans for 2004, 2003, 2002 and 2001:2002: 2003 2002 2001 2004 2003 2002 % % % % % % Discount rate 5.2 6.6 7.5 4.7 5.2 6.6 Expected return on plan assets 6.5 8.0 8.0 6.9 6.5 8.0 Rate of compensation increase 4.8 6.0 6.0 4.7 4.8 6.0 The expected long-term rate of return on plan assets assumption is based on weighted average expected long-term rate of returns for each asset class.class which are estimated based on factors such as historical return patterns for each asset class and forecasts for inflation. Historical return patterns and other relevant financial factors are reviewed for appropriateness and reasonableness and modifications are made when considered necessary. For example, the excessive returns on equity securities in the late 1990s were given less weight to the expected return on plan assets assumption than were the more moderate returns before and since then. The Group’s foreign benefit plan asset allocation at December 31, 20032004, as well as the target asset allocation are as follows (in %):follows: Target asset Plan assets allocation 2003 Target asset Actual % of 2004 Target asset Actual % of 2003 Asset category % % allocation 2005 plan assets allocation 2004 plan assets % % % % Equity 54.1 58.1 59.0 58.1 54.1 58.1 Fixed income 42.3 35.8 39.7 38.4 42.3 35.8 Real estate 0 4.5 Real Estate 0.0 0.0 0.0 4.5 Other 3.6 1.6 1.3 3.5 3.6 1.6 Total 100.0 100.0 100.0 100.0 100.0 100.0 The investment strategies for SAP’s foreign benefit plans vary according to the individual conditions of the country in which the benefit plans are situated.Additional informationInformation on funded statusFunded Status for domesticDomestic and foreign plansThe total accumulated benefit obligation for the Group’s principal domestic and foreign benefit plans for the year ended 20032004 was€ 29,82432,755 thousand (2002:(2003:€ 27,39629,824 thousand) and€ 157,535176,458 thousand (2002:(2003:€ 151,004157,535 thousand), respectively. The projected benefit obligation, accumulated benefit obligation, and fair value of planF-43F-44value of plan assets for the Group’s domestic and foreign defined benefit pension plans with accumulated benefit obligations in excess of plan assets are, as follows: Underfunding of Projected Accumulated Fair value of accumulated benefit obligation benefit obligation plan assets benefit obligation € (000) € (000) € (000) € (000) 12/31/2003 Domestic plans 30,271 29,752 25,686 4,066 Foreign plans 18,507 13,129 — 13,129 Total 48,778 42,881 25,686 17,195 12/31/2002 Domestic plans 27,581 26,690 22,620 4,070 Foreign plans 107,186 100,879 77,153 23,726 Total 134,767 127,569 99,773 27,796 31/12/2004 31/12/2003 Domestic Foreign Domestic Foreign plans plans Total plans plans Total € (000) € (000) € (000) € (000) € (000) € (000) Projected benefit obligation 33,141 78,821 111,962 30,271 18,507 48,778 Accumulated benefit obligation 32,667 71,823 104,490 29,752 13,129 42,881 Fair value of plan assets 27,447 51,915 79,362 25,686 0 25,686 Underfunding of accumulated benefit obligation 5,220 19,908 25,128 4,066 13,129 17,195 Expected future contributionsFuture Contributions and benefitsThe Group’s expected contribution in 20042005 is€ 1,8081,661 thousand for domestic plans and€ 35,96323,625 thousand for foreign plans, all of which is expected to be paid as cash contributions.The estimated future pension benefits to be paid over the next ten years by the Group’s domestic and foreign benefit plans for the years ended December 31 are as follows: Domestic Foreign Domestic Foreign plans plans Total plans plans Total € (000) € (000) € (000) € (000) € (000) € (000) 2004 481 5,533 6,014 2005 743 7,405 8,148 876 6,973 7,849 2006 965 8,923 9,888 971 8,055 9,026 2007 1,133 10,913 12,046 1,138 9,596 10,734 2008 1,341 12,885 14,226 1,337 11,250 12,587 2009 – 2013 8,005 85,531 93,536 2009 1,374 12,653 14,027 2010-2014 8,799 77,457 86,256 Contribution PlansThe Company also maintains domestic and foreign defined contribution plans. Amounts contributed by the Company under such plans are based upon a percentage of the employee’s salary or the amount of contributions made by employees. The costs associated with defined contribution plans were€ 79,95576,453 thousand,€ 67,24879,955 thousand, and€ 70,09767,248 thousand in 2004, 2003, and 2002, and 2001 respectively.Employee financed pension planEmployee-Financed Pension Plan Germany maintains an unqualified employee financedemployee-financed plan, whereby employees may contribute a limited portion of their salary. SAP purchases and holds guaranteed fixed rate insurance contracts, which are recorded in otherOther assets (see Note 19) and are equal to the obligations under the plan. (26) Other Reserves and Accrued Liabilities(25) OTHER RESERVES AND ACCRUED LIABILITIES 2003 2002 2004 2003 € (000) € (000) € (000) € (000) Current and deferred taxes 455,499 594,042 632,033 455,499 Other reserves and accrued liabilities 1,013,556 882,691 1,136,690 1,013,556 1,469,055 1,476,733 1,768,723 1,469,055 F-44F-45As of December 31, 2003,2004, accrued taxes include current and prior year tax obligations in the amount of€ 343,519567,831 thousand (2002:(2003:€ 482,947343,519 thousand) and deferred tax liabilities in the amount of€ 111,98064,202 thousand (2002:(2003:€ 111,095111,980 thousand).Other reserves and accrued liabilities as of December 31 are as follows: 2003 2002 2004 2003 € (000) € (000) € (000) € (000) Other obligations to employees 557,118 499,690 617,237 557,118 Obligations to suppliers 179,698 173,782 183,069 179,698 Vacation and other absences 137,191 126,765 145,293 137,191 STAR obligations 50,948 58 108,910 50,948 Restructuring costs 16,235 21,220 Customer claims 36,103 41,159 10,902 36,103 Unused lease space 17,691 7,577 Contribution to employees’ accident insurance account 8,561 4,019 6,584 8,561 Warranty and service costs 7,600 4,729 Auditing and reporting costs 5,312 4,905 5,889 5,312 Fair value of foreign exchange contracts 1,644 9,790 5,255 1,644 Warranty and service costs 3,852 7,600 Other 11,690 10,217 33,464 8,161 1,013,556 882,691 1,136,690 1,013,556 Other reserves and accrued liabilities payable after one year as of December 31, 20032004, are€ 92,961116,723 thousand (€ 29,450107,162 thousand in 2002)2003).Obligations to employees relate primarily to variable bonus payments tied to earnings performance, paid out after the balance sheet date. Other obligations to employees also includes termination benefits required by law in certain foreign subsidiaries that constitute defined benefit plans under SFAS 87, “Employers’ Accounting for Pensions”.87. Such benefits are payable in a lump sum upon separation from the Company. The accrued liability for such plans amounts to€ 11,30713,382 thousand as of December 31, 2003 (2002:2004 (2003:€ 11,43211,307 thousand).Obligations to suppliers represent services received or goods purchased for which SAP has not yet been invoiced. Warranty and service cost accruals represent estimated future warranty obligations and other minor routine items provided under maintenance. SAP generally provides a six to 12 month warranty on its software. SAP determines the warranty accrual based on the historical average cost of fulfilling its obligations under these commitments. As of December 31, 20032004 and 2002,2003, SAP accrued€ 7,6003,852 thousand and€ 4,7297,600 thousand, respectively. The aggregate utilization of the warranty accrual in 20032004 was€ 2,3174,366 thousand (2002:(2003:€ 4,6332,317 thousand) and the aggregate warranty expense was net€ 5,188618 thousand in 2003 (2002:2004 (2003:€ 4,7625,188 thousand). The majority of vacation accruals included in vacation and other absences relates to employee contracts without a limit on the number of vacation days that can be carried over. Exit activities include contract termination and similar restructuring costs for unused lease space as well as severance payments. Restructuring costs are included in the Consolidated Statements of Income in the line itemF-45F-46the line item Other operating expense, net. The following table presents the beginning and ending balances along with additions and deductions incurred:2002 Severance Unused payments for lease space restructuring Total € (000) € (000) € (000) Balance as of 12/31/2002 7,577 11,159 18,736 Expenses 2003 17,164 3,384 20,548 Payments in 2003 5,544 9,347 14,891 Adjustments 2003 0 1,001 1,001 Currency 1,506 666 2,172 Balance as of 12/31/2003 17,691 3,529 21,220 Balance as of 12/31/2001 2,874 10,121 12,995 Expenses 2002 12,960 33,148 46,108 Payments in 2002 7,262 30,739 38,001 Adjustments 2002 0 0 0 Currency 995 1,371 2,366 Balance as of 12/31/2002 7,577 11,159 18,736 Balance as Balance as of 01/01 Additions Utilization Release Currency of 31/12 € (000) € (000) € (000) € (000) € (000) € (000) Unused Lease space 2,874 12,960 (7,262 ) 0 (995 ) 7,577 Severance payments for restructuring 10,121 33,148 (30,739 ) 0 (1,371 ) 11,159 12,995 46,108 (38,001 ) 0 (2,366 ) 18,736 At most subsidiaries2003 Balance as Balance as of 01/01 Additions Utilization Release Currency of 31/12 € (000) € (000) € (000) € (000) € (000) € (000) Unused Lease space 7,577 17,164 (5,544 ) 0 (1,506 ) 17,691 Severance payments for restructuring 11,159 3,384 (9,347 ) (1,001 ) (666 ) 3,529 18,736 20,548 (14,891 ) (1,001 ) (2,172 ) 21,220 2004 Balance as Balance as of 01/01 Additions Utilization Release Currency of 31/12 € (000) € (000) € (000) € (000) € (000) € (000) Unused Lease space 17,691 2,625 (7,557 ) (1,415 ) (779 ) 10,565 Severance payments for restructuring 3,529 6,972 (3,668 ) (1,176 ) 13 5,670 21,220 9,597 (11,225 ) (2,591 ) (766 ) 16,235 SAP generally does not have an ongoing severance benefit plan arrangement.arrangement at most of its subsidiaries. SAP accounted for the majority of its 2003 one-time2004 severance obligations in accordance with SFAS 146.146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”), or SFAS 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits” (“SFAS 88”), depending on the subsidiary involved with the severance activity. In 2003, SAP accounted for most of its severance obligations in accordance with SFAS 146 since the majority of the severance activities related to one-time events. Other severance obligations (affecting 768 employees and 322 employees in 2002 and 2001, respectively)2002) were accounted for in accordance with SFAS 112 “Employers Accounting for Postemployment Benefits”, or EITF 94-3, as applicable. Because these other severance benefits do not vest or accumulate, the liability for such benefits was recognized when it became probable that an obligation had been incurred and the amount could be estimated. Provision for unused lease space relate to costs that will continue to be incurred for vacated space under various operating lease contracts that will have no future economic benefit to the Company in accordance with SFAS 146 in 2004 and 2003 and EITF 94-3 in 2002. ThoseFor 2004, the charges affected each of the segments, while for 2003 those charges primarily relate to the training segment, when SAP has been streamlining its training facility requirements.segment. (27) Other LiabilitiesF-47(26) OTHER LIABILITIESOther liabilities based on due dates as of December 31 are as follows: Term less Term Term more Term less Term between Term more Balance on Balance on than between 1 than Balance on Balance on 1 year 1 and 5 years than 5 years 12/31/2003 12/31/2002 1 year and 5 years 5 years 12/31/2004 12/31/2003 € (000) € (000) € (000) € (000) € (000) € (000) € (000) € (000) € (000) € (000) Bank loans and overdrafts 19,043 639 1,785 21,467 24,307 25,851 0 1,934 27,785 21,467 Advanced payments received 42,441 0 0 42,441 44,011 53,537 0 0 53,537 42,441 Accounts payable 286,862 0 0 286,862 328,841 340,455 6 0 340,461 286,862 Taxes 165,037 0 0 165,037 166,056 175,248 0 0 175,248 165,037 Social security 33,766 0 0 33,766 35,824 43,988 0 0 43,988 33,766 Other liabilities 101,568 1,819 23,184 126,571 149,723 56,266 2,674 28,879 87,819 126,571 648,717 2,458 24,969 676,144 748,762 695,345 2,680 30,813 728,838 676,144 Liabilities are unsecured, excluding retention of title and similar rights customary in the industry. Effective interest rates of bank loans are 6.14% and 6.18% in 2004 and 5.01% in 2003, and 2002, respectively.In 2002,2003, liabilities with a remaining term not exceeding one year amounted to€ 725,085648,717 thousand and those with a remaining term exceeding five years amounted to€ 22,86424,969 thousand. On November 5, 2004, SAP AG entered into a€As of December 31, 20032004, there were no borrowings outstanding under the facility. Additionally, as of December 31, 2004, and 2002,2003, SAP AG had available lines of credit totaling€ 858,000621,500 thousand and€ 980,000858,000 thousand, respectively. NoAs of December 31, 2004 and 2003, there were no borrowings were madeoutstanding under these lines of credit in 2003 and 2002.F-46As of December 31, 20032004 and 2002,2003, certain of SAP’s subsidiaries had lines of credit available that allowed them to borrow in local currencies at prevailing interest rates up to€ 178,010203,806 thousand and€ 204,756178,010 thousand, respectively. Total aggregate borrowings under these lines of credit, which are predominantly guaranteed by SAP AG, amounted to€27,785 thousand as of December 31, 2004, and€21,467 thousand as of December 31, 2003 and€ 24,307 thousand as of December 31, 2002. (28) Deferred Income(27) DEFERRED INCOME Deferred income consists mainly of prepayments for maintenance and deferred software license revenues. Such amounts will be recognized as software, maintenance, or service revenue, depending upon the reasons for the deferral.D. ADDITIONAL INFORMATION (29) Supplemental Cash Flow Information(28) SUPPLEMENTAL CASH FLOW INFORMATIONInterest paid included in net cash provided by operating activities in 2004, 2003, 2002, and 20012002 was€ 3,9005,503 thousand,€ 12,8583,900 thousand, and€ 20,83412,858 thousand, respectively. Income taxes paid in fiscal years 2004, 2003, 2002, and 2001,2002, net of refunds, was€ 591,012481,557 thousand,€ 366,642591,012 thousand, and€ 500,098366,642 thousand, respectively. See the reconciliation from cash and cash equivalents to liquid assets in Note 21. (30) Contingent Liabilities(29) CONTINGENT LIABILITIES SAP occasionally grants function and/or performance guarantees in routine consulting contracts and/or customer development arrangements, standard guarantee provisions and other items. Currently, the Company has several such agreements in place with various expiration dates.arrangements. Based on historical experience and evaluation, SAP does not believe that any material loss resulting from these guarantees is likely, and thereforeprobable. In addition, because the guarantees relate to SAP’s own performance, no related liability has been recorded. The Company also generally provides a six to 12 month warranty period on its software. Due to the nature of these warranties, which relate to the guarantees,performance of SAP’s software, SAP can notcannot reasonably estimate the maximum exposure of these guarantees.to loss resulting from the warranties. The relatedCompany’s warranty liability is included in other reserves and accrued liabilities (see Note 26)25). As of December 31, 20032004 and 20022003, no guarantees were provided for third party performance or financial obligations of third parties. (31) Other Financial Commitments(30) OTHER FINANCIAL COMMITMENTSOther financial commitments amounted to€ 664,798617,298 thousand and€ 780,258664,798 thousand as of December 31, 20032004 and 2002,2003, respectively, and are comprised primarily of commitments under rental and operating leases of€ 619,543563,478 thousand, and€ 674,918619,543 thousand as of December 31, 20032004 and 2002,2003, respectively. Those commitments relate primarily to the lease of office space, cars, and office equipment. In addition, financial commitments exist in the form of purchase commitments totaling€ 30,50926,068 thousand, and€ 83,27730,509 thousand as of December 31, 20032004, and 20022003, respectively. These commitments relate primarily relate to the construction of facilities in Germany, office equipment, and car purchase commitments. Historically, the majority of those purchase commitments have been utilized. For financial commitments related to SAP’s pension plans please refer to Note 25. In October 2000, SAP Properties, a wholly owned subsidiary of SAP America, Inc. entered into a seven-year lease arrangement with a sophisticated financial institution for office space and also agreed to serve as an agent to oversee the renovations of the office space. The operating lease agreement iswas between SAP Properties and the financial institution directly, with no involvement of any variable interest entity. Under the terms of the lease, SAP Properties iswas required to restrict cash equal to the amount spent by the financial institution on such renovations. Seerenovations (see Note 21.20). This lease iswas accounted for as an operating lease in accordance with SFAS 13, “Accounting for Leases”. In January 2004, SAP America Inc. and SAP Properties signed an agreement with a third-party real estate development company (the “Purchaser”) to sell a portion of the United States headquarters property in Newtown Square, Pennsylvania. A portion of the property to be sold iswas owned and another portion of the property isF-47currentlywas occupied by SAP America Inc. and certain subsidiaries pursuant to an operating lease (the “Leased Property”) with the sophisticated financial institution (the “Owner”) noted above. The sale is being undertaken to reduce future operating expense commitments associated with maintainingtook place in 2004 and released the Leased Property and to release restricted cash currently securing the lease obligation. The sale is subject to due diligence procedures being successfully completed by the Purchaser. In connection with this transaction, SAP Properties would exercise an existing option to purchase the Leased Property from the Owner prior to the sale. If completed, the sale would result in a pretax loss of approximately US$16 million. The sale is not expected to take place until June 2004.Commitments under rental and operating leasing contracts as of December 31, 2003:2004: € (000) Due 2004 141,891Due 2005 105,366134,085 Due 2006 80,685100,856 Due 2007 60,90172,400 Due 2008 50,74958,473Due 2009 51,255 Due thereafter 179,951146,410 Rent expense was€ 159,284153,418 thousand,€ 207,087159,284 thousand, and€ 208,908207,087 thousand for the years ended December 31, 2004, 2003, and 2002, and 2001, respectively. (32) Litigation and Claims(31) LITIGATION AND CLAIMS The bankruptcy trustee for the U.S. company FoxMeyer Corp. (“FoxMeyer”) instituted legal proceedings against SAP AG and SAP America, Inc., the U.S. subsidiary of SAP AG, in 1998.allegesalleged that the software failed to perform properly, damaging FoxMeyer’s business, and that such failure was a significant factor contributing to FoxMeyer’s bankruptcy in 1996 and its subsequent liquidation. On June 23, 2004, SAP reached a settlement agreement with FoxMeyer pursuant to which SAP was required to pay a specified amount to FoxMeyer and to which all outstanding disputes and litigation were dismissed by order of the United States Bankruptcy Court for the District of Delaware dated August 30, 2004. SAP paid FoxMeyer the settlement amount on September 9, 2004. The complaint asserts claimsterms of breach of contract, breach of express and implied warranties, fraud, negligent misrepresentation, and promissory estoppel.the settlement did not require SAP to make any changes to its business practices. The Trustee seeks unspecified compensatory and punitive damages, the award of costs, expenses and reasonable attorney’s fees, as well as pre-judgment and post-judgment interest. Fact discovery has concluded, however, the Trustee has filed a motion to reopen discovery. The parties are now proceeding with motion practice before the Court. While the ultimate outcome of this matter cannot be presently determined with certainty, we believe that the Trustee’s claims in this action are without merit. We are vigorously defending against the claims, and believe that this action issettlement amount did not likely to have a material effectimpact on our business, resultSAP’s financial position or 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, the Company 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.F-48 (33) Financial Instruments(32) FINANCIAL INSTRUMENTSFair Value of Financial InstrumentsThe Company utilizes various types of financial instruments in the ordinary course of business. The carrying amounts and fair values of SAP’s financial instruments are as follows: 2004 2003 2003 2002 Carrying Carrying Carrying value Fair value Carrying value Fair value value Fair value value Fair value € (000) € (000) € (000) € (000) € (000) € (000) € (000) € (000) Marketable equity securities — available-for-sale 24,457 24,457 11,250 11,250 17,328 17,328 24,457 24,457 Marketable debt securities — available-for-sale 53,679 53,679 54,353 54,353 473 473 53,026 53,026 Marketable securities 1,352 1,352 1,349 1,349 11,906 11,906 2,003 2,003 Other loans 61,214 61,214 58,170 58,170 53,320 53,320 61,214 61,214 Bank loans and overdrafts (21,467 ) (21,467 ) (24,307 ) (24,307 ) (27,785 ) (27,785 ) (21,467 ) (21,467 ) Derivative financial instruments Forward exchange contracts 177,297 177,297 28,315 28,315 81,653 81,653 177,297 177,297 Currency options 0 0 1,106 1,106 Call options (STAR hedge) 77,817 77,817 1,350 1,350 104,808 104,808 77,817 77,817 374,349 374,349 131,586 131,586 241,703 241,703 374,347 374,347 The market values of these financial instruments are determined as follows: • Marketable debt and equity securities: The fair values of marketable debt and equity securities are based upon available quoted market prices on December 31. • Other loans, bank loans, and overdrafts: The fair values of other loans, bank loans, and overdrafts approximate their carrying values. The interest-free, below market rate employee loans included in other loans are discounted based on prevailing market rates.
F-50•Marketable debt and equity securities: The fair values of marketable debt and equity securities are based upon available quoted market prices on December 31.•Other loans, bank loans, and overdrafts: The fair values of other loans, bank loans, and overdrafts approximate their carrying values.•Derivative financial instruments: The fair value of derivatives generally reflects the estimated amounts the Company would pay or receive to terminate the contracts on the reporting date. • Derivative financial instruments: The fair value of derivatives generally reflects the estimated amounts the Company would pay or receive to terminate the contracts on the reporting date. Detailed information about the fair value of the Company’s financial instruments is included in Notes 16 20 and 27.Accounting and Use of Derivative Financial Instruments As an internationally active enterprise, the Company is subject to risks from currency fluctuations in its ordinary operations. The Company utilizes derivative financial instruments to reduce such risks as described below. The derivative financial instruments employed by the Company are exclusively marketable instruments with sufficient liquidity. The Company has established internal guidelines that govern the use of derivative financial instruments.Foreign Exchange Risk Management Most of SAP AG’s subsidiaries have entered into license agreements with SAP AG pursuant to which each subsidiary has acquired the right to sublicense SAP AG software products to customers within a specific territory. Under these license agreements, the subsidiaries generally are required to pay SAP AG a royalty equivalent to a percentage of the product fees charged by them to their customers within 30 days following the end of the month in which the subsidiary recognizes the revenue. These intercompany royalties payable to SAP AG are generally denominated in the respective subsidiary’s local currency in order to centralize foreign currency risk with SAP AG in Germany. Because these royalties are denominated in the various subsidiariessubsidiaries’ local currencies, whereas the functional currency of SAP AG is the euro, SAP AG’s anticipated cash flows are subject to foreign exchange risks. In addition, the delay between the date when the subsidiary records product revenue and the date when the subsidiary remits payment to SAP AG exposes SAP AG to foreign exchange risk.F-49 SAP enters into derivative instruments, primarily foreign exchange forward contracts and currency options, to hedge anticipated cash flows in foreign currencies from foreign subsidiaries. Specifically, these foreign exchange forward contracts offset anticipated cash flows and existing intercompany receivables relating to the countries with significant operations, including the United States, Japan, the United Kingdom, Switzerland, Canada, and Australia. SAP uses foreign exchange derivatives that generally have maturities of 12 months or less, which may be rolled over to provide continuing coverage until the applicable royalties are received. Generally, anticipated cash flows represent expected intercompany amounts resulting from revenues generated within the 12 months following the purchase date of the derivative instrument. However, management infrequently extends the future periods being hedged for a period of up to two years from the purchase date of the derivative instrument based on the Company’s forecasts and anticipated exchange rate fluctuations in various currencies. Management believes the use of foreign currency derivative financial instruments reduces the aforementioned risks that arise from doing business in international markets and holds such instruments for purposes other than trading. Foreign exchange derivatives are recorded at fair value in the Consolidated Balance Sheets. Gains or losses on derivatives designated and qualifying as cash flow hedges are included in Accumulated other comprehensive income, net of tax. When intercompany accounts receivable resulting from product revenue royalties are recorded, the applicable gain or loss is reclassified to Other non-operating income/ expense, net. Going forward, any additional gains or losses relating to that derivative are posted to Other non-operating income/ expense, net until the position is closed or the derivative expires.Net gains of€ 26 thousand are also included in earnings forF-51 For the year ended December 31, 2003 (2002: net2004, no gains of€ 2,352 thousand; 2001: net gains of€ 468 thousand), reclassified from Accumulated other comprehensive income as a result of the discontinuance of foreign currency cash flow hedges because it was probable that the original forecasted transaction would not occur.occur are included in earnings. For the year ended December 31, 2003, such net gains of€26 thousand were included in earnings (2002: net gains of€2,352 thousand). It is estimated that€ 13,44113,310 thousand of net lossesgains included in accumulatedAccumulated other comprehensive income at December 31, 2003,2004, will be reclassified into earnings during the next year. As of December 31, 2003,2004, SAP held derivative financial instruments with a maximum term of 12 months to hedge its exposure to the variability in future cash flows for forecasted transactions. Foreign exchange derivatives entered into by SAP to offset exposure to anticipated cash flows that do not meet the requirements for applying hedge accounting are marked to market at each reporting period with unrealized gains and losses recognized in earnings.STAR Hedge To a certain extent SAP hedges anticipated cash flow exposures associated with unrecognized non-vested STARs (see Note 24)23) through the purchase of derivative instruments from an independent financial institution.As of December 31, 20032004 and 20022003, the following derivative instruments were designated as a hedge for the STAR 2004, 2003, and 2002, and 2001, respectively: 2004 2004 Hedge of 3.0 million 2004 STARs Hedge of 3.0 million 2004 STARs Hedge of 2.0 million 2003 STARs Number of call Number of call 2003 Hedge of 2.0 million 2003 STARs Number of Buy/sell call options Strike price Buy / sell options Strike price Buy / sell options Strike price Buy 2,000,000 84.91 3,000,000 134.35 Buy 2,000,000 84.91 Sell 1,000,000 134.91 1,500,000 184.35 Sell 1,000,000 134.91 Sell 500,000 184.91 750,000 234.35 Sell 500,000 184.91 Fair value as of December 31, 2004, in€ (000): 22,308 Fair value as of December 31, 2004, in€ (000): 22,308 Fair value as of December 31, 2004, in€ (000): 82,500 Fair value as of December 31, 2003 in€ (000): 77,790F-50 2003 2003 Hedge of 2.0 million 2003 STARs Hedge of 2.0 million 2003 STARs Hedge of 3.0 million 2002 STARs Number of call Number of call 2003 Hedge of 3.0 million 2002 STARs Number of Buy/sell call options Strike price Buy / sell options Strike price Buy / sell options Strike price Buy 3,000,000 158.80 2,000,000 84.91 Buy 3,000,000 158.80 Sell 1,500,000 208.80 1,000,000 134.91 Sell 1,500,000 208.80 Sell 750,000 258.80 500,000 184.91 Sell 750,000 258.80 Fair value as of December 31, 2003, in€ (000): 77,790 Fair value as of December 31, 2003, in€ (000): 77,790 Fair value as of December 31, 2003, in€ (000): 27 Fair value as of December 31, 2002 in€ (000): 27 2002 Hedge of 3.0 million 2002 STARs Number of Buy/sell call options Strike price Buy 3,000,000 158.80 Sell 1,500,000 208.80 Sell 750,000 258.80 Fair value as of December 31, 2002 in€ (000): 1,350 2002 Hedge of 3.2 million 2001 STARs Number of Buy/sell call options Strike price Buy 3,200,000 193.51 Sell 1,600,000 243.51 Sell 400,000 293.51 Fair value as of December 31, 2002 in€ (000): 0The terms of the derivative financial instruments are also designed to reflect the eight measurement dates and weighting factors applicable to the STAR program, as described in Note 24.23. The amount of options, which expire at each measurement date, reflect the respective weighting factor of that date. Payments dates reflect payment terms of the STAR program, which is subject to the respective hedge. Viewed together, SAP will receive from the financial institution 100% of the first€50 in appreciation of SAP’s stock price above the strike price of the STAR, 50% of the next€50 in appreciation of SAP’s stock price above the strike price of the STAR, and 25% of any additional appreciation of SAP’s stock price above the strike price of the STAR. The terms of the derivative financial instruments require cash settlement and there are no settlement alternatives. These derivative financial instruments are accounted for as Other assets on SAP’s Consolidated Balance Sheets. Hedge effectiveness is assessed based on changes in the intrinsic value of the STAR hedge instrument. Accordingly the change in the fair value attributable to the time value of the derivative instrument will berecorded currently in the Consolidated Statements of Income under Financial income/expense. The change in intrinsic value is recorded in Other comprehensive income with the resulting deferred tax liability recorded separately. The amount in Other comprehensive income is used to offset compensation expense on the STAR recognized over the vesting period. To the extent SAP entered into a hedge for recognized, vested STARs, the change in intrinsic value of the derivative is recognized currently in Financial income/expense.As of December 31, 2003 2004,€15 million have been recorded as an expense in Financial income/expense, net, thereof a gain of€ 31 million representing the amount of the hedges’ ineffectiveness. Compensation expense on STAR has been reduced by€ 1622 million; Other comprehensive income has been increaseddecreased by€ 2415 million, net of tax. In 2002,2003, approximately€ 5915 million has been recorded as an expense in Financial income/expense, net.F-512423 for additional information.The notional values and fair values of the derivative financial instruments as of December 31 are as follows: 2003 2002 Notional Notional value Fair value value Fair value € (000) € (000) € (000) € (000) Forward exchange contracts Gains 1,302,790 178,941 836,772 38,105 Losses 8,990 (1,644 ) 446,930 (9,790 ) 1,311,780 177,297 1,283,702 28,315 Currency options 0 0 83,372 1,106 Call options (STAR hedge) n/a 77,817 n/a 1,350 2004 2003 Notional Notional value Fair value value Fair value € (000) € (000) € (000) € (000) Forward exchange contracts Gains 1,226,531 86,908 1,302,790 178,941 Losses 222,487 (5,255 ) 8,990 (1,644 ) 1,449,018 81,653 1,311,780 177,297 Call options (STAR hedge) n/a 104,808 n/a 77,817 Credit Risk The Company is exposed to credit-related losses in the event of non-performance by counterparties to financial instruments. To avoid these counterparty risks, the Company conducts business exclusively with major financial institutions. SAP does not have significant exposure to any individual counterparty. (34) Segment Information(33) SEGMENT INFORMATION SAP discloses segment information in accordance with SFAS 131, “Disclosures about Segments of an Enterprise and Related Disclosures” (“SFAS 131”). SFAS 131 requires financial information about operating segments to be reported on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments. The Company’s internal reporting system produces reports in which business activities are presented in a variety of ways. Based on these reports, the Executive Board, which has been identified as the chief operating decision-maker according to the criteria of SFAS 131, evaluates business activities in a number of different ways. Neither the line of business nor the geographic structure can be identified as primary. Therefore, in accordance with SFAS 131,primary, and accordingly the line of business structure is regarded as constituting the operating segments. Accounting policies for each segment are the same as those described in the summary of significant accounting policies as disclosed in Note 3, except for differences in the currency translation and stock-based compensation expenses. Under management’s view, certain deferred compensation charges for settlements of stock-based compensation plans are also considered stock-based compensation. Differences in the foreign currency translation result in minor deviations between the figures reported internally and the figures reported in the financial statements. Depending on the type of service provided, Through December 31, 2003, SAP accountsaccounted for internal sales and transfers between segments either on a cost basis or at currentestimated market prices. Startingprices, depending on the type of service provided. Effective January 1, 2004, in order to best manage the utilization of its internal resources, SAP started recording all internal sales and transfers will be recorded utilizingbased on fully burdenloaded cost rates. The Company adjusted the management reporting of internal revenues such that internal sales and transfers are now reported as cost reduction rather than internal revenues. This change in segment measures resulted in lower revenues and costs for the operating segments. The Company also adopted a new calculation of the segment contribution in 2004 such that acquisition-related charges no longer burden a segment’s contribution. Although there have been no changes in the composition of operating segments or in reportable operating segments, the Company’s original segment disclosures for 2003 and 2002 have been presented along with revised information that conforms to the current presentation. 2004 Product Consulting Training Total € (000) € (000) € (000) € (000) External revenue 5,292,941 1,910,292 306,591 7,509,824 Segment expenses (2,058,099 ) (1,483,993 ) (209,001 ) (3,751,093 ) Segment contribution 3,234,842 426,299 97,590 3,758,731 Segment profitability 61.1 % 22.3 % 31.8 % 2003 As restated Product Consulting Training Total € (000) € (000) € (000) € (000) External revenue 4,797,827 1,884,801 316,088 6,998,716 Segment expenses (1,862,679 ) (1,442,398 ) (221,783 ) (3,526,860 ) Segment contribution 2,935,148 442,403 94,305 3,471,856 Segment profitability 61.2 % 23.5 % 29.8 % 2003 As previously reported Product Consulting Training Total € (000) € (000) € (000) € (000) External revenue 4,797,827 1,884,801 316,088 6,998,716 Internal revenue 448,486 507,244 65,981 1,021,711 Total revenue 5,246,313 2,392,045 382,069 8,020,427 Segment expenses (2,322,564 ) (1,927,112 ) (287,470 ) (4,537,146 ) Segment contribution 2,923,749 464,933 94,599 3,483,281 Segment profitability 55.7 % 19.4 % 24.8 % 2002 As restated Product Consulting Training Total € (000) € (000) € (000) € (000) External revenue 4,805,339 2,141,154 435,098 7,381,591 Segment expenses (2,109,955 ) (1,631,986 ) (292,664 ) (4,034,605 ) Segment contribution 2,695,384 509,168 142,434 3,346,986 Segment profitability 56.1 % 23.8 % 32.7 % F-52F-54SAP has three operating segments: “Product”, “Consulting” and “Training”. Product Consulting Training Total 2002 € (000) € (000) € (000) € (000) As previously reported Product Consulting Training Total 2003 € (000) € (000) € (000) € (000) External revenue 4,797,827 1,884,801 316,088 6,998,716 4,805,339 2,141,154 435,098 7,381,591 Internal revenue 448,486 507,244 65,981 1,021,711 464,669 513,064 83,860 1,061,593 Total revenue 5,246,313 2,392,045 382,069 8,020,427 5,270,008 2,654,218 518,958 8,443,184 Segment expenses (2,322,564 ) (1,927,112 ) (287,470 ) (4,537,146 ) (2,584,305 ) (2,128,383 ) (376,378 ) (5,089,066 ) Segment contribution 2,923,749 464,933 94,599 3,483,281 2,685,703 525,835 142,580 3,354,118 Segment profitability 55.7% 19.4% 24.8% 51.0 % 19.8 % 27.5 % 2002 External revenue 4,805,339 2,141,154 435,098 7,381,591 Internal revenue 464,669 513,064 83,860 1,061,593 Total revenue 5,270,008 2,654,218 518,958 8,443,184 Segment expenses (2,584,305 ) (2,128,383 ) (376,378 ) (5,089,066 ) Segment contribution 2,685,703 525,835 142,580 3,354,118 Segment profitability 51.0% 19.8% 27.5% 2001 External revenue 4,819,436 2,012,749 479,817 7,312,002 Internal revenue 480,457 445,589 118,451 1,044,497 Total revenue 5,299,893 2,458,338 598,268 8,356,499 Segment expenses (2,875,836 ) (2,034,119 ) (419,008 ) (5,328,963 ) Segment contribution 2,424,057 424,219 179,260 3,027,536 Segment profitability 45.7% 17.3% 30.0% Product The Product segment is primarily engaged in marketing and licensing the Company’s software products, performing software development services, and performing maintenance services. Maintenance services include technical support for the Company’s products, assistance in resolving problems, provision ofproviding user documentation, updates and other support for software products, and new releases, versions, and support packages.Consulting The Consulting segment assists customers in the implementation of SAP software products. Consulting services also include customer support in project planning, feasibility studies, analyses, organizational consulting, system adaptation, system optimization, release change, and interface setup.Training The Training segment provides educational services on the use of SAP software products and related topics for customer and partners. Training services include traditional classroom training at SAP training facilities, customer and partner specificpartner-specific training, end-user training, as well as e-learning.Revenues The external revenue figures for the operating segments differ from the revenue figures disclosed in the Consolidated Statements of Income because for internal reporting purposes revenue is generally allocated to theF-53segment that is responsible for the related project, whereas in the Consolidated Statements of Income revenue is allocated based on the nature of the transaction regardless of the segment it was provided by. Internal revenues comprise revenues from transactions with other parts of the Company.The following table presents a reconciliation of total segment revenues to total consolidated revenues as reported in the Consolidated Statements of Income: 2003 2002 As previously As previously 2003 2002 2001 2004 As restated reported As restated reported € (000) € (000) € (000) € (000) € (000) € (000) € (000) € (000) Total revenue for reportable segments 8,020,427 8,443,184 8,356,499 7,509,824 6,998,716 8,020,427 7,381,591 8,443,184 Elimination of internal revenues (1,021,711 ) (1,061,593 ) (1,044,497 ) 0 0 (1,021,711 ) 0 (1,061,593 ) Other external revenues 26,074 31,225 28,503 4,474 26,074 26,074 31,225 31,225 Other differences (184 ) 22 299 195 (184 ) (184 ) 22 22 7,024,606 7,412,838 7,340,804 7,514,493 7,024,606 7,024,606 7,412,838 7,412,838 Other external revenues result from services provided from outside the reportable segments. Other differences primarily comprise currency translation differences.Segment Contribution The segment contributions reflect only expenses directly attributable to the segments and do not represent the actual margins for the operating segments. Indirect costs such as general and administrative, research and development, and other corporate expenses, are not allocated to the operating segments and therefore are not included in segment contribution. Charges for stock-based compensation depreciation, and amortization of all long-lived assetsacquisition-related charges are also not allocated to the operating segments.The following table presents a reconciliation of total segment contribution to Income before income taxes, minority interest and extraordinary gain as reported in the Consolidated Statements of Income: 2003 2002 As previously As previously 2003 2002 2001 2004 As restated reported As restated reported € (000) € (000) € (000) € (000) € (000) € (000) € (000) € (000) Total contribution for reportable segments 3,483,281 3,354,118 3,027,537 3,758,731 3,471,856 3,483,281 3,346,986 3,354,118 Contribution from activities outside the reportable segments (1,628,877 ) (1,692,548 ) (1,616,697 ) (1,672,252 ) (1,591,996 ) (1,628,877 ) (1,657,996 ) (1,692,548 ) Acquisition-related charges (30,221 ) (25,735 ) 0 (27,478 ) 0 Stock-based compensation expenses (130,044 ) (35,868 ) (98,377 ) (38,126 ) (130,044 ) (130,044 ) (35,868 ) (35,868 ) Other differences (341 ) (24 ) (89 ) 249 (62 ) (341 ) 34 (24 ) Operating income 1,724,019 1,625,678 1,312,374 2,018,381 1,724,019 1,724,019 1,625,678 1,625,678 Other non-operating income/expenses, net 36,309 37,319 (10,643 ) 13,274 36,309 36,309 37,319 37,319 Finance income, net 16,287 (555,299 ) (232,974 ) 40,987 16,287 16,287 (555,299 ) (555,299 ) Income before income taxes, minority interest and extraordinary gain 1,776,615 1,107,698 1,068,757 Income before income taxes, minority interest, and extraordinary gain 2,072,642 1,776,615 1,776,615 1,107,698 1,107,698 Other differences primarily relate to currency translation differences.Segment Profitability A segment’s profitability is calculated as the ratio of segment contribution to segment total revenues.Segment Assets The Company does not currently track assets or capital expenditures by operating segments in its internal reporting system nor is such information used by the Executive Board when making decisions about resource allocations.F-54Geographic Information The following tables present a summary of operations by geographic region except for income before income tax. The amounts included are based on consolidated data, which reconciles to the Consolidated Statements of Income. Income before income tax is based on unconsolidated data.Sales by destination are based upon the location of the customer whereas sales by operation reflect the location of the SAP subsidiary responsible for the sale. Sales by destination Sales by operation Sales by destination Sales by operation 2003 2002 2001 2003 2002 2001 2004 2003 2002 2004 2003 2002 € (000) € (000) € (000) € (000) € (000) € (000) € (000) € (000) € (000) € (000) € (000) € (000) Germany Germany 1,670,286 1,654,144 1,468,726 1,771,289 1,793,961 1,615,777 1,780,128 1,670,261 1,654,144 1,875,081 1,771,289 1,793,961 Rest of EMEA(1) 2,299,601 2,394,011 2,317,456 2,238,387 2,301,660 2,211,982 Rest of EMEA1) 2,443,383 2,299,581 2,394,011 2,411,294 2,238,387 2,301,660 Total EMEA 3,969,887 4,048,155 3,786,182 4,009,676 4,095,621 3,827,759 Total EMEA 4,223,511 3,969,842 4,048,155 4,286,375 4,009,676 4,095,621 United States United States 1,736,341 1,969,748 2,084,140 1,728,008 1,954,427 2,102,136 1,893,746 1,736,080 1,969,748 1,880,247 1,728,008 1,954,427 Rest of Americas Rest of Americas 479,836 531,880 639,980 472,142 525,657 613,503 530,043 480,150 531,880 513,586 472,142 525,657 Total Americas 2,216,177 2,501,628 2,724,120 2,200,150 2,480,084 2,715,639 Total Americas 2,423,789 2,216,230 2,501,628 2,393,833 2,200,150 2,480,084 Japan Japan 441,558 485,939 444,090 440,226 485,605 434,163 387,443 441,557 485,939 385,013 440,226 485,605 Rest of Asia-Pacific Rest of Asia-Pacific 396,984 377,116 386,412 374,554 351,528 363,243 479,750 396,977 377,116 449,272 374,554 351,528 Total Asia-Pacific 867,193 838,534 863,055 834,285 814,780 837,133 Total Asia-Pacific 838,542 863,055 830,502 814,780 837,133 797,406 7,514,493 7,024,606 7,412,838 7,514,493 7,024,606 7,412,838 7,024,606 7,412,838 7,340,804 7,024,606 7,412,838 7,340,804 (1)1)Europe, Middle East, Africa Income before income tax2) Total assets 2004 2003 2002 2004 2003 2002 € (000) € (000) € (000) € (000) € (000) € (000) Germany 1,528,052 1,368,735 1,281,148 3,567,090 2,597,173 1,967,167 Rest of EMEA1) 335,768 285,565 312,278 1,376,879 1,295,265 1,301,115 Total EMEA 1,863,820 1,654,300 1,593,426 4,943,969 3,892,438 3,268,282 United States 265,344 178,372 268,043 1,866,987 1,710,432 1,616,408 Rest of Americas 21,593 40,170 80,340 288,370 318,451 326,496 Total Americas 286,937 218,542 348,383 2,155,357 2,028,883 1,942,904 Japan 38,752 61,891 82,071 151,712 163,616 177,624 Rest of Asia-Pacific 62,027 23,618 36,441 334,434 240,928 219,653 Total Asia-Pacific 100,779 85,509 118,512 486,146 404,544 397,277 2,251,536 1,958,351 2,060,321 7,585,472 6,325,865 5,608,463 1) Europe, Middle East, Africa (2)2)Figures of the IndividualStandalone Financial Statements Income before income tax(2) Total assets Property, plant, and equipment Capital expenditures 2003 2002 2001 2003 2002 2001 2004 2003 2002 2004 2003 2002 € (000) € (000) € (000) € (000) € (000) € (000) € (000) € (000) € (000) € (000) € (000) € (000) Germany Germany 1,368,735 1,281,148 1,416,177 2,597,173 1,967,167 2,276,865 702,500 699,863 648,828 117,187 159,019 201,799 Rest of EMEA(1) 285,565 312,278 263,340 1,295,265 1,301,115 1,247,286 Rest of EMEA1) 128,347 128,872 148,564 27,003 17,460 23,924 Total EMEA 1,654,300 1,593,426 1,679,517 3,892,438 3,268,282 3,524,151 Total EMEA 830,847 828,735 797,392 144,190 176,479 225,723 United States United States 178,372 268,043 (122,717 ) 1,710,432 1,616,408 1,905,382 132,590 158,805 208,466 11,689 9,009 21,423 Rest of Americas Rest of Americas 40,170 80,340 54,640 318,451 326,496 355,646 5,371 4,244 4,876 3,226 2,145 2,235 Total Americas 218,542 348,383 (68,077 ) 2,028,883 1,942,904 2,261,028 Total Americas 137,961 163,049 213,342 14,915 11,154 23,658 Japan Japan 61,891 82,071 73,840 163,616 177,624 178,411 5,377 7,518 11,019 1,959 1,840 2,424 Rest of Asia-Pacific Rest of Asia-Pacific 23,618 36,441 17,032 240,928 219,653 232,014 24,898 20,355 12,464 10,924 14,217 7,693 Total Asia-Pacific 30,275 27,873 23,483 12,883 16,057 10,117 Total Asia-Pacific 85,509 118,512 90,872 404,544 397,277 410,425 999,083 1,019,657 1,034,217 171,988 203,690 259,498 1,958,351 2,060,321 1,702,312 6,325,865 5,608,463 6,195,604 (1)Europe, Middle East, Africa(2)Figures of the Individual Financial StatementsF-55 Property, plant and equipment Capital expenditures 2003 2002 2001 2003 2002 2001 € (000) € (000) € (000) € (000) € (000) € (000) Germany 699,863 648,828 543,954 159,019 201,799 168,964 Rest of EMEA(1) 128,872 148,564 158,284 17,460 23,924 54,593 Total EMEA 828,735 797,392 702,238 176,479 225,723 223,557 United States 158,805 208,466 257,757 9,009 21,423 58,396 Rest of Americas 4,244 4,876 9,791 2,145 2,235 2,592 Total Americas 163,049 213,342 267,548 11,154 23,658 60,988 Japan 7,518 11,019 14,476 1,840 2,424 4,230 Rest of Asia-Pacific 20,355 12,464 12,790 14,217 7,693 6,521 Total Asia-Pacific 27,873 23,483 27,266 16,057 10,117 10,751 1,019,657 1,034,217 997,052 203,690 259,498 295,296 (1)Europe, Middle East, Africa(2)Figures of the Individual Financial Statements Employees as of December 31 Depreciation in full-time equivalents 2003 2002 2001 € (000) € (000) € (000) 2003 2002 2001 Germany 105,797 92,509 86,419 13,026 12,580 12,026 Rest of EMEA(1) 27,895 31,513 32,638 6,808 6,655 6,412 Total EMEA 133,692 124,022 119,057 19,834 19,235 18,438 United States 24,022 31,773 29,674 4,621 4,885 5,191 Rest of Americas 2,673 4,009 5,934 1,435 1,426 1,535 Total Americas 26,695 35,782 35,608 6,055 6,311 6,726 Japan 4,587 5,093 4,760 1,350 1,248 1,137 Rest of Asia-Pacific 5,038 6,909 9,636 2,370 2,003 2,109 Total Asia-Pacific 9,625 12,002 14,396 3,720 3,251 3,246 170,012 171,806 169,061 29,610 28,797 28,410 (1)1)Europe, Middle East, Africa Employees as of December 31, Depreciation in full-time equivalents 2004 2003 2002 2004 2003 2002 € (000) € (000) € (000) Germany 109,714 105,797 92,509 13,525 13,026 12,580 Rest of EMEA1) 24,862 27,895 31,513 7,133 6,808 6,655 Total EMEA 134,576 133,692 124,022 20,658 19,834 19,235 United States 18,211 24,022 31,773 5,143 4,621 4,885 Rest of Americas 1,985 2,673 4,009 1,541 1,435 1,426 Total Americas 20,196 26,695 35,782 6,684 6,056 6,311 Japan 3,778 4,587 5,093 1,340 1,350 1,248 Rest of Asia-Pacific 5,916 5,038 6,909 3,523 2,370 2,003 Asia-Pacific 9,694 9,625 12,002 4,863 3,720 3,251 164,466 170,012 171,806 32,205 29,610 28,797 1) Europe, Middle East, Africa The majority of research and development costs are incurred in Germany as SAP AG has title to the majority of internally developed software. As of December 31, 2003,2004, approximately 68.4%63.2% of the research and development personnel are located in Germany, 8.5%10.0% in the rest of EMEA, 10.9%9.4% in the United States, 1.2%1.3% in the rest of the Americas and 11%16.1% in the Asia-Pacific region.Six groups of industry sectors generated the following total sales revenues for the year ended December 31: Total revenue by industry sectors Software revenues by industry sectors1) 2003 2002 2001 2004 2003 2002 2004 2003 2002 € (000) € (000) € (000) € (000) € (000) € (000) € (000) € (000) € (000) Process industries 1,381,279 1,537,033 1,524,330 1,469,136 1,381,279 1,537,033 489,024 404,409 469,992 Discrete industries 1,659,334 1,764,154 1,807,468 1,807,871 1,659,334 1,764,154 550,444 496,127 490,304 Consumer industries 1,243,809 1,299,694 1,186,839 1,349,825 1,243,809 1,299,694 426,547 359,958 412,353 Service industries 1,664,525 1,765,903 1,849,741 1,673,901 1,664,525 1,765,903 455,054 525,061 563,470 Financial services 474,135 514,760 448,229 519,115 474,135 514,760 197,511 172,544 176,457 Public services 601,524 531,294 524,197 694,645 601,524 531,294 242,432 189,492 178,258 7,024,606 7,412,838 7,340,804 7,514,493 7,024,606 7,412,838 2,361,012 2,147,591 2,290,834 F-561) Based on actual customer assignment. The following table presents software revenues allocated to specific software solutions including revenues from integrated solution contracts, which are allocated based on customer usage surveys: 2003 2002 2001 € (000) € (000) € (000) mySAP SCM 477,131 463,966 582,892 mySAP CRM 440,121 472,966 444,918 mySAP PLM 156,043 167,988 195,963 mySAP Business Intelligence/ mySAP Enterprise Portal/ mySAP SRM/Marketplaces 273,075 258,981 415,922 mySAP Financials/ mySAP Human Resources 801,221 926,933 940,823 2,147,591 2,290,834 2,580,518 2004 2003 2002 € (000) € (000) € (000) Enterprise Resource Planning (ERP) 989,972 801,221 926,933 Supply Chain Management (SCM) 479,993 477,131 463,966 Customer Relationship Management (CRM) 501,007 440,121 472,966 Product Lifecycle Management (PLM) 166,924 156,043 167,988 Business Intelligence / Enterprise Portal / SRM / Marketplaces n/a 273,075 258,981 SRM 147,091 n/a n/a Other 76,025 n/a n/a 2,361,012 2,147,591 2,290,834 Beginning in 2004, the Company changed its usage surveys for determining software revenues by solution. The usage surveys no longer include certain technology components, including Business Intelligence and Portals since all technology components are now integrated with SAP NetWeaver. Accordingly, prior year comparable figures are not available for certain solutions using the new method. (35)Board of Directors(34) BOARD OF DIRECTORSEXECUTIVE BOARD EXECUTIVE BOARD Membership on supervisory boards and other comparable governing bodies of enterprises, other than subsidiaries of the Company, in Germany and other countries, on December 31, 20032004(1)Prof. Dr. Henning Kagermann
CEO
Overall responsibility for SAP’s strategy and business development, marketing, global communications, consulting, customer development, Business Solutions Group Financial & Public Services Supervisory Board, Deutsche Bank AG, Frankfurt am Main, Germany
Supervisory Board, DaimlerChrysler Services (debis) AG, Berlin,
Germany
Supervisory Board, Münchener
Rückversicherungs-Gesellschaft AG, Munich, GermanyShai Agassi
Development of the integration and applicationtechnology platform
SAP NetWeaver, mySAP SRMSupplier Relationship Management, SAP
Business One, and SAP xApps Léo Apotheker
Global Field Operations
(sales, consulting, education) Board of Directors, Enigma, Inc., Burlington, Massachusetts, United States Dr. Werner Brandt
Chief Financial Officer Supervisory Board, LSG Lufthansa Service Holding AG, Neu-Isenburg, Germany Prof. Dr. Claus E. Heinrich
Business Solutions Group
Manufacturing Industries,
human resources, labor relations Gerhard Oswald
Global support, IT infrastructure Dr. Peter Zencke
Development organization of SAP’s Enterprise Services platform, coordination ofArchitecture and Platform, global research activities, and development labs Supervisory Board, SupplyOn AG, Hallbergmoos, Germany Supervisory Board, SuSE Linux AG, Nuremberg, Germany (until January 12, 2004)
On March 1st, 2005, SAP announced a realignment of its management structure with immediate effect to reinforce the Company’s growth strategy and better serve its customers. The SAP Executive Board members’ responsibilities are now aligned along the SAP solutions value chain — spanning innovation, research and development, production, services, marketing, training, consulting, and sales. Following along this value chain, Peter Zencke is responsible for research and breakthrough innovation including the application development of Business Process Platform (BPP) as well as new solutions based on it. Shai Agassi is responsible for all software and solution development of existing products, including SAP NetWeaver as an integration and technology platform. He is also responsible for the Business Solution Groups, which deliver SAP’s portfolio of 28 industry-specific solutions and cross-industry applications. Shai Agassi is also responsible(1) Memberships on supervisory boards and comparable governing bodies of subsidiaries and changes in other membership that occurred during the year are shown in the financial statements of SAP AG, which can be obtained from the Company upon request. F-57F-60for product and industry marketing. In addition to his existing function as head of Global Human Resources, Claus Heinrich now manages all SAP’s research and development centers around the world and is responsible for final production and quality assurance of SAP software and the internal security and IT organizations. Gerhard Oswald continues to lead Global Service & Support. Léo Apotheker retains responsibility for global sales, as well as field services (consulting and training), but also takes over responsibility for global marketing. Werner Brandt remains Chief Financial Officer.SUPERVISORY BOARD EXTENDED MANAGEMENT BOARDLeslie HaymanGlobal SAP Human ResourcesWolfgang Kemna(up to January 30, 2004)Global Sales Operations/ Global InitiativesKarl-Heinz HessTechnology Platform SAP NetWeaverPeter J. KirschbauerBusiness Solutions Group Services IndustriesMartin J. HomlishGlobal MarketingKlaus Kreplin(from February 12, 2003)Technology Platform SAP NetWeaverF-58SUPERVISORY BOARD Membership on other supervisory boards and comparable governing bodies of enterprises other than the Company, in Germany and other countries on December 31, 20032004Prof. Dr. h.c. mult. Hasso Plattner(2), (4), (5), (7)
Chairperson
Chairman of the Supervisory Board Helga Classen(1), (4), (7)
Deputy Chairperson
Development architect Pekka Ala-Pietilä(5)
President Nokia Corporation, Espoo, Finland Willi Burbach(1), (4), (5)
Developer Prof. Dr. Wilhelm Haarmann(2), (3), (7)
Attorney-at-law, certified public auditor, certified tax advisor
Managing Partner, Haarmann, Hemmelrath & Partner, Frankfurt am Main, Germany Supervisory Board, Häussler AG, Stuttgart, Germany (until January 13, 2004)
Supervisory Board, Aareon AG (formerly Depfa IT Services), Mainz, Germany
Supervisory Board, Vodafone Deutschland GmbH, Düsseldorf, GermanyDietmar Hopp(6)
Managing Director, Dietmar Hopp
Stiftung GmbH,
Walldorf, Germany Bernhard Koller(1), (3)
Manager of idea management Christiane Kuntz-Mayr(1), (5), (7)
Development manager Lars Lamadé(1), (6) Human resources consultantRisk Manager Service & Support Dr. Gerhard Maier(1), (2), (6)
Development project manager F-59F-61 Membership on other supervisory boards and comparable governing bodies of enterprises other than the Company, in Germany and other countries on December 31, 2004 Dr. h.c. Hartmut Mehdorn(4)
Chairman of the Executive Board, Deutsche Bahn AG, Berlin, Germany Supervisory Board, DB Station & Service AG,
Frankfurt am Main, Germany
Supervisory Board, DB Reise & Touristik AG,
Frankfurt am Main, Germany (until April 19, 2004)
Supervisory Board, DB Regio AG,
Frankfurt am Main, Germany (until April 19, 2004)
Supervisory Board, Stinnes AG, Berlin, Germany,
Supervisory Board, DB Personenverkehr GmbH, Berlin (from April 15, 2004) Supervisory Board, DB Netz AG,
Frankfurt am Main, Germany
Supervisory Board, DEVK Deutsche Eisenbahn Versicherung
Lebensversicherungsverein a.G.,
Cologne, Germany
Supervisory Board, DEVK Deutsche Eisenbahn Versicherung
Sach- und HUK-Versicherungsverein a.G.,
Cologne, Germany
Supervisory Board, Dresdner Bank AG,
Frankfurt am Main, Germany (from April, 8, 2003)
Supervisory Board, Bayerische
Magnetbahnvorbereitungsgesellschaft mbH,
Munich, Germany
Advisory Council, Railog GmbH,
Kriftel, Germany
Supervisory Board, Projektgesellschaft METRORAPID mbH, Duisburg, Germany (until March 31, 2004)
Advisory Council, DB Akademie GmbH,
Berlin, Germany (from July 2003)Prof. Dr. Dr. h.c. mult. August- WilhelmAugust-Wilhelm Scheer(5),(6)
Director of the Institute for Information Systems at the German Research Center of Artificial Intelligence (DFKI), Saarbrücken, Germany Supervisory Board, IDS Scheer AG,
Saarbrücken, Germany
Supervisory Board, abaXX Technology AG,
Stuttgart, Germany (until June 30, 2004)
Supervisory Board, imc information multimedia communication AG, Saarbrücken, Germany
Board of Trustees, Hasso Plattner Stiftung für Software-systemtechnik,Softwaresystemtechnik, Potsdam, GermanyDr. Barbara Schennerlein(1), (7) Principle solutionPrincipal consultant Stefan Schulz(1), (3), (5) Solution architectDevelopment Project Manager Dr. Dieter Spöri(7)
Head of Corporate Representation Federal Affairs, DaimlerChrysler AG, Berlin, Germany Advisory Council, Contraf Nicotex Tobacco GmbH, Heilbronn, Germany Membership on other supervisory boards and comparable governing bodies of enterprises other than the Company, in Germany and other countries on December 31, 2004 Dr. h.c. Klaus Tschira(3) Managing Director, Klaus Tschira Foundation gGmbH, Heidelberg, Germany Supervisory Board, SRH Learnlife AG, Heidelberg, Germany Managing Director, Klaus Tschira Foundation gGmbH, Heidelberg, Germany Member of the Senate, Max-Planck-Gesellschaft
zur Förderung der Wissenschaften e.V.,
Munich, Germany(1) Elected by the employees (2) Member of the Company’s Compensation Committee (3) Member of the Company’s Audit Committee (4) Member of the Company’s Mediation Committee (5) Member of the Company’s Technology Committee (6) Member of the Company’s Finance and Investment Committee (7) Member of the Company’s General Committee F-60Remuneration The total remuneration of the SupervisoryExecutive Board Under SAP AG’s Articles of Incorporation the members of the Supervisory Board shall, in additionfor fiscal year 2004 amounted to the reimbursement of their expenditures, receive remuneration composed of a fixed element and a variable element. The variable element is dependent upon the distributed dividends. Both the€15,180 thousand. This amount includes€3,078 thousand fixed and€12,102 thousand variable remuneration. In addition, during fiscal year 2004 the variable remuneration are higher forExecutive Board members received 218,000 stock options under the chairperson and the deputy chairperson than for the other members.Subject to the adoption of the dividend resolution by the shareholders at the Annual General Shareholders’ Meeting on May 6, 2004,12, 2005, the total annual remunerations of the Supervisory Board members for the year ended December 31, 2003, are as follows: 2003 Fixed Variable 2002 remuneration remuneration Total € (000) € (000) € (000) € (000) Prof. Dr. h.c. mult. Hasso Plattner (Chairperson) (Member from May 9, 2003) 38.7 38.7 77.4 0.0 Helga Classen (Deputy chairperson) 43.5 43.5 87.0 78.3 Willi Burbach 29.0 29.0 58.0 52.2 Prof. Dr. Wilhelm Haarmann 29.0 29.0 58.0 52.2 Dietmar Hopp (Chairperson until May 9, 2003) 41.1 41.1 82.2 104.4 Bernhard Koller 29.0 29.0 58.0 52.2 Christiane Kuntz-Mayr 29.0 29.0 58.0 34.8 Klaus-Dieter Laidig (Member up to May 9, 2003) 12.1 12.1 24.2 52.2 Lars Lamadé 29.0 29.0 58.0 34.8 Dr. Gerhard Maier 29.0 29.0 58.0 52.2 Dr. h.c. Hartmut Mehdorn 29.0 29.0 58.0 52.2 Pekka Ala-Pietilä 25.0 25.0 50.0 30.0 Prof. Dr. Dr. h.c. mult. August-Wilhelm Scheer 29.0 29.0 58.0 34.8 Dr. Barbara Schennerlein 29.0 29.0 58.0 52.2 Stefan Schulz 29.0 29.0 58.0 34.8 Alfred Simon (Member up to May 3, 2002) 0.0 0.0 0.0 21.8 Dr. Dieter Spöri 29.0 29.0 58.0 52.2 Dr. h.c. Klaus Tschira 29.0 29.0 58.0 52.2 Total 508.4 508.4 1,016.8 843.5 The total annual remuneration of the Supervisory Board for the year ended December 31, 2002 amounted to€ 843.5875 thousand. This amount includes€ 468.6437.5 thousand fixed and€ 374.9437.5 thousand variable remuneration.Remuneration of the Executive Board The members of the Executive Board receive salaries, stock-based awards under SAP’s stock-based compensation plans and certain non-cash benefits for their services. Details and amounts of the remuneration are determined by the Supervisory Board’s Compensation Committee. The Executive Board members’ salaries consist of a fixed element and a variable bonus. The variable bonus depends on the achievement of the Company’s overall target, “Operating income before stock-based compensation and acquisition-related charges”.F-61For the fiscal years 2003 and 2002, the members of the Executive Board received the following remuneration (including salaries, cash value of non-cash benefits and insurance premiums): 2003 2002 € (000) € (000) Prof. Dr. h.c. mult. Hasso Plattner (Co-Chairman and CEO)
(Member until May 9, 2003) 1,450 1,748 Prof. Dr. Henning Kagermann (CEO) 3,383 1,301 Shai Agassi (Member from April 17, 2002) 2,200 666 Léo Apotheker (Member from August 1, 2002) 2,246 379 Dr. Werner Brandt 1,864 722 Prof. Dr. Claus E. Heinrich 2,260 919 Gerhard Oswald 2,252 920 Dr. Peter Zencke 2,271 929 17,926 7,584 thereof fixed remuneration 3,371 3,557 thereof variable remuneration 14,555 4,027 The amounts stated for members who joined or left the Executive Board in the course of 2003 only represent their remuneration for the period of their nomination. The difference between the total remuneration for 2002 and 2003 results, among other factors, from a higher variable remuneration in 2003. The figures are also impacted by the increase in the number of members from six to eight in 2002 and a decrease in the number of members from eight to seven in 2003.In addition to the compensation above, Shai Agassi received in 2003€ 860 thousand (2002:€ 7,030 thousand) in cash which resulted from stock-based compensation entitlement that he had received as a member of the management of TopTier Software, Inc. prior to the acquisition of TopTier by SAP. Upon the acquisition of TopTier in 2001, SAP had agreed to pay out these entitlements to all former employees and members of management of TopTier who continue to be actively employed by SAP after a certain vesting period.During the fiscal year 20032004 the members of the Executive Board received the following stock options under the SAP SOP 2002:StockoptionsProf. Dr. Henning Kagermann (CEO)80,000Shai Agassi60,000Léo Apotheker30,000Dr. Werner Brandt30,000Prof. Dr. Claus E. Heinrich45,000Gerhard Oswald45,000Dr. Peter Zencke45,000335,000The fair value at the granting date of the stock options grantedpension payments to theformer Executive Board members waswere€ 28.74 per option. The contractual life of the stock options is five years.247 thousand (2003:€F-62During the fiscal year 2003, the members of the Executive Board exercised awards granted under the LTI 2000 Plan as follows: Stock options Convertible bonds Weighted average Weighted average exercise price exercise price Number of per option Number of per bond stock options (€) stock options (€) Gerhard Oswald 22,626 77.84 — — Dr. Peter Zencke 15,851 78.59 — — 38,477 78.15 — — As of December 31, 2003, the members of the Executive Board held the following stock options granted under the LTI 2000 Plan: Exercisable as of Not exercisable as of December 31, 2003 December 31, 2003 Total Remaining Remaining Remaining contractual contractual contractual Exercise Number of life Number of life Number of life price (€) options (in years) options (in years) options (in years) Prof. Dr. h.c. mult. Hasso Plattner (Co-Chairman and CEO) (Member until May 9, 2003) — — — — — — Prof. Dr. Henning Kagermann
(CEO) 67.33 18,501 6.14 9,531 6.14 28,032 6.14 81.82 12,993 7.14 26,382 7.14 39,375 7.14 Shai Agassi — — — — — — — Léo Apotheker 101.08 — — 21,875 8.14 21,875 8.14 Dr. Werner Brandt 81.82 2,062 7.14 4,188 7.14 6,250 7.14 Prof. Dr. Claus E. Heinrich 67.33 13,551 6.14 6,981 6.14 20,532 6.14 81.82 9,075 7.14 18,425 7.14 27,500 7.14 Gerhard Oswald 67.33 — — 6,981 6.14 6,981 6.14 81.82 — — 18,425 7.14 18,425 7.14 101.08 — — 31,250 8.14 31,250 8.14 Dr. Peter Zencke 67.33 — — 6,981 6.14 6,981 6.14 81.82 — — 18,425 7.14 18,425 7.14 56,182 169,444 225,626 The strike prices for stock options listed above reflect the prices that an Executive Board member would have to pay for one SAP common share upon exercising the stock option on December 31, 2003. The strike prices vary based upon the outperformance of the SAP common share price appreciation versus the appreciation of the Goldman Sachs Software Index.F-63As of December 31, 2003, the members of the Executive Board held the following convertible bonds granted under the LTI 2000 Plan: Exercisable as of Not exercisable as of December 31, 2003 December 31, 2003 Total Number Remaining Number Remaining Number Remaining of contractual of contractual of contractual Exercise convertible life convertible life convertible life price (€) bonds (in years) bonds (in years) bonds (in years) Prof. Dr. h.c. mult. Hasso Plattner
(Co-Chairman and CEO)
(Member until May 9, 2003) — — — — — — — Prof. Dr. Henning Kagermann
(CEO) 290.32 14,800 6.14 7,625 6.14 22,425 6.14 191.25 10,395 7.14 21,105 7.14 31,500 7.14 151.50 — — 90,000 8.14 90,000 8.14 Shai Agassi — — — — — — — Léo Apotheker 334.67 15,741 6.14 8,109 6.14 23,850 6.14 191.25 9,900 7.14 20,100 7.14 30,000 7.14 151.50 — — 17,500 8.14 17,500 8.14 Dr. Werner Brandt 191.25 1,650 7.14 3,350 7.14 5,000 7.14 151.50 — — 30,000 8.14 30,000 8.14 Prof. Dr. Claus E. Heinrich 290.32 10,840 6.14 5,585 6.14 16,425 6.14 191.25 7,260 7.14 14,740 7.14 22,000 7.14 151.50 — — 50,000 8.14 50,000 8.14 Gerhard Oswald 290.32 10,840 6.14 5,585 6.14 16,425 6.14 191.25 7,260 7.14 14,740 7.14 22,000 7.14 151.50 — — 25,000 8.14 25,000 8.14 Dr. Peter Zencke 290.32 10,840 6.14 5,585 6.14 16,425 6.14 191.25 7,260 7.14 14,740 7.14 22,000 7.14 151.50 — — 50,000 8.14 50,000 8.14 106,786 383,764 490,550 The strike prices for convertible bonds listed above reflect the prices that an Executive Board member would have to pay for one SAP common share upon conversion of the bond. The strike prices are fixed and equal the market price of a common share as quoted on the day immediately preceding the granting of the convertible bond.F-64As of December 31, 2003, the members of the Executive Board held the following stock options granted under the SAP SOP 2002: Exercisable as of Not exercisable as of December 31, 2003 December 31, 2003 Total Remaining Remaining Remaining contractual contractual contractual Exercise Number of life Number of life Number of life price (€) options (in years) options (in years) options (in years) Prof. Dr. h.c. mult. Hasso Plattner
(Co-Chairman and CEO)
(Member until May 9, 2003) — — — — — — Prof. Dr. Henning Kagermann
(CEO) 90.37 — — 80,000 4.16 80,000 4.16 Shai Agassi 90.37 — — 30,000 4.16 30,000 4.16 99.13 — — 30,000 4.67 30,000 4.67 Léo Apotheker 90.37 — — 30,000 4.16 30,000 4.16 Dr. Werner Brandt 90.37 — — 30,000 4.16 30,000 4.16 Prof. Dr. Claus E. Heinrich 90.37 — — 45,000 4.16 45,000 4.16 Gerhard Oswald 90.37 — — 45,000 4.16 45,000 4.16 Dr. Peter Zencke 90.37 — — 45,000 4.16 45,000 4.16 — 335,000 335,000 The exercise price for one common SAP AG share shall be 110% of the base price. The base price for any stock option shall be the arithmetic mean of the SAP share closing auction price in the Frankfurt stock exchange Xetra trading system (or its successor system) over the five business days immediately before the Issue Date of that stock option. These provisions notwithstanding, the exercise price shall be not less than the closing auction price on the day before the Issue Date. During 2003 and as of December 31, 2003 the Company did not provide any loans, warranties or guarantees to members of the Executive Board and Supervisory Board.20032004, for former Executive Board members was€ 1,66210.819 thousand (2002:(2003:€ 1,50710.255 thousand).Shareholdings SAP did not grant any compensation advance or credit to, or enter into any commitment for the benefit of, any member of the Executive Board or Supervisory Board in fiscal year 2004, or in 2003, or in 2002. On December 31, 2004, members of the Executive Board held a total of 23,971 shares, members of the Supervisory Board and Executive Board The numberheld a total of SAP AG shares owned by Hasso Plattner (Chairman of the Supervisory Board), Dietmar Hopp (Member of the Supervisory Board) and Klaus Tschira (Member of the Supervisory Board), their family members and related entities are disclosed in Note 23. All other members of the Supervisory Board and the Executive Board own less than 1% of SAP AG106,789,190 shares.F-65In 2003, SAP received from members of the Supervisory Board and Executive Board and spouses, registered partners for life, parents, and children of Board members the following notifications under section 15a of the German Securities Trade Act regarding acquisitions and sales of SAP shares (directors dealing): Transactions in SAP shares (WKN 716460/ISIN DE 0007 164 600) Number Price Notifying party Transaction date Transaction of shares per share (€) Helga Classen December 2, 2003 Sale 440 130.50 December 2, 2003 Exercise of subscription right 250 51.62 Daniel Hopp September 11, 2003 Sale 17,950 117.75 September 12, 2003 Sale 34,897 117.80 October 16, 2003 Sale 150,000 126.11 October 17, 2003 Sale 67,500 126.24 October 21, 2003 Sale 57,250 123.49 October 30, 2003 Sale 62,500 124.86 October 31, 2003 Sale 109,903 123.57 Oliver Hopp September 11, 2003 Sale 17,950 117.75 September 12, 2003 Sale 34,897 117.80 October 16, 2003 Sale 150,000 126.11 October 17, 2003 Sale 67,500 126.24 October 21, 2003 Sale 57,250 123.49 October 30, 2003 Sale 62,500 124.86 October 31, 2003 Sale 109,903 123.57 Gerhard Oswald September 10, 2003 Exercise of subscription right 9,075 87.07 September 10, 2003 Sale 22,626 117.70 September 10, 2003 Exercise of subscription right 13,551 71.65 Kristina Plattner February 7, 2003 Purchase 20,000 86.10 February 10, 2003 Purchase 20,000 84.71 February 11, 2003 Purchase 8,000 86.43 February 12, 2003 Purchase 1,250 86.62 February 13, 2003 Purchase 15,750 86.12 Stefanie Plattner February 7, 2003 Purchase 20,000 86.10 February 10, 2003 Purchase 20,000 84.71 February 11, 2003 Purchase 8,000 86.43 February 12, 2003 Purchase 1,250 86.62 February 13, 2003 Purchase 15,750 86.12 Dr. Peter Zencke October 30, 2003 Sale 15,851 125.34 October 30, 2003 Exercise of subscription right 6,776 69.97 October 30, 2003 Exercise of subscription right 9,075 85.02 (36) Related Party Transactions(35) RELATED PARTY TRANSACTIONS Certain board members of SAP AG currently held or have held within the last year positions of significant responsibility with other entities as presented in Note 35.34. The Company has relationships with certain of these entities in the ordinary course of business, whereby it buys and sells a wide variety of services and software at arm’s length. August-Wilhelm Scheer is the major shareholder and head of the supervisory boardSupervisory Board of IDS Scheer AG, a German software and IT services company. Until early 2004, SAP owned a minority stake in IDS Scheer (approximately(approximately 2.5% of IDS Scheer’s shares outstanding as of December 31, 2003). SAP sold this stake in February 2004. IDS Scheer and SAP have relationships in the ordinary course of business and at arm’s length, whereby mainly IDS Scheer provides services for SAP. In October 2003, SAP and IDS Scheer entered into a strategic relationship to jointly develop and market a software solution for Business Process Management (BPM).F-66As part of this strategic relationship SAP both acquired and licensed certain software relatedsoftware-related intellectual property rights from IDS Scheer. In February 2002, SAP started negotiations with DCW Software AG & Co. KG (“DCW”) with regard to a possible investment of SAP in DCW. SAP acquired a controlling interest in DCW in November 2003 and increased this stake to 100% in January 2004. At the time of the initial negotiations DCW had a credit facility agreement with Fancourt Flugcharter GmbH & Co KG, a company wholly owned by Hasso Plattner. There were no credit amounts drawn by DCW under this facility when SAP started the investment negotiations. The credit facility agreement was terminated without further drawings in May 2003. After his move from SAP’s Executive Board to SAP’s Supervisory Board, Hasso Plattner entered into a contract with SAP AG under which he provides consulting services for SAP. The contract is expenses-only. Therefore SAP only incurred expenses for reimbursements of out-of-pocket expenses incurred by Hasso Plattner unterunder this contract. Wilhelm Hasso Plattner is the sole proprietor of H.P. Beteiligungs GmbH, which itself holds 90% of Bramasol, Inc., Palo Alto, United States. Bramasol is an SAP partner, with which SAP achieved revenues worth the equivalent of€1.9 million in fiscal year 2004. SAP received services from Bramasol worth€57 thousand. Haarmann Hemmelrath (HH or “the firm”) is an international group of advisory firms in the fields of legal, tax, audit, and management consultancy services. The firm has more than 1,000 employees in 22 offices worldwide. HH provided valuation services, tax, and legal counsel services for entities of the SAP Group. The total amount charged to SAP for those services in 2004 was€1.6 million (2003:€0.5 million; 2002:€1.3 million). SAP was informed by HH that revenues generated with SAP represented approximately 1% of HH’s revenue of the respective years. Additionally HH is a partnercustomer of SAP. Amounts paid by HH to SAP for products and services were€2 thousand,€20 thousand and€200 thousand in Haarmann, Hemmelrath & Partner (“HHP”), which infrequently serves as special German tax counsel, counsels SAP with regard to other legal matters,the years 2004, 2003, and provides expert valuation services for SAP. The fees paid for these services have historically been immaterial, both in relation to HHP’s total revenue and in relation to SAP’s total expenses for such services. At no point in the years ended December 31, 2004, 2003, or 2002, did the Company held Note receivables fromgrant loans to any member of the Executive Board and Supervisory Board. During the years ended December 31, 2004, 2003, 2002 and 2001,2002, there were no significant transactions between the Company and the major shareholders as outlined in Note 23. In 2000, SAP commenced a strategic alliance relationship with Commerce One to jointly develop, market, and sell Internet-based software solutions. In connection with this relationship, SAP in its fiscal year 2000 acquired common stock of Commerce One and in 2001 increased its equity investment in the common stock of Commerce One to the point of exercising significant influence. As part of the acquisition arrangement SAP agreed to certain limitations that restrict SAP’s ability to transfer its common shares of Commerce One, to increase its ownership interest and to engage in certain take-over transactions involving Commerce One without approved by Commerce One’s Board of Directors.One. In 2002, SAP named a non-voting observer to attend Commerce One’s Board of Directors meetings. The cooperation agreements between the two companies were amended several times between 2001 and 2003. In 2003, SAP effectively ceased all transactions under the cooperation arrangements and ceased the jointly developed products or replaced such products with SAP products. As discussed in Note 4, the carrying value of SAP’s investment in Commerce One was reduced to zero as of December 31, 2002, and remained at zero throughout 2003.2003 and 2004. For the yearyears ended December 31, 2004 and 2003, transactions with Commerce One accounted for less than 1% of the Company’s total revenues and cost of revenues. For the year ended December 31, 2002 and 2001, transactions with Commerce One accounted for approximately 1% of the Company’s total revenues and less than 1% of the Company’s cost of revenues. In 2004, Commerce One filed for bankruptcy, sold all of its assets, and was renamed CO Liquidation, Inc. Transactions involving Commerce OneCO Liquidation Inc. are expected to continue to be immaterial in periods beyond 2003.2004. As discussed in Note 16, SAP has issued loans to employees other than to Executive and Supervisory Board members with aggregate outstanding balances of€42.8 million and€37.8 million at December 31, 2004, and 2003, respectively. Loans granted to employees primarily consist of interest-free or below market rate building loans which SAP discounts for financial reporting purposes based on prevailing market rates. SAP’s default experience on loans to employees has been insignificant. There have been no loans to employees or executives to assist them in exercising stock options.(37) German Code of Corporate GovernanceF-64(36) GERMAN CODE OF CORPORATE GOVERNANCE The German federal government published the German Code of Corporate Governance in February 2002. The Code contains statutory requirements and a number of recommendations and suggestions. Only the legal requirements are binding for German companies. With regard to the recommendations, the German Stock Corporation Act, section 161, requires that listed companies publicly state every year the extent to which they comply with them. Companies can deviate from the suggestions without having to make any public statements. In 2004, 2003, and 2002, the Executive Boards and Supervisory Boards both of SAP AG and SAP’s publicly traded subsidiary SAP Systems Integration AG issued the required compliance statements. These statements are available on the websitesWeb sites of the two companies.(38) Subsequent Event(37) SUBSEQUENT EVENTS On March 1, 2005, SAP Systems Integration AG, Dresden (“announced a realignment of its management structure with immediate effect to reinforce the Company’s growth strategy and better serve its customers. For further information see Note 34. In January 2005, SAP SI”) is currentlyacquired Tomorrow Now, Inc., a majority-owned (70.3%)maintenance provider based in Bryan, Texas. The acquisition did not have a material impact on the Company’s consolidated subsidiaryfinancial statements. On February 28, 2005, SAP entered into a definitive merger agreement to acquire all of the Company.outstanding shares of Retek, Inc. (“Retek”), a provider of software solutions and services to the retail industry, for US$8.50 per share. The aggregate purchase price, including the cash settlement of Retek’s outstanding share-based awards and net of cash acquired, was expected to be approximately US$394 million. On March 23, 2004,8, 2005, Oracle Corporation (“Oracle”) made a hostile tender offer to acquire Retek’s outstanding shares at a price of US$9 per share and announced that it had accumulated approximately 10% of Retek’s outstanding shares already. On March 17, 2005, SAP increased its offer to US$11 per Retek share and Oracle increased its offer to US$11.25 per share. On March 22, 2005, SAP indicated that it would not provide an increased offer for Retek’s outstanding shares. Retek then terminated the Company announceddefinitive merger agreement with SAP and SAP withdrew its intention to bidtender offer for all remainingRetek.F-67F-65outstanding shares (approximately 10,727,521) of SAP SI, which are publicly traded, for€20.40 per share. The anticipated purchase price for those shares together with anticipated costs associated with the transaction (approximately€230 million) is expected to be paid in cash. The offer is expected to be completed in the first half of 2004, and will be accounted for as the acquisition of minority interest. Accordingly, the purchase price will be allocated to the fair value of the additional interest in the net assets of SAP SI acquired, with the excess, if any, allocated to goodwill. The Company believes the acquisition of the additional shares of SAP SI will allow the Company to strengthen its global capabilities for IT-strategy consulting offerings.F-68Walldorf, February 27, 2004March 8, 2005SAP AktiengesellschaftSysteme, Anwendungen, Produkte in der DatenverarbeitungWalldorf, BadenExecutive BoardKagermann Agassi Apotheker Brandt Heinrich Oswald ZenckeF-69F-66SCHEDULE IIValuation and Qualifying Accounts and ReservesYears ended December 31, 2004, 2003 2002 and 2001€ (000)2002 Exchange Rate Beginning Charged Effects and Ending Description Balance 2003 to Earnings Write-offs Other Changes Balance 2003 Allowances for doubtful accounts: 92,511 6,969 (*) (22,939 ) (5,530 ) 71,011 Exchange Rate Beginning Charged Effects and Ending Description Balance 2002 to Earnings Write-offs Other Changes Balance 2002 Allowances for doubtful accounts: 110,269 7,621 (*) (21,222 ) (4,157 ) 92,511 Exchange Rate Beginning Charged Effects and Ending Description Balance 2001 to Earnings Write-offs Other Changes Balance Allowances for doubtful accounts: 76,223 52,728 (*) (19,184 ) 502 110,269 Year ended December 31, 2004 2003 2002 € (000) Balance at beginning of year 71,011 92,511 110,269 Charged to costs and expenses (*) 1,742 6,969 7,621 Amounts written off (7,700 ) (22,939 ) (21,222 ) Currency translation and other changes (1,691 ) (5,530 ) (4,157 ) Balance at end of year 63,362 71,011 92,511 (*) includes the provision of bad debt expense based on aging charged (credited) to other operating income/(expense) of€ 5,368(1,791) thousand,€ 5,2885,368 thousand, and€ (14,706)5,288 thousand in 2004, 2003, and 2002, and 2001 respectively.