Software AG

2. Quarterly Report 2008



Other disclosures

Seasonal influences

Revenues and pre-tax earnings per quarter were as follows in fiscal 2007:

in € thousands Q1 2007 Q2 2007 Q3 2007 Q4 2007 2007
Total revenue 172,581 167,093 157,797 186,544 684,015
in % of annual revenue 25.2 24.4 23.1 27.3 100.0
Earnings before taxes 28,163 37,946 30,412 40,570 137,091
in % of net income for the year 20.5 27.7 22.2 29.6 100.0


In order to show seasonal influences, the revenues of SPL Software Ltd., Israel from January 1, 2007 through March 31, 2007 as well as the revenues of webMethods, Inc., USA from January 1, 2007 through May 24, 2007 were added to the revenues of the Software AG Group. Prior years showed a similar structure of revenues per quarter, which primarily reflects the purchasing behavior of our customers.

Pre-tax earnings show unadjusted values for the Software AG Group, excluding minority interests of acquired companies from the beginning of the year up to the date of acquisition. Because of the acquisitions of these companies and the cost synergies achieved during fiscal year 2007, the presentation does not reflect the normalized profit allocation. For this reason, no forward-looking statements can be derived from this profit allocation.

Given the forward-looking nature of these disclosures, the presentation of the previous year’s figures was omitted.

Contingent liabilities

in € thousands June 30, 2008 Dec. 31, 2007 June 30, 2007
Guarantees 12,922 15,337 11,577
Warranties 632 0 0
Other 1,426 1,341 5,339

14,980 16,678 16,916


The carrying amount of collateral received is €521 thousand (Q2 2007: €0 thousand).

Other financial commitments

The Company has entered into rent and lease agreements for buildings, land, computer and telephone equipment, and vehicles. The obligations under these agreements for their remaining non-cancelable terms up until the end of fiscal 2008 amount to €6,006 thousand (Q2 2007: €7,407 thousand). Obligations of €40,650 thousand exist for the period up until the end of fiscal year 2013 (Q2 2007: €41,090 thousand until the end of fiscal 2012), and obligations of €5,943 thousand for the period after fiscal 2013 (Q2 2007: €17,267 thousand for the period after fiscal 2012). The lease agreements are operating leases as defined in IAS 17.

Stock option plans and stock appreciation rights program

Software AG has different stock option plans for members of the Executive Board, officers, and employees of the Group. In the first half of 2008, in accordance with IFRS 2, personnel expenses of €880 thousand (H1 2007: €1,482 thousand) were recognized for stock option plans with optional fulfillment through equity instruments, of which €571 thousand related to the second quarter (Q2 2007: €97 thousand). In addition, personnel expenses recognized in the first half of 2008 for stock option plans with fulfillment through cash settlement amounted to €1,608 thousand (H1 2007: €0 thousand), of which €764 thousand related to the second quarter (Q2 2007: €0 thousand). In the first half of 2008, a total of 63,372 (H1 2007: 367,756) stock options were exercised from the second stock option plan, of which 27,359 were exercised in the second quarter (Q2 2007: 40,689). A total of 3,504 (H1 2007: 21,418) options were withdrawn in the first half of 2008, of which 3,002 (Q2 2007: 4,689) were exercised in the second quarter. A further total of 125,031 (H1 2007: 270,893) stock options issued to Executive Board members and officers under this plan is outstanding.

Another 14,500 (H1 2007: 0) stock options with an exercise price of €72.36 were issued to officers and employees in the first half of 2008 as part of the third stock price-based compensation plan; as in the previous year, no stock options from the third compensation plan were issued in the second quarter. In addition, a total of 35,190 (H1 2007: 0) stock options were withdrawn from officers and employees due to departure from the Company in the first half of 2008, of which 14,190 (Q2 2007: 0) were withdrawn in the second quarter. In addition, a total of 85,613 (H1 2007: 0) stock appreciation rights were withdrawn from members of the Executive Board, officers and employees due to departure from the Company in the first half of 2008, of which 85,613 (Q2 2007: 0) were withdrawn in the second quarter. Another 160,613 (H1 2007: 0) subscription rights granted as stock options were converted into stock appreciation rights in the first half of 2008, of which 85,613 (Q2 2007: 0) subscription rights granted as stock options were converted in the second quarter. Thus 751,000 (H1 2007: 0) subscription rights were granted as stock options and an additional 1,100,000 (H1 2007: 0) as stock appreciation rights from the third stock price-based compensation plan as of the end of the quarter.
A total of 388,717 (H1 2007: 0) stock options were not measured due to expected employee fluctuation.

Please refer to the 2007 Annual Report for further disclosures on the option plans.

Notes on Significant Business Events

1. Acquisition of the software division of Jacada Ltd., Israel
As of January 1, 2008, Software AG acquired business units and assets of Jacada Ltd., Israel. Through its acquisition of Jacada’s Application Modernization division, Software AG enhanced its product portfolio by adding new products for the modernization of user interfaces in applications that run on large and medium-sized systems. Jacada Ltd. is publicly listed on the Nasdaq (Nasdaq: JCDA).

Breakdown of purchase price
The purchase price paid for Jacada’s Application Modernization division was €17,665 thousand (US$26,000 thousand). The purchase price was paid on January 2, 2008. The cost of the business combination has been allocated provisionally in accordance with IFRS 3.62 as follows:

in € thousands

Fair value as of
January 01, 2008
Carrying amount prior
to acquisition
Intangible assets – customer base 15,195 0
Software 2,470 0
Carrying amount of the assets acquired
0
Cost of the business combination 17,665

Initial consolidation pursuant to IFRS 3.62
Because of the close proximity in time between the date of acquisition (January 1, 2008) and the balance sheet date of the half-yearly financial statements (June 30, 2008), the Application Modernization division acquired from Jacada was initially accounted for using provisional fair values.

Intangible assets – customer base
The Application Modernization Division acquired from Jacada generated annual revenue of approximately US$12 million in 2007. The achieved profit margin was higher than the Group average of Software AG. Software AG gained more than 200 corporate customers, primarily from the USA, as a result of this acquisition. For these reasons, a customer base was recognized as part of the initial accounting.

Software
The software that the Group has acquired is designed for the modernization of user interfaces in applications that run on large and medium-sized systems. It supplements Software AG’s product portfolio in the field of legacy modernization. Based upon a preliminary assessment, the software was valued at €2,470 thousand.

Contribution to revenue and earnings since acquisition on January 1, 2008
Since the date of acquisition on January 1, 2008, the Application Modernization division acquired from Jacada has contributed €1,545 thousand to Group revenues, of which €947 thousand related to the second quarter. The Application Modernization division contributed a negative €15 thousand to total Group net income since the date of acquisition, while in the second quarter of 2008 it contributed €92 thousand. As the Jacada software division has been completely integrated into Software AG, the contribution to Group net income for the year could be determined only by means of an estimate. As the date of acquisition was January 1, 2008, a presentation of these profit figures as if the acquisition had occurred at the beginning of fiscal 2008 can be omitted.

Expenses related to the acquisition of the Jacada software division
The customer base, which was identified as an asset in connection with the acquisition of Jacada’s Application Modernization division, will be amortized over a period of 10 years and the acquired software will be amortized over a period of 5 years. Total amortization in the first half of 2008 was €1,071 thousand, of which €567 thousand related to the second quarter. There were no other expenses connected with this acquisition, and no further expenses are expected.

2. Software AG also acquired the remaining minority interests of the following companies in the first half of 2008:

These acquisitions of remaining minority interests eliminated the need to report minority interests in equity and net income in the half-yearly consolidated financial statements as of June 30, 2008.

3. Earn-out payments for earlier acquisitions
Revenue-based earn-out payments of €951 thousand (Q2 2008: €463 thousand) for Software A.G. (Israel) Ltd. (previously Sabratec Ltd., Israel) and €332 thousand (Q2 2008: 0) for Casabac Technologies GmbH, Germany, were paid in the first half of 2008.

4. Currency translation effects
In the first half of 2008, the strong euro, particularly in relation to the US dollar, caused negative currency translation effects on Group revenues compared to the same period in the previous year in the amount of €22,046 thousand, €11,006 of this amount in the second quarter of 2008.

Employees

As of June 30, 2008, the effective number of employees (i.e., part-time employees taken into account on a pro-rata basis only) amounted to 3,427 (June 30, 2007: 3,719), 78.0 percent of whom were employed abroad (June 30, 2007: 79.5 percent). In absolute terms (i.e., part-time employees are taken fully into account), the Group employed 3,501 people (June 30, 2007: 3,841) at the end of the second quarter on June 30, 2008.

Supervisory Board

The term of office of Mr. Justus Mische, who had been a member of the Supervisory Board since December 9, 2002, and who was elected by the Annual Shareholders’ Meeting, ended with the end of the Annual Shareholders’ Meeting on April 29, 2008, as he had reached the age limit specified in the Articles of Association.

Mr. Willi Berchtold, Dipl. Oec., Chief Financial Officer, Controlling and Informatics at ZF Friedrichshafen AG, and residing in Überlingen, was elected by the Annual Shareholders’ Meeting on April 29, 2008 as a new member of the Supervisory Board.

Reorganization of the Executive Board

On April 29, 2008, the Supervisory Board approved a reorganization of the Executive Board. The sales organizations of the two business divisions, webMethods and ETS, have been placed under the joint direction of two Executive Board members with different regional responsibilities. Region West (North and South America, Western and Southern Europe), will be headed by Executive Board member Mark Edwards, previously Chief Operation Officer for the ETS division. Region East (Northern and Central Europe, Africa, Australia, and Asia) will be headed by David Broadbent, previously Chief Product Officer for the ETS Division, who directed sales in the Asia/Pacific region.

Dr. Peter Kürpick, who was previously responsible for R&D in the webMethods division, will in addition assume responsibility for R&D in the ETS division. Mr. David Mitchell resigned his office as member of the Executive Board on April 29, 2008. He had previously been responsible for sales in the webMethods business division.

Events after the balance sheet date

No significant events occurred between the end of the second quarter and the date of release of these quarterly financial statements by the Executive Board that would warrant inclusion in this report.

Date of release of the consolidated interim financial statements

Software AG’s Executive Board approved the quarterly consolidated financial statements on August 1, 2008.