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Other disclosures

 
 
 

Seasonal influences
The revenues and the pre-tax income adjusted for the restructuring expenses were distributed over the previous year’s quarters are as follows:

 

 

1st Quarter
2004

2d Quarter
2004

3d Quarter
2004

4th Quarter
2004

Total year
2004

Revenues €

95,720

106,256

96,635

112,760

411,371

   as % of
   annual revenue

23.3

25.8

23.5

27.4

100.0

Pre-tax income €

15,782

49,608

21,878

24,462

111,730

   as % of net
   income for
   the year

14.1

44.4

19.6

21.9

100.0

 

A structurally comparable distribution of revenues over the course of a year was also apparent in previous years and resulted primarily from the purchasing behavior of our customers. The restructuring measures during the first quarter 2004 led to considerable cost reductions and to a corresponding increase in pre-tax income. The pre-tax income in the second quarter 2004 includes €24,539 thousand of extraordinary income resulting from the sale of SAP SI shares. It is not likely that comparable extraordinary income can be realized in the future.

Contingent liabilities
No provisions as of March 31, 2005 have been made for the contingent liabilities listed below, expressed at nominal, value because it appears unlikely that claims will be asserted:

 

€ thousands

 

Guarantees

5,240

Other

4,385

 

9,625

 

Stock Option Plans
Software AG has different stock option plans for members of the Executive Board, executive staff members and other Group employees, which plans have not been recorded in the balance sheet.

First Stock Option Plan: As of September 30, 2004, 145,846 subscription rights had been issued to Executive Board members and 69,069 subscription rights had been issued to executive staff members; these subscription rights may, however, only be exercised after March 31, 2005. Thus the number of subscription rights has remained unchanged since December 31, 2004. No subscription rights could be exercised in the reporting period. The options have a term of seven years as from the time they were granted. Starting with a 24-month waiting period following the Company’s IPO, such options may in each case only be exercised during the term on a quarterly basis, following publication of the annual results, the semi-annual results and the quarterly results.

The subscription price per share upon exercise of the option corresponds to the issue price less a discount of 20 percent, but must be at least €28.12 (DEM 55.00). Given the issue price of €30, the minimum price was applied.

If the options are to be exercised, the following three conditions must have been met:

 (1) The Group’s profit from ordinary activities in accordance with the German Commercial Code (“HGB”) must have increased by a total of 30 percent in total in the years 1997 to 1999.
This condition was satisfied based on the profits recorded at that time.

 (2) The Group’s profit from ordinary activities is equivalent to at least 10 percent of sales in the year prior to exercise of the option.

 (3) The share price exceeds the minimum price at the time the option is exercised.

Second Stock Option Plan: As of March 31, 2005, 163,375 subscription rights had been issued to Executive Board members and 706,800 subscription rights had been issued to executive staff members; these subscription rights may, however, be exercised only after March 31, 2005. In the first quarter of 2005, 140,775 subscription rights were issued to executive staff members. Based on the new compensation model, which entered into effect on January 1, 2005, no further subscription rights were issued.

The subscription price per share upon exercise of the option corresponds to the average price in the XETRA closing auction over the last five trading days at the Frankfurt Stock Exchange prior to the date of the offer to grant the subscription rights.

If the options are to be exercised, the following two conditions must have been met:

 (1) In the fiscal year preceding exercise of the options, the Group’s sales must have increased by at least 10 percent compared to the previous year.

 (2) The Group’s profit from ordinary activities must be equivalent to at least 10 percent of the sales in the year prior to exercise of the option.

The terms, waiting periods and exercise dates correspond to the conditions of the First Stock Option Plan.

Other financial obligations
There are rent and lease agreements for buildings, real property, computer and telephone equipment as well as vehicles. The obligations under these contracts for the remaining fixed terms up to the end of fiscal year 2005 are €11,928 thousand. Obligations in the amount of €32.196 thousand exist for the period up to the end of the fiscal year 2010 and in the amount of €14,591 thousand for the time after fiscal year 2010. The lease agreements are operating leases within the meaning of IAS 17.

Notes on significant business events
1. Payments for restructuring: A total of €3,110 thousand was paid out for restructuring measures during the first quarter 2005. In fiscal year 2003, restructuring provisions of €30,682 thousand were created for this purpose.

2. Acquisition of Sabratec Ltd. Israel
Composition of purchase price:
Software AG acquired 100 percent of the shares in Software AG Israel (formerly Sabratec Ltd./Israel) and its subsidiary Sabratec Technologies, Inc./USA effective as of February 3, 2005 for a purchase price including ancillary costs of acquisition for legal advice, tax advice and accountants in an amount of €5,909 thousand. The purchase price was paid at the time of acquisition. Depending on future revenues, the purchase price may increase during the next three years by an additional TUSD 4,000.

Based on a preliminary investigation, the purchase price was paid for the balance of the following assets/liabilities:

  Assets/Liabilities

€ thousands

Fair market
value

Book value before
acquisition

Liquid funds

342

342

Trade receivables and other short-term assets

1,120

1,120

Intangible assets software

1,900

0

Intangible assets customer base

500

0

Goodwill

3,250

0

Property, plant and equipment

92

92

Financial assets

3

3

Deferred tax assets

519

519

Trade payables and other short term liabilities

- 182

- 182

Long-term liabilities

- 616

- 616

Deferred tax liabilities

- 958

0

Deferred income

- 48

- 48

Difference from currency translation

- 13

- 13

Purchase price

5,909

 

Book value of the acquired assets

 

1,217

 

Goodwill: As this company has an excellent reputation in the market for integration technology and since it was possible to acquire its ten most excellent software developers in the context of the acquisition, it was necessary to establish a goodwill value. There were no other apparent factors contributing to goodwill.

Contribution to income since the date of acquisition, February 3, 2005: Since the date of acquisition, the acquired company Software AG Israel has contributed €99 thousand to the quarterly surplus of the Software AG Group.

Preliminary initial consolidation pursuant to IFRS 3 § 62: As a result of the close proximity in time between the date of acquisition on February 3, 2005 and the date of the quarterly financial statements on March 31, 2005, it was not possible to complete the necessary valuations for the initial consolidation. Therefore, the initial consolidation of Software AG Israel was performed on the basis of the preliminary valuation.

Contribution to revenues and income in the case of initial consolidation on January 1, 2005: If Software AG Israel had been part of the Software AG Group since the beginning of the first quarter 2005 on January 1, 2005, it would have contributed an amount of €225 thousand to the consolidated revenues of the Group and an amount of €75 thousand to the consolidated income of the Group.

Expenses in connection with the acquisition of Software AG Israel: The software ApplinX and Guidance which were capitalized in connection with the acquisition of Software AG Israel will be amortized over a period of five years and in the first quarter 2005 led to amortization expenses in the amount of €63 thousand. The depreciation/amortization resulting from the acquired customer base over a period of five years led to expenses in the amount of €17 thousand in the first quarter 2005. The deferred tax liabilities relating to the reporting of the software and the customer base in the balance sheet will be reversed corresponding to the period of amortization/depreciation over five years; this resulted in deferred tax income of €21 thousand in the first quarter 2005. Other income and expenses resulting from the consolidation beyond those described were not incurred and are not anticipated in the future.

Employees
On March 31, 2005 the effective number of employees was 2,515 (31 March 2004: 2,512) (i.e. part time employees are only taken into account on a pro-rata basis), of which 69.8 percent (previous year 64.3 percent) were employed abroad. The average number of absolute employees (i.e. part-time employees are recorded in full) of the Software AG group in the first quarter 2005 was 2,583 (previous year 2,610). As of the cut-off date of the quarter ending March 31, 2005 an absolute number of 2,583 employees (previous year 2,610) were employed in the Group.

Executive Board and Supervisory Board
On April 1, 2005 Peter Kürpick, formerly Vice President NetWeaver Foundation, SAP AG, will join the Company. In the future he will be responsible for the business line XMLi.

There have been no changes in the Supervisory Board since December 31, 2004.

Follow-up report
AG Inc. and Software AG·/· U.S. Software Company
Software AG Inc. and Software AG filed a complaint against a U.S. software company in July 2003 seeking damages and a permanent injunction for a violation of a patent granted to Software AG in the year 1994 after out-of-court negotiations failed. The case is pending before the U.S. District Court, Delaware. After conclusion of the so-called “pretrial discovery” (the procedure used to investigate the facts prior to the actual trial) the court set the trial date in May 2005. In November 2004 the defendant company in turn filed a complaint alleging a patent violation before the U.S. District Court, Alexandria. The case could be settled in April 2005. The claims of both parties under the alleged violations of patents were set off against each other. This settlement did not result in any additional burden on income for Software AG.

 
 
 
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