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Allen & Overy LLP |
Cecilia D. Blye |
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1221 Avenue of the Americas |
Chief, Office of Global Security Risk |
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New York NY 10020 |
Division of Corporation Finance
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Tel
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212 610 6300 |
Securities and Exchange Commission
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Fax
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212 610 6399 |
100 F Street, N.E.
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Direct line
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212 610 6471 |
Washington, D.C. 20549 |
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peter.harwich@allenovery.com |
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Our ref J/50254-00030 ICM:5065699.1 |
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July 20, 2007 |
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Re: |
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SAP AG
Form 20-F for the Fiscal Year Ended December 31, 2006
Filed April 3, 2007
File No. 001-14251 |
Dear Ms. Blye:
By letter dated June 26, 2007, the staff of the Office of Global Security Risk (the Staff) of
the Securities and Exchange Commission (the Commission) provided certain comments to SAP AG (SAP or
the Company) For your convenience, we have reproduced in italics below the Staffs comments in the
June 26, 2007 letter and have provided SAPs responses below each comment.
1. |
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We note the disclosure on pages 11, 32, and 37 of your Form 20-F regarding your
operations in the Middle East. We also note various news reports that you have set up a
training center in Cuba and that SAP Arabia distributes your products in Iran, Sudan, and
Syria. Cuba, Iran, Sudan, Syria are identified as state sponsors of terrorism by the U.S.
Department of State, and are subject to U.S. economic sanctions and export controls.
Please describe for us the nature and extent of your past, current, and anticipated
operations in, or other contacts with, those countries, whether through subsidiaries,
distributors, or other direct or indirect arrangements. Your response should describe in
reasonable detail the products and services you have provided into the referenced
countries, and any agreements, commercial arrangements or other contacts with the
governments of those countries or entities controlled by them. |
As explained on page 29 and 34 of SAPs 2006 Annual Report on Form 20-F (the 2006 Form 20-F), SAP
offers software products, software related services (e.g. custom software development and software
support) and professional services (e.g. consulting and training). These products and services are
marketed and distributed primarily by SAPs network of subsidiaries. Additionally SAP markets its
software products and support services through independent resellers. In addition to SAPs
software products and support services, most of these independent resellers offer to their
customers additional software products, consulting, support and training services.
Independent resellers must license SAP software from SAP in order for them to license the software
to their customers. Either SAP or subsidiaries of SAP have agreements in place with all SAP
resellers that require those resellers to comply with all relevant export regulations. In
practice, SAP has developed a process pursuant to which any proposed software license sale into
countries embargoed by the U.S. or Germany among others requires prior approval from SAPs
Corporate Legal Department. This process applies to both SAP entities and independent resellers.
As a separate check on inadvertent delivery of its software to customers subject to export
restrictions, every license of any SAP software anywhere in the world (whether sales made by SAP,
by a subsidiary of SAP or via one of SAPs independent resellers) requires physical and/or
electronic delivery of the relevant software by SAP AG to the end customer or to a SAP subsidiary
or reseller for installation at the end customer. Prior to release of any software for delivery,
extensive information about the end customer must be fed into SAPs export control system database
which prevents delivery to any customers that appear on or are related to any of the persons or
entities listed on the then-current U.S., E.C., German and other lists of restricted persons. SAP
notes that, as with any arms length relationships, it is possible that independent resellers
conduct in various jurisdictions business that does not consist of the license of SAP software or
related intellectual property (e.g. consulting or training services). SAP has no control over
where and how their independent resellers sell products and services other than SAP software and
related intellectual property. SAP products are so pervasive in large organizations that an
industry consisting of literally hundreds of independent companies has emerged that provides
training for employees of organizations that run SAP products. So long as those independent
training companies do not use SAP intellectual property, there is no way SAP can limit or even
monitor their activities.
On pages 11, 32, and 37 of the 2006 Form 20-F, SAP makes disclosures about its business by region.
As explained on page 32 of the 2006 Form 20-F, SAP does business in three principal regions, of
which one is Europe, Middle East and Africa (EMEA).
Training Center or Other Business in Cuba
In March of 2004 SAP became aware of a press report suggesting that SAP had set up a regional
training center in Cuba. SAP immediately initiated an investigation to determine the source and
validity, if any, of these statements made in the press. The investigation concluded that the
press reports were entirely erroneous. As best SAP can tell a company independent of SAP had
promoted a training offering in Mexico, which the press report wrongly described as including
training services in Cuba.
SAP has never set up a training center in Cuba. SAP does not directly or indirectly sell products
or services in Cuba nor does SAP have any other business in Cuba. SAP is not aware of any SAP
contacts with the government of Cuba or entities controlled thereby nor does SAP anticipate having
business in Cuba or having contacts with the government of Cuba or entities controlled thereby in
the foreseeable future.
Business in the Middle East
SAP has a Software Distribution Agreement (SDA) with an independent reseller named SAP Arabia for
distribution of SAP software in the Middle East. As with all reseller agreements of SAP or its
subsidiaries, this SDA requires SAP Arabia to observe all relevant export laws (including those of
the U.S. and Germany) when selling SAP products. The SDA also requires SAP Arabia to include in
its End User License Agreements with its customers contractual provisions requiring its customers
to comply with the same requirements. SAP has no SDAs for distribution of SAP software in the
territory of Middle East with any reseller other than SAP Arabia.
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Sudan and Syria
Under the processes described above for licensing of SAP software SAP has never granted approval
for the sale of SAP software to entities in Sudan and Syria. Upon receiving the Staffs letter
dated June 26, 2007, SAP initiated an additional investigation to verify whether SAP has any
business in or with Sudan or Syria. This investigation concluded that SAP has not distributed any
products or services in Sudan or Syria either directly, via SAP Arabia or via any other independent
party. SAP also does not have any other business in Sudan or Syria nor is SAP aware of any
contacts to the governments of Sudan or Syria or entities controlled by either of them. SAP does
not anticipate doing any business in Sudan or Syria or having contacts with the governments of
Sudan or Syria or entities controlled by either of them in the foreseeable future.
Iran
SAP Arabia entered into three software license agreements with customers in Iran in the years 2004,
2005 and 2006. All arrangements were for a single outdated SAP software product for which SAP had
determined that no product specific restrictions under German and EU export control laws existed
and for which the relevant US-content is below the 10%-de minimis threshold established by the U.S.
Export Administration Regulations. All three software license agreements prohibit the customers
from receiving any upgrade to any other SAP software products. The customers entered into software
maintenance agreements, and SAPs consulting business provides installation consulting services to
these three customers. SAP has neither employees nor office space in Iran. In connection with
providing services to the customers described above, SAP and SAP Arabia have incurred minor
expenses in Iran for related food, lodging and transportation for SAP employees involved in
installation and support activities, and SAP has retained the services of Farsi language
interpreters in Iran from time to time at customary and minor expense.
Upon receiving the Staffs letter dated June 26, 2007, SAP initiated an additional investigation to
verify the extent of SAPs direct and indirect business with Iran. This investigation concluded
that SAP has not distributed any products or services in Iran beyond those described above, either
directly, via SAP Arabia, or via any other independent party. Other than as described above, SAP
does not have any business in Iran nor is SAP aware of any contacts with the government of Iran or
entities controlled thereby. Other than receipt of ongoing maintenance revenues from the three
existing customers and consulting revenues from the yet to be completed installation consulting
projects for some of these customers, SAP does not anticipate doing any business in Iran or having
contacts with the government of Iran or entities controlled thereby in the foreseeable future.
2. |
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Please discuss the materiality of the operations and other contacts described in
response to the foregoing comment, and whether they would constitute a material investment
risk for your security holders. You should address materiality in quantitative terms,
including the approximate dollar amounts of any associated revenues, assets, and
liabilities for the period covered by the annual report concerning each referenced country.
Also, address materiality in terms of qualitative factors that a reasonable investor would
deem important in making an investment decision, including the potential impact of
corporate activities upon a companys reputation and share value. |
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We note, for example, that Arizona and Louisiana have adopted legislation requiring their
state retirement systems to prepare reports regarding state pension fund assets invested in,
and/or permitting divestment of state pension fund assets from, companies that do business
with countries identified as state sponsors of terrorism. The Missouri Investment Trust has
established an equity fund for the investment of certain state-held monies that screens out
stocks of companies that do business with U.S.-designated state sponsors of terrorism. The
Pennsylvania legislature has adopted a resolution directing its Legislative Budget and
Finance Committee to report annually to the General Assembly regarding state funds invested
in companies that have ties to terrorist-sponsoring countries. Florida requires
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issuers to disclose in their prospectuses any business contacts with Cuba or persons located
in Cuba. States including California, Connecticut, Maine, New Jersey, and Oregon have
adopted, and other states are considering, legislation prohibiting the investment of certain
state assets in, and/or requiring the divestment of certain state assets from, companies
that do business with Sudan. Harvard University, Stanford University, the University of
California, and other academic institutions have adopted policies prohibiting investment in,
and/or requiring divestment from, companies that do business with Sudan. Your materiality
analysis should address the potential impact of the investor sentiment evidenced by such
actions directed toward companies that have operations or business contacts associated with
Cuba, Iran, Sudan and Syria. |
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Your qualitative materiality analysis also should address whether, and the extent to which,
the governments of the referenced countries, or persons or entities controlled by those
governments, receive cash or act as intermediaries in connection with your operations and
contacts. |
From the transactions described above with customers in Iran, SAP recognized the following revenues
in the years covered by the 2006 Form 20-F:
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All amounts in mill. |
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FY/2004 |
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FY/2005 |
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FY/2006 |
Software Revenue |
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3,55 |
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0,22 |
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0,16 |
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Maintenance Revenue |
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0,32 |
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0,68 |
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0,71 |
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Professional Services Revenue |
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1,42 |
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2,66 |
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3,32 |
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Total Revenue |
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5,29 |
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3,56 |
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4,19 |
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The following table shows these revenue amounts as a percentage of SAPs revenues in the
respective years:
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FY/2004 |
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FY/2005 |
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FY/2006 |
Software Revenue |
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0,150 |
% |
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0,008 |
% |
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0,005 |
% |
Maintenance Revenue |
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0,011 |
% |
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0,021 |
% |
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0,020 |
% |
Professional Services Revenue |
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0,062 |
% |
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0,107 |
% |
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0,122 |
% |
Total Revenue |
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0,070 |
% |
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0,042 |
% |
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0,045 |
% |
The impact of the business with the three customers in Iran is therefore quantitatively
clearly inconsequential to SAP in each of the periods presented.
SAP then assessed the qualitative impact to SAP of SAP Arabias three customers in Iran. While
there has been no error in financial reporting, SAP has considered among others the factors
described in Staff Accounting Bulletin 99, the Supreme Courts determination of materiality, the
extent any of SAPs large shareholders has expressed an intention to divest holdings of companies
with direct or indirect revenues from customers in Iran and the extent that SAP expects any
customers to discontinue or prospective new customers to decline to do business with SAP as a
result of these three customers. SAP has concluded that SAPs quantitatively inconsequential
business activities in Iran would not be viewed as qualitatively material by a reasonable investor
in making a rational investment decision. SAP believes that a reasonable investor would not view
the tiny
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amount of revenue lawfully derived from customers in Iran for the sale of an out-of-date version of
an SAP product that has no dual-use as material to an understanding of SAPs business, results of
operations, prospects or financial condition. In addition, while SAP is not able to determine the
identity of all its shareholders due to the bearer nature of the SAP shares, SAP does, based on an
analysis of existing shareholder information, not believe that any shareholder that would be
required to dispose of SAPs shares as a result of revenues derived from Iran (including the
entities described in the Staffs letter) holds any significant equity stake in SAP.
SAP acknowledges that:
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SAP is responsible for the adequacy and accuracy of the disclosure in the filings; |
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staff comments or changes to disclosure in response to the staffs comments do not foreclose the Commission from
taking any action with respect to the filing; and |
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SAP may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under
the federal securities laws of the United States. |
Yours sincerely,
/s/ Peter Harwich
Peter Harwich
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