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... tomorrowResource Management via Internet

PSI

Annual Report 1999

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wnn

“We are a companywith 30 years oftradition, and we are market leaders.”

PSI develops and distributes software solutions for

Resource Management. As experts in the core proces-

ses of our customers, we detect futuristic trends early

and realize them as innovative software. Thus, we

build consistently on resource management via the

internet.

• In the energy industry, PSI is market leader for soft-

ware for energy management and deregulation; in

our industrial sectors we show the way in production

management for service companies in information

logistics.

• For small to medium-sized industrial companies we

develop and market our ERP software PSIPENTA, a

standard solution for company resource manage-

ment, which distinguishes itself by its future-oriented

architecture.

• Furthermore we are especially active in consulting

service companies for change processes.

In 1999 with 1064 employees, PSI achieved sales of

DM 242 million.

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“We have maintained the investmenttempo becausewe plan for the future.”

PSI-Group in figures (US-GAAP)

(in DM million)

95 96 97 98 99

Sales revenue 110.5 111.7 128.8 186.2 242.0

Operating results -1.6 -2.1 -4.2 1.0 -16.7

Result before tax 0.8 -2.6 -10.3 2.5 -16.4

Balance sheet total 116.2 118.1 140.9 215.4 223.2

Equity 26.3 26.4 23.8 108.6 102.3

Equity ratio (in %) 22.6 22.4 16.9 50.4 45.9

Investments 8.6 8.6 15.9 21.7 47.9

Employees as of 12/31 655 620 669 833 1064

Turnover/employee (in 000s DM) 169 180 193 224 227

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Investments

(in millions of DM)

63 %

14 % 13 %

10 %

Employees per department

(in %)

Software development/consulting

Sales/marketing

Research and development

Administration

“In 1999 Research andDevelopment was our investment focus.”95 96 97 98 99

8.6 8.6 15.9 21.7 47.9

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“Today market leader for solutions for the energy industry, tomorrow for resourcemanagement via Internet.”

Content

Foreword by the Board of Directors 2

The PSI Stocks 4

The PSI Story

Strength in the Energy Market 6

Strength in the Production and

Distribution of Goods 10

Strength in eBusiness 14

Strength in Service 18

Group Report 22

Overall Economic Situation 22

Company Development 23

Outlook 32

Annual Report 33

Auditor's report 69

Report of the Supervisory Board 70

Executive Bodies 72

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2 | Foreword by the Board of Directors

1999 pointed the way for PSI. We are a com-

pany with 30 years of tradition and we are

technological market leader. We have

strengthened and built upon this position!

Furthermore we have continued to develop

our company strategy consistently and have

repositioned ourselves in a growing market

as an integrator for resource management

and eBusiness.

The basis for eBusiness is

resource management

As part of our repositioning we have refined

our profile and we represent a future-orient-

ed company. In this we have left the tradi-

tionally defined products and systems area

and are relying on the pillars of eBusiness

and resource management. This heavily in-

fluences the future business of PSI and that

of our customers: no company will survive in

the future without eBusiness, i.e. complete

business processes will be carried out via in-

ternet. With resource management resources

will be implemented and used that go be-

yond the borders of the company.

Our acquisitions in 1999 were already made

under this premise. With them we wanted to

strengthen the future position of PSI – in

the deregulated energy market as well as in

eBusiness. For eBusiness logistics is the key

to success; only those who use the speed ad-

vantage of the internet in conducting busi-

ness – flanked by adequate production and

distribution processes – will succeed. PSI

masters logistic chains and the internet.

We help our customers to integrate eBusi-

ness into their systems in order to get the

most out of them. We understand their prob-

lems in reference to the paradigm change

and offer them consulting as well as future-

oriented and profitable solutions.

Mastering deregulation: PSI is market

leader in the energy industry

In 1999 in another distinct process of

change we supported our customers in the

energy industry. The deregulation of the Eu-

ropean energy market has had similar results

as the deregulation of the telecommunica-

tions industry. In order to make the change

successfully, each energy company has to

control their own networks and resources. In

this area PSI is market leader. PSI also in-

vested early in the new tasks of sales and

transmission. The energy suppliers will de-

velop into multi-ultilities and thus into full-

service companies. This has opened addi-

tional long-term attractive markets to PSI.

These markets will also be heavily influ-

enced by the internet and need the special

competence of PSI in eBusiness.

Dear Stockholders,Dear Ladies and Gentlemen,

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Foreword by the Board of Directors | 3

Investments in ERP Software

In 1999 PSI once again increased invest-

ments in the ERP product PSIPENTA in

order to further strengthen its attractiveness

and to raise the value of this division. We

also expanded our service capacity in order

to be able to deliver the complete solutions

increasingly demanded worldwide. We main-

tained this forward-looking strategy despite

the subdued purchasing because of Y2K.

Results at the turning point

Due to the fact that growth in turnover did

not keep pace with these investments, the

product business had a clearly negative result

of DM 35 million. This could also not be

compensated for despite the significant in-

crease in profits of the system business, so

that the Group finished the year with a

negative result of DM 16.7 million. Our fun-

damental basis is, however, nevertheless

good: our increase in turnover to DM 242.0

million was clearly above market growth,

and we have the highest order rate in the

history of PSI.

Potential for increases in stock prices

In product business PSI suffered under the

lack of new investments because of Y2K

fears. This probably prevented potential in-

crease in stock prices. For this reason the

Board of Directors is also not satisfied with

the development of the PSI stocks. By

means of our repositioning and the strength-

ening of our investor relations, we want to

actively support the stock price. The admis-

sion of all stocks to the Neuer Markt of the

Frankfurt Stock Exchange will increase the

volume significantly and the attractiveness,

especially for institutional investors.

Well prepared for new markets

PSI profits from the additional growth spurts

arising from the deregulation of the energy

market, complete supply chain management

and eBusiness. We are especially well-pre-

pared for these new markets – PSI has always

participated actively in the structuring of

future technologies. Today PSI delivers solu-

tions for the deregulated European energy

market, tomorrow resource management via

internet. This will lead to growth in sales as

well as profit, and qualitatively to the con-

quest of new markets. PSI wants to and will

use these chances.

The market development supports our opti-

mism. The software industry is expecting sig-

nificant growth rates in the next years. Soft-

ware will again be seen as a strategic invest-

ment for strengthening competitive position:

the 21st century is the century of software.

The Board of Directors would like to thank

all stockholders, customers, suppliers, and

staff for their trust, which was sometimes

shaken by critique. We are convinced that

we will live up to the expectations of the

company.

Berlin, March 2000

Dietrich Jaeschke for the Board of Directors

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4 | The PSI Stocks

Y2K effect comes after a good start

Our start on the Neuer Markt was very suc-

cessful. Until the beginning of February

1999 the PSI stocks rose consistently by over

300% to a high of Euro 101.40.

At the beginning of February a long lasting

downward trend began affecting the entire

Neuer Markt of the Frankfurt Stock Ex-

change. Software supplier listed there – like

PSI – were especially hard hit because of

fears of Y2K effects. PSI especially felt that

the ERP market lagged behind expectations.

This had a negative effect on the product

business. The great potential of the system

business and the improved efforts in the

area of Investor Relations resulted in a stabi-

lization of PSI stocks at a low level. On

October 1, 1999 the stock price reached its

lowest level for the year at Euro 31 and then

began a long sideward trend. At the end of

the year, stock prices were at Euro 33.10 – an

increase of 39.2% compared to the initial

public offering of 16 months earlier.

Since February 2000 the stock price has

again shown a positive trend. On March 2,

2000 the PSI stock price was Euro 46, which

was nearly twice as high as at emission.

Stockholder structure

Currently 90% of PSI stocks are ordinary

stocks; the other stocks are held by the issu-

ing company Gold-Zack AG as post-IPO

participation. Over 400 PSI employees are

included in the ordinary stockholders and

hold together approximately 50% of all the

total PSI stocks.

PSI Stocks on the NeuWith above average growth rates and a high degree of inno-

vation PSI is well placed on the Neuer Markt of the Frank-

furt Stock Exchange. The stock price rose by 94% since

going public until the beginning of March 2000. We have

been able to stop the long downward trend with consistent

measures and active communication.

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The PSI Stocks | 5

PSI actively supports the stock price

In 1999 PSI implemented numerous middle

and long-term measures to support the stock

price. With the growth course which we

have been on since going public we have

been able to acquire additional market share

in all relevant markets. The acquisitions as

well as the high development costs of 1999

will have a positive effect on future business

development.

With the creation of new Investor Relations

department at the beginning of the year we

have intensified and improved our commu-

nication with stockholders over the course

of the year.

On October 20, 1999 the stocks that were

not yet offered on the Neuer Markt at the

time of the IPO were issued. This led to a

2.8-fold increase of PSI’s weighting in the

Neuer Markt Index and a clear stock struc-

ture developed. The necessary transforma-

tion of registered stocks which were held by

current and former employees into ordinary

common stocks led to the stocks being treat-

ed equally and thus to higher motivation

amongst the employees.

Continued growth

PSI offers its stockholders a distinct advan-

tage: the company can point to 30 years of

success. In this time we have re-written

technological history many times and have

occupied the markets of the future early.

This experience and the year-long business

relationships to leading companies resulting

from this are the basis for further growth and

for our future success.

Further growth and increasing company

worth are at the center of PSI’s strategy. For

this reason there will again be no dividend

payments for the fiscal year 2000.

We are convinced that PSI’s future develop-

ment provides enough potential for stock

price increases.

er MarktPerformance of the PSI stocks compared

to the Nemax All Share Index

(in %)

3/98 1/99 2/99 3/99 4/99 1/00 2/00

450

400

350

300

250

200

150

100

50

PSI Nemax

Quarter

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6 | The PSI-Story: Energy Market

The deregulation of the energy industry led

to dramatic changes in Europe in 1999. New

players in the market compete with the

traditional energy suppliers. Customers are

becoming more and more demanding; at the

same time prices are sinking under the in-

creased competition. With the deregulation

of the energy industry, a similar dynamic de-

velopment can be observed in Germany as

several years ago in the telecommunications

industry.

In addition to price, customer loyalty will

play a more and more important role in the

future. The energy suppliers must adapt their

processes to the needs of their customers.

Deregulation has created a large demand for

new software for the transmission and sales

of electricity and invoicing. In times of in-

creasing pressure to cut prices and costs, the

efficiency of network control systems will

become a strategic success factor.

New chances for new solutions

Due to this great demand, the market for en-

ergy management systems relevant to us will

double, as experiences in the USA illustrate.

PSI has recognized this early. Based on many

years of experience as a provider of energy

control systems, we have developed new so-

lutions. We have further complemented our

own product spectrum through acquisitions.

New control systems for new structures

PSI has developed a new generation of open

control systems. They offer network opera-

tors the possibility to combine them with

other systems inexpensively. This allows for

the construction of significantly larger con-

trol centers and therefore increased effi-

ciency.

In such control centers all information nec-

essary for network operation are collected

and visualized. From here the use of all

resources that are necessary for smooth oper-

ation are supervised and controlled.

Strength in the Energy PSI has been delivering complete solutions to the energy

industry for 25 years for the production, transport and distri-

bution of energy. In this attractive market we have achieved

the leading position in Germany: all major energy suppliers

use PSI software.

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The PSI-Story: Energy Market | 7

MarketTransmitting and selling electricity: more

efficient via internet

PSI solutions for transmitting and selling

electricity have been developed on the basis

of the state-of-the-art internet technology.

PSI software covers all areas needed for

transmitting and selling energy: this includes

selling and distributing electricity as well as

other types of energy. Our software offers the

suppliers additional functions such as man-

aging meter data and a billing interface.

Energy management:

Planning power plant usage with PSI

With the acquisition of the Viennese com-

pany IRM, PSI has at its disposal an inte-

grated software solution with which power

plant usage and energy sales can be planned

and optimized. This solution supports energy

suppliers in the optimization of their own

energy production under the conditions of

the deregulated electricity market.

Network control via the internet

The technology for using the internet for

network control applications represents a

further innovation. It was developed by the

new PSI subsidiary NENTEC. Information

or data can be transferred over great dis-

tances within the electricity network using

the internet. By using standard technology,

network operators can save 60% of their

costs compared to the traditional technology

developed especially for process control.

Leak detection in the transportation

of gas and oil

PSI is also market leader for environmental-

ly-friendly distribution systems for the trans-

portation of gas and oil. A special aspect of

the PSI solutions are the integrated, patent-

ed procedures with which leaks can be de-

tected and located. Their reliability was

again attested by the four largest TÜV

(DOT) organizations in early 2000. With

the development of these systems and their

use, PSI has made a practical contribution to

cost-cutting and environmental protection.

All major energy providers work with

PSI software

The innovative advantage of the PSI solu-

tions for the energy industry has led to PSI

having all major German companies

amongst their customers. In 1999 the already

high order volume of the previous year was

increased again. Among the new orders

there are numerous large strategic projects.

Behind them are important customers for

new solutions in the deregulated energy mar-

ket. Especially noteworthy is the contract

PSI –Number 1in the market forenergy software

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8 | The PSI-Story: Energy Market

Seven o’clock in the mo

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The PSI-Story: Energy Market | 9

from DB Netz AG for the delivery of two

central switching stations for providing ener-

gy to the German railroad system. The new

switching stations Berlin and Karlsruhe are

part of the concept of DB Netz AG to suc-

cessively reduce the number of switching

stations from the current 25 to seven. Part of

the agreement is an option for two more

central switching stations in Leipzig and

Duisburg. This contract does not only mean

expanding our product spectrum to include

“Provision of electricity to Train Systems”.

With a total volume of DM 27 million it is

also the largest single contract in the history

of PSI.

Efficiency via the internet

The increasing competitive pressure in the

energy market will also lead to an increase in

the meaning of internet-based solutions and

products. In the future, complete business

processes will be conducted over the inter-

net. This will allow for complete manage-

ment of all resources in the network. This

includes switching equipment and network

stations as well as service teams and their

current location. Above all the internet will

be the instrument for ensuring customer loy-

alty in the future. The spectrum will reach

from customer information and billing sys-

tems in the internet to the creation of inte-

grated multi-utility portals. This means cus-

tomers will receive supply, waste removal

and infrastructure services from a single

source. In this manner companies will be

able to distinguish themselves from their

competitors.

PSI delivers complete solutions to energy

suppliers for managing their resources via

the internet. Additionally PSI offers its cus-

tomers support in the development and real-

ization of their own eCommerce solutions.

Concrete examples are systems for electronic

purchasing or process tracking on the inter-

net. The use of electronic online advisors as

intelligent agents – autonomous software

components with knowledge about goals and

wishes of customers – offers, especially in the

energy sector, the possibility to make tailor-

made offers to customers. We will use our

technological advantage and will continue

to profit over-proportionally from the dy-

namic development of the energy markets in

the future.

rning, lights on . . .

With precise

software solutions

for energy suppliers,

electricity will be

delivered reliably

from the

power plant to

your house.

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PSI has developed valuable experience over

the last 30 years. Our know-how ranges from

factory automation to strategic planning.

Thus, it encompasses all resources in the en-

tire supply chain – from suppliers to produc-

ers and on to customers. We support impor-

tant core processes. Examples of these in-

clude distribution or material and produc-

tion management; the spectrum includes

controlling the complex transportation of

goods beyond company and country borders.

In the industrial sector PSI concentrates on

selected sectors in which the company has

built up extensive know-how over years and

has a leading market position.

PSIPENTA controls business processes

flexibly and economically

The basis of these solutions is represented

by the software product PSIPENTA. This

efficient complete solution was developed for

medium-sized production companies and

autonomous units of larger companies.

PSIPENTA is a lean system with a com-

pletely object-oriented component architec-

ture and is therefore state of the art software

technology. Because of this it is superior to

competitors’ products in reference to flexibil-

ity and efficiency according to leading mar-

ket analysts.

Functionally PSIPENTA covers the entire

value added chain and includes components

for eBusiness, order and customer manage-

ment, production control, supply chain man-

agement – i.e. the management of all parties

involved in the entire value added chain –,

project management and accounting.

PSIPENTA is completely compatible with

the internet and supports the most impor-

tant worldwide software standards.

The product was developed and is distrib-

uted by the PSI subsidiary PSIPENTA Soft-

ware Systems GmbH. For machine and plant

producers, automotive parts producers as well

as tool and mold producers there are special

PSIPENTA solutions available which are

specific to these sectors. This also increases

the efficiency of using PSIPENTA in medi-

um-sized companies.

PSI develops refined solutions for industry and our software

combines the individual components of the logistic chain

into a whole. This ensures problem-free processes beyond

company borders.

10 | The PSI-Story: Production and Distribution

Strength in the production

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Production and Distribution | 11

and distribution of goodsLeading companies already rely on the effi-

ciency and flexibility of PSIPENTA, such as

the large automobile manufacturers and mar-

ket leaders in machine and plant production.

Individual solutions for

special market sectors

For the metal, chemical and printing sectors

PSI has developed individual solutions based

on PSIPENTA for the core processes of

these customers.

We help our customers remain competitive

and to extend competitive advantages. In

the metal industry, for example, costs can be

cut by combining production steps. Our soft-

ware makes more efficient supply chain man-

agement possible, i.e. management of the

value added chain.

A large news magazine was able to shorten

the amount of time between the copy dead-

line and publication, thus being able to

deliver more current information. The PSI

solution for production management in the

printing industry led not only to advantages

in how current their information was, but

also led to cost reductions.

Strength through cooperation

In order to strengthen our already strong

position in these market sectors, PSI has en-

tered into a joint venture with the German

Steel Industry Association as of January 1,

2000. With this merger PSI is the market

leader in Germany for resource management

solutions in the metal and printing market

sectors. In the chemical and pharmaceutical

industries we also have a large customer base

and renowned references. This new joint

venture will develop solutions for these in-

dustries based on PSIPENTA and will use its

strong position in Germany for the interna-

tional expansion of its business.

PSI manages logistic chains

PSI has over 30 years of experience in logis-

tics. From the beginning we have developed

custom-made information systems for supply

chain management and distribution. For ex-

ample, our logistics software controls a distri-

bution center which supplies 30,000 shops

with coffee and consumer goods.

Above all the motor of growth is the fusion

of individual business processes into contin-

uous global supply chains and the success of

eCommerce: This is only successful if the

speed advantage of electronic orders is

passed on and the goods reach the consumer

faster than by traditional sales methods. In

order to master this successfully, exceptional

logistic management is a prerequisite.

Our software is

state of the art

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Ten o’clock, with a coff12 | The PSI-Story: Production and Distribution

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f ee to the meeting . . .The PSI-Story: Production and Distribution | 13

PSI tackled this challenge early and has in-

vested in the fusion of internet and logistics

since going public under the term eLogistics.

ECI, a subsidiary purchased at the end of

1998, has competitive standard software

components for the construction of logistics

solutions. PLANAR, acquired at the begin-

ning of 2000, has important core compe-

tence in the integration of internet and lo-

gistics applications within the framework of

complete supply chain management. With

the takeover of PLANAR, PSI has also ac-

quired entry into the attractive growth mar-

ket of airport logistics.

Economy through eBusiness

PSI customers can conduct their core busi-

ness processes – production and distribution

– via internet, i.e. as eBusiness. This grants

them significant potential for cutting costs

and improving customer loyalty. They could,

for example, globalize their product distribu-

tion without having to maintain their own

distribution offices. We use the synergies be-

tween our own individual business areas and

subsidiaries intensively in order to offer our

customers efficient and complete solutions

from one hand.

eBusiness sets new standards

The focus here will be on internet-based so-

lutions for the future. They will allow for

continuous resource management in produc-

tion and distribution.

One of PSI’s first eBusiness solutions for the

metal industry completely fulfilled cost re-

duction and customer loyalty expectations.

With this solution the customers have the

possibility to call up products themselves

directly from the warehouse via internet. Be-

cause of this, prices can be determined for

specific customers and the path of the order

can be traced.

The new version of the complete solution

PSIPENTA was introduced at CeBIT 2000

and also runs based completely on the inter-

net. It was expanded to include complete

eBusiness functionality for business-to-busi-

ness applications. This means that suppliers

and customers have been smoothly inte-

grated into the process chain.

In only a few years no company without

eBusiness will be competitive as the prices

and quick availability of internet-based

products become standard. PSI, as an IT so-

lution provider, therefore supports its cus-

tomers in the conception and realization of

entry into internet business. With this, PSI

offers its customers solutions which ensure

and strengthen their individual competitive

advantages in the future.

How does the bean

get to your morning

coffee? Our software

organizes its trip from

abroad to processing

all the way to the

shelf – it controls the

necessary processes

and supply chains.

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PSI expanded its core business in 1999 to in-

clude eBusiness. We have oriented our soft-

ware solutions towards eBusiness and have

hired eBusiness specialists. Our internet

strategy has also received new impulses

through the newly acquired innovative sub-

sidiaries.

New subsidiary UBIS combines

eCompetence

At the center of our internet strategy is

UBIS Consultants for Integrated Systems

GmbH with its close relationships to re-

search facilities and universities. It is a lead-

ing German consulting and software compa-

ny with many years of experience in eBusi-

ness. With its integration into the PSI

Group UBIS has concentrated fully on this

business area. It develops individual cus-

tomer solutions by combining internet tech-

nology and business processes.

In 1999 PSI mastered the change from a software supplier

for the production of energy and goods to an eBusiness com-

pany and therefore has occupied important futuristic mar-

kets early.

14 | The PSI-Story: eBusiness

Only those companies will remain competi-

tive in the future who conduct large parts of

their business over the internet, i.e. conduct

eBusiness. The internet is setting new stan-

dards for prices and quick availability of

products. The economic processes are speed-

ing up tremendously; this means on the one

hand that they are becoming more economi-

cal, but on the other hand the innovation

cycles are becoming much shorter. At the

same time not only the products will be a

competitive factor, but also the service ac-

companying the product. eBusiness makes

worldwide business activities possible even

for small and medium-sized companies.

And: eBusiness is revolutionizing the com-

pany itself. They must be more open and

seek joint ventures. Knowledge is available

over the web from every office; monopolies

on information have been lifted. Flat hierar-

chies are a necessary condition and the

result. In this area there is a great need for

consulting and for solutions. After the large

corporations, medium-sized companies are

also starting to recognize this.

Strength in eBusiness

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The PSI-Story: eBusiness | 15

The company possesses extensive experience

in the construction of e-commerce solutions,

newsstand systems and portals for banks and

retail companies. This includes solutions for

the distribution of electronic devices via in-

ternet as well as personal online consultants

for a large German department store group’s

entry into the internet. The software tech-

nology of intelligent agents used for this

made personal one-to-one marketing on the

internet possible.

PSI will use UBIS’ know-how even more in

the future to help our customers reach their

customers in target markets. For this purpose

we have entered into cooperations with

leading providers of eCommerce platforms,

including INTERSHOP and Catalog Inter-

national.

PSI: Leader for solutions in

dynamic eGovernment

PSI has a leading role in eBusiness in the

government sector. Already in 1999 PSI was

successful in developing software solutions

based on the internet which brought public

administration closer to the people and im-

proved their standing as a service provider.

Since the beginning of 2000 increasing dy-

namism can be observed in this sector. The

number of orders placed in the first two

weeks of this year amount to DM 4 million –

compared to DM 11 million for all of the

previous year. For this reason PSI is expect-

ing a significant increase in demand for

eGovernment solutions.

Competence in internet technology

In the fall of 1999 we took over NENTEC

Network Technology GmbH which is active

in the internet and telecommunications

markets. With this we secured a technology

not previously existing for our energy con-

trol technology. With this technology we

can use the internet for network control ap-

plications: with a standardized infrastructure

instead of special and expensive networks,

information and data can be transmitted

over great distances inside the electricity

networks. NENTEC also supplements our

competence in internet security and speech-

data integration.

eBusiness withPSI software improves efficiency

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16 | The PSI-Story: eBusiness

2 pm, research on the in

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The PSI-Story: eBusiness | 17

As the first German company, NENTEC has

developed a worldwide standard for secure

data encoding which was accepted by the

Internet Engineering Task Force (IETF).

Speech-data integration, which is the basis

for internet telephony, is increasing in

meaning for the providers of telecommuni-

cations services.

From this merger there are additional syner-

gies in the area of telecommunication. PSI is

already developing successful network man-

agement system solutions for telephone and

cellular phone companies. With this, PSI is

contributing to the build up and expansion

of the necessary eBusiness infrastructure.

eBusiness is PSIPENTA.COM

A central component of PSI’s eBusiness

strategy in 1999 was the further develop-

ment of the internet compatible complete

business solution PSIPENTA.

The new PSIPENTA.COM version makes it

easier for customers to enter eBusiness. The

web-based user interface visualizes all rele-

vant information simply and clearly.

PSIPENTA.COM can be used regardless of

location via the internet. This means that a

company’s worldwide business locations can

be connected via the World Wide Web.

A further highlight of the new PSIPENTA

version is the integrated eBusiness solution

which make business-to-business transac-

tions possible for both purchasing and sales.

With the development of the new PSIPENTA

version PSI further expanded its technologi-

cal advantage in 1999 as a provider of eco-

nomic complete solutions for medium-sized

companies.

PSI: Integrator for

resource management and eBusiness

Our investments in new companies and new

products ensure our competitive advantages

and highlight PSI’s position as an internet

company. We will continue to build on this

position in the future.

ternet . . .

The internet

simplifies logistics

and creates

continuous supply

chains. PSI shows

customers the way

into eBusiness.

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Examples from the recent past include the

deregulation of the energy market and the

fusion of the internet and resource manage-

ment into new business processes. In the en-

ergy sector PSI started developing solutions

for the demands of deregulation two years

ago.

PSI invested in the connection between in-

ternet technologies and business processes

very early. With individual customer solu-

tions for eBusiness, eGovernment and eLo-

gistics, we have positioned ourselves in one

of the most attractive growth markets.

Closeness to customers

without compromise

The prerequisite for this strategy is the exact

observation of market developments and,

above all, the consultants’ and developers’

proximity to customers – without compro-

mise. Because of this we have acquired a

great understanding of our customers’ core

business processes over the past three

decades – even demanding customer projects

are a “home game” for us. Our solutions are

very important for the core business and the

success of our customers. For this reason

quality plays a great role: PSI’s quality man-

agement system has been certified according

to ISO 9001 and ISO 9000-3 standards for

software producers since June 1994. We also

follow the stricter regulations of the ITQS

for European companies.

PSI has focussed on long-term customer relationships and the

greatest possible proximity to customers since its founding.

Because of this PSI has always been able to recognize market

and technology trends early and to offer customers solutions

for future developments.

18 | The PSI-Story: Service

Strength in Service

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The PSI-Story: Service | 19

High customer satisfaction

Long-term customer relationships over ten

and more years are the rule at PSI and one of

our most significant strengths. This is illus-

trated very impressively in the results of the

survey conducted within the framework of

the “Campaign for High Customer Satisfac-

tion” among the customers of PSI AG: as

the first German software company, PSI was

awarded “Recognition for high customer

satisfaction”.

Motivated employees make PSI strong

The key to customer orientation and success

are our employees. PSI believes that employ-

ees should participate in the success of the

company: a profit sharing program was intro-

duced in 1974 and until 1997 all PSI stocks

were held exclusively by employees.

Even after going public the majority of the

PSI workforce owns PSI’s stocks – almost

half of the capital equity is owned by em-

ployees. This results in a high level of moti-

vation and identification with the company

and thus promotes customer orientation.

Currently a new profit sharing model is

being worked out. Its effect on motivation

will extend to include those employees who

have joined the company since the IPO.

High standards through continued

qualifications

In addition to the motivation of the employ-

ees, their qualification is also decisively im-

portant for the quality of our work and the

satisfaction of our customers. The high num-

ber of exceptionally well-educated university

graduates among the PSI employees guaran-

tees flexibility and professionalism in cus-

tomer projects. Especially since going public

PSI is an attractive employer for manage-

ment trainees with above average potential.

We listen very carefully

and think ahead

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20 | The PSI-Story: Service

7 pm, caught the flight

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The PSI-Story: Service | 21

PSI has always placed high value on person-

nel development. Programs are offered by

PSI’s own schooling center which successful-

ly offers training and seminars for PSI cus-

tomers, qualification programs for employees

and for management trainees. This ensures

the further growth of PSI and the high stan-

dard of our consulting, realization and proj-

ect management for the future.

Through cooperation programs with univer-

sities, we invest early in future employees.

Within the framework of the Cooperative

Information Science Studies (KoSI), we

participate in the education of students in

Aschaffenburg. Information Science stu-

dents at the University of Darmstadt receive

scholarships, do internships and write theses

in the company, thus involving them early

in PSI.

home!

With PSI software,

you get home on time.

The conveyor belt

runs with PSI software

and is part of our

airport logistics

solutions.

PSI: a company with values

The basic values of our company culture can

be described using the following triangle:

• Technology

A clear dedication to technological top

performance as an incentive for excep-

tional solutions

• Openness

Openness in internal and external com-

munication as well as openness of the sys-

tems realized by us

• Success

Success in your own work and the success

of our customers as a motor for ensuring

economic success

Winning motivated and highly qualified em-

ployees and the further development of

management trainees into distinct personali-

ties will continue to be at the top of our pri-

ority list in the future. Because distinct per-

sonalities think ahead and maintain cus-

tomer relationships. They ensure PSI’s future

positive development.

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PSI grows faster than the market

(Sales in %)

IT-market in Western Europe +8.6 +10.1 +10.8

PSI +15.3 +44.5 +30.0

Source: European Information Technology Observatory (EITO)

22 | Group Report

Group Report

Overall economic situation

The economic situation in Germany and Eu-

rope demonstrated weak growth in the first

half of 1999, but recovered at the end of the

year. With this year end spurt, Germany in-

creased its GDP from an average of +1.5 %

for the year to +2.3% in the last three

months of 1999. In the European Union

growth was +3.1% in the last three months

compared to an average of +2.2% for the

year.

Western Europe's IT sector is booming

Western Europe's market for information

technology grew by 10.8% in 1999. In Ger-

many growth was double-digit for the first

time in several years at 10%.

The segments relevant to PSI, i.e. applica-

tion software, IT consulting, and implemen-

tation grew even more than the overall mar-

ket. They grew 17.8% in Western Europe

and 16.5% in Germany.

97 98 99

1999: Strong growth in relevant market segments

in Germany and Western Europe

(in %)

Germany Western Europe

Application software + 13.0 + 12.9

IT-Consulting + 12.0 + 16.9

Implementation + 16.5 + 17.8

Source: European Information Technology Observatory (EITO)

In 1999 PSI grew faster than the market. System business

experienced a boom due to the deregulation of the energy

market. In comparison, the results in product business suffe-

red under Y2K and high investments.

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Group Report | 23

Y2K effect weakened the

software market

A special influence on the IT industry in

1999 was the effect of changing to the year

2000: on the one hand the media painted a

black picture of what would happen if older

software quit working, on the other hand

Y2K led to different investment behavior on

the part of companies. Most investments

were made to make standard software Y2K

compatible, whereas strategic investments in

new software was for the most part post-

poned. General investment stops in the sec-

ond half of the year strengthened this trend

which led to postponing investments for up

to eight months and which therefore had an

influence on PSI's product business.

Deregulation of the electricity markets

The deregulation of the European electricity

markets created a change whose dynamism

can be compared to what happened after the

deregulation of telecommunications. The

energy suppliers now face much stricter com-

petition; they have to improve their business

processes, and they have to solve new prob-

lems in sales and transmission. This all cre-

ates a great demand for software and consult-

ing. Germany has now taken a leading role

in the deregulation process.

Company Development

PSI is growing faster than the market

Even in 1999 PSI grew dynamically and by

far outgrew the market with 30% growth in

sales to DM 242 million. Despite this, how-

ever, the development of the products and

systems segments were different.

Y2K affected product business

Product business saw an increase of 11%.

This segment includes all activities in con-

nection with the sales of our standard soft-

ware PSIPENTA. This includes standard de-

velopment, license sales, customer-specific

adjustments, implementation as well as

maintenance and care.

PSI sales continue to increase

(in millions of DM)

95 96 97 98 99

110.5 111.7 128.8 186.2 242.0

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Software development and consulting was

still the most important source of sales for

PSI in 1999

(in millions of DM)

Software develop-

ment and consulting

Licenses

Hardware

24 | Group Report

The 11% increase in sales for the product

business was below expectations and below

the values for the previous year. The reason

for this is above all the low sales of licenses –

many of our customers postponed their in-

vestment in standard software because of the

Y2K problem. This effect could not be com-

pensated for even with the growth of the

service sector (software development and

maintenance).

Even the operating results for product busi-

ness sank from DM -10.6 million to DM -35

million compared to the previous year. The

reason for this were the high investments in

the development and marketing of PSIPEN-

TA in anticipation of the expected stimula-

tion of the market for operational software.

Systems business has made a big leap

For the most part the systems segment in-

cludes the operational activities for the de-

velopment, implementation as well as main-

tenance and care of customer-specific soft-

ware solutions. In this sector sales increased

by 40%. Due to the deregulation of the Eu-

ropean energy market, PSI was able to win

numerous large strategic projects and to suc-

cessfully enter the market with new solu-

tions for electricity transmission and sales.

Systems business is the

largest part of sales

(Percentage of sales in %)

Systems

Products

71

29

69.1 172.9

Products Systems

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Group Report | 25

By means of the significant growth in system

business, the share of total sales for the indi-

vidual sectors changed: system business in-

creased its share slightly over last year from

66% to 71%.

The 40% increase in sales for system busi-

ness was above expectations and above the

25.6% of the previous year. The operating

results in this segment rose by 55% to

DM +18.0 million thanks to the excellent

market situation and the synergies resulting

from it.

Group result is temporarily weakened

Under the negative influence of the products

business result, the Group has an overall loss

of DM -16.7 compared to DM +1 million for

the previous year. For 2000, however, we

again expect a positive Group operating re-

sult. The expected stimulation of the market

for standard business software, the strategic

investments made in 1999 and the high

number of orders at the end of the year all

lead us to this conviction.

New orders at record level

The number of new orders placed with the

PSI Group reached a new record in 1999 of

worth DM 220 million. This means an in-

crease of 43% compared to the previous year

and is therefore significantly above expecta-

tions. The number of orders as of January 1,

2000, valued at DM 180 million, was even

50% higher than at the beginning of 1999.

Increasing number of orders

for the PSI Group

(in millions of DM)

95 96 97 98 99

106.5 135.2 105.4 154.4 220.0

This is an exceptional starting point from

which we can reach our goals for 2000. The

high number of orders confirms the middle

and long-term growth of PSI.

Financing

On May 27, 1999 we assumed a minority

share of 15% in PSIPENTA Software Sys-

tems GmbH, which was held by previous

senior management and staff. Within the

framework of this, our share equity –

switched to Euro in 1999 – versus contribu-

tion in kind of DM 1,215,700 (Euro

621,577.54) from authorized stock increased.

With the Board of Directors' resolutions of

August 31, 1999 and October 13, 1999, the

conversion of convertible profit participa-

tion capital into 437,372 ordinary stocks

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26 | Group Report

resulting from the IPO at the end of 1998.

Furthermore the net book worth for intan-

gible assets increased by 83%. This is due to

acquisitions in the reporting year and the

high investments in software development.

The proportion of current liabilities in

the balance sheet total rose minimally from

34.7% to 35.8%. Long-term liabilities also

increased minimally from 14.6% to 16.8%.

The equity ratio sank from 50.4% to 45.9%

compared to the year before.

Liquidity

PSI's liquidity planning foresees a balanced

cash flow from the operational business of

the individual companies of the Group for

2000. Due to the acquisitions planned

and/or carried out in 1999 the level of li-

quidity will improve. New acquisitions and

strategic partnerships will only be carried out

by using authorized stock capital (selling

stocks). PSI also has credit lines at its banks.

from authorized capital was approved. These

have a par value of DM 2,186,860 (Euro

1,118,123.76).

Within the framework of the acquisition of

NENTEC Netzwerktechnologie GmbH on

October 5, 1999, the share capital versus

contribution in kind was increased by DM

525,000 (Euro 268,428.23) from authorized

capital. The capital increase was not yet reg-

istered in the Trade Registry on the balance

sheet date.

Balance sheet structure

The balance sheet total increased by 3.6%

to DM 223.2 million compared to the pre-

vious year.

Current assets capital made up 48.9% of the

balance sheet total in 1999 versus 65.6% for

the previous year. The share of long-term

assets grew from 34.4% to 51.1% in 1999.

This shift is partly due to the high liquidity

Balance sheet structure 1999

(in millions of DM)

Assets

Current assets 48.9 %

Long-term assets 51.1 %

Liabilities

35.8 % Current liabilities

16.8 % Long-term liabilities

45.9 % Equity and liabilities

1.5 % Minority Interests

98 99 99 98

215.4 215.4223.2 223.2

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Group Report | 27

New risk management system

PSI is active in a very competitive and dy-

namic market which is characterized by

high-speed technological development.

Therefore, PSI faces economic risks which

are inseparable from operative action.

Above this, the general economic situation

and especially the developments in PSI's

home market of Europe are of importance.

PSI will pay especially close attention to and

analyze the further developments in Europe's

liberalization. The tight market for qualified

employees represents a further risk for PSI's

continued growth.

PSI AG financed the investments in

PSIPENTA through loans given to the

PSIPENTA Group. We expect positive re-

sults as of the year 2001 for the PSIPENTA

Group’s business. The future economic de-

velopment of the PSIPENTA Group is of ut-

most importance for the development of the

PSI Group.

Increased investments

The PSI Group invested a total of DM 47.9

million in 1999. Of this, DM 18.1 million

was for active software development costs

and DM 17.3 million was for acquisitions.

High investments in

research and development

The PSI Group invested 9.8% of sales in

research and development, i.e. DM 23.7 mil-

lion. This increase of 68% underlines the

high value we place on innovation.

After spending more and more on research

and development over the past years, we

now see ourselves well prepared for future

customer demands. We have developed nu-

merous functions for internet business as

well as functional sector expansions in the

PSIPENTA product family. At CeBIT 2000

we presented these for the first time. Fur-

thermore we have developed new software

components for the deregulated energy mar-

kets and internet business and have already

begun marketing these products. For the first

time we have also invested specifically in so-

lutions for telecommunications in order to

gain additional market share in this area.

Higher costs for

research and development

(in millions of DM)

95 96 97 98 99

6.9 8.2 8.8 14.1 23.7

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28 | Group Report

Of growing importance for acquiring new

employees is our cooperation with universi-

ties. With the acquisition of a majority share

of UBIS GmbH, a company that is especially

active in innovative technologies for eCom-

merce and eBusiness, we have strengthened

our ties to universities. Through projects

such as the Cooperative Information Sci-

ence Studies at the University of Darmstadt,

the supervision of masters’ theses and other

papers written at our company, we have been

able to commit students to us much earlier.

The internal and external continued train-

ing courses also serve to improve technical

qualifications as well as improving knowl-

edge about marketing and project manage-

ment.

In the past years PSI has achieved good fi-

nancial results and high customer satisfac-

tion through successful project management,

especially in systems and project business.

Within the framework of project manage-

ment there are risks which could lead to a

loss of reputation as well as claims for com-

pensation or other financial risks.

In order to record and handle these existing

risks we use effective control systems. These

systems are currently being further devel-

oped into a risk management system which

meets the requirements of KonTraG (the

Law for Control and Transparency for Cor-

porate Enterprises) and covers the risk areas

of market and orders, employees, products,

organization, environmental changes and fi-

nances. This system will enable the Board of

Directors to recognize possible risks and to

take measures to counteract them even earli-

er. In 2000 the documentation of the risk

management system, investment controls

and internal auditing will be improved.

Employees: PSI is attractive

for IT experts

PSI's success and continued growth are de-

pendent to a large degree on obtaining quali-

fied and motivated new employees. The mar-

ket for qualified IT specialists is very tight.

In light of this it is a true achievement that

we were able to increase our workforce by

231 to 1064. Of these 231 employees, 42%

are new hires and 58% came via our acquisi-

tions.

95 96 97 98 99

Number of employees has risen

655 620 669 833 1064

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Group Report | 29

On October 5, 1999 100% of NENTEC

Netzwerktechnologie GmbH was acquired.

In order to strengthen our market position in

the metal and chemicals sectors, we entered

into a joint venture with the BFI-BT GmbH

in November 1999, a subsidiary of the Asso-

ciation of the German Steel Industry, the

Association of German Iron Processors

(VDEh). The new PSI-BT Ltd. is the merger

of BFI-BT GmbH with PSI's business area

Production. PSI has a 58% share of the joint

venture and BFI-BT has 42%.

Results after the balance sheet date

PSI-BT started business January 1, 2000.

The business division Production became

part of the new joint venture on this date.

PSI purchased 90% of the stocks of

PLANAR GmbH on February 10, 2000.

This system house integrates applications for

internet and logistics into uniform supply

chain management.

On April 30, 2000 Kurt Schmalz will step

down from the Board of Directors for health

reasons. His successor in the area of Person-

nel and Technology will be Ali Saghati, who

was previously Director of Consulting and

eBusiness.

Modern personnel concepts such as variable,

performance-based income, flexible working

times, and a flat hierarchy have been con-

stantly improved.

A notable sign of the motivation of the em-

ployees and their identification with the

company is the increased number of stock-

holders amongst the staff since going public.

Additional motivation will also be gained

from a new employee profit sharing scheme

which is still being worked on.

The Board of Directors would like to ex-

pressly thank all employees for the good job

done this past year. This is even more true

because years of growth are combined with

extraordinary demands, especially in con-

nection with the high speed of innovation,

the organizational changes and the internal

changes resulting from the IPO.

Special occurrences in 1999

Since March 1, 1999 Björn S. Eriksen has

been a new member of the Board of Direc-

tors for Finance.

In May 1999 PSI celebrated its 30th an-

niversary. This was another milestone for the

company the year after the IPO.

On August 30, 1999 5,205,060 registered

stocks were transformed into ordinary com-

mon stocks and offered for trade on the

Neuer Markt of the Frankfurt Stock Ex-

change. This increased PSI's share equity by

a factor of 2.8.

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30 | Group Report

the banking and retail sectors. With their

close ties to universities PSI has been able to

acquire new employees. This year UBIS

could make black figures despite a loss of

DM 8 million in 1998.

GSI: pushes development of

human resources management software

GSI mbH, within the framework of their

year long partnership with PSI, develops

products for human resources management,

manufacturing executive (MES) and project

management. These are integrated into

PSI’s product PSIPENTA. The takeover will

ensure the correct treatment of human re-

sources management software and will guar-

antee further development.

PSIPENTA: the expert for

medium-sized companies

PSIPENTA Software Systems GmbH devel-

ops and markets the standard business soft-

ware PSIPENTA. The foreign subsidiaries of

this company in the USA, France and

Switzerland are responsible for PSIPENTA

business in their respective countries. In July

PSIPENTA took over the Enterprise Re-

source Planning (ERP) supplier “integral da-

tentechnik”. PSIPENTA uses their know-

how with smaller companies. For the 350

customers of the ERP software “indios” the

transfer to the future compatible ERP-soft-

ware PSIPENTA is ensured.

UBIS: Strength in eBusiness

UBIS GmbH strengthens the PSI Group's

competence for innovative technologies in

eCommerce and eBusiness. Furthermore

UBIS has its own strong customer base in

PSIPENTA Software Systems GmbH, Berlin

NENTEC Netzwerktechnologie GmbH, Karlsruhe

PLANAR GmbH, Dortmund

UBIS GmbH, Berlin

PSI-BT AG, Düsseldorf

GSI mbH, Berlin

iRM GmbH., Wien, Austria

ECI GmbH, Hamburg

Schindler Technik AG, Berlin

Sigma A.S., Istanbul, Turkey

100%

100%

90%

66%

58%

51%

51%

51%

28,5 %

20 %

100 %

100 %

100 %

78,4 %

100 %

PSIPENTA USA Inc., Newton, MA/USA

PSIPENTA France S.a.r.l., Paris, France

integral datentechnik GmbH, Kaiserslautern

PSI AG, Schwerzenbach, Switzerland

ECI Systems Ltd., London, England

PSI AG's subsidiaries and joint ventures

The takeover of PLANAR GmbH occured onFebruary 10, 2000.

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Group Report | 31

ECI: the logistics specialist

With ECI GmbH, PSI has strengthened its

position in the logistics sector. ECI develops

standard software products for logistics and

warehouse management. These are used in

the product and the system business. ECI has

excellent connections to the market via sup-

pliers of warehouse and material flow tech-

nology.

iRM: optimized use of energy

iRM GmbH strengthens PSI’s position in

the energy market. It develops and markets

products for the integration of energy use op-

timization and sales of energy. iRM also

opens the Austrian market to PSI.

NENTEC: a pillar in

telecommunications

The focus of NENTEC Netzwerktechnologie

GmbH's activities is technological develop-

ment for internet applications and telecom-

munications. With the takeover of this com-

pany, we have ensured a unique technology

for energy transmission controls. With these

we can use parts of the internet infrastruc-

ture for network control applications.

NENTEC complements our know-how in

the areas of internet security and speech-

data integration, the basis for internet te-

lephony.

PSI-BT: custom-made solutions

for core industries

PSI-BT AG (founded January 1, 2000)

strengthens PSI’s position in the metal,

chemical and printing sectors. It is a joint

venture with the Association of the German

Steel Industry. PSI-BT develops solutions for

the metal, chemical and printing sectors and

uses all products in the PSIPENTA family to

do so.

PLANAR: Specialist for

eBusiness and logistics

PLANAR GmbH, acquired in January 2000,

is an eBusiness and logistics specialist. Its

strength is in the connection of internet and

logistics into continuous supply chains.

PLANAR has a good customer base and

opens the door for PSI to the growth market

of airport logistics.

Schindler Technik:

the network specialist

Schindler Technik AG consults, plans and

implements computer and communication

networks. PSI uses these services to meet

complete customer demands.

Sigma: Turkish pillar

Sigma A.S. offers PSI software to the Turk-

ish market.

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32 | Outlook

PSI has achieved a convincing reputation

and a technologically leading position as in-

tegrator for resource management and eBusi-

ness.

With our clear profile and the necessary or-

ganizational structure in an attractive mar-

ket, PSI expects to return to black figures.

We will win market share by increasing

sales. This will also affect stock prices posi-

tively. The expansion of our investor rela-

tions and public relations will further

strengthen these tendencies.

Not only focussing on our own growth, PSI

will continue to seek strategic alliances

which could possibly even include equity ex-

changes. They should especially help to

speed up the growth of the product business.

PSI will also pursue partnerships interna-

tionally.

Our range of products was designed and

complemented in such a manner as to sup-

port our customers’ future business processes.

Thus PSI is strengthening customer loyalty

and at the same time reaching new markets.

Our clear profile as a specialist for resource

management via the internet ensures us an

excellent position for the next years.

The Board of Directors

A better export climate and thus economic

improvement are expected for 2000. The

growth rates should reach 2.7% for Germany

and 2.8% for the European Union. This cre-

ates a positive investment climate, also or

perhaps especially for software, in that this

market will grow by over 10%. Because of

the insecurity caused by Y2K, decisions that

were postponed in 1999 will be made up for

in 2000. PSI will also profit from impulses

coming from the deregulation of the Euro-

pean energy market and eBusiness which

will result in real business.In 1999 PSI ful-

filled the prerequisites for being successful in

this attractive market and will help influ-

ence the approaching processes of change.

An important requirement for this is the

high order volume of DM 220 million. It

gives us the substance for the optimization of

production and the necessary development

plan. Our personnel capacity of over 1000

employees enables PSI to react flexibly to

new market demands.

Furthermore, PSI has concentrated these

areas of specialty in 1999. This concentra-

tion is strengthened even more by the entire

Group being placed under the umbrella of

Resource Management. This can mean re-

sources necessary for power plants, ma-

chines, transportation or networks. With the

systematic expansion of our know-how for

future-oriented technologies for eBusiness,

OutlookThe highest number of orders in the history of PSI and the

repositioning as an integrator for resource management and

eBusiness promise a return to the profit zone.

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Consolidated Financial Statements

Consolidated Financial Statements | 33

Group Balance Sheet 34

Group Statement of Income 36

Group Cash Flow Statement 37

Development of Fixed Assets 38

Notes

Significant account and valuation principles 40

Consolidation Group 46

Explanatory comments 49

Auditor’s Report 69

Supervisory Board Report 70

Executive Bodies 72

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Assets

Notes 12-31-99 12-31-98 12-31-97

DM 000 DM 000 DM 000

Current assets

Cash and cash equivalents 8,575 66,914 9,160

Trade receivables 21 78,496 43,866 33,550

Inventories 22 8,995 23,577 39,359

Prepaid expenses 2,672 2,128 1,215

Deferred taxes 5,716 1,295 14

Other receivables 23 4,601 3,538 5,331

Total 109,055 141,318 88,629

Long-term assets

Receivables 0 2,952 0

Financial assets 24 1,983 855 1,580

Property, plant and equipment 25 25,693 20,813 18,707

Intangible assets (net) 26 61,094 33,404 21,531

Deferred tax assets 25,375 16,052 10,465

Total 114,145 74,076 52,283

Total assets 223,200 215,394 140,912

34 | Consolidated Financial Statements

Group Balance Sheet

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Consolidated Financial Statements | 35

Equity and Liabilities

Notes 12-31-99 12-31-98 12-31-97

DM 000 DM 000 DM 000

Current liabilities

Current financial liabilities 1.106 431 1,125

Trade payables 23,144 13,388 15,599

Payments received on account of orders 6,775 31,416 46,421

Deferred income 7,365 1,908 1,159

Other accruals 27 17,882 12,689 6,852

Deferred income taxes 12,585 5,955 7,497

Other liabilities 28 11,141 8,978 9,530

Total current liabilities 79,998 74,765 88,183

Long-term liabilities

Deferred tax liabilities 20,353 12,292 86

Long-term profit participation rights 32 454 481

Special items for investment grants 29 1,058 969 1,295

Long-term certificate of participating capital 1 3,500 3,438

Pension reserves 30 16,128 14,264 12,814

Financial liabilities 0 0 10,340

Total long-term liabilities 37,572 31,479 28,454

Equity 31

Capital stock 44,921 41,000 12,321

Capital surplus 78,057 76,850 15,566

Revenue reserves 2,386 2,386 2,727

Contributions made for capital increase 6,000 0 0

Unrealised net profits from securities 5 2 11

Difference relating to currency translation -257 -360 38

Net retained earnings -28,801 -11,260 -6,818

Total equity 102,311 108,618 23,845

Minority interests 32 3,319 532 430

Total equity and liabilities 223,200 215,394 140,912

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36 | Consolidated Financial Statements

Notes 1999 1998 1997

DM 000 DM 000 DM 000

Net sales 34

Software production and maintenance 188,007 145,872 101,558

Licenses 24,967 30,009 16,984

Hardware 29,044 10,330 10,244

242,018 186,211 128,786

Cost of sales 34

Software production and maintenance 149,474 117,030 85,440

Licenses 7,949 7,378 3,654

Hardware 25,263 9,051 8,333

182,686 133,459 97,427

Gross profit on sales 59,332 52,752 31,359

Operating expenses

Selling expenses 43,487 31,906 21,516

General and aministrative expenses 18,546 16,164 10,313

Research and development costs 23,680 14,090 8,769

Capitalized research and development costs -18,128 -10,470 -6,039

Depreciation of capitalized research and development costs 3,619 1,939 1,255

Other revenues or gains 4,847 -1,845 -274

76,051 51,784 35,540

Operative result -16,719 968 -4,181

Net interest, net investment income 283 1,581 -1,141

Extraordinary result 0 0 -4,966

Result before income tax -16,436 2,549 -10,288

Taxes on income -1,049 -5,391 248

Group net profit/loss -17,485 -2,842 -10,040

Minority interests -56 2,474 19

Profit/loss brought forward -11,260 -6,818 3,203

Appropriation of results (prior year result PSI AG) 0 -4,074 0

Group retained earnings/accumulated deficit -28,801 -11,260 -6,818

Result per share 38

in DM per share (5-DM/share) -1.97 -0.06 -4.23

Group Statement of Income

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Consolidated Financial Statements | 37

1999 1998 1997

DM 000 DM 000 DM 000

CASH FLOWS FROM OPERATING ACTIVITIESNet income -17,485 -2,842 -10,040Adjustments to reconcile net income (loss) to net cash used in operating activities

Depreciation of intangible assets and of property, plant and equipment 14,177 7,727 5,312

Net transfer to / release of pensions reserves 1,864 1,451 1,312

Net transfer to / release of deferred taxes 947 3,796 -619

Minority interests in result -56 2,474 19

Change in assets Inventories 14,582 15,782 10,122

Long-term receivables 2,952 -2,952 0

Prepaid expenses -544 -913 -766

Other receivable -1,063 1,793 -4,185

Trade receivables -34,630 -10,316 -9,926

Change in liabilitiesTrade payables 9,756 -2,211 5,758

Deferred income 5,457 749 483

Other reserves and accrued liabilities 5,193 5,837 3,352

Other liabilities 2,163 -552 752

Advance payments -24,641 -15,005 -3,875

Cash flow from operating activities -21,328 4,818 -2,301

INVESTING ACTIVITIESAdditions to capitalized research and development costs -18,128 -10,470 -6,039

Net additions to property, plant, equipment and other tangible assets -11,330 -9,855 -9,870

Additions to goodwills -10,082 -1,381 0

Purchase of financial assets -1,128 0 0

Cash flow from investing activities -40,668 -21,706 -15,909

FINANCING ACTIVITIESMininority interests 2,787 102 -269

Financial liabilities 675 -11,034 4,505

Other changes in equity 106 -407 -64

Special item for investment grants 89 -326 1,295

Issue of profit participating rights/profit part. certificate capital 0 35 3,788

Financial assets 0 725 566

issue of shares 0 85,547 8,214

Cash flow from financing activities 3,657 74,642 18,035

Increase (decrease) in cash and cash equivalents -58,339 57,754 -175

Cash and cash equivalents at the beginning of the year 66,914 9,160 9,335

Cash and cash equivalents at the end of the year 8,575 66,914 9,160

Group Cash Flow Statement

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38 | Consolidated Financial Statements

Number of shares subscribed Additional Revenueissued stock paid-in reserves

capital

2.500 DM 5 DM DM 000 DM 000 DM 000As of December 31, 1996 4,107 0 10,268 9,405 2,727

Group net lossCurrency translationIssuance of shares 0 410,700 2,053 6,161Other changes in minority interestsUnrealized gains on securitiesAs of December 31, 1997 4,107 410,700 12,321 15,566 2,727

Group net lossAppropriation of result for the financial year 1997 of PSI AG 1,910Appropriation of profit carry forwards of PSI AG 2,165Conversion of capital stock in shares with par value -4,107 2,053,500Issuance of shares

Capital increase from campany funds 3,696,300 18,482 -14,066 -4,416Capital increase from cash contribution 2,039,500 10,197 84,639Offsetting of IPO costs -9,289

Change in minority interestsCapital increase at PSIPENTA GmbHOther

Currency translationOther changesAs of December 31, 1998 0 8,200,000 41,000 76,850 2,386

Group net lossCurrency translationIssuance of shares

Conversion of convertible bonds 103,750 519 -104Contribution of 15% of shares to PSIPENTASoftware Systems GmbH for issuance of shares 243,140 1,215Exercise of participation rights 437,372 2,187 1,311

Change in minority interestsUnrealized profit/loss from share certificatesOther changesAs of December 31, 1999 0 8,984,262 44,921 78,057 2,386

Development of Fixed Assets

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Consolidated Financial Statements | 39

Retained earnings/ Unrealized Contributions Difference Total Minorityaccumulated gains made for related to equity interests

deficit on securities Capital increase currencytranslation

DM 000 DM 000 DM 000 DM 000 DM 000 DM 0003,203 35 0 78 25,716 699

-10,021 -10,021 -19-40 -40

8,2140 -250

-24 -24-6,818 11 0 38 23,845 430

-368 -368 -2,474

-1,910 0

-2,165 00

94,836-9,289

0 1,8000 776

-398 -3981 -9 -8

-11,260 2 0 -360 108,618 532

-17,541 -17,541 56103 103

415

1,2153,498

2,7313 3

6,000 6,000-28,801 5 6,000 -257 102,311 3,319

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40 | Notes

Notes

Summary of significant account and valuation principles

1. Description of business activities

The business operations of the Group comprise the production and distribution of IT products

and systems, consulting and training in the area of data processing as well as the sale of elec-

tronic equipment and systems. The Company’s headquarters are located in Berlin.

2. Accounting principles

The Company keeps commercial books according to German commercial code. All necessary

adjustment entries were carried out for the preparation of the consolidated financial statements

according to US accounting provisions (“United States Generally Accepted Accounting Prin-

ciples” or “US-GAAP”).

3. Consolidation principles

All major subsidiaries which are legally or factually controlled by PSI Aktiengesellschaft für

Produkte und Systeme der Informationstechnologie AG (hereinafter: PSI AG) have been

included in the consolidated financial statements. All material intercompany transactions have

been eliminated for consolidation purposes.

4. Associated enterprises

Significant equity investments are consolidated using the equity method when the PSI group

holds between 20 and 50% of the shares.

5. Currency translation

Currency translation is performed according to the Statement of Financial Accounting Stand-

ards (“SFAS”) No. 52 ‘Foreign Currency Translation’. According to this standard the assets and

liabilities of the subsidiaries are translated into German marks at the exchange rate prevailing

on the balance sheet date and the income statement is translated using the annual average

exchange rate. The equity of the investments is translated at the historical exchange rate.

While held by the Group, currency differences resulting from the use of different rates are

recorded without effect on income and shown as a separate item under equity.

Gains and losses from transactions in foreign currency are recorded with effect on income.

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Notes | 41

6. Revenue recognition

Revenue from licenses is recognized in accordance with the Statement of Position (SOP for

short) 97-2 ‘Software Revenue Recognition’ of the American Institute of Certified Public

Accountants – AICPA for short), and applying the supplementary statements SOP 98-4 and

SOP 98-9.

Under US-GAAP, revenue from licenses is recognized provided there is sufficient evidence that

a contract has been concluded, delivery has been made, the license fee has been fixed or is

determinable and receipt of payment is probable. Revenue from maintenance agreements is

realized on a straight-line basis over the term of the agreement based on past experience.

Income from consulting services and training is recognized as soon as the service has been ren-

dered.

Revenues from long-term projects are recognized according to ARB 45 (‘Accounting Research

Bulletin’ on ‘Long Term Construction Type Contracts’) and in accordance with SOP 97-2,

which refers to ARB 45 for such revenues, and the principles of revenue recognition for long-

term construction. For long-term construction type contracts which satisfy the conditions of the

Percentage of Completion Method, revenue is recognized on the degree of completion. The

recognized part profits are disclosed as non-invoiced receivables. Revenue from all other con-

struction type contracts is recognized according to the ‘Completed Contract Method’ upon

partial or final acceptance and billing of the project.

Project related hardware inventories, which were recorded as finished goods and merchandise in

the previous financial year, were invoiced to the customer upon receipt due to a change in the

invoicing procedure in the financial year 1999 and thus recorded as trade receivables.

7. Product-related expenses

Expenses for advertising and sales promotion as well as other sales-related expenses are recorded

with effect on income as they are incurred. Accruals for warranties are established when the

products are sold. Research and development is recorded as a normal expense – unless capital-

ization is required pursuant to SFAS 86 (‘Accounting for the Costs of Computer Software to Be

Sold, Leased, or Otherwise Marketed’).

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42 | Notes

8. Earnings per share

Earnings per share is computed in accordance with SFAS 128 (“Earnings per Share”) by divid-

ing the group result by the weighted average number of shares in issue. The diluted result per

share is computed by dividing the group result by the weighted number of shares issued and the

number of rights convertible into shares as a result of options. Group earnings represent the

earnings generated by the group as a whole during the year. For purposes of computing the earn-

ings per PSI AG share the minority interests are deducted or added.

9. Cash and cash equivalents

Cash and cash equivalents comprise cash on hand, current bank balances as well as deposits

that can be cashed at short notice with original terms of three months or less.

10. Inventories

Raw materials, consumables and supplies are valued at acquisition cost giving consideration to

the lower of cost or market principle.

Completed projects and work in process for which revenues are recognized according to the per-

centage of completion method are valued at manufacturing cost plus capitalizable partial profits

and are shown as a receivable. Manufacturing cost contains material direct costs and material

overheads as well as special direct labor costs. Valuation allowances have been set up for risks

related to diminished salability.

Finished project and work in process for which sales are recognized according to the Completed

Contract Method are valued at manufacturing costs plus general and administrative costs. Valu-

ation allowances have been set up for risks related to diminished salability.

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Notes | 43

11. Financial assets

Securities are stated in accordance with SFAS 115 (‘Accounting for Certain Investments in

Debt and Equity Securities’) at current selling price (‘fair value’). Unrealized gains and losses

are shown in the equity section. In the case of a permanent impairment of value securities and

equity investments are written down.

12. Property, plant and equipment (net)

Property, plant and equipment is stated at acquisition or manufacturing cost and depreciated

using the straight-line method of depreciation over the useful life of the asset as follows:

Useful life/

depreciation rate Method

Buildings and land improvements 10-50 years straight-line/declining balance

Leasehold improvements 3-15 years straight-line/term of rent agreement

Computers and accessories 3-4 years straight-line

Office and factory equipment 5-10 years straight-lineLow value assets, software up to DM 800 100% in the year of acquisition

13. Intangible assets (net)

Intangible assets including goodwill are valued at acquisition cost and depreciated over the use-

ful life generally used in the company of three to ten years. Goodwill is tested as to its net realiz-

able value as of each balance sheet date on the basis of estimated future cash flows.

The cost of the development of new software products and of significant improvements to exist-

ing software products are offset as expense until they are technically marketable; costs incurred

subsequently are capitalized in accordance with SFAS 86 (‘Accounting for the Costs of Com-

puter Software to Be Sold, Leased, or Otherwise Marketed’). Costs incurred after the product is

released for sale are recorded as expenses.

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44 | Notes

Capitalized software development costs are depreciated at the higher of the following two

amounts:

• straight-line over the estimated useful life of the software (four to seven years) or

• in proportion of the current gross revenue from the sale of the software to the total amount

of current and estimated future gross revenue from the sale of this software.

As of the balance sheet date the book value of the capitalized software developments is com-

pared with the present value of the estimated future net sales revenue of the software. If the

book value of the capitalized software development costs exceeds this present value, an appro-

priate valuation allowance is created.

Software developments acquired from third parties that are integrated as modules in existing

products of the Company are capitalized in accordance with APB-Opinion 17 (‘Accounting

Principles Board Opinion ‘Intangible Assets’). The acquired software developments are valued

at acquisition cost and written off using the straight-line method over a useful life of three

years. Capitalized third-party development costs are compared as of the balance sheet date with

the present value of the estimated future net sales revenues. If the book value of the capitalized

third party development costs exceeds this present value, an appropriate valuation allowance is

created.

For simplification purposes, low value assets with acquisition costs up to DM 800 are fully

expensed in the year of acquisition. The differences from the capitalization compared to sched-

uled depreciation are immaterial.

14. Deferred taxes

Deferred tax assets and liabilities are established and valued in accordance with SFAS No. 109

(‘Accounting for Income Taxes’) for temporary differences between the commercial balance

sheet and the tax accounts. When determining the applicable tax rate the recommendations of

the Emerging Issues Task Force of FASB on SFAS 109 are considered.

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Notes | 45

15. Use of estimates

When preparing the consolidated financial statements estimates have to be made to a certain

extent and assumptions made which impact the assets, liabilities and contingent liabilities

accounted for on the balance sheet date and the disclosure of income and expenses during the

reporting period. The actual amounts may deviate from these estimates.

16. Exemptive consolidated financial statements pursuant

to sec. 292 a (1) and (2) HGB (German Commercial Code)

The Company has made use of sec. 292 a (1) and (2) HGB (German Commerical Code) and

has prepared exemptive financial statements according to US-GAAP (US generally accepted

accounting principles). The differences compared to the balance sheet, valuation and consoli-

dation methods prepared according to current German law mainly relate to the capitalization of

self-produced intangible fixed assets, recognition of sales, the valuation of pension accruals and

recognition of deferred taxes.

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46 | Notes

Consolidation Group

The following companies are included in the consolidated financial statements as

subsidiaries or associated enterprises:

17. Subsidiaries

Shares as Equity Annual result12-31-99 1999

% DM 000 DM 000

Subsidiaries of PSI AG

PSIPENTA Software Systems GmbH, Berlin 100.0 -29,446 -36,109

UBIS Unternehmensberatung für Integrierte Systeme GmbH, Berlin 66.0 2,424 1,224

NENTEC Netzwerktechnologie GmbH, Karlsruhe 100.0 288 239

ECI – Entwicklungsgesellschaft für computer-gestützte Industriesysteme mbH, Hamburg 51.0 -986 -1,000

ECI Systems Ltd., London, UK 51.0 117 -15

iRM Integriertes Ressourcen Management GmbH, Vienna, Austria 51.0 3,222 -514

PSI-BT Business Technology for Industries AG, Düsseldorf 58.0 96 -2

GSI Gesellschaft für Steuerungs- und Informationssysteme mbH, Berlin 51.0 1,060 144

Subsidiaries of PSIPENTA Software Systems GmbH

PSI AG Produkte und Systeme der Informationstechnologie, Schwerzenbach, Switzerland 78.4 1,666 -821

integral datentechnik Kaiserslautern GmbH, Kaiserslautern 100.0 33 182

PSIPENTA USA Inc., Newton/Massachusetts, USA 100.0 -9,140 -4,988

PSIPENTA France S.a.r.l., Paris, France 100.0 -502 -308

The subsidiaries, UBK Unternehmensberatung Kühl & Partner GmbH, Aschaffenburg, and PSI Processturingen

Informatiesystemen BV, Nieuwegein, Netherlands, are not fully consolidated, as they have discontinued active

business operation and are of subordinate interest for the consolidated statements of PSI AG. They are consoli-

dated ‘at equity’.

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Notes | 47

The subsidiaries PSIPENTA USA Inc., Newton/Massachusetts, USA, and PSIPENTA France

S.a.r.l., Paris, France, discontinued their active business operations in fiscal 1999. As the results

of these companies are not of subordinate interest for the consolidated statements, both

companies have been fully consolidated and included in the consolidated statements as of

December 31, 1999.

18. Associated enterprises

Shares as Equity Annual result12-31-98 * 1998 *

% DM 000 DM 000

PSI Otomasyon ve Bilgi Sistemleri Ticaret Anonim Sirketi, Istanbul, Turkey 20.0 k.A. k.A.

Schindler & Partner GmbH, Berlin 38.0 875 385

* The final financial statements as of December 31, 1999 are not yet available.

19. Changes in the consolidation group

Compared to prior years the companies included in consolidation changed as follows:

• On December 29, 1998, PSI AG acquired 66% of the shares (nominally: DM 792 million)

of UBIS Unternehmensberatung für integrierte Systeme mbH (hereinafter ‘UBIS’) with

economic effect as of January 1, 1999 at a purchase price of DM 6,534 million. UBIS was

thus included in the consolidated financial statements of PSI for the first time in fiscal

1999. The business activities of UBIS include consulting services in the field of electronic

business.

• On January 8, 1999, PSI AG acquired a further 12% of the shares in GSI Gesellschaft für

Steuerungs- und Informationssysteme mbH (hereinafter ‘GSI’) at a purchase price of DM

486 million and increased capital stock by DM 15 millions plus a surplus of DM 750 mil-

lions. Furthermore, the shares in GSI held by PSI Aktiengesellschaft für Produkte und Sys-

teme der Informationstechnologie, Schwerzenbach, Switzerland, (hereinafter ‘PSI Switzer-

land’) were acquired for a purchase price of DM 245 millions. The share of capital stock

held by PSI AG thus rose to 51%. The business activities of GSI include software develop-

ment and consulting. The company develops important software components of PSIPENTA-

software.

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48 | Notes

• On March 17, 1999, PSI AG acquired 51% of the shares in iRM Integriertes Ressourcen

Management, Vienna, Austria (hereinafter ‘iRM’) at a purchase price of DM 3,060

million. In fiscal 1999, the shareholders of iRM Integriertes Ressourcen Management,

Vienna, Austria, paid in a total of DM 91 million to increase capital stock, and DM 3,002

million to increase the company’s capital reserves. The business activities of the company

consist in developing control and information systems for the power industry.

• By virtue of a notarized share purchase and capital contribution agreement of October 5,

1999, PSI AG acquired 100% of the shares in NENTEC Gesellschaft für Netzwerk-Tech-

nologie mbH (hereinafter ‘NENTEC’) in return for the issue of 105,000 no-par-value

shares with an imputed par value of DM 5.00 of Conware Netzpartner Gesellschaft für

Netzwerklösungen mbH. At the time of acquisition of the shares in NENTEC, the market

price of the shares issued came to DM 6,000 million. The business activities of NENTEC

consist of the development of network solutions.

• On November 10, 1999, PSI AG, together with BFI Betriebstechnik GmbH, a 100% sub-

sidiary of the Verein der deutschen Eisenhütten- und Stahlwerke, founded PSI BT Tech-

nologies for Industry AG (hereinafter ‘PSI BT’), with a capital stock of DM 98 million.

PSI AG contributed 58% of the capital stock by a cash contribution, while BFI Betriebs-

technik GmbH made a cash contribution of 42%. In an agreement of November 10,

1999, the shareholders of PSI BT resolved to increase non-cash capital as of January 1,

2000. In connection with this non-cash contribution, PSI AG has undertaken to spin off

its PRO business division and contribute it to PSI BT. The non-cash contribution to be

made by PSI AG comes to approx. DM 5,672 million. BFI Betriebstechnik GmbH will

contribute all assets and liabilities to PSI BT. The non-cash contribution of assets and

debts from BFI Betriebstechnik GmbH amounts to DM 4,107 million. The business activ-

ities of PSI BT include the production and sale of IT products and systems.

• By virtue of a notarized purchase agreement of September 23, 1999, PSIPENTA Software

Systems GmbH (hereinafter ‘PSIPENTA’) acquired 100% of the shares in Integral Daten-

technik Kaiserslautern GmbH (hereinafter ‘INTEGRAL’) in return for payment of a pur-

chase price of DM 376 million. The acquisition of this company is closely connected

commercially with the conclusion of a consulting agreement between Mr. Neuberger, a

shareholder of Integral Datentechnik Kaiserslautern GmbH, and PSIPENTA Software

Systems GmbH on March 30, 1999. The business activities of Integral Datentechnik

Kaiserslautern GmbH include the maintenance and sale of Indios, a software product.

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Notes | 49

All the subsidiaries acquired in fiscal 1999 are insignificant for the overall picture of the

PSI AG group, thus it is not necessary to provide any pro forma information.

20. Changes in the consolidation group following the balance sheet date

• Acquisition of shares in PLANAR Gesellschaft für technische Softwaresysteme mbH

(hereinafter ‘PLANAR’)

By virtue of a notarized purchase agreement of February 10, 2000, PSI AG acquired 90%

of the shares in PLANAR, in return for the issue of 42,000 non-par-value shares with an

imputed par value of DM 5.00. At the time of acquisition, the market value of the PSI

shares issued came to a total of DM 2,793 million. The business activities of PLANAR

comprise development and sale of software systems for operating technical equipment and

systems.

Explanatory Comments

21. Trade receivables

12-31-99 12-31-98DM 000 DM 000

78,496 43,866

Unlike prior years, in which no valuation allowances were set up, valuation allowances totaling

DM 1,113 million were set up for receivables for which default on payment is anticipated.

Of the receivables disclosed, DM 21,336 million (prior year: DM 6,818 million) is attributable

to non-invoiced receivables in connection with revenue recognition according to the percent-

age of completion method.

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50 | Notes

22. Inventories

12-31-99 12-31-98DM 000 DM 000

Work in process 6,815 10,129

Finished goods and trading goods 1,049 10,512

Advance payments 1,131 2,936

8,995 23,577

As of the balance sheet date, work in process includes capitalized, project-related expenses

amounting to DM 6,396 million which apply to various projects. In addition, work in process

contains capitalized manufacturing costs for projects whose sales are recognized according to the:

• completed contract method or

• software revenue recognition (SOP 97-2)

Project-related finished goods and trading goods disclosed in the prior year as inventories are

disclosed in fiscal 1999 as not yet invoiced receivables.

Advance payments relate to goods that have not yet been delivered.

23. Other receivables

12-31-99 12-31-98DM 000 DM 000

Payments on account for contract services 1,683 742

Receivables due from tax authorities 1,078 685

Receivables from associated enterprises 613 0

Loans to employees 269 182

Receivables due to foreign taxation 142 304

Loans to sub-suppliers 0 350

Other 816 1,275

4,601 3,538

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Notes | 51

Payments on account for outside services are the result of prepayments to third parties for devel-

opment services.

The receivables due from the tax authorities mainly result from corporate income tax prepay-

ments for financial year 1998.

The receivables from associated enterprises relate to loans to Schindler & Partner GmbH, with

a maturity of less than one year.

24. Financial assets

12-31-99 12-31-98DM 000 DM 000

Securities stated at market value

Securities held by foreign subsidiaries 1,423 593

Securities held by PSI AG and domestic subsidiaries 423 35

1,864 628

Associated companies consolidated ‘at equity’ 137 227

1,983 855

The acquisition costs and current selling values of the securities shown under financial assets

break down as follows:12-31-99 12-31-98

DM 000 DM 000

Debt instruments from domestic and foreign banks

Acquisition cost 1,841 626

Unrealized gains 5 2

Current selling value 1,846 628

Companies consolidated at equity include Schindler &Partner GmbH (DM 128 million) and

PSI Otomasyon ve Bilgi Sistemleri Ticaret Anonim Sirketi, Istanbul, Türkei (DM 9 million).

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52 | Notes

25. Property, plant and equipment (net)

12-31-99 12-31-98DM 000 DM 000

Acquisition cost

Land and buildings 23,471 20,702

Computers and accessories 19,615 18,012

Office and factory equipment 7,004 4,730

50,090 43,444

Accumulated depreciation -24,397 -22,631

Total property, plant and equipment 25,693 20,813

In fiscal 1999, depreciation on property, plant and equipment of DM 6,565,707 million (prior

year: DM 3,949,031 million) was recorded.

26. Intangible assets (net)

The intangible assets include other intangible assets, capitalized goodwill and capitalized soft-

ware development costs.

The book values of the intangible assets have developed as follows:

12-31-99 12-31-98

DM 000 DM 000Acquisition and manufacturing cost

Other intangible assets 14,191 15,500

Goodwill 18,806 1,498

Capitalized software development costs 44,473 26,345

77,470 43,343

Accumulated depreciation

Other intangible assets -6,580 -5,661

Goodwill -1,936 -36

Capitalized software development costs -7,860 -4,242

-16,376 -9,939

Book values

Other intangible assets 7,611 9,839

Goodwill 16,870 1,462

Capitalized software development costs 36,613 22,103

61,094 33,404

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Notes | 53

In fiscal 1999, depreciation on other intangible assets of DM 2,112 million (prior year: DM

1,827 million), on goodwill of DM 1,881 million (prior year: DM 12 million) and DM 3,619

million on capitalized software development costs (prior year: DM 1,939 million) was recorded.

Goodwill stated at book values is mostly a result of debit differences arising from the consolida-

tion of NENTEC (DM 5,416 million), UBIS (DM 5,255 million) and PSIPENTA (DM 2,758

million).

The software development costs capitalized according to SFAS 86 pertain to the following

licensed products:

12-31-99 12-31-98DM 000 DM 000

PSIPENTA Version 5,0 31,053 22,103

Network management system for the telecommunications industry 3,164 0

Order control system for the printing industry 1,205 0

System to optimize gas consumption 609 0

Warehouse management system 582 0

36,613 22,103

In fiscal 1999 a detailed program design was developed for Version 5.0 of the PSIPENTA soft-

ware. All development expenses incurred between completion of the program design and the

achievement of marketability of the software have been capitalized. The capitalized software

development costs for the PSIPENTA licensed product which include the development expen-

ses for PSIPENTA 5.0 and earlier versions not yet amortized are written off over the usual useful

life of seven years.

The network management system for the telecommunications industry, the order control sys-

tem for the printing industry, the warehouse management system and the system to optimize gas

consumption are new developments, that were developed into marketable licensed products in

fiscal 1999. These licensed products are written down over an estimated useful life of four years.

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54 | Notes

27. Other accruals

12-31-99 12-31-98DM 000 DM 000

Services still to be performed 7,282 4,409

Vacation and overtime credits 3,205 2,586

Other 7,395 5,694

17,882 12,689

28. Other liabilities

12-31-99 12-31-98DM 000 DM 000

Tax liabilities 5,609 5,214

Social security liabilities 1,859 1,617

Salary and wage liabilities 675 585

Liabilities to shareholders 102 0

Other 2,898 1,562

11,141 8,978

29. Special item for investment grants

12-31-99 12-31-98DM 000 DM 000

Status as of January 1 969 1,295

Additions 413 0

Releases -324 -326

Status as of December 31 1,058 969

PSI AG, PSIPENTA and GSI have received investment grants (“GA-Mittel”). The investment

grants collected are released over the usual useful life of the plant that is the subject of the

grant.

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Notes | 55

30. Pension accruals

The Company has made pension pledges (unfunded plan) to various employees. These

payments are based on the length of service and agreements in the employment contracts. The

valuation of pension obligations is based on the projected unit credit method in SFAS 87

“Employers’ Accounting for Pensions”. In the following the actuarially computed pension

obligation and the obligation shown in the balance sheet is presented:

12-31-99 12-31-98DM 000 DM 000

Change in the actuarial present value of the pension obligation

Actuarial present value at the beginning of the financial year 13,530 12,005

Reconciliation difference to the pension reserves under German Commercial Code 734 809

14,264 12,814

Service cost (present value of the vested claims acquired during the financial year) 882 737

Mark-up of expected pension obligations 1,081 838

Amoritization of losses in the period 42 0

Period expenses 2,005 1,575

Loss resulting from change in assumptions when computing pension reserves 2,098 1,949

Pension payments -65 50

Amortization of the reconciliation difference to the pension reserves under German Commercial Code -75 -75

Loss not considered resulting from change in assumptions when computing pension reserves -2,098 -1,949

Actuarial present value at the end of the financial year 15,468 13,530

Reconciliation difference to the pension reserves under German Commercial Code at the end of the financial year 660 734

Pension obligations disclosed 16,128 14,264

To calculate the pension obligations in the financial year and the prior year, a discount of 7%

and long-term salary increase rates of 1.5% were assumed.

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56 | Notes

The losses not considered in fiscal 1999 as a result of a change in assumptions when computing

pension reserves mainly relate to the changed mortality tables (Heubeck's Mortality Tables

1998). The difference ascertained in fiscal 1998, totaling DM 75 million, will be transferred to

the pension reserves in equal installments over a period of 12.9 years from fiscal 1999.

31. Equity

Common stock

Fully paid-in capital stock as filed in the commercial register amounts to Euro 21,849,777.33

(DM 42,734,450). It has been increased by the conversion of convertible participation rights by

Euro 1,118,123.77 (DM 2,186,860) to Euro 22,967,901.10 (DM 44,921,130). The related change

in the articles of association was passed by the Board of Supervisors on December 16, 1999 but

has not yet been filed at the commercial register.

Taking the conversion of convertible participation rights into account, common stock is divi-

ded into 8,984,262 shares of no par value (and therefore each share has an imputed value of

common stock of Euro 2.55646 = DM 5.00). Of these shares, 8,951,822 are bearer shares and

the remaining 32,440 are registered in the name of the holder.

Capital increases and authorized capital

During the transition from DM to Euro (registered in the commercial register on May 28, 1999)

authorized capital of Euro 2,660,635.13 (DM 5,203,705) was created pursuant to §7(1) of the

articles of association, now called Authorized Capital I. On the basis of this authorization in the

articles, the management board passed a resolution on May 27, 1999 with the approval of the

supervisory board to utilize Euro 621,577.54 ( DM 1,215,700). The shareholders’ statutory right

to subscription was excluded. Gold-Zack AG Mettmann, who was allowed to subscribe to the

new shares made a contribution in kind rather than a cash contribution by contributing shares

in PSIPENTA Software Systems GmbH, Berlin, of a total amount of DM 300,000.00. The in-

crease in capital was filed with the commercial register on August 9, 1999. Since that date,

Authorized Capital I stands at Euro 2,039,057.59 (DM 3,988,050).

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Notes | 57

By resolution of the annual general meeting on May 28, 1999, the management board were

authorized subject to supervisory board approval to increase the Company’s common stock by

up to Euro 5,112,918.81 (DM 10,000,000) by one or several issues of shares without par value

for cash contribution before April 30, 2003, while excluding the subscription rights of existing

shareholders to fractional amounts. The authorization is now included in the articles under

§7(2) (Authorized Capital II) and was filed at the commercial register on August 9, 1999.

By resolution of the annual general meeting on May 28, 1999, the management board were fur-

ther authorized subject to supervisory board approval to increase the Company’s common stock

by up to Euro 2,045,167.52 (DM 4,000,000) by one or several issues of bearer shares in exchange

for a contribution in kind for the purposes of acquiring companies and parts of companies or

investing in companies before April 30, 2003, while simultaneously excluding the subscription

rights of existing shareholders. The authorization is now included in the articles under §7(3)

(Authorized Capital III) and also filed at the commercial register on August 9, 1999.

Pursuant to §6 (7) of the articles, common stock can be increased contingently by up to Euro

1,118,450.99 (DM 2,187,500) divided into up to 437,500 shares to cover the option rights held

by the bearers of convertible profit participation rights. The contingent increase in capital was

utilized in 1999 by Euro 1,118,123.77 (DM 2,186,860). It forms the basis of the resolution

passed by the supervisory board on December 16, 1999. The contingent capital to cover the

outstanding option rights held by the bearers of convertible profit participation rights to 128

shares now stands at Euro 327.22 (DM 640).

The remaining amounts as of December 31, 1999 are therefore Euro 2,039,057.59 (DM

3,988,050) in Authorized Capital I, Euro 5,112,918.81 (DM 10,000,000.00) in Authorized

Capital II and Euro 2,045,167.52 (DM 4,000,000.00) in Authorized Capital III.

By contribution contract certified by public notary dated October 5, 1999, 100% of the shares

in NENTEC Gesellschaft für Netzwerk-Technologie mbH, Karlsruhe were acquired by issue of

105,000 no par shares with an imputed par value of Euro 2.56 (DM 5.00). Since the increase in

capital associated with the purchase had not been filed at the commercial register as at balance

sheet date, the increase in common stock by Euro 268,428.24 (DM 525,000.00) and the associ-

ated premium of Euro 2,799,323.05 (DM 5,475,000.00) was reported under the item, “capital

surplus”.

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58 | Notes

Participating capital

On November 8, 1997, the general shareholders’ meeting of PSI AG authorized the manage-

ment board to issue once or several times convertible participation rights with a total par value

of up to DM 3,500,000.00 to shareholders, employees, the legal representatives of the company

and of affiliated enterprises, and to selected third parties. As of the balance sheet date, a total of

DM 3,498,976 convertible profit participation rights has been converted into 437,372 no-par-

value shares in PSI AG at an imputed par value of DM 5.00. The average share price of the

shares at the time of conversion came to DM 125.20 per share, or DM 54,758,974.40 in total.

Convertible bonds

On June 7, 1997, the general shareholders’ meeting of PSI AG authorized the management

board to issue 83 convertible bonds made out to the bearer, with a total nominal value of DM

415,000.00. Conversion was performed in September 1998, taking advantage of the contingent

capital increase of DM 518,750.00 at a ratio of 1:2.5, and entered in the Commercial Register

on January 15, 1999. The 103,750 no-par-value shares issued in connection with the capital

increase, with an imputed par value of DM 5.00, could be attributed a share price of DM 166,20

per share, or DM 17,243,250 in total.

Other profit participation rights

In accordance with a resolution of the general shareholders’ meeting on May 20, 1995 profit

participation rights were issued. There were two variations (type A and type B).

The type A profit participation right has an indefinite term. The statutory blocking period ends

on December 31, 2000. The profit participation rights have a par value of DM 100.00. Partici-

pation rights totaling DM 29,000.00 were issued. The profit participation rights bear interest

according to the value added return, and in the case of a negative value added return is at most

– 4% and in the case of a positive value added return at most 15%. The type A profit participa-

tion rights participate at a rate of 10% of par value in the loss of the Company and their claims

are subordinate to those of other creditors.

Contrary to the type A profit participation right the statutory blocking period of the type B profit

participation right ended as of June 30, 1997. In addition, they do not participate in the loss of

the company. All other conditions apply by analogy to type A profit participation rights. Type B

profit participation rights totaling DM 101,700.00 were issued. In fiscal years 1997 and 1998,

DM 91,700.00 of type B profit participation rights were repaid or converted into convertible

profit participation rights. In fiscal 1999, a further DM 7,000.00 of type B profit participation

rights were repaid.

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Notes | 59

32. Minority interests

The minority interests disclosed at balance sheet date are allotted to the following subsidiaries:

12-31-99 12-31-98DM 000 DM 000

iRM Integriertes Ressourcen Management GmbH,Vienna, Austria 1,584 0

UBIS Unternehmensberatung fürintegrierte Systeme GmbH, Berlin 824 0

GSI Gesellschaft für Steuerungs-und Informationssysteme mbH, Berlin 516 0

PSI AG Produkte und Systeme der Informationstechnologie, Schwerzenbach, Switzerland 354 532

PSI-BT Business Technology for Industries AG, Düsseldorf 41 0

3,319 532

In accordance with APB 16 no negative minority interests have been disclosed. If book nega-

tive minority interests have arisen as a result of net losses for the year, the corresponding shares

in result have been debited from the group result. At balance sheet date, the following loss

accounts of minority interests exist, which have contributed to the group result:

12-31-99 12-31-98DM 000 DM 000

ECI – Entwicklungsgesellschaft fürcomputergestützte Industriesysteme mbH, Hamburg -497 0

PSIPENTA Software Systems GmbH, Berlin 0 -1,092

-497 -1,092

33. Obligations from rent and lease agreements and other financial commitments

and contingent liabilities

Office equipment, data processing systems and other equipment have been rented on the basis

of operating lease agreements. In 1999 leasing charges of DM 187 million (1998: DM 180 mil-

lion) were incurred for office equipment and of DM 900 million (1998: DM 885 million) for the

rented data processing systems and other equipment.

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60 | Notes

Future leasing payments from existing lease agreements (operating lease) amount to:

DM 000

2000 3,400

2001 – 2003 4,600

2004 – 2006 3,100

In fiscal 1996 PSI AG entered into a rent agreement for an office building in Berlin. The rent

agreement expires on March 31, 2012. Furthermore, PSIPENTA entered into a rent agreement

for a further office building in Berlin in fiscal 1999. The rent payments from the rent agreement

are as follows:

DM 000

2000 5,423

2001 – 2003 17,053

2004 – 2006 18,116

2007 – 2012 36,240

PSI AG has issued sureties of DM 34,224 million.

34. Sales and other expenses

Sales and cost of sales1999 1998

DM 000 DM 000

Software production and maintenanceSales 188,007 145,872

Cost of sales -149,474 -117,030

38,533 28,842

LicensesSales 24,967 30,009

Cost of sales -7,949 -7,378

17,018 22,631

Hardware Sales 29,044 10,330

Cost of sales -25,263 -9,051

3,781 1,279

TotalSales 242,018 186,211

Cost of sales 182,686 -133,459

Gross profit on sales 59,332 52,752

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Notes | 61

35. Taxes on income

German corporate income tax law uses the tax credit system when taxing companies and share-

holders. Retained earnings are initially taxed at a corporate income tax rate of 45% plus a soli-

darity surcharge of 5.5% of the corporate income tax balance due. Accordingly, this means that

the effective corporate income tax rate is 47.475%. In the case of dividends distributed to share-

holders, the corporate income tax rate is reduced to 30% (plus a solidarity surcharge of 5.5%),

with the amount previously paid in excess of the effective tax rate on dividends of 31.65%

being refunded. When profits are distributed, shareholders liable to German taxation receive a

tax credit note against personal income tax equivalent to the corporate income tax, but not the

solidarity surcharge, previously paid by the company.

To calculate anticipated tax expense, in accordance with the recommendations of the Emer-

ging Issues Task Force of the FASB concerning SFAS 109 (‘Accounting for Income Taxes’), the

effective corporate income tax rate for retained earnings is stated at 47.475% plus the effective

rate of trade tax, taking into account a basis of assessment for own and corporate income tax of

8.625%. To calculate deferred taxes, a tax rate of 55% is applied.

As of December 31, 1999, the following corporate income tax loss carryforwards existed within

the group for the German group companies:

DM 000

PSI AG

Tax loss 1998 2,355

Tax loss 1999 31,265

33,620

PSIPENTA

Loss carryforward 1997/1998 43,492

Tax loss 1999 51,246

94,738

ECI

Tax loss 1999 1,260

integral datentechnik Kaiserslautern GmbH

Loss carryforward 1997 and previous years 182

129,800

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62 | Notes

Trade tax loss carryforwards exceed the corporate income tax loss carryforwards.

According to SFAS 109, deferred taxes have to be capitalized for tax loss carryforwards which

will in all probability be used up in the next few years. A 55% tax rate is also applied to these

deferred taxes.

According to the tax result budget, complete utilization of the tax loss carryforwards accrued up

to December 31, 1999 is not to be expected within the originally stated budget period. A valu-

ation adjustment of DM 41,063 million has therefore been made for the deferred tax assets

caption on the group companies’ loss carryforwards.

Apart from the loss carryforwards and current tax losses of the German group companies, there

are losses in fiscal year 1999 that can be offset against tax amounting to a total of DM 7,060

million at:

- PSI, Switzerland

- PSIPENTA USA Inc., Newton/Massachusetts, USA,

- PSIPENTA France S.a.r.l., Paris, France

- and iRM

The deferred tax assets and liabilities result from temporal accounting and valuation differences

between the tax and the commercial balance sheets for the following balance sheet positions

and from the tax loss carryforward, as is illustrated by the following table:

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Notes | 63

12-31-99 12-31-98DM 000 DM 000

Deferred tax assets resulting from the balance sheet positions:Other accruals 173 0

Special item for investment grants 548 532

Other 43 0

764 532

Deferred tax liabilities resulting from the balance sheet positions:Capitalized software development costs -20,138 -12,157

Current assets, payments on account and sales-related accruals -12,585 -5,955

Pension reserves -215 -135

-32,938 -18,247

Deferred tax assets resulting from tax loss carry- forwards: 71,390 25,215

Valuation allowance for deferred tax assets resulting from tax loss carryforwards -41,063 -8,400

30,327 16,815

Net deferred tax assets/liabilities 1,847 -900

Of the deferred tax liabilities, DM 12,585 million have a term of less than one year as of the

balance sheet date. Of the deferred tax assets, DM 5,716 million have a term of less than one

year as of the balance sheet date. The remaining deferred tax liabilities and assets have a term

of more than one year.

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64 | Notes

36. Segment reporting – sales by geographically defined area

The following table provides geographical information in respect of sales:

Germany Switzerland Other TotalDM 000 DM 000 DM 000 DM 000

1997

Software production and maintenance 93,887 4,784 2,887 101,558

Licenses 12,593 4,301 90 16,984

Hardware 8,766 902 576 10,244

115,246 9,987 3,553 128,786

1998

Software production and maintenance 133,251 7,380 5,241 145,872

Licenses 25,075 4,361 573 30,009

Hardware 8,269 1,790 271 10,330

166,595 13,531 6,085 186,211

1999

Software production and maintenance 168,964 10,247 8,796 188,007

Licenses 21,692 2,549 726 24,967

Hardware 27,178 1,539 327 29,044

217,834 14,335 9,849 242,018

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Notes | 65

37. Segment reporting according to systems and product business

Systems Product PSI AGbusiness business groupDM 000 DM 000 DM 000

Sales

Software production and maintenance 142,383 45,624 188,007

Licenses 4,875 20,092 24,967

Hardware 25,645 3,399 29,044

172,903 69,115 242,018

Cost of sales

Software production and maintenance 101,468 48,006 149,474

Licenses 3,440 4,509 7,949

Hardware 22,451 2,812 25,263

127,359 55,327 182,686

Gross profit on sales 45,545 13,788 59,332

Orerating expenses

Selling expenses 16,357 27,130 43,487

General and administrative expenses 9,356 9,190 18,547

Research and development costs 5,672 18,008 23,680

Capitalized research and development costs -5,356 -12,772 -18,128

Depreciation of capitalized research and development costs 378 3,240 3,618

Other revenues or gains 810 4,037 4,847

27,218 48,833 76,051

Operating result 18,326 -35,045 -16,719

Net interest, net investment income 1,041 -758 283

Result before income tax 19,367 -35,803 -16,436

Taxes on income 9,861 -10,910 -1,049

Net profit/loss 29,228 -46,713 -17,485

Segment reporting for systems and product business was done on the basis of the income state-

ments for the group companies included in comprehensive consolidation. The income state-

ments were adjusted to eliminate group-internal effects.

The “systems business” segment mainly includes the economic activities of PSI AG, which

mainly consist in the creation, introduction, maintenance and updating of customized software.

In the financial year, there were no sales in which a single customer achieved a sales volume of

more than 10% of total sales for the segment.

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66 | Notes

The “product business” segment includes the economic activities of PSIPENTA Software Sys-

tems GmbH and of the group companies allocated operatively to that company. In particular,

product business comprises sales from the sale of the standard PSIPENTA software. In the

financial year, there were no sales in which a single customer achieved a sales volume of more

than 10% of total sales for the segment.

The non-current assets of PSI AG (consolidated) break down as follows by segment:

Systems Product PSI AGbusiness business groupDM 000 DM 000 DM 000

Financial assets 1,983 0 1,983

Property, plant and equipment(net) 21,426 4,267 25,693

Intangible assets (net) 16,515 44,579 61,094

39,924 48,846 88,770

38. Result per share

For fiscal years 1997 to 1999, result per share was calculated as follows:

1999 1998 1997thousands of thousands of thousands of

share share sharecertificates certificates certificates

Shares at the beginning of the year 8,200 2,464 2,054

Option rights at the beginning of the year 541 214 0

Shares at the end of the year 8,984 8,200 2,464

Option rights at the end of the year 12 541 214

Average 8,853 5,709 2,366

Group result -17,485 -2,842 -10,040

Minority interest share in result -56 2,474 19

-17,541 -368 -10,021

1999 1998 1997DM DM DM

Result per share -1.97 -0.06 -4.23

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Notes | 67

39. Business and transactions with affiliated enterprises and related parties

In the 1999 financial year, there were various contractual arrangements between the companies

in the PSI Group vor supplies, services and financing. These relationships and intercompany

profits were eliminated as at balance sheet date in the course of the consolidation of expenses

and income. The following is a representation of material transactions with affiliated companies

and related parties:

In the financial year, PSI AG bought back 15% of the shares in PSIPENTA which had been

sold to the management of that company in 1998. The shares had been sold to Gold Zack AG,

a major shareholder of PSI AG, by persons leaving the management of PSIPENTA in fiscal

years 1998 and 1999. Gold Zack AG contributed to PSI AG the shares it had acquired in return

for the issue of 243,140 no-par-value shares with an imputed par value of DM 5.00.

In the financial year, PSI AG sold 78.4% of its shares in PSI Schwieiz, to PSIPENTA. The loss

for PSI AG resulting from the sale has been eliminated as part of the consolidation of expenses

and earnings.

In the 1999 fiscal year, PSI Schweiz sold 26% of its share in GSI to PSI AG. The gain for PSI

Schweiz resulting from the sale has been eliminated as part of the consolidation of expenses and

earnings.

By virtue of an agreement of October 11, 1999, PSIPENTA sold the exclusive rights to the

licensed product PSIPENTA to BFI Betriebstechnik GmbH. By agreement of November 10,

1999 PSI BT, PSI AG and BFI Betriebstechnik GmbH agreed to perform a contribution in

kind on January 1, 2000. BFI Betriebstechnik GmbH has undertaken to contribute, with eco-

nomic effect from January 1, 2000, all its assets and liabilities – including the exclusive rights

purchased from PSIPENTA – to PSI BT, in which PSI AG has a majority shareholding. The

loss for PSI AG resulting from the sale has been eliminated as part of the consolidation of

expenses and earnings.

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68 | Notes

40. Supplementary declarations pursuant to the German Commercial Code

The following information comprises supplementary declarations that are a mandatory part of

the explanatory notes pursuant to the German Commercial Code:

Remuneration of the management board and supervisory board

The management board of PSI AG received remuneration of DM 1,187 million in the 1999

financial year. The supervisory board received remuneration of DM 157 million.

Members of the management board

Dietrich Jaeschke, Berlin

Björn S. Eriksen, Berlin (since March 1, 1999), Dipl.-commerce, Auditor

Kurt Schmaltz, Sailauf, Qualified engineer

Members of the supervisory board

Dr. André Warner, Berlin, Chairman, Dipl.-commerce

Kurt Kasch, Berlin, sDeputy Chairman, Consultant

Other supervisory boards: TRION Technology AG, CONDAT AG, RÖNTEC Holding AG,

QUIB Telekom AG

Franz Niedermaier, Munich, Consultant

Other supervisory boards: bit by bit Software AG, GFT Technologies AG, IBIKUS AG

Dietrich Walther, Iserlohn, Entrepreneur

Other supervisory boards: ce Consumer Electronic AG, Gerry Weber International AG,

Hunzinger Information AG, Kampa Haus AG, Mensch und Maschine Software AG,

Porta Systems AG, Schleicher & Co, International AG

Wolfgang Fischer, Aschaffenburg*, Qualified Engineer

Siegfried Hartmann, Aschaffenburg*, Qualified Engineer

* Chosen employee representative

Number of employees

As at balance sheet date, the PSI group employed an average of 949 personnel during the year.

Resolution concerning loss appropriation

The management board of PSI AG has proposed to the shareholders of PSI AG that the net

loss for the year according to the commercial statements of DM 31,706 million and the loss

carry forward of DM 4,381 million be carried forward to new account.

Berlin, March 2000

Dietrich Jaeschke Björn S. Eriksen Kurt Schmaltz

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Auditor’s Report | 69

We have audited the consolidated financial statements prepared by PSI Aktiengesellschaft für

Produkte und Systeme der Informationstechnologie, Berlin, consisting of balance sheet, income

statement, statement of changes in shareholders’ equity, cash flow statement and notes to the

financial statements for the fiscal year from January 1, 1999 to December 31, 1999. The prepa-

ration and the content of the consolidated financial statements are the responsibility of the

Company’s executive board. Our responsibility is to express an opinion whether the consolidat-

ed financial statements are in accordance with based on our audit.

We conducted our audit of the consolidated financial statements and the consolidated financial

statements pursuant to German statutory regulations and in compliance with the generally

accepted auditing principles set down by the Institut der Wirtschaftsprüfer (IDW). Those prin-

ciples require that we plan and perform the audit to obtain reasonable assurance about whether

the consolidated financial statements are free of material misstatement. The scope of the audit

was planned taking into account our understanding of business operations, the Group’s eco-

nomic and legal environment, and any potential errors anticipated. The evidence supporting

the amounts and disclosures in the consolidated financial statements is examined on a test basis

within the framework of the audit. The audit also includes assessing the accounting principles

used and significant estimates made by the legal representatives, as well as evaluating the over-

all presentation of the consolidated financial statements. We believe that our audit provides a

reasonable basis for our opinion.

In our opinion, the consolidated financial statements according to US GAAP present a true

and fair picture of the PSI Group’s net worth, financial position and earnings situation as well

as its cash flows for the financial year. Our audit, which also extends to the group management

report prepared by the executive board for the business year from January 1, 1999 to December

31, 1999, has not led to any reservations. In our opinion, on the whole the group management

report provides a suitable understanding of the PSI Group’s position and suitably presents the

risks of future development. In addition, we confirm that the consolidated financial statements

and the group management report for the business year from January 1, 1999 to December 31,

1999 satisfy the conditions required for the Company’s exemption from its obligation to prepare

consolidated financial statements and the group management report in accordance with Ger-

man law. We conducted our audit of the required consistency of the Group accounting with the

7th EU Directive for the exemption from the requirement for consolidated accounting pursuant

to German commercial law on the basis of the interpretation of the Directive by the European

Commission’s Contact Committee on Accounting Directives.

Berlin, March 23, 2000

ARTHUR ANDERSENWirtschaftsprüfungsgesellschaft • Steuerberatungsgesellschaft

Plett SelterWirtschaftsprüfer Wirtschaftsprüfer

Auditor’s Report

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70 | Report of the Supervisory Board

Report of the Supervisory Board

In 1999, the Supervisory Board exercised all of the tasks

assigned to it by law and under the corporation’s articles

of incorporation, and it constantly supervised the cor-

porate management of PSI AG. It reviewed all business

transactions of significance for the corporation, and it

consulted with the Board of Directors on important, indi-

vidual transactions at a total of nine meetings.

Arthur Andersen Wirtschaftsprüfungs- und Steuerbera-

tungs-Gesellschaft, Berlin was appointed as the corpor-

ation’s auditors at the Annual Shareholders’ Meeting on

May 28, 1999. At the Supervisory Board’s request, said

company audited the Annual Financial Statements, the

Consolidated Annual Financial Statements and the Report of the Board of Directors for the

period January 1 to December 31, 1999 and subsequently rendered an unqualified auditor’s

opinion. The Supervisory Board also audited the Annual Financial Statements and the Report

of the Board of Directors itself. It discussed them with the auditors and members of the Board of

Directors present at the board meeting on March 23, 2000. Thereafter the Supervisory Board

approved, and hence established, the Annual Financial Statements and the Report of the Board

of Directors.

The Supervisory Board appointed Mr. Björn S. Eriksen to the Board of Directors as Chief

Financial and Controlling Officer of PSI AG, effective March 1, 1999. No other changes were

made on the Board of Directors or on the Supervisory Board in 1999.

By August 1, all of the corporation’s holders of registered stocks, with few exceptions, had sub-

mitted their stocks to the corporation for conversion into bearer stocks. Deutsche Börse AG,

Frankfurt approved the shares for regular trading on Germany’s “New Market”, and they will be

held in a blocked securities custody account until July 31, 2000. All PSI AG stocks will be

freely tradeable in the current fiscal year, thus achieving equality among all PSI AG stockholders.

The corporation focused on expanding business in the wake of our successful IPO in 1998. The

Board of Directors and the Supervisory Board deliberated several times on acquiring holdings.

PSI AG subsequently acquired majority holdings in the following companies: UBIS GmbH,

Berlin, iRM GmbH, Vienna, NENTEC GmbH, Karlsruhe, and integral datentechnik GmbH,

Kaiserslautern. All decisions in this regard were made at ordinary meetings of the Supervisory

Board. The Supervisory Board’s Investment Committee (Mr. Fischer, Mr. Kasch, and Mr. Warner)

met twice in 1999, and its Human Resources Committee (Mr. Hartmann, Mr. Kasch, and Mr.

Warner) met once in 1999.

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Report of the Supervisory Board | 71

The Board of Directors began establishing a risk management system (early warning system) for

the corporation in 1999 within the scope of implementing “KonTraG”, the German law gov-

erning control and transparancy in companies. Our preexisting accounting, controlling and

quality management systems will be integrated into risk management. The Board of Directors

presented a system model to the Supervisory Board, which subsequently approved it. The

Supervisory Board is expecting the system to fully commence operation in the first half of 2000.

1999 was marked by an anti-cyclic development related to required Y2K conversion within the

entire business economy. This had a negative impact on other, essential IT investments. The

PSIPENTA business sector especially suffered from this development. The corporation was not

able to achieve the economic results forecast for 1999, despite expanded sales. We are expecting

a reduction in the “investment backlog” when this special development has drawn to a close,

which will cause a perceptible recovery in PSIPENTA’s ERP business. The Board of Directors

and the Supervisory Board increased their support of PSIPENTA’s business in mid 1999 in order

to assure further positive development.

All the other lines of business at PSI AG experienced very positive developments in 1999.

Energy management business especially achieved an excellent growth rate caused in part by

deregulation of the electrical energy market. PSI AG recognized early on that all business

processes involving the internet will convert at a rapid pace in coming years, and that the

entire PSI corporation can subsequently realize an enormous expansion of business from this.

PSI AG is consistently orientating itself toward this new market.

The Supervisory Board continues to fully support the Board of Directors’s course of consistent

growth and sustained, mid-term improvement of corporate net earnings. One visible indication

of this is the remuneration agreements with the Board of Directors. A considerable portion of

remuneration is profit-oriented and equally weighted according to growth, profit, and develop-

ment of the corporation’s stock price.

Berlin, March 2000

André Warner

Chairman of the Supervisory Board

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72 | Executive Bodies

Executive Bodies

Board of Directors

Dietrich Jaeschke is a co-founder of the

company. Since 1969, he had been the man-

aging shareholding partner of PSI GmbH in

Berlin. Since 1994, he has been a member of

the Board of Directors at PSI AG. Mr.

Jaeschke is responsible for strategic orienta-

tion, marketing, and distribution. He is

Chairman of the Supervisory Board at PSI-

BT AG, Duesseldorf and a member of the

Supervisory Board of BerliKomm Telekom-

munikationsgesellschaft mbH, Berlin.

Björn S. Eriksen has been on the Board of

Directors as the company’s Chief Financial

Officer since March 1, 1999. Mr. Eriksen is a

native of Copenhagen and holds an MBA

degree. He was previously the Finance

Director and CFO at the Cologne-based

Cyklop Group from 1997 to the beginning of

1999.

Kurt Schmaltz, MSc Engineering, is the

chief officer responsible for engineering and

development within the corporation. He

will depart from the Board of Directors on

April 30, 2000. Mr. Schmaltz joined the

Supervisory Board at PSI-BT AG, Duessel-

dorf on January 1, 2000.

Ali Saghati, MSc Engineering, has been in

charge of the consulting business sector

since 1974, and he played a major role in

building up the company. Mr. Saghati will

join the Board of Directors on April 1, 2000.

His appointment to the board imparts added

importance to future e-business technology,

which is visibly being fortified at the board

level. He bears responsibility as the chief

officer for human resources and engineering.

Supervisory board

Dr. André Warner, Chairman,

Dipl.-commerce, Berlin

Kurt Kasch, Consultant,

sBoard of directors Deutsche Bank AG, Berlin,

sDeputy Chairman, Berlin

Other supervisory boards: CONDAT AG,

TRION Technology AG, RÖNTEC Holding AG,

QUIB Telekom AG

Franz Niedermaier, Consultant, Munich

Other supervisory boards: bit by bit Software AG,

GFT Technologies AG, IBIKUS AG

Dietrich Walther, Entrepreneur,

Board of Directors Gold-Zack AG,

Iserlohn

Other supervisory boards: ce Consumer Electronic AG,

Gerry Weber International AG, Hunzinger Information AG,

Kampa Haus AG, Mensch und Maschine Software AG,

Porta Systems AG, Schleicher & Co. International AG

Wolfgang Fischer, Qualified Engineer,

Chosen employee representative PSI AG,

Aschaffenburg

Siegfried Hartmann, Qualified Engineer,

Chosen employee representative PSI AG,

Aschaffenburg

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Your Investor Relations contact person:

Karsten Pierschke

Telephone: +49 30 2801-2727

Fax: +49 30 2801-1000

eMail: [emailprotected]

We would be happy to include you on our distribution list

for information for stockholders and to send you the

PSI AG report.

“Investor Relations is part of our strategy.”

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Investor Relations Financial Dates 2000

Balance sheet press conference March 27, 2000

Analyst conference March 28, 2000

First quarter report May 24, 2000

Annual General Meeting May 26, 2000

Half year report August 21, 2000

Third quarter report November 20, 2000

Chronicles – 30 years PSI

1969 PSI Ltd. Company for Process Control and InformationSystems is founded in Berlin

1974 PSI is the first company to introduce an employee profit sharing plan

1976 First successes as a provider of software for the energy industry

1986 Launch of the first standard software product in the area ofEnterprise Resource Planning (ERP) under the name PIUSS-O

1994 Transformation of PSI into a public stock company; certification of the PSI Company as one of the first softwarecompanies in Europe according to ISO 9001 under observanceof ISO 9000-3 for software producers under the strict regula-tions of ITQS

1996 PSIPENTA – first object-oriented ERP system in Europe

1998 PSI AG went public on the “New Market” on August 31 andinitiated investments in the deregulated energy market

1999 PSI acquires the e-commerce provider UBIS and positionsitself as specialist for internet business and resource manage-ment; staff number exceed 1000 for the first time

2000 PSI AG is the first German software company to receive the“Award for High Customer Satisfaction”

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Publication details

PSI Aktiengesellschaft

für Produkte und Systeme

der Informationstechnologie

Berlin

Concept and Design

HGB Hamburger Geschäftsberichte GmbH & Co.

Hamburg

Photography

Corporate Photo Jens Waldenmaier

Hamburg (pp. 8, 12, 16, 20)

Ralf Tooten,

Hamburg (pp. 2, 70, Jacket)

Future-oriented statements:

This Annual Report contains future-

oriented statements, which are based

on future estimates by the Board of

Directors. Some factors are outside

the control of the Company, such as

changes in the general economic

environment as well as the occurrence

of individual risks or uncertain occur-

rences. These could result in the actual

results varying significantly from the

prognoses. PSI does not intend to

continually update the future-oriented

statements in this report.

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Rat

PSIPSI Aktiengesellschaft für Produkte und Systeme der Informationstechnologie

Dircksenstrasse 42-44, D-10178 Berlin

Phone: +49/30/28 01-0

Fax: +49/30/28 01-10 00

eMail: [emailprotected]

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