Orc Software Annual Report 1999

Transcription

1 Orc Software Annual Report 1999

2 Find the opportunities The Orc helps you identify business opportunities in various markets. Trade on them The Orc executes deals on these markets as efficiently as possible, realizing the potential opportunities. Secure your profit The sophisticated risk management in the Orc ensures that the accumulated profit does not evaporate amid unfavorable market conditions. 2

3 Contents This is Orc Software in brief Five-year summary of selected financial data Comments by the Chief Executive Officer Business concept and objectives The Orc system Market overview Orc Software's organization History Board of directors and the executive management Financial information

4 STOCKHOLM MOSCOW COPENHAGEN LONDON FRANKFURT MILAN NEW YORK Orc Software s head office is located in Stockholm, with support and sales offices in an additional seven countries. Orc Software s customer base includes the largest international investment banks world wide, with more than 100 names and more than 700 users in 15 countries. Orc Software is now connected to almost 20 exchanges, covering all significant electronic marketplaces worldwide. SYDNEY Orc Software s offices Customers Linked markets 2

5 This is Orc Software Orc Software develops and markets software systems for pricing, real-time trading and risk management on inter national financial, commodities and energy markets. Orc Software was founded in 1987 under the name of Research & Trade and has since inception methodically cre ated tools for pricing, trading and risk management. Orc Software is the market leader in Scandinavia as regards technology for derivatives analysis, risk management and electronic trading. Orc Soft ware is expanding rapidly around the world and currently has customers in 15 countries. Orc Software is active in one of the fastest growing segments within e-commerce. The demand for electronic trading systems is expected to rise steeply as a result of the widespread globalization of the financial markets, along with a greater need for systems enabling computerized trading and advanced analysis together with the development of the remote member concept in many European stock exchanges. sig nificant international electronic marketplaces. In brief, the Orc system is a powerful tool which is used to identify business opportunities simultaneously in various markets, effectively execute these, and to measure portfolio risk and return. Orc Software develops and offers technical solutions for Internet trading. Trading on the Internet is the fastest growing business area for Orc Software. The company has an advanced technology platform for Internet trading and is the dominant supplier in Scandinavia for Internet-based trading systems with a market share of approximately 60 %. Orc Software is expanding rapidly while maintaining profitability. Orc Software has since inception strived for and achieved profitable growth for its shareholders. During the last five years, the company has experienced an average growth of more than 50 %, while maintaining a profit margin of %. Orc Software provides its users with critical business tools. The company s products Orc and iorc permit users to be connected to and monitor electronic marketplaces worldwide from a single workstation. The Orc system is currently linked to almost 20 exchanges, including all 3

6 1999 in brief Revenue increased by 104 % to SEK 84 M Operating income surged 105 % to SEK 31 M Earnings per share advanced to SEK 2.25 (1.33) The proposed dividend was raised to SEK 1.10 (1.00) per share The number of employees at year-end totaled 52 (27) The Group s liquid assets at year-end amounted to SEK 66 (31) M Export revenue accounted for 60 % of total revenue 1999 marked a major breakthrough for Orc Software on the international financial markets, notably in the high-growth market for Internetbased trading in financial instruments. Continued strong growth in the number of Orc systems supplied. The number of systems supplied increased by 52 %, amounting to 715 (470) at year-end. The number of customers totaled 102. Orc Software secured a leading position in Scandinavia in Internet-based trading systems following the delivery of turnkey Orc systems to seven Scandinavian Internet brokers. Breakthrough in the U.S. market. During the year, an advanced Orc-based trading tool was delivered to the International Securities Ex change (ISE) the first fully electronic derivatives exchange in the U.S. Orc Software extended its office network through its acquisition in December of the international distribution operations of Orc technology from OM Technology. Following the acquisition, Orc Software has operations in eight countries. 4

7 Five-year summary of selected financial data SEK M Revenue Revenue growth per year, % Operating costs, exc. depreciation Depreciation Operating income Operating income growth per year, % Income after net financial items Profit margin, % Liquid assets Shareholders equity SEK M 90 Revenue 80 SEK M Income after net financial items In Sweden Outside Sweden 5

8 Comments by the Chief Executive Officer Major technological shift and strong market trends A crucial technological shift in the form of the digital revolution is currently taking place, influencing the society as a whole. Deregulatory measures and a worldwide shift towards market economies are rapidly changing market conditions, particularly in the financial sector. Deregulation, harmonization, privatization, individualization and, notably, accelerating technical progress, are just a few of the trends contributing to the increasing cross-border trading. In Europe, EMU and the introduction of a single currency has provided a solid basis for a vast common market. These trends are reinforced by the rapid progress in Information Technology. Digital and wireless technology such as Internet and Mobile Information Technology are transforming business models and trading patterns. Over a protracted period, Orc Software has monitored and adjusted its operations to this changing environment and we are convinced that this will create major business opportunities for us in the future. International breakthrough 1999 was a very successful year for Orc Software. Revenue and operating income more than doubled and our technology gained a major breakthrough in the international financial market, mainly in the highly expansive area of Internet trading. Since the very beginning, we have invested considerable resources in building the Orc brand name and these efforts are now begin ning to show results. During the year, we succeeded in turning our technology for Internet trading into something of an industry standard in several markets and the Orc system has become the market leader in many countries. Our customers include the largest international investment banks and brokerage houses, a confirmation that our products are of world class. Strong product portfolio in the absolute front line The Orc system is used for trading on stock exchang es, bond markets, commodities markets and currency markets. The key technical core in the Orc system, our new client technology (iorc) and the compression and encryption technology which we have developed to create the next gene ration of broker operations on the Internet, are now among the leading technologies in the world. Large efforts have been made on refining and improving the Orc system. Many complex problems have been solved on the way and several unique solutions have been created. Sales and market staff regularly spend a large amount of their time with customers in an effort to gather information on how they would like to trade and of their future plans for trading on the various markets worldwide. This enables us to correctly prioritize improvements in the Orc system. Each year we spend approximately one third of our revenue on research and development to ensure that the Orc technology is continually developed and enhanced so that we can retain and consolidate our leading position. The Orc system can be used for nearly all forms of trading in financial markets. Using a single workstation, the user can trade on almost 20 electronic markets simultaneously and analyze and measure risk across a spectrum that covers all types of spot and derivative instruments. 6

9 Future opportunities Exchange trading in the U.S. is not yet fully elec tronic. When this shift ultimately occurs, Orc Soft ware is well positioned to be a strong player in this gigantic market. Firstly, we have already accu mulated considerable experience from many markets, and secondly, the largest U.S. investment banks are already major customers of ours in various countries, which will facilitate the deci sion-making process. As a result, operations in the U.S. will be prioritized during 2000 and A similarly attractive area for Orc Software is bond trading, in which electronic trading is currently very limited. When this market seriously adopts digitalization, there will be increased demand for solutions such as the Orc system. The same trend is notable in commodities trading, which has now taken its initial steps toward electronic trading in the U.S. During 2000, Orc Software will apply for a listing on the OM Stockholm Exchange. The listing will strengthen Orc Software in its international expansion and enable the company to use its own shares in acquisitions. Moreover, interest in Orc Software will increase and marketing and recruitment will be facilitated. To conclude, I wish to mention the creation of a jointly owned company with Bridge Trading Company (U.S.). Together we will create something unique in the financial industry, a system that combines comprehensive market information and world-leading transaction technology in a broker-neutral electronic environment. New application areas will continue to open up, new customer groups will emerge and new requirements will arise. It is my strong belief that Orc Software will play an important role in these new areas. Stockholm, May 15, 2000 Nils Nilsson President and CEO 7

10 Business concept and objectives Business concept Orc Software develops and markets standardized and turnkey software systems for pricing, real-time trading and risk management on international financial, commodities and energy markets. Overall objective Orc Software s objective is to be a leading global supplier of the technology that lays the foundation for all types of electronic trading, covering financial markets, commodities markets and energy markets, irrespective of whether the transactions are conducted via the Internet, local or wireless networks. Operational objectives By the end of the financial year 2000, we plan to have: Established the Orc system in the U.S. as the leading trading and analytical system on the first electronic options exchange in the U.S., the International Securities Exchange (ISE). Commenced cooperation with strategic partners to create new distribution channels for the Orc system, preferably on the North American market. Connected 5-6 new electronic market places to the Orc system. During the next three years, we aim to: Consolidate Orc Software s position as Scand inavia s leading supplier of software systems for pricing, trading and risk management. Strengthen Orc Software s position among private and institutional end users as supplier of Internet-based Orc applications, the iorc. Establish the Orc system in the North American market as the leading technology for trading, pricing and risk management on electronic exchanges. Increase the number of Orc systems installed by 50 % annually. Deliver 40 iorc systems to Internet brokers. The installed base of iorc systems will thus amount to at least 50. Financial targets for Orc Software s objective is to increase revenue in line with the average annual growth rate experienced during the past five years, with a profit margin of approximately 30 %. Business model Orc Software is licensing the Orc system to its customers and each customer pays a monthly fee where initial service, ongoing support and new releases are included. The periodic license fee provides Orc Software with a steady and predictable cash flow. 8

11 Strategic Cornerstones Product strategy Over the years, we have made considerable invest ments in technical infrastructure, enabling us to offer our customers turnkey leading-edge products and standardized services. These products and services shall remain easy to distribute, install and support in order to maintain the pace of our global growth. Our products are flexible and reduce our custo mers exposure to costly expenditure on hardware and maintenance. Each year, we invest approximately one third of our revenue in the development and enhancement of the Orc technology in an effort to retain and consolidate our position as one of the leading suppliers of electronic trading systems. Another key feature of our product strategy is to stimulate local and international IT consulting companies, and our customers in-house IT depart ments, to build solutions that complement the Orc system and thus broaden the product and service offer, using Orc as the core technology. By means of this network, we create distinctive added value for our customers at the same time as the Orc system is increasingly becoming a key feature of our customers technical infrastructure. Expertise The expertise accumulated by Orc Software s employees, technical and mathematical skills plus lengthy experience of electronic trading systems, comprise the company s core. Our employees constitute a valuable investment and resource, and we consistently focus on enhancing the expertise within the company by means of further training and new recruitment. Since Orc Software operates worldwide, it is important for us to recruit people with varying cultural back- grounds. At year-end, the company had employees from Australia, Denmark, Italy, Russia, U.K., Sweden and the U.S. These employees have considerable experience from different business areas and a strong knowledge of the markets in which Orc is used. Brand name In recent years, we have systematically invested in developing the Orc brand name internationally. Orc represents leading-edge technology, continuity and extremely high operational reliability among its existing users. Orc Software currently holds trademark-protection in more than 20 countries. During 2000, we intend to invest more resources into further strengthening the brand name by actively marketing Orc in various media. The stock exchange listing of Orc Software is a key component of this brand development program. Geographic expansion Orc Software is convinced that electronic trading will comprise the standard solution for exchanges and other marketplaces in the future. In pace with the increasing digitalization of trading, favorable conditions are emerging for establishing Orc as the leading technology 9

12 Bridge Channel standard for electronic exchange trading. Corporate presence and personal contact with users and potential customers have been key factors in Orc Software s success and will continue to be instrumental in the years ahead. We intend to continue expanding our global presence by establishing new sales- and distribution offices and new distribution channels. This will strengthen our long-term relationships with customers and the ability to offer high-quality support. At the same time, we will continue to increasingly use the Internet for distribution, support and training. The Internet is already our most important distribution network and new creative solutions for simplifying the company's customer service are continually being developed. The U.S. market is of special significance for our future growth. The reason being that the U.S. exchanges, which are the largest worldwide, are still not digitalized. The International Securities Exchange (ISE) marks the opening of the first fully electronic options market in the U.S. Other exchanges are likely to follow suit and in many cases technology cooperation has already commenced with European exchanges for example Eurex - CBOT and the Globex alliance. This cooperation favors Orc Software since we have already linked the Orc system to several of these European marketplaces. During 2000, Orc Soft ware will thus invest considerable resources in establishing a strong position on the North American market in order to be prepared when the major transition to electronic trading begins. Our efforts will be facilitated by the fact that we already have a large portion of the major U.S. banks as customers. Strategic cooperation Orc Software has an explicit strategy of stimulating various types of cooperation in order to strengthen the functionality and accessibility of the Orc system. A key component of this strategy is to encourage local and global consulting com panies to work with the Orc technology on behalf of our customers. This applies to the development of the Orc system s API (1), to distribution and to technical support. Cooperation with our main owner, OM Techno logy, facilities our geographic expansion and distri bution, since OM Technology operates offices in several countries where our presence is limited. By sharing joint resources such as computer networks and so forth, Orc Software s costs and the time required to establish a corporate presence are reduced. As a result we (1) API - or Application Programming Interface - is essentially a set of rules governing the design of a program to enable it to interact with other programs. For example, the rules may illustrate how a database program can interact with a communication program. 10

13 can quickly create a presence and act on the global market. As part of Orc Software s efforts to offer end users direct access to exchanges, we established a jointly owned company with Bridge Trading Company in April Bridge Trading Company is a subsidiary of Bridge Information Systems, the largest provider of market news and information in the U.S. Together, using Bridge's 300,000 subscribers as a base combined with the Orc system s almost 20 market connections, we plan to offer institutional investors - via the SAVVIS network or the Internet the potential to trade on electronic exchanges. The new service will be the first to provide a broker-neutral trading service for derivatives, in which financial institutions will have the opportu nity to choose between brokers from an on-screen drop-down menu. The cooperation with Bridge is a good example of how an established player in information distribution can offer its customers high-quality transaction services via the Orc system. speed and security. In this context, Orc Software offers a flexible and reliable technology the iorc for Internet trading, a technology that currently represents the dominant solution on the Scandinavian market. With iorc, customers, Internet brokers and institutional investors are offered powerful compres sion and encryption technology, along with com plete integration with the local Orc system. In the next few years, a large portion of our revenue is expected to be generated, directly or indirectly, from Internetrelated products and services. International growth will take place through the expansion of existing sales offices, establishment in new countries and through new distribution channels and cooperation agreements. Our strategic alliance with Bridge Trading Company may be viewed as a distinct example of this expansion strategy. Further more, cooperation with OM Technology will continue to support growth. Growth Growth is a central aspect of Orc Software s strategy. Growth areas include new electronic markets, new types of instruments (such as futures, warrants and OTC) and expansion of and within the customer base. In addition Orc Software sees major opportunities for expansion in new Internet-related application areas. Internet applications are currently the fastest growing business segment, since an increasing number of market players prefer to use the Internet as their trading platform. Internet brokers are active in one of the most demanding areas in e-commer ce and one that imposes major demands in terms of transaction capacity, 11

14 The Orc system One system numerous possibilities The range of systems we develop are gathered under the Orc concept. Orc is a combination of various products, all of which are based on a single core system. Orc Software s standardized system makes it possible to trade on several electronic exchanges and in different currencies simultaneously. The Orc system consists of a server system, Orc Server, and of several different client applications Orc Trader, Orc Broker and Orc Investor. The Orc system s users are market participants who are active on electronic exchanges or who, in turn, offer electronic access to their customers via the Internet, WAN or wireless networks. The Orc system is used by investment banks, brokerage houses, Internet brokers, traders, market makers, investors and electronic exchanges. Whether we turn to a professional market maker in a global investment bank or an institutional investor who uses our Internet application iorc for trading via the Internet, our product consists of three functional blocks. In brief, Orc is used to realize the following basic aims: Find the opportunities, trade on them and secure the profit. Find the opportunities To identify business opportunities in the various markets to which the Orc is linked Trade on them To execute deals on these markets as efficiently as possible so that the potential opportunities are realized Secure your profit To use sophisticated risk management to ensure that the accumulated profit does not evaporate amid unfavorable market conditions Orc s functionality, scalability and performance create competitiveness The fragmented profile of exchange technology in Europe and the U.S. has created a need for system solutions that integrate and simplify trading for participants in these markets. Trading is increasingly becoming defined in terms of sector rather than country. This has given rise to a need for technology permitting the simultaneous and uniform execution of purchases and sales on several exchanges and in several currencies. Orc Orc Trader Orc Broker Orc Investor iorc Orc Software offers four different client applications: Orc Trader, Orc Broker, Orc Investor and the iorc for Internet brokers. 12

15 Users Connected markets INTERNET BROKERS EUREX INVESTMENT BANKS BROKERAGE HOUSES INVESTORS TRADERS Orc OM LIFFE XETRA OTHERS MARKET MAKERS The Orc system is an important tool for many different users. The Orc enables the user to trade on almost 20 electronic market places, for example Eurex, OM, Liffe and Xetra. Orc Software's objective is to add 5-6 new market places each year. Orc links several marketplaces to create a single market. The Orc system makes global trading possible by offering real time pricing and cross-border trading on a number of exchanges. For its users, the Orc system is the only interface required for conducting global trading, pricing and risk management in an electronic environment. Orc offers sophisticated analytical capacity. Parallel with the integration of marketplaces on the purely technical level, financial integration is also taking place. It is common for market participants to use a large range of tools that are more or less perfect substitutes. For example, derivatives trading requires that trading in the underlying spot instrument can be used to replicate risk profiles attained in the derivatives positions. Creating a trading technology which is able to compare positions in various types of financial instruments requires considerable mathematical and analytical capacity capacities that have been embedded in the Orc system from the beginning. Orc a flexible technology platform. The Orc technology has been created as an open platform to which our customers can link their own proprietary systems and solutions. This permits users to customize their requirements around the basic technology of the Orc system. Orc offers its users competitive advantages. The Orc system and its functionality represent an invaluable tool for market professionals in the highly competitive financial markets. The perfor mance of the Orc system permits automated order management and creates the conditions for faster, more reliable and more accurate order exe cution, thereby reducing the user s transaction costs Number of Orc systems installed

16 Market overview The financial markets show strong growth During the latter half of the 20th century, the U.S. and European financial markets have witnessed rapid growth in terms of transactions, participants and underlying market values. This development has created favorable market conditions for electronic trading and risk management systems. Electronic trading systems are expected to represent one of the fastest growing trading segments as a result of the globalization of financial markets, a greater need for support systems for computer-controlled trading and advanced analysis, as well as the development of the remote-member concept in certain European equities markets. Electronic exchanges end user gains direct access Until the beginning of the 1980s, all marketplaces worldwide based their transaction principles on a manual procedure. Today, many exchang es have abandoned this in favor of electronic systems. Compared to electronic systems, manual procedures are labor intensive and are generally a costly way of trading. The consensus is that electronic trading is faster, more cost effective and more accurate, at the same time as it permits larger volumes, better liquidity and support for more complex trading strategies. In the case of certain assets, such as derivatives, electronic systems have been so successful that they have rapidly become the standard. The derivatives exchanges established after 1998 are all based on electronic trading systems. Types of trading systems among exchanges world-wide Electronic (51 %) Manual (33 %) Combination (10 %) Unknown (6 %) Source: OM Group and Carnegie Research, Jan An important factor underlying growth and digitalization of the transaction chain is the focus of brokers, traders and institutional investors on liquidity. An ever-increasing number of brokers/ traders are acquiring or developing systems to offer institutional customers electronic exchange access. This is regarded as a very strong trend and by 2003, 20 % of brokers / traders institutional customers are expected to access % Percentage of Brokerage Clients with Direct Exchange Links e -00e -01e -02e -03e -04e Source: Meridien Research the majority of the world s exchanges through direct electronic access according to Meridien Research. Europe in the frontline the U.S. set for takeoff The varied range of exchange technology used in Europe and the U.S. has created a need for solutions that can integrate and simplify trading in these markets. Equities trading in Europe is a major growth market for electronic trading systems. Trading has increased fivefold since 1990 and there are no signs of a slowdown. Equities saving in Europe is still at a relatively low level and the average percentage of equities savings is well below that of the U.S. (and also below Sweden). In the U.S. market, equities trading is still not fully electronic. When this shift finally takes place, demand for electronic trading systems is expected to rise steeply. A similar trend is noted for other types of assets. So far, the use of electronic systems is limited in bond trading, while U.S. commodities trading has taken its first steps towards electro nic trading. When these markets seriously adopt digitalization, a major need for electronic trading solutions will emerge. In addition, there is a trend for assets such as electricity and pulp 14

17 M Number of Internet Equity accounts in Europe (forecast) (e) 2001(e) 2002(e) 2003(e) 2004(e) Source: Forrester Research to be traded on organized marketplaces. This develop ment will further widen the user base for electronic trading systems. The Internet creates accessibility for everyone The Internet is increasing accessibility to information and is making cross-border trading easier and more efficient. Using the Internet, an investor can place an order in the market irrespective of geographic location. Entirely new behavior patterns are emerging and 24-hour trading, seven days a week, is not far off. Independent institutions predict that within five years there will be more than ten times as many European equities accounts on the Internet as there are today. The explosive trend in trading on the Internet is adding to the growth rate in equities trading in terms of the number of transactions and volume. This growth will ultimately impose new demands on the technical infrastructure. The ability to manage high transaction volumes and have a flexible technical platform will be a success factor for many Internet brokers. Many customers already demand that Internet brokerage services are available 24-hours a day without interruption. Technical disruptions and inferior order execution create dissatisfaction and considerable frustration within the customer base. Consequently, there is major demand for solutions that reduce the risk of such problems. Competitive situation In many respects, Orc Software has unique competitive advantages. Our cooperation with OM Technology, combined with our own distribution network, provides a position as a global supplier to international players. Orc is a strong brand name in its segment and we are consistently working on strengthening it. The Orc technology also has an impressive range, which frequently enables us to exist side-by-side with competing systems among our customers. Thanks to Orc Software s access to OM Technology s broad product portfolio the two companies can jointly present unique solutions. The competitive situation varies depending on the functional area analysis, trading or risk management. There are several companies active in the area of analysis. The major competitors in this area include EasyScreen and RTS. In the area of execution/trading, competitors include the aforementioned companies as well as Pat Systems, Trading Technology and GL, as well as systems provided by the exchanges themselves. Competitors in risk management include Sungard and Murex. The competitive situation in Internet trading is fragmented and very few companies have a single solution that can replace the Orc. The competitive picture also varies with the instruments and asset classes traded. For example, the competitive situation in the bond risk management area is totally different from that in risk management for equity instruments. In futures trading, competitors include Pat Systems and Trading Technology, while these companies are less notable in options trading. USD M $ 450 $ 400 $ 350 $ 300 $ 250 $ 200 $ 150 $ 100 $ 50 $ 0 Spending on Internet-based Brokerage Services Asia-Pacific Europe North America Source: Meridien Research, Nov

18 Orc Software s organization Orc Software is part of the OM Group and OM Technology owns approximately 60 % of the shares. In its capacity as majority shareholder during the past three years, OM Technology has played a major role in developing Orc Software s international operations. The cooperation has also inclu ded concrete projects on behalf of customers, in which the ISE project has been of major impor tance. Cooperation with OM Technology will continue to deepen during Orc Software AB is the parent company in the Orc Software Group and is responsible for the development and marketing of central components for the Orc and iorc systems. Central market activities and administration of customers are also handled via the Parent Company. Since the majority of our customers are global market participants, it is important that activities involving these customers are coordinated, a task that is handled by the Parent Company. Orc Software also provides complementary services through the subsidiary Orc Online AB. Orc Online develops and markets our Internet trading application, iorc. Orc Online also works with Internet-related services for the iorc system. Orc Software s head office is located in Stockholm, with complementary offices in Copenhagen, Frankfurt, London, Milan, Moscow, New York and Sydney. These offices are responsible for sales and support in each respective country. In addition, the local offices assist customers with tech nical start-ups and hardware and software solutions. The development of local components, such as links to local exchanges, is sometimes conducted locally. In those countries where we have not yet established local distribution offices, sales are conducted via distributors. OM Technology is for example our distributor in Toronto and Hong Kong. Our cooperation with OM Technology is thus a major advantage. We consistently work on building additional distribution channels, since product distribution is a key factor in our continued expansion. Orc ACCOUNTING & ADMINISTRATION DEVELOPMENT SALES & SUPPORT ORC ONLINE STOCKHOLM STOCKHOLM MOSCOW COPENHAGEN LONDON LONDON NEW YORK MILAN FRANKFURT NEW YORK SYDNEY Orc Software's functional organization. 16

19 History Orc Software was founded in 1987 under the name Research & Trade by the current Chief Executive Officer Nils Nilsson and the current Executive Vice President Ulrika Hagdahl. While working as brokers on the options market, the two founders realized a need for adequate technical tools to use in their operations. On its establishment, Orc Software s main operations focused on the pricing of derivative instruments and the company acted as market maker in the OM options market. The company s current operations commenced in 1991, when it began to sell its proprietary trading and risk management system under the name of OWB (Option Work Bench). In 1992, the company s operations focused solely on the development and sale of analytical and transaction-oriented software. During the first five years, customers were exclusively Scandinavian. In 1995, the company gained its first non-scandinavian customer and in 1996 it secured its first non-european customer. In 1992, D. Carnegie became a shareholder in the company. In 1997, the OM Group acquired just over 50 % of the shares in Orc Software. During 1999, Orc Software s international expansion continued and the Group s revenue outside Sweden rose to 60 % of total revenue. Orc Software acquired the international distribution operations of Orc technology from OM Technology in December The acquired operations involved a workforce of 15 employees in London, Milan, and Sydney. Following the acquisition, Orc Software had established operations in eight countries. The acquisition, which was financed through a directed new share issue, meant that the OM Group increased its shareholding from 52.8 % to 60.2 % of the capital and voting rights in Orc Software. In March 2000, Research & Trade changed its name to Orc Software. 17

20 Board of directors and the executive management Stig Vilhelmson Ulrika Hagdahl Nils Nilsson Per E. Larsson Magnus Karlsson Böcker Ulf Sigfridsson Board of directors Stig Vilhemson, Chairman Ulrika Hagdahl Nils Nilsson Per E. Larsson Magnus Karlsson Böcker Fredrik Skogby (not included in photo above) Executive management Nils Nilsson, President and CEO Ulrika Hagdahl, Executive Vice President, Business Development Ulf Sigfridsson, Executive Vice President, Finance and Marketing 18

21 Board of directors report The Board of directors and the Chief Executive Officer of Orc Software AB (publ), corporate registration no , herewith submit the annual report and consolidated accounts for Share capital and ownership structure The share capital in Orc Software amounts to SEK 1,425,000, corresponding to 14,250,000 shares with a par value of SEK 0.10 each. Each share entitles the holder to equal participation in the company s assets and earnings. At the Annual General Meeting of shareholders, each person entitled to vote may vote for the full amount of shares owned and represented by him/her with no limits on voting rights. The company s major shareholders at the end of 1999 were OM Technology (60.2 %), Cancale Förvaltings AB (22.5 %) and D. Carnegie AB (10.5 %). Earnings trend Five-year summary, SEK M Revenue Revenue growth per year, % Operating expenses, exc. depreciation Depreciation Operating income Operating income growth per year, % Income after net financial items Income margin, % Liquid assets Shareholders equity Information on operations Orc Software s business concept is to develop and market standardized and turnkey software systems for pricing, real time trading and risk management on international financial, commodities and energy markets. In this area, operations consist mainly of the development of the Orc system, marketing, sales and distribution of these systems. Orc Software develops and markets primarily to customers who are active on electronic exchanges and who, in turn, offer electronic access to their customers via WAN, Internet or wireless networks. Significant events in 1999 Continued rapid growth The company reported continued rapid growth in Group revenue surged 104 % to SEK 84 M and operating income increased by 105 % to SEK 31 M. Group income after net financial items in 1999 totaled SEK 32 M. Earnings per share advanced to SEK 2.25 (1.33) and the number of employees at yearend amounted to 52 (27). Group liquid assets at year-end totaled SEK 66 (31) M. Significant business developments Export revenue in 1999 accounted for 60 % of total revenue. The number of licenses sold for the Orc system totaled 715 (470). The number of customers amounted to

22 Orc Software conducted a share split in Each existing share entitled the holder to 1,000 new shares. In December 1999, Orc Software acquired the international distribution operations for Orc technology from OM Technology. Following the acquisition, Orc Software has now established operations in its own name in eight countries. At the end of December 1999, a directed share issue of 2,250,000 shares was made to OM Technology, whose shareholding now totals 60.2 % of the voting rights and capital. The total number of shares after the new share issue amounts to 14,250,000. An extraordinary meeting of shareholders on December 16, 1999 approved a change in the corporate name of the company from Research & Trade to Orc Software. The same meeting decided that the company should seek a stock exchange listing on the OM Stockholm Exchange in an effort to strengthen its international expan sion and promote the Orc brand. During 1999, Orc technology made a major breakthrough in Internet-related trading of financial instruments. A consistent focus on robust and flexible technology meant that by year-end seven Internet brokers had elected to rely completely on Orc as a tool for their most important business flows. This trend has continued during During 1999, an advanced automatic Orcbased trading tool designed for the most demanding market makers on the International Securities Exchange (ISE) in New York was completed and delivered. When ISE commences its operations in May 2000, an increasing share of Orc Software s revenue and earnings will derive from operations in the U.S. market. company expects sustained favorable demand for Internet-related systems. An agreement to form a joint venture has been signed with the U.S. information company, Bridge, which means that Orc technology will be available for users of the Bridge system. Group According to the consolidated balance sheet, unrestricted shareholders' equity amounts to SEK 21,291,000. No allocations to restricted reserves will be made. Proposed distribution of income According to the consolidated balance sheet, the Group s disposable income amounts to SEK 21,291,000. The Board of directors proposes that the disposable income in the Parent Company, amounting to SEK 20,872,000, be distributed as follows: A dividend of SEK 1.10 per share will be paid to shareholders (total of SEK 15,675,000) and SEK 5,197,000 is to be carried forward. The company s overall financial position is presented in the following balance sheet, income statements, cash flow analysis and notes to the financial statements. International branches During 1999, a branch was established in Denmark to conduct sales and provide support for Orc systems in the Danish market significant events after the year-end Order bookings for the year ahead continue to increase and a continual development of the Orc system will proceed as scheduled. The 20

23 Consolidated income statement (SEK 000) Revenue, note 1 Systems revenue Other operating revenue Total revenue Operating expenses External expenses Cost of premises Communications expenses Sales costs Consulting fees Other external expenses Personnel expenses, note Depreciation, note Total expenses Operating income Financial items Interest income Interest expense Net financial items Income after net financial items Tax on net income for the year, note Net income for the year

24 Consolidated balance sheet (SEK 000) ASSETS Fixed assets Equipment, note Total fixed assets Current assets Accounts receivable, trade Other receivables Prepaid expenses and accrued income Cash and bank balances Total current assets TOTAL ASSETS SHAREHOLDERS EQUITY AND LIABILITIES Shareholders equity, note 7 Restricted shareholders' equity Share premium reserve Paid up, not registered share capital Share capital Restricted reserves Unrestricted shareholders equity Retained earnings Net income for the year Total shareholders equity Provisions Deferred tax liability Total provisions Current liabilities Accounts payable, trade Tax liabilities Other liabilities Accrued expenses and prepaid income Total current liabilities TOTAL SHAREHOLDERS EQUITY AND LIABILITIES Pledged assets and contingent liabilities None None 22

25 Consolidated cash flow statement (SEK 000) OPERATING ACTIVITIES Operating income Adjustments for items not included in cash flow: Depreciation Financial items Income tax paid, note Total cash flow from operating activities before changes in working capital Changes in working capital Changes in operating receivables Changes in operating liabilities Total change in working capital CASH FLOW FROM OPERATING ACTIVITIES INVESTING ACTIVITIES Acquisition of tangible fixed assets, note Sales of equipment - - Increase in long-term receivables - - Other adjustments - - CASH FLOW FROM INVESTING ACTIVITIES FINANCING ACTIVITIES Dividends New share issue CASH FLOW FROM FINANCING ACTIVITIES Change in liquid funds Opening liquid funds Closing liquid funds

26 Parent Company income statement (SEK 000) Revenue, note Systems revenue Other operating revenue Total revenue Operating expenses External expenses Cost of premises Communications expenses Sales costs Consulting fees Other external expenses Personnel expenses, note Depreciation, note Total expenses Operating income Financial items Interest income Interest expense Net financial items Income after net financial items Appropriations, note Tax on net income for the year, note Net income for the year

27 Parent Company balance sheet (SEK 000) ASSETS Fixed assets Equipment, note Shares in subsidiaries, note Total fixed assets Current assets Accounts receivable, trade Other receivables Prepaid expenses and accrued income Other current investments 1 1 Cash and bank balances Total current assets TOTAL ASSETS SHAREHOLDERS EQUITY AND LIABILITIES Shareholders equity, note 7 Restricted shareholders equity Share premium reserve Paid up, not registered share capital Share capital Restricted reserves Unrestricted shareholders equity Retained earnings Net income for the year Total shareholders equity Untaxed reserves Tax allocation reserve, note Tax equalization reserve 0 0 Total untaxed reserves Current liabilities Accounts payable, trade Tax liabilities Other liabilities Accrued expenses and prepaid income Total current liabilities TOTAL SHAREHOLDERS EQUITY AND LIABILITIES Pledged assets and contingent liabilities None None 25

28 Parent Company cash flow statement (SEK 000) OPERATING ACTIVITIES Operating income Adjustments for items not included in cash flow: Depreciation , Financial items Income tax paid, note Total cash flow from operating activities before changes in working capital Changes in working capital Changes in operating receivables Changes in operating liabilities Total change in working capital CASH FLOW FROM OPERATING ACTIVITIES INVESTING ACTIVITIES Acquisition of tangible fixed assets, note Sales of equipment - - Changes in shares and participations Increase in long-term receivables - - Other adjustments - - CASH FLOW FROM INVESTING ACTIVITIES FINANCING ACTIVITIES Dividends New share issue CASH FLOW FROM FINANCING ACTIVITIES Change in liquid funds Opening liquid funds Closing liquid funds

29 Accounting principles Consolidated accounting principles The consolidated accounts include the Parent Company and those companies in which the Parent Company holds more than 50 % of the shares and voting rights. The consolidated financial statements are prepared in accordance with acquisition accounting. Among other implications, this means that the book value of shares in subsidiaries is eliminated initially against restricted shareholders equity in each subsidiary and subsequently against unrestricted shareholders equity. Receivables and liabilities in foreign currency The valuation of receivables in foreign currency is conducted at the lower of the exchange rate on the acquisition date and the closing rate. There were no liabilities in foreign currency on the closing date. Systems development expenses Expenses arising from the development of system products are not reported in the balance sheet but are instead charged as expenses as they arise. 27

30 Note 1. Operating income GROUP Systems revenue via OM Technology Systems revenue in Sweden Systems revenue in the EU (exc. Sweden) Systems revenue outside the EU Total systems revenue Other income Total income PARENT COMPANY Systems revenue via OM Technology Systems revenue in Sweden Systems revenue in the EU (exc. Sweden) Systems revenue outside the EU Total systems revenue Other income Total income Note 2. Personnel NUMBER OF EMPLOYEES AT YEAR-END Total Women Total Women Sweden of which, the Parent Company London Milan Sydney New York Copenhagen Russia Total The average number of employees in the Group during the year was 42 (25), of whom, 23 (17) were employed by the Parent Company. 28

31 PERSONNEL EXPENSES Group Parent Company Wages/salaries and remuneration Executive management Other employees Total wages/salaries and renumeration Other personnel expenses Social security charges Pension expenses Other personnel expenses Total other personnel expenses Total personnel expenses Fees were not paid to the Board members in The President, Ulrika Hagdahl, received salary and benefits totaling SEK 560,000 (461,000) during the year. The Executive Vice President, Nils Nilsson, received salary and remuneration totaling SEK 639,000 (570,000) during the year. After the end of 1999, the President was replaced in such a manner that Nils Nilsson was appointed President and Ulrika Hagdahl was appointed Executive Vice President. Senior management receive the customary pension commitments within the framework of the Swedish public pension plan. In the event of notice being served by the company, senior managers are entitled to salary during the period of notice of six months. Other personnel expenses include SEK 5,989,000 for personnel hired in non-swedish operations. AUDITORS FEES Fees paid to the company s auditors (SEK 000) Group Parent Company Ernst & Young Auditing assignments Revisionsbyrå Rune Eriksson Auditing assignments Note 3. Fixed assets and depreciation Fixed assets Fixed assets are reported at their acquisition cost with deductions for accumulated depreciation. Depreciation principles Depreciation according to plan is calculated on the basis of the original acquisition value of assets. The depreciation rate is based on the estimated economic lifetime of equipment. The depreciation period for computers and other equipment is three years, and complies with the depreciation rules for tax purposes. Since there was no scope for excess depreciation, such depreciation has not been applied. 29