Annual Report 2003
Orc Software provides technology for advanced market making, trad-
ing and brokerage. Nils Nilsson CEO and Ulrika Hagdahl, who is now
a Board member, founded the company in 1987.
Orc Software’s clients include many of the world’s leading partici-
pants, such as investment banks, traders, market makers, brokerage
ﬁrms, Internet brokers, institutional investors and hedge funds.
The company provides the Orc System which consists of advanced
calculation models for analysis and pricing of ﬁnancial instruments.
This enables clients to identify and price business opportunities
in real-time and simultaneously execute orders on more than 70
different markets through fast and reliable market connections.
Additionally, the system has integrated portfolio and risk manage-
ment, which provides clients with the ability to view their total risk
within a single system.
The Orc System is ﬂexible and user-friendly, as well as easy to
install and maintain. Examples of tradable ﬁnancial instruments
are cash and derivatives for equities, ﬁxed income, currencies and
Orc Software’s technology for trading on electronic markets consists
of various applications specially designed for each user group:
CONTENTS Information for shareholders
02 Comments by the CEO FORTHCOMING FINANCIAL EVENTS
04 Business concept and objectives April 16, 2004 Interim report, ﬁrst quarter
April 21, 2004 Annual General Meeting
July 13, 2004 Interim report, second quarter
06 Market October 14, 2004 Interim report, third quarter
09 Quality FINANCIAL INFORMATION
09 Environment Can be ordered from:
10 Employees Orc Software, Investor Relations
12 Risks PO Box 7742, SE-103 95 Stockholm, Sweden
Telephone: +46 8 407 38 00
13 Directors’ report Fax: +46 8 407 38 01
22 Income statement E-mail: firstname.lastname@example.org
23 Balance sheet
24 Shareholders’ equity Immediately following public release, all ﬁnancial information is published
25 Cash ﬂow statement on www.orcsoftware.com
SHAREHOLDER’S INFORMATION CONTACT
37 Audit report
Susanne Holmlund, Investor Relations
38 Economic overview Telephone: +46 8 407 38 50
43 Deﬁnitions E-mail: email@example.com
44 The Orc share
46 Board of Directors PRESS INFORMATION CONTACT
47 Executive management and auditors Anders Fogel, Marketing & Communications
Telephone: +44 20 7942 0949
• Orc Liquidator – developed for the most advanced users – is a • Orc Online is an Internet application with real-time prices, news
high performance, server based, automated trading platform. With and order entry functionality. The application requires minimal
Orc Liquidator and its intuitive programming language, clients can bandwidth and is easy to distribute since users can download the
program their own trading strategies, according to which the sys- application themselves.
tem automatically monitors and executes transactions. Thus the
user has more time for analysis and further development of trading Orc Software licenses its software to the clients. The quarterly fee
strategies. is based on the number of users and the number of market connec-
tions, and includes new versions and support. In the last two years,
• Orc Trader is used for proprietary trading, market making and risk Orc Software’s business model has broadened to include Orc ExNet,
management. For over 10 years Orc Trader has met international which has a transaction-based revenue model.
traders’ demands for handling large trading volumes, fast execu-
tion and risk management. Orc Software is a global company with clients in 19 countries and
local ofﬁces in Chicago, Frankfurt, Hong Kong, London, Milan, Mos-
• Orc Broker is specially designed for brokers and sales traders. cow, New York, Stockholm, St Petersburg, Sydney, Tokyo, Toronto,
The application provides an overview of the clients’ orders, the Vienna and Zurich. As of 2002 Orc Software also has a distribution
capability to handle large order ﬂows and trade on several markets agreement with Reuters.
The company is listed on Stockholmsbörsen since 2000. In 2003 re-
• Orc Futures is a product for futures trading. The application offers venue equaled SEK 249 million and the operating income was SEK
an excellent overview of the market and makes it possible to exe- 74 million, giving an operating margin of 30 percent.
cute complex strategies with minimal input. By using quick keys
for placing orders a trader can instantly update positions.
ANNUAL GENERAL MEETING Dividend
The Annual General Meeting will be held on Wednesday April 21, 2004 at The Board of Directors proposes a dividend of SEK 3.40 per share. The
16:00 (CET) at Orc Software, Birger Jarlsgatan 32A, 5th ﬂoor, Stockholm, proposed record date for the dividend is Monday April 26, 2004. Provided
Sweden. that the Annual General Meeting approves this proposal the dividend will
be paid out through VPC AB on Thursday April 29, 2004.
Shareholders wishing to participate in the Annual General Meeting must Nominating committee
be recorded in the shareholders’ register maintained by VPC AB (the The nominating committee is responsible for issuing a proposal for the
Swedish Securities Register Centre) no later than Thursday April 8, 2004 members of Orc Software’s Board of Directors and Directors’ compensa-
and must also register with the company at: tion. Members of the committee are Magnus Böcker (OMHEX), Ulrika
Hagdahl (Cancale Förvaltnings), Mats Gustafsson (SEB) and Tomas
Orc Software, Annual General Meeting Nicolin (Third Swedish National Pension Fund).
PO Box 7742
SE-103 95 Stockholm, Sweden E-mail: firstname.lastname@example.org
or by telephone at +46 8 407 38 00, Address: Orc Software, Nominating Committee
or by e-mail at email@example.com PO Box 7742
SE-103 95 Stockholm
no later than Friday April 16, 2004 at 4 p.m. Sweden
To be entitled to participate in the Annual General Meeting, shareholders
whose shares have been registered in the name of a nominee through the
trust department of a bank or a securities ﬁrm must temporarily register
their shares with VPC AB. Shareholders who wish to re-register their
shares must notify their nominee before April 8, 2004.
2 Comments by the CEO
During the past year our increased efforts on marketing and sales quickly responding by offering increased electronic access. It is
have begun to show positive results. By combining a global net- my personal opinion that the exchanges in the US will convert
work of local sales and support offices with third party distribu- entirely from floor trading to electronic trading. In order to secure
tors we now have the opportunity to both support and supply our our stake in North America and to take advantage of these grow-
clients on a much wider basis, regardless of size or geographic ing opportunities we established an office in Chicago during the
location. year. Personally I have also spent a great deal of time in Asia
where I see clear signs of an improving economy and investment
BROADER PRODUCT OFFERING interest. The positive trend is strengthened even further by sev-
Due to our extensive investment in product development during eral investments in electronic exchange trading systems currently
2003, we have a sharper and broader product offering today than taking place in this region.
ever before. Our investments in the product portfolio for 2003
were the largest in company history. The company’s consistent We feel an increased optimism and in order to take advantage of
investment in building a knowledge center in Russia is already the currently arising opportunities in the market we feel the time
showing results in the form of, for example, a record high number is right for further investments, especially within development and
of new market connections — something that further secures Orc sales.
Software as a global and comprehensive participant in the finan-
cial markets. We currently cover trading on more than 70 markets As we now leave 2003 and start the new year, I can sum up what
around the world. Furthermore, during the year we launched no all of us at Orc Software believe: It’s Showtime!
less than four new products: Orc Broker, Orc Futures, Orc Online
and, last but not least, Orc Liquidator. Orc Liquidator, a system for Stockholm, February 23, 2004
automated trading with extreme performance, further strengthens
our position as the market’s leading supplier of technology for the
most advanced users in trading and market making. The global
launch of Orc Liquidator during the autumn generated a signifi-
cant interest for both the product and Orc Software in the eyes of
both clients and the media.
POSITIVE VIEW FOR THE FUTURE
A certain cautiousness and an obvious focus on costs still hov- Nils Nilsson
ers over the international markets, which results in longer sales CEO Orc Software
cycles. Nevertheless, during 2003 we saw a consistent inflow
of new clients and approximately 20 percent of our clients were
added during the last 12 months. Furthermore, an improved mar-
ket situation was noted during the second half of 2003.
The transition to electronic trading on the US market undoubtedly
favors an operator like Orc Software. A new electronic exchange
has been established in Chicago and the existing exchanges are
4 Business concept and Objectives
Business concept Objectives
Orc Software’s business concept is to develop and distribute Orc Software’s overall objective is to be the leading global sup-
technology for real-time pricing, trading and risk management in plier of technology for electronic trading in the financial and com-
electronic financial and commodities markets. modities markets.
REVENUE MODEL The Orc Technology shall constitute the core technology in the
Orc Software licenses the Orc Technology to its clients, who pay client’s business operations, as well as be the first choice for third
a quarterly license fee per user and server software in advance. party developers, consultants and business partners. Orc Soft-
The license fee includes new versions and support. Sales of more ware shall also provide service and support of the highest quality.
extensive system solutions may also generate initial installation
revenue in addition to the running license fees. The traditional
business model has also been complemented by new, more vari-
able license models that are based on the clients’ utilization of the
service. For example, a transaction-based license model is used
for services offered via Orc ExNet.
CONTINUOUSLY DEVELOPING AND made advantageously on a local level since an understanding of
IMPROVING THE ORC TECHNOLOGY specific market conditions is a vital competitive advantage. Orc
Orc Software has historically and shall also in the future allocate Software is continuously monitoring developments on new mar-
a considerable part of its resources to the continued development kets enabling Orc Software to quickly react and establish a local
and improvement of the Orc Technology. The system is delivered presence when new business opportunities arise. Geographical
with user-friendly open interfaces, which enables integration and prioritization and new establishments are driven by technological
adaptation to the users’ specific needs. Product development changes, market potential, the trading environment and level of
takes place continuously and in close cooperation with Orc Soft- sophistication.
ware’s clients, which provides Orc Software with a unique under-
standing of the development of the market and the clients’ needs. STRENGTHENING THE NETWORK OF DISTRI-
In order to meet the company goals and client demands new and BUTORS AND THIRD PARTY DEVELOPERS
improved functionality is launched on an ongoing basis. Orc Software’s strategy is to develop alliances with strong com-
panies with activities related to electronic trading. Such alliances
An important part of product development is to stimulate local will facilitate the development of complementing products and
and international IT consultancy firms, as well as clients’ internal services as well as broaden and streamline the distribution of Orc
IT departments, to develop solutions that complement the Orc Software’s products.
Technology. The latest addition to Orc Software’s product range,
Orc Liquidator, provides clients with completely new possibilities INCREASED KNOWLEDGE AND UNDER-
for integrating proprietary solutions with Orc Software’s advanced STANDING OF THE ORC SOFTWARE BRAND
technology. Thus increasing the added value for the clients while Orc Software is continuously investing substantial resources in
making the Orc System an integral part of the client’s total techni- development, research and know-how, resulting in a unique com-
cal infrastructure. petence and high quality products. This is also reflected in the Orc
Software brand, which represents cutting edge technology, con-
BROADEN THE USAGE OF THE ORC tinuity, as well as a high level of operational security and service.
TECHNOLOGY In addition to continuously striving to maintain this position, Orc
Today the majority of Orc Software’s clients are present in the Software is working to increase the awareness and understand-
markets for electronic equities and derivatives trading. The users ing of the brand.
are mostly participants with professional requirements, such as
traders and market makers. The Orc Technology is also used
within other client groups and growing areas of electronic trading.
Orc Software’s strategy is to create leverage by conforming the
company’s core technology to meet the requirements of new tar-
get groups and areas. The company ensures client confidence by
further developing the Orc System within many different areas.
IDENTIFY AND PRIORITIZE KEY MARKETS
Orc Software’s sales and support primarily takes place through
the company’s subsidiaries in Europe, North America, Asia and
Australia. The company’s technology is a business critical part
of the clients’ business, which makes local support a crucial
component of Orc Software’s client offering. Sales may also be
Automated solutions take
ORC SOFTWARE’S MARKET ties Exchange), which after only three years in business attained
Orc Software develops software for electronic trading on finan- higher trading volumes in stock options than the traditional floor
cial markets. The software is used to analyze and price different trading on the CBOE (Chicago Board Options Exchange).
instruments, execute orders as well as control risk. Clients main-
ly consist of investment banks, brokerage firms, hedge funds and Increased trading outside of traditional
institutional investors. exchanges
The exchanges have been greatly affected by the globalization
In the market, commercially developed systems compete with of the world’s financial markets during the past few years. During
in-house developed client specific solutions. In addition, many this process other types of trading networks, such as ECNs1, have
exchanges offer simple exchange specific software for order emerged and the exchanges therefore no longer enjoy a monopoly
entry. in supplying trading in financial instruments. The exchanges com-
pete to a greater extent with alternative trading networks that pro-
TRENDS vide trading directly between various banks and brokerage firms
The market for trading financial instruments is continuously deve- without passing transactions through a formal market place. Par-
loping. More market places around the world are converting to ticipants who use these alternative market places require techno-
pure electronic trading. Furthermore, an increased portion of trad- logy for managing order entry efficiently.
ing in financial instruments is taking place across national borders.
Cross-border trading creates good growth opportunities for sys- Breakthrough for automated solutions
tem suppliers, who offer access to many different market places, More and more of the market’s most advanced participants, such
especially if integration with proprietary solutions is possible. as professional traders and market makers, believe that automat-
During periods of lower profitability the demand for cost cutting ed trading is a prerequisite for success. New technology enables
technology increases. users to pre-program their own trading strategies. A system that
automatically reviews and executes transactions allows the trader
Historically, banks and other large participants in the financial to dedicate more time to analysis and strategy development while
sector have been important buyers of software, since efficient IT minimizing the risk for mistakes.
solutions are a condition for attaining a competitive advantage.
During the past few years extensive consolidation in the form of The increased interest in FIX (Financial Information eXchange
mergers and cut backs within the industry has resulted in parti- Protocol) promotes standardized and automated communication
cipants demanding more from their system suppliers as well as among market participants. FIX thus reduces development times
taking a more cautious approach to the purchase of new systems. and at the same time supports and simplifies integration between
Today’s market demands speed, access to many different market different systems.
places, efficiency and volume, which in turn requires significant
investment in product development. There are only a few techno- New types of market participants take market
logy suppliers today who can meet these demands. Orc Software share
is one of them. The transition to electronic trading contributes to a shift in the
power balance between the market’s participants, which is also
There are a number of basic trends that indicate that market accelerated by the introduction of automated trading. With the
growth will continue during the years to come: help of automated solutions, smaller participants can compete
by quickly reacting globally and cost effectively. With the help of
• Transition to electronic trading advanced technology participants such as hedge funds and pri-
• Increased trading outside of traditional exchanges vate investors can challenge the traditional participants and affect
• Breakthrough for automated solutions the markets in a more visible way. Such power shift would not have
• New types of market participants take market share been possible without the new products that certain technology
A more detailed description of these trends is set out below.
Transition to electronic trading
The transition to electronic trading is now a reality. Developments
in the US including among other things the launch of EUREX US
in Chicago, have created enormous pressure on floor trading mar-
ket places to offer electronic solutions. A clear example of this
trend is the electronic options exchange ISE (International Securi-
Electronic Communication Networks, ECN.
OPPORTUNITIES AND THREATS
Orc Software works in a constantly evolving market, which brings
both opportunities and threats.
• The transition to electronic trading creates increased demand
for advanced trading technology.
• A growing number of electronic market places increases the
need for market access.
• Increased interest in automated solutions.
• Due to new market participants Orc Software’s technology is
required by more clients groups.
• The competition in Orc Software’s market is increasing and
there is a risk that Orc Software may not succeed in holding its
• The technology in Orc Software’s market is developing rapidly.
There is a risk that Orc Software will not be able to adapt the
Orc System in time.
• A consolidation within the financial markets reduces the num-
ber of participants on the market. This could reduce the total
client base and cause Orc Software to become dependent on a
few large clients.
Orc Software’s system can be divided into three main functions: pany had sales of GBP 1.1 million with a net income after tax of
analysis, trading and risk management. Many of Orc Software’s GBP -1.5 million.
competitors only offer some of these functions, which contribute
to a fragmented competitor situation for Orc Software. When FRONT CAPITAL SYSTEMS sells systems for trading and risk man-
considering the instruments and assets that are traded, and the agement of equities, derivatives, fixed income and currencies. The
geographical markets that competitors act in, the competition company was founded in 1987 and is a subsidiary of SunGard
becomes even more segmented. Orc Software believes that there Data Systems which is listed on the New York Stock Exchange.
are few companies that can offer an equivalent system with inte- Front Capital Systems’ head office is in Stockholm and the com-
grated functionality for analysis, trading and risk management as pany has representation in Frankfurt, Hong Kong, Johannesburg,
well as a large number of market connections. Orc Software there- London, Los Angeles, New York, Singapore, Sydney, Tokyo and
fore has a technical and geographical advantage compared to Zurich.
many of its competitors.
FUTURE DYNAMICS was founded in 1999 and sells software for
Orc Software believes the company has a leading position in the trading derivatives. The company is not listed and has its head
Nordic countries and is also one of the leading suppliers on several office in Aldershot (UK), with additional offices in Chicago and
other markets, especially for trading in derivatives instruments. London.
The toughest competition for Orc Software and its competitors are GL TRADE sells systems for electronic order routing and market
system solutions developed and used in-house by certain partici- connections to financial markets. The company was formed in
pants in the financial markets. These systems still account for the 1987 and has offices in Paris, Amsterdam, Brussels, Chicago,
largest share of the market. Frankfurt, Geneva, Hong Kong, Johannesburg, London, Madrid,
Milan, New York, Singapore, Stockholm, Sydney, Tokyo, Toronto
ANALYSIS and Zurich. GL Trade is listed on Euronext. During 2003 the com-
A number of companies compete within the area of price analysis pany had sales of EUR 128 million.
applications. The larger ones include EasyScreen (UK), RTS Real-
time Systems Group (Germany) and Front Capital Systems (Swe- MUREX sells software and services for equities, derivatives, curren-
den). cies, fixed income and commodities. The company, which is not
listed on the stock market, has offices in Paris, Beirut, Dublin, New
TRADING York, Singapore, Sydney and Tokyo.
Competitors in the market for electronic trading systems include
the following companies: Future Dynamics (UK), Patsystems PATSYSTEMS sells software for electronic trading. The company
(UK), Royalblue (UK), RTS Realtime Systems Group, Trading was founded in 1995 and has offices in London, Chicago, New
Technologies (US), GL Trade (France) and Actant (Switzerland). York, Singapore, Sydney and Tokyo. Patsystems is listed on the
The systems that are offered by the exchanges are also regarded London Stock Exchange. During 2003, the company had sales of
as competing systems. GBP 10.7 million with a net income after tax of GBP -2.3 million.
RISK MANAGEMENT ROYALBLUE sells software for global financial equity trading. The
In the market for risk management systems, Front Capital Systems company was founded in 1997 and is listed on London Stock
and Murex (France) are the major competitors. Exchange. Royalblue has offices in Hong Kong, London, New
York, Paris, Surrey (UK) and Tokyo. During 2003, the company
DESCRIPTION OF COMPETITORS had sales of GBP 57 million with a net income after tax of GBP 7.5
Below is a brief description of Orc Software’s competitors. million.
ACTANT develops software for market makers. The company was RTS REALTIME SYSTEMS GROUP develops software for trading on
founded in 1998 and is not listed. The head office is located in Zug electronic exchanges. The company was founded in 1992 and
(Switzerland) and the company has offices in Amsterdam, Chi- has offices in Frankfurt, Amsterdam, Chicago, London, New York,
cago, Frankfurt, London and New York. Paris and Sydney. The company is not listed.
EASYSCREEN sells software for financial institutions that allows TRADING TECHNOLOGIES focuses on complete automation of elec-
access to several exchanges. The company was founded in 1998 tronic trading. The company was founded in 1994 and has offices
and a considerable portion of the company’s business is carried in Chicago, Frankfurt, London, New York and Sydney. The compa-
out in London, and the company also has offices in Chicago, New ny is not listed.
York and Sydney. The company is listed on the London Stock
Exchange. During the period April to September 2003, the com-
Quality and Environment 9
High demands for Small effect on the
Clients place extremely high demands on the quality of a trading Orc Software develops and markets standardized software with
system. A possible shutdown in operations can imply lost revenue digital production and distribution, which from an environmental
of significant amounts for clients. Orc Software invests consider- point of view implies no significant negative effects on the envi-
able resources in quality assurance. By maintaining high quality, ronment in terms of emissions from the company into the air, water
internal resources can be focused on further development instead or land. Orc Software’s impact on the environment is primarily re-
of correcting problems, which in turn contributes to the company lated to energy consumption in the company’s offices and trans-
maintaining its frontline position. Due to the mathematical and portation of personnel, which mostly takes place on airlines due to
technical complexity in the Orc System, tests and quality assur- Orc Software’s global coverage.
ance are extremely important.
Orc Software’s business operations do not impose any particular
Orc Software has a specific department for quality assurance, environmental risks, apart from those mentioned above, and it is
which has overall responsibility for the quality of the delivered the company’s view that there does not subsequently exist any
product. Before releasing a new version of the software, a series risk of significant future costs related to correcting environmental
of internal tests are performed. These include automated regres- damage. The Group is not involved in any ongoing environmental
sion tests, manual regression tests, and the testing of new func- litigation.
tionality. Once these internal tests are passed, the software is
released for external testing at a few pilot client sites. After final
approval, the new version is released to other clients.
Since Orc Software has a close working relationship with its cli-
ents, the company can quickly capture the clients’ requests for
quality improvement measures. The company uses a call handling
system in order to provide good client service, and easily spread
information within support and development. The system provides
information about problems that occur, gives support in priority
situations, and functions as an information database. Furthermore,
Orc Software’s sales support system makes it possible to quickly
review and follow up on sales efforts globally. For example, activi-
ties can be coordinated for the same client in different countries.
Great responsibility creates
commitment and fighting spirit
“Orc Software is a technologically advanced company where you ”I believe that I have a significantly greater personal responsibility
earn respect based on what you know and what you can do. My for my work assignments at Orc than I would have had in Russia,
colleagues are confident and capable, partly due to their educa- maybe this is typical for a Scandinavian company. For example, I
tion and excellent knowledge base. Orc Software is truly the per- have the opportunity on a broad scale to determine how I will com-
fect company for individuals who are looking for an intellectual plete my work assignments as long as they are done well. As a
challenge.” developer at Orc Software I work closely with our clients and since
Sergej Smirnov, Senior Product Engineer, Sweden the financial sector is so dynamic it is impossible to be bored.”
Ruslan Altynnikov, Software Developer, Sweden
“At Orc Software there are no free riders, every individual is impor-
tant and needed in order to push the company forward. Everyone “Orc Software is quite a multicultural company. In Sydney for exam-
is innovative, participates, takes initiative and responsibility for ple, we have co-workers from Russia, Sweden, New Zealand and
their work assignments. There is a bit of an elite feeling with an of course from Australia. I feel that everybody listens to you and
unbelievable fighting spirit. The company sets very high demands you have a good chance to say your opinion and to get information
on each person and you are expected to be focused and achieve regardless of the position you have in the company. If you want to
results. On the other hand, there are seldom restrictions when you try something different, either by moving geographically or to work
want to take a course or buy new technical equipment.” in a new area, you will get a lot of support from the company.”
David Ekman, Trading Software Specialist, Sweden Greg Chambers, Trading Software Specialist, Australia
“As a relatively new employee at Orc Software, I find the atmos- “Joining Orc Software’s team a year ago was an easy decision.
phere friendly, helpful and very team oriented, both within the com- Orc Software had all the components I was seeking in an employ-
pany and with our clients. There is a steep learning curve, but the er: financial stability, healthy culture, bright, dynamic manage-
structure of the company means that I am working with colleagues ment and a history of rapid growth in a very exciting market. Orc
throughout the organization in many different countries, helping Software has exceeded my expectations as an employer this
me learn the various different aspects of the Orc System and the past year and I’m looking forward to another exciting year.”
markets we connect to.” Francis O’Donnell, Sales, USA
Shanni De Silva, Trading Software Analyst, UK
Orc Software’s operational structure
Employees in ﬁgures 2003 2002
CEO Nils Nilsson
Total number of employees at year-end 141 138
Average number of employees 137 124
EVP, CTO Jonas Hansbo EVP, COO Lars Johansson
Percentage of women employees 17 18
Percentage of male employees 83 82
STOCKHOLM MOSCOW CHICAGO NORDIC Added value per employee, SEK million 1.2 1.6
ST PETERSBURG LONDON FRANKFURT SYDNEY Average age 31 30
SYDNEY TORONTO HONG KONG TOKYO
Percentage of employees with a minimum of
3 years education at university level. 86 84
FRANKFURT LONDON TORONTO
NEW YORK ZURICH
Orc Software’s operating structure consists of 14 offices in 12 countries. The
picture above shows the location of Orc Software’s development, sales and
support offices as well as the division of responsibilities within the management
group. From a functional perspective, the development side, which Jonas Hansbo
is responsible for, is divided into documentation, quality assurance, core techno-
logy, other development and internal IT support. The remainder of the organization
is divided into the following functions: sales, account management and support,
business support, marketing and communications, finance, legal and human
resources. Lars Johansson is responsible for these areas.
LOWER PERSONNEL GROWTH option program is available in the Directors’ report, page 19. As a
During 2003 the number of employees increased from 138 to 141, further initiative, there exists the possibility to receive bonus and
an increase of 2 percent. As a consequence of the uncertainty in sales commission.
the market during 2003 Orc Software decreased the number of
new employments for 2003 in comparison to previous years. The Bonus
number of employees has increased primarily in the offices in Orc Software’s employees, including the Group management,
London, Frankfurt, St Petersburg, Sydney and the office in Chi- have the possibility of receiving a bonus directly related to sales,
cago, which opened during the fourth quarter of 2003. The reduc- and a bonus that is paid if the Group’s revenue growth and ope-
tion of employees took place mainly in Moscow. rating income exceed the internally set goals. Income for 2003
encompasses only sales related bonuses, including social secu-
ORGANIZATION rity expenses, of SEK 2.3 (0) million. No commission or bonus was
During 2003 certain organizational changes were made. Among paid to the CEO.
other things a smaller management group was established con-
sisting of Nils Nilsson, Chief Executive Officer, Jonas Hansbo, The Board of Directors’ remuneration committee prepares the
Executive Vice President and Chief Technical Officer, and Lars incentive program.
Johansson, Executive Vice President and Chief Operating Offi-
cer. The formation of the new management group enhanced syn-
chronization of product development with current activities in the
Orc Software’s employees have on several occasions been
offered the opportunity to purchase call options in Orc Software in
order to increase the employees’ participation in the company. All
employees in the Group were offered the opportunity to purchase
call options in Orc Software in 2003. More information about the
Number of employees and total revenue per employee Number of employees per region December 31, 2003
Rest of Europe 21%
2,0 Asia and Australia 8%
North America 6%
1999 2000 2001 2002 2003 Number of employees per function December 31, 2003
Number of employees Total revenue per employee
Product development 43%
Company-wide functions 17%
External and internal
Orc Software’s business is exposed to a number of risks, both POLITICAL RISK
external and internal. The risk factors that may have the greatest The absolute majority of the countries in which Orc Software
significance for Orc Software’s future development are set out conducts business are considered very politically secure. In some
below, in no particular order of importance. markets, for example Russia and Hong Kong, the political risk is
higher. Currently however, Orc Software does not see any threat
TECHNOLOGICAL DEVELOPMENT towards the company’s continued business in these markets.
The market for pricing, trading and risk management software in However, this does not indicate that such a situation will not arise
different electronic market places is characterized by rapid tech- in the future.
nological development. Should Orc Software be unable to adapt
existing products or develop new products that reply to technolo- COMPETITION
gical development in time, or to meet clients’ needs in a competi- The market for software for trading on electronic exchanges is
tive way, the company’s operations could be influenced negatively. fragmented and exposed to competition. It is possible that com-
In order to ensure that Orc Software maintains its frontline position petition will increase in the future. Orc Software currently believes
concerning technological development, the company invests con- that the company is ahead of many of its competitors, particularly
siderable resources in ongoing development of the Orc System. It when it comes to experience, product range, number of market
is the company’s ambition to continue to invest important resour- connections, as well as the very advanced technical level of the
ces in product development in the future. products. Orc Software’s financial stability also places the compa-
ny in a special position in comparison with many of its competitors.
NEW PRODUCTS An investment in a trading system is long-term, and the client is
Orc Software intends to update the Orc System and to launch new dependent upon the supplier continuously developing the system.
products continuously. It is not unusual for new, complex high-tech
products to have certain initial faults, which are corrected over INTELLECTUAL PROPERTY
time. There are no guarantees that such faults, which could have The products marketed by Orc Software consist mainly of soft-
negative consequences for Orc Software’s clients and thus dam- ware that has been developed within the company over a long
age the company’s reputation as well as having a negative effect period of time. Orc Software believes that the company’s propri-
on the growth in revenue and income, will not occur. However, Orc etary products do not infringe the rights of any third party and the
Software’s standard license and support contracts contain a limi- company relies on the copyright protection afforded by Swedish
tation of the Group’s liability for damages. and international legislation. However, it cannot be ruled out that
a third party may claim that the company’s products or services
DEPENDENCE ON KEY EMPLOYEES infringe the intellectual property of others. Such claims could
The future development of Orc Software depends to a certain result in Orc Software having to invest significant resources in
degree on retaining key people with specific skills and long experi- legal proceedings and/or possible damages. Furthermore, others
ence in the organization. The loss of key people could imply that may attempt to improperly exploit Orc Software’s technology or to
Orc Software’s operations be affected negatively. Orc Software develop products that wholly or in part infringe the Group’s intel-
offers considerable responsibility and challenging tasks. There lectual property. It is not certain whether the Group’s insurance
also exist various incentive schemes that motivate personnel to would cover costs associated with attempts to intervene against
become engaged in the long-term development of the company. such infringements.
Orc Software has so far had very low staff turnover amongst its
key employees. LIABILITY
Orc Software’s products deal with extensive and complex transac-
RECRUITMENT OF COMPETENT tions that often involve significant amounts. Clients are located in
PERSONNEL many different parts of the world, including the US. Although Orc
There is a shortage of the cutting edge expertise that the company Software attempts to limit the Group’s liability for damages in its
is looking for in certain countries where Orc Software operates, license and support agreements in various ways, it cannot be ruled
which in the longer term could restrict the company’s operations. out that clients or others may bring claims for compensation for
But due to Orc Software’s presence in a number of countries, the losses or damage that are claimed to have arisen as a result of
company also has the possibility, to a certain extent, of steering faults or shortcomings in Orc Software’s products or services. Any
development work towards those countries where the availability such claims could result in Orc Software having to utilize signifi-
of labor is currently good. In order to facilitate the recruitment of cant amounts of its resources for legal proceedings and/or poten-
developers, Orc Software has for several years had development tial damages. It is not certain whether the Group’s insurance would
offices in Moscow and St Petersburg since the availability of the cover the costs specified above. Orc Software is not currently
type of development skills that Orc Software demands is good in involved in any litigation.
For Financial risk management, see page 18.
Directors’ report 13
The Board of Directors and the Chief Executive Officer of Orc MARKETS
Software AB (publ), corporate identity number 556313-4583 and The first half of the year was characterized by a continued general
domicile Stockholm, hereby submit the accounts for the financial review of costs among banks and brokerage houses and a con-
year 2003 for the Parent company and the Group. sistently cautious approach to technology investments. Further
consolidations were completed and less profitable participants
ABOUT ORC SOFTWARE left the market. Orc Software’s clients traded on more geographi-
Orc Software develops and distributes technology for advanced cal markets, but due to cost reasons they are localizing to fewer
market making, trading and brokerage on electronic financial and geographical sites. During the second half of the year, however,
commodities markets. The company’s overall objective is to be there was an increased activity and investment enthusiasm
the market leading global supplier of the technology upon which among the market’s participants.
electronic trading in financial markets as well as commodities is
based. In Europe sales to clients increased especially in Germany and
Austria, while sales development in the Nordic region remained
As of December 31, 2003, the Group consisted of the Parent weak. In Asia and Australia more and more clients trade on a
company, Orc Software AB, and the subsidiaries: greater number of market places, which presents interesting
growth opportunities for Orc ExNet in particular.
• Orc Software Pty Ltd. (Sydney)
• Orc Software s.r.l. (Milan) The transition to electronic trading in the US is now a reality,
• Orc Software Ltd. (London) which creates good growth opportunities for Orc Software who
• Orc Software GmbH (Frankfurt) offers a system with access to many different market places and
• Orc Software GmbH (Vienna) the possibility of integrating the system with proprietary solu-
• Orc Software GmbH (Zurich) tions. Among other things the launch of Eurex US in Chicago has
• Orc Software Inc. (New York) placed a pressure on the other exchanges in Chicago to offer
• Orc Software HK Ltd. (Hong Kong) electronic solutions. Another clear example is the electronic
• Orc Software KK. (Tokyo) options exchange ISE (International Securities Exchange) who
• Orc Software Inc. (Toronto) after only three years in business has attained larger trading
• Orc Software East AB (Moscow and St Petersburg) volumes in stock options than the traditional floor trading on the
• Orc ExNet Transaction Services AB (Stockholm) CBOE (Chicago Board Options Exchange).
• Orc Tradelab Robotic Trading AB (Stockholm)
• Dancharia Research & Trade East AB (Stockholm) During the fourth quarter Orc Software launched Orc Liquidator,
which makes it possible for the users to pre-program their own
In Orc Software s.r.l., the Parent company owns 95 percent and trading strategies, which is then executed automatically. More
the country manager 5 percent of the shares. In Orc Software HK and more of the market’s most advanced participants believe that
Ltd. and Orc Software GmbH (Zurich) the Parent company holds automatic trading is a prerequisite for success, and the launch of
99 percent and 95 percent respectively and two other companies Orc Liquidator was received with great interest from the clients.
in the Group the remaining parts. The ownership of Orc Software
s.r.l., Orc Software HK Ltd. and Orc Software GmbH (Zurich) is FUTURE OUTLOOK
governed by local regulations. As Orc Software controls the re- Orc Software has a positive outlook for future market develop-
maining shares in these companies, they are consolidated in full in ment, which is strengthened by increased activity and investment
the consolidated accounts. In Orc ExNet Transaction Services AB, willingness among the market’s participants. However, this is not
the Parent company owns 72 percent and the three founders of estimated to have any significant financial impact in the short run,
Orc ExNet hold the remaining part. All the other subsidiaries are since the international market is still characterized by an obvious
100-percent owned by the Parent company. Orc Software also focus on costs with longer lead times as a result. During the up-
owns 35 percent of Orc Education AB and 34 percent of E2E coming quarters Orc Software will partly be affected by previ-
infotech Limited. The remaining part of Orc Education is owned by ously obtained client cancellations, and partly by an increasing
Swedish Trading Institute AB. E2E infotech is also owned by Trad- influence from the weakening of the US dollar. In the long run,
ingLab who owns 34 percent and the founders of E2E infotech however, Orc Software expects an increase in demand and the
who own 32 percent. Orc Software owns 49 percent of Game company therefore believes that now is the right time for making
Federation Development AB and the remaining part is owned by further investments in development and sales. Some of these ini-
Game Federation Svenska AB. Furthermore Orc Software owns tiatives were already initiated during the last quarter of the year.
10 percent of Infront AS.
14 Directors’ report
SIGNIFICANT EVENTS • Osaka Stock Exchange, Japan
• Quotrix, Germany
Setting up in Chicago • Tokyo Stock Exchange (Cash), Japan
During the fourth quarter 2003 Orc Software opened a sales and • Tokyo Stock Exchange (Derivatives), Japan
support office in Chicago focused on taking advantage of the
market opportunities created by the increase in electronic trading Product development
in Chicago. Orc Software’s technology makes it possible to trade Orc Software launched a number of new products during the year.
on all the leading options and futures markets in Chicago. The new products bring possibilities of both widening the usage of
the Orc Technology for current clients as well as the ability to offer
Reuters alliance new clients a more complete product selection. Furthermore, clients
Following the formation of the Reuters/Orc alliance, Reuters can reduce their costs by limiting the number of system suppliers.
launched the ROMEX (Reuters Order Management for Exchange
Execution) product suite in Europe in Q1 2003. ROMEX is During the last two years Orc Software has dedicated significant
Reuters new trading tool based on Orc Software’s technology resources to the development of the new advanced product, Orc
and is targeted at sell side firms across Europe, particularly those Liquidator. This product, which is designed for the most advanced
with a need for efficient order execution. Reuters is also planning users, is a high performance, server based and automated trading
to offer the trading community an ASP (Application Service Pro- platform. The Orc Liquidator’s intuitive programming language
vider) service for ROMEX, which will help reduce overall customer allows the user to program their own trading strategies, according
costs. to which the system automatically monitors and executes transac-
tions. The system detects price differences at speeds that cannot
During 2003, the interest in the European market place was high be attained through manual trading. This creates the possibility
and Reuters sold ROMEX to clients in Belgium, Denmark, France, of making profits on the market’s order flow and allows the user
Germany, Italy, The Netherlands, Spain and Sweden. more time to analyze market trends as well as research and further
develop trading strategies.
During 2003 Orc ExNet added additional partners to its network. Orc Futures is a new client application specially designed for fu-
Agreements have been signed with Morgan Stanley and SEB tures traders. A major part of trading in Chicago is made up of
Futures for trading on American and European exchanges as well futures and Orc Software’s new futures product is an important
as Capital Futures Corporation, a Taiwanese brokerage house, for addition to the product portfolio in order to be able to increase sales
trading on the Taiwanese markets. In addition, agreements have in the US. The application may also be used for equity trading.
been signed with SEB Merchant Banking, which provides Orc
Software’s clients with the ability to trade currencies electroni- By agreement with the Norwegian software development com-
cally in the Orc System via SEB. During the fourth quarter con- pany Infront, Orc Software has the possibility to distribute Infront’s
tracts were signed with among others Fimat Australia for trading information and trading system on a global basis. The product,
on equities and derivatives exchanges in Asia and Australia. which is called Orc Online, was introduced during the third quarter
and is an Internet application offering real-time prices, news and
As of December 31, 2003 Orc ExNet offered trading possibilities completely integrated order entry functionality.
on 32 markets in Asia, Australia, Europe and North America, via
its cooperation partners. Furthermore the first versions of the Orc System that were based
on the new components developed in St Petersburg were put into
Market connections operation.
As of December 31, 2003, the Orc System was connected to 64
exchanges. Connections were established with the following 13 A total of 13 new market connections were completed during the
exchanges in 2003: year. In addition, maintenance, updates and performance optimiza-
tion on a number of existing market connections took place. The
• Amsterdam Switch, The Netherlands Orc System was further enhanced with a number of new functions
• Boston Options Exchange, US in the new versions, which were completed during the year. Among
• Chicago Board Options Exchange, US other things the following was added: new order types such as
• Chicago Board of Trade (e-cbot), US parent-child order, bait orders, and the ability to place orders
• Chicago Mercantile Exchange, US based on a volume weighted average price. Additionally, the auto-
• Euronext.liffe, Belgium, France and UK mated alert functions were improved and further functionality for
• Korea Stock Exchange, South Korea making the management of a large number of client orders more
• London Stock Exchange (SETS CW), UK efficient for brokers was added.
• MTS (Bonds), Europe
Directors’ report 15
Organization Orc ExNet continued to perform well during 2003. The total
During 2003 certain organizational changes were made. Among financial impact still represents a minor part of the Group’s sales.
other things a smaller management group was established con-
sisting of Nils Nilsson, Chief Executive Officer, Jonas Hansbo, During 2003, revenue from clients located outside Sweden repre-
Executive Vice President and Chief Technical Officer, and Lars sented 75 (74) percent of total revenue. At the end of December
Johansson, Executive Vice President and Chief Operating Officer. 2003, Orc Software had clients in a total of 19 (19) countries.
The new formation of the management group enhanced synchro-
nization of product development with current activities in the Revenue per geographic market
market. SEK million 2003 2002 Change in %
Sweden 59 69 -14
REVENUE2 Rest of the Nordic countries 18 21 -14
Rest of Europe 107 117 -9
Full year 2003 Asia and Australia 22 27 -19
The Group’s revenue decreased during 2003 by 9 percent to SEK North America 31 28 11
249 (275 in the corresponding period 2002) million. Work performed by the company
for its own use and capitalized 12 13 -8
Systems revenue decreased by 9 percent to SEK 224 (247) Total 249 275 -9
million and amounted to 90 (90) percent of total revenue. The
decrease is primarily due to cancellations of contracts and user Sales to the North American market grew by 11 percent to
licenses as well as the weakening of the US dollar. Initial reve- SEK 31 million, primarily due to sales of Orc Liquidator. Sales
nue for Orc Liquidator and sales of technology components to decreased on other markets. Sweden and the remainder of
OMHEX amounted to a total of approximately 7 percent of sys- Europe, excluding the Nordic region, accounted for the largest
tems revenue for 2003. decrease in absolute terms.
Other operating revenue decreased by 13 percent to SEK 13.2 The number of client sites3 amounted to 154 (164) at the end of
(15.2) million and primarily represents hardware sales as well as 2003. Average revenue per client site4 amounted during the year
consulting revenue. to SEK 1.4 (1.6) million.
The remaining revenue is related to development work performed The Group’s five largest clients represented a total of 18 percent
by the company for its own use and capitalized, which decreased of revenue during 2003. No individual client represented more
from SEK 13.4 to 12.0 million. than 5 percent of revenue.
Revenue per geographic market 2003 Total revenue, operating income and operating margin
Sweden 25% 250
Rest of Nordic 8% 40
Rest of Europe 45% 200
Asia and Australia 9%
North America 13%
100 Total revenue
50 Operating income
1999 2000 2001 2002 2003
Revenue and operating margin for 2002 and 2003 are calculated after taking into account The number of client sites includes the sites that as of year-end pay a license fee.
an increase in revenue of SEK 12.0 (13.4) million for 2003 subsequent to the capitalized work Calculated as the total systems revenue divided by the average number of client sites for the
performed by the company for its own use, in accordance with the Swedish Financial Accounting period.
Standards Council’s recommendation no.15.
16 Directors’ report
Fourth quarter 2003 which was primarily due to new employment and higher sales
The Group’s revenue decreased in the fourth quarter of 2003 commissions, a consequence of the increased systems revenue.
by 13 percent to SEK 62 (71) million. Compared to the previous
quarter revenue increased by 1 percent. The purchase cost of goods sold decreased during 2003 com-
pared to the previous year, as a result of decreased hardware
Systems revenue increased by 4 percent compared to the previ- sales. The cost in comparison to the third quarter increased by
ous quarter, due to among other things, two new sales of Orc SEK 0.9 million.
Liquidator. Other operating revenue decreased somewhat. Work
performed by the company for its own use and capitalized de- As a result of the expansion of the Stockholm office, as well as
creased by SEK 1.8 million as a result of the company completing the office in Tokyo, cost of premises increased by 13 percent to
a development project in St Petersburg. SEK 17 (15) million for 2003. The Chicago office was established
during the fourth quarter but had only a minor effect on cost of
During the fourth quarter 6 new client sites were added in Japan, premises. The cost in comparison to the previous quarter was
UK and the US. The number of lost client sites equaled 9 and largely unchanged.
consisted mostly of a number of smaller sites in the Nordic region
and Asia. During the period Orc Software received cancellations Telecom expenses decreased during 2003 by 7 percent and
regarding 7 client sites, which will impact the number of client amounted to SEK 7.5 (8.1) million. The cost in comparison to the
sites during the upcoming quarters. previous quarter was largely unchanged.
EARNINGS Consulting fees for product development increased somewhat
compared to the previous year and amounted to SEK 7.8 (7.0) mil-
Full year 2003 lion. In comparison to the previous quarter these costs decreased
Operating income for 2003 decreased by 36 percent to SEK from SEK 2.0 to 1.0 million.
74 (115) million, representing an operating margin of 29.9 (41.6)
percent. Other external expenses increased for 2003 by 3 percent to SEK
30 (29) million. In comparison to the previous quarter these costs
The lower operating income is primarily due to lower revenues. increased by 31 percent from SEK 6.8 to 8.9 million primarily due
Furthermore, the focus on development and sales, which aims to to the launch of Orc Liquidator.
generate future growth and accordingly did not have an immedi-
ate affect on revenue, increased costs. Depreciation and amortization increased by 22 percent and
amounted to SEK 13.1 (10.7) million. In comparison to the previ-
Fourth quarter 2003 ous quarter depreciation and amortization increased by 45 per-
Operating income for the fourth quarter 2003 decreased by 41 cent. This is due to the completion of the development project
percent to SEK 16 (27) million. The operating margin amounted in St Petersburg and that amortization of this intangible asset
to 24.9 (37.7) percent. Compared to the previous quarter opera- thereby began during the fourth quarter.
ting income decreased by 25 percent.
The lower operating margin was mostly related to the increased Orc Software constantly invests considerable resources in pro-
focus on marketing and sales activities and higher amortizations. duct development of new and existing applications. The main part
Among other things, the launch of Orc Liquidator increased mar- of development expenses consists of salaries. At the end of the
keting costs. Additionally a sales and support office was estab- year, 61 (58) people worked with product development in Frank-
lished in Chicago. Amortizations of intangible assets increased furt, London, Moscow, St Petersburg, Stockholm, Sydney and
significantly as a result of the completion of the development Toronto. Other product development expenses include computer
project in St Petersburg. equipment and premises for product developers, as well as exter-
Operating expenses increased for 2003 by 9 percent to SEK As of January 1, 2002 Orc Software capitalizes the part of the
175 (161) million. In comparison to the previous quarter operating Group’s expenses that are related to the development of new
expenses increased by 13 percent. market connections. Expenses for the development of new com-
ponents for Orc Software’s products, which took place in St
Personnel costs increased by 13 percent to SEK 93 (82) million Petersburg, were capitalized from the beginning of 2001 until the
during 2003. The average number of employees increased by 10 project was completed at the end of the third quarter of 2003.
percent for the same period. In comparison to the third quarter, The people involved in this project currently work with continued
personnel costs increased by 9 percent for the fourth quarter, development of the Orc System, which is not capitalized. Orc
Directors’ report 17
Software’s policy for the amortization period is three years from TAXES
completion. The tax rate for 2003 amounted to 30 (29) percent. Tax expen-
ses are calculated based on the expected tax for the Parent com-
Capitalized development expenditure during 2003 amounted to pany and each subsidiary.
SEK 12.0 (13.4) million. Amortization of the accumulated capital-
ized development expenditure during 2003 amounted to SEK 3.9 Income after tax decreased by 36 percent to SEK 56 (87) million.
OPERATING CAPITAL AND WORKING CAPITAL
The total development expenditure increased by 7 percent for COMMITMENT
2003 and amounted to approximately 25 (21) 5 percent of reve- Orc Software’s operating capital amounted to SEK -8 (-29) mil-
nue. In absolute terms the development expenses increased lion at the end of 2003. The increase in operating capital was pri-
mostly due to an increase in internal development resources for marily due to the decrease in liquid funds. The Group did not have
the subsidiaries as well as the use of external resources for deve- any interest bearing debt for the period.
lopment. The development expenses are expected to represent a
significant part of operating expenses also in the future. The working capital6 increased by SEK 2 million to SEK -30 (-32)
million. The principal reason behind the negative working capital
NET FINANCIAL INCOME commitment is the large item of accrued expenses and prepaid
Net financial income decreased to SEK 5.6 (8.5) million as a income that for the most part consists of license fees, which are
result of a decrease in liquid funds and lower interest rates as well invoiced quarterly in advance.
as lower income from associated companies. The Group’s liquid
funds decreased during the year from SEK 274 to 252 million, of ASSET TURNOVER RATIO
which SEK 216 (240) million consisted of short-term investments. The balance sheet total decreased during 2003 by 3 percent to
SEK 354 (365) million and the asset turnover ratio amounted to
Income after financial items decreased by 35 percent to SEK 80 1.0 (1.3).
EQUITY/ASSETS RATIO AND EARNING
The equity/assets ratio amounted at year-end to 69 (67) percent.
During 2003 the return on capital employed amounted to 33 (57)
percent and the return on shareholders’ equity amounted to 23
Breakdown of operating expenses 2003 Quarterly revenue and operating margin
Personnel costs 53%
Other external expenses 18% 60 40
Cost of premises 10%
Depreciation and amortization 8%
Consulting fees 4%
Telecom expenses 4%
Purchase cost of goods sold 3% 20 20
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
2000 2001 2002 2003
Total revenue Operating margin
Previously these figures included amortization of capitalized development expenditure. The now excluded in accordance with the definition of working capital in Swedish Financial Account-
comparable figure is recalculated. ing Standards Council’s recommendation no. 7. The comparable figures are adjusted for this
Tax liabilities/receivables were previously included in the calculation for working capital but are change.
18 Directors’ report
CASH FLOW AND INVESTMENTS FINANCIAL RISK MANAGEMENT
The Group’s cash flow, before changes in working capital and
investments, amounted at year-end to SEK 59 (111) million. The Foreign exchange risks
decrease in cash flow was mostly due to a lower operating income Transaction exposure
and a decrease in tax liabilities. The majority of Orc Software’s invoicing to clients in the Nordic
countries takes place in Swedish kronor. Clients outside the
The Group’s investments for the year amounted to SEK 22 (32) Nordic countries are invoiced primarily in US dollars and Euro,
million, primarily consisting of capitalized development expenses although invoicing is also done in Australian dollars, Danish kro-
amounting to SEK 12.0 million as well as computer and office nor, Canadian dollars as well as to some extent in British pounds.
equipment for SEK 6.1 million. The Group has significant exposure in US dollars and Euro, for
which invoicing exceeds expenses, as well as in British pounds
The Group’s cash flow after investments amounted to SEK 34 where expenses exceed revenue since the invoicing for UK cli-
(84) million during 2003. ents is primarily denominated in US dollars.
Cash flow from financing activities amounted to SEK -56 (-33) The Group’s exposed net inflow amounted to approximately SEK
million, which corresponds to the repurchase of own shares of 103 million in 2003, allocated as set out in the table below.
SEK 11.2 (0) million and the payment of dividends equaling SEK
45 (33) million. Inflow 2003 SEKm Outflow 2003 SEKm
USD 69 GBP 16
Liquid funds amounted to SEK 252 (274) million as of December EUR 30 JPY 6
31, 2003. AUD 2 HKD 2
DKK 2 CAD 1
The ratio between cash flow, before financial items and tax, and Total 103 CHF 1
the operating income, before depreciation and amortization, Total 26
amounted at year-end to 0.7 (0.8).
The effect of exchange rate fluctuations, calculated as a change
of the relevant average exchange rates between 2002 and 2003,
amounted to approximately SEK -11.1 million, and was primarily
due to the weakened USD, which at year-end equaled 7.28 Swed-
ish kronor. Foreign exchange hedging affected earnings on an
operating level by SEK 13.7 (3.0) million.
In accordance with the Group’s policy, significant net exposure in
each respective currency is hedged for the coming 3-12 months,
with a certain possibility of deviation in special cases. As of De-
Operating and working capital
cember 31, 2003, future flows equivalent to SEK 94 (162) million
had been hedged7, consisting of USD 6.0 (11.0) million hedged
1999 2000 2001 2002 2003 against the Swedish krona at an average forward rate of 9.99
(10.43) and EUR 3.7 (5.0) million hedged against the Swedish
-5 krona at an average forward rate of 9.30 (9.37). The total aver-
age remaining duration is approximately 3 (10) and 3 (9) months
respectively. These foreign exchange hedges represent approxi-
-15 mately 7-10 (15) months of future net flows.
At financial year-end,unrealized foreign exchange gains amount-
ed to SEK 7.5 (11.8) million, valued at the SEK/USD exchange
-30 rate of 7.28 (8.83) and the SEK/EUR rate of 9.09 (9.19).
SEKm Balance sheet exposure
It is Orc Software’s policy to hedge significant exposure in foreign
Working capital Operating capital currencies. At year-end, Orc Software did not have any significant
balance sheet exposure in foreign currencies.
OM Treasury AB is the counterpart on SEK 47 million of this amount.
Directors’ report 19
Liquidity management OPTIONS PROGRAM
As to liquidity risk and credit risk, investments may only take Carnegie has issued two option programs for Orc Software’s
place in instruments that have high liquidity and credit value. This employees. One program issued in 2000, covered the purchase
implies that Swedish issuers must be ranked “K1” as per Standard of 519 000 options by 55 employees and expired during the year.
& Poor’s ratings and that non-Swedish issuers must be ranked “A- The exercise price equaled SEK 60 per option with maturity on
1” and “P-1” as per Standard & Poor’s and Moody’s ratings. March 31, 2003. The second program issued in 2001 covers the
purchase of 270 000 call options by 39 employees with an exer-
The Group’s short-term investments, which at year-end amounted cise price of SEK 210 per option, maturing on March 1, 2004. The
to a nominal value of SEK 218 (243) million, consisted of Swedish options were purchased at a price calculated by Carnegie.
commercial papers with “K1” credit ratings and bank time deposits.
A new option program for Orc Software’s employees was
Credit risks launched during the first quarter of 2003. All employees in the
In general, Orc Software’s clients, who among others consist of Group were granted the opportunity to purchase call options
investment banks, banks and brokerage houses, represent a capi- issued by Hagströmer & Qviberg FK at market price. A total of 71
tal-strong segment with a consequent low risk for credit losses. employees purchased a total of 304 900 call options from Hag-
The Group’s credit losses are negligible due to the fact that cli- strömer & Qviberg. The exercise price for the call option is SEK
ents, on a quarterly or even longer basis, pay in advance and that 80 and the expiration date March 1, 2006. The option premium
Orc Software works actively to inform its clients of the importance amounted to SEK 11.50 per option.
of paying on time. During 2003, there were no significant credit
losses. All options will be cash-settled by a third party and the option
programs will therefore not result in any dilution and will not affect
Sensitivity analysis Orc Software’s earnings.
The sensitivity analysis below describes the full-year effect on the
Group’s operating income due to a change in a number of factors. PROPOSED DIVIDEND
The Board of Directors has resolved to recommend a dividend of
Effect on operating income SEK 3.40 (3.00) per share for 2003, representing a total of SEK
Factor Change for full year 2003, SEK million 50 (45) million and 89 (51) percent of net income. The Board pro-
License price +/– 5% +/– 11.2 poses a higher dividend given that the company expects positive
Salary costs +/– 5% –/+ 4.4 market development and today has a strong capital base. The
Development expenses +/– 5% –/+ 3.0 proposed record day for dividends is Monday April 26, 2004. If
SEK/USD +/– 5% +/– 3.98 the Annual General Meeting votes in favor of the proposal, the
SEK/GBP +/– 5% –/+ 0.88 expected payment date for the dividends is Thursday April 29,
SEK/EUR +/– 5% +/– 1.78 2004. The dividends are paid through VPC AB.
SHARE REPURCHASE AND REDUCTION OF
EMPLOYEES SHARE PREMIUM RESERVE
During 2003 the number of employees increased from 138 to During 2003 Orc Software purchased a total of 225 000 shares
141, an increase of 2 percent. The average number of employees for SEK 11.2 million, which equals 1.5 percent of the 14 850 000
was 137 (124). As a consequence of the uncertainty in the mar- shares issued, in accordance with the decision from the Annual
ket Orc Software decreased the number of new employments General Meeting 2003. Excluding Orc Software’s own sharehold-
for 2003 in comparison to previous years. The number of female ing, the number of shares equals 14 625 000. During the fourth
employees at year-end equaled 24 (23) and the number of male quarter of 2003 Orc Software did not purchase any Orc shares.
employees equaled 117 (115). The average age of the employees The nominal value of the acquired shares is SEK 22 500. The
is 31 (30) years. purpose of the acquisitions is to provide the Board with the oppor-
tunity to create additional value for the company’s shareholders by
BONUS adjusting the capital structure of the Group.
Orc Software’s employees including the Group management have
the possibility of receiving a bonus directly related to sales, and a The Annual General Meeting 2003 decided to reduce the share
bonus that is paid if the Group’s revenue growth and operating premium reserve by SEK 50 million, in order to create greater
income exceed the internally set goals. Income for 2003 encom- possibilities for distributing capital to shareholders. The District
passes only sales related bonuses, including social security ex- Court’s decision regarding the reduction was made on January
penses, of SEK 2.3 (0) million. The Board of Directors’ remunera- 14, 2004 and came into effect on February 4, 2004, at which
tion committee prepares the incentive program. time the period for appeal expired. As of December 31, 2003
Without taking into consideration existing hedging contracts.
20 Directors’ report
restricted and non-restricted reserves are accounted for includ- bonuses for the company’s employees in general and Group man-
ing the unapproved reduction of the share premium reserve. agement. The Board of Directors makes the final decisions.
TRANSACTIONS WITH AFFILIATED Nominating committee
COMPANIES In accordance with the authorization from the Annual General
During 2003 Orc Software sold technology components to OM Meeting in April 2003, Orc Software’s chairman has appointed
Technology AB for SEK 3.0 million. Of the Group’s total hedged a nominating committee. The nominating committee consists
foreign exchange position equaling SEK 94 million, OM Treasury of Magnus Böcker (OMHEX), Ulrika Hagdahl (Cancale Förvalt-
AB is the counterpart for SEK 47 million. Orc Software has also nings), Mats Gustafsson (SEB) and Tomas Nicolin (Third Swedish
purchased development services for SEK 3.3 million from Game National Pension Fund). The committee is responsible for pre-
Federation Development AB, in which Orc Software owns 49 per- senting a proposal for the members of Orc Software’s Board of
cent, and from E2E infotech Limited, in which Orc Software owns Directors and the Board’s remuneration.
34 percent, for SEK 2.0 million.
TRANSITION TO IFRS 2005
THE PARENT COMPANY According to the European Union’s International Accounting
The Parent company’s revenue9 decreased by 12 percent to SEK Standards (IAS) regulation all listed companies in the EU as of
230 (257) million. Income after financial items decreased and 2005 shall complete their Group accounting in accordance with
amounted to SEK 74 (114) million. Liquid funds amounted at the international accounting recommendations, International Finan-
end of the year to SEK 228 (258) million, of which SEK 211 (240) cial Reporting Standards (IFRS), which is the new name of IAS.
million consisted of short-term investments. The EU has yet to decide on the recommendations for financial
instruments, IAS 32 and IAS 39. Furthermore, a comprehensive
THE BOARD AND ITS WORK overview of a large number of current IFRS within the Internation-
Orc Software’s Board of Directors consists of 7 (8) members, al Accounting Standards Board (IASB) is taking place. Thus, the
following the resignation of one director during the year. All the implications of following IFRS from 2005 are still unclear. IASB
directors are elected at the Annual General Meeting. The Board has stated that only the IFRS which was published during the first
consists partly of members who represent the company’s larger quarter of 2004 will be in effect as of 2005.
shareholders, OM Technology and Cancale Förvaltnings, and
partly of independent directors. The Chief Executive Officer is The Swedish Financial Accounting Standards Council’s recom-
also a member of the Board. In 2003 Orc Software’s Board held mendations agree for the most part with current IFRS. Since Orc
9 (8) meetings. At each meeting during the year the Board Software’s financial reports are in agreement with the Swedish
addressed standard topics such as market development, signifi- Financial Accounting Standards Council’s recommendations the
cant issues regarding the company and, in particular, the com- impact of the transition to IFRS is expected to have little signifi-
pany’s financial position. In addition, issues regarding the annual cance. However, Orc Software’s accounting of financial instru-
report, interim reports, the budget and comprehensive matters ments will be affected. According to IAS 39, financial instruments
regarding strategy and world analysis were reviewed. shall be accounted for at face value in the balance sheet. Deriva-
tives have not previously been accounted for in Orc Software’s
The Board has chosen not to appoint a specific audit committee. balance sheet and the derivatives position primarily pertains to
Auditing issues are managed by the entire Board. The company’s hedges on foreign exchange exposure in US dollar and Euro. The
auditor participates in both a planning meeting and the meeting effect on shareholders’ equity and the impact of the transition
addressing the annual financial statements, at which time the will therefore depend on the size of the hedged cash flows as of
auditor presents any remarks from the review of Orc Software’s December 31, 2004 and the face value of these positions. The
internal controls and financial statements. hedged cash flow as of December 31, 2003 resulted in unreal-
ized foreign exchange gains of SEK 7.5 million.
The Group’s Chief Executive Officer presents strategy-related
matters and the Group’s Chief Operating Officer addresses eco- According to IFRS 1 reconciliation of shareholders’ equity as of
nomic and financial issues. January 1, 2004 and of the net income for 2004, between pre-
vious accounting principles and IFRS, shall be completed. Orc
Salary and remuneration committee Software intends to carry out such reconciliation in connection
The Board of Directors has appointed a remuneration committee with the year-end accounts for 2004.
consisting of Magnus Böcker and Åke Dovärn and the human
resources manager as a reporting member. The remuneration Except for the regulations in IAS 39 Orc Software has not identi-
committee prepares and discusses proposals regarding incentive fied any other significant areas in its accounting that are affected
programs, benefits and salaries, including sales commission and by the transition to IFRS.
Most of Orc Software’s invoicing is administered by the Parent company. The subsidiaries costs. As of the fourth quarter the Parent company’s revenues and costs are accounted for in
invoice the Parent company an amount that is based on the subsidiaries’ actual costs plus a proﬁt gross terms. Comparable ﬁgures have been adjusted for this change.
margin mark-up. Revenues in the Parent company’s accounting have previously offset these
Directors’ report 21
Orc Software has completed a number of activities due to the
planned transition to IFRS 2005. Orc Software has determined
which principles and areas differ from current principles and
developed the internal reporting.
DISTRIBUTION OF EARNINGS
The Group’s non-restricted reserves amount to SEK 141 million
after the year’s earnings of SEK 56 million. No provisions for re-
stricted reserves are required.
Orc Software AB (publ) Software AB (publ)
Earnings brought forward from the previous year 91 373 562 SEK
Income for the year 41 260 675 SEK
Total 132 634 237 SEK
The Board of Directors and the Chief Executive Ofﬁcer propose that these
funds be distributed as follows:
To the shareholders, a dividend of SEK 3.40 per share 49 725 000 SEK
To be carried forward 82 909 237 SEK
Total 132 634 237 SEK
Stockholm, February 25, 2004
Magnus Böcker Yngve Andersson Åke Dovärn Ulrika Hagdahl
Chairman of the Board
Per E. Larsson Nils Nilsson Stig Vilhelmson
Chief Executive Ofﬁcer
Our audit has been submitted February 25, 2004.
Ernst & Young AB
Authorized Public Accountant
22 Income statement
Group Parent company10
SEK thousands Note 2003 2002 2003 2002
OPERATING REVENUE 2, 4
Systems revenue 223 943 246 688 219 560 248 376
Work performed by the company
for its own use and capitalized 11 988 13 412 1 263 –
Other operating revenue 13 178 15 234 9 292 8 263
Total revenue 249 109 275 334 230 115 256 639
OPERATING EXPENSES 2, 3, 4
Purchase cost of goods sold -5 742 -8 169 -3 182 -5 355
Cost of premises -17 030 -14 914 -7 622 -5 230
Telecom expenses -7 542 -8 147 -2 877 -3 449
Consulting fees -7 839 -6 995 -3 512 -4 844
Other external expenses 7 -30 165 -29 294 -90 176 -81 802
Personnel costs 5 -93 222 -82 443 -46 174 -43 349
Depreciation and amortization 6 -13 076 -10 747 -9 735 -7 857
Total expenses -174 616 -160 709 -163 278 -151 886
Operating income 2, 8, 14 74 493 114 625 66 837 104 753
Income from participation in
associated companies 10 -1 379 -564 – –
Financial income 11 7 316 9 123 7 531 8 842
Financial expenses -332 -59 -226 -23
Net ﬁnancial income 5 605 8 500 7 305 8 819
Income after ﬁnancial items 2 80 098 123 125 74 142 113 572
Year-end appropriations 12 – – -16 729 -26 301
Tax on net income for the year 13 -23 717 -36 047 -16 152 -25 575
Minority’s part of the
income for the year -775 141 – –
Net income for the year 2, 8 55 606 87 219 41 261 61 696
Earnings per share11, SEK 21 3.78 5.87 – –
Number of shares at the end of year, reduced by
Orc Software’s repurchase of own shares, thousands 21 14 625 14 850 – –
Average number of shares, reduced by Orc
Software’s repurchase of own shares, thousands 21 14 712 14 850 – –
Most of Orc Software’s invoicing is administered by the Parent company. The subsidiaries these costs. As of the fourth quarter the Parent company’s revenues and costs are accounted for
invoice the Parent company an amount that is based on the subsidiaries’ actual costs plus a in gross terms. Comparable ﬁgures have been adjusted for this change.
proﬁt margin mark-up. Revenues in the Parent company’s accounting have previously offset Orc Software does not have any outstanding convertible loans or warrants.
Balance sheet 23
Group Parent company
SEK thousands Note Dec. 31, 2003 Dec. 31, 2002 Dec. 31, 2003 Dec. 31, 2002
Intangible assets 15
Capitalized development expenditure 21 888 13 832 21 888 13 832
Goodwill 286 382 – –
Other intangible ﬁxed assets12 2 164 2 906 – –
Tangible assets 14, 16
Equipment 17 530 19 750 13 792 15 769
Financial assets 17, 18
Shares in Group companies – – 10 510 8 415
Shares in associated companies 1 545 1 827 2 573 2 524
Other long-term ﬁnancial ﬁxed assets 5 229 4 115 4 449 2 107
Total ﬁxed assets 48 642 42 812 53 212 42 647
Accounts receivable 19 40 681 36 206 38 254 32 697
Receivables, Group companies – – 5 988 4 705
Prepaid tax 13 – – 2 279 –
Other receivables 6 165 7 500 1 224 5 523
Prepaid expenses and accrued income 20 6 868 4 776 4 900 3 198
Short-term investments 27 216 206 240 299 211 010 240 209
Cash and bank balances 24, 27 35 661 33 523 16 626 18 091
Total current assets 305 581 322 304 280 281 304 423
TOTAL ASSETS 354 223 365 116 333 493 347 070
SHAREHOLDERS’ EQUITY AND LIABILITIES
Shareholders’ equity13 8, 21
Share capital 1 485 1 485 1 485 1 485
Restricted reserves 101 461 138 818 37 437 87 437
Non-restricted reserves 85 726 17 621 91 373 35 348
Net income for the year 55 606 87 219 41 261 61 696
Total shareholders’ equity 244 278 245 143 171 556 185 966
Minority interest 1 259 484 – –
Untaxed reserves – – 86 633 69 903
Deferred tax liability 13 23 636 19 573 – –
Total provisions 23 636 19 573 – –
Current liabilities 2
Accounts payable 22 5 969 7 445 4 721 6 576
Liabilities, Group companies – – 1 983 2 581
Tax liabilities 13 1 685 19 106 – 15 853
Other liabilities 4 596 5 066 1 519 1 260
Accrued expenses and prepaid income 23 72 800 68 299 67 081 64 931
Total current liabilities 85 050 99 916 75 304 91 201
TOTAL SHAREHOLDERS’ EQUITY AND LIABILITIES 354 223 365 116 333 493 347 070
Pledged assets None None None None
Contingent liabilities None None None None
This item pertains to Orc ExNet. ing the reduction was made on January 14, 2004 and came into effect on February 4, 2004, at
As of December 31, 2003 restricted and non-restricted reserves are accounted for including which time the period for appeal expired.
a non-registered reduction of the share premium reserve. The District Court’s decision regard-
24 Shareholders’ equity
Share Restricted Non-restricted
SEK thousands capital reserves equity Total
Opening balance January 1, 2002 1 485 119 615 70 707 191 807
Dividend for 2001 – – -32 670 -32 670
Transfer to statutory reserve in accordance with distribution of earnings – 20 -20 0
Adjustments between restricted and non-restricted shareholders’ equity – 19 446 -19 446 0
Translation difference – -263 -950 -1 213
Net income for the year – – 87 219 87 219
Closing balance December 31, 2002 1 485 138 818 104 840 245 143
Dividend for 2002 – – -44 550 -44 550
Share repurchase – – -11 177 -11 177
The effect on shareholders’ equity due to the acquisition
of the remaining portion of associated company – – -145 -145
Reduction of share premium reserve, unregistered – -50 000 50 000 0
Adjustments between restricted and non-restricted shareholders’ equity – 12 916 -12 916 0
Translation difference etc. – -273 -326 -599
Net income for the year – – 55 606 55 606
Closing balance December 31, 2003 1 485 101 461 141 332 244 278
Cash ﬂow statement 25
Cash flow statement
Group Parent company
SEK thousands Note 2003 2002 2003 2002
Operating income 74 493 114 625 66 837 104 753
Adjustment for items not included in cash ﬂow
Depreciation and amortization 13 075 10 747 9 735 7 857
Other adjustments for items not included in cash ﬂow 376 1 037 216 -973
Financial items 25 7 102 8 850 7 631 8 398
Income tax paid14 13 -36 404 -24 016 -34 284 -20 360
Cash ﬂow from operating activities 58 642 111 243 50 135 99 675
before changes in working capital
CHANGES IN WORKING CAPITAL
Changes in accounts receivable -4 242 2 732 -5 557 4 314
Changes in operating assets -1 157 -6 029 988 -6 396
Changes in accounts payable -1 479 4 394 -1 855 4 901
Changes in operating liabilities14 4 252 3 126 1 811 1 156
Total changes in working capital -2 626 4 223 -4 613 3 975
Cash ﬂow from operating activities 56 016 115 466 45 522 103 650
Investments in intangible ﬁxed assets 15 -11 988 -13 413 -11 988 -13 413
Investments in tangible ﬁxed assets 16 -6 125 -12 835 -4 048 -9 458
Changes in financial fixed assets 17, 26 -3 421 -5 605 -4 486 -4 454
Cash ﬂow from investment activities -21 534 -31 853 -20 522 -27 325
Share repurchase 21 -11 177 – -11 177 –
Dividend 21 -44 550 -32 670 -44 550 -32 670
Cash ﬂow from ﬁnancing activities -55 727 -32 670 -55 727 -32 670
Change in liquid funds -21 245 50 943 -30 727 43 655
Opening liquid funds 27 273 822 224 289 258 300 215 442
Translation difference/exchange differences in liquid funds 27 -710 -1 410 63 -797
Closing liquid funds 27 251 867 273 822 227 636 258 300
Tax debt was previously included in Changes in operating liabilities but is now accounted in Income
tax paid in accordance with the Swedish Financial Accounting Standards Council’s recommendation
no. 7. Comparative ﬁgures have been adjusted accordingly.
NOTE 1. ACCOUNTING PRINCIPLES Minority interest
The minority’s part of the income after tax is reported as the
General accounting principles minority’s part of the income for the year in the income statement
The annual report and accounts have been prepared in accor- and as minority interest in the balance sheet. The entire entry
dance with the Swedish Companies Act and the recommenda- refers to Orc ExNet. The minority interest includes the minority’s
tions and opinions of the Swedish Financial Accounting Standards share of possible untaxed reserves for the portion that these rep-
Council currently in force. resent equity.
During 2003 new recommendations regarding Format of finan- Goodwill
cial reports (RR 22); Buildings held for investment purposes (RR Goodwill is reported at acquisition value less accumulated amor-
24); Reporting per segment – business segments and geographi- tizations and contingent write-downs. Goodwill represents the
cal areas (RR 25); Events after the accounting year-end (RR 26); portion of the acquisition cost exceeding the actual value on the
Financial instruments: information and classification (RR 27) and acquisition day identified by the net assets of the acquired compa-
Government support (RR 28) came into effect. The recommen- ny. According to current practice goodwill is written down linearly
dations concerning government support and buildings held for during the utility period, which is assumed to be a maximum of 60
investment purposes concern areas outside of Orc Software’s months. See note 15. The value of goodwill is reviewed, however,
business scope and therefore do not impact the format of Orc on a continuous basis with regard to contingent write-downs due
Software’s financial reports. The other recommendations do not to events or changes in conditions that indicate a possibility that
have any impact on Orc Software’s income and position and there- the value will not be recovered.
fore only result in broader disclosure requirements.
Translation of ﬁnancial statements of foreign subsidiaries
As a result of Orc Software’s working methods, in which there is The current method has been used for the translation of the finan-
a high degree of overlapping between sales and support efforts cial statements of foreign subsidiaries, which means that the res-
as well as sales and development work, Orc Software’s income is pective balance sheets are converted into Swedish kronor at the
accounted for according to the principles for income statements rate on the balance sheet date, except for shareholders’ equity,
classified according to type of cost. which is translated at the historical price, while entries on the in-
come statement are translated to an average foreign exchange
Principles of consolidation rate for the year. The differences arising due to the translations do
The consolidated accounts consist of the Parent company and not impact the income statement, but instead are booked directly
those companies which the Parent company controls, as well as to shareholders’ equity.
associated companies in which the Parent company has a sig-
nificant influence. The subsidiaries are consolidated in accor- Valuation principles
dance with the acquisition method. Consequently the book value Assets, provisions and liabilities have been valued at acquisition
for shares in subsidiaries is eliminated in the first instance against value if not specified otherwise.
restricted equity in each subsidiary and thereafter against non-
restricted equity. The Group’s non-restricted equity includes only Product development expenses
the portion of the subsidiary’s non-restricted equity that can be According to the basic principle, expenses for the development of
transferred to the Parent company without the holding needing to existing market connections and applications as well as research
be written-down. The Group’s income statement includes compa- are expensed on a continuous basis. Expenses for the develop-
nies acquired during the year valued with consideration taken only ment of new products should, however, be capitalized based on the
to the holding period. principles accounted for below.
Associated companies All expenses for ongoing research and development of existing
The accounting of associated companies is carried out according products are entered at cost as they occur.
to the equity method. The results from associated companies are
included in the consolidated income statement with the Parent Expenses for development of new products are reported as intan-
company’s share of equity and are reported under Financial items. gible assets when they meet the following criteria: the asset will
The value of associated companies is reported as a separate item most likely lead to future financial advantages for the Group; the
on the balance sheet. See note 10, 17 and 18. The value changes acquisition value may be calculated in a reliable way; the company
with the Parent company’s share of each respective company’s aims to complete the asset and the company has technical, finan-
profit or loss after tax, reduced by any dividends received and cial and other resources for completing the development, utilizing
other adjustments. Non-distributed income in associated compa- or selling the asset. Significant documents for verifying complet-
nies is reported as part of restricted reserves in the Group’s equity. ed capitalization may be business plans, budgets, results and the
company’s view of future results.
The acquisition value for accrued intangible assets is the sum of asset’s recovery value is calculated and the asset is written-down
the expenses arising at the time the intangible asset met the cri- to the recovery value. See note 16.
teria stated above up until the asset is completed and can be put
into production. The accrued intangible assets are written off lin- Accounts receivable and other receivables
early during the utility period as of completion. Accrued intangible Accounts receivable are entered at the invoiced value with deduc-
assets are accounted for at acquisition value with deductions for tions for any loss risk. An estimate of doubtful receivables is made
accumulated amortizations as well as any write-downs. A neces- when it is no longer probable that the receivable will be paid in full.
sary write-down is determined when events or changes in condi- Doubtful receivables are written-down when the loss is certain.
tions indicate that the value might not be recovered. See note 19.
These intangible assets are stated as Capitalized development Receivables and payables in foreign currencies
expenditure and have an estimated utility period of 36 months. Receivables and payables in foreign currencies are valued using
the rate on the balance sheet date. Receivables and payables in
Work during the accounting year on assets brought forward as foreign currencies that are hedged are valued at spot rates plus/
intangible fixed assets are taken up as revenue under Work per- minus the accrued forward premium. The accrued forward pre-
formed by the company for its own use and capitalized, on the mium is reported with exchange rate differences in the Operating
income statement. The main part of the entry is personnel expen- income. Forward contracts related to future invoicing do not corre-
ses, cost of premises and external expenses for consulting ser- spond to accounts receivable or accounts payable in the year-end
vices. The expense entries have not been reduced for the work accounts. Any unrealized exchange rate difference on the closing
regarding capitalized assets, instead the expense is met by the day for these contracts is not included in the results, although the
revenue entry. Thus the revenue entry under Work performed amount is specified in note 9 and in the Directors’ report.
by the company for its own use and capitalized does not have an
effect on income. During the accounting year the Group’s total Short-term investments and cash and bank
expenses for development amounted to SEK 60 million of which balances
SEK 12.0 million was capitalized. See note 3 and 15. Returns on short-term investments as well as on cash and depo-
sits in the bank are entered as financial income in the Group’s
Other intangible fixed assets income statement under Financial items.
The entry Other intangible fixed assets entirely refers to Orc
ExNet. This entry is valued at acquisition value with deductions for Leasing
accumulated amortizations and any write-downs. Any necessary Leasing may be classified as either financial or operational leas-
write-downs are determined when events or change in conditions ing. Financial leasing exists when the significant financial risks
indicate that the value might not be recovered. See note 15. and advantages connected to the ownership of an asset are trans-
ferred from the lessor to the lessee. All other cases refer to opera-
Other intangible fixed assets are written off linearly during the uti- tional leasing. In the case of operational leasing the leasing fee is
lity period, which is estimated to 60 months. entered as an expense during the leasing period starting from the
point of utilization. Orc Software only has operational leasing obli-
Tangible fixed assets gations regarding the leasing agreements for premises and leas-
Tangible fixed assets are valued at their acquisition value less ing of hardware for clients. See note 14.
accumulated depreciation and contingent write-downs. The need
for a possible write-down is determined when events or other con- Leasing revenue for leased hardware is accrued and recognized
ditions indicate that the value might not be recovered. as revenue during the life of the agreement. Costs related to the
leasing revenue are entered as they are realized. Depreciation
Linear depreciation is used during the asset’s utility period takes place according to the same principle as for the Group’s
according to the following: other assets in the same class. Leasing contracts mainly follow the
client agreement terms and are invoiced quarterly in advance.
Servers 60 months
Other computer and IT equipment 36 months Revenue recognition
Other equipment 60 months Revenue is reported in the income statement when it is probable
that the company will receive future financial advantages and that
Capitalized improvement expenses for leased premises are depre- these advantages can be calculated in a reliable way. The Group’s
ciated during the duration of the leasing agreement. revenues consist of systems revenue, work performed by the com-
pany for its own use and capitalized, hardware sales, consulting
Orc Software determines at each year-end if there are any indica- revenue and other revenue.
tions that an asset has decreased in value. If this is the case the
Systems revenue Consulting revenue
Sales of software program licenses The designated time frame for these consulting services is nor-
The Group’s accounted net revenue primarily pertains to software mally short and the revenue is accounted for after the assignment
program licenses. Invoicing takes place quarterly in advance and is completed.
revenues are allocated over the quarter pertaining to the invoice.
Sales of Orc Liquidator All invoicing of software system licenses takes place centrally
For certain products and assignments Orc Software follows the from the Parent company and the subsidiaries receive compensa-
principle of percentage of completion, referred to as “contract tion according to the cost plus method, which stipulates that the
assignment” on Stockholmsbörsen’s general guide for the subsidiaries’ sales take place at cost plus a reasonable mark-up.
accounting of revenue in technology companies. According to this See note 4.
principle, revenue and expenses for an assignment are accounted
for in relation to the assignment’s degree of completion on the ba- Cash flow statement
lance sheet day. The following conditions should be met: Cash flow statements have been prepared in accordance with the
indirect method. This means that the net result of payments re-
- the income can be calculated in a reliable way, ceived and made in the ongoing operations has been calculated
- it is probable that the contractor will receive the financial advan- by adjusting the net income for the year by the year’s change in
tages that are connected to the service assignment, operating receivables and operating liabilities.
- the degree of completion may be calculated in a reliable way and
- the expenses incurred and the remaining expenses for the com- Income tax
pletion of the service assignment can be calculated in a reliable The tax cost in the consolidated income statement consists of paid
way. tax and deferred tax. The deferred tax arises through a temporary
difference between the taxable values in the companies and the
Criteria that may indicate a classification as “contract assignment” accountable values in the Group. The deferred tax primarily arises
are as follows: from year-end appropriations in the Swedish companies. A small
- system software is not sold without services, amount, however, is related to a deferred tax receivable for a defi-
- the agreement contains milestones and payments are condi- cit deduction, and is accounted for in the consolidated balance
tioned on the client’s acceptance at the various stages, sheet as a provision for tax. See note 13.
- services included in the agreement can not be purchased from
other suppliers, New recommendation from the Swedish
- the system software is marketed as specifically tailored to the Financial Accounting Standards Council
client rather than a standard product and As of January 1, 2004, Orc Software will implement the new rec-
- the services mainly represent all the work completed prior to ommendation from the Swedish Financial Accounting Standards
installation. Council, Remuneration to employees (RR 29). The recommen-
dation will require greater disclosure in Orc Software’s financial
The degree of completion is calculated based on an estimate of reports. According to the recommendation, programs for remu-
how much work remains before the assignment is completed in neration following discontinued employment shall either be clas-
relation to the total estimated time and the starting point stated in sified as a defined contribution plan or as a defined benefit plan.
the project plan. When the project is completed the client begins Orc Software only has defined contribution plan and therefore
to pay monthly license fees and this revenue is accounted for in expenses fees for pensions and other commitments on a conti-
the same way as other sales of software program licenses. nual basis.
Work performed by the company for its own use and capitalized
The entry is defined under accounting principles under the head-
ing Product development expenses.
The revenue is accounted for when the significant risks and ad-
vantages connected to the user right of the product have been
transferred to the buyer and when the revenue amount can be cal-
culated in a reliable way.
NOTE 2. REPORTING PER SEGMENT
According to the Swedish Financial Accounting Standards Council’s recom- The local operations mainly consist of sales and support efforts and in certain
mendation number 25, Reporting per segment – business segments and geo- cases development. Functions such as Group management, legal, human
graphical areas, the company shall provide information about the businesses’ resources, accounting and administration, marketing, development, etc. are
various segments, lines of business and geographical areas. located centrally and are considered joint Group resources. This means that
a great part of the Group’s expenses cannot be attributed to a specific geogra-
Orc Software’s risks and opportunities are mainly affected by the company phical area in a reliable way and they therefore remain unallocated.
having operations in different geographical areas due to the location of clients.
This determines the primary segment division of the geographical areas. Orc The Group’s assets primarily consist of liquid funds which for the most part
Software’s products and services are of similar character, aimed at similar are related to the Parent company. Only the portion of liquid funds used in the
client groups, distributed in a similar manner and have a similar production pro- operational business for each segment has been divided.
cess. Accordingly the business consists of only one operating structure and
the division of the operating structure is not provided.
SEK thousands Europe North America Asia/Australia Other Total
Operating revenue for external clients 183 741 31 463 21 917 – 237 121
Work performed by the company for
its own use and capitalized – – – 11 988 11 988
Total 183 741 31 463 21 917 11 988 249 109
Income per segment before
joint Group expenses 133 777 20 935 4 551 – 171 251
Unallocated costs – – – -96 758 -96 758
Operating income – – – – 74 493
Net ﬁnancial income – – – 5 605 5 605
Income after ﬁnancial items – – – – 80 098
Tax on net income for the year – – – -23 717 -23 717
Minority’s part of the income – – – -775 -775
Net income for the year – – – – 55 606
Assets and liabilities
Assets for the segment 43 849 18 292 8 952 – 71 093
(Fixed assets and current assets
excl. prepaid taxes)
Unallocated current assets – – – 283 130 283 130
Total current assets – – – – 354 223
Liabilities for the segment 49 677 9 956 7 664 – 67 297
(Short-term liabilities excl. tax liabilities)
Unallocated short-term liabilities – – – 17 753 17 753
Total current liabilities – – – – 85 050
Other segment information
Investments in tangible assets 1 114 633 330 4 048 6 125
Depreciation of tangible assets -2 951 -138 -399 -4 494 -7 982
SEK thousands Europe North America Asia/Australia Other Total
Operating revenue for external clients 207 763 27 508 26 651 – 261 922
Work performed by the company for
its own use and capitalized – – – 13 412 13 412
Total 207 763 27 508 26 651 13 412 275 334
Income per segment before
joint Group expenses 167 819 16 844 10 100 – 208 175
Unallocated costs – – – -93 550 -93 550
Operating income – – – – 114 625
Net ﬁnancial income – – – 8 500 8 500
Income after ﬁnancial items – – – – 123 125
Tax on net income for the year – – – -36 047 -36 047
Minority’s part of the income – – – 141 141
Net income for the year – – – – 87 219
Comparable ﬁgures for 2002 regarding assets, liabilities, depreciation/amortization and investments are not provided since it is not possible to prepare this
NOTE 3. DEVELOPMENT EXPENSES Salaries, other remuneration and social costs
Group Parent company
Group SEK thousands 2003 2002 2003 2002
SEK thousands 2003 2002
Board members and
The year’s development work 59 961 55 843
management 7 810* 5 453* 7 810* 5 453*
Amortization of development work 3 932 1 281
Other employees 64 011 55 872 25 170 23 538
Total development expenses 63 893 57 124
Total salaries and other
remuneration 71 821 61 325 32 980 28 991
Social costs 19 841 18 058 12 654 12 385
of which pension costs 2 393** 2 964** 1 412** 1 697**
NOTE 4. TRANSACTIONS WITH AFFILIATED
Total social costs 19 841 18 058 12 654 12 385
Total salaries, other remu-
neration and social costs 91 662 79 383 45 634 41 376
During 2003 Orc Software has sold technology components to OM Techno- *Of which earnings-related compensation equaling SEK 200 (0) thousand rep-
logy AB for SEK 3 000 thousand. OM Technology AB owns 30.7 percent of the resents a variable salary of SEK 100 (0) thousand for Lars Johansson and Jonas
shares in Orc Software. Hansbo respectively.
**Of which the Chief Executive Officer and the company’s Executive Vice Presidents
SEK 320 (443) thousand, divided as follows: Nils Nilsson SEK 141 thousand, Lars
Purchases Johansson SEK 135 thousand, Jonas Hansbo SEK 21 thousand and Ulrika Hagdahl
During 2003 Orc Software purchased development services for SEK 3 304 SEK 23 thousand. The amounts represent gross salary deductions.
thousand from Game Federation Development AB, which is owned to 49 per-
cent by Orc Software and for SEK 2 039 thousand from E2E infotech Limited, Specification of salaries, other remuneration and option holdings
which Orc Software owns to 34 percent. for the Board and Group management
Most of Orc Software’s invoicing is administered by the Parent company. The Board of Directors
subsidiaries invoice the Parent company an amount that is based on the sub- The Annual General Meeting 2003 resolved that for the period until the next
sidiaries’ actual costs plus a profit margin mark-up, according to the so-called Annual General Meeting 2004 the compensation for the Chairman of the
cost plus method. Purchases related to the cost plus method amounted to SEK Board shall amount to SEK 250 thousand and for each Board member to
67 749 (65 280) thousand in the Parent company. SEK 125 thousand, with the exception of the Chief Executive Officer, who is
employed by the company. Compensation to the members of the Board, includ-
Purchases and sales between the Parent company and other ing social costs, has for 2003 been expensed to SEK 1 463 thousand consist-
Group companies ing of: SEK 467 thousand for 2002 and SEK 996 thousand for 2003, of which
SEK 71 880 (65 280) thousand of the Parent company’s purchases for the SEK 357 thousand is attributable to the Chairman of the Board and SEK 1 106
year are from other Group companies. SEK 716 (912) thousand of the Parent thousand to other Board members.
company’s revenues for the year pertains to sales to other Group companies.
Foreign exchange forward contracts Salaries and other remuneration below refer to each period that the person has
Of the Group’s total foreign exchange hedges amounting to SEK 94 million, held the position of Chief Executive Officer, Executive Vice President and/or
OM Treasury AB is the counterpart for SEK 47 million. member of Group management, gross salary deductions excluded.
SEK thousands 2003 2002
Compensation to the Chairman of the Board and Board members is accounted
CEO Nils Nilsson 2 328 1 165
for in Note 5.
EVP Lars Johansson 931 –
EVP Jonas Hansbo 486 –
EVP Ulf Sigfridsson 751 1 064
NOTE 5. PERSONNEL EVP Ulrika Hagdahl 91 799
Other Group management 2 240 2 125
Average number of employees Total 6 827 5 153
Total, women Total, women The entire amount for Chief Executive Officer Nils Nilsson is fixed salary since
Sweden 60 15 54 12 no variable compensation has been paid.
of which the Parent company 56 14 51 12
Australia 7 1 6 1 During 2003 a number of changes in Orc Software’s Group management took
Canada 3 0 2 0 place. Below is a summary of the period for which each specific person served
Germany 5 0 4 0 as Chief Executive Officer, Executive Vice President and/or member of Group
Hong Kong 3 0 2 1 management during 2003.
Italy 8 1 7 1
Russia 32 4 32 4 Nils Nilsson CEO January 1-December 31, 2003.
United Kingdom 12 2 12 3 Lars Johansson Member of Group management January 1-December 31,
US 4 0 3 0 2003, EVP as of March 20, 2003.
Other countries 3 0 2 0 Jonas Hansbo Member of Group management January 1-December 31,
Total average number of 2003, EVP as of September 1, 2003.
employees 137 23 124 22 Ulrika Hagdahl EVP and member of Group management
January 1-March 31, 2003.
Average number of employees as stated in the note is rounded to the closest Ulf Sigfridsson EVP and member of Group management
whole number. January 1-August 31, 2003.
Per Andersson Member of Group management February 1-August 31, 2003.
Anders Fogel Member of Group management March 6-August 31, 2003.
As of December 31, 2003 Orc Software’s Group management consists of 100
Option holding NOTE 6. DEPRECIATION AND AMORTIZATION
Ulrika Hagdahl, Nils Nilsson, Lars Johansson and Jonas Hansbo hold call options
Group Parent company
in Orc Software. The options are issued by a third party and will not entail any SEK thousands 2003 2002 2003 2002
costs for the company. Other members of the Board do not hold options in Orc Amortization of other intangible
Software. ﬁxed assets and goodwill -1 162 -838 – –
Depreciation of tangible
Pensions and severance pay ﬁxed assets -7 982 -8 628 -5 803 -6 576
During the ﬁnancial year 2002 pension commitments for the Group management Amortization concerning
changed to a model that offers the possibility for pension savings via gross salary capitalized development
deductions similar to other employees in Sweden. No other pension commit- expenditure -3 932 -1 281 -3 932 -1 281
ments exist in regards to the Group management.
Total depreciation and
amortization -13 076 -10 747 -9 735 -7 857
In the event that the company gives notice to members of Group management,
the dismissed have the right to receive salary during the notice period of 6
months. There is no additional severance pay.
NOTE 7 AUDIT FEES
Decision and preparation process The following compensation has been paid to auditors and audit firms for the
The Board has appointed a remuneration committee with representatives from annual financial audit and other reviews according to the law as well as for
the Board and a reporting representative from the company. The remuneration advice and other assistance based on the observations of the review (Audit
committee prepares and discusses proposals regarding incentive programs, ben- assignment). Compensation has also been paid for other independent advice
eﬁts and salaries, including sales commissions and bonuses, for Orc Software’s (Other assignments), which for the most part consist of tax consultancy.
Chief Executive Ofﬁcer, Group management and in general for other employees.
Group Parent company
Orc Software’s Chief Executive Ofﬁcer has not been paid a variable salary and SEK thousands 2003 2002 2003 2002
therefore principles for the division between variable and ﬁxed salary for the Ernst & Young
Chief Executive Ofﬁcer have not been established. In regard to remuneration Audit assignment 338 249 324 229
for other members of Group management, the Chief Executive Ofﬁcer issues a Other assignments 170 144 170 144
proposal to the remuneration committee, who then presents the proposal to the Harmer Slater
Board. In all cases the Board makes ﬁnal decisions. Audit assignment 48 48 – –
The nominating committee issues proposals for remuneration for the Board and Audit assignment 37 26 – –
the Annual General Meeting makes the ﬁnal decision.
Sick leave in the Parent company
The percentage of sick leave is reported according to the principle: total sick NOTE 8. FOREIGN EXCHANGE EFFECTS
leave divided by ordinary working hours. Ordinary working hours consist of Foreign exchange differences contained in Operating income
planned and scheduled working hours including vacation and leave of absence. Group
SEK thousands 2003 2002
Sick leave as a percentage of scheduled ordinary working hours Relating to current operations -398 -915
per category Total foreign exchange differences
contained in Operating income -398 -915
July 1-December 31, 2003 Foreign exchange differences
Men 0.6 contained in Financial items – –
Women 7.9 Total foreign exchange
Employees -29 years of age 0.4 differences that have affected
Employees 30-49 years of age 3.1 income after ﬁnancial items -398 -915
Employees 50- years of age* –
Total sick leave 2.5 Foreign exchange differences
* The number of employees in the category is fewer than 10 and is therefore not contained in Shareholders’ equity
reported. Accumulated foreign exchange
differences brought forward -863 350
There are over 60 days of sick leave in the category for women and the per- Translation differences for
centage for sick leave is relatively high given that the number of people inclu- the year -572 -1 213
ded in this category is low. Total foreign exchange
differences contained in
Sick leave over 60 days as a percentage of total sick leave: 65.4 Shareholders’ equity -1 435 -863
Foreign exchange rates (against SEK)
Average rate Closing day rate
January-December December 31
2003 2002 2003 2002
USD 8.09 9.73 7.28 8.83
EUR 9.13 9.16 9.09 9.19
GBP 13.19 14.57 12.91 14.15
DKK 1.23 1.23 1.22 1.24
AUD 5.26 5.28 5.43 4.98
CHF 6.00 6.24 5.83 6.32
CAD 5.77 6.19 5.56 5.63
HKD 1.04 1.25 0.94 1.13
JPY 0.0698 0.0776 0.0680 0.0740
NOTE 9. FINANCIAL RISK MANAGEMENT NOTE 12. YEAR-END APPROPRIATIONS
Foreign exchange risks Parent company
SEK thousands 2003 2002
Transfer to tax allocation fund -19 283 -29 042
Utilization of tax allocation fund 2 234 2 168
The majority of Orc Software’s invoicing to clients in the Nordic countries
Excess depreciation 320 573
takes place in Swedish kronor. Clients outside the Nordic countries are
Total appropriations -16 729 -26 301
invoiced primarily in US dollars and Euro, although invoicing is also done
in Australian dollars, Danish kronor, Canadian dollars as well as to some
extent in British pounds. The Group has significant exposure in US dollars
and Euro, for which invoicing exceeds expenses, as well as in British pounds NOTE 13. TAX ON NET INCOME FOR THE YEAR
where expenses exceed revenue since the invoicing for UK clients is primarily The following components are included in the reported tax expense
denominated in US dollars.
Group Parent company
The Group’s exposed net inflow amounted to approximately SEK 103 million in SEK thousands 2003 2002 2003 2002
2003, allocated as set out in the table below. Actual tax cost -19 872 -27 971 -16 198 -24 615
Paid foreign taxes -19 -104 -19 -104
Inﬂow 2003 SEK million Outﬂow 2003 SEK million Adjustment for taxes from
USD 69 GBP 16 previous years 65 -856 65 -856
EUR 30 JPY 6 Deferred tax expense* -4 731 -7 157 – –
AUD 2 HKD 2 Deferred tax revenue due to
DKK 2 CAD 1 temporary differences 840 41 – –
Total 103 CHF 1 Reported tax cost -23 717 -36 047 -16 152 -25 575
*Concerns in its entirety year-end appropriations in the Swedish companies.
The effect of exchange rate fluctuations, calculated as a change of the rele-
vant average exchange rates between 2002 and 2003, amounted to approxi- Reconciliation of actual tax expense
mately SEK -11.1 million, and was primarily due to the weakened USD, which
at year-end equaled 7.28 Swedish kronor. Foreign exchange hedging affected Group Parent company
SEK thousands 2003 2002 2003 2002
earnings on an operating level by SEK 13.7 (3.0) million.
Reported income before tax 67 565 97 415 57 693 88 002
Tax according to weighted
In accordance with the Group’s policy, significant net exposure in each respec-
average tax rate -19 592 -28 011 -16 154 -24 655
tive currency is hedged for the coming 3-12 months, with a certain possibility
Tax effect on expenses that are
of deviation in special cases. As of December 31, 2003, future flows equiva-
not tax deductible -370 -87 -137 -87
lent to SEK 94 (162) million had been hedged15, consisting of USD 6.0 (11.0)
Tax effect on non-taxable income 102 – 105 –
million hedged against the Swedish krona at an average forward rate of 9.99
Tax effect on paid foreign tax -12 127 -12 127
(10.43) and EUR 3.7 (5.0) million hedged against the Swedish krona at an
Actual tax expense -19 872 -27 971 -16 198 -24 615
average forward rate of 9.30 (9.37). The total average remaining duration is
approximately 3 (10) and 3 (9) months respectively. These foreign exchange
The Group’s weighted average tax rate, based on each country’s tax rate, is
hedges represent approximately 7-10 (15) months of future net flows.
29.0 (28.8) percent and for the Parent company 28.0 (28.0) percent and is
calculated according to the Swedish Financial Accounting Standards Council’s
At financial year-end, unrealized foreign exchange gains amounted to SEK 7.5
recommendation number 9 (RR 9). This implies that income before tax, in the
(11.8) million, valued at the SEK/USD exchange rate of 7.28 (8.83) and the
above table, is calculated after taking into account year-end appropriations,
SEK/EUR rate of 9.09 (9.19).
but without taking into account the tax effects for non-deductible costs, non-
taxable income and paid foreign tax.
The hedged US dollar position of 6.0 million has an actual value of SEK 59 940
thousand as of December 31, 2003. The equivalent amount for Euro is 3.7 mil-
lion, which is SEK 34 414 thousand. Deferred tax liability
Balance sheet exposure SEK thousands 2003 2002
It is Orc Software’s policy to hedge significant balance sheet exposure in for- Deferred tax liability on
eign currencies. At year-end, Orc Software did not have any significant balance untaxed reserves 24 304 19 573
sheet exposure in foreign currencies. Deferred tax receivable
regarding deﬁcit reduction -668 –
Deferred tax liability 23 636 19 573
NOTE 10. PROFIT/LOSS FROM SHARES IN
ASSOCIATED COMPANIES Tax liability/receivable
Group Group Parent company
SEK thousands 2003 2002 SEK thousands 2003 2002 2003 2002
Share of result in Tax liability on the year’s
associated companies -1 379 -564 income -2 525 -19 147 – -15 853
Total proﬁt/loss from shares Tax receivable on the year’s
in associated companies -1 379 -564 income – – 2 279 –
Tax receivable on other
temporary differences 840 41 – –
Tax liability/receivable -1 685 -19 106 2 279 -15 853
NOT 11. FINANCIAL INCOME
Group Parent company
SEK thousands 2003 2002 2003 2002
Interest income 7 316 9 123 7 531 8 842
Total ﬁnancial income 7 316 9 123 7 531 8 842
OM Treasury AB is the counterpart on SEK 47 million of this amount.
NOTE 14. LEASING CONTRACTS NOTE 16. TANGIBLE FIXED ASSETS
Leasing contracts of an operational character that have been entered Equipment
into are summarized as follows: Group Parent company
SEK thousands 2003 2002 2003 2002
Premises Acquisition value brought
forward 39 940 29 771 32 894 24 773
SEK thousands Group Parent company Investments during the year 6 125 12 835 4 048 9 458
Charges that fall due: Disposals during the year -4 707 -2 439 -4 637 -1 290
year 2004 11 299 6 570 Reclassiﬁcation – – -630 –
year 2005-2008 19 597 18 055 Translation difference -529 -227 – -47
year 2009 or later – – Accumulated acquisition
Total 30 896 24 625 value carried forward 40 829 39 940 31 675 32 894
The difference between the total future leasing costs as of the closing date brought forward -20 190 -13 293 -17 125 -11 622
and their present value amounts to SEK 2.4 million, discounted at a 5-year Disposals during the year 4 496 1 683 4 415 1 073
risk-free SEK interest rate. Depreciation for the year -7 982 -8 628 -5 803 -6 576
Reclassiﬁcation – – 630 –
Leased ﬁxed assets Translation difference 377 48 – –
Hardware to a total acquisition value of SEK 0.6 (5.2) million had been leased Accumulated depreciation
out as at December 31, 2003 to clients according to agreements with a dura- carried forward -23 299 -20 190 -17 883 -17 125
tion of 1 year with possibility of extension. Book value amounted to SEK 0.2 Net value carried forward 17 530 19 750 13 792 15 769
(2.3) million. Contracted future leasing revenue amounted to SEK 0.5 (2.0)
Orc Software has no financial leasing obligations.
NOTE 17 FINANCIAL FIXED ASSETS
Shares in Group companies
NOTE 15. INTANGIBLE FIXED ASSETS SEK thousands 2003 2002
Balance brought forward 8 415 7 557
Capitalized development expenses Start-ups during the year – 12
Group Parent company
SEK thousands 2003 2002 2003 2002 Acquisitions during the year 1 200 846
Acquisition value brought Reclassiﬁcation of associated company
forward 15 113 1 700 15 113 1 700 due to acquisition of the remaining portion 1 000 –
Investments during the year 11 988 13 413 11 988 13 413 Sales during the year -105 –
Accumulated acquisition value Balance carried forward 10 510 8 415
carried forward 27 101 15 113 27 101 15 113
Amortization brought forward -1 281 – -1 281 – Shares in associated companies
Amortization for the year -3 932 -1 281 -3 932 -1 281 Group Parent company
Accumulated amortization SEK thousands 2003 2002 2003 2002
carried forward -5 213 -1 281 -5 213 -1 281 Acquisition value brought forward 1 827 902 2 524 1 035
Net value carried forward 21 888 13 832 21 888 13 832 Acquisitions during the year 1 049 1 489 1 049 1 489
Reclassiﬁcation of associated
company due to acquisition of
Group Parent company the remaining portion -1 000 – -1 000 –
SEK thousands 2003 2002 2003 2002 Share of proﬁt/loss in
Acquisition value brought associated companies -1 379 -564 – –
forward 486 486 – – Deducted from the income part
Goodwill acquired during of associated companies16 532 – – –
the year 324 – – – Reversal of previous year’s loss17 516 – – –
Accumulated acquisition value Accumulated acquisition
carried forward 810 486 – – value carried forward 1 545 1 827 2 573 2 524
Amortization brought forward -104 -8 – –
Amortization for the year -420 -96 – – Other long-term ﬁnancial ﬁxed assets
Accumulated amortization Group Parent company
carried forward -524 -104 – – SEK thousands 2003 2002 2003 2002
Net value carried forward 286 382 – – Acquisition value brought forward 4 115 – 2 107 –
Acquisitions 2 246 – 2 246 –
Change in paid
Other intangible ﬁxed assets
Group Parent company leasing deposit -1 065 – 96 –
SEK thousands 2003 2002 2003 2002 Reclassiﬁcation of leasing deposit – 4 115 – 2 107
Acquisition value brought forward 3 710 3 710 – – Translation difference -67 – – –
Accumulated acquisition value Accumulated acquisition
carried forward 3 710 3 710 – – value carried forward 5 229 4 115 4 449 2 107
Amortization carried forward -804 -62 – –
Amortization for the year -742 -742 – –
carried forward -1 546 -804 – –
Net value carried forward 2 164 2 906 – –
During the year the remaining 50 percent of Orc Tradelab Robotic Trading AB was acquired. December 31, 2003.
The entry Income part of associated companies includes the company’s loss up to and inclu- As of December 31, 2002 SEK -516 thousand of Shares in associated companies attributed to
ding the acquisition date. This amount is not included in Shares in associated companies as of Orc Tradelab Robotic Trading AB.
NOTE 18. SHARES IN GROUP COMPANIES AND ASSOCIATED COMPANIES
Corporate Registered No of % of Book
Group companies identity no ofﬁce shares capital value
Orc Software Pty Ltd. 091 454 045 Sydney 20 000 100 106
Orc Software s.r.l. 13089980158 Milan 9 500 95 81
Orc Software Ltd. 3906 149 London 10 000 100 133
Orc Software GmbH hrb 50215 Frankfurt – 100 211
Orc Software GmbH FN 195812 Vienna – 100 146
Orc Software GmbH Ch-020.4.024.095-5 Zurich – 95 127
Orc Software Inc. – State of Delaware 100 100 1 028
Orc Software KK. 0104-01-047048 Tokyo 100 100 846
Orc Software HK Ltd. 773 037 Hong Kong 9 900 99 12
Orc Software Inc. 1160449774 Montreal 100 100 0
Orc Software East AB 556472-1685 Stockholm 1 000 100 100
& Trade East AB 556472-1693 Stockholm 1 000 100 100
Orc ExNet Transaction
Services AB 556613-3251 Stockholm 2 880 72 5 420
Orc Tradelab Robotic Trading AB 556510-5367 Stockholm 1 190 100 2 200
Total, SEK thousands 10 510
Corporate Registered No of % of Book value Book value
Associated companies identity no ofﬁce shares capital Parent company Group
E2E infotech Limited 3981436 London 3 400 34 1 489 1 488
Game Federation Development AB 556569-2166 Stockholm 1 000 49 1 049 0
Orc Education AB 556611-4087 Stockholm 350 35 35 57
Total, SEK thousands 2 573 1 545
In Orc Software s.r.l., the Parent company owns 95 percent and the country manager 5 percent of the shares. In Orc Software HK Ltd. and Orc Software GmbH
(Zurich) the Parent company holds 99 percent and 95 percent respectively and two other companies in the Group the remaining parts. The ownership of Orc Soft-
ware s.r.l., Orc Software HK Ltd. and Orc Software GmbH (Zurich) is governed by local regulations. As Orc Software controls the remaining shares in these com-
panies, they are consolidated in full in the consolidated accounts. In Orc ExNet Transaction Services AB, the Parent company owns 72 percent and the three
founders of Orc ExNet hold the remaining part. All the other subsidiaries are 100-percent owned by the Parent company.
NOTE 19. ACCOUNTS RECEIVABLE NOTE 21. SHAREHOLDERS’ EQUITY
Since the Group’s accounts receivable follows accepted payment conditions
the value in the balance sheet agrees with the real value. Share capital
Share capital amounts to SEK 1 485 (1 485) thousand, which corresponds to
The Group’s five largest clients represented a total of 18 (20) percent of reve- 14 850 (14 850) thousand ordinary shares with a nominal value of SEK 0.10
nue during 2003. No individual client represented more than 5 percent of reve- per share. The company has no potential ordinary shares.
Orc Software’s own shareholding
Credit risks During 2003 Orc Software purchased a total of 225 000 Orc shares for SEK
In general, Orc Software’s clients, who among others consist of investment 11.2 million, which equals 1.5 percent of the 14 850 thousand shares issued, in
banks, banks and brokerage houses, represent a capital-strong segment with accordance with the decision from the Annual General Meeting 2003. Exclud-
a consequent low risk for credit losses. The Group’s credit losses are negligible ing Orc Software’s own shareholding the number of shares equals 14 625
due to the fact that clients, on a quarterly or even longer basis, pay in advance thousand. The nominal value of the acquired shares is SEK 22 500. The pur-
and that Orc Software works actively to inform its clients of the importance of pose of the repurchase authorization is to provide the Board with the oppor-
paying on time. During 2003, there were no significant credit losses. tunity to create additional value for the company’s shareholders by adjusting
the capital structure of the company.
As of December 31, 2003, the real value of repurchased shares amounted to
NOTE 20. PREPAID EXPENSES AND ACCRUED SEK 19 013 thousand.
Group Parent company Restricted reserves
SEK thousands 2003 2002 2003 2002 Restricted reserves consist of a share premium reserve of SEK 37 197 thou-
Accrued interest income 1 073 1 177 1 059 1 177 sand, the equity portion of untaxed restricted reserves of SEK 62 464 and
Prepaid rent and insurance 2 648 1 850 2 266 1 850 other restricted reserves such as the reserve fund and translation differences,
Other prepaid expenses 3 147 1 749 1 575 171 etc., of SEK 1 800 thousand.
Total prepaid expenses and
accrued income 6 868 4 776 4 900 3 198 The Annual General Meeting 2003 decided to reduce the share premium
reserve by SEK 50 000 thousand. The District Court’s decision regarding the
reduction was made on January 14, 2004 and came into effect on February 4,
2004, at which time the period for appeal expired. As of December 31, 2003
restricted and non-restricted reserves are accounted for including the reduc-
tion of the share premium reserve.
Earnings per share NOTE 25. FINANCIAL ENTRIES IN CASH FLOW
Earnings per share amounted to SEK 3.78 (5.87). The average number of STATEMENT
shares used to calculate earnings per share amounted to 14 712 397. Orc Group Parent company
Software has no outstanding convertible loans or warrants, thus earnings per SEK thousands 2003 2002 2003 2002
share following dilution is not applicable. Received interest income
on liquid funds 7 316 9 123 7 531 8 842
Proposed dividend Paid interest expenses -332 -59 -226 -23
The Board of Directors has resolved to recommend a dividend of SEK 3.40 Change in accrued interest
(3.00) per share for 2003, representing a total of SEK 49 725 (44 550) thou- income 118 -214 326 -421
sand and 89 (51) percent of net income. Total ﬁnancial entries in cash
ﬂow statement 7 102 8 850 7 631 8 398
Speciﬁcation of the Parent company’s share capital
2003 NOTE 26. ACQUISITION OF SUBSIDIARIES
Parent company During the year a further 50 percent of Orc Tradelab Robotic Trading AB was
Non- acquired, which made the company a fully owned subsidiary.
Share Restricted restricted
SEK thousands capital reserves equity Total
Opening balance Jan. 1, 2003 1 485 87 437 97 044 185 966 During 2002, 100 percent of Orc Software KK was acquired.
Dividend for 2002 – – -44 550 -44 550
Repurchase of shares – – -11 177 -11 177 Below is the value of acquired assets and liabilities according to the acquisition
Other adjustments – – 56 56 analysis:
Reduction of the share premium
reserve, unregistered – -50 000 50 000 0 Acquisitions
Net income for the year – – 41 261 41 261 SEK thousands 2003 2002
Closing balance Dec. 31, 2003 1 485 37 437 132 634 171 556 Intangible fixed assets 324 77
Tangible fixed assets 44 –
2002 Deferred tax receivable 668 –
Parent company Other current assets 229 –
Share Restricted restricted Liquid funds 9 769
SEK thousands capital reserves equity Total Short-term liabilities -274 –
Opening balance Jan. 1, 2002 1 485 87 437 68 352 157 274 Total acquisition value 1 000 846
Dividend for 2001 – – -32 670 -32 670 Liquid funds in the acquired
Other adjustments – – -334 -334 company -9 -769
Net income for the year – – 61 696 61 696 Effect on the Group’s
Closing balance Dec. 31, 2002 1 485 87 437 97 044 185 966 liquid funds 991 77
NOTE 22. ACCOUNTS PAYABLE .
NOTE 27 LIQUID FUNDS
The Group’s accounts payable follows ordinary payment conditions and there- Liquid funds consist of cash and bank balances as well as short-term invest-
fore the value in the balance sheet agrees with the real value. ments as the short-term investments only are subject to insignificant risk for
price fluctuations and may easily be converted into cash.
Group Parent company
NOTE 23. ACCRUED EXPENSES AND DEFERRED SEK thousands 2003 2002 2003 2002
INCOME Short-term investments 216 206 240 299 211 010 240 209
Group Parent company Cash and bank balances 35 661 33 523 16 626 18 091
SEK thousands 2003 2002 2003 2002 Total liquid funds 251 867 273 822 227 636 258 300
Advance invoicing 61 283 59 981 61 055 59 960
personnel related taxes 4 740 3 400 2 686 2 417 The Group’s short-term investments consist of Swedish certificates with cre-
Other accrued expenses 6 777 4 918 3 340 2 554 dit rating “K1” according to Standard & Poor’s rating scale as well as fixed-term
Total accrued expenses and investments in the bank. These investments have high credit value and liqui-
deferred income 72 800 68 299 67 081 64 931 dity and may easily be transferred to cash. Short-term investments are valued
at acquisition value and interest is accrued during the life of the investment.
NOTE 24. OVERDRAFT FACILITIES
Authorized overdraft facilities amounted to SEK 0 (0).
Authorized overdraft facilities amounted to SEK 0 (0).
Speciﬁcation of short-term investments
SEK thousands Acquisition value Nominal value Actual value, Dec. 31 Maturity date Interest rate, %
AP Fastigheter AB 9 788 10 000 9 992 2004-01-09 3.33
Landshypotek AB 29 789 30 000 29 887 2004-02-17 2.84
Länsförsäkringar Bank Aktiebolag 39 518 40 000 39 847 2004-02-17 2.91
Länsförsäkringar Bank Aktiebolag 47 414 48 000 47 707 2004-03-17 2.89
Fortum OY 11 854 12 000 11 927 2004-03-17 2.87
Graninge AB 13 857 14 000 13 879 2004-04-21 2.80
Länsförsäkringar Bank Aktiebolag 34 604 35 000 34 642 2004-05-10 2.84
Bank time deposits, SEK 10 000 10 000 10 001 2004-01-07 2.65
Bank time deposits, USD 5 092 5 092 5 093 2004-01-07 0.95
Bank time deposits, EUR 9 094 9 093 9 094 2004-01-07 2.00
Bank time deposits, AUD 1 210 1 210 1 210 2004-03-02 4.93
Eltra A.M.B.A 3 986 4 000 3 994 2004-01-21 2.71
Total 216 206 218 395 217 273
The company receives ordinary interest on bank balances according to a variable interest rate.
Foreign exchange differences in liquid funds pertain to foreign exchange differences on opening liquid funds.
NOT 28. EVENTS AFTER ACCOUNTING YEAR-END
Balance sheet and income statement will be adopted at the Annual General
Audit report 37
TO THE GENERAL MEETING OF THE SHAREHOLDERS OF ORC SOFTWARE AB (PUBL)
Corporate identity number 556313-4583
We have audited the annual accounts, the consolidated accounts, the accounting records and the administration of the Board of Direc-
tors and the Chief Executive Officer of Orc Software AB for the year 2003. These accounts and the administration of the company are
the responsibility of the Board of Directors and the Chief Executive Officer. Our responsibility is to express an opinion on the annual
accounts, the consolidated accounts and the administration based on our audit.
We conduct our audit in accordance with generally accepted auditing standards in Sweden. Those standards require that we plan and
perform the audit to obtain reasonable assurance that the annual accounts and the consolidated accounts are free of material mis-
statement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the accounts. An audit
also includes assessing the accounting principles used and their application by the Board of Directors and the Chief Executive Officer
and significant estimates made by the Board of Directors and the Chief Executive Officer, as well as evaluating the overall presentation
of information in the annual accounts and the consolidated accounts. As a basis for our opinion concerning discharge from liability, we
examined significant decisions, actions taken and circumstances of the company in order to be able to determine the liability, if any, to
the company of any Board member or the Chief Executive Officer. We also examined whether any Board member or the Chief Execu-
tive Officer has, in any other way, acted in contravention of the Companies Act, the Annual Account Act or the Articles of Association.
We believe that our audit provides a reasonable basis for our opinion set out below.
The annual accounts and the consolidated accounts have been prepared in accordance with the Annual Account Act and, thereby, give
a true and fair view of the company’s and the Group’s financial position and results of operations in accordance with generally accepted
accounting principles in Sweden.
We recommend to the Annual General Meeting of the shareholders that the income statement and the balance sheet of the Parent
company and the Group be adopted, that the income for the Parent company be dealt with in accordance with the proposal in the
administration report and that the members of the Board of Directors and the Chief Executive Officer be discharged from liability for
the financial year.
Stockholm, February 25, 2004
Ernst & Young AB
Authorized Public Accountant
38 Economic overview
The following section contains an economic overview of the years 1996-2003. Consolidated accounts were not
prepared for the years 1996-1998 because the subsidiaries contained in the Group only had limited operations,
and invoicing was almost entirely carried out via the Parent company. In order to obtain comparability with the
consolidated accounts for other years, the consolidated income statements, balance sheets and cash ﬂow state-
ments are presented based on Orc Software AB’s and its subsidiaries’ revised year-end accounts for the years
1996-1998. This consequently implies that the subsidiaries have been consolidated in the accounts for these
years. The consolidation has however only led to marginal changes when compared to the revised Parent compa-
ny ﬁgures for the period.
Orc Software’s revenue consists for the most part of license fees. Software has participated in this development and has achieved
The remainder normally reflects hardware sales and income from substantial growth in both the number of clients and in the number
various offered services. As of January 1, 2002 Orc Software of users of the Orc System – whilst the Orc System has simultane-
capitalizes certain development expenses according to the Swe- ously gained acceptance and confidence. The company’s expan-
dish Financial Accounting Standards Council’s recommendation sion outside the Nordic region started in 1995, which accelerated
number 15 (RR 15). The capitalized development expenses are as of 1997 by OM starting to sell the Orc System in a number of
accounted as a separate entry under operating revenue and rep- countries. During the years 1997-2003, Orc Software established
resent an increase in revenue compared to previous years. operations in Chicago, Frankfurt, Hong Kong, London, Milan, New
York, Sydney, Tokyo, Toronto, Vienna and Zurich, which contributed
During the period 1996-2003 revenue increased on the average to considerably strengthening Orc Software’s market position and
by 44 percent per year. For the most part the growth has been to spreading the company’s brand name internationally. Orc Soft-
completely organic, except for the 1999 take over of the portion ware’s shares were listed on Stockholmsbörsen in 2000, which
of OM’s distribution organization responsible for sales and sup- amongst other things led to an increased awareness of the com-
port of the Orc System. Of the total increase in sales for 1999, the pany and its products. Furthermore, Orc Software has opened two
acquired distribution operations represented SEK 14.9 million and development offices in Moscow and St Petersburg.
SEK 4.2 million for 1998. Previously Orc Software net invoiced
OM for the sales that took place through OM’s distribution busi- During the last three years the financial markets have been
ness. affected by a more difficult economy, especially during 2002 and
the first half of 2003, which has led to weaker sales performance
The historical high rate of growth can partly be explained by strong for Orc Software. During 2002 sales increased by 31 percent, but
growth in the financial markets. This growth has created a need for then decreased by 9 percent in 2003. This is primarily due to the
solutions that integrate trading between different exchanges, and downturn in the economy but also to a certain extent the weak-
facilitate the activities of the participants in these markets. Orc ened US dollar.
SEK million 1996 1997 1998 1999 2000 2001 2002 2003
Operating revenue 19.1 29.0 41.1 83.7 131.3 209.7 275.3 249.1
Operating expenses excluding
depreciation and amortization -10.0 -17.1 -23.8 -49.1 -78.4 -116.5 -150.0 -161.5
Depreciation and amortization -1.1 -1.3 -2.2 -3.5 -3.2 -6.9 -10.7 -13.1
Operating income 8.0 10.6 15.1 31.1 49.7 86.3 114.6 74.5
Financial items 0.5 0.4 0.9 1.0 3.4 7.1 8.5 5.6
Income after ﬁnancial items 8.5 11.0 16.1 32.1 53.1 93.4 123.1 80.1
Tax on net income for the year -2.4 -3.1 -4.5 -10.0 -12.4 -28.4 -36.0 -23.7
Minority’s part of the net income
for the year – – – – – 0.1 0.1 -0.8
Net income for the year 6.1 7.9 11.6 22.1 40.7 65.1 87.2 55.6
Economic overview 39
OPERATING EXPENSES rating expenses increased from approximately 6 percent to 12
During 1996-2003, operating expenses amounted on average to percent. During 2000-2002 the cost of premises amounted on
62 percent of sales. Personnel expenses constitute the largest average to 9 percent of operating expenses. During 2003 the
portion of operating expenses. The number of employees in- cost of premises increased in both absolute as well as relative
creased on average by 44 percent per year for the relevant period. terms and amounted to 10 percent of operating expenses due to
the expansion of the Stockholm office and the office in Tokyo.
Personnel costs constitute the largest single operating expense Depreciation and amortization
and represented on average 50 percent of the total operating Depreciation and amortization amounted on average to approxi-
expenses in the period 1996-2003. The rate of international mately 8 percent of the Group’s total operating expenses during
expansion for the Group increased the need for sales and support the period 1996-1999. As of 2000, the company depreciates
personnel. The stock market listing in 2000 resulted in a greater certain types of computer equipment, such as servers, over 60
need for financial administration and information, which resulted months instead of previously 36 months, which decreased the
in a strengthening of these areas. Orc Software is continuously portion of operating expenses related to depreciations. During
expanding its product offering, therefore the number of employees 2002 Orc Software began to amortize intangible assets in accor-
is also increasing in development. dance with RR 15. During the later part of 2003 the development
project in St Petersburg was completed, which is the primary rea-
Consulting fees son that depreciation and amortization increased and amounted
The consulting fees’ portion of operating expenses amounted dur- to 7 percent of operating expenses during 2003.
ing 1996-1999 on average to 11 percent and relates to product
development. Orc Software aims to primarily use internal develop- Product development expenses
ment resources, which has resulted in a continuous decrease in Orc Software allocates each year considerable resources to pro-
consulting fees and during the past few years consulting fees duct development. The main part of product development expen-
equaled approximately 6 percent of expenses. Orc Software will ses consists of salaries. The product development expenses in
however, continue to use consultants with special expertise for 1999-2000 amounted to almost one third of total revenue. Dur-
development of certain products or components. ing 2000 to 2002, investment increased in development activities
in Russia, and the company established the development office in
Cost of premises St Petersburg. Expenses related to the development of new com-
With the taking over of the distribution operations from OM in ponents for the Orc System taking place in St Petersburg 2001-
1999, cost of premises were also taken over concerning these 2003 were capitalized. As of 2002, Orc Software also capitalizes
sales offices, whereby the cost of premises’ portion of total ope-
Total revenue, operating income and operating margin Net financial income and liquid funds
SEKm % Mkr
300 50 300 10
250 250 8
150 30 150
1996 1997 1998 1999 2000 2001 2002 2003 1996 1997 1998 1999 2000 2001 2002 2003
Total revenue Operating income Operating margin Liquid funds Net financial income
40 Economic overview
the part of the company’s expenses that pertain to the develop- TAX AND NET INCOME FOR THE YEAR
ment of new market connections. The average effective tax rate was 28 percent through 1998. In
1999, the tax rate was 31 percent due to amongst other things
The development expense portion of revenue, including capita- the effect of a non-deductible reserve. The tax rate in 2000 was
lized expenses, increased to 25 percent of sales for 2003, 23 percent. This low rate was amongst other things the result
excluding work performed by the company for its own use and of the above reserve being dissolved. The effective tax rate has
capitalized. The increase was partly due to increased investments increased to approximately 30 percent in line with the company’s
in internal development capacity and partly as a result of lower expansion abroad. Net income for the year has on average grown
revenue. The portion was just over 20 percent for 2001-2002. by 43 percent per year during the period 1996-2003. The profit
margin during the same period was on average 26 percent.
Orc Software has reported a positive operating income every year BALANCE SHEET
since the start in 1987. Operating margin amounted to at least 30 Orc Software’s balance sheet total amounted to SEK 354 million
percent each year since 1996. The operating margin showed a as of December 31, 2003. Prominent features of the balance
slight positive trend during the period 1997-1999, and amounted sheet are the large amount of cash and the high non-interest
to 42 percent in 2002. Operating margins between 1998 and bearing liabilities, which predominantly consist of accrued expen-
1999 are not truly comparable as income and costs related to ses and prepaid income due to Orc Software invoicing license
the distribution operations taken over in 1999 were previously fees quarterly in advance. Orc Software has not had any interest-
invoiced as a net item. During 2003 operating margin decreased bearing debt since the company was started in 1987. Accounts
to 30 percent. The lower operating margin was mostly due to receivable increased substantially between 1999 and 2000. This
lower income and investments in development and distribution, increase was mainly due to that Orc Software took over invoicing
which resulted in increased expenses. in its own name for the subsidiaries in UK, Italy and Australia from
OM during the first half-year 2000. An equivalent increase has
FINANCIAL ITEMS also taken place in current liabilities. In the beginning of 2001,
During the period 1996-2002, Orc Software’s profit margin accounts receivable increased again, due to among other things
after financial items amounted, on average, to 41 percent while invoicing, to a greater degree than before, taking place per calen-
it decreased in 2003 to 32 percent. The contributions from net dar quarter. Improvements in invoicing and collection procedures
financial income decreased partly due to falling interest rates and led to a decrease of accounts receivable as a percentage of reve-
partly due to lower liquid funds. nue during the last two years. During 2003 accounts receivable
increased slightly in both absolute terms as well as in relation to
sales. Orc Software’s business model with quarterly payments in
Accounts receivable in relation to revenue Balance sheet total, shareholders’ equity and equity/assets ratio
30 400 80
15 200 60
1996 1997 1998 1999 2000 2001 2002 2003 1996 1997 1998 1999 2000 2001 2002 2003
Balance sheet total, of which Shareholders’ equity
Economic overview 41
advance implies a negative working capital commitment, which in SHAREHOLDERS’ EQUITY
combination with limited fixed assets creates a negative operating During the period 1996-1999, shareholders’ equity increased
capital. faster than the total balance sheet, with a better equity/assets
ratio as a result. The equity/assets ratio amounted during the
FIXED ASSETS AND INVESTMENTS period on average to 61 percent. In 2000, this ratio continued to
Orc Software’s fixed assets consist predominantly of tangible increase and amounted to 72 percent, partially as a consequence
assets such as computers, equipment and furniture as well as of the new share issue carried out in conjunction with the stock
intangible assets such as capitalized expenses for development exchange listing. Advance invoicing, and thereby current liabilities,
work. Orc Software invested in 2002 and 2003 in both intangible, increased during the last three years, which has somewhat low-
tangible and financial fixed assets. The intangible fixed assets ered the equity/assets ratio. At the end of 2003 the equity/assets
consisted primarily of investments in the development of new ratio equaled 69 percent.
market connections, development activities in St Petersburg as
well as external development of a new program application. The
tangible fixed assets mostly consisted of computer equipment.
The financial fixed assets as of December 31, 2003 consisted of
rental deposits and investment in Infront.
SEK million 1996 1997 1998 1999 2000 2001 2002 2003
Fixed assets 2.5 3.1 5.3 8.2 17.0 23.2 42.8 48.6
Accounts receivable 1.7 5.3 5.6 5.7 24.9 38.9 36.2 40.7
Other receivables 3.8 0.4 3.5 2.2 5.0 6.7 12.3 13.0
Liquid funds 11.7 20.7 31.2 65.9 159.1 224.3 273.8 251.9
Total assets 19.8 29.6 45.5 82.0 206.0 293.1 365.1 354.2
Shareholders’ equity 11.9 18.0 24.7 57.3 147.3 191.8 245.1 244.3
Minority interest – – – – – 0.7 0.5 1.3
Provisions for deferred tax 1.2 1.8 2.7 4.7 6.9 12.4 19.6 23.6
Current liabilities 6.6 9.7 18.1 20.0 51.8 88.2 99.9 85.1
Shareholders’ equity and liabilities 19.8 29.6 45.5 82.0 206.0 293.1 365.1 354.2
Investments Return on capital employed and return on equity
SEKm % %
35 12 100
1996 1997 1998 1999 2000 2001 2002 2003 1996 1997 1998 1999 2000 2001 2002 2003
Tangible assets Intangible assets Return on capital employed Return on equity
Financial assets Investments /total revenue
42 Economic overview
CASH FLOW AND LIQUIDITY funds have increased and amounted at the end of 2003 to SEK
Orc Software’s cash flow has been positive during the period as a 252 million, in spite of the company having paid on average a divi-
result of strong cash flows from operating activities and a reduc- dend of 56 percent of the net income for the year during the peri-
tion in the working capital commitment. This has implied that liquid od 1996-2003.
SEK million 1996 1997 1998 1999 2000 2001 2002 2003
Operating revenue 19.1 29.0 41.1 83.7 131.3 209.7 275.3 249.1
Operating expenses excluding
depreciation and amortization -10.0 -17.1 -23.7 -49.2 -78.4 -116.6 -150.0 -161.5
Income before depreciation and
amortization 9.1 11.9 17.4 34.5 52.9 93.1 125.3 87.6
Change in working capital 0.1 2.9 4.9 3.1 9.8 20.7 4.2 -2.6
Investments in ﬁxed assets -2.2 -2.0 -4.4 -6.3 -11.9 -14.1 -31.9 -21.5
Cash ﬂow before ﬁnancial items and tax 7.0 12.8 17.9 31.3 50.8 99.7 97.6 63.5
Amounts in SEK million unless
otherwise stated 1996 1997 1998 1999 2000 2001 2002 2003
Gross margin, % 47.5 41.1 42.2 41.3 40.3 44.4 45.5 35.2
Operating margin, % 41.9 36.5 36.8 37.1 37.8 41.1 41.6 29.9
Proﬁt margin, % 32.1 27.3 28.1 26.4 31.0 31.0 31.7 22.3
Return on capital employed, % 90.8 74.3 75.6 78.4 52.0 55.2 56.5 33.3
Return on equity, % 65.1 53.0 54.1 53.8 39.8 38.4 39.9 22.7
Operating capital 0.1 -2.8 -6.4 -8.6 -11.8 -32.4 -28.7 -7.6
Capital employed 11.9 18.0 24.7 57.3 147.3 191.1 244.6 245.6
Shareholders’ equity 11.9 18.0 24.7 57.3 147.3 191.8 245.1 244.7
Interest-bearing net debt -11.7 -20.7 -31.2 -65.9 -159.1 -224.3 -273.8 -251.9
Asset turnover ratio, multiple 2.0 1.9 1.9 2.0 1.3 1.2 1.3 1.0
Net debt/equity ratio, multiple -1.0 -1.2 -1.3 -1.2 -1.1 -1.2 -1.1 -1.0
Equity/assets ratio, % 60.1 60.8 54.3 69.9 71.5 65.4 67.1 69.0
Cash ﬂow and liquidity
Cash ﬂow before investments 7.9 12.8 19.6 30.6 55.8 99.1 115.5 56.0
Cash ﬂow after investments 5.7 10.8 15.2 24.2 43.9 85.0 83.6 34.5
Liquid funds 11.7 20.7 31.2 65.9 159.1 224.3 273.8 251.9
Degree of self-ﬁnancing, multiple 3.6 6.4 4.5 4.9 4.7 7.0 3.6 2.6
Investments in ﬁxed assets -2.2 -2.0 -4.4 -6.3 -11.9 -14.1 -31.9 -21.5
Average number of employees 13 18 25 42 67 94 124 137
Revenue per employee* n.a. n.a. n.a. 2.0 2.0 2.2 2.2 1.8
Valued added per employee* n.a. n.a. n.a. 1.2 1.3 1.7 1.6 1.2
*Not applicable to years 1996-1998, since the employees of the distribution operations transferred from OM are not included in the average number of employees for these
Economic overview and Deﬁnitions 43
MARGINS Asset turnover ratio: Revenue divided by average capital employed.
Gross margin: Income before depreciation as a percentage of revenue.
Net debt-equity ratio: Interest-bearing net debt divided by shareholders’
Operating margin: Operating income as a percentage of revenue. equity.
Profit margin: Net income for the year as a percentage of revenue. Equity/assets ratio: Shareholders’ equity as a percentage of total assets.
PROFITABILITY CASH FLOW AND LIQUIDITY
Return on capital employed: Operating income plus financial income as a per- Liquid funds: Cash and bank balances and short-term investments.
centage of average capital employed.
Cash flow before investments: Cash flow from operating activities.
Return on equity: Net income for the year as a percentage of average share-
holders’ equity. Cash flow after investments: Cash flow from operating activities minus invest-
ments in fixed assets.
Operating capital: Total assets minus non-interest-bearing debt, including Degree of self-financing: Cash flow before investments divided by invest-
deferred tax liability, as well as cash and bank balances and short-term invest- ments.
ments. The average operating capital has been calculated as opening plus
closing operating capital divided by two. INVESTMENTS
Investments in fixed assets: Investments in fixed assets, after any disposals.
Working capital: Operating assets less operating liabilities.
Capital employed: Total assets minus non-interest-bearing debt, including Average number of employees: Average number of employees for the year,
deferred tax liability. Average capital employed has been calculated as ope- based on headcounts at the beginning of the year and at the end of each
ning plus closing capital employed divided by two. quarter.
Shareholders’ equity: Shareholders’ equity at year-end. Average sharehol- Value added per employee: Operating income plus personnel expenses
ders’ equity has been calculated as opening plus closing equity divided by two. divided by average number of employees.
Interest-bearing net debt: Interest-bearing debt minus liquid funds.
Working and operating capital Cash flow, investments, dividends and liquid funds
1996 1997 1998 1999 2000 2001 2002 2003 1996 1997 1998 1999 2000 2001 2002 2003
-5 120 300
-25 60 150
Cash ﬂ ow before investments
-30 40 100 New share issues
-35 Change in liquid funds
SEKm Liquid funds
Working capital Operating capital
-20 Dividends and repurchase
44 The Orc share
The Orc share
Orc Software’s shares were listed on the O-list of Stockholmsbörsen SHARE STRUCTURE
on October 19, 2000. The introductory price was SEK 120 per share. Orc Software’s share capital amounted to SEK 1 485 000 at the end
The shares are traded under the symbol ORC in the Attract 40 seg- of 2003 divided between 14 850 000 shares, with a nominal value
ment of the O-list. of SEK 0.10. Excluding Orc Software’s repurchase of own shares,
the number of shares amounts to 14 625 000. Each share entitles
PRICE TRENDS AND TURNOVER the holder to one vote at the Annual General Meeting and provides
During 2003, Orc Software’s share price increased by 25 percent equal rights to participate in the company’s assets and income. As of
from SEK 67.50 to SEK 84.50. Stockholmsbörsen’s All share index December 31, 2003 there were no outstanding convertible loans or
increased during the same period by 30 percent. The highest price option rights.
paid for the Orc share during 2003 was SEK 96.00, noted on Novem-
ber 14, and the lowest price paid was SEK 45.00, noted on June 4. DIVIDEND POLICY
At the end of 2003, Orc Software’s market capitalization amounted It is the Board of Directors’ intention to pay a dividend of approximate-
to SEK 1 236 (1 002) million, based on the last price paid. The num- ly 50 percent of the income after tax to the shareholders, provided
ber of Orc Software shares traded during 2003 was 15.5 (11.2) mil- that a healthy capital structure is maintained. For 2003, a dividend of
lion which is equivalent to an annual turnover rate of 105 (75) percent SEK 3.40 (3.00) per share is proposed. This is equivalent to 89 (51)
compared to 124 (122) percent for Stockholmsbörsen as a whole and percent of the income after tax. The Board proposes a higher dividend
78 (70) percent for the O-list. given that the company expects positive market development and
today has a strong capital base.
The number of shareholders in Orc Software as of December 31, INSTITUTIONS THAT COVER THE ORC SHARE
2003 was 3 277 (2 468). The ten largest shareholders accounted for • Alfred Berg
68 (68) percent of the votes and capital. The number of institutional • Cheuvreux
investors was 458 (487) and their holding was 88 (91) percent. There • D. Carnegie
were 177 (168) foreign shareholders with 20 (20) percent of the • Danske Equities
votes and capital. • Deutsche Bank
• Enskilda Securities
SHARE REPURCHASE • Hagströmer & Qviberg
The Annual General Meeting 2003 resolved to authorize the Board • HSBC
of Directors to decide on acquisitions and transfers of the company’s • Kaupthing Bank
own shares. The company’s non-restricted equity following the divi- • Nordea Securities
dend limits the repurchase to approximately SEK 52 million. During • Remium Securities
2003 Orc Software purchased a total of 225 000 shares, which • Skandiabanken
equals 1.5 percent of the 14 850 000 shares issued. • Svenska Handelsbanken
Orc Software’s 10 largest shareholders
No of % of capital
Shareholders shares and votes
OM Technology 4 488 075 30.7
Cancale Förvaltnings* 1 533 200 10.5
Third Swedish National Pension Fund 664 800 4.5
SEB Sweden Small Cap Fund 621 140 4.2
Share price development and share turnover
Goldman Sachs 530 815 3.6
Thousands Hagströmer & Qviberg 520 329 3.6
Fidelity funds 476 700 3.3
Nordea Bank Finland 462 631 3.2
Carnegie funds 380 000 2.6
150 Robur funds 298 300 2.0
2000 Other shareholders 4 649 010 31.8
100 1500 Total 14 625 000 100.0
Source: VPC AB (The Swedish Securities Register Centre), direct and nominee-regis-
tered shares as of December 30, 2003. As of December 31, 2003 Orc Software has
2000 2001 2002 2003
purchased 225 000 shares and the total number of shares, reduced by Orc Software’s
repurchase of own shares, amounted to 14 625 000.
Share turnover Orc share Stockholmsbörsen’s All-Share-index
*Ulrika Hagdahl and Nils Nilsson own Cancale Förvaltnings AB in equal shares. In addi-
tion, Hagdahl and Nilsson directly own 46 000 and 20 000 shares respectively.
The Orc share 45
Shareholding structure Per share data
No of No of No of % of capital 2003 2002
shares shareholders shares and votes Earnings per share, SEK 3.78 5.87
1-500 2 441 432 312 3.0 Dividend per share, SEK 3.40* 3.00
501-1 000 429 375 339 2.6 Equity per share, SEK 16.70 16.51
1 001-10 000 336 997 008 6.8 Share price at the end of year, SEK 84.50 67.50
10 001-50 000 35 865 291 5.9 Cash ﬂow per share, SEK -1.44 3.43
50 001-100 000 15 995 667 6.8 P/E-ratio 22 11
100 001- 18 10 959 383 74.9 Dividend yield, % 4.0 4.4
Total 3 277 14 625 000 100.0 Dividend payout ratio, % 90 51
Share price/equity, % 506 409
Source: VPC AB, direct and nominee-registered stock as of December 30, 2003. Average number of shares** 14 712 397 14 850 000
Number of shares at year-end** 14 625 000 14 850 000
**Reduced by Orc Software’s repurchase of own shares.
Changes in the share capital
Increase in share Increase in Share capital, Total no of Nominal value
Year Transaction capital, SEK no of shares SEK shares of shares, SEK
1987 Company founded 50 000 500 50 000 500 100
1988 New share issue 1 150 000 11 500 1 200 000 12 000 100
1999 Share split 1000:1 – 11 988 000 1 200 000 12 000 000 0.10
1999 Directed share issue* 225 000 2 250 000 1 425 000 14 250 000 0.10
2000 New share issue 60 000 600 000 1 485 000 14 850 000 0.10
*New share issue on December 23, 1999 directed at OM AB.
Earnings per share: Net income for the year divided by average number of Dividend yield: Dividend for the year divided by market capitalization at
Dividend per share: Dividend for the year divided by number of shares at Dividend payout ratio: Dividend for the year divided by net income for the
Equity per share: Shareholders’ equity at year-end divided by the number of Price/equity per share: Share price divided by equity per share.
shares at year-end. Average number of shares: Average number of shares after splits, bonus
Cash ﬂow per share: Cash ﬂow for the year divided by average number of issues and new share issues.
P/E-ratio: Share price divided by earnings per share.
Ownership structure per category Ownership structure per country
Swedish institutions 72% Sweden 80% USA 3%
Foreign institutions 16% United Kingdom 7% Switzerland 1%
Swedish private individuals 12% Luxembourg 4% Denmark 1%
Finland 3% Other 1%
Source: VPC AB, direct and nominee-regis-
tered stock as of December 30, 2003. The Source: VPC AB, direct and nominee-regis-
VPC statistics that are the basis of this table tered stock as of December 30, 2003. The
are based on the corporate identity number VPC statistics that are the basis of this table
and the national registration number, which are based on address data.
means that a person is registered as a Swed-
ish private individual if he/she has a Swedish
national registration number even if the per-
son in question is domiciled outside Sweden.
Board of Directors
Magnus Böcker Yngve Andersson Åke Dovärn
Chairman of the Board of Directors. Stockholm. Born 1942. Täby. Born 1952.
Stockholm. Born 1961. Business economist. Bachelor of Science.
Business economist. Member of the Board of Directors of Orc Member of the Board of Directors of Orc
Chairman of Orc Software AB since Software AB since 2000. Software AB since 2000.
2000. Member of the Board of Directors Consultant with Yan Konsult AB. Other Board duties: Member of the
since 1997. Other Board duties: Chairman of the Board of Directors of Focal Point AB.
Chief Executive Ofﬁcer of OMHEX AB. Board of Directors of Active Life Foun- Shares held in Orc Software AB: 7 000.
Other Board duties: Member of the dation and Netwise AB. Member of the Call options held in Orc Software AB:–.
Board of Directors of Adirondack Trad- Board of Directors of Casino Cosmopol
ing Partner LLC. Active within the Board AB, ICA Banken AB, Periﬁc AB, Seam-
of Directors of a number of companies less AB, Swedish Athletic Association
within the OMHEX group. and Vidbynäs Golf AB.
Shares held in Orc Software AB:–. Shares held in Orc Software AB: 1 000
Call options held in Orc Software AB:–. indirectly, 4 000 direct.
Call options held in Orc Software AB:–.
Ulrika Hagdahl Per E Larsson Stig Vilhelmson
Lidingö. Born 1962. Stockholm. Born 1961. Bromma. Born 1956.
Master of Engineering. Business economist. Master of Science, Economics and
Member of the Board of Directors of Orc Member of the Board of Directors of Orc Business.
Software AB since 1987. Employed by Software AB since 1997. Member of the Board of Directors of Orc
Orc Software AB 1987-2003. Other Board duties: Chairman of the Software AB since 1994.
Other Board duties: Member of the Board of Directors of AB Ago. Head of Equities Trading, Carnegie
Board of Directors of IFS AB and Pro- Shares held in Orc Software AB: 500. Investment Bank AB.
tect Data AB. Call options held in Orc Software AB:–. Shares held in Orc Software AB: 2 000.
Shares held in Orc Software AB: Call options held in Orc Software AB:–.
1 533 200 indirectly through company
which is jointly owned by Ulrika Hagdahl
and Nils Nilsson, 46 000 direct. Nils Nilsson
Call options held in Orc Software AB: See Executive management.
100 000 (2004-08-20) indirectly.
Executive management and auditors 47
Executive management and auditors
Nils Nilsson Jonas Hansbo Lars Johansson
Chief Executive Ofﬁcer Executive Vice President and Chief Executive Vice President and Chief
Bromma. Born 1961. Technical Ofﬁcer. Operating Ofﬁcer.
Business economist. Stockholm. Born 1963. Stockholm. Born 1959.
Member of the Board of Directors and Fil lic. mathematics. Master of Science, Economics and
employed by Orc Software AB since Employed by Orc Software AB since Business.
1987. 1994, member of the Executive ma- Employed by Orc Software AB since
Shares held in Orc Software AB: nagement since 2002. 2000.
1 533 200 indirectly through company Shares held in Orc Software AB: Shares held in Orc Software AB: 8 000.
which is jointly owned by Ulrika Hagdahl 61 200. Call options held in Orc Software AB:
and Nils Nilsson, 20 000 direct. Call options held in Orc Software AB: 18 000 (2004-03-01) and 20 000
Call options held in Orc Software AB: 20 000 (2006-03-01). (2006-03-01).
100 000 (2004-08-20) indirectly.
Authorized Public Accountant, Ernst &
Auditor of Orc Software AB since 1999.
Authorized Public Accountant, Ernst &
Deputy auditor of Orc Software AB
Orc Software Chicago Orc Software St Petersburg
70 West Madison Street, Suite 1400 Malaya Morskaya 23
Chicago, IL 60602, USA 190000 St Petersburg, Russia
Telephone +1 312 214 3170 Telephone +7 812 380 59 79
Fax +1 312 214 3171 Fax +7 812 380 59 59
Orc Software Frankfurt Orc Software Sydney
Guiollettstrasse 30 Level 24
60325 Frankfurt am Main, Germany 56 Pitt Street
Telephone +49 69 7167 390 Sydney 2000 NSW, Australia
Fax +49 69 7167 3920 Telephone +61 2 9240 2405
Fax +61 2 9240 2499
Orc Software Hong Kong
20/F, 8 Queen’s Road Orc Software Tokyo
Central, Hong Kong Roppongi Ignoppor Building
Telephone +852 2167 1950 5-9-20-506, Roppongi, Minato-ku
Fax +852 2167 8599 Tokyo 106-0032, Japan
Telephone +81 3 5770 1460
Orc Software London Fax +81 3 5770 1461
135 Cannon Street, 4th floor
London EC4N 5BP, UK Orc Software Toronto
Telephone +44 20 7942 0950 49 Wellington Street East
Fax +44 20 7942 0940 Suite 2 West
Toronto, Ontario, M5E 1C9, Canada
Orc Software Milan Telephone +1 416 364 9227
Via Silvio Pellico 12 Fax +1 416 364 8733
Photo: Johan Ödmann. Print: Jernström Offset. Paper: Curious Metallics Ice Gold 250gsm; Scandia 2000 130gsm.
201 21 Milan, Italy
Telephone +390 2 8691 5446 Orc Software Vienna
Fax +390 2 8691 5439 Köllnerhofgasse 6/3a
1010 Vienna, Austria
Orc Software Moscow Telephone +43 1 512 69 93
Ulitsa Koroviy Val 7, Fax +43 1 513 23 87
Building 1, Suite 138
117049 Moscow, Russia Orc Software Zurich
Telephone +7 095 771 69 12 Bolleystrasse 29
Fax +7 095 771 69 12 CH-8006 Zurich, Switzerland
Telephone +41 43 244 9245
Orc Software New York Fax +41 43 244 9246
420 Lexington Avenue, suite 2007
New York, NY 10170, USA
Telephone +1 646 435 2062 www.orcsoftware.com
Fax +1 646 435 2069 firstname.lastname@example.org
Orc Software Stockholm
Birger Jarlsgatan 32A
PO Box 7742
SE-103 95 Stockholm, Sweden
Telephone +46 8 407 38 00
Fax +46 8 407 38 01
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