- The HEX Group continued to perform well despite the tightened market
situation. The good result was supported by continually active equity
trading, a steady demand for Finnish derivatives products on Eurex and the
increasing demand for electronic market information. Costs rose driven by
strong growth in business operations, preparations for an increased
demand for capacity, and investments in new business activities.
- The Group´s turnover was 92.1 million euro (2000: 74.8m euro) and the
operating profit was 30.0 million euro (30.7m euro). Profit before
extraordinary items and taxes amounted to 32.2 million euro (32.4m euro)
and the net profit for the financial period equalled 22.8 million euro (23.0m
euro). The earnings per share was 1.70 euro (1.71 euro).
- The Group´s Board of Directors will recommend to the Annual General
Meeting that a dividend of 1.00 euro per share (0.80 euro/share) or in the
total amount of 13,471,728 euro (10,777,382.40 euro) should be paid for
the financial year 2001. The record date for dividend payment is March 27,
2002, and the dividend will be paid on April 5, 2002.
- HEX acquired in April-May a majority of the shares of the Estonian TSE
Group. TSE forms part of HEX´s Baltic Operations business unit. Possible
cooperation was discussed with the stock exchanges of Riga and Vilnius.
- In September, HEX made an acquisition significant for the Group´s outsourcing services supply by acquiring 95 per cent of the shares of Sampo Custody Services Ltd from Sampo Bank Plc. The acquired company was renamed HEX Back Office and Custody Services Ltd and it forms part of the Securities Services business unit.
Turnover increased by 23.1 per cent to 92.1 million euro (74.8m euro), with growth slowing down as of the third quarter. Costs rose to 62.0 million euro (44.0m euro), driven by sustained business operations, preparations for an increased demand for capacity, and investments in new business activities. The biggest increases were experienced in personnel costs, which amounted to 24.1 million euro (14.8m euro), and other operating costs, which totalled 30.2 million euro (22.9m euro).
Operating profit decreased by 2.3 per cent to 30.0 million euro (30.7m euro). The operating profit corresponded to 32.6 per cent of the turnover (41.1%). Financial income increased, adding up to 2.2 million euro (1.6m euro). Profit before extraordinary items and taxes amounted to 32.2 million euro (32.4m euro), 0.5 per cent down from the previous year. Net profit equalled 22.8 million euro (23.0m euro). Earnings per share amounted to 1.70 euro (1.71 euro), while equity per share grew by 18.3 per cent to 5.78 euro (4.88 euro). Capital expenditure totalling 15.3 million euro (9.2m euro) was channelled mainly into computer hardware and software, as well as office premises. Capital expenditure includes the acquisitions of the TSE Group and Sampo Custody Services.
ACQUISITIONS
Tallinn Stock Exchange
On February 27, 2001, the HEX Group and the Estonian TSE Group communicated
their intention to enter into a strategic, ownership and operational cooperation.
This cooperation supports the growth strategy of HEX while also developing
Estonian capital markets. The cooperation is based on HEX being a majority
shareholder in the TSE Group, which includes the Tallinn Stock Exchange (AS
Tallinna Börs) and the Estonian Central Securities Depository, EVK (AS Eesti
Väärtpaberikeskus).
HEX acquired its position as majority shareholder partly by purchasing shares from shareholders and partly by subscribing to shares in a rights issue. By the end of the year, HEX owned 61.6 per cent of TSE's shares. TSE was included in the HEX Group as of May 1, 2001. HEX and TSE's minority shareholders have entered a shareholder agreement regarding the objectives of TSE's operations and the principles related to ownership and management of TSE.
HEX's President and CEO Jukka Ruuska was elected chairman of TSE's Supervisory Boardon May 3, 2001, and the Baltic operations of HEX were made into a business unit consisting of TSE and the Baltic liaison unit. The business unit was led by Jukka Ruuska, while TSE operations were headed by CEO Gert Tiivas and Vice President Päivi Laaksomies from HEX was appointed Senior Vice President of the Baltic liaison unit.
HEX also expressed its interest in participating in the development of the securities and derivatives markets of other Baltic countries. Possible cooperation was discussed with the stock exchanges of Riga and Vilnius.
Sampo Custody Services Ltd
Through an acquisition carried out in late September, HEX Securities Services Ltd
Oy, a subsidiary of HEX Plc, purchased 95 per cent of the shares of Sampo
Custody Services Ltd from Sampo Bank Plc. After the acquisition, Sampo Bank
still owns five per cent of the shares.
The company changed its name to HEX Back Office and Custody Services Oy (HBO) on October 16, 2001. HBO was included in the HEX Group as of October 1, 2001.
The HBO acquisition serves the HEX Group's strategic goal to promote and develop the effectiveness and infrastructure of the Finnish securities markets. The Securities Services business area, which HBO belongs to, provides parties and institutions within the securities and derivatives markets with an opportunity to outsource operations that are outside their core business.
Business operations
TRADING
Turnover increased by 50,4 per cent to 49.1 million euro (32.7m euro), and profitability developed positively although the last quarter remained somewhat weaker than the first part of the year.
Share turnover fell slightly from year 2000 to 203 billion euro (227bn euro), while turnover measured by the number of shares nearly doubled, totalling 11 billion shares (6.3bn).
In derivative operations, Nokia's stock options continued their favourable development. Nokia was the second most traded stock option on the Eurex during the whole period. The demand for market information (HEXFeed) also continued strongly throughout the period.
The product range of HEX's derivatives trading was expanded in September, when trading started in HEXTech futures and options. The products are based on a new HEXTech index, launched in early July, which is calculated on the basis of technology shares.
Evening trading started in April in response to changing demand and European trends. From the very beginning, HEX monitored evening trading and customers' experiences. Based on the feedback received, a decision was made in December to cut back evening trading by one hour and close it at 8 pm. This change will take effect at the beginning of April 2002.
The number of members s continued to increase. At the end of 2001, there were 38 members in total (31). In addition to those in Helsinki, brokers from Stockholm, London, Paris and Amsterdam trade on the Helsinki Exchanges.
In late September, HEX signed a contract with Euronext in order to facilitate cross-memberships and technical access to the parties' market places. The aim of the arrangement is to direct international trade in Finnish stocks towards HEX.
SETTLEMENT AND DEPOSITORY
The turnover of the Settlement and depository business unit totalled 19.7 million euro (17.8m euro), amounting to a 10.8 per cent growth over 2000. The value depreciation of capital issued in the book-entry securities system along with a decrease in the number of transactions weakened the profitability of the business unit, which did not achieve the previous year's levels.
The move towards STP-based processes was promoted by the registration applications in machine language form implemented in March. Studies concerning the CCP structure continued.
The rate of equities clearing remained good. A total of 97.9 per cent (92.6 per cent) of stock transactions were cleared within the clearing period of T+3 in accordance with the marketplace rules.
ISSUER SERVICES
The turnover of Issuer services equalled 16.7 million euro (18.7m euro). Owing to the market value of listed companies remaining low and little interest being shown towards company listing, the turnover of the business unit decreased and profitability dropped compared to the previous accounting period.
The covered warrant markets developed rapidly, with the number of listed covered warrants rising to 112. Preparations were also made for the initiation of trading in index shares in early 2002.
The number of listed option rights for the management and personnel of listed companies equalled 39 at year-end. Companies issuing option rights received a new option monitoring service, which produces information about the transactions of option right holders.
SECURITIES SERVICES The turnover of Securities services equalled 7.4 million euro (5.8m euro), which amounted to a 27.0 per cent growth from 2000. The increase in turnover was due to a positive development in the number of transactions, but owing to one-time expenses related to acquisitions and heavy system development, the profitability of the business unit fell at the end of the year.
The acquisition of Sampo Custody Services Ltd was significant with regard to outsourcing services. The trade provided Securities services with the personnel required for operating a new business area, a custodian's licence in accordance with the Investment Funds Act and an existing customer base.
eHEX
eHEX continued to invest heavily in development projects. The unit's turnover was 0.9 million euro (1.5m euro) and operations continued in the red. Competition in eHEX's field became more intense in both online trading software and comprehensive information services.
The Investor Relations service for listed companies was launched in early April and received its first customers. The contract concerning the production of fund reports was renewed with the Finnish Association of Mutual Funds.
BALTIC OPERATIONS
The turnover of HEX's Baltic operations was 0.8 million euro for the period May-December. Profitability was weakened by one-time expenses.
Share trading on the Tallinn Stock Exchange amounted to 262.7 million euro in 2001, dropping clearly from trading in 2000, which totalled 353.9 million euro. The slowdown on the markets was also felt in Tallinn: no new companies were listed on the stock exchange.
Having initiated cooperation, HEX and TSE worked on a common market model and a technical operating environment as well as plans for their implementation. Preparations were made to start trading with Estonian shares listed on TSE in HEX's system.
In September, the Estonian parliament approved the Pension Fund Act. The Estonian Ministry of Finance decided that the Estonian Central Securities Depository should function as a service provider for those investing in pension funds.
SHARES AND SHAREHOLDERS
The number of HEX Plc shares at the end of December amounted to 13,471,728 while share capital was 26,943,456 euro. The stock-based incentive scheme for personnel may lead to a maximum of 2.8 million euro increase in share capital.
During the year under review, the Board of Directors had no current authorisations to issue any stock, convertible bonds or option rights, or any authorisations to purchase or hand over any of the company's own stock.
HEX Plc had 153 registered shareholders at year-end 2001. A total of 15.7 per cent of shares were nominee registered.
As a result of the stock-option incentive scheme, employee shareholding in the company may rise to a maximum of 9.4 per cent of shares and voting rights. The figure includes the holdings of the Executive group and its Secretary, which may rise to a maximum of 1.5 per cent as a result of the incentive scheme.
STOCK INCENTIVE SCHEME FOR PERSONNEL
The stock options included in the incentive scheme of the HEX Group employees entitle the subscription of a total of 1,400,000 HEX Plc shares. In accordance with the subscription terms, the original subscription price of 12.50 euro has been reduced to 11.70 euro by the dividend paid on 29 March 2001. The scaled share subscription period based on stock options will begin on 1 November 2002, 1 November 2003, 1 November 2004 and 1 November 2005, and will expire for all stock options on 30 November 2007.
If the company is not listed on the stock exchange, the holder of option rights is entitled to compensation in terms of salary or wages equalling the value of the increase in shareholders' equity. For this purpose, a 2.6 million euro entry burdening the company's result was made in accruals.
HUMAN RESOURCES
At the end of 2001, the HEX Group had a total of 424 employees, of which 396 were permanent employees (261) and 28 fixed-term employees (29). The average number of employees in 2001 was 320 (250). These figures include the people employed by TSE as of May 1, 2001 (23) and the employees that transferred to HEX in connection with the acquisition of HBO as of Octoberer 1, 2001 (27). On December 31, 2001, TSE employed 30 people.
OTHER EVENTS
In January 2001, the Finnish Competition Authority decided on two issues related to the HEX Group and its position under competition law. One of the decisions dealt with the exchange fees implemented by the Helsinki Exchanges in 2000, and the other dealt with the delivery overdue fees levied by the Central Securities Depository in securities clearing operations.
In its decisions, the Finnish Competition Authority adopted the opinion that Helsinki Exchanges as the maintainer of the public stock trading system, as well as the Central Securities Depository as the provider of clearing services, at least for the time being have a dominant position in Finland as defined in the Act on Competition Restrictions.
The Finnish Competition Authority's point of view was that the Exchange had not abused its dominant position when setting the exchange fees. The Competition Authority regarded the stock delivery overdue fees levied by the Central Securities Depository as an abuse of the Depository´s dominant position that is against the Act on Competition Restrictions. From the Authority's point of view, the fees were discriminating against customers and did not correspond with actual costs. HEX observed the decision of the Finnish Competition Authority by changing the overdue fee practices of the Central Securities Depository, for example.
However, HEX appealed to the Competition Council against both decisions as from HEX's point of view, under tightened international competition, the markets in question are geographically larger than the national markets. HEX does not hold an as dominant position on these broader markets as its competitors include Exchanges and Central Securities Depositories in other countries. The case is pending in the Market Court.
On September 7, the Helsinki District Court ruled that HEX Plc is entitled to be refunded for the value added tax paid by the Helsinki Stock Exchange Ltd for services conducted in the exchange business, other public trading and settlement operations during the years 1995 and 1996. The decision took effect on November 9, 2001, and 9.9 million euro of value-added tax paid from 1995 to 2000, as well as 1.4 million euro of interest compensation was paid to the subsidiaries of HEX, Helsinki Securities and Derivatives Exchange, Clearing House Ltd and Finnish Central Securities Depository Ltd.
HEX will negotiate with brokers and clearing parties regarding the processing of VAT refunds paid to its subsidiaries.
Based on an application by the Central Securities Depository, on December 12, 2001, the Ministry of Finance cancelled the ratification of loss balancing obligations given on the behalf of the Central Securities Depository in 1996 totalling 16.8 million euro. In practice, the Ministry of Finance's decision made it possible to abandon the loss balancing obligations after making the corresponding changes to the shareholder agreement concerning HEX Plc.
The Helsinki Exchanges and the Central Securities Depository reformed and expanded their market supervision activities in autumn 2001. The amended guidelines of the Stock Exchange and the Central Securities Depository, as well as the new guidelines of the Disciplinary Board took effect on December 10, 2001. Timo Rintanen was appointed Senior Vice President, Market Supervision and Enforcement at HEX. He also works as the Secretary of the Disciplinary Board.
the other dealt with the delivery overdue fees levied by the Central Securities Depository in securities clearing operations. In its decisions, the Finnish Competition Authority adopted the opinion that Helsinki Exchanges as the maintainer of the public stock trading system, as well as the Central Securities Depository as the provider of clearing services, at least for the time being have a dominant position in Finland as defined in the Act on Competition Restrictions.
The Finnish Competition Authority's point of view was that the Exchange had not abused its dominant position when setting the exchange fees. The Competition Authority regarded the stock delivery overdue fees levied by the Central Securities Depository as an abuse of the Depository´s dominant position that is against the Act on Competition Restrictions. From the Authority's point of view, the fees were discriminating against customers and did not correspond with actual costs. HEX observed the decision of the Finnish Competition Authority by changing the overdue fee practices of the Central Securities Depository, for example.
However, HEX appealed to the Competition Council against both decisions as from HEX's point of view, under tightened international competition, the markets in question are geographically larger than the national markets. HEX does not hold an as dominant position on these broader markets as its competitors include Exchanges and Central Securities Depositories in other countries. The case is pending in the Market Court.
On September 7, the Helsinki District Court ruled that HEX Plc is entitled to be refunded for the value added tax paid by the Helsinki Stock Exchange Ltd for services conducted in the exchange business, other public trading and settlement operations during the years 1995 and 1996. The decision took effect on November 9, 2001, and 9.9 million euro of value-added tax paid from 1995 to 2000, as well as 1.4 million euro of interest compensation was paid to the subsidiaries of HEX, Helsinki Securities and Derivatives Exchange, Clearing House Ltd and Finnish Central Securities Depository Ltd.
HEX will negotiate with brokers and clearing parties regarding the processing of VAT refunds paid to its subsidiaries.
Based on an application by the Central Securities Depository, on December 12, 2001, the Ministry of Finance cancelled the ratification of loss balancing obligations given on the behalf of the Central Securities Depository in 1996 totalling 16.8 million euro. In practice, the Ministry of Finance's decision made it possible to abandon the loss balancing obligations after making the corresponding changes to the shareholder agreement concerning HEX Plc.
The Helsinki Exchanges and the Central Securities Depository reformed and expanded their market supervision activities in autumn 2001. The amended guidelines of the Stock Exchange and the Central Securities Depository, as well as the new guidelines of the Disciplinary Board took effect on December 10, 2001. Timo Rintanen was appointed Senior Vice President, Market Supervision and Enforcement at HEX. He also works as the Secretary of the Disciplinary Board.
EVENTS AFTER THE PERIOD UNDER REVIEW
Eurex lowered its market-making prices for derivatives brokers from the beginning of January 2002. The new prices are estimated to cut the income from derivatives trading by approximately 20 per cent.
HEX will lower the fees levied on brokers involved in cash transactions from April 1, 2002 onwards.
The investment product range in trading was widened as trading in index shares started in February 2002.
The launch of trading in Estonian shares listed on TSE using the trading system of HEX was postponed by one month as requested by TSE brokers. The new initiation date was set for February 25, 2002. In February, TSE approved four members of the Helsinki Exchanges as its new members.
HEX expanded its service offering to securities clearing and custody operations in Estonia. HEX Back Office and Custody Services Ltd (HBO) obtained an account operator's licence in Estonia and started operating as a account operator custodian in the Estonian Central Securities Depository EVK when the trading of Estonian stocks was moved to HEX's trading system.
HEX and German IS Innovative Software AG signed a contract in January concerning market information services in the Nordic and Baltic countries. The strategy of the HEX Group is to promote and improve the liquidity and transparency of the Finnish stock market. The HEX Global Market Information Service provides the maintenance of market information databases and the distribution of market information through the Internet and other electronic distribution channels. The contract parties will establish a new subsidiary, HEX Information Services Ltd, for these operations. HEX will hold 70 per cent of the new company, with a 30 per cent share held by IS Innovative Software.
Mr. Gert Tiivas, CEO of the TSE Group, was appointed Senior Vice President in charge of the the Baltic Operations business unit from the beginning of 2002. He also will continue as CEO of the TSE Group.
Mr. Raimo Hyvärinen, personal deputy to HEX Plc Board Member Hannu Karppinen, resigned his seat as personal deputy on January 29, 2002.
The Finnish State, Bank of Finland, OKR Issuers Co-operative, Nordea Bank Finland Plc, the OKO Group, the Sampo Group and Aktia Savings Bank Plc signed a shareholder agreement on February 25, 2002. The agreement replaces an earlier shareholder agreement between the parties.
OUTLOOK FOR 2002
HEX's result for the three most recent years has been good. The relative profitability of 2001 decreased from the previous year as expected. The restructuring in the market-place business does not seem to be clearing up to any significant degree. The instability of the market conditions is also continuing.
Share trading in January and February 2002 remained at a good level: total trading volume for the two months was 35.9 billion euro (43.2bn euro). The average trading volume per day was 854 million euro, whereas the daily average over the whole year 2001 was 814.2 million euro.
The change in derivatives trade pricing that went into effect at the beginning of January is expected to lower the income from derivatives trading by approximately 20 per cent. HEX will lower cash market trading fees as of April 1, 2002.
The HEX operating principle is to continuously make the operations more effective to secure long-term competitiveness. At the same time HEX invests in enhancing the quality and reliability of operations. . The total financial effect of the price reductions cannot be fully covered by improvements to effectiveness in 2002, and relative profitability is thus expected to decrease also in 2002.
Financial information in 2002
HEX Plc's annual report will be published on March 15, 2002. Interim report for first quarter will be published on May 3, 2002. HEX Plc publishes its financial information in Finnish and English. The annual report can be seen at http://www.hexgroup.com/files/4EduZojA8/linkkifile/TP-tiedote-e.pdf
