As filed with the Securities and Exchange Commission on November 29, 2005
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F/A
AMENDMENT NO. 2
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No.: 0-30690
EUROTRUST A/S
f/k/a
Euro909.com A/S
(Exact name of Company as specified in its charter)
EUROTRUST A/S THE KINGDOM OF DENMARK
(Translation of Company's (Jurisdiction of incorporation
name into English) or organization)
POPPELGAARDVEJ 11-13
2860 SOEBORG DENMARK
(Address of principal executive offices)
Securities registered or to be registered pursuant to
Section 12(b) of the Act: None
Securities registered or to be registered pursuant to
Section 12(g) of the Act: None
Securities for which there is a reporting obligation American Depositary Shares, each representing
pursuant to Section 15(d) of the Act: six ordinary shares, nominal value DKK 1.25 per
ordinary share.
Indicate the number of outstanding shares of each of the
Company's classes of capital or common stock as of close Ordinary shares
5,108,267 of the period covered by the annual report (December 31, American
Depositary Shares: 5,108,267 2004):
Indicate by check mark whether the Company (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark which financial statement item the Registrant has
elected to follow Item 17 [ ] Item 18 [X]
TABLE OF CONTENTS
PAGE
EXCHANGE RATE INFORMATION.....................................................................4
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS..........................5
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE........................................5
ITEM 3. KEY INFORMATION................................................................5
ITEM 4. INFORMATION ON THE COMPANY....................................................14
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS..................................24
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES....................................37
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.............................43
ITEM 8. FINANCIAL INFORMATION.........................................................45
ITEM 9. THE OFFER AND LISTING.........................................................45
ITEM 10. ADDITIONAL INFORMATION........................................................47
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................51
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES........................52
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES...............................52
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND
USE OF PROCEEDS...............................................................52
ITEM 15. CONTROLS AND PROCEDURES.......................................................52
ITEM 16. RESERVED......................................................................52
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT..............................................52
ITEM 16B. CODE OF ETHICS................................................................52
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES........................................53
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT...............................53
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED...................53
ITEM 17. FINANCIAL STATEMENTS..........................................................54
ITEM 18. FINANCIAL STATEMENTS..........................................................54
ITEM 19. EXHIBITS......................................................................55
SIGNATURES ..................................................................................56
EXPLANATORY NOTE
This Form 20-F/A is being filed by EuroTrust A/S ("EuroTrust") as
Amendment No. 2 to its Annual Report on Form 20-F filed on June 3, 2005, as
amended on November 3, 2005 (the "Amended Form 20-F"). The purpose of this
Amendment No. 2 is to (i) include the revised report of our independent
registered public accounting firm; (ii) revise the Restated Consolidated
Statement of Cash Flows to separately show cash used in discontinued operations
as operating, investing and financing activities; and (iii) include in the notes
to the financial statements a description of the impact of all the restatements
to financial statements for the year ended December 31, 2004 on previously
issued financial statements (See Note 1 to the Financial Statements).
Except to reflect the changes described above, this Amendment No. 2 does
not, and does not purport to, modify or update the disclosures contained in
EuroTrust's Amended Form 20-F.
3
EXCHANGE RATE INFORMATION
In this annual report, unless otherwise specified or unless the context
otherwise requires, all references to "$" or "dollars" are to U.S. dollars and
all references to "DKK" are to Danish kroner. We have converted DKK amounts as
of December 31, 2004 into U.S. dollars at an exchange rate of $1.00 = DKK
5.4676, which was the noon buying rate on December 31, 2004, the last business
day of the year. We do not make any representation that the Danish kroner
amounts could have been, or could be, converted into U.S. dollars at that rate
on December 31, 2004, or at any other rate.
Unless specifically indicated or the context clearly indicates
otherwise all references to our ordinary shares shall include our American
Depositary Shares (ADSs) and vice-versa.
------------
WE USE THE TERMS "WE", "OUR", "US", EUROTRUST" AND "THE COMPANY" TO
MEAN EUROTRUST A/S AND ITS SUBSIDIARIES AND THEIR RESPECTIVE PREDECESSORS.
------------
AS NO INDEPENDENT SOURCES OF INDUSTRY DATA ARE AVAILABLE, INDUSTRY DATA
CONTAINED HEREIN, INCLUDING MARKET SIZE DATA, ARE BASED ON OUR ESTIMATES WHICH
ARE DERIVED FROM INTERNAL MARKET STUDIES AND MANAGEMENT CALCULATIONS.
------------
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 20-F/A contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995 regarding
our plans and objectives and future operations. Forward-looking statements
attempt to predict future occurrences and are identified by words like
"believe," "may," "intend," "will," "expect," "anticipate," "estimate" or
"continue," or other comparable terms. Forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from any future
results, performance or achievements expressed or implied by these
forward-looking statements. The forward-looking statements included in this
report are based on current expectations that involve numerous risks and
uncertainties. Our plans and objectives are based, in part, on assumptions
involving judgments about, among other things, future economic, competitive and
market conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control.
Although we believe that our assumptions underlying the forward-looking
statements are reasonable, any of these assumptions could prove inaccurate and,
therefore, we cannot assure you that the forward-looking statements included in
this report will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included in this report, you should
not assume, and we cannot assure you, that we can achieve our objectives or
implement our plans. Such statements speak only as of the date hereof and are
subject to change. We undertake no obligation to revise or update publicly any
forward-looking statements for any reason. Factors that could cause our actual
results to differ materially from those expressed or implied by forward-looking
statements include, but are not limited to, our ability to identify new under
valued opportunities for investment or acquisition; the potential unforeseen
impact of product or service offerings from competitors; our ability to raise
additional capital should it be required to finance our growth aspirations; our
ability to negotiate appropriate strategic relationships; our ability to control
costs and expenses; and general economic and political conditions and specific
conditions in the markets we address and the factors set forth under the
headings "Key Information - Risk Factors" (Item 3.D), "Information on the
Company" (Item 4) and "Operating and Financial Review and Prospects" (Item 5).
4
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not required because this Form 20-F/A is filed as an Annual Report.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not required because this Form 20-F/A is filed as an Annual Report.
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below as of December
31, 2000, 2001, 2002, 2003 and 2004 and for the years then ended have been taken
or are derived from our audited consolidated financial statements for those
periods. The selected consolidated financial data have been prepared in
accordance with generally accepted accounting principles in the United States of
America ("GAAP").
Effective October 1, 2000, we changed our method of accounting for
revenue recognition of domain name registration revenue in accordance with Staff
Accounting Bulletin (SAB) No.101 (SAB 101), REVENUE RECOGNITION IN FINANCIAL
STATEMENTS. Under SAB 101, which was adopted retroactively to January 1, 2000,
we recognized revenues ratably over the period the customer is provided access
to the registry through our servers. Before SAB 101 became effective, we
recognized revenue from initial registration of domain names when the
registration process was complete and annual service fees (registration renewal
fees) were recognized when invoiced to the customer. On July 21, 2001, we sold
our domain name registration service business, which was a part of our internet
services segment, to VeriSign, Inc. ("VeriSign.") In December 2001 we sold our
print and online media business; GAAP requires that the results of operations
from a discontinued segment be segregated from the results of operations from
our continuing business segments. As a result, our Consolidated Statement of
Operations and Consolidated Statement of Cash Flows for the fiscal year ended
December 31, 2001 and 2002 reflect the fact that the print and online media
business is treated as a discontinued operation. In addition, our Consolidated
Statement of Operations and Consolidated Statement of Cash Flows for the fiscal
years ended December 31, 1999 and 2000 were restated to reflect this fact.
On May 19, 2005 our shareholders approved a one for six reverse split
of our ordinary shares such that six ordinary shares nominal value DKK 1.25 were
combined into one ordinary share nominal value DKK 7.50 ("New Ordinary
Shares").In lieu of issuing a fraction of a New Ordinary Share, we will pay to
each holder the value thereof based upon the closing price of an ADS on the
NASDAQ Small Cap Market on May 19, 2005. All information contained in this
annual report has been presented as if such reverse stock split occurred as of
January 1, 2000.
The financial information presented below is only a summary and should
be read together with our consolidated financial statements included elsewhere
in this report.
5
CONSOLIDATED STATEMENT OF OPERATIONS DATA:(1)
YEAR ENDED DECEMBER 31,
-----------------------
2000 2001 2002 2003 2004 2004
---------- ---------- ---------- --------- --------- -------
DKK DKK DKK DKK DKK US$
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue 188,628 151,914 92,028 109,822 91,036 16,650
Total operating expenses 290,870 347,922 161,000 116,269 110,759 20,257
-------- --------- -------- ------- -------- -------
Operating loss (102,242) (196,008) (68,972) (6,447) (19,723) (3,607)
======== ========= ======== ======= ======== =======
Net (loss) income from
continuing operations
(101,384) 18,165 (97,363) (7,959) (26,251) (4,801)
======== ========= ======== ======= ======== =======
Net (loss) income from
discontinued operations (25,042) (10,460) (185,985) 1,629 84,705 15,492
======== ========= ======== ======= ======== =======
Cumulative effect of change in
accounting principle (20,278) 0 0 0 0 0
======== ========= ======== ======= ======== =======
Net (loss) income (146,704) 7,705 (283,348) (6,330) 58,454 10,691
======== ========= ======== ======= ======== =======
(Loss) Income from continuing operations
per average common share, basic (35.88) 4.50 (22.33) (1.70) (5.30) (0.97)
======== ========= ======== ======= ======== =======
(Loss) Income from discontinued operations
per average common share, basic (8.82) (2.58) (42.66) 0.35 17.12 3.13
======== ========= ======== ======= ======== =======
Net (loss) income per average
common share, basic (51.90) 1.92 (64.99) (1.35) 11.82 2.16
======== ========= ======== ======= ======== =======
(Loss) Income from continuing operations
per average common share, diluted (35.88) 4.38 (22.33) (1.70) (4.99) (0.91)
======== ========= ======== ======= ======== =======
(Loss) income from discontinued
operations per average
common share, diluted (8.82) (2.52) (42.66) 0.35 16.09 2.94
===== ==== ====== ===== ===== =====
Net (loss) income per average common
share diluted (51.90) 1.86 (64.99) (1.35) 11.10 2.03
===== ==== ====== ===== ===== ====
Weighted average number of common
shares outstanding, basic 2,828 4.030 4,360 4,671 4,947 4,947
===== ===== ===== ===== ===== =====
Weighted average number of common
shares outstanding diluted 2,828 4,124 4,360 4,671 5,266 5,266
===== ===== ===== ===== ===== =====
------------------------
(1) In June 2001, the FASB issued SFAS 142 fully effective for fiscal years
beginning after December 15, 2001, which changed the accounting for goodwill
from an amortization method to an impairment-only approach. We adopted the
provisions of SFAS 142 effective January 1, 2002. If the standards of SFAS 142
had been in effect beginning January 1, 2000 then (i) for the year ended
December 31, 2000 our net loss would have been DKK 142,431 and both our basic
and diluted loss per common share would have been DKK 50.28; and (ii) for the
year ended December 31, 2001 our net income would have been DKK 12,364, our
basic income per common share would have been DKK 3.06 and our diluted income
per common share would have been DKK 3.00.
6
INTERNET SERVICES:
Revenue 94,999 72,183 20,008 21,203 23 4
Total operating expenses 179,985 238,112 95,554 28,838 14,478 2,648
------- -------- -------- ------ ------ -----
Operating loss (84,986) (165,929) (75,546) (7,635) (14,455) (2,644)
======= ======== ======== ====== ======= ======
BROADCAST MEDIA:
Revenue 83,005 79,731 72,020 88,619 91,013 16,646
Total operating expenses 94,156 109,810 65,446 87,431 96,281 17,609
------- -------- -------- ------ ------- ------
Operating income (loss) (11,151) (30,079) 6,574 1,188 (5,268) (963)
======= ======== ======== ====== ======= ======
OTHER:
Revenue 10,624 0 0 0 0 0
Total operating expenses
16,729 0 0 0 0 0
------- -------- -------- ------ ------- -----
Operating (loss) income (6,105) 0 0 0 0 0
======= ======== ======== ====== ======= ======
DISCONTINUED OPERATIONS, NET (LOSS) GAIN: (25,042) (10,460) (179,985) (8,420) 1,090 199
======= ======== ======= ====== ======= ======
CONSOLIDATED BALANCE SHEET DATA:
AS OF DECEMBER 31,
2000 2001 2002 2003 2004 2004
---------- ---------- --------- --------- --------- ----------
DKK DKK DKK DKK DKK US$
(IN THOUSANDS)
Total assets 357,051 445,611 168,217 140,845 178,248 32,600
Net assets 199,638 333,168 44,242 46,360 101,566 18,576
Capital stock 25,814 34,006 34,006 39,693 38,312 7,007
Working capital (deficit) (6,009) 137,256 (4,280) (35,674) (19,447) (3,557)
Number of ordinary shares outstanding 3,442 4,534 4,534 5,292 5,108 5,108
We have never paid any dividends on our ordinary shares.
EXCHANGE RATE INFORMATION
The exchange rate on May 24, 2005 (the latest practicable date) was DKK
5.9035 per $1.00. The following table sets forth (i) the average exchange rate
for the years 2000, 2001, 2002, 2003 and 2004 calculated using the average
exchange rate on the last day of each month of the relevant year and (ii) the
high and low exchange rates for each of the most recent six months. (All rates
are expressed as Danish kroner per U.S. dollar.)
7
AVERAGE
-------
YEAR ENDED DECEMBER 31:
-----------------------
2000 DKK 8.0829
2001 DKK 8.3619
2002 DKK 7.8897
2003 DKK 6.5899
2004 DKK 5.9893
MONTH ENDED: HIGH LOW
------------ ---- ---
May 2005 (as of May 24, 2005) DKK 5.9365 DKK 5.7469
April 2005 DKK 5.8158 DKK 5.7049
March 2005 DKK 5.7630 DKK 5.5502
February 2005 DKK 5.8312 DKK 5.6118
January 2005 DKK 5.7527 DKK 5.5061
December 2004 DKK 5.6334 DKK 5.4580
B. CAPITALIZATION AND INDEBTEDNESS
Not required because this Form 20-F/A is filed as an Annual Report.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not required because this Form 20-F/A is filed as an Annual Report.
D. RISK FACTORS
IN ADDITION TO OTHER INFORMATION IN THIS FORM 20-F/A, THE FOLLOWING
RISK FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING US AND OUR BUSINESS
BECAUSE THESE FACTORS CURRENTLY HAVE OR MAY IN THE FUTURE HAVE A SIGNIFICANT
IMPACT ON OUR BUSINESS, OPERATING RESULTS OR FINANCIAL CONDITION. ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD- LOOKING STATEMENTS
CONTAINED IN THIS FORM 20-F/A AS A RESULT OF THE RISK FACTORS DISCUSSED BELOW
AND ELSEWHERE IN THIS FORM 20-F/A.
WE HAVE A SIGNIFICANT ACCUMULATED LOSS AND THE LIKELIHOOD OF FUTURE
PROFITABILITY IS UNCERTAIN. CONTINUING LOSSES MAY EXHAUST OUR CAPITAL RESOURCES
AND FORCE US TO TERMINATE OPERATIONS.
We incurred a net loss in each of the years ended December 31, 2000,
2002 and 2003 and we incurred an operating loss in each of those years and for
the year ended December 31, 2001. For the year ended December 31, 2004 we had an
operating loss of DKK 26.3 million (approximately $4.8 million). As of December
31, 2004, we had an accumulated deficit of DKK 457.4 million (approximately
$83.7 million). We may incur additional losses in the foreseeable future. We
cannot assure you that we will become profitable or, if we do become profitable,
that we will be able to sustain or increase our profitability in the future. If
operating losses continue for longer than we expect and we cannot raise
additional capital, we may be forced to terminate operations.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE. IF WE CANNOT DO SO, WE
MAY NOT BE ABLE TO FUND OUR FUTURE ACTIVITIES OR CONTINUE OPERATING.
Our future capital requirements will depend on a number of factors,
including our ability to generate positive cash flow from operations, capital
expenditure requirements and acquisition opportunities. If we need to raise
additional capital in the future, we cannot assure you that we will be
8
able to do so on acceptable terms or at all. If we raise additional capital
through the issuance of equity or convertible debt securities, the percentage
ownership of our company held by existing shareholders, including holders of our
ADSs, will be diluted. In addition, new securities may contain certain rights,
preferences or privileges that are senior to those of our ordinary shares. If we
are unsuccessful in raising additional capital, when needed, our business and
results from operations may be materially and adversely affected.
OUR FUTURE REVENUES ARE UNPREDICTABLE AND OUR FINANCIAL RESULTS MAY FLUCTUATE.
IF OUR FINANCIAL RESULTS FALL BELOW EXPECTATIONS IN ONE OR MORE FUTURE QUARTERS,
THE MARKET PRICE OF OUR ADSS MAY BE NEGATIVELY IMPACTED.
We cannot accurately forecast our revenues or operating results. Our
revenues and operating results may fluctuate significantly because of several
factors, many of which are beyond our control. These factors include:
o market acceptance of our products and services;
o a change in television viewer preferences if we are unsuccessful in
addressing those changes in our programming;
o the non-renewal of our contract with TeleDanmark Kabel to carry dk4;
o the non-renewal of our contract with Canal Digital A/S to carry dk4;
o the continued interest in televising live sporting events in
Scandanavia;
o the pace at which new television programming is produced in
Scandinavia;
o customer renewal rates for our products and services;
o our success in cross marketing our products and services to our
existing customers and to new customers;
o developing our direct and indirect distribution channels;
o a decrease in the level of spending for Internet products and services
from which our royalties are based;
o our ability to expand our operations;
o our success in assimilating the operations and personnel of any
acquired businesses;
o the impact of price changes in our products and services or those of
our competitors; and
o general economic conditions and economic conditions specific to the
television programming production or Internet services industry.
Due to all of the above factors, we believe that period-to-period comparisons of
our operating results will not necessarily be meaningful, and you should not
rely on them as an indication of future performance.
9
Also, operating results may fall below our expectations and the expectations of
securities analysts or investors in one or more future quarters. If this were to
occur, the market price of our ADSs would likely decline which may result in a
significant decline in the value of your investment.
WE HAVE A LIMITED OPERATING HISTORY IN THE MEDIA BUSINESS AND MAY ENCOUNTER
DIFFICULTIES SIMILAR TO THOSE FACED BY EARLY STAGE COMPANIES. OUR RESULTS FROM
OPERATIONS MAY DEPEND ON HOW SUCCESSFUL WE ARE IN DEALING WITH THESE
DIFFICULTIES.
Over the last five years, our business has evolved from (i) a
telecommunications company that also provided Internet access to (ii) an
Internet services provider focusing primarily on domain name registration
services to (iii) providing trusted Internet infrastructure products and
services to (iv) our current business which is made up of our TV broadcast
channel - dk4 and our TV production company - Prime Vision. We have only a
limited operating history in this business on which you can base an evaluation
of our current business and prospects. As such, our current business and
prospects must be considered in light of the risks and uncertainties encountered
by companies in the early stages of development.
We cannot be certain that we will successfully address this risk. If we
fail, our business and results from operations may be materially and adversely
impacted.
WE COMPETE IN THE HIGHLY COMPETITIVE BROADCASTING INDUSTRY.
The Danish broadcast industry is highly competitive and dominated by a
few large companies. As a result of competition, in 2001 we consolidated our
broadcast operations into one channel. In addition, we expect that the number of
channels competing for the places in the TeleDanmark Kabel programming network
will increase in the ensuing years. If viewer preferences change and we are
unsuccessful in addressing those changes in our programming, we may lose favor
with them and they may choose to view a competitor's channel over ours.
IF WE ARE UNABLE TO NEGOTIATE A RENEWAL OF OUR CONTRACT WITH EITHER TELEDANMARK
KABEL OR CANAL DIGITAL A/S THE REVENUES FROM OUR BROADCASTING BUSINESS MAY BE
ADVERSELY AFFECTED.
Our dk4 television channel is carried as part of the basic package of
channels provided to all cable television subscribers to TeleDanmark Kabel (the
primary Company providing cable television service in Denmark), for which we
receive a per subscriber fee as well as to all subscribers of Canal Digital A/S,
a Danish digital satellite television service provider. Our agreement with each
of TeleDanmark Kabel and Canal Digital A/S to carry dk4 as part of its basic
package expires on December 31, 2006 and December 31, 2007, respectively. We
cannot assure you that we will successfully negotiate a renewal of our agreement
with TeleDanmark Kabel or Canal Digital A/S. If we are unable to renew any of
the agreements the revenues from our broadcasting business would decrease
significantly and the results of operations from our broadcasting business would
be materially and adversely affected.
IF THE INTEREST IN VIEWING LIVE SPORTING EVENTS IN THE SCANDINAVIAN MARKET
SHOULD DECREASE OR IF THERE IS A SLOWDOWN IN OTHER TELEVISION PROGRAMMING
PRODUCTION OUR RESULTS COULD BE ADVERSELY AFFECTED.
As of May 1, 2005 we have approximately eight large mobile television
production vans which are leased to various other companies primarily for their
broadcast of live sporting events or the production of original television
programming. We also provide many of the technical personnel required for these
productions. If we are unable to lease these vans and our technical personnel to
other
10
broadcasters or television production companies we will be in a position where
we will not be able to cover the expenses associated with this business which in
turn could materially and adversely effect our business. Our ability to keep
these vans busy in order to generate revenue will be effected by many factors
outside of our control, including the continued interest in viewing live
sporting events and the continued desire to produce television programming in
Scandinavia.
WE MAY NEVER RECEIVE ANY ROYALTY PAYMENTS FROM THE SALE OF THE BUSINESSES
RELATED TO OUR INTERNET SERVICES DIVISION.
During 2003 and 2004 we sold all of the business operations related to
our internet services division including, the secure internet hosting business,
the digital video surveillance business, the secure remote back-up business, the
PKI services business and the virus detection software and services business.
Pursuant to the terms of the agreements for the sale of some of these businesses
we are entitled to royalty payments until 2010. If any of these businesses fail
to maintain or achieve market acceptance at a level necessary to sustain the
business then, we will receive a diminished level of, or even no, royalty
payments and, as a result, our results from operations may be adversely
affected.
OUR LONG-TERM GROWTH STRATEGY ASSUMES THAT WE MAKE SUITABLE ACQUISITIONS AND
INVESTMENTS. IF WE ARE UNABLE TO ADDRESS THE RISKS ASSOCIATED WITH ACQUISITIONS
AND INVESTMENTS OUR BUSINESS COULD BE HARMED.
Our long-term growth strategy includes identifying and, from time to
time, acquiring or investing in suitable candidates on acceptable terms. In
particular, we intend to acquire or make investments in businesses that provide
products and services that expand or complement our existing businesses and
expand our geographic reach. In pursuing acquisition and investment
opportunities, we may compete with other companies having similar growth and
investment strategies. Competition for these acquisition or investment targets
could also result in increased acquisition or investment costs and a diminished
pool of businesses, technologies, services or products available for acquisition
or investment. Our long-term growth strategy could be impeded if we fail to
identify and acquire or invest in promising candidates on terms acceptable to
us.
Assimilating acquired businesses involves a number of other risks,
including, but not limited to:
o disrupting our business;
o incurring additional expense associated with a write-off of all or a
portion of the related goodwill and other intangible assets due to
changes in market conditions or the economy in the markets in which we
compete or because acquisitions are not providing the benefits
expected;
o incurring unanticipated costs or unknown liabilities;
o managing more geographically-dispersed operations;
o diverting management's resources from other business concerns;
o retaining the employees of the acquired businesses;
o maintaining existing customer relationships of acquired companies;
11
o assimilating the operations and personnel of the acquired businesses;
and
o maintaining uniform standards, controls, procedures and policies.
For all these reasons, our pursuit of an overall acquisition and investment
strategy or any individual acquisition or investment could have a material
adverse effect on our business, financial condition and results of operations.
If we are unable to successfully address any of these risks, our business could
be harmed.
RAPID GROWTH IN OUR BUSINESS COULD STRAIN OUR MANAGERIAL, OPERATIONAL,
FINANCIAL, ACCOUNTING AND INFORMATION SYSTEMS, CUSTOMER SERVICE STAFF AND OFFICE
RESOURCES. IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS MAY BE
NEGATIVELY IMPACTED.
In order to achieve our growth strategy, we will need to expand all
aspects of our business, including our computer systems and related
infrastructure, customer service capabilities and sales and marketing efforts.
We cannot assure you that our infrastructure, technical staff and technical
resources will adequately accommodate or facilitate our expanded operations. To
be successful, we will need to continually improve our financial and managerial
controls, billing systems, reporting systems and procedures, and we will also
need to continue to expand, train and manage our workforce. In addition, as we
offer new products and services, we will need to increase the size and expand
the training of our customer service staff to ensure that they can adequately
respond to customer inquiries. If we fail to adequately train our customer
service staff and provide staffing sufficient to support our new products and
services, we may lose customers.
OUR INTERNATIONAL PRESENCE CREATES RISKS WHICH MAY ADVERSELY AFFECT OUR
BUSINESS.
Currently, our operations focus on the Scandinavian, markets. In
addition to the uncertainty as to our ability to successfully expand our
Scandinavian presence, there are certain risks inherent in doing business on an
international level. These risks include differences in legal and regulatory
requirements and other trade barriers, difficulties in staffing and managing
foreign operations, problems in collecting accounts receivable, fluctuations in
currency exchange rates, delays from government agencies, and tax laws. In
addition, our operations may be affected by changing economic, political and
governmental conditions in the countries in which we operate. Changes in
competition, economics, politics or laws, including tax, labor, environmental
and employment, could affect our ability to sell our products and services in
those countries. Our inability or failure to address these risks could have a
material adverse affect on our business, operations and financial condition.
Also, we cannot assure you that laws or administrative practices relating to
taxation, or other matters of countries within which we operate will not change.
Any change in these areas could have a material adverse effect on our business,
financial condition and results of operations.
IF WE ARE UNABLE TO ATTRACT AND RETAIN HIGHLY QUALIFIED MANAGEMENT AND TECHNICAL
PERSONNEL, OUR BUSINESS MAY BE HARMED.
Our success depends in large part on the contributions of our senior
management team, technology personnel and other key employees and on our ability
to attract, integrate, train, retain and motivate these individuals and
additional highly skilled technical and sales and marketing personnel. We face
intense competition in hiring and retaining quality management personnel. Many
of these companies have greater financial resources than we do to attract and
retain qualified personnel. The only key employees that have signed employment
agreements are Aldo Petersen, our Chief Executive Officer, and Soren Degn, our
Chief Financial Officer. Under these agreements, they can terminate their
employment
12
on six months notice. As a result, we may be unable to retain our key employees
or attract, integrate, train and retain other highly qualified employees in the
future, when necessary. If we fail to attract qualified personnel or retain and
motivate our current personnel, our business may be negatively impacted.
OUR RESULTS FROM OPERATIONS MAY BE ADVERSELY AFFECTED BY EXCHANGE RATE
FLUCTUATIONS.
A portion of our expenditures and receivables are paid in foreign
currencies. As a result, our financial results may be affected by an
appreciation or depreciation in the value of the Danish kroner relative to the
currencies of the countries in which we operate. Except for one hedging
transaction done in March of 2002, we have not engaged in hedging or other risk
management activities in order to offset the risk of currency exchange rate
fluctuations. We cannot predict in any meaningful way the effect of exchange
rate fluctuations upon future results. If the value of the Danish kroner
declines and the currencies of the countries in which we operate appreciate or
remain stable our results from operations may be negatively affected.
THE MARKET PRICE OF OUR ADSS MAY DECLINE IF THE VALUE OF THE DANISH KRONER FALLS
AGAINST THE US DOLLAR.
Fluctuations in the exchange rate between the Danish Kroner and the US
dollar are likely to affect the market price of our ADSs. For example, because
EuroTrust's financial statements are reported in Danish Kroners, if the value of
the Danish Kroner falls against the US dollar, EuroTrust's earnings per share in
US dollars will be reduced. This may adversely affect the price at which our
ADSs trade in the US.
THERE IS A LIMITED PUBLIC MARKET FOR OUR SECURITIES AND OUR SECURITIES MAY
EXPERIENCE EXTREME PRICE AND VOLUME FLUCTUATIONS.
Our ordinary shares are not listed on any securities exchange or
market. However, our ADSs are quoted on the Nasdaq SmallCap Market(R). The
market price of our ADSs may fluctuate significantly in response to various
factors and events, including:
o variations in our operating results;
o the liquidity of the markets;
o investor perceptions of us and the industry in which we operate;
o changes in earnings estimates by analysts;
o sales of ADSs by existing holders; and
o general economic conditions.
In addition, Nasdaq has recently experienced broad price and volume
fluctuations. This volatility has had a significant effect on the market price
of securities of companies for reasons that have often been unrelated to their
operating performance. These broad market fluctuations may also adversely affect
the market price of our ADSs and as a result, holders of our ADSs may lose a
significant portion of their investment.
13
WE HAVE NEVER PAID A DIVIDEND NOR DO WE ANTICIPATE DOING SO IN THE FORESEEABLE
FUTURE.
We have not declared or paid any cash dividends on our ordinary shares.
We do not expect to declare any dividends in the foreseeable future. We
anticipate that all cash that would otherwise be available to pay dividends will
be applied in the foreseeable future to finance our growth or to implement
shareholder-approved repurchases of our stock. Payment of any future dividends
will depend on our earnings and capital requirements, and other factors our
board of directors deem appropriate.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT
We are a Danish limited company, organized in 1986 under the Danish Act
on Limited Companies of the Kingdom of Denmark. Originally, we were organized
under the name Telepartner A/S. In 1999 we changed our name to euro909.com A/S
and in December 2001 we changed our name to EuroTrust A/S. Our registered office
is Poppelgaardvej 11-13, 2860 Soeborg, Denmark. Our telephone number is +45 39
54 00 00.
OUR BUSINESS
Until December 2001, our business operated in three distinct areas:
Internet products and services; broadcasting; and print and online media. In
early 2001 we made the strategic decision to focus primarily on providing
Internet infrastructure products and services and e-commerce solutions in
Scandinavia and selected west European markets and on key elements of our
broadcasting business. To that end, in 2001, we sold our domain name
registration, the remaining assets of our historical telecommunications business
and our print and online media businesses, and consolidated our television
programming business. As of January 1, 2004, we sold our secure internet hosting
business, our digital video surveillance business and our secure remote back-up
business. As a part of these transactions, we will continue to receive royalty
payments from future sales of the secure hosting and remote back-up services
that we formerly marketed. We sold our PKI services business to VeriSign,
Inc.("VeriSign.") on April 1, 2004. We sold the last of our Internet related
business, our virus detection software and services business on September 30,
2004.
As a result of these various transactions, subsequent to September 30,
2004 our business consists of our broadcast media division, which owns dk4, a
Danish television station and operates one of the largest television production
companies in Scandinavia, Prime Vision.
The proceeds from our divestitures in 2004 allowed us to invest more
than $10 million U.S. in Prime Vision. Prime Vision now owns one of Europe's
first High Definition mobile production units, five fully digitalized mobile
production units and two mobile analog production units that we expect to
rebuild into digital units during 2005. We use these assets to produce content
both for our own broadcast operations and for outside clients.
In addition to our television production operations, we continued to
expand our media content platforms in 2004. Our original television channel,
dk4, increased its subscriber base to record levels. Late in 2004, we also added
a new speciality television channel, 4SPORT, to focus on coverage of both Danish
sports, in cooperation with The Danish Sports Association, and international
sporting events of particular interest to Danish fans. The new channel is
currently in the testing phase of development and is
14
projected to provided coverage of, among other sports, boxing, volleyball and
basketball. However, the channel will not be televising soccer or handball the
two most popular sports in Denmark, as these sports currently have agreements
with other broadcasters.
We are in on-going negotiations with TDC on Cable to carry 4SPORT. The
early response to 4SPORT has been very encouraging. Given this response and the
response to new programming for dk4, we plan to focus on the development and
introduction of more speciality content platforms in 2005 and beyond.
In particular, we believe that dk4's long-standing coverage of the
European Parliament for Danish viewers should be extendible to a pan-European
audience. The European Parliament is desirous of making the citizens of the
member countries of the European Union ("EU") aware of the increased importance
of the EU and the influence it has on the politics of its independent member
nations. To support that objective, we have discussed with representatives of
the European Parliament, the proposed establishment of Europa Kanalen ("The
European Channel") to provide coverage of the EU political process for viewers
in other countries. We hope to begin coverage in 2005 or 2006 in three countries
and then to jointly assess the results of the European Channel with the European
Parliament to determine whether coverage throughout Europe is practical. If
successful, this could provide us with a Europe-wide content platform with
substantial growth opportunities. Since content providers are historically among
the most financially successful media operations, we plan to allocate
significant resources to this initiative.
B. BUSINESS OVERVIEW
Our objective is to become a leading provider of television production
facilities for live events in the Northern European market and to expand our
offering of quality content on our dk4 broadcast station, as well as, to develop
and introduce more speciality content platforms in the future, including our
recently established specialty television channel 4SPORT.
MEDIA
For most of 2001 we operated two television channels, dk4 and Bio+.
Both channels were carried by TDC on Cable, formerly known as TeleDanmark,
Denmark's largest cable operator. In October 2001 we consolidated the
programming of both channels into dk4, and expanded its programming by covering
European Union parliament sessions and joining the Pan-European Parliament TV
network. This decision was a result of the fact that the agreement with TDC to
broadcast dk4 was extended and Bio+ was not. Also in 2001, we entered into two
new distribution agreements and a new programming agreement for dk4.
Specifically, we entered into distribution agreements with the Danish digital
satellite television service provider Canal Digital A/S. In December 2003, we
entered into a new four-year agreement with Canal for the continued distribution
of dk4 programming on their digital satellite television network extending our
relationship to December 31, 2007. In December 2003 we reacquired the remaining
15% minority interest in our broadcast business that we had previously sold to
Parken Sport and Entertainment A/S for DKK 12 million in December 2001. In March
2004 we entered into a new agreement with TDC on Cable extending our
relationship to December 31, 2006. Late in 2004, we also added a new speciality
television channel, 4SPORT, to focus on coverage of both Danish sports, in
cooperation with The Danish Sports Association, and international sporting
events of particular interest to Danish fans. The new channel is currently in
the testing phase of development and is projected to provided coverage of, among
other sports, boxing, volleyball and basketball.
15
We are in on-going negotiations with TDC on Cable to carry 4SPORT. The
early response to 4SPORT has been very encouraging. Given this response and the
response to new programming for dk4, we plan to focus on the development and
introduction of more speciality content platforms in 2005 and beyond.
DK4
We acquired dk4 in October 1999. As of December 31, 2004, approximately
44% of all households in Denmark had access to dk4. In 2001, dk4 launched its
revised Internet platform. The homepage contains live video streaming, enabling
subscribers to watch part of dk4's broadcasts live over the Internet.
dk4's principal programs are in the areas of culture, education, sports
and politics:
o POLITICS. dk4 broadcasts proceedings of the Danish Parliament,
including debates and selected expert hearings. During 2002,
dk4 offered more than 50 programs on the European Union, among
these roundtable discussions and presentation of Members of
Parliament, including the former and the present President of
the European Parliament plus selected Members of the European
Commission. In 2001, dk4 was acknowledged as a European
Channel by the European Parliament and joined the discussion
forum for Parliamentary Channels in the European Union ("EU").
In 2003, dk4 has continued to focus on broadcasting
programming from the EU. In conjunction with the European
Parliament, dk4 produced an educational video for Danish high
schools on "Model European Parliament" (a multicultural
conference for young people on the inner workings of the EU).
o SPORTS. Beginning in 2002, dk4 offered a number of niche
sports programs.
o CULTURE. dk4 offers programs focusing on theatre, opera,
literature, classical music and history. In the 2000/2001
season, programs on contemporary art and fine wines were
added. Furthermore, a number of musical shows were introduced
and the number of such shows was increased in 2002.
o EDUCATION. Educational offerings include lectures given at the
newly founded "DK4 University", a series which is also
integrated with the Internet. In 2001, an add-on to this
series was introduced through the "EU University" with a
number of lectures on current EU topics such as Enlargement
and the future Constitution of the EU. In 2002, we introduced
an educational series on use of PCs.
PRIME VISION
In October 1999, dk4 acquired Prime Vision, or PV, a production
company. PV assists others in broadcasting live events and also produces
original programs for dk4 as well as for other television channels. PV owns and
operates eight large mobile vans used in the broadcasting of live events and for
the production of original television programming. These vans include all of the
necessary equipment required for these productions, including cameras and sound
equipment. PV employs the technicians such as cameramen and sound engineers who
are expert in the appropriate operation of the equipment. Therefore, PV can
offer a complete package of production equipment and personnel to broadcasters
who broadcast live events and to companies who produce original programming. One
of our primary objectives is for PV to become the leading production facility
house in Scandinavia. By the end of 2003
16
PV was among the three leading production companies in Denmark and has been
employed as a production company for the Danish Premier Soccer League and a
number of other sports productions.
BIO+
We acquired Bio+ in September 1999. As a result of a strategic alliance
with Fox Kids Europe in January 2000, we repackaged and relaunched the channel.
As repackaged, Bio+'s primary offering was Danish movies. In October 2001, we
combined the operations of Bio+ with those of dk4.
INTERNET PRODUCTS AND SERVICES
We sold the remainder of our businesses in Internet products and
services division during 2004 through the sale of our PKI services business, on
April 1, 2004, and our virus detection software and services business on
September 30, 2004. As a result, subsequent to September 30, 2004 our business
consists of our broadcast media division, which owns dk4, a Danish television
station and operates one of the largest television production companies in
Scandinavia, Prime Vision.
The following is a description of the Internet products and services we
provided through year 2004:
VIRUS SURVEILLANCE/DETECTION/SUPPORT, SECURITY PENETRATION
TESTING/ANALYSIS. Gartner research indicates that the IT security-consulting
sector represents the largest share of the Western European IT security market.
To address this sector, we offered the Scandinavian business community an array
of virus detection products and services marketed under our Virus 112 brand
name. Through our wholly-owned subsidiary, EuroTrust Virus112 A/S ("Virus112"),
we offered a suite of IT security consulting services including sophisticated
virus detection software, IT security support, security gap penetration
assessments and system vulnerability testing to more than 2,000 businesses in
Denmark and Norway. Offered on a subscription basis, Virus112's Early Warning
System scans the Internet for potential threats and immediately notifies its
clients via fax, email and text messaging of any potential outbreaks, minimizing
the risk of potential infections. In September 2001, Virus112 expanded its
business by offering IT security consulting services that emphasize risk
assessment and penetration testing services. In October 2002, Virus112 expanded
its product offerings by adding the following:
o "Virus112 Mail Scanning," a 24x7 e-mail surveillance and
virus-scanning, recognition and removal technology;
o "Virus112 Spam Scanner," a 24x7 automated guard against spam emails
which also provides the customer with a monthly report and online
access to information on email activity and blocked e-mails; and
o "EuroTrust Security Scanner," (ESS) a scanning system that scans
external IP addresses for potential security risk, to prevent viral
attacks through the Internet.
PUBLIC KEY INFRASTRUCTURE (PKI) SERVICES. PKI services, as well as
digital signatures and certificates, enable both companies and private
individuals to encrypt their online communications and ensure confidentiality.
Until our sale of this business to Verisign effective April 1, 2004, we sold PKI
services under the VeriSign Managed PKI Service (MPKI) and VeriSign Go Secure!
brands, and tailored them to meet the specific needs of enterprises that wished
to issue digital certificates to employees, customers, citizens or trading
partners.
17
In November 2000, we became part of VeriSign's Global Affiliate
Network, an expanding group of international service providers using common
technology, operating practices and infrastructure, compliant with the European
Union (EU) common criteria requirements, to deliver interoperable trust services
over the Internet. Under our Affiliate Agreement with VeriSign, as amended, we
provide(d) the following VeriSign trusted Internet infrastructure products and
services in Denmark, Norway, Sweden, Finland, Austria and Switzerland:
MPKI - MANAGED PKI-SOLUTIONS. MPKI is a managed service that
allows an organization to use our data processing infrastructure to
develop and deploy customized digital certificate services for use by
employees, customers and business partners. MPKI can be used to provide
digital certificates for a variety of applications, including:
controlling access to sensitive data and account information, enabling
digitally-signed e-mail, encryption of e-mail, or SSL sessions. MPKI
services can help customers create an online electronic trading
community, manage supply chain interaction and facilitate and protect
online credit card transactions.
GO SECURE! VeriSign Go Secure! services are a set of managed
application services that enable enterprises to quickly build digital
certificate-based security into their transaction and communication
applications. Go Secure! services are similar in functionality to MPKI
services and are designed to incorporate digital certificates into
existing e-mail, browsing applications, directory and virtual private
network devices. GoSecure(R) allows businesses to create a Virtual
Private Network (VPN) that integrates VeriSign's strong encryption
technology. GoSecure is also offered in cooperation with vendors of
server firewall products.
WEB SERVER DIGITAL CERTIFICATE SERVICES. Digital certificates are
electronic credentials that identify parties online, enabling encrypted online
communications and legally binding, valid digital signatures for online
transactions in e-commerce, financial services, supply-chain management, Virtual
Private Networks, and wireless and mobile commerce environments. Until April
2004, we offered a family of web server certificate services that allows
organizations to implement and operate secure websites that utilize the Secure
Sockets Layer, or SSL protocol or the Wireless Transport Layer Security, or
WTLS, protocol to establish their identities to customers and other websites
during electronic commerce transactions and communications over wired or
wireless internet protocol, or IP, networks. Without a digital certificate
installed on the website server the SSL and WTLS protocols cannot be utilized.
Given that we host more web sites on servers in our data center than any other
company in Denmark, we expect to take advantage of the current growth trend for
server security. Digital Ids can easily be created for customers and suppliers
through the MPKI administration solution.
APPLICATION ACCELERATION SERVICES. These are rapid deployment services
that secure information passed over applications such as Microsoft Exchange, SAP
and Virtual Private Networks (VPN) for e-commerce.
CONTENT SIGNING CERTIFICATES. In addition to Web Server Digital
Certificate services, until April 2004 we offered content signing certificates.
Content signing digital certificates enable developers, content providers,
publishers and vendors to digitally sign their content in order to authenticate
the source and provide assurance of the integrity of the content delivered to
end-users.
To expand and complement the services described above, our professional
services group, which includes experts in digital certificate architecture and
application integration, was staffed to provide a variety of design, development
and implementation services. These services included integrating with
18
existing applications and databases, consulting on policies and procedures
related to the management and deployment of digital certificates, training
classes on the latest developments in security technology and selecting the
necessary software and hardware to complement a digital certificate solution.
As a result of an independent examination of our PKI processing center
in Copenhagen, we received the prestigious WebTrust Seal of Assurance from KPMG.
The WebTrust seal, which is displayed on all of our web sites, indicates that we
have complied with the business standards prescribed by the American Institute
of Certified Public Accountants and the Canadian Institute of Chartered
Accountants concerning the issuance of digital certificates by certification
authorities and adopted by several European countries including Denmark.
Until December 2003, we also offered our customers a number of other
internet security products, including secure hosting, digital video surveillance
and secure remote backup services. In December 2003, as part of our plan to
intensify our focus on our television programming business and on providing
virus detection products and services, we sold EuroTrust Secure Hosting A/S, our
secure hosting subsidiary, EuroTrust Realtime Security A/S, our digital video
surveillance subsidiary, EuroTrust Sweden AB, our Swedish subsidiary, and the
assets related to EuroTrust NetVaulting A/S, our secure remote backup business.
REMOTE DATA BACKUP SERVICES. We provided remote data backup services to
more than 300 European businesses through EuroTrust NetVaulting A/S (formerly
known as WISEhouse Denmark A/S), a wholly-owned subsidiary of EuroTrust. Remote
backup services protect the data found on company servers from the threat of
fire, hardware failure, natural disasters, theft and viruses. The backup
technology is based on IBM's Tivoli Storage Manager software.
SECURE HOSTING. We provided secure web hosting services to more than
11,000 customers in Denmark, Sweden and Norway through EuroTrust Secure Hosting
A/S ("Hosting"). Hosting was created in January 2002 as a result of the
combination of our Digiweb activity with DHT Hosting ApS, a Danish automated
hosting company.
Our hosting services were based in our secure Internet data center in
Soeborg, Denmark. The center, designed with a wide range of physical security
features, including state-of-the-art smoke detection and fire suppression
systems, 24x7 secured access and video camera surveillance, as well as security
breach alarms, is capable of housing more than 1,500 servers and delivers one of
the strongest high-availability bandwidth capacities in Europe.
REAL TIME SECURITY. Through EuroTrust RealTime Security A/S, we offered
a full service digital video security system, which provided real-time video
monitoring and remote storage of the recording via a high speed Internet
connection to a central storage location. This system was able to provide
customers with the benefits of a complete video surveillance system without the
need to purchase and maintain costly video surveillance hardware required by
most traditional Closed Circuit Television ("CCTV") monitoring systems. The
system included, among other features, the following:
o Remote viewing and surveillance;
o Offsite recording and storage of the recordings in a secured
centralized location; and
o Email confirmation of alarms to minimize false alerts
19
DISTRIBUTION OF SALES
The following tables set out our revenues by category and region for
each of the years ended December 31, 2002, 2003 and 2004.
20
BREAKDOWN OF REVENUES BY CATEGORY(1)
2002 2003 2004 2004
------------------ ------------------ ------------------ -----------
DKK PERCENTAGE DKK PERCENTAGE DKK PERCENTAGE US$ PERCENTAGE
---------- ------------ ---------- ------------ --------- ------------ ------- ------------
(CURRENCY AMOUNTS ARE IN THOUSANDS)
Internet services 20,008 22% 21,203 19% 23 0% 4 0%
Broadcasting 72,020 78% 88,619 81% 91,013 100% 16,646 100%
---------- ------------ ---------- ------------ --------- ------------ -------- ------------
92,028 100% 109,822 100% 91,036 100% 16,650 100%
---------- ------------ ---------- ------------ --------- ------------ -------- ------------
BREAKDOWN OF REVENUES BY GEOGRAPHIC MARKET(1)
2002 2003 2004
DKK % DKK % DKK % USD
Denmark 91,095 99% 109,000 99.2% 84,510 93% 15,546
Norway 539 0.6% 417 0.4% - 0% -
Sweden 424 0.4% 405 0.4% 6,526 7% 1,194
-------------------- --------------------- -----------------------------------
92,028 100% 109,822 100% 91,036 100% 16,650
-------------------- --------------------- -----------------------------------
21
SEASONALITY
In Scandinavia it is common practice for businesses to close down in
July due to summer holidays. Therefore, the level of our consolidated activities
are usually lower in the third quarter than in the first, second and fourth
quarters.
INTELLECTUAL PROPERTY
We rely primarily on a combination of copyrights, trademarks, service
marks, restrictions on disclosure and other methods to protect our intellectual
property. We also enter into confidentiality agreements with our employees,
consultants and current and potential affiliates, customers and business
partners. We also generally control access to and distribution of documentation
and other proprietary information.
COMPETITION
BROADCAST MEDIA
In our broadcast business, we compete with channels that are carried by
more Cable providers, included in more "TV Packages", offered to cable
subscribers, and catering to a much larger viewing audience than we do. Until
2001, cable providers were subject to governmental regulations that limited
their programming to the programming provided by those channels chosen through a
referendum of subscribing households, every two years.
Presently, the only channels that cable providers are required to
include in their "TV Packages" are the publicly funded channels, i.e., DR, DR2,
TV2, (and one local TV station). We expect that the number of channels competing
to be included in those "TV Packages" will increase in the ensuing years. If
viewer preferences change and we are unsuccessful in addressing those changes in
our programming, we may lose favor with them and cable providers may choose to
replace us with a competitor.
GOVERNMENT REGULATION
Our broadcast station dk4 has been granted a license by the Danish
Board of Satellite and Cable. Our license obligates us to carry a certain mix of
programs I.E. no more than a certain percentage of our programs can be sports,
news, commercials, etc. If we change our program profile, we must advise the
Danish Board of Satellite and Cable. We believe that we are currently in
compliance with all of our license requirements.
SALES AND MARKETING
We market our dk4 television broadcast station through local
advertising sponsorships and participations in cable operator and cable
organization symposiums and direct marketing to individual cable operators. Our
market is dominated by three large operators that represent more than 80% of our
potential viewers. dk4 is currently carried by two of those operators.
Prime Vision produces programming for a large array of distributors of
content in the Scandinavian market. We market the Prime Vision services through
word of mouth from satisfied clients
22
as well as from the publicity we receive as the Company responsible for the
production of many important sporting events like soccer, basketball and boxing.
Prime Vision has established a well known reputation in broadcasting of live
sporting events and is involved in producing major sports events for large TV
channels in Denmark and Sweden. We also produce content for large channels like
DR, TV2, Viasat in Denmark, and STV, Canal Digital and Viasat in Sweden, which
is helpful for marketing the capability of Prime Vision.
C. ORGANIZATIONAL STRUCTURE OF THE COMPANY
The following is a list of our significant subsidiaries and their
jurisdiction of incorporation and our ownership interest in those subsidiaries.
COUNTRY OF INTEREST
SUBSIDIARY INCORPORATION OWNERSHIP
---------- ------------- ---------
Europe-Visions A/S (1) Denmark 100.0%
EuroTrust PKI Services A/S (2) Denmark 100.0% (Assets sold April 1, 2004)
EuroTrust Virus112 A/S (3) Denmark 100.0% Assets sold September 30, 2004
InAphone A/S (4) Denmark 60.0% Sold Jan. 1, 2005
------------------------------------
(1) Formerly known as Euro909Media A/S
(2) Formerly known as EuroTrust Denmark A/S.
(3) Formerly known as Virus112.com A/S.
(4) Formerly known as 909.909 A/S
Other significant operating subsidiaries consolidated under
Europe-Visions A/S and their jurisdiction of incorporation and our ownership
interest in those subsidiaries at December 31, 2004:
COUNTRY OF INTEREST
SUBSIDIARY INCORPORATION OWNERSHIP
---------- ------------- ---------
Ciac A/S Denmark 100.0%
Prime Vision A/S Denmark 100.0%
Arhustudiet A/S Denmark 100.0%
Publishing & Management ApS Denmark 51.0%
TV Akademiet A/S Denmark 100.0%
Formedia A/S Denmark 100.0%
Mobile Broadcasting A/S Denmark 100.0%
PROPERTY, PLANT AND EQUIPMENT
Our executive offices are located in Soeborg, Denmark, where we own
facilities which comprise 1,554 square meters of floor space and also, house our
Danish operations. As of April 1, 2004 we sublet approx. 600 square meters of
office space in Soeborg to VeriSign, and as of October 1, 2004 we sublet approx.
1,164 square meters of office space including the basement in Soeborg to Comendo
A/S, a provider
23
of managed anti-virus and anti-spam system solutions in Denmark and purchaser of
the assets of our EuroTrust Virus112 A/S subsidiary.
On April 1, 2005, we sold our building located at Poppelgardvej 11-13
in S0borg, Copenhagen to Lion Ejendomme ApS for DKK 20,000,000 in cash. At
December 31, 2004 the net book value of the building was DKK 19,638,000.
For our broadcasting media operations, we lease 2,233 square meters in
Copenhagen, Denmark, 1,534 square meters in Hvidovre, Denmark and 1,152 square
meters in Aarhus, Denmark. Furthermore, we lease three apartments in Aarhus for
a total of 459 square meters.
For our Internet services operations, until February 2005, we leased
1,130 square meters of floor space in Aarhus, Denmark, for our remote data
backup subsidiary, EuroTrust Net Vaulting. We sublet approximately 1,049 square
meters of office space in Aarhus to Munk IT, Metro Express and Ewire. These
subleases expired in the first quarter of 2005.
The total aggregate annual lease costs were approximately DKK 2,950,000
for 2004. The operating leases are cancelable by both parties through various
times between three and twelve months. We believe that the current facilities
for our media operations will be adequate for our purposes for at least the next
12 months. We also believe that there is a supply of alternative facilities
available in each of the locations where we operate, should we deem it desirable
to expand our facilities or otherwise change locations.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. OPERATING RESULTS
OVERVIEW
Until December 2001, our business operated in three distinct areas:
Internet products and services; broadcasting; and print and online media. In
early 2001 we made the strategic decision to focus primarily on providing
Internet infrastructure products and services and e-commerce solutions in
Scandinavia and selected west European markets and on key elements of our
broadcasting business. To that end, in 2001, we sold our domain name
registration, the remaining assets of our historical telecommunications business
and our print and online media businesses, and consolidated our television
programming business. In December 2003 and January, 2004, as part of our plan to
intensify our focus on our television programming business and on providing
virus detection products and services, we sold EuroTrust Secure Hosting A/S, our
secure hosting subsidiary, EuroTrust Realtime Security A/S, our digital video
surveillance subsidiary, EuroTrust Sweden AB, our Swedish subsidiary, and the
assets related to EuroTrust NetVaulting A/S, our secure remote backup business.
We sold our PKI services business on April 1, 2004 and our virus
detection software and services business on September 30, 2004.
As a result of these various transactions, subsequent to September 30,
2004 our business consists of our broadcast media division, which owns dk4, a
Danish television station and operates one of the largest television production
companies in Scandinavia, Prime Vision.
The proceeds from our divestitures in 2004 allowed us to invest more
than $10 million U.S. in Prime Vision. Prime Vision now owns one of Europe's
first High Definition mobile production units,
24
five fully digitalized mobile production units and two mobile analog production
units that we expect to rebuild into digital units during 2005. We use these
assets to produce content both for our own broadcast operations and for outside
clients
In addition to our television production operations, we continued to
expand our media content platforms in 2004. Our original television channel,
dk4, increased its subscriber base to record levels. Late in 2004, we also added
a new speciality television channel, 4SPORT, to focus on coverage of both Danish
sports, in cooperation with The Danish Sports Association, and international
sporting events of particular interest to Danish fans. The new channel is
currently in the testing phase of development and is projected to provide
coverage of, among other sports, boxing, volleyball and basketball.
We are in on-going negotiations with TDC on Cable to carry 4SPORT. The
early response to 4SPORT has been very encouraging. Given this response and the
response to new programming for dk4, we plan to focus on the development and
introduction of more speciality content platforms in 2005 and beyond.
In particular, we believe that dk4's long-standing coverage of the
European Parliament for Danish viewers should be extendible to a pan-European
audience. The European Parliament is desirous of making the citizens of the
member countries of the European Union ("EU") aware of the increased importance
of the EU and the influence it has on the politics of its independent member
nations. To support that objective, we have discussed with representatives of
the European Parliament, the proposed establishment of Europa Kanalen ("The
European Channel") to provide coverage of the EU political process for viewers
in other countries. We hope to begin coverage in 2005 or 2006 in three countries
and then to jointly assess the results of the European Channel with the European
Parliament to determine whether coverage throughout Europe is practical. If
successful, this could provide us with a Europe-wide content platform with
substantial growth opportunities. Since content providers are historically among
the most financially successful media operations, we plan to allocate
significant resources to this initiative.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States (GAAP). The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities. Management bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not
readily available from other sources. Actual results may differ from these
estimates under different assumptions or conditions. We believe that the
estimates, assumptions and judgments involved in the accounting policies
described below have the greatest potential impact on our consolidated financial
statements, so we consider these to be our critical accounting policies. See
"Summary of Significant Accounting Policies" in the consolidated financial
statements for more information about these critical accounting policies, as
well as descriptions of other significant accounting policies.
25
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. We
regularly review the adequacy of our accounts receivable allowance after
considering the size of the accounts receivable balance, each customer's
expected ability to pay and our collection history with each customer. We review
significant invoices that are past due to determine if an allowance is
appropriate based on the risk category using the factors described above. We
also monitor our accounts receivable for any build up of concentration to any
one customer, industry or geographic region. At December 31, 2004 we have two
customers who account for approximately 33% and 22% of our outstanding
receivables.
If we are unable to collect these receivables it would have a significant
negative impact on our operating income. We require all acquired companies to
adopt our credit policies. The allowance for doubtful accounts represents our
best estimate, but changes in circumstances relating to accounts receivable may
result in a requirement for additional allowances in the future.
LONG-TERM INVESTMENTS
We invest in securities of companies for business and strategic
purposes. These investments are in the form of equity securities of private
companies for which there is no public market. For a specification of the
investments you should refer to Note 3 of the accompanying consolidated
financial statements. These companies are typically in the early stage of
development and are expected to incur substantial losses in the near-term.
Therefore, we may never realize any return on these investments. Further, if
these companies are not successful, we could incur charges related to
write-downs or write-offs of these investments.
We review, the assumptions underlying the operating performance from
these privately held companies on an annual basis. This information may be more
limited, may not be as timely and may be less accurate than information
available from publicly traded companies. If we determine that an
other-than-temporary decline in fair value of the investment exists, we
write-down the investment to its fair value and record the related write-down as
an investment loss in our consolidated statement of operations.
We recorded a write-down of our long term investments and marketable
securities of approximately DKK 14.9 million in the year ended December 31,
2004.
26
VALUATION OF LONG-LIVED ASSETS
Our long-lived assets totaled DKK 92.6 million, as of December 31,
2004, which consist primarily of property and equipment subject to amortization
and depreciation. We test long-lived assets for recoverability whenever events
or changes in circumstances indicate that the carrying amount of such an asset
may not be recoverable. Such events or circumstances include, but are not
limited to:
o a significant decrease in the market price of a long-lived asset;
o a significant adverse change in the extent or manner in which a
long-lived asset is being used or in its physical condition;
o a significant adverse change in legal factors or in the business
climate that could affect the value of a long-lived asset;
o a current-period operating or cash flow loss combined with a history of
operating or cash flow losses or a projection or forecast that
demonstrates continuing losses associated with the use of a long-lived
asset; and
o a current expectation that it is probable that a long-lived asset will
be sold or otherwise disposed of significantly before the end of its
previously estimated useful life.
An impairment loss would be recognized when the sum of the undiscounted
future net cash flows expected to result from the use of the asset and its
eventual disposition is less than its carrying amount. Such impairment loss
would be measured as the difference between the carrying amount of the asset and
its fair value, which is usually based on future estimated discounted cash
flows. Significant judgment is required in the forecasting of future operating
results, which are used in the preparation of projected cash flows. If we made
different judgments or utilized different estimates, material differences may
result in write-downs of net long-lived and intangible assets, which would be
reflected by charges to our operating results for any period presented.
We recorded no impairment charge in the years ended December 31, 2003
and December 31, 2004.
GOODWILL
We account for acquisitions under the purchase method of accounting,
typically resulting in goodwill. Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible Assets, requires us to assess
goodwill for impairment at least annually in the absence of an indicator of
possible impairment and immediately upon an indicator of possible impairment.
The statement requires estimates of the fair values of our reporting units. If
we determine the fair values of a reporting unit is less than the carrying
amount recorded on our Consolidated Balance Sheet, we must measure any
impairment loss. The measurement of the impairment loss involves comparing the
fair value of the reporting unit with the fair values of the recognized and
unrecognized assets and liabilities to arrive at an implied fair value of
goodwill, which is then compared to the book value of the goodwill of the
reporting unit. At December 31, 2004, we had DKK 24.56 million of goodwill
recorded on our Consolidated Balance Sheet. The entire goodwill was recorded in
our Broadcasting media segment.
We performed our annual impairment assessment of goodwill in accordance
with the provisions of SFAS No. 142. In testing for potential impairment, we
measured the estimated fair value of our reporting units based upon discounted
future operating cash flows using a discount rate reflecting our estimated
discount rate for the specific reporting units. Differences in assumptions used
in
27
projecting future operating cash flows and estimated discount rate could have a
significant impact on the determination of impairment amounts.
In estimating future cash flows we used our internal budgets. Our
budgets were based on recent sales data for existing products and expected
growth rates for the Internet security services and framework agreements entered
into with customers in the broadcasting segment. These budgets were based on
current royalty percentages, expected staffing levels and expected inflation.
Due to the numerous variables associated with our judgments and
assumptions relating to the valuation of the reporting units and the effects of
changes in circumstances affecting these valuations, both the precision and
reliability of the resulting estimates are subject to uncertainty, and as
additional information becomes known, we may change our estimates.
For the year ended December 31, 2004 base on our annual impairment
assessment of goodwill, there were impairment of DKK 965 thousand
INVENTORIES
The inventory principally consists of 38,000 IBM Tivoli licenses
relating to our remote back-up business. Inventories are stated at the lower of
cost or market with cost determined on the basis of the first in, first out
method.
Management must make estimates about the future customer demand for IBM
Tivoli licenses when establishing the appropriate loss provisions for inventory.
When making these estimates, we consider general economic conditions and
historical sales of licenses, the market acceptance of the current generation of
licenses, the available market for these products and expected sales prices for
the licenses. These judgments must be made in the context of our customers'
shifting technology needs. A misinterpretation or misunderstanding of any of
these conditions could result in significant changes to the provisions
determined to be appropriate as of the balance sheet date.
We recorded an inventory loss provision related to our IBM Tivoli
licenses, of DKK 21,651 in 2002. During 2003 we received a credit of DKK 3,367
recorded as a reduction to cost of sales for the return of 7,000 IBM Tivoli
licenses.
TAX ASSET VALUATION
We currently have deferred tax assets resulting from net operating loss
carry forwards, and deductible temporary differences, all of which will reduce
taxable income in the future. We assess the realization of these deferred tax
assets when necessary to determine whether an income tax valuation allowance is
required. Based on available evidence, both positive and negative, we determine
whether it is more likely than not that all or a portion of the remaining net
deferred tax assets will be realized. The main factors that we consider include:
o future earnings potential determined through the use of internal
forecasts;
o cumulative losses in recent years;
o history of loss carry forwards and other tax assets expiring;
o the carry forward period associated with the deferred tax assets; and
o the nature of the income that can be used to realize the deferred tax
asset.
28
If it is our belief that it is more likely than not that some portion
of these assets will not be realized, an income tax valuation allowance is
recorded. Our gross tax assets and valuation allowances were DKK 113.0 million
and DKK 109.0 million respectively, as of December 31, 2004 resulting in a net
deferred tax asset of DKK 4.0 million.
See Note 14 to our financial statements for further details regarding
this deferred tax asset.
If market conditions improve and future results of operations exceed
our current expectations, our existing tax valuation allowances may be adjusted,
resulting in future tax benefits. Alternatively, if market conditions
deteriorate further or future results of operations are less than expected,
future assessments may result in a determination that some or all of the net
deferred tax assets are not realizable. As a result, we may need to establish
additional tax valuation allowances for all or a portion of the net deferred tax
assets.
CONSOLIDATED RESULTS
YEAR ENDED DECEMBER 31, 2004 COMPARED WITH YEAR ENDED DECEMBER 31, 2003
Net revenue for the year ended December 31, 2004 was DKK 91.0 million,
a decrease of DKK 18.8 million, or 17.1%, compared to revenue of DKK 109.8
million for the year ended December 31, 2003. The table below compares revenue
for both years on a segment-by-segment basis.
REVENUE AMOUNT OF PERCENTAGE
INCREASE INCREASE
2004 2003 (DECREASE) (DECREASE)
--------- --------- --------- -----------
(IN THOUSANDS OF DKK)
Internet services 23 21,203 (21,180) (99.9%)
Broadcast media 91,013 88,619 2,394 2.7%
TOTAL 91,036 109,822 (18,786) (17.1%)
The Internet services segment showed a decrease in revenues and the
broadcast media segment showed an increase in revenues. The decrease in revenue
in our Internet services segment is primarily attributable to the sales of our
remote back-up business as of December 1, 2003 and the sale of our secure
hosting business as of January 1, 2004. The increase in revenue in our broadcast
media segment reflects the increase in number of subscribers to dk4, our
television channel, and the increase of revenue in Prime Vision, our production
company.
Total operating expenses for the year ended December 31, 2004 were DKK
110.8 million, a decrease of DKK 5.5 million, or 4.7%, from the total operating
expenses of DKK 116.3 million for the year ended December 31, 2003. This
decrease is primarily attributable to decreases in Cost of sales and General and
administrative, expenses resulting primarily from the sales of the businesses in
our Internet services segment. The table below shows our operating expenses by
category on a segment-by segment basis.
29
COST OF SALES AMOUNT OF PERCENTAGE
INCREASE INCREASE
2004 2003 (DECREASE) (DECREASE)
----------- ----------- ------------ ----------
(IN THOUSANDS OF DKK)
Internet services 0 7,773 (7,773) (100.0%)
Broadcast media 60,349 58,045 2,304 4.0%
----------- ----------- ------------ ----------
TOTAL 60,349 65,818 (5,469) (8.3%)
SELLING AND MARKETING AMOUNT OF PERCENTAGE
INCREASE INCREASE
2004 2003 (DECREASE) (DECREASE)
----------- ----------- ------------ ----------
(IN THOUSANDS OF DKK)
Internet services 3,502 5,410 (1,908) (35.3%)
Broadcast media 14,225 12,085 2,140 17.7%
----------- ----------- ------------ ----------
TOTAL 17,727 17,495 232 1.3%
GENERAL AND ADMINISTRATIVE AMOUNT OF PERCENTAGE
INCREASE INCREASE
2004 2003 (DECREASE) (DECREASE)
----------- ----------- ------------ ----------
(IN THOUSANDS OF DKK)
Internet services 8,905 14,344 (5,439) (37.9%)
Broadcast media 12,638 12,537 101 0.8%
----------- ----------- ------------ ----------
TOTAL 21,543 26,881 (5,338) (19.9%)
DEPRECIATION,
AMORTIZATION AMOUNT OF PERCENTAGE
AND WRITE DOWN INCREASE INCREASE
2004 2003 (DECREASE) (DECREASE)
----------- ----------- ------------ ----------
(IN THOUSANDS OF DKK)
Internet services 2,071 1,311 760 (58.0%)
Broadcast media 9,069 4,764 4,305 90.4%
----------- ----------- ------------ ----------
TOTAL 11,140 6,075 5,065 83.4%
In our Internet services segment the operating expenses generally
decreased due to our continued focus on lowering expenses generally and the
significant cost reduction from the divestiture of the businesses in this
segment.
In our broadcast media segment operating expenses generally increased
due to the increase in production facilities and the increase in expenses
related to the growth in Prime Vision as well as the increase of new subscribers
to dk4 and the related variable costs related to the increase number of
subscribers and our increased focus on further developing and enhancing our
broadcast media business.
30
For the year ended December 31, 2004, the gross profit for our Internet
services segment was DKK 23 thousand, or a margin of 100% of segment revenues.
For the year ended December 31, 2003, the gross profit for our Internet services
business was DKK 13.4 million, or a margin of 63.3% of segment revenues.
In the case of our broadcast media segment, the gross profit for 2004
was DKK 30.7 million, or 33.7% of segment revenues while the gross profit margin
for 2003 was DKK 30.6 million, or 34.5% of segment revenues. This decrease is
primarily attributable to the increase in cost resulting from our increased
focus on further developing and enhancing our broadcast media business.
For the year ended December 31, 2004 our operating loss increased by
DKK 13.3 million to DKK 19.7 million compared to a loss of DKK 6.5 million for
the year ended December 31, 2003.
The operating loss for our Internet services segment increased by DKK
6.9 million to DKK 14.5 million compared to a loss of DKK 7.6 million for the
year ended December 31, 2003. This increase is primarily attributable to the
decrease in revenues due to the divestiture of the businesses in this segment.
For our broadcast media segment, we incurred an operating loss of DKK
5.3 million compared to an operating income of DKK 1.2 million for the year
ended December 31, 2003. This decrease is attributable to the increase in
operating expenses due to our increased focus on further developing and
enhancing our broadcast media business.
For 2004, we had interest income of DKK 0.3 million and interest
expense of DKK 1.2 million. For 2003, interest income was DKK 0.2 million and
interest expense was DKK 1.6 million. The increase in interest income in 2004
reflects the increase in our cash balances from the sale of our businesses. The
decrease in interest expense in 2004 reflects a one time guarantee payment of
DKK 1.1 million in 2003 not incurred in 2004.
For 2004, we had a net foreign exchange (loss) of DKK 0.8 million
compared to a net foreign exchange loss of DKK 1.8 million in 2003.
For 2004, based on our review of the valuation of long term investments
and marketable securities held at December 31, 2004, we wrote down a total
amount of DKK 14.9 million.
Our Net income for the year ended December 31, 2004 increased to DKK
58.5 million compared to a Net loss of DKK 6.3 million for the year ended
December 31, 2003. The increase in our Net income of DKK 64.8 million is
primarily attributable to one time gains from the sale of the Internet segment
businesses in the aggregate of DKK 83.6 million offset by a one time write down
of long term investments and marketable securities of DKK 14.9 million.
YEAR ENDED DECEMBER 31, 2003 COMPARED WITH YEAR ENDED DECEMBER 31, 2002
Net revenue for the year ended December 31, 2003 was DKK 109.8 million,
an increase of DKK 17.8 million, or 19.3%, compared to revenue of DKK 92.0
million for the year ended December 31, 2002. The table below compares revenue
for both years on a segment-by-segment basis.
31
REVENUE AMOUNT OF PERCENTAGE
INCREASE INCREASE
2003 2002 (DECREASE) (DECREASE)
------- ------- -------- ---------
(IN THOUSANDS OF DKK)
Internet services 21,203 20,008 1,195 6.0%
Broadcast media 88,619 72,020 16,599 23.0%
TOTAL 109,822 92.028 17,794 19.3%
Both the Internet services segment and the broadcast media segment
showed an increase in revenues. The increase in revenue in our Internet services
segment is attributable to an increase in our remote back-up business offset
against a small decrease in our secure hosting business. The increase in revenue
in our broadcast media segment reflects the increase in number of subscribers to
dk4, our television channel, and the increase of revenue in Prime Vision, our
production company.
Total operating expenses for the year ended December 31, 2003 were DKK
116.3 million, a decrease of DKK 44.7 million, or 27.8%, from the total
operating expenses of DKK 161.0 million for the year ended December 31, 2002.
This decrease resulted primarily from a decrease in amortization and write downs
and goodwill impairment. The table below shows our operating expenses by
category on a segment-by segment basis.
COST OF SALES AMOUNT OF PERCENTAGE
INCREASE INCREASE
2003 2002 (DECREASE) (DECREASE)
------------- -------------- --------------- ---------------
(IN THOUSANDS OF DKK)
Internet services 7,773 34,754 (26,981) (77.6%)
Broadcast media 58,045 40,534 17,511 43.2%
------------- ------------ -------------- -------------
TOTAL 65,818 75,288 (9,470) (12.6%)
SELLING AND MARKETING AMOUNT OF PERCENTAGE
INCREASE INCREASE
2003 2002 (DECREASE) (DECREASE)
------------- ------------ -------------- -------------
(IN THOUSANDS OF DKK)
Internet services 5,410 8,706 (3,296) (37.9%)
Broadcast media 12,085 10,150 1,935 19.1%
------------- ------------ -------------- -------------
TOTAL 17,495 18,856 (1,361) (7.2%)
GENERAL AND ADMINISTRATIVE AMOUNT OF PERCENTAGE
INCREASE INCREASE
2003 2002 (DECREASE) (DECREASE)
------------- -------------- --------------- ---------------
(IN THOUSANDS OF DKK)
Internet services 14,344 20,788 (6,444) (31.0%)
Broadcast media 12,537 9,934 2,603 26.2%
------------- ------------ -------------- -------------
TOTAL 26,881 30,722 (3,841) (12.5%)
32
DEPRECIATION,
AMORTIZATION AND AMOUNT OF PERCENTAGE
WRITE DOWN INCREASE INCREASE
2003 2002 (DECREASE) (DECREASE)
------------- ------------ -------------- -------------
(IN THOUSANDS OF DKK)
Internet services 1,311 31,306 (29,995) (95.8%)
Broadcast media 4,764 4,828 (64) (1.3%)
------------- ------------ -------------- -------------
TOTAL 6,075 36,134 (30,059) (83.2%)
In our Internet services segment the operating expenses generally
decreased due to a significant non-reoccurring expense in 2002, included in Cost
of sales, related to the IBM Tivoli licenses for our remote back-up business, a
reduction in general administrative costs and our continued focus on lowering
expenses generally.
In our broadcast media segment operating expenses generally increased
due to the increase in production facilities and the increase in expenses
related to the growth in Prime Vision as well as the increase of new subscribers
to dk4 and the related variable costs related to the increase number of
subscribers and our increased focus on further developing and enhancing our
broadcast media business.
For the year ended December 31, 2003, the gross profit for our Internet
services segment was DKK 13.4 million, or a margin of 63.3% of segment revenues.
For the year ended December 31, 2002, the gross loss for our Internet services
business was DKK 14.7 million, or a loss margin of 73.7% of segment revenues.
This increase in gross profit margin is mainly attributable to a significant one
time expense included in Cost of sales for 2002 which is related to the IBM
Tivoli licenses for our remote back-up business.
In the case of our broadcast media segment, the gross profit for 2003
was DKK 30.6 million, or 34.5% of segment revenues while the gross profit margin
for 2002 was DKK 31.5 million, or 43.7% of segment revenues. This decrease is
primarily attributable to the increase in cost resulting from our increased
focus on further developing and enhancing our broadcast media business.
For the year ended December 31, 2003 our operating loss decreased by
DKK 62.6 million to DKK 6.4 million compared to a loss of DKK 69.0 million for
the year ended December 31, 2002.
The operating loss for our Internet services segment decreased by DKK
67.9 million to DKK 7.6 million compared to a loss of DKK 75.5 million for the
year ended December 31, 2002. This decrease is primarily attributable to the
decrease in the write down of goodwill and other assets. In the Internet
services segment, we depreciated and wrote down approximately DKK 1.3 million
for the year ended December 31, 2003 compared to DKK 31.3 million for the year
ended December 31, 2002.
The operating income for our broadcast media segment decreased to DKK
1.2 million compared to an operating income of DKK 6.6 million for the year
ended December 31, 2002. This decrease is attributable to the increase in
operating expenses due to our increased focus on further developing and
enhancing our broadcast media business.
For 2003, we had interest income of DKK 0.2 million and interest
expense of DKK 1.6 million. For 2002, interest income was DKK 1.8 million and
interest expense was DKK 1.0 million. The reduction in interest income in 2003
reflects our lower cash balances during the year due to increased capital
expenditures. The increase in interest expense in 2003 reflects an increase in
our borrowings during the year.
33
For 2003, we had a net foreign exchange (loss/increase) of DKK 1.8
million compared to a net loss of DKK 5.2 million in 2002. The increase is
mainly due to the adverse developments in the US dollar exchange rate in 2002.
For 2003, we wrote down long term investments by DKK 0.2 million
compared to a write down of DKK 18.3 million for 2002.
Our net loss for the year ended December 31, 2003 was DKK 6.3 million
compared to a net loss of DKK 283.3 million for the year ended December 31,
2002. The decrease in our net loss of DKK 277 million is primarily attributable
to the decrease in the loss from operations of the internet services segment in
2003 due to the sale of most of the segment businesses in 2003.
B. LIQUIDITY AND CAPITAL RESOURCES
Historically, our primary cash needs have been for capital expenditures
and to fund operating losses. At December 31, 2004, our cash and cash
equivalents totaled DKK 6.8 million compared to cash and cash equivalents
totaling DKK 9.4 million at December 31, 2003. At December 31, 2004 the ratio of
current assets to current liabilities was 0.67 to 1. Our current assets
primarily reflect our cash and cash equivalents, restricted cash and accounts
receivables.
At December 31, 2004, we had secured lines of credit from banks
totaling DKK 9.0 million, of which DKK 8.4 million have been drawn, and an
outstanding note payable, due in September 2009, in the principal amount of DKK
3.84 million which accrues interest at a rate of 5.5% per annum and is payable
in equal monthly installments. Interest on the secured lines of credit is
payable on the line at a floating rate based on the market rates of the major
banks. The weighted average interest rate as of December 31, 2004 was 5.5%. In
Denmark, a line of credit, such as that used by us, can be cancelled upon three
months notice. Any termination would result in the principal and interest
becoming due and payable immediately. The line of credit has been used for
working capital purposes.
For the year ended December 31, 2004, cash used in operations
(including cash used in discontinued operations) was DKK 10.1 million compared
to DKK 18.5 million for the prior year, a decrease of DKK 8.4 million.
For the year ended December 31, 2004, cash provided by investing
activities (including cash used in discontinued operations) was DKK 5.5 million
compared to cash used in investing activities of DKK 13.4 million for the prior
year, an increase of DKK 18.9 million. The increase is primarily attributable to
the proceeds from the sale of the businesses in the Internet services segment,
which increased by DKK 60.0 million in 2004 compared to 2003.
For the year ended December 31, 2004, cash provided by financing
activities (including cash used in discontinued operations) was DKK 2.1 million
compared to cash provided by financing activities of DKK 2.6 million for the
prior year, a decrease of DKK 0.5 million. This decrease is primarily due to
purchases of treasury stock and a net change in restricted cash in the aggregate
of DKK 16.2 million partially off-set by an increase of DKK 13.1 million net
change in short- and long-term borrowings, and a DKK 1.7 million reduction in
lease payments.
Our capital expenditures for the year ended December 31, 2004 were DKK
31.2 million. These expenditures primarily relate to purchase of equipment in
our media segment.
34
On January 1, 2005, we received cash of DKK 1 in connection with the
sale of the subsidiary, InAphone A/S, through which we engaged in the
development and marketing of mobile phone software technologies.
We believe that our cash on hand and the positive trend of our
operating cash flow together with borrowings currently available and other
potential sources of funds as described above will be sufficient to fund our
anticipated working capital needs and capital spending requirements in the
foreseeable future. However, if we were to incur any unanticipated expenditures
or the positive trend of our operating cash flow does not continue, such
circumstances could put a substantial burden on our cash resources.
CONTRACTUAL OBLIGATIONS (in thousands of DKK)
-------------------------------- -------- ---------- ------------- ------------
TOTAL
CONTRACTUAL OBLIGATIONS 2005 LATER YEARS OBLIGATIONS
-------------------------------- -------- ---------- ------------- ------------
Capital leases 1,560 4,269 5,829
-------------------------------- -------- ---------- ------------- ------------
Operating leases 1,115 2,894 4,009
-------------------------------- -------- ---------- ------------- ------------
Film Rights 2,109 0 2,109
-------------------------------- -------- ---------- ------------- ------------
TOTAL CONTRACTUAL OBLIGATIONS 4,784 7,163 11,947
-------------------------------- -------- ---------- ------------- ------------
INFLATION
We do not believe that inflation had a material impact on our results
of operations.
COMMITMENTS
In November 2000, we became part of VeriSign's Global Affiliate
Network, an expanding group of international service providers using common
technology, operating practices and infrastructure, compliant with the European
Union (EU) common criteria requirements, to deliver interoperable trust services
over the Internet. VeriSign is the leading provider of Internet infrastructure
services in the world. Under our Affiliate Agreement with VeriSign, as amended,
we provide VeriSign Internet infrastructure products and services in Denmark,
Norway, Sweden, Finland, Austria and Switzerland. In February 2003 the Affiliate
Agreement with VeriSign was amended, which, among other things, extended the
term of the agreement for an additional 4 years through December 31, 2010 and
reduced the minimum royalty payments and annual fee due to VeriSign for the year
ending December 31, 2003 from approximately DKK 49.7 million ($7.0 million) to
approximately DKK 16.3 million ($2.3 million). The minimum fee for the first
quarter of 2004 was $327,531 pursuant to an agreement with VeriSign. On April 1,
2004 we sold our PKI services business to VeriSign, Inc.
In January 2002, in connection with the combination of our Digiweb
activity with DHT Hosting ApS (a Danish automated hosting company) to form
EuroTrust Secure Hosting A/S, in which we have a 75% ownership interest and DHT
has a 25% ownership interest. DHT had an option to sell its 25% interest in
Secure Hosting to us in 2004 at a price based on the future profitability of
Secure Hosting or
35
for a minimum of DKK 2.5 million. On January 1, 2004 we sold our hosting
business to Mondo A/.S and the DHT option was cancelled.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs". SFAS
No. 151 requires abnormal amounts of inventory costs related to idle facility,
freight handling and wasted material (spoilage) to be recognized as
current-period charges. In addition, SFAS No. 151 requires that allocation of
fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. The Company will be required to adopt the
provisions of SFAS No. 151 for fiscal years beginning after June 15, 2005.
Management believes the provisions of this Standard will no effect on our
financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based
Payment". This Statement revises SFAS No. 123, "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees."
SFAS No. 123(R) requires that the compensation cost relating to
share-based payment transactions be recognized in financial statements. The cost
will be measured based on the fair value of the instruments issued. The Company
will be required to apply SFAS No. 123(R) as of the first fiscal that begins
after June 15, 2005. Accordingly, the Company will adopt SFAS No.123(R) as of
January 1, 2006. Management is currently evaluating the impact SFAS No. 123(R)
will have on the Company's results of operations as a result of adopting this
new Standard. Upon adopting SFAS 123(R) the Company's income will decrease as a
result of the additional compensation expense if additional options are granted.
In January 2003, the FASB issued Interpretation No. 46, "CONSOLIDATION
OF VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ACCOUNTING RESEARCH BULLETIN
("ARB") NO. 51." In December 2003, the FASB issued a revision to Interpretation
No. 46, and interpretation of ARB Opinion No. 51 ("FIN 46R"). FIN 46R clarifies
the application of ARB 51 "CONSOLIDATED FINANCIAL STATEMENTS," to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support provided by any parties, including the equity holders. FIN 46R requires
the consolidation of these entities, known as variable interest entities
("VIE's"), by the primary beneficiary of the entity. The primary beneficiary is
the entity, if any, that will absorb a majority of the entity's expected losses,
receive a majority of the entity's expected residual returns, or both.
Among other changes, the revisions of FIN 46R (a) clarified some
requirements of the original FIN 46, which had been issued in January 2003, (b)
eased some implementation problems, and (c) added new scope exceptions. FIN 46R
deferred the effective date of the interpretation for public companies to the
end of the first reporting period ending after March 15, 2004, except that all
public companies must at a minimum apply the unmodified provisions of the
interpretation to entities that were previously considered "special-purpose
entities" in practice and under the FASB literature prior to the issuance of FIN
46R by the end of the first reporting period ending after December 15, 2003.
Among the scope expectations, companies are not required to apply FIN
46R to an entity that meets the criteria to be considered a "business" as
defined in the interpretation unless one or more of four named conditions exist.
FIN 46R applies immediately to a VIE created or acquired after January 31, 2003.
EuroTrust does not have any interests in VIE's and the adoption of FIN 46R did
not have a material impact on EuroTrust financial position, results of
operations or cash flows.
36
In March 2004, the FASB issued EITF Issue No. 03-1 ("EITF 03-1"), "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments." EITF 03-1 includes new guidance for evaluating and recording
impairment losses on debt and equity instruments, as well as new disclosure
requirements for investments that are deemed to be temporarily impaired. The
accounting guidance provided in EITF 03-1 is effective for fiscal years
beginning after June 15, 2004, while the disclosure requirements are effective
for annual periods ending after June 15, 2004. The Company does not expect the
adoption of EITF 03-1 will have a material impact on its financial position,
results of operations, or cash flows.
OFF BALANCE SHEET ARRANGEMENTS
The Company is not aware of any material transactions which are not
disclosed in its consolidated financial statements.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES]
A. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth, as of April 1, 2005, the name,
position, age, principal occupation and address and the date on which they first
became an officer or director for our directors and senior management.
DATE BECAME A
NAME AND POSITION AGE PRINCIPAL OCCUPATION AND ADDRESS DIRECTOR/OFFICER
------------------------------------ ------- ------------------------------------------------- -------------------
Aldo M.N. Petersen Chief Executive Officer of
President, Chief Executive EuroTrust A/S
Officer, Chief Operating Poppelgaardvej 11-13
Officer, Managing director, and 43 2860 Soeborg
director........................ Denmark January 1988
Soren Degn Chief Financial Officer of
Chief Financial Officer......... 36 EuroTrust A/S
Poppelgaardvej 11-13
2860 Soeborg
Denmark September 2003
Karoly Laszlo Nemeth Chairman of the Board of
Chairman of the board........... 62 Nemeth & Sigetty A/S
Frederiksgade 21,4.
1265 Copenhagen
Denmark January 1988
John J. Stuart, Jr.(1)(2) Chief Financial Officer of
Director........................ 65 Irvine Sensors Corporation
3001 Redhill Avenue
Costa Mesa, CA 92626-4532
USA May 1998
37
Robert M. Gutkowski (1)(2) Consultant
Director........................ 57 c/o EuroTrust A/S
Poppelgaardvej 11-13
2860 Soeborg
Denmark May 2004
Jan Berger(1)(2) 62 Management Consultant
Director..................... c/o EuroTrust A/S
Poppelgaardvej 11-13
2860 Soeborg
Denmark May 2003
------------------------
(1) Member, audit committee of the Board of Directors. (2) Member, compensation
committee of the Board of Directors.
ALDO M.N. PETERSEN, PRESIDENT, CHIEF EXECUTIVE OFFICER, CHIEF OPERATING OFFICER,
MANAGING DIRECTOR AND DIRECTOR
Mr. Petersen has been our President, Chief Executive Officer, Managing
Director and a member of our board of directors since January 1988. He also
serves as a member of the board for several of our wholly-owned subsidiaries,
and is an investor of F.C. Copenhagen, the Copenhagen professional soccer team.
Mr. Petersen holds a degree in economics from the Copenhagen Business School.
SOREN DEGN, CHIEF FINANCIAL OFFICER
Mr. Degn has been our chief financial officer since September 2003. He
also serves as a member of the board for several of our wholly-owned
subsidiaries. Prior to this appointment he served as our Corporate Finance
Director since 2001. Mr. Degn spent 5 years with Kampsax A/S (a consultancy
firm) and 7 years with KPMG in Denmark. Mr. Degn has a Graduate Diploma in
Business Administration in accountancy and a MSC (Business Administration and
Auditing) in financial planning and control from the Copenhagen Business School.
KAROLY LASZLO NEMETH, CHAIRMAN OF THE BOARD
Mr. Nemeth was elected to our board of directors in January 1988 and
also serves as a member of the board for several of our subsidiaries.. He is a
partner in and chairman of the board of Nemeth & Sigetty A/S, a law firm that
performs legal services for us. He also serves on the board of various privately
held Scandinavian companies.
JOHN J. STUART, JR., DIRECTOR
Mr. Stuart was elected to our Board of Directors in May 1998. Since
January 1983 Mr. Stuart has been employed by Irvine Sensors Corporation ("ISC"),
Costa Mesa, California USA, a developer of proprietary technologies to produce
extremely compact packages of solid state microcircuitry. He currently serves as
ISC's Senior Vice President and Chief Financial Officer, positions he has held
since November 1998 and July 1985, respectively. Between July 1985 and February
1995, he also held the position of ISC's treasurer and was reappointed to this
position in November 1998. Mr. Stuart holds a degree in Industrial Management
from the Massachusetts Institute of Technology.
38
ROBERT M. GUTKOWSKI, DIRECTOR
Mr. Gutkowski was elected to our Board of Directors in May 2004. Mr.
Gutkowski currently provides consulting services to business in the sports and
entertainment industries. He recently advised the New York Yankees in regard to
the creation of the YES Network, a regional sports and entertainment network. He
previously served as chief executive officer of the Marquee Group, Inc., a
worldwide sports and entertainment firm that managed, produced and marketed
sports and entertainment events and provided representation for athletes,
entertainers and broadcasters. From 1991 until 1994, he was President of Madison
Square Garden, Inc. ("MSG) where he was responsible for the operations of the
New York Knickerbockers basketball team, the New York Rangers hockey club and
MSB Communications, which included the MSG Television Network.
JAN BERGER, DIRECTOR
Mr. Berger was elected to our Board of Directors in May 2003. Mr.
Berger has been a Management Consultant since 1998. He has more than 24 years of
experience in the Information Technology (IT) industry and has held various top
management positions with leading IT companies. In addition, Mr. Berger has
served as a board member at several companies including, chairman of the board
of Skrivervik Data, a SUN Microsystems distributor in Norway. Mr. Berger has
degree in Business Economics and Administration with an emphasis on Sales and
Marketing.
There are no family relationships among any of our directors and
executive officers or those of our subsidiaries.
B. COMPENSATION
EXECUTIVE COMPENSATION
Cash compensation paid by us and our subsidiaries for the year ended
December 31, 2004 to our directors and senior management for services in all
capacities, other than professional fees, totaled approximately DKK 4.0 million
(approximately $732,000). In addition, we maintain a standard pension plan for
our executive officers under the terms of which we contribute an amount equal to
15% of their annual salary to the plan. The total contribution for 2004 totaled
approximately DKK 315,000 (approximately $58,000).
We entered into new employment agreements with Aldo M.N. Petersen, our
Chief Executive Officer and Soren Degn, our Chief Financial Officer, each of
which is effective as of January 1, 2005.
The agreement with Mr. Petersen provides, among other things, for an
annual salary of DKK 1.8 million an annual vacation payment of DKK 50,000 and a
10 year option to purchase 225,000 ADSs at a price of DKK 4.75 per ADS (the
market price of our ADSs on the date of the grant). Mr. Petersen's employment
agreement will initially expire on December 31, 2007. However the agreement will
39
automatically be extended for unlimited 1-year periods unless we provide him
with 2 1/2 years advance notice that the Company will not renew his employment.
The agreement with Mr. Degn provides, among other things, for an
annual salary of DKK 1,080,000 an annual vacation payment of DKK 50,000 and a 10
year option to purchase 112,500 ADSs at a price of DKK 4.75 per ADS (the market
price of our ADSs on the date of the grant). Mr. Degn's employment agreement
will initially expire on December 31, 2007. However the agreement will
automatically be extended for unlimited 1-year periods unless we provide him
with 2 years advance notice that the Company will not renew his employment.
OPTIONS
Options that were granted pursuant to our stock option plan to the
named executive officers during the year ended December 31, 2004 and are set
forth in the following table:
SECURITIES SECURITIES EXERCISE PRICE EXERCISE PRICE
UNDERLYING UNDERLYING PER SHARE PER SHARE
NAME OPTIONS(1) OPTIONS(2) ($)(1) ($)(2) EXPIRATION DATE
--------------------------- ---------------- -------------- ---------------- --------------- -------------------
Aldo M. N. Petersen 151,463 151,463 3.2571 3.2571 March 31, 2009
Soren Degn 68,158 68,158 3.2571 3.2571 March 31, 2009
----------------------
(1) These securities are reflected as ordinary shares (after giving effect to
a 1 for 6 reverse stock split on May 19, 2005).
(2) These securities are reflected in ADSs.
DIRECTOR COMPENSATION
Directors are reimbursed for expenses they incur in connection with
attending meetings of the Board of Directors and committees thereof. We
periodically grant options to our directors, although the amount and timing of
those grants are determined by the Board in its sole discretion. In addition,
our independent directors are paid (U.S.) $5,000 per quarter for serving as a
director and receive (U.S.) $1,000 for each Board meeting which they attend in
person. On May 12, 2004, the Board granted to each director who was not also an
executive officer of the Company an option to purchase 25,000 ordinary shares
(equivalent to 25,000 ADSs) with an exercise price equivalent to the closing
market price on the date of grant.
C. BOARD PRACTICES
Our Board of Directors may consist of between three and seven members.
As of May 20, 2005, the Board consisted of five members. Under certain
provisions of the Danish Companies Act, our employees have the right to elect
three board members. However, our employees have not exercised this right.
Each director is elected by a vote at the annual or special meeting of
the shareholders and serves for a term of one year. All of our current directors
were elected or re-elected at the annual general meeting held on May 19, 2005.
There is no restriction on the re-election of directors. The quorum for
a meeting of the Board of Directors is a simple majority. All members of the
Board of Directors have equal voting rights and all resolutions are passed by a
simple majority.
40
The citizenships of the directors are as follows:
Name Country of Citizenship
------------------------------------------------------------------------
ALDO M.N. PETERSEN Denmark
KAROLY LASZLO NEMETH Denmark
JOHN J. STUART, JR. United States
JAN BERGER Norway
ROBERT M. GUTKOWSKI United States
There are no agreements with our Board members that provide for the
payment of benefits upon termination of their directorship.
The Board has determined that Messrs. Berger, Gutkowski and Stuart meet
the standard for independent directors as required by the listing standards of
NASDAQ.
BOARD COMMITTEES
Our Board of Directors has an audit committee and a compensation
committee.
The audit committee reviews our financial statements and accounting
practices, approves the selection of the Company's independent auditors and
meets and interacts with the independent auditors to discuss questions in regard
to the Company's financial reporting, reviews the results and scope of the audit
and other services provided by our independent auditors, and our internal
controls. The audit committee consists of Messrs. Berger, Gutkowski and Stuart.
The Board has determined that Mr. Stuart is an "audit committee financial
expert", as defined under the rules promulgated by the United States Securities
and Exchange Commission.
The compensation committee makes recommendations to the Board regarding
remuneration of executive officers and reviews our compensation plans and
policies. The compensation committee consists of Messrs. Berger, Gutkowski and
Stuart.
INDEMNIFICATION
Except to the extent indicated below, neither our Articles of
Association nor any contract or other arrangement to which we are a party
contains any provision under which any of our directors, members of management
or officers are insured or indemnified in any manner against any liability that
he or she may incur in his or her capacity as a director or an officer.
We have obtained an insurance policy under which our directors and
officers are insured against losses arising from their acts or omissions in
their capacities as directors or officers up to DKK 40 million. This policy has
a DKK 50,000 deductible.
Under the Danish Act on Limited Companies, our directors and officers,
who are registered as managers with the Danish Commerce and Companies Agency,
are liable for losses caused deliberately or by negligence in connection with
the performance of their duties to us and to third parties. Officers not so
registered are indemnified by us under applicable Danish law in respect of
actions taken by them in their official capacity.
41
Insofar as indemnification for liabilities under the Securities Act of
1933, as amended, may be permitted to our directors, officers or controlling
persons as set forth above, we have been informed that in the opinion of the
SEC, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
D. EMPLOYEES
As of December 31, 2004, we had 101 employees, a decrease of 36
employees from the prior year. All of our employees are located in Denmark (see
the following table.) This decrease is primarily attributable to the selling of
our e-security businesses, partially offset by a growth of 33% in our broadcast
media segment . The table below gives a breakdown of our employees and area of
employment:
Denmark Total
Sales and marketing 5 5
Customer service and support 5 5
Technical 76 76
Finance and administration 15 15
-- --
Totals 101 101
=== ===
Some of our employees are members of various labor unions; however, we
are not required to, and we do not have agreements with any union. We have not
experienced any work stoppages, and we consider our relations with our employees
to be good.
Competition in the recruiting of highly-qualified personnel is intense.
We believe that our future success will depend, in part, on our continued
ability to hire, motivate and retain qualified management, marketing and
technical personnel. To date, we have not experienced any difficulty in
attracting and retaining qualified personnel, but we can provide no assurance
that we will be able to continue to attract and retain qualified personnel in
the future.
We believe that our relations with our union and non-union employees
are good.
E. SHARE OWNERSHIP
The following table sets forth the ownership of our ordinary shares by
the individuals named in Item 6.A., as of May 13, 2005 after giving effect to a
1 for 6 reverse stock split on May 19, 2005
NUMBER ORDINARY
NAME SHARES (1) NUMBER OF ADSS (2) PERCENT (3)
-------------------------------- -------------------------- ---------------------------- ----------------
Aldo M.N. Petersen 924,742 (4) 924,742 16.84%
Karoly Laszlo Nemeth 80,000 (5) 80,000 1.48%
Soren Degn 94,291 (6) 94,241 1.72%
John J. Stuart, Jr. 80,000 (7) 80,000 1.48%
Robert M. Gutkowski * * *
Jan Berger * * *
All officers and directors
As a group (6 persons) 1,248,983 (8) 1,248,983 21.82%
42
-----------------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Common shares relating to
options currently exercisable or exercisable within 60 days of May 13,
2005 are deemed outstanding for computing the percentage of the person
holding such securities but are not deemed outstanding for computing the
percentage of any other person. Except as indicated by footnote, and
subject to community property laws where applicable, the persons named in
the table above have sole voting and investment power with respect to all
shares shown as beneficially owned by them.
(2) The number of ADS shares beneficially owned.
(3) As of May 13, 2005, 5,108,267 ordinary shares are issued, including no
treasury shares. Beneficial ownership percentages are calculated based on
5,108,267 ordinary shares issued and outstanding as of May 13, 2005. Of
the amount issued, ordinary shares have been deposited and ADSs issued
(represented by 5,108,267 ADSs, each representing one ordinary share
issued under the Deposit Agreement with The Bank of New York.
(4) Includes an aggregate of (i) 836,373 ordinary shares beneficially owned
by Mr. Petersen; (ii) 88,369 currently exercisable options to purchase
ordinary shares, at an exercise price of $3.2571 per share, expiring on
March 31, 2009.
(5) Includes an aggregate of 80,000 ordinary shares beneficially owned by Mr.
Nemeth. (6) Includes an aggregate of (i) 4,000 ordinary shares
beneficially owned by Mr. Degn; (ii) 8,333 currently exercisable options
to purchase ordinary shares, at an exercise price of $5.52 per share,
expiring on May 30, 2005; (ii) 13,750 currently exercisable options to
purchase ordinary shares, at an exercise price of $1.50 per share,
expiring on February 3, 2008; and (iii) 68,158 currently exercisable
options to purchase ordinary shares, at an exercise price of $3.2571 per
share, expiring on March 31, 2009.
(7) Includes an aggregate of (i) 8,333 ordinary shares beneficially owned by
Mr. Stuart; (ii) 38,333 currently exercisable options to purchase
ordinary shares, at an exercise price of $1.50 per share, expiring on
February 3, 2008 and 25,000 currently exercisable options to purchase
ordinary shares, at an exercise price of $3.76 per share, expiring on May
12, 2009.
(8) Includes 320,276 ordinary shares underlying exercisable options and
warrants.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The following table sets forth information, as of May 13, 2005 with
respect to the beneficial ownership of our ordinary shares (after giving effect
to a 1 for 6 reverse stock split on May 19, 2005) by each shareholder known by
us to beneficially own more than 5% of our ordinary shares.
SHARES BENEFICIALLY OWNED
-----------------------
NAME OF BENEFICIAL OWNER(1) NUMBER(1) PERCENT
--------------------------- --------- -------
Aldo M.N. Petersen (2)....................... 924,742 16.84%
-----------------------------------
TOTAL ....................................... 924,742 16.84%
===================================
-----------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Ordinary shares issuable upon
currently exercisable or convertible securities or securities exercisable
or convertible within 60 days of May 13, 2005 are deemed beneficially
owned and outstanding for computing the percentage owned by the person
holding such securities, but are not considered outstanding for computing
the percentage of any other person.
(2) Includes an aggregate of (i) 836,373 ordinary shares beneficially owned
by Mr. Petersen and (ii) 88,369 currently exercisable options to purchase
ordinary shares, expiring on March 31, 2009.
43
Except, as set forth in the table above, to our knowledge, in the last
three years, there has not been any significant change in ownership by major
shareholders. Our major shareholders do not have different voting rights. We are
not owned or controlled, directly or indirectly, by another corporation or by
any foreign government. We are not aware of any arrangement that may at a
subsequent date result in a change of control.
B. RELATED PARTY TRANSACTIONS
In the ordinary course of business, EuroTrust engages in transactions
with certain entities and individuals that are considered to be related parties
as follows:.
VERISIGN, INC
VeriSign, Inc. (`VeriSign") was a minority shareholder in EuroTrust A/S
owning approximately 18% until April 1, 2004. The transactions entered into
during the year and the accounts payable at the year end shown below are a
result of commercial trade with VeriSign. Current accounts with VeriSign are not
carrying any interest.
DECEMBER 31,
2003 2004
---- ----
4,204 2,082
VeriSign, Inc. (Annual fees and royalties)
=========== ===========
VeriSign, Inc. (Accounts payable) 477 0
=========== ===========
During 2001 we sold our domain name registration business to VeriSign
for a gross cash consideration of DKK 210,687. Originally, during 2000 and 2001,
we had purchased rights from VeriSign for DKK 75,305, which allowed us to sell
VeriSign products in a number of European countries including, Denmark, Sweden,
Norway, Finland, Austria, Switzerland and Italy. However, during 2002 the
balance on the amount capitalized for the rights acquired from VeriSign was
written-off due to the poor financial performance of the business.
On April 1, 2004, we sold the Secure Socket Layer (SSL) certificate
assets of EuroTrust PKI to VeriSign. EuroTrust PKI, a wholly-owned subsidiary,
is the operation through which we sold Public Key Infrastructure (PKI) Services,
including VeriSign's SSL certificates and related services in Austria,
Switzerland, Finland, Norway, Sweden and Denmark. Under the terms of the
agreement, VeriSign paid us $8.5 million U.S. in cash and assumed the ongoing
obligations of EuroTrust PKI SSL contracts.
Simultaneously with the closing of the transaction to sell the assets
of EuroTrust PKI to VeriSign, we repurchased 2,748,720 (458,120 after giving
effect to the1 for 6 reverse stock split) of our ordinary shares (equivalent to
458,120 American Depository Shares or "ADSs") from VeriSign for $1,136,138 U.S.
The repurchase was authorized by our shareholders.
44
NEMETH & SIGETTY A/S
Mr. Karoly Laszlo Nemeth is the Chairman of the board of directors of
EuroTrust A/S and is also the joint owner of Nemeth & Sigetty A/S. Nemeth &
Sigetty A/S provided legal services to the Company during the three years ended
December 31, 2004. For the years ended December 31, 2002, 2003 and 2004 Nemeth
& Sigetty A/S has been paid DKK 1,115, DKK 418 and DKK 962, respectively. There
were nooutstanding payables due to Nemeth & Sigetty A/S as at December 31, 2003
and December 31, 2004.
C. INTERESTS OF EXPERTS AND COUNSEL.
Not applicable because this is an Annual Report filed under the
Exchange Act of 1934.
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See Item 18. "Financial Statements" and pages F-1 through F-43 of this
report.
LEGAL PROCEEDINGS
We recorded a provision in 2003 of DKK 1 million for expenses relating
to an arbitration court settlement regarding the construction of our building
located in Soeborg, Denmark. The result of the arbitration court was a net
payment to the contractor of approximately DKK 1 million. The case was fully
settled in 2004.
Other than as described above, neither we nor our property is a party
in any other pending material legal proceeding.
DIVIDEND PAYMENT POLICY
We have not paid out any dividend to our shareholders in the last three
financial years. Payment of any future dividends will depend on our earnings and
capital requirements, and other factors our board of directors deem appropriate.
B. SIGNIFICANT CHANGES
None.
ITEM 9. THE OFFER AND LISTING
A. TITLE
Our ordinary shares are not traded on any stock exchange or
over-the-counter market. However, our ADS are traded on the Nasdaq SmallCap
Market under the symbol "EURO".
On August 29, 2002, we implemented a one for six reverse ratio change
in the number of ordinary shares represented by each ADS such that each new ADS
issued subsequent to the ratio change will represent six ordinary shares (prior
the ratio change, each ADS represented one ordinary share). Holders of our ADSs
prior to the ratio change, each of which represents one ordinary share ("Old
ADSs"), exchanged their Old ADSs for new ADSs, each of which represents six
ordinary shares ("New
45
ADSs"). On May 19, 2005 our shareholders approved a one for six reverse split of
our ordinary shares such that six ordinary shares nominal value DKK 1.25 were
combined into one ordinary share nominal value DKK 7.50 ("New Ordinary Shares").
Therefore, each ADS now represents one New Ordinary Share.
On December, 31, 2004, there were 5,108,267 New ADSs issued and
outstanding representing 5,108,267 ordinary shares.
The following table sets forth, for the periods indicated, the range of
high and low market prices per ADS as quoted on the Nasdaq SmallCap Market. The
prices shown below (in US Dollars) are adjusted to reflect the 1 for 6 reverse
ratio change in our ADSs, described above, and represent quotations among
securities dealers, do not include retail markups, markdowns or commissions and
may not represent actual transactions.
HIGH LOW
---- ---
YEAR ENDED DECEMBER 31, 2000: $202.5000 $8.2500
YEAR ENDED DECEMBER 31, 2001: $28.5000 $5.7000
YEAR ENDED DECEMBER 31, 2002: $8.5200 $2.15000
YEAR ENDED DECEMBER 31, 2003:
First Quarter $2.6200 $1.0000
Second Quarter $4.0500 $0.7500
Third Quarter $5.0200 $1.7500
Fourth Quarter $2.7500 $2.1100
YEAR ENDED DECEMBER 31, 2004:
First Quarter $3.9000 $2.2110
Second Quarter $5.5000 $3.3600
Third Quarter $4.7500 $4.0600
Fourth Quarter $6.0000 $4.4000
MONTH ENDED:
May 2005 (as of May 24, 2005) $6.0000 $4.4100
April 2005 $5.3700 $4.8100
March 2005 $5.9800 $5.3000
February 2005 $6.0000 $4.3400
January 2005 $4.6100 $4.1200
December 2004 $5.9700 $4.9300
B. PLAN OF DISTRIBUTION
Not required because this Form 20-F/A is filed as an Annual Report.
46
C. MARKETS
Our ordinary shares are not traded on any stock exchange or
over-the-counter market. However, our ADSs are traded on the Nasdaq SmallCap
Market under the symbol "EURO".
D. SELLING SHAREHOLDERS
Not required because this Form 20-F/A is filed as an Annual Report.
E. DILUTION
Not required because this Form 20-F/A is filed as an Annual Report.
F. EXPENSES OF THE ISSUE
Not required because this Form 20-F/A is filed as an Annual Report.
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not required because this Form 20-F/A is filed as an Annual Report.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
See Exhibit 1.1.
C. MATERIAL CONTRACTS
On September 30, 2004, we sold our Internet security division, Virus
112, to Comendo A/S, one of the largest providers of managed anti-virus and
anti-spam system solutions in Denmark, at a purchase price of approximately U.S.
$2.5 million. The purchase price was paid to us in the following manner: U.S.
$700,000 in cash and U.S. $1.8 million 5-year, debenture bearing 6% interest. In
accordance with the sale agreement, Comendo agreed to hire the Virus 112
employees and assume the employee obligations of Virus 112. In addition, Comendo
entered into a 5-year lease for the portion of the facility then occupied by
Virus 112.
On April 1, 2004, we sold our PKI services business to VeriSign and
terminated the international affiliate agreement ("Affiliate Agreement") with
VeriSign which we entered into on November 17, 2000 pursuant to which we became
an affiliate of VeriSign, as a member of the VeriSign Global Affiliate Network,
for the distribution and delivery of VeriSign's Internet Trust services and
products within Denmark, Norway, Sweden, Finland, Austria, Switzerland and
Italy. Under the terms of the sale agreement, VeriSign paid us $8.5 million U.S.
in cash and assumed the ongoing obligations of EuroTrust PKI SSL contracts.
D. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
There are no governmental laws, decrees or regulations of the Kingdom
of Denmark that restrict the export or import of capital (including, without
limitation, foreign exchange controls), or that affect
47
the remittance of dividends, interest or other payments to nonresident holders
of ordinary shares. There are no limitations imposed by the laws of the Kingdom
of Denmark or our Articles of Association on the right of nonresident or foreign
holders to hold or vote ordinary shares.
E. TAXATION
The following summary contains a description of the material United
States federal income tax and Danish tax consequences of the purchase, ownership
and disposition of ordinary shares or ADSs by a beneficial owner that (i) is an
individual citizen or resident in the United States (for United States federal
income tax purposes), a corporation or partnership organized under the laws of
the United States or any state thereof, or estates or trusts the income of which
is subject to United States federal income tax regardless of its source, (ii) is
not also a resident or corporation of Denmark and is not domiciled in Denmark,
(iii) does not hold ordinary shares or ADSs in connection with any permanent
establishment or fixed base in Denmark, (iv) does not own, and has not owned
(directly, indirectly or by attribution) at any time, 10% or more of our total
combined voting power or equity, and (v) holds ordinary shares or ADSs as
capital assets. The term "United States holder," as used in this summary, means
a beneficial owner of ordinary shares or ADSs meeting these requirements.
The following summary of certain United States federal and Danish tax
matters is based on tax laws of the United States and Denmark as in effect on
the date of this report and the current Income Tax Treaty between the United
States and the Kingdom of Denmark (the "Treaty"), which is a generally effective
as of January 1, 2001. We cannot assure you that future legislation,
regulations, administrative rulings or court decisions will not adversely affect
the accuracy of the statements contained in this report. Also, changes in United
States and Danish law and the Treaty made after the date of this report could
have retroactive effect.
The following summary does not consider or discuss the tax laws of any
country other than the United States or Denmark. This summary does not describe
United States federal estate and gift tax considerations, or state, local or
provincial tax considerations. Furthermore, it does not address United States
federal income tax or Danish tax considerations that apply to United States
holders of our ordinary shares or ADSs who are also subject to taxing
jurisdictions other than or in addition to the United States. Finally, it does
not address all possible categories of United States holders, some of whom (such
as financial institutions, trusts, estates, insurance companies, dealers in
securities, certain retirement plans and tax exempt organizations) may be
subject to special rules.
THE FOLLOWING DISCUSSION DOES NOT PURPORT TO BE EXHAUSTIVE OF ALL
POSSIBLE TAX CONSIDERATIONS. UNITED STATES HOLDERS OF ORDINARY SHARES OR ADSs
SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE UNITED STATES, DANISH OR OTHER
TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ORDINARY SHARES
OR ADSs.
UNITED STATES TAX CONSEQUENCES OF OWNERSHIP OF ORDINARY SHARES OR ADSS
DIVIDENDS. For United States federal income tax purposes, the gross
amount of all dividends (that is, the amount before reduction for Danish
withholding tax) paid to a United States holder with respect to ordinary shares
or ADSs out of our current or accumulated earnings and profits ("E&P") will be
taxable for United States federal income taxation as a foreign source dividend
income. As such, these dividends are not eligible for the dividends received
deduction otherwise available to United States corporations in connection with
dividends received from United States corporations. To the extent that a
48
distribution exceeds E&P, it will be treated first as a return of capital to the
extent of the Untied States holder's basis, and then, as gain from the sale of a
capital asset.
For United States federal income tax purposes, the amount of any
dividend paid in Danish kroner will be the United States dollar value of the
kroner at the exchange rate in effect on the date of receipt, whether or not the
kroner is converted into United States dollars at that time.
The withholding tax imposed by Denmark generally is a creditable
foreign tax for United States federal income tax purposes. As a result, a United
States holder generally will be entitled to include the amount withheld as
foreign tax paid in computing a foreign tax credit (or in computing a deduction
for foreign income taxes paid, if the United States holder does not elect to use
the foreign tax credit provisions of the Internal Revenue Code of 1986, as
amended (the "Code")). The Code, however, imposes a number of limitations on the
use of foreign tax credits, based on the particular facts and circumstances of
each taxpayer. United States holders who hold ordinary shares or ADSs should
consult their tax advisors regarding the availability of the foreign tax credit.
Backup withholding, imposed at the rate of 31%, may apply to a United
States holder in connection with the sale or exchange of ordinary shares or
ADSs. Generally, backup withholding does not apply to a United States holder (i)
that is a corporation or comes within certain other exempt categories or (ii)
provides a taxpayer identification number, certifies as to no loss of exemption
from backup withholding and otherwise complies with applicable requirements of
the backup withholding rules.
SALE OR OTHER DISPOSITION OF ORDINARY SHARES OR ADSS. Gain or loss
recognized by a United States holder on the sale or other disposition of
ordinary shares or ADSs will be taxable for United States federal income tax
purposes as capital gain or loss in an amount equal to the difference between
such United States holder's basis in the ordinary shares or ADSs and the amount
realized on the disposition. The capital gain or loss will be long term if the
securities were held for more than 12 months and will be short term if they were
held for less than 12 months. Capital losses are generally deductible only
against capital gains and not against ordinary income.
Capital gain recognized by a United States holder on the sale or other
disposition of ordinary shares or ADSs will be United States source gain. Losses
from the sale of ordinary shares or ADSs would generally be sourced in the same
manner as gains from the sale of such ordinary shares or ADSs. However, treasury
regulations include a dividend recapture rule and other exceptions that may
apply. United States holders of ordinary shares or ADSs should consult their tax
advisors regarding the proper treatment of such losses.
DANISH TAX CONSEQUENCES OF OWNERSHIP OF ORDINARY SHARES OR ADSS.
DIVIDENDS. For Danish income tax purposes, the gross amount of all
distributions made by us to our shareholders is taxed as a dividend. However, a
distribution of liquidation proceeds made by us to our shareholders during the
calendar year in which we are finally liquidated and dissolved is taxed as
capital gain. In addition, the gross amount paid by us to redeem ordinary shares
or ADSs are generally taxed as a dividend. However, a shareholder may apply to
Danish tax authorities for a ruling allowing for capital gains treatment. If the
ruling is obtained before the distribution is decided the ruling includes an
exemption from the dividend tax. If the exemption request is granted, the
consideration will be taxed as capital gain.
49
The granting of bonus shares to shareholders, and the right of
shareholders to subscribe for ordinary shares or ADSs at a price that is less
than the current trading value of such ordinary shares or ADSs, are not
considered taxable distributions to shareholders.
In general, a Danish withholding tax of 28% is levied on all dividends.
However, corporate shareholders holding at least 20 % of the share capital for a
consecutive period for at least one year may be exempt from Danish withholding
tax on dividends. The dividend in question must be covered by the double tax
treaty between Denmark and United States. Further, a United States holder
(individual or a company) may apply to the Danish tax authorities for a partial
refund of the dividends tax that has been withheld under the Treaty. If this
refund request is granted, the Danish withholding tax on such dividends is
effectively reduced to 15%. The rate is reduced to 5% for corporate shareholders
holding at least 10% of the share capital. We do not presently contemplate the
payment of any dividends on our ordinary shares or ADSs. However, should we
decide to make payment of dividend, we will apply to the Danish tax authorities
for a blanket exemption allowing us to withhold only 15% of all gross dividends
paid to a United States holder. While we believe that such an exemption will be
granted, there can be no assurance that this will occur. Shareholders eligible
for further reduction must apply individually for such reduction.
SALE OR OTHER DISPOSITION OF ORDINARY SHARES OR ADSS. Capital gains
realized by United States holders upon the sale or other disposition of ordinary
shares or ADSs may be exempt from Danish tax.
DANISH SHARE TRANSFER DUTY.
No Danish share transfer duty is levied on the disposal of ordinary
shares or ADSs.
DANISH ESTATE AND GIFT TAXES.
Generally, if a United States holder acquires or disposes of ordinary
shares or ADSs by inheritance, legacy or gift, such holder will not be subject
to Danish gift or inheritance taxes. If a United States holder should make a
gift of ordinary shares or ADSs to any person resident in Denmark the gift can
only be subject to Danish gift tax when forming part of the business property of
a permanent establishment in Denmark. Other transfers of shares or ADS's shall
be taxable only in the state in which the transferor was domiciled at the time
of his death or when making the gift according to the United States-Denmark
Double Taxation Convention with respect to taxes on estates, inheritance and
gifts.
F. DIVIDENDS AND PAYING AGENTS
Not required because this Form 20-F/A is filed as an Annual Report.
G. STATEMENTS BY EXPERTS
Not required because this Form 20-F/A is filed as an Annual Report.
H. DOCUMENTS ON DISPLAY
We are subject to the information requirements of the Securities
Exchange Act of 1934, as amended and, to the extent required, we file periodic
reports and other information with the Securities and Exchange Commission. These
reports and information are available and may be copied at the public reference
facilities listed below. We intend to give our shareholders annual reports
containing audited
50
financial statements and a report thereon from our independent auditors and
quarterly reports for the first three quarters of each fiscal year containing
unaudited interim financial information.
Statements made in this annual report about the contents of contracts
or other documents are not necessarily complete and we refer you to the copy of
such contracts or other documents filed as exhibits to this annual report.
You can obtain a copy of the exhibits hereto and other information
about us at the public reference facilities of the Securities and Exchange
Commission located at:
Public Reference Room 1024
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
You may obtain information about the operation of the public reference
facility by calling the Securities and Exchange Commission at (800) 732-0330.
We will also provide our shareholders with proxy statements prepared
according to Danish law. As a Danish company, we are exempt from the Exchange
Act rules about the provision and content of proxy statements and about
short-swing profit reporting and liability.
I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2004, we did not believe that market risk financial
instruments would have a material affect on future operations or cash flows nor
did we view currency exchange risk or interest rate risk as material.
Operational currency exchange risk would arise if we priced products in one
currency while material costs and expenses were denominated in a different
currency. We do not believe that the operational currency exchange risk is
material. However, from time to time we enter into a contract denominated in a
currency other than the currency of operating expenses and, in such cases, may
enter into currency forward arrangements with respect to and for the period
covering such contract. Throughout the year 2004 and specifically at December
31, 2004, we had no material foreign exchange contracts outstanding.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not required because this Form 20-F/A is filed as an Annual Report.
51
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND
USE OF PROCEEDS
None.
ITEM 15. CONTROLS AND PROCEDURES
a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. EuroTrust's management,
with the participation of the chief executive officer and the chief financial
officer, carried out an evaluation of the effectiveness of EuroTrust's
"disclosure controls and procedures" (as defined in the Securities Exchange Act
of 1934 (the "Exchange Act") Rules 13a-15(e) and 15-d-15(e)) as of the end of
the fiscal year covered by this Annual Report (the "Evaluation Date"). Based
upon that evaluation, the chief executive officer and the chief financial
officer concluded that, as of the Evaluation Date, EuroTrust's disclosure
controls and procedures are effective, providing them with material information
relating to EuroTrust as required to be disclosed in the reports EuroTrust files
or submits under the Exchange Act on a timely basis.
b) MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING. Not
applicable for fiscal years ending before July 15, 2006. c) ATTESTATION REPORT
OF THE REGISTERED PUBLIC ACCOUNTING FIRM. Not applicable for fiscal years ending
before July 15, 2006.
d) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. There were no changes
in EuroTrust's internal controls over financial reporting, known to the chief
executive officer or the chief financial officer, that occurred during the
period covered by this report that has materially affected, or is reasonably
likely to materially affect, EuroTrust's internal control over financial
reporting.
ITEM 16. RESERVED
ITEM 16 A. AUDIT COMMITTEE FINANCIAL EXPERT
The Board has determined that, Mr. John Stuart, is an "audit committee
financial expert," as that term is defined in Item 401(h) of Regulation S-K, and
"independent" for purposes of current and recently-adopted Nasdaq listing
standards and Section 10A(m)(3) of the Securities Exchange Act of 1934.
ITEM 16 B. CODE OF ETHICS
We have adopted a code of conduct that applies to our principal executive
officer, principal financial officer and other persons performing similar
functions, as well as all of our other employees and directors. This code of
conduct is posted on our website at www.eurotrust.dk and is filed as Exhibit
11.1 to this report.
52
ITEM 16 C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
For the fiscal years ended 2003 and 2004, our principal accounting
firm, Gregory & Eldredge, LLC, billed aggregate fees of approximately $100,000
and $102,772, respectively for the audit of our 2003 and 2004 financial
statements.
AUDIT-RELATED FEES
None.
TAX FEES
None.
ALL OTHER FEES
None.
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
The Audit Committee charter provides that the Audit Committee will
pre-approve audit services and non-audit services to be provided by our
independent auditors before the accountant is engaged to render these services
other than the minimums non-audit services for which the pre-approval
requirements are waived in accordance with the rules and regulations of the SEC.
The Audit Committee may consult with management in the decision-making process,
but may not delegate this authority to management. The Audit Committee may
delegate its authority to pre-approve services to one or more committee members,
provided that the designees present the pre-approvals to the full committee at
the next committee meeting.
ITEM 16 D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
Not Applicable.
ITEM 16 E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS.
----------------------------------------------------------------------------------------------------------------------
Issuer Purchase Of Equity Securities
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
(D) MAXIMUM NUMBER
(C) TOTAL NUMBER OF (OR APPROXIMATE
ADSS PURCHASED AS DOLLAR VALUE) OF
PART OF PUBLICLY ADSS THAT MAY YET BE
(A) TOTAL NUMBER OF (B) AVERAGE PRICE ANNOUNCED PLANS OR PURCHASED UNDER THE
PERIOD ADSS PURCHASED PAID PER ADS PROGRAMS PLANS OR PROGRAMS
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
MONTH #7 150,000(1) $4.25 NONE NONE
JULY 1, 2004 THROUGH
JULY 31, 2005
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
(1) All of these shares were purchased directly from a shareholder of our ADSs
in a private transaction.
53
PART III
ITEM 17. FINANCIAL STATEMENTS
See Item 18, below.
ITEM 18. FINANCIAL STATEMENTS
See the Company's Consolidated Financial Statements, which are
incorporated herein by reference and set forth on pages F-1 through F-43.
54
ITEM 19. EXHIBITS
1.1 Amended Articles of Association of the Registrant, as of December
6, 2001 (1)
1.2 Rules of Procedures of the Registrant, as amended (2)
2.1 Employee and Director Subscription Option Plan*
4.5 Form of Employment Agreement between the Registrant and Aldo
Petersen, effective as of January 1, 2005*
4.6 Form of Employment Agreement between the Registrant and Soren Degn,
effective as of January 1, 2005*
8.1 List of the Subsidiaries of the Registrant *
11.1 Code of Ethics(4)
12.1 Chief Executive Officer Certification pursuant to Rule 13a-14(a)
or Rule 15d-14(a).*
12.2 Chief Financial Officer Certification pursuant to Rule 13a-14(a)
or Rule 15d-14(a).*
13.1 Chief Executive Officer Certification pursuant to Rule 13a-14(b)
or Rule 15d-14(b) and 18 U.S.C. Section 1350.*
13.2 Chief Financial Officer Certification pursuant to Rule 13a-14(b)
or Rule 15d-14(b) and 18 U.S.C. Section 1350.*
-----------
* Included herewith.
(1) Filed as an exhibit to the Company's Annual Report on Form 20-F, filed
on June 27, 2002, and incorporated by reference herein.
(2) Filed as an exhibit to the Company's original filing of the
Registration Statement on Form F-1 (File No. 333-7092), filed on June
20, 1997, and incorporated by reference herein.
(3) Filed as an exhibit to the Company's Annual Report on Form 20-F, filed
on September 23, 2003, and incorporated by reference herein.
(4) Incorporated by reference. Filed as an exhibit to the Company's Annual
Report on Form 20-F, filed on May 12, 2004.
55
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant certifies that it meets all of
the requirements for filing on Form 20-F/A and has duly caused this annual
report to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of S0borg, Denmark.
EUROTRUST A/S
Dated: November 29, 2005 By: /s/ ALDO M.N. PETERSEN
------------------------------
Aldo M.N. Petersen
Chief Executive Officer
(Principal Executive Officer)
Dated: November 29, 2005 By: /s/ SOREN DEGN
------------------------------
Soren Degn
Chief Financial Officer
(Principal Financial and Accounting
Officer)
56
EUROTRUST A/S AND SUBSIDIARIES
Formerly known as Euro909.com A/S
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm ................................ F-2
Consolidated Balance Sheets as of December 31, 2003 and 2004 ........................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 2002, 2003
and 2004 ............................................................................ F-5
Consolidated Statements of Shareholders' Equity for the Years Ended December 31,
2002, 2003 and 2004 ................................................................. F-6
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended
December 31, 2002, 2003 and 2004........................................................ F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2003
and 2004 ............................................................................ F-8
Notes to Consolidated Financial Statements ............................................. F-9
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
EuroTrust A/S AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheets of
EuroTrust A/S and Subsidiaries as of December 31, 2004 and 2003 and the related
consolidated statements of operations, comprehensive income, shareholders'
equity and cash flows for the years ended December 31, 2004, 2003 and 2002. The
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with standards of the Public
Company Accounting Oversight Board in the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
EuroTrust A/S and Subsidiaries at December 31, 2004 and 2003 and the
consolidated results of its operations and its cash flows for the year ended
December 31, 2004, 2003 and 2002, in conformity with accounting principles
generally accepted in the United States.
As discussed in Note 1 and Note 6, the financial statements for all
periods presented have been restated to reclassify the assets, liabilities,
result of operations and cash flow for certain disposed components to
discontinued operations. The effect of the restatement on revenues and income
from continuing operations is described in Note 1.
/s/Gregory & Eldredge, LLC.
March 4, 2005, except for Note 24
As to which the Date is May 19, 2005
Salt Lake City, Utah
F-2
EUROTRUST A/S AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA AND WHERE OTHERWISE INDICATED)
DECEMBER 31,
------------
2003 2004 2004
---------------- ----------------- --------------
DKK DKK USD
ASSETS
Current assets:
Cash and cash equivalents 9,363 6,750 $1,234
Restricted cash - 5,352 979
Accounts receivable trade, net of allowance for
doubtful
accounts of DKK 2,239 in 2003 and DKK 592 in 2004 20,357 16,521 2,765
Notes receivable current - 2,200 402
Broadcasting programming rights, current 952 2,928 535
Inventories - - -
Deferred tax assets 2,036 - -
Valued added tax receivables - - -
Prepaid expenses and deposits 862 2,002 366
Other receivables 2,891 1,423 260
Current assets of discontinued operations 17,914 2,570 728
---------------- ----------------- --------------
Total current assets 54,375 39,746 7,269
Marketable securities - available for sale 304 197 36
Notes receivable, net of current portion - 8,800 1,609
Broadcasting programming rights, net of current
portion - 2,898 530
Rent and other long term deposits 1,123 3,250 595
Other receivables, long term 64 524 96
Long term investments at cost 2,494 - -
Equity method investment in Mediehuset Danmark ApS 1,500 1,638 299
Property, plant and equipment, net 52,620 92,554 16,928
Goodwill 23,941 24,561 4,492
Deferred long-term tax assets 347 3,972 726
License rights, net 1,100 - -
Long term assets of discontinued operations 2,977 108 20
---------------- ----------------- --------------
Total assets 140,845 178,248 $32,600
================ ================= ==============
DKK amounts have been converted into US$ at an exchange rate of $1=DKK 5.4676.
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
EUROTRUST A/S AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA AND WHERE OTHERWISE INDICATED)
DECEMBER 31,
------------
2003 2004 2004
-------------- ------------- --------------
DKK DKK USD
LIABILITIES AND SHAREHOLDERS` EQUITY
Current liabilities:
Secured line of credit - 8,417 $1,540
Bank loan current portion - 741 135
Lease obligations, current portion 1,176 1,244 227
Accounts payable 25,438 22,402 4,097
Accounts payable, related parties - - -
Accrued expenses 21,196 11,681 2,136
Equipment purchase obligation, current portion - 12,152 2,223
Deferred revenue, current 1,645 - -
Income tax payable 61 - -
Current liabilities of discontinued operations 40,533 2,556 468
-------------- ------------- --------------
Total current liabilities 90,049 59,193 10,826
Long term liabilities:
Long term equipment purchase obligation, net of current
portion - 9,749 1,783
Deferred revenue - - -
Bank loan, net of current portion - 3,099 566
Lease obligations, net of current portion - 4,585 839
Long term liabilities of discontinued operations 1,576 - -
-------------- ------------- --------------
Total long term liabilities 1,576 17,433 3,188
Minority interest in subsidiaries 2,860 56 10
Shareholders' equity:
Common shares - par value DKK 7.50, 8,175,000
and 7,991,000 authorized, 5,292,245 and 5,108,267
issued at December 31, 2003 and 2004 39,693 38,312 7,007
Additional paid-in capital 526,040 519,844 95,077
Accumulated deficit (515,840) (457,386) (83,654)
Accumulated other comprehensive income 512 796 146
Treasury stock, 71,093 in 2003 and no treasury shares
in 2004 respectively, at cost (4,045) - -
-------------- ------------- --------------
Total shareholders' equity 46,360 101,566 18,576
-------------- ------------- --------------
Total liabilities and shareholders' equity 140,845 178,248 $32,600
============== ============= ==============
DKK amounts have been converted into US$ at an exchange rate of $1=DKK 5.4676.
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
EUROTRUST A/S
RESTATED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA AND WHERE OTHERWISE INDICATED)
YEARS ENDED DECEMBER 31,
2002 2003 2004 2004
--------------- ------------- -------------- -------------
DKK DKK DKK USD
Net revenue 92,028 109,822 91,036 $16,650
Operating expenses:
Cost of revenue 75,288 65,818 60,349 11,038
Selling and marketing 17,948 16,421 17,727 3,242
Selling and marketing - related parties 908 1,074 - -
General and administrative 29,607 26,463 20,581 3,764
General and administrative - related parties 1,115 418 962 176
Depreciation 14,823 6,075 10,226 1,870
Amortization and write down 5,778 - - -
Goodwill impairment 15,533 - 914 167
---------------------------------- ----------------------------
Total operating expenses 161,000 116,269 110,759 20,257
---------------------------------- ----------------------------
Operating income (loss) (68,972) (6,447) (19,723) (3,607)
Other income (expenses)
Interest income 1,846 214 284 52
Interest expense (966) (1,610) (1,203) (220)
Foreign currency exchange loss, net (5,226) (1,847) (762) (139)
Gains from divestitures - - 8,102 1,482
Write-down of long term investments & marketable
securities (18,284) (196) (14,942) (2,733)
Equity in earnings of Mediahuset Danmark ApS - - 138 25
Other (expenses) income, net (6,331) 693 (1,442) (264)
---------------------------------- ----------------------------
(Loss) income from continuing operations
before income taxes and minority interest (97,933) (9,193) (29,548) (5,404)
Income tax expense - current and deferred (2,499) 1,491 3,105 568
Minority interest in net income (loss) of subsidiaries 3,069 (257) 192 35
---------------------------------- ----------------------------
(Loss) income from continuing operations (97,363) (7,959) (26,251) (4,801)
---------------------------------- ----------------------------
Gain (loss) from operations of discontinued internet
segment components net of tax, 0 in 2002, 2003 and 2004 (179,985) (8,420) 1,090 199
Gain (loss) from disposal of discontinued Print/On line Media
division and internet segment components net of tax, 0 in
2002, 2003 and 2004 (6,000) 10,049 83,615 15,293
---------------------------------- -----------------------------
NET (LOSS) INCOME (283,348) (6,330) 58,454 $10,691
============== ================ =========== ================
BASIC INCOME (LOSS) PER WEIGHTED AVERAGE COMMON SHARE
(Loss) Income from continuing operations (22.33) (1.70) (5.30) $(0.97)
============== ================ =========== ===============
Gain (loss) from operations of discontinued components (41.28) (1.80) 0.22 $0.04
============== ================ =========== ===============
Income (loss) income from discontinued operations (1.38) 2.15 16.90 $3.09
============== ================ =========== ===============
Net (loss) income (64.99) (1.35) 11.82 $2.16
============== ================ =========== ===============
Weighted average common shares outstanding 4,360 4,671 4,947 4,947
================================== ============================
DILUTED INCOME (LOSS) PER WEIGHTED AVERAGE COMMON SHARES
(Loss) Income from continuing operations (22.33) (1.70) (4.99) $(0.91)
================================== ============================
Gain (loss) from operations of discontinued components (41.28) (1.80) 0.21 0.04
=============== ================ =========== ==============
Income (loss) from discontinued operations (1.38) 2.15 15.88 $2.90
============== ================ =========== ===============
Net (loss) income (64.99) (1.35) 11.10 $2.03
============== ================ =========== ===============
Weighted average common shares outstanding 4,360 4,671 5,266 5,266
============== ================ =========== ===============
DKK amounts have been converted into US$ at an exchange rate of $1=DKK 5.4676.
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
EUROTRUST A/S AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
[RESTATED]
(IN THOUSANDS, EXCEPT PER SHARE DATA AND WHERE OTHERWISE INDICATED)
ACCUMULATED
COMMON ADDITIONAL OTHER COM-
SHARES PAID-IN ACCUMULATED PREHENSIVE TREASURY
AMOUNT CAPITAL DEFICIT INCOME STOCK TOTAL
------------------------------------------------------------------------------
DKK DKK DKK DKK DKK DKK
BALANCE AT DECEMBER 31, 2001 34,006 532,280 (226,162) (1,500) (5,456) 333,168
Purchase of 116,000 shares of
treasury stock - - - - (6,522) (6,522)
Foreign currency translation
adjustments - - - 958 - 958
Unrealized loss on marketable
securities - - - (14) - (14)
Net loss - - (283,348) - - (283,348)
------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2002 34,006 532,280 (509,510) (556) (11,978) 44,242
Issuance of 758,000 common shares
for cash through exercise of stock
options 5,687 605 - - - 6,292
Sale of 140,000 shares of common
stock from treasury - (6,845) - - 7,933 1,088
Currency translation adjustments - - - 921 - 921
Unrealized loss on marketable securities - - - 147 - 147
Net income - - (6,330) - - (6,330)
------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2003 39,693 526,040 (515,840) 512 (4,045) 46,360
Issuance of 285,000common shares for
cash through exercise of stock
options 2,138 141 - - - 2,279
Issuance of 60,000 common shares for
cash through exercise of stock
options 450 332 - - - 782
Foreign currency translation
adjustments - - - (110) - (110)
Other than temporary losses on
marketable securities - - - 394 - 394
Purchase of 608,120 common shares
into treasury at cost - - - - (10,826) (10,826)
Sale of 150,000 shares of treasury
stock
Compensation for the issuance of 25,000 - 319 3,829 4,148
warrants to purchase common
stock at DKK 23.76 per ordinary share - 85 - - - 85
Cancellation of 529,000 common shares
held in treasury at cost (3,969) (7,073) - - 11,042 -
Net income - - 58,454 - - 58,454
------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2004 38,312 519,844 (457,386) 796 - 101,566
BALANCE AT DECEMBER 31, 2004 USD$7,007 USD$95,077 USD$(83,654) USD$146 USD$0 USD$18,576
DKK amounts have been converted into US$ at an exchange rate of $1=DKK 5.4676.
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
EUROTRUST A/S AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE DATA AND WHERE OTHERWISE INDICATED)
YEARS ENDED DECEMBER 31,
2002 2003 2004 2004
-------------- ------------- -------------- --------------
DKK DKK DKK USD
Net income (loss) (283,348) (6,330) 58,454 $10,691
Currency translation adjustment, net of
taxes of DKK 0 in 2002, 2003 and 2004 958 921 (110) (20)
Net change in unrealized loss on marketable securities,
net of
taxes of DKK 0 in 2002, 2003 and 2004 (14) 147 394 72
--------------------------------------------- --------------
Comprehensive net income (loss) (282,404) (5,262) 58,738 $10,743
============================================= ==============
DKK amounts have been converted into US$ at an exchange rate of $1=DKK 5.4676.
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
EUROTRUST A/S AND SUBSIDIARIES
RESTATED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA AND WHERE OTHERWISE INDICATED)
YEARS ENDED DECEMBER 31,
2002 2003 2004 2004
----------- ------------- ------------ ---------
DKK DKK DKK USD
Cash flows from operating activities:
Net (loss) income from continuing operations (97,363) (7,959) (26,251) $(4,801)
Adjustments to reconcile net loss (income) to
cash used in operating activities:
Depreciation, amortization and write down 54,418 6,075 11,140 2,037
Non-cash compensation expense options and warrants 4,498 (2,287) 85 16
(Gain) on sale business - - (8,102) (1,482)
(Gain)/loss on sale of fixed assets (594) (1,703) 169 31
Provision for doubtful accounts - (699) (720) (132)
Loss on write-down of investments and marketable securities - 197 14,943 2,733
Deferred tax (350) (1,677) (1,589) (291)
Minority interest (3,069) 257 (127) (23)
(Gain) on equity method investments - - (138) (25)
Non-cash issuance of common shares from treasury - 1,088 - -
Changes in operating assets and liabilities:
Accounts receivable 6,845 (5,156) 8,697 1,591
Accounts receivable, related parties 3,084 - - -
Broadcasting programming rights 3,244 3,804 (3,186) (583)
Inventories and other assets 14,012 934 (149) (27)
Prepaid expenses 6,525 2,270 (3,427) (627)
Income tax payable 1,263 (1,202) (61) (11)
Other receivables 5,310 4,337 574 105
Accounts payable (10,658) 7,225 316 58
Accounts payable, related parties 6,273 (12,356) (477) (87)
Accrued expenses (15,170) (3,094) (6,857) (1,254)
Deferred revenue 13,452 1,018 3,298 603
--------- ----------- ---------- -------
Cash used in operating activities from continuing operations (8,280) (8,928) (11,862) (2,169)
Cash used in discontinued operations (46,873) (19,578) 1,788 327
--------- ----------- ---------- -------
Cash used in operating activities (55,153) (18,506) (10,074) (1,842)
========= =========== ========== =======
Cash flows from investing activities:
Net (Purchase of investments) proceeds from sales of
investments (5,128) 216 (11,948) (2,185)
Acquisition of businesses, net of cash acquired (15,586) (1,500) (13,086) (2,393)
Proceeds from sale of business, net of cash disposed of 40,121 1,986 61,730 11,290
Purchase of fixed assets (13,881) (14,773) (31,220) (5,709)
Proceeds from sales of fixed assets 2,177 1,448 561 103
--------- ----------- ---------- -------
Cash provided (used) in investing activities from continuing 7,703 (12,623) 6,037 1,104
operations
Cash provided (used) in discontinued operations (3,590) (732) (582) (106)
========= =========== ========== =======
Cash provided (used) in investing activities 4,113 (13,355) 5,455 998
========= =========== ========== =======
Cash flows from financing activities:
Net change in short- and long-term borrowings (3,201) (809) 12,257 2,242
Purchase of treasury stock (6,523) - (10,826) (1,980)
Proceeds from sale and lease back 7,000 - - -
Lease payments (3,573) (2,852) (1,172) (214)
Net change in restricted cash - - (5,352) (979)
Proceeds from issuance of common shares, treasury shares and
stock options - 6,292 7,209 1,318
Cash provided (used) in financing activities from continuing
operations (6,297) 2,631 2,116 387
Cash provided (used) in discontinued operations - - - -
========= =========== ========== =======
Cash provided (used) in financing activities (6,297) 2,631 2,116 387
========= =========== ========== =======
Effect of currency exchange rate changes on cash and cash equivalents 958 921 (110) (20)
--------- ----------- ---------- -------
Net (decrease) in cash and cash equivalents (56,379) (28,309) (2,613) (478)
Cash and cash equivalents, beginning of period 94,051 37,672 9,363 1,712
--------- ----------- ---------- -------
Cash and cash equivalents, end of period 37,672 9,363 6,750 1,234
========= =========== ========== =======
Cash paid for interest (1,076) (1,714) (1,240) (227)
========= =========== ========== =======
Cash paid for taxes 618 1,373 - -
========= =========== ========== =======
DKK amounts have been converted into US$ at an exchange rate of $1=DKK 5.4676.
The accompanying notes are an integral part of these consolidated
financial statements.
F-8
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
EuroTrust A/S and its subsidiaries (the "Company") engage in providing
production and broadcasting services and operating the Danish cable channel DK4.
The Company previously provided Internet security products and services in
Scandinavia these operations were sold during 2003 and 2004.
The Company operated in two reportable service-based segments from 2002
through 2004: The Production and Broadcasting Segment and the Internet Security
Product and Services Segment.
PRODUCTION AND BROADCASTING SEGMENT
The Company's Production and Broadcasting Segment consists of the
Danish Cable Channel DK4, and one of the largest media production companies in
Scandinavia with a special focus on sports programming. The Company's media
division also offers educational courses in television production.
INTERNET SECURITY PRODUCT AND SERVICE SEGMENT
At December 31, 2004, the Internet services segment monitors the
continuing royalty payments received in connection with the sale of our secure
hosting and remote back-up components in 2004.
The Company's Internet Security Product and Services Segment previously
offered trusted Internet security products and services including virus
detection products and services, email security products, vulnerability testing,
secure remote backup services, digital video surveillance, secure hosting and
Public Key Infrastructure (PKI) Services until the sale of these businesses
during 2003 and 2004.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States ("US GAAP") and
include the accounts of EuroTrust A/S and its majority-owned subsidiaries. All
intercompany balances and transactions have been eliminated in consolidation.
The following is a list of our significant operating subsidiaries and
their jurisdiction of incorporation and our ownership interest in those
subsidiaries at December 31, 2004:
COUNTRY OF INTEREST
SUBSIDIARY INCORPORATION OWNERSHIP
---------- ------------- ---------
Europe-Visions A/S Denmark 100.0%
EuroTrust PKI Services A/S Denmark 100.0% (Assets sold April 1, 2004)
EuroTrust Virus112 A/S Denmark 100.0% (Assets sold September 30, 2004)
InAphone A/S (1) Denmark 60.0% (Subsequently Sold Jan. 1, 2005)
F-9
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
(1) Formerly known as 909.909 A/S
On December 31, 2003, the Company purchased the remaining 15% interest
in Europe-Visions A/S. The minority interests' proportionate share of income or
loss of Europe-Visions A/S is included in the consolidated statement of
operations through December 31, 2004.
The accompanying financial statements included the operating results of
Public Key Infrastructure (PKI) Services through April 1, 2004, internet
security products and services including virus detection services, email
security products, vulnerability testing through September 30, 2004 the secure
remote backup services through November 2003, digital video surveillance through
December 2003, and secure hosting through January 1, 2004.
Other significant operating subsidiaries consolidated under
Europe-Visions A/S and its jurisdiction of incorporation and the related Company
ownership interest in those subsidiaries at December 31, 2004 are as follows:
COUNTRY OF INTEREST
SUBSIDIARY INCORPORATION OWNERSHIP
---------- ------------- ---------
Ciac A/S Denmark 100.0%
Prime Vision A/S Denmark 100.0%
Arhustudiet A/S Denmark 100.0%
Publishing & Management ApS Denmark 51.0%
TV Akademiet A/S Denmark 100.0%
Formedia A/S Denmark 100.0%
Mobile Broadcasting A/S Denmark 100.0%
On April 1, 2004, the Company purchased the remaining 25%
interest of Mobile Broadcasting A/S. The minority interests' proportionate share
of income or loss of Mobile Broadcasting is included in the consolidated
statement of operations through March 31, 2004.
On July 1, 2004, the Company distributed a 49% interest of Publishing &
Management ApS to current management. The minority interests' proportionate
share of income or loss of Publishing & Management ApS is included in the
consolidated statement of operations from July 1, 2004 through December 31,
2004.
On April 1, 2004 the Company merged TV Facilities A/S into Prime Vision
A/S. The merger had no effect on the accompanying financial statements.
On June 25, 2004 the Company formed Formedia A/S as a wholly owned
subsidiary of Europe-Visions A/S.
At December 31, 2004 and 2003, the Company held a 25% interest in
Mediehuset Danmark ApS; the investment is accounted for under the equity method
of accounting.
F-10
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
REPORTING CURRENCY
The consolidated financial statements are stated in Danish Kroner
("DKK"), the currency of the country in which the Company and its major
subsidiaries are incorporated and operate. Balance sheet accounts of foreign
subsidiaries are translated into DKK at the year-end exchange rate and items in
the statement of operations are translated at the average exchange rate.
Resulting translation adjustments are recorded to other accumulated
comprehensive income, a separate component of shareholders' equity.
Translation adjustments arising from inter-company financing of a
long-term investment nature are accounted for similarly. Some transactions of
the Company and its subsidiaries are made in currencies other than the reporting
currency. Gains and losses from these transactions are included in the statement
of operations as foreign currency transaction gains and losses.
INFORMATION EXPRESSED IN US DOLLARS
Translation of DKK amounts into US Dollar amounts is included solely
for the convenience of the reader and has been made at the rate of 5.4676 DKK to
one US Dollar, the approximate exchange rate at December 31, 2004. Such
translation should not be construed as a representation that the DKK amounts
could be converted into US Dollars at that or any other rate.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
US GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Estimates are used when accounting for items and matters such as the
allowance for uncollectible accounts, inventory obsolescence, amortization,
asset valuations, impairment assessments, taxes, guarantees and contingencies.
Management bases its estimates on historical experience and on other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities. Actual results may differ from these estimates under different
assumptions or conditions.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and short-term deposits with
maturities of less than three months at the time of purchase.
RESTRICTED CASH
Restricted cash as of December 31, 2004, included an escrow account
with respect to the secure communications, on-site solutions, and payment
platforms to website owners, commercial enterprises and electronic commerce
service providers business (PKI) that was sold in April 2004 amounting to DKK
F-11
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
5,352. 50% of the holdback amount was released five business days following
December 31, 2004 and the last 50% of the holdback amount is to be released five
business days following September 30, 2005.
MARKETABLE SECURITIES - AVAILABLE FOR SALE
The Company accounts for investments in Marketable securities in
accordance with Statement of Financial Accounting Standard (SFAS) 115,
"Accounting for Certain Investments in Debt and Equity Securities". Under SFAS
115 the Company's investments in public companies are classified as
"available-for-sale". These investments are carried at fair value based on
quoted market prices. We review the marketable equity holdings in publicly
traded companies on a regular basis to determine if any of the marketable
securities have experienced an other-than-temporary decline in its fair value.
We consider the investee company's cash position, earnings and revenue outlook,
stock price performance over the past six months, liquidity and management,
among other factors, when reviewing the marketable equity securities. If it is
determined that an other-than-temporary decline in fair value exists in a
marketable equity security, we record an investment loss in the consolidated
statement of operations. Marketable securities are classified as current if the
Company has the ability or intention of selling the security within 12 months.
LONG-TERM INVESTMENTS
Investments in non-public companies are included in long-term
investments in the consolidated balance sheet and are accounted for under the
cost method and equity method. For these non-quoted investments, we regularly
review the assumptions underlying the operating performance and cash flow
forecasts based on information requested from these privately held companies.
Generally, this information may be more limited, may not be as timely as and may
be less accurate than information available from publicly traded companies.
Assessing each investment's carrying value requires significant judgment by
management. If it is determined that there is an other-than-temporary decline in
the fair value of a non-public equity security, we write-down the investment to
its fair value and record the related write-down as an investment loss in the
consolidated statement of operations.
TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable are recorded at the amount invoiced to
customers and they do not bear interest. The allowance for doubtful accounts is
the Company's best estimate of amount of probable losses resulting from the
inability of our customers to make required payments. We regularly review the
adequacy of our accounts receivable allowance after considering the size of the
accounts receivable balance, each customer's expected ability to pay and our
collection history with each customer. We review significant invoices that are
past due to determine if an allowance is appropriate based on the risk category
using the factors described above.
F-12
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
The following includes the changes in the allowance for doubtful
accounts for the years ended December 31, 2002 to December 31, 2004:
Amounts
charged
(credited) to
Allowance for doubtful accounts: Balance at Operating Balance at
January 1 Expenses Write-offs December 31
------------- ------------- ---------- ----------------
Year ended December 31, 2002 7,640 0 (3,011) 4,629
Year ended December 31, 2003 4,629 ( 699) (1,691) 2,239
Year ended December 31, 2004 2,239 ( 720) (927) 592
NOTES RECEIVABLE
Notes receivable were recorded as a result of the sale of Virus 112 and
totaled DKK 11,000 at December 31, 2004. Interest of 6% per annum is recorded
and receivable on a quarterly basis beginning December 31, 2004. Principal
payments of DKK 550 are payable quarterly beginning March 31, 2005 through
December 31, 2009. No allowance for doubtful accounts has been recorded on the
notes as they are deemed collectable. The Company's policy for putting the loan
on non-accrual status and to record an allowance for doubtful accounts is based
upon management's best estimate of amount of probable losses resulting from the
purchaser inability to make required payments.
BROADCASTING PROGRAMMING RIGHTS
The Company acquires rights to broadcasting programming and produces
programming for exhibit on its cable television station. The costs incurred in
acquiring and producing programs are capitalized and amortized over the greater
of when the program is aired or the license period or the projected useful life
of the programming, currently 12 to 28 months. Program rights and the related
liabilities are recorded at the gross amount of the liabilities when the license
period has begun, the cost of the program is determinable, and the program is
accepted and available for airing.
INVENTORIES
Inventories principally consist of 38,000 (not in thousands) IBM Tivoli
licenses at both December 31, 2003 and 2004, relating to our remote back-up
business. Inventories are stated at the lower of cost or market with cost
determined on the basis of the first-in, first-out method. In order to evaluate
the designated market value of such assets the company investigates the
available market for these products and their expected sales price. As of
December 31, 2002 these licenses were written-down by DKK 21.7 million to DKK 0.
During 2003, the Company recognized a DKK 3,367 reduction in cost of revenues
for inventory credits given on the return of 7,000 IBM Tivoli licenses. As of
December 31, 2004 these licenses were valued at DKK 0, net of allowance for
obsolescence or DKK 18,333.
PROPERTY, PLANT AND EQUIPMENT
Buildings, production and technical equipment, furniture and fixtures,
automobiles and leasehold improvements are carried at cost less accumulated
depreciation. Assets held under capital leases are recorded at the present value
of minimum lease payments less accumulated depreciation. Land is carried at cost
and is not depreciated.
Buildings are depreciated on a straight-line basis over 50 years. Production and
technical equipment, furniture and fixtures and automobiles are depreciated on a
straight-line basis over the expected useful lives
F-13
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
of between three and ten years. Leasehold improvements are amortized over the
shorter of their expected lives, which is ten years or the non-cancelable term
of the leases.
GOODWILL AND OTHER DEFINITE LIFE INTANGIBLE ASSETS
Goodwill represents the excess of costs over the fair value of the
identifiable net assets of businesses or remaining minority interest of
businesses acquired. Other definite life intangibles assets consisted in 2003 of
license rights to virus scanning software and other intangible assets. The
Company accounts for Goodwill and Other Intangible Assets in accordance with
SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, and accordingly Goodwill and
indefinite intangible assets are tested for impairment at least annually or when
circumstances change that could result in impairment; definite-life intangible
assets with estimable useful lives are amortized over their respective estimated
useful lives, and reviewed for impairment in accordance with SFAS No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS No. 144, long-lived assets, such as property,
plant, and equipment, and purchased intangibles subject to amortization, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Circumstances which
could trigger a review include, but are not limited to: significant decreases in
the market price of the asset; significant adverse changes in the business
climate or legal factors; current period cash flow or operating losses combined
with a history of losses or a forecast of continuing losses associated with the
use of the asset; and current expectation that the asset will more likely than
not be sold or disposed of significantly before the end of its estimated useful
life.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated undiscounted future cash flows, an impairment charge
is recognized by the amount by which the carrying amount of the asset exceeds
the fair value of the asset. Assets to be disposed of would be separately
presented in the balance sheet and reported at the lower of the carrying amount
or fair value less costs to sell, and would no longer be depreciated. The
depreciable basis of assets that are impaired and continue in use is their
respective fair values
REVENUE RECOGNITION
The Company derives revenues from two primary categories: (i)
Broadcasting, which includes cable and digital television subscriber income and
program production income; and (ii) Internet services, which include managed
public key infrastructure ("PKI") services and digital certificate services
(through April 1, 2004), virus surveillance and detection services (through
September 30, 2004), and royalty relating to remote data backup services. The
Company's revenue recognition policies are in accordance with SEC Staff
Accounting Bulletin ("SAB") No. 104, "REVENUE RECOGNITION, unless otherwise
noted below. The revenue recognition policy for each of these categories is as
follows:
F-14
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
BROADCASTING
The Company recognizes cable and digital television revenue in
accordance with the terms of the contracts entered into with cable and
digital television providers, which are based on the number of subscribers
for the Company's television channel and as programming, is made available
to viewers. Revenue and costs associated with program production are
recognized when persuasive evidence of an arrangement exists, programs are
completed and delivered to our customers, and fees are fixed and
collectable with no further future obligation to the customer.
INTERNET SERVICES
The Company previously recognized revenues from issuances of digital
certificates and managed PKI services, virus surveillance and detection
services, and remote data backup, previous to the divestitures of these
businesses in 2003 and 2004, when all of the following criteria were met:
(1) persuasive evidence of an arrangement exists, (2) delivery of products
and services has occurred, (3) the fee is fixed or determinable and (4)
collectibility is reasonably assured. We determine each of the criteria in
our revenue recognition as follows:
PERSUASIVE EVIDENCE OF AN ARRANGEMENT EXISTS. We enter into written
agreements with our customers, that are signed by both the customer and
the Company, or other related documentation from those customers who have
previously negotiated an arrangement.
DELIVERY OF PRODUCTS AND SERVICES HAS OCCURRED. Certificate and
security technologies may be delivered physically or downloaded by the
customer. Undelivered components of these technologies that are essential
to the functionality of the products, if any are not recognized until
delivery in full is complete.
THE FEE IS FIXED OR DETERMINABLE. Agreements with customers do not
include a right to return. The majority of the initial fees are due within
one year or less. Should there be arrangements with payment terms that
extending beyond customary payment terms, the fees then are considered not
to be fixed or determinable, and revenues from such arrangements are
recognized as payments become due and realizable.
COLLECTIBILITY IS PROBABLE. Collectibility is assessed for each
customer class of which there is a history of successful collection based
upon a credit review. Initial determination that collectibility is not
probable results in the revenues being recognized as cash is collected.
In software arrangements involving multiple elements, as required by
the EITF Issue 00-21, "Revenue Arrangements with Multiple Deliverables"
and American Institue of Certified Public Accountants Statement of
Position ("SOP") 97-2, as amended by SOP 98-9, the Company allocates and
defers revenue for the undelivered elements based on vendor-specific
objective evidence, or VSOE, of the fair value of the undelivered
elements, and recognizes the difference between the total arrangement fee
and the amount deferred for the undelivered elements as revenue. VSOE of
each element is based on the price for which the undelivered element is
sold separately. If VSOE does not exist for undelivered elements such as
maintenance services, then the entire arrangement fee is recognized over
the performance period.
Fees from the sales of digital certificates and managed PKI services,
which include bundled
F-15
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
maintenance services that are not sold separately, were deferred and
recognized ratably over the period that such contracted services were
provided, usually 12 to 24 months.
Revenues from virus surveillance and detection services, which include
bundled maintenance services that were not sold separately, were deferred
and recognized ratably over the period that the service was provided,
usually 3 to 36 months.
Up-front fees from hosting and remote data backup services were
deferred and recognized ratably over the period that the services are
provided, usually 3 to 12 months.
The Company's consulting and installation services relating to secure
communication, virus protection and network security were not essential to
the functionality of the software. These software products were fully
functional upon delivery and did not require any significant modification
or alteration. Revenues from consulting and installation services, which
were provided on a time and materials basis, were recognized as the
services were performed and accepted by the customer.
Currently, the Company receives royalties on the sales of Internet
products and services of divested subsidiaries. These royalties are
recognized as revenues in the periods in which they are earned and deemed
collectable.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expenses
totaled DKK 4.0 million, DKK 3.9 million and DKK 5.0 million in 2002, 2003 and
2004, respectively.
INCOME TAXES
The Company utilizes the asset and liability method to account for
income taxes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and to operating loss carry forwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
The Company records a valuation allowance to reduce deferred tax assets to an
amount which realization is more likely than not.
STOCK OPTIONS
At December 31, 2004, the Company has a number of stock options
outstanding. We apply the intrinsic value-based method of accounting prescribed
by Accounting Principles Board ("APB") Opinion No. 25, "ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES", and related interpretations including FASB Interpretation
No. 44, "ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION AN
INTERPRETATION OF APB NO. 25" issued in March 2000, to account for our fixed
plan stock options.
F-16
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
Under this method, compensation expense is recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. SFAS No. 123 "ACCOUNTING FOR STOCK-BASED COMPENSATION,"
established accounting and disclosure requirements using a fair value-based
method of accounting for stock-based employee compensation plans. As allowed by
SFAS No. 123, we have elected to continue to apply the intrinsic value-based
method of accounting described above, and have adopted the disclosure
requirements of SFAS No. 123. The following table (in DKK) illustrates the
effect on net loss and net loss per share if we had applied the fair value
recognition provisions of SFAS No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION," to stock-based employee compensation under which the estimated
fair value of the options would have been over the options' vesting periods:
2002 2003 2004
---------------------------------------------------
Reported net income (loss) (283,348) (6,330) 58,454
Reported stock-based compensation expense - - -
Pro forma stock-based compensation expense (12,036) (8,027) (6,982)
------------- ------------- -------------
Pro forma net income (loss) (295,384) (14,357) 51,472
Reported basic income (loss) per share (64.99) (1.35) 11.82
Reported diluted income (loss) per share (64.99) (1.35) 11.10
Pro forma basic income (loss) per share (67.75) (3.07) 10.40
Pro forma diluted income (loss) per share (67.75) (3.07) 9.77
The fair value of these stock options was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted
average assumptions
2002 2003 2004
-------------------------------------
Risk free interest rate 4.70% 3.62% 3.47%
Dividend yield 0% 0% 0%
ADR's Annual volatility of the expected market price 1.25 1.58 1.60
Expected life of the options 2.81 4.90 4.47
CONCENTRATION OF CREDIT RISK
Cash and cash equivalents are, for the most part, maintained with
several major financial institutions in Scandinavia. These balances are insured
up to DKK 300 per account.
The company has one large customer in the broadcasting segment which alone
accounts for 28% and 25% of the company's consolidated revenue for 2002, 2003,
respectively. The company has two large customers
F-17
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
in the broadcasting segment which accounts for 32% and 16%, respectively of the
company's consolidated revenue for 2004. These two customers account for
approximately 33% and 22% of our outstanding receivables at December 31, 2004.
PENSIONS AND OTHER POST-RETIREMENT AND POST-EMPLOYMENT BENEFITS
The Company contributes to insurance companies for defined contribution
pension benefits agreements between employees and insurance companies. The
Company's contributions are expensed as incurred. The Company has no future
liabilities related to pensions beyond the contribution.
Other than the pension benefits described above, the Company does not
provide its employees with post-retirement and post-employment benefits.
RESTATEMENT
The financial statements have been restated for all periods presented
to reflect a one-for-six reverse stock split of it ordinary common shares
effected May 19, 2005 (See Note 14).
The financial statements for all periods presented have been restated
to reclassify the assets, liabilities, result of operations and cash flow for
the disposed components of EuroTrust Virus 112 A/S, EuroTrust PKI Services A/S,
EuroTrust Sweden, Telefax Scandinavia AB, EuroTrust E-Security SARL, and
EuroTrust France SAS to discontinued operations.
The effect of the restatement reduced revenues from continuing
operations from DKK 135,789 to DKK 92,028 for 2002, from DKK 166,411 to DKK
109,822 for 2003 and DKK 112,111 to DKK 91,036 for 2004. The effect of the
restatement reduced the (loss) from continuing operations from DKK (277,348) or
DKK (63.61) per share to DKK (97,363) or DKK (22.33) per share for 2002;
resulted in the (loss) from operation of DKK (8,930) or DKK (1.91) per share
changing to income from continuing operations of DKK 2,041 or DKK 0.44 per share
for 2003; and income from continuing operations changing from DKK 58,454 or DKK
11.82 per share to a (loss) from continuing operations of DKK (26,251) or DKK
(5.30) per share in 2004. The restatement had no effect on net loss or loss per
share for 2002 and 2003 or net income or income per share for 2004.
RECLASSIFICATIONS
Certain balances in the financial statements for December 31, 2002 and
2003 have been reclassified to conform to the headings and classifications used
in the December 31, 2004 financial statements
RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs". SFAS
No. 151 requires abnormal amounts of inventory costs related to idle facility,
freight handling and wasted material (spoilage) to be recognized as
current-period charges. In addition, SFAS No. 151 requires that allocation of
fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. The Company will be required to adopt the
provisions of SFAS No. 151 for fiscal years beginning after June 15, 2005.
Management believes the provisions of this Standard will no effect on our
financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based
Payment". This Statement revises SFAS No. 123, "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees."
SFAS No. 123(R) requires that the compensation cost relating to
share-based payment transactions be recognized in financial statements. The cost
will be measured based on the fair value of the instruments issued. The Company
will be required to apply SFAS No. 123(R) as of the first fiscal year begins
after June 30, 2005. Accordingly, The Company will adopt SFAS No. 123(R) during
the first quarter of fiscal 2006. Management is currently evaluating the impact
SFAS No. 123(R) will have on the Company's results of operations as a result of
adopting this new Standard. Upon adopting SFAS 123(R)
F-18
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
the Company's income will decrease as a result of the additional compensation
expense if additional options are granted.
In January 2003, the FASB issued Interpretation No. 46, "CONSOLIDATION
OF VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ACCOUNTING RESEARCH BULLETIN
("ARB") NO. 51." In December 2003, the FASB issued a revision to Interpretation
No. 46, and interpretation of ARB Opinion No. 51 ("FIN 46R"). FIN 46R clarifies
the application of ARB 51 "CONSOLIDATED FINANCIAL STATEMENTS," to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support provided by any parties, including the equity holders. FIN 46R requires
the consolidation of these entities, known as variable interest entities
("VIE's"), by the primary beneficiary of the entity. The primary beneficiary is
the entity, if any, that will absorb a majority of the entity's expected losses,
receive a majority of the entity's expected residual returns, or both.
Among other changes, the revisions of FIN 46R (a) clarified some
requirements of the original FIN 46, which had been issued in January 2003, (b)
eased some implementation problems, and (c) added new scope exceptions. FIN 46R
deferred the effective date of the interpretation for public companies to the
end of the first reporting period ending after March 15, 2004, except that all
public companies must at a minimum apply the unmodified provisions of the
interpretation to entities that were previously considered "special-purpose
entities" in practice and under the FASB literature prior to the issuance of FIN
46R by the end of the first reporting period ending after December 15, 2003.
Among the scope expectations, companies are not required to apply FIN
46R to an entity that meets the criteria to be considered a "business" as
defined in the interpretation unless one or more of four named conditions exist.
FIN 46R applies immediately to a VIE created or acquired after January 31, 2003.
EuroTrust does not have any interests in VIE's and the adoption of FIN 46R did
not have a material impact on EuroTrust financial position, results of
operations or cash flows.
In March 2004, the FASB issued EITF Issue No. 03-1 ("EITF 03-1"), "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments." EITF 03-1 includes new guidance for evaluating and recording
impairment losses on debt and equity instruments, as well as new disclosure
requirements for investments that are deemed to be temporarily impaired. The
accounting guidance provided in EITF 03-1 is effective for fiscal years
beginning after June 15, 2004, while the disclosure requirements are effective
for annual periods ending after June 15, 2004. The Company does not expect the
adoption of EITF 03-1 will have a material impact on its financial position,
results of operations, or cash flows.
2. INVESTMENT SECURITIES
The following is a summary of available-for-sale investments held as
long-term assets (in DKK):
GROSS
UNREALIZED FAIR
COST LOSSES VALUE
---- ------ -----
December 31, 2003:
Shares in Land and Leisure A/S 698 (394) 304
------------- ----------- -----------
Total 698 (394) 304
------------- ----------- -----------
F-19
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
OTHER THAN
TEMPORARY FAIR
COST LOSSES VALUE
---- ------ -----
December 31, 2004:
Shares in Land and Leisure A/S 698 (501) 197
------------- ----------- -----------
Total 698 (501) 197
------------- ----------- -----------
The unrealized loss on the available-for-sale investment securities is
included in other cumulative comprehensive income during 2003. During 2004, the
Company recognized a DKK 501 other than temporary loss on available-for-sale
marketable securities.
3. LONG TERM COST AND EQUITY METHOD INVESTMENTS IN UNCONSOLIDATED COMPANIES
The following is a summary of long-term investments that are stated at
cost less impairment charges(in DKK)
DECEMBER 31,
2003 2004
---- ----
Cost Method Investments
Shares in Excelsa S.P.A. 2,494 0
Trust Italia S.p.A. - -
GBS A/S - 0
-------------- --------------
Total Cost Method Investments 2,494 0
-------------- --------------
Equity Method Investments
Mediehuset Danmark ApS 1,500 1,638
-------------- --------------
-------------- --------------
EXCELSA SA S.R.L.
During the second half of 2004, the Company acquired additional 139,322
(not in thousands) ordinary shares of Excelsa S.P.A. for a total cash amount of
DKK 11,948 or Euro 1,659. Subsequent to year ended December 31, 2004, Eurotrust
discovered that Excelsa SA had overstated their 2004 and 2003 results.
EuroTrust, MSGI and one other significant shareholders entered into negotiations
with Excelsa to attempt to remediate the damages. As a result of overstatement
and uncertainty of Excelsa ability to continue as a going concern management
recorded an impairment charge of DKK 14,442 during 2004.
TRUST ITALIA S.P.A.
On September 1, 2004, the Company sold its approximately 16% interest in
Trust Italia S.p.A. to Excelsa SA for a total consideration of DKK 7,436 or
Euros 1,000. The investment was written down to zero at December 31, 2002 based
on an impairment test.
F-20
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
GBS A/S
During 2004 the Company sold the remaining 10% of the shares in GBS A/S
for DKK 72 in cash. The investment was written down to zero at December 31, 2002
based on an impairment test.
MEDIEHUSET DANMARK APS
In 2003, as part of a severance agreement with our former COO, Brain
Mertz Pedersen, the Company invested 1.5 million DKK for a 25% ownership of
Mediahuset Danmark ApS. At the date of purchase the purchase price exceeded 25%
of the net equity of Mediahuset Danmark ApS by DKK 998. The Company's Equity in
earnings of Mediahuset Danmark ApS for the year ended September 30, 2004 was DKK
138.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment include the following (in DKK):
DECEMBER 31,
Estimated ------------
Life 2003 2004
N/A ------------------------------
Land 1,929 1,929
Building 50 years 27,321 27,321
Production & Technical equipment 3 to 5 years 24,998 83,362
Furniture and fixtures 3 to 5 years 10,031 1,920
Automobiles 5 years 3,536 4,617
Leasehold improvements 3 to 10 years 6,040 3,748
-------------- -------------
73,855 122,897
Less accumulated depreciation and (18,514) (30,305)
amortization
-------------- -------------
Net property, plant and equipment 55,341 92,592
============== =============
Depreciation expense 7,872 10,604
The net book value of assets on capital lease arrangements included in
property, plant and equipment total DKK 0 and DKK 5,829 at December 31, 2003 and
2004, respectively.
On April 1, 2005, the Company sold its building located at
Poppelgardvej 11-13 in S0borg, Copenhagen to Lion Ejendomme ApS for DKK 20,000
in cash. At December 31, 2004 the net book value of the building was DKK 19,638.
At December 31, 2003 and 2004, certain of the Company's building and
equipment was held as collateral on current and long term financing (See Note 9
& 10).
F-21
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
5. GOODWILL
Goodwill relating to the purchase of the Company's Broadcast Media
segment. consisted of the following (in DKK):
December 31,
2003 2004
----------------------------------
BALANCE AT THE BEGINNING OF THE YEAR 20,964 23,941
CHANGES:
Additions 2,977 1,585
Disposals 0 0
Impairment 0 (965)
----------------------------------
BALANCE AT THE END OF THE YEAR 23,941 24,561
----------------------------------
On April 1, 2004, Prime Vision A/S purchased the remaining 25% of
Mobile Broadcast A/S, from Euro Broadcast Hire A/S thereby becoming the 100%
owner of Mobile Broadcast A/S. The purchase price exceeded the fair market value
of net assets acquired by approximately DKK 620, which was recorded as goodwill.
On April 23, 2004, the Company's subsidiary InAphone (formerly known as
909.909 A/S) acquired the assets of Ideation House ApS. The purchase price
exceeded the fair value of the net assets acquired by approximately DKK 965,
which was recorded as Goodwill. At December 31, 2004, the Company recorded an
impairment charge of DKK 965 related to the purchase as the projected future
cash flows from the subsequent sale of InAphone were insufficient to realize the
related goodwill.
On December 31, 2003, EuroTrust A/S purchased the remaining 15% of
Europe-Visions A/S (formerly Euro909Media A/S), from Parken Sport &
Entertainment thereby becoming the 100% owner of Europe-Visions A/S. The
purchase price exceeded the fair market value of net assets acquired by
approximately DKK 2,977, which was recorded as goodwill.
During the fourth quarter of 2003 and 2004, the Company performed the
annual impairment test and recorded an impairment charge of DKK 0 and DKK 965,
respectively.,
Fair value was estimated for each reporting unit, within EuroTrust,
using the expected present value of discounted future cash flows the unit is
expected to generate over its remaining life. When making these estimates, we
were required to make estimates of future operating trends and judgments on
discount rates and other variables. Actual future results and other assumed
variables could differ from these estimates. The discount rates used ranged from
14 to 16 percent and the terminal values were estimated based on terminal growth
rates of two percent. The assumptions supporting the estimated future cash
flows, including the discount rate and estimated terminal values, reflect
management's best estimates.
F-22
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
6. LICENSE RIGHTS AND OTHER INTANGIBLES, NET
License rights and certain other intangible assets are classified as
definite life intangible assets and consisted of the following:
December 31,
------------------------------
2003 2004
-------------- --------------
Definite Life Intangible Assets:
Software licensing rights 52,540 -
Other intangible assets 5,816 5,816
-------------- --------------
58,356 5,816
Less accumulated amortization (57,256) (5,816)
-------------- --------------
Net definite life intangible assets 1,100 -
============== ==============
Amortization expense (445) (224)
Weighted average amortization period 5 Years 5 Years
During 2004, the Company sold the remaining software licensing rights
in connection with the sale of Virus 112 (See Note 7).
7. BUSINESS ACQUISITIONS, DIVESTITURES AND DISCONTINUED OPERATIONS
ACQUISITIONS DURING 2004
On April 1, 2004, Prime Vision A/S purchased the remaining 25% of
Mobile Broadcast A/S, from Euro Broadcast Hire A/S thereby becoming the 100%
owner of Mobile Broadcast A/S. The purchase price exceeded the fair market value
of net assets acquired by approximately DKK 620, which was recorded as goodwill.
On April 23, 2004, the Company's subsidiary formerly known as 909.909
A/S changed it's name to InAphone A/S and acquired, in a transaction accounted
for as a purchase, the assets and operations of Ideation House ApS which engages
in the development and marketing of mobile phone software technologies. The
terms of the purchase required the Company to surrender 40% of the outstanding
equity of InAphone A/S to the current management and to loan DKK 3,000 of
working capital to InAphone A/S. The purchase price exceeded the fair value of
the net assets acquired by approximately DKK 965, which was recorded as
Goodwill. The consolidated financial statements include the results of
operations of InAphone A/S from April 23, 2004 through December 31, 2004.
Further, the net loss for InAphone A/S for the period from April 23, 2004
through December 31, 2004 applicable to the 40% minority interest were not
allocated to the holders of the non-controlling interest as there is an
inability of the minority shareholders to share in such losses.
On January 1, 2005, and subsequent to December 31, 2004, the Company
sold InAphone A/S as InAphone A/S had depleted the capital management was
willing to allocate, without showing any significant increase in sales from the
use of media in mobile phones and hand-held personal organizers. The minority
shareholders paid DKK 1 for the Company's 60% interest and assumed the net
liabilities of InAphone A/S as of December 31, 2004. The subsequent sale
resulted in no gain or loss.
F-23
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
ACQUISITIONS DURING 2003
On December 31, 2003, EuroTrust A/S purchased the remaining 15% of
Europe-Visions A/S (formerly Euro909Media A/S), from Parken Sport &
Entertainment thereby becoming the 100% owner of Europe-Visions A/S. The
purchase price exceeded the fair market value of net assets of Europe-Visions
acquired by approximately DKK 2.9 million, which was recorded as goodwill.
ACQUISITIONS DURING 2002
ALPHASYS SAS
As of January 2002, the Company acquired 100% of the French IT-security
company Alphasys SAS, for a cash consideration of DKK 40.2 million. This
consideration was subsequently reduced by DKK 5,057 after a loss guarantee was
negotiated and a refund paid by the vendor of Alphasys SAS in June 2002.
Alphasys was purchased from Synerco ApS, a Danish company, also known
as Venture 2000. Peter Forchhammer is a majority shareholder of Synerco ApS and
was one of the original founders of EuroTrust in 1985 and is currently a
shareholder in EuroTrust.
The total purchase price has been allocated to the assets acquired and
the liabilities assumed on the acquisition date. In the provisional purchase
price allocation goodwill of DKK 33.2 million was recorded in connection with
this acquisition, which forms part of The Company's Internet Security Product
and Services Segment. The results of these operations have been reclassified to
discontinued operations in the Company's financial statements.
As of December 31, 2002, following an assessment of the current and
future performance of the Alphasys business, we tested the goodwill arising on
this acquisition for impairment. As a result of this test we wrote down the
carrying value of the goodwill from DKK 33.2 million to zero. The tangible fixed
assets acquired were also written down to zero as a result of this impairment
test.
EUROTRUST NETVAULTING A/S (FORMERLY WISEHOUSE A/S)
As of December 31, 2002 Medani A/S exercised the written option issued
at the time of the Company's purchase of an 85% equity interest in EuroTrust
NetVaulting A/S to sell its remaining equity interest of 15% in EuroTrust
NetVaulting A/S to the company. The consideration comprised 134,083 ADR's,
valued at DKK 5,000. The share purchase was made in accordance with the terms of
a shareholder agreement with the minority shareholder Medani A/S. The EuroTrust
ADR's issued to Medani A/S in this transaction were purchased from a shareholder
who had purchased the shares in the
F-24
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
market, at the request of the Company, during the period August 2002 to November
2002. The shares were sold to the Company at the same price that the shareholder
had paid in the market with an additional 1% to cover transaction costs. The
shareholder has been working as a consultant to EuroTrust NetVaulting A/S.
The Company experienced a loss of DKK 4,923 with regard to this option
which is included within other (expenses) income in the consolidated statement
of operations as of December 31, 2002. The difference between the actual
purchase price for the ADR's of DKK 4,575 and the fair value of the option of
DKK 5,000 has been included within other (expenses) income, net in the
consolidated statement of operations as a gain amounting to DKK 425.
EUROTRUST SECURE HOSTING A/S
As of January 1, 2002, we combined our Digiweb activity with DHT
Hosting ApS (a Danish automated hosting company) to form EuroTrust Secure
Hosting A/S, our secure web hosting subsidiary, in which we have a 75% ownership
interest. DHT Hosting ApS has an option to sell its 25% interest in EuroTrust
Secure Hosting A/S to us in 2004 and forward at a price based on the future
profitability of Hosting or for a minimum of DKK 2,500. In addition, DHT Hosting
ApS has an option to acquire an additional 10% of EuroTrust Secure Hosting A/S
for a price of DKK 50 (at par). These options have been included in the
financial statements at their respective fair values, resulting in an expense of
DKK 2,287 in 2002 which is included within other (expenses) income, net in the
consolidated statement of operations for the year ended December 31, 2002.
DISCONTINUED OPERATIONS
During 2004 and 2003, the company elected to divest the operations of
the internet services segment. The divestitures were completed during 2004 and
2003 with the operations of EuroTrust Virus 112 A/S, EuroTrust PKI Services A/S,
EuroTrust Sweden, Telefax Scandinavia AB, EuroTrust E-Security SARL, and
EuroTrust France SAS being reclassified in the accompanying statement of
operations to discontinued operations as the Company will not have any
continuing involvements in the components or cash flows from their operations.
Revenues of the discontinued components for the years ended December 31, 2004,
2003 and 2002 were DKK 21,075, DKK 56,589, and DKK 43,761. The pretax income or
(loss) from the operations of the discontinued components was DKK(179,985),
DKK(18,420) and DKK1,090 for the 2002, 2003 and 2004, respectively. The gain
(loss) on disposal of the discontinued components was DKK (6,000), DKK 10,049
and DKK 83,615 for 2002, 2003 and 2004, respectively.
DIVESTITURES DURING 2004
VIRUS 112
On September 30, 2004 the Company sold the assets of Virus112, to
Comendo A/S. Virus112 A/S, a wholly-owned subsidiary of the Company, through
which the Company offered virus detection products and services. The purchase
price was approximately U.S. $2.5 million, of which U.S. $700,000 was paid in
cash and the balance was paid by a five-year note receivable in the principal
amount of U.S. $1.8 million, bearing interest of 6% per annum, and payable in
quarterly installments. Comendo will also hire the Virus112 employees and assume
the employee and the ongoing contractual obligations of Virus112. In addition,
Comendo will enter into a 5-year lease for the portion of the facility owned by
the Company that is occupied by Virus 112.
In connection with the sale Comendo agreed to lease certain office
space and equipment from the Company. The lease calls for Comendo to make
monthly payments of DKK 79 the first 6 months and afterwards DKK 113 per month
through September 30, 2009.
F-25
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
The following table summarizes the proceeds received, the assets and
liabilities divested and the gain recorded by the Company on the closing date of
the sale to Comendo:
SEPTEMBER 30, 2004
--------------------
(IN THOUSANDS DKK)
Proceeds from sale of Virus112 A/S assets:
Cash received (October 1, 2004) 4,000
Notes receivable 11,000
----------
15,000
==========
Assets and liabilities divested in sale of EuroTrust PKI assets:
Current assets 3,190
----------
Total assets divested 3,190
----------
Current deferred revenue (10,868)
----------
Total liabilities divested (10,868)
----------
Net liabilities divested (7,678)
==========
Write-down of related property and equipment in connection with
the sale 1,741
==========
Related cost of divestiture 1,200
==========
Gain on sale of business 19,737
==========
PKI
On April 1, 2004, the Company sold the Secure Socket Layer certificate
assets of EuroTrust PKI to VeriSign. EuroTrust PKI, a wholly-owned subsidiary of
the Company, is the operation through which
F-26
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
the Company sells Public Key Infrastructure (PKI) Services, including VeriSign's
SSL certificates and related services in Austria, Switzerland, Finland, Norway,
Sweden and Denmark. Under the terms of the agreement, VeriSign paid the Company
U.S. $8.5 million in cash and assume the ongoing obligations of EuroTrust PKI
SSL contracts.
In connection with the sale VeriSign agreed to lease certain office space
and equipment from the Company. The lease calls for VeriSign to make monthly
payments of U.S. $10 through April 1, 2007. VeriSign may cancel the lease after
18 months through the payment of a U.S. $50 cancellation fee.
The following table summarizes the proceeds received, the assets and
liabilities divested and the gain recorded by the Company on the closing date of
the sale to VeriSign:
APRIL 1, 2004
------------------
(IN THOUSANDS DKK)
Proceeds from sale of EuroTrust PKI assets:
Cash received 46,312
Cash held in escrow 5,959
-----------
52,271
===========
Assets and liabilities divested in sale of EuroTrust PKI assets:
Current assets 8,888
-----------
Total assets divested 8,888
-----------
Current deferred revenue (29,620)
-----------
Total liabilities divested (29,620)
-----------
Net liabilities divested (20,732)
-----------
Write-down of related property and equipment in connection with
the sale 9,367
==========
Legal and related cost of divestiture 574
==========
Gain on sale of business 63,062
==========
F-27
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
Secure Hosting A/S
In January 2004, the Company sold its hosting subsidiary, EuroTrust
Secure Hosting A/S, to Mondo A/S. The consideration we received includes a
three-year royalty agreement on future sales generated from our transferred
customer base and thus has not been classified as a discontinued operations. The
agreement includes a minimum royalty of DKK 7,100 over the three-year period.
During 2004, the Company received royalty payment of DKK 1,435 which have been
included in the gain from sales of business line item on the consolidated
statements of operations.
DIVESTITURES DURING 2003
NetVaulting A/S
On November 30, 2003, the Company sold the assets in its secure remote
back-up business, EuroTrust NetVaulting A/S, to Munk IT. The consideration
includes a 10-year royalty agreement on future sales generated from our
transferred customer base and thus has not been classified as discontinued
operations.
EuroTrust Sweden AB
On December 31, 2003, the Company sold its 70% interest in EuroTrust
Sweden AB to CEO/shareholder (30% of EuroTrust Sweden - Klas Carlin) and our
previous CTO Tobias Wahlgren for DKK 1. The operations have been reclassified as
discontinued operations in the accompanying financial statements. All employment
liabilities for Tobias Wahlgren is in connection with the agreement transferred
from EuroTrust PKI Services A/S to EuroTrust Sweden AB. EuroTrust Sweden AB had
a negative equity of approx. DKK 1,400 as of December 31, 2003. Due to the
negative equity EuroTrust has given EuroTrust Sweden AB the possibility for a
loan of a maximum of DKK 1,600 forward for the period ending December 31, 2005.
The loan can at anytime be transferred into equity of a maximum of 25% in
EuroTrust Sweden AB.
On December 31, 2003 we sold our interest in Alphasys for DKK 1 and
recognized a gain of approximately DKK 6,400 gain on sale of subsidiary. The
operations have been reclassified to discontinued operations in the accompanying
financial statements. Alphasys had previously been forced into liquidation in
October 2003. Management believes in consultation with its French attorney that
no liability will be raised against EuroTrust A/S.
On November 30, 2003 the Company disposed of the operations and assets
of Realtime Security A/S for DKK 400 resulting in the Company recognizing a loss
of DKK 520 on the sale. The operations have been reclassified as discontinued
operations in the accompanying financial statements.
F-28
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's cash equivalents and restricted cash,
receivables, marketable securities, long-term investments, line of credit and
long-term debt, payables and lease obligations approximates the carrying amount,
which is the amount for which the instrument could be exchanged in a current
transaction between willing parties. Information about each instrument follows:
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The carrying amount of cash, cash equivalents and restricted cash
approximates their fair value as of December 31, 2003 and 2004, because of the
short term maturities of those instruments.
ACCOUNTS RECEIVABLE, RECEIVABLES FROM RELATED PARTIES, VAT RECEIVABLE AND OTHER
RECEIVABLES
The carrying amounts of accounts receivable, receivables from related
parties, VAT receivable and other receivables approximate their fair value as of
December 31, 2003 and 2004 because of the expected short term collection of
those instruments.
NOTES RECEIVABLE,
The carrying amount of notes receivable approximates their fair value
as of December 31, 2003 and 2004 because the interest rates approximate the rate
of similar instruments as of December 31, 2004.
Marketable securities
The fair values of investment securities are estimated based on quoted
market prices as of December 31, 2003 and 2004 and are stated at fair value.
LONG TERM INVESTMENTS
For long-term other investments for which there are no quoted market
prices, a reasonable estimate of fair value as of December 31, 2003 and 2004 is
based on a review of the assumptions underlying the operating performance of the
privately held companies.
LINE OF CREDIT AND LONG- TERM DEBT
The fair values of the Company's line of credit and long-term debt as
of December 31, 2003 and 2004 approximate recorded values as of December 31,
2004, based on similar current rates offered to the Company for debt of the same
remaining maturities.
ACCOUNT PAYABLE AND ACCOUNTS PAYABLE, RELATED PARTIES
The carrying amount of accounts payable and accounts payable -related
party approximates fair value as of December 31, 2003 and 2004, because of the
short term maturity of those instruments.
LEASE OBLIGATIONS
The fair value of the Company's lease obligations is estimated by
discounting the future cash flows at rates currently offered to the Company for
debt of comparable maturities by the Company's bankers and is similar to
recorded amounts as of December 31, 2004.
F-29
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
9. SHORT-TERM BORROWING AND LINE-OF-CREDIT
Short-term borrowing from a Danish bank is due on demand and consists
of the following (in DKK):
DECEMBER 31,
------------
2003 2004
---- ----
Forstaedernes Bank - 8,417
0 8,417
=========== ============
At December 31, 2004 the Company also has secured lines-of-credit with
Danish banks up to DKK 9.0 million. Interest rates fluctuate with the market
rates of the major banks. The weighted average interest rates as of December 31,
2003 and 2004 were 6.0% and 5.5%, respectively. The Company has pledged a
mortgage deed on the building of DKK 10,000 as collateral for the borrowings.
10. BANK LOANS
Bank loans consists of the following (in DKK):
DECEMBER 31,
------------
2003 2004
---- ----
Forstaedernes Bank 5.5% note payable,
due September 2009, payable in monthly
installments of DKK 77, with vehicles
and broadcasting equipment valued at
DKK 4,150 pledged as collateral
- 3,840
----------- -----------
Less current portion - 741
----------- -----------
- 3,099
=========== ===========
The estimated aggregate maturities required on long-term debt for each of the
individual years at December 31, 2004 are as follows:
2004
--------------
Year ending December 31:
2005 741
2006 767
2007 810
2008 855
2009 667
-------------
3,840
=============
F-30
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
11. CAPITAL LEASES
The Company is obligated under capital leases for inventories and
production van and equipment that expire at November 1, 2008. At December 31,
2003 and 2004, the gross amount of production vans and equipment and related
accumulated depreciation recorded under capital leases and the amount of
inventories subject to sale-and-leaseback arrangements were as follows:
DECEMBER 31,
------------
2003 2004
Inventories, net of impairment charges - -
OB van and equipment - 7,095
------------ ------------
- 7,095
Less accumulated depreciation - 1,266
------------ ------------
- 5,829
============ ============
For the year ended December 31, 2004 the Company recorded depreciation
expense on assets held under capital leases of DKK 1,172 which was included in
depreciation expense on the statements of operations.
In 2002 the Company entered into a sale and lease back agreement with
IBM regarding the company's inventories of Tivoli licenses. The lease payments
amount to DKK 3,706 per year and the agreement expires April 30, 2004. The lease
is secured by 15,000 Tivoli licenses valued at approximately DKK 7,215 before
their impairment in 2002. During 2003 the Company stopped making payments on the
lease obligations due to disagreements regarding the underlying Tivoli Licenses;
resulting in the lease obligation being in default according to the terms of the
lease agreement. At December 31, 2003 and 2004 the Company has included
approximately DKK 3,839, in accounts payable representing approximately DKK
3,744 in principal and DKK 95 in interest relating to unpaid lease commitments.
The Company is from time to time in discussions with IBM to resolve the
underlying disagreements and to potentially renegotiate the terms of the lease
agreement.
The Company also has several non-cancelable operating leases, primarily
for office space, that expire over the next two years. These leases generally
contain renewal options for one year and require the Company to pay all
executory costs such as maintenance and insurance. Expenses under operating
leases, amounted to DKK 3.4 million, DKK 1.8 million and DKK 1.3 million in the
years ended December 31, 2002, 2003 and 2004, respectively.
Future minimum lease payments under non-cancelable operating leases
(with initial or remaining lease terms in excess of one year) and future minimum
capital lease payments, as of December 31, 2004 are:
F-31
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
CAPITAL LEASES OPERATING LEASES
----------------------- --------------------
Year ending December 31:
2005 1,560 1,115
2006 1,560 1,027
2007 1,560 754
2008 1,430 680
2009 - 225
2010 - 208
----------------------- --------------------
Total minimum lease payments 6,110 4,009
====================
Less amount representing interest 281
-----------------------
Present value of net minimum capital lease payments 5,829
-----------------------
Less current installments of obligations under capital leases 1,244
-----------------------
Obligations under capital leases, excluding
current installments 4,585
=======================
12. RELATED PARTY TRANSACTIONS
In the ordinary course of business, EuroTrust engages in transactions
with certain entities and individuals that are considered to be related parties
as follows:
VERISIGN INC
VeriSign was a minority shareholder in EuroTrust A/S (approx. 18%)
until April 1, 2004. The transactions entered into during the year and the
accounts payable at the year end shown below are a result of commercial trade
with VeriSign. Current accounts with VeriSign are not carrying any interest.
DECEMBER 31,
------------
2003 2004
---- ----
4,204 2,082
VeriSign Inc. (Annual fees and royalties)
=========== ===========
VeriSign Inc. (Accounts payable) 477 -
=========== ===========
On April 1, 2004, the Company sold the Secure Socket Layer certificate
assets of EuroTrust PKI to VeriSign. EuroTrust PKI, a wholly-owned subsidiary of
the Company, is the operation through which
F-32
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
the Company sells Public Key Infrastructure (PKI) Services, including VeriSign's
SSL certificates and related services in Austria, Switzerland, Finland, Norway,
Sweden and Denmark. Under the terms of the agreement, VeriSign paid the Company
$8.5 million U.S. in cash and assumed the ongoing obligations of EuroTrust PKI
SSL contracts.
Simultaneously with the closing of the transaction to sell the assets of
EuroTrust PKI to VeriSign, the Company repurchased 458,120 (Not in thousands) of
its ordinary shares which is equivalent to 458,120 (Not in thousands) American
Depository Receipts or "ADRs" from VeriSign for $1,136 U.S. The repurchase was
authorized by the Company's shareholders on May 28, 2003.
NEMETH & SIGETTY A/S
Mr. Karoly Laszlo Nemeth is the Chairman of the board of directors of
EuroTrust A/S and is also the joint owner of Nemeth & Sigetty A/S. Nemeth &
Sigetty A/S provided legal services to the Company during each of the three
years ended December 31, 2002, 2003 and 2004. For the years ended December 31,
2002, 2003 and 2004 Nemeth & Sigetty A/S has been paid, DKK 1,115, DKK 418 and
DKK 962 respectively. The total outstanding payables due to Nemeth & Sigetty
A/S as at December 31, 2003 and December 31, 2004 were DKK 0 and DKK 0,
respectively.
13. INCOME TAXES
The Company and each of its subsidiaries file separate tax returns in
each country of incorporation. Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 2003 and 2004 are as follows (in DKK):
DECEMBER 31,
--------------------------
2003 2004
DEFERRED TAX ASSETS
Net operating loss carry forwards 105,365 98,393
Tax value of fixed assets in excess of book value of fixed assets 7,415 1,709
Other temporary differences 0
Deductible goodwill and intangible assets 9,547 2,624
Provisions 10,262 10,262
Capital losses on shares 0 0
--------------------------
Total deferred tax assets 132,589 112,988
------- -------
Less: Valuation allowance (130,206) (109,016)
--------------------------
NET DEFERRED TAX ASSETS 2,383 3,972
Deferred tax liabilities 0 0
Total net deferred tax assets 2,383 0
F-33
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
The recognized tax assets as of December 2003 and 2004 are related to
temporary differences between the book and fiscal values of fixed assets in the
profitable broadcasting segment and for the company EuroTrust Secure Hosting
A/S.
The Company assessed the realization of the deferred tax assets based
on available evidence, both positive and negative, to determine whether it is
more likely than not that all or a portion of the deferred tax assets will be
realized. The conclusion as to whether it is more likely than not that some
portion of these assets will not be realized takes into consideration the
following factors, among others:
o Future earnings potential determined through the use of internal
forecasts o The carry forward period associated with the deferred tax
assets and o The nature of the income that can be used to realize the
deferred tax assets
To the extent that the Company determines it is more likely than not
that all or a portion of the deferred tax assets will not be realized, a
valuation allowance is recorded.
The tax loss carry-forwards available at December 31, 2004 and their
expiration years are as follows (in DKK):
EXPIRATION YEAR DENMARK SWITZERLAND TOTAL
--------------- ------- ----------- -----
2005 28,355 28,355
2006 52,597 52,597
Indefinitely 195,700 12,250 207,950
------- ------ -------
The accumulated tax loss carry forwards cannot be used by all group
companies as only a limited number of companies are jointly taxed.
For financial reporting purposes, income before income taxes is as
follows (in DKK):
DECEMBER 31,
---------------------------------
2002 2003 2004
---- ---- ----
Pretax income (loss):
Denmark (268,422) (995) 28,026
Sweden (2,844) 0 0
France (3,616) 0 0
UK 45 0 0
Switzerland (3,081) (9,169) 0
---------------------------------
(277,918) (10,164) 28,026
======== ======= ======
Significant components of the
provision for income taxes are:
Current: Denmark (2,849) (186) 0
Others 0 0 0
-------- ------- ------
(2,849) (186) 0
-------- ------- ------
Deferred: Denmark 350 1,677 (3,105)
Others 0 0 0
-------- ------- ------
350 350 (3,105)
-------- ------- ------
Total: (2,499) (2,499) (3,105)
======== ======= ======
F-34
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
The reconciliation of income tax computed at the Danish statutory tax
rate to income tax expense is:
2002 2003 2004
---- ---- ----
Danish income tax rate...................................... 30% 30% 30%
Non taxable gain on sold business........................... 0% 0% 0%
Non deductible impairment charges.......................... (10)% 0% 0%
Change in valuation allowance on deferred tax assets........ (21)% 45% 45%
Other items, net............................................ 0% 0% 0%
------
Reported income tax expense................................. (1)% (15)% (15)%
======
14. SHAREHOLDERS' EQUITY
TREASURY SHARES
During 2004, a total of 150,000 (not in thousands) shares were
purchased from a shareholder into treasury and were later sold for DKK 4,148.
Both transactions were at market price and resulted in a gain of DKK 319, which
were booked under additional paid in capital. The Company repurchased 458,120
(Not in thousands) of its ordinary shares from VeriSign for $1,136 U.S.
simultaneously with the closing of the transaction to sell the assets of
EuroTrust PKI to VeriSign,. The shares were purchased into treasury.
During the fourth quarter of 2004, the Company cancelled the 458,120
(not in thousands) in treasury with a cost of DKK 11,042.
In 2003 the Company issued from treasury 139,423 (not in thousands)
treasury shares valued at DKK 1,088 (the market price of the common share on the
date issued from treasury) in connection with a guarantee for equity financing
in EuroTrust in the event of needed funding. The guarantee expired May 9, 2004.
The DKK 1,088 has been recorded as interest expense in the accompanying
financial statements.
During the period from September 2002 to December 2002, a total of
15,400 (not in thousands) shares were purchased by a shareholder and were then
sold back to the Company at the same price as that originally paid by the
shareholder. During 2002 the Company purchased an additional 100,542 (not in
thousands) treasury shares through its stockbroker. The Company has not bought
any additional treasury shares in 2003.
F-35
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
COMMON STOCK
During 2004, the Company issued 345,254 shares (not in thousands) upon
the exercise of options at pricing ranging from $1.32 to $2.46 per share.
During 2003, the Company issued 758,079 shares (not in thousands) upon
the exercise of options at pricing ranging from $1.26 to $1.50 per share.
1 FOR 6 REVERSE STOCK SPLIT OF ORDINARY SHARES
On May 19, 2005, and reflected in the accompanying financial statements
the Company effected a 1 for 6 reverse stock split of it's ordinary shares
wherein in lieu of issuing a fraction of a New Share, to pay to each holder the
value thereof based upon the closing price of an ADR on the NASDAQ Small Cap
Market on the day on which the change shall have occurred. The Company further
effected a change in the par value of each ordinary common share of the Company
from DKK1.25 to DKK 7.50.
15. EARNINGS PER SHARE
Basic net (loss) income per share is computed by dividing net (loss)
income (numerator) by the weighted-average number of shares of common stock
outstanding during the period (denominator). Diluted net (loss) income per share
gives effect to stock options considered to be potential common shares, if
dilutive. Potential common shares consist of shares issuable upon the exercise
of stock options computed using the treasury stock method.
The following table presents the computation of basic and diluted average common
shares outstanding:
YEAR ENDED DECEMBER 31,
2002 2003 2004
Determination of basic and diluted shares:
Weighted-average shares outstanding
4,360 4,671 4,947
Potential common shares--dilutive stock
options -- -- 319
--------------- ------------ ------------
Basic and diluted average common shares 4,360 4,671 5,266
outstanding
In 2004, the Company excluded 267 common share equivalents with a
weighted-average share price of $5.52, in 2003, the Company excluded 136
weighted-average common share equivalents with a weighted-average share price of
$1.38 and in 2002, the Company excluded 14 weighted-average common share
equivalents with a weighted-average share price of $5.04 from the potential
common shares because their effect would have been anti-dilutive.
Weighted-average common share equivalents do not include stock options with an
exercise price that exceeded the average fair market value of the Company's
common stock for the period.
F-36
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
Subsequent to the year ended December 31, 2004 the Company issued
71,094 (not in thousands) common ADR shares upon the exercise of stock options,
issued 207,458 (not in thousands) common ADR shares upon the exercise of stock
options, issued 16,666 (not in thousands) common ADR shares upon the exercise of
stock options, issued 15,000 (not in thousands) common ADR shares upon the
exercise of stock options and issued 587,500 (not in thousands) warrants to
purchase the Company's Common Stock at $4.75 per share expiring on April 30,
2015.
16. STOCK OPTIONS
STOCK OPTIONS
2001 INCENTIVE OPTION PLAN
During 2001, the Board authorized the grant and issue of 354,167 (not
in thousands) options each to purchase one common share at various share prices
ranging from $6.30 to $10.26 per share to employees and directors of the
Company. The exercise price of the stock options was equal to the market price
on the date of grant. The stock options are exercisable during the year of grant
through their expiration dates ranging from August 31, 2003 to December 31,
2005. At December 31, 2004, 26,667 (not in thousands) options were outstanding.
In addition during 2001, the Board authorized the grant and issue of
7,500 (not in thousands) options each to purchase one common share at a price of
$6.54. A total of 2,500 (not in thousands) of these options became exercisable
during 2002, another 2,500 (not in thousands) vest in 2003 and the remainder
vest in 2004. These options all expired on January 1, 2005.
2002 INCENTIVE STOCK OPTION PLAN
During 2002, the Board authorized the grant and issue of 413,924 (not
in thousands) stock options each to purchase one common share at various share
prices ranging from $2.34 to $7.86 to employees and directors of the Company.
The exercise price of the options was equal to the market price on the date of
grant. A total of 294,458 (not in thousands) of these options were outstanding
at December 31, 2004. The stock options are exercisable during the year of grant
through their expiration dates ranging from January 1, 2005 to May 30, 2005.
2003 INCENTIVE STOCK OPTION PLAN
During 2003, the Board authorized the grant and issue of 1,318,750 (not in
thousands) stock options each to purchase one common share at various share
prices ranging from $1.20 to $2.88 to employees and directors of the Company.
The exercise price of the options was equal to the market price on the date of
grant. Of these options 215,417 (not in thousands) were outstanding at December
31, 2004. The stock options are exercisable during the year of grant through
their expiration dates ranging from May 30, 2005 to February 3, 2008.
2004 INCENTIVE STOCK OPTION PLAN
During 2004, the Board authorized the grant and issue of 434,621 (not in
thousands) stock options each to purchase one common share at various share
prices ranging from $3.24 to $3.76 to employees and
F-37
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
directors of the Company. The exercise price of the options was equal to the
market price on the date of grant. Of these options all were outstanding at
December 31, 2004. 434,621 stock options are exercisable during the year of
grant and all stock options have expiration dates ranging from May 12, 2007 to
May 12, 2009.
A summary of the Company's stock option activity, and related
information for the three years ended December 31, 2004 is as follows:
2002 2003 2004
------------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
OPTIONS AVERAGE OPTIONS AVERAGE OPTIONS AVERAGE
EXERCISE PRICE EXERCISE PRICE EXERCISE PRICE
-------------- -------------- --------------
Outstanding, beginning of year 723 $11.46 1,021 $7.92 947 $3.12
Granted 414 4.92 1,319 1.38 435 3.48
Exercised - - (758) 1.26 (345) 1.32
Forfeited (17) 7.20 (250) 5.94 - -
Expired (99) 21.00 (385) 7.50 (64) 7.74
Outstanding, end of year 1,021 $7.92 947 $3.12 973 $3.48
Exercisable, end of year 1,016 $7.92 944 $3.12 903 $3.48
Weighted average fair value of
options granted during the year $3.60 $6.42 $3.18
The following table summarizes information about stock options outstanding
as of December 31, 2004:
WEIGHTED-AVERAGE
REMAINING WEIGHTED-AVERAGE
RANGE OF SHARES CONTRACTUAL EXERCISE SHARES WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE EXERCISE PRICE
---------------------- -------------- ---------------- ------------- ------------ ---------------------
$1.44 - $1.50 166 3.0 years $1.50 166 $1.50
$2.34 - $2.88 52 2.5 years $2.82 52 $2.82
$3.00 - $3.30 298 3.3 years $3.24 298 $3.24
$3.78 - $3.78 215 3.3 years $3.78 215 $3.78
$4.68 - $8.40 242 0.28 years $5.64 242 $5.64
Total 973 2.46 years $3.48 973 $3.48
No compensation cost is recognized in income for any of the years
presented above as the options can be exercised at a price equal to or greater
than the price on the date of grant.
WARRANTS
During 2004, the Company recorded DKK 85 in consulting expense for the
issuance of warrants to purchase 25,000 (not in thousands) common shares at DKK
23.76 expiring February 28, 2005. The warrants were valued using the Black
Scholes method and with the following variables Yield of 0%, Volatility of
42.79%, Risk free interest rate of 3%, and estimated life of 0.5 years.
F-38
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
17. PENSIONS
During 2002, 2003 and 2004, the company has recognized expenses for
defined contribution pension agreements with paid to pension and insurance
companies on behalf of employees totaling DKK 1.5 million, DKK 1.8 million and
DKK 0.8 million, respectively. The Company has no liability beyond their
contributions related to the pensions.
18. NON-CASH FINANCING AND INVESTING ACTIVITIES
Capital lease obligations of DKK 525, DKK 1,176 and DKK 5,829 were
incurred in 2002, 2003 and 2004 respectively. The Company entered into the
leases for machinery, equipment and automobiles.
In 2003 the Company issued from treasury, 139,422 (not in
thousands) shares of its common stock in connection with a guarantee for
committing a private Placement in EuroTrust valid for 12 months.
In 2002 the Company issued from treasury, 134,083 (not in thousands)
shares of its common stock with a market value of DKK 5,000 as consideration for
the purchase of a 15% interest in the subsidiary EuroTrust NetVaulting A/S.
19. COMMITMENTS
The Company issues product guarantees in accordance with Danish law,
normally covering the subscription period of services provided to customers. The
Company has not incurred any costs in fulfilling these guarantees and the
Company estimated a liability of DKK $0 for the cost of such guarantees as of
December 31, 2003 and 2004.
20. LITIGATION
During 2003, the Company recorded a provision of DKK 1,000 for expenses
relating to an arbitration court regarding the construction of our building
located in Soeborg. The constructor claimed bills for extra work performed and
EuroTrust claim compensation due to insufficient work performed by the
constructor. During 2004, as a result of the arbitration the Company paid a net
payment to the constructor of approx. DKK 1,000 in settlement of the case.
During 2004, the Company paid Cyberguard DKK 994 in settlement of
claims arising out of a disagreement regarding a reseller agreement signed in
October 2002.
The Company is from time to time involved in routine legal and
administrative proceedings and claims of various types. While any proceedings or
claim contains an element of uncertainty, Management does not expect them to
have an affect on our results of operations or financial position.
F-39
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
21. SEGMENT REPORTING
The Company's Chief Operating Decision-maker, as defined in SFAS No.
131, is considered to be EuroTrust's CEO. The Chief Operating Decision-maker
reviews separate consolidated financial information for the Internet services
business segment, the broadcast media business segment and prior to 2002 other
segments. Each of the Company's business segments are managed separately because
they offer and distribute distinct services to different customer segments. The
Company therefore considers that it has three reportable segments under SFAS 131
from 2002 to 2004 as follows: (i) Internet services, and (ii) broadcast media.
The print and online media segment was disposed of in December 2001 and is,
therefore, treated as a discontinued operation thereafter. The internet services
segment was disposed of during 2004 and 2003 with the operations being
classified as discontinued operations with the exception of the operations of
the EuroTrust Secure Hosting and Netvaulting components as the Company continued
to receive royalties from the existing customers at the time of their sale.
The Chief Operating Decision-maker evaluates performance and allocates
resources based on profit or loss from operations before interest, gains and
losses on the Company's investment portfolio, and income taxes. The accounting
policies of the reportable segments are the same as those described in the
summary of significant accounting policies. It is the Company's policy that
trade between the segments is entered into on an arms-length basis.
Net sales by geographical location and reportable segment information
for each and business segment for each of the years ended December 31, 2002,
2003 and 2004 is presented in the following tables:
F-40
EUROTRUST A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
2002 2003 2004 2004
DKK % DKK % DKK % USD
Denmark 91,095 99% 109,000 99.2% 84,510 93% 15,456
Norway 539 0.6% 417 0.4% - -% -
Sweden 424 0.4% 405 0.4% 6,526 7% 1,194
-------------------- --------------------- --------------------- ------------
92,028 100% 109,822 100% 91,036 100% 16,650
-------------------- --------------------- --------------------- ------------
The segmented data are as follows:
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
F-41
EUROTRUST A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED) YEARS ENDED DECEMBER 31,
2002 2003 2004 2004
-------------- ------------- -------------- -----------
DKK DKK DKK USD
INTERNET SERVICES:
Net revenue 20,008 21,203 23 $4
Operating expenses:
Cost of sales 34,754 7,773 0 0
Selling and marketing expenses 8,706 5,410 3,502 641
General and administrative expenses 20,788 14,344 8,905 1,629
Depreciation, amortization and write
down 31,306 1,311 2,071 379
-------------- ------------- -------------- -----------
Total operating expenses 95,554 28,838 14,478 2,648
-------------- ------------- -------------- -----------
Operating (loss) (75,476) (7,635) (14,455) $(2,644)
-------------- ------------- -------------- -----------
Capital expenditure 9,210 1,762 2,541 $465
-------------- ------------- -------------- -----------
Total assets 99,962 65,655 55,581 $10,165
-------------- ------------- -------------- -----------
BROADCAST MEDIA
Net revenue 72,020 88,619 91,013 $16,646
Operating expenses:
Cost of sales 40,534 58,045 60,349 11,038
Selling and marketing expenses 10,150 12,085 14,225 2,601
General and administrative expenses 9,934 12,537 12,638 2,312
Depreciation, amortization and write
down 4,828 4,764 9,069 1,658
-------------- ------------- -------------- -----------
Total operating expenses 65,446 87,431 96,281 17,608
-------------- ------------- -------------- -----------
Operating income (loss) 6,574 1,188 (5,268) $(963)
-------------- ------------- -------------- -----------
Capital expenditure 8,261 13,743 29,261 $5,352
-------------- ------------- -------------- -----------
Total assets 68,255 75,190 122,667 $22,435
-------------- ------------- -------------- -----------
CONSOLIDATED
Net revenue 92,028 109,822 91,036 16,650
Operating expenses:
Cost of sales 75,288 65,818 60,349 11,038
Selling and marketing expenses 18,856 17,495 17,727 3,242
General and administrative expenses 30,722 26,881 21,543 3,940
Depreciation, amortization and write
down 36,134 6,075 11,140 2,037
-------------- ------------- -------------- -----------
Total operating expenses 161,000 116,269 110,759 20,257
-------------- ------------- -------------- -----------
Operating (loss) (68,972) (6,447) (19,723) ($3,607)
-------------- ------------- -------------- -----------
Capital expenditure 17,471 15,505 31,802 $5,816
-------------- ------------- -------------- -----------
Total assets 168,217 140,845 178,248 $32,600
-------------- ------------- -------------- -----------
DKK amounts have been converted into US$ at an exchange rate of $1=DKK
5.4676.
F-42
EUROTRUST A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED) YEARS ENDED DECEMBER 31,
24. SUBSEQUENT EVENTS
The Company issued 310,218(not in thousands) common ADR shares upon the
exercise of stock options at DKK 13.02 to DKK 21.72 per share.
On April 1, 2005, the Company sold its building located at
Poppelgardvej 11-13 in S0borg, Copenhagen to Lion Ejendomme ApS for DKK 20,000
in cash. At December 31, 2004 the net book value of the building was DKK 19,638.
On May 16, 2005, the Company issued 587,500 warrants to Officers and
Directors of the Company to purchase the Company's common stock at $4.75 per
share. The warrants vest immediately and are expire April 30, 2015. The
estimated fair value of the warrants on the date issued is approximately
DKK15,600.
On May 19, 2005, and reflected in the accompanying financial statements
the Company effected a 1 for 6 reverse stock split of it's ordinary shares
wherein in lieu of issuing a fraction of a New Share, to pay to each holder the
value thereof based upon the closing price of an ADR on the NASDAQ Small Cap
Market on the day on which the change shall have occurred. The Company further
effected a change in the par value of each ordinary common share of the Company
from DKK1.25 to DKK 7.50.
F-43