As filed with the Securities and Exchange Commission on May 12, 2004
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
[_] 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, 2003
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 name into English) (Jurisdiction of incorporation
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 American Depositary Shares, each
reporting obligation pursuant to representing six ordinary shares,
Section 15(d) of the Act: nominal value DKK 1.25 per ordinary
share.
Indicate the number of outstanding Ordinary shares 31,753,474
shares of each of the Company's American Depositary Shares: 4,389,538
classes of capital or common stock as
of close of the period covered by the
annual report (December 31, 2003):
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......................................................3
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS..............4
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE............................4
ITEM 3. KEY INFORMATION....................................................4
ITEM 4. INFORMATION ON THE COMPANY........................................14
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS......................26
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES........................39
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.................46
ITEM 8. FINANCIAL INFORMATION.............................................48
ITEM 9. THE OFFER AND LISTING.............................................49
ITEM 10. ADDITIONAL INFORMATION............................................50
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........55
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES............56
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES...................56
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS...............................................56
ITEM 15. CONTROLS AND PROCEDURES...........................................56
ITEM 16. RESERVED..........................................................56
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT..................................57
ITEM 16B. CODE OF ETHICS....................................................57
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES............................57
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT...................58
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED.......58
ITEM 17. FINANCIAL STATEMENTS..............................................58
ITEM 18. FINANCIAL STATEMENTS..............................................58
ITEM 19. EXHIBITS..........................................................59
SIGNATURES....................................................................60
2
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, 2003 into U.S. dollars at an exchange rate of $1.00 = DKK
5.9576, which was the noon buying rate on December 31, 2003, 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, 2003, 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 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. 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, 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).
3
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not required because this Form 20-F is filed as an Annual Report.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not required because this Form 20-F 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, 1999, 2000, 2001, 2002 and 2003 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.
The financial information presented below is only a summary and should
be read together with our consolidated financial statements included elsewhere
in this report.
4
CONSOLIDATED STATEMENT OF OPERATIONS DATA:(1)
YEAR ENDED DECEMBER 31,
1999 2000 2001 2002 2003 2003
------- -------- -------- -------- ------- -------
DKK DKK DKK DKK DKK US$
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue ............................. 109,548 188,628 151,914 135,789 166,411 27,933
Total operating expenses ............ 151,608 290,870 347,922 381,455 181,130 30,403
------- -------- -------- -------- ------- -------
Operating loss ...................... (42,060) (102,242) (196,008) (245,666) (14,719) (2,470)
======= ======== ======== ======== ======= =======
Net (loss) income from
continuing operations(2) ........ (41,866) (101,384) 18,165 (277,348) (8,930) (1,500)
======= ======== ======== ======== ======= =======
Net (loss) income from
discontinued operations ......... (1,473) (25,042) (10,460) (6,000) 2,600 436
======= ======== ======== ======== ======= =======
Cumulative effect of change
in accounting principle ......... 0 (20,278) 0 0 0 0
======= ======== ======== ======== ======= =======
Net (loss) income ................... (43,339) (146,704) 7,705 (283,348) (6,330) (1,064)
======= ======== ======== ======== ======= =======
(Loss) Income from
continuing operations per
average common share, basic ..... (4.65) (5.98) 0.75 (10.60) (0.32) (0.05)
======= ======== ======== ======== ======= =======
(Loss) Income from
discontinued operations per
average common share, basic ..... (0.17) (1.47) (0.43) (0.23) 0.09 0.01
======= ======== ======== ======== ======= =======
Net (loss) income per average
common share, basic ............. (4.82) (8.65) 0.32 (10.83) (0.23) (0.04)
======= ======== ======== ======== ======= =======
(Loss) Income from continuing
operations per average
common share, diluted ........... (4.65) (5.98) 0.73 (10.60) (0.32) (0.05)
======= ======== ======== ======== ======= =======
(Loss) income from discontinued
operations per average
common share, diluted ........... (0.17) (1.47) (0.42) (0.23) 0.09 0.01
======= ======== ======== ======== ======= =======
Net (loss) income per average
common share diluted ............ (4.82) (8.65) 0.31 (10.83) (0.23) (0.04)
======= ======== ======== ======== ======= =======
Weighted average number of common
shares outstanding, basic ....... 8,997 16,968 24,185 26,162 28,025 28,025
======= ======== ======== ======== ======= =======
Weighted average number of common
shares outstanding diluted ...... 8,997 16,968 24,745 26,162 28,025 28,025
======= ======== ======== ======== ======= =======
--------
(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 8.38; 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 0.51 and our diluted income
per common share would have been DKK 0.50.
(2) The loss from continuing operations for the year ended 1999 increased by
DKK 93 thousand. This adjustment is due to our improper accounting treatment of
a realized loss on investment securities.
5
CONSOLIDATED STATEMENT OF OPERATIONS DATA:(1)
YEAR ENDED DECEMBER 31,
1999 2000 2001 2002 2003 2003
------- -------- -------- -------- ------- -------
DKK DKK DKK DKK DKK US$
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INTERNET SERVICES:
Revenue 66,946 94,999 72,183 63,769 77,792 13,058
Total operating expenses 106,265 179,985 238,112 316,009 93,699 15,728
------- -------- -------- -------- ------- -------
Operating loss (39,319) (84,986) (165,929) (252,240) (15,907) (2,670)
======= ======== ======== ======== ======= =======
BROADCAST MEDIA:
Revenue 13,544 83,005 79,731 72,020 88,619 14,875
Total operating expenses 16,360 94,156 109,810 65,446 87,431 14,676
------- -------- -------- -------- ------- -------
Operating income (loss) (2,816) (11,151) (30,079) 6,574 1,188 199
======= ======== ======== ======== ======= =======
OTHER:
Revenue 29,058 10,624 0 0 0 0
Total operating expenses 28,983 16,729 0 0 0 0
-------- -------- -------- ------- -------
Operating (loss) income 75 (6,105) 0 0 0 0
======= ======== ======== ======== ======= =======
DISCONTINUED OPERATIONS, NET LOSS: (1,473) (25,042) (10,460) (6,000) 2,600 436
======= ======== ======== ======== ======= =======
CONSOLIDATED BALANCE SHEET DATA:
YEAR ENDED DECEMBER 31,
1999 2000 2001 2002 2003 2003
------- -------- -------- -------- ------- -------
DKK DKK DKK DKK DKK US$
(IN THOUSANDS)
Total assets 221,038 357,051 445,611 168,217 140,845 23,641
Net assets 149,638 199,638 333,168 44,242 46,360 7,782
Capital stock 18,629 25,814 34,006 34,006 39,693 6,662
Working capital (deficit) 41,786 (6,009) 137,256 (4,280) (35,674) (5,988)
Number of ordinary shares 14,903 20,651 27,205 27,205 31,753 31,753
We have never paid any dividends on our ordinary shares.
EXCHANGE RATE INFORMATION
The exchange rate on May 11, 2004 (the latest practicable date) was DKK
6.3038 per $1.00. The following table sets forth (i) the average exchange rate
for the years 1999, 2000, 2001, 2002 and 2003 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.)
6
AVERAGE
YEAR ENDED DECEMBER 31:
1999 DKK 6.9763
2000 DKK 8.0829
2001 DKK 8.3619
2002 DKK 7.8897
2003 DKK 6.5899
MONTH ENDED: HIGH LOW
May 2004 (as of May 11, 2004) DKK 6.3038 DKK 6.1366
April 2004 DKK 6.2916 DKK 6.0437
March 2004 DKK 6.1438 DKK 5.9692
February 2004 DKK 6.0090 DKK 5.8104
January 2004 DKK 6.0198 DKK 5.8060
December 2003 DKK 6.2142 DKK 5.9554
B. CAPITALIZATION AND INDEBTEDNESS
Not required because this Form 20-F is filed as an Annual Report.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not required because this Form 20-F is filed as an Annual Report.
D. RISK FACTORS
IN ADDITION TO OTHER INFORMATION IN THIS FORM 20-F, 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 AS A RESULT OF THE RISK FACTORS DISCUSSED BELOW AND
ELSEWHERE IN THIS FORM 20-F.
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, 1999,
2000 and 2002 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, 2003 we had a
net loss of DKK 6.33 million (approximately $1.1 million) and an operating loss
of DKK 14.72 million (approximately $2.5 million). As of December 31, 2003, we
had an accumulated deficit of DKK 515.84 million (approximately $86.6 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.
7
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 new acquisition opportunities and our ability to increase our revenues
and control our expenses. If we need to raise additional capital in the future,
we cannot assure you that we will be 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; and
o the non-renewal of our contract with TeleDanmark Kabel.
o the non-renewal of our contract with Canal Digital A/S
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 virus detection
products and services by our existing customers;
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;
o general economic conditions and economic conditions specific to the
television programming production or Internet services industry;
8
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. 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 ordinary shares 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 IN THE BUSINESS OF
PROVIDING INTERNET VIRUS DETECTION PRODUCTS AND SERVICES 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. Our current business primarily consists of our media division which is
made up of our TV broadcast channel - dk4 and our TV production company - Prime
Vision and our Internet services division. We have only a limited operating
history in these businesses 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, 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. If we
are unable to renew either agreement the revenues from our broadcasting business
would decrease significantly and the results of operations from our broadcasting
business would be materially and adversely affected. We cannot assure you that
we will successfully negotiate a renewal of our agreement with TeleDanmark Kabel
or Canal Digital A/S.
9
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 10, 2004 we have 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
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.
THE SUCCESS OF OUR VIRUS DETECTION BUSINESS DEPENDS LARGELY ON THE LEVEL OF
MARKET ACCEPTANCE OF OUR PRODUCTS AND SERVICES.
The market for Internet virus detection products and services is
relatively new and rapidly evolving. As a result, the future demand for our
products and services is uncertain. Even if the market for electronic commerce
and online communications grows, we cannot assure you that our products and
services will become widely accepted. If this market fails to grow, our business
and results from operations may be adversely affected.
OUR VIRUS DETECTION BUSINESS FACES SIGNIFICANT COMPETITION FROM COMPETITORS
WHICH ARE MUCH LARGER THAN WE ARE AND HAVE LONGER OPERATING HISTORIES, LARGER
CLIENT BASES, GREATER BRAND OR NAME RECOGNITION AND SIGNIFICANTLY GREATER
FINANCIAL, TECHNICAL, MARKETING AND PUBLIC RELATIONS RESOURCES THAN WE HAVE.
The market for virus detection products is intensely competitive and we
expect this competition to continue for the foreseeable future. In addition,
there are relatively few barriers preventing new competitors from entering the
markets in which we operate. Furthermore, we do not own any patented technology
and our competitors may develop new technologies in the future that are
perceived as being more secure, effective or cost efficient than the technology
underlying our products and services. Increased competition could result in
pricing pressures, reduced margins or the failure of our virus detection
products and services to achieve or maintain market acceptance, any of which
could harm our business.
OUR RESULTS FROM OPERATIONS MAY BE NEGATIVELY IMPACTED IF WE ARE NOT ABLE TO
ESTABLISH A BRAND IDENTITY
We believe that establishing and maintaining a good reputation and name
recognition is critical to our success. We also believe that the importance of
reputation and name recognition will increase due to the growing number of
companies providing Internet infrastructure products and services. Over the last
three years, we have gone through several name changes as our business has
evolved. In 1999, we changed our name from Telepartner A/S to euro909.com A/S
and in December 2001 to EuroTrust A/S. Our brand-enhancement strategy includes
mass market and multimedia advertising, promotional programs and public
relations activities. In addition, promoting and enhancing our name depends
largely on our success in providing uninterrupted high quality services. We
intend to make significant expenditures on advertising and promotional programs
and activities. We cannot assure you that our efforts will lead to an increase
in net revenues sufficient to cover our advertising and promotional
10
expenses. To build brand identity we must provide high quality services at a
competitive price. If our reputation is damaged or if potential clients are not
aware of the products and services we provide, or if our clients do not perceive
our services as effective, reasonably priced or qualitatively better than the
competition, our reputation could be materially and adversely affected and we
could lose market share.
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 a portion of
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;
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.
11
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 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.
12
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
depreciates 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, particularly in the technology sector. 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.
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
13
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.
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. During 2003 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. On April 1, 2004 we sold our PKI services business to
VeriSign, Inc.("VeriSign.")
As a result of these various transactions, subsequent to April 1, 2004
our business consists of two distinct divisions:
Our broadcast media division, which owns dk4, a Danish television
station and operates one of the largest television production companies in
Scandinavia; and
Our internet services division which markets virus detection software
and services under our "Virus 112" brand name and also monitors the royalty
payments which we receive in connection with the sale of our secure hosting and
remote back-up services businesses.
Initially, our business involved compiling and publishing directories
that included financial, operating and administrative information about
businesses located in Scandinavia and directories of fax numbers. These
directories were sold to subscribers primarily in Denmark, Sweden and Norway. In
late 1996, we entered into an agreement with WorldCom Telecommunications
Services GmbH that enabled us to begin offering international telephone services
to our Danish customers in 1997. At the time we entered into the agreement with
WorldCom GmbH we expected telephony to be our primary business focus. However,
intense price competition in the telephony industry made that business
increasingly difficult. At the same time, the popularity of the Internet as a
means of communication and as a means of conducting commerce was increasing
rapidly.
In response to this changing market, in 1998 we changed our focus and
concentrated on providing small- and medium-sized businesses, and to a lesser
extent, consumers, with the tools to effectively use the Internet as a
communications, information and commercial medium. As a result of
14
our agreement with WorldCom GmbH, we were already offering Internet access
services. Through a series of acquisitions, our Internet services business
eventually grew to include domain name registration services, web hosting
services, online security services and online intellectual property rights
services. Our products and services provided the critical web identity,
authentication and transactional infrastructure that online businesses need to
establish their web identities and to conduct secure e-commerce and
communications. Our products and services supported businesses and consumers
from the moment they first established an Internet presence through the entire
life-cycle of e-commerce activities. The typical initial introduction of our
products and services to our customers was through domain name registration. As
our customers' businesses grew and Internet strategies developed, we provided
additional support and tools, from web site hosting to placing targeted
advertising within our print and electronic media.
At the same time that we were building our Internet services business,
we were also building our broadcast and media businesses. In 1999 we acquired
two television channels, dk4 and Bio+, and a group of teen magazines and related
web sites, known as the Chili group. As a result of our strategic decision to
focus on providing Internet infrastructure services, in 2001 we sold our print
and online media business and consolidated our broadcast business into one
television channel.
In November 2000, we entered into an international affiliate agreement
with VeriSign, a leading provider of Internet infrastructure products and
services. Under this agreement we became a VeriSign. affiliate for the purpose
of distributing various VeriSign products and services in Scandinavia and other
specified west European countries.
The following is a list of acquisitions made to date since January 2001
in connection with expanding our Internet services business:
o As of January 1, 2001, we acquired 40% of GBS A/S, a consulting company
in Denmark. During 2002 we sold 30 % of the shares in GBS A/S. The sales
price was DKK one thousand in cash;
o As of June 30, 2001, we acquired the remaining 49% of Netname
Solutions.com GmbH, a German company offering internet services. This
business was included in the domain name registration service business
we sold to VeriSign in July 2001;
o As of August 31, 2001, we acquired 85% of WISEhouse Denmark A/S, a
Danish remote data backup and storage service provider. Subsequently, on
December 31, 2002, we purchased the remaining 15% and changed its name
to "EuroTrust NetVaulting A/S". In November 2003, we sold all the assets
of EuroTrust NetVaulting A/S;
o As of November 30, 2001, we acquired E!novasion Denmark A/S, a web
hosting and development company. We sold this business in January 2004;
o 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 75%
ownership interest. In December 2003, we divested all of our ownership
interest in this subsidiary;
15
o As of January 21, 2002, we acquired 67% and subsequently the remaining
33% of Alphasys SAS, a Paris based e-security firm. Subsequently, we
changed the name of Alphasys SAS to "EuroTrust France SAS." We sold this
business in December 2003;
o As of March 11, 2002, we acquired 1.53% of WISeKey SA, a Switzerland
based e-security firm; and
o As of March 20, 2002, we acquired 10% of Excelsa Spa, an Italian
Internet-based video surveillance company along with exclusive rights to
market Excelsa's security system in Denmark, Sweden, Norway and Finland.
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 expand
our offering of virus detection products and services with our Virus112 brand
name.
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 through March 31, 2004 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 Scandinavian
cable operator Telenord Vision and with the Danish digital satellite television
service provider Canal Digital A/S. Telenord and Canal have approximately
800,000 subscribers. 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
March 2004 we entered into a new agreement with TDC on Cable extending our
relation to December 31, 2006. In addition, 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.
DK4
We acquired dk4 in October 1999. As of December 31, 2002, approximately
33% 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
16
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 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
INTERNET INFRASTRUCTURE PRODUCTS AND SERVICES
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 currently offer the Scandinavian business community
an
17
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 offer 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.
During 2003, we also offered our customers a number of other internet
security products, including PKI services, 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.
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:
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.
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.
18
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 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.
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
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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
In addition, we provided the following Internet related services through
July 2001:
DOMAIN NAME REGISTRATION.
We began registering domain names for our Scandinavian customers
in October 1996. Until June 1999, Network Solutions was the exclusive registry
and registrar for second level domain names within the .com, .org, .net and .edu
top level domains. We were one of Network Solution's largest European partners.
Through our strategic relationship with Network Solutions, we were able to
register local domain names, such as .dk for Danish domains, .se for Swedish
domains, and .no for Norwegian domains, international top level domains, such as
..com, .org, .net and .edu; and other international domain names.
The decision to sell our domain name registration business in
2001 was based on a number of factors. Principally, we believed that a
significant percentage of European businesses and consumers are not yet on the
Internet. Moreover, we believed that a large percentage of our domain name
registration customers did not have an Internet web site or connection at the
time they were contacted by our telemarketing department. Accordingly, we would
have had to make significant expenditures of working capital to continue to grow
this sector of our business, and we were not willing to make that commitment.
WEB SITE DESIGN SERVICES.
In 1998, we began offering web site design services. Most of the
web design customers were small- and medium-sized companies, which constituted
our historical customer base. Depending on
20
customer needs, we were able to provide simple web design services by merely
converting basic information the customer provides to us into HTML format and
creating or updating the web site, or we could be involved in more elaborate
consulting on design, layout and content of a customer's web sites. An ancillary
service that we also offered our customers was the ability to update all the
major search engines on the Internet once a customer's web site had been created
or updated so that appropriate user searches using these search engines will
find these web sites. We charged fees for our web site design services based
upon the complexity of the site and the amount of original material and design
work our staff was asked to create. In addition, we offered customers reliable
hosting services, both at the UUNET site and at the Digiweb site. We also had
the capability to transfer hosting accounts from the UUNET site to the Digiweb
site, while providing, what we believe to be, a comparable quality of service.
In connection with our strategy to focus on Internet infrastructure products and
services we decided to cease the operation of our Web Site Design Services
business in 2001.
PRINT AND ON-LINE PUBLICATIONS
In August 1999, we acquired All Media Holding A/S, which owned 77.5% of
Chili A/S, publisher of the Danish and Norwegian versions of CHILI magazine as
well as the sponsor of various CHILI web sites. Chili was one of the largest
youth-oriented media companies in the Scandinavian market. Telia, the Swedish
telecom communications conglomerate, owned the other 22.5% of Chili. In April
2001, Chili A/S merged with Dobedo AB of Sweden. In December 2001 we sold our
entire interest in All Media Holding A/S to JTS express A/S, the sole
distributor of CHILI magazine.
DISTRIBUTION OF SALES
The following tables set out our revenues by category and region for
each of the years ended December 31, 2001, 2002 and 2003.
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BREAKDOWN OF REVENUES BY CATEGORY(1)
2001 2002 2003 2003
------------------ ------------------ ------------------ ------------------
DKK PERCENTAGE DKK PERCENTAGE DKK PERCENTAGE US$ PERCENTAGE
--------- ---------- --------- ---------- --------- ---------- --------- ----------
(CURRENCY AMOUNTS ARE IN THOUSANDS)
Internet services 72,183 48% 63,769 47% 77,792 47% 13,058 47%
Broadcasting 79,731 52% 72,020 53% 88,619 53% 14,875 53%
--------- --------- --------- --------- --------- --------- --------- ---------
151,914 100% 135,789 100% 166,411 100% 27,933 100%
--------- --------- --------- --------- --------- --------- --------- ---------
BREAKDOWN OF REVENUES BY GEOGRAPHIC MARKET(1)
2001 2002 2003
DKK % DKK % DKK % USD
Denmark (1) 100,016 66% 110,992 82% 133,397 80% 22,391
Norway 19,117 13% 4,967 4% 8,278 5% 1,389
Sweden 29,703 20% 2,874 2% 7,736 5% 1,299
France 2,310 2% 9,636 7% 5,770 3% 969
Finland 0 0% 2,763 2% 4,718 3% 792
Austria 0 0% 1,884 1% 1,593 1% 267
Switzerland 0 0% 2,673 2% 4,563 3% 766
Other 768 1% 0 0% 356 0% 60
-------------------- --------------------- -----------------------------------
151,914 100% 135,789 100% 166,411 100% 27,933
-------------------- --------------------- -----------------------------------
(1) The amount for 2001 do not include revenues from the print and online
media business because that business was sold in 2001 and is reflected
as loss from discontinued operations.
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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.
We have registered trademarks for "DIGIWEB," "Virus112" and "EUROTRUST"
at OHIM, the European Trademark Office. We also applied for registration of the
trademark "EUROTRUST" in Switzerland and Norway. In both countries the trademark
"EUROTRUST" is still pending. We have obtained Danish and foreign trademark
registrations for various EuroTrust marks. With regard to our digital trust
services, we also rely on certain licensed third-party technology, such as
public key cryptography technology and other technology that is used in our
digital trust license from RSA Security Inc. or RSA. In particular, RSA has
granted us a perpetual, royalty free, nonexclusive, worldwide license to
distribute internet-based trust services. We develop services that contain or
incorporate the RSA BSAFE and TIPEM products and that relate to digital
certificate-issuing software, software for the management of private keys and
for digitally signing computer files on behalf of others, software for customers
to preview and forward digital certificate requests to them, or such other
services that, in RSA's reasonable discretion, are reasonably necessary for the
implementation of a digital certificate business. RSA's BSAFE product is a
software tool kit that allows for the integration of encryption and
authentication features into software applications. TIPEM is a secure e-mail
development tool kit that allows for secure e-mail messages to be sent using one
vendor's e-mail product and read by another vendor's e-mail product.
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.
23
INTERNET SERVICES
Companies with Internet expertise are current or potential competitors
to our virus detection products and services. These companies include systems
integrators and consulting firms, such as IBM Global Services. Instead of
competing against these companies, our strategy is to create beneficial
partnerships urging them to use and sell our virus detection products and
services.
Several of our current and potential competitors have longer operating
histories and significantly greater financial, technical, marketing and other
resources than we do and therefore may be able to respond more quickly than we
can to new or changing opportunities, technologies, standards and customer
requirements. Many of these competitors also have broader and more established
distribution channels that may be used to deliver competing products or services
directly to customers through bundling or other means. If such competitors were
to bundle competing products or services for their customers, the demand for our
products and services might be substantially reduced and our ability to
distribute our products successfully and the utilization of our services would
be substantially diminished.
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 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 SR, Canal
Digital and Viasat in Sweden, which is helpful for marketing the capability of
Prime Vision.
We market our products and services throughout Scandinavia through
multiple distribution channels, including the Internet, direct sales, telesales,
value added resellers and systems integrators. Our sales teams build upon our
existing customer relationships by contacting clients about security offerings
on an ongoing basis and periodically selling them other complementary security
products. We have found that satisfied customers of one or more of our services
will likely become repeat customers for additional products or services and may
recommend our services to other potential customers.
24
Our customers typically represent organizations in the following
sectors: government, travel, banking/finance, professional services and
consulting, telecommunication, and other technology companies.
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
Euro909.dk A/S Denmark 100.0%
EuroTrust PKI Services A/S (1) Denmark 100.0%
EuroTrust Virus112 A/S (2) Denmark 100.0%
EuroTrust NetVaulting A/S Denmark 100.0%
EuroTrust Secure Hosting A/S Denmark 100.0%
Europe Visions A/S (3) Denmark 100.0%
EuroTrust E-Security SARL Switzerland 100.0%
----------
(1) Formerly known as EuroTrust Denmark A/S.
(2) Formerly known as Virus112.com A/S.
(3) Formerly known as Euro909Media A/S
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.
For our broadcasting media operations, we lease 2,233 square meters in
Copenhagen, Denmark and 1,152 square meters in Aarhus, Denmark.
For our Internet services operations we lease the following:
(i) 780 square meters of floor space in Aarhus, Denmark, for our remote data
backup subsidiary, EuroTrust Net Vaulting; ending February 2005
The total aggregate annual lease costs were approximately DKK 3,200,000
for 2003. The operating leases are cancelable by both parties through various
times between six and thirty-seven months. We believe that the current
facilities for our broadcasting media operations and our Danish activities,
including our Internet data center, 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.
25
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, 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 believe that our products and services, together with our reputation
as a customer-service oriented company, provide us with competitive advantages.
However, we cannot assure you that we will successfully implement our business
strategy.
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.
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
26
customer, industry or geographic region. To date our receivables have not had
any particular concentrations that, if not collected, would have a significant
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.
In fourth quarter of 2002, we determined that the decline in value of
certain of our non-public equity investments was other-than-temporary and
recorded write-downs of these investments totalling DKK 19.1 million. No
write-downs were made in the year ended December 31, 2003.
VALUATION OF LONG-LIVED ASSETS
Our long-lived assets totaled DKK 56.4 million, as of December 31, 2003,
which consist primarily of rights, other intangible assets and 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.
27
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 an impairment charge of approximately DKK 74.0 million in
the year ended December 31, 2002 and no impairment charge in the year ended
December 31, 2003.
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, 2003, we had DKK 23.94 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 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.
In the fourth quarter of 2002, we recorded a goodwill impairment charge
of approximately DKK 65.3 million in the internet services segment. For the year
ended December 31, 2003, base on our annual impairment assessment of goodwill,
there were no impairment charges.
28
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 and no provision was made in 2003. As a result, our inventory at
December 31, 2003 was only approximately $21,000, an amount which we believe
minimizes risks of future material inventory loss.
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.
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 132.6 million
and DKK 130.2 million respectively, as of December 31, 2003, resulting in a net
deferred tax asset of DKK 2.4 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.
29
CONSOLIDATED RESULTS
YEAR ENDED DECEMBER 31, 2003 COMPARED WITH YEAR ENDED DECEMBER 31, 2002
Revenue for the year ended December 31, 2003 was DKK 166.4 million, a
increase of DKK 30.6 million, or 23%, compared to revenue of DKK 135.8 million
for the year ended December 31, 2002. The table below compares revenue for both
years on a segment-by-segment basis.
REVENUE AMOUNT OF PERCENTAGE
INCREASE INCREASE
2003 2002 (DECREASE) (DECREASE)
------- ------- -------- --------
(IN THOUSANDS OF DKK)
Internet services 77,792 63,769 14,023 22.0%
Broadcast media 88,619 72,020 16,599 23.0%
TOTAL 166,411 135,789 30,622 22.6%
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 the maturity of our offering of SSL-certificates in
the markets in which we offer our products. The fact the deferred revenue
increased significantly in 2002, the first year of full operation of the sale of
SSL-certificates had a positive effect on revenue for 2003. 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
181.1 million, a decrease of DKK 200.4 million, or 53%, from the total operating
expenses of DKK 381.5 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 24,170 55,484 (31,314) (56.4%)
Internet services, related parties 4,204 24,988 (20,784) (83.2%)
Broadcast media 58,045 40,534 17,511 43.2%
Broadcast media, related parties 0 0 0 0
------- ------- ------- -------
TOTAL 86,419 121,006 (34,587) (28.6%)
SELLING AND AMOUNT OF PERCENTAGE
MARKETING INCREASE INCREASE
2003 2002 (DECREASE) (DECREASE)
------- ------- -------- --------
(IN THOUSANDS OF DKK)
Internet services 32,622 38,391 (5,769) (15.0%)
Internet services, related parties 1,074 908 166 18.3%
Broadcast media 12,085 10,150 1,935 19.1%
Broadcast media, related parties 0 0 0 0
------- ------- ------- -------
TOTAL 45,781 49,449 (3,668) (7.4%)
30
GENERAL AND AMOUNT OF PERCENTAGE
ADMINISTRATIVE INCREASE INCREASE
2003 2002 (DECREASE) (DECREASE)
------- ------- -------- --------
(IN THOUSANDS OF DKK)
Internet services 27,658 33,834 (6,176) (18.3%)
Internet services, related parties 418 1,115 (697) (62.5%)
Broadcast media 12,537 9,934 2,603 26.2%
Broadcast media, related parties 0 0 0 0
------- ------- ------- -------
TOTAL 40,613 44,883 (4,270) 9.5%
DEPRECIATION
AMORTIZATION AND
WRITE DOWN AND AMOUNT OF PERCENTAGE
GOODWILL IMPAIRMENT INCREASE INCREASE
2003 2002 (DECREASE) (DECREASE)
------- ------- -------- --------
(IN THOUSANDS OF DKK)
Internet services 3,553 161,289 (157,736) (97.8%)
Broadcast media 4,764 4,828 (64) (1.3%)
------- ------- -------- -------
TOTAL 8,317 166,117 (157,800) (95.0%)
In our Internet services segment the operating expenses generally
decreased due to a significant cost reduction in cost of sales and significant
reductions in cost of staff related to the sales of Enterprise solutions and
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 49.4 million, or a margin of 63.5% of segment revenues.
For the year ended December 31, 2002, the gross loss for our Internet services
business was DKK (16.7) million, or a margin of (26.2%) of segment revenues.
This increase in gross profit margin is mainly attributable to the increase in
revenue of SSL-certificates and lower costs related to the balance between
actual revenue and the minimum sell through commitments to VeriSign and the fact
that the gross profit margin for 2002 was reduced by the additional expenses of
DKK 10 million, attributable to annual fee and minimum sell through guarantees
to VeriSign and DKK 21.7 million, attributable to our write down of the value of
our IBM Tivoli licenses, both of which are included in the cost of sales for
2002. The DKK 10 million expense was reversed in 2003 reducing the cost of
sales.
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
31
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
231.0 million to DKK 14.7 million compared to a loss of DKK 245.7 million for
the year ended December 31, 2002.
The operating loss for our Internet services segment decreased by DKK
236.3 million to DKK 15.9 million compared to a loss of DKK 252.2 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 3.5 million
for the year ended December 31, 2003 compared to DKK 161.3 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 1.7 million. For 2002, interest income was DKK 1.9 million and interest
expense was DKK 1.1 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.
For 2003, we had a net foreign exchange (loss/increase) of DKK 1.9
million compared to a net loss of DKK 5.3 million in 2002. The increase is
mainly due to the adverse developments in the US dollar exchange rate in 2002.
For 2003, we did not write down any long term investments compared to a
write down of DKK 19.1 million for 2002. Based on our review of the valuation of
investments made at December 31, 2003, we did not believe that a write down of
any of our investments were necessary at that date.
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 write down of goodwill.
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001
Revenue for the year ended December 31, 2002 was DKK 135.8 million, a
decrease of DKK 16.1 million, or 10.6%, compared to revenue of DKK 151.9 million
for the year ended December 31, 2001. The table below compares revenue for both
years on a segment-by-segment basis.
REVENUE AMOUNT OF PERCENTAGE
INCREASE INCREASE
2002 2001 (DECREASE) (DECREASE)
------- ------- -------- --------
(IN THOUSANDS OF DKK)
Internet services 63,769 72,183 (8,414) (11.7%)
Broadcast media 72,020 79,731 (7,711) (9.7%)
TOTAL 135,789 151,914 (16,125) (10.6%)
32
Both the Internet services segment and the broadcast media segment
showed a decrease in revenues. The decrease in revenue in our Internet services
segment is attributable to the fact that in 2001 we realized revenues from our
domain name registration business until it was sold in July 2001. We have not
realized any significant revenues under our International Affiliate Agreement
with VeriSign in 2002 to offset for the decrease in revenue resulting from the
sale of our domain name registration business. The decrease in revenue in our
broadcast media segment reflects the fact that in 2001 we consolidated all of
our television programming into a single television channel, dk4. The
consolidation resulted primarily from the fact that the carriage agreement with
TDC to broadcast Bio+ was not going to be renewed once it expired December 31,
2001. In addition, the carriage agreement for dk4 was extended through March 31,
2004 and we entered into two new distribution agreements and a new programming
agreement for dk4. As a result, the lost revenue from the consolidation of Bio+
and dk4 and the non-renewal of the Bio+ agreement with TDC could not be
completely supplanted by the revenues from the new agreements entered into by
dk4.
Total operating expenses for the year ended December 31, 2002 were DKK
381.5 million, an increase of DKK 33.6 million, or 9.7%, from the total
operating expenses of DKK 347.9 million for the year ended December 31, 2001.
This increase resulted primarily from an increase in amortization and write
downs mainly related to a write down of VeriSign rights and goodwill impairment
in our trusted Internet infrastructure services business, offset by the
elimination of the operating expenses associated with both the operations of the
domain name registration business and our Bio+ television channel. The table
below shows our operating expenses by category on a segment-by segment basis.
COST OF SALES AMOUNT OF PERCENTAGE
INCREASE INCREASE
2002 2001 (DECREASE) (DECREASE)
------- ------- -------- --------
(IN THOUSANDS OF DKK)
Internet services 55,484 34,526 20,958 60.7%
Internet services, related parties 24,988 7,376 17,612 238.8%
Broadcast media 40,534 55,710 (15,176) (27.2%)
Broadcast media, related parties 0 0 0 0.0%
------- ------- ------- -------
TOTAL 121,006 97,612 23,394 24.0%
SELLING AND AMOUNT OF PERCENTAGE
MARKETING INCREASE INCREASE
2002 2001 (DECREASE) (DECREASE)
------- ------- -------- --------
(IN THOUSANDS OF DKK)
Internet services 38,391 57,690 (19,299) (33.5%)
Internet services, related parties 908 1,436 (528) (36.8%)
Broadcast media 10,150 8,980 1,170 13.0%
Broadcast media, related parties 0 0 0 0.0%
------- ------- ------- -------
TOTAL 49,449 68,106 (18,657) (27.4%)
GENERAL AND AMOUNT OF PERCENTAGE
ADMINISTRATIVE INCREASE INCREASE
2002 2001 (DECREASE) (DECREASE)
------- ------- -------- --------
(IN THOUSANDS OF DKK)
Internet services 33,834 45,429 (11,595) (25.5%)
Internet services, related parties 1,115 1,083 32 3.0%
Broadcast media 9,934 10,140 (206) (2.0)%
Broadcast media, related parties 0 0 0 0.0%
------- ------- ------- -------
TOTAL 44,883 56,652 (11,769) (20.8%)
33
DEPRECIATION
AMORTIZATION AND
WRITE DOWN AND AMOUNT OF PERCENTAGE
GOODWILL IMPAIRMENT INCREASE INCREASE
2002 2001 (DECREASE) (DECREASE)
------- ------- -------- --------
(IN THOUSANDS OF DKK)
Internet services 161,289 90,572 70,717 78.1%
Broadcast media 4,828 34,980 (30,152) (86.2%)
------- ------- ------- -------
TOTAL 166,117 125,552 40,565 32.3%
The increase in cost of sales for our Internet services revenues is
primarily attributable to the additional incremental expenditure associated with
the increase in sales of trusted internet Infrastructure services during 2002
including the additional expenses of DKK 10 million, attributable to annual fee
and minimum sell through guarantees to VeriSign and DKK 21.7 million,
attributable to our write down of the value of our IBM Tivoli licenses, both of
which are included in the cost of sales for 2002. As a result of the successful
renegotiation of the Affiliate Agreement with VeriSign, in February 2003,
pursuant to which, among other items, they agreed to waive their rights under
the annual fee and minimum sell through guarantees for 2002. Accordingly, our
cost of sales in the first quarter of 2003 were reduced by DKK 10 million.
The decrease in sales and marketing expenses and general and
administrative expenses is attributable to the sale of our domain name
registration business and our continued focus on lowering expenses generally.
The increase in depreciation, amortization and write-down and goodwill
impairment expenses reflects a write down of goodwill and other write downs in
accordance with our adoption, in 2002, of Statement of Financial Accounting
Standards (SFAS) No.s 142 and 144. Accordingly, in the Internet services
segment, we depreciated and wrote down approximately DKK 161.3 million for the
year ended December 31, 2002. Based on our management's assessment, the write
downs included DKK 63.4 million from the write down of the rights we acquired
from VeriSign and DKK 33.2 million from the write down of goodwill attributable
to our acquisition of Alphasys SAS (due to revenue expectations not being met).
The balance of the depreciation and the write down expenses mainly relate to the
write down of goodwill in connection with various business acquisitions also due
to revenue expectations not being met.
In our broadcast media segment, cost of sales, general and
administrative expenses, depreciation, amortization and write-down and goodwill
impairment expenses decreased due to the fact that we consolidated all of our
television programming into a single television channel, dk4. For the year ended
December 31, 2002, the aggregate depreciation, amortization and write-down and
goodwill impairment expenses decreased, approximately DKK 30.2 million, to DKK
4.8 million as compared to the same period in the prior year. This decrease is
due to our write down of a significant portion of the goodwill attributable to
the acquisition of our broadcasting business as a result of the closing of Bio+
in 2001 and the consolidation of its operations with that of dk4.
34
For the year ended December 31, 2002, the gross loss for our Internet
services segment was DKK (16.7) million, or a margin of (26.2)% of segment
revenues. For the year ended December 31, 2001, the gross profit for our
Internet services business was DKK 30.3 million, or a margin of 42.0% of segment
revenues. This decrease in gross profit margin is mainly attributable to the
fact that the gross profit margin on the domain name registration business which
is included in 2001 results for a six month period are substantially higher than
the gross profit margin on our trusted Internet infrastructure services
business. We expect the gross profit margin to increase with time as the
business of providing trusted Internet infrastructure services mature.
Furthermore, the gross profit margin for 2002 was further reduced by the
additional expenses of DKK 10 million, attributable to annual fee and minimum
sell through guarantees to VeriSign, and DKK 21.7 million, attributable to our
write down of the value of our IBM Tivoli licenses, both of which are included
in the cost of sales for 2002. As a result of the successful renegotiation of
the Affiliate Agreement with VeriSign, in February 2003, pursuant to which,
among other items, they agreed to waive their rights under the annual fee and
minimum sell through guarantees for 2002. Accordingly, our cost of sales in the
first quarter of 2003 were reduced by DKK 10 million.
In the case of our broadcast media segment, the gross profit margin for
2002 was DKK 31.5 million, or 43.7% of segment revenues while the gross profit
margin for 2001 was DKK 24.0 million, or 30.1% of segment revenues. This
increase is primarily attributable to the general reduction of cost resulting
from the consolidation of our television programming into a single television
channel, dk4.
For the year ended December 31, 2002 our operating loss increased by DKK
49.7 million to DKK 245.7 million compared to a loss of DKK 196.0 million for
the year ended December 31, 2001. The operating loss for our Internet services
segment increased by DKK 86.3 million to DKK 252.2 million compared to a loss of
DKK 165.9 million for the year ended December 31, 2001. This increase is
primarily attributable to the write down of goodwill and other assets to reflect
the impairment in the fair market value of certain acquired assets in accordance
with SFAS 142. In the Internet services segment, we depreciated and wrote down
approximately DKK 161.3 million for the year ended December 31, 2002. Based on
our management's assessment, the write downs included DKK 63.4 million from the
write down of the rights we acquired from VeriSign, and DKK 33.2 million from
the write down of goodwill attributable to our acquisition of Alphasys SAS (due
to revenue expectations not being met). The balance of the depreciation and the
write down expenses mainly relate to the write down of goodwill in connection
with various business acquisitions also due to revenue expectations not being
met.
The operating income for our broadcast media segment increased by DKK
36.7 million to DKK 6.6 million compared to an operating loss of DKK 30.1
million for the year ended December 31, 2001. This increase is attributable to
the reduction in operating expenses due to the consolidation of our television
programming into a single television channel.
For 2002, we had interest income of DKK 1.9 million and interest expense
of DKK 1.1 million. For 2001, interest income was DKK 2.3 million and interest
expense was DKK 0.3 million. The reduction in interest income in 2002 reflects
our lower cash balances during the year due to increased capital expenditures.
The increase in interest expense in 2002 reflects an increase in our borrowings
during the year.
For 2002, we had a net foreign exchange loss of DKK 5.3 million compared
to a net loss of DKK 2.9 million in 2001. The increase is mainly due to the
adverse developments in the US dollar exchange rate in 2002.
35
For 2002, we wrote down DKK 19.1 million of long term investments
compared to DKK 0 for 2001. Based on our review of the valuation of investments
made at December 31, 2002, we wrote down our investments in Trust Italia S.p.A.
(DKK 16,053), Wisekey SA (DKK 2,322) and certain other shares (DKK 751). These
write downs were made due to revenue expectations not being met.
Our net loss for the year ended December 31, 2002 was DKK 283.3 million
compared to a net income of DKK 7.7 million for the year ended December 31,
2001. This difference of DKK 291.0 million is primarily attributable to the gain
realized from the sale of our domain name registration business in 2001 and to
an increase in the write-off of goodwill and other long-lived assets in 2002.
B. LIQUIDITY AND CAPITAL RESOURCES
Historically, our primary cash needs have been for capital expenditures
and to fund operating losses. At December 31, 2003, our cash balances were DKK
9.4 million compared to cash balances (DKK 37.7 million) and restricted cash
(DKK 2.0 million) totaling DKK 39.7 million at December 31, 2002. At December
31, 2003 the ratio of current assets to current liabilities was 0.60 to 1. Our
current assets primarily reflect our cash, accounts receivables and inventories.
At December 31, 2003, we had secured lines of credit from banks totaling
DKK 0.5 million, from which none have been drawn. Interest 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, 2002 was 6.0%. 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, 2003, cash used in operations was DKK
15.1 million compared to DKK 55.2 million for the prior year, a decrease of DKK
40.1 million. The decrease is primarily due to a improvement in operations in
2003 compared to 2002.
For the year ended December 31, 2003, cash used in investing activities
was DKK 13.4 million compared to cash provided by investing activities of DKK
4.1 million for the prior year, a decrease of DKK 17.5 million. The decrease is
primarily attributable to the proceeds from the sale of business, which has
decreased by DKK 38.1 million in 2003 compared to 2002.
For the year ended December 31, 2003, cash provided in financing
activities was DKK 2.6 million compared to cash used by financing activities of
DKK 6.3 million for the prior year, an increase of DKK 8.9 million. The increase
is primarily due to an increase of DKK 6.2 million, in proceeds from the
issuance of common shares from the exercise of public warrants during 2003.
Our capital expenditures for the year ended December 31, 2003 were DKK
15.5 million. These expenditures primarily relate to purchase of equipment in
our media segment.
On April 1, 2004, we received cash of $8,500,000 U.S. in connection with
the sale of our PKI Services business to VeriSign. At the same time, we
repurchased 2,748,720 of our ordinary shares from VeriSign for $ 1,136,000 U.S.
These transactions resulted in a net cash receipts of $7,364,000 U.S. VeriSign
further assumed deferred revenues of DKK 17,737 in connection with the purchase.
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
36
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 2004 2005 LATER YEARS OBLIGATIONS
------------------------------- ----------- --------- ------------ -------------
Capital leases 1,184 0 0 1,184
------------------------------- ----------- --------- ------------ -------------
VeriSign affiliate contract 1,951 0 0 1,951
------------------------------- ----------- --------- ------------ -------------
Operating leases 1,317 291 0 1,608
------------------------------- ----------- --------- ------------ -------------
Film Rights 0 0 0 0
------------------------------- ----------- --------- ------------ -------------
TOTAL CONTRACTUAL OBLIGATIONS 4,452 291 0 4,743
------------------------------- ----------- --------- ------------ -------------
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). It has not been agreed what the
minimum annual royalty payments are to be after December 31, 2003. The amendment
states that the minimum annual royalty payments for the calendar years following
2003 shall be agreed by the Company and VeriSign no less than 60 days prior to
the end of the calendar year 2003. In March 2004 it was agreed with VeriSign
that the minimum fee for the first quarter of 2004 would be $327.531,25. 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 has 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 for a minimum of DKK 2.5 million.
37
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2002, the Emerging Issues Task Force issued its consensus on
EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables ("EITF
Issue No. 00-21") on an approach to determine whether an entity should divide an
arrangement with multiple deliverables into separate units of accounting.
According to the EITF, in an arrangement with multiple deliverables, the
delivered item(s) should be considered a separate unit of accounting if all of
the following criteria are met: (1) the delivered item(s) has value to the
customer on a standalone basis, (2) there is objective and reliable evidence of
the fair value of the undelivered item(s), and (3) if the arrangement includes a
general right of return, delivery or performance of the undelivered item(s) is
considered probable and substantially in the control of the vendor. If all the
conditions above are met and there is objective and reliable evidence of fair
value for all units of accounting in an arrangement, the arrangement
consideration should be allocated to the separate units of accounting based on
their relative fair values. The guidance in this Issue is effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003.The
adoption of this statement did not have a material effect on EuroTrust's
financial statements.
In December 2003, the SEC issued Staff Accounting Bulletin ("SAB") No,
104 "REVENUE RECOGNITION" which codifies, revises and rescinds certain sections
of SAB No. 101, "REVENUE RECOGNITION", in order to make this interpretive
guidance consistent with current authoritative accounting and auditing guidance
and SEC rules and regulations. The changes noted in SAB No. 104 did not have a
material effect on EuroTrust consolidated financial position, results of
operations or cash flows.
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 is
not expected to have a material impact on EuroTrust financial position, results
of operations or cash flows.
In April, 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities", which amends SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," to address
(1) decisions reached by the Derivatives Implementation Group, (2) developments
in other Board projects that address financial instruments, and (3)
implementation issues related to the definition of a derivative. SFAS No. 149
has multiple effective date
38
provisions depending on the nature of the amendment to SFAS No. 133. The
adoption of this statement did not have a material effect on EuroTrust's
financial statements.
On May 15, 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 is effective for all financial instruments entered into or modified
after May 31, 2003. For unmodified financial instruments existing at May 31,
2003, SFAS No. 150 is effective at the beginning of the first interim period
beginning after June 15, 2003, except for mandatory redeemable financial
instruments of nonpublic entities. The adoption of this statement did not have a
material effect on EuroTrust's financial statements.
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 [NEEDS TO BE UPDATED]
A. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth, as of May 12, 2004, 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 42 2860 Soeborg
director........................ Denmark January 1988
Soren Degn Chief Financial Officer of
Chief Financial Officer......... 35 EuroTrust A/S
Poppelgaardvej 11-13
2860 Soeborg
Denmark September 2003
Karoly Laszlo Nemeth Chairman of the Board of
Chairman of the board........... 61 Nemeth & Sigetty A/S
Frederiksgade 21,4.
1265 Copenhagen
Denmark January 1988
John J. Stuart, Jr.(1)(2) Chief Financial Officer of
Director........................ 64 Irvine Sensors Corporation
3001 Redhill Avenue
Costa Mesa, CA 92626-4532
USA May 1998
39
DATE BECAME A
NAME AND POSITION AGE PRINCIPAL OCCUPATION AND ADDRESS DIRECTOR/OFFICER
------------------------------------ ------- ------------------------------------------------- -------------------
Robert M. Gutkowski (1) Consultant
Director........................ 56 c/o EuroTrust A/S
Poppelgaardvej 11-13
2860 Soeborg
Denmark May 2004
Jan Berger(1)(2) 61 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. In December
2003, upon the resignation of Brian Mertz Pedersen, Mr. Petersen also assumed
the responsibilities of Chief Operating Officer. 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 was appointed our chief financial officer since in December
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 wholly-owned
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
40
position of ISC's treasurer and was reappointed to this position in November
1998. Mr. Stuart is also a member of the board of directors and is vice
president of finance and chief financial officer of Novalog, Inc. (since October
1995), Microsensors, Inc. (since October 1997), RedHawk Vision, Inc. (since
March 2000) and iNetWorks, Inc. (since October 2000) all of which are
subsidiaries of ISC.
ROBERT M. GUTKOWSKI, DIRECTOR
Mr. Gutkowski was elected to our board of directors on May 12, 2004.
Since 2002, Mr. Gutkowski has provided consulting services, specializing 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 whose linchpin is their telecast of New York Yankee baseball, as well as
New Jersey Nets basketball. From June 2000 through 2002, he served as President
and Chief Executive Officer of Magnum Sports & Entertainment, Inc., a company
which offered a multitude of services to entertainers in the fashion, music,
sports and film/television industries .In 1996, he founded 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. He served as Marquee's chief executive
officer until 1999 when the company was sold to SFX Entertainment, Inc. From
1991 until 1994, he was President of Madison Square Garden, Inc.("MSG"). In that
position, he was responsible for the operations of the New York Knickerbockers
basketball team, the New York Rangers hockey club and MSG Communications, which
included the MSG television Network. From 1985 to 1991 he was President of the
MSG television Network. Mr. Gutkowski holds a B.A. degree in Business
Administration from Hofstra University.
JAN BERGER, DIRECTOR
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 a 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, 2003 to our directors and senior management for services in all
capacities, other than professional fees, totaled approximately DKK 5.0 million
(approximately $832,000). 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 2003 totaled
approximately DKK 671,000 (approximately $113,000). The above mentioned amounts
include amounts paid to Brian Mertz Pedersen, former COO, and Bertel Jensen, our
former CFO.
41
Effective as of July 2001, we entered into an employment agreement with
each of Aldo M.N. Petersen, our Chief Executive Officer and Bertel E. Jensen,
our former Chief Financial Officer and effective as of September 2003 an
agreement with Soren Degn, our new Chief Financial Officer, each of which may be
terminated at any time (i) by us by providing 12 months notice of termination,
or (ii) by either Mr. Petersen, Mr. Jensen or Mr. Degn by providing 6 months
notice of termination. Pursuant to their employment agreements each of Mr.
Petersen, Mr. Jensen and Mr. Degn are annually granted a 5-year option to
acquire our ordinary shares. Accordingly, in 2003 they were each granted the
number of options set forth in the table below under the section entitled
"Options." Effective as of December 1, 2003, Mr. Jensen resigned as Chief
Financial Officer as a consequence of our streamlining of the management and
organization due to the sale of certain of our subsidiaries and closing down of
our Swiss office.
OPTIONS
Options that were granted pursuant to our stock option plan to the named
executive officers during the year ended December 31, 2003 and are set forth in
the following table:
SECURITIES SECURITIES EXERCISE PRICE EXERCISE PRICE
UNDERLYING UNDERLYING PER SHARE PER SHARE
NAME OPTIONS(1) OPTIONS(2) ($)(1) ($)(2) EXPIRATION DATE
--------------------------- -------------- -------------- ------------------ ----------------- ---------------------
Aldo M. N. Petersen 2,700,000 450,000 0.1967 1.1800 April 16, 2008
Bertel E. Jensen 2,220,000 370,000 0.1967 1.1800 April 16, 2008
Brian Mertz Pedersen 874,998 145,833 0.2500 1.5000 February 3, 2008
Brian Mertz Pedersen 300,000 50,000 0.2133 1.2800 March 1, 2008
Soren Degn 292,500 48,750 0.2500 1.5000 February 3, 2008
Soren Degn 240,000 40,000 0.4083 2.4500 February 3, 2008
----------
(1) These securities are reflected as ordinary shares.
(2) These securities are reflected in ADSs (after giving effect to a 1 for 6
reverse ratio change of ADSs on August 29, 2002).
DIRECTOR COMPENSATION
Our independent directors receive a fee of $20,000 U.S. per year plus
$1,000 for eachmeeting attended in person. Directors are reimbursed for expenses
they incur in connection with attending meetings of the board of directors and
committees thereof. In addition, we periodically grant options to our directors,
although the amount and timing of those grants are determined by the board in
its sole discretion. On May 12, 2004, the Board granted to each independent
director an option to purchase 150,000 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
The board of directors may consist of between three and seven members.
As of April 20, 2004, 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.
42
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 the current
directors, Messrs. Aldo M.N. Petersen, Karoly Laszlo Nemeth, John J. Stuart,
Jr., Robert M. Gutkowski and Jan Berger , were elected at the annual general
meeting held on May 12, 2004. Each executive officer will serve until his or her
successor is duly appointed or elected by the board of directors or his or her
earlier removal or resignation from office.
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.
Our executive officers serve at the discretion of the board of
directors. The citizenships of our executive officers and directors are as
follows:
Name Country of Citizenship
------------------------------------------------------------------------
ALDO M.N. PETERSEN Denmark
SOREN DEGN Denmark
KAROLY LASZLO NEMETH Denmark
JOHN J. STUART, JR. United States
ROBERT M. GUTKOWSKI United States
JAN BERGER Norway
There are no agreements with our board members that provide for the
payment of benefits upon termination of their directorship.
The board of directors has an audit committee and a compensation
committee. The members of the audit committee are Messrs Berger, Gutkowski and
Stuart. The audit committee reviews our financial statements and accounting
practices, appoints our independent auditors, meets and interacts with the
independent auditors to discuss questions in regard to EuroTrust's financial
reporting, reviews the results and scope of the audit and other services
provided by our independent auditors, and our internal controls. The members of
the compensation committee are Messrs. Berger and Stuart. The committee makes
recommendations to the board regarding remuneration of executive officers, and
reviews our compensation plans and policies.
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
43
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.
Insofar as indemnification for liabilities under the Securities Act of
1933 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, 2003, we had 129 employees, a decrease of 54
employees from the prior year. All of our employees are located in Denmark. (See
the following table.) This decrease is primarily attributable to streamlining
our e-security business, partially offset by a growth of 22% in our broadcast
media segment . The table below gives a breakdown of our employees and area of
employment:
Denmark Total
Sales and marketing 29 29
Customer service and support 13 13
Technical 59 59
Finance and administration 28 28
-- --
Totals 129 129
=== ===
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 in the
Internet-related services industry 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 11, 2004.
44
NUMBER ORDINARY NUMBER OF
NAME SHARES(1) ADSS(2) PERCENT (3)
--------------------------- ----------------- ------------ ------------
Aldo M.N. Petersen 5,187,288(4) 864,548 17.82%
Karoly Laszlo Nemeth 330,000(5) 55,000 1.14%
Soren Degn 415,494(6) 69,249 1.43%
John J. Stuart, Jr 330,000(7) 55,000 1.14%
Robert M. Gutkowski * * *
Jan Berger * * *
All officers and directors
As a group(6 persons) 6,577,780(8) 1,096,297 21.60%
----------
* 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 11,
2004 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, assuming conversion into
ADSs (reflected in ADSs) after giving effect to a 1 for 6 reverse ratio
change of ADSs on August 29, 2002
(3) As of May 11, 2004, 31,753,474 ordinary shares are issued, including
3,175,284 treasury shares. Beneficial ownership percentages are
calculated based on 28,578,190 ordinary shares issued and outstanding as
of May 11, 2004. Of the amount issued, 28,770,378 ordinary shares have
been deposited and ADSs issued (represented by 4,795,063 ADSs, each
representing six ADSs (after giving effect to a 1 for 6 reverse ratio
change on August 29, 2002) issued under the Deposit Agreement with The
Bank of New York.
(4) Includes an aggregate of (i) 4,647,540 ordinary shares beneficially
owned by Mr. Petersen; (ii) 100,000 currently exercisable options to
purchase ordinary shares, at an exercise price of $0.92 per share,
expiring on May 30, 2005; (iii) 439,747 currently exercisable options to
purchase ordinary shares, at an exercise price of $0.8382 per share,
expiring on May 30, 2005.
(5) Includes (i) 50,000 currently exercisable options to purchase ordinary
shares, at an exercise price of $0.92 per share, expiring on May 30,
2005; and (ii) 280,000 currently exercisable options to purchase
ordinary shares, at an exercise price of $0.2500 per share, expiring on
February 3, 2008.
(6) Includes (i) 130,500 currently exercisable options to purchase ordinary
shares, at an exercise price of $0.2500 per share, expiring on February
3, 2008; (ii) 125,000 currently exercisable options to purchase ordinary
shares, at an exercise price of $0.5500 per share, expiring on May 30,
2005; (iii) 50,000 currently exercisable options to purchase ordinary
shares, at an exercise price of $0.9200 per share, expiring on May 30,
2005; (iv) 65,000 currently exercisable options to purchase ordinary
shares, at an exercise price of $1.0600 per share, expiring on January
1, 2005; (v) 45,000 currently exercisable options to purchase ordinary
shares, at an exercise price of $0.2500 per share, expiring on January
1, 2005.
(7) Includes an aggregate of (i) 50,000 ordinary shares beneficially owned
by Mr. Stuart; (ii) 280,000 currently exercisable options to purchase
ordinary shares, at an exercise price of $0.2500 per share, expiring on
February 3, 2008.
(8) Includes 1,880,240 ordinary shares underlying exercisable options and
warrants.
45
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The following table sets forth information, as of May 11, 2004 with
respect to the beneficial ownership of our ordinary shares 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) NUMBER(2) PERCENT(3)
Aldo M.N. Petersen (4)........ 5,187,288 864,548 17.82%
-----------------------------------------------
TOTAL ........................ 5,187,288 864,548 17.82%
===============================================
-----------
(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 11, 2004 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) The number of ADS shares beneficially owned, assuming conversion into
ADSs (reflected in ADSs) after giving effect to a 1 for 6 reverse ratio
change of ADSs on August 29, 2002
(3) As of May 11, 2004, 31,753,474 ordinary shares are issued, including
3,175,284 treasury shares. Beneficial ownership percentages are
calculated based on 28,578,190 ordinary shares issued and outstanding as
of May 11, 2004. Of the amount issued, 28,770,378 ordinary shares have
been deposited and ADSs issued (represented by 4,795,063 ADSs, each
representing six ADSs (after giving effect to a 1 for 6 reverse ratio
change on August 29, 2002) issued under the Deposit Agreement with The
Bank of New York.
(4) Includes an aggregate of (i) 4,647,540 ordinary shares beneficially
owned by Mr. Petersen; (ii) 100,000 currently exercisable options to
purchase ordinary shares, at an exercise price of $0.92 per share,
expiring on May 30, 2005; (iii) 439,747 currently exercisable options to
purchase ordinary shares, at an exercise price of $0.8382 per share,
expiring on May 30, 2005.
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. The
portion of our ordinary shares held in the United States is approximately 90%
and the number of record holders is 32. 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:.
MR ALDO PETERSEN
On November 30, 2000, we acquired 20% of Trust Italia SpA., an Italian
digital security company. During 2001, the agreement for the acquisition was
changed, following investment in Trust Italia SpA by other parties, resulting in
an ownership in Trust Italia of 15.7% (242,000 shares) and an
46
additional cash consideration of DKK 4,265. The cash was paid to Aldo Petersen,
the CEO of the Company who also owned 2.6% of the shares of Trust Italia SpA.
PARKEN SPORTS & ENTERTAINMENT A/S
On December 31, 2003, EuroTrust A/S purchased the remaining 15% of
Europe-Visions A/S (formerly Euro909Media A/S) for a total purchase price of DKK
8.5 million, from Parken Sport & Entertainment A/S thereby becoming the 100%
owner of Europe-Visions A/S. Aldo Petersen was a member of the board of
directors of Parken Sports & Entertainment A/S until the end of December 2002
and currently holds 40,000 shares representing ownership of approximately 2% of
the issued share capital of Parken Sports & Entertainment.
On November 29, 2001, the Company entered into an agreement with Parken
Sports & Entertainment A/S for pitch-side advertising and corporate hospitality
at football matches involving FC Copenhagen, a football team owned by Parken
Sports & Entertainment. The agreement is expires December 31, 2007.
DECEMBER 31,
------------
2002 2003
Parken Sports & Entertainment A/S (Purchases) 908 1,074
============ ===========
Parken Sports & Entertainment A/S (Sponsorship) 3,280 0
============ ===========
As of December 31, 2001 Aldo Petersen owed EuroTrust A/S DKK 3,084
representing the balance on his loan account with the company. This loan account
was fully repaid during 2002.
VERISIGN, INC
VeriSign, Inc. (`VeriSign") is a minority shareholder in EuroTrust A/S
owning approximately 18% as of December 31, 2003. 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,
------------
2002 2003
---- ----
24,988 4,204
VeriSign, Inc. (Annual fees and royalties)
=========== ===========
VeriSign, Inc. (Accounts payable) 12,833 477
=========== ===========
During 2001 the Company sold its domain name registration business to
VeriSign for a gross cash consideration of DKK 210,687. During 2000 and 2001,
the Company originally had purchased rights from VeriSign for DKK 75,305, which
allows the Company to sell VeriSign products in a number of European countries
(including Denmark, Sweden, Norway, Finland, Austria, Switzerland and Italy).
During 2002 the balance on the amount capitalized for the rights acquired was
written off due to the poor financial performance of the business.
47
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 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 will pay the Company $8.5 million U.S. in cash
and assume 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 2,748,720 of its ordinary
shares (equivalent to 458,120 American Depository Receipts or "ADRs") from
VeriSign for $1,136,138 U.S. The repurchase was authorized by the Company's
shareholders.
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, 2003. For the years ended December 31, 2001, 2002 and 2003 Nemeth &
Sigetty A/S has been paid DKK 1,083, DKK 1,115 and DKK 418, respectively. The
total outstanding payables due to Nemeth & Sigetty A/S as at December 31, 2002
and December 31, 2003 were DKK 625 and DKK 0, respectively.
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-44 of this
report.
LEGAL PROCEEDINGS
We recorded a provision of DKK 1,000,000 for expenses relating to an
arbitration court settlement regarding the construction of our building located
in Soeborg, Denmark.
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.
48
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 ADSs").
On December, 31, 2003, there were 4,389,538. New ADSs issued and
outstanding representing 26,337,228 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, 1999: $168.0000 $12.3750
YEAR ENDED DECEMBER 31, 2000: $202.5000 $8.2500
YEAR ENDED DECEMBER 31, 2001: $28.5000 $5.7000
YEAR ENDED DECEMBER 31, 2002:
First Quarter $8.5200 $6.1200
Second Quarter $6.6000 $3.9000
Third Quarter $5.9500 $2.5000
Fourth Quarter $5.3000 $2.1500
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
49
HIGH LOW
---- ---
MONTH ENDED:
May 2004
(as of May 11, 2004) $3.9200 $3.5390
April 2004 $5.5000 $3.5000
March 2004 $3.9000 $2.5500
February 2004 $2.5000 $2.2110
January 2004 $2.6900 $2.2600
December 2003 $2.6500 $2.1100
B. PLAN OF DISTRIBUTION
Not required because this Form 20-F is filed as an Annual Report.
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 is filed as an Annual Report.
E. DILUTION
Not required because this Form 20-F is filed as an Annual Report.
F. EXPENSES OF THE ISSUE
Not required because this Form 20-F is filed as an Annual Report.
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not required because this Form 20-F is filed as an Annual Report.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
See Exhibit 1.1.
C. MATERIAL CONTRACTS
On November 17, 2000, we entered into an international affiliate
agreement ("Affiliate Agreement") with VeriSign, Inc. ("VeriSign"), a Delaware
corporation and a provider of Internet Trust services and products.
50
In general, under the Affiliate Agreement:
o 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 (the
"Territory");
o VeriSign granted to us the nonexclusive, nontransferable right
and license to use the VeriSign Software for the purposes of
approving, issuing, suspending or revoking digital certificates
within the Territory;
o We agreed not to compete with VeriSign during its term and any
renewal periods. The agreement has a five year term and at our
option automatically renewable for additional five one year
periods based on our meeting of certain market performance and
minimum royalty requirements;
o We are required to meet certain market performance criteria; and
o Among other rights, we have a right to market and promote our
affiliation with VeriSign as an authorized VeriSign
International Affiliate for VeriSign certificates and
certificate services.
In addition, as a member of the VeriSign Global Affiliate Network,
VeriSign provides us with a combination of technology, support and marketing
services to facilitate the initial deployment and on-going delivery of various
digital certificate services. VeriSign also provides us with the appropriate
business readiness services to facilitate the efficient and timely rollout of
their digital certificate offerings. These readiness services may include
Service Center or Processing Center installation and integration services,
facility and network design consulting, technical and customer support
documentation and training, sales and marketing support, operating practice
templates and local market customization.
We are also a member of the VeriSign Trust Network (VTN), a global
network of digital certificate service providers that operate with common
technology, infrastructure and practices to enable digital certificate
interoperability on a worldwide basis.
In June 2002, the Affiliate Agreement was amended to incorporate
additional terms and conditions relating to certain procedures and practices
that EuroTrust must observe, as a member of the VTN, in developing our own
internal procedures and practices that are in compliance with VTN guidelines.
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). It has not been agreed what the minimum annual royalty payments
are to be after December 31, 2003. The amendment states that the minimum annual
royalty payments for the calendar years following 2003 shall be agreed by the
Company and VeriSign no less than 60 days prior to the end of the calendar year
2003. In March 2004 it was agreed with VeriSign that a minimum for the first
quarter of 2004 of $327.531,25. It has been agreed with VeriSign that the annual
fees will be reduced for 2004 and beyond. As a result of the amendment to the
affiliate agreement with VeriSign, the accrued royalties and annual fees of
approximately DKK 12.8 million payable to VeriSign as of December 31, 2002 were
reduced to
51
approximately DKK 2.8 million in the first quarter of 2003 resulting in a
corresponding decrease in cost of sales in the first quarter of 2003.
On April 1, 2004 we sold our PKI services business to VeriSign and as a
consequence the Affiliate Agreement was terminated.
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 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
52
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
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.
53
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.
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 is filed as an Annual Report.
54
G. STATEMENTS BY EXPERTS
Not required because this Form 20-F 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 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, 2003, 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 2003 and specifically at December
31, 2003, we had no material foreign exchange contracts outstanding.
55
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not required because this Form 20-F is filed as an Annual Report.
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 April 15, 2005.
c) ATTESTATION REPORT OF THE REGISTERED PUBLIC ACCOUNTING FIRM. Not
applicable for fiscal years ending before April 15, 2005.
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. However, in connection with their audit of our consolidated financial
statements for 2002 included in our Annual Report on Form 20-F for the year
ended December 31, 2002, KPMG expressed to us that they believe that a lack of
U.S. GAAP technical accounting and financial reporting expertise represents a
material weakness in the operation of our internal control over financial
reporting and that this was demonstrated by, amongst other things EuroTrust
making a number of adjustments and/or reclassifications from numbers previously
reported. They recommended that EuroTrust obtain additional personnel who have
significant expertise in external financial reporting and disclosure matters
applicable to U.S. SEC Registrants. We believe that this concern was properly
addressed in 2003 and our current independent auditors have not expressed any
such concerns.
ITEM 16. RESERVED
56
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.
ITEM 16 C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
For the fiscal years ended 2002 and 2003, our principal accounting firm,
Gregory & Eldredge, LLC, billed aggregate fees of approximately $50,000 and
100,000, respectively for the audit of our 2002 and 2003 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.
57
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.
None during the fiscal year ended December 31, 2003.
PART III
ITEM 17. FINANCIAL STATEMENTS
Not applicable. 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-44.
58
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)
4.2 VeriSign International Affiliate Agreement between the Registrant
and VeriSign, Inc., dated November 17, 2000 (1)(4)
4.2(a) Amendment No. 2 to the VeriSign International Affiliate Agreement
between the Registrant and VeriSign, Inc., dated June 17, 2002(5)
4.2(b) Amendment No.3 to the VeriSign International Affiliate Agreement
between the Registrant and VeriSign, Inc., dated February,
2003(4)(5)
4.3 Employment Agreement between the Registrant and Aldo Petersen,
effective July, 2001(5)
4.4 Employment Agreement between the Registrant and Soren Degn,
effective in September 2003*
8.1 List of the Subsidiaries of the Registrant *
11.1 Code of Ethics*
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) Incorporated by reference to the Company's Annual Report on Form 20-F,
filed on June 27, 2002.
(2) Incorporated by reference to the original filing of the Registration
Statement on Form F-1 (File No. 333-7092), filed on June 20, 1997.
(3) Incorporated by reference to the Company's Annual Report on Form 20-F,
filed on June 30, 1998.
(4) Portions of this Exhibit, will be filed separately with the Commission
in reliance on Rule 24b-2 of the Securities Exchange Act of 1934, as
amended, and the Registrant's request for confidential treatment.
(5) Incorporated by reference to the Company's Annual Report on Form 20-F,
filed on September 23, 2003.
59
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 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: May 12, 2004 By: /s/ ALDO M.N. PETERSEN
------------------------------
Aldo M.N. Petersen
Chief Executive Officer
(Principal Executive Officer)
Dated: May 12, 2004
By: /s/ SOREN DEGN
------------------------------
Soren Degn
Chief Financial Officer
(Principal Financial and
Accounting Officer)
60
EUROTRUST A/S AND SUBSIDIARIES
Formerly known as Euro909.com A/S
INDEX TO FINANCIAL STATEMENTS
Independent Auditor's Reports.............................................................. F-2
Consolidated Balance Sheets as of December 31, 2002 and 2003 .............................. F-4
Consolidated Statements of Operations for the Years Ended December 31, 2001, 2002
and 2003 ............................................................................... F-6
Consolidated Statements of Shareholders' Equity for the Years Ended December 31,
2001, 2002 and 2003 .................................................................... F-7
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended
December 31, 2001, 2002 and 2003........................................................ F-8
Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2002
and 2003 ............................................................................... F-9
Notes to Consolidated Financial Statements ................................................ F-10
F-1
INDEPENDENT AUDITOR'S REPORT
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, 2003 and 2002 and the related
consolidated statements of operations, comprehensive income, shareholders'
equity and cash flows for the years ended December 31, 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 auditing standards generally
accepted 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, 2003 and 2002 and the
consolidated results of its operations and its cash flows for the year ended
December 31, 2003 and 2002, in conformity with accounting principles generally
accepted in the United States.
/s/ GREGORY & ELDREDGE, LLC
March 13, 2004
Salt Lake City, Utah
F-2
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
EuroTrust A/S
We have audited the accompanying consolidated statements of operations,
comprehensive income, shareholders' equity and cash flows of EuroTrust A/S
(formerly known as euro909.com A/S) for the year ended December 31, 2001. 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 auditing standards generally
accepted 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 statements. 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 results of its operations and
its cash flows for the year ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG
Copenhagen, Denmark
May 28, 2002
F-3
EUROTRUST A/S AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA AND WHERE OTHERWISE INDICATED)
DECEMBER 31,
------------
2002 2003 2003
--------------- --------------- ---------------
DKK DKK USD
ASSETS
Current assets:
Cash and cash equivalents 37,672 9,363 $1,572
Restricted cash 1,986 0 0
Accounts receivable trade, net of allowance for doubtful
accounts of DKK 4,629 in 2002 and DKK 2,239 in 2003 21,210 25,150 4,221
Broadcasting rights, current 3,805 952 160
Inventories 1,403 128 21
Deferred tax assets, current 706 2,036 342
VAT receivables 1,599 184 31
Prepaid expenses and deposits 15,019 12,568 2,110
Other receivables 7,175 3,994 670
--------------- --------------- ---------------
Total current assets 90,575 54,375 9,127
Marketable securities - available for sale 570 304 51
Broadcasting rights, long term 951 0 0
Rent and other deposits 1,783 1,379 231
Other receivables 64 64 11
Long term investments at cost 2,792 2,494 418
Investment in affiliated companies - equity method 0 1,500 252
Property, plant and equipment, net 48,973 55,341 9,289
Goodwill 20,964 23,941 4,019
Deferred tax asset, long-term 0 347 58
License rights, net 1,400 1,100 185
Other intangibles assets, net 145 0 0
--------------- --------------- ---------------
Total assets 168,217 140,845 $23,641
=============== =============== ===============
DKK amounts have been converted into US$ at an exchange rate of
$1=DKK 5.9576. The accompanying notes are an integral part of
these consolidated financial statements.
F-4
EUROTRUST A/S AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA AND WHERE OTHERWISE INDICATED)
DECEMBER 31,
------------
2002 2003 2003
----------------- --------------- -------------
DKK DKK USD
LIABILITIES AND SHAREHOLDERS` EQUITY
Current liabilities:
Short term borrowings 809 0 0
Accounts payable 21,038 26,914 $4,518
Accounts payable, related parties 12,833 477 80
Accrued expenses 28,310 26,282 4,412
Deferred revenue, current 20,274 35,139 5,898
Lease obligations, current 4,328 1,176 197
Income tax payable 1,263 61 10
Liabilities of discontinued operations 6,000 0 0
----------------- --------------- -------------
Total current liabilities 94,855 90,049 15,115
Long term liabilities:
Deferred revenue, net of current portion 15,423 1,576 264
Lease obligations, net of current portion 3,444 0 0
Other liabilities, long term 2,287 0 0
----------------- --------------- -------------
Total long term liabilities 21,154 1,576 264
Minority interest in subsidiaries 7,966 2,860 480
Shareholders' equity:
Common shares - par value DKK 1.25, 34,502,000 and 49,050,000
authorized, 27,205,000 and 31,753,474 issued at
December 31, 2002 and 2003 34,006 39,693 6,662
Additional paid-in capital 532,280 526,040 88,298
Accumulated deficit (509,510) (515,840) (86,585)
Accumulative other comprehensive income (loss) (556) 512 86
Less, treasury stock, 1,263,100 and 426,562 common shares
at December 31, 2002 and 2003 respectively, at cost (11,978) (4,045) (679)
----------------- --------------- -------------
Total shareholders' equity 44,242 46,360 7,782
----------------- --------------- -------------
Total liabilities and shareholders' equity 168,217 140,845 $23,641
================= =============== =============
DKK amounts have been converted into US$ at an exchange rate of
$1=DKK 5.9576. The accompanying notes are an integral part of
these consolidated financial statements.
F-5
EUROTRUST A/S
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA AND WHERE OTHERWISE INDICATED)
YEARS ENDED DECEMBER 31,
2001 2002 2003 2003
--------------- -------------- ------------ ------------
DKK DKK DKK USD
Net revenue 151,914 135,789 166,411 $27,933
--------------------------------------------------------------
Operating expenses:
Cost of revenue 90,236 96,018 82,215 13,800
Cost of revenue - related parties 7,376 24,988 4,204 706
Selling and marketing 66,670 48,541 44,707 7,504
Selling and marketing - related parties 1,436 908 1,074 180
General and administrative 55,569 43,768 40,195 6,747
General and administrative - related parties 1,083 1,115 418 70
Depreciation 18,375 17,006 8,317 1,396
Amortization and write down 53,439 83,768 0 0
Goodwill impairment 53,738 65,343 0 0
-------------------------------- ------------ ------------
Total operating expenses 347,922 381,455 181,130 30,403
-------------------------------- ------------ ------------
Operating income (loss) (196,008) (245,666) (14,719) (2,470)
Other income (expenses)
Interest income 2,266 1,859 229 38
Interest expense (286) (1,076) (1,714) (288)
Foreign exchange gain (loss), net (2,929) (5,291) (1,906) (320)
Gains from sales / dissolution of businesses, net 213,187 0 7,449 1,250
Write-down of long term investments 0 (19,126) (196) (33)
Other income (expenses), net 0 (8,618) 693 116
-------------------------------- ------------ ------------
Income (Loss) before income taxes and minority interest 16,230 (277,918) (10,164) (1,707)
Income tax expense (24) (2,499) 1,491 250
Minority interest in net income (loss) of subsidiaries 1,959 3,069 (257) (43)
-------------------------------- ------------ ------------
Income (loss) from continuing operations 18,165 (277,348) (8,930) (1,500)
Gain (loss) from discontinued print/on line media division,
net of tax, 0 in 2001, 2002 and 2003 (10,115) (6,000) 2,600 436
Loss on disposal of print/on line media division
net of tax of 0 in 2001, 2002 and 2003 (345) 0 0 0
--------------- -------------- ------------ ------------
NET INCOME (LOSS) 7,705 (283,348) (6,330) $(1,064)
BASIC INCOME (LOSS) PER WEIGHTED AVERAGE COMMON SHARE
Income (loss) from continuing operations 0.75 (10.60) (0.32) $(0.05)
Income (loss) from discontinued operations (0.43) (0.23) 0.09 0.01
--------------------------------------------------------------
Net income (loss) 0.32 (10.83) (0.23) $(0.04)
================ ============= ============ ============
Weighted average common shares outstanding 24,185 26,162 28,025 28,025
=============================================== ============
DILUTED INCOME (LOSS) PER WEIGHTED AVERAGE COMMON SHARES
Income (loss) from continuing operations 0.73 (10.60) (0.32) $(0.05)
Income (loss) from discontinued operations (0.42) (0.23) 0.09 0.01
--------------------------------------------------------------
Net income (loss) 0.31 (10.83) (0.23) $(0.04)
=============== ============== ============ ============
Weighted average common shares outstanding,
assuming dilution 24,745 26,162 28,025 28,025
================================ ============ ============
DKK amounts have been converted into US$ at an exchange rate of
$1=DKK 5.9576. The accompanying notes are an integral part of
these consolidated financial statements.
F-6
EUROTRUST A/S AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA AND WHERE OTHERWISE INDICATED)
NOTES
COMMON ADDITIONAL OTHER COM- RECEIVABLE TOTAL
SHARES PAID-IN ACCUMULATED PREHENSIVE TREASURY FROM SALE
AMOUNT CAPITAL DEFICIT INCOME STOCK OF SHARES
--------------------------------------------------------------------------------
DKK DKK DKK DKK DKK DKK DKK
BALANCE AT DECEMBER 31, 2000 25,814 414,628 (233,867) (890) 0 (47) 205,638
Issuance of 248 common shares to
acquire new businesses 310 3,652 3,962
Issuance of 6,306 common shares for
cash in private placement 7,882 114,529 122,411
Purchase of treasury stock (7,150) (7,150)
Sale of treasury stock (529) 1,694 1,165
Currency translation adjustments (393) (393)
Unrealized loss on investment
securities (217) (217)
Repayment of notes receivable 47 47
Net income 7,705 7,705
--------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 34,006 532,280 (226,162) (1,500) (5,456) 0 333,168
Purchase of treasury stock (6,522) (6,522)
Currency translation adjustments 958 958
Unrealized loss on investment
securities (14) (14)
Net loss (283,348) (283,348)
--------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2002 34,006 532,280 (509,510) (556) (11,978) 0 44,242
Issuance of 4,550 common shares for
cash through exercise of
stock options 5,687 605 6,292
Issuance of 837 common shares from
treasury For equity financing
guarantees (6,845) 7,933 1,088
Currency translation adjustments 921 921
Unrealized gain on investment
securities 147 147
Net loss (6,330) (6,330)
--------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2003 39,693 526,040 (515,840) 512 (4,045) 0 46,360
================================================================================
BALANCE AT DECEMBER 31, 2003 USD$6,662 USD$88,298 USD$(86,585) USD$86 USD$(679) USD$0 USD$7,782
================================================================================
DKK amounts have been converted into US$ at an exchange rate of
$1=DKK 5.9576. The accompanying notes are an integral part of
these consolidated financial statements.
F-7
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,
2001 2002 2003 2003
-------------- -------------- -------------- -------------
DKK DKK DKK USD
Net income (loss) 7,705 (283,348) (6,330) $(1,063)
Currency translation adjustment, net of
taxes of DKK 0 in 2001, 2002 and 2003 (393) 958 921 155
Net change in unrealized investment security losses, net of
taxes of DKK 0 in 2001, 2002 and 2003 (217) (14) 147 25
---------------------------------------------------------
Comprehensive net income (loss) 7,095 (282,404) (5,262) $(883)
=========================================================
DKK amounts have been converted into US$ at an exchange rate of
$1=DKK 5.9576. The accompanying notes are an integral part of
these consolidated financial statements.
F-8
EUROTRUST A/S AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA AND WHERE OTHERWISE INDICATED)
YEARS ENDED DECEMBER 31,
2001 2002 2003 2003
-----------------------------------------------------
DKK DKK DKK USD
Cash flows from operating activities:
Net income (loss) from continuing operations 18,165 (277,348) (8,930) $(1,500)
Adjustments to reconcile net loss (income) to
cash used in operating activities:
Depreciation, amortization and write down 133,889 185,243 8,317 1,396
Option loss (gain) 0 6,785 (2,287) (384)
(Gain) on sale of business (213,187) 0 (7,449) (1,250)
(Gain)/loss on sale of fixed assets 0 (594) (1,703) (286)
Provision for doubtful accounts 0 0 (699) (117)
Loss on marketable securities 0 0 197 33
Deferred tax 0 (350) (1,677) (281)
Minority interest (1,959) (3,069) 257 43
Non-cash issuance of common shares from treasury 0 0 1,088 183
Changes in operating assets and liabilities:
Accounts receivable 10,984 6,845 (5,156) (865)
Accounts receivable, related parties (3,084) 3,084 0 0
Broadcasting rights 10,312 3,244 3,804 639
Inventories and other assets (481) 14,012 934 157
Prepaid expenses 0 6,525 2,270 381
Income tax payable (2,433) 1,263 (1,202) (202)
Other receivables (1,354) 5,310 4,337 728
Accounts payable (10,783) (10,658) 7,225 1,213
Accounts payable, related parties 4,263 6,273 (12,356) (2,075)
Accrued expenses (23,591) (15,170) (3,094) (519)
Deferred revenue (18,533) 13,452 1,018 171
----------- --------------- ------------ ------------
Cash used in operating activities: (97,792) (55,153) (15,106) (2,537)
Cash used in discontinued operations: (6,469) 0 (3,400) (571)
----------- --------------- ------------ ------------
(104,261) (55,153) (18,506) (3,106)
=========== =============== ============ ============
Cash flows from investing activities:
Proceeds from sales of investments (purchase of investments) (5,625) (5,128) 216 36
Acquisition of new business, net of cash acquired (10,059) (15,586) (1,500) (252)
Proceeds from sale of business, net of cash disposed of 171,656 40,121 1,986 333
Purchase of fixed assets (123,619) (17,471) (15,505) (2,603)
Proceeds from sales of fixed assets 0 2,177 1,448 243
----------- --------------- ------------ ------------
Cash (used in) provided by investing activities: 32,353 4,113 (13,355) (2,242)
Cash (used in) provided by discontinued operations: 9,525 0 0 0
----------- --------------- ------------ ------------
41,878 4,113 (13,355) (2,242)
=========== =============== ============ ============
Cash flows from financing activities:
Net change in short-term borrowings 1,673 (3,201) (809) (136)
Sales of treasury stock 1,212 0 0 0
Purchase of treasury stock (7,150) (6,523) 0 0
Proceeds from sale and lease back 0 7,000 0 0
Lease payments 4,345 (3,573) (2,852) (479)
Long term debt (10,584) 0 0 0
Proceeds from issuance of common shares and stock options 122,411 0 6,292 1,056
----------- --------------- ------------ ------------
Cash provided by (used in) financing activities: 111,907 (6,297) 2,631 442
Cash used in discontinued operations: (5,282) 0 0 0
----------- --------------- ------------ ------------
106,625 (6,297) 2,631 442
=========== =============== ============ ============
Effect of currency exchange rate changes on cash and cash
equivalents 1,166 958 921 155
----------- --------------- ------------ ------------
Net increase (decrease) in cash and cash equivalents 45,408 (56,379) (28,309) (4,752)
Cash and cash equivalents, beginning of period 48,643 94,051 37,672 6,323
----------- --------------- ------------ ------------
Cash and cash equivalents, end of period 94,051 37,672 9,363 $1,572
=========== =============== ============ ============
Cash paid for interest (286) (1,076) (1,714) $(288)
=========== =============== ============ ============
Cash paid for taxes 1,980 618 1,373 $230
=========== =============== ============ ============
DKK amounts have been converted into US$ at an exchange rate of
$1=DKK 5.9576. The accompanying notes are an integral part of
these consolidated financial statements.
F-9
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
EuroTrust A/S and its subsidiaries ("the Company"), formerly
euro909.com and earlier Telepartner A/S, and its subsidiaries engage in
providing production and broadcasting services and Internet security products
and services in Scandinavia and other European countries.
The Company is currently organized into two reportable service-based
segments: A Production and Broadcasting Segment and an Internet Security Product
and Services Segment. During 2001 the Company previously operated a print and
online media segment.
PRODUCTION AND BROADCASTING SEGMENT
The Company's Production and Broadcasting Segment consists of a
broadcast media property and it also operates the largest media production
company in Scandinavia with a special focus on sports programming. The Company's
media division also offers educational courses in television production. During
the fourth quarter of 2001, we consolidated all of our television programming
into a single television channel, dk4.
On December 31, 2003, the Company purchased the remaining 15% interest
in Europe-Visions A/S. Europe-Visions A/S owns 75% of the outstanding shares of
common stock of its subsidiary Mobile Broadcasting A/S. The minority interests'
proportionate share of income or loss of Europe-Vision A/S and Mobile
Broadcasting is included in the consolidated statement of operations.
INTERNET SECURITY PRODUCT AND SERVICE SEGMENT
The Company's Internet Security Product and Services Segment offers
trusted Internet security products and services including virus detection, email
security products, vulnerability testing, secure communications, on-site
solutions, and payment platforms to website owners, commercial enterprises and
electronic commerce service providers.
On April 1, 2004, the Company sold the secure communications, on-site
solutions, and payment platforms to website owners, commercial enterprises and
electronic commerce service providers business.
The Company provided secure remote backup services, digital video surveillance,
secure hosting until the sale of these businesses in November 2003, December
2003 and January 1, 2004, respectively. The Company owned approximately 75% of
its subsidiary EuroTrust Secure Hosting A/S until it's sale On January 1, 2004.
PRINT AND ONLINE MEDIA SEGMENT
Until the end of 2001, the Company operated a print and online media
segment. In 2001 we made the strategic decision to focus primarily on providing
broadcasting, trusted Internet infrastructure products and services. As a
result, we sold our domain name registration business to VeriSign in July 2001,
we sold
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)
the remaining assets of our historical telecommunications business and our print
and online media properties in December 2001.
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.
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, 2003:
COUNTRY OF INTEREST
SUBSIDIARY INCORPORATION OWNERSHIP
---------- ------------- ---------
Euro909.dk A/S Denmark 100.0%
EuroTrust PKI Services A/S (1) Denmark 100.0% Assets sold April 1, 2004
EuroTrust Net Vaulting A/S Denmark 100.0% Sold Nov. 30, 2003
EuroTrust Virus112 A/S (2) Denmark 100.0%
Europe-Visions A/S (3) Denmark 100.0%
EuroTrust Secure Hosting A/S (4) Denmark 75.0% Sold Jan. 1, 2004
Telefax Scandinavia i Sverige AB Sweden 100.0%
EuroTrust E-Security SARL Switzerland 100.0% Sold Dec. 2003
EuroTrust France SAS (5) France 100.0% Sold Dec. 31, 2003
---------------------------
(1) Formerly known as EuroTrust Denmark A/S.
(2) Formerly known as Virus112.com A/S.
(3) Formerly known as Euro909Media A/S
(4) Result of the combination of our Digiweb activity with DHT Hosting
ApS, on January 1, 2002. Sold on January 1, 2004.
(5) Formerly known as Alphasys SAS.
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, 2003:
COUNTRY OF INTEREST
SUBSIDIARY INCORPORATION OWNERSHIP
---------- ------------- ---------
Ciac A/S Denmark 100.0%
Prime Vision A/S Denmark 100.0%
Arhustudiet A/S (1) Denmark 100.0%
Publishing & Management ApS Denmark 100.0%
TV Akademiet A/S Denmark 100.0%
Mobile Broadcasting A/S Denmark 75.0%
All intercompany balances and transactions have been eliminated in
consolidation. The
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)
Company's investments representing a 20% to 50% interest in unconsolidated
subsidiaries are accounted for by the equity method of accounting.
At December 31, 2003, the Company had the following equity method
investments:
Mediehuset Danmark ApS Denmark 25.0%
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 charged or credited to 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
functional currency. Gains and losses from these transactions are included in
the income statement.
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 5.9576 DKK to one
US Dollar, the approximate exchange rate at December 31, 2003. 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.
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)
RESTRICTED CASH
Restricted cash as of December 31, 2002, included an escrow account
with respect to the remaining consideration for the Company's domain name
registration business that was sold in June 2001 amounting to DKK 1,986.
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.
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. 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.
The following includes the changes in the allowance for doubtful
accounts for the years ended December 31, 2001 to December 31, 2003:
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)
Amounts
charged
Balance at (credited) to Write-offs
-------------- operating Balance at
Allowance for doubtful accounts: January 1 expenses December 31
--------------- ------------------
Year ended December 31, 2001 7,928 1,519 (1,807) 7,640
Year ended December 31, 2002 7,640 0 (3,011) 4,629
Year ended December 31, 2003 4,629 ( 699) (1,691) 2,239
The deductions for the year ended December 31, 2001 of DKK 1.8 million relate to
the Print and Online Media Division and are included in discontinued operations
as this business was sold in 2001.
BROADCASTING RIGHTS
Broadcasting rights, which comprise of acquired rights to broadcast
television programs on the Company's television stations, and the related
liabilities are recorded at their gross value when the license period begins and
the programs are available for use. These rights are expensed over the greater
of when the program is aired or over the period of license. Program rights are
classified as current or non-current based on anticipated usage in the following
twelve month period.
INVENTORIES
Inventories principally consist of 45,000 and 38,000 (not in thousands)
IBM Tivoli licenses at December 31, 2002 and 2003, 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.
PROPERTY, PLANT AND EQUIPMENT
Buildings, 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. Technical
equipment, furniture and fixtures and automobiles are depreciated on a
straight-line basis over the expected useful lives 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 acquired. Other definite life intangibles
assets consist of license rights to virus scanning software and other intangible
assets. The Company fully adopted the provisions of SFAS No. 142,
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)
GOODWILL AND OTHER INTANGIBLE ASSETS, as of January 1, 2002. Goodwill and
intangible assets acquired in a purchase business combination and determined to
have an indefinite useful life are not amortized, but instead are tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
Impairment losses arising from this impairment test, if any, are included in
operating expenses in the period of impairment. SFAS No. 142 requires that
definite intangible assets with estimable useful lives be 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.
Prior to the adoption of SFAS No. 142, goodwill was amortized on a
straight-line basis over the expected periods to be benefited, generally five to
ten years, and assessed for recoverability in accordance with APB Opinion 17 and
SFAS No. 121 by determining whether the amortization of the goodwill balance
over its remaining life could be recovered through undiscounted future operating
cash flows of the acquired operation. All other intangible assets were amortized
on a straight-line basis not exceeding 5 years. The amount of goodwill and other
intangible asset impairment, if any, was measured based on projected discounted
future operating cash flows using a discount rate reflecting our average cost of
funds.
Had the provisions of SFAS No. 142 been in effect for 2001, the
Company's results of operations would have been as follows:
-------------------------------------------------------------------------------------
2001
-------------------------------------------------------------------------------------
Reported results
(Loss) income from continuing operations 18,165
Loss from discontinued operations - net of tax (10,115)
Loss on disposal of Print/Online Media Division (345)
-------------------------------------------------------------------------------------
(Loss) income - reported 7,705
-------------------------------------------------------------------------------------
Adjustments
Amortization of goodwill from continuing operations - net of tax 4,659
Amortization of goodwill from discontinued operations 0
-------------------------------------------------------------------------------------
Total net adjustments 4,659
-------------------------------------------------------------------------------------
Adjusted results
(Loss) income from continuing operations 22,824 Loss from discontinued
operations - net of tax (10,460)
-------------------------------------------------------------------------------------
(Loss) income - adjusted 12,364
-------------------------------------------------------------------------------------
Reported basic (loss) income per common share:
From continuing operations 0.75
From discontinued operations (0.43)
-------------------------------------------------------------------------------------
Basic (loss) income per common share - reported 0.32
-------------------------------------------------------------------------------------
Reported diluted (loss) income per common share:
From continuing operations 0.73
From discontinued operations (0.42)
-------------------------------------------------------------------------------------
Diluted (loss) income per common share - reported 0.31
-------------------------------------------------------------------------------------
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)
Adjusted basic (loss) income per common share:
From continuing operations 0.94
From discontinued operations (0.43)
-------------------------------------------------------------------------------------
Basic (loss) income per common share - adjusted 0.51
-------------------------------------------------------------------------------------
Adjusted diluted (loss) income per common share:
From continuing operations 0.92
From discontinued operations (0.42)
-------------------------------------------------------------------------------------
Diluted (loss) income per common share - adjusted 0.50
-------------------------------------------------------------------------------------
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 three primary categories: (i) Internet
services, which include managed public key infrastructure ("PKI") services and
digital certificate services, hosting, virus surveillance and detection
services, and remote data backup services; (ii) broadcasting, which includes
cable and digital television subscriber income and program production income;
and (iii) until July 31, 2001, domain name registration 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:
INTERNET SERVICES
The Company recognizes revenues from issuances of digital certificates
and managed PKI services, virus surveillance and detection services, and
remote data backup, when all of the following criteria are 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
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)
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 maintenance services that are not sold
separately, are deferred and recognized ratably over the period that such
contracted services are provided, usually 12 to 24 months.
Revenues from virus surveillance and detection services, which
include bundled maintenance services that are not sold separately, are
deferred and recognized rateably over the period that the service is
provided, usually 3 to 36 months.
Up-front fees from hosting and remote data backup services are
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 are not
essential to the functionality of the software. These software products
are fully functional upon delivery and do not require any significant
modification or alteration. Revenues from consulting and installation
services, which are provided on a time and materials basis, are recognized
as the services are performed.
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)
DOMAIN NAME REGISTRATION
The Company sold its domain name registration business in 2001.
The Company recognized revenues from initial registration of domain
names and subsequent renewal over the period the customer is provided
access to the domain registry through its servers.
BROADCASTING
The Company recognizes cable and digital television revenue on an
accrual basis 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 programs are completed and delivered to the
broadcaster with no further obligation to customers.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expenses
totalled DKK 3.2 million, DKK 4.0 million and DKK 3.9 million in 2001, 2002 and
2003, 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, 2003, 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.
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
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)
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:
2001 2002 2003
---------------------------------------------------
Reported net income (loss) 7,705 (283,348) (6,330)
Reported stock-based compensation expense 0 0 0
Pro forma stock-based compensation expense (24,385) (12,036) (8,027)
--------------- --------------- ---------------
Pro forma net loss (16,680) (295,384) (14,357)
Reported basic income (loss) per share 0.32 (10.60) (0.23)
Reported diluted income (loss) per share 0.31 (10.60) (0.28)
Pro forma basic and diluted loss per share (0.69) (11.29) (0.51)
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
2001 2002 2003
---------------------------------------
Five year risk free interest rate 5.25% N/A 3.65%
Three year risk free interest rate 4.92% 4.7% N/A
Two year risk free interest rate 0 4.08% 2.77%
Dividend yield 0% 0% 0%
-------- ------------- ----------------
ADR's Annual volatility of the expected market price 1.3 1.25 1.58
Expected life of the options 2.90 2.81 4.90
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 a large number of small customers located throughout
Scandinavia, and, to a limited extent, in certain Western European countries,
and does not require collateral from its customers. The company has one large
customer in the broadcasting segment which alone accounts for 23%, 28% and 25%
of the company's consolidated revenue for 2001, 2002, and 2003, respectively.
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 INCOME (EXPENSES), NET
Other income (expenses), net of DKK 693 in 2003 mainly relates to
cancellation of written options issued in connection with business acquisitions
and provision for losses on an arbitration case.
Other income (expenses), net of DKK (8,618) in 2002 mainly relates to
changes in the fair values of written options issued in connection with business
acquisitions.
As of December 31, 2002 Medani A/S exercised the written put 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 Company recorded a loss of DKK
4,498 with regard to this option which is included within other (expenses)
income, net in the consolidated statement of operations for the year ended
December 31, 2002.
The Company has issued a written put option to buy a 25% interest in
EuroTrust Secure Hosting A/S in 2004 at a price based on the future
profitability of EuroTrust Secure Hosting A/S or for a minimum of DKK 2,500. In
addition, the Company has issued a written call option to sell an additional 10%
of EuroTrust Secure Hosting A/S for DKK 50. These options have been included as
a liability in the financial statements at their respective fair values,
resulting in an expense of DKK 2,287 in 2002 which is included within other
income (expenses), net in the consolidated statement of operations for the year
ended December 31, 2002.
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 their contribution.
Other than the pension benefits described above, the Company does not
provide its employees with post-retirement and post-employment benefits.
RECLASSIFICATIONS
Certain balances in the financial statements for December 31, 2001 and
2002 have been reclassified to conform to the headings and classifications used
in the December 31, 2003 financial statements
RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2002, the Emerging Issues Task Force issued its
consensus on EITF Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables ("EITF Issue No. 00-21") on an approach to determine whether an
entity should divide an arrangement with multiple deliverables into separate
units of accounting. According to the EITF, in an arrangement with multiple
deliverables, the delivered item(s) should be considered a separate unit of
accounting if all of the following criteria are met: (1) the delivered item(s)
has value to the customer on a standalone basis, (2) there is objective and
reliable evidence of the fair value of the undelivered item(s), and (3) if the
arrangement includes a general right
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)
of return, delivery or performance of the undelivered item(s) is considered
probable and substantially in the control of the vendor. If all the conditions
above are met and there is objective and reliable evidence of fair value for all
units of accounting in an arrangement, the arrangement consideration should be
allocated to the separate units of accounting based on their relative fair
values. The guidance in this Issue is effective for revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. The adoption of this
statement did not have a material effect on EuroTrust's financial statements.
In December 2003, the SEC issued Staff Accounting Bulletin ("SAB") No, 104
"REVENUE RECOGNITION" which codifies, revises and rescinds certain sections of
SAB No. 101, "REVENUE RECOGNITION", in order to make this interpretive guidance
consistent with current authoritative accounting and auditing guidance and SEC
rules and regulations. The changes noted in SAB No. 104 did not have a material
effect on EuroTrust consolidated financial position, results of operations or
cash flows.
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 April, 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities", which amends SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," to address (1)
decisions reached by the Derivatives Implementation Group, (2) developments in
other Board projects that address financial instruments, and (3) implementation
issues related to the definition of a derivative. SFAS No. 149 has multiple
effective date provisions depending on the nature of the amendment to SFAS No.
133. The adoption of this statement did not have a material effect on
EuroTrust's financial statements.
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)
On May 15, 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 is effective for all financial instruments entered into or modified
after May 31, 2003. For unmodified financial instruments existing at May 31,
2003, SFAS No. 150 is effective at the beginning of the first interim period
beginning after June 15, 2003, except for mandatory redeemable financial
instruments of non-public entities. The adoption of this statement is not
expected to have a material effect on EuroTrust's financial statements.
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, 2002:
Shares in Land and Leisure A/S 1,111 (541) 570
------------ ------------- -------------
Total 1,111 (541) 570
------------ ------------- -------------
December 31, 2003:
Shares in Land and Leisure A/S 698 (394) 304
------------ ------------- -------------
Total 698 (394) 304
------------ ------------- -------------
The unrealized loss on the available-for-sale investment securities is included
in other cumulative comprehensive income.
3. LONG TERM INVESTMENTS
The following is a summary of long-term investments that are stated at
cost (in DKK)
December 31,
2002 2003
-----------------------------
Shares in TrustItalia S.p.A. 0 0
Shares in Excelsa SA s.r.l. 2,792 2,494
Shares in Wisekey SA 0 0
-----------------------------
Total long term investments 2,792 2,494
-----------------------------
Based on our review of the valuation of investments made at December
31, 2002, we wrote down to zero our investments in Trust Italia S.p.A. (DKK
16,053), Wisekey SA (DKK 2,322) and certain other shares (DKK 751). These write
downs are included in write-down of long term investments in the consolidated
statement of operations for 2002.
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)
TRUST ITALIA SpA
On November 30, 2000, the Company acquired 20% of the ordinary shares
of Trust Italia SpA., an Italian digital security company. This amounted to the
acquisition of 325,000 shares. The consideration comprised 750,000 ordinary
shares of stock valued at DKK 11,788.
During 2001, the agreement for the acquisition was amended, following
investment in TrustItalia SpA by other parties, resulting in an ownership in
TrustItalia of 15.7% (242,000 shares) and an additional cash consideration of
DKK 4,265.
Of the total shares acquired, 150,600 shares in Trust Italia SpA were
purchased from Ben Rispoli who owned 9.8% of the shares of Trust Italia SpA.
These shares were purchased in return for 559,155 shares in EuroTrust.
On March 7, 2002 the Company granted a note payable totaling DKK 1,250,
to Mr Rispoli who has since provided the Company's 559,155 shares he
subsequently acquired from the above transaction as collateral.
The carrying value in the consolidated balance sheet of the loan to Mr.
Rispoli as of December 31, 2002 was DKK 750 net of a provision for possible
non-repayment of DKK 500.
The note payable has been paid in full to Mr. Rispoli during 2003.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment include the following (in DKK):
DECEMBER 31,
------------
Estimated 2002 2003
Life -------------------------------------------
Land N/A 1,929 1,929
Buildings 50 years 27,077 27,321
Technical equipment 3 to 5 years 35,221 24,998
Furniture and fixtures 3 to 5 years 12,798 10,031
Automobiles 5 years 3,930 3,536
Leasehold improvements 3 to 10 years 5,477 6,040
------------------ ----------------------
86,432 73,855
Less accumulated depreciation (37,459) (18,514)
------------------ ----------------------
Net property, plant and equipment 48,973 55,341
================== ======================
Depreciation expense 16,688 7,872
During 2002, based on a review of past results and market prospects we
reduced the future projections of our Internet services segment businesses to a
fair value estimated in accordance with SFAS
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)
No. 144. The discount rates used ranged from 14 to 16 percent. This resulted in
a pre-tax charge of DKK 11.0 million recorded in Amortization and write-downs in
the accompanying financial statements in the consolidated statement of
operations including DKK 5,287 of leased asset impairments.
The net book value of leased assets included in property, plant and
equipment totalling DKK 0 and DKK 0 at December 31, 2002 and 2003, respectively.
Leased assets of DKK 5,287 were impaired as part of the DKK 11.0 million
impairment of assets in 2002.
5. GOODWILL
Goodwill consisted of the following (in DKK):
December 31,
2002 2003
--------------------------------
BALANCE AT THE BEGINNING OF THE YEAR 51,002 20,964
CHANGES:
Additions 36,732 2,977
Disposals (1,427) 0
Impairment (65,343) 0
--------------------------------
BALANCE AT THE END OF THE YEAR 20,964 23,941
--------------------------------
The remaining goodwill as of December 31, 2002 and 2003 relates to
the Company's Broadcast Media segment.
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 2002 and 2003, the Company performed the
annual impairment test and recorded an impairment charge of DKK 65.3 million and
0, 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 2 percent. The assumptions supporting the estimated future cash flows,
including the discount rate and estimated terminal values, reflect management's
best estimates.
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)
The Company attributes the impairment losses to the deterioration in
the market value of EuroTrust since January 1, 2002, the current general
economic environment and current market situation, All of the goodwill
impairment relates to the Internet services segment and the most significant
single element of this write down relates to goodwill recognized in connection
with the purchase of Alphasys SAS in January 2002 of DKK 33.2 million. (See Note
7).
During 2001, the Company performed an impairment tests in accordance
with APB Opinion 17 and SFAS No. 121 and recorded an impairment charge of DKK
53.7 million; DKK 36.2 million thereof is included in the Internet services
segment and DKK 17.5 million is included in the Broadcast media segment. The
impairment is a result of a change in the Company's strategy and results
realized on the investments
6. LICENSE RIGHTS AND OTHER INTANGIBLES, NET
License rights and other intangible fixed assets are classified as definite life
intangible assets and consisted of the following:
December 31,
--------------------------------
2002 2003
---------------- --------------
Definite Life Intangible Assets:
Software licensing rights 78,403 52,540
Other intangible fixed assets 7,314 5,816
---------------- --------------
85,717 58,356
Less accumulated amortization (84,172) (57,256)
---------------- --------------
Net definite life intangible assets 1,545 1,100
================ ==============
Amortization expense (9,727) (445)
Weighted average amortization period 5 Years 5 Years
Estimated future amortization expenses related to rights and other
intangibles at December 31, 2003 is as follows: DKK 300 in each of the years
2004, 2005 and 2006 and DKK 200 in 2007.
7. BUSINESS COMBINATIONS
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.
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)
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 consolidated in
the Company's financial statements since January 21, 2002.
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 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.
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)
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.
ACQUISITIONS DURING 2001
EUROTRUST NETVAULTING A/S (FORMERLY WISEHOUSE A/S)
As of August 31, 2001, the Company acquired 85% of the Danish remote
back-up company, EuroTrust NetVaulting A/S, for a cash consideration of DKK 25
million. In addition, 1,000,000 stock options with an exercise price of USD 1.25
were also part of the consideration. The options vest based on the profitability
of EuroTrust NetVaulting in 2002 and 2003. These options have not vested in
2002. The stock options expire as of September 1, 2004. The purchase price
exceeded the fair market value of net assets acquired by approximately DKK 6.3
million, which was recorded as goodwill. The results of these operations have
been consolidated from August 31, 2001. The goodwill arising on this acquisition
has been fully written off during 2002.
As part of the shareholder agreement signed on August 29, 2001, Medani
A/S received an option to sell at any time within two years after the signature
of the shareholder agreement its 15% interest in EuroTrust NetVaulting A/S to
the Company for a price of DKK 5,000, to be paid in a variable number of
EuroTrust A/S shares, based on the fair value of such shares subject to a cap of
US$2.00 per share. In addition, EuroTrust received an option to purchase Medani
A/S's remaining 15% interest within two years after the signature of the
shareholder agreement, again for a fixed price of DKK 5,000 to be paid in
EuroTrust A/S shares according to the same formula.
The total purchase price has been allocated to the assets acquired and
the liabilities assumed based on their respective fair values on the acquisition
date.
The following table summarizes the estimated fair values of the assets
acquired and the liabilities assumed at the date of acquisition (in DKK):
August 31,2001
--------------
Currents asset 37,018
Fixed assets 8,350
Goodwill 6,343
------
Total assets acquired 51,711
======
Currents Liabilities (12,834
Long-term debt (10,584)
Minority interest (3,293)
-------
Total liabilities assumed (26,711)
-------
NET ASSETS ACQUIRED 25,000
=======
F-27
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
NETNAME-SOLUTIONS.COM GmbH
As part of the sale of the domain name registration business to
VeriSign, the Company acquired on June 30, 2001 the remaining 49% of
Netname-Solutions.com GmbH, a German company offering Internet services that it
did not already own. The consideration comprised DKK 219 in cash and DKK 2,267
in shares. The total consideration exceeded the fair value of the net
liabilities assumed by DKK 4,095, which excess was recorded as goodwill. In July
2001, all shares in this investment were sold to VeriSign, see below.
The 51% investment in the Netname-Solution.com -Gmbh was consolidated until the
date of sale.
DISPOSALS DURING 2003
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 a lease of our TSM assets.
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 1 DKK. 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 1.4 million 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 1.6 million forward 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 1 DKK and
recognized a gain of approximately 6,400 DKK gain on sale of subsidiary. The
company was taken under liquidation in October 2003. Management believes in
consultation with it's French attorney 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 400DKK resulting in the Company recognizing a loss
of 520 DKK on the sale.
DISPOSALS DURING 2001
In July 2001, the Company sold its domain name registration business to
VeriSign. This sale includes the disposals of these activities from Euro909.dk
A/S and the disposals of the Company's investments in Grona Verket AB,
Primaerdata AS, Euro909 France and NetName-Solutions.com GmbH. The consideration
for the sale to VeriSign totalled DKK 210,687 in cash, of which DKK 41,607 was
paid into an escrow account. Of this restricted cash, DKK 39,621 was received in
2002 and the remaining DKK 1,986 was received in 2003. The sale to VeriSign
resulted in a gain of DKK 217,783 in 2001.
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)
In December 2001, the Company sold its investment in TV Bio+ and 15% of
its investment in Euro909Media A/S for cash consideration of DKK 1 (DKK one
krone) and DKK 12 million, respectively. These sales resulted in a loss of DKK
4,596.
In December 2001, the Company sold its Print and Online Media segment.
The disposal included the disposal of All Media Holding A/S and its subsidiary
Chili A/S. The Company's net liability in All Media Holding A/S totalled DKK
1,417. See Discontinued operations. The consideration for the Print and Online
Media segment totalled DKK one in cash. In addition the company had to settle a
guarantee, given previously to Chili A/S for supporting their business
development resulting in an additional loss of DKK 1,762. The sale of the Print
and Online Media segment resulted in a loss of DKK 345.
8. INVESTMENTS IN UNCONSOLIDATED COMPANIES
GBS A/S
On January 1, 2001, the Company acquired 40% of Global Business Solutions
A/S, a consulting company in Denmark. The consideration totalled DKK 1,694 in
shares. The total consideration exceeded the fair value of the Company's share
of the net liabilities of GBS A/S by DKK 2,313, which excess was recorded as
goodwill. In addition, 130,000 stock options with an exercise price of $1.625
were also granted as consideration. The options vest if Global Business
Solutions A/S realizes a profit. These options vested in 2002, but have not been
exercised. The stock options expire as of January 31, 2004.
During 2002 the Company sold 30% of the shares in GBS A/S. The sales
price was DKK one thousand in
cash.
The remaining holding of 10%, which is included in long term
investments, was written down during the fourth quarter of 2002. This amounted
to a charge of DKK 425.
In 2003, as part of a severance agreement with our former COO, Brain
Mertz Pedersen, the Company invested 1.5 million DKK for a 25% ownership of
Mediahuset Danmark ApS.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The carrying amount of cash, cash equivalents and restricted cash
approximates their fair value as of December 31, 2002 and 2003, because of the
short maturity of those instruments.
ACCOUNTS RECEIVABLE, RECEIVABLES FROM RELATED PARTIES, VAT RECEIVABLE AND OTHER
RECEIVABLES The carrying amount of Accounts receivable, receivables
from related parties, VAT receivable and
other receivables approximates their fair value as of December 31, 2002 and 2003
because of the expected short maturity of those instruments.
Investment securities
The fair values of investment securities are estimated based on quoted
market prices for those or similar investments as of December 31, 2002 and 2003.
F-29
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
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, 2002 and 2003 is
based on a review of the assumptions underlying the operating performance of the
privately held companies.
SHORT TERM DEBT
The fair value of the Company's short term debt is estimated as of
December 31, 2002 and 2003, based on 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, 2002 and 2003, because of the
short 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.
WRITTEN OPTIONS
The fair value as of December 31, 2002 of the written put option
included in the shareholder agreement in relation to EuroTrust Secure Hosting
A/S, as described in note 7, is estimated by using a Black and Scholes option
pricing model. The shareholder agreement has been cancelled in 2003 in relation
to the sale of EuroTrust Secure Hosting A/S to Mondo A/S.
10. DISCONTINUED OPERATIONS
In December 2001, the Company decided to dispose of its Print and
Online Media Operations. The operations disposed of included the subsidiaries
All Media Holding A/S and Chili A/S. The decision to dispose of the print and
online media segment was made in December 2001 and the sale was closed December
22, 2001. There were no significant operations between the measurement date and
the disposal date. The sales price was 1 DKK .
In 2002 Telia A/S has re-confirmed its exercise of its put option on
the 22.5% of the shares it owned in Chili A/S and demanded the payment of the
DKK 6 million exercise price. The Company has recognized a DKK 6,000 charge
relating to this liability within line item 'Net loss from discontinued Print/On
line Media Division' in the consolidated statement of operations for the year
ended December 31, 2002. The liability has been settled in 2003 by a payment of
DKK 3.4 million. The Company has recognized a DKK 2.6 million income relating to
the settlement of this liability within the line item 'Net loss from
Discontinued Print/On line Media Division in the consolidated statement of
operations for the year ended December 31, 2003.
11. SHORT-TERM BORROWING AND LINE-OF-CREDIT
Short-term borrowing from a bank is due on demand and consists of the
following (in DKK):
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)
DECEMBER 31,
2002 2003
---- ----
Nordea 809 0
----------- -----------
809 0
=========== ===========
At December 31, 2003 the Company also has secured lines-of-credit with
banks up to DKK 0.5 million, of which DKK none had been drawn down at year-end.
Interest rates fluctuate with the market rates of the major banks. The weighted
average interest rates as of December 31, 2002 and 2003 were 7.0% and 6.0%,
respectively.
12. LEASES
The Company is obligated under leases covering inventories, certain
machinery and equipment and automobiles that expire at various dates during the
next five years. At December 31, 2002 and 2003, the gross amount of machinery
and equipment and automobiles and related accumulated depreciation recorded
under capital leases and the amount of inventories subject to sale-and-leaseback
arrangements were as follows:
DECEMBER 31,
------------
2002 2003
Machinery and equipment 6,219 0
Automobiles 525 0
--------- ---------
6,744 0
Less accumulated depreciation (including impairments) 6,744 0
--------- ---------
0 0
Inventories 7,215 7,215
Less previously impaired 7,215 7,215
--------- ---------
0 0
========= =========
Depreciation of assets held under capital leases is included in
depreciation expense. Leased machinery and equipment of DKK 5,287 was fully
impaired as part of the 2002 impairment of assets, which expense is recorded in
amortization and write downs in the consolidated statement of operations. During
2003, the leased machinery and equipment was sold.
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 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. The Company is currently in discussions with
IBM to resolve the underlying disagreements and renegotiate the terms of the
lease agreement.
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)
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 6.1 million, DKK 3.4 million and DKK 1.8 million in the
years ended December 31, 2001, 2002 and 2003, 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, primarily relating to Tivoli licenses, as of December
31, 2003 are:
CAPITAL OPERATING
LEASES LEASES
------------ -------------
Year ending December 31:
2004 1,184 1,317
2005 0 291
2006 0 0
------------ -------------
Total minimum lease payments 1,184 1,608
=============
Less amount representing interest (at rates ranging from 3.0% to
10.0%) 8
------------
Present value of net minimum capital lease payments 1,176
------------
Less current installments of obligations under capital leases 1,176
------------
Obligations under capital leases, excluding
current installments 0
============
At December 31, 2003 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 commitment on the capital lease that is
default based on the terms of the lease. The Company is currently attempting to
renegotiate the related lease agreement.
13. 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:.
MR ALDO PETERSEN
On November 30, 2000, we acquired 20% of Trust Italia SpA., an Italian
digital security company. During 2001, the agreement for the acquisition was
changed, following investment in TrustItalia SpA by other parties, resulting in
an ownership in TrustItalia of 15.7% (242,000 shares) and
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)
an additional cash consideration of DKK 4,265. The cash was paid to Aldo
Petersen, the CEO of the Company who also owned 2.6% of the shares of Trust
Italia SpA.
PARKEN SPORTS & ENTERTAINMENT A/S
Parken Sports & Entertainment A/S was a minority owner of 15% of the
shares in Europe-Visions A/S (formerly Euro909Media A/S) until December 31,
2003. Aldo Petersen was a member of the board of directors of Parken Sports &
Entertainment A/S until the end of December 2002 and currently holds 40,000
shares representing ownership of approximately 2% of the issued share capital of
Parken Sports & Entertainment.
On November 29, 2001, the Company entered into an agreement with Parken
Sports & Entertainment A/S for pitch-side advertising and corporate hospitality
at football matches involving FC Copenhagen, a team owned by Parken Sports &
Entertainment. The agreement is expires December 31, 2007.
DECEMBER 31,
------------
2002 2003
Parken Sports & Entertainment A/S (Purchases) 908 1,074
========== ========
Parken Sports & Entertainment A/S (Prepaid expenses) 3,280 0
========== ========
As of 31 December 2001 Aldo Petersen owed EuroTrust A/S DKK 3,084 representing
the balance on his loan account with the company. This loan account was fully
repaid during 2002.
VERISIGN INC
VeriSign is a minority shareholder in EuroTrust A/S (18%) as of
December 31, 2003. 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,
------------
2002 2003
---- -----
VeriSign Inc. (Annual fees and royalties) 24,988 4,204
=========== ===========
VeriSign Inc. (Accounts payable) 12,833 477
=========== ===========
During 2001 the Company sold its domain name registration business to
VeriSign for a gross cash consideration of DKK 210,687. During 2000 and 2001,
the Company originally had purchased rights from VeriSign for DKK 75,305, which
allows the Company to sell VeriSign products in a number of European countries
(including Denmark, Sweden, Norway, Finland, Austria, Switzerland and Italy).
During 2002 the balance on the amount capitalized for the rights acquired was
written off due to the poor financial performance of the business.
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)
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 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 will pay the Company $8.5 million U.S. in cash
and assume 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 2,748,720 of its ordinary
shares (equivalent to 458,120 American Depository Receipts or "ADRs") from
VeriSign for $1,136,138 U.S. The repurchase was authorized by the Company's
shareholders.
NEMETH & SIGETTY A/S
Mr. Karoly Laszlo Nemeth is the Chairman of the board of directors of
EuroTrust A/S and is also the joint owner of Nemeth & Sigetty A/S. Nemeth &
Sigetty A/S provided legal services to the Company during the three years ended
December 31, 2003. For the years ended December 31, 2001, 2002 and 2003 Nemeth
& Sigetty A/S has been paid DKK 1,083, DKK 1,115 and DKK 418, respectively. The
total outstanding payables due to Nemeth & Sigetty A/S as at December 31, 2002
and December 31, 2003 were DKK 625 and DKK 0, respectively.
14. INCOME TAXES
The Company and each of its subsidiaries file separate tax returns in
their country of incorporation. Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets and
liabilities as of December 31, 2002 and 2003 are as follows (in DKK):
DECEMBER 31,
-----------------------
2002 2003
---- ----
DEFERRED TAX ASSETS
Net operating loss carry forwards 95,547 105,365
Tax value of fixed assets in excess of book
value of fixed assets 11,489 7,415
Other temporary differences 0 0
Deductible goodwill and intangible assets 21,488 9,547
Provisions 12,313 10,262
Capital losses on shares 8,400 0
-----------------------
Total deferred tax assets 149,237 132,589
-------
Less: Valuation allowance (148,531) (130.206)
-----------------------
NET DEFERRED TAX ASSETS 706 2,383
Deferred tax liabilities 0 0
Total net deferred tax assets 706 2,383
F-34
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
The recognized tax assets as of December 2002 and 2003 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, 2003 and their
expiration years are as follows (in DKK):
EXPIRATION YEAR DENMARK SWITZERLAND TOTAL
--------------- ------- ----------- -----
2004 31,576 31,576
2005 44,706 44,706
2006 83,566 83,566
Indefinitely 161,750 12,250 174,000
------- ------ -------
Total 321,598 12,250 333,848
======= ====== =======
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,
----------------------------------
2001 2002 2003
---- ---- ----
Pretax income (loss):
Denmark 19,028 (268,422) (995)
Sweden 0 (2,844) 0
France 0 (3,616) 0
UK (2,798) 45 0
Switzerland 0 (3,081) (9,169)
----------------------------------
16,230 (277,918) (10,164)
====== ========= ========
Significant components of the provision for income taxes are:
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)
Current: Denmark (527) (2,849) (186)
Others 0 0 0
------- --------- -------
(527) (2,849) (186)
------- --------- -------
Deferred: Denmark 503 350 1,677
Others 0 0 0
------- --------- -------
503 350 1,677
------- --------- -------
Total: ( 24) (2,499) 1,491
======= ======== =======
The reconciliation of income tax computed at the Danish statutory tax
rate to income tax expense is:
2001 2002 2003
---- ---- ----
Danish income tax rate........................................ 30% 30% 30%
Non taxable gain on sold business (394%) 0% 0%
Non deductible impairment charges 108% (10)% 0%
Change in valuation allowance on deferred tax assets.......... 264% (21)% 45%
Other items, net.............................................. (8)% 0% 0%
------ ------ ------
Reported income tax expense................................... 0% (1)% (15)%
====== ====== ======
15. SHAREHOLDERS' EQUITY
TREASURY SHARES
During 2001 the Company decided to start a buy-back program of treasury
shares. At December 31, 2003 the Company had a total of 426,564 (not in
thousands)_treasury shares. During the period from September 2002 to December
2002, a total of 92,400 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 603,250 (not in
thousands) treasury shares through its stockbroker. The Company has not bought
any additional treasury shares in 2003.
In 2001 the Company used treasury shares in connection with a business
acquisition, see also note 7.
In 2003 the Company issued from treasury 836,536 (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..
2001 SHARE ISSUANCES
During 2001 the Company issued 6,306 common shares for cash in private
placements resulting in total proceeds to the Company of DKK 122,411.
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)
In 2001 the Company issued a total of 248 common shares as partial
consideration for a newly acquired businesses.
During 2003 the Company issued 4,550, common shares for 6,290 DKK
received upon the exercise of stock options.
16. 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,
2001 2002 2003
Determination of basic and diluted shares:
Weighted-average shares outstanding
24,185 26,162 28,668
Potential common shares--dilutive stock
options 560 -- --
Basic and diluted average common shares
outstanding 24,745 26,162 28,668
In 2003, the Company excluded 816 weighted-average common share equivalents with
a weighted-average share price of $0.23 and in 2002, the Company excluded 83
weighted-average common share equivalents with a weighted-average share price of
$0.84 from the potential common shares because their effect would have been
anti-dilutive. Weighted-average common share equivalents do not include stock
options with an exercise price that exceeded the average fair market value of
the Company's common stock for the period.
Subsequent to the year ended December 31, 2003 the Company, repurchased
2,748,720 of its ordinary shares in connection with the sale of assets of PKI to
VeriSign. See Note 24.
17. STOCK OPTIONS
STOCK OPTIONS
2001 INCENTIVE OPTION PLAN
F-37
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
During 2001, the Board authorized the grant and issue of 2,125,000 (not
in thousands) options each to purchase one common share at various share prices
ranging from $1.05 to $1.71 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, 2003, 460,000 (not in thousands) options were outstanding.
In addition during 2001, the Board authorized the grant and issue of
45,000 (not in thousands) options each to purchase one common share at a price
of $1.09. 15,000 (not in thousands) of these options became exercisable during
2002, 15,000 (not in thousands) vest in 2003 and the remainder vest in 2004.
These options all expire on December 31, 2004.
2002 INCENTIVE STOCK OPTION PLAN
During 2002, the Board authorized the grant and issue of 2,483,545 (not
in thousands) stock options each to purchase one common share at various share
prices ranging from $0.39 to $1.31 to employees and directors of the Company.
The exercise price of the options was equal to the market price on the date of
grant. 1,806,744 (not in thousands) of these options were outstanding at
December 31, 2003. The stock options are exercisable during the year of grant
through their expiration dates ranging from March 31, 2004 to May 31, 2005.
2003 INCENTIVE STOCK OPTION PLAN
During 2003, the Board authorized the grant and issue of 7,912,500 (not in
thousands) stock options each to purchase one common share at various share
prices ranging from $0.20 to $0.48 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 4,548,474 (not in thousands) were exercised with the
remaining 3,364,026 (not in thousands) outstanding at December 31, 2003. The
stock options are exercisable during the year of grant through their expiration
dates ranging from May 30, 2005 to February 3, 2008.
A summary of the Company's stock option activity, and related
information for the three years ended December 31, 2003 is as follows:
2001 2002 2003
WEIGHTED WEIGHTED WEIGHTED
OPTIONS AVERAGE OPTIONS AVERAGE OPTIONS AVERAGE
EXERCISE PRICE EXERCISE PRICE EXERCISE PRICE
-------------- -------------- --------------
Outstanding, beginning of year 2,420 $2.76 4,335 $1.91 6,124 $1.32
Granted 2,170 $1.39 2,484 $0.82 7,912 $0.23
Exercised 0 0 0 0 4,548 $0.21
Forfeited 0 0 100 $1.20 1,502 $0.99
Expired 255 $5.69 595 $3.50 2,310 $1.25
Outstanding, end of year 4,335 $1.91 6,124 $1.32 5,676 $0.52
Exercisable, end of year 3,266 $2.08 6,094 $1.32 5,661 $0.52
Weighted average fair value of
options granted during the year $1.37 $0.60 $1.07
F-38
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
The following table summarizes information about stock options outstanding
as of December 31, 2003:
WEIGHTED-AVERAGE
RANGE OF SHARES REMAINING WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- ---------------- ----------- ----------------
$0.20 - $0.25 2,824 4.2 years $0.22 2,809 $0.22
$0.41 - $0.48 540 3.2 years $0.44 540 $0.44
$0.39 - $0.55 457 1.4 years $0.55 457 $0.55
$0.78 - $1.09 1,355 1.3 years $0.91 1,355 $0.91
$1.12 - $1.78 500 0.76 years $1.26 500 $1.26
Total 5,676 2.91 $0.52 5,661 $0.52
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.
19. PENSIONS
During 2001, 2002 and 2003, the company has recognized expenses for
defined contribution pension agreements with paid to pension and insurance
companies on behalf of employees totalling DKK 1.7 million, DKK 1.5 million and
DKK 1.8 million, respectively. The Company has no liability beyond their
contributions related to the pensions.
20. NON-CASH FINANCING AND INVESTING ACTIVITIES
Capital lease obligations of DKK 8,069 and DKK 525 were incurred in
2001 and 2002 respectively, when the Company entered into leases for machinery,
equipment and automobiles. As of December 31, 2003 no obligations relating to
machinery, equipment and automobiles were outstanding.
In 2003 the Company issued from treasury, 836,536 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, 804,498 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.
In 2001 248,000 shares of common stock at a price of DKK 3,962 and
treasury stock with a market value of DKK 1,165 were issued as partial
consideration for acquired businesses.
21. COMMITMENTS
The Company has entered into an agreement to pay minimum royalties and
annual fees to VeriSign for first quarter 2004. The minimum royalties and annual
fees pursuant to these agreements amount to approximately DKK 2,000 (US$328).
These commitments were amended in 1. quarter 2004.
F-39
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
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 $0 for the cost of such guarantees as of
December 31, 2002 and 2003.
22. LITIGATION
The Company has recorded a provision of DKK 1,000 for expenses relating
to an arbitration court regarding the construction of our building located here
in Soeborg. The constructor claims bills for extra work performed and EuroTrust
claim compensation due to insufficient work performed by the constructor. The
result of the arbitration court was a net payment to the constructor of approx.
DKK 1,000.
23. SEGMENT REPORTING
The Company's Chief Operating Decision-maker, as defined in SFAS No. 131, is
considered to be Aldo Pedersen, EuroTrust's CEO. The Chief Operating
Decision-maker reviews separate consolidated financial information for the
Internet services business segment, the broadcast media business segment and
prior to 2002 other segments. Each of the Company's business segments are
managed separately because they offer and distribute distinct services to
different customer segments. The Company therefore considers that it has three
reportable segments under SFAS 131 (i) Internet services, (ii) broadcast media
and (iii) other. The print and online media segment was disposed of in December
2001 and is, therefore, treated as a discontinued operation.
The Chief Operating Decision-maker evaluates performance and allocates resources
based on profit or loss from operations before interest, gains and losses on the
Company's investment portfolio, and income taxes. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies. It is the Company's policy that trade between
the segments is entered into on an arms-length basis.
Reportable segment information for each geographical and business
segment for each of the years ended December 31, 2001, 2002 and 2003 is
presented in the following tables:
F-40
EUROTRUST A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND WHERE
OTHERWISE INDICATED)
2001 2002 2003
DKK % DKK % DKK % USD
Denmark (1) 100,016 66% 110,992 82% 133,397 80% 22,391
Norway 19,117 13% 4,967 4% 8,278 5% 1,389
Sweden 29,703 20% 2,874 2% 7,736 5% 1,299
France 2,310 2% 9,636 7% 5,770 3% 969
Finland 0 0% 2,763 2% 4,718 3% 792
Austria 0 0% 1,884 1% 1,593 1% 267
Switzerland 0 0% 2,673 2% 4,563 3% 766
Other 768 1% 0 0% 356 0% 60
--------------- ----------------- ---------------- ---------
151,914 100% 135,789 100% 166,411 100% 27,933
--------------- ----------------- ---------------- ---------
(1) The amount for 2001 do not include revenues from the print and online
media business because that business was sold in 2001 and is reflected
as loss from discontinued operations.
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,
2001 2002 2003 2003
------------ --------------- ------------ ------------
DKK DKK DKK USD
INTERNET SERVICES:
Net revenue 72,183 63,769 77,792 13,058
Operating expenses:
Cost of sales 41,902 80,472 28,374 4,763
Selling and marketing expenses 59,126 39,299 33,696 5,656
General and administrative expenses 46,512 34,949 28,076 4,713
Depreciation, amortization and write down 90,572 161,289 3,553 596
------------ --------------- ------------ ------------
Total operating expenses 238,112 316,009 93,699 15,728
------------ --------------- ------------ ------------
Operating income (loss) (165,929) (252,240) (15,907) (2,670)
------------ --------------- ------------ ------------
Capital expenditure 105,972 9,210 1,762 296
------------ --------------- ------------ ------------
Total assets 111,662 99,962 65,655 11,020
------------ --------------- ------------ ------------
BROADCAST MEDIA
Net revenue 79,731 72,020 88,619 14,875
Operating expenses:
Cost of sales 55,710 40,534 58,045 9,743
Selling and marketing expenses 8,980 10,150 12,085 2,028
General and administrative expenses 10,140 9,934 12,537 2,104
Depreciation, amortization and write down 34,980 4,828 4,764 800
------------ --------------- ------------ ------------
Total operating expenses 109,810 65,446 87,431 14,676
------------ --------------- ------------ ------------
Operating income (loss) (30,079) 6,574 1,188 199
------------ --------------- ------------ ------------
Capital expenditure 34,646 8,261 13,743 2,307
------------ --------------- ------------ ------------
Total assets 56,555 68,255 75,190 12,621
------------ --------------- ------------ ------------
CONSOLIDATED
Net revenue 151,914 135,789 166,411 27,933
Operating expenses:
Cost of sales 97,612 121,006 86,418 14,506
Selling and marketing expenses 68,106 49,449 45,781 7,684
General and administrative expenses 56,652 44,883 40,614 6,817
Depreciation, amortization and write down 125,552 166,117 8,317 1,396
------------ --------------- ------------ ------------
Total operating expenses 347,922 381,455 181,130 30,403
------------ --------------- ------------ ------------
Operating income (loss) (196,008) (245,666) (14,719) (2,470)
------------ --------------- ------------ ------------
Capital expenditure 140,618 17,471 15,505 2,603
------------ --------------- ------------ ------------
Total assets 445,611 168,217 140,845 23,641
------------ --------------- ------------ ------------
DKK amounts have been converted into US$ at an exchange rate of
$1=DKK 5.9576.
F-42
24. SUBSEQUENT EVENTS
In January 2004, the Company sold its hosting subsidiary, EuroTrust
Secure Hosting A/S, to Mondo A/S. The consideration we received includes a
3-years royalty agreement on future sales generated from our transferred
customer base. The agreement includes a minimum amount of DKK 7.1 million over
the 3-years period.
In March 2004, the Company through its wholly owned subsidiary,
Europe-Vision, entered into a new 3 year agreement to have TDC Kabel TV A/S
continue to televise our dk4 channel. The agreement extends the 10 year
relationship between the two companies and means that TDC Kabel TV will continue
through dk4 to provide local content, movies, sports, political coverage and
cultural programming to its subscribers.
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 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 will pay the Company $8.5 million U.S. in cash
and assume 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 2,749 of its ordinary
shares (equivalent to 458 American Depository Receipts or "ADRs") from VeriSign
for $1,136 U.S. The repurchase was authorized by the Company's shareholders.
F-43
INDEX TO EXHIBITS
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)
4.2 VeriSign International Affiliate Agreement between the Registrant
and VeriSign, Inc., dated November 17, 2000 (1)(4)
4.2(a) Amendment No. 2 to the VeriSign International Affiliate Agreement
between the Registrant and VeriSign, Inc., dated June 17, 2002(5)
4.2(b) Amendment No.3 to the VeriSign International Affiliate Agreement
between the Registrant and VeriSign, Inc., dated February,
2003(4)(5)
4.3 Employment Agreement between the Registrant and Aldo Petersen,
effective July, 2001(5)
4.4 Employment Agreement between the Registrant and Soren Degn,
effective in September 2003*
8.1 List of the Subsidiaries of the Registrant *
11.1 Code of Ethics*
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) Incorporated by reference to the Company's Annual Report on Form 20-F,
filed on June 27, 2002.
(2) Incorporated by reference to the original filing of the Registration
Statement on Form F-1 (File No. 333-7092), filed on June 20, 1997.
(3) Incorporated by reference to the Company's Annual Report on Form 20-F,
filed on June 30, 1998.
(4) Portions of this Exhibit, will be filed separately with the Commission
in reliance on Rule 24b-2 of the Securities Exchange Act of 1934, as
amended, and the Registrant's request for confidential treatment.
(5) Incorporated by reference to the Company's Annual Report on Form 20-F,
filed on September 23, 2003.