SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2005
Commission file number 000-30690
EUROTRUST A/S
(Translation of Company's name into English)
POPPELGARDVEJ 11-13
2860 S0BORG
DENMARK
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under Form 20-F or Form 40-F.
Form 20-F [X] Form 40-F [ ]
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(1): N/A
NOTE: Regulation S-T Rule 101(b)(1) only permits the submission in
paper of a Form 6-K if submitted solely to provide an attached annual report to
security holders.
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(7): N/A
NOTE: Regulation S-T Rule 101(b)(7) only permits the submission in
paper of a Form 6-K if submitted to furnish a report or other document that the
registrant foreign private issuer must furnish and make public under the laws of
the jurisdiction in which the registrant is incorporated, domiciled or legally
organized (the registrant's "home country"), or under the rules of the home
country exchange on which the registrant's securities are traded, as long as the
report or other document is not a press release, is not required to be and has
not been distributed to the registrant's security holders, and, if discussing a
material event, has already been the subject of a Form 6-K submission or other
Commission filing on EDGAR.
Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the information to
the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
YES [ ] NO [X]
If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): N/A
EUROTRUST A/S
FORM 6-K
TABLE OF CONTENTS
PAGE
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Disclosure Regarding Forward-Looking Statements............................................ 2
Exchange Rate Information.................................................................. 2
Unaudited Consolidated Condensed Balance Sheets
as of March 31, 2005 and December 31, 2004................................................. 3
Unaudited Consolidated Condensed Statements of Operations for the three-month
periods ended March 31, 2005 and 2004...................................................... 5
Unaudited Consolidated Condensed Statements of Shareholders' Equity for the Years Ended
December 31, 2003 through December 31, 2004 and for the three-month period
ended March 31, 2005....................................................................... 6
Unaudited Consolidated Condensed Statements of Cash Flows for the three-month periods ended
March 31, 2005 and 2004.................................................................... 7
Notes To Unaudited Consolidated Condensed Financial Statements ............................ 8
Management's Discussion And Analysis Of Financial Condition And Results Of Operations...... 20
Risk Factors .............................................................................. 28
Signature ................................................................................. 35
Index to Exhibits ......................................................................... 36
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 6-K contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995 regarding
our plans and objectives and future operations. Forward-looking statements
attempt to predict future occurrences and are identified by words like
"believe," "may," "intend," "will," "expect," "anticipate," "estimate" or
"continue," or other comparable terms. Forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from any future
results, performance or achievements expressed or implied by these
forward-looking statements. The forward-looking statements included in this
report are based on current expectations that involve numerous risks and
uncertainties. Our plans and objectives are based, in part, on assumptions
involving judgments about, among other things, future economic, competitive and
market conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control.
Although we believe that our assumptions underlying the forward-looking
statements are reasonable, any of these assumptions could prove inaccurate and,
therefore, we cannot assure you that the forward-looking statements included in
this report will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included in this report, you should
not assume, and we cannot assure you, that we can achieve our objectives or
implement our plans. Such statements speak only as of the date hereof and are
subject to change. We undertake no obligation to revise or update publicly any
forward-looking statements for any reason. Factors that could cause our actual
results to differ materially from those expressed or implied by forward-looking
statements include, but are not limited to, our ability to identify new under
valued opportunities for investment or acquisition; the potential unforeseen
impact of product or service offerings from competitors; our ability to raise
additional capital should it be required to finance our growth aspirations; our
ability to negotiate appropriate strategic relationships; our ability to control
costs and expenses; and general economic and political conditions and specific
conditions in the markets we address; and certain factors set forth in our
Annual Report on Form 20-F for the fiscal year ended December 31, 2004, filed
with the Securities and Exchange Commission on June 3, 2005, 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).
------------
EXCHANGE RATE INFORMATION
In this 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 March 31, 2005 into U.S. dollars at an exchange rate of $1.00 = DKK 5.7463,
the exchange rate on March 31, 2005. 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 March 31, 2005, or at any other rate.
------------
Unless specifically indicated or the context clearly indicates
otherwise all references to our ordinary shares (also referred to herein as
"common 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.
2
EUROTRUST A/S AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
DECEMBER 31, UNAUDITED
------------ ---------
2004 MARCH 31, 2005
------- -------------------
DKK DKK USD
ASSETS
Current assets:
Cash and cash equivalents 6,750 25,376 $ 4,416
Restricted cash 5,352 2,803 488
Accounts receivable trade, net of allowance for
doubtful accounts of DKK 592 in 2004 and DKK 188 in 2005 17,173 11,713 2,038
Notes receivable, current 2,200 2,200 383
Broadcasting programming rights, current 2,928 2,928 510
Valued added tax receivables 332 100 17
Prepaid expenses and deposits 2,263 2,517 438
Other receivables 2,748 2,221 387
------- ------- -------
Total current assets 39,746 49,858 8,677
Marketable securities - available for sale 197 222 39
Notes receivable, net of current portion 8,800 8,800 1,531
Broadcasting programming rights, net of current
portion 2,898 2,165 377
Rent and other long term deposits 3,256 3,128 544
Other receivables, long term 588 535 93
Long term investments at cost -- -- --
Equity method investment in Mediehuset Danmark ApS 1,638 1,638 285
Property, plant and equipment, net 92,592 91,139 15,860
Goodwill 24,561 24,613 4,283
Deferred tax assets, net of current portion 3,972 3,716 647
------- ------- -------
Total assets 178,248 185,814 $32,336
======= ======= =======
DKK amounts have been converted into US$ at an exchange rate of $1=DKK 5.7463.
See accompanying Notes.
3
EUROTRUST A/S AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
DECEMBER 31, UNAUDITED
2004 MARCH 31, 2005
------------ ----------------------
DKK DKK USD
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Secure Line of Credit, current 8,417 8,268 $ 1,439
Bank loan, current 741 741 129
Lease obligations, currents 1,244 1,244 217
Accounts payable 24,026 16,247 2,827
Accrued expenses 12,613 9,962 1,733
Deposit received on sale of building -- 19,250 3,350
Equipment purchase obligation, current 12,152 12,152 2,115
Income tax payable -- -- --
-------- -------- --------
Total current liabilities 59,193 67,864 11,810
Long term liabilities:
Long term equipment purchase obligation, net of current
portion 9,749 6,870 1,196
Bank loan, long term, less current maturities 3,099 2,920 508
Lease obligations, long term, less current maturities 4,585 4,281 745
-------- -------- --------
Total long term liabilities 17,433 14,071 2,449
Minority interest in subsidiaries 56 25 4
Shareholders' equity:
Common shares - par value DKK 7.50, 7,991,000 and 8,269,630
authorized, 5,108,267 and 5,386,820 issued at December 31, 2004
and March 31, 2005, respectively 38,312 40,401 7,031
Additional paid-in capital 519,844 523,511 91,104
Accumulated deficit (457,386) (460,083) (80,066)
Accumulative other comprehensive income 796 25 4
-------- -------- --------
Total shareholders' equity 101,566 103,854 18,073
-------- -------- --------
Total liabilities and shareholders' equity 178,248 185,814 $ 32,336
======== ======== ========
DKK amounts have been converted into US$ at an exchange rate of $1=DKK 5.7463.
See accompanying notes to the consolidated financial statements.
4
EUROTRUST A/S AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
THREE MONTHS ENDED MARCH 31,
2004 2005 2005
------- ------- -------
DKK DKK USD
Unaudited Unaudited Unaudited
Net sales 34,076 20,449 $ 3,559
Operating expenses:
Cost of sales 16,021 12,611 2,195
Selling and marketing 7,569 4,024 700
General and administrative 5,965 4,880 849
Depreciation 3,206 3,403 592
------- ------- -------
Total operating expenses 32,761 24,918 4,336
------- ------- -------
Operating income (loss) 1,315 (4,469) (777)
Other income (expenses)
Interest income 5 200 35
Interest expense (104) (299) (52)
Foreign currency gain (loss), net 22 342 60
Gains from sales of businesses 196 1,394 242
Other (expenses) income, net (29) -- --
------- ------- -------
(Loss) income before income taxes and minority interest 1,405 (2,832) (492)
Income tax expense -- 104 18
Minority interest in net income (loss) of subsidiaries 183 31 5
------- ------- -------
NET (LOSS) INCOME 1,588 (2,697) $ (469)
======= ======= =======
BASIC INCOME (LOSS) PER WEIGHTED AVERAGE COMMON SHARE
Net (loss) income 0.34 (0.52) $ (0.09)
======= ======= =======
Weighted average common shares outstanding 4,671 5,212 5,212
======= ======= =======
DILUTED INCOME (LOSS) PER WEIGHTED AVERAGE COMMON SHARES
Net (loss) income 0.31 (0.52) $ (0.09)
======= ======= =======
Weighted average common shares outstanding, assuming dilution 5,184 5,212 5,212
======= ======= =======
DKK amounts have been converted into US$ at an exchange rate of $1=DKK 5.7463.
See accompanying notes to the consolidated financial statements.
5
EUROTRUST A/S AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2004 AND THREE MONTHS ENDED MARCH 31, 2005
(IN THOUSANDS, EXCEPT PER SHARE DATA AND WHERE OTHERWISE INDICATED)
OTHER
ACCUM.
ADDITIONAL COM-
COMMON PAID-IN ACCUMULATED PREHENSIVE TREASURY
SHARES CAPITAL DEFICIT INCOME STOCK TOTAL
DKK DKK DKK DKK DKK DKK
BALANCE AT DECEMBER 31, 2003 39,693 526,040 (515,840) 512 (4,045) 46,360
Issuance of 285,333 common shares for
cash through exercise of stock
options 2,138 141 -- -- -- 2,279
Issuance of 60,000 common shares for
cash through exercise of stock
options 450 332 -- -- -- 782
Currency translation adjustments -- -- -- (110) -- (110)
Other than temporary losses on
marketable securities -- -- -- 394 -- 394
Purchase of 608,120 common shares into
treasury at cost -- -- -- -- (10,826) (10,826)
Sale of 150,000 shares of treasury
stock -- 319 -- -- 3,829 4,148
Compensation for the issuance of
25,000 warrants to purchase common
stock at DKK 23.76 per ordinary share -- 85 -- -- -- 85
Cancellation of common shares held in
treasury at cost (3,969) (7,073) -- -- 11,042 --
Net income 58,454 58,454
--------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2004 38,312 519,844 (457,386) 796 -- 101,566
Issuance of 71,094 common shares for
cash through exercise of stock
options 533 717 -- -- -- 1,250
Issuance of 207,458 common shares for
cash through exercise of stock
options 1,556 2,950 -- -- -- 4,506
Currency translation adjustments -- -- -- (796) -- (796)
Unrealized gain on marketable
securities -- -- -- 25 -- 25
Net income (2,697) (2,697)
--------------------------------------------------------------------------
BALANCE AT MARCH 31, 2005 40,401 523,511 (460,083) 25 -- 103,854
BALANCE AT MARCH 31, 2005 USD$7,031 USD$91,104 USD$(80,066) USD$4 USD$0 USD$18,073
DKK amounts have been converted into US$ at an exchange rate of $1=DKK 5.7463.
See accompanying Notes.
6
EUROTRUST A/S AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
THREE MONTHS ENDED MARCH 31,
2004 2005 2005
------- ------- -------
Unaudited Unaudited Unaudited
DKK DKK USD
Cash flows from operating activities:
Net (loss) income from continuing operations 1,588 (2,697) $ (469)
Adjustments to reconcile net loss (income) to cash used in operating activities:
Depreciation, amortization and write down 3,206 3,403 592
(Gain) on sale business (196) (1,394) (242)
Provision for doubtful accounts 0 (55) (10)
Deferred tax 0 256 45
Minority interest (480) (31) (5)
Changes in operating assets and liabilities:
Accounts receivable (2,053) 5,515 960
Broadcasting programming rights (3,343) 733 128
Other assets -- 128 22
Prepaid expenses -- (254) (44)
Income tax payable 59 -- --
Other receivables 1,673 812 141
Accounts payable (91) (7,779) (1,354)
Accounts payable, related parties (477) -- --
Accrued expenses (5,753) (2,651) (461)
Deferred revenue 2,703 -- --
------- ------- -------
Cash used in operating activities: (3,164) (4,014) (697)
======= ======= =======
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired -- (52) (9)
Proceeds from sale of business, net of cash disposed of 196 598 104
Purchase of fixed assets (1,509) (4,829) (840)
Deposit received on the sales of building 0 19,250 3,350
------- ------- -------
Cash (used in) provided by investing activities: (1,313) 14,967 2,605
======= ======= =======
Cash flows from financing activities:
Net payments of principle in short- and long-term borrowings -- (328) (57)
Payments on lease obligations -- (304) (53)
Net change in restricted cash -- 2,549 444
Proceeds from issuance of common shares, treasury shares and
stock options -- 5,756 1,002
------- ------- -------
Cash provided by (used in) financing activities: -- 7,673 1,336
======= ======= =======
Effect of currency exchange rate changes on cash and cash equivalents -- -- --
------- ------- -------
Net increase (decrease) in cash and cash equivalents (4,477) 18,626 3,244
Cash and cash equivalents, beginning of period 9,363 6,750 1,175
------- ------- -------
Cash and cash equivalents, end of period 4,886 25,376 $ 4,419
======= ======= =======
Supplemental disclosure of cash flow information
Cash paid for interest 5 (299) $ (52)
======= ======= =======
Cash paid for taxes (104) -- --
======= ======= =======
Non-cash Investing and Financing Activities:
During the three months ended March 31, 2004, The Company purchased DKK 26,000
of mobile production equipment under an equipment purchase agreement. The
Company further reclassified DKK 777 in lease obligations currently payable to
accounts payable.
DKK amounts have been converted into US$ at an exchange rate of $1=DKK 5.7463.
See accompanying Notes.
7
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with Generally Accepted Accounting Principles
in the United States of America. However, certain information or footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed, or omitted,
pursuant to the rules and regulations of the Securities and Exchange Commission.
In the opinion of management, the financial statements include all normal
recurring adjustments that are necessary for the fair presentation of the
results of the interim periods presented. Interim results are not necessarily
indicative of results for the fiscal year. These financial statements should be
read in conjunction with the Company's audited financial statements for the year
ended December 31, 2004, as set forth in the Company's Annual Report on Form
20-F, filed with the Securities and Exchange Commission on June 3, 2005.
In preparing financial statements that conform with Generally Accepted
Accounting Principles in the United States of America, management must make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and amounts of revenues and expenses reflected during the
reporting period. Actual results could differ from those estimates.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
EuroTrust A/S and its subsidiaries (the "Company") engage in providing
production and broadcasting services and operating the Danish cable channel DK4.
The Company previously provided Internet security products and services in
Scandinavia these operations were sold during 2003 and 2004.
The Company operated in two reportable service-based segments from 2002
through 2005: The Production and Broadcasting Segment and the Internet Security
Product and Services Segment.
PRODUCTION AND BROADCASTING SEGMENT
The Company's Production and Broadcasting Segment consists of the
Danish Cable Channel DK4, a large media production company in Scandinavia with a
special focus on sports programming. The Company's media division also offers
educational courses in television production.
INTERNET SECURITY PRODUCT AND SERVICE SEGMENT
At March 31, 2005, the Internet services segment monitors the
continuing royalty payments received in connection with the sale of our secure
hosting and remote back-up services business in 2004.
The Company's Internet Security Product and Services Segment previously
offered trusted Internet security products and services including virus
detection products and services,
8
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
email security products, vulnerability testing, secure remote backup services,
digital video surveillance, secure hosting and Public Key Infrastructure (PKI)
Services until the sale of these businesses during 2003 and 2004.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States ("US GAAP") and
include the accounts of EuroTrust A/S and its majority-owned subsidiaries.
The following is a list of our significant operating subsidiaries and
their jurisdiction of incorporation and our ownership interest in those
subsidiaries at March 31, 2005 includes:
COUNTRY OF INTEREST
SUBSIDIARY INCORPORATION OWNERSHIP
---------- ------------- ---------
Europe-Visions A/S Denmark 100.0%
EuroTrust PKI Services A/S Denmark 100.0% (Assets sold April 1, 2004)
EuroTrust Virus112 A/S Denmark 100.0% (Assets sold September 30, 2004)
Other significant operating subsidiaries consolidated under
Europe-Visions A/S and its jurisdiction of incorporation and the related Company
ownership interest in those subsidiaries at March 31, 2005 are as follows:
COUNTRY OF INTEREST
SUBSIDIARY INCORPORATION OWNERSHIP
---------- ------------- ---------
Ciac A/S Denmark 100.0%
Prime Vision A/S Denmark 100.0%
Arhustudiet A/S Denmark 100.0%
Publishing & Management ApS Denmark 51.0%
TV Akademiet A/S Denmark 100.0%
Formedia A/S Denmark 100.0%
Mobile Broadcasting A/S Denmark 100.0%
At March 31, 2005, 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 local 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.
9
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
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. Any resulting gains and losses from these transactions are
included in the Statement of Operations as foreign currency transaction gain
(losses).
INFORMATION EXPRESSED IN US DOLLARS
Translation of DKK amounts into US Dollar amounts is included solely
for the convenience of the reader and has been made at the rate of 5.7463 DKK to
one US Dollar, the approximate exchange rate at March 31, 2005. 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.
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,
10
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
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, the Company writes-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.
PROGRAMMING RIGHTS
The Company acquires rights to programming and produces programming for exhibit
on its cable television station. The costs incurred in acquiring and producing
programs are capitalized and amortized over the greater of when the program is
aired or the license period or the projected useful life of the programming.
Program rights and the related liabilities are recorded at the gross amount of
the liabilities when the license period has begun, the cost of the program is
determinable, and the program is accepted and available for airing.
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, GOODWILL AND
OTHER INTANGIBLE ASSETS. 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.
11
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
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 estimate 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
with a reduced carrying cost of their respective fair values.
REVENUE RECOGNITION
The Company derives revenues from broadcasting, which includes cable
and digital television subscriber income and program production. The Company
previously derived income from 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. 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:
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.
INTERNET SERVICES
The Company recognized 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 existed, (2) delivery of products
and services had occurred, (3) the fee was fixed or determined and (4)
collectibility was reasonably assured. We determined each of the criteria
in our revenue recognition as follows:
12
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
PERSUASIVE EVIDENCE OF AN ARRANGEMENT EXISTS. We entered into written
agreements with our customers, that were 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 were delivered physically or downloaded by the
customer. Undelivered components of these technologies that were essential
to the functionality of the products, if any were not recognized until
delivery in full was complete.
THE FEE IS FIXED OR DETERMINABLE. Agreements with customers do not
include a right to return. The majority of the initial fees were due
within one year or less. Any arrangements, if any, with payment terms that
extended beyond customary payment terms, the fees were considered not to
be fixed or determinable, and revenues from such arrangements were
recognized as payments become due and realizable.
COLLECTIBILITY IS probable. Collectibility was assessed for each
customer class of which there was a history of successful collection based
upon a credit review. Initial determination that collectibility was not
probable results in the revenues being recognized as cash was 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 allocated and
deferred revenue for the undelivered elements based on vendor-specific
objective evidence, or VSOE, of the fair value of the undelivered
elements, and recognized the difference between the total arrangement fee
and the amount deferred for the undelivered elements as revenue. VSOE of
each element was based on the price for which the undelivered element was
sold separately. If VSOE does not exist for undelivered elements such as
maintenance services, then the entire arrangement fee was recognized over
the performance period.
Fees from the sales of digital certificates and managed PKI services,
which include bundled maintenance services that were not sold separately,
were deferred and recognized ratably over the period that such contracted
services were provided, usually 12 to 24 months.
Revenues from virus surveillance and detection services, which include
bundled maintenance services that were not sold separately, were deferred
and recognized rateably over the period that the service was provided,
usually 3 to 36 months.
Up-front fees from hosting and remote data backup services were
deferred and recognized ratably over the period that the services are
provided, usually 3 to 12 months.
The Company's consulting and installation services relating to secure
communication, virus protection and network security were not essential to
the functionality of the software. These software products were fully
functional upon delivery and do not require any significant modification
or alteration. Revenues from consulting and installation services, which
were provided on a time and materials basis, were recognized as the
services were performed.
13
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
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 March 31, 2005, 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 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
expensed over the options' vesting periods:
2004 2005 2005
----------------------------------
DKK DKK US $
Reported net income (loss) 1,588 (2,697) (469)
Reported stock-based compensation expense -- -- --
Pro forma stock-based compensation expense (102) -- --
------ ------ ------
Pro forma net loss 1,486 (2,697) (469)
Reported basic income (loss) per share 0.34 (0.52) (0.09)
Reported diluted income (loss) per share 0.31 (0.52) (0.09)
Pro forma basic loss per share 0.34 (0.52) (0.09)
Pro forma diluted loss per share 0.31 (0.52) (0.09)
14
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
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 25% and 10% of the
company's consolidated revenue for 2003, and the three months ended March 31,
2004 respectively. During the three months ended March 31, 2005, the Company has
two customers in the broadcasting segment which account for 38% and 33%,
respectively.
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 its' contribution.
Other than the pension benefits described above, the Company does not
provide its employees with post-retirement and post-employment benefits.
RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs". SFAS
No. 151 requires abnormal amounts of inventory costs related to idle facility,
freight handling and wasted material (spoilage) to be recognized as
current-period charges. In addition, SFAS No. 151 requires that allocation of
fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. The Company will be required to adopt the
provisions of SFAS No. 151 for fiscal years beginning after June 15, 2005.
Management believes the provisions of this Standard will no effect on our
financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based
Payment". This Statement revises SFAS No. 123, "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees."
SFAS No. 123(R) requires that the compensation cost relating to
share-based payment transactions be recognized in financial statements. The cost
will be measured based on the fair value of the instruments issued. The Company
will be required to apply SFAS No. 123(R) as of the first fiscal year begins
after June 30, 2005. Accordingly, The Company will adopt SFAS No. 123(R) during
the first quarter of fiscal 2006. Management is currently evaluating the impact
SFAS No. 123(R) will have on the Company's results of operations as a result of
adopting this new Standard. Upon adopting SFAS 123(R) the Company's income will
decrease as a result of the additional compensation expense if additional
options are granted.
15
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
In March 2004, the FASB issued EITF Issue No. 03-1 ("EITF 03-1"), "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments." EITF 03-1 includes new guidance for evaluating and recording
impairment losses on debt and equity instruments, as well as new disclosure
requirements for investments that are deemed to be temporarily impaired. The
accounting guidance provided in EITF 03-1 is effective for fiscal years
beginning after June 15, 2004, while the disclosure requirements are effective
for annual periods ending after June 15, 2004. The Company does not expect the
adoption of EITF 03-1 will have a material impact on its financial position,
results of operations, or cash flows.
PURCHASE OF EQUIPMENT
During 2004, the Company entered into two agreements to purchase
approximately DKK 32460 in production equipment excluding VAT. The DKK 32,460
obligation is payable in quarterly payments of DKK 2,746 through August 30,
2006. At March 31, 2005 the remaining obligation totaled DKK 15,217 excluding
VAT.
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 shares
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:
THREE MONTHS ENDED MARCH 31,
2004 2005
Determination of basic and diluted shares:
Weighted-average shares outstanding 4,671 5,212
Potential common shares--dilutive stock options 513 --
Basic and diluted average common shares
outstanding 5,184 5,212
16
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
At March 31, 2004 the Company excluded 513at pricies ranging from $1.18
to $2.75 and in 2005, the Company excluded 625 at prices ranging from $1.18 to
$6.78 per sharefrom the potential common shares because their effect would have
been anti-dilutive.
COMMON SHARES
During the three months ended March 31, 2005, the Company issued
278,552 (not in thousands) common shares upon the exercise of stock options at
DKK 8.62 to DKK 31.72 per share.
DISPOSITIONS
On January 1, 2005, and subsequent to December 31, 2004, the Company
sold InAphone A/S, a majority owned subsidiary, as InAphone A/S had depleted the
capital management was willing to allocate, without showing any significant
increase in sales from the use of media in mobile phones and hand-held personal
organizers. The minority shareholders paid DKK 1 for the Company's 60% interest
and assumed the net liabilities of InAphone A/S as of December 31, 2004.
SUBSEQUENT EVENTS
On April 1, 2005, the Company sold its building located at
Poppelgardvej 11-13 in S0borg, Copenhagen to Lion Ejendomme ApS for DKK 20,000
in cash. At December 31, 2004 the net book value of the building was DKK 19,638.
On May 16, 2005, the Company issued 587,500 (not in thousands) warrants
to Officers and Directors of the Company to purchase the Company's common shares
at $4.75 per share. The warrants vest immediately and expire April 30, 2015. The
estimated fair value of the warrants on the date issued using the Black-Scholes
option pricing model is approximately DKK 15,600.
On May 19, 2005, and reflected in the accompanying financial statements
the Company effected a 1 for 6 reverse stock split of it's common shares wherein
in lieu of issuing a fraction of a New Share, to pay to each holder the value
thereof based upon the closing price of an ADR on the NASDAQ Small Cap Market on
the day on which the change shall have occurred. The Company further effected a
change in the par value of each common share of the Company from DKK 1.25 to DKK
7.50.
SEGMENT REPORTING
The Company's Chief Operating Decision-maker, as defined in SFAS No.
131, is considered to be Aldo Pedersen, EuroTrust's CEO. The Chief Operating
Decision-maker reviews separate consolidated financial information for the
Internet services business segment and the Broadcast media business segment.
Each of the Company's business segments are managed separately because they
offer and distribute distinct services to different customer segments. The
Company therefore considers that it has two reportable segments under SFAS 131
(i) Internet services and (ii) Broadcast media.
17
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
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 of the periods ended March 31,
2004 and 2005 is presented in the following table:
18
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
THREE MONTHS ENDED MARCH 31
2004 2005 2005
-------- -------- --------
DKK DKK USD
INTERNET SERVICES:
Net revenue 13,455 0 $ 0
Operating expenses:
Cost of sales 4,680 0 0
Selling and marketing expenses 4,695 361 63
General and administrative expenses 2,566 1,106 192
Depreciation, amortization and write down 769 230 40
-------- -------- --------
Total operating expenses 12,710 1,697 295
-------- -------- --------
Operating income (loss) 745 (1,697) (295)
-------- -------- --------
Total assets 58,483 61,748 10,746
-------- -------- --------
BROADCAST MEDIA
Net revenue 20,621 20,449 3,559
Operating expenses:
Cost of sales 11,341 12,611 2,195
Selling and marketing expenses 2,874 3,663 637
General and administrative expenses 3,399 3,774 657
Depreciation, amortization and write down 2,437 3,173 552
-------- -------- --------
Total operating expenses 20,051 23,221 4,041
-------- -------- --------
Operating income (loss) 570 (2,772) (482)
-------- -------- --------
Total assets 106,161 124,066 21,590
-------- -------- --------
CONSOLIDATED
Net revenue 34,076 20,449 3,559
Operating expenses:
Cost of sales 16,021 12,611 2,195
Selling and marketing expenses 7,569 4,024 700
General and administrative expenses 5,965 4,880 849
Depreciation, amortization and write down 3,206 3,403 592
-------- -------- --------
Total operating expenses 32,761 24,918 4,336
-------- -------- --------
Operating income (loss) 1,315 (4,469) (777)
-------- -------- --------
Total assets 164,644 185,814 $ 32,336
-------- -------- --------
DKK amounts have been converted into US$ at an exchange rate of $1=DKK 5.7463.
See accompanying Notes.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Our business operated in two distinct areas: Internet products and
services; and broadcasting and production. In December 2003 and January, 2004,
as part of our plan to intensify our focus on our television programming
business and on providing virus detection products and services, we sold
EuroTrust Secure Hosting A/S, our secure hosting subsidiary, EuroTrust Realtime
Security A/S, our digital video surveillance subsidiary, EuroTrust Sweden AB,
our Swedish subsidiary, and the assets related to EuroTrust NetVaulting A/S, our
secure remote backup business.
We sold our PKI services business on April 1, 2004 and our virus
detection software and services business on September 30, 2004.
As a result of these various transactions, our business consists of our
broadcast media division, which owns dk4, a Danish television station and
operates one of the largest television production companies in Scandinavia,
Prime Vision. and the Internet services segment monitors the continuing royalty
payments received in connection with the sale of our secure hosting and remote
back-up services business in 2004.
The proceeds from our divestitures in 2004 allowed us to invest more
than $10 million U.S. in Prime Vision. Prime Vision now owns one of Europe's
first High Definition mobile production units, five fully digitalized mobile
production units and two mobile analog production units that we expect to
rebuild into digital units during 2005. We use these assets to produce content
both for our own broadcast operations and for outside clients
In addition to our television production operations, we continued to
expand our media content platforms in 2004. Our original television channel,
dk4, increased its subscriber base to record levels. Late in 2004, we also added
a new speciality television channel, 4SPORT, to focus on coverage of both Danish
sports, in cooperation with The Danish Sports Association, and international
sporting events of particular interest to Danish fans. The new channel is
currently in the testing phase of development and is projected to provide
coverage of, among other sports, boxing, volleyball and basketball.
We are in on-going negotiations with TDC on Cable to carry 4SPORT. The
early response to 4SPORT has been very encouraging. Given this response and the
response to new programming for dk4, we plan to focus on the development and
introduction of more speciality content platforms in 2005 and beyond.
In particular, we believe that dk4's long-standing coverage of the
European Parliament for Danish viewers should be extendible to a pan-European
audience. The European Parliament is desirous of making the citizens of the
member countries of the European Union ("EU") aware of the increased importance
of the EU and the influence it has on the politics of its independent member
nations. To support that objective, we have discussed with representatives of
the European Parliament, the proposed establishment of Europa Kanalen ("The
European Channel") to provide coverage of the EU political process for viewers
in other countries. We hope to begin coverage in 2005 or 2006 in three countries
and then to jointly assess the results of the European
20
Channel with the European Parliament to determine whether coverage throughout
Europe is practical. If successful, this could provide us with a Europe-wide
content platform with substantial growth opportunities. Since content providers
are historically among the most financially successful media operations, we plan
to allocate significant resources to this initiative.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States (GAAP). The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities. Management bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not
readily available from other sources. Actual results may differ from these
estimates under different assumptions or conditions. We believe that the
estimates, assumptions and judgments involved in the accounting policies
described below have the greatest potential impact on our consolidated financial
statements, so we consider these to be our critical accounting policies. See
"Summary of Significant Accounting Policies" in the consolidated financial
statements for more information about these critical accounting policies, as
well as descriptions of other significant accounting policies.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. We
regularly review the adequacy of our accounts receivable allowance after
considering the size of the accounts receivable balance, each customer's
expected ability to pay and our collection history with each customer. We review
significant invoices that are past due to determine if an allowance is
appropriate based on the risk category using the factors described above. We
also monitor our accounts receivable for any build up of concentration to any
one customer, industry or geographic region. At March 31, 2005 we have two
customers who account for approximately 38% and 33% of our outstanding
receivables. If we are unable to collect these receivables it would have a
significant negative impact on our operating income. We require all acquired
companies to adopt our credit policies. The allowance for doubtful accounts
represents our best estimate, but changes in circumstances relating to accounts
receivable may result in a requirement for additional allowances in the future.
LONG-TERM INVESTMENTS
We invest in securities of companies for business and strategic
purposes. These investments are in the form of equity securities of private
companies for which there is no public market. For a specification of the
investments you should refer to Note 3 of the consolidated financial statements
accompanying our annual report on Form 20-F. 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.
21
We review, the assumptions underlying the operating performance from
these privately held companies on an annual basis. This information may be more
limited, may not be as timely and may be less accurate than information
available from publicly traded companies. If we determine that an
other-than-temporary decline in fair value of the investment exists, we
write-down the investment to its fair value and record the related write-down as
an investment loss in our consolidated statement of operations.
We had no write-downs of our long term investments and marketable
securities in the fiscal quarter ended March 31, 2005.
VALUATION OF LONG-LIVED ASSETS
Our long-lived assets totaled DKK 91.1 million, as of March 31, 2005,
which consist primarily of property and equipment subject to amortization and
depreciation. We test long-lived assets for recoverability whenever events or
changes in circumstances indicate that the carrying amount of such an asset may
not be recoverable. Such events or circumstances include, but are not limited
to:
o a significant decrease in the market price of a long-lived asset;
o a significant adverse change in the extent or manner in which a
long-lived asset is being used or in its physical condition;
o a significant adverse change in legal factors or in the business
climate that could affect the value of a long-lived asset;
o a current-period operating or cash flow loss combined with a history of
operating or cash flow losses or a projection or forecast that
demonstrates continuing losses associated with the use of a long-lived
asset; and
o a current expectation that it is probable that a long-lived asset will
be sold or otherwise disposed of significantly before the end of its
previously estimated useful life.
An impairment loss would be recognized when the sum of the undiscounted
future net cash flows expected to result from the use of the asset and its
eventual disposition is less than its carrying amount. Such impairment loss
would be measured as the difference between the carrying amount of the asset and
its fair value, which is usually based on future estimated discounted cash
flows. Significant judgment is required in the forecasting of future operating
results, which are used in the preparation of projected cash flows. If we made
different judgments or utilized different estimates, material differences may
result in write-downs of net long-lived and intangible assets, which would be
reflected by charges to our operating results for any period presented.
We recorded no impairment charge in the fiscal quarter ended March 31,
2005.
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.
22
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 March 31, 2005, we had DKK 24.6 million of goodwill recorded
on our Consolidated Balance Sheet. The entire goodwill was recorded in our
Broadcasting media segment.
For the fiscal year ended December 31, 2004, 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.
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.
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
23
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.
COMMON EUROPEAN CURRENCY
The Treaty on European Economic and Monetary Union, or EU, provides for
the introduction of a single European currency, the Euro, in substitution for
the national currencies of the member states of the EU that adopt the Euro. This
was effective on January 1, 2002. The Euro was introduced and foreign exchange
operations in the Euro commenced on January 1, 1999 when irrevocable conversion
rates were set between the national currencies of the eleven member states of
the EU that qualified to participate, and elected to participate in the Euro.
Denmark, Sweden and the United Kingdom elected not to participate in the Euro.
Norway is not currently a member state of the EU. Finland, Austria and Italy
qualified and elected to participate. The change to the Euro has not had a
significant financial effect of us.
UNAUDITED CONSOLIDATED RESULTS
THREE MONTHS ENDED MARCH 31, 2005 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2004
Revenue for the three months ended March 31, 2005 was DKK 20.5 million,
a decrease of DKK 13.6 million, or 40.0%, compared to revenues of DKK 34.1
million for the three months ended March 31, 2004. The table below compares
revenues for the relevant periods on a segment-by-segment basis.
REVENUE AMOUNT OF PERCENTAGE
INCREASE INCREASE
2004 2005 (DECREASE) (DECREASE)
------- ------- ---------- ----------
(IN THOUSANDS OF DKK)
Internet services 13,455 0 (13,455) (100.0%)
Broadcast media 20,621 20,449 (172) (0.8%)
------- ------- ------- -------
Total 34,076 20,449 (13,627) (40.0%)
The decrease in revenue in our Internet services segment reflects the
fact that beginning in 2003, we made the decision to change our strategic focus
to our broadcasting business and consequently we made the decision to sell all
of our Internet businesses. As of September 2004, all of our Internet businesses
have been sold. The decrease in revenue in our broadcast media segment for the
three months ended March 31, 2005 reflects an increase in the number of
subscribers to dk4, but a decrease in the payment per subscriber and a growth in
the production of programs for broadcasting.
Total operating expenses for the three months ended March 31, 2005 were
DKK 24.9 million, a decrease of DKK 7.9 million, or 23.9%, compared to total
operating expenses of DKK 32.8 million for the three months ended March 31,
2004. Total operating expenses include cost of sales, selling and marketing
expenses, general and administrative expenses and depreciation, amortization and
write-down. For the three months ended March 31, 2005 compared to the same
period in 2004, the percentage of total revenues represented by each of the
following expenses are as follows: (i) Cost of sales was 61.7% compared to
47.0%; (ii) Selling and marketing expenses was 19.7% compared to 22.2%; (iii)
General and administrative expenses was 23.9% compared to
24
17.5%; and (iv) Depreciation, amortization and write-down expenses was 16.6%
compared to 9.4%. The tables below show our operating expenses by category on a
segment-by-segment basis.
COST OF SALES AMOUNT OF PERCENTAGE
INCREASE INCREASE
2004 2005 (DECREASE) (DECREASE)
------- ------- ---------- ----------
(IN THOUSANDS OF DKK)
Internet services 4,680 0 (4,680) (100.0%)
Broadcast media 11,341 12,611 1,270 11.2%
------- ------- ------- -------
Total 16,021 12,611 (3,410) (21.3%)
SELLING AND MARKETING AMOUNT OF PERCENTAGE
INCREASE INCREASE
2004 2005 (DECREASE) (DECREASE)
------- ------- ---------- ----------
(IN THOUSANDS OF DKK)
Internet services 4,695 361 (4,334) (92.3%)
Broadcast media 2,874 3,663 789 27.5%
------- ------- ------- -------
Total 7,569 4,024 (3,545) 46.8%
GENERAL AND
ADMINISTRATIVE AMOUNT OF PERCENTAGE
INCREASE INCREASE
2004 2005 (DECREASE) (DECREASE)
------- ------- ---------- ----------
(IN THOUSANDS OF DKK)
Internet services 2,566 1,106 (1,460) (56.9%)
Broadcast media 3,399 3,774 375 11.0%
------- ------- ------- -------
Total 5,965 4,880 (1,085) (18.2%)
DEPRECIATION,
AMORTIZATION AND
WRITE DOWNS AMOUNT OF PERCENTAGE
INCREASE INCREASE
2004 2005 (DECREASE) (DECREASE)
------- ------- ---------- ----------
(IN THOUSANDS OF DKK)
Internet services 769 230 (539) (70.1%)
Broadcast media 2,437 3,173 736 30.2%
------- ------- ------- -------
Total 3,206 3,403 197 6.1%
As of September 2004, we sold the last of our Internet services
businesses. During the fiscal quarter ended March 31, 2005 we had no revenues
from those businesses and as a result, our operating expenses were reduced
significantly resulting in no Cost of sales and significantly reduced Selling
and marketing expenses, General and administrative expenses and Depreciation,
amortization and write-down expenses.
In the case of our broadcast media segment, for the three months ended
March 31, 2005 compared to the same period in 2004, the percentage of segment
revenue represented by each of the following expenses are as follows: (i) Cost
of sales was 61.7% compared to 55.0%; (ii) Selling and marketing expenses was
17.9% compared to 13.9%; (iii) General and administrative
25
expenses was 18.5% compared to 16.5%; and (iv) Depreciation, amortization and
write-down expenses was 15.5% compared to 11.8%.
For the three months ended March 31, 2005, due to the sale of all of
our Internet services businesses, our Internet services segment had no gross
profit compared to DKK 8.8 million, or 65.2% of segment revenues for the same
period in 2004. In the case of our broadcast media segment, for the three months
ended March 31, 2005 the gross profit decreased to DKK 7.8 million, or 38.3% of
segment revenues compared to DKK 9.3 million, or 45.0% of segment revenues for
the same period in 2004. The decrease in the gross margin reflects an increase
in Cost of sales and a slight reduction in Net revenue in our broadcast media
segment.
GROSS PROFIT AMOUNT OF PERCENTAGE
INCREASE INCREASE
2004 2005 (DECREASE) (DECREASE)
------- ------- ---------- ----------
(IN THOUSANDS OF DKK)
Internet services 8,775 0 (8,775) (100.0%)
Broadcast media 9,280 7,838 (1,442) (15.5%)
------- ------- ------- -------
Total 18,055 7,838 (10,217) (56.6)
We had an operating loss of DKK 4.5 million for the three months ended
March 31, 2005 compared to an operating profit of DKK 1.3 million for the same
period in the prior year. The decrease in operating income is primarily due to
the loss of the revenues from the Internet services businesses without an
accompanying increase in the broadcast media revenues. In our Internet services
segment we had an operating loss of DKK 1.7 million for the three months ended
March 31, 2005 compared to an operating profit of DKK 0.7 million for the same
period in the prior year. In our broadcast media segment we had an operating
loss of DKK 2.8 million for the three months ended March 31, 2005 compared to an
operating income of DKK 0.6 million for the same period in the prior year. The
decrease reflects an increase in operating expenses due to increase in capital
expenditures made in connection with the expanded activity in our production of
programs for broadcasting by others and our new 4SPORT channel which was not
accompanied by an increase in revenues.
LIQUIDITY AND CAPITAL RESOURCES
Historically, our primary cash needs have been for capital expenditures
and to fund operating losses. At March 31, 2005, cash balances totaled DKK 25.4
million compared to cash balances of DKK 6.8 million at December 31, 2004. At
March 31, 2005 the ratio of current assets to current liabilities was 0.73 to 1.
Our current assets primarily reflect our cash, accounts receivables and prepaid
expenses and deposits.
At March 31, 2005, we had secured lines of credit from banks totaling
DKK 9.0 million, from which DKK 8.3 million have been drawn, and an outstanding
note payable, due in September 2009, in the current principal amount of DKK 3.66
million which accrues interest at a rate of 5.5% per annum and is payable in
equal monthly installments. 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 March 31, 2005 was 5.5%. In Denmark, a line of credit, such as that used
by us, can be cancelled upon three months notice. Any termination would result
in the principal and interest
26
becoming due and payable immediately. The line of credit has been used for
working capital purposes.
For the three months ended March 31, 2005, cash used in operations was
DKK 4.0 million compared to DKK 3.2 million for the three months ended March 31,
2004, an increase of DKK 0.8 million. The increase is primarily due to a net
loss of DKK 2.7 million from continuing operations in the fiscal quarter ended
March 31, 2005 compared to net income of DKK 1.6 million for the same period in
2004, and the change in the items accounts receivable, broadcasting programming
rights, accounts payable, accrued expenses and deferred revenue.
For the three months ended March 31, 2005, cash provided by investing
activities was DKK 15.0 million compared to cash used in investing activities of
DKK 1.3 million for the three months ended March 31, 2004, an increase in cash
provided by investing activities of DKK 16.3 million. The increase is primarily
attributable to the deposit received for the sale of our building located at
Poppelgaardvej 11-13 in Soeborg.
For the fiscal quarter ended March 31, 2005, cash provided by financing
activities was DKK 7.7 million compared to no cash used in financing activities
for the three months ended March 31, 2004. The increase in cash provided is
partially due to the release of 50% of the cash held in an escrow account in
connection with the sale of our former PKI Internet services business in April
of 2004 and partially due to proceeds from the private placements of our
securities.
For the first three months of 2005 we experienced net cash inflows from
financing and investing activities.
We believe that our cash on hand, cash received from the sales of our
Internet services businesses and the positive trend in our cash flow together
with borrowings currently available and other potential sources of funds will be
sufficient to fund our anticipated working capital needs and capital spending
requirements in the foreseeable future. However, if we were to incur any
unanticipated expenditures or the positive trend in our cash flow does not
continue it could put a substantial burden on our cash resources.
27
RISK FACTORS
OUR FUTURE OPERATING RESULTS ARE HIGHLY UNCERTAIN AND MAY BE INFLUENCED
BY A VARIETY OF FACTORS INCLUDING THOSE DISCUSSED BELOW AND ELSEWHERE IN THIS
REPORT. IN ADDITION TO OTHER INFORMATION IN THIS FORM 6-K, THE FOLLOWING RISK
FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING OUR BUSINESS AND US BECAUSE
THESE FACTORS CURRENTLY HAVE A SIGNIFICANT IMPACT OR MAY 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 6-K AS A RESULT OF THE RISK FACTORS DISCUSSED BELOW AND
ELSEWHERE IN THIS FORM 6-K.
WE HAVE A SIGNIFICANT ACCUMULATED LOSS AND THE LIKELIHOOD OF FUTURE
PROFITABILITY IS UNCERTAIN. CONTINUING LOSSES MAY EXHAUST OUR CAPITAL RESOURCES
AND FORCE US TO TERMINATE OPERATIONS.
We incurred a net loss in each of the years ended December 31, 2000,
2002 and 2003 and we incurred an operating loss in each of those years and for
the year ended December 31, 2001. For the year ended December 31, 2004 we had an
operating loss of DKK 18.23 million (approximately $3.17 million). For the three
months ended March 31, 2005 we had an operating loss of DKK 4.47 million,
($0.778 million) and a net loss of DKK 2.70 million, ($0.469 million). As of
March 31, 2005, we had an accumulated deficit of DKK460.1 million, ($80.1
million). We may incur additional losses in the foreseeable future. We cannot
assure you that we will become profitable or, if we do become profitable, that
we will be able to sustain or increase our profitability in the future. If
operating losses continue for longer than we expect and we cannot raise
additional capital, we may be forced to terminate operations.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE. IF WE CANNOT DO SO, WE
MAY NOT BE ABLE TO FUND OUR FUTURE ACTIVITIES OR CONTINUE OPERATING.
Our future capital requirements will depend on a number of factors,
including our ability to generate positive cash flow from operations, capital
expenditure requirements and acquisition opportunities. If we need to raise
additional capital in the future, we cannot assure you that we will be able to
do so on acceptable terms or at all. If we raise additional capital through the
issuance of equity or convertible debt securities, the percentage ownership of
our company held by existing shareholders, including holders of our ADSs, will
be diluted. In addition, new securities may contain certain rights, preferences
or privileges that are senior to those of our ordinary shares. If we are
unsuccessful in raising additional capital, when needed, our business and
results from operations may be materially and adversely affected.
OUR FUTURE REVENUES ARE UNPREDICTABLE AND OUR FINANCIAL RESULTS MAY FLUCTUATE.
IF OUR FINANCIAL RESULTS FALL BELOW EXPECTATIONS IN ONE OR MORE FUTURE QUARTERS,
THE MARKET PRICE OF OUR ADSS MAY BE NEGATIVELY IMPACTED.
We cannot accurately forecast our revenues or operating results. Our
revenues and operating results may fluctuate significantly because of several
factors, many of which are beyond our control. These factors include:
o market acceptance of our products and services;
o a change in television viewer preferences if we are unsuccessful in
addressing those changes in our programming;
o the non-renewal of our contract with TeleDanmark Kabel to carry dk4;
28
o the non-renewal of our contract with Canal Digital A/S to carry dk4;
o the continued interest in televising live sporting events in
Scandanavia;
o the pace at which new television programming is produced in
Scandinavia;
o customer renewal rates for our products and services;
o our success in cross marketing our products and services to our
existing customers and to new customers;
o developing our direct and indirect distribution channels;
o a decrease in the level of spending for Internet products and services
from which our royalties are based;
o our ability to expand our operations;
o our success in assimilating the operations and personnel of any
acquired businesses;
o the impact of price changes in our products and services or those of
our competitors; and
o general economic conditions and economic conditions specific to the
television programming production or Internet services industry.
Due to all of the above factors, we believe that period-to-period comparisons of
our operating results will not necessarily be meaningful, and you should not
rely on them as an indication of future performance. Also, operating results may
fall below our expectations and the expectations of securities analysts or
investors in one or more future quarters. If this were to occur, the market
price of our ADSs would likely decline which may result in a significant decline
in the value of your investment.
WE HAVE A LIMITED OPERATING HISTORY IN THE MEDIA BUSINESS AND MAY ENCOUNTER
DIFFICULTIES SIMILAR TO THOSE FACED BY EARLY STAGE COMPANIES. OUR RESULTS FROM
OPERATIONS MAY DEPEND ON HOW SUCCESSFUL WE ARE IN DEALING WITH THESE
DIFFICULTIES.
Over the last five years, our business has evolved from (i) a
telecommunications company that also provided Internet access to (ii) an
Internet services provider focusing primarily on domain name registration
services to (iii) providing trusted Internet infrastructure products and
services to (iv) our current business which is made up of our TV broadcast
channel - dk4 and our TV production company - Prime Vision. We have only a
limited operating history in this business on which you can base an evaluation
of our current business and prospects. As such, our current business and
prospects must be considered in light of the risks and uncertainties encountered
by companies in the early stages of development.
We cannot be certain that we will successfully address this risk. If we
fail, our business and results from operations may be materially and adversely
impacted.
29
WE COMPETE IN THE HIGHLY COMPETITIVE BROADCASTING INDUSTRY.
The Danish broadcast industry is highly competitive and dominated by a
few large companies. As a result of competition, in 2001 we consolidated our
broadcast operations into one channel. In addition, we expect that the number of
channels competing for the places in the TeleDanmark Kabel programming network
will increase in the ensuing years. If viewer preferences change and we are
unsuccessful in addressing those changes in our programming, we may lose favor
with them and they may choose to view a competitor's channel over ours.
IF WE ARE UNABLE TO NEGOTIATE A RENEWAL OF OUR CONTRACT WITH EITHER TELEDANMARK
KABEL OR CANAL DIGITAL A/S THE REVENUES FROM OUR BROADCASTING BUSINESS MAY BE
ADVERSELY AFFECTED.
Our dk4 television channel is carried as part of the basic package of
channels provided to all cable television subscribers to TeleDanmark Kabel (the
primary Company providing cable television service in Denmark), for which we
receive a per subscriber fee as well as to all subscribers of Canal Digital A/S,
a Danish digital satellite television service provider. Our agreement with each
of TeleDanmark Kabel and Canal Digital A/S to carry dk4 as part of its basic
package expires on December 31, 2006 and December 31, 2007, respectively. We
cannot assure you that we will successfully negotiate a renewal of our agreement
with TeleDanmark Kabel or Canal Digital A/S. If we are unable to renew any of
the agreements the revenues from our broadcasting business would decrease
significantly and the results of operations from our broadcasting business would
be materially and adversely affected.
IF THE INTEREST IN VIEWING LIVE SPORTING EVENTS IN THE SCANDINAVIAN MARKET
SHOULD DECREASE OR IF THERE IS A SLOWDOWN IN OTHER TELEVISION PROGRAMMING
PRODUCTION OUR RESULTS COULD BE ADVERSELY AFFECTED.
As of May 1, 2005 we have approximately eight large mobile television
production vans which are leased to various other companies primarily for their
broadcast of live sporting events or the production of original television
programming. We also provide many of the technical personnel required for these
productions. If we are unable to lease these vans and our technical personnel to
other broadcasters or television production companies we will be in a position
where we will not be able to cover the expenses associated with this business
which in turn could materially and adversely effect our business. Our ability to
keep these vans busy in order to generate revenue will be effected by many
factors outside of our control, including the continued interest in viewing live
sporting events and the continued desire to produce television programming in
Scandinavia.
WE MAY NEVER RECEIVE ANY ROYALTY PAYMENTS FROM THE SALE OF THE BUSINESSES
RELATED TO OUR INTERNET SERVICES DIVISION.
During 2003 and 2004 we sold all of the business operations related to
our internet services division including, the secure internet hosting business,
the digital video surveillance business, the secure remote back-up business, the
PKI services business and the virus detection software and services business.
Pursuant to the terms of the agreements for the sale of some of these businesses
we are entitled to royalty payments until 2010. If any of these businesses fail
to maintain or achieve market acceptance at a level necessary to sustain the
business then, we will receive a diminished level of, or even no, royalty
payments and, as a result, our results from operations may be adversely
affected.
30
OUR LONG-TERM GROWTH STRATEGY ASSUMES THAT WE MAKE SUITABLE ACQUISITIONS AND
INVESTMENTS. IF WE ARE UNABLE TO ADDRESS THE RISKS ASSOCIATED WITH ACQUISITIONS
AND INVESTMENTS OUR BUSINESS COULD BE HARMED.
Our long-term growth strategy includes identifying and, from time to
time, acquiring or investing in suitable candidates on acceptable terms. In
particular, we intend to acquire or make investments in businesses that provide
products and services that expand or complement our existing businesses and
expand our geographic reach. In pursuing acquisition and investment
opportunities, we may compete with other companies having similar growth and
investment strategies. Competition for these acquisition or investment targets
could also result in increased acquisition or investment costs and a diminished
pool of businesses, technologies, services or products available for acquisition
or investment. Our long-term growth strategy could be impeded if we fail to
identify and acquire or invest in promising candidates on terms acceptable to
us.
Assimilating acquired businesses involves a number of other risks,
including, but not limited to:
o disrupting our business;
o incurring additional expense associated with a write-off of all or a
portion of the related goodwill and other intangible assets due to
changes in market conditions or the economy in the markets in which we
compete or because acquisitions are not providing the benefits
expected;
o incurring unanticipated costs or unknown liabilities;
o managing more geographically-dispersed operations;
o diverting management's resources from other business concerns;
o retaining the employees of the acquired businesses;
o maintaining existing customer relationships of acquired companies;
o assimilating the operations and personnel of the acquired businesses;
and
o maintaining uniform standards, controls, procedures and policies.
For all these reasons, our pursuit of an overall acquisition and investment
strategy or any individual acquisition or investment could have a material
adverse effect on our business, financial condition and results of operations.
If we are unable to successfully address any of these risks, our business could
be harmed.
RAPID GROWTH IN OUR BUSINESS COULD STRAIN OUR MANAGERIAL, OPERATIONAL,
FINANCIAL, ACCOUNTING AND INFORMATION SYSTEMS, CUSTOMER SERVICE STAFF AND OFFICE
RESOURCES. IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS MAY BE
NEGATIVELY IMPACTED.
In order to achieve our growth strategy, we will need to expand all
aspects of our business, including our computer systems and related
infrastructure, customer service capabilities
31
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.
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
32
the Danish kroner declines and the currencies of the countries in which we
operate appreciate or remain stable our results from operations may be
negatively affected.
THE MARKET PRICE OF OUR ADSS MAY DECLINE IF THE VALUE OF THE DANISH KRONER FALLS
AGAINST THE US DOLLAR.
Fluctuations in the exchange rate between the Danish Kroner and the US
dollar are likely to affect the market price of our ADSs. For example, because
EuroTrust's financial statements are reported in Danish Kroners, if the value of
the Danish Kroner falls against the US dollar, EuroTrust's earnings per share in
US dollars will be reduced. This may adversely affect the price at which our
ADSs trade in the US.
THERE IS A LIMITED PUBLIC MARKET FOR OUR SECURITIES AND OUR SECURITIES MAY
EXPERIENCE EXTREME PRICE AND VOLUME FLUCTUATIONS.
Our ordinary shares are not listed on any securities exchange or
market. However, our ADSs are quoted on the Nasdaq SmallCap Market(R). The
market price of our ADSs may fluctuate significantly in response to various
factors and events, including:
o variations in our operating results;
o the liquidity of the markets;
o investor perceptions of us and the industry in which we operate;
o changes in earnings estimates by analysts;
o sales of ADSs by existing holders; and
o general economic conditions.
In addition, Nasdaq has recently experienced broad price and volume
fluctuations. This volatility has had a significant effect on the market price
of securities of companies for reasons that have often been unrelated to their
operating performance. These broad market fluctuations may also adversely affect
the market price of our ADSs and as a result, holders of our ADSs may lose a
significant portion of their investment.
WE HAVE NEVER PAID A DIVIDEND NOR DO WE ANTICIPATE DOING SO IN THE FORESEEABLE
FUTURE.
We have not declared or paid any cash dividends on our ordinary shares.
We do not expect to declare any dividends in the foreseeable future. We
anticipate that all cash that would otherwise be available to pay dividends will
be applied in the foreseeable future to finance our growth or to implement
shareholder-approved repurchases of our stock. Payment of any future dividends
will depend on our earnings and capital requirements, and other factors our
board of directors deem appropriate.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed by the undersigned,
thereunto duly authorized.
EUROTRUST A/S
Dated: July 28, 2005 By: /s/ Soren Degn
----------------------------
Soren Degn
Chief Financial Officer
34
INDEX TO EXHIBITS
EXHIBITS
--------
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.
35