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 September 30, 2003
Commission file number 000-30690
EUROTRUST A/S
(Translation of Company's name into English)
Poppelgardvej 11-13
2860 Soborg
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 September 30, 2003 and December 31, 2002...................................................... 3
Unaudited Consolidated Condensed Statements of Operations for the nine-month and three-month
periods ended September 30, 2003 and 2002........................................................... 5
Unaudited Consolidated Condensed Statements of Shareholders' Equity for the Years Ended
December 31, 1999 through December 31, 2002 and for the nine-month period
ended September 30, 2003............................................................................ 6
Unaudited Consolidated Condensed Statements of Cash Flows for the nine-month periods ended
September 30, 2003 and 2002......................................................................... 7
Notes To Unaudited Consolidated Condensed Financial Statements ..................................... 8
One For Six Ratio Change of Our American Depositary Shares.......................................... 17
Management's Discussion And Analysis Of Financial Condition And Results Of Operations............... 17
Risk Factors ....................................................................................... 27
Signature .......................................................................................... 39
Index to Exhibits .................................................................................. 40
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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. We do not intend or assume any obligation to update these
forward-looking statements. In light of the significant uncertainties inherent
in the forward-looking statements included in this report, the inclusion of
these statements should not be interpreted by anyone that we can achieve our
objectives or implement our plans. Factors that could cause our actual results
to differ materially from those expressed or implied by forward-looking
statements include, but are not limited to, certain factors set forth in our
Annual Report on Form 20-F for the fiscal year ended December 31, 2002, filed
with the Securities and Exchange Commission on September 12, 2003, 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
September 30, 2003 into U.S. dollars at an exchange rate of $1.00 = DKK 6.3728,
the exchange rate on September 30, 2003. 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 September 30, 2003, or at any other rate.
------------
Unless specifically indicated or the context clearly indicates otherwise
all references to our ordinary shares shall include our American Depositary
Shares (ADSs) and vice-versa.
------------
We use the terms "we," "our," "us," "EuroTrust" and "the Company" to mean
EuroTrust A/S and its subsidiaries and their respective predecessors.
2
EUROTRUST A/S
Unaudited Consolidated Condensed Balance Sheets
(in thousands)
December 31,
2002 September 30, 2003
------------ ----------------------
DKK DKK $
ASSETS
Current assets:
Cash and cash equivalents 37,672 13,116 2,058
Restricted cash 1,986 1,793 282
Accounts receivable trade, net of allowances for doubtful
accounts of DKK 5,769 in 2002 and DKK 3,551 in 2003 21,210 21,369 3,353
Broadcasting rights 3,805 1,903 299
Inventories 1,403 574 90
Deferred tax assets 706 533 84
VAT receivables 1,599 197 31
Prepaid expenses and deposits 15,019 11,650 1,828
Other receivables 7,175 5,705 895
--------- --------- ---------
Total current assets 90,575 56,840 8,920
Investment securities 570 353 55
Broadcasting rights, long term 951 0 0
Rent and other deposits 1,783 1,900 298
Other receivables 64 64 10
Long term investments 2,792 2,792 438
Prepaid Investments 0 1,500 235
Property, plant and equipment, net 48,973 50,294 7,892
Goodwill 20,964 21,309 3,344
License rights, net 1,400 1,176 185
Other intangible fixed assets, net 145 32 5
--------- --------- ---------
Total assets 168,217 136,260 21,382
========= ========= =========
DKK amounts have been converted into US$ at an exchange rate of $1=DKK 6.3728.
See accompanying Notes.
3
EUROTRUST A/S
Unaudited Consolidated Condensed Balance Sheets
(in thousands)
December 31,
2002 September 30, 2003
------------ -----------------------------
DKK DKK $
LIABILITIES AND SHAREHOLDERS` EQUITY
Current liabilities:
Short term borrowings 809 268 42
Accounts payable 21,038 20,652 3,241
Accounts payable, related parties 12,833 0 0
Accrued expenses 34,310 22,534 3,536
Deferred revenue 20,274 31,263 4,906
Lease obligations, current 4,328 2,918 458
Income tax payable 1,263 789 124
---------- ---------- ----------
Total current liabilities 94,855 78,424 12,307
Long term liabilities:
Deferred revenue, long term 15,423 5,703 895
Lease obligations, long term 3,444 1,708 268
Other liabilities, long term 2,287 2,291 359
Minority interest in subsidiaries 7,966 8,538 1,340
---------- ---------- ----------
Total long term liabilities 29,120 18,240 2,862
Shareholders' equity:
Common shares - 2003: authorized 46,376,000, issued
29,079,000, par value DKK 1.25, 2002: authorized 34,502,000,
issued 27,205,000, par value DKK 1.25 34,006 36,349 5,704
Additional paid-in capital 532,280 525,679 82,488
Accumulated deficit (509,510) (518,785) (81,406)
Other comprehensive loss (556) 398 62
Treasury stock, 1,263,100 and 559,512 common shares in 2002
and 2003 respectively, at cost (11,978) (4,045) (635)
---------- ---------- ----------
Total shareholders' equity 44,242 39,596 6,213
---------- ---------- ----------
Total liabilities and shareholders' equity 168,217 136,260 21,382
========== ========== ==========
DKK amounts have been converted into US$ at an exchange rate of $1=DKK 6.3728
See accompanying Notes.
4
EUROTRUST A/S
Unaudited Consolidated Condensed Statements of Operations
(in thousands, except per share data)
Nine months ended September 30, Three months ended September 30,
2002 2003 2003 2002 2003 2003
-------- -------- -------- -------- -------- --------
DKK DKK $ DKK DKK $
Revenues 93,943 123,044 19,308 34,903 40,131 6,297
Operating expenses:
Cost of revenue 59,215 62,279 9,772 20,354 23,243 3,647
Selling and marketing expenses 34,160 34,648 5,437 12,262 10,033 1,574
General and administrative expenses 29,774 29,689 4,659 10,828 7,766 1,218
Depreciation, amortization and write downs 22,294 5,901 926 7,583 1,892 297
-------- -------- -------- -------- -------- --------
Total operating expenses 145,443 132,517 20,794 51,027 42,934 6,736
-------- -------- -------- -------- -------- --------
Operating loss (51,500) (9,473) (1,486) (16,124) (2,803) (439)
Interest income 1,546 117 18 506 52 8
Interest expense (688) (1,566) (246) (238) (157) (25)
Foreign exchange gain (loss), net (4,132) (2,050) (322) (3,196) (239) (38)
(Loss) gain from sales of business (650) 82 13 0 82 13
Other (expenses) income, net (318) 4,112 645 (318) 4,112 645
-------- -------- -------- -------- -------- --------
(Loss) income before income taxes and minority
interest (55,742) (8,778) (1,378) (19,370) 1,047 164
Income tax expense 0 0 0 0 0 0
Minority interest in subsidiaries 606 (497) (78) (100) (258) (40)
-------- -------- -------- -------- -------- --------
Net (loss) income (55,136) (9,275) (1,456) (19,470) 789 124
======== ======== ======== ======== ======== ========
Net (loss) income per average common share, basic (2.10) (0.33) (0.05) (0.74) 0.03 0.004
======== ======== ======== ======== ======== ========
Net (loss) income per average common share, diluted (2.10) (0.33) (0.05) (0.74) 0.03 0.004
======== ======== ======== ======== ======== ========
Average common shares outstanding, basic 26,232 27,840 27,840 26,232 28,652 28,652
======== ======== ======== ======== ======== ========
Average common shares outstanding, diluted 26,232 27,840 27,840 26,232 28,911 28,911
======== ======== ======== ======== ======== ========
DKK amounts have been converted into US$ at an exchange rate of $1=DKK 6.3728.
See accompanying Notes.
5
EUROTRUST A/S
Unaudited Consolidated Condensed Statements of Shareholders' Equity
(in thousands)
Notes
Additional Other com- Receivable
Common Paid-In Accumulated prehensive Treasury from Sale of
Shares Capital Deficit Income Stock Shares Total
------------------------------------------------------------------------------------
DKK DKK DKK DKK DKK DKK DKK
Balance at December 31, 1999 18,629 218,608 (87,163) (350) 0 (86) 149,638
Issuance of 2,655 common shares to acquire
new businesses 3,319 107,945 111,264
Issuance of 2,571 common shares for cash
through exercise of stock options 3,213 80,728 83,941
Issuance of 522 common shares for cash
in private placement 653 7,347 8,000
Repayment of note receivables 39 39
Currency translation adjustments (203) (203)
Unrealized loss on investment securities (337) (337)
Net loss (146,704) (146,704)
------------------------------------------------------------------------------------
Balance at December 31, 2000 25,814 414,628 (233,867) (890) 0 (47) 205,638
Issuance of 248 common shares to acquire
new businesses 310 3,652 3,962
Issuance of 6,306 common shares for cash
in private placement 7,882 114,529 122,411
Purchase of treasury stock (7,150) (7,150)
Sale of treasury stock (529) 1,694 1,165
Currency translation adjustments (393) (393)
Unrealized loss on investment securities (217) (217)
Repayment of notes receivable 47 47
Net income 7,705 7,705
------------------------------------------------------------------------------------
Balance at December 31, 2001 34,006 532,280 (226,162) (1,500) (5,456) 0 333,168
Purchase of treasury stock (6,522) (6,522)
Currency translation adjustments 958 958
Unrealized loss on investment securities (14) (14)
Net loss (283,348) (283,348)
------------------------------------------------------------------------------------
Balance at December 31, 2002 34,006 532,280 (509,510) (556) (11,978) 0 44,242
Issuance of 300 common shares for cash
through exercise of stock options 375 30 405
Issuance of 1,169 common shares for cash
through exercise of stock options 1,462 61 1,523
Issuance of 300 common shares for cash
through exercise of stock options 506 153 659
Sale of treasury stock (6,845) 7,933 1,088
Currency translation adjustments 954 954
Net loss (9,275) (9,275)
------------------------------------------------------------------------------------
Balance at September 30, 2003 36,349 525,679 (518,785) 398 (4,045) 0 39,596
See accompanying Notes.
6
EUROTRUST A/S
Unaudited Consolidated Condensed Statements of Cash Flows
(in thousands)
Nine months ended September 30,
2002 2003 2003
---------- ---------- ----------
DKK DKK $
Cash flows from operating activities:
Net income (loss) from operations (55,136) (9,275) (1,426)
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating activities:
Depreciation, amortization and write down 22,294 5,901 908
(Gain)/loss on sale business 0 (82) (13)
(Gain)/loss on sale of fixed assets 0 116 18
Minority interest (475) 573 88
Changes in operating assets and liabilities:
Accounts receivable (14,458) (159) (24)
Accounts receivable, related parties 3,084 0 0
Broadcasting rights 2,288 2,853 438
Inventories and other assets (726) 830 128
Income tax payable 0 (474) (73)
Other receivables (1,259) 6,413 986
Accounts payable 1,074 (386) (59)
Accounts payable, related parties (1,960) (12,833) (1,974)
Accrued expenses (17,788) (7,260) (1,117)
Deferred revenue 19,057 1,269 195
---------- ---------- ----------
Cash used in operating activities: (44,005) (12,514) (1,925)
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sales of short-term investments (2,285) 217 33
Prepaid Investments 0 (1,500) (231)
Proceeds from sale of business, net of cash 0 82 13
Purchase of fixed assets (36,712) (8,376) (1,288)
Proceeds from sales of fixed assets 0 912 140
---------- ---------- ----------
Cash provided by (used in) investing activities: (38,997) (8,665) (1,333)
---------- ---------- ----------
Cash flows from financing activities:
Net change in short-term borrowings 1,640 (541) (83)
Sales (purchase) of treasury stock 0 1,088 167
Leasing commitments 0 (3,146) (484)
Net change in restricted cash 39,495 193 30
Other 0 (4,512) (694)
Proceeds from issuance of common shares and warrants 0 2,587 398
---------- ---------- ----------
Cash provided by (used in) financing activities: 41,135 (4,331) (666)
---------- ---------- ----------
Effect of exchange rate changes on cash and cash equivalents 380 954 147
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (41,487) (24,556) (3,777)
Cash and cash equivalents, beginning of period 94,051 37,672 5,795
---------- ---------- ----------
Cash and cash equivalents, end of period 52,564 13,116 2,018
========== ========== ==========
Cash received for interest 1,546 117 18
========== ========== ==========
Cash paid for interest (688) (1,566) (246)
========== ========== ==========
DKK amounts have been converted into US$ at an exchange rate of $1=DKK 6.3728.
See accompanying Notes.
7
EUROTRUST A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK and US$ amounts in thousands, except per share amounts
and where otherwise indicated)
The accompanying unaudited consolidated financial statements have been
prepared in accordance with United States generally accepted accounting
principles. 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, 2002,
as set forth in the Company's Annual Report on Form 20-F, filed with the
Securities and Exchange Commission on September 12, 2003.
In preparing financial statements that conform with United States
generally accepted accounting principles, 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
In December 2001, we changed our name to EuroTrust A/S (from euro909.com
A/S and earlier Telepartner A/S).
We are engaged in Internet services and broadcasting activities.
We provide an array of trusted Internet security products and services,
including secure communications, secure servers, on-site solutions, virus
detection, security penetration testing, digital video surveillance, and secure
remote backup services to website owners, commercial enterprises and electronic
commerce service providers in Scandinavia and other European countries.
Until 2002, our business operated in three distinct areas: Internet
products and services; broadcasting; and print and online media. In 2001 we made
the strategic decision to focus primarily on providing trusted Internet
infrastructure products and services and e-commerce solutions in Scandinavia and
selected European markets. As a result, we sold our domain name registration
business to VeriSign in July 2001, and we sold the remaining assets of our
historical telecommunications business and our print and online media properties
in December 2001. Also, in the fourth quarter of 2001, we consolidated all of
our television programming into a single television channel, dk4.
Reporting currency
The functional currency of EuroTrust A/S ("the Company") and its
subsidiaries is the local currency of the country in which they conduct their
business. Balance sheet accounts are translated into DKK at the period-end
exchange rate and items in the statement of operations are translated at the
8
EUROTRUST A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK and US$ amounts in thousands, except per share amounts and where otherwise
indicated)
average exchange rate. Resulting translation adjustments are charged or credited
to a separate component of shareholders' equity. Translation adjustments arising
from inter company financing of a long-term investment nature are accounted for
similarly. Some transactions of the Company and its subsidiaries are made in
currencies other than the functional currency. Gains and losses from these
transactions are included in the income statement.
Information expressed in US dollars
The consolidated financial statements are stated in Danish kroner ("DKK"),
the currency of the country in which the Company and its major subsidiaries are
incorporated and operate. 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 6.3728 DKK to one US Dollar, the approximate exchange rate at September 30,
2003. Such translation should not be construed as a representation that the DKK
amounts could be converted into US Dollars at that or any other rate.
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 after
elimination of intercompany accounts and transactions. The Company's investments
representing a 20% to 50% interest are accounted for by the equity method of
accounting.
Risks and uncertainties
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 and contingencies.
Earnings per share
Basic net (loss) income per share is computed by dividing net (loss)
income (numerator) by the weighted-average number of shares of common stock
outstanding during the period (denominator). Diluted net (loss) income per share
gives effect to stock options considered to be potential common shares, if
dilutive. Potential common shares consist of shares issuable upon the exercise
of stock options computed using the treasury stock method.
Revenue recognition
The Company derives revenues from three primary categories: (i) internet
services, which include managed public key infrastructure services and digital
certificate services, hosting, virus surveillance and detection services, and
remote data backup services; (ii) broadcasting, which includes cable and digital
television subscriber income and program production income; and (iii) until July
31, 2001, domain name registration services. The revenue recognition policy for
each of these categories is as follows:
Internet services
9
EUROTRUST A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK and US$ amounts in thousands, except per share amounts and where otherwise
indicated)
The Company recognizes revenues from issuances of digital certificates and
managed PKI services, virus surveillance and detection services, and remote data
backup, when all of the following criteria are met: (1) persuasive evidence of
an arrangement exists, (2) delivery has occurred, (3) the fee is fixed or
determinable and (4) collectibility is reasonably assured.
In software arrangements involving multiple elements, as required by SOP
97-2, the Company allocates and defers revenue for the undelivered elements
based on vendor-specific objective evidence, or VSOE, of the fair value of the
undelivered elements, and recognizes the difference between the total
arrangement fee and the amount deferred for the undelivered elements as revenue.
VSOE of each element is based on the price for which the undelivered element is
sold separately. If VSOE does not exist for undelivered elements such as
maintenance services, then the entire arrangement fee is recognized over the
performance period.
Revenues from the sale of digital certificates and managed PKI services,
which include bundled maintenance services which are not sold separately, are
deferred and recognized ratably over the period that such contracted services
are provided, usually 12 to 24 months.
Revenues from virus surveillance and detection services, which include
bundled maintenance services which are not sold separately, are deferred and
recognized rateably over the period that the service is provided, usually 3 to
36 months.
Revenues from hosting and remote data backup services are deferred and
recognized rateably over the period that the service is provided, usually 3 to
12 months.
The Company's consulting and installation services are not essential to
the functionality of the software. The Company's software products are fully
functional upon delivery and do not require any significant modification or
alteration. Revenues from consulting and installation services, which are
provided on a time and materials basis, are recognized as the service is
performed.
Broadcasting
The Company recognizes cable and digital television revenue on an accruals
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. Revenue and costs associated with program
production are recognized when programs are completed and delivered to the
broadcaster.
Domain name registration
The Company sold its domain name registration business in 2001.
Effective October 1, 2000, the Company changed its method of accounting
for recognition of domain name registration revenue in accordance with Staff
Accounting Bulletin No.101, Revenue Recognition in Financial Statements.
Previously, the Company recognized revenue from initial registration of domain
names when the registration process was complete and annual service fees
(registration renewal fees) were recognized when invoiced to the customer. Upon
completion of the initial registration, the only continuing obligation to the
Company was to provide the customer access through one of its servers, resulting
in no incremental cost to the Company, to the domain name registry for purposes
of maintaining the customer's domain name registration. Under the new method of
accounting, which was adopted retroactively to January 1, 2000, the Company
recognized
10
EUROTRUST A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK and US$ amounts in thousands, except per share amounts and where otherwise
indicated)
revenues over the period the customer is provided access to the registry through
its servers. The effect of this change on the year ended December 31, 2000, was
an increase in the loss before cumulative effect of the accounting change of DKK
16.5 million (DKK 0.97 per share). During 2000, the Company recognized DKK 27.6
million of revenue and DKK 7.3 million of cost of revenue that was included in
the cumulative effect adjustment, which decreased the loss for the year by DKK
20.3 million or DKK 1.20 per share.
Income taxes
We use 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 carryforwards. 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. We
record a valuation allowance to reduce deferred tax assets to an amount whose
realization is more likely than not.
Cash and cash equivalents
Cash and cash equivalents represent cash and short-term deposits with
maturities of less than three months at the time of purchase.
Restricted cash
Restricted cash as of September 30, 2003 include an escrow account in
respect of the remaining consideration for our domain name registration business
that was sold in June 2001 amounting to DKK 1,793.
Investment securities
Investments in public companies are classified as "available-for-sale" and
are included in investment securities in the consolidated financial statements.
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 security has experienced an other-than-temporary
decline in its fair value. We consider the invested company's cash position,
earnings and revenue outlook, stock price performance over the past six months,
liquidity and management, among other factors, when reviewing the marketable
equity securities. If it is determined that an other-than-temporary decline in
fair value exists in a marketable equity security, we record an investment loss
in the consolidated statement of operations.
Long-Term investments
Investments in non-public companies are included in long-term investments
in the consolidated balance sheet and are accounted for under the cost method.
For these non-quoted investments, we regularly review the assumptions underlying
the operating performance and cash flow forecasts based on information requested
from these privately held companies. Generally, this information may be more
limited, may not be as timely as and may be less accurate than information
available from publicly traded companies. Assessing each investment's carrying
value requires significant judgment by management. If it is determined that
there is an other-than-
11
EUROTRUST A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK and US$ amounts in thousands, except per share amounts and where otherwise
indicated)
temporary decline in the fair value of a non-public equity security, we
write-down the investment to its fair value and record the related write-down as
an investment loss in the consolidated statement of operations.
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.
Broadcasting rights
Broadcasting rights, which comprise acquired rights to broadcast
television programs on the Company's television stations, and the related
liabilities are recorded at their gross value when the license period begins and
the programs are available for use. These rights are expensed when the program
is aired. Program rights are classified as current or non-current based on
anticipated usage in the following year.
Inventories
Inventories are stated at the lower of cost or market with cost determined
on the basis of the first in, first out method. In order to evaluate the
realizable value of such assets the company investigates the available market
for these products and expected sales price.
Property, plant and equipment
Buildings, technical equipment, furniture and fixtures, cars and leasehold
improvements are carried at cost less depreciation. Assets held under capital
leases are stated at the present value of minimum lease payments. 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 cars 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 10 years or the non-cancelable term of the lease.
Goodwill and other intangible assets
Goodwill represents the excess of costs over the fair value of the
identifiable net assets of businesses acquired. We fully adopted the provisions
of SFAS No. 142, Goodwill and Other Intangible Assets, as of January 1, 2002.
Goodwill and intangible assets acquired in a purchase business combination and
determined to have an indefinite useful life are not amortized, but instead are
tested for impairment at least annually in accordance with the provisions of
SFAS No. 142. Impairment losses arising from this impairment test are included
in operating expenses. SFAS No. 142 also requires that intangible assets with
estimable useful lives be amortized over their respective estimated useful lives
to their estimated residual values, and reviewed for impairment in accordance
with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.
12
EUROTRUST A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK and US$ amounts in thousands, except per share amounts and where otherwise
indicated)
A two-step evaluation to assess goodwill for impairment is required.
First, the fair value of each reporting unit is compared to its carrying value.
If the fair value exceeds the carrying value, goodwill and other intangible
assets are not impaired and proceeding to the second step is not required. If
the carrying value of any reporting unit exceeds its fair value, then the
implied fair value of the reporting unit's goodwill and other intangible assets
must be determined and compared to the carrying value of its goodwill and other
intangible assets (the second step). If the carrying value of a reporting unit's
goodwill and other intangible assets exceeds its implied fair value, then an
impairment charge equal to the difference is recorded.
Prior to the adoption of SFAS No. 142, goodwill was amortized on a
straight-line basis over the expected periods to be benefited, generally 5 to 10
years, and assessed for recoverability by determining whether the amortization
of the goodwill balance over its remaining life could be recovered through
undiscounted future operating cash flows of the acquired operation. All other
intangible assets were amortized on a straight-line basis not exceeding 5 years.
The amount of goodwill and other intangible asset impairment, if any, was
measured based on projected discounted future operating cash flows using a
discount rate reflecting our average cost of funds.
Impairment of Long-Lived Assets
In accordance with SFAS No. 144, long-lived assets, such as property,
plant, and equipment, and purchased intangibles subject to amortization, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Circumstances which
could trigger a review include, but are not limited to: significant decreases in
the market price of the asset; significant adverse changes in the business
climate or legal factors; current period cash flow or operating losses combined
with a history of losses or a forecast of continuing losses associated with the
use of the asset; and current expectation that the asset will more likely than
not be sold or disposed of significantly before the end of its estimated useful
life.
Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated 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 assets and liabilities of a
group classified as held for sale would be presented separately in the
appropriate asset and liability sections of the balance sheet.
Goodwill and intangible assets not subject to amortization are tested
annually for impairment, and are tested for impairment more frequently if events
and circumstances indicate that the asset might be impaired. An impairment loss
is recognized to the extent that the carrying amount exceeds the asset's fair
value.
Prior to the adoption of SFAS No. 144, the Company accounted for
long-lived assets in accordance with SFAS No. 121, Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
13
EUROTRUST A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK and US$ amounts in thousands, except per share amounts and where otherwise
indicated)
Stock Options
At September 30, 2003, we have a number of stock-based employee
compensation plans, under which options are 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.
Concentration of credit risk
Cash and cash equivalents are, for the most part, maintained with several
major financial institutions in Scandinavia.
Pensions and other post-retirement and post-employment benefits
The Company contributes to insurance companies for the benefit of pension
agreements between employees and insurance companies. The Company's
contributions are expensed as incurred. The Company has no liabilities related
to pensions.
Other than the pension benefits described above, the Company does not
provide its employees with post-retirement and post-employment benefits.
Reclassifications
Certain prior years balances have been reclassified to conform to the
current years presentation.
These changes do not impact net income, net assets or net increase in cash
and cash equivalents.
Business Acquisitions
All acquisitions have been accounted for under the purchase method of
accounting. The results of operations of the acquired businesses are included in
the financial statements from the dates of the respective acquisitions. Goodwill
amounts recorded for the acquisitions are being treated according to SFAS No.
142.
14
EUROTRUST A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK and US$ amounts in thousands, except per share amounts and where otherwise
indicated)
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.
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 September 30,
2002 and 2003 is presented in the following table:
15
EUROTRUST A/S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK and US$ amounts in thousands, except per share amounts and where otherwise
indicated)
Nine months ended September 30, Three months ended September 30,
2002 2003 2003 2002 2003 2003
-------- -------- -------- -------- -------- --------
DKK DKK $ DKK DKK $
Internet services:
Net revenue 42,768 59,509 9,338 17,111 18,367 2,882
Operating expenses:
Cost of sales 32,223 24,655 3,868 11,634 9,988 1,567
Selling and marketing expenses 27,895 26,974 4,233 10,260 7,476 1,173
General and administrative expenses 21,426 19,725 3,095 8,176 4,844 760
Depreciation and amortization 16,573 3,043 477 5,669 919 144
-------- -------- -------- -------- -------- --------
Total operating expenses 98,117 74,397 11,673 35,739 23,227 3,644
-------- -------- -------- -------- -------- --------
Operating loss (55,349) (14,888) (2,335) (18,628) (4,860) (762)
-------- -------- -------- -------- -------- --------
Broadcasting:
Net revenue 51,175 63,535 9,970 17,792 21,764 3,415
Operating expenses:
Cost of sales 26,992 37,624 5,904 8,720 13,255 2,080
Selling and marketing expenses 6,265 7,674 1,204 2,002 2,557 401
General and administrative expenses 8,348 9,964 1,564 2,652 2,922 458
Depreciation and amortization 5,721 2,858 449 1,914 973 153
-------- -------- -------- -------- -------- --------
Total operating expenses 47,326 58,120 9,121 15,288 19,707 3,092
-------- -------- -------- -------- -------- --------
Operating income (loss) 3,849 5,415 849 2,504 2,057 323
-------- -------- -------- -------- -------- --------
Consolidated
Net revenue 93,943 123,044 19,308 34,903 40,131 6,297
Operating expenses:
Cost of sales 59,215 62,279 9,772 20,354 23,243 3,647
Selling and marketing expenses 34,160 34,648 5,437 12,262 10,033 1,574
General and administrative expenses 29,774 29,689 4,659 10,828 7,766 1,218
Depreciation and amortization 22,294 5,901 926 7,583 1,892 297
-------- -------- -------- -------- -------- --------
Total operating expenses 145,443 132,517 20,794 51,027 42,934 6,736
-------- -------- -------- -------- -------- --------
Operating income (loss) (51,500) (9,473) (1,486) (16,124) (2,803) (439)
======== ======== ======== ======== ======== ========
DKK amounts have been converted into US$ at an exchange rate of $1=DKK 6.3728.
See accompanying Notes.
16
ONE-FOR-SIX RATIO CHANGE OF OUR AMERICAN DEPOSITARY SHARES
On August 29, 2002, we implemented a one for six reverse ratio change in
the number of ordinary shares represented by each ADS such that each new ADS
issued subsequent to the ratio change will represent six ordinary shares (prior
the ratio change, each ADS represented one ordinary share). Holders of our ADSs
prior to the ratio change, each of which represents one ordinary share ("Old
ADSs"), exchanged their Old ADSs for new ADSs, each of which represents six
ordinary shares ("New ADSs"). This ratio change did not effect our
capitalization.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a provider of trusted Internet infrastructure products and services
and e-commerce solutions to website owners, commercial enterprises, electronic
commerce service providers and individuals in Scandinavia and other west
European markets. Governments and other public institutions (i.e. Public
Universities and Schools) in Europe, generally, are in the process of adopting
the usage of trusted digital services to secure their activities over the
Internet. As a result of our affiliation with VeriSign, the global leader in
trusted Internet infrastructure products and services, and other acquisitions
made over the last few years, we believe that we are poised to take advantage of
this growth opportunity.
Until December 2001, our business operated in three distinct areas:
Internet products and services; broadcasting; and print and online media. In
early 2001 we made the strategic decision to focus primarily on providing
trusted Internet infrastructure products and services and e-commerce solutions
in Scandinavia and selected west European markets. To that end, in 2001, we sold
our domain name registration, historical telecommunications (all the remaining
assets) and our print and online media businesses, and consolidated our
television programming business.
We believe that our products and services, together with our reputation as
a customer-service oriented company, provide us with competitive advantages.
However, we cannot assure you that we will successfully implement our business
strategy.
Critical accounting policies
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States (GAAP). The preparation of these financial statements requires
Management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities. Management bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not
readily available from other sources. Actual results may differ from these
estimates under different assumptions or conditions. We believe that the
estimates, assumptions and judgments involved in the accounting policies
described below have the greatest potential impact on our consolidated financial
statements, so we consider these to be our critical accounting
17
policies. See "Summary of Significant Accounting Policies" beginning on page 8
in the notes to the 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. To date our receivables have not
had any particular concentrations that, if not collected, would have a
significant impact on our operating income. We require all acquired companies to
adopt our credit policies. The allowance for doubtful accounts represents our
best estimate, but changes in circumstances relating to accounts receivable may
result in a requirement for additional allowances in the future.
Long-term investments
We invest in securities of companies for business and strategic purposes.
These investments are in the form of equity securities of private companies for
which there is no public market. These companies are typically in the early
stage of development and are expected to incur substantial losses in the
near-term. Therefore, we may never realize any return on these investments.
Further, if these companies are not successful, we could incur charges related
to write-downs or write-offs of these investments.
We review, the assumptions underlying the operating performance of 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.
Valuation of long-lived assets
Our long-lived assets totaled DKK 51.5 million, as of September 30, 2003,
which consist primarily of rights, other intangible assets and property and
equipment subject to amortization and depreciation. We test long-lived assets
for recoverability whenever events or changes in circumstances indicate that the
carrying amount of such an asset may not be recoverable. Such events or
circumstances include, but are not limited to:
o a significant decrease in the market price of a long-lived asset;
o a significant adverse change in the extent or manner in which a
long-lived asset is being used or in its physical condition;
o a significant adverse change in legal factors or in the business
climate that could affect the value of a long-lived asset;
18
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.
Goodwill
We account for acquisitions under the purchase method of accounting,
typically resulting in goodwill. Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible Assets, requires us to assess
goodwill for impairment at least annually in the absence of an indicator of
possible impairment and immediately upon an indicator of possible impairment.
The statement requires estimates of the fair values of our reporting units. If
we determine the fair values of a reporting unit is less than the carrying
amount recorded on our Consolidated Balance Sheet, we must measure any
impairment loss. The measurement of the impairment loss involves comparing the
fair value of the reporting unit with the fair values of the recognized and
unrecognized assets and liabilities to arrive at an implied fair value of
goodwill, which is then compared to the book value of the goodwill of the
reporting unit. At September 30, 2003, we had DKK 21.3 million of goodwill
recorded on our Consolidated Balance Sheet. The entire goodwill was recorded in
our Broadcasting media segment.
We performed impairment assessments 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 use our internal budgets. Our budgets
are 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 are 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.
19
Inventories
Inventories are stated at the lower of cost or market with cost determined
on the basis of the first in, first out method.
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 September 30, 2003 Compared With Three Months Ended September
30, 2002
Revenue for the three months ended September 30, 2003 was DKK 40.1
million, an increase of DKK 5.2 million, or 15.0%, compared to revenues of DKK
34.9 million for the three months ended September 30, 2002. The table below
compares revenues for the relevant periods on a segment-by-segment basis.
Net Revenue Percentage
Increase Increase
2003 2002 (Decrease) (Decrease)
-------- -------- ---------- ----------
(in thousands of DKK)
Internet services 18,367 17,111 1,256 7.3%
Broadcast media 21,764 17,792 3,972 22.3%
-------- -------- -------- --------
Total 40,131 34,903 5,228 15.0%
The increase in revenue in our Internet services segment reflects the fact
that we are realizing increased revenues from the services we provide under our
International Affiliate Agreement with VeriSign. The revenue attributable to
that agreement increased by more than 60% for the three months ended September
30, 2003 compared to the three months ended September 30, 2002. The increase in
revenue in our broadcast media segment for the three months ended September 30,
2003 reflects an increase in the number of subscribers to dk4 and in the growth
in the production of programs for broadcasting.
Total operating expenses for the three months ended September 30, 2003
were DKK 42.9 million, a decrease of DKK 8.1 million, or 15.9%, compared to
total operating expenses of DKK 51.0 million for the three months ended
September 30, 2002. Total operating expenses include cost of revenue, selling
and marketing expenses, general and administrative expenses and depreciation,
amortization, write-down and impairment. For the three months ended September
30, 2003 compared to the same period in 2002, the percentage of total revenues
represented by each of the following expenses are as follows: (i) Cost of
revenue was 57.9 % compared to 58.3 %; (ii) Selling and marketing expenses was
25.0% compared to 35.1%; (iii) General and
20
administrative expenses was 19.4% compared to 31.0% ; and (iv) Depreciation,
amortization, write-down and impairment expenses was 4.7% compared to 21.7%. The
tables below shows our operating expenses by category on a segment-by-segment
basis.
Cost of Revenue Percentage
Increase Increase
2003 2002 (Decrease) (Decrease)
-------- -------- ---------- ----------
(in thousands of DKK)
Internet services 9,988 11,634 (1,646) (14.1%)
Broadcast media 13,255 8,720 4,535 52.0%
-------- -------- -------- --------
Total 23,243 20,354 2,889 14.2%
Sales and Marketing Percentage
Increase Increase
2003 2002 (Decrease) (Decrease)
-------- -------- ---------- ----------
(in thousands of DKK)
Internet services 7,476 10,260 (2,784) (27.1%)
Broadcast media 2,557 2,002 555 27.7%
-------- -------- -------- --------
Total 10,033 12,262 (2,229) (18.2%)
General /
Administration Percentage
Increase Increase
2003 2002 (Decrease) (Decrease)
-------- -------- ---------- ----------
(in thousands of DKK)
Internet services 4,844 8,176 (3,332) (40.8%)
Broadcast media 2,922 2,652 270 10.2%
-------- -------- -------- --------
Total 7,766 10,828 (3,062) (28.3%)
Depreciation,
amortization,
write downs Percentage
and impairment Increase Increase
2003 2002 (Decrease) (Decrease)
-------- -------- ---------- ----------
(in thousands of DKK)
Internet services 919 5,669 (4,750) (83.8%)
Broadcast media 973 1,914 (941) (49.2%)
-------- -------- -------- --------
Total 1,892 7,583 (5,691) (75.0%)
With respect to our Internet services segment, cost of revenue decreased
by DKK 1.6 million to DKK 10.0 million which is primarily attributable to a
change in the product mix and lower product costs for the three months ended
September 30, 2003 compared to the same period in 2002. For the three months
ended September 30, 2003 compared to the same period in 2002, the percentage of
segment revenue represented by each of the following expenses are as follows:
(i) Cost of revenue was 54.4 % of compared to 68.0 %; (ii) Selling and marketing
expenses was 40.7% compared to 60.0%; (iii) General and administrative expenses
was 26.4% compared to
21
47.8%; and (iv) Depreciation, amortization and write-down and impairment
expenses was 5.0% compared to 33.1%. The decrease in Selling and marketing
expenses and General and administrative reflects our continuing focusing on
costs savings. The decrease in depreciation, amortization, write-down and
impairment expenses primarily reflect a write down of assets in 2002 to reflect
the fair market which was not necessary during the three months ended September
30, 2003.
In the case of our broadcast media segment, for the three months ended
September 30, 2003 compared to the same period in 2002, the percentage of
segment revenue represented by each of the following expenses are as follows:
(i) Cost of revenue was 60.9 % compared to 49.0%. The increase in the cost of
revenue for the three months ended September 30, 2003 reflects the increased
cost associated with the start-up costs incurred in our production of programs
for broadcasting abroad; (ii) Selling and marketing expenses was 11.7% compared
to 11.3%; (iii) General and administrative expenses was 13.4% compared to 14.9%;
and (iv) Depreciation, amortization and write-down and impairment expenses was
4.5% compared to 10.8%.
For the three months ended September 30, 2003, the gross profit for our
Internet services segment increased to DKK 8.4 million, or 45.6% of segment
revenues compared to DKK 5.5 million, or 32.0% of segment revenues for the same
period in 2002. This increase is primarily attributable to the increase in sales
of trusted Internet infrastructure services. In the case of our broadcast media
segment, for the three months ended September 30, 2003 the gross profit
decreased to DKK 8.5 million, or 39.1% of segment revenues compared to DKK 9.1
million, or 51.0% of segment revenues for the same period in 2002. The decrease
in the gross margin is primarily attributable to the fact that a higher part of
the revenue now is related to our production of programs, which historically has
a lower gross margin and the expenses associated with the production of new
programs for broadcasting.
Gross profit Percentage
Increase Increase
2003 2002 (Decrease) (Decrease)
-------- -------- ---------- ----------
(in thousands of DKK)
Internet services 8,379 5,477 2,902 53.0%
Broadcast media 8,509 9,072 (563) (6.2%)
-------- -------- -------- --------
Total 16,888 14,549 2,339 16.1%
We reduced our operating loss by DKK 13.3 million for the three months
ended September 30, 2003 to DKK 2.8 million compared to a loss of DKK 16.1
million for the same period in the prior year. This improvement is partly due to
the increase in revenue of trusted Internet infrastructure services and to our
continuing focusing on costs savings. In our Internet services segment we
reduced our operating loss by DKK 13.7 million to DKK 4.9 million for the three
months ended September 30, 2003 compared to a loss of DKK 18.6 million for the
same period in the prior year. In our broadcast media segment our operating
income decreased by DKK 0.4 million to DKK 2.1 million for the three months
ended September 30, 2003 compared to an operating income of DKK 2.5 million for
the same period in the prior year.
22
Nine Months Ended September 30, 2003 Compared With Nine Months Ended
September 30, 2002
Revenue for the nine months ended September 30, 2003 were DKK 123.0
million, an increase of DKK 29.1 million, or 31.0%, compared to revenue of DKK
93.9 million for the nine months ended September 30, 2002. The table below
compares revenues for the relevant periods on a segment-by-segment basis.
Net Revenue Percentage
Increase Increase
2003 2002 (Decrease) (Decrease)
-------- -------- ---------- ----------
(in thousands of DKK)
Internet services 59,509 42,768 16,741 39.1%
Broadcast media 63,535 51,175 12,360 24.2%
-------- -------- -------- --------
Total 123,044 93,943 29,101 31.0%
Both, the Internet services segment and the broadcast media segment showed
an increase in revenues. The increase in revenues in our Internet services
segment reflects the fact that we are realizing increased revenues from the
services we provide under our International Affiliate Agreement with VeriSign.
The revenue under our International Affiliate Agreement with VeriSign has
increased by more than 110% for the nine months ended September 30, 2003
compared to the nine months ended September 30, 2002. The increase in revenues
in our broadcast media segment for the nine months ended September 30, 2003
reflects an increase in the number of subscribers to dk4 and in the growth in
production of programs.
Total operating expenses for the nine months ended September 30, 2003 were
DKK 132.5 million, a decrease of DKK 12.9 million from total operating expenses
of DKK 145.4 million for the nine months ended September 30, 2002. Total
operating expenses include cost of revenue, selling and marketing expenses,
general and administrative expenses and depreciation, amortization, write-down
and impairment expenses. For the nine months ended September 30, 2003 compared
to the same period in 2002, the percentage of total revenues represented by each
of the following expenses are as follows: (i) Cost of revenue was 50.6% compared
to 63.0%; (ii) Selling and marketing expenses was 28.2% compared to 36.4%; (iii)
General and administrative expenses was 24.1% compared to 31.7%; and (iv)
Depreciation, amortization and write-down and impairment expenses was 4.8%
compared to 23.7%. The table below shows our operating expenses by category on a
segment-by-segment basis.
For the nine months ended September 30, 2003 we realized a reduction of
DKK 10 million in our cost of revenue as a result of an amendment to the
Affiliate Agreement with VeriSign in February 2003, which reduced the accrued
royalties and annual fees of approximately DKK 12.8 million payable to VeriSign
as of December 31, 2002 to approximately DKK 2.8 million in the first quarter of
2003.
23
Cost of Revenue Percentage
Increase Increase
2003 2002 (Decrease) (Decrease)
-------- -------- ---------- ----------
(in thousands of DKK)
Internet services 24,655 32,223 (7,568) (23.5%)
Broadcast media 37,624 26,992 10,632 39.4%
-------- -------- -------- --------
Total 62,279 59,215 3,064 5.2%
Sales and Marketing Percentage
Increase Increase
2003 2002 (Decrease) (Decrease)
-------- -------- ---------- ----------
(in thousands of DKK)
Internet services 26,974 27,895 (921) (3.3%)
Broadcast media 7,674 6,265 1,409 22.5%
-------- -------- -------- --------
Total 34,648 34,160 488 1.4%
General /
Administration Percentage
Increase Increase
2003 2002 (Decrease) (Decrease)
-------- -------- ---------- ----------
(in thousands of DKK)
Internet services 19,725 21,426 (1,701) (7.9%)
Broadcast media 9,964 8,348 1,616 19.4%
-------- -------- -------- --------
Total 29,689 29,774 (85) (0.3%)
Depreciation,
amortization
write downs Percentage
and impairment Increase Increase
2003 2002 (Decrease) (Decrease)
-------- -------- ---------- ----------
(in thousands of DKK)
Internet services 3,043 16,573 (13,530) (81.6%)
Broadcast media 2,858 5,721 (2,863) (50.0%)
-------- -------- -------- --------
Total 5,901 22,294 (16,393) (73.5%)
With respect to our Internet services segment, cost of revenue decreased
by DKK 7.6 million to DKK 24.7 million which is primarily attributable to an
amendment to the Affiliate Agreement with VeriSign in February 2003, which
reduced the accrued royalties and annual fees payable to VeriSign as of December
31, 2002 from DKK 12.8 million to DKK 2.8 million. For the nine months ended
September 30, 2003 compared to the same period in 2002, the percentage of
segment revenue represented by each of the following expenses are as follows:
(i) Cost of revenue was 41.4 % compared to 75.3 %; (ii) Selling and marketing
expenses was 45.3% compared to 65.2%; (iii) General and administrative expenses
was 33.1% compared to 50.1%; and (iv) Depreciation, amortization and write-down
and impairment expenses was 5.1% compared to 38.8%. The decrease in Selling and
marketing expenses and General and administrative reflects our continuing
focusing on costs savings. The decrease in depreciation, amortization,
write-down and impairment expenses primarily reflect a write down of assets in
2002 to reflect the fair market which was not necessary during the nine months
ended September 30, 2003.
24
In the case of our broadcast media segment, for the nine months ended
September 30, 2003 compared to the same period in 2002, the percentage of
segment revenues represented by each of the following expenses are as follows:
(i) Cost of revenue was 59.2 % compared to 52.7%. The increased cost of revenue
for the nine months ended September 30, 2003 reflects the increased cost
associated with the fact that a higher part of the revenue now is related to our
production of programs. Furthermore we have start-up costs relating to our
production of programs abroad; (ii) Selling and marketing expenses was 12.1%
compared to 12.2%; (iii) General and administrative expenses was 15.7% compared
to 16.3%; and (iv) Depreciation, amortization and write-down and impairment
expenses was 4.5% compared to 11.2%.
For the nine months ended September 30, 2003, the gross profit for our
Internet services segment increased to DKK 34.9 million, or 58.6% of segment
revenue compared to DKK 10.5 million, or 24.7% of segment revenue for the same
period in 2002. This increase is primarily attributable to the fact that we
began realizing more significant revenues from the services we provide under our
International Affiliate Agreement with VeriSign and an amendment to the
Affiliate Agreement with VeriSign in February 2003, which reduced the accrued
royalties and annual fees payable to VeriSign as of December 31, 2002 from DKK
12.8 million to DKK 2.8 million. In the case of our broadcast media segment, for
the nine months ended September 30, 2003 the gross profit increased to DKK 25.9
million, or 40.8% of segment revenue compared to DKK 24.2 million, or 47.3 % of
segment revenue for the same period in 2002. This increase of DKK 1.7 million or
7.1% is attributable to the increased in revenues resulting from the increase in
the number of subscribers to dk4 and in the increase in the production of
programs for broadcasting.
Gross profit Percentage
Increase Increase
2003 2002 (Decrease) (Decrease)
-------- -------- -------- ----------
(in thousands of DKK)
Internet services 34,854 10,545 24,309 230.5%
Broadcast media 25,911 24,183 1,728 7.1%
-------- -------- -------- --------
Total 60,765 34,728 26,037 75.0%
We reduced our operating loss by DKK 42.0 million to DKK 9.5 million for
the nine months ended September 30, 2003 compared to a loss of DKK 51.5 million
for the same period ended September 30, 2002. This improvement is partly due to
the increase in sales of trusted Internet infrastructure services, to the
continuing positive development of our television programming segment and to the
amendment to the Affiliate Agreement with VeriSign in February 2003, which
reduced the accrued royalties and annual fees payable to VeriSign as of December
31, 2002 from DKK 12.8 million to DKK 2.8 million. In our Internet services
segment we reduced our operating loss by DKK 40.4 million to DKK 14.9 million
for the nine months ended September 30, 2003 compared to a loss of DKK 55.3
million for the same period in the prior year. In our broadcast media segment
our operating income increased by DKK 1.6 million to a profit of DKK 5.4 million
for the nine months ended September 30, 2003 compared to an operating profit of
DKK 3.8 million for the same period in the prior year.
Our net loss decreased by DKK 45.8 million to DKK 9.3 million for the nine
months ended September 30, 2003 compared a net loss of DKK 55.1 million for the
nine months ended September 30, 2002. This improvement is partly due to the
increase in sales of trusted Internet infrastructure services and to the
continuing positive development of our television programming.
25
Liquidity and Capital Resources
Historically, our primary cash needs have been for capital expenditures
and to fund operating losses. At September 30, 2003, cash balances (DKK 13.1
million) and restricted cash (DKK 1.8 million) totaled DKK 14.9 million compared
to cash balances (DKK 37.7 million) and restricted cash (DKK 2.0 million)
totaling DKK 39.7 million at December 31, 2002. At September 30, 2003 the ratio
of current assets to current liabilities was 0.72 to 1. Our current assets
primarily reflect our cash, accounts receivables and prepaid expenses and
deposits.
At September 30, 2003, we had secured lines of credit from banks totaling
DKK 2.0 million, from which we have drawn DKK 0.3 million. 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 September 30, 2003 was 7.25%. In Denmark, a
line of credit, such as that used by us, can be cancelled upon three months
notice. Any termination would result in the principal and interest becoming due
and payable immediately. The line of credit has been used for working capital
purposes.
For the nine months ended September 30, 2003, cash used in operations was
DKK 12.5 million compared to DKK 44.0 million for the nine months ended
September 30, 2002, a decrease of DKK 31.5 million. The decrease is primarily
due to better results of operations for the nine months ended September 30,
2003.
For the nine months ended September 30, 2003, cash used in investing
activities was DKK 8.7 million compared to cash used in investing activities of
DKK 39.0 million for the nine months ended September 30, 2002, a decrease of DKK
30.3 million. The decrease is primarily attributable to a reduction in purchase
of fixed assets for the nine months ended September 30, 2003 compared to the
nine months ended September 30, 2002.
For the nine months ended September 30, 2003, cash used in financing
activities was DKK 4.3 million compared to cash provided by financing activities
of DKK 41.2 million for the nine months ended September 30, 2002, a decrease of
DKK 45.5 million. The decrease is primarily due to our purchase of the remaining
15% interest in EuroTrust NetVaulting A/S not owned by us and to a reduction in
cash provided by change in restricted cash..
Our capital expenditures for the nine months ended September 30, 2003 were
DKK 8.4 million. These expenditures primarily relate to purchase of equipment.
For the first nine months of 2003 we have continued to experience net cash
outflows from our operations. If this trend continues we will be required to
raise additional cash to fund both our operations and any capital expenditures.
In addition to the line of credit described above we believe we could raise
additional funds (i) from borrowing against (or selling) our building in
Soeborg, Denmark which we own free of any mortgages and (ii) from the private
placement of our ordinary shares to an investor, who has agreed to invest up to
DKK 15 million to purchase our ordinary shares, at our option, through May 28,
2004.
We believe that our cash on hand and the positive trend of our operating
cash flow together with borrowings currently available and other potential
sources of funds will be sufficient to fund our anticipated working capital
needs and capital spending requirements in the foreseeable future. However, if
we were to incur any unanticipated expenditures or the positive trend of our
operating cash flow does not continue it could put a substantial burden on our
cash resources.
26
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, 1998, 1999,
and 2000 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, 2002 we had a net
loss of DKK 283.3 million (approximately $44.5 million) and an operating loss of
DKK 245.7 million (approximately $38.6 million). As of December 31, 2002, we had
an accumulated deficit of DKK 509.5 million (approximately $79.9 million). For
the nine months ended September 30, 2003 we had a net loss of DKK 9.3 million
(approximately $1.5 million). We anticipate that our revenues will increase as
we develop and expand our trusted Internet infrastructure products and services
and that in connection with this expansion, our operating expenses (excluding
deprecation and amortization) particularly our sales and marketing and our
capital expenditures, will increase as well. Accordingly, 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 new acquisition opportunities and our ability to increase our revenues
and control our expenses. If we need to raise additional capital in the future,
we cannot assure you that we will be able to do so on acceptable terms or at
all. If we raise additional capital through the issuance of equity or
convertible debt securities, the percentage ownership of our company held by
existing shareholders, including holders of our ADSs, will be diluted. In
addition, new securities may contain certain rights, preferences or privileges
that are senior to those of our ordinary shares. If we are unsuccessful in
raising additional capital, when needed, our business and results from
operations may be materially and adversely affected.
Our future revenues are unpredictable and our financial results may fluctuate.
In addition, we expect that our expenses will increase. 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. If the
increase in our expenses is not accompanied by a corresponding increase in our
revenues, our operating results will suffer. 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;
27
o the long sales and implementation cycles for, and potentially large
order sizes of, some of our products and services and the timing and
execution of individual contracts;
o customer renewal rates for our products and services;
o the timing of releases of new versions of Internet browsers or other
third-party software products and networking equipment that include
our technology;
o the mix of our offered products and services sold during a quarter;
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 trusted Internet
infrastructure products and services by our existing customers;
o our ability to expand our operations;
o our success in assimilating the operations and personnel of any
acquired businesses;
o the amount of revenue received and the application of our revenue
recognition policies compared to the amount and timing of
expenditures;
o the impact of price changes in our products and services or those of
our competitors;
o general economic conditions and economic conditions specific to the
Internet services industry;
o a change in viewer preference and we are unsuccessful in addressing
those changes in our programming; and
o the non-renewal of our contract with TeleDanmark Kabel.
Due to all of the above factors, we believe that period-to-period comparisons of
our operating results will not necessarily be meaningful, and you should not
rely on them as an indication of future performance. Also, operating results may
fall below our expectations and the expectations of securities analysts or
investors in one or more future quarters. If this were to occur, the market
price of our ordinary shares would likely decline which may result in a
significant decline in the value of your investment.
Our results of operations in the future could be materially and adversely
affected if it is determined that the carrying value of goodwill attributed to
businesses that we acquire is higher than their fair value.
In 2002, pursuant to SFAS No. 142, we wrote-off DKK 65.3 million
(approximately $10.2 million) of goodwill after determining that the carrying
value of goodwill attributed to businesses
28
we acquired was higher than their fair values. SFAS No. 142 requires that we
review the carrying value of goodwill for impairment at least annually, which
may negatively affect our results of operations if we determine that the
carrying value of goodwill is higher than its fair value. If in the future we
determine that the carrying value of goodwill for businesses we acquire is
higher than their fair value, additional goodwill will be written-off and as a
result, our results of operations could be materially and adversely affected.
We have a limited operating history in providing trusted Internet infrastructure
products and services under our current business structure and expect to
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. We have only a limited operating history as a provider of trusted
Internet infrastructure products and services 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. These risks and
uncertainties are magnified for companies, like ours, in new and rapidly
evolving markets and for companies integrating many businesses. Our success will
depend on many factors, including, but not limited to, the following:
o our ability to successfully integrate acquired companies;
o the rate and timing of the growth and use of internet protocol, or
IP, networks for electronic commerce and communications;
o the extent to which digital certificates are used for online
communications and e-commerce;
o the continued growth in the use of the Internet;
o the growth in demand for our products and services ;
o the continued evolution of electronic commerce as a viable means of
conducting business;
o the competitive environment;
o the perceived security of electronic commerce and communications
over IP networks;
o the perceived security of our services, technology, infrastructure
and practices; and
o our ability to maintain our current, and enter into additional,
strategic relationships.
To address this risk we must, among other things:
o successfully market our products and services to new and existing
customers;
29
o attract, integrate, train, retain and motivate qualified personnel;
o respond to competitive developments; and
o successfully introduce new products and services and enhancements to
our existing products and services to address new technologies and
standards and changing market conditions.
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.
Our business depends on the future growth of the Internet and adoption and
continued use of IP networks.
Our future success substantially depends on the continued growth in the
use of the Internet and IP networks for communications and commerce.
Organizations that already have invested substantial resources in other methods
of conducting business may be reluctant to migrate to the Internet model. Also,
individuals with established patterns of purchasing goods and services and
effecting payments may be reluctant to change. To date, many businesses and
consumers have been deterred from utilizing the Internet and IP networks for a
number of reasons, including, but not limited to:
o security concerns, particularly for online payments, including the
potential for merchant or user impersonation and fraud or theft of
stored data and information communicated over IP networks;
o privacy concerns, including the potential for disclosure or sale of
personal information about users to third parties, without notice to
or the consent of such users;
o other security concerns such as attacks on popular websites by
hackers;
o potentially inadequate development of network infrastructure;
o inconsistent quality of service;
o lack of availability of cost-effective, high-speed systems and
service;
o limited number of local access points for corporate users;
o inability to integrate business applications on IP networks;
o the need to operate with multiple and frequently incompatible
products;
o government regulation;
o a lack of tools to simplify access to and use of IP networks;
o congestion of traffic or other usage delays; and
o uncertainty regarding intellectual property ownership.
30
If the Internet and the adoption and use of IP networks fail to become a widely
accepted method of conducting business and exchanging information, our business
and results from operations may be materially and adversely affected.
The success of our business depends largely on the level of market acceptance of
our products and services.
The market for trusted Internet infrastructure products and services is
relatively new and rapidly evolving. As a result, the future demand for our
products and services is uncertain. Even if the market for electronic commerce
and online communications grows, we cannot assure you that our products and
services will become widely accepted. If the market for trusted Internet
infrastructure products and services, in general, or our products and services,
in particular, fails to grow, our business and results from operations may be
materially and adversely affected.
Our business may be negatively impacted if we cannot establish and maintain
strategic and other relationships.
One of our significant business strategies so far has been to enter into
strategic alliances or other similar collaborative relationships that enable us
to expand our product and service offerings and our customer base. An example of
this type of relationship is our arrangement with VeriSign. Our future growth
depends on our ability to establish direct seller channels and to develop
multiple distribution channels by partnering with Internet technology, or IT,
consulting firms and systems integrators and other third parties. We cannot
assure you that we can enter into additional, or maintain our existing,
strategic relationships on commercially reasonable terms, if at all. Many of our
existing relationships do not, and any future relationships may not, afford us
any exclusive marketing or distribution rights or preclude our partners from
pursuing alternative technologies or developing alternative products and
services either on their own or in collaboration with others, including our
competitors. If we fail to enter into additional strategic relationships, we
would have to devote substantially more of our own resources to develop,
distribute, sell and market our products and services than we do currently. In
addition, our strategic partners may not view their relationships with us as
significant for their own businesses and they could reduce their commitment to
us at any time in the future. If we are unable to maintain our existing
relationships or to enter into additional strategic relationships, our business
and results of operations may be materially and negatively affected.
Our business may be materially and adversely affected if an easy factoring
method is developed, techniques for attacking public key cryptography systems
advance significantly, or by negative public perception.
Our primary products and services depend on public key cryptography
technology, which is based on the application of specific mathematical
principles known as factoring. Should an easy factoring method be developed, the
security of encryption products utilizing public key cryptography technology
would be reduced or eliminated. Even if no breakthroughs in factoring are
developed, factoring problems can theoretically be solved by a computer system
significantly faster and more powerful than those currently available.
Furthermore, any significant advance in techniques for attacking cryptographic
systems could also render some or all of our existing products and services
obsolete or unmarketable. If improved techniques for attacking cryptographic
systems were ever developed, we would likely have to reissue digital
certificates to some or all of our customers, which could damage our reputation
and brand or otherwise harm our business. In addition, our business could also
be harmed by the negative publicity associated
31
with, a successful attack on cryptographic and other Internet security
technologies. This type of publicity could also hurt the public perception as to
the safety of the public key cryptography technology included in our digital
certificates.
Many of our trusted Internet infrastructure products and services have lengthy
sales and implementation cycles, which could negatively impact our business.
The sale and implementation of our trusted Internet infrastructure
products and services typically involves a lengthy education process of
potential customers and a significant technical evaluation and commitment of
capital and other resources by such customers. This process is also subject to
the risk of delays associated with customers' internal budgeting and other
procedures for approving large capital expenditures, deploying new technologies
within their networks and testing and accepting new technologies that affect key
operations. As a result, the sales and implementation cycles associated with our
products and services can be lengthy, potentially lasting from three to six
months, and unpredictable. Our financial results could be negatively impacted if
orders forecasted for a particular quarter are delayed or not realized.
We face significant competition from competitors which are much larger than we
are and have longer operating histories, larger client bases, greater brand or
name recognition and significantly greater financial, technical, marketing and
public relations resources than we have.
The market for services that enable trusted and secure electronic commerce
and communications over IP networks is intensely competitive and we expect this
competition to continue for the foreseeable future. Our principal competitor in
Denmark is TDC A/S (formerly, TeleDanmark A/S). On an international level our
competitors, among others, include Baltimore Technologies, PLC. and EnTrust
Technologies, Inc.. These competitors are much larger than we are and have
longer operating histories, larger client bases, greater brand or name
recognition and significantly greater financial, technical, marketing and public
relations resources than we have. In addition, there are relatively few barriers
preventing new competitors from entering the markets in which we operate.
Furthermore, we do not own any patented technology and our competitors may
develop new technologies in the future that are perceived as being more secure,
effective or cost efficient than the technology underlying our products and
services. Increased competition could result in pricing pressures, reduced
margins or the failure of our trusted Internet infrastructure products and
services to achieve or maintain market acceptance, any of which could harm our
business.
Our business depends largely on our ability to keep pace with changing
technologies. If we are unable to respond quickly and cost-effectively to
changing Internet and communications technologies and devices and changes in
customer tastes and preferences, our business will be harmed.
The emerging nature of the Internet in general and of trusted Internet
infrastructure products and services, in particular, requires us to continually
update our products and service offerings, particularly in response to
competitive offerings and to make sure they are compatible with and take
advantage of new technologies and changes in consumer tastes and preferences.
Since we do not own any proprietary technology, we rely on our strategic
partners to provide us with state-of-the-art products and services. The success
of any new products and services depends on several factors, including
performance, features, reliability and cost. Updating our
32
technology internally and licensing new technology from third parties may
require us to incur significant additional capital expenditures. Our inability
or the inability of our suppliers to respond quickly and cost-effectively to
changing Internet and communications technologies and devices and changes in
customer tastes and preferences, could make our existing service offering
non-competitive and may cause us to lose market share. We cannot be certain that
we will successfully develop, acquire and market new trusted Internet
infrastructure products and services and have access to third-party technology
that respond to competitive and technological developments and changing customer
needs.
System interruptions and security breaches could harm our business.
Our success depends on the uninterrupted operation of our computer
and communications systems and the integrity of our data center in S0borg,
Denmark. It is critical to our business strategy that this facility and
infrastructure remain secure and are perceived by the marketplace to be secure.
We must protect these systems and our data center from loss, damage or
interruption caused by fire, natural disaster, power loss, telecommunications
failure, physical break-ins, computer viruses, and attacks by hackers or similar
disruptive problems. For example, our ability to issue digital certificates
depends on the efficient operation of the Internet connections from customers to
our data center. These connections depend upon efficient operation of web
browsers, Internet service providers and Internet backbone service providers.
Any problems or outages could decrease customer satisfaction. In addition, all
confidential customer information is stored in our data center. A system
failure, electronic break-in or other security breach or other similar event
that results in the deletion of client data or otherwise compromises any of the
information stored on our systems could have an adverse impact on our reputation
and our business. Finally, if our back office billing and collections
infrastructure and telecommunications systems cannot meet the demands of the
increasing number of customer e-mails and telephone calls, our customer support
service and our ability to process, bill and collect registration requests in a
timely manner could be substantially degraded. Any damage or failure that causes
interruptions to our computer and communications systems could materially harm
our business. We may have to expend significant time and money to maintain or
increase the security of our data center and infrastructure.
Our results from operations may be negatively impacted if we are not able to
establish a brand identity in the trusted Internet infrastructure services
market.
We believe that establishing and maintaining a good reputation and
name recognition is critical to our success. We also believe that the importance
of reputation and name recognition will increase due to the growing number of
companies providing trusted Internet infrastructure products and services. Over
the last three years, we have gone through several name changes as our business
has evolved. In 1999, we changed our name from Telepartner A/S to euro909.com
A/S and in December 2001 to EuroTrust A/S. Our plan is to aggressively promote
the name EuroTrust and to establish a brand identity in the market for trusted
Internet infrastructure products and services. Our brand-enhancement strategy
includes mass market and multimedia advertising, promotional programs and public
relations activities. In addition, promoting and enhancing our name depends
largely on our success in providing uninterrupted high quality services. We
intend to make significant expenditures on advertising and promotional programs
and activities. We cannot assure you that our efforts will lead to an increase
in net revenues sufficient to cover our advertising and promotional expenses. To
build brand identity we must provide high quality services at a competitive
price. If our reputation is damaged or if potential clients are not aware of the
products and services we provide, or if our clients do not perceive our
33
services as effective, reasonably priced or qualitatively better than the
competition, our reputation could be materially and adversely affected and we
could lose market share.
Our long-term growth strategy assumes that we make suitable acquisitions and
investments. If we are unable to address the risks associated with acquisitions
and investments our business could be harmed.
Our long-term growth strategy includes identifying and, from time to time,
acquiring or investing in suitable candidates on acceptable terms. In
particular, we intend to acquire or make investments in businesses that provide
products and services that expand or complement our existing businesses and
expand our geographic reach. In pursuing acquisition and investment
opportunities, we may compete with other companies having similar growth and
investment strategies. Competition for these acquisition or investment targets
could also result in increased acquisition or investment costs and a diminished
pool of businesses, technologies, services or products available for acquisition
or investment. Our long-term growth strategy could be impeded if we fail to
identify and acquire or invest in promising candidates on terms acceptable to
us.
Assimilating acquired businesses involves a number of other risks,
including, but not limited to:
o disrupting our business;
o incurring additional expense associated with a write-off of a
portion of goodwill and other intangible assets due to changes in
market conditions or the economy in the markets in which we compete
or because acquisitions are not providing the benefits expected;
o incurring unanticipated costs or unknown liabilities;
o managing more geographically-dispersed operations;
o diverting management's resources from other business concerns;
o retaining the employees of the acquired businesses;
o maintaining existing customer relationships of acquired companies;
o assimilating the operations and personnel of the acquired
businesses;
o incorporating acquired technologies into our existing products and
services; 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.
34
Rapid growth in our business could strain our managerial, operational,
financial, accounting and information systems, customer service staff and office
resources. If we fail to manage our growth effectively, our business may be
negatively impacted.
In order to achieve our growth strategy, we will need to expand all
aspects of our business, including our computer systems and related
infrastructure, customer service capabilities and sales and marketing efforts.
We cannot assure you that our infrastructure, technical staff and technical
resources will adequately accommodate or facilitate our expanded operations. To
be successful, we will need to continually improve our financial and managerial
controls, billing systems, reporting systems and procedures, and we will also
need to continue to expand, train and manage our workforce. In addition, as we
offer new products and services, we will need to increase the size and expand
the training of our customer service staff to ensure that they can adequately
respond to customer inquiries. If we fail to adequately train our customer
service staff and provide staffing sufficient to support our new products and
services, we may lose customers.
We may become subject to burdensome government regulations and legal
uncertainties affecting the Internet.
To date, government regulations have not materially restricted the use of
the Internet. However, the legal and regulatory environment pertaining to the
Internet is uncertain and may change. Both new and existing laws may be applied
to the Internet covering issues that include:
o taxes;
o user privacy;
o pricing controls;
o characteristics and quality of products and services;
o consumer protection;
o cross-border commerce;
o libel and defamation;
o copyright, trademark and patent infringement; and
o other claims based on the nature and content of Internet materials.
New laws or regulations or the new application or interpretation of
existing laws or regulations could hinder the growth in use of the Internet and
other online services generally and decrease the acceptance of the Internet and
other online services as a means of communications, commerce and advertising.
Our business may be harmed if any slowing of the growth of the Internet reduces
the demand for our services. In addition, new legislation could increase our
costs of doing business and prevent us from delivering our products and services
over the Internet at reasonable cost, which may harm our business.
35
Our international presence creates risks that may adversely affect our business.
Currently, our operations focus on the Scandinavian, Austrian and Swiss
markets. Our business plan contemplates expanding our operations into other west
European countries. In addition to the uncertainty as to our ability to
successfully expand our Scandinavian and European 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.
We compete in the highly competitive broadcasting industry.
The Danish broadcast industry is highly competitive and dominated by a few
large companies. As a result of competition, we consolidated our broadcast
operations into one channel. In addition, we expect that the number of channels
competing for the places in the TeleDanmark Kabel programming network will
increase in the ensuing years. If viewer preferences change and we are
unsuccessful in addressing those changes in our programming, we may lose favor
with them and they may choose to view a competitor's channel over ours.
If we are unable to negotiate a renewal of our contract with TeleDanmark Kabel
the revenues from our broadcasting business may be adversely affected.
Our dk4 television channel is carried as part of the 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. Our agreement with TeleDanmark Kabel to carry dk4 as part of
its basic package expires on March 31, 2004. If we are unable to renew this
agreement the revenues from our broadcasting business would decrease
significantly and the results of operations from our broadcasting business would
be materially adversely affected. We cannot assure you that we will successfully
negotiate a renewal of our agreement with TeleDanmark Kabel.
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 and technology
personnel from a number of sectors, including technology and Internet companies.
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, Bertel Jensen, Brian Mertz Pedersen and
Tobias Wahlgren, our chief executive officer,
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chief financial officer, chief operating officer and chief technology officer,
respectively. 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. We do not engage in hedging or
other risk management activities in order to offset the risk of currency
exchange rate fluctuations. We cannot predict in any meaningful way the effect
of exchange rate fluctuations upon future results. If the value of the Danish
kroner depreciates and the currencies of the countries in which we operate
appreciate or remain stable our results from operations may be negatively
affected.
The market price of our ADSs may decline if the value of the Danish Kroner falls
against the US dollar.
Fluctuations in the exchange rate between the Danish kroner and the US
dollar are likely to affect the market price of our ADSs. For example, because
EuroTrust's financial statements are reported in Danish kroners, if the value of
the Danish kroner falls against the US dollar, EuroTrust's earnings per share in
US dollars will be reduced. This may adversely affect the price at which our
ADSs trade in the US.
There is a limited public market for our securities and our securities may
experience extreme price and volume fluctuations.
Our ordinary shares are not listed on any securities exchange or market.
However, our ADSs are quoted on the Nasdaq Small Cap Market. The market price of
our ADSs may fluctuate significantly in response to various factors and events,
including:
o variations in our operating results;
o the liquidity of the markets;
o investor perceptions of us and the industry in which we operate;
o changes in earnings estimates by analysts;
o sales of ADSs by existing holders; and
o general economic conditions.
In addition, Nasdaq has recently experienced broad price and volume
fluctuations, particularly in the technology sector. This volatility has had a
significant effect on the market price of securities of companies for reasons
that have often been unrelated to their operating performance. These broad
market fluctuations may also adversely affect the market price of our ADSs and
as a result, holders of our ADSs may lose a significant portion of their
investment.
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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. Payment of any future dividends
will depend on our earnings and capital requirements, and other factors our
board of directors deem appropriate.
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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: November 12, 2003 By: /s/ Bertel E. Jensen
----------------------------
Bertel E. Jensen
Chief Financial Officer
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INDEX TO EXHIBITS
Exhibits
32.1 Chief Executive Officer Certification pursuant to Rule 13a-14(b) or Rule
15d-14(b) and 18 U.S.C. Section 1350.*
32.2 Chief Financial Officer Certification pursuant to Rule 13a-14(b) or Rule
15d-14(b) and 18 U.S.C. Section 1350.*
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* Included herewith.
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