As filed with the Securities and Exchange Commission on June 23, 2006
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
|_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
|_| SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of event requiring this shell company report _________________________
For the transition period from __________ to __________
Commission File No.: 0-30690
EUROTRUST A/S
f/k/a
Euro909.com A/S
(Exact name of Company as specified in its charter)
EUROTRUST A/S THE KINGDOM OF DENMARK
(Translation of Company's name (Jurisdiction of incorporation
into English) or organization)
POPPELGAARDVEJ 11-13
2860 SOEBORG DENMARK
(Address of principal executive offices)
Securities registered or to be
registered pursuant to Section 12(b)
of the Act: None
Securities registered or to be
registered pursuant to Section 12(g)
of the Act: None
Securities for which there is a American Depositary Shares, each
reporting obligation pursuant to representing one ordinary share,
Section 15(d) of the Act: nominal value DKK 7.50 per ordinary
share.
Indicate the number of outstanding
shares of each of the Company's
classes of capital or common stock as
of close of the period covered by the Ordinary shares 5,826,232
annual report (December 31, 2005): American Depositary Shares: 5,799,351
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes |_| No |X|
If this report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
Yes |_| No |X|
Note - Checking the box above will not relieve any registrant required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 |_| Item 18 |X|
If this is an annual report, indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
TABLE OF CONTENTS
PAGE
EXCHANGE RATE INFORMATION......................................................4
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS................5
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE..............................5
ITEM 3. KEY INFORMATION......................................................5
ITEM 4. INFORMATION ON THE COMPANY...........................................8
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS........................28
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES..........................41
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS...................47
ITEM 8. FINANCIAL INFORMATION...............................................49
ITEM 9. THE OFFER AND LISTING...............................................49
ITEM 10. ADDITIONAL INFORMATION..............................................51
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........55
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES..............56
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.....................56
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS.................................................56
ITEM 15. CONTROLS AND PROCEDURES.............................................56
ITEM 16. RESERVED............................................................56
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT....................................56
ITEM 16B. CODE OF ETHICS......................................................57
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES..............................57
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT.....................57
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED.........57
ITEM 17. FINANCIAL STATEMENTS................................................58
ITEM 18. FINANCIAL STATEMENTS................................................58
ITEM 19. EXHIBITS............................................................59
SIGNATURES....................................................................60
2
EXCHANGE RATE INFORMATION
In this annual report, unless otherwise specified or unless the context
otherwise requires, all references to "$" or "dollars" are to U.S. dollars and
all references to "DKK" are to Danish kroner. We have converted DKK amounts as
of December 31, 2005 into U.S. dollars at an exchange rate of $1.00 = DKK
6.3241, which was the noon buying rate on December 31, 2005, the last business
day of the year. We do not make any representation that the Danish kroner
amounts could have been, or could be, converted into U.S. dollars at that rate
on December 31, 2005, or at any other rate.
Unless specifically indicated or the context clearly indicates otherwise
all references to our ordinary shares shall include our American Depositary
Shares (ADSs) and vice-versa.
------------
WE USE THE TERMS "WE", "OUR", "US", EUROTRUST" AND "THE COMPANY" TO MEAN
EUROTRUST A/S AND ITS SUBSIDIARIES AND THEIR RESPECTIVE PREDECESSORS.
------------
AS NO INDEPENDENT SOURCES OF INDUSTRY DATA ARE AVAILABLE, INDUSTRY DATA
CONTAINED HEREIN, INCLUDING MARKET SIZE DATA, ARE BASED ON OUR ESTIMATES WHICH
ARE DERIVED FROM INTERNAL MARKET STUDIES AND MANAGEMENT CALCULATIONS.
------------
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 20-F contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995 regarding
our plans and objectives and future operations. Forward-looking statements
attempt to predict future occurrences and are identified by words like
"believe," "may," "intend," "will," "expect," "anticipate," "estimate" or
"continue," or other comparable terms. Forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from any future
results, performance or achievements expressed or implied by these
forward-looking statements. The forward-looking statements included in this
report are based on current expectations that involve numerous risks and
uncertainties. Our plans and objectives are based, in part, on assumptions
involving judgments about, among other things, future economic, competitive and
market conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control.
Although we believe that our assumptions underlying the forward-looking
statements are reasonable, any of these assumptions could prove inaccurate and,
therefore, we cannot assure you that the forward-looking statements included in
this report will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included in this report, you should
not assume, and we cannot assure you, that we can achieve our objectives or
implement our plans. Such statements speak only as of the date hereof and are
subject to change. We undertake no obligation to revise or update publicly any
forward-looking statements for any reason. Factors that could cause our actual
results to differ materially from those expressed or implied by forward-looking
statements include, but are not limited to, our ability to identify new under
valued opportunities for investment or acquisition; the potential unforeseen
impact of product or service offerings from competitors; our ability to raise
additional capital should it be required to finance our growth aspirations; our
ability to negotiate appropriate strategic relationships; our ability to control
costs and expenses; and general economic and political conditions and specific
conditions in the markets we address and the factors set forth under the
headings "Key Information - Risk Factors" (Item 4.C), "Information on the
Company" (Item 4) and "Operating and Financial Review and Prospects" (Item 5).
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not required because this Form 20-F is filed as an Annual Report.
3
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not required because this Form 20-F is filed as an Annual Report.
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below as of December
31, 2001, 2002, 2003, 2004 and 2005 and for the years then ended have been taken
or are derived from our audited consolidated financial statements for those
periods. The selected consolidated financial data have been prepared in
accordance with generally accepted accounting principles in the United States of
America ("GAAP").
Effective October 1, 2000, we changed our method of accounting for
revenue recognition of domain name registration revenue in accordance with Staff
Accounting Bulletin (SAB) No.101 (SAB 101), REVENUE RECOGNITION IN FINANCIAL
STATEMENTS. Under SAB 101, which was adopted retroactively to January 1, 2000,
we recognized revenues rateably over the period the customer is provided access
to the registry through our servers. Before SAB 101 became effective, we
recognized revenue from initial registration of domain names when the
registration process was complete and annual service fees (registration renewal
fees) were recognized when invoiced to the customer. On July 21, 2001, we sold
our domain name registration service business, which was a part of our internet
services segment, to VeriSign, Inc. ("VeriSign.") In December 2001 we sold our
print and online media business; GAAP requires that the results of operations
from a discontinued segment be segregated from the results of operations from
our continuing business segments. As a result, our Consolidated Statement of
Operations and Consolidated Statement of Cash Flows for the fiscal year ended
December 31, 2001 and 2002 reflect the fact that the print and online media
business is treated as a discontinued operation.
On May 19, 2005 our shareholders approved a one for six reverse split of
our ordinary shares such that six ordinary shares nominal value DKK 1.25 were
combined into one ordinary share nominal value DKK 7.50 ("New Ordinary Shares").
In lieu of issuing a fraction of a New Ordinary Share, we paid to each holder
the value thereof based upon the closing price of an ADS on the NASDAQ Small Cap
Market on May 19, 2005. All information contained in this annual report has been
presented as if such reverse stock split occurred as of January 1, 2001.
The financial information presented below is only a summary and should
be read together with our consolidated financial statements included elsewhere
in this report.
4
CONSOLIDATED STATEMENT OF OPERATIONS DATA:(1)
YEAR ENDED DECEMBER 31,
-----------------------
2001 2002 2003 2004 2005 2005
-------- -------- -------- -------- -------- --------
DKK DKK DKK DKK DKK US$
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue 151,914 92,028 109,822 91,036 94,652 14,967
Total operating expenses 347,922 161,000 116,269 110,759 118,405 18,723
-------- -------- -------- -------- -------- --------
Operating loss (196,008) (68,972) (6,447) (19,723) (23,753) (3,756)
======== ======== ======== ======== ======== ========
Net (loss) income from
continuing operations 18,165 (97,363) (7,959) (26,251) (9,982) (1,578)
======== ======== ======== ======== ======== ========
Net (loss) income from
discontinued operations (10,460) (185,985) 1,629 84,705 2,058 326
======== ======== ======== ======== ======== ========
Net (loss) income 7,705 (283,348) (6,330) 58,454 (7,924) (1,252)
======== ======== ======== ======== ======== ========
(Loss) Income from continuing operations
per average common share, basic 4.50 (22.33) (1.70) (5.30) (1.82) (0.29)
======== ======== ======== ======== ======== ========
(Loss) Income from discontinued operations
per average common share, basic (2.58) (42.66) 0.35 17.12 0.38 0.06
======== ======== ======== ======== ======== ========
Net (loss) income per average
common share, basic 1.92 (64.99) (1.35) 11.82 (1.45) (0.23)
======== ======== ======== ======== ======== ========
(Loss) Income from continuing operations
per average common share, diluted 4.38 (22.33) (1.70) (4.99) (1.82) (0.29)
======== ======== ======== ======== ======== ========
(Loss) income from discontinued operations
per average common share, diluted (2.52) (42.66) 0.35 16.09 0.38 0.06
======== ======== ======== ======== ======== ========
Net (loss) income per average common
share diluted 1.86 (64.99) (1.35) 11.10 (1.45) (0.23)
======== ======== ======== ======== ======== ========
Weighted average number of common
shares outstanding, basic 4.030 4,360 4,671 4,947 5,478 5,478
======== ======== ======== ======== ======== ========
Weighted average number of common
shares outstanding diluted 4,124 4,360 4,671 5,266 5,478 5,478
======== ======== ======== ======== ======== ========
----------
(1) In June 2001, the FASB issued SFAS 142 fully effective for fiscal years
beginning after December 15, 2001, which changed the accounting for goodwill
from an amortization method to an impairment-only approach. We adopted the
provisions of SFAS 142 effective January 1, 2002. If the standards of SFAS
142 had been in effect beginning January 1, 2000 then (i) for the year ended
December 31, 2000 our net loss would have been DKK 142,431 and both our basic
and diluted loss per common share would have been DKK 50.28; and (ii) for the
year ended December 31, 2001 our net income would have been DKK 12,364, our
basic income per common share would have been DKK 3.06 and our diluted income
per common share would have been DKK 3.00.
5
INTERNET SERVICES:
Revenue 72,183 20,008 21,203 23 0 0
Total operating expenses 238,112 95,554 28,838 14,478 10,280 1,626
-------- -------- -------- -------- -------- --------
Operating loss (165,929) (75,546) (7,635) (14,455) (10,280) (1,626)
======== ======== ======== ======== ======== ========
BROADCAST MEDIA:
Revenue 79,731 72,020 88,619 91,013 94,652 14,967
Total operating expenses 109,810 65,446 87,431 96,281 108,125 17,097
-------- -------- -------- -------- -------- --------
Operating income (loss) (30,079) 6,574 1,188 (5,268) (13,473) (2,130)
======== ======== ======== ======== ======== ========
DISCONTINUED OPERATIONS, NET (LOSS) GAIN: (10,460) (179,985) (8,420) 1,090 0 0
======== ======== ======== ======== ======== ========
CONSOLIDATED BALANCE SHEET DATA:
AS OF DECEMBER 31,
------------------
2001 2002 2003 2004 2005 2005
-------- -------- -------- -------- -------- --------
DKK DKK DKK DKK DKK US$
(IN THOUSANDS)
Total assets 445,611 168,217 140,845 178,248 160,953 25,451
Net assets 333,168 44,242 46,360 101,566 109,217 17,271
Capital stock 34,006 34,006 39,693 38,312 43,697 6,910
Working capital (deficit) 137,256 (4,280) (35,674) (19,447) 5,158 817
Number of ordinary shares outstanding 4,534 4,534 5,292 5,108 5,826 5,826
We have never paid any dividends on our ordinary shares.
EXCHANGE RATE INFORMATION
The exchange rate on June 12, 2006 (the latest practicable date) was DKK
5.9301 per $1.00. The following table sets forth (i) the average exchange rate
for the years 2001, 2002, 2003, 2004 and 2005 calculated using the average
exchange rate on the last day of each month of the relevant year and (ii) the
high and low exchange rates for each of the most recent six months. (All rates
are expressed as Danish kroner per U.S. dollar.)
AVERAGE
-------
YEAR ENDED DECEMBER 31:
-----------------------
2001 DKK 8.3619
2002 DKK 7.8897
2003 DKK 6.5899
2004 DKK 5.9893
2005 DKK 6.0034
MONTH ENDED: HIGH LOW
------------ ---- ---
June 2006 (as of June 12, 2006) DKK 5.9301 DKK 5.8201
May 2006 DKK 5.9221 DKK 5.7875
April 2006 DKK 6.1861 DKK 5.9510
March 2006 DKK 6.2619 DKK 6.1236
February 2006 DKK 6.2964 DKK 6.1732
January 2006 DKK 6.3082 DKK 6.0700
December 2005 DKK 6.3712 DKK 6.1982
6
B. CAPITALIZATION AND INDEBTEDNESS
Not required because this Form 20-F is filed as an Annual Report.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not required because this Form 20-F is filed as an Annual Report.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT
We are a Danish limited company, organized in 1986 under the Danish Act
on Limited Companies of the Kingdom of Denmark. Originally, we were organized
under the name Telepartner A/S. In 1999 we changed our name to euro909.com A/S
and in December 2001 we changed our name to EuroTrust A/S. Our registered office
is Poppelgaardvej 11-13, 2860 Soeborg, Denmark. Our telephone number is +45 39
54 00 00.
OUR BUSINESS
Until December 2001, our business operated in three distinct areas:
Internet products and services; broadcasting; and print and online media. In
early 2001 we made the strategic decision to focus primarily on providing
Internet infrastructure products and services and e-commerce solutions in
Scandinavia and selected west European markets and on key elements of our
broadcasting business. To that end, in 2001, we sold our domain name
registration, the remaining assets of our historical telecommunications business
and our print and online media businesses, and consolidated our television
programming business. As of January 1, 2004, we sold our secure internet hosting
business, our digital video surveillance business and our secure remote back-up
business. As a part of these transactions, we will continue to receive royalty
payments from future sales of the secure hosting and remote back-up services
that we formerly marketed. We sold our PKI services business to VeriSign, Inc.
("VeriSign.") on April 1, 2004. We sold the last of our Internet related
business, our virus detection software and services business on September 30,
2004.
As a result of these various transactions, subsequent to September 30,
2004 our business consisted of our broadcast media division, which owns dk4, a
Danish television station and operates the television production company Prime
Vision.
The proceeds from our divestitures in 2004 allowed us to invest more
than $10 million U.S. in Prime Vision. Prime Vision owned one of Europe's first
High Definition mobile production units, five fully digitalized mobile
production units and two mobile analog production units that we rebuilt into
digital units during 2005. We used these assets to produce content both for our
own broadcast operations and for outside clients.
In addition to our television production operations, we continued to
expand our media content platforms in 2004. Our original television channel,
dk4, increased its subscriber base to record levels. Late in 2004, we also added
a new speciality television channel, 4SPORT, to focus on coverage of both Danish
sports, in cooperation with The Danish Sports Association, and international
sporting events of particular interest to Danish fans.
7
On November 29, 2005, we entered into agreements to acquire all of the
capital stock of Aktiv Gruppen A/S, a Danish company which operates in two
distinct lines of business, namely the development and sale of residential real
estate projects in Denmark and Norway, and the operation of wind energy farms in
Germany. On April 17, 2006 we consummated our acquisition of Aktiv Gruppen.
On May 4, 2006 we entered into an agreement to sell three of our seven
mobile television production vans, our Prime Vision brand name and the external
customer base of Prime Vision.
On June 2, 2006 we completed the sale of our media business by selling
all of the outstanding shares of Europe-Visions A/S to Tritel Investment, Inc.
As a result of the sale of Europe-Visions A/S as of June 2, 2006, our
business consists of our property development operations and our wind energy
operations.
B. BUSINESS OVERVIEW
DESCRIPTION OF CONTINUING BUSINESS
REAL ESTATE DEVELOPMENT
Our real estate development segment, through various wholly owned
subsidiaries and corporate joint ventures, primarily develops homeowner
condominiums, complexes, single family homes, recreational homes and
multi-family rental complexes throughout Denmark and Norway. The development
occurs as we: 1) seek out desirable locations for property development, 2)
acquire permission for resale of a finalized development project, 3) acquire the
land or options to purchase the land, 4) design the project in cooperation with
outside architects and engineers, 5) acquire governmental permission to build
the project, 6) pre-sell through local real estate agents a minimum number of
units, requiring purchasers to sign a binding sales contract and guarantee, 7)
construct the properties through outside construction contractors and 8) sell
remaining units, if any.
In order to minimize our potential exposure in this area we generally do
not begin construction of each stage of the development project until at least
75% of the units to be developed in that stage of the project have been
contracted for by purchasers who put down a small deposit and deliver to us a
bank guarantee for the remainder of the purchase price.
We sell these units primarily through local real estate agents to whom
we pay a commission for each sale.
Generally, if we are unable to obtain contracts for 75% of the units
within a designated period of time we will return the deposits and bank
guarantees to the prospective purchasers and will not begin development of the
project. Additionally, in these instances if the land on which the project was
to be built was not owned by us, but was subject to our option, we will not
exercise the option to acquire the land.
Operating under this methodology we generally do not obligate the
Company to incur expenditures for a particular project until we have assured
ourselves that the revenue to be received in regard to the number of units that
have been pre-sold will cover substantially all of our expenses associated with
the project.
As of June 1, 2006 we have under development, projects to construct 316
units in Denmark and 231 units in Norway. We expect to complete construction of
these units over the next two years.
8
We also have options to acquire land and/or own land for the development
of 2,473 units in Denmark and 1,400 units in Norway.
We also own recreational property timeshare units in Helsingor, Denmark
for resale and we own a 565 square meter office property in Koge, Denmark which
is leased to third parties.
WIND ENERGY
In June 2005, Aktiv Gruppen acquired six operating windmills located in
windparks in Germany. The Company also holds a 25% equity interest in an
additional windmill in Germany. Each respective windmill or windpark has entered
into 20 year agreements with German electric utilities companies, to sell all of
the electricity generated. The agreements have fixed prices. The manufacturers
have agreed to operate the windparks at a fixed percentage of revenue. When the
windmills were purchased the manufacturers guaranteed that they would be in full
operation for 97% of each year for the ten years after installation. The Company
has leased the land on which the windparks are located for 20 years with two
five year options to extend the lease.
Aktiv Gruppen plans to continue to expand this segment through the
development and operation of windmill energy parks throughout Europe, where we
believe there is a strong consumer and government preference for renewable and
alternative non-polluting energy sources, resulting in attractive government
subsidies and tax benefits from accelerated depreciation. We expect this
political climate to persist in the near future.
In May 2006 we entered into an agreement to acquire a 50.25% interest in
European Wind Farms A/S. European Wind Farms is currently developing wind energy
farms in Germany, Italy, Poland, Bulgaria, Lithuania and France. European Wind
Farms current projects will have an installed capacity of approximately 200
megawatts generating approximately 400 million kilowatt hours of electric power
on a yearly basis. The wind farms under development are all expected to be
operational within two years. European Wind Farms is in the final stages of
negotiations for the project rights to develop additional wind farms with an
installed capacity of 300 megawatts.
Windmills installed in countries other than Germany will not have
government fixed prices and therefore, the amount we receive for the sale of the
electricity generated by the windmills is subject to the then prevailing market
price for electricity. However in these countries when the windmill begins
operation we will in some of the other countries be given a "green certificate"
because the energy we generate is non-polluting. These certificates allow energy
companies to create a certain amount of pollution from their energy production
and therefore these certificates can be sold to companies that produce energy
from sources that are not "non-polluting", such as oil and coal. A market has
developed in Europe for the sale of these "green certificates." In determining
where and when to put up new windmills we will consider both the expected market
price of electricity and the value of the "green certificates."
The amounts of electricity that can be generated by a windmill is
dependent upon the amount of wind at the specific site and therefore before we
decide where to establish a wind farm we review existing historical wind studies
and, if necessary, commission our own wind measurement study.
DESCRIPTION OF HISTORIC BUSINESS
MEDIA
For most of 2001 we operated two television channels, dk4 and Bio+. Both
channels were carried by TDC on Cable, formerly known as TeleDanmark, Denmark's
largest cable operator. In
9
October 2001 we consolidated the programming of both channels into dk4, and
expanded its programming by covering European Union parliament sessions and
joining the Pan-European Parliament TV network. This decision was a result of
the fact that the agreement with TDC to broadcast dk4 was extended and Bio+ was
not. Also in 2001, we entered into two new distribution agreements and a new
programming agreement for dk4. Specifically, we entered into distribution
agreements with the Danish digital satellite television service provider Canal
Digital A/S. In December 2003, we entered into a new four-year agreement with
Canal for the continued distribution of dk4 programming on their digital
satellite television network extending our relationship to December 31, 2007. In
December 2003 we reacquired the remaining 15% minority interest in our broadcast
business that we had previously sold to Parken Sport and Entertainment A/S for
DKK 12 million in December 2001. In March 2004 we entered into a new agreement
with TDC on Cable extending our relationship to December 31, 2006. Late in 2004,
we also added a new speciality television channel, 4SPORT, to focus on coverage
of both Danish sports, in cooperation with The Danish Sports Association, and
international sporting events of particular interest to Danish fans.
DK4
We acquired dk4 in October 1999. As of December 31, 2005, approximately
44% of all households in Denmark had access to dk4. In 2001, dk4 launched its
revised Internet platform. The homepage contains live video streaming, enabling
subscribers to watch part of dk4's broadcasts live over the Internet.
dk4's principal programs are in the areas of culture, education, sports
and politics:
o POLITICS. dk4 broadcasts proceedings of the Danish Parliament,
including debates and selected expert hearings. During 2002, dk4
offered more than 50 programs on the European Union, among these
roundtable discussions and presentation of Members of
Parliament, including the former and the present President of
the European Parliament plus selected Members of the European
Commission. In 2001, dk4 was acknowledged as a European Channel
by the European Parliament and joined the discussion forum for
Parliamentary Channels in the European Union ("EU"). In 2003,
dk4 has continued to focus on broadcasting programming from the
EU. In conjunction with the European Parliament, dk4 produced an
educational video for Danish high schools on "Model European
Parliament" (a multicultural conference for young people on the
inner workings of the EU).
o SPORTS. Beginning in 2002, dk4 offered a number of niche sports
programs.
o CULTURE. dk4 offers programs focusing on theatre, opera,
literature, classical music and history. In the 2000/2001
season, programs on contemporary art and fine wines were added.
Furthermore, a number of musical shows were introduced and the
number of such shows was increased in 2002.
o EDUCATION. Educational offerings include lectures given at the
newly founded "DK4 University", a series which is also
integrated with the Internet. In 2001, an add-on to this series
was introduced through the "EU University" with a number of
lectures on current EU topics such as Enlargement and the future
Constitution of the EU. In 2002, we introduced an educational
series on use of PCs.
PRIME VISION
In October 1999, dk4 acquired Prime Vision, or PV, a production company.
PV assists others in broadcasting live events and also produces original
programs for dk4 as well as for other television channels. Throughout 2005 PV
owned and operated seven large mobile vans used in the broadcasting of
10
live events and for the production of original television programming. These
vans include all of the necessary equipment required for these productions,
including cameras and sound equipment. PV employs the technicians such as
cameramen and sound engineers who are expert in the appropriate operation of the
equipment. Therefore, PV could offer a complete package of production equipment
and personnel to broadcasters who broadcast live events and to companies who
produce original programming. One of our primary objectives was for PV to become
the leading production facility house in Scandinavia. By the end of 2003 PV was
among the three leading production companies in Denmark and has been employed as
a production company for the Danish Premier Soccer League and a number of other
sports productions.
BIO+
We acquired Bio+ in September 1999. As a result of a strategic alliance
with Fox Kids Europe in January 2000, we repackaged and relaunched the channel.
As repackaged, Bio+'s primary offering was Danish movies. In October 2001, we
combined the operations of Bio+ with those of dk4.
INTERNET PRODUCTS AND SERVICES
We sold the remainder of our businesses in Internet products and
services division during 2004 through the sale of our PKI services business, on
April 1, 2004, and our virus detection software and services business on
September 30, 2004. As a result, subsequent to September 30, 2004 our business
consists of our broadcast media division, which owns dk4, a Danish television
station and operates the television production company Prime Vision.
The following is a description of the Internet products and services we
provided through year 2004:
VIRUS SURVEILLANCE/DETECTION/SUPPORT, SECURITY PENETRATION TESTING/
ANALYSIS. Gartner research indicates that the IT security-consulting sector
represents the largest share of the Western European IT security market. To
address this sector, we offered the Scandinavian business community an array of
virus detection products and services marketed under our Virus 112 brand name.
Through our wholly-owned subsidiary, EuroTrust Virus112 A/S ("Virus112"), we
offered a suite of IT security consulting services including sophisticated virus
detection software, IT security support, security gap penetration assessments
and system vulnerability testing to more than 2,000 businesses in Denmark and
Norway. Offered on a subscription basis, Virus112's Early Warning System scans
the Internet for potential threats and immediately notifies its clients via fax,
email and text messaging of any potential outbreaks, minimizing the risk of
potential infections. In September 2001, Virus112 expanded its business by
offering IT security consulting services that emphasize risk assessment and
penetration testing services. In October 2002, Virus112 expanded its product
offerings by adding the following:
o "Virus112 Mail Scanning," a 24x7 e-mail surveillance and virus-scanning,
recognition and removal technology;
o "Virus112 Spam Scanner," a 24x7 automated guard against spam emails
which also provides the customer with a monthly report and online access
to information on email activity and blocked e-mails; and
o "EuroTrust Security Scanner," (ESS) a scanning system that scans
external IP addresses for potential security risk, to prevent viral
attacks through the Internet.
PUBLIC KEY INFRASTRUCTURE (PKI) SERVICES. PKI services, as well as
digital signatures and certificates, enable both companies and private
individuals to encrypt their online communications and ensure confidentiality.
Until our sale of this business to VeriSign effective April 1, 2004, we sold PKI
services under the VeriSign Managed PKI Service (MPKI) and VeriSign Go Secure!
brands, and tailored them to meet the specific needs of enterprises that wished
to issue digital certificates to employees, customers, citizens or trading
partners.
11
In November 2000, we became part of VeriSign's Global Affiliate Network,
an expanding group of international service providers using common technology,
operating practices and infrastructure, compliant with the European Union (EU)
common criteria requirements, to deliver interoperable trust services over the
Internet. Under our Affiliate Agreement with VeriSign, as amended, we provided
the following VeriSign trusted Internet infrastructure products and services in
Denmark, Norway, Sweden, Finland, Austria and Switzerland:
MPKI - MANAGED PKI-SOLUTIONS. MPKI is a managed service that
allows an organization to use our data processing infrastructure to
develop and deploy customized digital certificate services for use by
employees, customers and business partners. MPKI can be used to provide
digital certificates for a variety of applications, including:
controlling access to sensitive data and account information, enabling
digitally-signed e-mail, encryption of e-mail, or SSL sessions. MPKI
services can help customers create an online electronic trading
community, manage supply chain interaction and facilitate and protect
online credit card transactions.
GO SECURE! VeriSign Go Secure! services are a set of managed
application services that enable enterprises to quickly build digital
certificate-based security into their transaction and communication
applications. Go Secure! services are similar in functionality to MPKI
services and are designed to incorporate digital certificates into
existing e-mail, browsing applications, directory and virtual private
network devices. GoSecure(R) allows businesses to create a Virtual
Private Network (VPN) that integrates VeriSign's strong encryption
technology. GoSecure is also offered in cooperation with vendors of
server firewall products.
WEB SERVER DIGITAL CERTIFICATE SERVICES. Digital certificates are
electronic credentials that identify parties online, enabling encrypted online
communications and legally binding, valid digital signatures for online
transactions in e-commerce, financial services, supply-chain management, Virtual
Private Networks, and wireless and mobile commerce environments. Until April
2004, we offered a family of web server certificate services that allows
organizations to implement and operate secure websites that utilize the Secure
Sockets Layer, or SSL protocol or the Wireless Transport Layer Security, or
WTLS, protocol to establish their identities to customers and other websites
during electronic commerce transactions and communications over wired or
wireless internet protocol, or IP, networks. Without a digital certificate
installed on the website server the SSL and WTLS protocols cannot be utilized.
Given that we host more web sites on servers in our data center than any other
company in Denmark, we expect to take advantage of the current growth trend for
server security. Digital Ids can easily be created for customers and suppliers
through the MPKI administration solution.
APPLICATION ACCELERATION SERVICES. These are rapid deployment services
that secure information passed over applications such as Microsoft Exchange, SAP
and Virtual Private Networks (VPN) for e-commerce.
CONTENT SIGNING CERTIFICATES. In addition to Web Server Digital
Certificate services, until April 2004 we offered content signing certificates.
Content signing digital certificates enable developers, content providers,
publishers and vendors to digitally sign their content in order to authenticate
the source and provide assurance of the integrity of the content delivered to
end-users.
To expand and complement the services described above, our professional
services group, which includes experts in digital certificate architecture and
application integration, was staffed to provide a variety of design, development
and implementation services. These services included integrating with existing
applications and databases, consulting on policies and procedures related to the
management and
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deployment of digital certificates, training classes on the latest developments
in security technology and selecting the necessary software and hardware to
complement a digital certificate solution.
As a result of an independent examination of our PKI processing center
in Copenhagen, we received the prestigious WebTrust Seal of Assurance from KPMG.
The WebTrust seal, which was displayed on all of our web sites, indicates that
we have complied with the business standards prescribed by the American
Institute of Certified Public Accountants and the Canadian Institute of
Chartered Accountants concerning the issuance of digital certificates by
certification authorities and adopted by several European countries including
Denmark.
Until December 2003, we also offered our customers a number of other
internet security products, including secure hosting, digital video surveillance
and secure remote backup services. In December 2003, as part of our plan to
intensify our focus on our television programming business and on providing
virus detection products and services, we sold EuroTrust Secure Hosting A/S, our
secure hosting subsidiary, EuroTrust Realtime Security A/S, our digital video
surveillance subsidiary, EuroTrust Sweden AB, our Swedish subsidiary, and the
assets related to EuroTrust NetVaulting A/S, our secure remote backup business.
REMOTE DATA BACKUP SERVICES. We provided remote data backup services to
more than 300 European businesses through EuroTrust NetVaulting A/S (formerly
known as WISEhouse Denmark A/S), a wholly-owned subsidiary of EuroTrust. Remote
backup services protect the data found on company servers from the threat of
fire, hardware failure, natural disasters, theft and viruses. The backup
technology is based on IBM's Tivoli Storage Manager software.
SECURE HOSTING. We provided secure web hosting services to more than
11,000 customers in Denmark, Sweden and Norway through EuroTrust Secure Hosting
A/S ("Hosting"). Hosting was created in January 2002 as a result of the
combination of our Digiweb activity with DHT Hosting ApS, a Danish automated
hosting company.
Our hosting services were based in our secure Internet data center in
Soeborg, Denmark. The center, designed with a wide range of physical security
features, including state-of-the-art smoke detection and fire suppression
systems, 24x7 secured access and video camera surveillance, as well as security
breach alarms, is capable of housing more than 1,500 servers and delivers one of
the strongest high-availability bandwidth capacities in Europe.
REAL TIME SECURITY. Through EuroTrust RealTime Security A/S, we offered
a full service digital video security system, which provided real-time video
monitoring and remote storage of the recording via a high speed Internet
connection to a central storage location. This system was able to provide
customers with the benefits of a complete video surveillance system without the
need to purchase and maintain costly video surveillance hardware required by
most traditional Closed Circuit Television ("CCTV") monitoring systems. The
system included, among other features, the following:
o Remote viewing and surveillance;
o Offsite recording and storage of the recordings in a secured centralized
location; and
o Email confirmation of alarms to minimize false alerts
DISTRIBUTION OF SALES
The following tables set out our revenues by category and region for
each of the years ended December 31, 2003, 2004 and 2005.
13
BREAKDOWN OF REVENUES BY
CATEGORY(1)
2003 2004 2005 2005
---------------------- ---------------------- --------------------- -------------------
DKK PERCENTAGE DKK PERCENTAGE DKK PERCENTAGE US$ PERCENTAGE
------- ---------- ------- ---------- ------- ---------- ----- ----------
(CURRENCY AMOUNTS ARE IN THOUSANDS)
Internet services 21,203 19% 23 0% 0 0% 0 0%
Broadcasting 88,619 81% 91,013 100% 94,652 100% 14,967 100%
-------- --------- -------- ---------- ------- --------- ------ ---------
109,822 100% 91,036 100% 94,652 100% 14,967 100%
-------- --------- -------- ---------- ------- --------- ------ ---------
BREAKDOWN OF REVENUES BY GEOGRAPHIC MARKET(1)
2003 2004 2005
DKK % DKK % DKK % USD
------- ----- ------ --- ------ --- ------
Denmark 109,000 99.2% 84,510 93% 86,784 92% 13,723
Norway 417 0.4% - 0% - -% -
Sweden 405 0.4% 6,526 7% 7,868 8% 1,244
------------------ ------------------- ------------------- ---------
109,822 100% 91,036 100% 94,652 100% 14,967
------------------ ------------------- ------------------- ---------
14
SEASONALITY
Our quarterly operating results typically fluctuate with the seasons.
Construction of a customer's home typically proceeds after signing the agreement
of sale and can require 12 months or more to complete. Weather-related problems
may occur in the late winter and early spring, delaying starts or closings or
increasing costs and reducing profitability. In addition, delays in opening new
communities or new sections of existing communities could have an adverse impact
on home sales and revenues. Because of these factors, our quarterly operating
results may be uneven and may be marked by lower revenues and earnings in some
quarters than in others. In addition, the electricity generated by our wind
parks is dependent upon the seasonal nature of the wind velocity in a particular
area.
INTELLECTUAL PROPERTY
We rely primarily on a combination of copyrights, trademarks, service
marks, restrictions on disclosure and other methods to protect our intellectual
property. We also enter into confidentiality agreements with our employees,
consultants and current and potential affiliates, customers and business
partners. We also generally control access to and distribution of documentation
and other proprietary information.
COMPETITION
REAL ESTATE DEVELOPMENT
We compete with many other developers in Denmark and Norway in the sale
of residential housing units. Many of our competitors have greater resources
than we do which may enable them to obtain better parcels of land for
development. The sale of residential real estate in Denmark and Norway is
dependent to a large extent on the location of the development and the purchase
price of the unit.
WIND ENERGY
We compete with both other wind energy companies as well as companies
which generate electricity from other sources both polluting and non-polluting.
Most of these companies have far greater resources then us.
BROADCAST MEDIA
In our broadcast business, we compete with channels that are carried by
more Cable providers, included in more "TV Packages", offered to cable
subscribers, and catering to a much larger viewing audience than we do. Until
2001, cable providers were subject to governmental regulations that limited
their programming to the programming provided by those channels chosen through a
referendum of subscribing households, every two years.
Presently, the only channels that cable providers are required to
include in their "TV Packages" are the publicly funded channels, i.e., DR, DR2,
TV2, (and one local TV station). We expect that the number of channels competing
to be included in those "TV Packages" will increase in the ensuing years. If
viewer preferences change and we are unsuccessful in addressing those changes in
our programming, we may lose favor with them and cable providers may choose to
replace us with a competitor.
15
GOVERNMENT REGULATION
REAL ESTATE DEVELOPMENT
Our real estate development business is subject to obtaining numerous
national and local approvals and licenses in connection with our construction of
residential units and to our compliance with various zoning and other
regulations.
WIND ENERGY
Our wind energy business is subject to obtaining numerous permits
regarding the construction of windmills and to various regulations regarding the
operation of the windmills.
BROADCAST MEDIA
Our broadcast station dk4 has been granted a license by the Danish Board
of Satellite and Cable. Our license obligates us to carry a certain mix of
programs I.E. no more than a certain percentage of our programs can be sports,
news, commercials, etc. If we change our program profile, we must advise the
Danish Board of Satellite and Cable. We believe that we are currently in
compliance with all of our license requirements.
SALES AND MARKETING
Our real estate units are primarily sold through local real estate
brokers to whom we pay a sales commission.
We market our dk4 television broadcast station through local advertising
sponsorships and participations in cable operator and cable organization
symposiums and direct marketing to individual cable operators. Our market is
dominated by three large operators that represent more than 80% of our potential
viewers. dk4 is currently carried by two of those operators.
Prime Vision produces programming for a large array of distributors of
content in the Scandinavian market. We market the Prime Vision services through
word of mouth from satisfied clients as well as from the publicity we receive as
the Company responsible for the production of many important sporting events
like soccer, basketball and boxing. Prime Vision has established a well known
reputation in broadcasting of live sporting events and is involved in producing
major sports events for large TV channels in Denmark and Sweden. We also produce
content for large channels like DR, TV2, Viasat in Denmark, and STV, Canal
Digital and Viasat in Sweden, which is helpful for marketing the capability of
Prime Vision.
C. RISK FACTORS
IN ADDITION TO OTHER INFORMATION IN THIS FORM 20-F, THE FOLLOWING RISK
FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING US AND OUR BUSINESS BECAUSE
THESE FACTORS CURRENTLY HAVE OR MAY IN THE FUTURE HAVE A SIGNIFICANT IMPACT ON
OUR BUSINESS, OPERATING RESULTS OR FINANCIAL CONDITION. ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD- LOOKING STATEMENTS
CONTAINED IN THIS FORM 20-F AS A RESULT OF THE RISK FACTORS DISCUSSED BELOW AND
ELSEWHERE IN THIS FORM 20-F.
16
RISK FACTORS ASSOCIATED WITH CONTINUING BUSINESS
AN ADVERSE CHANGE IN ECONOMIC CONDITIONS COULD REDUCE THE DEMAND FOR HOMES AND,
AS A RESULT, COULD REDUCE OUR EARNINGS.
Changes in economic conditions in Denmark and Norway, as well as local
economic conditions where we conduct our operations and where prospective
purchasers of our homes live, can have a negative impact on our business.
Adverse changes in employment levels, job growth, consumer confidence, interest
rates and population growth may reduce demand and depress prices for our homes.
This, in turn, can reduce our earnings.
THE PROPERTY DEVELOPMENT INDUSTRY IS HIGHLY COMPETITIVE AND, IF OTHERS ARE MORE
SUCCESSFUL, OUR BUSINESS COULD DECLINE.
We operate in a very competitive environment, which is characterized by
competition from a number of other property developers in each market in which
we operate. We compete with other property developers for land, financing, and
skilled management and labor resources. We also compete with the resale, or
"previously owned," home market. Increased competition could cause us to reduce
our prices. An oversupply of homes available for sale could also depress our
home prices and adversely affect our operations. If we are unable to compete
effectively in our markets, our business could decline.
IF LAND IS NOT AVAILABLE AT REASONABLE PRICES, OUR SALES AND EARNINGS COULD
DECREASE.
Our operations depend on our ability to continue to obtain land for the
development of our residential communities at reasonable prices. Changes in the
general availability of land, competition for available land, availability of
financing to acquire land, zoning regulations that limit housing density and
other market conditions may hurt our ability to obtain land for new residential
communities. If the supply of land appropriate for development of our
residential communities becomes more limited because of these factors, or for
any other reason, the cost of land could increase and/or the number of homes
that we sell and build could be reduced.
GOVERNMENT REGULATIONS MAY DELAY THE START OR COMPLETION OF OUR COMMUNITIES,
INCREASE OUR EXPENSES OR LIMIT OUR PROPERTY DEVELOPMENT ACTIVITIES, WHICH COULD
HAVE A NEGATIVE IMPACT ON OUR OPERATIONS.
We must obtain the approval of numerous governmental authorities in
connection with our development activities, and these governmental authorities
often have broad discretion in exercising their approval authority. We incur
substantial costs related to compliance with legal and regulatory requirements.
Any increase in legal and regulatory requirements may cause us to incur
substantial additional costs. Various statutes, ordinances, rules and
regulations concerning building, zoning, sales and similar matters apply to
and/or affect the housing industry. This governmental regulation affects
construction activities as well as sales activities, mortgage lending activities
and other dealings with consumers.
INCREASES IN TAXES OR GOVERNMENT FEES COULD INCREASE OUR COSTS, AND ADVERSE
CHANGES IN TAX LAWS COULD REDUCE CUSTOMER DEMAND FOR OUR HOMES.
Increases in real estate taxes and other local government fees could
increase our costs and have an adverse effect on our operations. In addition,
increases in local real estate taxes could adversely affect our potential
customers who may consider those costs in determining whether to make a home
purchase and decide, as a result, not to purchase one of our homes. In addition,
any changes in the income tax laws that
17
would reduce or eliminate tax deductions or incentives to homeowners, such as
the proposed changes limiting the deductibility of interest on home mortgages,
could make housing less affordable or otherwise reduce the demand for housing,
which in turn could reduce our sales and hurt our operating results.
ADVERSE WEATHER CONDITIONS AND CONDITIONS IN NATURE BEYOND OUR CONTROL COULD
DISRUPT THE DEVELOPMENT OF OUR PROJECTS, WHICH COULD HARM OUR SALES AND
EARNINGS.
Adverse weather conditions and natural disasters, such as, floods and
fires, can have serious effects on our ability to develop our residential
communities. We also may be affected by unforeseen engineering, environmental or
geological problems. Any of these adverse events or circumstances could cause
delays in the completion of, or increase the cost of, developing one or more of
our residential communities and, as a result, could harm our sales and earnings.
PRODUCT LIABILITY LITIGATION AND WARRANTY CLAIMS THAT ARISE IN THE ORDINARY
COURSE OF BUSINESS MAY BE COSTLY, WHICH COULD ADVERSELY AFFECT OUR BUSINESS.
As a homebuilder, we are subject to construction defect and home
warranty claims arising in the ordinary course of business. These claims are
common in the homebuilding industry and can be costly. In many of our projects
we have an indemnity from our general construction contractor, which covers
defects for up to 10% of the cost of a project for the first year after the
construction has been completed, and for up to 2% of the cost of a project for
the next 4 years. We anticipate that this will cover any claims Therefore, we do
not carry an additional insurance, which is costly and the amount of coverage
offered by insurance companies is currently limited. There can be no assurance
that the indemnity coverage we have from our general contractors will cover all
defect and home warranty claims. If claims exceed the amount of this indemnity,
we may experience losses that could hurt our financial results
IF OUR POTENTIAL CUSTOMERS ARE NOT ABLE TO OBTAIN SUITABLE FINANCING, OUR
BUSINESS MAY DECLINE.
Our business and earnings also depend on the ability of our potential
customers to obtain mortgages for the purchase of our homes. Increases in the
cost of home mortgage financing could prevent our potential customers from
purchasing our homes. In addition, where our potential customers must sell their
existing homes in order to buy a home from us, increases in mortgage costs could
prevent the buyers of our customers' existing homes from obtaining the mortgages
they need to complete the purchase, which could result in our potential
customers' inability to buy a home from us. If our potential customers or the
buyers of our customers' current homes are not able to obtain suitable
financing, our sales and revenues could decline.
IF WE ARE NOT ABLE TO OBTAIN SUITABLE FINANCING, OUR BUSINESS MAY DECLINE.
Our business and earnings depend substantially on our ability to obtain
financing for the development of our residential communities and the purchase
and installation of windmills If we are not able to obtain suitable financing,
our costs could increase and our revenues could decrease, or we could be
precluded from continuing our operations at current levels. Increases in
interest rates can make it more difficult and/or expensive for us to obtain the
funds we need to operate our business.
18
OUR BUSINESS IS SEASONAL IN NATURE, SO OUR QUARTERLY OPERATING RESULTS
FLUCTUATE.
Our quarterly operating results typically fluctuate with the seasons.
Construction of a customer's home typically proceeds after signing the agreement
of sale and can require 12 months or more to complete. Weather-related problems
may occur in the late winter and early spring, delaying starts or closings or
increasing costs and reducing profitability. In addition, delays in opening new
communities or new sections of existing communities could have an adverse impact
on home sales and revenues. Because of these factors, our quarterly operating
results may be uneven and may be marked by lower revenues and earnings in some
quarters than in others. In addition, the electricity generated by our wind
parks is dependent upon the seasonal nature of the wind velocity in a particular
area.
THE AMOUNT OF ELECTRICITY WE GENERATE FOR SALE IS ENTIRELY DEPENDENT UPON WIND
VELOCITY.
We locate our wind parks in areas where studies indicate that the
historic wind velocity is sufficient to generate such minimum amount of
electricity as in our judgment will generate a profit. If wind patterns change
and the expected minimum wind velocity does not occur over our revenues and
profits may be materially adversely affected.
NEW TECHNOLOGIES MAY BECOME BETTER SOURCES OF CLEAN ENERGY.
If new technologies for the production of clean energy from sources
other than wind power are developed and these technologies are to provide clean
energy more efficiently and at lower prices than wind energy we may not be able
to sell the electricity we generate at a profit which would have a material
adverse effect on our business.
RISK FACTORS ASSOCIATED WITH HISTORIC BUSINESS
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, 2002 and
2003 and we incurred an operating loss in each of those years and for the year
ended December 31, 2001 and 2004. For the year ended December 31, 2005 we had a
net loss of DKK 7.9 million (approximately $1.3 million). As of December 31,
2005, we had an accumulated deficit of DKK 465.3 million (approximately $73.6
million). We may incur additional losses in the foreseeable future. We cannot
assure you that we will become profitable or, if we do become profitable, that
we will be able to sustain or increase our profitability in the future. If
operating losses continue for longer than we expect and we cannot raise
additional capital, we may be forced to terminate operations.
OUR FUTURE REVENUES ARE UNPREDICTABLE AND OUR FINANCIAL RESULTS MAY FLUCTUATE.
IF OUR FINANCIAL RESULTS FALL BELOW EXPECTATIONS IN ONE OR MORE FUTURE QUARTERS,
THE MARKET PRICE OF OUR ADSS MAY BE NEGATIVELY IMPACTED.
We cannot accurately forecast our revenues or operating results. Our
revenues and operating results may fluctuate significantly because of several
factors, many of which are beyond our control. These factors include:
19
o market acceptance of our products and services;
o a change in television viewer preferences if we are unsuccessful in
addressing those changes in our programming;
o the non-renewal of our contract with TeleDanmark Kabel to carry dk4;
o the non-renewal of our contract with Canal Digital A/S to carry dk4;
o the continued interest in televising live sporting events in
Scandinavia;
o the pace at which new television programming is produced in Scandinavia;
o customer renewal rates for our products and services;
o our success in cross marketing our products and services to our existing
customers and to new customers;
o developing our direct and indirect distribution channels;
o a decrease in the level of spending for Internet products and services
from which our royalties are based;
o our ability to expand our operations;
o our success in assimilating the operations and personnel of any acquired
businesses;
o the impact of price changes in our products and services or those of our
competitors; and
o general economic conditions and economic conditions specific to the
television programming production or Internet services industry.
Due to all of the above factors, we believe that period-to-period
comparisons of our operating results will not necessarily be meaningful, and you
should not rely on them as an indication of future performance. Also, operating
results may fall below our expectations and the expectations of securities
analysts or investors in one or more future quarters. If this were to occur, the
market price of our ADSs would likely decline which may result in a significant
decline in the value of your investment.
WE HAVE A LIMITED OPERATING HISTORY IN THE MEDIA BUSINESS AND MAY ENCOUNTER
DIFFICULTIES SIMILAR TO THOSE FACED BY EARLY STAGE COMPANIES. OUR RESULTS FROM
OPERATIONS MAY DEPEND ON HOW SUCCESSFUL WE ARE IN DEALING WITH THESE
DIFFICULTIES.
Over the last five years, our business has evolved from (i) a
telecommunications company that also provided Internet access to (ii) an
Internet services provider focusing primarily on domain name registration
services to (iii) providing trusted Internet infrastructure products and
services to (iv) our current business which is made up of our TV broadcast
channel - dk4 and our TV production company - Prime Vision. We have only a
limited operating history in this business on which you can base an evaluation
of our current business and prospects. As such, our current business and
prospects must be
20
considered in light of the risks and uncertainties encountered by companies in
the early stages of development.
We cannot be certain that we will successfully address this risk. If we
fail, our business and results from operations may be materially and adversely
impacted.
WE COMPETE IN THE HIGHLY COMPETITIVE BROADCASTING INDUSTRY.
The Danish broadcast industry is highly competitive and dominated by a
few large companies. As a result of competition, in 2001 we consolidated our
broadcast operations into one channel. In addition, we expect that the number of
channels competing for the places in the TeleDanmark Kabel programming network
will increase in the ensuing years. If viewer preferences change and we are
unsuccessful in addressing those changes in our programming, we may lose favor
with them and they may choose to view a competitor's channel over ours.
IF WE ARE UNABLE TO NEGOTIATE A RENEWAL OF OUR CONTRACT WITH EITHER TELEDANMARK
KABEL OR CANAL DIGITAL A/S THE REVENUES FROM OUR BROADCASTING BUSINESS MAY BE
ADVERSELY AFFECTED.
Our dk4 television channel is carried as part of the basic package of
channels provided to all cable television subscribers to TeleDanmark Kabel (the
primary Company providing cable television service in Denmark), for which we
receive a per subscriber fee as well as to all subscribers of Canal Digital A/S,
a Danish digital satellite television service provider. Our agreement with each
of TeleDanmark Kabel and Canal Digital A/S to carry dk4 as part of its basic
package expires on December 31, 2006 and December 31, 2007, respectively. We
cannot assure you that we will successfully negotiate a renewal of our agreement
with TeleDanmark Kabel or Canal Digital A/S. If we are unable to renew any of
the agreements the revenues from our broadcasting business would decrease
significantly and the results of operations from our broadcasting business would
be materially and adversely affected.
IF THE INTEREST IN VIEWING LIVE SPORTING EVENTS IN THE SCANDINAVIAN MARKET
SHOULD DECREASE OR IF THERE IS A SLOWDOWN IN OTHER TELEVISION PROGRAMMING
PRODUCTION OUR RESULTS COULD BE ADVERSELY AFFECTED.
As of May 1, 2005 we have approximately eight large mobile television
production vans which are leased to various other companies primarily for their
broadcast of live sporting events or the production of original television
programming. We also provide many of the technical personnel required for these
productions. If we are unable to lease these vans and our technical personnel to
other broadcasters or television production companies we will be in a position
where we will not be able to cover the expenses associated with this business
which in turn could materially and adversely effect our business. Our ability to
keep these vans busy in order to generate revenue will be effected by many
factors outside of our control, including the continued interest in viewing live
sporting events and the continued desire to produce television programming in
Scandinavia.
RISK FACTORS ASSOCIATED WITH BOTH CONTINUING BUSINESS AND HISTORIC
BUSINESS
WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE. IF WE CANNOT DO SO, WE
MAY NOT BE ABLE TO FUND OUR FUTURE ACTIVITIES OR CONTINUE OPERATING.
Our future capital requirements will depend on a number of factors,
including our ability to generate positive cash flow from operations, capital
expenditure requirements and acquisition
21
opportunities. If we need to raise additional capital in the future, we cannot
assure you that we will be able to do so on acceptable terms or at all. If we
raise additional capital through the issuance of equity or convertible debt
securities, the percentage ownership of our company held by existing
shareholders, including holders of our ADSs, will be diluted. In addition, new
securities may contain certain rights, preferences or privileges that are senior
to those of our ordinary shares. If we are unsuccessful in raising additional
capital, when needed, our business and results from operations may be materially
and adversely affected.
OUR 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, available for acquisition or investment. Our long-term
growth strategy could be impeded if we fail to identify and acquire or invest in
promising candidates on terms acceptable to us.
Assimilating acquired businesses involves a number of other risks,
including, but not limited to:
o disrupting our business;
o incurring additional expense associated with a write-off of all or a
portion of the related goodwill and other intangible assets due to
changes in market conditions or the economy in the markets in which we
compete or because acquisitions are not providing the benefits expected;
o incurring unanticipated costs or unknown liabilities;
o managing more geographically-dispersed operations;
o diverting management's resources from other business concerns;
o retaining the employees of the acquired businesses;
o assimilating the operations and personnel of the acquired businesses;
and
o maintaining uniform standards, controls, procedures and policies.
For all these reasons, our pursuit of an overall acquisition and
investment strategy or any individual acquisition or investment could have a
material adverse effect on our business, financial condition and results of
operations. If we are unable to successfully address any of these risks, our
business could be harmed.
22
RAPID GROWTH IN OUR BUSINESS COULD STRAIN OUR MANAGERIAL, OPERATIONAL,
FINANCIAL, ACCOUNTING AND INFORMATION SYSTEMS, 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. 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.
OUR INTERNATIONAL PRESENCE CREATES RISKS WHICH MAY ADVERSELY AFFECT OUR
BUSINESS.
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. Our inability or failure to
address these risks could have a material adverse affect on our business,
operations and financial condition. Also, we cannot assure you that laws or
administrative practices relating to taxation, or other matters of countries
within which we operate will not change. Any change in these areas could have a
material adverse effect on our business, financial condition and results of
operations.
IF WE ARE UNABLE TO ATTRACT AND RETAIN HIGHLY QUALIFIED MANAGEMENT AND TECHNICAL
PERSONNEL, OUR BUSINESS MAY BE HARMED.
Our success depends in large part on the contributions of our senior
management team, and other key employees and on our ability to attract,
integrates, train, retain and motivate these individuals and additional highly
skilled technical and sales and marketing personnel. We face intense competition
in hiring and retaining quality management personnel. Many of these companies
have greater financial resources than we do to attract and retain qualified
personnel. The only key employee that has signed an employment agreement is
Soren Degn, our Chief Financial Officer. Under the agreement, he can terminate
employment on six months notice. As a result, we may be unable to retain our key
employees or attract, integrate, train and retain other highly qualified
employees in the future, when necessary. If we fail to attract qualified
personnel or retain and motivate our current personnel, our business may be
negatively impacted.
OUR RESULTS FROM OPERATIONS MAY BE ADVERSELY AFFECTED BY EXCHANGE RATE
FLUCTUATIONS.
A portion of our expenditures and receivables are paid in foreign
currencies. As a result, our financial results may be affected by an
appreciation or depreciation in the value of the Danish kroner relative to the
currencies of the countries in which we operate. Except for one hedging
transaction done in March of 2002, we have not engaged in hedging or other risk
management activities in order to offset the risk of currency exchange rate
fluctuations. We cannot predict in any meaningful way the effect of exchange
rate fluctuations upon future results. If the value of the Danish kroner
declines and the
23
currencies of the countries in which we operate appreciate or remain stable our
results from operations may be negatively affected.
WE ARE SUBJECT TO INCREASED U.S. REGULATORY REQUIREMENTS IN OUR NEXT FISCAL
YEAR, WHICH WILL INCREASE OUR COSTS AND POSE RISKS THAT THE VALUE OF OUR ADSS
COULD DECLINE IF WE FAIL TO TIMELY COMPLY.
The value of our publicly traded ADSs held by non-affiliates makes us
subject to the financial controls certification requirements of Section 404 of
the Sarbanes-Oxley Act as of the end of our next fiscal year, June 30, 2007. We
will have to expend significant resources to meet this requirement, and we
cannot assure you that we will successfully achieve this objective by that date.
Failure to achieve Section 404 certification in a timely manner may adversely
effect investor confidence in our Company and this lack of investor confidence
may adversely effect the market price of our ADSs.
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 National Market(R). The market price
of our ADSs may fluctuate significantly in response to various factors and
events, including:
o variations in our operating results;
o the liquidity of the markets;
o investor perceptions of us and the segments in which we operate;
o changes in earnings estimates by analysts;
o sales of ADSs by existing holders; and
o general economic conditions.
In addition, Nasdaq has recently experienced broad price and volume
fluctuations. This volatility has had a significant effect on the market price
of securities of companies for reasons that have often been unrelated to their
operating performance. These broad market fluctuations may also adversely affect
the market price of our ADSs and as a result, holders of our ADSs may lose a
significant portion of their investment.
24
WE HAVE NEVER PAID A DIVIDEND NOR DO WE ANTICIPATE DOING SO IN THE FORESEEABLE
FUTURE.
We have not declared or paid any cash dividends on our ordinary shares.
We do not expect to declare any dividends in the foreseeable future. We
anticipate that all cash that would otherwise be available to pay dividends will
be applied in the foreseeable future to finance our growth or to implement
shareholder-approved repurchases of our stock. Payment of any future dividends
will depend on our earnings and capital requirements, and other factors our
board of directors deem appropriate.
D. ORGANIZATIONAL STRUCTURE OF THE COMPANY
The following is a list as of December 31, 2005, of our significant
subsidiaries and their jurisdiction of incorporation and our ownership interest
in those subsidiaries.
COUNTRY OF INTEREST
SUBSIDIARY INCORPORATION OWNERSHIP
---------- ------------- ---------
Europe-Visions A/S (1) Denmark 100.0% (Sold June 2, 2006)
------------------------------------
(1) Formerly known as Euro909Media A/S
Other significant operating subsidiaries consolidated under
Europe-Visions A/S and their jurisdiction of incorporation and our ownership
interest in those subsidiaries at December 31, 2005:
COUNTRY OF INTEREST
SUBSIDIARY INCORPORATION OWNERSHIP
---------- ------------- ---------
Ciac A/S Denmark 100.0%
Prime Vision A/S Denmark 100.0%
Arhustudiet A/S Denmark 100.0%
Publishing & Management ApS Denmark 51.0%
TV Akademiet A/S Denmark 100.0%
Formedia A/S Denmark 100.0%
Mobile Broadcasting A/S Denmark 100.0%
PROPERTY, PLANT AND EQUIPMENT
On April 1, 2005, we sold our building located at Poppelgardvej 11-13 in
Soborg, Copenhagen to Lion Ejendomme ApS for DKK 20,000,000 in cash. At December
31, 2004 the net book value of the building was DKK 19,638,000. We lease approx.
85 square meters at Poppelgardvej 11-13 in Soborg, Copenhagen from Comendo A/S.
For our broadcasting media operations, we lease 2,233 square meters in
Copenhagen, Denmark, and 1,152 square meters in Aarhus, Denmark. Furthermore, we
lease six apartments in Aarhus for a total of 724 square meters.
25
For our Internet services operations, until February 2005, we leased
1,130 square meters of floor space in Aarhus, Denmark, for our remote data
backup subsidiary, EuroTrust Net Vaulting. We sublet approximately 1,049 square
meters of office space in Aarhus to Munk IT, Metro Express and Ewire. These
subleases expired in the first quarter of 2005.
The total aggregate annual lease costs were approximately DKK 3,574,537
(not in thousands) for 2005. The operating leases are cancelable by both parties
through various times between three and six months. We believe that the current
facilities for our media operations will be adequate for our purposes for at
least the next 12 months. We also believe that there is a supply of alternative
facilities available in each of the locations where we operate, should we deem
it desirable to expand our facilities or otherwise change locations.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. OPERATING RESULTS
OVERVIEW
Until December 2001, our business operated in three distinct areas:
Internet products and services; broadcasting; and print and online media. In
early 2001 we made the strategic decision to focus primarily on providing
Internet infrastructure products and services and e-commerce solutions in
Scandinavia and selected west European markets and on key elements of our
broadcasting business. To that end, in 2001, we sold our domain name
registration, the remaining assets of our historical telecommunications business
and our print and online media businesses, and consolidated our television
programming business. In December 2003 and January, 2004, as part of our plan to
intensify our focus on our television programming business and on providing
virus detection products and services, we sold EuroTrust Secure Hosting A/S, our
secure hosting subsidiary, EuroTrust Realtime Security A/S, our digital video
surveillance subsidiary, EuroTrust Sweden AB, our Swedish subsidiary, and the
assets related to EuroTrust NetVaulting A/S, our secure remote backup business.
We sold our PKI services business on April 1, 2004 and our virus
detection software and services business on September 30, 2004.
As a result of these various transactions, subsequent to September 30,
2004 our business consists of our broadcast media division, which owns dk4, a
Danish television station and operates the television production company Prime
Vision.
The proceeds from our divestitures in 2004 allowed us to invest more
than $10 million U.S. in Prime Vision. Prime Vision now owns one of Europe's
first High Definition mobile production units, five fully digitalized mobile
production units and two mobile analog production units that we expect to
rebuild into digital units during 2005. We use these assets to produce content
both for our own broadcast operations and for outside clients.
In addition to our television production operations, we continued to
expand our media content platforms in 2004. Our original television channel,
dk4, increased its subscriber base to record levels. Late in 2004, we also added
a new speciality television channel, 4SPORT, to focus on coverage of both Danish
sports, in cooperation with The Danish Sports Association, and international
sporting events of particular interest to Danish fans.
26
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States (GAAP). The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities. Management bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not
readily available from other sources. Actual results may differ from these
estimates under different assumptions or conditions. We believe that the
estimates, assumptions and judgments involved in the accounting policies
described below have the greatest potential impact on our consolidated financial
statements, so we consider these to be our critical accounting policies. See
"Summary of Significant Accounting Policies" in the consolidated financial
statements for more information about these critical accounting policies, as
well as descriptions of other significant accounting policies.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. We
regularly review the adequacy of our accounts receivable allowance after
considering the size of the accounts receivable balance, each customer's
expected ability to pay and our collection history with each customer. We review
significant invoices that are past due to determine if an allowance is
appropriate based on the risk category using the factors described above. We
also monitor our accounts receivable for any build up of concentration to any
one customer, industry or geographic region. At December 31, 2005 we have two
customers who account for approximately 21% and 20% of our outstanding
receivables. If we are unable to collect these receivables it would have a
significant negative impact on our operating income. We require all acquired
companies to adopt our credit policies. The allowance for doubtful accounts
represents our best estimate, but changes in circumstances relating to accounts
receivable may result in a requirement for additional allowances in the future.
27
VALUATION OF LONG-LIVED ASSETS
Our long-lived assets totaled DKK 67.1 million, as of December 31, 2005,
which consist primarily of equipment subject to amortization and depreciation.
We test long-lived assets for recoverability whenever events or changes in
circumstances indicate that the carrying amount of such an asset may not be
recoverable. Such events or circumstances include, but are not limited to:
o a significant decrease in the market price of a long-lived asset;
o a significant adverse change in the extent or manner in which a
long-lived asset is being used or in its physical condition;
o a significant adverse change in legal factors or in the business climate
that could affect the value of a long-lived asset;
o a current-period operating or cash flow loss combined with a history of
operating or cash flow losses or a projection or forecast that
demonstrates continuing losses associated with the use of a long-lived
asset; and
o a current expectation that it is probable that a long-lived asset will
be sold or otherwise disposed of significantly before the end of its
previously estimated useful life.
An impairment loss would be recognized when the sum of the undiscounted
future net cash flows expected to result from the use of the asset and its
eventual disposition is less than its carrying amount. Such impairment loss
would be measured as the difference between the carrying amount of the asset and
its fair value, which is usually based on future estimated discounted cash
flows. Significant judgment is required in the forecasting of future operating
results, which are used in the preparation of projected cash flows. If we made
different judgments or utilized different estimates, material differences may
result in write-downs of net long-lived and intangible assets, which would be
reflected by charges to our operating results for any period presented.
We recorded no impairment charge in the years ended December 31, 2004
and December 31, 2005.
GOODWILL
We account for acquisitions under the purchase method of accounting,
typically resulting in goodwill. Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible Assets, requires us to assess
goodwill for impairment at least annually in the absence of an indicator of
possible impairment and immediately upon an indicator of possible impairment.
The statement requires estimates of the fair values of our reporting units. If
we determine the fair values of a reporting unit is less than the carrying
amount recorded on our Consolidated Balance Sheet, we must measure any
impairment loss. The measurement of the impairment loss involves comparing the
fair value of the reporting unit with the fair values of the recognized and
unrecognized assets and liabilities to arrive at an implied fair value of
goodwill, which is then compared to the book value of the goodwill of the
reporting unit. At December 31, 2005, we had DKK 24.56 million of goodwill
recorded on our Consolidated Balance Sheet. The entire goodwill was recorded in
our Broadcasting media segment.
We performed our annual impairment assessment of goodwill in accordance
with the provisions of SFAS No. 142. In testing for potential impairment, we
measured the estimated fair value of our reporting units based upon discounted
future operating cash flows using a discount rate reflecting our estimated
discount rate for the specific reporting units. Differences in assumptions used
in projecting
28
future operating cash flows and estimated discount rate could have a significant
impact on the determination of impairment amounts.
In estimating future cash flows we used our internal budgets. Our
budgets were based on recent sales data for existing products and expected
growth rates for the Internet security services and framework agreements entered
into with customers in the broadcasting segment. These budgets were based on
current royalty percentages, expected staffing levels and expected inflation.
Due to the numerous variables associated with our judgments and
assumptions relating to the valuation of the reporting units and the effects of
changes in circumstances affecting these valuations, both the precision and
reliability of the resulting estimates are subject to uncertainty, and as
additional information becomes known, we may change our estimates.
For the year ended December 31, 2004 based on our annual impairment
assessment of goodwill, there were impairment charges of DKK 965 thousand. No
impairment charge was recorded for the year ended December 31, 2005.
TAX ASSET VALUATION
We currently have deferred tax assets resulting from net operating loss
carry forwards, and deductible temporary differences, all of which will reduce
taxable income in the future. We assess the realization of these deferred tax
assets when necessary to determine whether an income tax valuation allowance is
required. Based on available evidence, both positive and negative, we determine
whether it is more likely than not that all or a portion of the remaining net
deferred tax assets will be realized. The main factors that we consider include:
o future earnings potential determined through the use of internal
forecasts;
o cumulative losses in recent years;
o history of loss carry forwards and other tax assets expiring;
o the carry forward period associated with the deferred tax assets; and
o the nature of the income that can be used to realize the deferred tax
asset.
If it is our belief that it is more likely than not that some portion of
these assets will not be realized, an income tax valuation allowance is
recorded. Our gross tax assets and valuation allowances were DKK 113.9 million
and DKK 105.3 million respectively, as of December 31, 2005 resulting in a net
deferred tax asset of DKK 8.6 million.
See Note 13 to our financial statements for further details regarding
this deferred tax asset.
If market conditions improve and future results of operations exceed our
current expectations, our existing tax valuation allowances may be adjusted,
resulting in future tax benefits. Alternatively, if market conditions
deteriorate further or future results of operations are less than expected,
future assessments may result in a determination that some or all of the net
deferred tax assets are not realizable. As a result, we may need to establish
additional tax valuation allowances for all or a portion of the net deferred tax
assets.
29
CONSOLIDATED RESULTS
YEAR ENDED DECEMBER 31, 2005 COMPARED WITH YEAR ENDED DECEMBER 31, 2004
Net revenue for the year ended December 31, 2005 was DKK 94.7 million,
an increase of DKK 3.7 million, or 4.0%, compared to revenue of DKK 91.0 million
for the year ended December 31, 2004. The table below compares revenue for both
years on a segment-by-segment basis.
---------------------- ------------------------
REVENUE VALUE PERCENTAGE
INCREASE INCREASE
2005 2004 (DECREASE) (DECREASE)
----------- ---------- ---------- ------------
(IN MILLIONS OF DKK)
Internet services 0 23 (23) (100.0%)
Broadcast media 94,652 91,013 3,639 4.0%
----------- ---------- ---------- ------------
Total 94,652 91,036 3,616 4.0%
----------- ---------- ---------- ------------
The Internet services segment showed a decrease in revenues and the
broadcast media segment showed an increase in revenues. The decrease in revenue
in our Internet services segment is attributable to the sales of all our
business within that segment through 2003 and 2004. The increase in revenue in
our broadcast media segment reflects the increase in number of subscribers to
dk4, our television channel, and the increase of revenue in Prime Vision, our
production company.
Total operating expenses for the year ended December 31, 2005 were DKK
118.4 million, a increase of DKK 7.6 million, or 4.7%, from the total operating
expenses of DKK 110.8 million for the year ended December 31, 2004. This
decrease is primarily attributable due to the increase in production facilities
and the increase in expenses related to the growth in Prime Vision as well as
the increase of new subscribers to dk4 and the related variable costs related to
the increase number of subscribers and our increased focus on further developing
and enhancing our broadcast media business. The table below shows our operating
expenses by category on a segment-by segment basis.
-------------------- -------------------------
COST OF SALES VALUE PERCENTAGE
INCREASE INCREASE
2005 2004 (DECREASE) (DECREASE)
--------- --------- ----------- ------------
(IN MILLIONS OF DKK)
Internet Services 0 0 0 0.0%
Broadcast media 68,806 60,349 8,457 14.0%
--------- --------- ----------- ------------
Total 68,806 60,349 8,457 14.0%
--------- --------- ----------- ------------
-------------------- ------------------------
SALES/MARKETING VALUE PERCENTAGE
INCREASE INCREASE
2005 2004 (DECREASE) (DECREASE)
---------- --------- ----------- -----------
(IN MILLIONS OF DKK)
Internet services 2,847 3,502 (655) (18.7%)
Broadcast media 14,302 14,225 77 0.5%
---------- --------- ----------- -----------
Total 17,149 17,727 (578) (3.3%)
---------- --------- ----------- -----------
30
-------------------- ------------------------
GENERAL/ VALUE PERCENTAGE
ADMINISTRATION
INCREASE INCREASE
2005 2004 (DECREASE) (DECREASE)
---------- --------- ----------- -----------
(IN MILLIONS OF DKK)
Internet services 6,839 8,905 (2,066) (23.2%)
Broadcast media 13,916 12,638 1,278 10.1%
---------- --------- ----------- -----------
Total 20,755 21,543 (788) (3.7%)
---------- --------- ----------- -----------
-------------------- ------------------------
DEPRECIATION VALUE PERCENTAGE
AMORTIZATION
AND WRITE DOWN
INCREASE INCREASE
2005 2004 (DECREASE) (DECREASE)
---------- --------- ----------- -----------
(IN MILLIONS OF DKK)
Internet Services 594 2,071 (1,477) (71.3%)
Broadcast media 11,101 9,069 2,032 22.4%
---------- --------- ----------- -----------
Total 11,695 11,140 555 5.0%
---------- --------- ----------- -----------
In our Internet services segment the operating expenses generally
decreased due to our continued focus on lowering expenses generally in this
segment.
In our broadcast media segment operating expenses generally increased
due to the increase in production facilities and the increase in expenses
related to the growth in Prime Vision as well as the increase of new subscribers
to dk4 and the related variable costs related to the increase number of
subscribers and our increased focus on further developing and enhancing our
broadcast media business.
For the year ended December 31, 2005, the gross profit for our Internet
services segment was DKK 0. For the year ended December 31, 2004, the gross
profit for our Internet services business was DKK 23 thousand, or a margin of
100% of segment revenues.
In the case of our broadcast media segment, the gross profit for 2005
was DKK 25.8 million or 27.3% of segment revenues while the gross profit margin
for 2004 was DKK 30.7 million, or 33.7% of segment revenues. This decrease is
primarily attributable to the increase in cost resulting from our increased
focus on further developing and enhancing our broadcast media business.
For the year ended December 31, 2005 our operating loss increased by DKK
4.1 million to DKK 23.8 million compared to a loss of DKK 19.7 million for the
year ended December 31, 2004.
The operating loss for our Internet services segment decreased by DKK
4.3 million to DKK 10.3 million compared to a loss of DKK 14.6 million for the
year ended December 31, 2004.
For our broadcast media segment, we incurred an operating loss of DKK
13.5 million compared to an operating loss of DKK 5.3 million for the year ended
December 31, 2004. This decrease is attributable to the increase in operating
expenses due to our increased focus on further developing and enhancing our
broadcast media business.
31
For 2005, we had interest income of DKK 1.4 million and interest expense
of DKK 1.5 million. For 2004, interest income was DKK 0.3 million and interest
expense was DKK 1.2 million. The increase in interest income in 2005 reflects
the increase in our cash balances from the sale of our businesses.
For 2005, we had a net foreign exchange income of DKK 0.7 million
compared to a net foreign exchange loss of DKK 0.8 million in 2004.
For 2004, based on our review of the valuation of long term investments
and marketable securities held at December 31, 2004, we wrote down a total
amount of DKK 14.9 million. No write down was made in 2005.
Our Net loss for the year ended December 31, 2005 decreased to DKK 7.9
million compared to a Net income of DKK 58.5 million for the year ended December
31, 2004. The decrease in our Net income of DKK 66.4 million is primarily
attributable to one time gains from the sale of the Internet segment businesses
in the aggregate of DKK 83.6 million offset by a one time write down of long
term investments and marketable securities of DKK 14.9 million in 2004.
YEAR ENDED DECEMBER 31, 2004 COMPARED WITH YEAR ENDED DECEMBER 31, 2003
Net revenue for the year ended December 31, 2004 was DKK 91.0 million, a
decrease of DKK 18.8 million, or 17.1%, compared to revenue of DKK 109.8 million
for the year ended December 31, 2003. The table below compares revenue for both
years on a segment-by-segment basis.
REVENUE AMOUNT OF PERCENTAGE
INCREASE INCREASE
2004 2003 (DECREASE) (DECREASE)
---------- ------------- ------------ -------------
(IN THOUSANDS OF DKK)
Internet services 23 21,203 (21,180) (99.9%)
Broadcast media 91,013 88,619 2,394 2.7%
TOTAL 91,036 109,822 (18,786) (17.1%)
The Internet services segment showed a decrease in revenues and the
broadcast media segment showed an increase in revenues. The decrease in revenue
in our Internet services segment is primarily attributable to the sales of our
remote backup business as of December 1, 2003 and the sale of our secure hosting
business as of January 1, 2004. The increase in revenue in our broadcast media
segment reflects the increase in number of subscribers to dk4, our television
channel, and the increase of revenue in Prime Vision, our production company.
Total operating expenses for the year ended December 31, 2004 were DKK
110.8 million, a decrease of DKK 5.5 million, or 4.7%, from the total operating
expenses of DKK 116.3 million for the year ended December 31, 2003. This
decrease is primarily attributable to decreases in Cost of sales and General and
administrative expenses, resulting primarily from the sales of the businesses in
our Internet services segment. The table below shows our operating expenses by
category on a segment-by segment basis.
32
COST OF SALES AMOUNT OF PERCENTAGE
INCREASE INCREASE
2004 2003 (DECREASE) (DECREASE)
---------- ------------ ------------ -------------
(IN THOUSANDS OF DKK)
Internet services 0 7,773 (7,773) (100.0%)
Broadcast media 60,349 58,045 2,304 4.0%
---------- ------------ ------------ -------------
TOTAL 60,349 65,818 (5,469) (8.3%)
SELLING AND MARKETING AMOUNT OF PERCENTAGE
INCREASE INCREASE
2004 2003 (DECREASE) (DECREASE)
---------- ------------ ------------ -------------
(IN THOUSANDS OF DKK)
Internet services 3,502 5,410 (1,908) (35.3%)
Broadcast media 14,225 12,085 2,140 17.7%
---------- ------------ ------------ -------------
TOTAL 17,727 17,495 232 1.3%
GENERAL AND AMOUNT OF PERCENTAGE
ADMINISTRATIVE INCREASE INCREASE
2004 2003 (DECREASE) (DECREASE)
---------- ------------ ------------ -------------
(IN THOUSANDS OF DKK)
Internet services 8,905 14,344 (5,439) (37.9%)
Broadcast media 12,638 12,537 101 0.8%
---------- ------------ ------------ -------------
TOTAL 21,543 26,881 (5,338) (19.9%)
DEPRECIATION,
AMORTIZATION AMOUNT OF PERCENTAGE
AND WRITE DOWN INCREASE INCREASE
2004 2003 (DECREASE) (DECREASE)
---------- ------------ ------------ -------------
(IN THOUSANDS OF DKK)
Internet services 2,071 1,311 760 (58.0%)
Broadcast media 9,069 4,764 4,305 90.4%
---------- ------------ ------------ -------------
TOTAL 11,140 6,075 5,065 83.4%
In our Internet services segment the operating expenses generally
decreased due to our continued focus on lowering expenses generally and the
significant cost reduction from the divestiture of the businesses in this
segment.
In our broadcast media segment operating expenses generally increased
due to the increase in production facilities and the increase in expenses
related to the growth in Prime Vision as well as the increase of new subscribers
to dk4 and the related variable costs related to the increase number of
subscribers and our increased focus on further developing and enhancing our
broadcast media business.
33
For the year ended December 31, 2004, the gross profit for our Internet
services segment was DKK 23 thousand, or a margin of 100% of segment revenues.
For the year ended December 31, 2003, the gross profit for our Internet services
business was DKK 13.4 million, or a margin of 63.3% of segment revenues.
In the case of our broadcast media segment, the gross profit for 2004
was DKK 30.7 million, or 33.7% of segment revenues while the gross profit margin
for 2003 was DKK 30.6 million, or 34.5% of segment revenues. This decrease is
primarily attributable to the increase in cost resulting from our increased
focus on further developing and enhancing our broadcast media business.
For the year ended December 31, 2004 our operating loss increased by DKK
13.3 million to DKK 19.7 million compared to a loss of DKK 6.5 million for the
year ended December 31, 2003.
The operating loss for our Internet services segment increased by DKK
6.9 million to DKK 14.5 million compared to a loss of DKK 7.6 million for the
year ended December 31, 2003. This increase is primarily attributable to the
decrease in revenues due to the divestiture of the businesses in this segment.
For our broadcast media segment, we incurred an operating loss of DKK
5.3 million compared to an operating income of DKK 1.2 million for the year
ended December 31, 2003. This decrease is attributable to the increase in
operating expenses due to our increased focus on further developing and
enhancing our broadcast media business.
For 2004, we had interest income of DKK 0.3 million and interest expense
of DKK 1.2 million. For 2003, interest income was DKK 0.2 million and interest
expense was DKK 1.6 million. The increase in interest income in 2004 reflects
the increase in our cash balances from the sale of our businesses. The decrease
in interest expense in 2004 reflects a one time guarantee payment of DKK 1.1
million in 2003 not incurred in 2004.
For 2004, we had a net foreign exchange (loss) of DKK 0.8 million
compared to a net foreign exchange loss of DKK 1.8 million in 2003.
For 2004, based on our review of the valuation of long term investments
and marketable securities held at December 31, 2004, we wrote down a total
amount of DKK 14.9 million.
Our Net income for the year ended December 31, 2004 increased to DKK
58.5 million compared to a Net loss of DKK 6.3 million for the year ended
December 31, 2003. The increase in our Net income of DKK 64.8 million is
primarily attributable to one time gains from the sale of the Internet segment
businesses in the aggregate of DKK 83.6 million offset by a one time write down
of long term investments and marketable securities of DKK 14.9 million.
B. LIQUIDITY AND CAPITAL RESOURCES
Historically, our primary cash needs have been for capital expenditures
and to fund operating losses. At December 31, 2005, our cash and cash
equivalents totaled DKK 12.3 million compared to cash and cash equivalents
totaling DKK 6.8 million at December 31, 2004. At December 31, 2005 the ratio of
current assets to current liabilities was 1.12 to 1. Our current assets
primarily reflect our cash and cash equivalents, restricted cash and accounts
receivables.
34
At December 31, 2005, we had secured lines of credit from banks totaling
DKK 12 million, of which DKK 11.3 million have been drawn, and an outstanding
note payable, due in September 2009, in the principal amount of DKK 3.111
million which accrues interest at a rate of 5.5% per annum and is payable in
equal monthly installments. Interest on the secured lines of credit is payable
on the line at a floating rate based on the market rates of the major banks. The
weighted average interest rate as of December 31, 2004 was 6.0%. In Denmark, a
line of credit, such as that used by us, can be cancelled upon three months
notice. Any termination would result in the principal and interest becoming due
and payable immediately. The line of credit has been used for working capital
purposes.
For the year ended December 31, 2005, cash used in operations (including
cash provided by discontinued operations) was DKK 22.0 million compared to DKK
10.7 million for the prior year, an increase of DKK 11.3 million. The increase
is primarily due to a decrease in accounts payable in 2005 compared to 2004.
For the year ended December 31, 2005, cash provided by investing
activities was DKK 3.4 million compared to cash provided by investing activities
of DKK 6.0 million for the prior year, a decrease of DKK 2.6 million.
For the year ended December 31, 2005, cash provided by financing
activities was DKK 24.9 million compared to cash provided by financing
activities of DKK 2.1 million for the prior year, an increase of DKK 22.8
million. This increase is primarily due to a net change in restricted cash in of
10.7 and an increase in proceeds from the issuance of common shares of DKK 9.7
million.
Our capital expenditures for the year ended December 31, 2005 were DKK
16.0 million. These expenditures primarily relate to purchase of equipment in
our media segment.
We believe that our cash on hand and the positive trend of our operating
cash flow together with borrowings currently available and other potential
sources of funds as described above will be sufficient to fund our anticipated
working capital needs and capital spending requirements in the foreseeable
future. However, if we were to incur any unanticipated expenditures or the
positive trend of our operating cash flow does not continue, such circumstances
could put a substantial burden on our cash resources.
CONTRACTUAL OBLIGATIONS (in thousands of DKK)
------------------------------- ---------- --------- ----------- ---------------
LATER TOTAL
CONTRACTUAL OBLIGATIONS 2006 YEARS OBLIGATIONS
------------------------------- ---------- --------- ----------- ---------------
Capital leases 2,191 5,213 7,404
------------------------------- ---------- --------- ----------- ---------------
Operating leases 3,926 1,323 5,249
------------------------------- ---------- --------- ----------- ---------------
TOTAL CONTRACTUAL
OBLIGATIONS 6,117 6,536 12,653
------------------------------- ---------- --------- ----------- ---------------
INFLATION
We do not believe that inflation had a material impact on our results of
operations.
35
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based
Payment". This Statement revises SFAS No. 123, "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees."
SFAS No. 123(R) requires that the compensation cost relating to
share-based payment transactions be recognized in financial statements. The cost
will be measured based on the fair value of the instruments issued. The Company
will be required to apply SFAS No. 123(R) as of the first fiscal year that
begins after June 30, 2005. Accordingly, The Company will adopt SFAS No. 123(R)
during the first quarter of fiscal 2006. Management is currently evaluating the
impact SFAS No. 123(R) will have on the Company's results of operations as a
result of adopting this new Standard. Upon adopting SFAS 123(R) the Company's
income will decrease as a result of the additional compensation expense if
additional options are granted.
In December 2004, the FASB issued Statement of Financial Accounting
Standard ("SFAS") No. 153, "Exchanges of Non-monetary Assets." This Statement
amends Opinion 29 to eliminate the exception for non-monetary exchanges of
similar productive assets and replaces it with a general exception for exchanges
of non-monetary assets that do not have commercial substance. A non-monetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. The provisions of
this Statement are effective for non-monetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. Earlier application is permitted
for non-monetary asset exchanges occurring in fiscal periods beginning after
December 16, 2004. The provisions of this Statement should be applied
prospectively. The adoption of this pronouncement did not have a material effect
on the Company's financial statements.
The Emerging Issues Task Force ("EITF") Issue 04-8, "The Effect of
Contingently Convertible Instruments on Diluted Earnings per Share." The EITF
reached a consensus that contingently convertible instruments, such as
contingently convertible debt, contingently convertible preferred stock, and
other such securities should be included in diluted earnings per share (if
dilutive) regardless of whether the market price trigger has been met. The
consensus is effective for reporting periods ending after December 15, 2004. The
adoption of this pronouncement did not have a material effect on the Company's
financial statements.
In May 2005, the FASB issued FASB 154, "Accounting Changes and Error
Corrections," a replacement of APB Opinion No. 20 and FASB statement No. 3,
"Reporting Accounting Changes in Interim Financial Statements." This statement
changes the requirements for the accounting for and reporting of a change in
accounting principle. This Statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. This statement is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005.
On September 28, 2005, the FASB ratified the following consensus reached
in EITF Issue 05-8 ("Income Tax Consequences of Issuing Convertible Debt with a
Beneficial Conversion Feature"): a) The issuance of convertible debt with a
beneficial conversion feature results in a basis difference in applying FASB
Statement of Financial Accounting Standards SFAS No. 109, Accounting for Income
Taxes. Recognition of such a feature effectively creates a debt instrument and a
separate equity instrument for book purposes, whereas the convertible debt is
treated entirely as a debt instrument for income tax purposes. b) The resulting
basis difference should be deemed a temporary difference because it will
36
result in a taxable amount when the recorded amount of the liability is
recovered or settled. c) Recognition of deferred taxes for the temporary
difference should be reported as an adjustment to additional paid-in capital.
This consensus is effective in the first interim or annual reporting period
commencing after December 15, 2005, with early application permitted. The effect
of applying the consensus should be accounted for retroactively to all debt
instruments containing a beneficial conversion feature that are subject to EITF
Issue 00-27, "Application of Issue No. 98-5 to Certain Convertible Debt
Instruments" (and thus is applicable to debt instruments converted or
extinguished in prior periods but which are still presented in the financial
statements). The adoption of this pronouncement is not expected to have a
material impact on the Company's financial statements.
The Emerging Issues Task Force ("EITF") reached a tentative conclusion
on EITF Issue No. 05-1, "Accounting for the Conversion of an Instrument That
Becomes Convertible upon the Issuer's Exercise of a Call Option" that no gain or
loss should be recognized upon the conversion of an instrument that becomes
convertible as a result of an issuer's exercise of a call option pursuant to the
original terms of the instrument. The application of this pronouncement is not
expected to have an impact on the Company's consolidated financial statements.
In June 2005, the FASB ratified EITF Issue No. 05-2, "The Meaning of
'Conventional Convertible Debt Instrument' in EITF Issue No. 00-19, 'Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock'" ("EITF No. 05-2"), which addresses when a convertible debt
instrument should be considered 'conventional' for the purpose of applying the
guidance in EITF No. 00-19. EITF No. 05-2 also retained the exemption under EITF
No. 00-19. EITF No. 05-2 is effective for new instruments entered into and
instruments modified in periods beginning after June 29, 2005. The Company has
applied the requirements of EITF No. 05-2 since the required implementation
date. The adoption of this pronouncement did not have an impact on the Company's
consolidated financial statements.
EITF Issue No. 05-4 "The Effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument Subject to EITF Issue No. 00-19, 'Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock'" ("EITF No. 05-4") addresses financial instruments, such as
stock purchase warrants, which are accounted for under EITF 00-19 that may be
issued at the same time and in contemplation of a registration rights agreement
that includes a liquidated damages clause. The consensus of EITF No. 05-4 has
not been finalized. The Company does not believe the adoption of this
pronouncement will have an impact on the Company's consolidated financial
statements.
In September 2005, the FASB ratified EITF Issue No. 05-7, "Accounting
for Modifications to Conversion Options Embedded in Debt Instruments and Related
Issues" ("EITF No. 05-7"), which addresses whether a modification to a
conversion option that changes its fair value affects the recognition of
interest expense for the associated debt instrument after the modification and
whether a borrower should recognize a beneficial conversion feature, not a debt
extinguishment, if a debt modification increases the intrinsic value of the
debt. EITF No. 05-7 is effective for the first interim or annual reporting
period beginning after December 15, 2005. The Company does not believe the
adoption of this pronouncement will have an impact on the Company's consolidated
financial statements.
37
OFF BALANCE SHEET ARRANGEMENTS
The Company is not aware of any material transactions which are not
disclosed in its consolidated financial statements.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth, as of June 1, 2006, the name, position,
age, principal occupation and address and the date on which they first became an
officer or director for our directors and senior management.
DATE BECAME A
NAME AND POSITION AGE PRINCIPAL OCCUPATION AND ADDRESS DIRECTOR/OFFICER
----------------------------- ------ ---------------------------------------- ----------------
Bo Kristensen Chief Executive Officer of
President, Chief EuroTrust A/S
Executive Officer Poppelgaardvej 11-13
46 2860 Soeborg
Denmark May 2006
Soren Degn Chief Financial Officer of
Chief Financial Officer... 37 EuroTrust A/S
Poppelgaardvej 11-13
2860 Soeborg September
Denmark 2003
Erik Damgaard Private Investor
Chairman of the Board..... 45 c/o EuroTrust A/S
Poppelgaardvej 11-13
2860 Soeborg
Denmark December 2005
Peter Juul 43 Chief Executive Officer of Aktiv
Director, Chief Executive Gruppen Holding A/S and a Director of
Officer of Aktiv Gruppen EuroTrust A/S
Holding A/S............. Poppelgaardvej 11-13
2860 Soeborg
Denmark December 2005
John J. Stuart, Jr.(1)(2) Chief Financial Officer of
Director.................. 66 Irvine Sensors Corporation
3001 Redhill Avenue
Costa Mesa, CA 92626-4532
USA May 1998
Christian Rovsing (1)(2) Management Consultant c/o EuroTrust A/S
Director.................. 69 Poppelgaardvej 11-13
2860 Soeborg
Denmark May 2006
38
DATE BECAME A
NAME AND POSITION AGE PRINCIPAL OCCUPATION AND ADDRESS DIRECTOR/OFFICER
----------------------------- ------ ---------------------------------------- ----------------
Jan Berger(1)(2) Management Consultant
Director................ 63 c/o EuroTrust A/S
Poppelgaardvej 11-13
2860 Soeborg
Denmark May 2003
------------------------
(1) Member, audit committee of the Board of Directors.
(2) Member, compensation committee of the Board of Directors.
BO KRISTENSEN, PRESIDENT, CHIEF EXECUTIVE OFFICER
Mr. Kristensen has been our Chief Executive Officer since May 2006. He
has been affiliated as partner and responsible for economy and financing in the
subsidiary Aktiv Gruppen Holding A/S since 2001. Mr. Kristensen also serves as a
member of the board for several of our wholly owned subsidiaries. Mr. Kristensen
has a Graduate Diploma in Economics (Management Accounting) and Higher
Commercial Examination. Mr. Kristensen is highly experienced in both business
areas - Renewable Energy and Estate Development
SOREN DEGN, CHIEF FINANCIAL OFFICER
Mr. Degn has been our Chief Financial Officer since September 2003. He
also serves as a member of the board for several of our wholly-owned
subsidiaries. Prior to this appointment he served as our Corporate Finance
Director since 2001. Mr. Degn spent 5 years with Kampsax A/S (a consultancy
firm) and 7 years with KPMG in Denmark. Mr. Degn has a Graduate Diploma in
Business Administration in accountancy and a MSC (Business Administration and
Auditing) in financial planning and control from the Copenhagen Business School.
PETER JUUL, DIRECTOR, CHIEF EXECUTIVE OFFICER OF AKTIV GRUPPEN HOLDIng A/S
Mr. Juul has been the Chief Executive Officer of Aktiv Gruppen Holding
A/S since November 14, 2005. He was Chairman of the board of Aktiv Gruppen from
September 1, 2002 to November 14, 2005. Prior to his becoming Chief Executive
Officer of Aktiv Gruppen, Mr. Juul was a partner in the law firm of Interlex
Advokater located in Arhus, Denmark.
ERIK DAMGAARD, Chairman of the Board of DIRECTORS
Mr. Damgaard is currently a private investor. From 2002 to 2004 Mr.
Damgaard was a software architect for Microsoft Corporation. Prior to 2002 Mr.
Damgaard was the Technology Officer of Navision A/S, a company which he helped
found. In 2002, Navision A/S was sold to Microsoft.
39
JOHN J. STUART, JR., DIRECTOR
Mr. Stuart was elected to our Board of Directors in May 1998. Since
January 1983 Mr. Stuart has been employed by Irvine Sensors Corporation ("ISC"),
Costa Mesa, California USA, a developer of proprietary technologies to produce
extremely compact packages of solid state microcircuitry. He currently serves as
ISC's Senior Vice President and Chief Financial Officer, positions he has held
since November 1998 and July 1985, respectively. Between July 1985 and February
1995, he also held the position of ISC's treasurer and was reappointed to this
position in November 1998. Mr. Stuart holds a degree in Industrial Management
from the Massachusetts Institute of Technology.
CHRISTIAN ROVSING, DIRECTOR
Mr. Rovsing was a member of the European Parliament from 1989-2004. He
is currently president or a board member of a number of companies active mainly
in the areas of space, biotech and telecommunications. Mr. Rovsing received a
M.Sc. (electronics) from the Technical University of Denmark.
JAN BERGER, DIRECTOR
Mr. Berger was elected to our Board of Directors in May 2003. Mr. Berger
has been a Management Consultant since 1998. He has more than 24 years of
experience in the Information Technology (IT) industry and has held various top
management positions with leading IT companies. In addition, Mr. Berger has
served as a board member at several companies including, chairman of the board
of Skrivervik Data, a SUN Microsystems distributor in Norway. Mr. Berger has
degree in Business Economics and Administration with an emphasis on Sales and
Marketing.
There are no family relationships among any of our directors and
executive officers or those of our subsidiaries.
B. COMPENSATION
EXECUTIVE COMPENSATION
Cash compensation paid by us and our subsidiaries for the year ended
December 31, 2005 to our directors and senior management for services in all
capacities, other than professional fees, totaled approximately DKK 2.6 million
(approximately $411,000). In addition, we maintain a standard pension plan for
our executive officers under the terms of which we contribute an amount equal to
15% of their annual salary to the plan. The total contribution for 2005 totaled
approximately DKK 402,000 (approximately $64,000).
We have an employment agreement with Mr. Soren Degn our chief financial
officer which provides, among other things, for an annual salary of DKK
1,080,000 and an annual vacation payment of DKK 50,000. Also pursuant to the
Agreement, in May 2005 Mr. Degn was granted a 10 year option to purchase 112,500
ADSs at a price of DKK 4.75 per ADS (the market price of our ADSs on the date of
the grant). Mr. Degn's employment agreement will initially expire on December
31, 2007. However the agreement will automatically be extended for unlimited
1-year periods unless we provide him with 2 years advance notice that the
Company will not renew his employment.
40
We had an employment agreement with Mr. Aldo Petersen our former chief
executive officer which provided, among other things, for an annual salary of
DKK 1.8 million an annual vacation payment of DKK 50,000 and an annual bonus
based upon the annual income of the Company. This agreement expired on December
31, 2008. In connection with the acquisition of Aktiv Gruppen, Mr. Petersen and
the Company agreed in November, 2005 that his employment agreement would
terminate immediately after the 2005 Annual General Meeting of the Company,
which was held on May 24, 2006. Mr. Petersen was paid DKK 1,000,000 by the
Company in exchange for his agreement to the early termination of his employment
agreement.
OPTIONS
Options that were granted pursuant to our stock option plan to the named
executive officers during the year ended December 31, 2005 and are set forth in
the following table:
SECURITIES EXERCISE
UNDERLYING PRICE
NAME OPTIONS PER SHARE ($) EXPIRATION DATE
----------------------- -------------- ----------------- --------------------
Aldo M. N. Petersen 225,000 4.75 April 30, 2015
Soren Degn 112,500 4.75 April 30, 2015
----------------------
DIRECTOR COMPENSATION
Directors are reimbursed for expenses they incur in connection with
attending meetings of the Board of Directors and committees thereof. We
periodically grant options to our directors, although the amount and timing of
those grants are determined by the Board in its sole discretion. In addition,
our independent directors are paid (U.S.) $5,000 per quarter for serving as a
director and receive (U.S.) $1,000 for each Board meeting which they attend in
person
C. BOARD PRACTICES
Our Board of Directors may consist of between three and seven members.
As of May 24, 2006, the Board consisted of five members. Under certain
provisions of the Danish Companies Act, our employees have the right to elect
three board members. However, our employees have not exercised this right.
Each director is elected by a vote at the annual or special meeting of
the shareholders and serves for a term of one year. All of our current directors
were elected or re-elected at the annual general meeting held on May 24, 2006.
There is no restriction on the re-election of directors. The quorum for
a meeting of the Board of Directors is a simple majority. All members of the
Board of Directors have equal voting rights and all resolutions are passed by a
simple majority.
The citizenships of the directors are as follows:
41
Name Country of Citizenship
------------------------------------------------------------------------
ERIK DAMGAARD Denmark
PETER JUUL Denmark
JOHN J. STUART, JR. United States
JAN BERGER Norway
CHRISTIAN ROVSING Denmark
There are no agreements with our Board members that provide for the
payment of benefits upon termination of their directorship.
The Board has determined that Messrs. Berger, Rovsing and Stuart meet
the standard for independent directors as required by the listing standards of
NASDAQ.
BOARD COMMITTEES
Our Board of Directors has an audit committee and a compensation
committee.
The audit committee reviews our financial statements and accounting
practices, approves the selection of the Company's independent auditors and
meets and interacts with the independent auditors to discuss questions in regard
to the Company's financial reporting, reviews the results and scope of the audit
and other services provided by our independent auditors, and our internal
controls. The audit committee consists of Messrs. Berger, Rovsing and Stuart.
The Board has determined that Mr. Stuart is an "audit committee financial
expert", as defined under the rules promulgated by the United States Securities
and Exchange Commission.
The compensation committee makes recommendations to the Board regarding
remuneration of executive officers and reviews our compensation plans and
policies. The compensation committee consists of Messrs. Berger, Rovsing and
Stuart.
INDEMNIFICATION
Except to the extent indicated below, neither our Articles of
Association nor any contract or other arrangement to which we are a party
contains any provision under which any of our directors, members of management
or officers are insured or indemnified in any manner against any liability that
he or she may incur in his or her capacity as a director or an officer.
We have obtained an insurance policy under which our directors and
officers are insured against losses arising from their acts or omissions in
their capacities as directors or officers up to DKK 40 million. This policy has
a DKK 50,000 deductible.
Under the Danish Act on Limited Companies, our directors and officers,
who are registered as managers with the Danish Commerce and Companies Agency,
are liable for losses caused deliberately or by negligence in connection with
the performance of their duties to us and to third parties. Officers not so
registered are indemnified by us under applicable Danish law in respect of
actions taken by them in their official capacity.
42
Insofar as indemnification for liabilities under the Securities Act of
1933, as amended, may be permitted to our directors, officers or controlling
persons as set forth above, we have been informed that in the opinion of the
SEC, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
D. EMPLOYEES
As of December 31, 2005, we had 91 employees, a decrease of 10 employees
from the prior year. All of our employees are located in Denmark (see the
following table.) This decrease is primarily attributable to the selling of our
e-security businesses. The table below gives a breakdown of our employees and
area of employment:
Denmark Total
Sales and marketing 2 2
Customer service and 0 0
support
Technical 71 71
Finance and administration 18 18
-- --
Totals 91 91
== ==
Some of our employees are members of various labor unions; however, we
are not required to, and we do not have agreements with any union. We have not
experienced any work stoppages, and we consider our relations with our employees
to be good.
Competition in the recruiting of highly-qualified personnel is intense.
We believe that our future success will depend, in part, on our continued
ability to hire, motivate and retain qualified management, marketing and
technical personnel. To date, we have not experienced any difficulty in
attracting and retaining qualified personnel, but we can provide no assurance
that we will be able to continue to attract and retain qualified personnel in
the future.
We believe that our relations with our union and non-union employees are
good.
E. The following table sets forth the ownership of our ordinary
shares by the individuals named in Item 6.A., as of June 9, 2006
NUMBER ORDINARY
NAME SHARES AND ADSS (1) PERCENT (2)
--------------------------- ---------------------- -------------
Bo Kristensen 3,400,000 10.20%
Erik Damgaard 1,823,267 5.47%
Peter Juul 2,820,000 8.46%
Soren Degn * *
John J. Stuart, Jr. * *
Christian Rovsing * *
Jan Berger * *
All officers and directors
As a group (7 persons) 8,249,667(3) 24.47%
-----------------------
* Less than 1%
43
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Common shares relating to
options currently exercisable or exercisable within 60 days of June 9, 2006
are deemed outstanding for computing the percentage of the person holding
such securities but are not deemed outstanding for computing the percentage
of any other person. Except as indicated by footnote, and subject to
community property laws where applicable, the persons named in the table
above have sole voting and investment power with respect to all shares
shown as beneficially owned by them.
(2) As of June 9, 2006, 33,342,760 ordinary shares are issued, including no
treasury shares. Beneficial ownership percentages are calculated based on
33,342,760 ordinary shares issued and outstanding as of June 9, 2006. Of
the amount issued, 28,580,878 ordinary shares have been deposited
(represented by 28,580,878 ADSs, each representing one ordinary share
issued) under the Deposit Agreement with The Bank of New York.
(3) Includes 95,000 ordinary shares underlying exercisable options and
warrants.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The following table sets forth information, as of June 9, 2006 with
respect to the beneficial ownership of our ordinary shares by each shareholder
known by us to beneficially own more than 5% of our ordinary shares.
NAME OF BENEFICIAL OWNER(1) SHARES BENEFICIALLY OWNED
NUMBER (1) PERCENT
Erik Damgaard 1,823,267 5.47%
A,O, Holding ApS, controlled by Arne Olsen 3,756,550 11.27%
J,L,Invest Holding ApS, controlled by Jan Larsen 3,436,550 10.31%
Dansk Anlaegsinvest ApS, controlled by Bo Kristensen 3,400,000 10.20%
Volleshave Holding ApS, controlled by Peter Juul 2,820,000 8.46%
Peter Forchhammer 3,088,967 9.26%
Vind Energi Invest A/S 2,300,000 6.90%
================ ===========
TOTAL 20,625,334 61.86%
================ ===========
-----------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Ordinary shares issuable upon
currently exercisable or convertible securities or securities exercisable
or convertible within 60 days of May 29, 2006 are deemed beneficially owned
and outstanding for computing the percentage owned by the person holding
such securities, but are not considered outstanding for computing the
percentage of any other person.
Our major shareholders do not have different voting rights. We are not
owned or controlled, directly or indirectly, by another corporation or by any
foreign government. We are not aware of any arrangement that may at a subsequent
date result in a change of control.
44
B, RELATED PARTY TRANSACTIONS
In the ordinary course of business, EuroTrust engages in transactions
with certain entities and individuals that are considered to be related parties
as follows:
VERISIGN INC
VeriSign was a minority shareholder in EuroTrust A/S (approx, 18%) until
April 1, 2004. The transactions entered into during the year and the accounts
payable at the year end shown below are a result of commercial trade with
VeriSign, Current accounts with VeriSign are not carrying any interest.
DECEMBER 31,
---------------
2004 2005
---- ----
2,082 --
VeriSign Inc, (Annual fees and royalties) ========== ==========
VeriSign Inc, (Accounts payable) -- --
========== ==========
On April 1, 2004, the Company sold the Secure Socket Layer certificate
assets of EuroTrust PKI to VeriSign. EuroTrust PKI, a wholly-owned subsidiary of
the Company, is the operation through which the Company sold Public Key
Infrastructure (PKI) Services, including VeriSign's SSL certificates and related
services in Austria, Switzerland, Finland, Norway, Sweden and Denmark. Under the
terms of the agreement, VeriSign paid the Company $8,5 million U,S, in cash and
assumed the ongoing obligations of EuroTrust PKI SSL contracts.
Simultaneously with the closing of the transaction to sell the assets of
EuroTrust PKI to VeriSign, the Company repurchased 458,120 (not in thousands) of
its ordinary shares which is equivalent to 458,120 (Not in thousands) American
Depository Receipts or "ADRs" from VeriSign for $1,136 U.S. The repurchase was
authorized by the Company's shareholders on May 28, 2003.
NEMETH & SIGETTY A/S
Mr., Karoly Laszlo Nemeth was the Chairman of the board of directors of
EuroTrust A/S and is also the joint owner of Nemeth & Sigetty A/S, Nemeth &
Sigetty A/S provided legal services to the Company during each of the three
years ended December 31, 2003, 2004 and 2005. For the years ended December 31,
2003, 2004 and 2005 Nemeth & Sigetty A/S has been paid, DKK 418, DKK 962 and DKK
142 respectively. The total outstanding payables due to Nemeth & Sigetty A/S at
December 31, 2004 and December 31, 2005 were DKK 0 and DKK10, respectively.
C. INTERESTS OF EXPERTS AND COUNSEL,
Not applicable because this is an Annual Report filed under the Exchange
Act of 1934.
45
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See Item 18, "Financial Statements" and pages F-1 through F-43 of this
report.
LEGAL PROCEEDINGS
We recorded a provision in 2003 of DKK 1 million for expenses relating
to an arbitration court settlement regarding the construction of our building
located in Soeborg, Denmark. The result of the arbitration court was a net
payment to the contractor of approximately DKK 1 million. The case was fully
settled in 2004.
Other than as described above, neither we nor our property is a party in
any other pending material legal proceeding.
DIVIDEND PAYMENT POLICY
We have not paid out any dividend to our shareholders in the last three
financial years. Payment of any future dividends will depend on our earnings and
capital requirements, and other factors our board of directors deem appropriate.
B. SIGNIFICANT CHANGES
None
ITEM 9. THE OFFER AND LISTING
A. TITLE
Our ordinary shares are not traded on any stock exchange or
over-the-counter market. However, our ADS are traded on the Nasdaq National
Market under the symbol "EURO".
On August 29, 2002, we implemented a one for six reverse ratio change in
the number of ordinary shares represented by each ADS such that each new ADS
issued subsequent to the ratio change will represent six ordinary shares (prior
the ratio change, each ADS represented one ordinary share). Holders of our ADSs
prior to the ratio change, each of which represents one ordinary share ("Old
ADSs"), exchanged their Old ADSs for new ADSs, each of which represents six
ordinary shares ("New ADSs"). On May 19, 2005 our shareholders approved a one
for six reverse split of our ordinary shares such that six ordinary shares
nominal value DKK 1,25 were combined into one ordinary share nominal value DKK
7,50 ("New Ordinary Shares"). Therefore, each ADS now represents one New
Ordinary Share.
On December, 31, 2005, there were 5,799,351 New ADSs issued and
outstanding representing 5,799,351 ordinary shares. On June 1, 2006 there were
28,580,878 New ADSs issued and outstanding representing 28,580,878 ordinary
shares.
The following table sets forth, for the periods indicated, the range of
high and low market prices per ADS as quoted on the Nasdaq SmallCap or National
Market. The prices shown below (in US Dollars) are adjusted to reflect the 1 for
6 reverse ratio change in our ADSs, described above, and represent quotations
among securities dealers, do not include retail markups, markdowns or
commissions and may not represent actual transactions.
46
AMERICAN
DEPOSITARY
SHARES
------
HIGH LOW
---- ---
Year Ending December 31, 2001: $28.500 $5.700
Year Ending December 31, 2002: $8.52 $2.15
Year Ending December 31, 2003: $5.02 $0.75
Year Ending December 31, 2004:
First Quarter $3.90 $2.21
Second Quarter $5.50 $3.36
Third Quarter $4.75 $4.06
Fourth Quarter $6.00 $4.40
Year Ending December 31, 2005:
First Quarter $6.00 $4.12
Second Quarter $6.51 $4.41
Third Quarter $6.97 $5.40
Fourth Quarter $12.01 $4.85
Month Ending:
June 2006 (as of June 12, 2006) $16.52 $14.76
May 2006 $18.45 $12.74
April 30, 2006 $13.75 $12.50
March 31, 2006 $13.65 $12.86
February 28, 2006 $13.26 $10.11
January 31, 2006 $11.86 $10.07
December 31, 2005 $12.01 $6.590
B. PLAN OF DISTRIBUTION
Not required because this Form 20-F is filed as an Annual Report.
C. MARKETS
Our ordinary shares are not traded on any stock exchange or
over-the-counter market. However, our ADSs are traded on the Nasdaq National
Market under the symbol "EURO".
D. SELLING SHAREHOLDERS
Not required because this Form 20-F is filed as an Annual Report.
E. DILUTION
Not required because this Form 20-F is filed as an Annual Report.
F. EXPENSES OF THE ISSUE
Not required because this Form 20-F is filed as an Annual Report.
47
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not required because this Form 20-F is filed as an Annual Report.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
See Exhibit 1.1.
C. MATERIAL CONTRACTS
On September 30, 2004, we sold our Internet security division, Virus
112, to Comendo A/S, one of the largest providers of managed anti-virus and
anti-spam system solutions in Denmark, at a purchase price of approximately U.S.
$2.5 million. The purchase price was paid to us in the following manner: U.S.
$700,000 in cash and U.S. $1.8 million 5-year, debenture bearing 6% interest. In
accordance with the sale agreement, Comendo agreed to hire the Virus 112
employees and assume the employee obligations of Virus 112. In addition, Comendo
entered into a 5-year lease for the portion of the facility then occupied by
Virus 112.
On April 1, 2004, we sold our PKI services business to VeriSign and
terminated the international affiliate agreement ("Affiliate Agreement") with
VeriSign which we entered into on November 17, 2000 pursuant to which we became
an affiliate of VeriSign, as a member of the VeriSign Global Affiliate Network,
for the distribution and delivery of VeriSign's Internet Trust services and
products within Denmark, Norway, Sweden, Finland, Austria, Switzerland and
Italy. Under the terms of the sale agreement, VeriSign paid us $8.5 million U.S.
in cash and assumed the ongoing obligations of EuroTrust PKI SSL contracts.
D. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
There are no governmental laws, decrees or regulations of the Kingdom of
Denmark that restrict the export or import of capital (including, without
limitation, foreign exchange controls), or that affect the remittance of
dividends, interest or other payments to nonresident holders of ordinary shares.
There are no limitations imposed by the laws of the Kingdom of Denmark or our
Articles of Association on the right of nonresident or foreign holders to hold
or vote ordinary shares.
E. TAXATION
The following summary contains a description of the material United
States federal income tax and Danish tax consequences of the purchase, ownership
and disposition of ordinary shares or ADSs by a beneficial owner that (i) is an
individual citizen or resident in the United States (for United States federal
income tax purposes), a corporation or partnership organized under the laws of
the United States or any
48
state thereof, or estates or trusts the income of which is subject to United
States federal income tax regardless of its source, (ii) is not also a resident
or corporation of Denmark and is not domiciled in Denmark, (iii) does not hold
ordinary shares or ADSs in connection with any permanent establishment or fixed
base in Denmark, (iv) does not own, and has not owned (directly, indirectly or
by attribution) at any time, 10% or more of our total combined voting power or
equity, and (v) holds ordinary shares or ADSs as capital assets. The term
"United States holder," as used in this summary, means a beneficial owner of
ordinary shares or ADSs meeting these requirements.
The following summary of certain United States federal and Danish tax
matters is based on tax laws of the United States and Denmark as in effect on
the date of this report and the current Income Tax Treaty between the United
States and the Kingdom of Denmark (the "Treaty"), which is a generally effective
as of January 1, 2001. We cannot assure you that future legislation,
regulations, administrative rulings or court decisions will not adversely affect
the accuracy of the statements contained in this report, Also, changes in United
States and Danish law and the Treaty made after the date of this report could
have retroactive effect.
The following summary does not consider or discuss the tax laws of any
country other than the United States or Denmark. This summary does not describe
United States federal estate and gift tax considerations, or state, local or
provincial tax considerations Furthermore, it does not address United States
federal income tax or Danish tax considerations that apply to United States
holders of our ordinary shares or ADSs who are also subject to taxing
jurisdictions other than or in addition to the United States. Finally, it does
not address all possible categories of United States holders, some of whom (such
as financial institutions, trusts, estates, insurance companies, dealers in
securities, certain retirement plans and tax exempt organizations) may be
subject to special rules.
THE FOLLOWING DISCUSSION DOES NOT PURPORT TO BE EXHAUSTIVE OF ALL
POSSIBLE TAX CONSIDERATIONS,. UNITED STATES HOLDERS OF ORDINARY SHARES OR ADSs
SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE UNITED STATES, DANISH OR OTHER
TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ORDINARY SHARES
OR ADSs.
UNITED STATES TAX CONSEQUENCES OF OWNERSHIP OF ORDINARY SHARES OR ADSS
DIVIDENDS. For United States federal income tax purposes, the gross
amount of all dividends (that is, the amount before reduction for Danish
withholding tax) paid to a United States holder with respect to ordinary shares
or ADSs out of our current or accumulated earnings and profits ("E&P") will be
taxable for United States federal income taxation as a foreign source dividend
income. As such, these dividends are not eligible for the dividends received
deduction otherwise available to United States corporations in connection with
dividends received from United States corporations. To the extent that a
distribution exceeds E&P, it will be treated first as a return of capital to the
extent of the Untied States holder's basis, and then, as gain from the sale of a
capital asset.
For United States federal income tax purposes, the amount of any
dividend paid in Danish kroner will be the United States dollar value of the
kroner at the exchange rate in effect on the date of receipt, whether or not the
kroner is converted into United States dollars at that time.
The withholding tax imposed by Denmark generally is a creditable foreign
tax for United States federal income tax purposes. As a result, a United States
holder generally will be entitled to include the amount withheld as foreign tax
paid in computing a foreign tax credit (or in computing a deduction for foreign
income taxes paid, if the United States holder does not elect to use the foreign
tax credit
49
provisions of the Internal Revenue Code of 1986, as amended (the "Code")). The
Code, however, imposes a number of limitations on the use of foreign tax
credits, based on the particular facts and circumstances of each taxpayer.
United States holders who hold ordinary shares or ADSs should consult their tax
advisors regarding the availability of the foreign tax credit.
Backup withholding, imposed at the rate of 31%, may apply to a United
States holder in connection with the sale or exchange of ordinary shares or
ADSs. Generally, backup withholding does not apply to a United States holder (i)
that is a corporation or comes within certain other exempt categories or (ii)
provides a taxpayer identification number, certifies as to no loss of exemption
from backup withholding and otherwise complies with applicable requirements of
the backup withholding rules.
SALE OR OTHER DISPOSITION OF ORDINARY SHARES OR ADSS. Gain or loss
recognized by a United States holder on the sale or other disposition of
ordinary shares or ADSs will be taxable for United States federal income tax
purposes as capital gain or loss in an amount equal to the difference between
such United States holder's basis in the ordinary shares or ADSs and the amount
realized on the disposition. The capital gain or loss will be long term if the
securities were held for more than 12 months and will be short term if they were
held for less than 12 months. Capital losses are generally deductible only
against capital gains and not against ordinary income.
Capital gain recognized by a United States holder on the sale or other
disposition of ordinary shares or ADSs will be United States source gain. Losses
from the sale of ordinary shares or ADSs would generally be sourced in the same
manner as gains from the sale of such ordinary shares or ADSs. However, treasury
regulations include a dividend recapture rule and other exceptions that may
apply. United States holders of ordinary shares or ADSs should consult their tax
advisors regarding the proper treatment of such losses.
DANISH TAX CONSEQUENCES OF OWNERSHIP OF ORDINARY SHARES OR ADSS
DIVIDENDS. For Danish income tax purposes, the gross amount of all
distributions made by us to our shareholders is taxed as a dividend. However, a
distribution of liquidation proceeds made by us to our shareholders during the
calendar year in which we are finally liquidated and dissolved is taxed as
capital gain. In addition, the gross amount paid by us to redeem ordinary shares
or ADSs are generally taxed as a dividend. However, a shareholder may apply to
Danish tax authorities for a ruling allowing for capital gains treatment. If the
ruling is obtained before the distribution is decided the ruling includes an
exemption from the dividend tax. If the exemption request is granted, the
consideration will be taxed as capital gain.
The granting of bonus shares to shareholders, and the right of
shareholders to subscribe for ordinary shares or ADSs at a price that is less
than the current trading value of such ordinary shares or ADSs, are not
considered taxable distributions to shareholders.
In general, a Danish withholding tax of 28% is levied on all dividends.
However, corporate shareholders holding at least 20 % of the share capital for a
consecutive period for at least one year may be exempt from Danish withholding
tax on dividends. The dividend in question must be covered by the double tax
treaty between Denmark and United States. Further, a United States holder
(individual or a company) may apply to the Danish tax authorities for a partial
refund of the dividends tax that has been withheld under the Treaty. If this
refund request is granted, the Danish withholding tax on such dividends is
effectively reduced to 15%. The rate is reduced to 5% for corporate shareholders
holding at least 10% of the share capital. We do not presently contemplate the
payment of any dividends on our
50
ordinary shares or ADSs. However, should we decide to make payment of dividend,
we will apply to the Danish tax authorities for a blanket exemption allowing us
to withhold only 15% of all gross dividends paid to a United States holder.
While we believe that such an exemption will be granted, there can be no
assurance that this will occur. Shareholders eligible for further reduction must
apply individually for such reduction.
SALE OR OTHER DISPOSITION OF ORDINARY SHARES OR ADSS. Capital gains
realized by United States holders upon the sale or other disposition of ordinary
shares or ADSs may be exempt from Danish tax.
DANISH SHARE TRANSFER DUTY.
No Danish share transfer duty is levied on the disposal of ordinary
shares or ADSs.
DANISH ESTATE AND GIFT TAXES.
Generally, if a United States holder acquires or disposes of ordinary
shares or ADSs by inheritance, legacy or gift, such holder will not be subject
to Danish gift or inheritance taxes. If a United States holder should make a
gift of ordinary shares or ADSs to any person resident in Denmark the gift can
only be subject to Danish gift tax when forming part of the business property of
a permanent establishment in Denmark. Other transfers of shares or ADS's shall
be taxable only in the state in which the transfer or was domiciled at the time
of his death or when making the gift according to the United States-Denmark
Double Taxation Convention with respect to taxes on estates, inheritance and
gifts.
F. DIVIDENDS AND PAYING AGENTS
Not required because this Form 20-F is filed as an Annual Report.
G. STATEMENTS BY EXPERTS
Not required because this Form 20-F is filed as an Annual Report.
H. DOCUMENTS ON DISPLAY
We are subject to the information requirements of the Securities
Exchange Act of 1934, as amended and, to the extent required, we file periodic
reports and other information with the Securities and Exchange Commission. These
reports and information are available and may be copied at the public reference
facilities listed below. We intend to give our shareholders annual reports
containing audited financial statements and a report thereon from our
independent auditors and quarterly reports for the first three quarters of each
fiscal year containing unaudited interim financial information,
Statements made in this annual report about the contents of contracts or
other documents are not necessarily complete and we refer you to the copy of
such contracts or other documents filed as exhibits to this annual report.
51
You can obtain a copy of the exhibits hereto and other information about
us at the public reference facilities of the Securities and Exchange Commission
located at:
Public Reference Room 1024
Judiciary Plaza
450 Fifth Street, N,W,
Washington, D,C, 20549
You may obtain information about the operation of the public reference
facility by calling the Securities and Exchange Commission at (800) 732-0330.
We will also provide our shareholders with proxy statements prepared
according to Danish law, As a Danish company, we are exempt from the Exchange
Act rules about the provision and content of proxy statements and about
short-swing profit reporting and liability.
I. SUBSIDIARY INFORMATION
Not applicable
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2005, we did not believe that market risk financial
instruments would have a material affect on future operations or cash flows nor
did we view currency exchange risk or interest rate risk as material.
Operational currency exchange risk would arise if we priced products in one
currency while material costs and expenses were denominated in a different
currency. We do not believe that the operational currency exchange risk is
material. However, from time to time we enter into a contract denominated in a
currency other than the currency of operating expenses and, in such cases, may
enter into currency forward arrangements with respect to and for the period
covering such contract, Throughout the year 2005 and specifically at December
31, 2005, we had no material foreign exchange contracts outstanding.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not required because this Form 20-F is filed as an Annual Report.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
OF PROCEEDS
None.
52
ITEM 15. CONTROLS AND PROCEDURES
a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES, EuroTrust's
management, with the participation of the chief executive officer and the chief
financial officer, carried out an evaluation of the effectiveness of EuroTrust's
"disclosure controls and procedures" (as defined in the Securities Exchange Act
of 1934 (the "Exchange Act") Rules 13a-15(e) and 15-d-15(e)) as of the end of
the fiscal year covered by this Annual Report (the "Evaluation Date"). Based
upon that evaluation, the chief executive officer and the chief financial
officer concluded that, as of the Evaluation Date, EuroTrust's disclosure
controls and procedures are effective, providing them with material information
relating to EuroTrust as required to be disclosed in the reports EuroTrust files
or submits under the Exchange Act on a timely basis.
b) MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING, Not applicable for fiscal years ending before July 15, 2006.
c) ATTESTATION REPORT OF THE REGISTERED PUBLIC ACCOUNTING FIRM, Not
applicable for fiscal years ending before July 15, 2006.
d) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING, There were
no changes in EuroTrust's internal controls over financial reporting, known to
the chief executive officer or the chief financial officer, that occurred during
the period covered by this report that has materially affected, or is reasonably
likely to materially affect, EuroTrust's internal control over financial
reporting.
ITEM 16. RESERVED
ITEM 16 A AUDIT COMMITTEE FINANCIAL EXPERT
The Board has determined that, Mr., John Stuart, is an "audit committee
financial expert," as that term is defined in Item 401(h) of Regulation S-K, and
"independent" for purposes of current and recently-adopted Nasdaq listing
standards and Section 10A(m)(3) of the Securities Exchange Act of 1934.
ITEM 16 B CODE OF ETHICS
We have adopted a code of conduct that applies to our principal executive
officer, principal financial officer and other persons performing similar
functions, as well as all of our other employees and directors, This code of
conduct is posted on our website at WWW.EUROTRUST.DK and is filed as Exhibit
11.1 to this report.
ITEM 16 C PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
For the fiscal years ended 2004 and 2005, our principal accounting firm,
Gregory & Eldredge, LLC, billed aggregate fees of approximately $102,772 and
$102,555 respectively for the audit of our 2004 and 2005 financial statements.
AUDIT-RELATED FEES
None
53
TAX FEES
None
ALL OTHER FEES
None
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
The Audit Committee charter provides that the Audit Committee will
pre-approve audit services and non-audit services to be provided by our
independent auditors before the accountant is engaged to render these services
other than the minimums non-audit services for which the pre-approval
requirements are waived in accordance with the rules and regulations of the SEC.
The Audit Committee may consult with management in the decision-making process,
but may not delegate this authority to management. The Audit Committee may
delegate its authority to pre-approve services to one or more committee members,
provided that the designees present the pre-approvals to the full committee at
the next committee meeting.
ITEM 16D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not Applicable
ITEM 16 E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
NOT APPLICABLE
PART III
ITEM 17. FINANCIAL STATEMENTS
See Item 18, below.
ITEM 18. FINANCIAL STATEMENTS
See the Company's Consolidated Financial Statements, which are
incorporated herein by reference and set forth on pages F-1 through F-43.
54
ITEM 19, EXHIBITS
1.1 Amended Articles of Association of the Registrant, as of December 6,
2001 (1)
1.2 Rules of Procedures of the Registrant, as amended (2)
2.1 Employee and Director Subscription Option Plan (4)
4.5 Form of Employment Agreement between the Registrant and Aldo
Petersen, effective as of January 1, 2005 (4)
4.6 Form of Employment Agreement between the Registrant and Soren Degn,
effective as of January 1, 2005 (4)
8.1 List of the Subsidiaries of the Registrant *
11.1 Code of Ethics (3)
12.1 Chief Executive Officer Certification pursuant to Rule 13a-14(a) or
Rule 15d-14(a),*
12.2 Chief Financial Officer Certification pursuant to Rule 13a-14(a) or
Rule 15d-14(a),*
13.1 Chief Executive Officer Certification pursuant to Rule 13a-14(b) or
Rule 15d-14(b) and 18 U,S,C, Section 1350,*
13.2 Chief Financial Officer Certification pursuant to Rule 13a-14(b) or
Rule 15d-14(b) 2 and 18 U,S,C, Section 1350,*
-----------
* Included herewith,
(1) Filed as an exhibit to the Company's Annual Report on Form 20-F, filed on
June 27, 2002, and incorporated by reference herein.
(2) Filed as an exhibit to the Company's original filing of the Registration
Statement on Form F-1 (File No, 333-7092), filed on June 20, 1997, and
incorporated by reference herein.
(3) Filed as an exhibit to the Company's Annual Report on Form 20-F, filed on
September 23, 2003, and incorporated by reference herein.
(4) Filed as an exhibit to the Company's Annual Report on Form 20-F, filed on
June 3, 2005, and incorporated by reference herein.
55
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant certifies that it meets all of the
requirements for filing on Form 20-F and has duly caused this annual report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Soborg, Denmark.
EUROTRUST A/S
Dated: June 23, 2006 By: /s/ Bo Kristensen
------------------------------------
Bo Kristensen
Chief Executive Officer
(Principal Executive Officer)
Dated: June 23, 2006 By: /s/ Soren Degn
------------------------------------
Soren Degn
Chief Financial Officer
(Principal Financial and Accounting
Officer)
EUROTRUST A/S AND SUBSIDIARIES
Formerly known as Euro909.com A/S
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm ................... F-2
Consolidated Balance Sheets as of December 31, 2004 and 2005 .............. F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2003, 2004 and 2005 ........................................ F-5
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2003, 2004 and 2005 ........................................ F-6
Consolidated Statements of Comprehensive Income (Loss)
for the Years Ended December 31, 2003, 2004 and 2005..................... F-7
Consolidated Statements of Cash Flows for the Years Ended December 31,
2003, 2004 and 2005 ..................................................... F-8
Notes to Consolidated Financial Statements ................................ F-9
F-1
[GRAPHIC OMITTED]
4631 SO. SYCAMORE DR. o SALT LAKE CITY, UTAH 84117
(801) 277-2763 PHONE o (801) 277-6509
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
EuroTrust A/S AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheets of
EuroTrust A/S and Subsidiaries as of December 31, 2004 and 2005 and the related
consolidated statements of operations, comprehensive income, shareholders'
equity and cash flows for the years ended December 31, 2003, 2004 and 2005. The
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with standards of the Public
Company Accounting Oversight Board in the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The company was not
required to have, nor were we engaged to perform, an audit of its internal
controls over financial reporting. Our audit included consideration of internal
controls over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal controls over financial
reporting. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
EuroTrust A/S and Subsidiaries at December 31, 2004 and 2005 and the
consolidated results of its operations and its cash flows for the year ended
December 31, 2003, 2004 and 2005, in conformity with accounting principles
generally accepted in the United States.
/s/ Gregory & Associates, LLC.
March 10, 2006, except for Note 24
as to which the Date is June 2, 2006
Salt Lake City, Utah
F-2
EUROTRUST A/S AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA AND WHERE OTHERWISE INDICATED)
DECEMBER 31,
------------
2004 2005 2005
------- ------- ------
DKK DKK USD
ASSETS
Current assets:
Cash and cash equivalents 6,750 12,315 1,947
Restricted cash 5,352 -- --
Debt securities, available for sale -- 12,155 1,922
Accounts receivable trade, net of
allowances for doubtful accounts of DKK
592 in 2004 and DKK 43 in 2005 16,521 15,848 2,506
Notes receivable, current 2,200 2,200 348
Broadcasting programming rights, current 2,928 2,893 458
Prepaid expenses and deposits 2,002 1,865 295
Other receivables 1,423 1,747 276
Current assets of discontinued operations 2,570 -- --
------- ------- ------
Total current assets 39,746 49,023 7,752
Marketable securities - available for sale 197 -- --
Notes receivable, net of current portion 8,800 7,150 1,131
Broadcasting programming rights, net of
current portion 2,898 -- --
Rent and other long term deposits 3,250 2,325 368
Other receivables, long term 524 -- --
Equity method investment in Mediehuset
Danmark ApS 1,638 2,099 332
Property, plant and equipment, net 92,554 67,122 10,613
Goodwill 24,561 24,561 3,884
Deferred tax assets 3,972 8,611 1,361
Long term assets of discontinued operations 108 64 10
------- ------- ------
Total assets 178,248 160,955 25,451
======= ======= ======
DKK amounts have been converted into US$ at an exchange rate of
$1=DKK 6.3241. The accompanying notes are an integral part of
these cons olidated financial statements.
F-3
DECEMBER 31,
------------
2004 2005 2005
------- ------- ------
DKK DKK USD
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Secure Line of Credit 8,417 11,323 1,790
Bank loan, current 741 802 127
Lease obligations, current 1,244 1,790 283
Accounts payable 22,402 11,293 1,785
Accrued expenses 11,681 9,855 1,558
Equipment purchase obligation, current 12,152 8,802 1,392
Liabilities of discontinued operations 2,556 -- --
-------- -------- --------
Total current liabilities 59,193 43,865 6,935
Long term liabilities:
Equipment purchase obligation, net of
current portion 9,749 -- --
Bank loan, net of current portion 3,099 2,829 447
Lease obligations, long term 4,585 4,969 786
-------- -------- --------
Total long term liabilities 17,433 7,798 1,233
-------- -------- --------
Minority interest in subsidiaries 56 75 12
-------- -------- --------
Shareholders' equity:
Common shares - par value DKK 7,50,
7,991,000 and 37,492,898 authorized,
5,108,267 and 5,826,232 issued at
December 31, 2004 and 2005 38,312 43,697 6,910
Additional paid-in capital 519,844 531,438 84,034
Accumulated deficit (457,386) (465,310) (73,577)
Cumulative other comprehensive income 796 (608) (96)
-------- -------- --------
Total Shareholders' equity 101,566 109,217 17,271
-------- -------- --------
Total liabilities and Shareholders' equity 178,248 160,955 25,451
======== ======== ========
DKK amounts have been converted into US$ at an exchange rate of
$1=DKK 6.3241. The accompanying notes are an integral part of
these consolidated financial statements.
F-4
EUROTRUST A/S
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA AND WHERE OTHERWISE INDICATED)
YEARS ENDED DECEMBER 31,
2003 2004 2005 2005
-------- -------- -------- --------
DKK DKK DKK USD
Net revenue 109,822 91,036 94,652 14,967
Operating expenses:
Cost of revenue, exclusive of depreciation shown separately below 65,818 60,349 68,806 10,880
Selling and marketing 16,421 17,727 17,149 2,712
Selling and marketing - related parties 1,074 -- -- --
General and administrative 26,463 20,581 20,755 3,282
General and administrative - related parties 418 962 -- --
Depreciation 6,075 10,226 11,695 1,849
Goodwill impairment -- 914 -- --
-------- -------- -------- --------
Total operating expenses 116,269 110,759 118,405 18,723
-------- -------- -------- --------
Operating (loss) (6,447) (19,723) (23,753) (3,756)
Other income (expenses)
Interest income 214 284 1,391 220
Interest expense (1,610) (1,203) (1,506) (238)
Foreign exchange gain (loss), net (1,847) (762) 696 110
Gains from sales of businesses/divestitures -- 8,102 8,497 1,344
Write-down of long term investments & marketable securities (196) (14,942) -- --
Equity in earnings of Mediehuset Danmark ApS 0 138 461 73
Other (expenses) income, net 693 (1,442) (150) (24)
-------- -------- -------- --------
(Loss) before income taxes and minority interest (9,193) (29,548) (14,364) (2,271)
Income tax benefit 1,491 3,105 4,401 696
Minority interest in net income (loss) of subsidiaries (257) 192 (19) (3)
-------- -------- -------- --------
(Loss) from continuing operations (7,959) (26,251) (9,982) (1,578)
Gain (loss) from operations of discontinued internet
segment components net of tax 0 in 2003, 2004, 2005 (8,420) 1,090 -- --
Gain from disposal of discontinued internet segment
components net of tax, 0 in 2003, 2004 and 2005 10,049 83,615 2,058 326
-------- -------- -------- --------
NET (LOSS) INCOME (6,330) 58,454 (7,924) (1,252)
BASIC INCOME (LOSS) PER WEIGHTED AVERAGE COMMON SHARE
(Loss) from continuing operations (1.70) (5.31) (1.82) (0.29)
======== ======== ======== ========
(Loss) Gain from operations of discontinued components (1.80) 0.22 N/A N/A
======== ======== ======== ========
Income from discontinued operations 2.15 16.90 0.38 0.06
======== ======== ======== ========
Net (loss) income (1.35) 11.82 (1.45) (0.23)
======== ======== ======== ========
F-5
EUROTRUST A/S
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA AND WHERE OTHERWISE INDICATED)
YEARS ENDED DECEMBER 31,
2003 2004 2005 2005
-------- -------- -------- --------
DKK DKK DKK USD
Weighted average common shares outstanding (in thousands) 4,671 4,947 5,478 5,478
======== ======== ======== ========
DILUTED INCOME (LOSS) PER WEIGHTED AVERAGE COMMON SHARES
(Loss) from continuing operations (1.70) (4.98) (1.82) (0.29)
======== ======== ======== ========
(Loss) Gain from operations of discontinued components (1.80) 0.21 N/A N/A
======== ======== ======== ========
Income from discontinued operations 2.15 15.88 0.38 0.06
======== ======== ======== ========
Net (loss) income (1.35) 11.10 (1.45) (0.23)
======== ======== ======== ========
Weighted average common shares outstanding, assuming dilution
(in thousands) 4,671 5,266 5,478 5,478
======== ======== ======== ========
DKK amounts have been converted into US$ at an exchange rate of
$1=DKK 6.3241. The accompanying notes are an integral part of
these consolidated financial statements.
F-6
EUROTRUST A/S AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA AND WHERE OTHERWISE INDICATED)
COMMON ADDITIONAL OTHER COM-
SHARES PAID-IN ACCUMULATED PREHENSIVE TREASURY
AMOUNT CAPITAL DEFICIT INCOME STOCK TOTAL
-------- ---------- ----------- --------- -------- --------
DKK DKK DKK DKK DKK DKK
BALANCE AT DECEMBER 31, 2002 34,006 532,280 (509,510) (556) (11,978) 44,242
Issuance of 4,550 common shares for cash
through exercise of stock options 5,687 605 -- -- -- 6,292
Sale of treasury stock -- (6,845) -- -- 7,933 1,088
Currency translation adjustments -- -- -- 921 -- 921
Unrealized loss on marketable securities -- -- -- 147 -- 147
Net loss -- -- (6,330) -- -- (6,330)
--------- ---------- ------------ -------- ----- ----------
BALANCE AT DECEMBER 31, 2003 39,693 526,040 (515,840) 512 (4,045) 46,360
Issuance of 2,072 common shares for cash
through exercise of stock options 2,588 473 -- -- -- 3,061
Currency translation adjustments -- -- -- (110) -- (110)
Other than temporary losses on
marketable securities -- -- -- 394 -- 394
Purchase of 3,648,720 common shares into
treasury at cost -- -- -- -- (10,826) (10,826)
Sale of 900,000 shares of treasury stock 319 3,829 4,148
Compensation for the issuance of 150,000
warrants to purchase common stock at
DKK 3,96 per ordinary share -- 85 -- -- -- 85
Cancellation of common shares held in
treasury at cost (3,969) (7,073) -- -- 11,042 --
Net income -- -- 58,454 -- -- 58,454
--------- ---------- ------------ -------- ----- ----------
BALANCE AT DECEMBER 31, 2004 38,312 519,844 (457,386) 796 -- 101,566
Issuance of 717.964 common shares for cash
through exercise of stock options 5,385 11,480 -- -- -- 16,865
Compensation for the issuance of 25,000
warrants to purchase common stock at
DKK 5,50 per ordinary share -- 114 -- -- -- 114
Currency translation adjustments -- -- -- (796) -- (796)
Unrealized loss on marketable securities -- -- -- (608) -- (608)
Net loss -- -- (7,924) -- -- (7,924)
--------- ---------- ------------ -------- ----- ----------
BALANCE AT DECEMBER 31, 2005 43,697 531,438 (465,310) (608) -- 109,217
BALANCE AT DECEMBER 31, 2005 USD$6,909 USD$84,034 USD$(73,577) USD$(96) USD$0 USD$17,270
DKK amounts have been converted into US$ at an exchange rate of
$1=DKK 6.3241. The accompanying notes are an integral part of
these consolidated financial statements.
F-7
EUROTRUST A/S AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE DATA AND WHERE OTHERWISE INDICATED)
YEARS ENDED DECEMBER 31,
2003 2004 2005 2005
------- ------- ------- -------
DKK DKK DKK USD
Net income (loss) (6.330) 58.454 (7.924) (1.252)
Currency translation adjustment, net of
taxes of DKK 0 in 2003, 2004 and 2005 921 (110) (796) (126)
Unrealized investment gains (losses), net
of taxes of DKK 0 in 2003, 2004 and 2005 147 394 (608) (96)
------- ------- ------- -------
Comprehensive net income (loss) (5.262) 58.738 (9.328) (1.474)
======= ======= ======= =======
DKK amounts have been converted into US$ at an exchange rate of
$1=DKK 6.3241. The accompanying notes are an integral part of
these consolidated financial statements.
F-8
EUROTRUST A/S AND SUBSIDIARIES
RESTATED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA AND WHERE OTHERWISE INDICATED)
YEARS ENDED DECEMBER 31,
2003 2004 2005 2005
------- ------- ------- -------
DKK DKK DKK USD
Cash flows from operating activities:
Net (loss) from continuing operations (7,959) (26,251) (9,982) (1,578)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation, amortization and write down 6,075 11,140 11,695 1,849
Non-cash compensation expense options and warrants (2,287) 85 114 18
(Gain) on sale business -- (8,102) (8,497) (1,344)
(Gain)/loss on sale of fixed assets (1,703) 169 172 27
Provision for doubtful accounts (699) (720) (107) (7)
Loss on investments/marketable securities 197 14,943 -- --
Deferred taxes (1,677) (1,589) (4,401) (696)
Minority interest 257 (127) 19 3
(Gain) on equity method investments -- (138) (461) (73)
Non-cash issuance of common shares from treasury 1,088 -- -- --
Changes in operating assets and liabilities:
Accounts receivable (5,156) 8,697 780 113
Broadcasting programming rights 3,804 (3,186) 2,932 464
Inventories and other assets 934 (149) 925 146
Prepaid expenses 2,270 (3,427) 138 22
Income tax payable (1,202) (61) -- --
Other receivables 4,337 574 200 32
Accounts payable 7,225 316 (13,731) (2.171)
Accounts payable, related parties (12,356) (477) -- --
Accrued expenses (3,094) (6,857) (1,826) (289)
Deferred revenue 1,018 3,298 -- --
------- ------- ------- -------
Cash used in operating activities: (8,928) (11,862) (22,030) (3,484)
Cash used in discontinued operations: (10,310) 1,206 58 9
------- ------- ------- -------
(19,238) (10,656) (21,972) (3.475)
======= ======= ======= =======
Cash flows from investing activities:
(Purchase of investments) proceeds from sales of investments 216 (11,948) 197 31
Acquisition of businesses, net of cash acquired (1,500) (13,086) -- --
Proceeds from sale of business, net of cash disposed of 1,986 61,730 10,555 1,677
Proceeds from notes receivables -- -- 1,650 261
Purchase of bonds -- -- (13,000) (2,056)
Purchase of fixed assets (14,773) (31,220) (15,972) (2,534)
Proceeds from sales of fixed assets 1,448 561 19,989 3,161
------- ------- ------- -------
Cash (used in) provided by investing activities: (12,623) 6,037 3,419 540
======= ======= ======= =======
Cash flows from financing activities:
Net change in short and long-term borrowings (809) 12,257 2,697 426
Purchase of treasury stock -- (10,826) -- --
Lease payments (2,852) (1,172) -- --
Net change in restricted cash -- (5,352) 5,352 846
Proceeds from issuance of common sharesand treasury shares 6,292 7,209 16,865 2,667
------- ------- ------- -------
Cash provided by financing activities: 2,631 2,116 24,914 3,939
======= ======= ======= =======
Effect of currency exchange rate changes on cash and cash equivalents 921 (110) (796) (126)
------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents (28,309) (2,613) 5,565 878
Cash and cash equivalents, beginning of period 37,672 9,363 6,750 1,069
------- ------- ------- -------
Cash and cash equivalents, end of period 9,363 6,750 12,315 1,947
======= ======= ======= =======
Cash paid for interest (1,714) (1,240) (1,508) (238)
======= ======= ======= =======
Cash paid for taxes 1,373 -- -- --
======= ======= ======= =======
DKK amounts have been converted into US$ at an exchange rate of
$1=DKK 6.3241. The accompanying notes are an integral part of
these consolidated financial statements.
F-9
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
EuroTrust A/S and its subsidiaries (the "Company") engaged in providing
production and broadcasting services and operated the Danish cable channel
DK4,through June 2, 2006. The Company previously provided Internet security
products and services in Scandinavia; these operations were sold during 2003 and
2004.
On June 2, 2006, the Company effectively discontinued its' production
and broadcasting operations through the sale of all the issued and outstanding
shares of Euro-Vision A/S (See Note 24).
On April 17, 2006, the Company was acquired by Aktiv Gruppen Holdings
A/S and subsidiaries which owns, acquires, and develops real estate in Denmark
and Norway. Aktiv Gruppen Holdings A/S further owns and operates wind energy
turbines primarily located in Germany. The acquisition was accounted for as a
reverse merger or recapitalization of Aktiv Gruppen Holdings A/S, wherein Aktiv
Gruppen Holdings A/S became a 100% owned subsidiary of EuroTrust A/S. Therefore,
the pre-acquisition financial statements of Aktiv Gruppen Holding A/S will be
treated as the historical financial statements of the combined companies. The
historical accumulated deficit through the date of acquistion of EuroTrust A/S
will be reclassified against additional paid in capital. The results of
operations of EuroTrust will only be included in subsequent financial results
from the date of acquisition. In addition, EuroTrust's changed its fiscal year
end from December 31, to June 30, which is the fiscal year end of Aktiv Gruppen
Holdings A/S (See Note 24).
The Company operated in two reportable service-based segments from 2002
through 2004: The Production and Broadcasting Segment and the Internet Security
Product and Services Segment.
Production and Broadcasting Segment
-----------------------------------
The Company's Production and Broadcasting Segment consisted of the
Danish Cable Channel DK4, and one of the largest media production companies in
Scandinavia with a special focus on sports programming. The Company's media
division also offered educational courses in television production.
Internet Security Product and Service Segment
---------------------------------------------
At December 31, 2005, the Internet services segment monitors the
continuing royalty payments received in connection with the sale of our secure
hosting and remote back-up components in 2004.
The Company's Internet Security Product and Services Segment previously
offered trusted Internet security products and services including virus
detection products and services, email security products, vulnerability testing,
secure remote backup services, digital video surveillance, secure hosting and
Public Key Infrastructure (PKI) Services until the sale of these businesses
during 2003 and 2004.
F-10
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States ("US GAAP") and
include the accounts of EuroTrust A/S and its majority-owned subsidiaries. All
inter-company balances and transactions have been eliminated in consolidation.
The following is a list of our significant operating subsidiaries and
their jurisdiction of incorporation and our ownership interest in those
subsidiaries at December 31, 2005:
COUNTRY OF INTEREST
SUBSIDIARY INCORPORATION OWNERSHIP
---------- ------------- ---------
Europe-Visions A/S Denmark 100.0% (Sold June 2, 2006)
On December 31, 2003, the Company purchased the remaining 15% interest
in Europe-Visions A/S. The minority interests' proportionate share of income or
loss of Europe-Visions A/S is included in the consolidated statement of
operations through December 31, 2003.
The accompanying financial statements included the operating results of
Public Key Infrastructure (PKI) Services through April 1, 2004, internet
security products and services including virus detection services, email
security products, vulnerability testing through September 30, 2004 the secure
remote backup services through November 2003, digital video surveillance through
December 2003, and secure hosting through January 1, 2004.
Other significant operating subsidiaries consolidated under
Europe-Visions A/S and its jurisdiction of incorporation and the related Company
ownership interest in those subsidiaries at December 31, 2005 are as follows:
COUNTRY OF INTEREST
SUBSIDIARY INCORPORATION OWNERSHIP
---------- ------------- ---------
Ciac A/S Denmark 100.0%
Prime Vision A/S Denmark 100.0%
Arhustudiet A/S Denmark 100.0%
Publishing & Management ApS Denmark 51.0%
TV Akademiet A/S Denmark 100.0%
Formedia A/S Denmark 100.0%
Mobile Broadcasting A/S Denmark 100.0%
On April 1, 2004, the Company purchased the remaining 25% interest of
Mobile Broadcasting A/S. The minority interests' proportionate share of income
or loss of Mobile Broadcasting is included in the consolidated statement of
operations through March 31, 2004.
F-11
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
On July 1, 2004, the Company distributed a 49% interest of Publishing &
Management ApS to current management. The minority interests' proportionate
share of income or loss of Publishing & Management ApS is included in the
consolidated statement of operations from July 1, 2004.
On April 1, 2004 the Company merged TV Facilities A/S into Prime Vision
A/S. The merger had no effect on the accompanying financial statements.
On June 25, 2004 the Company formed Formedia A/S as a wholly owned
subsidiary of Europe-Visions A/S.
At December 31, 2005 and 2004, the Company holds a 25% interest in
Mediehuset Danmark ApS; the investment is accounted for under the equity method
of accounting.
REPORTING CURRENCY
The consolidated financial statements are stated in Danish Kroner
("DKK"), the currency of the country in which the Company and its major
subsidiaries are incorporated and operate. Balance sheet accounts of foreign
subsidiaries are translated into DKK at the year-end exchange rate and items in
the statement of operations are translated at the average exchange rate.
Resulting translation adjustments are recorded to other accumulated
comprehensive income, a separate component of shareholders' equity.
Translation adjustments arising from inter-company financing of a
long-term investment nature are accounted for similarly. Some transactions of
the Company and its subsidiaries are made in currencies other than the reporting
currency. Gains and losses from these transactions are included in the statement
of operations as foreign currency transaction gains and losses.
INFORMATION EXPRESSED IN US DOLLARS
Translation of DKK amounts into US Dollar amounts is included solely for
the convenience of the reader and has been made at the rate of 6.3241 DKK to one
US Dollar, the approximate exchange rate at December 31, 2005. Such translation
should not be construed as a representation that the DKK amounts could be
converted into US Dollars at that or any other rate.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
US GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Estimates are used when accounting for items and matters such as the
allowance for uncollectible accounts, inventory obsolescence, amortization,
asset valuations, impairment assessments, taxes, guarantees and contingencies.
Management bases its estimates on historical experience and on other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities. Actual results may differ from these estimates under different
assumptions or conditions.
F-12
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and short-term deposits with
maturities of less than three months at the time of purchase.
RESTRICTED CASH
Restricted cash as of December 31, 2004, included an escrow account with
respect to the secure communications, on-site solutions, and payment platforms
to website owners, commercial enterprises and electronic commerce service
providers business (PKI) that was sold in April 2004. As of December 2005 the
total balance of restricted cash was fully received.
MARKETABLE SECURITIES - AVAILABLE FOR SALE
The Company accounts for investments in marketable securities in
accordance with Statement of Financial Accounting Standard (SFAS) 115,
"Accounting for Certain Investments in Debt and Equity Securities". Under SFAS
115 the Company's investments in public companies are classified as
"available-for-sale". These investments are carried at fair value based on
quoted market prices. We review the marketable equity holdings in publicly
traded companies on a regular basis to determine if any of the marketable
securities have experienced an other-than-temporary decline in its fair value.
We consider the investee company's cash position, earnings and revenue outlook,
stock price performance over the past six months, liquidity and management,
among other factors, when reviewing the marketable equity securities. If it is
determined that an other-than-temporary decline in fair value exists in a
marketable equity security, we record an investment loss in the consolidated
statement of operations. Marketable securities are classified as current if the
Company has the ability or intention of selling the security within 12 months.
LONG-TERM INVESTMENTS
Investments in non-public companies are included in long-term
investments in the consolidated balance sheet and are accounted for under the
cost or equity method. For these non-quoted investments, we regularly review the
assumptions underlying the operating performance and cash flow forecasts based
on information requested from these privately held companies. Generally, this
information may be more limited, may not be as timely as and may be less
accurate than information available from publicly traded companies. Assessing
each investment's carrying value requires significant judgment by management. If
it is determined that there is an other-than-temporary decline in the fair value
of a non-public equity security, we write-down the investment to its fair value
and record the related write-down as an investment loss in the consolidated
statement of operations.
F-13
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable are recorded at the amount invoiced to
customers and they do not bear interest. The allowance for doubtful accounts is
the Company's best estimate of the amount of probable losses resulting from the
inability of our customers to make required payments. We regularly review the
adequacy of our accounts receivable allowance after considering the size of the
accounts receivable balance, each customer's expected ability to pay and our
collection history with each customer. We review significant invoices that are
past due to determine if an allowance is appropriate based on the risk category
using the factors described above.
The following includes the changes in the allowance for doubtful
accounts for the years ended December 31, 2003 to December 31, 2005:
Allowance for doubtful accounts: Amounts
charged
credited) to
Balance at Operating Balance at
January 1 Expenses Write-offs December 31
---------- -----------
Year ended December 31, 2003 4,629 ( 699) (1,691) 2,239
Year ended December 31, 2004 2,239 ( 720) (927) 592
Year ended December 31, 2005 592 ( 107) (442) 43
NOTES RECEIVABLE
Notes receivable were recorded as a result of the sale of Virus 112 and
totaled DKK 11,000 and 9,350 at December 31, 2004 and 2005, respectively.
Interest of 6% per annum is recorded and receivable on a quarterly basis
beginning December 31, 2004. Principal payments of DKK 550 are payable quarterly
beginning March 31, 2005 through December 31, 2009. No allowance for doubtful
accounts has been recorded on the notes as they are deemed collectable. The
Company's policy for putting the loan on non-accrual status and to record an
allowance for doubtful accounts is based upon management's best estimate of
amount of probable losses resulting from the purchaser inability to make
required payments.
BROADCASTING PROGRAMMING RIGHTS
The Company acquires rights to broadcasting programming and produces
programming for exhibit on its cable television station. The costs incurred in
acquiring and producing programs are capitalized and amortized over the greater
of when the program is aired or the license period or the projected useful life
of the programming, currently 12 to 28 months. Program rights and the related
liabilities are recorded at the gross amount of the liabilities when the license
period has begun, the cost of the program is determinable, and the program is
accepted and available for airing.
F-14
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
PROPERTY, PLANT AND EQUIPMENT
Buildings, production and technical equipment, furniture and fixtures,
automobiles and leasehold improvements are carried at cost less accumulated
depreciation. Assets held under capital leases are recorded at the present value
of minimum lease payments less accumulated depreciation. Land was carried at
cost and is not depreciated.
Buildings were depreciated on a straight-line basis over 50 years.
Production and technical equipment, furniture and fixtures and automobiles are
depreciated on a straight-line basis over the expected useful lives of between
three and ten years. Leasehold improvements are amortized over the shorter of
their expected lives, which is ten years or the non-cancelable term of the
leases.
GOODWILL AND OTHER DEFINITE LIFE INTANGIBLE ASSETS
Goodwill represents the excess of costs over the fair value of the
identifiable net assets of businesses or remaining minority interest of
businesses acquired. Other definite life intangibles assets consisted in 2003 of
license rights to virus scanning software and other intangible assets. The
Company accounts for Goodwill and Other Intangible Assets in accordance with
SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, and accordingly Goodwill and
indefinite intangible assets are tested for impairment at least annually or when
circumstances change that could result in impairment; definite-life intangible
assets with estimable useful lives are amortized over their respective estimated
useful lives, and reviewed for impairment in accordance with SFAS No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS No. 144, long-lived assets, such as property,
plant, and equipment, and purchased intangibles subject to amortization, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Circumstances which
could trigger a review include, but are not limited to: significant decreases in
the market price of the asset; significant adverse changes in the business
climate or legal factors; current period cash flow or operating losses combined
with a history of losses or a forecast of continuing losses associated with the
use of the asset; and current expectation that the asset will more likely than
not be sold or disposed of significantly before the end of its estimated useful
life.
Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated undiscounted future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of would be separately presented
in the balance sheet and reported at the lower of the carrying amount or fair
value less costs to sell, and would no longer be depreciated. The depreciable
basis of assets that are impaired and continue in use is their respective fair
values
F-15
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
REVENUE RECOGNITION
The Company derived revenues from two primary categories: (i)
Broadcasting, which includes cable and digital television subscriber income and
program production income; and (ii) Internet services, which include managed
public key infrastructure ("PKI") services and digital certificate services
(through April 1, 2004), virus surveillance and detection services (through
September 30, 2004), and royalty relating to remote data backup services. The
Company's revenue recognition policies are in accordance with SEC Staff
Accounting Bulletin ("SAB") No. 104, "REVENUE RECOGNITION, unless otherwise
noted below. The revenue recognition policy for each of these categories is as
follows:
BROADCASTING
The Company recognizes cable and digital television revenue in
accordance with the terms of the contracts entered into with cable and
digital television providers, which are based on the number of subscribers
for the Company's television channel and as programming, is made available
to viewers. Revenue and costs associated with program production are
recognized when persuasive evidence of an arrangement exists, programs are
completed and delivered to our customers, and fees are fixed and
collectable with no further future obligation to the customer.
INTERNET SERVICES
The Company previously recognized revenues from issuances of digital
certificates and managed PKI services, virus surveillance and detection
services, and remote data backup, previous to the divestitures of these
businesses in 2003 and 2004, when all of the following criteria were met:
(1) persuasive evidence of an arrangement exists, (2) delivery of products
and services has occurred, (3) the fee is fixed or determinable and (4)
collectibility is reasonably assured. We determine each of the criteria in
our revenue recognition as follows:
PERSUASIVE EVIDENCE OF AN ARRANGEMENT EXISTS. We enter into written
agreements with our customers, that are signed by both the customer and the
Company, or other related documentation from those customers who have
previously negotiated an arrangement.
DELIVERY OF PRODUCTS AND SERVICES HAS OCCURRED. Certificate and security
technologies may be delivered physically or downloaded by the customer.
Undelivered components of these technologies that are essential to the
functionality of the products, if any are not recognized until delivery in
full is complete.
THE FEE IS FIXED OR DETERMINABLE. Agreements with customers do not
include a right to return. The majority of the initial fees are due within
one year or less. Should there be arrangements with payment terms that
extend beyond customary payment terms, the fees then are considered not to
be fixed or determinable, and revenues from such arrangements are
recognized as payments become due and realizable.
COLLECTIBILITY IS PROBABLE. Collectibility is assessed for each customer
class of which there is a history of successful collection based upon a
credit review. Initial determination that collectibility is not probable
results in the revenues being recognized as cash is collected.
F-16
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
In software arrangements involving multiple elements, as required by the
EITF Issue 00-21, "Revenue Arrangements with Multiple Deliverables" and
American Institue of Certified Public Accountants Statement of Position
("SOP") 97-2, as amended by SOP 98-9, the Company allocates and defers
revenue for the undelivered elements based on vendor-specific objective
evidence, or VSOE, of the fair value of the undelivered elements, and
recognizes the difference between the total arrangement fee and the amount
deferred for the undelivered elements as revenue. VSOE of each element is
based on the price for which the undelivered element is sold separately. If
VSOE does not exist for undelivered elements such as maintenance services,
then the entire arrangement fee is recognized over the performance period.
Fees from the sales of digital certificates and managed PKI services,
which include bundled maintenance services that are not sold separately,
were deferred and recognized ratably over the period that such contracted
services were provided, usually 12 to 24 months.
Revenues from virus surveillance and detection services, which include
bundled maintenance services that were not sold separately, were deferred
and recognized ratably over the period that the service was provided,
usually 3 to 36 months.
Up-front fees from hosting and remote data backup services were deferred
and recognized ratably over the period that the services are provided,
usually 3 to 12 months.
The Company's consulting and installation services relating to secure
communication, virus protection and network security were not essential to
the functionality of the software. These software products were fully
functional upon delivery and did not require any significant modification
or alteration. Revenues from consulting and installation services, which
were provided on a time and materials basis, were recognized as the
services were performed and accepted by the customer.
Currently, the Company receives royalties on the sales of Internet products
and services of divested subsidiaries. These royalties are recognized as
revenues in the periods in which they are earned and deemed collectable.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expenses totaled
DKK 3.9 million, DKK 5.0 million and DKK 3.2 million in 2003, 2004 and 2005,
respectively.
INCOME TAXES
The Company utilizes the asset and liability method to account for
income taxes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and to operating loss carry forwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
The Company records a valuation allowance to reduce deferred tax assets to an
amount which realization is more likely than not.
F-17
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
STOCK OPTIONS
At December 31, 2005, the Company has a number of stock options
outstanding. We apply the intrinsic value-based method of accounting prescribed
by Accounting Principles Board ("APB") Opinion No. 25, "ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES", and related interpretations including FASB Interpretation
No. 44, "ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION AN
INTERPRETATION OF APB NO. 25" issued in March 2000, to account for our fixed
plan stock options.
Under this method, compensation expense is recorded on the date of grant
only if the current market price of the underlying stock exceeded the exercise
price. SFAS No. 123 "ACCOUNTING FOR STOCK-BASED COMPENSATION," established
accounting and disclosure requirements using a fair value-based method of
accounting for stock-based employee compensation plans. As allowed by SFAS No.
123, we have elected to continue to apply the intrinsic value-based method of
accounting described above, and have adopted the disclosure requirements of SFAS
No. 123. The following table (in DKK) illustrates the effect on net loss and net
loss per share if we had applied the fair value recognition provisions of SFAS
No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," to stock-based employee
compensation under which the estimated fair value of the options would have been
over the options' vesting periods:
2003 2004 2005
-------- -------- --------
Reported net income (loss) (6,330) 58,454 (7,924)
Reported stock-based compensation expense -- -- --
Pro forma stock-based compensation expense (8,027) (6,982) (18,395)
-------- -------- --------
Pro forma net income (loss) (14,357) 51,472 (26,319)
Reported basic income (loss) per share (1.35) 11.82 (1.45)
Reported diluted income (loss) per share (1.35) 11.10 (1.45)
Pro forma basic income (loss) per share (3.07) 10.40 (4.80)
Pro forma diluted income (loss) per share (3.07) 9.77 (4.80)
The fair value of these stock options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted average
assumptions
2003 2004 2005
------ ------ ------
Risk free interest rate 3.62% 3.47% 3.00%
Dividend yield 0% 0% 0%
ADR's Annual volatility of the expected market price 1.58 1.60 1.10
Expected life of the options 4.90 4.47 9.32
F-18
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
CONCENTRATION OF CREDIT RISK
Cash and cash equivalents are, for the most part, maintained with
several major financial institutions in Scandinavia. These balances are insured
up to DKK 300 (in thousands) per account.
The company has one large customer in the broadcasting segment which alone
accounts for 25% of the company's consolidated revenue for 2003, respectively.
The company has two large customers in the broadcasting segment which accounts
for 32% and 16%, respectively of the company's consolidated revenue for 2004 and
accounts for 32% and 30%, respectively of the company's consolidated revenue for
2005. These two customers account for approximately 21% and 20% of our
outstanding receivables at December 31, 2005.
PENSIONS AND OTHER POST-RETIREMENT AND POST-EMPLOYMENT BENEFITS
The Company contributes to insurance companies for defined contribution
pension benefits agreements between employees and insurance companies. The
Company's contributions are expensed as incurred. The Company has no future
liabilities related to pensions beyond the contribution.
Other than the pension benefits described above, the Company does not
provide its employees with post-retirement and post-employment benefits.
STOCK SPLIT
On May 19, 2005, and reflected in the accompanying consolidated
financial statements, the Company effected a 1 for 6 reverse stock split of it's
common shares wherein in lieu of issuing a fraction of a new share, to pay to
each holder the value thereof based upon the closing price of an ADR on the
NASDAQ Small Cap Market on the day on which the change shall have occurred. The
Company further effected a change in the par value of each common share of the
Company from DKK 1.25 to DKK 7.50.
RECLASSIFICATIONS
Certain balances in the financial statements for December 31, 2003 and
2004 have been reclassified to conform to the headings and classifications used
in the December 31, 2005 consolidated financial statements.
F-19
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based
Payment". This Statement revises SFAS No. 123, "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees."
SFAS No. 123(R) requires that the compensation cost relating to
share-based payment transactions be recognized in financial statements. The cost
will be measured based on the fair value of the instruments issued. The Company
will be required to apply SFAS No. 123(R) as of the first fiscal year that
begins after June 30, 2005. Accordingly, The Company will adopt SFAS No. 123(R)
during the first quarter of fiscal 2006. Management is currently evaluating the
impact SFAS No. 123(R) will have on the Company's results of operations as a
result of adopting this new Standard. Upon adopting SFAS 123(R) the Company's
income will decrease as a result of the additional compensation expense if
additional options are granted.
In December 2004, the FASB issued Statement of Financial Accounting
Standard ("SFAS") No. 153, "Exchanges of Non-monetary Assets." This Statement
amends Opinion 29 to eliminate the exception for non-monetary exchanges of
similar productive assets and replaces it with a general exception for exchanges
of non-monetary assets that do not have commercial substance. A non-monetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. The provisions of
this Statement are effective for non-monetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. Earlier application is permitted
for non-monetary asset exchanges occurring in fiscal periods beginning after
December 16, 2004. The provisions of this Statement should be applied
prospectively. The adoption of this pronouncement did not have a material effect
on the Company's financial statements.
The Emerging Issues Task Force ("EITF") Issue 04-8, "The Effect of
Contingently Convertible Instruments on Diluted Earnings per Share." The EITF
reached a consensus that contingently convertible instruments, such as
contingently convertible debt, contingently convertible preferred stock, and
other such securities should be included in diluted earnings per share (if
dilutive) regardless of whether the market price trigger has been met. The
consensus is effective for reporting periods ending after December 15, 2004. The
adoption of this pronouncement did not have a material effect on the Company's
financial statements.
In May 2005, the FASB issued FASB 154, "Accounting Changes and Error
Corrections," a replacement of APB Opinion No. 20 and FASB statement No. 3,
"Reporting Accounting Changes in Interim Financial Statements." This statement
changes the requirements for the accounting for and reporting of a change in
accounting principle. This Statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. This statement is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005.
On September 28, 2005, the FASB ratified the following consensus reached
in EITF Issue 05-8 ("Income Tax Consequences of Issuing Convertible Debt with a
Beneficial Conversion Feature"): a) The issuance of convertible debt with a
beneficial conversion feature results in a basis difference in applying FASB
Statement of Financial Accounting Standards SFAS No. 109, Accounting for Income
Taxes. Recognition of such a feature effectively creates a debt instrument and a
separate equity instrument for
F-20
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
book purposes, whereas the convertible debt is treated entirely as a debt
instrument for income tax purposes. b) The resulting basis difference should be
deemed a temporary difference because it will result in a taxable amount when
the recorded amount of the liability is recovered or settled. c) Recognition of
deferred taxes for the temporary difference should be reported as an adjustment
to additional paid-in capital. This consensus is effective in the first interim
or annual reporting period commencing after December 15, 2005, with early
application permitted. The effect of applying the consensus should be accounted
for retroactively to all debt instruments containing a beneficial conversion
feature that are subject to EITF Issue 00-27, "Application of Issue No. 98-5 to
Certain Convertible Debt Instruments" (and thus is applicable to debt
instruments converted or extinguished in prior periods but which are still
presented in the financial statements). The adoption of this pronouncement is
not expected to have a material impact on the Company's financial statements.
The Emerging Issues Task Force ("EITF") reached a tentative conclusion
on EITF Issue No. 05-1, "Accounting for the Conversion of an Instrument That
Becomes Convertible upon the Issuer's Exercise of a Call Option" that no gain or
loss should be recognized upon the conversion of an instrument that becomes
convertible as a result of an issuer's exercise of a call option pursuant to the
original terms of the instrument. The application of this pronouncement is not
expected to have an impact on the Company's consolidated financial statements.
In June 2005, the FASB ratified EITF Issue No. 05-2, "The Meaning of
'Conventional Convertible Debt Instrument' in EITF Issue No. 00-19, 'Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock'" ("EITF No. 05-2"), which addresses when a convertible debt
instrument should be considered 'conventional' for the purpose of applying the
guidance in EITF No. 00-19. EITF No. 05-2 also retained the exemption under EITF
No. 00-19. EITF No. 05-2 is effective for new instruments entered into and
instruments modified in periods beginning after June 29, 2005. The Company has
applied the requirements of EITF No. 05-2 since the required implementation
date. The adoption of this pronouncement did not have an impact on the Company's
consolidated financial statements.
EITF Issue No. 05-4 "The Effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument Subject to EITF Issue No. 00-19, 'Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock'" ("EITF No. 05-4") addresses financial instruments, such as
stock purchase warrants, which are accounted for under EITF 00-19 that may be
issued at the same time and in contemplation of a registration rights agreement
that includes a liquidated damages clause. The consensus of EITF No. 05-4 has
not been finalized. The Company does not believe the adoption of this
pronouncement will have an impact on the Company's consolidated financial
statements.
In September 2005, the FASB ratified EITF Issue No. 05-7, "Accounting
for Modifications to Conversion Options Embedded in Debt Instruments and Related
Issues" ("EITF No. 05-7"), which addresses whether a modification to a
conversion option that changes its fair value affects the recognition of
interest expense for the associated debt instrument after the modification and
whether a borrower should recognize a beneficial conversion feature, not a debt
extinguishment, if a debt modification increases the intrinsic value of the
debt. EITF No. 05-7 is effective for the first interim or annual reporting
period beginning after December 15, 2005. The Company does not believe the
adoption of this pronouncement will have an impact on the Company's consolidated
financial statements.
F-21
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
2. INVESTMENT SECURITIES
The following is a summary of available-for-sale investments held as
long-term assets (in DKK):
GROSS
UNREALIZED FAIR
COST LOSSES VALUE
---- ------ -----
December 31, 2004:
Shares in Land and Leisure A/S 698 (501) 197
------------- ------------ -----------
Total 698 (501) 197
------------- ------------ -----------
In 2004, the Company recognized a DKK 501 other than temporary loss on
available-for-sale marketable securities. During 2005, the Company sold all the
remaining shares in Land and Leisure A/S and recorded a gain of DKK 41.
3. EQUITY METHOD INVESTMENTS IN UNCONSOLIDATED COMPANIES
The following is a summary of equity method investments (in DKK)
DECEMBER 31,
2004 2005
-------------------------------
Mediehuset Danmark ApS 1,638 2,099
-------------------------------
MEDIEHUSET DANMARK ApS
In 2003, as part of a severance agreement with our former COO, Brain
Mertz Pedersen, the Company invested 1.5 million DKK for a 25% ownership of
Mediahuset Danmark ApS. At the date of purchase the purchase price exceeded 25%
of the net equity of Mediahuset Danmark ApS by DKK 998. The Company's Equity in
earnings of Mediahuset Danmark ApS for the year ended September 30, 2005 and
2004 was DKK 461 and DKK138, respectively.
EXCELSA SA s.r.l.
During the second half of 2004, the Company acquired an additional
139,322 (not in thousands) ordinary shares of Excelsa S.P.A. for a total cash
amount of DKK 11,948 or Euro 1,659. Subsequent to year ended December 31, 2004,
Eurotrust discovered that Excelsa SA had overstated their 2004 and 2003 results.
EuroTrust, MSGI and one other significant shareholder entered into negotiations
with Excelsa to attempt to remediate the damages. As a result of overstatement
and uncertainty of Excelsa's ability to continue as a going concern, management
recorded an impairment charge of DKK 14,442 during 2004.
TRUST ITALIA S.p.A.
On September 1, 2004, the Company sold its approximately 16% interest in
Trust Italia S.p.A. to Excelsa SA for a total consideration of DKK 7,436 or
Euros 1,000. The investment had previously been written down to zero at December
31, 2002 based on an impairment test.
F-22
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment include the following (in DKK):
DECEMBER 31,
------------
Estimated 2004 2005
Life -------- --------
Land N/A 1,929 --
Building 50 years 27,321 --
Production & Technical equipment 3 to 10 years 83,324 88,723
Furniture and fixtures 3 to 5 years 1,920 2,701
Automobiles 5 years 4,617 4,398
Leasehold improvements 3 to 10 years 3,748 3,820
-------- --------
122,859 99,642
Less accumulated depreciation
and amortization (30,305) (32,520)
-------- --------
Net property, plant and equipment 92,554 67,122
======== ========
Depreciation expense 10,604 11,695
The net book value of assets on capital lease arrangements included in
property, plant and equipment total DKK 5,829 and DKK 6,801 at December 31, 2004
and 2005, respectively.
On April 1, 2005, the Company sold its building located at Poppelgardvej
11-13 in Soborg, Copenhagen to Lion Ejendomme ApS for DKK 20,000 in cash less
broker expenses.
At December 31, 2005, certain of the Company's equipment was held as
collateral on current and long term financing (See Note 9 & 10).
5. GOODWILL
Goodwill relating to the purchase of the Company's Broadcast Media
segment consisted of the following (in DKK):
DECEMBER 31,
2004 2005
------- ------
BALANCE AT THE BEGINNING OF THE YEAR 23,941 24,561
CHANGES:
Additions 1,585 --
Disposals -- --
Impairment (965) --
------- ------
BALANCE AT THE END OF THE YEAR 24,561 24,561
------- ------
F-23
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
On April 1, 2004, Prime Vision A/S purchased the remaining 25% of Mobile
Broadcast A/S, from Euro Broadcast Hire A/S thereby becoming the 100% owner of
Mobile Broadcast A/S. The purchase price exceeded the fair market value of net
assets acquired by approximately DKK 620, which was recorded as goodwill.
On April 23, 2004, the Company's subsidiary InAphone (formerly known as
909.909 A/S) acquired the assets of Ideation House ApS. The purchase price
exceeded the fair value of the net assets acquired by approximately DKK 965,
which was recorded as Goodwill. At December 31, 2004, the Company recorded an
impairment charge of DKK 965 related to the purchase as the projected future
cash flows from the subsequent sale of InAphone were insufficient to realize the
related goodwill.
During the fourth quarter of 2004 and 2005, the Company performed the
annual impairment test and recorded an impairment charge of DKK 965 and DKK 0,
respectively.
Fair value was estimated for each reporting unit, within EuroTrust,
using the expected present value of discounted future cash flows the unit is
expected to generate over its remaining life. When making these estimates, we
were required to make estimates of future operating trends and judgments on
discount rates and other variables. Actual future results and other assumed
variables could differ from these estimates. The discount rates used ranged from
11 to 14 percent and the terminal values were estimated based on terminal growth
rates of two percent. The assumptions supporting the estimated future cash
flows, including the discount rate and estimated terminal values, reflect
management's best estimates.
7. BUSINESS ACQUISITIONS, DIVESTITURES AND DISCONTINUED OPERATIONS
ACQUISITIONS DURING 2004
On April 1, 2004, Prime Vision A/S purchased the remaining 25% of Mobile
Broadcast A/S, from Euro Broadcast Hire A/S thereby becoming the 100% owner of
Mobile Broadcast A/S. The purchase price exceeded the fair market value of net
assets acquired by approximately DKK 620, which was recorded as goodwill.
On April 23, 2004, the Company's subsidiary formerly known as 909.909
A/S changed it's name to InAphone A/S and acquired, in a transaction accounted
for as a purchase, the assets and operations of Ideation House ApS which engages
in the development and marketing of mobile phone software technologies. The
terms of the purchase required the Company to surrender 40% of the outstanding
equity of InAphone A/S to the current management and to loan DKK 3,000 of
working capital to InAphone A/S. The purchase price exceeded the fair value of
the net assets acquired by approximately DKK 965, which was recorded as
Goodwill. The consolidated financial statements include the results of
operations of InAphone A/S from April 23, 2004 through December 31, 2004.
Further, the net loss for InAphone A/S for the period from April 23, 2004
through December 31, 2004 applicable to the 40% minority interest were not
allocated to the holders of the non-controlling interest as there is an
inability of the minority shareholders to share in such losses.
F-24
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
ACQUISITIONS DURING 2003
On December 31, 2003, EuroTrust A/S purchased the remaining 15% of
Europe-Visions A/S (formerly Euro909Media A/S), from Parken Sport &
Entertainment thereby becoming the 100% owner of Europe-Visions A/S. The
purchase price exceeded the fair market value of net assets of Europe-Visions
acquired by approximately DKK 2.9 million, which was recorded as goodwill.
DISCONTINUED OPERATIONS
During 2005, 2004 and 2003, the company elected to divest the operations
of the internet services segment. The divestitures were completed during 2005,
2004 and 2003 with the operations of InAphone A/S, EuroTrust Virus 112 A/S,
EuroTrust PKI Services A/S, EuroTrust Sweden, Telefax Scandinavia AB, EuroTrust
E-Security SARL, and EuroTrust France SAS being reclassified in the accompanying
statement of operations to discontinued operations as the Company will not have
any continuing involvements in the components or cash flows from their
operations. Revenues of the discontinued components for the years ended December
31, 2003, 2004 and 2005 were DKK 56,589, DKK 21,075, and DKK 0. The pretax
income or (loss) from the operations of the discontinued components was DKK
(18,420), DKK 1,090, and DKK 0 for, 2003, 2004, and 2005 respectively. The gain
on disposal of the discontinued components was DKK 10,049 and DKK 83,615 and DKK
2,058 for, 2003, 2004, and 2005 respectively.
DIVESTITURES DURING 2005
On January 1, 2005, the Company sold InAphone A/S as InAphone A/S had
depleted the capital management was willing to allocate, without showing any
significant increase in sales from the use of media in mobile phones and
hand-held personal organizers. The minority shareholders paid DKK 1 for the
Company's 60% interest and assumed the net liabilities of InAphone A/S as of
December 31, 2004. At the time of sale, the sale resulted in no gain or loss.
The operating results of InAphone A/S have been classified as discontinued
operations in the accompanying financial statements. However, during December of
2005, the Company recorded a gain on disposal of discontinued operations of DKK
2,058 resulting from the collection of inter-company loans the Company had made
to InAphone A/S, while a 60% owned subsidiary, which had previously been
eliminated in consolidation.
DIVESTITURES DURING 2004
VIRUS 112
On September 30, 2004 the Company sold the assets of Virus112, to
Comendo A/S. Virus112 A/S, a wholly-owned subsidiary of the Company, through
which the Company offered virus detection products and services. The purchase
price was approximately U.S. $2.5 million, of which U.S. $700,000 was paid in
cash and the balance was paid by a five-year note receivable in the principal
amount of U.S. $1.8 million, bearing interest of 6% per annum, and payable in
quarterly installments. Comendo will also hire the Virus112 employees and assume
the employee and the ongoing contractual obligations of Virus112.
F-25
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
In connection with the sale Comendo agreed to lease certain office space
and equipment from the Company. The company collected DKK 237 in lease payments
during 2005, prior to selling the building in April 2005.
The following table summarizes the proceeds received, the assets and
liabilities divested and the gain recorded by the Company on the closing date of
the sale to Comendo:
SEPTEMBER 30, 2004
------------------
(IN THOUSANDS DKK)
Proceeds from sale of Virus112 A/S assets:
Cash received (October 1, 2004) 4,000
Notes receivable 11,000
------------------
15,000
==================
Assets and liabilities divested in sale of EuroTrust PKI assets:
Current assets 3,190
------------------
Total assets divested 3,190
------------------
Current deferred revenue (10,868)
------------------
Total liabilities divested (10,868)
------------------
Net liabilities divested (7,678)
==================
Write-down of related property and equipment 1,741
==================
Related cost of divestiture 1,200
==================
Gain on sale of business 19,737
==================
F-26
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
PKI
On April 1, 2004, the Company sold the Secure Socket Layer certificate
assets of EuroTrust PKI to VeriSign. EuroTrust PKI, a wholly-owned subsidiary of
the Company, is the operation through which the Company sells Public Key
Infrastructure (PKI) Services, including VeriSign's SSL certificates and related
services in Austria, Switzerland, Finland, Norway, Sweden and Denmark. Under the
terms of the agreement, VeriSign paid the Company U.S. $8.5 million in cash and
assume the ongoing obligations of EuroTrust PKI SSL contracts.
In connection with the sale VeriSign agreed to lease certain office
space and equipment from the Company. The Company collected DKK 179 during 2005
in lease payments prior to selling the building in April 2005. The following
table summarizes the proceeds received, the assets and liabilities divested and
the gain recorded by the Company on the closing date of the sale to VeriSign:
APRIL 1, 2004
---------------------
(IN THOUSANDS DKK)
Proceeds from sale of EuroTrust PKI assets:
Cash received 46,312
Cash held in escrow 5,959
---------------------
52,271
=====================
Assets and liabilities divested in sale of EuroTrust PKI assets:
Current assets 8,888
---------------------
Total assets divested 8,888
---------------------
Current deferred revenue (29,620)
---------------------
Total liabilities divested (29,620)
---------------------
Net liabilities divested (20,732)
=====================
Write-down of related property and equipment 9,367
=====================
Legal and related cost of divestiture 574
Gain on sale of business 63,062
=====================
F-27
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
Secure Hosting A/S
In January 2004, the Company sold its hosting subsidiary, EuroTrust
Secure Hosting A/S, to Mondo A/S. The consideration we received includes a
three-year royalty agreement on future sales generated from our transferred
customer base and thus has not been classified as a discontinued operation. The
agreement includes a minimum royalty of DKK 7,100 over a three-year period.
During 2004 and 2005, the Company received royalty payments of DKK 1,435 and
2,459, respectively, which have been included in the gain from sales of
divestitures line item on the consolidated statements of operations.
DIVESTITURES DURING 2003
NetVaulting A/S
On November 30, 2003, the Company sold the assets in its secure remote
back-up business, EuroTrust NetVaulting A/S, to Munk IT. The consideration
includes a 10-year royalty agreement on future sales generated from our
transferred customer base and thus has not been classified as discontinued
operations.
EuroTrust Sweden AB
On December 31, 2003, the Company sold its 70% interest in EuroTrust
Sweden AB to CEO/shareholder (30% of EuroTrust Sweden - Klas Carlin) and our
previous CTO Tobias Wahlgren for DKK 1. The operations have been reclassified as
discontinued operations in the accompanying financial statements. All employment
liabilities for Tobias Wahlgren is in connection with the agreement transferred
from EuroTrust PKI Services A/S to EuroTrust Sweden AB. EuroTrust Sweden AB had
a negative equity of approx. DKK 1,400 as of December 31, 2003. Due to the
negative equity EuroTrust has given EuroTrust Sweden AB the possibility for a
loan of a maximum of DKK 1,600 forward for the period ending December 31, 2005.
The loan can at anytime be transferred into equity of a maximum of 25% in
EuroTrust Sweden AB.
On December 31, 2003 we sold our interest in Alphasys for DKK 1 and
recognized a gain of approximately DKK 6,400 gain on sale of subsidiary. The
operations have been reclassified to discontinued operations in the accompanying
financial statements. Alphasys had previously been forced into liquidation in
October 2003. Management believes in consultation with its French attorney that
no liability will be raised against EuroTrust A/S.
On November 30, 2003 the Company disposed of the operations and assets
of Realtime Security A/S for DKK 400 resulting in the Company recognizing a loss
of DKK 520 on the sale. The operations have been reclassified as discontinued
operations in the accompanying financial statements.
F-28
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's cash equivalents and restricted cash,
receivables, marketable securities, long-term investments, line of credit and
long-term debt, payables and lease obligations approximates the carrying amount,
which is the amount for which the instrument could be exchanged in a current
transaction between willing parties. Information about each instrument follows:
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The carrying amount of cash, cash equivalents and restricted cash
approximates their fair value as of December 31, 2004 and 2005, because of the
short term maturities of those instruments.
ACCOUNTS RECEIVABLE, RECEIVABLES FROM RELATED PARTIES, VAT RECEIVABLE AND OTHER
RECEIVABLES
The carrying amounts of accounts receivable, receivables from related
parties, VAT receivable and other receivables approximate their fair value as of
December 31, 2004 and 2005 because of the expected short term collection of
those instruments.
NOTES RECEIVABLE
The carrying amount of notes receivable approximates their fair value as
of December 31, 2004 and 2005 because the interest rates approximate the rate of
similar instruments as of December 31, 2005.
Marketable securities
The fair values of investment securities are estimated based on quoted
market prices as of December 31, 2004 and 2005 and are stated at fair value.
LONG TERM INVESTMENTS
For long-term other investments for which there are no quoted market
prices, a reasonable estimate of fair value as of December 31, 2004 and 2005 is
based on a review of the assumptions underlying the operating performance of the
privately held companies.
LINE OF CREDIT AND LONG- TERM DEBT
The fair values of the Company's line of credit and long-term debt as of
December 31, 2004 and 2005 approximate recorded values as of December 31, 2004,
based on similar current rates offered to the Company for debt of the same
remaining maturities.
ACCOUNT PAYABLE AND ACCOUNTS PAYABLE, RELATED PARTIES
The carrying amount of accounts payable and accounts payable -related
party approximates fair value as of December 31, 2004 and 2005, because of the
short term maturity of those instruments.
LEASE OBLIGATIONS
The fair value of the Company's lease obligations is estimated by
discounting the future cash flows at rates currently offered to the Company for
debt of comparable maturities by the Company's bankers and is similar to
recorded amounts as of December 31, 2005.
F-29
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
9. SHORT-TERM BORROWING AND LINE-OF-CREDIT
Short-term borrowing from a Danish bank is due on demand and consists of
the following (in DKK):
DECEMBER 31,
-----------------------
2004 2005
---------- -----------
Forstaedernes Bank 8,417 11,323
========== ===========
At December 31, 2004 the Company also has secured lines-of-credit with
Danish banks up to DKK 11.3 million. Interest rates fluctuate with the market
rates of the major banks. The weighted average interest rates as of December 31,
2004 and 2005 were 5.5% and 6.0%, respectively. The Company has pledged bonds
held in Dexia Dannervirke of nominal value of 13.0 million, with a current
market value or 12.2 million, as collateral for the borrowings.
10. BANK LOANS
Bank loans consist of the following (in DKK):
DECEMBER 31,
-----------------------
2004 2005
--------------------------------------------------------------------------------
Forstaedernes Bank 5.5% note payable, due September
2009, payable in monthly installments of DKK 77,
with vehicles and broadcasting equipment valued at
DKK 4,150 pledged as collateral -- 3,111
Variable rate note payable, interest at CIBOR 3.75 at
December 31, 2005, payable in monthly installments of
DKK 7 through January 2013, with a vehicle valued at
DKK 564 pledged as collateral -- 520
-------- --------
3,631
Less current portion -- 802
-------- --------
-- 2,829
======== ========
The estimated aggregate maturities required on long-term debt for each of the
individual years at December 31, 2005 are as follows:
2005
----------
Year ending December 31:
2006 802
2007 878
2008 928
2009 779
2010 77
Thereafter 167
----------
3,631
==========
F-30
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
11. CAPITAL LEASES
The Company is obligated under capital leases for production vans and
equipment that expire at November 1, 2008. At December 31, 2004 and 2005, the
gross amount of production vans and equipment and related accumulated
depreciation recorded under capital leases and the amount of inventories subject
to sale-and-leaseback arrangements were as follows:
DECEMBER 31,
------------
2004 2005
OB van and equipment 7,095 9,738
---------- ----------
Less accumulated depreciation 1,266 2,937
---------- ----------
5,829 6,801
========== ==========
For the year ended December 31, 2005 the Company recorded depreciation
expense on assets held under capital leases of DKK 1,671 which was included in
depreciation expense on the statements of operations.
The Company also has several non-cancelable operating leases, primarily
for office space, that expire over the next two years. These leases generally
contain renewal options for one year and require the Company to pay all
executory costs such as maintenance and insurance. Expenses under operating
leases, amounted to DKK 1.8 million, DKK 1.3 million and DKK 1.3 million in the
years ended December 31, 2003, 2004 and 2005, respectively.
Future minimum lease payments under non-cancelable operating leases
(with initial or remaining lease terms in excess of one year) and future minimum
capital lease payments, as of December 31, 2005 are:
F-31
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
CAPITAL LEASES OPERATING LEASES
---------------- ----------------
Year ending December 31:
2006 2,191 3,926
2007 2,191 534
2008 2,561 467
2009 461 74
2010 -- 77
2011 and thereafter -- 171
---------------- ----------------
Total minimum lease payments 7,404 5,249
================
Less amount representing interest (645)
----------------
Present value of net minimum capital
lease payments 6,759
----------------
Less current installments of obligations
under capital leases 1,790
----------------
Obligations under capital leases,
excluding current installments 4,969
================
12. RELATED PARTY TRANSACTIONS
In the ordinary course of business, EuroTrust engages in transactions
with certain entities and individuals that are considered to be related parties
as follows:
VERISIGN INC
VeriSign was a minority shareholder in EuroTrust A/S (approx. 18%) until
April 1, 2004. The transactions entered into during the year and the accounts
payable at the year end shown below are a result of commercial trade with
VeriSign.
DECEMBER 31,
------------
2004 2005
---------- ----------
VeriSign Inc. (Annual fees and royalties) 2,082 --
========== ==========
VeriSign Inc. (Accounts payable) -- --
========== ==========
On April 1, 2004, the Company sold the Secure Socket Layer certificate
assets of EuroTrust PKI to VeriSign. EuroTrust PKI, a wholly-owned subsidiary of
the Company, is the operation through which the Company sold Public Key
Infrastructure (PKI) Services, including VeriSign's SSL certificates and related
services in Austria, Switzerland, Finland, Norway, Sweden and Denmark. Under the
terms of the agreement, VeriSign paid the Company $8.5 million U.S. in cash and
assumed the ongoing obligations of EuroTrust PKI SSL contracts.
F-32
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
Simultaneously with the closing of the transaction to sell the assets of
EuroTrust PKI to VeriSign, the Company repurchased 458,120 (Not in thousands) of
its ordinary shares which is equivalent to 458,120 (Not in thousands) American
Depository Receipts or "ADRs" from VeriSign for $1,136 U.S. The repurchase was
authorized by the Company's shareholders on May 28, 2003.
NEMETH & SIGETTY A/S
Mr. Karoly Laszlo Nemeth is the Chairman of the board of directors of
EuroTrust A/S and is also the joint owner of Nemeth & Sigetty A/S. Nemeth &
Sigetty A/S provided legal services to the Company during each of the three
years ended December 31, 2003, 2004 and 2005. For the years ended December 31,
2003, 2004 and 2005 Nemeth & Sigetty A/S has been paid, DKK 418, DKK 962 and DKK
142 respectively. The total outstanding payables due to Nemeth & Sigetty A/S at
December 31, 2004 and December 31, 2005 were DKK 0 and DKK10, respectively.
13. INCOME TAXES
The Company and each of its subsidiaries file separate tax returns in
each country of incorporation. Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and (liabilities) as
of December 31, 2004 and 2005 are as follows (in DKK):
DECEMBER 31,
------------------------
2004 2005
---------- ----------
LONG-TERM:
Net operating loss carry forwards 98,393 98,807
Tax value of fixed assets in excess of book value
of fixed assets 1,709 5,920
Other temporary differences -- (145)
Unrealized loss on marketable securities -- 237
Deductible goodwill and intangible assets 2,624 --
Provisions 10,262 9,122
---------- ----------
Total deferred tax assets 112,988 113,941
Less: Valuation allowance (109,016) (105,330)
---------- ----------
NET DEFERRED TAX ASSETS LONG-TERM 3,972 8,611
========== ==========
The recognized tax assets as of December 2004 and 2005 are related to
temporary differences between the book and fiscal values of fixed assets in the
profitable broadcasting segment and for the company EuroTrust Secure Hosting
A/S.
F-33
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
The Company assessed the realization of the deferred tax assets based on
available evidence, both positive and negative, to determine whether it is more
likely than not that all or a portion of the deferred tax assets will be
realized. The conclusion as to whether it is more likely than not that some
portion of these assets will not be realized takes into consideration the
following factors, among others:
o Future earnings potential determined through the use of internal
forecasts
o The carry forward period associated with the deferred tax assets and
o The nature of the income that can be used to realize the deferred
tax assets
To the extent that the Company determines it is more likely than not
that all or a portion of the deferred tax assets will not be realized, a
valuation allowance is recorded.
The tax loss carry-forwards available at December 31, 2005 and their
expiration years are as follows (in DKK):
EXPIRATION YEAR DENMARK TOTAL
------------------------ ------- -------
2006 52,597 52,597
Indefinitely 294,903 294,903
------- -------
The accumulated tax loss carry forwards cannot be used by all group
companies as not all companies have been jointly taxed.
For financial reporting purposes, income before income taxes is as
follows (in DKK):
DECEMBER 31,
-----------------------------
2003 2004 2005
------- ------- -------
Pretax income (loss):
Denmark (995) 28,026 (12,218)
Switzerland (9,169) -- --
------- ------- -------
(10,164) 28,026 (12,218)
======= ======= =======
Significant components of the provision
for income taxes are:
Current: Denmark (186) 0 145
Others 0 0 --
------- ------- -------
(186) 0 145
------- ------- -------
Deferred: Denmark 1,677 (3,105) (4,546)
Others 0 0 0
------- ------- -------
1,677 (3,105) (4,546)
------- ------- -------
Total: 1,491 (3,105) (4,401)
======= ======= =======
F-34
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
The reconciliation of income tax computed at the Danish statutory tax
rate to income tax expense is:
2003 2004 2005
---- ---- ----
Danish income tax rate ................................. 30% 30% 28%
Non taxable gain on sold business ...................... 0% 0% 0%
Change in valuation allowance on deferred tax assets ... (45)% (45)% (64)%
Other items, net ....................................... 0% 0% 0%
Reported income tax expense ............................ (15)% (15)% (36)%
14. SHAREHOLDERS' EQUITY
TREASURY SHARES
During 2004, a total of 150,000 (not in thousands) shares were purchased
from a shareholder into treasury and were later sold for DKK 4,148. Both
transactions were at market price and resulted in a gain of DKK 319, which were
booked under additional paid in capital. The Company repurchased 458,120 (not in
thousands) of its ordinary shares from VeriSign for $1,136 U.S. simultaneously
with the closing of the transaction to sell the assets of EuroTrust PKI to
VeriSign. The shares were purchased into treasury.
During the fourth quarter of 2004, the Company cancelled the 458,120
(not in thousands) in treasury with a cost of DKK 11,042.
In 2003 the Company issued from treasury 139,423 (not in thousands)
treasury shares valued at DKK 1,088 (the market price of the common share on the
date issued from treasury) in connection with a guarantee for equity financing
in EuroTrust in the event of needed funding. The guarantee expired May 9, 2004.
The DKK 1,088 has been recorded as interest expense in the accompanying
financial statements.
COMMON STOCK
During 2005, the Company issued 717,965 shares (not in thousands) upon
the exercise of options at pricing ranging from $1.37 to $5.34 per share.
During 2004, the Company issued 345,254 shares (not in thousands) upon
the exercise of options at pricing ranging from $1.32 to $2.46 per share.
During 2003, the Company issued 758,079 shares (not in thousands) upon
the exercise of options at pricing ranging from $1.26 to $1.50 per share.
1 FOR 6 REVERSE STOCK SPLIT OF ORDINARY SHARES
On May 19, 2005, and reflected in the accompanying consolidated
financial statements the Company effected a 1 for 6 reverse stock split of it's
ordinary shares wherein in lieu of issuing a fraction of a New Share, to pay to
each holder the value thereof based upon the closing price of an ADR on the
NASDAQ Small Cap Market on the day on which the change shall have occurred. The
Company further effected a change in the par value of each ordinary common share
of the Company from DKK1.25 to DKK 7.50.
F-35
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
15. EARNINGS PER SHARE
Basic net (loss) income per share is computed by dividing net (loss)
income (numerator) by the weighted-average number of shares of common stock
outstanding during the period (denominator). Diluted net (loss) income per share
gives effect to stock options considered to be potential common shares, if
dilutive. Potential common shares consist of shares issuable upon the exercise
of stock options computed using the treasury stock method.
The following table presents the computation of basic and diluted average common
shares outstanding:
YEAR ENDED DECEMBER 31,
---------------------------
(In Thousands) 2003 2004 2005
------- ------- -------
Determination of basic and diluted shares:
Weighted-average shares outstanding 4,671 4,947 5,478
Potential common shares--dilutive stock options -- 319 --
------- ------- -------
Basic and diluted average common shares outstanding 4,671 5,266 5,478
In 2005, the Company excluded 2 (in thousands) common share equivalents
with a weighted-average share price of $6.35, in 2004, the Company excluded 267
(in thousands) weighted-average common share equivalents with a weighted-average
share price of $5.52 and in 2003, the Company excluded 136 (in thousands)
weighted-average common share equivalents with a weighted-average share price of
$1.38 from the potential common shares because their effect would have been
anti-dilutive. Weighted-average common share equivalents do not include stock
options with an exercise price that exceeded the average fair market value of
the Company's common stock for the period.
Subsequent to the year ended December 31, 2005 the Company issued
716,527 (not in thousands) common ADR shares upon the exercise of stock options.
F-36
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
16. STOCK OPTIONS
2001 INCENTIVE OPTION PLAN
During 2001, the Board authorized the grant and issue of 354,167 (not in
thousands) options each to purchase one common share at various share prices
ranging from $6.30 to $10.26 per share to employees and directors of the
Company. The exercise price of the stock options was equal to the market price
on the date of grant. The stock options are exercisable during the year of grant
through their expiration dates ranging from August 31, 2003 to January 1, 2006.
At December 31, 2005, 833 (not in thousands) options were outstanding.
In addition during 2001, the Board authorized the grant and issue of
7,500 (not in thousands) options each to purchase one common share at a price of
$6.54. A total of 2,500 (not in thousands) of these options became exercisable
during 2002, another 2,500 (not in thousands) vest in 2003 and the remainder
vest in 2004. These options all expired on January 1, 2005.
2002 INCENTIVE STOCK OPTION PLAN
During 2002, the Board authorized the grant and issue of 413,924 (not in
thousands) stock options each to purchase one common share at various share
prices ranging from $2.34 to $7.86 to employees and directors of the Company.
The exercise price of the options was equal to the market price on the date of
grant. At December 31, 2005 none of the options were outstanding.
2003 INCENTIVE STOCK OPTION PLAN
During 2003, the Board authorized the grant and issue of 1,318,750 (not
in thousands) stock options each to purchase one common share at various share
prices ranging from $1.20 to $2.88 to employees and directors of the Company.
The exercise price of the options was equal to the market price on the date of
grant. Of these options 82,500 (not in thousands) were outstanding at December
31, 2005. The stock options are exercisable during the year of grant through
their expiration dates ranging from May 30, 2005 to February 3, 2008.
2004 INCENTIVE STOCK OPTION PLAN
During 2004, the Board authorized the grant and issue of 434,621 (not in
thousands) stock options each to purchase one common share at various share
prices ranging from $3.24 to $3.76 to employees and directors of the Company.
The exercise price of the options was equal to the market price on the date of
grant. Of these options 291,527 (not in thousands) were outstanding at December
31, 2005. The stock options are exercisable during the year of grant and all
stock options have expiration dates ranging from May 12, 2007 to May 12, 2009.
2005 INCENTIVE STOCK OPTION PLAN
During 2005, the Board authorized the grant and issue of 738,500 (not in
thousands) stock options each to purchase one common share at various share
prices ranging from $4.75 to $6.00 to employees and directors of the Company.
The exercise price of the options was equal to the market price on the date of
grant. Of these options 538,000 (not in thousands) were outstanding at December
31, 2005. The stock options are exercisable during the year of grant and all
stock options have expiration dates ranging from December 31, 2005 to April 30,
2015.
F-37
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
A summary of the Company's stock option activity, and related
information for the three years ended December 31, 2005 is as follows:
2003 2004 2005
----------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- -------------- ------- --------------
Outstanding, beginning of year 1,021 $7.92 947 $3.12 973 $3.48
Granted 1,319 1.38 435 3.48 739 4.79
Exercised (758) 1.26 (345) 1.32 (669) 2.58
Forfeited (250) 5.94 -- -- -- --
Expired (385) 7.50 (64) 7.74 (130) 4.93
------- -------------- ------- -------------- ------- --------------
Outstanding, end of year 947 $3.12 973 $3.48 913 $4.08
Exercisable, end of year 944 $3.12 903 $3.48 913 $4.08
Weighted average fair value of
options granted during the year $6.42 $3.18 $4.22
The following table summarizes information about stock options
outstanding as of December 31, 2005:
WEIGHTED
AVERAGE WEIGHTED-
REMAINING AVERAGE
RANGE OF SHARES CONTRACTUAL EXERCISE SHARES WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE EXERCISE PRICE
------------------ ----------- ------------- ----------- ----------- ----------------
$1.50 - $1.50 63 2.1 years $1.50 63 $1.50
$2.85 - $2.85 20 2.1 years $2.85 20 $2.85
$3.25 - $3.76 291 2.7 years $3.49 291 $3.49
$4.75 - $4.75 537 9.3 years $4.75 537 $4.75
$6.00 - $6.78 2 2.7 years $6.35 2 $6.35
----------- ------------- ----------- ----------- ----------------
Total 913 6.5 years $4.09 913 $4.09
----------- ------------- ----------- ----------- ----------------
No compensation cost is recognized in income for any of the years
presented above as the options can be exercised at a price equal to or greater
than the price on the date of grant.
WARRANTS
During 2005, the Company recorded DKK 114 in consulting expense for the
issuance of warrants to purchase 25,000 (not in thousands) common shares at DKK
34.78 expiring August 31, 2005. The warrants were valued using the Black Scholes
method and with the following variables Yield of 0%, Volatility of 36.82%, Risk
free interest rate of 3%, and estimated life of 0.46 years.
During 2004, the Company recorded DKK 85 in consulting expense for the
issuance of warrants to purchase 25,000 (not in thousands) common shares at DKK
23.76 expiring February 28, 2005. The warrants were valued using the Black
Scholes method and with the following variables Yield of 0%, Volatility of
42.79%, Risk free interest rate of 3%, and estimated life of 0.5 years.
F-38
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
17. PENSIONS
During 2003, 2004 and 2005, the company has recognized expenses for
defined contribution pension agreements paid to pension and insurance companies
on behalf of employees totaling DKK 1.8 million, DKK 0.8 million and DKK 0.5
million, respectively. The Company has no liability beyond their contributions
related to the pensions.
18. NON-CASH FINANCING AND INVESTING ACTIVITIES
Capital lease obligations of DKK 1,176, DKK 5,829 and DKK 2,733 were
incurred in 2003, 2004 and 2005 respectively. The Company entered into the
leases for machinery, equipment and automobiles.
In 2003 the Company issued from treasury, 139,422 (not in thousands)
shares of its common stock in connection with a guarantee for committing a
private placement in EuroTrust valid for 12 months.
19. COMMITMENTS
The Company issues product guarantees in accordance with Danish law,
normally covering the subscription period of services provided to customers. The
Company has not incurred any costs in fulfilling these guarantees and the
Company estimated a liability of DKK 0 for the cost of such guarantees as of
December 31, 2004 and 2005.
20. LITIGATION
During 2003, the Company recorded a provision of DKK 1,000 for expenses
relating to an arbitration court regarding the construction of our building
located in Soeborg. The constructor claimed bills for extra work performed and
EuroTrust claim compensation due to insufficient work performed by the
constructor. During 2004, as a result of the arbitration the Company paid a net
payment to the constructor of approx. DKK 1,000 in settlement of the case.
During 2004, the Company paid Cyberguard DKK 994 in settlement of claims
arising out of a disagreement regarding a reseller agreement signed in October
2002.
The Company is from time to time involved in routine legal and
administrative proceedings and claims of various types. While any proceedings or
claim contains an element of uncertainty, Management does not expect them to
have an affect on our results of operations or financial position.
F-39
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
21. SEGMENT REPORTING
The Company's Chief Operating Decision-maker, as defined in SFAS No.
131, is considered to be EuroTrust's CEO. The Chief Operating Decision-maker
reviews separate consolidated financial information for the Internet services
business segment, the broadcast media business segment and prior to 2002 other
segments. Each of the Company's business segments are managed separately because
they offer and distribute distinct services to different customer segments. The
Company therefore considers that it has two reportable segments under SFAS 131
from 2002 to 2004 as follows: (i) Internet services, and (ii) broadcast media.
The print and online media segment was disposed of in December 2001 and is,
therefore, treated as a discontinued operation thereafter. The internet services
segment was disposed of during 2004 and 2003 with the operations being
classified as discontinued operations with the exception of the operations of
the EuroTrust Secure Hosting and Netvaulting components as the Company continued
to receive royalties from the existing customers at the time of their sale.
The Chief Operating Decision-maker evaluates performance and allocates
resources based on profit or loss from operations before interest, gains and
losses on the Company's investment portfolio, and income taxes. The accounting
policies of the reportable segments are the same as those described in the
summary of significant accounting policies. It is the Company's policy that
trade between the segments is entered into on an arms-length basis.
Net sales by geographical location and reportable segment information
for each and business segment for each of the years ended December 31, 2003,
2004 and 2005 is presented in the following tables:
F-40
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
2003 2004 2005 2005
DKK % DKK % DKK % USD
------- -------- ------- -------- ------- -------- -------
Denmark 109,000 99.2% 84,510 93% 86,785 92% 13,723
Norway 417 0.4% -- -% -- -% --
Sweden 405 0.4% 6,526 7% 7,868 8% 1,244
------- -------- ------- -------- ------- -------- -------
109,822 100% 91,036 100% 94,653 100% 14,967
------- -------- ------- -------- ------- -------- -------
The segmented data are as follows:
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
F-41
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
YEARS ENDED DECEMBER 31,
2003 2004 2005 2005
------------ ------------ ------------ ------------
DKK DKK DKK USD
INTERNET SERVICES:
Net revenue 21,203 23 0 0
Operating expenses:
Cost of sales 7,773 0 0 0
Selling and marketing expenses 5,410 3,502 2,847 451
General and administrative expenses 14,344 8,905 6,839 1,081
Depreciation, amortization and write down 1,311 2,071 594 94
------------ ------------ ------------ ------------
Total operating expenses 28,838 14,478 10,280 1,626
------------ ------------ ------------ ------------
Operating income (loss) (7,635) (14,455) (10,280) (1,626)
------------ ------------ ------------ ------------
Capital expenditure 1,762 2,541 0
------------ ------------ ------------ ------------
Total assets 65,655 55,581 36,658 5,796
------------ ------------ ------------ ------------
BROADCAST MEDIA
Net revenue 88,619 91,013 94,653 14,967
Operating expenses:
Cost of sales 58,045 60,349 68,805 10,880
Selling and marketing expenses 12,085 14,225 14,302 2,261
General and administrative expenses 12,537 12,638 13,916 2,201
Depreciation, amortization and write down 4,764 9,069 11,101 1,755
------------ ------------ ------------ ------------
Total operating expenses 87,431 96,281 108,124 17,097
------------ ------------ ------------ ------------
Operating income (loss) 1,188 (5,268) (13,471) (2,130)
------------ ------------ ------------ ------------
Capital expenditure 13,743 29,261 (30,014) (4,746)
------------ ------------ ------------ ------------
Total assets 75,190 122,667 124,297 19,655
------------ ------------ ------------ ------------
CONSOLIDATED
Net revenue 109,822 91,036 94,653 14,967
Operating expenses:
Cost of sales 65,818 60,349 68,805 10,880
Selling and marketing expenses 17,495 17,727 17,149 2,712
General and administrative expenses 26,881 21,543 20,755 3,282
Depreciation, amortization and write down 6,075 11,140 11,695 1,849
------------ ------------ ------------ ------------
Total operating expenses 116,269 110,759 118,404 18,723
------------ ------------ ------------ ------------
Operating income (loss) (6,447) (19,723) (23,751) (3,756)
------------ ------------ ------------ ------------
Capital expenditure 15,505 31,802 (30,014) (4,746)
------------ ------------ ------------ ------------
Total assets 140,845 178,248 160,955 25,450
------------ ------------ ------------ ------------
DKK amounts have been converted into US$ at an exchange rate of $1=DKK 6.3241.
F-42
EUROTRUST A/S AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DKK AND US$ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND WHERE OTHERWISE INDICATED)
24. SUBSEQUENT EVENTS
During January through May of 2006, the Company issued 816,527 (not in
thousands) common ADR shares upon the exercise of stock options at DKK 9.49 to
DKK 30.04 per share.
On May 4, 2006, the Company sold three of its seven mobile television
production vans, its Prime Vision brand name and the external customer base of
Prime Vision.
On June 2, 2006, the Company effectively discontinued its' production
and broadcasting operations through the sale of all the issued and outstanding
shares of Euro-Vision A/S for 31,250,000 shares of Tritel Media AB (or
approximate 23% of the shares outstanding of Tritel Media AB).
On November 29, 2005, the Company entered into an agreement to acquire,
Aktiv Gruppen Holdings A/S and subsidiaries through the issuance of 21,700,000
shares of the Company for all 10,000 issued and outstanding shares of Aktiv
Gruppen Holdings A.S to be closed upon the approval of the Danish Authority that
the transaction will be considered a tax free exchange and Company will remain
listed on the NASDAQ market. On April 17, 2006, the Company closed the merger.
The merger was accounted for as a reverse merger or recapitalization of Aktiv
Gruppen Holdings A/S, wherein Aktiv Gruppen Holdings A/S became a 100% owned
subsidiary of EuroTrust A/S. Therefore, the pre-acquisition financial statements
of Aktiv Gruppen Holding A/S will be treated as the historical financial
statements of the combined companies. The historical accumulated deficit through
the date of acquistion of EuroTrust A/S will be reclassified against additional
paid in capital.The results of operations of EuroTrust will only be included in
the financial results from the date of the acquisition. In addition, EuroTrust
changed its fiscal year end from December 31, to June 30, which is the fiscal
year end of Aktiv Gruppen Holdings A/S. In connection with the reverse merger
the Company's President resigned and the Company has agreed to buyout his
employment agreement for DKK 3,200.
Unaudited proforma condensed combined balance sheet aggregating the
balance sheet of EuroTrust A/S and Subsidiaries as of June 30, 2005 and the
balance sheet of Aktiv Gruppen Holdings A/S and Subsidiaries as of June 30, 2005
accounting for the transaction as a recapitalization of the Aktiv Gruppen
Holdings A/S with the issuance of shares for the net assets of EuroTrust A/S (a
reverse acquisition), giving effect to the transaction, as if the transaction
had occurred as of June 30, 2005, and unaudited proforma condensed combined
statement of operations which reflect the results of operations of EuroTrust A/S
and Subsidiaries for the twelve month periods ended June 30, 2005 and 2004 and
the results of operations of Aktiv Gruppen Holdings A/S and Subsidiaries for the
years ended June 30, 2005 and 2004 as if the transaction had occurred as of the
July 1, 2003 were filed with the SEC on form 6-K dated April 12, 2006.
On May 17, 2006, The Company entered into agreements to purchase a
controlling interest in European Wind Farms A/S, for a purchase price of DKK 120
million (approximately $20 million) and 915,500 ordinary shares of the Company.
The cash purchase price will be paid to European Wind Farms in exchange for
newly issued shares and the 915,500 shares of the Company will be issued to the
existing shareholders of European Wind Farms in exchange for certain of the
shares owned by them. The closing of the merger is subject to the Company's due
dilligence and a ruling approving the transaction as a tax free merger and is
expected to occur during July 2006. Upon completion of the transactions the
Company will own 50.25% of the outstanding shares of European Wind Farms.
During May 2006, The Company issued 2,650,000 common shares to purchased
the remaining 50% interest in AGH Nordan Invest A/S that it does not already
own.
On June 2, 2006, the Company acquired two Danish property development
companies -- Drejens Strandskovpark A/S and 2 S Ejendomsinvest ApS -- for an
aggregate purchase price of DKK140 million payable in cash. These entities are
in the process of building a 200 unit residential development, wellness centre
and golf course at Romo, Denmark, and a 60 unit residential development in
Kolding, Denmark. In addition they have projects rights to construct residences
and a holiday centre near Mommark at Als and residences in Esbjerg, Denmark.
F-43
INDEX TO EXHIBITS
EXHIBITS
--------
1.1 Amended Articles of Association of the Registrant, as of December 6,
2001 (1)
1.2 Rules of Procedures of the Registrant, as amended (2)
2.1 Employee and Director Subscription Option Plan (4)
4.5 Form of Employment Agreement between the Registrant and Aldo
Petersen, effective as of January 1, 2005 (4)
4.6 Form of Employment Agreement between the Registrant and Soren Degn,
effective as of January 1, 2005 (4)
8.1 List of the Subsidiaries of the Registrant *
11.1 Code of Ethics (3)
12.1 Chief Executive Officer Certification pursuant to Rule 13a-14(a) or
Rule 15d-14(a),*
12.2 Chief Financial Officer Certification pursuant to Rule 13a-14(a) or
Rule 15d-14(a),*
13.1 Chief Executive Officer Certification pursuant to Rule 13a-14(b) or
Rule 15d-14(b) and 18 U,S,C, Section 1350,*
13.2 Chief Financial Officer Certification pursuant to Rule 13a-14(b) or
Rule 15d-14(b) and 18 U,S,C, Section 1350,*
-----------
* Included herewith,
(1) Filed as an exhibit to the Company's Annual Report on Form 20-F, filed on
June 27, 2002, and incorporated by reference herein,.
(2) Filed as an exhibit to the Company's original filing of the Registration
Statement on Form F-1 (File No, 333-7092), filed on June 20, 1997, and
incorporated by reference herein.
(3) Filed as an exhibit to the Company's Annual Report on Form 20-F, filed on
September 23, 2003, and incorporated by reference herein.
(4) Filed as an exhibit to the Company's Annual Report on Form 20-F, filed on
June 3, 2005, and incorporated by reference herein.