SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2002
Commission file number 000-30690
EUROTRUST A/S
f/k/a
Euro909.com A/S
(Translation of Company's name into English)
Toldbodgade 63
1253 Copenhagen
Denmark
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under Form 20-F or Form 40-F.
Form 20-F |X| Form 40-F |_|
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(1): N/A
Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper
of a Form 6-K if submitted solely to provide an attached annual report to
security holders.
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(7): N/A
Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper
of a Form 6-K if submitted to furnish a report or other document that the
registrant foreign private issuer must furnish and make public under the laws of
the jurisdiction in which the registrant is incorporated, domiciled or legally
organized (the registrant's "home country"), or under the rules of the home
country exchange on which the registrant's securities are traded, as long as the
report or other document is not a press release, is not required to be and has
not been distributed to the registrant's security holders, and, if discussing a
material event, has already been the subject of a Form 6-K submission or other
Commission filing on EDGAR.
Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the information to
the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
YES |_| NO |X|
If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): N/A
EUROTRUST A/S
Form 6-K
TABLE OF CONTENTS
Page
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Disclosure Regarding Forward-Looking Statements.................................................. 2
Exchange Rate Information........................................................................ 2
Unaudited Consolidated Condensed Balance Sheets
as of September 30, 2002 and December 31, 2001................................................... 3
Unaudited Consolidated Condensed Statements of Operations for the nine-month and three-month
periods ended September 30, 2002 and 2001 ....................................................... 5
Unaudited Consolidated Condensed Statements of Shareholders' Equity for the Years Ended
December 31, 1997 through December 31, 2001 and for the nine-month period
ended September 30, 2002......................................................................... 6
Unaudited Consolidated Condensed Statements of Cash Flows for the nine-month periods ended
September 30, 2002 and 2001...................................................................... 8
Notes To Unaudited Consolidated Condensed Financial Statements .................................. 9
One For Six Ratio Change of Our American Depositary Receipts..................................... 16
Management's Discussion And Analysis Of Financial Condition And Results Of Operations............ 16
Risk Factors .................................................................................... 26
Signature ....................................................................................... 37
Index to Exhibits ............................................................................... 38
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 6-K contains "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 regarding our
plans and objectives and future operations. Forward-looking statements attempt
to predict future occurrences and are identified by words like "believe," "may,"
"intend," "will," "expect," "anticipate," "estimate" or "continue," or other
comparable terms. Forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by these forward-looking statements. The
forward-looking statements included in this report are based on current
expectations that involve numerous risks and uncertainties. Our plans and
objectives are based, in part, on assumptions involving judgments about, among
other things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond our control. Although we believe that
our assumptions underlying the forward-looking statements are reasonable, any of
these assumptions could prove inaccurate and, therefore, we cannot assure you
that the forward-looking statements included in this report will prove to be
accurate. We do not intend or assume any obligation to update these
forward-looking statements. In light of the significant uncertainties inherent
in the forward-looking statements included in this report, the inclusion of
these statements should not be interpreted by anyone that we can achieve our
objectives or implement our plans. Factors that could cause our actual results
to differ materially from those expressed or implied by forward-looking
statements include, but are not limited to, certain factors set forth in our
Annual Report on Form 20-F for the fiscal year ended December 31, 2001, filed
with the Securities and Exchange Commission on June 27, 2002, under the headings
"Key Information - Risk Factors" (Item 3.D), "Information on the Company" (Item
4) and "Operating and Financial Review and Prospects" (Item 5).
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EXCHANGE RATE INFORMATION
In this report, unless otherwise specified or unless the context otherwise
requires, all references to "$" or "dollars" are to U.S. dollars and all
references to "DKK" are to Danish kroner. We have converted DKK amounts as of
September 30, 2002 into U.S. dollars at an exchange rate of $1.00 = DKK 7.5329,
the exchange rate on September 30, 2002. We do not make any representation that
the Danish kroner amounts could have been, or could be, converted into U.S.
dollars at that rate on September 30, 2002, 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.
------------
In December 2001 we changed our name from Euro909.com A/S to EuroTrust
A/S. We use the terms "we", "our" and "us" to mean EuroTrust A/S and its
subsidiaries and their respective predecessors.
2
EUROTRUST A/S
Unaudited Consolidated Condensed Balance Sheets
(in thousands)
December 31,
2001 September 30, 2002
------------ ------------------
DKK DKK $
ASSETS
Current assets:
Cash and cash equivalents 94,051 52,564 6,978
Restricted cash 41,607 2,112 280
Short-term investments 16,963 19,248 2,555
Accounts receivable trade, net of allowances
of DKK 7,640 in 2001, DKK 5,982 in 2002 24,505 32,940 4,373
Related parties receivable 3,084 0 0
Broadcasting rights 8,000 5,712 758
Inventories 21,940 22,666 3,009
Deferred tax assets 356 0 0
VAT receivables 1,328 250 33
Prepaid expenses and deposits 9,625 7,489 994
Other receivables 4,677 8,633 1,146
Other current assets 14,062 14,936 1,983
------- ------- ------
Total current assets 240,198 166,550 22,109
Tangible fixed assets, net 62,502 57,300 7,607
Goodwill, net 51,002 90,045 11,954
Rights, net 70,258 66,605 8,842
Other intangible fixed assets, net 1,297 372 49
Rent and other deposits 18,989 1,435 190
Investment in affiliates 1,255 1,173 156
Other assets 110 2,901 385
------- ------- ------
Total assets 445,611 386,381 51,292
======= ======= ======
DKK amounts have been converted into US$ at an exchange rate of $1=DKK 7.5329.
See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
3
EUROTRUST A/S
Unaudited Consolidated Condensed Balance Sheets
(in thousands)
December 31,
2001 September 30, 2002
------------ --------------------
DKK DKK $
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 28,115 29,189 3,875
Accounts payable, related parties 6,560 4,600 611
Accrued expenses 39,430 21,642 2,873
Deferred revenue 22,245 41,302 5,482
Notes payable, current 4,010 941 125
Leasing commitments 768 1,026 136
-------- -------- -------
Total current liabilities 101,128 98,700 13,102
Minority interest 7,738 7,263 964
Leasing commitments, long term 3,577 8,028 1,066
Shareholders' equity:
Common Shares - authorized 35,502,000 and issued 27,205,000
in 2001; authorized 44,502,000 and issued 27,205,000 in 2002 34,006 34,006 4,514
Additional paid-in capital 532,280 528,010 70,094
Retained earnings (224,192) (279,328) (37,081)
Other comprehensive income (loss) (3,470) (3,090) (410)
Treasury stock (5,456) (7,208) (957)
-------- -------- -------
Total shareholders' equity 333,168 272,390 36,160
-------- -------- -------
Total liabilities and shareholders' equity 445,611 386,381 51,292
======== ======== =======
DKK amounts have been converted into US$ at an exchange rate of $1=DKK 7.5329
See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
4
EUROTRUST A/S
Unaudited Consolidated Condensed Statements of Operations
(in thousands, except per share data)
Nine months ended September 30, Three months ended September 30,
-------- -------- -------- -------- -------- --------
2001 2002 2002 2001 2002 2002
-------- -------- -------- -------- -------- --------
DKK DKK $ DKK DKK $
Net revenue 134,406 93,943 12,471 34,051 34,903 4,633
Operating expenses:
Cost of sales 90,001 59,215 7,861 22,573 20,354 2,702
Selling and marketing expenses 47,369 34,160 4,535 9,247 12,262 1,628
General and administrative expenses 42,386 29,774 3,953 15,631 10,828 1,437
Depreciation and amortization 118,024 22,294 2,959 93,495 7,583 1,007
-------- -------- ------- -------- ------- -------
Total operating expenses 297,780 145,443 19,308 140,946 51,027 6,774
-------- -------- ------- -------- ------- -------
Operating income (loss) (163,374) (51,500) (6,837) (106,895) (16,124) (2,141)
Interest income 2,759 1,546 205 1,072 506 67
Interest expense (938) (688) (91) (375) (238) (32)
Investment gains (losses), net 217,473 (650) (86) 217,473 0 0
Foreign exchange gain (loss), net (3,749) (4,132) (549) (3,540) (3,196) (424)
Other income (expenses), net 86 (318) (42) (38) (318) (42)
-------- -------- ------- -------- ------- -------
Income (loss) before income taxes 52,257 (55,742) (7,400) 107,697 (19,370) (2,572)
Income taxes and income tax benefit (22) 0 0 0 0 0
Minority interest 1,275 606 81 99 (100) (13)
-------- -------- ------- -------- ------- -------
Net income (loss) from continuing operations 53,510 (55,136) (7,319) 107,796 (19,470) (2,585)
======== ======== ======= ======== ======= =======
Net (loss) from discontinued operations (11,376) 0 0 (7,149) 0 0
Net income (loss) 42,134 (55,136) (7,319) 100,647 (19,470) (2,585)
======== ======== ======= ======== ======= =======
Net income (loss) from continuing operations per
weighted
average common share, basic 2.29 (2.10) (0.28) 3.99 (0.74) (0.10)
======== ======== ======= ======== ======= =======
Net loss from discontinued operations per weighted
average common share, basic (0.48) 0.00 0.00 (0.27) 0.00 0.00
======== ======== ======= ======== ======= =======
Net income (loss) per weighted average common
share, basic 1.81 (2.10) (0.28) 3.72 (0.74) (0.10)
======== ======== ======= ======== ======= =======
Net income (loss) from continuing operations per
weighted
average common share, diluted 2.29 (2.10) (0.28) 3.99 (0.74) (0.10)
======== ======== ======= ======== ======= =======
Net loss from discontinued operations per weighted
average common share, diluted (0.48) 0.00 0.00 (0.27) 0.00 0.00
======== ======== ======= ======== ======= =======
Net income (loss) per weighted average common
share, diluted 1.81 (2.10) (0.28) 3.72 (0.74) (0.10)
======== ======== ======= ======== ======= =======
Weighted average common shares outstanding, basic 23,342 26,232 26,232 27,038 26,232 26,232
======== ======== ======= ======== ======= =======
Weighted average common shares outstanding, diluted 23,342 26,232 26,232 27,038 26,232 26,232
======== ======== ======= ======== ======= =======
DKK amounts have been converted into US$ at an exchange rate of $1=DKK 7.5329.
See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
5
EUROTRUST A/S
Unaudited Consolidated Condensed Statements of Shareholders' Equity
(in thousands)
Notes
Additional Other com- Receivable
Common Paid-In Retained rehensive Treasury from Sale of
Shares Capital Earnings Income Stock Shares Total
-----------------------------------------------------------------------------------
DKK DKK DKK DKK DKK DKK DKK
Balance at December 31,1997 7,445 51,586 (17,901) (935) (296) (524) 39,375
Repayment of notes receivable 313 313
Currency translation adjustments (578) (578)
Unrealized loss on investment (991) (991)
Net loss (24,046) (24,046)
-----------------------------------------------------------------------------------
Balance at December 31,1998 7,445 51,586 (41,947) (2,504) (296) (211) 14,073
Issuance of 2,174 common shares and 1,087
warrants for cash in private placement 2,717 21,485 24,202
Issuance of 2,710 common shares and 960
warrants to acquire new businesses 3,388 62,160 65,548
Issuance of 1,040 common shares for cash
in private placement 1,300 15,237 16,537
Issuance of 3,023 common shares for cash
through exercise of warrants 3,779 67,818 71,597
Repayment of notes receivable 125 125
Currency translation adjustments 277 277
Unrealized loss on investment (93) (93)
Sale of treasury stock 322 296 618
Net loss (43,246) (43,246)
-----------------------------------------------------------------------------------
Balance at December 31,1999 18,629 218,608 (85,193) (2,320) 0 (86) 149,638
Issuance of 2,655 common shares to
acquire new businesses 3,319 107,945 111,264
Issuance of 2,571 common shares for cash
through exercise of warrants 3,213 80,728 83,941
Issuance of 522 common shares for cash
in private placement 653 7,347 8,000
Repayment of note receivables 39 39
Currency translation adjustments (203) (203)
Unrealized loss on investment (337) (337)
Net loss (146,704) (146,704)
-----------------------------------------------------------------------------------
Balance at December 31, 2000 25,814 414,628 (231,897) (2,860) 0 (47) 205,638
See accompanying Notes to Unaudited Consolidated Condensed
Financial Statements.
6
EUROTRUST A/S
Unaudited Consolidated Condensed Statements of Shareholders' Equity (continued)
(in thousands)
Balance at December 31, 2000 25,814 414,628 (231,897) (2,860) 0 (47) 205,638
Issuance of 248 common shares to acquire
new businesses 310 3,652 3,962
Issuance of 6,306 common shares for cash
in private placement 7,882 114,529 122,411
Purchase of treasury stock (7,150) (7,150)
Sale of treasury stock (529) 1,694 1,165
Currency translation adjustments (393) (393)
Unrealized losses (217) (217)
Repayment of notes receivable 47 47
Net income 7,705 7,705
---------------------------------------------------------------------------------
Balance at December 31, 2001 34,006 532,280 (224,192) (3,470) (5,456) 0 333,168
Purchase of treasury stock (1,752) (1,752)
Unrealized loss treasury stock (4,270) (4,270)
Currency translation adjustments 380 380
Net income (loss) (55,136) (55,136)
---------------------------------------------------------------------------------
Balance at September 30, 2002 34,006 528,010 (279,328) (3,090) (7,208) 0 272,390
=================================================================================
See accompanying Notes to Unaudited Consolidated Condensed
Financial Statements.
7
EUROTRUST A/S
Unaudited Consolidated Condensed Statements of Cash Flows
(in thousands)
Nine months ended September 30,
2001 2002 2002
-------- -------- -------
DKK DKK $
Cash flows from operating activities:
Net income/(loss) 53,510 (55,136) (7,319)
Adjustments to reconcile net income/(loss) to cash provided
by (used in) operating activities:
Depreciation and amortization 118,024 22,294 2,959
(Gain)/loss on sale of business (205,567) 0 0
Minority interest 5,052 (475) (63)
Changes in operating assets and liabilities:
Accounts receivable 9,424 (14,458) (1,920)
Related party receivable 0 3,084 409
Broadcasting rights 12,289 2,288 303
Inventories and other assets (21,879) (726) (96)
Income tax payable 101 0 0
Other receivables (3,090) (1,259) (167)
Accounts payable (11,292) 1,074 143
Accounts payable, related parties (2,297) (1,960) (260)
Accrued expenses (37,544) (17,788) (2,362)
Deferred revenue (30,919) 19,057 2,530
-------- ------- -------
Cash used in operating activities: (114,188) (44,005) (5,843)
Cash used in discontinued operations: (3,483) 0 0
-------- ------- -------
(117,671) (44,005) (5,843)
======== ======= =======
Cash flows from investing activities:
Purchase of short-term investments 6,138 (2,285) (303)
Sale of business, net of cash 205,567 0 0
Purchase of fixed assets (101,143) (36,712) (4,873)
-------- ------- -------
Cash used in investing activities: 110,562 (38,997) (5,176)
Cash used in discontinued operations: (9,077) 0 0
-------- ------- -------
101,485 (38,997) (5,176)
======== ======= =======
Cash flows from financing activities:
Net change in short-term borrowings (3,550) 1,640 218
Net change in subordinated debt 315 0 0
Net change in restricted cash (40,812) 39,495 5,243
Proceeds from issuance of common shares and warrants 125,631 0 0
-------- ------- -------
Cash provided by (used in) financing activities: 81,584 41,135 5,461
Cash provided from discontinued operations: 9,159 0 0
-------- ------- -------
90,743 41,135 5,461
======== ======= =======
Effect of exchange rate changes on cash and cash
equivalents 0 380 51
Cash provided by discontinued operations 0 0 0
-------- ------- -------
Net increase (decrease) in cash and cash equivalents 74,557 (41,487) (5,507)
Cash and cash equivalents, beginning of period 49,082 94,051 12,485
-------- ------- -------
Cash and cash equivalents, end of period 123,639 52,564 6,978
======== ======= =======
DKK amounts have been converted into US$ at an exchange rate of $1=DKK 7.5329.
See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
8
EUROTRUST A/S
Notes to Unaudited Consolidated Condensed Financial Statements
The accompanying unaudited consolidated financial statements have been
prepared in accordance with United States generally accepted accounting
principles. However, certain information or footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed, or omitted, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, the financial statements include all normal recurring adjustments
that are necessary for the fair presentation of the results of the interim
periods presented. Interim results are not necessarily indicative of results for
the fiscal year. These financial statements should be read in conjunction with
the Company's audited financial statements for the year ended December 31, 2001,
as set forth in the Company's Annual Report on Form 20-F, filed with the
Securities and Exchange Commission on June 27, 2002.
In preparing financial statements that conform with United States
generally accepted accounting principles, management must make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and amounts of revenues and expenses reflected during the reporting
period. Actual results could differ from those estimates.
1. Earnings per share
Earnings per share amounts have been presented to conform to the SFAS No.
128 requirements, which require the calculation of basic and diluted earnings
per share. Basic earnings per share exclude any dilutive effects of options,
warrants and convertible securities. If the options, warrants and convertible
securities are anti-dilutive they are excluded from the computation of diluted
earnings per share.
2. Revenue recognition
Revenues from Internet Services and web hosting are recognized on accrual
basis ratably over the life of the services, generally 12 to 60 months. Other
Internet services are recognized when the services are rendered.
Cable and digital television fees are recognized on a monthly basis when
the programming is broadcast.
Effective October 1, 2000, the Company changed its method of accounting
for revenue recognition in accordance with Staff Accounting Bulletin (SAB)
No.101, Revenue Recognition in Financial Statements. Previously, the Company
recognized revenue from initial registration of domain names when the
registration process was complete and annual service fees (registration renewal
fees) were recognized when invoiced to the customer. Upon completion of the
initial registration, the only continuing obligation to the Company was to
provide the customer access through one of its servers, resulting in no
incremental cost to the Company, to the domain name registry for purposes of
maintaining the customer's domain name registration. Under the new method of
accounting, which was adopted retroactively to January 1, 2000, the Company
recognizes
9
EUROTRUST A/S
Notes to Unaudited Consolidated Condensed Financial Statements
(continued)
revenues over the period the customer is provided access to the registry through
its servers. The effect of this change on the year ended December 31, 2000, was
an increase of the loss before cumulative effect of the accounting change of DKK
16.5 million (DKK 0.97 per share). During 2000, the Company recognized DKK 27.6
million of revenue and DKK 7.3 million of cost of sales that was included in the
cumulative effect adjustment, which decreased the loss for the year by DKK 20.3
million or DKK 1.20 per share.
3. Inventories
Inventories are stated at the lower of cost or market value with cost
determined on the basis and the first in, first out method.
4. Tangible fixed assets
Real property, (consisting of buildings and land), technical equipment,
furniture and fixtures, cars and improvements are carried at cost. Land is not
depreciated. Buildings are depreciated on a straight-line basis over 50 years.
Technical equipment, furniture and fixtures and cars are depreciated on a
straight-line basis over the expected useful lives of between three and ten
years. Leasehold improvements are amortized over the shorter of their expected
lives or the non-cancelable term of the lease.
5. Goodwill and other intangibles
Goodwill, representing the excess of the cost of acquired businesses over
the fair values assigned to assets and liabilities acquired, has historically
amortized over a 5 to 10 year period depending on the nature of the business
acquired. Goodwill recorded on the acquisition of Internet-related business is
amortized over 5 years. Other intangibles are amortized over the expected useful
lives, however, not exceeding 5 years.
As required, the Company adopted SFAS No. 142 as of January 1, 2002. SFAS
No. 142 requires that goodwill resulting from a business combination will no
longer be amortized to earnings, but instead be reviewed for impairment. For
goodwill resulting from business combinations prior to July 1, 2001,
amortization of goodwill continued through December 31, 2001, but ceased
commencing January 1, 2002. For business combinations occurring on or after July
1, 2001, the associated goodwill will not be amortized. We are required to
perform a transitional impairment test for all recorded goodwill within six
months and, if necessary, determine the amount of an impairment loss by December
31, 2002. The adoption of SFAS No. 142 has reduced the amount of amortization of
goodwill and intangible assets with an indefinite life. The Company does not
have intangibles with an indefinite life. The Company is still in the process of
determining the effects of SFAS No. 142.
10
EUROTRUST A/S
Notes to Unaudited Consolidated Condensed Financial Statements
(continued)
If the carrying value of a reporting unit's goodwill exceeds its implied
fair value, then an impairment loss equal to the difference will be recorded as
a charge against earnings.
6. Broadcasting rights
Broadcasting rights, which are comprised of acquired rights to broadcast
television programs on the Company's television stations, and the related
liabilities are recorded at their gross value when the license period begins and
the programs are available for use. These rights are either expensed when the
program is aired or amortized on an accelerated basis when the Company is
entitled to more than one airing. Program rights are classified as current or
non-current based on anticipated usage in the following year.
7. 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. In
addition, we maintain a general reserve for all invoices by applying a
percentage based on the age category.
8. Cash and cash equivalents
Cash and cash equivalents represent cash and short-term deposits with
maturities of less than three months at the time of purchase.
9. Short-term investments
Short-term investments, which are classified as available-for-sale, are
carried at fair market value with the unrealized gains or losses, net of tax,
reported in a separate component of shareholders' equity.
10. Reporting currency
The functional currency of the Company and its subsidiaries is the local
currency of the country in which they conduct their business. Balance sheet
accounts are translated into Danish Kroner ("DKK") at the period end exchange
rate and items in the statement of operations are translated at the average
exchange rate. Resulting translation adjustments are charged or credited to a
separate component of shareholders' equity. Translation adjustments arising from
intercompany financing of a long-term investment nature are accounted for
similarly. Some transactions of the Company and its subsidiaries are made in
currencies other than the functional currency. Gains and losses from these
transactions are included in the income statement.
11
EUROTRUST A/S
Notes to Unaudited Consolidated Condensed Financial Statements
(continued)
11. Information expressed in US dollars
The consolidated financial statements are stated in Danish Kroner ("DKK"),
the currency of the country in which the Company and its major subsidiaries are
incorporated and operate. Translation of DKK amounts into US Dollar amounts is
included solely for the convenience of the reader and has been made at the rate
of DKK 7.5329 to US $ 1, the approximate exchange rate at September 30, 2002.
Such translation should not be construed as a representation that the DKK
amounts could have been or could be converted into US Dollars at that or any
other rate.
12. Basis of presentation and principles of consolidation
The Company financial statements are prepared in accordance with
accounting principles generally accepted in the United States ("US GAAP") and
include the accounts of EuroTrust A/S and its majority-owned subsidiaries after
elimination of intercompany accounts and transactions. The Company's investments
representing a 20% to 50% interest are accounted for by the equity method of
accounting.
13. Risks and uncertainties
The preparation of consolidated financial statements in conformity with US
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure 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.
14. Reclassification
Certain prior year's balances have been reclassified to conform to the
current year's presentation.
15. Post-retirement and post-employment benefits
The Company does not provide its employees with post-retirement and
post-employment benefits.
16. Business Acquisitions
All acquisitions have been accounted for under the purchase method of
accounting. The results of operations of the acquired businesses are included in
the financial statements from the dates of the respective acquisitions. Goodwill
amounts recorded for the acquisitions are being treated according to SFAS No.
142.
Alphasys
In January 2002, together with Firstream SA, each of us acquiring an equal
percentage, we acquired 67% of Alphasys SA, a Paris-based e-security firm.
12
EUROTRUST A/S
Notes to Unaudited Consolidated Condensed Financial Statements
(continued)
In April 2002, we entered into an agreement with Excelsa Spa, an Italian
Internet-based video surveillance company, to acquire a 10 percent ownership
interest along with exclusive rights to market Excelsa's security system in
Denmark, Sweden, Norway and Finland.
17. Segment Reporting
The Company 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. Intersegment sales and transfers are recorded
at cost plus an agreed upon intercompany profit on intersegment sales or
transfers.
The Company's reportable segments are business units that offer different
services. The reportable segments are each managed separately because they offer
and distribute distinct services to different customer segments.
The Company historically divided its operations into two operating
segments: (i) internet services and (ii) broadcast media.
The Internet services segment includes business operations relating to web
site hosting, security consultancy, PKI services and other trusted
infrastructure services, Internet access and e-mail services. On July 21, 2001,
the Company sold its domain name registration business to VeriSign, Inc. and in
December 2001 the Company sold its telecommunications business. Therefore, the
results of these activities are not included in 2002, but only for the
comparable period in 2001.
The broadcast media segment includes the operations of the Company's cable
television properties: one cable television channel, dk4 (and until the fourth
quarter of 2001 the Bio+ cable television channel), and a production company,
PrimeVision. In December 2001, TeleDanmark Kabel, Net, the cable system operator
that carried both cable channels, advised the Company that the carriage
agreement for Bio+ would not be renewed after it expired on December 31, 2001
but that the carriage agreement for dk4 would be extended through March 31,
2004. As a result, we consolidated in fourth quarter 2001 our television
programming into a single television channel, dk4.
13
EUROTRUST A/S
Notes to Unaudited Consolidated Condensed Financial Statements
(continued)
Nine months ended September 30, Three months ended September 30,
2001 2002 2002 2001 2002 2002
------- ------- ------- ------- ------- ------
DKK DKK $ DKK DKK $
Internet services:
Net revenue 69,551 42,768 5,677 12,188 17,111 2,271
Operating expenses:
Cost of sales 36,101 32,223 4,278 8,601 11,634 1,543
Selling and marketing expenses 46,573 27,895 3,703 9,034 10,260 1,361
General and administrative expenses 33,546 23,676 3,143 13,496 8,926 1,185
Depreciation and amortization 86,435 16,573 2,200 71,275 5,669 753
-------- -------- ------- -------- ------- ------
Total operating expenses 202,655 100,367 13,324 102,406 36,489 4,842
-------- -------- ------- -------- ------- ------
Operating loss (133,104) (57,599) (7,647) (90,218) (19,378) (2,571)
-------- -------- ------- -------- ------- ------
Broadcasting:
Net revenue 64,855 51,175 6,794 21,863 17,792 2,362
Operating expenses:
Cost of sales 53,900 26,992 3,583 13,972 8,720 1,159
Selling and marketing expenses 796 6,265 832 213 2,002 267
General and administrative expenses 8,840 6,098 810 2,135 1,902 252
Depreciation and amortization 31,589 5,721 759 22,220 1,914 254
-------- -------- ------- -------- ------- ------
Total operating expenses 95,125 45,076 5,984 38,540 14,538 1,932
-------- -------- ------- -------- ------- ------
Operating income (loss) (30,270) 6,099 810 (16,677) 3,254 430
-------- -------- ------- -------- ------- ------
Consolidated
Net revenue 134,406 93,943 12,471 34,051 34,903 4,633
Loss from operations (163,374) (51,500) (6,837) (106,895) (16,124) (2,141)
Interest income 2,759 1,546 205 1,072 506 67
Interest expense (938) (688) (91) (375) (238) (32)
Investment gains (losses), net 217,473 (650) (86) 217,473 0 0
Foreign exchange loss, net (3,749) (4,132) (549) (3,540) (3,196) (424)
Other income (expenses), net 86 (318) (42) (38) (318) (42)
-------- -------- ------- -------- ------- ------
Loss before income taxes 52,257 (55,742) (7,400) 107,697 (19,370) (2,572)
-------- -------- ------- -------- ------- ------
Income taxes and income tax benefit (22) 0 0 0 0 0
Minority interest 1,275 606 81 99 (100) (13)
-------- -------- ------- -------- ------- ------
Net income (loss) from continuing operation 53,510 (55,136) (7,319) 107,796 (19,470) (2,585)
======== ======== ======= ======== ======= ======
Net loss from discontinued operation (11,376) 0 0 (7,149) 0 0
Net income (loss) 42,134 (55,136) (7,319) 100,647 (19,470) (2,585)
======== ======== ======= ======== ======= ======
DKK amounts have been converted into US$ at an exchange rate of $1=DKK 7.5329.
See accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
14
EUROTRUST A/S
Notes to Unaudited Consolidated Condensed Financial Statements
(continued)
Specification of Internet services segment:
Nine months ended September 30, Three months ended September 30,
2001 2002 2002 2001 2002 2002
-------- -------- -------- -------- --------- --------
EuroTrust PKI DKK DKK $ DKK DKK $
Net revenue 241 11,513 1,528 172 5,224 693
Operating expenses:
Cost of sales 2,988 16,045 2,130 2,409 5,795 769
Selling and marketing expenses 1,959 12,058 1,600 1,629 4,080 541
General and administrative
expenses 3,660 6,340 842 1,294 2,360 313
Depreciation and amortization 3,689 8,054 1,070 357 2,802 373
-------- ------- ------ ------- ------- ------
Total operating expenses 12,296 42,497 5,642 5,689 15,037 1,996
-------- ------- ------ ------- ------- ------
Operating loss (12,055) (30,984) (4,114) (5,517) (9,813) (1,303)
-------- ------- ------ ------- ------- ------
Deferred revenue 1,074 26,762 3,552
-------- ------- ------
EuroTrust Virus
Net revenue 3,903 11,662 1,548 1,757 4,225 561
Operating expenses:
Cost of sales 0 1,873 249 0 670 89
Selling and marketing expenses 5,218 6,711 891 2,038 2,722 361
General and administrative
expenses 1,244 5,926 787 522 2,000 265
Depreciation and amortization 226 101 13 117 33 4
-------- ------- ------ ------- ------- ------
Total operating expenses 6,688 14,611 1,940 2,677 5,425 719
-------- ------- ------ ------- ------- ------
Operating loss (2,785) (2,949) (392) (920) (1,200) (158)
-------- ------- ------ ------- ------- ------
Deferred revenue 7,260 10,183 1,352
-------- ------- ------
EuroTrust Holding
Net revenue 0 137 18 0 137 18
Operating expenses:
Cost of sales 0 0 0 0 0 0
Selling and marketing expenses 2,716 6,191 822 586 2,125 282
General and administrative
expenses 17,794 6,217 825 14,307 2,731 363
Depreciation and amortization 37,851 1,299 172 27,993 521 69
-------- ------- ------ ------- ------- ------
Total operating expenses 58,361 13,707 1,819 42,886 5,377 714
-------- ------- ------ ------- ------- ------
Operating loss (58,361) (13,570) (1,801) (42,886) (5,240) (696)
-------- ------- ------ ------- ------- ------
Deferred revenue 0 0 0
-------- ------- ------
EuroTrust Internet other
Net revenue 65,407 19,456 2,583 10,259 7,525 999
Operating expenses:
Cost of sales 33,113 14,305 1,899 6,192 5,169 685
Selling and marketing expenses 36,680 2,935 390 4,781 1,333 177
General and administrative
expenses 10,848 5,193 689 (2,627) 1,835 244
Depreciation and amortization 44,669 7,119 945 42,808 2,313 307
-------- ------- ------ ------- ------- ------
Total operating expenses 125,310 29,552 3,923 51,154 10,650 1,413
-------- ------- ------ ------- ------- ------
Operating loss (59,903) (10,096) (1,340) (40,895) (3,125) (414)
-------- ------- ------ ------- ------- ------
Deferred revenue 1,525 4,357 578
-------- ------- ------
15
ONE-FOR-SIX RATIO CHANGE OF OUR AMERICAN DEPOSITARY RECEIPTS
On August 29, 2002 we implemented a one-for-six ratio change of our
American Depositary Receipts (ADRs), in which one new ADR was exchanged for
every six existing ADRs. This ratio change did not effect our capitalization.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Prior to January of 2002 our operations were divided into three principal
areas: (i) Internet services, (ii) print and on-line media and (iii) broadcast
media. The Internet services segment includes business operations relating to
domain name registration, web site design, web site hosting, security
consultancy and other trusted infrastructure services, Internet access and
e-mail services and our historical telecommunications products and services. The
print and on-line media segment includes three Chili print publications and
their related web sites. The broadcast media segment includes the operations of
our television channels dk4 and Bio+ and the production facility, PrimeVision.
In 2001 we made the strategic decision to focus primarily on providing
trusted Internet infrastructure products and services and e-commerce solutions
with the goal of becoming a leading provider of such services in Scandinavia and
other selected western European markets. In order to implement that strategy, we
decided to sell that portion of our Internet services segment that did not fall
within our primary area of interest as well as to sell our various media
properties. On July 21, 2001, we sold our domain name registration business to
VeriSign, Inc. We also signed an International Affiliate Agreement with VeriSign
under which we were appointed as an authorized affiliate of VeriSign in
Scandinavia, Finland, Switzerland, Austria and Italy. In that capacity, we
distribute various VeriSign products and services in those countries. VeriSign
is the worldwide leader of trusted infrastructure services. VeriSign's digital
certificate and payment services provide the critical web identity,
authentication and transaction infrastructure that online businesses need to
establish their web identities and to conduct secure e-commerce and
communications. At the same time we entered into the Affiliate Agreement with
VeriSign, VeriSign purchased from us approximately 4.9 million of our common
shares, representing approximately 18% of our issued and outstanding common
shares, for approximately US$10.4 million. We believe that our affiliation with
VeriSign is a critical part of our growth strategy.
Also, in 2001, TDC, the cable provider that carries our cable television
channels, informed us that the carriage agreement for Bio+ would not be renewed
but that the carriage agreement for dk4, our other cable channel, would be
extended through March 31, 2004. As a result, all operations relating to Bio+
were merged into dk4 in October 2001 and we sold a 15% interest in dk4 for DKK
12 million to Parken Sports and Entertainment.
In December 2001, we sold the remaining assets of our historical
telecommunications business and our print and online media segment.
As a result of the sale of our print and online media business segment,
the results of operations for the nine months ended September 30, 2002 as
compared to the same period in the prior year are exclusive of the results of
operations from that business segment. Accordingly, for
16
comparison purposes, results of operations for the prior year have been adjusted
to exclude the results of operations from the print and online media business
segment and reflected as a discontinued operation in the unaudited Consolidated
Condensed Statement of Operations and Consolidated Condensed Statement of Cash
Flows for the nine months ended September 30, 2002.
Critical accounting policies
The discussion and analysis of our financial condition and results of
operations are based upon our unaudited financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. 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. On an ongoing basis, management evaluates its estimates,
including those related to revenue recognition, doubtful accounts and long-lived
assets. 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 the following critical accounting policies affect our more
significant judgments and estimates used in preparing our financial statements.
Revenue recognition
Until the sale of our domain name registration operations in 2001, which
was a portion of the internet services segment, we derived revenues from two
primary categories: domain name registration service fees and cable and digital
television fees.
Effective October 1, 2000, we changed our method of accounting for revenue
recognition in accordance with Staff Accounting Bulletin (SAB) No.101, Revenue
Recognition in Financial Statements. Previously, 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. Upon completion of the initial registration, our only
continuing obligation to the customer was to provide the customer access through
one of our servers, resulting in no incremental cost to us, to the domain name
registry for purposes of maintaining the customer's domain name registration.
Under the new method of accounting, which was adopted retroactively to January
1, 2000, we recognize revenues over the period the customer is provided access
to the registry through our servers.
Domain name registration revenues consisted primarily of registration fees
charged to customers for domain name registration services. Revenues from the
sale or renewal of domain name registration services were deferred and
recognized ratably over the registration term, generally one to two years.
Domain name registration renewal fees were estimated and recorded based on
recent renewal and collection rates. Customers were notified of the expiration
of their registration in advance, and we recorded the receivables for estimated
renewal fees in the month preceding the anniversary date of their registration
when we had a right to bill under the terms of domain name registration
agreements. The variance between the actual collections and the rate used to
estimate the
17
renewal fees was reflected in setting of prospective renewal rates. Fees for
renewals and advance extensions to the existing term were deferred until the new
incremental period commenced. These fees were then recognized ratably over the
new registration term, ranging from one to two years.
Cable and digital television fees are recognized on a monthly basis when
the program is broadcast.
Revenues from internet services and web hosting are recognized on accrual
basis ratably over the life of the services, generally 12 to 60 months. Other
internet services are recognized when the services are rendered.
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. In
addition, we maintain a general reserve for all invoices by applying a
percentage based on the age category. We also monitor our accounts receivable
for any build up of concentration to any one customer, industry or geographic
region. To date our receivables have not had any particular concentrations that,
if not collected, would have a significant impact on our operating income. We
require all acquired companies to adopt our credit policies. The allowance for
doubtful accounts represents our best estimate, but changes in circumstances
relating to accounts receivable may result in a requirement for additional
allowances in the future.
Long-lived assets
Our long-lived assets consist primarily of goodwill and other intangible
assets and property and equipment. We review long-lived assets for impairment
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, a significant decrease in the fair value of the underlying
business, a significant decrease in the benefits realized from the acquired
business, difficulty and delays in integrating the business or a significant
change in the operations of the acquired business.
Recoverability of long-lived assets is measured by comparison of the
carrying amount to estimated future undiscounted net cash flows the assets are
expected to generate. Those cash flows include an estimated terminal value based
on a hypothetical sale of an acquisition at the end of its goodwill amortization
period. Estimating these cash flows and terminal values requires management to
make judgments about the growth in demand for our services, sustainability of
gross margins, our ability to integrate acquired companies and achieve economies
of scale, and valuation multiples required by investors or buyers. Changes in
these estimates could require us to further write down the carrying amount of
our long-lived assets. If assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount of the
long-lived asset exceeds its fair value.
On January 1, 2002, we began assessing impairment of goodwill in
accordance with the provisions of SFAS No. 142. The provisions of SFAS No. 142
require that a two-step test be
18
performed. First, the fair value of each of our reporting units will be compared
to its carrying value. If the fair value exceeds the carrying value, goodwill is
not impaired and no further testing is performed. If the carrying value exceeds
the fair value, then the implied fair value of the reporting unit's goodwill
must be determined and compared to the carrying value of the goodwill. If the
carrying value of a reporting unit's goodwill exceeds its implied fair value,
then an impairment loss equal to the difference will be recorded as a charge
against earnings.
Common European Currency
The Treaty on European Economic and Monetary Union, or EU, provides for
the introduction of a single European currency, the Euro, in substitution for
the national currencies of the member states of the EU that adopt the Euro. This
was effective on January 1, 2002. The Euro was introduced and foreign exchange
operations in the Euro commenced on January 1, 1999 when irrevocable conversion
rates were set between the national currencies of the eleven member states of
the EU that qualified to participate, and elected to participate in the Euro.
Denmark, Sweden and the United Kingdom elected not to participate in the Euro.
Norway is not currently a member state of the EU. Finland, Austria and Italy
qualified and elected to participate. The change to the Euro has not had a
significant financial effect of us.
Unaudited Consolidated Results
Three Months Ended September 30, 2002 Compared With Three Months Ended September
30, 2001
Net revenues for the three months ended September 30, 2002 were DKK 34.9
million, an increase of DKK 0.8 million, or 2.5%, compared to net revenues of
DKK 34.1 million for the three months ended September 30, 2001. The table below
compares net revenues for the relevant periods on a segment-by-segment basis.
Net Revenue Value Percentage
Increase Increase
2002 2001 (Decrease) (Decrease)
------ ------ ---------- ----------
(in thousands of DKK)
Internet services 17,111 12,188 4,923 40.4%
Broadcast media 17,792 21,863 (4,071) (18.6%)
------ ------ ------ -----
Total 34,903 34,051 852 2.5%
The increase in net revenues in our Internet services segment reflects the
fact that we began realizing more significant revenues from the services we
provide under our International Affiliate Agreement with VeriSign and the fact
that we sold our domain name registration business in third quarter of 2001. The
decrease in net revenues in our broadcast media segment reflects the fact that
in the fourth quarter of 2001 we consolidated all of our television programming
into a single television channel, dk4. The consolidation resulted primarily from
two developments: (i) the failure of either channel (Bio+ and dk4) to achieve
profitability, which we attribute to TDC's declining subscription fees; and (ii)
the fact that the carriage agreement for Bio+ was not going to be renewed once
it expired December 31, 2001. In addition, the carriage agreement for dk4 was
extended through March 31, 2004 and we entered into two new distribution
agreements and a new programming agreement for dk4.
Total operating expenses for the three months ended September 30, 2002
were DKK 51.0 million, a decrease of DKK 89.9 million, or 63.8%, over total
operating expenses of DKK 140.9
19
million for the three months ended September 30, 2001. Total operating expenses
include cost of sales, sales and marketing expenses, general and administrative
expenses and depreciation, amortization and write-off. The table below shows our
operating expenses by category on a segment-by-segment basis.
Cost of Sales Value Percentage
Increase Increase
2002 2001 (Decrease) (Decrease)
------ ------ ---------- ----------
(in thousands of DKK)
Internet services 11,634 8,601 3,033 35.3%
Broadcast media 8,720 13,972 (5,252) (37.6%)
------ ------ ----- -----
Total 20,354 22,573 (2,219) (9.8%)
Sales and Marketing Value Percentage
Increase Increase
2002 2001 (Decrease) (Decrease)
------ ------ ---------- ----------
(in thousands of DKK)
Internet services 10,260 9,034 1,226 13.6%
Broadcast media 2,002 213 1,789 839.9%
------ ----- ----- -----
Total 12,262 9,247 3,015 32.6%
General /
Administration Value Percentage
Increase Increase
2002 2001 (Decrease) (Decrease)
------ ------ ---------- ----------
(in thousands of DKK)
Internet services 8,926 13,496 (4,570) (33.9%)
Broadcast media 1,902 2,135 (233) (10.9%)
------ ------ ------ -----
Total 10,828 15,631 (4,803) (30.7%)
Depreciation and
Amortization Value Percentage
Increase Increase
2002 2001 (Decrease) (Decrease)
----- ------ ---------- ----------
(in thousands of DKK)
Internet services 5,669 71,275 (65,606) (92.0%)
Broadcast media 1,914 22,220 (20,306) (91.4%)
----- ------ ------- -----
Total 7,583 93,495 (85,912) (91.9%)
With respect to our Internet services segment, the increase in costs of
sales and sales and marketing expenses are primarily attributable to the
additional incremental expenditure associated with the increase in demand for
trusted internet Infrastructure services during the three months ending
September 2002. However, sales and marketing expenses for the three months ended
September 2002 were 60.0% of total revenue compared to 74.1% of total revenue
for the three months ending September 2001. The decrease in general and
administrative expenses is primarily attributable to the sale of our domain name
registration business and an increased focus on
20
reducing expenditures, generally. The decrease in depreciation and amortization
expenses primarily reflects a write down of goodwill in third quarter 2001 to
reflect the fair market value of previously acquired assets and the fact that,
in accordance with SFAS No. 142, beginning January 1, 2002 we assess goodwill
for impairment.
In the case of our broadcast media segment, cost of sales, general and
administrative expenses, and depreciation and amortization expenses decreased
due to the fact that we consolidated all of our television programming into a
single television channel, dk4.
For the three months ended September 30, 2002, the gross profit for our
Internet services segment increased to DKK 5.5 million, or 32.0% of segment net
revenues compared to DKK 3.6 million, or 29.4% of segment net revenues for the
same period in 2001. This increase is primarily attributable to the increase in
sales of trusted Internet infrastructure services. We expect the gross profit to
increase with time as the business of providing trusted Internet infrastructure
services mature. In the case of our broadcast media segment, for the three
months ended September 30, 2002 the gross profit margin increased to DKK 9.1
million, or 51.0% of segment net revenues compared to DKK 7.9 million, or 36.1 %
of segment net revenues for the same period in 2001. This increase is primarily
attributable to the general reduction of cost resulting from the consolidation
of our television programming into a single television channel, dk4.
Gross Profit Value Percentage
Increase Increase
2002 2001 (Decrease) (Decrease)
---------- ---------- ---------- ----------
(in thousands of DKK)
Internet services 5,477 3,587 1,890 52.7%
Broadcast media 9,072 7,891 1,181 15.0%
---------- ---------- ---------- ----------
Total 14,549 11,478 3,071 26.8%
We reduced our operating loss by DKK 90.8 million for the three months
ended September 30, 2002 to DKK 16.1 million compared to a loss of DKK 106.9
million for the same period in the prior year. This improvement is partly due to
our decision to focus primarily on our core businesses and to the consolidation
of our television programming. In our Internet services segment we reduced our
operating loss by DKK 70.8 million to DKK 19.4 million for the three months
ended September 30, 2002 compared to a loss of DKK 90.2 million for the same
period in the prior year. In our broadcast media segment our operating income
increased by DKK 20.0 million to DKK 3.3 million for the three months ended
September 30, 2002 compared to an operating loss of DKK 16.7 million for the
same period in the prior year.
Nine Months Ended September 30, 2002 Compared With Nine Months Ended
September 30, 2001
Net revenues for the nine months ended September 30, 2002 were DKK 93.9
million, a decrease of DKK 40.5 million, or 30.1%, compared to net revenues of
DKK 134.4 million for the nine months ended September 30, 2001. The table below
compares net revenues for the relevant periods on a segment-by-segment basis.
21
Net Revenue Value Percentage
Increase Increase
2002 2001 (Decrease) (Decrease)
---------- ---------- ---------- ----------
(in thousands of DKK)
Internet services 42,768 69,551 (26,783) (38.5%)
Broadcast media 51,175 64,855 (13,680) (21.1%)
---------- ---------- ---------- ----------
Total 93,943 134,406 (40,463) (30.1%)
Both, the Internet services segment and the broadcast media segment showed
a decrease in net revenues. The decrease in net revenues in our Internet
services segment is primarily attributable to the fact that we sold our domain
name registration business in 2001 and the fact that revenues resulting from our
International Affiliate Agreement with VeriSign has not yet fully matured. The
decrease in net revenues in our broadcast media segment reflects the fact that
in the fourth quarter of 2001 we consolidated all of our television programming
into a single television channel, dk4. The consolidation resulted from two
developments: (i) the failure of either channel (Bio+ and dk4) to achieve
profitability, which we attribute to TDC's declining subscription fees; and (ii)
the fact that the carriage agreement for Bio+ was not going to be renewed once
it expired December 31, 2001. In addition, the carriage agreement for dk4 was
extended through March 31, 2004 and we entered into two new distribution
agreements and a new programming agreement for dk4.
Total operating expenses for the nine months ended September 30, 2002 were
DKK 145.4 million, a decrease of DKK 152.4 million, or 51.2%, over total
operating expenses of DKK 297.8 million for the nine months ended September 30,
2001. Total operating expenses include cost of sales, sales and marketing
expenses, general and administrative expenses and depreciation, amortization and
write-off. The table below shows our operating expenses by category on a
segment-by-segment basis.
Cost of Sales Value Percentage
Increase Increase
2002 2001 (Decrease) (Decrease)
---------- ---------- ---------- ----------
(in thousands of DKK)
Internet services 32,223 36,101 (3,878) (10.7%)
Broadcast media 26,992 53,900 (26,908) (49.9%)
---------- ---------- ---------- ----------
Total 59,215 90,001 (30,786) (34.2%)
22
Sales and Marketing Value Percentage
Increase Increase
2002 2001 (Decrease) (Decrease)
---------- ---------- ---------- ----------
(in thousands of DKK)
Internet services 27,895 46,573 (18,678) (40.1%)
Broadcast media 6,265 796 5,469 (687.1%)
---------- ---------- ---------- ----------
Total 34,160 47,369 (13,209) (27.9%)
General / Administration Value Percentage
Increase Increase
2002 2001 (Decrease) (Decrease)
----------- ----------- ---------- ----------
(in thousands of DKK)
Internet services 23,676 33,546 (9,870) (29.4%)
Broadcast media 6,098 8,840 (2,742) (31.0%)
---------- ---------- ---------- ----------
Total 29,774 42,386 (12,612) (29.8%)
Depreciation and Value Percentage
Amortization Increase Increase
2002 2001 (Decrease) (Decrease)
---------- ---------- ---------- ----------
(in thousands of DKK)
Internet services 16,573 86,435 (69,862) (80.8%)
Broadcast media 5,721 31,589 (25,868) (81.9%)
---------- ---------- ---------- ----------
Total 22,294 118,024 (95,730) (81.1%)
The decrease in costs of sales, sales and marketing and in general and
administrative expenses as it relates to our Internet services segment is
primarily attributable to the sale of our domain name registration business. The
decrease in depreciation and amortization expenses primarily reflects a write
down of goodwill in the third quarter of 2001 to reflect the fair market value
of previously acquired assets and the fact that, in accordance with SFAS No.
142, beginning January 1, 2002 we assess goodwill for impairment.
In the case of our broadcast media segment, cost of sales, general and
administrative expenses, and depreciation and amortization expenses decreased
primarily due to the fact that we consolidated all of our television programming
into a single television channel, dk4.
For the nine months ended September 30, 2002, the gross profit for our
Internet services segment decreased to DKK 10.5 million, or 24.7% of segment net
revenues compared to DKK 33.5 million, or 48.1% of segment net revenues for the
same period in 2001. This decrease is primarily attributable to the start-up
cost associated with our change in focus from the business of domain name
registration to providing trusted Internet infrastructure services. We expect
the gross profit to increase with time as the business of providing trusted
Internet infrastructure services matures. In the case of our broadcast media
segment, for the nine months ended September 30, 2002 the gross profit margin
increased to DKK 24.2 million, or 47.3% of segment net revenues compared to DKK
11.0 million, or 16.9 % of segment net revenues for the same
23
period in 2001. This increase is primarily attributable to the general reduction
of cost resulting from the consolidation of our television programming.
Gross profit Value Percentage
Increase Increase
2002 2001 (Decrease) (Decrease)
---------- ---------- ---------- ----------
(in thousands of DKK)
Internet services 10,545 33,450 (22,905) (68.5%)
Broadcast media 24,183 10,955 13,228 120.7%
---------- ---------- ---------- ----------
Total 34,728 44,405 (9,677) (21.8%)
We reduced our operating loss by DKK 111.9 million to DKK 51.5 million for
the nine months ended September 30, 2002 compared to a loss of DKK 163.4 million
for the same period in the prior year. This improvement is mainly due to our
decision to focus primarily on our core businesses and to the consolidation of
our television programming. In our Internet services segment we reduced our
operating loss by DKK 75.5 million to DKK 57.6 million for the nine months ended
September 30, 2002 compared to a loss of DKK 133.1 million for the same period
in the prior year. In our broadcast media segment our operating income increased
by DKK 36.4 million for a profit of DKK 6.1 million for the nine months ended
September 30, 2002 compared to an operating loss of DKK 30.3 million for the
same period in the prior year.
We had a net loss of DKK 55.1 million for the nine months ended September
30, 2002 compared a net profit of DKK 42.1 million for the nine months ended
September 30, 2001. The decrease primarily reflects the sale of our domain name
registration business in the third quarter of 2001.
Liquidity and Capital Resources
Historically, our primary cash needs have been for capital expenditures
and to fund operating losses. At September 30, 2002, cash balances, short-term
investments and restricted cash stood at DKK 73.9 million compared to DKK 152.6
million as of December 31, 2001. At September 30, 2002, we had working capital
of DKK 67.9 million and the ratio of current assets to current liabilities was
1.7 to 1. Our current assets primarily reflects our cash and accounts
receivables.
For the nine months ended September 30, 2002, the cash used in operations
was DKK 44.0 million compared to DKK 117.7 million for the same period in 2001.
This decrease reflects a reduction of the cash used in operations as a result of
a related party receivable of DKK 3.1 million, an improvement in inventories of
DKK 21.2 million, an improvement in accounts payable of DKK 12.4 million, a
decrease in accrued expenses of DKK 19.8 million and an increase in deferred
revenue of DKK 50.0 million.
The cash used in investing activities was DKK 39.0 million compared to
cash provided by investing activities of DKK 101.5 million for the nine months
ended September 30, 2001. This difference is primarily due to the sale of our
domain name registration business in the third quarter of 2001 which provided
net cash of DKK 205.6 million, and a decrease in cash used for purchase of fixed
assets of DKK 64.4 million and a change in purchase of short-term investments
24
of DKK 8.4 million and the elimination of cash used in investing activities
attributable to our discontinued print and online media operations segment of
DKK 9.1 million.
The cash provided from financing activities was DKK 41.1 million compared
to DKK 90.7 million provided by financing activities for the nine months ended
September 30, 2001. This decrease reflects a change in short-term borrowings of
DKK 5.2 million, an increase in restricted cash of DKK 80.3 million, a decrease
in cash provided by issuance of common shares and warrants of DKK 125.6 million,
and the nonrecurrence of cash provided by financing activities attributable to
our discontinued print and online media operations segment of DKK 9.2 million.
Our capital expenditures for the nine months ended September 30, 2002 were
DKK 36.7 million. These expenditures primarily relate to investments in
Alphasys.
We believe that our cash on hand and cash flow from operating activities,
together with borrowings available under local working capital facilities will
be sufficient to fund our anticipated working capital needs and capital spending
requirements as well as debt service requirements in the foreseeable future.
25
RISK FACTORS
Our future operating results are highly uncertain and may be influenced by
a variety of factors including those discussed below and elsewhere in this
report. In addition to other information in this Form 6-K, the following risk
factors should be carefully considered in evaluating us and our business because
these factors currently have a significant impact or may have a significant
impact on our business, operating results or financial condition. Actual results
could differ materially from those projected in the forward-looking statements
contained in this Form 6-K as a result of the risk factors discussed below and
elsewhere in this Form 6-K.
We have a significant accumulated loss and the likelihood of future
profitability is uncertain. Continuing losses may exhaust our resources and
force us to terminate operations.
We incurred a net loss in each of the years ended December 31, 1997, 1998,
1999 and 2000. For the year ended December 31, 2001 we had an operating loss of
DKK 196 million. As of December 31, 2001, we had an accumulated deficit of DKK
224.2 million (approximately $29.8 million). For the nine months ended September
30, 2002 we had a net loss of DKK 55.1 million. We anticipate that our operating
expenses, particularly our sales and marketing and capital expenditures, will
increase as we develop and expand our trusted Internet infrastructure products
and services. Accordingly, we may incur additional losses in the foreseeable
future. We cannot assure you that we will become profitable or, if we do become
profitable, that we will be able to sustain or increase our profitability in the
future. If operating losses continue for longer than we expect and we cannot
raise additional capital, we may be forced to terminate operations.
We may need to raise additional capital in the future. If we cannot do so,
we may not be able to fund our future activities or continue operating.
Our future capital requirements will depend on a number of factors,
including new acquisition opportunities and our ability to increase our revenues
and control our expenses. If we need to raise additional capital in the future,
we cannot assure you that we will be able to do so on acceptable terms or at
all. If we raise additional capital through the issuance of equity or
convertible debt securities, the percentage ownership of our company held by
existing shareholders, including holders of our ADSs, will be diluted. In
addition, new securities may contain certain rights, preferences or privileges
that are senior to those of our ordinary shares. If we are unsuccessful in
raising additional capital, when needed, our business and results from
operations may be materially and adversely affected.
Our future revenues are unpredictable and our financial results may
fluctuate. In addition, we expect that our expenses will increase. If our
financial results fall below expectations in one or more future quarters, the
market price of our ADSs may be negatively impacted.
We cannot accurately forecast our revenues or operating results. If an
increase in our expenses is not accompanied by a corresponding increase in our
revenues, our operating results will suffer. Our revenues and operating results
may fluctuate significantly because of several factors, many of which are beyond
our control. These factors include:
o market acceptance of our products and services;
o the long sales and implementation cycles for, and potentially large
order sizes of, some of our products and services and the timing and
execution of individual contracts;
26
o customer renewal rates for our products and services;
o the timing of releases of new versions of Internet browsers or other
third-party software products and networking equipment that include
our technology;
o the mix of our offered products and services sold during a quarter;
o our success in cross marketing our products and services to our
existing customers and to new customers;
o developing our direct and indirect distribution channels;
o a decrease in the level of spending for trusted Internet
infrastructure products and services by our existing customers;
o our ability to expand our operations;
o our success in assimilating the operations and personnel of any
acquired businesses;
o the amount of revenue received and the application of our revenue
recognition policies compared to the amount and timing of
expenditures;
o the impact of price changes in our products and services or those of
our competitors; and
o general economic conditions and economic conditions specific to the
Internet services industry.
In addition, we expect a significant increase in our operating
expenses as we:
o increase our sales and marketing operations and activities; and
o continue to update our systems and infrastructure.
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.
Our results of operations in the future could be materially and adversely
affected if it is determined that the carrying value of goodwill attributed to
businesses that we acquire is higher than their fair value.
In 2001, we wrote-off DKK 107.2 million of goodwill after determining that
the carrying value of goodwill attributed to businesses we acquired was higher
than their fair values. If in the future we determine that the carrying value of
goodwill for businesses we acquired is higher than their fair value, additional
goodwill will be written-off. As a result, our results of operations would be
materially and adversely affected.
27
We have a limited operating history under our current business structure and
expect to encounter difficulties similar to those faced by early stage
companies. Our results from operations may depend on how successful we are in
dealing with these difficulties.
Over the last five years, our business has evolved from (i) a
telecommunications company that also provided Internet access to (ii) an
Internet services provider focusing primarily on domain name registration
services to (iii) providing trusted Internet infrastructure products and
services. We have only a limited operating history as a provider of trusted
Internet infrastructure products and services on which you can base an
evaluation of our current business and prospects. As such, our current business
and prospects must be considered in light of the risks and uncertainties
encountered by companies in the early stages of development. These risks and
uncertainties are magnified for companies, like ours, in new and rapidly
evolving markets and for companies integrating many businesses. Our success will
depend on many factors, including, but not limited to, the following:
o our ability to successfully integrate acquired companies;
o the rate and timing of the growth and use of internet protocol, or
IP, networks for electronic commerce and communications;
o the extent to which digital certificates are used for online
communications and e-commerce;
o the continued growth in the use of the Internet;
o the growth in demand for our products and services ;
o the continued evolution of electronic commerce as a viable means of
conducting business;
o the competitive environment;
o the perceived security of electronic commerce and communications
over IP networks;
o the perceived security of our services, technology, infrastructure
and practices; and
o our ability to maintain our current, and enter into additional,
strategic relationships.
To address this risk we must, among other things:
o successfully market our products and services to new and existing
customers;
o attract, integrate, train, retain and motivate qualified personnel;
o respond to competitive developments; and
o successfully introduce new products and services and enhancements to
our existing products and services to address new technologies and
standards and changing market conditions.
28
We cannot be certain that we will successfully address this risk. If we fail,
our business and results from operations may be negatively affected.
Our business depends on the future growth of the Internet and adoption and
continued use of IP networks.
Our future success substantially depends on the continued growth in the
use of the Internet and IP networks for communications and commerce.
Organizations that already have invested substantial resources in other methods
of conducting business may be reluctant to migrate to the Internet model. Also,
individuals with established patterns of purchasing goods and services and
effecting payments may be reluctant to change. To date, many businesses and
consumers have been deterred from utilizing the Internet and IP networks for a
number of reasons, including, but not limited to:
o security concerns, particularly for online payments, including the
potential for merchant or user impersonation and fraud or theft of
stored data and information communicated over IP networks;
o privacy concerns, including the potential for disclosure or sale of
personal information about users to third parties, without notice to
or the consent of such users;
o other security concerns such as attacks on popular websites by
hackers;
o potentially inadequate development of network infrastructure;
o inconsistent quality of service;
o lack of availability of cost-effective, high-speed systems and
service;
o limited number of local access points for corporate users;
o inability to integrate business applications on IP networks;
o the need to operate with multiple and frequently incompatible
products;
o government regulation;
o a lack of tools to simplify access to and use of IP networks;
o congestion of traffic or other usage delays; and
o uncertainty regarding intellectual property ownership.
If the Internet and the adoption and use of IP networks fail to become a widely
accepted method of conducting business and exchanging information, our business
and results from operations may be materially and adversely affected.
29
The success of our business depends largely on the level of market acceptance of
our products and services.
The market for trusted Internet infrastructure products and services is
relatively new and rapidly evolving. As a result, the future demand for our
products and services is uncertain. Even if the market for electronic commerce
and online communications grows, we cannot assure you that our products and
services will become widely accepted. If the market for trusted Internet
infrastructure products and services, in general, or our products and services,
in particular, fails to grow, our business and results from operations may be
materially and adversely affected.
Our business may be negatively impacted if we cannot establish and maintain
strategic and other relationships.
One of our significant business strategies so far has been to enter into
strategic alliances or other similar collaborative relationships that enable us
to expand our product and service offerings and our customer base. Examples of
these types of relationships include our arrangements with VeriSign and WISeKey.
Our future growth also depends on our ability to establish direct seller
channels and to develop multiple distribution channels by partnering with
Internet technology, or IT, consulting firms and systems integrators and other
third parties. We cannot assure you that we can enter into additional, or
maintain our existing, strategic relationships on commercially reasonable terms,
if at all. For example, many of our existing relationships do not, and any
future relationships may not, afford us any exclusive marketing or distribution
rights or preclude our partners from pursuing alternative technologies or
developing alternative products and services either on their own or in
collaboration with others, including our competitors. If we fail to enter into
additional strategic relationships, we would have to devote substantially more
resources to develop, distribute, sell and market our products and services than
we do currently. In addition, our strategic partners may not view their
relationships with us as significant for their own businesses and they could
reduce their commitment to us at any time in the future. If we are unable to
maintain our existing relationships or to enter into additional strategic
relationships, our business and results of operations may be materially and
negatively affected.
Our business may be materially and adversely affected if an easy factoring
method is developed, techniques for attacking public key cryptography systems
advance significantly, or by negative public perception.
Our primary products and services depend on public key cryptography
technology, which is based on the application of specific mathematical
principles known as factoring. Should an easy factoring method be developed, the
security of encryption products utilizing public key cryptography technology
would be reduced or eliminated. Furthermore, any significant advance in
techniques for attacking cryptographic systems could also render some or all of
our existing products and services obsolete or unmarketable. If improved
techniques for attacking cryptographic systems were ever developed, we would
likely have to reissue digital certificates to some or all of our customers,
which could damage our reputation and brand or otherwise harm our business. In
addition, our business could also be harmed by negative publicity. In the past
there have been public announcements of the successful attack upon cryptographic
keys of certain kinds and lengths and of the potential misappropriation of
private keys and other activation data. This type of publicity could also hurt
the public perception as to the safety of the public key cryptography technology
included in our digital certificates.
30
Many of our trusted Internet infrastructure products and services have lengthy
sales and implementation cycles, which could negatively impact our business.
The sale and implementation of our trusted Internet infrastructure
products and services typically involves a lengthy education process and a
significant technical evaluation and commitment of capital and other resources
by our customers. This process is also subject to the risk of delays associated
with customers' internal budgeting and other procedures for approving large
capital expenditures, deploying new technologies within their networks and
testing and accepting new technologies that affect key operations. As a result,
the sales and implementation cycles associated with our products and services
can be lengthy, potentially lasting from three to six months. Our financial
results could be negatively impacted if orders forecasted for a particular
quarter are delayed or not realized.
We face significant competition from competitors which are much larger than we
are and have longer operating histories, larger client bases, greater brand or
name recognition and significantly greater financial, technical, marketing and
public relations resources than we have.
The market for services that enable trusted and secure electronic commerce
and communications over IP networks is intensely competitive and we expect this
competition to continue for the foreseeable future. Our principal competitors
are TDC A/S (formerly, TeleDanmark A/S), KMD (Kommunedata) and PBS
(PengeinstitutternesBetalingsservice). On an international level our competitors
include Baltimore and EnTrust. These competitors are much larger than we are and
have longer operating histories, larger client bases, greater brand or name
recognition and significantly greater financial, technical, marketing and public
relations resources than we have. In addition, there are relatively few barriers
preventing new competitors from entering the markets in which we operate.
Furthermore, we do not own any patented technology and our competitors may
develop new technologies in the future that are perceived as being more secure,
effective or cost efficient than the technology underlying our products and
services. Increased competition could result in pricing pressures, reduced
margins or the failure of our trusted Internet infrastructure products and
services to achieve or maintain market acceptance, any of which could harm our
business.
Our business depends largely on our ability to keep pace with changing
technologies. If we are unable to respond quickly and cost-effectively to
changing Internet and communications technologies and devices and changes in
customer tastes and preferences, our business will be harmed.
The emerging nature of the Internet in general and of trusted Internet
infrastructure products and services, in particular, requires us to continually
update our products and service offerings, particularly in response to
competitive offerings and to make sure they are compatible with and take
advantage of new technologies and changes in consumer tastes and preferences.
Since we do not own any proprietary technology, we rely on our strategic
partners to provide us with state-of-the-art products and services. The success
of any new products and presence services depends on several factors, including
performance, features, reliability and cost. Updating our technology internally
and licensing new technology from third parties may require us to incur
significant additional capital expenditures. Our inability or the inability of
our suppliers to respond quickly and cost-effectively to changing Internet and
communications technologies and devices and changes in customer tastes and
preferences, could make our existing service offering non-competitive and may
cause us to lose market share. We cannot be certain that we will successfully
develop, acquire and market new trusted Internet infrastructure products
31
and services that respond to competitive and technological developments and
changing customer needs.
System interruptions and security breaches could harm our business.
Our success depends on the uninterrupted operation of our computer and
communications systems and the integrity of our data center in Soeborg, Denmark.
It is critical to our business strategy that this facility and infrastructure
remain secure and are perceived by the marketplace to be secure. We must protect
these systems and our data center from loss, damage or interruption caused by
fire, natural disaster, power loss, telecommunications failure, physical
break-ins, computer viruses, and attacks by hackers or similar disruptive
problems. For example, our ability to issue digital certificates depends on the
efficient operation of the Internet connections from customers to our data
center. These connections depend upon efficient operation of web browsers,
Internet service providers and Internet backbone service providers. Any problems
or outages could decrease customer satisfaction. In addition, all confidential
customer information is stored in our data center. A system failure, electronic
break-in or other security breach or other similar event that results in the
deletion of client data or otherwise compromises any of the information stored
on our systems could have an adverse impact on our reputation and our business.
Finally, if our back office billing and collections infrastructure and
telecommunications systems cannot meet the demands of the increasing number of
customer e-mails and telephone calls, our customer support service and our
ability to process, bill and collect registration requests in a timely manner
could be substantially degraded. Any damage or failure that causes interruptions
to our computer and communications systems could materially harm our business.
We may have to expend significant time and money to maintain or increase the
security of our data center and infrastructure.
Unknown defects in our products and services could have an adverse affect on our
business.
The products and services we offer may contain undetected defects or
errors, which could result in loss of or delay in receipt of revenues, loss of
market share, failure to achieve market acceptance, diversion of development
resources, injury to our reputation, tort or warranty claims, increased
insurance costs or increased service and warranty costs, any of which could harm
our business.
Our results from operations may be negatively impacted if we are not able to
establish a brand identity in the trusted Internet infrastructure services
market.
We believe that establishing and maintaining a good reputation and name
recognition is critical to our success. We also believe that the importance of
reputation and name recognition will increase due to the growing number of
companies providing trusted Internet infrastructure products and services. Over
the last three years, we have gone through several name changes as our business
has evolved. In 1999, we changed our name from Telepartner A/S to euro909.com
A/S and in December 2001 to EuroTrust A/S. Our plan is to aggressively promote
the name EuroTrust and to establish a brand identity in the market for trusted
Internet infrastructure products and services. Our brand-enhancement strategy
includes mass market and multimedia advertising, promotional programs and public
relations activities. In addition, promoting and enhancing our name depends
largely on our success in providing uninterrupted high quality services. We
intend to make significant expenditures on advertising and promotional programs
and activities. We cannot assure you that our efforts will lead to an increase
in net revenues sufficient to cover our advertising and promotional expenses. To
build brand identity we must provide high quality services at a competitive
price. If our reputation is damaged or if potential
32
clients are not aware of the products and services we provide, or if our clients
do not perceive our services as effective, reasonably priced or qualitatively
better than the competition, our reputation could be materially and adversely
affected and we could lose market share.
Our long-term growth strategy assumes that we make suitable acquisitions and
investments. If we are unable to address the risks associated with acquisitions
and investments our business could be harmed.
Our long-term growth strategy includes identifying and, from time to time,
acquiring or investing in suitable candidates on acceptable terms. In
particular, we intend to acquire or make investments in businesses that provide
products and services that expand or complement our existing businesses and
expand our geographic reach. In pursuing acquisition and investment
opportunities, we may compete with other companies having similar growth and
investment strategies. Competition for these acquisition or investment targets
could also result in increased acquisition or investment costs and a diminished
pool of businesses, technologies, services or products available for acquisition
or investment. Our long-term growth strategy could be impeded if we fail to
identify and acquire or invest in promising candidates on terms acceptable to
us.
Assimilating acquired businesses involves a number of other risks,
including, but not limited to:
o disrupting our business;
o incurring additional expense associated with a write-off of a
portion of goodwill and other intangible assets due to changes in
market conditions or the economy in the markets in which we compete
or because acquisitions are not providing the benefits expected;
o incurring unanticipated costs or unknown liabilities;
o managing more geographically-dispersed operations;
o diverting management's resources from other business concerns;
o retaining the employees of the acquired businesses;
o maintaining existing customer relationships of acquired companies;
o assimilating the operations and personnel of the acquired
businesses;
o incorporating acquired technologies into our existing products and
services; and
o maintaining uniform standards, controls, procedures and policies.
For all these reasons, our pursuit of an overall acquisition and investment
strategy or any individual acquisition or investment could have a material
adverse effect on our business, financial condition and results of operations.
If we are unable to successfully address any of these risks, our business could
be harmed.
33
Rapid growth in our business could strain our managerial, operational,
financial, accounting and information systems, customer service staff and office
resources. If we fail to manage our growth effectively, our business may be
negatively impacted.
In order to achieve our growth strategy, we will need to expand all
aspects of our business, including our computer systems and related
infrastructure, customer service capabilities and sales and marketing efforts.
We cannot assure you that our infrastructure, technical staff and technical
resources will adequately accommodate or facilitate our expanded operations. To
be successful, we will need to continually improve our financial and managerial
controls, billing systems, reporting systems and procedures, and we will also
need to continue to expand, train and manage our workforce. In addition, as we
offer new products and services, we will need to increase the size and expand
the training of our customer service staff to ensure that they can adequately
respond to customer inquiries. If we fail to adequately train our customer
service staff and provide staffing sufficient to support our new products and
services, we may lose customers.
If we are unable to attract and retain highly qualified management and technical
personnel, our business may be harmed.
Our success depends in large part on the contributions of our senior
management team, technology personnel and other key employees and on our ability
to attract, integrate, train, retain and motivate these individuals and
additional highly skilled technical and sales and marketing personnel. We face
intense competition in hiring and retaining quality management and technology
personnel from a number of sectors, including technology and Internet companies.
Many of these companies have greater financial resources than we do to attract
and retain qualified personnel. The only key employees that have signed
employment agreements are Aldo Petersen, Bertel Jensen and Brian Mertz, our
chief executive officer, chief financial officer and chief operating officer,
respectively. Under these agreements, they can terminate their employment on six
months notice. As a result, we may be unable to retain our key employees or
attract, integrate, train and retain other highly qualified employees in the
future, when necessary. If we fail to attract qualified personnel or retain and
motivate our current personnel, our business may be negatively impacted.
We may become subject to burdensome government regulations and legal
uncertainties affecting the Internet.
To date, government regulations have not materially restricted the use of
the Internet. However, the legal and regulatory environment pertaining to the
Internet is uncertain and may change. Both new and existing laws may be applied
to the Internet covering issues that include:
o taxes;
o user privacy;
o pricing controls;
o characteristics and quality of products and services;
o consumer protection;
o cross-border commerce;
34
o libel and defamation;
o copyright, trademark and patent infringement; and
o claims based on the nature and content of Internet materials.
New laws or regulations or the new application or interpretation of
existing laws or regulations could hinder the growth in use of the Internet and
other online services generally and decrease the acceptance of the Internet and
other online services as a means of communications, commerce and advertising.
Our business may be harmed if any slowing of the growth of the Internet reduces
the demand for our services. In addition, new legislation could increase our
costs of doing business and prevent us from delivering our products and services
over the Internet at reasonable cost, which may harm our business.
We compete in the highly competitive broadcasting industry.
The Danish broadcast industry is highly competitive and dominated by a few
large companies. As a result of competition, we consolidated our broadcast
operations into one channel. 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. Because of these
reasons or for any other reason, TeleDanmark may decide to terminate our
carriage agreement with them before the March 31, 2004 expiration date or decide
not to renew the agreement. If either occurs it is unlikely that another cable
television provider would be able to provide us with similar levels of revenues.
Accordingly, unless we are able to replace those revenues with revenues from our
other lines of business in our broadcast media segment, that segment will be
materially and adversely impacted.
Our results from operations may be adversely affected by exchange rate
fluctuations.
In general we pay operating expenses in foreign currencies. As a result,
our financial results may be affected by an appreciation or depreciation in the
value of the Danish kroner relative to the currencies of the countries in which
we operate. We do not engage in hedging or other risk management activities in
order to offset the risk of currency exchange rate fluctuations. In addition,
while our financial results are reported in Danish kroner, our ADSs trade in
U.S. dollars. The value of the ADSs will fluctuate as the rate of the exchange
between the U.S. dollar and the Danish kroner fluctuates. We cannot predict in
any meaningful way the effect of exchange rate fluctuations upon future results.
If the value of the Danish kroner depreciates and the currencies of the
countries in which we operate appreciate or remain stable our results from
operations may be negatively affected.
Our international presence creates risks that may adversely affect our business.
Currently, our operations focus on the Scandinavian, Italian, Austrian and
Swiss markets. Our business plan contemplates expanding our operations into
other western European countries, such as United Kingdom, Germany and France. In
addition to the uncertainty as to our ability to successfully expand our
Scandinavian and European presence, there are certain risks inherent in
35
doing business on an international level. These risks include differences in
legal and regulatory requirements, difficulties in staffing and managing foreign
operations, problems in collecting accounts receivable and fluctuations in
currency exchange rates. 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,
foreign exchange 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.
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 listed on the Nasdaq National Market. The market price of
our ADSs may fluctuate significantly in response to various factors and events,
including:
o variations in our operating results;
o the liquidity of the markets;
o investor perceptions of us and the industry in which we operate;
o changes in earnings estimates by analysts;
o sales of ADSs by existing holders; and
o general economic conditions.
In addition, Nasdaq has recently experienced broad price and volume
fluctuations, particularly in the technology sector. This volatility has had a
significant effect on the market price of securities of companies for reasons
that have often been unrelated to their operating performance. These broad
market fluctuations may also adversely affect the market price of our ADSs and
as a result, holders of our ADSs may lose a significant portion of their
investment.
We have never paid a dividend nor do we anticipate doing so in the foreseeable
future.
We have not declared or paid any cash dividends on our ordinary shares. We
do not expect to declare any dividends in the foreseeable future. We anticipate
that all cash that would otherwise be available to pay dividends will be applied
in the foreseeable future to finance our growth. Payment of any future dividends
will depend on our earnings and capital requirements, and other factors our
board of directors deem appropriate.
36
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed by the undersigned,
thereunto duly authorized.
EUROTRUST A/S
Dated: December 5, 2002 By: /s/ Bertel E. Jensen
-----------------------------------
Bertel E. Jensen
Chief Financial Officer
37
INDEX TO EXHIBITS
Exhibits
99.1 Chief Executive Officer Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act
of 2002, filed with the Securities and Exchange Commission on
the date hereof. *
99.2 Chief Financial Officer Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act
of 2002, filed with the Securities and Exchange Commission on
the date hereof. *
-----------
* Included herewith.
38