lycos europe n.v. annual report (us-gaap)...

Lycos Europe N.V.Annual Repor t (US-GAAP) 2003

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Full year 2003 and 2002Year ended Year ended

In million Euro December 31, December 31,(except per share data, change and gross margin) 2003 2002 Change

Total revenues 85.0 118.0 (28)%

Gross profit 28.2 35.2 (20)%

Gross margin 33% 30%

Operating loss (62.3) (90.3) (31)%

Net loss before cumulative effect

of accounting change (56.1) (78.6) (29)%

Net loss (56.1) (179.0) (69)%

Net loss per share before cumulative

effect of accounting change in Euro (0.18) (0.25) (28)%

Net loss per share in Euro (0.18) (0.57) (68)%

EBITDA (40.5) (53.9) (25)%

Three months ended December 31, 2003 and 2002Three months Three months

ended endedDecember 31, December 31,

In million Euro 2003 2002(except per share data, change and gross margin) (unaudited) (unaudited) Change

Total revenues 23.3 28.8 (19)%

Gross profit 8.8 11.2 (21)%


Operating loss (17.0) (6.4) 167%

Net loss (16.3) (1.5) 1,026%

Net loss per share in Euro (0.05) (0.00) N/A

EBITDA (11.8) 1.5 (867)%

December 31, December 31, 2003 2002 Change

Page views per quarter (unaudited) 8.7 billion 9.9 billion (12)%

Number of employees 856 883 (3)%

Cash, cash equivalents and deposits in million Euro 175.2 219.6 (20)%

Please refer also to the explanatory notes to the key figures, which are displayed on page 56

Report to the Shareholders

1. Message from the CEO 02

2. Overview 05

3. Financial Results 18

4. The Share 23

5. Employees 25

6. Corporate Governance 26

7. Risk Management 27

8. Outlook 28

Consolidated Financial Statements

Consolidated Financial Statements 30

Notes to the Consolidated Financial Statements 36

Independent Auditors’ Report 55

Quarterly Financial Information 56

Report of the Supervisory Board 57

Group Structure 60

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02 Report to the Shareholders | Message from the CEO

In 2003, Lycos Europe set a new long-term strategic tar-

get and initiated a comprehensive process of reshaping

the company. The slimming down and simplification of

our organizational structure permits us to refocus Lycos

Europe after years of acquisitions and product integra-

tions and allows us to react more quickly to the require-

ments of the market. The clear focus of our development

capacities on our four newly defined core business units

enables us to create products that are competitive in all

European markets. In connection with a significant ex-

pansion of our marketing activities, we intend to create

the basis for increasing both our number of users and

our revenues. Since we will steer our four business units

as profit centers, we expect further impact on our cost

structure and finally on our financial results.

Although our new profit center structure was effective

only as of January 1, 2004, we already laid the founda-

tion for positioning us for new and ambitious targets.

In 2003, we concentrated on improving the quality and

the performance of our products and services in our

four business units and succeeded in winning several

product awards. The extension of our European chat

market leadership to four million registered members

in September 2003 was a milestone for Lycos Europe

and gives evidence of the great popularity and the out-

standing quality of the Lycos Chat with its interactive

features and high security standards. This great success

example confirms our product strategy of focusing on

community and entertainment.

d e a r s h a r e h o l d e r s ,

1m e s s a g e f r o m t h e C E O

03Message from the CEO | Report to the Shareholders

Moreover, we succeeded in reinforcing our core business

units through cooperations and acquisitions. We signed

long-term cooperation agreements with Google and

Yahoo! Europe / Overture Services in 2003. These agree-

ments will enable us to even better monetize our com-

munities and our search products. In January 2004,

Lycos Europe acquired united-domains and BuyCentral.

The acquisition of united-domains, a specialist for the

growth market of domain registration with excellent

competencies in the product and sales sector, will per-

fectly complement our webhosting business while the

acquisition of BuyCentral will accelerate our growth in

another strategic area, shopping.

We want to become profitable in two to four years and

intend to achieve our strategic goal of increasing our

revenues from paid services and shopping to EUR 100

million at that time, contributing 30 to 40 percent to our

total revenues then. Thanks to our investments on the

product side and our new structure, we are well posi-

tioned both for 2004 and to achieve our strategic goal.

Christoph Mohn

Chief Executive Officer

4 Letter to the Shareholders

4

05Overview | Report to the Shareholders

The following report to the shareholders should be

read in conjunction with the consolidated financial

statements and notes thereto. This report contains

certain forward-looking statements and information

relating to Lycos Europe that are based on the be-

liefs of Lycos Europe as well as assumptions made

by and information currently available to Lycos

Europe. These statements include, but are not limit-

ed to, statements about Lycos Europe’s strategies,

plans, objectives, expectations, intentions, revenues,

expenditures and assumptions as well as other

statements contained in this report that are not

historical facts. When used in this document, words

such as “anticipate”, “believe”, “estimate”, “expect”,

“intend”, “plan” and “project” and similar expres-

sions, as they relate to Lycos Europe or its man-

agement, are intended to identify forward-looking

statements. These statements reflect Lycos Europe’s

current views with respect to future events, are not

guarantees of future performance and involve risks

and uncertainties that are dif ficult to predict. Fur-

ther, certain forward-looking statements are based

upon assumptions as to future events that may not

prove to be accurate. Investors are cautioned that

forward-looking statements contained in this section

involve both risk and uncertainty. Several important

factors may cause actual results to dif fer materially

from those anticipated by these statements.

2o v e r v i e w

06 Report to the Shareholders | Overview

2003 was a year of transition for Lycos Europe. Because

of the ongoing slowdown of the overall economy, the

impact of sold entities, the loss of the Bertelsmann

agreement and a decline in reach in some local markets

Lycos Europe had to face decreasing revenues. Espe-

cially advertising revenues for 2003 did not meet the

company’s expectations. Besides, Lycos Europe’s prod-

uct portfolio had grown continuously over the years

leading to unclear priorities both for development and

monetization efforts. The definition of new core busi-

ness units and a new organizational structure laid the

foundation to reshape the company. A new strategic

target and a comprehensive relaunch of its portal de-

sign complemented Lycos Europe’s reorientation.

New Strategic Target

Since its foundation in 1997, Lycos Europe had set two

strategic goals. The first one was to pass its direct

portal competitors in terms of users and revenues in

Europe, which was achieved by the end of 2000. The

second goal was to become EBITDA-break even in the

fourth quarter of 2002 which Lycos Europe also achieved

successfully.

In early 2003, Lycos Europe therefore set a new long-term

strategic target: within three to five years, revenues from

paid services and shopping are set to rise to EUR 100

million. Lycos Europe intends to generate about 30 to

40 percent of its total revenues from paid services at

that time and thus expects paid services to join the

advertising business as a key long-term cornerstone of

its operations. Compared to the advertising business,

paid services show significantly higher revenues per client

and a stronger customer loyalty but also higher customer

acquisition costs. By significantly increasing its pro for-

ma revenues from paid services compared to previous

year, Lycos Europe successfully laid the foundation for

achieving this ambitious goal.

New Core Business Units

After years of acquisitions and technical integration,

the introduction of premium and paid services changed

Lycos Europe’s business model significantly. While the

original business model was based on advertising rev-

enues only, the new diversity of products and services

caused both a lack of focus in the product range and a

complex organization with long and inefficient coordi-

nation and decision making processes. Lycos Europe

therefore decided to simplify its product portfolio, to

redefine its core business units and to change its orga-

nizational structure.

r e s h a p i n g t h e c o m p a n y


january�Prime Standard listing of Lycos

Europe’s share�Relaunch of eVITA

february�Launch of Lycos Premium Chat in

Germanymarch

�Reduction of Lycos Europe’s issued share capital by cancellation of treasury shares

�Launch of Lycos PictureSearch and Lycos LiveSearch

april�Launch of Lycos MMS Composer �Launch of Lycos Online in Germany�Relaunch of Love@Lycos

may�Announcement of Lycos Europe’s new

strategic target (“revenues of EUR 100 million from paid services and shopping in three to five years”)

�One million users for Lycos Mobile�Launch of Coupons@Lycos in Germany

june�Strategic alliance with Google�Launch of new portal design

“meet you there”�Sale of Norsk Familieøkonomi�Launch of Lycos SlimSearch

july�“Internet Magazin” awards Lycos Search�“Tomorrow” awards Lycos Chat�Relaunch of Lycos Mail�Relaunch of Fireball

august�“Tomorrow” awards Lycos News

september�“Stiftung Warentest” awards Lycos Mail �“Stiftung Warentest” awards Lycos Online�“Tomorrow” awards Lycos News�“Journal du Net” awards Lycos WebCenter�Four million registered users for Lycos Chat�Relaunch of HotBot�Legal merger of Lycos Europe N.V. and

Spray Network N.V.november

�Announcement of new profit center structure

december�Long-term agreement with Yahoo! Europe

and Overture Services

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Starting in January 2004, Lycos Europe will focus its

development capacities on four core businesses: portal

(e.g. content channels, directories, access in Germany

and Sweden) & communication (e.g. e-mail, messenger,

SMS, MMS), communities (chat, dating), webhosting

(WebCenter, Tripod), and shopping & search. Lycos Europe

will steer these business units via a European-wide

profit center structure. At the same time, Lycos Europe

will reduce its product portfolio by eliminating low-mar-

gin niche services and will closer bundle its develop-

ment centers.

The new organization assigns clear responsibilities,

reduces complexity and will significantly reduce cost in

the forthcoming years. The far-reaching program will

thus boost Lycos Europe’s competitiveness on the market.

In order to strengthen its development and operation

team, Lycos Europe will shift additional responsibilities

to its off-shore location Armenia.

Apart from redefining the four core businesses and ini-

tiating the organizational changes, Lycos Europe contin-

ued to follow its consolidation strategy and withdrew

from non-strategic business activities. In June 2003,

Lycos Europe sold its fully owned subsidiary Norsk Fami-

lieøkonomi, a Norwegian membership-based shopping

club distributing multiple services such as insurance,

electricity, telephony and banking at low cost to its mem-

bers. Norsk Familieøkonomi was loss-making.


portal & communication

Portal

A new and convenient way to surf the internet was in-

troduced in Germany in April 2003: Lycos Online. Lycos

Online offers unlimited internet access at a favorable

price without any basic fee, minimum volume or contract.

ISDN-channel bundling is available on demand and

shortens download times by 50 percent. Lycos Online

is characteristic for Lycos Europe’s strategy of providing

its constantly growing community with a comprehensive

offer of communication products. In September 2003,

“Stiftung Warentest” tested internet providers and because

of its technical performance Lycos Online was bench-

marked as “good”. Lycos Online was furthermore espe-

cially recommended for surfing US sites.

In its September edition, the German internet and mul-

timedia magazine “Tomorrow” called Lycos News the

second best news portal on the internet. Lycos News

was marked "very good" with 93 out of 100 possible

points. The clear design and the easy navigation concept

of Lycos Europe’s news offer were particularly pointed out.

Communication

In April 2003, Lycos Germany launched the new version

of the Lycos MMS (Multimedia Messaging Service) Com-

poser, an internet tool allowing users to send multimedia

messages from their PC to any standard mobile phone.

core products■ Websearch■ E-mail■ Content channels■ Mobile■ Access (SW, DE)

monetization■ Advertising■ Paid services■ Interconnect charges

key activities■ Expand partnership with

Fast and Overture■ Launch of premium e-mail

and German DSL service tocreate additional revenuestream and build reach

■ Increase marketingexpenditure

port

al &

com

munic

ation


By now, Lycos Europeis one of the largest mailproviders in Europe.

No MMS mobile phone is needed. Addressees without

MMS mobile phones receive a SMS including a link to

the internet where the MMS message is available. Lycos

Mobile Channel offers up to ten slides that can be com-

bined with a photo, a sound file and a text respectively.

A personal archive can store five photos that have been

taken by the user himself. Since the start of the new

Lycos MMS Composer, the number of users has increased

significantly and in May 2003, the one millionth registered

user joined Lycos Mobile Channel in Germany only. With

its SMS facility and the download section for ring tones,

mobile games and logos, Lycos Europe provides its users

with a comprehensive range of mobile communication

features.

In July 2003, Lycos Mail saw both its complete migration

and interesting new features such as several new func-

tionalities for the address book. The migration implied

major cost savings while Lycos Europe still wants to

guarantee high quality and performance to its free mail

users. In September 2003, “Stiftung Warentest”, the in-

dependent German institute for performing comparative

testing of products and services, mentioned Lycos Mail

as being one of the four best free e-mail services. Out of

30 tested e-mail services only nine were considered “good”

and only four of these recommended services are free

of charge, amongst them Lycos Mail. At present, Lycos

Mail is available in Austria, Denmark, France, Germany,

Italy, the Netherlands, Spain, Sweden, Switzerland, and

the United Kingdom. By now, Lycos Europe is one of the

largest mail providers in Europe.

Since Lycos Mail is the center platform of Lycos Europe’s

comprehensive range of communication products, Lycos

Europe will even extend its mail offer by introducing

premium services. The European-wide introduction of

premium features in 2004 will be the next milestone for

Lycos Mail. The provision of extra-large storage capacities

and the integration of professional spam and virus pro-

tection will be characteristic for Lycos Premium Mail.

communities


Lycos Europe’s portal is the internet platform for meeting

friends, having fun and communicating with each other.

The Lycos Chat is setting the benchmark and points out

ideally Lycos Europe’s new theme “meet you there”.

Designed as a luxury cruise liner, with a range of unique

bots (intelligently programmed chat robots), Lycos Chat

offers more than 3,000 innovative chat functions on

various theme decks. Besides the user-friendly service

functions, the security mechanisms of the Lycos Chat

were significantly enhanced in 2003 and match the

highest security demands in all European countries now.

Technical “bad word” filters automatically track down

and replace user content, which infringe upon ethic,

moral or legal regulations, even before they appear

on the screen. Unwanted messages or even the whole

contact to certain members can be easily blocked by

the users themselves. Further, all users can take use of

the help and advice of chat-moderators. In Denmark,

Lycos Europe also entered into a cooperation with a

child protection organization in order to assure a safe

chat environment.

In February 2003, Lycos Premium Chat was launched in

Germany and showed a great demand right from the

start. With its one million users, Lycos Chat is the most


popular chat room in Germany. It offers seven different

premium packages for its users. Prices of the premium

packages depend on the terms of the contract varying

between one month and one year.

In July 2003, “Tomorrow” voted for the Lycos Chat as

being Germany’s best chat product. The Lycos Chat

achieved 91 out of 100 possible points and was the only

chat room that was rated “very good”. Main criteria

were a clear design, personal adaptation tools and the

number and the activity of the registered users.

In September 2003, Lycos Europe expanded its European

chat market leadership to four million registered members

across Europe.

After the announcement of the close-down of the MSN

chat in October 2003, Lycos Europe offered all castaway

MSN chatters a free premium-access for the Lycos Chat

for the period of one month. When the free month of

testing the Lycos Chat had expired, the new Lycos chat-

ters had the choice to decide either for the free usage of

the Lycos Chat with its user-oriented basic functions, or

to go for one of the various chargeable premium chat

packages which especially fit to the high individual de-

mands of chat-enthusiasts.

In 2003, Lycos Europe also launched the new version

of Love@Lycos, Europe’s biggest dating community with

3.5 million registered users in eight countries. The new

release is to intensify the conversion and the sale of the

deluxe package which, in addition to extended search

functions, also offers users the opportunity to personalize

their profiles. By creating a stronger value proposition

for the users Lycos Europe intends to have as many

users as possible subscribing to the deluxe offering. In

September 2003, a paid-only Love@Lycos was launched

in the Netherlands.

3.5 millionregistered users in eight European countries makesLove@Lycos Europe’s biggest dating community.

core products■ Chat■ Love@Lycos

monetization■ Paid services■ Advertising

key activities■ Merge products into one

platform■ Develop white label

solution for third parties

com

munitie

s

webhosting


In June 2003, Lycos Europe entered into a multi-year pan-

European strategic partnership with Google. The agree-

ment leverages Google’s content-targeted advertising to

provide relevant text-based advertising to the users of

the member pages of Lycos Tripod. Lycos Tripod is an

advertising-financed, free-to-use homepage building

platform offering various services and tools for every

level of expertise. The personal homepages of Lycos

Tripod members offer a wide range of topics for Google's

advertisers such as arts, business, hobbies, traveling,

and games. These pages generate hundreds of millions

of page views per month. As soon as a Lycos Tripod

member page is viewed, Google's content-targeted ad-

vertising service identifies the meaning of the web

page and then automatically offers relevant text-based

advertising to the viewer. The agreement enables Lycos

Europe to generate much higher revenues from one of

its largest community products. Monetizing the commu-

nities helps Lycos Europe to further invest and develop

these free services to the benefit of its users. In Septem-

ber 2003, Lycos Tripod exceeded one billion page im-

pressions on member and portal pages all across Europe

for the first time. This underlines Lycos Tripod’s popu-

larity as Europe’s largest homepage building community

with about six million member pages.

With about 6 millionmember pages Lycos Tripod is Europe’s largest homepage building community.


In 2003, a new version of the premium product Lycos

WebCenter was launched. Lycos WebCenter is the do-it-

yourself solution for creating a professional internet

presence. With its wide range of facilities and services

based on a modular principle, Lycos WebCenter offers

a tailor-made web presence for individuals, freelancers

and smaller companies. The new version is characterized

by a new design and two new hosting packages for

photos and resumes. A new order process also enables

Lycos Europe’s country organizations to place local pro-

motions more easily. In October 2003, Lycos Europe

launched a premium service bundle of Lycos WebCenter

and paid submissions. This bundle enables customers

to directly submit URLs into the Fast index. In September

2003, the leading French internet magazine “Journal du

Net” considered Lycos WebCenter to be the most reliable

hosting provider in France.

In January 2004, Lycos Europe acquired united-domains,

a German company focusing on worldwide domain regis-

tration for private and corporate customers. With a range

of more than 45 domain endings (top-level domains) and

with over 165,000 registered domains, united-domains is

one of the leading domain suppliers in German-speaking

areas. The acquisition will enable Lycos Europe to further

strengthen its domain selling and webhosting business

and underlines Lycos Europe’s strategy of expanding its

chargeable product range.

core products■ Free service Tripod■ Paid service WebCenter

monetization■ Paid services■ Advertising

key activities■ Expand partnership

with Google■ Improve scale of web-

hosting via internal growth and acquisitions

webhost

ing

shopping & search


core products■ White-label shopping

channel for most European portals

■ Shopping@Lycos

monetization■ Primarily paid services

key activities■ Expand internationally■ Growth both organically

and via acquisition

shoppin

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Shopping

As of January 1, 2003, Lycos Europe took over manage-

ment responsibility for eVITA upon acquiring this shop-

ping portal from Deutsche Post. eVITA offers more than

1.5 million products and appears in a fresh design with

an easy-to-handle navigation. The number of shops

associated with eVITA increased to more than 250.

Lycos Germany entered into an agreement with Nielsen

Clearing House and introduced a new platform called

Coupons@Lycos in May 2003. Online couponing is an

innovative way for Lycos users to save money by buying

brand products at a lower price – online or at local

stores. Every week, Coupons@Lycos features the most

interesting offers. Well-known companies such as Burger

King, Otto-Versand and T-Mobile joined Coupons@Lycos

right from the start. The new platform makes Lycos

Europe even more attractive to both its users and its

advertising clients by helping its users to save money

and by enabling its advertising clients to acquire new

customers and to communicate product innovations

into the market.

With its specialist “Pangora” search engine, Lycos Europe is one of the most significant e-commerce providers in the business-to-business sector.


In December 2003, Lycos Europe,

Yahoo! Europe and Overture

Services signed a long-term

cooperation agreement. As part

of the agreement, Lycos Europe

will provide its Pangora shop-

ping technology to Yahoo!

Europe. Pangora is Germany’s

market leader in the field of

aggregated shopping platforms

for online portals. Online shop-

pers are guided quickly, precisely

and effectively to a provider of the product they are

searching for. The user-friendly search functions and the

high technological standards have already become suc-

cessfully established in Germany, the United Kingdom,

France, and Austria. As a customized “white label solu-

tion” in terms of the look and feel of the portal partner

involved, Pangora delivers flexible, modularly-structured

and thus tailor-made tech-nical solutions. For a period of

15 months starting in late February 2004, Pangora will

power Yahoo! Europe’s shop-ping platforms in the United

Kingdom and in Germany. With this cooperation, Pan-

gora reinforces its strong position in two of the leading

European online shopping markets. Pangora is a product

of Internet Business Opportunities GmbH (IBO), a fully-

owned subsidiary of Lycos Europe. With its Pangora

search engine, Lycos Europe is one of the most important

e-commerce providers in the business-to-business sector.

In January 2004, Lycos Europe acquired BuyCentral, a

French company operating shopping platforms in France

and Italy. BuyCentral aggregates data of online sellable

goods and services and makes them searchable on its

own websites or on third parties' websites. The acquisi-

tion will accelerate Lycos Europe's growth in the field

of shopping resulting in a number two position on the

French online shopping market. The acquisition will also

extend Lycos Europe's shopping activities to the Italian

market. With this acquisition, Lycos Europe is following

its long-term strategic objective of significantly increasing

its revenues from paid services and shopping.

shopping & search


Search

Lycos Search does not only deliver high quality informa-

tion but is also a reach driver for Lycos Europe. A new

search version was launched in the first quarter of 2003.

The new search includes a new image search called

Lycos PictureSearch. Its advanced search technology and

index provides a superior picture search tool that gives

access to a growing library of over 200 million quality

images. Another new feature is the live search viewer

called Lycos LiveSearch. This application allows users to

view live what others are searching. Lycos LiveSearch

is meant to entice people to search with Lycos. With

‘Popularimeter’ users gain a precise picture of what is

currently ‘Hot or Not’ both on and offline. Hot or Not

tracks trends by measuring how often the phrase appears

within the Lycos search index. Following its new portal

design, Lycos Europe launched Lycos SlimSearch in June

2003. Lycos SlimSearch offers quick and functional search

features and a user-friendly search start page with an

eye-catching search box inviting users to submit complex

search queries. Users can choose from local or worldwide

search indices, or opt for picture search. The last five

search queries can be saved making further searches

much faster. When adding the new search start page to

the bookmarks, the personalization function enables

users to customize the bookmark according to their in-

dividual preferences. Users can choose from different

browser skins and change their personal basic settings

(e.g. catalogue search, highlight search queries, erotic

filter). Lycos SlimSearch also features the new convenient

search presenting the search results precisely and com-

pactly. Users can click from one search result to another

without changing the browser window.

With its combination of classical search engine and

editorial directory Lycos Search won German “Internet

Magazin’s” award. To its readers, “Internet Magazin”

did not only recommend using Lycos Search but also

setting the Lycos portal as browser homepage. Further-

more, the Italian internet magazine “Idea Web” awar-

ded Lycos Search as the second best search engine

available with four out of five stars.

In July 2003, a new version of the leading German-speak-

ing search engine Fireball was launched. Its new index-

ing approach considers links, the popularity of links and

the surrounding anchor text and has significantly im-

proved the relevancy of the search results. At the same

time, a new, clear and stylish design allows for shorter

download times. A new graphic symbol refers to those

documents that were included during the last 24 hours

only. Due to its unique technology, the Fireball index is

updated every day.

The Italian internet magazine “Idea Web” awarded Lycos Search as the second best search engineavailable with four out of five stars.


In September 2003, Lycos Europe launched a new version

of the professional search engine HotBot in France,

Germany, Italy, the Netherlands, Spain, and the United

Kingdom. The new lean and consistent design and

navigation concept was adapted from HotBot’s success-

ful US version. On the advanced search page HotBot

still offers its powerful filtering options which were further

improved and supplemented. Most remarkable new

feature is the unique regional boosting function. Based

on a regional link analysis HotBot will find websites

that are relevant for or relate to a particular region. In

France, Germany and the United Kingdom HotBot also

offers a new integrated shopping search provided by

IBO, another subsidiary of Lycos Europe.

The long-term cooperation agreement with Yahoo! Europe

and Overture Services signed in December 2003 extends

and expands Lycos Europe’s commercial search relation-

ship with Overture Services, a wholly-owned subsidiary

of Yahoo! Inc. As of January 1, 2004, Lycos Europe will

continue to feature Overture's sponsored links across its

European network.

New Product Strategy “meet you there”

In 2003, Lycos Europe launched a new portal design across Europe. The comprehensive relaunch started in early June 2003and stretched across all countries of Lycos Europe’s network.All country sites now appear in the same clear layout. The newdesign provides Lycos Europe’s portal with a simple and stylishlook and feel and generates consistent products and services.The unique environment increases the value and the dif feren-tiation of Lycos Europe’s products. This will help Lycos Europeto extend its reach and the degree of its users’ lock-in and willfurthermore encourage users to pay for its premium services.According to Lycos Europe’s motto “stylish, simple and reliable”the new portal design attracts the attention of Lycos Europe’starget group, of fers an easy-to-use navigation and is character-ized by stable technical features. Moreover, a new logo wascreated to even better illustrate Lycos Europe’s new promisingtheme “meet you there”.

Lycos Europe’s new portal design is characterized by seventheme categories pooling related topics and dif fering in termsof color. In the first category, “Home”, users can find Lycos Online and Lycos Europe’s various theme channels, e.g. news,money and travel. “E-mail & SMS” guides users into the worldof communication with Lycos Mail, Lycos Instant Messenger, e-cards, and Lycos Mobile Channel. “Search” of fers varioussearch applications while “Flirt & Chat” comprises Love@Lycos,Lycos Chat, and Lycos Classmates. “Build a Site” stands for Lycos WebCenter, Lycos Tripod, and Lycos Webmaster Channel.“Entertainment” among other things of fers games, celebritiesand erotic. Finally, “Shopping” bundles Lycos Europe’s e-com-merce activities.

18 Report to the Shareholders | Financial Results

Pro forma

During the year 2002, Lycos Europe sold NZ Netzeitung,

Massmarket and Nettavisen. Additionally, during the

year 2003, Lycos Europe sold Norsk Familieøkonomi

(previously called Lycos Norway AS). The following table

presents selected financial information for Lycos Europe

for the year ended December 31, 2003, as well as for

the year ended December 31, 2002, on an unaudited

pro forma basis, as if the disposals during the years

2002 and 2003 had occurred on January 1, 2002.

Amounting to EUR 85.0 million for the year ended De-

cember 31, 2003, Lycos Europe’s revenues decreased by

28 percent compared to the year ended December 31,

2002. Adjusted for the group companies, which were

sold in 2002 and 2003, revenues decreased by 17 percent.

Advertising revenues for the year ended December 31,

2003, experienced a decline of 38 percent, compared

to the year ended December 31, 2002. The decline in

advertising revenues in 2003 is the result of the sale of

group companies and the loss of the advertising agree-

ment with Bertelsmann, which was not compensated by

contracts with other clients. This agreement contributed

EUR 23.7 million in revenues in 2002.

3f i n a n c i a l r e s u l t s

Pro forma Pro formaYear ended Year ended

December 31, December 31, In thousand Euro 2003 2002(except share data) (unaudited) (unaudited) Change

Revenues 83,674 101,114 (17)%

Gross profit 26,865 32,441 (17)%



of accounting change (55,070) (72,060) (24)%

Net loss (55,070) (172,454) (68)%

Net loss per share before cumulative

effect of accounting change basic and

diluted in Euro (0.18) (0.23) (23)%

Net loss per share basic and diluted in Euro (0.18) (0.55) (68)%

EBITDA (39,835) (46,284) (14)%

19Financial Results | Report to the Shareholders

Paid services and shopping for the year ended Decem-

ber 31, 2003, decreased by 19 percent compared to the

year ended December 31, 2002. The decrease of paid

services and shopping is due to the sale of Massmarket

AS and Norsk Familieøkonomi AS in Norway. Adjusted

for the sale of Massmarket and Norsk Familieøkonomi

paid services and shopping revenues increased by 64

percent. This increase is the result of recently implemen-

ted paid services and continuous growth in existing

products. Adjusted for the sale of Massmarket and Norsk

Familieøkonomi paid services and shopping revenues

generated 21 percent and 11 percent of total revenues,

respectively for the year ended December 31, 2003, and

2002.

Interconnect revenues for the year ended December 31,

2003, decreased by 5 percent compared to the year

ended December 31, 2002.

For the three months ended December 31, 2003, revenues

amounted to EUR 23.3 million and decreased by 19 per-

cent compared to revenues of EUR 28.8 million for the

three months ended December 31, 2002. The reduction

in revenues is the result of the sale of group companies

during the years 2002 and 2003 and the loss of the

advertising agreement with Bertelsmann. Adjusted for

the group companies, which were sold in 2002 and

2003, pro forma revenues for the three months ended

December 31, 2003, decreased by 12 percent compared

to the three months ended December 31, 2002.

Barter revenues represented less than 5 percent of net

group revenues during those periods.

RevenuesActuals Actuals

Year ended Year endedDecember 31, December 31,

In thousand Euro 2003 2002

Advertising 43,360 69,940

Paid services and shopping 18,913 23,365

Interconnect 21,213 22,302

Licensing and other 1,532 2,437

Total revenues 85,018 118,044

Pro forma Pro formaYear ended Year ended

December 31, December 31, 2003 2002

In thousand Euro (unaudited) (unaudited)







Cost of Revenues

Cost of revenues decreased from EUR 82.8 million for

the year ended December 31, 2002, to EUR 56.8 million

for the year ended December 31, 2003. The sale of NZ

Netzeitung, Nettavisen and Massmarket in 2002 contri-

buted strongly to the improvement of the gross margin.

The gross margin improved 3 percent points from 30

percent for the year ended December 31, 2002, to 33

percent for the year ended December 31, 2003, of which

3 percent points of the improvement were due to the

sold entities. Adjusted for the sale of the group compa-

nies cost of revenues decreased by 17 percent. The main

cost elements in cost of revenues, which decreased, were

salary and bandwidth cost. Bandwidth costs reduced

significantly as a result of the price erosion in the tele-

com sector.

The gross margin amounted to 38 percent for the three

months ended December 31, 2003, and remained almost

stable compared to 39 percent for the three months ended

December 31, 2002. The pro forma margin decreased

to 38 percent for the three months ended December 31,

2003, compared to 41 percent for the three months ended

December 31, 2002.

Sales and Marketing

Sales and marketing expenses amounted to EUR 30.7

million for the year ended December 31, 2003, which is

an increase of 3 percent compared to the year ended

December 31, 2002.

Sales and marketing expenses increased from EUR 4.9

million for the three months ended December 31, 2002,

to EUR 8.7 million for the three months ended December

31, 2003. This increase of 78 percent was due to addi-

tional marketing efforts in the three months ended De-

cember 31, 2003, compared to the three months ended

December 31, 2002, with the focus on increasing sales

in a difficult advertising market.

General and Administrative

General and administrative expenses decreased from EUR

41.8 million for the year ended December 31, 2002, to

EUR 29.9 million for the year ended December 31, 2003.

This decrease of 29 percent was due to a significant

reduction in cost for external services and a reduction

of salary cost. The reduction of salary cost is the result

of the restructuring efforts performed in the year 2002.

General and administrative expenses for the three months

ended December 31, 2003, decreased by 8 percent

compared to the same period last year as a result of the

reasons mentioned above.

21Financial Results | Report to the Shareholders

Research and Development

Cost incurred for research and product development

amounted to EUR 25.7 million for the year ended

December 31, 2003, compared to EUR 30.4 million for

the year ended December 31, 2002. This decrease of

16 percent is primarily due to Lycos Europe’s continuing

focus on the reduction of costs by performing most of

the development work internally.

Research and development cost decreased from EUR 6.7

million for the three months ended December 31, 2002,

to EUR 6.5 million for the three months ended December

31, 2003.

Restructuring Charges

On November 10, 2003, Lycos Europe announced a far

reaching program aimed at increasing its competitive-

ness on the market. As part of the program it was an-

nounced that the number of employees will be reduced

from its current level to an expected 825 excluding new

employees joining from recently acquired companies.

As a result, Lycos Europe incurred EUR 3.1 million of re-

structuring costs in the last quarter of 2003. In the full

year ended December 31, 2002, Lycos Europe incurred

restructuring charges of EUR 11.8 million as the company

accelerated its turnaround program launched in Septem-

ber 2001.

Other Income

Other income includes the result of the sale of Norsk

Familieøkonomi AS (previously Lycos Norway AS), which

was sold effective on June 20, 2003.

Amortization of Intangibles /

Cumulative Effect of Accounting Change

As a result of the adoption of SFAS 142 on January 1,

2002, Lycos Europe recorded a goodwill impairment loss

of EUR 100.4 million, which was recorded as a cumulative

effect of accounting change in Lycos Europe’s Consolidated

Statements of Operations for the year ended December

31, 2002. The fair value of the reporting units giving rise

to the transitional impairment loss was estimated using

the expected present value of future cash flows. Lycos

Europe performs its annual impairment review during

the second quarter of each year.

In the second quarter 2003, Lycos Europe performed an

impairment review, which was only focused on intangible

assets other than goodwill, as the goodwill position of

Lycos Europe had already been fully impaired during

the year 2002. The impairment review performed in the

second quarter 2003 did not indicate that an additional

impairment was required in the year 2003.


EBITDA

EBITDA is not a measure recognized by US-GAAP. This

and similar measures are used by different companies

for differing purposes and are often calculated in ways

that reflect the unique situations of those companies.

See page 56 for Lycos Europe’s definition of the EBITDA

result.

The EBITDA result amounted to EUR (40.5) million for

the year ended December 31, 2003, which is an im-

provement of 25 percent compared to the year ended

December 31, 2002 (EUR (53.9) million). Adjusted for

the group companies, which were sold in 2002 and

2003, EBITDA improved by 14 percent.

The EBITDA result decreased from EUR 1.5 million for

the three months ended December 31, 2002, to EUR

(11.8) million for the three months ended December 31,

2003. Decreasing revenues for the three months ended

December 31, 2003, compared to the period for the

three months ended December 31, 2002, had a strong

impact on the decrease of the result. Additionally, the

sales and marketing costs plus the restructuring efforts

had a strong impact on the results.

Financing

The total amount for cash and cash equivalents, short-

term and long-term deposits decreased from EUR 219.6

million on December 31, 2002, to EUR 175.2 million on

December 31, 2003. During the full year ended December

31, 2003, Lycos Europe used EUR 35.7 million cash in

operating activities and an amount of EUR 8.3 million

was used for the acquisition of long-term assets. The

actual cash and cash equivalents amount, EUR 78.3

million on December 31, 2003, reduced partially as an

additional amount of EUR 12.1 million was invested in

deposits, which do not qualify as cash and cash equi-

valents. Lycos Europe is under the assumption that it will

not need these cash amounts in the short run and it

was decided to invest the amounts for a period longer

than three months. Lycos Europe focuses on reducing

its operating losses and will continue to do so, expect-

ing no additional funding requirement until becoming

cash-flow positive.

23The Share | Report to the Shareholders

Prime Standard Listing

Following the reshaping of Frankfurt Stock Exchange’s

trading segments, Lycos Europe decided to list in the

Prime Standard. Lycos Europe’s share was thus not

traded on Neuer Markt any longer but is listed in the

Prime Standard since its beginning on January 1, 2003.

Due to the reshaping of the German stock markets

Deutsche Börse discontinued the calculation of the

Nemax Internet Index on March 21, 2003. On March 24,

2003, the new index system was introduced and Lycos

Europe’s share is part of the Prime All Share Index, the

Technology All Share Index and the Prime Software Index.

Share Price Performance

In 2003, Lycos Europe’s share price rose from EUR 0.32

(opening price) on January 2, 2003, to EUR 0.80 (closing

price) on December 30, 2003, an increase of 150 per-

cent. Throughout the year, Lycos Europe’s share used to

outperform both the Nemax Internet Index and the

Technology All Share Index. Starting in August 2003, this

development became particularly apparent when the

Dutch financial investor John H. H. de Mol acquired via

his investment company Talpa Capital at least five per-

cent of Lycos Europe’s share capital.

400

350

300

250

200

150

100

50

0

Jan

02

Jan

16

Jan

30

Feb

13

Feb

27

Mar

13

Mar

27

Apr 10

Apr 24

May

08

May

22

Jun

05

Jun

19

Jul 03

Jul 17

Jul 31

Aug

14

Aug

28

Sep

11

Sep

25

Oct

09

Oct

23

Nov

06

Nov

20

Dec

04

Dec

18

Perc

ent

2003

Nemax Internet | Technology All Share

Lycos Europe

Lycos Europe’s Stock Price Performance Compared to Nemax Internet Index and Technology All Share

4t h e s h a r e

24 Report to the Shareholders | The Share

Shareholder Structure and Shares Outstanding

Lycos Europe’s legal shareholder structure as of December

31, 2003, is as follows: Terra Lycos (32.1%), Bertelsmann

Internet Holding GmbH / Fireball Internet GmbH / Jahr

Vermögensverwaltungs GmbH & Co. KG (20.0%), Christoph

Mohn Internet Holding GmbH (12.1%), Lycos Europe N.V.

[shares held as treasury shares] (0.2%), and Free float

(35.6%). The total number of shares outstanding as of

December 31, 2003, is 311,576,344, excluding the treasury

shares.

On January 17, 2003, Lycos Europe’s shareholders resolved

at an extraordinary general meeting upon the reduction

of the Company’s issued share capital by canceling

27,277,144 bearer shares previously held as treasury

shares by Lycos Europe. This resolution became effective

on March 22, 2003. Lycos Europe continues to hold

723,656 of its own shares recorded as treasury shares.

On August 20, 2003, Lycos Europe was informed that

Talpa Capital B.V., which is owned by the Dutch financial

investor John H. H. de Mol, had acquired at least five

percent of Lycos Europe’s share capital.

Legal Merger

On September 18, 2003, Spray Network N.V. merged

with Lycos Europe N.V. This legal merger does not have

any impact on Lycos Europe’s shareholder structure

since Lycos Europe N.V. already held 100 percent of

Spray Network N.V.

12

%20

3236

Free float

Terra Lycos

Bertelsmann Internet Holding GmbH / Fire-

ball Internet GmbH / Jahr Vermögensverwaltungs

GmbH & Co. KG

Christoph Mohn Internet Holding GmbH

25Employees | Report to the Shareholders

The total number of employees in Europe decreased

from 883 as per December 31, 2002, to 856 employees

as per December 31, 2003. The reduction in the number

of employees is a result of the restructuring program

including the sale of Norsk Familieøkonomi. Throughout

the restructuring process, management paid particular

attention to employees´ interests.

5e m p l o y e e s

26 Report to the Shareholders | Corporate Governance

On December 9, 2003, the Dutch corporate governance

committee, chaired by Mr. Tabaksblat (the "Committee"),

published its Dutch corporate governance code (the

"Code"), an English translation of which can be retrieved

from www.commissiecorporategovernance.nl. The Code

contains the principles and concrete provisions which

the persons involved in a company (including manage-

ment board members and supervisory board members)

and stakeholders (including institutional investors) should

observe in relation to one another.

The Code applies to all companies whose registered

office is in the Netherlands and whose shares or deposi-

tary receipts for shares are officially listed on a Dutch or

foreign government-recognized stock exchange, such as

Lycos Europe N.V.

The Code has come into force with effect from the

financial year starting on January 1, 2004. From the an-

nual report for the 2004 financial year onwards, listed

companies such as Lycos Europe N.V. will therefore be

expected to devote a chapter in the annual report to the

broad outline of their corporate governance structure

and to compliance with the corporate governance code,

as well as the non-application of any best practice pro-

visions.

As a general rule, Lycos Europe N.V.´s Management Board

and Supervisory Board take a positive attitude towards

the principles and best practice provisions set out in the

Code. Lycos Europe N.V. has started an internal assess-

ment of the precise requirements of the Code and whether

it should make amendments to its corporate governance

structure and practices as a result thereof. Lycos Europe

N.V. expects to report on the results of this assessment

and any action taken as a consequence thereof in its

annual report for the year ended December 31, 2004.

In their assessment, Lycos Europe N.V.´s Management

Board and Supervisory Board may find it appropriate for

Lycos Europe N.V. to deviate from certain Code provisions

and it will address the relevant issues in the annual

report for the year ending December 31, 2004. Deviation

from certain provisions may follow from or be justified

by specific aspects of Lycos Europe N.V.´s legal structure,

shareholder structure, business and other circumstances,

including but not limited to the following aspects in

which Lycos Europe N.V. differs from most other Dutch

listed companies:

1. Lycos Europe N.V. was founded as a joint venture

company between two (groups of ) large shareholders,

which are still closely connected to Lycos Europe N.V.;

2. Lycos Europe N.V. is a company whose registered

office is in the Netherlands, but (part of ) whose shares

are solely listed in the German Prime Standard and on

the French Nouveau Marché, and thus not on any Dutch

stock exchange. Consequently, a large part of the in-

vestors in Lycos Europe N.V. will be located in Germany

and France.

6c o r p o r a t e g o v e r n a n c e

27Risk Management | Report to the Shareholders

7r i s k m a n a g e m e n t

The German law on Control and Transparency in Cor-

porations (KonTraG) specifies the legal obligations

pertaining to corporate risk management. Based on

these requirements in Germany, Lycos Europe maintains

a comprehensive risk management system. As part of

this program, Lycos Europe systematically lists all risks

that might affect the company, quantifies and qualifies

their potential effects, and determines the key levers

required to influence each risk. Beyond this, certain

employees are assigned responsibility for specific and

general risks. They are accountable for monitoring

potential risks and ensure that the agreed measures

are implemented.

28 Report to the Shareholders | Outlook

8o u t l o o k

In 2004, Lycos Europe will focus on its newly defined

core business units portal & communication, communi-

ties, webhosting and shopping & search. These core

units comprise the revenue drivers in premium services

and thus are key for Lycos Europe’s future company

development and for achieving its long-term strategic

target. Current revenues from premium and paid services

look promising and are expected to grow continuously

in 2004. Lycos Europe intends to further invest in this

field and will launch new premium products and services

in the upcoming months.

The acquisitions of united-domains and BuyCentral are

supporting Lycos Europe’s strategy to increase revenues

from paid services and shopping. united-domains’ skills

will be an ideal addition and reinforcement to Lycos

Europe’s hosting business, as they enable Lycos Europe

to offer high quality domains and related services

on attractive terms throughout Europe in the future.

Through the acquisition of united-domains, Lycos

Europe will be able to further expand the paid services

business and thus consistently pursue its long-term

strategic target. Lycos Europe will furthermore strive

towards an internationalization of its domain activities

into further European territories based on the successful

business development in Germany. The acquisition of

BuyCentral will reinforce and broaden Lycos Europe’s

international shopping activities by accelerating its growth

in France and paving the way to the Italian market.

Apart from paid services and shopping, advertising and

interconnect will remain Lycos Europe’s major revenue

sources. Therefore, Lycos Europe will focus on improving

its position on the online advertising market, while, at

the same time, further increasing its premium user base.

Lycos Europe will concentrate on brand awareness and

reach again and will thus increase its marketing expenses,

primarily for organizing PR events and for print media.

Though the advertising market is currently still considered

weak, Lycos Europe expects this market to have a very

attractive long-term potential.

29Outlook | Report to the Shareholders

Lycos Europe anticipates to incur substantial losses in

2004. This is due to Lycos Europe’s increased investment

especially in premium services that will generate start-

up losses in 2004 while benefits will mostly show only

in following financial years. Moreover, Lycos Europe ex-

pects the economic slowdown in Europe to continue so

that advertising revenues may remain on a low level in

2004. Since advertising revenues show high margins

Lycos Europe’s results may continue to suffer short- to

mid-term. At the same time, the new profit center orga-

nization with clear responsibilities and less complexity

will significantly reduce costs in the forthcoming years.

This will enable Lycos Europe to achieve further im-

provements of its financial results. Compared to 2003,

Lycos Europe anticipates to improve its financial results

significantly on an annual basis as well as in the years

thereafter.

Haarlem, the Netherlands

January 28, 2004

Christoph Mohn, CEO

30 Consolidated Financial Statements

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03

31Consolidated Financial Statements

Lycos Europe N.V.

consolidated statements of operations

In thousand Euro Year ended Year ended

(except share and per share data) December 31, 2003 December 31, 2002

Revenues






Cost of revenues (56,809) (82,817)

Gross profit 28,209 35,227

Operating expenses

Sales and marketing (30,702) (29,876)

General and administrative (29,888) (41,829)

Research and development (25,675) (30,442)

Restructuring charges (3,081) (11,789)

Acquisition related expenses – (10,342)

Amortization of intangibles (1,165) (1,278)

Total operating expenses (90,511) (125,556)

Operating loss (62,302) (90,329)

Other income (expense)

Result from equity investments – (137)

Interest income 5,517 9,494

Interest expense (187) (213)

Other income (expense), net 850 1,778

Total other income 6,180 10,922

Net loss before taxes, minority interests and

cumulative effect of accounting change (56,122) (79,407)

Minority interests in subsidiaries – 846

Income tax expenses (4) (12)


of accounting change (56,126) (78,573)

Cumulative effect of accounting change – (100,394)

Net loss (56,126) (178,967)

Net loss per share basic and diluted before

cumulative effect of accounting change in Euro (0.18) (0.25)

Net loss per share basic and diluted in Euro (0.18) (0.57)

Weighted average number of shares outstanding 311,576,344 313,961,551

The accompanying notes are an integral part of these consolidated financial statements

US-GAAP


Lycos Europe N.V.

consolidated balance sheet

In thousand Euro December 31, 2003 December 31, 2002

Assets

Current assets

Cash and cash equivalents 78,330 134,768

Short-term deposits 62,500 84,800

Accounts receivable, net 16,953 22,595

Due from related parties 345 960

Prepaid expenses and other current assets 13,345 20,965

Total current assets 171,473 264,088

Long-term deposits 34,403 –

Property and equipment, net 13,953 24,766

Intangible assets, net 12,196 15,191

Prepaid expenses and other non current assets 1,442 301

Total assets 233,467 304,346

Liabilities and shareholders’ equity

Current liabilities

Short-term debt 685 34

Due to related parties 368 290

Accounts payable 10,314 13,106

Accrued expenses and other current liabilities 19,945 26,049

Deferred revenue 8,317 14,052

Total current liabilities 39,629 53,531

Other liabilities 165 428

Deferred revenue 2,005 2,619

Total liabilities 41,799 56,578

Commitments and contingencies (note 19)

Shareholders’ equity

Class AA registered shares 620 620

Class AB registered shares 620 620

Class B ordinary bearer shares 1,883 2,156

Additional paid-in capital 1,610,191 1,687,298

Treasury shares at cost (2,052) (79,432)

Accumulated deficit (1,419,811) (1,363,685)

Other comprehensive income 217 191

Total shareholders’ equity 191,668 247,768

Total liabilities and shareholders’ equity 233,467 304,346


US-GAAP


Lycos Europe N.V.

consolidated statements of cash flows

Year ended Year ended


Cash flows from operating activities

Net loss (56,126) (178,967)

Adjustments to reconcile net loss to

net cash used in operating activities

Cumulative effect of accounting change – 100,394

Depreciation and amortization 21,844 26,085

Result from equity investments – 137

Gain on sale of subsidiaries (1,549) (3,004)

Other (16) (1,846)

Minority interests in subsidiaries – (846)

Changes in operating assets and liabilities

Decrease in accounts receivable 5,016 6,261

(Increase) / decrease in prepaid expenses and other current assets 7,625 (3,522)

Increase in prepaid expenses and other non current assets (633) (87)

Net change in related party operating accounts 693 (2,214)

Decrease in accounts payable (2,627) (4,787)

Decrease in accrued expenses and other current liabilities (4,277) (9,077)

Increase / (decrease) in deferred revenue (5,395) 5,983

Decrease in other non current liabilities (263) (510)

Total adjustments 20,418 112,967

Net cash used in operating activities (35,708) (66,000)

Cash flows from investing activities

Purchases of long-lived assets (8,262) (11,491)

Net change in short and long term deposits (12,103) (84,800)

Payments for acquisitions, net of cash acquired – (36)

Proceeds from sale of subsidiaries, net of cash (860) 1,695

Net cash used in investing activities (21,225) (94,632)

Cash flows from financing activities

Proceeds from issuance of capital stock – 5,449

Change in short-term debt 651 29

Net cash provided by / (used in) financing activities 651 5,478

Effect of exchange rate changes on cash and cash equivalents (156) 1,031

Net change in cash and cash equivalents (56,438) (154,123)

Cash and cash equivalents, beginning of the period 134,768 288,891

Cash and cash equivalents, end of the period 78,330 134,768


US-GAAP


US-GAAPLycos Europe N.V.

consolidated statements of shareholders’ equity

Class AA shares Class AB shares Class B shares

In thousand No. of Amount No. of Amount No. of Amount

(except share data) shares H shares H shares H

Balance as of December 31, 2001 62,000,000 620 62,000,000 620 214,858,032 2,148

Issuance of shares for cash

and receivables 521,250 6

Issuance of shares for

exercise of options 197,862 2

Re-issuance of shares for

exercise of options

Treasury shares acquired for

settlement of receivables

Translation loss

Net loss


Cancellation of treasury shares (27,277,144) (273)

Translation gain

Net loss




US-GAAP

Additional Treasury shares Accumulated Other Total Total

paid-in capital deficit compr. income compr. income

No. of Amount

H shares H H H H H

1,682,327 (24,922,300) (79,224) (1,184,718) 709 (1,184,009) 422,482

5,208 5,214

138 140

(375) 147,000 470 95

(3,225,500) (678) (678)

(518) (518) (518)

(178,967) (178,967) (178,967)

1,687,298 (28,000,800) (79,432) (1,363,685) 191 (1,363,494) 247,768

(77,107) 27,277,144 77,380 –

26 26 26

(56,126) (56,126) (56,126)

1,610,191 (723,656) (2,052) (1,419,811) 217 (1,419,594) 191,668

Lycos Europe N.V.Notes to the Consolidated Financial Statements

The Company

Lycos Europe (Prime Standard: LCY / Nouveau Marché: 5770) is one of the leading European internet destinations

operating a pan-European network of websites in eight languages. The Company's combination of portal &

communication, communities, webhosting, and shopping & search addresses a wide range of target groups.

The Lycos Europe Network provides an attractive medium not only for consumers but also for advertisers and

e-commerce partners throughout Europe. Every month about 25 million users visit the Lycos sites in Europe.

Today, Lycos Europe generates about 2.5 billion page views each month. With a network of websites covering

Austria, Denmark, France, Germany, Great Britain, Italy, the Netherlands, Spain, Sweden and Switzerland, Lycos

Europe has a large geographical reach in Europe.

The Company commenced operations in the year 1997, and the companies existing before 2000 were reorganized

as subsidiaries of Lycos Europe N.V. in January 2000. The Company’s consolidated financial statements are

prepared in accordance with the accounting principles generally accepted in the United States ("US-GAAP").

The registered office of the Company is in Haarlem, the Netherlands. The Company generates its revenue from

I) selling advertising (advertising), II) paid services and shopping, III) providing internet access (interconnect),

IV) licensing its products and services (licensing and other). The websites of the Company are directed at target

groups throughout Europe in the language of the country concerned and with country-specific content.

Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Lycos Europe N.V. and all of its majority-owned

subsidiaries all of which are 100 percent owned. All significant intercompany transactions have been eliminated

in the consolidation. Investments in entities in which the Company can exercise significant influence, but are

less than majority owned and not otherwise controlled by the Company, are accounted for under the equity

method.

Foreign Exchange Translation and Transaction

The functional currencies of the Company’s foreign operations are the local currencies in the respective countries.

The financial statements of these subsidiaries are translated into Euro using the year-end rates of exchange

for assets and liabilities, and average rates of exchange for the year for income and expense items. Translation

gains (losses) are recorded in other comprehensive income as a component of shareholders’ equity. Net gains

and losses resulting from foreign exchange transactions are included in the consolidated statements of operations.

36 Notes to the Consolidated Financial Statements

1

2

Revenue Recognition

The Company generates its revenues from:

■ Advertising

■ Paid services and shopping

■ Interconnect

■ Licensing and other

Revenues from the sale of advertising (advertising) are obtained through short-term contracts and payments,

which business partners make for long-term prominent placing and advertising space on the Company’s websites.

Under these contracts, the Company guarantees for a fixed or a variable price a certain number of page

impressions (accesses to internet pages which show advertising) or user referrals to other internet sites.

Revenues on advertising contracts are recognized ratably over the period in which the advertisement is dis-

played, provided that no significant Company obligations remain at the end of a period and that the collection

of the resulting receivables is probable. Company obligations typically include guarantees of minimum number

of “impressions” or times that an advertisement appears in pages viewed by users of the Company’s online

properties.

Revenues from paid services and shopping are made up from fees charged to internet users for the access

to certain products of the Company, from commissions on the turnover made by the business partners and

generated through the Company's websites, as well from the sale of goods on the internet. Revenues from

shopping are recognized at the time the service is rendered, if there are no substantial commitments on the

part of the Company remaining and the collection of the resulting receivable is probable.

Revenues from providing interconnect consist of the portion of the interconnection fees due to the Company.

Revenues from providing internet access are recorded at gross when the Company acts as principal in the

transaction and carries the risk of loss for the collection. Only a commission (kick back fee) is recorded as

revenue from providing internet access when the criteria as described above are not met. The revenues are

recognized when the services are performed.

Licensing and other revenues consist of revenues from licensing which are generated from the fees for product

licenses and the relevant maintenance and support services. Revenues from licensing are recognized at the

time the service is rendered, if there are no substantial commitments on the part of the Company remaining

and the collection of the resulting receivable is probable. Fees from maintenance and support for the products

of the Company, including the revenue, which is obtained in connection with the initial license fees, are

deferred and recorded as revenue proportionately over the support period.

Revenues from barter transactions are accounted for in accordance to Emerging Issues Task Force (“EITF”)

99-17, “Accounting for Advertising Barter Transactions”. In accordance with EITF 99-17, barter transactions have

been valued based upon similar cash transactions, which have occurred within six months prior to the date of

the barter transaction. Advertising revenues from barter transactions are recognized during the period, during

which the advertisements are displayed. During the year ended December 31, 2003, and 2002, revenues from

barter transactions have been less than 5 percent of total revenues.

37Notes to the Consolidated Financial Statements

Cost of Revenues

Cost of revenues consists of the cost associated with the production and usage of the Company’s online media

properties. These costs primarily consist of costs related to in-house production of content, fees paid for content

purchased from third parties, cost related to the shopping products sold, internet connection charges, amortization

of trade names and license fees, depreciation and amortization related to data center, hosting cost, other network

cost and compensation expenses. Cost of revenues has not been allocated to advertising revenues and e-com-

merce, license, access and other revenues as management is of the opinion that these costs cannot be directly

allocated and that management of the Company also does not use this information to measure the performance

of the different revenues types.

Deferred Revenue

The deferred revenues consist of advertising, commissions and license fees that are invoiced on the basis of

non-cancelable contracts at the balance sheet date, the performance of which is rendered at a future time.

Research and Development Costs

Research and development costs consist primarily of payroll and related cost incurred by the Company to develop,

enhance and maintain the Company’s website and associated systems. Development costs include external

direct costs of material and services and payroll costs for employees devoting time to software projects during

the application development stage. The amortization period is two years, which represents management’s estimate

of the economic life of the capitalized costs. Technology and development costs other than those capitalized in

accordance with Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or

Obtained for Internal Use” are expensed as incurred.

Advertising Costs

Costs of media advertising production are expensed the first time the advertising takes place. All other ad-

vertising costs are expensed as incurred. The advertising costs of the Company amounted to EUR 10.1 million

and EUR 4.3 million during the year ended December 31, 2003 and 2002 respectively.

Legal Costs

The Company expenses legal costs, including those costs expected to be incurred in connection with a loss

contingency, as incurred.

Cash and Cash Equivalents, Short and Long-Term Deposits

The Company invests its excess cash in debt instruments of high-quality banks and high quality other corporate

issuers. All highly liquid instruments with an original maturity date of three months or less are considered cash

and cash equivalents. Instruments with an original maturity date greater than 3 months are labeled deposits.

Deposits with remaining maturities of less than twelve months from the balance sheet date are considered

short-term deposits. Deposits with remaining maturities greater than twelve months from the balance sheet

date are considered long-term deposits.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist

primarily of cash and cash equivalents, and accounts receivable. Substantially all of the Company’s cash and

cash equivalents are managed by financial institutions. Accounts receivable are typically unsecured and are


derived from revenues earned from customers primarily located in Europe. The Company performs ongoing

credit evaluations of its customers and maintains reserves for potential credit losses. As of December 31, 2003

and 2002, no one customer accounted for 10 percent or more of the accounts receivable balance.

Depreciation and Amortization

Property and equipment are stated at cost, net of accumulated amortization and depreciation, and depreciated

over the estimated useful lives of the assets (usually three to five years) on a straight-line basis.

Lease Equipment

Lease equipment are capitalized where the terms of the lease indicate that the Company maintains substantially

all of the risks and rewards of the equipment. Lease equipment, which are classified as capital lease are stated

at the discounted present value of the lease payments, net of accumulated amortization, and amortized over

the lesser of the estimated useful lives of the equipment or the lease term.

Goodwill and Other Intangibles

Purchased intangible assets with definite useful lives are capitalized and amortized on a straight-line basis

over their estimated useful lives. For identifiable internally developed intangible assets, only the direct external

costs incurred in generating these assets are capitalized and amortized on a straight-line basis over their useful

life. The Company reviews its intangible assets with estimable useful lives for impairment whenever events or

changes in circumstances indicate that the carrying amount of its asset may not be recoverable.

The Company evaluates goodwill and indefinite lived intangible assets for impairment on an annual basis

between annual test dates if events or changes in circumstances indicate that the asset may be impaired.

Prior to the adoption of SFAS 142, goodwill, which represents the excess of purchase price over the fair value

of net assets acquired, was amortized on a straight-line basis over the expected periods to be benefited, and

assessed for recoverability by determining whether the amortization of the goodwill balance over its remaining

life could be recovered through undiscounted future operating cash flows of the acquired operation. The amount

of goodwill impairment, if any, was measured based on projected discounted future operating cash flows

using a discount rate reflecting the Company’s average cost of capital.

The carrying values of long-lived assets such as properties, plant, and equipment, and purchased intangibles

subject to amortization are reviewed for possible impairment on each balance sheet date or whenever events

or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In the

event that facts and circumstances indicate that the carrying amount of any long-lived asset may be impaired,

an evaluation of recoverability would be performed whereby the estimated future undiscounted cash flows

associated with the asset would be compared to the asset’s carrying amount to determine if a write-down to

fair value is required. The remaining useful life of the assets is evaluated accordingly. An impairment loss is

recognized to the extent that the carrying amount exceeds the asset’s fair value.

Minority Interests

The minority interests shown in the consolidated financials statements reflect third parties’ interests in the

subsidiaries, which are not fully owned. All third parties’ interests relating to the minority interests were

acquired by the Company in 2002.


Unconsolidated Investments

The Company’s investments in less than 50 percent owned affiliates, where the Company can exercise significant

influence, are accounted for using the equity method.

Income Taxes

Deferred income taxes are calculated using the assets and liability method. Under the assets and liability method,

deferred income tax assets and liabilities are determined based on the differences between the financial reporting

and tax bases of assets and liabilities and are measured using the current tax rates and laws. A valuation allowance

is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.

Stock-based Compensation

The Company accounts for stock-based employee compensation arrangements in accordance with the provisions

of Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees”, and complies

with the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” as amended by

SFAS No. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure”. Under APB 25,

compensation expense is based on the difference, if any, on the date of grant, between the fair value of the

Company’s stock and the exercise price of the option.

As the Company accounts for stock-based compensation using the intrinsic value method prescribed by

Accounting Principles Board Opinion No. 25 “Accounting for Stock issued to Employees”, under which no

compensation cost for stock options has been recognized for the stock based compensation programs as the

stock options were granted with an exercise price at or above fair market value. Had compensation expense

for the Company’s and its subsidiaries stock-based compensation plan been determined based upon fair values

at the grant dates for awards under those plans in accordance with SFAF No. 123, “Accounting for Stock-Based

Compensation” as amended by SFAS 148 “Accounting for Stock-Based Compensation – Transition and Disclosure”,

the Company’s net loss and loss per share would have been increased to the pro forma amounts indicated

below.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing

model with the following weighted average assumptions for 2003: expected volatility of 64 percent, discount

rate of 5.5 percent and estimated forfeiture rate of 11 percent. The weighted average assumptions used for

2002 were: expected volatility of 66 percent, discount rate of 5.4 percent and estimated forfeiture rate of 7

percent.

In thousand Euro Year ended Year ended

(except per share data) December 31, 2003 December 31, 2002

Net loss

As reported (56,126) (178,967)

Compensation expenses (1,878) (4,243)

Pro forma (58,004) (183,210)

Loss per share in Euro

As reported (0.18) (0.57)

Pro forma (0.19) (0.58)


Loss per Share

Basic net loss per share is calculated using the weighted average number of common shares outstanding during

the year. Diluted net loss per share is similar to basic net loss per share except that the weighted average of

common shares outstanding is increased to include the number of additional common shares that would have

been outstanding if the dilutive potential common shares resulting from options and other potentially dilutive

instruments had been issued. Because of the net losses for all periods presented, the inclusion of options in the

calculation of weighted average common shares is anti-dilutive; and therefore, there is no difference between

basic and diluted earning per share.

Use of Estimates

The preparation of financial statements in conformity with US-GAAP requires management to make estimates

and assumptions that affect the reported amounts of the assets and liabilities and the disclosure of contingent

assets and liabilities at the date of the financial statements as well as on revenues and expenses during the

reporting period. The actual amounts may differ from these estimates.

Comprehensive Income

Other comprehensive income, as included in the accompanying consolidated balance sheets, consists of the

cumulative translation adjustment resulting from the translation of the balance sheet and income statements

of foreign subsidiaries.

Recent Accounting Pronouncements

In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities – an interpretation of ARB

No. 51” (“FIN 46”), which gives guidance to consolidation rules to certain variable interest entities. In general,

a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business

purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do

not provide sufficient financial resources for the entity to support its activities. FIN 46 requires a variable

interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss

from variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns, or

both. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after

January 31, 2003. The consolidation requirements apply to variable interest entities created before February 1,

2003, in the first fiscal year or interim period beginning after December 15, 2003. Certain disclosure requirements

apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity

was established. The adoption of FIN 46 had no impact on Lycos Europe N.V.’s consolidated financial position

or results of operations because Lycos Europe N.V. currently holds no significant variable interests in any variable

interest entities.

On April 30, 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments

and Hedging Activities (the Statement)”. The Statement amends and clarifies financial accounting and reporting

for derivative instruments and hedging activities under Statement 133. The Statement amends Statement 133

to clarify the definition of a derivative, expand the nature of exemptions from Statement 133, clarify the appli-

cation of hedge accounting when using certain instruments, clarify the application of paragraph 13 of Statement

133 to embedded derivative instruments in which the underlying is an interest rate, and modify the cash flow

presentation of derivative instruments that contain financing elements. This Statement is effective for financial

instruments entered into or modified after June 30, 2003, and otherwise is effective at the beginning of the

first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of


3

4


nonpublic entities. Lycos Europe N.V. did not enter or modify financial instruments after June 30, 2003, and

adopted the Statement on July 1, 2003. The adoption of the Statement did not have a significant impact on

the financial statements of Lycos Europe N.V.

In May 2003, the EITF reached a consensus on EITF Issue No. 01-8, “Determining Whether an Arrangement

Contains a Lease”, which applies prospectively to new or modified arrangements in fiscal periods beginning

after May 28, 2003. Guidance in the Consensus requires that both parties to an arrangement determine

whether a service or supply contract includes a lease within the scope of FASB Statement No. 13, whereby the

right to use property, plant and equipment is conveyed to the purchaser. The adoption of EITF 01-8 does not

have a material impact in the result of operations or the financial position of Lycos Europe N.V.

On May 15, 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics

of Both Liabilities and Equity”. The Statement requires companies to classify as liabilities (or assets in some

circumstance) three classes of freestanding financial instruments that embody obligations for the company.

Generally, the Statement is effective for financial instruments entered into or modified after May 31, 2003, and

is otherwise effective at the beginning for the first interim period beginning after June 15, 2003. Lycos Europe

N.V. adopted the provisions of the Statement on July 1, 2003. Lycos Europe N.V. did not enter into any financial

instruments within the scope of the Statement during June 2003. In addition, Lycos Europe N.V. did not see

any effect as a result of adopting the provisions of the Statement on July 1, 2003.

Cash, Cash Equivalents, Short and Long-Term Deposits

Cash, cash equivalents, short and long-term deposits are made up of the following:


Cash and cash equivalents 78,330 134,768

Deposits due within one year 62,500 84,800

Deposits due after one year through five years 29,600 –

Deposits due after five years 4,803 –

Total 175,233 219,568

An amount of EUR 8.1 million and EUR 3.5 million are restricted in use as per December 31, 2003 and December

31, 2002 respectively.

Accounts Receivable

Accounts receivable net are made up of the following:


Accounts receivable 23,128 30,852

Less: Allowance for doubtful accounts receivable (6,175) (8,257)

Accounts receivable, net 16,953 22,595

5


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7

The allowance for doubtful accounts receivables recorded in the Consolidated Financial Statements of Operations

amounted to EUR 0.6 million and EUR 4.4 million for the year ended December 31, 2003, and December 31,

2002, respectively. In the Consolidated Financial Statements of Operations these costs are included in the

General and Administrative expenses category.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets are made up of the following:


VAT receivable 3,014 4,327

Rent deposits and prepayments 1,806 3,317

Prepaid expenses 2,603 4,295

Accrued income 2,477 3,426

Other short term receivables 3,445 5,600

Prepaid expenses and other current assets 13,345 20,965

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation, including equipment under capital

leases are made up as follows:


Computers 46,921 52,270

Furniture and fixtures 5,511 10,389

52,432 62,659

Less: Accumulated depreciation and amortization (38,479) (37,893)

Property and equipment, net 13,953 24,766

Disposals

On July 1, 2002, the Company sold its German subsidiary NZ Netzeitung GmbH to BertelsmannSpringer, a

subsidiary of Bertelsmann AG at that time, for a consideration of EUR 1. NZ Netzeitung is a German online

newspaper.

On November 7, 2002, Spray Network N.V., a fully owned company of Lycos Europe N.V., sold its Norwegian

subsidiary Massmarket AS to Visma Services ASA for a consideration of EUR 1.8 million. Massmarket AS is an

online outsourcing company specializing in the procurement for business customers.

On December 31, 2002, the Company sold its Norwegian subsidiary Nettavisen AS to TV2 Gruppen AS for a

consideration of EUR 3.0 million. Nettavisen AS is a Norwegian online newspaper.

8


On June 20, 2003, Lycos Europe N.V. sold its Norwegian subsidiary, Norsk Familieøkonomi AS (previously called

Lycos Norway AS) in a Management Buyout for a consideration of EUR 1 million. Norsk Familieøkonomi is a

membership-based shopping club that distributes multiple services like insurance, electricity, telephony and

banking at low cost to its members.

Goodwill and Intangible Assets

The Company completed the transitional impairment test under SFAS 142 in 2002. The measurement date for

the test was the beginning of the year of the adoption period; hence, the Company performed an impairment

test of its goodwill and intangible assets as of January 1, 2002. The Company recorded an impairment loss for

goodwill and other intangibles of EUR 100.4 million, which was recorded as a cumulative effect of an accounting

change in the Company's consolidated statements of operations for the year ended December 31, 2002. The

fair value of the reporting units giving rise to the transitional impairment loss was estimated using the expected

present value of future cash flows. The Company performs its annual impairment review during the second

quarter of each year.

In the second quarter 2003, Lycos Europe performed an impairment review, which was only focused on intangible

assets other than goodwill, as the goodwill position of Lycos Europe had already been fully impaired during

the year 2002. The impairment review performed in the second quarter 2003 did not indicate that an additional

impairment was required in the year 2003.

Amortization expenses, which amounted to EUR 6.7 million for the year ended December 31, 2003, are included

in all the main expense categories within the statements of operations. In line with the provisions of SFAS No.

142, the Company ceased the amortization of goodwill and certain intangibles with indefinite life on January 1,

2002.

The EUR 100.4 million cumulative adjustments were recorded in the Group’s Consolidated Financial Statements

for the year ended December 31, 2002. Further information concerning the adoption of SFAS 142 can be found

in those Consolidated Financial Statements and the notes included therein.

The effect of the accounting change on the fiscal year 2002 is as follows:

Year ended

In thousand Euro December 31, 2002

Reported net loss before cumulative

effect of accounting change (78,573)

Cumulative effect on accounting change (100,394)

Net loss (178,967)


Net loss per share Year ended

basic and diluted in Euro December 31, 2002

Reported net loss before cumulative effect

of accounting change (0.25)

Cumulative effect on accounting change (0.32)

Net loss (0.57)

The goodwill amounts to zero as of December 31, 2003, and December 31, 2002.

The intangible assets are recorded at costs less accumulated amortization, as follows:

In thousand Euro Accumulated

as of December 31, 2003 Gross values amortization Net values

Licenses and other rights 50,510 (41,475) 9,035

Capitalized development expenses 8,831 (6,568) 2,263

Purchased software 2,605 (1,707) 898

Intangible assets 61,946 (49,750) 12,196

In thousand Euro Accumulated

as of December 31, 2002 Gross values amortization Net values

Licenses and other rights 50,425 (38,838) 11,587

Capitalized development expenses 7,305 (5,548) 1,757

Purchased software 2,900 (1,053) 1,847

Intangible assets 60,630 (45,439) 15,191

Aggregated Amortization Expenses:



Aggregated amortization expenses 6,699 5,176

Estimated Amortization Expenses:

For the financial year until December 31, In thousand Euro

2004 3,725

2005 2,529

2006 1,359

2007 917

2008 917


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Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities are made up as follows:


Provision for salary and salary related cost 3,908 3,301

Provision for marketing cost 2,024 1,515

Provision for professional services 1,145 2,214

Restructuring provision 2,027 2,736

Other current liabilities 4,718 10,008

Other accrued expenses 6,123 6,275

Accrued expenses and other current liabilities 19,945 26,049

Restructuring Charges

In March 2002, the Company announced its plans to accelerate its turnaround program launched in September

2001. As such, the Company implemented an additional restructuring program consisting of several elements,

including the establishment of a new network concept. Part of the overall program was to further reduce

headcount.

In November 2003, Lycos Europe announced to focus on its core products and to implement profit centers

which resulted in a far-reaching program aimed at boosting Lycos Europe’s competitiveness on the market.

Part of the program was a reduction of headcount and related costs.

The development of the restructuring provision during the year ended December 31, 2003, was as follows:

In thousand Euro

Restructuring provision as per December 31, 2002 2,736

Restructuring charge 3,081

Payments (3,790)

Restructuring provision as per December 31, 2003 2,027

Included in the restructuring provision are, amongst others, termination benefits for 95 and 23 employees as

per December 31, 2003, and December 31, 2002, respectively.

Related Party Transactions

The Company engages in various related party transactions with both Terra Lycos and Bertelsmann, which

include revenue and expense transactions. The billing rates are set at rates, which are believed to approximate

fair value.

11


The receivables from and liabilities to related parties are as follows:


Due from related parties:

Other trade receivables (Terra Lycos) 241 798

Other trade receivables (Bertelsmann) 104 162

Due from related parties 345 960

Due to related parties:

Other trade payable (Terra Lycos) 13 146

Other trade payable (Bertelsmann) 355 144

Due to related parties 368 290

Within the accrued expenses and other current liabilities accruals of the following related party amounts are

included:


Terra Lycos 79 1,040

Bertelsmann 171 217

Total 250 1,257

The following table summarizes the principal transactions of the Company with related parties:



Advertising revenues 296 23,698

Cost of revenues (1,648) (13,231)

Sales and marketing expenses (444) (445)

General and administrative expenses (3,477) (3,240)

Research and development expenses (228) (286)

Interest income – 2,114

The related party revenues for the year ended December 31, 2002, related to a two-year agreement with

Bertelsmann AG. This agreement was terminated at the end of October 2002 and has not been continued.

On July 1, 2002, the Company sold its German subsidiary NZ Netzeitung GmbH to BertelsmannSpringer, a

subsidiary of Bertelsmann AG at that time, for a consideration of EUR 1. NZ Netzeitung is a German online

newspaper and was loss making.

Loss per Share

Because of the net losses incurred by the Company for all periods presented, the inclusion of outstanding

options in the calculation of weighted average common shares would be anti-dilutive, and therefore, there is

no difference between basic and diluted loss per share.

Shareholders’ Equity

The Company’s Class AA and AB shares have been issued in registered form and may only be transferred by a

private deed. These registered shares carry special voting and binding nomination rights. Of the shareholders,

only holders of Class AA and AB registered shares have also the right to make binding nominations of the

Management Board and the Supervisory Board as well as for the positions of Chairman and Deputy Chairman

of the Supervisory Board.

The Class AA shares have a par value of EUR 0.01. Of the 250,000,000 shares authorized, 62,000,000 are

issued and outstanding on December 31, 2003, and December 31, 2002. These shares are owned by Terra Lycos,

an initial shareholder and founder of the Company.

The Class AB shares have a par value EUR 0.01. Of the 250,000,000 shares authorized, 62,000,000 are issued

and outstanding on December 31, 2003, and December 31, 2002. These shares are owned by Bertelsmann

Internet Holding GmbH (24,347,400), Fireball Internet GmbH (14,260,000) and Christoph Mohn Internet Holding

(23,392,600), also initial shareholders and founders of the Company.

The Class B shares have a par value of EUR 0.01. Of the 500,000,000 shares authorized, 188,300,000 and

215,577,144 are issued on December 31, 2003, and December 31, 2002, respectively, and 187,576,344 and

187,576,344 are outstanding on December 31, 2003, and December 31, 2002, respectively.

In fiscal year 2000, the Company issued 28,000,000 Class B shares in an Initial Public Offering. A total of 83.3

million Lycos Europe shares have been issued in connection with the acquisition of Spray Network. A total of

18.1 million Lycos Europe shares have been issued in connection with the acquisition of MultiMania. On Sep-

tember 20, 2000, Spray Ventures and Investor Guernsey entered into a share purchase agreement with the

Company to acquire a total of 10.0 million shares for a total consideration of EUR 100 million. All these Lycos

Europe shares have been issued in connection with this share purchase agreement to Spray Ventures and

Investor Guernsey.

On February 16, 2001, Spray Ventures entered into an agreement with the Company to transfer 24.9 million

Lycos Europe shares (representing a value of EUR 78.7 million) to the Company in settlement of amounts due

under the share purchase agreement. These shares have been recorded as treasury shares at the settlement

amount within shareholders’ equity.

The Company issued 197,862 shares and reissued 147,000 treasury shares during the year ended December

31, 2002, in connection with the exercise of employee stock options.


12

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14

In October 2002, Spray Ventures transferred 3.2 million Lycos Europe shares (representing a value of EUR 0.7

million) to the Company as indemnification for arranging the settlement with the previous shareholders of

Massmarket AS.

On January 17, 2003, Lycos Europe’s shareholders resolved at an extraordinary general meeting upon the

reduction of the Company’s issued share capital by canceling 27,277,144 bearer shares held as treasury

shares by Lycos Europe. This resolution was effective on March 22, 2003. Lycos Europe continues to hold

723,656 of its own shares recorded as treasury shares.

Legal Merger

On September 18, 2003, Spray Network N.V. merged with Lycos Europe N.V. This legal merger does not have

any impact on the shareholders of Lycos Europe N.V. since Lycos Europe N.V. already owned 100 percent of

Spray Network N.V.

Income Taxes

The income tax expenses differ from the amount computed by applying the Netherlands statutory rate of 34.5

percent as follows:


Expected income tax benefit at the statutory tax rate 19,363 27,395

Effect of non deductible charges (1,802) (4,028)

Different foreign tax rates (887) (1,311)

Changes in valuation allowance (26,563) (10,670)

Change prior years 9,885 (11,398)

Income tax expenses (4) (12)

The development of the valuation allowance for deferred tax assets are summarized as follows:

In thousand Euro

Valuation allowance December 31, 2002 161,573

Reduction due to sold entities (1,144)

Change in valuation allowance 26,563

Valuation allowance December 31, 2003 186,992

In view of the fact that in all reporting periods since its formation the Company has incurred considerable

losses, the Company considers that valuation allowances are necessary for all deferred tax assets to the

extent to which they are in excess of the future taxable differences. Consequently, no deferred tax benefit is

shown in the consolidated statement of operations.

Deferred tax assets and liabilities are summarized as follows:


Deferred tax assets

Accrued pensions 2 31

Loss carry forward 194,802 170,636

Total deferred tax assets 194,804 170,667

Less valuation allowance (186,992) (161,573)

Deferred tax assets, net 7,812 9,094

Deferred tax liabilities

Fixed assets 813 359

Intangible assets 6,999 8,735

Total deferred tax liabilities 7,812 9,094

Deferred tax assets (liabilities), net – –

In assessing the recoverability of deferred tax assets, management considers whether it is more likely than

not that some or all of the deferred tax assets will be realized. The Company believes that sufficient uncertainty

about the recoverability of the deferred tax assets exists so that valuation allowances of EUR 187.0 million

and EUR 161.6 million on the deferred tax assets have been established for December 31, 2003, and December

31, 2002, respectively, these being the amounts by which the deferred tax assets are in excess of the future

reversals of taxable temporary differences.

On December 31, 2003, and December 31, 2002, the Company recorded operating loss carry forward of

approximately EUR 551.8 million and EUR 477.7 million respectively. A major portion of the loss carry forward

has an indefinite life.

Employees

On December 31, 2003, Lycos Europe employed 856 employees compared to 883 employees on December 31,

2002.

Pension

The Company provides limited defined pension benefits to an officer of the Company. The pension payments

are calculated on the basis of years of service and average income (whereby a maximum is set for calculating

the pension payments) in the three years prior to retirement. No plan assets exist in connection with this pension

obligation.

The pension obligations under this unfunded pension plan are EUR 0.1 million and EUR 0.1 million as per

December 31, 2003 and December 31, 2002, respectively.


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17Stock Option Plan

In fiscal year 2000, the Company approved a stock option plan (“the Plan”). Under the terms of the Plan, the

Company may grant up to 10 million options to purchase shares of the Company. Options are generally granted

for a period of 8 years.

As of December 31, 2003, the total number of options granted and outstanding to the employees was

2,190,482 Lycos Europe options. No options have been granted during the year ending December 31, 2003.

Options outstanding

Number of Weighted average

Range of exercise outstanding options as remaining contractual life Weighted average

prices (in EUR) of December 31, 2003 (in years) exercise price per share

0.00 – 2.50 284,632 4.6 1.86

2.50 – 7.50 748,950 5.0 6.16

7.50 – 17.50 449,400 3.4 14.37

17.50 – 30.00 707,500 3.8 28.80

2,190,482 4.2 14.60

Options exercisable

Number of Weighted

Range of exercise exercisable options as average exercise

prices (in EUR) of December 31, 2003 price per share

0.00 – 2.50 124,165 1.89

2.50 – 7.50 499,300 6.16

7.50 – 17.50 358,400 13.98

17.50 – 30.00 707,500 28.80

1,689,365 16.99

The development of the option program during the year ended December 31, 2003, and 2002, respectively is

presented below:

Weighted average

Number exercise price

of options per share in Euro

Options outstanding on December 31, 2001 7,374,915 13.33

Options exercised (344,862) 0.58

Options expired (333,978) 12.22

Options cancelled (3,698,682) 13.78


Options expired (177,837) 15.80

Options cancelled (629,074) 13.08



18 Segment Information

Revenues are attributed to geographic regions on the basis of the language and target audience to which the

relevant website is directed and with which the corresponding revenues are generated. Revenue is attributed

to individual countries according to the international online property that generated the revenue. This seg-

mentation is consistent with the data made available to the Company’s management to assess performance

and make decisions. The Company does not allocate any operating or other costs to its geographic regions or

business segments, as management does no0t use this information to measure the performance of the geograph-

ic regions and business segments. Management does not believe that allocation of these expenses is material

in evaluating segment performance.

Revenues from the geographic regions are made up as follows:



Germany 24,584 37,724

Sweden 23,491 19,155

France 9,637 13,300

United Kingdom 9,489 13,879

Other countries 17,817 33,986

Total 85,018 118,044

Revenues from the business segments are made up as follows:







Total 85,018 118,044

Commitments and Contingencies

Minimum Lease and Rental Payments

The Company has entered into lease agreements in Armenia, Denmark, France, Germany, Great Britain, Italy,

the Netherlands, Spain and Sweden.

19


The future, non-cancelable minimum lease and rental payments under these commitments are as follows:

For the financial year until December 31, In thousand Euro

2004 3,583

2005 2,850

2006 1,523

2007 1,285

2008 765

Thereafter 3,818

Total 13,824

Litigation

From time to time, the Company is subject to legal proceedings and claims in the ordinary course of business.

Lycos Europe is currently not aware of any legal proceeding or claims that the Company believes will have,

individually or in the aggregate, a materially adverse effect on the Company’s financial position, results of

operations or cash flows.

Directors‘ Holding as of December 31, 2003

Supervisory Board Members

Options

No stock options rights in the Company are granted to or acquired by members of the Supervisory Board.

Shares

No member of the Supervisory Board of Lycos Europe held shares in the Company.

Management Board of Directors

Options

Christoph Mohn (who is the sole Director of Lycos Europe) owns 285,000 stock options in the Company.

Shares

Christoph Mohn owns 8,333 shares in the Company and owns 100 percent in Christoph Mohn Internet Holding

GmbH that owns 37,730,000 shares in the Company on December 31, 2003.

Subsequent Events

On January 8, 2004, Lycos Europe announced that is has entered into an agreement to acquire all shares in

BuyCentral S.A.S., a French company operating shopping platforms in France and Italy. BuyCentral S.A.S.

aggregates data of online sellable goods and services and makes them searchable on its own websites or on

third parties' websites. The purchase price will be EUR 3.0 million, resulting in preliminary estimates for goodwill

of EUR 3.0 million. Lycos Europe also agreed to pay conditional consideration to the sellers at the beginning

of 2005, using a formula based upon the gross margin to be achieved by BuyCentral in 2004. This contingent

consideration will be recorded when the contingency is resolved and the consideration is issued.

20

21

Best estimate of total revenues, net result and total assets of BuyCentral for the year ended and as of December

31, 2003, were EUR 1.4 million, EUR 0.2 million and EUR 1.3 million respectively. The acquisition is subject to

final approval of supervising legal authorities, expected to be received at the beginning of February 2004.

On January 13, 2004, Lycos Europe acquired all shares in united-domains AG, a German company which specializes

in worldwide domain registration. The purchase price was EUR 6.0 million, resulting in preliminary estimates

for goodwill of EUR 5.4 million. Lycos Europe also agreed to pay conditional consideration to the sellers using

a formula based upon the number of new domain registrations for new domain extensions at the moment

these new domain extensions are being registered. This contingent consideration will be recorded when the

contingency is resolved and the consideration is issued. Best estimate of total revenues, net result and total

assets of united-domains for the year ended and as of December 31, 2003, were EUR 3.4 million, EUR 0.2

million and EUR 1.1 million respectively.

The financial statements of united-domains and BuyCentral will be included in Lycos Europe's consolidated

statements of operations starting on the date of the acquisitions, respectively January 13, 2004 and at the

beginning of February 2004.


Independent Auditors’ Report

To Lycos Europe N.V., Haarlem

We have audited the accompanying consolidated balance sheets of Lycos Europe N.V. and subsidiaries as

of December 31, 2003 and 2002, and the consolidated statements of operations, statements of changes in

shareholders’ equity, and cash flows for the years then ended. These consolidated financial statements which

have been prepared in accordance with Accounting Principles Generally Accepted in the United States of

America (US-GAAP), are the responsibility of the Company’s management. Our responsibility is to express an

opinion, whether the consolidated financial statements are in accordance with US-GAAP based on our audit.

We conducted our audits in accordance with International Standards on Auditing (ISA). Those standards require

that we plan and perform the audit to obtain reasonable assurance about whether the financial statements

are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the

amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles

used and significant estimates made by management, as well as evaluating the overall financial statement

presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,

the financial position of Lycos Europe N.V. as of December 31, 2003 and 2002, and the results of its operations

and its cash flows for the years then ended, in conformity with US-GAAP.

We have provided the services described above on behalf of Lycos Europe N.V. We have carried out our engagements

on the basis of the General Engagement Terms included in our engagement agreement dated as of January 1,

2002. By taking note of and using the information as contained in our Auditors’ Report the recipient confirms

to have taken note of the terms and conditions stipulated in the aforementioned General Engagement Terms

(including the liability limitations to EUR 4 million for negligence specified in item No. 9 included therein) and

acknowledges their validity in relation to us.

Düsseldorf, January 28, 2004

KPMG Deutsche Treuhand-Gesellschaft

Aktiengesellschaft

Wirtschaftsprüfungsgesellschaft

Stefan Haas Charlotte Niessen

Independent Auditor Independent Auditor

55Independent Auditors’ Report

56 Quarterly Financial Information

Quarterly Financial Information(unaudited)

Quarter ended Quarter ended Quarter ended Quarter ended

In thousand Euro March 31, June 30, September 30, December 31,

(except per share data) 2002 (3) 2002 2002 2002

Revenues 32,101 30,005 27,166 28,772

Operating loss (23,231) (29,143) (31,574) (6,381)

Net loss before cumulative

effect of accounting change (19,284) (27,461) (30,378) (1,450)

Net loss (119,678) (27,461) (30,378) (1,450)

Net loss per share basic and

diluted before cumulative effect

of accounting change in Euro(1) (0.06) (0.09) (0.10) (0.00)

Net loss per share basic

and diluted in Euro (1) (0.38) (0.09) (0.10) (0.00)

EBITDA (2) (17,351) (22,441) (15,651) 1,541

Quarter ended Quarter ended Quarter ended Quarter ended

In thousand Euro March 31, June 30, September 30, December 31,

(except per share data) 2003 2003 2003 2003

Revenues 20,788 21,581 19,396 23,253

Operating loss (16,197) (14,707) (14,366) (17,032)

Net loss before cumulative

effect of accounting change (14,749) (12,485) (12,562) (16,330)

Net loss (14,749) (12,485) (12,562) (16,330)

Net loss per share basic

and diluted in Euro (1) (0.05) (0.04) (0.04) (0.05)

EBITDA (2) (10,865) (9,624) (8,150) (11,820)

(1) The sum of net loss per share does not equal earnings per share for the year due to equivalent share calculations, which are impacted by

the timing (weighting) of the shares issued.

(2) EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization, which is calculated by excluding the depreciation and amortization

from the Company’s operating loss. The Company considers EBITDA an important indicator of the performance of its business including the

ability to provide cash flows to fund capital expenditures. EBITDA, however, should not be considered an alternative to operating result or

net result as an indicator of the performance of the Company, or as an alternative to cash flows provided by (used in) operating activities as

a measure of liquidity, in each case determined in accordance with accounting principles generally accepted in the United States (“US-GAAP”).

(3) The cumulative effect of the accounting change has been presented in the financial results for three months ended March 31, 2002, in

accordance with FASB Statement No. 3, “Reporting Accounting changes in Interim Financial Statements”.

Report of the Supervisory Board

The Management Board of Lycos Europe N.V. kept its supervisory bodies well informed about the situation

and course of business at the Company during the period under its review, January 1, 2003, to December 31,

2003. The course of business was discussed on the basis of monthly reports containing comparative figures

relating to the budget, sales and page views trends, developments in the regional markets, marketing

expenditures, and numbers of staff. In addition, the Supervisory Board engaged in extensive discussions with

the Management Board on fundamental issues of corporate policy and significant business developments in

joint Supervisory Board Meetings and in telephone conferences. The Supervisory Board was thus able to

conclude that business was being managed properly.

The Supervisory Board participated in all the resolutions as provided by the Company statutes. We specifically

discussed the strategic orientation of the Company and lent it our unreserved support.

The consolidated financial statements, notes to the consolidated financial statements and management report

of Lycos Europe N.V. for the fiscal year extending from January 1, 2003, to December 31, 2003, as submitted

by the Management Board were prepared in the form of a consolidated report in accordance with US-GAAP.

These financial statements have been audited by KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft

Düsseldorf and an unqualified audit opinion was issued. The Supervisory Board has accepted and approved

the results of the audit and, subsequent to its own review of the financial statements, the notes to the financial

statements and the management report, has no objections to it. The Supervisory Board approves the financial

reports as drawn up by the Management Board, and it is therefore deemed approved.

We wish the entire staff and the Management Board of Lycos Europe N.V. every success for the upcoming

business year.

Amsterdam, February 17, 2004

Prof. Dr. Jürgen Frank Richter

Chairman of the Supervisory Board

57Report of the Supervisory Board

Supervisory Board(During the year ended December 31, 2003)

Prof. Dr. Jürgen Frank Richter

■ Chairman of the Supervisory Board for the whole year ended December 31, 2003

Joaquin Agut Bonsfills

■ Member of the Supervisory Board for the whole year ended December 31, 2003

■ Chief Executive Officer of Endemol Holding N.V.

■ Member of the Boards of Directors of Terra Networks, S.A., Lycos, Inc., A Tu Hora, S.A., Red Universal de

Marketing y Booking online, S.A., Teleinformatica y comunicaciones, S.A.U., and Grupo J. Uriach, S.A.

Dr. Dieter Ulrich Bohnert


■ Senior Partner Heuking Kühn Lüer Wojtek

■ Member of the Supervisory Board of Schneider Electric GmbH

Pedro Javier Martinez Diez

■ Member of the Supervisory Board since January 17, 2003

■ Executive Vice President Terra Networks, S.A.

■ Member of the Board of Directors Terra Networks Latam, S.L.

José Fransisco Mateu Isturiz

■ Member of the Supervisory Board since January 17, 2003

■ Executive Vice President and General Counsel Terra Networks, S.A.

Rolf Eberhard Buch

■ Member of the Supervisory Board since May 22, 2003

■ Member of the Board of Directors of arvato AG and Chairman of the Executive Board of arvato direct

services

Juan Rovira de Ossó


■ Executive Vice President Terra Networks, S.A.

■ Member of the Management Board Deremate.com, Inc.

■ Member of the Board of Directors Terra Networks Asociadas, S.L.

Burkhard Schmidt


■ Managing Director Jahr Holding GmbH & Co. KG and member of the Shareholders’ Committee at Henkel

KGaA

58 Supervisory Board

59Supervisory Board

Juan Antonio García-Urgelés Capdevila

■ Member of the Supervisory Board until January 17, 2003

■ Consumer Business Unit Director of Vodafone, Spain

Stephen James Killeen

■ Member of the Supervisory Board until January 17, 2003

■ President and Chief Executive Officer of World Winner, Inc.

■ Member of the Advisory Board of Protégent, Inc. and member of the Board of Directors of Molecular, Inc.

Dr. Siegfried Luther

■ Member of the Supervisory Board until May 22, 2003

■ Member of the Management Board and Chief Financial Officer Bertelsmann AG

■ Member of the Supervisory Boards of WestLB AG, Gruner + Jahr AG, Springer Verlag GmbH & Co.KG, RTL

Group S.A., Bertelsmann Buch AG

60 Group Structure

Group Structure(Direct and Indirect Holdings as of December 31, 2003)

Subsidiaries of Lycos Europe N.V. included in the consolidated Financial Statements are as follows:

Company Ownership Country

Angelfire SL 100 % Spain

Bottnia Internet Provider AB (“BIP AB”) 100 % Sweden

Hotbot SL 100 % Spain

IBO Internet Business Opportunities GmbH 100 % Germany

Jubii A/S 100 % Denmark

Lycos cjsc 100 % Armenia

Lycos Eastern Europe GmbH 100 % Germany

Lycos Espana Internet Services SL 100 % Spain

Lycos Europe GmbH 100 % Germany

Lycos Europe BV 100 % The Netherlands

Lycos France SA 100 % France

Lycos Italia Srl 100 % Italy

Lycos Netherlands BV 100 % The Netherlands

Lycos Portugal Lda 100 % Portugal

Lycos Pro S.L. 100 % Spain

Lycos UK Ltd 100 % United Kingdom

Sonique S.L. 100 % Spain

Spray Network AB 100 % Sweden

Spray Network GmbH 100 % Germany

Spray Network Services AB 100 % Sweden

Spray Trademark Holding AB 100 % Sweden

Triangular Popular Domains S.L. 100 % Spain

Yarps International AB 100 % Sweden

w w w . l y c o s - e u r o p e . c o m

Lycos Europe N.V.

Richard Holkade 36

2033 PZ Haarlem

The Netherlands

Investor Relations

E-mail: [email protected]

The annual report for the period from

January 1, 2003, to December 31, 2003,

is also available in German and French.

In case of doubt, the English version

is decisive.

lycos europe n.v. annual report (us-gaap)...

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