Lycos Europe N.V. Annual Report (US-GAAP)...
Transcript of Lycos Europe N.V. Annual Report (US-GAAP)...
Lycos Europe N.V.Annual Repor t (US-GAAP) 2003
f o r t h e y e a r e n d e d D e c e m b e r 3 1 , 2 0 0 3
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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)%
Gross margin 38% 39%
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
07Overview | Report to the Shareholders
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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03
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.
08 Report to the Shareholders | Overview
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
09Overview | Report to the Shareholders
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
10 Report to the Shareholders | Overview
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
11Overview | Report to the Shareholders
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
12 Report to the Shareholders | Overview
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.
13Overview | Report to the Shareholders
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
14 Report to the Shareholders | Overview
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
g &
searc
h
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.
15Overview | Report to the Shareholders
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
16 Report to the Shareholders | Overview
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.
17Overview | Report to the Shareholders
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)%
Gross margin 32% 32%
Net loss before cumulative effect
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)
Advertising 43,338 66,340
Paid services and shopping 17,591 10,736
Interconnect 21,213 22,302
Licensing and other 1,532 1,736
Total revenues 83,674 101,114
20 Report to the Shareholders | Financial Results
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.
22 Report to the Shareholders | Financial Results
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
lyco
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n.v
.co
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31,
20
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
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
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)
Net loss before cumulative effect
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
32 Consolidated Financial Statements
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
The accompanying notes are an integral part of these consolidated financial statements
US-GAAP
33Consolidated Financial Statements
Lycos Europe N.V.
consolidated statements of cash flows
Year ended Year ended
In thousand Euro December 31, 2003 December 31, 2002
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
The accompanying notes are an integral part of these consolidated financial statements
US-GAAP
34 Consolidated Financial Statements
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
Balance as of December 31, 2002 62,000,000 620 62,000,000 620 215,577,144 2,156
Cancellation of treasury shares (27,277,144) (273)
Translation gain
Net loss
Balance as of December 31, 2003 62,000,000 620 62,000,000 620 188,300,000 1,883
The accompanying notes are an integral part of these consolidated financial statements
35Consolidated Financial Statements
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
38 Notes to the Consolidated Financial Statements
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.
39Notes to the Consolidated Financial Statements
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)
40 Notes to the Consolidated Financial Statements
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
41Notes to the Consolidated Financial Statements
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42 Notes to the Consolidated Financial Statements
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:
In thousand Euro December 31, 2003 December 31, 2002
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:
In thousand Euro December 31, 2003 December 31, 2002
Accounts receivable 23,128 30,852
Less: Allowance for doubtful accounts receivable (6,175) (8,257)
Accounts receivable, net 16,953 22,595
5
43Notes to the Consolidated Financial Statements
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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:
In thousand Euro December 31, 2003 December 31, 2002
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:
In thousand Euro December 31, 2003 December 31, 2002
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
44 Notes to the Consolidated Financial Statements
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)
45Notes to the Consolidated Financial Statements
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:
Year ended Year ended
In thousand Euro December 31, 2003 December 31, 2002
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
46 Notes to the Consolidated Financial Statements
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Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities are made up as follows:
In thousand Euro December 31, 2003 December 31, 2002
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
47Notes to the Consolidated Financial Statements
The receivables from and liabilities to related parties are as follows:
In thousand Euro December 31, 2003 December 31, 2002
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:
In thousand Euro December 31, 2003 December 31, 2002
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:
Year ended Year ended
In thousand Euro December 31, 2003 December 31, 2002
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.
48 Notes to the Consolidated Financial Statements
12
13
49Notes to the Consolidated Financial Statements
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:
In thousand Euro December 31, 2003 December 31, 2002
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:
In thousand Euro December 31, 2003 December 31, 2002
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.
50 Notes to the Consolidated Financial Statements
15
16
51Notes to the Consolidated Financial Statements
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 outstanding on December 31, 2002 2,997,393 14.35
Options expired (177,837) 15.80
Options cancelled (629,074) 13.08
Options outstanding on December 31, 2003 2,190,482 14.60
52 Notes to the Consolidated Financial Statements
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:
Year ended Year ended
In thousand Euro December 31, 2003 December 31, 2002
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:
Year ended Year ended
In thousand Euro December 31, 2003 December 31, 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 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
53Notes to the Consolidated Financial Statements
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.
54 Notes to the Consolidated Financial Statements
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
■ Member of the Supervisory Board for the whole year ended December 31, 2003
■ 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
■ Member of the Supervisory Board for the whole year ended December 31, 2003
■ 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
■ Member of the Supervisory Board for the whole year ended December 31, 2003
■ 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.