interim report (ifrs) for the three-month period ended...

1Letter to the Shareholders

LYCOS Europe N.V.Inter im Repor t ( IFRS)

For the three-month period ended March 31, 2005

interim report

1/2005

The Report to the Shareholders should be read in conjunction with the consolidated financial statements and notes thereto. The report

contains certain forward-looking statements and information relating to LYCOS Europe that are based on the beliefs of LYCOS Europe as

well as assumptions made by and information currently available to LYCOS Europe. These statements include, but are not limited 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 expressions, as they relate to LYCOS Europe or its manage-

ment, are intended to identify forward-looking statements. These statements, which 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. Further, 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 cause actual

results to dif fer materially from those anticipated by these statements.

First three months 2005/2004Three months Three months

ended ended March 31, March 31,

In million Euro 2005 2004 Change(except per share data, change and gross margin) (unaudited) (unaudited)

Total revenues 30.0 23.8 26%

Gross profit 15.2 9.4 62%

Gross margin 51% 39% 28%

Operating loss (8.6) (13.1) 34%

Net loss (8.1) (11.9) 32%

Net loss per share in Euro (0.03) (0.04) 32%

EBITDA (5.7) (9.6) 41%

March 31, March 31, 2005 2004 Change

(unaudited) (unaudited)

Number of employees 825 865 (5)%

Cash, cash equivalents and deposits in million Euro 114.8 155.8 (26)%

Please refer also to the explanatory notes to the key figures, which are displayed on page 41.

key figures

Report to the Shareholders 02

1. Message from the CEO 02

2. Overview 03

3. Financial Results 06

4. The Share 11

5. Employees 12

6. Outlook 13

Unaudited Condensed Consolidated

Interim Financial Statements 14

Notes to the Unaudited Condensed Consolidated

Interim Financial Statements 20

Quarterly Financial Information 41

table of contents

02 Report to the Shareholders | Message from the CEO

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

In the fourth quarter of 2004, LYCOS Europe announced

a cost optimization program to pave the way for prof-

itability for the full year 2006. This program shows the

first positive effects in the first three months of 2005

with a 41 percent EBITDA improvement to EUR (5.7)

million compared with EUR (9.6) million in the reference

period 2004. At the same time, total revenues had a

sound development and went up by 26 percent to EUR

30.0 million compared with EUR 23.8 million in the first

quarter 2004.

After a more detailed look on each of the revenue

streams of LYCOS Europe, the new set-up of the com-

pany becomes evident. LYCOS Europe’s strategic focus

on innovative paid services and shopping laid the

cornerstone for a stable basis of three similarly dimen-

sioned revenue drivers. Revenues from advertising,

paid services & shopping, and Interconnect contributed

to total revenues by 29 percent, 34 percent and 36

percent respectively. LYCOS Europe has therefore suc-

ceeded in building up strong and more than proportio-

nally growing business fields besides advertising, so

that LYCOS Europe of 2005 has a sound basis to meet

the financial goals of the future.

The access business of LYCOS Europe saw a remarkable

revenue growth by 73 percent (Q1/2005 vs. Q1/2004),

which was mainly caused by the integration and con-

solidation of the former Tiscali Sweden access customer

base within Spray Networks, a wholly owned LYCOS

Europe subsidiary. At the same time, LYCOS Europe

realized satisfying growth rates especially on the German

high competitive broadband access market. Telephony

products are developing promising in Sweden and have

been launched in Denmark recently.

LYCOS Europe generated over EUR 10 million with paid

services & shopping in the first quarter of 2005 an

increase by 48 percent. Like in the second half year

2004, the shopping business was a main driver. Two

new shopping portal launches (BuyCentral) in the

United Kingdom and Germany in the first three months

of 2005 are an indicator for this prospering field.

Nevertheless, premium products in webhosting, domain

selling, mail and communities develop smoothly. On

this level, LYCOS Europe is confident to generate EUR

100 million in revenues from paid services and shopping

within the next three years.

In the first quarter 2005, advertising revenues of EUR

8.7 million have been realized and were therewith first

time not the main contributor to total revenues any

more. Two effects account for this planned development:

The strategic focus on paid services & shopping as

well as the investments in the access business led to

an over proportional increase of these two revenue

streams. The reduction in advertising revenues of 15

percent in the comparison period 2004 has been caused

by a reorganization of the local and international sales

units at the beginning of 2005. LYCOS Europe is con-

fident that the new set-up of the sales units combined

with a positive trend in reach figures will lead to an

improved business in the near future.

1m e s s a g e

f r o m t h e c e o

Sound revenue growth in core businesses accompanied by promisingcost optimization effects

03Overview | Report to the Shareholders

2o v e r v i e w

Portal & Communication

LYCOS Europe was able to increase its user base on its

pan-European portals. After having faced a negative

trend in reach in the first half year 2004 culminating in

15.6 percent pan-European reach in June 2004, LYCOS

Europe grew steadily in the second half of 2004 and

continued on the path of growth in the first quarter

2005. With about 22 million unique users and about

20 percent reach, LYCOS Europe has fortified its position

as one of the leading European portal providers.

Many improvements contributed to the growing reach

figures within the first three months of 2005: LYCOS

Europe implemented new reach-driving products such

as LYCOS Crazy Mail, an interactive community tool

that provides a database of fun email attachments.

LYCOS Germany also integrated new content partners

and attracted more users with “news-to-use” for in-

stance in the segments of travel information, financials

and music. The combination of the LYCOS portal with

the travel-community Holidaycheck.de, an expert for

worldwide accommodation ratings, led to an increase

of more than 300.000 unique users. A co-operation

with Laut.de, a German music site with more than

400.000 unique users neck-and-neck to mtv.de, was

started in January 2005. A cross national positive trend

can also be seen on the LYCOS Europe Shopping.

The access business of LYCOS Europe concentrates on

Sweden and Germany. Foremost due to the acquisition

of Tiscali Sweden in the third quarter 2004, LYCOS

Europe’s customer base grew by around 50 percent in

2004. In total, LYCOS Europe’s access customer base

reached about 300.000 on March 31, 2005. Around

85.000 customers were attracted by the LYCOS/Spray

broadband products alone, with a national split of two

thirds on the Swedish market and one third on the

German market.

LYCOS Mail, the multi-million user base communication

platform of LYCOS Europe, introduced a new release

of its “LYCOS Inside” tool. With LYCOS Inside users are

able to integrate the LYCOS Mail account into their

Microsoft Outlook as well as having a LYCOS toolbar

and a desktop icon for direct access to the “LYCOS

virtual hard drive”. Security features e.g. to protect the

users against spam mails and viruses are constantly

being optimized and extended.

Communities

In February 2005, the French community product Cara-

chat was replaced by the enhanced LYCOS Chat. A

large amount of Carachat users were transferred to the

LYCOS Chat platform, making the French LYCOS Chat

the one with the most registered users in all of the

04 Report to the Shareholders | Overview

LYCOS countries. The new system is able to carry

15.000 chatters simultaneously and a new technical

infrastructure will cope with even more registrations.

In comparison to the old Carachat system, LYCOS Chat

brings state-of-the-art security tools, entertainment,

design and features to the French chatters.

In January 2005 an exclusive co-operation with Afton-

bladet, Sweden’s largest tabloid newspaper, and Spray

Date and Spray Mail was launched. Spray Date and

Spray Mail took over the existing dating and mail cus-

tomer bases from Aftonbladet. Part of the co-operation

are also fixed placements, banners, web TV campaign

as well as editorial placements in the printed newspaper.

Love@LYCOS is also available on mobile phones in

many European countries – LYCOS Europe co-operates

in the mobile business with Vodafone (Germany, Sweden),

KPN (Netherlands), Halebop (Sweden) and SFR (France)

and intends to widen these activities to other countries

and other products such as the LYCOS Chat in the near

future.

Hosting & Domain Names

In order to strengthen its webhosting business, LYCOS

Europe developed the LYCOS Partnershop, a reseller

network in which affiliated online shops distribute

LYCOS Europe’s premium hosting packages as well as

other LYCOS premium products. After its successful

launch in the Netherlands, United Kingdom and France

in 2004, the German LYCOS Partnershop was introduced

in February 2005. LYCOS Partnershop offers its affiliates

a variety of opportunities such as attractive provisions

for each new customer, a dedicated support team,

advertising brochures, search engine advertising and

much more.

In January 2005, LYCOS Webhosting added 20 more

scripts to the LYCOS OneClickSite which is the fast and

easy solution for the installation of dynamic contents

on any website. With this innovative product which was

first introduced in October 2004 novice homepage

builders as well as experienced users get an easy-to-use

tool to install PHP scripts ranging from web logs,

message boards, picture galleries, and content manage-

ment systems to complete portal and e-business solu-

tions without any HTML knowledge.

In March 2005, LYCOS Webhosting was appointed “Best

Webhoster of the month” by the experts of renowned

Dutch “Linux Webhosting”. The jury stated that in com-

parison to most of the competitors LYCOS Webhosting

has a unique selling point in software applications that

can easily be installed without in-depth technical know-

how. LYCOS Webhosting is therefore “a must for small,

medium and large websites”, the jury says. After having

generated the second largest growth rates in the world-

wide hosting market in 2004 (source: Netcraft), this

award demonstrates the successful development of the

LYCOS Webhosting convincing product range.

05Overview | Report to the Shareholders

Since March 2005, the LYCOS Webhosting system has

been completely linked to the united-domains registry

entry and technical infrastructure. This means, that

every new domain registration ordered within the LYCOS

portals is automatically being handled by united-

domains itself instead of third parties. united-domains

was acquired by LYCOS Europe in 2004 and is a well

established domain registrar for private and corporate

customers. To date, about 450.000 domains names

are being administered by united-domains.

united-domains also kept on expanding its business by

adding more ccTLDs (country code Top Level Domains)

to its portfolio. The introduction of .in-domains as one

of the first registrars after the liberalisation of the up-

and-coming Indian domain market in February 2005 for

example showed very promising results and incoming

orders for united-domains.

Shopping

In January 2005, Pangora, a provider for product search

technology on the Internet and the largest operator of

shopping portals in Germany and fully owned subsidiary

of LYCOS Europe, signed a new co-operation with

German Internet provider 1&1. Chosen as the supplier

for the newly introduced 1&1-portal in terms of shop-

ping expertise, Pangora provides the 1&1 portal users

with a new shopping channel including 700.000 products

and an easy-to-use search tool.

In the first quarter of 2005, LYCOS Europe launched

with “BuyCentral” a new shopping portal not only on

the British but also on the German market. BuyCentral

is one of the leading shopping portals in France and

Italy already and has been acquired by LYCOS Europe

in 2004. With the motto “Buy better. Buy central.”, the

design and structure of BuyCentral are focussed on the

basic needs: simplicity, speed and value for the con-

sumer. The straightforward user experience helps online

shoppers to find the most appropriate product at the

best price, very quickly. Users can either enter a search

for the desired product or browse for the desired offer

in the main categories such as “Electrical Goods”,

“Books”, “Computers & Games” or “Film & Music”. In

total, BuyCentral generates around one million unique

users per month (source: Nielsen Netratings, January

2005). The search technology behind the portals is

developed by LYCOS Europe’s fully-owned subsidiary,

Pangora, which offers complete shopping solutions for

portals and other leading destination sites.

In March 2005, the new Pangora parameter search was

launched on the German portal eVita. Users are enabled

to compare different products via parameters and get

an overview of the relevant product prices. This state-

of-the-art technology was first introduced by Pangora at

the end of 2004 and will be rolled out to other large

portals and countries in the future. Besides implement-

ing the new parameter search, eVita got a completely

new design including an enhanced menu prompt. eVita

is the former eCommerce portal of the German Post

and was acquired by LYCOS Europe in 2002. It covers

around 3.5 million products and also includes job offers.

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

Report to the Shareholders | Financial Results06

Pro forma

During the year 2004, LYCOS Europe acquired united-

domains AG, a German company which specializes in

worldwide domain registration, Pangora SAS (previously

BuyCentral SAS), a French company operating shopping

platforms in France and Italy, and by its Swedish sub-

sidiary Spray Network AB, Spray Telecom Network AB

(previously Tiscali AB), a Swedish Internet communication

company providing broadband and narrowband access

for consumers and business. The following table presents

selected financial information of LYCOS Europe for the

year 2005, as well as for the year 2004, on an unaudited

pro forma basis, as if the acquisitions during the year

2004 would had occurred on January 1, 2004.

During the year 2005, LYCOS Europe succeeded in

reducing further its dependency on the advertising

business. Revenues from paid services and shopping

showed substantial growth rates and mirrored LYCOS

Europe’s enhanced efforts to extend its paid services

offer. Paid services and shopping contributed 34 per-

cent and interconnect 36 percent to LYCOS Europe’s

total revenues in the period ended March 31, 2005.

Amounting to EUR 30.0 million for the three months

ended March 31, 2005, LYCOS Europe’s revenues in-

creased by 26 percent compared to the three months

ended March 31, 2004. Adjusted for the group compa-

nies which were acquired in 2004, revenues increased

by 7 percent.

07Financial Results | Report to the Shareholders

Pro forma Pro formathree months three months

ended ended March 31, March 31,

In thousand Euro 2005 2004 Change(except share data) (unaudited) (unaudited)

Revenues 30,010 27,978 7%

Gross profit 15,219 10,992 38%

Gross margin 51% 39% 29%

Net loss (8,069) (11,731) 31%

Net loss per share basic and diluted in Euro (0.03) (0.04) 31%

EBITDA (5,653) (9,415) 40%

Revenues Actuals Actualsthree months three months

ended endedMarch 31, March 31,

2005 2004 ChangeIn thousand Euro (unaudited) (unaudited)

Advertising 8,686 10,198 (15)%

Paid services and shopping 10,083 6,824 48%

Interconnect 10,907 6,304 73%

Licensing and other 334 464 (28)%

Total revenues 30,010 23,790 26%

Pro forma Pro formathree months three months

ended endedMarch 31, March 31,

2005 2004 ChangeIn thousand Euro (unaudited) (unaudited)

Advertising 8,686 10,198 (15)%

Paid services and shopping 10,083 6,974 45%

Interconnect 10,907 10,308 6%

Licensing and other 334 498 (33)%

Total revenues 30,010 27,978 7%

08 Report to the Shareholders | Financial Results

Advertising revenues for the three months ended March

31, 2005, experienced a decline of 15 percent, compared

to three months ended March 31, 2004. The decline in

advertising revenues has been caused by a reorganization

of the local and international sales units at the begin-

ning of 2005.

Paid services and shopping for the three months ended

March 31, 2005, increased by 48 percent compared to

the three months ended March 31, 2004. The increase

of paid services and shopping is the result of the con-

tinuous growth in existing products. Adjusted for the

acquisitions of united-domains and Pangora SAS paid

services and shopping revenues increased by 45 percent.

Interconnect revenues for the three months ended

March 31, 2005, increased by 73 percent compared to

the three months ended March 31, 2004. Adjusted for

the acquisition of Spray Telecom Network interconnect

revenues increased by 6 percent.

Barter revenues represented less than 5 percent of net

group revenues during those periods.

Cost of Revenues

Cost of revenues increased from EUR 14.4 million for

the three months ended March 31, 2004, to EUR 14.8

million for three months ended March 31, 2005, even

though revenues increased by EUR 6.2 million. Therefore

the gross margin improved by 28 percent especially

as a result of continuous cost reduction efforts. The

increase in costs of revenues mainly relates to the

acquisition of Spray Telecom Network. Adjusted for

acquisitions of the group companies cost of revenues

decreased by 13 percent.

Sales and Marketing

Sales and marketing expenses amounted to EUR 7.9

million for the three months ended March 31, 2005, which

is a decrease of 9 percent compared to three months

ended March 31, 2004. The decrease was due to cost

reductions as a result of the restructuring program

announced in 2004 and improved marketing plans.

09Financial Results | Report to the Shareholders

General and Administrative

General and administrative expenses increased from

EUR 7.3 million for the three months ended March 31,

2004 to EUR 8.1 million for three months ended March

31, 2005, mainly caused by costs incurred in the com-

panies that were acquired in 2004 and additional ad-

ministration of these businesses. Adjusted for acquisitions

of the group companies general and administrative

expenses decreased by 3 percent.

Research and Development

Cost incurred for research and product development

amounted to EUR 5.4 million for three months ended

March 31, 2005, compared to EUR 5.9 million for the

three months ended March 31, 2004. This decrease of

8 percent is primarily due to the shift of research and

development efforts from LYCOS Europe’s western

European locations to Armenia resulting in lower salary

expenses and LYCOS Europe’s focus on the reduction

of costs by performing most of the development work

internally.

Restructuring Charges

On December 3, 2004, LYCOS Europe announced a far

reaching program aimed at increasing its competitiveness

on the market. LYCOS Europe plans yearly cost reduc-

tions of around EUR 30 million with full impact in 2006.

These cost reductions will be mainly realized due to

merging of sales and support areas, the ongoing set-up

of the location in Yerevan/Armenia as well as the central

management of profit centers and portal areas. About

one third of the cost optimizations account for personnel

costs. As a result, LYCOS Europe incurred additional

EUR 1.8 million of restructuring costs in the three

months ended March 31, 2005.

Amortization of Intangibles

Amortization expenses amounting to EUR 0.8 million

for the three months ended March 31, 2005 are mainly

related to amortization of intangible assets excluding

goodwill identified in the purchase price accounting of

united-domains AG, Pangora SAS and Spray Telecom

Network AB.

10 Report to the Shareholders | Financial Results

EBITDA

EBITDA is not a measure recognized by IFRS. 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 41 for LYCOS Europe’s definition of the EBITDA

result.

The EBITDA result amounted to EUR (5.7) million for

the three months ended March 31, 2005, which is

an improvement of 41 percent compared to the three

months ended March 31, 2004 (EUR (9.6) million).

Adjusted for the group companies, which were acquired

in 2004, EBITDA increased by 40 percent.

Financing

The total amount for cash and cash equivalents, short-

term and long-term deposits decreased from EUR 121.7

million on December 31, 2004, to EUR 114.8 million on

March 31, 2005. During the three months ended March

31, 2005, LYCOS Europe used EUR 5.8 million cash in

operating activities and an amount of EUR 1.0 million

was used for the acquisition of long-term assets in-

cluding an additional engagement in Seznam, a Czech

Internet company, where LYCOS Europe is already

engaged in since October 2000. This investment is

accounted for at cost.

LYCOS Europe focuses on reducing its operating losses

and will continue to do so, expecting no additional

funding requirement until becoming cash-flow positive.

11The Share | Report to the Shareholders

Shareholder Structure

LYCOS Europe’s legal shareholder structure as of March

31, 2005, is as follows: LYCOS Europe Holding Corpo-

ration (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%,

including Talpa Capital B.V., a company controlled by

the Dutch financial investor John H. H. de Mol, as well

as including Lyxor Asset Management, a company con-

trolled by the French Société Générale Group).

As of March 31, 2005, the total number of shares out-

standing is 311,576,344, excluding the treasury shares.

Stock Price Performance

In the first three months of 2005, LYCOS Europe’s stock

price increased from EUR 0.66 on January 3, 2005, to

EUR 0.78 on March 31, 2005, an increase of about 18

percent. LYCOS Europe’s stock price clearly outperformed

the Technology All Share Index in the first quarter of

2005. The Technology All Share Index gained only 2,5

percent in the same period of time.

4t h e s h a r e

130

125

120

115

110

105

100

95

Perc

ent

Technology All Share

LYCOS Europe N.V.

Date

February March

2005

LYCOS Europe’s Stock Price Performance Compared to Technology All Share

12 Report to the Shareholders | Employees

The total number of employees decreased from 905 as

per December 31, 2004 to 825 as per March 31, 2005.

The decrease is mainly the result of the latest restruc-

turing program.

Management Change

The Management Board of LYCOS Europe N.V. appointed

Lydia Lux-Schmitt (39) as the new Chief Financial Officer

of LYCOS Europe with effect from February 10, 2005.

Lydia Lux-Schmitt succeeded Dr. Ralf Struthoff as CFO

on that date. As announced earlier, Dr. Ralf Struthoff

left the company after four and a half years at the end

of January 2005.

5e m p l o y e e s

13Outlook | Report to the Shareholders

The results of the first quarter 2005 exactly pinpoint the

way LYCOS Europe is heading for to reach its financial

goals – profitability for the full year 2006. The cost

optimization program that was announced at the end

of 2004 and that will be fully implemented one year

later already shows promising effects with a significant

reduction of the losses compared to last year’s first

quarter. Lycos Europe is confident, due to a higher cost

efficiency mainly achieved by the reduction of data cen-

ters, the standardization of technical infrastructure and

the centralization of organizational units and services,

to show steadily improved results for LYCOS Europe in

2005. It becomes apparent that LYCOS Europe has set

the course for turnaround by the actions taken.

At the same time, the expansion in revenues especially

with paid services & shopping and interconnect show

a good development. And even though LYCOS Europe

still faces a decline in advertising revenues on a planned

basis in the first quarter, the company is confident to

raise the momentum through a newly formed sales

force which combines local and international sales in

one unit.

Within the next months we will see improvements on

our product side, be it through new billing solutions,

through better access products, through enhanced fea-

tures and tools or through content activities. All these

actions will help LYCOS Europe in order to keep on

growing in reach, to gain more customers on a free

and on a paid for basis and to be more attractive as

an advertising platform. They will help to make the

LYCOS Europe business model a successful and pros-

pering one.

Haarlem, The Netherlands

April 22, 2005

Christoph Mohn, CEO

6o u t l o o k

u n a u d i t e d c o n d e n s e d c o n s o l i d a t e di n t e r i m f i n a n c i a l s t a t e m e n t s ( i f r s )

f o r t h e p e r i o d e n d e d m a r c h 3 1 , 2 0 0 5

lycos europe n.v.

14 Unaudited Condensed Consolidated Interim Financial Statements

15Unaudited Condensed Consolidated Interim Financial Statements

LYCOS Europe N.V.

unaudited condensed consolidated interim balance sheets

Notes March 31, 2005 December 31, 2004

In thousand Euro (unaudited)

Assets

Property, plant and equipment 4 5,640 6,687

Goodwill 5,6 14,397 14,470

Intangible assets 5,6 15,892 16,957

Deferred tax assets 7 152 835

Long-term deposits 8 8,579 20,535

Other non-current assets 2,297 2,192

Total non-current assets 46,957 61,676

Cash and cash equivalents 8 91,767 72,075

Short-term deposits 8 14,454 29,054

Accounts receivable, net 18,042 18,889

Accounts receivable, net due from related parties 9 46 124

Prepaid expenses and other current assets 10 12,858 12,244

Total current assets 137,167 132,386

Total assets 184,124 194,062

Shareholders’ equity and liabilities

Class AA registered shares 620 620

Class AB registered shares 620 620

Class B ordinary bearer shares 1,883 1,883

Share premium 1,610,191 1,610,191

Treasury shares (2,052) (2,052)

Accumulated deficit (1,473,356) (1,465,287)

Translation reserve 484 223

Total shareholders’ equity 11 138,390 146,198

Deferred revenue 2,052 1,829

Deferred tax liabilities 7 1,306 1,917

Provisions 13 1,282 1,287

Total non-current liabilities 4,640 5,033

Short-term debt 8 79

Accounts payable 9,810 11,593

Accounts payable, due to related parties 9 169 209

Restructuring provisions 13 3,866 3,316

Other short-term liabilities 14 18,566 20,497


Total current liabilities 41,094 42,831

Total liabilities 45,734 47,864

Total shareholders’ equity and liabilities 184,124 194,062

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


LYCOS Europe N.V.

unaudited condensed consolidated interim income statements

Three months Three months

In thousand Euro ended ended

(except share and per share data) Notes March 31, 2005 March 31, 2004

Revenues

Advertising 8,686 10,198

Paid services and shopping 10,083 6,824

Interconnect 10,907 6,304

Licensing and other 334 464

Total revenues 30,010 23,790

Cost of revenues (14,791) (14,400)

Gross profit 15,219 9,390

Sales & marketing expenses (7,927) (8,671)

General & administration expenses (8,082) (7,252)

Research & development expenses (5,396) (5,863)

Other income 17 173 0

Restructuring charges 13 (1,784) (466)

Amortization of intangibles 6 (790) (205)

Total operating expenses (23,806) (22,457)

Loss from operations (8,587) (13,067)

Net financing income 17 636 1,176

Loss before tax (7,951) (11,891)

Income tax expenses 7 (118) (22)

Net loss for the period (8,069) (11,913)

Basic loss per share (Euro) 19 (0.03) (0.04)

Weighted average number of shares outstanding 311,576,344 311,576,344



LYCOS Europe N.V.

unaudited condensed consolidated interim statements of cash flows


ended ended

In thousand Euro Notes March 31, 2005 March 31, 2004

Cash flows from operating activities

Loss before interest and tax (8,587) (13,067)

Adjustments for:

Depreciation and amortization 2,934 3,423

Other non cash movements 68 (246)

Decrease / (increase) in accounts receivable 580 (2,107)

(Increase) / decrease in prepaid expenses

and other current assets (678) 511

Decrease in prepaid expenses and other

non current assets 474 38

Net change in related party operating accounts 38 79

Decrease in accounts payable (1,264) (1,134)

(Decerase) / increase in accrued expenses and

other current liabilities (1,333) 661

Increase in deferred revenue 1,756 462

Decrease in other non current liabilities (600) (92)

Interest income 902 1,445

Income tax (118) (22)

Net cash used in operating activities (5,828) (10,049)

Cash flows from investing activities

Purchases of long-lived assets (958) (1,660)

Net change in short and long-term deposits 26,488 (4,764)

Payments for acquisitions, net of cash acquired 0 (7,224)

Net cash provided / (used) in investing activities 25,530 (13,648)

Cash flows from financing activities

Net change in short-term debt (71) (679)

Net cash provided / (used) in financing activities (71) (679)

Effect of exchange rate changes

on cash and cash equivalents 61 205

Increase / (decrease) in cash and cash equivalents 19,692 (24,171)

Cash and cash equivalents, beginning of the period 72,075 78,330

Cash and cash equivalents, end of the period 8 91,767 54,159



LYCOS Europe N.V.

unaudited condensed consolidated interim statements of shareholders’ equity

Class AA shares Class AB shares Class B shares

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

(except share data) Notes shares H shares H shares H

Balance as of December 31, 2003 62,000,000 620 62,000,000 620 188,300,000 1,883

Translation gain

Net loss

Balance as of March 31, 2004 62,000,000 620 62,000,000 620 188,300,000 1,883

Translation loss

Net loss

Balance as of December 31, 2004 62,000,000 620 62,000,000 620 188,300,000 1,883

Translation loss

Net loss

Balance as of March 31, 2005 11 62,000,000 620 62,000,000 620 188,300,000 1,883



Share Translation Accumulated

premium Treasury shares reserve deficit Total

No. of Amount

H shares H H H H

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

292

(11,913)

1,610,191 (723,656) (2,052) 509 (1,431,724) 180,047

(286)

(33,563)

1,610,191 (723,656) (2,052) 223 (1,465,287) 146,198

261

(8,069)

1,610,191 (723,656) (2,052) 484 (1,473,356) 138,390

20 Notes to the Unaudited Condensed Consolidated Interim Financial Statements

1

LYCOS Europe N.V.Notes to the Unaudited Condensed Consolidated Interim Financial Statements

1. Significant accounting policies

2. Group entities

3. Segment reporting

4. Property, plant & equipment

5. Acquisition and disposal of subsidiaries

6. Goodwill & intangible assets

7. Income tax expenses

8. Cash, cash equivalents and deposits

9. Related party transactions

10. Prepaid expenses & other assets

11. Shareholders’ equity

12. Employee benefits

13. Provisions

14. Other short-term liabilities

15. Contingencies & commitments

16. Personnel expenses

17. Other operating income

18. Net financing costs

19. Loss per share

20. Subsequent events

21. Explanation of transition to IFRS

Significant accounting policies

LYCOS Europe N.V. (“LYCOS Europe” or the “Company” / ISIN NL0000233195) 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 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 registered

office of the Company is in Haarlem, the Netherlands (LYCOS Europe N.V., Richard Holkade 36, 2033 PZ

Haarlem, the Netherlands).

The unaudited condensed consolidated interim financial statements of the Company comprise the Company

and its subsidiaries (together referred to as the “Group”) and the Group’s interest in associates. The financial

statements were authorized for issue by the Management Board of the Company.

a) Statement of compliance

The unaudited condensed consolidated interim financial statements have been prepared in accordance with

International Financial Reporting Standards (IFRSs) and its interpretations adopted by the International

Accounting Standards Board (IASB). Interim financial statements and the notes thereto include the requirements

21Notes to the Unaudited Condensed Consolidated Interim Financial Statements

of IAS 34. These are the Group’s first unaudited condensed consolidated interim financial statements for

part of the period covered by the first IFRS annual financial statements and IFRS 1 has been applied.

An explanation of how the transition to IFRS has affected the reported financial position and shareholders’

equity is provided in note 21. The unaudited condensed consolidated interim financial statements do not

include all of the information required for full annual finacial statements.

b) Basis of preparation

The financial statements are presented in Euro, rounded to the nearest thousand. The accounting policies set

out below have been applied consistently to all periods presented in these unaudited condensed consolidated

interim financial statements. These unaudited condensed consolidated interim financial statements have

been prepared on the basis of IFRSs in issue that are effective or available for early adoption at the Group’s

first IFRS annual reporting date, December 31, 2005. Based on these IFRSs, the Management Board has

made assumptions about the accounting policies expected to be adopted when the first IFRS annual finan-

cial statement are prepared for the year ended December 31, 2005.

The IFRSs that will be effective or available for voluntary early adoption in the annual financial statements

for the period ended December 31, 2005 are still subject to change and to issue of additional interpretations

and therefore cannot be determined with certainty. Accordingly, the accounting policies for that annual

period that are relevant to these unaudited condensed consolidated interim financial statements will be

determined only when the first IFRS financial statements are prepared at December 31, 2005.

The preparation of financial statements in conformity with IFRS requires management to make judgments,

estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities,

income and expenses. The estimates and associated assumptions are based on historical experience and

various other factors that are believed to be reasonable under the circumstances, the results of which form

the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent

from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates

are recognized in the period in which the estimate is revised if the revision affects only that period or in the

period of the revision and future periods if the revision affects both current and future periods.

c) Basis of consolidation

The unaudited condensed consolidated interim financial statements of the Company include all of its controlled

subsidiaries. Control exists when the Company has the power directly, or indirectly, to govern the financial

and operating policies of an entity so as to obtain benefits from its activities. The financial statements of

subsidiaries are included in the unaudited condensed consolidated interim financial statements from the

date that control commences until the date that control ceases.

Intragroup balances and any unrealized gains and losses or income and expenses arising from intragroup

transactions, are eliminated in preparing the unaudited condensed consolidated interim financial statements.

Unrealized gains arising from transactions with associates are eliminated to the extent of the Group’s inter-

est in the entity. Unrealized losses are eliminated in the same way as unrealized gains, but only to the

extent that there is no evidence of impairment.


d) Foreign currency

Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the trans-

action. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are

translated to Euro at the foreign exchange rate ruling at that date. Foreign exchange differences arising on

translation are recognized in the income statement.

The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on

consolidation, are translated to Euro at foreign exchange rates ruling at the balance sheet date. The revenues

and expenses of foreign operations are translated to Euro at rates approximating to the foreign exchange

rates ruling at the dates of the transactions. Foreign exchange differences arising on retranslation are recognized

directly in a separate component of equity.

e) Property, plant & equipment

Tangible assets are stated at costs less accumulated depreciation and impairment losses. Where parts of an

item of property, plant and equipment have different remaining useful lives, they are accounted for as separate

items of property, plant and equipment.

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

all of the risks and rewards of the equipment. Risks and rewards are maintained by the lessee if among

others the present value of the minimum lease payments amounts to at least substantially all of the fair

value of the leased asset. Lease equipment, which are classified as financial 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.

Depreciation is charged to the income statement on a straight line basis over the estimated useful lives of

tangible assets. The estimated useful lives are as follows:

Computers : 2–3 years

Furniture & Fixtures : 3–10 years

Other tangible fixed assets : 3–5 years

f) Goodwill & intangible assets

All business combinations are accounted for by applying the purchase method. Goodwill represents amounts

arising on acquisition of subsidiaries. In respect of business acquisitions that have occurred since January 1,

2004, goodwill represents the difference between the cost of the acquisition and the fair value of the net

identifiable assets acquired. In respect of acquisitions prior to this date, goodwill is included on the basis of

its cost recorded under previous GAAP. According to exemptions provided by IFRS 1 the classification and

accounting treatment of business combinations that occurred prior to January 1, 2004 has not been reconsidered

in preparing the Group’s opening IFRS balance sheet at January 1, 2004. Goodwill is stated at cost less any

accumulated impairment losses. Goodwill is allocated to a group of cash-generating units and is tested

annually for impairment.

Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge

and understanding, is recognized in the income statement as an expense as incurred.


Expenditure on development activities, enhancement of the Company’s website and associated systems, is

capitalized if the product or process is technically and commercially feasible and the Group has sufficient

resources to complete development. The expenditure capitalized includes external direct costs of material

and services, payroll costs for employees devoting time to software projects during the application development

stage and indirect costs for rent and office computer usage. Other development costs are recognized in the

income statement as an expense as incurred. Capitalized development costs are stated at cost less accu-

mulated amortization and impairment losses.

Other intangible assets that are acquired by the Group are stated at cost less accumulated amortization and

impairment.

Amortization is charged to the income statement on a straight-line basis over the estimated useful lives of

intangible assets unless such lives are indefinite. Goodwill and intangible assets with an indefinite useful

life are systematically tested for impairment. Other intangible assets are amortized from the date they are

available for use. The estimated useful lives are as follows:

Licenses & other rights : 1–10 years

Trademark licenses : 5–10 years

Capitalized development expenses : 2 years

g) Impairment

The carrying amounts of the Group’s assets, other than deferred tax assets, are reviewed whenever events

or circumstances indicate that the carrying amount may not be recoverable.

For goodwill, intangible assets that have an indefinite useful life and intangible assets that are not yet available

for use, the recoverable amount is estimated annually. An impairment loss is recognized whenever the

carrying amount of an asset or its group of cash-generating unit exceeds its recoverable amount. Impairment

losses are recognized in the income statement. Impairment losses recognized in respect of a group of cash-

generating units are allocated first to reduce the carrying amount of any goodwill allocated to group of

cash-generating units (group of units) and then, to reduce the carrying amount of the other assets in the

unit (group of units) on a pro rata basis.

The recoverable amount is the greater of selling price and value in use. In assessing value in use, the estimated

future cash flows are discounted to their present value using a pre-tax discount rate that reflects current

market assessments of the time value of money and the risks specific to the asset. For an asset that does

not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating

unit to which the asset belongs. The recoverable amount of the Group’s receivables carried at amortized

cost is calculated as the present value of estimated future cash flows, discounted at the original effective

interest rate.

An impairment loss in respect of goodwill is not reversed. In respect of other assets, an impairment loss

is reversed if there has been a change in the estimates used to determine the recoverable amount. An

impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying

amount that would have been determined, net of depreciation or amortization, if no impairment loss had

been recognized.


h) Income tax

Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognized in

the income statement.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or sub-

stantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous

years.

Deferred tax is provided using the balance sheet liability method, providing for temporary differences between

the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for

taxation purposes. The following temporary differences are not provided for: goodwill not deductible for tax

purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, and

differences relating to investments in subsidiaries to the extent that they will probably not reverse in the

foreseeable future. The amount of deferred tax provided is based on the expected manner of realization or

settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted

at the balance sheet date.

A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be

available against which the asset can be utilized. Deferred tax assets are reduced to the extent that it is no

longer probable that the related tax benefit will be realized.

i) Cash and cash equivalents

Cash and cash equivalents comprise cash balances and call deposits. The Company invests its excess cash

in debt instruments of high-quality banks and high quality other corporate issuers. Deposits with the

remaining 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.

j) Trade and other receivables

Trade and other receivables are stated at their cost less impairment losses. Accounts receivable are typically

unsecured and are derived from revenues earned from customers primarily located in Europe. The Company

performs ongoing credit evaluations of its customers and maintains reserves for potential credit losses.

k) Employee benefits

The share option programs of the Group allow Group employees to acquire shares of the Company. No

compensation cost for stock options were recognized for stock options granted with an exercise price at or

above fair market value as a result of adoption of exemption rules provided in IFRS 1.

l) Financial instruments

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

primarily of cash and cash equivalents, and accounts receivable. Cash and cash equivalents are recognized

initially at cost. Subsequent to initial recognition, they are stated at fair value. The gain or loss on remea-

surement to fair value is recognized immediately in profit or loss.


m) Provisions

A provision is recognized in the balance sheet when the Group has a legal or constructive obligation as a

result of a past event, it is probable that an outflow of economic benefit will be required to settle the obli-

gation and a reliable estimate can be made of the amount of the obligation. When the effect of the time

value of money is material, the amount of the provision is discounted by using a pre-tax rate that reflects

current market assessments.

A provision for restructuring is recognized when the Group has approved a detailed and formal restructuring

plan, and the restructuring has either commenced or has been announced publicly. Future operating costs

are not provided for.

n) Trade and other payables

Trade and other payables are stated at their cost.

o) Revenue

The Group generates revenues due to rendering of services. Revenues comprise of Advertising, Paid service,

Shopping, Interconnect, Licensing and Other revenues.

Advertising revenues

Revenues from the sale of 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.

Paid service and shopping revenues

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 as from commissions of the sale of goods on the internet.

Interconnect revenue

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 is recorded as revenue from

providing internet access when the criteria as described above are not met.

Licensing & other revenues

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.

Revenue from services rendered is recognised in the income statement in proportion to the stage of completion

of the transaction at the balance sheet date. The stage of completion is assessed by reference to surveys

of work performed. No revenue is recognised if there are significant uncertainties regarding recovery of the

consideration due or associated costs.


Revenues from barter transactions have been valued based upon similar cash transactions according to SIC

31. Advertising revenues from barter transactions are recognized similar to advertising revenues. During the

period ended March 31, 2005, and 2004, revenues from barter transactions have been less than 5 percent

of total revenues.

p) Government grants

Government grants are recognized in the balance sheet initially as deferred income when there is reasonable

assurance that it will be received and that the Group will comply with the conditions attaching to it. Grants

that compensate the Group for expenses incurred or costs of an asset are recognized as other operating

income in the income statement.

q) Expenses

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, 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.

Costs other than costs of revenues are allocated using a functional split to Sales & Marketing, General &

Administrative and Research & Development expenses.

r) Segment reporting

A segment is a distinguishable component of the Group’s business that is engaged in providing products

(business segment) or in providing products or services within a particular economic environment (geo-

graphical segment), which is subject to risks and rewards that are different from those of other segments.

In order to identify the Group’s reporting segment, the dominant source and nature of an enterprise's risks

and returns should be selected. The risks and rates of return of LYCOS Europe NV are affected both by

differences in geographical areas and business units. Internal reporting of the group is based as well on

regional structures and business unit approach.

Management believes that choosing geographical segments as primary segment reflects best the current risk

approach of the Group. Business units were chosen as a secondary segment.

Geographic segments are determined by the country in which each legal entity is operating. Business segments

are split into the business units Portal/Access/Communication, Webhosting, Communities and Shopping.


Group entities

Subsidiaries of LYCOS Europe N.V. included in the consolidated financial statements are as follows:

(Direct and indirect holdings as of March 31, 2005)

Company Ownership Country of incorporation

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

Dopoly GmbH 100 % Germany

Home SE AB 100 % Sweden

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 % Netherlands

LYCOS France SARL 100 % France

LYCOS Italia Srl 100 % Italy

LYCOS Netherlands BV 100 % Netherlands

LYCOS Pro S.L. 100 % Spain

LYCOS UK Ltd 100 % United Kingdom

Odina Sverige AB 100 % Sweden

Pangora SAS 100 % France

Pangora Italia Srl 100 % Italy

Spray Network AB 100 % Sweden

Spray Network GmbH (in liquidation) 100 % Germany

Spray Telecom Network AB 100 % Sweden

Spray Network Services AB 100 % Sweden

Spray Trademark Holding AB 100 % Sweden

united-domains AG 100 % Germany

Yarps International AB (merged with Spray Network AB) 100 % Sweden

Segment reporting

Segment information is presented in respect of the Group’s geographical segments. The primary format,

geographical segments, is based on the Group’s management and internal reporting structure. Inter-segment

pricing is determined on an arm’s length basis. Segment results include items directly attributable to a segment

as well as those that can be allocated on a reasonable basis.

2

3


Geographical Segments

Germany Sweden France United Kingdom

Three Three Three Three Three Three Three Three

months months months months months months months months

ended ended ended ended ended ended ended ended

March March March March March March March March

31, 31, 31, 31, 31, 31, 31, 31,

In thousand Euro 2005 2004 2005 2004 2005 2004 2005 2004

Revenues 12,152 10,872 11,759 6,754 2,542 1,862 965 1,321

Revenues from

inter-segment

transactions 5,889 7,939 1,882 2,245 3,183 2,588 2,173 1,179

Net profit / loss

for the period* (4,847) – (578) – (1,950) – (298) –

Other regions &

Denmark eliminations Consolidated

Three Three Three Three Three Three

months months months months months months

ended ended ended ended ended ended

March March March March March March

31, 31, 31, 31, 31, 31,

In thousand Euro 2005 2004 2005 2004 2005 2004

Revenues 1,574 1,358 1,018 1,623 30,010 23,790

Revenues from

inter-segment

transactions 1,217 1,401 (14,344) (15,352) 0 0

Net profit / loss

for the period* (787) – 391 – (8,069) (11,913)

* Net profit / loss per geographic region is not readily available for previous interim periods

Property, plant & equipment

Property, plant and equipment are stated at cost less accumulated depreciation and if applicable any impair-

ment charge, including equipment under capital lease. They comprise of:

4


Furniture & Other tangible

In thousand Euro Computers fixtures fixed assets Total

Cost

Balance as of December 31, 2004 31,915 4,471 20 36,406

Balance as of March 31, 2005 26,331 4,412 7 30,750

Depreciation and impairment loss

Balance as of December 31, 2004 (27,092) (2,621) (6) (29,719)

Balance as of March 31, 2005 (22,388) (2,722) 0 (25,110)

Carrying amounts

Balance as of December 31, 2004 4,823 1,850 14 6,687

Balance as of March 31, 2005 3,943 1,690 7 5,640

As a result of the 2004 restructuring program, tangible long-lived assets were subject to an impairment

review. The total impairment charge amounts to EUR 2.1 million for the year ended December 31, 2004, and

is mainly related to servers and storage systems which can no longer be used.

Acquisition and disposal of subsidiaries

On January 13, 2004, LYCOS Europe N.V. acquired all shares in united-domains AG, a German company which

specializes in worldwide domain registration. LYCOS Europe N.V. also agreed to pay a consideration to the

sellers using a formula based upon the number of new .eu domain registrations. The purchase price including

the consideration amounting to EUR 1.2 million, expected to be paid during 2006, is EUR 7.1, resulting in

goodwill of EUR 5.3 million and other intangibles of EUR 1.2 million including the effect of deferred taxes.

Total revenues, net income and total assets of united-domains for the year ended and as of December 31,

2003, were EUR 3.5 million, EUR 0.2 million and EUR 1.0 million, respectively.

On January 30, 2004, LYCOS Europe N.V. acquired all shares in Pangora SAS (previously BuyCentral SAS),

a French company operating shopping platforms in France and Italy. Pangora SAS aggregates data of online

sellable goods and services and makes them searchable on its own websites or on third parties’ websites.

The purchase price was EUR 4.5 million, resulting in goodwill of EUR 3.7 million and other intangibles

including the effect of deferred taxes of EUR 0.8 million. Included in the purchase price of EUR 4.5 million

was a conditional consideration of EUR 1.5 million to the sellers, which was paid on September 24, 2004.

Total revenues, net income and total assets of Pangora 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.

On August 30, 2004, LYCOS Europe announced that it has entered into an agreement to acquire all shares

in Spray Telecom Network AB (previously Tiscali AB), a Swedish Internet communication company (previously

called Tiscali AB), providing broadband and narrowband access for consumers and business applications as

well as innovative communications services and content, by its Swedish subsidiary Spray Network AB. The

acquisition also includes Spray Telecom Network Sweden’s Internet and mail-provider Home SE AB and

Odina Sverige AB. The purchase price of EUR 13.0 million was paid on September 29, 2004, after approval

of the Swedish Competition Authority. The preliminary purchase price allocation resulted in goodwill of EUR

5


5.4 million and other intangibles of EUR 4.6 million including the effect of deferred taxes and accounts

receivable of EUR 3.3 million, other assets of EUR 3.0 million, accounts payable of EUR (2.0) million and

other liabilities of EUR (1.3) million. The initial and preliminary purchase price allocation was adjusted as a

result of an error correction in the assets assumed at purchase date. LYCOS Europe is currently renegotiating

with Tiscali as the correction relates to an incorrect balance sheet for the year ended December 31, 2003.

The B2B business of Spray Telecom Network AB was sold in December 2004 at no gain or loss. Total rev-

enues, net result and total assets of Spray Telecom Network AB consolidated for the year ended and as of

December 31, 2003, were EUR 14.1 million, EUR (0.4) million and EUR 8.8 million, respectively. The financial

statements of Spray Telecom Network AB have been included in the LYCOS Europe’s consolidated financial

statements as of September 29, 2004.

Goodwill & intangible assets

The classification and accounting treatment of business combinations that occurred prior to January 1, 2004

has not been reconsidered in preparing the Group’s opening IFRS balance sheet at January 1, 2004. Goodwill

is stated at cost less any accumulated impairment losses.

In the second quarter 2004, LYCOS Europe performed an impairment review, which was focused on intangible

assets and goodwill. The impairment review performed did not indicate that an additional impairment was

required in the year 2004.

Amortization expenses, which amounted to EUR 1.7 million and EUR 1.2 million for the period ended March 31,

2005, and March 31, 2004, respectively are included in all the main expense categories within the income

statements.

Licenses Capitalized

and other development Purchased

In thousand Euro Goodwill rights expenses software Total

Cost

Balance as of December 31, 2004 14,470 56,915 8,343 3,210 82,938

Balance as of March 31, 2005 14,397 56,807 8,728 3,426 83,358

Amortization and impairment loss

Balance as of December 31, 2004 0 (42,938) (5,383) (3,190) (51,511)

Balance as of March 31, 2005 0 (45,046) (5,835) (2,188) (53,069)

Carrying amounts

Balance as of December 31, 2004 14,470 13,977 2,960 20 31,427

Balance as of March 31, 2005 14,397 11,761 2,893 1,238 30,289

Spray Telecom Network AB was acquired by Spray Network AB, a Swedish subsidiary of Lycos Europe NV.

Goodwill accounted for in the purchase price accounting is booked in the functional currency of Spray

Network AB, SEK. Above displayed movements of goodwill are related to exchange rate differences.

6


7Income tax expenses

Income taxes recognized comprise as follows:


ended ended

March 31, March 31,

In thousand Euro 2005 2004

Current income tax expenses (19) 0

Income tax expenses related to

deferred tax assets/liabilities (99) (22)

Income tax expenses (118) (22)

Deferred tax assets and liabilities are summarized as follows:

March 31, December 31,

2005 2004


Deferred tax assets

Loss carry-forward 219,328 218,570

Intangible assets 6,209 6,371

Valuation allowance (223,819) (223,095)

Netting (1,566) (1,011)

Total deferred tax assets 152 835

Deferred tax liabilities

Tangible assets 199 346

Intangible assets 2,673 2,582

Netting (1,566) (1,011)

Total deferred tax liabilities 1,306 1,917

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 not be realized. The ultimate realization of deferred tax

assets is dependent upon the generation of future taxable income during the periods in which those temporary

differences become deductible. Management considers the scheduled reversal of deferred tax liabilities,

projected future taxable income, and tax planning strategies in making this assessment.

On March 31, 2005, and December 31, 2004, the Company recorded operating loss carry forward of approxi-

mately EUR 638.1 million and EUR 630.5 million, respectively. Substantially all of the loss carry forward have

an indefinite life.


Cash, cash equivalents and deposits

Cash, cash equivalents and deposits are made up of the following:


2005 2004


Cash and cash equivalents 91,767 72,075

Deposits due within one year 14,454 29,054

Long-term deposits

Deposits due after one year through five years 8,579 20,535

Total 114,800 121,664

An amount of EUR 12.3 million is restricted in use as of March 31, 2005, and December 31, 2004, respec-

tively. An amount of EUR 5.8 million and EUR 8.4 million of the restricted cash is non-current as of March

31, 2005, and December 31, 2004, respectively.

Related party transactions

The Company engages in various related party transactions with both Terra Networks SA and Bertelsmann

AG, which include revenue and expense transactions. The transactions with Bertelsmann are booked on

accounts with Bertelsmann and generally settled within thirty days of the relevant transaction. The billing

rates are set at rates, which are believed to approximate fair value.

The LYCOS tradename is being licensed from a third party by LYCOS, Inc. Following the disposal of LYCOS,

Inc. by Terra Networks SA, LYCOS Europe N.V. is currently in negotiations as it relates to the licensing of the

LYCOS tradename.

Prepaid expenses & other current assets

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


2005 2004


VAT receivable 507 443

Rent deposits and prepayments 589 586

Prepaid expenses current 2,227 1,920

Accrued income 6,812 6,912

Other short-term receivables 2,723 2,383

Total 12,858 12,244

8

9

10


Shareholder’s 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 share-

holders, 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 March 31, 2005, and December 31, 2004. These shares are owned by the LYCOS

Europe Holding Group, a company fully owned by Terra Networks SA.

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 March 31, 2005, and December 31, 2004. 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 are

issued on March 31, 2005, and December 31, 2004, respectively, and 187,576,344 are outstanding on March

31, 2005, and December 31, 2004, 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 September 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.

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.

11


Employee benefits

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.

These options were granted to the employees as an additional incentive to the usual salary payments.

Intention of the management was to achieve a higher identification of the employees with the Company.

Options outstanding

Number of Weighted average Weighted average

Range of exercise outstanding options as remaining contractual life exercise price

prices (in EUR) of March 31, 2005 (in years) per share

0.00 – 2.50 170,232 3.8 1.75

2.50 – 7.50 406,750 3.7 6.16

7.50 – 17.50 341,200 1.9 14.01

17.50 – 30.00 340,100 2.6 28.80

Options exercisable

Number of Weighted

Range of exercise exercisable options as average exercise

prices (in EUR) of March 31, 2005 price per share

0.00 – 2.50 170,232 1.75

2.50 – 7.50 406,750 6.16

7.50 – 17.50 341,200 14.01

17.50 – 30.00 340,100 28.80

Weighted average

Number exercise price

of options per share in Euro

Options outstanding on December 31, 2003 2,190,482 14.60

Options expired (10,332) 0.58

Options cancelled (606,500) 16.78

Options outstanding on December 31, 2004 1,573,650 13.85

Options expired (23,268) 3.28

Options cancelled (292,100) 14.85

Options outstanding on March 31, 2005 1,258,282 13.81

12


Provisions

Provisions recognized are presented below:

Restructuring Other

Balance at December 31, 2003 2,027 165

Provisions made during the year 2004 3,994 1,206

Provisions used during the year 2004 (2,705) (84)

Balance at December 31, 2004 3,316 1,287

Provisions made during the year 2005 1,784 0

Provisions used during the year 2005 (1,234) (5)

Balance at March 31, 2005 3,866 1,282

Non-current 0 1,282

Current 3,866 0

On December 3, 2004, LYCOS Europe announced a new restructuring program aimed at increasing its com-

petitiveness on the market. Included in the restructuring provision are termination costs for rent and other

contracts in the amount of EUR 0.4 million and EUR 1.9 million for the period ended March 31, 2005 and

December 31, 2004, respectively and termination benefits in the amount of EUR 1.4 million and EUR 2.1

million for the period ended March 31, 2005 and December 31, 2004, respectively for 99 and 83 employees

as of March 31, 2004, and December 31, 2004, respectively.

Other provisions mainly comprise of the consideration to the former shareholders of united-domains AG

amounting to EUR 1.2 million expected to be paid during 2006.

Other short-term liabilities

Other short-term liabilities comprise of:


2005 2004


Accrual for salary and salary related cost 4,108 4,585

Accrual for marketing cost 3,678 3,248

Accrual for professional services 1,276 1,177

Other accrued expenses 5,884 6,708

Other current liabilities 3,620 4,779

Accrued expenses and other current liabilities 18,566 20,497

13

14


Contingencies & commitments

Minimum Lease and Rental Payments

The Company has entered into lease agreements in Armenia, Denmark, France, Germany, United Kingdom,

Italy, the Netherlands, Spain and Sweden.

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

2005 (remaining 9 months) 2,398

2006 2,618

2007 2,465

2008 2,406

2009 1,502

Thereafter 6,525

Total 17,914

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.

Personnel expenses

Personnel expenses comprise of:


ended ended

March 31, March 31,


Wages and salaries 9,398 9,944

Social security payments 1,926 2,286

Total 11,324 12,230

The Company employed 825 and 865 employees on a full-time equivalent basis as of March 31, 2005 and

as of March 31, 2004, respectively.

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.

15

16


Other operating income

Other operating income is made up of the following:


ended ended

March 31, March 31,


Other operating income 168 0

Other income 5 0

Total 173 0

During 2004, the Company entered into an amendment to the Yahoo contract that resulted in a one-time

payment from Yahoo which partially has been recorded over time as other operating income.

Net financing costs

Financing costs are made up of the following:


ended ended

March 31, March 31,


Interest income 916 1,464

Interest expense (15) (19)

Other (265) (269)

Total 636 1,176

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.

17

18

19



ended ended

March 31, March 31,

2005 2004

Basic / diluted net loss (In thousand Euro) (8,069) (11,913)

Weighted average shares 311,576,344 311,576,344

Net loss per share basic and diluted (0.03) (0.04)

Subsequent events

On December 3, 2004, LYCOS Europe announced a far reaching program aimed at increasing its competitive-

ness on the market. LYCOS Europe intends to continue to implement this plan in the coming months.

Explanation of transition to IFRS

As stated in the accounting policies (note 1) these are the Group’s first unaudited condensed consolidated

interim financial statements prepared in accordance with IFRS.

The accounting policies set out in note 1 have been applied in preparing the financial statements for this

year, the comparative information and in the preparation of an IFRS opening balance sheet.

In preparing its opening IFRS balance sheet the Group has adjusted amounts reported previously in accordance

with US-GAAP. An explanation of how the transition from US-GAAP to IFRS has affected the Group’s financial

position is set out in the following table and notes.

20

21


Transition of the consolidated balance sheet Year ended Year ended

December 31, December 31,

2004 2004

In thousand Euro Notes (US-GAAP) Adjustments (IFRS)

Assets

Property, plant and equipment 6,687 6,687

Goodwill, net a,b,c 12,705 1,765 14,470

Intangible assets, net 16,957 16,957

Deferred tax assets 835 835

Long-term deposits d 45,135 (24,600) 20,535

Other non-current assets 2,192 2,192

Total non-current assets 84,511 (22,835) 61,676

Cash and cash equivalents 72,075 72,075

Short-term deposits d 4,454 24,600 29,054

Accounts receivable, net 18,889 18,889

Accounts receivable, net due from related parties 124 124

Prepaid expenses and other current assets c 12,809 (565) 12,244

Total current assets 108,351 24,035 132,386

Total assets 192,862 1,200 194,062

Shareholders’ equity and liabilities

Class AA registered shares 620 620

Class AB registered shares 620 620

Class B ordinary bearer shares 1,883 1,883

Share premium 1,610,191 1,610,191

Treasury shares (2,052) (2,052)

Accumulated deficit e (1,465,287) (1,465,287)

Translation reserve 223 223

Total shareholders’ equity 146,198 0 146,198

Employee benefits f 0 0


Deferred tax liabilities 1,917 1,917

Provisions b 87 1,200 1,287

Total non-current liabilities 3,833 1,200 5,033

Short-term debt 79 79

Accounts payable 11,593 11,593

Accounts payable, due to related parties 209 209

Restructuring provisions 3,316 3,316

Other short-term liabilities 20,497 20,497


Total current liabilities 42,831 0 42,831

Total liabilities 46,664 1,200 47,864

Total shareholders’ equity and liabilities 192,862 1,200 194,062


Equity reconciliation

The transition from US-GAAP to IFRS has not affected the net equity during the financial year 2004.

In thousand EUR US-GAAP Adjustments IFRS

Balance as of December 31, 2003 191,668 0 191,668

Translation gain 292 0 292

Net loss (11,913) 0 (11,913)

Balance as of March 31, 2004 180,047 0 180,047

Translation gain (286) 0 (286)

Net loss (33,563) 0 (33,563)

Balance as of December 31, 2004 146,198 0 146,198

Income statement reconciliation

The transition from US-GAAP to IFRS has not affected the net loss during the financial year 2004.

Notes to the transition to IFRS

(a) Business combinations

LYCOS accounts for the transition of business combinations to IFRS according to the exemption rules. No

business combination has been restated.

(b) Provisions

Under US-GAAP provision for the earn out payment related to the acquisition of united-domains AG was

classified as a contingent liability and thus was not recognised as part of the purchase price allocation.

Under IFRS, according to IFRS 3, recognition is required.

(c) Goodwill

The initial purchase price allocation of Spray Telecom Network AB was adjusted as a result of a correction in

the assets assumed at purchase date relating to an incorrect balance sheet for the year ended December 31,

2003.

(d) Deposits

Deposits were classified according to original maturity date under US-GAAP. IFRS requires the presentation

of deposits according to their the remaining maturity.

(e) Financial instruments

An entity may elect to use an exemption rule related to designation of previously recognised financial

instruments to the category at fair value through profit and loss or as available for sale. LYCOS Europe

designates securities recognised until December 31, 2004 in the category at fair value through profit and

loss and thus will not make any adjustment to the opening balance sheet.

(f) Share-based payment transactions

An entity may elect to use an exemption rule related to share-based payment transactions granted on or

before November 7, 2002. Under US-GAAP LYCOS Europe accounted for stock-based compensation using

the intrinsic value method under which no compensation cost for stock options was recognized for stock

options granted with an exercise price at or above fair market value. Therefore LYCOS does not have to

recognise an adjustment related to share based payments in the IFRS opening balance sheet.

41Quarterly 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) 2004 2004 2004 2004

Revenues 23,790 23,856 22,838 33,292

Operating loss (13,067) (15,445) (10,504) (11,295)

Net loss (11,913) (14,404) (9,049) (10,110)

Net loss per share basic

and diluted in Euro(1) (0.04) (0.05) (0.03) (0.03)

EBITDA(2) (9,645) (11,928) (7,169) (5,485)

Quarter ended

In thousand Euro March 31,

(except per share data) 2005

Revenues 30,010

Operating loss (8,587)

Net loss (8,069)

Net loss per share basic

and diluted in Euro(1) (0.03)

EBITDA(2) (5,653)

(1) The sum of net loss per share does not equal earnings per share for the year due to equivalent share calculations, which are impactedby 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 amortiza-tion from the Company’s operating loss. The Company considers EBITDA an important indicator of the performance of its business includingthe ability to provide cash flows to fund capital expenditures. EBITDA, however, should not be considered an alternative to operating result ornet result as an indicator of the performance of the Company, or as an alternative to cash flows provided by (used in) operating activities asa measure of liquidity, in each case determined in accordance with International Financial Reporting standards (IFRS).

LYCOS Europe N.V.

Richard Holkade 36

2033 PZ Haarlem

The Netherlands

Investor Relations / Corporate Public Relations

Email: [email protected]

Web: www.lycos-europe.com

The interim report for the period from

January 1, 2005, to March 31, 2005,

is also available in German and French.

In case of doubt, the English version

is decisive.

interim report (ifrs) for the three-month period ended...

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