The Power of Voice. Annual Report 2000

Transcription

1 The Power of Voice Annual Report 2000

2 Key Figures telegate AG TDM TDM TDM TEUR Revenues 79, , , ,144 Gross profit 24,547 66, ,703 56,090 Operational result 21,919 2,417 19,657 10,050 EBITDA 16,430 11, Net income/ loss 23,599 4,411 18,911 9,669 Earnings DVFA/ SG 23,599 4,411 18,911 9,669 Earnings per share DVFA/SG Balance sheet total 41, , , ,923 Fixed assets 19,388 32,043 81,369 41,603 Shareholders equity 11, ,419 88,717 45,360 Equity ratio 62% 42% 42% Employees 1,283 2,364 3,913 3,913

3 The Power of Voice We live in a networked world - everyone is talking about the Internet and it finally seems that the global village is here to stay. And still, despite improvements in technology and speed, there will never be a form of communication as fast or immediate as the voice. Information from far and wide continues to be relayed most rapidly and easily by telephone. Personal, verbal contact is a part of human nature, and whatever happens, it will always be the most direct way to exchange information. That s why telegate has moved the personal assistant into centre stage. Whoever dials will receive just the information they want, and will not have to make a tedious search, or scan pages, or chase information, or even wait until a data channel opens. Every request will be satisfied with a smile, when you re connected to a telegate operator every time. The personal touch and getting close to our customers is what guarantees a consistent, first class service. We are waiting to talk to you.

4 Corporate structure of the telegate Group 100% Telegate Call-Center GmbH 50.68% PhoneCom Kommunikationsdienste GmbH 100% MEDIA EVOLUTION Agentur für neue Medien GmbH 100% Datagate GmbH ICS* Germany/ Austria 100% Telegate Anklam Gesellschaft für telefonische Informationsdienste mbh 100% Telegate Ltd., London telegate AG 100% Telegate International B.V. 95% 99% Telegate Italia S.r.L., Milan Telegate España S.A., Madrid ICS* Europe 100% Telegate Inc., Delaware ICS* USA 100% com GmbH 33.33% mobilsafe AG 33% KIM Travel Consulting AG 100% travelteam24 GmbH Internet / com 33.33% arsmovendi.com AG * Information & Call-Center Services

5 GESCHÄFTSBERICHT Contents 2 Foreword of the Board of Directors 4 Report of the Supervisory Board 6 Investor Relations Management Report 2000 Economic Situation Earnings Segmental Report Investments Acquisitions Research and Development Call centers and employees Interim Report Report on the future outlook Risk Report Additional Information Three steps to success From experience to growth Expanding Internationally From online business pages to an internet service portal Potentials show the way Consolidated Financial Statements 2000 of the telegate-group according to US-GAAP Consolidated Balance Sheet (US-GAAP) as of Dec 31, 2000 Consolidated Statement of Operations (US-GAAP) Consolidated Statement of Cash Flow (US-GAAP) Consolidated Statement of Shareholders Equity Notes to the 2000 Consolidated Financial Statements (US-GAAP) Fixed assets movement (US-GAAP) Revenues (US-GAAP) Report of Independent Auditors

6 FOREWORD OF THE BOARD OF DIRECTORS 2 Foreword of the Board of Directors Dr. Klaus Harisch CEO Dear shareholders, At the close of the financial year 2000 we would like to thank you for your confidence in us and your active participation in the growth of our company was an eventful year for all of us, marked by a number of events; mostly positive, others less so. We want to take the opportunity here of reviewing the financial year which has just ended. In the last year telegate has grown from a medium-sized company to a large international group. Having now nearly 4,000 employees in Germany, Italy, Spain, Great Britain and the United States, we achieved revenues of over a quarter of a billion DM. We have attracted new staff and taken a number of important steps for our international expansion. During the year we have enhanced our internet portal, while continuing to develop our core business in Germany. These are all reasons for feeling justifiable satisfaction when looking back over the past year. On the other hand, achieving such a rate of growth is, when the prevailing market conditions are taken into account, a permanent challenge, a challenge that has to be accepted over and over again. Internal restructuring and unexpected market developments were as characteristic for telegate s 2000 as the above-mentioned successes. The divisions of the company were reorganised to optimise organisational processes and improve the base from which to achieve further growth. The size of the Supervisory Board reflects the present size of telegate AG. Because of the sharply increased number of employees, the number of supervisory board members has increased to twelve in February One of the most important events was the change in our shareholder structure. In May 2000, we succeeded in winning the Italian information and internet company SEAT Pagine Gialle, S.p.A. as our new international partner and majority shareholder. This transaction was an important strategic step in telegate s international expansion. National and worldwide market conditions have had a decisive influence on telegate s In Italy and Spain, less progress than expected was made in the urgently needed deregulation process, which is necessary for the development of our services there. This meant that we could not make the advances we would have wished in those markets.

7 FOREWORD OF THE BOARD OF DIRECTORS 3 Dirk Roesing CFO Peter Wünsch CTO Nevertheless, today we are well positioned concerning our international expansion and are confident to be in a top position once the directory enquiries market has been opened up. In Germany, too, we are not letting up in our efforts to further consolidate the successes we have already achieved. In 2000 we opened a further five call centres and now have 3,500 staff bringing our services to the public. Though these are certainly impressive figures for a four-year-old company, we feel they can still be improved. In the course of last year we had to adapt to a new technology in the internet area. This has been demanding and time-consuming but we are now in a position to offer you a forward-looking and powerful internet product for We are convinced that our online services will further the success of our company even more. With the internet we will make it to add the second important medium in telecommunications beside the telephone to our successful business model. In 2000 we continued to consolidate the success of our core business, in the other business sectors we set the course for steady expansion and future growth. Unfortunately, in the fourth quarter we had to scale down our forecasts for financial year That, together with the reaction of the share price, was less pleasing for all of us. However, we are sure that there is no reason to expect such news in the future. telegate is extremely well-prepared to rise to any future challenge. Whether in our core business in Germany, at an international scale, or in the internet telegate has laid a stable and secure foundation for growth in 2001 and beyond. We are pleased that you will be joiningus in our successes duringthe comingyear. We would like to express our special thanks to all those who, believing in telegate, have stuck with us during stormy times. Together we shall succeed in making 2001 a successful year for telegate AG and its shareholders. Dr. Klaus Harisch Dirk RoesingPeter Wünsch

8 4REPORT OF THE SUPERVISORY BOARD Report of the Supervisory Board During the financial year 2000, the Supervisory Board has monitored and advised the Board of Directors. The situation of the company was discussed in detail in four meetings of the entire Supervisory Board as well as in many conferences of its chairman and the Board of Directors. The development of the company and medium term plans as well as important business matters were discussed in detail. No committees were formed. The Board of Directors has in written and oral form regularly informed the Supervisory Board in detail regarding the situation of the company. The Board of Directors has informed the Supervisory Board about future business politics and has addressed the risks in context of the development of the company. In the second quarter of the financial year telegate AG s staff grew to over 2,000 for the first time, as a result of the planned expansion of the Company s activity. In compliance with the legal requirements and pursuant to 97 section 1 AktG (Stock Corporation Act), the Board of Directors on 27 June 2000 announced in the Bundesanzeiger, that the composition of the Supervisory Board no longer met the requirements of the relevant legal provisions. According to 97 section 2 clause 3 AktG (Corporate Stock Act), the term of the current Supervisory Board members expired with the end of the extraordinary general meeting on 10 January As a result, the company now has a Supervisory Board consisting of twelve members according to 4 of the articles of incorporation. Six of these members are elected by the general meeting, and six are elected by employees according to the regulations of the Employee Co-determination Law (Co-Determination Law as amended in 1997). In the general meeting on 10 January 2001, Mr Herbert Brenke, Dr Joachim Dreyer, Dr Martin Hartl, Mr Uwe Heddendorp, Mr Domenico Labianca and Mr Paolo Maracattilj were elected to the Supervisory Board. The election of the employees representatives is scheduled for the end of May Based on the according application by the Board of Directors the provisional completion of the Supervisory Board with employees representatives was, according to 104 AktG (Corpoarte Stock Act), effected by a court decision of the Munich district court on 30 January Mrs Ina Krech, Mrs Birgit Labs and Mrs Ilona Rosenberg were appointed as employees representatives. Executive employees will be represented by Mr Jürgen Heinath. Mrs Katrin Küther and Mrs Heidelore Thiede are the trade union representatives. After the constituent session on 20 February 2001, the Supervisory Board elected Mr Herbert Brenke as chairman and Mrs Birgit Labs as deputy chairwoman. The Supervisory Board formed a committee according to 27 section 3 MitbestG (Co-Determination Law).

9 REPORT OF THE SUPERVISORY BOARD 5 Herbert Brenke Chairman of the Supervisory Board The financial statements and the management report according to the German commercial code as well as the consolidated financial statements prepared in accordance with US-GAAP and 292a HGB (German Commercial Code) for the fiscal year 2000 of telegate, have been audited by PwC Deutsche Revision Aktiengesellschaft, chartered accountants, Munich branch, including book-keeping. The auditors had no objections and verified the financial statements as well as the consolidated financial statements without any limitations. The financial statements and the management report according to the German commercial code, the consolidated financial statements and the management report prepared in accordance with US-GAAP as well as the auditor s report were sent to all members of the Supervisory Board in time. The auditor was present during the final meeting to discuss the financial statements. The auditor did report on his audit and responded to requested explanations. The Supervisory Board has examined the financial statements of telegate AG as well as the management report. The Supervisory Board approved the result of the audit performed by the auditors. It thereby also approved the management report as well as the financial statements 2000 of telegate AG presented by the Board of Directors, that is therewith adopted. The Supervisory Board has also examined the consolidated financial statements and the management report of telegate AG according to US-GAAP. The Supervisory Board approved of the result the audit performed by the auditors. It thereby also approved the management report as well as the consolidated financial statements 2000 of telegate AG presented by the Board of Directors. The Supervisory Board has discussed and examined the report on affiliated companies that was provided by the Board of Directors. The relations to affiliated companies have been audited by PwC Deutsche Revision Aktiengesellschaft, chartered accountants, Munich branch. The report on affiliated companies received the unrestricted approval of the auditors, and was provided to the members of the Supervisory Board. In the course of the discussions of the report on affiliated companies the auditor did report on auditing procedures. The report on affiliated companies was approved with the following audit certificate: Having carried out our inspection and evaluation as required, we confirm that the factual details in the report are correct and the Company s contribution to the legal transactions listed was not unreasonably high. The Supervisory Board has examined and approved the report on affiliated companies. The Supervisory Board agrees to the results of the audit carried out by the auditor and, based on the closing results of its examination, raises no objections against the final declaration of the Board of Directors as included in the report. The Supervisory Board would like to express its thanks and recognition to the management and staff of the telegate group who have worked together in a spirit of responsibility and determination throughout the financial year Munich, March 2001 Herbert Brenke Chairman of the Supervisory Board

10 6INVESTOR RELATIONS Investor Relations Jan Feb Mar Apr May Jun Jul AugSep Oct Nov Dec telegate Nemax 50 With the financial year 2000 having seen plenty of variations for both our company and our shares, we would like to give a short overview of events and our activities concerning telegate s shares. For us, as an information service company with unusually high quality standards, a proactive and transparent information policy is particularly important. Above all, it is in the areas of investor relations and public relations that an open communication style is particularly important, which is why we are in permanent contact with our private and institutional investors, analysts and the press. As part of this policy, we had a total of three roadshows during in Germany, Switzerland and Great Britain, and many more conversations with investors and analysts. In these conversations we kept our investors updated with detailed information about telegate AG s business developments and expectations. We practise this open and fast information flow not only as a fair weather policy, but also in particularly difficult times. We put a high priority on rapidly establishing the greatest possible degree of transparency for investors. We showed this at the time we corrected our forecasts in October 2000, when we proactively spoke to our investors and answered their questions. This is the only way to respond to the trust they have in us. The price of telegate shares was extremely volatile in Our share did not escape the start of the decline in the Neuer Markt, but then began to rise again, bucking the market trend, and remained steady until October at an average of 120 Euro. The correction of our forecast for the year 2000 resulted in a definite decline to around 70 Euro. In the following period the share price showed a continuing rise against the negative market trend, and finished the year quite solidly at over 90 Euro. Taking the year as a whole, telegate s shares, in spite of the movements described above, proved to be, compared to the NEMAX50, a stable and attractive investment. Comparison of the price at the beginning of 2000 at around 60 Euro with the year-end price of 94 shows a clear and continuing growth in the price of the shares. telegate s shares are one of only twelve securities in the Neuer Markt that closed the year 2000 with an increase in value.

11 INVESTOR RELATIONS 7 The SEAT Transaction 1. Phase: Starting Point Telegate Holding GmbH telegate AG holds 51% of the 51% RSL Com Deutschland GmbH 49% Ligapart AG 51% Telegate Holding GmbH 13% Management telegate AG 36% Free Float A key event for telegate AG in 2000 was the announcement of the takeover of Telegate Holding GmbH which itself holds 51% of telegate s shares, by the Italian SEAT Pagine Gialle S.p.A. Some of our shareholders were puzzled by the announcement of this transaction and the offer to trade-in telegate shares for Seat shares. Shareholders initial concerns were unjustified because in SEAT Pagine Gialle, telegate AG has been able to win an ideal partner as a strategic majority shareholder. SEAT Pagine Gialle has publicly announced that telegate AG shall continue to be listed on the Neuer Markt. Our Italian partner will support every activity that continues to increase telegate s attractiveness as an interesting investment. This is underlined by the agreement to the issue of approved capital for use, firstly, in company acquisitions, and secondly, to increase portfolio investment in telegate. The transaction was completed with the complete takeover of the Telegate Holding GmbH by SEAT Pagine Gialle in January Finally, so that the complex transaction can be more easily understood, we have prepared diagrams of the separate stages. We want to underline, once again, the importance of our investors confidence to us. In the future we shall continue to develop our open discussion of topical questions with our investors. This will help us to permanently establish telegate s shares as an interesting investment. Thanks to our present excellent position and strategic restructuring, we are well-positioned for the coming year. Investment in our equity is investment in success with a future. We would like to thank you for continuing to place your trust in our company, as you have done in the past. We look forward to working together with you in the new year. 2. Phase: SEAT acquires a majority stake in Telegate Holding GmbH Telegate Holding GmbH telegate AG holds 51% of the 49% RSL Com Deutschland GmbH 51% SEAT Pagine Gialle SEAT Pagine Gialle acquires the holdings of Ligapart AG in Telegate Holding GmbH (49%). In addition SEAT Pagine Gialle acquires approx. 2% of Telegte Holding GmbH from RSL Com Deutschland GmbH. As a result SEAT Pagine Gialle controls 51% of Telegate Holding GmbH as well as indirectly 51% of telegate AG. Furthermore SEAT Pagine Gialle acquires a 13.5% direct stake in telegate AG via a tender offer to the outstanding shareholders of telegate AG and the market. 3. Phase: SEAT acquires 100% of Telegate Holding GmbH Telegate Holding GmbH telegate AG holds 51% of the 51% Telegate Holding GmbH 13.5% SEAT Pagine Gialle DIREKT 13% Management telegate AG 22.5% Free Float 100% SEAT Pagine Gialle 51% Telegate Holding GmbH 13.5% SEAT Pagine Gialle DIREKT 13% Management telegate AG 22.5% Free Float SEAT Pagine Gialle acquires the remaining 49% of Telegate Holding GmbH, that were previously held by RSL Com Deutschland GmbH. As a result SEAT Pagine Gialle controls 100% of Telegate Holding GmbH. Within the shareholder structure of telegate AG no changes take place.

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13 MANAGEMENT REPORT Management Report Economic Situation Earnings Report Segmental Report Investments Acquisitions Research and Development Call centers and employees Interim Report Report on the future Outlook Risks Report

14 MANAGEMENT REPORT Economic Situation 10 Economic Situation Market shares German Directory Enquiries Market 2000 % 69% Deutsche Telekom AG 23% telegate AG 5% Talkline, Viag Interkom, D2 Vodafone 3% debitel, e-plus, o.tel.o, Arcor, GTS (outsourced to telegate AG) Source: RegTP, Estimates telegate AG Industry trends Increasing competition in the telecommunications industry is an unstoppable worldwide trend. Markets are being liberalised at the same time as radical technological developments are taking place and consumer behaviour is showing significant changes. No other area has so clearly revealed what fundamental changes deregulation and liberalisation of a market lead to as the telecommunications market. In Germany, in particular, the opening-up of this market has entailed vigorous competition, leading to falling voice telephony prices. The speed of development and introduction of new technologies has increased significantly. The UMTS licence auctions in 2000 heralded the dawn of a new telecommunications era. It is UMTS technology that enables customers to be offered an increasing number of additional sources of information and services. The telephone information service market and the internet will both benefit from this development. The German directory enquiries market There was no fundamental change in the competitive situation in the directory enquiries market during the financial year Provisional figures for the German directory enquiries market assume some 450 to 480 million calls during The most significant players are Deutsche Telekom AG, which has a market share of around 69%, and telegate, which has a market share of about 23%. If one includes the calls handled by telegate under outsourcing arrangements with debitel, e-plus, o. tel.o, Arcor and GTS, then telegate s market share amounts to 26%. The operators Talkline, Viag Interkom and D2 Vodafone have a combined market share of about 5%. Within this group D2 Vodafone, with some 3% of the total market alone, is the largest competitor. Compared to 1999 telegate is the only operator to have shown a significant market share increase from 21% to 26%. It was primarily the ex-monopolist Deutsche Telekom AG which lost ground in the German directory enquiries market.

15 MANAGEMENT REPORT Economic Situation 11 The European directory enquiries market An assessment of the competition and the economic state of the directory enquiries markets and conditions in telegate s various target markets is largely based on an outline of the regulatory framework in these markets. Only in a small number of countries has a competitive environment even been established. In the majority of markets directory enquiry services are usually supplied by the former state-owned telephone companies. As ever, the quality of the monopolists service is regarded as unsatisfactory. There are no other service providers. These conditions represent a tremendous opportunity for a service provider like telegate. The market potential is huge when the monopolies are broken up. In both Italy and Spain the former state-owned telecommunications companies Telecom Italia and Telefónica, respectively, dominate the directory enquiries market. In both countries telegate is the only competitor offering an alternative directory enquiries service nationwide. telegate does not market the service actively, because fair competitive conditions do not prevail. Market volumes for 2000 of over 300 million calls in Italy, and over 200 million calls in Spain, are expected. In Great Britain, over 700 million calls are generated every year. As the British directory enquiries market is due to be deregulated in 2001, telegate has initiated the build up of a subsidiary in the 2000 financial year. At present British Telecom, Cable & Wireless, and Kingston offer enquiry services in the UK. In other European countries some progress in the deregulation of the directory enquiries services is evident. The US directory enquiries market The United States of America is the world s largest directory enquiries market with over 4 billion calls. At present, the directory enquiries service is mainly provided by the telecommunications companies, and can be accessed by dialling 411 from anywhere in the country. The actual call handling is largely carried out by call center companies (outsourcing). Consumers are currently not able to access a directory enquiries service other than their own telecommunication companies through 411. Under this type of system, the nondiscriminated entry of an alternative, branded service provider into the market is effectively prevented. This is why at present telegate is taking steps to push for deregulation in the USA. At the same time, however, the Company is also gaining entry to the directory enquiry market via outsourcing.

16 MANAGEMENT REPORT Economic Situation 12 Internet users in the most important European countries Country million percentage of population % Great Britain Germany Italy France The Netherlands Spain Sweden Belgium Austria Switzerland Denmark Finland Norway Ireland Portugal Iceland The market for online business pages information in Germany In 2000 the internet market in Germany, as in the rest of the world, was characterized by strong turbulences. The increasing numbers of users show that the Web continues to establish itself as an information and transaction medium. Some proposed internet business models have not proved viable. The enthusiasm at the beginning of the year has been replaced by a degree of disillusionment. In the present market consolidation phase it is particularly important to show that revenue is not only generated by banner advertising or internetto-consumer business (B2C). With its internet subsidiary com GmbH, telegate has a promising business model similar to the printed business pages directory. Business customers and small and medium-sized firms use the internet as a medium to present themselves to potential customers via com. Beyond the scope of such presentations, other services are being offered to internet users. The German market for online business pages services is relatively underdeveloped when compared internationally. Deutsche Telekom AG, Yellowmap, and a number of regional providers are the main participants in the German market. None of them has a strong brand name in the internet; consequently none has a dominating position in the branch. The number of firms, businesses and self-employed professionals who are the potential customers for online business pages is put at around 3.5 million. Source: Grafik C FTK 2000

17 MANAGEMENT REPORT Economic Situation13 The telegate Group s operations In achieving profitability in its German core business in 1999, telegate has shown that it has been successful in establishing its business model. In the financial year 2000 telegate has further consolidated its strong position as the number two provider of directory enquiries services in Germany, now having a 26% share of the market. The Company has begun to transfer this successful business concept to other markets. During the financial year 2000 telegate started subsidiaries in Italy, Spain and the USA; it also laid the foundations for entry into the British market. Concurrently with its international expansion, telegate pushed on with the development of the com online service portal. This means the opening-up of the internet as an important second information platform for offering information and services, in addition to the telephone. In the financial year 2000 telegate has succeeded in positioning itself to take the best advantage of emerging growth opportunities. In order to secure a powerful position in the future however the Company has to accept unavoidable development and start-up costs. The resulting negative effects on earnings must be seen as up-front contributions which secure future revenue and earnings growth. Development of revenues million. DM 254,5 173,5 +46,7% Call and revenue development In financial year 2000 the number of calls handled was once again significantly higher than that of the previous year. During the report period telegate operators answered 139 million calls, an increase of 50.3% (number of calls in 1999: 92.5 million). Revenues again showed a significant increase in the financial year In the report period telegate s revenues increased by 46.7% to DM million (turnover in 1999: DM million). Development of calls million Calls ,3% 92,

18 MANAGEMENT REPORT Earnings Report 14 Earnings Report Development of gross margins % of revenues Development of S, G&A expenses % of revenues Earnings trends On the expenditure side, the costs of revenues increased from DM million in 1999 to DM million in the financial year This meant that the gross profit rose by 65.7% to DM million in 2000 (gross profit in 1999: DM 66.2 million), which is a substantial improvement in the gross profit margin i.e. the gross profit versus total revenues ratio from 38.1% in 1999 to 43.1% in the report period. This improvement in the gross margin was mainly due to reductions in data costs and variable line costs. The installation of the Group s own subscriber database by the wholly-owned subsidiary, Datagate GmbH, resulted in lower data costs, while an interconnection agreement with Deutsche Telekom AG reduced the variable line costs. With regard to the selling, general and administrative (S, G&A) expenses item, increased staff and general administration costs arising from the development of new business fields were particularly noticeable. In connection with the creation of management capacity for the new divisions, DM 29.0 million, or 11.4% of revenues for personnel costs was expensed (personnel costs 1999: DM 12.3 million, or 7.1% of turnover). Other administration expenses ran at DM 40.5 million, 15.9% of revenues (other administration costs in 1999: DM 14.3 million, 8.3% of revenues). An important reason for the noticeable increase in other administration costs was the cost of legal advice concerning regulation in all of telegate s targeted markets. telegate spent DM 42.3 million, or 16.6% of turnover, on marketing costs (1999: DM 29.5 million, 17% of turnover). Depreciation and amortisation totalled DM 17.5 million, or 6.9% of turnover (depreciation and amortisation 1999: DM 7.7 million, or 4.4%) in the statement of operations. 6.9 Depreciation/Amortisation Marketing General administrat Personnel costs

19 MANAGEMENT REPORT Earnings Report 15 Earnings before interest, tax, depreciation and amortisation (EBITDA) show a minor deficit of DM 2.2 million compared with the 1999 EBITDA of DM 10.1 million. If adjusted by the share of earnings attributable to minority interests in companies covered by the consolidated statements (DM 4.4 million), a positive EBITDA of DM 2.2 million would emerge. The financial result for 2000 was DM 1.1 million (previous year DM 1.1 million). This is in part due to the capital borrowed to finance the acquisition of CFW Information Services, Inc. After other expenses (DM 2.6 million) and the minority interest (DM 4.4 million) the Group s consolidated loss after tax stood at DM 18.9 million. The comparable after-tax figures for the financial year 1999 showed a profit of DM 4.4 million. Earnings EBITDA million DM A look at the Company s result for 2000 calculated according to DVFA/SG principles shows an equal loss of DM 18.9 million (DVFA/SG figure for 1999: DM 4.4 million). Based on this figure the loss per share for 2000 according to DVFA/SG amounts to DM 1.49 (DVFA/SG figure for 1999: DM 0.43 per share). The cash flow for 2000 according to DVFA/SG reached DM 1.4 million (in absolute figures), or DM 0.11 per share (1999 cash flow according to DVFA/SG, absolute: DM 11.0 million, per share: DM 1.08) Earnings Net income/loss million DM Earnings per share according to DVFA /SG DM

20 MANAGEMENT REPORT Earnings Report 16 Development of the equity ratio Balance sheet total in million DM Equity ratio in % Balance sheet information and equity capital telegate s balance sheet total rose significantly from DM million at the end of the financial year 1999 to DM million at 31 December The cash position was reduced to DM 12.5 million from the previous year s DM million. This is mainly due to increased investment and acquisition activity, which is reflected in the 154% increase in property and equipment valued at DM 81.4 million (1999 property and equipment: DM 32 million). A further major item on the assets side is the goodwill of acquired companies valued at DM 62.4 million. Trade receivables are DM 34.8, which is only a small increase given the considerably higher revenues (1999 trade receivables: DM 32.9 million) Important balance sheet positions Assets Balance sheet total Equity ratio million DM Good will Property and equipment Trade accounts receivable Cash and cash equivalents

21 MANAGEMENT REPORT Earnings Report17 On the liabilities side of the balance sheet, current liabilities are moderately higher, at DM 71.4 million (1999 current liabilities: DM 63.2 million). The Company s long-term debt as of December 31, 2000 was DM 45.9 million (1999 DM 1.9 million). A major portion of this balance sheet item refers to the long-term loan taken out to finance the acquisition of CFW Information Services, Inc. The Company s equity capital at the end of financial year 2000 was DM 88.7 million, compared with DM million at the end of financial year Taking account of the noticeably increased balance sheet total, the capital ratio had fallen from 62,2% to 42,4% as of December 31, Important balance sheet positions liabilities million DM Shareholders equity long term debt Current liabilities

22 MANAGEMENT REPORT Segmental Report 18 Segmental Report So that trends in telegate s various segments are made more transparent, the Company has issued its first segmental report as part of its annual report for the financial year The segments correspond to the four business divisions of Information & Call Center Services Germany/Austria, Information & Call Center Services Europe, Information & Call Center Services USA and Internet/11880.com. Costs in connection with the telegate Group s central functions are not related to the operations of the segments and have not been allocated. This ensures that the results of individual operational segments are not distorted by costs which are not directly related to the respective segment. Because this is the first time that telegate issued a segmental report, there are no directly comparable figures from the previous year.

23 Key figures of the segments of the telegate Group MANAGEMENT REPORT Segmental Report19 million DM ICS ICS ICS Internet / Head- Germany/Austria Europe USA com quarter* Group Revenues EBITDA EBIT Property and equipment * No segment of its own but an aggregation of the costs for central functions Information & Call Center Services Germany/Austria The segment Information & Call Center Services Germany/Austria comprises the full scope of telegate s activities in its core business telephone information services in Germany and Austria. This mainly concerns the information and service number and all outsourcing business. The segment also includes Datagate GmbH, a wholly-owned telegate AG subsidiary and the interest in PhoneCom Kommunikationsdienste GmbH. Datagate GmbH is the entity within the telegate Group responsible for the administration, refinement, and marketing of data. It supplies telegate s directory enquiries services, among others, with the necessary subscriber information. The telemarketing service provider PhoneCom Kommunikationsdienste GmbH, in which telegate has a 50.7% stake, provides computer-based voice recognition services as well as conventional inbound and outbound services. In the financial year 2000, the segment Information & Call Center Services Germany/ Austria mainly focused on the further expansion of the service s market share in the German directory enquiries market. In the first half of the year it was hardly possible to provide the required call center capacity fast enough. The continually increasing volume of calls could not always be dealt with. To avoid suffering a reduction in the service quality, advertising was sharply reduced in the second and third quarters. In the fourth quarter these bottlenecks were removed. Having surplus advertising time, Deutsche Telekom AG increased advertising for their directory enquiries service in October and November Therefore telegate did not increase its marketing efforts during this period. It was not before December that advertising for the enquiries service returned to its planned level, when a new commercial featuring Verona Feldbusch was launched. Although the targets for 2000 could no longer be reached for the reasons described above, the number of callers in 2000 increased 25.3%, up from 92.5 million to million. Of these calls, million were generated via the information and service number alone. This represents a growth in call volume of 23.6% compared to the previous year (call volume 1999: 83,6 million). On average, 36% of callers took advantage of the call completion service and had their calls directly connected. In the outsourcing area of the segment, 12.6 million customer calls were handled, i.e. about 41.6% more than in the previous year (call volume 1999: 8.9 million).

24 MANAGEMENT REPORT Segmental Report 20 Revenue split Information & Call Center Services Germany/ Austria 1999 % 78.6% Mio. DM 8.4% Call Completion 14.5 Mio. DM 7.2% Outsourcing 12.5 Mio. DM 5.7% Telephony 9.9 Mio. DM 0.1% Datagate GmbH 0.1 Mio. DM Revenue split Information & Call Center Services Germany/ Austria 2000 % The segment Information & Call Center Services Germany/Austria achieved revenues of DM million in the 2000 financial year. This represented an increase of 37,7% over the 1999 figure of DM million. The service number brought a revenue of DM 162.3, an increase of 18.9% over the previous year s DM million. The call completion service which generated revenues of DM 14.5 million in 1999, showed a tripling of its revenues to DM 44 million. The segment increased its revenue in the outsourcing business by about 28% to DM 16 million (1999 turnover: DM 12.5 million). Total revenues from the telephone business reached DM 8.5 million. The call-by-call service, which accounted for the lion s share in this field, was closed down in the second quarter of In the 1999 financial year, the telephone business reported revenues of DM 9.9 million. Since the date of consolidation, PhoneCom Kommunikations GmbH contributed DM 7.9 million through its outsourcing services, while Datagate GmbH achieved a turnover of DM 0.2 million (1999: DM 0.1 million). Taking into consideration all apportionable costs, the earnings before interest, tax, depreciation and amortisation (EBITDA) of telegate s Information & Call Center Services Germany/ Austria were DM 42.3 million. Earnings before interest and tax (EBIT) were DM 31.4 million. These results show that telegate s core business is highly profitable. A comparison with the previous year only underlines this positive development. Since the segment Information & Call Center Services Germany/Austria consolidated with the Headquarter costs is a comparable unit to the telegate business of last year, a rough comparison with the previous year s figures is possible. Such an approximate assessment shows a rise of the German core business EBITDA from DM 10.1 million in 1999 to DM 33.4 million in This is equivalent to an increase of over 231%, or more than a tripling of results. 67.9% Mio. DM 18.4% Call Completion 44 Mio. DM 6.7% Outsourcing 16 Mio. DM 3.6% Telephony 8.5 Mio. DM 3.3% PhoneCom Kommunikationsdienste 7.9 Mio. DM 0.1% Datagate GmbH 0.2 Mio. DM

25 MANAGEMENT REPORT Segmental Report21 Information & Call Center Services Europe The segment Information & Call Center Services Europe includes the telegate Group s expansion of its core business telephone information services in Europe outside Germany and Austria. In the financial year 2000, this included the development of operations in Italy, Spain and Great Britain. Because of delays in market deregulation in Italy and Spain, directory enquiries services in those countries could not be marketed as planned. In Britain, where deregulation of the directory enquiries market is expected in 2001, the build-up of a subsidiary was initiated in 2000 already. For this reason the segment Information & Call Center Services Europe generated revenues of only DM 30,000. Because of start-up costs in the various countries, earnings before interest, tax, depreciation and amortisation (EBITDA) were negative, at DM 10.0 million. Earnings before interest and tax (EBIT) totalled DM 10.9 million. Information & Call Center Services USA The segment Information & Call Center Services USA includes all telegate s activities aimed at establishing its active business in the United States. telegate s entry into the US market was marked by the successful acquisition of the directory enquiries firm CFW Information Services, Inc, which runs three call centers. In addition, telegate has developed two call centers of its own: one in California and the other in Utah. The regulatory environment in the USA is, as in Europe, difficult because directory enquiries services have not yet been opened for an alternative service provider. telegate has, particularly in 2000, increased its pressure on the regulatory authorities. The Information & Call Center Services USA segment registered 23.0 million calls which were handled by telegate staff who had become part of the telegate Group following the acquisition of CFW Information Services, Inc., Virginia. As CFW Information Services activities have only been consolidated from July 2000, the number of calls registered relates to a period of just under six months. Revenue was DM 15 million. Due to the costs of regulatory consultations and of starting-up the operation, earnings before interest, tax, depreciation and amortisation (EBITDA) totalled DM 11.4 million. Earnings before interest and tax (EBIT) were DM 14 million.

26 MANAGEMENT REPORT Segmental Report 22 Internet/ com telegate groups all its internet-related business in the segment Internet/ com. In addition to com GmbH, this includes the investments in mobilsafe AG, arsmovendi.com AG and KIM Travel Consulting AG. Internet-related activities in 2000 were mainly concerned with the deployment of the com online information and service portal. It was launched in Spring 2000, though not aggressively marketed because of early software problems which prevented the speedy implementation of customer requests with regard to the presentation of their own business data. As a consequence, the Company stopped all related marketing campaigns and rather focused on reworking the technological concept of its com information and service portal. A new software partner, GI AG, was identified in Autumn Since then, work has concentrated on the implementation of a new database solution, the integration of new services and the redesign of the layout. The redesigned information and service portal com was relaunched in February The travel providers arsmovendi.com AG and KIM Travel Consulting AG have been offering their services on the internet site since November Further enhancement of the range of services offered is planned in The virtual safe-deposit of mobilsafe AG has been available to customers since Because of very limited marketing, the Internet/ com segment contributed only DM 0.6 million to the total revenues. Earnings before interest, tax, depreciation and amortisation (EBITDA) were DM 14.2 million. Earnings before interest and tax (EBIT) were DM 15.7 million. Headquarter costs The Headquarter costs cannot be assigned directly to an operating segment. Therefore these costs are displayed separately. In the financial year 2000 earnings before interest, tax, and depreciation and amortisation (EBITDA) generated by the headquarter functions amounted to DM 8,9 million. The contribution to earnings before interest and tax (EBIT) was DM 10.4 million.

27 MANAGEMENT REPORT Investments 23 Investments In the financial year 2000 telegate s proporty and equipment position increased from DM 32 million to DM 81.4 million. Gross investments, i. e. investment before depreciation, were about DM 66.3 million in In Germany the Company invested a total of DM 20.6 million in the expansion of the existing call centers and in the construction of new call centre facilities. Some DM 5 million was invested in user licences, hardware and the setting up of a data warehouse. Investment in hardware and software for the development of the com internet portal ran at some DM 4.8 million. During the report period the Company invested DM 3 million in expanding the Datagate GmbH s subscriber database. DM 4.2 million was invested in the construction of the Italian call center and DM 3.8 million in the Spanish call center. The creation of the two new US call centers resulted in DM 4.7 million of investment. With the acquisition of CFW Information Services the Company also took on property and equipment amounting to DM 17.6 million. Further investment amounting to DM 2.6 million included hardware, software, other assets, as well as property and equipment allocated under the full consolidation of acquisitions. Changes in the shareholder structure In financial year 2000 there were fundamental changes in the shareholder structure of telegate AG. telegate AG was able to secure the Italian information and internet provider SEAT Pagine Gialle, S.p.A, as the new majority shareholder. After the completion of the transaction, SEAT Pagine Gialle via Telegate Holding GmbH controls approximately 64.5% of telegate AG. In SEAT Pagine Gialle, telegate has an ideal strategic partner, particularly for the international expansion.

28 MANAGEMENT REPORT 24 Acquisitions Acquisitions telegate is expanding into new markets with its own operating units and is thereby securing an enormous potential for organic growth. Through complementary and highly beneficial strategic acquisitions the Company intends to strengthen its position as an innovative information service provider. telegate therefore invested DM 85.2 million in the financial year 2000 in acquisitions or participations. To date the acquisitions have been financed by the proceeds of the initial public offering. In the case of the acquisition of CFW Information Services, Inc. the Company obtained a long-term bank loan. At the Company s extraordinary general meeting held on 10 January 2001, an increase in authorized capital was approved. This enables the Company to use its own shares to fund new acquisitions without putting further strain on the Company s cash or credit facilities. In March 2000, telegate acquired a 35% interest in the telemarketing firm PhoneCom Kommunikationdienste GmbH. Munich based PhoneCom is one of the leading providers of services combining voice recognition computers and call centers. Among its core products are interactive computer-based voice recognition services as well as the customary inbound and outbound services. In financial year 1999, PhoneCom and its 300 employees achieved revenues of DM 9.2 million. Its key accounts include the state lotteries SKL and NKL, the Bauer-Verlag publishing house, and the Bavarian broadcasting organisation (Bayerischer Rundfunk). The range of PhoneCom products perfectly complements telegate s services. One objective is to develop special information services which can use voice recognition computers. With the intention to further develop the co-operation between the two companies, telegate stepped up its interest in PhoneCom Kommunikationsgesellschaft to 50.7% in December 2000.

29 MANAGEMENT REPORT Acquisitions25 In connection with the development of the travelgate travel services portal, telegate acquired 33.3% of arsmovendi.com AG and 33% of KIM Travel Consulting AG in April arsmovendi.com AG has specialised in selling travel services to private customers, particularly on the internet. The company has access to all tour operators catalogues and accepts and handles all direct bookings. In 1999 arsmovendi.com AG was named by the Dortmund Institute for Internet Marketing Profnet as Germany s best virtual travel agency. KIM Travel Consulting AG has its focus on business customers and handles all the necessary transactions. Since November 2000 both companies have offered all travel services for private and business customers on their website. In the future, customers will be able to access the travelgate platform to book travel services, both on the internet and by telephone. With its takeover of CFW Information Services Inc., Virginia, in July 2000 telegate succeeded in entering the US market. CFW Information Services operates directory enquiry services under outsourcing agreements, i. e. not under its own brand name. In 1999, CFW s 300 operators handled 47 million calls and generated revenues of USD 16 million. The company s biggest customer is AT&T, one of the world s leading telecommunications companies. As part of its online concept redesign, com GmbH signed an agreement with GI AG to take over the latter s highly advanced spotscout internet platform. GI AG develops technologies for the international media industry and has specialised in integrated database, content management and cross-media archiving solutions. This platform is an ideal technological foundation for the construction of the com online portal. Once the transaction is completed, com GmbH will not only have access to the technology but also to the highly qualified software development specialists. It is intended to pay for the acquisition with com GmbH shares to be made available through a capital increase. By 31 December 2000, however, no statutory amendments to this respect had been effected. The transaction is expected to be completed in the first quarter of 2001.

30 MANAGEMENT REPORT Research and Development 26 Research and Development Being a service provider, telegate undertakes no fundamental research and development in the conventional sense. Development for telegate means, above all, the call center employees training, which is intensive and demanding. All call center staff are friendly, speedy and competent, they are service-oriented and problem solvers. To ensure that this is the case, special staff selection and training procedures have been developed. The operators work in light, friendly and well-furnished rooms. This is because only happy staff can guarantee customer satisfaction. Further decisive factors for telegate s success as an information service provider are the quality of the huge data pool and how up-to-date it is. Datagate GmbH is the subsidiary founded for this purpose that specialised in maintaining the database with over 38 million subscriber entries, which is updated every night. This database will continue to be developed so that the data can be enriched and used for value-adding. telegate s business concept is based on a powerful, state-of-the-art technology suited to the various demands of the voice portal. The Company is working on further development of this technology with reliable partners such as Siemens AG and Varetis AG. This guarantees a fail-safe service and continuous technology updating. In the internet field, telegate has access, via its com GmbH subsidiary, to highly qualified software developers who are able to support the rapid deployment of new technologies.

31 MANAGEMENT REPORT Call centers and employees 27 Call centers and employees Employees of telegate Group Call Center Anklam Greifswald Rostock Neubrandenburg Wismar Bremen Güstrow 200 Schwedt 194 Stralsund 126 Frankfurt/Oder 28 Cottbus 23 Total telegate AG Call Center Overhead 87 Teamleader und Trainees 122 Headquaters Total Tochtergesellschaften Deutschland Datagate GmbH com 24 Total 0 40 Further strong increases in staff numbers are another sign of telegate s ongoing expansion. Compared with 2,364 employees in 1999, at 31 December 2000 the Group employed 3,913 people was the first year in which staff outside Germany were engaged. 495 people are employed in Italy, Spain, the Netherlands, Great Britain and the USA, and 3,418 in Germany. Most of the German call centers are located in the former East Germany, in some regions of which the Company has become the largest employer. In Germany, the number of call centers has almost doubled from six to eleven. Around 50 workers council members represent employees interests, six members on the supervisory board are employee delegates. In addition to the recruitment of friendly and competent employees for the Company s call centers, the further development of a well-qualified management staff is of the utmost importance. In financial year 2000 management in both the corporate headquarters and the subsidiaries was significantly increased. In order to remain attractive to qualified management staff, telegate has expanded the existing share stock programme to cover the management level of the whole Group. Beteiligungen mobilsafe AG 3 Phonecom Kommunikationsdienste GmbH 238 arsmovendi.com AG 13 KIM Travel Consulting AG 18 Total Tochtergesellschaften Ausland TGT International Holding B.V., O Niederlande Telegate Inc., USA 437 Telegate Italia S.r.L.,Italien 31 Telegate España 31 S.A., Madrid Telegate Ltd., London 3 Total telegate Group total

32 MANAGEMENT REPORT Interim Report 28 Interim Report Affiliated companies under Section 312 German Corporation Law (AktG) The managing board has reported on relations with affiliated companies in a separate report, as required by German Corporation Law (Section 312). The report closes with the following declaration: With reference to the above-mentioned, we declare that when the aforesaid transactions took place, our Company received, to the best of our knowledge at the time, appropriate compensation for each transaction. Other actions requiring reporting were neither taken nor omitted Subsequent events report At the end of January 2001 telegate s Italian subsidiary, Telegate Italia signed an outsourcing agreement with Telecom Italia Mobile (TIM). Under the agreement telegate will build up the directory enquiries service for the approximately 23 million mobile phone customers of TIM. By adding the largest national mobile phone company to its key accounts, telegate has strengthened its market position in Italy. During telegate s extraordinary general meeting held in Munich on 10 January 2001, the shareholders approved the proposed agenda. The profit and loss transfer agreements with the wholly-owned subsidiaries Telegate Call Center GmbH, Datagate GmbH and Telegate Anklam Gesellschaft für telefonische Informationsdienste mbh were thereby approved. They form the basis for an optimisation of the tax situation across the whole Group. The telegate AG general meeting also authorised the management to increase the Company s capital by issuing shares for cash or assets, up to EURO 6,365,000 until 9 January 2006, subject to the agreement of the supervisory board. This measure will allow the management to respond swiftly and flexibly to opportunities by funding future acquisitions with telegate AG shares. Finally, the extraordinary general meeting elected the new shareholder representatives to the supervisory board. They will be Mr Herbert Benke, Dr Joachim Dreyer, Dr Martin Hartl, Mr Uwe Heddendorp, Mr Domenico Labianca and Mr Paolo Marcattilj. As the supervisory board of telegate AG will have to be constituted as stipulated in Sections 96 (1) and 101(1) of the German Corporation Law to be applied in conjunction with Sections 1 (1) and 7 (1) item 1 of the Corporate Representation Law, the six shareholder representatives will be complemented by six employees representatives. Under these principles, Ms Ina Krech, Ms Katrin Küther, Ms Birgit Labs, Ms Ilona Rosenberg, Ms Heidelore Thiede and Mr Jürgen Heinath were appointed to join the supervisory board in February 2001.

33 MANAGEMENT REPORT Report on the future outlook29 Report on the future outlook telegate will continue to relentlessly pursue its strategic goals. In the German market, the focus will be on an increased share of the directory enquiries market. In January 2001, the Company opened the twelfth call center in Brandenburg, doubling the number of German call centers in just twelve months. In the process, telegate has managed to remove the bottleneck and create sufficient capacity to handle the budgeted increase in the number of callers. To stimulate demand the Company will resort to novel means of advertising, such as new commercials featuring TV star Verona Feldbusch. The Company expects a surge in the number of callers following the introduction of new informational and other services. telegate is particularly interested in gaining more customers in the mobile phone markets. The number of mobile phone users in Germany is now assumed to be just as large as the number of fixed-line connections. telegate s services such as the call completion service are made to measure for mobile phone users. The continuing high growth rates expected in the mobile phone business in both Germany and the rest of Europe point to an enormous growth potential for telephone-based information and services. Numbers of mobile phone users in Europe million people Source: 2000 Ovum Ltd. rest of Europe Total Germany

34 MANAGEMENT REPORT Report of the future outlook 30 telegate s international expansion has been delayed by slow deregulation in the target markets. It seems unlikely that the Italian and Spanish markets will be completely opened in telegate s response has been a big increase in its efforts to secure outsourcing agreements. By providing services via outsourcing the Company intends to bridge the period until competitive conditions are suitable for setting up its own directory enquiries service. In Italy the Company has already found two outsourcing partners in COLT Telecom and Telecom Italia Mobile (TIM). Just taking on TIM s directory enquiries has given telegate access to a potential customer base of 23 million mobile phone users. telegate also plans to offer informational services with its majority shareholder SEAT Pagine Gialle. At the same time telegate will take further steps to drive the deregulation of the market. The Company assumes that the British directory enquiries market will be deregulated in the course of the 2001 financial year. In order to be competitive when the market is opened a call center is being set up in Dumfries, Scotland. At the same time, telegate is making efforts to acquire outsourcing agreements in Great Britain. In the USA, telegate s early focus is on strengthening its market position in the outsourcing business where the Company has secured a good starting position through its acquisition of CFW Information Services, Inc. At the same time telegate will increase its pressure on the American regulator in order to achieve nondiscriminatory access to the market. Generally, the Company expects fresh impetus from its partnership with SEAT Pagine Gialle as its European expansion proceeds. In the context of this partnership, telegate will be responsible for the Group-wide deployment of the voice portal where the content pool available in the SEAT group should prove of particular benefit.

35 MANAGEMENT REPORT Report on the future outlook31 By developing the com online service portal, telegate is transferring its service oriented business concept to the internet. Since finding a partner with the necessary database platform expertise in the fourth quarter of 2000, the com service portal has been completely reworked, and was relaunched at the beginning of February As before, the core product is the online business pages directory enhanced with all kinds of information from the user s environment. Early in 2001, a sales team began active marketing in selected conurbations, supported by a marketing campaign. The Company intends to expand the sale of this product step by step throughout the whole of Germany to secure a strong place in the national market. The next stage will then be to go international with the service portal. In the financial year 2000 telegate had to lower its sales and earnings expectations because of certain problems in developing the internet portal, and due to regulatory delays which impeded the internationalisation strategy. A loss of DM 18.9 million was stated for the year. Already in 2000, the Company introduced steps to improve revenues and results, and adapted some strategies so as to reduce the risks involved. Despite these measures telegate does not expect to cease being loss-making in financial year It is assumed that costs of developing the new activities and the respective start-up losses will once again outweigh the profit generated by the core business in Germany. In view of the huge potential associated with the new business activities, the Company is actively pursuing a strategy of suffering short-term negative effects on results in the expectation of long-term increases in revenues and profits. The Company has taken appropriate precautions to reduce the risks of such strategy. As part of a restructuring, new business fields were established and clear responsibilities for the realisation of strategy laid down. In its risk management system put into place in early 2000, the Company has a suitable early warning tool. To finance its operations the Company can draw on a number of loan facilities and on the positive cash flow expected in the future. Appropriate hedging measures are taken to deal with any foreign currency risks.

36 MANAGEMENT REPORT Risk Report 32 Risk Report The services provided under the information and service number will continue to be expanded under the current allocation rules for the directory enquiries access numbers, which are overseen by the regulatory body. Such rules concern, in particular, call completion and subscriber data enquiries services. Breach of the allocation rules brings with it the risk of an official order to redesign or even cease certain services (products). The ultimate sanction would be withdrawal of the number. In Germany Deutsche Telecom AG remains an important supplier for telegate. This results in a degree of economic dependency. Most of the supply relationships are, however, subject to regulatory or competitive supervision, which reduces the risk. The billing and charge collection procedures watched over by the regulatory authority are about to change. In accordance with the regulations, Deutsche Telekom AG will continue to bill customers (primary collection), while, in future, the reminder process (secondary collection) and customer complaints shall be carried out by telegate or by a contract service provider. At the time of printing this report, it was emerging that under a pilot scheme effective from 1 April 2001, Deutsche Telekom AG would pass on the customer data of defaulters to telegate or the contract service provider so that arrears can be collected. In the other countries where telephone services are supplied (Spain, Italy, USA), arrangements similar to those in Germany are in force. In each individual case, however, the regulatory framework, national data protection laws and EU-wide regulations shall be observed. Non-compliance would endanger the access to subscriber data which is an important basis of telegate s business. A fundamental element affecting telegate s international expansion is that the Company is exposed to the risk of delayed or insufficient changes in the regulatory framework of the target country. It continues to be the policy of the Company to exert positive influence on both regulators and political decision makers so that a fair competitive environment for the establishment of profitable telephone services is created. A fair competitive environment means that access to national subscriber data is available at competitive costs. The Company also needs a permanently assigned non-discriminatory access number so that it can establish its own, marketable, directory enquiries service. In the first place, non-discriminatory means that this access number has the same number of digits as those of competitors including the former monopolist. Secondly, it means that a directory enquiries number that has been established for years or decades (for example by the former monopolist would) be withdrawn, because otherwise the entry to the market would be handicapped by very high marketing costs.

37 MANAGEMENT REPORT Risk Report 33 A further element of a fair competitive environment is that the predominant telecommunications company does not use profits from other fields of business to cross-subsidise the directory enquiries division. If these conditions do not prevail or are implemented at a very slow pace, the effects on telegate s international expansion could be detrimental. In addition to its deregulatory drive, the Company is countering these risks with its outsourcing strategy which does not require the costly marketing of access numbers, until fair competitive conditions are finally established. The expansion of telegate s internet activities remains subject to the general risks entailed in using the internet as a business platform. They are mostly technological risks which can affect operation of the internet platform. Also of crucial importance for the success of an internet product is the sustainability of the underlying business model and its economic viability. In 2000 a number of internet firms which were highly dependent on sales from banner advertising, particularly in the business to consumer (B2C) area, went out of business. This risk is however not really of significant concern to telegate, since the com business concept does not primarily rest on the creation of revenue through the internet. Rather, the success of telegate s internet product is dependent on its acceptance by end users and by business customers, who have to be won for an entry in the classified online directory. The ability to attract highly qualified staff as managers and leaders will be of decisive importance for the future of the telegate Group. The competition for such staff is fierce, both nationally and internationally. The Company has taken the necessary steps to make itself still more attractive as an employer. Such steps include a stock options programme for management staff. All statements about future prospects in this business report are based on assumptions and estimates of telegate s management. These expectations are realistic on the basis of what is known today. There cannot be any guarantee, however, that the assumptions will in fact prove to be correct. These assumptions may bear risks and imponderables which could lead to actual results differing from those projected.

38 ADDITIONAL INFORMATION 34 Additional Information 35 Three steps to success 37 From experience to growth 39 Expanding internationally 43 From online buisiness pages to an internet service portal 46 Potentials show the way

39 ADDITIONAL INFORMATION Three steps to success 35 Three steps to success In this report you will hear a great deal about change, restructuring and market conditions. What do these terms really mean for telegate? We want to show you what telegate s strategy for further success looks like. How can we develop a new market, what are the underlying conditions, where are the opportunities and where are the risks? Once we have described the conditions, you will know what makes telegate so unique and so successful. What do you do when you need a phone number fast and reliable? Of course, you call the directory enquiries service. Until a few years ago you only had one choice, to phone the Deutsche Telekom s service. Because there was no alternative, it was the only number you could call. No one had ever thought of competing in this area, until in 1997 the former monopolist found it had competition. That was when telegate AG first appeared with its countrywide directory enquiries service number The ex-monopolist carried on using the old directory enquiries number, which meant that the odds were stacked against telegate - the old, ex-monopolist s number was so deeply etched in everybody s mind. It was not until October 1997 that directory enquiry numbers were redistributed. Twenty-two competing companies and Deutsche Telekom were assigned new numbers; levelling the playing field for everyone.

40 ADDITIONAL INFORMATION Three step s to success36 Of course, users of the service had to get used to the new numbers. But, with heavy support in the media this was a quick process, and for the first time they had the luxury of accessing competing enquiries services. This meant that telegate was able to attract more and more customers to its fundamentally unique enquiries service. Every caller dialling receives the information they want from one person promptly, competently and reliably. Our operators have become personal assistants supplying the customer with the required information or services at any time. This individually tailored service concept is the big difference between us and other enquiries services. Your personal assistant will supply you with the information you need, seven days a week, around the clock: Whether you need to know a phone number, what is on at the cinema or theatre, restaurant information, book a trip, or want to be woken in the morning our voice-portal can do it all. And, our service concept has worked. Today we are the second largest directory enquiries service in Germany, and are on the way to becoming the world s largest information service provider in this area. 3-Steps-Model Market presence with operational business exerts pressure on regulators 1. Fair competition by new allocation of enquiries numbers 2. Securing of unlimited data access 3. Securing of billing and collection through ex-monopolist Establishment of convincing service-concept in the newly developed market

41 ADDITIONAL INFORMATION From Experience to Growth 37 From Experience to Growth The experience and the know-how that we have accumulated in the course the establishment of our successful business in the German directory enquiries market are important factors for our growth in other countries. In nearly every other European country the regulatory conditions are similar to those that prevailed in Germany until a few years ago. To open up these markets, conditions have to become competition friendly and a prerequisite to the successful opening up of the European markets is their deregulation. Using a three-step approach, we want to show you the way we successfully tackled this problem in Germany, and the way we worked with the regulators. The first step: Market presence increases pressure on the regulators In the first phase of opening up a market for directory enquiries services it is important to be operating in that market. Building call centres, installing a powerful and reliable technology, and training the most competent operators all requires a great deal of preparation. As mentioned before, we were able to offer directory enquiries services in Germany during 1997 from fully operational call centres using the number Our active presence in the market helped us during the intensive and detailed negotiations with the regulators, who only become active in opening up a market when an independent competitor s activity is affected by monopolistic structures. Because of our high level of know-how and involvement, coupled with months of persuasion, we were able to drive through the process of deregulation.

42 ADDITIONAL INFORMATION From Experience to Growth 38 The second step: Redistribution of the directory enquiries numbers creates a level playing field The assignment of new directory enquiries numbers is the decisive move in ensuring a level playing field. It is only with the new allocation of numbers to all competitors, including the former monopolist that they all have an equal chance to compete and establish themselves. It is only then that every independent service provider is able to publicise its services and convince the public of its level of performance. With the new allocation of directory enquiries service numbers the former monopolist is also obliged to take on responsibility billing and collection services for the independent service providers. Legal regulations ensure that all enquiries service providers have access to the subscriber databases on a fair price basis. The new assignment of directory enquiries numbers, billing and collection by the ex-monopolist, and the legally guaranteed access to the ex-monoplist s data were the basis for establishing fair competition on a level playing field for all competitors. We made good use of the market deregulation in Germany, and were able to quickly establish ourselves as the leading independent information service company, with high brand awareness. The third step: Friendliness, speed, competence and quality as our agenda We offer our customers a range of services that no other provider offers. Both the quality of the information and the service itself are first class. Each customer s operator is a personal assistant who can quickly supply him with information he needs seven days a week, twenty-four hours a day. Our operators friendliness, competence, speed, high level of service and approachability mean that our customers can experience what our you ll be really helped here actually means. The continuous upgrading of our information services and the high level of recognition which we have achieved have helped to further increase our market share. telegate s success story is proof that competition means, above all, advantages for the consumer. The supplier offering the best service will ultimately be successful and that s why we see ourselves as being extremely well-positioned for the future.

43 ADDITIONAL INFORMATION Expanding internationally 39 Expanding internationally The core business in Germany is the basis of our success and has succeeded in building up a very satisfactory second position in the local directory enquiries market. In the future, we are going to concentrate on continuing to expand and improve our core business and to react to market changes fast. At the same time we are focussing on international growth. We intend to repeat the success we have had in the German market in other countries. With our know-how and our experience we are well-prepared for expansion into other markets abroad. This year we have set up subsidiaries in Italy, Spain, Great Britain and the USA. This will help us to increase the pressure on the regulators in those countries and push on with the deregulation process to our benefit. In both Italy and Spain we have received telecommunications licences and shorter, easy-to-memorize telephone numbers. This means that we have already laid the foundations for establishing ourselves in these markets as the first and in the long term successful alternative service provider.

44 ADDITIONAL INFORMATION Expanding Internationally 40 Italy In November 2000, telegate concluded an interconnection agreement with Telecom Italia. In this agreement Telecom Italia agreed to interconnect telegate into its network and also to allow telegate free access to subscriber data. In spite of this progress in the Italian market it is still not possible to see when complete deregulation, meaning the introduction of new access numbers, will be achieved. In order to profitably use our call centres, we have extended our activity to outsourcing. From early 2001 we shall be running the directory enquiries service for Italian telecommunications companies. Our first partner was the Italian subsidiary of COLT, the international telecommunications company and in January 2001, we did sign a contract with Telecom Italia Mobile (TIM), the mobile telephone subsidiary of Telecom Italia, to build up its new enhanced enquiries service. telegate is able to provide the customers of the largest European national mobile carrier a fast and competent service via its voice portal. Our success in the Italian market was being honoured with the Greenfield Award, which meant that the Piedmont region recognised Telegate Italia as the most innovative foreign enterprise in Motorola was the previous year s winners. Spain In Spain we are the only company apart from Telefónica (the former monopolist), which offers a voice based directory enquiries service. Although we have a telecommunications licence and a short directory enquiries number (1616), we have yet to receive confirmation on a final deregulation date. The Spanish National Authority for Telecommunications has issued a request to the Ministry of Science and Technology in the fourth quarter of 2000, to release the 118xy pathway for use as access codes for enquiry. This must be seen as a positive sign. However, until we have received a 118xy number as the access code for our own enquiries service, we shall not develop the telegate brand, but concentrate on winning outsourcing contracts. We are confident that a positive announcement in this area will be issued soon, due to the already high interest of some significant carriers.

45 ADDITIONAL INFORMATION Expanding Internationally 41 United Kingdom All the indicators point at the United Kingdom as the next likely candidate for deregulation in Europe. In November 2000 the UK regulator (Oftel), issued a paper which spoke of the opening of the market during The UK market is particularly important for us, because it represents with around 700 million calls per annum the single largest European market for directory enquiries. The demand for state-of-the-art enquiries services is more developed here than in any other European country. Our research indicates that the UK consumer will be the most receptive to our unique service concept of a single point information voice portal. That s why we have already begun the development of a subsidiary there in 2000, and in the early part of 2001 shall be opening our first call centre in Dumfries, Scotland. Until the market is deregulated we will, as in other countries, acquire outsourcing contracts to build critical mass ready for market deregulation. Serious negotiations have already begun with several major carriers. USA The starting point in the USA is rather different from that of Europe, because the same directory enquiries number, 411, is used all over the country. The telecommunications companies themselves usually offer directory services, which is in turn outsourced to companies running call centres. Independent directory enquiries service companies have until now been unable to establish themselves with a brand identity in the American market. The main reason is that independent service providers are effectively denied access to the countrywide 411 enquiries number. telegate is taking steps in the USA as elsewhere to persuade the regulators to deregulate the market. Although some progress has been made, it is hard to know when the market will be deregulated. For telegate this means not just waiting for the deregulation, but also offering directory enquiries services using the 411 number under outsourcing arrangements. With two call centres of our own and three further call centres acquired on taking over the US company CFW Information Services, Inc. we are already well placed to develop our business in the USA. At present AT&T, one of the world s biggest telecommunications companies is a valued telegate customer.

46 ADDITIONAL INFORMATION Expanding Internationally42 We are ideally positioned for the coming fiscal year Our target markets abroad offer us good conditions and we believe that the regulators in at least one of the countries will agree to deregulation in telegate s aim is clear. We want to be the number one independent operator after the former monopolist in every country in which we have a presence. In all the countries mentioned so far we are beginning to tap the huge potential that is beckoning. Customers want voice-driven, fast, friendly, uncomplicated, reliable and accessible information and services. The increasing number of calls in Germany is demonstrable proof of the satisfaction we give our customer. It is telegate s aim to compete in the markets of all the countries mentioned. Just as in Germany we shall offer our customers the best possible services and so win market share. The telegate brand name will soon become an international byword for first-class information service.

47 ADDITIONAL INFORMATION From online business pages to an Internet service portal 43 From Online Business Pages to an Internet Service Portal It is clear that the internet has become one of the most important information and communication media we have today. The extent and depth of information is unavailable anywhere else. That s why it is so important that internet information should be wellstructured and attractively presented. Waiting time, complicated menus, and boredom are the main reasons for users to move on to other sites. With its online portal com, telegate is developing a future-oriented, fast and accurate internet information service alongside its voice portal. On the principle of one source for everything useful, internet users are able to access information about their local area through a single countrywide internet address. It is particularly important for the portal users that this address is globally local meaning that there is only one internet address needed for all cities rather than a myriad of local city addresses. All the information can be accessed via com. The development of our internet portal is a multi-stage process. The basic idea is to offer an internet service comparable to that already offered over the telegate telephone portal. By using the com, the user has countrywide access to business pages information which have been enhanced with a number of features such as maps and routing functions, countrywide cinema listings, detailed TV listings, up-to-date news etc. travel services can also be booked via the travel portal travelgate.com

48 ADDITIONAL INFORMATION From online business pages to an Internet service portal 44 In the second stage, telephone portal services will be linked to those in the internet and redeveloped. This includes a more broadly based internet enquiries service which will offer information about local events, business pages informations via telephone or features to book and arrange telephone conferences, amongst others. Our customers and users will soon be able to access intelligent services and information either via the internet or the telephone and thereby reap the benefits of both media. We will offer large amounts of commercial information and background reports on the various business areas. For example, a company will be able to show its areas of expertise, special offers, prices and opening times. Our flexible, multi-scale technology will allow us to continuously broaden our service. New co-operations, partner programs as well as additional services will increase the attractiveness of the portal com in the next months com s revenues do not come from the classical internet business approach focussing on banner-ads com is based on a very successful offline business model that of the printed business pages directories, and forms the basis for fiscal year We do not intend to merely put the business pages on the net, but we shall benefit from the dynamic and interactive nature of the internet and can thus offer customers and users value added products. The realisation of this project has meant taking a number of strategic steps. Detailed market research, targeted marketing and a portfolio of marketable products form the foundations of our strategy. Problems with the start-up and sales difficulties are now under control. This year we are going to broaden and improve our marketing efforts and to this end have increased our headquarters staff in We are developing a production and editorial centre in Berlin and with the integration of the new technological platform in autumn last year have now acquired our own development department com counters criticism that business information in the internet is boring. With an attractive portal, full of the latest news and information and with an easy to use menu system, guiding you to the information you need, all motivate the internet user to visit the site again and again. This fiscal year we shall be focussing on the optimisation of the business directory and the continual broadening of the range of services and products we offer.

49 45 ADDITIONAL INFORMATION From online business pages to an Internet service portal By the end of 2001, com wants to become Germany s second most visited online business directory. Our target is to have over two million hits per month by the end of the year com will, as a member of the telegate family, play an important role in making the vision of a multimedia, information and service company become reality. We intend to become first Germany s and then Europe s leading internet service portal. It is vital to offer solutions to the consumer in the information jungle that are relevant, useful, reliable, up to the minute and well-structured using the most contemporary media. telegate is clear about one thing - the future of consumer-orientated services means the integration of telephone and internet.

50 ADDITIONAL INFORMATION Potentials Show the Way 46 Potentials Show the Way Apart from technical and structural conditions it is the staff that has the most decisive role to play in telegate. Without our team s motivation and reliability the story of telegate AG s success would have been unthinkable. The voice portal has proven to be a successful solution in the information market. Each customer who dials can expect friendly operators, first-class information and perfect service at any time of the day or night. During times of change and restructuring, capable and motivated staff are always of vital importance. Our staff, whether in the call centres or in the headquarters in Munich, were a vital element of telegate AG s strong market position in In order to make changes work, everyone involved must be committed to them. It is in this area that staff development plays a key role. All staff members have the opportunity of developing their skills and capabilities. In this way they can react quickly and flexibly to the demands of the market and at the same time predict market trends. Our staff is involved in the processes which make our company successful both as thinkers and doers. telegate offers its staff excellent opportunities for development initiative and taking responsibility are essential elements of the work we do. telegate AG offers staff plenty of room for personal, in-team and with international expansion intercultural development. It is our aim to discover and foster individual talent. Continuous change means a secure future for both the company and every employee.

51 CONSOLIDATED FINANCIAL STATEMENTS 2000 MANAGEMENT REPORT Die wirtschaftliche Ausgangssituation 47 CONSOLIDATED FINANCIAL STATEMENTS 2000 of the telegate-group according to US-GAAP 48 Consolidated Balance Sheet (US-GAAP) as of Dec 31, Consolidated Statement of Operations (US-GAAP) 51 Consolidated Statement of Cash Flows (US-GAAP) 52 Consolidated Statement of Shareholders Equity (US-GAAP) 53 Notes to the 2000 Consolidated Financial Statements (US-GAAP) 76 Fixed assets movement (US-GAAP) 78 Revenues (US-GAAP) 79 Report of Independent Auditors

52 CONSOLIDATED FINANCIAL STATEMENTS 2000 Consolidated Balance Sheet (US-GAAP) 48 Consolidated Balance Sheet (US-GAAP) as of December 31, 2000 Assets Dec. 31, 2000 Dec. 31, 1999 Current asets Cash and cash equivalents 12, ,174 Short term securities 1,149 Trade accounts receivable net of allowance of TDM 1,136 and TDM 1,062 at December 31, 2000 and 1999, respectively 34,768 32,858 Grants receivable 3,012 2,748 Prepaid expenses and other current assets 9,1652,718 Total current assets 60, ,498 Investments 2,093 Property and equipment, net 81,369 32,043 Non-current assets Goodwill, net 62,374 Intangible assets, net 2,264 2,043 Other noncurrent assets Total noncurrent assets 65,096 2,061 Total assets 209, ,602 TDM TDM The accompanying notes are an integral part of these financial statements.

53 CONSOLIDATED FINANCIAL STATEMENTS 2000 Consolidated Balance Sheet (US-GAAP)49 Liabilities and Shareholders Equity Dec. 31, 2000 Dec. 31, 1999 Liabilities Trade accounts payable 10,948 22,949 Current portion of long term debt 5,230 Current portion of capital lease obligation Turnover tax burden 1,128 3,247 Loans due to shareholders 20,000 Accrued expenses and other liabilities 33,587 36,570 Total current liabilities 71,409 63,249 Accrued pension liability Capital lease obligation 1,274 1,790 Long term debt 44,348 Total liabilities 117,267 65,180 Minority Interest 3,139 3 Shareholders equity Common stock, 12,930,000 shares authorized (1999: 12,930,000) and 12,730,000 issued and outstanding (1999: 12,730,000) 24,898 24,898 Additional paid in capital 124, ,204 Accumulated deficit 60,589 41,678 Accumulated other comprehensive income (expense) Total shareholders equity 88, ,419 Total liabilities and shareholders equity 209, ,602 TDM TDM

54 CONSOLIDATED FINANCIAL STATEMENTS 2000 Consolidated Statement of Operations (US-GAAP) 50 Consolidated Statements of Operations (US-GAAP) For the year For the year ended Dec. 31, ended Dec. 31, Revenues 254, ,507 Cost of revenues 144, ,321 Gross profit 109,703 66,186 Advertising costs 42,345 29,474 Personnel costs 29,044 12,266 Depreciation and amortization 17,484 7,684 Other administrative expenses 40,487 14,345 Total operating costs 129,360 63,769 Operating (loss) profit 19,657 2,417 Interest income 1,9631,900 Interest expense 3, Other (expense) income 2, Other (expense) income, net 3,661 1,994 Minority Interest 4,407 Profit or loss before tax 18,911 4,411 Income tax expenses Net (loss) income 18,911 4,411 Diluted (loss) earnings and basic (loss) earnings per share in DM TDM TDM The accompanying notes are an integral part of these financial statements.

55 CONSOLIDATED FINANCIAL STATEMENTS 2000 Consolidated Statement of Cash Flows (US-GAAP) 51 Consolidated Statement of Cash Flows (US-GAAP) Dec. 31, 2000 Dec.31, 1999 Cash flow from operating activities Net (loss) income 18,911 4,411 Adjustments to reconcile net income (loss) to net cash povided by (used in) operating activities Depreciation and amortization 17,484 7,684 Minority share of loss 4,407 Government grant income in cost of revenues 3,670 5,543 Loss on foreign currency translation 2,703 Loss on sale of property and equipment 4 5 Loss on sale of securities 7 Provisions for losses on accounts receivable Pension expenses, net Changes in operating assets and liabilities: Trade receivables 4,898 22,471 Other assets 2, Trade payables 20,706 9,548 Other liabilities 12,17322,158 Cash (used in) provided by operating activities 37,209 15,541 Investing activities Capital expenditures 46,006 24,919 Acquisition of intangible assets 630 2,830 Cash paid for acquisitions, net of cash received 73,560 Proceeds from the sale of property and equipment 1 7 Proceeds from (issuance of) notes receivable Withdrawals from restricted cash accounts 400 (Investments in) sale of short-term securities 1, Cash (used in) investing activities 120,994 27,605 Financing activities Proceeds from issuance of stock 19,550 Proceeds from Initial Public Offering, net of offering costs ,170 Proceeds from government grants 6,737 9,709 Proceeds from bank loans 73,202 Proceeds from other loans 20,800 Repayments of capital lease liability Repayments of bank loans 29,256 4,400 Repayments of other loans 14,751 Cash provided by financing activities 70, ,826 (Decrease) increase in cash and cash equivalents 87,703 92,762 Cash and cash equivalents, beginning of the year 100,174 7,412 Cash and cash equivalents, end of the year 12, ,174 Supplemental disclosure of cash flow information: Interest paid 2, Income taxes paid Supplemental disclosures at non-cash investing and financing activities: Acquisition of property and equipment through issuance of debt 2,000 The accompanying notes are an integral part of these financial statements. TDM TDM

56 CONSOLIDATED FINANCIAL STATEMENTS 2000 Consolidated Statement of Shareholders Equity (US-GAAP) 52 Consolidated Statement of Shareholders Equity (US-GAAP) Accumulated other com- Total Shares of Additional Accumu- prehensive sharecommon Common paid in lated income holders stock stock capital deficit (expensive) equity in thousands TDM TDM TDM TDM TDM Balance at January 1, ,450 33,432 46, ,207 Net income 4,411 4,411 Currency translation adjustment 5 5 Comprehensive income 4,406 Issuance of common stock 3,910 19,550 19,550 Stock split 6, Initial Public Offering, net offering costs 2,000 3,912 90,758 94,670 Balance at Dec. 31, ,730 24, ,204 41, ,419 Net loss 18,911 18,911 Currency translation adjustment Comprehensive loss 18,702 Balance at Dec. 31, ,730 24, ,204 60, ,717 The accompanying notes are an integral part of these financial statements.

57 Notes to the 2000 Consolidated Financial Statements (US-GAAP) NOTES to the 2000 Consolidated Financial Statements (US-GAAP) 53

58 54 NOTES Notes to the 2000 Consolidated Financial Statements (US-GAAP) Notes to the 2000 Consolidated Financial Statements (US-GAAP) 1 Basis of Presentation Telegate AG, Planegg-Martinsried, Deutschland, and it s subsidiaries (the Company ) provide operator and directory assistance services for private and corporate customers of various telephone companies. On the basis of outsourcing agreements, these services are also rendered for other telephone companies in Germany, Europe and in the USA. In addition, the Company offers internet services and travel agency services. During 2000, the Company expanded it s business in Europe and in the USA. The accompanying consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles ( US-GAAP ). Accordingly, the Company is a listed company pursuant to Section 292a HGB and as a result is exempt from the preparation of consolidated financial statements in accordance with Section 290 et seq HGB. The consolidated management report was prepared according to the provisions of Section 315 HGB. To comply with German law, the Company is required to prepare and publish financial statements in accordance with the German Commercial Code, which represents generally accepted accounting principles in Germany ( German GAAP ). German GAAP varies in certain significant respects from US-GAAP. Accordingly, the Company has recorded certain adjustments in order to present the accompanying consolidated financial statements in accordance with US-GAAP (see note 3). 2 Summary of Significant Accounting Policies Principles of Consolidation As of December 31, 2000, the Company has consolidated the following companies. The Company has consolidated subsidiaries in which it owns less than 50% due to the application of the control concept. The control concept is deemed applicable as the Company has control of the Board of Directors and has the authority to make management and operating decisions.

59 NOTES Notes to the 2000 Consolidated Financial Statements (US-GAAP) 55 Name Registered Share- Type of Date of Equity as Results office holding share- first con- of Dec. 31, in 2000 holding solidation 2000 (TDM) Datagate GmbH Planegg, 100% direct Dec. 31, quarter Martinsried com GmbH Martinsried, 100% direct Dec.31, , ,808.2 City of Planegg MobilSafe AG Meerbusch 33.33% indirect April 1, , ,534.6 Telegate Call Center GmbH Planegg 100% direct April 1, PhoneCom Kommunikations- Munich 50.68% indirect May 1, , ,556.6 dienste GmbH MEDIA EVOLUTION Agentur Munich 50.68% indirect May 1, für neue Medien GmbH arsmovendi.com AG Munich 33.33% direct July 1, , ,410.7 KIM Travel Consulting AG Ismaning 33% direct April 1, ,316,0 travelteam24 GmbH Schongau 33% indirect Sept. 1, Telegate Anklam Gesellschaft Anklam 100% direct Aug. 1, für telefonische Informationsdienste mbh TGT International B.V. Amsterdam, 100% direct Dec. 13, ,4 Netherlands Telegate Italia S.r.L. Milan, Italy 95% indirect Dec. 13, ,591.5 Telegate Espana S.A. Madrid, 99% indirect Dec. 13,1999 Spain 1% direct 5, ,769.2 Telegate Ltd. London, UK 100% indirect Sept. 1, Telegate Inc. City of Willmington, USA 100% indirect Dec. 21, , ,940.4 The type of shareholding relates to the Parent company, telegate AG. A direct holding is owned by telegate AG and an indirect holding is owned by a consolidated subsidiary. All significant intercompany transactions and accounts have been eliminated in consolidation. Revenue Recognition The Company recognizes revenues when services have been provided. Revenues from directory assistance services are recognized based on the number and duration of calls received from end customers at the date of service provision. Revenues in the internet segment are recognized ratably over the related service agreement, which is generally six or twelve months. In December 1999 the Securities and Exchange Commission Staff issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101). SAB 101 clarifies the application of US-GAAP to selected revenue recognition issues. SAB 101 has been applied by the Company in the fourth quarter of 2000 and did not have an impact on the Company s revenue recognition policies.

60 56 NOTES Notes to the 2000 Consolidated Financial Statements (US-GAAP) Cost of Revenues Cost of revenues primarily consist of the cost of line fees, costs for access to the information data base, salaries paid to the telephone operators and the team managers. Advertising Costs Advertising costs are expensed when the related service is provided. Segment Information The company applies Statement of Financial Accounting Standards No. 131 Disclosures about Segments of an Enterprise and Related Information (SFAS No. 131). This statement establishes standards for the reporting of information about operating segments in annual and interim financial statements and requires restatements of prior year information. Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker(s) in deciding how to allocate resources and in assessing performance. SFAS No. 131 also requires disclosures about products and services and geographic areas as presented in note 16. Cash and Cash Equivalents The Company considers all highly liquid investments with an original term of three months or less to be cash equivalents. Marketable Securities Marketable securities which are available-for-sale mainly consist of an investment in bond funds and may be sold readily. Government Grants Receivable Telegate AG received investment grants from the Wirtschaftsministerium Mecklenburg-Vorpommern and from the Senator für Wirtschaft, Mittelstand, Technologie und Europaangelegenheiten, Bremen, as well as from funds of the common task Verbesserung der regionalen Wirtschaftsstruktur in connection with funds of the Europäischen Fonds für regionale Entwicklung (only Mecklenburg-Vorpommern). The governmental authorities have the right to audit the use of payments received by the Company. The grants that were given to establish and expand call centers in Germany are recorded as a reduction of the cost basis of the related assets. Grants received as reimbursement for wages of employees hired from unemployment pools are recorded as a reduction of the Company s personnel costs. Receivables Receivables are stated at nominal values. Collection risks are sufficiently covered by the allowance for doubtful accounts. Investments The Company holds an investment in preferred shares class C of a company in the USA. The investment was acquired as part of a business acquisition during 2000 and is stated at historical cost at the balance sheet date. The Company is performing a valuation of the investment to determine its fail value. Any adjustment to the currently stated value will be reflected as an adjustment to goodwill.

61 NOTES Notes to the 2000 Consolidated Financial Statements (US-GAAP) 57 Property and Equipment Property and equipment is recorded at historical cost and depreciated using the straight line method over the estimated useful life of the asset which ranges from 3 years (computer equipment, excluding software) to 10 years (office equipment). Purchased software is depreciated using the straight line method over 3 to 5 years. Low-value assets pursuant to section 6 (2) EStG are fully depreciated in the year of acquisition and are recorded in the fixed assets movement schedule under additions and disposals. Additions to assets in the amount of up to DM 100 are directly expensed. Goodwill Goodwill resulting from business acquisitions represents the excess of the purchase price over the fair value of net assets acquired. Goodwill is amortized on a straight line basis over periods from 5 to 15 years depending on the expected period of benefit based on the business activities of the related companies acquired. Intangible assets Other intangible assets, comprising primarily class 4 telephone license for Germany, are amortized on a straight line basis over the license term (8 years). Current year amortization expense of intangible assets was TDM 410 and TDM 228 at December 31, 2000 and at December 31, 1999, respectively. Impairment of Long-lived Assets Long-lived assets, including goodwill and intangible assets, are periodically reviewed for impairment based upon undiscounted cash flows. Long-lived assets with recorded values that are not expected to be recovered through future cash flows are written down to current fair value. Fair value is determined from estimated discounted future net cash flows. The management believes its long-lived assets are realizable and that no impairment allowance is necessary. Accrued Expenses and Other Liabilities Accrued expenses and other liabilities cover all foreseeable risks and contingent liabilities, including potential litigation costs. Accrued expenses and other liabilities mainly relate to accruals for fixed and variable line costs (TDM 9,733; 1999: TDM 22,537), general administrative expenses (TDM 6,402; 1999: TDM 3,122) and personnel expenses (TDM 11,105; 1999: TDM 4,908). Liabilities are stated at amounts repayable. Income taxes The Company accounts for income taxes using the liability method. Under this method, deferred income taxes are recognized for net operating loss carryforwards and temporary differences between financial and income tax bases of assets and liabilities using the enacted tax rates in effect in the years in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period that the rate change is enacted. Deferred tax assets are reduced by a valuation allowance when the management cannot determine that it is more likely than not that some portion or all of the related tax asset will be realized.

62 58 NOTES Notes to the 2000 Consolidated Financial Statements (US-GAAP) Principles of Currency Translation Balance sheets of foreign subsidiaries are translated at the average rate prevailing at the balance sheet date, the statement of operations is translated at annual average exchange rates. The resulting differences from foreign currency translation are recorded directly to accumulated other comprehensive income (expense) as a separate component of equity. Receivables and payables denominated in currencies of countries that participate in the Economic and Monetary Union were stated at the fixed rate determined by the European Union. Fair Value of Financial Instruments The carrying value of financial instruments such as cash, investments, accounts receivable, and accounts payable approximate their fair value based on the short-term maturities of these instruments. The carrying value of the Company s debt approximates fair value, which is estimated using discounted cash flow analyses based on current incremental borrowing rates for similar types of borrowing arrangements. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires the management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Concentration of Credit Risk The Company does business with a large number of customers. The majority of the Company s revenues from business with end customers (2000: 74%; 1999: 92%) are collected by Deutsche Telekom AG ( DTAG ). At December 31, 2000 and December 31, 1999, accounts receivable from DTAG under this collection agreement amounted to 65% and 91,5% of total receivables, respectively. In addition, DTAG is a very important provider of services as the Company has leased the line network from DTAG. The Company receives most of the calls and the customer data required for directory services via the DTAG network. Should DTAG no longer meet its obligations under the agreement, the Company s operating result could be adversely affected. In view of the sound financial basis of DTAG, the obligations under the deregulation of the telecommunications market and the emergency concepts available, this appears rather unlikely. International outsourcing customers are invoiced directly by the Company. Earnings (Loss) per Share The Company calculates net earnings (loss) per share under the provisions of SFAS no. 128 Earnings per Share. The net earnings (loss) per share amounts reflected on the statements of operations and the number of shares outstanding on the balance sheets reflect the for-1 stock split, which occurred in March 1999 (see note 13). The stock split has been retroactively reflected within these financial statements and related notes. Comprehensive Income In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive Income. SFAS 130 established reporting and disclosure requirements for comprehensive income and its components within the financial statements. The Company records comprehensive income on its consolidated statement of stockholders equity (deficit). The Company s comprehensive income is comprised of net income and foreign currency translation adjustments.

63 NOTES Notes to the 2000 Consolidated Financial Statements (US-GAAP) 59 Stock-Based Compensation The Company accounts for the fair value of its stock option grants in accordance with FASB Statement 123 Accounting for Stock-Based Compensation. Changes in Accounting Principles Effective October 1, 2000, the Company changed its method of accounting for depreciation of fixed assets from the declining balance method to the straight line method. This change in the depreciation method was adopted to comply with the accounting policies of the new majority shareholder and because the management believes that the straight line method results in a better matching of cost and revenue. The effect of this change on net income is not material. Reclassifications Prior to the third Quarter 2000, bad debt expense was included in Cost of Revenues. To conform with US-GAAP presentation, the Company now classifies bad debt expense as an Other Administrative Expense and has reclassified bad debt expense for prior periods to conform with current presentation. The effect of the reclassifications was to decrease Cost of Revenues and increase Gross Profit and Other Administrative Expense by TDM 1,816 for the twelve month ended December 31, Certain other reclassifications have been made in the financial statements, including the Statement of Cash Flows, to ensure that the presentation of prior years data conforms with the current presentation. These reclassifications have had no impact on previously reported net income (loss) or stockholders equity.

64 60 NOTES Notes to the 2000 Consolidated Financial Statements (US-GAAP) 3 US-GAAP Adjustments Capital Lease The Company leases computer equipment for the infrastructure of their call centers in Germany. In opposition to German-GAAP, the lease is treated as a capital lease for US-GAAP purposes. The capital lease is depreciated using the straight line method over the 5 year life of the lease. Investment Grants Investment grants authorities for the acquisition of property and equipment are recorded as a reduction of the cost basis of the related assets for US-GAAP purposes. Those grants are recorded as a special reserve under German-GAAP. The special reserve is reversed in the same way as the related property and equipment is depreciated. The income on reversing the special reserve is recorded as other income for German-GAAP purposes. Other investment grants are recorded as other income under German-GAAP. Under US-GAAP, those grants are recorded as a reduction of the cost basis of the related assets. Employee Benefit Plan German-GAAP: The legal basis for the pension liability to the Managing Board of telegate AG pursuant to section 6a EStG in conjunction with Regulation 41 of the Income Tax Regulations are the 1983 and 1998 mortality tables by Dr. Klaus Heubeck. The difference resulting from the transition from the 1983 tables to the 1998 tables is transferred to the pension accruals over 3 financial years. An interest rate of 6% has been taken as a basis of discounting. The employee benefit plan is accounted for in accordance with SFAS 87 under US-GAAP as described in note 11. There are no other pension plans. Offering Costs for Initial Public Offering Under German-GAAP, the offering costs for the initial public offering were recorded as extraordinary expense in the fiscal year According to US-GAAP, the offering costs for the initial public offering reduce the additional paid in capital. Accrual for Internal Costs of Preparing the Financial Statements The Company established an accrual for internal costs of preparing the financial statements for German-GAAP purposes which was eliminated for US-GAAP purposes. Capitalization of Incidental Acquisition Costs of Investments Under US-GAAP, costs incurred in connection with acquisitions (legal due diligence, financial due diligence, notarial charges etc.) are treated as incidental acquisition costs and are capitalized. Under German-GAAP the costs are expensed. Currency Translation On the valuation of individual transactions denominated in foreign currencies at the balance sheet date, the corresponding actual rate prevailing at the balance sheet date is used under US-GAAP, disregarding the lower of cost or market principle which German-GAAP use as a basis.

65 NOTES Notes to the 2000 Consolidated Financial Statements (US-GAAP) 61 Stock Options The Company grants stock options to selected managers and other key employees of the Company. Under HGB, only the cash bonus equivalent which the employee forfeits in favor of the options is accrued. The treatment of the stock options under US-GAAP is explained in note 14. Minority Shareholdings The minority shareholder s portion of losses in a consolidated subsidiary cannot result in a negative minority interest balance under US-GAAP unless the minority shareholder is required to further fund the operations of the subsidiary. Under German-GAAP, this minority interest income can be recognized. 4 Business Acquisitions During 2000, the Company acquired six businesses for an aggregate of TDM 11,847 in cash. These acquisitions have been accounted for by the purchase method of accounting and accordingly, the operating results have been included in the Company s consolidated results of operations from the date of acquisition. The excess of the consideration given over the fair value of net assets acquired has been recorded as goodwill of TDM 10,409. On July 11, 2000 the Company acquired the stock of CFW Information Services, Inc. for TDM 73,383. The acquisition has been accounted for by the purchase method of accounting and accordingly, the operating results have been included in the Company s consolidated results of operations from the date of acquisition. The excess of the consideration given over the fair value of net assets acquired has been recorded as goodwill of TDM 54,493. A summary of assets acquired and liabilities assumed as a result of these transactions is as follows: Current assets 8,665 Property and equipment 19,158 Liabilities assumed (11,873) TDM The following unaudited pro forma consolidated results of operations are presented as if the acquisitions had been made at the beginning of the periods presented. Years ended December Revenues 268, ,958 Net (loss) income (20,252) 1,653 Basic and diluted (loss) earnings per share (in DM) (1.59) 0.14 TDM TDM

66 62 NOTES Notes to the 2000 Consolidated Financial Statements (US-GAAP) 5 Property and equipment Property and equipment consist of: At December TDM TDM Computer-Software 16,104 6,641 Technical equipment 58,881 27,832 Office equipment 13,563 2,410 Capital lease (technical equipment) 2,833 2,833 Deposits on fixed assets 20,784 6, ,165 45,829 Less accumulated depreciation (30,796) (13,786) Property and equipment, net 81,369 32,043 The Company s depreciation expense on property and equipment was TDM 14,518 and TDM 7,466 in the years ended December 31, 2000 and 1999 respectively. The classification and the movement of individual fixed assets and depreciation is included in the fixed assets movement schedule in Exhibit I. 6 Goodwill Goodwill presented in the balance sheet relates to the acquisition of the following companies: Goodwill Accumulated Residual Useful depreciation book value life TDM TDM TDM Years Datagate GmbH 4.1 (4.1) com GmbH 7.0 (7.0) 0 1 Telegate Call Center GmbH 43.8 (2.4) MobilSafe AG 2,428.8 (260.3) 2, PhoneCom Kommunikationsdienste GmbH 2,832.6 (141.0) 2, MEDIA EVOLUTION Agentur für neue 42.0 (5.6) Medien GmbH arsmovendi.com AG 3,200.6 (160.1) 3, KIM Travel Consulting AG 1,489.8 (111.7) 1, travelteam24 GmbH (22.0) CFW Information Services, Inc. 54,492.8 (1,813.2) 52, ,901.8 (2,527.4) 62,374.4

67 NOTES Notes to the 2000 Consolidated Financial Statements (US-GAAP) 63 7 Leases The Company leases facilities and equipment under long-term operating leases. Future minimum payments under non-cancelable operating and capital leases with initial terms of one year or more are as follows: Fiscal year ending December 31 Capital Operating lease lease , , , , ,807 Thereafter 30,941 TDM TDM The Company s rental expense under operating leases in the years ended December 31, 2000 and 1999 totalled TDM 7,016 and TDM 2,695 respectively. 8 Short term Borrowings Through arrangements with various banks, the Company has overdraft credit facilities available totalling TDM 11,000 and TDM 50,500 at December 31, 2000 and 1999 respectively. These credit facilities have no stated expiration date. Interest on borrowings under these facilities is charged at rates ranging from 7.375% to 7.5%. There is no charge for unused balances. No amounts were outstanding on the facilities at December 31, 2000 and Long term Debt At December 31, 2000, the Company s long term debt consisted of a capital lease obligation and various loans. At December Capital lease obligation computer equipment 1,790 2,273 Notes payable, due in quarterly installments from Sept. 30, 2000 to Sept. 30, ,507 Notes payable, due in quarterly installments from Sept. 30, 2001 to Sept. 30, ,271 Asset financing 2,000 Loan due to minority shareholders ,368 2,273 Current portion of long term debt (5,746) (483) 45,622 1,790 TDM TDM

68 64 NOTES Notes to the 2000 Consolidated Financial Statements (US-GAAP) During 2000, the Company entered into an investment loan agreement with a financial institution. The interest rate on the outstanding principal on the loan is variable based on 3-months LIBOR plus a 0.6 % margin (7.71% in 2000) and is adjusted quarterly. During 2000, the Company entered into an additional investment loan agreement with a financial institution. The interest rate on the outstanding principal on the loan is variable based on 6-months LIBOR plus a 0.6% margin ( % in 2000) and is adjusted quarterly. In November 2000, the Company issued debt to minority shareholders in exchange for property and equipment. The loan carries an interest rate of 7% with no stated expiration date. In the year 2000, the Company received 3 loans from two minority shareholders in the total amount of TDM 800. The loan carries an interest rate of the refinancing rate of the European Central Bank plus 1.5% (at December 31, 2000: 6.75%). The loans are due at December 31, The Company s long-term debt maturities for fiscal years subsequent to December 31, 2000 are as follows: Year ending December 31 TDM , , , , and thereafter 24,372 51, Shareholder Loans In December 2000, the Company obtained loans from two shareholders of the company in the amount of DM 20 million. These loans carry an interest rate of 6.3% and are due in March Employee Benefit Plans The Company established a defined benefit plan covering the members of the Board of Directors of telegate AG, effective December 31, The benefit to be paid is a pre-determined fixed annual amount, payable from the time the participant reaches 65 years of age. All participants are fully vested in the plan.

69 NOTES Notes to the 2000 Consolidated Financial Statements (US-GAAP) 65 The following table sets forth the plan s funded status and the amounts recognized for the defined benefit pension plan in the Company s consolidated financial statements: At December Projected benefit obligation at beginning of the year Service cost Interest cost Actuarial gain (loss) 34.9 (81.0) PBO end of the year Fair value of plan assets Funded status (235.4) (141.4) Unrecognized net actuarial gain (34.7) (77.3) Unrecognized prior service costs Net amount recognized in the balance sheet (208.1) (153.6) The Company assumed a discount rate of 6% in calculating the plan s projected benefit obligation. The Company did not make any contributions to the plan nor did the plan pay any benefits in the years ended December 31, 2000 and The components of pension expense for the year ended December 31 are as follows: TDM TDM Service cost Interest expense Amortization of actuarial gain (3.8) (8.6) Amortization of prior service cost Pension expense TDM TDM

70 66 NOTES Notes to the 2000 Consolidated Financial Statements (US-GAAP) 12 Earnings per share The Company calculates net earnings (loss) per share under the provisions of SFAS No. 128 (SFAS 128), Earnings per Share. Basic earnings per share (EPS) includes no dilution and is computed by dividing net income (loss) by the weighted average shares of common stock outstanding. Diluted EPS is computed by dividing net in-come (loss) by the weighted average shares of common stock and dilutive common stock equivalents outstanding. The Company s dilutive common stock equivalents result from stock options and are computed using the treasury stock method. The net earnings (loss) per share amounts reflected on the statements of operations for 1999 and in the following table retroactively reflect the issuance of 3,910,000 shares prior to the IPO which have been deemed to be issued for nominal consideration and treated as an effective stock split as prescribed by SFAS 128 and the for-1 stock split which occurred on March 18, The following table sets forth the computation of the basic and diluted EPS computations for the years ended December 31, 2000 and 1999: Year ended December Numerator: Net income (loss) numerator for basic and diluted loss per share (18,910,756) 4,411,022 Denominator: Weighted average shares outstanding Basic 12,730,000 12,121,780 Dilutive effect of stock options 11,445 Weighted average shares outstanding Diluted 12,730,000 12,133,225 Basic and diluted earnings (loss) per share (1.49) 0.36 DM DM At December 31, 2000 diluted loss per share excludes the outstanding stock options because treatment of the stock options as if converted would have an anti-dilutive effect.

71 NOTES Notes to the 2000 Consolidated Financial Statements (US-GAAP) Shareholders Equity At December 31, 2000, the Company has 12,930,000 shares authorized (1999: 12,930,000) and 12,730,000 (1999: 12,730,000) total shares of common stock issued and outstanding. Common stock is stated at nominal value. Holders of common shares are entitled to one vote per share on all matters submitted to a vote of shareholders. The common shares are not redeemable and have no conversion rights. Dividends may only be declared and paid from the distributable balance sheet profit determined on the basis of the Company s annual German statutory accounts. Issuance of Common Stock During the first quarter of 1999, the Company received proceeds of DM 19,500,000 through the issuance of 3,910,000 of common stock at DM 5 per share to existing shareholders. All existing shareholders were given the option to purchase 19 additional shares for each share owned at DM 5 per share. The entire allotment of shares offered were not sold. Stock Split On March 18, 1999 the Company redenominated the share capital from DM to Euro. Concurrently with this redenomination, a for-1 stock split, was effected of the then issued and outstanding capital stock. All references per share data included in the financial statements and related notes have been adjusted to give retroactive effect to the stock split. Initial Public Offering On April 21, 1999 the Company completed its Initial Public Offering (IPO) of 3,764,012 shares of its common stock (including 1,273,055 shares which were sold by former shareholders and 490,957 Greenshoe shares) at a price of DM per share (Euro 27.-). Net proceeds to the Company net of underwriting discounts and commissions and offering expenses aggregated TDM 94, Stock Option Plans The Company has reserved 200,000 shares of common stock for issuance under its 1999 stock option plan. The Company grants selected executives and other key employees stock option awards at an exercise price not less than the fair market value of the common stock at the date of grant. In exchange for the granting of these options, the employees to which the options were granted forfeited a cash bonus. In the event the employee leaves the Company prior to the vesting of the options, the cash amount forfeited can be recovered by the employee. The stock option awards vest two years from the date of grant, contingent upon increases in the Company s share price. Options held by the Board of Management may only be exercised if the telegate share price outperforms the MSCI Europe Telecoms Index by an average of 5% during the period in which the option is outstanding. Options held by managerial staff may only be exercised if the telegate share price outperforms the Neuer Markt Performance Index or the MSCI Europe Telecoms Index by an average of 5% during the period in which the option is outstanding. The options expire 4 years from the date of grant.

72 68 NOTES Notes to the 2000 Consolidated Financial Statements (US-GAAP) Option transactions under the plan are summarized as follows: Number of shares Weighted average exercise price Outstanding at December 31, 1998 Granted 21, Outstanding at December 31, , Granted 11, Cancelled (6,315) Outstanding at December 31, , The following table summarizes the stock options outstanding at December 31, As at December 31, 2000 there are no stock options exercisable. Weighted average Number of contractual life Exercise Price options remaining DM , , DM Years 26, The Company accounts for the fair value of its stock option plans in accordance with FASB Statement 123 Accounting for Stock-Based Compensation. Compensation expense of DM 414,323 and DM 415,484 has charged against income in the years ended December 31, 2000 and 1999 respectively. The estimated fair value of stock options granted during the years ended December 31, 2000 and 1999 were DM and DM per option respectively. The fair values were estimated on the grant dates utilizing the Black-Scholes option-pricing model and the following assumptions: Year ended December 31, Risk free interest rates 4.50% 3.0% Expected life 2.25 years 3.0 years Expected Volatility 48% 50% Expected Dividends

73 NOTES Notes to the 2000 Consolidated Financial Statements (US-GAAP) Provision for Income Taxes As a result of losses incurred, the Company has not recorded any provisions for income taxes in the two years ended December 31, 2000 and 1999 respectively. Reconciliations between the provisions for income taxes and that computed by applying the German statutory rate of 53.7%, which includes both income and trade tax, to income before income taxes and minority interests are as follows: Provisions computed at statutory rate 12,516 2,368 Valuation allowance (9,699) 0 Utilization of net operating losses 0 2,368 Adjustment due to change in tax rate (2,817) 0 Deferred tax assets, net of valuation allowance TDM TDM Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities. They are measured by applying the enacted tax rates and laws in effect for the years in which such differences are expected to reverse. In the third quarter 2000, a reduction of the German income tax rate was effected. This change in tax law resulted in a 25% income tax on profits which is a reduction from the previous rates of 40% for retained profits and 30% for distributed profits. Deferred taxes are attributable to the following: At December Deferred tax assets: Net operating loss carryforwards 35,547 26,000 Property and equipment Capitalization of incidental acquisition cost of investments (318) Other differences (207) (63) Deferred tax assets 35,945 26,246 Valuation allowance (35,945) (26,246) Deferred tax assets, net of valuation allowance TDM TDM As of December 31, 2000 the Company had available cumulative tax loss carryforwards of approximately DM 89 million, of which DM 61 million relate to Germany, DM 16 million in the USA and DM 12 million in other European countries. Under German and European tax laws, these loss carryforwards may be off-set against future profits, provided that the conditions for the utilization of tax losses in merger situations are met. The United State tax loss carry-forwards expire in 15 years.

74 70 NOTES Notes to the 2000 Consolidated Financial Statements (US-GAAP) 16 Segment Information The Company operates in four segments, each of which are strategic businesses that are managed separately. The Company views its business in four segments which are primarily determined by their geographic region and due to similar regulatory environments of information services in each region. The segments and a description of their businesses are as follows: Information & Call Center Services (ICS) Germany/Austria includes information services and related outsourcing activities to the deregulated German market. Information & Call Center Services (ICS) Europe includes subsidiaries formed or acquired during the year as an attempt to expand information services in European markets which are in the process of becoming deregulated. Information & Call Center Services (ICS) USA also includes the expansion of information services into this market. Internet/11880.com comprises the companies activities relating to delivering information services via internet. During 1999, the Company s only business activities consisted of what now is the ICS Germany/Austria segment. Therefore the segmental information for 1999 has not been presented. The management s dominant measurements are consistent with the Company s consolidated financial statements and, accordingly, are reported on the same basis herein. The management evaluates the performance of its segments and allocates resources to them primarily based on operating income. Intersegment sales are generally accounted for at amounts comparable to sales to unaffiliated customers and are eliminated in consolidation. The accounting policies of the segments are substantially the same as those described in the summary of significant accounting policies, as discussed in note 2. Certain items are maintained at the Company s corporate headquarters (Corporate) and are not allocated to the segments. They primarily include most of the Company s debt and cash and equivalents and related net interest expense, corporate headquarters costs, non-recurring gains and losses and certain foreign currency gains and losses.

75 NOTES Notes to the 2000 Consolidated Financial Statements (US-GAAP) 71 As of and for the ICS Germany/ ICS ICS Internet/ year ended December 31 Austria Europe USA com Totals TDM TDM TDM TDM TDM 2000 Revenues from external customers and intersegment sales 239, , ,629 Intersegment revenues Total consolidated revenues 238, , ,539 Depreciation and amortization 10, ,530 1,458 15,880 Operating profit (loss) 31,358 (10,926) (13,975) (15,693) (9,236) EBITDA 42,302 (9,980) (11,445) (14,235) (6,642) Total expenditure for additions to long-lived assets 25,544 8,073 22,239 6,506 62,362 With respect to depreciation and amortization and expenditure for long-lived assets, the differences between the segment totals and the consolidated totals relate to assets maintained at the Corporate headquarters. As of and for the year ended December Operating profit (loss) Total operating loss from segments (9,236) Unallocated amounts (other corporate items) (10,421) Consolidated totals (19,657) Long-lived assets Total long-lived assets from segments 62,362 Unallocated amounts (other corporate items) 5,043 Consolidated totals 67,405 TDM The following table presents geographic area. As of and for the year ended December Revenues Europe 239,576 USA 14,963 Consolidated totals 254,539 Long-lived assets Europe 45,165 USA 22,239 Consolidated totals 67,405 TDM

76 72 NOTES Notes to the 2000 Consolidated Financial Statements (US-GAAP) 17 Revenues Revenues, number of operator calls and network minutes are reflected in Exhibit II for the years ended December 31, 2000 and 1999 respectively, and are subdivided into the segments ISC Germany/Austria, ISC Europe, ICS USA and Internet/11880.com. 18 Personnel Expenses The following table presents total personnel expenses for the years ended December 31, 2000 and 1999 respectively. Total expenses differ from the amount reported in the Statement of Operations due to the inclusion of certain personnel costs in cost of revenues Wages and salaries 87,956 49,663 Social security and pension expenses 26,139 8,867 (of which for pensions) (55) (60) 114,095 58, Number of Employees The number of employees, excluding the Managing Board, amounts to: Balance sheet date Dec. 31, 2000 absolute full-time employees TDM TDM Annual average absolute full-time employees TDM TDM TDM TDM Total 3,913 3,093 3,576 2,686 Of which operator 3,475 2,662 3,230 2,343 At December 31, 1999 telegate AG employed 2,364 persons (expressed in full-time employees: 1,682). In the annual average, 1,851 persons were employed (expressed in full-time employees: 1,321).

77 NOTES Notes to the 2000 Consolidated Financial Statements (US-GAAP) Related Party Transactions As stated in note 9, the Company acquired property and equipment in the amount of TDM 2,000 through the issuance of debt to a minority shareholder. As described more fully in note 10, the Company obtained loans from two shareholders of the Company in the amount of DM 20 million. Payments for services received from a company with a significant common shareholder of the Company totalled TDM 6,077 for the year ended December 31, In the years ended December 31, 2000 and 1999 respectively, the Company received further services from a shareholder amounting to TDM 3,035 and TDM 3,455 respectively. Telegate Holding GmbH, Planegg, holds the majority stake (50.98%) in telegate AG. At the balance sheet date, SEAT Pagine Gialle S.p.A., Turin/Italy, holds 51.37% in Telegate Holding GmbH and includes the Company in its consolidated financial statements; the Company is fully consolidated. Ing. C. Olivetti & C. S.p.A., Turin/Italy, is the ultimate parent company and includes the Company in its consolidated financial statements. The Company is fully consolidated. 21 Commitments and Contingencies At December 31, 2000 the Company had commitments outstanding for capital expenditures under purchase orders and contracts amounting to TDM 10,769, all of which are expected to be incurred in the fiscal year The Company has entered into contracts for marketing and EDP services. Future minimum payments under noncancelable contracts with initial terms of one year or more are as follows: Year ended December , , , , Thereafter 101 TDM The management is not aware of any matters that would give rise to significant liabilities which would have a material adverse effect on the Company s financial position or results of operations.

78 74 NOTES Notes to the 2000 Consolidated Financial Statements (US-GAAP) 22 Information on Corporate Bodies of telegate AG Supervisory Board of telegate AG Other assignments Mr Herbert Brenke Chairman of Supervisory Board SHS Informationssysteme AG, Munich, (since Jan. 1, 1999) Supervisory Board Management Consultant QS Communications AG, Cologne, Essen Deputy Chairman of Supervisory Board European Telco Exchange AG, Düsseldorf, Supervisory Board ASR Auto-Stern von Russland AG, Moscow, Supervisory Board Member of Advisory Board Rheinland of Dresdner Bank ASKK Holding AG, Hamburg, Chairman of Supervisory Board Mr Peter Titz Deputy Chairman Industrie- und Immobilien Leasing GmbH, Tutzing, (since July 7, 1998) Member of Advisory Board Dipl.-VW, Dipl.-Ing. ProSyst Software AG, Cologne, Baar, Switzerland Chairman of Supervisory Board Publity AG, Leipzig, Chairman of Supervisory Board Varetis AG, Munich, member of Supervisory Board WebWasher AG, Paderborn, Chairman of Supervisory Board Wolfcraft GmbH, Kempenich, member of Advisory Board Albergo Giardino Holding SA, CH-Zug, member of VR Aureus Private Equity AG, CH-Zug, President of VR Aureus Management AG, CH-Zug, member of VR Invision AG, CH-Zug, member of VR Medialine Interactive Solutions AG, CH-Chur, member of VR Aureus Capital Ltd., GB-St. Helier, Chairman of the Board autobytel.europe, NL-Amsterdam, Member of the Board autobytel.com USA-Irvine, Board of Directors enba plc, IRL-Dublin, Member of the Board Mrs Ina Krech Mrs Birgit Labs Dr. Hans-Werner Moritz Team Director Rostock Chairwoman of Works Council in the Neubrandenburg branch, Neubrandenburg Lawyer Krailling Mr Nir Tarlovsky Vice President Delta Three.com, USA New York, USA

79 NOTES Notes to the 2000 Consolidated Financial Statements (US-GAAP) 75 Managing Board Dr. Klaus Harisch, Spokesman of Managing Board since Oktober 1, 1999 Diplom-Physiker Munich Responsible for the sales area Mr. Peter Wünsch, Diplom-Informatiker Gauting Management of the technology sector Mr. Dirk Roesing, Diplom-Betriebswirt (BA) Munich Responsible for the commercial sector Remuneration of the Supervisory Board and the Managing Board of telegate AG In the fiscal year 2000, remuneration of the Supervisory Board amounted to TDM 125 (1999: TDM 2). Total remuneration of the Managing Board amounted to TDM 3,296 (1999: TDM 1,689) in the fiscal year Loans The Company granted a loan in the amount of TDM 60 to a member of the Managing Board. The loan is repayable in four equal installments each in the amount of TDM 15 from December 31, 1999 to December 31, 2001, including interest in the amount of the discount rate of Deutsche Bundesbank. At December 31, 2000 the loan portfolio amounts to TDM 15. Planegg-Martinsried, March 6, 2001 The Managing Board

80 76 NOTES Fixed assets movement (US-GAAP) Exhibit I Fixed assets movement (US-GAAP) Acquisition cost and cost of production Additions Jan. 01, from acqui- Dec. 31, 2000 sitions Additions Disposals Transfers 2000 TDM TDM TDM TDM TDM TDM I. Investments 1. Investments 2,093 2, , ,093 II. Property and equipment 1. Software 6,641 1,905 7, , Technical equipment and machinery 27,832 11,528 16,037 3,484 58, Capital lease 2,833 2,83 4. Other equipment, fixtures, fittings and equipment 2,410 6,194 5, , Advance payments and plant and machinery in process of construction 6,1132,47315,880 3,682 20,784 45,829 22,100 44, ,165 III. Intangible assets 1. Goodwill ,691 64, Other intangible assets 2, ,902 2, , ,804

81 NOTES Fixed assets movement (US-GAAP) Exhibit I77 Accumulated depreciation and amortization Book value Additions Foreign Jan. 01, from acqui- currency Dec. 12, Dec. 12, Dec. 12, 2000 sitions Additions Disposals Transfers translation TDM TDM TDM TDM TDM TDM TDM TDM TDM 0 0 2, ,093 1, ,158 3,909 5,507 12,195 10,984 8,688 19,672 16,848 39, ,147 2,195 1,686 1,030 2,325 3, ,068 1,380 7, ,113 20,784 13,7862,942 14, ,79632,043 81, , , , ,043 2, , ,166 2,043 64,638

82 78 NOTES Revenues (US-GAAP) Exhibit II Revenues (US-GAAP) Jan. 1 Dec. 31, 2000 Jan. 1 Dec. 31,1999 Number of Number of operator Network operator Network calls minutes Revenues calls minutes Revenues in thousands in thousands TDM in thousands in thousands TDM National directory inquiries 101, ,772 82, ,208 International directory inquiries 1,095 4, ,145 Call Completion 78,455 44,022 30,863 14,480 Outsourcing Inbound 12,648 17,141 8,918 1,584 12,513 Outsourcing Outbound 6,728 Value added services Technical enterprises 2, Informations & Call Center Services 115,880 78, ,404 92,454 32, ,922 Multiple directory enquiries Data sales 108 Other 21 4 Data Services Call-by-Call 76,199 6, ,204 9,470 Other 17 Telephony 0 76,199 6, ,204 9,487 Information & Call Center Services Germany/Austria 116, , ,971 92, , ,507 National directory inquiries Information & Call Center Services Information & Call Center Services Europe Outsourcing Inbound 23,040 14,963 Information and Call Center Services 23, , Information & Call Center Services USA 23, , Yellow Pages 48 travelgate 527 Internet Information Services Internet/ com Total 139, , ,539 92, , ,507

83 NOTES Report of Independent Auditors79 Report of Independent Auditors We have audited the accompanying consolidated balance sheet of telegate AG, Planegg, quarter Martinsried, and subsidiaries as of December 31, 2000, and the related consolidated statement of income, statement of changes in stockholders equity and cash flows as well as notes for the years then ended. These consolidated financial statements prepared in accordance with United States Generally Accepted Accounting Principles are the responsibility of the Company s Board of Managing Directors. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit of the consolidated financial statements in accordance with German auditing regulations for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer in Deutschland (IDW). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The audit includes examining, on a testing basis, evidence supporting the amounts and disclosures in the financial statements. The audit also includes assessing the accounting principles used and significant estimates made by the Board of Managing Directors, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provide a reasonable basis for our opinion. In our opinion, based on our audit the consolidated financial statements referred to above present fairly, in all material respect, the net assets and financial position of telegate AG, Planegg, quarter Martinsried, as of December 31, 2000, and of its result of operations and its cash flow for the year then ended in conformity with United States Generally Accepted Accounting Principles. Our audit, which according to German auditing regulations also extends to the Group management report prepared by the Board of Managing Directors for the business year from Januar 1, 2000 to December 31, 2000 has not led to any reservations. In our opinion, on the whole the group management report provides a suitable understanding of the Group s position and suitably presents the risks of the future development. In addition, we confirm that the consolidated financial statements and the Group management report for the business year from January 1 to December 31, 2000 satisfy the conditions required for the Company's exemption from its duty to prepare consolidated financial statements and the Group management report in accordance with German accounting law. Munich, March 6, 2001 PwC Deutsche Revision AG Eiber Auditor Straub Auditor

84 Responsible telegate AG Concept and Design CARROTS, Cologne Photography Thomas Rabsch Lithography purpur, Köln Paper 300 g/m 2, 170 g/m 2 Zanders Mega matt