AdLINK Internet Media AG, Montabaur. Financial Statements

Transcription

1 AdLINK Internet Media AG, Montabaur Financial Statements as of December 31, 2008

2 AdLINK Internet Media AG Management Report of the Company and the Group Content of Management Report 1. Economic environment 2. Business development 3. Result of operations, financial position and net assets 4. Subsequent events 5. Risk report 6. Dependent company report 7. Outlook 1. ECONOMIC ENVIRONMENT Financial crisis placing increasing burden on real economy Following a strong first quarter, the Euro zone s economy shrank in all subsequent quarters during 2008 (compared with the previous year). At -1.5% and -1.2%, the fourth quarter in particular was well behind the previous quarter and prior-year quarter, respectively. According to the European statistics agency Eurostat, annual growth in 2008 reached just 0.7% thanks above all to the strong first quarter. As a consequence of the financial crisis, German growth was almost halved in According to a report of the Federal Statistics Agency (Destatis) in February 2009, however, the strong start to 2008 helped the German economy reach growth of 1.3% for the year as a whole. The corresponding figure for 2007 was 2.5% and as much as 3,0% in the boom year After a buoyant first quarter, the downward trend accelerated toward year-end. In the fourth quarter, gross domestic product was down 2.1% on the previous quarter following similar declines in the second and third quarters. Online advertising markets growing more slowly The leading market research institutes all expected further strong growth for the global online advertising market and forecast before the onset of the global financial crisis similarly high growth rates as in previous years. As fears of global recession grew, however, advertisers became increasingly cautious with their

3 spending and market researchers were forced to downgrade their growth forecasts for all major advertising markets. According to the Interactive Advertising Bureau (IAB) and PricewaterhouseCoopers (PwC), online advertising revenues continue to grow in the USA. However, there was a noticeable slowdown in the pace of growth during 2008 from 18.2% in the first quarter to 12.8% in the second and 11.0% in the third as a result of the financial and economic crisis. At the time of writing, the figures for the fourth quarter of 2008 are not yet available. According to calculations prepared by Nielsen Media Research, gross online advertising revenues in Germany generated with graphic advertising grew by 27% in 2008 to 1.5 billion. Nielsen Media Research also reported that there was a marked slowdown in the pace of growth over the last quarters. The Online Marketing Group (Online-Vermarkterkreis - OVK) of the German Digital Economy Association (Bundesverband Digitale Wirtschaft BVDW) comes to similar figures: with growth of 25%, OVK states that online advertising in Germany boasts the highest growth rate by far compared with other media. Gross advertising revenues from classic online advertising, search word marketing and affiliate marketing totaled 3.65 billion. Classic online advertising displayed the strongest growth (27%), generating revenues of around 1.9 billion. Search word marketing achieved year-on-year growth of 24% and climbed to around 1.48 billion. The affiliate marketing segment grew by 25% to 268 million. Despite the adverse economic conditions, the German online advertising market thus once again confirmed the positive trend of the preceding years in While the proportion of spending on classic media formats continues to stagnate or steadily decline, online advertising continues to grow and gain further ground. Online advertising s share of the total advertising market has grown by more than 10% over the past four years. At the same time, media formats such as general-interest magazines (-3.3%), newspapers (-3.0%) and TV (-3.2%) have all lost market share. Although online advertising continues to grow in significance as part of the overall marketing mix it was not able to escape the effects of the general economic

4 situation. The same is still true today. As a consequence, the OVK s growth forecast of around 10% for 2009 is much more conservative than in previous years. It should also be noted that both Nielsen Media Research and the OVK only report gross spendings, and thus the official list prices. We believe that the growth in net advertising revenue in the online advertising market will fall significantly as a result of ongoing pressure on prices and discounts. 2. BUSINESS DEVELOPMENT Development falls below our expectations The mounting financial and economic crisis during 2008 had a negative impact on the AdLINK Group s operating business. Sales and, above all, earnings were well below our original expectations for The main causes of this development were changes in Domain Marketing and the strong decline in spending by customers in display advertising, which became increasingly noticeable in the second half of This growing reluctance displayed by customers as a result of the global financial crisis and subsequent fears of recession led to both falling revenues and at the same time to fierce competition for the remaining budgets, and thus to greater pressure on prices and margins. In contrast to the disappointing sales and earnings figures in our Domain and Display Marketing, the Affiliate Marketing segment performed well on the whole without consideration of special items. Planned cooperation with United Internet Media On December 1, 2008 the AdLINK Group published an ad-hoc announcement to the effect that it had commenced talks about a possible strategic alliance with United Internet Media AG. United Internet Media AG markets United Internet s portals (WEB.DE, GMX and 1&1, and the shopping portal SmartShopping.de) and together with the AdLINK Group is a member of the United Internet Group. The investigation of a possible strategic alliance will focus on the further development of media and advertising technologies, as well as product development and the possibility of cooperative marketing. Further possibilities involving even closer cooperation are not excluded. These may involve the legal integration of United Internet Media into the listed AdLINK Group. The stock market listing of the AdLINK Group is not under discussion. The same applies to the clear strategic positioning of

5 AdLINK Media as a third-party marketer and United Internet Media as a marketer of its own portals. Segment development The AdLINK Group divides its business into the primary segments Germany, Euroland and Non-Euroland: In the Germany segment, there was year-on-year growth in sales of 3.1%, from million to million. This was mainly due to growth in the field of Affiliate Marketing and Display Marketing, which more than compensated for falling sales in Domain Marketing. The segment result, however, fell from 16.8 million in 2007 to 9.5 million (-43.5%). This decline was mainly a result of the development in Domain Marketing. In the Euroland segment, sales fell from 63.1 million in 2007 to 60.6 million (- 4.0%). There was also a year-on-year decline in the segment result, from 4.2 million to 0.9 million (-78.6%). Segment revenues fell particularly in the second half of 2008 in all sub-markets of the Display Marketing division, while there was growth in our Affiliate Marketing business in France. Earnings were down on the previous year for all units of our Euroland segment. However, the prior-year result includes a positive special item from the contribution of company shares amounting to 1.2 million. In the past fiscal year, the Non-Euroland segment generated revenues of 34.3 million, compared with 40.7 million in the previous year (-15.7%). Adjusted for exchange rate fluctuations, the decline amounted to 10.4%. There were significant falls in revenue on the UK and US markets, while the sale of our Swedish subsidiary on June 30, 2008 was also responsible in part for the decline. The segment result amounted to -0.7 million, following million in the previous year. In addition to the positive special item of 15.6 million from contributing company shares in the previous year, the main reason for the year-on-year decline in earnings was a deterioration in results on the UK and US markets.

6 The AdLINK Group arranges its secondary segments according to products: Display Marketing contains the brands AdLINK Media, composite and net:dialogs, while Affiliate Marketing comprises the affilinet brand and Domain Marketing the sedo and GreatDomains brands. Display Marketing: AdLINK Media is Europe s leading independent online marketer AdLINK Media is the specialist for Display Marketing within the AdLINK Group and is a leading independent online marketer in Europe with a portfolio of high-reach and high-quality websites. AdLINK Media is represented by its numerous local offices in Europe s most important markets. Our specialists composite and net:dialogs are also positioned in the Display Marketing segment. As an marketing specialist, composite is able to use its pool of address data to supply global campaigns. net:dialogs is the right partner for successful activities in the field of direct and dialogue marketing. In comparison with the previous year, sales in the Display Marketing segment fell by 9.0% from 87.3 million to 79.4 million in This was due to the growing economic crisis in 2008 which led many online advertisers to cut their budgets for image advertising at short notice. As a consequence, the number of advertising customers also fell from 3,875 to 3,598 (-7.1%). The network s reach, however, was once again enhanced. Monthly ad impressions grew from 8.5 billion to 10.4 billion (+22.4%), while the number of unique users per month climbed from 81.6 million to 92.6 million (+13.5%). This development resulted from the fact that AdLINK Media focused on marketing high-quality and highly frequented websites. In the course of the past fiscal year, the number of employees fell slightly from 216 at year-end 2007 to 214 as of December 31, In early 2008, our investment Goldbach Media expanded into South-East Europe, acquiring online marketing companies in Croatia and Slovenia. These companies were already operating profitably in the field of online marketing and search engine marketing and have since been integrated via cooperation and license agreements into the AdLINK Group s network where they will strengthen the European business of the AdLINK Media brand. The acquisition and integration of the Croatian and

7 Slovenian companies has also strengthened our position as a leading supplier of online marketing solutions in South-East Europe. In the second half of 2008, the targeting standard TGPopen of United Internet Media was introduced by AdLINK Media in Germany. TGPopen guarantees maximum efficiency in reaching the chosen target group. TGP offers advertisers and agencies direct, precise and high-reach targeting in order to optimize the effectiveness (enhanced advertising impact) and efficiency (reduced wastage) of their campaigns. TGPopen is Germany s most advanced targeting system with the highest market penetration now also available to AdLINK Media customers. In order to achieve a sustained improvement in earnings, AdLINK Media s business in Sweden was sold in The AdLINK Media brand and services will continue to be offered by the new owners on the basis of a franchise agreement. AdLINK Media s exclusive marketing of the ViaMichelin websites was extended by a further two years in December The website reaches internet users in Germany, Italy, Spain, Belgium, the Netherlands, Switzerland and Austria. This deal means that advertising customers will continue to have the possibility of placing their display advertising in a high-quality and high-reach environment. The TGPopen targeting tool also offers additional support for their advertising activities. AdLINK Media s exclusive marketing agreement with the OMS network an association of over 170 internet sites belonging to 80 leading German newspaper publishers is due to end in mid Within the Display Marketing segment, composite is our specialist for marketing. In this particular form of online marketing, recipients are only contacted by advertisers with their express permission. Advertisers therefore have the benefit of being able to target recipients individually and establish sustainable customer relationships. Advertisers benefit from composite s exclusive technology and many years of experience. Our brand is represented by offices throughout Europe and works with cooperation partners in America and Asia.

8 net:dialogs is the AdLINK Group s specialist for direct and dialogue-based marketing and acts as a full-service agency. net:dialogs is also part of our Display Marketing segment. The services and solutions for our direct customers and media agencies include designing and implementing complete communication campaigns for effective and measurable targeting in all digital media. The service offered by net:dialogs ranges from the first project idea to campaign handling and performance controlling. With the aid of net:dialogs specialized web-based software, customers can utilize the AdLINK Group s entire international marketing network. Affiliate Marketing: affilinet still on track for expansion affilinet is the specialist for Affiliate Marketing within the AdLINK Group. With offices in all major European markets, affilinet operates one of Europe s most successful affiliate networks. It offers online advertisers (affiliate program suppliers) an effective digital sales channel and its registered sales partners (publishers) attractive earning opportunities. In the Affiliate Marketing segment, we succeeded in raising sales by 11.5% to 88.4 million (prior year: 79.3 million) in fiscal year Despite the growing financial and economic crisis, this direct marketing instrument with purely success-based advertising proved highly stable. Especially in difficult times, advertisers can boost product sales via this channel, and the high level of transparency in measuring success makes it easier for advertisers to allocate their budgets. The number of partner programs grew from 1,370 to 1,540 (+12.4%), compared with the previous year. The number of participating websites rose by 10.3% from 426,000 to 470,000, although the number of ad impressions per month failed to reach the prior-year level of 6.2 billion (the number fell slightly by 1.6% to 6.1 billion). At the end of the period under review, 117 people were employed in this segment (prior year: 98). affilinet continued to drive its European expansion in 2008 and is now represented in 7 nations with 5 languages. affilinet first launched its international platform on the Dutch market and soon after expanded its network to Spain. This gives both Spanish and, above all, international advertisers and website owners the possibility to benefit from the platform s quality and reach across borders also in Spain. affilinet also cooperates closely with AdLINK Media in these countries, enabling it to offer

9 customers one-stop-shopping and making it even more attractive for advertisers to run their campaigns centrally via the AdLINK Group s networks. In mid 2008 affilinet launched a new Publisher Communication Center. The new publisher management system with innovative functions enables even more efficient administration for advertisers and optimum communication with their online sales partners. With even more effective administration possibilities, the tool provides clear segmentation and categorization of sales partners. Extensive display and filter options help to sort website owners according to various criteria, such as canals, segments, commission fees or time periods. At the Online Marketing Düsseldorf (OMD) fair in September 2008, affilinet launched its International Developer Portal for the development of innovative web applications and the enhancement of affiliate sales. affilinet offers developers the possibility to create their own web applications and advertising formats online. The aim of the Developer Portal is to utilize the network s creativity and innovative strength in order to enhance it in the long term. The portal offers European developers the possibility to implement new ideas at an international level. affilinet provides a wide range of interfaces, and is continually adding more. The new developments can help advertisers achieve greater success for their programs and thus raise revenues in the long term. In late 2008 affilinet launched a more effective portal for successful affiliate marketing in Europe, which will benefit both advertisers and website owners. In addition to its new design and improved user interface, the portal provides direct access to all programs and to affilinet s Developer Portal. Domain Marketing: Sedo able to strengthen its market position Sedo, and its American brand GreatDomains, is the specialist for Domain Marketing within the AdLINK Group and the leading international market place for domain trading. Sedo is also one of the world s leading companies in the field of domain parking, which enables domain owners to place advertising on their unused domains. The company s services also include domain brokerage, domain transfer and domain appraisal.

10 The strongest decline in sales and earnings in fiscal year 2008 was recorded by our Domain Marketing business. In an increasingly competitive and mature market with falling margins, sales and earnings were burdened above all by changes in the policy and algorithms of our most important partner in the field of search engines, as well as by unfavorable currency effects. As a consequence, revenues fell by 12.6% from 62.6 million in the previous year to 54.7 million in Despite weak sales and earnings, the number of domains offered for sale grew from 10.5 million to 15.3 million, corresponding to growth of 45.7%. The stock of parked domains increased by 21.6% from 5.1 million in the previous year to 6.2 million. There was also strong growth in the number of registered members, from 647,000 to 907,000 (+40.2%). The number of employees increased from 158 at the end of the previous year to 179. Effective January 1, 2008, Sedo acquired a shareholding of 40% in the Italian company DomainsBot S.r.l.. The company offers innovative search technology for domain names and develops models to find and research domain names. In early 2008, Sedo introduced customer certification programs to raise the quality of future customer accounts and thus further enhance its advertising services. Bidder certification was also introduced during the first half of the year. This gives sellers more market place security and protection from manipulated bids, especially in the case of high-price premium auctions. The platform was further optimized in the second half of the year with the launch of a buyer/seller activity index. The index reflects the activity of individual customers in the market place. These measures enabled Sedo to further improve its customer service and make its trading platform even more attractive. In 2007 the domain pizza.com was successfully auctioned for USD 2,605,000 via the GreatDomains trading platform, which we acquired in Bidders from around the world displayed great interest and helped raise the bid to this record amount. Sedo also handled the sale of the kredit.de domain for 892,500. This was the highest price ever paid for a domain with the German national suffix. A number of live

11 auctions were also successfully conducted in On one particular day, as many as 70 domain names were auctioned for a total sum of 350,000. In addition to Cologne and Boston (USA), Sedo has also been represented in London (UK) since mid 2008 via a cooperation with AdLINK Media. This enables the company to offer its UK clients the best possible local service. With over 7 million registered.co.uk domains, the UK domain market still has plenty of potential and promises high growth opportunities. With the acquisition of the domain.co.uk domain three years ago, Sedo already laid the foundation for accessing domain traders in the UK. In November 2008, Sedo founded a company together with two US partners in which Sedo holds a 49% stake. Intellectual Property Management Company Inc. offers professional management of company domain names as a service for the respective companies. This service comprises integrated management of a company s online presence from registration to transfer, the buying and selling of domains to trademark and rights management. The company is based in the USA. Employees On December 31, 2008 the Group employed 510 (prior year: 472) people. Of this total, 274 were employed in Germany (prior year: 252) and 236 outside Germany (prior year: 220). The increase in headcount resulted from the positive development of our domestic Affiliate Marketing business and the continued international expansion of the Group as a whole. Personnel expenses grew by 5.1%, from 27.6 million in the previous year to 29.0 million. Principles of Management Board and Supervisory Board remuneration The Supervisory Board is responsible for determining the remuneration of Management Board members. The remuneration received by the members of the AdLINK Group s Management Board is performance-oriented and consists of fixed and variable elements. In addition, there are components providing long-term incentives in the form of convertible bonds and Stock Appreciation Rights (SARs). The amount of these remuneration components is regularly reviewed. The fixed

12 component is paid monthly as a salary. The size of the variable component is dependent upon the attainment of certain fixed financial objectives identified at the beginning of the year and mainly related to sales and earnings figures. Depending on the attainment of targets, the Chairman of the Supervisory Board determines the variable component, which is limited to a certain maximum amount. There is no subsequent amendment of performance targets. There is no guaranteed minimum payment of the variable remuneration component. In addition to cash compensation, Management Board members received long-term incentive components in the form of convertible bonds and SARs. The members of the Supervisory Board receive remuneration consisting of a fixed element and a variable component based on the company s economic success. Each member of the Supervisory Board receives fixed remuneration of 15,000 per year. The Chairman of the Supervisory Board receives the double amount. In addition to this fixed remuneration, each member of the Supervisory Board (including the Chairman and his deputy) receives an annual compensation amount based on the Company s performance, amounting to 250 for every 0.01 of earnings per share, as disclosed in the Company s consolidated financial statements for the year in question, which exceeds a minimum amount of 0.30 per share. 3. RESULT OF OPERATIONS, FINANCIAL POSITION AND NET ASSETS Business development falls short of expectations The AdLINK Group s business development in fiscal year 2008 fell well short of its own expectations, which originally envisaged significant growth in sales and earnings. As a result of the negative development of the Domain Marketing segment and the worsening economic crisis in the second half of the year, there was a yearon-year decline in both sales and earnings in Sales revenues of the AdLINK Group fell by 6.7 million or 2.9% in fiscal year 2008, to reach million (prior year: million). Adjusted for currency fluctuations, sales would have remained stable at million. The development of the UK pound and the US dollar against the euro had a particularly adverse effect on revenues during the period under review.

13 Earnings In a fiercely competitive market in which many companies are competing for tight budgets, gross margin fell from 25.0% in the previous year to 20.7%. Gross profit decreased from 57.3 million in the previous year to 46.1 million. This 19.5% decline in gross profit is due to the pressure on margins in Display Marketing and above all to changes in the field of Domain Marketing. In comparison with sales revenue, there was a proportionately stronger increase in sales expenses in the past fiscal year from 15.7 million to 17.5 million. General and administrative expenses also grew more than proportionately to 16.1 million (prior year: 15.1 million). The rise in costs resulted from higher personnel expenses from stock-based compensation programs. Earnings before interest, taxes, depreciation, amortization and depreciation for domains (adjusted EBITDA) fell from 43.3 million to 14.0 million in the period under review. The operating result amounted to 0.5 million, compared with 30.9 million in the previous year. Earnings before taxes (EBT) fell to -9.0 million, compared with 28.5 million in the previous year. Fiscal year 2008 closed with a negative consolidated result after tax of 13.9 million (prior year: net profit of 18.8 million). Undiluted earnings per share (EPS) fell from 0.72 in 2007 to in This development in earnings was mainly due to negative effects in fiscal year 2008 in connection with our stake in Goldbach Media AG, goodwill writedowns in Display and Affiliate Marketing and falling profits in Domain and Display Marketing as well as positive special items included in the prior-year result from the contribution of our subsidiaries AdLINK Switzerland and AdLINK Austria to Goldbach Media AG. In fiscal year 2008 the carrying value of our shares in the Swiss advertising company Goldbach Media AG were written down by 7.9 million. Due to share prices in Goldbach Media AG well below their acquisition cost, the value of this investment was written down to the lower value of 12.0 million (prior year: 28.8 million). The revaluation reserve formed in the previous year for the subsequent valuation of shares in Goldbach Media AG was reversed in 2008 without effect on profit and loss. Further goodwill writedowns amounting to 9.2 million (prior year: 9.4 million) were

14 made as a result of the decreased earnings prospects of our German and French Display Marketing market as well as for the impairment of subsidiaries in the French Affiliate Marketing market. Special items thus amounted to million (prior year: +7.4 million) in fiscal year If one deducts special items, pre-tax earnings fell from 21.1 million in 2007 to 8.1 million in Fall in cash flow As a result of the decline in earnings and higher tax payments, operative cash flow fell to 9.5 million (prior year: 18.2 million). A total of 1.2 million was spent on investment activities during the period under review (prior year: 3.7 million), primarily for property, plant and equipment. Cash flow from financing activities was marked by a reduction in utilized credit lines from affiliated companies amounting to 21.2 million and a corresponding increase in bank loans amounting to 14.9 million. Borrowing was reduced in total by 6.4 million. At the end of period, cash and cash equivalents increased to 12.0 million, compared with 9.5 million as of December 31, Total assets fall to million In the past fiscal year, total assets fell from million to million, mainly as a result of goodwill writedowns, the subsequent valuation of financial assets and a decrease in trade receivables. Other financial assets, which include our stake in the listed company Goldbach Media AG, fell from 28.8 million in the previous year to 12.0 million. The Group s equity capital fell to 46.2 million as of the balance sheet date 2008 (prior year: 66.4 million), due to the negative consolidated result and writedowns. The Group s equity ratio decreased to 30.7% (prior year: 36.0%). Annual financial statements of the parent company acc. to German Commercial Code (HGB) In the period under review, sales revenues of the AdLINK Group s parent company AdLINK Internet Media AG amounted to 21.0 million and were thus down by 4.1% on the previous year ( 21.9 million). Sales consist of revenues from international campaigns which are centrally billed or centrally purchased by AdLINK Internet Media AG, as well as charges and costs allocated to operating subsidiaries and the Group s licensees. The main influencing factors for the development of sales and

15 earnings of AdLINK Internet Media AG were therefore the marketing of international campaigns and the continuation of service agreements with the Group s subsidiaries. Costs for administrative services provided by AdLINK Internet Media AG in the field of finance, legal affairs, human resources, marketing, management, IT, DART system administration/campaign management and product development are allocated to the respective subsidiaries. In 2008, AdLINK Internet Media AG received revenues from allocated direct costs (e.g. DART costs, IT services, travel expenses) amounting to 12.4 million (prior year: 13.1 million) and from allocated overheads amounting to 4.6 million (prior year: 5.1 million). Services rendered in connection with central purchases for international campaigns accounted for 1.6 million (prior year: 1.7 million). In addition, sales revenues from third parties totaled 2.1 million (prior year: 1.8 million). Income from investments amounting to 2.8 million (prior year: 20.0 million) resulted mainly from dividends distributed by subsidiaries (AdLINK Media Spain, Belgium, the Netherlands) and Goldbach Media. In the previous year, income resulted mainly from the contribution of joint venture companies to Goldbach Media. AdLINK Internet Media AG received income of 3.3 million (prior year: 9.8 million) from existing profit transfer agreements with subsidiaries. Due to reduced earnings prospects, writedowns were made on the carrying values of investments ( 11.0 million) and on loans to certain subsidiaries ( 6.6 million) totaling 17.6 million in fiscal year The writedowns affected the following companies: AdLINK Media France ( 10.1 million), AdLINK Media UK ( 5.4 million), affilinet UK ( 1.8 million) and net:dialogs ( 0.3 million). The reduced share price also necessitated a writedown on the value of our shares in Goldbach Media of 7.9 million, which reduced their valuation from 19.9 million to 12.0 million. Total writedowns on financial assets thus amounted to 25.5 million. In fiscal year 2008, the result from ordinary activities amounted to million, compared with 32.2 million in the previous year. The decline was mainly due to the above mentioned writedowns on financial assets, as well as the positive effect from the contribution of companies in the previous year. The net loss of AdLINK Internet Media AG amounts to 25.2 million and has thus deteriorated compared with the previous year (net profit 29.5 million).

16 Total assets fell to million (prior year: million), mainly as a result of the aforementioned writedowns on financial assets. Liabilities due to affiliated companies were reduced from 86.2 million to 70.8 million as of December 31, 2008 and consisted mainly of financial liabilities due to United Internet AG amounting to 30.1 million (prior year: 51.0 million) and liabilities due to subsidiaries of AdLINK Internet Media AG amounting to 40.6 million (prior year: 34.7 million). Liabilities due to banks were correspondingly increased from 0.2 million to 15.0 million. As of the balance sheet date, cash and cash equivalents of AdLINK Internet Media AG increased to 7.2 million (compared with 0.8 million as of December 31, 2007). The equity ratio fell down from 37.4% to 25,1% in Explanation of disclosures acc. to Secs. 289 (4), 315 (4) (HGB) The Company s capital stock amounts to 26,205,890 divided into 26,205,890 nopar value, registered, common shares. Each share entitles the owner to one vote at the Annual Shareholders' Meeting. There are no other share categories. As far as the Company is informed, United Internet AG, Montabaur, held 23,771,194 shares or 90.71% of total shares in the AdLINK Group as of December 31, The Supervisory Board appoints the members of the Management Board for a period of no more than five years. The Management Board consists of one or more persons, whereby the number is determined by the Supervisory Board. The Supervisory Board may appoint a member of the Management Board as chairman. Deputy members of the Management Board may also be appointed. The Supervisory Board may revoke an appointment to the Management Board and the appointment as chairman of the Management Board in the case of reasonable grounds. The Annual Shareholders' Meeting must adopt all resolutions concerning amendments of the Company s articles. The resolution of the Annual Shareholders' Meeting requires a majority of at least three quarters of capital stock represented at the time of adoption. The Supervisory Board is authorized to make amendments to the articles insofar as they only affect the form. The Management Board is entitled to issue new shares under the following circumstances:

17 The Management Board is authorized, subject to approval by the Company s Supervisory Board, to increase the Company s capital stock on one or more occasions before May 17, 2010 by a total of 12,900,000 by issuing new no-par shares for cash or non-cash contributions (Authorized Capital 2005). Capital stock may also be increased conditionally by up to 1,044,010, divided into up to 1,044,010 no-par value shares. The conditional increase in capital is earmarked for conversion options to be granted to the bearers of convertible bonds. The Annual Shareholders' Meeting of May 17, 2004, authorized the Management Board or Supervisory Board to issue such convertible bonds. It will only be implemented to the extent that these conversion options are exercised and providing the Company does not service the conversion options from its stock of treasury shares. The shares will participate in profits from the beginning of the fiscal year in which they are created by exercise of the conversion option. With regard to the members of the Management Board, the Supervisory Board is authorized and, with regard to the other persons entitled to convertible bonds, the Company s Management Board is authorized to define further details of the conditional capital increase and the execution thereof. Capital stock may still be increased conditionally by up to 10,000,000.00, divided into up to 10,000,000 no-par value shares. The conditional capital increase is earmarked for shares to be granted to bearers or holders of warrant or convertible bonds, which the Annual Shareholders' Meeting of May 17, 2005 authorized the Company or a subordinated Group company to issue up to May 16, 2010, providing the issue is in return for cash and the warrant or convertible bonds are not serviced from the Company s stock of treasury shares or approved capital. It will only be implemented to the extent that the warrant or conversion options of the aforementioned bonds are exercised or conversion obligations from such bonds are fulfilled and providing the warrant or convertible bonds are not serviced from the Company s stock of treasury shares or approved capital. The shares will participate in profits from the beginning of the fiscal year in which they are created by exercise of the warrant or conversion option. The Company s Management Board is authorized to define further details of the conditional capital increase and the execution thereof.

18 In accordance with a resolution passed by the Annual Shareholders' Meeting on May 26, 2008 the Management Board is authorized to acquire treasury shares not exceeding ten percent of its capital stock up to November 25, SUBSEQUENT EVENTS On February 25, 2009 the AdLINK Group acquired the customer base, the brand and the software rights of the US domain parking supplier RevenueDirect, via its subsidiary Sedo LLC.. At the same time, Sedo agreed a close strategic alliance with the seller s parent company, Dotster Inc.. The acquisition of RevenueDirect will enable Sedo GmbH to significantly expand its share of the North American market. Sedo expects its alliance with Dotster one of the heavyweights on the US domain registry market with over three million registered domains to offer further strategic benefits with regard to its further expansion on the fiercely competitive US domain parking market. 5. RISK REPORT The aim of risk management is to systematically deal with potential risks as well as to promote a risk-oriented approach throughout the entire organization. This controlled approach to risks is aimed at utilizing existing opportunities to the full and enhancing the company's success. The concept, organization and task of Enterprise Risk Management was defined by the Management Board of AdLINK Internet Media AG and documented as part of a risk manual available to all members of the Group. These requirements are continually compared with the changing legal conditions and adapted or developed further as required. As part of our risk management process, we identify, classify and evaluate company risks in a standardized group-wide system with clear allocation of responsibilities. We use Enterprise Risk Management not only to identify risks which may endanger the Group s continued existence, but also to identify and monitor those risks which do not jeopardize our existence but which may have a significant negative impact on the Group s net assets, financial situation and results of operations. In fiscal year 2008 we once again conducted a company-wide risk audit. Risk scenarios were evaluated with regard to the possible negative impact on the

19 respective company s EBT and the probability of such damage. Wherever sensible, risk-limiting measures were defined for identified significant potential risks. Earlywarning indicators with pre-determined threshold values were allocated to risks as part of a proactive monitoring system. The current risk status is communicated to the Management Board and Supervisory Board on a quarterly basis. Sudden risk occurrences or significant changes in the risk situation trigger an ad-hoc reporting obligation and the respective risk is communicated immediately to the Management Board, and where necessary by them to the Supervisory Board. The main risks and uncertainties of the AdLINK Group are presented in the following: Market The AdLINK Group operates in a number of countries and is subject to the economic development of these sub-markets. The respective economic development influences the amount of advertising spending by potential customers and thus the size of the total market in which the AdLINK Group is active. In the past fiscal year, the economic situation deteriorated significantly. The Group s continued market development is uncertain in view of the amount of the online advertising budgets of our customers. Thus subject may have a significant impact on its result of operations, financial position and net assets. Competition There is strong competition from national and international companies operating in the field of digital online marketing. New competitors might also enter the market and further raise the intensity of competition. For example, the market entry of Google Inc. with their product AdSense for Domains in the domain parking business in the beginning of Even major portals are still competing for advertising budgets. AdLINK Internet Media AG can only influence these factors to a very limited extent. Such strong competition could lead to a deterioration of our net assets, financial situation and results of operations, as advertisers and website operators would be able to choose from a wide range of advertising brokers and advertising options. AdLINK Group strengthens the ties to its customers and partners by means of active

20 customer management and the provision of new and innovative advertising products and services, also on an international level, in order to expand its own domestic and international market position. Market price risk The Company holds Goodwill which is evaluated by stock-exchange prices. In case of an significant decline of this stock-exchange prices a worsening for our asset, finance and earnings situation could be the result. Product development On the markets for online advertising, technological innovations emerge at short intervals. For example, new technical possibilities are constantly being made available by marketers to suit the requirements of specified target groups and integrated into the product range. If we do not use this technological progress, or use it only insufficiently, other operators might achieve better product quality, services or processes than ours. This could weaken our competitive standing, as we would not be able to supply customers with the desired products, or at least not in the desired quality. This risk might also occur if a technical service provider we employ, and whose systems we use for important supplies of advertising formats, does not implement technological innovations or only with delay. As a consequence, we might lose important advertising customers and/or websites and thus revenue and earnings. AdLINK Internet Media AG takes action to counter this risk by closely monitoring the market and competitors, by evaluating technological possibilities, by entering into cooperations and by driving our own developments. Reach A key differentiation factor of the AdLINK Group is our portfolio of high-quality and highly frequented websites and domains which are used for marketing purposes. Should the AdLINK Group lose many of these important websites and domains, or not have enough high-reach advertising sites in its portfolio and was unable to sufficiently replace them, we might become less attractive for advertisers. There is also a risk that certain websites do not reach their guaranteed revenue targets. This

21 loss of revenue, with consistently high costs, may result in a deterioration of our net assets, financial situation and results of operations. We attempt to limit this risk by providing active partner support, continually improving service quality, expanding our international organization (of particular importance for major international websites) and maximizing the revenue potential of websites. Dependency on customers/business partners Future budgets of advertisers cannot be predicted accurately nor can they be influenced by AdLINK Internet Media AG; advertising budgets are often awarded for each new campaign. In the case of affilinet and Sedo, a substantial proportion of revenue is often generated with a few major business partners. Renegotiations with these business partners are upcoming in 2009 or probably parts of business relations will end. Such dependencies also exist in part for the AdLINK Media companies. Should these partners reduce or end their relations with us, this may result in a serious deterioration of our net assets, financial situation and results of operations. AdLINK Internet Media AG reduces this risk by employing experienced key account managers, maintaining long-term and close relations with these business partners, expanding our customer base and providing a convincing range of products and services. Pressure on prices/margins The current fierce competition situation increases the pressure on margins and prices. The AdLINK Group has positioned itself as a European online specialist with an innovative product portfolio and special services for its customers and websites. Due to the current competitive situation in certain countries, the AdLINK Group might decide to take preemptive action or react by reducing prices/margins in these countries. Such falling prices and/or margins could result in a deterioration of our net assets, financial situation and results of operations. In order to counter this risk, the AdLINK Group offers innovative additional services and new high-margin products. Liquidity As of December 31, 2008, the AdLINK Group had net liabilities (financial liabilities less cash and cash equivalents) of 32.9 million, consisting of liabilities to United Internet AG and banks. Net liabilities were thus reduced significantly once again in

22 fiscal year There are risks with regard to the arranged short terms of credit lines and the possibility to terminate existing loans. Should existing credit lines be terminated or not extended, and the possibility of refinancing through United Internet AG be restricted, the Company s liquidity would not be secured. On the basis of current information, the liquidity of AdLINK Internet Media AG can be regarded as secure at present and is sufficient to be able to meet all future payment obligations. Protected rights The legislation and court decisions of most countries in which the AdLINK Group operates are continually developing with regard to the protection of trademarks and responsibility for content on the online market. Despite the resulting increase in clarity regarding the rights and obligations of all market players, there may still be uncertainties in these areas. The possibility cannot be excluded that certain market players attempt to use these uncertainties to their advantage. The AdLINK Group counters this risk by swiftly implementing new legal requirements and seeking regular advice from experts in these areas of law. Personnel An important factor contributing to the successful operation of the AdLINK Group are the skills and market knowledge of its employees. High staff turnover or the loss of key personnel could have an adverse impact on the AdLINK Group. So far, we have always succeeded in quickly compensating for the loss of key personnel. We counter such risks by pursuing an active personnel development strategy. Qualitative information pertaining to the overall level of risk Due to the current economic situation, the overall risk situation has increased in comparison with fiscal year As a result of ongoing fierce competition on the online advertising market, the major risks for the Company s future net assets, financial situation and results of operations focus not only on the market development, but also on the areas of competition, reach, dependencies on customers and partners, personnel and product development. Our risk management culture enables us to proactively counter such risks and limit them to a minimum. We judge the probability of such adverse developments as moderate. There were no

23 risks which directly jeopardized the continued existence of AdLINK Internet Media AG in the fiscal year 2008, neither from individual risks nor from the overall risk situation. Annual inspection of the risk management system acc. To Sec. 317 (4) HGB In the course of their audit of the Company s annual financial statements, the auditors assess both the functionality and compliance of the risk management system installed by AdLINK Internet Media AG. The auditors confirmed that our risk management system complied with legal requirements in DEPENDENT COMPANY REPORT In compliance with Sec. 312 (1) AktG, the Management Board of AdLINK Internet Media AG presented the Supervisory Board with a Dependent Company Report dealing with the company s possible dependence on its majority shareholder United Internet AG. It closes with the declaration that the company received adequate compensation (quid pro quo) for each legal transaction in accordance with the circumstances known at the time when such transactions were carried out, or the measure involved was executed or omitted, and that the company was not disadvantaged by such measures being executed or omitted. 7. OUTLOOK Global economy 2009 near to zero growth The International Monetary Fund (IMF) has reduced its economic forecast for 2009 once again. The IMF now expects the global economy to grow by 0.5% in the current year. That would be the lowest growth rate since the end of World War Two, according to the updated World Economic Outlook report published in late January In November 2008 the IMF was still expecting growth of 2.2%: it therefore reduced its own forecast by 1.7 percentage points within just two months. A further reduction of its growth forecast for 2009 cannot be excluded. For 2010, the IMF expects global growth of 3.0%. Even worse than the IMF s forecast for the USA (-1.6%) is its expectation for the Euro zone (-2.0%). All leading institutes also forecast a steep downturn for the German economy in The general view is that economic output will fall by around 2%. At the same time, Germany faces a considerable increase in borrowing

24 in 2009, due in part to the direct consequences of the economic crisis and in part to the cost of the government s recovery packages. The German government hopes that these packages will help industry and consumers, and thus reduce the severity of the expected recession. The problems of the finance sector remain acute and will also affect the real economy states the IMF report. According to the IMF, a sustained economic recovery will not be possible until the finance sector is fully functional again and the bottleneck in the credit markets has been removed. Further growth for online advertising The online advertising market will continue to grow although a temporary but significant downturn is expected in 2009 as a result of the global economic problems. The overall importance of online advertising in the total advertising mix will continue to rise. The Marketers' Internet Ad Barometer 2008 report shows that eight out of ten European advertisers will invest more heavily in online advertising in the coming years. The study commissioned by the European Interactive Advertising Association, the association of pan-european online marketers and technology service providers, questioned marketing executives of leading European companies. According to the report, almost three quarters of all advertisers questioned in Europe (2008: 73%; 2006: 52%) used the internet increasingly as an advertising medium. Over one third of these deciders regard the internet as an essential channel for their marketing. In 2006 this proportion was just 17%. 82% of those companies which raised their online advertising budget in 2008, moved part of their media budget from print (40%), TV (39%) and direct marketing (32%) to the internet. Although online advertising will continue to grow in importance in Germany, it will not be able to escape the effects of the general economic situation. The OVK s growth forecast for 2009 is thus much more conservative than in previous years. The online experts expect gross advertising revenues to grow by 10%. The OVK forecasts an increase to just over 4 billion. We believe that the growth in net advertising revenue in the online advertising market will fall significantly as a result of ongoing pressure on prices and discounts.