VIVENDI UNIVERSAL SA
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As filed with the Securities and Exchange Commission on June 29, 2005
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 20-F
     
o
  REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
    OR
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2004
    OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from                           to
Commission File Number: 001-16301
VIVENDI UNIVERSAL, S.A.
(Exact name of Registrant as specified in its charter)
     
N/A
  Republic of France
(Translation of Registrant’s name into English)   (Jurisdiction of incorporation or organization)
42, avenue de Friedland
75380 Paris Cedex 08
France
(Address of principal executive offices)
     Securities registered or to be registered pursuant to Section 12(b) of the Act:
     
    Name of each exchange
Title of each class   on which registered
     
Ordinary Shares, nominal value 5.50 per share
  New York Stock Exchange*
American Depositary Shares (as evidenced by American Depositary Receipts), each representing one share, nominal value 5.50 per share
  New York Stock Exchange
 
Listed, not for trading or quotation purposes, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.
 
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
         
American Depositary Shares
    63,224,034  
Ordinary Shares, nominal value 5.50 per share
    1,072,624,363  
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes þ  No o
Indicate by check mark which financial statement item the Registrant has elected to follow:
Item 17 o  Item 18 þ
 
 


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PRESENTATION OF INFORMATION
      This Annual Report on Form 20-F (referred to herein as this “annual report” or this “document”) has been filed with the US Securities and Exchange Commission (SEC).
      “Vivendi Universal” refers to Vivendi Universal, S.A., a société anonyme, a form of stock corporation, organized under the laws of the Republic of France, and its direct and indirect subsidiaries. “Vivendi” refers to Vivendi, S.A., the predecessor company to Vivendi Universal. Unless the context requires otherwise, references to the “Vivendi Universal group”, “we,” “us” and “our” mean Vivendi Universal, S.A. and its subsidiaries or its predecessor company and its subsidiaries. “Vivendi Universal Entertainment” and “VUE” refer to Vivendi Universal Entertainment LLLP, a limited liability limited partnership organized under the laws of the State of Delaware. “Vivendi Environnement” changed its name pursuant to a shareholder resolution adopted on April 30, 2003 to “Veolia Environnement” (VE). “Shares” refers to the ordinary shares of Vivendi Universal. The principal trading market for the ordinary shares of Vivendi Universal is Euronext Paris S.A., or the Paris Bourse. “ADSs” or “ADRs” refers to the American Depositary Shares or Receipts, respectively, of Vivendi Universal which are listed on the New York Stock Exchange, or NYSE, each of which represents the right to receive one Vivendi Universal ordinary share.
      This annual report includes Vivendi Universal’s Consolidated Financial Statements for the years ended December 31, 2004, 2003 and 2002 and as at December 31, 2004, 2003 and 2002. Vivendi Universal’s Consolidated Financial Statements, including the notes thereto, are included in “Item 18 — Financial Statements” and have been prepared in accordance with generally accepted accounting principles in France, which we refer to in this annual report as “French GAAP” or “GAAP”. Unless otherwise noted, the financial information contained in this annual report is presented in accordance with French GAAP. French GAAP is based on requirements set forth in French law and in European regulations and differs significantly from generally accepted accounting principles in the United States, which we refer to in this annual report as “US GAAP”. See “Item 18 — Financial Statements — Note 32” for a description of the significant differences between French GAAP and US GAAP and a reconciliation of net income, shareholders’ equity and other measures from French GAAP to US GAAP.
      Various amounts in this document are shown in millions for presentation purposes. Such amounts have been rounded and, accordingly, may not total. Rounding differences may also exist for percentages.
CURRENCY TRANSLATION
      Share capital in Vivendi Universal is represented by ordinary shares with a nominal value of 5.50 per share. Our shares are denominated in euros. Because we intend to pay cash dividends denominated in euros, exchange rate fluctuations will affect the US dollar amounts that shareholders will receive on conversion of dividends from euros to dollars.
      We publish our Consolidated Financial Statements in euros. Unless noted otherwise, all amounts in this annual report are expressed in euros. The currency of the United States will be referred to as “US dollars,” “US$,” “$” or “dollars”. For historical exchange rate information, refer to “Item 3 — Key Information — Exchange Rate Information”. For a discussion of the impact of foreign currency fluctuations on Vivendi Universal’s financial condition and results of operations, see “Item 5 — Operating and Financial Review and Prospects”.
FORWARD-LOOKING STATEMENTS
      This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, or Exchange Act. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to divestitures, acquisitions, working capital and capital requirements, available liquidity, maturity of debt obligations, business trends and other information that is not historical information. Forward-looking

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statements can be identified by context. For example, when we use words such as estimate(s), aim(s), expect(s), feel(s), will, may, believe(s), anticipate(s) and similar expressions in this document, we are intending to identify those statements as forward-looking. All forward-looking statements, including, without limitation, the launching or prospective development of new business initiatives and products, anticipated music or motion picture releases, and anticipated cost savings from asset disposals and synergies are based upon our current expectations and various assumptions. Our expectations, beliefs, assumptions and projections are expressed in good faith, and we believe there is a reasonable basis for them. There can be no assurance, however, that management’s expectations, beliefs and projections will be achieved. There are a number of risks and uncertainties that could cause our actual results to differ materially from our forward-looking statements. These include, among other things:
  •  our ability to retain or obtain required licenses, permits, approvals and consents;
 
  •  legal and regulatory requirements, and the outcome of legal proceedings and pending investigations;
 
  •  the lack of commercial success of our product or services, particularly in the television, motion pictures and music markets;
 
  •  challenges to, loss, infringement, or inability to enforce intellectual property rights;
 
  •  lost sales due to piracy, particularly in the motion picture and music business;
 
  •  downturn in the markets in which we operate, particularly the music market;
 
  •  increased technical and commercial competition, particularly in the television market;
 
  •  our ability to develop new technologies or introduce new products and services;
 
  •  changes in our corporate rating or rating of Vivendi Universal’s debt;
 
  •  the availability and terms of financing;
 
  •  changes in business strategy or development plans;
 
  •  political instability in the jurisdictions in which we operate;
 
  •  fluctuations in interest rates or foreign currency exchange rates and currency devaluations;
 
  •  inflation and instability in the financial markets;
 
  •  restrictions on the repatriation of capital;
 
  •  natural disasters; and
 
  •  war or acts of terrorism.
      The foregoing list is not exhaustive; other factors may cause actual results to differ materially from the forward-looking statements. We urge you to review and consider carefully the various disclosures we make concerning the factors that may affect our business, including the disclosures made in “Item 3 — Key Information — Risk Factors,” “Item 5 — Operating and Financial Review and Prospects,” and “Item 11 — Quantitative and Qualitative Disclosures About Market Risk”. All forward-looking statements attributable to us or persons acting on our behalf speak only as of the date they are made and are expressly qualified in their entirety by the cautionary statements. Vivendi Universal does not undertake to update any forward-looking statement.

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        Page
         
   Identity of Directors, Senior Management and Advisers     1  
   Offer Statistics and Expected Timetable     1  
   Key Information     1  
   Information on the Company     7  
   Operating and Financial Review and Prospects     51  
   Directors, Senior Management and Employees     106  
   Major Shareholders and Related Party Transactions     123  
   Financial Information     123  
   The Offer and Listing     127  
   Additional Information     128  
   Quantitative and Qualitative Disclosures about Market Risk     141  
   Description of Securities Other than Equity Securities     143  
   Default, Dividend Arrearages and Delinquencies     143  
   Material Modifications to the Rights of Security Holders     143  
   Controls and Procedures     144  
   Audit Committee Financial Expert     144  
   Code of Ethics     144  
   Principal Accountant Fees and Services     144  
   Exemptions from the Listing Standards for Audit Committees     146  
   Purchases of Equity Securities by the Issuer and Affiliated Purchasers     146  
   Financial Statements     147  
   Financial Statements     147  
   Exhibits     147  
 EX-1.1: BY LAWS
 EX-8.1: LIST OF SUBSIDIARIES OF VIVENDI UNIVERSAL SA
 EX-12.1: CERTIFICATION OF CHIEF EXECUTIVE OFFICER
 EX-12.2: CERTIFICATION OF CHIEF FINANCIAL OFFICER
 EX-13.1: CERTIFICATION OF CHIEF EXECUTIVE OFFICER
 EX-13.2: CERTIFICATION OF CHIEF FINANCIAL OFFICER
 EX-14.1: CONSENT
 EX-15.1: IFRS 2004 TRANSITION


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PART I
Item 1:      Identity of Directors, Senior Management and Advisers
      Not applicable.
Item 2:      Offer Statistics and Expected Timetable
      Not applicable.
Item 3:      Key Information
Selected Financial Data
      The selected consolidated financial data at year end and for each of the years in the three-year period ended December 31, 2004 have been derived from our Consolidated Financial Statements and the related notes appearing elsewhere in this annual report. The selected consolidated financial data at year end and for each of the years in the two-year period ended December 31, 2001 have been derived from our Consolidated Financial Statements not included in this annual report. You should read this section together with “Item 5 — Operating and Financial Review and Prospects” and our Consolidated Financial Statements included in this annual report.
      Our Consolidated Financial Statements have been prepared in accordance with French GAAP, which differs in certain significant respects from US GAAP. The principal differences between French GAAP and US GAAP, as they relate to us, are described in “Item 18 — Financial Statements — Note 32”. For a discussion of significant transactions and accounting changes that affect the comparability of our Consolidated Financial Statements and the financial data presented below, refer to “Item 4 — Information on the Company — Main Developments for 2004, 2003 and 2002” and the Notes to our Consolidated Financial Statements.

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SELECTED CONSOLIDATED FINANCIAL DATA
                                                           
    Year Ended December 31,
     
        2002 with VE    
        accounted for    
    2004 as   2003 as   using the equity   2002 as   2001 as   2000   2000 as
    published   published   method(a)   published   published   restated(b)   published
                             
    (In millions of euros)
STATEMENT OF INCOME
                                                       
Amounts in accordance with French GAAP
                                                       
 
Revenues
  21,428     25,482     28,112     58,150     57,360     41,580     41,798  
 
Operating income
  3,476     3,309     1,877     3,788     3,795     1,823     2,571  
 
Income (loss) before gain (loss) on businesses sold, net of provisions, income tax, equity affiliates, goodwill amortization and minority interests
    2,774       2,102       (2,217 )     (954 )     1,867       1,061       1,938  
 
Gain (loss) on businesses sold, net of provisions/exceptional items(b)
    (140 )     602       1,125       1,049       2,365       3,812       2,947  
 
Goodwill amortization and impairment losses
    (669 )     (2,912 )     (19,434 )     (19,719 )     (15,203 )     (634 )     (634 )
 
Minority interests
    (1,030 )     (1,212 )     (574 )     (844 )     (594 )     (625 )     (625 )
 
Net income (loss)
  754     (1,143 )   (23,301 )   (23,301 )   (13,597 )   2,299     2,299  
 
Earnings (loss) per share — basic
    0.70       (1.07 )     (21.43 )     (21.43 )     (13.53 )     3.63       3.63  
 
Earnings (loss) per share — diluted
    0.63       (1.07 )     (21.43 )     (21.43 )     (13.53 )     3.41       3.41  
Amounts in accordance with US GAAP
                                                       
 
Revenues
    21,254       25,321             40,062       51,733       34,276       34,276  
 
Net income (loss)
    2,921       (1,358 )           (43,857 )     (1,172 )     1,908       1,908  
 
Earnings (loss) per share — basic
    2.73       (1.27 )           (40.35 )     (1.19 )     3.24       3.24  
 
Earnings (loss) per share — diluted
    2.58       (1.27 )           (40.35 )     (1.19 )     3.03       3.03  
Dividend per share
    0.0       0.0       1.0       1.0       1.0       1.0       1.0  
Average share outstanding (millions)(c)
    1,072.1       1,071.7       1,087.4       1,087.4       1,004.8       633.8       633.8  
Shares outstanding at year-end (millions)
    1,072.6       1,071.5       1,068.6       1,068.6       1,085.8       1,080.8       1,080.8  
STATEMENT OF FINANCIAL POSITION
                                                       
Amounts in accordance with French GAAP
                                                       
 
Intangible assets, net (including goodwill, net)
    23,195       29,567       34,768       34,768       60,919       67,313       67,313  
 
Shareholders’ equity
  13,621     11,923     14,020     14,020     36,748     56,675     56,675  
 
Minority interests
    2,959       4,929       5,497       5,497       10,208       9,787       9,787  
 
Equity and quasi-equity(d)
    17,580       17,852       20,517       20,517       46,956       66,462       66,462  
 
Total assets
    43,288       54,920       69,333       69,333       139,002       150,738       150,738  
 
Financial net debt(e)
  3,135     11,565     12,337     12,337     37,055     35,535     35,535  
Amounts in accordance with US GAAP
                                                       
 
Shareholders’ equity
    14,483       9,804             11,655       54,268       64,729       64,729  
 
Total assets
    44,061       54,696             69,790       151,139       151,818       151,818  
STATEMENT OF CASH FLOWS
                                                       
Amounts in accordance with French GAAP
                                                       
 
Net cash provided by operating activities
    4,798       3,886       2,795       4,670       4,500       2,514       2,514  
 
Net cash provided by (used for) investing activities
    2,986       (3,900 )     4,109       405       4,340       (1,481 )     (1,481 )
 
Net cash (used for) provided by financing activities
    (7,517 )     (4,313 )     (2,461 )     (3,792 )     (7,469 )     (631 )     (631 )
 
Capital expenditures and purchases of investments
  1,947     5,974     3,729     8,926     13,709     38,343     38,343  
 
(a)  This condensed French GAAP financial data presents Vivendi Universal’s consolidation scope as of December 31, 2002. VE is accounted for using the equity method from January 1, 2002, instead of December 31, 2002.
 
(b)  Restated to reflect changes in accounting policies and financial statement presentation adopted in 2001. As permitted by the Comité de la Réglementation Comptable (CRC) Rule 99.02 (§41), Vivendi Universal elected to present its Consolidated Statement of Income in a format that classifies income and expenses by function rather than by category, which was the format previously presented, and the definition of exceptional items was restricted to gain (loss) on businesses sold, net of provisions. Prior to 2001, Vivendi Universal adopted a broader definition of exceptional items, including restructuring costs, plant dismantling and closure costs and the effect of guarantees given when exercised, among others. These items are now included as a component of operating income or financing expense when they concern the impairment of financial assets.
 
(c)  Excluding treasury shares recorded as a reduction of shareholders’ equity.

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(d)  Including total shareholders’ equity, minority interests and other equity (notes mandatorily redeemable in new shares of Vivendi Universal), which are separate lines in the Consolidated Statement of Financial Position.
 
(e)  Financial Net Debt, a non-GAAP measure, is defined as gross financial debt (sum of long-term debt, bank overdrafts and other short-term borrowings which are separate lines in the Consolidated Statement of Financial Position) less cash and cash equivalents, as presented in the Consolidated Statement of Financial Position. Until 2001, Vivendi Universal used a notion corresponding to Financial Net Debt less other marketable securities, short-term loans receivable, and net interest-bearing long-term loans receivable.
Exchange Rate Information
      The following table sets forth, for the periods indicated, the end-of-period average, high and low noon buying rates in the City of New York for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York. Unless otherwise indicated, such rates are set forth as US dollars per euro. On June 23, 2005, the noon buying rate was 1.00 = $1.2066.
                                 
    Period   Average        
Month Ended   End   Rate(1)   High   Low
                 
May 31, 2005
    1.23       1.27       1.29       1.23  
April 30, 2005
    1.29       1.29       1.31       1.28  
March 31, 2005
    1.30       1.32       1.35       1.29  
February 28, 2005
    1.33       1.30       1.33       1.28  
January 31, 2005
    1.30       1.31       1.35       1.30  
December 31, 2004
    1.36       1.34       1.36       1.32  
                                 
    Period   Average        
Year Ended   End   Rate(2)   High   Low
                 
December 31, 2004
    1.36       1.24       1.30       1.18  
December 31, 2003
    1.26       1.13       1.26       1.04  
December 31, 2002
    1.05       0.95       1.05       0.86  
December 31, 2001
    0.89       0.89       0.95       0.84  
December 31, 2000
    0.94       0.92       1.03       0.83  
 
(1)  The average of the exchange rates for all days during the applicable month.
 
(2)  The average of the exchange rates on the last day of each month during the applicable year.
Dividends
      The table below sets forth the total dividends paid per Vivendi Universal ordinary share and Vivendi Universal ADSs from 2000 through 2004. The amounts shown exclude the avoir fiscal, a French tax credit which was abolished as of January 1, 2005 (more information is provided under “Item 10 — Additional Information — Taxation — French Taxation of US Holders of Our Ordinary Shares or ADSs”). We have rounded dividend amounts to the nearest cent.
                 
    Dividend per   Dividend per
    Ordinary Share   ADS
         
    (euros)   (dollars)(1)
2000(2)
    1.00       0.89  
2001
    1.00       0.89  
2002
    1.00       0.91  
2003
           
2004(3)
           
 
(1)  Translated solely for convenience into US dollars at the noon buying rates on the respective dividend payment dates, or on the following business day if such date was not a business day in the US. The noon buying rate may differ from the rate that may be used by the depositary to convert euros to US dollars for the purpose of making payments to holders of ADSs.
 
(2)  Prior to December 8, 2000, the date of the completion of the Vivendi S.A., The Seagram Company Ltd. and Canal Plus, S.A. merger transactions (described below under “Item 4 — Information on the Company — History and Development of the Company”), each

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Vivendi ADS represented one-fifth of a Vivendi ordinary share, while each Vivendi Universal ADS now represents one Vivendi Universal ordinary share.
 
(3)  The payment of a dividend of 0.60 per share for fiscal year 2004 was approved at the annual meeting of the shareholders held on April 28, 2005. This dividend was paid on May 4, 2005.
Risk Factors
      You should carefully review the risk factors described below in addition to the other information presented in this document.
We are a party to numerous legal proceedings and investigations that could have a negative effect on us.
      We are a party to lawsuits and investigations in France and in the US that could have a material adverse effect on us. In France, the Autorité des Marchés Financiers (AMF, formerly the Commission des Opérations de Bourse) commenced in July 2002, May 2004 and January 2005, separate investigations regarding, respectively, certain of our financial statements, certain of our share repurchases and movements in our share price at the time of the issuance of notes mandatorily redeemable for our shares in November 2002. We are also being investigated by the financial department of the Parquet de Paris (Office of the Public Prosecutor) regarding the publication of false or misleading information regarding our financial situation or prospects, as well as the publication of untrue or inaccurate financial statements (for financial years 2000 and 2001). In the US, we are a party to a number of suits and investigations concerning allegations challenging the accuracy of our financial statements and certain public statements made by us describing our financial condition from late 2000 through 2002. We are also involved in a dispute with the US Internal Revenue Service with respect to the tax treatment reported by the Seagram Company Limited with respect to the redemption of DuPont shares held by Seagram. In our opinion, the plaintiffs’ claims in the legal proceedings lack merit, and we intend to continue to defend against such claims vigorously. However, the outcome of any of these legal proceedings or investigations or any additional proceedings or investigations that may be initiated in the future could have a material adverse effect on us. For a more complete discussion of our legal proceedings and investigations, see “Item 8 — Financial Information — Litigation”.
We have a number of contingent liabilities that could cause us to make substantial payments.
      We have a number of significant contingent liabilities. These liabilities are generally described in “Item 18 — Financial Statements — Note 28”. If we were forced to make a payment due to one or more of these contingent liabilities, it could have an adverse effect on our financial condition and our ability to make payments under our debt instruments.
Unfavorable currency exchange rate fluctuations could adversely affect our results of operations.
      A significant portion of our assets, liabilities, revenues and costs are denominated in currencies other than euros. To prepare our Consolidated Financial Statements, we must translate those assets, liabilities, revenues and expenses into euros at then-applicable exchange rates. Consequently, increases and decreases in the value of the euro versus other currencies will affect the amount of these items in our Consolidated Financial Statements, even if their value has not changed in their original currency. These translations could result in significant changes to our results of operations from period to period. In addition, exchange rate fluctuations could cause our expenses to increase as a percentage of net sales, affecting our profitability and cash flows.
Our business operations in some countries are subject to additional risks.
      We conduct business in markets around the world. The risks associated with conducting business internationally, and in particular in some countries outside Western Europe, the US and Canada, can include, among other risks:
  •  fluctuations in currency exchange rates (particularly the US dollar-euro exchange rate) and currency devaluations;

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  •  restrictions on the repatriation of capital;
 
  •  differences and unexpected changes in regulatory environments;
 
  •  varying tax regimes which could adversely affect our results of operations or cash flows;
 
  •  exposure to different legal standards and enforcement mechanisms and the associated cost of compliance therewith; and
 
  •  tariffs, duties, export controls and other trade barriers.
      We may not be able to insure or hedge against these risks and we may not be able to ensure compliance with all of the applicable regulations without incurring additional costs. Furthermore, financing may not be available in countries with less than investment-grade sovereign credit ratings. As a result, it may be difficult to create or maintain profit-making operations in developing markets.
We may suffer reduced profits or losses as a result of intense competition.
      The majority of the industries in which we operate are highly competitive and require substantial human and capital resources. From time to time, our competitors may reduce their prices in an effort to expand market share, introduce new technologies or services, or improve the quality of their services. We may lose business if we are unable to match the prices, technologies or service quality offered by our competitors. In addition, television programs produced and distributed by us face intensified competition due to the expansion of digital cable and satellite broadcasting, which increases the number of competing channels and programs offered. Any of these competitive effects could have a material adverse effect on our business and financial performance.
We may not be successful in developing new technologies or introducing new products and services.
      The industries in which we operate are subject to rapid and significant changes in technology and are characterized by the frequent introduction of new products and services. The pursuit of necessary technological advances may require substantial investments of time and resources, and we may not succeed in developing marketable technologies. Furthermore, we may not be able to identify and develop new product and service opportunities in a timely manner. Finally, technological advances may render our existing products obsolete, forcing us to write off investments and make substantial new investments.
We may not be able to retain or obtain required licenses, permits, approvals and consents.
      We need to retain or obtain a variety of permits and approvals from regulatory authorities to conduct and expand our businesses. The process for obtaining or renewing these permits and approvals is often lengthy, complex, unpredictable and costly. If we are unable to retain or obtain the permits and approvals we need to conduct and expand our businesses at a reasonable cost and in a timely manner — in particular, licenses to provide telecommunications services and broadcasting licenses — our ability to achieve our strategic objectives could be impaired. In addition, any adverse changes in the regulatory environment in which our businesses operate could impose prohibitive costs on us and limit our revenue.
We may have difficulty enforcing our intellectual property rights.
      The decreasing cost of electronic and computer equipment and related technology has made it easier to create unauthorized versions of audio and audiovisual products such as compact discs, videotapes and DVDs. Similarly, advances in Internet technology have increasingly made it possible for computer users to share audio and audiovisual information without the permission of the copyright owners and without paying royalties to holders of applicable intellectual property or other rights. A substantial portion of our revenue comes from the sale of audio and audiovisual products that are potentially subject to unauthorized copying and widespread, uncompensated dissemination on the Internet. If we fail to obtain appropriate relief or enforcement through the judicial process, or if we fail to develop effective means of protecting our entertainment-related intellectual property, our results of operations and financial position may suffer.

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Our motion picture businesses may lose sales due to unauthorized copies and piracy.
      Technological advances and the conversion of motion pictures into digital formats have made it easier to create, transmit and “share” high-quality unauthorized copies of motion pictures in theatrical release, on videotapes and DVDs, from pay-per-view through unauthorized set-top boxes and other devices and through unlicensed broadcasts on free TV and the Internet. Unauthorized copies and piracy of these products compete against legitimate sales of these products. A failure to obtain appropriate relief from unauthorized copying through the judicial process and legislation and an inability to curtail rampant piracy may have an adverse effect on our motion picture business.
Universal Music Group has been losing, and is likely to continue to lose, sales due to unauthorized copies and piracy.
      Technological advances and the conversion of music into digital formats have made it easy to create, transmit and “share” high-quality unauthorized copies of music through pressed disc and CD-R piracy, home CD burning and the downloading of music from the Internet. Unauthorized copies and piracy both decrease the volume of legitimate sales and put pressure on the price at which legitimate sales can be made and have had, and we believe will continue to have, an adverse effect on Universal Music Group (UMG).
The recorded music market has been declining and may continue to decline.
      Economic recession, CD-R piracy and illegal downloading of music from the Internet and growing competition for consumer discretionary spending and shelf space have all contributed to a declining recorded music market. Additionally, the period of growth in recorded music sales driven by the introduction and penetration of the CD format has ended and no profitable new format has emerged to take its place. Worldwide sales in the recorded music market have declined since 1999, with no assurances against continued decline. A declining recorded music market is likely to lead to the loss of revenue and operating income at UMG.
Our content assets in television, motion pictures and music may not be commercially successful.
      A significant amount of our revenue comes from the production and distribution of content offerings such as feature films, television series and audio recordings. The success of content offerings depends primarily upon their acceptance by the public, which is difficult to predict. The market for these products is highly competitive and competing products are often released into the marketplace at the same time. The commercial success of a motion picture, television series or audio recording depends on several variable factors, including the quality and acceptance of competing offerings released into the marketplace at or near the same time and the availability of alternative forms of entertainment and leisure time activities. Our motion picture business is particularly dependent on the success of a limited number of releases, and the commercial failure of just a few of these motion pictures can have a significant adverse impact on results. Our failure to garner broad consumer appeal could materially harm our business, financial condition and prospects for growth.
Canal+ Group is subject to French and other European content and expenditure provisions that restrict its ability to conduct its business.
      Canal+ Group is regulated by various statutes, regulations and orders. In particular, under its French broadcast authorization, the premium channel Canal+ is subject to, among others, the following regulations: (i) no more than 49% of its capital stock may be held by a single shareholder and (ii) 60% of the films broadcast by the channel must be European films and 40% must be French-language films. French regulations, as well as formal commitments to the French motion picture industry, also stipulate financing levels for European and French content. These regulations limit Canal+’s ability to choose content and could have an adverse effect on its operations and results.

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Item 4:     Information on the Company
History and Development of the Company
      The commercial name of our company is Vivendi Universal, and the legal name of our company is Vivendi Universal, S.A. Vivendi Universal is a société anonyme, a form of stock corporation, initially organized under the name Sofiée, S.A. on December 11, 1987, for a term of 99 years in accordance with the French Commercial Code. Our registered office is located at 42, avenue de Friedland, 75380 Paris Cedex 08, France, and the telephone number of our registered office is +33 1 71 71 1000. Our agent in the US is Vivendi Universal US Holding Co., located at 800 Third Avenue, 5th Floor, New York, New York 10022. All matters addressed to our agent should be to the attention of the Senior Vice President, Deputy General Counsel.
      We were formed through the merger in December 2000 of Vivendi S.A., The Seagram Company Ltd. and Canal Plus, S.A., with Vivendi Universal continuing as the surviving parent entity (Merger Transactions). From our origins as a water company, we expanded our business rapidly in the 1990s and transformed ourselves into a media and telecommunications company with the December 2000 merger. Following the appointment of new management in July 2002, we commenced a significant asset divestiture program aimed at reducing the Vivendi Universal group’s indebtedness, which we have almost completed. See “— Our Strategy” and “— Main Developments for 2004, 2003 and 2002” below.
Our Strategy
      Our focus is to grow our media and telecommunications businesses.
      The media and telecommunications sectors grew twice as fast as the rest of the economy during the past thirty years, and we believe these sectors continue to have high growth potential. The penetration rate for media and telecommunications remains low in many geographic markets, and we expect the increase in the number of platforms and distribution formats, combined with the diversification of applications for the telecommunications networks, to contribute to organic growth across all of our businesses in all markets.
      The revolution in digital distribution should create new opportunities where the media and telecommunications sectors intersect, which we expect will generate organic growth. Although our activities span across different markets, our operations complement each other in many ways. New technologies (including the increase in bandwidth, the rapid expansion and development of fixed and mobile networks, and the improvement of man-machine interfaces, screens and batteries) increase opportunities for our media and telecommunications businesses to bolster their offerings. Our businesses share and leverage key know-how, such as the digitization of content, subscription management, intellectual property management and research and development capacity.
      We expect our businesses to capitalize on the anticipated growth opportunities in the media and telecommunications sectors:
  •  Platforms: We have already implemented or have begun to develop the platforms on which we expect media content will be distributed in the future. The Canal+ Group currently broadcasts content across terrestrial, cable, satellite, ADSL, Digital Terrestrial Television (DTT) and UMTS (3G) platforms. UMG distributes content on CDs, DVDs, portable digital music players, other digital platforms and mobile telephony. Vivendi Universal Games (VU Games) develops products for various formats: CD-ROM, Internet, consoles and handheld devices.
 
  •  Networks: We believe that quality content will drive the future success of telecommunications networks. We expect that growth of UMTS mobile telephony will rely on the availability of games, music, Internet, television and movie content. Similarly, we expect growth in fixed telephony and ADSL to be driven by the availability of music, television and video on demand.
      Our ability to grow our principal businesses will be further strengthened by the substantial completion of our reorganization in 2004. Our reorganization effort resulted in the divestiture of a total of 24.6 billion worth of assets, and new investments totaling 24.1 billion to increase our stake in SFR Cegetel Group and Maroc Telecom and acquire a 20% interest in NBC, to create NBC Universal (NBCU).

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      In 2004, we significantly improved our operating results and the cash flows generated by our businesses, as a result of the turnaround at Canal+ Group and UMG, the ongoing restructuring process of VU Games and the continued growth at SFR Cegetel Group and Maroc Telecom. We reduced our financial net debt to 3.1 billion as at the end of 2004 (significantly less than our 5 billion target), and regained our Investment Grade status in 2004. Our objectives are to focus on completing the turnaround efforts at Canal+ Group, UMG and VU Games and to strengthen each of our businesses.
Main Developments for 2004, 2003 and 2002
      Over the last three years, the Vivendi Universal group has evolved considerably, by divesting almost 24.6 billion(1) in assets and investing approximately 24.1 billion(2) (including the acquisition of an additional 16% stake in Maroc Telecom in January 2005). The Vivendi Universal group’s revenues were divided by 2.7, operating income remained almost stable and Financial Net Debt was divided by 11.8. Following this important reorganization, Vivendi Universal emerged as a major player in the Media and Telecommunications industries. In 2004, Vivendi Universal consolidated its position in its strategic businesses.
      The divestitures completed since January 2002 reduced Financial Net Debt by 19.7 billion, including 16.7 billion with respect to the divestitures plan approved by the board of directors on September 25, 2002. As a result, Vivendi Universal exceeded the initial goal of 12.0 billion of reduction in Financial Net Debt within 18 months and the target for reduction in Financial Net Debt was increased to 16.0 billion in 2003. In particular, the combination of Vivendi Universal Entertainment LLLP (VUE) and National Broadcasting Company, Inc. (NBC) resulted, from an accounting standpoint, in the divestiture of 80% of VUE and the acquisition of 20% of NBC. An enterprise value of approximately 10.2 billion was attributed to VUE in this transaction, corresponding to the related reduction in Financial Net Debt (5.3 billion) and to the value of the 20% stake received in NBC (4.9 billion).
Divestitures completed were as follows:
      For more details, please refer to “— 2004 Developments”, “— 2003 Developments”, and “— 2002 Developments”.
                             
        Cash and       Impact
        cash   Financial   on financial
Date   Assets   equivalents   gross debt   net debt
                 
        (In millions of euros)
June/December 2002
  Veolia Environnement(a)   3,335         3,335  
June/July 2002
  Vivendi Universal Publishing (VUP) — Professional and
Health divisions
    894       37       931  
June 2002
  Canal+ Digital     264             264  
July 2002
  Interest in Lagardère     44             44  
August 2002
  Vizzavi     143             143  
December 2002
  Houghton Mifflin     1,195       372       1,567  
December 2002
  Interest in EchoStar     1,037             1,037  
December 2002
  VUP publishing activities in Europe     1,121       17       1,138  
December 2002
  Sithe Energies Inc.      319             319  
    Other divestitures (including divestiture fees)     219             219  
                       
    Sales of investments in 2002 (excluding Veolia Environnement)     8,571       426       8,997  
                       
June 2002
  Vinci shares(b)     291             291  
                       
    Total 2002(c)   8,862     426     9,288  
                       
 
(1)  Represents the impact on the Financial Net Debt (19.7 billion) and the value of assets received as a result of the divestitures (4.9 billion).
(2)  Represents the impact on the Financial Net Debt (12.3 billion) and the value of the exchanged stake (11.8 billion).

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        Cash and       Impact
        cash   Financial   on financial
Date   Assets   equivalents   gross debt   net debt
                 
        (In millions of euros)
February 2003
  Consumer Press division     200             200  
February 2003
  Canal+ Technologies     191             191  
February/June 2003
  InterActiveCorp warrants     600             600  
April 2003
  Telepiù(d)     457       374       831  
May 2003
  Fixed-line telecommunication in Hungary(e)     10       305       315  
May 2003
  Comareg     135             135  
May 2003
  Interest in Vodafone Egypt     43             43  
June 2003
  Interest in Sithe International     40             40  
October 2003
  Canal+ Nordic(f)     48             48  
    Other divestitures (including divestiture fees)     (316 )     239       (77 )
                       
    Sales of investments in 2003     1,408       918       2,326  
June 2003
  VUE real estate(b)     276             276  
                       
    Total 2003   1,684     918     2,602  
                       
February 2004
  Atica & Scipione     31       10       41  
March 2004
  Sportfive     274             274  
May 2004
  Vivendi Universal Entertainment(g)     2,312       2,984       5,296  
May 2004
  Kencell     190             190  
June 2004
  Monaco Telecom     169             169  
June/August 2004
  “flux-divertissement” (“flow entertainment”) businesses at StudioExpand and Canal+ Benelux     49       (7 )     42  
June 2004
  Egée and Cèdre Towers     84             84  
August 2004
  Interest in VIVA Media     47             47  
October 2004
  UCI Cinemas     170             170  
December 2004
  15% of Veolia Environnement     1,497             1,497  
    Other divestitures (including divestiture fees)     (118 )     46       (72 )
                       
    Sales of investments in 2004     4,705       3,033       7,738  
September 2004
  Canal+ Group headquarters(b)     108             108  
                       
    Total 2004   4,813     3,033     7,846  
                       
    Total divestitures completed between 2002 and 2004   15,359     4,377     19,736  
                       
      including the divestiture plan decided by the board of directors
  (between July 2002 and December 2004)
  12,387     4,340     16,727  
 
(a) This transaction led to the deconsolidation of Veolia Environnement debt (15.7 billion) and the accounting of Veolia Environnement using the equity method as of December 31, 2002.
 
(b) Divestiture of assets not included in the line “sales of investments” of the consolidated statement of cash flows but part of the divestiture plan approved by the board of directors on September 25, 2002.
 
(c) Includes the impact of 6,279 million on Financial Net Debt for the second half of 2002, excluding Veolia Environnement.
 
(d) Includes a 13 million adjustment corresponding to the reimbursement of accounts payable net of debt.
 
(e) Excludes the promissory note of 10 million received by Vivendi Universal in August 2004.
 
(f) Excludes a residual amount of approximately 7 million of deferred purchase consideration received in the first quarter of 2004 and excludes inter-company loans.
 
(g) Corresponds to gross cash proceeds of 3,073 million, net of transaction fees and other (107 million), Matsushita Electronic, Inc. (MEI) proceeds (40 million) and cash closing adjustments (614 million). Please refer to “Item 5 — Operating and Financial Review and Prospects — Liquidity and Capital Resources — Net cash provided by (used for) investing and financing activities”. From an accounting standpoint, the combination of NBC and VUE was recorded as the divestiture of 80% of Vivendi Universal’s stake in VUE, and the concurrent acquisition of a 20% stake in NBC.
     In addition, total acquisitions signed between January 2002 and December 2004 amounted to 24.1 billion, representing an increase of 12.3 billion in Financial Net Debt and 11.8 billion of exchange of interests.

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      Acquisitions completed were as follows:
      For more details, please refer to “— 2004 Developments”, “— 2003 Developments”, and “— 2002 Developments”.
                                                 
        Cash and       Impact on        
        cash   Financial   financial   Exchange of   Total
Date   Assets   equivalents   gross debt   net debt   interests   impact
                         
        (In millions of euros)
  January 2002    
EchoStar shares
  1,699         1,699         1,699  
  January 2002    
Interest in Sportfive
    122             122             122  
       
Other
    179             179             179  
                                     
       
Purchases of investments in 2002
    2,000             2,000             2,000  
  May 2002    
Entertainment assets of InterActiveCorp. 
    1,757       2,507       4,264       6,871 (a)     11,135  
                                     
       
Total 2002
  3,757     2,507     6,264     6,871     13,135  
  January 2003    
Additional 26% interest in SFR
(ex Cegetel Group S.A.)
    4,011             4,011             4,011  
  March 2003    
Closing of contractual guarantees to former Rondor shareholders
    207             207             207  
  December 2003    
Telecom Développement
    56       162       218             218  
       
Other
    148       (24 )     124             124  
                                     
       
Purchases of investments in 2003
    4,422       138       4,560             4,560  
  January 2004    
DreamWorks(b)
    94             94             94  
  March 2004    
Sportfive — exercise of put option by Jean-Claude Darmon
    30             30             30  
  May 2004    
VUE — exercise of call option on Barry Diller’s stake (1.5%)
    226             226             226  
  May 2004    
VUE — acquisition of 20% interest in NBC
                      4,929 (c)     4,929  
       
Other
    57       (6 )     51             51  
                                     
       
Purchases of investments in 2004
    407       (6 )     401       4,929       5,330  
                                     
       
Total completed between 2002 and 2004
  8,586     2,639     11,225     11,800     23,025  
                                     
  November 2004    
Additional 16% interest in Maroc Telecom (estimation)(d)
    1,100             1,100             1,100  
                                     
       
Total acquisitions signed between January
2002 and December 2004
  9,686     2,639     12,325     11,800     24,125  
                                     
 
(a) Contribution of 320.9 million USANi LLC shares held by Vivendi Universal and stakes of 5.44% and 1.5% in VUE issued to InterActiveCorp (IAC, formerly known as USA Interactive and prior thereto as USA Networks, Inc.) and to Barry Diller, respectively, and after deduction of IAC warrants received by Vivendi Universal.
 
(b) Includes the purchase of the music rights catalog as well as the advance on the film rights distribution agreement.
 
(c) From an accounting standpoint, the combination of NBC and VUE is recorded as the divestiture of 80% of Vivendi Universal’s stake in VUE, and the concurrent acquisition of a 20% stake in NBC.
 
(d) Signed on November 18, 2004 and completed on January 4, 2005.
Subsequent Developments in 2005 — Purchase of IAC’s Equity Interests in VUE
      On June 7, 2005, Vivendi Universal, NBCU and InterActiveCorp (IAC) unwound IAC’s interests in VUE through the purchase by NBCU of IAC’s common and preferred interests in VUE. The unwinding of IAC’s interests was funded in part through (i) the sale of treasuries applied for the defeasance of the covenants of the VUE Class A preferred interests, (ii) the exchange of 56.6 million shares of IAC stock securing the put/call rights relating to the VUE Class B preferred interests and (iii) capital contributions of $160 million by Vivendi Universal, through its subsidiary Universal Studios Holding. As a result of the unwinding of IAC’s interests, Vivendi Universal’s obligations to fund the after-tax cost of 94.56% of the 3.6% per annum cash coupon on the VUE Class B preferred interests and pay up to $520 million to NBCU in respect of any loss from the disposition of Universal Parks and Resorts were eliminated. As part of the

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unwinding, Vivendi Universal and IAC also agreed to terminate their pending tax dispute. In addition, Vivendi Universal and GE agreed to defer by one year, to January 2007 and May 2010, respectively, the dates on which Vivendi Universal may first exercise its rights to monetize its equity interest in NBCU over time at fair market value, and on which GE may exercise its call right on Vivendi Universal’s equity interest in NBCU. For more information on the formation of NBCU, please refer to “— Combination of VUE and NBC to form NBC Universal (NBC-Universal transaction) — May 2004”.
2004 Developments
      In 2004, Vivendi Universal achieved its main goals: the finalization of the strategic alliance between VUE and NBC to form NBCU (20% controlled and 18.5% owned by Vivendi Universal); the divestiture of 15% out of the 20.3% stake held in VE; the conclusion of an agreement with the Kingdom of Morocco in order to acquire an additional 16% interest in Maroc Telecom to increase Vivendi Universal’s stake to 51%; and the admission of Vivendi Universal to the French Consolidated Global Profit Tax System, which should generate maximum tax savings of approximately 3.8 billion. The finalization of the divestiture program contributed to the reduction in Financial Net Debt, which totaled 3,135 million as of December 31, 2004. Given the current level of debt, associated with the decrease in financing expense following the debt rating upgrades (back to Investment Grade by the three rating agencies) and the redemption of the High Yield Notes, Vivendi Universal management views the financial flexibility of the Vivendi Universal group as fully restored (please refer to “Item 5 — Operating and Financial Review and Prospects — Liquidity and Capital Resources”).
      In addition, the actions taken in 2004 reflect the priority given to the management of the Vivendi Universal group’s businesses in order to reinforce its position among the main European players in Media and Telecommunications. In particular, Canal+ Group won exclusive rights to the French National Football League 1 for three seasons (2005-2008), signed an agreement for exclusive first broadcasts of all of the movies produced by Twentieth Century Fox and signed many agreements in order to reinforce its partnership with the French movie industry and to improve its supply of movies. UMG continued its restructuring efforts and its actions to fight against piracy and counterfeiting. A new management team was put in place in January 2004 at VU Games in order to set up an efficient international organization. SFR Cegetel launched France’s first public 3G offer (UMTS) on June 16, 2004 and became the first operator to commercialize 3G telephone services to the general public in France at the beginning of November 2004. Lastly, Maroc Telecom continued, notably, to develop the penetration and use of mobile telecommunications in order to stimulate growth in the market in which it operates.
Combination of VUE and NBC to form NBC Universal (NBC-Universal transaction) — May 2004
      On October 8, 2003, Vivendi Universal and GE announced the signing of a definitive agreement(3) for the combination of the respective businesses of NBC and VUE. This transaction, which was completed on May 11, 2004, resulted, from an accounting standpoint, on the one hand, in the divestiture of 80% of Vivendi Universal’s interest in VUE for an amount of 8,002 million (corresponding to gross cash proceeds of 3,073 million and value of interests received in NBC of 4,929 million, before Universal Studios Holding Corp. minority interests) and, on the other hand, in the concurrent acquisition of a 20% interest in NBC (for 4,929 million). The new company, called NBC Universal, is 80% owned and controlled by GE, with 18.5%
 
(3)  The main shareholder agreements entered into with GE relating to the NBC-Universal transaction are available at http://finance.vivendiuniversal.com.

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owned and 20% controlled by Vivendi Universal (through its subsidiary, Universal Studios Holding Corp.) as presented in the following organizational chart:
LOGO
 
* Before the closing of the NBC-Universal transaction, Vivendi Universal exercised the call option on Barry Diller’s 1.5% stake in VUE for $275 million (226 million).
     NBCU’s assets mainly include: the NBC Television Network, Universal Pictures studios, television production studios (NBC Studios and Universal Television), a portfolio of cable networks, 14 NBC local stations, Spanish-language TV broadcaster Telemundo and its 15 Telemundo local stations, and interests in five theme parks.
      As part of the NBC-Universal transaction, GE paid at closing $3.65 billion (3.073 billion) of cash consideration to Universal Studios Holding Corp. In addition, as a result of this transaction,Vivendi Universal transferred approximately $4.3 billion (3.6 billion) of VUE’s consolidated gross financial debt to NBCU and thus reduced its Financial Net Debt by approximately $6.3 billion (5.3 billion), after cash adjustments (please refer to “Item 5  — Operating and Financial Review and Prospects — Liquidity and Capital Resources — Consolidated Cash Flows”).
      Under the terms of the NBC-Universal transaction, Vivendi Universal (i) was responsible for the cost of the defeasance of covenants of the VUE Class A preferred interests (657 million; or 607 million after minority interests), (ii) is responsible for the net costs of the dividends of 3.6% per annum on the VUE Class B preferred interests (298 million; or 275 million after minority interests) and (iii) will receive from NBCU, when certain put/call rights relating to the VUE Class B preferred interests are exercised, the potential after-tax economic benefit related to the divestiture of the 56.6 million shares of IAC stock transferred to NBCU as part of the NBC-Universal transaction (above $40.82 per share). Vivendi Universal also has certain contingent obligations in connection with the NBC-Universal transaction relating to taxes, retained businesses and liabilities, the divestiture of certain businesses and other matters customary for a transaction of this type. On June 7, 2005, Vivendi Universal, NBCU and IAC unwound IAC’s interests in VUE through the purchase by NBCU of IAC’s common and preferred interests in VUE. As a result, Vivendi Universal’s obligations to fund the after-tax cost of 94.56% of the 3.6% per annum cash coupon on the VUE Class B preferred interests and pay up to $520 million to NBCU in respect of any loss from the disposition of Universal Parks and Resorts were eliminated.

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      Vivendi Universal is entitled to sell its stake in NBCU under mechanisms providing for exits at fair market value, the timing of which has been deferred by one year as part of the June 2005 VUE unwinding. As a result, Vivendi Universal will be able to sell its shares on the market beginning in 2007, for an amount up to $3 billion in 2007 and $4 billion in 2008 and each year thereafter. GE will have the right to pre-empt any of Vivendi Universal’s sales to the market. Under certain circumstances, if Vivendi Universal does exercise its right to sell its shares on the market and if GE does not exercise its pre-emption right, Vivendi Universal will be able to exercise a put option to GE. Lastly, for a 12-month period commencing on May 11, 2010, GE will have the right to call either (i) all of Vivendi Universal’s NBCU shares or (ii) $4 billion of Vivendi Universal’s NBCU shares, in each case at the greater of their market value at the time the call is exercised or their value as determined at the time of the NBC-Universal transaction. If GE calls $4 billion, but not all, of Vivendi Universal’s NBCU shares, GE must call the remaining NBCU shares held by Vivendi Universal by the end of the 12-month period commencing on May 11, 2011. Please also refer to “— Subsequent Developments in 2005 — Purchase of IAC’s Equity Interests in VUE”.
      In addition to the exit rights described above, as part of the agreements with GE, Vivendi Universal has certain veto, board designation, information and consent rights in NBCU. Vivendi Universal initially holds three out of 15 seats on the board of directors of NBCU. Vivendi Universal’s governance rights in NBCU may terminate, under certain circumstances, upon a change in control of Vivendi Universal.
      For 2004, the impact of the NBC-Universal transaction on Vivendi Universal’s earnings corresponded to a 1,793 million capital loss, which can be analyzed as follows:
  •  a capital gain of $653 million, before a $290 million tax impact, resulting in an after-tax profit of $363 million (312 million). The carrying value in dollars of disposed assets did not exceed the transaction value in dollars; and
 
  •  a -2,105 million foreign currency translation adjustment (with no impact on cash position or on shareholders’ equity), as Vivendi Universal reclassified to net income 80% of a cumulative foreign currency translation adjustment related to VUE (previously recorded as a reduction of shareholders’ equity and resulting from the depreciation of the dollar versus the euro since VUE’s acquisition date).
      In addition, in the context of the NBC-Universal transaction, Vivendi Universal has expanded VUE’s relationship with DreamWorks Pictures for seven years, and UMG acquired DreamWorks Records for 94 million in January 2004. The label’s roster and catalog are comprised of rock and pop, country, urban, film scores and soundtracks, and Broadway cast recordings.
      Please refer to “— Subsequent Developments in 2005 — Purchase of IAC’s Equity Interests in VUE” and “Item 18 — Financial Statements — Note 3.1” for further information.
Divestiture of 15% of Veolia Environnement, Part of Vivendi Universal’s 20.3% Stake — December 2004
      In December 2004, Vivendi Universal disposed of 15% of VE, part of its 20.3% stake in VE, through three transactions: (i) 10% was placed under an accelerated book building procedure for total proceeds of 997 million (24.65 per share) on December 9, (ii) 2% was sold to VE for 195 million (23.97 per share) and (iii) 3% was sold to Société Générale for 305 million (24.65 per share).
      The last two transactions were carried out following the non-exercise of the call options granted by Vivendi Universal in November 2002 to certain institutional shareholders of VE relative to Vivendi Universal’s stake in VE. The exercise price was 26.50 per share. As these options expired on December 23, 2004, the related premium recorded as a deferred income in the amount of 173 million in December 2002 was recognized in “Other financial expenses, net of provisions” on their expiry date.
      Overall, Vivendi Universal received a total amount of 1,497 million in these transactions, generating an after-tax capital gain of 1,485 million. From a tax standpoint, the associated capital gain of 477 million was offset by Vivendi Universal’s current capital losses and, therefore, did not result in any cash capital gain tax.

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      VE, which was fully consolidated until December 31, 2002 and accounted for using the equity method thereafter, was fully deconsolidated on December 9, 2004. Currently, Vivendi Universal retains 5.3% of VE subject to a lock-up period of 180 days starting on December 9, 2004.
      In addition, Vivendi Universal and Société Générale entered into a three-year derivative transaction that enables Vivendi Universal to benefit from any potential capital gains on 5% of VE over a price of 23.91 per share. This derivative may be settled by Vivendi Universal at any time from December 9, 2005, exclusively in cash. The premium due by Vivendi Universal to Société Générale is recorded in “Portfolio Investments — Other” at its net present value (68 million as of December 31, 2004) and is payable in thirds for three years, starting January 10, 2005.
      At the same time, in order to finalize the financial separation from its former subsidiary, Vivendi Universal decided to substitute a third party in its guarantee commitments with respect to network renewal costs, granted to VE in June 2000 and in December 2002. For this purpose, on December 21, 2004, Vivendi Universal signed a contract of perfect delegation with VE and a third party to transfer all its residual obligations towards VE. As a result, Vivendi Universal paid the third party a balance of 194 million corresponding to the present value on that day of the maximum exposure until 2011 (including 2004 renewal costs of 35 million). The costs for 2004 were accounted for as an operating expense. The remaining balance was recorded as a loss on businesses sold, net of provisions.
      Please refer to “Item 18 — Financial Statements — Note 3.2” for further information.
Maroc Telecom in 2004: Listing on the Casablanca and Paris Stock Exchanges and Execution of an Agreement for the Acquisition of 16% of the Capital
      Listing of Maroc Telecom on the Casablanca and Paris Stock Exchanges. The shares of the historical telecommunications operator in the Kingdom of Morocco have traded on the Casablanca Stock Exchange and the Euronext Paris S.A. Premier Marché since December 13, 2004. The introduction price was fixed at MAD 68.25 per share (6.16 per share based on the dirham/euro exchange rate as of December 10, 2004). At December 31, 2004, the market price was 8.41 per share. 130,985,210 shares were sold by the Kingdom of Morocco as part of the offer, representing 14.9% of Maroc Telecom’s share capital.
      Acquisition of an Additional 16% Stake in Maroc Telecom. The Kingdom of Morocco and Vivendi Universal agreed, on November 18, 2004, to the acquisition by Vivendi Universal of an additional 16% stake in Maroc Telecom, indirectly via a wholly-owned subsidiary (Société de Participation dans les Télécommunications). This acquisition, which was completed on January 4, 2005, enables Vivendi Universal, a strategic partner that has held operating control of Maroc Telecom since the beginning of 2001, to increase its stake from 35% to 51%, thereby perpetuating its control over the company. By virtue of the Maroc Telecom shareholders agreements, Vivendi Universal holds the majority of voting rights at shareholder meetings and on the Supervisory Board until December 30, 2005. After this acquisition, Vivendi Universal’s control is now assured by the direct holding, unlimited in time, of the majority of voting rights at shareholder meetings and by the entitlement to appoint, by virtue of shareholder agreements and the Company bylaws, three of the five members of the Management Board and five of the eight members of the Supervisory Board. This acquisition marks a new and decisive milestone in the strategic partnership between the Kingdom of Morocco and Vivendi Universal. The deal price was set at MAD 12.4 billion, or approximately 1.1 billion, and includes a premium for continuing control. Payment was made on January 4, 2005 and was financed 50% by long-term debt issued in Morocco of MAD 6 billion, or approximately 537 million (please refer to “Item 5 — Operating and Financial Review and Prospects — Liquidity and Capital Resources”). For Vivendi Universal, from an economic standpoint, this transaction will be accretive to net income as of 2005, taking into account, notably, a cost of financing that is lower than the yield of the investment. In addition, from an accounting standpoint, the accretion from this transaction will improve as a result of the absence of goodwill amortization under the International Financial Reporting Standards (IFRS), which is applicable as of January 1, 2005.
      Full Consolidation of Mauritel by Maroc Telecom since July 1, 2004. Mauritel, previously accounted for using the equity method, has been fully consolidated by Maroc Telecom since July 1, 2004. For the second

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half of 2004, Mauritel generated revenues and operating income of 34 million and 11 million, respectively. For more details, please refer to “Item 18 — Financial Statements — Note 30”.
Consolidated Global Profit Tax System since January 1, 2004
      On December 23, 2003, Vivendi Universal applied to the Ministry of Finance for permission to use the Consolidated Global Profit Tax System under Article 209 quinquies of the French tax code. Authorization was granted by an order, dated August 22, 2004, and notified on August 23, 2004, for a five-year period beginning with the taxable year 2004. This period may be extended. Vivendi Universal is thus entitled to consolidate its own profits and losses (including tax losses carried forward as of December 31, 2003) with the profits and losses of its subsidiaries operating within and outside France. Subsidiaries in which Vivendi Universal owns at least 50% of outstanding shares, both French and foreign, as well as Canal+ S.A., fall within the scope of the Consolidated Global Profit Tax System, including, but not limited to, Universal Music Group (UMG), VU Games, CanalSatellite and SFR. The 2004 Finance Act authorized the unlimited carry forward of existing ordinary losses as of December 31, 2003, which, combined with Vivendi Universal’s permission to use the Consolidated Global Profit Tax System, enables Vivendi Universal to maintain its capacity to maximize the value of ordinary losses carried forward.
      In the absolute, with Vivendi Universal S.A. reporting ordinary losses of 11.8 billion as of December 31, 2004, as the head of the tax group, Vivendi Universal could realize maximum tax savings of approximately 3.8 billion (undiscounted value), at current income tax rates (excluding additional contributions) by the end of the loss relief period. Nonetheless, the period during which losses will be applied cannot currently be determined with sufficient precision given the uncertainty associated with any economic activity. As such, at the December 31, 2004 year-end, Vivendi Universal recognized in its 2004 income tax the expected tax savings relating to the current year (464 million) and a deferred tax asset in the amount of expected tax savings in 2005 (492 million) based on budget forecasts.
      Overall, receipt of authorization to use the Consolidated Global Profit Tax System generated a tax saving of 956 million in 2004. Vivendi Universal’s first tax return in respect of 2004 consolidated net income must be filed with the tax authorities by November 30, 2005 at the latest.
Reinforcement of the Program Offerings of Canal+ Group
      In 2004, Canal+ Group was involved in many discussions to enhance program offerings for subscribers. As a result, in December 2004, Canal+ Group won exclusive rights to the French National Football League 1 matches for three seasons (2005-2008) for an average cost of approximately 600 million per year. Also, to improve its film offerings, Canal+ (i) signed, in May 2004, several agreements to reinforce its partnership with the French film industry (covering the period 2005-2009), (ii) extended, in November 2004, an agreement for first broadcast of all Twentieth Century Fox film features, (iii) extended, in January 2005, a long-term agreement for exclusive first broadcast rights to all future productions of NBCU’s studio, (iv) extended, in February 2005, its exclusivity contract with DreamWorks for its next 40 movies, and (v) extended, in April 2005, its exclusivity contract with Spyglass Entertainment until December 2009. In addition, on February 11, 2005, Canal+ Group and Lagardère Group ended their participation in MultiThématiques (that is now owned 100% by Canal+ Group) and Lagardère Thématiques. This development enabled Canal+ Group to present itself under optimal conditions at the May 2005 selection launched by the Conseil Supérieur de l’Audiovisuel (CSA) for the attribution of DTT frequencies.
Elektrim Telekomunikacja Sp. z.o.o (Elektrim Telekomunikacja) in 2004
      Since December 1999, Vivendi Universal has held a 49% interest in Elektrim Telekomunikacja, with Elektrim S.A. (Elektrim) holding the remaining 51% until September 3, 2001. On that date, the Luxembourg investment company, Ymer, acquired a 2% equity interest in Elektrim Telekomunikacja from Elektrim. Vivendi Universal indirectly bears the economic risk associated with the assets held by Ymer, but does not have legal control over such assets. Ymer is a company independent of Vivendi Universal, which does not own or control Ymer, directly or indirectly. Vivendi Universal is not entitled to exercise the voting rights held by

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Ymer in Elektrim Telekomunikacja. In return for the economic risk borne by Vivendi Universal, the transfer by Elektrim to Ymer of a 2% equity interest in Elektrim Telekomunikacja enabled Vivendi Universal to limit the risk of sale of the controlling interest in Elektrim Telekomunikacja by Elektrim to a third party and, thereby, protect the value of its investment in Elektrim Telekomunikacja. Vivendi Universal accounts for its investment in Elektrim Telekomunikacja using the equity method. Please refer to “Item 18 — Financial Statements — Note 7.3”.
      As of December 31, 2004, Elektrim Telekomunikacja’s only major asset was a 48% stake in the Polish mobile telecommunications company Polska Telefonia Cyfrowa (PTC), alongside Carcom Warszawa (Carcom) (3%) and Deutsche Telekom (DT) (49%). Carcom is owned 50% by Vivendi Universal, 49% by Elektrim and 1% by Ymer. A chart of the PTC ownership structure is presented below:
LOGO
      As of December 31, 2004, Vivendi Universal has invested approximately 1.8 billion in Elektrim Telekomunikacja (capital of 1.2 billion and shareholder advances of 0.6 billion). The capital investment is fully impaired since December 31, 2002. The net book value of shareholder advances totaled 379 million as of December 31, 2004.
      In December 2000, DT commenced an arbitration proceeding in Vienna against Elektrim and Elektrim Telekomunikacja. DT asked the arbitration tribunal to declare invalid the transfer by Elektrim to Elektrim Telekomunikacja of 48% of the PTC shares owned by Elektrim.
      In its award (the Award), which was served on the parties on December 13, 2004, the arbitration tribunal held that:
        1. The transfer by Elektrim to Elektrim Telekomunikacja of the PTC shares was ineffective, and the PTC shares were to be considered as never having ceased to form part of the assets of Elektrim;
 
        2. The said sale did not constitute a material breach of Article 16.1 of the shareholders agreement between DT and Elektrim, but such a material breach would occur if Elektrim did not recover the shares concerned within two months of service of the Award;
 
        3. The Tribunal dismissed DT’s claim for a declaration that an Economic Impairment on the part of Elektrim existed; and
 
        4. The Tribunal did not have jurisdiction over Elektrim Telekomunikacja, and the claims concerning Elektrim Telekomunikacja could not be entertained in the context of the arbitration.
      DT withdrew its claim concerning its financial loss.

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      On February 2, 2005, the Award was partially recognized by a Warsaw tribunal (Regional Court — Civil Division) with regard to the first three points described above. In February, 2005, Elektrim Telekomunikacja appealed against this partial exequatur for breach of the provisions of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, dated June 10, 1958. The decision was also appealed by the Public Prosecutor.
      In the context of proceedings launched by Elektrim Telekomunikacja concerning ownership of the PTC shares and notified to PTC on December 10, 2004, the Warsaw Tribunal (Regional Court — Commercial Division) issued an injunction on December 30, 2004, upon Elektrim Telekomunikacja’s request prohibiting any amendment of the company register held by PTC. This injunction is currently the subject of an appeal by DT and Elektrim.
      In parallel with these proceedings, Elektrim attempted twice to unilaterally obtain from the Warsaw Registry Court an amendment of the registration of ownership of the PTC shares allocated to Elektrim Telekomunikacja, in its favor. In its decision rendered on February 10, 2005, the Warsaw Registry Court considered the claims to be unjustified with regard to aforesaid injunction awarded on December 30, 2004 and dismissed the proceedings. Nevertheless, on February 25, 2005, the Warsaw Registry Court has, based on PTC shareholders lists and deliberations by the Boards drawn up and produced by DT and Elektrim in conditions considered to be fraudulent by Elektrim Telekomunikacja, authorized the registration of Elektrim as a shareholder of PTC in lieu of Elektrim Telekomunikacja. Elektrim Telekomunikacja has commenced proceedings in order to rectify the register and filed a complaint before the Warsaw Public Prosecutor.
      For these reasons, Vivendi Universal considers that the legal uncertainty surrounding ownership of the PTC shares held by Elektrim Telekomunikacja represents severe long-term restrictions on Elektrim Telekomunikacja’s ability to exercise joint control and influence over PTC. As a result, Vivendi Universal has accounted for Elektrim Telekomunikacja, using the equity method based on financial statements in which the PTC investment is no longer consolidated from January 1, 2004. Please refer to “Item 8 — Financial Information — Litigation” and “Item 18 — Financial Statements — Note 7.3”.
Vivendi Universal Disposed of Approximately 1.1 Billion in Assets (Not Including the NBC-Universal and Veolia Environnement Transactions) in 2004
Canal+ Group
      Sportfive. In March 2004, RTL Group and Canal+ Group signed an agreement with Advent International for the divestiture of their interests in Sportfive. Before signing the agreement, Canal+ Group and RTL Group acquired on March 31, 2004, Jean Claude Darmon’s approximate 4.9% stake in Sportfive for a total of 60 million (including a price adjustment of 5 million). The sale to Advent International of the 48.85% stake in Sportfive held by Canal+ Group, for which the group received 274 million in cash, was completed on June 25, 2004. This divestiture generated a gain of 44 million (including a 22 million provision reversal).
      Canal+ Group finalized, among other things, the divestiture of the companies of StudioExpand’s “flux-divertissement” business in June 2004 and Canal+ Benelux in August 2004 for a total amount of 42 million (the deconsolidation of the cash held by these companies, as well as the payment of a litigation had a 26 million unfavorable impact on Financial Net Debt). These divestitures generated a gain of 66 million (including a provision reversal of 24 million).
      Quai André Citroën Headquarters. In September 2004, Canal+ Group finalized the divestiture of its former headquarters at Quai André Citroën for 108 million. This divestiture generated a capital gain of 13 million.
      Divestiture of NC Numéricâble. In December 2004, Canal+ Group and France Telecom announced that they had signed an agreement for the divestiture of their cable operations to the Cinven investment fund and to Altice Multiple Service Operator. Canal+ Group will retain an interest of approximately 20% in the new operator for an estimated amount of 37 million (corresponding to its share in equity). Canal+ Group proceeds from the divestiture are estimated at 87 million (before potential adjustments to the number of

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networks actually transferred). This transaction, subject to regulatory approvals, was finalized on March 31, 2005. A 56 million provision accrual was recorded in 2004.
Non-core operations
Vivendi Telecom International (VTI)
      Kencell. In May 2004, Vivendi Universal sold its 60% stake in Kencell, Kenya’s No. 2 mobile phone operator, for a cash amount of $230 million (190 million). The stake was sold to Sameer Group, the owner of the remaining 40% stake, after it exercised its pre-emptive rights. This divestiture generated a gain of 38 million (net of a 7 million provision accrual).
      Monaco Telecom. In June 2004, Vivendi Universal sold to Cable & Wireless its 55% stake in Monaco Telecom for a total consideration of 169 million in cash (including a 7 million dividend distribution). This divestiture generated a gain of 21 million (net of a 5 million provision accrual).
Finalization of the Total Withdrawal from Publishing Operations: Divestiture of Brazilian Publishing Operations — February 2004
      Vivendi Universal divested its interest in Atica & Scipione, publishing operations in Brazil, for a total consideration of 41 million. This divestiture generated a loss of 8 million.
Divestiture of United Cinema International (UCI) — October 2004
      Vivendi Universal and Viacom finalized the divestiture of their respective 50% stakes in European operations of the UCI Cinemas group to Terra Firma. In addition, UCI Group divested its 50% stake in UCI Japan to Sumitomo Corporation (50% of transaction proceeds were paid by UCI Cinemas to Vivendi Universal). As part of these transactions, Vivendi Universal received 170 million. These transactions generated a capital gain of 64 million.
     Other 2004 transactions
      UMG. In August 2004, UMG sold its stake of approximately 15% in VIVA Media to Viacom for a total consideration of 47 million. This divestiture generated a gain of 26 million.
      Divestiture of two Philip Morris Towers. In June 2004, the divestiture of the Cèdre (27,000 m2) and the Egée (55,000 m2) towers located at La Défense, Paris, resulted in a reduction in Vivendi Universal’s off balance sheet commitments related to the long-term leases signed with Philip Morris in 1996, by 270 million.
      In addition, the reimbursement of the different participating loans and/or guarantees granted by Vivendi Universal led to a net cash inflow of 84 million.
2003 Developments
      In 2003, Vivendi Universal invested 6.0 billion, including 1.6 billion of capital expenditures in its core businesses and 4 billion to purchase BT Group’s 26% interest in SFR Cegetel (for more details, please refer to “Item 5 — Operating and Financial Review and Prospects — Consolidated Cash Flows”). In addition, in 2003, Vivendi Universal formed a strategic alliance between VUE and NBC. Vivendi Universal also refocused, restructured, and recapitalized Canal+ Group for close to 3 billion, eliminated major cash drains, divested non-strategic assets with proceeds of approximately 3 billion and refinanced its debt.
SFR Cegetel: Vivendi Universal Invested 4 Billion in January 2003 to Strengthen its Position in SFR Cegetel
      In January 2003, Vivendi Universal purchased BT Group’s 26% interest in Cegetel Groupe S.A. for 4 billion, thereby increasing its voting interest in the French telecommunications operator from 59% to 85% and its ownership interest from 44% to 70% (approximately 56% ownership interest in SFR, its mobile

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subsidiary). The acquisition of this interest from BT Group was made through Société d’investissement pour la téléphonie (SIT), as follows:
  a.  SIT, wholly owned, controlled and consolidated by Vivendi Universal, was initially the legal owner of the 26% shareholding at an acquisition cost of 4 billion.
  b.  SIT financed this acquisition by a 2.7 billion cash contribution from Vivendi Universal (in turn financed partly by the 1 billion bond issue completed in November 2002 and redeemable in Vivendi Universal new shares on November 25, 2005) and by a non-recourse loan of 1.3 billion with a scheduled maturity of June 30, 2004. Debt service on this loan, which was drawn on January 23, 2003, was to be provided by dividends paid in respect of its 26% shareholding in Cegetel Groupe S.A. This loan was repaid in July 2003 out of the proceeds of the issuance of five-year High Yield Notes. Following the repayment of its credit facility, SIT merged with Vivendi Universal, allowing the Vivendi Universal group to simplify the ownership structure of the 26% stake in Cegetel Groupe S.A. acquired in January 2003, and thereby increase its access to dividends from Cegetel Groupe S.A.
      As a result of this transaction, Cegetel Groupe S.A., which was consolidated by Vivendi Universal with a 44% ownership interest, has been consolidated with a 70% ownership interest since January 23, 2003 (approximately 56% ownership interest in SFR, its mobile subsidiary).
      During 2003, Vivendi Universal signed with Vodafone Group Plc a number of agreements designed to further improve the performance of SFR Cegetel, as well as optimize cash flows between SFR Cegetel and its shareholders:
  •  Vodafone and SFR signed an agreement to increase their cooperation and their joint economies of scale in a number of different areas through: coordination of their activities in the development and rollout of new products and services, including Vodafone live!, and development of operational synergies in procurement (including IT and technology), and best practice sharing.
 
  •  On December 18, 2003, the extraordinary shareholders’ meeting of Cegetel Groupe S.A. approved the simplification of the group’s structure through the merger of Transtel, Cofira and SFR into Cegetel Groupe S.A. holding company.
  The new company resulting from the merger, which is both a mobile phone operator and the holding company of the group, was renamed SFR. It is owned 55.8% by Vivendi Universal, 43.9% by Vodafone, and 0.3% by individual shareholders. In connection with this simplification, an amendment to the Cegetel shareholders’ agreement was signed in order to include the specific provisions of the SFR shareholders’ agreement (this document is available at: http://www.vivendiuniversal.com). The group, comprised of SFR and its subsidiaries and the fixed line operator Cegetel, became SFR Cegetel.
  •  In 2004, SFR decided to implement a dividend distribution plan, which will in part involve the distribution of premiums and reserves and the introduction of quarterly advance dividend payments. Please refer to “Item 5 — Operating and Financial Review and Prospects — Liquidity and Capital Resources”.
      In parallel, in December 2003, SFR (formerly known as Cegetel Group) and SNCF (the French National Railway Company) decided to merge their fixed line business and approved the merger of Cegetel S.A. (fixed line operator, subsidiary of SFR) and Telecom Développement (network operator, subsidiary of SNCF, in which SFR had a minority interest). This entity is named Cegetel S.A.S. and the capital is held 65% by SFR and 35% by SNCF.

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      As a result of these transactions, the structure of SFR Cegetel is as follows:
(SFR CEGETEL FLOW CHART)
 
* Stake acquired by Vodafone in 2003
Canal+ Group: recovery efforts in 2003
      Canal+ made significant progress in its turnaround efforts. It refocused on its core pay-TV activities in France and the activities of StudioCanal. It launched a number of initiatives to restructure and reposition these activities. It exited most of its non-core activities, which often represented significant cash drains (see “— 2003 Divestitures: Vivendi Universal divested about 3 billion of assets” below).
      Also, on December 18, 2003, following Canal+ Group’s extraordinary shareholders’ meeting, Vivendi Universal recapitalized Canal+ Group for 3 billion through the conversion of an inter-company loan into equity, with no cash impact. This transaction was approved by Vivendi Universal’s board of directors on September 23, 2003.
      As a result of this recapitalization, the performance of Canal+ Group in 2003 and divestitures of non-core assets, Canal+ Group’s Financial Net Debt was close to 1 billion at the end of 2003 versus approximately 5 billion on June 30, 2003. In February 2004, Canal+ Group Financial Net Debt was reduced to approximately 500 million.
Cash drains in 2003
      Vivendi Universal continued its efforts to eliminate its major cash drains. It essentially shut down its Internet operations, which had generated approximately 2.5 billion in losses since 2000, divested a number of businesses that had previously generated significant losses (see “— 2003 Divestitures: Vivendi Universal divested about 3 billion of assets” below) and refocused and restructured its headquarter activities (see “— Reorganization of Vivendi Universal Headquarters in 2002” below).
2003 Divestitures: Vivendi Universal divested about 3 billion of assets
Canal+ Group
      Canal+ Technologies. The sale of Vivendi Universal’s 89% stake in Canal+ Technologies to Thomson Multimedia was completed on January 31, 2003 for 191 million in cash. Given the previous impairment loss recorded against this investment, the divestiture generated a capital gain of 21 million.
      Telepiù. In April 2003, Vivendi Universal, Canal+ Group, News Corporation and Télécom Italia completed the sale of Telepiù, the Italian pay-TV platform. The consideration for this transaction amounted to

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831 million, comprising debt of 374 million (after a capital contribution of 100 million) and 457 million in cash.
      The cash payment included a 13 million adjustment relating to the reimbursement of accounts payable net of the debt adjustment. This transaction generated a capital gain of 215 million, after the reversal of a 352 million provision, resulting from unanticipated improvements in working capital registered by Telepiù in the first quarter of 2003.
      Dilution in Sogecable. In connection with its merger with ViaDigital, a Telefonica subsidiary, Sogecable performed a capital increase in July 2003 subscribed to in full by Telefonica. As a consequence, Canal+ Group’s ownership interest in Sogecable decreased from 21.27% to 16.38%. Following termination of the shareholders agreement governing Sogecable on September 29, 2003, Vivendi Universal ceased to account for Sogecable on an equity basis on October 1, 2003. This transaction generated a dilution profit of 71 million. In addition, the three principal shareholders (Canal+ Group, Prisa and Telefonica) granted a 50 million loan to Sogecable that will mature in 10 years’ time. In February 2004, the 20,637,730 Sogecable shares held by Canal+ Group, as well as the 50 million loan, were transferred to Vivendi Universal.
      Canal+ Nordic. In October 2003, Vivendi Universal and Canal+ Group sold the subsidiaries of Canal+ Nordic, the company in charge of its pay-TV channel activities in the Nordic region, to an investment fund consortium comprising Baker Capital and Nordic Capital. The transaction contributed approximately 55 million to the Vivendi Universal group’s debt reduction (including 7 million received in the first quarter of 2004), principally due to loan relinquishment. This transaction generated a capital gain of 17 million.
      Canal+ Benelux. In December 2003, Canal+ Group sold its Flemish operations to Telenet, and sold Canal+ Belgique S.A. to Deficom, for a total consideration of 32 million. These transactions generated a capital gain of 33 million.
Vivendi Universal Entertainment in 2003
      Spencer Gifts. On May 30, 2003, Vivendi Universal (through VUE) sold Spencer Gifts, a novelty and gift store chain operating in the US, Canada and the UK, to an investor group led by privately held Gordon Brothers Group and Palladin Capital Group Inc. for consideration of approximately $100 million. This operation generated no capital gain.
Non-core operations in 2003
Vivendi Universal Publishing (VUP) in 2003
      Consumer Press. Vivendi Universal completed the sale of the Consumer Press Division (Groupe Express-Expansion — Groupe l’Etudiant) to the Socpresse Group in February 2003, for an aggregate consideration of 200 million. This transaction generated a capital gain of 104 million.
      Comareg. In May 2003, Vivendi Universal completed the sale of Comareg to the France Antilles group. The consideration received from this transaction was 135 million. Given the previous impairment loss recorded against this investment, this transaction generated a capital gain of 42 million.
Vivendi Telecom International in 2003
      Vivendi Telecom Hungary. In May 2003, Vivendi Universal concluded the divestiture of its fixed-line telephony activities in Hungary (Vivendi Telecom Hungary) to a consortium led by AIG Emerging Europe Infrastructure Fund and GMT Communications Partners Ltd. The amount of the transaction was 325 million in enterprise value, including the issuance of a 10 million promissory note received by Vivendi Universal in August 2004. Given the previous impairment loss recorded against this investment, the divestiture generated a capital gain of 15 million in 2003.
      Xfera. In August 2003, Vivendi Universal sold its 26.3% interest in Xfera for a nominal 1 to the other members of the Xfera consortium. This transaction generated a capital gain of 16 million, after a 75 million provision accrual.

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      Elektrim Telekomunikacja. In 2003, Vivendi Universal pursued a strategy to divest its stake in Elektrim Telekomunikacja. On January 8, 2003, Vivendi Universal signed a letter of intent with Polsat Media S.A. (Polsat) involving the sale to Polsat of Vivendi Universal’s stake in Elektrim Telekomunikacja and Elektrim for a total consideration of 550 million. However, Polsat was subsequently unable to meet the closing conditions of this transaction. On September 2, 2003, Vivendi Universal’s board of directors approved the decision to propose to the supervisory board of Elektrim Telekomunikacja, which is 49% owned by Vivendi Universal, to accept the tender offer for PTC, the Polish mobile telecommunications operator, from DT. On September 14, 2003, DT, Vivendi Universal, Elektrim (in agreement with bondholder representatives on the management board) and Ymer Finance announced an agreement in principle on DT’s offer to increase its shareholding in PTC from 49% to 100% for a total revised cash offer of 1.1 billion. This agreement did not close because Elektrim could not obtain the required consent of bondholders.
Other 2003 transactions
      InterActiveCorp Warrants. In 2003, Vivendi Universal sold in two steps 60.47 million warrants of IAC for consideration totaling 600 million. These warrants were initially acquired in connection with the acquisition of the entertainment assets of IAC. These transactions generated a loss of 329 million, which was offset by the reversal of the related provision of 454 million, which corresponded to a downside mark-to-market adjustment registered as of December 31, 2002.
      Unwinding of the Total Return Swap in connection with Time Warner Inc. (formerly known as AOL Time Warner Inc.) Call Options. In April 2003, Time Warner Inc. exercised its call options on the AOL Europe shares held by LineInvest for a cash consideration of $813 million received in May 2003. The provision of $100 million (97 million) recorded by Vivendi Universal in 2002 (in order to cover the market risk under the terms of the total return swap if Time Warner Inc. had opted for payment in its own shares) was consequently reversed in 2003.
      Modification of the Structure of UGC S.A.’s share capital. On December 31, 2003, Vivendi Universal and the family shareholders of the UGC Group signed an agreement modifying the structure of UGC S.A.’s share capital. Under the terms of the agreement:
  •  Vivendi Universal holds 37.8% of UGC S.A.’s share capital. After the elimination of the UGC S.A. treasury shares, Vivendi Universal will hold only 40% of UGC S.A.’s share capital, and the family shareholders’ stake will be 56.20%. Vivendi Universal holds five of the 14 seats on the UGC board of directors.
 
  •  Vivendi Universal has been released from the put option previously granted to the family shareholders, thereby removing a significant off-balance-sheet commitment for Vivendi Universal.
 
  •  Vivendi Universal also granted a call option to the family shareholders for its UGC S.A. shares at a price of 80 million until December 31, 2005. The price may be adjusted in the case of an onward sale by UGC family shareholders at a later date (within one year of exercise of the call) with an increase in value.
      Closing of Contractual Guarantees to Former Rondor Shareholders. Finally, in connection with the purchase of Rondor Music International in 2000, there existed a contingent purchase price adjustment based on the market value of Vivendi Universal shares. The contingent purchase price adjustment was triggered in April 2002 when the share price of Vivendi Universal fell below $37.50 for 10 consecutive days and the former shareholders of Rondor requested early settlement. A liability for this adjustment was recorded in the Consolidated Statement of Financial Position of Vivendi Universal at December 31, 2002 for an estimated amount of 223 million (approximately $230 million). On March 3, 2003, this liability was settled and the former shareholders of Rondor received 8.8 million shares of Vivendi Universal, then representing 0.8% of share capital and a cash amount of $100 million (93 million).

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2002 Developments
      While the beginning of 2002 was marked by the completion of the acquisition of the entertainment assets of IAC, the rest of the year was focused on solving Vivendi Universal’s liquidity issue, refinancing its debt, initiating a comprehensive divestiture program, and initiating cost-cutting measures at Vivendi Universal’s headquarters.
Acquisition of the Entertainment Assets of InterActiveCorp for 11,135 million — May 2002
      These assets were transferred to NBCU in May 2004 (please refer to “— Combination of VUE and NBC to form NBC Universal (NBC-Universal transaction) — May 2004” and “— Subsequent Developments in 2005 — Purchase of IAC’s Equity Interests in VUE”).
      On May 7, 2002, Vivendi Universal consummated its acquisition of the entertainment assets of IAC through the limited liability limited partnership VUE, in which Vivendi Universal then had an approximate 93% voting interest and an approximate 86% economic interest (due to the minority stake of MEI). As part of the transaction, Vivendi Universal and its affiliates surrendered 320.9 million shares of USANi LLC previously exchangeable into shares of IAC stock. In addition, Vivendi Universal transferred 27.6 million treasury shares to Liberty Media Corporation in exchange for (i) 38.7 million USANi LLC shares (which were among the 320.9 million surrendered) and (ii) 25 million shares of IAC common stock, which were retained by Vivendi Universal.
      As consideration for the transaction, IAC received a $1.62 billion cash payment from VUE, a 5.44% common interest in VUE and Class A and Class B preferred interests in VUE with initial face values of $750 million and $1.75 billion, respectively. The Class B preferred interests were subject to put/call provisions at any time after May 2022 for a number of IAC shares having a market value equal to the accreted face value of the Class B preferred interests at such time, subject to a maximum of 56.6 million shares of IAC common stock.
      In addition, Mr. Diller, IAC’s chairman and chief executive officer, received a 1.5% common interest in VUE in return for agreeing to specific non-competition provisions for a minimum of 18 months, for informally agreeing to serve as VUE’s chairman and chief executive officer (Mr. Diller terminated his temporary assignment as chief executive officer in March 2003) and as consideration for his agreement not to exercise his veto right over this transaction. In connection with the NBC-Universal transaction, Universal Studios elected to purchase Mr. Diller’s common interest for $275 million pursuant to the terms of the VUE partnership agreement.
      In connection with the acquisition of the entertainment assets of IAC, Vivendi Universal received approximately 60.5 million warrants to purchase common stock of IAC, with exercise prices ranging from $27.50 to $37.50 per share. All of the warrants were sold in 2003.
      The entertainment assets acquired by Vivendi Universal were IAC’s television programming, cable networks and film businesses, including USA Films, Studios USA and USA Cable. These assets, combined with the film, television and theme park assets of the Universal Studios Group, formed the new entertainment group, VUE controlled at 93% and owned at approximately 86% by Vivendi Universal.
      The acquisition cost of the IAC entertainment assets amounted to 11,135 million and was determined with the assistance of an independent third-party valuation firm. Vivendi Universal sold all of its interests in VUE and the IAC common stock to NBC on May 11, 2004. Subsequently, on June 7, 2005, VUE was restructured through the purchase by NBCU of all of IAC’s preferred and common interests in VUE in exchange for 56.6 million shares of IAC common stock and cash. For more information, see “— 2004 Developments” and “— Subsequent Developments in 2005 — Purchase of IAC’s Equity Interests in VUE”.
      In connection with the sale of its shares in IAC, Liberty Media transferred to Vivendi Universal its 27.4% share in the European cable television company, MultiThématiques, and its current account balances in exchange for 9.7 million Vivendi Universal shares. The share value was based on the average closing price of Vivendi Universal shares during a reference period before and after December 16, 2001, the date the

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agreement was announced. Following this acquisition, Vivendi Universal held, directly and indirectly, 63.9% of MultiThématiques’ share capital. The additional goodwill resulting from Vivendi Universal taking a controlling stake in this company, which had been consolidated until March 31, 2002 using the equity method and fully consolidated thereafter, amounted to 542 million.
2002 Divestitures: 9.3 billion in 2002
      Vivendi Universal initiated a comprehensive divestiture program aimed at reducing its debt and refocusing the company. The following transactions were completed in 2002.
      Veolia Environnement. Following a decision taken by its board of directors on June 17, 2002, Vivendi Universal reduced its ownership interest in VE in three steps. Prior to taking these steps, Vivendi Universal entered into an agreement with Mrs. Esther Koplowitz by which she agreed not to exercise the call option on VE’s participation in Fomento de Construcciones y Contratas (FCC), which otherwise would have been exercisable once Vivendi Universal’s ownership interest in VE fell below 50%.
      The first step occurred on June 28, 2002, when 53.8 million VE shares were sold on the market (approximately 15.5% of the share capital before the capital increase). The shares were sold by a financial institution that had held the shares since June 12, 2002 following a repurchase transaction (known in France as a “pension livrée”) carried out with Vivendi Universal. In parallel, in order to make it possible for the financial institution to return the same number of shares to Vivendi Universal at the maturity of the repurchase agreement on December 27, 2002, Vivendi Universal entered into a forward sale for the same number of shares to this financial institution at the price of the investment. As a result, Vivendi Universal reduced its debt by 1,479 million and held 47.7% of the share capital of VE.
      In the second step, on August 2, 2002, VE increased its share capital by 1,529 million, following the issuance and the sale of approximately 58 million new shares (14.3% of the share capital after the capital increase) to a group of investors. Vivendi Universal had previously sold its preferential subscription rights to the group of investors pursuant to an agreement dated June 24, 2002. Following this second transaction, Vivendi Universal owned 40.8% of VE’s share capital, and VE continued to be consolidated using the full consolidation method in accordance with GAAP.
      The third step occurred on December 24, 2002, a month after the banks that managed the June transaction and a group of new investors entered into an amendment to the June 24, 2002 agreement. Under the terms of the amended agreement, Vivendi Universal agreed to sell 82.5 million shares of VE, representing 20.4% of VE’s share capital as at December 24, 2002, and the new investors agreed to become subject to the lock-up on disposals of these shares previously agreed to by Vivendi Universal for the remaining term of that lock-up agreement; i.e., until December 21, 2003. Each of these shares of VE included a call option that entitles these investors to acquire additional VE shares at any time until December 23, 2004 at an exercise price of 26.50 per share. On December 24, 2002, Vivendi Universal received, in exchange for the shares and the call options, 1,856 million. The call options on the VE shares are recorded as deferred items in liabilities for an amount of 173 million. As of December 23, 2004, the call options had not been exercised (see “— Divestiture of 15% of Veolia Environnement, Part of Vivendi Universal’s 20.3% Stake — December 2004”).
      Following this transaction, Vivendi Universal held 82.5 million shares, or 20.4%, of VE’s share capital as of December 31, 2002, which were held in an escrow account to cover the call options. From December 31, 2002 to December 9, 2004, this investment was accounted for using the equity method (please refer to “— Divestiture of 15% of Veolia Environnement, Part of Vivendi Universal’s 20.3% Stake — December 2004”).
      Vivendi Universal recorded a 1,419 million capital gain in respect of these transactions in 2002.
      Vivendi Universal Publishing. In April 2002, VUP signed a definitive agreement pursuant to which the Cinven, Carlyle and Apax investment funds acquired 100% of the professional and health information divisions of VUP. The transaction completed in July 2002 and reduced profit before tax by 298 million.

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      In December 2002, Vivendi Universal sold both VUP’s European activities and Houghton Mifflin. The European publishing activities were acquired by Editis (formerly known as Investima 10), a company wholly owned by Natexis Banques Populaires, for Lagardère. The gross proceeds from the sale amounted to 1,198 million. This transaction generated a pre-tax gain of 329 million. A purchase price adjustment of 17 million was paid to Editis in December 2003.
      Houghton Mifflin was sold to an investment fund consortium comprised of Thomas H. Lee and Bain Capital on December 30, 2002. The purchase price was approximately 1.6 billion, including a cash payment of 1.2 billion. As a result of this transaction, Vivendi Universal recognized a capital loss of 822 million before tax, including a foreign currency translation loss of 236 million.
      Vizzavi Europe. In August 2002, Vivendi Universal sold to Vodafone its 50% stake in Vizzavi Europe. As a result, Vivendi Universal received 143 million in cash. As part of the transaction, Vivendi Universal took over 100% of Vizzavi France. This transaction generated a capital gain of 90 million.
      EchoStar Communications Corporation (EchoStar). In December 2002, Vivendi Universal sold its entire stake in EchoStar, consisting of 57.6 million Class A common shares, back to EchoStar. Total net proceeds of the sale were $1,066 million, generating a capital loss of 674 million before tax. Vivendi Universal held these Class A common shares following the conversion of the 5.8 million EchoStar Class D preferred stock acquired in January 2002 for $1.5 billion. Each Class D preferred stock was convertible into 10 EchoStar Class A common shares.
      Sithe. In December 2002, Vivendi Universal sold its remaining 34% stake in Sithe to Apollo Energy LLC. Net cash proceeds from this transaction were 319 million, generating a capital loss of 232 million before tax. Under the terms of this transaction, Vivendi Universal retained ownership of certain minor assets in Asia. These Asian assets were transferred to Marubeni for $47 million on June 11, 2003.
      Vinci. In June 2002, Vivendi Universal sold 5.3 million Vinci shares for a total of 344 million, thereby generating a pre-tax capital gain of 153 million. At the same time, Vivendi Universal bought call options on 5.3 million shares at 88.81 for 53 million allowing the Vivendi Universal group to cover the 527 million principal amount of bonds exchangeable for Vinci shares issued in March 2001.
      Settlement of the Total Return Swap in Connection with the Divestiture of Vivendi Universal’s Investment in BSkyB plc in October 2001. In order to comply with the conditions imposed by the European Commission in October 2001 on the merger of Vivendi, Seagram and Canal+, Vivendi Universal sold 96% (approximately 400 million common shares) of its investment in BSkyB’s common shares and 81 million of money market securities to two qualifying special purpose entities (QSPEs). Concurrently, Vivendi Universal entered into a total rate of return swap with the same financial institution that held all of the beneficial interests in the QSPEs, thus allowing Vivendi Universal to maintain its exposure to fluctuations in the price of BSkyB shares until October 2005.
      In December 2001, the financial institution controlling the beneficial interest of the QSPEs issued 150 million equity certificates repayable in BSkyB shares, at 700 pence per share. As a result, Vivendi Universal and the financial institution were able to reduce the nominal amount of the swap by 37% and thus fix a value of 150 million BSkyB shares and generate a capital gain of 647 million after-tax and expenses.
      In May 2002, this financial institution sold the remaining 250 million BSkyB shares held by the QSPEs, and, concurrently, Vivendi Universal and the financial institution terminated the total return swap on those shares, which were settled at approximately 670 pence per share, before payment by Vivendi Universal of related costs. As a result of this transaction, Vivendi Universal recognized a pre-tax gain of approximately 1.6 billion, net of expenses, and was able to reduce gross financial debt by 3.9 billion.
      In addition, in February 2002, Vivendi Universal sold 14.4 million shares in BSkyB following the exercise of its option to exchange a convertible bond for BSkyB shares issued by Pathé that came into Vivendi Universal’s possession when it acquired Pathé in 1999. The redemption date was fixed on March 6, 2002, at a redemption price of 100% of the principal amount plus accrued interest to that date. Holders of the bonds were

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entitled to convert them into 188.5236 shares of BSkyB per FFr10,000 principal amount of bonds through and including February 26, 2002.
Reorganization of Vivendi Universal Headquarters in 2002
      In October 2002, Vivendi Universal initiated a reorganization plan for its headquarters in Paris, as well as its locations outside France. It aimed to redefine and refocus the headquarters’ tasks on holding company activities, concentrating all those tasks in Paris and turning New York into a representative office for the company; to sell moveable property and real estate assets held by the holding company (such as three planes and the New York art collection, both sold in 2003 for 84 million); and to achieve full-year savings generated by a very significant cut in non-payroll costs (fees for external services, in particular), as well as a reduction in the number of employees at all headquarters sites. As a result, the number of employees at all headquarters sites was reduced from 507 at the end of 2002 to 288 at the end of 2003 and Holding & Corporate operating losses were reduced by one half from 665 million in 2002 to 330 million in 2003, including 125 million costs savings from operating expenses at the holding company level.
Other 2002 Transactions
      Repurchase program. The company initiated a share repurchase program through:
  •  Treasury Shares: Transactions related to treasury shares are detailed in “Item 18 — Financial Statements — Note 11.1”. The cumulative impact of treasury share cancellation on shareholders’ equity between 2000 and December 2002 was a reduction of approximately 4.6 billion.
 
  •  Sale of Put Options on Vivendi Universal Shares: Vivendi Universal sold put options on its own shares, by which it agreed to buy its own shares on specified dates at specified exercise prices. As of December 31, 2002 and December 31, 2001, Vivendi Universal had outstanding obligations on 3.1 million and 22.8 million shares, respectively. The average exercise prices were 50.5 and 70, respectively, resulting in a potential commitment of 154 million and 1,597 million, respectively. These put options were only exercisable on their exercise dates and expired during the first quarter of 2003. The losses incurred by Vivendi Universal during 2002 resulting from option holders exercising their rights was 589 million, representing the net premium paid on cash settlement of the difference between the market price and the exercise price. At the end of December 2002, Vivendi Universal then marked to market put options with a specific future exercise date. This resulted in a provision of 104 million, corresponding to the premium paid by Vivendi Universal in connection with cash settlements of these options during the first quarter of 2003. The cumulative cash impact of these transactions was 951 million.
      Acquisition of Additional Interest in UGC — December 2002. Following the exercise by BNP Paribas of the put granted by Vivendi Universal in July 1997, Vivendi Universal acquired, for a total consideration of 59.3 million, 5.3 million of UGC shares, representing 16% of UGC share capital. Vivendi Universal’s 58% interest in UGC did not provide operational control of the company due to a shareholders’ agreement. Accordingly, this investment was still accounted for using the equity method. On December 31, 2003, Vivendi Universal and the family shareholders of the UGC Group signed an agreement modifying the structure of UGC S.A.’s share capital. For more details, please refer to “— 2003 Developments”.
      Settlement Agreement with Pernod Ricard-Diageo — August 2002. Vivendi Universal, Pernod Ricard and Diageo reached a global settlement of outstanding claims relating to post-closing adjustments arising from the acquisition of Seagram’s spirits and wine division, concluded in December 2000 and closed in December 2001. As a result, Vivendi Universal received $127 million in cash.
      Waiver by Convertible Bondholders of the Guarantee Agreed by Vivendi Universal — September 2002. Holders of 1.50% 1999-2005 VE bonds exchangeable for new or existing Vivendi Universal shares held a general meeting on August 20, 2002. At this meeting, the bondholders waived, effective September 1, 2002, all rights to the guarantee provided by Vivendi Universal in respect of VE’s obligations under these bonds and, as a consequence, waived certain rights under the liability clause in the event of default by Vivendi Universal. In

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exchange, the nominal interest rate was increased by 0.75%, from 1.50% to 2.25%. For more details, please refer to “Item 18 — Financial Statements — Note 11.4”.
Business Overview
General
      We are a leading Media and Telecommunications company. Our media business is comprised of the Canal+ Group, UMG and VU Games. On May 11, 2004, we completed the NBC-Universal transaction and currently have an approximate 20% interest in NBCU. Our telecommunications business is comprised of the SFR Cegetel Group and Maroc Telecom. We also maintain other non-core operations and investments.
Segment Data
      The contribution of our business segments to our consolidated revenues for each of 2004, 2003 and 2002, in each case after the elimination of intersegment transactions, is as follows:
                                         
    Year ended December 31,
     
        On a comparable
    As published   basis(a)
         
    2004   2003   2002   2004   2003
                     
    (In millions of euros)
Canal+ Group
  3,580     4,158     4,833     3,470     3,339  
Universal Music Group
    4,993       4,974       6,276       4,993       4,974  
Vivendi Universal Games
    475       571       794       475       571  
                               
Media
    9,048       9,703       11,903       8,938       8,884  
SFR Cegetel
    8,317       7,574       7,067       8,317       7,537  
Maroc Telecom
    1,627       1,471       1,487       1,658       1,523  
                               
Telecom
    9,944       9,045       8,554       9,975       9,060  
Non-core operations and elimination of intercompany transactions(b)
    109       584       813       (20 )     28  
                               
Total Vivendi Universal (Excluding VUE, VE and VUP assets sold in 2003)
  19,101     19,332     21,270     18,893     17,972  
                               
Vivendi Universal Entertainment(c)
    2,327       6,022       6,270              
VUP assets sold in 2003(d)
          128       572              
Veolia Environnement
                30,038              
                               
Total Vivendi Universal
  21,428     25,482     58,150     18,893     17,972  
                               
 
(a) Comparable basis essentially illustrates the effect of the divestiture of VUE, the divestitures at Canal+ Group (Telepiù, Canal+ Nordic, Canal+ Benelux, etc.), the divestitures of VUP (Comareg and Atica & Scipione), Vivendi Telecom Hungary, Kencell and Monaco Telecom and the abandonment of Internet operations, and includes the full consolidation of Telecom Développement at SFR Cegetel and of Mauritel at Maroc Telecom as if these transactions had occurred at the beginning of 2003. In addition, comparable basis takes into consideration a change in presentation adopted as of December 31, 2004: in order to standardize the accounting treatments of sales of services provided to customers on behalf of content providers (mainly toll numbers), following the consolidation of Telecom Développement, sales of services to customers, managed by SFR Cegetel and Maroc Telecom on behalf of content providers, previously presented on a gross basis in SFR and Telecom Développement’s revenues, are presented net of the related expenses. This change in presentation has no impact on operating income. At SFR Cegetel, it reduced revenues by 168 million in 2004. At Maroc Telecom, the impact was immaterial.
 
(b) Corresponds to VUP activities in Brazil (Atica & Scipione) deconsolidated since January 1, 2004, Internet operations abandoned since January 1, 2004, VTI, Vivendi Valorisation and other non-core businesses.
 
(c) VUE was deconsolidated as of May 11, 2004 as a result of the divestiture (from an accounting standpoint) of 80% of Vivendi Universal’s interest in this company.

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(d) Corresponds to Consumer Press Division sold in February 2003, which was deconsolidated as of January 1, 2003, and Comareg sold in May 2003.
Geographic Data
      The contribution of selected geographic markets to our consolidated revenue for each of 2004, 2003 and 2002 is as follows:
                         
    Year ended December 31,
     
    2004   2003   2002
             
    (In millions of euros)
France
  12,075     11,515     26,391  
Rest of Europe
    2,749       4,359       15,092  
United States of America
    3,704       6,238       10,810  
Rest of world
    2,900       3,370       5,857  
                   
Total
  21,428     25,482     58,150  
                   
Our Segments
Media
Canal+ Group
      The Canal+ Group has two principal lines of business:
  •  Pay-TV channel production in France, which includes the Canal+ premium channel and theme channels such as Sport+, i>Télé, CinéCinéma channels, Planète channels, Jimmy, Seasons, Comédie! and Cuisine TV; and
 
  •  Pay-TV channel distribution terrestrially, via satellite, cable or ADSL, which includes CanalSatellite (renamed CanalSat in May 2005), CanalSatDSL, NC Numéricâble and Media Overseas.
      The Canal+ Group also engages in the production and distribution of films through StudioCanal, a major European studio involved in the production, co-production, acquisition and distribution of feature films.
      Vivendi Universal owns 100% of Canal+ Group, which in turn owns 49% of Canal+ S.A. (premium channel) and 66% of CanalSatellite.
Pay-TV — France
      Canal+ Group’s pay-TV operations in France are centered on the Canal+ premium channel and theme channels, which provide subscribers with exclusive, high-quality content.
The Canal+ Premium Channel
      The Canal+ premium channel, which celebrated its 20th anniversary in November 2004, is a pioneer in pay-TV in Europe. Canal+ is broadcast terrestrially, via satellite, cable and, since March 2004, via ADSL. Since March 5, 2005, Canal+’s digital subscribers have had access to the “Canal+ Le Bouquet” offering, the first premium multi-channel digital package offer in France, which provides premium content channels (Canal+, Canal+ Cinéma, Canal+ Sport, Canal+ Décalé, with their own programs and identities, and Canal+ Hi-Tech). Since November 2004, Canal+ is the only French channel to broadcast movies with Dolby Digital 5.1 sound on its dedicated wide screen (16/9) channel.
      Canal+ offers a unique programming format featuring exclusive first-run movies, various sports events, news, documentaries and original entertainment shows.
      Canal+ broadcasts approximately 400 films a year, 320 of which are exclusive first runs. Each month nearly 30 French or international movies are shown for the first time, excluding pay-per-view. The channel

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features all film genres, as well as exclusive broadcasts of such major events as the Cannes film festival, France’s César Awards and Hollywood’s Academy Awards. In 2004, Canal+ also invested more than 131 million to acquire French-language productions. The channel holds exclusive first-run rights to movies produced by major US studios such as Twentieth Century Fox, NBCU, Sony/ Columbia, DreamWorks, New Line, Miramax and Spyglass. Canal+ also has a special agreement with Walt Disney and Pixar covering exclusive broadcasting rights to recent feature-length animated films. In January 2005, the channel renewed its agreement with Luc Besson’s EuropaCorp for a three-year period. In April 2005, Canal+ Group extended its agreement with Spyglass Entertainment for a four-year period.
      In May 2004, Canal+ and representatives of the French film industry entered into an agreement to strengthen their partnership and to offer Canal+ subscribers an enhanced movie offering. The five-year agreement, which reflects changes in the regulatory environment, came into effect on January 1, 2005 (for further information on this agreement, see “— Regulatory Environment”).
      Canal+ offers premium sports coverage, with exclusive commercial-free broadcasts, and pre-game, half-time and post-game reports.
      On December 10, 2004, the French soccer league granted Canal+ Group exclusive rights to broadcast all French National League 1 games, France’s top soccer league, for three seasons (2005-2008).
      Canal+ is France’s leading pay-TV channel, with 4.95 million subscriptions (in mainland France and its overseas territories) at December 31, 2004, a net increase of 48,000 as compared to 2003. During 2004, Canal+ gained 550,000 new subscriptions and achieved a 2 percentage point decrease in its churn rate, which fell below 11%.
Theme Channels
      Canal+’s theme channels include: i>Télé, a 24-hour news channel, Sport+, a sports channel, Jimmy, a channel dedicated to TV series, Seasons, a dedicated hunting and fishing channel, Comédie!, a comedy channel, Cuisine TV, a cooking channel, CinéCinéma’s seven-channel package and the four documentary channels from the Planète package.
      On January 3, 2005, Canal+ Group and Lagardère Group signed an agreement under which Lagardère sold its entire stake in MultiThématiques to Canal+ Group. In return, Canal+ Group sold its entire interest in Lagardère Thématiques to Lagardère. Now that the transactions have been completed, Canal+ Group wholly owns MultiThématiques and its subsidiaries, and no longer holds any shares or voting rights in Lagardère Thématiques and its subsidiaries.
Pay-TV Distribution
CanalSatellite
      Canal+ Group owns 66% of CanalSatellite, the leading French digital satellite pay-TV provider. In 2004, CanalSatellite continued to grow significantly to reach nearly three million subscriptions at the end of December 2004 (a net increase of 238,000 subscriptions as compared to 2003), and a 0.5 percentage point decrease in its churn rate to 8.6%. CanalSatellite offers over 290 channels and services, about 65 of which are satellite exclusives. CanalSatellite’s revenues are comprised mainly of subscription fees.
      CanalSatellite diversified its package in 2004 by offering ten additional TV channels dedicated to discovery and entertainment, including the French debut and satellite exclusive of the Discovery Channel (a world leader in factual entertainment), w TV (Filles TV, the first channel aimed at girls aged 11 to 17), E! Entertainment (another satellite exclusive), Pink TV (the first general-interest channel dedicated to the gay community), Planète Choc (devoted to documentaries), CinéCinéma Famiz (which offers comedies, adventure films and animated features), Jetix (dedicated to 4 to 14-year-olds) and BBC Prime (international programs).
      CanalSatellite also offers more than 40 interactive services, which generate nearly 1.5 million connections a month.

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      Since March 2003, CanalSatellite has offered a new-generation digital set-top box equipped with a hard drive and a double tuner and based on the new international standards in interactive TV (DVB-MHP). This personal video recorder (PVR), called Pilotime, can record up to 40 hours of programs in digital quality, record a program while another program is being watched at the same time, and pause or repeat a live transmission within a timeframe of 30 minutes. Approximately 75,000 Pilotime set-top boxes are currently in use.
NC Numéricâble
      Canal+ Group, which owned, as at December 31, 2004, 100% of the French cable operator NC Numéricâble, signed a memorandum of understanding with France Telecom, reflecting the parties’ aims to combine their respective cable activities and networks in March 2004. In December 2004, Canal+ Group and France Telecom Group entered into an agreement to sell their cable activities to the private equity firm Cinven and the cable operator Altice. This transaction closed on March 31, 2005. Canal+ Group now holds approximately 20% of the new company created through the combination of NC Numéricâble and France Telecom Câble.
Media Overseas
      Media Overseas, a wholly owned subsidiary of Canal+ Group, is the operator for Canal+ and CanalSatellite in France’s overseas territories and outside of France. Media Overseas also owns over 50% of four overseas operators (Africa, Caribbean, Indian Ocean and Pacific) and manages Canal+ Group’s Polish platform.
      With over 640,000 subscriptions in French overseas territories and in Africa, MediaOverseas is the third largest French satellite operator and the only French network abroad. As a developer of platforms for French-speaking channels with direct reception via satellite, MediaOverseas fulfills its purpose to promote French culture and the French language abroad.
ADSL TV
      Since the first quarter of 2004, with the launch of the digital version of Canal+ via ADSL and CanalSatDSL, Canal+ Group offers ADSL TV distribution as part of its strategy to reach as many homes as possible. Canal+ Group’s offerings — Canal+ Le Bouquet and CanalSatDSL (80 channels and services) — have been available through Neuf Telecom since March 2004, France Telecom since the end of June 2004 and Free since November 2004.
Digital Terrestrial Television (DTT)
      On January 17, 2005, Canal+ Group became the first operator to broadcast a full program (Canal+) over DTT. On March 31, 2005, Canal+ began broadcasting unscrambled programs as part of the launch of free DTT services. Canal+ expects to introduce scrambled programs in accordance with the government’s timetable for pay-TV via DTT.
Video On Demand (VOD)
      On April 30, 2004, Canal+ Group acquired Moviesystem (renamed Canal+ Active), the leading developer and operator of video-on-demand services in France as well as in several other European countries.
StudioCanal
      Through StudioCanal, Canal+ Group is also a major player in the production, co-production, acquisition and distribution of European and French films. StudioCanal has one of the largest film libraries in the world, with over 5,000 French, British and American feature film titles, including Terminator 2, Basic Instinct, Cliffhanger, The Graduate, The Producers, The Third Man, Breathless, Chicken Run, Billy Elliot, Grand

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Illusion, The Spanish Apartment (L’Auberge espagnole), The Pianist, Bridget Jones’ Diary and Bridget Jones: The Edge Of Reason.
      In December 2003, StudioCanal signed a four-year agreement with Universal Pictures with respect to Working Title, the British film studio that produced Four Weddings and a Funeral, Notting Hill and Bridget Jones. Under the terms of this agreement, StudioCanal will be the minority co-producer, with Universal Studios, of films produced by Working Title and the distributor of these films in French-speaking countries.
      In 2004, StudioCanal co-produced five of the 11 French films that sold over 1.5 million box-office tickets in France, including Yann Moix’s Podium, Olivier Dahan’s Les Rivières Pourpres 2, and Valérie Guignabodet’s Mariages!. StudioCanal acquired the French rights to Michael Moore’s Fahrenheit 9/11, which was awarded the Palme d’Or at the 2004 Cannes Film Festival, and co-produced Mike Leigh’s Vera Drake, which won the Golden Lion and the Coppa Volpi for Best Actress at the Venice International Film Festival. In 2004, StudioCanal was once again the top seller of videos in France with its comedy DVDs, De Caunes/ Garcia and L’Intégrule 2.
Other Activities
Cyfra+ (Poland)
      In Poland, Canal+ Group is a significant pay-TV operator through the Canal+ premium channel and theme channels, as well as the Cyfra+ digital package. Cyfra+ offers 56 TV and radio channels, 51 of which are in Polish, as well as approximately 100 additional unscrambled channels accessible via satellite. Cyfra+ is the leading pay-TV package in Poland with approximately 700,000 subscribers. Canal+ Group directly holds 49% of Cyfra+ and controls Polcom, which in turn holds 26% of Cyfra+.
Paris Saint-Germain (PSG)
      Canal+ Group has a 98.5% stake in PSG, a leading soccer club in France and the only French National League 1 soccer club in Paris. At the end of the 2004/2005 season, PSG ranked number 9 in the League 1 soccer championship.
Seasonality
      Canal+ Group revenues are mainly derived from subscriptions which provide Canal+ Group’s pay television activity with regular monthly revenues and good visibility in terms of income due to the duration of subscriber contracts. Canal+ Group is, therefore, less affected by seasonal variances other than with respect to new subscriptions, more than 50% of which are usually generated in the last quarter of each year.
Competition
      Competition in the pay-TV sector remains largely national due to language and cultural factors specific to each country. In France, pay-TV has a penetration rate of nearly 37%, compared with 42% in the UK. Satellite TV dominates the French market and therefore cable TV’s penetration is weak compared to North America and certain other European countries. Canal+ Group’s main pay-TV competitors in France for the distribution of TV channels are TPS (which offers its package via satellite and ADSL) and cable operators. Since 2004, telecommunications providers have also developed television via ADSL offers (which include Canal+ Group channels). New participants are entering the pay-TV industry as digital technology (including DTT in several European countries) expands broadcasting options. The development of new distribution media also increases competition for premium channels such as Canal+, particularly with the release of certain films on DVD before they are broadcast on pay-TV channels.
      Competition for theme channels is more international than in the traditional pay-TV sector. In a move initiated by US-based media companies and studios, labels are expanding internationally on the model of MTV and Disney Channel. In the film industry, StudioCanal’s main competitors are other film studios from the US, Europe and France.

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      We also face competition from piracy, which the Canal+ Group actively combats to protect its commercial interests as well as those of copyright owners. In December 2003, Canal+ Group implemented an “over-encryption” system for some of its signals that ended the piracy of its satellite broadcasts, which was particularly prevalent in North African countries. The latest version of the Mediaguard conditional access control software, used by CanalSatellite, Canal+’s digital offering and NC Numéricâble, was implemented in 2002. Canal+ Group is currently developing a new version of Mediaguard.
      In order to fight piracy, Canal+ Group has created CK2 Security, a subsidiary dedicated to technological monitoring and research that employs approximately 15 people. Canal+ Group and CK2 are actively working on encryption security for the DTT system.
      In an agreement signed in 2003, Canal+ Group renewed its relationship with Nagra+ as supplier of the conditional access system used for analog broadcasting of the Canal+ premium channel in France. This agreement allowed Canal+ Group to change all the analog keys in February 2005 to further enhance the security of the system.
      In 2004, the Canal+ Group continued to seek legal remedies in criminal proceedings against pirates.
Regulatory Environment
      Our broadcast operations are subject to national laws and regulations overseen by such authorities as France’s CSA. These authorities generally grant broadcasting licenses for specific time periods. Canal+ Group owns 49% of Canal+ S.A., a company listed under “Compartment B” of Eurolist by Euronext Paristm, which holds the broadcasting license to broadcast the Canal+ premium channel terrestrially, by satellite and by cable that was renewed in December 2000 for five years.
      Under its broadcasting license in France, Canal+ S.A. is subject to the following requirements: (i) a single shareholder may not own more than 49% of its capital; (ii) 60% of the films broadcast by the channel must be European films; and (iii) 40% of the films broadcast must be French-language films. Canal+ is also required to invest 4.5% of its revenues in television productions such as made-for-TV movies and original drama.
      In May 2004, Canal+ entered into a five-year agreement, which became effective on January 1, 2005, with organizations of the French film industry. Pursuant to the agreement, Canal+:
  •  gained more flexibility in the scheduling and programming of movies on the Canal+ channel and other Canal+ related channels;
 
  •  agreed to allocate 17% of its obligation to acquire French-language movies to films with a budget of 4 million or less as part of a more ambitious and diverse film acquisition policy;
 
  •  renewed its financial commitment to support all film industry segments and will continue to allocate at least 9% (up to 12.5% in certain circumstances) of its revenues to the acquisition of French-language films, as part of its obligation to devote 12% of its revenues to the acquisition of European movies; and
 
  •  agreed to continue to invest 80% of its French-language film obligation in films prior to the first day of filming.
      Our operations are also subject to the French Electronic Communications and Audiovisual Communication Services Act of July 9, 2004, which amended the Audiovisual Communications Act of September 30, 1986 regarding freedom of communications. The new Act confirms and harmonizes the “must carry” system that requires distributors of services via cable, satellite, ADSL and other networks that do not use terrestrial frequencies assigned by the CSA to provide public access to unused frequencies and increases from five to seven the number of licenses a single person may hold, directly or indirectly, for national digital services broadcast terrestrially.
      In October 2004, the French Administrative Supreme Court cancelled the DTT authorizations (for a discussion of DTT services see “Digital Terrestrial Television (DTT)” above) granted in June 2003 by the CSA to Canal+, i>Télé, Sport+, CinéCinéma Premier and Planète. Canal+’s DTT authorization was not

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affected by this decision. In March 2005, Canal+ Group applied to the CSA for the allocation of six DTT channels in addition to the one already allocated to Canal+: i> Télé, as a free-access channel, and Canal+ Cinéma, Canal+ Sport, CinéCinéma Premier, Sport+ and Planète as pay-TV channels. In May 2005, the CSA allocated four DTT channel authorizations to Canal+ Group (out of the eight DTT channel authorizations that were allocated): i> Télé, as a free access channel, and Canal+ Cinéma, Canal+ Sport and Planète as pay-TV channels.
      Our broadcast operations are also subject to European Union legislation such as the “Television Without Frontiers” directive and other directives with respect to intellectual property, e-commerce, data protection and telecommunications.
Research and Development
      In 2004, as in 2003, the Canal+ Group did not incur significant research and development costs; most of its expenditure in 2002 (51 million) was related to Canal+ Technologies, a subsidiary which was divested in January 2003.
Raw Materials
      Canal+ Group does not rely on raw materials in a material way. Raw materials are primarily comprised of celluloid for the production of films, polycarbonate for the production of DVDs, and paper for packaging. Canal+ Group’s operations do not rely on raw materials which are subject to price fluctuations that could have a material impact on Canal+ Group’s business.
Property, Plant and Equipment
      Canal+ Group’s main assets recorded as property, plant and equipment are: PVRs and set-top boxes (Pilotime, Mediasat, Syster), which are either lent or rented to subscribers; broadcasting related assets: including Canal+’s control room/ Playout, CanalSatellite’s new broadcasting center, and NC Numéricâble’s cable networks (divested in March 2005).
     Universal Music Group
      Our music business is operated through UMG, in which we hold a 92% interest. UMG is the largest recorded music company in the world in terms of revenues (according to management estimates for 2004 and the International Federation of the Phonographic Industry for 2003). In 2004, UMG held an estimated 24.7% of the global music market (according to management estimates). UMG acquires, manufactures, markets and distributes recorded music through a network of subsidiaries, joint ventures and licensees in 77 countries. UMG also manufactures, sells and distributes music video and DVD products, and licenses recordings. UMG participates in and encourages online electronic music distribution by making a significant amount of its content available online. UMG also invests resources through a variety of independent initiatives and strategic alliances in the technology and electronic commerce areas to allow the music business to be conducted over the Internet and over cellular, cable and satellite networks. UMG is not dependent on any single artist. UMG’s top 15 album releases accounted for 13% of unit volume in 2004 (10% in 2003).
      UMG is also active in the music publishing market. UMG acquires rights to musical compositions (as opposed to recordings) in order to license them for use in recordings and related uses, such as in films, advertisements or live performances. We believe that UMG is the number three global music publishing company with over one million owned or administered titles.
      The key to UMG’s success has been its ability to consistently identify, attract and retain successful artists and market them effectively. We believe this is primarily attributable to:
  •  The stability of the management team compared to UMG’s major competitors, which allowed UMG to have a consistent strategy to respond effectively to industry and social trends and challenges;

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  •  UMG’s size and strength in marketing and distribution, which builds on itself by attracting established artists;
 
  •  UMG’s large catalog of prior hit releases that provide a stable and profitable revenue stream, accounting for approximately 30% of sales, without significant additional investment;
 
  •  UMG’s diverse array of labels in the major markets and local representation across the globe complement each other through their focus on different genres, sub-genres and music segments, and thereby mitigate the effect of changes in consumer tastes; and
 
  •  Multi-album and multi-year contracts, which secure long-term relationships with some of the most important artists and talent finders in the industry.
Recorded Music
      UMG’s recorded music business is the largest in the world with particularly strong positions in the important North American and European markets, which together account for nearly three quarters of global sales.
      UMG’s major recording labels include popular music labels Island Def Jam Music Group, Interscope A&M Records, Geffen Records, Lost Highway Records, MCA Nashville, Mercury Nashville, DreamWorks Nashville, Mercury Records, Polydor and Universal Motown Records Group; classical labels Decca, Deutsche Grammophon and Philips; and jazz labels Verve and Impulse! Records.
      Best-selling albums in 2004 included new releases from Eminem, U2 and Nelly and carryover sales from 2003 releases from Black Eyed Peas, Hoobastank and greatest hits collections from Shania Twain, Guns N’ Roses and George Strait. Other major sellers were the debut releases from several new artists including Ashlee Simpson, Kanye West, JoJo and Lloyd Banks. In the UK, UMG enjoyed an exceptional year for breaking new artists with the debut releases from Scissor Sisters and Keane, also the best-selling titles in that market in 2004. Local artists continued to make a significant contribution to sales, and regional best-sellers included: Rammstein, Rosenstoltz, The Rasmus, Calogero and Michel Sardou (Europe); Hikaru Utada, Kou Shibasaki and Moriyama Naotaro (Japan); and Ivete Sangalo and Juanes (Latin America).
      Sales from prior releases account for a significant and stable part of UMG’s recorded music revenues each year. UMG owns the largest catalog of recorded music in the world, with performers from the US, the UK and around the world, including: ABBA, Louis Armstrong, Bee Gees, Chuck Berry, James Brown, The Carpenters, Eric Clapton, Patsy Cline, John Coltrane, Count Basie, Def Leppard, Dire Straits, Ella Fitzgerald, The Four Tops, Marvin Gaye, Johnny Hallyday, Jimi Hendrix, Billie Holiday, Buddy Holly, The Jackson Five, The Jam, Elton John, Herbert von Karajan, Kiss, Andrew Lloyd Webber, Lynyrd Skynyrd, The Mamas & the Papas, Bob Marley, Van Morrison, Nirvana, Luciano Pavarotti, Tom Petty, Edith Piaf, The Police, Smokey Robinson, The Rolling Stones, Diana Ross & The Supremes, Michel Sardou, Cat Stevens, Rod Stewart, Caetano Veloso, Muddy Waters, Barry White, Hank Williams and The Who.
      UMG markets its recordings and artists through advertising and exposure in magazines, on radio and TV, via the Internet, and through other media and point-of-sale material. Public appearances and performances are also important elements in the marketing process. UMG coordinates television and radio appearances and may provide financing for concert tours by some artists. TV marketing of both specially compiled products and new albums is increasingly important. Marketing is carried out on a country-by-country basis, although global priorities and strategies for certain artists are determined centrally.
      Following the sale in May 2005 of UMG’s manufacturing and distribution facilities in the United States and Germany to Glenayre Technologies, the parent company of Entertainment Distribution Corporation (EDC), UMG has outsourced the bulk of its manufacturing and distribution requirements to third parties or joint ventures with other record companies. UMG retains distribution facilities in the U.K. and France.

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E-Commerce and Electronic Delivery
      Legal digital distribution of music continued to boom in 2004, evolving into a significant revenue stream. Revenue growth was driven by several factors, including:
  •  growth of download offerings in the US;
 
  •  expansion of download offerings in Europe; and
 
  •  growth of mobile offerings in Europe, Asia and the US.
      Retail sales of UMG’s US digital downloads increased from approximately 14 million in 2003 to approximately 71 million in 2004. This growth was driven primarily by Apple’s iTunes and other US digital download retailers, such as Napster, Real Networks and Musicmatch. Many US digital retailers launched in Europe in 2004, including iTunes and Napster, joining Europe’s local competitors in growing the legal digital marketplace. The emergence of new competitors and the increased focus on the European download market led to strong growth in that market. Retail sales of UMG’s European digital downloads increased from 500,000 in December 2003 to over 2 million in December 2004.
      Mirroring the growth in music downloads, UMG sold over 10 million master ring tones in the US in 2004 (from 0 in 2003) and began selling “ringback tones” through one US carrier, with more carriers expected to rollout this product in 2005. In Asia and Europe, UMG’s already established mobile business grew strongly, selling a range of digitized products including videos and images in addition to music.
      In 2004, UMG maintained its leadership position in digital distribution, achieving an industry-leading market share of 32%, in the US, higher than our market share of 30% for retail distribution. UMG’s market share in digital distribution is primarily due to the fact that UMG offers the largest digital distribution catalog, delivers new releases to digital retailers upon release and collaborates with digital retailers to promote its products. UMG continues to innovate by improving its download offerings with, among other enhancements, digital CD booklet artwork, more flexible pricing and promotional offerings.
      In 2005, UMG anticipates continued strong growth in US and European download sales as key partners such as Microsoft and Napster begin to market their services more aggressively and as portable music players continue to proliferate. Mobile master ring tones, ring backs and other ancillary mobile products should continue to drive growth in mobile revenue in the US, Europe and Asia. Additionally, we expect that the music subscription market (currently less than 15% of US digital music revenue and insignificant in Europe) will benefit from new technology that enables “rented” downloads to be transferred to compatible portable devices.
Music Publishing
      Music publishing involves the acquisition of rights to, and licensing of, musical compositions (as opposed to recordings). UMG enters into agreements with composers and authors of musical compositions for the purpose of acquiring an interest in the underlying copyright so that we may license the compositions for use in sound recordings, films, videos, commercials and by way of live performances and broadcasting. We also license compositions for use in printed sheet music and song folios. We generally seek to acquire rights, but also administer musical compositions on behalf of third-party owners such as other music publishers and composers and authors who have retained or re-acquired rights. In 2004, the copyrights related to the VUE film and television catalog were transferred to NBCU, as part of the NBC-Universal transaction. We simultaneously negotiated an agreement to continue to administer these rights.
      UMG’s publishing catalog includes more than one million titles that are owned or administered, including some of the world’s most popular songs, such as “American Pie”, “Strangers in the Night”, “Girl from Ipanema”, “Good Vibrations”, “I Want to Hold Your Hand”, “Candle in the Wind”, “I Will Survive” and “Sitting on the Dock of the Bay”, among many others. Among the significant artists and songwriters represented are ABBA, Avril Lavigne, 50-Cent, The Beach Boys, Mary J. Blige, Bon Jovi, The Corrs, Gloria Estefan, No Doubt, Prince, Michel Sardou, Paul Simon, Andre Rieu, Shania Twain, Andrew Lloyd Webber and U2. Legendary composers represented include Leonard Bernstein, Elton John and Bernie Taupin, and

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Henry Mancini. Acquisitions in 2004 included the Trema (Art Music) catalog, as well as compositions by Mariah Carey, Diana Krall, Ludacris, Franz Ferdinand, BOSS (Joey Starr and Dadoo), Twista, The Killers, Dave Grohl (Foo Fighters) and Clarence Avant (Bill Withers).
Seasonality
      Music sales are weighted towards the last quarter of the calendar year when approximately one-third of annual revenues are generated.
Competition
      The profitability of a recorded music business depends on its ability to attract, develop and promote recording artists, the public acceptance of those artists and the recordings released in a particular period. UMG competes for creative talent both for new artists and those artists who have already established themselves through another label with the following major record companies: EMI, Sony BMG Entertainment and Warner Music Group. UMG also faces competition from independent labels that are frequently distributed by other major record companies. Although independent labels have a significant combined market share, no label on its own has influence over the market. Changes in market share are essentially a function of a company’s artist roster and release schedules.
      Sony BMG Entertainment was created in August 2004 when Sony Corporation and Bertelsmann AG combined their global recorded music businesses. The new company does not include the parent companies’ businesses in music publishing, physical distribution and manufacturing, or Sony Corporation’s recorded music business in Japan, SMEJ.
      The music industry also competes for consumer discretionary spending with other entertainment products such as video games and motion pictures. UMG is also facing intensified competition for shelf space in recent years due to the success of DVD videos and further consolidation in the retail sector in the US and in Europe.
      Finally, the recorded music business continues to be adversely affected by pressed disc and CD-R piracy, home CD burning and illegal downloading from the Internet. According to the International Federation of the Phonographic Industry (IFPI), the worldwide music market for sales of physical formats decreased slightly by 1.3% in value and 0.4% in volume in 2004, and sales of pirated music amounted to $4.5 billion in 2003 (most recent available data) as compared to $4.6 billion in 2002 and $4.3 billion in 2001 (the slight decrease in pirated sales value is a result of the lower prices of pirated products). IFPI further estimates that sales of pirated products represented 15% of the world market of legal music sales in 2003, up from 11% in 1999, and that the global pirate market for recorded music totaled 1.7 billion units in 2003.
      Online music services continue to be developed to offer consumers a viable, legal, copy-protected online source of music. The industry and UMG are increasing their anti-piracy activities with a multi-pronged approach focusing on legal action, including participating in industry legislative efforts, public relations and education, and technical countermeasures while offering consumers new products and services (for further information, see “— E-Commerce and Electronic Delivery” above).
Regulatory Environment
      UMG’s businesses are subject to laws and regulations in each jurisdiction in which they operate. In the US, certain UMG companies entered into a Consent Decree in 2000 with the Federal Trade Commission under which they agreed for seven years not to make the receipt of any co-operative advertising funds for their pre-recorded music products contingent on the price or price level at which such product is advertised or promoted. Also in the US, a UMG company entered into a Consent Decree with the Federal Trade Commission in 2004 under which it agreed to comply with the provisions of the Children’s Online Privacy Protection Act and to maintain records demonstrating compliance.
      In Canada, in connection with Vivendi’s purchase of Seagram, UMG is required to continue its investments in Canada’s domestic music industry as part of an undertaking given to the Canadian Department of Heritage.

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Research and Development
      UMG aims to pursue digital distribution opportunities and to protect its copyrights and the rights of its contracted artists from unauthorized digital or physical distribution. UMG has established eLabs, a business strategy and technology division, which supervises UMG’s digitization and online distribution of content and negotiates agreements for selling that content through third parties. eLabs is actively engaged in various projects intended to open new distribution channels and improve existing ones. In addition, eLabs reviews and considers emerging technologies for application in UMG businesses, such as technological defenses against piracy and new physical formats such as DVD-Audio and HD DVD. Research and development costs incurred by UMG are immaterial.
Raw Materials
      The raw materials utilized by UMG’s businesses are polycarbonate, for the production of CDs, and paper for packaging. Fluctuations in the price of these raw materials would not have a material impact on UMG’s business.
Property, Plant and Equipment
      Following the sale in May 2005 of UMG’s manufacturing and distribution facilities in the United States and Germany to Glenayre Technologies, the parent company of Entertainment Distribution Corporation (EDC), UMG has outsourced the bulk of such facilities to third parties or joint ventures with other record companies. UMG retains distribution facilities in the U.K. and France and the properties housing the manufacturing and distribution facilities in Germany sold to EDC. UMG generally leases office buildings although a small number are owned.
Vivendi Universal Games
      Vivendi Universal Games (VU Games) is a global developer, publisher and distributor of multi-platform interactive games. VU Games’ development studios and publishing labels include Blizzard Entertainment, Radical Entertainment, Sierra Entertainment and Massive Entertainment. VU Games is a leader in the subscription-based Massively Multi-player Online (MMO) games category and also holds leading positions in the PC and console games markets.
      VU Games’ library contains over 700 titles, many of which were developed in-house and for which VU Games holds the intellectual property rights, including Warcraft, StarCraft, Diablo and World of Warcraft from Blizzard; Crash Bandicoot, Spyro, Empire Earth, Leisure Suit Larry, Ground Control and Tribes. VU Games also maintains commercial relationships with strategic partners such as NBCU and Twentieth Century Fox. VU Games owns certain of the technologies used in its PC and console games and also maintains relationships with top-tier external developers. External developer relationships are generally based on long-term, multiple product contracts in order to leverage the developed technology in sequels and spin-offs. Typically, the developer owns the underlying technology that it brings at the beginning of the development process. By using existing technology, VU Games reduces technical risks at the beginning of a project.
      In 2004, VU Games became the market leader in the subscription-based MMO games market with Blizzard Entertainment’s World of Warcraft, which was launched in North America, Australia and New Zealand in November of that year. World of Warcraft became the largest MMO in North America during its first week of sales and was the region’s fastest-growing MMO. The game was also launched in Korea in mid-January 2005 and became the most successful 100-day launch ever for an MMO role-playing game in the country. World of Warcraft was released in Europe in February 2005 and posted excellent first weekend sales and, as at March 2005, there were 500,000 active subscribers. As at June 2005, World of Warcraft had more than 2 million subscribers worldwide. The strong results of World of Warcraft are expected to have a positive impact on VU Games’ results in 2005.
      VU Games’ strong performance in the PC games category was led by Half-Life 2, launched globally in November 2004, with an estimated 2.3 million units sold at retail as at April 2005. Other top-selling PC titles

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in 2004 included Counter-Strike: Condition Zero, The Chronicles of Riddick: Escape from Butcher Bay, Men of Valor and Tribes: Vengeance.
      In the console games market, VU Games publishes titles for Sony’s Playstation 2, Microsoft’s Xbox and Nintendo’s GameCube. In 2004, VU Games’ best performers in this segment included titles based on content licensed from Universal Studios (The Chronicles of Riddick: Escape from Butcher Bay and Van Helsing), as well as proprietary games (Crash Twinsanity, Spyro: A Hero’s Tail and Leisure Suit Larry: Magna Cum Laude). The Simpsons: Hit & Run, which was originally released by VU Games in 2003, continued to achieve strong sales in 2004.
      VU Games’ 2005 release schedule includes a World of Warcraft launch in China and launches of console and PC titles, such as 50 Cent: Bulletproof, Robots, Empire Earth 2, F.E.A.R., SWAT 4, Crash Bandicoot: Tag Team Racing and The Incredible Hulk: Ultimate Destruction.
      VU Games is also intensifying its development efforts for the next generation of consoles from Sony, Microsoft and Nintendo, which are expected to launch commercially in late 2005 or early 2006. VU Games expects to release its next-generation products in 2006. In preparation for the next generation consoles, VU Games entered into an exclusive development agreement with Vancouver-based Radical Entertainment. In March 2005, VU Games completed the acquisition of Radical Entertainment.
Seasonality
      PC and console software sales are historically higher during the last quarter of the year. In 2005, VU Games plans to release PC and console games during all quarters to capture revenues throughout the entire year.
      The MMO games business provides a consistent revenue stream throughout the year, as consumers are required to pay a monthly subscription fee in order to play games. The continuous revenue flow from World of Warcraft should reduce the seasonality of VU Games’ revenues.
Competition
      VU Games’ main competitors are global publishers with products for multiple platforms and genres. The worldwide leader is Electronic Arts with an approximate 22% market share. The combined worldwide market share of the top ten game publishers is approximately 75%. VU Games is the ninth largest global publisher of interactive games, which comprises PC games and video game software. VU Games’ share of the European and US markets is approximately 4.7%.
      VU Games is the second-largest publisher of PC game software in North America and Europe, with a market share of 12.6%. VU Games holds top market share positions in key regions: number two in the US and Germany, and number three in France, the UK and Spain (source: NPD Funworld, PC Data, Chart-Track, GFK. Data as of December 2004).
      In the console and handheld games market, VU Games is the eleventh largest publisher in North America and Europe with a combined 3.7% market share. VU Games’ rankings in key markets are as follows: number 12 in the US, number 11 in Germany and France, number six in the UK and number eight in Spain. (Source: The NPD Group, Chart-Track, GFK. Data as of November 2004).
Piracy
      Piracy is a serious concern for game publishers generally, and one that VU Games’ anti-piracy department combats directly (e.g., via investigation, litigation, and criminal referrals) and in collaboration with third parties such as other publishers and trade associations. The Interactive Software Federation of Europe estimates that the entertainment software industry lost 2.5 billion to piracy in 2003. The Entertainment Software Association reported that worldwide piracy cost publishers based in the US more than $3 billion last year. With the advent of file sharing software, large pirated games files, which previously were cumbersome to download, now proliferate over the Internet. VU Games continuously updates its internal

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security measures and copy protection technology in an effort to prevent and reduce the infringement of its intellectual property. VU Games has also pursued emerging business models, such as MMO role-playing games, which embrace the Internet while at the same time utilizing technology to prevent piracy. VU Games’ recent release of the Blizzard title, World of Warcraft, incorporated online CD-Key authentication for subscription-based play, which has greatly reduced traditional piracy levels. Significant recent international property rights enforcement victories for VU Games include prevailing in litigation against the architects of an unauthorized server project known as “bnetd” (which circumvented Blizzard’s security protections) and, along with Atari, Inc. and Electronic Arts, Inc., against 321 Studios, Inc. which published software for illegally copying game software.
Regulatory Environment
      VU Games voluntarily participates in self-regulatory ratings systems established by various industry organizations around the world. In the US, VU Games adheres to ratings, advertising guidelines and online privacy principles adopted by the Entertainment Software Association and the Entertainment Software Rating Board. Pursuant to these guidelines, VU Games displays on its product packaging and advertising the age group for which a particular product is intended and provides a brief description of the product’s content. VU Games must also comply with advertising standards and privacy principles for on-line gaming.
      In Europe and the Asia-Pacific region, VU Games complies with local legal requirements applicable to computer games and video games, as well as with local statutory rating systems.
      MMO games, such as Blizzard’s World of Warcraft, require the involvement of extensive teams to manage the game. VU Games and Blizzard have developed a specific training program for “game masters” who manage and monitor World of Warcraft players during online gameplay. In addition to providing online service and support, game masters regularly monitor chat rooms and the players’ online behavior; players who behave inappropriately are immediately expelled.
Research and Development
      Research and development costs include development costs incurred prior to the technological feasibility study of a project. Research and development expenses were 158 million in 2004, 112 million in 2003 and 122 million in 2002.
Raw Materials
      Raw materials do not constitute a significant amount in the total economics of a game. The raw materials utilized by VU Games are polycarbonate, for the production of CDs and DVDs, and paper for packaging. These raw materials are not subject to price fluctuations that could have a material impact on VU Games’ business.
Property, Plant and Equipment
      In the US, VU Games operates an assembling and distribution facility which it leases in Fresno, CA; all property and equipment in the building are owned by VU Games. In Europe, VU Games uses external partners for manufacturing and physical distribution. VU Games leases its offices (major offices are located in Los Angeles, CA, Irvine, CA, Seoul, South Korea, and Vélizy, France).
Telecommunications
SFR Cegetel Group
      The SFR Cegetel Group is the second-largest mobile and fixed-line telecommunications operator in France with approximately 18 million customers at December 31, 2004, an 8% increase as compared to 2003 on a comparable basis. The SFR Cegetel Group is the only private telecommunications operator in France operating in both the mobile and fixed telephony sectors.

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      The SFR Cegetel Group operates in the mobile telephony sector through SFR, in which Vivendi Universal holds 55.8% of the share capital (the remaining 43.9% and 0.3% of SFR’s share capital are held by Vodafone and individual shareholders, respectively) and in the fixed telephony sector (voice, data transmission and Internet) through Cegetel, a 65%-owned subsidiary of SFR. The SFR Cegetel Group’s customer base includes residential, professional and corporate customers, as well as operators and Internet service providers. The infrastructure of SFR Cegetel’s network as well as the handsets and SIM cards which its sells to its clients are purchased from different sources.
      In May 2005, Cegetel and French fixed-line and Internet service provider, Neuf Telecom, announced their merger plan to set up a new group called Neuf Cegetel that would become the largest alternative fixed telecommunications operator in France. This merger plan is subject to approval from personnel representatives of both Cegetel and Neuf Telecom, and from competition and regulatory authorities. Upon completion of the merger the two reference shareholders of the new Neuf Cegetel, SFR and Louis Dreyfus S.A.S., will have an equal stake of 28% each. The remaining 44% will be held by current shareholders of Neuf Telecom.
Mobile Telephony
      SFR offers mobile telephony services both on a subscription (post-paid) and a prepaid basis, with or without handsets, for residential, professional and corporate customers in mainland France and in the French overseas territories, Réunion and Mayotte, through its wholly-owned affiliate Société Réunionnaise du Radiotéléphone (SRR). As at December 31, 2004, SFR (including SRR) had 15.82 million customers, representing 35.5% of the total mobile telephony market in France as compared to 35.3% in 2003 and 35.1% in 2002 (source: French telecommunications regulatory authority (ARCEP — formerly ART)). In 2004, SFR’s customer base increased by almost 1.1 million, from 14.72 million to 15.82 million, a 7% increase. In 2004, for the second year in a row, SFR held the highest market share by net sales (38.2%) in France according to the ARCEP. In 2004, SFR’s average revenue per user (ARPU) reached 432, a 2% increase as compared to 2003 on a comparable basis.
      In 2004, SFR strengthened its position in mobile multimedia services by becoming the first operator to offer third-generation (3G or UMTS-Universal Mobile Telecommunications System) services in France for the corporate market in June and the consumer market in early November. The success of the Vodafone live! mobile multimedia services portal continued in 2004 with more than 2.2 million customers at the end of 2004. This success contributed to a sharp increase in data services usage with more than 4.5 billion text messages (SMS) and 37 million multimedia messages (MMS) sent by SFR customers in 2004, against 3.4 billion and 6 million, respectively, in 2003.
Network
      SFR’s mobile services operate through a GSM (Global System for Mobile Communication) license — the international standard for mobile communications and the dominant digital standard in Europe — or through a UMTS license. SFR’s GSM network covers 98% of the French population and its GSM/ GPRS (General Packet Radio Service) network covers 87% of France’s territory. At the end of 2004, the UMTS network covered 38% of the French population, and 64 of the 104 French cities with more than 50,000 inhabitants. UMTS coverage in 2005 should reach 58% of the French population as a result of a significant capital expenditure program in 2005.
      SFR has signed roaming agreements covering over 170 countries for GSM/ GPRS and 12 countries for UMTS.
      SFR’s GSM license was renewed by the French government for a further 15 years from March 25, 2006 for an annual fee of 25 million and 1% of SFR’s turnover generated by the GSM network.
      In 2001, SFR was granted a UMTS license by the French government for a period of 20 years (2001-2021) in return for a one-time payment of 619 million and an annual fee equal to 1% of SFR’s future turnover generated by the UMTS network. The UMTS system is a third-generation mobile radio system which generates additional capacity, enables broadband media applications and high-speed Internet access.

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SFR will continue to invest in the development of its UMTS network in the coming years. Through its partnership with Vodafone, SFR will benefit from the experience of other European operators.
      SFR’s network was ranked first or first ex-aequo for quality on 53 out of the 57 criteria used by the ARCEP in its annual audit on the quality of mobile networks. SFR continues to invest in its GSM/ GPRS network in order to maintain a high quality of service and to increase the capacity of the network. At the end of 2004, SFR’s mobile network comprised 14,680 GSM/ GPRS sites in mainland France.
Fixed Telephony, Data and Internet
      The fixed telephony, data and Internet businesses are operated through Cegetel S.A.S., which was created as a result of the merger of Cegetel and Télécom Développement in December 2003. Cegetel is the second largest fixed telecommunications operator in France, with 1.7 million active residential customers, and more than 25,000 corporate customers at the end of 2004.
      In March 2004, Cegetel launched its high-speed Internet access offer for residential and professional customers. At the end of 2004, Cegetel had 699,000 DSL customer lines, including 244,000 retail customer lines.
      Cegetel also simplified its telecommunications offerings with the introduction of single rates for local and domestic calls and calls from fixed-line phones to mobile phones on all mobile phone networks.
      In October 2004, Cegetel was awarded the largest contract in its history, with EDF-GDF (the French national gas and electricity provider). At the end of 2004, Cegetel had over 27,300 customer sites, a 34% increase as compared to 2003.
      In 2004, Cegetel launched packages combining high-speed Internet access and unlimited domestic phone communications, WiFi packages, the first ADSL packages in France offering download speeds of up to four megabytes, and ADSL packages offering download speeds of up to eight megabytes.
      Cegetel’s fixed telephony network, which comprises 22,918 kilometers of fiber optic cable, is the most extensive private telecommunications network infrastructure in France. The network carried more than 42 billion minutes in 2004, a 5% increase as compared to 2003.
      In 2004, one of Cegetel’s priorities was to develop a broadband Internet network, with the investment of 150 million in unbundling and the installation of 600 DSLAM (Digital Subscriber Line Access Multiplexer). This equipment was installed in record time, which enabled Cegetel to be the provider (at benchmark quality) of more than 21% of the unbundled ADSL lines in France at the end of 2004. Using the latest technology, Cegetel’s DSL platform is modular and compatible with the most advanced DSL features (video on ADSL, ADSL 2+). As a result, the Internet access services currently offered will be supplemented with IP telephony and TV/video on ADSL from 2005.
Seasonality
      The SFR Cegetel Group’s sales (acquisition of new customers) are generally higher at year end, particularly for mobile activity.
Competition
      The SFR Cegetel Group faces strong competition in both the mobile and fixed telephony markets.
      SFR’s principal competitors are Orange France (a subsidiary of France Telecom, France’s incumbent operator) and Bouygues Telecom. According to the ARCEP, the penetration rate of mobile telephony increased by 4.8 percentage points in 2004 to reach 73.9% at year-end as compared to 69.1% at the end of 2003. According to the ARCEP, at the end of 2004, the market share of Orange France and Bouygues Telecom was 47.7% and 16.8%, respectively, and 35.5% for SFR. In the UMTS market, SFR faces competition from Orange France, which launched its UMTS services on December 6, 2004, and Bouygues

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Telecom, which indicated that it will launch UMTS services in 2007. In December 2001, the French government offered to grant a fourth UMTS license; there has been no candidate for this license to date.
      In June 2004, SFR signed the first MVNO (Mobile Virtual Network Operator) agreement in France with Debitel. Under the terms of this agreement, Debitel can offer a mobile telephony service under its own brand and to its own customers using the resources of SFR’s network. This agreement currently covers GSM services only; however, it will be extended to UMTS services during 2005. SFR also signed MVNO agreements with NRJ Mobile in February 2005 for the consumer market and, for the professional market, with Futur Telecom in February 2005, as well as Cegetel and Neuf Telecom in March 2005. Orange France has signed a similar agreement with The Phone House (a French mobile telephony retail outlet), which has set up Breizh Mobile for this purpose.
      In the fixed-line telephony and broadband Internet market, Cegetel’s main competitors are, in addition to France Telecom and its Internet access subsidiary Wanadoo, Tele2, Neuf Telecom, Free (Groupe Iliad), Completel, AOL, Club Internet and Tiscali. The SFR Cegetel Group also faces indirect competition from the providers of other telecommunications services in France.
      Competitive pressures have led to a decrease in rates and an increase in customer retention costs as operators seek to control customer churn rates.
Regulatory Environment
      Our telecommunications operations are subject to national laws and regulations overseen by such authorities as France’s ARCEP. Since 2004, new telecommunications operators are not required to hold a license to operate a fixed or mobile telecommunications network in France; they must, however, make a declaration to the ARCEP. This sector remains heavily regulated. SFR’s GSM license was renewed by the French government for a further 15 years from March 25, 2006 for an annual fee of 25 million and 1% of SFR’s turnover generated by the GSM network.
      In 2004, a series of European directives known as the “Telecoms Package” were transposed into French law to encourage competition within the French telecommunications market. As a result, the ARCEP will study 18 different markets identified as “relevant” by the European Commission and in each case, the ARCEP must, on the basis of the position of the participants in such markets, determine if it is appropriate to allow the normal rules of competition to prevail or if the regulator needs to intervene and impose specific measures designed to re-establish a competitive balance. The ARCEP may notify European Community authorities of its intention to define additional relevant markets in France if it deems this is necessary. These provisions apply to both fixed and mobile telecommunications operators.
      The sector-specific measures that the regulator can adopt in the relevant markets include: obligation to provide access, pricing controls (including wholesale cost pricing) and accounting separation. These measures could enhance the development of virtual operators (MVNO) in the mobile telephony market or force France Telecom to offer wholesale resale of telephone services to its competitors.
      Within this new regulatory framework, the ARCEP has been granted wider powers and is responsible for studying the competitive conditions within each relevant market. It is responsible for allocating frequencies and phone numbers and is also authorized to settle disputes relating to interconnection and access.
      In July 2003, the French government, the association of French mayors (Association des Maires de France), the Association of French departments, the ARCEP and the three French mobile telecommunications operators launched a two-phase program to extend mobile services to 3,000 cities — which do not have access to mobile services — by 2007 (so called “white zones”). The second phase of this program, which is entirely financed by the mobile operators, was launched in July 2004 and aims to cover approximately 1,200 cities.
      SFR complies with the regulations (Decree of May 3, 2002) concerning the limitation of public exposure to electromagnetic fields and endeavors to keep the public, local authorities and its landlords informed about the latest developments and regulations on this issue. SFR has also taken an active part in the work of the

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French mobile operators’ association (Association Française des Opérateurs Mobiles — AFOM) in order to enhance the dialog and transparency on this issue. In April 2004, AFOM and the association of French mayors agreed to a best practices guide for the installation of mobile phone masts, which anticipated most of the requirements of the July 2004 law on public health.
      The rapid growth of mobile telephony in recent years has led to an international debate on the potential health risks caused by electromagnetic waves. At the end of 2000, SFR set up a dedicated management team, as well as a team of scientific advisers including an epidemiologist and a sociologist, in order to monitor research on this issue, understand the expectations of the various interested parties and take appropriate measures if necessary.
      Both within France and outside of France, expert opinion is generally of the view that mobile phone masts do not pose a health risk. The latest report published by the French environmental health agency, the Agence Française de Sécurité Sanitaire Environnementale in April 2003, which is due to be updated in 2005, concluded that “the waves emitted by base stations do not have an adverse effect on health”.
      Similarly, scientific research carried out on mobile phones over the last decade has not shown any risk to the health of users. Certain results have, however, raised questions which merit further investigation, and research in this field is still on-going. In particular, the International Cancer Research Center, authorized by the World Health Organization, conducted a large-scale epidemiological study, the conclusions of which are expected to be published in 2005. SFR, in association with the French Ministry for Research and other companies, created a foundation to study “radio frequencies and health” in January 2005.
Research and Development
      The SFR Cegetel Group’s research and development effort focuses on standard components and the development of next-generation technologies. The SFR Cegetel Group’s research and development costs totaled 37 million in 2004, as compared to 58 million in 2003 and 59 million in 2002.
Raw Materials
      As a service operator, the SFR Cegetel Group’s operations do not rely on raw materials.
Property, Plant and Equipment
      SFR and Cegetel own the telecommunications equipment which is used to operate their networks. This equipment is either located in premises rented from third parties (principally through long-term lease agreements) or owned by the SFR Cegetel Group itself. In some cases equipment is located in premises shared with other telecommunications operators. Most of the administrative buildings are rented. The SFR Cegetel Group uses external partners for the storage and distribution of its products such as mobile handsets or modems.
Maroc Telecom
      Maroc Telecom was created in 1998 following its spin-off from the Office National des Postes et Télécommunications (the Moroccan National Postal and Telecommunications Office). Maroc Telecom is Morocco’s leading telecommunications operator in both the fixed-line and the fast-growing mobile business. Maroc Telecom also controls 51% of Mauritel, the national telecommunications operator in Mauritania, together with a group of local investors.
      Vivendi Universal became the Kingdom of Morocco’s strategic partner in Maroc Telecom after acquiring a 35% equity interest in Maroc Telecom in 2001 following an auction process organized by the Moroccan government. Pursuant to a shareholders’ agreement entered into at the time of the acquisition of the 35% interest, Vivendi Universal controlled Maroc Telecom. The Moroccan government continued the process of privatizing Maroc Telecom by selling us 16% of Maroc Telecom’s capital in November 2004 (this transaction closed in January 2005) and by conducting an equity offering of 14.9% of Maroc Telecom’s share capital in December 2004 (which led to the simultaneous listing of Maroc Telecom on the Casablanca and Paris stock

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exchanges). As a result of these transactions, Vivendi Universal now holds 51% of Maroc Telecom’s share capital and the remaining 34.1% and 14.9% of Maroc Telecom’s share capital are held by the Kingdom of Morocco and the public, respectively.
Mobile Telephony
      The Moroccan mobile telecommunications market grew significantly as a result of the introduction of prepaid offers in 1999 and the liberalization of this sector in 2000.
      At the end of 2004, the penetration rate of mobile telephony was 31.2% and Maroc Telecom held a 67.5% market share (source: Agence Nationale de Réglementation des Télécommunications — National Telecommunications Regulation Agency (ANRT)). In 2004, Maroc Telecom’s mobile customer base increased by more than 1.1 million, up 22%, to reach nearly 6.4 million customers, 96% of which were prepaid.
      During 2004, Maroc Telecom continued to improve its commercial offer and introduced new services, a more comprehensive handset range, increased its plan offerings with capped-fee plans and continued the development of its loyalty program.
      The churn rate, which has been declining steadily for the past three years, was 15.6% at the end of 2004 for post-paid customers compared to 20% at the end of 2003. The churn rate of prepaid customers was 11.4% at the end of 2004, compared to 12% at the end of 2003.
      The policy to develop the pre-paid customer base, combined with increased prepaid customer usage, contributed to the slight increase in ARPU, which reached MAD 123 in 2004 (11.04), compared to MAD 122 (10.95) in 2003.
      Maroc Telecom remains the benchmark for the SMS and MMS market in Morocco and, until October 2004, was the only operator to offer MMS and GPRS services. In 2004, Maroc Telecom maintained its leadership by offering MMS roaming to its prepaid customers and GPRS roaming to postpaid customers.
Fixed-line Telephony, Data and Internet
      Maroc Telecom is the sole holder of a fixed-line telephony license and is the leading data provider in Morocco.
      The principal fixed-line telecommunications services provided by Maroc Telecom are:
  •  telephony services;
 
  •  interconnection services with national and international operators;
 
  •  data transmission services to professional markets and to Internet service providers, as well as to other telecoms operators; and
 
  •  Internet services which include Internet access services and related services such as hosting.
      After declining for three years, the number of fixed lines increased in 2003, driven by the growth of residential and public telephony. This trend continued in 2004 with a total of more than 1.3 million customers at December 31, 2004, up 7% as compared to 2003.
      The residential customer base was nearly 890,000 lines at the end of 2004, a 2% increase over 2003. The growth of this segment since 2003 is primarily due to the success of a new line of products, under the El Manzil brand, which includes calling plans, packages and capped-fee plans with refill options.
      The number of professional and corporate users reached 283,000 at the end of 2004, representing an 11% increase as compared to 2003.
      Public telephony is comprised of a network of public booths and an extensive network of phone shops, which are managed by private entrepreneurs who lease, on average, four lines per shop. Phone shops generate a revenue equal to the difference between the retail price (determined by Maroc Telecom) and the rate charged by Maroc Telecom. This activity grew significantly in 2004, largely as a result of the termination in

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October 2004 of the “chaining” requirement imposing a minimum distance of 200 meters between phone shops. The termination of the “chaining” requirement enabled a more concentrated phone shop network. The number of lines reached 136,000, a 48% increase as compared to 2003.
      Maroc Telecom provides companies with data transmission solutions including X25, Frame relay, digital and analog lease lines, and IP VPN links.
      Maroc Telecom’s Internet offer consists of Internet access packages under the Menara brand provided to residential and professional customers. The launch of ADSL services in October 2003 has helped to increase Maroc Telecom’s Internet customer base. At year-end 2004, Maroc Telecom had nearly 105,000 subscribers to its Internet access services, more than 57% of whom were ADSL subscribers.
Distribution
      Maroc Telecom has an extensive distribution network with a direct and indirect network comprising nearly 30,000 points-of-sale and subject to distribution agreements with local resellers or with national retailers.
      At December 31, 2004, the various distribution channels were as follows:
  •  the direct network, composed of 269 sales agencies;
 
  •  the local indirect network, comprised of independent shops subject to exclusive agreements, which are managed by the closest Maroc Telecom commercial agency. A significant part of these resellers also have a phone shop;
 
  •  an independent local network, primarily dedicated to mobile telephony, managed by GSM Al Maghrib, a company in which Maroc Telecom has held a 35% stake since July 2003; and
 
  •  retailers with nationwide networks whose main business is not in telecommunications (supermarkets, newspaper and magazine retailers, tobacco shops or Moroccan post offices).
Network
      Maroc Telecom’s fixed-telephony and data transmission network has a switching capacity of nearly 1.9 million lines and provides national coverage, as a result of its focus on servicing newly created urban residential areas.
      Maroc Telecom manages a fully digitized network as well as a fiber optic interurban transmission infrastructure capable of carrying data at high speed. The international Internet bandwidth has been gradually extended to reach 1,395 Mbits/s.
      In mobile telephony, Maroc Telecom has focused on growing both population and geographic coverage. At year-end 2004, Maroc Telecom had nearly 3,750 GSM sites (compared to 3,300 in 2003 and 600 in 1999). Maroc Telecom covers 97% of the Moroccan population. At December 31, 2004, Maroc Telecom had entered into a total of 327 roaming agreements (more than 275 of which are operational) with operators in 184 countries.
Mauritel Group
      Maroc Telecom holds 80% of the share capital of Compagnie Mauritanienne de Communications (CMC), which in turn holds 51% of the share capital of Mauritel SA. The remaining 20% of the share capital of CMC is held by Mauritanian investors.
      The Mauritel Group is comprised of Mauritel SA, the only fixed-line telephony operator in Mauritania, which provides both fixed-line telephony (voice and data) and Internet access services and Mauritel SA’s wholly-owned subsidiary Mauritel Mobiles, the leading mobile phone operator in Mauritania with an estimated 70% percent market share. At the end of 2004, Mauritel had approximately 39,000 fixed lines (a 1% penetration rate) and Mauritel Mobiles had 330,000 clients (a 15% penetration rate).

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Seasonality
      Maroc Telecom’s revenues in mobile and public telephony traditionally increase in July and August, with the return of Moroccans residing abroad, and in the two-week period preceding Aïd El Adha (which was on the second day of February in 2004), while the month of Ramadan (from mid-October to mid-November in 2004) is a low point in consumption for both fixed-line and mobile telephony.
Competition
      Twelve telecommunications operator licenses have been allocated in Morocco: a public fixed telecommunications network operator license (Maroc Telecom), two GSM operator licenses (Maroc Telecom and Médi Télécom (Méditel)), four licenses for GMPCS-type satellite telecommunications networks, three licenses for operators of VSAT type satellite-based telecommunications networks and two licenses for operators of shared resources radio electric networks.
      Third generation (UMTS) licenses will be granted in 2005 and a third GSM mobile license could be allocated by 2007.
Fixed-line Telephony
      After an unsuccessful invitation to tender for the allocation of a second fixed-line telephony license in 2002, the ANRT launched in February 2005 an invitation to tender for the allocation in June 2005 of new licenses for the local loop, national transmission and international gateway and transit.
      Maroc Telecom has a monopoly on the fixed-line telephony market with the exception of the public telephone market segment (where operators use GSM or satellite technologies to compete against each other in fixed-line services) and the professional segment (via the use of GSM gateways).
      In the public telephony market, competition started in 2004 with Méditel, which opened phone shops using GSM technology in spring 2004, and Globalstar, which opened phone shops using satellite technology. Thuraya, another operator, announced in September 2004 that it would shortly enter this market as a result of a partnership agreement with Quickphone, a Moroccan company. At year end 2004, Maroc Telecom’s market share in the public telephony market was estimated at approximately 94% of the number of lines.
      Méditel, through the installation of GSM gateways known as “Link Optimization Box” (LO Box), entered the professional fixed-line market. The installation of this equipment for outgoing PABX lines facilitates the transformation of fixed-to-mobile traffic into mobile-to-mobile traffic without using Maroc Telecom’s fixed-line network.
      Competition in data transmission services is relatively limited. Maroc Telecom’s main competitors include Internet service providers (ISPs), satellite operators and Equant, an international operator.
Mobile
      Maroc Telecom’s competitor in this segment is Méditel, a mobile license holder since August 1999. The majority shareholders in Méditel are Telefonica and Portugal Telecom, each with 32.18% of the share capital, and a group of Moroccan investors led by Banque Marocaine du Commerce Extérieur.
      At December 31, 2004, Maroc Telecom held 67.5% of the mobile market (source: ANRT).
Internet
      Maroc Telecom holds a 90% market share of the Internet market, excluding subscription-free services (source: ANRT) and its competitors include Maroc Connect, distributor of the Wanadoo brand, with an estimated market share below 10%, as well as other ISPs.
      Maroc Telecom has a 95% market share in the high-growth ADSL market (source: ANRT).

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Regulatory Environment
      The Kingdom of Morocco created the ANRT, a telecommunications regulatory authority, which is in charge of liberalizing and regulating the telecommunications market in Morocco and manages the liberalization and privatization program of the telecommunications market advocated by the World Bank. Maroc Telecom fulfills its obligations as a fixed-line operator by providing universal service.
      In 2004, the Government of the Kingdom of Morocco re-launched the liberalization process in the telecommunications sector by amending and supplementing the Post and Telecommunications Act of August 7, 1997 with Moroccan Law 55-01, which institutes a more gradual sanction system based on fines, relieves the operators of some obligations related to universal service and land development, and authorizes the use of alternative infrastructures, and by publishing a policy paper for the liberalization of the sector for the 2004-2008 period.
      In February 2005, the ANRT launched an invitation to tender for the allocation of additional fixed-line telephony licenses for local loop, national transmission and international gateway and transit in June 2005.
Research and Development
      Maroc Telecom’s research and development activities focus on the introduction of new Maroc Telecom products and/or services or the transformations or improvements to existing Maroc Telecom products. Maroc Telecom’s research and development expenses were immaterial in 2004, and were approximately 2 million in 2003 and 2002.
Raw Materials
      As a service operator, Maroc Telecom’s operations do not rely on raw materials.
Property, Plant and Equipment
      For the development of its networks and commercial, support and administrative functions, Maroc Telecom has approximately 4,500 sites (buildings, land, etc.), throughout Morocco, including 3,350 leased locations and 1,150 owned locations.
      Most of the 1,150 owned sites previously belonged to the Kingdom of Morocco, and were transferred to Maroc Telecom at the time of its incorporation in 1998 as an in-kind contribution in accordance with Act 24-96. However, at that time, title deeds were not available due to delays in proceedings with the Land Registry. Maroc Telecom is currently regularizing these deeds in order to gain formal legal title to these properties. This process is expected to be completed by the end of the second half of 2006. This timetable is for information only as the regularization of such properties is dependent, in particular, on the duration of governmental proceedings. There have been no difficulties with respect to the regularization of these titles to date. The costs connected with such actions are not deemed significant.
Other
NBC Universal
      In May 2004, Vivendi Universal completed the combination of the businesses of NBC with those of VUE and certain related assets to create one of the world’s leading media companies, NBC Universal (NBCU). Vivendi Universal holds approximately 20% of NBCU.
      NBCU is primarily engaged in the broadcast of network television services to affiliated television stations within the US, including:
  •  the production of live and recorded television programs;
 
  •  the production and distribution of motion pictures;

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  •  the operation, under licenses from the Federal Communications Commission (FCC), of television broadcasting stations;
 
  •  the ownership of several cable/satellite networks around the world;
 
  •  the operation of theme parks; and
 
  •  investment and programming activities in multimedia and the Internet.
      The NBC television network is one of four major US commercial broadcast television networks and serves more than 230 affiliated stations in the US. NBC owns and operates Telemundo, a leading US Spanish-language commercial broadcast television network.
      At December 31, 2004, NBC owned and/or operated 29 VHF and UHF television stations including those located in Birmingham, Alabama; Los Angeles, California; San Diego, California; Hartford, Connecticut; Miami, Florida; Chicago, Illinois; New York, New York; Raleigh-Durham, North Carolina; Columbus, Ohio; Philadelphia, Pennsylvania; Providence, Rhode Island; Dallas, Texas; and Washington, DC. Broadcasting operations of the NBC Television Network, the Telemundo network, and the company’s owned stations are subject to FCC regulation.
      NBCU operations also include investment and programming activities in cable television, principally through USA Network, Bravo, CNBC, SCI FI Channel, MSNBC, CNBC Europe, CNBC Asia Pacific, and entertainment channels across Europe and Latin America. NBCU has equity investments in Arts and Entertainment, The History Channel, the Sundance Channel, ValueVision Media, Inc., and a non-voting interest in Paxson Communications Corporation. Through a strategic alliance with Dow Jones, NBCU operates CNBC Europe and CNBC Asia Pacific using the European and Asian business news resources of Dow Jones, and uses Dow Jones editorial resources in the US. NBCU has secured exclusive television rights to the Olympic Games through 2012.
Veolia Environnement
      Until June 2002, we held approximately 63% of the share capital of VE, a global environmental services company. We gradually reduced our share capital in VE to 40.8% in July 2002, 20.2% in December 2002, and 5.3% in December 2004. For further information on the December 2004 transaction, see “— 2004 Developments”.
Vivendi Telecom International (VTI)
      Vivendi Telecom International operated our fixed and mobile telecommunications businesses outside of France and Morocco.
      Kenya. In May 2004, Vivendi Universal sold its 60% stake in Kencell, Kenya’s No. 2 mobile phone operator, for a cash amount of $230 million (90 million). The stake was sold to Sameer Group, the owner of the remaining 40% stake, after it exercised its pre-emptive rights.
      Monaco. On June 18, 2004, Vivendi Universal sold its 55% stake in Monaco Telecom to Cable & Wireless for a total consideration of 169 million in cash (including a 7 million dividend distribution).
      For further information about VTI’s operations in 2003 and 2002, see “— 2003 Developments” and “— 2002 Developments”.
Elektrim Telekomunikacja
      Vivendi Universal holds 49% of Elektrim Telekomunikacja, a major participant player in the Polish telecommunications market. For further information on Elektrim see “— 2004 Developments” and “Item 8 — Financial Information — Litigation”.

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Publishing Operations
      In February 2004, we completed the divestiture of our remaining publishing operations through the sale of our interest in Atica & Scipione (publishing operations in Brazil) for a total consideration of 1 million.
Vivendi Universal Net (VU Net)
      Our Internet and new technology operations were held by VU Net, a wholly-owned subsidiary of Vivendi Universal, and its subsidiary, Vivendi Universal Net USA Group, Inc. (VU Net USA). In 2002, we carried out a strategic review of Internet operations, which led to a comprehensive restructuring in 2003 through cost-reduction programs, asset sales, transfers of certain operations to other Vivendi Universal entities and the wind-up of certain subsidiaries. As a result, VU Net and VU Net USA were no longer operating subsidiaries of Vivendi Universal as of January 2004. The restructuring was completed in 2004.
Public Takeover Offers
      To our knowledge, we have not been the target of any public takeover offer by third parties in respect of our shares during the last or current fiscal year. Moreover, we have not sought to acquire another company in a public takeover except as might be disclosed in this document or in last year’s annual report on Form 20-F.
Organizational Structure
      The following table sets forth the subsidiaries through which we conducted the majority of our operations as of December 31, 2004 (subsidiaries are indented following their respective parent companies).
                                                                         
        2004   2003
             
    Country of   Accounting   Voting   Ownership   Accounting   Voting   Ownership
    Incorporation   Method   Interest   Interest   Method   Interest   Interest
                             
                direct   indirect           direct   indirect
Canal+ Group
                                                                   
 
Groupe Canal+ S.A. 
  France     C       100%       100%               C       100%       100%          
   
Canal+ S.A.(a)
  France     C       49%               49%       C       49%               49%  
   
CanalSatellite S.A. 
  France     C       66%               66%       C       66%               66%  
   
StudioCanal S.A. 
  France     C       100%               100%       C       100%               100%  
   
MultiThématiques(b)
  France     C       70%               70%       C       64%               64%  
Universal Music Group
                                                                   
 
Universal Studios Holding I Corp. 
  USA     C       92%       92%               C       92%       92%          
   
Universal International Music B.V. 
  Netherlands     C       100%               92%       C       100%               92%  
   
Universal Music (UK) Holdings Ltd. 
  UK     C       100%               92%       C       100%               92%  
   
Universal Entertainment GmbH
  Germany     C       100%               92%       C       100%               92%  
   
Universal Music K.K. 
  Japan     C       100%               92%       C       100%               92%  
   
Universal Music France S.A.S. 
  France     C       100%               92%       C       100%               92%  
   
Universal Music Group, Inc. 
  USA     C       100%               92%       C       100%               92%  
   
UMG Recordings, Inc. 
  USA     C       100%               92%       C       100%               92%  
Vivendi Universal Games
  USA     C       100%               99%       C       100%               99%  
SFR Cegetel Group
                                                                   
 
SFR(c)
  France     C       56%       56%               C       56%       56%          
   
Cegetel S.A.S.(d)
  France     C       65%               36%       C       65%               36%  
Maroc Telecom S.A.(e)
  Morocco     C       51%               35%       C       51%               35%  
 
Mauritel(f)
  Mauritania     C       51%               14%                            
Vivendi Universal Entertainment/ NBC Universal
                                                                   
   
Universal Studios Holding I Corp. 
  USA     C       92%       92%               C       92%       92%          
   
Vivendi Universal Entertainment LLLP(g)
  USA                               C       93%               86%  
   
NBC Universal
  USA     E       20%               18%                            

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        2004   2003
             
    Country of   Accounting   Voting   Ownership   Accounting   Voting   Ownership
    Incorporation   Method   Interest   Interest   Method   Interest   Interest
                             
                direct   indirect           direct   indirect
Other
                                                                   
 
Vivendi Telecom International S.A. 
  France     C       100%       100%               C       100%       100%          
   
Kencell S.A.(g)
  Kenya                               C       60%               60%  
   
Monaco Télécom S.A.M.(g)
  Monaco                               C       55%               55%  
   
Elektrim Telekomunikacja(h)
  Poland     E       49%               49%       E       49%               49%  
 
Vivendi Universal Publishing S.A. 
  France     C       100%       100%               C       100%       100%          
   
Atica & Scipione(g)
  Brazil                               C       98%               49%  
 
Vivendi Universal Net(i)
  France                               C       100%       100%          
 
UGC
  France     E       38%       38%               E       38%       38%          
 
Veolia Environnement S.A.(g)
  France                               E       20%       20%          
 
C:  Consolidated; E: Equity.
(a)  Consolidated because Vivendi Universal (i) has majority control over the board of directors, (ii) no other shareholder or shareholder group is in a position to exercise substantive participating rights that would allow them to veto or block decisions taken by Vivendi Universal and (iii) it assumes the majority of risks and benefits pursuant to an agreement between Canal+ S.A. and Canal+ Distribution, a wholly owned subsidiary of Vivendi Universal. Under the terms of this agreement, Canal+ Distribution guarantees Canal+ S.A. results in return for exclusive commercial rights to the Canal+ S.A. subscriber base.
(b)    In February 2005, Canal+ Group and Lagardère Group ended their participation in MultiThématiques (that is now owned 100% by Canal Group) and Lagardère Thématiques.
(c)  SFR is owned 55.8% by Vivendi Universal, 43.9% by Vodafone, and 0.3% by individual shareholders. Under the terms of the shareholders’ agreement, Vivendi Universal has management control of SFR, majority control over the board of directors and appoints the chairman and CEO, majority control over the shareholders’ general meeting, and no other shareholder or shareholder group is in a position to exercise substantive participating rights that would allow them to veto or block decisions taken by Vivendi Universal.
 
(d)  In December 2003, Cegetel S.A. and Telecom Développement (a network operator, and subsidiary of SNCF) were merged into a new entity named Cegetel S.A.S. The capital of this company is owned 65% by SFR and 35% by SNCF. In May 2005, Cegetel and Neuf Telecom announced their merger plan to form Neuf Cegetel, which will be 28% owned by SFR (corresponding to a 15.62% interest for Vivendi Universal through its 55.8% ownership in SFR) and equity-accounted. This transaction is subject to approval from personnel representatives of both Neuf Telecom and Cegetel and from competition and regulatory authorities.
 
(e)  As of December 31, 2004, Vivendi Universal owned a 35% interest in Maroc Telecom, the Kingdom of Morocco holds 50.1% and the remaining 14.9% is held by private investors following an IPO which led to the simultaneous listing of Maroc Telecom shares on the Casablanca and Paris stock exchanges in December 2004. Vivendi Universal consolidates Maroc Telecom because under company by-laws and shareholders’ agreements, Vivendi Universal has majority control over its supervisory board and management board. Under shareholders’ agreements, Vivendi Universal appoints three of the five members of the management board, appoints the chairman of the management board, exercises 51% of all voting rights at shareholders’ general meetings, granting it, under the majority rules set forth in the company’s by-laws, control over the shareholders’ general meeting, as well as over the supervisory and management boards of Maroc Telecom.
     On November 18, 2004, Vivendi Universal and the Kingdom of Morocco agreed to the acquisition by Vivendi Universal of 16% of Maroc Telecom’s capital. Under the terms of the agreement, Vivendi Universal acquired, indirectly through Société de Participation dans les Télécommunications (100% subsidiary of Vivendi Universal), an additional 16% stake in Maroc Telecom. This acquisition, completed on January 4, 2005, allows Vivendi Universal, a strategic partner holding the operating control of Maroc Telecom since the beginning of 2001, to increase its stake from 35% to 51% and, thus, to perpetuate its control over the company. The stake held by the Kingdom of Morocco decreased from 50.1% to 34.1%. Indeed, beyond the shareholders’ agreements which granted Vivendi Universal the majority of votes at shareholders’ general meetings and at the supervisory board until December 30, 2005, Vivendi Universal’s control is now ensured as a result of (i) the direct holding, unlimited in time, of the majority of voting rights at shareholders’ general meetings and (ii) the right to appoint, pursuant to the company by-laws and shareholders’ agreements, three out of the five members of the management board and five out of the eight members of the supervisory board. The acquisition was completed on January 4, 2005 for a deal price of MAD 12.4 billion, or approximately 1.1 billion, including a premium for continuing control. Payment was made on January 4, 2005 and was financed 50% by long-term debt issued in Morocco of MAD 6 billion, or approximately 537 million. The agreement signed November 18, 2004 also terminated the obligations under the put option granted by Vivendi Universal to the Kingdom of Morocco concerning 16% of Maroc Telecom share capital. The pledge over the Maroc Telecom shares held by Vivendi Universal, implemented as a payment guarantee, was released on January 4, 2005 following the acquisition of the 16% stake in Maroc Telecom.
(f)  Maroc Telecom has a 51% voting interest and approximately 41% ownership interest in Mauritel SA, which was acquired in April 2001. This company, the incumbent telecommunications operator in Mauritania, operates both a fixed-line network and a mobile phone license through a wholly owned subsidiary. In connection with this acquisition, the Islamic Republic of Mauritania and Maroc

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Telecom entered into a shareholders’ agreement which provided for, among others, the grant to the Mauritanian government of veto rights relating to significant transactions. Since these veto rights expired on June 30, 2004, Maroc Telecom is now able to exercise exclusive control over Mauritel. As a result, this subsidiary, accounted for using the equity method as of January 1, 2004, has been fully consolidated since July 1, 2004.
 
(g)  Participations sold in 2004.
 
(h)  Please refer to “Item 18 — Financial Statements — Note 7.3.”
 
(i)  Operations abandoned as of January 1, 2004.
Patents, Licenses, Contracts, Manufacturing Processes
      Other than our mobile telecommunication licenses (see “Item 18 — Financial Statements — Note 5” for further information), we have no patent, license, contract or other manufacturing process that is, individually, material to Vivendi Universal.
Item 5:     Operating and Financial Review and Prospects
Basis of Presentation
      The discussion presented below focuses on an analysis of Vivendi Universal’s financial and business segment results prepared in accordance with French GAAP, which differ in certain significant respects from US GAAP. For discussion of the most significant reconciling items, see “Item 18 — Financial Statements — Note 32”.
      We, under previous management, announced that we intended to fully adopt US GAAP reporting standards beginning in 2002 for the disclosure of supplemental financial information for investors. Following the change in senior management in July 2002, it was decided that Vivendi Universal, as a French company, would prospectively only report its primary financial statements in French GAAP with a reconciliation to US GAAP. We will, however, periodically publish selected US GAAP financial information as required under certain of our debt agreements.
Overview
      In 2004, Vivendi Universal achieved its main goals: the finalization of the strategic alliance between VUE and NBC to form NBCU (20% controlled and 18.5% owned by Vivendi Universal); the divestiture of 15% out of the 20.3% stake held in VE; the conclusion of an agreement with the Kingdom of Morocco in order to acquire an additional 16% interest in Maroc Telecom to increase Vivendi Universal’s stake to 51%; and the admission to the French Consolidated Global Profit Tax System, which should generate maximum tax savings of approximately 3.8 billion. The finalization of the divestiture program contributed to the reduction in Financial Net Debt, which totaled 3,135 million as of December 31, 2004. Given the current level of debt, associated with the decrease in financing expense following the debt rating upgrades (back to Investment Grade by the three rating agencies) and the redemption of the High Yield Notes, Vivendi Universal management views the financial flexibility of the Vivendi Universal group as fully restored (please refer to “— Liquidity and Capital Resources”).
      In addition, the actions taken in 2004 reflect the priority given to the management of the Vivendi Universal group’s businesses in order to reinforce its position among the main European players in Media and Telecom. In particular, Canal+ Group won exclusive rights to the French National Football League 1 for three seasons (2005-2008), signed an agreement for exclusive first broadcasts of all of the movies produced by Twentieth Century Fox and signed many agreements in order to reinforce its partnership with the French movie industry and to improve its supply of movies. UMG continued its restructuring efforts and its actions to fight against piracy and counterfeiting. A new management team was put in place in January 2004 at VU Games in order to set up an efficient international organization. SFR Cegetel launched France’s first public 3G offer (UMTS) on June 16, 2004 and became the first operator to commercialize 3G telephone services to the general public in France at the beginning of November 2004. Lastly, Maroc Telecom continued, notably, to develop the penetration and use of mobile telecommunications in order to stimulate growth in the market in which it operates.

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      Moreover, for the first time since 2000, Vivendi Universal reported net income of 754 million in 2004, compared to a loss of 1,143 million in 2003. The 2003 net loss was mainly due to impairment losses. Net income in 2004 mainly resulted from an increase in the operating income of Media businesses (Canal+ Group and UMG) and Telecom businesses (SFR Cegetel and Maroc Telecom), and from a decline in financing expense and other financial expenses, net of provisions, and a substantial reduction in goodwill amortization. However, these were slightly offset by an increase in income tax and losses on businesses sold, net of provisions.
      The following discussion of our operations should be read in conjunction with our Consolidated Financial Statements and related Notes set forth in “Item 18 — Financial Statements” of this annual report.
Accounting Policies
Changes in Accounting Principles and Financial Statement Presentation
New Accounting Standard and Change in Estimate
New accounting policy: CRC Rule 04-03 issued on May 4, 2004 concerning the consolidation of Special Purpose Entities
      The Financial Security Act (Loi de Sécurité Financière), enacted on August 1, 2003, includes an accounting provision that eliminates the requirement to own an interest in a special purpose entity (please refer to “Item 18 — Financial Statements — Note 1.6”) for its consolidation, whenever the entity is deemed to be controlled. This provision, which took effect on January 1, 2004, resulted in an amendment to CRC Rule 99-02 by issuance of CRC Rule 04-03 dated May 4, 2004.
Real estate defeasance
      In accordance with CRC Rule 04-03, Vivendi Universal fully consolidates, as of January 1, 2004, certain special purpose entities used for the defeasance of real estate assets. This consolidation, as of January 1, 2004, resulted in (i) on the assets side, the recognition of real estate assets, i.e., an increase of 245 million in “Property, plant and equipment”, and (ii) on the liabilities side, an increase of 333 million in “Long-term debt” (please refer to “Item 18 — Financial Statements — Note 17”). The impact on shareholders’ equity amounted to -58 million. The impact on net income for the period was -8 million. This consolidation had no effect on the subtotals in the Consolidated Statement of Cash Flows.
Ymer
      In accordance with CRC Rule 04-03, Vivendi Universal fully consolidates Ymer, as of January 1, 2004, because it is considered to be a special purpose entity. Despite the fact that Vivendi Universal has no legal control over Ymer, this entity is controlled by Vivendi Universal from an accounting standpoint since Vivendi Universal carries the economic exposure related to Ymer’s assets. Nevertheless, Vivendi Universal’s ownership interests in Elektrim Telekomunikacja remain unchanged at 49% because it does not have the power to exercise Ymer’s voting rights in Elektrim Telekomunikacja. As a result, Vivendi Universal accounts for its stake in Elektrim Telekomunikacja using the equity method. Please refer to “Item 18 — Financial Statements — Note 7.3” and “Item 18 — Financial Statements — Note 8.1”. Application of this new rule had no impact on shareholders’ equity or net income.
Qualified Technological Equipment (QTE) operations
      In accordance with CRC Rule 04-03, Vivendi Universal fully consolidates, as of January 1, 2004, certain entities created pursuant to QTE operations performed in 1999 and 2001 by SFR. This consolidation, as of January 1, 2004, resulted in (i) on the assets side, the recognition of deposits relating to the pre-financing of QTE agreement arrangement commissions, i.e., an 865 million increase in “Portfolio investments — other” and (ii) on the liabilities side, the recording of advance lease payments in “Other non-current liabilities and accrued expenses” in the same amount. This change in accounting method did not impact shareholders’ equity or net income.

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New accounting policy: Notice n°2004-E issued on October 13, 2004 by the CNC Urgent Issues Taskforce
      Notice n°2004-E issued on October 13, 2004 by the CNC Urgent Issues Taskforce (Comité d’Urgence du Conseil National de la Comptabilité) specified the accounting methods applicable to discount rights and benefits in kind (goods or services) granted by companies to their customers. The first application of this policy resulted in the accounting in deferred income of contingent future premiums granted by SFR and Maroc Telecom to their customers in connection with their loyalty programs. These premiums consist of discounts offered to customers on the purchase price of a new mobile phone. They were evaluated taking into account the period of validity of the coupons acquired and the probability of their use. The impact on shareholders’ equity amounted to -29 million (after income tax and minority interests) and corresponds to benefits acquired prior to January 1, 2004. The impact on net income for the period is not significant.
Change in presentation of Telecom operation revenues
      In order to standardize the accounting treatment of sales of services provided to customers on behalf of content providers (mainly toll numbers), following the consolidation of Telecom Développement, the following change in presentation was adopted in 2004: sales of services to customers, managed by SFR Cegetel and Maroc Telecom on behalf of content providers, previously presented on a gross basis in SFR and Telecom Développement’s revenues, are presented net of related expenses. This change in presentation had no impact on operating income. At SFR Cegetel, it resulted in a reduction in revenues by 168 million in 2004. At Maroc Telecom, the impact was immaterial.
Change in estimate at Universal Music Group
      As of January 1, 2004, the amortization period for UMG’s recorded music catalog and music publishing copyrights was reduced from 20 to 15 years. This change in estimate resulted from the company’s annual impairment review of intangible assets at the end of 2003, which determined that estimated useful lives were shorter than originally anticipated, primarily as a result of the weakness of the global music market. As a result, the prospective amortization expense in 2004 was increased by 63 million.
Critical Accounting Estimates
      Accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of Vivendi Universal’s financial statements because they inherently involve significant judgments and uncertainties. For all of these estimates, Vivendi Universal cautions that future events rarely develop exactly as forecast, and that these estimates are subject to adjustments.
Use of Estimates
      The preparation of Vivendi Universal’s financial statements requires management to make informed estimates and assumptions that affect: the reported amounts of assets and liabilities; the disclosure of contingent assets and liabilities at the date of the financial statements; and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to the sale of future and existing music and publishing related products, as well as from the distribution of theatrical and television products, in order to evaluate the ultimate recoverability of accounts receivable, film inventory, artist and author advances and investments and in determining valuation allowances for investments, long-lived assets, pension liabilities and deferred taxes. Estimates and judgments are also required and regularly evaluated concerning financing entities, restructuring costs, contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ significantly from these estimates under different assumptions or conditions.

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Asset Impairment
Valuation of long-term assets
      Vivendi Universal reviews the carrying value of its long-term assets held and used, intangible assets that do not have indefinite lives and long-term assets to be disposed of whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. This review is performed using estimates of future cash flows. Management believes that the estimates of future cash flows and fair value are reasonable; however, changes in estimates resulting from lower future cash flows and fair value due to unforeseen changes in business assumptions could negatively affect the valuations of those long-term assets.
Goodwill and other intangible assets with indefinite lives
      Vivendi Universal regularly reviews the carrying value of goodwill and other intangible assets with an indefinite life. These assets are tested for impairment at the end of each annual reporting period and whenever events or change in circumstances indicate that the carrying value of the assets may not be recoverable. Impairment tests consist of comparing the carrying amount of an asset to its recoverable amount, defined as the fair value less cost to sell, or the value in use to Vivendi Universal. Value in use is equal to the sum of future cash flows expected to be obtained from the continuing use of the asset (or the operating unit) and from its ultimate disposition. Cash flows used are consistent with the most recent budgets and business plans approved by the management and presented to the board of directors. The discount rate applied reflects current market assessments of the time value of money and risks inherent to the asset (or operating unit). Fair value less costs to sell represents an estimate of the amount which could be obtained from the disposition of the asset (or the operating unit) in an arm’s length transaction between knowledgeable and willing parties, after deducting the costs of disposition. These values are determined based on market information (comparison with similar listed companies, recent transactions and stock market prices) or in the absence of such information based on discounted cash flows. Fair values are determined with the assistance of a third-party appraiser.
      Under US GAAP, Vivendi Universal adopted SFAS 142 as of January 1, 2002. Under this standard, Vivendi Universal tests for impairment on the basis of the same objective criteria that are used under French GAAP. Nevertheless, SFAS 142 requires a two-step approach at the reporting unit level. In the first step, the fair value of the reporting unit is compared to its carrying value, including goodwill. In order to determine the fair value of the reporting unit, significant management judgment is applied in order to estimate the underlying discounted future cash flows. If the fair value of the reporting unit is less than its carrying value, a second step is performed which compares the implied value of goodwill allocated to the reporting unit to its carrying value. The implied value of goodwill is determined based upon the difference between the fair value of the reporting unit and the net of the fair value of the identifiable assets and liabilities of the reporting unit. If the implied value of goodwill is less than its carrying value, the difference is recorded as an impairment loss. For more information, see “Item 18 — Financial Statements — Note 32”. Management believes that the estimates of future cash flows and fair value are reasonable; however, changes in estimates resulting in lower cash flows and fair value due to unforeseen changes in business assumptions could negatively affect the valuations.
Investments and receivables from equity affiliates
      Vivendi Universal holds minority interest receivables in companies having operations or technology in areas within or adjacent to its strategic focus. Some of these companies are publicly traded and their share prices are highly volatile while some of these companies are non-publicly traded and their value is difficult to determine. Vivendi Universal records an investment impairment charge when it believes an investment has experienced a decline in value that is other than temporary, and records an allowance for receivables if recoverability is uncertain. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments or receivables, thereby possibly requiring an impairment charge in the future.

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Revenue Recognition
      Vivendi Universal has revenue recognition policies for its various business units, which are appropriate to the circumstances of each business. See “Item 18 — Financial Statements — Note 1” for a summary of these revenue recognition policies.
      Vivendi Universal records reductions to revenues for estimated future returns of merchandise, primarily home video, DVD, recorded music and software products. These estimates are based upon historical return experience, current economic trends and projections of customer demand for and acceptance of the products. Differences may arise with respect to the amount and timing of the revenue for any period if actual performance varies from these estimates.
Film and Television Revenues and Costs
      Vivendi Universal accounts for the production and distribution of motion pictures and television programming in accordance with SOP 00-2, which requires management’s judgment as it relates to total revenues to be received and costs to be incurred throughout the life of each film or program. These estimates are used to determine the amortization of capitalized production costs, expensing of participation and residual cost and any necessary net realizable value. If actual demand or market conditions are actually less favorable than the projections, potentially significant film, television or programming cost write-downs may be required.
Music Advances to Artists
      For established artists, Vivendi Universal capitalizes advances and direct costs associated with the creation of master recordings and expenses these costs as the related royalties are earned or when the amounts are determined to be unrecoverable. An established recording artist is an artist whose past performance and current popularity provide a sound basis for estimating the recoverability of the advance. Advances to artists who are not established are expensed as incurred. Estimates of recoverability can change based on the current popularity of the artist based on sales through the reporting period. Unearned balances are reviewed periodically and if future performance is no longer assured, the balances are appropriately reserved.
Pension Benefit Costs
      Vivendi Universal’s pension benefit obligations and the related costs are calculated using actuarial models and assumptions applicable in the countries where the plans are located, principally in the US, the UK and Canada. Two critical assumptions, discount rate and expected return on plan assets, are important elements of plan expense and/or liability measurement. We evaluate these critical assumptions at least annually. Other assumptions involve demographic factors such as retirement, mortality, turnover and rate of compensation increase. These assumptions are evaluated periodically and are updated to reflect our experience. Actual results in any given year will often differ from actuarial assumptions because of economic and other factors. The discount rate enables us to state expected future cash flows at a present value on the measurement date. We have little latitude in selecting this rate, as it is required to represent the market rate for high-quality fixed income investments. A lower discount rate increases the present value of benefit obligations and increases pension expense. We reduced our weighted average discount rate from 5.7% in 2002 to 5.4% in 2003 and 5.1% in 2004 to reflect market interest rate conditions. For our US plans, a further 50 basis point decrease in the discount rate would increase pension expense by approximately 0.9 million per year. To determine the expected long-term rate of return on pension plan assets, we consider, for each country, the structure of the asset portfolio and the expected rates of return for each of the components. For our US plans, a 50 basis point decrease in the expected return on assets of principal plans would increase pension expense on our principal plans by approximately 2 million per year.
      We assumed that the weighted averages of long-term returns on our pension plans were 6.4% in 2004, 6.5% in 2003 and 7.2% in 2002. Further information on our principal pension plans is provided in “Item 18 — Financial Statements — Note 15”, including disclosure of these assumptions.

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Contingencies
      Vivendi Universal records provisions when (i) at the end of the reporting period the Vivendi Universal group has a legal, regulatory or contractual obligation as a result of past events, (ii) it is probable that an outflow of resources will be required to settle the obligation and (iii) the obligation can be reliably estimated. Estimating probable losses requires analysis of multiple forecasts that often depend on judgments about potential actions by third parties such as regulators. The amount recognized as a provision represents the best estimate of the risk at the Consolidated Statement of Financial Position date. If no reliable estimate can be made of the amount of the obligation, no provision is recorded. The information is then presented in the Notes to our Consolidated Financial Statements in “Item 18 — Financial Statements”. Contingent liabilities are often resolved over long time periods.
Provisions and Liabilities
      Provisions and liabilities related to taxes, legal issues and restructuring charges, including environmental matters, require significant judgments and estimates by management. Vivendi Universal continually evaluates these estimates based on changes in the relevant facts and circumstances and events that may impact estimates. Management continually assesses the appropriateness and adequacy of these accounts and adjusts them as estimates change based on current facts and circumstances. While management believes that the current provisions and liabilities for these matters are adequate, there can be no assurance that circumstances will not change in future periods.
      Certain significant accounting policies do not involve the same level of measurement uncertainties as those discussed above, but are nevertheless important to an understanding of our Consolidated Financial Statements. Policies related to financial instruments, deferred taxes and business combinations require difficult judgments on complex matters. For a discussion of accounting policies that Vivendi Universal has selected from acceptable alternatives, see “Item 18 — Financial Statements — Note 1”.

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RESULTS OF OPERATIONS
Consolidated Statement of Income
                           
    Year Ended December 31,
     
    2004 as   2003 as   2002 as
    Published(a)   Published   Published
             
    (In millions of euros,
    except per share amounts)
Revenues
  21,428     25,482     58,150  
Cost of revenues
    (11,633 )     (15,268 )     (40,574 )
 
Gross margin(%)
    46 %     40 %     30 %
Selling, general and administrative expenses
    (6,201 )     (6,812 )     (12,937 )
Other operating expenses, net
    (118 )     (93 )     (851 )
                   
Operating income
    3,476       3,309       3,788  
Financing expense
    (455 )     (698 )     (1,333 )
Other financial expenses, net of provisions
    (247 )(b)     (509 )     (3,409 )
                   
Financing and other expenses, net
    (702 )     (1,207 )     (4,742 )
                   
Income (loss) before gain (loss) on businesses sold, net of provisions, income tax, equity affiliates, goodwill amortization and minority interests
    2,774       2,102       (954 )
Gain (loss) on businesses sold, net of provisions
    (140 )(c)     602       1,049  
Income tax
    (400 )(d)     408       (2,556 )
                   
Income (loss) before equity affiliates, goodwill amortization and minority interests
    2,234       3,112       (2,461 )
Equity in earnings of sold subsidiaries
          1       17  
Income (loss) from equity affiliates
    219       71       (294 )
Veolia Environnement impairment
          (203 )      
Goodwill amortization
    (638 )     (1,120 )     (1,277 )
Impairment losses
    (31 )     (1,792 )     (18,442 )
                   
Income (loss) before minority interests
    1,784       69       (22,457 )
Minority interests
    (1,030 )     (1,212 )     (844 )
                   
Net income (loss)
  754     (1,143 )   (23,301 )
                   
Basic earnings per share
  0.70     (1.07 )   (21.43 )
                   
Diluted earnings per share
  0.63     (1.07 )   (21.43 )
                   
Weighted average common shares outstanding (in millions)(e)
    1,072.1       1,071.7       1,087.4  
Potential dilutive effect of outstanding financial instruments (in millions)
    127.0 (f)     137.9       146.3  
 
(a) Given the deconsolidation of VUE as of May 11, 2004, the 2004 statement of income includes 132 days of business for this entity (please refer to “Item 18 — Financial Statements — Note 3.1”).
 
(b) Includes High Yield Notes redemption costs (-350 million).
 
(c) Includes the after-tax loss on the divestiture of 80% of Vivendi Universal’s interest in VUE (-1,793 million net of a -2,105 million foreign currency translation adjustment — with no impact on cash position and shareholders’ equity, please refer to “Item 18 — Financial Statements — Note 3.1”, the capital gain on the divestiture of 15% of Vivendi Universal’s interest in VE (+1,316 million), as well as the gain on the divestiture of other entities, net of provisions (+337 million).
 
(d) Following its admission to the French Consolidated Global Profit Tax System as of January 1, 2004, Vivendi Universal recognized a tax saving of 956 million. Please refer to “Item 4 — 2004 Developments — Consolidated Global Profit Tax System since January 1, 2004” and to “Item 18 — Financial Statements — Note 24”.
 
(e) Excluding treasury shares recorded as a reduction in shareholders’ equity (2,441 shares as of December 31, 2004).
 
(f) Financial instruments in the money as of December 31, 2004 represented approximately 104.8 million common shares.

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Comparison of 2004 versus 2003
      Vivendi Universal’s net income amounted to 754 million in 2004 compared to a net loss of 1,143 million in 2003. This improvement of 1,897 million was achieved through:
  + 167 million from improvement in operating income, despite VUE deconsolidation as of May 11, 2004 generating an unfavorable difference of 594 million;
 
  + 243 million from reduction in financing expenses resulting from (i) VUE deconsolidation as of May 11, 2004, and (ii) the decrease in the average financial gross debt (10.3 billion in 2004 compared to 16.4 billion in 2003);
 
  + 262 million from improvement in other financial expenses, net of provisions (mainly due to an improvement in the foreign exchange result: net gain of 9 million compared to net loss of 228 million in 2003, the loss induced by the forgiveness of Société Financière de Distribution (SFD) debt of 200 million by SFR Cegetel in 2003 and the premium received on call options for VE shares for 173 million and despite the cost related to the redemption of the High Yield Notes for 307 million);
 
  + 147 million from improvement in income from equity affiliates and equity in earnings of sold subsidiaries mainly as a consequence of the equity accounting of NBCU from May 12, 2004 (172 million corresponding to 234 days);
 
  + 2,446 million of reduction in goodwill amortization and impairment losses; and
 
  + 182 million from lower minority interests: in 2003, SFR Cegetel’s result benefited from tax savings relating to the rationalization of its structure;
partially offset by:
  808 million from an increase in income tax expense due to the increase of earnings before tax, particularly at SFR Cegetel. The positive impact of the Consolidated Global Profit Tax System in 2004 (+ 956 million) was offset by the impact of the rationalization of the SFR Cegetel structure recognized in 2003 (+ 515 million before minority interests) and a reversal in 2003 of a reserve established in 2002 related to VUE (+477 million); and
 
  742 million on capital losses, mainly due to the divestiture of 80% of Vivendi Universal’s interest in VUE, which was partially offset by the gain on the disposition of the 15% stake in VE.
Revenues
      In 2004, Vivendi Universal’s consolidated revenues amounted to 21,428 million compared with 25,482 million in 2003.
      On a comparable basis,(4) revenues increased by 5% (7% at constant currency), from 17,972 million to 18,893 million. This positive performance was mainly achieved through a return to revenue growth at UMG, Canal+ Group and continued growth at SFR Cegetel and Maroc Telecom, and despite a revenue decline at VU Games (which nonetheless reported growth in the fourth quarter of 2004 compared to the fourth quarter of 2003).
      For an analysis of revenues by business segment, please refer to “— Business Segment Results”.
Cost of Revenues and Gross Margin
      In 2004, cost of revenues represented 54% of revenues (11,633 million) compared to 60% of revenues (15,268 million) in 2003. The gross margin rate increased from 40% in 2003 to 46% in 2004, mainly due to (i) significant changes in scope (primarily the deconsolidation of VUE in May 2004, because VUE’s gross
 
(4)  For a definition of comparable basis, please refer to “— Revenues and operating income from operations by business segment on a comparable basis 2004 - 2003.”

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margin rate was lower than the Vivendi Universal group’s average), (ii) tight control of customer acquisition and retention costs at SFR Cegetel and (iii) efficient cost reduction policy, particularly at UMG.
Selling, General and Administrative Expenses
      In 2004, selling, general and administrative expenses amounted to 6,201 million compared to 6,812 million in 2003. Cost reduction in 2004 compared to 2003 was mainly attributable to significant changes in scope in 2004 (primarily the deconsolidation of VUE and the divestiture of non-core businesses).
Depreciation and Amortization
      Depreciation and amortization are part of the administrative and commercial expenses and cost of revenues. In 2004, depreciation and amortization amounted to 1,843 million compared to 1,977 million in 2003. This slight improvement was mainly due to significant changes in scope (deconsolidation of VUE in May 2004 and divestiture of non-core businesses), slightly offset by higher amortization costs at UMG (resulting from the reduction in the amortization period for music and music publishing catalogs from 20 to 15 years) and at telecommunications operations, mainly at SFR Cegetel, following the commencement of the amortization period for the UMTS license beginning mid-June 2004.
Other Operating Expenses, Net
      In 2004, other operating expenses, net, amounted to 118 million compared to 93 million in 2003. They consisted of restructuring charges, which amounted to 112 million (primarily at UMG and VU Games) in 2004 compared to 221 million in 2003. In 2003, other operating expenses, net, also included provision reversals (including 129 million at Canal+ Group).
Operating Income
      In 2004, Vivendi Universal’s operating income amounted to 3,476 million compared to 3,309 million in 2003.
      On a comparable basis, operating income increased by 41% (41% at constant currency), from 2,216 million to 3,117 million. All businesses contributed to this strong performance, especially UMG and SFR Cegetel.
      For an analysis of operating income by business segment, please refer to “— Business Segment Results”.
Financing Expense
      In 2004, financing expense amounted to 455 million compared to 698 million in 2003. Lower financing costs resulting from the deconsolidation of VUE as of May 11, 2004 contributed 189 million to this reduction. Average financial gross debt (calculated on a daily basis) decreased to 10.3 billion in 2004 compared to 16.4 billion in 2003. This was mainly due to the impact of the divestiture plan, and in particular the divestiture of VUE to NBCU which resulted in the deconsolidation of VUE’s debt (3.6 billion) and generated cash proceeds (approximately 3 billion, after cash payment to minority shareholders and other fees).
      The cost of the average financial gross debt was 4.8% in 2004, unchanged compared to 2003. The decrease in financing costs resulting from lower average financial gross debt was offset by the additional costs incurred in 2004 in connection with the High Yield Notes (1.2 billion issued in April 2003 bearing an interest rate of 9.25% for the tranche denominated in US dollars and 9.5% for the tranche denominated in euros, as well as 1.35 billion issued in July 2003 bearing an interest rate of 6.25%), 83% of which was redeemed in June 2004. The remaining balance of outstanding High Yield Notes were redeemed in January 2005.
      For the twelve months ended December 31, 2004, the cost of average financial gross debt was lower than for the first six months ended June 30, 2004 (5.26%) as a result of the significant decrease in the cost of average financial gross debt over the second half of 2004 (4.44% versus 5.23% for the second half of 2003) due

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to the combined effect of the redemption of 83% of the High Yield Notes in June 2004 (funded by the cash received from the NBC-Universal transaction) and the new credit facilities obtained on better financial terms as a result of the upgrade of Vivendi Universal’s credit rating to “Investment Grade” by Fitch (BBB- on May 12, 2004), Standard & Poor’s (BBB- on June 1, 2004) and Moody’s (Baa3 on October 22, 2004). Please refer to “— Liquidity Management and Capital Resources”.
      Furthermore, financing expense included the cost of interest rate swaps (76 million) and interest paid on the notes mandatorily redeemable for new shares in Vivendi Universal (78 million).
Other Financial Expenses, Net of Provisions
      In 2004, other financial expenses, net of provisions, amounted to 247 million compared to 509 million in 2003.
      In 2004, they were mainly comprised of: (i) the cost related to the redemption of the High Yield Notes (-350 million including premiums paid to bondholders of 300 million and accelerated amortization of residual issuance fees), (ii) amortization of deferred charges related to bond issuances, facilities and other (-70 million), (iii) the provision in respect of the SNCF put option on Cegetel S.A.S. (-35 million in addition to the provision of —85 million recorded as of December 31, 2003) and (iv) loss resulting from the sale of treasury shares to employees exercising their stock options (-23 million). These negative impacts were slightly offset by (i) the release to income of a premium received on call options for VE shares sold on December 2002 and not exercised at maturity on December 2004 (+173 million), (ii) a provision reversal related to the mark-to-market of DuPont shares (+31 million), (iii) the gain related to divestiture of VIVA Media shares (+26 million), and (iv) the loss incurred on the settlement of interest rate swaps (as a result of the completion of the refinancing plan, 56 million of non-hedging interest rate swaps were recorded in financial expenses, offset by provision reversals of 67 million).
      In 2003, other financial expenses, net of provisions, were mainly comprised of: (i) foreign exchange losses (-228 million), (ii) the forgiveness of SFD debt by SFR Cegetel (-200 million, offset by the improvement in SFD earnings and shareholders’ equity, which positively impacted SFR Cegetel’s equity share in SFD earnings), (iii) amortization of deferred charges related to bond issuances, facilities and other (-193 million including a 64 provision accrual), (iv) fees incurred on the implementation of the refinancing plan (-50 million), (v) the SEC fine (-40 million), and (vi) the mark-to-market of the SNCF put option on Cegetel SAS (-85 million, for more details, please refer to “Item 18 — Financial Statements — Note 28”). These negative impacts were partially offset by (i) the gain on the sale of IAC warrants (+125 million including a 454 provision reversal), (ii) the mark-to-market of DuPont shares (+142 million), (iii) the termination of LineInvest total return swap (+97 million), and (iv) the sale of the impaired investment in Softbank Capital Partner (+29 million).
      Please refer to “Item 18 — Financial Statements — Note 22”.
Gain (Loss) on Businesses Sold, Net of Provisions
      In 2004, the loss on business sold, net of provisions, amounted to 140 million. It mainly included:
  •  A capital loss of 1,793 million related to the divestiture of 80% of Vivendi Universal’s interests in VUE, completed on May 11, 2004 (please refer to “Item 18 — Financial Statements — Note 3.1”). This loss was comprised of:
  •  before-tax profit of $653 million, since the carrying value in dollars of disposed assets was less than their transaction value in dollars;
 
  •  tax expense of $290 million, i.e., an after-tax profit of $363 million (312 million); and
 
  •  the reclassification to net income of the share of negative non-cash cumulative foreign currency translation adjustments relating to the divested assets, in the amount of 2,105 million.

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  •  The gain on the divestiture of 15% of Vivendi Universal’s interests in VE of 1,316 million (please refer to “Item 18 — Financial Statements — Note 3.2”).
 
  •  The gain on the divestiture of other entities, net of provisions, of 337 million, which was mainly comprised of various liquidation bonuses (+74 million), the impact of the divestiture of the “flux-divertissement” business of StudioExpand and Canal+ Benelux (+66 million), UCI Cinemas (+64 million), Sportfive (+ 44 million), Kencell (+38 million), Monaco Telecom (+21 million) and Atica & Scipione (-8 million), as well as a provision relating to the anticipated divestiture of NC Numéricâble (-56 million) and the impact of the abandonment of Internet operations (+34 million).
      In 2003, the gain on businesses sold, net of provisions, of 602 million consisted mainly of capital gains on the divestiture of and/or dilution of Vivendi Universal’s interest in the following investments (please refer to “Item 4 — 2003 Developments” for further details): gain on Telepiù (+215 million, including a 352 million provision reversal), Consumer Press Division (+104 million), Comareg (+42 million), Internet subsidiaries (+38 million), Xfera (+16 million, including a 75 million provision accrual) and dilution results in Sogecable (+71 million) and UGC (-47 million).
      On December 31, 2003, income tax and minority interests relating to the gain on business sold, net of provisions, amounted to —21 million and 11 million, respectively. Please refer to “Item 18 — Financial Statements — Note 23”.
Income Tax
      In 2004, the income tax expense totaled 400 million compared to a credit of 408 million in 2003.
      On December 23, 2003, Vivendi Universal applied to the French Ministry of Finance for permission to use the Consolidated Global Profit Tax System. Vivendi Universal was admitted to this system by an order, dated August 22, 2004, notified on August 23, 2004, for a five-year period beginning with the taxable year 2004. As of December 31, 2004, the impact of this agreement on the income tax expense corresponded to expected tax savings of 956 million. The first tax return must be filed by November 30, 2005 at the latest. This credit corresponds to expected tax savings in fiscal year 2004 (464 million) and a deferred tax asset in the amount of 2005 expected tax savings (492 million) based on next year’s budget. Please refer to “Item 4 — 2004 Developments — Consolidated Global Profit Tax System since January 1, 2004” and to “Item 18 — Financial Statements — Note 24”.
      Furthermore, in 2004, excluding 2003 non-recurring items described below, the income tax expense increase reflected the improvement in the income before gain (loss) on businesses sold, net of provisions, income tax, equity interest, goodwill amortization and minority interests of the businesses and particularly SFR Cegetel.
      In 2003, Vivendi Universal reported an income tax credit of 408 million mainly due to (i) tax savings relating to the rationalization of the structure at SFR Cegetel (515 million), (ii) a reversal of a reserve of 477 million (established in 2002 for a potential contractual liability for tax compensation that might have arisen in 2002 if Vivendi Universal had been unable to secure refinancing for the bridge loan relating to the $1.6 billion Vivendi Universal Entertainment Leveraged Partnership Distribution made on May 7, 2002) and (iii) other provision reversals resulting from the conclusion of tax audits covering prior taxable periods.
      Income Tax Cash Flow. Income tax paid amounted to 580 million in 2004 compared to 1,242 million in 2003. This improvement was mainly achieved through (i) tax savings related to the rationalization of the corporate structure at SFR Cegetel, which mainly had a cash impact on tax paid in 2004, and (ii) VUE’s deconsolidation as of May 11, 2004.

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Income from Equity Affiliates
      Income from equity affiliates amounted to 219 million in 2004 compared to 71 million in 2003. This improvement was mainly due to the equity accounting of NBCU from May 12, 2004 (172 million corresponding to 234 days) slightly offset by SFD’s contribution in 2003.
Goodwill Amortization
      In 2004, goodwill amortization decreased by 43% to 638 million compared to 1,120 million in 2003 primarily due to changes in scope in 2004 (mainly the deconsolidation of VUE) and the exceptional amortization recorded by Canal+ Group in the first quarter of 2003.
Impairment Losses
      In 2004, impairment losses amounted to 31 million compared to 1,792 million in 2003 and were incurred mainly in certain subsidiaries of Canal+ Group. In 2003, the main sources of impairment were UMG, due to continued deterioration of the music market in 2003 (1,370 million), VUE, due to softness in the tourism market impacting theme park operations (188 million), Canal+ Group, as a consequence of the impairment of international assets under divestiture (165 million) and VU Games (61 million). For more details, please refer to “Item 18 — Financial Statements — Note 4.4”.
Minority Interests
      In 2004, minority interests declined by 15% to 1,030 million and were primarily comprised of minority interests at SFR Cegetel and Maroc Telecom. This decrease mainly resulted from the decline in SFR Cegetel’s net income before minority interests, which benefited from tax savings relating to the rationalization of the corporate structure in 2003.
Earnings per share — Basic and Diluted
      In 2004, earnings improved significantly from a net loss of 1,143 million in 2003 (-1.07 per share — basic and diluted) to a net income of 754 million in 2004 (basic earnings of 0.70 per share and diluted earnings of 0.63 per share).
Comparison of 2003 versus 2002
      Vivendi Universal’s net loss was significantly reduced in 2003 to 1,143 million compared to 23,301 million in 2002. Excluding VE, this significant improvement was mainly due to lower impairment losses of goodwill and other intangible assets and lower financial provision accrual, which were slightly offset by lower gain on businesses sold.
Revenues
      In 2003, Vivendi Universal’s consolidated revenues amounted to 25,482 million compared to 58,150 million in 2002. Excluding VE and the publishing businesses divested in 2003, Vivendi Universal 2003 revenues declined 10%, from 28,157 million to 25,354 million. Main contributors to the decline at constant currency were UMG, VU Games and Canal+ Group (mainly due to scope changes), partially offset by increased revenues at SFR Cegetel, Maroc Telecom and VUE.
      For an analysis of revenues by business segment, please refer to “— Business Segment Results”.
Cost of Revenues
      In 2003, cost of revenues represented 60% of revenues or 15,268 million compared to 60% of revenues or 16,749 million in 2002, excluding VE. Gross margins were flat due to the combination of: (i) improved gross margin from Canal+ Group mainly due to the efficient cost reduction policy and scope changes, (ii) reduced gross margins at UMG (higher proportion of lower margin activities) and VU Games (higher royalties

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expenses), (iii) the divestiture of Consumer Press Division and Comareg, and (iv) reduced costs from VTI and Internet activities as a result of the ongoing restructuring plan.
Selling, General and Administrative Expenses
      Selling, general and administrative expenses represented 27% of revenues or 6,812 million in 2003 compared to 32% of revenues or 8,918 million in 2002 excluding VE. The cost improvements in 2003 versus 2002 were attributable to: (i) lower fixed costs at UMG, (ii) scope changes at Canal+ Group, VTI and VUE and the divestiture of Comareg and Consumer Press Division, and (iii) decline of holding costs as 2002 was impacted by high expenses related to pensions and insurance due to a change in scope.
Depreciation and Amortization
      Depreciation and amortization (D&A) are part of cost of revenues and selling, general and administrative expenses. In 2003, D&A amounted to 1,977 million compared to 2,669 million in 2002, excluding VE. This improvement was mainly due to scope changes at Canal+ Group, reduction of the amortization of catalogue induced by impairment losses recorded at UMG in 2002, and higher level of D&A at SFR Cegetel in 2002 resulting from the revision of the useful life of mobile tangible assets and from the effect of the impairment test on the fixed line operations.
Other Operating Expenses, Net
      Other operating expenses, net, amounted to 93 million in 2003 compared to 851 million in 2002. They were comprised of restructuring charges, which amounted to 221 million in 2003 (mainly at UMG, Canal+ Group and Internet) compared to 304 million in 2002 (mainly resulting from restructuring plans at the holding level and at Internet). In 2002, other operating expenses also included non-recurring provisions.
Operating Income
      Whereas Vivendi Universal’s revenues declined by 56%, Vivendi Universal operating income declined by 13% to 3,309 million, compared to 3,788 million in 2002, mainly due to scope changes. Excluding VE and VUP assets sold in 2003, the 1,412 million change was achieved through:
      +572 million improvement at Canal+ Group, which recorded 247 million of operating income in 2003 including some provision reversal early in the year;
      +510 million from the elimination of the company’s cash drains in the non-core businesses (VU Net, VTI and Vivendi Valorisation);
      +470 million from the improved performance at SFR Cegetel;
      +335 million from lower holding and corporate costs;
      +160 million growth at Maroc Telecom; and
      +115 million at VUE, mainly due to changes in scope;
and was offset by:
      -486 million decline at UMG; and
      -264 million decline at VU Games.
      For an analysis of operating income by business segment, please refer to “ — Business Segment Results”.
Financing Expense
      In 2003, financing expense was reduced by one half to 698 million compared to 1,333 million in 2002.
      Average financial gross debt decreased to 16.4 billion in 2003 from 22.1 billion in 2002, including the 4 billion investment to increase Vivendi Universal’s stake in SFR Cegetel by 26%, but as a result of the

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refinancing program, the average cost of financial gross debt increased from 4.1% in 2002 to 4.8% in 2003, including management of interest costs.
Other Financial Expenses, Net of Provisions
      In 2003, other financial expenses, net of provisions, amounted to 509 million compared to 3,409 million in 2002.
      In 2002, they were primarily comprised of a capital gain on the sale of Vinci (153 million) and dividends from unconsolidated investments (58 million) offset by losses related to put options on treasury shares (693 million including a provision accrual of 104 million), fees related to the implementation of the refinancing plan (193 million) and provision accruals as a result of mark-to-market of IAC warrants, interest rate swaps and premiums on Vivendi Universal call options (454 million, 261 million and 226 million, respectively), impairment losses related to Elektrim Telekomunikacja, UGC and UGC Ciné Cité, investments in international telecommunications and Softbank Capital Partner investment (609 million, 220 million, 175 million and 120 million, respectively) and amortization of deferred charges related to bond issuances, facilities and other (174 million).
      Please refer to “Item 18 — Financial Statements — Note 22”.
Gain on Businesses Sold, Net of Provisions
      In 2002, gain on businesses sold, net of provisions, totaled 1,049 million; the principal components of which were capital gains on the divestiture and/or dilution of our interest in the following investments: 1,588 million for BSkyB, 1,419 million for VE, 329 million for VUP’s European publishing operations, 172 million for Canal Digital, and 90 million for Vizzavi Europe. Partially offsetting these gains were capital losses on the divestitures of Houghton Mifflin (822 million), EchoStar (674 million), VUP’s business-to-business and health divisions (298 million), and Sithe (232 million), and a 360 million provision related to the anticipated sale of Telepiù.
Income Tax
      In 2003, income tax was a credit of 408 million compared to an expense of 2,556 million in 2002. This improvement was mostly due to (i) the effect of the rationalization of the structures at SFR Cegetel (savings of 515 million in 2003), (ii) the deconsolidation of VE (expense of 437 million in 2002), (iii) a reversal of a reserve of 477 million (established in 2002 for a potential contractual liability for tax indemnification that would have arisen in 2002 if Vivendi Universal had been unable to secure refinancing for the bridge loan relating to the $1.6 billion Vivendi Universal Entertainment Leveraged Partnership Distribution made on May 7, 2002) and (iv) other provision reversals resulting from the conclusion of tax audit for prior taxable period. Vivendi Universal’s income tax rate on adjusted net income in 2003 was 31% compared to 63% in 2002.
      Income Tax Cash Flow. Since SFR Cegetel, Maroc Telecom, CanalSatellite and Canal+ S.A. were not part of Vivendi Universal’s consolidated tax group, losses elsewhere in the group were not available to offset profits taxable at those entities. Income tax paid amounted to 1,242 million in 2003 compared to 1,252 million in 2002.
Income from Equity Affiliates
      Income from equity affiliates amounted to 71 million in 2003, excluding VE impairment losses and impairment losses recorded in respect to certain VUE affiliates, compared to a loss from equity affiliates of 294 million in 2002 mainly due to decreased losses from VTI, Internet and Canal+ subsidiaries as main cash drains have been eliminated and increased earnings from SFR Cegetel subsidiaries, mainly due to SFD contribution, which had no impact on Vivendi Universal’s account as it was offset by another financial expense.

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Goodwill Amortization
      In 2003, goodwill amortization declined 12% to 1,120 million compared to 1,277 million in 2002. The increase in Canal+ Group and SFR Cegetel goodwill amortization was primarily driven by the exceptional amortization (129 million) of Telepiù at Canal+ Group to offset the provision reversal and increased goodwill amortization at SFR, primarily due to the acquisition of BT’s 26% stake, which have been more than offset by the impact of the divestitures and restructuring plan at VU Net and particularly the reduction of amortization induced by the impairment losses recorded in previous years.
Impairment Losses
      In 2003, impairment losses amounted to 1,792 million compared to 18,442 million in 2002. In view of the continued deterioration of the economy in 2002 and the resulting decline in the value of some Media and Telecommunications assets, combined with the impact of the future increased cost of capital to the group as a result of liquidity issues, 18,442 million of goodwill was written down in 2002. These impairment losses were broken down as follows: 5.4 billion for Canal+ Group, 5.3 billion for UMG, 6.5 billion for VUE, and 1.2 billion for international telecommunications and Internet assets. This impairment charge did not reflect any proportional notional impairment of goodwill originally recorded as a reduction of shareholders’ equity, which amounted to 0.7 billion in 2002.
      For further discussion on impairment losses, please refer to “Item 18 — Financial Statements — Note 4.4”.
Minority Interests
      In 2003, minority interest expense increased by 44% to 1,212 million, primarily due to the increased profitability at SFR Cegetel and Maroc Telecom and despite the acquisition of BT’s 26% stake in SFR Cegetel.
Earnings per Share — Basic and Diluted
      Net loss was significantly reduced to 1,143 million compared to 23,301 million in 2002. Vivendi Universal’s 2003 loss per share (basic and diluted) amounted to 1.07 compared to 21.43 in 2002.
Adjustments to Conform to US GAAP
                         
    Year Ended December 31,
     
    2004   2003   2002
             
    (In millions, except per share
    amount)
Revenues
  21,254     25,321     40,062  
Operating income (loss)(a)
    3,266       940       (18,633 )
Net income (loss)
    2,921       (1,358 )     (43,857 )
Net income (loss) per share — basic
  2.73     (1.27 )   (40.35 )
Net income (loss) per share — diluted
  2.58     (1.27 )   (40.35 )
 
(a) The reconciliation of the operating income as reported under French GAAP to the operating income (loss) under US GAAP is as follows:

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    Year Ended December 31,
     
    2004   2003   2002
             
    (In millions)
Operating income — French GAAP
  3,476     3,309     3,788  
 
Adjustments to conform to US GAAP
                       
   
Impairment losses
    (30 )     (2,301 )     (21,587 )
   
Real estate defeased properties
    21       44       182  
   
Employee benefit plans
    (21 )     (66 )     (69 )
   
Amortization of SFR market share
    (147 )     (138 )      
   
Other
    (33 )     92       (947 )
                   
Operating income (loss) — US GAAP
  3,266     940     (18,633 )
                   
Comparison of 2004 versus 2003
Operating Income
      The most significant reconciling item impacting operating income in 2004 related to the amortization of SFR market share recognized under US GAAP but not under French GAAP. In 2003, as a result of the allocation of the purchase price of an additional 26% interest in SFR in January 2003, Vivendi Universal recorded a market share for an amount of 650 million. Under French GAAP, market shares are considered to be indefinite-lived assets and thus not amortized. However, they are subject to a regular impairment test. Under US GAAP, this market share was qualified as a subscriber base and determined to be amortized over periods ranging from three to five years resulting in an operating expense of 147 million in 2004 and 138 million in 2003. Furthermore, the impairment losses recorded with respect to goodwill and other intangible assets were included in the operating income under US GAAP but not under French GAAP.
Net Income (Loss)
      For the years ended December 31, 2004 and 2003, the net income (loss) under US GAAP was 2,921 million and -1,358 million, respectively, compared to a net income (loss) of 754 million and -1,143 million under French GAAP. In 2004, the most significant reconciling item related to the divestiture of 80% of Vivendi Universal’s interest in VUE for an amount of 2,200 million. Under French GAAP, the divestiture resulted in a capital loss of -1,793 million (please refer to “Item 18 — Financial Statements — Note 3.1). Under US GAAP, this transaction generated a capital gain of 407 million (please refer to Item 18 — Note 32.9) since the carrying value of VUE was lower under US GAAP than under French GAAP. As of December 31, 2003, the fair value of VUE denominated in US dollars, as per the VUE/ NBC combination agreement, exceeded its carrying value also denominated in US dollars. However, Vivendi Universal’s functional currency being the euro, a cumulative foreign currency loss was recorded as a reduction to shareholders’ equity through the currency translation adjustment account. Under French GAAP, at December 31, 2003, this foreign currency loss should not be taken into consideration when determining the estimated gain or loss related to the disposition of 80% of Vivendi Universal’s interest in VUE. Therefore, this foreign currency loss had no impact on Vivendi Universal’s net income in 2003 under French GAAP. Under US GAAP, VUE qualified as assets held for sale, its carrying value was initially measured at the lower of cost or fair value less costs to sell. EITF 01-5 required that, for purposes of this measurement, the carrying value should also include that portion of the cumulative translation adjustment which would be reclassified to earnings at the time of divestiture. As a result, the carrying value of VUE was reduced and a corresponding impairment loss of 920 million was recognized in 2003. In addition, under US GAAP, long-lived assets which were part of the VUE divestiture group were no longer depreciated or amortized.
      Furthermore, amortization of goodwill under French GAAP was reversed, since goodwill ceased to be amortized under US GAAP on January 1, 2002 upon the adoption of SFAS 142, and the calculation of the impairment test was different under US GAAP. In 2004, given the recent developments surrounding the ownership of the Elektrim Telekomunikacja stake in PTC (please refer to “Item 18 — Financial State-

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ments — Note 7.3”), the carrying value of Elektrim Telekomunikacja was fully impaired in the US GAAP consolidated statement of financial position, as it has been in the French GAAP consolidated statement of financial position since December 31, 2002: in 2001, the impairment related to Elektrim Telekomunikacja recognized under French GAAP included an accrual for contingent losses (300 million) that did not meet the FAS 5 criteria for accrual and therefore was not taken into account under US GAAP. In 2003, a lower impairment loss was recorded with respect to UMG under US GAAP (1,370 million under French GAAP versus 982 million under US GAAP).
Comparison of 2003 versus 2002
Operating Income
      The most significant reconciling items impacting operating income in 2003 and 2002 related to the impairment losses recorded with respect to goodwill and other intangible assets, which were included in the operating income under US GAAP but not under French GAAP. In 2003, under US GAAP, SFR market share amortization resulted in an operating expense of 138 million.
Net Loss
      For the years ended December 31, 2003 and 2002, the net loss under US GAAP was 1,358 million and 43,857 million, respectively, compared to a net loss of 1,143 million and 23,301 million, respectively, under French GAAP. The most significant reconciling items in both periods were goodwill amortization, since goodwill ceased to be amortized under US GAAP on January 1, 2002 upon the adoption of SFAS 142, and the impact of the impairment test, for which the calculation is different under US GAAP. In 2002, under French GAAP, in light of the deteriorating economic conditions and the impact of the higher financing cost for Vivendi Universal, an additional impairment charge of approximately 18.4 billion was recorded (representing a cumulative impairment loss of approximately 31.3 billion). Under US GAAP, Vivendi Universal adopted SFAS 142 and 144 and recorded an impairment charge of 38.2 billion. Furthermore, as of December 31, 2003, under US GAAP, the carrying value of VUE, as assets held for sale, was reduced and a corresponding impairment loss of 920 million was recognized. In addition, under US GAAP, long-lived assets which are part of the VUE divestiture group are no longer depreciated or amortized.
      In 2002, the differential accounting treatment for the sale of our investment in BSkyB also decreased US GAAP net income by approximately 1,417 million.

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BUSINESS SEGMENT RESULTS
      For more information on business unit operations, see “Item 4 — Information on the Company”.
Revenues and operating income by business segment as published in 2004-2003-2002
                                   
    As Published
     
    Year Ended December 31,
     
    2004   2003   % Change   2002
                 
    (In millions of euros)
Revenues
                               
 
Canal+ Group
  3,580     4,158       -14 %   4,833  
 
Universal Music Group
    4,993       4,974       0 %     6,276  
 
Vivendi Universal Games
    475       571       -17 %     794  
                         
 
Media
    9,048       9,703       -7 %     11,903  
 
SFR Cegetel
    8,317       7,574       10 %     7,067  
 
Maroc Telecom
    1,627       1,471       11 %     1,487  
                         
 
Telecom
    9,944       9,045       10 %     8,554  
 
Non core operations and elimination of intercompany transactions(a)
    109       584       -81 %     813  
                         
 
Total Vivendi Universal (Excluding VUE, VE and VUP assets sold in 2003)
  19,101     19,332       -1 %   21,270  
                         
 
Vivendi Universal Entertainment(b)
    2,327       6,022       -61 %     6,270  
 
VUP assets sold in 2003(c)
          128       na *     572  
 
Veolia Environnement
                na *     30,038  
                         
 
Total Vivendi Universal
  21,428     25,482       -16 %   58,150  
                         
Operating Income
                               
 
Canal+ Group
  198     247       -20 %   (325 )
 
Universal Music Group
    338       70       x5       556  
 
Vivendi Universal Games
    (183 )     (201 )     9 %     63  
                         
 
Media
    353       116       x3       294  
 
SFR Cegetel
    2,257       1,919       18 %     1,449  
 
Maroc Telecom
    673       628       7 %     468  
                         
 
Telecom
    2,930       2,547       15 %     1,917  
 
Holding & corporate
    (220 )     (330 )     33 %     (665 )
 
Non core operations(a)
    76       39       95 %     (471 )
                         
 
Total Vivendi Universal (Excluding VUE, VE and VUP assets sold in 2003)
  3,139     2,372       32 %     1,075  
                         
 
Vivendi Universal Entertainment(b)
    337       931       -64 %     816  
 
VUP assets sold in 2003(c)
          6       na *     (14 )
 
Veolia Environnement
                na *     1,911  
                         
 
Total Vivendi Universal
  3,476     3,309       5 %   3,788  
                         
 
*na:  non applicable
(a) Corresponds to VUP activities in Brazil (Atica & Scipione) deconsolidated since January 1, 2004, Internet operations abandoned since January 1, 2004, VTI, Vivendi Valorisation and other non-core businesses.
 
(b) VUE was deconsolidated as of May 11, 2004 as a result of the divestiture (from an accounting standpoint) of 80% of Vivendi Universal’s interest in this company.
 
(c) Corresponds to Consumer Press Division sold in February 2003, which was deconsolidated as of January 1, 2003, and Comareg sold in May 2003.

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Revenues and operating income by business segment on a comparable basis 2004 — 2003
      Comparable basis essentially illustrates the effect of the divestiture of VUE, the divestitures at Canal+ Group (Telepiù, Canal+ Nordic, Canal+ Benelux, etc.), the divestitures of VUP (Comareg and Atica & Scipione), Vivendi Telecom Hungary, Kencell and Monaco Telecom and the abandonment of Internet operations, and includes the full consolidation of Telecom Développement at SFR Cegetel and of Mauritel at Maroc Telecom as if these transactions had occurred at the beginning of 2003. In addition, comparable basis takes into consideration a change in presentation adopted as of December 31, 2004: in order to standardize the accounting treatments of sales of services provided to customers on behalf of content providers (mainly toll numbers), following the consolidation of Telecom Développement, sales of services to customers, managed by SFR Cegetel and Maroc Telecom on behalf of content providers, previously presented in a gross basis in SFR and Telecom Développement’s revenues, are presented net of the related expenses. This change in presentation has no impact on operating income. At SFR Cegetel, it reduced revenues by 168 million in 2004. At Maroc Telecom, the impact was immaterial.
                                   
    Comparable Basis
     
    Year Ended December 31,
     
        % Change at
        Constant
    2004   2003   % Change   Currency
                 
    (In millions of euros)
Revenues
                               
 
Canal+ Group
  3,470     3,339       4 %     4 %
 
Universal Music Group
    4,993       4,974       0 %     5 %
 
Vivendi Universal Games
    475       571       -17 %     -11 %
                         
 
Media
    8,938       8,884       1 %     3 %
 
SFR Cegetel
    8,317       7,537       10 %     10 %
 
Maroc Telecom
    1,658       1,523       9 %     11 %
                         
 
Telecom
    9,975       9,060       10 %     10 %
 
Non core operations and elimination of intercompany transactions(a)
    (20 )     28       na *     na *
                         
 
Total Vivendi Universal
  18,893     17,972       5 %     7 %
                         
Operating Income
                               
 
Canal+ Group
  184     95       94 %     95 %
 
Universal Music Group
    338       70       x5       x5  
 
Vivendi Universal Games
    (183 )     (201 )     9 %     0 %
                         
 
Media
    339       (36 )     na *     na *
 
SFR Cegetel
    2,257       1,971       15 %     15 %
 
Maroc Telecom
    682       642       6 %     8 %
                         
 
Telecom
    2,939       2,613       12 %     13 %
 
Holding & corporate
    (220 )     (330 )     33 %     31 %
 
Non core operations(a)
    59       (31 )     na *     na *
                         
 
Total Vivendi Universal
  3,117     2,216       41 %     41 %
                         
 
(a) Corresponds to VTI (excluding Vivendi Telecom Hungary, Kencell and Monaco Telecom), Vivendi Valorisation and other non-core businesses.

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Comments on revenues and operating income for Media operations
      In 2004, Media operations revenues amounted to 9,048 million, down 7% compared with 2003 (representing a 3% increase on a comparable basis at constant currency).
      In 2004, Media operations operating income increased threefold amounting to 353 million (on a comparable basis it went from -36 million in 2003 to 339 million in 2004).
      In 2003, Media operations revenues amounted to 9,703 million, down 18% compared to 2002, while operating income amounted to 116 million, down 60% compared to 2002.
Canal+ Group
                                             
    Year Ended December 31,
     
        Comparable
    As Published   Basis(a)
         
    2004   2003   % Change   2002(b)   % Change
                     
    (In millions of euros, except for margins)
Revenues
                                       
 
Pay-TV — France
  2,861     2,813       2 %   2,663       3 %
 
Film — StudioCanal
    394       351       12 %     455       12 %
 
Other
    325       994       -67 %     1,715       8 %
                               
 
Total Canal+ Group
  3,580     4,158       -14 %   4,833       4 %
Operating income (loss)
  198     247       -20 %   (325 )     94 %
Operating margin(%)
    6 %     6 %     stable       na*       +2 points  
Subscriptions (in thousands)(c)
                                       
   
Analog
    2,455       2,611       -6 %     2,864          
   
Digital
    1,917       1,738       10 %     1,613          
                               
 
Individual subscribers
    4,372       4,349       1 %     4,477          
 
Collective
    402       375       7 %     363          
 
Overseas
    181       183       -1 %     178          
                               
Total Canal+ (premium channel)
    4,955       4,907       1 %     5,018          
CanalSatellite
    2,989       2,751       9 %     2,520          
NC Numericâble
    436       423       3 %     407          
                               
Total subscriptions in France
    8,380       8,081       4 %     7,945          
 
(a) Comparable basis essentially illustrates the effect of the divestitures at Canal+ Group (Telepiù, Canal+ Nordic, Canal+ Benelux, etc.) as if these transactions had occurred at the beginning of 2003.
 
(b) Please note that to better reflect the performances of each separate business, Canal+ Group has reallocated dedicated operations and holding costs to each appropriate business line. These amounts were previously reported in “other”. As a consequence, breakdown of revenues and operating income by business differs from figures published in 2002.
 
(c) Individual and collective subscriptions differ from 2002 published data, which included only individual subscriptions.
2004 versus 2003
      Canal+ Group reported revenues of 3,580 million in 2004, up 4% as compared to 2003 on a comparable basis.
      For 2004, Canal+ Group reported operating income of 198 million, up 94% as compared to the previous year on a comparable basis. With positive operating income for the second consecutive year, Canal+ Group confirmed the steady strengthening of its economic situation. This strong performance also reflected the ongoing effects of the strategic recovery plan implemented since 2003.

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Pay TV — France:
      Revenues of Canal+ Group’s core business, French pay-TV, amounted to 2,861 million in 2004 and increased 3% as compared to 2003 on a comparable basis. At the end of 2004, Canal+ Group’s portfolio had nearly 8.4 million subscriptions (individual and collective, in France and French overseas territories) to its pay-TV offerings in France, a net increase of 300,000 subscriptions in one year.
      In 2004, Canal+, the premium channel, increased its number of subscriptions for the first time since 2000. On December 31, 2004, its portfolio reached 4.95 million subscriptions, representing a net increase of 48,000 subscriptions compared to the previous year. Over the course of 2004, the premium channel totaled more than 550,000 new subscriptions and achieved a significant churn rate decrease (-2 percentage points), which fell below 11%. In 2004, Canal+ strengthened its premium offer, in particular by signing an agreement with the French movie industry and securing exclusivity rights to France’s top soccer league for three seasons (2005 to 2008).
      CanalSatellite continued its growth, ending 2004 with 2.99 million subscriptions (a net increase of 238,000) and achieved a 0.5 percentage point churn rate decrease to 8.6%.
      French pay-TV’s operating income amounted to 151 million in 2004, up 18% compared to the previous year on a comparable basis. This improved result of the group’s core business was mainly due to revenue growth in addition to savings resulting from the strategic recovery plan.
Film — StudioCanal:
      Canal+ Group’s movie business increased revenues by 12% to 394 million in 2004, primarily due to successful theatrical releases (Les Rivières Pourpres 2, Podium, Comme une Image, Bridget Jones 2) and the strong performance of DVDs, including Les Nuls, L’Intégrule 1 & 2 and De Caunes & Garcia.
      With operating income of 38 million in 2004, the group’s movie business grew 57% as compared to 2003 on a comparable basis, highlighting the turnaround of StudioCanal over the last two years. This improved performance resulted mainly from the commercial performance of the 2004 theatrical line-up and successful DVD sales.
Other:
      In 2004, “Other” mainly includes French soccer club PSG and Cyfra+.
      PSG’s strong revenues and operating income are mainly attributable to the club’s performance over the different championships: PSG won the French Cup in 2004, ranked number two in the 2003-2004 season of the French National Football League 1 and qualified for the 2004-2005 Champions League championship.
      With nearly 700,000 subscribers in 2004, Cyfra+ confirmed its leadership over other digital platforms in Poland. Cyfra’s operating income was positive for the second year in a row.
      2003 versus 2002
      In 2003, actual revenues at Canal+ Group decreased by 14% to 4,158 million as a result of divestitures made in 2003 and described in “Item 4 — 2003 Developments”.
      Canal+ Group ended 2003 with an operating income of 247 million, compared to an operating loss of 325 million in 2002. Operating income in 2003 included, in particular, a provision reversal impacting Telepiù’s operating income of 129 million before its disposal in April 2003. This provision on a contract with a channel was reversed when Telepiù reached a high enough number of subscribers to make the contract profitable.
Pay-TV — France:
      Revenues from the French pay-TV operations, Canal+ Group’s core business, increased 6% to 2,813 million in 2003. Canal+ Group ended 2003 with nearly 8.1 million subscriptions to its Canal+ pay-TV

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offerings in France, representing a net growth of approximately 135,000 subscriptions for the year. With 4.9 million subscriptions at December 31, the Canal+ premium channel significantly limited the forecast decline in its subscriber base to a net of approximately 110,000, primarily due to the sustained level of commitments from new subscribers whose number rose 10% during the year. The churn rate remained at industry-comparable low levels of 12.9%, or 11.8% excluding the impact of special commercial offers not repeated in 2004 which allowed free cancellations. This compares with 10.6% in 2002. CanalSatellite continued to grow, ending the year with 2.8 million subscriptions, for a net annual increase of approximately 230,000 subscriptions. The churn rate was up slightly at 9.1% compared to 8.4% in 2002.
      Operating income was 128 million in 2003, which was double that reported in 2002. All of the operations (premium channel, theme channels, satellite and cable packages and operations in the French overseas departments and territories) contributed to the increase. The strong operating performances were achieved through revenue growth, restructuring efforts and cost savings.
Film — StudioCanal:
      StudioCanal revenues fell 23% to 351 million in 2003, in line with the company strategy to be more selective in its movie investments. StudioCanal’s Les Nuls, l’Intégrule ranked number one among France’s best-selling videos and DVDs during the holiday season, with nearly one million copies sold, an unprecedented achievement for a comedy DVD in France.
      Operating income in 2003 was positive at 26 million (compared to a 95 million operating loss in 2002) due to the benefits of the company’s restructuring, the introduction of a new editorial policy, and the decision to discontinue in-house movie production.
Other:
      Other includes non-strategic or non-profitable companies which were disposed of in 2003, either outside of France (pay-TV businesses including Telepiù, Canal+ Nordic and Canal+ Benelux) or in France (Canal+ Technologies, certain Expand activities), as well as Cyfra+ and PSG.
      While revenues of this group of companies, at 994 million in 2003, fell 42% due to scope changes, operating income rose due to the positive contribution of most of the companies concerned. In particular, Cyfra+ in Poland reported operating income for the first time in 2003. The subscriber portfolio grew 5% to 670,000 at the end of 2003, representing approximately one million subscriptions to the different premium offers (Canal+ and HBO MaxPak) and to the digital platform Cyfra+.

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Universal Music Group
                                   
    Year Ended December 31,
     
    As published
     
    2004   2003   % Change   2002
                 
    (In millions of euros, except for
    margins)
Revenues
                               
 
North America(a)
  1,985     1,895       5 %   2,670  
 
Europe(a)
    2,003       2,044       -2 %     2,418  
 
Asia(a)
    455       516       -12 %     563  
 
Rest of the World(a)
    216       193       12 %     263  
                         
    4,659     4,648       0 %   5,914  
 
Publishing
    372       370       1 %     412  
 
Intersegment elimination
    (38 )     (44 )     -14 %     (50 )
                         
 
Total UMG
  4,993     4,974       0 %   6,276  
Operating income
  338     70       x5     556  
Operating margin(%)
    7 %     1 %     +6 points       9 %
Market shares(b)
                               
 
North America
    29.9 %     27.9 %             31.7 %
 
Europe
    26.7 %     25.6 %             27.1 %
 
Asia
    12.8 %     13.4 %             12.0 %
 
Rest of the World
    na *     na *             na *
                         
 
Total UMG
    24.7 %     23.5 %             25.4 %
Music market growth(b)
                               
 
North America
    4.1 %     -5.9 %             -8.2 %
 
Europe
    -5.1 %     -8.5 %             -4.1 %
 
Asia
    -5.1 %     -9.8 %             -10.3 %
 
Rest of the World
    na *     na *             na *
                         
 
Total UMG
    -0.8 %     -7.6 %             -7.2 %
                                                 
Best selling titles   Artist   Units   Artist   Units   Artist   Units
                         
    (Units sold, in millions)
      Eminem       9       50 Cent       9       Eminem       14  
      U2       8       t.A.T.u.       4       Shania Twain       8  
      Shania Twain       5       Eminem       3       Nelly       8  
      Guns N’Roses       5       Sheryl Crow       3       8 Mile OST       6  
      Black Eyed Peas       4       Toby Keith       3       U2       5  
% of top 15 of total units sold
            13 %             10 %             14 %
 
  * na: not applicable
(a)  In 2003, revenues by country included publishing revenues. In 2004, to better reflect the economic reality, revenues by country did not include publishing revenues, which are now presented on a separate line. As a result, 2002 and 2003 data differs from that published in 2003.
 
(b)  Music market and market share data for 2004 are UMG estimates using the IFPI methodology. Music market and market share data for 2003 and 2002 are IFPI data.
     2004 versus 2003
      UMG’s revenues of 4,993 million were up slightly (+0.4%) in 2004 compared to 2003, despite significant adverse currency movements.
      At constant currency, revenues were up 5% with better than market performances particularly in North America and the UK, more than offsetting market weakness across most of continental Europe and lower sales

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in the Music Clubs. Revenues in Asia were down versus 2003. However, there was a rebound in both Latin America and Australasia. Digital sales of recorded music, including downloads and ringtones, represented approximately 2% of total revenues. UMG estimates that its worldwide market share reached 24.7% in 2004 compared to 2003’s market share of 23.5% as measured by IFPI. US album unit sales, as measured by Nielsen SoundScan, rose 2% versus 2003 with UMG outperforming the market with a 7% increase. According to Nielsen SoundScan, UMG’s market share grew from 28.1% in 2003 to 29.6% in 2004.
      Best sellers for 2004 included new releases from Eminem, U2, and Nelly, carryover sales from 2003 releases from Black Eyed Peas and Hoobastank and Greatest Hits collections from Shania Twain, Guns N’ Roses and George Strait. Other major sellers were debut releases from several new artists, including Ashlee Simpson, Kanye West, JoJo, and Lloyd Banks. UMG UK enjoyed an exceptional year for breaking new artists, such as best selling debut releases from Scissor Sisters and Keane. Local repertoire continued to make a significant contribution to activity and regional best sellers included: Rammstein, Rosenstolz, The Rasmus, Calogero, and Michel Sardou in Europe; Hikaru Utada, Kou Shibasaki and Moriyama Naotaro in Japan; and Ivete Sangalo and Juanes in Latin America.
      Operating income of 338 million in 2004, compared to 70 million in 2003, reflected the better than market sales performance, lower marketing expenses, the other results of the company’s cost reduction program.
      The strong operating performance was partly offset by higher amortization costs, primarily due to a reduction in the period that music and music publishing catalogs were amortized from 20 to 15 years, and an impairment charge in respect of UMG’s Music Clubs in the UK and France prior to their sale in December 2004. Results in 2003 included a charge relating to an unfavorable decision after trial in a lawsuit currently under appeal. Operating margins improved to 7% of revenues in 2004 from 1% in 2003.
2003 versus 2002
      UMG’s revenues of 4,974 million in 2003 were 21% below 2002 due to adverse currency movements, weakness in the global music market, and a lower number of releases from global superstars. Growth in Japan and the UK was more than offset by declines in the US, Germany, and France. The global music market declined an estimated 7% in 2003 due to the combined impact of pressed disc and CD-R piracy, illegal downloading of music from the Internet, and increased competition from other forms of entertainment such as DVDs. UMG’s top 15 album releases accounted for 10% of unit volume in 2003 versus 14% in 2002. Best sellers included 50 Cent, which was the number one best seller of the year in the US and strong carryover sales from 2002 releases by t.A.T.u. and Eminem. Other major sellers in 2003 were from Sheryl Crow, Toby Keith, Black Eyed Peas, with very strong sales outside of North America, and from Sting and Busted, who had two albums in the year selling over 1 million units.
      In 2003, operating income at UMG declined 87% to 70 million. This decline reflected the margin impact of the decline in revenue and a higher proportion of lower margin activity. Lower marketing and catalog amortization expenses offset restructuring costs incurred as a result of reorganizing businesses primarily in the US and Europe and a substantial increase in legal charges, primarily the cash deposit made with the United States District Court in connection with UMG’s appeal of an unfavorable decision after trial in a lawsuit brought by TVT Records and TVT Music, Inc. (the TVT matter).

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Vivendi Universal Games
                                           
    As published
     
    Year ended December 31,
     
    2004   2003   % change   2002
                 
    (In millions of euros, except for margins)
Revenues
     475        571       -17 %     794          
Operating income (loss)
    (183 )     (201 )     9 %     63          
Operating margin(%)
    na *     na *     na *     8 %        
% sales
                                       
 
PC
    46 %     38 %             59 %        
 
Console
    48 %     62 %             40 %        
 
Online and Other
    6 %                   2 %        
Breakdown of revenues
                                       
 
North America
    56 %     55 %             63 %        
 
Europe
    34 %     34 %             27 %        
 
Asia Pacific and ROW
    10 %     11 %             10 %        
             
Best selling titles
  • Half-Life 2   • Simpsons Hit and Run   • Warcraft III
    • Simpsons Hit and Run   • Hulk   • Fellowship of the Ring
    • Crash Twinsanity   • Crash Nitro Kart   • Crash V
    • World of Warcraft   • Warcraft III expansion pack   • The Thing
    • Spyro: A Hero’s Tail   • Hobbit   • Spyro I
 
na: not applicable
2004 versus 2003
      In spite of the improved performance of the fourth quarter, VU Games’ revenues in 2004 amounted to 475 million, down 17% as compared to 2003 (11% at constant currency). Best-sellers in 2004 included two critically acclaimed new releases — the global release of Half-Life 2, the sequel to one of the best-selling PC games in history, and the launch of the highly anticipated subscription-based, MMO game World of Warcraft in North America, Australia, and New Zealand. At December 31, 2004, Half-Life 2 had sold an estimated 1.7 million units globally and was a top-selling PC game in most major markets including Germany, the UK, Nordic countries, France, Italy, Spain, and the US. World of Warcraft is the fastest-growing game in its category, achieving more than 600,000 active accounts since its commercial launch in November 2004 and is the largest MMO in North America. However, due to its year-end launch, subscription revenues from World of Warcraft had only a modest impact on VU Games’ 2004 revenues.
      Best-sellers in 2004 also included the following new releases: Crash Twinsanity, Spyro: A Hero’s Tail, Riddick and Baldur’s Gate: Dark Alliance II, as well as very strong continuing sales of last year’s highly successful Simpsons: Hit & Run.
      In 2004, VU Games’ operating loss was 183 million compared to 201 million in 2003. Excluding one-time costs associated with the turnaround plan (approximately 95 million),VU Games’ operating loss in 2004 was reduced significantly compared to the prior year. These one-time costs included write-offs of certain projects and titles, along with significant restructuring expenses associated with the cost of reducing staff numbers in North America and Europe.
2003 versus 2002
      VU Games’ revenues in 2003, comprised of a balanced mix of original content (45%), licensed properties (40%) and third-party releases (15%), decreased to 571 million in 2003, 28% below 2002.

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      Operating loss in 2003 amounted to 201 million compared to an operating income of 63 million in 2002 mainly reflecting lower gross margins on declining revenues and the write-off of R&D expenses (54 million, please refer to “Item 18 — Financial Statements — Note 1”). A weaker release schedule in 2003 compared to the prior year compounded by slippage resulted in lower revenues, higher returns, price protection, and products and advance write-offs.
Comments on revenues and operating income for Telecommunications operations
      In 2004, Telecommunications operations revenues amounted to 9,944 million, up 10% from 2003 (10% increase on a comparable basis at constant currency).
      Telecommunications operations operating income amounted to 2,930 million, up 15% from 2003 (13% increase on a comparable basis at constant currency).
      In 2003, Telecommunications operations revenues amounted to 9,045 million, up 6% from 2002, while operating income amounted to 2,547 million, up 33% on 2002.
SFR Cegetel
                                           
    Year Ended December 31,
     
        Comparable
    As Published   basis(a)
         
    2004   2003(b)   % change   2002(b)   % of variation
                     
    (In millions of euros, except for margins)
Revenues
                                       
 
Network revenues
  6,850     6,338       8%     5,800       10%  
 
Equipment sales, net
    433       370       17%       316       17%  
 
Other (including connection fees and intercompany transactions)
    (100 )     41       na*       46       na*  
                               
 
Mobile
  7,183     6,749       6%     6,162       10%  
 
Fixed and Internet
    1,134       825       37%       905       12%  
                               
 
Total SFR Cegetel
  8,317     7,574       10%     7,067       10%  
Operating Income
  2,257     1,919       18%     1,449       15%  
Operating margin(%)
    27%       25%       +2 points       21%       +1 point  
MOBILE OPERATIONS(c)
                                       
Number of customers (end of period, in thousands)
                                       
 
Postpaid
    9,601       8,501       13%       7,187          
 
Prepaid
    6,219       6,223       0%       6,360          
                               
 
Total number of customers(d)
    15,820       14,724       7%       13,547          
Market share
    35.5%       35.3%       +0.2 point       35.1%          
Annual rolling ARPU (in /year)(e)
                                       
 
Postpaid
  603     635       -5%     674       -4%  
 
Prepaid
    183       176       4%       162       5%  
                               
 
Total
  432     431       0%     424       2%  
Churn rate (in %/year)
                                       
 
Postpaid
    13%       13%       +0 point       21%          
 
Prepaid
    36%       36%       +0 point       33%          
                               
 
Total
    24%       24%       +0 point       27%          

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    Year Ended December 31,
     
        Comparable
    As Published   basis(a)
         
    2004   2003(b)   % change   2002(b)   % of variation
                     
    (In millions of euros, except for margins)
FIXED OPERATIONS
                                       
Breakdown of revenues (before SFR
                                       
Cegetel intercompany transactions)
                                       
 
Revenues(f)
    1,435       825       74%       905       11%  
 
Residential and professional(%)
    26%       46%       ns*       48%       -3 points  
 
Corporate(%)
    27%       54%       ns*       52%       -3 points  
 
Wholesale(%)
    47%       0%       ns*       0%       +6 points  
Customers (end of period, in thousands)
                                       
 
Residential and professional(g)
    1,722       1,472       17%       3,286          
 
DSL
    244       ns*       ns*       ns*          
 
Total DSL (incl. third parties)
    699       ns*       ns*       ns*          
 
DSL unbundled
    337       ns*       ns*       ns*          
 
Corporate Data sites
    28.0       20.3       38%       12.4          
Backbone switched traffic
(minutes, in billions)
    42       40       5%       34          
 
*na:  not applicable; ns: non significant
(a) Comparable basis illustrates the full consolidation of Telecom Développement as if the merger had occurred at the beginning of 2003. In addition, comparable basis takes into consideration a change in presentation adopted as of December 31, 2004. In order to standardize the accounting treatment of sales of services provided to customers on behalf of content providers (mainly toll numbers), following the consolidation of Telecom Développement, sales of services to customers managed by SFR Cegetel on behalf of content providers, previously presented in a gross basis in SFR and Telecom Développement’s revenues, are presented net of related expenses. This change in presentation had no impact on operating income. At SFR Cegetel, it resulted in a reduction in revenues by 168 million in 2004.
 
(b) Please note that because of the merger of SFR and Cegetel Groupe S.A., and to better reflect the performances of each separate business, SFR Cegetel has reallocated holding and other revenues, which were previously reported in the “fixed and other” line renamed “fixed and internet”, to the “mobile” line. As a consequence, SFR Cegetel’s breakdown of results by business in 2002 and 2003 differs from figures published in 2003.
 
(c) Including mainland France (SFR) and La Réunion (French overseas department) (SRR).
 
(d) Source: ARCEP.
 
(e) ARPU is defined as revenues net of promotions and net of third-party content provider revenues (including toll numbers related revenues) excluding roaming in and equipment sales divided by average ARCEP total customer base for the last twelve months.
 
(f) In order to better reflect the economic reality of fixed operations, Cegetel revenues are presented before inter-company transactions, which increased in 2004 following Telecom Développement consolidation.
 
(g) In order to better reflect the economic reality of fixed operations, this line now presents only residential and professional active voice customers. As a result, the number of residential and professional customers differs from data presented in 2003.
  2004 versus 2003
      SFR Cegetel revenues increased by 10% (also 10% on a comparable basis) to 8,317 million in 2004. Operating income grew 18% (15% on a comparable basis) to 2,257 million.
Mobile:
      The contribution of the mobile telephony activity to SFR Cegetel revenues increased by 6% (10% on a comparable basis) to 7,183 million in 2004, mainly reflecting the year-on-year increase in the customer base combined with a slight increase in blended ARPU. This performance was achieved despite the fixed to mobile voice termination rate cut of 12.5% on January 1, 2004.

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      In 2004 (and for the second year in a row, as measured by ARCEP), SFR (including SRR) became the market leader in net adds with a 38% market share and 1,095,000 new net customers, taking its registered customer base to 15.82 million, a 7% increase against 2003. SFR increased its market share in the French mobile market to 35.5% compared to 35.3% at the end of December 2003.
      The improved customer mix to 60.7% postpaid customers at the end of 2004, against 57.7% in 2003 combined with improved use of data services led to an increase of 2% on a comparable basis in the annual rolling blended ARPU to 432.
      In 2004, SFR strengthened its position as reference operator for mobile multimedia services in France by becoming the first operator to offer 3G services to the consumer market in France in early November. Additionally, the success of Vodafone live! was confirmed with more than 2.23 million customers registered to the mobile multimedia services portal at the end of 2004.
      This contributed to a sharp increase in data services use with 4.5 billion text messages (SMS) and 37 million multimedia messages (MMS) sent by SFR customers in 2004 (against 3.4 billion and 6 million, respectively, in 2003) and a 31% growth in data ARPU to 52. Data revenues represented 11% of network revenue in 2004, compared to 9% in 2003.
      For 2004, mobile activity operating income grew 20% (also 20% on a comparable basis) to 2,332 million, due to continued strong control of customer acquisition and retention costs (12% of network revenues compared to 13% in 2003) and the recording of 48 million of positive, non-recurring items versus 26 million in 2003.
Fixed and Other:
      The contribution of fixed telephony and Internet activity to SFR Cegetel revenues increased by 37% to 1,134 million (12% on a comparable basis), driven mainly by growing retail and wholesale broadband Internet along with the strong performance of the Cegetel corporate division.
      Cegetel achieved strong commercial performance in the broadband Internet market during the fourth quarter of 2004 with 12%(5) of market net adds, compared to 9% for the third quarter, even though this activity was only launched commercially in March 2004. Cegetel ended 2004 with 699,000 DSL customer lines(6) including wholesale and more than 244,000 DSL retail customer lines.
      Cegetel efforts to roll-out a broadband Internet network since the beginning of 2004 are also reflected by the number of unbundled lines, which represent 21%(7) of the French market’s unbundled lines at the end of 2004 against 7% at the end of June 2004.
      As a consequence of the heavy commercial and technical costs of the broadband Internet retail offer launched in March 2004 and despite the growth in revenues and the recording of positive non-recurring items amounting to 74 million (versus 31 million in 2003), the fixed telephony and Internet activity reported operating losses of 75 million in 2004, compared to a loss of 29 million for the same period in 2003 (and income of 24 million on a comparable basis).
  2003 versus 2002
      SFR Cegetel reported strong performance in 2003 with consolidated revenue growth of 7% to 7,574 million. Operating income increased by 32% to 1,919 million compared to 1,449 million in 2002, mainly reflecting efficient cost management.
 
(5)  Cegetel 2004 fourth quarter net increase in the number of direct broadband customers, according to market data disclosed by ARCEP on January 17, 2005.
(6)  DSL lines include ADSL lines and, marginally, Turbo DSL lines.
(7)  Cegetel number of DSL unbundled lines at the end of December 2004 according to market data disclosed by ARCEP on January 17, 2005.

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Mobile:
      Mobile telephony revenues increased 10% to 6,749 million in 2003, driven by significant growth in the customer base and a strong annual rolling ARPU. SFR increased its market share in the French mobile market to 35.3% at the end of December 2003, against 35.1% at the end of December 2002. In 2003 and for the first time ever, SFR (including SRR) became the market leader in net adds with a 38% market share, recording 1,177,500 new net customers and taking its registered customer base to 14.7 million, a 9% increase over 2002. This positive performance was primarily achieved due to strong market share on postpaid net adds (43%). Furthermore, SFR is actively taking measures to attract and increase the loyalty of postpaid customers resulting in a 7.1 percentage point churn rate decline to 13.4% in 2003. The number of prepaid customers declined by 136,900 or 2% compared to flat overall growth in the total market.
      Annual rolling ARPU grew 1.7% to 431 in 2003, despite the fixed incoming call tariff decrease of 15% on January 1, 2003. This favorable ARPU trend is explained by an improved customer mix and increased usage in 2003: postpaid customer base grew 18% (compared to 14% market growth) to 8.5 million, improving the customer mix to 57.7% at the end of December 2003, against 53% at the end of December 2002 while overall voice usage increased 7% year-on-year to 256 minutes per average customer per month.
      In addition, the number of multimedia customers more than doubled, exceeding 2.3 million at the end of December 2003. The growing adoption of multimedia mobile services by SFR customers was confirmed, with approximately 330,000 customers (as at December 31, 2003) for the new multimedia service portal Vodafone live! launched in November 2003 (and approximately 410,000 customers at end of January 2004) and 3.3 billion text messages (SMS) and 6 million multimedia messages (MMS) sent in 2003.
      Growth in the customer base, strong annual rolling ARPU, declining customer acquisition costs per gross addition (-10% excluding promotions) resulting from efficient cost management and a strong reduction in bad debt increased profitability and increased operating income by 25% to 1,948 million in 2003.
Fixed and Internet:
      Fixed telephony revenues declined 9% to 825 million in 2003 primarily due to the unfavorable impact of year end 2002 voice price decreases and an unfavorable traffic mix. Operating losses decreased by 75% to 29 million in 2003 mainly due to improved cost management and favorable non-recurring events that more than offset the revenue decline.

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Maroc Telecom
                                           
    Year ended December 31,
     
        Comparable
    As published   basis(a)
         
        % of
    2004   2003   % change   2002   variation
                     
    (In millions of euros, except for margins)
Revenues
                                       
 
Network revenues
    600       505       19 %     447       19 %
 
Equipment sales, net
    93       79       18 %     96       18 %
 
Other (including connection fees and intercompany transactions)
    208       192       8 %     203       8 %
 
Mauritel (mobile)
    20             na*             20 %
                               
 
Mobile
    921       776       19 %     746       16 %
 
Voice revenues
    604       608       -1 %     645       -1 %
 
Data and Internet revenues
    73       70       4 %     60       4 %
 
Other (including connection fees, data, Internet and intercompany transactions)
    325       360       -10 %     361       -10 %
 
Mauritel (fixed)
    14             na*             7 %
                               
 
Fixed and Internet
    1,016       1,038       -2 %     1,066       -3 %
 
Elimination of intercompany transactions
    (310 )     (343 )     na*       (325 )     na*  
                               
 
Total Maroc Telecom
    1,627       1,471       11 %     1,487       9 %
Operating income
    673       628       7 %     468       6 %
Operating margin(%)
    41 %     43 %     -2 points       31 %     -1 point  
Mobile(b)
                                       
 
Number of customers (end of period, in thousands)
    6,361       5,214       22 %     4,598