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As filed with the Securities and Exchange Commission on April 16, 2004   SECURITIES AND EXCHANGE COMMISSION  FORM 20-F ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2003
Commission file number: 1-15156   TELEKOM AUSTRIA AG  AUSTRIA
(Jurisdiction of incorporation or organization) Lassallestraße 9, 1020 Vienna, Austria(Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act: Title of each class
    
    Name of each exchange on which registeredAmerican Depositary Shares,
representing Common Stock
    
    New York Stock ExchangeCommon Stock, no par value
    
    Vienna Stock Exchange
New York Stock Exchange*
   *
    
    Not for trading, 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: Common Stock, no par value               
                         500,000,000 Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by  Section 13 or15(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.
þ YesoNo Indicate by check mark which financial statement item the registrant has elected to follow.
o
Item 17þItem 18




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TABLE OF CONTENTS 
 PART IItem 1.
    
    Identity of Directors, Senior Management and Advisors
    
    
    2Item 2.
    
    Offer Statistics and Expected Timetable
    
    
    2Item 3.
    
    Key Information
    
    
    2Selected Financial and Other Data
    
    
    2Dividends
    
    
    6Exchange Rate Information
    
    
    7Risk Factors
    
    
    8Item 4.
    
    Information on the Company
    
    
    13History and Development of the company
    
    
    13Business Overview
    
    
    15Wireline
    
    
    17Wireless
    
    
    33Properties
    
    
    42Research and development
    
    
    42Regulation and legal framework
    
    
    44Item 5.
    
    Operating and Financial Review and Prospects
    
    
    60Overview
    
    
    60Results of operations
    
    
    662003 compared to 2002
    
    
    662002 compared to 2001
    
    
    85Liquidity and capital resources
    
    
    108Item 6.
    
    Directors, Senior Management and Employees
    
    
    116Item 7.
    
    Major Shareholders and Related Party Transactions
    
    
    121Item 8.
    
    Financial Information
    
    
    123Item 9.
    
    The Offer and Listing
    
    
    127Item 10.
    
    Additional Information
    
    
    128Item 11.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    144Item 12.
    
    Description of Securities Other than Equity Securities
    
    
    147PART IIItem 13.
    
    Defaults, Dividend Arrearages and Delinquencies
    
    
    147Item 14.
    
    Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    147Item 15.
    
    Controls and Procedures
    
    
    147Item 16A.
    
    Audit Committee Financial Expert
    
    
    147Item 16B.
    
    Code of Ethics
    
    
    148Item 16C.
    
    Principal Accountant Fees and Services
    
    
    148Item 16D.
    
    Exemptions from the Listing Standards for Audit Committees
    
    
    150Item 16E.
    
    Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    150PART IIIItem 17.
    
    Financial Statements
    
    
    150Item 18.
    
    Financial Statements
    
    
    150Item 19.
    
    Exhibits
    
    
    150Exhibit 1.1Exhibit 8.1Exhibit 12.1Exhibit 12.2Exhibit 13.1
 i




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REFERENCES In this annual report, Telekom Austria or we refers to Telekom Austria
AG and its consolidated subsidiaries, of which mobilkom austria and its
subsidiaries are a part of mobilkom austria refers to mobilkom austria AG &
Co KG and mobilkom austria group refers to mobilkom austria and its
subsidiaries. FORWARD-LOOKING STATEMENTS This annual report contains forward-looking statements that involve risks
and uncertainties. These forward-looking statements are usually accompanied by
words such as believe, intend, anticipate, plan, expect and similar
expressions. Our actual results may differ materially from those anticipated in
these forward-looking statements as a result of a number of factors, including
the risks described in Item 3  Risk factors, and elsewhere in this annual
report. Forward-looking statements involve inherent risks and uncertainties. We
caution that a number of important factors could cause actual results or
outcomes to differ materially from those expressed in any forward-looking
statement. These factors include, but are not limited to, the following:  
    
    the level of demand for telecommunications services or equipment,
particularly with regard to access lines, traffic, bandwidth and new
products;
    
    competitive forces in liberalized markets, including pricing
pressures, technological developments, alternative routing developments
and new access technologies, and our ability to retain market share in
the face of competition from existing and new market entrants;
    
    the effects of our tariff reduction initiatives or other marketing initiatives;
    
    the impact of insolvencies of our major customers or international suppliers;
    
    the regulatory developments and changes, including the levels of
tariffs, the terms of interconnection, unbundling of access lines and
international settlement arrangements;
    
    our ability to achieve cost savings and realize productivity
improvements;
    
    the success of new business, operating and financial initiatives,
many of which involve start-up costs, and new systems and applications;
    
    our ability to secure the licenses we need to offer new services
and the cost of these licenses and related network infrastructure
build-outs;
    
    the progress of our domestic and international investments, joint
ventures and alliances;
    
    the impact of our new business strategies and transformation
process including the restructuring of operations;
    
    the availability, terms and deployment of capital and the impact of
regulatory and competitive developments on capital expenditures;
    
    the outcome of current and future litigation in which we are or will be involved;
    
    the level of demand for our shares which can affect our business strategies;
    
    our ability to further reduce our existing workforce;
    
    changes in the law including regulatory, civil servants and social security, pensions and tax law;
    
    concerns over health risks associated with the use of wireless
handsets or radio frequency emissions from transmission masts; and
    
    general economic conditions, government and regulatory policies,
new legislation and business conditions in the markets we serve. Unless otherwise stated, references to market share, penetration rates and
other market data throughout this annual report are estimates we have made
based on official and unofficial published sources and our operating and
marketing records. While we believe our estimates are accurate, estimates are
inherently uncertain and those by other persons may differ from our estimates. 1




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PART I 
 Item 1. Identity of Directors, Senior Management and Advisors Not applicable. 
 Item 2. Offer Statistics and Expected Timetable Not applicable. 
 Item 3. Key Information 
 SELECTED FINANCIAL AND OTHER DATA The following tables present a summary of consolidated financial and
operating data for Telekom Austria. The financial data presented in these
tables are derived from the consolidated financial statements which have been
prepared in accordance with U.S. GAAP and are included elsewhere in this annual
report. You should read those sections for a further explanation of the
financial data summarized here. For a description of other factors which have
affected or may affect our financial results, see
 Risk factors and Item 5  Overview. Prior to June 28, 2002, Telekom Austria held a 74.999% interest in
mobilkom austria. Due to certain substantive participating rights held by the
minority shareholder, Telecom Italia Mobile International N.V., Telekom
Austrias investment in mobilkom austria was accounted for under the equity
method. On June 28, 2002, we acquired 100% of Autel Beteiligungs GmbH, which
held a 25.001% stake in mobilkom austria, from Telecom Italia Mobile
International N.V., bringing our total interest in mobilkom austria to 100%.
Consequently, we have consolidated mobilkom austria group effective June 28,
2002. The consolidated statement of operations for the year ending December 31,
2002 reflects Telekom Austrias equity in earnings of mobilkom austria group
through June 28, 2002 and mobilkom austria groups results of operations for
the period June 28, 2002 until December 31, 2002. The consolidated financial statements for the years ended December 31,
1999, 2000 and 2001 have been audited in accordance with auditing standards
generally accepted in the United States of America by KPMG Austria GmbH
Wirtschaftsprüfungs- und Steuerberatungsgesellschaft and Grant
Thornton 
Jonasch & Platzer Wirtschaftsprüfungs- und Steuerberatungsgesellschaft-OHG. The
consolidated financial statements of Telekom Austria for the years ended
December 31, 2002 and 2003 have been audited in accordance with auditing
standards generally accepted in the United States of America by KPMG
Alpen-Treuhand GmbH, Wirtschaftsprüfungs- und Steuerberatungsgesellschaft. The
consolidated financial statements of mobilkom austria group for the years ended
December 31, 2002 and 2003 have been audited in accordance with auditing
standards generally accepted in the United States of America by Grant Thornton
Wirtschaftsprüfungs- und Steuerberatungs-GmbH. Totals in the following tables may differ from the sum of their components
as a result of rounding effects. 2




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Year ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(in EUR millions, except per share information)Consolidated statements of operations:Operating revenues (1) (2) (3)
    
    
    3,969.8
    
    
    
    3,118.1
    
    
    
    2,659.7
    
    
    
    2,814.4
    
    
    
    2,948.2Operating expenses:Materials
    
    
    (297.1
    )
    
    
    (196.4
    )
    
    
    (71.9
    )
    
    
    (108.2
    )
    
    
    (133.7
    )Employee costs, including benefits
and taxes (4)
    
    
    (699.3
    )
    
    
    (600.7
    )
    
    
    (619.1
    )
    
    
    (865.6
    )
    
    
    (645.6
    )Depreciation and amortization
    
    
    (1,133.2
    )
    
    
    (1,016.3
    )
    
    
    (904.1
    )
    
    
    (913.8
    )
    
    
    (864.5
    )Impairment charges
    
    
    (6.8
    )
    
    
    (41.9
    )
    
    
    (145.1
    )
    
    
    (2.1
    )
    
    
    Other operating expenses
    
    
    (1,463.6
    )
    
    
    (1,205.4
    )
    
    
    (1,114.9
    )
    
    
    (1,223.9
    )
    
    
    (1,036.7
    )Total operating expenses
    
    
    (3,600.0
    )
    
    
    (3,060.7
    )
    
    
    (2,855.1
    )
    
    
    (3,113.6
    )
    
    
    (2,680.5
    )Operating income (loss)
    
    
    369.8
    
    
    
    57.4
    
    
    
    (195.4
    )
    
    
    (299.2
    )
    
    
    267.6Other income (expense):Interest income
    
    
    75.2
    
    
    
    88.2
    
    
    
    82.7
    
    
    
    78.6
    
    
    
    66.7Interest expense
    
    
    (231.0
    )
    
    
    (244.6
    )
    
    
    (241.0
    )
    
    
    (239.9
    )
    
    
    (228.1
    )Dividend income
    
    
    0.0
    
    
    
    0.0
    
    
    
    2.2
    
    
    
    1.4
    
    
    
    1.2Equity in earnings of affiliates
    
    
    19.1
    
    
    
    140.5
    
    
    
    195.4
    
    
    
    36.3
    
    
    
    117.5Other, net
    
    
    (0.5
    )
    
    
    2.3
    
    
    
    (44.0
    )
    
    
    (38.2
    )
    
    
    (9.5
    )Income
(loss) before income taxes and
minority interests
    
    
    232.6
    
    
    
    43.8
    
    
    
    (200.1
    )
    
    
    (461.0
    )
    
    
    215.4Income tax benefit (expense)
    
    
    (83.1
    )
    
    
    (26.1
    )
    
    
    94.9
    
    
    
    178.8
    
    
    
    (14.5
    )Minority interests
    
    
    (3.4
    )
    
    
    (4.9
    )
    
    
    0.6
    
    
    
    0.1
    
    
    
    Income before extraordinary items and
cumulative effect of change in
accounting principle
    
    
    146.1
    
    
    
    12.8
    
    
    
    (104.6
    )
    
    
    (282.1
    )
    
    
    200.9Extraordinary loss, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3.5
    )
    
    
    (0.7
    )Cumulative effect of change in accounting
principle
    
    
    (11.9
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    
    134.2
    
    
    
    12.8
    
    
    
    (104.6
    )
    
    
    (285.6
    )
    
    
    200.2Basic and fully diluted earnings (loss) per
share
    
    
    0.27
    
    
    
    0.03
    
    
    
    (0.21
    )
    
    
    (0.57
    )
    
    
    0.40Basic and fully diluted earnings (loss) per share
excluding extraordinary items
    
    
    0.27
    
    
    
    0.03
    
    
    
    (0.21
    )
    
    
    (0.56
    )
    
    
    0.40Basic and fully diluted earnings (loss) per share
excluding cumulative effect of change in
accounting principle
    
    
    0.29
    
    
    
    0.03
    
    
    
    (0.21
    )
    
    
    (0.57
    )
    
    
    0.40
 Year ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(in EUR millions)Consolidated cash flow data:Cash generated from operations
    
    
    1,219.9
    
    
    
    1,171.4
    
    
    
    842.4
    
    
    
    1,007.7
    
    
    
    1,211.7Cash used in investing activities
    
    
    (643.9
    )
    
    
    (1,175.9
    )
    
    
    (453.2
    )
    
    
    (893.7
    )
    
    
    (596.2
    )Cash from (used in) financing activities
    
    
    (406.8
    )
    
    
    1.8
    
    
    
    (380.7
    )
    
    
    (476.5
    )
    
    
    (1,015.1
    )Effect of exchange rate differences
    
    
    5.4
    
    
    
    3.6
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    Net increase (decrease) in
cash and cash equivalents
    
    
    174.6
    
    
    
    0.9
    
    
    
    8.7
    
    
    
    (362.4
    )
    
    
    (399.7
    )
 3




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At December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(in EUR millions)Consolidated balance sheet data:Assets:Current assets
    
    
    1,124.8
    
    
    
    865.2
    
    
    
    839.2
    
    
    
    912.0
    
    
    
    1,422.0Property, plant and equipment, net
    
    
    4,457.7
    
    
    
    5,000.7
    
    
    
    4,591.8
    
    
    
    5,069.5
    
    
    
    5,411.1Intangible assets, net (5)
    
    
    1,309.6
    
    
    
    1,316.6
    
    
    
    80.7
    
    
    
    230.3
    
    
    
    16.5Investments
    
    
    147.2
    
    
    
    171.3
    
    
    
    682.2
    
    
    
    768.6
    
    
    
    684.8Other assets and deferred tax assets
    
    
    857.0
    
    
    
    1,180.5
    
    
    
    1,315.5
    
    
    
    864.3
    
    
    
    693.3Due from related parties (long-term)
    
    
    
    
    
    
    
    
    
    
    218.0
    
    
    
    218.0
    
    
    
    Total assets
    
    
    7,896.3
    
    
    
    8,534.3
    
    
    
    7,727.3
    
    
    
    8,062.7
    
    
    
    8,227.8Liabilities:Current liabilities
    
    
    1,789.7
    
    
    
    2,531.0
    
    
    
    1,680.1
    
    
    
    1,799.4
    
    
    
    1,755.9Long-term debt, net of current portion
    
    
    2,342.3
    
    
    
    2,079.9
    
    
    
    2,005.2
    
    
    
    2,353.9
    
    
    
    2,319.1Lease obligations, net of current portion
    
    
    861.3
    
    
    
    1,076.4
    
    
    
    1,086.9
    
    
    
    799.0
    
    
    
    757.3Employee benefit obligations
    
    
    156.0
    
    
    
    232.5
    
    
    
    378.1
    
    
    
    448.5
    
    
    
    248.5Other liabilities and deferred income taxes
    
    
    107.6
    
    
    
    105.0
    
    
    
    76.6
    
    
    
    58.3
    
    
    
    116.9Total liabilities
    
    
    5,256.9
    
    
    
    6,024.8
    
    
    
    5,226.9
    
    
    
    5,459.1
    
    
    
    5,197.7Stockholders equity
    
    
    2,639.4
    
    
    
    2,509.5
    
    
    
    2,500.4
    
    
    
    2,603.6
    
    
    
    3,030.1Total liabilities and Stockholders equity
    
    
    7,896.3
    
    
    
    8,534.3
    
    
    
    7,727.3
    
    
    
    8,062.7
    
    
    
    8,227.8
 At December 31,Other
data:
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999Wireline (in thousands)Fixed access lines
    
    
    3,010.8
    
    
    
    3,097.3
    
    
    
    3,166.9
    
    
    
    3,269.0
    
    
    
    3,454.2Fixed access channels
    
    
    3,684.2
    
    
    
    3,762.3
    
    
    
    3,806.2
    
    
    
    3,832.9
    
    
    
    3,862.4Internet customers in Austria (6)
    
    
    1,026.6
    
    
    
    846.5
    
    
    
    666.4
    
    
    
    293.4
    
    
    
    106.1Customers Czech On Line
    
    
    279.4
    
    
    
    275.3
    
    
    
    238.2
    
    
    
    188.7
    
    
    
    Wireless customers (in thousands)Austria
    
    
    3,163.2
    
    
    
    3,001.4
    
    
    
    2,849.9
    
    
    
    2,804.3
    
    
    
    2,259.8Croatia
    
    
    1,210.5
    
    
    
    1,097.8
    
    
    
    855.7
    
    
    
    531.4
    
    
    
    155.1Slovenia
    
    
    361.5
    
    
    
    350.0
    
    
    
    269.6
    
    
    
    
    
    
    
    Liechtenstein
    
    
    2.5
    
    
    
    2.0
    
    
    
    1.3
    
    
    
    0.2
    
    
    
    Total
    
    
    4,737.7
    
    
    
    4,451.2
    
    
    
    3,976.5
    
    
    
    3,335.9
    
    
    
    2,414.9Full-time equivalent employees, including
mobilkom austria group (year-end)
    
    
    13,890
    
    
    
    14,951
    
    
    
    16,586
    
    
    
    18,301
    
    
    
    18,645
 4




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(1)
    
    In 2003, the Austrian Supreme Court ruled that no contractual relationship
exists between value added service providers (VASP) and Telekom Austria,
with the contractual relationship being established directly between the
VASP and the customers. We are no longer considered the primary obligor and
ceased reporting revenues on a gross basis beginning on October 1, 2003. Had
the ruling been in effect for all of 2003, 2002 and 2001, revenues and
expenses in the accompanying consolidated statements of operations would
have been lower by EUR 45.9 million EUR 51.2 million and EUR 41.4 million,
respectively.(2)
    
    On June 28, 2002 we acquired the remaining 25.001% of mobilkom austria
from Telecom Italia Mobile International, which also held certain blocking
rights that precluded us from consolidating mobilkom austria group in
prior years. Our consolidated figures now include mobilkom austria groups
results of operations since June 28, 2002 and are therefore not directly
comparable with previous years.(3)
    
    Effective January 1, 2002, the Austrian regulatory authority approved a
change in the way interconnection charges between Austrian alternative
service providers are billed and collected. As a result of the change
Telekom Austria is no longer a party to such transactions. Had the new
regulation been in place during 2001, revenues and operating expenses in
the Wireline segment would have been lower by EUR 257.2 million. This
change had no impact on operating income.(4)
    
    In the Wireline segment in 2003, a one-time charge in connection with the
early retirement of civil servants increased employee costs by EUR 47.3
million. This was partially compensated by the release of accruals for
contractual termination benefits of EUR 26.8 million in 2003. For further
information see note (16) of the accompanying financial statements.(5)
    
    In 2002, net intangible assets increased significantly to EUR 1,316.6
million due to the addition of goodwill, licenses, brand names and
subscriber base relating to the acquisition and consolidation of mobilkom
austria group. For further information see note (8) of the accompanying
financial statements.(6)
    
    The total number of internet customers excludes approximately 53,500 ADSL
subscriptions that were sold to our wholesale customers. 5




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DIVIDENDS The following table sets forth the annual dividends declared and paid per
share based on 500 million shares outstanding with respect to each of the
financial years indicated. Dividends declared and denominated in U.S. dollars
are based on the noon buying rate on December 31, 2003, which translated to EUR
1.00 = USD 1.2597. For the fiscal year
    
    Dividends declared and paid per shareATS
    
    EUR
    
    USD1999
    
    
    3.87
    
    
    
    0.28
    
    
    
    0.352000
    
    
    
    
    
    
    
    
    
    
    2001
    
    
    
    
    
    
    
    
    
    
    2002
    
    
    
    
    
    
    
    
    
    
    
 For fiscal year 1999, Telekom Austria paid an aggregate cash dividend of
EUR 140.5 million in 2000. We did not pay dividends for 2000, 2001 and
2002.Under Austrian law, we may pay dividends only from net income as shown in
the annual financial statements of Telekom Austria AG prepared under Austrian
GAAP. The Management Board and Supervisory Board plan to propose to the
shareholders at the annual general shareholders meeting on June 3, 2004 a
distribution from unappropriated earnings of EUR 0.13 per zero par value share. The payment of future dividends depends on our earnings, financial
condition and other factors, including cash requirements, our future prospects,
taxation, regulations and the pay-out ratios of other European
telecommunications operators. Investors should not assume that any dividend
will actually be paid or make any assumption about the amount which may be paid
in any given year. Our historical pay-out ratio of dividends should not be
considered as indicative of our future dividend pay-out ratio. Any dividends
paid will be subject to Austrian withholding tax. For further information on
Austrian withholding tax, see Item 10  Taxation  Austrian taxation. Dividends will be paid in Euro. Cash dividends payable to holders of ADSs
listed on the New York Stock Exchange will be paid to The Bank of New York,
which will convert the dividends into U.S. dollars, at the rate of exchange
applicable on the date such dividends are paid, for disbursement to such
holders. Cash dividends payable to the holders of shares listed on the Vienna
Stock Exchange will be paid to an Austrian bank  which will be selected and
announced in due time prior to our annual general meeting on
June 3, 2004  as
paying agent, in Euro for disbursement to shareholders. 6




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EXCHANGE RATE INFORMATION Telekom Austria published its consolidated financial statements for 1999
in Austrian Schilling in accordance with Austrian GAAP. These financial
statements were restated into Euro in accordance with U.S. GAAP for purposes of
this annual report. Beginning with fiscal year 2000, Telekom Austria began
publishing its financial statements in Euro in accordance with U.S. GAAP. Effective January 1, 1999, Austria and eleven other member states of the
European Union have adopted the Euro as the single currency in substitution for
their then existing national currencies. On March 1, 2002, the Euro became the
sole legal tender for Austria and the Austrian Schilling was withdrawn from
circulation. Our financial statements and certain other amounts stated in Euro
appearing in this document have been translated from Austrian Schilling at the
official fixed conversion rate of EUR 1.00 = 13.7603 Austrian Schilling. Our shares are quoted in Euro on the Vienna Stock Exchange. Our ADSs are
quoted in U.S. dollars and traded on the New York Stock Exchange. Exchange rate fluctuations between the Euro and U.S. dollar may affect the
U.S. dollar equivalent of the Euro price of our shares on the Vienna Stock
Exchange and, as a result, are likely to affect the market price of the ADSs on
the New York Stock Exchange. In the future we will declare any cash dividends
in Euro and exchange rate fluctuations will affect the U.S. dollar amounts
received by holders of ADSs on conversion of cash dividends on the shares
represented by the ADSs. The following table shows, for the periods indicated, information
concerning the exchange rate between the U.S. dollar and the Euro. These rates
are provided solely for your convenience. We do not represent that the Euro
could be converted into U.S. dollars at these rates or at any other rate. The
table below shows the averages of the relevant exchange rates on the last
business day of each month during the period specified. The high and low
columns show the highest and lowest quotes, respectively, on any business day
during the relevant period. On April 9, 2004, the noon buying rate translated
to EUR 1.00 = USD 1.2102. End of period
    
    High
    
    Low
    
    AverageYear or MonthU.S. dollars per EUR 1.00 (1)1999
    
    
    1.0070
    
    
    
    1.1812
    
    
    
    1.0016
    
    
    
    1.05882000
    
    
    0.9388
    
    
    
    1.0335
    
    
    
    0.8270
    
    
    
    0.92072001
    
    
    0.8901
    
    
    
    0.9535
    
    
    
    0.8370
    
    
    
    0.89092002
    
    
    1.0485
    
    
    
    1.0485
    
    
    
    0.8594
    
    
    
    0.94952003
    
    
    1.2597
    
    
    
    1.2597
    
    
    
    1.0361
    
    
    
    1.1411October 2003
    
    
    1.1609
    
    
    
    1.1833
    
    
    
    1.1596November 2003
    
    
    1.1995
    
    
    
    1.1995
    
    
    
    1.1417December 2003
    
    
    1.2597
    
    
    
    1.2597
    
    
    
    1.19562004January 2004
    
    
    1.2452
    
    
    
    1.2853
    
    
    
    1.2389February 2004
    
    
    1.2441
    
    
    
    1.2848
    
    
    
    1.2426March 2004
    
    
    1.2292
    
    
    
    1.2431
    
    
    
    1.2088April 2004 (through April 9)
    
    
    1.2102
    
    
    
    1.2358
    
    
    
    1.2008
   (1)
    
    Based on the U.S. Federal Reserve Bank noon buying rate for the Euro. The
average exchange rates for 1999, 2000, 2001, 2002, and 2003 are calculated
using the rate on the last business day of each month during the given
period. 7




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RISK FACTORS You should carefully consider the risks described below and other information
in this document. The occurrence of any of the following events could harm
Telekom Austria and lead to a decline in the value of your ordinary shares. Risks relating to our business  We expect continuing competition in the fixed line and mobile communications
markets which may have a negative impact on our revenues and profitability. Several of our existing and potential competitors in each of our business
segments are affiliated with international telecommunications operators, some
of which are incumbents in their own countries of origin, that have substantial
financial resources. In addition, on the basis of the interconnection rates
fixed by the regulatory authority and the availability of access to subscriber
lines, numerous competitors are able to compete with us in our fixed line
business with minimal or modest investments in network infrastructure and with
prices that undercut our tariffs. As a result of liberalization, we have lost market share in the fixed line
and mobile communications services markets and we have reduced our tariffs in
response to increasing downward pressure on tariffs. Intensifying competition
from existing and new operators may result in additional losses of market share
and further tariff reductions. Other factors that may increase competition
include new forms of telecommunications that circumvent conventional tariff
structures as well as licensing schemes and alternative technologies such as
providing wireless access. See Item 4  Business overview. According
to the new European Regulatory Framework the Austrian Telecommunications Act
(implementation on August 19, 2003), requires mobile operators to make mobile
number portability available to customers. There have been ongoing negotiations
between operators since mid-2002 to agree on terms and conditions to provide
that service. As no agreement could be concluded, Hutchison 3G Austria started
regulatory proceedings against a small number of operators in October 2003. As
mobilkom austria was not included in those proceedings, we filed an application
against Hutchison 3G Austria at the end of December 2003, with the objective to
be able to communicate our view regarding mobile number portability to the
National Regulatory Authority. A decision is not expected before May 2004.
Therefore, mobile number portability is not expected to be available for
customers before the end of 2004. From then on, competition is likely to
intensify even more, especially in the market for business customers. In Austria, we will compete with new operators that offer wireless
communications services without maintaining their own networks (known as mobile
virtual network operators) and which therefore incur substantially lower costs
than we do. One of our competitors in the fixed line business, TELE 2, who
entered the mobile communications market in February 2003 as a service provider
reselling mobile communications services of another competitor under its own
brand name, intends to become a Mobile Virtual Network Operator (MVNO), with
its own access number, in the first half of 2004. The Austrian mobile
communications market currently has four GSM operators with UMTS licenses, one
operator holding only a UMTS license and the mentioned service provider. All
UMTS license holders have launched UMTS services in 2003 and therefore the
competition for 3G services is expected to further increase. We started the
commercial launch of UMTS in April 2003. However, until sufficient UMTS
handsets with adequate performance are available for our customers, we will not
strongly promote UMTS services. A further threat for the UMTS business might be
other mobile technologies for data transmission with equal or higher data
transmission capacity such as Wireless Local Area Network (WLAN). The amount
paid for UMTS licenses in Austria was only EUR 103 per capita, as compared to
an average of EUR 630 per capita in other European countries. Although we are
confident that revenues generated from the UMTS technology will justify the
investment in license and network of UMTS, we cannot guarantee that this
business will be profitable in the near future. We expect increased competition in our Croatian market due to the expected
auction of UMTS licenses in 2004. The entry of a third operator may result in
increased pressure on tariffs and the obligation to offer national roaming or
to sell available capacity. Because of the increased competition, the main challenge we face is
maintaining our leadership in the Austrian telecommunications market. If we do
not manage to maintain this leadership, our revenues, profitability and growth
may be adversely affected. 8




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Approximately 89% of our revenues come from the Austrian market. Both, the
Austrian mobile communications and fixed line markets are saturated and highly
competitive and this has led to fierce competition in the mobile communications
market. If this development continues our profitability may decline. Our primary business is the provision of communications services in
Austria. We expect a decline in revenue in the fixed-line market, and lower
growth in revenues for mobile communications in Austria. The number of fixed
lines may further diminish as more customers migrate to mobile communications,
substitute technologies like Voice over IP utilizing broadband internet
access, and alternative fixed network operators. In the mobile communications business we face increasing competition.
Austria has one of the highest penetration rates of mobile communications in
Europe, reaching approximately 89.7% at December 31, 2003. Since the market has
been reaching maturity in terms of customer growth, we are focusing on
retention of the existing customer base leading to increased customer retention
costs. Formerly, competition was based on handset subsidies. Lately our
competitors have started to compete increasingly through lower tariffs
resulting in the offer of mobile voice services for one Euro cent per minute or
free for calls within their respective networks. As customer retention costs
increase and the tariff reductions by our competitors are very aggressive, a
continuation of the low tariffs would have a material adverse effect on our
profitability. We generate only about 11% of our revenues in markets outside Austria and
therefore our success is highly dependent on the Austrian market. However, the
increasing saturation of the Austrian fixed-line and mobile communications
markets may adversely affect our results of operations which might not be
compensated by the profitability of our investments in telecommunications
companies outside Austria. We are limited in our ability to adjust our operating expenses according
to the changing market environment. In recent years we have taken measures in order to cut our costs and
enhance our competitiveness. One of these measures was to reduce our existing
workforce. Currently, 54% of all employees of our group are civil servants who
cannot be dismissed except for cause. In the past we have implemented early
retirement packages for voluntary retirement of our employees. Recent changes
in Austrian law will no longer allow us to implement early retirement packages
in the future. The telecommunications market in which we operate has become
increasingly competitive in terms of prices. If this competitive environment
continues, it will have an impact on our revenues. The restrictions of the
Austrian Career Public Service Regulations Act to further reduce our current
workforce could have a negative impact on our profitability. Our customer tariffs for fixed line services are generally subject to
prior approval by the regulatory authority and we may be forced to decrease our
fixed or mobile interconnection rates. These restrictions may limit our
flexibility in pricing, particularly in bidding for contracts from the public
sector, and may adversely affect our profitability. Changes to our tariff structure are generally subject to prior approval by
the regulatory authority, whereas our competitors are generally free to alter
their prices without any prior approval. As a consequence, our competitors may
be more nimble at setting a pricing structure that exploits changes in the
market, thus increasing their market shares. Our interconnection rates in our
fixed and mobile networks may be lowered by the regulatory authority in 2004,
which may adversely affect our profitability. Our competitors may also be more
successful in bidding for contracts from the public sector which could have an
adverse effect on our results of operations. For further information see Item
4  Regulation and legal framework  Legal framework  Procurement law and
telecommunications act. The extent to which we must share our infrastructure with our competitors
remains to be settled by the implementation of the Telecommunications Act of
2003 through the Austrian regulatory authority and the courts. A regulatory
framework unfavorable to us in any of the markets in which we operate could
cause our revenues and growth to decline. The adoption of new, or modifications to existing laws, regulations,
licenses or policies by the regulatory authorities overseeing the Austrian
telecommunications market or interpretations thereof by the courts, may have a
material adverse impact on our business, financial condition and results of
operations. Some important regulatory issues remain to be settled. These include the
following:  
    
    We do not know the extent to which we will be obliged to share our
infrastructure, including technical facilities and administrative
services, with other operators or the price we may charge for such
sharing. 9




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The new EU regulatory framework has been implemented into national law.
Thus, the principle of neutrality in terms of technology could lead to an
extended regulation of infrastructure and services which have not been
subject to regulation so far such as mobile communications and internet
services. The Telecommunications Act 2003 increases the competencies of
the regulatory authority (see Item 4  Regulation and
Legal Framework  Regulation). In several decisions in 2001, the regulatory authority
decided that we must also allow partial unbundling of our local loop to
other fixed network operators and to internet service providers. We have
appealed these decisions. If we are not successful, the decisions could
significantly affect our profitability and, with respect to access to
internet service providers, the integrity of our network.
    
    We are required to provide other telephone network operators access
to our local network infrastructure at fees determined by the
regulatory authority. These fees are currently subject to several
appeals pending before the Austrian High Courts. The outcome of these
proceedings is uncertain. Should the courts reduce our fees,
particularly if they are reduced retroactively, or if the charges we
have to pay to other networks are raised, our competitive strength may
be damaged and our revenues may decline. In addition, if the regulatory
authority decides to significantly decrease the price for providing
these services, it could affect our competitiveness and decrease our
revenues.
    
    The regulatory authority might request us to submit a resale offer
covering access services to enable all our competitors to bill, among
other things, monthly line rental costs directly to customers. This
would result in a limited access to our customer base and might lead to
a decrease of revenues.
    
    After completion of the market analyses it will be clear, whether
any other of our services will be subject to pre-approval by the
regulatory authority.
    
    At the end of 2003, a proceeding concerning fixed line
interconnection tariffs was initiated containing the major request of
three alternative network operators to decrease the local termination
tariffs for Telekom Austria; separately one of them applied for the
approval of non-reciprocal tariffs by the National Regulatory Authority
in Austria. The risk relating to the insolvency of major customers or international
suppliers may have an impact on our revenues or profitability. In the past some of our large wholesale customers faced severe liquidity
constraints. Insolvencies of these customers might expose us to risks in
connection with settlement of our accounts receivables. Insolvencies of major
international suppliers of bandwidth might have an adverse effect on the
availability of the connectivity we need to provide services to our customers. Technological change could increase competition, render existing
technologies obsolete or require us to make substantial additional investments. Our services are technology-intensive, and the development of new
technologies could render our services non-competitive and require us to
write-down the book-values of investments we have made in existing
technologies. We are already making substantial investments, and may have to
make substantial additional investments in new technologies in order to remain
competitive. New technologies that we choose to develop or acquire, however,
may not prove to be successful. In addition, we may not receive the regulatory
or intellectual property licenses needed to provide services based on new
technologies in Austria or abroad. As a result, we might lose customers, fail
to attract new customers or incur substantial costs to maintain our customer
base. We are in the process of evaluating the details and financial implications
of a migration to next generation networks (NGN) with particular consideration
of existing investments. The costs relating to the build-out of NGN and its
implications on our business are expected to be substantial. The time frame for
its development will depend on various factors including customer needs and
competition. At this early stage, however, it is too early to quantify the
capital expenditure requirements or to give a time horizon for its
implementation. As a result this might lead to substantial investments in the
future and might impair the value of existing investments which could have a
negative impact on our profitability. The value of our international investments in telecommunications companies
outside Austria, particularly in Central and Southeastern Europe, may be
adversely affected by political, economic and legal developments in these
countries. We have made significant equity investments in telecommunications
operators in the Czech Republic, Slovenia and Croatia and may make further
investments in other markets with significant growth potential. 10




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These countries have political, economic, and legal systems that are still
in the process of transformation. Political or economic disruption or changes
in laws and their application may harm the companies in which we have invested.
This may impair the value of these investments. Actual or perceived health risks or other problems relating to mobile
handsets or transmission masts could lead to litigation or decreased mobile
communications usage. Concern has been expressed that the electromagnetic signals from mobile
handsets and transmission masts, which serve as antennae for transmitting radio
signals, may pose health risks and interfere with the operation of electronic
equipment. Actual or perceived risks of transmitters and receivers, and related
publicity, litigation or legislative actions could reduce the growth rate of
our mobile communications business, customer base, or average usage per
customer. Environmental objections may also impair our ability to augment our
infrastructure, including primarily our mobile network, and reduce the
willingness of contract partners to renew site contracts for mobile sites in
the upcoming years. Risks relating to our shares Our major shareholder, ÖIAG, continues to exercise significant influence
over our strategic direction and major corporate actions. Österreichische Industrieholding AG(ÖIAG) continues to hold a controlling
interest in our shares. This level of shareholding gives ÖIAG significant
rights to determine our strategic direction and to determine what matters are
brought to shareholders for a vote. The issues that may be influenced by ÖIAG
include any merger, any acquisition or divestiture of material assets, approval
of the annual financial statements, declaration of dividends, capital
increases, and the election and removal of members of our Supervisory Board.
The interests of ÖIAG in deciding these matters and the factors ÖIAG considers
in exercising its votes could be different from other shareholders interests.
This could have the effect of delaying, or preventing a change of control, or a
merger, consolidation, takeover or other business combination that shareholders
might otherwise approve. For further information see
Item 7  Relationship
with the Republic of Austria and ÖIAG. The future sale of a substantial number of our shares or ADSs could
negatively affect our share price. We and ÖIAG have agreed with investment banks that acted as joint book
runners in connection with the sale of Telecom Italia Internationals stake in
us in January 2004 that each party will not issue, sell or pledge shares of
Telekom Austria until May 31, 2004 without prior written consent of the
investment banks. The Austrian government has declared to privatize us entirely
by the end of the legislative period in 2006 (see Item 10  Memorandum and
Articles of Association  Takeover rules. The market price of our shares could fall as a result of sales of
substantial amounts of shares in the public market, or the perception that a
large number of shares is available for sale. ÖIAG will be free to sell the shares they own in us to another investor,
which could lead to a change in control of Telekom Austria. In 2003, the Austrian government announced its intention to sell its 47.2%
ownership in our share capital which is currently held through ÖIAG by the end
of the legislative period in 2006. In connection with Telecom Italia
Internationals sale of our shares in January 2004, ÖIAG has agreed not to sell
shares in Telekom Austria before May 31, 2004. As of June 1, 2004 ÖIAG will be
free to sell its shares in us, which could lead to a change in control of
Telekom Austria. A change of control as defined in the Austrian takeover Act would require
the investor to make a compulsory offer to our remaining shareholder. A change
of control followed by the compulsory offer would therefore be likely to reduce
the liquidity of our shares in the public markets and could eventually lead to
their delisting from the Vienna and New York Stock Exchanges. See
Item 10 
Memorandum and Articles of Association  Takeover rules. Currency fluctuations may adversely affect the trading prices of our
common stock and ADSs and the value of any distributions we make. The value of the Euro against the U.S. dollar has appreciated
significantly since January 2002. Before that point the value of the Euro
against the U.S. dollar had generally declined and had fluctuated
significantly. 11




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##### Table of Contents



Because our common stock is traded in Euro and our ADSs are traded in U.S.
dollars, fluctuations in the exchange rate between the two currencies may
affect the relative value of your investment. In addition, should we make any
distribution on our common stock in Euro, the depositary will convert such
distributions to U.S. dollars. If exchange rates fluctuate before the
depositary converts the currencies, shareholders may lose some of the value of
the distribution. Shareholders rights are governed by Austrian law and differ in some
respects from the rights of shareholders under U.S. law. We are a stock corporation organized under the laws of the Republic of
Austria. The rights of holders of our ordinary shares, and, therefore, many of
the rights of our ADS holders are governed by our Articles of Association and
by Austrian law and the laws of the European Union. These rights differ in some
respects from the rights of shareholders in typical U.S. corporations. In
particular, Austrian law significantly limits the circumstances under which
shareholders of Austrian corporations may bring derivative actions. In
addition, it may be difficult for shareholders to prevail in a claim against us
under, or to enforce liabilities predicated upon, U.S. securities laws. It may notbepossible for shareholders to enforce judgments of U.S.
courts against members of our Supervisory Board or Management Board. Telekom Austria is an Austrian stock corporation. The members of our
Supervisory Board and Management Board are non-residents of the United States.
In addition, our assets and the assets of members of our Supervisory Board and
Management Board are located in whole or in substantial part outside the United
States. As a result, it may not be possible for shareholders to enforce against
us or the members of our Supervisory Board and Management Board judgments
obtained in United States courts based on the civil liability provisions of the
securities laws of the United States. In addition, awards of punitive damages
and judgments rendered in the United States or elsewhere may be unenforceable
in Austria. 12




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##### Table of Contents



Item 4. Information on the Company Telekom Austria AG is a stock corporation (Aktiengesellschaft) organized
under the laws of the Republic of Austria. It is the parent company of the
consolidated Telekom Austria Group (Telekom Austria) providing a wide range
of advanced wireline and wireless communications services. The corporate headquarters and the principal executive offices of Telekom
Austria were transferred to Lassallestraße 9, 1020 Vienna, Austria from
Schwarzenbergplatz 3, 1010 Vienna, Austria on June 30, 2003. The telephone
number is +43 (0)590591 0 and our website address is www.telekom.at. Reference
to our website does not incorporate the information contained on the website
into this annual report. Our agent for service of process in the United States is CT Corporation
System, 111 Eighth Avenue, New York, New York, 10011. 
 HISTORY AND DEVELOPMENT OF THE COMPANY Before the liberalization of the Austrian telecommunications market in
1998, the Post- und Telegraphenverwaltung, or PTV, and its successor Post und
Telekom Austria AG, or PTA, had the exclusive right to provide
telecommunications services in Austria. PTV was an integrated part of the
federal property administration of the Republic of Austria and a department of
the Federal Ministry of Science and Transportation. As a consequence of the
liberalization of the telecommunications sector, PTV was transformed into a
private stock corporation. The Austrian Post Restructuring Act
(Poststrukturgesetz) of 1996 created Post und Telekom Austria AGas the
successor to PTV to continue its activities in telecommunications, postal
services, and public transportation. PTA was created on May 1, 1996 as a
wholly-owned subsidiary of Post- und Telekom Beteiligungsgesellschaft mbH, or
PTBG, a holding company wholly-owned by the Republic of Austria, which
exercised its ownership through the Federal Minister of Finance. In October 1996, Post und Telekom Austria AGtransferred its mobile
communications business to its wholly-owned subsidiary mobilkom austria. In
April 1997, Post und Telekom Austria AGsold 25% plus one share of mobilkom
austria to STET Mobile Holding N.V., at the time a joint subsidiary of STET
International S.p.A., Telecom Italia Mobile S.p.A. and Telecom Italia. In July 1998, Post und Telekom Austria AGs telecommunications business
became Telekom Austria AG owned by Post und Telekom Austria AG. Only a few
months later in October 1998, Post und Telekom Austria AGsold 25.00007% of
Telekom Austria to STET International Netherlands N.V., a joint subsidiary of
STET International and Telecom Italia. In May 2000, the Austrian parliament passed the ÖIAG Act 2000 (ÖIAG-Gesetz
2000), under which PTBG and Post und Telekom Austria AG, the latter owning
74.99993% of Telekom Austria, merged with Österreichische Industrieholding AG
(ÖIAG), an industrial holding company wholly owned by the Republic of Austria.
As a result, ÖIAG held 74.99993% of the share capital of Telekom Austria, and
Telecom Italia indirectly held the remainder. In November 2000, ÖIAG, sold a portion of its shareholding in Telekom
Austria as part of the initial public offering in Austria and the United States
of America and as a private placement elsewhere. As a result, 22.4% of our
share capital was held by widely dispersed retail and institutional investors.
After the offering, ÖIAG retained 47.8% (currently 47.2%) of our share capital.
Telecom Italia S.p.A., through a subsidiary, owned the remaining 29.8% and
disposed of its entire stake in Telekom Austria in two transactions. On
November 4, 2002 Telecom Italia sold 75 million shares in a private placement,
reducing its level of ownership to 14.8%. On January 21, 2004 Telecom Italia
sold its residual shareholding, corresponding to 73.9 million shares or 14. 8%
of Telekom Austrias share capital, in a private placement to institutional
investors. In 2002, we decided to reintegrate some of our main subsidiaries into
Telekom Austria. On October 1, 2002, we merged with our wholly owned
subsidiaries Datakom Austria GmbH, Jet2Web Internet Services GmbH and Jet2Web
Network Services GmbH and the wholly owned subsidiary of Datakom Austria GmbH,
Datakom International Solutions GmbH, effective as of December 31, 2001. We
believe that these mergers helped to strengthen our market position by
establishing a customer-focused organization of our Wireline segment,
comprising voice telephony, data communications and internet. 13




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##### Table of Contents



Change in mobilkom austrias corporate form and ownership In March 2001, in order to realize a number of benefits, including an
increase in Telekom Austrias liquidity and favorable tax treatment, we
converted mobilkom austria AG into a limited partnership called mobilkom
austria AG & Co KG. A newly formed mobilkom austria AG was created to act as
general partner of mobilkom austria AG & Co KG. Prior to June 28, 2002, Telekom Austria held 75% minus one share of common
stock interest in mobilkom austria AG and a 74.999% interest in mobilkom
austria AG & Co KG. On June 28, 2002, we acquired 100% of Autel Beteiligungs
GmbH, which held 25% plus one share of common stock interest in mobilkom
austria AG and 25.001% stake in mobilkom austria AG & Co KG, from Telecom
Italia Mobile International N.V. (the successor of STET Mobile Holding N.V.),
bringing our total interest in mobilkom austria to 100%. Change in Telekom Austria AGs ownership On June 28, 2002, Telecom Italia and ÖIAG agreed upon a structure of
phased exit of both parties and entered into a Share Transfer Restriction
Agreement. Pursuant to the Share Transfer Restriction Agreement on November 8,
2002 Telecom Italia sold 75 million shares in a private placement to
institutional investors in the United States of America (qualified
institutional buyers) as well as to professional investors in Austria and
outside the Unites States of America under Regulation S of the U.S. Securities
Act of 1933. This transaction decreased the stake of Telecom Italia
International N.V. (TII), a subsidiary of Telecom Italia S.p.A., in Telekom
Austria AG to 14.8%. As a result of the termination of the syndicate agreement
between ÖIAG and Telecom Italia, both of Telecom Italias representatives have
resigned from Telekom Austrias Supervisory Board. On January 21, 2004 TII sold its remaining stake of 73.9 million Telekom
Austria shares in a private placement to institutional buyers. As a result of
this transaction the agreements between Telecom Italia and ÖIAG that governed
the phased exit terminated. 14




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##### Table of Contents



BUSINESS OVERVIEW In 2003 we started to report our business in the following three segments:  
    
    Wireline (merging the previous fixed line, data communications, and internet services segments);
    
    Wireless (renaming our previous mobile communications segment); and
    
    Other activities (covering internal financial services). We are the market leader in Austria in both business segments, Wireline
and Wireless. On May 21, 2002, our Supervisory Board approved the reintegration and
merger of Datakom Austria GmbH, Datakom International Solutions GmbH, Jet2Web
Internet Services GmbH and Jet2Web Network Services GmbH into Telekom Austria.
On October 1, 2002 these companies have been incorporated into Telekom Austria
with effect from December 31, 2001. As of January 1, 2003 we finalized the
reorganization of our operations into two distinct operating segments,
Wireline, and Wireless, and a third segment Other activities which includes
primarily various centralized financial services that are provided by our
subsidiary Telekom Finanzmanagement GmbH to both business segments, Wireline
and Wireless. The two business segments also conduct business with each other
which is accounted for in the form of eliminations. In order to give
shareholders a clear view of our external performance as a company, we
separately disclose these internal transactions when presenting our results. We have started reporting according to the new segments commencing with
the first quarter of 2003. Strategy Telekom Austria applies different strategies for the two business segments
Wireline and Wireless. Different strategies and independent structures for the
two segments are the basis for the success of our overall goal  to
substantially strengthen the corporate value. The coordination of strategic
issues between the business segments is the responsibility of the Management
Board of Telekom Austria AG. In 2003, the major accomplishment of the Wireline segment has been the
establishment of two strong marketing organizations to address the wholesale
business and the retail business. In 2004, the Wireline segment will continue its efforts to reduce
operational expenditures by optimizing both organizational and technical
processes. We intensify our efforts to increase our revenues in the fields of
internet, broadband and data products. The Wireless segment, consisting mainly of mobilkom austria in Austria,
VIPnet in Croatia, Si.mobil in Slovenia and mobilkom [liechtenstein] in
Liechtenstein, has adapted its strategy to the local needs of its respective
country of operation. All companies are the leading or second strongest
provider in their markets. Each of the subsidiaries of the Wireless segment
independently seeks to improve the process of its customer relationship
management and to maximize the benefits of mobilkom austrias partnership with
Vodafone. In 2003, we proved again our leadership in innovation and enhanced
our international reputation with the launch of the first national UMTS service
in Europe and the launch of one of the first European Enhanced Data Services
for GSM Evolution (EDGE) networks by Si.mobil. A close cooperation among all Wireless companies at all levels enables us
to generate synergies and therefore retain a lean organizational structure.
International partnerships such as the cooperation with Vodafone, including
visitor roaming agreements and joint product developments, will further
strengthen our ability to offer our customers state-of-the-art technologies. We
will further investigate possible acquisitions based on their ability to fit
into our overall strategy. 15




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##### Table of Contents



Overview of Telekom Austrias revenues Our operating revenues are derived principally from fixed line
communications services, which consist primarily of switched voice telephony
services, and mobile communications services. The growth in mobile
communications and internet services, including revenues from subsidiaries
outside of Austria has offset the decline in fixed line services. The following
table shows our operating revenues for each of our reporting segments for the
years 2001 to 2003. On June 28, 2002 we acquired Telecom Italia Mobile Internationals stake
in mobilkom austria. As a result of the acquisition, we gained full strategic
and operating control of our mobile communications business. Thus, our
consolidated statement of operations for the fiscal year ending 2002 reflects
our equity in earnings of mobilkom austria group through June 28, 2002, and
consolidates mobilkom austria groups results of operations for the period from
June 28, 2002 until December 31, 2002. Our consolidated figures are therefore not directly comparable with
previous years. Furthermore, although we were unable to consolidate mobilkom
austria group in prior years, we have always managed the business of mobilkom
austria group. To facilitate a discussion of results on a comparable basis, we
are providing supplemental total managed data below. The total managed data
shown in this table include 100% of mobilkom austria groups financial
statements for all periods presented. In 2003 total managed and total
consolidated figures are identical. For a discussion of our operating revenues
and more details, see also Item 5  Results of operations. 2003
    
    2002
    
    2001(in EUR millions)Operating revenues:Wireline
    
    
    2,197.7
    
    
    
    2,260.0
    
    
    
    2,886.4Wireless
    
    
    2,030.2
    
    
    
    1,002.5
    
    
    
    Other activities & Eliminations
    
    
    (258.1
    )
    
    
    (144.4
    )
    
    
    (226.7
    )Consolidated operating revenues
    
    
    3,969.8
    
    
    
    3,118.1
    
    
    
    2,659.7Wireless  prior to consolidation
    
    
    
    
    
    
    906.9
    
    
    
    1,713.2Intersegmental eliminations
    
    
    
    
    
    
    (116.8
    )
    
    
    (429.4
    )Total managed operating revenues
    
    
    3,969.8
    
    
    
    3,908.2
    
    
    
    3,943.5
 Approximately 11% of Telekom Austrias total operating revenues in 2003
are derived from activities outside of Austria, mainly in the mobile
communications services. Austria has demonstrated a strong demand for communications services, with
a mobile user penetration rate of 89.7% at December 31, 2003, one of the
highest in Europe. Internet user penetration in Austria was approximately 55%
at the same date. 16




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Wireline In 2003, our Wireline segment generated revenues of EUR 2,197.7 million.
Switched voice telephony services in particular continue to be our most
significant revenue contributor, representing approximately 46.2% of total
Wireline revenues in 2003. Approximately 7.6% are internal revenues, generated
from the Wireless segment. The Wireline segment replaces three segments
reported in 2002: fixed-line services, data communications services and
internet services. Market position We are the leading provider of Wireline telecommunications services in
Austria. In 2003, we were able to retain our market position in the Wireline
segment. At December 31, 2003, we had a market share of 52.9% of voice
telephony, excluding internet dial-up, carried over fixed network based on
traffic volume in comparison to 52.6% end of 2002. Due to a decrease of dial-up
minutes our market share for voice telephony including internet dial-up traffic
remained unchanged at a level of 55.3% in 2003 in comparison to 2002. We
serviced 3.0 million access lines in Austria, of which 455,000 operate on our
Integrated Services Digital Networks (ISDN). ISDN networks allow simultaneous,
fully digital transmission of voice and data at higher speed than over normal
access lines. Our network infrastructure covers all of Austria and is fully
digital. We are the overall market leader in data communications and IT-solutions
in the Austrian telecommunications market. In particular, we believe that we
are the market leader in our core service areas of switched and routed data
networks. Although the weak economic environment negatively impacted the
Austrian data communications market, we managed to stabilize our revenues. In
order to provide our customers one-stop-solutions and to stabilize our revenues
we extended our business into a wide range of IT-services supplementing our
provision of data communication services, which we market as network centric
IT services. With approximately 1,026,600 internet customers we are the largest
internet service provider in Austria in terms of customers. We had a 42% share
of the residential internet market in the fourth quarter of 2003 (including 2%
contributed by mobilkom austrias mobile internet customers) up from 38% in the
fourth quarter of 2002. According to the AIM Austrian Internet Monitor survey,
Austria had an internet user penetration rate of 55%, up from 50% in the fourth
quarter of 2002 based on a population of 6.8 million persons aged 14 and older
which means that in total 3.7 million Austrians use the internet. At the same
time, the number of online-shoppers has been growing. In the fourth quarter of
2003, 50% of all internet users were shopping online according to the AIM
Austrian Internet Monitor survey. We are also the leading provider of wholesale fixed line services in
Austria. In 1999, we were one of the first incumbent telecommunications
companies in Europe to introduce Asymmetrical Digital Subscriber Lines (ADSL)
services. ADSL is one of the xDSL technologies (all types of digital subscriber
line technologies via copper lines) that permit the transmission of data at
very high speeds using a standard copper access line. Primary services Wireline is our largest business segment and includes:  
    
    Switched voice telephony;
    
    Pay phones and value-added services (VAS);
    
    Data and IT-solutions;
    
    Internet access & media;
    
    Wholesale voice & internet;
    
    Wholesale data; and
    
    Other (customer premises equipment and directory services). 17




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Switched voice telephony Services We provide traditional telephone line access, also called Public Switched
Telephone Network access (PSTN), and ISDN basic and multi access. Unlike a PSTN
telephone line which offers a single access channel, an ISDN basic line
provides two channels and an ISDN multi-line provides 30 channels which can be
used for simultaneous voice and data transmission at higher speeds. We are
required by law to grant other operators access to our subscriber lines, also
called the local loop. Under the Telecommunications Act 2003 we are required to
act as the only universal service provider until December 31, 2004. We offer a variety of calling services to residential and business
customers throughout Austria. These services include local, long distance,
fixed-to-mobile and internet dial-up at different tariffs. We provide
international fixed line voice services to destinations worldwide. We also
offer a range of call management services comprising digital voicemail, call
waiting, call forwarding, three-way conference calls and caller identification. Access lines The following table shows selected data relating to our PSTN and ISDN
lines for the periods indicated. The figures exclude pay phones, but include
our internal lines and approximately 247,800 lines for qualifying low income
persons at December 31, 2003. The service for low income persons includes free
monthly rental and one hour of free local traffic per month. We receive
reimbursement from the government for each of these lines. For further
information see  Regulation and legal framework  Major regulatory decisions
affecting Telekom Austria. Each PSTN line includes one access channel, each
basic ISDN line includes two access channels and each multi ISDN line includes
30 access channels. At December 31,2003
    
    2002
    
    2001(in thousands)Number of fixed lines:PSTN access lines
    
    
    2,555.8
    
    
    
    2,659.1
    
    
    
    2,759.8Basic ISDN access lines
    
    
    447.2
    
    
    
    430.1
    
    
    
    398.7Multi ISDN access lines
    
    
    7.8
    
    
    
    8.1
    
    
    
    8.3Total access lines
    
    
    3,010.8
    
    
    
    3,097.3
    
    
    
    3,166.9Total access channels
    
    
    3,684.2
    
    
    
    3,762.3
    
    
    
    3,806.2
 To date, the major portion of the demand for our ISDN lines has come from
business customers. The number of our ISDN lines increased from approximately
438,200 at December 31, 2002, to approximately 455,000 at December 31, 2003,
representing an increase of 3.8%. The decline in the number of our PSTN lines
is primarily due to increased migration to mobile networks and substitution by
ISDN lines. Traffic volume The following table shows selected information regarding our national
fixed line traffic for the periods indicated. It includes all minutes of tariff
packages that are generally charged by the minute, as well as free minutes at
certain times of the week. Year ended December 31,2003
    
    2002
    
    2001(in millions of minutes) (1)Traffic minutes:National (local + national long distance)
    
    
    4,485
    
    
    
    4,607
    
    
    
    5,158Fixed-to-mobile
    
    
    855
    
    
    
    826
    
    
    
    830International
    
    
    484
    
    
    
    472
    
    
    
    476Total voice minutes
    
    
    5,824
    
    
    
    5,905
    
    
    
    6,464
  (1)
    
    All amounts exclude traffic minutes that were not generated from our
customers such as interconnection traffic that originated in networks of
other providers or payphone traffic. 18




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The overall mix of our voice traffic continued to change during 2003,
reflecting an increasingly competitive environment. In 2003, the decrease in
voice traffic resulted from lower national traffic minutes due to increased
migration of voice traffic to mobile networks. In 2003, our customers generated 484 million minutes of outgoing
international traffic through our fixed line network, compared to 472 million
minutes in 2002 and 476 million minutes in 2001. This resulted in an increase
of 2.5% in 2003 compared to a decrease of 0.9% in 2002. Our principal outgoing
international traffic routes are to Germany, Switzerland and Italy and
accounted for approximately 53.7% of our total outgoing international traffic
during 2003. Tariffs In 2001, we introduced a pay-per-second tariff scheme, the so-called
TikTak tariffs, which is adapted to our customers calling patterns. As a
result, we managed to increase our voice market share (excluding internet
dial-up) to 52.9% at December 31, 2003, up from 52.6% at December 31, 2002. At
the end of 2003, the TikTak tariff scheme accounted for 21.4% of our traffic
volume. At December 31, 2003, more than 1.2 million customers had opted for one
of the TikTak tariff packages. The table below shows the trend of our average tariffs. Due to increased
marketing efforts and growing competition, our average tariffs fell in all
categories in comparison to 2002. The total average tariff for voice services
decreased by 3.7% in comparison to the prior year. The average tariffs are
calculated by dividing the revenues in each category by the total minutes as
reported in the table on traffic minutes. Year ended December 31,2003
    
    2002
    
    2001Average tariffs:National (local + national long distance)
    
    
    0.044
    
    
    
    0.048
    
    
    
    0.057Fixed-to-mobile
    
    
    0.184
    
    
    
    0.189
    
    
    
    0.201International
    
    
    0.196
    
    
    
    0.213
    
    
    
    0.244Average voice tariff
    
    
    0.078
    
    
    
    0.081
    
    
    
    0.088
 Besides the TikTak tariffs, we still offer a Standard Tariff which is
billed based on pulse. In September 2003, we discontinued our Minimum Tariff, a tariff option for
low usage customers. Existing customers of the Minimum Tariff were transferred
to the Standard Tariff. Our former Minimum Tariff offered a low monthly fee in
combination with higher rates on a per minute basis. Pre-selection customers
were able to take advantage of this offer by choosing an alternative operator
providing lower rates on a per minute basis. The monthly fee element of the
Minimum Tariff did not cover our costs for the network that we provided to an
increasing number of pre-selection customers. Therefore we filed an application
for discontinuation of our Minimum tariff which was approved by the regulatory
authority in September 2003. Pay phones and value-added services (VAS) Public pay phone services We are the principal provider of public pay phones in Austria and operate
approximately 22,600 pay phones and about 100 public multimedia terminals
across Austria. Multimedia terminals provide access to internet, e-mail, video
telephony and various other multimedia services. At December 31, 2003, 38.5% of
our pay phones were prepaid-card operated. The number of pay phones was reduced
by 5.0%. The roll out of public multimedia terminals, primarily in premium
locations, started in 2003. Tariffs for pay phones are separated from fixed voice tariffs. Therefore,
tariff reductions for fixed line calls did not impact pay phone revenues. 19




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Value-added services Our current portfolio of value-added services includes:  
    
    toll-free services, which enable a user to call a telephone number free of charge;
    
    shared cost service, which allows callers and call recipients to share call charges;
    
    premium rate services, which charge the caller a higher than
standard telephone rate in exchange for services provided, a portion of
which is passed on to the information provider called by the customer;
    
    voice virtual private network (VPN); VPN are network services that
form a virtual network designed for the exclusive use of a corporate or
governmental entity using the infrastructure of one or more carriers;
and
    
    calling cards. In 2003 the demand for toll-free services, especially for customer service
hotlines, has increased due to stronger competition and higher demands for
professional customer services. Premium rate services allow our business
customers to sell their products and services directly over the telephone in
order to reduce sales costs and meet their customers needs. We expect to
increase market share in the area of premium-rate, free-phone and shared cost
services due to further product innovations and variations launched in 2003. Tariffs We adhere to the regulated tariffs for toll-free numbers, shared cost and
premium rate services. Telekom Austrias prepaid calling cards allow customers
to make calls from both fixed-line and mobile telephones from Austria to about
200 countries and vice versa from about 40 countries to Austria at various
prepaid price models. Data and IT-solutions Data and IT-solutions encompasses most business activities of the former
Datakom Austria GmbH, which was reintegrated in 2002 enabling us to offer
customers a full range of integrated services, bundling data, internet and IT
services into customized solutions. Services We offer a wide range of national and international data communications and IT-solutions, including:  
    
    Leased lines and related services;
    
    Switched data services; Corporate network services;
    
    IP-MPLS services (multi-protocol label switching technology based on the internet protocol standard)
    
    Data value-added services;
    
    IT-solution services; and
    
    Business applications. As we are Austrias leader in the leased lines market, the regulatory
authority requires us to give other operators access to our leased line
network. Leased lines and connected services We are the principal provider of national and international leased lines
in Austria and operate a centrally managed national leased line network. Leased
lines are fixed point-to-point connections between locations and
are mainly used for high volume data transmission. Our leased lines are
usually marketed in combination with a service package such as security and
network management. These packages are used by customers to establish, operate
and extend their own networks. 20




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Our leased line customers pay an initial installation charge and a
recurring fee based on the type, length and capacity of the leased line.
However, in recent years, the recurring fees have declined significantly. We
expect that competition will continue to pressure leased line prices.
Nonetheless, we expect demand for leased lines and connected services to
continue to increase as telecommunications and internet service providers lease
additional capacity to establish new, or extend existing, networks. Data services based on SDH Technology.Our Datastream/SDH network provides
cost-effective broadband services for business customers requiring higher and
more flexible levels of bandwidth. Datastream/SDH is an internationally
recognized high speed digital transmission and switching device that permits
integrated voice, data and multimedia communications, which we now market as
Nx64 Service. Switched data services We offer a range of data services on our switched network, including
packet switched, frame relay and ATM services. Packet-switched services.We provide packet-switched services on our
public switched data network. These services allow data communications for a
range of applications, such as database searches, electronic funds transfers,
and e-mail. We use the X.25 protocol, which is a worldwide standard for
transmitting data using packet-switched networks. Although traffic has grown in
recent years, we expect that customers now using packet-switched services will
increasingly migrate to frame relay or IP (internet protocol) -based services.
The number of our service ports connected to our packet-switched service
increased by 3.2% to 63,900 at the end of 2003 from 61.900 at the end of 2002. In 1999, we introduced a new product called Datacash, a solution which
enables cashless payment systems to meet the increasing demand for electronic
payment. In 2001, we introduced aircash, the wireless equivalent to Datacash.
Aircash is a joint product of our Wireline and Wireless segments. Frame relay services.Frame relay is a high speed open protocol that is
more efficient than X.25 packet-switching and is well suited to data-intensive
applications, such as connecting local area networks. Our frame relay service
is a cost-effective alternative to leased lines for some of our business
customers. Instead of leasing high capacity lines in order to accommodate
occasional or intermittent high data volumes, customers using frame relay pay
for sufficient capacity to satisfy their average requirements. This capacity
can be supplemented with a guaranteed additional bandwidth level to accommodate
periods of more intense usage. Our frame relay service is integrated with the frame relay networks of,
and services provided by, other international carriers. This enables us to
provide integrated international services. The number of ports on our frame relay platform was reduced since we
started to move customers to our new IP-based platform. The number of frame
relay service ports declined by 11.6% to 3,800 at the end of 2003 from 4,300 at
the end of 2002. ATM (asynchronous transfer mode) services.ATM is a high-performance,
cell-oriented switching and multiplexing technology that utilizes fixed-length
packets to carry different types of traffic. It offers standardized quality
levels and flexible bandwidth connections in order to accommodate varying
application requirements. We have developed products to counteract system
failure and increase resilience. Thus, we are able to back up our customers
networks in case of system break-downs. The number of ATM ports increased by
59.9% to 4,316 in 2003 from 2,699 in 2002. Corporate network services We offer a wide range of corporate network services, including planning,
installation, network management, and maintenance of corporate-wide
communications networks. These services include:  
    
    Corporate network LAN solutions. Local-Area Networks (LAN) are
computer networks that are typically confined to a single or a few
buildings.
    
    Corporate network WAN solutions. Wide-Area Networks (WAN) are
computer networks that consist of two or more local-area networks
(LANs) and provide coverage of larger geographical areas. Our WAN
solutions provide fully designed and managed WAN network infrastructure
to business customers.
    
    Network Management Solutions provide advanced functionalities for
customers to manage and customize their computer networks. 21




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##### Table of Contents




    
    International Corporate & Partner Services in cooperation with
international partners provides customers global access to various
network services like frame relay, ATM, IP services and corporate
network services.
    
    Voice over IP. This technology transmits voice over the internet
protocol. We offer corporate customers the integration of real-time
voice communications into corporate data networks including PABX
functionality (private automatic branch exchange). Corporate network customers pay a flat rate for services, such as network
management, depending on the level of service selected in the service level
agreement. We expect that the demand for corporate network services will continue to
increase as businesses increase internal efficiency and knowledge management,
as well as to provide products and services to customers more quickly and
conveniently. We also expect to provide corporate network services bundled with
IT solutions and business applications and utilize additional synergies. IP-MPLS services (multi-protocol label switching technology based on the
internet protocol standard) We were the first provider in Austria with a standalone business IP
backbone, based on multi-protocol label switching technology (MPLS) with
different classes of service features. Standalone means that we operate our
customer VPNs (virtual private networks) on our network rather than on a public
internet platform, which is important for security and performance reasons.
MPLS is a technology to increase the performance of a routed network. In a
routed network devices called routers determine the best path for forwarding
packets of data using common protocols to communicate with each other and
configure the best route between any two hosts. Each customer application can
be assigned to one of five classes of service, each providing different
performance levels. This business IP backbone is the basis network for our
business IP products and solutions. Data value-added services Data value-added services primarily represent electronic data interchange
services of legal documents (Elektronischer Rechtsverkehr). This is a secure
on-line system operated for the Austrian Ministry of Justice in cooperation
with Austrian bar associations which enables customers to file legal documents
electronically with the Austrian courts. We also provide a service called the
European Business Register (Europäisches Firmenbuch). This service provides
access to commercial register databases in 11 European countries and allows
companies to find information about other companies. In the medical sector, we
offer a special network used for the transmission and management of patient
data to and from medical institutions, called DaMe. Through
our co-operation with A-Trust, in which we hold a 19.9 % stake, we
provide a digital signature product allowing secure digital signatures to be
used on-line, thereby enabling the secure processing of transactions and
payments over the internet. The product is used in combination with our
e-business services. IT-solution services IT-solution
services  a new business line of Telekom Austria  deals with
a wide range of IT-services supplementing our provision of data communications
services which we market as network centric IT services and generates
additional value for our customers beyond traditional data services. The
service offering ranges from consulting to design and implementation of
customer specific IT-solutions. These solutions are designed for outsourcing
customers IT infrastructures to external service providers, in the way that
analogous to customers needs several IT services modules can be flexibly and
efficiently combined to a homogenous IT-solution. Moreover, Telekom Austria is
responsible for the continuous surveillance, end-to-end management and
maintenance of IT services, which ensures the ongoing success of customers
business transactions. IT-solution services mainly include 5 different service definitions:  
    
    IT infrastructure services  launched in 2003
, centrally provide
the basic data center infrastructure (housing services) as well as the
disposition of local services at the customer site (desktop services).
    
    Managed IT services, available since mid-2003, provide housing
(providing accommodation of IT equipment) and hosting services
(providing hardware and software for IT solutions) for the customers
IT infrastructure with defined service level agreements. In 2004,
storage providing services will complete the managed IT services
offering. 22




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##### Table of Contents




    
    Application and web servicescontain in addition to the supply of
domain name services the provision of web space and standard
applications, such as applications for mailing services.
    
    IT Security Servicesinclude firewall services (centrally hosted or
locally provided at the customer site) and  launched in 2003
 an
email security service which protects customers e-mail traffic from
computer viruses. We intend to expand our product portfolio by a
complementary service to block unsolicited email or spam in 2004.
    
    IT Outsourcing Servicesinclude managing a customers IT landscape
partially or entirely. Thus, the customer specific IT-services are
completely outsourced to and provided by Telekom Austria. Business applications Business applications represent a wide range of services, which are mainly
based on electronic data interchange services and e-business solutions. The e-business product portfolio was adjusted to the changing market
requirements. We provide customized e-business solutions from customer
relationship management, e-marketing or e-procurement to corporate website
services. A new e-conferencing solution enables companies to conduct virtual
meetings and share virtual presentations. New web-learning products provide
virtual classrooms. As a full service provider we offer solutions including
access to the platform, standard content, individual content creation and
consulting. Recently, we were awarded a commission by Suzuki International Europe for
an Application Service Provider (ASP)-based ordering system for 1,500 Suzuki
dealers in Germany and France. This follows the successful implementation of an
Austria-wide B2B portal for about 200 Suzuki dealers in 2003. On July 29, 2003, we acquired 74% of World-Direct eBusiness solutions
GmbH, bringing our total interest to 100%. World Direct provides e-business
solutions ranging from design and management of corporate websites to
e-procurement applications. Internet access & media As part of our re-organization into two operating segments (Wireline,
Wireless), Jet2Web Internet Services GmbH was re-integrated into Telekom
Austria in 2002. We also provide internet services in the Czech Republic
through our 100% subsidiary, Czech On Line. Services Internet access & media comprise the following services:  
    
    Access services (dial-up access, broadband ADSL access, business internet access); and
    
    Portal business with online media sales, e-commerce, paid services and multimedia services. The brand Aon combines all product and service offerings for private
internet access and internet services. Access services We offer fixed network internet access through dial-up service and high
speed broadband internet access service, ADSL. At December 31,2003
    
    2002
    
    2001Dial-up customers
    
    
    819,000
    
    
    
    703,400
    
    
    
    580,000ADSL customers
    
    
    207,600
    
    
    
    143,100
    
    
    
    86,400Total customers
    
    
    1,026,600
    
    
    
    846,500
    
    
    
    666,400Internet dial-up traffic (in millions of minutes)
    
    
    3,953
    
    
    
    4,305
    
    
    
    4,505Average Internet dial-up tariff (in EUR/min.)
    
    
    0.017
    
    
    
    0.016
    
    
    
    0.017
 23




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##### Table of Contents



The table shows the development of the number of our internet customers at
the dates shown. At December 31, 2003, we had about 207,600 ADSL customers. In
addition, we have approximately 53,500 ADSL subscriptions that were sold to our
wholesale customers. Our one-time internet offer, Complete, is not included in
the data presented above  see below for more information. We derive revenues for our access services primarily from subscriber fees
paid by customers for our dial-up and ADSL services. Dial-up access In October 2001, we launched AonFlash, our dial-up product family with
five different service packages. For our product AonFlash Easy, as with its
predecessor AonPuls, we do not charge a monthly rental fee, but a special
dial-up internet tariff for the connection via fixed line. In addition, we
offer AonSuccess which is not a separate product but an add-on product
available to customers who use one of the other internet products described
above. In addition to the web space for homepages included in each of the other
access products listed, AonSuccess provides 50 megabytes of additional web
space for large homepages. In 2000, we also offered a special flat-rate internet product called
Complete. Although we stopped offering this flat rate internet product in 2000,
for which the minutes used are not charged, the corresponding traffic still
exists. This one time internet offer accounted for 3,862 million traffic
minutes in 2003, 3,801 million traffic minutes in 2002, and 3,593 million
traffic minutes in 2001. Broadband ADSL access In the summer of 2003, the residential ADSL portfolio with modules for
download volume or online time was re-launched and included Aon Speed FreeTime
and add-on products like Aon Spamfilter, AonVirenchecker to better meet the
changing customers needs and to satisfy their increasing demand for security
products. The product AonSpeed FreeTime provides unlimited usage during evening and
weekend hours within the limits of Telekom Austrias fair use policy. Under
this policy, Telekom Austria has the contractual right to block data
transmission if customers exceed a predefined amount of transmitted data. AonSpamfilter enables residential customers to take control of their
personal mailbox and protect themselves from junk mails. AonVirenchecker
includes a local desktop virus protection software as well as a tool to scan
incoming e-mails and attachments for viruses. For all products (except ISDN), residential customers can choose between
self installation or installation by the technical customer service. They can
also choose two additional packages which offer wireless connectivity in
connection with several of our ADSL products. Aon.tv.In June 2003, Telekom Austria launched the paid service Aon.tv,
succeeding our multimedia services field trial Jet2web-tv. Telekom Austria is
one of the first European operators providing TV through broadband ADSL access.
Customers can choose from a variety of live TV channels, on demand video clips
and movies utilizing the PC as a user interface. The bandwidth was increased
from 512/64 kbit/s to 768/128 kbit/s for all customers enabling optimal usage
of our interactive TV service Aon.tv and other multimedia offers. Aon Gaming.Telekom Austria was the first official ADSL online gaming
partner of Microsoft and Sony when they started their online services in
Austria in 2003. We developed product bundles consisting of gaming consoles and
broadband internet access. Business internet access For our business customer we re-launched the product group Business
Access including Business Access Dial-in in 128 kbits/s for high bandwidth
demand outside of our ADSL coverage areas and broadband SDSL access. SDSL
(Symmetric DSL)  different from ADSL  provides data transmission at the same
speed in both directions (upload and download) as an alternative to leased line
services. We sell these products together with services such as secure e-mail,
virus detection software and spam email filter as a response to the increasing
need for secure access to internet services, as for example SecureMail, which
is a central platform that allows business customers to search their companys
entire email traffic for viruses and other dangerous programs. 24




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Portal business with online media sales, e-commerce, paid services and
multimedia services Our main portal, Aon.at, offers a wide range of services from
communication, entertainment to online shopping and tries to satisfy various
daily needs of Austrian users. A portal is defined as a network that
aggregates, navigates and delivers a wide range of internet commerce,
community, communication, and content services. Portals evolved from simple
search engine, allowing users to search the internet quickly, to become
aggregators and distributors of commerce, community, communication, and content
services. Revenues are generated from business-to-consumer services, multimedia
services, Aon.tv, sales of online advertising, various other paid services and
an online shop. Our main activities in 2003 were:  
    
    We re-launched the customer service area on our portal improving
and increasing the customers usage of self-care functionalities for
various services of Telekom Austria.
    
    We launched a new business portal in July 2003, which allows
business customers to customize their access to our portfolio of
business products and services. The business portal also strengthens
our long-term business relationships to our clients.
    
    We re-launched our online shopping area, AonShopping, in 2003. The
shopping mall concept provides users with the opportunity to choose
from a wide range of products of various suppliers within a single
shopping area.
    
    We completed our content offering with new games (AonGamepoint,
AonGames Competitions), a multi-functional communications service (Aon
Communicator) and a music download service. AonMusicdownload is the
first legal, secure, paid service for the download of music in Austria.
    
    Through co-operations we added new on-line magazines to our
portals. These co-operations allowed us by sharing content and
marketing expenditures to cut our costs and increase advertising
revenues as well as raise the number of Aon.at visitors. We expect to continue to transform existing free services into paid
services and focus on co-operations, entertainment, communication and local
content in order to create new ways to generate and increase revenues and our
profitability. The Telekom Austria portals led the Austrian portal market of internet
service providers with 600 million page impressions excluding mobilkom
austrias portal A1.net in 2003. Page impressions refer to the number of times
a specific website has been accessed or viewed by users. Czech On Line We are present in the Czech internet market through our Czech subsidiary,
Czech On Line a.s. (COL), a leading provider of internet services and the first
provider to introduce free dial-up internet access in the Czech Republic. In
2003 Czech On Line generated revenues of EUR 18.5 million. It was fully
acquired by Telekom Austria during the fiscal year 2000. In 2001, COL evolved
from an internet service provider to a full communications service provider and
defended its leading position in an increasingly competitive environment. At
December 31, 2003, Czech On Line had approximately 279,400 active customer
accounts up from approximately 275,300 at the end of 2002. COL offers the following services:  
    
    free dial-up internet access through PSTN, ISDN and GSM;
    
    internet access for customers via frame relay, leased lines, and
wireless point-to-point and point-to-multipoint access services and
ADSL services;
    
    PSTN voice services for business customers for local, national and
international calls based on direct access and carrier pre-selection,
and for residential customers based on carrier selection;
    
    value-added services (such as global internet roaming, web hosting,
domain registration, virtual mailboxes, anti-spam and anti-virus
software);
    
    content services, including a news aggregator and a customized search engine for Czech content; and 25




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
    
    free customer support 24 hours a day, seven days a week. After receiving a 3.5GHz license for microwave transmission, COL has
rolled out a basic access network in Prague and six regional cities in the
Czech Republic in 2002. Due to changes in the regulatory environment in 2003, COL was able to
enter into an interconnection agreement regarding the internet dial-up traffic
with Cesky Telekom. Through the introduction of ADSL products COL entered the
broadband market. In addition, COL introduced bundled voice and internet
services for business customers and voice telephony for existing residential
customers on the basis of carrier selection. Wholesale voice & internet We provide wholesale services for national and international mobile and
fixed network operators and Internet Service Providers (ISP). National wholesale servicesinclude:  
    
    call origination and termination;
    
    transit and access to other services;
    
    toll-free and premium rate services;
    
    broadband solutions for internet service providers and other telecommunications providers; and
    
    emergency and directory inquiry services. At December 31, 2003, we had entered into interconnection agreements with
27 fixed-line and 6 mobile licensed operators in Austria. Separate fixed and
mobile interconnection agreements were entered into with all six mobile
operators. By the end of 2003 we had installed about 53,500 ADSL connections
for our wholesale customers. International wholesale servicesinclude:  
    
    Call termination. We deliver international incoming calls to
Telekom Austria customers or subscribers of other network operators.
    
    Voice transit service. This service consists of routing traffic via
our international network. We also act as account intermediary.
    
    Signaling for international roaming.
    
    Bandwidth transit services. Due to Austrias geographic location,
we are in a position to offer transit capacity on our international
network among the eight countries that border Austria.
    
    International internet access. We provide connections to the
networks of other European countries, the United States and worldwide.
    
    Satellite services. We provide bandwidth as well as international
connectivity to our national and international customers through our
own teleport. A teleport is a satellite antenna station that provides
connectivity to various international satellites.
    
    International Virtual Private Networks (VPNs). We provide VPNs for
national retail business customers throughout the world directly
through international partners.
    
    Network construction. We use our technical experience to plan,
build, operate and maintain networks for our wholesale customers. In
2003 we strengthened our position as the prime outsourcing partner for
high quality backbone networks for other national UMTS operators.
    
    Jet2Web Stream. In mid-2003, we further expanded our fiber optic
ring Jet2Web Stream to Milan, Italy as part of our international
broadband activities. In 2002 we had extended our transmission capacity
to connect Vienna to Prague, Frankfurt, Munich and Salzburg and started
operations on the network 26




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connecting Vienna, Bratislava and Budapest. An extension of the network to
Slovenia and Croatia is currently under development. All parts of this
network can be upgraded up to 320Gbit/s which would allow us to adjust
capacity step-by-step to growing demand. Traffic volume Our incoming and outgoing international traffic includes calls to and from
our customers and customers of other network operators routed through our
network. We processed more than 2.5 billion traffic minutes of international
incoming and outgoing calls, especially incoming calls to fixed and mobile
networks. Tariffs We receive payments for terminating international traffic and pay
international carriers to carry and terminate our outgoing calls in other
countries. These receipts and payments are based on settlement rates negotiated
with other international carriers on a bilateral basis. In addition, we receive payments for national interconnection traffic and
pay other national carriers to carry and terminate calls from our customers in
their networks. These tariffs are regulated by the Austrian regulatory
authority. Our main source of interconnection costs arises from calls to mobile
networks. mobilkom austria was required by the Austrian regulatory authority to
lower its interconnection fees for call termination from EUR 0.1125 to EUR
0.1111 on April 1, 2003 and further to EUR 0.1086 on September 1, 2003.
Interconnection fees for terminating calls in the network of other mobile
operators range from EUR 0.1318 (T-Mobile), EUR 0.1380 (Connect Austria), and
EUR 0.1962 (tele.ring and Hutchison 3G Austria). Interconnection costs also arise from calls to toll-free and value-added
service numbers provided in our network which originated in networks of
Austrian mobile operators. The underlying, so-called mobile origination tariffs
are also regulated by the Austrian regulatory authority and range from EUR
0.1028 (mobilkom austria) up to EUR 0.1962 (tele.ring and Hutchison 3G
Austria). Daytime, evening and weekend rates are identical. Wholesale data Leased line services The leased line business generates revenues by leasing fixed lines to
customers for their exclusive and dedicated use. Our leased line basic service
establishes a permanent connection for the transmission of voice and data
traffic between two geographically separate points or between a point and
several other points. These points can be entirely within Austria or partly in
Austria and partly abroad. We lease lines to other local telephone operators
and wireless service providers who use such lines as part of their networks. We
also lease lines to providers of data services. In addition to leased line
services we provide several service levels including express setup services. Other services (customer premises equipment and directory services) Customer premises equipment We are a leading provider of telecommunications equipment, systems,
related post-sales maintenance, and service for residential and business
customers in Austria. As in most European Union member countries, the market in
Austria for such equipment and systems, commonly known as customer premises
equipment, is characterized by high competition and low profit margins. We
believe, however, that the supply and servicing of customer premises equipment
is an essential element of providing a full service to our customers. Through
the provision of customer premises equipment, we are able to develop closer
relationships with our customers, encourage the use of new technologies and
cross-sell other services such as ISDN and ADSL. It also helps us to better
understand our customers evolving telecommunications needs. We sell and lease
customer premises equipment manufactured by leading vendors through retail
outlets, including our own call centers, our Telekom and A1 Shops, direct sales
force (for business customers), our door-to-door agents, as well as third-party
distributors. Our range of customer premises equipment includes: 27




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
    
    Telephone systems, which help corporate customers manage their
telephone extensions based on state-of-the-art technologies and
developments like Voice over IP telephony (VoIP);
    
    Enhancements and supplements to PABX (private automatic branch
exchange) such as Computer-Telephony Integration (CTI), contact-center
applications or unified messaging (UMS), which provides a single
interface for voice, e-mail and fax messages;
    
    LAN and WAN networks based on standardized ISDN-telephony or based on VoIP telephony;
    
    Voice communication based on ISDN and VoIP telephony, and PC software applications;
    
    Telephones and accessories, fax machines;
    
    Mobile products; and
    
    Maintenance services. We plan to grow our customer premises equipment business by exploiting
opportunities arising from the convergence of information technology and
telecommunications systems, and systems integration and internet services. Directory services Directory services include mainly call center services and directory
publications. The number of directory inquiries and connected services
decreased further during 2003 due to the availability of electronic inquiry
devices via internet, which at current are mostly free of charge, as well as
electronic devices such as PDAs and mobile phones that include applications for
directory management. Call center services.We provide national and international directory
services through value added numbers and electronic interface, exchange of
computerized national directory information with international carriers,
hosting of directory service numbers of other carriers as well as cash
collection services and weather information services. Furthermore, we offer
telephone- and video-conferencing, InteractiveVoice Response (IVR) and
audiotext services and complete call center solutions including sale and
installation of call center equipment. Directory publications.According to the Austrian Universal Service
Ordinance we collect and maintain a database of our subscriber data and other
fixed-line and mobile service providers subscribers. This database is also
offered to directory publishers. In July 2003, we sold our 26% stake in Herold to an investor group led by
the two funds, Veronis Suhler Stevenson and 3i. Herold continues to publish our
telephone directories. As of January 29, 2004, the online telephone directories
www.etb.at, provided by Telekom Austria and www.Herold.at, provided by
Herold Business Data AG merged into a joint search machine for Austrian
telephone numbers. The newly created joint platform will soon be expanded by
additional user-friendly features including new search masks for telephone
numbers, data transfer for electronic organizers or the sending of telephone
numbers as business cards via SMS. Competition We face intense competition that has resulted in a reduction of tariffs
and prices throughout the market and we expect that pressure on tariffs will
continue. We believe that market liberalization has contributed to market
growth for internet services and intensified competition in voice telephony.
Management believes that the market for data communications and IT solutions as
well as internet services will continue to grow moderately whereas the
fixed-line voice telephony market will further stabilize. The population of Austria is concentrated primarily in a few urban areas.
Approximately 20% of the Austrian population lives in the Vienna area.
Competitors can therefore service a large percentage of the population of
Austria by focusing on a limited geographic area. Under our universal service
obligation, we are required to provide voice telephony, public pay phones,
directory inquiry services and other services throughout Austria, including
rural areas. Until the end of 2002, competition has concentrated primarily on
price. However, we believe that the decrease in prices is slowing down and we
are noticing a trend towards bundled products such as fixed line services with
online products. 28




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The Austrian government fully liberalized the Austrian data communications
market in 1993 and the mobile communications market in 1996 together with the
granting of the second license to provide digital mobile communications
services, and voice telephony through fixed lines in 1998. The regulatory
authority has determined that we have significant market power in the fixed
telephony network and services market, leased line market and interconnection
market as defined by the Telecommunications Act 2003. This partially limits our
pricing flexibility. As a result, most of our pricing had to remain cost-based
and significant changes have been subject to prior approval by the regulatory
authority. For more information, see  Regulation and
legal framework 
Regulation. The procurement of goods and services by the Austrian federal government,
state governments, municipalities and the public sector in Austria is subject
to the Austrian public procurement law. Under the approval procedure for our
tariffs and general terms and conditions we are limited in our ability to grant
substantial price discounts and alter terms and conditions. The public
procurement law requires the public sector to make its purchase decision on
either the best price or quality among the offers. Our competitors are free to
fix their tariffs and general terms and conditions and thus may have greater
flexibility in the price discounts and general terms and conditions they may
offer. In early 1998, call-by-call operators launched services in the Austrian
market for voice telephony through fixed lines. Pre-selection of a carrier has
been available since early 2000 for long distance, international,
fixed-to-mobile calls, and calls to specific value-added service numbers. In
early 2000, some of our competitors became full service providers by offering
fixed line access. Carrier pre-selection for local calls has been made
available since the beginning of 2001. We had interconnection agreements with
27 fixed line operators and 6 mobile network operators as of December 31, 2003. Our primary competitors in the provision of voice telephony through fixed
lines are UTA, TELE 2, tele.ring, eTel and UPC Telekabel (Priority). Several
smaller competitors have left the market including Carrier One, European
Telecom, TeraCom, KPNQwest, Red Telekom and Cybertron. Most of our competitors
are partly or even in majority owned by international, experienced
telecommunications operators, and some of them are incumbents in their own home
markets. In the market for data communications and IT solution we face intense
competition ranging from start-up companies to multinational alliances, like
AT&T, Equant, T-Systems, Colt, tele.ring and UTA. We compete in all areas of
data communications services based primarily on a combination of price and
quality of service. We are the overall leader among data communications
providers in Austria. We face many competitors in the provision of internet services, ranging
from established global portal service providers to general telecommunications
operators like UTA, UPC Telekabel (chello), T-Online or Inode. Our main ISP
competitors are partly or wholly owned by international internet service
providers. In the business market segment, we compete primarily with
full-service telecommunications operators that offer internet access services,
hosting services and voice telephony through fixed lines. Some of the operators
in these market segments have longer operating histories abroad and greater
name recognition in some European markets or in the United States. Our main
competitor in the Austrian portal market for internet service providers is
T-Online.at. In the wholesale services market we face intense competition as well. That
has resulted in a reduction of prices and we expect that the pressure on prices
will continue. Our primary competitors in the provision of wholesale services
are T-Systems, Telecom Italia, BT, MCI, France Telecom, UTA, eTel, Colt and
Level 3. We are the overall leader among wholesale services in Austria. The
expansion of our fiber optic ring Jet2Web Stream enabled us to act as a major
provider for the transmission of voice and data communications in Central and
Southeast Europe. Sales and marketing In the Wireline segment, we classify our retail customer base into three
customer groups:  
    
    Residential retail sales: in this marketing segment we serve about
2.4 million residential customers. The customer base is segmented
according to customer needs in telecommunications services;
    
    Small offices/home offices (SOHOs) and small and medium-sized enterprises (SME); and
    
    Top SMEs; and key accounts. 29




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In all three retail customer groups, marketing activities are based on
integrated marketing analysis including customer needs, customer behavior and
customer lifetime value. In accordance with their telecommunications
preferences, we create individual customer target groups and provide them with
special products and solutions. For each customer segment an individual
communication core message and communication channel mix is developed. We
target our customers by direct mailings, online advertising and sales
promotions. Customers have the choice of ordering products and services by
telephone, fax or mail and via online shopping on http://shop.telekom.at. Our
call center hotline is another important sales channel through which customers
can obtain information and order fixed line-related products and services. Our whole customer base comprises national and international mobile and
fixed network operators and Internet Service Providers (ISP). Our marketing
activities are customized to the individual needs of our customers focusing on
the provision of integrated solutions and quality of service. At December 31, 2003, we had a network of 49 Telekom Austria Shops,
offering competent customer service and advice concerning our entire service
offerings for residential and business customers. In addition, we market our
products and services through the offices of the Austrian Postal service and
use retail chains as sales points. Furthermore, customers are directly
solicited by professionals and by our employees. We target business customers in this segment with our dedicated sales
force. Starting in 2002, we focused on retention of our large business
customers and extension of our customer base by attracting medium and
small-sized enterprises. As part of the integration of fixed-line, data
communications and internet services into a single Wireline segment, we
combined data communications services with Telekom Austrias key account
management and formed a new unit called Business Solutions. Moreover, we
replaced the former technology and product-oriented organization with a
customer-focused approach with a strong emphasis on all-in-one solutions. Our wholesale services are marketed and sold directly by our carrier
managers, to national and international carriers. In 2003, we served more than
100 national and 250 international wholesale customers. We also plan to further
push our sales activities through indirect Partner Sales in those countries
which are covered by our fiber optic ring (Jet2Web Stream). Customer service We believe that a long lasting customer relationship is essential to
outperform our competitors. Therefore, we continuously concentrate on service
leadership. We handle about 23 million customer contacts per year with a focus
on improving customer satisfaction. Selective training programs for our employees proved to be successful as
customer satisfaction for service and installation of access lines improved
significantly. On our hotlines we were able to increase the rate of immediate
solution of customer request. Furthermore, our new more descriptive invoice
design gained positive feedback from our customers. The customer service center was re-organized from a technology-based
organization to a customer process-oriented organization. Our technical
structure and functional organization facilitate but do not determine our
customer service processes. We improved interfaces between operational support
systems, billing and other customer service systems to achieve more efficient
customer service management. As a result, we increased our performance and
achieved significant cost savings. Our technical customer service realized
efficiency growth of up to 24 % compared to the year 2002 in terms of daily
order processing per employee. Installation time for fixed access lines was
reduced by over 30 % due to further optimizations in our workflow. We increased
our customer self care options to be more efficient while satisfying additional
customer needs. To further improve efficiency and performance we will selectively invest
into effective customer-orientated end-to-end processes. Networks Telekom Austria is the largest telecommunications operator for fixed and
mobile network services in Austria. All customer services are based on
advanced, high quality technology networks with proven reliability. 30




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Switched network We operate a fully digital voice switching network serving 2.6 million
PSTN access lines, about 447,200 ISDN basic access lines, and 7,800 ISDN multi
access lines at December 31, 2003. Our network combines reliable technology with efficient network design.
Our voice switching network operates on a double-tracked operation,
administration, and maintenance system to assure network reliability. Our call
success rate and exchange availability for 1999 through 2003 was between 99%
and 100%. The call success rate is the percentage of originating calls
resulting in successful connections (ringing tone) with the intended
destinations. At December 31, 2003, more than 94% of the voice switches and remote units
were connected to our transmission network by optical fiber cables, the highest
capacity medium available. We are in the process of optimizing the switching network. We expect this
program to reduce operational costs, lower capital expenditures, and accelerate
service rollout. Through our intelligent network, or IN platform, we offer, among other
services, toll-free, value-added services and number portability. The demand
for new IN services is driven by the customer need for communication within a
predetermined user group and from regulatory requirements, such as number
portability. By adopting the same IN technology in the fixed and mobile
networks, we will be able to offer convergent services such as using the same
handheld phone for fixed and mobile calls. Data networks Technological innovations and advances in standardization allow us to
provide a set of new telecommunications and multimedia services in connection
with our large established network infrastructure. These innovations have
occurred in three different areas: backbone network infrastructure, access
infrastructure, and advanced services. Backbone network infrastructure.This infrastructure is based on optical
signal transmission. We predominantly use optical fiber as the transport medium
for high-speed digital transmission. Our core network was based on
approximately 18,584 kilometers of optical fiber cables at December 31, 2003.
In addition, we provide radio links in specific areas upon customer demand. The primary transmission technology we deploy is a transmission standard
for fiber optic networks and allows for a simpler and more easily managed
network with enhanced reliability with different levels of multiplexing. By
using specific protection concepts such as multi-path section protection, we
achieve high network availability within this network infrastructure. Telekom Austria runs a state-of-the-art multiservice network which is
based on ATM and IP technology. Through the deployment of MPLS networking
technologies we are able to integrate the SDH, ATM and IP networking concepts
in order to offer the required quality of service for the whole service
portfolio of Telekom Austria, i. e. broadband access services based on ADSL and
business customer services derived from fiber and SDSL access technology. Thus,
we are implementing our networking infrastructure towards an All IP
networking concept which is the basis for further cost reduction as well as
offering new voice and data services. Access infrastructure.Our access infrastructure is the means by which our
customers connect to our networks. The access network plays a key role in our
business as it supports the entire range of services. Broadband technologies
such as ADSL permit high-speed internet access and digital video transmission
on normal telephone lines. Across Austria we have installed 765 ADSL relay
stations covering more than 85% of Austrian households. We had 261,100 ADSL
lines installed at the end of December 2003, up from 174,100 at the end of the
year 2002 and we continue our expansion. In addition, we provide multimedia and other data services with high
capacity requirements using direct access via optical fiber for large business
customers. As the demand for broadband services increases, we anticipate a
deeper penetration of optical fiber in the access network and expect to
implement next generation solutions such as very high speed digital subscriber
line (VDSL) applications on existing copper lines Advanced services.These services are driven partly by the technological
developments and partly by the demand from customers for more sophisticated
services. New information and communication technologies such as digital mass
storage and techniques for video compression and software platforms enable us
to offer internet content services, unified messaging services, and commercial
services such as digital signatures. 31




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International network Our international voice traffic is routed through two international
gateways. We have connections to 234 destinations (including global satellite
networks) and direct links to 118 international operators in 86 countries. We
partially own or have rights to use undersea cables in addition to satellite
capacities of the corporations Intelsat and Eutelsat. We also take part in
projects for the installation of international optical fiber-backbones such as
Trans European Lines and Trans Asia European Lines. With the installation of Jet2Web Stream we have expanded our broadband
activities abroad. The network now covers Prague, Frankfurt, Munich,
Bratislava, Budapest and Milan. All parts of this network can be expanded up to
320Gbits, which would allow us to adjust capacity step-by-step to meet growing
demand. The expansion of our fiber optic ring Jet2Web Stream enabled us to
connect mobilkom austrias subsidiaries to our networks at low costs and to act
as a major provider for the transmission of voice and data communications in
Central and Southeast Europe. Next generation network Similar to the way in which the entire telecommunications network had to
be completely renewed through digitalization at the beginning of the 1980s,
new technology is being developed to enable a gradual transition from the
digital networks to a packet oriented network, commonly referred to as Next
Generation Network (NGN). A packet oriented network is expected to enable a more efficient
simultaneous transmission of data services and voice telephony services. NGN is
expected to give us more flexibility to satisfy customer wishes and to offer
the exact services that are needed at the moment. Easier access to services
like videoconferencing, multimedia messaging services, audio/video streaming
applications or video mailboxes will generate additional business
opportunities. We are in the process of evaluating the details and financial implications
of a migration to NGN with particular consideration of existing investments
(see Item 5  Liquidity and Capital Resources  Capital Expenditures). Information technology/Operations support systems The quality of our operations support systems is critical to the success
of our business. Our operations support systems store, manage and analyze
essential business information. These operations support systems enable us to
make timely business decisions and develop new products and services based on
the needs of our customers. By increasing the automation of our business
processes we improved the productivity of our operational units and improved
access to information. Our operations support systems are mainly based on
market-standard software, and we expect to further replace legacy systems with
standard software solutions. In continuation of our projects in 2002 we have implemented several
crucial improvements and enhancements to our operations support systems
including:  
    
    added functionalities to our customer relationship management
systems like a workforce management system for field service;
    
    enhancement of the billing system to improve the support of new
services;
    
    streamlined business processes within our enterprise resource
management systems in the areas of logistics, material management,
finance, investment, and procurement, among others. The above mentioned systems are interdependent and designed to improve
customer service while reducing costs and increasing reliability through
centralization of customer data and process management. 32




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Wireless Our Wireless segment is represented by mobilkom austria group which is
comprised of mobilkom austria and its subsidiaries. mobilkom austria group
generated revenues of EUR 2,030.2 million in 2003, EUR 1,909.4 million in 2002
and EUR 1,713.2 million in 2001, before intersegmental eliminations. In
addition to providing mobile communications services in Austria, we also
provide mobile communications services through VIPnet in Croatia, Si.mobil in
Slovenia and mobilkom [liechtenstein] in Liechtenstein, representing 20.9% of
our mobile communications revenues in 2003 compared to 20.3% and 16.4% in 2002
and 2001, respectively. We had more than 4.7 million mobile communications customers at the end of
2003 representing, a 6.4% increase compared to 2002. The Wireless segment
covers a total population of close to 15 million. Wireless market penetration
ranges from 55.0% in Croatia and 76.5% in Slovenia to 89.7% in Austria. On January 7, 2003 mobilkom austria group entered into an exclusive
partnership with Vodafone to co-operate in the Austrian, Croatian and Slovenian
market. The co-operation has extended the range of existing products and
services of mobilkom austria group and has improved the product portfolio in
particular for business customers. Both companies collaborate in the field of
roaming, purchasing, development of new products and services, technical
platforms, global account management and joint marketing initiatives. Vodafone
Eurocall, the first joint product, was launched in the first half of 2003,
offering favorable and transparent roaming prices to users in more than 30
European countries. In summer 2003, a new service was launched together with
Vodafone enabling our customers to recharge their accounts in most Vodafone
countries in Europe when traveling abroad. Competition has resulted in a reduction of tariffs and prices throughout
the markets and we expect that it will continue to pressure tariffs downward.
We believe that market liberalization has contributed to market growth and
intensified competition in the Wireless segment. We expect that the market for
mobile communications will continue to grow moderately. We expect that the
growth in the Wireless segment will not be able to match the growth rates of
prior years. Austria mobilkom austria is the leading provider of mobile communications services
in Austria with approximately 3,2 million customers at December 31, 2003, which
represented a total market share of about 43.3% of the Austrian mobile
communications market, in comparison to 44.4% at the end of 2002. Our mobile
business has experienced rapid growth in recent years as the mobile penetration
rate in Austria increased from 14.4% at December 31, 1997 to 89.7% at December
31, 2003. The penetration rate increased by 6.6 percentage points compared to
2002. We believe that we have a strong market position as a result of our
customer-focused services, two well recognized brands in Austria with A1 as the
product brand and mobilkom austria as the company brand, broad network coverage
and eligible customer service. In August 2000, we were one of the first mobile communications operators
worldwide to launch a nationwide and commercially operated network based on
general packet radio service, or GPRS. GPRS is a technology which is a data
service enhancement for Global System for Mobile Communication, or GSM. GSM is
one of the leading standards for digital wireless communications. On November 8, 2001, we purchased 49% of paybox österreich. paybox
österreich was the holding company of paybox austria, which has offered mobile
payment services since January 2001. Following a Europe-wide reorganization of
the paybox group, we acquired 100% ownership of paybox CEE (Central Eastern
Europe) in September 2003, thereby also assuming full ownership of paybox
österreich. On December 17, 2003 paybox österreich was merged into paybox CEE.
This acquisition allows us to offer m-commerce (mobile commerce) solutions both
in Austria as well as in Central and Eastern Europe. In January 2002, mobilkom austria was the first mobile communications
service provider worldwide who was assigned a bank license. This license
allowed us to establish our 100% subsidiary A1 Bank, enabling us to provide a
broad range of m-commerce services. We were the first European operator to set up a national UMTS network,
with the commercial launch of our UMTS network in April 2003. In 2003 we did
not heavily promote UMTS due to the fact that there were only a few adequate
UMTS handsets available. The focus was on improving our network and testing our
services in order to be prepared well in advance of our competitors. By the end
of 2003, mobilkom austria covered all major cities and altogether about 50% of
the Austrian population with its UMTS network and has therefore already 33




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fulfilled the regulatory obligations for the year 2005. The further
expansion of the network will depend on the future development of revenues. Competition The Austrian mobile telecommunications market was liberalized in 1996 with
the granting of the second Austrian license to provide digital mobile
communications services. The Austrian mobile communications market currently has four GSM operators
with UMTS licenses (mobilkom austria, T-Mobile Austria, ONE, and tele.ring) and
one additional UMTS license holder (Hutchison 3 G Austria). Hutchison 3G
Austria launched its operations shortly after mobilkom austria in May 2003. In
December 2003, mobilkom austria acquired Telefonica-owned 3G Mobile, which also
held a UMTS license, and thereby increased the available frequency spectrum.
However, there is the obligation to sell 2x5 MHz of the acquired frequency
spectrum by January 31, 2005. Therefore, mobilkom austria sold 2x5 MHz to the
competitor T-Mobile Austria in March 2004. By the end of 2003, all UMTS license
holders commercially launched UMTS, but only Hutchison 3G Austria is actively
promoting the service. In addition, one of our competitors in the fixed line
business, TELE 2, entered the market in February 2003 as a service provider
using the network infrastructure of our competitor, ONE, reselling mobile
communications services under its own brand name but without its own access
number. TELE 2 intends to become a Mobile Virtual Network Operator (MVNO) and
to introduce their own access number during the first half of 2004. Our competitors in the Austrian mobile communications market are partly or
wholly owned by international, experienced telecommunications operators, and
some of these competitors are also incumbents in their domestic markets. We
compete in all facets of the mobile communications business, including handset
prices, tariffs, corporate image, distribution network, product offerings, and
network quality and coverage. Customers and traffic We have experienced substantial growth in our mobile customer base over
the past few years. According to our own market research, there were about 7.31
million mobile customers in Austria in December 2003, representing a mobile
penetration rate of 89.7% of the population, which is one of the highest
penetration rates of mobile communications in Europe. The growth of the
penetration rate has slowed down. As a result of the market saturation we have
focused on retaining customers rather than acquiring new customers. We expect
growth in the medium-term will be driven by new data services as well as the
expansion of mobile technology to new products and services. In December 2003,
our mobile customers represented approximately 43.3% of the mobile
communications market in Austria, a 1.1 percentage points decrease compared with
the end of 2002. The following table shows selected customer and market share data for our
services in Austria at the dates specified. Customer totals are based on total
customer identification numbers issued. The size of this market has been
estimated by us. At December 31,2003
    
    2002
    
    2001(in thousands)Customers at end of periodContract
    
    
    1,682.2
    
    
    
    1,574.9
    
    
    
    1,439.4Prepaid
    
    
    1,481.0
    
    
    
    1,426.5
    
    
    
    1,410.5Total customers
    
    
    3,163.2
    
    
    
    3,001.4
    
    
    
    2,849.9Net additions
    
    
    161.8
    
    
    
    151.5
    
    
    
    45.6Market InformationTotal market for mobile services
    
    
    7,312.5
    
    
    
    6,762.8
    
    
    
    6,650.3Our total market share
    
    
    43.3
    %
    
    
    44.4
    %
    
    
    42.9
    %
 Our customer base increased to nearly 3.2 million customers in 2003, of
which approximately 1.7 million were contract customers and approximately 1.5
million prepaid customers. Our focus on contract customers resulted in a
stronger increase of contract customers compared to prepaid customers. In addition, we were able to reduce our total churn rate from 19.5% in
2002 to 16.1% in 2003. The churn rate provides insight into the growth or
decline of the customer base as well as the average length of participation in
the service. Our Austrian churn rate is calculated based on the total number of
customers who discontinue their use of our service in a 12 month period,
divided by the average number of total customers during that period. A prepaid
customer is disconnected 13 months following the last account deposit. In 2003,
our contract 34




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churn rate was 10.8% and our prepaid churn rate was 22.0%. These rates are in
line with the average churn rate of mobile operators in European Union
countries where mobile operators subsidize handsets given to customers as an
incentive to switch operators. Subsidized handsets have been available in
Austria since late 1998. The following table shows for the periods indicated traffic volume of our
customers excluding visitor roamers, average number of customers, and the
average monthly traffic per customer in Austria for the periods indicated.
Customer traffic comprises outgoing calls made in Austria and abroad and
incoming calls received by our customers abroad and excludes traffic from
internal lines and from visitor roamers. Year ended December 31,2003
    
    2002
    
    2001Traffic (in millions of minutes)
    
    
    4,509
    
    
    
    4,124
    
    
    
    3,695Average number of customers (in thousands)
    
    
    3,064.5
    
    
    
    2,895.7
    
    
    
    2,829.0Minutes per customer per month
    
    
    123
    
    
    
    119
    
    
    
    109
 Sales, marketing and customer service Our mobile sales and marketing strategy aims to enhance the breadth and
quality of our service and build long-term relationships with our customers,
thereby reducing churn and maintaining our strong position in a highly
competitive market. Our sales and marketing strategy includes:  
    
    increasing sales through our own shops and developing them into
service points for our customers, e.g. for hardware replacement;
    
    strong focus on valuable business customers;
    
    further improving customer service; and
    
    exploring additional distribution channels for internet retail. In the Wireless segment, we group our customer base into three customer
groups:  
    
    Business customers: Individual business solutions are offered to
this group of sole proprietorships and larger corporations and
organizations.
    
    Residential customers: Residential contract customers with medium
to high usage of mobile communications services are included in this
group.
    
    Prepaid customers: Residential customers with low usage of mobile
communications services are served in this group. We market contract and prepaid mobile communications services through
various channels: including our own shops, shops-in-shops, post offices, retail
agents, internet, and a key account sales force. At December 31, 2003, we operated 39 A1 shops in major metropolitan areas
in Austria. A1 shops offer mobile communications products, services and
accessories, technical information and advice, and the opportunity to test
mobile communications products. We have also entered into distribution
agreements with approximately 1,500 electronics equipment outlets throughout
Austria as of December 31, 2003. Our shop-in-shop concept comprises 173 branded
information counters in large consumer electronics outlets. In addition, our
mobile communications products and services are also offered in our Telekom
shops and in 1,650 post offices throughout Austria, which provide high
visibility for our products and services. In order to satisfy the demand for prepaid mobile communications services,
we also sell our prepaid products through other retail agents, such as
supermarkets and gas stations throughout Austria. We operate one of the leading Austrian e-commerce websites (www.a1.net)
for our mobile communications products and services, offering contract and
prepaid subscriptions, accessories and re-loading of prepaid accounts via
internet. The majority of these services may also be accessed via mobile
handsets. 35




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Customer service We seek to provide high quality customer service and to continuously
strengthen the relationship with mobile customers starting from the first
contact. We continue investing in effective information systems to facilitate
the interface between operational support systems, administrative systems,
billing, distribution and customer service systems. In 2003, we fully introduced a customer relationship management system
which enables paperless operations at mobilkom austrias customer service
centers. We are continuously upgrading our billing systems in order to support
the introduction of new products and services, and to increase our ability to
offer more flexible tariff structures. These systems enable us to produce
customized bills for our business and residential customers as well as to offer
electronic bills (ONLINE BILL). After thorough usability testing, mobilkom
austrias customer bills including all electronic bill formats (online bill,
electronic bill transfer formats) were redesigned and re-launched in 2003 with
the objective of further increasing their comprehensibility and convenience to
customers. Our contract customers receive itemized bills and are encouraged to pay by
direct debit transfer. The direct debit ratio of above 90% has a big impact on
mobilkom austrias cash flow.We have a flexible billing system for corporate
customers, which allows us to carry out customer segmentation and to offer
multiple tariff rates and more tailored billing information. We monitor our
exposure to credit loss and customer fraud through a credit scoring system that
evaluates potential fraudsters among contract customers. A new, internationally
interlinked fraud management system was put in place within all mobilkom
austria group companies. The system provides near real time call behavior of
potential fraudsters within all networks of mobilkom austria group. In 2001, our call center and inbound and outbound services were certified
by the ÖNORM Institute, the Austrian Standards Institute, becoming the first
certified call center in Austira. In 2003, the ÖNORM Institute audited mobilkom
austrias customer service quality and extended the certification for
additional two years. We adjust our customer retention activities according to market
requirements. We try to retain our customers and try to keep our churn rate low
through various special offers. Our focus is on retaining high value customers
and increasing their loyalty and satisfaction by optimizing our
customer-related processes. As part of our aim to encourage customer loyalty,
we introduced a points-based customer loyalty program in April 1999 for which
approximately one million customers were registered at December 31, 2003. By
the end of 2002, participants earned one point per call minute. This
minute-based points accrual mechanism was changed into a revenue-based accrual
in 2003. Existing participants have been migrated to the new program with the
result that at year-end 2003 78% of our participants are in the new accrual
program. The collected points entitle customers to purchase new subsidized
handsets and accessories for mobile phones. We also provide the A1 Auskunftservice. This directory assistance offers
address and telephone number information. The information can be communicated
by voice, sent by e-mail, SMS or fax, or the customer can be directly connected
to the requested number. Services We offer a wide range of mobile communications products and services
including value-added services such as voicemail, information services,
m-commerce, mobile internet access, mobile office solutions, telematics (a
combination of location-based services, global-positioning system (GPS)
localization and remote control), service for using three mobile phones under
the same number, short messaging services (SMS) and multimedia messaging
services (MMS). Location-based services encompass all services where
information about the location of the consumer is needed, like finding the
closest hospital, restaurant, post office or grocery store and other location
based information. Whereas with SMS only text-based messages can be sent, MMS offers the
ability to send and receive multimedia messages comprising a combination of
text, sounds, images and video to and from MMS capable handsets. In addition,
MMS can also be sent and received via special internet platforms, such as the
mobilkom austria portal A1.net. The portal A1.net uses the internet to promote,
adapt and sell various products for our mobile phone services. Contract services.For our contract customers we offer dedicated customer
service and special tariff packages. Our customized products target all
segments, from residential customers to large corporate accounts. Our large
corporate customers benefit from a range of specialized corporate services such
as mobile communications with full virtual private network functionalities. For
instance, our A1 MOBILE OFFICE product combines hardware and software that
allows internet access, voice, data and fax communications via 36




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mobile phone. Our GPRS product, A1 DATA GUARD, enables employees to have
secure access to their employers internal computer network via their mobile
phone. The A1 XTRACARD PRO enables customers to use three mobile phones with
the same telephone number, allowing mobile data usage and voice calls at the
same time. Furthermore, mobilkom austria offers solutions for virtual private
networking (VPN) to its business customers. Prepaid services. Prepaid products are marketed primarily to lower volume
mobile phone users. The advantages of prepaid services for us are decreased
credit risk, lower costs of sales and reduced administrative costs. From its
introduction until 2002, our prepaid service experienced rapid growth and was a
significant element in the growth of our mobile customer base. In 2002, we
observed a saturation of the market. M-commerce services.In the past two years we enlarged our range of
m-commerce (mobile commerce) services. For instance, since April 2001 customers
have been able to order more than 50,000 items from an Austrian mail-order
house via their mobile phones. In 2002, we continued to enlarge our service
offerings: event ticketing, closing of a short-term insurance contract for
major sports injuries, paying at vending machines and betting via mobile phone.
In September 2003 we launched a ticketing solution for public transportation in
Vienna, Austria which enables customers to purchase tickets via
mobile phone. In October 2003, we started the m-parking service in Vienna, Austria.
m-parking enables car drivers to pay short-term parking fees via their mobile
phone, processed through our subsidiary A1 Bank. A1 Bank administers the funds
generated through parking management in trust for the City of Vienna, Austria. International roaming services.International roaming enables our
customers to make and receive calls with their mobile phones in other countries
using the networks of operators with whom we have entered into international
roaming agreements. These services are offered to our contract customers and
registered prepaid customers. At December 31, 2003, we had international
roaming agreements with 237 mobile network operators in 124 countries.
Additionally, we offered to our prepaid customers roaming in 23 countries with
28 mobile operators without any registration necessary. At December 31, 2003,
we offered GPRS roaming in 19 countries. In addition, we offered our customers
additional convenient services (e.g. using the same short numbers for calling
voice mail abroad). Other mobile phone services.The portfolio of entertainment services
targeted primarily at the youth market was enlarged in 2002 by the A1 GAME
ZONE, which offers games for mobile devices. These games can either be accessed
through Wireless Application Protocol (WAP) or using the SMS technology. WAP
allows access to the Internet using mobile handsets, even without the use of a
computer. The second mainly youth-targeted service, A1 HANDY STYLING (ringtone
and picture SMS service) was enlarged with new content categories as polyphonic
ringtones or music files. In the telemetric business area, the A1 TELECOMMANDER received the tel.con
award 2003 assigned by NEC and the Institute for International Research for
innovative technical products. A1 TELECOMMANDER transforms the mobile phone
into a remote control for auxiliary heating systems for cars, alarm devices or
air-conditioning units via SMS, WAP and the Internet. With the A1 TELECOMMANDER
we assigned co-operations with various car producers as well as the European
Car Association. We phased out our paging network in September 2002. Instead,
we offer SMS PRO for emergency and yellow cab services as a special, SMS-based,
high performance solution. SMS PRO offers in comparison to paging a better
standard of convenience, such as web-based group administration, web-based
alert function, full compatibility to telemetries, delivery reports and high
performance two-way emergency communication. Tariffs We offer promotional packages intended to attract and retain customers,
such as bundled airtime minutes, or reduced monthly fees. With innovative
tariff packages such as A1 Xcite and B-Free Komix, we are the only operator in
Austria which applies a segmented marketing approach by limiting these services
to certain age groups, therefore addressing the special needs of young
consumers and children. In addition, we intend to continue to focus on
attracting and retaining high-volume corporate customers by offering flexible
corporate tariff structures, volume discounts and handset replacements.
Eurocall, the first joint product with Vodafone, was launched in the first half
of 2003, offering favorable and transparent roaming prices to users in 32
European countries. 37




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Networks Our mobile networks in Austria consist of:  
    
    a digital mobile network based on GSM/GPRS technology; and
    
    a digital mobile network based on UMTS technology. mobilkom austria continuously monitors the quality of its network in terms
of blocking, set-up success and drop call rate and reports the results on a
monthly basis. During 2003 the GSM call success rate was 97.8% on average,
which is the highest rate in comparison to our competitors. At December 31, 2003, mobilkom austrias GSM network consisted of 14
mobile switching centers, 4 home location registers and 5,209 base stations. An
intelligent network platform is installed for GPRS and value-added services. We
have expanded our GSM network in recent years, particularly in areas of high
traffic such as Vienna. In 2003, 252 new base stations were brought on-line, of
which 174 were macrocell stations, which assure broad coverage, and 78 were
microcell stations, which assure additional capacity in densely populated urban
areas. The following table shows the number of GSM microcell stations (which
assure in-door coverage and additional capacity), GSM macrocell stations and
total GSM transmitter stations in Austria that were operational at the end of
the periods indicated. At December 31,2003
    
    2002
    
    2001Microcell stations
    
    
    1,010
    
    
    
    932
    
    
    
    844Macrocell stations
    
    
    4,199
    
    
    
    4,025
    
    
    
    3,815Total (on air)
    
    
    5,209
    
    
    
    4,957
    
    
    
    4,659
 We provide dual band services to accommodate our expanding customer base.
At December 31, 2003, we operated nationwide a 2x10.4MHz (52 channels) spectrum
in the 900MHz band and a 2x15.0MHz (75 channels) spectrum in the 1800MHz band.
As was done in the past, we will expand dual band service to areas with
significant amounts of mobile traffic like large and medium cities, technology
parks, tourist sites, highways and airports. Our digital transmission network includes the standard components of a
mobile telecommunications network, such as digital cross-connects, microwave,
and radio links, and other transmission devices to connect different components
of its networks. We use our fixed line corporate network services for
transmission between mobile network elements and Public Switched Telephone
Network (PSTN) interconnection points, in particular for high capacity and high
availability transmission requirements. Wireless Application Protocol (WAP).In December 1999 mobilkom austria
introduced WAP, a specification for a set of communication protocols to
standardize the way that wireless devices can be used for internet access,
including e-mail and newsgroups. Since March 2000, mobilkom austria has offered
a personalized WAP-portal with an integrated search engine. General Packet Radio Service (GPRS).GPRS enables high-speed mobile
data-transfers, particularly for data applications such as mobile internet
browsing and e-mail. We launched our GPRS services in August 2000. GPRS is
available in the entire network. Maximum data rates are achieved by optimizing
data compression. Based on this GPRS data transport capability, MMS was
introduced in 2002. Through the implementation of Service Level Monitoring
(concurrent monitoring of prime services taking the customer  ́s view) we could
further enhance our quality of service. Universal Mobile Telecommunication System (UMTS).mobilkom austria
successfully bid for a UMTS license in Austria on November 3, 2000. UMTS allows
for packet-switching and allows operators to transmit data rates significantly
exceeding those of the preceding mobile systems. It also permits implementation
of multimedia applications that integrate voice, video, and data
communications. On September 25, 2002, the technical launch of UMTS was
demonstrated with a live video conference over mobilkom austrias UMTS network.
As the first operator in Austria, mobilkom austria commercially launched the
service on April 25, 2003, covering about 50% of the Austrian population at the
end of 2003. The year 2003 provided sufficient time to improve our UMTS-network
and build the necessary skills of our technical staff. Once the handsets will
be 38




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available in sufficient numbers and quality, the growth of our UMTS customer
base will increase. The takeover of 3G Mobile in December 2003 increased the
available frequency spectrum for mobilkom austria from 2x10 MHz to 2x14.8 MHz
which gives us ample capacity to handle potential growth of mobile services in
the future and will allow us to reduce the number of our macrocell stations.
Another 2x5 MHz frequency spectrum, that were acquired in the takeover, had to
be re-sold due to regulatory requirements in March 2004. The following table
shows the number of UMTS macrocell stations which assure indoor coverage and
additional capacity for densely populated areas: At December 31,2003
    
    2002
    
    2001Macrocell stations
    
    
    1,271
    
    
    
    855
    
    
    
    0
 Wireless Local Area Network (WLAN). WLAN uses high-frequency radio waves
rather than wires to create a locally-limited, broadband connection to computer
networks. In order to enable our customers different access technologies,
mobilkom austria initiated a WLAN project with McDonalds at the beginning of
2004 to install WLAN access points in McDonalds restaurants. Information technology/Operations support systems Our operations support systems store, manage and analyze essential
business information. These operations support systems enable us to make timely
business decisions and develop new products and services based on the needs of
our customers. Essential developments in 2003 were the enhancement of online
bill presentment, creation of a new bill (replacement of hardcoded layout with
modular structure; new bill design), and development of an interconnection
billing system (to manage wholesale business of national / international
traffic), implementation of an m-payment platform with the ability to handle
micro payments for m-commerce applications. Our main IT systems include our billing systems, customer relationship
management (CRM) system, mobile data applicationsand internal applications.
Our billing systems collect and rate the individual customer transactions
(voice and data) and produce the invoices either electronically via secure
access or in print. Our CRM system covers the total range of customer contacts,
serves as an information base for products and services, coordinates
business-sales-activities, documents the individual history of customer
contacts, and operates campaigns. Our mobile data applications
 mobile portal
(internet applications via web and WAP)enable the use of internet-based
services via mobile phones, such as office solutions and portals (www.a1.net).
Our internal applications comprise SAP as Enterprise Resource Management System
(which is in use to support consolidated and streamlined business processes in
the areas of logistics, material management, finance, investment, and
procurement) and our Data Warehouse, which is continuously developed to deliver
all relevant business information. Croatia In September 1998, Croatia awarded its second GSM license to VIPnet, a
consortium in which we have held an interest through mobilkom austria since
1998. We increased our stake in VIPnet by 9% on January 30, 2003 and further by
19% on June 23, 2003, bringing our total interest in VIPnet to 99%. The
remaining 1% of shares is still owned by Vecernji list, one of the largest
media enterprises in Croatia. VIPnet shares the Croatian mobile communications
market with the incumbent operator HTmobile, a subsidiary of HT (Hrvatske
telekomunikacije d.d.), with Deutsche Telekom as its main shareholder. VIPnet started operations on July 1, 1999, and by December 31, 2003 it
served 1.2 million customers (85% of them use prepaid services), increasing its
customer base in 2003 by 10.3% compared to December 31, 2002. VIPnet had a low
annual churn rate of 17.3% in 2003. VIPnet has a 50.0% share in the Croatian
mobile communications market. Croatias mobile communications penetration rate
was 51.9% as of December 31, 2002 and increased to 55.0% as of December 31,
2003. In mid-2001, VIPnet started targeting the corporate market by launching
products for small and medium-sized enterprises such as Virtual Private
Networks (VPN). Following the expiration of the first VPN contracts, VIPnet
started an aggressive retention campaign. In 2003, customers sent more than 1 billion SMSs. On average, customers
send 73 SMSs monthly, which is one of the highest SMS usage rates in Europe.
This is partly due to successful services such as VIPparking 39




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introduced in
September 2001  a service that enables all GSM customers to pay their parking
charges per SMS. This service can be used in 13 major towns in Croatia and almost 2.1
million SMSs were sent in 2003 in order to pay for parking charges. As a major tourist destination, Croatia has a high number of visitor
roamers in the summer season. Visitors generated more than 12% of VIPnets
total revenues. In March 2003, VIPnet presented Vodafones Eurocall service
that offers VIPnet customers special roaming tariffs in 32 European countries.
In addition, the new cooperation with Vodafone allows VIPnet to offer our
customers as well as Vodafones customers the option of recharging their
prepaid accounts with vouchers offered by VIPnet since July 2003. In October 2003, VIPnet started a new corporate identity campaign. Four
corporate logos have been consolidated into a single VIPnet logo in order to
simplify and strengthen VIPnets brand recognition. In 2003, VIPnet improved its customer relationship management, focusing on
a segmentation of its customers based on their revenue contribution. Service
levels for customer care were realigned according to customer segments. Churn
prediction and campaign management tools for private and business contract
customers were implemented. These systems enable a detailed track record of
customers, thus facilitating marketing campaign management. In May 2003, VIPnet placed its first UMTS test call in Croatia. VIPnet
intends to apply for a UMTS license in the first half of 2004. The commercial
launch of VIPnets UMTS service is expected to take place in 2005. Furthermore, VIPnet intends to enter the market for fixed-line services.
The granting of a license depends on two main factors: the foundation of the
Croatian regulatory authority for telecommunication, which is not expected
before April 2004; and new interconnection rules to be agreed upon between the
new agency and HT. For both factors, no strict time limits have been set and
the legally defined dates already passed. VIPnet does not expect the license
for fixed-line services to be granted before September 2004. Slovenia In February 2001 we purchased a 75% plus one share interest in Si.mobil, a
Slovenian mobile communications provider. We fully consolidate Si.mobil because
we hold an option to purchase the shares which we do not currently own for a
fixed price. At the end of December 2002 the final closing of the purchase of
the remaining shares was postponed until 2007. In Slovenia there are currently three mobile operators, Mobitel as the
dominant incumbent, Si.mobil and Vega. In addition, Debitel as a service
provider provides mobile communications services using the infrastructure of an
existing competitor whereas an operator relies on its own network
infrastructure. The competitive environment is characterized by a dominant
incumbent with a market share of around 69.2% and high market penetration at
76.5% at the end of 2003. At December 31, 2003 Si.mobil had a market share of
23.6% of the mobile communications market in Slovenia making it the second
largest mobile operator in Slovenia. Si.mobils number of customers amounted to
approximately 361,500 by the end of 2003, which represents an increase of the
customer base by 3.3% compared to end of 2002. The contract customer base
accounts for 43.5% of the total customer base. Si.mobil
introduced its (dual-) brand Si.mobil  Vodafone for its entire
market presence in September 2003. Further new and innovative tariff offers
such as Vodafone Eurocall and IZI, the first, true flat-rate tariff in the
Slovenian market were launched in 2003 as well. Besides being the first operator in Slovenia to introduce GPRS for prepaid
customers, Si.mobil implemented the first Enhanced Data Service for GSM
Evolution (EDGE) network in Europe in December 2003. This allows data transfer
in broadband quality and further promotes the usage of existing and future data
applications. For the time being EDGE, is an alternative to UMTS, as the
state-owned incumbent Mobitel was the only operator to have auctioned a UMTS
license in 2002 due to exceptionally high license fee compared to other
European countries. Nevertheless, a second tender for UMTS licenses is
expected. There are currently no indications concerning the timing of the
tender. Although the mobile communications market is near saturation, the
Slovenian regulatory authority has not yet taken any measures to increase
competition. Therefore, Si.mobil took the initiative and came into an agreement
with Mobitel on asymmetrical mobile-to-mobile interconnection fees providing
Si.mobil with a 40




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favorable termination fee for calls from Mobitel customers.
However, due to Slovenias upcoming entry into the European Union in May 2004,
a harmonization of local laws with European standards is expected. Liechtenstein On November 16, 1999, the Principality of Liechtenstein granted a GSM
license to mobilkom [liechtenstein], a wholly owned subsidiary of mobilkom
austria. mobilkom [liechtenstein] launched services on September 13, 2000.
Furthermore, mobilkom [liechtenstein] started premium-rate services and
services for mobile virtual network operators, which are interconnection
margin-businesses that account for a substantial part of its financial results. The penetration rate in Liechtenstein reached 76.3% at December 31, 2003.
The customer base of mobilkom [liechtenstein] amounts to more than 2,500 (all
of them contract customers), thus accounting for a 10.3% share of the mobile
communications market in Liechtenstein. mobilkom [liechtenstein] is the second
largest mobile communications provider in this highly competitive market. 41




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Properties Our consolidated financial statements (including mobilkom austria group)
show a net value for property, land and equipment of EUR 4,457.7 million in
2003 and EUR 5,000.7 million in 2002. The acquisition costs were EUR 10,682.3
million in 2003, and EUR 10,650.5 million in 2002. The acquisition costs
include, among others, communications network and other equipment totaling EUR
9,382.0 million, land totaling EUR 60.3 million and buildings totaling EUR
663.0 million at December 31, 2003. The item communications network and other
equipment includes primarily switching and transmission technology as well as
access and trunk cables. The properties of Telekom Austria consist primarily of buildings with
integrated technical facilities, such as switching devices, transmission
towers, antennas and, to a relatively small extent, administrative buildings.
In addition to the buildings we own, we also lease space. At December 31, 2003,
we used about 2096 facilities, of which approximately 35% were leased. The land
and buildings comprise overwhelmingly the property owned by Post und Telekom
Austria AGallocated between Österreichische Post and us as a result of the
spin-offs described under  History and Development of the Company. On June 30, 2003 we finished the relocation of our headquarters to
Viennas second district. The majority of our information technology equipment
is located at our own premises of approximately 11,000 square meters in Vienna.
Our main switching and transmission equipment is based in our Arsenal facility,
which occupies approximately 90,000 square meters in Viennas third district. The contract with Post & Telekom Immobiliengesellschaft mbH, a
wholly-owned subsidiary of Österreichische Post, for the planning, construction
and administration of the buildings we own and use, terminated on December 31,
2003 and has not been renewed. 
 Research and development Research and development in combination with our innovation strategy,
product lifecycle management and technology strategy is an integral part of our
innovation management. We believe that research and development (R&D) is
important to our continuing success and on retaining technological innovation
leadership. We hold a variety of patents and licenses. No single patent or
license is material to our business. We seek to stay ahead in promising areas of new research and scientific
advances with focused investing in application-oriented research. We focus our
research activities on trend-setting technologies particularly in the field of
broadband communications, transmission technologies, service platforms, optical
core technology and network security and support systems within our fixed line
and mobile telecommunications networks. We consider these research areas
indispensable for the creation of new services and for the build-up of
efficient and reliable multi-service network structures. Related issues are
being dealt with through participation in national and international
initiatives. The establishment of two operating segments, Wireline and Wireless, as
part of the reorganization of Telekom Austria has led to a bundling of forces.
Through enhanced coordination of the activities based on an integrated research
and development strategy, initiatives in R&D have been optimized. To assure technological leadership today and in the future, Telekom
Austria considers the further study of changing user patterns as an integrated
component of its innovation management. Within the past years there was a
considerable shift in R&D to consumer-oriented topics. The social and cultural
area has changed considerably through new technologies and vice versa. Thus, we
opened our studies in topics of cultural, media & communications. As a result
of the development of the internet from an information-source to an interactive
multimedia-platform, audio and video content is expected to be delivered per
mouse click. Telekom Austria looked into the challenges of broadband portals
in terms of customer acceptance, service bundling and content delivery network
infrastructure. Focus in our Wireless unit is also application and service-oriented. Many
of our research activities in cooperation with partners from industry, research
institutes and universities have dealt with services based on mobile data
applications, integration of advanced service platforms based on 3G (3rd
Generation Mobile Services architecture), multi-modal speech applications and
concepts for prototyping new services for the 3G environment. Within these
co-operations we have developed localization technologies to enhance accuracy.
We also hold patents for enhanced localization methods and a Service
Interaction Gateway. 42




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In accordance with one of the national main strategies Intelligent
Infrastructure presented by the Austrian ministry for transportation,
innovation and technology we have started a research program for telematic
services by using synergies through the co-operation with Arsenal Research and
other partners from the Austrian Traffic Telematic Cluster. We continued our participation in European Union-funded research projects,
with the objective of showing how multiple wireless standards and services they
offer can be converged in a flexible manner within one mobile consumer
terminal. In addition, we have worked on alternative mobile access
technologies, such as WLAN and its convergence with 3G-technologies as well as
service aspects due to packet oriented architectures in future mobile networks
(3rd Generation Partnership Project). In the e-government sector we presented a prototype of a digital
signature, which allows Austrian citizens to use their digital signature for
public administration issues by using their mobile phone. The development in
close cooperation with the Austrian Ministry of the Interior is based on the
new e-government law which was enacted in March of 2004. Our consolidated research and development expenses amounted to EUR 42.8
million, EUR 30.3 million and EUR 21.8 million for the years ended December 31,
2003, 2002 and 2001, respectively. Capital expenditures For
information relating to our capital expenditures, see
Item 5  Liquidity and capital resources  Capital expenditures. 43




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REGULATION AND LEGAL FRAMEWORK Regulation Liberalization (1998-2002) The development of the Austrian law follows the regulatory actions taken
by the European Union. As a result of implementing European Union directives,
the Austrian telecommunications market was liberalized by the Austrian
Telecommunications Act of 1997. In 1998, we lost our last exclusive right as
the national incumbent to provide domestic and international voice telephony
services to the public in Austria via fixed network. Recent developments (2002-today) In August 2003, a newly amended Austrian Telecommunications Act (the
Telecommunications Act of 2003) implemented European Union telecommunication
directives adopted in 2002 into Austrian law aligning the Austrian
communications market from sector specific regulation to the principles of
competition law. The act is also expected to lead to further harmonization of
market conditions through an obligatory European Union-wide consultation
process among national regulatory authorities, as well as by keeping national
regulations technologically neutral. The Telecommunications Act empowers the
Austrian Federal Minister for Transportation, Innovation and Technology (the
minister) and the national regulatory authority to issue ordinances containing
detailed provisions relating to the Austrian telecommunications market. Regulatory framework The amended Telecommunications Act of 2003 which entered into force on
August 20, 2003, allows unrestricted market access to all entrants who qualify
under the act and replaces the former licensing regime by a general
notification requirement. Consequently, any telecommunications service provider
is allowed to offer its services in Austria without a license. One of the
principal objectives of the Telecommunications Act of 2003 is the promotion of
competition within the Austrian communications sector and the provision of
reliable, high-quality and innovative telecommunications services at a
reasonable price. Regulatory measures are supposed to promote a modern
telecommunications infrastructure that leads to high-quality sites and
effective competition by stimulating investments in innovation and
infrastructure. Additional objectives include the provision of universal
service throughout Austria, the protection of customers and operators against
the distortion of competition, access to information and transparency of prices
and general terms, data protection, avoidance of significant market power and
efficient and interference-free use of frequencies. Operators having
significant market power in particular communications markets are subject to a
special regulatory regime. In general, sector specific regulatory measures will
be applicable only in the absence of effective competition. Regulatory measures
must be kept technologically neutral and may not restrict the introduction of
innovative products and services (generally referred to as emerging markets). Retail markets should be subject only to regulation if regulatory
measures applied to the wholesale markets fail to ensure effective competition.
In accordance with the principles of general competition law, markets which may
be subject to sector-specific regulation are generally identified by the
European Commission and accordingly defined by the Austrian regulatory
authorities as subjects of market analysis. The European Commission can veto
market definition and market analysis decisions proposed by the national
regulatory authority. Where the minister or the national regulatory authority
intend to take measures with material effect on the Austrian telecommunications
markets, a national consultation process is required to take place. Under the new regime, the scope of sector-specific regulation shall be
subject to a broader market concept and regulatory measures must be narrowly
and proportionally directed at concrete market failures. As a further result of
the intended transition to general competition law, the Cartel Court has been
vested with sole jurisdiction over matters concerning abuse of significant
market power. The mandate of the regulatory authority overseeing the Austrian
communications markets is to ensure competition and the availability of
high-quality communications services. Under the Telecommunications Act of 2003,
the regulatory authority is responsible for notification, usage of frequencies,
administration of the numbering system, ensuring unrestricted market access for
new entrants and controlling the provision of universal service. The regulatory
authority is required to define and analyze markets in order to identify
operators with significant market power and to impose regulatory measures where
it is deemed necessary. The authoritys role encompasses ensuring equal access
to networks, internally used services and facilities for all competitors,
particularly in the areas of interconnection, pre-selection of a carrier,
number portability and opening of access to local subscriber lines, also called
unbundling of the local loop. Access may be refused only 44




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on objective grounds, such as network-security or lack of interoperability
of services. The Telecommunications Act of 2003 also generally deals with
protection of data, technical infrastructure, numbering, rights of way and
consumer protection. New markets and regulation of operators with significant market power Under the 2002 EU directives, the former sector-specific concept of market
dominance, now called significant market power has been aligned with the
concept of market dominance as used in European Union and Austrian competition
law. In May 2003 the EU Commission identified the following 18 markets which
may be subject to sector-specific regulation. Retail level:  
    
    access to the public telephone network at a fixed location for residential customers;
    
    access to the public telephone network at a fixed location for non-residential customers;
    
    publicly available local and/or national telephone services
provided at a fixed location for residential customers;
    
    publicly available international telephone services provided at a
fixed location for residential customers;
    
    publicly available local and/or national telephone services
provided at a fixed location for non-residential customers;
    
    publicly available international telephone services provided at a
fixed location for non-residential customers; and
    
    minimum set of leased lines (which comprises the specified types of
leased lines up to and including 2MB/sec as referenced in Article 18
and Annex VII of the Universal Service Directive). Wholesale level:  
    
    call origination on the public telephone network provided at a fixed location;
    
    call termination on individual public telephone networks provided at a fixed location;
    
    transit services in the fixed public telephone network;
    
    wholesale unbundled access (including shared access) to metallic
loops and sub-loops for the purpose of providing broadband and voice
services;
    
    wholesale broadband access;
    
    wholesale terminating segments of leased lines;
    
    wholesale trunk segments of leased lines;
    
    access and call origination on public mobile telephone networks;
    
    voice call termination on individual mobile networks;
    
    wholesale national market for international roaming on public mobile networks; and
    
    broadcasting transmission services, to deliver broadcast content to end users. With the exception of the market for broadcasting transmission services,
the remaining 17 of these markets are relevant for telecommunication.To date,
the Austrian regulatory authority has defined 16 nationwide markets which may
be subject to sector-specific regulation in the Austrian communication sector
by market ordinance (Märkteverordnung)which entered into force on October 17,
2003. The only market that remains to be identified is the market for wholesale
broadband services. The regulatory authority analyses the actual status, development and
progress of competition on these markets. Effective competition implies the
absence of significant market power. 45




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Under the new regime, an operator is considered to have significant market power if:  
    
    it faces little or no competition; or
    
    compared to its competitors, it has an overwhelming position due to
its ability to influence market conditions, its revenues in comparison
to the size of the market, its control of the means of access to
customers, its access to financial resources or its experience in
providing products and services. If the regulatory authority concludes that no provider is exercising any
significant market power, the regulatory authority will not take any measures
to promote and strengthen competition. Where an operator is identified as having significant market power, the
regulatory authority will impose at a minimum one of the following measures: On a wholesale market:  
    
    Operators shall follow the principle of non-discrimination and
provide competitors with services and special network access facilities
with the same terms and conditions and quality at which the operator
offers them to each of the 18 markets defined above, to its affiliated
companies and other competitors.
    
    Operators shall provide the regulator with information about their
costs and accounting, technical specifications, network
characteristics, general terms and pricing rules including discounts.
    
    Operators shall grant access to the telecommunications network,
various facilities (including site sharing, co-location etc.) or
unbundled parts thereof on a non-discriminatory basis to all
competitors and users. Further, operators may be required to provide
access of specific services on a wholesale basis for resale by third
parties, co-location or other forms of facility sharing (including
lines, building or mast sharing), access to operational support systems
or similar software systems necessary to ensure fair competition in the
provision of services, or may be obliged to grant open access to
technical interfaces, protocols or other key technologies that are
indispensable for the interoperability of services or virtual network
services.
    
    Operators shall implement adequate, separate cost accounting
systems for their telecommunications activities and other businesses to
ensure transparency and prevent cross-subsidization. The regulatory
authority is allowed to impose a specific cost accounting method. On a retail market:  
    
    Operators may be prevented from applying unjustified prices.
    
    Operators may not discriminate among customers.
    
    Operators may not unbundle services in a discriminating manner.
    
    Operators shall obtain prior approval for business terms and
conditions relating to the provision of voice telephony on fixed and
mobile networks and leased lines. Operators shall obtain prior approval
for fixed line voice telephony and leased line tariffs. Pursuant to the Telecommunications Act of 2003, the regulatory measures in
the retail market may only be taken in case of failure of adequate measures in
the respective wholesale markets. All operators which are deemed to have
significant market power are obliged to provide a minimum set of leased lines
according to the principles of non-discrimination, cost orientation and
transparency. Every measure taken by the regulatory authority must be proportional and
adequate and take into consideration existing capacities, investment risks,
industrial or intellectual property rights, provision of European Union-wide
services and long term competition. In late 2003, the regulatory authority began its analyses of the markets
pursuant to the Telecommunications Act of 2003.We do not expect any decision
identifying operators with significant market power on specific communication
markets and regulatory actions before mid-2004. Until then, our current
obligations in place will continue. The regulatory authority will start with
its market analyses of mobile roaming charges after the European Commission has
published its findings on this topic. 46




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According to the regulatory authoritys decision issued in 2001, no mobile
operator in Austria was deemed to have significant market power, either in the
market of mobile voice telephony or in the market of interconnection. According
to a 2002 decision by the regulatory authority, Telekom Austria is the only
operator considered to have significant market power, but only in the markets
defined according to the former regime:  
    
    voice telephony over fixed network;
    
    leased lines; and
    
    national interconnection. Pricing and price regulation for end users The regulatory authority may impose specific obligations for operators
with significant market power in the relevant retail market if there is no
effective competition in that (or end user) market and specific obligations for
wholesale markets including carrier selection and carrier pre-selection are not
likely to achieve the objectives of the Telecommunications Act of 2003. Once the regulatory authority has determined that we exercise significant
market power in one of the relevant markets, the regulatory authority may
subject us to the requirement that we not charge excessive prices, or provide
unreasonable bundles. The regulatory authority has the power to control
individual tariffs and cost orientation of these tariffs. The regulatory
authority also has the right to approve the minimum offer of leased lines and
the prices for those leased lines. If the regulatory authority subjects our tariffs and tariff-related
business terms and conditions for services in special retail markets to its
approval, the regulatory authority must approve the business terms and
conditions and tariffs of these services prior to their introduction or change.
Prices for these services must be cost-oriented and based on transparent
criteria. We are required to maintain a cost accounting system which is
certified each year by the regulatory authority. The regulatory authority has the right to approve or refuse the proposed
tariffs and business terms within eight weeks. If the regulatory authority
fails to act within this time, the terms and conditions or tariffs are deemed
approved. Tariffs for services without the obligation for approval are subject
only to a notification obligation concerning the service and business terms,
conditions and tariffs. In addition, all terms and conditions which are modified in a way that is
unfavorable for customers must be announced two months prior to their
introduction. Furthermore, affected customers must obtain detailed information
about the unfavorable modifications at least one month before the modification
becomes effective and have the right to terminate their contracts. Special provisions exist for service number tariffs. The Price Ordinance
for Service Numbers specifies maximum tariffs for the various services offered. Ordinances under the new Telecommunications Act 2003 Since the enactment of the Telecommunications Act of 2003, the minister
and the regulatory authority have issued several important ordinances: The Mobile Number Portability Ordinance, issued by the minister on
November 4, 2003, establishes the legal and regulatory framework for the
portability of mobile subscriber numbers between operators. The ordinance also
stipulates the manner in which calls originating in the fixed networks will be
routed to these ported numbers, customer protection and transparency of costs. The Telecommunications Market Ordinance, which entered into force on
October 17, 2003 defines the markets which may be subject to regulation. The Ordinance on Itemized Billing, issued by the regulatory authority on
December 1, 2003 stipulates special requirements for operators with regard to
itemized bills. 47




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We continue to be materially affected by former ordinances implementing
the Telecommunications Act of 1997. The Interconnection Ordinance deals with
interconnection under the Telecommunications Act, special network access and
opening of the local access and joint use of facilities. It subjects operators
with significant market power to a cost accounting system based on the
forward-looking long-run average incremental costs. The Numbering Ordinance
describes the numbering plan, including the national numbers regime, the
proposed changes towards area codes, mobile numbers, personal numbers,
toll-free numbers, shared cost and value-added service numbers, and numbers for
services in the public interest and the structure of national and international
numbers. Since legal competencies regarding issuing these ordinances have been
moved from the minister to the regulatory authority we expect the
Interconnection Ordinance and the Numbering Ordinance to be amended or reissued
in 2004. The Ordinance on Tariffs for Value-Added Services, reissued on October 27,
2003 determines the maximum prices for calls to personal numbers, shared cost
services and premium rate services. The Telecommunications Acts of 1997 and of 2003 contain provisions
relating to the nation-wide availability of certain basic telecommunications
services, referred to as universal service. Additional details concerning
universal service requirements are provided in the Universal Service Ordinance
which became effective in June 1999 and was amended during 2000. The ordinance
which determines the amount operators are required to contribute to the funding
of the regulatory authority entered into force on March 8, 2004. According to
this ordinance, in 2004, operators with a revenues exceeding EUR 230,000 in the
telecommunications sector are required to contribute to the financing of the
regulatory authority. The regulatory authority The Telecommunications Act of 2003 and the Communications Authority Act
establish the legal basis for the existing regulatory bodies in the
telecommunications (Telekom-Control-Kommission) and the broadcasting media
sector (Communications Authority). The Rundfunk und Telekom Regulierungs-GmbH
serves as the administrative arm of both of these authorities. Within this
report the term regulatory authority refers to Telekom-Control-Kommission
and to Rundfunk und Telekom Regulierungs-GmbH. Telekom-Control-Kommission The Telekom-Control-Kommission is an independent three-member committee
that meets the requirements of a Tribunal under the European Convention on
Human Rights. The competencies of the Telekom-Control-Kommission are ordering joint use
in a dispute concerning rights of way; decisions in proceedings concerning data
of subscriber directories; exercising the right to object pursuant to general
conditions of business; determining financial compensation to be paid from the
universal service fund; determining the amount to be paid to the universal
service fund; determining if in a respective relevant market one or more
operators have significant market power and imposing specific obligations;
decisions in procedures concerning specific obligations (e.g. obligation of
non-discrimination, access to network equipment and network features,
interconnection, number portability and Carrier Selection); approval of
conditions of business and charges and exercising the right to object;
frequencies: decision on the licensing and allocating of frequencies as well as
change and revoke of frequency allocations; decision on the right to provide
communications networks or services, including the right to revoke these
rights; decision on preliminary injunctions; identification and filing
applications concerning skimming off enrichment; and filing applications with
the Cartel Court. Rundfunk und Telekom Regulierungs-GmbH Generally, the Rundfunk und Telekom Regulierungs-GmbH a non-profit company
with limited liability, is responsible for all issues, which are outside the
responsibility of the Telekom-Control-Kommission. Its primary activities are in
particular numbering or dispute resolution between end-users and operators and
dispute resolution among operators. Pursuant to a modification of the
Telecommunications Act of 2003, the Rundfunk und Telekom Regulierungs-GmbH can
enact ordinances (such as those concerning numbering, value added services or
relevant markets for regulation) and must resolve some disputes called
alternative dispute resolution concerning the Telekom-Control-Kommission.
Although it is wholly owned by the Republic of Austria, the Rundfunk und
Telekom Regulierungs-GmbH is financially independent from the Austrian state.
Its expenditures are covered by annual payments from communications service
providers and broadcasting companies in relation to the total revenue of the
respective markets. The minister supervises the Rundfunk und Telekom
Regulierungs-GmbHs activities. Rundfunk und Telekom Regulierungs-GmbH is
required to publish a 48




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yearly report about the activities of the regulatory authority and it is
also obliged to report annually in writing to the minister and to the
Parliament on the implementation of the targets set by regulation. Communications authority Pursuant to the Communications Authority Act, the Communications Authority
is responsible for the broadcasting media sector. In some cases, the
Communications Authority may serve as the regulatory authority under the
Telecommunications Act of 2003 or has at least the status of a party in
proceedings. Other regulatory bodies The minister, the Telecommunications Offices and the Office for Radio
Installations and Telecommunications Facilities are administrative authorities
that is empowered to take all measures may take all measures requiring the
exercise of administrative power in the area of telecommunications with regard
to Austrian telecommunications law. Although not established at this point, the
Telecommunications Advisory Board will advise the minister and the regulatory
authority regarding telecommunications matters. Decisions of the regulatory
authority may be appealed to the Supreme Administrative Court and in limited
circumstances to the Constitutional Court. Regulation of market entry The Telecommunications Act of 2003 abolished the former licensing regime.
Entry into the market by a new participant requires only notification with the
regulatory authority and the payment of a processing fee. The new Telecommunications Act of 2003 also replaced the former licensing
regime for mobile operators using the GSM technology with a notification
regime. However, the provision of mobile telecommunication services continues
to be limited by the allocation of frequency spectrum. Therefore, the number of
GSM-network operators has remained the same as under the former
Telecommunications Act. There are four GSM network operators:  
    
    mobilkom austria AG & Co KG
    
    T-Mobile Austria GmbH, the former max.mobil Gesellschaft für Telekommunikation GmbH
    
    One GmbH, the former Connect Austria Gesellschaft für Telekommunikation GmbH and
    
    tele.ring Telekom Service GmbH & Co KG. One GSM-service provider, Tele2, uses the network of One GmbH. UMTS On November 3, 2000, six mobile operator, including mobilkom austria, the
three other GSM-operators in Austria and two new entrants (Hutchison 3G Austria
and 3G Mobile), successfully bid for UMTS licenses. mobilkom austria bid for
paired 10MHz and unpaired 10MHz frequency spectra in an auction held by the
Austrian regulatory authority. Under the terms of the license award, mobilkom
austria is required to cover 25% of the Austrian population by the end of 2003
and 50% by the end of 2005. At the time of the commercial launch of the service
in April 2003 mobilkom austrias UMTS network already covered 42% of the
Austrian population. By the end of 2003, one of the new entrants, Telefonica, suspended its
operations in Austria. mobilkom austria bought the Telefonica-owned Austrian
company 3G Mobile, thereby acquiring additional paired 9.8 MHz frequency
spectrum. However, prior to its approval, the National Regulatory Authority
(NRA) imposed the obligation on mobilkom austria to sell 2x5 MHz frequency
spectrum by January 31, 2005. Therefore mobilkom austria sold 2x5 MHz to the
competitor T-Mobile Austria in March 2004. The Telecommunications Act of 2003 requires that UMTS licensees, like
mobilkom austria, also hold digital GSM licenses. UMTS licenses grant national
roaming services to any UMTS licensees who do not operate a GSM network
provided that there is enough capacity. National roaming means that the
customers of a UMTS operator are able to make and receive phone calls in areas
not covered by their UMTS operator by using the network of another GSM
operator. National roaming has been designed to allow UMTS operators which do
not have an established GSM network to offer nationwide GMS services and
thereby enhancing competition. UMTS providers that have a geographic coverage
of 20% of Austria with their UMTS network are entitled to receive 49




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national roaming. If no agreement on roaming rights can be reached among
the respective UMTS providers, the regulatory authority can determine the
roaming rights and roaming fees after a hearing with the respective parties.
mobilkom austria entered into an agreement with Hutchison 3G Austria for GSM
and GPRS roaming services as Hutchison 3G Austria only provides its customers a
UMTS network in congested areas. mobilkom austria is in the position to make
additional revenues, mainly because commercial terms were agreed, not
regulated. National roaming among UMTS operators is also permitted, although
there is no legal obligation to provide this service. Major regulatory decisions affecting Telekom Austria Current tariffs: voice telephony services and leased lines Our current tariffs for voice telephony services and national leased lines
have been approved under the Telecommunications Act of 1997. The last decisions
concerning these approvals are dated July 21, 2003. The minimum tariff was
cancelled on July 21, 2003. We did not file an application but only notified the regulatory authority
about our international leased lines tariffs which became effective on May
2001. In our opinion these tariffs were not subject to approval. The regulatory
authority instituted proceedings against us since it believes to have the
authority to set the tariffs for international leased lines. The Supreme
Administrative Court will decide whether these tariffs are subject to approval
or not. Pending the completion by the regulatory authority of the market analyses
the current regulatory obligations for dominant undertakings pursuant to the
Telecommunications Act of 1997 continue to be in effect. The current obligation of price control for voice telephony services
requires that we obtain approval from the regulatory authority prior to
implementing new tariffs or changing existing tariffs. Under the
Telecommunications Act of 2003, we may continue to be subject to such
obligation in the future, depending on the outcome of the market analyses by
the regulatory authority (see   New markets and regulation of operators with
significant market power.. The market analyses might also subject additional
services to the pre-approval requirement by the regulatory authority. Fixed-to-mobile tariffs The regulatory authority set the amount which we may retain for each
minute originating from our fixed line network, known as the mobile turnover
retention, at EUR 0.06 per minute. We may retain this amount for each minute
originating from our fixed line network, notwithstanding the mobile operators
termination charge. Even if we increase the fixed-to-mobile tariff we are not
allowed to retain more than EUR 0.06 per minute but have to pass the increase
on to the mobile operator. Tariffs for special services In December 2000, the Austrian government enacted a special act (Fernsprechentgeltzuschussgesetz) providing for payments by the state for the
communications costs of certain customers, such as those who are indigent,
physically handicapped or poor. The Republic of Austria will pay
telecommunications providers EUR 13.81 per month for each such customer. With
this entitlement, the eligible person is granted free access plus one hour of
free calls during day-time hours in their local zone. We also signed a contract
with the minister that regulates until March 2007 the administration and
payment concerning this subsidy. We are currently negotiating a new contract.
At December 31, 2003 we served about 247,800 entitled customers. Interconnection and specific network access The issue of interconnection is still of particular importance to the
development of a competitive market in telecommunications. The European Union
Regulatory Framework for Interconnection is set out in Directive 2002/19/EC on
access to and interconnection of electronic communication networks and
associated facilities. These provisions were implemented into Austrian law by
the Telecommunications Act of 2003, the Interconnection Ordinance and the
Numbering Ordinance. The Telecommunications Act imposes specific obligations concerning network
access and interconnection. The Interconnection Ordinance provides detailed
regulations and specifies the manner in which interconnection 50




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and special network access is to be carried out. The Numbering Ordinance
also lays down the principles of pre-selection of a carrier and number
portability. General principles All operators of public telecommunications networks are obligated upon
request to offer network interconnection to other operators. If the parties
fail to reach an agreement within six weeks, each party can refer the matter to
the regulatory authority, who will then decide on the conditions for
interconnection. The regulatory authority is also entitled to determine fees
for interconnection if providers with significant market power are involved.
The interconnection agreement must contain certain terms required by the
Interconnection Ordinance discussed below. Provisions applicable to operators with significant market power An operator with significant market power of a communications network who
offers communications services to the public must grant other operators
specific access to its communications network and facilities. In imposing these obligations the regulatory authority takes into
consideration the technical and economic viability of using or installing
competing facilities (in the light of the rate of market development), the
feasibility of providing the access proposed (in relation to the capacity
available) and the initial investment by the facility by the facility owner
plus the risks involved in making the investment. If the regulatory authority
decides to impose any measures, a network operator must grant competitors
access to its services on equal terms and conditions which it uses internally,
unless different conditions can be objectively justified. In addition, the
operator may be required to unbundle its services and therefore to offer its
services used internally, including transmission, switching and operational
interfaces in a way that competitors do not need to purchase services they did
not request. In addition, operators with significant market power are obliged to grant
physical collocation. This means the operator is obliged, if technically
feasible, to allow competitors to use transmission, switching and operational
interfaces to the competitors network on the operators premises on equal
terms and conditions which it uses internally. An operator with significant
market power is not, however, required to unbundle if it can demonstrate that
the request for unbundling is not objectively justified. An operator with significant market power must adhere to the harmonized
technical standards for interfaces and service features in conformity with the
Directives of the New Regulatory Framework, especially with the Access
Directive, of the European Union. Operators with significant market power may be obliged to issue reference
interconnection offers. The regulatory authority must publish reference
interconnection offers. They also have the power to amend the reference
interconnection offers at any time. Operators that are obliged to render reference interconnection offers must
file agreements on interconnection and special network access to the regulatory
authority. Agreements must be based on objective criteria and be
comprehensible. Interconnection and special network access must be provided on
a non discriminatory basis. 51




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Interconnection in Austria In various decisions since March 1998, the regulatory authority has set
out additional principles for interconnection. With these decisions, the
regulatory authority set the tariffs for interconnection from fixed and
mobile-to-fixed line and also from fixed line to mobile networks. The
regulatory authority decides on the tariffs for carrier selection, the type and
scope of carrier selection to be implemented, local interconnection, mutual
access to toll-free numbers, value-added services, shared cost services,
private networks, personal numbers and access to on-line services. At December 31, 2003, we had entered into interconnection agreements with
27 fixed-line and 6 mobile (GSM, Tetra, UMTS) registered operators in Austria.
Separate fixed and mobile agreements were entered into with all six mobile
operators. The most important services between operators are voice
interconnection services, such as call termination, carrier selection, call
origination to services (e.g. value-added services), and number portability as
described below. Call termination in Austria Termination is the service which transports a telephone call from the
point of physical connection between two or more networks to the called party
of another network. Fees for call termination vary depending on the route taken
by the signal, and the number of switching elements used. Depending on the
locations of the point of interconnection and the called party, there may be a
different number of switching stages and inter-exchange links, which is the
reason for a more complex tariff structure. The charge is calculated on a per
minute basis. Austrian practice distinguishes among three situations:  
    
    Local exchange interconnection allows access to all customers
within a local area. At December 31, 2003, we allowed access to 43
local exchanges;
    
    Single transit interconnection is interconnection via a single
transit switch. In technical terms, this is known as single transit or
single tandem call termination. We offer seven long distance exchanges
for single transit interconnection; and
    
    Double transit interconnection is interconnection via two transit
switches. In technical terms, this is known as double transit or double
tandem call termination. Carrier selection Carrier selection is the feature that allows a customer to select another
network operator for voice telephony services. Carrier selection is identified
as an interconnection service in the Telecommunications Act. Two types of
carrier selection are currently regulated:  
    
    Pre-selection. The customer chooses the network operator for all
local, long distance, international, fixed-to-mobile calls, and calls
to special service numbers on a permanent basis with the opportunity
for call by call override; and
    
    Call-by-call selection. The customer dials a prefix number or
Carrier Access Code and a network operator code, or Carrier
Identification Code, each time prior to dialing the called partys
number to identify the network operator to be used to route the call. We are required under the Numbering Ordinance to offer pre-selection and
call-by-call selection. To date other fixed line operators are not required to
do so, but are not prohibited. Number portability According to European Union directives, the Austrian Telecommunications
Act, and the Numbering Ordinance,all fixed network providers are required to
provide number portability. This means that customers can change operators
while keeping their existing telephone number provided they do not change their
residence. In early 2000, the regulatory authority decided on the portability
of geographical numbers as well as service numbers for the first time. The Numbering Ordinance requires the introduction of three types of number
portability to be implemented in two stages. The obligation to provide operator
portability and service number portability became effective on January 1, 1998.
The obligation to provide geographic number portability became effective on
January 1, 2000. 52




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The regulatory authority, in a 2002 decision, ruled that operator
portability of geographic numbers and service number portability have to be
offered at a one-off fee of EUR 21.79. The Telecommunications Act of 2003 now requires mobile operators to
provide for number portability. The Number Portability Ordinance
(Nummernübertragungsverordnung) entered into force in November 2003. Prior to
the effectiveness of the ordinance in mid-2002 all GSM-operators, the new
UMTS-licensees, and all fixed line operators established a working group with a
goal to agree on the technical and commercial terms for mobile number
portability. As no agreement was reached, several proceedings are pending with
the regulatory authority to determine the details of the number portability
ordinance. A decision is not to be expected before May 2004 and the
implementation of the Number Portability is not to be expected before end of
2004. Access to local subscriber lines As described above, a network operator with significant market power in a
particular market must allow other providers to access its network or unbundled
parts of that network. Limitations on access may be based only on the
essential requirements as set forth in the European Union Regulation on
Unbundling of the Local Loop and the EU Unbundling Recommendation, which
include the preservation of the security of network operations, the maintenance
of network integrity, the interoperability of services and the protection of
data. Agreements on network access must be based on objective criteria, must be
comprehensible and must provide non-discriminatory unbundled access with equal
opportunity to the telecommunications networks of an operator. In light of these obligations, various competitors have requested a
reference unbundling offer which contains the conditions according to which we
provide them access to local subscriber lines, also called unbundling of the
local loop. Allowing competitors to connect to customer access lines also gives
them direct access to customers without having to construct local networks on
their own. Therefore, competitors may use our customer access lines to offer a
wide range of services. We receive a flat monthly fee from the operators,
irrespective of the bandwidth transmitted. The regulatory authoritys decisions
to date are not restricted to voice telephony or a certain bandwidth. We have
always adapted our reference unbundling offer to these decisions. A resale of
access lines by our competitors is not expected until 2005. With full unbundling, the copper telephone line is leased to a third party
for its exclusive use. The lessee has full control of the relationship with its
customer for the provision of a full range of telecommunications services,
including deployment of digital subscriber lines or DSL systems for high speed
data applications. A related issue is collocation, whereby we must grant space to operators
requesting unbundling, which must be physically close to the telecommunications
lines. The regulatory authority has determined that such space must be leased
at market rates. We have filed appeals to the Supreme Administrative Court on
the basis that the imposed monthly and one-time fee per customer does not cover
our costs. On March 12, 2001, the regulatory authority decided that, beginning
January 1, 2002, we must offer full unbundling for a monthly fee of EUR 10.90
and subloop unbundling (unbundling of a specific part, but not the entire local
loop) for a monthly fee of EUR 8.43 until December 31, 2004. We may not charge
our competitors for sub-loop unbundling from an in-house distribution point to
a network termination point. Due to various decisions that were rendered in 2000, leased line and
internet providers are also allowed to unbundle our subscriber lines under a
non-discriminatory regime. We appealed to the Supreme Administrative Court
because we believe that this could endanger our networks integrity. We think
that the monthly and one-off fees set by the regulatory authority do not cover
our costs and penalties for not following the procedures are excessive. At December 31, 2003, we had entered into agreements with about 22
competitors concerning unbundling the local loop. Due to advancing investments
by our competitors in unbundling activities, the number of unbundled subscriber
lines is increasing. At December 31, 2003, about 27,000 subscriber lines have
been fully unbundled. An alternative to full unbundling is high speed bit stream access in which
an operator installs a high speed access link to the customers premises, for
example by installing its preferred DSL equipment and configuration in its
local access network. The access link must be made available to third parties
to enable them to provide high speed services to customers. This form of
unbundling is available on demand as a result of an agreement with ISPA, the
organization of Austrian Internet Service Providers, and put into force in
March 2000. The agreement has been frequently amended to reflect technical
changes. 53




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In light of the European Union Regulation on Unbundling of the Local Loop
which was put into force at the beginning of 2001, the regulatory authority
requires us to offer shared use. We appealed against this decision. With shared
use of the copper subscriber line, one of the operators provides telephone
service, while the other delivers high speed data services over the same
subscriber line using its own high-speed DSL modems. Telephone traffic and data
traffic are separated by means of a splitter before the switch. The line
remains connected to and part of the public switched telephone network. While
we are presently required to offer shared use, there has been no significant
demand in the Austrian market for such usage so far. Regulation of interconnection and access fees As previously discussed in more detail, according to the
Telecommunications Act of 2003, the former market for interconnection will be
redefined. The regulatory authority is now analyzing whether effective
competition exists in the relevant markets. In the absence of effective
competition, the regulatory authority will identify operators with significant
market power in these markets. Remedies may be imposed on operators with
significant market power. The regulatory authoritys decisions are expected by
mid-2004. Until then, the existing obligation on operators with significant
market power will remain valid. Interconnection fees for the fixed network are regulated by element-based
costing. Element-based costing means that fees are charged according to the
number and level of switching facilities used. This differentiates between
single and double tandem interconnection. There are local, single tandem and
double tandem tariffs. Interconnection fees vary according to the time of day.
Peak time is from 8:00 a.m. to 6:00 p.m. from Monday through Friday. Off-peak
time is from 6:00 p.m. to 8:00 a.m. on weekdays and the entire weekend and on
public holidays. Origination and termination fees are usually identical except for
interconnection at the double tandem level where origination fees are higher
than termination fees. According to the regulatory authority, higher
origination fees on the double tandem level should avoid atypical traffic by
giving incentives to alternative network operators to expand their networks
into a larger number of point of interconnection locations. The regulatory
authority took this decision to avoid inefficient market entry from companies
with few switches or small networks. The following table shows the applicable interconnection fees, valid until
September 30, 2003. Single tandem
    
    Double tandemRates
    
    Local
    
    (One main switch)
    
    (Two main switches)(EUR per minute)
    
    (EUR per minute)
    
    (EUR per minute)Origination
    
    Peak
    
    
    0.0085
    
    
    
    0.0130
    
    
    
    0.0290Off-peak
    
    
    0.0050
    
    
    
    0.0072
    
    
    
    0.0110Termination
    
    Peak
    
    
    0.0085
    
    
    
    0.0130
    
    
    
    0.0225Off-peak
    
    
    0.0050
    
    
    
    0.0072
    
    
    
    0.0087Transit
    
    Peak
    
    
    n.a.
    
    
    
    0.0029
    
    
    
    0.0062Off-peak
    
    
    n.a.
    
    
    
    0.0015
    
    
    
    0.0032
 A group of operators, UPC Telekabel, Tele2, UTA, MCI and IT Austria,
initiated a proceeding regarding future fees with the regulatory authority. A
decision is expected before mid-2004. The new fees will become effective
retroactively on October 1, 2003. These interconnection fees apply to voice
telephony services and other services, including access to value-added services
in the fixed network. These interconnection fees have been prolonged with all
operators except for the aforementioned operators starting October 1, 2003 and
until new fees become effective. In case of a reduction of interconnection fees
by the regulatory authority, the interconnection fees for the aforementioned
operators will be adjusted retroactively as of October 1, 2003. For all other
operators with whom we have bilateral agreements the new interconnection fees
will be adjusted as of the dates set in these bilateral agreements. Interconnection fees for accessing on-line services are EUR 0.0085 per
minute (peak) and EUR 0.0050 per minute (off-peak) for the local level, and EUR
0.0130 per minute and EUR 0.0072 per minute for single tandem. Local transit is
not permitted. The regulatory authority decided that we must pay the
interconnection fee for regional call termination instead of a local
termination fee to one operator which is connected at the local level. Mobile operators must pay the same fees as fixed network operators for
terminating their calls in the fixed network. For fixed-to-mobile termination,
the fees vary depending on in which mobile network the call is actually
terminated. 54




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Mobile interconnection tariffs are regulated in Austria as a result of
decision Z 8/99 of November 11, 1999 (UTA against mobilkom austria). Due to the
fact that mobilkom austria had significant market power in the markets of voice
telephony and interconnection, these tariffs had to be offered to all
fixed-line operators in Austria. mobilkom austria took the position that
interconnection tariffs between mobile operators had to be applied
reciprocally. Therefore mobilkom austria initiated regulatory proceedings
against the three other mobile operators in Austria at that time: T-Mobile
Austria (former max.mobil), One GmbH (former Connect Austria), and tele.ring.
In decisions Z 6/00, Z 7/00, and Z 8/00 on July 31, 2000, the regulatory
authority agreed with mobilkom austrias position and decided, although in
stages, on reciprocal termination rates. The next decision on termination rates
to other mobile networks, Z 31/01, Z 3/02 between mobilkom austria and T-mobile
Austria, was issued on May 6, 2002. However, contrary to the former decisions
the regulatory authority decided in favor of non-reciprocal interconnection
charges between mobile networks. The regulatory authority argued that other
mobile networks incurred higher used-capacity costs per minute, and should
therefore be entitled to charge higher interconnection fees. Due to the fact
that since mid-2001 no mobile operator is considered to have significant market
power, the determination of the fees was made on the basis of a general
obligation to offer services at reasonable prices (the fee comprising
used-capacity costs and parts of other cost factors). mobilkom austria filed
appeals against all these regulatory decisions. The appeal against the decision
Z 8/99 was dismissed in March 2004. All other appeals are still pending. In December 2002 UTA, T-Mobile Austria and tele.ring commenced regulatory
proceedings against mobilkom austria, the main issue once again being
interconnection fees. In decision Z 28/02, Z 29/02, Z 2/03 the regulatory
authority established new interconnection tariffs for the involved mobile
operators: for mobilkom austria EUR 0.1125 per minute from January 1, 2003 to
March 31, 2003, EUR 0.1111 to August 31, 2003, and EUR 0.1086 from September 1,
2003 to September 30, 2003; for T-Mobile Austria EUR 0.138 from January 1, 2003
to March 31, 2003, EUR 0.1349 from April 1, 2003 to August 31, 2003, and EUR
0.1318 from September 1, 2003 to September 30, 2003; for tele.ring the rate
remained unchanged at EUR 0.1962 until September 30, 2003. mobilkom austria has
filed an appeal against this decision. Commercial agreements on interconnection tariffs have been reached with
all mobile operators beginning October 1, 2003. Thereby tele.rings mobile
termination rate will be lowered in stages to finally EUR 0.1381 in April 2005
reducing the asymmetry of interconnection fees between operators. At January 1, 2002 we altered the invoicing system with alternative
telecommunications companies in accordance with the regulation of the
regulatory authority. This resulted in a reduction of revenues in 2002 as the
amounts were only invoiced net of the interconnection charged to us for
terminated calls from alternative telecommunications companies. During the year 2002, we standardized our contracts with all domestic
interconnection partners in the fixed and mobile sector, effective January 1,
2002. We have received approval for these contracts by the regulatory
authority. The standard contracts contain a requirement that all contracting
parties provide collateral for the obligations under the contract, which allows
us to minimize the risk of potential insolvency of interconnection partners.
Additionally, the standard interconnection contracts include, among other
conditions, the obligation for all operators to transmit the calling line
identification to allow us to trace the origin of the core. The contract also
provides for a renegotiation of the contract in case it is voided by the
Austrian courts. GSM-frequency spectrum In December 2003, the regulatory authority granted a regional 5 MHz
GSM-1800MHz-frequency spectrum to mobilkom austria, free of charge. Numbering Pursuant to the Telecommunications Act of 2003, the national telephone
numbering system is administered by the regulatory authority and the minister.
The regulatory authority must allocate numbers for all applications
(geographical, non-geographical), including numbers which provide access to
services (toll-free, shared cost and value-added services as well as emergency
services and special numbers). The regulatory authority is also responsible for
designing the numbering plan set out in the Numbering Ordinance. We expect a new Numbering Ordinance to be issued by the regulatory
authority in 2004. Special regulations apply for numbers for value-added
services, shared cost services and premium rate services. These numbers are 55




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also allocated by the regulatory authority and can be allocated to network
operators as well as to end users. The number allocated to an operator or an
end user will be implemented in a specific network at the request of an end
user. Special fees apply for the implementation of these numbers in other
networks. The Numbering Ordinance also puts into effect the requirements of
interoperability, carrier pre-selection and number portability. All operators
must ensure interoperability to all customers, independent of the operator they
use. Pre-selection of a carrier and call-by-call selection must be offered by
operators with significant market power. Additionally, customers must have the
option of overriding their pre-selected carrier on a call-by-call basis. The
selected carrier, whether on a call-by-call or a pre-selected basis, is
responsible for billing and collecting the fees for the call. Under the Numbering Ordinance, Telekom Austria and other
telecommunications network operators have to provide number portability,
permitting customers to keep their assigned telephone numbers when they choose
to change their network operator. As discussed in more detail above, number
portability currently applies to geographic and service numbers but does not
apply to emergency and special numbers. The Numbering Ordinance also requires
operators to offer geographic portability within the same area. Since November 2003, mobile operators must also permit their customers to
keep their assigned telephone numbers when changing their mobile network
operator. Universal service The Telecommunications Act of 2003 sets forth the framework for universal
service in Austria. Universal service is defined as the minimum public services
that all users must have access to, at an affordable price and at a specific
quality level, independent of their place of residence or business. The scope
of universal service comprises access to public voice telephony via fixed line
including fax, modem and functional access to internet (excluding broadband),
access to a comprehensive directory enquiry service, access to a comprehensive
telephone directory and the full area coverage of public payphones at
accessible locations. The detailed technical quality criteria are further
defined by the Universal Service Ordinance. The Universal Service Ordinance also provides criteria for the quality of
voice/speech transmission, the reaction time for operator services, the
percentage of public payphones in function and billing accuracy. The operator
responsible for the provision of universal service has to report to the
regulatory authority about the quality parameters once a year. Upon request of other providers of public telecommunications services and
of publishers of comprehensive subscriber directories or comprehensive
directory enquiry services, each provider of public telephone services has to
provide them with subscriber data online or at least weekly in electronically
readable form for cost oriented charges. We are the only provider that is required to provide universal service.
Pursuant to the Telecommunications Act 2003 we are required to do so at least
until December 31, 2004. The Federal Minister of Transport Innovation and
Technology shall verify in due time if the conditions for a tender procedure
exist. In case such conditions do not exist, verifications shall be repeated
every five years. In case the provision of a universal service should lead to a
deficit, the regulatory authority will create and manage a Universal Service
Fund. All operators of telecommunications services who generate revenues of
more than EUR 5 million per year will contribute according to their revenues in
relation to the revenues of the other operators. The amount of the contribution
will be fixed by the regulatory authority. We have so far not been reimbursed for any of our costs incurred for the
provision of universal services by the Universal Service Fund. The
Telecommunications Act of 2003 states that the costs of universal service which
cannot be covered despite cost-efficient management are to be refunded to the
provider upon application to the extent such costs constitute an unreasonable
burden. However, costs are only to be refunded if the universal service
provider has a market share of less than 80% in the relevant market. In the
proceeding which determines the amount of compensation, the parties which are
required to pay the universal services charge shall be considered one joint
party. Under the Telecommunications Act of 2003 we have the right to submit an
application for universal service costs for the years 1999 to 2002 until May
20, 2004. Applications for subsequent years will have to be submitted within
one year after the end of the business year in which the services were
provided. 56




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Legal framework Rights of way The Telecommunications Act of 2003 also regulates the principal matters
which were previously governed by the no-longer effective Telecommunications
Rights of Way Act. Each provider of communications services or communications
networks has the ability to use land for establishing, developing, operating
and maintaining communications lines. In exercising these rights, it is
necessary to have an agreement with the landowner or to have a decision from
the Telecommunications Offices. The use of public land, including streets, sidewalks, public places and
the airspace above them, is free of charge. For the use of private land,
compensation must be paid to the landowner. If the landowner wants to use his
land in a particular way the provider has to move the communications line at
the providers costs. There are also special obligations for the joint use of
alternative operators telecommunications lines. Ordinance regulating lawful interception The ordinance regulating surveillance systems (lawful interception) which
became effective on December 1, 2001 is based on a standardization
recommendation by the European Telecommunications Standards Institute and
comprises detailed technical descriptions of new technologies and interfaces
which enable a harmonized Europe-wide surveillance system for use in criminal
prosecution. The amount of the refund by the government for our investments in
surveillance systems have not yet been determined. Competition law and general legal framework In addition to the Telecommunications Act, our operations are subject to
Austrian and European competition laws. The main principles of the European Union competition rules are found in
Articles 81 and 82 of the EC Treaty (the former Articles 85 and 86), the
Competition Directive (recently amended in 2002) and in the European Union
merger control regulations. Article 81 of the EC Treaty prohibits collusive
behavior between competitors which may affect trade between member states and
which restricts, or is intended to restrict, competition within the European
Union. Article 82 prohibits any abuse of a dominant market position within a
substantial part of the European Union that may affect trade between member
states. These rules are enforced by the European Commission in co-operation
with the national competition authority. In addition, the national courts have
jurisdiction over alleged violations of European Union competition law. The Austrian Antitrust Act prohibits the abuse of dominant market position
and the distortion of competition caused by horizontal and vertical agreements
or collusion of market participants. While the Austrian Federal Competition
Authority (Bundeswettbewerbsbehörde)focuses on improving EU-wide cooperation
of competition authorities and streamlining proceedings in order to make
competition law more effective, it is the Austrian Cartel Court which rules on
these cases. Parties can appeal against the Cartel Court  ́s decisions to the
Austrian Supreme Court in the function of a Cartel Appellation Court. According to the Austrian Antitrust Act, the Cartel Court must be notified
of any mergers, acquisitions and joint ventures if the turnover of the parties
involved reaches certain thresholds, but remains below the threshold applicable
to mergers which must be notified to the European Commission. These mergers are
prohibited if they create or strengthen a dominant market position. Parties to
a cooperation agreement may voluntarily ask the European Commission for
clearance that their cooperation does not violate the prohibition on collusive
practices established by the EC Treaty. The European Commission may also grant
an exemption from the prohibition if the parties show that the benefits of the
cooperation for the consumer or for research and development outweigh the
supposed distortion of competition. We expect there to be further inquiries and other measures of the European
Commission aimed at promoting competition in the European telecommunications
sector. 57




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Procurement law and telecommunications act As long as we are viewed by the regulatory authority as having significant
market power in the market of voice telephony in fixed network fixed lines, our
terms and tariffs towards our customers are subject to prior approval by the
regulatory authority. Our customers in the public sector are subject to the Austrian procurement
law. The Austrian procurement law requires the public sector to make its
purchase decision on either the best price or quality among the offers. Under
the tariff approval procedure we may offer only limited price discounts. Our
competitors are free to fix the prices. Customer protection and data protection Customer protection The Telecommunications Act of 2003 identifies the protection of the
customer as one of its major goals. Accordingly, the Act contains various
provisions regulating the rights of the customers vis-à-vis the
telecommunications services providers. All operators that provide public
communications services must ensure that the services are available to everyone
on the published terms and conditions. The Telecommunications Act creates a
special dispute resolution mechanism to resolve billing disputes. We are
obliged to issue itemized bills upon customers request to allow the customers
to check the accuracy of the calls listed. If a dispute cannot be amicably
settled, the customer can appeal to an Arbitration Board established within the
regulatory authority without prejudice to the right to appeal to the courts. We automatically inform every customer whose bill exceeds a certain
threshold value within one billing cycle (two months). The customer may choose
lower limits and will be informed by us that he/she has reached this lower
chosen threshold value. The Ordinance on Tariffs for Value-Added Services contains maximum prices
for specific premium rate services. The customer is required to receive price
information about the call before being connected. The Telecommunications Act of 2003 requires us to include in our
description of terms and conditions and services certain mandatory information
such as the level of quality, provision time, penalties to customers if
services are not provided compliant to the service description, rules about
billing disputes and information about actual tariffs. In order to allow
customers better cost control, we have to provide free of charge a limitation
of access for special value added services once a year. Furthermore, we have to
offer universal services on a prepaid basis and the possibility to pay
universal services in installments. For purposes of transparent billing, we are
obliged to provide customers free of charge with an itemized call list. The
Ordinance on Itemized Bills (Einzelentgeltnachweisverordnung) which will be
enacted on May 1, 2004 sets forth the standards for itemized billing. Data protection Both the Telecommunications Act of 2003 and the Data Protection Act 2000
contain provisions concerning data protection. Tapping and other forms of surveillance of telephone calls by third
parties are prohibited. Exceptions exist only for authorities investigating
serious criminal offences. Special switches can be established to trace people
who stalk or harass others by telephone. Telephone calls and faxes for the purposes of direct marketing are
permissible only if a subscriber has given his prior consent. Likewise it is
generally not permitted to send e-mails  including SMS-messages  to consumers
for the purpose of direct-marketing or to more than 50 recipients without prior
consent. In limited circumstances prior consent need not to be obtained. This
applies, for example, where a customer provided his electronic contact details
to the sender in connection with a sale of the senders products or services
and where the subsequent direct marketing relates to an offer of a similar
product or service by the sender. In such instance, the customer must be given
an opportunity to object to the use of his/her contact details. Sending e-mails to non-consumers without prior consent is authorized when
the recipient is given the opportunity to reject future messages. After having obtained the customers consent, data for the direct
marketing of telecommunications services may be processed only to the extent
necessary for such services. Any other data may only be used upon the 58




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customer consent. Customers have the right to request information about
the storing and processing of their data and to request corrections or
deletions of data that was not properly stored. Network operators are not allowed to store traffic data past the end of
the period during which the bill may lawfully be challenged or payment may be
pursued. Without the customers prior explicit consent, traffic data such as
billing data may only be processed in order to perform telecommunications
services. The European Union Austria is a member of the European Union and is required to implement
European Union law in its domestic law and to take European Union legislation
into account when applying its domestic law. European Union legislation
basically comes in two forms: regulations and directives. Regulations are
generally and directly applicable and binding in their entirety in all European
Union member states. Directives are binding, but national legislators choose
the form and method of their implementation into domestic law. In the 1990s, the European Commission had used its powers under new
Article 86 (3) (former Article 90) of the EC-Treaty to open telecommunications
markets in the European Union member states by issuing directives providing for
liberalization, abolishing monopoly rights of the state-owned
telecommunications operators. In the following years, the European Union has
also adopted a number of directives and recommendations regarding open and
efficient access to and use of public telecommunications networks and public
telecommunications services, the Open Network Provisions. These requirements
are intended to harmonize technical interfaces, usage conditions and tariff
principles throughout the European Union and to ensure objectivity,
transparency and non discrimination in access to and use of public
telecommunications networks and public telecommunications services and foresaw
first detailed regulatory measures like Carrier Pre-selection or Number
Portability and universal services like directory services, public payphones or
non-discriminatory access to the network. The European Commission issued a binding decision on the harmonized
Europe-wide introduction of the third generation of mobile systems, UMTS. The
decision provides for roaming, licensing and frequency allocation and set
January 1, 2002 as the target date for the technical realization of UMTS
networks and services. At the end of December 2000, the European Union issued a regulation
regarding access to unbundled local loops which is directly applicable in the
member states without further implementation at the national level. Based on
this decision, the regulatory authority has requested that we extend our
unbundling offer by offering line sharing. In February 2002 the European Union adopted a package of new directives,
which was implemented by the Telecommunications Act in August 2003. The new
legal environment is based on the framework-directive, which defines new rules
for the market definition procedure and is more and more harmonized with
general competition law which is the basis for any regulation of the
telecommunications markets. The 25% threshold for significant market power no
longer applies. The national regulatory authorities are required to consider
more factors in determining whether a company has a dominant position in that
market. Under the framework directive the national regulatory authorities will
seek to harmonize their decisions on an EU-wide scale. Therefore, the
competencies of the regulatory authorities to regulate the telecommunications
markets will be extended. The Access- and Interconnection-directive provides for the legal
instruments for regulating the telecommunications wholesale markets (carrier to
carrier relations) based on the principle of technical neutrality, while the
Universal Service directive focuses on the provision of universal service and
limited ways of regulating retail prices. The licensing directive establishes a
common ground for providing services and operating networks. By July 2002, the European Union adopted a new directive on processing of
personal data and the protection of privacy in the electronic communications
sector which contains provisions on the use of cookies, public directories and
the confidentiality of communication. The directive also regulates unsolicited
commercial communication provided by automatic calling machines, fax and e-mail
which will be subject to the recipients prior consent (opt-in) unless the
recipient is given the opportunity for opting out. Finally, the directive on
competition in the markets for electronic communications networks and services,
also adopted in September 2002, has replaced the former directive on full
competition (90/388/EC) by July 25, 2003. 59




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Item 5. Operating and Financial Review and Prospects 
 OVERVIEW The following discussion should be read in conjunction with the
consolidated financial statements included elsewhere in this annual report.
Those financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (U.S. GAAP). In 2003 we started to report our business in three segments:  
    
    Wireline (merging the previous fixed line, data communications, and internet services segments);
    
    Wireless (renaming our previous mobile communications segment); and
    
    Other activities (covering internal financial services). On May 21, 2002, our Supervisory Board approved the reintegration and
merger of Datakom Austria GmbH, Datakom International Solutions GmbH, Jet2Web
Internet Services GmbH and Jet2Web Network Services GmbH into Telekom Austria.
On October 1, 2002 these companies have been incorporated into Telekom Austria.
As of January 1, 2003 we finalized the reorganization of our operations into
two distinct operating segments, Wireline, and Wireless, and a third segment
Other activities which includes primarily various centralized financial
services that are provided by our subsidiary Telekom Finanzmanagement GmbH to
both business segments, Wireline and Wireless. The two business segments also
conduct business with each other, which are eliminated in consolidation. In
order to give shareholders a clear view of our external performance as a
company, we separately disclose these internal transactions when presenting our
segment results. We started reporting according to the new segments commencing with the
first quarter of 2003. We have reclassified certain amounts in prior year
financial statements to conform to the current year presentation. Accuracy of forward-looking statements In the normal course of business, and in an effort to help keep
shareholders and the public informed about our operations, we may from time to
time issue certain statements, either in writing or orally, that contain or may
contain forward-looking information such as statements made in this annual
report. Generally, these statements relate to business plans or strategies,
projected or anticipated benefits or other consequences of such plans or
strategies, or projections involving anticipated revenues, earnings or other
aspects of operating results. Such statements are subject to a number of
factors that may tend to influence the accuracy of the statements and the
projections upon which the statements are based. As noted elsewhere in this
annual report, our operations are subject to a number of uncertainties, risks
and other influences, many of which are beyond our control, and any one of
which, or a combination of which, could materially affect our results of
operations. See Forward Looking Statements, Item 3  Risk factors, Item 4
 Regulation and legal framework,  Critical
accounting policies and  Subsequent events. Certain factors affecting our financial results Our business has been affected in recent years by a number of important
trends including increased competition as a result of the liberalization of the
Austrian telecommunications market, the declining importance of fixed line
voice telephony and an increasing demand for mobile and internet communications
and technological changes. Therefore, investors should consider our results of
operations and future prospects in light of the fundamental changes occurring
in the structure of Telekom Austria and the environment in which we operate. Open competition The Austrian fixed line market was opened to full competition on January
1, 1998. Since the Austrian market has been fully liberalized, a number of
competitors have commenced operations in various market segments. In the
Wireline segment, our competitors include international telecommunications
carriers and 60




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domestic companies. In the wireless segment, several additional national
licenses have been granted to our competitors in both the GSM and UMTS ranges.
An additional competitor, TELE 2, started its operations as a service provider
in cooperation with the existing mobile operator ONE in February 2003. In May
2003, Hutchison 3G Austria entered the Austrian mobile communications market as
the first provider of UMTS service only. mobilkom austria entered into a
national roaming agreement with Hutchison 3G Austria allowing our competitor to
use our GSM network as a supplement to its own UMTS network. We expect
competition to further intensify in the foreseeable future as our current
competitors expand their operations. Because of increasing competition, the most important challenge is to
maintain our leadership in the telecommunications market, and the extent to
which we are able to do so will have a major influence on our future revenue
and operating results. As the operator of a former state monopoly for public
telecommunications, we previously lost market share in the Wireline segment as
a result of the full liberalization of the telecommunications market. However,
competition has also stimulated overall market demand for telecommunications
services, and we expect further growth in the markets for data and IT solution
services and internet services. In the mobile communications services market we
expect growth primarily from the international sector. We expect a flat
development in Austria. Technological change Rapid technological changes in telecommunications and information
technology will continue to have a profound effect on the way we do business
and will give rise to new competitive challenges, as the traditional businesses
of telecommunications, information technology, media, entertainment and
security increasingly converge. Technological advances have increased the
capacity of telecommunications networks and led to the rise of a number of
alternatives to traditional network transmission and new access technologies.
Because we have the competitive advantage of being the leading
telecommunications service provider in Austria that offers fixed network,
mobile, data communications services, internet services for residential,
business and wholesale customers, we believe we have the opportunity to become
a leading provider of multi-service networks and advanced multimedia services. One of our objectives is to increase our medium-term infrastructure
investments in growth areas such as internet, broadband transmission and
access, which are the main elements of the future next generation network
infrastructure, and new mobile communications services like UMTS. For further
information see Item 4  Business overview. On the other hand we intend to
reduce our capital expenditures in mature business areas such as fixed line
voice telephony, and to achieve a net decrease in our capital expenditures. Regulatory environment The regulatory authorities that oversee the Austrian telecommunications
industry consider Telekom Austria to have significant market power in the
markets for voice telephony over fixed networks, leased lines and
interconnection. Changes to our fixed-line tariff structure are generally
subject to prior approval by the regulatory authorities, which could reduce our
speed and flexibility in terms of pricing strategy to respond to market
developments. Furthermore, we must allow other fixed and mobile network service
providers to interconnect to our network and must provide fixed line telephone
customers the ability to select their preferred service provider on a
call-by-call or pre-selection basis and to keep their telephone numbers when
changing service providers. At December 31, 2003, we had interconnection agreements with 27 fixed-line
operators and 6 mobile operators. In August 2003, the directives of the European Union were implemented into
Austrian domestic law under the amended Telecommunication Act. See Item 4 
Regulation and legal framework  Legal Framework  The European Union.
According to the amended Telecommunications Act of 2003, a more differentiated
regulatory approach is possible. This may imply a shift from ex-ante regulation
towards competition law in the long run and includes a further liberalization
of the licensing regime. For further information see Item 3  Risk factors. Tariff reductions We carried out major tariff reforms for the fixed line business in
September 1999 and June 2000 in order to meet ongoing competitive conditions.
With the introduction of our second-based tariff scheme in 2001, we managed to
stop the declines and even increase our voice market share. From January 1,
2003 to September 30, 2003, mobilkom austria was required to lower its
interconnection fees in stages to a final level of EUR 0.1086. As of October 1,
2003, mobilkom austria has managed for the first time to reach commercial
agreements on interconnection tariffs with all mobile operators. 61




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We expect competition to lead to continued pressure on tariffs. As
interconnection fees are expected to decline, customer tariffs are assumed to
fall as a result. Transformation program A number of organizational and strategic changes were implemented prior to
full liberalization in order to prepare Telekom Austria for operating in a
fully competitive environment. In June 2000, we began a transformation program
that aimed to reduce operating expenses, implement new technologies, change our
corporate culture and stabilize fixed line voice revenues. The financial impact
of these measures, mainly in the form of reduced costs, has been visible in
2001, 2002 and 2003. To reduce personnel, we implemented three voluntary retirement incentive
programs (VRIPs) in 1997, 1999 and 2000. These resulted in approximately 3,500
employees accepting early retirement. At December 31 of the years 2002 and
2003, 1,723 and 120 employees, respectively, were covered by our respective
provisions. The other former employees have already left the program and no
longer have claims representing any current or future liability to us. On
January 1, 2002 a law was enacted that covers civil servants after the age of
55 by a governmental retirement plan with the effect of reducing our obligation
under the VRIPs. Following that law we reversed EUR 26.8 million and EUR 57.4
million of these accruals in 2003 and 2002, respectively. As a result of the transformation program, we have employees who no longer
report to work but who are paid a salary by us due to their civil servant
status. We refer to these employees as our idle workforce. Costs related to
such personnel are included in our results of operations. Until the end of November 2003 the Austrian government offered early
retirement at reduced future pension payments to certain civil servants. We
offered these eligible employees additional payments to alleviate financial
losses from the reduction in future pension payments and to improve the
acceptance of the offer by our civil service employees. Due to this measure we
were able to reduce our workforce by 650 civil servants in 2003. We incurred a
contractual obligation to civil servants taking advantage of this opportunity
and accrued EUR 47.3 million in 2003. We will not face any future liabilities
in addition to these accruals. Recent changes in Austrian law no longer allow
us to implement early retirement packages in the future. Claims against the Republic of Austria In 2003 we filed a claim for a refund with the Austrian Ministry of
Finance as representative of the Republic of Austria in the amount of EUR 245
million for certain expenses relating to the employment of civil servants. The
claim is based on the Postal Restructuring Act and the argument that we have
incurred higher costs for the employment of civil servants and their
termination compared to our competitors. In August 2003 an amendment to the law
with retroactive effect cancelled our claims. We are currently seeking a
settlement with the Ministry of Finance. Due to the uncertainties involved we
have not recorded the claim in our books. Enhanced customer focus To protect our market share, we will enhance to a greater extent our focus
on customer care. The change in our corporate culture and our efforts to
stabilize fixed line voice revenues resulted in the implementation of
additional initiatives such as campaigns to change consumer price perception of
our products, welcome calls for new customers, special tariff offers for a
limited period, days on which certain voice minutes are free of charge and
other activities to improve customer retention and to win back customers. In
June 2002, we introduced a new brand and logo meant to demonstrate our
commitment to our customers and to symbolize stability, confidence, security
and competence. Court Ruling on Value Added Services In 2003, the Austrian Supreme Court ruled that no contractual relationship
exists between the customer and Telekom Austria, but rather that the
contractual relationship is established directly between the VASP and the
customers. As a consequence we are no longer considered the primary obligor
towards our customers in respect to services provided by VASP on our lines and
ceased reporting revenues from these services on a gross basis, beginning on
October 1, 2003. Had the ruling been in effect for the full year of 2003, 2002
and 2001, revenues and expenses in the accompanying consolidated statements of
operations would have been lower by EUR 45.9 million, EUR 51.2 million and EUR
41.4 million, respectively. This reduction in revenue would not have had any
impact on consolidated operating income. Consolidated operating revenues and expenses would have been higher by EUR
16.0 million in 2003 if the change in revenue recognition had not taken effect
beginning with the fourth quarter of 2003. 62




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Critical accounting policies Reported financial conditions and results of our operations are sensitive
to accounting methods, assumptions and estimates that underlie the preparation
of financial statements. The profile of critical accounting policies, the
judgments and other uncertainties affecting the application of those policies,
and the sensitivity of reported results to changes in conditions and
assumptions are factors to be considered in conjunction with reviewing our
financial statements and the discussion below in  Results of operations. Valuation of long-lived assets, intangible assets and goodwill Fixed assets, intangible assets and goodwill comprise a significant
portion of our total assets. Changes in technology or changes in our intended
use of these assets may cause the estimated period of use or the value of these
assets to change. We perform annual assessments to confirm the appropriateness
of estimated economic useful lives for each category of current property, plant
and equipment. Additionally, fixed assets and intangible assets with definite
useful lives are reviewed for impairment whenever events or changes in
circumstances have indicated that their carrying amounts may not be
recoverable. Goodwill and intangible assets with indefinite useful lives are
tested for impairment at least annually. Estimates and assumptions used in
setting useful lives and testing for recoverability require both judgment and
estimation. Total fixed assets, intangible assets and goodwill were EUR 5,767.3
million, EUR 6,317.3 million and EUR 4,672.5 million at December 31, 2003, 2002
and 2001 respectively. Depreciable fixed assets are depreciated over estimated useful lives
between 3 and 50 years and amortizable intangible assets are amortized over
useful lives between 4 and 30 years. Although we have substantial historical
evidence about estimated useful lives of these assets, there is the inherent
risk of a change in useful lives. For example a one-year increase or decrease
in the useful lives of all depreciable or amortizable assets would increase or
decrease depreciation and amortization expense by approximately EUR 130
million. Depreciation and amortization expenses amounted to EUR 1,133.2 for the
period ended December 31, 2003. Total impairment charges were EUR 6.8 million, EUR 41.9 million and EUR
145.1 million for the periods ended December 31, 2003, 2002 and 2001,
respectively. The impairment charges in 2003 primarily relate to long-lived
assets as future estimated net cash flows were below the carrying value of the
related assets. Valuation of employee benefit obligations Employee benefit obligations are established for (i) contractual
termination benefits available for eligible civil servants (ii) service awards
that are granted to eligible employees after specified service periods, (iii)
severance payments upon termination of employment of eligible employees and
(iv) pension benefits granted to certain former employees. Contractual termination benefits.In order to reduce headcount and related
operating expenses we have offered several programs in 1997, 1999 and 2000
whereby selected employees who were approaching the age of 55 were offered
certain incentives to induce their voluntary retirement. We refer to these
incentives as Voluntary Retirement Incentive Programs (VRIPs) or social plans.
Generally, such plans target civil servants who can not be terminated without
cause. In aggregate 3,500 employees accepted one of our VRIP offers in prior
years. At the time an employee accepts a VRIP offer we recognize an accrual for
the present value of the estimated future contractual obligations assuming an
annual salary increase of 2.5% for future years and a discount rate of 4.5%. On
January 1, 2002 a law was enacted that covers civil servants after the age of
55 by a governmental retirement plan with the effect of reducing our obligation
under the VRIPs. Following that law we reversed EUR 26.8 million and EUR 57.4
million of these accruals in 2003 and 2002, respectively. As of December 31,
2003, the remaining accrual of EUR 31.9 million for the VRIPs relate to 120
employees. A change in the elected discount rate by 1% would either increase or
decrease the accrual for contractual termination benefits by about EUR 0.4
million. Service awardsare paid after 25 and 40 years of service and to retiring
employees with at least 35 years of service. The compensation is accrued as
earned over the period of service taking into account estimates of employees
whose employment will be terminated or who will retire prior to reaching the
required service period. Actuarial gains and losses are recognized immediately
in the period realized. Severanceconsists of legal severance and voluntary severance. Eligible
employees hired before January 1, 2003 receive legal severance payments upon
termination of their employment or upon retirement. The amount of the severance
payment equals a multiple of their monthly compensation depending on the
employees years of service including variable elements like overtime and
bonus. Following a legal change, obligations for 63




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employees starting to work for us after January 1, 2003 are covered by a
defined contribution plan and we paid EUR 0.1 million to this defined
contribution plan (BAWAG Allianz Mitarbeitervorsorgekasse AG) in
2003. Civil servants do not qualify for legal severance payments. Until the end
of November 2003 the Austrian government offered early retirement at reduced
future pension payments to certain civil servants. Under this legislation,
civil servants had a one-time opportunity to retire before reaching their legal
retirement age. We offered these eligible employees additional payments to
alleviate financial losses from the reduction in future pension payments and to
improve the acceptance of the offer by our civil servants. As a result we
recorded accrued severance costs of EUR 39.6 million and other costs of EUR 7.7
million totaling EUR 47.3 million for 650 civil servants who accepted this
offer in 2003. After making these payments Telekom Austria will not face any
future liabilities. Pension benefits. We provide defined benefits for certain former
employees. This unfunded plan provides benefits based on a percentage of the
salary depending on the years employed not exceeding 80% of the salary before
retirement including the pension provided by social security. We use the
projected unit credit method to determine pension cost and amortize actuarial
gains and losses using the corridor method. For further information see note
(16) of the accompanying financial statements. The recorded amounts for service awards, severance payments and pensions
are affected by the actuarial assumptions of discount rate, rate of
compensation increase and rate of increase of pensions. The total obligation
for these benefits amounted to EUR 124.1 million, EUR 100.2 million and EUR
90.8 million as of December 31, 2003, 2002 and 2001, respectively. A change of
the selected discount rate of 5.0% by one percentage point would increase or
decrease the obligation for these benefits by approximately EUR 17 million in
2003. For further information see note (16) of the accompanying financial
statements. Valuation of tax assets At December 31, 2003, we had approximately EUR 701.5 million of operating
loss carry-forwards. Thereof, EUR 110.6 million relate to foreign subsidiaries
with EUR 110.1 million expiring between 2004 and 2010. The remaining amount is
deductible in Austria and do not expire under current regulation. Their annual
usage is limited to 75.0% of the taxable income in Austria for that year. In assessing the recoverability of deferred tax assets, management
considers whether it is more likely than not that all the deferred tax assets
will be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income and tax
planning strategies in making this assessment. As of December 31, 2003 we
recognized a net deferred tax asset of EUR 123.5 million. In order to realize
this deferred tax asset we will need to generate future taxable income
exclusive of reversing taxable temporary differences of approximately EUR 486.8
million. Based on the level of historical taxable income and projections for
future taxable income and tax planning strategies over the periods in which the
deferred tax assets are deductible, management believes it is more likely than
not we will realize the benefits of these deductible differences, net of the
existing valuation allowance. The amount of deferred tax assets considered
realizable, however, could be reduced in the near term if estimates of future
taxable income are reduced. A new Austrian tax reform act has been proposed stipulating a reduction of
the corporate income tax rate from 34% to 25% and an expansion of the taxable
base. The tax reform is planned to become effective in 2005. The promulgated
changes, if effectuated, would immediately reduce the value of our Austrian
deferred tax assets but reduce income taxes in future years. The effect of this
tax reform on the realizability of deferred tax assets can not be estimated yet
due to the early state of the proposal and the uncertainty about the provisions
in detail. Recent developments On January 21, 2004, Telecom Italia International N.V. sold its residual
shareholding, corresponding to 73.9 million shares or 14.78% of Telekom
Austrias share capital, in a private placement to institutional investors at a
price of Euro 10.55 per share. Following completion of this transaction, the
free float in Telekom Austrias share capital increased to 52.83%. The
remaining stake is owned by ÖIAG, representing the Republic of Austria. ÖIAG
and Telekom Austria have each entered into lock-up agreements that end on May
31, 2004. As of February 27, 2004, the average share price had exceeded the Initial
Public Offering price by 30% or more for five consecutive days. Therefore, the
3,268,850 stock options discussed in note (17) of the 64




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accompanying financial statements became exercisable. In the first quarter
of 2004 we recorded a compensation expense estimated in the amount of EUR 9.4
million. On February 27, 2004, we exercised our 3,326,881 American call options on
treasury shares which were acquired in the Initial Public Offering in November
2000 to limit our exposure under the stock option plan that expired on February
27, 2004. The strike price of each call option was EUR 9. Following the
exercise of the options, 3,326,881 Telekom Austria shares, i.e. 0.67% of the
share capital, were credited to our accounts through an off-market transaction
on March 3, 2004. On March 18, 2004, the Cartel Court found that the cancellation of one of
our former tariffs (Minimumtarif)constitutes an abuse of our dominant
position and imposed a fine of EUR 0.5 million. We will appeal against this
decision with the Supreme Court. At the annual general meeting of June 4, 2003 the Management Board was
granted authorization to increase our share capital by up to 10 million shares
to serve stock options. The current proposal intends to grant the options in
three annual tranches beginning in 2004. To issue the first tranche, on March
23, 2004 the Management Board decided to increase the share capital by up to
EUR 6.5 million on the condition that the options issued in 2004 are served.
This resolution still requires approval by the Supervisory Board. On March 24, 2004 our Management Board announced that it intends to make
use of the authorization by the shareholders received at the annual general
meeting in June 2003 to buy back up to 50 million shares at a price between EUR
9 and EUR 15 until December 3, 2004. Following the first repurchase by
exercising our American Call Options on February 27, 2004 through an off-market
transaction, there are currently up to EUR 270 million of reserves available
for further buybacks. Telekom Austria intends to execute the share repurchases
through market transactions and to limit such purchases so that the holding of
our principal shareholder ÖIAG does not exceed 50% of our outstanding shares. 65




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RESULTS OF OPERATIONS 
 2003 compared to 2002 OVERVIEW On June 28, 2002 we acquired the remaining 25.001% of mobilkom austria
from Telecom Italia Mobile International, which also held certain blocking
rights. These blocking rights precluded us from consolidating mobilkom austria
group prior to June 28, 2002. Our consolidated financial statements include
mobilkom austria groups results of operations for the entire year of 2003 and
are therefore not directly comparable to 2002. Consolidated operating results The following table shows our operating revenues, operating expenses and
the resulting consolidated operating income as well as the percentage changes
for the periods indicated. 2003
    
    2002
    
    2003/2002(in EUR millions)
    
    (% change)Operating revenues
    
    
    3,969.8
    
    
    
    3,118.1
    
    
    
    27.3Operating expenses:Materials
    
    
    (297.1
    )
    
    
    (196.4
    )
    
    
    51.3Employee costs, including benefits and taxes
    
    
    (699.3
    )
    
    
    (600.7
    )
    
    
    16.4Depreciation and amortization
    
    
    (1,133.2
    )
    
    
    (1,016.3
    )
    
    
    11.5Impairment charges
    
    
    (6.8
    )
    
    
    (41.9
    )
    
    
    (83.8
    )Other operating expenses
    
    
    (1,463.6
    )
    
    
    (1,205.4
    )
    
    
    21.4Total operating expenses
    
    
    (3,600.0
    )
    
    
    (3,060.7
    )
    
    
    17.6Consolidated operating income
    
    
    369.8
    
    
    
    57.4
    
    
    
    544.3
 Operating revenues Our consolidated operating revenues increased by EUR 851.7 million or
27.3% to EUR 3,969.8 million in 2003. The operating revenues for 2002 do not
include EUR 790.1 net of intersegmental eliminations, which were generated by
mobilkom austria group before its consolidation as of June 28, 2002. If the
change in revenue recognition for certain value-added services provided by
third-party providers, in response to a decision by the Austrian Supreme Court
had been in effect before October 1, 2003, revenues and expenses in the
accompanying consolidated statements of operations would have been lower by EUR
45.9 million in 2003 and EUR 51.2 million in 2002. The effect in the fourth
quarter of 2003 was a reduction in revenues in the amount of EUR 16.0 million.
For further information see  Court Ruling on Value Added Services. This
change had no impact on consolidated operating income. The increase is due to
the growth in our Wireless segment due to the growth of the mobile customer
base, higher average usage per customer, higher interconnection traffic through
our mobile network and the introduction of interconnection fees for SMS in
Austria. This revenue growth was partially offset by declining revenues in the
Wireline segment as a result of lower revenues from switched voice base traffic
and lower average voice tariffs. Operating expenses Our consolidated operating expenses increased by EUR 539.3 million or
17.6% to EUR 3,600.0 million in 2003. Total operating expenses do not include
EUR 574.4 million net of intersegmental eliminations, which were incurred by
mobilkom austria group before its consolidation as of June 28, 2002. A more
detailed analysis of the individual expense items is presented below. 66




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Material costs Our consolidated material costs increased by EUR 100.7 million or 51.3% to
EUR 297.1 million in 2003. The material expenses for 2002 do not include EUR
97.6 million net of intersegmental eliminations, which were incurred by
mobilkom austria group before its consolidation as of June 28, 2002. Taking
into account this effect, the remaining change was an increase in material
expenses of EUR 3.1 million. Material costs in the Wireline segment increased
due to the expansion of the ADSL network to provide better coverage and higher
bandwidth in Austria. In the Wireless segment rising demand for high quality
handsets and handset replacements contributed to this increase. Employee costs, including benefits and taxes Our consolidated employee costs including benefits and taxes increased by
EUR 98.6 million or 16.4% to EUR 699.3 million in 2003. The employee costs for
2002 do not include EUR 77.3 million net of intersegmental eliminations, which
were incurred by mobilkom austria group before its consolidation as of June 28,
2002. Taking into account this effect, the remaining change was an increase in
employee costs of EUR 21.3 million. Both business segments contributed to this
increase. In the Wireline segment a one-time charge in connection with the
early retirement of civil servants increased employee costs by EUR 47.3
million. Other factors concerning the development of personnel costs in the
Wireline segment are described in  Segment results  Wireline. In the
Wireless segment the headcount growth accompanying the growth of mobile
business contributed to the rise in employee costs as well. Depreciation and amortization Our consolidated depreciation and amortization expenses increased by EUR
116.9 million or 11.5% to EUR 1,133.2 million in 2003. Depreciation and
amortization for 2002 do not include EUR 133.0 million net of intersegmental
eliminations, which were incurred by mobilkom austria group before its
consolidation as of June 28, 2002. Taking into account this effect, the remaining change was a decrease in
depreciation and amortization of EUR 16.1 million resulting primarily from a
strong decline in depreciation expenses in the Wireline segment due to our
efforts to cut capital expenditures relating to our fixed line network. For
further information concerning our capital expenditures see  Liquidity and
Capital Expenditures  Capital Expenditures. The growth of amortization
expense in the Wireless segment partially offset this decline as a result of an
increase in amortizable intangible assets and the start of amortization of the
Austrian UMTS license in May 2003. Impairment charges Our consolidated impairment charges decreased by EUR 35.1 million or 83.8%
to EUR 6.8 million in 2003. The impairment charges in 2003 primarily relate to
long-lived assets as future estimated net cash flows were below the carrying
value of related assets. In 2002, impairment losses were mainly driven by an
impairment charge of EUR 40.4 million for our subsidiary Czech On Line based on
lower profitability expectations. Other operating expenses Our consolidated other operating expenses increased by EUR 258.2 million
or 21.4% to EUR 1,463.6 million in 2003. Other operating expenses for 2002 do
not include EUR 266.5 million net of intersegmental eliminations, which were
incurred by mobilkom austria group before its consolidation as of June 28,
2002. If the change in revenue recognition for certain value-added services
provided by third-party providers, in response to a decision by the Austrian
Supreme Court had been in effect before October 1, 2003, other consolidated
operating expenses would have been lower by EUR 45.9 million in 2003 and EUR
51.2 million in 2002. The effect in the fourth quarter of 2003 was a reduction
in other operating expenses in the amount of EUR 16.0 million. This change had
no impact on consolidated operating income. Operating income Operating income increased by EUR 312.4 million or 544.3% to EUR 369.8
million in 2003. Operating income for 2002 does not include EUR 215.7 million
net of intersegmental eliminations, which were generated by mobilkom austria
group before its consolidation as of June 28, 2002. The factors described above
contributed to the increase in operating income. Both business segments
contributed to this positive development in operating income. The consolidated
operating income of the Wireless segment increased to EUR 401.4 million in 2003
from EUR 164.8 million in 2002, while the Wireline segment decreased its
consolidated operating loss 67




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to EUR 34.3 million in 2003 from EUR 115.3 million in 2002. For an
analysis of the segmental operating revenues and expenses see  Segment
Results. Other income, taxation, minority interests, cumulative effect of change in accounting principle and net income 2003
    
    2002
    
    2003/2002(in EUR millions)
    
    (% change)Consolidated operating income
    
    
    369.8
    
    
    
    57.4
    
    
    
    544.3Other income (expense)Net interest
    
    
    (155.8
    )
    
    
    (156.4
    )
    
    
    0.4Equity in
earnings of affiliates
    
    
    19.1
    
    
    
    140.5
    
    
    
    (86.4
    )Other, net
    
    
    (0.5
    )
    
    
    2.3
    
    
    
    n.a.Income tax expense
    
    
    (83.1
    )
    
    
    (26.1
    )
    
    
    (218.4
    )Minority interest
    
    
    (3.4
    )
    
    
    (4.9
    )
    
    
    30.6Cumulative effect of changes in accounting principle
    
    
    (11.9
    )
    
    
    
    
    
    
    n.a.Consolidated net income
    
    
    134.2
    
    
    
    12.8
    
    
    
    948.4
 Net interest Net interest expense decreased by 0.4% to EUR 155.8 million in 2003. The
decline of interest expense by EUR 13.6 million to EUR 231.0 million resulted
mainly from the continued reduction in net debt in 2003. The decline in
interest income by EUR 13.0 million to 75.2 million in 2003 was mainly caused
by the effects of the consolidation of mobilkom austria group beginning June
28, 2002. The decline of both, interest income and expenses, also resulted from
lower recognized interest income and expenses in equal amounts for cross border
lease transactions we had entered into in 1998, 1999 and 2001. For further
information see note (15) of the accompanying financial statements. Equity in earnings of affiliates Equity in earnings of affiliates in 2002 includes primarily the equity
income from the 74.999% participation held in mobilkom austria. As a
consequence of the consolidation of mobilkom austria group beginning June 28,
2002 mobilkom austrias operations are included in the financial statements of
Telekom Austria and are no longer reported as equity in earnings of affiliates. Equity in earnings of affiliates amounted to EUR 19.1 million in 2003 down
from EUR 140.5 million in 2002 and includes a gain of EUR 18.4 million
resulting from the sale of the 26% stake in Herold Business Data AG in July
2003. Income tax expense Income tax expense increased from EUR 26.1 million in 2002 to EUR 83.1
million in 2003 as a result of the continued growth in profitability of our
Wireless segment leading to a higher taxable base. The effective tax rate for the full year 2003 decreased from 59.6% to
35.7% compared to the prior year. Due to a higher tax base the effective tax
rate came closer to the statutory tax rate of 34.0% in Austria where most of
Telekom Austrias operations are located. Our effective tax rate of 59.6% in
2002 was primarily due to non-deductible goodwill impairment charges and an
increase in the deferred tax valuation allowance, partially offset by certain
tax credits and incentives and lower tax rate differentials on equity in
earnings of affiliates. A new Austrian tax reform act has been proposed stipulating a reduction of
the corporate income tax rate from 34.0% to 25.0% and an expansion of the
taxable base. The tax reform is planned to become effective in 2005. The effect
of this tax reform on our financial results could not be estimated yet due to
the early state of the proposal and the uncertainty about the provisions in
detail. For the assessment of the recoverability of deferred tax assets see 
Critical accounting policies  Valuation of tax assets. 68




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Minority interests Due to the consolidation of mobilkom austria group effective June 28,
2002, minority shareholders earnings in some of mobilkom austrias
subsidiaries are presented as minority interests. Overall these companies
contributed positively to mobilkom austria groups result, the portion of
the subsidiaries earnings attributable to the minority interests in the amount
of EUR 3.4 million in 2003 are deducted in arriving at consolidated net income. Cumulative effect of change in accounting principle The Company adopted SFAS No. 143 as of January 1, 2003 and recorded a
cumulative change in accounting principle for the retirement and
decommissioning of existing base stations, buildings, booths for public
payphones and wooden masts impregnated with tar or salt in the amount of EUR
11.9 million in 2003. For further information see note (13) of the accompanying
financial statements. Consolidated net income Our consolidated net income increased by EUR 121.4 million to EUR 134.2
million in 2003. Continued growth in the Wireless segment combined with the
effect of full consolidation of mobilkom austria as of June 28, 2002 mainly
contributed to this strong increase in net income. The Wireline segment also
supported the growth in net income through various cost cutting measures and
lower depreciation, amortization and impairment charges leading to a stronger
decrease in operating expenses than the loss in Wireline operating revenues. 69




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SUPPLEMENTARY INFORMATION Although Austrian GAAP permitted us to consolidate mobilkom austria group,
we did not consolidate mobilkom austria group under U.S. GAAP through June 28,
2002. This was because through that date mobilkom austrias minority
shareholder, a subsidiary of Telecom Italia held substantive contractual rights
in connection with its investment. Consequently, we presented separately
consolidated financial information for mobilkom austria group. Since our initial public offering in November 2000 we have, however, shown
total managed results of operations for the entire Telekom Austria group, in
order to present a complete picture of the enterprise. The managed data include
all revenues and operating income from all business segments including the
Wireless segment under the management of our Management Board. On June 28, 2002 we acquired Telecom Italias stake in mobilkom austria.
As a result of the acquisition, we gained full strategic and operating control
of our wireless services business. Thus, our consolidated statement of
operations for the fiscal year ending 2002 reflects our equity in earnings of
mobilkom austria group through June 28, 2002, and consolidated mobilkom austria
groups results of operations for the period from June 28, 2002 until December
31, 2002. The consolidated statements of operations exclude the operations of
mobilkom austria group through June 28, 2002 and are thus not directly
comparable to the consolidated financial statements for 2003. Thus, in order to
provide investors with a more comprehensive picture of the development of our
business, we are presenting supplementary to our consolidated statement of
operations a comparison between the consolidated financial data for 2003 and
total managed data for the entire fiscal year of 2002 together with a
reconciliation between the total managed data for the year ended December 31,
2002 and our consolidated statements for the same period. As of January 1, 2003 we finalized the reorganization of our operations
into two distinct operating segments, Wireline, which includes fixed line, data
communications and internet services and Wireless, consisting of the mobile
communications segment and a third segment Other activities which includes
primarily various financial services that are provided by our corporate
treasury department to both business segments, Wireline and Wireless. The two
business segments also conduct business with each other which is accounted for
in the form of eliminations and summarized together with Other activities in
the category Other activities & Eliminations. In order to give shareholders a
clear view of our external performance as a company, we separately disclose
these internal transactions when presenting our results for Telekom Austria. 2003
    
    2002
    
    2003/2002(in EUR millions)
    
    (% change)Operating revenues:Wireline
    
    
    2,197.7
    
    
    
    2,260.0
    
    
    
    (2.8
    )Wireless
    
    
    2,030.2
    
    
    
    1,002.5
    
    
    
    102.5Other activities & Eliminations
    
    
    (258.1
    )
    
    
    (144.4
    )
    
    
    (78.7
    )Consolidated operating revenues
    
    
    3,969.8
    
    
    
    3,118.1
    
    
    
    27.3Wireless  prior to consolidation
    
    
    
    
    
    
    906.9
    
    
    
    n.a.Intersegmental eliminations
    
    
    
    
    
    
    (116.8
    )
    
    
    n.a.Total managed operating revenues
    
    
    3,969.8
    
    
    
    3,908.2
    
    
    
    1.6
 Whereas our consolidated operating revenues increased by 27.3% to EUR
3,969.8 million in 2003 from EUR 3,118.1 million in 2002, our total managed
operating revenues increased by only 1.6% in 2003 from EUR 3,908.2 million in
2002 as a result of the consolidation of mobilkom austria group as of June 28,
2002. If the change in revenue recognition for certain value-added services
provided by third-party providers in response to a decision by the Austrian
Supreme Court had been in effect before October 1, 2003, total managed
operating revenues would have been lower by EUR 45.9 million in 2003 and EUR
58.4 million in 2002. Taking into account this effect, our total managed
operating revenues would have increased by 1.9% to EUR 3,923.9 million from EUR
3,849.8 million in 2002. The effect from the change in revenue recognition in
the fourth quarter of 2003 was a reduction in revenues in the amount of EUR
16.0 million. The increase is driven primarily by growth in revenues from our Wireless
segment which were up by 6.3% to EUR 2,030.2 million in 2003 from total managed
operating revenues of EUR 1,909.4 million in 2002. The rise was achieved
through an increase in the number of mobile customers and a higher average
usage per 70




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customer which reflects our focus on high value mobile customers. The increase
came both from Austria and foreign operations. The growth in the Wireless
segment more than offsets the decrease in revenues from our Wireline segment.
The Other activities segment representing internally provided financial
services did not generate any revenues in 2003 or 2002. We
evaluate the performance of our segments using the non-U.S. GAAP
financial measure adjusted EBITDA which is based on net income excluding
interest, taxes, depreciation, amortization, impairment charges, dividend
income, equity in earnings of affiliates, other non-operating income/expense,
minority interests and the cumulative effect of changes in accounting
principle. This equals operating income before depreciation, amortization and
impairment charges. The following table provides an overview for the items that
were excluded from net income to determine consolidated adjusted EBITDA for the
periods indicated. 2003
    
    2002(in EUR millions)Net income
    
    
    134.2
    
    
    
    12.8Adjustments:Depreciation and amortization
    
    
    1,133.2
    
    
    
    1,016.3Impairment charges
    
    
    6.8
    
    
    
    41.9Interest income
    
    
    (75.2
    )
    
    
    (88.2
    )Interest expense
    
    
    231.0
    
    
    
    244.6Equity in
earnings of affiliates and dividend income
    
    
    (19.1
    )
    
    
    (140.5
    )Other income (expense)
    
    
    0.5
    
    
    
    (2.3
    )Income tax expense
    
    
    83.1
    
    
    
    26.1Minority interests
    
    
    3.4
    
    
    
    4.9Cumulative effect of change in accounting principle,
net of tax
    
    
    11.9
    
    
    
    Adjusted EBITDA (consolidated)
    
    
    1,509.8
    
    
    
    1,115.6
 Adjusted EBITDA excludes depreciation and amortization expenses, in order
to eliminate the impact of generally long-term capital investments, that cannot
be significantly influenced by our management on a short-term basis. Management
also excludes impairment charges that were recorded as a consequence of the
decline in fair value of several long-term investments and buildings below
their carrying amount. In evaluating and managing our operating activities we
exclude these charges that cannot be influenced by our key operating decision
makers on a short-term basis. We may record impairment charges in the future if
there are further declines in the fair values of our investments. Adjusted
EBITDA excludes other non-operating income/expense, since these do not reflect
the operating results that we achieve from servicing our customers. Dividend
income and equity in earnings of affiliates result from investments, in which
we exercise significant influence, but do not have control As we do not control
these entities, our management excludes these results when evaluating the
operating performance of our business segments. Minority interests reflect the
share in generated net income belonging to minority shareholders of fully
consolidated entities by Telekom Austria and are added back into adjusted
EBITDA since our management has to evaluate the total operating performance of
these consolidated entities to make appropriate business decisions. Adjusted
EBITDA also excludes interest income and expense and the provision for income
taxes arising in connection with our capitalization and tax structures. The
cumulative effect of change in accounting principle which was caused by the
adoption of SFAS 143 (Asset Retirement Obligation) as of January 1, 2003
represents the retroactive recording of fair values of asset retirement
obligations for existing tangible long-lived assets. The management excludes
this non-recurring, unusual charge when evaluating the performance of our
business segments. Our management believes adjusted EBITDA is meaningful to investors because
it provides an analysis of our operating results and our segment profitability
using the same measure used by our chief operating decision makers. Although
adjusted EBITDA may be defined differently by other companies in the
telecommunications industry or present other varying financial measures, we
believe that adjusted EBITDA provides comparability in analyzing operating
performance of companies in the telecommunication industry. Adjusted EBITDA is
also one of many factors used by credit rating agencies to determine our credit
ratings. There are material limitations to use measures such as adjusted EBITDA,
including the difficulty associated with comparing these performance measures
as we calculate them to similar performance measures presented by other
companies, and the fact that these performance measures do not take into
account certain significant items, 71




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including depreciation and amortization, impairment charges, dividend
income, equity in earnings of affiliates or other non-operating income/expense
that directly affect our net income. Adjusted EBITDA should be considered
in addition to, but not as a substitute for, other measures of financial
performance reported in accordance with accounting principles generally
accepted in the United States of America such as operating income and net
income. 2003
    
    2002
    
    2003/2002(in EUR millions)
    
    (% change)Adjusted EBITDA:Wireline
    
    
    780.5
    
    
    
    807.6
    
    
    
    (3.4
    )Wireless
    
    
    727.1
    
    
    
    300.4
    
    
    
    142.0Other activities & Eliminations
    
    
    2.2
    
    
    
    7.6
    
    
    
    (71.1
    )Adjusted EBITDA (consolidated)
    
    
    1,509.8
    
    
    
    1,115.6
    
    
    
    35.3Wireless  prior to consolidation
    
    
    
    
    
    
    349.1
    
    
    
    n.a.Intersegmental eliminations
    
    
    
    
    
    
    (0.3
    )
    
    
    n.a.Adjusted EBITDA (total managed for 2002)
    
    
    1,509.8
    
    
    
    1,464.4
    
    
    
    3.1
 Our consolidated adjusted EBITDA increased by 35.3% in 2003 to EUR 1,509.8
million from EUR 1,115.6 million in 2002. As shown in the table above this
increase is primarily a result of the consolidation of mobilkom austria groups
results of operations effective June 28, 2002 excluding the contribution to
adjusted EBITDA by the Wireless segment for the first half of 2002. In the
Wireline segment lower revenues led to a decline in adjusted EBITDA by 3.4% to
EUR 780.5 million in 2003 from EUR 807.6 million in 2002. Our Wireless segment increased its contribution to our consolidated
adjusted EBITDA by EUR 426.7 million to EUR 727.1 million in 2003 from EUR
300.4 million in 2002. Based on total managed adjusted EBITDA figures the
Wireless segment raised its contribution by EUR 77.6 million or 11.9% in 2003 
this considering an additional EUR 348.8 million for the first half of 2002
which is included in our total managed adjusted EBITDA. This increase resulted
from growing revenues in all markets of our Wireless segment and a strong focus
on cost-efficient operations. The increase in the results of our wireless
segment more than offset the decline in our Wireline segment and led to the
rise of adjusted EBITDA by 3.1% based on total managed adjusted EBITDA of EUR
1,464,4 million in 2002. 72




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The following table reconciles consolidated adjusted EBITDA (and
additionally total managed adjusted EBITDA for 2002) to net income for the
periods indicated. 2003
    
    2002(in EUR millions)Adjusted EBITDA (total managed for 2002)
    
    
    1,509.8
    
    
    
    1,464.4Wireless  prior to consolidation
    
    
    
    
    
    
    (349.1
    )Impairment charges
    
    
    (6.8
    )
    
    
    (41.9
    )Intersegmental eliminations for 2002
    
    
    
    
    
    
    0.3Adjusted EBITDA consolidated (including impairment charges)
    
    
    1,503.0
    
    
    
    1,073.7Depreciation and amortization
    
    
    (1,133.2
    )
    
    
    (1,016.3
    )Interest income
    
    
    75.2
    
    
    
    88.2Interest expense
    
    
    (231.0
    )
    
    
    (244.6
    )Equity in earnings of affiliates  other
    
    
    19.1
    
    
    
    140.5Other
    
    
    (0.5
    )
    
    
    2.3Income before taxes, minority interests
and cumulative effect of change in accounting principle
    
    
    232.6
    
    
    
    43.8Income tax expense
    
    
    (83.1
    )
    
    
    (26.1
    )Minority interests
    
    
    (3.4
    )
    
    
    (4.9
    )Cumulative effect of change in accounting principle, net of tax
    
    
    (11.9
    )
    
    
    Net income
    
    
    134.2
    
    
    
    12.8
 73




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SEGMENT RESULTS As of January 1, 2003 we finalized the reorganization of our operations
into two distinct operating segments, Wireline, which includes fixed line, data
communications and internet services and Wireless, consisting of the mobile
communications segment and a third segment Other activities which includes
primarily various financial services that are provided by our subsidiary
Telekom Finanzmanagement GmbH to both business segments, Wireline and Wireless.
In order to give shareholders a clear view of our external performance as a
company, we separately disclose these internal transactions when presenting our
results for Telekom Austria. Wireline The Wireline segment includes mainly the operating activities of Telekom
Austria AG, and provides telecommunications services such as voice telephony on
fixed networks, data communications services, internet services, services for
other carriers, and equipment sales. Due to the creation of the Wireline segment encompassing the previous
fixed-line, data communications and internet services segments, we reclassified
certain amounts in the financial statements of 2002 to conform to the current
year presentation and to provide comparability. We also introduced new
categories of our Wireline operating revenues in order to integrate revenues
from our previous fixed-line, data communications and internet services
segments. The Austrian fixed line voice market, measured in terms of minutes,
experienced another slight decrease during 2003 especially in national minutes
due to increased migration to mobile communication services. Nevertheless, we
were able to increase our market share based on minutes, excluding internet
dial-up minutes, to 52.9% at December 31, 2003, up from 52.6% at year-end 2002
due to the continuing promotion of our second-based TikTak tariffs, which were
originally introduced in 2001. With the growing use of pre-selection of a
carrier and unbundling of the local loop, we face increasing competition for
national telephony traffic on fixed networks resulting in lower average voice
tariffs. Our market share for fixed line traffic including internet dial-up
remained at 55.3% due to a shift from dial-up internet access to broadband
internet access reducing the traffic minutes generated from internet dial-up.
Our ADSL broadband customer base increased by 50.0% including our wholesale
ADSL lines in 2003, attracting particularly regular users of the internet,
while our dial-up customer base increased by 16.4%. ADSL is a technology that
permits a high speed transmission of data using a standard copper access line. Revenues Revenues from our Wireline segment are derived primarily from the
following sources:  
    
    Switched voice base traffic charges for national (local and
national long-distance), fixed-to-mobile and international calls;
switched voice monthly and other voice revenues comprising initial
connection fees, installation fees, monthly rental and other charges;
    
    Public payphone services and value added services (VAS);
    
    Data and IT solutions;
    
    Internet access and media;
    
    Wholesale voice and internet including interconnection fees paid by
other carriers to access our fixed line network and related carrier
services;
    
    Wholesale data represented by our leased line services for other carriers; and
    
    Fees from other services, including equipment sales and directory services. The following table shows revenues from our Wireline segment and
percentage changes for the periods indicated. 74




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2003
    
    2002
    
    2003/2002(in EUR millions)
    
    (% change)Wireline operating revenues:Switched voice base traffic (1)
    
    
    447.3
    
    
    
    495.9
    
    
    
    (9.8
    )Switched voice monthly & other voice revenues
    
    
    567.9
    
    
    
    562.2
    
    
    
    1.0Payphones & VAS (1)
    
    
    67.5
    
    
    
    81.6
    
    
    
    (17.3
    )Data & IT-solutions
    
    
    338.3
    
    
    
    340.6
    
    
    
    (0.7
    )Internet access & media
    
    
    198.4
    
    
    
    193.7
    
    
    
    2.4Wholesale voice & Internet
    
    
    311.4
    
    
    
    305.5
    
    
    
    1.9Wholesale data
    
    
    103.8
    
    
    
    97.4
    
    
    
    6.6Other (1)
    
    
    163.1
    
    
    
    183.1
    
    
    
    (10.9
    )Total wireline operating revenues
    
    
    2,197.7
    
    
    
    2,260.0
    
    
    
    (2.8
    )
 (1)
    
    If the change in revenue recognition for certain value-added services
provided by third-party providers, in response to a decision by the
Austrian Supreme Court had been in effect before October 1, 2003, total
Wireline operating revenues would have been lower by EUR 32.7 million in
2003 and EUR 42.8 million in 2002, affecting revenues from switched voice
base traffic, pay phones & value added services and other revenues. Switched voice base traffic Switched voice base traffic revenues decreased by 9.8% to EUR 447.3
million in 2003 from EUR 495.9 million in 2002. In 2003 our lower priced
pay-per-second TikTak tariffs were selected by additional customers raising
the number of TikTak customers to 1.2 million customers as of December 31,
2003, which represents an increase of 48.1%. As a result, our average tariffs
fell by 3.7% driven by the decline in average national tariffs by 8.3% in 2003. The decline in average tariffs was accompanied by a further drop of 1.4%
in traffic volume in 2003 compared to 2002 as a result of a decline in national
traffic minutes by 2.6% in 2003, as illustrated in the table below. 2003
    
    2002
    
    2003/2002(in millions of minutes)(1)
    
    (% change)Traffic minutes:National (local + national long distance)
    
    
    4,485
    
    
    
    4,607
    
    
    
    (2.6
    )Fixed-to-mobile
    
    
    855
    
    
    
    826
    
    
    
    3.5International
    
    
    484
    
    
    
    472
    
    
    
    2.5Total voice minutes
    
    
    5,824
    
    
    
    5,905
    
    
    
    (1.4
    )
 (1)
    
    All amounts exclude traffic minutes that were not generated from our
customers such as interconnection traffic that originated in networks of
other providers or payphone traffic. Strong competition for fixed network services, the shift from fixed line
traffic to mobile communications traffic and the possibility of carrier
pre-selection for local calls since January 1, 2001 are the key factors in the
decline of fixed line traffic. The decline in national traffic was partially
offset by an increase of fixed-to-mobile traffic. The successful promotion of
TikTak tariffs enabled us, however, to increase our market share based on
minutes from 52.6% in 2002 to 52.9% in 2003, which partially offset the decline
in revenues from switched voice base traffic. The reduction in revenues from switched voice base traffic was also caused
by a change in revenue recognition for certain value-added services provided by
third-party providers starting October 1, 2003, in response to a decision by
the Austrian Supreme Court. Traffic revenues would have been lower by EUR 18.5
million in 2003 and EUR 22.5 million in 2002, if the revenue recognition had
been applied retroactively. 75




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Switched voice monthly and other voice revenues Revenues from our initial connection and installation fees, monthly
rentals and other network services increased by 1.0% to EUR 567.9 million in
2003 from EUR 562.2 million in 2002. In July 2003, the regulatory authority gave its approval to Telekom
Austrias plan to discontinue its Minimum Tariff. Existing customers of the
Minimum Tariff were transferred to the Standard Tariff on September 28, 2003.
This move was made due to the increased usage of the Minimum Tariff by
pre-selection customers. All other tariff models of Telekom Austria remained
unchanged. The discontinuation of the Minimum Tariff caused an increase in the
monthly rental (incl. 20% VAT) from EUR 14.38 to EUR 17.44, however, at up to
6% lower tariffs for voice base traffic. This effect, in combination with the
introduction in mid-2002 of a fee to recover costs of manual payment of
telephone bills in Austria, resulted in an increase of our switched voice
monthly and other voice revenues, although our actual revenues from initial
connection and installation fees declined. These revenues are generally a function of the number and mix of standard
PSTN telephone, ISDN and the corresponding initial connection fees and monthly
rental charges. Each of our traditional telephone lines, called PSTN lines, provides one
access channel. We also offer lines on new networks that provide up to 30 lines
and can be used simultaneously for voice and data transmissions at higher
speeds than over normal access lines. These networks are called integrated
services digital network, or ISDN. There are two kinds of ISDN lines. Basic
ISDN lines provide two access channels each and multi ISDN lines provide 30
access channels each. The following table shows the number of our access lines and channels and
percentage changes for the periods indicated. The figures exclude payphones,
but include our internal lines and approximately 247,800 lines for qualifying
low income persons at December 31, 2003. The service for low income persons,
which we have provided for many years, includes free monthly rental and one
hour of free local traffic per month. We receive a reimbursement from the
federal government for these services. 2003
    
    2002
    
    2003/2002(in thousands)
    
    (% change)Number of fixed lines:PSTN access lines
    
    
    2,555.8
    
    
    
    2,659.1
    
    
    
    (3.9
    )Basic ISDN access lines
    
    
    447.2
    
    
    
    430.1
    
    
    
    4.0Multi ISDN access lines
    
    
    7.8
    
    
    
    8.1
    
    
    
    (3.7
    )Total access lines
    
    
    3,010.8
    
    
    
    3,097.3
    
    
    
    (2.8
    )Total access channels
    
    
    3,684.2
    
    
    
    3,762.3
    
    
    
    (2.1
    )
 The total number of access lines decreased by 2.8% in 2003, primarily due
to growth in the mobile communications market and unbundling of local loops,
and to a lesser extent a shift to alternative providers such as cable
television operators. The decrease in the number of PSTN lines was partially
offset by a migration of our customers to our basic ISDN lines. The number of
total access channels in the fixed network declined by approximately 2.1% in
2003 compared to 2002. Public payphone services and value added services In 2003 the revenues from our public payphone and value added services
decreased by 17.3% to EUR 67.5 million from EUR 81.6 million in 2002. The
revenues from public payphones declined due to falling demand primarily as a
result of the high mobile penetration rate. The roll-out of more attractive
public multimedia stations providing access to internet, e-mail, video
telephony and various other multimedia services in 2003 could not offset this
decline. Revenues from value added services decreased resulting from a change in
revenue recognition for certain value-added services provided by third-party
providers, started October 1, 2003, in response to a decision by the Austrian
Supreme Court. Revenues from public payphone and value added services would
have been lower by EUR 9.7 million in 2003 and EUR 14.5 million in 2002, if the
revenue recognition had been applied retroactively. 76




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Data and IT solutions In 2003 the revenues from data and IT solutions decreased by 0.7% to EUR
338.3 million from EUR 340.6 million in 2002. These revenues are generated from
a large portfolio of data-related services that are mainly
provided to our business customers: leased line services, switched data
transmission services, corporate network services, MPLS services, data value
added services and IT solutions. Price reductions which led to declining revenues from leased line services
were partially offset by increased revenues from corporate network services and
IT solutions. Internet access and media We are the leading internet service provider in Austria with approximately
1 million residential customers. We had a share of approximately 42.0% of the
residential internet market (including 2.0% contributed by mobilkom austrias
mobile internet customers) in the fourth quarter of 2003. Internet access and
media comprises access services (dial-up and broadband ADSL access) and a
portal business with online media sales, e-commerce and multimedia services. Our revenue generated by our internet access and portal business increased
by 2.4% to EUR 198.4 million in 2003 from EUR 193.7 million in 2002. This
growth was in line with the increase in the subscriber base in Austria by 21.3%
from 846,500 at the beginning of 2003 to 1,026,600 at the end of 2003.
ADSL-residential customers, also included in these figures, increased by 41.1%
in the same period, supported by a new tax benefit for ADSL access to
residential customers. Business broadband access grew even stronger by 106.9%
due to our launch of business broadband services at the end of 2002. The
increase in revenues did not follow the increase in the customer base due to
lower average usage and lower average revenues per user. Our subsidiary Czech On Line, a Czech telecommunications provider with a
strong focus in internet services, which we acquired in 2000, generated overall
revenues of EUR 18.5 million in 2003 up from EUR 10.9 million in 2002. Thereof,
Czech On Line contributed revenues of EUR 12.7 million or 6.4% to our internet
access and media business in 2003. Wholesale voice and internet Wholesale voice and internet services generate revenues by providing
network services to domestic and international carriers. These carrier services
consist of termination, origination (or carrier selection) and transit of
national traffic and international termination in Austria and abroad,
international bandwidth services and internet access. Revenues increased by 1.9% to EUR 311.4 million in 2003 from EUR 305.5
million in 2002. This growth resulted mainly from growing revenues from
wholesale internet services. The strong sale of our internet products for
wholesale customers showed an increased result in 2003, raising the number of
wholesale ADSL subscriptions from 31,000 to 53,500. Revenues from wholesale
voice services, however, slightly declined due to lower interconnection tariff
minutes and due to reductions of interconnection tariffs that became effective
in July 2002. Wholesale data Through our wholesale data services we generate revenues by leasing fixed
lines to alternative telephone operators, wireless service providers and
providers of data services for their exclusive and dedicated use. Revenues
increased by 6.6% to EUR 103.8 million in 2003 up from EUR 97.4 million in
2002. Strong revenue development from some large-scale projects for some of our
larger wholesale customers more than compensated the decline in the Austrian
and international mass market for leased line services. Other revenues (customer premises equipment and directory services) This category primarily includes sales and rentals of customer premises
equipment and directory services. We generate revenues from sales of
telecommunications equipment including residential, as well as mobile telephone
equipment and systems for business customers, and by providing related
post-sale maintenance and services. As part of our directory services we
generate revenues from offering call-center services and the management of a
database of subscriber data of our and other fixed-line and mobile service
providers subscribers, which is offered to directory publishers. Revenues
decreased by 10.9% to EUR 163.1 million in 2003 from EUR 183.1 million in 2002. 77




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Other revenues decreased resulting from a change in revenue recognition
for certain value-added services provided by third-party providers, beginning
October 1, 2003, in response to a decision by the Austrian Supreme
Court. Other revenues would have been lower by EUR 4.5 million in 2003 and
EUR 5.8 million in 2002, if the revenue recognition had been applied
retroactively. Revenues from equipment slightly declined due to lower quantities of
equipment sold and a declining demand for maintenance, whereas our revenues
from directory services such as directory publication and call center services
grew moderately. Our other revenues, however, declined primarily because we phased out our
business to build up, operate and maintain networks for other operators. Operating expenses The following table shows operating expenses of our Wireline segment and
percentage changes for the periods indicated. 2003
    
    2002
    
    2003/2002(in EUR millions)
    
    (% change)Wireline operating expenses:Material expense
    
    
    63.3
    
    
    
    59.1
    
    
    
    7.1Employee costs, including benefits and taxes
    
    
    531.9
    
    
    
    523.1
    
    
    
    1.7Depreciation and amortization, impairment charges
    
    
    814.8
    
    
    
    922.8
    
    
    
    (11.7
    )Interconnection (1)
    
    
    319.7
    
    
    
    319.3
    
    
    
    0.1Maintenance and Repairs
    
    
    119.2
    
    
    
    130.6
    
    
    
    (8.7
    )Services received (1)
    
    
    42.5
    
    
    
    26.4
    
    
    
    61.0Other
    
    
    340.5
    
    
    
    394.0
    
    
    
    (13.6
    )Total wireline operating expenses
    
    
    2,231.9
    
    
    
    2,375.3
    
    
    
    (6.0
    )
  (1)
    
    If the change in revenue recognition for certain value-added services
provided by third-party providers, in response to a decision by the
Austrian Supreme Court had been in effect before October 1, 2003, total
Wireline operating expenses would have been lower by EUR 32.7 million in
2003 and EUR 42.8 million in 2002, affecting costs from interconnection
and services received. Materials Materials consist mainly of expenses for spare parts, cables and supplies
for our network and merchandise we sell to our customers. Materials in the
Wireline segment increased by 7.1% in 2003 to EUR 63.3 million from EUR 59.1
million in 2002. The increase in material expenses is primarily due to the
expansion of the ADSL network to provide better coverage and higher bandwidth
in Austria. Employee costs, including benefits and taxes Employee costs including benefits and taxes in our Wireline segment
increased by 1.7% in 2003 to EUR 531.9 million from EUR 523.1 million in 2002. The increase was due to a one-time charge for civil servants accepting
early retirement and lower reversals of provisions for our voluntary retirement
incentive programs (VRIPs) in 2003 as described below. The increase was
partially offset by a decrease of our average number by 1,157 employees or 9.5%
to 11,027 employees in 2003 as a result of our transformation program, as
described in  Overview  Transformation program. Until the end of November 2003 the Austrian government offered to certain
civil servants early retirement at reduced future pension payments. We offered
these eligible employees additional payments to alleviate financial losses from
the reduction in future pension payments and to improve the acceptance of the
offer by the government. Due to this measure our workforce could be reduced by
650 civil servants in 2003. We incurred a contractual obligation to civil
servants making use of this opportunity and accrued EUR 47.3 million in 2003.
We will not face any future liabilities in addition to these accruals. From 1997 to 2000, we offered VRIPs to eligible employees. We made
provisions for expenses related to these programs of EUR 253.2 million in 2000.
In 2003 we reversed 26.8 million of the VRIP provisions after a reversal of EUR
57.4 million in 2002. At December 31, 2003, 120 employees were still covered by
the VRIP 78




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provisions. For more information about our relationship with employees, see
Item 6  Relationship with employees. Depreciation and amortization including impairment charges Depreciation, amortization including impairment charges in our Wireline
segment decreased by 11.7% to EUR 814.8 million in 2003 from EUR 922.8 million
in 2002 as a result of the continuing downward trend of capital expenditures. Depreciation expenses decreased due to our efforts to cut capital
expenditures relating to our fixed line network. Amortization expenses for
intangible assets remained at an insignificant level. The impairment charges for fiscal year 2003 were lower by EUR 35.1 million
and primarily relate to long-lived assets as future estimated net cash flows
were below the carrying value of related assets. In 2002, impairment losses
were largely the result of an impairment charge of EUR 40.4 million for our
subsidiary Czech On Line based on lower profitability expectations. Interconnection Interconnection costs increased by 0.1% to EUR 319.7 million in 2003 from
EUR 319.3 million in 2002. The increase was mainly caused by higher
interconnection traffic generated by international transit. An offsetting factor for the increase in interconnection costs was the
change in revenue recognition for certain value-added services provided by
third-party providers, effective October 1, 2003, in response to a decision by
the Austrian Supreme Court. Interconnection costs would have been lower by EUR
18.8 million in 2003 and EUR 23.1 million in 2002 if the revenue recognition
had been applied retroactively. Maintenance and Repairs Expenses for maintenance and repairs decreased by 8.7% to EUR 119.2
million in 2003 from EUR 130.6 million in 2002. The optimization of service
contracts for our communications network equipment and a reduction of buildings
led to this decline. Services received Services received are incurred as a result of various services provided by
third-parties such as value-added services. The change in revenue recognition
for certain value-added services provided by third-party providers, starting
October 1, 2003, in response to a decision by the Austrian Supreme Court would
have reduced services received by EUR 13.9 million in 2003 and EUR 19.7 million
in 2002 if the revenue recognition had been applied retroactively. The increase
of services provided by third-parties for meeting the growing demand for leased
line services contributed to the increase in services received to EUR 42.5
million in 2003. Other operating expenses Other operating expenses include expenses such as energy, rental,
marketing, consulting, training and advertising expenses. Other operating
expenses in the Wireline segment decreased by 13.6% in 2003 to EUR 340.5
million from EUR 394.0 million in 2002. The integration of our previous subsidiaries Datakom Austria GmbH, Jet2Web
Internet Services GmbH and Jet2Web Network Services GmbH in 2002 provided for
ongoing savings in other operating expenses. In addition, we incurred lower
expenses from bad debt, generated savings from the consolidation of our
buildings and lowered our advertising expenses. Wireless The total number of customers in the mobile business segment as of
December 31, 2003 grew by 6.4% compared to December 31,2002. At the end of 2003
we had more than 4.7 million customers in our Wireless segment. The majority of
customer growth came from mobilkom austria with a penetration rate of 89.7% in
the Austrian market at the end of 2003. Our foreign subsidiaries also
experienced lower market growth in 2003, thus their contribution to the
customer base as of December 31, 2003 remained almost stable at around 33%. 79




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We were still able to increase the total number of our mobile customers in
Austria by 5.4%, or approximately 161,800 during 2003. However, due to stronger
competition and an increasing number of Austrian mobile customers our market
share decreased to 43.3% at December 31, 2003, down from 44.4% at the
end of 2002. As a result of our successful retention programs mobilkom
austrias churn rate decreased to 16.1% at year-end 2003 from 19.5% at year-end
2002 During 2003 the number of Austrian contract customers increased by 6.8%
and the number of prepaid customers increased by 3.8%. At December 31, 2003,
contract customers account for 53.2% of the total customer base of mobilkom
austria compared to 52.5% at December 31,2002 as a result of our continuing
focus to increase the share of high value contract customers. mobilkom austrias subsidiary, VIPnet, a mobile operator in Croatia, added
approximately 112,700 customers in the year 2003. The penetration rate in
Croatia amounted to 55.0% at the end of 2003, with VIPnet holding a total
market share of 50.0%. mobilkom austrias subsidiary Si.mobil, a mobile
operator in Slovenia added approximately 11,500 customers in the year 2003.
Penetration in Slovenia reached a level of 76.5% at the end of 2003 with
Si.mobil holding a total market share of 23.6%. Revenues Our Wireless segment generates revenues from operations of our mobile
networks. The revenues mainly include traffic charges, monthly rental charges,
equipment sales and roaming and interconnection fees. We expect revenues from our Wireless segment to continue to grow due to
increased revenues from our international subsidiaries, primarily from the
potential of market growth in Croatia. In spite of a slow-down of the overall
customer growth, we expect to increase the profitability of the Wireless
segment as a result of our focus on improving the quality of the customer base. We expect roaming revenues to decline in the long-term due to increasing
pressure on roaming tariffs. Our partnership-agreement with Vodafone should
allow us to attract additional customers and roaming visitors. This would lead
to higher roaming traffic and offset, at least partially, the decline in
roaming revenues. The following table shows revenues from our Wireless segment and
percentage changes for the periods indicated. 2003
    
    2002
    
    2003/2002(in EUR millions)
    
    (% change)Wireless operating revenues:Traffic revenues (1)
    
    
    1,095.6
    
    
    
    1,000.6
    
    
    
    9.5Monthly rental
    
    
    297.7
    
    
    
    283.5
    
    
    
    5.0Equipment
    
    
    176.3
    
    
    
    175.2
    
    
    
    0.6Roaming
    
    
    153.8
    
    
    
    155.9
    
    
    
    (1.3
    )Interconnection (1)
    
    
    305.0
    
    
    
    275.9
    
    
    
    10.5Other
    
    
    18.1
    
    
    
    27.7
    
    
    
    (34.7
    )Discounts
    
    
    (16.3
    )
    
    
    (9.4
    )
    
    
    (73.4
    )Total wireless operating revenues
    
    
    2,030.2
    
    
    
    1,909.4
    
    
    
    6.3
  (1)
    
    If the change in revenue recognition for certain value-added services
provided by third-party providers, in response to a decision by the
Austrian Supreme Court had been in effect before October 1, 2003, total
Wireless operating revenues would have been lower by EUR 20.3 million in
2003 and EUR 25.3 million in 2002, affecting traffic revenues of mobilkom
austria and interconnection revenues of mobilkom [liechtenstein]. Our operating revenues from our Wireless segment increased by 6.3% in 2003
to EUR 2,030.2 million from EUR 1,909.4 million in 2002, with 79.1% of
operating revenues generated in the Austrian market. 80




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Traffic revenues Traffic revenues depend on the total number of customers, traffic volume,
mix of prepaid and contract customers and tariffs. Traffic revenues increased
by 9.5% in 2003 to EUR 1,095.6 million from EUR 1,000.6 million in 2002. This
growth was primarily a result of the increase in the customer bases which
increased by 5.4% at mobilkom austria, 10.3% at VIPnet, and 3.3% at Si.mobil.
The following table shows the number of customers of our Wireless segment and
percentage changes for the periods indicated. 2003
    
    2002
    
    2003/2002(in thousands)
    
    (% change)Wireless customers:Austria
    
    
    3,163.2
    
    
    
    3,001.4
    
    
    
    5.4Croatia
    
    
    1,210.5
    
    
    
    1,097.8
    
    
    
    10.3Slovenia
    
    
    361.5
    
    
    
    350.0
    
    
    
    3.3Liechtenstein
    
    
    2.5
    
    
    
    2.0
    
    
    
    24.5Total customers
    
    
    4,737.7
    
    
    
    4,451.2
    
    
    
    6.4
 In addition to the higher customer base, the average usage per customer
rose by 1.7% for the Wireless segment. This was partially offset by a decrease
in tariffs due to the highly competitive markets particularly in Austria,
Slovenia and Liechtenstein. Another offsetting factor was the change in revenue
recognition for certain value-added services provided by third-party providers
starting October 1, 2003, in response to a decision by the Austrian Supreme
Court. Traffic revenues would have been lower by EUR 18.5 million in 2003 and
EUR 24.6 million in 2002, if the revenue recognition had been applied
retroactively. In the Wireless segment both, contract and prepaid customers contributed
to the increase in traffic revenues for 2003. For both types of customers the
customer base rose. The contract customer base grew by 6.3%, while the number
of prepaid customers increased by 6.5%. Despite the highly competitive markets,
overall average revenue per customer showed a slight increase of 0.7%. The share of data traffic revenues increased from 12.4% at year-end 2002
to 13.9% at year-end 2003. In Austria this share increased by 1.2 percentage
points to 11.4% at year-end 2003. The majority of data revenues is derived from
SMS (Short Message Service) and to a lesser extent from GPRS (General Packet
Radio Service) and MMS (Multimedia Message Service). We expect that data
revenues from GPRS and MMS services at mobilkom austria will increase
significantly due to a leap in the number of GPRS users by 277.0% to 839,900
users compared to 222,800 users in 2002 and due to a growing number of MMS
users in 2003. Monthly rental We generate revenues from monthly rental fees paid by our contract
customers for access to our mobile communications network. Revenues from
monthly rentals increased by 5.0% in 2003 to EUR 297.7 million from EUR 283.5
million in 2002. The rise in revenues from monthly rental is primarily
attributable to the increase in our contract customer base by 6.8% in Austria
and by 5.8% in Croatia. However, the introduction of tariff packages with lower
or no monthly rental tariffs partially offset the increase in revenues from
monthly rental fees. Equipment We generate revenues from customer equipment primarily from sales of
handsets to our customers and resellers. Revenues from equipment increased by
0.6% in 2003 to EUR 176.3 million from EUR 175.2 million in 2002 primarily due
to increased sales of higher priced handsets with more functionalities like MMS
or GPRS, in particular in Croatia. This effect was partially offset by a
decline in the number of gross customer additions. Roaming Roaming fees are generated when our mobile network carries a call made by
a customer of another international mobile operator. Revenues from roaming fees
decreased by 1.3% in 2003 to EUR 153.8 million from EUR 155.9 million in 2002.
This decline was primarily caused by mobilkom austria lowering its roaming fees
in Austria in order to stay competitive. Rising roaming revenues in Croatia and
Slovenia mainly as a result
of the strong summer tourism and the cooperation with Vodafone, however,
partially offset the overall loss in revenues. 81




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Interconnection Our Wireless segment generates interconnection revenues primarily from
interconnection fees from our Wireline segment as well as from other fixed and
mobile operators for calls terminating in our mobile networks. In addition, we
receive revenues from service numbers such as toll free numbers. Our
interconnection revenues increased significantly by 10.5% in 2003 to EUR 305.0
million from EUR 275.9 million in 2002 in Austria, Croatia and Liechtenstein.
The increase in interconnection revenues in Austria was a result of the
increase in interconnection traffic minutes and the introduction of
interconnection fees for SMS services which was partially offset by decisions
of the regulatory authority which lowered mobile termination rates in stages
from EUR 0.1125 to EUR 0.1086 beginning April 1, 2003. Interconnection revenues
also increased in Croatia as a result of higher average interconnection fees
with the Croatian incumbent operator. In Liechtenstein the increase was mostly
generated from value-added services in 2003. In Slovenia additional revenues
from higher charged traffic minutes charged for interconnection were eliminated
as a result of lower average interconnection fees. The change in revenue recognition for certain value-added services
provided by third-party providers starting October 1, 2003, in response to a
decision by the Austrian Supreme Court reduced interconnection revenues at
mobilkom [liechtenstein] by EUR 1.8 million in 2003 and EUR 0.7 million in
2002, if the revenue recognition had been applied retroactively. Other This category includes revenues from one-time charges such as initial
connection fees and collection services such as fees for transfer payments as
well as fees for call center services, and revenues from real estate. Revenues
decreased by 34.7% in 2003 to EUR 18.1 million from EUR 27.7 million in 2002 in
part as a result of special promotions and lower revenues for provided call
center services in Austria as well as lower activation fees due to lower gross
additions of subscribers at VIPnet. Discounts Discounts increased by 73.4% in 2003 to EUR 16.3 million compared to EUR 9.4
million in 2002. These discounts include provisions for customer loyalty
programs at mobilkom austria and VIPnet. mobilkom austria had to increase its
provision for customer loyalty programs and offer higher discounts to
resellers. The increase at VIPnet was driven by a higher usage of replacement
programs resulting in higher discounts to resellers. Operating expenses The following table shows operating expenses from our Wireless segment and
percentage changes for the periods indicated. 2003
    
    2002
    
    2003/2002(in EUR millions)
    
    (% change)Wireless operating expenses:Material expense
    
    
    254.7
    
    
    
    252.3
    
    
    
    1.0Employee costs
    
    
    167.8
    
    
    
    158.6
    
    
    
    5.8Depreciation and amortization
    
    
    325.6
    
    
    
    268.8
    
    
    
    21.1Interconnection (1)
    
    
    224.0
    
    
    
    192.6
    
    
    
    16.3Repairs
    
    
    62.0
    
    
    
    59.3
    
    
    
    4.6Services received
    
    
    250.9
    
    
    
    231.2
    
    
    
    8.5Other
    
    
    343.8
    
    
    
    365.9
    
    
    
    (6.0
    )Total wireless operating expenses
    
    
    1,628.8
    
    
    
    1,528.7
    
    
    
    6.5
 (1)
    
    If the change in revenue recognition for certain value-added services
provided by third-party providers, in response to a decision by the
Austrian Supreme Court had been in effect before October 1, 2003, total
Wireless operating expenses would have been lower by EUR 20.3 million in
2003 and EUR 25.3 million in 2002, affecting interconnection costs. Materials Materials in the Wireless segment increased slightly by 1.0% in 2003 to
EUR 254.7 million from EUR 252.3 million in 2002. The higher costs were caused
by the rising demand for high quality products and 82




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higher number of handset replacements, particularly in Austria, and partially
offset by the decline in the number of gross customer additions in all
companies. Employee costs, including benefits and taxes Employee costs, including benefits and taxes increased by 5.8% in 2003 to
EUR 167.8 million from EUR 158.6 million in 2002 due to headcount growth in the
Wireless segment by 1.8%% in terms of full-time-employees at year-end to
support the higher number of our mobile customers. In addition, in Austria, the
base salary increased for employees and accruals for severance benefits
increased Depreciation and amortization Depreciation and amortization expenses increased by 21.1% in 2003 to EUR
325.6 million from EUR 268.8 million in 2002. The increase in depreciation
resulted from growing network-related capital expenditures in prior years to
increase capacity and maintain the quality of mobile transmissions in all
markets. However, capital expenditures in the Wireless segment were reduced by
12.6% in 2003 to EUR 300.4 million from EUR 343.6 million in 2002. For further
information regarding our capital expenditures, see  Liquidity and capital
resources  Capital expenditures. Two significant factors for the rise of amortization expenses were the
increase in amortizable intangible assets and the amortization of the Austrian
UMTS license. The acquisition of the 25.001% stake in mobilkom austria led to
an increase in amortizable intangible assets of EUR 121.0 million in 2002. The
amortization of the UMTS license over 14.2 years began in May 2003 after the
commercial launch of UMTS services and the generation of revenues. We recorded
amortization and depreciation expense from the use of the UMTS license and
related network equipment of EUR 14.1 million in 2003. Interconnection Interconnection costs increased by 16.3% in 2003 to EUR 224.0 million from
EUR 192.6 million in 2002. The growth was in line with the higher charged
interconnection traffic minutes and the introduction of interconnection fees
for SMS traffic since October 2002. The largest increase in interconnection
costs was recorded in Austria due to rising traffic volumes to one of the
smaller mobile operators, tele.ring, which has the highest interconnection
tariff on the market. VIPnet contributed to the growth in interconnection
costs, due to increased average interconnection fees and increased
interconnection traffic. The change in revenue recognition for certain value-added services
provided by third-party providers starting October 1, 2003, in response to a
decision by the Austrian Supreme Court reduced the increase in interconnection
costs. Interconnection costs would have been even lower by EUR 20.3 million in
2003 and EUR 25.3 million in 2002, if the revenue recognition had been applied
retroactively. Repairs Repairs increased by 4.6% in 2003 to EUR 62.0 million from EUR 59.3
million in 2002 primarily due to increasing maintenance costs at VIPnet and
more expensive service agreements at Si.mobil for a growing amount of network
and IT equipment due to continuing capital investments. mobilkom austria
recorded a decrease of repair costs in Austria as a result of decreasing
software adaptations. Services received Services received increased by 8.5% in 2003 to EUR 250.9 million from EUR
231.2 million in 2002 mainly due to an increase in roaming costs as a result of
the increased roaming traffic. In addition higher leased lines expenses in
Croatia and Austria contributed to the overall rise in costs from services
received. Other operating expenses Other operating expenses in the Wireless segment decreased by 6.0% in 2003
to EUR 343.8 million from EUR 365.9 million in 2002. Lower expenses for
consulting fees and lower marketing and sales costs contributed to this decline
in other operating expenses. Other operating expenses also includes net losses from retirement of
long-lived assets, which were shown in the last annual report as a separate
item due to the application of SFAS No. 144, as amended. 83




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Other activities The segment Other activities includes primarily various centralized financial
services that are provided by our subsidiary Telekom Finanzmanagement GmbH to
both business segments, Wireline and Wireless. The segment Other activities
did not record any revenues either in 2002 or 2003 and the operating expenses
were insignificant in both years as well. 84




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RESULTS OF OPERATIONS 
 2002 compared to 2001 OVERVIEW On June 28, 2002 we acquired the remaining 25.001% of mobilkom austria
from Telecom Italia Mobile International, which also held certain blocking
rights. These blocking rights precluded us from consolidating mobilkom austria
group in prior years. Our consolidated financial statements now include
mobilkom austria groups results of operations for the period June 28, 2002
until December 31, 2002 and are therefore not directly comparable with previous
years. Consolidated operating results Operating revenues The following table shows our operating revenues and percentage changes by
business segment for the periods indicated. 2002
    
    2001
    
    2002/2001(in EUR millions)
    
    (% change)Fixed line services
    
    
    2,057.2
    
    
    
    2,456.7
    
    
    
    (16.3
    )%Data communications services
    
    
    330.0
    
    
    
    (196.4
    )
    
    
    (0.1
    )Internet services
    
    
    119.6
    
    
    
    99.5
    
    
    
    20.2Mobile communications services
    
    
    1,002.5
    
    
    
    
    
    
    
    n.aIntersegmental eliminations and others
    
    
    (391.2
    )
    
    
    (226.7
    )
    
    
    72.6Consolidated operating revenues
    
    
    3,118.1
    
    
    
    2,659.7
    
    
    
    17.2
    %
 Our consolidated operating revenues increased by EUR 458.4 million or
17.2% to EUR 3,118.1 million in 2002. The consolidation of mobilkom austria
group since June 28, 2002 increased the operating revenues by EUR 858.6 million
net of intersegmental eliminations. Effective January 1, 2002, the Austrian
regulatory authority approved a change in the way interconnection charges
between Austrian alternative service providers are billed and collected. As a
result of the change Telekom Austria is no longer a party to such transactions.
Had the new regulation been in place during 2001, revenues and operating
expenses in the fixed line services segment would have been reduced by EUR
257.2 million. This change had no significant impact on operating income.
Taking into account these two above mentioned effects, the remaining change was
a reduction in operating revenues of EUR 143.0 million or 6.0%. This was due to
lower revenues in the fixed line services segment resulting from a drop in
traffic volume, lower average tariffs and a lower market share, which was only
partially offset by higher revenues in the internet segment due to the
increased subscriber base in Austria. Revenues in the data communications
segment remained stable. Year-on-year changes within the mobile segment are
discussed below under  Supplementary
information and  Segment results  Mobile communications services. 85




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Material costs 2002
    
    2001
    
    2002/2001(in EUR millions)
    
    (% change)Fixed line services
    
    
    55.5
    
    
    
    66.5
    
    
    
    (16.5
    )%Data communications services
    
    
    12.0
    
    
    
    11.4
    
    
    
    5.3Internet services
    
    
    0.9
    
    
    
    2.3
    
    
    
    (60.9
    )Mobile communications services
    
    
    148.7
    
    
    
    
    
    
    
    n.a.Intersegmental eliminations and others
    
    
    (20.7
    )
    
    
    (8.3
    )
    
    
    149.4Consolidated material costs
    
    
    196.4
    
    
    
    71.9
    
    
    
    173.2
    %
 Our consolidated material costs increased by EUR 124.5 million or 173.2%
to EUR 196.4 million in 2002. The consolidation of mobilkom austria group since
June 28, 2002 increased the material expenses by EUR 137.4 million net of
intersegmental eliminations. Taking into account this effect, the remaining
change was a reduction in material expenses of EUR 12.9 million or 17.9%. This
was due to lower material expenses in the fixed line services and the internet
services segments resulting from declining revenues from the sales of equipment
and lower numbers of initial connections. These lower expenses were only
partially offset by higher expenses in the data communications services segment
resulting primarily from a write-down of inventory to market value in the
amount of EUR 2 million. Employee costs 2002
    
    2001
    
    2002/2001(in EUR millions)
    
    (% change)Fixed line services
    
    
    426.2
    
    
    
    505.5
    
    
    
    (15.7
    )%Data communications services
    
    
    51.0
    
    
    
    48.2
    
    
    
    5.8Internet services
    
    
    16.8
    
    
    
    14.1
    
    
    
    19.1Mobile communications services
    
    
    81.2
    
    
    
    
    
    
    
    n.a.Intersegmental eliminations and others (1)
    
    
    25.5
    
    
    
    51.3
    
    
    
    (50.3
    )Consolidated employee costs
    
    
    600.7
    
    
    
    619.1
    
    
    
    (3.0
    )%
 (1)
    
    Includes the cost of idle workforce. These costs are not controlled by
segment managers but are the responsibility of corporate management. Beginning
in 2002, employees who are on medical leave and have applied for early
retirement on medical reasons are included in idle workforce. Prior year
figures were reclassified for comparative purposes. Costs for idle workforce
amounted to EUR 29.4 million in 2002 and EUR 52.0 million in 2001 (up from
originally reported EUR 49.9 million in 2001). Our consolidated employee costs including benefits, taxes and costs for
idle workforce decreased by EUR 18.4 million or 3.0% to EUR 600.7 million in
2002. The consolidation of mobilkom austria group since June 28, 2002 increased
employee costs by EUR 77.5 million net of intersegmental eliminations. This was
more than offset by a reduction in the fixed line services segment by EUR 79.3
million or 15.7%, which reflected the successful reduction of headcount, as
well as a reversal of prior year accruals for voluntary retirement incentive
plans of civil servants in the amount of EUR 57.4 million. The reversal was the
result of 656 plan participants entering the government sponsored national
retirement plan earlier than expected primarily due to a change in Austrian
law. When participants enter the government retirement plan, we are released
from our contractual obligations and therefore reverse the related accrual. 86




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Depreciation and amortization including impairment charges and net loss from retirement of long-lived assets 2002
    
    2001
    
    2002/2001(in EUR millions)
    
    (% change)Fixed line services
    
    
    839.6
    
    
    
    836.0
    
    
    
    0.4
    %Data communications services
    
    
    37.9
    
    
    
    35.3
    
    
    
    7.4Internet services
    
    
    53.0
    
    
    
    129.8
    
    
    
    (59.2
    )Mobile communications services
    
    
    144.6
    
    
    
    
    
    
    
    n.a.Intersegmental eliminations and others
    
    
    1.8
    
    
    
    48.1
    
    
    
    (96.3
    )Consolidated depreciation, amortization,
impairment charges and net losses from
retirement of long-lived assets
    
    
    1,076.9
    
    
    
    1,049.2
    
    
    
    2.6
    %
 Our consolidated depreciation and amortization expenses including
impairment charges and net losses from retirement of long-lived assets
increased by EUR 27.7 million or 2.6% to EUR 1,076.9 million in 2002. This
moderate change is the result of several effects that offset each other. The
consolidation of mobilkom austria group since June 28, 2002 resulted in an
increase of depreciation and amortization of EUR 135.5 million and an increase
in net losses from retirement of long-lived assets of EUR 9.1 million. As a result of the adoption of SFAS No. 142 goodwill and intangible assets
with indefinite useful life are no longer amortized starting in 2002. In 2001
we reported amortization of goodwill of EUR 50.4 million, of which EUR 48.5
million were included in intersegmental eliminations and others for the
goodwill of Czech On Line (COL) relating to our internet services segment,
and additional EUR 27.0 million were included in equity in earnings of
affiliates. Included in the internet segment are impairment charges for goodwill
originally recorded from the acquisition of COL in the amount of EUR 40.4
million in 2002 and EUR 120.0 million 2001. The acquisition was based on a
business plan assuming the full liberalization of the Czech market in the year
2001. As this was first postponed to the year 2002 and the liberalization of
the Czech market still remains unsatisfactory overall with regard to
interconnection and limited wholesale offers to alternative operators, the
business of COL has not developed as originally expected. This resulted in
impairment charges in 2001 and 2002. The impairment loss was recorded in the
internet segment in 2002. In 2001 the impairment losses of goodwill were
originally classified in intersegmental eliminations and others, but were
reclassified in 2002 to the internet segment for comparability purposes. In accordance with SFAS No. 144, as amended, the net loss from retirement
of long-lived assets of EUR 18.7 million is presented in 2002 in the operating
result. In 2001, the net loss from retirement of long-lived assets of EUR 39.0
million was included in other income, net. Taking into account these effects,
the remaining change was an increase in depreciation and amortization of EUR
21.4 million primarily related to the acceleration of depreciation due to a
change in useful lives of certain technical network software. 87




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Other operating expenses 2002
    
    2001
    
    2002/2001(in EUR millions)
    
    (% change)Fixed line services
    
    
    762.4
    
    
    
    1,013.7
    
    
    
    (24.8
    )%Data communications services
    
    
    220.4
    
    
    
    215.9
    
    
    
    2.1Internet services
    
    
    115.4
    
    
    
    103.3
    
    
    
    11.7Mobile communications services
    
    
    463.1
    
    
    
    
    
    
    
    n.aIntersegmental eliminations and others
    
    
    (374.6
    )
    
    
    (218.0
    )
    
    
    71.8Consolidated other operating expenses
    
    
    1,186.7
    
    
    
    1,114.9
    
    
    
    6.4
    %
 Our consolidated other operating expenses increased by EUR 71.8 million or
6.4% to EUR 1,186.7 million in 2002. The consolidation of mobilkom austria
group since June 28, 2002 increased the other operating expenses by EUR 326.1
million, net of intersegmental eliminations. Effective January 1, 2002, the
Austrian regulatory authority approved a change in the way interconnection
charges between Austrian alternative service providers are billed and
collected. As a result of the change, Telekom Austria is no longer a party to
such transactions. Had the new regulation been in place during 2001, revenues
and operating expenses in the fixed line services segment would have been lower
by EUR 257.2 million. This change had no significant impact on operating
income. Taking into account these two above mentioned effects, other operating
expenses remained rather stable with a slight increase of EUR 2.9 million or
0.3%. Operating income (loss) 2002
    
    2001
    
    2002/2001(in EUR millions)
    
    (% change)Fixed line services
    
    
    (26.4
    )
    
    
    35.0
    
    
    
    n.a
    %Data communications services
    
    
    8.6
    
    
    
    19.4
    
    
    
    (55.7
    )Internet services
    
    
    (66.4
    )
    
    
    (150.0
    )
    
    
    (55.7
    )Mobile communications services
    
    
    164.9
    
    
    
    
    
    
    
    n.aIntersegmental eliminations and others
    
    
    (23.3
    )
    
    
    (99.8
    )
    
    
    n.aConsolidated operating income (loss)
    
    
    57.4
    
    
    
    (195.4
    )
    
    
    n.a
    %
 Operating income improved from a loss of EUR 195.4 million in 2001 to an
income of EUR 57.4 million in 2002. The consolidation of mobilkom austria group
since June 28, 2002 contributed EUR 171.3 million net of intersegmental
eliminations to this improvement. The factors described above contributed to
the improvement in operating income. Other income, taxation, and minority interests 2002
    
    2001
    
    2002/2001(in EUR millions)
    
    (% change)Other income (expense)Net interest
    
    
    (156.5
    )
    
    
    (158.3
    )
    
    
    (1.1
    )%Equity in earnings of affiliates and dividend income
    
    
    141.0
    
    
    
    197.7
    
    
    
    (28.7
    )Other, net
    
    
    1.9
    
    
    
    (44.0
    )
    
    
    n.aIncome tax (expense) benefit
    
    
    (26.1
    )
    
    
    94.9
    
    
    
    n.aMinority interest
    
    
    (4.9
    )
    
    
    0.5
    
    
    
    n.aTotal
    
    
    (44.6
    )
    
    
    90.8
    
    
    
    n.a
    %
 Net interest Net interest expense decreased by 1.1% to EUR 156.5 million in 2002. A
decrease in net debt during the first six months and favorable financing of the
purchase price for the June 28, 2002 acquisition of mobilkom 88




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austria led to a
reduction in total consolidated net interest expense. For further details see
 Liquidity and capital resources. Equity in earnings of affiliates and dividend income Equity in earnings of affiliates includes primarily the equity income from
the 74.999% participation held in mobilkom austria. As a consequence of the
consolidation of mobilkom austria group beginning June 28, 2002
mobilkom austrias operations are included in the financial statements of
Telekom Austria and are no longer reported as equity in earnings of affiliates.
This results in a decrease of equity in earnings of affiliates to EUR 140.5
million in 2002 from EUR 195.5 million in 2001. Dividend income decreased to EUR 0.4 million in 2002 compared to EUR 2.2
million in 2001. Other, net This item improved from an expense of EUR 44.0 million to an income of EUR
1.9 million in 2002. SFAS No. 144, as amended, requires classification of a net
loss from retirement of long-lived assets as operating expenses in 2002. For
2001 a net loss from retirement of long-lived assets of EUR 39.0 million is
included in other, net. Income tax (expense) benefit Austrian stock corporations are generally subject to corporate income tax
of 34% of their taxable income. Our effective tax rate in 2002 was 59.6%
primarily due to non-deductible goodwill impairment charges and an increase in
the deferred tax valuation allowance, partially offset by certain tax credits
and incentives and lower tax rate differentials on equity in earnings of
affiliates. Our effective tax rate in 2001 was 47.4% primarily due to a tax
benefit recorded for prior year goodwill amortization and impairment, partially
offset by an increase in the deferred tax valuation allowances. In assessing the recoverability of deferred tax assets, management
considers whether it is more likely than not that all the deferred tax assets
will be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income and tax
strategies in making this assessment. Based on the level of historical taxable
income and projections for future taxable income over the periods in which the
deferred tax assets are deductible, management believes it is more likely than
not that we will realize all the benefits of these deductible differences, net
of the existing valuation allowance. In 2001, mobilkom austria AG & Co KG (formerly mobilkom austria AG), in
which our equity investment at the time amounted to 74.999%, recorded a tax
expense of EUR 134.4 million due to a change in tax status of mobilkom austria
AG from a taxable entity to a non-taxable limited liability partnership. The
change occurred in the first quarter of 2001 and was, for tax purposes,
effective retroactively to July 1, 2000. Correspondingly, we recorded our
74.999% proportional share of these tax charges of mobilkom austria and,
accordingly, recognized a deferred tax benefit during the three months ended
March 31, 2001. Thus, the direct income tax effects on us from the change in
tax status of mobilkom austria and the proportional pickup from the income tax
expense reported by mobilkom austria itself essentially offset each other in
the income tax expense reported by us for the three months ended March 31,
2001. Minority interests Due to the consolidation of mobilkom austria group effective June 28,
2002, minority shareholders earnings in some of mobilkom austrias
subsidiaries are presented as minority interests. Overall these companies
contributed positively to mobilkom austria groups result, the portion of the
subsidiaries earnings attributable to the minority interests are deducted in
arriving at consolidated net income. 89




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Consolidated net income (loss) 2002
    
    2001
    
    2002/2001(in EUR millions)
    
    (% change)Total
    
    
    12.8
    
    
    
    (104.6
    )
    
    
    n.a.
 Telekom Austria shows a positive consolidated net income for the first
time since 1999. Net income improved to EUR 12.8 million in 2002 compared to a
loss of EUR 104.6 million in 2002. The positive development was supported by
continuing growth in the mobile communications segment combined with the
consolidation of mobilkom austria group from June 28, 2002 through December 31,
2002. This development was also a result of the adoption of SFAS No. 142 in that
goodwill and indefinite-lived intangible assets are no longer amortized. In
2001 we reported amortization of goodwill of EUR 50.4 million and additional
EUR 27.0 million were included in equity in earnings of affiliates. We
recognized impairment charges of EUR 41.9 million and EUR 145.1 million in 2002
and 2001 respectively. These charges are primarily related to the impairment of
goodwill in Czech On Line, which decreased from EUR 120.0 million in 2001 to
40.4 million in 2002. The improvement of the consolidated net income was also due to the release
of provisions for contractual termination benefits in the amount of EUR 57.4
million in 2002 compared to EUR 2.4 million in 2001. Further, a decline in
revenue in the fixed line services segment was partially offset by successful
cost reductions. 90




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SUPPLEMENTARY INFORMATION Although Austrian GAAP permitted us to consolidate mobilkom austria group,
we did not consolidate mobilkom austria group under U.S. GAAP through June 28,
2002. This was because through that date mobilkom austrias minority
shareholder, a subsidiary of Telecom Italia Mobile S.p.A. (TIM) held
substantive contractual rights in connection with its investment. Consequently
we presented separately consolidated financial information for mobilkom austria
group. Since our privatization in November 2000 we have, however, shown total
managed results of operations for the entire Telekom Austria group, in order to
present a complete picture of the enterprise. The managed data include all
revenues and operating income from all business segments including the mobile
communications segment under the management of our Management Board. On June 28, 2002 we acquired TIMs stake in mobilkom austria. As a result
of the acquisition, we gained full strategic and operating control of our
mobile communications services business. Thus, our consolidated statement of
operations for the fiscal year ending 2002 reflects our equity in earnings of
mobilkom austria group through June 28, 2002, and consolidated mobilkom austria
groups results of operations for the period from June 28, 2002 until December
31, 2002. These consolidated statements of operations, however, exclude the
operations of mobilkom austria group through June 28, 2002 and are thus not
directly comparable to the total managed data we presented in 2001. Thus, in
order to provide investors with a more complete picture of the development of
our business, we are presenting supplementary to our consolidated statement of
operations a comparison between the total managed data for the entire fiscal
year of 2002 with the fiscal year 2001 together with a reconciliation between
the total managed data for the year ended December 31, 2002 and our
consolidated statements for the same period. Percentage changes related to the mobile communications services segment
before and after the acquisition of mobilkom austria are not meaningful and
therefore, are not presented in the tables below. 2002
    
    2001
    
    2002/2001(in EUR millions)
    
    (% change)Operating revenues:Fixed line services
    
    
    2,057.2
    
    
    
    2,456.7
    
    
    
    (16.3
    )%Data communications services
    
    
    330.0
    
    
    
    330.2
    
    
    
    (0.1
    )Internet services
    
    
    119.6
    
    
    
    99.5
    
    
    
    20.2Mobile communications services
    
    
    1,002.5
    
    
    
    (196.4
    )
    
    
    n.a.Intersegmental eliminations and others
    
    
    (391.2
    )
    
    
    (226.7
    )
    
    
    n.a.Consolidated operating revenues
    
    
    3,118.1
    
    
    
    2,659.7
    
    
    
    17.2
    %Mobile communications services  prior to consolidation
    
    
    906.9
    
    
    
    1,713.2
    
    
    
    n.a.Intersegmental eliminations
    
    
    (116.8
    )
    
    
    (429.4
    )
    
    
    n.a.Total managed operating revenues
    
    
    3,908.2
    
    
    
    3,943.5
    
    
    
    (0.9
    )%
 Whereas our consolidated operating revenues increased by 17.2% to EUR
3,118.1 million in 2002 from EUR 2,659.7 million in 2001 mainly due to the
consolidation of mobilkom austria group as of June 28, 2002, our total managed
operating revenues decreased by 0.9% in 2002 to EUR 3,908.2 million from EUR
3,943.5 million in 2001. The reduction in total managed operating revenues was
caused by a change in the way interconnection charges between Austrian
alternative service providers are billed and collected. As a result of this
changes Telekom Austria is no longer a party to such transactions. Had the
change been in place during 2001, total managed operating revenues would have
been lower by EUR 84.2 million. Taking into account this effect, our total
managed operating revenues would have increased by 1.3% from EUR 3,859.3
million in 2001. The increase is driven primarily by growth in revenues from
our mobile communications services segment which were up by 11.5% to EUR
1,909.4 million in total in 2002 from EUR 1,713.2 million in 2001. The rise was
achieved through an increase in the number of mobile customers and a higher
average usage per subscriber which reflects our focus on high value mobile
customers. The increase came both from Austria and, above all, 91




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foreign operations. Revenue growth in this segment together with growth from
our internet services segment more than offsets the decrease in revenues from
our fixed line and data communications services segment. We evaluate the performance of our segments based on operating income
before depreciation, amortization, impairment charges, net losses from
retirement of long-lived assets and costs of idle workforce (EBITDA). EBITDA is
used to measure the performance of segments because we believe it is a widely
accepted indicator of our ability to incur and service debt. EBITDA does not
give effect to cash used for debt service requirements and does not reflect
funds available for dividends, reinvestment or other discretionary uses. EBITDA is also used in the telecommunications industry as a comparative
measure of financial performance by excluding certain variables that affect net
income but may not relate to all financial aspects of telecommunications
operation of a company. In addition, because we have adjusted EBITDA as
presented herein, this may not be comparable to similarly titled measures
reported by other companies. Costs of idle workforce are not controlled by the segment managers but are
the responsibility of corporate management, since idle workforce is no longer
employed by our operating segments. Therefore, fixed-line EBITDA and EBIT
exclude the costs of idle workforce. Before 2002 these costs included direct
expenses for civil servants who had been released or transferred from the
workforce and lump sum payments for civil servants who had agreed to leave with
severance packages. In 2002, costs for employees who were on medical leave and
had applied for early retirement as a result of medical disability are included
in the costs for idle workforce. This change in the definition of idle
workforce resulted in the reclassification of prior-year costs of idle
workforce from EUR 49.9 million to EUR 52.0 million after reclassification.
Prior-year fixed line EBITDA was adjusted from EUR 869.0 million, as previously
reported, to EUR 871.0 million and EBIT from EUR 33.0 million to EUR 35.0
million. Following a change in U.S. GAAP reporting, a net loss from retirement of
long-lived assets of EUR 18.7 million is presented as a component of operating
income in 2002. In 2001 a similar loss of EUR 39.0 million was reported as
non-operating expense in the other income, net section. To enhance
comparability with prior periods the tables below present consolidated EBITDA
and EBIT excluding such losses, also titled EBITDA (as adjusted) and EBIT (as
adjusted). The tables also present consolidated EBITDA and EBIT including the
net loss from retirement of long lived assets in 2002. We have not adjusted
2001 EBITDA or EBIT for this reporting change. 2002
    
    2001
    
    2002/2001(in EUR millions)
    
    (% change)EBITDA:Fixed line services
    
    
    813.2
    
    
    
    871.0
    
    
    
    (6.6
    )%Data communication services
    
    
    46.6
    
    
    
    54.7
    
    
    
    (14.8
    )Internet services
    
    
    (13.4
    )
    
    
    (20.1
    )
    
    
    (33.3
    )Mobile communications services
    
    
    309.5
    
    
    
    
    
    
    
    n.a.Intersegmental eliminations and Others
    
    
    7.8
    
    
    
    0.1
    
    
    
    n.a.Consolidated EBITDA (excluding losses for the
retirement of long-lived assets and costs for idle workforce)
    
    
    1,163.7
    
    
    
    905.7
    
    
    
    28.5
    %Mobile communications services  prior to consolidation
    
    
    351.4
    
    
    
    571.3
    
    
    
    n.a.Intersegmental eliminations
    
    
    (0.3
    )
    
    
    (2.2
    )
    
    
    n.a.Total managed EBITDA (excluding losses for the
retirement of long-lived assets and costs for idle workforce)
    
    
    1,514.8
    
    
    
    1,474.8
    
    
    
    2.7
    %Consolidated EBITDA (excluding losses for the
retirement of long-lived assets and costs for idle workforce)
    
    
    1,163.7
    
    
    
    905.7
    
    
    
    28.5
    %Idle workforce
    
    
    (29.4
    )
    
    
    (52.0
    )
    
    
    (43.5
    )Net losses from retirement of long-lived assets
    
    
    (18.7
    )
    
    
    
    
    
    
    n.a.Consolidated EBITDA
    
    
    1,115.6
    
    
    
    853.7
    
    
    
    30.7
    %
 Our consolidated EBITDA increased by 30.7% in 2002 to EUR 1,115.6 million
from EUR 853.7 million in 2001. As shown in the table above this increase is
primarily a result of the consolidation of mobilkom austria groups result of
operations effective June 28, 2002. In the fixed line services segment lower
revenues led to a decline in EBITDA (as adjusted) by 6.6% in 2002 to EUR 813.2
million from EUR 871.0 million in 2001. The 92




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data communications segment was negatively affected by bad debt expenses, which
led to a 14.8% decline in EBITDA (as adjusted) to EUR 46.6 million. Negative
EBITDA (as adjusted) reported by the internet segment improved by 33.3% to EUR
(13.4) million in 2002 resulting from an increase in the subscriber base
leading to higher revenues. Our mobile communications services segment contributed EUR 309.5 million
to our consolidated EBITDA (as adjusted) in 2002 and additional EUR 351.4
million for the first half of 2002 which is included in our total managed
EBITDA (as adjusted). The mobile communications segment showed higher
profitability in all markets, with EBITDA (as adjusted) rising by 15.7% to EUR
660.9 million in 2002. The increase in the results of our mobile communications services segment
more than offsets the decline in our other segments and leads to the rise of
total managed EBITDA (as adjusted) by 2.7% to EUR 1,514.8 million in 2002
compared to EUR 1,474.8 million in the previous year. The following table shows our operating income, which we refer to as
earnings before interests and taxes (EBIT), and percentage changes by business
segment for the periods indicated. 2002
    
    2001
    
    2002/2001(in EUR millions)
    
    (% change)EBIT:Fixed line services
    
    
    (21.4
    )
    
    
    35.0
    
    
    
    n.a.Data communication services
    
    
    10.5
    
    
    
    19.4
    
    
    
    (45.9
    )Internet services (1)
    
    
    (65.7
    )
    
    
    (150.0
    )
    
    
    (56.2
    )Mobile communications services
    
    
    173.9
    
    
    
    
    
    
    
    n.a.Intersegmental eliminations and Others
    
    
    8.2
    
    
    
    (47.9
    )
    
    
    n.a.Consolidated EBIT (excluding losses for the
retirement of long-lived assets and costs for idle workforce)
    
    
    105.5
    
    
    
    (143.5
    )
    
    
    n.a.Mobile communications services  prior to consolidation
    
    
    218.2
    
    
    
    303.5
    
    
    
    n.a.Intersegmental eliminations
    
    
    (0.2
    )
    
    
    (2.0
    )
    
    
    n.a.Total managed EBIT (excluding losses for the
retirement of long-lived assets and costs for idle workforce)
    
    
    323.5
    
    
    
    158.0
    
    
    
    104.7
    %Consolidated EBIT (excluding losses for the
retirement of long-lived assets and costs for idle workforce)
    
    
    105.5
    
    
    
    (143.5
    )
    
    
    n.a.Idle workforce
    
    
    (29.4
    )
    
    
    (51.9
    )
    
    
    (43.4
    )%Net losses from retirement of long-lived assets
    
    
    (18.7
    )
    
    
    
    
    
    
    n.a.Consolidated EBIT
    
    
    57.4
    
    
    
    (195.4
    )
    
    
    n.a.
   (1)
    
    The impairment charge for our Czech On Line goodwill of EUR 120.0 million
in 2001 was excluded from intersegmental eliminations and reclassified to
our internet segment. As described above, in order to facilitate the comparability of the EBIT
data for 2001 and 2002 on a segment level we have excluded costs for the
retirement of long lived assets in the amount of EUR 5.1 million in the fixed
line segment, EUR 1.9 million in the data communications segment, EUR 0.7
million in the internet segment and EUR 11.4 million in the mobile
communications segment. All costs of idle workforce are attributable to and
subtracted from the fixed line services segment. We achieved a total managed EBIT (as adjusted) of EUR 323.5 million in
2002, compared to EUR 158.0 million in 2001. Our boost in total managed EBIT
(as adjusted) in 2002 compared to last year was partially due to the
performance of our mobile communications services segment which is up by 29.2%
to EUR 392.1 million in 2002. Further, a decline in revenue in the fixed line
services segment was partially offset by successful cost reductions. In
addition this increase was due to the release of provisions for contractual
termination benefits in the amount of EUR 57.4 million in 2002 compared to EUR
2.4 million in 2001. As a result of the adoption of SFAS No. 142 goodwill and intangible assets
with indefinite useful life are no longer amortized. In 2001 we reported
amortization of goodwill of EUR 50.4 million and additional EUR 27.0 million
were included in equity in earnings of affiliates. We recognized impairment
charges of EUR 41.9 million and EUR 145.1 million in 2002 and 2001
respectively. These charges are primarily related to the impairment of goodwill
in Czech On Line, our foreign subsidiary in the internet services segment,
which decreased from EUR 120.0 million in 2001 to 40.4 million in 2002. 93




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The following table reconciles EBITDA and EBIT to cash generated from
operations for the periods indicated. 2002
    
    2001(in EUR millions)Total managed EBITDA (excluding losses for the
retirement of long-lived assets and costs for idle workforce)
    
    
    1,514.8
    
    
    
    1,474.8Intersegmental eliminations
    
    
    0.3
    
    
    
    2.2EBITDA mobile communications services segment  prior to consolidation
    
    
    (351.4
    )
    
    
    (571.3
    )Consolidated EBITDA (excluding losses for the
retirement of long-lived assets and costs for idle workforce)
    
    
    1,163.7
    
    
    
    905.7Depreciation, amortization and impairment charges
    
    
    (1,058.2
    )
    
    
    (1,049.2
    )Consolidated EBIT (excluding losses for the
retirement of long-lived assets and costs for idle workforce)
    
    
    105.5
    
    
    
    (143.5
    )Depreciation, amortization and impairment charges
    
    
    1,058.2
    
    
    
    1,049.2Net loss from retirement of long-lived assets
    
    
    (18.7
    )
    
    
    Other income net
    
    
    1.9
    
    
    
    (44.0
    )Idle workforce
    
    
    (29.4
    )
    
    
    (52.0
    )Net interest
    
    
    (156.5
    )
    
    
    (158.3
    )Income from investments
    
    
    141.0
    
    
    
    197.7Income taxes
    
    
    (26.1
    )
    
    
    94.9Minority interests
    
    
    (4.9
    )
    
    
    0.5Employee benefit obligation  non cash
    
    
    (49.8
    )
    
    
    3.1Allowance for doubtful accounts
    
    
    39.2
    
    
    
    14.8Change in deferred taxes
    
    
    33.5
    
    
    
    (95.0
    )Dividends from affiliates, less than equity in income
    
    
    (45.9
    )
    
    
    (80.7
    )Loss on sales of investments and disposal of equipment
    
    
    17.5
    
    
    
    38.9Changes in assets and liabilities, net of effect of business acquired
    
    
    105.9
    
    
    
    16.8Cash generated from operations
    
    
    1,171.4
    
    
    
    842.4
 For a breakdown of the differences between total managed EBITDA and
consolidated EBITDA please refer to the explanation given above. Whereas consolidated EBITDA (as adjusted) increased by EUR 258.0 million
or 28.5% to EUR 1,163.7 million in 2002, cash generated from operations
increased by EUR 329.0 million or 39.1% to EUR 1,171.4 million. The differences
are presented above. When doing the reconciliation we first deduct depreciation, amortization,
impairment charges and net loss from retirement of long lived assets thereby
arriving at consolidated EBIT. The same amount is added back thereafter as it
is one of several non-cash adjustments necessary to reconcile EBIT to Cash
generated from operations. All other differences for the reconciliation to cash
generated from operations are applicable for EBIT the same way as they are for
EBITDA. 94




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The following table shows a reconciliation of EBIT to net income (loss)
from operations for the periods indicated. 2002
    
    2001(in EUR millions)Total managed EBIT (excluding losses for the
retirement of long-lived assets and costs for idle workforce)
    
    
    323.5
    
    
    
    158.0Intersegmental eliminations
    
    
    0.2
    
    
    
    2.0EBIT mobile communications services segment  prior to consolidation
    
    
    (218.2
    )
    
    
    (303.5
    )Consolidated EBIT (excluding losses for the
retirement of long-lived assets and costs for idle workforce)
    
    
    105.5
    
    
    
    (143.5
    )Net interest
    
    
    (156.5
    )
    
    
    (158.3
    )Idle workforce
    
    
    (29.4
    )
    
    
    (52.0
    )Net losses from retirement of long-lived assets
    
    
    (18.7
    )
    
    
    Equity in earnings of affiliates  mobilkom austria prior to acquisition
    
    
    142.9
    
    
    
    197.9Equity in earnings of affiliates  other
    
    
    (2.3
    )
    
    
    (2.5
    )Other
    
    
    2.3
    
    
    
    (41.6
    )Income tax (expense) benefit
    
    
    (26.1
    )
    
    
    94.9Minority interests
    
    
    (4.9
    )
    
    
    0.5Net income (loss)
    
    
    12.8
    
    
    
    (104.6
    )
 95




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SEGMENT RESULTS Fixed line services Fixed line services is our largest business segment and includes mainly
the operating activities of Telekom Austria AG and Telekom Austria
Personalmanagement GmbH, including voice telephony on fixed networks, services
for other carriers, equipment sales, certain leased lines and other services. The Austrian fixed line voice market, measured in terms of minutes,
experienced another slight decrease during 2002 especially in local voice
minutes. The ongoing increase in competition in the fixed line market resulted
in a slight decline of our market share based on minutes, including internet
dial-up minutes, to 55.3% at December 31, 2002 down from 56.2% by year-end
2001. However, the promotion of our second-based TikTak tariff packages which
were introduced in the course of 2001 led to an increase in the number of
TikTak lines to 840,300 at December 31, 2002 compared to approximately 212,000
by year-end 2001. With the growing use of pre-selection of a carrier and unbundling of the
local loop, we began to face increasing competition on the local network level.
Due to the introduction of our new tariffs, we managed to lessen the average
decline of our market share, but could not manage to stop the decline in
revenues. On the basis of interconnection rates fixed by the regulatory authorities,
numerous competitors are able to compete with us with minimal or modest
investments in network infrastructure. Our tariff reforms contributed
significantly to reductions in our traffic-related revenues. We succeeded in
partially offsetting the reduction in traffic related revenues by increasing
revenues from monthly rental. In addition, we aim to reinforce our current
market position through a new customer-focused organization. We expect to keep
our market share above 50% in 2003. Revenues Revenues from our fixed line services segment are derived primarily from the following sources:  
    
    traffic and access related charges for:  
    
    local, national long-distance, fixed-to-mobile, international calls and internet dial-up; and
    
    initial connection fees, installation fees, monthly rental and other charges;  
    
    carrier services including interconnection fees paid by other
carriers to access our fixed line network and related carrier services;
    
    fees paid for leased lines;
    
    sales of equipment; and
    
    fees from other services, including value-added services, public
payphone services, call center services, directory services and other. The following table shows revenues from our fixed line services segment
and percentage changes for the periods indicated. 96




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2002
    
    2001
    
    2002/2001(in EUR millions)
    
    (% change)Fixed line operating revenues:Traffic and access related services
    
    
    1,118.5
    
    
    
    1,234.6
    
    
    
    (9.4
    )%Carrier
services (1)
    
    
    366.4
    
    
    
    637.0
    
    
    
    (42.5
    )Leased lines
    
    
    246.1
    
    
    
    (196.4
    )
    
    
    (4.1
    )Equipment
    
    
    94.5
    
    
    
    97.7
    
    
    
    (3.3
    )Other
    
    
    231.7
    
    
    
    230.8
    
    
    
    0.4Total fixed line operating revenues
    
    
    2,057.2
    
    
    
    2,456.7
    
    
    
    (16.3
    )%
   (1)
    
    The change of the invoicing system with alternative telecommunications
operators resulted in a reduction of revenues in 2002. If in effect, the
change would have reduced fixed line revenues by EUR 257.2 million in
2001. Traffic and access related services The following table shows revenues from traffic and access related
services and percentage changes for the periods indicated. 2002
    
    2001
    
    2002/2001(in EUR millions)
    
    (% change)Traffic and access related services:Traffic revenues
    
    
    499.4
    
    
    
    599.1
    
    
    
    (16.6
    )%Initial connection and installation fees, monthly
rental and other network services
    
    
    619.1
    
    
    
    635.5
    
    
    
    (2.6
    )Total
    
    
    1,118.5
    
    
    
    1,234.6
    
    
    
    (9.4
    )%
 Traffic revenues decreased by 16.6% to EUR 499.4 million in 2002 from EUR
599.1 million in 2001. In 2001 we introduced lower priced pay-per-second
tariff schemes called TikTak tariffs. As of December 31, 2002, 840,300
customers already opted for our TikTak tariffs compared to 212,000 at the end
of 2001, an increase of 296.4%. As a result, our average tariffs fell 8.9%
which accounted for approximately 50% of the decline in sales revenues. The remaining decline in revenues was attributable to a further drop in
traffic volume in 2002 of 6.9% compared to 2001, as illustrated in the table
below. Strong competition for fixed network services and the possibility of
carrier pre-selection for local calls since January 1, 2001 have put pressure
on our revenues and have caused our market share to decline from 56.2% in 2001
to 55.3% in 2002. In addition, local traffic declined due to a shift from fixed
line traffic to mobile communications traffic. Internet dial-up minutes
declined by 4.4% partially due to migration from internet dial-up to ADSL,
especially from regular users of the internet. ADSL is a technology that
permits the transmission of data at very high speeds using a standard copper
access line. The number of ADSL access lines went up by 73.1% compared to 2001. The decline in local and internet dial-up traffic was partially offset by
an increase of national long distance traffic, as the following table shows: 97




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Year ended December 31,2002
    
    2001
    
    2002/2001(in millions of minutes) (1)
    
    (% change)Fixed line traffic:Local traffic
    
    
    3,765
    
    
    
    4,335
    
    
    
    (13.1
    )%National long distance traffic
    
    
    842
    
    
    
    823
    
    
    
    2.3Fixed-to-mobile traffic
    
    
    826
    
    
    
    830
    
    
    
    (0.5
    )International traffic
    
    
    472
    
    
    
    476
    
    
    
    (0.8
    )Internet dial-up traffic
    
    
    4,305
    
    
    
    4,505
    
    
    
    (4.4
    )Total fixed line traffic (excluding value-added
services, emergency calls, payphones)
    
    
    10,210
    
    
    
    10,969
    
    
    
    (6.9
    )%
   (1)
    
    All amounts exclude interconnection traffic, products offered under flat
fee, and payphone traffic. Revenues from our initial connection and installations fees, monthly
rentals and other network services decreased by 2.6% to EUR 619.1 million in
2002 from EUR 635.5 million in 2001. These revenues are primarily a function of
the number and mix of standard PSTN telephone, ISDN and ADSL access lines and
the corresponding initial connection fees and monthly rental charges. Each of
our traditional telephone lines, called PSTN lines, provides one access
channel. We also offer lines on new networks that provide up to 30 lines and
can be used simultaneously for voice and data transmissions at higher speed
than over normal access lines. These networks are called integrated digital
service networks, or ISDN. There are two kinds of ISDN lines. Basic ISDN lines
provide two access channels each and multi ISDN lines provide 30 access
channels each. The following table shows the number of our access lines and channels and
percentage changes for the periods indicated. The figures exclude payphones,
but include ADSL, our internal lines and approximately 259,100 lines for
qualifying low income persons at December 31, 2002. The service for low income
persons, which we have provided for many years, includes free monthly rental
and one hour of free local traffic per month. We receive a reimbursement from
the federal government for these services. Year ended December 31,2002
    
    2001
    
    2002/2001(in thousands)
    
    (% change)Number of fixed lines:PSTN access lines
    
    
    2,659.1
    
    
    
    2,759.8
    
    
    
    (3.6
    )%Basic ISDN access lines
    
    
    430.1
    
    
    
    398.7
    
    
    
    7.9Multi ISDN access lines
    
    
    8.1
    
    
    
    8.3
    
    
    
    (2.4
    )Total access lines
    
    
    3,097.3
    
    
    
    3,166.9
    
    
    
    (2.2
    )of which ADSL
    
    
    174.1
    
    
    
    100.6
    
    
    
    73.1Total access channels
    
    
    3,762.3
    
    
    
    3,806.2
    
    
    
    (1.2
    )%
 The total number of access lines decreased by 2.2% in 2002, primarily due
to a shift to alternative providers such as cable television operators and to a
lesser extent to the growth in the mobile communications market. The decrease
in the number of PSTN lines was partially offset by a migration of our
customers to our basic ISDN lines. Our ADSL access lines increased by 73.1% in
2002 to 174.1 from 100.6 in 2001. The number of total access channels in the
fixed network declined by approximately 1.2% in 2002 compared to 2001. The decrease in access lines and channels resulted in a decrease in
initial connection and installations fees, monthly rental and other network
services revenues. The decrease was only partially offset by the migration to
higher priced basic ISDN lines. Carrier Services Our carrier service business area generates revenues by providing network
services to domestic and international carriers. These carrier services consist
of termination, origination (or carrier selection) and transit of national
traffic and international termination in Austria and abroad, international
bandwidth services and internet access. 98




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Revenues from carrier services declined to EUR 366.4 million in 2002 from
EUR 637.0 million in 2001. Effective January 1, 2002, the Austrian regulatory
authority approved a change in the way interconnection charges between Austrian
alternative service providers are billed and collected. As a result of the
change Telekom Austria is no longer a party to such transactions. Had the new
regulatory been in place during 2001, operating revenues would have been lower
by EUR 257.2 million. In 2002, after the change in interconnection between alternative service
providers, revenues from carrier service decreased by 3.5% to EUR 366.4 million
from EUR 379.8 million in 2001. This downturn was caused by lower incoming
mobile traffic. Many multinational carriers have set up subsidiaries in Austria
and are therefore in the position to directly route their traffic. In addition,
in September 2002, the regulatory authority decided on new interconnection
rates which were reduced by 4.8% on average. Leased lines Our leased lines business area generates revenues by leasing fixed lines
to customers for their exclusive and dedicated use. Revenues from leased lines
decreased by 4.1% in 2002 to EUR 246.1 million from EUR 256.6 million in 2001.
This decline is attributable to the decrease in our international business area
as a result of strong competition. In addition, within Austria our domestic
competitors were in a position to benefit from lower costs pursuant to the
optimization of their networks resulting in lower revenues to us. Furthermore,
the reduction of leased lines rates which took effect since September 1, 2001
also contributed to this negative development. The average price reduction was
3.6% for all leased lines. This decline was, however, partially offset by the
increased demand for higher capacities or bandwidths. Equipment We generate revenues from sales of telecommunications equipment including
residential, as well as mobile telephone equipment and systems for business
customers, and by providing related post-sale maintenance and services.
Revenues from equipment sales decreased by 3.3% in 2002 to EUR 94.5 million
from EUR 97.7 million in 2001. This decline was primarily attributable to
reduced sales quantities of equipment as well as declining demand for
maintenance and services. As we de-emphasized sales efforts on lower margin
products, sales of Private Automatic Branch Exchange (PABX) installations and
telecommunications infrastructure declined by approximately 14% in 2002. Other revenues This category primarily includes value-added services, public payphone
services, call center services, directory services and some other services.
Revenues increased slightly by 0.4% to EUR 231.7 million in 2002 from EUR 230.8
million in 2001. This increase resulted from an increase in inquiry service
tariffs that more than compensated declining revenues from public payphones,
which have become less popular due to the increasing use of mobile phones. Operating expenses The following table shows operating expenses of our fixed line services
segment and percentage changes for the periods indicated. 2002
    
    2001
    
    2002/2001(in EUR millions)
    
    (% change)Fixed line operating expenses:Materials
    
    
    55.5
    
    
    
    66.5
    
    
    
    (16.5
    )%Employee costs, including benefits and taxes
    
    
    426.2
    
    
    
    505.5
    
    
    
    (15.7
    )Depreciation and amortization
    
    
    834.5
    
    
    
    836.0
    
    
    
    (0.2
    )Loss from retirement of long-lived assets
    
    
    5.1
    
    
    
    
    
    
    
    n.aCarrier services
    
    
    310.5
    
    
    
    568.1
    
    
    
    (45.3
    )Repairs
    
    
    123.8
    
    
    
    129.7
    
    
    
    (4.5
    )Services received
    
    
    13.1
    
    
    
    24.3
    
    
    
    (46.1
    )Other operating expenses
    
    
    314.9
    
    
    
    291.6
    
    
    
    8.0Total fixed line operating expenses
    
    
    2,083.6
    
    
    
    2,421.7
    
    
    
    (14.0
    )%
 99




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Materials Materials consist mainly of expenses for spare parts, cables and supplies
for our network and merchandise we sell to our customers. Materials in the
fixed network business segment decreased by 16.5% in 2002 to EUR 55.5 million
from EUR 66.5 million in 2001. The decrease in material expenses is primarily
due to the declining sales of equipment especially for PABX installations and
lower numbers of initial connections. Employee costs, including benefits and taxes Employee costs including benefits and taxes in our fixed line services
segment decreased by 15.7% in 2002 to EUR 426.2 million from EUR 505.5 million
in 2001. Our personnel expenses in 2000, 2001 and 2002 reflect the accruals for
our voluntary retirement incentive programs described in the following
paragraph. From 1997 to 2000, we offered voluntary retirement incentive programs
(VRIP) to eligible employees. We made provisions for expenses related to these
programs of EUR 253.2 million in 2000. At December 31, 2000, 2,976 employees
were covered by the social plan provisions reflected in our balance sheet as of
that date. In 2001 there was a release of accruals of EUR 2.4 million. On
January 1, 2002 a new law was enacted that allows civil servants to move from
Telekom Austrias VRIP into government funded early retirement at the age of
55. Because a number of employees either elected early retirement under this
new law or qualified for early retirement as the result of medical disability,
EUR 57.4 million of these provisions were reversed during 2002. Consequently,
our obligation under the VRIP was reduced as pension payments to these former
employees are being covered by the government funded retirement plan. For more
information, see  Critical accounting policies  Voluntary retirement
incentive programs and note 15 to our consolidated financial statements
included elsewhere in this report. At December 31, 2002, 1,723 employees were covered by our VRIP provisions.
The following table sets forth our provisions for these programs for the
periods indicated. Voluntary retirementincentive programs(in EUR millions)VRIP provisionsBalance at
December 31, 2000
    
    
    358.1Release of provision
    
    
    (2.4
    )Cash payments
    
    
    (68.5
    )Balance
at December 31, 2001
    
    
    287.3Release of provision
    
    
    (57.4
    )Cash payments
    
    
    (95.3
    )Other
    
    
    (2.3
    )Balance at December 31, 2002
    
    
    132.3
 We recognize an obligation for voluntary termination benefits when the
eligible employee accepts the offer. The present value of the obligation is
determined based on current compensation levels and the law. An annual increase
of 2.5% for future years and a discount rate of 4.5% are used. We estimate
future new charges to employee costs and future cash payments based on
actuarial assumptions, including assumptions for the discount rate, rate of
compensation increase and rate of increase of pensions. If our actuarial
assumptions and retirements are incorrect, our actual new charges to employee
costs and cash payments may be different. Apart from future interest expense related to our early retirement
programs, we expect to incur additional costs due to our retraining programs
and voluntary severance payments, such as golden handshakes, as part of our
headcount reduction plan which is a component of our transformation program.
Total costs for severance payments amounted to EUR 26.0 million and EUR 29.0
million in 2002 and 2001, respectively. The average number of employees in the fixed line services segment
decreased by 20.6% or 2,143 employees in 2002 as a result of the improved
efficiency due to our transformation program. In 2002, we reduced total group
headcount by 1,620 full time equivalent employees, considering increases in the
mobile communications services segment. In the new wireline segment we expect
to reduce our headcount by approximately 600 in 2003 and approximately 250 in
2004. We expect savings in our employee costs in the mid-term as a result of
the reduction in our personnel. Our estimated savings may vary, however, with
the number of personnel who actually take part in our plans. 100




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For more information about our relationship with employees, see
Directors, Senior Management and Employees  Relationship with employees. Depreciation and amortization Depreciation, amortization and impairment charges in our fixed line
services segment decreased by 0.2% to EUR 834.5 million in 2002 from EUR 836.0
million in 2001 as a result of our efforts to cut capital expenditures relating
to our fixed line network. As part of our transformation program, we are concentrating our offices in
fewer locations. Over time, we expect this to lead to cost savings. However, as
a result of our location consolidation program, we recorded an impairment
charge for buildings totaling EUR 17.4 million in 2001 and EUR 1.0 million in
2002 included in depreciation and amortization, as we will no longer use these
buildings and we are in the process of selling them. Loss from retirement of long-lived assets In accordance with SFAS No. 144, as amended, the net loss from retirement
of long-lived assets is presented in operating income in 2002. In prior years
such losses were included in other, net in the other income section. Carrier services Effective January 1, 2002, the Austrian regulatory authority approved a
change in the way interconnection charges between Austrian alternative service
providers are billed and collected. As a result of the change Telekom Austria
is no longer a party to such transactions. Had the change been in place during
2001, interconnection fees would have been lower by EUR 257.2 million. Taking
into account this effect, our operating expenses remained rather stable at EUR
310.5 million compared to EUR 310.9 million in 2001. Repairs Repairs decreased slightly by 4.5% to EUR 123.8 million in 2002 from EUR
129.7 million in 2001. The decrease was due to lower expenses for maintenance
of communications network equipment and buildings. Services received Services received decreased by 46.1% to EUR 13.1 million in 2002 from EUR
24.3 million in 2001. The decrease in services received is primarily a result
of an increasing reliance on internal expertise to develop and maintain network
software, resulting in lower levels of purchased services. Other operating expenses Other operating expenses include expenses such as energy, rental,
marketing, consulting, training and advertising expenses. Other operating
expenses in the fixed network business segment increased by 8.0% in 2002 to EUR
314.9 million from EUR 291.6 million in 2001. This was mainly due to increased
marketing, advertising and travel expenses, as well as commission fees that
were only partially off-set by lower rental, consulting and legal fees. Mobile communications services The total number of subscribers in the mobile business segment as of
December 31, 2002 grew by 11.9% compared to December 31, 2001. At the end of
2002 we had approximately 4.5 million subscribers in our mobile business
segment. Due to a high penetration rate of 83.1% in the Austrian market at the
end of year 2002, the majority of subscriber growth came from our foreign
subsidiaries which contributed 33% of the subscriber base as of December 31,
2002, up from 28% as of December 31, 2001. We were still able to increase the total number of our mobile customers in
Austria by 5.3% or approximately 151,500 during 2002. This resulted in an
increase of our market share to 44.4% at December 31, 2002, up from 42.9% at
the end of 2001, despite strong competition and the shut down of our analog
network at the end of February 2002. Due to focused marketing activities, a
high share of these analog customers had already migrated to the digital
network during the preceding months. As a result of our successful retention
programs the GSM 101




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churn rate decreased from 23.8% at year-end 2001 to 17.0% at year-end
2002. The introduction of our new tariffs at the beginning of 2002 and our
hardware replacement program have contributed to the success of our retention
programs. Nevertheless, we expect to lose market share in the future due to the
entry of new service providers and one further operator into the Austrian
market during 2003. A service provider is a competitor who provides mobile
communications services using the infrastructure of an existing competitor. An
operator relies on its own network infrastructure. During 2002 the number of contract customers of mobilkom austria increased
by 9.4% and the number of prepaid subscribers increased by 1.1%. The growth in
prepaid segment was rather low primarily as a result of the deactivation of
inactive subscribers and deactivation of our analog network. This is a direct
result of our continuing focus to increase the shares of high value contract
subscribers. At December 31, 2002, contract customers account for 52% of the
total customer base of mobilkom austria compared to 50% at December 31, 2001. mobilkom austrias subsidiary, VIPnet, a digital mobile operator in
Croatia, added approximately 242,100 customers in the year 2002. The
penetration rate in Croatia amounted to 51.9% at the end of 2002, with VIPnet
holding a total market share of 48.2%. mobilkom austrias subsidiary Si.mobil,
a digital mobile operator in Slovenia added approximately 80,400 customers in
the year 2002. Penetration in Slovenia reached a level of 74.7% at the end of
2002 with Si.mobil holding a total market share of 23.4%. Revenues Our mobile communications services segment generates revenues from
operations of our mobile networks. In Austria we disconnected our analog mobile
network in February 2002 and phased out paging services on September 30, 2002.
The revenues mainly include traffic charges, monthly rental charges, equipment
sales and roaming and interconnection fees. Due to the fact that Si.mobil was
acquired at the end of February 2001, only ten months of Si.mobils financial
results were consolidated in the financial statements of mobilkom austria group
in 2001. We expect revenues from our mobile communications services segment to
continue to grow due to increased revenues from our subsidiaries, primarily
from the potential of market growth in Croatia and Slovenia. In spite of a
slow-down of the overall subscriber growth, we expect to increase the
profitability of the mobile business segment as a result of our focus on
improving the quality of the subscriber base. During 2002, we stopped our
market share losses and were able to increase our market share to 44.4% in 2002
from 42.9% in 2001. We expect roaming revenues to decline in the long-term due to increasing
pressure on roaming tariffs. Our partnership-agreement with Vodafone should
allow us to attract additional customers and roaming visitors, which would lead
to higher roaming traffic and offset, at least partially, the decline in
roaming revenues. The following table shows revenues from our mobile communications services
segment and percentage changes for the periods indicated. 2002
    
    2001
    
    2002/2001(in EUR millions)
    
    (% change)Mobile communications operating revenues:Traffic revenues
    
    
    1,000.6
    
    
    
    853.3
    
    
    
    17.3
    %Monthly rental
    
    
    283.5
    
    
    
    252.1
    
    
    
    12.5Interconnection
    
    
    275.9
    
    
    
    274.3
    
    
    
    0.6Equipment
    
    
    175.2
    
    
    
    181.0
    
    
    
    (3.2
    )Roaming
    
    
    155.9
    
    
    
    147.8
    
    
    
    5.5Other
    
    
    27.7
    
    
    
    26.9
    
    
    
    3.0Discounts
    
    
    (9.4
    )
    
    
    (22.2
    )
    
    
    (57.7
    )Total mobile communications operating revenues
    
    
    1,909.4
    
    
    
    1,713.2
    
    
    
    11.5
    %
 102




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Our operating revenues from our mobile communications services segment
increased by 11.5% in 2002 to EUR 1,909.4 million from EUR 1,713.2 million in
2001, with 80% of operating revenues generated in the Austrian market. Traffic revenues Traffic revenues depend on the total number of customers, traffic volume,
mix of prepaid and contract customers and tariffs. Traffic revenues increased
by 17.3% in 2002 to EUR 1,000.6 million from EUR 853.3 million in 2001. This
growth was primarily a result of the increase in the subscriber bases which
increased by 28.3% at VIPnet, 29.8% at Si.mobil and 5.3% at mobilkom austria.
In addition to the higher subscriber base, the average usage per subscriber
rose by approximately 5% for the mobile communications segment, resulting in
17.8% higher charged minutes of use in 2002. This was partially offset by a
slight decrease in price due to the highly competitive markets in Austria,
Croatia, Slovenia and Liechtenstein. The following table shows the number of
customers of our mobile communications services segment and percentage changes
for the periods indicated. 2002
    
    2001
    
    2002/2001(in thousands)
    
    (% change)Mobile communications customers:Austria
    
    
    
    3,001.4
    
    
    
    2,849.9
    
    
    
    5.3Croatia
    
    
    
    1,097.8
    
    
    
    855.7
    
    
    
    28.3Slovenia
    
    
    
    350.0
    
    
    
    269.6
    
    
    
    29.8Liechtenstein
    
    
    
    2.0
    
    
    
    1.3
    
    
    
    51.6Total customers
    
    4,451.2
    
    
    
    3,976.5
    
    
    
    11.9
    %
 The growth in our mobile communications customer base is mainly driven by
VIPnet and Si.mobil and partially by mobilkom austria. Most of the increase in traffic revenues for 2002 compared to 2001 was a
result of an increase in revenues from our contract customers. In Austria the
number of our contract customers increased by 9.4% in 2002. The growth in the
number of contract customers was primarily in response to newly introduced
tariffs. In addition, our mobile tariffs targeted at business customers have
also contributed positively to this development. The rising number of contract
customers resulted in an increase in the average revenue per user which rose
from EUR 34.1 in 2001 to EUR 35.8 in 2002. In Austria, the data traffic
percentages share of airtime revenues increased from 9.7% at year-end 2001 to
10.2% at year-end 2002. The majority of data revenues is derived from SMS
(Short Message Service) and to a lesser extent from GPRS (General Packet Radio
Service). The number of SMS charged to our subscribers rose by 15.3% from EUR
426.6 million in 2001 to EUR 491.7 million in 2002. In our international mobile business both prepaid and contract subscribers
showed a significant growth. Specifically, the contract segment performed very
successfully. The share of contract customers increased at VIPnet from 13.9% to
16.0% and at Si.mobil from 36.2% to 44.1% at year end 2002 in comparison to
year-end 2001. Monthly rental We generate revenues from monthly rental fees paid by our contract
customers for access to our mobile communications network. Revenues from
monthly rentals increased by 12.5% in 2002 to EUR 283.5 million from EUR 252.1
million in 2001. The rise in revenues from monthly rental is primarily
attributable to the increase in our contract customers base as a result of the
introduction and the acceptance of low monthly rental tariffs in Austria and
due to the growth of our international mobile communications business. Interconnection Our mobile communications segment generates interconnection revenues
primarily from interconnection fees from our fixed line segment as well as from
other fixed and mobile operators for calls terminating in our mobile networks.
In addition, we receive revenues from service numbers such as toll free
numbers. Our interconnection revenues increased slightly by 0.6% in 2002 to EUR
275.9 million from EUR 274.3 million in 2001 as a result of a decrease in
Austria, more than offset by an increase internationally. The decrease in
interconnection revenues in Austria was a result of the decision of the
regulatory authority, which lowered mobile-to-mobile rates from EUR 0.1240 to
EUR 0.1125 beginning April 1, 2002. This, however, was more than 103




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offset by the positive development in Croatia and Slovenia which was mainly
driven by an increase in incoming minutes. Equipment We generate revenues from customer equipment primarily from sales of
handsets to our customers. Revenues from equipment decreased by 3.2% in 2002 to
EUR 175.2 million from EUR 181.0 million in 2001, primarily due to a decline in
the number of gross customer additions. This effect was partially offset by
increased sales of higher priced handsets with more functionalities like MMS or
GPRS. Roaming Roaming fees are generated when our mobile network carries a call made by
a customer of another international mobile operator. Revenues from roaming fees
increased by 5.5% in 2002 to EUR 155.9 million from EUR 147.8 million in 2001.
This growth is primarily attributable to rising roaming revenues in Croatia and
Slovenia mainly as a result of the strong summer tourism. However, it was
partially offset by a 4.0% decline in roaming revenues at mobilkom austria due
to direct links established between competitors. Other This category includes revenues from one-time charges like initial
connection fees and collection services such as fees for transfer payments as
well as fees for call center services, and revenues from real estate. Revenues
increased by 3.0% in 2002 to EUR 27.7 million from EUR 26.9 million in 2001 in
part as a result from higher collection revenues. In addition, the rise in
other revenues was driven by higher revenues from fees for call center services
and increased revenues from site-sharing with other mobile operators. These
increases were partially offset by higher incentives for business customers. Discounts Discounts showed a decrease of 57.7% in 2002 to EUR 9.4 million compared to EUR
22.2 million in 2001. These discounts include provisions for customer loyalty
programs at mobilkom austria and VIPnet. mobilkom austria and VIPnet both show
a decreasing trend regarding these discounts. The decrease results from a
revaluation of the value of customer loyalty programs at mobilkom austria,
which reflects a similar decrease in the average value of customer redemptions
over the last twelve months. Operating expenses The following table shows operating expenses from our mobile
communications segment and percentage changes for the periods indicated. 2002
    
    2001
    
    2002/2001(in EUR millions)
    
    (% change)Mobile communications operating expenses:Materials
    
    
    252.3
    
    
    
    250.7
    
    
    
    0.6
    %Employee costs, including benefits and taxes
    
    
    158.6
    
    
    
    134.5
    
    
    
    17.9Depreciation and amortization
    
    
    268.8
    
    
    
    267.8
    
    
    
    0.4Income/loss from retirement of long-lived assets
    
    
    11.4
    
    
    
    
    
    
    
    n.a.Interconnection
    
    
    192.6
    
    
    
    169.2
    
    
    
    13.8Repairs
    
    
    59.3
    
    
    
    39.9
    
    
    
    48.6Services received
    
    
    231.2
    
    
    
    210.2
    
    
    
    10.0Other operating expenses
    
    
    354.5
    
    
    
    337.3
    
    
    
    5.1Total mobile communications operating expenses
    
    
    1,528.7
    
    
    
    1,409.6
    
    
    
    8.4
    %
 Materials Materials in the mobile communications services segment increased slightly
by 0.6% in 2002 to EUR 252.3 million from EUR 250.7 million in 2001. The higher
costs were caused by the rising demand for high quality products and partially
offset by the decline in the number of gross customer additions. Furthermore
the costs of spare parts for radio communications systems increased. 104




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Employee costs, including benefits and taxes Employee costs, including benefits and taxes increased by 17.9% in 2002 to
EUR 158.6 million from EUR 134.5 million in 2001 due to headcount growth to
support the higher number of our mobile customers. The headcount increased by
4.5% for the entire mobile segment. In addition, in Austria, we had a general
salary increase for employees of 2.5%, combined with a minimum payment of EUR
43.6 for low level salaries and higher provisions for vacation time not taken. Depreciation and amortization Depreciation and amortization expenses increased by 0.4% in 2002 to EUR
268.8 million from EUR 267.8 million in 2001. This increase was due to growing
network-related capital expenditures in the past. In Austria, the main reason
for the increase are capital expenditures to increase capacity and maintain the
quality of mobile transmissions. In Croatia and Slovenia capital expenditures
increased to support the larger customer base in those countries. However,
capital expenditures for property, plant and equipment in the mobile
communications segment have been reduced by 11.4% in 2002 to EUR 321.7 million
from EUR 363.2 million in 2001. In addition, the acquisition of the 25.001% stake in mobilkom austria led
to an increase in amortizable intangible assets of EUR 121.0 million. Therefore
amortization expense increased by EUR 10.1 million. This increase of depreciation and amortization at mobilkom austria group
is almost offset by the application of SFAS No. 142, which no longer permits
amortization of goodwill, but rather requires annual impairment testing. In
2001 we reported amortization of goodwill of EUR 33.8 million. We expect depreciation and amortization expenses to increase in 2003 and
2004 mainly as a result of the start of operation of a new UMTS network, for
which we acquired licenses in November 2000. Additionally, we will continue to
invest in our network abroad in 2003. For further information regarding our
capital expenditures, see  Liquidity and capital resources  Capital
expenditures. Net loss from retirement of long-lived assets In accordance with SFAS No. 144, as amended, the net loss from retirement
of long-lived assets is presented in operating income in 2002. In prior years
such losses were included in other, net in the other income section. Interconnection Interconnection fees increased by 13.8% in 2002 to EUR 192.6 million from
EUR 169.2 million in 2001. The growth was in line with the higher
interconnection volume, mostly to other local mobile networks and higher
international traffic. Rising interconnection traffic at VIPnet and Si.mobil
also contributed to this development. Repairs Repairs increased by 48.6% in 2002 to EUR 59.3 million from EUR 39.9
million in 2001 primarily due to service agreements for software, maintenance
of data processing equipment and software adaptations mainly at mobilkom
austria and to a lesser extent at VIPnet and Si.mobil. Services received Services received increased by 10.0% in 2002 to EUR 231.2 million from EUR
210.2 million in 2001 mainly due to an increase in roaming fees paid to
international mobile operators, leased lines expenses and postage fees. Other operating expenses Other operating expenses in the mobile communications business segment
increased by 5.1% in 2002 to EUR 354.5 million from EUR 337.3 million in 2001.
Higher marketing and sales costs at VIPnet and Si.mobil with the goal of
increasing customer base, and increased consulting fees at mobilkom austria
contributed significantly to the increase in operating expenses. 105




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Data communications services We are the market leader for data communications, notably in the core
services areas of leased lines and switched data networks, as well as the other
areas such as corporate network services and data value-added services.
Although the general weak economic environment impacted negatively the Austrian
data communications market, we stabilized our revenues and increase our market
share by providing a broad portfolio of high quality services and tailored
systems solutions. We are transforming our data communications services segment into Telekom
Austrias business solution provider. We believe this will secure more
profitable business in the future by expanding the services we offer. Revenues The main sources of revenues from our data communications services segment
are fees for leased lines, enhanced data transfer services and corporate
networks products. In 2002, approximately 27% of the revenues were for
corporate network services provided to mobilkom austria for its own use. Despite the negative business climate, revenues from our data
communications segment stabilized at EUR 330.0 million in 2002. The slight
decrease from EUR 330.2 million was caused by the general stagnation in the
data communications market and the later than expected introduction of new
products. The weak data communications market puts pressure on prices and leads
to restrained investment activity by corporate customers. In response to this
trend, sales efforts have been intensified to provide even better service to
top customers and the time to market newly developed products has been
shortened. The general decrease in revenues was partially offset by a strong
increase in revenues from our corporate networks services and our Datacash
product, a solution for cashless payment. The rise in corporate networks revenues was mainly driven by the
enlargement of our service portfolio and the acquisition of new customers which
resulted in a 60% increase in the subscriber base. We expect additional revenues from new products and services, including
Application Service Providing (ASP) enabling and strategic partnerships in the
IT solution business. Operating expenses The following table shows operating expenses from our data communications
services segment and percentage changes for the periods indicated. 2002
    
    2001
    
    2002/2001(in EUR millions)
    
    (% change)Data communications operating expenses:Materials
    
    
    12.0
    
    
    
    11.4
    
    
    
    5.3
    %Employee costs, including benefits and taxes
    
    
    51.0
    
    
    
    48.2
    
    
    
    5.8Depreciation and amortization
    
    
    36.0
    
    
    
    35.3
    
    
    
    2.0Loss from retirement of long-lived assets
    
    
    1.9
    
    
    
    
    
    
    
    n.aOther operating expenses
    
    
    220.5
    
    
    
    215.9
    
    
    
    2.1Total data communications operating expenses
    
    
    321.4
    
    
    
    310.8
    
    
    
    3.4
    %
 Materials Materials in the data communications business segment increased by 5.3% to
EUR 12.0 million in 2002 from EUR 11.4 million in 2001. The increase is mainly
the result of a write-down of inventories to market value in the amount of EUR
2 million in 2002. Employee costs, including benefits and taxes As a result of the reduction in headcount from 908 to 841, which caused an
increase in severance payments, employee costs increased by 5.8% to EUR 51.0
million in 2002 from EUR 48.2 million in 2001. 106




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Depreciation and amortization Depreciation
and amortization increased slightly by 2.0% in 2002 to
EUR 36.0 million from EUR 35.3 million in 2001 as a result of impairment charges of
EUR 1.6 million in 2002 related to data communications facilities. Net loss from retirement of long-lived assets In accordance with SFAS No. 144, as amended, the net loss from retirement
of long-lived assets is presented in operating income in 2002. In prior years
such losses were included in other, net in the other income section. Other operating expenses Other operating expenses in the data communications business segment
increased by 2.1% in 2002 to EUR 220.5 million from EUR 215.9 million in 2001,
primarily due to bad debt expenses that increased by approximately EUR 10 million compared to last year. This rise was partly offset by decreased legal
and consulting fees as well as lower expenses for advertising and marketing. Internet services We are the leading internet service provider in Austria with approximately
846,500 residential customers. We had a share of approximately 35% of the
residential internet market in the fourth quarter of 2002. Our Internet
Services segment provides access services to the Internet and runs a portal
business with online media sales, e-commerce and multimedia services. Revenues Operating revenues of this segment increased by 20.2% to EUR 119.6 million
in 2002 from EUR 99.5 million in 2001. This growth was in line with the
increase in the subscriber base in Austria by 27.0% from 666,400 at the
beginning of 2002 to 846,500 at the end of 2002 in Austria. ADSL-subscribers,
also included in these figures, increased by 73.1% in the same period. The
increase in revenues did not follow the increase in the subscriber base due to
lower average usage and revenues per user. About 9% of the revenues in 2002
were derived from Czech On Line, an internet service provider in the Czech
Republic, which we acquired in 2000. Operating expenses Operating expenses decreased by 25.5% to EUR 186.0 million in 2002 from EUR 249.5 million in 2001. Included in the internet segment are impairment charges
for goodwill originally recorded from the acquisition of COL in the amount of
EUR 40.4 million in 2002 and EUR 120.0 million 2001. The acquisition was based
on a business plan assuming the full liberalization of the Czech market in the
year 2001. As this was first postponed to the year 2002 and the liberalization
of the Czech market still remains unsatisfactory overall with regard to
interconnection and limited wholesale offers to alternative operators, the
business of COL has not developed as originally expected. This resulted in an
impairment charge in 2001 and 2002. The impairment loss was recorded in the
internet segment in 2002. In 2001 the impairment losses of goodwill were
originally classified in intersegmental eliminations and others, but were
reclassified in 2002 to the internet segment for comparability purposes. Excluding the decrease in impairment charges operating expenses would have
increased by 12.4% to EUR 145.6 million in 2002 from EUR 129.5 million in 2001,
primarily as a result of costs incurred in connection with the expansion of our
internet activities. The costs include network usage costs and marketing and
advertising expenses. Network usage costs increased in line with traffic
volume. The higher marketing and advertising activities resulted in higher
marketing related costs. In addition we launched new portals and e-business
solutions. Depreciation and amortization increased as a result of higher
capital expenditures for server, portal and ISP infrastructure. The higher
costs were partially offset by lower material expenses in 2002 due to fewer
hardware bundles. 107




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LIQUIDITY AND CAPITAL RESOURCES Because we manage the liquidity for all our business segments on a total
group basis and allocate the capital resources of all our business segments, we
discuss our total group liquidity and capital resources. Over the past years, we have principally met our financing needs out of
cash flow from operating activities. In particular, we have met our working
capital needs and most capital expenditure requirements through the use of
internally generated funds. The following table shows information regarding our consolidated cash
flows for the periods indicated. The figures do not include cash flows
generated by mobilkom austria group prior to consolidation beginning on June
28, 2002, except for dividends received. In the first half of 2002 and in 2001
these dividends received amounted to EUR 90.7 million and EUR 199.3 million,
respectively. Therefore, the figures are not directly comparable. For further
details on cash flows see the consolidated statements of cash flows of the
accompanying financial statements. Cash flow
    
    2003
    
    2002
    
    2001(in EUR millions)Cash generated from operationsNet income
    
    
    134.2
    
    
    
    12.8
    
    
    
    (104.6
    )Depreciation, amortization and impairment charges
    
    
    1,140.0
    
    
    
    1,058.2
    
    
    
    1,049.2Change in deferred taxes
    
    
    59.2
    
    
    
    33.5
    
    
    
    (95.0
    )Equity in earnings of affiliates less than (in excess of)
dividends received
    
    
    1.0
    
    
    
    (45.8
    )
    
    
    (80.7
    )Change in accounts receivable  trade
    
    
    (140.3
    )
    
    
    175.5
    
    
    
    24.4Change in accounts payable  trade
    
    
    (58.9
    )
    
    
    11.0
    
    
    
    (85.7
    )Change in employee benefit obligation
    
    
    (76.6
    )
    
    
    (102.6
    )
    
    
    (73.6
    )Other
    
    
    161.3
    
    
    
    28.8
    
    
    
    208.4Cash generated from operations
    
    
    1,219.9
    
    
    
    1,171.4
    
    
    
    842.4Cash from investing activitiesCapital expenditure, including interest capitalized
    
    
    (599.7
    )
    
    
    (560.7
    )
    
    
    (459.0
    )Acquisitions and investments, net of cash acquired
    
    
    (86.0
    )
    
    
    (665.1
    )
    
    
    (4.8
    )Other
    
    
    41.8
    
    
    
    49.9
    
    
    
    10.6Cash used in investing activities
    
    
    (643.9
    )
    
    
    (1,175.9
    )
    
    
    (453.2
    )Cash from financing activitiesProceeds from issuance of long-term debt and bonds
    
    
    775.9
    
    
    
    127.9
    
    
    
    Principal payments on long-term debt
    
    
    (385.3
    )
    
    
    (406.3
    )
    
    
    (335.2
    )Changes in short-term bank borrowings
    
    
    (774.6
    )
    
    
    238.0
    
    
    
    75.0Other
    
    
    (22.8
    )
    
    
    42.2
    
    
    
    (120.5
    )Cash (used in) generated from financing activities
    
    
    (406.8
    )
    
    
    1.8
    
    
    
    (380.7
    )Effect of exchange rate changes
    
    
    5.4
    
    
    
    3.6
    
    
    
    0.1Net increase in cash and cash
equivalents
    
    
    174.6
    
    
    
    0.9
    
    
    
    8.7Cash and cash equivalents at beginning of period
    
    
    27.3
    
    
    
    26.4
    
    
    
    17.8Cash and cash equivalents at end of period
    
    
    201.9
    
    
    
    27.3
    
    
    
    26.4
 108




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Cash generated from operations Our primary source of liquidity is cash generated from operations which
increased by EUR 48.5 million to EUR 1,219.9 million in 2003 compared to EUR
1,171.4 million in 2002 after having increased by EUR 329.0 million from 842.4
million in 2001. This increase is primarily due to higher net income and
increased depreciation, amortization and impairment charges. Net income
increased by EUR 121.4 million to EUR 134.2 million in 2003 compared to EUR
12.8 million in 2002 and a loss of EUR 104.6 million in 2001. Prior to June 28, 2002, 74.999% of mobilkom austrias net income was
included in the consolidated result of operations under the equity method of
accounting. This non-cash item was reversed in the cash flow statement and
replaced by dividends received from mobilkom austria, as shown in item Equity
in earnings of affiliated less than (in excess of) dividends received. In the
first half of 2002 and in 2001 these dividends received amounted to EUR 90.7
million and EUR 199.3 million, respectively. The pro forma consolidated net
income for the year ended December 31, 2002, as if mobilkom austria would have
been acquired at the beginning of 2002 would have amounted to EUR 29.8 million
compared to EUR 12.8 million actually achieved. Comparing net income of 2003
and 2002 on a fully consolidated basis it increased by EUR 104.4 million as a
result of increased group revenues and profitability. The increase in depreciation, amortization and impairment charges in
2003 of EUR 81.8 million was mainly due to mobilkom austria group where
depreciation, amortization and impairment charges included into the group
cash flow was EUR 325.2 million, compared with EUR 135.3 million in 2002. This
effect was partially offset by the downward trend in depreciation,
amortization and impairment charges in the Wireline segment. For more
information see  Results of operations. In 2003 cash generated from operations was reduced by a change in working
capital in the amount of EUR 184.6 million, which mainly relates to an increase
of accounts receivable by EUR 140.3 million due to less cash drawn from our
asset-backed securitization program implemented on January 16, 2002. In 2002
our accounts receivable-trade decreased by EUR 175.5 million. Comparing
operating cash flow of 2003 and 2002 the change in accounts receivable-trade
caused a year on year difference of EUR 315.8 million. In 2003 we did not draw
all of the money we were entitled to from the qualifying special purpose entity
(QSPE) and therefore reported a receivable from the QSPE of EUR 145.4 million
decreasing our cash generated from operations. For further details
see  Off-balance sheet transactions. Additionally, accounts payable and accrued liabilities decreased by EUR
82.4 million in 2003 compared to 2002 and led to a higher outflow of cash.
These negative effects were, however, partially offset by a change in other
assets and liabilities of EUR 116.6 million. Cash payments for voluntary
retirement incentive programs and golden handshakes of EUR 76.6 million were
made in 2003, compared to EUR 102.6 million in 2002 and EUR 73.6 million in
2001, respectively. We expect further measures related to the reduction of
headcount to result in additional payments for retirement of employees as well
as payments for re-training. These payments will be made through 2009 and will
reduce our cash generated from operations. Cash used in investing activities Cash used in investing activities mainly consists of acquisitions of
subsidiaries and capital expenditures for property, plant and equipment and
intangible assets. It decreased by EUR 532.0 million to EUR 643.9 million in
2003 from EUR 1,175.9 million in 2002 after having increased by EUR 722.7
million from 453.2 million in 2001. In 2003 mobilkom austria acquired an
additional share of 28% of VIPnet d.o.o., Zagreb, for a total purchase price of
EUR 69.7 million, bringing its interest to 99 %. Acquisitions of subsidiaries
in 2002 primarily relate to the purchase of the 25.001% stake in mobilkom
austria which was acquired for a total purchase price of EUR 693.1 million,
including cash acquired of EUR 29.5 million. The increase in capital
expenditures results from the 100% consolidation of mobilkom austria as
additions to tangible and intangible assets of mobilkom austria are included in
the group cash flow statement beginning on June 28, 2002. For more information
concerning capital expenditures on a comparable basis see  Capital
expenditures. Differences to capital expenditures on a segment basis result
from the elimination of intra-group transactions. Cash (used in) generated from financing activities Cash used in financing activities was EUR 406.8 million in 2003, compared
with cash generated by financing activities of EUR 1.8 million in 2002 and cash
used of EUR 380.7 million in 2001. On June 30, 2003, Telekom Austria AG and
Telekom Finanzmanagement GmbH (the 100% financing subsidiary of Telekom Austria
AG) initiated a Euro Medium Term Note (EMTN) Programme. Under this programme
we successfully launched and placed a Eurobond offering raising EUR 740.9
million net of discount and issue costs. Part of the 109




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funds were used to repay short-term debt and to meet scheduled redemptions
of long-term debts. This bond issue increased the average maturity of our debt.
For further information see   Funding sources. The management board and supervisory board plan to propose to the
shareholders at the annual general shareholders meeting on June 3, 2004 a
distribution from unappropriated earnings of EUR 0.13 per zero par value share. On March 24, 2004 our management board announced that it intends to make
use of the authorization by the shareholders received at the annual general
meeting in June 2003 to buy back up to 50 million shares at a price between EUR
9 and EUR 15 until December 3, 2004. Following the first repurchase by
exercising our American Call Options on February 27, 2004 through an off-market
transaction, there are currently up to EUR 270 million of reserves available
for further buybacks. Telekom Austria intends to execute the share repurchases
through market transactions and to limit such purchases so that the holding of
our principal shareholder ÖIAG does not exceed 50% of our outstanding shares. Funding sources Our principal sources of external funding are borrowings from the Austrian
and international debt capital markets. The outstanding long-term debt, other
than lease obligations are summarized as follows: At December 31,
    
    Maturity
    
    2003
    
    2002
    
    2001(in EUR millions)Bonds under EMTN Programme
    
    
    2004-2013
    
    
    
    745.1
    
    
    
    
    
    
    
    Other bonds
    
    
    2004-2013
    
    
    
    159.7
    
    
    
    175.5
    
    
    
    249.6Bank debt
    
    
    2004-2011
    
    
    
    1,967.6
    
    
    
    2,347.7
    
    
    
    2,169.1Other
    
    
    2008
    
    
    
    0.8
    
    
    
    15.7
    
    
    
    2,873.2
    
    
    
    2,538.9
    
    
    
    2,418.7Less current portion of long-term debt
    
    
    
    
    
    
    (530.9
    )
    
    
    (459.0
    )
    
    
    (413.5
    )Long-term debt, net of current portion
    
    
    
    
    
    
    2,342.3
    
    
    
    2,079.9
    
    
    
    2,005.2
 Bonds In order to give Telekom Austria access to international debt capital
markets and in preparation for entering the Eurobond market, Telekom Austria AG
and Telekom Finanzmanagement GmbH established a Euro Medium Term Note (EMTN)
Programme, unconditionally and irrevocably guaranteed by Telekom Austria AG in
June 2003. This program allows Telekom Austria and Telekom Finanzmanagement
GmbH to issue notes up to a maximum aggregate nominal amount of EUR 2.5 billion
outstanding at any single point in time. In July 2003, Telekom Austria (through Telekom Finanzmanagement GmbH)
issued its inaugural bond with a nominal value of EUR 750.0 million, 10 year
maturity and a coupon of 5% under the newly established EMTN programme. The
notes were issued at a discount including issue costs of EUR 9.1 million (EUR
8.6 million as of December 31, 2003) providing Telekom Austria with funds in
the amount of EUR 740.9 million. The bonds are listed on the Luxembourg Stock
Exchange and Vienna Stock Exchange. Bank debts As of December 31, 2003, we had unused committed lines of credit of EUR
500.0 million, expiring between January 2004 and November 2006. As of December 31, 2003, 2002 and 2001, we had total outstanding debt,
excluding current portion of lease obligations, amounting to EUR 2,878.1
million, EUR 3,281.8 million and EUR 2,895.8 million, respectively. Whereas
debt incurred prior to May 1996 is guaranteed by the Federal Republic of
Austria, debt incurred thereafter is not. At December 31, 2003, EUR 1,354.6
million of our EUR 2,873.2 million total long-term debt were covered by such
guarantees. The following bank debt is not guaranteed by the government as they were
entered into after the privatization of the Company: 110




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In March 2000, the Company entered into a loan agreement for EUR 145.0
million with the European Investment Bank. As of December 31, 2003, EUR 116.0
million of the loan is outstanding in accordance with the repayment terms.
Under the terms of this agreement, the Company must observe covenants requiring
the Company to meet certain financial ratios. Further, in October 2000 the Company entered into a loan agreement for EUR
232.6 million. As of December 31, 2003 the loan is outstanding in full in
accordance with the repayment terms. Under the terms of the contract the
Company has to maintain certain investments, otherwise the loan becomes due.
The interest rates vary depending on the rating of the Company. As of December 31, 2003, EUR 295.2 million of a syndicated loan granted to
mobilkom austria was outstanding and is guaranteed by Telekom Austria AG. The
original loan totaled EUR 305.0 million. In March 2001, VIPnet increased its senior debt facility to EUR 170.0
million, up from EUR 120.0 million. In December 2002 this senior debt facility
was restructured to improve terms and conditions of the financing. VIPnet
entered into a syndicated loan of EUR 150.0 million of which EUR 96.2 million
were drawn. Outstanding debt is EUR 93.2 million as of December 31, 2003. The
loan was used for the refinancing of the existing loans to VIPnet and falls due
between 2003 and 2008. As a consequence of Telekom Austrias improved liquidity
and in order to reduce interest expenses we repaid the loan in March 2004
before maturity. In March 1999, Si.mobil entered into a loan agreement amounting to EUR
36.0 million (original currency: Deutsche Mark 71.0 million) to finance the
construction of the GSM network in Slovenia. The interest rate is three month
LIBOR plus 1.075 %. The loan is secured by bills of exchange, property,
receivables and shares of Si.mobil. The loan is repayable until March 2007. The year-end average interest rates for the long-term debt excluding
interest rate swaps are as follows: 2003
    
    2002
    
    2001Bonds
    
    
    4.57
    %
    
    
    5.32
    %
    
    
    4.32
    %Bank debts
    
    
    4.96
    %
    
    
    3.49
    %
    
    
    5.42
    %
 Since June 2003, Telekom Austria Group is rated by Moodys Investors
Service Ltd. and Standard & Poors. Our current corporate credit ratings are
noted below: Moodys
    
    StandardInvestors
    
    &Service
    
    PoorsLong-term debt
    
    Baa2
    
    BBBShort-term debt
    
    P-2
    
    A-2
 Moodys Investors Service rates our long-term corporate credit Baa2
(stable outlook). The rating classification of Baa means that an issuer offers
adequate financial security. However, certain protective elements may be
lacking or may be unreliable over any great period of time. The numerical
modifier 2 indicates a mid-range ranking within the letter ranking category.
The rating outlook, expressed as positive, stable, or negative, provides an
opinion regarding the likely direction of any medium-term rating actions,
typically based on an 18-month horizon. Moodys Investors Services short-term corporate credit ratings fall into
the following four categories: Prime-1 (P-1), Prime-2 (P-2), Prime-3 (P-3) and
Not Prime. Issuers rated Prime-2 have a strong ability, albeit less superior
ability than Prime-1 issuers, to repay senior short-term debt obligations. Standard & Poors rates our long-term corporate credit BBB (positive
outlook). The outlook changed from stable to positive on April 14, 2004. This
exhibits adequate protection parameters. However, adverse economic conditions
or changing circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on obligations. The lack of a modifer
(plus (+) or minus ()) indicates a mid-range ranking within the major rating
category of BBB. The positive in the outlook indicates that a rating may be
raised. 111




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Standard & Poors categorizes its short-term ratings A-1, A-2, A-3, B, C
and D. Having a short-term rating of A-2 means that Telekom Austria is somewhat
more susceptible to the adverse effects of changes in
circumstances and economic conditions than issuers rated A-1. However, the
capacity to meet the financial commitment on our obligations is satisfactory. Our 2,500 million EMTN-Programme is currently rated Baa2 and BBB by
Moodys Investors Service and Standard & Poors, respectively. The EUR 750
million bond issued by TFG in July 2003 is also rated BBB by Standard and
Poors. Telekom Austria has no further agreements with nationally recognized
statistical rating organizations to provide a long-term and short-term credit
rating for our Company. Please be advised that security ratings are not a recommendation to buy,
sell or hold securities. Credit ratings may be subject to revision or
withdrawal by the rating agencies at any time. You should evaluate each rating
independently of any other rating. Other funding sources In order to diversify our short-term funding sources we implemented an
asset-backed securitization program in January 2002. Under the terms of the
program Telekom Austria and mobilkom austria were entitled to fund up to EUR
290.0 million. In December 2003 Telekom Austria and mobilkom austria increased
the volume of this asset-backed securitization program from EUR 290.0 million
to EUR 350.0 million. For more information, see  Off-balance sheet
transactions. In December 2001 we entered into a USD 250.0 million U.S. cross-border
lease of digital switching equipment. The net cash effect resulting from these
transactions relates to the total gain from the sale of the tax benefits which
amounted to EUR 14.5 million in 2001. For further details on cross-border lease
see the notes to the accompanying consolidated financial statements. At the Annual General Meeting on June 4, 2003, the Management Board was
authorized to increase the share capital by up to EUR 21.8 million in order to
provide stock options to be granted to employees, directors and members of the
Management Board of the Company or of an affiliated company for a period of
five years, ending 2008. As it is common with telecommunications companies, we typically carry
current liabilities in excess of current assets. Total current liabilities
exceeded total current assets by EUR 664.9 million in 2003 compared to EUR
1,665.7 million in 2002 and EUR 840.9 million in 2001. In 2003 part of the
funds raised by the EUR 750 million bond as well as the positive operating cash
flow were used to reduce current liabilities. We believe that our cash flow from operations, together with the liquidity
available to us on the Austrian and international money and debt capital
markets provide the flexibility in funding needed to cover our expenditures in
the future. Capital expenditures The following table shows our capital expenditures on a total managed
basis for the periods indicated. Capital expenditures are defined as additions
to tangible and intangible assets, excluding additions to asset retirement
obligation, goodwill, brandname and customer base as well as additions from
initial consolidation. Differences to capital expenditures in the cash flow
statement result from the elimination of intra-group transactions. 2003
    
    2002
    
    2001(in EUR millions)Capital expenditures:Wireline
    
    
    300.0
    
    
    
    343.4
    
    
    
    458.9Tangible
    
    
    298.0
    
    
    
    340.7
    
    
    
    449.0Intangible
    
    
    2.0
    
    
    
    2.7
    
    
    
    9.9Wireless
    
    
    300.4
    
    
    
    343.6
    
    
    
    420.8Tangible
    
    
    290.6
    
    
    
    321.8
    
    
    
    363.1Intangible
    
    
    9.8
    
    
    
    21.8
    
    
    
    57.7Total capital expenditures
    
    
    600.4
    
    
    
    687.0
    
    
    
    879.7
 112




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Our total capital expenditures decreased by 12.6% in 2003 to EUR 600.4
million from EUR 687.0 million in 2002 after having decreased by 21.9% in 2002
from EUR 879.7 million in 2001. Capital expenditures in our Wireline segment fell by 12.6 % to EUR 300.0
million in 2003 compared to EUR 343.4 million in 2002. Additions in broadband
activities, above all in the access area, declined by 7.0 % to EUR 104.6
million. Additions in our network decreased by 29.4 % to EUR 83.8 million
because the major optimization of the network was realized in 2002. Also,
investments in buildings were reduced by 21.5 % to EUR 37.0 million in 2003 as
the modification of the headquarters was finished in 2002. Only IT operations
support shows increased expenditures of 19.9 % to EUR 69.1 million because of
investments in new billing and CRM  Customer Relations Management systems. Capital expenditures in our Wireless segment differed by market, but fell
by 12.6% to EUR 300.4 million in 2003 compared to EUR 343.6 million in 2002 due
to the downward trend in Austria and Slovenia. At VIPnet the level of capital
expenditures remained generally stable. A total of EUR 36.5 million was
invested in the Austrian UMTS network equipment during 2003. The higher
investments in intangible assets in 2002 were mainly due to the acquisition of
an additional 2x2.6 MHz GSM-1800MHz-frequency spectrum in Austria. We believe that capital expenditures for the financial years 2004 and 2005 will principally be used to:  
    
    develop a UMTS infrastructure and assure sufficient capacity for mobile networks;
    
    extend the broadband access and broadband backbone network infrastructure;
    
    establish the multi-service-data-network; and
    
    improve our information technology capabilities. We are in the process of evaluating the technological and financial
implications of a migration to next generation networks (NGN) with particular
consideration of existing investments. The costs relating to the build-out of
NGN and its implications on our business are expected to be substantial. The
time frame for its development will depend on various factors including
customer needs and competition. At this stage, however, we are not in a
position to quantify the capital expenditure requirements or to give a time
horizon for its implementation. Additionally, we may make further investments in other markets with
significant growth potential, in particular in the field of mobile
communications. Net debt The following table shows the development of net debt on a total managed
basis. 2003
    
    2002
    
    2001(in EUR millions)Long-term debt
    
    
    2,342.3
    
    
    
    2,079.9
    
    
    
    2,455.2Short-term debt
    
    
    631.3
    
    
    
    1,309.9
    
    
    
    1,015.3Short-term portion of capital and cross border lease
    
    
    (95.5
    )
    
    
    (107.9
    )
    
    
    (111.2
    )Capital lease obligations
    
    
    2.1
    
    
    
    7.3
    
    
    
    14.5Payables to related parties
    
    
    0.0
    
    
    
    0.4
    
    
    
    0.0Receivables from related parties
    
    
    0.0
    
    
    
    (0.1
    )
    
    
    0.0Cash and cash equivalents,
short-term and long-term investments
    
    
    (226.4
    )
    
    
    (46.6
    )
    
    
    (91.7
    )Financial instruments, included in other assets
    
    
    (16.5
    )
    
    
    (38.7
    )
    
    
    Net debt of Telekom Austria
    
    
    2,637.3
    
    
    
    3,204.2
    
    
    
    3,282.1
 A reduction in additions to property, plant and equipment and improved
profitability further reduced net debt by EUR 566.9 million to EUR 2,637.3
million in 2003. 113




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As shown in the table above, long-term debt increased by EUR 262.4 million
as a consequence of the EUR 750 million bond issued by the Company in July
2003. Part of the funds were used to repay existing short-term debts which
decreased by EUR 678.6 million. Existing long-term debts were met in accordance
with the redemption scheme. In 2002 short-term debt was incurred to finance the purchase price of EUR
693.1 million for the 25.001% stake in mobilkom austria. As a consequence net
debt could only be reduced slightly to EUR 3,204.2 million as of December 31,
2002 from EUR 3,282.1 million in 2001. Without these liabilities, net debt
would have fallen to EUR 2,511.1 million at year-end 2002 because of
improvement in the operating result and lower capital expenditures. In order to
guarantee comparability, net debt was adjusted and includes mobilkom austria at
100% for both 2002 and 2001. The development of net debt includes the impact of the sale of receivables
to a Qualifying Special Purpose Entity which is not related to Telekom Austria.
In 2003 cash outflows from the QSPE totaled EUR 112.7 million, in 2002 cash
inflows from the QSPE totaled EUR 267.3 million. For more
information, see  Off-balance sheet transactions. Contractual obligations and commercial commitments The following table shows our contractual obligations. Less thanTotal
    
    1 year
    
    1-3 years
    
    4-5 years
    After 5 years(in EUR millions)Contractual Obligations:Long-term debt
    
    
    2,873.2
    
    
    
    530.9
    
    
    
    1,073.2
    
    
    
    462.8
    
    
    
    806.3Capital lease obligations
    
    
    2.1
    
    
    
    1.9
    
    
    
    0.2
    
    
    
    0.0
    
    
    
    0.0Operating leases
    
    
    371.7
    
    
    
    71.4
    
    
    
    126.4
    
    
    
    119.6
    
    
    
    54.3Cross border leases
    
    
    1,316.5
    
    
    
    93.7
    
    
    
    216.1
    
    
    
    254.6
    
    
    
    752.1Purchase Obligations (1)
    
    
    1,641.2
    
    
    
    437.0
    
    
    
    598.8
    
    
    
    604.5
    
    
    
    0.9Total obligations
    
    
    6,204.7
    
    
    
    1,134.9
    
    
    
    2,014.7
    
    
    
    1,441.5
    
    
    
    1,613.6
   (1)
    
    Purchase Obligations include purchase commitments for fixed assets and
other non-redeemable contractual commitments such as service agreements
and interconnection obligations. Interconnection obligations can only
be estimated for a period of five years. Off-balance sheet transactions On January 16, 2002, in order to diversify our short-term funding sources,
we entered into a revolving period securitization program. Under the program we
sell receivables to a qualifying special purpose entity (QSPE) incorporated in
Dublin, Ireland, which is neither affiliated with us nor under our control. We
retain servicing responsibilities relating to the sold receivables. Solely for
the purpose of credit enhancement from the perspective of the QSPE, we retained
interests in the sold receivables in the amount of EUR 7.9 million as of
December 31, 2002. These retained interests were initially measured at
estimated fair values, which we believed approximate historical carrying
values, and were subsequently measured based on a periodic evaluation of
collections and delinquencies. In 2003 we recorded a receivable from the trust
of EUR 145.4 million. The outstanding obligation as of December 31, 2003 and
2002 was EUR 170.0 million and EUR 276.9 million, respectively. In 2003 we sold
EUR 106.9 million fewer receivables to the program than in 2002 as sufficient
liquidity was given through the EUR 750.0 million bond issue in July 2003. In December 2003, Telekom Austria and mobilkom austria increased the
maximum amount of receivables they each may sell freely to the QSPE from EUR
250.0 million to EUR 300.0 million and from 80.0 million to EUR 150.0 million,
respectively. Nevertheless, the total amount of receivables sold to the QSPE by
Telekom Austria and mobilkom austria together was increased by EUR 60.0 million
to EUR 350.0 million. The QSPE has the right to terminate the facility in the
event that the default ratio of Telekom Austrias receivables and of mobilkom
austrias receivables exceeds a certain percentage. During the year ended
December 31, 2003 net cash paid to the QSPE totaled EUR 112.7 million, in 2002
EUR 187.0 million were received. 114




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Research and development Our consolidated research and development expenses amounted to EUR 42.8
million, EUR 30.3 million and EUR 21.8 million for the years ended December 31,
2003, 2002 and 2001, respectively. For a description of our research and
development activities see Item 4  Business Overview
 Research and
development. Foreign exchange rate risk With effect from January 1, 1999, the Euro was adopted by Austria and
eleven other members of the European Union as their common legal currency. On
the same day, these member states, including Austria, established fixed
conversion rates between their existing sovereign currencies and the Euro. The
conversion rate fixed between the Austrian Schilling and the Euro since January
1, 1999 has been EUR 1.00 = 13.7603 Austrian Schilling. On March 1, 2002, the
Euro became the sole legal tender for Austria and the Austrian Schilling was
withdrawn from circulation. We raise funds in the domestic and international money and debt markets.
We hedge a high proportion of foreign exchange rate risks on our debt portfolio
to Austrian Schilling/Euro using currency swap contracts. We conduct our business primarily in Austria and, therefore, our operating
and investing cash flows were substantially denominated in Austrian Schilling
and since the beginning of 2002 are denominated in Euro. We are exposed to
foreign exchange risks related to debt, payables and anticipated foreign
exchange payments denominated in currencies other than those of
Euro-participant countries. Anticipated foreign exchange payments relate
primarily to expense payments, principally to international third party
telecommunications carriers and capital expenditures. We evaluate the volume
and value of these transactions on an ongoing basis to identify the level of
foreign exchange rate risk associated with these transactions. Most of our
debt, payables and expenses are denominated in Euro. For a detailed discussion of our foreign exchange rate risk, see Item 11
 Currency risk. 115




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Item 6. Directors, Senior Management and Employees Management Board members The current members of our Management Board are: Name
    
    Age
    
    Term of appointment
    
    Area of responsibilityHeinz Sundt
    
    
    56
    
    
    April 11, 2000 - April 11, 2005
    
    Chairman of the Board, Chief
Executive OfficerStefano Colombo
    
    
    43
    
    
    April 11, 2000 - April 11, 2005
    
    Vice Chairman, Chief Financial OfficerRudolf Fischer
    
    
    50
    
    
    November 1, 1998 - April 11,
2005
    
    Chief Operating Officer WirelineBoris Nemsic
    
    
    46
    
    
    July 1, 2002 - April 11, 2005
    
    Chief Operating Officer Wireless,
Chief Executive Officer of mobilkom
austria
 Heinz Sundtwas born in 1947 and attended the School of International
Trade in Vienna (Hochschule für Welthandel). He started his career at the
Länderbank in 1967. From 1969 through 1986, he held several management
positions in the marketing and sales departments at IBM Austria and from 1986
through 1989 was the head of the Telecom and Network Divisions. In 1989, Mr.
Sundt became head of marketing and sales at Neupack GmbH, a subsidiary of Mayr
Melnhof. In January 1996, Mr. Sundt became the head of mobilkom austria and led
the development of the mobile communications division within Telekom Austria.
Mr. Sundt became Chief Executive Officer (CEO) and Chairman of the Management
Board of Telekom Austria in April 2000. Stefano Colombowas born in 1961 and graduated from the Luigi Bocconi
University in Milan. He began his career in the corporate finance department of
Mediobanca. In 1990, he became the assistant to the Chief Financial Officer of
Enimont. In 1994, he became the Chief Financial Officer of Olivetti Telemedia.
From 1996 to 1999 he was the head of Carrera Optyl in Linz, Austria, a
sub-division of the Italian eyeglass producer Safilo. He became the Chief
Financial Officer of the eyeglass company Marcolin, the producer of Dolce &
Gabbana and Chloe eyeglasses, in 1999, and coordinated Marcolins initial
public offering. Mr. Colombo became Chief Financial Officer and Vice-Chairman
of the Management Board of Telekom Austria in April 2000. Rudolf Fischerwas born in 1953. After completing his studies at the
Vienna University of Economics and Business Administration, Mr. Fischer began
his career in 1974 in the technical department of ITT Austria. In 1983, he
became the head of Accounting and Taxes at Alcatel Austria and in 1988 he also
became the head of Controlling. From 1989 through 1993, Mr. Fischer was head of
AOSA, a joint venture between Siemens and Alcatel, and was involved in the
expansion of the Austrian telecommunications infrastructure. In 1994, he became
the Chairman of the board at United Telecom Investment B.V., where he headed
the largest local network operator in Hungary. In 1996, he was appointed
President of the association of local telecommunications operators. Mr. Fischer
has been Chief Technical Officer and a member of the Management Board at
Telekom Austria since November 1998 and Chief Operating Officer Wireline since
November 2001. Boris Nemsicwas born in 1957. In 1980 he graduated from the Technical
University of Sarajevo and in 1990 obtained his PhD from the Technical
University of Vienna. He began his professional career in 1980 in radio
broadcasting and started working in 1983 at Sarajevo Technical University. From
1988 to 1990 he was employed as an Assistant Lecturer at the Institute for
Telecommunications and Radio Frequency Engineering, Vienna. From 1990 to 1997
he managed the Department for Mobile Communications Development at ASCOM in
Vienna and Solothurn (Switzerland), and headed the hardware and software
development at BOSCH Telecom in Vienna and Berlin. Starting in 1997, Boris
Nemsic was director of network planning at mobilkom austria. In November 1998,
he became Chief Executive Officer of VIPnet, the first private mobile
communications operator in Croatia. In May 2000, Mr. Nemsic was appointed Chief
Executive Officer of mobilkom austria. Boris Nemsic was member of GSM and UMTS
core preparatory groups and is an expert of the European Commission in the
field of telecommunications. Mr. Nemsic joined the Management Board of Telekom
Austria on July 1, 2002 as Chief Operating Officer Wireless. In 2003, remuneration expenses for the members of the Management Board
amounted to EUR 1.4 million and in addition attributable bonuses of EUR 0.7
million. The actual amount of bonuses will depend on the extent of achievement
of specified performance goals and will be determined in 2004. In 2002, the
amount of remuneration was EUR 1.2 million and in addition attributable bonuses
of EUR 0.6 million were paid in 2003. Mr. Nemsic joined the Management Board in
summer 2002. In the event ÖIAG reduces its shareholding in us below 20%, ceases
to hold more shares than any remaining strategic shareholders in us or ceases
to be entitled to 116




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appoint our CEO and the majority of our Supervisory Board, Mr. Sundt is
entitled to resign from the board and to receive his current compensation until
April 10, 2005, without being entitled to an annual bonus for the period after
his resignation. In the event we no longer control mobilkom austria, Mr. Nemsic
is entitled to resign from the board and to receive his current compensation
until April 10, 2005, without being entitled to an annual bonus for the period
after his resignation. There are no other special arrangements of this kind
with any of the other members of the Management Board. In connection with our
initial public offering, we instituted a stock option program for members of
the Management Board and the senior management of Telekom Austria, mobilkom
austria, Datakom and Jet2Web Internet and other controlled subsidiaries. This
stock option plan was exercised and expired in February 2004. Telekom Austria
is in the process of establishing a new stock option plan as described below
under  Stock option plan. No Management Board member owns more than 1% of
our outstanding share volume. Supervisory Board members The current members of our Supervisory Board are presented in the table
below: Name
    
    Member since / re-elected
    
    Principal occupationPeter Michaelis (Chairman)
    
    June 28, 2001 / June 4, 2003
    
    Speaker of the Management Board of ÖIAGEdith Hlawati (Vice Chairperson)
    
    June 28, 2001 / June 4, 2003
    
    AttorneyHans Haider
    
    June 4, 2003
    
    Chief Executive Officer VerbundStephan Koren
    
    September 17, 1999 / June 4, 2003
    
    Chief Executive Officer Österreichische Postsparkasse AGHarald Sommerer
    
    June 4, 2003
    
    Management Board Member at AT&SHarald Stöber
    
    June 4, 2003
    
    Chief Executive Officer Arcor AG & Co.Rainer Wieltsch
    
    June 12, 2002 / June 4, 2003
    
    Member of Management Board of ÖIAGOtto G. Zich
    
    September 17, 1999 / June 4, 2003
    
    Former General Director Sony EuropeWalter Hotz
    
    December 9, 2003
    
    Employee representativeMichael Kolek
    
    March 20, 2002
    
    Employee representativeKurt Friedl
    
    October 21, 2003
    
    Employee representativeWillhelm Eidenberger
    
    April 30, 2001
    
    Employee representative
 Erich Huhndorf und Karl-Heinz Muik, both former employee representatives,
are no longer members of the Supervisory Board in 2004. The two members
nominated by Telecom Italia in accordance with the shareholders agreement
terminated at the sale of 75 million shares by Telecom Italia in November 2002,
have resigned and were replaced by two new members in our ordinary shareholders
meeting on June 4, 2003. The members of our Supervisory Board receive annual compensation and
attendance fees determined by the shareholders meeting. In 2003, the members
of the Supervisory Board received an aggregate compensation including
attendance fees of EUR 0.1 million. The compensation for the Supervisory Board
members concerning 2003 will be determined at the annual shareholders meeting
on June 3, 2004. No Supervisory Board member owns more than 1% of our
outstanding shares. Edith Hlawati is a member of the law firm Cerha, Hempel,
Spiegelfeld, Hlawati, which rendered services to us in 2001, 2002 and 2003. For
further information see note (6) of the accompanying financial statements. The members of the Supervisory Board, who are not employee
representatives, are appointed to a limited term until the annual shareholders
meeting in 2008. At this meeting, shareholders will vote on whether to extend
the term of the Supervisory Board members. However, employee representatives
are appointed for an unlimited term, as long as they hold their function as
employee representative. Five of the members of the Supervisory Board, who are
not employee representatives were re-elected at the shareholders meeting on
June 4, 2003. The members of the Supervisory Board can be contacted at the business
address of Telekom Austria. Audit Committee There are two Supervisory Board committees: a Financial Committee that also
acts as Audit Committee and a Chairing Committee. Set forth below is a table
with the current members of each committee. For a comprehensive discussion of
the functions of our committees, please refer to Item 10
 Corporate
Governance. 117




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##### Table of Contents



Name of committee
    
    Current membersAudit Committee, Financial Committee
    
    Rainer Wieltsch, Harald Sommerer, Michael KolekChairing Committee
    
    Peter Michaelis, Edith Hlawati
 Stock option plans On October 4, 2000, Telekom Austrias shareholders approved a stock option
plan. Based on this approval mobilkom austria formed a separate stock option
plan with the same terms and conditions. The following figures include mobilkom
austria. Under this plan, we granted a total of 4,686,881 options. Each option
entitled its grantee to receive, at the grantees choice, either cash equal to
the difference between the average quoted price of our shares during the five
trading days preceding the options exercise and the initial public offering
price of EUR 9 or shares at an exercise price of EUR 9. One option was
exercisable for one share. The options could be exercised on specific dates
between May 31, 2002 and February 27, 2004 as long as the average share price
during the five days prior to exercise exceeded the initial public offering
price by 30% or more. As of December 31, 2003 3,268,850 options were
outstanding after the forfeiture of 164,077 options in 2003, 520,766 in 2002
and 733,188 in 2001, respectively. To be eligible to receive options, plan members must have purchased shares
in our initial public offering. Members of the Management Boards of Telekom
Austria or its subsidiaries were eligible to receive 12 options for each share
so purchased, non-civil servant senior managers eight options for each share so
purchased, up to a maximum investment of EUR 109,000 per plan member. Plan
members could not sell any shares purchased in the initial public offering
during the life of the option. On February 27, 2004, the average share price had exceeded the initial
public offering price by 30 % or more for five consecutive days. Therefore, the
outstanding 3,268,850 stock options became exercisable. An estimated amount of
EUR 9.4 million for compensation expense was recorded in the first quarter of
2004. On November 21, 2000, in order to limit our exposure under the stock
option plan, we purchased 4,686,881 American call options for a premium of EUR
15.3 million. In 2003 we sold 610,000 American call options for an aggregate
price of EUR 1.0 million, which decreased the number of American call options
from 3,936,881 as of December 31, 2002, to 3,326,881 as of December 31, 2003.
The expiration date of these call options was February 27, 2004. The underlying
shares of the call options were the shares of Telekom Austria. The strike and
execution price of each call option was EUR 9 and settlement was either
physical delivery of the shares or, at our request, cash. On February 27, 2004,
we exercised our American Call options and received 3,326,881 shares on March
3, 2004, representing 0.67% of our share capital. For further information see
note (20 and 27) of the accompanying financial statements. In 2003 our shareholders authorized the framework of a new stock option
plan since our old stock option plan was due to expire on February 27, 2004.
Under the current proposal for a new stock option plan our Management Board and
executive officers will be eligible to participate. The current proposal
intends to grant the options in three annual tranches beginning in 2004. The
first tranche is currently subject to supervisory board approval. The details
of the second and third tranche have not been determined yet. Under the first
tranche we plan to grant non-transferable options exercisable for up to an
aggregate of 3 million of our shares. Our shareholders approved an increase of
our share capital by up to 10 million shares to cover the shares to be issued
upon the exercise of the options. The shareholder resolution allows us to determine whether the options will
be settled in cash or shares. Each option entitles the holder at our choice to
receive either shares at the exercise price a combination of shares and cash or
only cash. The cash portion is calculated based on the difference between the
closing price of our shares on the Vienna Stock Exchange on the day of the
exercise of the option and the exercise price. The exercise price is determined
as the average closing price of our shares at the Vienna stock exchange during
a period of twenty trading days ending two trading days before the granting of
options. To be eligible to receive options, plan members must acquire and hold an
investment in our shares until the options are exercised. For every share
purchased the grantee will receive 15 options up to a maximum amount of options
specified by the plan. The options may only be exercised during an exercise
period of three years after a 12-month vesting period, and after an exercise
hurdle was met. The exercise hurdle is annually determined by the Supervisory
Board for the Management Board and will be a specific level of earnings per
share for the year 2004. In turn, upon approval by the Supervisory Board, the
Management Board determines the exercise hurdle for the other eligible
executive officers. The last exercise date for options granted under the new
stock option plan in 2004 is May 30, 2008. 118




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##### Table of Contents



Employees The following table shows the year-end number of our employees in full
time equivalents for the last three years excluding personnel representatives,
civil servants who opted for early retirement, employees on parental and other
leave, trainees, and employees on military duty and vacation replacements. 2003
    
    2002
    
    2001Number of Employees (year-end)Wireline
    
    
    10,234
    
    
    
    11,359
    
    
    
    13,148Wireless
    
    
    3,656
    
    
    
    3,592
    
    
    
    3,438Group total
    
    
    13,890
    
    
    
    14,951
    
    
    
    16,586
 Civil servants At December 31, 2003, approximately 54% of all employees of Telekom
Austria were civil servants and 46% were private law employees. The employment
of civil servants is regulated by the Post Restructuring Act and related laws.
Our employees were taken over from the Republic of Austrias civil
administration upon the formation of Post- und Telekom Austria AGon May 1,
1996. After May 1, 1996, employees newly hired by us were no longer given civil
servant status but are instead private law employees. In Austria, civil
servants employment cannot be terminated without their consent unless this
termination is made for gross breach of their civil servant duties as defined
in the Civil Servants Employment Act. Employment, compensation and pension
provisions that relate generally to federal civil servants remain in effect for
the approximately 54% of our workforce that have civil servant status. The Post Restructuring Act transferred the function of disciplinary
authority, which used to lie with the Republic of Austrias civil service, to
the Management Board of Telekom Austria in May 1996. The chief executive
officer of Telekom Austria in his function as head of disciplinary authority is
not bound by the instructions of any authority of the Republic of Austria and
there is only a limited right of appeal for these civil servants to the courts.
The chief executive officer of Telekom Austria is empowered to issue decrees
under the Civil Servants Employment Act to adjust the civil servants
compensation, provided these measures comply with the collective bargaining
agreement that governs the salary increases of our private sector employees. Pension provisions for our civil servants are the responsibility of the
Republic of Austria in accordance with the provisions of the Pensions Act 1965.
We are relieved from direct payment to retired civil servants but must make
monthly compensation contributions to the Republic of Austria towards expenses
incurred with respect to pension payments. In 2003, this contribution amounted
to 30.1% of the cost of salaries of our active civil servants. In return, we
withhold a pension contribution between 11.05% and 12.55% from the gross
salaries of our civil servants. Beginning October 2005 the contribution will be
reduced to 28.3%. The pension provisions described above also apply to civil servants
working for subsidiaries and affiliates of Telekom Austria. Private law employees At December 31, 2003, approximately 46% of all our employees were private
law employees. This group consists of employees who were privately employed by
the Republic of Austria and those employees who since May 1, 1996 have been
employed on the basis of private law employment contracts. The Employment Act
and our collective bargaining agreement apply to these employees. We have full
autonomy to conduct all relevant negotiations with the employees trade unions.
Under the Post Restructuring Act the rights of employees who were formerly
privately employed by the Republic of Austria, such as protection against
termination, have not been limited. The collective bargaining agreement currently in force determines
primarily salaries and wages, working hours, overtime pay, holidays, parental
leave and termination. The agreement provides for special termination
provisions for employees who have been employed with Telekom Austria for more
than 10 years. The agreement applies to our subsidiaries and affiliates. The collective bargaining agreement includes an increase of 1.9% in annual
salary for all employees in 2004. This compares with an increase of 2.5% in
2002 and 2.0% in 2003. 119




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In 2000 and 1999, we sponsored a defined contribution plan, which was
offered in 2001 to all our employees of Telekom Austria and all its other
Austrian subsidiaries. The contributions to this plan are based on a percentage
of the compensation not exceeding 5% of the salaries. The annual cost of this
plan amounted to approximately EUR 9.1 million in 2003. Inter-company representation of interests Based on the Postal Works Constitution Act, Telekom Austria has introduced
personnel committees and central committees to represent the interests of
employees, in addition to on-site employee representatives. Their rights of
co-determination, in particular rights of consent, are similar to the
provisions of the Labor Constitution Act which applies to all business
enterprises in Austria. Personnel representatives have a better protection
against termination of employment than regular employees. Adjustment measures with regard to personnel Under special framework legislation for civil servants out-sourced to
state-owned companies, we offered our civil servant employees who have reached
the age of 55 an early retirement option pursuant to a social compensation
plan. Approximately 3,500 have entered one of these programs since 1997. At
December 31, 2003, 120 employees were covered by the provisions made for our
voluntary retirement incentive program. Transfer of employees We transferred all our personnel including all civil servants and private
law employees except the Management Board members to a wholly owned subsidiary
named Telekom Austria Personalmanagement GmbH by way of a spin-off as of June
30, 2000. Our management has and will continue to analyze the number of
employees who are needed at Telekom Austria and who are, therefore, being
transferred back to Telekom Austria. The re-transfer started on August 1, 2001.
The proportion of civil servants amounted to 57% in 2002 and decreased to 54%
in 2003. Department heads are now merely private law employees. Should Telekom Austria temporarily require additional personnel, this need
will be covered primarily by leasing personnel resources from Telekom Austria
Personalmanagement GmbH, as long as this procedure is reasonable from a
business standpoint. In the future Telekom Austria Personalmanagement will
lease their personnel to other companies. Relationship with employees As a necessary result of our transformation program, we have significantly
reduced the number of our employees. Although we generally consider our
relationship with our employees to be good, many of our employees have
expressed dissatisfaction with the speed and depth of our personnel reduction. 120




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Item 7. Major Shareholders and Related Party Transactions We have two major shareholders. ÖIAG, an industrial holding company wholly
owned by the Republic of Austria, owns 47.2% of our share capital. Capital
Research & Management Company based in Los Angeles, California, USA, notified
us that it held 5.7% of our shares on December 31, 2003. Telecom Italia
International (renamed from STET International Netherlands in May 2002) a joint
subsidiary of STET International and Telecom Italia owned 29.8% of our share
capital as of December 31, 2001 and 14.8% of our share capital after its sale
of 75 million of our shares in November 2002 as of December 31, 2002 and 2003.
Telecom Italia International sold its 14.8% interest in us on January 21, 2004. Relationship with the Republic of Austria and ÖIAG The Republic of Austria exercises its ownership rights in ÖIAG through the
Federal Minister of Finance. The business of ÖIAG is managed by its Management
Board. This board is subject to supervision by ÖIAGs Supervisory Board but is
independent from and not subject to instructions from the Supervisory Board or
the Republic of Austria as shareholder, though it is subject to their approval
for some major transactions. The Supervisory Board of ÖIAG consists of 15
members. Ten members are managers or business experts whose successors are
elected by the Supervisory Board members themselves to assure their
independence. Five members, chosen from the workers council of major
subsidiaries of ÖIAG, are nominated by the Austrian Chamber of Labor and
appointed by the shareholders meeting. According to the ÖIAG Act, ÖIAG is entitled to establish guidelines and
authorized to instruct the Management Board members to create favorable
conditions for privatization. By law, ÖIAG and Telekom Austria may not form a
controlled group. The Austrian government announced in its privatization mandate to ÖIAG in
April 2003 that privatization by ÖIAGs stake in us should pay due regard to
(1) protecting jobs in Austria, (2) ensuring that the decision making process
for the privatized companies remains in Austria, (3) preservation and expansion
of existing research and development capacities by creation of an Austrian
core-shareholder-structure and (4) considering the interests of the Austrian
capital markets. According to the privatization mandate the Austrian government
intends to privatize up to 100 percent of its shareholding in us. As a result of this privatization mandate ÖIAG issued in July 2003 an
exchangeable bond of EUR 325 million payable in 2006 exchangeable into EUR 25
million of our shares to professional investors outside of the United States
under Regulation S of the Securities Act of 1933. The exchange price has been
set at EUR 13 for each Telekom Austria AG share. Pension contributions for civil servants The Republic of Austria administers the pension and salary payments for
civil servants. Civil servants employed by Telekom Austria are entitled to
pension benefits provided by the Republic. We in turn are required to make
payments to the Republic as a contribution to these pension costs. For further
information, please see Item 5  Certain factors affecting our financial
results  Claims against the Republic of Austria. The Republic of Austria as regulator The Republics role of supervising the telecommunications market in
Austria through the regulatory authority is independent of its role as an
indirect shareholder of Telekom Austria. As a telecommunications operator with a significant market share in
Austria, we are required to provide certain telephone services for qualifying
low-income customers free of charge. We receive reimbursements from the
Republic for these services. The relevant contract terminates in 2007. The Republic of Austria as customer The Republic of Austria is our largest customer and purchases products and
services based on our standard pricing and tariff policies. Nevertheless, the
provision of services to the Austrian Government does not constitute a material
part of our revenues. Thus, our internal reporting systems are not set up to
specifically track business with the various departments and agencies. However,
we estimate that in 2003 our overall revenues from this business amounted to
less than 3% of our total revenues. 121




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On March 31, 2003, as the result of tender procedures concerning a new
framework agreement for voice telephony services via a fixed and mobile
telephone network to all the government agencies, the Republic of Austria,
represented by the Federal Procurement Limited Liability Company
(Bundesbeschaffung GmbH), awarded the bigger part of the contract to us.
mobilkom austria is providing the mobile telephony services as a subcontractor
of Telekom Austria. Therefore, the previous framework agreement was terminated
as of June 30, 2003. The duration of the new agreement will be for a minimum
period of 30 months. Federal guarantees for Telekom Austria and mobilkom austria loans All our long-term loans incurred under the Telecommunications Investment
Act that existed and were transferred to Post und Telekom Austria AGat the
time of Post und Telekom Austria AGs creation as a private law stock
corporation on May 1, 1996, were guaranteed by the Republic of Austria. Part of
Post und Telekom Austria AGs loans were transferred to mobilkom austria in
October 1996. As of December 31, 2003, EUR 1,354.6 million of our total EUR 2,873.2
million long-term debt benefited from these guarantees. None of our debt
incurred since May 1, 1996 is subject to such guarantees. Relationship with Österreichische Post In May 1998, Telekom Austria and Österreichische Post entered into a
framework agreement determining the services that both parties render to each
other, whereby Österreichische Post provides us mainly with distribution and
sales of our products and services through post offices, postal services, and
rented buildings. We provide Österreichische Post, a 100% subsidiary of ÖIAG,
primarily with information technology support services, voice telephony
services and technical services. The prices of services are based on market
prices or comparable service offers from third parties, if available. The
contractual relationship with Österreichische Post was amended and updated
several times. In 2003, Österreichische Post terminated some services rendered
by Telekom Austria under the agreement. However, in September 2003
Österreichische Post and Telekom Austria confirmed that the majority of
services rendered by Telekom Austria under the agreement will be provided until
the end of September 2005. In late 2003, the provisions regarding distribution
and sales of our products and services through post offices were amended to
allow the distribution of our products in post offices and through other sales
channels of Österreichische Post. For further information see note (6) of the
accompanying financial statements. Relationship with Telecom Italia In November 2002, Telecom Italia International N.V. (TII), a subsidiary of
Telecom Italia S.p.A., sold 75 million shares in us in a private placement to
institutional investors in the United States of America (qualified
institutional buyers) as well as to professional investors in Austria and
outside the United States under Regulation S of the U.S. Securities Act of
1933. The interest of Telecom Italia decreased and remained at 14.8% through
2003. In January 2004, TII sold its remaining stake in us. Business relationship with Telecom Italia We provide to each other standard international telecommunications
services on an arms-length basis, e.g. Telekom Austria offers Telecom Italia
managed bandwidth services, wavelengths, IP-transit, local loops and on a
bilateral basis international voice and data services as well as housing
services at the respective point of presence. In addition, in December 2002 we
have entered into a mutual, long-term dark fiber swap, which replaced the
original agreement signed by both parties on Mach 23, 2000. This modified Dark
Fiber Swap Agreement allows for a better expansion of our Jet2Web Stream to
Italy because it grants us additional rights, such as the right to extend our
network to certain telehouses in Milan allowing access to networks of other
carriers. For further information see Item 4  Business overview  Wireline. 122




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Item 8. Financial Information CONSOLIDATED FINANCIAL STATEMENTS See Item 18. Financial Statements and pages F-1 through F-51. OTHER INFORMATION Litigation Telekom Austria and its subsidiaries are involved in a number of legal
proceedings in the ordinary course of their business. The following is a
summary of litigation matters outside the ordinary course of our business. Telekom Austria One of our former competitors now in bankruptcy has brought four claims
for damages against us relating to alleged default in providing hardware and
services. We reached a settlement in September 2002 with the insolvency
administrator who filed two of these claims with an amount in controversy
totaling EUR 5.2 million. In the meantime, one of these claims has been
withdrawn by the debtor. The remaining case for a claim of EUR 58.1 million is
still pending and we do not expect a decision before summer 2004. Management
believes that this claim has a low likelihood of success. We have filed a claim against a former competitor in the amount of EUR 1.2
million which we have since reduced to about EUR 1.0 million. This competitor
has served us a notice of claim in the amount of EUR 5.7 million for damages
alleged to have been caused by an abuse of dominant position. A settlement has
been reached and we are in the process of executing the settlement agreement. The insolvency administrator in the bankruptcy of one of our competitors
has indicated that he may file a claim in the amount of EUR 7.5 million which
we had received as payment for our services before the insolvency proceedings
had been opened. The Vienna public prosecutors office is investigating whether legal
proceedings should be opened against our management in connection with
allegations published in the Austrian press to the effect that our civil
servants and other present or formerly state-owned Austrian enterprises have
been granted early retirement on medical grounds based upon fraudulent medical
certificates in contravention of applicable law. We have publicly stated that
in managements view we have fully complied with applicable law in the
application of our retirement policies and we are fully cooperating with the
investigation. In addition, the auditing arm of the Republic of Austria, the
Rechnungshof, has began an investigation into the early retirement practices of
several current and prior state owned enterprises, including us, to determine
whether there has been any abuse of the current legal framework for early
retirement. As the authority of the Rechnungshof to review our retirement
policy is not clear, we denied any access to our files; in 2003 the
Rechnungshof has started proceedings with the Austrian Constitutional Court to
render a ruling on whether it has the right of access to our files. On September 11, 2000, we received a complaint filed by United Telekom
Austria with the European Commission, General Directorate for Competition
against us and the Republic of Austria concerning our tariff and discount
system, alleging that we abuse our dominant market position. We replied to this
complaint on October 9, 2000, denying the allegations. To date, we have not
received a further response. On March 18, 2004, the Cartel Court found that the cancellation of one of
our former tariffs (Minimumtarif)constitutes an abuse of our dominant
position and imposed a fine of EUR 0.5 million. We will file an appeal against
this decision with the Supreme Court. A directory service provider raised a
claim in Belgium against us that we have abused our dominant position with
regard to the supply of directory data. The claimant alleges that he has a
right to obtain this data for free. Management believes that in case the
claimant is successful this will have an impact on our prices for the supply of
directory data. In late spring 2001 Libro AG, an Austrian book and music retailer listed
on the Vienna Stock Exchange in which we held an equity stake of 25% plus one
share, went into bankruptcy proceedings. The administrator in the bankruptcy
proceedings has served on two members of our Management Board and a member of
our Management Board at the time a notice of claim for damage alleging a breach
of their duty as member of the supervisory board of Libro AG. Pursuant to the
notice of claim the supervisory board has not exercised its duties 123




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with sufficient care, which did not allow the discovery that the internal
controls were insufficient and that the bankruptcy proceedings were initiated
too late. mobilkom austria Six claims have been brought against our subsidiary mobilkom austria
relating to alleged health problems caused by the emission of radiation through
mobile communications transmitting and receiving stations. Some of these claims
also seek damages for the alleged decrease in the value of the plaintiffs real
estate. In the first of the six proceedings, an initial ruling has been made,
only pertaining to the gathering of expert reports through the appellate court,
and a later date was set for the remaining five proceedings. In three of these
proceedings, the parties agreed to suspend the case until a decision had been
reached in the first proceedings. In the other two proceedings, the claimants
failed to gain a provisional injunction. The claimants have appealed. In one of
these two cases the Court of Appeal rendered a decision, which is now
effective. The right of forbearance has been rejected, because the claimant
could not prove that health problems are caused by electromagnetic radiation
from our base transceiver station. A successful claim for damages against mobilkom austria may have a
negative impact on our results of operations. mobilkom austria is involved in a number of proceedings before the Supreme
Administrative Court for alleged breaches of environmental or zoning laws by
mobilkom austria. In one of these cases, a decision was rendered obliging
mobilkom austria to remove a mobile communications transmitting and receiving
station. mobilkom austria has appealed against this decision. A competitor in the bidding process for the license granted to our
subsidiary Si.mobil by the Slovenian government filed a claim to nullify the
license decision and the Concession Agreement entered into between Si.mobil and
the Slovenian government in 1998. The Supreme Court nullified the license
decision for failure to comply with form requirements, whereupon the government
issued a new license decision complying with the procedural instructions of the
Supreme Court. The former competitor in the bidding process thereupon appealed
the new license decision. This appeal has been pending since 1999. Management
believes that this claim has a low likelihood of success. A labor union group (Vertrauenspersonenausschuss Wien) has filed a claim
against mobilkom austria regarding the extent of additional vacation time for
night shift heavy workers pursuant to the Night Shift Heavy Workers Act
(Nachtschwerarbeitergesetz). We believe we are not required to provide
additional vacation time based on a provision of the Postal Restructuring Act
which excludes our employees from the application of the Night Shift Heavy
Workers Act. Our legal position has been approved by the Court of Appeal. The
claim is now pending at the Supreme Court and we expect a decision to be
rendered by the end of 2004. In 2000 mobilkom austria and five mobile operators successfully bid for
UMTS licenses. mobilkom austria was awarded a license. It was not made clear
whether the amount paid was a net amount. Therefore mobilkom austria together
with the other mobile operators who had received a license were convinced to
have paid for a gross amount. In order to be able to claim a VAT refund from
the Republic of Austria mobilkom austria and other mobile operators asked for
an invoice for the license which would allow them to claim the refund. Since
the Republic of Austria refuses to issue an invoice mobilkom austria and each
of the other mobile operators filed a claim for a refund with the court who has
jurisdiction over each of the mobile operators. For simplicity reasons several
claims have been joined to one proceeding. Since European Community law is
applicable the Austrian court has staid the proceeding and the national court
is now in process of asking the European Court of Justice for clarification
(Preliminary Rulings). The judgement of the European Court of Justice has
mandatory nature and the national procedure will continue and decided by an
court. mobilkom austria also has filed a claim against the regulatory authority
regarding the same issue. Due to Austrian rules of procedure this claim will be
decided by a different court and can not be joined with the above mentioned
trials. Regulatory matters regarding Telekom Austria and mobilkom austria mobilkom austria has filed a number of appeals against decisions of the
regulatory authority on interconnection, the determination of significant
market power until 2001, and tariff approval for its A1-Total product which
concerns the provision of voice telephony through fixed lines. These appeals
were pending at the Supreme Administrative Court and the Constitutional Court
on December 31, 2003. In 2003, the regulatory 124




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authority did not consider mobilkom austria to have significant market
power. In spite of this decision, mobilkom austria was required by the
regulatory authority to offer lower interconnection fees. In December 2003, the
regulatory authority granted a regional 5 MHz GSM-1800MHz-frequency spectrum to
mobilkom austria, again for no charge. This decision was necessary after the
original decisions (K 9/98 and K 51/98) of the regulatory authority had been rescinded by the
Administrative Court due to formal reasons. Telekom Austria appealed against a number of the regulatory authoritys
decisions on interconnection, unbundling of access to local subscriber lines,
also called unbundling of the local loop, number portability, pre-selection,
the non-granting of approvals for tariffs and the decision that we have been
determined as provider with significant market power. In the appeals we filed
with either the Constitutional Court or the Supreme Administrative Court
against more than 50 decisions from the regulatory authority concerning
interconnection in December 2003, we primarily targeted the interconnection
tariffs set by the regulatory authority. Our appeals of these decisions are
based on the argument that the tariffs for call termination, call origination,
transit, access to specific services (such as toll-free, on-line services,
special services) have not been set in accordance with the requirements of the
Telecommunications Act and the Interconnection Ordinance. We have generally
taken the position in these appeals that these tariffs have been set below our
actual costs and therefore adversely affect our profitability. In our five appeals (some of them against identical decisions of the
regulatory authority), that we had filed prior to December 31, 2003, we argued
that the monthly fee to be paid to us by our competitors for an unbundled
subscriber line had been set too low by the regulatory authority, and that this
adversely affected our profitability. In three of these appeals, we also argued
that neither the Telecommunications Act nor the Interconnection Ordinance
provide that internet services providers or leased line providers are entitled
to have unbundled access to the local subscriber lines. In two appeals we
opposed the obligation to sub-loop unbundling and grant access to our in-house
lines free of charge. We also argued against excessive penalties. In the six appeals we have made against the regulatory authoritys
decisions on number portability, we argued that the regulatory authority had no
power under the existing legislation to decide on this issue within the
interconnection framework. We also argued that the tariffs set by the
regulatory authority do not reflect our actual costs and are therefore not in
line with the Telecommunications Act or the Interconnection Ordinance. Since
September 2001, some of these decisions taken by the regulatory authority were
reversed by the Supreme Administrative Court. In these decisions, the
regulatory authority raised the price for portability of non- geographic
numbers to EUR 20.11. In the three appeals we made against the regulatory authoritys decisions
on pre-selection of a carrier, we argued that, under the Numbering Ordinance,
alternative operators must also provide pre-selection of a carrier. We also argued that the fees set by the regulatory authority are not in
line with the requirements of the Telecommunications Act or the Interconnection
Ordinance. In May 2003, the European Court of Justice decided that the Supreme
Administrative Court has jurisdiction for appeals filed before June 1, 2000. Since June 2000, we have filed a number of appeals with the Supreme
Administrative Court, when an amendment to the Telecommunications Act
explicitly declared the Supreme Administrative Court competent for the matters
described above. We believe that we have a reasonable prospect of success in
our appeals. However, as of today, the Supreme Administrative Court has decided
on only few of the matters that we have appealed to date. If the Supreme
Administrative Court agrees with our position that the tariffs are too low, the
courts decision would be favorable to us. If the Supreme Administrative Court
refers the appeals back to the regulatory authority on formal grounds only, the
regulatory authority has discretion to take a decision that may not be
substantially different from what their position has been to date. The Supreme
Administrative Court may also refer the appeals to the regulatory authorities
on the grounds that the tariffs that we appeal are too high, which would be
unfavorable to us. We believe this outcome to be possible, but highly unlikely. 125




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Dividends Declaration of dividends A dividend payment requires the adoption of a resolution by the
shareholders meeting on the distribution of profits. The holders of our
ordinary shares are entitled to dividends in proportion to their participation
in our share capital. Our fiscal year corresponds to the calendar year. Austrian law provides
that within the first five months of each fiscal year, the Management Board
must prepare financial statements, including a balance sheet, income statement
and the notes thereto, consolidated financial statements, and a management
report for the previous fiscal year and, after completion of the audit, submit
them to the Supervisory Board together with a proposal for the payment of
dividends. The Supervisory Board is required to examine the financial
statements, the proposal for the payment of dividends and the management
report, and to present its findings to the shareholders meeting. If the Supervisory Board approves the financial statements, they are
adopted unless the Management Board and the Supervisory Board decide to have
them approved by the shareholders meeting. Unless that is the case, the
shareholders meeting is bound by the adopted annual financial statements
approved by the Management Board and the Supervisory Board. The shareholders meeting decides the payment of dividends. According to
our Articles of Association, shareholders at the annual shareholders meeting
may also resolve that all or part of the net income be retained. The amendments
to the financial statements required by a retention are made by the Management
Board. Under Austrian law, we may pay dividends only from net income as shown
in the annual financial statements prepared according to Austrian GAAP by
Telekom Austria AG. The shareholders meeting is not obligated to follow the
Management Boards proposal on dividends and is not bound by the findings and
recommendations of the Supervisory Board. The shareholder may receive final or interim dividends. The Management
Board may authorize the payment of interim dividends with the approval of the
Supervisory Board but does not require the shareholders approval to do so. Payment of dividends Unless otherwise decided by the shareholders meeting, dividends declared
for distribution by the shareholders meeting become due and payable 30 days
after the date of the shareholders meeting at which they were approved. Our
Articles of Association provide that dividends that are not collected within
three years after the due date are forfeited in favor of Telekom Austria. 126




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Item 9. The Offer and Listing MARKETS Our shares are listed on the Vienna Stock Exchange and the New York Stock
Exchange. The shares are also traded on the German stock exchanges in Berlin,
Düsseldorf, Frankfurt, Munich and Stuttgart. Options on the shares are traded
on the Austrian options exchange (ÖTOP). In November 2000, the total number of
shares sold in the initial public offering amounted to 112,000,000, or 22.4% of
the total outstanding shares. The offer price was EUR 9 per share and U.S.
dollar 15.2874 per American Depositary Shares, or ADS. Each ADS represents two
shares of common stock and trade under the symbol TKA on the New York Stock
Exchange (NYSE). The depositary for the ADSs is the Bank of New York. Telekom Austrias shares are traded on Xetra (electronic exchange trading
platform) in addition to being traded on the auction market. Xetra is an
electronic exchange trading platform operated by rules and regulations. Xetra
is available daily between 8:30 a.m. and 5:45 p.m. to brokers and banks that
have been admitted to Xetra. Private investors can trade on Xetra through their
banks or brokers. The stock exchange trading in Austria was regulated by the stock exchange
law of 1989 (BGBl. Nr. 555/1989), amended by the federal law BGBl. I Nr.
2/2001. The Federal Supervisory Authority for Securities Trading
(Bundes-Wertpapieraufsichtsbehörde) monitors trading activities on the Austrian
stock exchange. In 2003, Telekom Austria ADSs reached a high of USD 24.72 and a low of
USD 18.90 on the New York Stock Exchange. On the Vienna Stock Exchange Telekom
Austria Shares reached a high of EUR 11.10 and a low of EUR 8.60 in 2003. From
January through April 2004, our ADSs reached a high of USD
30.30 and
a low of USD 24.82 on the New York Stock Exchange. On the Vienna Stock Exchange
Telekom Austria Shares reached a high of EUR 12.70 and a low of EUR
9.80 in
2004. The table below indicates the price range of the high and low prices for
our shares on the Vienna Stock Exchange and for the ADS on the New York Stock
Exchange1. New York
    
    ViennaHigh
    
    Low
    
    High
    
    LowUSD
    
    EUR1999
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2000
    
    
    14.44
    
    
    
    9.63
    
    
    
    9.00
    
    
    
    5.712001
    
    
    16.70
    
    
    
    9.50
    
    
    
    9.48
    
    
    
    5.382002
    
    
    20.04
    
    
    
    14.46
    
    
    
    9.95
    
    
    
    7.24First Quarter
    
    
    17.20
    
    
    
    15.75
    
    
    
    9.95
    
    
    
    9.06Second Quarter
    
    
    17.38
    
    
    
    14.59
    
    
    
    9.80
    
    
    
    7.71Third Quarter
    
    
    17.75
    
    
    
    15.17
    
    
    
    9.03
    
    
    
    7.60Fourth Quarter
    
    
    20.04
    
    
    
    14.46
    
    
    
    9.72
    
    
    
    7.242003First Quarter
    
    
    21.95
    
    
    
    18.90
    
    
    
    10.25
    
    
    
    8.79Second Quarter
    
    
    23.30
    
    
    
    19.35
    
    
    
    10.15
    
    
    
    8.60Third Quarter
    
    
    24.40
    
    
    
    20.15
    
    
    
    11.10
    
    
    
    9.00Fourth Quarter
    
    
    24.72
    
    
    
    20.71
    
    
    
    10.08
    
    
    
    8.98October
    
    
    22.65
    
    
    
    21.15
    
    
    
    9.70
    
    
    
    9.02November
    
    
    22.98
    
    
    
    20.71
    
    
    
    9.69
    
    
    
    8.98December
    
    
    24.72
    
    
    
    23.20
    
    
    
    10.08
    
    
    
    9.382004First Quarter
    
    
    30.30
    
    
    
    24.82
    
    
    
    11.99
    
    
    
    9.80January
    
    
    28.80
    
    
    
    24.82
    
    
    
    11.51
    
    
    
    9.80February
    
    
    30.30
    
    
    
    28.44
    
    
    
    11.99
    
    
    
    11.25March
    
    
    29.13
    
    
    
    27.59
    
    
    
    11.93
    
    
    
    11.24April
(through 8)
    
    
    30.17
    
    
    
    28.68
    
    
    
    12.70
    
    
    
    11.58
   1
    
    Intraday high and low; Source: Reuters, Bank of New York 127




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Item 10. Additional Information MEMORANDUM AND ARTICLES OF ASSOCIATION Overview Telekom Austria is registered under the number FN 144.477t in the
companies register of the commercial court of Vienna with its seat in Vienna,
Austria. Our Articles of Association state that our object is the provision of
telecommunications services and the creation of conditions which will promote
the development of telecommunications services in Austria. These services
include the provision of telephone voice services, automatic data processing
and information technology, the planning, construction, maintenance and
operation of infrastructure facilities and networks and the installation of
communications facilities and terminals. We may also conduct activities
associated with these services. The articles authorize us to take all actions
necessary to achieve our objective, except that we are not permitted to carry
out banking activities. Shares and share capital Our share capital amounts to EUR 1,090,500,000 and is divided into 500
million no par value shares (Stückaktien) each representing a pro rata amount
of EUR 2.181 of the share capital. Pursuant to the amendment to our Articles of
Association voted on at our ordinary shareholders meeting held on June 12,
2002, all of our shares, are bearer shares. On June 4, 2003 our shareholders
authorized us to increase the share capital of Telekom Austria AG by up to EUR
21,810,000 by issuing up to 10 million new ordinary bearer shares or new
ordinary registered shares with no par value in order to serve stock options to
be granted to employees, directors and members of the Management Board of the
company or of an affiliated company for a period of five years and our articles
of association were modified accordingly. With regard to this capital increase
the statutory rights of existing shareholders to subscribe for additional
shares issued by the company for cash on a pro ratabasis is excluded. In addition, our shareholders authorized the Management Board to acquire
up to 50 million own bearer or registered shares, i.e. up to 10% of the share
capital of Telekom Austria at the time of this resolution, during a period of
18 months from the day of this resolution at a minimum price of EUR 9 and a
maximum price of EUR 15 per share. The Management Board received authorization
to (i) decrease the share capital of the company up to EUR 109,050,000
without a further shareholders resolution by withdrawing up to 50 million
registered or bearer shares with no par value; and (ii) use the purchased shares to serve stock options to be granted to
employees, directors and members of the Management Board of the company or of
an affiliated company. On February 27, 2004, we exercised 3,326,881 American call options and
received 3,326,881 shares on March 3, 2004. These treasury shares represent
0.67% of our share capital, and are intended for the beneficiaries of our IPO
stock option program as well as for future stock option programs. Under this
program 3,268,850 outstanding stock options were exercised on February 27,
2004. For further information see Item 6  Stock option plans. Our original share capital was raised pursuant to § 10 Austrian Post
Restructuring Act by way of a contribution in kind and amounted to 15 billion
Austrian Schilling divided into 1.5 million registered shares with a nominal
value of 10,000 Austrian Schilling. On October 4, 2000 our shareholders
resolved to convert our share capital into Euro and to split our share capital
into 500 million non-par value shares. Under our Articles of Association, our shareholders do not have a right to
receive individual share certificates. We may, however, issue global
certificates and interim certificates. Our bearer shares are freely transferable. Shares held by ÖIAG are subject
to contractual restrictions. All shares have been admitted to trading on the
Vienna Stock Exchange and will be represented by one or more global
certificates deposited with Österreichische Kontrollbank AG, the Austrian
central depositary. The shares can only be transferred in book-entry form.
Other than the global certificates, no separate share certificates in bearer
form will be issued. 128




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Corporate governance As required under the Austrian Stock Corporation Act, Telekom Austria has
a two-tier board system comprising the Management Board (Vorstand) and the
Supervisory Board (Aufsichtsrat). The functions of management and supervision
are strictly separated and no individual may simultaneously be a member of both
boards. The Management Board represents the company in day-to-day business
matters, and is not subject to instructions from the Supervisory Board or the
shareholders. The Supervisory Board appoints and removes the members of the
Management Board and oversees the Management Boards activities. The general
meeting of shareholders has the power to elect and remove Supervisory Board
members. Our Supervisory Board consists of up to eight members elected by the
shareholders meeting and four members appointed by our workers council under
mandatory provisions of the Austrian Labor Constitution Act. ÖIAG owns about 47.2% of our outstanding shares and is in a position to
control us. In addition, we hold a general meeting of shareholders once a year. At
this meeting, the shareholders vote on the distribution of net profits, the
compensation of the members of the Supervisory Board, the appointment of our
independent auditors and on other significant corporate transactions. In 2002, an Austrian working committee on corporate governance completed
preparation of the Austrian corporate governance code, which calls for
voluntary compliance with its provisions. With the publication of the annual
report 2003, we announced our voluntary compliance with the Austrian Corporate
Governance Code. The respective declaration has been published on our corporate
website at www.telekom.at. In July 2002, the U.S. Congress passed the Sarbanes-Oxley Act, which aims
to strengthen investor protection and restore confidence in the capital
markets. The Sarbanes-Oxley Act, together with the related rules adopted by the
U.S. Securities and Exchange Commission, introduced numerous changes in
corporate governance regulations for all companies listed on U.S. stock
exchanges. Some of these regulations have not yet come into effect. In implementing the provisions of the Sarbanes-Oxley Act, we have among
other things, established a Disclosure Committee that is responsible for
reviewing and approving all information included in this annual report as well
as in our quarterly earnings releases. In addition, the Disclosure Committee
defines the framework and the principles of documentation of internal control
for financial reporting. We have also introduced a procedure that enables the
management of our business units to certify their compliance with our internal
control system and the financial figures they submit. On the basis of this
procedure, the chief executive officer and the chief financial officer of
Telekom Austria AG certify the appropriateness of our financial statements to
the SEC, as required by the Sarbanes-Oxley Act. We have expanded the duties of
the Financial Committee of our Supervisory Board to act as our audit committee
according to the requirements of the Sarbanes-Oxley Act and introduced a Code
of Ethics. Management Board (Vorstand) Since our Articles of Association were amended at the ordinary
shareholders meeting on June 28, 2001, our Management Board may consist of two
to four members nominated by the Supervisory Board. The Supervisory Board can
appoint a member to be chairman of the board and another to be vice chairman. We are represented by and act through the members of our Management Board.
Under the Articles of Association, any two members of the Management Board, one
member of the Management Board and one holder of a general power-of-attorney
(Prokuristen), or any two holders of a general power-of-attorney can legally
bind the company to the extent permitted by law. The members of the Management Board are appointed, and may be
re-appointed, for a term of up to five years each. Under certain circumstances,
such as a serious breach of duty or a vote of no confidence by the
shareholders meeting, a member of the Management Board may be removed by the
Supervisory Board prior to the expiration of the term. The Supervisory Board
appoints the chairman of the Management Board and a deputy chairman. Decisions are made by a simple majority of the votes cast. At least half
of all members of the Management Board including the chairman or the deputy
chairman must be present in order to constitute a quorum. The chairman has the
casting vote in case of a tie. 129




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The Management Board manages the company on a day-to-day basis within the
limitations set forth by law, the Articles of Association, the Supervisory
Board, the rules of procedure or specific resolutions of the shareholders
meeting. The Management Board must act in the best interest of the company,
while also taking into account the interests of its shareholders, employees,
and the public. In carrying out these duties, the members of the Management
Board must exercise the standard of care of a diligent and prudent business
person. In addition to exercising management functions, the Management Board is
responsible for the financial books and records of the company. The Management
Board must report to the Supervisory Board on a regular basis, at least every
quarter, and outline the course of business and the situation of the group. The
Management Board also reports to the chairman of the Supervisory Board when
necessary on an important matter. The Management Board must provide a report at
the request of at least two members of the Supervisory Board. Without the approval of the Supervisory Board, members of the Management
Board are not allowed to engage in commercial activities or any business
transaction in Telekom Austrias lines of business for their own or a third
partys account. If a member of the Management Board violates these principles,
the company is entitled to claim damages or to demand that the business
transaction made by the board member in his own name be transferred to the
company. Supervisory Board (Aufsichtsrat) Our Supervisory Board consists of up to eight members elected by the
shareholders meeting and four members appointed by our workers council under
mandatory provisions of the Austrian Labor Constitution Act. One-third of the share capital present at the shareholders meeting has
the statutory right to elect the third new member of the Supervisory Board if
at least three members of the Supervisory Board are to be elected. No member of
the Supervisory Board may be appointed for a longer period than four years,
until the shareholders meeting deciding on the discharge of the board members
for the fourth year following their appointment. The Supervisory Board elects one chairman and one or more deputy chairmen.
The Supervisory Board has a financial sub-committee that prepares the
resolutions of the Supervisory Board regarding the annual financial statements,
and may create other subcommittees for special tasks. Our Articles of
Association require that at least half of the members of the Supervisory Board,
including the chairman or one of his deputies must be present at a meeting in
order to constitute a quorum. Resolutions of the Supervisory Board are passed
by a simple majority of the votes cast. The chairman has the casting vote in
case of a tie. The Supervisory Board supervises the management of Telekom Austria. The
Supervisory Board may at any time request a report by the Management Board
concerning company matters. The Supervisory Board may inspect and review all
books and documents of the company as well as assets, cash accounts and stock
in trade. According to Austrian law, the following transactions and matters may
be decided by the Management Board only with the approval of the Supervisory
Board:  
    
    acquisition and sale of participating interests as well as the
acquisition, sale and termination of businesses and establishments;
    
    acquisition, sale and encumbrance of real estate;
    
    establishing and closing down of branches;
    
    material investments;
    
    taking and granting material loans and credits;
    
    commencement and termination of lines of business and types of production;
    
    determination of general principles of business policy;
    
    determination of principles for granting of profit shares or
commissions on turnover and pension commitments to managers and senior
employees; 130




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
    
    stock options for employees and key employees of the company or
affiliated companies as well as for members of the Management Board and
the Supervisory Board of the company or affiliated companies and
    
    granting of general powers-of-attorney The rules of procedure of our Management Board may provide for additional
situations where a Supervisory Board approval is required. Failure of the Management Board to obtain the prior approval of the
Supervisory Board does not affect the enforceability of transactions towards
third parties but may render the Management Board liable for any damages
resulting therefrom. Supervisory Board Committees The Supervisory Board has established 2 committees: The Financial
Committee, which also acts as our Audit Committee, and the Chairing Committee. The Financial Committee, whose duties, responsibilities and processes is
set out in separate by-laws, fulfill the requirements of the Austrian Corporate
Governance Code and take into account the Sarbanes-Oxley requirements. On
November 18, 2003 our Supervisory Board extended the responsibility of our
financial committee (Finanzausschuss) to become an Audit Committee meeting the
requirements under the Sarbanes-Oxley Act. Our audit committee now comprises
two shareholder representatives and one employee representative. The
Sarbanes-Oxley Act requires that all members of the audit committee be
independent. Our financial expert, Harald Sommerer, is independent as described
in Item 16 A. The SECs regulations implementing the Sarbanes-Oxley Act
permit the representative of foreign governmental entity that is an affiliate
of the issuer to become a member of the audit committee. The chairman of our
audit committee is the chief executive officer of our main shareholder, ÖIAG,
which administers the government interests in us. The SECs regulations also
permit employee representatives, who have been elected in accordance with the
Austrian Co-determination Act and who, due to their employment with us, are not
independent, to serve on the Audit Committee. The Audit Committee oversees our internal and external accounting
processes. On the basis of reports provided by the independent auditors, it
will review our quarterly and annual financial statements, and informs the
Supervisory Board about its recommendation whether or not to approve the annual
financial statements. In addition, the Audit Committee will oversee our internal control system
and the procedures for assessing, monitoring and managing risk. The Audit
Committee is responsible for liaising between us and the independent auditors.
In particular, it awards the audit contract to the independent auditors elected
by the Annual Shareholders Meeting and determines the focal points of their
audit as well as their fee. In addition, the Audit Committee monitors the
auditors independence. In accordance with the requirements of the Sarbanes-Oxley Act, the
Supervisory Board has designated Harald Sommerer the financial expert of the
Audit Committee. The Chairing Committee(Präsidium) comprising of the chairperson and the
deputy chairperson of the Supervisory Board, determines the bonus and other
compensation related matters of the Management Board, and is responsible for
much of the governance process of the Supervisory Board. Shareholders meeting The shareholders meetings must decide on major corporate matters such as
the distribution of net profits, the discharge of the members of the Management
and Supervisory Boards and the appointment of independent auditors. Our
Management Board is required to convene an ordinary shareholders meeting
within the first eight months of our fiscal year. A resolution of the
shareholders meeting is required for approval of matters such as amendments to
the Articles of Association, modification of shareholders rights, approval of
mergers, increases or decreases in share capital, the creation of a new class
of shares and the authorization of the issuance of convertible bonds and
similar securities. 131




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Shareholders meetings are held at Telekom Austrias registered seat in
Vienna, Austria, or at a place of business within Austria or at the capital of
an Austrian Federal District. The time and place must be provided in the
invitation notice to the shareholders meeting. Shareholders meetings are called by the Management Board or the
Supervisory Board. The notice must be published and must state the name of the
company as well as the time and place of the shareholders meeting. At least 14
days must elapse between the day of the last publication of the invitation
notice and the day of the shareholders meeting. Attendance and exercise of
voting rights at ordinary and extraordinary shareholders meetings are subject
to certain conditions. In order to attend a shareholders meeting and vote
shares, shareholders must register at least three days prior to the meeting and
deposit a certificate (Hinterlegungsbescheinigung) evidencing their shares
until the end of the shareholders meeting with an Austrian notary public, with
the main office of an Austrian credit institution, with any other Austrian or
foreign credit institution specified in the invitation notice, or with Telekom
Austria. The shares can also be deposited with a depository bank designated by
us, in a blocked account until the end of the shareholders meeting. Our
Articles of Association provide that shareholders must have at least 14 days
after the publication date of the invitation notice to the shareholders
meeting to effect the deposit. If the last day of this period is a Sunday or
public holiday, the deposit may be made on the next business day. The
certificate must be deposited to allow at least three business days between the
day of deposit and the day of the shareholders meeting. Saturdays, Good Friday
and December 24 are not deemed to be business days for purposes of this
provision. Shareholders meetings are chaired by the chairman of the Supervisory
Board or, in his absence, by one of the deputy chairmen. In their absence, the
notary public present at the shareholders meeting to draft and authenticate
the minutes of the meeting has to hold an election for the chairman of the
meeting. The chairman leads the proceedings and determines the form of voting.
The order of the agenda items follows the order set out in the notice. The
chairman, however, may deviate from that order and may conduct the discussion
and voting accordingly. The Stock Corporation Act and our Articles of Association do not require
that a specific percentage of our share capital be present to form a quorum.
Resolutions of the shareholders meeting are passed by simple majority of the
votes cast, if not otherwise provided for by law or the Articles of
Association. Whenever permitted by law, our Articles of Association have
reduced all qualified majorities to simple majority. The following matters
require a vote of 75% of the votes represented, which cannot be decreased by
the Articles of Association:  
    
    amendment of the business purpose;
    
    increase of the share capital with a simultaneous exclusion of preemptive rights;
    
    authorized capital/conditional capital;
    
    decrease of share capital;
    
    dissolution, and continuation of the company after dissolution;
    
    transformation into a company with limited liability (GmbH);
    
    mergers and spin-offs;
    
    transfer of all of the companys assets; and
    
    profit and business transfer agreements. No consent of the general meeting is required in case of a merger with a
90% shareholder. Shareholders rights Our bearer shares are freely tradable. We know of no existing limitations
that limit the rights of non-Austrians to own our bearer shares or to exercise
voting rights in accordance with the procedures described above. In the ordinary shareholders meeting of June 12, 2002, our shareholders
passed a resolution which provided for the conversion of all outstanding
registered shares into bearer shares, by amendment of Sec. 4 of our Articles 132




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of Association. The amendment to our Articles of Association was submitted
to the Commercial Register of Vienna for registration and duly registered on
June 20, 2002. All of the converted shares are admitted for trading on the
Vienna Stock Exchange, effective November 6, 2002. Provided the shareholders shares have previously been deposited as
described above, each shareholder has the right to attend the shareholders
meetings, to ask questions in connection with any matter on the agenda set out
in the invitation notice and to vote upon any resolution. Each shareholder is
entitled to one vote per share. Each shareholder entitled to vote may exercise
his voting rights by written proxy. The proxies must be deposited with and
remain in the custody of the company. A shareholder or group of shareholders whose shares in the aggregate
represent at least 1/5 of our nominal share capital, is entitled to request the
enforcement of claims for damages by the company against members of the
Management Board, the Supervisory Board, or third parties if it is determined
that these persons have engaged in illegal conduct. A minority shareholder or
group of shareholders whose shares in aggregate represent at least 1/10 of our
nominal share capital is entitled to:  
    
    request a special audit of transactions in connection with the
creation of Telekom Austria or with the management thereof, if the
transaction was carried out within the last two years and, if such
request has been rejected by a shareholders resolution, to apply to a
court to request the appointment of special auditors;
    
    veto the appointment of auditors and petition the court to request
the appointment of other auditors for a special audit;
    
    request the adjournment of the shareholders meeting if certain
items of the annual financial statements are objected to by minority
shareholders;
    
    veto the appointment of auditors for cause. This veto right may
also be exercised by any shareholder or group of shareholders holding shares with a total nominal value of at least EUR 700,000;
    
    petition the court to request the revocation for cause of members
of the Supervisory Board nominated by the shareholders; and
    
    request separate consolidated financial statements for companies
within our group prepared according to Austrian or foreign accounting
principles. This right may also be exercised by any shareholder or
group of shareholders holding shares with an aggregate nominal value of
at least EUR 1,400,000. A minority shareholder or group of shareholders whose shares in aggregate
represent at least 1/20 of
our nominal share capital is entitled to:  
    
    request that a shareholders meeting be called or, upon court
approval, to call the meeting themselves if the Management Board or the
Supervisory Board does not comply with this request;
    
    request that a topic be put on the agenda of the shareholders
meeting;
    
    enforce damages against the Management Board, Supervisory Board or
shareholders if audit reports reveal facts or actions that may
constitute a basis for liability;
    
    petition the court to request the appointment or revocation for
cause of liquidators, and request a special audit of the annual
financial statements during the liquidation period and apply to a court
to request the appointment of auditors. This right may also be invoked
by any shareholder or group of shareholders holding shares with a total
nominal value of at least EUR 350,000;
    
    appeal against a shareholders resolution if by this resolution the
depreciation adjustments and reserves have been affected to an extent
exceeding the maximum amounts permissible under the Stock Corporation
Act or our Articles of Association; and
    
    request separate consolidated financial statements for companies
within our group prepared according to Austrian or foreign accounting
principles. This right may also be exercised by any shareholder or
group of shareholders holding shares with an aggregate nominal value of
at least EUR 700,000. 133




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To be valid, every resolution adopted at a shareholders meeting must be
recorded in the minutes prepared by an Austrian notary public who must be
present at the meeting and authenticates the minutes after they have been
signed by the chairman of the meeting. Important rules regarding acquisitions Each domestic or foreign shareholder of a company listed on the Vienna
Stock Exchange must notify the Exchange, the Austrian Federal Securities
Authority and Telekom Austria itself within seven days of any acquisition or
disposition of direct or indirect interests that results in that shareholders
voting rights exceeding, equaling, or falling below the following thresholds:
5, 10, 15, 20, 25, 30, 35, 40, 45, 50, 75 or 90% of the voting rights of
Telekom Austria. The Company is required to publish any such event or a
reference to where that information can be found in the Austrian newspaper,
Wiener Zeitung, within nine days of notification. The same applies to shares
that are subject to option and trust arrangements and to banks that exercise
voting rights on behalf of beneficial owners. Under certain circumstances, the acquisition of shares may be subject to
approval by the Austrian Cartel Court or the European Commission. Preemptive rights According to the Stock Corporation Act, shareholders generally have
statutory rights to subscribe for additional shares issued by the company for
cash on a pro ratabasis. These preemptive rights must be exercisable during a
period of at least two weeks. The Management Board is required to publish a
notice of the commencement and duration of this period in the Austrian
newspaper Wiener Zeitung. Preemptive rights not exercised within this period
lapse. In case of an increase of share capital, the shareholders exercise their
preemptive rights by notifying Telekom Austria and delivering a duly executed
subscription application in the form required by the Stock Corporation Act. We
may also issue new shares to a bank who undertakes to offer the new shares to
the shareholders who would otherwise have direct preemptive rights. In this
case the shareholders will have the same rights against the bank. Preemptive
rights may be transferred and, if applicable, by delivery of a coupon
evidencing the transferred rights. If the shares to which the preemptive rights
relate are held in a clearing system, the rights may be transferred in
accordance with the rules of that clearing system. Statutory preemptive rights may be excluded by a resolution of the
shareholders meeting when deciding on a capital increase only or the
shareholders may authorize the Management Board, with the consent of the
Supervisory Board, to exclude these rights when issuing new shares out of
authorized capital. If the shareholders authorize the Management Board to
effect capital increases by means of authorized capital with exclusion of
preemptive rights, the shareholders cannot later prevent such exclusion in the
context of any individual use of authorized capital. If preemptive rights are
to be excluded, the Management Board is required to report the reason for the
exclusion of preemptive rights to the shareholders. Stock options are
considered an adequate reason for the exclusion of the shareholders preemptive
rights according to the Stock Corporation Act. The exclusion of the
shareholders preemptive rights requires a majority of at least 75% of the
votes represented at the shareholders meeting. The intention to exclude the
preemptive rights has to be notified to the shareholders together with the
invitation notice at least 14 days before the shareholders meeting. In the ordinary Shareholders meeting on June 4, 2003 our shareholders
authorized us to increase the share capital of Telekom Austria AG by up to EUR
21,810,000 by issuing up to 10 million new ordinary bearer shares or new
ordinary registered shares with no par value in order to serve stock options to
be granted to employees, directors and members of the Management Board of the
company or of an affiliated company for a period of five years and our articles
of association were modified accordingly. With regard to this capital increase
the statutory rights of existing shareholders to subscribe for additional
shares issued by the company for cash on a pro ratabasis is excluded. For
further information see Item 6  Stock option plans. 134




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Repurchase of shares Under the Stock Corporation Act, we may repurchase our own shares only for
limited circumstances, including:  
    
    prevention of substantial damage to the company;
    
    allocation of shares to employees; key employees or members of the
management or the Supervisory Boards; the repurchase must be authorized
by a resolution of the shareholders meeting; not exceeding 18 months
and must identify the price range and the number of shares to be
repurchased;
    
    compensation for minority shareholders as permitted by law; and
    
    share buy-back program for up to 10% of the share capital based on
an authorization of the management by a shareholders resolution for a
duration of up to 18 months, whereby the price range and duration must
be specified. In the ordinary Shareholders meeting on June 4, 2003, our shareholders
authorized the Management Board to acquire up to 50 million own bearer or
registered shares, i.e. up to 10% of the share capital of Telekom Austria at
the time of this resolution, during a period of 18 months from the day of this
resolution at a minimum price of EUR 9 and a maximum price of EUR 15 per share.
The Management Board received authorization to: (i) decrease without a further shareholders resolution the share capital
of the company up to EUR 109,050,000 by withdrawing up to 50 million registered
or bearer shares with no par value; and (ii) use the purchased shares to serve stock options to be granted to
employees, directors and members of the Management Board of the company or of
an affiliated company. Liquidation In the event of the liquidation of Telekom Austria, the assets remaining
after the payment of all outstanding debts will be distributed among the
shareholders. The distribution will be made in proportion to the shareholdings
of each shareholder, unless there are multiple classes of shares with different
rights to participate in the liquidation proceeds. If the capital contributions
have not been made in the same proportion for all shares, the capital
contributions will first be repaid to the shareholders and then the remainder
of the proceeds, if any, will be distributed in proportion to shareholdings. If our assets are not sufficient to repay the amount of capital paid in,
the shareholders will bear the loss in proportion to their participation in the
share capital. Outstanding payments or contributions will be collected by
Telekom Austria. Takeover rules Public offers for a part or all of the shares of Austrian companies listed
on the Vienna Stock Exchange are subject to the rules of the Austrian Takeover
Act. The law differentiates between voluntary offers and compulsory offers. A compulsory offer must be made when a shareholder or a group of
shareholders or any third person or persons acting in concert have gained a
direct or indirect controlling interest over a listed company. According to the
Takeover Act a direct or indirect controlling interest is established by:  
    
    ownership of the majority of the target companys voting rights;
    
    the right to appoint or dismiss the majority of the members of the
Management Board or Supervisory Board; or
    
    the ability to exert a controlling influence over the business of
the target company. 135




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The Takeover Commission has issued an ordinance giving additional guidance
as to other situations in which a rebuttable presumption of controlling
interest exists. According to this ordinance, the rebuttable presumption of
controlling interest means the acquisition of:  
    
    30% of the voting rights of a company; or
    
    between 20% and 30% of the voting rights of a company if this
amount would have comprised a majority of the votes present at the last
three consecutive shareholders meetings. The Takeover Commission has also issued an ordinance according to which a
bidder with a controlling interest without a majority of votes is required to
make a compulsory offer each time it acquires at least a further 2% of the
targets shares within a period of 12 months. The offer price for a compulsory offer must be at least equal to the
average stock price during the last six months and must be at least equal to
the highest share price paid by the bidder during the last 12 months less a
discount of no more than 15%. Such a discount may be excluded by the Articles
of Association. In the ordinary Shareholders meeting on June 4, 2003, our
shareholders modified our Articles of Association accordingly and excluded the
discount of a compulsory takeover bid. A compulsory offer must comprise a cash
payment for the shares, although other shares may also be offered as
consideration. However, it is in the sole discretion of the shareholder to
accept other than cash consideration. The Takeover Act requires that the bidder prepare offer documents which
must be examined by an independent expert before being filed with the Takeover
Commission and the target company. The management of the target company has to
issue a statement on the offer. Any higher bid or other competitive bids have
to follow the same rules. From the time of the publication by a bidder of its
intention to submit a public offer, a target company, may not generally
undertake measures to jeopardize the offer. The bidder must refrain from
selling any shares in the target company. The violation of any material legal
provisions may result in the suspension of voting rights and fines imposed by
the Takeover Commission. Material contracts For a summary of our agreements with our major shareholders, see Item 7.
Relationship with Major Shareholders. Exchange controls We know of no Austrian laws, decrees, regulations or other legislation
that limits the import or export of capital or the payment of dividends to
shareholders or ADS holders who do not reside in Austria. 136




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TAXATION Austrian taxation The following description of the material Austrian tax consequences of
ownership of Telekom Austrias shares or ADSs is based on current law and
practice as to matters of Austrian taxation. It does not purport to be a
complete analysis of all potential tax effects relevant to a decision to invest
in the shares or ADSs and makes no claim to fully present all of the
tax-related considerations related to the acquisition and disposition of the
shares or ADSs. Potential purchasers of shares or ADSs should consult their own
lawyers or tax advisors to receive information about the tax consequences of
the purchase, the ownership and the disposition, in a sale or as a gift, of the
shares or ADSs and regarding the procedures required for a potential refund of
Austrian withholding tax. Only the investors own advisors are in a position to
appropriately consider the particular tax situation of that person. All individuals resident in Austria are subject to Austrian income tax on
their worldwide income (unlimited tax liability). Non-residents are taxed on
income from certain sources in Austria only (limited tax liability). Corporations resident in Austria (domestic corporations) are subject to
corporate income tax on their worldwide income whether or not remitted to
Austria. Non-resident corporations (foreign corporations) engaged in a trade or
business in Austria are taxed on certain Austrian source investment and other
passive income and on income that is effectively connected with the conduct of
a trade or business in Austria. Non-resident corporations not engaged in an
Austrian trade or business are taxed only on certain Austrian source investment
and other passive income. For Austrian tax purposes and for purposes of the Austria-United States
treaty, holders of ADRs evidencing ADSs will be treated as owners of the shares
represented by those ADSs. Corporate income tax Austrian stock corporations are subject to a corporate income tax rate of
34% of their taxable income. The corporate income tax amounts to a minimum of
5% of a quarter of the minimum share capital of an Austrian stock corporation
for each quarter of the fiscal year. This amounts to  3,500 annually for
Telekom Austria, irrespectively whether any taxable earnings are generated. Any
portion of this minimum tax exceeding the actual corporate income tax payable
can be carried forward indefinitely and can be offset against corporate income
tax becoming due in later periods. Taxation of dividends Residents of Austria Dividends distributed by an Austrian stock corporation to its shareholders
are subject to withholding tax (Kapitalertragsteuer) to be withheld by the
company at a rate of 25% of the paid-out dividends. The company or the bank
paying the dividend on behalf of the company must give each shareholder a
receipt indicating the amounts of the dividend income and of the withholding
tax, the payment date and the period for which the dividends have been paid and
information about which tax office the withholding tax amount was transferred
to. For natural persons subject to unlimited tax liability in Austria, the
withholding tax is in principle treated as a final payment of income tax. If
the natural persons income tax to be levied on dividends according to the
income tax schedule is lower than the withholding tax, it will be deducted
against the income tax liability and any excess amount will be refunded to the
shareholder. In such cases, reduced rates of income tax amounting to one half
of the average income tax rate apply. For corporations subject to unlimited tax liability in Austria, dividend
income is tax exempt and any withholding tax withheld will be set off against
corporate income tax under the Austrian Corporate Income Tax Act. If the
corporate income tax payable is lower than the sum of all amounts to be set
off, the difference is to be credited to the corporation. Withholding tax does
not have to be withheld if a corporation subject to unlimited tax liability in
Austria directly owns at least 25% of the share capital of the corporation
paying out the dividend. 137




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Non-residents of Austria The standard rate of dividend withholding tax under Austrian law amounts
to 25% of the distributed dividend. Austria currently has double taxation treaties with more than 50 countries
including the United Kingdom, the United States, France, Germany, Japan, The
Netherlands and Switzerland. These treaties basically follow the scheme of the
model convention of the Organization of Economic Co-operation and Development
(OECD). As a general rule, the withholding tax in many of these treaties is
reduced to 15%. Most Austrian treaties provide for a tax credit system with
regard to the double taxation of dividends so that Austrian tax payable in
accordance with the relevant treaty will be treated as a credit against tax
payable on the dividend in the country of residence of the recipient. Relief at source may be available if the Austrian ministry of finance has
not issued any special decree prohibiting its application under the relevant
tax treaty. If available, the shareholder will have to provide a certificate of
residence to prove that he is a resident in the state with which the applicable
tax treaty was concluded. Special decrees have been issued with respect to some
tax treaties concluded by Austria, under which the full amount of withholding
tax must initially be deducted. The shareholder is then entitled, under Section
240 of the Federal Administrative Code, to claim a refund of the tax withheld
in excess of the rate provided for in the applicable tax treaty. Special tax rules for U.S. shareholders For purposes of the following discussion, the U.S. treaty refers to the
current income tax treaty between Austria and the United States. A U.S.
investor described below under United States federal income taxation will be
an eligible U.S. shareholder or ADS holder if the U.S. investor:  
    
    is a resident of the United States, for purposes of the U.S.
treaty;
    
    does not hold the ordinary shares or ADSs in connection with the
conduct of business through a permanent establishment, or the
performance of services through a fixed base in Austria; and
    
    is otherwise eligible for benefits under the U.S. treaty with
respect to income and gain from the ordinary shares or ADSs. Dividends paid by an Austrian corporation to a U.S. investor are subject
to Austrian dividend withholding tax (Kapitalertragsteuer) to be withheld by
us. The standard dividend withholding tax under Austrian law amounts to 25% of
the amount of the dividend. If you are an eligible U.S. shareholder or ADS
holder and are the beneficial owner of the dividends received, the U.S. treaty
limits the rate of Austrian tax to 15% of the gross amount of the dividends.
The U.S. treaty limits the rate of Austrian income tax further to 5% of the
gross amount of the dividends if the beneficial owner is a company (not a
partnership) that directly owns at least 10% of our voting stock. Withholding tax relief at the source is not available under the U.S.
treaty. In order to obtain a reduced tax rate of withholding taxes under the
U.S. treaty, a U.S. shareholder or ADS holder will generally have to file an
application with the Austrian tax authority requesting the reduced tax rate of
withholding taxes together with a certification by the U.S. tax authority that
the shareholder or ADS holder is a U.S. resident under the treaty. The Austrian
Federal Ministry of Finance has established a simplified system for the refund
of Austrian withholding taxes under the regime of double taxation treaties
(including the U.S. treaty) according to which a new tax form is to be used for
applications requesting the reduced tax rate. This form is available in a
German and English language download-version from the website of the Federal
Ministry of Finance (www.bmf.gv.at). Taxation of capital gains Residents of Austria Capital gains from the sale of shares or ADSs by resident individuals are
taxable as income if:  
    
    a shareholder sells shares or ADSs within 12 months of purchase
(deemed speculative by tax legislation); 138




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
    
    in the absence of speculative transactions, a shareholder held a
substantial shareholding of at least 1% of the share capital at any
time during a five year period prior to the sale of the shares or ADSs.
    
    the shares or ADSs are part of a domestic business property. For natural persons speculative gains are subject to taxation as income at
regular rates if such gains exceed EUR 440 in one year. All other taxable
capital gains mentioned above that are achieved by natural persons are subject
to reduced rates of income tax amounting to one-half of the average income tax
rate. All capital gains generated from shares or ADSs that are
business-connected property are generally subject to taxation as income at
regular rates. Reduced rates of income tax amounting to one half of the average
income tax rate are applicable only when the shares are sold after a 12-month
period from purchase has elapsed. Corporations subject to unlimited tax liability in Austria are subject to
corporate income tax on any capital gains realized from any sale of shares or
ADSs. If an Austrian resident shareholder changes his permanent residence to a
foreign country, Austria loses its right of taxation according to treaty rules
although domestic legislation in principle provides for Austrias right of
taxation if the shareholder owned at least 1% of the share capital at any time
during a five year period prior to the sale of the shares. A change of
residence of this type is therefore considered a sale under Austrian income tax
law, and shareholders risk incurring taxable income in case of the change of
residence. Non-residents of Austria Under current Austrian law, any capital gains resulting from the disposal
of shares or ADSs by a non-resident shareholder are not subject to taxation in
Austria. If, however, within the last five years prior to the disposal, a
non-resident shareholders shareholding has at any time equaled or exceeded 1%
of the companys issued share capital, the non-resident will be subject to tax
on those capital gains unless an applicable double taxation treaty provides
relief. Dividends paid in the assessment period of the year of disposal which
were subject to withholding tax are not taxable as capital gains. Under the
U.S. treaty, gains from the disposal of shares or ADSs by an eligible U.S.
shareholder are explicitly exempt from tax in Austria. Taxation of other income Residents of Austria Discounts on the issue price of the shares or ADSs are generally not
treated as capital income. If, however, the discount is granted in exchange for
consideration from the shareholder, such as renouncement of certain uses or
rights, according to a recently published opinion issued by the ministry of
finance such discount will be taxable as other income at the standard tax rate
unless the income does not exceed EUR 220 per year. Loyalty bonuses granted
to the shareholder for not selling the shares for a certain period of time are
also not generally treated as capital income subject to withholding tax.
However, these bonuses are also treated as other income and subject to tax at
the standard tax rate unless the income does not exceed EUR 220. Please consult
your tax advisor regarding the application of these rules. Non-residents of Austria The above mentioned tax consequences of discounts on the issue price are
not applicable. Inheritance and gift tax Residents of Austria Inheritance and gift tax is levied on inheritances, gifts and special
purpose donations, as defined in the Inheritance and Gift Tax Act. The rate of
gift tax varies from 2% to 60% depending upon the value of the donated shares
and upon the relationship of the beneficiary to the deceased or the donor. The
tax is imposed on total market value transferred. Various tax exemptions apply
for family members and relatives. Beginning with the year 2001, no tax is
levied upon inherited shares if the testators shareholding was below 1% of the
companys issued share capital. 139




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Non-residents of Austria Shares or ADSs held by non-resident shareholders are not subject to
Austrian inheritance and gift tax on a transfer to another non-resident of
Austria by reason of death or donation. Non-resident shareholders include
Austrian citizens who have not resided in Austria for at least two years. In
all other cases, the transfer of shares or ADSs due to death or as a gift by
shareholders is subject to inheritance and gift tax. Special rules may apply under any applicable double taxation treaty. If no
such treaty applies, foreign inheritance and gift taxes can be credited against
the Austrian inheritance and gift tax by the Austrian ministry of finance if
reciprocal treatment is available. Reciprocity exists if the foreign country
does not levy inheritance or gift tax on assets located in Austria or if the
foreign country allows Austrian inheritance and gift tax as a credit against
its own inheritance and gift tax. Applications for such credit must be filed
with the Austrian ministry of finance. Under the current Estate and Gift Tax Treaty between Austria and the
United States, transfers of shares or ADSs by eligible U.S. shareholders are
not subject to Austrian tax. For more detailed information, reference is made to the double taxation
treaty, if any, concluded with the non-resident shareholders country of
residence. (folgender gelb markierter Textteil muss von DPW überarbeitet werden) United States federal income taxation Overview The following discussion describes the material U.S. federal income tax
consequences of the acquisition, ownership and sale of Telekom Austrias
shares, including shares represented by ADSs evidenced by ADRs that are
generally applicable to the U.S. holders described below. For these purposes,
you are considered a U.S. holder if you are a beneficial owner of the shares or
ADS and one of the following:  
    
    a citizen or resident of the United States for U.S. federal income
tax purposes;
    
    a corporation, or other entity taxable as a corporation, organized
under the laws of the United States or of any political subdivision of
the United States; or
    
    an estate or trust the income of which is includible in gross
income for U.S. federal income tax purposes regardless of its source. This discussion only applies to shares or ADSs held by a U.S. holder as
capital assets. This discussion is based on the tax laws of the United States currently in
effect, including the Internal Revenue Code of 1986, as amended, Treasury
Regulations, administrative announcements, and judicial decisions, as well as
the U.S. treaty. These laws may change, possibly with retroactive effect. This
discussion does not address U.S. state, local or non-U.S. tax consequences.
This discussion is based in part upon representations of the Depositary and
assumes that each obligation provided for in, or otherwise contemplated by, the
Deposit Agreement and any related agreement will be performed in accordance
with its respective terms. The U.S. Treasury has expressed concerns that
parties to whom ADRs are pre-released may be taking actions that are
inconsistent with the claiming, by U.S. holders of ADRs, of foreign tax credits
for United States federal income tax purposes. Accordingly, the analysis of the
creditability of Austrian taxes described below could be affected by future
actions that may be taken by the U.S. Treasury. Please note that this discussion does not discuss all of the tax
consequences that may be relevant in light of your particular circumstances. In
particular, it does not address purchasers subject to special rules, including:  
    
    persons subject to the alternative minimum tax;
    
    insurance companies;
    
    tax-exempt entities;
    
    dealers in securities; 140




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
    
    financial institutions;
    
    persons who own the shares or ADSs as part of an integrated
investment, including a straddle, hedging or conversion transaction,
comprised of the share or ADSs and one or more other positions for tax
purposes;
    
    persons whose functional currency is not the U.S. dollar; or
    
    persons who actually or constructively own 10% or more of our voting stock. U.S. holders should consult their tax advisers with regard to the
application of U.S. federal income tax laws to the shares or ADSs, whether they
are eligible for benefits under the U.S. treaty and any tax consequences
arising under the laws of any state, local or non-U.S. taxing jurisdictions.
For U.S. federal income tax purposes, holders of ADRs evidencing ADSs will be
treated as owners of the shares represented by those ADSs and the discussion of
U.S. federal income tax consequences to holders of ADSs applies as well to
holders of shares. Taxation of dividends Distributions (other than certain pro rata distributions of shares or
rights to acquire shares or ADSs) received on the shares or ADSs, including the
amount of any Austrian tax withheld, will generally constitute foreign source
dividend income for U.S. federal income tax purposes to the extent such
distributions are made from our current or accumulated earnings and profits, as
determined in accordance with U.S. federal income tax principles. U.S. holders
will not be entitled to claim a dividends received deduction for dividends paid
on the shares or ADSs. The amount of any cash distribution paid in Euro,
including the amount of any Austrian tax withheld, will be equal to the U.S.
Dollar value of such Euro on the date the dividend distribution is received by
the U.S. holder regardless of whether the payment is in fact converted into
U.S. Dollars. Gain or loss, if any, recognized on the sale or other disposition
of such Euro will be U.S. source ordinary income or loss. Subject to applicable
limitations that may vary depending upon a holders individual circumstances,
dividends paid to noncorporate U.S. holders in taxable years beginning before
January 1, 2009 will be taxable at a maximum tax rate of 15%. Noncorporate U.S.
holders should consult their own tax advisers to determine whether they are
subject to any special rules that limit their ability to be taxed at this
favorable rate. Subject to certain limitations and restrictions, Austrian taxes withheld
from distributions will be eligible for credit against a U.S. holders U.S.
federal income tax liability. To the extent a refund of the tax withheld is
available to you under Austrian law or under the U.S. treaty, the amount of tax
withheld that is refundable will not be eligible for credit against your United
States federal income tax liability. Furthermore, you will not be allowed a
foreign tax credit for foreign taxes withheld on distributions if you:  
    
    have held the shares or ADSs in a capacity in which you are not
protected from risk of loss for less than a specified minimum period;
    
    are under an obligation to make related payments with respect to
positions in substantially similar or related property; or
    
    hold the shares or ADSs in arrangements in which your expected
economic profit, after non-United States taxes, is not substantial. The limitation on foreign taxes eligible for credit is calculated
separately with respect to specific classes of income. For this purpose,
dividends we distribute with respect to the shares or ADSs will generally
constitute passive income or, in the case of certain U.S. holders, financial
services income. Prospective purchasers should consult their tax advisers
concerning the foreign tax credit implications of the payment of these
withholding taxes. Taxation of capital gains You will recognize a capital gain or loss for U.S. federal income tax
purposes on the sale or exchange of shares or ADSs in the same manner as you
would on the sale or exchange of any other shares held as capital assets. As a
result, you will generally recognize a capital gain or loss for U.S. federal
income tax purposes equal to the difference between the amount realized and
your adjusted basis in the shares or ADSs. The gain or loss 141




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will generally be U.S. source income or loss. You should consult your own
tax adviser about the treatment of capital gains, which may be taxed at lower
rates than ordinary income for non-corporate taxpayers, and capital losses, the
deductibility of which may be limited. Information reporting and backup withholding Payment of dividends and sales proceeds that are made within the United
States or through certain U.S.-related financial intermediaries generally are
subject to information reporting and to backup withholding unless (i) the
holder is a corporation or other exempt recipient or (ii) the holder provides a
correct taxpayer identification number and certifies that no loss of exemption
from backup withholding has occurred. The amount of any backup withholding from a payment to a holder will be
allowed as a credit against your United States federal income tax liability and
may entitle the holder to a refund, provided that the required information is
furnished to the Internal Revenue Service. 142




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DOCUMENTS ON DISPLAY We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, or the Exchange Act, and file periodic
reports and other information with SEC. We filed a registration statement on
Form F-1 under the Securities and Exchange Act which includes documents
described in this Annual Report. We have filed and will continue to file our
annual reports on Form 20-F and have furnished our interim reports and other
material information on Form 6-K. A copy of our United States public filings, including the exhibits and
schedules thereto, may be read and copied at the SECs Public Reference Room at
450 Fifth Street, N.W., Washington, D.C. 20549, United States. Information on
the operation of the Public Reference Room may be obtained by calling the SEC
at 1-800-SEC-0330. Our previous filings are also available for reading and
copying at our offices and the offices of the New York Stock Exchange at 20
Broad Street, New York, New York 10005, United States. In November 2002, we
started to be an electronic filer. The SEC maintains an Internet site
(www.sec.gov) that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC. The
annual reports of Telekom Austria may be obtained, and are available for
inspection, during regular business hours at Telekom Austrias registered
office, Lassallestraße 9, A-1020 Vienna, Austria. We also maintain an internet
site at www.telekom.at. Our website and the information contained therein or
connected thereto shall not be deemed to be part of this document. Our shares have been admitted to listing with the Vienna Stock Exchange
(Austria). As a result of the Vienna Stock Exchange listing of our ordinary
shares, we are subject to the informational reporting requirements of the
Austrian Exchange Act of 1989, as amended. In accordance with this law, we are
required to file three quarterly reports, our annual business reports, our
approved financial statements, notice of our shareholders meeting and of
dividend distributions, issuance of new shares and exercise of subscription or
conversion rights, modification of shareholders rights, substantial
modifications in stake holdings formerly published if known to the corporation,
the Austrian paying agent, buy-back programs relating to the listed shares and
any new facts likely to have a significant influence on the share price. Most
of these filing requirements comprise an additional communication to the
Austrian Financial Market Authority. All the information mentioned above is
publicly available and may be inspected and copies thereof may be obtained at
the Vienna Stock Exchange, Wallnerstraße 8, A-1014 Vienna, Austria. Information
relating to quarterly reports, annual reports, shareholders meetings and
notices of new price sensitive facts can also be found on the Vienna Stock
Exchanges website www.wienerboerse.at under the icons Investor center,
Investor relations and Corporate calendar. 143




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Item 11. Quantitative and Qualitative Disclosures about Market Risk We are exposed to market risks, including interest rate and foreign
currency exchange rate risk associated with underlying assets, liabilities and
anticipated transactions. We selectively enter into derivative financial
instruments to manage the related risk exposures pursuant to our policies in
areas such as counterparty exposure and hedging practices. These policies have
been approved by our senior management. We do not hold or issue derivative
financial instruments for trading or speculative purposes. We invest excess liquidity in instruments with counterparties approved by
our Debt Management Committee which in the case of all long-term instruments
and derivatives are counterparties with a rating of A or higher from
Standard & Poors Ratings Group or an equivalent rating from another globally
recognized rating agency. The following discussion and tables, which constitute forward-looking
statements that involve risk and uncertainties, summarize our market-sensitive
financial instruments including their fair value, maturity and contract terms.
These tables address market risk only and do not present other risks which we
face in the normal course of business, including country risk, credit risk and
legal risk. Interest rate risk We regard changing interest rates as our major market risk exposure. A
high proportion of our long-term debt has fixed rates of interest, mitigating
our exposure to fluctuating interest rates. However, the fair value of our
fixed rate debt increases when market rates are below the rates fixed on these
loans. We achieve fixed rates on our borrowings either directly through the use
of fixed rate debt or indirectly through the use of interest rate swaps. Under
interest rate swaps, we agree with other parties to exchange, at specified
intervals, the difference between fixed-rate and floating-rate amounts
calculated by reference to an agreed notional principal amount. The following tables summarize the nominal and fair values, maturity and
contract terms of our interest rate sensitive financial instruments at December
31, 2003 for Telekom Austria on a consolidated basis. In the tables that
follow, average pay rate represents the weighted average interest rate
applicable as at December 31, 2003. This interest rate is applied to the
notional principal amount under the relevant interest rate swap contract to
determine the amount of interest that we must pay. Average receive rate
represents the weighted average interest rate applicable at December 31, 2003.
Again, this interest rate is applied to the notional principal amount under the
relevant interest rate swap contract to determine the amount of interest that
we receive. The notional principal amounts under the relevant contracts are the
amounts used notionally to calculate the amount of interest to be paid or
received as appropriate and are not actually received by either party and are
not, therefore, repayable under the terms of the contract. Amounts subject to interest rate risk at December 31, 2003Maturities, year ended December 31,2009 and
    
    
    
    
    
    Fair2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    thereafter
    
    Total
    
    Value(in EUR thousands, except percentages)ASSETS:Cash at bank and in hand:Fixed rate
    
    
    201,926
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    201,926
    
    
    
    201,926Average interest rate (%)(1)
    
    
    2.14
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.14
    %Short-term investments:Fixed rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Average interest rate (%)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-current investments:Securities available for sale
    
    
    19,344
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,344
    
    
    
    19,344
   (1)
    
    Weighted average of the year end interest rates applicable to the
outstanding amounts. 144




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Liabilities and related derivative instruments subject to interest rate risk at December 31, 2003Maturities, year ended December 31,2009 and
    
    
    
    
    
    Fair2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    thereafter
    
    Total
    
    Value(in EUR thousands, except percentages)LIABILITIES:Bank OverdraftsFixed Rate
    
    
    4,962
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,962
    
    
    
    4,962Interest rate (%)(1)
    
    
    3.20
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.20
    %Short-term borrowingsFixed rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Average interest rate (%)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Bonds:Fixed rate
    
    
    11,125
    
    
    
    3,270
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    745,117
    
    
    
    759,512
    
    
    
    759,769Average interest rate (%)(1)
    
    
    6.80
    %
    
    
    6.50
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.00
    %
    
    
    5.03
    %Variable rate
    
    
    
    
    
    
    145,346
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    145,346
    
    
    
    145,346Average interest rate (%)(1)
    
    
    
    
    
    
    2.25
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.25
    %Loans:Fixed rate
    
    
    312,429
    
    
    
    349,227
    
    
    
    405,823
    
    
    
    49,403
    
    
    
    226,217
    
    
    
    37,190
    
    
    
    1,380,289
    
    
    
    1,461,092Average interest rate (%)(1)
    
    
    6.26
    %
    
    
    5.80
    %
    
    
    6.07
    %
    
    
    5.82
    %
    
    
    5.60
    %
    
    
    5.60
    %
    
    
    5.95
    %Variable rate
    
    
    207,315
    
    
    
    83,250
    
    
    
    86,276
    
    
    
    122,386
    
    
    
    64,773
    
    
    
    24,010
    
    
    
    588,010
    
    
    
    588,010Average interest rate (%)(1)
    
    
    1.98
    %
    
    
    3.14
    %
    
    
    3.10
    %
    
    
    2.67
    %
    
    
    3.75
    %
    
    
    3.46
    %
    
    
    2.71
    %SWAP AGREEMENTS:Euro interest rate swap
agreements:Variable to fixed (2)
    
    
    36,336
    
    
    
    145,346
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    181,682
    
    
    
    (12,991
    )Average pay rate (%)
    
    
    5.71
    %
    
    
    6.66
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.47
    %Average receive rate (%)(3)
    
    
    2.25
    %
    
    
    2.25
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.25
    %Fixed to variable (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,000
    
    
    
    300.000
    
    
    
    (4,883
    )Average pay rate (%)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.96
    %
    
    
    2.96
    %Average receive rate (%)(3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.00
    %
    
    
    5.00
    %Japanese Yen interest rate
swap agreements:Variable to fixed (2)
    
    
    74,047
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74,047
    
    
    
    (1,708
    )Average pay rate (%)
    
    
    3.15
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.15
    %Average receive rate (%)(3)
    
    
    0.01
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.01
    %Foreign currency swap
agreements:Buy Euro
    
    
    
    
    
    
    176,635
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    176,635
    
    
    
    14,213Average fixed interest rate (%)
    
    
    
    
    
    
    7.65
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7.65
    %Sell Swiss Franc
    
    
    
    
    
    
    192,567
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    192,567Average fixed interest rate (%)
    
    
    
    
    
    
    5.47
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.47
    %Buy Euro
    
    
    73,554
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    73,554
    
    
    
    (1,147
    )Average fixed interest rate (%)
    
    
    6.41
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.41
    %Sell Japanese Yen
    
    
    74,047
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74.047Average fixed interest rate (%)
    
    
    3.15
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.15
    %Foreign currency forward
contract
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Notional amount in EUR
    
    
    2,862
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,862
    
    
    
    (180
    )Notional amount in USD
    
    
    3,350
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,350
   (1)
    
    Weighted average of the year end interest rates applicable to the
outstanding amounts.(2)
    
    Represents notional amounts.(3)
    
    Weighted average of the year-end interest rates 145




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##### Table of Contents



Exchange rate risk The table below provides information for Telekom Austria on a consolidated
basis at December 31, 2003 relating to liabilities subject to foreign exchange
rate risk and foreign currency derivative instruments which have been entered
into in connection with principal and interest debt payments denominated in
foreign currencies. At December 31, 2003 Liabilities and related derivative instruments subject toforeign exchange rate riskMaturities, year ended December 31,2009 and
    
    
    
    
    
    Fair2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    thereafter
    
    Total
    
    Value(in EUR thousands, except percentages)LIABILITIES:Loans:Fixed rate
    
    
    
    
    
    
    192,567
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    192,567
    
    
    
    212,323Average
interest rate (%)(1)
    
    
    
    
    
    
    5.47
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.47
    %Variable rate
    
    
    74,047
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74,047
    
    
    
    74,047Average
interest rate (%)(1)
    
    
    0.01
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.01
    %Foreign currency swap
agreements:Buy Euro
    
    
    
    
    
    
    176,635
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    176,635
    
    
    
    14,213Average
fixed interest rate (%)
    
    
    
    
    
    
    7.65
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7.65
    %Sell Swiss Franc
    
    
    
    
    
    
    192,567
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    192,567Average
fixed interest rate (%)
    
    
    
    
    
    
    5.47
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.47
    %Buy Euro
    
    
    73,554
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    73,554
    
    
    
    (1,147
    )Average
fixed interest rate (%)
    
    
    6.41
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.41
    %Sell Japanese Yen
    
    
    74,047
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74,047Average
fixed interest rate (%)
    
    
    3.15
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.15
    %
   (1)
    
    Weighted average of the interest rates applicable to the outstanding
amount. The fair value of loans and other debt, including bonds, finance leases
and liabilities to banks, is estimated based on the present value of fixed-rate
instruments using market rates. The carrying amount of short-term positions
approximates fair value because of their short maturity. The fair value of
securities available for sale is based on quoted market rates. The fair value
of derivative instruments generally reflects the estimated amount we would
receive or pay to terminate the contracts at the reporting date, taking into
account the current unrealized gains and losses of open contracts. The
estimated fair values of derivatives used to hedge or modify our risk will vary
substantially with future changes in interest rates or with fluctuations in
foreign exchange rates. These fair values should not be viewed in isolation,
but rather in relation to the fair values of the underlying hedged transactions
and the overall reduction in our exposure to adverse fluctuations in interest
and foreign exchange rates. 146




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##### Table of Contents



Item 12. Description of Securities Other than Equity Securities Not applicable 
 PART II 
 Item 13. Defaults, Dividend Arrearages and Delinquencies None 
 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds None 
 Item 15. Controls and Procedures The Company, under the supervision and with the participation of the
Companys management, including the Chief Executive Officer and the Chief
Financial Officer, performed an evaluation of the effectiveness of the
Companys disclosure controls and procedures. Based on this evaluation, the
Companys Chief Executive Officer and Chief Financial Officer concluded as of
the end of the period covered by this report that the Companys disclosure
controls and procedures are effective for gathering, analyzing and disclosing
the information the Company is required to disclose in the reports it files
under the Securities Exchange Act of 1934, within the time periods specified in
the SECs rules and forms. The Companys management necessarily applied its
judgment in assessing the costs and benefits of such controls and procedures,
which by their nature can provide only reasonable assurance regarding
managements control objectives. There have been no significant changes in the
companys internal controls over financial reporting during the fiscal year
2003, which have materially affected or are reasonably likely to materially
affect the Companys internal controls over financial reporting. Item 16. [Reserved] 
 Item 16A. Audit Committee Financial Expert Our Supervisory Board has determined that our audit committee currently
includes one financial expert: Harald Sommerer. On November 18, 2003, our Supervisory Board created an audit committee in
accordance with the provisions of the Sarbanes-Oxley Act also serving as
financial committee (Bilanzausschuss) under the Austrian Stock Corporation Act.
Our audit committee consists of three members of the Supervisory Board, one of
which  Mr. Harald Sommerer  is the financial expert in accordance with the
Sarbanes-Oxley Act. Mr. Rainer Wieltsch also being CFO of ÖIAG acts as chairman
of the audit committee and Mr. Michael Kolek being employee representative in
our Supervisory Board was also appointed as a member of the audit committee. Mr Sommerer, born in 1967, is qualified to serve as financial expert on
our audit committee due to his education and experience: Education:  
    
    1986-1990: Vienna University of Economics and Business
Administration, degree (Magister) in Social and Economic Sciences
    
    1990-1994: Vienna University of Economics and Business
Administration, PhD (Doktor) in Social and Economic Sciences
    
    1995-1997: J. L. Kellogg Graduate School of Management,
Northwestern University, Evanston Illinois, USA, Master of Management 147




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##### Table of Contents



Professional Experience:  
    
    1997-1998: board member (mergers & acquisitions, finance
management) since 1997: AT&S Austria Technology & Systems Engineering,
Leoben.
    
    1998-2001: board member (mergers & acquisitions, finance
management, purchasing, human resources, investor relations, internal
communication) of AT&S Austria Technology & Systems Engineering.
    
    1998-2004: chief financial officer (supply-chain management, IT,
accounting/controlling, treasury, human resources, investor relations,
M & A, legal/insurance, taxes, revision) AT&S Austria Technology &
Systems Engineering.
    
    Since April 2004: chief executive officer (supply-chain management,
human resources, investor relations) AT&S Austria Technology & Systems
Engineering. 
 Item 16B. Code of Ethics We have adopted a code of ethics for financial matters that applies to the
Chief Executive Officer, Chief Financial Officer, Chief Operation Officer
Wireline, Chief Operation Officer Wireless, principal accounting officer,
principal controller and all other persons performing similar functions. The
code of ethics is available on our corporate website at www.telekom.at. 
 Item 16C. Principal Accountant Fees and Services In January 2003, the U.S. Securities and Exchange Commission adopted rules
requiring disclosure of fees billed by a public companys accountants in each
of a companys two most recent fiscal years. Fees billed to us for professional services by our principal accountants
KPMG Alpentreuhand GmbH Wirtschaftsprüfungs- und Steuerberatungs Gesellschaft
(KPMG) for Telekom Austria and Grant Thornton Wirtschaftsprüfungs- und
Steuerberatungs-GmbH for mobilkom austria group, during the fiscal years 2002
and 2003 were as follows: For fiscal
    
    For fiscalyear ended
    
    year endedType of Fees
    
    December 31, 2003
    
    December 31, 2002( in millions)Audit Fees
    
    
    3.2
    
    
    
    3.0Audit-Related Fees
    
    
    0.3
    
    
    
    0.2Tax Fees
    
    
    0.3
    
    
    
    0.3All Other Fees
    
    
    0.0
    
    
    
    0.1Total
    
    
    3.8
    
    
    
    3.6
 In the above table, audit fees are the aggregate fees billed by KPMG and
Grant Thornton for professional services in connection with the audit of our
consolidated annual financial statements, as well as audits of our statutory
financial statements. Audit-related fees are fees billed by KPMG and Grant
Thornton for accounting advice on actual or contemplated transactions, due
diligence engagements related to acquisitions or dispositions, attestation
services not required by statute or regulation, internal control reviews and
assistance with internal control reporting requirements and other agreed-upon
procedures. Tax fees are fees for tax advice on actual or contemplated
transactions, international tax compliance and state and local tax compliance. Audit Committee pre-approval policies Our independent auditors are appointed by the Shareholders Meeting based
on a proposal from the Supervisory Board. On June 4, 2003, the Shareholders
Meeting appointed KPMG Alpen-Treuhand GmbH, Wirtschaftsprüfungs- und
Steuerberatungsgesellschaft and Grant Thornton Wirtschaftsprüfungs- und
Steuerberatungs-GmbH to serve as independent auditors for 2003. In future the
audit committee of the Supervisory Board will propose its recommendation on the
selection of independent auditors to the Supervisory Board. Subsequent to the
auditors appointment, the audit committee awards the contract and in its sole
authority 148




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##### Table of Contents



approves the scope and terms of the audit and all audit engagement fees as
well as monitors the auditors independence. In order to ensure the integrity of independent audits, our audit
committee established a policy to approve all audit and permissible non-audit
services provided by our independent auditors prior to the auditors engagement.
As a part of this approval process, the audit committee adopted pre-approval
policies and procedures pursuant to which the audit committee pre-approves
certain types of services to be performed by our independent auditors in the
Audit Committee Meeting on December 15, 2003. Under the policies, the audit
committee is required to pre-approve the audit and non-audit services performed
by the independent auditors in order to ensure that the provision of such
services does not impair the auditors independence. Unless a type of service
to be provided by the independent auditors has received general pre-approval,
it will require specific pre-approval by the audit committee. Any proposed
services exceeding pre-approved cost levels will require specific pre-approval
by the audit committee. Pre-approved non-audit services will require specific
pre-approval if the annual aggregate amount of fees earned by the auditors for
those services exceeds 35% of the annual fees paid to the auditors for audit
services. In December 2003, the audit committee retroactively approved the
performance by KPMG and Grant Thornton of the following categories of audit and
permitted non-audit services for the fiscal year 2003 and simultaneously
pre-approved these services for 2004: Audit services  
    
    Audits for subsidiaries and services associated with SEC registration statements
    
    Statutory audits of our financial statements Audit-related Services  
    
    Accounting advice relating to actual transactions or events
    
    Internal control reviews and assistance with internal reporting requirements
    
    Due diligence relating to contemplated acquisitions and dispositions
    
    Accounting advice relating to contemplated transactions or events
    
    Attestation services not required by statute or regulation (in 2003
EMTN Program including insurance premium) Tax services  
    
    Tax planning and advice
    
    State and local tax compliance
    
    International tax planning and advice
    
    International tax compliance
    
    Review of state, local and international income and other tax returns Other Services No other services were pre-approved by the Audit Committee 149




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##### Table of Contents



Item 16D. Exemptions from the Listing Standards for Audit Committees Not applicable 
 Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers Not applicable 
 PART III 
 Item 17. Financial Statements Not applicable 
 Item 18. Financial Statements See pages F-1 through F-51, which are included in the appendix. 
 Item 19. Exhibits Documents filed as exhibits to this Report:  1.1
    
    The Articles of Association of Telekom Austria AG.1.2
    
    The By-laws of Telekom Austria AG incorporated by reference to
Exhibit 3.2 of the Registration Statement filed on Form F-1 on October
31, 2000.8.1
    
    Subsidiaries as of the date of this filing (Structure of Telekom
Austria Group).12.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.12.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.13.1
    
    Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. 150




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##### Table of Contents



SIGNATURES The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf. TELEKOM AUSTRIA AGBy
    /s/ Heinz SundtName:
    Heinz SundtTitle:
    Chief Executive Officer By
    /s/ Stefano ColomboName:
    Stefano ColomboTitle:
    Chief Financial Officer Dated: April 16, 2004 151




---



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 
 PageTelekom Austria AktiengesellschaftConsolidated Financial StatementsIndependent auditors reports
    
    
    F-2Consolidated balance sheets as of December 31, 2003 and 2002
    
    
    F-5Consolidated statements of operations for the years ended December 31, 2003, 2002 and 2001
    
    
    F-6Consolidated statements of cash flows for the years ended December 31, 2003, 2002 and 2001
    
    
    F-7Consolidated statements of changes in stockholders equity for the years ended
December 31, 2003, 2002 and 2001
    
    
    F-8Notes to consolidated financial statements
    
    
    F-9
 F-1




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##### Table of Contents



Independent Auditors Report The Supervisory Board and Stockholders
Telekom Austria Aktiengesellschaft: We have audited the accompanying consolidated balance sheets of Telekom Austria
Aktiengesellschaft and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of income, stockholders equity and
comprehensive income, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the financial
statements of mobilkom austria AG & Co KG and mobilkom austria AG and
subsidiaries (collectively mobilkom), wholly-owned consolidated subsidiaries
(74.999% owned unconsolidated subsidiaries from January 1, 2002 to June 28,
2002) whose total assets as of December 31, 2003 and 2002 constitute 35.6
percent and 32.2 percent of total consolidated assets and whose revenues for
the year ended December 31, 2003 and for the period June 28, 2002 to December
31, 2002, respectively, constitute 48.9 percent and 30.7 percent of total
consolidated revenues. Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for mobilkom, is based solely on the report of the other
auditors. We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Telekom Austria Aktiengesellschaft
and subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America. As discussed in note 1 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 143
Accounting for Asset Retirement Obligations effective January 1, 2003 and
Statements of Financial Accounting Standards No. 141 Business Combinations
and No. 142 Goodwill and Other Intangible Assets effective January 1, 2002. KPMG Alpen-Treuhand GmbH
Wirtschaftsprüfungs-und Steuerberatungsgesellschaft(KPMG)
 Vienna, Austria
March 10, 2004 F-2




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##### Table of Contents



Independent Auditors Report The Supervisory Board and Stockholders
mobilkom austria AG & Co KG and
mobilkom austria AG: We have audited the consolidated balance sheets of mobilkom austria AG & Co KG
and mobilkom austria AG and subsidiaries (collectively mobilkom),
wholly-owned consolidated subsidiaries of Telekom Austria Aktiengesellschaft
(74.999% owned unconsolidated subsidiaries from January 1, 2002 to June 28,
2002), as of December 31, 2003 and 2002, and the related consolidated
statements of income, stockholders equity and comprehensive income, and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of mobilkom as of
December 31, 2003 and 2002, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America. As discussed in note 1 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 143
Accounting for Asset Retirement Obligations effective January 1, 2003 and
Statements of Financial Accounting Standards No. 141 Business Combinations
and No. 142 Goodwill and Other Intangible Assets effective January 1, 2002. Grant Thornton
Wirtschaftsprüfungs-und Steuerberatungs-GmbH-s- GRANT THORNTON Vienna, Austria
February 12, 2004 F-3




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##### Table of Contents



Independent Auditors Report The Supervisory Board and Stockholders
Telekom Austria Aktiengesellschaft: We have audited the accompanying consolidated balance sheet of Telekom Austria
Aktiengesellschaft and subsidiaries as of December 31, 2001, and the related
consolidated statement of income, stockholders equity and comprehensive
income, and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Telekom Austria as
of December 31, 2001, and the results of its operations and its cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States of America. Grant Thornton  Jonasch & Platzer
Wirtschaftsprüfungs-und Steuerberatungs-OHG-s- G. Thornton - Jonasch & Platzer
    
    KPMG Austria GmbH
Wirtschaftsprüfungs-und Steuerberatungsgesellchaft(KPMG)
 Vienna, Austria
March 20, 2002 F-4




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##### Table of Contents



TELEKOM AUSTRIA AG
CONSOLIDATED BALANCE SHEETS
(in EUR 000s, except share information) December 31,
    
    December 31,Notes No
    
    2003
    
    2002ASSETSCurrent assetsCash and cash equivalents
    
    
    
    
    
    
    201,926
    
    
    
    27,337Short-term investments
    
    
    
    
    
    
    6,867
    
    
    
    5,327Accounts
receivable  trade, net of allowances of EUR 92,238 and EUR 74,945 as of December 31, 2003 and December 31, 2002
    
    
    (5
    )
    
    
    559,872
    
    
    
    451,934Receivables due from related parties
    
    
    (6
    )
    
    
    1,549
    
    
    
    6,723Inventories
    
    
    (7
    )
    
    
    83,535
    
    
    
    91,261Deferred tax assets
    
    
    (18
    )
    
    
    45,633
    
    
    
    4,657Prepaid expenses
    
    
    
    
    
    
    91,177
    
    
    
    81,935Taxes receivable
    
    
    
    
    
    
    9,739
    
    
    
    22,829Assets held for sale
    
    
    
    
    
    
    5,560
    
    
    
    30,512Other current assets
    
    
    
    
    
    
    118,963
    
    
    
    142,743TOTAL CURRENT ASSETS
    
    
    
    
    
    
    1,124,821
    
    
    
    865,258Property, plant and equipment, net
    
    
    (9
    )
    
    
    4,457,666
    
    
    
    5,000,659Goodwill
    
    
    (8
    )
    
    
    597,577
    
    
    
    590,727Other intangible assets, net
    
    
    (8
    )
    
    
    711,988
    
    
    
    725,893Investments in affiliates
    
    
    (3
    )
    
    
    3,555
    
    
    
    8,642Other investments
    
    
    
    
    
    
    143,630
    
    
    
    162,682Deferred tax assets
    
    
    (18
    )
    
    
    94,349
    
    
    
    193,414Other assets
    
    
    
    
    
    
    762,679
    
    
    
    987,063TOTAL ASSETS
    
    
    
    
    
    
    7,896,265
    
    
    
    8,534,338LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesShort-term borrowings
    
    
    (10
    )
    
    
    631,321
    
    
    
    1,309,905Accounts payable  trade
    
    
    
    
    
    
    589,368
    
    
    
    649,890Accrued liabilities
    
    
    (11
    )
    
    
    231,778
    
    
    
    256,790Payables to related parties
    
    
    
    
    
    
    23,657
    
    
    
    37,198Deferred income
    
    
    (12
    )
    
    
    150,378
    
    
    
    129,963Income taxes payable
    
    
    
    
    
    
    7,650
    
    
    
    6,077Other current liabilities
    
    
    
    
    
    
    155,563
    
    
    
    141,210TOTAL CURRENT LIABILITIES
    
    
    
    
    
    
    1,789,715
    
    
    
    2,531,033Long-term debt, net of current portion
    
    
    (14
    )
    
    
    2,342,288
    
    
    
    2,079,885Lease obligations, net of current portion
    
    
    (15
    )
    
    
    861,300
    
    
    
    1,076,354Employee benefit obligations
    
    
    (16
    )
    
    
    155,960
    
    
    
    232,529Other liabilities and deferred income
    
    
    
    
    
    
    107,629
    
    
    
    104,997Stockholders equityCommon stock, issued and outstanding shares 500,000,000
with zero par value
    
    
    
    
    
    
    1,090,500
    
    
    
    1,090,500Additional paid in capital
    
    
    
    
    
    
    453,371
    
    
    
    452,498Retained earnings
    
    
    
    
    
    
    1,103,867
    
    
    
    969,626Accumulated other comprehensive loss
    
    
    
    
    
    
    (8,365
    )
    
    
    (3,084
    )TOTAL STOCKHOLDERS EQUITY
    
    
    (20
    )
    
    
    2,639,373
    
    
    
    2,509,540TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    
    
    
    
    
    7,896,265
    
    
    
    8,534,338
 see accompanying notes to consolidated
financial statements F-5




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##### Table of Contents



TELEKOM AUSTRIA AG
CONSOLIDATED STATEMENTS OF OPERATIONS
(in EUR 000s, except share information) twelve months endedDecember 31,Notes No
    
    2003
    
    2002
    
    2001Operating revenues (a)
    
    
    (21
    )
    
    
    3,969,750
    
    
    
    3,118,064
    
    
    
    2,659,660Operating expenses (b)Materials
    
    
    
    
    
    
    (297,084
    )
    
    
    (196,434
    )
    
    
    (71,908
    )Employee costs, including benefits and taxes
    
    
    
    
    
    
    (699,348
    )
    
    
    (600,718
    )
    
    
    (619,080
    )Depreciation and amortization
    
    
    
    
    
    
    (1,133,148
    )
    
    
    (1,016,312
    )
    
    
    (904,075
    )Impairment charges
    
    
    (9
    )
    
    
    (6,825
    )
    
    
    (41,871
    )
    
    
    (145,126
    )Other operating expenses
    
    
    (22
    )
    
    
    (1,463,521
    )
    
    
    (1,205,354
    )
    
    
    (1,153,930
    )OPERATING INCOME
    
    
    
    
    
    
    369,824
    
    
    
    57,375
    
    
    
    (234,459
    )Other income (expense)Interest income (c)
    
    
    
    
    
    
    75,167
    
    
    
    88,191
    
    
    
    82,683Interest expense (d)
    
    
    
    
    
    
    (230,979
    )
    
    
    (244,628
    )
    
    
    (240,986
    )Equity in earnings of affiliates
    
    
    
    
    
    
    19,112
    
    
    
    140,543
    
    
    
    195,450Other, net
    
    
    (23
    )
    
    
    (567
    )
    
    
    2,330
    
    
    
    (2,756
    )INCOME BEFORE INCOME
TAXES, MINORITY
INTERESTS AND
CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE
    
    
    
    
    
    
    232,557
    
    
    
    43,811
    
    
    
    (200,068
    )Income tax (expense) benefit
    
    
    (18
    )
    
    
    (83,036
    )
    
    
    (26,112
    )
    
    
    94,913Minority interests
    
    
    
    
    
    
    (3,422
    )
    
    
    (4,910
    )
    
    
    530INCOME BEFORE
CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE
    
    
    
    
    
    
    146,099
    
    
    
    12,789
    
    
    
    (104,625
    )Cumulative effect of change in accounting
principle, net of tax of EUR 6,071
    
    
    (13
    )
    
    
    (11,858
    )
    
    
    
    
    
    
    NET INCOME
    
    
    
    
    
    
    134,241
    
    
    
    12,789
    
    
    
    (104,625
    )Basic and fully diluted earnings per share
    
    
    
    
    
    
    0.27
    
    
    
    0.03
    
    
    
    (0.21
    )Basic and fully diluted earnings per share
excluding
cumulative effect of change in accounting principle
    
    
    
    
    
    
    0.29
    
    
    
    0.03
    
    
    
    (0.21
    )a) includes revenues from related parties of
    
    
    
    
    
    
    89,506
    
    
    
    147,990
    
    
    
    293,459b) includes operating expenses from related parties of
    
    
    
    
    
    
    128,694
    
    
    
    192,153
    
    
    
    314,769c) includes interest income from related parties of
    
    
    
    
    
    
    1
    
    
    
    4,992
    
    
    
    17,619d) includes interest expense from related parties of
    
    
    
    
    
    
    30
    
    
    
    938
    
    
    
    749
 see accompanying notes to consolidated
financial statements F-6




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##### Table of Contents



TELEKOM AUSTRIA AG
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in EUR 000s, except share information) twelve months endedDecember 31,Notes No
    
    2003
    
    2002
    
    2001Cash generated from operationsNet income
    
    
    
    
    
    
    134,241
    
    
    
    12,789
    
    
    
    (104,625
    )Adjustments to reconcile net income to cash
generated from operationsDepreciation, amortization and impairment charges
    
    
    
    
    
    
    1,139,973
    
    
    
    1,058,183
    
    
    
    1,049,201Write-offs from investments
    
    
    
    
    
    
    2,840
    
    
    
    
    
    
    
    Employee
benefit obligation  non cash
    
    
    
    
    
    
    307
    
    
    
    (49,840
    )
    
    
    3,145Allowance for doubtful accounts
    
    
    (5
    )
    
    
    30,629
    
    
    
    39,184
    
    
    
    14,818Change in deferred taxes
    
    
    
    
    
    
    59,241
    
    
    
    33,498
    
    
    
    (94,969
    )Equity in earnings of affiliates less than (in excess of) dividends received
    
    
    
    
    
    
    1,027
    
    
    
    (45,801
    )
    
    
    (80,731
    )Asset
retirement obligation  accretion expense
    
    
    
    
    
    
    1,336
    
    
    
    
    
    
    
    Cumulative effect of change in accounting principle, net of tax
    
    
    (13
    )
    
    
    11,858
    
    
    
    
    
    
    
    (Gain) Loss on sale of investments
    
    
    
    
    
    
    (17,903
    )
    
    
    195
    
    
    
    Loss on disposal / retirement of equipment
    
    
    
    
    
    
    41,571
    
    
    
    17,280
    
    
    
    38,922Other
    
    
    
    
    
    
    (660
    )
    
    
    
    
    
    
    1,270,219
    
    
    
    1,052,699
    
    
    
    930,386Changes in assets and liabilities, net of effect of business acquiredAccounts
receivable  trade
    
    
    
    
    
    
    (140,331
    )
    
    
    175,522
    
    
    
    24,401Due from related parties
    
    
    
    
    
    
    5,813
    
    
    
    3,759
    
    
    
    69,050Inventories
    
    
    
    
    
    
    5,765
    
    
    
    6,052
    
    
    
    19,030Prepaid expenses and other assets
    
    
    
    
    
    
    71,506
    
    
    
    (9,020
    )
    
    
    (56,442
    )Accounts
payable  trade
    
    
    
    
    
    
    (58,944
    )
    
    
    10,979
    
    
    
    (85,734
    )Employee benefit obligation
    
    
    
    
    
    
    (76,649
    )
    
    
    (102,565
    )
    
    
    (73,592
    )Accrued liabilities
    
    
    
    
    
    
    (23,487
    )
    
    
    3,881
    
    
    
    (54,414
    )Due to related parties
    
    
    
    
    
    
    (13,358
    )
    
    
    17,088
    
    
    
    3,830Other liabilities and deferred income
    
    
    
    
    
    
    45,100
    
    
    
    230
    
    
    
    170,490(184,585
    )
    
    
    105,926
    
    
    
    16,619Cash generated from operations
    
    
    
    
    
    
    1,219,875
    
    
    
    1,171,414
    
    
    
    842,380Cash from investing activitiesCapital expenditures, including interest capitalized
    
    
    
    
    
    
    (599,684
    )
    
    
    (560,742
    )
    
    
    (459,039
    )Acquisitions and investments, net of cash acquired
    
    
    
    
    
    
    (85,989
    )
    
    
    (665,128
    )
    
    
    (4,759
    )Sale of subsidiary, net of cash
    
    
    
    
    
    
    205
    
    
    
    
    
    
    
    Proceeds from sale of equipment
    
    
    
    
    
    
    17,300
    
    
    
    49,819
    
    
    
    12,106Purchase of
investments  short-term
    
    
    
    
    
    
    (79,750
    )
    
    
    (1,629
    )
    
    
    (2,790
    )Purchase of
investments  long-term
    
    
    
    
    
    
    (601
    )
    
    
    (1,107
    )
    
    
    Sale of American call options
    
    
    
    
    
    
    957
    
    
    
    2,609
    
    
    
    Proceeds
from sale of investments  short-term
    
    
    
    
    
    
    80,108
    
    
    
    6
    
    
    
    8Proceeds
from sale of investments  long-term
    
    
    
    
    
    
    23,599
    
    
    
    225
    
    
    
    1,285Cash used in investing activities
    
    
    
    
    
    
    (643,855
    )
    
    
    (1,175,947
    )
    
    
    (453,189
    )Cash from financing activitiesPrincipal payments on bonds
    
    
    
    
    
    
    (22,765
    )
    
    
    (72,673
    )
    
    
    (61,845
    )Proceeds from issuance of long-term debt and bonds
    
    
    
    
    
    
    775,948
    
    
    
    127,857
    
    
    
    Principal payments on long-term debt
    
    
    
    
    
    
    (385,330
    )
    
    
    (406,294
    )
    
    
    (335,159
    )Changes in short-term bank borrowings
    
    
    
    
    
    
    (774,644
    )
    
    
    237,973
    
    
    
    74,968Changes from financing with mobilkom austria
    
    
    
    
    
    
    
    
    
    
    114,921
    
    
    
    (73,166
    )Proceeds from sale of tax benefits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,547Cash (used in) generated from financing activities
    
    
    
    
    
    
    (406,791
    )
    
    
    1,784
    
    
    
    (380,655
    )Effect of exchange rate changes
    
    
    
    
    
    
    5,360
    
    
    
    3,693
    
    
    
    142Net increase in cash and cash equivalents
    
    
    
    
    
    
    174,589
    
    
    
    944
    
    
    
    8,678Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    27,337
    
    
    
    26,393
    
    
    
    17,715Cash and cash equivalents at end of period
    
    
    
    
    
    
    201,926
    
    
    
    27,337
    
    
    
    26,393
 see accompanying notes to consolidated
financial statements F-7




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##### Table of Contents



TELEKOM AUSTRIA AG
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(in EUR 000s, except share information) Common stock
    
    
    
    
    
    
    
    
    
    Accumulated otherNumber of
    
    
    
    
    
    Additional paid
    
    Retained
    
    comprehensive
    
    Total stockholdersshares
    
    Par value
    
    in capital
    
    earnings
    
    income (loss)
    
    equityBalance January 1, 2001
    
    
    500,000,000
    
    
    
    1,090,500
    
    
    
    451,677
    
    
    
    1,061,462
    
    
    
    (27
    )
    
    
    2,603,612Comprehensive incomeNet loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (104,625
    )
    
    
    
    
    
    
    (104,625
    )Net unrealized loss on securities, net of
EUR 83 deferred income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (162
    )
    
    
    (162
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,630
    
    
    
    14,630Cumulative effect of accounting change, net
of EUR 5,646 deferred income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,959
    )
    
    
    (10,959
    )Unrealized net loss of hedging activities,
net of EUR 954 deferred income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,102
    )
    
    
    (2,102
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (103,218
    )Balance December 31, 2001
    
    
    500,000,000
    
    
    
    1,090,500
    
    
    
    451,677
    
    
    
    956,837
    
    
    
    1,380
    
    
    
    2,500,394Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,789
    
    
    
    
    
    
    
    12,789Net unrealized loss on securities, net of
EUR 362 deferred income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (687
    )
    
    
    (687
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,496
    )
    
    
    (6,496
    )Unrealized net gain of hedging activities, net of
EUR (1,386) deferred income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,719
    
    
    
    2,719Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,325Sale of call options, net of
EUR (424) income tax
    
    
    
    
    
    
    
    
    
    
    821
    
    
    
    
    
    
    
    
    
    
    
    821Balance December 31, 2002
    
    
    500,000,000
    
    
    
    1,090,500
    
    
    
    452,498
    
    
    
    969,626
    
    
    
    (3,084
    )
    
    
    2,509,540Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    134,241
    
    
    
    
    
    
    
    134,241Net unrealized gains on securities, net of
EUR (1,141) deferred income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,214
    
    
    
    2,214Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,690
    )
    
    
    (10,690
    )Unrealized net gain on hedging activities,
net of EUR (1,646) deferred income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,195
    
    
    
    3,195Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    128,960Sale of call options, net of
EUR (451) income tax
    
    
    
    
    
    
    
    
    
    
    873
    
    
    
    
    
    
    
    
    
    
    
    873Balance December 31, 2003
    
    
    500,000,000
    
    
    
    1,090,500
    
    
    
    453,371
    
    
    
    1,103,867
    
    
    
    (8,365
    )
    
    
    2,639,373
 see accompanying notes to consolidated
financial statements F-8




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) (1)   THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES Description of business, organization and relationship with the Federal Republic of Austria Telekom Austria AG and subsidiaries (the Company or Telekom Austria)
is engaged as a full service telecommunications provider of long distance,
local and wireless services, corporate data communications services as well as
internet services. The Company also provides services through pay phones and
supplies telephones and technical equipment for telephone communications. These
activities are conducted and operated primarily in Austria. On May 1, 1996, Post und Telekom Austria Aktiengesellschaft (PTA) was
incorporated as the successor to Post und Telegraphenverwaltung. The
Poststrukturgesetz (Austrian Post Restructuring Act) provided the basis for the
separation of PTA from the Federal Republic of Austria. PTAs operations
included postal services, telecommunications, coach line services and other
activities. As of December 31, 1997, the postal services, coach line services and
other non-telecommunications-related operations of PTA were transferred to
different legal entities. The operations remaining related to the
telecommunications business and were named Telekom Austria AG. Telecom Italia owned 29.78% of Telekom Austria until their sale of
75,000,000 shares on November 4, 2002 in a private placement, thereby reducing
its level of ownership to 14.78% as of December 31, 2002 and 2003, respectively
(see note (27)). The Federal Republic of Austria, through Österreichische Industrie-Holding
AG (ÖIAG), continues to be a significant shareholder with its holding of
approximately 47.17% of the voting common stock of the Company. In July 2003,
ÖIAG issued convertible notes in the nominal amount of EUR 325,000 due in 2006
exchangeable into 25 million existing underlying common shares of Telekom
Austria AG. The exchange price has been set at Euro 13 for each Telekom Austria
AG share. In addition to the related party transactions described in note (6),
the Federal Republic of Austria authorizes and supervises the Rundfunk und
Telekom Regulierungs  GmbH (RTR), which regulates certain activities of the
Company. The government holds the taxing authority for the Austrian operations
of Telekom Austria and imposes taxes such as income and value added taxes on
the Company. All of the Companys interests in mobile communications business are held
through mobilkom austria AG & Co KG and mobilkom austria AG and its
subsidiaries; collectively these companies are referred to as mobilkom austria. Prior to June 28, 2002, the Company held a 74.999% interest in mobilkom
austria. Due to certain substantive participating rights held by the minority
shareholder, the Companys investment in mobilkom austria was accounted for
under the equity method. These participation rights included significant
blocking rights over operating decisions including operating budgets, capital
spending, senior management positions, strategy and dividend distributions. On June 28, 2002, the Company acquired the remaining 25.001% equity
interest in mobilkom austria, thereby bringing its total interest in mobilkom
austria to 100%. Consequently, the Company has consolidated mobilkom austria
effective June 28, 2002. The consolidated statement of operations for the year
ending December 31, 2002 reflects the Companys equity in earnings of mobilkom
austria through June 28, 2002 and mobilkom austrias results of operations for
the period June 28, 2002 until December 31, 2002. F-9




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) Basis of presentation The consolidated financial statements of Telekom Austria have been
prepared in accordance with accounting principles generally accepted in the
United States of America (U.S. GAAP). The Company has reclassified certain amounts in prior year financial
statements to conform to the current year presentation. In December 2001, the RTR enacted a regulation that revised the manner in
which phone calls that are both i) initiated and terminated within Austria and
ii) require interconnection between multiple networks, are controlled.
Historically, the Company served as a central hub through which all such calls
were interconnected based on agreements in place between the Company and
Austrian alternative service providers or mobile phone operators. Accordingly,
the Company would recognize revenue and a trade receivable on the
interconnection fee charged to the provider on whose network the call was
initiated and recognize expense and a trade payable to the provider on whose
network the call was terminated. As a result of the new regulation, the Company
is no longer a party to such transactions unless the call either originates or
terminates on its network. Had the new regulation been in place during 2001,
revenues and expenses in the accompanying consolidated statements of operations
would have been lower by EUR 257,243, all of which relates to the wireline
segment. In September 2003, the Austrian Supreme Court ruled that no contractual
relationship exists between value-added service providers (VASP) and the
Company, with the contractual relationship being established directly between
the VASP and the customers. The Company is no longer considered the primary
obligor and ceased reporting revenues on a gross basis beginning on October 1,
2003. Had the ruling been in effect for all of 2003, 2002 and 2001, revenues
and expenses in the accompanying consolidated statements of operations would
have been lower by EUR 45,886, EUR 51,206 and EUR 41,386, respectively. Had the
enacted regulation been in place during 2001 and the VASP ruling been in effect
for all of 2003, 2002 and 2001 revenues and expenses would have been adjusted
as follows: Year ended December 31,2003
    
    2003
    
    2002
    
    2002
    
    2001
    
    2001pro-forma
    
    as reported
    
    pro-forma
    
    as reported
    
    pro-forma
    
    as reportedRevenues
    
    
    3,923,864
    
    
    
    3,969,750
    
    
    
    3,066,858
    
    
    
    3,118,064
    
    
    
    2,361,031
    
    
    
    2,659,660Operating expenses
    
    
    (3,554,040
    )
    
    
    (3,599,926
    )
    
    
    (3,009,483
    )
    
    
    (3,060,689
    )
    
    
    (2,595,490
    )
    
    
    (2,894,119
    )Operating income
    
    
    369,824
    
    
    
    369,824
    
    
    
    57,375
    
    
    
    57,375
    
    
    
    (234,459
    )
    
    
    (234,459
    )
 Principles of consolidation The consolidated financial statements include the accounts of Telekom
Austria AG and all subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation. Investments in companies in which the Company has significant influence,
but less than a controlling financial interest, are accounted for using the
equity method. Under the equity method, only the Companys investments in and
net amounts due to and due from the equity investee are included in the
consolidated balance sheet. The Companys share of the investees earnings is
included in the consolidated operating results and only dividends, cash
distributions, loans or other cash received from or paid to the investee are
included in consolidated cash flows. F-10




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) Cash and cash equivalents The Company considers cash in banks and highly liquid investments with
original maturities of three months or less to be cash and cash equivalents.
Money market deposits with original maturities of more than three months are
classified as short-term investments along with marketable securities. Marketable securities Marketable debt and equity securities, other than investments accounted
for by the equity method, are classified as either available-for-sale or
held-to-maturity. Securities classified as available-for-sale are reported at
fair value at the balance sheet date and held-to-maturity securities are
reported at amortized cost. Unrealized gains and losses on available-for-sale
securities are included in accumulated other comprehensive income, net of
applicable deferred tax. Inventories Inventories consist of merchandise sold in retail shops and material and
spare parts used for the construction of networks, mainly for the Companys own
use. Inventories are valued at the lower of cost or market, cost being
determined on the basis of weighted average cost. Property, plant and equipment Property, plant and equipment are stated at cost, which includes certain
costs that are capitalized during the installation and expansion of the
telecommunications network including material, payroll, direct overhead and
interest costs as well as the present value of estimated asset retirement
obligations. Value added tax (VAT), which is charged by suppliers and
refunded by the tax authorities, is not included in cost. Plant and equipment
under capital leases are stated at the lower of present value of minimum lease
payments or fair value. Depreciation on plant and equipment is calculated using the straight-line
method and the estimated useful lives of the assets. Plant and equipment under
capital lease and leasehold improvements are amortized using the straight-line
method over the lease term or the estimated useful life of the asset, whichever
is shorter. The useful lives are: YearsTransmission equipment
    
    
    3  20Cables and wires
    
    
    10  20Communications equipment
    
    
    4  10Software
    
    
    3  8Furniture, fixtures and other
    
    
    3  8Buildings and leasehold improvements
    
    
    10  50
 Maintenance and repairs are expensed as incurred while replacements and
improvements are capitalized. The cost and accumulated depreciation of assets
sold or retired are removed from the accounts, and any resulting gain or loss
is reflected in other operating expenses. F-11




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TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) Goodwill and other intangible assets Goodwill and other intangible assets with indefinite useful lives are not
amortized, but are tested for impairment in accordance with SFAS No. 142 at
least annually, but also on an interim basis if an event or circumstance
indicates that an asset may be impaired. Other intangible assets with estimable
useful lives are amortized over their respective useful lives to their
estimated residual values and reviewed for impairment in accordance with SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Asset. The goodwill impairment test is a two-step evaluation. The first step
requires the Company to compare the fair value and carrying value of any
reporting unit to which goodwill has been allocated. If the fair value of the
reporting unit is less than its carrying value, an indication of goodwill
impairment exists and the second step of the impairment test must be performed.
In the second step, the implied fair value of goodwill, determined by
allocating the aggregate fair value of the reporting unit to all identifiable
tangible and intangible assets, is compared to its carrying amount. Any
shortfall in fair value compared to carrying value is recognized as an
impairment loss. In each reporting period, the Company is required to reevaluate its
decision that an Other intangible asset has an indefinite useful life. If a
nonamortizable intangible asset is subsequently determined to have a finite
useful life, the intangible asset is written down to the lower of its fair
value or carrying amount and amortized prospectively based on its remaining
useful life. The impairment test is a comparison of the fair value of the
intangible asset with its carrying value. Any excess of carrying value over
fair value is recognized as an impairment loss. Amortizable intangible assets are stated at cost and are amortized using
the straight-line method over their estimated useful lives, as shown below: YearsWireless and wireline licenses
    
    
    10  15Patents and proprietary rights
    
    
    4  20Subscriber base
    
    
    6Other
    
    
    10  30
 Impairment of long-lived assets and long-lived assets to be disposed of Long-lived assets and certain identifiable intangible assets are reviewed
for impairment annually at each year-end and whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to undiscounted future net cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured as the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Assets
held for sale are reported at the lower of the carrying amount or estimated
proceeds less cost to sell. Internally developed software Certain direct and indirect development costs associated with internally
developed software, including direct costs of materials and services, and
payroll costs for employees devoting time to the software projects, are
capitalized once the project has reached the application development stage. The
costs are amortized using the straight-line method over a period not exceeding
four years, beginning when the asset is substantially ready for use. Costs
incurred during the preliminary project stage, maintenance and training costs
and research and development costs are expensed as incurred. F-12




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TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) Advertising and promotional costs Generally, advertising and promotional costs are expensed as incurred and
totaled EUR 198,362, EUR 153,737 and EUR 75,368 for the years ended December
31, 2003, 2002 and 2001, respectively. Research and development costs Research and development costs are expensed as incurred and amounted to
EUR 42,759, EUR 30,338 and EUR 21,817 for the years ended December 31, 2003,
2002 and 2001, respectively and are classified in the consolidated statement of
operations according to the nature of the expense. Income taxes Income taxes are accounted for using the liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amount of
an existing asset or liability and its respective tax basis and operating
losses and tax credit carry-forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which these temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of changes in tax
rates is recognized as income or expense in the period that includes the
enactment date. Investment tax credits are recognized as a reduction of income taxes in
the period in which those credits are granted. Deferred income taxes on investments in pass-through enterprises are
provided on the excess of the financial statement carrying amount of the
investment, including the goodwill within the pass-through enterprise, over the
tax basis of the investment. Earnings per share Basic and diluted earnings (loss) per share are computed by dividing
consolidated net income (loss) by the weighted average number of common shares
outstanding for the year. As the Company will not issue new shares for the
stock option plan, but has purchased an American call option to satisfy the
obligation, diluted earnings per share equals basic earnings per share, and
there were no potentially dilutive securities for any of the periods presented. Asset retirement obligation The Company accounts for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs in
accordance with SFAS No. 143, Accounting for Asset Retirement Obligations.
The Company records the fair value of an asset retirement obligation as a
liability in the period in which the legal obligation associated with the
retirement of a tangible long-lived asset is incurred. An amount equal to the
initial obligation is recorded as an increase to the carrying amount of the
related long-lived asset and depreciated over the remaining useful life of the
asset. The liability is adjusted at the end of each period to reflect the
passage of time and changes in the estimated future cash flows underlying the
initial fair value measurement. F-13




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TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) Employee benefit obligations The Company provides retirement benefits under defined contribution and
defined benefit plans. In the case of defined contribution plans the Company pays contributions
to publicly or privately administered pension insurance plans on a mandatory or
contractual basis. Once the contributions have been paid, the Company has no
further payment obligations. The regular contributions constitute net periodic
costs for the year in which they are due. All other retirement benefit plans are unfunded defined benefit plans for
which the Company records accruals. The pension provisions are calculated using
the projected unit credit method in accordance with SFAS No. 87. The future
benefit obligations are valued using actuarial methods on the basis of an
appropriate assessment of the discount rate, rate of compensation increase and
rate of increase of pensions. Concentration of risks A portion of the Companys revenue is derived from services provided to
other companies in the telecommunications industry, mainly to alternative
telecommunications and cellular companies and internet online services. As a
result, the Company has some concentration of credit risk in its customer base.
The Company performs ongoing credit evaluations of its large customers
financial condition to support its receivables. As of the balance sheet dates,
the Company does not have any significant concentrations of business transacted
with a particular supplier or lender that could, if suddenly eliminated,
severely impact operations. The Company also does not have a concentration of
available sources of labor, services, franchises, or licenses or other rights
that could, if suddenly eliminated, severely impact operations. The Company
invests its cash with several high-quality credit institutions. Foreign currency translation Until December 31, 2001, the Company prepared its consolidated financial
statements in Austrian Schilling and then translated them into Euro using the
official fixed exchange rate of 13.7603. Since January 1, 2002 the Company has
adopted the Euro as its functional currency. Foreign currency receivables and liabilities are recognized at the
exchange rate applicable on the transaction date and retranslated periodically
at the then ruling balance sheet rate. Unrealized foreign exchange losses and
gains due to exchange rate fluctuations are recognized in the statement of
operations. The functional currency for the Companys foreign operations is the
applicable local currency. Assets and liabilities are translated using the
current exchange rate in effect at the balance sheet date. Revenues and
expenses are translated using the weighted average exchange rate during the
period. Resulting translation adjustments are recorded as other comprehensive
income or loss. Revenue recognition Wireline The Company generates revenues from fixed line services to individuals,
commercial and non-commercial organizations and other national and foreign
carriers. Fixed line services include access fees, domestic and long
distance services, including internet, fixed to mobile calls,
international traffic, voice value-added services, interconnection, call center
services and public payphone services. F-14




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TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) The Company recognizes long distance and local service revenue based upon
minutes of traffic processed or contracted fee schedules when the services are
rendered. Revenues due from other national and foreign carriers for incoming
calls from outside the companys network are recognized in the period the call
occurs. Access fees, monthly base fees and lines leased to commercial customers
are billed in advance resulting in deferred revenues. These fees are amortized
over the period the service is provided. Cash discounts and incentives are
accounted for as reductions in revenues when granted. Product and other service revenues are recognized when the products are
delivered and accepted by customers or when services are provided in accordance
with contract terms. The installation of customer lines in residences is a separate service and
the Company provides this installation service in situations where it is not
providing other services. Revenue on such installation work is recognized when
the installation work is completed. The Company has entered into a limited number of agreements with other
telecommunication operators outside of Austria whereby the Company grants some
pre-defined access to existing capacity on its physical network in return for
similar access to the physical network of the counter party. The Company does
not recognize revenue or an obligation to the counter party under such
agreements apart from the trade revenue arising from subscriber transactions
under normal tariff plans. The benefits and costs of such swap agreements will
be reflected in the Companys results of operations in the periods in which
they are realized through reduced interconnection obligations and revenues,
respectively. Wireless The Company provides mobile communications services to individuals and
commercial and non-commercial organizations through mobilkom austria. mobilkom
austria generates revenue primarily by providing digital wireless services as
well as value-added services, text and multimedia messaging, m-commerce and
information services. To a lesser extent, mobilkom austria generates revenue
from the sale of wireless handsets. The Company recognizes mobile usage and roaming service revenue based upon
minutes of traffic processed or contracted fee schedules when the services are
rendered. Revenues due from foreign carriers for international roaming calls
are included in revenues in the period in which the call occurs. Certain prepaid usage services in the mobile communications segment are
billed in advance resulting in deferred revenues. These fees are amortized over
the period the service is provided. Cash discounts and incentives are accounted
for as a reduction in revenues when granted. Customer acquisition costs are
recognized ratably over the contract period as marketing expense when a service
contract exists. Revenue and related expenses associated with the sale of wireless handsets
to distributors are recognized when the products are delivered and accepted, as
such sales are separate and distinct from the sale of wireless services to
customers. Activation revenues and direct incremental expenses are generally
recognized over the average expected contract term. When direct incremental
expenses exceed revenues, the excess is expensed. Other service revenues are recognized when delivered and accepted by
customers and when services are provided in accordance with contract terms. F-15




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TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) Allowance for doubtful accounts The Company estimates the portion of its outstanding receivables that are
uncollectible based on aging schedules. Based on historical experience,
uncollectibility is estimated as an increasing percentage of each aging
category. Additionally, the Company records an allowance for specific customers
if circumstances indicate non-collectibility. The estimated allowance for doubtful accounts relating to receivables sold
under the securitizations described in note (5) are recorded as accrued
liabilities. Stock compensation The Company accounts for stock-based employee compensation in accordance
with the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees. Further, the Company
accounts for its combination stock option and stock appreciation right plan in
accordance with the provisions of Financial Accounting Standards Board (FASB)
Interpretation No. 28, Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans, which requires the plan be accounted for
as a stock appreciation right. The company will recognize a liability and pro rata compensation expense
in the first period in which it is probable that the target stock price
criteria outlined in the plan will be met. Based on historical trends of the
stock and current market conditions, no compensation expense has been
recognized under the plan for any of the years presented. Application of the
fair-value approach prescribed by SFAS No. 123, Accounting for Stock-Based
Compensation, would not effect the amount of compensation expense recognized
under this combination plan (see note (27)). Derivative financial instruments Effective January 1, 2001, the Company adopted SFAS No. 133, as amended,
which requires all derivative instruments, such as interest rate swap contracts
and foreign-currency exchange contracts, be recognized in the financial
statements and measured at fair value regardless of the purpose or intent for
holding them. Changes in the fair value of derivative financial instruments are
recognized periodically either in income or stockholders equity (as a
component of accumulated other comprehensive income), depending on whether the
derivative is being used to hedge changes in fair value or cash flows. For
derivatives designated as fair value hedges, changes in fair value of the
hedged item and the derivative are recognized in earnings. For derivatives
designated as cash flow hedges, fair value changes of the effective portion of
the hedging instruments are recognized in accumulated other comprehensive
income in the balance sheet until the hedged item is recognized in earnings.
The ineffective portion of the value changes are recognized in earnings
immediately. SFAS No. 133 also requires that certain derivative instruments
embedded in host contracts be accounted for separately as derivatives. Upon the adoption of SFAS No. 133, the Company had cash flow hedges only
and, therefore, recorded a transition loss of EUR 11,492, net of tax of EUR
5,920, related to the interest rate swap contracts and a transition gain of EUR
533, net of tax of EUR 275, related to the cross currency swap agreements, in
other comprehensive income. Additionally, the adoption resulted in the
recognition of a derivative instrument asset of EUR 48,359 and a derivative
liability of EUR 17,412. The Company has entered into various foreign currency forward contracts
which are accounted for as free standing derivatives. These forward contracts
serve as economic hedges of the Companys operating exposure to F-16




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TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) fluctuations in foreign currencies. Changes in the fair values of such
forward contracts are recorded directly in income. Fair value of financial instruments The carrying amounts of cash, accounts receivable, accounts payable,
receivables due from and payables due to related parties and accrued
liabilities approximate their fair value. The fair values of securities
held-to-maturity and securities available-for-sale is based on quoted market
rates. The fair value of long-term debt and swap agreements is determined based
on the cash flows from such financial instruments discounted at the Companys
estimated current interest rate to enter into similar financial instruments. The fair value of some investments is estimated based on quoted market
prices. For other investments, mainly in unconsolidated subsidiaries and equity
investments, for which there are no quoted market prices, the Company estimates
the fair value to approximate the carrying value based on the audited financial
statements, if available. Those investments are tested for impairment if losses
are generated over an extended period or if the business environment changes
materially. Use of estimates The preparation of financial statements in conformity with U.S. GAAP
requires the use of estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could differ
from these estimates. F-17




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TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) Changes in accounting principles See note (13) for discussion of the Companys adoption of SFAS No. 143 as
of January 1, 2003. As discussed in Goodwill and other intangible assets above, the adoption
of SFAS No. 142 effective January 1, 2002, changed the manner in which the
Company accounts for goodwill and intangible assets acquired in business
combinations. Upon adoption of SFAS No. 142, the Company ceased amortization of
goodwill and did not recognize amortization on the indefinite lived intangible
assets. The following table reconciles reported net income (loss), basic
earnings (loss) per share and diluted earnings (loss) per share to the
corresponding adjusted amounts excluding the effects of amortization recognized
for goodwill in prior years: 2003
    
    2002
    
    2001Year ended December 31,Reported net income (loss)
    
    
    134,241
    
    
    
    12,789
    
    
    
    (104,625
    )Add back amortizationGoodwill
    
    
    
    
    
    
    
    
    
    
    50,444Goodwill included in equity in earnings from
mobilkom austria
    
    
    
    
    
    
    
    
    
    
    25,362Goodwill included in equity in earnings, others
    
    
    
    
    
    
    
    
    
    
    1,639Adjusted net income
    
    
    134,241
    
    
    
    12,789
    
    
    
    (27,180
    )Basic and diluted earnings (loss) per shareReported net income (loss)
    
    
    0.29
    
    
    
    0.03
    
    
    
    (0.21
    )Add back amortizationGoodwill
    
    
    
    
    
    
    
    
    
    
    0.10Goodwill included in equity in earnings from
mobilkom austria
    
    
    
    
    
    
    
    
    
    
    0.05Goodwill included in equity in earnings, others
    
    
    
    
    
    
    
    
    
    
    Adjusted net income
    
    
    0.29
    
    
    
    0.03
    
    
    
    (0.06
    )
 New accounting pronouncements In May 2003, the Emerging Issues Task Force reached consensus on EITF
Issue 00-21, Accounting for Revenue Arrangements with Multiple Deliverables,
which addresses (1) how to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting and (2) how arrangement
consideration should be measured and allocated to the separate units of
accounting in the arrangement. EITF 00-21 does not change otherwise applicable
revenue recognition criteria. EITF 00-21 is effective for Telekom Austria
beginning January 1, 2004. The Company does not expect EITF 00-21 to have a
material impact on the Companys consolidated financial statements. The FASB issued FIN No. 46 in January 2003, Consolidation of Variable
Interest Entities, which provides guidance regarding the consolidation of
certain entities in which equity investors do not have the characteristics of
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN No. 46 introduces the concept of variable
interest entities, explains how to identify a variable interest entity, and
requires that the primary beneficiary of any variable interest entity
consolidates that entity. In December 2003, the FASB deliberated a partial
deferral of and certain proposed modifications to FIN No. 46 to address certain
implementation issues. The Board decided that all of the F-18




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TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) proposed modifications will be incorporated directly into a revised FIN
No. 46, rather than into a new interpretation that amends FIN No. 46 (FIN No.
46-R or the Revised Interpretation). The effective dates for the Company for
both FIN No. 46 and FIN No. 46-R are at the end of the first annual reporting
period ending after March 15, 2004. The Company does not expect to identify or
consolidate any variable interest entities. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities, which amends SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, to address (1)
decisions reached by the Derivatives Implementation Group, (2) developments in
other Board projects that address financial instruments, and (3) implementation
issues related to the definition of a derivative. SFAS No. 149 has multiple
effective date provisions depending on the nature of the amendment to SFAS No.
133. The adoption of SFAS No. 149 did not have a material impact on the
Companys financial statements. In May 2003, the FASB issued Statement of Financial Reporting Standards
No. 150, Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity. SFAS No. 150 clarifies the accounting for certain
financial instruments with characteristics of both liabilities and equity and
requires that those instruments be classified as liabilities in statements of
financial position. Previously, many of those financial instruments were
classified as equity. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003 and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. On
November 7, 2003, FASB Staff Position 150-3 was issued, which indefinitely
deferred the effective date of SFAS No. 150 for certain mandatory redeemable
non-controlling interests. As the Company does not have any of these financial
instruments, the adoption of SFAS 150 did not have any impact on the Companys
consolidated financial statements. (2)   BUSINESS COMBINATIONS All acquisitions have been accounted for under the purchase method, with
the excess of the purchase price over the estimated fair value of the net
assets acquired accounted for as goodwill. The results of operations of the
acquired businesses are included in the consolidated financial statements from
the dates of the acquisition. The Companys interests in mobile communications are held through mobilkom
austria AG & Co KG and mobilkom austria AG (mobilkom austria), which,
together with its subsidiaries, operate mobile telecommunications networks and
provide ancillary services in Austria, Croatia, Slovenia and Liechtenstein. The
operations include wireless internet access. On June 28, 2002, the Company acquired 100% of AUTEL Beteiligungs GmbH
(Autel), which held a 25.001% interest in mobilkom austria, from Telecom
Italia Mobile SpA (the successor of STET Mobile Holding N.V.), a
publicly-traded subsidiary of Telecom Italia, bringing its total interest in
mobilkom austria to 100%. Consequently, the Company consolidated the balance
sheet of mobilkom austria for the first time as of June 28, 2002. The aggregate
purchase price was EUR 693,064 and the Company recognized goodwill in the
amount of EUR 431,304, a brand name not subject to amortization of EUR 159,161
and amortizable intangible assets of EUR 229,004. The consolidated statement of operations for the year ended December 31,
2002 reflects the Companys equity in earnings of mobilkom austria through June
28, 2002 and mobilkom austrias results of operations for the period June 28,
2002 until December 31, 2002. As a result of the acquisition, the Company
gained strategic and operating control of mobile communications service
providers in Austria, Croatia, Slovenia and Liechtenstein. The following table shows pro forma consolidated results of operations for
the year ended December 31, 2002, as if Autel had been acquired at the
beginning of 2002. F-19




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TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) Pro formaDecember 31,2002Revenues
    
    
    3,908,226Net income
    
    
    29,844Basic and fully diluted earnings per share
    
    
    0.06
 The pro forma results include amortization of the intangible assets
acquired, interest expense on debt assumed to finance the purchase and income
taxes as well as other adjustments including amortization of fair value
adjustments to long-term debt and pension benefit obligation and the reversal
of deferred gain not representing a liability. The pro forma results of
operations are not necessarily indicative of what actually would have occurred
if the acquisition had been completed as of the beginning of the period
presented, nor are they necessarily indicative of future consolidated results. As of January 30, 2003, mobilkom austria acquired an additional 9% and as
of June 23, 2003, a further 19% of VIPnet d.o.o., Zagreb, for a total purchase
price of EUR 69,663 bringing its interest to 99%. mobilkom austria recognized
intangible assets of EUR 34,035, including intangible assets with an indefinite
life of EUR 15,728 and a goodwill totaling EUR 11,774 as a result of these two
transactions. On July 29, 2003, the Company acquired 74% of World-Direct eBusiness
solutions GmbH bringing its total interest to 100%. The purchase price amounted
to EUR 1,543, of which EUR 543 was already prepaid. The Company recognized
goodwill totaling EUR 1,000 as a result of the transaction. On September 23, 2003, mobilkom austria acquired 100% of paybox cee AG
which held a 51.02% in paybox österreich AG for a total purchase price of EUR
795. Prior to this acquisition, mobilkom austria held the remaining 48.98% of
paybox österreich AG and accounted for the investment using the equity method.
Consequently, the Company consolidated the balance sheets of paybox cee AG and
subsidiaries for the first time as of September 30, 2003. As the purchase price
was less than the fair value of the net assets acquired and liabilities
assumed, the Company reduced the purchase price allocated to intangible assets
(licenses). Following the purchase, paybox österreich AG was merged into paybox
cee as of December 17, 2003. On December 23, 2003 mobilkom austria purchased 100% of 3G Mobile
Telecommunications GmbH (3G Mobile). The net assets acquired consist of a
UMTS license. The total purchase price was allocated to the license and
therefore no goodwill was recognized. Tax assets on acquired tax loss carry
forwards were not recognized as currently the use of these loss carry forwards
is not considered more likely than not. No pro forma disclosure has been presented for the effect of the
acquisitions discussed in the prior four paragraphs because the Company
believes that the impact on the financial statements is not material. On November 28, 2003, the Company sold 90% of Telekom Building Systems
GmbH in a management buy-out transaction for a total purchase price of EUR 537,
reducing its interest to 10%. (3)   INVESTMENTS IN AFFILIATES As of December 31, 2003, the investments in affiliates comprise a 26.00%
interest in Omnimedia Werbegesellschaft mbH (Omnimedia) and a 25.10% interest
in Output Service GmbH (OSG). F-20




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TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) In October 2001, the Company purchased 26.00% of the common stock of
Omnimedia, a marketing and advertising company for EUR 3,401. In accordance
with SFAS Nos. 141 and 142, the goodwill totaling EUR 3,161 was not amortized
in 2001 and 2002. In January 2002 the Company sold a 74.90% interest in OSG, a formerly
consolidated subsidiary, for EUR 26. The Company accounts for its remaining
25.10% interest in OSG using the equity method of accounting. In July 2003 the Company sold its 26.00% interest in Herold Business Data
AG, the leading telephone directory provider in Austria, to PASR Vierte
Beteiligungsverwaltung GmbH for a total purchase price of EUR 22,000 and
realized a gain of EUR 18,367 which is recorded in equity in earnings of
affiliates. A summary of aggregated financial information as reported by equity
investees is as follows: Year ended December 31,
    
    2003
    
    2002
    
    2001Revenues
    
    
    35,515
    
    
    
    68,045
    
    
    
    67,491Operating income
    
    
    4,653
    
    
    
    7,833
    
    
    
    10,922Net income
    
    
    2,908
    
    
    
    8,285
    
    
    
    6,867
 At December 31,
    
    2003
    
    2002Total current assets
    
    
    31,003
    
    
    
    81,914Total assets
    
    
    31,684
    
    
    
    92,911Current liabilities
    
    
    28,808
    
    
    
    70,129Long-term debt
    
    
    1,357
    
    
    
    3,846Total liabilities
    
    
    30,165
    
    
    
    73,975Total stockholders equity
    
    
    1,519
    
    
    
    18,936
 (4)   MARKETABLE SECURITIES Debt securities originating from cross border lease transactions entered
into in 1998 and 1999 (see note (15)) are classified as held-to-maturity as the
Company is contractually obligated to hold these securities until maturity. The
securities are bonds of triple A rated issuers and held by a custodian. Through
a further asset based swap the cash inflows from the securities are transformed
into the cash flow stream required to match a specified portion of the lease
payments. The securities are pledged to a counter-party in the swap agreement.
No sales of securities held-to-maturity occurred in 2003, 2002 and 2001. The
interest rates on the securities are fixed and range from 5.65% to 9.01%.
Accrued interest is recorded as interest income. The securities will mature
between 2006 and 2011. F-21




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) Gross
    
    GrossAmortized
    
    unrealized
    
    unrealized
    
    Faircost
    
    holding gains
    
    holding losses
    
    valueAt December 31, 2003Non-current assetsAvailable-for-saledebt securities
    
    
    4,702
    
    
    
    168
    
    
    
    
    
    
    
    4,870equity securities
    
    
    6,914
    
    
    
    2,646
    
    
    
    605
    
    
    
    8,955mutual funds
    
    
    5,679
    
    
    
    2
    
    
    
    163
    
    
    
    5,518Held-to-maturity
    
    
    124,951
    
    
    
    16,596
    
    
    
    
    
    
    
    141,547At December 31, 2002Non-current assetsAvailable-for-saledebt securities
    
    
    5,908
    
    
    
    298
    
    
    
    1
    
    
    
    6,205equity securities
    
    
    2,456
    
    
    
    
    
    
    
    258
    
    
    
    2,198mutual funds
    
    
    11,516
    
    
    
    37
    
    
    
    1,008
    
    
    
    10,545Held-to-maturity
    
    
    138,454
    
    
    
    21,015
    
    
    
    
    
    
    
    159,469
 The contractual maturities of debt securities classified as
held-to-maturity at December 31, 2003 were as follows: Amortized
    
    Faircost
    
    valueHeld-to-maturityDue within one year
    
    
    5,159
    
    
    
    5,195Due after one year through five years
    
    
    27,394
    
    
    
    30,548Due after five years through ten years
    
    
    92,399
    
    
    
    105,804124,951
    
    
    
    141,547
 Proceeds from sales of available-for-sale securities amounted to EUR
80,108 and EUR 7,070 in 2003 and 2002, respectively. Gross realized gains from
sales of available-for-sale securities were EUR 323 and EUR 46 in 2003 and
2002, respectively. The specific identification method was used to determine
the cost in computing realized gains and losses. F-22




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) For the following marketable securities the Company incurred holding
losses but has not recognized an impairment, since the losses are not material: Less than 12 months
    
    12 months or longer
    
    TotalGross unrealized
    
    
    
    
    
    Gross unrealized
    
    
    
    
    
    Gross unrealizedFair value
    
    holding losses
    
    Fair value
    
    holding losses
    
    Fair value
    
    holding lossesAt December 31, 2003Non-current assetsAvailable-for-saleequity securities
    
    
    988
    
    
    
    48
    
    
    
    4,550
    
    
    
    557
    
    
    
    5,538
    
    
    
    605mutual funds
    
    
    125
    
    
    
    8
    
    
    
    4,231
    
    
    
    155
    
    
    
    4,355
    
    
    
    163Total temporarily
impaired securities
    
    
    1,113
    
    
    
    56
    
    
    
    8,781
    
    
    
    712
    
    
    
    9,893
    
    
    
    768
 (5)   ACCOUNTS RECEIVABLE  TRADE The roll-forward of the allowance for accounts receivable-trade is as
follows: 2003
    
    2002Allowance beginning of the year
    
    
    74,945
    
    
    
    47,074Foreign currency adjustment
    
    
    (11
    )
    
    
    2Change in consolidated entities
    
    
    
    
    
    
    32,838Reclassification to accruals for sold receivables
    
    
    
    
    
    
    (26,485
    )Charged to expenses
    
    
    30,629
    
    
    
    39,184Amounts written-off
    
    
    (13,325
    )
    
    
    (17,668
    )Allowance at the end of the year
    
    
    92,238
    
    
    
    74,945
 December 31,2003
    
    December 31,2002Accounts receivable-trade,
gross
    
    
    652,110
    
    
    
    526,879Allowances
    
    
    (92,238
    )
    
    
    (74,945
    )Accounts receivable-trade, net
    
    
    559,872
    
    
    
    451,934
 Of these receivables EUR 226,807 are held for sale due to the
securitization program described in the following paragraphs. In January 2002, the Company entered into a revolving period
securitization and sold trade receivables to a Qualifying Special Purpose
Entity (QSPE) unrelated to the Company. The Company retains servicing
responsibilities relating to the sold receivables. Solely for the purpose of
credit enhancement from the perspective of the QSPE, the Company retains
interests in the sold receivables (retained interests). These retained
interests are initially measured at estimated fair values, which the Company
believes approximate historical carrying values, and are subsequently measured
based on a periodic evaluation of collections and delinquencies. F-23




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) In December 2003 the asset-backed securitization program was extended
regarding the trade receivables sold and the maximum amount transferred to the
trust. Additionally, the discounts required were reduced. The maximum program
limit was increased from EUR 290,000 to EUR 350,000. At December 31, 2003, the Company recorded a receivable due from the QSPE
of EUR 145,360. The Company routinely evaluates its portfolio of trade
receivables for risk of non-collection and records an allowance for doubtful
accounts to reflect the carrying value of its trade receivables at estimated
net realizable value. Pursuant to the provisions of the revolving-period
securitizations, the Company effectively bears the risk of potential
delinquency or default associated with trade receivables sold or interests
retained. Accordingly, in the normal course of servicing the assets sold, the
Company evaluates potential collection losses and delinquencies and updates the
estimated fair value of the Companys retained interest. The allowances recorded for sold receivables are classified as accrued
liabilities. As of December 31, 2003 and 2002, respectively, the accruals
totaled EUR 28,882 and EUR 62,481. In accordance with SFAS No. 140, Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities, the Company has not
recorded a servicing asset as management believes it is not practicable to
estimate this value given that verifiable data as to the fair value of the
compensation and or cost related to servicing the types of the assets sold is
not readily obtainable. In the periods ended December 31, 2003 and 2002, respectively, the
following cash flows were received from and paid to the QSPE: December 31,2003
    
    2002Gross trade receivables sold to QSPE
    
    
    2,789,761
    
    
    
    2,044,513Collections made on behalf of and paid to the QSPE
    
    
    (2,578,860
    )
    
    
    (1,732,372
    )Deferred purchase price withheld
    
    
    (168,846
    )
    
    
    (104,616
    )Unearned discount (withheld) reduced
    
    
    (3,620
    )
    
    
    (4,100
    )Liquidity and program fees
    
    
    (5,788
    )
    
    
    (8,499
    )Retained interests
    
    
    
    
    
    
    (7,930
    )Receivable from the QSPE
    
    
    (145,360
    )
    
    
    Net cash (paid to) received from QSPE during the period.
    
    
    (112,713
    )
    
    
    186,996
 Cash settlement with the QSPE takes place on a monthly basis. Gross trade
receivables sold represent the fair value of billed and unbilled receivables to
the QSPE during the periods ended December 31, 2003 and 2002, respectively. As
the Company services these receivables, collection of the receivables
previously sold is made on behalf of the QSPE. The Company recorded discounts,
liquidity and program fees related to the securitization of trade receivables
of EUR 5,690 and EUR 8,427 for the periods ended December 31, 2003 and 2002,
respectively. These discounts and fees are included in interest expense in the
statement of operations. (6)   RELATED PARTY TRANSACTIONS The disclosures below present balances and transactions relating to the
Companys majority shareholder ÖIAG and its subsidiary Österreichische Post AG
as ÖIAG, with other government agencies and government-owned entities, for
practical reasons, not being disclosed. None of the individual accounts
associated with government agencies or government-owned entities is considered
significant to the Company. F-24




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) The majority of the related party transactions were carried out with
mobilkom austria. The Company charged mobilkom austria for interconnection
fees, voice telephony, rent, repair and other services. mobilkom austria
charged the Company mainly for interconnection fees. Since June 28, 2002 such
transactions are fully eliminated in consolidation. Österreichische Post AG and its subsidiaries (Post), a subsidiary of
ÖIAG which provides postal services, charged the Company for different services
such as postal charges, rent, repair and administration. The Company charged
Post for IT support, voice telephony, technical services, rent, repair and
other services. On September 17, 2003, Postbus AG, a 100% subsidiary of
Österreichische Post AG, was sold to Österreichische Bundesbahnen and is
therefore no longer reported as related party. The terms of services provided by Telekom Austria to government entities
are generally based on standard pricing policies. However, the Company is
obligated to provide voice telephone services for disadvantaged individuals at
reduced tariffs for which it is entitled to appropriate compensation from the
government on a contractual basis. Beginning January 1, 2001, the contract with
the government specifies the reimbursement of Euro 13.81 per customer per
month, which is recorded as revenue in the service period. The total
reimbursement was EUR 41,396, EUR 41,670 and EUR 43,032 in 2003, 2002 and 2001,
respectively. On June 28, 2001, a partner in a law firm which provides legal services to
the Company was elected to the supervisory board. In 2003, 2002 and 2001 (since
the day of appointment), respectively, the Company was charged EUR 560, EUR 993
and EUR 409 for legal services by that law firm. Telecom Italia and the Company charged for interconnection services
provided to each other at standard rates. The Company has entered into agreements with Telecom Italia whereby the
Company grants some pre-defined access to existing capacity on its physical
network in return for similar access to the physical network of Telecom Italia.
The Company does not recognize revenue or an obligation under such agreements
apart from the trade revenue arising from subscriber transactions under normal
tariff plans. The benefits and costs of such swap agreements will be reflected
in the Companys results of operations in the periods realized through reduced
interconnection obligations and revenues, respectively. The following is the detail of the accounts receivable with related
parties: At December 31,
    
    2003
    
    2002ÖIAG
    
    
    945
    
    
    
    4,296Telecom Italia
    
    
    
    
    
    
    435Affiliated companies and other
    
    
    604
    
    
    
    1,992Total
    
    
    1,549
    
    
    
    6,723
 The following is the detail of the accounts payable to related parties: At December 31,
    
    2003
    
    2002ÖIAG
    
    
    7,840
    
    
    
    4,997Omnimedia
    
    
    13,192
    
    
    
    25,032Affiliated companies and other
    
    
    2,625
    
    
    
    7,169Total
    
    
    23,657
    
    
    
    37,198
 F-25




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) The following is the detail of revenues from and expenses charged to
related parties: Year ended December 31,
    
    2003
    
    2002
    
    2001Revenuesmobilkom austria
    
    
    
    
    
    
    72,879
    
    
    
    222,231ÖIAG
    
    
    62,635
    
    
    
    56,660
    
    
    
    55,344Telecom Italia
    
    
    24,014
    
    
    
    14,361
    
    
    
    13,448Other
    
    
    2,857
    
    
    
    4,090
    
    
    
    2,436Total
    
    
    89,506
    
    
    
    147,990
    
    
    
    293,459Interest incomemobilkom austria
    
    
    
    
    
    
    4,988
    
    
    
    17,619Other
    
    
    1
    
    
    
    4
    
    
    
    0Total
    
    
    1
    
    
    
    4,992
    
    
    
    17,619Expensesmobilkom austria
    
    
    
    
    
    
    43,590
    
    
    
    207,172ÖIAG
    
    
    70,643
    
    
    
    58,285
    
    
    
    66,421Telecom Italia
    
    
    10,808
    
    
    
    23,559
    
    
    
    25,841Other
    
    
    47,243
    
    
    
    66,719
    
    
    
    15,335Total
    
    
    128,694
    
    
    
    192,153
    
    
    
    314,769Interest expensemobilkom austria
    
    
    
    
    
    
    837
    
    
    
    731ÖIAG and other
    
    
    30
    
    
    
    101
    
    
    
    18Total
    
    
    30
    
    
    
    938
    
    
    
    749
 For the years ended December 31, 2003 and 2002, respectively, EUR 36,146
and EUR 55,289 of other expenses mainly relate to advertising and marketing
services provided by Omnimedia. (7)   INVENTORIES Inventories consist of: At December 31,
    
    2003
    
    2002Spare parts, cables and supplies
    
    
    44,510
    
    
    
    36,830Merchandise
    
    
    39,025
    
    
    
    54,431Total
    
    
    83,535
    
    
    
    91,261
 F-26




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) (8)   GOODWILL AND OTHER INTANGIBLE ASSETS Other intangible assets consist of: At December 31,
    
    2003
    
    2002Wireless and wireline licenses
    
    
    559,273
    
    
    
    544,893Patents and proprietary rights
    
    
    53,497
    
    
    
    47,100Brandnames
    
    
    174,046
    
    
    
    158,934Subscriber base
    
    
    138,622
    
    
    
    120,999Other
    
    
    35,858
    
    
    
    37,952Total intangibles
    
    
    961,296
    
    
    
    909,878Less accumulated amortization
    
    
    (249,308
    )
    
    
    (183,985
    )Net intangibles
    
    
    711,988
    
    
    
    725,893
 Amortization expense was EUR 68,340, EUR 27,410 and EUR 53,339 for the
years 2003, 2002 and 2001, respectively. Licenses are recorded at cost and amortized on a straight-line basis over
the estimated useful life. In November 2000, mobilkom austria purchased a UMTS
license for Austria with a term of 20 years for EUR 171,540. Interest in the
amount of EUR 1,843 and EUR 6,495 was capitalized in 2003 and 2002,
respectively, on the UMTS license. The amortization of the UMTS license over
14.2 years and depreciation of the related network equipment over 8 years began
in May 2003 after the start of the UMTS services and the generation of
revenues. The Company recorded amortization and depreciation expenses from the
use of these assets of EUR 14,086 in 2003 and expects EUR 19,567 on an annual
basis thereafter. The Company holds licenses to operate as a mobile telecommunications
service provider from the Austrian, Croatian and Slovenian communications
commissions. The Croatian license, granted for 10 years, was acquired for EUR
13,672 in 1998. Licenses from the Slovenian Government granted in 2001 and 1999
for 15 years, were acquired for EUR 4,637 and EUR 11,121, respectively. Upon adoption of SFAS No. 142 on January 1, 2002, the Company ceased
amortizing goodwill. The following tables illustrate the changes in net book
value of goodwill by segment for the periods ended December 31, 2003 and 2002,
respectively: Wireline
    
    Wireless
    
    TotalGoodwill January 1, 2003
    
    
    30,795
    
    
    
    559,932
    
    
    
    590,727Acquisitions
    
    
    1,000
    
    
    
    11,774
    
    
    
    12,774Translation adjustment
    
    
    (376
    )
    
    
    (5,548
    )
    
    
    (5,924
    )Goodwill December 31, 2003
    
    
    31,419
    
    
    
    566,158
    
    
    
    597,577
 F-27




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) Wireline
    
    Wireless
    
    TotalGoodwill January 1, 2002
    
    
    60,244
    
    
    
    
    
    
    
    60,244Acquisitions
    
    
    9,824
    
    
    
    563,153
    
    
    
    572,977Impairment
    
    
    (40,893
    )
    
    
    
    
    
    
    (40,893
    )Translation adjustment
    
    
    1,620
    
    
    
    (3,221
    )
    
    
    (1,601
    )Goodwill December 31, 2002
    
    
    30,795
    
    
    
    559,932
    
    
    
    590,727
 In 2002 and 2001 impairment charges in the amount of EUR 40,441 and EUR
119,950 were recorded for goodwill originally recorded from the acquisition of
Czech On Line (COL). The acquisition was based on a business plan assuming
the full liberalization of the Czech market. As this remained unsatisfactory
with regard to interconnection and limited wholesale offers to alternative
operators, the business of COL had not developed as originally expected. The
valuation of the reporting unit in 2002 was based on forecasted cash flows and
used the weighted average cost of capital employed of 13.2% as discount rate. The gross carrying amounts and accumulated amortization of intangible
assets subject to amortization, by major class, are as follows: Acquisition
    
    Accumulated
    
    CarryingAt December 31, 2003
    
    cost
    
    amortization
    
    valueWireless and wireline licenses
    
    
    559,273
    
    
    
    (172,301
    )
    
    
    386,972Subscriber base
    
    
    138,622
    
    
    
    (32,088
    )
    
    
    106,534Other
    
    
    89,355
    
    
    
    (44,919
    )
    
    
    44,436Total
    
    
    787,250
    
    
    
    (249,308
    )
    
    
    537,942
 Acquisition
    
    Accumulated
    
    CarryingAt December 31, 2002
    
    cost
    
    amortization
    
    valueWireless and wireline licenses
    
    
    544,893
    
    
    
    (139,043
    )
    
    
    405,850Subscriber base
    
    
    120,999
    
    
    
    (10,083
    )
    
    
    110,916Other
    
    
    85,052
    
    
    
    (34,859
    )
    
    
    50,193Total
    
    
    750,944
    
    
    
    (183,985
    )
    
    
    566,959
 The following table presents expected amortization expense related to
amortizable intangible assets for each of the following periods: 2004
    
    
    72,0802005
    
    
    70,3842006
    
    
    68,5742007
    
    
    65,3742008
    
    
    53,675Thereafter
    
    
    207,855
 The total carrying amount of intangible assets, other than goodwill, not
subject to amortization is EUR 174,046 as of December 31, 2003. This amount
relates entirely to the value of brandnames. The value of brandnames increased
by EUR 15,728 as a result of the acquisition of the 28% interest in VIPnet in
2003 (see note (2)). F-28




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) (9)   PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment transferred to the Company by the government
was recorded upon transfer at cost less accumulated depreciation as of that
date. Acquisitions since then have been recorded at cost. At December 31,
    
    2003
    
    2002Land
    
    
    60,281
    
    
    
    62,462Buildings and leasehold improvements
    
    
    663,044
    
    
    
    653,010Communications network and other equipment
    
    
    9,381,996
    
    
    
    9,358,138Capital leases
    
    
    13,963
    
    
    
    16,207Software
    
    
    376,567
    
    
    
    325,387Construction in progress, network
    
    
    186,487
    
    
    
    235,26310,682,338
    
    
    
    10,650,467Less accumulated depreciation (other than capital leases)
    
    
    (6,214,641
    )
    
    
    (5,640,965
    )Less accumulated depreciation, capital leases
    
    
    (10,031
    )
    
    
    (8,843
    )Property, plant and equipment, net
    
    
    4,457,666
    
    
    
    5,000,659
 Total interest capitalized and amortization and depreciation expenses for
the years ended December 31, 2003, 2002 and 2001 are as follows: 2003
    
    2002
    
    2001Interest capitalized
    
    
    1,605
    
    
    
    2,635
    
    
    
    2,893Depreciation and amortization expense
    
    
    1,071,633
    
    
    
    989,878
    
    
    
    875,912ThereofAmortization expense of software
    
    
    79,059
    
    
    
    42,623
    
    
    
    24,276Amortization expense of leased assets
    
    
    3,663
    
    
    
    2,341
    
    
    
    1,025
 In the period ended December 31, 2003, 2002 and 2001, respectively,
impairment charges of EUR 6,825, EUR 977 and EUR 23,181 are included in
depreciation. The impairment charges in 2003 primarily relate to long-lived
assets as future estimated net cash flows were below the carrying value of
related assets. The impairment charges of prior years related primarily to
buildings which the Company no longer uses. The impairments recorded relating
to these buildings equal the excess of carrying value over estimated fair
value. F-29




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) (10)   SHORT-TERM BORROWINGS The Companys short-term borrowings include: At December 31,
    
    2003
    
    2002Current portion of long-term debt
    
    
    530,869
    
    
    
    458,995Short-term debt
    
    
    
    
    
    
    737,144Lines of credit
    
    
    4,962
    
    
    
    5,823Current portion of lease obligations
    
    
    95,490
    
    
    
    107,943Total
    
    
    631,321
    
    
    
    1,309,905
 The weighted-average interest rate on lines of credit was 3.20% and 4.02%
in 2003 and 2002, respectively. As of December 31, 2003 the Company has unused
committed lines of EUR 500,000 and recorded commitment and servicing fees for
these unused lines of EUR 1,543, which represents 0.3% of the committed lines.
The credit line commitments will expire between January 2004 and November 2006. Short-term debts were repaid using part of the funds provided by the
long-term bond issued by the Company in July 2003 (see note (14)). (11)   ACCRUED LIABILITIES Accrued liabilities consist of the following: At December 31,
    
    2003
    
    2002Taxes, other than income
    
    
    9,845
    
    
    
    8,517Employee benefits
    
    
    69,935
    
    
    
    67,384Customer discounts
    
    
    47,444
    
    
    
    53,240Customer retention programs
    
    
    40,161
    
    
    
    37,693Exit costs
    
    
    6,829
    
    
    
    8,363Bad debt reserve for sold receivables
    
    
    28,882
    
    
    
    62,481Other
    
    
    28,682
    
    
    
    19,112Total
    
    
    231,778
    
    
    
    256,790
 Other accruals mainly relate to legal fees and lawsuits, audit fees,
public fees and consulting services. In establishing accruals, management assesses different scenarios of
reasonably estimated outcomes in determining the amount that the Company is
expected to pay upon the resolution of a contingency. The Company records the
most likely of all scenarios contemplated or, if none of the scenarios is more
likely to occur, the scenario with the lowest amount is considered in
establishing the accrual. During the year ended December 31, 2001, the Company formally terminated
certain leases, which require the Company to refurbish the properties as they
are vacated. Upon termination of the leases, the Company recorded an accrual
totaling EUR 1,912. The Company utilized EUR 1,456 and released EUR 456 of this
accrual in 2002. As of December 31, 2002, the Company recorded an accrual
totaling EUR 8,363 for certain non-cancellable lease contracts related to
premises which the Company vacated in 2003. This accrual covers the minimum
lease payments until the end of the lease contracts. The Company utilized EUR
3,297 and accrued an additional EUR 1,763 in 2003. As of December 31, 2003, the
Company has an accrual of EUR 6,829 that it expects to be fully utilized. F-30




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) (12)   DEFERRED INCOME At December 31,
    
    2003
    
    2002Unearned income
    
    
    143,266
    
    
    
    122,850Unamortized balance on sale of tax benefits
    
    
    51,573
    
    
    
    58,686194,839
    
    
    
    181,536Less non-current portion
    
    
    (44,461
    )
    
    
    (51,573
    )Deferred income net of non-current portion
    
    
    150,378
    
    
    
    129,963
 The deferred income mainly relates to prepaid access fees, monthly base
fees, leased lines to commercial customers, prepaid mobile fees and rental
income from site sharing. These fees are amortized over the period the service
is provided. Additional information concerning the sale of tax benefits is contained in
note (15). (13)   ASSET RETIREMENT OBLIGATION The Company adopted SFAS No. 143 as of January 1, 2003 and recorded the
following additions to long-lived assets, asset retirement obligation and a
cumulative change in accounting principles: January 1, 2003Addition to long-lived assets
    
    
    6,288Addition to accumulated depreciation
    
    
    (2,263
    )Cumulative effect of change in accounting principle
    
    
    17,929Asset retirement obligations
    
    
    21,954
 The roll-forward of the asset retirement obligation starting January 1,
2003 is as follows: Asset retirement obligations as of January 1, 2003
    
    
    21,954Foreign exchange difference
    
    
    (3
    )Liability incurred in the current period
    
    
    451Accretion expense
    
    
    1,336Settlement
    
    
    (461
    )Release
    
    
    (15
    )Asset retirement obligations as of December 31, 2003
    
    
    23,262
 The Company recorded asset retirement obligations for the retirement and
decommissioning of base stations, buildings, booths for public payphones and
wooden masts impregnated with tar or salt. The Company has an obligation to operate a sufficient number of booths to
assure that the Austrian population has sufficient access to telecommunications
services. As long as the Company stays in business and technology does not
materially change, the number of booths operated will be reduced but not
eliminated completely for the foreseeable future. The Company estimated the
number and timing of booths to be retired from service and estimated the asset
retirement obligation based on probability-weighted cash flow estimates. F-31




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) The Company has also recorded an asset retirement obligation for masts
impregnated with tar or salt. Although the Company stopped setting up tar-masts
in 1992, some will be in operation for approximately another 30 years. Masts
impregnated with salt are currently in operation and set up for the foreseeable
future. The average remaining useful life is 30 years. The Company has recorded
an asset retirement obligation based on estimated settlement dates and expected
cash flows. Additionally, the Company recorded asset retirement obligations for
buildings concerning obligations for the disposal of hazardous substances that
were used in prior decades. mobilkom austria rents land, rooftops and other premises for an unlimited
period of time. As it becomes more difficult to obtain sites because of health
concerns and as base stations are crucial to the business of a mobile
communications operator, except as discussed below, mobilkom austria does not
expect to, and will not give up the majority of its rented sites as long as it
stays in business. As mobilkom austria has both the ability and the intent to
renew its license indefinitely, the retirement obligation in relation to those
base stations is indeterminate. mobilkom austria is therefore unable to
estimate the fair value of an asset retirement obligation as potential
settlement dates for the retirement obligation are not predictable. mobilkom
austria will recognize the obligation as soon as sufficient information exists
to estimate the range of potential settlement dates. However, mobilkom austria
does estimate that approximately 5% of the base stations will be given up.
Therefore, mobilkom austria recorded an asset retirement obligation based on
expected cash flows and settlement dates. Additionally, mobilkom austria recorded asset retirement obligations for
buildings and shops under operating leases in accordance with the obligation to
refurbish the sites at the expiration of the lease contracts. Had the Company adopted SFAS No. 143 as of January 1, 2002 and measured
the asset retirement obligation using the information, assumptions and interest
rates in effect as of the date of the adoption of this Statement, the pro forma
asset retirement obligation would have amounted to EUR 20,331. (14)   LONG-TERM DEBT The outstanding long-term debt, other than lease obligations are
summarized as follows: At December 31,
    
    Maturity
    
    2003
    
    2002Bonds under EMTN Programme
    
    
    2004-2013
    
    
    
    745,117
    
    
    
    Other bonds
    
    
    2004-2013
    
    
    
    159,741
    
    
    
    175,537Bank debt
    
    
    2004-2011
    
    
    
    1,967,509
    
    
    
    2,347,652Other
    
    
    2008
    
    
    
    790
    
    
    
    15,6912,873,157
    
    
    
    2,538,880Less current portion of long-term debt
    
    
    
    
    
    
    (530,869
    )
    
    
    (458,995
    )Long-term debt, net of current portion
    
    
    
    
    
    
    2,342,288
    
    
    
    2,079,885
 On June 30, 2003, Telekom Austria AG and Telekom Finanzmanagement GmbH
(the 100% financing subsidiary of Telekom Austria AG) initiated a Euro Medium
Term Note (EMTN) Programme. The payments of all amounts due in respect of
notes issued by Telekom Finanzmanagement GmbH under this framework agreement
will be unconditionally and irrevocably guaranteed by Telekom Austria AG. The
maximum aggregate nominal amount of all notes outstanding at any time under the
programme will not exceed the equivalent of EUR 2,500,000. Under this programme the Company successfully launched and placed a
Eurobond offering which raised EUR 750,000 with a 10-year maturity and a coupon
of 5.00% on July 10, 2003. The notes were issued at a discount including issue
costs of EUR 9,053 (EUR 8,647 as of December 31, 2003) and were used to
refinance existing debt. F-32




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) Of the total bank debt, amounts of EUR 1,354,583 and EUR 1,751,264 at
December 31, 2003 and 2002, respectively, are guaranteed by the Federal
Republic of Austria. From the total long-term debt, as of December 31, 2003 and
2002, respectively, EUR 266,614 and EUR 286,947 are denominated in Japanese Yen
and Swiss Francs. The loan of EUR 74,046 denominated in Japanese Yen is due in
June 2004. The Company uses cross currency swaps to reduce the exposure to the
risks of adverse changes in exchange rates as described in note (19). The interest rates of the loans vary between 2.2% and 7.3%. The weighted
average interest rate for the periods ended December 31, 2003 and 2002,
respectively, were 4.6% and 3.7% for bonds and 5.2% for bank debt in both
years. The following bank debt is not guaranteed by the government as they were
entered into after the privatization of the Company: In March 2000, the Company entered into a loan agreement for EUR 145,000
with the European Investment Bank. As of December 31, 2003, EUR 116,000 of the
loan is outstanding in accordance with the repayment terms. Under the terms of
this agreement, the Company must observe covenants requiring the Company to
meet certain financial ratios. Further, in October 2000 the Company entered into a loan agreement for EUR
232,553. As of December 31, 2003 the loan is outstanding in full in accordance
with the repayment terms. Under the terms of the contract the Company has to
maintain certain investments, otherwise the loan becomes due. The interest
rates vary depending on the rating of the Company. As of December 31, 2003, EUR 295,160 of a syndicated loan granted to
mobilkom austria was outstanding. The original loan totaled EUR 305,000 and was
guaranteed by Telekom Austria AG. In December 2002 VIPnet entered into a syndicated loan of EUR 150,000 of
which EUR 96,200 were drawn. Outstanding debt is EUR 93,240 as of December 31,
2003. The loans become due between 2003 and 2008 and carry an interest rate of
three month EURIBOR plus a margin that depends on operating performance and
indebtedness and 0.375% commitment fees. The loan was used for the refinancing
of the loans to VIPnet. In March 1999, Si.mobil entered into a loan agreement amounting to EUR
36,000 (original currency: Deutsche Mark 71,000) to finance the construction of
the GSM network in Slovenia. The interest rate is three month LIBOR plus 1.075
%. The loan is secured by bills of exchange, property, receivables and shares
of Si.mobil. The loan is repayable until March 2007. As of December 31, 2003, the Company was in compliance with all covenants
agreed to in the loan agreements mentioned above. As of December 31, 2003, outstanding debt to VIPnets minority
shareholders is EUR 450. The year-end average interest rates for the long-term debt excluding
interest rate swap agreements for 2003 and 2002 are as follows: 2003
    
    2002Bonds
    
    
    4.57
    %
    
    
    5.32
    %Bank debt
    
    
    4.96
    %
    
    
    3.49
    %
 F-33




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) Following is a table that shows the aggregate amounts of long-term debt
maturing during the next five years and thereafter: 2004
    
    
    530,8692005
    
    
    581,0932006
    
    
    492,0992007
    
    
    171,7892008
    
    
    290,990Thereafter
    
    
    806,317
 (15)   LEASING The Company leases equipment used in its operations. The leases are
classified as either operating or capital leases. The lease contracts expire on
various dates through 2015. Future minimum lease payments for noncancelable operating leases, capital
leases and cross border leases as of December 31, 2003 are: Crossborder
    
    Capital
    
    Operatingleases
    
    leases
    
    leases2004
    
    
    93,725
    
    
    
    1,898
    
    
    
    71,4302005
    
    
    101,542
    
    
    
    166
    
    
    
    64,6862006
    
    
    114,603
    
    
    
    25
    
    
    
    61,6802007
    
    
    135,375
    
    
    
    6
    
    
    
    60,2112008
    
    
    119,214
    
    
    
    8
    
    
    
    59,431after 2008
    
    
    752,090
    
    
    
    
    
    
    
    54,271Total minimum lease payments
    
    
    1,316,549
    
    
    
    2,103
    
    
    
    371,709Less amount representing interest
    
    
    (361,846
    )
    
    
    (16
    )Present value of lease payments
    
    
    954,703
    
    
    
    2,087Less current portion
    
    
    (93,725
    )
    
    
    (1,765
    )Non-current lease obligations
    
    
    860,978
    
    
    
    322
 Total rent expense was EUR 74,358, EUR 67,666 and EUR 52,130 in 2003, 2002
and 2001, respectively. Cross border leases In 1999 and 1998, the Company entered into various cross border lease
transactions whereby certain equipment items, mainly switches, were sold to a
U.S.-based trust and leased back over certain terms. Concurrent with the
inception, the Company entered into Payment Undertaking Agreements (PUA) with
several counter-parties whereby the counterparties agreed to make lease
payments on behalf of the Company in exchange for a deposit. The counterparties
in the PUAs received upfront payments totaling EUR 509,285 and EUR 113,763 for
a portion of the debt assumed in 1999 and 1998, respectively. Interest accruing
on the cash deposits matches interest on the debt portion financed through the
deposit. In addition to the cash deposits, the Company purchased debt
securities, deposited those securities with a custodian and pledged the
securities to one of the counter-parties in the PUA; the balance is to cover
the remaining portion of the present value of the lease obligation not yet
covered by the cash F-34




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) deposit made by the Company. The Company then also entered into a
swap agreement with that same counterparty swapping the entire cash flows from
the securities for cash flows from the portion of the lease payments that the
counterparty is obligated to pay under the PUA. As a result of the swap
agreement, interest income on the securities matches interest expense on the
lease. In 1999, mobilkom austria entered into similar cross border lease
transactions whereby certain equipment items (mainly transceiver stations, base
station controllers and location registers) were sold to four U.S.-based trusts
and leased back over certain terms. In 2001, the Company entered into a cross border lease transaction whereby
certain equipment items, mainly switches were leased to a U.S.-based trust and
leased back over certain terms. Concurrent with the inception, the Company
entered into PUAs with several counterparties whereby the counterparties agreed
to make lease payments on behalf of the Company in exchange for the upfront
lease payments received under the head lease. The counter-parties in the PUAs
received upfront payments totaling EUR 200,526 for a portion of the debt
assumed in 2001. In addition to the PUAs the Company provided a loan of EUR
66,554 to the U.S.-based trust. Interest accruing on the PUAs and the loan
match interest on the debt portion. The difference between the cash proceeds from the sale and the present
value of the future minimum lease payments represents a gain on the sale of a
tax benefit. The net cash effect resulting from these transactions relates to
the total gain from the sale of the tax benefits which amounted to EUR 14,547,
EUR 44,437 and EUR 7,337 in 2001, 1999 and 1998, respectively. The Company is
amortizing these amounts over the term of the lease. The cash deposits, the
securities purchased in connection with the PUAs and the upfront payments
received for the head lease and the lease obligations are recorded separately
on the balance sheets as the Company has not been released from their
obligation under the lease and a legal right to offset does not exist.
Accordingly, interest income and expenses in an equal amount totaling EUR
65,669, EUR 70,634 and EUR 58,598 have been recognized in 2003, 2002 and 2001,
respectively. Total assets and liabilities recorded in connection with the cross border
leases are as follows: At December 31,
    
    2003
    
    2002Securities held-to-maturity, non-current
    
    
    119,793
    
    
    
    138,454Other assets
    
    
    834,910
    
    
    
    1,038,580Total assets in connection with cross border leases
    
    
    954,703
    
    
    
    1,177,034Of which current
    
    
    94,517
    
    
    
    103,978Lease obligations
    
    
    954,703
    
    
    
    1,177,034Of which current
    
    
    93,725
    
    
    
    102,719
 In 2001, two banks issued letters of credit to the trust for the
liabilities of the Company. As of December 31, 2003, these letters of credit
totaled EUR 108,497. F-35




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) (16)   EMPLOYEE BENEFIT OBLIGATIONS Long-term liabilities for employee benefits consist of the following: At December 31,
    
    2003
    
    2002Contractual termination benefits
    
    
    31,932
    
    
    
    132,346Service awards
    
    
    46,870
    
    
    
    57,862Severance
    
    
    67,606
    
    
    
    32,612Pensions
    
    
    9,552
    
    
    
    9,709Total
    
    
    155,960
    
    
    
    232,529
 Contractual termination benefits In June 2000, June 1999 and in November 1997, the Company offered
voluntary retirement incentive programs (VRIPs) to civil servants who cannot
be terminated involuntarily. An obligation for VRIPs was recognized when the
eligible civil servant accepted the offer. The present value of the obligation
is determined based on current compensation levels and the law. An annual
increase of 2.5% for future years and a discount rate of 4.5% are used. VRIPs
are not funded. On January 1, 2002 a law was enacted that covers civil servants after the
age of 55 by a governmental retirement plan with the effect of reducing the
Companys obligation under the VRIPs. Following that law the Company reversed
EUR 26,802 and EUR 57,366 of these accruals in 2003 and 2002, respectively. As
of December 31, 2003, the accrual for the VRIPs relate to 120 employees. In
connection with VRIPs the Company made payments of EUR 69,634, EUR 95,262 and
EUR 68,456 during 2003, 2002 and 2001, respectively. Expenses as well as the reversals of accruals are reflected as a reduction
of employee costs in the accompanying consolidated statement of operations. Actuarial assumptions The assumptions used in the measurement of obligations for service awards,
severance payments and pensions are shown in the following table: At December 31,
    
    2003
    
    2002
    
    2001Actuarial assumptions:Discount rate
    
    
    5.0
    %
    
    
    5.0
    %
    
    
    5.0
    %Rate of
compensation increase  civil servants
    
    
    4.0
    %
    
    
    3.7
    %
    
    
    3.6
    %Rate of
compensation increase  other employees
    
    
    2.5
    %
    
    
    3.7
    %
    
    
    3.6
    %Rate of increase of pensions
    
    
    1.8
    %
    
    
    1.1
    %
    
    
    1.1
    %
 Service awards Civil servants and certain employees (together employees) are eligible
to receive service awards. Under these plans, eligible employees receive a cash
bonus after a specified service period. The bonus is equal to two months salary
after 25 years of service and four months salary after 40 years of service.
Employees with at least F-36




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) 35 years of service when retiring are also eligible to receive a bonus
equal to four months salary. The compensation is accrued as earned over the
period of service taking into account estimates of employees whose employment
will be terminated or who will retire prior to reaching the required service
period. All actuarial gains and losses are recognized immediately in the period
realized. The following table provides the components and a reconciliation of the
changes in service awards for the years ended December 31, 2003 and 2002,
respectively: 2003
    
    2002Accrual at the beginning of the year
    
    
    57,862
    
    
    
    59,186Change in reporting entities
    
    
    
    
    
    
    2,744Service cost
    
    
    2,301
    
    
    
    2,348Interest cost
    
    
    2,814
    
    
    
    3,024Recognized actuarial gains
    
    
    (12,125
    )
    
    
    (6,930
    )Benefits paid
    
    
    (3,982
    )
    
    
    (2,510
    )Accrual at the end of the year
    
    
    46,870
    
    
    
    57,862
 Severance Severance benefit obligations for employees hired before January 1, 2003
are covered by defined benefit plans as described below. Following a legal
change, obligations for employees starting to work for the Company after
January 1, 2003 are covered by a defined contribution plan and the Company paid
EUR 119 to this deferred contribution plan (BAWAG Allianz
Mitarbeitervorsorgekasse AG) in 2003. Eligible employees receive severance payments equal to a multiple of their
monthly compensation which comprises fixed compensation plus variable elements
such as overtime and bonuses. Maximum severance is equal to a multiple of
twelve times eligible monthly compensation. Up to three months of benefits are
paid upon termination, with any benefit in excess of that amount being paid in
monthly installments over a period not exceeding ten months. In case of death,
the heirs of an eligible employee will receive 50% of the severance benefits. The following tables provide the components of the net periodic benefit
cost and a reconciliation of the changes in severance benefit obligations for
the years ended December 31, 2003, 2002 and 2001, respectively: 2003
    
    2002
    
    2001Service cost
    
    
    4,218
    
    
    
    3,926
    
    
    
    1,893Interest cost
    
    
    1,784
    
    
    
    1,311
    
    
    
    924Amortization of unrecognized net obligation
    
    
    308
    
    
    
    221
    
    
    
    29Curtailment loss / settlement
    
    
    1,090
    
    
    
    683
    
    
    
    1,876Net periodic benefit cost
    
    
    7,402
    
    
    
    6,141
    
    
    
    4,722
 F-37




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) 2003
    
    2002Projected benefit obligation at the beginning of the year
    
    
    36,849
    
    
    
    22,415Change in reporting units
    
    
    (587
    )
    
    
    4,249Service cost
    
    
    4,218
    
    
    
    3,926Interest cost
    
    
    1,784
    
    
    
    1,311Actuarial (gains) losses
    
    
    (11,004
    )
    
    
    7,459Curtailment loss / settlement
    
    
    1,090
    
    
    
    683Benefits paid
    
    
    (2,723
    )
    
    
    (3,194
    )Projected benefit obligation at the end of the year
    
    
    29,627
    
    
    
    36,849Unrecognized net actuarial losses
    
    
    (4,782
    )
    
    
    (16,093
    )Accrued liability at the end of the year
    
    
    24,845
    
    
    
    20,756Voluntary severance obligation
    
    
    42,761
    
    
    
    11,856Total accrued severance liabilities at the end of the year
    
    
    67,606
    
    
    
    32,612
 The liability for voluntary severance payments relates to individuals who
are generally not entitled to severance payments, but have accepted a special
offer by the Company to receive severance payments for voluntary termination of
employment. Until November 28, 2003, the government offered to civil servants at a
certain age an early retirement at reduced future pension payments. The Company
offered these eligible employees additional severance payments to further
encourage the acceptance of the government offer. The Company incurred a legal
obligation to civil servants making use of this opportunity and accrued
severance costs of EUR 39,630 and other costs of EUR 7,678 in 2003. Telekom
Austria does not expect any future liabilities in addition to these accruals.
Due to this one-time offer the Companys workforce was reduced by 650 civil
servants in 2003. Pensions Defined contribution pension plans Pension benefits are generally provided by social security for employees
and by the government for civil servants in Austria. The Company is required to
assist in funding the Austrian governments pension and health care obligations
to the Companys current and former civil servants and their surviving
dependents. The Company was legally obligated to make annual contributions to
the Austrian government for active civil servants. These contributions
gradually increased from 27.5% in 2000 to 30.1% in 2003. Beginning in October
2005 the contribution will be reduced to 28.3%. Contributions to the
government, net of the share contributed by civil servants, were EUR 51,520,
EUR 52,647 and EUR 56,380 in 2003, 2002 and 2001, respectively. In 2000 and 1999, the Company sponsored a defined contribution plan
covering substantially all employees of one subsidiary. In 2001, this plan was
also offered to the employees of Telekom Austria and all its other Austrian
subsidiaries. The Companys contributions to this plan are based on a
percentage of the compensation not exceeding 5% of the salaries. The annual
cost of this plan amounted to approximately EUR 9,082, EUR 6,961 and EUR 4,669
in 2003, 2002 and 2001, respectively. F-38




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) Defined benefit pension plan The Company provides defined benefits for certain former employees. All of
such employees are retired and were employed prior to January 1, 1975. This
unfunded plan provides benefits based on a percentage of the salary and on the
years employed, not exceeding 80% of the salary before retirement including the
pension provided by social security. The Company uses the projected unit credit method to determine pension
cost for financial reporting purposes. In conjunction with this method the
Company amortizes actuarial gains and losses using the corridor method. The pension benefits for 2003, 2002 and 2001 are shown in the following
table: 2003
    
    2002
    
    2001Interest cost
    
    
    396
    
    
    
    424
    
    
    
    504Amortization of actuarial
gain
    
    
    (64
    )
    
    
    (50
    )
    
    
    (59
    )Amortization of unrecognized transition obligation
    
    
    343
    
    
    
    343
    
    
    
    343Net periodic pension benefit cost
    
    
    675
    
    
    
    717
    
    
    
    788
 The following table provides a reconciliation of the changes of benefit
obligations for the years ended December 31, 2003 and 2002, respectively: 2003
    
    2002Projected benefit obligation at the beginning of the year
    
    
    8,327
    
    
    
    8,926Interest cost
    
    
    396
    
    
    
    424Actuarial gains
    
    
    (273
    )
    
    
    (128
    )Benefits paid
    
    
    (832
    )
    
    
    (895
    )Projected benefit obligation at the end of the year
    
    
    7,618
    
    
    
    8,327Unrecognized net gain
    
    
    1,934
    
    
    
    1,725Unrecognized transition obligation
    
    
    
    
    
    
    (343
    )Accrued pension liability
    
    
    9,552
    
    
    
    9,709
 (17)   STOCK BASED COMPENSATION Stock option plan On October 4, 2000, the shareholders of Telekom Austria approved stock
option plans for employees of the Company and mobilkom austria. Under this
plan, the Company may grant a total of 4,686,881 options, each of which entitle
eligible grantees upon exercise of the option to receive at their choice either
cash equal to the difference between the average quoted price of Telekom
Austria stock during the five trading days preceding the exercise and the IPO
price of Euro 9 or shares at an exercise price of Euro 9. One option is
convertible into one share. The options granted may be exercised on specific
dates between May 31, 2002, and February 27, 2004, as long as the average share
price during the five days prior to exercise exceeds the initial public
offering price by 30% or more. On November 21, 2000, the Company granted all 4,686,881 options. In 2003,
2002 and 2001, respectively, 164,077,520,766 and 733,188 options were
forfeited, therefore; 3,268,850, and 3,432,927 options are outstanding as of
December 31, 2003 and 2002, respectively. F-39




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) As the stock option plans are accounted for in accordance with APB Opinion
25 and related interpretations, the amount of the liability is measured each
period based on the current stock price. As the stock price as of December 31,
2003, 2002 and 2001 did not exceed the hurdle and was not deemed probable, no
compensation expense was recorded in 2003, 2002 and 2001 (see note (27)). (18)   INCOME TAXES Income (loss) before income taxes, minority interests and cumulative
effect of a change in accounting principle is attributable to the following
geographic locations: 2003
    
    2002
    
    2001Domestic
    
    
    186,197
    
    
    
    33,710
    
    
    
    (199,049
    )Foreign
    
    
    46,360
    
    
    
    10,101
    
    
    
    (1,019
    )Total
    
    
    232,557
    
    
    
    43,811
    
    
    
    (200,068
    )
 As described in note (2), on June 28, 2002 the Company acquired the
remaining outstanding interest of mobilkom austria through the acquisition of
Autel. mobilkom austria has been consolidated since that date. Prior to the
acquisition of Autel on June 28, 2002, the Company held a 74.999% interest in
mobilkom austria which was accounted for under the equity method. In the first
quarter 2001, mobilkom austria recorded a tax expense of EUR 134,437 due to a
change in tax status of mobilkom austria AG from a taxable entity to a
nontaxable pass-through entity which occurred in the first quarter of 2001 and
which was effective retroactive to July 1, 2000 for tax purposes.
Correspondingly, the Company recorded its 74.999% proportional share of
mobilkom austrias tax expense and recognized a deferred tax benefit during the
three month period ended March 31, 2001. Thus, the direct income tax effects on
the Company of the change in tax status of mobilkom austria and the
proportional pickup from the income tax expense reported by mobilkom austria
essentially offset each other in the income tax expense reported by the Company
for the year ended December 31, 2001. Income tax expense (benefit) attributable to income (loss) before income
taxes, minority interests and extraordinary items for the years ended December
31, consisted of the following: 2003
    
    2002
    
    2001CurrentDomestic
    
    
    8,899
    
    
    
    1,097
    
    
    
    (292
    )Foreign
    
    
    14,511
    
    
    
    5,771
    
    
    
    23,410
    
    
    
    6,868
    
    
    
    (292
    )DeferredDomestic
    
    
    52,506
    
    
    
    15,627
    
    
    
    (94,278
    )Foreign
    
    
    7,120
    
    
    
    3,617
    
    
    
    (343
    )59,626
    
    
    
    19,244
    
    
    
    (94,621
    )Total
    
    
    83,036
    
    
    
    26,112
    
    
    
    (94,913
    )
 F-40




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) Benefits of operating loss carryforwards of EUR 1,818, EUR 8,641 and EUR
7,799 were included in the deferred tax expense (benefit) for the years ended
December 31, 2003, 2002 and 2001, respectively. Total income tax expense (benefit) was recorded as follows: 2003
    
    2002
    
    2001Continuing operations
    
    
    83,036
    
    
    
    26,112
    
    
    
    (94,913
    )Other comprehensive income
    
    
    2,787
    
    
    
    1,024
    
    
    
    (6,683
    )Additional paid in capital
    
    
    451
    
    
    
    424
    
    
    
    86,274
    
    
    
    27,560
    
    
    
    (101,596
    )
 The Company is subject to income taxes in Austria at a rate of 34% of
taxable income. The following table shows the principal components for the
difference between the reported income tax expense (benefit) and the amount of
income tax expense (benefit) that would result from applying the Austrian
statutory income tax rate to income (loss) before income taxes, minority
interests and changes in cumulative effect of a change in accounting principle: 2003
    
    2002
    
    2001Income tax expense (benefit) at statutory rate
    
    
    79,069
    
    
    
    14,896
    
    
    
    (68,023
    )Foreign tax rate differential
    
    
    (7,053
    )
    
    
    (2,125
    )
    
    
    31Non-deductible expenses
    
    
    3,792
    
    
    
    335
    
    
    
    150Tax incentives
    
    
    (3,673
    )
    
    
    (3,626
    )
    
    
    (2,105
    )Tax free income from investments
    
    
    (563
    )
    
    
    (1,163
    )
    
    
    (1,603
    )Tax rate differential on equity in earnings of affiliates
    
    
    
    
    
    
    (1,389
    )
    
    
    10,611Nondeductible goodwill amortization and impairment charges
    
    
    
    
    
    
    4,388
    
    
    
    647Tax benefit recognized for prior year goodwill amortization and impairment
    
    
    
    
    
    
    
    
    
    
    (40,080
    )Change in valuation allowance
    
    
    7,724
    
    
    
    11,008
    
    
    
    5,456Other
    
    
    3,740
    
    
    
    3,788
    
    
    
    3Income tax expense (benefit)
    
    
    83,036
    
    
    
    26,112
    
    
    
    (94,913
    )Effective income tax rate
    
    
    35.7
    %
    
    
    59.6
    %
    
    
    47.4
    %
 Non-deductible expenses mainly consist of interest expenses on shareholder
loans. Tax incentives principally consist of research incentives. The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at December 31 are shown below. 2003
    
    2002Deferred tax assetsGoodwill
    
    
    34,846
    
    
    
    44,615Deferred deduction for write downs of investments in subsidiaries
    
    
    63,219
    
    
    
    76,858Operating loss carryforwards
    
    
    227,956
    
    
    
    207,232Long-term debt
    
    
    6,614
    
    
    
    13,362Other liabilities
    
    
    10,484
    
    
    
    5,542Employee benefit obligations
    
    
    3,745
    
    
    
    Other
    
    
    8,276
    
    
    
    12,354Total deferred tax assets
    
    
    355,140
    
    
    
    359,963Valuation allowance
    
    
    (81,639
    )
    
    
    (16,214
    )Deferred tax assets, net of valuation allowance
    
    
    273,501
    
    
    
    343,749
 F-41




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) 2003
    
    2002Deferred tax liabilitiesProperty, plant and equipment
    
    
    (30,244
    )
    
    
    (39,683
    )Long-term investments
    
    
    (8,690
    )
    
    
    Other intangible assets
    
    
    (97,347
    )
    
    
    (88,178
    )Accrued liabilities
    
    
    (350
    )
    
    
    (4,892
    )Other assets
    
    
    (5,277
    )
    
    
    (13,866
    )Employee benefit obligation
    
    
    
    
    
    
    (30
    )Other
    
    
    (8,093
    )
    
    
    (12,351
    )Total deferred tax liabilities
    
    
    (150,001
    )
    
    
    (159,000
    )Net deferred tax
    
    
    123,500
    
    
    
    184,749
 At December 31, 2003, the Company had approximately EUR 701,516 of
operating loss carryforwards. Thereof, EUR 110,598 relate to foreign
subsidiaries. Of these loss carryforwards relating to foreign subsidiaries, EUR
110,114 have expiration dates as follows: Years
    
    Amount2004
    
    
    8,1112005
    
    
    28,0872006
    
    
    40,2142007
    
    
    24,3462008
    
    
    8,4652009
    
    
    8912010
    
    
    Total
    
    
    110,114
 The remaining amount of operating loss carryforwards are in Austria and do
not expire. In Austria the annual usage is limited to 75% of the taxable income
for that year. In assessing the recoverability of deferred tax assets, management
considers whether it is more likely than not that all the deferred tax assets
will be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income and tax
planning strategies in making this assessment. As of December 31, 2003 the
Company has recognized a net deferred tax asset of EUR 124,138 related to the
operations in Austria. In order to realize this deferred tax asset the Company
will need to generate future taxable income exclusive of reversing taxable
temporary differences of approximately EUR 486,815 over an indefinite period in
Austria. Based on the level of historical taxable income and projections for future
taxable income over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not the Company will
realize the benefits of these deductible differences and operating loss carry
forwards, net of valuation allowances. The amount of deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income are reduced. During the years ended December 31, 2003 and 2002 deferred tax expenses of
EUR 6,560 and EUR 11,008, respectively, were recognized as adjustments to the
valuation allowance because of a change in circumstances that caused a change
in judgement about the realizability of the related deferred tax asset in
future years. In 2003 and 2002 the valuation allowance increased by EUR 65,425
and EUR 10,758, respectively. Thereof EUR 57,701 and EUR 250 had no impact on
the income statement in 2003 and 2002, respectively. F-42




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) (19)   FINANCIAL INSTRUMENTS Derivative financial instruments are used by the Company to manage its
exposure to adverse fluctuations in interest and foreign exchange rates. The
Company has established a control environment which includes policies and
procedures for risk assessment, approval, reporting and monitoring of
derivative financial instrument activities. The Company is not a party to
leveraged derivatives and the policies prohibit the holding or issuing of
financial instruments for speculative purposes. The Company uses into various types of financial instruments including
derivative financial instruments in the normal course of business for purposes
other than trading. By their nature, all such instruments involve risk, including market risk
and credit risk of nonperformance by counterparties, and the maximum potential
loss may exceed the amount recognized in the balance sheets. However, at
December 31, 2003 and 2002, in managements opinion the probability of
nonperformance of the counterparties in these financial instruments was remote. Credit risk The Company monitors its exposure to credit risk. The Company does not
have any significant exposure to any individual customer or counterparty, nor
does it have any major concentration of credit risk related to any financial
instrument other than noted under section concentration of credit risk in
significant accounting policies. The Company does not require collateral in respect of financial assets. In
order to reduce the risk of nonperformance by the other parties to swap
agreements, the contracts are subject to the International Swap Dealers
Agreement. Market risk The market risk is monitored by using value-at-risk models for interest
rate as well as currency risk for the long-term debt and derivative portfolios. Information with respect to cash flow hedges Changes in the fair value of interest rate swaps designated as hedging
instruments of variability of cash flows associated with variable rate
long-term debt are reported in accumulated other comprehensive income. These
amounts are subsequently classified into financial income as a yield adjustment
in the same period in which the related interest on the floating-rate debt
obligations affect earnings. In 2003 and 2002, respectively, no hedge
ineffectiveness occurred. Interest rate swap agreements In the years 1995 to 1997 the Company entered into interest rate swaps to
reduce the aggregate exposure to changes in floating interest rates and fair
market value fluctuations of the debt portfolio. Fixed interest rate payments
as of December 31, 2003, ranged from 6.7% to 3.0%. Floating-rate payments are
based on rates tied to different inter-bank offered rates. F-43




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) In line with its risk policy the Company entered into fix to floating
interest rate swaps in 2003. The floating rate is based on EURIBOR and enables
the company to participate from current low short-term interest rates. The following table indicates the types of swaps in use at December 31,
2003 and 2002, and their weighted-average interest rates and the
weighted-average remaining terms of the interest rate swap contracts. Average
variable rates are those in effect at the reporting date and may change
significantly over the lives of the contracts: 2003
    
    2002Variable to fixed swaps in EURNotional amount in EUR
    
    
    181,682
    
    
    
    181,682Average receive rate
    
    
    2.25
    %
    
    
    3.35
    %Average pay rate
    
    
    6.47
    %
    
    
    6.47
    %Average maturity in years
    
    
    1.4
    
    
    
    2.4Fixed to variable swaps in EURNotional amount in EUR
    
    
    300,000
    
    
    
    Average receive rate
    
    
    5.00
    %
    
    
    Average pay rate
    
    
    2.96
    %
    
    
    Average maturity in years
    
    
    9.5
    
    
    
    Variable to fixed swaps in Japanese Yen (JPY)Notional amount in JPY
    
    
    10,000,000
    
    
    
    10,000,000Notional amount in EUR
    
    
    74,047
    
    
    
    80,392Average receive rate
    
    
    0.005
    %
    
    
    0.01
    %Average pay rate
    
    
    3.15
    %
    
    
    3.15
    %Average maturity in years
    
    
    0.5
    
    
    
    1.5
 Foreign exchange agreements The Company entered into foreign currency denominated loans because of low
interest rates connected to loans denominated in Japanese Yen and Swiss Francs
(SFR). The use of cross currency swaps allows the Company to reduce the
exposure to the risk of adverse changes in exchange rates. Fixed interest rates
as of December 31, 2003, range from 6.4% to 7.7%. The following table indicates the types of foreign exchange agreements in
use at December 31, 2003 and 2002, and if applicable their weighted-average
interest rates, the weighted-average remaining terms and the respective
exchange rates of the contracts: 2003
    
    2002Cross Currency Swaps EUR  SFRNotional amount in EUR
    
    
    176,635
    
    
    
    176,635Notional amount in SFR
    
    
    300,000
    
    
    
    300,000Average receive rate SFR
    
    
    5.47
    %
    
    
    5.47
    %Average pay rate EUR
    
    
    7.65
    %
    
    
    7.65
    %Average maturity in years
    
    
    1.4
    
    
    
    2.4
 F-44




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) 2003
    
    2002Cross Currency Swaps EUR  JPYNotional amount in EUR
    
    
    73,554
    
    
    
    73,554Notional amount in JPY
    
    
    10,000,000
    
    
    
    10,000,000Average receive rate JPY
    
    
    3.15
    %
    
    
    3.15
    %Average pay rate EUR
    
    
    6.41
    %
    
    
    6.41
    %Average maturity in years
    
    
    0.5
    
    
    
    1.5Forward exchange contracts  US $Notional amount in EUR
    
    
    2,862
    
    
    
    3,599Notional amount in US $
    
    
    3,350
    
    
    
    3,600Forward exchange rate (weighted)
    
    
    1.17
    
    
    
    1.00Exchange rate as of the balance sheet date
    
    
    1.26
    
    
    
    1.05Longest term of the contracts
    February 2004
    
    March 2003
 The notional amounts of the derivative instruments above do not represent
amounts exchanged by the parties and, therefore, are not a measure of our
exposure. The Companys exposure is limited to the fair value of the contracts
with a positive fair value plus interest receivable, if any, at the reporting
date. The following table summarizes the fair values of financial instruments: 2003
    
    2002Carrying
    
    Fair
    
    Carrying
    
    Fairamount
    
    value
    
    amount
    
    valueFinancial instrumentsCash
    
    
    201,926
    
    
    
    201,926
    
    
    
    27,337
    
    
    
    27,337Accounts receivable  trade
    
    
    559,872
    
    
    
    559,872
    
    
    
    451,934
    
    
    
    451,934Balances due from related parties
    
    
    1,549
    
    
    
    1,549
    
    
    
    6,723
    
    
    
    6,723Accounts
payable  trade
    
    
    (589,368
    )
    
    
    (589,368
    )
    
    
    (649,890
    )
    
    
    (649,890
    )Payables to related parties
    
    
    (26,657
    )
    
    
    (26,657
    )
    
    
    (37,198
    )
    
    
    (37,198
    )Securities held-to-maturity
    
    
    124,951
    
    
    
    141,547
    
    
    
    138,454
    
    
    
    159,469Securities available-for-sale
    
    
    19,344
    
    
    
    19,344
    
    
    
    18,948
    
    
    
    18,948Long-term debt
    
    
    (2,342,288
    )
    
    
    (2,423,348
    )
    
    
    (2,079,885
    )
    
    
    (2,203,008
    )Derivative financial instrumentsInterest rate swap agreements
    
    
    (19,582
    )
    
    
    (19,582
    )
    
    
    (20,996
    )
    
    
    (20,996
    )Cross currency swap agreements
    
    
    13,065
    
    
    
    13,065
    
    
    
    36,034
    
    
    
    36,034Foreign currency forward contract
    
    
    (180
    )
    
    
    (180
    )
    
    
    (160
    )
    
    
    (160
    )
 (20)   SHAREHOLDERS EQUITY Accounting for derivative and hedging activities Derivative financial instruments are used by the Company to manage its
exposure to adverse fluctuations in interest and foreign exchange rates. The
Company has established a control environment which includes policies and
procedures for risk assessment, approval, reporting and monitoring of
derivative financial instrument activities. The F-45




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) Company is not a party to leveraged derivatives and the policies prohibit
the holding or issuing of financial instruments for speculative purposes. For derivatives designed either as fair value or cash flow hedges, changes
in the time value of the derivatives are excluded from the assessment of hedge
effectiveness and are recorded in earnings. Hedge ineffectiveness, determined
in accordance with SFAS No. 133 had no impact on the Companys earnings for the
years ended December 31, 2003 and 2002, respectively. No fair value hedges or
cash flow hedges were derecognized or discontinued during the years ended
December 31, 2003 and 2002, respectively. The cumulative unrealized gains and losses for hedging activities recorded
in other comprehensive income are as follows: December 31,
    
    December 31,2003
    
    2002Unrealized LossesGross
    
    
    (10,645
    )
    
    
    (17,148
    )Less income tax
    
    
    3,498
    
    
    
    5,559Net of income tax
    
    
    (7,147
    )
    
    
    (11,589
    )Unrealized GainsGross
    
    
    
    
    
    
    1,890Less income tax
    
    
    
    
    
    
    (643
    )Net of income tax
    
    
    
    
    
    
    1,247Unrealized net loss
    
    
    (7,147
    )
    
    
    (10,342
    )
 Other comprehensive income Other comprehensive income consist of the following items: Unrealized gain
    
    Unrealized gain
    
    
    
    
    
    Accumulated other(loss) on
    
    (loss) on hedging
    
    Foreign currency
    
    comprehensivesecurities
    
    activities
    
    translation
    
    incomeBalance January 1, 2001
    
    
    1
    
    
    
    
    
    
    
    (28
    )
    
    
    (27
    )Cumulative effect of accounting change,
net of income tax
    
    
    
    
    
    
    (10,959
    )
    
    
    
    
    
    
    (10,959
    )Changes, net of income tax
    
    
    (162
    )
    
    
    (2,102
    )
    
    
    14,630
    
    
    
    12,366Balance December 31, 2001
    
    
    (161
    )
    
    
    (13,061
    )
    
    
    14,602
    
    
    
    1,380Changes, net of income tax
    
    
    (687
    )
    
    
    2,719
    
    
    
    (6,496
    )
    
    
    (4,464
    )Balance December 31, 2002
    
    
    (848
    )
    
    
    (10,342
    )
    
    
    8,106
    
    
    
    (3,084
    )Changes, net of income tax
    
    
    2,214
    
    
    
    3,195
    
    
    
    (10,690
    )
    
    
    (5,281
    )Balance December 31, 2003
    
    
    1,366
    
    
    
    (7,147
    )
    
    
    (2,584
    )
    
    
    (8,365
    )
 F-46




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) Sale of American call option On November 21, 2000, Telekom Austria purchased 3,832,248 American call
options for a premium of EUR 12,527. The expiration date is February 27, 2004.
The underlying share of the American call option is the share of Telekom
Austria AG. The strike and execution price of the call option is Euro 9 and
settlement is either physical delivery of the shares or cash, at the request of
Telekom Austria. The American call option will be used to satisfy any
obligation resulting from the stock option plan. As of December 31, 2003,
together with mobilkom austria, the Company holds 3,326,881 options. In 2003, the Company sold 610,000 American call options for an aggregate
price of EUR 957. In 2002, the Company sold 717,701 American call options for
an aggregate price of EUR 1,245. As the original acquisition of the options was
accounted for as permanent equity under the provisions of EITF 00-19, proceeds
from the sale of the options have been credited net of tax directly to
additional paid in capital in the accompanying statement of changes in
shareholders equity. Treasury shares At the Annual General Meeting on June 4, 2003, the Management Board was
authorized to increase the share capital by up to EUR 21,810 in order to
provide stock options to be granted to employees, directors and members of the
Management Board of the Company or of an affiliated company for a period of
five years, ending 2008. In addition, the Management Board was authorized to acquire up to 50
million treasury shares at a minimum price of Euro 9 and a maximum price of
Euro 15 per share during a period of 18 months, ending at the end of 2004, and
is empowered to either retire these shares or use them to satisfy the
obligation under the stock option program described in note (17). Restricted earnings Under the Austria Stock Corporation Act, retained earnings available for
distribution to shareholders are based upon the unconsolidated retained
earnings of Telekom Austria AG as reported in its balance sheet determined in
accordance with the Austrian Commercial Code. The net income of Telekom Austria AG including released untaxed reserves
of EUR 63,096 amounts to EUR 396,710. According to the Stock Corporation Act,
Article 126, the supervisory board and the management board have decided to
transfer EUR 300,000 to retained earnings, resulting in unappropriated profits
of EUR 69,710. The management board and supervisory board plan to propose to
the shareholders at the annual general shareholders meeting a distribution
from unappropriated earnings of Euro 0.13 per zero par value share. (21)   REVENUES Year ended December 31,
    
    2003
    
    2002
    
    2001Revenues from services
    
    
    3,726,955
    
    
    
    2,931,892
    
    
    
    2,555,596Revenues from sales of merchandise
    
    
    242,795
    
    
    
    186,172
    
    
    
    104,064Total
    
    
    3,969,750
    
    
    
    3,118,064
    
    
    
    2,659,660
 F-47




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) (22)   OTHER OPERATING EXPENSES Year ended December 31,
    
    2003
    
    2002
    
    2001Interconnection
    
    
    421,787
    
    
    
    361,608
    
    
    
    562,736Repairs
    
    
    178,256
    
    
    
    167,496
    
    
    
    137,345Services received
    
    
    201,050
    
    
    
    99,395
    
    
    
    39,626Advertising and marketing
    
    
    198,362
    
    
    
    153,737
    
    
    
    75,368Other support services
    
    
    107,079
    
    
    
    87,121
    
    
    
    59,027Rental expenses
    
    
    74,358
    
    
    
    67,666
    
    
    
    52,130Commission expenses
    
    
    41,078
    
    
    
    25,347
    
    
    
    4,531Bad debt expenses
    
    
    30,629
    
    
    
    39,184
    
    
    
    15,069Legal and other consulting
    
    
    44,451
    
    
    
    54,368
    
    
    
    55,304Charges from related parties
    
    
    15,013
    
    
    
    32,980
    
    
    
    35,062Travel expenses
    
    
    23,696
    
    
    
    23,363
    
    
    
    24,676Other taxes
    
    
    7,201
    
    
    
    8,665
    
    
    
    5,242Energy
    
    
    21,979
    
    
    
    21,285
    
    
    
    21,752Training expenses
    
    
    13,129
    
    
    
    11,773
    
    
    
    7,131Other
    
    
    85,453
    
    
    
    51,366
    
    
    
    58,931Total
    
    
    1,463,521
    
    
    
    1,205,354
    
    
    
    1,153,930
 In accordance with SFAS No. 144, as amended, the net loss from retirement
of long-lived assets in 2003, 2002 and 2001 respectively, of EUR 41,571, EUR
18,715 and EUR 39,020 is presented in other operating expenses, other. (23)   OTHER, net Year ended December 31,
    
    2003
    
    2002
    
    2001Foreign exchange losses
    
    
    (246,883
    )
    
    
    (216,261
    )
    
    
    (63,632
    )Foreign exchange gains
    
    
    242,013
    
    
    
    211,422
    
    
    
    56,474Dividend income
    
    
    48
    
    
    
    448
    
    
    
    2,229Other
    
    
    4,255
    
    
    
    6,721
    
    
    
    2,173Total
    
    
    (567
    )
    
    
    2,330
    
    
    
    (2,756
    )
 (24)   COMMITMENTS AND CONTINGENCIES In the normal course of business the Company is subject to proceedings,
lawsuits and other claims, including proceedings under laws and regulations
related to interconnection. Such matters are subject to many uncertainties, and
outcomes are not predictable with certainty. Consequently, management is unable
to ascertain the ultimate aggregate amount of monetary liability or financial
impact with respect to these matters at December 31, 2003. These matters could
affect the operating results or cash flows of any one quarter when resolved in
future periods. However, management believes that after final disposition, any
monetary liability or financial impact to the Company beyond that provided for
at year-end would not be material to its consolidated financial statements. F-48




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) (25)   CASH FLOW STATEMENT Following is a summary of supplemental cash flow information: Years ended December 31,
    
    2003
    
    2002
    
    2001Cash paid forInterest
    
    
    182,836
    
    
    
    173,940
    
    
    
    180,436Income taxes
    
    
    16,246
    
    
    
    10,558
    
    
    
    10,235Cash received forInterest
    
    
    3,128
    
    
    
    11,122
    
    
    
    18,176Tax refunds
    
    
    
    
    
    
    21
    
    
    
    91,255Non cash investing and financingDividends
    
    
    
    
    
    
    28,294
    
    
    
    267,505Cross border leasing
    
    
    
    
    
    
    
    
    
    
    86,315
 (26)   SEGMENT REPORTING As of January 1, 2003 management reorganized its operations into three
segments: wireline, wireless and other activities. The segment reporting for
the years 2002 and 2001 was reformatted to provide comparable data. Wireline includes fixed line, data communications and internet services
and focuses on wholesale and retail customers. Wholesale customers including
telecommunications operators and service providers are offered network-based
services, while retail customers, including business and residential end-users
are offered voice telephony, data communications, internet and other services. Wireless, operated by our mobile communications segment, offers a full
range of digital mobile communications services to business and residential
customers. The segment other activities contains the financing activities of the
Company. Adjusted EBITDA is defined by the Company as operating income before
depreciation, amortization and impairment charges. The Company uses adjusted
EBITDA to measure the performance of segments because it is commonly used in
the telecommunications industry as a comparative measure of financial
performance. In addition, the Company believes it is a widely accepted
indicator of its ability to incur and service debt. The accounting policies of the segments are the same as those described in
the summary of significant accounting policies (see note (1)). For the period ended December 31, 2003, the segment totals reconcile to
the consolidated financial statements as a result of eliminating transactions
and balances between consolidated segments. For the periods ended December 31,
2002 and 2001, respectively, the reconciliation additionally includes the
results of operations of mobilkom austria prior to June 28, 2002 (see note
(2)). F-49




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) Other
    
    SegmentWireline
    
    Wireless
    
    activities
    
    totals
    
    Eliminations
    
    ConsolidatedYear
ended December 31, 2003External revenues
    
    
    2,029,893
    
    
    
    1,939,857
    
    
    
    
    
    
    
    3,969,750
    
    
    
    
    
    
    
    3,969,750Intersegmental revenues
    
    
    167,758
    
    
    
    90,344
    
    
    
    
    
    
    
    258,102
    
    
    
    (258,102
    )
    
    
    Total revenues
    
    
    2,197,651
    
    
    
    2,030,201
    
    
    
    
    
    
    
    4,227,852
    
    
    
    (258,102
    )
    
    
    3,969,750Adj. EBITDA (excl.
Impairment charges)
    
    
    780,508
    
    
    
    727,057
    
    
    
    (45
    )
    
    
    1,507,520
    
    
    
    2,277
    
    
    
    1,509,797Impairment charges
    
    
    6,825
    
    
    
    
    
    
    
    
    
    
    
    6,825
    
    
    
    
    
    
    
    6,825Adj. EBITDA (incl.
Impairment charges)
    
    
    773,683
    
    
    
    727,057
    
    
    
    (45
    )
    
    
    1,500,695
    
    
    
    2,277
    
    
    
    1,502,972Depreciation and
amortization
    
    
    807,935
    
    
    
    325,620
    
    
    
    
    
    
    
    1,133,555
    
    
    
    (407
    )
    
    
    1,133,148Operating Income
    
    
    (34,252
    )
    
    
    401,437
    
    
    
    (45
    )
    
    
    367,140
    
    
    
    2,684
    
    
    
    369,824Total assets
    
    
    6,116,105
    
    
    
    3,131,630
    
    
    
    1,125,178
    
    
    
    10,372,913
    
    
    
    (2,476,648
    )
    
    
    7,896,265Additions to property,
plant and
equipment
    
    
    300,991
    
    
    
    294,629
    
    
    
    
    
    
    
    595,620
    
    
    
    (363
    )
    
    
    595,257
 Other
    
    Segment
    
    
    
    
    
    MobileWireline
    
    Wireless
    
    activities
    
    totals
    
    Eliminations
    
    communications
    
    ConsolidatedYear ended December 31, 2002External revenues
    
    
    2,090,006
    
    
    
    1,819,219
    
    
    
    
    
    
    
    3,909,225
    
    
    not providedIntersegmental revenues
    
    
    170,005
    
    
    
    90,132
    
    
    
    
    
    
    
    260,137Total revenues
    
    
    2,260,011
    
    
    
    1,909,351
    
    
    
    
    
    
    
    4,169,362
    
    
    
    (144,348
    )
    
    
    (906,950
    )
    
    
    3,118,064Adj. EBITDA (excl.
Impairment charges)
    
    
    807,562
    
    
    
    649,487
    
    
    
    (73
    )
    
    
    1,456,976
    
    
    
    7,691
    
    
    
    (349,109
    )
    
    
    1,115,558Impairment charges
    
    
    41,871
    
    
    
    
    
    
    
    
    
    
    
    41,871
    
    
    
    
    
    
    
    
    
    
    
    41,871Adj. EBITDA (incl.
Impairment charges)
    
    
    765,691
    
    
    
    649,487
    
    
    
    (73
    )
    
    
    1,415,105
    
    
    
    7,691
    
    
    
    (349,109
    )
    
    
    1,073,687Depreciation and
amortization
    
    
    880,971
    
    
    
    268,757
    
    
    
    
    
    
    
    1,149,728
    
    
    
    (196
    )
    
    
    (133,220
    )
    
    
    1,016,312Operating Income
    
    
    (115,280
    )
    
    
    380,730
    
    
    
    (73
    )
    
    
    265,377
    
    
    
    7,887
    
    
    
    (215,889
    )
    
    
    57,375Total assets
    
    
    6,428,133
    
    
    
    2,832,149
    
    
    
    1,007,006
    
    
    
    10,267,288
    
    
    
    (1,732,950
    )
    
    
    
    
    
    
    8,534,338Additions to property,
plant and
equipment
    
    
    340,710
    
    
    
    321,656
    
    
    
    
    
    
    
    662,366
    
    
    
    (2,300
    )
    
    
    (129,100
    )
    
    
    530,966
 Other
    
    Segment
    
    
    
    
    
    MobileWireline
    
    Wireless
    
    activities
    
    totals
    
    Eliminations
    
    communications
    
    ConsolidatedYear ended December 31, 2001External revenues
    
    
    2,437,429
    
    
    
    1,506,026
    
    
    
    
    
    
    
    3,943,455
    
    
    not providedIntersegmental revenues
    
    
    222,108
    
    
    
    207,153
    
    
    
    292
    
    
    
    429,553Total revenues
    
    
    2,659,537
    
    
    
    1,713,179
    
    
    
    292
    
    
    
    4,373,008
    
    
    
    (169
    )
    
    
    (1,713,179
    )
    
    
    2,659,660Adj. EBITDA (excl.
Impairment charges)
    
    
    814,821
    
    
    
    564,716
    
    
    
    (72
    )
    
    
    1,379,465
    
    
    
    (7
    )
    
    
    (564,716
    )
    
    
    814,742Impairment charges
    
    
    145,126
    
    
    
    
    
    
    
    
    
    
    
    145,126
    
    
    
    
    
    
    
    
    
    
    
    145,126Adj. EBITDA (incl.
Impairment charges)
    
    
    669,695
    
    
    
    564,716
    
    
    
    (72
    )
    
    
    1,234,339
    
    
    
    (7
    )
    
    
    (564,716
    )
    
    
    669,616Depreciation and
amortization
    
    
    904,075
    
    
    
    267,784
    
    
    
    
    
    
    
    1,171,859
    
    
    
    
    
    
    
    (267,784
    )
    
    
    904,075Operating Income
    
    
    (234,380
    )
    
    
    296,932
    
    
    
    (72
    )
    
    
    62,480
    
    
    
    (7
    )
    
    
    (296,932
    )
    
    
    (234,459
    )Total assets
    
    
    7,352,012
    
    
    
    2,214,101
    
    
    
    520,046
    
    
    
    10,086,159
    
    
    
    (144,736
    )
    
    
    (2,214,101
    )
    
    
    7,727,322Additions to property,
plant and
equipment
    
    
    449,031
    
    
    
    363,177
    
    
    
    
    
    
    
    812,208
    
    
    
    
    
    
    
    (363,177
    )
    
    
    449,031
 F-50




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) EBITDA differs from consolidated net income as a result of the following differences: Year ended December 31,2003
    
    2002
    
    2001Adj. EBITDA
 segment totals
    
    
    1,507,520
    
    
    
    1,456,976
    
    
    
    1,379,465Impairment charges
    
    
    (6,825
    )
    
    
    (41,871
    )
    
    
    (145,126
    )Adj. EBITDA
 segment totals
    
    
    1,500,695
    
    
    
    1,415,105
    
    
    
    1,234,339Depreciation and amortization
    
    
    (1,133,148
    )
    
    
    (1,016,312
    )
    
    
    (904,075
    )Interest income
    
    
    75,167
    
    
    
    88,191
    
    
    
    82,683Interest expense
    
    
    (230,979
    )
    
    
    (244,628
    )
    
    
    (240,986
    )Adj. EBITDA
 mobilkom austria prior to acquisition
    
    
    
    
    
    
    (349,109
    )
    
    
    (564,715
    )Equity in
earnings of affiliates  mobilkom austria prior to acquisition
    
    
    
    
    
    
    142,906
    
    
    
    197,941Equity in
earnings of affiliates  other
    
    
    19,112
    
    
    
    (2,363
    )
    
    
    (2,491
    )Other
    
    
    1,710
    
    
    
    10,021
    
    
    
    (2,764
    )Income before taxes, minority interests
and cumulative effect of change in accounting principle
    
    
    232,557
    
    
    
    43,811
    
    
    
    (200,068
    )Income tax expense
    
    
    (83,036
    )
    
    
    (26,112
    )
    
    
    94,913Minority interests
    
    
    (3,422
    )
    
    
    (4,910
    )
    
    
    530Cumulative effect of change in accounting principle, net of tax
    
    
    (11,858
    )
    
    
    
    
    
    
    Net income
    
    
    134,241
    
    
    
    12,789
    
    
    
    (104,625
    )
 In 2003, 2002 and 2001, more than 89%, 90% and 94%, respectively, of the
revenues generated by the reportable segments relate to operations in Austria.
As of December 31, 2003 and 2002, respectively, 93% and 94% of the long-lived
assets were located in Austria. (27)   SUBSEQUENT EVENTS On January 21, 2004, Telecom Italia International N.V. sold its residual
shareholding, corresponding to 73.9 million shares or 14.78% of Telekom
Austrias share capital, in a private placement to institutional investors at a
price of Euro 10.55 per share. Following completion of this transaction, the
free float in Telekom Austrias share capital increased to 52.83%. The
remaining stake is owned by ÖIAG, representing the Republic of Austria. ÖIAG
and Telekom Austria have each entered into lock-up agreements that end on May
31, 2004. On February 16, 2004, the Company acquired 33.33% of IVS Interactive Video
Services GmbH, Vienna, bringing its total interest to 100%. The purchase price
amounted to EUR 202. As of February 27, 2004, the average share price had exceeded the Initial
Public Offering price by 30% or more for five consecutive days. Therefore, the
3,268,850 stock options / stock appreciation rights discussed in note (17)
became exercisable. Therefore, compensation expense estimated at EUR 8,832 will
be recorded in the first quarter 2004. On February 27, 2004, the Company exercised its 3,326,881 American call
options on treasury shares which were acquired during the Initial Public
Offering in November 2000 to limit the Companys exposure under the stock
option plan that expired on February 27, 2004. The strike price of each call
option was Euro 9. Following the exercise of the options, 3,326,881 Telekom
Austria shares, i.e. 0.67% of its share capital, were credited to the accounts
of Telekom Austria through an off-market transaction on March 3, 2004. F-51