Annual report 2004 by Belgacom Group

key ﬁgures

(1)

2002

2003

2004

Total revenue before non-recurring items

5,338

5,454

5,540

Non-recurring revenue

1,085

Total revenue

6,422

5,454

5,540

EBITDA (2) before non-recurring items

2,020

2,250

2,394

EBITDA (2)

2,341

1,353

2,353

Operating income (EBIT)

1,482

566

1,611

Net ﬁnance revenue/(costs)

-25

-27

Loss from enterprises accounted for using the equity method

-12

-4

-1

1,445

534

1,583

-203

-208

-508

-99 1,142

-154 172

-152 922

2002

2003

2004

1,371

296

1,899

-566

-502

-556

Cash ﬂows from other investing activities

1,276

Free cash ﬂow (3)

2,081

-189

1,421

-1,560 521

-575 -764

-1,658 -237

Balance sheet total

7,298

6,009

5,368

Non-current assets

4,601

4,381

3,963

Investments, cash and cash equivalents

1,611

604

406

Shareholders’ equity

2,978

2,548

2,223

Year ended 31 December

Income Statement (EUR million)

Income before taxes and minority interests Tax expense Minority interests Net income (Group share)

As of 31 December

Cash Flow and Capital Expenditures (EUR million) Cash ﬂows from operating activities Capital expenditures

Cash ﬂows used in ﬁnancing activities Net increase/(decrease) of cash and cash equivalents

Balance sheet (EUR million)

The commitment of a leader. The spirit of a challenger.

Minority interests

293

446

407

1,545 1,109

840 157

760 110

2002

2003

2004

Basic earnings per share (in EUR)

2.86

0.43

2.57

Diluted earnings per share (in EUR)

2.86

0.43

2.57

400,000,000

399,932,159

358,612,854

0.70 1.43

0.99 0.00

1.38 0.55

2002

2003

2004

5,088

5,219

5,252

519

784

1,024

4,076

4,201

4,198

5.9

6.4

6.9

19,003

17,541

16,933

Liabilities for pensions and other post-employment beneﬁts Net ﬁnancial position

Year ended 31 December

Data per share

Weighted average number of ordinary shares

annual report 2004

Dividend per share, gross (in EUR) Special dividend per share, gross (in EUR)

As of 31 December Operating data Total access channels (in thousands) (4) Total retail and wholesale ADSL access channels (in thousands) Active mobile customers (in thousands) (5) Minutes transported by International Carrier Services (in billions)

Belgacom

Personnel

annual report • 2004

(1) Prepared under IFRS. (2) Earnings Before Interests, Taxes, Depreciation and Amortization. (3) Cash ﬂow before ﬁnancing activities.

(4) PSTN + ISDN BA + ISDN PRA + retail ADSL. (5) Customers who received/made a call or received/sent an SMS over the past three months.

key ﬁgures

(1)

2002

2003

2004

Total revenue before non-recurring items

5,338

5,454

5,540

Non-recurring revenue

1,085

Total revenue

6,422

5,454

5,540

EBITDA (2) before non-recurring items

2,020

2,250

2,394

EBITDA (2)

2,341

1,353

2,353

Operating income (EBIT)

1,482

566

1,611

Net ﬁnance revenue/(costs)

-25

-27

Loss from enterprises accounted for using the equity method

-12

-4

-1

1,445

534

1,583

-203

-208

-508

-99 1,142

-154 172

-152 922

2002

2003

2004

1,371

296

1,899

-566

-502

-556

Cash ﬂows from other investing activities

1,276

Free cash ﬂow (3)

2,081

-189

1,421

-1,560 521

-575 -764

-1,658 -237

Balance sheet total

7,298

6,009

5,368

Non-current assets

4,601

4,381

3,963

Investments, cash and cash equivalents

1,611

604

406

Shareholders’ equity

2,978

2,548

2,223

Year ended 31 December

Income Statement (EUR million)

Income before taxes and minority interests Tax expense Minority interests Net income (Group share)

As of 31 December

Cash Flow and Capital Expenditures (EUR million) Cash ﬂows from operating activities Capital expenditures

Cash ﬂows used in ﬁnancing activities Net increase/(decrease) of cash and cash equivalents

Balance sheet (EUR million)

The commitment of a leader. The spirit of a challenger.

Minority interests

293

446

407

1,545 1,109

840 157

760 110

2002

2003

2004

Basic earnings per share (in EUR)

2.86

0.43

2.57

Diluted earnings per share (in EUR)

2.86

0.43

2.57

400,000,000

399,932,159

358,612,854

0.70 1.43

0.99 0.00

1.38 0.55

2002

2003

2004

5,088

5,219

5,252

519

784

1,024

4,076

4,201

4,198

5.9

6.4

6.9

19,003

17,541

16,933

Liabilities for pensions and other post-employment beneﬁts Net ﬁnancial position

Year ended 31 December

Data per share

Weighted average number of ordinary shares

annual report 2004

Dividend per share, gross (in EUR) Special dividend per share, gross (in EUR)

Belgacom

Personnel

annual report • 2004

(1) Prepared under IFRS. (2) Earnings Before Interests, Taxes, Depreciation and Amortization. (3) Cash ﬂow before ﬁnancing activities.

(4) PSTN + ISDN BA + ISDN PRA + retail ADSL. (5) Customers who received/made a call or received/sent an SMS over the past three months.

Despite ever increasing fixed and mobile competitive pressure, the Belgacom Group managed to generate higher revenue and EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization) in 2004. The net profit (Group share) also rose significantly as compared with the previous financial year.

group ﬁnancials Revenue 2004 by segments* (before eliminations) Revenue* (in EUR millions)

EBITDA* (in EUR millions)

5,338

5,454

5,540 5,300

5,400

EBITDA* 2,394

5,500

5,600

1,800

1,900

2,000

2,100

2,200

2,300

37% MCS

2,400

EBITDA 2004 by segments* Net proﬁt (in EUR millions)

Earnings per share (in EUR) 1,142

922 200

400

600

800

2.57

04 1,000

142,000

customers won back at FLS

1,200

0.0

0.5

1.0

1.5

more than

2.0

2.5

Group EBITDA* increased by 6.4% mainly thanks to Fixed Line Services (FLS), via a strict cost control policy on operating expenses. EBITDA* margin increased to 43.2%.

Net proﬁt

0% ICS

Net proﬁt (Group share) amounted to EUR 922 million.

53% FLS

Earnings per share

0.43

04 0

2.86

172

Group revenue was up by almost 1.6% on the previous year, primarily due to the increase in the Mobile Communications Services (MCS) and International Carrier Services segments (ICS).

52% FLS 2,250

04 5,200

11% ICS

2,020

Revenue*

47% MCS

Basic earnings per share increased also signiﬁcantly to EUR 2.57 in 2004.

3.0

1,000,000

total retail and wholesale ADSL access channels

4.2 million

active customers at MCS

* Figures before non-recurring items.

group ﬁnancials Revenue 2004 by segments* (before eliminations) Revenue* (in EUR millions)

EBITDA* (in EUR millions)

5,338

5,454

5,540 5,300

5,400

EBITDA* 2,394

5,500

5,600

1,800

1,900

2,000

2,100

2,200

2,300

37% MCS

2,400

EBITDA 2004 by segments* Net proﬁt (in EUR millions)

Earnings per share (in EUR) 1,142

922 200

400

600

800

2.57

04 1,000

142,000

customers won back at FLS

1,200

0.0

0.5

1.0

1.5

more than

2.0

2.5

Group EBITDA* increased by 6.4% mainly thanks to Fixed Line Services (FLS), via a strict cost control policy on operating expenses. EBITDA* margin increased to 43.2%.

Net proﬁt

0% ICS

Net proﬁt (Group share) amounted to EUR 922 million.

53% FLS

Earnings per share

0.43

04 0

2.86

172

Group revenue was up by almost 1.6% on the previous year, primarily due to the increase in the Mobile Communications Services (MCS) and International Carrier Services segments (ICS).

52% FLS 2,250

04 5,200

11% ICS

2,020

Revenue*

47% MCS

Basic earnings per share increased also signiﬁcantly to EUR 2.57 in 2004.

3.0

1,000,000

total retail and wholesale ADSL access channels

4.2 million

active customers at MCS

* Figures before non-recurring items.

02 • The Belgacom Group 04 • Highlights 2004 06 • Message from the Chairman 08 • Message from the CEO 10 • Corporate governance and management 20 • Shareholder information

24 • Business update 26 • Fixed Line Services 30 • Mobile Communications Services 34 • International Carrier Services

36 • Group strategy 40 • Teams that have endurance 44 • Striving for the well-being of all 48 • Financial report

Committed to defend its leadership and be Best-in-class

The commitment of a leader. The spirit of a challenger.

A combination of strength and ﬂexibility, in other words. Two approaches that may seem paradoxical, but that both require our attention. The strength of a leader that can invest in future technologies. The ﬂexibility of a challenger that has what it takes to streamline structures, and to adapt them to every market demand. It is our way of listening to our customers. To respond to their needs and to anticipate their desires.

the Belgacom Group Corporate proﬁle Belgacom is the leading telecommunications company in Belgium and a market leader in a number of areas, including retail and wholesale ﬁxed-line telephony services, mobile communications services and broadband data and Internet services. For the year ended 31 December 2004, the Group had total revenues of EUR 5,540 million and operating income before depreciation and amortization (excluding non-recurring items) of EUR 2,394 million.

Vision We believe in a world where unlimited communication possibilities will create new unexpected services of uplifting beneﬁt for all.

Mission By opening up the amazing universe of communication possibilities, we enable and inspire people and organizations to achieve their dreams and goals in their ever changing world.

Values Simple – Uplifting – Reliable – Fresh

Our activities Fixed Line Services (FLS) Belgacom offers a comprehensive range of voice, data and Internet ﬁxed-line services to residential and business customers. At the end of 2004, Belgacom provided approximately 5.3 million ﬁxed connections for residential and business customers, including around 975,000 ISDN access lines and 828,000 ADSL access lines for the retail market. As the leading

ISP in Belgium, Belgacom offered Internet access to more than 1 million narrowband and broadband subscribers at the end of 2004, as well as providing wholesale services to other operators and service providers in Belgium. Belgacom has the widest commercial coverage of all telecom operators in Belgium thanks to its sales outlets, resale network, account managers, call centers and website.

Mobile Communications Services (MCS) Belgacom Mobile is the leading provider of mobile communications services in Belgium through its Proximus and Pay&Go brands, with approximately 4.2 million active customers(1) and an estimated market share of approximately 50%. Belgacom has a 75% stake in Belgacom Mobile while 25% is owned by Vodafone, one of the world’s largest mobile operators. Belgacom Mobile provides a broad range of mobile communications services to residential and business customers in Belgium, including traditional voice, data (SMS and MMS) and international roaming as well as wholesale data services to other companies.

International Carrier Services (ICS) In addition to its activities in Belgium, Belgacom provides voice and data connectivity and capacity services to telecommunications operators and service providers worldwide. On 22 February 2005, Belgacom signed an agreement to combine its BICS with Swisscom Fixnet into a joint venture in which Belgacom will own 72% of the shares.

(1) Active customers are customers who have made or received at least one call or sent or received at least one SMS message in the last three months.

2004 was not just the year in which Belgacom was first listed on the stock exchange, it was also a year of fierce competition. This we experienced every day, at all levels of the Group’s activities. But we did more than just stand our ground: we launched a counter-offensive. Which is apparent in some of the key events of the year: the winback of 142,000 (fixed-line) customers, the reinforcement of our leadership position in terms of market shares and mobile-sector profitability, and our active participation in the consolidation of European carrier activities.

highlights 2004 January

May

• Fixed Line Services (FLS) launches major internal campaign to win back customers.

• Launch of external mobility projects “e-ID” and “Call Center 112.”

February

• FLS boosts its ADSL offer and introduces ADSL Light.

• Belgacom has 1,000,000 active surfers connected to its network. More than two out of every three have opted for ADSL.

• Mobile Communications Services (MCS) launches ﬁrst 3G services for corporate market in Belgium.

March

• Belgacom makes development of interactive digital television a top priority.

• International Carrier Services (ICS) ofﬁcially opens its Dubai ofﬁce.

June

• Successful Initial Public Offering of Belgacom on Euronext Brussels Prime Market, with share offer price of EUR 24.50.

• MCS brings Vodafone live!, the most integrated multimedia offer, to the residential market.

• Appointment of new members to the Board of Directors.

• Skynet acquires 100% of Eduline capital.

April • New independent Board member appointed and new composition of Board Committees approved. • Fixed Line Services (FLS) launches “Discovery Line.”

03/04

March: listing on the stock market

June: launch of Vodafone live!

06/04

Highlights early 2005 • The International Carrier Services (ICS) segment becomes a subsidiary named BICS (Belgacom International Carrier Services). • Belgacom sells its stake in Alert Services Holding to Securitas. • Belgacom sells its stake in BDS (Belgacom Directory Services) to Promedia. • Agreement to merge ICS business in a joint venture with Swisscom Fixnet. • Decision to conduct a share buyback for a maximum amount of EUR 300 million. • Reshaping of MCS Management Committee.

July

November

• Belgacom ICS selected by peers as most competitive carrier.

• Launch of Belgacom TV test, a new service over Belgacom broadband.

August • Belgacom decides to cancel 70% of its treasury shares.

October

• MCS markets UMTS/GPRS/Wireless LAN Connect card. • More than one million ADSL connections in Belgium. • Skynet launches Arena51 gaming portal.

• Theo Dilissen appointed as chairman of the Board of Directors of Belgacom.

• Belgacom receives “Supplier of Telecommunications Services of the Year” award from Data News.

• Government sells Belgacom shares, bringing its stake back to 50% + one share.

December

• FLS launches Belgacom VDSL and automatic Directory Services 1-2-3-4.

• Internal presentation of Belgacom main strategic axes for the future (Today we build tomorrow).

• MCS proposes BlackBerry solution to its business customers.

More than 142,000 customers won back in 2004!

07/04

July: ICS most competitive carrier

Belgacom has come an long way over the last ten years. I myself arrived in October 2004, following my appointment as the Chairman of the Board of Directors. And one of the ﬁrst things that struck me was how different today’s Belgacom — dynamic, state-of-the-art — is from yesterday’s monopoly operator.

message from the Chairman Today, Belgacom is a de facto leader in the ﬁeld of electronic

An exciting future is opening up for Belgacom. One that will be

communications. Belgacom has played, is playing now and will

marked by change and progress. We will continue to move further

continue to play a fundamental role in helping individuals and

away from the former monopoly to become more of a service

businesses communicate.

company, offering not only access and bandwidth but also appli-

The liberalization of the telecom market is now a well-established

cations and content.

fact. Inevitably, when Belgacom ceased to be a monopoly, it lost market share. And today Belgacom, like any other company, has to

Stock market listing

ﬁght day in and day out to maintain its leadership position and to

For Belgacom, 2004 was a year marked above all by a fundamental

attract and keep customers.

transition: on 22 March 2004, Belgacom was listed for the ﬁrst time on the Euronext Brussels stock market. My thanks and con-

Conﬁdence in the future Thanks to its healthy ﬁnancial situation and absence of debt,

Offering (IPO), the largest ever on the Belgian market! The opera-

Belgacom is in a position to develop exciting projects, to look to

tion was ﬂawlessly executed, and the investors who have placed

the future with conﬁdence and ambition.

their trust in the company’s management have ample reason to be

• We are investing heavily in the construction of very high-speed

pleased.

broadband networks, thereby laying the foundations for tomor-

The listing on the stock market has created new obligations of

row’s information highway, for e-Belgium.

transparency and corporate governance for Belgacom, which the

• Belgacom, which remains Belgium’s telecommunications leader, is now positioning itself to be a challenger in the world of broad-

company has met as a positive challenge. On a practical level, the IPO brought about changes in the composition of the Board of

casting. We are not taking this step simply for the pleasure of

Directors: as part of our efforts to apply principles of good corpo-

diversifying our activities: Belgacom is bringing to the effort its

rate governance, eight new Directors joined the Board.

expertise, its networks and, thanks to interactivity, an innovative

Committees created to ensure proper management, such as

way of thinking about television.

the Audit and Compliance Committee, the Nomination and

• Lastly, Belgacom can now look beyond Belgium’s frontiers and

gratulations go to all those who helped prepare the Initial Public

Remuneration Committee and the Strategic and Business

consider opportunities for expansion. Finding a partner for our

Development Committee, have functioned extremely well. Several

international wholesale activities… seizing proﬁtable oppor-

Belgacom Board members were active participants in the work of

tunities… Belgacom is ready for these new challenges and will

the Lippens Commission, which in December 2004 established a

evaluate them with a simple question: do they create value for

new code of corporate governance. I would like to extend my most

our shareholders?

sincere thanks to the Board Members for the excellent work they

â&#x20AC;&#x153;An exciting future is opening up for Belgacom. One that will be marked by change and progress.â&#x20AC;? carried out in 2004. By sharing their commitment and professionalism, they have given Belgacom the tools for building its future. Upon my arrival, I also found a spirit of open, constructive dialog between the representatives of labor and management. It will be essential to preserve this spirit in order to take Belgacom and its employees forward together. Let me conclude by thanking Didier Bellens, the Management Committee and each of our 17,000 employees for the quality of their work during this crucial year in the life of our company. Together, we will continue working in concert to make Belgacom a company turned towards the future. A company that prides itself on providing for the well-being of its employees, meeting the needs of its customers, rewarding the conďŹ dence of its shareholders and doing its part to help make Belgian society more harmonious and the knowledge economy a reality.

Theo Dilissen Chairman

Today Belgacom is ﬁghting to create value for the company and its shareholders. Belgacom intends to create this value by being Best-in-class and by innovating. New uses, new services and new rates have enabled Belgacom to meet its objectives in 2004.

message from the CEO There is certainly no shortage of challenges half way through this ﬁrst decade of the new century: technologies are developing at

same time, we conducted a large-scale communication campaign to show that the rates applied by Belgacom are indeed attractive.

high speed, the landscape is constantly changing through increasingly intensive competition, the regulatory context is complex. In this extremely complicated environment, 2004 has proved a highly satisfactory year for Belgacom, despite ever fiercer competition, both in the mobile and the fixed-line sectors. For Belgacom, the opening up of the market obviously meant losing a share of that market. In 2004, we entered into a new phase in which the emphasis was placed on retaining and winning back customers. Today Belgacom is fighting to create value for the company and its shareholders. Belgacom intends to create this value by being Best-in-class and by innovating. New uses, new services and new rates have enabled Belgacom to meet its objectives in 2004.

Fixed-line telephony Where ﬁxed-line telephony is concerned, Belgacom decided to

Mobile telephony As for mobile telephony, we are the Belgian market leader and are determined to maintain this position. In the business segment, we are still the biggest, by far. On the other hand, for the first time since Proximus launched mobile technology ten years earlier, we noted in 2004 that the market was reaching a high level of maturity. Competition is fierce, which explains why growth was limited. Here too, we turned to new uses and applications for the future, such as mobile payment, location-based services and videophony. Once again Mobile Communications Services demonstrated its capacity for innovation by being the first operator to deploy a UMTS network and propose a veritable multimedia portal (Vodafone live!) to its customers, in anticipation of the services of the future. In addition, new types of rate plans and targeted customer-retention campaigns allowed Proximus to make good its promises.

take the offensive with a vigorous program to win back customers who had left for the competition and a communication campaign to increase awareness of the attractive rate plans available at Belgacom. At the very beginning of the year, from January on, we launched the Winback program, which enabled Belgacom to recover more than 142,000 customers who had left for the competition. This daily effort manifested itself in great operational dynamism: new products, new offers, etc. We launched Discovery Line, a discount program for conventional ﬁxed-line telephony subscriptions which allowed us to keep and win back a signiﬁcant number of customers; we developed our ADSL range of products, providing ever more users with high-speed Internet access. At the

International Carrier Services Finally, our international operations (Carrier & Wholesale) also had a positive year, even though competition is fierce in this sector too. The results recorded by Belgacom International Carrier Services (BICS) show that the decision to put greater emphasis on the mobile segment was a good one. At the end of 2004, this activity was completely spun off to enable BICS to take full advantage of the consolidation opportunities that will present themselves. The objective is to reach sufficient critical size to improve profitability in this global call-termination market, where volumes continue to increase but rates are constantly under pressure.

“We did it and we made it a success: we’ve done a fantastic job! I’m proud of Belgacom.” (on the IPO of Belgacom, 22 March, 2004)

Infrastructure

Stock market listing

Of course, voice communications should remain relatively stable; but the principal ﬁeld of growth in the next few years will be data transmission. One of Belgacom’s major challenges is to develop a very high-capacity data transmission infrastructure capable of meeting this increased demand. To create value for Belgacom and its shareholders was our strategy in 2004 and is still our commitment for the the future.

Of course, 2004 was also the year that Belgacom launched an initial public offering, which was a resounding success for the company as a whole. This was a corporate project that truly united all our forces in a common objective. And I believe that we were successful in attracting and retaining major international investors, who are clearly conﬁdent about Belgacom’s future.

We also decided to launch the Broadway project and invest massively to increase the capacity of our networks, notably through VDSL for ﬁxed-line telephony and UMTS for mobile telephony. This major effort will make it possible to develop applications and services in a number of different ﬁelds: e-Health, electronic billing, teleworking, home networks, data storage, online gaming, television via PC and interactive digital television, the latter a challenge that Belgacom took up in 2004 under the name “Belgacom TV”. Not to mention e-Government and e-Belgium, social projects in which we aim to play a key role. It is in this dynamic environment that the Belgacom Group was able to attain its objectives. Revenue increased by 1.6% to reach EUR 5,540 million. These achievements were only possible with the full support of all the Belgacom employees. Their recognition and development are the key elements in a global strategy developed by the management, in continuous consultation with its union partners. In 2004, Belgacom has favored clear, transparent consultation between labor and management. This open and continuous dialog fosters a positive management-labor environment.

All this would not have been possible without a team of brilliant professionals, which successfully managed Belgacom’s transition to a listed company while facing the changes and challenges speciﬁc to our sector. Together with all Belgacom staff, and with the support of the Board of Directors, I intend to transform Belgacom, a telecommunications company, into a veritable service company.

Didier Bellens President & CEO

Good corporate governance leads to increased transparency

Corporate governance aims to deﬁne a set of rules and behaviors according to which companies are properly managed and controlled, the result being increased transparency. Belgacom is preparing itself to conform to the recommendations made by the market authorities and more speciﬁcally to best practices of Belgium’s “Lippens Code,” published on 9 December 2004. Additionally it has continued to reinforce its internal compliance program.

corporate governance and management

The goal of the code is to set forth principles of good governance and transparency that will help companies develop and improve their image vis-à-vis investors and the general public. This code of best practices on corporate governance is based on the “comply or explain” system.

The key features of Belgacom’s governance model are: • a Board of Directors, which defines Belgacom’s general policy and strategy and supervises operational management; • the creation by the Board of Directors within its structure of an Audit and Compliance Committee, a Nomination and Remuneration Committee and a Strategic and Business Development Committee; • a Chief Executive Officer, who takes primary responsibility and ownership for operational management (including, but not limited to, day-to-day management); and • a Management Committee which, apart from a number of specific responsibilities attributed to it by the 1991 law, assists the Chief Executive Officer in the exercise of his duties.

Belgacom governance model

Board of Directors

The Lippens Code At the European Commission level, several initiatives have been taken to improve governance and strengthen shareholders’rights. In Belgium, in order to align with international practices and EU recommendations, the Banking, Finance and Insurance Commission, Euronext Brussels and the Federation of Belgian Enterprises established a committee in January 2004 to draft one single code for listed companies.

At Belgacom, the Articles of Association are strongly influenced by the specific legal status of the company. As a limited liability company under public law, Belgacom is in first instance governed by the Law of 21 March 1991 on autonomous public-sector enterprises (“the 1991 Law”). The 1991 Law was not modified on the occasion of the IPO. For matters not explicitly regulated otherwise by the 1991 Law, Belgacom is governed by Belgian corporate law.

As provided for in the 1991 Law, the Board of Directors is composed of: • Directors appointed by the Belgian State pro rata to its shareholding; the aggregate number of directors being determined by the shareholders’ meeting; and • Directors appointed by a separate vote among the other shareholders, for the remaining seats.

Current Board of Directors Name

Age Position

Theo DILISSEN(1)

Didier BELLENS(1)

Johny CORNILLIE(1)

Chairman of the Board President and Chief Executive Ofﬁcer Director

Didier DE BUYST(1)

Director

Martine DUREZ(1)

Michel MOLL(1)

Director Term Since Expires 2004

2009

2003

2009

1994

2006

1996

2006

Director

1994

2006

Director

1994

2006

Robert TOLLET(1)

Director

2003

2009

Norbert VAN BROEKHOVEN(1)

Director

1994

2006

Paul VAN DE PERRE(1)

Director

1994

2006

Carla CICO(2)

Director

2004

2006

Pierre-Alain DE SMEDT(2)

Director

2004

2010

Carine DOUTRELEPONT(2)

Director

2004

2006

Philip HAMPTON(2)

Director

2004

2010

George JACOBS(2)

Director

2004

2006

Maurice LIPPENS(2)

Director

2004

2006

Oren G. SHAFFER(2)

Director

2004

2005

Philippe VAN DE VYVERE

Director

2004

2006

Lutgart VAN DEN BERGHE(2)

Director

2004

2010

(2)

10 12

15 14

(1) Appointed by the Belgian State. (2) Appointed by the shareholders’ meeting and independent.

Theo Dilissen (10). Theo Dilissen was appointed as Chairman of the Board of Directors of Belgacom in October 2004. Previously Mr. Dilissen was CEO, Managing Director and Vice-Chairman of Real Software and from 1989 to 2000 he was COO and member of the Board of ISS (a Danish publicly listed company). He studied Sociology and holds a Master in Business Administration.

Didier Bellens (9). Didier Bellens was appointed as President and Chief Executive Ofﬁcer and a director of Belgacom in March 2003. Previously Mr. Bellens served as the CEO of the RTL Group in Luxembourg and prior to that, as the CEO of the Group Bruxelles-Lambert. He holds a degree in Economics and Business Administration from the University of Brussels (ULB).

Johny Cornillie (4). Johny Cornillie was appointed to the Board in December 1994. He is a former chief of the private office of the minister-president of the government of Flanders. Until 1997 he was CEO of Van Gansewinkel group and until 2002 chairman of SEGHERS better technology group. He is currently a director and advisor of several international companies. Mr. Cornillie graduated as an engineer in applied economics from the University of Leuven. Didier De Buyst (13). Didier De Buyst was appointed director in March 1996. Mr. De Buyst began his career in the nuclear sector. He was CEO of Inter-Eco Group, an engineering and consultancy firm, from 1993 to 2003. He was also a Member of the Board of the Federaal Agentschap voor Nucleaire Controle (Federal Agency for Nuclear Monitoring) and Chairman of the Audit Committee between 2002 and 2003. He is now mediator/arbitrator for (inter)national industrial disputes of a technological nature and is also a part-time professor at the Department of Architecture of the Universiteit Hogescholen Limburg. Mr. De Buyst is a civil engineer (with a Masters in Engineering), has a doctorate in engineering (PhD in Engineering obtained in 1993) from the University of Gent and he holds also a degree from the Vlerick Leuven Gent Management School. Martine Durez (16). Martine Durez was appointed director in December 1994. Ms. Durez is the Chief Financial and Accounting Officer at La Poste. Ms. Durez was Professor of Financial Management and Analysis at the University of Mons-Hainaut. She has also served as a member of the High Council of Corporate

Auditors and the Committee of Accounting Standard and as a special emissary at the Cabinet for Communication and State Companies. She serves as a regent of the National Bank of Belgium. Ms. Durez graduated as a Commercial Engineer and holds a degree in Applied Economics from the University of Brussels (ULB).

Michel Moll (8). Michel Moll was appointed director in December 1994. Since 1996 he has served as the Chairman of the Board of Directors and the General Manager of BRUFICOM (Brussels Finance Communication), a venture capital company with minority shareholdings in small and start-up companies in the ﬁelds of telecommunications, multimedia and computers. Prior to 1996, Mr. Moll was manager and director of the SNI (Société Nationale d’Investissement). He is currently a director of SONACA (Société Nationale de Construction Aérospatiale) and SBI (Société Belge d’Investissement Internationale). Mr. Moll graduated as a commercial engineer from the Business School of the University of Leuven.

Robert Tollet (14). Robert Tollet was appointed director in October 2003. Mr. Tollet is the chairman of the board of directors of the Société Fédérale de Participations, a public sector holding company and serves on the boards of Crédit Professionnel and Credibe. He is also the Chairman of the Central Council for the Economy. Mr. Tollet holds a degree in Economics and a degree in Economic Analysis and Policy from the University of Brussels (ULB). Norbert Van Broekhoven (5). Norbert Van Broekhoven was appointed director in December 1994. He is a civil engineer and was CEO of Van Broekhoven’s Algemene Ondernemingen NV. He is currently CEO of Actima NV and director and advisor of several Belgian companies. Mr. Van Broekhoven graduated as a civil engineer from the University of Leuven. Paul Van de Perre (2). Paul Van de Perre was appointed director in December 1994. He is the co-founder of GIMV (Venture Capital Firm) and was formerly a director of Sidmar (Arcelor). He is currently a director of Meta Pharma (nutraceuticals) and Greenbridge (incubator). Mr. Van de Perre is CEO of 5 Financial Solutions, a division of Praxis in Management, a corporate ﬁnance house. Mr. Van de Perre holds an MBA and Master in Economics and is a certiﬁed accountant (IAB).

Carla Cico (17). Carla Cico was appointed director in March 2004. Ms. Cico has been CEO of Brasil Telecom since 2001. She has been working in the telecommunications sector for over 19 years, in the areas of strategy, equipment and operations. Ms. Cico is a member of the London Business School’s Regional Advisory Board. She obtained a MBA from London Business School. In August 2004 Ms. Cico ranked 75th in Forbes Magazine’s “100 Most Powerful Women” and in October was selected by Fortune Magazine as the 25th among the world’s 50 most powerful women in international business. Pierre-Alain De Smedt (12). Pierre-Alain De Smedt was appointed director in March 2004. Mr. De Smedt was appointed Executive Vice President of Renault in 1999. He was chairman of Autolatina, VAG and Ford’s joint venture subsidiary in Latin America. He served as Chairman of Volkswagen Brazil and Argentina before being appointed as Chairman of Seat. Mr. De Smedt is member of the Board of Deceuninck Plastics Group and also of Compagnie Nationale à Portefeuille. He is a graduate in engineering and economics from the University of Brussels (ULB).

Carine Doutrelepont (6). Carine Doutrelepont was appointed director in March 2004. Ms. Doutrelepont is a partner at the Belgian law ﬁrm of Uyttendaele, Gérard & Doutrelepont and is specialized in information technology, intellectual property, media law and competition matters. She is a member of the Belgian Competition Authority. She holds a PhD in law from the University of Brussels (ULB) where she currently holds tenure as a Professor of Media Law, Intellectual Property Law, Electronic Commerce Law and European Audiovisual Law. She is also Director of the Information and Communication Law Centre of the ULB. Philip Hampton (3). Philip Hampton was appointed director in March 2004. He spent the ﬁrst ten years of his career at Lazard Brothers in London, New York and Paris. He then took up the positions of Finance Director for British Steel plc, British Gas plc and British Telecommunications Group plc and for Lloyds TSB Group plc. He is currently Chairman of J. Sainsbury plc. Mr. Hampton is a Chartered Accountant and holds an MBA from INSEAD, Fontainebleau.

Georges Jacobs (15). Baron Georges Jacobs was appointed director in March 2004. Mr. Jacobs is a Chairman of the Board of Directors of UCB. He commenced his career as an economist

at the International Monetary Fund (USA). Later, he joined the UCB Group and was appointed as a Director of UCB in 1987. Furthermore, Baron Jacobs is member and Chairman of the Board of Delhaize, and a member of the Board of Bekaert and SN Brussels Airlines. He holds a law degree and a degree in economics, as well as a Master of Arts in Economics from the University of California, Berkeley.

Maurice Lippens (not on the picture). Count Maurice Lippens was appointed director in March 2004. Mr. Lippens is co-founder of Fortis, created in 1990 and the first European cross-border banking and insurance group. He served as the executive Chairman of Fortis until 2000 and since then he is the non-executive Chairman of the Board of Directors. He is a member of the Board of several companies including Suez-Tractebel, Groupe Bruxelles Lambert and Total. He holds a law degree from the University of Brussels (ULB) as well as an MBA from Harvard Business School. Oren G. Shaffer (7). Oren G. Shaffer was appointed director in April 2004. He is Vice Chairman and Chief Financial Officer of Qwest Communications International Inc. Formerly Mr. Shaffer was President and Chief Operating Officer of Sorrento Networks and from 1994 to 2000 he was Chief Financial Officer of Ameritech. He holds a Bachelor of Science in business administration from The University of California at Berkeley and a Master of Science in management from The Massachusetts Institute of Technology. Philippe Van de Vyvere (not on the picture). Philippe Van de Vyvere was appointed director in March 2004. Mr. Van de Vyvere is the founder, CEO and Chairman of Sea-Invest, Europe’s largest bulk and fruit transshipment company. He is currently a non-executive board member for ING Belgium. Mr. Van de Vyvere holds a degree in Economics. Lutgart Van den Berghe (11). Prof. dr. Lutgart Van den Berghe was appointed director in March 2004. Ms. Van den Berghe holds a PhD in economics from Gent University. As Executive Director, she heads the Competence Centre Entrepreneurship, Governance and Strategy at the Vlerick Leuven Gent Management School as well as the Belgian Directors’ Institute. She is a professor at Gent University, where she lectures on corporate governance and serves as a non-executive director in a number of listed and non-listed multinational companies such as Electrabel, CSM (The Netherlands), SHV Holding (The Netherlands) and Solvay BV (The Netherlands). Roger De Borger (1). Government Commissioner.

Functioning of the Board of Directors The Board of Directors meets whenever the interests of the company so require or at the request of at least two directors. In principle, the Board of Directors meets six times a year. The agenda for each meeting contains items of an informational nature and items on which a decision must be made. In principle, the Board’s decisions are made by a simple majority of the directors present or represented. For certain issues, a qualified majority is required. The Board of Directors has adopted a Board Charter which, together with the charters of the Board Committees, reflects the principles by which the Board of Directors and its Committees operate. The Board Charter provides, among other things, that important decisions should have broad support, understood as a qualitative concept indicating effective decisionmaking within the Board of Directors following a constructive dialogue between directors. They should be prepared by standing or ad hoc Board Committees having significant representation of non-executive, independent directors within the meaning of Article 524, § 4 of the Belgian Commercial Companies Code.

Committees of the Board of Directors The Board of Directors adopted formal charters for its Committees at its meeting of 19 February 2004. Amendments to key principles with respect to the composition and core tasks of such Committees, as set out in their respective charters, require broad support within the Board of Directors.

Audit and Compliance Committee The Audit and Compliance Committee (ACC) consists of five nonexecutive directors, the majority of whom must be independent. Pursuant to its charter, the ACC is chaired by an independent director. The Audit and Compliance Committee’s role is to assist and advise the Board of Directors in its oversight of: • the quality and integrity of the statutory and the consolidated annual accounts and the financial statements of the Company; • the relationship with the Company’s statutory auditors; • the Company’s internal audit function; • the Company’s compliance with legal and regulatory requirements; and • compliance within the Company with the Company’s Code of Conduct and its Policies, which must include dealings in financial instruments of the Company, equal opportunity treatment among the sexes and sexual harassment. The Audit and Compliance Committee meets at least once every quarter.

Nomination and Remuneration Committee The Nomination and Remuneration Committee (NRC) consists of four directors. Pursuant to its charter, this committee is chaired by the Chairman of the Board of Directors, who is an ex-officio member. One member is chosen from among the directors appointed by the Belgian State. Two members must be appointed among the independent directors. The Nomination and Remuneration Committee’s role is to assist and advise the Board of Directors regarding: • the nomination of candidates for appointment to the Board of Directors and the Board Committees; • the appointment of the President and Chief Executive Officer and appointment by the President and Chief Executive Officer of the members of the Management Committee; • the remuneration of the members of the Board of Directors and the Board Committees (legal duties and others); • the remuneration of the President and Chief Executive Officer and members of the Management Committee; the review on an annual basis of the remuneration philosophy and strategy of all personnel and specifically the compensation packages of top senior management; and • the oversight of the decisions of the President and Chief Executive Officer with respect to the appointment, the dismissal and the compensation of management, in order to allow the Board of Directors, when it chooses to do so, to exercise its overall supervising duties. In its session of October 2004, the Board of Directors decided to extend the role of the Nomination and Remuneration Committee and requested it to also assist and advise the Board of Directors regarding Corporate Governance issues. The Nomination and Remuneration Committee meets at least two times annually. Mr. Theo Dilissen (Chairman), Ms. Martine Durez, Mr. Georges Jacobs and Ms. Lutgart Van den Berghe are the members of the Nomination and Remuneration Committee.

Strategic and Business Development Committee The Strategic and Business Development Committee (SBDC) consists of five directors. Pursuant to its charter, the President and Chief Executive Officer and the Chairman of the Board of Directors are ex officio members, and the committee is chaired by the Chairman of the Board of Directors. One additional member is chosen among the directors appointed by the Belgian State. Two members must be appointed from among the independent directors.

Mr. Philip Hampton (Chairman), Messrs. Pierre-Alain De Smedt, Michel Moll, Oren G. Shaffer and Paul Van de Perre are the members of the Audit and Compliance Committee.

The Strategic and Business Development Committee’s role is to assist and advise the Board of Directors on matters concerning the Company’s general policy and strategy, as well as on major issues regarding its strategic development.

The President and CEO is invited to meetings to state the management’s view on audit ﬁndings.

The Strategic and Business Development Committee meets at least two times annually.

Mr. Theo Dilissen (Chairman), Mr. Didier Bellens, Ms. Carla Cico and Messrs. Maurice Lippens and Robert Tollet are the members of the Strategic and Business Development Committee.

Activity report and attendance at Board and Committee meetings

At times, the Committee invites other Board members to the meetings.

Name

(total 6) (total 4) (total 10) (total 3)

Theo DILISSEN

2/2

Changes in the composition of the Board of Directors

Didier BELLENS

5/6

Johny CORNILLIE

6/6

In addition to the changes in the composition of the Board of Directors that occurred on the occasion of the company’s IPO in March 2004, the following changes occurred at the level of the Board of Directors.

Didier DE BUYST

6/6

Martine DUREZ

6/6

In conformity with his commitment, Mr. Lloyd Kelley resigned in April 2004, since ADSB Telecommunications BV retained less than 7.5% of the voting stocks after the IPO. The Board of Directors has ﬁlled the vacancy by appointing Mr. Oren Shaffer as independent director through cooptation, upon the recommendation of the Nomination and Remuneration Committee. The shareholders will be requested to ratify this appointment during their 13 April 2005 meeting. Mr. Oren Shaffer is considered independent since he meets all the independence conditions of the Belgian Code on Corporate Governance. In October 2004, Mr. Jan Coene resigned for personal reasons as member and Chairman of the Board of Directors.

Board

Michel MOLL

6/6

Robert TOLLET

6/6

Norbert VAN BROEKHOVEN

6/6

Paul VAN de PERRE

6/6

Carla CICO

4/5

Pierre-Alain DE SMEDT

3/5

Carine DOUTRELEPONT

5/5

Philip HAMPTON

5/5

Georges JACOBS

5/5

Maurice LIPPENS

3/5

Oren G. SHAFFER

5/5

Philippe VAN de VYVERE

4/5

Lutgart VAN den BERGHE

4/5

Jan COENE

4/4

The Belgian State appointed Mr. Theo Dilissen as member and Chairman of the Board of Directors.

James W. CALLAWAY

1/1

Sock Koong CHUA

1/1

Directors’ remuneration

Henning DYREMOSE

1/1

Lloyd KELLEY

2/2

Jonathan P. KLUG

1/1

Ho Kee LIM

0/1

Hans MUNK NIELSEN

1/1

J. Kenneth RALEY

1/1

Hang Boon SIN

1/1

By virtue of a decision taken by the General Meeting on 12 April 1995, members of the Board of Directors that were appointed by the Belgian State, with the exception of the President & CEO, have the right to an attendance fee of EUR 619.73 per meeting, up to a ceiling of EUR 9,915.74 a year. They also have the right to directors’ emoluments for an amount equal to the attendance fee. On 19 February 2004, the General Meeting changed these directors’ remunerations and compensations as follows. An annual ﬁxed compensation of EUR 50,000 for the Chairman of the Board of Directors and of EUR 25,000 for the other members of the Board of Directors, with the exception of the President & CEO, is foreseen. All members of the Board of Directors, with the exception of the President & CEO, have the right to an attendance fee of EUR 5,000 per attended meeting of the Board of Directors. Finally attendance fees of EUR 2,500 have been foreseen for each member, with the exception of the President & CEO, of an advising committee to the Board of Directors. For the Chairman these attendance fees are doubled.

ACC

NRC 2/2

SBC 1/1 2/2

10/10 3/3 3/3

4/4 3/3 2/3

3/3 4/4 2/3 2/3

4/4 1/1

8/8

2/2

5/6 1/1

The IPO resulted in an important change in the composition of the Board of Directors. Representatives of ADSB Telecommunications BV resigned at the occasion of the IPO and hence were only invited to one (or for Mr. Lloyd Kelley two) Board meeting(s) in 2004.

Transactions between the company and its board members and executive managers

For 2004, a total amount of EUR 1,011,000 has been paid out.

A general policy on conﬂicts of interest is applicable within the company. It prohibits the possession of ﬁnancial interests that may affect one’s personal judgment or professional tasks to the detriment of the Belgacom Group.

As of 2005, individidual compensation will be published in conformity with the Code Lippens’ recommendations.

In accordance with Article 523 of the Belgian Commercial Companies Code, President & CEO Didier Bellens declared at the

19 February 2004 and 13 December 2004 Board of Directors meetings that he had a conflict of interest in connection with the Employee Incentive Plans item of the agenda of these Board meetings. He is in fact a proposed beneficiary of the Senior Management Long-term Incentive Plans 2004 and 2005 and the Short-term Incentive Plans 2004 and 2005. Mr. Bellens has also been offered the opportunity to purchase shares at a discount under the Belgacom Discounted Share Purchase Plan 2004 (DSPP). He has informed Belgacom’s auditor of these conflicts of interests and has decided not to participate in the deliberation or voting on such items on the agenda. Other members of the Belgacom Management Committee (BMC) are also proposed beneficiaries under the Senior Management Long-term Incentive Plans 2004 and 2005 and the Short-term Incentive Plans 2004 and 2005. Additionally, in the context of the 2004 DSPP, the BMC members have been offered the opportunity to purchase shares at a discount, just as any other employee of the Group.

Application of the measures taken by the company in order to comply with existing legislation on insider trading and market manipulation (market abuse) In order to comply with existing legislation on insider dealing and market manipulation, Belgacom adopted a dealing code prior to the IPO. This code aims at creating awareness about possible improper conduct by employees, officers and directors and the possible sanctions attached thereto. This dealing code has been widely communicated and is available to all employees. A list of key persons is kept, and all directors and key employees were requested to sign a affidavit that they have read, understand and agree to comply with the dealing code. Closed periods (including prohibited periods) are defined, and any deal must be communicated to and cleared by the Head of Compliance Services before the transaction (see “Compliance” section p. 18).

Management President and Chief Executive Officer The President and Chief Executive Officer is entrusted with the day-to-day management and reports to the Board of Directors. In addition, pursuant to the 1991 Law and the company’s Articles of Association, the Board of Directors may, deciding by a majority of two thirds of its members present or represented, delegate all or part of its powers to the President and Chief Executive Officer with the exception of:

• the approval of the Management Contract with the Belgian State and changes thereto; • the establishment of the business plan and general policy of the company; • the supervision of the President and Chief Executive Officer; and • other powers explicitly reserved by law to the Board of Directors which include, for example, the establishment of the annual accounts for submission to the General Shareholders Meeting and the preparation of merger proposals. The Board of Directors has delegated broad powers to the President and Chief Executive Officer. The composition and, with the exception of certain specific powers entrusted to the Management Committee by the 1991 Law, the powers of the Management Committee are determined by the President and Chief Executive Officer. The President and Chief Executive Officer is appointed by the Belgian State by Royal Decree deliberated in the Council of Ministers for a renewable six-year term. The President and Chief Executive Officer and the Chairman of the Board of Directors must come from different language groups. The President and Chief Executive Officer may only be removed from office by Royal Decree deliberated in the Council of Ministers. Pursuant to the 1991 Law and the Company’s Articles of Association, the President and Chief Executive Officer is a member of the Board of Directors. The current President and Chief Executive Officer is Mr. Didier Bellens.

Management Committee The Management Committee’s role, apart from exercising the specific powers entrusted by the 1991 Law to the Management Committee, is to assist the President and Chief Executive Officer in the exercise of his duties. The Management Committee aims to decide by consensus, but in the event of disagreement, the view of the President and Chief Executive Officer will prevail. The Management Committee generally meets on a weekly basis. Pursuant to the 1991 Law and the Articles of Association, the President and Chief Executive Officer serves as a member of the Management Committee, which he chairs. There must be the same number of French-speaking members and Dutch-speaking members on the Management Committee, the President and Chief Executive Officer excepted in case of an uneven number. Members who are neither French-speaking nor Dutch-speaking shall not be taken into account for the calculation of this linguistic parity requirement. The current members of the Management Committee are as follows:

Belgacom Management Committee Didier Bellens. Didier Bellens (49) was appointed as President and Chief Executive Officer and a director of Belgacom in March 2003. Previously Mr. Bellens served as the CEO of the RTL Group in Luxembourg and prior to that, as the CEO of the Group Bruxelles-Lambert. He holds a degree in Economics and Business Administration from the University of Brussels (ULB). Scott Alcott (1). Scott Alcott (38) is Chief Operating Officer of Belgacom’s Fixed Line Services since July 2004. Previously, Mr. Alcott served as Belgacom’s Chief Strategy Officer, Chief Information and Technology Officer, General Manager of Marketing and Product Management, director at Skynet and director at Belgacom’s MultiMedia Venture Capital Fund. In 1995, Mr. Alcott joined Ameritech (now SBC) as Director of Marketing & Product Management – Long Distance Division, and later as Director of New Product Development/Packaging. Mr. Alcott holds a B.S. in Economics from the Wharton School at the University of Pennsylvania. Bridget P. Cosgrave (2). Bridget Cosgrave (43) has served as the President of the International Carrier Services of Belgacom since 2001, and she joined the Board of Directors of Belgacom Mobile in 2004. From 1993 to 1996, Ms. Cosgrave was a Project Director at British Telecom Plc. In 1996, she was elected and served her full term as the Deputy Director General of the European Telecommunications Standards Institute (ETSI). Ms. Cosgrave has a B.A. (Hons.) from Queen’s University at Kingston, Canada and a MBA from the London Business School.

Astrid De Lathauwer (3). Astrid De Lathauwer (41) has served as Chief Human Resources Ofﬁcer for Belgacom since 2002. Ms. De Lathauwer joined Belgacom in 2000 and previously held the positions of Top Group Resources & Talent Director and HR Director of Belgacom. Prior to joining Belgacom, Ms. De Lathauwer

worked in marketing and human resources with Monsanto. Ms. De Lathauwer holds a degree in History of Art from the University of Gent and a degree in International Politics and Diplomatic Sciences from the University of Leuven.

William Mosseray (4). William Mosseray (40) was appointed Chief Strategy Officer in July 2004 and has served as Belgacom’s Chief Restructuring and Change Officer since 2002. Mr. Mosseray joined Belgacom in 1993 and has served as Executive Advisor to the CEO, General Manager for the Special Business Division, Head of Corporate Strategy & Development and Chief Human Resources Officer. He obtained a law degree from the University of Leuven and a tax law degree from ICHEC. Mr. Mosseray also holds an MBA from the Vlerick Leuven Gent Management School. Ray Stewart (5). Ray Stewart (55) has served as the Chief Financial Officer of Belgacom since 1997. Mr. Stewart was employed by SBC, but became an employee of Belgacom on 1 April 2004. From 1994 to 1997, Mr. Stewart was the CFO of Matav, a Hungarian telecom operator in which Ameritech bought a shareholding. Mr. Stewart holds an undergraduate degree in Accounting and an MBA in Finance from Indiana University and is a certified public accountant. Philippe Vander Putten (6). Philippe Vander Putten (45) has served as the CEO of Belgacom Mobile since 1998 where he is also an executive director, since 1998. Mr. Vander Putten started his professional career at Procter & Gamble, working in the FMCG sector at L’Oréal. In 1986, Mr. Vander Putten joined the Kraft Jacobs Suchard Group (now Kraft Foods) and held several positions in Marketing & Sales before becoming the Managing Director of Kraft General Foods for Benelux in 1991. Mr. Vander Putten holds a bachelor’s degree and a master’s degree in administration and management from the University of Leuven.

Compensation of the members of the Management Committee

bers of the Joints Auditors: Ernst & Young Reviseurs d’entreprises S.C.C.R.L. and Callens, Guevar, Van Impe & Co. S.C.C.R.L.

The total amount paid to members of the Belgacom Management Committee (BMC) as a whole, including the President & CEO, amounted to EUR 4,897,000 in the year ending 31 December 2004. The members of the Belgacom Management Committee are Ms. B. Cosgrave, Ms. A. De Lathauwer and Messrs. D. Bellens, R. Stewart, Ph. Vander Putten, W. Mosseray and S. Alcott. This total covers the pecuniary benefits, both direct or immediate (basic pay, variable pay) and indirect (insurance, long-term profit-sharing scheme), which are related directly to the office held or which are awarded to members of the BMC.

The overview of the subject and the remuneration linked to exceptional assignments executed by the auditors within Belgacom SA under public law or a Belgian enterprise affiliated to Belgacom SA under public law in the sense of article 11 or a foreign affiliate is as follows: • to Ernst & Young Reviseurs d’entreprises: EUR 1,026,330 for control assignments concerning the initial public offering, EUR 350,218 for other control assignments and EUR 6,250 for other assignments within Belgacom SA under public law and EUR 39,000 for other control assignments in affiliated enterprises in Belgium; • to other members of the Ernst & Young network: EUR 20,758 for other assignments in foreign affiliates; • to Callens, Guevar, Van Impe & Co.: EUR 5,750 for other control assignments in Belgacom SA under public law.

In addition to these pecuniary beneﬁts, the BMC as a whole, including the President & CEO, participated in the Discounted Share Purchase Plan (510,410 shares bought at an introduction price of EUR 24.50 with a discount of 16, 66 %) and the Employee Stock Option Plan (355,581 stock options acquired at a strike price of EUR 24.50). As of 2005, compensation details of members of the Management Committee will be published in conformity with the Lippens Code recommendations.

Board of Auditors The Board of Auditors of the company is composed of the following persons: • ERNST & YOUNG Reviseurs d’Entreprises S.C.C.R.L./ Bedrijfsrevisoren B.C.V.B.A., represented by Ludo Swolfs, also Chairman of the Board of Auditors • Romain LESAGE, Member of the Court of Auditors, Commissaire • Pierre RION, Member of the Court of Auditors, Commissaire • CALLENS, GUEVAR, VAN IMPE & Co S.C.C.R.L./B.C.V.B.A., represented by Herman VAN IMPE, Commissaire Ernst & Young is responsible for the audit of the consolidated ﬁnancial statements of Belgacom and its subsidiaries. The other members of the Board of Auditors are, together with Ernst & Young, entrusted with the audit of the non-consolidated ﬁnancial statements of the parent company. Mr. Lesage’s mandate will expire on 30 June 2008, the mandates of Mr. Rion, Ernst & Young, and Callens, Guévar, Van Impe & Co. will expire at the annual General Shareholders Meeting in 2010.

Additional fees paid to the statutory auditors In accordance with the provisions of Article 134 § 2 of the Belgian Company Law, Belgacom declares the supplementary fees that it granted during the 2004 ﬁnancial year to two auditors, mem-

Government Commissioner The State has appointed Mr. Roger De Borger as Government Commissioner in order to supervise, in conformity with the 1991 law, the management of Belgacom from an administrative point of view.

Compliance Towards more transparency Belgacom has consistently considered compliance as an important part of sound corporate governance. As early as 1998, it introduced a code of conduct, and today more than 40 policies have been implemented in matters as diverse as competition law, e-mail usage and business continuity management. Aware that it is operating in an increasingly complex regulatory environment and because of the legitimate high expectations of its customers, shareholders and other stakeholders, Belgacom has decided to integrate these different existing initiatives into one central Compliance Ofﬁce, as of 1 October 2004. Furthermore, various public initiatives such as the Sarbanes Oxley Act in the United States and the European Union action plan on enhancing corporate governance have in the meantime further strengthened the case for a coherent compliance approach. In Belgium, this was also the case with the publication of the “Belgian Code on Corporate Governance” (Lippens Code).

Belgacom Compliance Ofﬁce

Belgacom compliance program

Since the IPO of 22 March 2004, compliance is deﬁned at the Belgacom board level, in the Audit & Compliance Committee (ACC).

In an effort to streamline existing initiatives and enhance employees’ awareness of the importance of proper compliance, the Compliance Ofﬁce has identiﬁed 10 compliance areas which together constitute the Belgacom Compliance Program:

In the ACC Charter, the ACC has been given the responsibility of regularly reviewing Belgacom’s compliance with legal/regulatory requirements and the Belgacom Group’s codes of conduct and policies. The Belgacom SA Code of Conduct and a set of 40 policies provide guidelines to employees so as to clarify what is expected from them in given situations. The guidelines cover all ﬁelds of the business, including customer and business relations, corporate culture, assets and corporate citizenship. A similar structure is in place at Belgacom Mobile. The Compliance Ofﬁce began operations on 1 October 2004, building upon the existing Code and Policies team. The ACC has appointed a senior executive as Head of Compliance Services, with a direct reporting line to the ACC Chairman and to the President and CEO. A Group Compliance Council has been set up. It meets quarterly under the presidency of the Head of Compliance Services and is composed of key executives from Internal Audit, Risk Management, Human Resources, Corporate Communications, Internal Services, Belgacom Mobile and BICS.

Code of Conduct

Corporate Governance

Regulatory Compliance

Accounting Practices

Risk Management

Competition Law

Chinese Walls

Privacy

Environment

Dealing Code

The 10 compliance areas have been established based on the specific activities and operating environment of Belgacom, as confirmed through internal questionnaires, Enterprise Risk Management and benchmarking. For each of these different areas, a specific compliance plan will be developed, involving consolidation of various existing initiatives into the plans as well as developing new efforts. With the creation of the Compliance Office, Belgacom is taking an important step forward in its challenge to continue to play a leading role in an environment of complex legislation and demanding markets.

Rules, tools and consistency It is every employee’s personal responsibility to ensure that the company and its employees comply with the internal and external rules and regulations. Belgacom’s compliance office has three responsibilities: to clarify the rules, to provide tools and to ensure consistency. • In the identified compliance areas, the compliance office ensures that the rules, as set by the area owners and endorsed by management, are clearly defined, properly communicated and easily accessible. • The compliance office ensures that the necessary implementation, training and reporting tools for compliance are in place, so that management is properly equipped to make sure that the rules are satisfactorily complied with. • The compliance office ensures that the rules are consistent throughout the Belgacom Group. The main instruments of the compliance office in 2004 have been the Code & Policies intranet website, regular policy-related email information, the availability of a “Helpdesk policies” mailbox and the forum of the Group Compliance Council.

Welcome to our new shareholders! 22 March 2004 was a historic date for Belgacom, as it made its entry on the Euronext Brussels stock exchange. In addition to the arrival of new partners in our capital, this listing has brought sweeping change to our corporate culture and to how the company is perceived in the telecommunications world and ﬁnancial markets. Belgacom now has an additional tool for implementing its Best-in-class strategy and taking up further challenges.

shareholder information A successful IPO! In March 2004, the main private shareholders in the consortium ADSB Telecommunications BV sold their stake in Belgacom. Despite weak and volatile ﬁnancial markets due to the bomb attacks in Madrid and tension in the Middle East during the ﬁrst quarter of the year, both retail and institutional investors rushed to buy Belgacom shares.

Belgacom shares Belgacom shares on the stock market

The size of the Belgacom IPO (including green shoe) was EUR 3.6 billion, making it the largest IPO ever in Belgium, the largest in Europe since 2001 and the biggest in the world in 2004.

Stock market:

First Market of Euronext Brussels

Ticker:

BELG

ISIN:

BE0003810273

The institutional tranche of the offering was more than three times oversubscribed, and the new shareholder structure exhibits a healthy mix of large European institutions with a majority in the UK, France and Belgium.

National SVM code:

3810.27

Bloomberg code:

BELG BB

Reuters code:

BCOM

The retail market participation represented an impressive demand of EUR 1.2 billion (approximately 2.5 times the amount of allocated shares) and, in the end, 22.6 million shares were allocated to individual investors in Belgium.

Solid market debut On 22 March, the shares were ﬂoated at EUR 24.50, slightly below the middle of the indicative price range (EUR 23 to 26.50), and on the ﬁrst day of trading closed up 4.8% from the IPO price. For the remainder of the year, the Belgacom share price has performed extremely well, closing at EUR 31.80 (+29.80%) on 31 December. It has consistently outperformed its peers (DJ Stoxx Telecom index, +11.31%) as well as the Belgian BEL20 index (+24.32%). The lowest price was EUR 24.30, slightly below the IPO price, and it peaked at EUR 32.64 on 29 December. With 361.77 million shares outstanding, the market capitalization reached EUR 11.5 billion at the end of December 2004. The Belgacom share has been included in a total of 53 indexes, including the BEL20 (20 main Belgian caps) and the major European/telecom indexes.

From the IPO until the end of 2004, a total volume of 191 million shares were traded on the Euronext Brussels stock exchange. The average trading volume from 1 April until year end was approximately 778,500 shares per day.

Changes in the share capital and number of shares Share split At the Extraordinary General Meeting held on 19 February 2004, the shareholders approved a ten-for-one share split, subsequent to which ten new ordinary shares were issued for each ordinary share existing on that date. Following the share split, the aggregate number of ordinary shares amounted to 400,000,000. Of these, 12,380,950 were owned by Belgacom (ﬁrst share buyback on 30 December 2003).

Share buyback and cancellation In March 2004, concurrently to the IPO, Belgacom repurchased 38,761,905 shares from its exiting shareholder ADSB Telecommunications BV for EUR 949,666,673. In Belgium, companies are prohibited by law from owning more than 10% of their outstanding share capital. Prior to this purchase, Belgacom therefore cancelled the 12,380,950 ordinary shares bought back at the end of December 2003. Under Belgian law, the voting and dividend rights in respect of treasury shares are suspended.

Committed to return value to its shareholders

Employee Incentive Plans In March 2004, Belgacom sold 1,842,026 treasury shares for an amount of EUR 45 million to more than 5,600 of its employees, under a discounted share purchase plan. They were allowed to buy the shares with a 16.6% discount and they must keep them for a period of 2 or 2.5 years. On 19 March 2004, Belgacom launched a long-term incentive plan via the granting of stock options to certain management personnel, who have accepted a total of 1,128,500 options. These options become one-third vested after one year, two-thirds vested after two years and 100%-vested after three years. The options are exercisable at the IPO retail price (EUR 24.50) until 22 March 2011, except the options of the President and CEO which are exercisable until 2012.

Second cancellation of treasury shares On 26 August 2004, the Board of Directors decided to cancel 70% of the 36,919,879 existing treasury shares, i.e., 25,843,915 shares. The remaining treasury shares (11,075,964) are held by the company to hedge for existing and future employee incentive plans. At the end of October, the Belgian government decided to reduce its stake from 55.3% to the historical level of 50% plus one share and sold 19,112,441 shares in a accelerated book built (1 day) for an amount approaching EUR 540 million.

Share capital At end of December 2004, the capital amounted to EUR 1 billion (fully paid up), represented by 361,775,135 shares, with no nominal value and all having the same rights, provided such rights are not suspended. The share capital has not changed over the last three years.

Authorized capital Under Belgian corporate law, Belgacom may increase or decrease its share capital by decision of the General Shareholders Meeting, taken with a majority of 75% of the votes cast, at a meeting where at least 50% of the share capital of the Company is present or represented. On 19 February 2004, the General Shareholders Meeting authorized the Board of Directors to increase the share capital, one or several times, by an amount not exceeding EUR 200 million (Article 5 of the Belgacom Articles of Association). The authorization includes the power to issue convertible bonds and warrants. The consideration may take any form, including contributions in cash or in kind, incorporation of reserves or issue premiums. The authorization to the Board of Directors was granted for a renewable period of

five years. When using its power to issue additional capital, the Board of Directors may, by a majority of two thirds of the votes cast, restrict or withdraw the pre-emption rights of the existing shareholders. This may also be done to the benefit of one or more specific persons, whether or not such persons are employees of Belgacom or one of its subsidiaries. However, in the case of warrants, such restriction or withdrawal may not be done primarily to benefit specific persons, other than employees of Belgacom or one of its subsidiaries. The Articles of Association have also explicitly granted the authority to the Board of Directors to proceed with a capital increase in any form, as well as the power to withdraw or restrict the pre-emption rights of the existing shareholders in that regard in the event of a public tender offer for the securities of the company. Without such specific authorization in the Articles of Association, the powers granted to the Board of Directors to increase the capital would be suspended by law from the moment that Belgacom received notice from the Banking, Finance and Insurance Commission (BFIC) of a public tender offer for the securities of the company. This specific authorization has been granted to the Board of Directors for a renewable period of three years, effective upon closing of the IPO. The powers of authorized capital are limited by law in the case of a public tender offer: the issue is capped at 10% of the shares in existence prior to the capital increase and the issue price may not be lower than the price of the tender offer. In addition, pursuant to the 1991 Law, all issues of shares, convertible bonds or warrants are subject to prior approval by the Belgian State (by Royal Decree deliberated in the Council of Ministers). No such issues may be made to persons other than public authorities if, as a result of the issue, the public authorities’ direct participation in the share capital at the time of the issue would no longer exceed 50% of the share capital.

Belgacom ownership structure Initial Public Offering Until early 2004, the main shareholders of Belgacom were the Belgian State with 50% plus one share and the consortium ADSB Telecommunications BV with 50% minus one share. ADSB was owned by three international telecom operators, SBC (35%), TDC (33%) and Singapore Telecom (27%) as well as three Belgian financial partners (together 5%): Dexia, KBC and Sofina. On 22 March 2004, the Belgacom ownership structure changed fundamentally: all the private shareholders but Sofina sold their stake in an Initial Public Offering.

Volume 5,000 (in thousands) 4,500

34 Price (in EUR) 32

4,000 3,500

3,000 2,500

2,000 26

1,500 1,000

500 0

19/03

30/05

11/06

22/07

01/09

12/10

22/11

Belgacom

BEL 20 Stoxx Telco Volume Belgacom

31/12 Source: Bloomberg.

Transparency rules and shareholder notifications According to the Belgian transparency law, shareholdings amounting to at least 5% (or a multiple of 5%) of the total share capital must be disclosed to both the BFIC and the company itself. Pursuant to the Belgacom Articles of Association, the notification of shareholdings must be done once the threshold of 3% is reached. Shareholding percentage in the notification

Date of notiﬁcation

Shareholder name

Number of shares held

22 March 2004

Belgian State

200,000,010 (1)

51.6%

22 March 2004

Belgacom SA

38,761,905

22 March 2004

AXA SA

13,218,524 (1)

3.41%

14 September 2004

Belgian State

200,000,010 (1)

55.11%

14 September 2004

Belgacom SA

11,075,964 (1)

3.06%

2 November 2004

Belgian State

180,887,569

(1)

10%

50.00% + 1

(2)

(1) -1,842,026: sale of treasury shares to personnel. -25,843,915: cancellation of 70% treasury shares. (2) -19,112,441: sale pursuant to Royal Decree of 28 October 2004.

Number of shares and potential voting rights (denominator) Number of outstanding shares (effective voting rights attached to shares representing the capital)

361,775,135

Future, potential or not, voting rights resulting from rights and commitments at the conversion into or the subscription for shares to be issued - Options (linked to treasury shares)

1,128,500

Total shares and potential voting rights

361,775,135

Ownership structure On 31 December 2004, the distribution and ownership of Belgacom SA shares was as follows: Shares

% shares

% voting rights

180,887,569

50.0% + 1

51.6%

11,075,964

3.1%

1,842,026

0.5%

Free ﬂoat

167,969,576

46.4%

47.9%

Total

361,775,135

100%

Belgian State Belgacom (treasury shares) Belgacom personnel

Shareholder remuneration On 24 February 2005, the Belgacom Board of Directors has decided to propose the following shareholder remuneration at the Annual General Meeting on 13 April 2005: • In accordance with the dividend policy and subject to approval of the appropriation of proﬁt by the Annual General Meeting a normal dividend of EUR 500 Million or EUR 1.38 (gross) per share will be proposed.

Dividend per share, gross* (in EUR)

For bearer shares, it will be paid at the branches of the following paying agents: Fortis Bank, ING Belgium, KBC Bank and Petercam. For shares held through a share account, the bank or broker automatically handles the dividend payment. For registered shares, Belgacom will pay directly the shareholders in its register. In order to transform their shares into bearer or registered securities, shareholders should contact their ﬁnancial institution, which will liaise with Petercam, Brussels.

Dividend policy Belgacom intends to declare and distribute an annual dividend of 50% to 60% of its annual net income. This amount may be adjusted to reﬂect one-time gains or losses, and the amount of dividends declared may vary from year to year. In determining the amount of any annual dividends to propose to the shareholders, the Board of Directors will take into account the dividend payment practices of other European telecommunications operators. The amount of any annual dividends and the determination of whether to pay dividends in any year may be affected by a number of factors, including the Group’s business prospects, cash requirements, ﬁnancial performance, the condition of the market and the general economic climate, and other factors, including tax and other regulatory considerations.

Financial calendar 13 April 2005

Annual General Shareholders’ Meeting

18 April 2005*

Payment of the dividend

26 August 2005

Announcement of 2005 half-year results

24 February 2006

Announcement of 2005 annual results

12 April 2006

Annual General Shareholders’ Meeting

* Subject to the decision of AGM.

Shareholder structure - end December 2004

50.0% + 1 Belgian State

0.70

• In addition, the Board of Directors will propose an extraordinary dividend of EUR 200 Million, representing EUR 0.55 (gross) per share to be paid to the shareholders. The Board of Directors does however conﬁrm that this is an exceptional decision and does not imply replication in the future. • Furthermore the Belgacom Board of Directors has decided to conduct a share buyback for a maximum amount of EUR 300 million and will hold on to the purchased shares for future uses. The share price must not be more than 5% above the highest and 10% below the lowest closing price in the thirty-day trading period preceding the transaction. There will be no dividend rights for the shares thus purchased for as long as these shares are in the possession of Belgacom.

1.43

46.4% Free Float

0.99

3.1% Belgacom

1.38

0.55 0

0.25

0.50

0.5% Belgacom personnel 0.75

1.00

* Extraordinary dividend of EUR 1.43 per share paid in 2002 and of EUR 0.55 per share paid in 2004.

1.25

1.50

> 24

A commitment to listen even more to our customers

In 2004, the Group’s various areas of activity faced even more aggressive competition. We stood up to it. Our teams stepped up their efforts to defend and increase our market share, striving to respond even more closely to customers’ needs, whether residential customers, business customers or other actors in the telecom sector. We also focused on achieving operational excellence by streamlining and automating procedures.

business update 2004 was characterized by fierce attacks from our competitors. Fixed and mobile operators targeted our fixed-line services by launching a number of promotional offers encouraging users to cancel their fixed-line subscriptions with Belgacom by running very aggressive rate-awareness campaigns. Fixed Line Services responded successfully by launching initiatives to:

In the Mobile Communications Services division, the battle to

• secure the loyalty of as many customers as possible, win back customers who had switched to the competition, and acquire new customers;

that was well under control.

• develop and market new products and services in order to generate new revenue sources.

(BICS) and searched for a partner. In this highly competitive

Communication campaigns were launched to improve the price perception of FLS on the market, and to respond to the competition’s advertisements. The main objective was to increase awareness of our rate plans.

remain proﬁtable. ICS succeeded in increasing its trafﬁc volume

retain or win over customers was also tougher. After launching segmented offers and new products and services, MCS finished the year with a market share (of active customers) estimated at 50%. It also confirmed its leadership position in terms of profitability, with a slight rise in average revenue per user and a cost structure

For International Carrier Services, 2004 was a time to prepare for the sector’s consolidation: it formed an autonomous company line of activity, winning “the race for size” is what is required to and appreciably reducing the per-minute operational costs of the network. Its efforts were rewarded by its being named “Most Competitive Carrier.”

With 5.3 million ﬁxed connections, including 828,000 ADSL access lines for the retail market, FLS offers a comprehensive range of voice, data and Internet ﬁxed-line services to residential and business customers. As the leading ISP in Belgium, Belgacom offers Internet access to more than 1 million narrowband and broadband subscribers. It also provides wholesale services to other operators and service providers in Belgium.

Fixed Line Services (FLS) Constantly changing market

Broadband Internet market shares

Both the Belgian population as a whole and the number of households have increased slightly. The market share of mobile-only, other licensed operators (OLO) and cable telephony companies is increasing.

Year end

2002

2003

2004

Population (in thousands)

10,310

10,351

10,396

Households (in thousands)

4,325

4,361

4,402

Market share of households (in %) No phone / Mobile-Only

24%

25%

26%

Fixed Telephony

76%

75%

74%

72%

70%

67%

Belgacom Cable and OLOs Source: NIS, BGC data, Telecom Universe.

This increase is mainly due to competition. In 2004, the ﬁxed-line market was subject to intensiﬁed competition, putting pressure on our market share.

Total ﬁxed-line voice market Year end (in EUR millions)

2002

2003

2004

FLS Access Revenues

963

957

931

FLS Trafﬁc Revenues

990

908

802

FLS Total

1,953

1,865

1,733

FLS Retail Voice Market Share (Value)

83.0%

80.6%

76.1%

FLS Retail Trafﬁc Market Share (Volume)*

82.7%

74.5%

67.9%

EOP

2002 2003 2004

FLS Retail ADSL

50%

53%

52%**

Other ADSL (Bitstream Access + Wholesale)

10%

09%

13%**

Cable

40%

38%

35%**

FLS Flanders*

43%

45%

45%**

Telenet Flanders

57%

55%

55%**

Source: ISPA and BIPT for Cable. * No data on other ADSL and non-Telenet cable for Flanders. ** June 2004 ﬁgures.

In this tough telecom environment, the FLS business unit remains market leader in its different activities.

Ever-increasing competition Voice market 2004 began with a very aggressive attack from our competitors. Both fixed and mobile operators hit FLS with numerous promotions, cut-the-wire campaigns and aggressive price-perception campaigns. Towards the end of the year, competitors started to reshape their strategies. • On top of their existing product portfolio, fixed operators have changed their customer approach by marketing bundled offers combining voice (fixed and/or mobile) with Internet services. Some of them also have announced and/or implemented Mobile

Source: Company ﬁgures, market share based on estimates from Gartner. * On own network.

Despite ﬁerce competition from cable companies in the broadband Internet market, especially in Flanders, and the growing success of regulated offers (bitstream access), in 2004 FLS managed to limit market share loss to 1% in Belgium and kept its market share in Flanders at same level.

Virtual Network Operator (MVNO) activities, adding mobile voice services to their fixed portfolio offers. • New pricing plans such as flat fee offers (e.g., unlimited fixed offpeak calls for a flat monthly fee) were also launched.

Internet market The Internet market in Belgium continued to grow in 2004 (+ 7% vs. December 2003). Narrowband Internet access is decreasing further (32% fewer users) in favor of broadband Internet access (+27%). Broadband is by far the most popular Internet access technology; 79% of all Internet connections in Belgium are broadband. Belgium has one of the

FLS highlights • Competition heated up and competitors started to reshape their strategies. • FLS addressed the market dynamics successfully (new tailored products and services, adapted pricing plan, specific promotions, etc.). • 142,000 customers won back, leading to lower line-loss and flattening out of traffic market-share loss. • Enhanced xDSL offers to push further broadband penetration. Launch of iDTV commercial test to 1,000 friendly users.

highest broadband penetration rates in terms of the percentage of households in Europe (approximately 37% at the end of 2004). The launch of “Light” offers by both competitors and FLS stimulated growth in broadband in 2004 by offering customers an entry-level broadband package for a limited price. FLS broadband retail market share has stabilized, and wholesale is growing thanks to new BROBA regulated offers (Bitstream Access). Most cable connections are from Telenet, which is still broadband market leader in Flanders. The cable market is still very fragmented in Wallonia. Residential players such as Telenet are extending their scope with digital subscriber line (DSL) offers provided in areas lacking cable coverage. Telenet Solutions (ex-Codenet) is pushing their share in the Broadband Market by marketing “DSL Ofﬁce” offers to the business segment.

Data market In the business data market, system integrators, ICT players and other competitors have strengthened their position based on consolidations and by focusing on new customer segments and/or core business activities.

FLS Marketing in action FLS addressed the challenging market dynamics successfully by adopting a coherent marketing strategy addressing all 4 Ps (Promotion, Product, Place, Pricing) in order to • Retain as many customers as possible, win back lost customers and acquire new customers; and • Develop and offer new products and services creating new revenue flows. “Winback” is a prime example: in early 2004 FLS launched major winback initiatives and campaigns based on our new competitive rate plans. Dedicated winback teams obtained positive results by contacting customers and recommending attractive solutions that fit the client’s calling profile. In addition, an access winback campaign was launched with positive results. Thanks to these campaigns, more than 142,000 customers were back at Belgacom by the end of 2004. To increase customer retention, specific actions were taken targeting our top voice traffic customers. These efforts will be continued in 2005. FLS also started implementing multiple types of segmentations to better serve specific customer groups: geographical segmentation, increased focus on heavy users, etc.

In 2004, the retail data market continued to be subject to increased xDSL competition via regulated offers (BROBA and BRUO). Not only DSL solutions but also the success of new technologies changed the market, promoting migration [scenarios] from leased lines to IP services and Ethernet solutions.

New communication campaigns were launched to improve perception of FLS prices in the market and to counter competitive advertisements by creating awareness of our rate plans.

On top of pure connectivity services (Belgacom interconnection of Local Area Networks), this segment was also characterized by growth in managed services (increased market demand for security and voice over IP), increased capacity needs, migration to higher speeds and an ongoing move to ICT convergence and bundled services.

Continuous, attention-getting voice and broadband promotions (free installations, free calls, free modems, etc.) were also launched. Innovative types of customer contact (door-to-door, cooperation with indirect distribution channels, etc.) were also successfully created.

Promotion

Broadband Market Channels (in %) – Belgium

50% 10%

02 03 04

Broadband Market Channels (in %) – Flanders

40%

53%

38%

52%

13%

35%

Belgacom Retail ADSL Other ADSL Cable 0

Source: ISPA, Company data.

43%

57%

45%

55%

44%

56%

Belgacom Retail ADSL Cable (Telenet) 40

100

Source: Company data, Telenet press. Not included: other ADSL and non-Telenet cable.

100

Product These communication campaigns were reinforced by the aggressive launch of new products and services.

Residential market In May 2004 “Discovery Line” was introduced, a very innovative discount program for conventional fixed-line telephony offering a lower subscription charge (EUR 6.50 per month) and higher rates for outgoing calls (additional charge of EUR 0.15 per minute on top of the usual Belgacom call charge). At the end of the year, more than 70,000 customers had acquired a Discovery Line. To further stimulate the broadband market, FLS also brought “Belgacom ADSL Light” to the market in June 2004. FLS has again demonstrated its frontrunner position by being the first operator in Europe to launch a commercial VDSL offer. The market has identified this offer as being the fastest Internet offer available. Neither offer has cannibalized the existing standard ADSL offers. Skynet renewed its portal in June, which was perceived as very positive by our customers. Customer experience testing and a new technical platform allowed the audience to be served in a personalized way. In order to become the market leader in the gaming sector, Skynet launched Arena51, a new gaming design, together with new community tools, game downloads, online gaming calendars, etc. Skynet has also further improved its Internet services: security solutions, its Music Club offer and exclusive access to specific content.

Business market To meet needs of SMEs, FLS launched speciﬁc products such as Plug & Work, a teleworking solution via Internet; ADSL Pro Compact, an entry-level solution for professional Internet access; and Belgacom Communication Tools, an outsourced version of the Microsoft Exchange solution. FLS launched a new international concept for its retail professional customers. This concept is based on expanding its strong national managed services portfolio (BiLAN) worldwide. Connectivity is purchased through different partners to obtain an optimal mix of coverage and cost. In addition to this connectivity, Belgacom brands its own services. In 2004, this concept was launched through managed DSL solutions in the Netherlands, France and Luxembourg. Recent satellite technologies also allowed FLS to further integrate its satellite and terrestrial solutions to optimize global coverage. To counter the threat of integrators on the professional market and to create new revenue streams by going higher up in the value chain, FLS focused on its Network and System Integration

unit. This was achieved by launching new services (managed BiLAN services - “Belgacom managed software ﬁrewall”) and by acquiring a high-performance data center, allowing further diversiﬁcation of our product portfolio. FLS also marketed a full range of network security solutions for the professional market.

Place Via an optimized sales channel strategy, FLS has focused on how to approach its customers.

Residential Within the residential market, new Belgacom partner programs and the integration of new indirect sales channels have improved customer contacts.

Business Our multi-channel strategy was pursued with a strong focus in the business market on the direct sales channel (BOOST program): our presence was literally “boosted” by increasing the number of customer visits and contacts, offering tailor made loyalty programs and increasing awareness of our total solution portfolio.

Key ﬁgures • Call center: 6,000,000 contacts / year • Belgacom points of sale: 4.2 million residential & business customers served in 96 shops in 12 regions, corresponding to more than 3 million customer visits / year • ESD sales: top 50,000 customers corresponding to 60,000 customer visits / year • Indirect sales: 1,200 partner points of sales, 4,000 sales representatives

Pricing As our customers perceive basic voice services as a commodity product, innovative pricing concepts were introduced and promoted for both residential and business customers. Maxi Call National Anytime (unlimited calling for 20 cents per call), No Limit National Hometime (unlimited calling during off-peak hours and weekends for EUR 12 per month), No Limit National Anytime (unlimited calling for EUR 29.95 per month) are just a few examples.

National wholesale market Belgacom is the main national wholesale service provider in Belgium. Our product portfolio includes voice and data connectivity plus capacity and infrastructure services. Of the 90 active wholesale customers, 22 are interconnected with Belgacom. National wholesale activities increased by approximately 10% in 2004. The consolidation on this market is ongoing and will continue over the coming years. Belgacom’s market share remained

at an estimated 70% in 2004. The company’s primary focus is on delivering competitive, high-quality services, maintaining a responsive wholesale organization and making intensive use of e-tools.

Technology and innovation Broadway In 2004 FLS has invested approximately EUR 83 million in the Broadway project to allow the planned rollout of the VDSL platform and to bring ﬁber to the street-cabinet level. By the end of 2004, 1,343 VDSL remote units were active, yielding a footprint of 6.77% or 264,000 lines. The aim of Broadway is to achieve VDSL coverage of 46% by the end of 2006, whereas ADSL currently covers 98.5% of the country.

Processes Optimizing processes has led to service delivery improvements for our customers, in turn leading to improved USO results, improved dispatching and routing processes, increased proactive repair activities and an improved ADSL installation process (DIY – Do it Yourself process). The rollout of a new customer information system at the end of the year will also allow FLS to improve its current customer relationship management.

Regulatory landscape New law regarding electronic communications The draft Belgian law implementing the new European regulatory framework was adopted by the Belgian Government in July 2004 and submitted to the Parliament in the autumn. This law will lay down the political direction for electronic communications in Belgium over the coming years. It will also set up a legal framework for the obligations imposed on market players with signiﬁcant market power, universal service obligations and end-user protections.

Belgacom reference offers Traffic Because Belgacom is an operator with significant market power, its interconnection rates are regulated and fixed in a reference offer (BRIO). Regarding BRIO 2004, the BIPT has decided to require Belgacom to reduce its interconnection rates (an approximate 10% decrease versus the BRIO 2003 rates for termination IAA – Intra Access Area).

to raise its call-termination charges by approximately 500%. The BIPT made a similar decision in 2002 regarding Telenet’s interconnection rates. Belgacom has appealed both decisions.

Access Belgacom rates for local loop unbundling are also regulated. The three most signiﬁcant changes versus BRUO 2003 in the BIPT’s BRUO 2004 decision are: average installation rates remain unchanged; monthly rental charges for raw copper loops will decrease slightly; and the monthly rental charge for shared pair loops will decrease by approximately 27%. The main BIPT decisions concerning BROBA 2004 were an approximate 5% reduction in the monthly line-rental charge for individual lines and a 20% decrease in charges for the use of the Belgacom ATM network compared to 2003.

Outlook FLS will continue to experience ﬁerce competition from new products and services such as VoIP, Triple Play offers, etc. Keeping the broadband market growing at the same pace as in 2004 will also be a challenge.

Residential market To obtain insight into the full potential of telecom and media convergence, in November 2004 FLS began testing interactive digital television (iDTV) services with an eye to a possible launch in 2005. Other focus areas for the Fixed Line Services business unit include the digital home, mobile-ﬁxed service convergence and the implementation of VoIP. These services will make it possible to extract the maximum beneﬁt from our VDSL platform.

Business market New services and packages are being developed and assessed for their market potential, and FLS will continue to focus on its Network and System Integration unit. In 2005, FLS will also pursue its efforts to win back customers in both the residential and business markets. FLS is committed to maintaining its current leadership position in the market and to becoming Best-in-class. It will therefore concentrate on its customers’ evolving needs and on technological and product developments.

The interconnection rates of operators who do not have signiﬁcant market power are not subject to the same obligations as Belgacom’s. Based on this principle, in December the regulator allowed Versatel

Belgacom on top!

Carrier Broadband Lines (in thousands)

116

196

04 0

Source: ISPA, Company data.

120

160

200

In November 2004, Belgacom received the Data News Excellence Award for “Telecom Service Provider of the year”. Jacques Heynen, Executive Vicepresident Sales & Customer Service

Belgacom Mobile is the leading provider of mobile communications services in Belgium through its Proximus and Pay&Go brands, with approximately 4.2 million active customers (market share of approximately 50%). Belgacom Mobile provides a broad range of mobile communications services to residential and business customers in Belgium, including traditional voice, data (SMS and MMS) and international roaming as well as wholesale data services to other companies.

Mobile Communications Services (MCS) Market and competition evolution Since the incorporation of Belgacom Mobile in 1994, the Mobile Communications Services (MCS) arm of the Group has always been the leader on the Belgian market. It has been continually innovating, developing a superior-quality network and offering state-of-the-art products and services via extensive distribution channels to both its business and residential customers. In December 2004, Belgium’s mobile phone active penetration reached an estimated 81% (versus 75,7% in 2003) with an estimated 8.4 million users. MCS faced an increased level of competition from the two other mobile operators in the market: one focused strongly on the business segment with aggressive pricing offers, while the other attacked mainly the residential market with advertising campaigns and continuous promotions, including free minutes and referal programs. In addition, several Mobile Virtual Network Operators (MVNO) entered the market. So far MVNOs have not taken a mass-market approach but instead have a niche positioning. At the end of 2004 more than 20 MVNOs were active on the Belgian market. MCS will continue to closely monitor the development of the Belgian mobile market’s needs and believes its market approach based on its competitive strengths will make it possible to maintain its leading position.

At the end of 2004, MCS remained the leader in the market share of active customers with an estimated 50.0% in 2004 versus 53.7% in 2003. An active customer is deﬁned as a customer having made/ sent or received a call or SMS message during the last three months. MCS improved its percentage of active customers: 97.1% in 2004 versus 96.6% in 2003, which is well above the European and Belgian average. This attests to the quality of the operator’s customer portfolio. In absolute ﬁgures, at the end of 2004, the number of active MCS customers was 4,197,826 versus 4,201,503 at the end of 2003. The number of SIM cards registered on the Proximus network was 4,320,861 (1,739,095 postpaid and 2,581,766 prepaid) versus 4,348,736 cards at the end of 2003. At the end of December 2004, blended ARPU was EUR 41.00 for the active customer base versus 40.30 at the end of 2003. This represents an average of EUR 19.60 for a prepaid customer (compared to EUR 19.20 at the end of 2003) and EUR 71.60 for a postpaid customer (compared to EUR 69.10 at the end of 2003). MCS is also the market leader in customer loyalty. It has a TRIM index (measure of customer satisfaction in terms of loyalty) of 74, clearly above its competitors. MCS has consolidated its brand leadership. In 2004 Proximus brand awareness reached 85% while the competitors were at 76% and 59%.

Percentage of active mobile customers

ARPU evolution (in EUR)

95.8

02 03

96.6

97.1

39.50

100

40.30 41.00 0

MCS highlights • Active customers market share maintained at approximately 50%. • Commercial launch of UMTS for business customers. • Vodafone live!, the most integrated mobile multimedia offer, introduced in June. • Launch of the BlackBerry solution for business customers in October. • Introduction of multiple new rate plans for residential and business customers. • In 2005, Philippe Vander Putten hands over his function of CEO to Michel Georgis (ex-COO) and becomes President of the Board of Directors of MCS.

A top class network Covering more than 99% of the population, the Proximus GSM/ GPRS network was deployed on 3,320 antenna sites at the end of 2004. The cutting-edge technologies that were set up, matched with careful maintenance, ensure first-rate quality and reliability. As for value for money, MCS ranks in the top 5 of the operators of the Vodafone group; as for the limitation of service disruptions, MCS is in the top 3. In 2004 MCS was the first mobile operator to start 3G services in Belgium and was still the only operator to offer such services at the end of 2004. MCS business customers can use the Vodafone Mobile Connect datacard via the UMTS network in 12 major Belgian cities. The Proximus UMTS network covered 28% of the population at the end of 2004. In 2004 more than EUR 50 million were invested in the UMTS network. In June 1999 MCS was the first operator to provide coverage in the Brussels underground. Driven by its continuous concern to improve its services, as of December 2004 MCS has also become the only Belgian mobile operator to enable its customers to use their GSMs in the undergrounds of Charleroi and Antwerp. MCS leads the Belgian market in terms of worldwide reach. Its postpaid customers can use their mobile phone via the GSM network in 171 countries thanks to voice roaming agreements with 308 operators. Its prepaid customers can do the same with 67 operators in 46 countries. MCS has also GPRS roaming agreements with 94 operators in 50 countries and UMTS roaming agreements in 12 countries.

Innovation in products & services Business customers In May 2004, MCS was the ﬁrst mobile operator in Belgium to commercially launch 3G for laptop users. MCS offers the Vodafone Mobile Connect UMTS/GPRS data-card, the ﬁrst high-speed datacard for laptops in Europe, to its customers. MCS extended its range of datacards in November 2004 with the Vodafone Mobile Connect UMTS/GPRS/WLAN datacard, enabling users to select between three technologies, UMTS, GPRS or Wireless LAN, to have access to their business applications. More than 1,300 datacards were in use at the end of 2004. MCS steadily increased its number of Wireless LAN hotspots to 44 end December 2004 including the Brussels airport. MCS wants to offer businesspeople a total mobility solution and thus integrated the hotspots into its range of high-speed data services to provide

its customers with the best possible connection (GSM, GPRS, UMTS or Wireless LAN). To make the life of large companies easier by automatically integrating their mobile bills into their accounting system, MCS launched eBill, a certiﬁed electronic bill solution in collaboration with Certipost. With Business Package Easy, MCS introduced a new rate for SMEs and the self-employed who above all want to be reachable. The users pay a per-minute rate, regardless of the time of day or network used. MCS launched SMS Communicator, a professional solution to send SMS messages from a PC or laptop simultaneously to a number of recipients. In October 2004, MCS launched the BlackBerry solution for corporate customers. Thanks to this push architecture, e-mails and appointments are delivered automatically to the BlackBerry device without having to dial in.

Residential customers Since March 2004 Dexia bank customers have been able to do all their banking transactions via their GSM via Dexia Direct Mobile, a simple and secure application. Vodafone live!, the most integrated mobile multimedia offer, was introduced to residential clients in June 2004. This industry-leading, multimedia consumer service offering, opens up a world of mobile color communication, bringing news, information, email, chat, location-based services, games, ringtones, etc. to customers’ mobile devices. Vodafone live! has an exclusive range of MMScompatible handsets with color screens and built-in cameras. MCS introduced two new rates plans for its postpaid customers in 2004: Exprimo with the possibility to send 10 SMS messages or call for 10 minutes for EUR 1 and FreeStyle, which makes it possible to combine the advantages of a postpaid subscription and a prepaid card in one single formula. MCS was the ﬁrst mobile operator to introduce the Real Tones, a new generation of ring tones, in Belgium. For its prepaid customers, MCS launched a new reload value of EUR 5 and a new simple prepaid formula, called Pay&Go Evening Talk. Pay&Go customers can also reload their prepaid card via 1-2-ring (directly via their GSM), whatever their bank. The prepaid card loyalty program with free calling credit, Pay&Go Club, was also launched.

ProximusCollection: a unique range of mobile phones

Proximus extended its range of datacards in November 2004 with the Vodafone Mobile Connect UMTS/GPRS/WLAN datacard.

In 2004, MCS sold nearly 900,000 mobile telephones under the label “ProximusCollection”. These phones were tested, adopted and preconﬁgured with the settings of MCS (Proximus Multimedia Services, GPRS, MMS).

In October 2004 MCS launched the “BlackBerry from Vodafone” for business users. As this new product is a major step towards more convenience for the customers on the move, MCS plans to extend its BlackBerry offering to the SME market in 2005.

This collection covers GSMs for the residential segment (Vodafone live! mobiles) and the professional segment (Vodafone Mobile Connect datacard, BlackBerry, PDA). The average selling price of GSMs decreased by 25% in 2004 but remains higher in Belgium than in the majority of EU countries because handsets subsidies are not allowed.

MCS provides the customers of Vodafone and its partner networks with transparent access to its international services. For their part, MCS customers will beneﬁt from the advantages of Vodafone roaming services and its worldwide coverage.

Extended sales channels The MCS sales channels call upon direct and indirect distribution as well as the Customer Service department, which provides advice and practices up-selling and cross-selling. On 31 December 2004, MCS had an indirect distribution network of 1,512 points of sale, spread across telecom chains (208 including the 96 Belgacom points of sale), telecom agents (392 points of sale), retail chains (290 points of sale) and retail agents (622 points of sale). Pay&Go reload cards are sold in more than 8,000 distribution points.

Partnership with Vodafone Vodafone, which owns 25% of Belgacom Mobile, is the leader in mobile telephony at global level. To take even greater advantage of this strength, a new cooperation agreement was signed in late 2003 aimed at fostering and formalising MCS cooperation with Vodafone in the following areas : Product and Services development, Branding (in airports), Procurement (synergies), Account Management and IT/Technical Management. The ﬁrst result of this agreement was the launch in May 2004 of the Vodafone Mobile Connect UMTS/GPRS datacard, the ﬁrst high-speed datacard for laptops in Europe, for its customers. MCS extended its range of datacards in November 2004 with the Vodafone Mobile Connect UMTS/GPRS/WLAN datacard. In June 2004 MCS launched Vodafone live! for its residential customers, offering a full range of multimedia services.

In addition to the development and launch of new products and services, the cooperation was also reinforced by developing operational synergies in the area of purchasing (including IT) and by sharing best practices.

Pricing and regulatory environment Because of its status of operator with a powerful position in the mobile communication and interconnection markets, the BIPT, the telecom regulator, decided in December 2001 that MCS’s interconnection rates would have to fall gradually. MCS has since then reduced its interconnection rates ﬁve times. MCS lowered its interconnection rates by 7% in November 2004 (instead of the 12% decrease in July planned initially). MCS interconnect rates are consequently below the EU average. Belgium is one of the countries with the highest degree of asymmetry (greater than 50%) of mobile termination charges between the various operators. Due to the delays in the transposition of the new European regulatory framework for telecommunications, the year 2004 can be considered as a transition year. Elements to note are the review by the regulator of the decision of 2001 deﬁning the evolution of the mobile termination charges of MCS and also the communication clarifying the status and use of GSM-gateways on mobile networks.

2004, a challenging year Competition was more intense than expected in 2004. MCS saw its number of active customers decrease slightly, whereas active penetration in Belgium increased more than 5%. The number of customers who left MCS was not entirely offset by the number

Our constant priority is to propose new ways of going mobile

+ 42 %

Advanced data revenues

of new customers. As a result, MCS saw an increase in revenue of slightly less than 3%. Nevertheless, MCS maintains its leadership position on the market as measured by the main operational and ﬁnancial indicators: active market share of 50%; Average Revenue Per User greater than EUR 41; data-related revenue representing nearly 16% of service-related revenues. The numerous initiatives launched in 2004: new rate plans (Exprimo, FreeStyle, Business Package Easy, Pay&Go Evening Talk); new products (EUR 5 reload, Vodafone Mobile Connect card, BlackBerry, Real Tones); and services (roaming agreements, Pay&Go Club, etc.) demonstrate the vigorousness of MCS’s reaction to the aggressive competition. MCS maintained an EBITDA margin above 50%.

Outlook All mentioned initiatives will impact the results for 2005, and many other initiatives will be introduced. MCS plans to continue to ﬁght for its “Business” market share, continuing retention and winback. On the residential market, MCS will launch several campaigns to keep its high-value customers (e.g., free calls during the week-end nights in February 2005). Using what it has learned in 2004, MCS will reinforce in 2005 its strategy centered on customers. All campaigns this year will be even more driven by and target their needs. The ﬁrst three strategic axes are directly related to customers.

Stimulating customers: for MCS to grow, it will have to increase the use that customers make of its network. Our constant priority is to propose new ways of “going mobile.” MCS therefore makes a point of reinforcing its role of leader on the market where innovation is concerned, for example, via the development of the UMTS network or the launching of video telephony. But stimulating customers also implies achieving even minimal increases in the use of voice and SMS services. Attracting new customers: the aggressiveness of the competition generates an increase in the levels of “churn” between operators. MCS consequently makes a point of proposing to valuable prospective customers an offer that will appeal to them by emphasizing where Proximus is different from the competition. And by selling exclusive products and services such as Belgium’s most complete multimedia offer, thanks to the Vodafone live! portal. Controlling costs: faced with a market environment where revenue growth is limited, MCS will continue to manage its costs in a strict manner to maintain its level of proﬁtability by spotlighting numerous initiatives that ensure efﬁcient and effective projects, procedures and an organization as a whole. And that notwithstanding the increased interconnection charges. The objectives of MCS’s teams are fully in line with these four strategic axes. To which can be added the will to invest in our customers in order to be their preferred choice, not only in 2005 but for the years to come. Hence, the theme for the year: “Win the Customer today and tomorrow.”

Keeping customers: MCS is fully aware that success in 2005 will be determined above all by the satisfaction of the 4.2 million residential and business customers who each day use or discover the products and services offered via the Proximus mobile telephone network. Numerous campaigns launched in 2004 will be extended and even reinforced in 2005, the main one being providing each customer the calling plan most appropriate for his/her proﬁle. MCS has understood that each customer is unique and plans on reinforcing its offer of differentiated products and services. MCS will be emphasizing the service offered to the customer, which must be differentiated as much as possible with respect to our competitors, whether in terms of the network, distribution, customer service or loyalty programs.

In October 2004, MCS launched the “BlackBerry from Vodafone” for business users

Our success will be determined above all by the satisfaction of our 4.2 million customers

In addition to its activities in Belgium, Belgacom provides voice and data connectivity and capacity services to telecommunications operators and service providers worldwide. On 22 February 2005, BICS signed an agreement to combine its business with Swisscom Fixnet in a joint venture of whose shares Belgacom will own 72%.

International Carrier Services (ICS) Belgacom around the world Belgacom International Carrier Services (ICS) provides voice, data and capacity services to mobile and ﬁxed telecommunications operators and service providers worldwide. 2004 was a challenging year, as price and margin declines continued in the wholesale market. In spite of this, ICS performed well, regaining market share, cutting costs and compensating some revenue losses incurred in the ﬁrst half-year. In addition, ICS made the necessary changes to participate proactively in the strategic consolidation taking place in the market.

Market dynamics The size of the international inter-operator market targeted by ICS is estimated

(1)

to have grown by 1.2% during 2004 to EUR 13.2

billion. International voice still represents more than 90% of this market. The international wholesale voice market volumes (transit) are calculated to have grown by 13% from 2003 to 2004. The market of carrier services to mobile operators has expanded in 2004. This growth is present across the spectrum of the international carrier products: voice, messaging and roaming services, data and capacity. Mobile voice traffic is expected (2) to grow by 20%, and ICS expects mobile data revenues to increase by 25% over the next five years. Liberalization and the pace of economic growth are creating important opportunities outside Europe, especially in the mobile sector. The biggest growth is expected from India, China, the Middle East and Africa, where countries will progressively open up their markets. The total market of voice traffic from fixed operators continues to decline, as mobile and VoIP substitution continues. The development of the VoIP retail interface allows ISPs & ASPs to collect voice

Competitive landscape During the first half of 2004, ICS faced tough competition in the international voice market, due to aggressive pricing by competitors. During the second half of 2004, ICS was able to regain most of the market share and revenue losses incurred during the first half of the year. Belgacom ICS’s voice transit traffic grew from 3.5 billion minutes in 2003 to 4.2 billion in 2004, a volume increase of 18%.

Products and services evolution New mobile products SMS transit and MMS transit, launched in 2004, generated encouraging revenues. Contracts signed in the last quarter and contracts pending with major mobile groups should be sources of incremental revenue in the future. After 11 months of operations, the sales ofﬁce in Dubai has been most satisfactory both in terms of trafﬁc terminated in the region and new contracts. Further developments in parallel with liberalization are planned, including a network point of presence and the reinforcement of the local sales force.

Towards increased efﬁciency Despite a sharp increase in trafﬁc and the implementation of new services, ICS managed to reduce by 12% its network, HR and other operating expenses (excluding impairment bookings). ICS maintained investment for the future through a switchingplatform upgrade to provide full IP compliancy and capacity increase; implementation of Best-in-class operating and support system (OSS) tools; and a new trading platform.

trafﬁc directly from end users and has created a new customer

Strategy

segment for the carrier industry. VoIP trafﬁc is estimated(2) to have

Consolidation in the international carrier services market is expected to continue. Belgacom is well positioned to beneﬁt from consolidation opportunities, which can increase stable trafﬁc

reached 30 billion minutes in 2004, accounting for more than 13% of the world’s international trafﬁc.

Foreign exchange issues are present in the international carrier segment, where the evolution of the US dollar in 2004 has made pricing in euro less competitive towards customers buying in this currency.

(1) Based on Telegeography 2005, Ovum and company estimates. (2) According to Telegeography 2005.

ICS highlights • Preparation of spin-off & incorporation as BICS (Belgacom International Carrier Services). • New mobile products: SMS transit and MMS transit. • Satisfactory results of the Dubai sales ofﬁce, opened in early 2004. • Belgacom ICS selected by peers as most competitive voice carrier. • Total volumes up 8.6% compared to 2003 (mainly due to transit). • Continued efforts to reduce operating expenses, leading to lower network cost/minute.

volumes, optimize resource utilization through economies of scale and generate operating-cost efﬁciencies. In 2004, ICS reviewed various consolidation opportunities. To facilitate participation in this consolidation, Belgacom has spun off its ICS activities into a wholly-owned subsidiary of Belgacom SA. The new company, Belgacom International Carrier Services (BICS), began operating on 1 January 2005.

Joint venture In the context of the segment’s consolidation strategy, Belgacom concluded on 22 February 2005, a joint venture agreement with Swisscom Fixnet, aiming at a business combination between Belgacom ICS and Swisscom ICS, a division of Swisscom Fixnet acting as the international carrier arm of the Swisscom group. The actual business combination, subject to regulatory approvals and the integration of the two businesses’ billing systems, is planned for the third quarter 2005. The joint venture will be controlled 72% by Belgacom SA and 28% by Swisscom Fixnet and will be Swisscom’s and Belgacom’s preferred provider of international connectivity services. Important costs synergies are anticipated from this transaction.

Risks and opportunities

It is anticipated that customer sourcing behavior will evolve, with “mid-cap” medium-sized ﬁxed or mobile operators reviewing their strategy for international trafﬁc sourcing and turning progressively to a limited number of “strategic supply” partners offering them a wide range of products and services, including end-to-end solutions.

Outlook In 2005, BICS will focus on achieving the following four objectives: • Focus on the most profitable customers and destinations: ICS will further strengthen its position in higher-margin regions by capturing more business to and from newly liberalized regions in Africa, the Middle East and Asia, where the Singapore and Dubai sales offices will play an important role. • Excel in operations: rollout of efficiency projects (OSS and switching-facility updates) and smooth integration of any strategic partnership. • Grow the mobile business and explore further opportunities along the mobile value chain. Complement the messaging suite (SMS and MMS) and strengthen the company’s position in roaming products (signaling and GPRS roaming) to ensure responsiveness to customer needs. • Explore further consolidation opportunities to reach a 15% market share and be in the Top 3 of international wholesale carriers.

As many competitors seek to maintain market share, further unit-margin erosion is expected in the short term. In the medium term the progressive consolidation of the market should lead to a unit-margin stabilization.

+ 18 %

Volume increase of ICS’s voice transit trafﬁc

9 March 2004: inauguration of our ICS Sales Office in Dubai by Prince Philippe. Bridget Cosgrave, Chairman & CEO of BICS SA and Nabil Baccouche, Office Manager. The inauguration took place during the economic mission in the United Arab Emirates and Oman organized by the Belgian Office for Foreign Trade

Focus on core business to maintain proďŹ table leadership

The world today is full of challenges: technology is constantly evolving, competition is making itself felt and regulators are redesigning the telecom landscape. To stay ahead, our group has adopted a clear and focused strategy firmly rooted in three main pillars: maintaining its leadership position on the Belgian market, achieving operational efficiency and investing in profitable growth.

group strategy Best-in-class Belgacom’s strategy remains to focus on the core business areas where it has competitive advantages in order to retain its position as the preferred provider of telecommunications services in Belgium while maintaining proﬁtability. Our goal is to become Best-in-class. Belgacom makes a point of setting its goals high. In order to stretch the thinking of the company to reach top performance, the Best-in-class concept is used internally to help efforts to dramatically improve business performance. One prerequisite is to instill new behaviors in the organization through the development of a new corporate culture. Several new competencies like customer focus, agility and resultsorientation have been identiﬁed as key to realizing Belgacom’s ambitions. The company will encourage the development of these behaviors in order to guarantee that our Group’s workforce will be a key asset in today’s market dynamics.

Three pillars for future stability Maintain market leadership Achieve true customer intimacy A tectonic shift is underway inside the Group: from being technology-centric to becoming customer-focused. So far, emphasis has already been put on segmentation, customer relationship management and other techniques aiming at better serving our customers. This attention remains more than ever at the core of the Group strategy, along with a clear willingness to deliver high-quality service and to become a leader in proactively offering the best total solutions to telecom customers. More and more we will concentrate on delivering through our services the results our customers are looking for.

Defend market share of services When markets are opened up to competition, an incumbent leader can only lose market share. For Belgacom, the time has now come to fight for each valuable customer. Keeping a significant share of the market value is of vital importance to maintain the profitability of the company. In Fixed Line Services: innovation in products and services and a strong focus on segmented win-back, without entering a spiral of value destruction. In Mobile Communications Services: new types of rate plans, prepaid-to-postpaid conversion programs and active retention to keep market and value shares as close as possible to current levels.

Actively participate in international wholesale consolidation

Become Best-in-class

Achieve true customer intimacy Defend market share Consolidate international wholesale

pp o

Implement best practices Streamline processes Manage resources

Market leadership

r ti ng

Operational efﬁciency

Win the broadband battle Develop next generation services Push existing mobile data

e orat new corp 38

stra tegic goals

oals tegic g a r t gs Proﬁtable tin r o growth pp

new corp orat e

cul tu re s

The objective is to reach sufficient scale to improve profitability in the worldwide call-termination market, where volumes are continuously growing but prices are still under pressure due to tough competition, regulation and overcapacity. In this context, Belgacom has actively reviewed opportunities to increase the scale of its operations in this business in 2004 and will continue to do so in 2005. The first step taken to implement this strategy was the spin-off of the international carrier activities and creation of Belgacom International Carrier Services (BICS), a private company 100% owned by Belgacom.

su re u t cul

Achieve operational efficiency In a harsh environment characterized by substitution and aggressive competition, the company is persistently working to operate more efficiently and cut costs where possible without impacting customer satisfaction. Great progress has been achieved in fixedline activities, and the mobile segment was already characterized by a remarkable level of efficiency.

Streamline processes to increase efﬁciency Automation, e-tools and self-care are increasingly used to reduce administrative work volume while great effort is being made to improve network processes. FLS is also targeting speciﬁc business policies and processes that are too heavy and require too many steps and too many interactions. The objective is to raise customer satisfaction and reduce unnecessary volumes in core business operations.

Manage resources in line with needs Following the implementation in the business of the Horizon efﬁciency program, all costs are continuously monitored to reduce them as much as possible. At the same time, external mobility projects, combined with natural workforce attrition, are making it possible to manage the headcount in line with business requirements.

Benchmark and implement best practices in each business External references are used at several levels to monitor progress and make sure innovative, winning ideas are also applied at Belgacom.

2005 will see the first UMTS applications rolled out to residential customers, improving their overall mobile data experience. The Group has continued to review possible external investment opportunities in order to define paths for future growth. These focus primarily on profitable opportunities in segments where the company believes external growth is necessary, such as Network and System Integration (NSI). The Group will also actively participate in further consolidation of the international carrier business. Any other opportunity will be considered provided it contributes to creating additional value for shareholders.

Innovation Overall the environment is becoming more and more complex. To face the new challenges, Belgacom will innovate. Additional services will be launched, made possible by new connectivity technologies (like UMTS or VDSL) and applications that will make ‘digital lifestyle’ more of a reality every day. FLS is, for example, working on expanding NSI activities further, participating in the development of e-Belgium and planning the commercial launch of iDTV for 2005. MCS is developing mobile internet services both for residential and business customers; working on mobile payment, machineto-machine and location-based services. This new array of innovative services will make our customers’ lives easier.

Business Outlook

Invest in profitable growth Broadband is key to the company’s development. Great emphasis is being placed on expanding the Group’s leading position in broadband by continuing to grow the DSL subscriber base (both in retail and wholesale) and by launching new DSL flavors. These include VDSL services enabling a new generation of applications, including TV broadcasting and video-on-demand services to name a few. Other projects are being launched to develop new services such as e-health applications and video telephony for the deaf and elderly. For the mobile business, mobile data is more than ever key to maintaining and growing ARPU. Several initiatives focus directly on stimulating SMS and MMS consumption, while the launch of Vodafone live! is paving the way for a new customer experience with mobile data. In May 2004, business customers became the first to benefit from the increased bandwidth offered by UMTS.

FLS is determined to tenaciously defend its position on the market. Customer retention and winback will remain at the heart of ﬁxed-line activities, the objective being to retain as many valuable customers as possible for the year 2005. In this context, increased pressure on market pricing, especially in the form of bundles and joint offers will challenge the top line revenue with an impact of about -3%. But FLS’s ambition is to hold EBITDA margin ﬂat. For MCS, the main priority will be to defend the current market share leadership. To achieve this, focus will be to retain the current qualitative customer portfolio. Stimulation and further penetration of existing products & services (like Vodafone live! / Vodafone Mobile Connect Card, etc.) as well as the launch of new segmented rate plans and 3G services should help MCS to generate a service revenue growth between 0 and 3%. This “market share leadership” program will impact the EBITDA margin target.

External mobility projects are making it possible to manage the headcount in line with business requirements

Commercial launch of iDTV is planned for 2005

It is the mission of Human Resources to maintain a balance between the company’s needs and the aspirations of its employees, who are the company’s driving force. In the hectic environment of the telecom sector which has been unsettled by liberalization and characterized by intensive competition and technological transformations, one of the main drivers of growth is human resources.

teams that have endurance! The recognition and development of our employees are the key elements in a global strategy deﬁned by the highest level of management, in continuous consultation with its union partners. Three strong points of this strategy are: • giving our employees the means to lead fulﬁlling working and private lives; • remuneration as a management tool; • internal communication.

IPO – the new benchmark In the upheaval experienced by the telecommunications sector in the past ten years, our teams have proven that not only can they adapt to change, but that they can also initiate it. A prime example is the successful engineering of Belgacom’s IPO on 22 March 2004. But this is no time for self-satisfaction. Although this accomplishment has demonstrated the competency of our staff, it also points to new challenges. The IPO has given us a new benchmark; 2004 ushered in a new era in which change is the order of the day. For Belgacom, the only certainty is change. Given the competitiveness and the ever-changing technologies in the telecom sector, the challenges facing the Human Resources department are clear. We must ensure that all our employees maintain a Best-in-class level of competence.

Optimal deployment of human capital We must equip all our employees with the skills that will enable them to meet the forthcoming changes in the market and our customers’ needs. And continuously reinforce a forwardthinking mindset that will keep us in the vanguard. Learning is a key factor for the survival and growth of an organization. That is why the Belgacom Corporate University (BCU) strives to be a proactive business partner. Why it gives Belgacom employees the means to acquire skills that are strategic for our line of business. The use of the term “university” reﬂects Belgacom’s intention to offer the highest standard of learning to all its employees. BCU is divided into nine schools, representing nine major functional groups in our company. The purpose of the BCU is to enhance the performance, corporate culture, personal growth and career development of every employee. With a number of training programs, Belgacom is developing the potential that will better equip the company for tomorrow’s challenges. In 2004, 86% of our employees took at least one training course. The average time spent per employee on courses rose from 30 hours in 2003 to 36 in 2004. The total training cost rose from EUR 36 million in 2003 to more than EUR 38 million in 2004. E-learning is still increasing, accounting for 15% of learning time. In 2005, Belgacom will continue to invest in employee training. Not only do we want to pay special attention to the leadership proﬁle of our managers, but we also want to step up our training efforts for more administrative and technical employees.

Competent men and women in a changing organization

Guidance for the changing employment situation

spend most of their working time traveling, to use a temporary ofﬁce infrastructure when reporting back to home base.

To help employees without a job or who face the risk of losing their jobs, Belgacom, in cooperation with the labor unions, has launched a vast re-qualiﬁcation and external mobility program to help these employees move on in their career. The “e-ID” and “Call Center 112” projects are part of the ﬁrst phase of this initiative. The e-ID project was launched to assist the municipalities in the preparation and distribution of electronic ID cards to 8.2 million Belgians. The “Call Center 112” project aims to group the current emergency numbers such as 100 and 101 under the same number: 112. Almost 1,000 employees applied and 350 people were already appointed to new positions outside the company. 254 people are still in the selection process, with a possible departure on 1 April 2005. Other initiatives of this type will be launched in 2005.

A number of facilities that make everyday working life more pleasant for employees have been set up: dispensers for hot beverages, soft drinks and sandwiches; an ATM machine, bank, travel agency and press shop in the Brussels Towers. And, last but not least, 19 company restaurants that serve an average of over 5,000 meals a day. Health care is an important part of our employees’ well-being. Belgacom is also aware of the pressure on employees working in an environment that is competitive and undergoing constant change, and ﬁnds it important to prevent and detect any psychosocial risks generated by this.

In this context, Belgacom wants to increase its people’s employability continuously by offering them the opportunity to acquire the initiative, ﬂexibility and skills that will enable them to respond to the demands of a constantly-changing job market.

With regard to smoking, Belgacom has declared all Belgacom buildings as “non-smoking” areas, with the exception of a few specially equipped rooms. In addition to this strict policy, Belgacom launched a “Stop Smoking plan,” which includes assistance, advice and counseling.

Employee health and well-being

Internal satisfaction An internal satisfaction survey was conducted throughout the Group in December 2004. It was completed by more than 55% of the employees.

Belgacom pays considerable attention to the working environment and well-being of its employees. Which translates into a company culture that emphasizes quality of life. Underlying all our initiatives in this area is an important principle: a balance between private and working life. For this purpose, we give special attention to everything that can support and encourage the family life of our employees: flexibility, a variety of amenities, student grants and loans, children’s outings, leisure activities, etc. Moreover, a special team called the “Social Unit” was created to provide guidance and assistance for employees facing personal, financial, family or professional difficulties.

The satisfaction level was in line with that of 2003: 85% of the employees of Belgacom SA indicated that they were generally satisﬁed. MCS even attained a 92% satisfaction level.

Remuneration as a management tool The salary policy is based on two principles, i.e., benchmarking, which allows Belgacom to adjust to market conditions, and performance, evaluated in accordance with each employee’s achievement of objectives, using the same systems and standards for all.

Belgacom has taken many measures to enable its employees to maintain a work-life balance. One of the company’s objectives in this area is to reduce commuting to and from work through teleworking. Ten specially equipped satellite ofﬁces have been made available for employees who want to telework.

At the time of the IPO on 22 March 2004, Belgacom enabled its employees to subscribe to the company’s shares at a rate that was lower than the ﬁrst share price of EUR 24.50.

A pleasant working environment is essential. This year, we also took measures to improve this. Numerous workstations and meeting areas were set up or refurbished, including “dynamic” (temporary) ofﬁces, which enable employees who are required to

Average training hours per employee 24 2

25 2

5,629 managers and employees subscribed to a total of 1,842,026 shares. Which is a real success if you compare these ﬁgures with those of similar operations in other companies.

Learning Penetration (in %)

Total training costs (in EUR millions)

74%

31 2

90% 85%

18.79

17.53

17.15

14.38

16.88

15.04

functional IDA (off working hours development) 0

20.53

19.91

operational costs participant costs 30

100

Personnel costs are one of the Group’s main expenses. The number of employees (full-time equivalents) of the Belgacom Group decreased from 17,541 in 2003 to 16,933 in 2004. The wage bill decreased from EUR 1,046 million in 2003 to EUR 993 million in 2004, i.e., a decrease of 5.34%.

Belgacom is developing, in cooperation with the labor unions, a ﬂexible working arrangement for technical staff working at customer sites.

For the Belgacom Group as a whole, the average wage cost per active employee fell from EUR 59,632 in 2003 to EUR 58,643 in 2004.

It is not easy for a company to evaluate its activities impartially, which is why we systematically benchmark our achievements with the market results, and particularly with our competitors. We also try to gauge our achievements by applying for awards organized by independent Human Resource experts.

Development of the Belgacom Group’s personnel expenses in EUR millions

2002

2003

2004

Total

1,101

1,046

993

19,003

17,541

16,933

Employees (full-time equivalents)

Internal communication The intranet is the backbone of all the Group’s internal communication. Aside from providing the usual information about the company structure and policies, our intranet enables employees to organize their work through a variety of practical tools. They can also perform many other operations online, such as reserve parking spaces and meeting rooms, order translations, submit expense claims, order office supplies, consult information about internal job vacancies, their salary, objectives, and evaluation. The company’s intranet has the advantage of being incredibly flexible. But Belgacom, too, derives direct benefit from the site, thanks to the enormous savings in time and, therefore, in cost. Approximately 70% of the communication between Belgacom and its employees for administrative matters takes place electronically!

Award-winning work

The Belgacom Corporate University (BCU) was thus rewarded the HRM Development Award (organized by HRM Net) for its HR Embassy project, which consisted of creating an entire range of e-learning courses aimed at honing the expertise of Belgacom’s HR staff. MCS also scored well, ranking 16th among the “Best Employer 2004” event, organized by the HRM Center of Vlerick Leuven Gent Management, the “Great Place to Work Institute Europe” and Vacature (the Flemish recruitment magazine and website). For the same event, Proximus received the Gender Equality Special Award.

A pilot Personal Home Page (PHP) system was launched in 2004 and will be extended to the entire company in 2005. Thanks to this system, individual employees can create direct links and immediate access to the tools that they and their department need most.

Our social/union partners Belgacom has always favored clear, transparent consultation between labor and management. Even if the open, continuous dialog is at times complicated, it always fosters a positive management-labor environment. In addition to the company’s compliance with and the implementation of the commitments made with respect to the collective labor agreement (CLA) of 2002-2005,

Learning is a key factor for the growth of Belgacom. That is why the Belgacom Corporate University (BCU) strives to be a proactive partner

Some may think the title of this section too bold for an annual report. Belgacom is nevertheless convinced that every company must act as a responsible corporate citizen. Must think about what it can do for society. This type of contribution is based on concern for its fellow citizens. Without which, we can hardly see how a company can continue to prosper in the future.

striving for the well-being of all

People today feel that companies must be accountable for their social and environmental actions, that companies must reconcile their short-term objectives (proﬁtability, economic performance) with longer-term considerations. A company that wants to prosper in the future has to strive for a balance between a number of factors. Along with the objective of good ﬁnancial results, it must keep in mind the well-being of its employees, and that it must conduct itself as a corporate citizen, in an ethical and environmentally responsible manner.

Solidarity, patronage and sponsoring Belgacom focuses on four areas: • social, humanitarian and charitable activities; • cultural and artistic events; • support for scientiﬁc and educational initiatives; • the sponsorship of sporting events. “The Helping Hand”, which celebrated its second anniversary on 2 December 2004, remains the spearhead of our social, humanitarian and charitable activities. This anniversary provided us with an opportunity to take stock of the achievements: 320 associations have beneﬁted from this wonderful Helping Hand project, receiving contributions that ranged from a recycled PC to EUR 5,000, which was the maximum allocated amount. About half of the applications were submitted by Belgacom employees. Which is what Belgacom had been aiming for at the launch of the project: encouraging solidarity among its employees, and their commitment to society.

Belgacom also paid particular attention to Child Focus, the European center for missing and sexually abused children, and Special Olympics Belgium, which helps the disabled to overcome their disability by participating in top-level sports events. And then there is our support for United Fund For Belgium, an association that redistributes funds collected from companies to charity institutions active in Belgium. In December 2002, Mobile Communications Services launched the Proximus Foundation, enabling it to support 36 projects in 2004 and establish links with even a greater number of people and organizations. In 2004, it had provided a total of EUR 500,000 in funds. In 2005, Belgacom will continue its commitments along this line by extending its support to other organizations, such as AiG (Action Innocence Group), which informs parents and children of possible dangers on the Internet. Belgacom is also launching its own activities, such as, for example, the video telephony pilot project for the deaf in cooperation with the Flemish and French-speaking federations of associations for the deaf. In the ﬁeld of art and culture, Belgacom contributes to the Queen Elizabeth Music Competition, La Monnaie Opera House, the Royal Opera of Namur, and the Klara Festival. We also support the Queen Elizabeth College of Music by offering three Belgian students a scholarship for piano, violin and singing studies.

Committed to accountability

In the area of scientific and teaching initiatives, we support: • the Research Center of the Solvay Business School’s Corporate Social Responsibility and the Knowledge Space – a gigantic virtual library; Belgacom is also contributing to the construction of a new building whose inauguration is planned for 2006. Equipped with the latest technology, user-friendly and conducive to communication, the new center aspires to be a unique place in Brussels for the exchange of ideas between companies, associations and academic communities; • the Network for Training Entrepreneurship, which demonstrates to underprivileged young people how to assume active roles and find strength in taking entrepreneurial initiatives; • the Erasmus Foundation, through a Belgacom research scholarship that enables a young doctor to fully dedicate himself or herself to a biomedical research project; • the Queen Paola Foundation, which, with the goal of helping young people reintegrate into society, organizes awards such as the Queen Paola prize to reward the most innovative teachers in this area; • the International Polar Foundation (IPF), established in Brussels with the aim of informing the public about polar research and its important contribution to understanding climate changes; • university graduates, through our Management Trainee project, which enables these young people to carry out a 16-month internship within the Belgacom Group; • students, by providing them with guidance for their theses and projects in the area of telecommunications. In the field of sports, in 2004, we concentrated our efforts on helping Belgian athletes in their goal to win medals. There is no doubt that Justine Henin’s victory was a high point of the Olympic Games last season. Companies who want to invest in sports sponsorship must keep high-level athletes among their main objectives. However, they do well to keep purely recreational sports in mind, too, such as sports for families and socializing. A way to be closer to supporters, to “move” with them. This change in strategy explains our backing of the Belgacom Beach Soccer tournaments. We intend to also take initiatives aimed at encouraging the participation of young people in athletics. Three exceptions to this new line of sports sponsorship are the Diables Rouges (Belgian national soccer team), the Mémorial Van Damme track and field competition, and the Belgian Interfederal Olympic Committee, which we will continue to back. In 2005, we will be the Memorial’s Presenting Partner. In 2005, we decided to sponsor amateur cinema in Belgium, and particularly digital films. Our ambition is to encourage creative projects in the digital sector.

Diversity as a principle Belgacom did not wait for the ofﬁcial texts comprising the law of 25 February 2003 to combat all types of discrimination in the company. It is a fundamental principle of our company to treat all employees equally. This is stated very clearly in our code of conduct. In terms of employment status, promotions, evaluation and general personnel policy, for example, Belgacom does not make any distinction with regard to its staff members’ gender, religion, social origin, lifestyle, etc. We also developed and disseminated a procedure setting out how any type of moral or sexual harassment or violence should be avoided (or remedied). Belgacom participates in different working groups involved with this issue in the framework of the European Telecommunications Network Operators (ETNO). A workgroup called the “Diversity Committee” was formed in the company, three of whose members are from the Executive Committee. This workgroup gave itself precise objectives and priorities, based on the results of an internal study. As an example of already existing means to promote diversity in matters of Work-Life balance, we have set-up a series of measures – not included in the legal obligations – to make life easier for mothers and fathers: supplementary maternity leave, child care for sick children, school holidays, priority for holiday planning, for school holidays, etc.

Security, a priority The Belgacom Group considers the security of people and property in all its buildings, sites, construction sites, etc., very important. The objective is to further improve performance and aim for a zero accident rate.

Frequency rate

2000

2001

2002

2003

2004

19.88

20.1

18.52

16.35

16.34

This index is based on the annual number of accidents multiplied by one million and divided by the number of hours of service performed in a year. In absolute ﬁgures, the number of accidents a year decreased from 644 in 2000 to 369 in 2004, i.e., a reduction of 42%. Belgacom opens an average of ten thousand sites a year. Ten percent of these are monitored systematically by special teams who not only monitor compliance with safety requirements, but also act as instructors, conveying their knowledge to others. Other teams, accompanied by the members of the Local Joint Labor Committee for Prevention and Protection at Work (CPLP/LPCP) conduct more than 450 company inspections a year. On average,

Gender & age distribution at Belgacom and in the Belgian working population (in %) TOTAL 20-29 Y 30-39 Y

– 6.9 %

40-49 Y 50-64 Y

Belgacom: men Belgacom: women 0

Belgium: men Belgium: women 30

The younger its population, the more Belgacom becomes a mirror of the Belgian working population.

Decrease fuel consumption in 2004 compared to 2003

the committees meet three times a month with representatives (of employer and employees) and the company doctor. To ensure the security of property, the approximately 600 Belgacom buildings are protected by more than 2,600 badge readers. We entrusted the security assignment for these buildings to the company Securitas. In ten sites, Securitas also takes care of welcoming customers, and serves as a continuous contact point.

Belgacom knows that its choice of suppliers can have completely unforeseeable repercussions. A company being brought to court for gross negligence or failure to assist persons in danger after one of its suppliers is caught using child or forced labor has now become a real possibility.

Every month, mobile monitoring agents conduct more than 7,000 building inspections and respond to nearly 80 alarms. A number of internal awareness campaigns were conducted in 2004 on safety on the way to and from work. 680 employees followed safe-driving courses organized and offered by Belgacom.

Environment: a long-term effort What we create and build today is the heritage of tomorrow. Today’s unstoppable growth could leave future generations with major ﬁnancial debts and irreversible scarcities. Even if the impact on the environment of a company such as ours is less direct than that of an industrial company, the effect is still there, particularly when it comes to the usage of energy, paper and transport. In 1996, Belgacom signed the Environmental Charter of the European Telecommunication Network Operators (ETNO), which requires signatories to take fundamental urgent actions to protect the environment. Since this date, representatives from our company monitor the various working groups specialized in different environmental ﬁelds. To contribute to the reduction of CO2 emissions, Belgacom launched a campaign to reduce fuel consumption, which decreased by 6.9% in 2004 compared to 2003.

Year

Annual consumption various fuels

2002

13,435,965

–

2003

12,570,413

-6.4%

2004

11,705,595

-6.9%

We also incorporated the comparison of emission levels into our purchasing requirements for service vehicles. In keeping with this criteria, at the end of 2004, we entered into a lease contract for 1,200 Opel Combos, a particularly low-emission vehicle. In general, we provide clauses related to environmental protection for every contract that we sign. In 2004, we invested more than EUR 250,000 in the analysis of soil. Four new remediation sites were opened in 2004. Our objective

is to make a thorough soil-pollution assessment of each of our company’s sites by the end of 2005.

A few ﬁgures speak for themselves In 2004, we produced a total of 20,549 tons of waste, compared to 22,304 in 2003 and 26,820 in 2002. A reduction of 24% in 3 years. In 2003, 71% of this waste was recycled, versus 68% in 2004. Whereas we produced 65,600 kilograms of hazardous waste in 2003, in 2004, this decreased to 31,122 kg. Some examples of recycled products: • 365,250 kg of metal waste; • 345,520 kg of copper cables; • 237,000 electronic components; • 80,286 telephone terminals; • 7,919 different computer parts; • 5,786 ink cartridges. In 2004, Belgacom produced 83 million printed pages internally. An enormous quantity of paper is also used for billing. Internal and external campaigns have been launched to radically decrease this consumption. Since May 2004, we have been making electronic bills available to our customers. Over the years, this should make it possible to reduce the amount of paper generated by the paper bills sent to our millions of customers. By the end of 2004, 12,776 customers switched to electronic billing. A good beginning, but there is still a long way to go.

At the end of 2004, Belgacom entered into a lease contract for 1,200 Opel Combo, a particularly low-emission vehicle

key figures

(1)

2002

2003

2004

5,338 1,085 6,422 2,020 2,341 1,482 -25 -12 1,445 -203 -99 1,142

5,454 0 5,454 2,250 1,353 566 -27 -4 534 -208 -154 172

5,540 0 5,540 2,394 2,353 1,611 -27 -1 1,583 -508 -152 922

As of 31 December

2002

2003

2004

Cash Flow and Capital Expenditures (EUR million) Cash flows from operating activities Capital expenditures Cash flows from other investing activities Free cash flow (3) Cash flows used in financing activities Net increase/(decrease) of cash and cash equivalents

1,371 -566 1,276 2,081 -1,560 521

296 -502 17 -189 -575 -764

1,899 -556 78 1,421 -1,658 -237

7,298 4,601 1,611 2,978 293 1,545 1,109

6,009 4,381 604 2,548 446 840 157

5,368 3,963 406 2,223 407 760 110

2002

2003

2004

2.86 2.86 0.70 1.43 400,000,000

0.43 0.43 0.99 0 399,932,159

2.57 2.57 1.38 0.55 358,612,854

19,003 19,875 268,567 101,641

17,541 17,880 305,054 125,852

16,933 17,108 323,847 139,945

37.8% 36.5% 23.1% 17.8% 40.7% 24.6% 27.4%

41.3% 24.8% 10.4% 3.2% 6.2% 10.2% 11.2%

43.2% 42.5% 29.1% 16.6% 38.7% 31.1% 38.4%

-37.2%

-6.2%

-4.9%

-0.5 -0.5

-0.1 -0.1

0.0 0.0

10.6% 8.8%

9.2% 9.2%

10.0% 10.0%

Year ended 31 December Income Statement (EUR million) Total revenue before non-recurring items Non-recurring revenue Total revenue EBITDA (2) before non-recurring items EBITDA (2) Operating income (EBIT) Net finance revenue/(costs) Loss from enterprises accounted for using the equity method Income before taxes and minority interests Tax expense Minority interests Net income (Group share)

Balance sheet (EUR million) Balance sheet total Non-current assets Investments, cash and cash equivalents Shareholders’ equity Minority interests Liabilities for pensions and other post-employment benefits Net financial position

Year ended 31 December Data per share Basic earnings per share (in EUR) Diluted earnings per share (in EUR) Dividend per share, gross (in EUR) Special dividend per share, gross (in EUR) Weighted average number of ordinary shares Data on employees Number of employees (full-time equivalents) Average number of employees over the period Total revenue before non-recurring items per employee (in EUR) EBITDA (2) before non-recurring items per employee (in EUR) Ratios Profitability EBITDA (2) margin before non-recurring items EBITDA (2) margin Operating margin (EBIT) Net margin (group’s share) Return on equity (ROE) (4) Return on assets (ROA) (5) Return on capital employed (ROCE) (6) Gearing Net financial debt to shareholders’ equity Coverage Net financial debt to EBITDA before non-recurring items Net financial debt to EBITDA Self-financing Capital expenditures to total revenue before non-recurring items Capital expenditures to total revenue (1) Prepared under IFRS. (2) Earnings Before Interests, Taxes, Depreciation and Amortization. (3) Cash flow before financing activities.

(4) Net income/average shareholders’ equity. (5) EBIT/average (total assets - current investments & cash and cash equivalents). (6) EBIT/average (total assets - current liabilities).

management discussion and analysis of operating results

50 â&#x20AC;˘ Comments on consolidated figures 54 â&#x20AC;˘ Management discussion and analysis of operating results per business segment 59 â&#x20AC;˘ Liquidity and capital resources

comments on consolidated figures Consolidated income statement Year ended 31 December (EUR million)

2002

2003

2004

Net revenue Other operating revenue Non-recurring revenue Total revenue

5,252 86 1,085 6,422

5,377 78 0 5,454

5,415 125 0 5,540

-1,353 -1,101 -863 -764 -4,081

-1,376 -1,046 -782 -897 -4,101

-1,461 -993 -693 -41 -3,187

Operating income before depreciation and amortization

2,341

1,353

2,353

Depreciation and amortization Operating income

-859 1,482

-787 566

-742 1,611

Net finance costs Loss from enterprises accounted for using the equity method Income before taxes and minority interests

-25 -12 1,445

-27 -4 534

-27 -1 1,583

Tax expense Minority interests Net income

-203 -99 1,142

-208 -154 172

-508 -152 922

Costs of materials and charges to revenue Personnel expenses and pensions Other operating expenses Non-recurring expenses Total operating expenses before depreciation and amortization

The Group’s total revenue increased by 1.6%, to EUR 5,540 million, driven by revenue growth in the Mobile Communications Services and International Carrier Services segments. The Group’s revenue was impacted by competitive pressure in the Fixed Line Services segment. Total revenue includes the gain on disposal of buildings and equipments and a compensatory amount relating to the IPO transaction (EUR 35 million in total). The Group’s operating income before depreciation and amortization (EBITDA) grew by 73.9% to EUR 2,353 million, mainly impacted by a non-

recurring expense recorded in 2003 related to the transfer of certain pension obligations to the Belgian State (EUR 897 million). In combination with the above-mentioned revenue growth, the positive evolution of this result was driven by a 1.8% decrease (EUR 58 million) in operating expenses (excluding non-recurring items). The Group’s EBITDA evolution was negatively impacted by the recognition in 2004 of an impairment loss on the International Carrier Services segment (EUR 20 million) and by non-recurring expenses in respect of restructuring costs for the external mobility plans (EUR 41 million), also recorded in 2004.

Total revenue per business segment Year ended 31 December

2002

2003

2004

(EUR million)

(%)

(EUR million)

(%)

(EUR million)

(%)

Variance 2004 versus 2003 (%)

Fixed Line Services Mobile Communications Services International Carrier Services Intersegment eliminations Total

3,188 2,075 625 -550 5,338

60 39 12 -10 100

3,108 2,181 626 -461 5,454

57 40 11 -8 100

3,092 2,239 645 -435 5,540

56 40 12 -8 100

-0.5 2.6 3.0 -5.6 1.6

Non-recurring revenue Total

1,085 6,422

0 5,454

0 5,540

For the year ended 31 December 2004, total revenue increased by 1.6%: Fixed Line Services revenue decreased year-over-year by 0.5%. The growth in broadband and in national wholesale nearly offset the decline in the traditional voice business. Two one-time items (the gain on the sale of buildings and equipments and a compensatory amount related to the IPO transaction, for EUR 35 million in total) also positively impacted the segment revenue. Mobile Communications Services revenue increased by 2.6%, as a result of service revenue growth (+3.3%). This was, however, partly offset by certain exceptional credits and discounts granted for the

•

10th anniversary of Belgacom Mobile that impacted the first half of the year 2004. International Carrier Services revenue increased by 3.0%, thanks to the growth of mobile destination traffic (+24.4%).

For the year ended 31 December 2003, total revenue decreased by EUR 968 million, to EUR 5,454 million. This decrease was primarily driven by the recognition of non-recurring revenue in 2002 (EUR 1,085 million), mainly in respect of gains arising from the sale of Ben Nederland and Belgacom France.

Operating expenses before depreciation and amortization Year ended 31 December (EUR million)

2002

2003

2004

Variance 2004 versus 2003

Costs of materials and charges to revenue Personnel expenses and pensions Other operating expenses Total

1,353 1,101 863 3,318

1,376 1,046 782 3,204

1,461 993 693 3,146

6.1% -5.0% -11.4% -1.8%

Non-recurring expenses Total

764 4,081

897 4,101

41 3,187

Excluding non-recurring expenses, total operating expenses before depreciation and amortization decreased by 1.8% or EUR 58 million.

Costs of materials and charges to revenue For the year ended 31 December 2004, the costs of material and charges to revenue increased by 6.1%. This increase is mainly related to higher expenses for interconnection within Mobile Communications Services and to the impact on costs of mobile destination traffic growth in the International Carrier Services segment. Fixed Line Services cost of materials and charges to revenue decreased by 0.6%, the cost increase in National Wholesale being more than offset by the cost decrease in the retail business.

Personnel expenses and pensions Year ended 31 December (EUR million)

Salaries and wages Social security expenses Pension costs Post-employment benefits other than pensions Other personnel expenses Total Number of employees (full-time equivalents) (1)

2002

2003

2004

822 142 110

782 142 100

746 163 17

9 18 1,101

7 15 1,046

39 27 993

19,003

17,541

16,933

Salaries and wages decreased in 2004 by EUR 35 million or 4.5%. The decrease is driven by the overall headcount reduction at Belgacom Group level (minus 608 full-time equivalents or -3.5%, some of which were the result of the BeST program and external mobility projects), offset in part by annual increases in salary levels (including indexrelated 2% increases at Mobile Communications Services in July 2004 and at Fixed Line Services and International Carrier Services in November 2004). The increase in social security expenses in 2004 was mainly driven (for EUR 30 million) by additional social security contributions paid to the Belgian State for statutory employees (which is a consequence of the Pension Fund transfer at the end of 2003) and partly offset by fewer social security expenses following the headcount reduction. Due to the transfer of the fully funded Pension Fund for statutory employees in 2003 and to the reclassification of interest costs related to BeST and PTS liabilities under “post-employment benefits other than pensions” in 2004, pension-related charges declined from EUR 100 million in 2003 to EUR 17 million in 2004. The EUR 17 million are in respect of pension benefits for statutory and non-statutory employees in excess of legal pension benefits. Post-employment benefits other than pensions increased year-over-year 2004 versus 2003 by EUR 33 million. The increase was mainly driven by interest costs related to BeST and PTS liabilities (EUR 26 million), which previously had been classified under pension costs.

(1) Number of full-time equivalents, calculated on the basis of the consolidation percentage of subsidiaries owned less than 100%.

The EUR 12 million increase in other personnel expenses was mainly driven by the discounted share purchase plan (DSPP) and the employees stock option plan (ESOP), EUR 8 million and EUR 2 million respectively.

Other operating expenses Other operating expenses decreased by 11.4% (EUR 89 million), thanks primarily to the impact of cost-reduction initiatives. The trend here was also impacted by the reversal in 2003 of an impairment loss on rights of use from Global Crossing recorded in 2002 (EUR 9 million, within International Carrier Services), by the booking in the first half of 2004 of an impairment loss on net assets (EUR 20 million, within International Carrier Services) and by favorable one-time items recorded within Fixed Line Services in the first half of 2004 (EUR 30 million).

Non-recurring expenses In 2004, the Group recognized a liability for restructuring programs (non-recurring expense) amounting to EUR 41 million. This was recorded in order to cover the obligation related to employees that have accepted the external mobility offer for the electronic identity card (e-ID) and for the emergency call center projects of the Ministry of Internal Affairs. In 2003, the Group recorded a non-recurring expense of EUR 897 million incurred in connection with the transfer to the Belgian State of the accrued and future legal pension obligations for the Company’s current and former statutory employees and their survivors. In 2002, the Group recorded non-recurring expenses for a total amount of EUR 764 million, primarily due to the costs of implementation of the BeST restructuring program.

Operating income before depreciation and amortization (EBITDA) Year ended 31 December

2002

2003

(EUR million)

(%)

(EUR million)

(%)

(EUR million)

(%)

Variance 2004 versus 2003 (%)

Fixed Line Services Mobile Communications Services International Carrier Services Total

1,008 1,006 6 2,020

50 50 0 100

1,109 1,113 28 2,250

49 49 1 100

1,257 1,135 2 2,394

53 47 0 100

13.3 1.9 -91.4 6.4

Non-recurring revenue Non-recurring expense Total

1,085 -764 2,341

0 -897 1,353

0 -41 2,353

For the year ended 31 December 2004, total Group EBITDA progressed year-over-year by EUR 1,000 million. Excluding the impact of nonrecurring items, operating income before depreciation and amortization grew by EUR 144 million or 6.4%.

Communications Services, depreciation and amortization charges are increasing over the years, mainly due to the operational launch in 2004 of both the new billing system and UMTS services.

Fixed Line Services’ segment result increased by 13.3% year-over-year, thanks to lower operating expenses and one-time items recorded in the first half of 2004.

Operating income (EBIT)

Mobile Communications Services’ segment result progressed by 1.9%, driven by revenue growth. International Carrier Services’ segment result decreased year-overyear by EUR 25 million, mainly impacted by one-time items related to impairment losses. Excluding the impact of one-time items in both years, the ICS segment result grew by EUR 3 million (14.7%).

2004

For the year ended 31 December 2004, operating income increased by EUR 1,045 million. This increase is primarily related to the impact of non-recurring expense of EUR 897 million recorded in 2003, compared to a non-recurring expense of EUR 41 million posted in 2004 to cover restructuring costs for external mobility projects. Excluding non-recurring expenses in both years, operating income grew by EUR 189 million (12.9%) in 2004.

Depreciation and amortization

Net finance costs

The downward trend in depreciation and amortization charges over the years can be explained in particular by a decreasing level of capital expenditures within Fixed Line Services until the year 2003. A downward review in June 2003 of the useful life of submarine cables within International Carrier Services had caused a significant charge of depreciation and amortization for the year 2003 for cables that were at the end of their new estimated useful life. Within Mobile

The level of net finance costs has remained rather stable in 2002, 2003 and 2004. Finance costs for the year 2004 reflected an increase in net interest charges over 2003, due to the significant cash-consuming events of late December 2003 and early 2004. On the other hand, the Group has collected greater dividends from its investments in satellites in 2004 and the Group has recorded much lower impairment losses on other

Minority interests

participating interests that are not fully compensated by higher costs for the remeasurement to fair value of financial instruments.

The Groupâ&#x20AC;&#x2122;s most significant minority interest is Vodafoneâ&#x20AC;&#x2122;s 25% stake in Belgacom Mobile. In 2002, this line also included the special purpose vehicle formed in connection with the transfer of the shares of Ben Nederland.

Loss from enterprises accounted for using the equity method For the years 2003 and 2004, enterprises accounted for using the equity method consist only of Alert Services Holding.

Net income

Tax expense The effective income tax rate of the year 2004 amounts to 32.1%. This means an effective percentage lower than the tax rate applicable in Belgium (33.99% as from 1 January 2003) due to non-taxable income of some subsidiaries exceeding non-deductible expenditures of the Group.

Net income (Group share) increased from EUR 172 million in 2003 to EUR 922 million in 2004 thanks to a positive evolution of the operating income. In 2003, it was however impacted by a non-recurring cost of EUR 897 million.

Organizational chart on 01/03/2005

Belgacom SA Fixed Line Services Belgacom Skynet WIN CERTIPOST Connectimmo DAD Expercom Belgacom finance Finbel Re Belgacom services Belgacom Opal

100% 100% 50% 100% 85% 100% 100% 100% 100% 100%

Mobile Communications Services

International Carrier Services

100%

72%*

Belgacom Invest

BICS

75%

100%

Belgacom Mobile

Points of presence companies in 15 countries * Subject to clearance of transaction with Swisscom.

management discussion and analysis of operating results per business segment Fixed Line Services Year ended 31 December (EUR million)

2003

2004

Total segment revenue

3,108

3,092

-597 -884 -518

-593 -828 -414

-1,999

-1,835

1,109

1,257

Non-recurring expense Operating income before depreciation and amortization

-897

-41

212

1,216

Depreciation and amortization Operating income

-565 -353

-500 717

Costs of materials and charges to revenue Personnel expenses and pensions Other operating expenses Total operating expenses before depreciation and amortization Total segment result

For the year ended 31 December 2004, Fixed Line Services (FLS) revenue decreased year-over-year by EUR 16 million or 0.5%.

2003

Year ended 31 December 2004 Variance Variance

Retail Voice Access Voice Traffic Total Voice Internet Data Other retail (1) Total retail revenue

957 908 1,865 375 221 262 2,723

931 802 1,733 418 227 248 2,626

-2.7% -11.7% -7.1% 11.5% 2.6% -5.4% -3.6%

-26 -106 -132 43 6 -14 -97

National Wholesale

325

358

10.2%

108

81.2%

3,108

3,092

-0.5%

-16

Others Total revenue

National Wholesale revenues increased by 10.2% in 2004, reaching EUR 358 million. This was mainly driven by carrier broadband lines, including carrier DSL lines and bitstream-regulated accesses (+67.8%), and by an increase in interconnection minutes (+18.1%).

Operationals 2003

(1) Other retail includes revenue from International Data, International leased lines and satellite solutions, WIN SA, Digital Age Design SA/NV (“DAD”), Expercom, Certipost, Skynet, Eduline and other company retail revenues. Revenues from Skynet and Eduline have been moved from “others” to “other retail” in the second half of 2004. Data of former years have been restated accordingly.

Retail Fixed Line Services revenue decreased year-over-year by 3.6% or EUR 97 million, driven by a revenue decline in voice access and voice traffic. This evolution is mainly attributable to increased competition and to substitution. Internet revenues (dial-up and broadband access and connectivity) grew by 11.5% or EUR 43 million, thanks to continued growth in the xDSL subscriptions park (+24.4%). Data access and connectivity revenue increased by 2.6%, driven by growth in outsourced network management services and network integration services (+117.9%).

New products and services were launched in the course of the year, in order to sustain broadband growth and address the voice access (PSTN/ISDN channels) and voice traffic decline. These products and services include ADSL light (lower-priced ADSL lines), VDSL (the fastest Internet solution and first commercial service of the Broadway project), “Discovery” lines (reduced PSTN subscription fee) and new traffic offers such as “Belgacom No Limit” (traffic bundle) or “Maxi Call” (fixed rate per minute). The launch of a winback program in January 2004 has brought more than 142,000 customers back to Belgacom.

Other revenues also include one-time items such as the gain on the sale of property and a compensatory amount relating to the IPO transaction (for a total amount of EUR 35 million). Those one-time items were recorded in the first half of the year 2004.

Segment revenue

(EUR million)

Other retail revenues decreased by 5.4%, mainly due to a revenue decline in international products (leased lines, satellites) and mobile handset sales.

Number of access channels (in thousands) Residential PSTN ISDN ADSL Total Business PSTN ISDN ADSL Total Traffic (in millions of minutes) Residential National Fixed to Mobile International Total Business National Fixed to Mobile International Total Average monthly voice revenue per voice access channel

Year ended 31 December 2004 Variance

3,285 379 589 4,253

3,181 377 723 4,282

-3.2% -0.5% 22.9% 0.7%

280 605 81 966

267 598 105 970

-4.7% -1.2% 29.4% 0.4%

6,490 965 459 7,914

5,239 851 385 6,476

-19.3% -11.8% -16.0% -18.2%

2,612 504 450 3,567

2,268 513 430 3,211

-13.2% 1.8% -4.4% -10.0%

34.2

32.7

-4.4%

In 2004, access channels increased year-over-year by 0.7% in the residential market and by 0.4% in the business market, thanks to the ADSL growth. Winback and marketing actions (launch of the “Discovery line” offering a PSTN access line at a reduced rate to more than 70,000 customers at the end of 2004) have been started, in order to slow down the voice access decline. As result of those actions, FLS lost more than 28,000 fewer PSTN/ISDN access channels in the second half of 2004 (-8,135 access channels lost per month on average), compared to the first half of 2004 (-12,906 access channels lost per month on average). Retail voice traffic volumes declined by 15.6% year-over-year. This trend is primarily the result of increased competition and substitution effect from mobile, e-mail and SMS. In order to partly offset this trend, FLS has developed differentiated pricing offers, adapted to the customer profile, including the launch of new traffic bundles and rates (Belgacom No Limit, Maxi Call), and through winback actions.

Operating expenses before depreciation and amortization For the year ended 31 December 2004, operating expenses before depreciation and amortization decreased by 8.2% to EUR 1,835 million. This reduction was mainly driven by lower personnel expenses (workforce reduction) and pensions (transfer to the Belgian State of certain pensions obligations) as well as by lower other operating expenses (cost-control measures, including maintenance-contract renegotiations and lower consultancy expenditures). One-time items recorded in the first half of 2004 also had a favorable impact (reversal of provisions for litigations amounting to EUR 30 million). In 2003, advertising expenses were inflated by the costs related to the rebranding initiative.

Non-recurring expenses In 2004, the Fixed Line Services segment recognized a liability for restructuring programs via non-recurring expense, amounting to EUR 41 million. This was recorded in order to cover the obligation related to employees that have accepted the external mobility offer

for the electronic identity card (e-ID) and for the emergency call center projects of the Ministry of Internal Affairs. In 2003, the Fixed Line Services segment recorded a non-recurring expense of EUR 897 million incurred in connection with the transfer to the Belgian State of certain pension obligations in respect of statutory employees.

Operating income before depreciation and amortization (EBITDA) For the year ended 31 December 2004, FLS’ operating income before depreciation and amortization progressed by EUR 1,004 million, reaching EUR 1,216 million. Excluding the impact of non-recurring expenses recorded in 2003 (EUR 897 million) and 2004 (EUR 41 million), Fixed Line Services’ segment result grew by EUR 148 million or 13.3%, thanks to a strict cost-control policy. EBITDA margin before non-recurring expenses increased in 2004 by five percentage points to 40.7%, versus 35.7% in 2003.

Depreciation and amortization Depreciation and amortization charges are decreasing over the years mainly due to a decreasing level of capital expenditures until the year 2003. This decrease is not offset by the impacts of the useful life reduction of some classes of assets carried out in 2003 and 2004.

Operating income (EBIT) For the year ended 31 December 2004, operating income increased by EUR 1,070 million, to EUR 717 million. Excluding the impact of non-recurring expenses recorded in 2003 (EUR 897 million, related to the transfer to the Belgian State of certain pension obligations) and in 2004 (EUR 41 million, to cover restructuring costs for certain external mobility projects), operating income would have increased by EUR 214 million (39.3%). This was achieved thanks to lower operating expenses and lower depreciation.

Total access channels (in thousands)

Total retail and wholesale ADSL access channels (in thousands) 5,088

02 03

5,219

5,252

1,000

2,000

3,000

4,000

5,000

519

6,000

784 1,024 0

250

500

750

1,000

1,250

Mobile Communications Services

calling minutes) during the campaign celebrating the 10th anniversary of Belgacom Mobile, which impacted the first half of the year. Year ended 31 December

(EUR million)

2003

2004

Total segment revenue

2,181

2,239

-654 -143 -271

-683 -146 -275

-1,068

-1,104

Total segment result

1,113

1,135

Operating income before depreciation and amortization

1,113

1,135

-196 917

-227 907

Costs of materials and charges to revenue Personnel expenses and pensions Other operating expenses Total operating expenses before depreciation and amortization

Depreciation and amortization Operating income

Revenues from data services have increased by 14.1% year-over-year. In 2004, data services represent 15.8% of total service revenue, compared to 14.3% in 2003.

Operating expenses before depreciation and amortization Operating expenses before depreciation and amortization increased by 3.4% (EUR 36 million), driven by higher interconnection costs (increased traffic to other mobile operators) and content fees, increased personnel expenses (partly linked to the employee incentive program and to index-related 2% salary increases), higher contracting expenses linked to systems replacement and implementation of new platforms (e.g., Vodafone live!) and the impact of the Vodafone partnership fee, partly offset by lower advertising expenses.

Operating income before depreciation and amortization (EBITDA)

Segment revenue Year ended 31 December 2004 Variance Variance

(EUR million)

2003

Service revenue Voice services (1) Data services (1) Total Service revenue Credits and discounts Handsets Other revenue

1,825 305 2,130 -63 92 23

1,851 348 2,199 -74 90 24

1.4% 14.1% 3.3% -17.8% -1.7% 4.1%

26 43 70 -11 -2 1

Total revenue

2,181

2,239

2.6%

Operating income before depreciation and amortization increased by 1.9% (EUR 22 million). This increase was driven by higher revenue, partially offset by higher costs. The EBITDA margin slightly decreased versus 2003, but remains above 50%.

Depreciation and amortization The increase over the years of the depreciation and amortization charges within Mobile Communications Services is mainly due to the operational launch in 2004 of both the new billing system and UMTS services.

(1) Including roaming-in.

For the year ended 31 December 2004, Mobile Communication Services (MCS) total revenue increased year-over-year by 2.6% (EUR 58 million), driven by higher service revenue (+3.3%) and partially offset by greater credits and discounts granted to customers (free SMS messages and free

Active mobile customers (in thousands) 4,076

02 03

4,201

4,198 0

1,000

2,000

3,000

4,000

5,000

Operating income (EBIT) Mobile Communications Services operating income decreased yearover-year by 1.1% (EUR 10 million), impacted by higher depreciation and amortization costs.

Operationals 2003 Number of active customers (1) (in thousands) Pre-paid Post-paid Active customers as a percentage of total customers (2) Annualized churn rate (3) (blended - variance in p.p.) ARPU (4) Pre-paid (in EUR) Post-paid (in EUR) Blended (in EUR) Blended voice (in EUR) Blended data (in EUR) Market share of active customers (5) Pre-paid Post-paid Total UoU (6) MoU SMS

Year ended 31 December 2004 Variance

4,201 2,442 1,759

4,198 2,478 1,720

-0.1% 1.5% -2.2%

96.6%

97.1%

0.5 p.p.

17.7%

18.3%

-0.6 p.p.

19.2 69.1 40.3 34.3 6.0

19.6 71.6 41.0 34.3 6.7

2.1% 3.6% 1.8% 0.1% 11.7%

49.1% 61.5% 53.7% 212.6 165.9 46.7

46.2% 56.7% 50.0% 214.6 166.3 48.3

-2.9 p.p. -4.8 p.p. -3.7 p.p. 0.9% 0.3% 3.3%

(1) Active customers are customers who have made or received at least one call or sent or received at least one SMS message in the last three months. (2) Percentage based on total number of Belgacom Mobile SIM cards in circulation. (3) Annualized churn is the total number of SIM cards disconnected from the Belgacom Mobile network, plus the total number of port-outs due to mobile number portability, during a given year, divided by the average number of customers during that year. (4) ARPU has been calculated on the basis of monthly averages for the period indicated. Monthly blended ARPU is total service revenues, excluding roaming-in and activation revenues, divided by Belgacom Mobileâ&#x20AC;&#x2122;s active post-paid and pre-paid customer base for that period. (5) Belgacom Mobile estimate. (6) UoU: voice minutes of use + SMS (where 1 SMS equals 1 minute) per active customer.

International Carrier Services (in billions of minutes)

Year ended 31 December

2003

2004

626

645

-540 -19 -39

-564 -21 -57

-598

-643

Total segment result

Operating income before depreciation and amortization

-26 1

-15 -13

(EUR million)

Total segment revenue Costs of materials and charges to revenue Personnel expenses and pensions Other operating expenses Total operating expenses before depreciation and amortization

Depreciation and amortization Operating income

Segment revenue The International Carrier Services (ICS) segment achieved a 3.0% yearover-year increase of revenue in 2004. The growth of mobile voice revenue in the second semester of 2004 more than offset the revenue decrease in the first half of the year. Data revenue nearly doubled, primarily as a result of mobile data services.

Year ended 31 December 2004 Variance

6.40 3.78 2.61

6.95 3.70 3.25

8.6% -2.3% 24.4%

Operating expenses before depreciation and amortization Operating expenses before depreciation and amortization increased year-over-year by 7.4% (EUR 44 million). The evolution of operating expenses was mainly impacted by the reversal in 2003 of an impairment loss on rights of use from Global Crossing recorded in 2002 (EUR 9 million) and by the booking in 2004 of an impairment loss on net assets (EUR 20 million). The operating expense increase was also driven by higher charges to revenue, related to the growth of mobile destination volumes. This evolution was partially offset by savings in international network cost and by an increased control on customer debt.

Operating income before depreciation and amortization (EBITDA) ICS operating income before depreciation and amortization decreased year-over-year by EUR 25 million, mainly impacted by one-time items (impairment loss related). Excluding the impact of those one-time items in both years, EBITDA of the segment increased by EUR 3 million.

The ICS strategy to capture growth from mobile operators proved successful throughout 2004. The segment recorded 24.4% growth in destination mobile minutes, which largely offsets the decrease in destination fixed minutes.

EBITDA margin decreased from 4.4% in 2003 to 0.4%, impacted by impairment loss-related bookings.

Voice and data revenue growth was partially offset by a continuing decline in traditional infrastructure and capacity leases provided to other incumbent operators.

The downward review of the useful life of submarine cables realized in June 2003 increased significantly the charge of depreciation and amortization for the year 2003 for assets that were at the end of their new estimated useful life.

Year ended 31 December 2004 Variance Variance

2003

(EUR million)

Voice Data Capacity, infrastructure and others (1) Total revenue

603 2

626 4

3.8% 92.0%

23 2

21 626

15 645

-27.8% 3.0%

-6 19

(1) Others include primarily revenues from telegraphy and telex.

Minutes transported by ICS (in billions) 3.96

1.90

3.78

2.61

3.70

3.25

fixed mobile 0

Total Total fixed Total mobile

2003

Depreciation and amortization

Operating income (EBIT) Operating income decreased by EUR 14 million, impacted by one-time items (impairment loss) and higher charges to revenue (related to volume growth). These effects are partially offset by savings in international network, customer debt related cost and lower depreciation and amortization. Excluding the impact of the reversal of impairment loss recorded in 2003 (EUR 9 million) and of the impairment loss recorded in 2004 (EUR 20 million), ICS operating income grew by EUR 14 million.

liquidity and capital resources Cash flow As of 31 December (EUR million)

Cash flow and capital expenditures Cash flows from operating activities Capital expenditures Cash flows from other investing activities Cash flow before financing activities or “Free cash flow” Cash flows used in financing activities Net increase/(decrease) of cash and cash equivalents

2002

2003

2004

1,371 -566 1,276

296 -502 17

1,899 -556 78

2,081 -1,560

-189 -575

1,421 -1,658

521

-764

-237

The cash generated by the Group’s operations is the primary source of liquidity. Despite the additional funding of EUR 1,381 million of the pension fund for statutory employees before its transfer to the Belgian State that occurred late in December 2003, the Group’s operations of the year 2003 generated a positive cash flow of EUR 296 million, compared to a positive cash flow of EUR 1,899 million for the year 2004. Excluding cash expenses for non-recurring items, the cash flow from operations has increased between 2003 and 2004 by more than EUR 200 million. This is mainly due to higher result from operations,

to lower payments for pensions in 2004 not offset by increased social security contributions following the transfer of the pension obligation to the Belgian State late in December 2003 and to slightly decreased cash used to finance the working capital. The cash flow used in investing activities remained comparable from 2003 (EUR 485 million) to 2004 (EUR 478 million) due to a higher level of capital expenditures for 2004 that is compensated by a higher level of cash received from disposals of buildings and equipments. Financing activities generated a net cash outflow of EUR 1,658 million compared to EUR 575 million for the year 2003, due to a dividend payment to Vodafone of EUR 192 million in 2004 (no dividends were paid to Vodafone in 2003), to higher net outflows relating to the buy back of shares in 2004 (EUR 883 million) than in 2003 (EUR 325 million), to greater reimbursements of long term debts in 2004 (EUR 142 million) than in 2003 (EUR 61 million), and to purchases of investments in 2004 (EUR 43 million) instead of disposals of investments in 2003 (EUR 246 million). The high level of cash used in investing and financing activities during 2004 has been financed to a large extent by the cash flows provided by operating activities (EUR 1,899 million) and to a lesser extent by a reduction of the cash and cash equivalents of the Group (EUR 237 million).

Capital expenditures Year ended 31 December

2002

2003

2004

(EUR million)

(%)

(EUR million)

(%)

(EUR million)

(%)

367 165 34 566

65 29 6 100

336 149 17 502

67 30 3 100

338 205 13 556

61 37 2 100

Fixed Line Services Mobile Communications Services International Carrier Services Total

Fixed Line Services capital expenditures grew in 2004 by 1% to EUR 338 million. Investments as part of the Broadway initiative increased by EUR 51 million, reaching EUR 83 million, mainly offset by lower investments in the existing network as well as in business support functions. Mobile Communications Services capital expenditures increased year-over-year by 38% at EUR 205 million, mainly due to network

deployments (UMTS rollout) and investments in special projects (e.g., Vodafone live! and systems reengineering). Capital expenditures in the UMTS rollout represented EUR 51 million in 2004. Capital expenditures inside International Carrier Services decreased year-over-year by EUR 4 million to EUR 13 million, due to lower investment in the international network.

Capital Resources The Group finances its development primarily with cash flows from operations. The Group has a USD 1 billion Euro Medium Term Note program, under which EUR 30.7 million was outstanding as of 31 December 2004; a EUR 1 billion short-term Commercial Paper program; and a syndicated credit facility of EUR 750 million, both of which had no amounts outstanding as of 31 December 2004. Belgacom also has bilateral credit facilities with a group of banks, with an aggregate commitment of EUR 674 million as of 31 December 2004. Access to international capital markets and its associated cost of funding depend in part on Belgacom’s credit ratings. Belgacom maintains a regular dialog with the principal credit rating agencies which review Belgacom’s ratings periodically. Standard & Poor’s and Moody’s Investors Services have rated Belgacom’s long-term debt AAand Aa3, respectively.

Euro MTN Program Short-term CP program Syndicated credit facility Bilateral credit facilities

Size of program

Principal amount outstanding as of 31 December 2004

% outstanding

USD 1.0 billion

EUR 30.7 million (1)

EUR 1.0 billion

None

EUR 750 million (2)

None

EUR 674 million (3)

None

(1) Consists of a EUR 30.7 million bond due 2005. (2) Consists of EUR 375 million in short-term credit facilities and EUR 375 million in long-term credit facilities. (3) Consists of EUR 223 million in short-term credit facilities and EUR 451 million in long-term credit facilities.

On 25 February 2004, Belgacom entered into a EUR 750 million syndicated credit facility with a number of banks. The facility is equally split between a tranche with a maturity of 364 days and a tranche with a maturity of five years. All of the Group’s interest-bearing debt obligations contain negative pledge provisions that restrict the pledge of assets to secure future borrowings without granting a similar secured status to existing lenders.

financial report 2004 62 • Consolidated Financial Statements

86 • Derivatives

62 • Consolidated income statement

88 • Financial risk management objectives and policies

63 • Consolidated balance sheet 64 • Consolidated cash flow statement 65 • Consolidated statement of changes in shareholders’ equity 66 • Notes to the consolidated financial statements 66 • Corporate information 66 • Significant accounting policies 71 • Intangible assets 72 • Property, plant and equipment 74 • Investments in subsidiaries and joint ventures 75 • Enterprises accounted for under the equity method 76 • Other participating interests 76 • Income taxes 78 • Assets and liabilities for pensions, other post-employment benefits and termination benefits 82 • Other non-current assets 82 • Trade receivables

90 • Net revenue 90 • Other operating revenue 90 • Non-recurring revenue 90 • Costs of materials and charges to revenue 90 • Personnel expenses and pensions 91 • Other operating expenses 91 • Non-recurring expenses 91 • Depreciation and amortization 91 • Finance costs (net) 92 • Earnings per share 92 • Dividends paid and proposed 92 • Related party disclosures 94 • Rights, commitments and contingent liabilities 95 • Cross-border lease arrangements 96 • Net financial position of the Group 96 • Fair value of financial instruments 97 • Share-based payment 97 • Segment reporting

82 • Other current assets

101 • Post balance sheet events

82 • Investments

101 • Recent IFRS pronouncements

83 • Cash and cash equivalents 83 • Shareholders’ equity 83 • Interest-bearing liabilities 85 • Provisions 86 • Other non-current payables

102 • Report of the independent auditors

103 • Extract of the statutory financial statements of Belgacom S.A. under public law - Belgian GAAP 109 • General information

86 • Other current payables

consolidated income statement (year ended 31 December)

Note

2002

2003

2004

Net revenue Other operating revenue Non-recurring revenue Total revenue

22 23 24

5,252 86 1,085 6,422

5,377 78 0 5,454

5,415 125 0 5,540

Costs of materials and charges to revenue Personnel expenses and pensions Other operating expenses Non-recurring expenses Total operating expenses before depreciation and amortization

25 26 27 28

-1,353 -1,101 -863 -764 -4,081

-1,376 -1,046 -782 -897 -4,101

-1,461 -993 -693 -41 -3,187

2,341

1,353

2,353

-859

-787

-742

1,482

566

1,611

69 -94 -25

64 -91 -27

37 -64 -27

-12

-4

-1

1,445

534

1,583

-203 -99

-208 -154

-508 -152

1,142

172

922

2.86 2.86 400,000,000 400,000,000

0.43 0.43 399,932,160 399,932,160

2.57 2.57 358,612,854 358,698,931

(EUR million, except per share amounts)

Operating income before depreciation and amortization Depreciation and amortization

Operating income Finance revenue Finance costs Net finance costs Loss from enterprises accounted for using the equity method Income before taxes and minority interests Tax expense Minority interests

8 5

Net income Basic earnings per share (in EUR) Diluted earnings per share (in EUR) Weighted average number of ordinary shares Weighted average number of ordinary shares for diluted earnings per share

31 31

consolidated balance sheet (as of 31 December)

(EUR million)

Note

2002

2003

2004

3 4 6 7 8 9 10

4,601 525 3,139 31 270 482 7 149

4,381 534 2,854 27 209 647 6 104

3,963 501 2,658 26 211 476 6 86

11 8 12 13 14

2,696 60 947 1 77 286 1,326

1,628 49 873 35 67 42 562

1,405 53 844 50 52 81 325

7,298

6,009

5,368

2,978 1,000 0 100 29 0 1,849

2,548 1,000 -325 100 32 0 1,742

2,223 1,000 -271 100 59 2 1,332

293

446

407

16 9 17 8 18

2,362 547 1,545 209 43 18

1,469 371 840 210 46 3

1,294 303 760 191 38 2

1,665 78 850 150 588

1,545 154 809 198 384

1,445 58 782 224 381

7,298

6,009

5,368

ASSETS Non-current assets Intangible assets Property, plant and equipment Enterprises accounted for under the equity method Other participating interests Deferred income tax assets Pension asset Other non-current assets Current assets Inventories Trade receivables Current income tax asset Other current assets Investments Cash and cash equivalents Total assets

LIABILITIES AND SHAREHOLDERS’ EQUITY Shareholders’ equity Issued capital Treasury shares Restricted reserve Remeasurement to fair value Stock compensation Retained earnings Minority interests Non-current liabilities Interest-bearing liabilities Liability for pensions, other post-employment benefits and termination benefits Provisions Deferred income tax liabilities Other non-current payables Current liabilities Interest-bearing liabilities Trade payables Income tax payable Other current payables Total liabilities and shareholders’ equity

16 8 19

consolidated cash flow statement (year ended 31 December)

(EUR million)

Cash flow from operating activities Net income Adjustments for: • Minority interests • Depreciation and amortization on intangible assets and property, plant and equipment • Increase/(decrease) of impairment on intangible assets and property, plant and equipment • Increase of provisions • Deferred tax expense/(income) • Increase of impairment on participating interests • Loss from investments accounted for using the equity method • Fair value adjustments on financial instruments • Gain on disposal of consolidated companies • Gain on disposal of property, plant and equipment • Other non-cash movements Operating cash flow before working capital changes Decrease/(increase) in inventories Decrease in trade receivables Decrease/(increase) in current income tax assets Decrease/(increase) in other current assets Decrease in trade payables Increase in income tax payables Increase/(decrease) in other current payables Increase/(decrease) in net liability for pensions, other post-employment benefits and termination benefits Decrease in other non-current payables and provisions (Increase)/decrease in working capital, net of acquisitions and disposals of subsidiaries

Note

3, 4 3, 4 8 6 5

Net cash flow provided by operating activities (1) Cash flow from investing activities Cash paid for acquisitions of intangible assets and property, plant and equipment Cash paid for acquisitions of other participating interests Cash paid for consolidated companies, net of cash acquired Dividends received from non-consolidated companies Cash received from sales of consolidated companies, net of cash disposed of Cash received from sales of intangible assets and property, plant and equipment Cash received from other non-current assets Net cash (used in)/provided by investing activities

3, 4

30 5

Cash flow before financing activities Cash flow from financing activities Dividends paid to shareholders Dividends paid to minority interests Net acquisition of treasury shares Sale/(purchase) of investments Decrease of minority interests Repayment of long term debt Issuance/(repayment) of short term debt Net cash used in financing activities

32 5

Net increase/(decrease) of cash and cash equivalents Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December (1) Net cash flow from operating activities includes the following cash movements: Interest paid Interest received Income taxes paid

2002

2003

2004

1,142

172

922

99 859

154 787

152 742

24 106 -113 11 12 14 -1,085 -9 0 1,062

-5 37 -163 53 4 1 0 -5 -5 1,030

20 9 162 22 1 7 0 -37 -13 1,988

21 46 5 -16 -35 38 16

11 76 -35 10 -42 48 -62

-4 29 -15 0 -28 26 11

292 -58 310

-705 -34 -733

-79 -30 -88

1,371

296

1,899

-566 -9 -12 0 1,111 25 161 710

-502 0 -1 0 0 8 10 -485

-556 0 0 15 0 60 4 -478

2,081

-189

1,421

-663 0 0 -281 -11 -597 -8 -1,560

-440 0 -325 246 0 -61 4 -575

-395 -192 -883 -43 0 -142 -3 -1,658

521

-764

-237

805 1,326

1,326 562

562 325

-66 43 -274

-35 57 -326

-34 17 -239

consolidated statement of changes in shareholders’ equity Issued capital

Treasury shares

Restricted reserve

Remeasurement to fair value

Stock Compensation

Retained Earnings

Shareholders’ Equity

Balance at 31 December 2001 1,000 Result on revaluation of financial instruments on available-for-sale instruments - variations during the year 0 Equity changes not recognised in the income statement 0

100

1,530

2,630

0 0

29 29

0 0

29 29

Net income Dividends to shareholders (relating to 2001) Special dividends to shareholders (relating to 2002)

0 0 0

1,142 -253 -570

Balance at 31 December 2002 1,000 Result on revaluation of financial instruments on available-for-sale instruments - variations during the year 0 Equity changes not recognized in the income statement 0

100

1,849

2,978

0 0

3 3

0 0

3 3

0 0 0

0 0 -325

0 0 0

172 -280 0

172 -280 -325

Balance at 31 December 2003 1,000 Result on revaluation of financial instruments on available-for-sale instruments - variations during the year 0 Equity changes not recognized in the income statement 0

-325

100

1,742

2,548

0 0

28 28

0 0

28 28

0 0

922 -395

0 0 0

22 303 -950

0 0 0

0 -303 0

22 0 -950

0 0

45 633

0 0

0 -633

45 0

0 0 0

5 -5 2

0 0 0

5 -5 2

1,000

-271

100

1,332

2,223

(EUR million)

Net income Dividends to shareholders (relating to 2002) Acquisition of treasury shares

Net income Dividends to shareholders (relating to 2003) Treasury shares • Price adjustment on treasury shares acquired in 2003 • Cancellation of treasury shares acquired in 2003 • Acquisition of treasury shares • Sale of treasury shares under a discounted share purchase plan • Cancellation of treasury shares acquired in 2004 Stock options • Stock options granted and accepted • Deferred stock compensation • Amortization deferred stock compensation Balance at 31 December 2004

notes to the consolidated financial statements Note 1. Corporate information The consolidated financial statements of Belgacom SA (hereafter “the Group”) at 31 December 2004, 2003 and 2002 were approved by the Board of Directors on 24 February 2005. Belgacom SA is a “Limited Liability Company of Public Law” registered in Belgium. The transformation of Belgacom SA from “Autonomous State Company” into a “Limited Liability Company of Public Law” was implemented by the Royal Decree of 16 December, 1994. Belgacom SA headquarters are located at Boulevard du Roi Albert II, 27 1030 Brussels, Belgium. The main activities of the Group are: Fixed Line Services, Mobile Communications Services and International Carrier Services. Further information concerning the business segments is included under note 39. The number of employees of the Group (in full time equivalents) amounted to 16,933 at 31 December 2004, 17,541 at 31 December 2003 and 19,003 at 31 December 2002.

Note 2. Significant accounting policies Basis of preparation Until 31 December 2002, the Group maintained its official accounting records and prepared its consolidated financial statements for statutory purposes in accordance with accounting and reporting laws and regulations applicable in Belgium (“Belgian GAAP”). In application of article 125 of the Company Code, the Group obtained on 27 November 2003 a formal authorization from the Belgian Minister of Economy to publish consolidated financial statements in conformity with International Financial Reporting Standards (“IFRS”). The accompanying consolidated financial statements as of 31 December 2004 and for the year then ended have been prepared in accordance with applicable IFRS. In addition, the Group has early adopted IFRS 2 “Share-Based Payment” in 2004. The Group did not early adopt any other IASB standards or interpretations in 2004. The accompanying consolidated financial statements as of 31 December 2002 and 2003 have been prepared in accordance with the IFRS applicable at the reporting date 31 December 2003, with a date of transition to IFRS of 1 January 2001. As a first-time adopter of IFRS in 2003, the Group elected to apply IFRS 1 “First-time adoption of IFRS”, together with its exemption in respect of business combinations. Therefore, the Group did not apply IAS 22 “Business combinations” to business combinations that occurred prior to the transition date of 1 January 2001. The Group did not early adopt any other IASB standards or interpretations in 2002 and 2003. The accompanying consolidated financial statements as of 31 December 2002 and for the year then ended differ from those previously issued under Belgian GAAP. The consolidated financial statements have been prepared on an historical cost basis, except for the measurement at fair value of derivatives and available-for-sale financial assets. The carrying values of assets and liabilities that are hedged with fair-value hedges

are adjusted to record the change in the fair value attributable to the risks that are being hedged.

Basis of consolidation The consolidated financial statements comprise the financial statements of Belgacom SA and its subsidiaries and joint ventures as well as the Group’s share of results in associates. Notes 5 and 6 list the Group’s subsidiaries, joint ventures and associates. Subsidiaries are those entities controlled by the Group. Control exists when Belgacom has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The investments in subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. Intercompany balances and transactions, and resulting unrealized profits or losses between Group companies are eliminated in consolidation. When necessary, accounting policies of subsidiaries are adjusted to ensure that the consolidated financial statements are prepared using uniform accounting policies. Companies that are jointly controlled (defined as those entities in which the Group has joint control through a contractual arrangement with one or more venturers entities) are included using the proportionate consolidation method, whereby the Group’s share of the assets, liabilities, expenses, incomes and cash-flow of joint ventures are combined on a line-by-line basis with similar items in the consolidated financial statements. The Group’s proportionate share of the inter-company balance and transactions and resulting unrealized profits or losses between Group companies and jointly controlled entities are eliminated in consolidation. Associated companies in which the Group has a significant influence, defined as an investee in which Belgacom has the power to participate in its financial and operating policy decisions (but not to control the investee), are accounted for using the equity method. Under that method, the investments held in associates are initially recorded at cost and the carrying amount is subsequently adjusted to recognize the Group’s share in the profit or losses of the associate as from the date of acquisition. These investments and the equity share of results for the period are shown in the balance sheet and income statement as investments in enterprises accounted for under the equity method and share in the result of the enterprises accounted for using the equity method, respectively. Subsidiaries are excluded from consolidation when the control is intended to be temporary because the subsidiary is acquired and held exclusively with a view of subsequent disposal in the near future or when it operates under severe long-term restrictions that impair its ability to transfer funds to the Group.

Use of estimates The preparation of financial statements in conformity with IFRS requires that management make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.

Estimates that have been made at each reporting date reflect conditions that existed at those dates (e.g. market prices, interest rates and foreign exchange rates). Although these estimates are based on management’s best knowledge of current events and actions that the Group may undertake, actual results may differ from those estimates.

The useful lives are assigned as follows: Useful life (years) Goodwill GSM/UMTS licenses Other intangible assets and internally generated assets, including software

5 to 15 15 to 20 3 to 20

Foreign currency translation Foreign currency transactions The reporting currency for the Group is the Euro. Foreign currency transactions are translated, on initial recognition, at the foreign exchange rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into Euro at the balance sheet date using the closing rate at that date. Net exchange differences on the translation of monetary assets and liabilities are classified in “other operating expenses” in the income statement in the period in which they arise.

Foreign operations The assets and liabilities of foreign subsidiaries and joint ventures operating under currencies other than the Euro (i.e., financial statements of the Points of Presence (hereafter the “POP’s”) in the UK, Sweden, Switzerland, the Asia-Pacific region and the USA) have been translated according to the monetary/non-monetary method since these entities are classified as foreign operations that are integral to the operations of the reporting enterprise. Monetary assets and liabilities are translated at the closing rate, non-monetary assets and liabilities are translated at the historical rate, while revenue and expenses are translated at the average rate. The resulting exchange differences are classified in “other operating expenses” in the income statement.

Intangible assets Intangible assets consist primarily of the excess of consideration paid over the fair value of net assets acquired in business combinations (Goodwill), the Global System for Mobile communication (“GSM”) license, the Universal Mobile Telecommunication System (“UMTS”) license and other intangible assets which predominantly consist of internally or externally developed software. Intangible assets are stated at cost less accumulated amortization and accumulated impairment losses. The residual value of intangible assets is assumed to be zero. Intangible assets are amortized on a straight-line basis over their estimated useful life. Amortization commences when the intangible asset is ready for its intended use. The Group capitalizes certain costs incurred in connection with developing or purchasing software for internal use when they meet the criteria set out in IAS 38. Capitalized software costs are included in internally generated and other intangible assets and are amortized over three to five years. The useful life of the GSM and UMTS intangible assets has been determined based on the license terms. The useful life of goodwill reflects the best estimate of the period during which future economic benefits are expected to flow to the Group.

The amortization of intangible assets, including goodwill, is classified as depreciation and amortization in the income statement.

Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. The cost of additions and substantial improvements to property, plant and equipment is capitalized. The cost of maintenance and repairs of property, plant and equipment is charged to operating expenses when they do not extend the life of the asset or do not significantly increase its capacity to generate revenue. Depreciation of an asset commences when the asset is ready for its intended use. Depreciation is calculated using the straight-line method over the estimated useful life of the asset. The useful lives are assigned as follows: Useful life (years) Land and buildings

• Land • Building and constructions

indefinite 5 to 33

Technical and network equipment

• Switches • Cables and Operational support systems • Transmission • Equipment installed at client premises • Equipment for data transfer business • Mobile antennas

3 to 10 4 to 20 4 to 10 2 to 5 3 to 5 6

Furniture and vehicles

• Furniture and office equipment • Vehicles

3 to 10

Other tangible assets

3 to 33

Income from own capitalized costs related to network construction is reported in the income statement net of the corresponding operating expense. Leasehold improvements are depreciated over the shorter of their estimated useful life or the remaining term of the lease. Fixed assets retired from active use and held for disposal are carried at their carrying amount at the date when the asset is retired from active use. At the end of the financial year, an impairment test is applied to these assets. Borrowing costs are expensed when incurred.

Impairment of assets The Group reviews its assets regularly for any indication of impairment. When such indications exist, an impairment loss is recognized when the carrying value exceeds the estimated recoverable amount, being the higher of the asset’s net selling price and its value in use for the Group. Impairment losses are recorded in operating expenses.

Deferred taxation Deferred taxation is provided for all temporary differences between the carrying amount of assets and liabilities in the consolidated balance sheet and their respective taxation bases. Deferred taxation is not provided on differences relating to goodwill for which amortization is not deductible for taxation purposes. Deferred tax assets associated to deductible temporary differences and unused tax losses carried forward are recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary difference or the unused tax losses can be utilized. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset will be realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Provision for taxation that could arise if undistributed retained profit of certain subsidiaries is remitted to the parent company, is only made where a decision has been taken to remit such retained profit, i. e., where the subsidiary intends to distribute a dividend.

Pensions, other post-employment benefits and termination benefits The Group operates two defined benefit pension plans to which the contributions are made through separately managed funds. A third plan was settled in the course of 2003 (see note 9). The Group also agreed to provide additional post-employment benefits to certain employees. The cost of providing benefits under the plans is determined separately for each plan using the projected credit unit actuarial valuation method. Actuarial gains and losses are recognized as income or expense when the cumulative unrecognized gains or losses for an individual plan at the end of the previous reporting period exceed 10% of the higher of the present value of the defined benefit obligation and the fair value of plan assets at the beginning of the year. These gains and losses are recognized over the average remaining service life of the employees participating in the individual plan. The Group has a legal obligation to provide child allowance payments to dependents of certain retirees, and operates several restructuring programs that involve termination benefits or other forms of additional compensation. The actuarial gains and losses on these liabilities are immediately recognized in the income statement.

Short-term and long-term employee benefits The cost of all short-term and long-term employee benefits, such as salaries, employee entitlements to leave pay, bonuses, medical aid

and other contributions, are recognized during the period in which the employee renders the related service. The Group recognizes those costs only when the Group has a present legal or constructive obligation to make such payment and a reliable estimate of the liability can be made.

Financial instruments Fair value of financial instruments The following methods and assumptions were used to estimate the fair value of financial instruments: for investments in quoted companies and mutual funds, the fair value is their quoted price; for investments in non-quoted companies, fair value is estimated by using different valuation techniques such as discounted future cash flow models and multiples methods, or by recent sales transactions on the shares of these non-quoted companies; for investments in non-quoted companies for which no fair value can be reliably determined, fair value is based on the historical acquisition cost, adjusted for impairment losses, if any; for other non-current financial assets (other than derivatives), the amortized cost is assumed to approximate fair value; for long term debts carrying a floating interest rate, the amortized cost is assumed to approximate fair value; for long term debts carrying a fixed interest rate, the fair value is determined based on the discounted future cash flows; for trade receivables, trade payables, other current assets and current liabilities, the carrying amounts reported in the balance sheet approximate their fair value considering their short maturity; for cash and cash equivalents, the carrying amounts reported in the balance sheet approximate their fair value considering their short maturity; for derivatives, fair values have been estimated by using different valuation techniques, in particular the discounting of future cash flows.

• • • • • • • • •

Criteria for initial recognition and for de-recognition of financial assets and liabilities Financial instruments are initially recognized when the Group becomes party to the contractual terms of the instruments. “Regular way” purchases and sales of financial assets are accounted for at their settlement dates. Financial assets (or a portion thereof) are de-recognized when the Group realizes the rights to the benefits specified in the contract, the rights expire or the Group surrenders or otherwise loses control of the contractual rights that comprise the financial asset. Financial liabilities (or a portion thereof) are de-recognized when the obligation specified in the contract is discharged, cancelled or expires.

Criteria for offsetting financial assets and liabilities Where a legally enforceable right of offset exists for recognized financial assets and liabilities, and there is an intention to settle the liability and realize the asset simultaneously, or to settle on a net basis, all related financial effects are offset.

Other participating interests

Deposits are considered as held-to-maturity and measured at amortized cost.

Other participating interests are initially recognized at cost, being the fair value of the consideration given and including acquisition costs associated with the investment. These interests are classified as available-for-sale financial assets in the balance sheet.

Cash and cash equivalents

After initial recognition, other participating interests are carried at fair value, with recognition of the changes in fair value directly in equity, until the financial asset is sold, collected or otherwise disposed of, or until the asset is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is included in financial income or expenses. Impairment losses are classified in financial expenses.

Cash and cash equivalents are carried at nominal value when they are assets held with financial institutions, and at amortized cost in all other cases. An impairment loss is recorded in financial expense when the recoverable amount at the closing date is lower than the carrying amount.

Other non-current financial assets Other non-current financial assets include derivatives (see below), long-term interest-bearing receivables such as loans to joint ventures, personnel and cash guarantees and long-term investments such as notes and purchased bonds. Long-term receivables are accounted for as loans and receivables originated by the company and are carried at amortized cost. Long-term investments are classified as held-to-maturity and are carried at amortized cost. An impairment loss is recorded when the carrying amount is greater than the estimated recoverable amount, and is classified in financial expenses.

Trade receivables and other current assets Trade receivables and other current assets are shown on the balance sheet at nominal value (generally, the original invoice amount) less the allowance for doubtful debts. Such allowance is recorded in operating result when it is probable that the company will not be able to collect all amounts due. Allowances are calculated on an individual basis, and on a portfolio basis for groups of receivables that are not individually identified as impaired.

Investments Investments include shares, fixed income securities and deposits with a maturity greater than three months but less than one year. Shares are initially recognized at cost, being the fair value of the consideration given and including acquisition costs associated with the investment. After initial recognition, shares are treated as available-for-sale, with re-measurement to fair value recorded directly in equity until the investment is sold, collected or otherwise disposed of, at which time the cumulative gain or loss previously reported in equity is included in financial income or expenses. Fixed income securities are initially recognized at cost, being the fair value of the consideration given and including acquisition costs associated with the investment. After initial recognition, fixed income securities that are classified as available-for-sale, are measured at fair value, with gains and losses on remeasurement recognized in equity until the investment is sold, collected or otherwise disposed of, at which time the cumulative gains or loss reported in equity is included in financial income or expense. Fixed income securities that are intended to be held-to-maturity are measured at amortized cost, using the effective interest rate method.

Cash and cash equivalents include cash, current bank accounts and investments with an original maturity of less than three months.

Interest-bearing liabilities All loans and borrowings are initially recognized at cost, being the fair value of the consideration received, net of issuance costs associated with the borrowings. After initial recognition, debts not hedged are measured at amortized cost, with amortization of discounts or premiums through the income statement. Debts that are hedged with interest rate swaps (IRS), and interest rate and currency swaps (IRCS) (fair value hedges) are re-measured to the extent of the risk being hedged. The gain or loss attributable to the hedged risk resulting from re-measurement to fair value is recognized in financial income or expense.

Derivatives The Group makes use of derivatives such as IRS, IRCS, forward foreign exchange contracts and currency options to reduce its risks associated with interest rate and foreign currency fluctuations on underlying assets, liabilities and anticipated transactions. The derivatives are carried at fair value under the captions other assets (non-current and current), interest-bearing liabilities (non-current and current) and other payables (non-current and current). The Group uses IRS and IRCS to reduce its exposure to interest rate and foreign currency fluctuations on long-term debts. The interest coupons receivable and payable under the terms of these swaps are accrued over the period to which the coupon relates. The table below summarizes the relationship between hedged items and hedging instruments: Hedging instrument

Hedged item

Type of hedge relationship

Risk(s) being hedged

Interest rate and currency swap

Fixed rate debt in foreign currency

Fair value

Currency and interest rate risks

Interest rate swap

Fixed rate debt

Fair value

Interest rate risk

Most of these swaps are fair value hedges, so their revaluation matches the revaluation of the hedged items in the income statement. Belgacom does not hold or issue derivative financial instruments for trading purposes but some of its derivative contracts do not meet the criteria set by IAS 39 to be considered as hedges and are therefore

treated as derivatives held-for-trading, with changes in fair value recorded in the income statement. Belgacom uses currency options and forward foreign exchange contracts to manage its foreign currency exposure arising from operational contracts. Nevertheless, since the matching between these instruments and the underlying exposure is not sufficiently effective, or the effectiveness cannot be easily demonstrated, these instruments are not accounted for as hedges and are consequently carried at fair value, with changes in fair value posted to the income statement. Some debts issued by Belgacom include embedded derivatives. Such derivatives are separated from their host contract and carried at market value with changes in fair value posted to the income statement. These debts are hedged by derivatives neutralising the effect of the embedded derivatives.

Inventories Inventories are stated at the lower of cost and net realizable value. Cost is determined by the weighted average cost method.

Leases Leases where the lessor retains substantially all the risks and the benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as an expense in the income statement on a straight-line basis over the lease term.

Provisions Provisions are recognized when the Group has a present legal or constructive obligation resulting from past events, for which it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. A past event is deemed to give rise to a present obligation if, taking into account the available evidence, it is more likely than not that a present obligation exists at the balance sheet date. Certain assets and improvements that are situated on property owned by third parties must eventually be dismantled, and the property must be restored to its original condition. The estimated costs associated with dismantling and restorations are recorded under property, plant and equipment and depreciated over the life of the asset. The total estimated cost required for dismantling and restoration, discounted to its present value, is recorded under provisions.

Share based payments The fair value of share options issued under the Group’s Employee Stock Option Plan is determined at grant date taking into account the terms and conditions upon which the options are granted, and by using a valuation technique that is consistent with generally accepted valuation methodologies for pricing financial instruments, and that incorporates all factors and assumptions that knowledgeable, willing market participants would consider in setting the price. The fair value of the share options is recognized in personnel expenses over their vesting period.

Revenue and operating expenses Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Specific revenue streams and related recognition criteria are as follows: Revenue from wireline, carrier and mobile traffic is recognized on usage. Revenue from connection fees and installation fees is recognized in income at the time of connection or installation. Revenue from sales of communication equipment is recognized upon delivery to the customer. Revenues relating to the monthly rent or access fees, which are applicable to wireline and mobile revenues are recognized in the period in which the services are provided. Subscription fees are recognized as revenue over the subscription period on a pro-rata basis. Prepaid revenue such as revenue from prepaid fixed and mobile phone cards is deferred and recognized based on usage of the cards.

• • • • • •

The Group’s consolidated income statement presents operating expenses by nature. Operating expenses are reported net of work performed by the enterprise that is capitalized. The costs of materials and charges to revenues include the costs for purchases of materials and services directly related to revenue. Costs for commissions to dealers, advertising costs and other marketing costs are expensed as incurred. Non-recurring revenues and operating expenses include gains or losses on the disposal of consolidated companies exceeding individually EUR 5 million in a particular year, restructuring costs and the transfer (in 2003) of the pension liability in respect of statutory personnel towards the Belgian State.

Note 3. Intangible assets Goodwill

GSM and UMTS licenses

Internally generated assets

Other intangible assets

Total

71 9 -23 0 0 -9

450 0 -176 0 0 -16

60 44 0 2 0 -47

192 58 -23 -7 -3 -57

773 111 -222 -4 -3 -129

As of 31 December 2002 net of accumulated amortization and impairment Additions Acquisition of subsidiary Reclassifications Impairment charge Amortization charge for the year

47 2 0 0 -3 -9

258 0 0 0 0 -15

59 63 0 11 0 -18

161 43 3 -6 0 -63

525 108 3 5 -3 -104

As of 31 December 2003 net of accumulated amortization and impairment Additions Reclassifications Impairment charge Amortization charge for the year

38 0 0 0 -8

243 0 0 0 -20

115 53 -51 0 -21

138 56 60 -5 -98

534 109 10 -5 -147

As of 31 December 2004 net of accumulated amortization and impairment

223

151

501

Goodwill

GSM and UMTS licenses

Internally generated assets

Other intangible assets

Total

As of 1 January 2002 Cost Accumulated amortization and impairment Net carrying amount

145 -74 71

563 -113 450

190 -130 60

355 -163 192

1,253 -481 773

As of 31 December 2002 Cost Accumulated amortization and impairment Net carrying amount

112 -65 47

377 -118 258

236 -177 59

345 -185 161

1,070 -545 525

As of 31 December 2003 Cost Accumulated amortization and impairment Net carrying amount

114 -76 38

377 -133 243

275 -160 115

384 -247 138

1,150 -617 534

As of 31 December 2004 Cost Accumulated amortization and impairment Net carrying amount

109 -78 30

377 -154 223

240 -144 96

538 -387 151

1,264 -763 501

(EUR million)

As of 1 January 2002 net of accumulated amortization and impairment Additions Disposal of subsidiary Reclassifications Impairment charge Amortization charge for the year

(EUR million)

The license fees relate to the Global System for Mobile communication (“GSM”) and Universal Mobile Telecommunication System (“UMTS”): In 1994, the Group acquired a GSM license in Belgium for an amount of EUR 226 million. Amortization started in 1995 over the useful life of the license (15 years). In March 2001, the Group acquired a UMTS license in Belgium for an amount of EUR 150 million. Amortization has started in June 2004 over the useful life of the license, that is scheduled to end in 2020.

• •

The decrease of the GSM and UMTS licenses in 2002 results from the sale of Ben Nederland Group. Other intangible assets mainly include purchased software and rights of use for cables. All the acquisitions of the three years presented have been realized in Belgium.

Note 4. Property, plant and equipment Land and buildings

Technical and network equipment

Furniture and vehicles

Other tangible assets

Assets under construction

Total

As of 1 January 2002 net of accumulated depreciation and impairment Additions Disposals Disposal of subsidiary Reclassifications Impairment Depreciation charge for the year

763 30 -6 -2 -61 0 -46

2,559 321 0 -117 108 -21 -625

58 20 0 -3 1 0 -29

154 13 -9 -44 43 0 -30

125 81 0 -55 -87 0 0

3,658 465 -16 -221 4 -21 -731

As of 31 December 2002 net of accumulated depreciation and impairment Additions Acquisition of subsidiary Disposals Reclassifications Impairment Depreciation charge for the year

678 13 0 -1 0 0 -51

2,225 217 0 0 122 8 -586

46 16 0 0 0 0 -21

126 29 0 -1 9 0 -25

64 121 0 0 -135 0 0

3,139 397 1 -2 -5 8 -683

As of 31 December 2003 net of accumulated depreciation and impairment Additions Disposals Reclassifications Impairment Depreciation charge for the year

640 16 -19 0 0 -40

1,988 241 -1 95 -15 -511

41 12 0 0 0 -19

137 13 -4 7 0 -26

50 164 0 -111 0 0

2,854 447 -24 -10 -15 -595

As of 31 December 2004 net of accumulated depreciation and impairment

596

1,797

128

102

2,658

(EUR million)

Land and buildings

Technical and network equipment

Furniture and vehicles

Other tangible assets

Assets under construction

Total

As of 1 January 2002 Cost Accumulated depreciation and impairment Net carrying amount

1,524 -761 763

9,355 -6,797 2,559

206 -148 58

248 -94 154

125 0 125

11,458 -7,800 3,658

As of 31 December 2002 Cost Accumulated depreciation and impairment Net carrying amount

825 -147 678

8,809 -6,584 2,225

177 -131 46

226 -100 126

64 0 64

10,101 -6,962 3,139

As of 31 December 2003 Cost Accumulated depreciation and impairment Net carrying amount

825 -185 640

8,726 -6,739 1,988

179 -139 41

256 -120 137

50 0 50

10,036 -7,182 2,854

As of 31 December 2004 Cost Accumulated depreciation and impairment Net carrying amount

775 -179 596

8,722 -6,925 1,797

152 -117 35

259 -132 128

102 0 102

10,011 -7,353 2,658

(EUR million)

Following the unfavourable evolution of the results of the International Carrier Services segment, an impairment loss was recorded in the first half-year of 2004 on the segmentâ&#x20AC;&#x2122;s intangible assets and technical and network equipment for an amount of EUR 5 million (see note 3) and EUR 15 million respectively.

All the acquisitions of the three years presented have been realized in Belgium. During the period from 1996 through 2001, the Group entered into several cross-border lease arrangements of technical and network equipment (see note 35). Such arrangements are still operational.

Note 5. Investments in subsidiaries and joint ventures Note 5.1. Investments in subsidiaries The consolidated financial statements include the financial statements of Belgacom SA and the subsidiaries listed in the following table. Name Belgacom Mobile SA Belgacom Directory Services SA Belgacom Finance SA Belgacom Services SA Finbel Re SA Connectimmo SA Expercom SA Citius Belgium SA Digital Age Design SA Belgacom Skynet SA ThePush SA WIN SA Streamcase SA Belgacom Invest SARL Infosources SA and subsidiaries (1) Belgacom International Carrier Services SA Belgacom Deutschland G.m.b.H. Belgacom UK Ltd Belgacom Nederland B.V. Belgacom Incorporated Belgacom Asia PTE Ltd Belgacom Portugal SA Belgacom Italia Srl Belgacom Spain SL Belgacom Switzerland AG Belgacom Austria G.m.b.H. Belgacom Sweden AB Belgacom Japan KK Belgacom China Ltd Belgacom Presence SA (1) Hereafter “Group Infosources”. (2) Belgium, France, Germany and Switzerland.

Country of incorporation Belgium Belgium Luxemburg Belgium Luxemburg Belgium Belgium Belgium Belgium Belgium Belgium Belgium Belgium Luxemburg (2)

Belgium Germany United Kingdom The Netherlands United States Singapore Portugal Italy Spain Switzerland Austria Sweden Japan China France

Group’s participating interests

2002

2003

2004

75% 100% 100% 100% 100% 100% 100% 100% 85% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

75% 100% 100% 100% 100% 100% 100% 100% 85% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

On 30 September 2002, the vast majority of the Group’s real estate was contributed to Connectimmo SA, a wholly owned real estate subsidiary offering its services to companies of the Group. The spinoff did not result in a cash flow. Minority interests include primarily the share of the minority shareholder Vodafone BV in the equity, net income and dividend payments of Belgacom Mobile SA.

Note 5.2. Investments in joint ventures

A summary of the assets and liabilities disposed of during the year 2002 is as follows: Total

(EUR million)

Non-current assets disposed of Current assets disposed of, excluding cash and cash equivalents Cash and cash equivalents disposed of Non-current liabilities disposed of Current liabilities disposed of Net assets disposed of

436 90 62 -4 -276 309

The Group has a joint venture interest in the following companies.

Name

Country of incorporation

Eduline SA Certipost SA

Belgium Belgium

Aditel SA Aditel BV

Belgium The Netherlands

Group’s participating interests

2002

2003

2004

50% -

50% 50%

50%

50% 50%

50%

The Group’s share of the assets, liabilities, revenues and expenses of these joint venture interests is not material to the consolidated financial statements.

Note 5.3. Acquisitions of subsidiaries and joint ventures No significant acquisitions of subsidiaries or joint ventures occurred in the three years presented.

Note 5.4. Disposals of subsidiaries or joint ventures and decreases in participating interests The following disposals of subsidiaries and decreases of participating interests occurred during 2002: The Group divested its interest in Ben Nederland Group on 25 September 2002 (see note 24). The Group’s investment in Alert Services Holding and subsidiaries was diluted from 95% to 28% due to a capital increase by Securitas Direct International (hereafter “SDI”) in Alert Services Holding in February 2002. The dilution resulted in a gain of EUR 9 million that is recognized in the income statement in non-recurring revenue (see note 24). Because the Group no longer holds control in these entities but continues to exercise significant influence, the consolidation method was switched from full consolidation to equity method in February 2002. In connection with the agreement concluded in 2001 with SDI, the Group acquired put options with SDI for the remaining 28% stake held in Alert Services Holding and subsidiaries. The fair value of the option is recorded under other non-current assets for an amount of EUR 13 million at 31 December 2004 (see note 10). On 22 March 2002, Belgacom sold its 100% stake in Belgacom France in exchange for a 10.8% ownership in “neuf telecom SA” (previously named “LD Com”), an unlisted French telecommunications provider. This transaction resulted in a non-recurring gain of EUR 104 million (see note 24). The investment in “neuf telecom SA” was initially recognized at cost in March 2002.

• •

•

Consideration received

1,393

Gain on disposal

1,085

The net cash inflow on disposal is as follows: (EUR million)

Total

Cash received Cash and cash equivalents disposed of with the subsidiaries

1,173 -62

Net cash inflow

1,111

Ben Nederland Group contributed a loss of EUR 14 million to the Group accounts for the period 1 January 2002 through 31 March 2002. Belgacom France contributed a loss of EUR 6 million from 1 January 2002 through 22 March 2002. No significant disposals of subsidiaries or joint ventures or decreases of participating interests occurred in 2003 and in 2004.

Note 6. Enterprises accounted for under the equity method The investments in enterprises accounted for under the equity method are summarized as follows: (EUR million - as of 31 December)

Tritone Telecom BV Alert Services Holding and subsidiaries (1) Total

2002

2003

2004

0 31 31

0 27 27

0 26 26

(1) Companies of Alert Services Holding and subsidiaries are incorporated in Belgium, the Netherlands and France.

Loss from these enterprises accounted for using the equity method is summarized as follows: (EUR million - year ended 31 December)

Tritone Telecom BV Alert Services Holding and subsidiaries Other Total

2002

2003

2004

-3 -2 -6 -12

-4 -4

-1 -1

Note 7. Other participating interests (EUR million - as of 31 December)

neuf telecom SA Other unlisted shares Unlisted shares Listed shares Total

Note 8. Income taxes

2002

2003

2004

187 81 269 1 270

140 68 208 1 209

120 91 211 211

On 22 March 2002, the Group sold its 100% stake in Belgacom France in exchange for a 10.8% ownership in the company “neuf telecom SA”, an unlisted French telecommunications provider (see note 5.4.). Other unlisted shares include primarily interests in companies in the satellite industry. In 2003, the Group recorded an impairment loss on its participating interest in “neuf telecom SA” for an amount of EUR 47 million. In 2004, the recoverable amount further decreased taking into account the evolution of the EBITDA and sales multiples, the updated business metrics (including cash flow analysis using a discount rate of 11%) and other publicly available information. Based on these elements, the range of values between EUR 120 million and EUR 160 million determined in 2003 was further reduced to a range between EUR 110 and 130 million in 2004. As a result, an additional impairment loss of EUR 20 million was recorded in 2004.

Gross deferred income tax assets/(liabilities) relate to the following: (EUR million - as of 31 December)

Deferred income tax liabilities Accelerated depreciation for tax purposes Remeasurement of financial instruments to fair value Deferred taxation on sales of property, plant and equipment Other Gross deferred income tax liabilities Remeasurement of financial instruments to fair value Post-employment and termination benefits Tax losses carried forward Capital losses on investments in subsidiaries Other Gross deferred income tax assets

2002

2003

2004

-90

-39

-30

-1

-73 -12 -175

0 -24 -64

-6 -25 -63

7 220 301

7 14 553

9 23 380

64 21 613

69 23 665

69 20 501

Net deferred income tax assets/(liabilities), when grouped per taxable entity, are as follows: (EUR million - as of 31 December)

2002

2003

2004

-43 482

-46 647

-38 476

Impairment losses on unlisted shares other than “neuf telecom SA” amounted to EUR 10 million in 2002 and EUR 8 million in 2003. All these impairment losses are recorded as financial expenses (see note 30).

Net deferred income tax liability Net deferred income tax asset

Remeasurement to fair value of some other participating interests resulted in increases of their carrying amount for EUR 28 million in 2002, EUR 2 million in 2003 and EUR 25 million in 2004. These amounts were recorded directly in equity.

The Group has tax losses carried forward arising in Belgium that are available indefinitely to offset future taxable profits of the companies in which these losses arose. At 31 December 2004, Belgacom SA’s accumulated tax losses amount to EUR 1,227 million amongst others as a result of the non-recurring expenses related to the BeST restructuring program launched in 2002 and the non-recurring expenses related to the transfer of the pension obligations for statutory employees in 2003. Based on the current business plan of Belgacom SA, future taxable profit will be available against which the tax losses can be further utilized. As a result of the sale of its French ISP activities in 2001, the parent company Belgacom SA will have the opportunity to deduct the capital losses on the Infosources investment from its future profits. A deferred tax asset of EUR 69 million has consequently been recorded because it is probable that the deferred tax asset will be realized in the foreseeable future. Deferred tax assets have not been recognized in respect of the losses of subsidiaries that have been loss-making for several years. At 31 December 2004, an amount of EUR 43 million of cumulative tax losses carried forward and tax credits is available for such Belgian companies. Belgacom’s share in the undistributed retained profit of subsidiaries amounts to EUR 1,610 million at 31 December 2004 and is taxable at an effective tax rate of 1.7% upon remittance to the parent company. At 31 December 2004, a deferred tax liability is recorded on EUR 691 million of those undistributed earnings since these are intended to be distributed in the foreseeable future.

In the income statement, deferred tax income/(expense) relate to the following: (EUR million - year ended 31 December)

Relating to deferred income tax liabilities Accelerated depreciation for tax purposes Deferred taxation on sales of property, plant and equipment Other Relating to deferred income tax assets Remeasurement of financial instruments to fair value Post-employment and termination benefits Tax losses carried forward Capital losses on investments in subsidiaries Other Deferred tax income/(expense) of the year

2002

2003

2004

-38 -2

73 -12

-6 -1

5 -152 301

1 -206 251

2 10 -173

-5 -2

5 1

0 -3

113

163

-162

The consolidated income statement includes the following tax expense: (EUR million - year ended 31 December)

Current income tax Current income tax expense Adjustments in respect of current income tax of previous periods Deferred income tax Income/(expense) resulting from changes in temporary differences Expense resulting from a reduction in income tax rates Total deferred tax income/(expense) Income tax expense reported in consolidated income statement

The reconciliation of income tax expense applicable to income before taxes and minority interests at the statutory income tax rate to income tax expense at the groupâ&#x20AC;&#x2122;s effective income tax rate for the years ended 31 December is as follows: (EUR million - year ended 31 December)

Income before taxes and minority interests At Belgian statutory income tax rate of 40.17% At Belgian statutory income tax rate of 33.99% Effect of reduction in income tax rates on closing balance of deferred income tax Income tax consequences of disposal of subsidiaries Income tax consequences of capital losses on investments in subsidiaries Non-taxable income from subsidiaries Non-deductible expenditures for income tax purposes Other Income tax expense

2002

2003

2004

-316

-369

-346

-3

Effective income tax rate (in %)

2002

2003

2004

1,445

534

1,583

580

182

538

-437

-6 -56

-19 -45

0 -51

42 -1

75 17

26 -6

203

208

508

14.08

38.98

32.09

In 2002, the income tax consequences of the disposal of subsidiaries mainly relate to the gain on the sale of Ben Nederland Group shares and on the sale of Belgacom France shares. The non-taxable income from subsidiaries primarily relates to the income of Belgacom Services, which is subject to a tax regime that is not based on taxable income.

195

163

-162

-82 113

0 163

0 -162

Non-deductible expenditures for income tax purposes primarily relate to unrecognized tax losses carried forward, goodwill amortization and various expenses that are disallowed for tax purposes.

-203

-208

-508

Other adjustments of the year 2003 mainly include deferred tax liabilities recognized on undistributed profits of subsidiaries.

The current income tax rate applicable to the entities incorporated in Belgium was reduced from 40.17% to 33.99% in 2002, with effect from 1 January 2003 onwards. Since the reduced tax rate was enacted at 31 December 2002, the resulting deferred tax charge of EUR 82 million was recorded in 2002.

Note 9. Assets and liabilities for pensions, other post-employment benefits and termination benefits The Group has six plans that are summarized below and detailed by plan: (EUR million - as of 31 December)

2002

2003

2004

Defined benefit pension for statutory employees of Belgacom SA (Pension fund I - until 2002) and BeST and PTS termination benefits Termination benefits and additional compensation for temporary leaves in respect of external mobility offer Complementary defined benefit plan for Belgacom SA and some subsidiaries (Pension fund II) Post-employment benefits other than pensions Liability for child allowance benefits Net liability recognized in the balance sheet

1,368 0 2 156 18 1,545

665 0 3 153 18 840

546 34 8 155 17 760

7 7

6 6

5 5

Complementary defined benefit plan for Belgacom Mobile SA (Pension fund III) Net asset recognized in the balance sheet

The calculation of the net liability is based on the assumptions established at the balance sheet date. The assumptions for the various plans have been determined based on both macro-economic factors and the specific terms of each plan relating to the duration and the beneficiary population, in order to apply the most relevant measure of estimated outflow of resources.

A. Pensions and termination benefits for statutory employees of Belgacom SA Until 22 December 2003, pensions for statutory employees (i.e. legacy civil servants) of Belgacom SA were not covered by the Belgian social security system but by a non-contributory defined benefit pension plan organized by the Group itself. This plan provides a benefit based on years of service and on the employees’ average income over a specified period. The defined benefit obligation of the statutory pension plan furthermore includes the liability for termination benefits in respect of the restructuring programs People, Teams and Skills (“PTS”) and Belgacom e-Strategic Transformation (“BeST”). As a result of an agreement signed on 2 October 2003 between the Company and its shareholders at that time (the Belgian State and ADSB Telecommunications B.V.) (hereafter “the Protocol Agreement”), the Belgian State issued the law of 11 December 2003 and related royal decrees that regulated the transfer of Belgacom’s pension liability in respect of statutory employees towards the Belgian State prior to 31 December 2003. In this respect, Belgacom paid on 22 December 2003 an extra-contribution of EUR 1,381 million to the pension fund to fully fund the pension liability up to the maximum liability amount of EUR 5,000 million stipulated in the law. This payment released Belgacom from its existing pension obligations, and consequently the Company recorded in December 2003 the settlement of the defined benefit pension plan. The related settlement loss of EUR 897 million is disclosed as a non-recurring expense in the income statement. Articles 9 and 10 of the law of 11 December 2003 furthermore state that, starting 1 January 2004, Belgacom pays higher employer social security contributions in respect of pensions. The liability for termination benefits in respect of the restructuring programs BeST and PTS that historically was incorporated in the

liability of the defined benefit pension plan is not transferred to the Belgian State. After the transfer of the pension obligations, the population and characteristics of this remaining liability are substantially different from those prevailing before the transfer of the defined benefit pension plan. Therefore, the actuarial assumptions for the remaining liability were modified at 31 December 2003 and the related expenses are reported as part of the settlement loss of EUR 897 million. Any subsequent remeasurement of the remaining liability is recognized immediately in the income statement. The PTS restructuring program was implemented in the years 1997 and 1998. This program consisted of a voluntary early retirement program offered to 6,290 employees. The voluntary early retirement program was accepted by 98% of those offered this early leave. Under the terms of the plan, the Group will pay bridge pension amounts until the year 2007. During the first quarter of 2002, Belgacom SA implemented the BeST restructuring program. The program offered all statutory employees aged 50 years and older, and having 20 or more service years in the company, the option to voluntarily early leave the company in return for a guaranteed monthly payment of a percentage of their base salary. The program allows the employees to receive full pension benefits and provides them with additional years of service towards their pension benefits. The BeST program resulted in an increase in 2002 of the defined benefit obligation via non-recurring costs (see note 28) of EUR 754 million specified as follows: cost of EUR 712 million for special termination benefits representing the cost of the departure premiums, the salary continuation and additional service cost until pension, and curtailment losses of EUR 42 million resulting from the effective pensioning date moving forward from the age of 62 years to 60 years.

• •

Under the terms of the plan, the Group will pay guaranteed salary allowances until the year 2012. The number of employees that accepted the offer was 4,157. The BeST and PTS programs also involved substantial expenses for training and job conversion for other employees. These expenses are recorded as a period cost when they occur.

The funded status of the plan for pensions and BeST and PTS termination benefits is as follows: (EUR million - as of 31 December)

2002

2003

2004

Defined Benefit Obligation Plan assets at fair value Benefit obligation in excess of plan assets

5,228 -3,320

671 -6

546 0

1,908

665

546

Unrecognized actuarial loss Net liability recognized in the balance sheet

-540

1,368

665

546

The components of the expense recognized in the income statement are as follows: (EUR million - year ended 31 December)

Current service cost - employer Interest cost Expected income on plan assets Actuarial loss recognized Past service cost recognized Expense recognized in the income statement, before curtailment, settlement and special termination benefits Special termination benefits Curtailment/settlement loss Expense recognized in the income statement

2002

2003

2004

45 320 -264 0 0

23 329 -266 12 2

0 22 0 4 0

100

699 40

0 897

0 0

839

997

The movement in the net liability recognized in the balance sheet is as follows: (EUR million - as of 31 December)

2002

2003

2004

At the beginning of the year Expense for the period Actual employer contribution At the end of the year

1,095 839 -566 1,368

1,368 997 -1,700 665

665 26 -145 546

Change in plan assets: (EUR million - as of 31 December)

2002

2003

2004

At the beginning of the year Actual gain/(loss) on plan assets Actual employer contribution Employee contribution Settlements Distributions to beneficiaries At the end of the year

3,305 -255 566 5 0 -301 3,320

3,320 302 1,700 29 -5,000 -346 6

6 0 145 0 0 -151 0

Change in the defined benefit obligation: (EUR million - as of 31 December)

2002

2003

2004

At the beginning of the year Service cost Interest cost Actuarial loss recognized Past service cost recognized Special termination benefits Settlements Distributions to beneficiaries Employee contribution Actuarial gain At the end of the year

4,426 45 320 0 0 739 0 -301 5 -6 5,228

5,228 23 329 405 2 0 -5,000 -346 29 0 671

671 0 22 4 0 0 0 -151 0 0 546

The liability for pensions and BeST and PTS termination benefits was determined using the following assumptions: (in % - as of 31 December)

Discount rate Expected rate of return on plan assets Future price inflation Real future baremic salary increase Pension increase

2002

2003

2004

6.50 8.00 2.30 1.25 0.48

3.70 1.40 0.48

As from 31 December 2003 onwards, no assumption is determined for the return on plan assets because no plan assets are accumulated for the BeST and PTS termination benefits.

B. Termination benefits and additional compensation for temporary leaves in respect of external mobility offer In 2004, the Group implemented an external mobility offer whereby statutory employees can voluntarily apply for permanent or temporary outplacement to the e-ID cards and emergency call centre projects of the Ministry of Internal Affairs. At 31 December 2004, 507 people that applied for the outplacement jobs, have been assigned to both projects. As a result, the Group incurred in 2004 termination benefits and additional compensation costs for temporary leave for an amount of EUR 41 million. These restructuring expenses are classified as nonrecurring expenses in the income statement (see note 28). Any remeasurement of the liability is recognized immediately in the income statement. No plan assets are accumulated for such benefits.

The movement in the net liability recognized in the balance sheet is:

The funded status of these benefits is as follows: (EUR million - as of 31 December)

Defined Benefit Obligation Plan assets at fair value Net liability recognized in the balance sheet

2002

2003

2004

(EUR million - as of 31 December)

2002

2003

2004

0 0

34 0

At the beginning of the year Expense for the period Actual employer contribution At the end of the year

2 6 -6 2

2 6 -6 3

3 11 -6 8

2002

2003

2004

2002

2003

2004

0 0 0 0

0 41 -7 34

19 -3 6 -1 21

21 2 6 0 29

29 3 6 -1 36

2002

2003

2004

22 7 1 0 -1 -4 26

26 6 2 0 0 -2 32

32 12 2 1 -1 2 47

Change in the defined benefit obligation: (EUR million - as of 31 December)

At the beginning of the year Expense during the year Distributions to beneficiaries At the end of the year

Change in plan assets:

The liability for termination benefits and additional compensation was determined using the following assumptions: (in % - as of 31 December)

Discount rate Inflation

2002

2003

2004

2.69 1.33

C. Complementary pension plan of Belgacom SA and some subsidiaries The Group set up a complementary defined benefit pension plan in 1997 for management that provides pension benefits for services as of 1 January 1997. The related separately administrated pension fund was created in 1998. The funded status of the pension plan is as follows: (EUR million - as of 31 December)

Defined Benefit Obligation Plan assets at fair value Benefit obligation in excess of plan assets Unrecognized actuarial loss Net liability recognized in the balance sheet

2002

2003

2004

26 -21

32 -29

47 -36

-3 2

-1 3

-3 8

The components of the expense recognized in the income statement are as follows: (EUR million - year ended 31 December)

Current service cost - employer Interest cost Expected income on plan assets Past service cost recognized Expense recognized in the income statement

2002

2003

2004

7 1 -2 0

6 2 -2 0

12 2 -3 1

(EUR million - as of 31 December)

At the beginning of the year Actual gain/(loss) on plan assets Actual employer contribution Benefits payments and expenses At the end of the year

Change in the defined benefit obligation: (EUR million - as of 31 December)

At the beginning of the year Service cost Interest cost Plan amendments Benefits payments and expenses Actuarial loss/(gain) At the end of the year

The pension liability was determined using the following assumptions: (in % - as of 31 December)

Discount rate Expected rate of return on plan assets Future price inflation Real future salary increase Real future baremic salary increase

2002

2003

2004

6.50 8.00 2.30 2.50 1.95

6.10 8.00 2.30 2.50 1.95

D. Complementary pension plan of Belgacom Mobile Belgacom Mobile, a subsidiary of Belgacom, has a complementary defined benefit pension plan for its employees. The related separately administered fund was created in 2001. The funded status of the pension plan is as follows:

2002

2003

2004

Defined Benefit Obligation Plan assets at fair value Benefit obligation in excess of plan assets

-21 18 -2

-29 24 -4

-35 31 -4

Unrecognized actuarial loss Net asset recognized in the balance sheet

9 7

10 6

9 5

(EUR million - as of 31 December)

The components of the expense recognized in the income statement are as follows: (EUR million - year ended 31 December)

Current service cost - employer Interest cost Expected income on plan assets Expense recognized in the income statement

2002

2003

2004

4 1 -2

5 2 -2

The movement in the net asset recognized in the balance sheet is as follows: (EUR million - as of 31 December)

2002

2003

2004

At the beginning of the year Expense for the period Actual employer contribution At the end of the year

6 -3 4 7

7 -5 4 6

6 -5 5 5

E. Post-employment benefits other than pensions Historically, the Group grants to its retirees post-employment benefits other than pensions in the form of train ticket discounts, hospitalization insurance, reimbursement of medical expenses and a socio-cultural aid premium. All post-employment benefits other than pensions are directly paid by the Group to the retirees and therefore no plan assets are accumulated for such benefits. In 2003, the reimbursement of medical expenses was abolished and the benefits in respect of hospitalization insurance were expanded. The funded status of the plan is as follows: (EUR million - as of 31 December)

Defined Benefit Obligation Plan assets at fair value Benefit obligation in excess of plan assets Unrecognized actuarial loss Unrecognized past service cost Net liability recognized in the balance sheet

2002

2003

2004

157 0 157 0 0

160 0 160 -4 -3

161 0 161 -3 -3

156

153

155

Change in plan assets: (EUR million - as of 31 December)

At the beginning of the year Actual gain/(loss) on plan assets Actual employer contribution At the end of the year

2002

2003

2004

19 -5 4 18

18 2 4 24

24 2 5 31

2002

2003

2004

15 4 1 0 1 21

21 4 1 0 2 29

29 5 2 0 -1 35

Change in the defined benefit obligation: (EUR million - as of 31 December)

At the beginning of the year Service cost Interest cost Benefits payments and expenses Actuarial loss/(gain) At the end of the year

The pension liability was determined using the following assumptions: (in % - as of 31 December)

Discount rate Expected rate of return on plan assets Future price inflation Real future salary increase

2002

2003

2004

6.50 8.00 2.30 3.00

6.10 8.00 2.30 3.00

The components of the expense recognized in the income statement are as follows: (EUR million - year ended 31 December)

Current service cost - employer Interest cost Actuarial gain recognized Past service cost recognized Expense recognized in the income statement, before curtailment, settlement and special termination benefits Special termination benefits Curtailment or settlement loss/(gain) Expense recognized in the income statement

2002

2003

2004

1 9 -1 0

1 10 0 10

2 9 0 0

8 2

0 -14

0 0

The movement in the net liability recognized in the balance sheet is as follows: (EUR million - as of 31 December)

2002

2003

2004

At the beginning of the year Expense for the period Actual employer contribution At the end of the year

142 19 -5 156

156 7 -10 153

153 11 -9 155

(EUR million - as of 31 December)

2002

2003

2004

At the beginning of the year Actual employer contribution Distributions to beneficiaries At the end of the year

0 -5 5 0

0 -10 10 0

0 -9 9 0

Change in plan assets:

Note 10. Other non-current assets

Change in the defined benefit obligation: (EUR million - as of 31 December)

At the beginning of the year Service cost Interest cost Amortization of actuarial gain Past service cost Special termination benefits & curtailment (gain)/loss Distributions to beneficiaries Actuarial (gain)/loss At the end of the year

2002

2003

2004

134 1 9 -1 0

157 1 10 0 14

160 2 9 0 0

10 -5 8 157

-14 -10 3 160

0 -9 -1 161

The liability for post-employment benefits other than pensions was determined using the following assumptions: (in % - as of 31 December)

Discount rate Future cost trend Future price inflation

2002

2003

2004

6.50 2.67 2.30

6.10 2.60 2.30

6.10 3.10 2.30

The liability for post-employment benefits other than pensions is determined using the Belgian official mortality tables, adjusted for mortality experience of the statutory retirees.

F. Liability for child allowance benefits The Group has a legal obligation to pay child allowance benefits to a limited number of statutory retirees and to the BeST and PTS beneficiaries. Those amounts are directly paid by the Group since no plan assets are accumulated for such benefits. Any remeasurement of the liability is recognized immediately in the income statement. The funded status of this benefit is as follows: (EUR million - as of 31 December)

Defined Benefit Obligation Plan assets at fair value Net liability recognized in the balance sheet

2002

2003

2004

18 0

17 0

The liability for child allowance benefits was determined using the following assumptions: (as of 31 December)

Discount rate (in %) Inflation (in %) Estimated maximum entitlement age for children (in years)

2002

2003

2004

5.00 1.80

Note

2002

2003

2004

20 20

109 16

76 0

59 1

5.4

12 0 12 149

13 0 14 104

13 6 7 86

(EUR million - as of 31 December)

2002

2003

2004

Gross receivables Allowance for doubtful debtors Total

1,101 -153 947

1,032 -159 873

984 -140 844

(EUR million - as of 31 December)

Derivatives held-for-hedging Other derivatives Put option related to Alert Services Holding Non-current investments Other financial assets Total

Note 11. Trade receivables

Note 12. Other current assets (EUR million - as of 31 December)

VAT receivables Derivatives held-for-hedging Other derivatives Prepaid expenses and accrued income Other receivables Total

Note

2002

2003

2004

20 20

16 11 0

12 1 14

21 0 0

32 19 77

24 16 67

25 6 52

2002

2003

2004

250 36 286

0 42 42

0 81 81

Note 13. Investments (EUR million - as of 31 December)

Fixed income securities Shares Total

In 2002, the Group invested its cash primarily in fixed income securities from JP Morgan Benelux Funding Inc. The securities were sold in January 2003. These fixed income securities were classified as available-for-sale. Shares include sicavs and funds invested mainly in money markets instruments, euro-bonds and equity instruments. The shares are classified as available-for-sale and are measured at fair value, being their quoted price.

Note 14. Cash and cash equivalents (EUR million - as of 31 December)

2002

2003

2004

Fixed income securities Short-term deposits Cash at bank and in hand Total

896 386 43 1,326

0 214 348 562

245 61 18 325

The Group invests most of its surplus liquidities in commercial paper or treasury certificates held-to-maturity and carried at amortized cost. Short-term deposits are made for periods varying between one month and three months, depending on the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates. Cash at bank earns interest at floating rates based on daily bank deposit rates.

Note 15. Shareholders’ equity On 16 December 1994, the legal status of Belgacom SA was transformed from “Autonomous State Company” into a “Limited Liability Company of Public Law”. As part of this transformation, the issued capital of EUR 992 million was created through incorporation of retained earnings and issuance of 40 million fully paid registered shares with no par value. As part of the conversion to the Euro as legal tender in Belgium, the issued capital was increased by EUR 8 million to EUR 1,000 million in 2001, through the incorporation of retained earnings. On 19 February 2004 during an extraordinary General Meeting, the existing shares were split into ten new shares each. Distribution of retained earnings of Belgacom SA, the parent company, is limited by a restricted reserve built up in prior years in accordance with Belgian Company Law up to 10% of Belgacom’s issued capital. Belgacom SA has a statutory obligation to distribute 5% of the parent company income before taxes to its employees. In the accompanying financial statements, this profit distribution is accounted for as personnel expenses.

On 30 December 2003, Belgacom SA purchased 12,380,950 of its own shares (after the above mentioned share split) from its shareholder at that time, ADSB Telecommunications BV, for an amount of EUR 325 million or EUR 26.25 per share. In accordance with the Protocol Agreement concluded on 2 October 2003 between Belgacom and its shareholders at that time, the purchase price of that transaction would subsequently be adjusted to the share price in case of the initial public offering. This price adjustment has resulted in March 2004 in the reimbursement to Belgacom of EUR 22 million by ADSB Telecommunications. On 20 March 2004, the own shares acquired in December 2003 (EUR 303 million) were cancelled. Under the Protocol Agreement concluded on 2 October 2003, a second purchase of own shares from the shareholder at that time, ADSB Telecommunications BV, was carried out on 20 March 2004 for a total number of shares of 38,761,905 and for a total amount of EUR 950 million. In March 2004, Belgacom sold treasury shares for an amount of EUR 45 million to its employees, under a discounted share purchase plan (see note 38). On 19 March 2004, Belgacom launched an Employee Stock Option plan whereby 1,128,500 share options were granted to the top management of the Group (see note 38). On 14 September 2004, 25,843,915 own shares acquired in March 2004 (EUR 633 million) were cancelled in execution of a decision of the Board of Directors taken on 26 August 2004.

Note 16. Interest-bearing liabilities Note 16.1. Non-current interest-bearing liabilities (EUR million - as of 31 December)

Unsubordinated debentures Credit institutions Derivatives held-for-hedging Other derivatives Total

Note

20 20

2002

2003

2004

396 125 0 25 547

345 0 2 24 371

273 0 0 30 303

Non-current interest-bearing liabilities, by year of maturity, are summarized as follows (state of borrowings at 31 December 2004): Maturity date (*)

As of 31 December

Interest rate (b)

2002

2003

2004

2006

2007

2008-26

242 20

242 -

217 -

62 59

Total

414

273

217

Fair value remeasurement - loans hedged Fair value remeasurement - derivatives Total

108 25 547

72 26 371

56 30 303

(EUR million)

Unsubordinated debentures Floating rate borrowings EUR Fixed rate borrowings JPY EUR

• •

4.63% to 4.74% (a)

Credit institutions Fixed rate borrowings ITL GBP

•

(*) State of non-current interest-bearing liabilities per maturity date at 31 December 2004. (a) Has been converted by means of an interest rate and currency swap into a EUR loan with floating rate. (b) Interest rate for the year 2004 (for floating rate borrowings, average interest rate).

All long-term debt is unsecured.

Bank credit facilities at 31 December 2004

The state of long-term borrowings at 31 December 2004 is as follows: 4,63% to 4,74% unsubordinated debentures in JPY

In addition to the interest-bearing liabilities disclosed in these notes 16.1 and 16.2, the Group is backed by long-term credit facilities of EUR 623 million and short-term credit facilities of EUR 826 million. These facilities are provided by a diversified group of banks. At 31 December 2004, there was no outstanding balance under the long-term and short-term facilities.

These are bonds issued by Belgacom SA for which interests are payable annually and capital is repayable in full on maturity date.

Note 16.2. Current interest-bearing liabilities (EUR million - as of 31 December)

Unsubordinated debentures current portion Credit institutions current portion Derivatives held-for-hedging current portion Other derivatives Other current financial debt Total Fair value remeasurement loans hedged Total

Note

20 20

2002

2003

2004

121

0 0 7 68

2 0 12 155

3 1 1 62

10 78

-1 154

-3 58

The Group has also established a USD 1 billion Euro Medium Term Note (“EMTN”) Program and a EUR 1 billion Commercial Paper (“CP”) Program. At 31 December 2004, there was an amount of EUR 31 million outstanding under the EMTN Program with an average remaining maturity of one year. There was no outstanding balance under the CP Program at 31 December 2004.

Note 17. Provisions Workers’ accidents

Litigation

Illness days

Other risks

Total

As of 1 January 2002 Additions Utilizations Withdrawals As of 31 December 2002

50 1 0 0 51

51 27 -6 -6 66

38 13 -13 0 38

56 37 -35 -5 53

195 77 -53 -10 209

Additions Utilizations Withdrawals As of 31 December 2003

1 -3 0 49

11 -1 -5 71

12 -12 0 38

19 -20 -2 51

44 -35 -7 210

Additions Utilizations Withdrawals As of 31 December 2004

3 -3 -1 49

33 -9 -35 59

11 -11 0 39

6 -6 -8 43

53 -28 -44 191

(EUR million)

The provision for workers’ accidents relates to compensation that Belgacom SA could pay to members of personnel injured (including professional illness) when performing their job and on their way to work. Until 31 December 2002, according to the law of 1967 (public sector) on labor accidents, compensation was funded and paid directly by Belgacom. This provision (annuities part) is based on actuarial data including mortality tables, compensation ratios, interest rates and other factors defined by the law of 1967 and calculated with the support of a professional insurer. Taking into account the mortality table, it is expected that most of these costs will be paid out until 31 December 2053. As from 1 January 2003, contractual employees are subject to the law of 1971 (private sector) and statutory employees remain subject to the law of 1967 (public sector). For both the contractual and statutory employees, Belgacom is covered as from 1 January 2003 by insurance policies for workers’ accidents and therefore will not pay directly members of personnel.

The provision for litigation represents management’s best estimate for probable losses due to pending litigation where Belgacom has been sued by a third party or is subject to a judicial or tax dispute. The expected timing of the related cash outflows depends on the progress and duration of the underlying judicial procedures. The provision for illness days represents management’s best estimate of probable charges related to the granting by Belgacom of accumulating non-vesting illness days to its statutory employees. The provision has been determined based on statistical data. The provision for other risks primarily includes the provision for the incurred risks from the re-insurance company, the expected costs for dismantling and restoration of mobile antenna sites and buildings, environmental risks and sundry risks. It is expected that most of these costs will be paid during the period 2005-2018. The provision for restoration costs is estimated at current prices and discounted using a discount rate of 5.52%.

Note 18. Other non-current payables (EUR million - as of 31 December)

Other derivatives Other amounts payable Total

Note 20. Derivatives

Note

2002

2003

2004

14 4 18

0 3 3

0 2 2

Non-current assets Derivatives held-for-hedging Other derivatives Current assets Derivatives held-for-hedging Other derivatives Total

Note 19. Other current payables (EUR million - as of 31 December)

VAT payables Payables to employees Accrual for holiday pay Accrual for social security contributions Taxes withheld on remuneration Special dividend declared on 9 December 2002 Deferred income Other derivatives Accrued expenses Other amounts payable Total

Note

2002

2003

2004

4 113 55

6 80 60

7 87 60

40 17

33 17

33 20

160 143 0 41 16 588

0 128 16 33 12 384

0 144 0 24 6 381

The special dividend declared on 9 December 2002 was paid in February 2003.

(EUR million - as of 31 December)

Non-current liabilities Derivatives held-for-hedging interest-bearing liabilities Other derivatives interest-bearing liabilities Other derivatives non-interest-bearing liabilities Current liabilities Derivatives held-for-hedging interest-bearing liabilities Other derivatives interest-bearing liabilities Other derivatives non-interest-bearing liabilities Total

Note

2002

2003

2004

10 10

109 16

76 0

59 1

12 12

11 0 136

1 14 91

0 0 59

0 40

16 43

0 35

The Group makes use of derivatives such as interest rate swaps (IRS), interest rate and currency swaps (IRCS) and forward foreign exchange contracts. Belgacom owns mainly derivatives for hedge purposes. Hedges are fair value hedges, with remeasurement to fair value of hedged items and hedging derivatives recorded in the income statement. Belgacom does not hold or issue derivatives for trading purposes but, when the relationship between hedging instrument and hedged item does not meet criteria for hedge accounting set by IAS 39, derivatives are accounted for as held-for-trading with remeasurement to fair value recorded into the income statement.

The table below shows the positive and negative fair value of derivatives, included in the balance sheet respectively as current/non-current assets or liabilities, together with the notional amounts presented by the term of maturity. Fair value

Notional amount 3-12 1-5 over months years 5 years

Positive

Negative

Within 2 months

Interest rate swaps Interest rate and currency swaps Derivatives held as fair value hedges

2 117 120

60 60

20 85 105

217 217

20 362 382

Interest rate swaps Forward foreign exchange contracts Equity options bought sold Derivatives not qualifying as hedges

2 14 16

-25 0 -14 -40

17 17

62 3 65

86 20 20 126

144 144

292 20 20 20 352

136

-40

125

231

361

734

Positive

Negative

Within 2 months

Notional amount 3-12 1-5 over months years 5 years

Total

Interest rate swaps Interest rate and currency swaps Derivatives held as fair value hedges

1 76 77

-4 -4

20 59 79

25 25

217 217

20 301 321

Interest rate swaps Forward foreign exchange contracts Equity options bought sold Derivatives not qualifying as hedges

1 13 14

-24 -2 -13 -40

50 50

62 20 20 102

86 86

144 144

292 50 20 20 382

Total

-43

181

111

361

703

Positive

Negative

Within 2 months

Notional amount 3-12 1-5 over months years 5 years

Total

59 59

-3 -3

25 25

217 217

0 242 242

0 1 1

-31 -31

86 86

144 1 145

230 1 0 231

-35

112

362

473

(EUR million - as of 31 December 2002)

Total

Fair value (EUR million - as of 31 December 2003)

Fair value (EUR million - as of 31 December 2004)

Interest rate swaps Interest rate and currency swaps Derivatives held as fair value hedges Interest rate swaps Equity options

bought sold Derivatives not qualifying as hedges Total

Total

Note 21. Financial risk management objectives and policies

Credit risk and significant concentrations of credit risk

The Group is exposed to market risks, including interest rates and foreign currency exchange rates risks, associated with underlying assets, liabilities and anticipated transactions. Based on the analysis of these exposures, Belgacom selectively enters into derivatives to manage the related risk exposures.

Interest rate risk The Group manages its exposure to changes in interest rates and its overall cost of financing by using mainly interest rate swaps (IRS), interest rate and currency swaps ( IRCS) and forward rate agreements. The main interest rate instruments used are IRS and IRCS. They are used to transform the interest rate exposure on the underlying assets or liabilities from a fixed interest rate to a floating interest rate or vice versa.

Foreign currency risk The Group’s currency exposure relates to foreign currencies in which debts have to be paid and to operational activities in foreign currencies that are not “naturally” hedged. In order to hedge the currency exposure, the Group uses derivatives such as interest rate and currency swaps (IRCS), currency options and forward foreign exchange contracts.

Direct borrowing Weighted average Average Notional interest time to amount rate maturity (as of 31 December 2002)

Credit risk arising from the inability of a counterpart to meet the terms of the Group’s financial instruments is generally limited to the amount, if any, by which the counterpart’s obligations exceed the obligations of the Group. The Group’s maximum exposure to credit risk (not taking into account the value of any collateral or other security held) in the event the counterpart fail to perform their obligations in relation to each class of recognized financial assets, including derivatives, is the carrying amount of those assets in the balance sheet. The Group is exposed to credit loss in the event of non-performance by a counterpart on derivatives, but does not anticipate non-performance by any of these counterparts, given their very good credit rating. The amount of such exposure equals the market value of such contracts. The Group generally does not require collateral or other security from the counterpart as these are highly rated financial institutions. The tables below summarize the borrowings’ portfolio, the interest rate and currency swap agreements (IRCS), the net currency obligations and the interest rate swap agreements (IRS) of the Group at 31 December 2002, 2003 and 2004.

IRCS agreements Weighted Amount average Average payable interest time to (receivable) rate maturity

Net currency obligations Weighted Amount average Average payable interest time to (receivable) rate maturity

(in years)

(EUR million)

(in years)

(EUR million)

(in years)

EUR Fixed Variable

• •

82 31

6.50% 4.04%

1.5 2.9

362

3.37%

10.6

82 393

6.50% 3.42%

1.5 10.1

GBP Fixed Variable

• •

61 -

6.30% -

1.4 -

(61) -

6.30% -

1.4 -

0 -

0.00% -

0.0 -

CHF Fixed Variable

69 -

3.80% -

1.0 -

(69) -

3.80% -

1.0 -

0 -

0.00% -

0.0 -

JPY Fixed Variable

• •

265 -

5.90% -

15.3 -

(265) -

5.90% -

15.3 -

0 -

0.00% -

0.0 -

Total

508

5.70%

8.7

(33)

475

3.96%

8.7

• •

(EUR million)

Concentration of credit risk relating to local accounts receivable is limited due to the large number of customers. For accounts receivables from foreign telecommunication companies, the concentration of credit risk is also limited due to the netting agreements with accounts payable to these companies, prepayment obligations, bank guarantees and credit limits of credit insurers.

Direct borrowing Weighted average Average Notional interest time to amount rate maturity (as of 31 December 2003)

(EUR million)

IRCS agreements Weighted Amount average Average payable interest time to (receivable) rate maturity

Net currency obligations Weighted Amount average Average payable interest time to (receivable) rate maturity

(in years)

(EUR million)

(in years)

(EUR million)

(in years)

EUR Fixed Variable

• •

82 31

7.88% 3.02%

0.5 1.9

301

2.47%

11.7

82 332

7.88% 2.52%

0.5 10.8

GBP Fixed Variable

57 -

6.36% -

0.4 -

(57) -

6.36% -

0.4 -

0 -

0.00% -

0.0 -

CHF Fixed Variable

0 -

0.00% -

0.0 -

0 -

0.00% -

0.0 -

0 -

0.00% -

0.0 -

JPY Fixed Variable

• •

244 -

5.30% -

14.3 -

(244) -

5.30% -

14.3 -

0 -

0.00% -

0.0 -

Total

414

5.79%

8.7

414

3.58%

8.7

• • • •

Direct borrowing Weighted average Average Notional interest time to amount rate maturity (as of 31 December 2004)

(EUR million)

IRCS agreements Weighted Amount average Average payable interest time to (receivable) rate maturity

Net currency obligations Weighted Amount average Average payable interest time to (receivable) rate maturity

(in years)

(EUR million)

(in years)

(EUR million)

(in years)

EUR Fixed Variable

2.65%

1.0

242

2.13%

13.1

273

2.19%

11.7

JPY Fixed Variable

• •

242 -

4.58% -

13.1 -

(242) -

4.58% -

13.1 -

0 -

0.00% -

0.0 -

Total

273

4.37%

11.7

273

2.19%

11.7

• •

2002

(as of 31 December)

Fixed rate to fixed rate Fixed rate to variable rate Variable rate to variable rate Variable rate to fixed rate Total

2003

2004

IRS agreements Notional amount (EUR million) 62 20 31 200 313

62 20 31 200 313

2004 IRS agreements Weighted average Average time payable interest rate to maturity (in years)

0 0 31 200 230

2.0% 5.9% -

0.9 8.0 -

Note 22. Net revenue

Note 26. Personnel expenses and pensions

(EUR million - year ended 31 December)

2002

2003

2004

(EUR million - year ended 31 December)

Sales of goods Rendering of services Total

248 5,004 5,252

247 5,130 5,377

230 5,185 5,415

Salaries and wages Social security expenses Pension costs Post-employment benefits other than pensions Other personnel expenses Total

Note 23. Other operating revenue (EUR million - year ended 31 December)

Income from directory business Gain on disposal of intangible assets and property, plant and equipment Gain on disposal of consolidated companies Other income Total

2002

2003

2004

3 46 86

0 46 78

0 61 125

2002

2003

2004

972

9 104 1,085

0 0 0

Note 24. Non-recurring revenue (EUR million - year ended 31 December)

Gain on sale of Ben Nederland Group Gain on dilution of investment in Belgacom Alert Services Holding Gain on sale of Belgacom France Total

Gains on the disposal of subsidiaries and joint ventures are reported as non-recurring revenue when they individually exceed EUR 5 million. On 25 September 2002, Belgacom divested its interest in Ben Nederland Group. This sale resulted in the recognition of a gain of EUR 972 million. On 22 March 2002, Belgacom sold its 100% stake in Belgacom France in exchange for a 10.8% ownership in “neuf telecom SA”. This sale resulted in the recognition of a gain of EUR 104 million (see note 5.4.).

Note 25. Costs of materials and charges to revenue (EUR million - year ended 31 December)

2002

2003

2004

Purchases of materials Purchases of services Total

166 1,188 1,353

167 1,210 1,377

151 1,310 1,461

Purchases of materials are shown net of work performed by the enterprise that is capitalized for an amount of EUR 13 million in 2002, EUR 13 million in 2003 and EUR 12 million in 2004.

2002

2003

2004

822 142 110

782 142 100

746 163 17

9 18 1,101

7 15 1,046

39 27 993

Starting 1 January 2004, following the transfer of the pension obligation for statutory employees to the Belgian State, Belgacom does not pay legal pensions anymore for statutory employees. On the other hand, Belgacom pays higher employer social security contributions from the same date onwards (see note 9). Pension costs of the year 2002 exclude special termination benefits and curtailment losses. Such costs are reported under non-recurring operating expenses because they represent one-time expenses due to employees who accepted the BeST voluntary early leave offer (see notes 9 and 28). Pension costs of the year 2003 exclude the settlement loss resulting from the transfer of the defined benefit pension plan for statutory employees towards the Belgian State. This loss is reported under nonrecurring operating expenses (see notes 9 and 28). Pension costs of the year 2004 exclude the costs related to termination benefits and additional compensation benefits of the employees who have accepted the external mobility offer in respect of the e-ID cards and emergency call centre projects of the Ministry of Internal Affairs. Such costs are disclosed as non-recurring expenses in the income statement (see notes 9 and 28). As from 2004, interest charges for discounting the liability for termination benefits of the BeST and PTS plans are reported under the caption “post-employment benefits other than pensions”. Until 2003, such interests were included in the caption “pension costs”. The increase of other personnel expenses for the year 2004 relates to the costs of the Employee Stock Option Plan and the Discounted Share Purchase Plan (see note 38). Salaries and wages and social security expenses are shown net of work performed by the enterprise that is capitalized for an amount of EUR 33 million in 2002, EUR 36 million in 2003 and EUR 36 million in 2004.

Note 27. Other operating expenses (EUR million - year ended 31 December)

2002

2003

2004

The Group recorded in 2003 a settlement loss of EUR 897 million in respect of the transfer of the defined benefit pension plan for statutory employees towards the Belgian State (see note 9).

Rent expense Maintenance and utilities Advertising and public relations Consultancy Administration and training Telecommunications, postage costs and office equipment Outsourcing Allowances on trade debtors Impairment on intangible assets and property, plant and equipment Taxes other than income taxes Other operating charges (1) Total

96 198 153 117 64

87 195 149 121 69

87 167 110 118 66

The Group recorded in 2004 termination benefits and additional compensation benefits for temporary leaves for an amount of EUR 41 million in respect of the external mobility offer for the e-ID cards and emergency call centre projects of the Ministry of Internal Affairs (see note 9).

42 18 32

36 30 23

30 36 19

24 42 76 863

-8 33 45 781

20 49 -9 693

(1) Including unrealized and realized exchange gains amounting to EUR 6 million in 2002, unrealized and realized exchange losses amounting to EUR 3 million in 2003 and EUR 2 million in 2004. This line item also includes a net decrease of provisions of EUR 30 million in 2004.

2002

2003

2004

120

139

731 859

683 787

595 742

2002

2003

2004

0 68

5 58

1 21

-69 -1

-35 -1

-34 -1

-10

-55

-20

Amortization of goodwill Amortization of licenses and other intangible assets Depreciation of property, plant and equipment Total

(EUR million - year ended 31 December)

Note 28. Non-recurring expenses Special termination benefits of BeST restructuring Curtailment losses of BeST restructuring Termination benefits and additional compensation for temporary leaves in respect of external mobility offer Settlement loss on pension liability for statutory employees Tritone restructuring Total

(EUR million - year ended 31 December)

Note 30. Finance costs (net)

Other operating expenses are shown net of work performed by the enterprise that is capitalized for an amount of EUR 103 million in 2002, EUR 86 million in 2003 and EUR 96 million in 2004.

(EUR million - year ended 31 December)

Note 29. Depreciation and amortization

2002

2003

2004

712 43

0 0

0 9 764

897 0 897

0 0 41

Finance income Dividends received from other participating interests Gain on disposal of other participating interests Interest income Fair value measurement of put option on Alert Services Holding Finance costs Interests and charges on debts Discounting charges on provisions Impairment losses on other participating interests Fair value adjustments of financial instruments Total

Losses on the disposal of subsidiaries and joint ventures that individually exceed EUR 5 million and restructuring costs are recorded as non-recurring expenses.

Note

5.4

-14

-9

-25

-27

In 2004, the Group obtained a dividend of EUR 15 million from its investments in satellites.

The Group recorded in 2002 special termination benefits of EUR 712 million and curtailment losses of EUR 43 million in respect of the BeST restructuring program (see note 9).

Note 31. Earnings per share

Note 33. Related party disclosures

Basic earnings per share are calculated by dividing the net income for the year attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year.

Note 33.1. Consolidated companies

Diluted earnings per share are calculated by dividing the net income for the year attributable to ordinary shareholders, by the weighted average number of ordinary shares outstanding during the year (adjusted for the effects of dilutive options). The following table reflects the income and share data used in the computation of basic and diluted earnings per share: (year ended 31 December)

2002

2003

2004

Net income attributable to ordinary shareholders (EUR million) 1,142 172 Weighted average number of ordinary shares (*) 400,000,000 399,932,160

922

86,076

358,698,931 2.57 2.57

(*) Over the year.

On 19 February 2004, the shareholders have decided during an extraordinary General Meeting to split each existing ordinary share into ten new shares. The weighted average number of ordinary shares in the above calculation has been adjusted for the years 2002 and 2003 in order to take into account this share split.

Note 32. Dividends paid and proposed Dividends on ordinary shares: Dividends proposed to the shareholders’ meeting (EUR million) Number of shares with dividend rights (end of year) Dividend per share (in EUR) Special dividend proposed to shareholders’ meeting (EUR million) Special dividend per share (in EUR)

2002

2003

2004

280

395

500

400,000,000 400,000,000 0.70 0.99

361,775,135 1.38

570 1.43

200 0.55

The proposed dividends for the years 2002 and 2003 have been effectively paid in April 2003 and April 2004 respectively. As decided in the Protocol Agreement dated 2 October 2003 between Belgacom and its shareholders at that time, the EUR 395 million of proposed dividends for the year 2003 have been distributed in 2004 before the Initial Public Offering, in accordance with the shareholders structure of Belgacom SA that existed before the purchase of own shares that occurred on 30 December 2003 (see note 15).

Joint ventures Ben Nederland Holding BV and subsidiaries The Group had a joint venture interest in Ben Nederland Holding BV and subsidiaries until 31 March 2002 (see note 5.2.). In 2002, the Group had no significant transactions with Ben Nederland Holding BV and subsidiaries.

358,612,854

Adjustment for share options 0 0 Weighted average number of ordinary shares for diluted earnings per share (*) 400,000,000 399,932,160 Basic earnings per share (in EUR) 2.86 0.43 Diluted earnings per share (in EUR) 2.86 0.43

(year ended 31 December)

Subsidiaries and joint ventures are listed in note 5. Enterprises accounted for under the equity method are listed in note 6. Commercial terms and market prices apply for the supply of goods and services between Group companies.

Enterprises accounted for under the equity method Alert Services Holding and subsidiaries The Group holds a 28% stake in Alert Services Holding and subsidiaries since February 2002 (see note 5.4.). The Group had no significant transactions with Alert Services Holding and subsidiaries since that date. Tritone The Group holds a majority stake in Tritone Telecom BV but the operating activities of Tritone Telecom BV ceased in July 2002. During 2002, Belgacom granted loans of EUR 20 million to finance the unwinding of the operations of Tritone. Loans receivable from Tritone, net of the related allowance, are nil at 31 December 2004. The Group sold goods and services to Tritone for EUR 8 million until July 2002 and ceased to do business with Tritone since that date. Trade receivables from Tritone, net of the related allowance for doubtful debtors, are nil at 31 December 2004.

Note 33.2. Relationship with shareholders The Belgian State is the majority shareholder of the Group, with a stake of 50% plus 1 share. The Group holds treasury shares for 3.1%. The remaining 46.9% are traded on the First Market of Euronext Brussels since the March 2004 public offering initiated by the consortium ADSB Telecommunications BV (hereafter “ADSB”). This stake of 46.9% of Belgacom SA traded on Euronext Brussels includes a stake of 0.5% owned by the personnel of Belgacom Group. We refer to note 40 in respect of a share buyback that may occur in the coming months.

Relationship with the Belgian State The Group supplies telecommunication services to the Belgian State and various administrations of the Belgian State. All such transactions are made within normal customer/supplier relationships on terms and conditions that are no more favourable than those available to other customers and suppliers. While the administrations of the State represent one of the Group’s largest customers, the services provided to those administrations do not represent a significant component of the Group’s net revenue.

Commercial relationship with the former shareholder ADSB until the Initial Public Offering The few transactions of the Group with ADSB and ADSB’s shareholders (SBC Communications Inc, Singapore Telecommunications Limited and TDC A/S) until March 2004 related to international traffic termination and international network renting, and were carried out at arm’s length. The Group purchased services from ADSB for EUR 4 million in 2002, EUR 3 million in 2003 and EUR 0.8 million in 2004 until the date of the IPO. No trade payables were outstanding at each year-end. The Group purchased services from Singapore Telecom for EUR 8 million in 2002, EUR 3 million in 2003 and EUR 0.1 million in 2004 until the date of the IPO. The Group purchased traffic services from TDC for EUR 8 million in 2002, EUR 3 million in 2003 and EUR 0.4 million in 2004 until the date of the IPO. The Group had trade payables with Singapore Telecom and TDC for EUR 2 million at 31 December 2002 and EUR 1 million at 31 December 2003. The Group sold services to Singapore Telecom for EUR 8 million in 2002, EUR 6 million in 2003 and EUR 0.8 million in 2004 until the date of the IPO. The Group sold services to TDC for EUR 14 million in 2002, EUR 11 million in 2003 and EUR 2.6 million in 2004 until the date of the IPO. The Group had trade receivables towards Singapore Telecom and TDC for EUR 5 million at 31 December 2002 and EUR 4 million at 31 December 2003. The Group had no significant transactions with SBC Communications during the periods presented.

Other relationship with the former shareholder ADSB As decided in the Protocol Agreement dated 2 October 2003 between Belgacom and its shareholders at that time, the Group purchased 12,380,950 of its own shares from ADSB on 30 December 2003, for a total price of EUR 325 million. The purchase value has been adjusted downwards by EUR 22 million, at the time of the pricing of the initial public offering, based on the initial offer price per share (see note 15). In accordance with the same Protocol Agreement, the Group purchased on 20 March 2004 38,761,905 ordinary shares from ADSB at the initial offer price per share for an amount of EUR 950 million.

Relationship with the minority shareholders of Belgacom Mobile Vodafone BV and subsidiaries (hereafter “Vodafone”) holds a 25% stake in Belgacom Mobile. The Group enters into transactions with Vodafone in the framework of its mobile telephony activity (roaming-in revenues and roaming-out costs), and Vodafone also charges consultancy fees. These transactions are done at normal customer/supplier relationships on terms and conditions that are no more favourable than those available to other customers/suppliers. The Group sold services to Vodafone for EUR 29 million in 2002, EUR 35 million in 2003 and EUR 55 million in 2004. Vodafone sold services to the Group for EUR 64 million in 2002, EUR 68 million in 2003 and EUR 87 million in 2004.

Accounts receivables from Vodafone amounted to EUR 7 million at 31 December 2002, EUR 7 million at 31 December 2003 and EUR 8 million at 31 December 2004. Trade payables to Vodafone amounted to EUR 6 million at 31 December 2002, EUR 2 million at 31 December 2003 and EUR 6 million at 31 December 2004.

Note 33.3. Relationship with key management personnel Prior to the Initial Public Offering of 22 March 2004, by virtue of a decision by the General Meeting of 12 April 1995, the members of the Board of Directors who represented the Belgian State, with the exception of the Chief Executive Officer (CEO), had the right to a directors’ fee that amounted to 619.73 EUR per meeting with a maximum of 9,915.74 EUR per year. They also had the right to directors’ emoluments for an amount equivalent to that of the directors’ fee. The Chairman of the Board of Directors had, in pursuance of that same decision, also the right to a directors’ fee and directors’ emoluments for an amount that corresponded to the double of the amounts granted to the above mentioned members of the Board of Directors. Since the Initial Public Offering date of 22 March 2004, the Chairman of the Board of Directors has the right to an annual fixed fee of 50,000 EUR and the other members of the Board of Directors have the right to an annual fixed director’s fee of 25,000 EUR. Each member of the Board of Directors, except the Chief Executive Officer, has also the right to a variable fee of 5,000 EUR per attended meeting. The Chairman of any advisory committee of the Board of Directors has the right to a fee of 5,000 EUR per meeting of that Committee. Any other members, except the Chief Executive Officer of such Committee has the right to a fee of 2,500 EUR per meeting. In 2002, 2003 and 2004, the Board of Directors met 6 times a year. For the year ended 31 December 2002, a total amount of EUR 6,128,583 was paid in aggregate to the members of the “Belgacom Group Council” (BGC), Chief Executive Officer included. In 2002, the members of the Belgacom Group Council were Mrs B. Cosgrave and Mr J. Goossens (from 1 January 2002 until 08 November 2002), M. Dussenne (from 08 November 2002 until 31 December 2002), R. Stewart, M. Vermaerke, J.-C. Vandenbosch, Ph. Vander Putten, P. Methens, M. Speeckaert, M. Rigolle, W. Mosseray, J. Heynen, B. Delvaux and S. Alcott. For the year ended 31 December 2003, a total amount of EUR 4,806,301 was paid in aggregate to the members of the “Belgacom Management Committee” (BMC), Chief Executive Officer included. In 2003, the members of the Belgacom Management Committee were Mrs B. Cosgrave and A. De Lathauwer and Mr D. Bellens (since 1 March 2003), R. Stewart, M. Vermaerke, J.-C. Vandenbosch, Ph. Vander Putten, W. Mosseray and S. Alcott. For the year ended 31 December 2004, a total amount of EUR 4,897,228.95 was paid in aggregate to the members of the “Belgacom Management Committee” (BMC), Chief Executive Officer included. The members of the Belgacom Management Committee are

Mrs B. Cosgrave and A. De Lathauwer and Mr D. Bellens, R. Stewart, Ph. Vander Putten, W. Mosseray and S. Alcott. This total amount contains the pecuniary advantages, direct or immediate (base pay, variable pay) and indirect or postponed (insurances, long-term profit-sharing scheme), that are linked directly to the function or awarded to the members of the Belgacom Management Committee. In addition to these pecuniary advantages, the members of the BMC also had the opportunity to participate to the Discounted Share Purchase Plan whereby they bought 510,410 shares with a 16.67% discount compared to the issuance price of the initial public offering (24.50 EUR per share). The BMC members also had the opportunity to participate to an Employee Stock Option Plan whereby 355,581 share options were granted to the BMC members.

Note 33.4. Regulations The telecommunications sector is regulated through the legislation adopted in the Belgian parliament, through a series of Royal and Ministerial Decrees, and also through decisions of the Belgian Institute for Postal services and Telecommunications, commonly referred to as the “BIPT/IBPT”. The Belgian licensing regime provides for individual licenses for the provision of public fixed voice telephony services, public network infrastructure services and mobile telecommunications services. The company is also governed by certain provisions and principles of Belgian public and administrative law whereby Belgacom has obligations such as the delivery of regulated services and public services.

Operating lease commitments The Group rents sites for its telecom infrastructure and leases buildings, technical and network equipment, as well as furniture and vehicles under operating leases with terms of one year or more. Rental expenses in respect of these operating leases amounted to EUR 152 million in 2002, EUR 141 million in 2003 and EUR 124 million in 2004. Future minimum rentals payable under the non-cancellable operating leases are as follows at 31 December 2004:

Buildings Sites Technical and network equipment Furniture Vehicles Total

From time to time Belgacom has been, and expects to continue to be, subject to legal, regulatory and tax proceedings and claims arising in the ordinary course of its business. The Group is currently involved in various judicial and regulatory proceedings, including those for which a provision has been made (see note 17) and those described below, in the jurisdictions in which it operates concerning matters arising in connection with the conduct of its business. These include also proceedings before the Belgian Institute for Postal services and Telecommunications (“BIPT”), appeals against decisions taken by the BIPT on the one hand, and proceedings with the Belgian tax administrations with respect to real estate withholding taxes on the other hand. In September 2002, Codenet, Versatel, Colt and Worldcom filed a complaint with the Belgian Competition Council alleging that Belgacom’s “Benefit Excellence Program” constitutes an abuse of an alleged dominant position in the market through pricing and loyalty rebates. The complainants also filed a request for interim relief measures with the President of the Competition Council requesting, among other things, the suspension of the program. Belgacom’s “Benefit Excellence Program”, which was launched in March 2002, is a voice telephony tariff plan aimed at large corporate users offering specific base rates for national telephony and for fixed-to-mobile calls as well as an additional discount scheme. In May 2004, the complainants have suppressed their price squeeze allegation for the year 2004 and Belgacom has clarified to its customers the volume discount scheme confirming there was no locking of customers. On 22 December 2004, the President of the Competition Council rejected the complainants’ request for interim relief measures because Belgacom had clarified the way the volume discounts are applied, and stated that there was, in his opinion, no serious risk that other licensed operators would disappear because of the ’Benefit Excellence’ tariffs (and especially the volume discount).

Note 34. Rights, commitments and contingent liabilities

(EUR million)

Claims and legal proceedings

Within one year

From 1 to 3 years

From More 3 to 5 than years 5 years

19 9

39 20

19 8

4 5

80 43

31 2 25 87

36 3 49 147

28 2 26 83

37 1 10 57

133 7 111 373

Total

The issue of interim relief measures having been closed successfully for Belgacom, the case on the merits with respect to the alleged infringement is still pending and no calendar for the proceedings has been set. Belgacom may be subject to an obligation to increase the retail tariffs that are the subject of the claim and if it would ultimately be found to have committed an abuse of dominant position, it may be subject to a maximum fine of up to 10% of the Group’s annual turnover. Based on this, Belgacom has provided for a portion of the claim. In June 2003, BASE filed an action against Belgacom Mobile before the Commercial Court of Brussels. BASE alleges that Belgacom Mobile’s termination rates since 1 October 2000 are not in accordance with the official telecommunications regulations requiring cost oriented pricing and that Belgacom Mobile’s Proximus-to-Proximus tariffs constitute an abuse of Belgacom Mobile’s alleged dominant position in the Belgian market. BASE’s provisional estimate of the claim for compensation , based upon BASE’s briefs in August 2004, amounts to approximately EUR 700 million in reimbursement and damages, representing the amount of lost revenue that BASE allegedly suffered as a result of these practices, and is subject to increase. On 1 March

2004, Mobistar filed a request to intervene voluntarily in the action brought by BASE against Belgacom Mobile. Mobistar alleges that if the Commercial Court of Brussels were to find that Belgacom Mobile’s termination rates were not in accordance with the obligation of costoriented pricing, Mobistar should be awarded damages provisionally estimated by Mobistar to range between EUR 967,000 and EUR 56,000,000 depending on the termination rates upheld by the Court. Furthermore, Mobistar alleges that in addition to the Proximusto-Proximus tariffs, certain tariff schemes offered by Belgacom Mobile to business and corporate customers constitute an abuse of Belgacom Mobile’s allegedly dominant position. Mobistar requests the Court to appoint a court expert to calculate the amount of alleged damages and seeks compensation for such damages, provisionally estimated at a minimum of EUR 50,000,000. As with the action filed by BASE, Belgacom Mobile is contesting the claim made by Mobistar. Belgacom believes that its mobile termination rates were in line with the rulings of the BIPT. Accordingly, no provision was recorded in the financial statements at 31 December 2004. On 13 May 2004, the Netherlands Arbitration Institute has ruled in favor of Belgacom in the request for binding arbitration that the Danish operator TDC A/S had initiated against the company in October 2002 for an amount of EUR 91 million. The dispute related to the allocation of an alleged capital gain resulting from the entry of a new investor in the share capital of Ben Nederland Group in 2000. As a consequence Belgacom no longer provides for this claim at 31 December 2004.

Capital expenditures commitments At 31 December 2004, the Group has contracted commitments of EUR 56 million, mainly for the acquisition of intangible assets and technical and network equipment.

Other rights and commitments

Note 35. Cross-border lease arrangements During the period 1996 through 2001, the Group entered into several cross-border lease arrangements with foreign investors relating to part of its fixed and mobile switches equipment. Under the terms of these agreements, which range in duration from 13 to 16 years, the Group received at the inception date of the arrangements a total amount of USD 684 million and placed a total amount of USD 654 million on deposit. The Group entered, in respect of the deposits, into non-refundable payment undertaking agreements with highly rated banks. Based on interpretation 27 (SIC-27, “Evaluating the substance of transactions involving the legal form of a lease”), the Group concluded that these arrangements in substance do not involve a lease and that the related lease debts and deposits must not be recognized in the financial statements because they do not meet the definition of an asset and a liability under IFRS. In respect of these arrangements, the Group received fees from the foreign investors or realized gains for a total amount of EUR 23 million. These fees or gains are recognized in the income statement under the caption “other operating revenue” over the lifetime of the respective agreements. The fees effectively recognized in income amount to EUR 1.6 million in 2002, 2003 and 2004. On 25 September 2002, the Group sold its investment in Ben Nederland Group but agreed it will continue to guarantee the payment of leasing debts amounting at 31 December 2004 to USD 63 million (EUR 46 million), in case the payment undertakers on the related cross-border lease arrangement would become insolvent. The risk that this guarantee will result in a payment by the Group is mitigated by the fact that the deposit institutions involved are rated AAA or AA by Standard & Poors. The term of the related leasing debt expires in 2012.

At 31 December 2004, the Group has the following other rights and commitments: the Group received bank guarantees from its suppliers to guarantee the completion of works ordered by the Group for an amount of EUR 20 million; the Group granted bank guarantees to its customers to guarantee, among others, the completion of works ordered by its clients and the payment of rental expenses for renting of sites for antennas installation for an amount of EUR 31 million; the Group granted bank guarantees to the Walloon Region of Belgium to guarantee execution by Wallonie Intranet SA (hereafter “WIN SA”) of all obligations provided for in WIN SA’s contractual agreement with the Walloon Region. The commitment, which is renewable, amounts to EUR 7.4 million; the Group has a put option from 1 January 2003 through 1 January 2009 whereby the Group can sell at a strike price of minimum EUR 40 million the remaining 28% stake it currently owns in Alert Services Holding SA. The Group exercised this put option towards the co-shareholder Securitas Direct International in 3 January 2005 (see note 40).

• • •

•

Note 36. Net financial position of the Group

(EUR million as of 31 December 2003)

The Group defines net financial position as the net amount of investments, cash and cash equivalents, interest-bearing liabilities and related derivatives (including remeasurement to fair value). (EUR million - as of 31 December)

Assets Investments (*) Cash and cash equivalents (*) Non-current derivatives Current derivatives

Note

2002

2003

2004

10, 13 14 10 12

286 1,326 111 11

42 562 77 1

87 325 59 0

-547

-371

-303

-78 1,109

-154 157

-58 110

Liabilities Non-current interestbearing liabilities (*) Current interestbearing liabilities (*) Net financial position

Note

Carrying amount

Estimated fair value

Difference

10 11 8 12 14

14 873 35 53 562

0 0 0 0 0

16 18

-107 -3 -809 -198 -366

-104 -3 -809 -198 -366

3 0 0 0 0

Financial assets Other non-current assets Trade receivables Current income tax asset Other current assets Cash and cash equivalents Financial liabilities Interest-bearing liabilities, non-current and current Other non-current payables Trade payables Income tax payable Other current payables

8 19

Net difference between recorded amount and estimated fair value

(*) After remeasurement to fair value, if applicable.

Non-current interest-bearing liabilities include non-current derivatives at fair value amounting to EUR 25 million in 2002, EUR 24 million in 2003 and EUR 30 million in 2004 (see note 16).

Note 37. Fair value of financial instruments The estimated fair values of financial assets and liabilities which are not carried at fair value in the balance sheet are presented in the following tables: (EUR million as of 31 December 2002)

Note

Financial assets Other participating interests Other non-current assets Trade receivables Current income tax asset Other current assets Investments Cash and cash equivalents Financial liabilities Interest-bearing liabilities, non-current and current Other non-current payables Trade payables Income tax payable Other current payables Net difference between recorded amount and estimated fair value

Carrying amount

Estimated fair value

Difference

7 10 11 8 12 13 14

207 12 947 1 66 250 1,326

0 0 0 0 0 0 0

16 18

-100 -4 -850 -150 -588

-101 -4 -850 -150 -588

-1 0 0 0 0

8 19

-1

(EUR million as of 31 December 2004)

Note

Carrying amount

Estimated fair value

Difference

10 11 8 12 14

14 844 50 52 325

0 0 0 0 0

16 18

-32 -2 -782 -224 -381

-33 -2 -782 -224 -381

0 0 0 0 0

8 19

Note 38. Share-based Payment

The following assumptions were used for determining the weighted average fair value of the share options at grant date (EUR 4.29):

Discounted Share Purchase Plan

Option pricing model Contractual life of the options Expected life Exercise price Expected volatility (compared to peer group volatility) Expected dividend pay-out ratio Risk free interest rate

In March 2004, the Group launched a Discounted Share Purchase Plan (hereafter “DSPP”), that provided all employees the opportunity to buy shares of the company at a 16.67% discount compared to the issuance price of the initial public offering (24.50 EUR per share). Under the plan, the employees purchased a total number of 1,842,026 shares at the discounted price of 20.42 EUR per share. The cost of the discount amounted to EUR 7.5 million and was recorded in personnel expenses (see note 26).

Employee Stock Option Plan

Binomial 7 years 5 (to 6) years EUR 24.50 27.50% 50% - 60% Euro swap annual rate

On 31 December 2004, no share option has been exercised yet.

Note 39. Segment reporting

In March 2004, Belgacom launched an Employee Stock Option Plan (hereafter “ESOP”) whereby 1,128,500 share options were granted to the top management of the Group. In respect of this arrangement, the Group has early adopted IFRS 2 (“Share-based Payments”), as issued on 19 February 2004. The fair value of the share options at inception date (amounting to EUR 5 million) is recognized over their vesting period. The share options vest over a three year period in accordance with the graded vesting method. The annual charge of the graded vesting is recognized in personnel expenses and amounts to EUR 2 million in 2004.

The Board of Directors and the Chief Executive Officer manage the operations of Belgacom Group by business segments. These business segments are the primary segments and can be described as follows: Fixed Line Services. This segment provides retail voice, data and Internet services, to residential and business customers in Belgium, as well as regulated and commercial wholesale services to other carriers and service providers in Belgium. Mobile Communications Services. This segment provides retail mobile telephony services to residential and business customers in Belgium and provides wholesale data services to third parties. Prior to the disinvestment in March 2002 of the Group’s interest in the Ben Nederland Group, the results of operations of the Ben Nederland Group were also included in this business segment. International Carrier Services. This segment provides voice, data and capacity and infrastructure services to telecommunications operators worldwide.

• •

At the moment of exercise, the employee will pay the exercise price of 24.50 EUR per share, with physical delivery of the share. The share options are exercisable until 22 March 2011 at the latest, except the share options of the Chief Executive Officer that are exercisable until 2012 at the latest. The ESOP rules define specific vesting conditions and exercise periods for the share options in case of voluntary or involuntary leave of a plan participant. In case of voluntary leave of the employee, all unvested options forfeit except during the first year, for which the first third of the options vests immediately and must be exercised within two years as from the date of leave. In case of involuntary leave of the employee, all unvested options vest immediately and must be exercised within two years as from the date of leave.

•

The Group’s head office and central functions are included for financial reporting purposes within the Fixed Line Services segment. When a legal entity includes more than one segment, adjustments for inter-segment pricing are determined on an arm’s length basis. Segment results, assets and liabilities include items attributable to a segment as well as those that can be allocated on a reasonable basis.

The evolution of the shares option plan is as follows: Number of Weighted average stock options exercise price (in EUR) Outstanding at 1 January 2004 Movements during the period: Granted Forfeited Exercised Expired Total Outstanding at 31 December 2004 Exercisable at 31 December 2004

1,128,500 0 0 0 1,128,500 1,128,500 5,331

24.50 24.50 24.50 24.50

Fixed Line Services

Mobile Communications Services

International Carrier Services

Intersegment eliminations

Total

3,023 165 3,188 1,008

1,801 275 2,075 1,006

514 111 625 6

-550 -550 0

5,338 0 5,338 2,020

Non-recurring revenue Non-recurring expense Operating income before depreciation and amortization

113 -764 357

972 1,978

1,085 -764 2,341

Depreciation and amortization Operating income

-593 -236

-255 1,723

-11 -5

-859 1,482

-12

-25 -12

-203 -99 1,142

Fixed Line Services

Mobile Communication Services

International Carrier Services

Unallocated

Total

31 3,385 -956 367

1,204 -585 165

311 -273 34

2,397 -2,505 -

31 7,298 -4,320 566

-9 -10

-15 -

-24 -10

(EUR million - year ended 31 December 2002)

Revenue Intersegment revenue Total segment revenue Total segment result

Finance costs (net) Loss from enterprises accounted for using the equity method Tax expense Minority interests Net income

(EUR million - as of 31 December 2002)

Enterprises accounted for under the equity method Segment assets Segment liabilities Capital expenditure Impairment losses recorded in the income statement on intangible assets, property, plant & equipment (into segment result) on other participating interests (into finance costs)

â&#x20AC;˘ â&#x20AC;˘

Fixed Line Services

Mobile Communications Services

International Carrier Services

Intersegment eliminations

Total

2,971 137 3,108 1,109

1,957 225 2,181 1,113

527 99 626 28

-461 -461 0

5,454 0 5,454 2,250

Non-recurring expense Operating income before depreciation and amortization

-897 212

1,113

-897 1,353

Depreciation and amortization Operating income

-565 -353

-196 917

-26 1

-787 566

-4 -

-27 -4 -208

-154 172

Fixed Line Services

Mobile Communication Services

International Carrier Services

Unallocated

Total

27 3,084 -916 336

1,160 -576 149

243 -231 17

1,522 -1,738 -

27 6,009 -3,461 502

-2 -55

-1 -

9 -

8 -2 -55

(EUR million - year ended 31 December 2003)

Revenue Intersegment revenue Total segment revenue Total segment result

Finance costs (net) Loss from enterprises accounted for using the equity method Tax expense Minority interests Net income

(EUR million - as of 31 December 2003)

â&#x20AC;˘ â&#x20AC;˘ â&#x20AC;˘

Fixed Line Services

Mobile Communications Services

International Carrier Services

Intersegment eliminations

Total

Revenue Intersegment revenue Total segment revenue Total segment result

2,938 154 3,092 1,257

2,046 193 2,239 1,135

557 88 645 2

0 -435 -435 0

5,540 0 5,540 2,394

Non-recurring expense Operating income before depreciation and amortization

-41 1,216

0 1,135

0 2

0 0

-41 2,353

-500 717

-227 907

-15 -13

0 0

-742 1,611

-1 -

-27 -1 -508

-152 922

Fixed Line Services

Mobile Communication Services

International Carrier Services

Unallocated

Total

26 2,807 -794 338

1,130 -406 205

242 -226 13

1,189 -1,721 -

26 5,368 -3,145 556

0 -1 -20

0 -

-20 -

-20 -1 -20

(EUR million - year ended 31 December 2004)

Depreciation and amortization Operating income Finance costs (net) Loss from enterprises accounted for using the equity method Tax expense Minority interests Net income

(EUR million - as of 31 December 2004)

â&#x20AC;˘ â&#x20AC;˘ â&#x20AC;˘

Management examined the need for secondary segment information by geographical location and concluded that there are no significant geographical segments outside Belgium.

100

Note 40. Post balance sheet events In January 2005, Belgacom SA sold to Securitas Direct International for EUR 50 million its 28% minority stake in Alert Services Holding SA via the exercise of its put option foreseen in the initial agreement with Securitas signed in April 2001. In January 2005, Belgacom SA contributed the branch of activity of its International Carrier Services segment to its subsidiary Belgacom International Carrier Services SA (BICS) incorporated on 27 August 2004. In February 2005, Belgacom signed a joint venture agreement with Swisscom stipulating that Swisscom Fixnet AG will transfer all of its carrier activities in BICS in exchange of a stake of 28% in the capital of BICS.

In January 2005, Belgacom SA sold all shares of Belgacom Directory Services SA, a subsidiary of the Group, to Promedia SA for an amount of EUR 285 million. On 24 February 2005, the Belgacom Board of Directors decided to conduct a share buyback for a maximum amount of EUR 300 million and for a share price that must not be more than 5% above and 10% below the highest closing price in the thirty-day trading period preceding the transaction.

Note 41. Recent IFRS pronouncements Belgacom does not early adopt any IASB standards or interpretations except IFRS 2 (“Share-based Payment”) in 2004 and IFRS 1 (“First time Adoption of IFRS”) in 2002 and 2003.

101

report of the independent auditors Ernst & Young Reviseurs d’Entreprises Bedrijfsrevisoren Avenue Marcel Thiry 204 Marcel Thirylaan 204 B-1200 Bruxelles - Brussel

Tel : +32 (0)2 774 91 11 Fax : +32 (0)2 774 90 90

To the Shareholders of Belgacom SA de droit public/NV van publiek recht

We have audited the accompanying consolidated balance sheets of Belgacom SA de droit public/NV van publiek recht and subsidiaries (“Belgacom Group”) as of 31 December 2002, 2003 and 2004, and the related consolidated statements of income, of changes in shareholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s Board of Directors. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with International Standards on Auditing. Those standards require that we plan and perform the audits 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 consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Belgacom Group as of 31 December 2002, 2003 and 2004, and of the consolidated results of their operations and their cash flows for the years then ended in accordance with International Financial Reporting Standards (“IFRS”). We also reported separately on the consolidated financial statements of Belgacom Group for the year ended at 31 December 2002 prepared in accordance with accounting and reporting laws and regulations applicable in Belgium.

Brussels, Belgium, 18 March 2005

Ernst & Young Reviseurs d’Entreprises S.C.C.R.L./ Bedrijfsrevisoren B.C.V.B.A. represented by

Ludo SWOLFS Partner

102

extract of the statutory financial statements of Belgacom S.A. under public law - Belgian GAAP

104 • Income statement 106 • Balance sheet after appropriation 108 • Appropriation statement

103

income statement (EUR million - year ended 31 December)

104

Operating income A. Turnover B. Increase (+); Decrease (-) in stocks of finished goods, work and contracts in progress C. Own construction capitalised D. Other operating income

II.

Operating charges A. Raw materials, consumables and goods for resale 1. Purchases 2. Increase (-); Decrease (+) in stocks B. Services and other goods C. Remuneration, social security costs and pensions D. Depreciation of and other amounts written off formation expenses, intangible and tangible fixed assets E. Increase (+); Decrease (-) in amounts written off stocks, contracts in progress and trade debtor F. Increase (+); Decrease (-) in provisions for liabilities and charge G. Other operating charges

III.

Operating profit

IV.

Financial income A. Income from financial fixed assets B. Income from current assets C. Other financial income

Financial Charges A. Interest and other debt charges C. Other financial charges

VI.

Profit on ordinary activities before taxes

2002

2003

2004

3,773 3,586 -1 140 48

3,714 3,557 -1 119 38

3,713 3,525 0 124 65

-3,436 207 190 16 1,531 1,016

-3,236 180 175 5 1,538 956

-2,971 165 170 -5 1,522 784

600

537

495

9 19 54

-1 -7 32

-2 -21 28

337

478

743

50 0 18 32

151 115 3 33

88 61 3 24

-173 140 33

-170 131 39

-219 185 35

214

459

612

(EUR million - year ended 31 December)

VI.

Profit on ordinary activities before taxes

VII.

Extraordinary income B. Adjustments to amounts written off financial fixed assets C. Adjustments to provisions for extraordinary liabilities and charges D. Gain on disposal of fixed assets E. Other extraordinary income

VIII. Extraordinary charges A. Extraordinary depreciation of and extraordinary amounts written off formation expenses, intangible and tangible fixed assets B. Amounts written off financial fixed assets C. Provisions for extraordinary liabilities and charges (increase +, decrease -) D. Loss on disposal of fixed assets E. Other extraordinary charges IX. Profit for the period before taxes IXbis. A. Transfer from deferred taxation B. Transfer to deferred taxation X.

Income taxes A. Income taxes B. Adjustment of income taxes and write-back of tax provisions

XI.

Profit for the period

XII.

Transfer from untaxed reserve Transfer to untaxed reserve

XIII. Profit for the period available for appropriation Loss for the period available for appropriation

2002

2003

2004

214

459

612

1,082 7 0 1,067 8

5,981 11 17 5,953 0

32 0 5 26 0

-1,155

-1,566

-95

23 34 538 151 410

0 118 -80 0 1,528

0 22 -84 0 157

142 5 -69

4,873 74 0

549 0 -6

0 0 0

-4 -6 2

2 0 2

4,943

544

10 -138

143 0

0 -12

-50

5,086 -

532 -

105

balance sheet after appropriation (EUR million - as of 31 December)

2002

2003

2004

6,247

12,008

11,809

152

137

ASSETS FIXED ASSETS I.

Formation expenses

II.

Intangible assets

III.

Tangible assets A. Land and buildings B. Plant, machinery and equipment C. Furniture and vehicles D. Leasing and other similar rights E. Other tangible assets F. Assets under construction and advance payments

2,019 273 1,539 30 118 23 35

1,840 257 1,377 31 96 36 45

1,680 234 1,254 29 74 34 55

IV.

Financial assets A. Affiliated enterprises 1. Participating interests 2. Amounts receivable B. Other enterprises linked by participating interests 1. Participating interests 2. Amounts receivable C. Other financial assets 1. Shares 2. Amounts receivable and cash guarantees

4,168 4,079 4,079 0 44 43 1 45 44 1

10,015 9,931 9,931 0 45 45 0 39 38 0

9,991 9,911 9,911 0 45 45 0 35 34 1

907

1,097

1,005

4 0 4

3 0 3

CURRENT ASSETS V.

Amounts receivable after more than one year A. Trade debtors B. Other amounts receivable

VI.

Inventories and contracts in progress A. Inventories 1. Raw materials and consumables 2. Work in progress 4. Goods purchased for resale B. Contracts in progress

42 41 24 0 17 1

39 39 24 0 15 0

40 40 25 0 15 0

VII.

Amounts receivable within one year A. Trade debtors B. Other amounts receivable

799 767 32

679 644 35

661 643 18

VIII. Investments A. Own shares B. Other investments and deposits

38 0 38

352 325 27

279 271 8

IX.

Cash at bank and in hand

Deferred charges and accrued income

7,154

13,105

12,813

Total assets

106

2002

2003

2004

SHAREHOLDERS’ EQUITY

1,542

6,063

4,964

Capital

1,000

II.

Share premium

III.

Revaluation surplus

IV.

Reserves A. Legal reseve B. Reserve not available for distribution 1. In respect of own shares held C. Untaxed Reserves D. Reserves available for distribution

542 100 0 0 148 294

5,062 100 325 325 4 4,633

3,964 100 293 293 17 3,554

Profit/(Loss) carried forward

VI.

Investment grants

PROVISION AND DEFERRED TAXATION

1,140

962

859

VII.

1,140 1,066 0 0 0 1,066 74

962 962 0 0 0 962 0

859 852 0 0 0 852 7

LIABILITIES

4,472

6,080

6,991

VIII. Amounts payable after more than one year A. Financial debts 2. Unsubordinated debentures 3. Leasing and similar obligations 4. Credit institutions 5. Other loans D. Other amounts payable

2,000 1,999 242 0 1,706 51 0

1,724 1,723 242 0 1,450 31 1

3,612 3,611 217 0 3,036 359 1

IX.

2,328 355 606 606 0 692 692

4,228 476 2,513 2,354 158 646 646

3,214 870 849 849 0 619 619

2. Suppliers bills D. Advances received on contracts in progress E. Taxes, remuneration and social security 1. Taxes 2. Remuneration and social security F. Other amounts payable

0 33 184 17 167 458

0 21 138 23 115 434

0 24 140 19 122 712

Accrued charges and deferred income

145

127

164

7,154

13,105

12,813

(EUR million - as of 31 December)

LIABILITIES AND SHAREHOLDERS’ EQUITY

Provisions and deferred taxation A. Provisions for liabilities and charges 1. Pensions and similar obligations 2. Taxation 3. Major repairs and maintenance 4. Other liabilities and charges B. Deferred taxation

Amounts payable within one year A. Current portion of amounts payable after more than 1 year B. Financial debts 1. Credit institutions 2. Other loans C. Trade creditors 1. Suppliers

Total liabilities and shareholders’ equity

107

appropriation statement (EUR million - year ended 31 December)

108

2002

2003

2004

Profit to be appropriated Loss to be appropriated

-50

5,086 -

532 -

Transfers from capital and reserves

907

196

Transfers to capital and reserves

-4,664

-21

Distribution of profit

-857

-422

-706

general information Additional Information Corporate name and legal form

The autonomous public-sector company Belgacom is a Société anonyme de droit public/Naamloze vennootschap van publiek recht (limited liability company under public law) as defined by the Law of 21 March 1991 on the reform of certain public-sector commercial undertakings and organized under the laws of Belgium. The Company is subject to the statutory and regulatory provisions of commercial law applicable to companies limited by shares in all matters not expressly determined by (or by virtue of) the Law of 21 March 1991 or specific legislation of any kind.

Registered Office

Consultation of the issuer’s documents Date of constitution

Boulevard du Roi Albert II/Koning Albert II-laan, 27 1030 Brussels Belgium VAT BE 0202.239.951 Brussels Register of Legal Entities Brussels Trade Registry 587.163 The public documents concerning the issuer can be consulted at the registered office The company was established as an autonomous public-sector company, governed by the Law of 19 July 1930 setting up the Belgian National Telephone and Telegraph Company, the RTT (Régie des Téléphones et Télégraphes/Regie van telegraaf en telefoon). The transformation of Belgacom into a SA of public law was implemented by the Royal Decree of 16 December 1994, which was published in the Belgian Official Gazette on 22 December 1994, and went into effect on the same day.

Objects of the Company

As described in the Article 3 of the Articles of Association, the Company’s objects are: 1. to develop services within the field of telecommunications in Belgium or elsewhere; 2. to take all actions aimed at promoting, directly or indirectly, its activities or ensuring optimal use of its infrastructure; 3. to acquire participating interests in bodies, companies or associations – whether existing or to be created, Belgian, foreign or international, and public or private sector – that may contribute, directly or indirectly, to the achievement of its corporate objects; 4. to provide radio and television broadcasting services.

Disclaimer

This communication contains forward-looking statements, including statements about the Company’s beliefs and expectations. These statements are based on the Company’ s current plans, estimates and projections, as well as its expectations of external conditions and events. Forward-looking statements involve inherent risks and uncertainties and speak only as of the date they are made. The Company undertakes no duty to and will not necessarily update any of them in light of new information or future events, except to the extent required by Belgian law. The Company cautions investors that a number of important factors could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements.

109

For financial information, please contact Ingvild Van Lysebetten

Investor Relations Manager Bd du Roi Albert II/Koning Albert II-laan, 27 B - 1030 Brussels Tel: + 32 2 202 40 23 Fax: + 32 2 201 54 94 E-Mail: investor.relations@belgacom.be

For further information, please contact Thierry Bouckaert

Press Relations Director Bd du Roi Albert II/Koning Albert II-laan, 27 B - 1030 Brussels Tel: + 32 2 202 82 50 Fax: + 32 2 203 65 93 E-Mail: about@belgacom.be Visit Belgacomâ&#x20AC;&#x2122;s website: www.belgacom.be Belgacomâ&#x20AC;&#x2122;s Annual Report is also published in Dutch and in French

110

glossary ADSL

ARPU ATM

BACKBONE BILAN BIT

BROADBAND

CDMA

CHAT DWDM ETHERNET

EXTRANET FRAME RELAY

GPRS

GPS

GSM

INTRANET IP

(Asymmetric Digital Subscriber Line): technology enabling a one-to-one, high-speed, digital connection (up to eight megabits per second (Mbps) in receive mode and 640 Kilobits per second (Kbps) in send mode) on a single pair of copper wires. (Average Revenue Per Unit): Average revenue generated per mobile telephone subscriber. (Asynchronous Transfer Mode): technique enabling the high-speed transfer of digital data. It consists of dividing information flow (voice, data and image) into fixed-size packets, known as “cells”. This is a high bandwidth line which acts as the mainstay linking access providers to the world network. (Belgacom Interconnection of LAN): a total solution based on the Internet Protocol (IP), Frame Relay and ATM networks. (Contraction of Binary digIT): the basic unit of information. A bit has two possible values, 1 or 0. Each print character has an eight-bit code. Eight bits make one octet, or byte. Network capable of high-speed transmission of several Megabits per second (Mbps), generally much faster than on the telephone network. These networks are composed of coaxial cable, optic fiber or wireless media. (Code Division Multiple Access): digital technique in which different conversations can be transmitted simultaneously and are differentiated by being tagged with a code. Type of messaging done over the Internet, involving short text messages and often used by strangers to meet. (Dense Wavelength Division Multiplexing): see WDM. The most common LAN (Local Area Network) technology, developed originally by Xerox, DEC and Intel. Conventionally, the Ethernet LAN uses coaxial cables or high-quality twisted cable. The most widely installed Ethernet network is known as 10BASE-T, which enables transmission at a speed of up to 10 Mbps. With Fast Ethernet, or 100BASE-T, speeds of up to 100 Megabits per second (Mbps) are possible. Intranet to which a company’s suppliers, customers and partners have access. A network essential for e-business. Data transport protocol that divides a physical communications line into several virtual channels. Technology part-way between X25 packet switching and ATM. (General Packet Radio Service): a second-generation mobile telephony standard. It enables direct Internet access and data exchange at speeds 18 times faster than those of the GSM protocol and allows volumebased pricing. (Global Positioning System): system enabling a vehicle or person to pinpoint their position within approximately 50 meters or so anywhere in the world. It functions thanks to a network of 24 satellites put in place by the US Department of Defense. (Global System for Mobile Communications): an abbreviation which is often synonymous, in common parlance, with mobile terminal or telephone. In reality, it is a European standard for a common digital cellular telephony system. Application of Internet technologies (e-mail, Web, etc.) to a company’s local area network (LAN). (Internet Protocol): packet data protocol used for routing and carriage of messages across the Internet.

IP VPN

ISDN

ISP LARGE BAND MMS PABX

(Internet Protocol Virtual Private Network): A VPN offers the advantages of a private network (security, etc.) while using the resources of a public switched network. The user thereby saves money on network infrastructure and management costs. (Integrated Services Digital Network): fully digitized network enabling simultaneous, high-speed transmission of speech, text, data and images (still or animated). There are two types of ISDN lines: the ISDN-2, equipped with two communication channels, and the ISDN-30, equipped with thirty communication channels. (Internet Service Provider): a company providing Internet access to its customers and a personal e-mail address. See Broadband. (Multimedia Messaging Service): possibility to illustrate text messages on mobile phones with photographs, images and sound. (Private Automatic Branch Exchange): company exchange around which the company’s internal telephone network is organized. It also enables data transmission.

PORTAL

Site offering to act as a gateway to the World Wide Web (WWW) for a large number of surfers, ideally immediately on connection. Many Internet Access Providers offer portals to their customers (e.g., the Belgacom Skynet portal).

SERVER

Machine that assists in providing information and/or resources in a network, be it public or private.

SDSL

A technology that transports data at a maximum bit rate of 2.3 Mbits/s in both directions.

SMS

(Short Message Service): enables written messages to be received and displayed on a GSM.

STREAMING

Technique for downloading multimedia files enabling surfers to read the file in real-time, without waiting for full download. This is the case, for example, with sound or video on the Internet.

TCP-IP

(Transmission Control Protocol – Internet Protocol): a protocol used in conjunction with the Internet Protocol (IP) to send data in the form of message units (datagrams, or packets) between computers over the Internet. IP handles the actual delivery of the data, while TCP keeps track of the individual units of data for efficient routing through the Internet.

UMTS

(Universal Mobile Telecommunications System): a third-generation telecommunications system capable of providing multimedia services at a very-high speed.

VIDEOCONFERENCING VPN

Communication in which the callers can be seen as well as heard (video conference). (Virtual Private Network): a data network that shares telecommunications infrastructure but acts as a secure private network, with an architecture based on the use of the TCP-IP (Time Compression Multiplexing Internet Protocol).

WAP

(Wireless Application Protocol): new protocol enabling GSMs to be transformed into Internet and multimedia terminals.

WDM

(Wavelength Division Multiplexing) or DWDM (Dense Wavelength Division Multiplexing): technique enabling several independent flows of digital information to coexist on the same optical fiber.

WIFI

Stands for wireless fidelity. Technology makes possible wireless, high-speed surfing from a hotspot.

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Editor-in-chief: Philippe Rogge Bd du Roi Albert II/Koning Albert II-laan, 27 â&#x20AC;&#x201C; B - 1030 Brussels Conception and coordination: Baudhuin Pringiers - Belgacom Corporate Communication Manager Bernard Caroyez - Investor Relations Graphics: Chris Communications - www.chriscom.be Prepress: Snel Grafics Printing: Gam Pictures: Belgacom, Jean-Michel Byl, Getty Images, Zefa and Photonica

112

group ﬁnancials Revenue 2004 by segments* (before eliminations) Revenue* (in EUR millions)

EBITDA* (in EUR millions)

5,338

5,454

5,540 5,300

5,400

EBITDA* 2,394

5,500

5,600

1,800

1,900

2,000

2,100

2,200

2,300

37% MCS

2,400

EBITDA 2004 by segments* Net proﬁt (in EUR millions)

Earnings per share (in EUR) 1,142

922 200

400

600

800

2.57

04 1,000

142,000

customers won back at FLS

1,200

0.0

0.5

1.0

1.5

more than

2.0

2.5

Group EBITDA* increased by 6.4% mainly thanks to Fixed Line Services (FLS), via a strict cost control policy on operating expenses. EBITDA* margin increased to 43.2%.

Net proﬁt

0% ICS

Net proﬁt (Group share) amounted to EUR 922 million.

53% FLS

Earnings per share

0.43

04 0

2.86

172

Group revenue was up by almost 1.6% on the previous year, primarily due to the increase in the Mobile Communications Services (MCS) and International Carrier Services segments (ICS).

52% FLS 2,250

04 5,200

11% ICS

2,020

Revenue*

47% MCS

Basic earnings per share increased also signiﬁcantly to EUR 2.57 in 2004.

3.0

1,000,000

total retail and wholesale ADSL access channels

4.2 million

active customers at MCS

* Figures before non-recurring items.

key ﬁgures

(1)

2002

2003

2004

Total revenue before non-recurring items

5,338

5,454

5,540

Non-recurring revenue

1,085

Total revenue

6,422

5,454

5,540

EBITDA (2) before non-recurring items

2,020

2,250

2,394

EBITDA (2)

2,341

1,353

2,353

Operating income (EBIT)

1,482

566

1,611

Net ﬁnance revenue/(costs)

-25

-27

Loss from enterprises accounted for using the equity method

-12

-4

-1

1,445

534

1,583

-203

-208

-508

-99 1,142

-154 172

-152 922

2002

2003

2004

1,371

296

1,899

-566

-502

-556

Cash ﬂows from other investing activities

1,276

Free cash ﬂow (3)

2,081

-189

1,421

-1,560 521

-575 -764

-1,658 -237

Balance sheet total

7,298

6,009

5,368

Non-current assets

4,601

4,381

3,963

Investments, cash and cash equivalents

1,611

604

406

Shareholders’ equity

2,978

2,548

2,223

Year ended 31 December

Income Statement (EUR million)

Income before taxes and minority interests Tax expense Minority interests Net income (Group share)

As of 31 December

Cash Flow and Capital Expenditures (EUR million) Cash ﬂows from operating activities Capital expenditures

Cash ﬂows used in ﬁnancing activities Net increase/(decrease) of cash and cash equivalents

Balance sheet (EUR million)

The commitment of a leader. The spirit of a challenger.

Minority interests

293

446

407

1,545 1,109

840 157

760 110

2002

2003

2004

Basic earnings per share (in EUR)

2.86

0.43

2.57

Diluted earnings per share (in EUR)

2.86

0.43

2.57

400,000,000

399,932,159

358,612,854

0.70 1.43

0.99 0.00

1.38 0.55

2002

2003

2004

5,088

5,219

5,252

519

784

1,024

4,076

4,201

4,198

5.9

6.4

6.9

19,003

17,541

16,933

Liabilities for pensions and other post-employment beneﬁts Net ﬁnancial position

Year ended 31 December

Data per share

Weighted average number of ordinary shares

annual report 2004

Dividend per share, gross (in EUR) Special dividend per share, gross (in EUR)

Belgacom

Personnel

annual report • 2004

(1) Prepared under IFRS. (2) Earnings Before Interests, Taxes, Depreciation and Amortization. (3) Cash ﬂow before ﬁnancing activities.

(4) PSTN + ISDN BA + ISDN PRA + retail ADSL. (5) Customers who received/made a call or received/sent an SMS over the past three months.