58 • Key figures
59 • Management Report
73 • Consolidated financial statements
116 • Report of the independent auditors
117 • Extract from the Belgian GAAP
non-consolidated financial statements
of Belgacom SA under public law
contents
key figures
(1)
Year ended 31 December 2003 2004 2005
Income Statement (in EUR million)
Total revenue before non-recurring items 5,454 5,540 5,458
Non-recurring revenue 0 0 238
Total revenue 5,454 5,540 5,696
EBITDA (2) before non-recurring items 2,250 2,394 2,214
EBITDA (2) 1,353 2,353 2,098
Operating income (EBIT) 566 1,611 1,372
Net finance revenue/(costs) -27 -27 64
Loss from enterprises accounted for using the equity method -4 -1 0
Income before taxes 534 1,583 1,436
Tax expense -208 -508 -339
Minority interests 154 152 139
Net income (Group share) 172 922 959
As of 31 December 2003 2004 2005
Cash Flow and Capital Expenditures (in EUR million)
Cash flows from operating activities 296 1,899 1,883
Capital expenditures -502 -556 -696
Cash flows from other investing activities 17 78 389
Free cash flow (3) -189 1,421 1,575
Cash flows used in financing activities -575 -1,658 -1,102
Net increase/(decrease) of cash and cash equivalents -764 -237 473
Balance sheet (in EUR million)
Balance sheet total 6,009 5,368 5,831
Non-current assets 4,381 3,963 3,808
Investments, cash and cash equivalents 604 406 884
Shareholders’ equity 2,548 2,223 2,221
Minority interests 446 407 370
Liabilities for pensions, other post-employment benefits and termination benefits 840 760 1,010
Net financial position 157 110 534
Year ended 31 December 2003 2004 2005
Data per share
Basic earnings per share (in EUR) 0.43 2.57 2.78
Diluted earnings per share (in EUR) 0.43 2.57 2.77
Weighted average number of outstanding ordinary shares 399,932,159 358,612,854 345,406,186
Dividend per share, gross (in EUR) 0.99 1.38 1.52
Special dividend per share, gross (in EUR) 0.00 0.55 0.00
Data on employees
Number of employees (full-time equivalents) 17,541 16,933 16,335
Average number of employees over the period 17,880 17,108 16,388
Total revenue before non-recurring items per employee (in EUR) 305,054 323,847 333,029 EBITDA (2) before non-recurring items per employee (in EUR) 125,852 139,945 135,101
Ratios
Profitability
EBITDA (2) margin before non-recurring items 41.3% 43.2% 40.6%
EBITDA (2) margin 24.8% 42.5% 36.8%
Operating margin (EBIT) 10.4% 29.1% 24.1%
Net margin (Group share) 3.2% 16.6% 16.8%
Return on equity (ROE) (4) 6.2% 38.7% 43.1%
Return on assets (ROA) (5) 10.2% 31.1% 27.7%
Return on capital employed (ROCE) (6) 11.2% 38.4% 34.1%
Gearing
Net financial debt to shareholders’ equity -6.2% -4.9% -24.0%
Coverage
Net financial debt to EBITDA before non-recurring items -0.1 0.0 -0.2
Net financial debt to EBITDA -0.1 0.0 -0.3
Self-financing
Capital expenditures to total revenue before non-recurring items 9.2% 10.0% 12.8%
Capital expenditures to total revenue 9.2% 10.0% 12.2%
(1) Prepared under IFRS as adopted for use in the European Union. (4) Net income/average shareholders’ equity.
(2) Earnings Before Interests, Taxes, Depreciation and Amortization. (5) EBIT/average (total assets - current investments & cash and cash equivalents). (3) Cash flow before financing activities. (6) EBIT/average (total assets - current liabilities).
60 • Highlights of the year 2005
61 • Comments on consolidated figures
61 • Income statement
61 •
Revenue per business segment
62 •
Operating expenses before depreciation
and amortization
63 •
Operating income before depreciation
and amortization (EBITDA)
63 •
Operating income (EBIT)
63 •
Net finance revenue/costs
63 •
Tax expense
63 •
Minority interests
64 •
Net income (Group share)
64 • Balance sheet
64 • Liquidity and capital resources
64 •
Cash flow
65 •
Capital expenditures
65 •
Capital resources
management report
66 • Comments on business segment figures
66 • Fixed Line Services (FLS)
68 • Mobile Communications Services (MCS)
70 • International Carrier Services (ICS)
71 • Other information
71 • Rights, commitments and contingencies
as of 31 December 2005
71 • Use of financial instruments
71 • Research and development activities
71 • Treasury shares
71 • Major risks and uncertainties
71 • Post-balance sheet events
highlights of the year 2005
A major event of 2005 was the launch of Belgacom TV, an interac-tive digital television offering provided over the broadband network. The Fixed Line Services segment also launched “Happy Time”, a new pricing scheme that allows free calling during off-peak hours and flat rate calling during off-peak hours.
The Mobile Communication Services segment launched its Market Share Leadership Program to face fierce competition. Proximus also launched a new online offer “UglyDuck”, a new tariff structure for postpaid customers “Smile”, and was the first to launch 3G services for residential customers.
On 1 January 2005, Belgacom constituted its international carrier activities including its related foreign subsidiaries into a wholly-owned subsidiary, Belgacom International Carrier Services SA (“BICS”). The next milestone in the consolidation strategy imple-mentation was achieved with the agreement between Belgacom SA and Swisscom Fixnet AG to combine BICS and Swisscom ICS, a division of Swisscom Fixnet. The joint venture has been effective since 1 July 2005, with shared control based on the respective shareholding, 72% for Belgacom SA and 28% for Swisscom Fixnet. At the beginning of 2005, the Group sold 100% of its shares of Belgacom Directory Services SA to Promedia Comm.V. and its minority stake in Alert Services Holding to Securitas Direct Inter-national.
The Group completed a EUR 300 million share buy-back on 17 August 2005, bringing its stake to 5.9%.
In September 2005, Belgacom launched a takeover bid for Telindus Group. The public offer on all outstanding shares and warrants of Telindus was successfully closed on 6 January 2006 with 90.86% of the shares, warrants included, or 84.3% warrants excluded. In order to give remaining shareholders the opportu-nity to contribute their shares and warrants at the same condi-tions, the offer has been reopened. (See Note 41 in the
“Consolidated financial statements” for additional post-balance sheet information.)
In 2005, a new collective agreement was approved by Belgacom following intensive and constructive negotiations with the unions. As a result of this agreement, 362 employees who could not be redeployed left the company in accordance with the provi-sions agreed as of 31 December 2005. The agreement also included an innovative end-of-career program (tutorship), allowing the most senior and experienced employees to rear-range their work schedule, and transmit their experience and knowledge to younger employees. 2,792 employees, or 84% of the target group, signed up irrevocably for the program before 31 December 2005.
Income statement
Total revenue of the Belgacom Group progressed 2.8% year-over-year to EUR 5,696 million, including a non-recurring revenue recorded in the first half of 2005 (EUR 238 million related to the gain on the disposal of shares in Belgacom Directory Services SA). The Group’s revenue decreased 0.4% (EUR 20 million), excluding non-recurring items and adjusted for the disposal of consoli-dated companies in 2005 (Belgacom Directory Services SA, Digital Age Design SA and Expercom SA) and for 2004 one-time items, impacted by fierce competition in the fixed and mobile
Fixed Line Services (FLS) revenue decreased 4.2% year-over-year. When adjusted for the disposal of consolidated companies (representing a revenue decrease of EUR 28 million) and for 2004 one-time items (EUR 35 million), FLS revenue decreased 2.3%, principally impacted by a revenue decline in traditional voice services, partially offset by the growth in broadband, outsourced network management, network integration services and national wholesale products.
Mobile Communications Services (MCS) total revenue evolution was impacted by aggressive competition and decreased 2.6%. Net Service revenue declined by 2.3%, mainly driven by higher credits and discounts granted within the framework of the Market Share Leadership Program, which resulted in positive
customer trends (number of active customers, active customers percentage, churn rate).
International Carrier Services (ICS) revenue increased 10.6%. The segment implemented its consolidation strategy, the joint venture with Swisscom Fixnet AG being effective on 1 July 2005, and succeeded in capturing growing traffic from mobile operators.
Non-recurring revenue
In January 2005, the Group sold 100% of Belgacom Directory Services SA shares to Promedia Comm.V. This transaction resulted in the recognition of a gain of EUR 238 million. This gain is accounted for as non-recurring revenue.
segments. International Carrier Services recorded a double-digit revenue growth, further implementing its consolidation strategy. The operating income before depreciation and amortization (EBITDA) of the Group decreased 10.9% to EUR 2,098 million, including a non-recurring expense of EUR 355 million, related to termination benefits and other related costs in the frame of the collective agreement in respect of the work organization. The Group’s EBITDA decreased 4.8% to EUR 2,209 million, excluding non-recurring items recorded in 2004 and 2005, and adjusted for the disposal of consolidated companies and 2004 one-time items.
comments on consolidated figures
Revenue per business segment
Year ended 31 December
2003 2004 2005 Variance 2005
versus 2004
(in EUR million) (%) (in EUR million) (%) (in EUR million) (%) (%)
Fixed Line Services 3,108 57 3,092 56 2,961 54 -4.2
Mobile Communications Services 2,181 40 2,239 40 2,181 40 -2.6
International Carrier Services 626 11 645 12 713 13 10.6
Intersegment eliminations -461 -8 -435 -8 -396 -7 -9.0
Total 5,454 100 5,540 100 5,458 100 -1.5
Non-recurring revenue 0 0 238
companies (62 full-time equivalents) and other natural attrition factors (138 full-time equivalents).
Social security expenses remained flat in 2005 compared with 2004, despite the lower headcount level. The impact of a lower headcount level was offset by an increasing amount of expenses on which social security is due.
The decrease in “other personnel expenses” was fully driven by lower charges related to the discounted share purchase plans (EUR 6 million).
Other operating expenses
Other operating expenses increased with 5.6% (EUR 39 million). When adjusted for the disposal of consolidated companies and for 2004 one-time items, other operating expenses increased 4.2%. This increase was mainly driven by Mobile Communications Services (higher costs related to the Market Share Leadership Program, Vodafone fee increase and Universal Service Obligation contribution) and by International Carrier Services (costs resulting from the joint venture).
Non-recurring expenses
In 2005, a new collective agreement was approved by Belgacom following intensive and constructive negotiations with the unions. As a result of this agreement, 362 employees who could not be redeployed left the company in accordance with the provisions agreed as of 31 December 2005.
The agreement also included an innovative end-of-career program (tutorship), allowing the most senior and experienced employees to rearrange their work schedule, and transmit their experience and knowledge to younger employees. 2,792 employees, or 84% of the target group, signed up irrevocably for the program before 31 December 2005. Statutory employees can gradually reduce their work schedule between the ages of 55 and 58, and can stop working at the age of 58, until they officially retire at age 60. Contractual employees can leave the company definitively at age 58.
Costs of materials and charges to revenue
Costs of materials and charges to revenue increased 6.5% (EUR 95 million), mainly driven by the impact on costs of the revenue growth in the International Carrier Services segment and by higher interconnection expenses within Mobile Commu-nications Services. In the Fixed Line segment, cost of materials and charges to revenue were nearly flat despite the revenue decline, due to product mix evolution (additional costs related to Belgacom TV, to transit traffic growth within National Wholesale, etc.).
Personnel expenses and pensions
Year ended 31 December
(in EUR million) 2003 2004 2005
Salaries and wages 782 746 717 Social security expenses 142 163 163
Pension costs 100 17 16
Post-employment benefits other than
pensions and termination benefits 7 39 40 Other personnel expenses 15 27 21
Total 1,046 993 957
Number of employees at year end
(full-time equivalents) (1) 17,541 16,933 16,335
(1) Number of full-time equivalents, calculated on the basis
of the consolidation percentage of subsidiaries owned less than 100%.
Salaries and wages decreased in 2005 by EUR 29 million or 3.9%. The decrease is mainly driven by an overall headcount reduction at the Belgacom Group level of 599 full-time equivalents (-3.5%), lower charges for exit costs and lower expenses for profit distri-bution to employees, partially offset by annual increases in salary levels. Headcount reductions are mainly driven by the BeST program (206 full-time equivalents), external mobility projects (193 full-time equivalents), the disposal of consolidated
Operating expenses before depreciation and amortization
Year ended 31 December Variance 2005
(in EUR million) 2003 2004 2005 versus 2004
Costs of materials and charges to revenue 1,376 1,461 1,555 6.5%
Personnel expenses and pensions 1,046 993 957 -3.6%
Other operating expenses 782 693 731 5.6%
Total 3,204 3,146 3,244 3.1%
Non-recurring expenses 897 41 355
Fixed Line Services EBITDA (excluding non-recurring items) decreased 8.8%. When adjusted for the disposal of consolidated companies and 2004 one-time items, FLS EBITDA decreased 1.9%, the revenue decline being partially offset by positive effects of cost saving initiatives.
Mobile Communications Services EBITDA decreased 8.3% year-over-year, driven by higher credits and discounts granted to customers and higher costs (interconnection costs, Market Share Leadership Program costs, Universal Service Obligation
contribution and Vodafone fee increase).
International Carrier Services EBITDA increased by EUR 24 million year-over-year, impacted by a 2004 one-time item related to an impairment loss on net assets. Excluding this one-time item, ICS EBITDA increased 19.7% (EUR 4 million).
Operating income (EBIT)
The operating income of the group decreased 14.8% to EUR 1,372 million, driven by the EBITDA evolution. When excluding non-recurring items, the Group operating income decreased 9.9% (EUR 164 million).
Net finance revenue/costs
The improvement of the financial result from EUR 27 million net costs in 2004 to EUR 64 million net revenue in 2005 is the
result of the increase of the net financial position and of the gain realized on the disposal of associates and other participating interests which exceeds the amount of dividends collected in 2004 from satellite companies (EUR 15 million). Indeed in 2005, Belgacom disposed of its interests in satellite companies amounting to a gain of EUR 51 million and its minority stake in Alert Services Holding following the exercise of its put option and resulting in a gain of EUR 11 million.
Tax expense
The effective tax rate of the year 2005, 23.57%, is much lower than the tax rate applicable in Belgium, 33.99%, due to signi-ficant non-taxable income.
Minority interests
The Group’s minority interest is Vodafone’s 25% stake in Belgacom Mobile.
Net income (Group share)
Net income (Group share) increased from EUR 922 million in 2004 to EUR 959 million in 2005, favorably impacted by a posi-tive evolution of the financial result and lower tax expenses recorded in 2005.
In order to cover its financial obligations under the terms of this collective agreement, the Group recognized a liability for termi-nation benefits and additional employee compensation for an amount of EUR 355 million.
In 2004, the Group recognised a liability for restructuring expenses to cover the obligation from the external mobility programs for a total amount of EUR 41 million.
On 31 December 2003, the legal pension obligations for statutory employees of Belgacom SA have been transferred to the Belgian State that received in compensation an amount of EUR 5 billion. In order to realize such payment, Belgacom made an additional contribution to the pension fund of EUR 1,381 million. This trans-action resulted in a significant cost of EUR 897 million, which has been accounted for as a non-recurring expense in 2003.
Operating income before depreciation and amortization (EBITDA)
Year ended 31 December
2003 2004 2005 Variance 2005
versus 2004
(in EUR million) (%) (in EUR million) (%) (in EUR million) (%) (%)
Fixed Line Services 1,109 49 1,257 53 1,147 52 -8.8
Mobile Communications Services 1,113 49 1,135 47 1,041 47 -8.3
International Carrier Services 28 1 2 0 27 1
-Intersegment eliminations 0 0 0 0 -1 0
Total 2,250 100 2,394 100 2,214 100 -7.5
Non-recurring revenue 0 0 238
Non-recurring expense -897 -41 -355
Balance sheet
Intangible assets and property, plant and equipment are the Group’s main assets. Year-over-year, property, plant and equip-ment are decreasing due to higher depreciation and amortiza-tion than capital expenditures which, however, are increasing. In 2004 and 2005, the capital expenditures principally concerned investments in the “Broadway project” (infrastructure enabling to offer VDSL services) and in the UMTS network. The increase in intangible assets for 2005 is due to the acquisition of the soccer rights from the Belgian Football League and of other broad-casting rights.
Deferred income tax assets relate mainly to tax losses carried forward that Belgacom SA has accumulated, amongst others, as a result of the non-recurring expenses related to the BeST restruc-turing program launched in 2002, the transfer of the pension obli-gations for statutory employees in 2003, the provision recorded in 2005 resulting from the collective agreement in respect of the work organization. Based on Belgacom’s current business plan, such tax losses will be utilized during the coming years.
Year-over-year, the evolution of cash and cash equivalents results from a different evolution of the cash provided by operating activities and of the cash used for investing and financing activi-ties. Such evolution is presented in the consolidated cash flow statement of the consolidated financial statements.
The share buy-back transactions and the payment of dividends have led to a decrease in 2004 of shareholders’ equity due to insufficient net income (group share) to offset such impacts whereas shareholders’ equity remained stable in 2005. Such impacts are presented in the consolidated statement of changes in equity of the consolidated financial statements.
In 2004, the Group obtained additional bank credit facilities that have been used during 2004 to finance the special cash consuming events described above. These bank credit facilities were reim-bursed before year-end 2004. The Group did not enter into new long-term borrowings in 2004 or in 2005.
In 2004, the liability for pensions, other post-retirement benefits and termination benefits decreased following higher payments than the cost of the year. Such liability increased in 2005 following
the recognition of a liability to cover the commitments taken by the Group in the collective agreement that are much higher than the payments of the year for pensions, other post-employment benefits and termination benefits.
Trade payables increased in 2005 principally due to the acqui-sition of soccer and broadcasting rights, with an installment schedule over more than one year.
Liquidity and capital resources
Cash flow
As of 31 December
(in EUR million) 2003 2004 2005
Cash flows from operating activities 296 1,899 1,883 Capital expenditures -502 -556 -696 Cash flows from other
investing activities 17 78 389 Cash flow before financing
activities or “Free cash flow” -189 1,421 1,575 Cash flows used in financing activities -575 -1,658 -1,102 Net increase/(decrease) of cash
and cash equivalents -764 -237 473 The cash generated by the Group’s operations remains the primary source of liquidity. However, in 2004, the Group had to use part of its accumulated cash from previous years because of insufficient cash generated by operating activities during the year (EUR 1,899 million) to finance the capital expenditures (EUR 556 million), a share buy-back of EUR 950 million, the payment of dividends to Belgacom shareholders (EUR 395 million) and to minority interests (EUR 192 million) and the reimbur-sement of long term loans (EUR 142 million).
Despite the high level of dividends (EUR 855 million), and the share buy-back of EUR 300 million, the year 2005 recorded an increase of cash and cash equivalents (EUR 473 million) princi-pally due to the cash received from the operations and the disposal of subsidiaries (EUR 237 million) and associates and other participating interests (EUR 136 million).
Fixed Line Services capital expenditures grew 44.3% year-over-year (EUR 150 million), mainly due to investments for Belgacom TV (infrastructure and content). Total investment related to Belgacom TV amounted to EUR 195 million in 2005.
Mobile Communications Services capital expenditures decreased 4.8% (EUR 10 million) year-over-year. This is explained by lower IT and GSM (2G) network related investments. The UMTS (3G) network investments have increased from EUR 51 million in 2004 up to EUR 69 million in 2005.
Capital resources
Principal amount outstanding
Size of program as of 31 December 2005 % outstanding
Euro MTN Program USD 1.0 billion None None
Short-term CP program EUR 1.0 billion EUR 18 million 1.8%
Syndicated credit facility EUR 375 million None None
Bilateral credit facilities EUR 662 million (1) EUR 46 million 6.9%
(1) Consists of EUR 451 million short-term credit facilities and EUR 211 million of long-term credit facilities.
The Group finances its development principally with the cash flows from its operations. The Group has a USD 1 billion Euro Medium Term Note program, which has no amounts
outstanding as of 31 December 2005, a EUR 1 billion short-term Commercial Paper program under which EUR 18 million was outstanding as of 31 December 2005 and a syndicated credit facility of EUR 375 million which had no amounts outstanding as of 31 December 2005. The Group also has bilateral credit faci-lities with a group of banks, with an aggregate commitment of
Capital expenditures
Year ended 31 December
2003 2004 2005 Variance 2005
versus 2004
(in EUR million) (%) (in EUR million) (%) (in EUR million) (%) (%)
Fixed Line Services 336 67 338 61 488 70 44.3
Mobile Communications Services 149 30 205 37 195 28 -4.8
International Carrier Services (1) 17 3 13 2 19 3 45.2
Intersegment eliminations (1) - - - - -6 -1
-Total 502 100 556 100 696 100 25.1
(1) In 2005, includes the irrevocable right of use (IRU) of the Belgacom network.
International Carrier Services capital expenditures include EUR 6 million related to the right to use the Belgacom network (IRU) after the transfer of the ICS activities into a subsidiary (Belgacom International Carrier Services). Excluding IRU, ICS capital expenditures decreased 2.4% (EUR 0.3 million), due to lower investments in IT development.
EUR 662 million as of 31 December 2005 and an outstanding amount of EUR 46 million as of 31 December 2005.
Access to international capital markets and its associated funding cost partly depend 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 A+ and Aa2, respectively.
comments on business segment figures
Fixed Line Services (FLS)
Year ended 31 December
(in EUR million) 2004 2005
Total segment revenue 3,092 2,961
Costs of materials and charges to revenue -593 -591 Personnel expenses and pensions -828 -788 Other operating expenses -414 -435
Total operating expenses
before depreciation and amortization -1,835 -1,814
Total segment result (1) 1,257 1,147
Segment result margin 40.7% 38.7%
Non-recurring revenue 0 238
Non-recurring expense -41 -355
Operating income
before depreciation and amortization 1,216 1,031
Depreciation and amortization -500 -492
Operating income 717 538
(1) Operating income before depreciation and amortization and before non-recurring revenue and expenses.
Segment revenue
Year ended 31 December 2004 2005 Variance Variance
(in EUR million) (%)
Retail Voice Access 931 901 -3.3 -30 Voice Traffic 802 707 -11.8 -95 Total Voice 1,733 1,608 -7.2 -125 Internet 416 448 7.7 32 Data 232 228 -1.9 -4 Other retail (1) 271 272 0.4 1
Total retail operations
revenue 2,653 2,556 -3.6 -96
National Wholesale 360 390 8.4 30
Others 80 15 -81.7 -65
Total revenue before
non-recurring items (2) 3,092 2,961 -4.2 -131
(1) Other retail mainly includes revenues from international activities and fixed business subsidiaries.
(2) Some minor product definitions were changed in 2005. Figures of the previous year have been restated accordingly.
Fixed Line Services (FLS) revenue before non-recurring items decreased 4.2% year-over-year (EUR 131 million). This was partly caused, however, by the sale of several subsidiaries in 2005 and by one-time items recorded in 2004 (for a total amount of EUR 35 million). When adjusted for the disposal of consolidated companies and 2004 one-time items, FLS revenue decreased by 2.3% (EUR 68 million).
Revenue from retail operations decreased 3.6% (EUR 96 million). Traditional fixed voice access and traffic services continued to be impacted by fierce competition and by substitution, leading to a decline of 7.2% year-over-year. Nevertheless, the launch of simpli-fied and innovative price packages (“Belgacom Happy Time” and new offers of “Belgacom No Limit”) had a positive effect on customer retention, mainly in the residential market. The voice access line loss showed a decelerating trend in the second part of 2005 (-54,619 equilines compared to -95,269 in the first half of 2005).
FLS also succeeded in increasing its voice traffic market share on the Belgacom network by 3.5 pp in 2005, compared to a loss of 6.6 pp in 2004.
Internet revenues (dial-up and broadband access and connec-tivity) grew 7.7% year-over-year.
In 2005, FLS further improved and expanded its ADSL offering (increased surfing convenience, new services and content such as music, videos, games, …) and launched a new low-cost entry-level service (“ADSL Time”). These actions resulted in a further growth of 18% of the xDSL park.
In June 2005, Belgacom launched Belgacom TV, allowing it to offer triple play (voice, internet, TV services) to its customers. At the end of 2005, 33,000 subscriptions were sold.
Data access and connectivity revenue decreased 1.9%. The growth of SDSL, outsourced network management and network integration services were unable to fully offset the decline of national leased lines revenue.
National Wholesale revenue increased 8.4% year-over-year. This was mainly driven by the growth of carrier broadband lines including carrier DSL lines, bitstream lines and unbundled lines, (+42.9%) and by increased transit traffic (+7.6%).
Other revenue decrease (-81.7% or EUR 65 million) was mainly caused by the sale of Belgacom Directory Services SA and by one-time items recorded in 2004 (EUR 35 million, related to the gain on the sale of property and a compensatory amount related to the IPO transaction).
Non-recurring revenue
In 2005, FLS recorded a non-recurring revenue of EUR 238 million with respect to the gain realized on the disposal of Belgacom Directory Services SA shares to Promedia Comm.V.
Operating expenses before depreciation
and amortization
FLS operating expenses before depreciation and amortization decreased 1.1 % year-over-year (EUR 21 million). When adjusted for the disposal of consolidated companies and 2004 one-time items (reversal of provisions for litigations amounting to EUR 30 million), FLS operating expenses before depreciation and amortization decreased 2.5% (EUR 47 million). This reduction was driven in the first place by lower HR expenses, explained by lower headcount and by other HR savings (lower charges for exit costs and lower expenses for profit distribution to employees). The evolution of other operating expenses was impacted by the launch of Belgacom TV.
Non-recurring expenses
In 2005, FLS recognized a liability for the impacts resulting from the collective agreement in respect of the work organiza-tion via a non-recurring expense, amounting to EUR 355 million. This was recorded in order to cover the financial obligations related to termination benefits and related employee benefits. In 2004, the segment recognized a liability amounting to EUR 41 million, related to employees having accepted external mobility offers.
Operating income before depreciation
and amortization (EBITDA)
FLS EBITDA decreased 15.2% year-over-year to EUR 1,031 million. Excluding non-recurring items and adjusted for the disposal of consolidated companies and 2004 one-time items, FLS EBITDA decreased 1.9% (EUR 22 million), the revenue decline being partially offset by positive effects of cost control initiatives. The adjusted EBITDA margin, and excluding non-recurring items, improved from 38.5% in 2004 to 38.7% in 2005.
Operating income (EBIT)
FLS operating income decreased 24.9% year-over-year to EUR 538 million, driven by the EBITDA evolution.
When excluding non-recurring items, FLS operating income decreased 13.6%.
Total access channels
(in thousands) Total retail and wholesale ADSL access channels (in thousands) (1)
) *%))) +%))) ,%))) -%))) .%))) /%))) ), )- ). .%+*2 .%+.+ .%+.* ) +.) .)) 0.) *%))) *%+.) *%.)) ), )- ). 02) *%),+ *%+/1
Operationals (retail)
Year ended 31 December
2004 2005 Variance
Number of access channels (in thousands) Residential PSTN 3,181 3,064 -3.7% ISDN 377 370 -1.8% ADSL 723 852 17.8% Total 4,282 4,287 0.1% Business PSTN 267 254 -5.0% ISDN 598 585 -2.2% ADSL 105 125 19.0% Total 970 964 -0.7%
Traffic (in millions of minutes) Residential National 5,239 4,949 -5.5% Fixed to Mobile 851 803 -5.6% International 385 352 -8.7% Total 6,476 6,105 -5.7% Business National 2,268 1,966 -13.3% Fixed to Mobile 513 505 -1.5% International 430 397 -7.8% Total 3,211 2,868 -10.7%
Average monthly voice revenue
per voice access channel 32.7 31.4 -4.0%
Total revenue of Mobile Communications Services (MCS) decreased 2.6% year-over-year to EUR 2,181 million.
Total service revenue increased 0.2% year-over-year thanks to the progression of data services revenue (+4.4%), driven by higher advanced data revenue (mainly business broadband mobile applications). Voice services revenue decreased 0.7% year-over-year, mainly explained by lower access revenue due to the shift to new bundled pricing plans e.g. Smile or Business Package. Data services represent 16.5% of the total service revenue, compared to 15.8% in 2004.
Net service revenue declined 2.3% year-over-year, mainly due to the promotional campaigns, designed to create more value for MCS customers. These campaigns had an effect on the amount of credits and discounts granted in 2005. With the Market Share Leadership Program, MCS was able to improve customer trends (number of active customers +55,606 in 2005, compared to -3,677 in 2004, customer activity rate 97.9% in 2005 compared to 97.1% in 2004, churn rate 16.6% in 2005 whereas this was still 18.3% in 2004).
Operating expenses before depreciation
and amortization
MCS operating expenses before depreciation and amortization increased 3.2% year-over-year, primarily impacted by higher interconnection cost of sales, higher costs linked to the Market Share Leadership Program, the USO (“Universal Service Obliga-tion”) contribution and the Vodafone fee increase.
Operating income before depreciation
and amortization (EBITDA)
MCS EBITDA decreased 8.3% year-over-year (EUR 94 million), caused by a revenue decline and higher operating expenses before depreciation and amortization.
Operating income (EBIT)
MCS operating income decreased 8.9% year-over-year to EUR 827 million, the EBITDA decline being partly compensated by lower depreciation and amortization charges.
Active mobile customers (in thousands) ) *%))) +%))) ,%))) -%))) .%))) ), -%+)* )--%*21 ). -%+.,
Mobile Communications Services (MCS)
Year ended 31 December(in EUR million) 2004 2005
Total segment revenue 2,239 2,181
Costs of materials and charges to revenue -683 -688 Personnel expenses and pensions -146 -149 Other operating expenses -275 -304
Total operating expenses before
depreciation and amortization -1,104 -1,140
Total segment result 1,135 1,041
Segment result margin 50.7% 47.7%
Operating income before depreciation
and amortization 1,135 1,041
Depreciation and amortization -227 -214
Operating income 907 827
Segment revenue
Year ended 31 December 2004 2005 Variance Variance
(in EUR million) (%)
Voice services (1) 1,851 1,839 -0.7 -12
Data services (1) 348 364 4.4 15
Total Service revenue 2,199 2,203 0.2 3
Credits and discounts -74 -126 -69.9 -52
Net Service revenue 2,125 2,077 -2.3 -49
Handsets 90 87 -3.5 -3
Other revenue 24 17 -28.1 -7
Total revenue 2,239 2,181 -2.6 -58
Operationals
In 2005, thanks to the strategy and the launch of the Market Share Leadership Program in the second quarter, main perfor-mance indicators evolved favourably despite the intensified competition.
Although the number of active customers decreased in 2004 (-3,677), this trend was reversed in 2005 and the active customer base went up again (+55,606). Compared to 2004, the churn rate was also reduced and the market share erosion slowed down significantly.
The customer portfolio was improved thanks to the positive evolution of the customer mix (with an increase of the postpaid customers versus the prepaid customers), and to an increase of almost one extra percentage point in the overall activity rate level.
Year ended 31 December
2004 2005 Variance
Number of active customers (1)
(in thousands) 4,198 4,253 1.3%
Prepaid 2,478 2,475 -0.1%
Postpaid 1,720 1,778 3.4%
Active customers as a percentage
of total customers (2) 97.1% 97.9% 0.8 p.p.
Annualized churn rate (3)
(blended - variance in p.p.) 18.3% 16.6% -1.6 p.p.
ARPU (4) (in EUR)
Prepaid 19.6 19.9 1.7%
Postpaid 71.6 71.9 0.4%
Blended 41.0 41.2 0.5%
Blended voice 34.3 34.3 0.0%
Blended data 6.7 6.9 3.4%
Net ARPU (5) (in EUR)
Prepaid 18.7 18.1 -2.9%
Postpaid 69.4 68.5 -1.4%
Blended 39.5 38.7 -2.0%
Market share of active customers (6)
Prepaid 45.5% 46.6% 1.1 p.p. Postpaid 56.4% 51.1% -5.3 p.p. Total 49.4% 48.4% -1.0 p.p. UoU (7) (units) 214.6 213.6 -0.5% MoU (8) (min) 166.3 165.8 -0.3% SMS (9) (units) 48.3 47.8 -1.0%
(1) Active customers are customers who have made or received at least one call or sent or received at least one SMS in the last three months.
(2) Percentage based on total number of Belgacom Mobile SIM cards in circulation. (3) Annualized churn is the total annualized number of SIM cards disconnected from
the Belgacom Mobile network (including the total number of port-outs due to mobile number portability) during the given period, divided by the average number of customers for that same period.
(4) ARPU has been calculated on the basis of monthly averages for the period indi-cated. Monthly blended ARPU is total service revenues, excluding roaming-in and activation revenues, divided by Belgacom Mobile’s active postpaid and prepaid customer base for that period.
(5) Net ARPU is equal to ARPU minus credits and discounts. (6) 2004 Belgacom Mobile estimate replaced by actual figure.
(7) UoU (Units of use): voice minutes of use + SMS (where 1 SMS equals 1 minute) per active customer per month.
(8) MoU (Minutes of Use): duration of all calls from or to Proximus, per active customer and per month.
Minutes transported by ICS (in billions) ) + -/ ), ,'01 )-+'/* ).!*" ,'0) ,'+. -'2--'/,
ICS segment revenue increased 10.6% over-year. The year-over-year comparison is however affected by the combination of business with Swisscom Fixnet AG as of 1 July 2005.
In 2005, voice revenue grew further, thanks to transit volume growth (mainly to mobile operators) and to fixed inbound/ outbound volumes generated by the Swiss partner. Data revenue grew strongly with new revenues from mobile data products: signalling products, SMS, MMS and GRX.
Capacity revenue increase was principally related to interna-tional leased lines (incorporated from the Swiss partner), and to the sales of a submarine cable capacity.
ICS others revenue include the gain (EUR 3.8 million) resulting from the Swisscom Fixnet AG contribution of assets measured at fair value, which are higher than the share of assets disposed of and measured at historical cost.
Operating expenses before depreciation
and amortization
ICS operating expenses before depreciation and amortization increased year-over-year by 6.8%, primarily due to higher charges to revenue (related to the revenue growth) and to higher other operating expenses resulting from the joint venture, partly offset by favourable settlements with foreign operators.
In 2004, ICS operating expenses before depreciation and amorti-zation included an impairment loss on net assets (EUR 20 million).
Operating income before depreciation and
amortization (EBITDA)
ICS EBITDA increased year-over-year by EUR 24 million. Adjusted for 2004 one-time item (impairment loss), ICS EBITDA increased 19.7% (EUR 4 million), favorably impacted by the gain resulting from the joint venture transaction.
Depreciation and amortization
The depreciation and amortization costs of the ICS segment increase from EUR 15 million in 2004 to EUR 20 million in 2005 as a result of additional depreciation (EUR 6 million) on some network assets to reflect new technology evolution (reduction of useful life).
Operating income (EBIT)
ICS operating income grew year-over-year by EUR 20 million, but 2004 operating income was impacted by an impairment loss on net assets (EUR 20 million). The EBITDA growth is partially offset by additional depreciation and amortization costs.
International Carrier Services (ICS)
Year ended 31 December(in EUR million) 2004 2005
Total segment revenue 645 713
Costs of materials and charges to revenue -564 -621 Personnel expenses and pensions -21 -20 Other operating expenses -57 -44
Total operating expenses before
depreciation and amortization -643 -686
Total segment result 2 27
Segment result margin 0.4% 3.8%
Operating income before depreciation
and amortization 2 27
Depreciation and amortization -15 -20
Operating income -13 7
From 1 July 2005, the financial results of the International Carrier Services (ICS) segment are proportionally consolidated at 72% following the contribution by Swisscom Fixnet AG of its international carrier activities into Belgacom International Carrier Services SA (BICS), in exchange of an ownership of 28% and joint control with Belgacom Group.
Segment revenue
Year ended 31 December
(in EUR million) 2004 2005 Variance
Voice 626 675 7.8%
Data 4 11 189.2%
Capacity, infrastructure
and others (1) 15 26 78.0%
Total revenues 645 713 10.6%
(1) Others include mainly revenues from telegraphy and telex. In 2005, ICS others revenue also includes the gain resulting from the joint venture transaction (EUR 3.8 million).
Year ended 31 December
(in billion of minutes) 2004 2005 (1) Variance
Total 6.95 9.57 37.8%
Total fixed 3.70 4.94 33.7%
Total mobile 3.25 4.63 42.3%
(1) BICS volumes included at 100%, from 1 July 2005 on, for the comparison.
(1) BICS volumes included at 100%, from 1 July 2005 on, for the comparison.
fixed mobile
Rights, commitments and contingencies
as of 31 December 2005
Disclosures related to rights, commitments and contingencies are reported in note 35 of the consolidated financial statements.
Use of financial instruments
Disclosures related to the use of financial instruments are reported in note 22 of the consolidated financial statements.
Research and development activities
In 2005 the research and development activities were mainly focused on improving the implementation of new video and communication services over xDSL technologies (Digital Subscriber Line). As regards service platforms, particular atten-tion was paid to video services and next generaatten-tion communica-tion services. For classical telephony, the latest state-of-the-art generic platforms were investigated, to allow Belgacom to deliver next generation voice services (voice over IP) in the future and develop these services.
Belgacom is working together with the universities and other industrial partners on a new Multimedia Content Distribution platform and a number of other projects in the field of video, multimedia and home networking.
Finally Belgacom is participating in a number of projects in I.B.B.T., the Interdisciplinair Instituut voor BreedBand Techno-logie. This institute was set up by the Flemish government for the development of Information and Communication technology (ICT) with special emphasis on broadband applications.
Treasury shares
Disclosures related to treasury shares are reported in note 16 of the consolidated financial statements.
Major risks and uncertainties
Disclosures related to major risks and uncertainties are reported in notes 22 and 35 of the consolidated financial statements.
Post-balance sheet events
Disclosures related to post-balance sheet events are reported in note 41 of the consolidated financial statements.
100 •
Note 19. Other non-current payables
100 •
Note 20. Other current payables
100 •
Note 21. Derivatives
102 •
Note 22. Financial risk management
objectives and policies
104 •
Note 23. Net revenue
104 •
Note 24. Other operating revenue
104 •
Note 25. Non-recurring revenue
104 •
Note 26. Costs of materials and charges
to revenue
104 •
Note 27. Personnel expenses and pensions
105 •
Note 28. Other operating expenses
105 •
Note 29. Non-recurring expenses
105 •
Note 30. Depreciation and amortization
105 •
Note 31. Net finance income/(costs)
105 •
Note 32. Earnings per share
106 •
Note 33. Dividends paid and proposed
106 •
Note 34. Related party disclosures
108 •
Note 35. Rights, commitments and
contingent liabilities
110 •
Note 36. Cross-border lease arrangements
110 •
Note 37. Net financial position of the Group
110 •
Note 38. Fair value of financial instruments
111 •
Note 39. Share-based payment
112 •
Note 40. Segment reporting
115 •
Note 41. Post balance sheet events
115 •
Note 42. Recent IFRS pronouncements
74 •
Consolidated income statement
75 •
Consolidated balance sheet
76 •
Consolidated cash flow statement
77 •
Consolidated statement of changes in equity
78 •
Notes to the consolidated financial statements
78 •
Note 1. Corporate information
78 •
Note 2. Significant accounting policies
83 •
Note 3. Goodwill
84 •
Note 4. Intangible assets with finite useful life
85 •
Note 5. Property, plant and equipment
86 •
Note 6. Investments in subsidiaries and joint
ventures
88 •
Note 7. Enterprises accounted for under
the equity method
88 •
Note 8. Other participating interests
89 •
Note 9. Income taxes
91 •
Note 10. Assets and liabilities for pensions,
other post-employment benefits and
termination benefits
96 •
Note 11. Other non-current assets
96 •
Note 12. Trade receivables
96 •
Note 13. Other current assets
96 •
Note 14. Investments
96 •
Note 15. Cash and cash equivalents
96 •
Note 16. Equity
97 •
Note 17. Interest-bearing liabilities
99 •
Note 18. Provisions
consolidated financial statements
(in EUR million, except per share amounts) Note 2003 2004 2005
Net revenue 23 5,377 5,415 5,384 Other operating revenue 24 78 125 74 Non-recurring revenue 25 0 0 238
Total revenue 5,454 5,540 5,696
Costs of materials and charges to revenue 26 -1,376 -1,461 -1,555 Personnel expenses and pensions 27 -1,046 -993 -957 Other operating expenses 28 -782 -693 -731 Non-recurring expenses 29 -897 -41 -355
Total operating expenses before depreciation and amortization -4,101 -3,187 -3,598
Operating income before depreciation and amortization 1,353 2,353 2,098
Depreciation and amortization 30 -787 -742 -726
Operating income 566 1,611 1,372
Finance revenue 64 37 90
Finance costs -91 -64 -26
Net finance revenue/(costs) 31 -27 -27 64
Loss from enterprises accounted for using the equity method 7 -4 -1 0
Income before taxes 534 1,583 1,436
Tax expense 9 -208 -508 -339
Net income 326 1,075 1,098
Minority interests 16 154 152 139 Net income (group share) 172 922 959 Basic earnings per share (in EUR) 32 0.43 2.57 2.78 Diluted earnings per share (in EUR) 32 0.43 2.57 2.77 Weighted average number of ordinary shares 32 399,932,160 358,612,854 345,406,186 Weighted average number of ordinary shares for diluted earnings per share 32 399,932,160 358,698,931 345,572,258
consolidated income statement
(in EUR million) Note 2003 2004 2005 ASSETS
Non-current assets 4,381 3,963 3,808
Goodwill 3 38 30 0
Intangible assets with finite useful life 4 496 471 602 Property, plant and equipment 5 2,854 2,658 2,497 Enterprises accounted for under the equity method 7 27 26 0 Other participating interests 8 209 211 198 Deferred income tax assets 9 647 476 440
Pension asset 10 6 6 5
Other non-current assets 11 104 86 65
Current assets 1,628 1,405 2,022
Inventories 49 53 61
Trade receivables 12 873 844 947 Current income tax asset 9 35 50 67 Other current assets 13 67 52 64
Investments 14 42 81 86
Cash and cash equivalents 15 562 325 798
Total assets 6,009 5,368 5,831
LIABILITIES AND EQUITY
Equity 16 2,995 2,630 2,591
Shareholders’ equity 16 2,548 2,223 2,221
Issued capital 1,000 1,000 1,000 Treasury shares -325 -271 -564 Restricted reserve 100 100 100 Remeasurement to fair value 32 59 68
Stock compensation 0 2 4
Retained earnings 1,742 1,332 1,614
Minority interests 16 446 407 370
Non-current liabilities 1,469 1,294 1,542
Interest-bearing liabilities 17 371 303 296 Liability for pensions, other post-employment benefits and termination benefits 10 840 760 1,010 Provisions 18 210 191 193 Deferred income tax liabilities 9 46 38 42 Other non-current payables 19 3 2 1
Current liabilities 1,545 1,445 1,698
Interest-bearing liabilities 17 154 58 111 Trade payables 809 782 1,038 Income tax payables 9 198 224 202 Other current payables 20 384 381 347
Total liabilities and equity 6,009 5,368 5,831
consolidated balance sheet
(in EUR million) Note 2003 2004 2005 Cash flow from operating activities
Net income 172 922 959
Adjustments for:
• Minority interests 16 154 152 139 • Depreciation and amortization on intangible assets and property, plant and equipment 4, 5 787 742 726 • Increase/(decrease) of impairment on intangible assets and property, plant and equipment 4, 5 -5 20 5 • Increase of provisions 37 9 21 • Deferred tax expense/(income) 9 -163 162 39 • Increase of impairment on participating interests 53 22 0 • Loss from investments accounted for using the equity method 7 4 1 0 • Fair value adjustments on financial instruments 1 7 3 • Gain on disposal of consolidated companies 6 0 0 -249 • Gain on disposal of other participating interests and enterprises accounted for using
the equity method 31 -5 -1 -63 • Gain on disposal of property, plant and equipment -5 -37 -12 • Other non-cash movements 0 -13 3
Operating cash flow before working capital changes 1,030 1,988 1,570
Decrease/(increase) in inventories 11 -4 -10 Decrease/(increase) in trade receivables 76 29 -169 Increase in current income tax assets -35 -15 -17 Decrease/(increase) in other current assets 10 0 -13 Increase/(decrease) in trade payables -42 -28 336 Increase/(decrease) in income tax payables 48 26 -18 Increase/(decrease) in other current payables -62 11 -23 Increase/(decrease) in net liability for pensions, other post-employment benefits
and termination benefits 10 -705 -79 249 Decrease in other non-current payables and provisions -34 -30 -22
Decrease/(increase) in working capital, net of acquisitions and disposals of subsidiaries -733 -88 313
Net cash flow provided by operating activities (1) 296 1,899 1,883
Cash flow from investing activities
Cash paid for acquisitions of intangible assets and property, plant and equipment 3, 4, 5 -502 -556 -696 Cash paid for acquisitions of other participating interests 0 0 -9 Cash paid for consolidated companies, net of cash acquired -1 0 0 Dividends received from non-consolidated companies 31 0 15 0 Cash received from sales of consolidated companies, net of cash disposed of 6 0 0 237 Cash received from sales of intangible assets and property, plant and equipment 8 60 26 Cash received from sales of other participating interests and enterprises accounted
for using the equity method and from other non-current assets 10 4 136
Net cash used in investing activities -485 -478 -308
Cash flow before financing activities -189 1,421 1,575
Cash flow from financing activities
Dividends paid to shareholders 33 -440 -395 -679 Dividends paid to minority interests 16 0 -192 -176 Net acquisition of treasury shares -325 -883 -292 Sale/(purchase) of investments 246 -43 -9 Increase of shareholders’ equity 0 0 1 Repayment of long term debt -61 -142 -56 Issuance/(repayment) of short term debt 4 -3 110
Net cash used in financing activities -575 -1,658 -1,102
Net increase/(decrease) of cash and cash equivalents -764 -237 473
Cash and cash equivalents at 1 January 1,326 562 325 Cash and cash equivalents at 31 December 15 562 325 798
(1) Net cash flow from operating activities includes the following cash movements:
Interest paid -35 -34 -21
Interest received 57 17 22
Income taxes paid -326 -239 -316
consolidated cash flow statement
consolidated statement of changes in equity
Remeasu- Stock Share-
Issued Treasury Restricted rement to Compen- Retained holders’ Minority Total
(in EUR million) capital shares reserve fair value sation Earnings Equity interests Equity
Balance at 31 December 2002 1,000 0 100 29 0 1,849 2,978 293 3,271
Fair value changes
in available-for-sale investments 0 0 0 3 0 0 3 0 3
Equity changes not recognised
in the income statement 0 0 0 3 0 0 3 0 3 Net income 0 0 0 0 0 172 172 154 326
Total recognised income and expense 0 0 0 3 0 172 176 154 329
Dividends to shareholders (relating to 2002) 0 0 0 0 0 -280 -280 0 -280 Acquisition of treasury shares 0 -325 0 0 0 0 -325 0 -325
Total transactions with equity holders 0 -325 0 0 0 -280 -605 0 -605 Balance at 31 December 2003 1,000 -325 100 32 0 1,742 2,548 446 2,995 Fair value changes in
available-for-sale investments 0 0 0 28 0 0 28 0 28
Equity changes not recognised
in the income statement 0 0 0 28 0 0 28 0 28 Net income 0 0 0 0 0 922 922 152 1.075
Total recognised income and expense 0 0 0 28 0 922 950 152 1.102
Dividends to shareholders (relating to 2003) 0 0 0 0 0 -395 -395 0 -395 Dividends of subsidiaries to minority interests 0 0 0 0 0 0 0 -192 -192 Treasury shares
• Price adjustment on treasury shares
acquired in 2003 0 22 0 0 0 0 22 0 22 • Cancellation of treasury shares
acquired in 2003 0 303 0 0 0 -303 0 0 0 • Acquisition of treasury shares 0 -950 0 0 0 0 -950 0 -950 • Sale of treasury shares under a discounted
share purchase plan 0 45 0 0 0 0 45 0 45 • Cancellation of treasury shares
acquired in 2004 0 633 0 0 0 -633 0 0 0 Stock options
• Stock options granted and accepted 0 0 0 0 5 0 5 0 5 • Deferred stock compensation 0 0 0 0 -5 0 -5 0 -5 • Amortization deferred stock compensation 0 0 0 0 2 0 2 0 2
Total transactions with equity holders 0 54 0 0 2 -1,332 -1,276 -192 -1,468 Balance at 31 December 2004 1,000 -271 100 59 2 1,332 2,223 407 2,630 Fair value changes in
available-for-sale investments 0 0 0 8 0 0 8 0 8
Equity changes not recognised
in the income statement 0 0 0 8 0 0 8 0 8 Net income 0 0 0 0 0 959 959 139 1,098
Total recognised income and expense 0 0 0 8 0 959 967 139 1,106
Dividends to shareholders (relating to 2004) 0 0 0 0 0 -679 -679 0 -679 Dividends of subsidiaries to minority interests 0 0 0 0 0 0 0 -176 -176 Treasury shares
• Exercise of stock options 0 4 0 0 0 0 4 0 4 • Acquisition of treasury shares 0 -300 0 0 0 0 -300 0 -300 • Sale of treasury shares under a discounted
share purchase plan 0 3 0 0 0 1 4 0 4 Stock options
• Stock options granted and accepted 0 0 0 0 1 0 1 0 1 • Deferred stock compensation 0 0 0 0 -1 0 -1 0 -1 • Amortization deferred stock compensation 0 0 0 0 2 0 2 0 2 • Exercise of stock options 0 0 0 0 -1 1 0 0 0
Total transactions with equity holders 0 -292 0 0 1 -677 -968 -176 -1,145 Balance at 31 December 2005 1,000 -564 100 68 4 1,614 2,221 370 2,591
notes to the consolidated financial statements
Note 1. Corporate information
The consolidated financial statements of Belgacom SA (hereafter “the Group”) at 31 December 2005, 2004 and 2003 were approved by the Board of Directors on 23 February 2006.
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 40.
The number of employees of the Group (in full time equivalents) amounted to 16,335 at 31 December 2005, 16,933 at 31 December 2004 and 17,541 at 31 December 2003.
Note 2. Significant accounting policies
Basis of preparation
The accompanying consolidated financial statements as of 31 December 2005 and for the year then ended have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted for use in the European Union. In addition, the Group has early adopted IFRS 2 “Share-Based Payment” in 2004 and IFRS 1 “First-time adoption of IFRS” in 2003 (with a transition date of 1 January 2001). The Group did not early adopt any other IASB standards or interpretations. 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 attri-butable to the risks that are being hedged.
Changes in accounting policies
The accounting policies applied are consistent with those of the previous financial years except that the Group applied the new or revised IFRS standards and interpretations as adopted by the European Union that became mandatory on or after 1 January 2005. Some minor changes in accounting policies resulted from the 13 revised standards of the IASB Improvements Project, revised IAS 19 (“Employee benefits”) and the new standards IFRS 5 (“Non-current Assets Held for Sale and Discontinued Operations”). The initial application of these revised or new standards and interpretations did not have an effect on equity and net income for the current period or each other period presented. In the notes to the financial statements, comparative figures have been amended as required by the disclosure require-ments of the revised or new standards and interpretations.
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 6 and 7 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. Inter-company 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 consoli-dated 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 requiring unanimous consent of the parties sharing control) are included using the proportionate consolida-tion method, from the date on which joint control is established and until the date on which the Group ceases to have joint control over the joint venture. The Group’s share of the assets, liabilities, expenses, income 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 influ-ence, 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 subse-quently 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 invest-ments 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 disposal within twelve months.
Judgments
In the process of applying the Group’s accounting policies, management has made the following judgments, apart from those involving estimations, which have the most significant effect on the amounts recognized in the financial statements: Cross-border lease arrangements
The Group holds several cross-border lease arrangements with foreign investors in relating to part of its fixed and mobile switches equipment. The Group determined that these arrange-ments 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. More details are given in note 36.
