Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Parent Company and
Consolidated Financial
Statements
TIM Participações S.A.
December 31, 2005 and 2004
with Report of Independent Auditors
TIM PARTICIPAÇÕES S.A.
FINANCIAL STATEMENTS
December 31, 2005 and 2004
Contents
Report of Independent Auditors | 1 | |
Audited Financial Statements: | ||
Balance Sheets | 3 | |
Statements of Income | 5 | |
Statements of Shareholders Equity | 6 | |
Statements of Changes in Financial Position | 7 | |
Notes to Financial Statements | 8 |
A free translation from Portuguese into English of the Report of Independent Auditors on financial statements prepared in Brazilian currency in accordance with the accounting practices adopted in Brazil
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
TIM Participações S.A.
1. We have audited the accompanying balance sheets of TIM Participações S.A. and the accompanying consolidated balance sheets of TIM Participações S.A. and its subsidiaries as of December 31, 2005 and 2004, and the related statements of income, of shareholders equity and of changes in financial position for the years then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements.
2. We conducted our audits in accordance with generally accepted auditing standards in Brazil which comprised: (a) the planning of our work, taking into consideration the materiality of balances, the volume of transactions and the accounting and internal control systems of the Company and its subsidiaries, (b) the examination, on a test basis, of the documentary evidence and accounting records supporting the amounts and disclosures in the financial statements, and (c) an assessment of the accounting practices used and significant estimates made by the Companys and subsidiaries management, as well as an evaluation of the overall financial statement presentation.
3. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of TIM Participações S.A. and the consolidated financial position of TIM Participações S.A. and its subsidiaries at December 31, 2005 and 2004, and the results of their operations, changes in their shareholders equity and changes in their financial position for the years then ended, in conformity with the accounting practices adopted in Brazil.
1
4. Our audits were conducted with the objective of expressing an opinion on the financial statements referred to in the first paragraph above. The statements of cash flows (company and consolidated) and value added (company and consolidated) for the year ended December 31, 2005, prepared in accordance with the accounting practices adopted in Brazil, are presented to provide additional information on the Company, and are not a required component of the financial statements. This supplementary information was submitted to the same audit procedures described in the second paragraph above and, in our opinion is fairly presented, in all material respects, in relation to the basic financial statements taken as a whole.
Rio de Janeiro, January 18, 2006
ERNST & YOUNG
Auditores Independentes S.S.
CRC-2SP015199/0-6-F-RJ
Mauro Moreira
Accountant CRC-1RJ072056/O-0
2
A free translation from Portuguese into English of the financial statements prepared in accordance with the accounting practices adopted in Brazil
TIM PARTICIPAÇÕES S.A.
BALANCE SHEETS
December 31, 2005 and 2004
(In thousands of reais)
Parent company | Consolidated | |||||||
2005 | 2004 | 2005 | 2004 | |||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | 5,972 | 1,299 | 1,281,768 | 856,332 | ||||
Accounts receivable | - | - | 723,335 | 608,122 | ||||
Inventories | - | - | 81,880 | 47,200 | ||||
Taxes and contributions recoverable | 18,167 | 13,587 | 114,065 | 91,154 | ||||
Deferred income and social contribution | ||||||||
taxes | 1,137 | 1,512 | 103,118 | 108,706 | ||||
Dividends and interest on capital | ||||||||
recoverable | 146,776 | 126,037 | - | - | ||||
Prepaid expenses | - | - | 6,321 | 1,195 | ||||
Other current assets | 294 | 474 | 2,952 | 3,638 | ||||
172,346 | 142,909 | 2,313,439 | 1,716,347 | |||||
Noncurrent assets | ||||||||
Taxes and contributions recoverable | 6,873 | - | 69,946 | 46,750 | ||||
Deferred income and social contribution | ||||||||
taxes | 2,312 | 2,156 | 117,478 | 163,114 | ||||
Related parties | - | 108 | 18,618 | 397 | ||||
Escrow deposits | 447 | 341 | 26,278 | 30,291 | ||||
Other noncurrent assets | 13 | - | 4,706 | 1,505 | ||||
9,645 | 2,605 | 237,026 | 242,057 | |||||
Permanent assets | ||||||||
Investments | 2,727,775 | 2,012,656 | 8,310 | 9,890 | ||||
Property, plant and equipment | - | - | 1,826,288 | 1,627,862 | ||||
2,727,775 | 2,012,656 | 1,834,598 | 1,637,752 | |||||
Total assets | 2,909,766 | 2,158,170 | 4,385,063 | 3,596,156 | ||||
3
Parent company | Consolidated | |||||||
2005 | 2004 | 2005 | 2004 | |||||
Liabilities and shareholders equity | ||||||||
Current liabilities | ||||||||
Suppliers | 3,364 | 797 | 1,056,721 | 691,022 | ||||
Loans and financing | - | - | 25,707 | 62,872 | ||||
Salaries and related charges | 1,379 | 755 | 22,685 | 20,842 | ||||
Taxes, charges and contributions | 20,909 | 15,806 | 157,666 | 153,563 | ||||
Concessions payable | - | - | 8,741 | 11,361 | ||||
Dividends and interest on capital | ||||||||
payable | 131,178 | 79,017 | 141,606 | 114,678 | ||||
Related parties | - | 34,948 | 45,042 | 2,944 | ||||
Other current liabilities | 194 | - | 21,909 | 21,238 | ||||
157,024 | 131,323 | 1,480,077 | 1,078,520 | |||||
Noncurrent liabilities | ||||||||
Loans and financing | - | - | 105,076 | 41,220 | ||||
Taxes, charges and contributions | - | - | 4,634 | 26,005 | ||||
Provision for contingencies | 3,215 | 2,643 | 42,787 | 32,602 | ||||
Supplementary pension plan | 3,584 | 3,697 | 3,584 | 3,697 | ||||
Concessions payable | - | - | 2,962 | - | ||||
6,799 | 6,340 | 159,043 | 103,524 | |||||
Minority interests | - | - | - | 393,605 | ||||
Shareholders equity | ||||||||
Capital | 1,472,075 | 884,504 | 1,472,075 | 884,504 | ||||
Capital reserves | 192,081 | 240,634 | 192,081 | 240,634 | ||||
Income reserves | 1,081,787 | 895,369 | 1,081,787 | 895,369 | ||||
2,745,943 | 2,020,507 | 2,745,943 | 2,020,507 | |||||
Total liabilities and shareholders equity | 2,909,766 | 2,158,170 | 4,385,063 | 3,596,156 | ||||
4
TIM PARTICIPAÇÕES S.A.
STATEMENTS OF INCOME
Years ended December 31, 2005 and 2004
(In thousands of reais, except earnings per share, expressed in reais)
Parent company | Consolidated | |||||||
2005 | 2004 | 2005 | 2004 | |||||
Gross revenues | ||||||||
Telecommunications services | - | - | 3,169,742 | 2,782,403 | ||||
Sale of goods | - | - | 733,530 | 646,772 | ||||
- | - | 3,903,272 | 3,429,175 | |||||
Deductions from gross revenues | - | - | (985,057) | (864,543) | ||||
Net revenues | - | - | 2,918,215 | 2,564,632 | ||||
Cost of services rendered | - | - | (841,102) | (784,233) | ||||
Cost of goods sold | - | - | (536,470) | (513,662) | ||||
Gross profit | - | - | 1,540,643 | 1,266,737 | ||||
Operating income (expenses): | ||||||||
Selling | - | - | (798,106) | (647,277) | ||||
General and administrative | (18,328) | (20,764) | (185,946) | (182,442) | ||||
Equity pickup | 463,407 | 334,788 | - | - | ||||
Amortization of goodwill on privatization | - | - | (50,450) | (50,450) | ||||
Amortization of concessions | - | - | (9,295) | (8,626) | ||||
Other operating income (expenses) | (1,360) | (4,182) | (16,014) | 10,164 | ||||
443,719 | 309,842 | (1,059,811) | (878,631) | |||||
Income before financial results | 443,719 | 309,842 | 480,832 | 388,106 | ||||
Financial income (expenses): | ||||||||
Financial income | 3,274 | 1,938 | 158,546 | 133,613 | ||||
Financial expenses | (11,175) | (10,130) | (83,634) | (68,801) | ||||
Foreign exchange variation, net | ,010 | - | (2,482) | (4,241) | ||||
(7,891) | (8,192) | 72,430 | 60,571 | |||||
Operating income | 435,828 | 301,650 | 553,262 | 448,677 | ||||
Non-operating loss | - | (4,997) | (2,260) | (4,592) | ||||
Income before income and social contribution taxes | ||||||||
and minority interests | 435,828 | 296,653 | 551,002 | 444,085 | ||||
Provision for income and social contribution taxes | (1,339) | (9,781) | (130,338) | (108,037) | ||||
Income before minority interests | 434,489 | 286,872 | 420,664 | 336,048 | ||||
Minority interests | - | - | (21,464) | (70,113) | ||||
Net income for the year | 434,489 | 286,872 | 399,200 | 265,935 | ||||
Earnings per thousand shares outstanding at year-end | ||||||||
(R$) | 0.49 | 0.41 | ||||||
5
TIM PARTICIPAÇÕES S.A.
STATEMENTS OF SHAREHOLDERS EQUITY
(PARENT COMPANY)
Years ended December 31, 2005 and 2004
(In thousands of reais)
Capital reserves | Income reserves | |||||||||||||||||
Reserve | ||||||||||||||||||
for | ||||||||||||||||||
Special | future | Unearned | ||||||||||||||||
goodwill | capital | Legal | Dividends | income | Expansion | Retained | ||||||||||||
Capital | reserve | increase | reserve | payable | reserve | reserve | earnings | Total | ||||||||||
Balances at December 31, 2003 | 369,163 | 148,565 | - | 29,835 | - | - | 379,423 | - | 926,986 | |||||||||
Capital increase with transfer of reserve | 87,102 | (27,102) | - | - | - | (60,000) | - | - | ||||||||||
Capital and reserves increase with incorporation | ||||||||||||||||||
of net assets: | ||||||||||||||||||
Tele Nordeste Celular Participações S.A. | 428,239 | 119,171 | 32,839 | 2,300 | 18,838 | 280,194 | - | 881,581 | ||||||||||
Realization of special dividends reserve | - | - | - | (2,300) | - | - | - | (2,300) | ||||||||||
Net income for the year | - | - | - | - | - | - | 286,872 | 286,872 | ||||||||||
Allocation of net income for the year: | ||||||||||||||||||
Legal reserve | - | - | 14,343 | - | - | - | (14,343) | - | ||||||||||
Interest on capital | - | - | - | - | - | - | (30,000) | (30,000) | ||||||||||
Dividends | - | - | - | - | - | - | (42,632) | (42,632) | ||||||||||
Expansion reserve | - | - | - | - | - | 199,897 | (199,897) | - | ||||||||||
Balances at December 31, 2004 | 884,504 | 240,634 | - | 77,017 | - | 18,838 | 799,514 | - | 2,020,507 | |||||||||
Capital increase with transfer of reserve | 170,496 | (54,954) | - | - | - | - | (115,542) | - | - | |||||||||
Capital increase with incorporation of shares: | ||||||||||||||||||
TIM Sul S.A | 208,220 | - | - | - | - | - | - | - | 208,220 | |||||||||
TIM Nordeste Telecomunicações S.A. | 206,849 | - | - | - | - | - | - | - | 206,849 | |||||||||
Capital increase related to stock option plan | 2,006 | - | - | - | - | - | - | - | 2,006 | |||||||||
Capital reserve increase | - | 6,401 | - | - | - | - | - | 6,401 | ||||||||||
Realization of unearned income reserve | - | - | - | - | - | (18,838) | - | - | (18.838) | |||||||||
Net income for the year | - | - | - | - | - | - | - | 434,489 | 434,489 | |||||||||
Allocation of net income for the year: | ||||||||||||||||||
Legal reserve | - | - | - | 21,724 | - | - | - | (21,724) | - | |||||||||
Interest on capital | - | - | - | - | - | - | - | (70,000) | (70,000) | |||||||||
Dividends | - | - | - | - | - | - | - | (43,691) | (43,691) | |||||||||
Expansion reserve | - | - | - | - | - | - | 299,074 | (299,074) | - | |||||||||
Balances at December 31, 2005 | 1,472,075 | 185,680 | 6,401 | 98,741 | - | - | 983,046 | - | 2,745,943 | |||||||||
6
TIM PARTICIPAÇÕES S.A.
STATEMENTS OF CHANGES IN FINANCIAL POSITION
Years ended December 31, 2005 and 2004
(In thousands of reais)
Parent company | Consolidated | |||||||
2005 | 2004 | 2005 | 2004 | |||||
Sources of working capital | ||||||||
Net income for the year | 434,489 | 286,872 | 399,200 | 265,935 | ||||
Amounts which do not affect working capital: | ||||||||
Exchange and monetary variation and interest | (875) | 2,640 | 1,748 | 9,038 | ||||
Provision for contingencies | ,572 | 2,589 | 6,676 | 11,678 | ||||
Equity pickup | (463,407) | (334,788) | - | - | ||||
Depreciation and amortization | 1,582 | 2,472 | 481,907 | 332,534 | ||||
Residual value of fixed asset disposals | - | 1,794 | 5,723 | 1,643 | ||||
Gain on investments | - | 5,950 | - | - | ||||
Minority interests | - | - | 21,464 | 45,526 | ||||
Pension supplementation | (113) | (36) | (113) | (36) | ||||
Total from operations | (27,752) | (32,507) | 916,605 | 666,318 | ||||
From shareholders | ||||||||
Capital subscription | 417,075 | - | 417,075 | - | ||||
Capital reserve increase | 6,401 | - | 6,401 | - | ||||
From subsidiaries | ||||||||
Dividends receivable | 61,775 | 65,591 | - | - | ||||
Interest on capital receivable | 100,000 | 71,112 | - | - | ||||
Effect of merger with Tele Nordeste Celular Partic. S.A.: | ||||||||
Noncurrent assets | - | (884) | - | (101,958) | ||||
Investment | - | (889,316) | - | - | ||||
Property, plant and equipment | - | (2,621) | - | (662,453) | ||||
Noncurrent liabilities | - | 18,604 | - | 53,195 | ||||
Minority interests | - | - | - | 165,891 | ||||
Net assets | - | 881,581 | - | 881,579 | ||||
585,251 | 144,067 | 423,476 | 336,254 | |||||
From third parties | ||||||||
Decrease in noncurrent assets | 1,792 | 23,066 | 202,958 | 156,445 | ||||
Increase in noncurrent liabilities | - | 24,511 | 3,509 | 26,665 | ||||
New loans and financing | - | - | 85,349 | - | ||||
Tax incentive ADENE | - | - | 35,289 | 25,611 | ||||
1,792 | 47,577 | 327,105 | 208,721 | |||||
Total sources | 559,291 | 159,137 | 1,667,186 | 1,211,293 | ||||
Applications of working capital | ||||||||
Acquisition of fixed assets | - | - | 684,474 | 586,355 | ||||
Increase in investments with company merger | 415,069 | - | - | - | ||||
Increase in noncurrent assets | 7,957 | 15,925 | 197,463 | 135,646 | ||||
Decrease in noncurrent liabilities | 45,950 | 42,116 | 110,879 | |||||
Minority interests | - | - | 415,069 | - | ||||
Dividends | 62,529 | 44,932 | 62,529 | 44,932 | ||||
Interest on capital | 70,000 | 30,000 | 70,000 | 30,000 | ||||
Total applications | 555,555 | 136,807 | 1,471,651 | 907,812 | ||||
Increase in working capital | 3,736 | 22,330 | 195,535 | 303,481 | ||||
Changes in working capital: | ||||||||
Current assets | ||||||||
At end of year | 172,346 | 142,909 | 2,313,439 | 1,716,347 | ||||
At beginning of year | 142,909 | 47,220 | 1,716,347 | 752,695 | ||||
29,437 | 95,689 | 597,092 | 963,652 | |||||
Current liabilities | ||||||||
At end of year | 157,024 | 131,323 | 1,480,077 | 1,078,520 | ||||
At beginning of year | 131,323 | 57,964 | 1,078,520 | 418,349 | ||||
25,701 | 73,359 | 401,557 | 660,171 | |||||
Increase in working capital | 3,736 | 22,330 | 195,535 | 303,481 | ||||
7
TIM PARTICIPAÇÕES S.A.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005 and 2004
(In thousands of reais)
1. Operations
TIM Participações S.A., with registered office located at Avenida das Américas, 3.434 building 1, 7th floor part, Rio de Janeiro Rio de Janeiro state, is a listed entity directly controlled by TIM Brasil Serviços e Participações S.A., a company of the Telecom Italia Group, which has the ownership of 50.33% of the voting capital and 19.88% of the total capital, of which the business purpose is to control companies carrying out telecommunications services, including mobile telephony services, among others, in the areas of their concessions and/or authorizations.
The Company has the controlling ownership of TIM Sul S.A. and TIM Nordeste Telecomunicações S.A. TIM Sul S.A. provides mobile telephony services in the states of Paraná (except for the cities of Londrina and Tamarana), Santa Catarina and in the cities of Pelotas, Capão do Leão, Morro Redondo and Turuçu, in the state of Rio Grande do Sul. TIM Nordeste Telecomunicações S.A. provides mobile telephony services in the states of Alagoas, Ceará, Piauí, Rio Grande do Norte, Paraíba and Pernambuco.
Services provided by the subsidiaries and the respective rates are regulated by ANATEL (Agência Nacional de Telecomunicações), regulatory authority of telecomunications in Brazil.
2. Corporate Reorganization
a) Corporate merger
On June 1, 2004, Tele Celular Sul Participações S.A. and Tele Nordeste Celular Participações S.A., subsidiaries of TIM Brasil Serviços e Participações S.A., released significant information stating that their Boards of Directors authorized the Protocol and Justification of Merger, which proposed the merger of Tele Nordeste Celular Participações S.A. by Tele Celular Sul Participações S.A.
On August 30, 2004, with ANATEL approval, the Shareholders General Meeting of Tele Celular Sul Participações S.A. approved the proposal of the Board of Directors for the merger of net assets of Tele Nordeste Celular Participações S.A. at book value. In such meeting, Tele Celular Sul Participações S.A. was renamed TIM Participações S.A.
Net assets were included in the merging companys equity through the transfer of credit and debit balances on a line by line basis. Accordingly, the merging companys results include the revenues and expenses of the merged company until the base date of the merger (June 30, 2004).
8
2. Corporate Reorganization (Continued)
b) Incorporation of shares of TIM Sul S.A and TIM Nordeste Telecomunicações S.A.
On April 26, 2005, TIM Participações S.A. released significant information stating that its Boards of Directors authorized the Protocol and Justification of Merger, which proposed the incorporation of all the shares of TIM Sul S.A and TIM Nordeste Telecomunicações S.A by TIM Participações S.A.
On May 30, 2005, the Extraordinary General Meetings of TIM Sul S.A, TIM Nordeste Telecomunicações S.A. and TIM Participações S.A. approved the incorporation of all the shares of TIM Sul S.A. and TIM Nordeste Telecomunicações S.A. by TIM Participações S.A., making the companies into wholly-owned subsidiaries of TIM Participações S.A.
This operation intended to concentrate liquidity of the shares of the three companies into only one company, TIM Participações S.A., as well as to reduce expenses related to controls and the maintenance of several shareholders in different companies.
The withdrawing right of shareholders holding common shares of TIM Participações S.A., as well as that of minority shareholders of TIM Sul S.A. and TIM Nordeste Telecomunicações S.A., expired on July 1, 2005. The amount disbursed by the companies for payment of the dissident minority was of R$ 0.8, represented by 153,861 common shares and 154,407 preferred shares.
3. Presentation of the Financial Statements
a) Basis of presentation
The parent company and consolidated financial statements were prepared in accordance with the accounting practices adopted in Brazil and the rules applicable to concessionaires of public telecommunications services as well as the rules and accounting procedures established by the Brazilian Securities Commission (CVM).
TIM Participações S.A. is a publicly-traded company, with American Depositary Receipts being traded on the New York stock exchange USA. Based on that, the Company is subject to the rules of the Security Exchange Commission (SEC) and, aiming to meet market needs, the Company adopts the procedure to disclose information simultaneously to both markets in Brazilian reais, in Portuguese and English.
9
3. Presentation of the Financial Statements (Continued)
b) Consolidated Financial Statements
The consolidated financial statements include assets, liabilities and the result of operations of the Company and its subsidiaries, which are as follows:
Ownership % | ||||
2005 | 2004 | |||
TIM Sul S.A. | 100.00 | 81.73 | ||
TIM Nordeste Telecomunicações S.A. | 100.00 | 81.75 |
The main consolidation procedures are as follows:
I. Elimination of asset and liability accounts among the consolidated companies;
II. Elimination of the participation in capital, reserves and retained earnings of the subsidiaries;
III. Elimination of revenues and expenses generated by transactions among the consolidated companies;
IV. Separate disclosure of the minority
interest participation in the consolidated financial statements, where applicable.
Reconciliation of the results of operations is set out below:
2005 | 2004 | |||
Parent company | 434,489 | 286,872 | ||
ADENE tax incentive directly recorded in shareholders' | ||||
equity of subsidiary TIM Nordeste Telecomunicações S.A. | (35,289) | (20,937) | ||
Consolidated | 399,200 | 265,935 | ||
c) Comparability of the financial statements
To allow better comparison with the financial statements for the current year, certain reclassifications were made in the financial statements for 2004. However, the amount of said reclassifications is not material in relation to the financial statements, as such, are not being disclosed.
10
4. Summary of Accounting Practices
a) Cash and cash equivalents
These represent cash and bank balances and short-term investments, recorded at cost, plus interest accrued up to the balance sheet date.
b) Accounts receivable
Accounts receivable from mobile telephone subscribers are calculated at the tariff rate on the date the services were rendered. Accounts receivable also include services provided to customers up to the balance sheet date but not yet invoiced and receivables from sales of handsets and accessories.
c) Allowance for doubtful accounts
The allowance for doubtful accounts is recorded based on the customer base profile, the aging of overdue accounts, the economic scenario and the risks involved in each case. The allowance amount is considered sufficient to cover possible losses on the receivables.
d) Inventories
Refer to cellular handsets and accessories, which are stated at average acquisition cost, and does not exceed replacement cost. A provision to adjust the slow-moving items balance to the related realization value was recorded.
e) Investments
Investments in subsidiaries are carried under the equity method based on the subsidiaries equity at the balance sheet date and consistent with the accounting practices adopted by the Company.
Other investments are stated at acquisition cost, reduced to their realization value, when applicable.
f) Property, plant and equipment
Property, plant and equipment is stated at acquisition and/or construction cost, less accumulated depreciation calculated based on the straight-line method at rates that take into consideration the estimated useful lives of the assets. Repair and maintenance costs which extend the useful lives of the related assets are capitalized, while other routine costs are charged to the result of operations.
Interest computed on debts that finance the construction of property, plant and equipment, is capitalized until the related assets become operational.
11
4. Summary of Accounting Practices (Continued)
f) Property, plant and equipment (Continued)
Noncurrent assets, mainly property, plant and equipment, are periodically reviewed for possible impairment.
The useful lives of all property, plant and equipment items are regularly reviewed to reflect any technological changes.
g) Income and social contribution
Income tax is calculated based on the taxable income for the period, as determined by current legislation. Social contribution is calculated based on prevailing tax rates, considering pretax income.
The subsidiary TIM Nordeste Telecomunicações S.A., through Certificates (Laudos Constitutivos) No. 0144/2003 and No. 0232/2003, issued on March 31, 2003 by the Agency for Development of the Northeast Region of Brazil - ADENE, became eligible to the following tax incentives: (i) 75% reduction in income tax and non-refundable surtaxes, for 10 (ten) years, from 2002 to 2011, calculated on profit from tax incentive activities ("lucro da exploração") resulting from implementation of their installed capacity to render digital mobile telephony services; and (ii) reduction by 37.5%, 25% and 12.5% in income tax and refundable surtaxes, for fiscal years 2003, 2004 to 2008 and 2009 to 2013, respectively, calculated on profit from tax incentive activities resulting from the installed capacity for rendering analogical mobile telephony services.
Income tax is calculated based on the taxable income for the period, as determined by current legislation. Social contribution is calculated based on prevailing tax rates, considering pretax income. Deferred taxes are recognized on temporary differences and income and social contribution tax losses, when applicable. The amount of the aforementioned tax benefit of income tax reduction is recorded as a reduction in the provision for income tax payable, against capital reserve tax incentive, in shareholders equity of the subsidiary TIM Nordeste Telecomunicações S.A.
Deferred taxes related to temporary differences and tax losses are recorded as current and noncurrent assets, and the expected realization is supported by projected future taxable income, which is reviewed every year and properly approved by Companys management.
12
4. Summary of Accounting Practices (Continued)
h) Loans and financing
Loans and financing include accrued interest to the balance sheet date. The Companys subsidiaries are party to certain derivative instruments, related to its U.S. dollar denominated liabilities with the objective of hedging themselves against risks associated with unexpected real/U.S. dollar exchange rates. Additionally, the subsidiaries also are party to certain derivative instruments with the objective of heding themselves against risk associated to variations of market interest rates. Gains and losses from such operations are recognized in the statement of income under the accrual method, based on the rates established in the contracts.
i) Provision for contingencies
The provision for contingencies is recorded based on estimates which take into consideration the opinion of the Company and its subsidiaries management and of their legal advisors, and is recorded based on the probable losses at the end of the claims.
j) Revenue recognition
Service revenues are recognized as the services are provided. Billings are monthly recorded. Unbilled revenues from the last billing date to a client and the month end are measured and recognized during the month in which the service was provided. Revenues from pre-paid telecommunication services are deferred and recorded to income in the period in which they are utilized. Revenues from the sale of handsets and accessories are recognized as the products are delivered to and accepted by end consumers or distributors.
k) Financial income (expenses)
It represents interest and exchange and monetary variations related to marketable securities, hedge contracts, loans and financing received and granted.
l) Pension plans
The Company and its subsidiaries record the adjustments related to the obligations of the employees pension plan in conformity with the rules established by IBRACON NPC 26, approved by CVM Instruction No. 371.
m) Minority interests
Minority interests correspond to the interest of the minority shareholders in the subsidiaries. On May 30, 2005, the subsidiaries were converted into wholly-owned subsidiaries of the Company.
13
4. Summary of Accounting Practices (Continued)
n) Use of estimates
The preparation of financial statements in conformity with accounting practices adopted in Brazil requires management to make estimates and assumptions concerning the amounts of recorded assets and liabilities and the disclosure of contingent assets and liabilities at the Financial Statements date, as well as the estimation of revenues and expenses for the period. The actual results may differ from those estimates.
o) Foreign currency transactions
Transactions in foreign currency are recorded at the rate of exchange prevailing of the transaction date. Foreign currency denominated assets and liabilities are translated into reais using the exchange rate of the balance sheet date, which is reported by the Central Bank of Brazil. Exchange gains and losses are recognized in the statement of income as they occur.
p) Employees profit sharing
The Company and its subsidiaries record a provision for employees profit sharing, based on the targets disclosed to its employees and approved by the Board of Directors. The related amounts are recorded as personnel expenses and allocated to profit and loss accounts considering each employees cost center.
q) Interest on capital
Interest on capital paid and/or payable are recorded against financial expenses, which, for financial reporting purposes, are reclassified and disclosed as appropriation of net income for the year, in the statement of shareholders equity. Interest on capital received and/or receivable are recorded against financial income, which are reclassified and disclosed as equity pickup. For presentation purposes, impacts on the result of operations are eliminated, and the reduction is presented in the investments account.
r) Supplemental information
In order to provide additional information, the following are being presented: a) statement of cash flows, prepared according to the Accounting Rules and Procedures NPC 20 issued by IBRACON, and; b) value added statement, prepared according to Resolution CFC #1.010.
14
5. Cash and Cash Equivalents
Parent company | ||||
2005 | 2004 | |||
Cash and banks | 55 | 1,033 | ||
Short-term investments | 5,917 | 266 | ||
5,972 | 1,299 | |||
Consolidated | ||||
2005 | 2004 | |||
Cash and banks | 30,124 | 89,873 | ||
Short-term investments | 1,251,644 | 766,459 | ||
1,281,768 | 856,332 | |||
The balance of short-term investments of the Company is backed by government securities (LFTs and LTNs). The balance of short-term investments of the subsidiaries also include Bank Deposit Certificates (CDB) issued by first tier banks, with interest of 101.47% of Interbank Deposit Certificates (CDI) variation.
These investments can be withdrawn at any time, with no impact on recorded yield.
6. Accounts Receivable
Consolidated | ||||
2005 | 2004 | |||
Services billed | 233,948 | 230,208 | ||
Unbilled services | 123,621 | 95,922 | ||
Network use | 176,810 | 129,393 | ||
Sale of handsets | 258,513 | 216,906 | ||
792,892 | 672,429 | |||
Allowance for doubtful accounts | (69,557) | (64,307) | ||
723,335 | 608,122 | |||
Annually, the criteria for determining the allowance for doubtful accounts are reviewed in order to reflect the current risk scenario related to accounts receivable.
15
7. Inventories
Consolidated | ||||
2005 | 2004 | |||
Cellular handsets | 78,435 | 47,424 | ||
Accessories and kits for prepaid cards | 1,770 | 1,885 | ||
TIM "chips" | 9,100 | 3,373 | ||
89,305 | 52,682 | |||
Provision for adjustment to realization value | (7,425) | (5,482) | ||
81,880 | 47,200 | |||
8. Taxes and Contributions Recoverable
Parent company | ||||
2005 | 2004 | |||
Income tax | 9,609 | 2,771 | ||
Social contribution tax | 9 | 9 | ||
Withholding income tax (IRRF) on interest on capital | 15,000 | 10,667 | ||
IRRF recoverable | 422 | 140 | ||
25,040 | 13,587 | |||
Current | (18,167) | (13,587) | ||
Noncurrent | 6,873 | - | ||
Consolidated | ||||
2005 | 2004 | |||
Income tax | 18,761 | 12,335 | ||
Social contribution tax | 3,691 | 2,883 | ||
ICMS | 111,841 | 84,854 | ||
PIS/COFINS | 18,080 | 17,907 | ||
IRRF on interest on capital | 15,000 | 10,667 | ||
IRRF recoverable | 14,657 | 8,344 | ||
Other | 1,981 | 914 | ||
184,011 | 137,904 | |||
Current | (114,065) | (91,154) | ||
Noncurrent | 69,946 | 46,750 | ||
16
8. Taxes and Contributions Recoverable (Continued)
The noncurrent portion refers to recoverable income tax at the parent company level, and also refers to ICMS on fixed assets of the subsidiaries at the consolidated level.
9. Income and Social Contribution Taxes
The deferred income and social contribution taxes are comprised as follows:
Parent company | ||||
2005 | 2004 | |||
Tax loss carryforwards income tax | 650 | 1,009 | ||
Tax loss carryforwards social contribution tax | 234 | 363 | ||
Provision for contingencies | 1,093 | 899 | ||
Provision for pension plan | 1,218 | 1,257 | ||
Provision for employees profit sharing | 254 | 140 | ||
3,449 | 3,668 | |||
Current | (1,137) | (1,512) | ||
Noncurrent | 2,312 | 2,156 | ||
Consolidated | ||||
2005 | 2004 | |||
Goodwill on privatization | 383,322 | 531,704 | ||
Reversal of the provision for integrity of equity | (252,992) | (350,924) | ||
Tax credit from merger | 130,330 | 180,780 | ||
Tax loss carryforwards - income tax | 5,912 | 25,639 | ||
Tax loss carryforwards social contribution tax | 2,149 | 9,250 | ||
Depreciation of free lease handsets | 21,832 | 16,192 | ||
Allowance for doubtful accounts | 23,649 | 21,865 | ||
Provision for contingencies | 14,548 | 8,067 | ||
Accelerated depreciation of TDMA equipment | 14,682 | 4,663 | ||
Provision for pension plans | 1,218 | 1,257 | ||
Provision for employees profit sharing | 3,158 | 1,551 | ||
Other provisions | 3,118 | 2,556 | ||
220,596 | 271,820 | |||
Current | (103,118) | (108,706) | ||
Noncurrent | 117,478 | 163,114 | ||
The Company and its subsidiary TIM Sul S.A., based on the expectation of future taxable profit generation, recognize tax credits arising from tax loss related to income and social contribution taxes carried forward from prior years, which have no expiration date. The use of these tax credits is limited to 30% of the annual taxable income.
17
9. Income and Social Contribution Taxes (Continued)
The deferred tax asset related to the tax credit resulting from merger refers to the future tax benefit, as a consequence of the restructuring plan started in 2000. The matching account of the referred tax benefit is a special reserve for goodwill in shareholders equity and is realized based on the estimated future profitability and the time of the concession, which is expected to terminate in 2008. The goodwill amortization is recorded in the statement of income.
In 2005, R$50,450 (R$50,450 in 2004) related to such goodwill were realized. Also under the terms of the restructuring plan, the effective tax benefit for each fiscal year will be subsequently capitalized in the name of the controlling shareholder. The minority shareholders are ensured of preemptive right on acquisition of an amount proportional to the new capital of the controlling shareholder. The special goodwill reserve recorded by the Companys subsidiary represents the parent companys right on future capitalization (see Note 20-b).
In accordance with projections made by the subsidiaries management, the noncurrent portion of deferred taxes will be realized as follows:
Consolidated | |
2007 | 88,048 |
2008 | 29,430 |
117,478 | |
Income and social contribution tax expenses are as follows: | ||||||||
Parent company | Consolidated | |||||||
2005 | 2004 | 2005 | 2004 | |||||
Current income tax | (818) | (3,589) | (95,208) | (68,648) | ||||
Current social contribution tax | (302) | (1,301) | (34,355) | (25,189) | ||||
(1,120) | (4,890) | (129,563) | (93,837) | |||||
Deferred income tax | (161) | (3,596) | (570) | (10,762) | ||||
Deferred social contribution tax | (58) | (1,295) | (205) | (3,438) | ||||
(219) | (4,891) | (775) | (14,200) | |||||
(1,339) | (9,781) | (130,338) | (108,037) | |||||
18
9. Income and Social Contribution Taxes (Continued)
The reconciliation between income and social contribution tax expenses, tax expense calculated based on combined statutory rates, and the amount recorded in the statement of income, is as follows:
Parent company | ||||
2005 | 2004 | |||
Income before income and social contribution taxes | 435,828 | 296,653 | ||
Combined statutory rate | 34% | 34% | ||
Income and social contribution taxes at combined statutory rate | (148,182) | (100,862) | ||
(Additions)/Exclusions: | ||||
Equity pickup (net of interest on capital) | 147,358 | 89,650 | ||
Amortization of goodwill reserve | (537) | (537) | ||
Other | 22 | 1,968 | ||
146,843 | 91,081 | |||
Income and social contribution taxes debited to income for the year | (1,339) | (9,781) | ||
Effective rate | 0.31% | 3.30% | ||
Consolidated | ||||
2005 | 2004 | |||
Income before income and social contribution taxes | 551,002 | 444,085 | ||
Combined statutory rate | 34% | 34% | ||
Income and social contribution taxes at combined statutory rate | (187,341) | (150,989) | ||
(Additions)/Exclusions: | ||||
Realization of the provision for equity integrity | 33,297 | 33,297 | ||
Interest on capital | 23,800 | 10,200 | ||
Exclusion of balances of provisions | 4,516 | - | ||
Amortization of goodwill reserve | (537) | (537) | ||
Other | (4,073) | (8) | ||
57,003 | 42,952 | |||
Income and social contribution taxes debited to income for the year | (130,338) | (108,037) | ||
Effective rate | 23.65% | 24.33% | ||
19
10. Related Parties
The balances and transactions with related parties at December 31, 2005 are as follows:
Parent company
Assets | Liabilities | Income | Expense | |||||||
Total | Total | Total | Total | Total | ||||||
2004 | 2004 | 2004 | 2005 | 2004 | ||||||
TIM Nordeste Telecom. S.A. | - | 17,265 | 15,755 | 246 | 1,381 | |||||
TIM Sul S.A. | 108 | 17,683 | 1,071 | 356 | 991 | |||||
Total | 108 | 34,948 | 16,826 | 602 | 2,372 | |||||
Loan agreement
In January 2005, loan agreements with subsidiaries were settled. These agreements borne interest of 104.22% of Interbank Deposit Certificate (CDI) variation.
Consolidated
Assets | ||||||||
Accounts | Accounts | |||||||
receivable | receivable | |||||||
Network | Sales of | Total | Total | |||||
use | handsets | 2005 | 2004 | |||||
TIM Celular S.A. | 14,138 | 4,391 | 18,529 | 387 | ||||
Maxitel S.A. | 89 | - | 89 | 11 | ||||
Total | 14,227 | 4,391 | 18,618 | 397 | ||||
20
10. Related Parties (Continued)
Liabilities | ||||||||||||
Accounts | ||||||||||||
Accounts | payable | |||||||||||
payable | Purchase | |||||||||||
Network | of | CSP 41 - | Other | Total | Total | |||||||
use | handsets | Cobilling | debts | 2005 | 2004 | |||||||
TIM Celular S.A. | 28 | 3,403 | 32,984 | - | 36,415 | 253 | ||||||
Maxitel S.A. | 217 | 688 | - | - | 905 | - | ||||||
Blah! | - | - | - | 1,102 | 1,102 | 2,691 | ||||||
Telecom Italia S.p.A. | - | - | - | 5,285 | 5,285 | - | ||||||
IT Telecom Italia | - | - | - | 1,335 | 1,335 | - | ||||||
Total | 245 | 4,091 | 32,984 | 7,722 | 45,042 | 2,944 | ||||||
Income | ||||||
Network | Sales of | Total | ||||
use | handsets | 2005 | ||||
TIM Celular S.A. | 111,481 | 6,666 | 118,147 | |||
Maxitel S.A. | 89 | 4 | 93 | |||
Total | 111,570 | 6,670 | 118,240 | |||
Cost/Expense | ||||||||
Network | Total | Total | ||||||
Usage | Other | 2005 | 2004 | |||||
TIM Celular S.A. | 28 | - | 28 | 9,302 | ||||
Maxitel S.A. | 217 | - | 217 | - | ||||
Blah! | - | 4,771 | 4,771 | 13,824 | ||||
Total | 245 | 4,771 | 5,016 | 23,126 | ||||
CSP 41 - Cobilling
Due to the superposition of licenses granted by Anatel with another already held by another company of the TIM Group in Brazil, the authorizations of the subsidiaries of TIM Participações S.A for long-distance services were terminated in 2005. The customers of the subsidiaries started to make long-distance calls selecting the code of any of the operators authorized to render the service. As such, the subsidiaries of TIM Participações S.A stopped to receive income from long-distance services and, consequently, do not incur costs related to this service.
21
10. Related Parties (Continued)
CSP 41 Cobilling (Continued)
Since March 2005, TIM Celular, a company of the TIM Brazil Group, started to be the sole license holder in the TIM Group to render long-distance services. In view of this, the subsidiaries of TIM Participações S.A. started to record the amounts billed to their customers for use of the service as intercompany accounts payable (cobilling).
Network use
The subsidiaries of TIM Participações S.A. record as intercompany accounts receivable the revenues related to the tariff for network use (VU-M), received from the operator rendering long-distance services in the TIM Group, for calls made using their networks.
Handsets purchase and sale
In order to optimize excess inventory at TIM Group companies, handset purchase and sale operations were carried out in the year among Group companies. These operations were carried out at cost of acquisition of handsets from third parties.
Purchases of handsets from Group companies totaled R$ 10,769 in 2005.
Other expenses
The amount classified as other expenses refers to expenses with services rendered by Blah! Sociedade Anônima de Serviços e Comércio to the subsidiaries.
11. Escrow deposits
Consolidated | ||||
2005 | 2004 | |||
Civil and labor claims | 5,037 | 3,305 | ||
ICMS Agreement 69/98 | 2,294 | 11,830 | ||
ICMS 5% tax difference in Santa Catarina state | 11,779 | 8,085 | ||
Other | 7,168 | 7,071 | ||
26,278 | 30,291 | |||
22
11. Escrow deposits (Continued)
In September 2005, the subsidiary TIM Sul S.A. prevailed in a proceeding contesting ICMS Agreement 69/98 in the Paraná state, and the corresponding escrow deposit was assigned to the subsidiary. The remaining balance refers to the Santa Catarina state.
12. Investments
Parent company | ||||
2005 | 2004 | |||
Investments | ||||
Subsidiaries | 2,719,487 | 2,002,786 | ||
Other | 8,288 | 9,870 | ||
2,727,775 | 2,012,656 | |||
a) Equity interest in subsidiaries
2005 | ||||||
TIM Nordeste | ||||||
Telecomunicações | Tim Sul | |||||
S.A. | S.A. | Total | ||||
- Subsidiaries | ||||||
Capital | 535,995 | 1,001,243 | ||||
Number of shares held | 29,749,763,679 | 15,747,586,938 | ||||
Total equity interest held | 100% | 100% | ||||
Adjusted shareholders equity | 1,267,185 | 1,266,308 | ||||
Net income for the year | 215,745 | 233,837 | ||||
Equity pickup | 238,868 | 224,539 | 463,407 | |||
Investment value | 1,267,185 | 1,266,308 | 2,533,493 | |||
Special goodwill reserve (*) | 94,303 | 91,691 | 185,994 | |||
Investment value | 1,361,488 | 1,357,999 | 2,719,487 | |||
- Other (**) | ||||||
Goodwill cost | 16,918 | 16,918 | ||||
Accumulated goodwill | ||||||
amortization | (8,630) | (8,630) | ||||
8,288 | 8,288 | |||||
23
12. Investments (Continued)
a) Equity interest in subsidiaries (Continued)
2004 | ||||||
TIM Nordeste | ||||||
Telecomunicações | Tim Sul | |||||
S.A | S.A | Total | ||||
- Subsidiaries | ||||||
Capital | 508,799 | 971,470 | ||||
Number of shares held | 23,760,037,374 | 12,529,889,700 | ||||
Total equity interest held | 81.75% | 81.73% | ||||
Voting capital held | 94.09% | 90.65% | ||||
Adjusted shareholders equity | 1,066,755 | 1,088,788 | ||||
Net income for the year | 184,766 | 199,197 | ||||
Equity pickup | 171,985 | 162,803 | 334,788 | |||
Investment value | 872,072 | 889,866 | 1,761,938 | |||
Special goodwill reserve (*) | 119,384 | 121,464 | 240,848 | |||
Investment value | 991,456 | 1,011,330 | 2,002,786 | |||
- Other (**) | ||||||
Goodwill cost | 16,918 | 16,918 | ||||
Accumulated goodwill | ||||||
amortization | (7,048) | (7,048) | ||||
9,870 | 9,870 | |||||
24
12. Investments (Continued)
(**) Goodwill on TIM SUL S.A. was recorded based on future profitability and will be amortized over ten years. In view of projected results for the investee, for the first two years goodwill was amortized at a rate of 4% per annum and the remaining balance is being amortized on a straight line basis over the remaining eight years to 2008.
(b) Changes in investments in subsidiaries:
TIM | ||||||
Nordeste | ||||||
Telecom. | TIM Sul | |||||
S.A. | S.A. | Total | ||||
Balance of investment at December 31, 2003 | - | 921,336 | 921,336 | |||
Shareholders equity at December 31, 2003 | ||||||
of merged company | 889,316 | - | 889,316 | |||
Interest on capital and dividends | (64,950) | (71,754) | (136,704) | |||
Equity pickup | 171,985 | 162,803 | 334,788 | |||
Loss on goodwill capitalization | (4,895) | (1,055) | (5,950) | |||
Balance of investment at December 31, 2004 | 991,456 | 1,011,330 | 2,002,786 | |||
Capital increase | 206,849 | 208,220 | 415,069 | |||
Interest on capital and dividends | (75,685) | (86,090) | (161,775) | |||
Equity pickup | 238,868 | 224,539 | 463,407 | |||
Balance of investment at December 31, 2005 | 1,361,488 | 1,357,999 | 2,719,487 | |||
25
13. Property, Plant and Equipment
Consolidated | ||||||||||
2005 | 2004 | |||||||||
Annual | ||||||||||
depreciation | ||||||||||
rate | Accumulated | |||||||||
% | Cost | depreciation | Net | Net | ||||||
SMP exploration rights | 20 | 43,527 | (21,876) | 21,651 | 30,690 | |||||
Switching/transmission | ||||||||||
equipment | 14.29 | 2,717,533 | (1,852,942) | 864,591 | 826,543 | |||||
Leasefree handsets | 50 | 211,168 | (145,396) | 65,772 | 51,805 | |||||
Infrastructure | 33.33 | 296,518 | (118,724) | 177,794 | 157,509 | |||||
Leasehold improvements | 33.33 | 59,873 | (32,571) | 27,302 | 19,881 | |||||
Software and hardware | 20 | 181,190 | (87,104) | 94,086 | 44,648 | |||||
Assets for general use | 10 | 39,814 | (18,124) | 21,690 | 16,567 | |||||
Intangible assets | 20 | 662,633 | (314,412) | 348,221 | 238,485 | |||||
Assets and installations in | ||||||||||
service | 4,212,256 | (2,591,149) | 1,621,107 | 1,386,128 | ||||||
Land | 6,397 | - | 6,397 | 6,241 | ||||||
Construction in progress | 198,784 | - | 198,784 | 235,493 | ||||||
4,417,437 | (2,591,149) | 1,826,288 | 1,627,862 | |||||||
The subsidiaries use rented areas for installation of their transmission equipment, of which the rental amount is provisioned and posted monthly to income.
The balance of construction in progress basically refers to the construction of new transmission units (Cell Sites - BTS) for network expansion.
In 2005, the amount of R$1,352 was recorded in property, plant and equipment (R$ 1,607 in 2004) by subsidiary TIM Nordeste Telecomunicações S.A., referring to interest capitalization. There was no such recording by TIM Sul S.A in 2005 (R$ 4,869 in 2004).
SMP exploration rights
Authorization to render the Personal Mobile Service (SMP) of the subsidiaries was granted by means of the terms signed in 2002, 2003 and 2004 with Anatel for exploration of SMP during fifteen years within the companies operating area.
In 2003 and 2004, the subsidiaries obtained authorization from Anatel to use radiofrequency blocks associated to the authorization to render SMP at the frequency of 900 MHz and 1800 MHz, respectively.
26
13. Property, Plant and Equipment (Continued)
SMP exploration rights (Continued)
Authorization amounts for exploration of SMP are shown below:
Consolidated | ||||||||
TIM | ||||||||
Nordeste | ||||||||
Telecom. | TIM Sul | |||||||
S.A. | S.A. | 2005 | 2004 | |||||
SMP exploration rights - principal | ||||||||
Authorizations obtained in 2003 | 23,211 | 17,557 | 40,768 | 40,768 | ||||
Authorizations obtained in 2004 | 2,759 | - | 2,759 | 2,759 | ||||
25,970 | 17,557 | 43,527 | 43,527 | |||||
Accumulated amortization | (12,431) | (9,445) | (21,876) | (12,837) | ||||
13,539 | 8,112 | 21,651 | 30,690 | |||||
Implementation of new technology
The subsidiaries of TIM Participações S.A. began, in the second six-month period of 2003, introducing GSM technology into their service network, supplementing current TDMA technology. At December 31, 2005 no adjustment to the property, plant and equipment account was considered to be necessary, as a result of the new GSM technology implementation, as both technologies are to remain in operation at the companies to 2008, at least. The assets related to TDMA technology have been subject to accelerated depreciation and must be 100% depreciated by 2008.
14. Suppliers
Parent company | Consolidated | |||||||
2005 | 2004 | 2005 | 2004 | |||||
Suppliers | 3,364 | 797 | 1,030,937 | 655,686 | ||||
Network use services | - | - | 25,784 | 35,336 | ||||
3,364 | 797 | 1,056,721 | 691,022 | |||||
The balance payable for network use services comprises: (i) use of the network of other fixed and mobile cell telephone operators, where calls are initiated in TIM network and end in the network of other operators (detraf); (ii) calls made when customers are outside their registration area, and are therefore considered a visitor in the other network (roaming); and (iii) calls made by customers when they choose another long-distance call operator CSP (cobilling).
27
15. Loans and Financing
Consolidated | ||||
2005 | 2004 | |||
Foreign currency U.S. dollars | ||||
Suppliers: bearing exchange rate variation and interest of 7.3% p.a. Subject matter of swap to CDI operation. |
- | 755 | ||
European Bank of Investment: refers to direct financing of US$ 50,000, bearing interest based on the Libor rate for 3- month deposits + 1.625% p.a., subject matter of a hedging operation for which the rate is 100% of the CDI monthly variation to final maturity. |
- | 44,720 | ||
Local currency |
||||
Banco do Nordeste: financing subject to pre-fixed interest of 14% p.a., and bonus of 15% and 25% for payments made on time regarding interest. This financing is subject matter of a hedging operation, for which the rate is 69.8% and 75.75% of the CDI monthly variation to final maturity. |
106,982 | 20,018 | ||
BNDES National Bank for Economic and Social Development: this financing bears interest of 4% p.a. plus variation of the TJLP (long-term interest rate) as disclosed by the Central Bank of Brazil or of the "UMBNDES" of the Basket of Currencies. The basket of currencies financing was subject matter of swap to CDI operation. |
18,989 | 38,122 | ||
Hedging contracts | 4,812 | 477 | ||
130,783 | 104,092 | |||
Current | (25,707) | (62,872) | ||
Noncurrent | 105,076 | 41,220 | ||
The BNDES loans of subsidiary TIM Sul S.A. are subject to certain covenants covering specific ratios. Out of the five ratios required, the Company did not meet only one as of December 31, 2005.
Company management is carrying negotiations with BNDES to obtain formal debt waiver related to this ratio which was not met. Although the long-term debt in the amount of R$ 604 is scheduled for January 2007 and management believes that the debt waiver will be obtained, said amount was reclassified to current liabilities to meet the accounting practices adopted in Brazil.
28
15. Loans and Financing (Continued)
Guarantees for these financing operations are as follows: Banco do Nordeste bank guarantee by Banco Bradesco S.A., and BNDES link of installments from mobile cell telephone service income.
Subsidiaries enter into hedging transactions to protect themselves against devaluation of the Brazilian currency (real) in relation to U.S. dollar and against variation in the fair value of financing indexed to pre-fixed interest rates, of which the term is the same as that stipulated in the financing agreement.
The noncurrent portion of loans and financing matures, as follows:
Consolidated | |
2007 | 13,122 |
2008 | 17,858 |
2009 | 17,809 |
2010 | 17,767 |
2011 onwards | 38,520 |
105,076 | |
16. Salaries and Related Charges
Parent company | ||||
2005 | 2004 | |||
Salaries and fees | - | 41 | ||
Social charges | 250 | 102 | ||
Labor provisions | 1,077 | 571 | ||
Employee retention | 52 | 41 | ||
1,379 | 755 | |||
Consolidated | ||||
2005 | 2004 | |||
Salaries and fees | 1,743 | 2,067 | ||
Social charges | 3,901 | 3,582 | ||
Labor provisions | 16,120 | 14,312 | ||
Employee retention | 921 | 881 | ||
22,685 | 20,842 | |||
29
17. Taxes, Charges and Contributions
Parent company | ||||
2005 | 2004 | |||
IRPJ and CSL | 1,121 | 4,890 | ||
COFINS | 7,600 | 5,406 | ||
PIS | 1,650 | 1,174 | ||
IRRF | 10,538 | 4,336 | ||
20,909 | 15,806 | |||
Consolidated | ||||
2005 | 2004 | |||
IRPJ and CSL | 3,444 | 4,890 | ||
ICMS | 99,796 | 129,532 | ||
COFINS | 16,569 | 13,538 | ||
PIS | 3,594 | 2,936 | ||
FISTEL | 8,292 | 7,528 | ||
FUST | 1,187 | 1,247 | ||
FUNTTEL | 593 | 624 | ||
IRRF | 25,641 | 17,730 | ||
Other | 3,184 | 1,543 | ||
162,300 | 179,568 | |||
Current | (157,666) | (153,563) | ||
Noncurrent | 4,634 | 26,005 | ||
The subsidiary TIM Sul S.A., entered into an agreement with the Paraná state to defer ICMS tax to be paid in 48 months after the respective triggering event, restated by FCA/PR. This benefit was granted by the Paraná state under Programa Paraná Mais Emprego.
30
18. Concessions Payable
Consolidated | ||||||||
TIM Nordeste | ||||||||
Telecomunicações | TIM Sul | |||||||
S.A. | S.A. | 2005 | 2004 | |||||
SMP exploration rights: | ||||||||
Authorizations acquired | 23,649 | 15,802 | 39,451 | 39,451 | ||||
Payments | (21,166) | (15,802) | (36,968) | (36,968) | ||||
Monetary adjustment | 5,443 | 3,777 | 9,220 | 8,878 | ||||
7,926 | 3,777 | 11,703 | 11,361 | |||||
Current | (4,964) | (3,777) | (8,741) | (11,361) | ||||
Noncurrent | 2,962 | - | 2,962 | - | ||||
At the end of 2004, Management of the subsidiary TIM Nordeste Telcomunicações S.A. had the intention to liquidate in advance the concessions payable during 2005, which did not occur. Based on the current intention to liquidate such liabilities at the respective due dates, the installments payable after 2006 were reclassified to noncurrent liabilities.
Monetary adjustment of balances payable is based on the General Price Index Internal Availability (IGP-DI) variation, plus interest of 1% per month.
19. Provision for Contingencies
The Company and its subsidiaries are party to certain legal proceedings (labor, tax and civil) arising in the ordinary course of their business, and have recorded provisions when management believes that it can reasonably estimate probable losses, based on the opinion of their legal advisors.
31
19. Provision for Contingencies (Continued)
The provision for contingencies is comprised as follows:
Parent company | ||||
2005 | 2004 | |||
Civil | 200 | 192 | ||
Labor | 3,015 | 2,451 | ||
3,215 | 2,643 | |||
Consolidated | ||||
2005 | 2004 | |||
Civil | 15,893 | 11,356 | ||
Labor | 8,360 | 7,545 | ||
Tax | 15,631 | 13,701 | ||
Regulatory | 2,903 | - | ||
42,787 | 32,602 | |||
Civil contingencies
Civil contingencies refer to claims filed by former customers in connection with billing disputes, as well as claims for civil damages.
Labor contingencies
These involve several labor claims, mainly related to salary differences, salary parity and overtime payment, among others.
32
19. Provision for Contingencies (Continued)
Tax contingencies
The subsidiary TIM Nordeste Telecomunicações S.A. was served delinquency notice by the Ceará state tax authorities, amounting to R$ 12,721, related to (i) disallowing of expenses used in the determination of IRPJ in the period 1999 to 2001, corresponding to the amount of R$ 8,402; (ii) unpaid CSLL differences in 1998 to 2001, in the amount of R$ 3,208; and (iii) unpaid PIS and COFINS differences in 1998 to 2002, in the amount of R$ 334 and R$ 777, respectively. The company filed a defense in connection with this delinquency notice, contesting this assessment by the tax authorities. The Companys internal and external counsel classified the risk of loss on the delinquency notice as possible, as such, no corresponding provision was recorded.
The subsidiary TIM Sul S.A. was served delinquency notices by the Santa Catarina state tax authorities in 2003 and 2004, amounting to R$ 95,666, mainly related to disputes concerning applicability of ICMS taxation on certain services provided by the subsidiary. The subsidiary is currently discussing these notices with the tax authorities and, based on the opinion of both internal and external counsel, management concluded that probable losses to be incurred in these proceedings amount to R$ 15,631, being such properly recorded.
Regulatory contingencies
Due to noncompliance with certain provisions of the Personal Mobile Service Regulation (SMP) and quality targets, defined in the General Plan of Quality Targets for SMP (PGMQ-SMP), Anatel started a proceeding for noncompliance with obligations (PADO) against the subsidiaries.
The subsidiaries have endeavored to contest the proceeding. The defense arguments, most of which having technical and juridical nature, may contribute to a significant reduction in the penalty initially applied or result in definitive PADO revocation without any penalty application. The provision for regulatory contingencies was recorded based on the amount of the penalties received for which the risk of loss is considered probable.
33
19. Provision for Contingencies (Continued)
Fund for Universalization of Telecommunications Services FUST contribution tax
Anatel issued on December 15, 2005 Abridgment of Law No. 01, aiming to collect the Fust contribution tax on interconnection revenues of telecommunications service providers, as from enactment of Law No. 9998, dated August 17, 2000. The Company believes that the referred to revenue is not subject to FUST levy, based on applicable legislation (including the provisions of sole paragraph of article 6 of Law No. 9998/00), and management intends to take applicable measures to defend Company interests. Due to the different opinion of Anatel about the matter, Company internal and external legal counsel evaluated arguments for and against Anatels opinion and, considering the current status of the discussion about the matter, they concluded that the likelihood of an unfavorable outcome for the Company is remote. In view of this and according to applicable accounting practices, management has not recorded any corresponding provision for this matter.
20. Shareholders Equity
a) Capital
At December 31, 2005, the subscribed and paid in capital was represented by no par value shares as follows:
2005 | 2004 | |||
Number of common shares | 299,610,631,068 | 264,793,296,882 | ||
Number of preferred shares | 579,965,856,092 | 437,711,795,252 | ||
879,576,487,160 | 702,505,092,134 | |||
b) Capital reserve
Special Goodwill Reserve
This reserve was set up during the corporate reorganization process in 2000. The portion of the special reserve corresponding to the tax benefit obtained may be capitalized at the end of each fiscal year for the benefit of the controlling shareholder, with new issuance of shares. The respective capital increase will be subject to preemptive rights of the minority shareholders, in proportion to their shareholdings, by kind and class, at the time of new issuance, and the amounts payable during the year in connection with this right must be delivered directly to the controlling shareholder, in accordance with Instruction No. 319/99 of the Brazilian Securities Commission (CVM).
Reserve for Future Capital Increase
34
In March 2005, capital increases were approved at the subsidiaries TIM Nordeste Telecomunicações S.A. and TIM Sul S.A. as a consequence of the capitalization of part of the special goodwill reserve, as above mentioned. The deadline for the non controlling shareholders to exercise their preference rights ended in April of 2005, when TIM received the amount of R$ 6.401 from the shareholders who exercised their rights. When the amount was received, the exchange relation of shares described in note 2b, in which the subsidiaries became wholly owned by TIM Participações S.A., and the respective capital increases had been established. Thus, the amount received from non controlling shareholders (now shareholders of TIM Participações S.A.) was recorded as Reserve for Future Capital Increase. Management intends to propose in the Shareholders meeting the capitalization of such amount, without the issuance of new shares, in the benefit of all shareholders.
35
20. Shareholders Equity (Continued)
c) Income reserves
Legal reserve
This refers to the 5% (five percent) of net income for every year ended December 31 to be applied to the legal reserve, which should not exceed 20% (twenty percent) of capital. Also, the Company may not set up the legal reserve when it exceeds 30% (thirty percent) of capital plus capital reserves. This reserve can be used only for capital increase or compensation of accumulated deficit.
Unearned income reserve
The unearned income reserve originates from the portion of equity pickup to be financially realized, substantially represented by the capital reserve from income tax incentive set up by the subsidiary. In conformity with Law No. 10303/01, the reserve, amounting to R$ 18,838, was set up for the amount of compulsory dividends, which exceeded the realized portion of net income for 2003.
Companys management will propose the distribuition of the reserve at the Shareholders Meeting due to its realization in 2005. Assuming the approval by the shareholders, the balance was transferred in its entirety to dividends payable.
36
20. Shareholders Equity (Continued)
c) Income reserves (Continued)
Reserve for expansion
The remaining balance of net income for the year ended December 31, 2005, adjusted as required by Law No. 6404/76, article 202, in the amount of R$ 299,074, comprises the balance of the income reserve for expansion account, as determined by CVM Instruction (IN) No. 59/86, and will be used in the expansion of the Companys network and of its IT environment as well as of its subsidiaries. The accrual of the reserve for expansion is provided for in paragraph 2, article 40 of the Companys by-laws and in article 194 of Law No. 6404/76. In addition, the investments to be made are supported by capital budget to be approved by the General Meeting as proposed by management.
d) Dividends
Dividends are calculated in accordance with the by-laws and Brazilian Corporation Law (Lei das Sociedades por Ações).
Based on its by-laws, the Company shall distribute an amount equivalent to 25% of adjusted net income as minimum dividend every year ended December 31, provided there are funds available for distribution.
Preferred shares are nonvoting and enjoy priority on (i) the payment of capital at no premium, and (ii) payment of a minimum noncumulative dividend of 6% p.a., calculated on the result of the division of the capital stock represented by the total number of the same class of shares issued by the Company.
In order to comply with the New Corporation Law, the Companys by-laws were amended, including the First Paragraph of Section 10, which ensures the holders of preferred shares, every year, the right to receive stock dividends, corresponding to 3% (three percent) of net earnings per share, based on the balance sheet most recently approved, whenever the dividend established according to this criterion exceeds the dividend calculated according to the criteria previously established, described in the preceding paragraph.
37
20. Shareholders Equity (Continued)
Dividends, which correspond to the greater of values determined within the minimum set by each of the methods provided for by the by-laws, were calculated as follows:
2005 | 2004 | |||
Net income for the year | 434,489 | 286,872 | ||
(-) Setup of legal reserve | (21,724) | (14,343) | ||
Adjusted net income | 412,765 | 272,529 | ||
Compulsory dividends: 25% | 103,191 | 68,132 | ||
Interest on capital, net of withholding income tax | ||||
of 15% | 59,500 | 25,500 | ||
Supplementary dividends | 43,691 | 42,632 | ||
103,191 | 68,132 | |||
Realization of unearned income reserve/dividends payable | 18,838 | 2,300 | ||
Total proposed dividends and interest on capital | 122,029 | 70,432 | ||
The balance of dividends and interest on capital payable includes amounts from prior years of R$ 9,149 (R$ 8,585 in 2004).
2005 | 2004 | |||
Dividends and interest on capital per 1,000 shares | ||||
(in reais) | ||||
Common shares | 0.1387 | 0.1003 | ||
Preferred shares | 0.1387 | 0.1003 |
e) Stock option plan
On May 2, 2001, the Companys shareholders approved a stock option plan with the following objectives:
(i) retain the services and opinions of key employees on which the Company depends respecting their judgment, initiatives and efforts;
(ii) provide key employees with a certain combination of compensation based on the Companys market value
increase; and
(iii)have general interests of key employees in line with the shareholders interests.
38
20. Shareholders Equity (Continued)
e) Stock option plan (Continued)
On April 26, 2005, the Companys Board of Director approved capital increase by R$ 2,006 through issue of 595,198 lots of 1,000 preferred shares, for the price of R$ 3.37 per 1,000 shares, resulting from the exercise of share purchase options by 24 Company employees in connection with the Companys stock option plan.
The market value of the Companys preferred shares as of the date of capital increase was R$ 3.84 per 1,000 shares.
The term for exercise of stock options previously granted expired in 2005 and new stock options have not been granted.
39
21. Net Operating Income
Consolidated | ||||
2005 | 2004 | |||
Revenue from telecommunications services | ||||
Subscription charges | 258,610 | 358,178 | ||
Use charges | 1,664,512 | 1,246,666 | ||
Network use | 940,251 | 822,576 | ||
Long distance service | 32,797 | 202,963 | ||
Value-added services VAS | 218,965 | 118,396 | ||
Other | 54,607 | 33,624 | ||
3,169,742 | 2,782,403 | |||
Sales of products | 733,530 | 646,772 | ||
Gross operating income | 3,903,272 | 3,429,175 | ||
Deductions | ||||
Taxes | (813,302) | (723,716) | ||
Discounts | (150,624) | (134,253) | ||
Other | (21,131) | (6,574) | ||
(985,057) | (864,543) | |||
2,918,215 | 2,564,632 | |||
22. Cost of Services Rendered and Goods Sold
Consolidated | ||||
2005 | 2004 | |||
Personnel | (26,868) | (23,158) | ||
Third-party services | (71,581) | (54,800) | ||
Interconnection charges | (340,323) | (334,630) | ||
Depreciation and amortization | (378,351) | (351,018) | ||
Telecommunications supervision fund (Fistel) | (2,643) | (2,987) | ||
Other | (21,336) | (17,640) | ||
Cost of services rendered | (841,102) | (784,233) | ||
Cost of goods sold | (536,470) | (513,662) | ||
Total cost of services rendered and goods sold | (1,377,572) | (1,297,895) | ||
40
23. Selling Expenses
Consolidated | ||||
2005 | 2004 | |||
Personnel | (66,515) | (55,152) | ||
Third-party services | (417,093) | (318,778) | ||
Allowance for doubtful accounts | (117,978) | (112,605) | ||
Telecommunications supervision fund (Fistel) | (123,858) | (95,624) | ||
Depreciation and amortization | (49,194) | (46,103) | ||
Other | (23,468) | (19,015) | ||
(798,106) | (647,277) | |||
24. General and Administrative Expenses
Parent company | ||||
2005 | 2004 | |||
Personnel | (5,919) | (12,475) | ||
Third-party services | (12,047) | (5,735) | ||
Depreciation and amortization | - | (892) | ||
Other | (362) | (1,662) | ||
(18,328) | (20,764) | |||
Consolidated | ||||
2005 | 2004 | |||
Personnel | (31,781) | (37,349) | ||
Third-party services | (98,489) | (91,392) | ||
Depreciation and amortization | (43,486) | (40,133) | ||
Other | (12,190) | (13,568) | ||
(185,946) | (182,442) | |||
41
25. Other Operating Income (Expenses)
Parent company | ||||
2005 | 2004 | |||
Income | ||||
Prescribed dividends | 1,907 | 662 | ||
Other operating income | 489 | 765 | ||
2,396 | 1,427 | |||
Expenses | ||||
Taxes, charges and contributions | (805) | (992) | ||
Goodwill amortization | (1,582) | (1,581) | ||
Provision for contingencies | (1,063) | (2,345) | ||
Loss on legal proceedings | (306) | (691) | ||
(3,756) | (5,609) | |||
Other operating income (expenses) | (1,360) | (4,182) | ||
Consolidated | ||||
2005 | 2004 | |||
Income | ||||
Telecommunication service fines | 11,446 | 10,993 | ||
Prescribed dividends | 3,165 | 1,069 | ||
Reversal of the provision for contingencies | 3,566 | 3,223 | ||
Reversal of the allowance for doubtful accounts (a) | - | 10,000 | ||
Other operating income | 423 | 6,687 | ||
18,600 | 31,972 | |||
Expenses | ||||
Taxes, charges and contributions | (16,660) | (5,907) | ||
Goodwill amortization | (1,582) | (1,581) | ||
Provision for contingencies | (10,242) | (9,063) | ||
Loss on judicial proceedings | (6,130) | (4,573) | ||
Other operating expenses | - | (684) | ||
(34,614) | (21,808) | |||
Other operating income (expenses) | (16,014) | 10,164 | ||
42
26. Financial Income
Parent company | ||||
2005 | 2004 | |||
Interest accrued on short-term investments | 2,107 | 731 | ||
Monetary adjustment | 951 | 450 | ||
Other | 216 | 757 | ||
3,274 | 1,938 | |||
Consolidated | ||||
2005 | 2004 | |||
Interest accrued on short-term investments | 137,701 | 103,567 | ||
Monetary adjustment | 6,716 | 7,313 | ||
Interest on accounts receivable | 9,985 | 17,520 | ||
Other | 4,144 | 5,213 | ||
158,546 | 133,613 | |||
27. Financial Expenses
Parent company | ||||
2005 | 2004 | |||
Interest on borrowings from related parties | (602) | (2,372) | ||
PIS/COFINS on financial income | (9,602) | (5,608) | ||
Monetary adjustment | (17) | - | ||
CPMF | (617) | (656) | ||
Other | (337) | (1,494) | ||
(11,175) | (10,130) | |||
Consolidated | ||||
2005 | 2004 | |||
Interest on loans and financing | (10,454) | (2,224) | ||
PIS/COFINS on financial income | (12,334) | (15,957) | ||
Monetary adjustment | (772) | (5,540) | ||
Interest on taxes and charges | (2,581) | (4,597) | ||
CPMF | (16,251) | (13,636) | ||
Discounts granted | (18,642) | (14,836) | ||
Credit card companies charges | (14,881) | (5,913) | ||
Other | (7,719) | (6,098) | ||
(83,634) | (68,801) | |||
43
28. Non-operating Result
Parent | ||||||
company | Consolidated | |||||
2004 | 2005 | 2004 | ||||
Income | ||||||
Investment disposals | 898 | - | 898 | |||
Fixed asset disposals | 1,769 | 3,413 | 1,977 | |||
2,667 | 3,413 | 2,875 | ||||
Expenses | ||||||
Loss on change in shareholding | ||||||
percentage | (5,950) | - | (5,950) | |||
Cost of fixed assets disposed of | (1,714) | (5,673) | (1,517) | |||
(7,664) | (5,673) | (7,467) | ||||
Non-operating result | (4,997) | (2,260) | (4,592) | |||
29. Financial Instruments and Risk Management
Risk factors
The risk factors affecting the Company and its subsidiaries instruments are the following:
(i) Exchange rate risk
The exchange rate risk relates to the possibility of the Company and its subsidiaries computing losses resulting from fluctuations in exchange rates, thus increasing debt balances of loans obtained in the market and the corresponding financial charges. In order to mitigate this kind of risk, the Company carries out hedge contracts with financial institutions.
At December 31, 2005, financings of the Company and its subsidiaries indexed to the UMBNDES exchange variance of a basket of currencies are 100% covered by hedge contracts. The income or loss resulting from these hedge contracts is charged to operating results.
There are no significant financial assets indexed to foreign currencies.
44
29. Financial Instruments (Continued)
(ii) Interest rate risk
Interest rate risk refers to:
- possible variation in the fair value of financing subject to pre-fixed interest rates, if such rates do not reflect current market conditions. In order to mitigate this type of risk, the Company and its subsidiaries enter into hedging contracts with financial institutions. Gain or loss from these hedge contracts is charged to operating results;
- possible unfavorable interest rate change, which would lead to an increase in financial expenses of the Company and its subsidiaries on debts and hedging operations entered into at variable interest rate. At December 31, 2005, financial resources of subsidiaries were mainly invested in Interbank Deposit Certificates (CDI), which significantly reduces this risk.
(iii) Credit risk related to services rendered
This risk relates to the possibility of the Company and its subsidiaries to incur losses arising from the difficulty in collecting accounts receivable billed to subscribers. In order to mitigate this risk, the Company and its subsidiaries perform credit rating analyses to support management of risk related to collection problems and also monitor accounts receivable from subscribers, disabling telephone lines of defaulting subscribers.
(iv) Credit risk related to sale of telephone sets and prepaid telephone cards
The policy adopted by the Companys subsidiaries for the sale of telephone sets and distribution of prepaid telephone cards is directly related to the risk of credit levels accepted during the normal course of business. The selection of partners, the diversification of the accounts payable portfolio, the monitoring of loan conditions, the positions and limits of requests established for traders, the constitution of security interests are procedures adopted by the subsidiaries to minimize possible collection problems with its commercial partners. There are no customers accounting for more than 10% of accounts receivable from sale of goods at December 31, 2005 and 2004 or income from sale of goods in 2005 and 2004.
45
29. Financial Instruments (Continued)
(v) Financial credit risk
This risk relates to the possibility of the Company and its subsidiaries computing losses originating from the difficulty in realizing short-term investments and hedge contracts.
The Company and its subsidiaries minimize the risk associated to these financial instruments by investing in well-reputed financial institutions.
There is no concentration of available resources of work, service, concessions or rights that have not been mentioned above that could, if eliminated suddenly, severely impact the operations of the Company and its subsidiaries.
Market value of financial instruments
The estimated market value of financial instruments, mainly of cash and cash equivalents, accounts receivable and short-term financial instruments approximates the corresponding book value considering that maturity of these instruments is within short-term. Financial instruments whose market value differs from book value at December 31, 2005 are as follows:
2005 | 2004 | |||||||||||
Market | Market | |||||||||||
Book value | value | Book value | value | |||||||||
Loans and financing | 125,971 | 123,133 | 103,615 | 103,038 | ||||||||
Hedge contracts | 4,812 | 4,206 | 477 | (340) |
The market value of loans and financing and of hedge contracts was determined through discounted future cash flows and use of interest rates applicable to instruments of similar nature involving the same conditions and risks, or is based on market quotations for such instruments.
Market value was estimated for a certain period, based on available information and own valuation methodology. Changes in assumptions may significantly affect such estimates.
46
30. Pension Plans and Other Post-Employment Benefits
TIM Participações S.A. and its subsidiaries have been sponsoring a private pension plan for defined benefits for a group of employees of the former TELEBRÁS system, which is managed by Fundação Sistel de Seguridade Social SISTEL, as a consequence of the legal provisions applicable to the privatization process of these companies in July 1998.
Considering that in 1999 and 2000 the sponsors of the pension plans managed by SISTEL had already negotiated conditions for the creation of individual pension plans by sponsoring company and maintenance of joint liability only in relation to the participants already assisted on January 31, 2000, the Companies and their subsidiaries in 2002, alike other companies resulting from the former TELEBRÁS system, started the creation of a pension plan for defined contributions meeting the most modern social security standards adopted by private companies and allowing the possibility of migration to this plan of the group of employees linked to SISTEL.
On November 13, 2002, the Brazilian Secretariat for Supplemental Pension Plans, through official ruling No. 1917 CGAJ/SPC, approved the statutes of the new pension plan, denominated Statutes of the TIMPREV Benefits Plan, for defined contributions, which provide for new conditions for benefits granting and maintenance, as well as the rights and obligations of the Plan Managing Entity, the sponsoring companies, participants and the beneficiaries thereof.
Under the new plan, the contribution on the part of the sponsoring company shall be of 100% of the amount of the basic contribution on the part of participants, and the managing entity of TIMPREV shall ensure, on the terms and conditions of the approved plan statutes, the benefits listed below, not being held liable for granting any other, even if the government official social security adventitiously starts granting them to beneficiaries:
However, as not all employees of the controlled companies and their subsidiaries have migrated to TIMPREV plan, the pension and health plans deriving from the TELEBRÁS system continue existing and are briefly set out below:
PBS: benefits plan of SISTEL, for defined benefits which includes the employees paying contributions to the plan (active) who participated in the plans sponsored by the companies of the former TELEBRÁS system;
47
30. Pension Plan and Other Post-Employment Benefits (Continued)
PBS Assistidos: private pension plan for employees receiving benefits (inactive), for multi-sponsored benefits;
Convênio de Administração: covenant for managing pension payment to pensioners of the predecessors of the controlled companies;
PAMEC: health plan granted to pensioners of the predecessors of the controlled companies;
PBT: plan for defined benefits for pensioners of the predecessors of the companies and their subsidiaries;
PAMA: health plan for retired employees and their dependents, on a shared cost basis.
The actuarial position of assets and liabilities of said plans, in accordance with the rules established by IBRACON NPC-26, approved by CVM Instruction No. 371, presents a surplus not recorded by the Company due to the impossibility of refund thereof, and contributions on the part of sponsor will not be reduced in the future.
The Company is sponsor, as successor from the partial spin-off of Telecomunicações do Paraná S.A. - TELEPAR, of the pension supplementation plans introduced in 1970 by a Collective Agreement Document, approved by the Atypical Contractual Relationship Document entered into by the Company and the labor unions representing the major professional categories of employees.
In the year ended December 31, 2005, the contributions to TIMPREV totaled R$ 296, of which R$ 123 were contributed by TIM Nordeste Telecomunicações S.A and R$ 173 by TIM Sul S.A. (R$ 340 by TIM Nordeste Telecomunicações S.A. and R$ 198 by TIM Sul S.A, in 2004).
The actuarial position of assets and liabilities related to pension and health care plans as of December 31, 2005 is shown below, considering the rules defined in IBRACON NPC-26, as approved by CVM Instruction 371 for the plans existing prior to TIMPREV, and which still have active members.
48
30. Pension Plan and Other Post-Employment Benefits (Continued)
Parent company
a) Effects recognized as of December 31:
Plans | Total | |||||||
PBS | PAMA | 2005 | 2004 | |||||
Present value of actuarial liabilities | 6,490 | 467 | 6,957 | 6,355 | ||||
Present value of actuarial liabilities | 6,490 | 467 | 6,957 | 6,355 | ||||
Fair value of plan assets | (10,404) | (329) | (10,733) | (9,000) | ||||
Present value of liabilities in excess of fair | ||||||||
value of assets | (3,914) | 138 | (3,776) | (2,645) | ||||
Net actuarial liabilities (assets) | (3,914) | 138 | (3,776) | (2,645) | ||||
No asset was recognized by the sponsors due to the impossibility of refund of this surplus and because contributions on the part of sponsors will not be reduced in the future.
b) Changes in net actuarial liabilities (assets)
Plans | ||||
PBS | PAMA | |||
Net actuarial liabilities (assets) at 12/31/04 | (2,742) | 96 | ||
Expenses (income) recognized in the prior year | (894) | (3) | ||
Sponsors contributions | (6) | - | ||
Recognized actuarial (gains) losses | (272) | 45 | ||
Net actuarial liabilities (assets) at 12/31/05 | (3,914) | 138 |
c) Statement of losses (gains)
Plans | ||||
PBS | PAMA | |||
(Gain) Loss on actuarial liabilities | 352 | 71 | ||
(Gain) Loss on plan assets | (624) | (26) | ||
(Gain) Loss at 12/31/05 | (272) | 45 | ||
Corridor calculation (10% of equity and liabilities) | 1,040 | 47 |
49
30. Pension Plan and Other Post-Employment Benefits (Continued)
Parent company (Continued)
d) Reconciliation of present value of liabilities
Plans | ||||
PBS | PAMA | |||
Value of liabilities as of 12/31/04 | 5,969 | 386 | ||
Cost of current service | 7 | 1 | ||
Interest on actuarial liabilities | 648 | 43 | ||
Benefits paid during the year | (486) | (34) | ||
Liabilities | 352 | 71 | ||
Value of liabilities as of 12/31/05 | 6,490 | 467 | ||
e) Reconciliation of fair value of assets
Plans | ||||
PBS | PAMA | |||
Fair value of assets at 12/31/04 | 8,711 | 289 | ||
Benefits paid in the year | (486) | (34) | ||
Participants contributions | 5 | - | ||
Sponsors contributions | 6 | 1 | ||
Actual yield of plan assets in the year | 2,168 | 73 | ||
Value of liabilities at 12/31/05 | 10,404 | 329 | ||
f) Expenses expected for 2006
Plans | ||||
PBS | PAMA | |||
Cost of current service (with interest) | 8 | 1 | ||
Interest on actuarial liabilities | 705 | 52 | ||
Expected yield of plan assets | (1,397) | (44) | ||
Total expenses recognized | (684) | 9 | ||
Expected participants contributions for next year | (5) | - | ||
Total net expenses (income) to be recognized | (689) | 9 |
50
30. Pension Plan and Other Post-Employment Benefits (Continued)
Consolidated
a) Effects recognized at December 31:
Consolidated | ||||||||||||||||
Plans | Total | |||||||||||||||
PBS | Convênio de | |||||||||||||||
PBS | Assistidos | Administração | PAMEC | PBT | PAMA | 2005 | 2004 | |||||||||
Reconciliation of assets and liabilities at 12/31/05 | ||||||||||||||||
Present value of actuarial liabilities | 22,879 | 4,507 | 863 | 79 | 1,389 | 2,823 | 32,540 | 28,853 | ||||||||
Fair value of plan assets | (35,508) | (5,838) | (1,677) | (189) | (1,725) | (1,987) | (46,924) | (40,338) | ||||||||
Present value of liabilities in excess of fair | ||||||||||||||||
value of plan assets | (12,629) | (1,331) | (814) | (110) | (336) | 836 | (14,384) | (11,485) | ||||||||
Net actuarial liabilities / (assets) | (12,629) | (1,331) | (814) | (110) | (336) | 836 | (14,384) | (11,485) | ||||||||
No asset was recognized by the sponsors due to the impossibility of refund of this surplus and because contributions on the part of sponsors will not be reduced in the future.
b) Changes in net actuarial liabilities (assets)
Plans | ||||||||||||
PBS | Convênio de | |||||||||||
PBS | Assistidos | Administração | PAMEC | PBT | PAMA | |||||||
Actuarial liabilities (assets) at 12/31/04 | (9,401) | (1,246) | (814) | (97) | (390) | 463 | ||||||
Expenses (income) recognized in prior year | (2,994) | (188) | (170) | (19) | (127) | 7 | ||||||
Sponsor's contributions | (77) | - | - | - | - | (16) | ||||||
Actuarial (gains) losses recognized | (157) | 103 | 170 | 6 | 181 | 382 | ||||||
Net actuarial liabilities (assets) at 12/31/05 | (12,629) | (1,331) | (814) | (110) | (336) | 836 | ||||||
51
30. Pension Plan and Other Post-Employment Benefits (Continued)
Consolidated (Continued)
c) Statement of losses (gains)
Plans | ||||||||||||
PBS | PBS Assistidos |
Convênio de Administração |
PAMEC | PBT | PAMA | |||||||
(Gain) Loss on actuarial liabilities | 1,130 | 248 | 81 | 9 | 93 | 888 | ||||||
(Gain) Loss on plan assets | (1,310) | (145) | 89 | (3) | 88 | (506) | ||||||
(Gain) Loss on employees' contributions | 23 | - | - | - | - | - | ||||||
(Gain) Loss at 12/31/05 | (157) | 103 | 170 | 6 | 181 | 382 | ||||||
Corridor calculation (10% of equity and liabilities ) | 3,551 | 584 | 168 | 19 | 172 | 282 |
d) Reconciliation of present value of liabilities
Plans | ||||||||||||
PBS | PBS Assistidos |
Convênio de Administração |
PAMEC | PBT | PAMA | |||||||
Value of liabilities at 12/31/04 | 20,762 | 4,149 | 764 | 64 | 1,267 | 1,847 | ||||||
Cost of current service | 208 | - | - | - | - | 26 | ||||||
Interest on actuarial liabilities | 2,269 | 450 | 83 | 6 | 137 | 205 | ||||||
Benefits paid in the year | (1,490) | (340) | (65) | - | (108) | (143) | ||||||
Liabilities | 1,130 | 248 | 81 | 9 | 93 | 888 | ||||||
Liabilities at 12/31/05 | 22,879 | 4,507 | 863 | 79 | 1,389 | 2,823 | ||||||
e) Reconciliation of fair value of assets
Plans | ||||||||||||
PBS | PBS Assistidos |
Convênio de Administração |
PAMEC | PBT | PAMA | |||||||
Fair value of assets at 12/31/04 | 30,163 | 5,396 | 1,578 | 160 | 1,657 | 1,384 | ||||||
Benefits paid in the year | (1,490) | (340) | (65) | - | (108) | (143) | ||||||
Participants' contributions | 60 | - | - | - | - | - | ||||||
Sponsor's contributions | 77 | - | - | - | - | 16 | ||||||
Actual yield of plan assets in the year | 6,698 | 782 | 164 | 29 | 176 | 730 | ||||||
Liabilities at 12/31/05 | 35,508 | 5,838 | 1,677 | 189 | 1,725 | 1,987 | ||||||
52
30. Pension Plan and Other Post-Employment Benefits (Continued)
f) Expenses expected for 2006
Plans | ||||||||||||
PBS | PBS Assistidos |
Convênio de Administração |
PAMEC | PBT | PAMA | |||||||
Cost of current service (with interest) | 89 | - | - | - | - | 24 | ||||||
Interest on actuarial liabilities | 2,497 | 489 | 94 | 9 | 151 | 314 | ||||||
Expected yield of plan assets | (4,786) | (779) | (226) | (26) | (229) | (268) | ||||||
Total expenses recognized | (2,200) | (290) | (132) | (17) | (78) | 70 | ||||||
Expected participants' contributions for the | ||||||||||||
next year | (60) | - | - | - | - | - | ||||||
Total net expenses (income) to be recognized | (2,260) | (290) | (132) | (17) | (78) | 70 |
Actuarial assumptions adopted in the calculation
The main actuarial assumptions adopted in the calculation were as follows:
Nominal discount rate of actuarial liabilities: | 11.30% p.a. | |
Estimated nominal yield rate of plan assets: | 13.75% p,a, | |
Estimated nominal rate of salary increase: | 7.10% p,a, | |
Estimated nominal rate of benefit increase: | 5.00% p,a, | |
Biometric general mortality table: | UP94 severity-adjusted 2 years segregated by sex | |
Biometric disability table: | Mercer Disability Table | |
Estimated turnover rate: | Nil | |
Retirement likelihood: | 100% upon first eligibility to a plan benefit | |
Estimated long-term inflation rate | 5.00% | |
Computation method | Projected Credit Unit Method |
31. Officers Compensation
Officers compensation in 2005 totaled R$ 1,385, less than the amount approved at the Ordinary Shareholders Meeting held in March 2005.
32. Insurance (unaudited)
As of December 31, 2005, the Company and its subsidiaries have insurance cover against fire and sundry risks for inventories and fixed assets, Management considers the amounts sufficient to cover any losses, based on the risks and amounts involved.
53
33. Commitments (unaudited)
On the terms of the Authorization for Mobile Personal Service (SMP) Exploitation, the subsidiaries committed themselves to implement mobile personal telecommunications cover for the assigned area, on a phased basis, within the quality standards established by said authorization. Subsidiaries are subject to penalties if the terms of the authorization are not complied with.
Anatel started administrative proceedings against the subsidiaries for noncompliance with certain service quality ratios provided for in the Personal Mobile Service (SMP) authorizations in 2003 and 2004, The subsidiaries submitted answers to Anatel explaining that noncompliance with certain quality ratios was mainly due migration from Mobile Service (SMC) to SMP, change in the long-distance system, as well as the implementation of GSM network. The subsidiaries cannot forecast the outcome of Anatel proceedings at this point. The provision for regulatory contingencies recorded in the balance sheet reflects the expected losses, per managements expectations.
54
34. Supplementary Information (2004 unaudited)
a) Statements of cash flows
Parent company | Consolidated | |||||||
2005 | 2004 | 2005 | 2004 | |||||
Operating activities | ||||||||
Net income for the year | 434,489 | 286,872 | 399.200 | 265.935 | ||||
Adjustments to reconcile net income to cash: | ||||||||
Depreciation and amortization | 1,582 | 2,472 | 532.357 | 382.984 | ||||
Losses on nonoperating investments | - | 5,950 | - | - | ||||
Equity pickup | (463,407) | (334,788) | - | - | ||||
Book value of permanent asset disposal | - | 1,794 | 5.723 | 1.643 | ||||
Interest on capital received | 126,037 | 30,108 | - | - | ||||
Deferred income tax and social contribution | 219 | 1,230 | 775 | 15.109 | ||||
Minority interests | - | 21,464 | 45.526 | |||||
Interest, monetary and exchange variations on loans | - | 16,396 | 8,657 | |||||
Supplementary pension plan | (113) | (36) | (113) | (36) | ||||
Allowance for doubtfull accounts | - | - | 117.978 | 112.605 | ||||
Effect of mergers: | ||||||||
Current assets | - | - | - | (395,379) | ||||
Current liabilities | - | - | - | 340,797 | ||||
Noncurrent assets | - | (884) | - | (101,958) | ||||
Investment | - | (889,316) | - | - | ||||
Property, plant and equipment | - | (2,621) | - | (662,453) | ||||
Noncurrent liabilities | - | 18,604 | - | 53,195 | ||||
Minority interests | - | - | - | 165,891 | ||||
Net assets | - | 881,581 | - | 881,579 | ||||
Decrease (increase) in operating assets | ||||||||
Trade receivables | - | - | (233.191) | (281,925) | ||||
Taxes recoverable | 3,547 | 373 | (31.107) | 20.635 | ||||
Inventories | - | - | (34.680) | (18.579) | ||||
Related Parties | 108 | 7,364 | (18.221) | 241 | ||||
Other current assets | 180 | (412) | (4.440) | (4,703) | ||||
Other noncurrent assets | (119) | 580 | 812 | (13.103) | ||||
Increase (decrease) in operating liabilities | ||||||||
Labor charges | 624 | (10,180) | 1.843 | (2.668) | ||||
Suppliers | 2,567 | 59 | 365.699 | 280.614 | ||||
Taxes payable | (5,397) | 9,916 | (7.479) | 15.862 | ||||
Accrued interest | 572 | - | 10.185 | 11.124 | ||||
Related Parties | (34,948) | 34,948 | 42.098 | (10.391) | ||||
Other current liabilities | (1,100) | (18,604) | (1.548) | 7.312 | ||||
Net cash generated by operating activities | 64,841 | 27,401 | 1,183,751 | 1,127,920 | ||||
Investing activities | ||||||||
Capital increase stock option plan | 2,006 | - | 2,006 | - | ||||
Capital reserve increase | 6,401 | - | 6,401 | - | ||||
Purchase of fixed assets | - | - | (683,122) | (579,879) | ||||
8,407 | - | (674,715) | (579,879) | |||||
Financing activities | ||||||||
New loans | - | - | 85,319 | 20,000 | ||||
Amortization of loans | - | - | (76,034) | (102,552) | ||||
Concessions paid | - | - | - | (18,816) | ||||
Dividends and interest on capital | (68,575) | (36,315) | (92,885) | (9,063) | ||||
(68,575) | (36,315) | (83,600) | (110,431) | |||||
Increase (decrease) in cash and cash equivalents | 4,673 | (8,914) | 425,436 | 437,610 | ||||
55
34. Supplementary Information (2004 unaudited) (Continued)
Supplemental cash flow information | ||||||||
Income and social contribution taxes paid | - | - | 71,743 | 58,505 | ||||
Interest paid | - | - | 10,067 | 85,086 | ||||
Capitalized Interest | 1,352 | 6,476 | ||||||
Merger of shares from TIM Nordeste and TIM Sul | ||||||||
415,069 | - | 415,069 | - | |||||
b) Statements of value added
Parent company | Consolidated | |||||||
2005 | 2004 | 2005 | 2004 | |||||
Income | ||||||||
Gross operating revenue | - | - | 3,903,272 | 3,429,175 | ||||
Losses and allowance for doubtful accounts | - | - | (117,978) | (112,605) | ||||
Discounts | - | - | (171,756) | (140,827) | ||||
Net operating income (expenses) | - | (4,997) | (2,260) | (4,592) | ||||
- | (4,997) | 3,611,278 | 3,171,151 | |||||
Consumables from third parties | ||||||||
Cost of services rendered and goods sold | - | - | (950,678) | (905,598) | ||||
Materials, energy, third-party services and others | (11,171) | (8,026) | (545,399) | (410,449) | ||||
(11,171) | (8,026) | (1,496,077) | (1,316,047) | |||||
Retentions | ||||||||
Depreciation and amortization | (1,582) | (2,472) | (532,357) | (498,142) | ||||
Net added value generated | (12,753) | (15,495) | 1,582,844 | 1,356,961 | ||||
Added value received in transfer | ||||||||
Gain on investments | 463,407 | 334,788 | - | - | ||||
Financial income | 3,274 | 1,938 | 167,716 | 157,569 | ||||
466,681 | 336,726 | 167,716 | 157,569 | |||||
Total added value available for distribution | 453,928 | 321,231 | 1,750,560 | 1,514,530 | ||||
Distribution of added value | ||||||||
Payroll and related charges | 5,091 | 10,427 | 107,394 | 99,096 | ||||
Taxes and contributions | 13,318 | 19,163 | 1,127,918 | 987,097 | ||||
Interest and rentals | 1,030 | 4,769 | 94,584 | 92,289 | ||||
Minority interest | - | - | 21,464 | 70,113 | ||||
Dividends and interest on capital | 132,529 | 72,632 | 132,529 | 72,632 | ||||
Retained earnings | 301,960 | 214,240 | 266,671 | 193,303 | ||||
453,928 | 321,231 | 1,750,560 | 1,514,530 | |||||
56
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TIM PARTICIPAÇÕES S.A. | ||
Date: February 01, 2006 | By: | /s/ Paulo Roberto Cruz Cozza |
Name: Paulo Roberto Cruz Cozza | ||
Title: Chief Financial Officer |