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.
A free translation from Portuguese into English of Quarterly | ||
Financial Information prepared in Brazilian currency and in | ||
accordance with the accounting practices adopted in Brazil. | ||
FEDERAL GOVERNMENT SERVICE | ||
BRAZILIAN SECURITIES COMMISSION (CVM) | Corporate Legislation | |
QUARTERLY INFORMATION - ITR | September 30, 2006 | |
COMMERCIAL, INDUSTRIAL AND OTHER COMPANIES |
REGISTRATION WITH THE CVM DOES NOT IMPLY ANY ANALYSIS OF THE COMPANY. COMPANY MANAGEMENT IS RESPONSIBLE FOR THE ACCURACY OF THE INFORMATION PROVIDED. |
01.01 IDENTIFICATION
1 - CVM CODE 01763-9 |
2 COMPANY NAME TIM PARTICIPAÇÕES S.A. |
3 - National Corporate Taxpayers' Registration Number CNPJ 02.558.115/0001-21 |
4 State Registration Number NIRE 53 3 0000572 9 |
01.02 - HEAD OFFICE
1 - ADDRESS Av. das Américas, 3434, Bloco 1 7º andar parte |
2 - SUBURB OR DISTRICT Barra da Tijuca |
||||||||
3 - POSTAL CODE 22640-102 |
4 - MUNICIPALITY Rio de Janeiro |
5 - STATE Rio de Janeiro |
|||||||
6 - AREA CODE 21 |
7 - TELEPHONE 4009-3742 |
8 - TELEPHONE - |
9 - TELEPHONE - |
10 - TELEX - |
|||||
11 - AREA CODE 21 |
12 - FAX 4009-3314 |
13 - FAX - |
14 - FAX - |
- | |||||
15 - E-MAIL jserafim@timbrasil.com.br |
01.03 - INVESTOR RELATIONS OFFICER (Company Mail Address)
1- NAME Stefano De Angelis |
|||||||||
2 - ADDRESS Av. das Américas, 3434, Bloco 1 7º andar parte |
3 - SUBURB OR DISTRICT Barra da Tijuca |
||||||||
3 - ZIP CODE 22640-102 |
4 - MUNICIPALITY Rio de Janeiro |
5 - STATE Rio de Janeiro |
|||||||
6 - AREA CODE 21 |
7 - TELEPHONE 4009-3742 |
8 - TELEPHONE - |
9 - TELEPHONE - |
10 - TELEX - |
|||||
11 - AREA CODE 21 |
12 - FAX 4009-3314 |
13 - FAX - |
14 - FAX - |
- | |||||
15 - E-MAIL jserafim@timbrasil.com.br |
01.04 - GENERAL INFORMATION/INDEPENDENT ACCOUNTANT
CURRENT YEAR | CURRENT QUARTER | PRIOR QUARTER | |||||
1 - BEGINNING | 2. END | 3 - QUARTER | 4 - BEGINNING | 5 - END | 6 - QUARTER | 7 - BEGINNING | 8 - END |
01.01.2006 | 12.31.2006 | 3 | 07.01.2006 | 09.30.2006 | 2 | 04.01.2005 | 06.31.2005 |
09 - INDEPENDENT ACCOUNTANT Directa Auditores |
10 - CVM CODE 3670 |
||||||
11. PARTNER RESPONSIBLE Ernesto Rubens Gelbcke |
12 INDIVIDUAL TAXPAYERS REGISTRATION NUMBER OF THE PARTNER RESPONSIBLE 062.825.718-04 |
A free translation from Portuguese into English of Quarterly | ||
Financial Information prepared in Brazilian currency and in | ||
accordance with the accounting practices adopted in Brazil. | ||
FEDERAL GOVERNMENT SERVICE | ||
BRAZILIAN SECURITIES COMMISSION (CVM) | Corporate Legislation | |
QUARTERLY INFORMATION - ITR | September 30, 2006 | |
COMMERCIAL, INDUSTRIAL AND OTHER COMPANIES |
01.01 IDENTIFICATION
1 - CVM CODE 01763-9 |
2 - COMPANY NAME TIM PARTICIPAÇÕES S.A. |
3 - Federal Corporate Taxpayers' Registration Number CNPJ 02.558.115/0001-21 |
01.05 - CAPITAL COMPOSITION
Number of Shares (Thousands) |
Current quarter 06.30.2006 |
Prior quarter 03.31.2006 |
Same quarter in prior year 06.30.2005 |
Paid-up capital | |||
1 - Common | 793,544,277 | 791,117,235 | 299,610,631 |
2 - Preferred | 1,536,170,583 | 1,531,472,229 | 579,965,856 |
3 - Total | 2,329,714,860 | 2,322,589,464 | 879,576,487 |
Treasury Stock | |||
4 - Common | 0 | 0 | 0 |
5 - Preferred | 0 | 0 | 0 |
6 - Total | 0 | 0 | 0 |
01.06 CHARACTERISTICS OF THE COMPANY
1 - TYPE OF COMPANY Commercial, industrial and other |
2 - SITUATION Operational |
3 - NATURE OF OWNERSHIP Local Private |
4 - ACTIVITY CODE 113 Telecommunication |
5 - MAIN ACTIVITY Cellular Telecommunication Services |
6 - TYPE OF CONSOLIDATION Full |
7 - TYPE OF REPORT OF INDEPENDENT ACCOUNTANT Unqualified |
01.07 - COMPANIES EXCLUDED FROM THE CONSOLIDATED FINANCIAL STATEMENTS
1 - ITEM | 2 - CNPJ | 3 - NAME |
01.08 - DIVIDENDS AND OR INTEREST ON CAPITAL APPROVED AND/OR PAID DURING AND AFTER THE QUARTER
1 - ITEM | 2 - EVENT | 3 - DATE APPROVED | 4 - AMOUNT | 5 - DATE OF PAYMENT | 6 - TYPE OF SHARE | 7 - AMOUNT PER SHARE |
A free translation from Portuguese into English of Quarterly | ||
Financial Information prepared in Brazilian currency and in | ||
accordance with the accounting practices adopted in Brazil. | ||
FEDERAL GOVERNMENT SERVICE | ||
BRAZILIAN SECURITIES COMMISSION (CVM) | Corporate Legislation | |
QUARTERLY INFORMATION - ITR | September 30, 2006 | |
COMMERCIAL, INDUSTRIAL AND OTHER COMPANIES |
01.01 IDENTIFICATION
1 - CVM CODE 01763-9 |
2 - COMPANY NAME TIM PARTICIPAÇÕES S.A. |
3 - Federal Corporate Taxpayers' Registration Number CNPJ 02.558.115/0001-21 |
01.09 - SUBSCRIBED CAPITAL AND CHANGES IN THE CURRENT YEAR
1 - ITEM | 2 - DATE OF CHANGE | 3 - CAPITAL (IN THOUSANDS OF REAIS) |
4 - TOTAL CHANGE (IN THOUSANDS OF REAIS) |
5 - NATURE OF CHANGE | 7 - NUMBER OF SHARES ISSUED (IN THOUSANDS) |
8 -SHARE PRICE ON ISSUED DATE (IN REAIS) |
01 | 03.16.2006 | 7,455,859 | 5,983,784 | Merger of shares | 1,443,012,977 | 0,0041467290 |
02 | 09.29.2006 | 7,462,260 | 6,401 | Capital Reserve | 0 | 0,0000000000 |
03 | 09.29.2006 | 7,512,710 | 50,450 | Capital Reserve | 7,125,395 | 0,0070803090 |
01.10 - INVESTOR RELATIONS OFFICER
1- DATE | 2 - SIGNATURE |
Free Translation into English of Quarterly Information (ITR) Originally Issued in Portuguese
Code | Heading | 09/30/2006 | 06/30/2006 |
1 | Total assets | 8.385.057 | 8.367.506 |
1.01 | Current assets | 18.774 | 21.712 |
1.01.01 | Cash and cash equivalents | 18.569 | 20.727 |
1.01.02 | Accounts receivable | - | - |
1.01.03 | Inventories | - | - |
1.01.04 | Other | 205 | 985 |
1.01.04.01 | Recoverable taxes and contributions | 95 | - |
1.01.04.02 | Deferred income and social contribution taxes | - | - |
1.01.04.03 | Dividends and interest on shareholders' equity | - | - |
1.01.04.04 | Other current assets | 110 | 985 |
1.02 | Noncurrent assets | 9.055 | 9.099 |
1.02.01 | Sundry receivables | 8.030 | 8.110 |
1.02.01.01 | Taxes and contributions recoverable | 8.030 | 8.110 |
1.02.01.02 | Deferred income and social contribution taxes | - | - |
1.02.02 | Related parties | - | - |
1.02.02.01 | Affiliates | - | - |
1.02.02.02 | Subsidiaries | - | - |
1.02.02.03 | Other related parties | - | - |
1.02.03 | Other | 1.025 | 989 |
1.02.03.01 | Judicial deposits | 1.025 | 989 |
1.02.03.02 | Other | - | - |
1.03 | Permanent assets | 8.357.228 | 8.336.695 |
1.03.01 | Investments | 8.357.228 | 8.336.695 |
1.03.01.01 | In affiliates | - | - |
1.03.01.02 | In subsidiaries | 8.350.125 | 8.329.197 |
1.03.01.03 | Other investments | 7.103 | 7.498 |
1.03.02 | Property, plant and equipment | - | - |
1.03.03 | Deferred charges | - | - |
Page: 1
Free Translation into English of Quarterly Information (ITR) Originally Issued in Portuguese
Code | Heading | 09/30/2006 | 06/30/2006 |
2 | Total liabilities and shareholders' equity | 8.385.057 | 8.367.506 |
2.01 | Current liabilities | 15.758 | 18.559 |
2.01.01 | Loans and financing | - | - |
2.01.02 | Debentures | - | - |
2.01.03 | Suppliers | 541 | 931 |
2.01.04 | Taxes, charges and contributions | 346 | 16 |
2.01.05 | Dividends payable | 13.868 | 16.757 |
2.01.06 | Provisions | - | - |
2.01.07 | Related parties | - | - |
2.01.08 | Other | 1.003 | 855 |
2.01.08.01 | Labor liabilities | 1.003 | 855 |
2.01.08.02 | Other | - | - |
2.02 | Noncurrent liabilities | 6.545 | 6.538 |
2.02.01 | Loans and financing | - | - |
2.02.02 | Debentures | - | - |
2.02.03 | Provisions | 6.545 | 6.538 |
2.02.03.01 | Supplementary pension plan | 3.584 | 3.584 |
2.02.03.02 | Provision for contingencies | 2.961 | 2.954 |
2.02.04 | Related parties | - | - |
2.02.05 | Other | - | - |
2.03 | Deferred income | - | - |
2.05 | Shareholders' equity | 8.362.754 | 8.342.409 |
2.05.01 | Capital | 7.512.710 | 7.455.859 |
2.05.02 | Capital reserves | 135.230 | 192.081 |
2.05.03 | Revaluation reserves | - | - |
2.05.03.01 | Own assets | - | - |
2.05.03.02 | Subsidiaries/affiliates | - | - |
2.05.04 | Income reserves | 1.081.787 | 1.081.787 |
2.05.04.01 | Legal reserve | 98.741 | 98.741 |
2.05.04.02 | Statutory reserve | - | - |
2.05.04.03 | Reserves for contingencies | - | - |
2.05.04.04 | Unearned income reserve | - | - |
2.05.04.05 | Retained earnings | - | - |
2.05.04.06 | Special reserve for undistributed dividends | - | - |
2.05.04.07 | Other income reserves | 983.046 | 983.046 |
2.05.05 | Retained earnings | (366.973) | (387.318) |
Page: 2
Free Translation into English of Quarterly Information (ITR)
Originally Issued in Portuguese
From 07/01/2006 to | From 01/01/2006 to | From 07/01/2005 to | From 01/01/2005 to | ||
Code | Heading | 09/30/2006 | 09/30/2006 | 09/30/2005 | 09/30/2005 |
3.01 | Gross revenues | - | - | - | - |
3.02 | Deductions from gross revenues | - | - | - | - |
3.03 | Net revenues | - | - | - | - |
3.04 | Cost of goods sold and services rendered | - | - | - | - |
3.05 | Gross profit | - | - | - | - |
3.06 | Operating income (expenses) | 20.345 | (363.524) | 112.385 | 278.206 |
3.06.01 | Selling | - | - | - | - |
3.06.02 | General and administrative | (3.291) | (13.385) | (3.366) | (11.063) |
3.06.03 | Financial income (expenses) | 655 | 997 | 167 | 217 |
3.06.03.01 | Financial income | 674 | 1.616 | 658 | 2.143 |
3.06.03.02 | Financial expenses | (19) | (619) | (491) | (1.926) |
3.06.04 | Other operating income | 3.244 | 3.732 | 1.998 | 2.365 |
3.06.05 | Other operating expenses | (1.191) | (1.721) | (728) | (3.158) |
3.06.06 | Equity pickup | 20.928 | (353.147) | 114.314 | 289.845 |
3.07 | Operating income | 20.345 | (363.524) | 112.385 | 278.206 |
3.08 | Nonoperating result | - | - | (6.401) | - |
3.08.01 | Income | - | - | (6.401) | - |
3.08.02 | Expenses | - | - | - | - |
3.09 | Income before taxation and participations | 20.345 | (363.524) | 105.984 | 278.206 |
3.10 | Provision for income and social contribution taxes | - | - | - | - |
3.11 | Deferred income tax | - | (3.449) | 2.698 | 3.552 |
3.12 | Participations/statutory contributions | - | - | - | - |
3.12.01 | Participations | - | - | - | - |
3.12.02 | Contributions | - | - | - | - |
3.13 | Reversal of interest on shareholders' equity | - | - | - | - |
3.15 | Net income for the period | 20.345 | (366.973) | 108.682 | 281.758 |
Page: 3
Tim Participações S.A.
Notes to Quarterly Review Information
(In Thousand of Reais, except when otherwise stated)
1 Operations
TIM Participações S.A. headquartered at Avenida das Américas, 3434, block 1, 7th floor, Rio de Janeiro, RJ, is a publicly-held company directly controlled by TIM Brasil Serviços e Participações S.A., a Telecom Italia Groups company, holding interests of 81.25% of its voting capital and 69.75% of its total capital (these percent participations reflect TIM Brasil´s subscription of the whole capital increase approved at the General Extraordinary Stockholders´ Meeting of September 29, 2006, through capitalization of the Special Goodwill Reserve corresponding to the tax benefit granted to the Company´s subsidiaries in 2005. The minority stockholders´ preferential rights in connection with this capital increase will end on November 3, 2006 Note 22-a).
Among TIM Participações S.A.´s objectives is the control of companies exploring telecommunications services in its concession and/or authorization areas, especially cellular telephones.
Concluding the transactions included in Note 2-d, the Company has full control of TIM Celular S.A., which in turn controls TIM Nordeste S.A. (formerly Maxitel S.A.). TIM Celular S.A. and its subsidiary TIM Nordeste S.A. jointly operate cellular telephone services in all Brazilian states.
The services provided by the subsidiaries and the respective tariffs are regulated by ANATEL Brazilian Telecommunications Agency authority in charge of regulating all Brazilian telecommunications. The subsidiaries´ authorizations mature as follows:
TIM Celular | Expiry Date | |
Region 1 | ||
Amapá | March, 2016 | |
Roraima | March, 2016 | |
Pará | March, 2016 | |
Amazonas | March, 2016 | |
Rio de Janeiro | March, 2016 | |
Espírito Santo | March, 2016 | |
Region 2 | ||
Acre | March, 2016 | |
Rondônia | March, 2016 | |
Mato Grosso | March, 2016 | |
Mato Grosso do Sul | March, 2016 | |
Tocantins | March, 2016 | |
Distrito Federal | March, 2016 | |
Goiás | March, 2016 | |
Rio Grande do Sul (except for Pelotas) | March, 2016 | |
Region 3 | ||
São Paulo | March, 2016 | |
Region 4 | ||
Paraná | September, 2007 | |
Santa Catarina | September, 2008 | |
Rio Grande do Sul (the city of Pelotas) | April, 2009 |
Page: 4
TIM Nordeste | Expiry Date | |
Region 1 | ||
Pernambuco | May, 2009 | |
Ceará | November, 2008 | |
Paraiba | December, 2008 | |
Rio Grande do Norte | December, 2008 | |
Alagoas | December, 2008 | |
Piauí | March, 2009 | |
Region 2 | ||
Minas Gerais | April, 2013 | |
Region 3 | ||
Bahia and Sergipe | August, 2012 |
2 Corporate Restructuring
a. Incorporation of Shares of TIM Sul S.A and TIM Nordeste Telecomunicações S.A
On May 30, 2005, at the General Extraordinary Stockholders´ Meetings of TIM Sul S.A, TIM Nordeste Telecomunicações S.A and TIM Participações S.A, the incorporation of all shares of TIM Sul S.A. and TIM Nordeste Telecomunicações S.A. by TIM Participações S.A was approved, thus converting the companies into wholly-owned subsidiaries of TIM Participações S.A.
This operation was intended to concentrate the liquidity of the three companies´ shares into those of one company, TIM Participações S.A., and to lower the expenses associated with controls and maintenance of the plurality of stockholders in separate entities.
The right of withdrawal of the stockholders owning common shares of the capital stock of TIM Participações S.A., as well as the minority stockholders of TIM Sul S.A. and TIM Nordeste Telecomunicações S.A., ended on July 1, 2005. The amount disbursed by the Company for payment to dissenting stockholders was R$ 0.8, represented by 153,861 common shares and 154,407 preferred shares.
b. Incorporation of Shares of TIM Celular S.A
On March 16, 2006, at the General Extraordinary Stockholders´ Meetings of TIM Celular S.A. and TIM Participações S.A, the incorporation of all shares of TIM Celular S.A. by TIM Participações S.A was approved, thus converting TIM Celular S.A. into a wholly-owned subsidiary of TIM Participações S.A.
This operation aimed at optimizing the companies´ and their subsidiaries´ organizational structure, by unifying and rationalizing their business administration and consequently reducing the related costs and increasing value for the stockholders, while enabling better use of intercompany synergy through operational combination of cellular telephone service companies operating under the name TIM nationwide.
Page: 5
The right of withdrawal of the stockholders owning common shares of the capital stock of TIM Participações S.A., as well as the minority stockholders of TIM Celular S.A. ended on April 19, 2006. As no stockholder exercised their right of withdrawal, there was no disbursement by the companies.
c. Merger of the companies CRC - Centro de Relacionamento com Clientes Ltda. and Blah! Sociedade Anônima de Serviços e Comércio On March 30, 2006, the General Extraordinary Stockholders Meeting of TIM Celular S.A. approved the incorporation of the net assets of CRC - Centro de Relacionamento com Clientes Ltda. - and Blah! Sociedade Anônima de Serviços e Comércio, then wholly owned by TIM Celular S.A.
CRC - Centro de Relacionamento com Clientes Ltda. operated the call center service to clients, rendering these services to TIM Celular S.A on an exclusive basis. Blah! Sociedade Anônima de Serviços e Comércio rendered value-added services (VAS), basically for companies of the Grupo Telecom Italia.
d. Merger of TIM Nordeste Telecomunicações S.A. by Maxitel S.A. and of TIM Sul S.A. by TIM Celular S.A.
On May 4, 2006, the TIM Participações S.A.´s Administrative Council approved the signing of Protocols of Merger relating to the proposed merger of TIM Nordeste Telecomunicações S.A. by Maxitel S.A. and of TIM Sul S.A. by TIM Celular S.A.
On June 30, 2006, at the General Extraordinary Stockholders´ Meetings of TIM Celular S.A., Maxitel S.A., TIM Nordeste Telecomunicações S.A. and TIM Sul S.A approved the merger of TIM Nordeste Telecomunicações S.A. by Maxitel S.A. and of TIM Sul S.A. by TIM Celular S.A. On the same date, Maxitel S.A.´s name changed to TIM Nordeste S.A., and its headquarters moved from Belo Horizonte (MG) to Jaboatão dos Guararapes (PE).
This operation aimed at optimizing the companies organization structure, unifying and rationalizing their business and operations even more, lowering costs associated to the maintenance of distinct companies, enabling the intercompany synergy, including fiscal and financial efficiencies.
3 Presentation of the Quarterly Information
a. Presentation and Disclosure Criteria
The quarterly information (company and consolidated) was prepared in accordance with accounting practices adopted in Brazil, the rules applicable to concessionaires of public telecommunications services, and the CVMs (Brazilian Securities Commission) accounting standards and procedures.
Page: 6
TIM Participações S.A. is a publicly-held company, who owns American Depositary Receipts traded on the New York Stock Exchange USA. Therefore, the Company is subject to the rules of the Securities and Exchange Commission (SEC) and, aiming at meeting market needs, it is the Companys principle to disclose information simultaneously to both markets in Brazilian Reais, in Portuguese and English.
b. Consolidated Quarterly Information
The consolidated quarterly information includes assets, liabilities and the result of operations of the Company and its subsidiaries, as follows:
% Ownership | ||||||||
09/2006 | 06/2006 | |||||||
Direct | Indirect | Direct | Indirect | |||||
TIM Celular S.A. | 100.00 | - | 100.00 | - | ||||
TIM Nordeste S.A. (formerly Maxitel S.A.) | - | 100.00 | 100.00 |
The following are the main consolidation procedures:
I. Elimination of intercompany consolidated assets and liabilities accounts;
II. Elimination of participation in capital, reserves and retained earnings of the subsidiaries;
III. Elimination of intercompany revenues and expenses;
IV. Separate disclosure of the minority interest participation in the consolidated quarterly information, when applicable.
Page: 7
The reconciled income for the period can be thus shown:
09/2006 | 09/2005 | |||
Parent Company | (366,973) | 281,758 | ||
ADENE benefit and fiscal incentive directly recorded as stockholders | ||||
equity of the subsidiary TIM Nordeste Telecomunicações S.A. (merged | ||||
by TIM Nordeste S.A.) | (13,401) | (27,952) | ||
Consolidated | (380,374) | 254,166 | ||
c. Comparability of Quarterly Information
Pro forma information
For ease and as a matter of comparison of this information with the prior periods quarterly information, the pro forma consolidated balance sheet and statement of income for the period of nine months ending at September 30, 2005 are shown below, as though the merger process mentioned in Note 2-b had occurred on January 1, 2005:
Page: 8
09/2005 | ||
Pro-forma | ||
Consolidated | ||
Gross operating revenue | ||
Telecommunications services | 6.425.619 | |
Sales of goods | 1.546.543 | |
7.972.162 | ||
Deductions from gross revenue | ||
Net operating revenue | (1.981.728) | |
5.990.434 | ||
Cost of services rendered and goods sold | (3.366.390) | |
Gross income | 2.624.044 | |
Operating revenues (expenses): | ||
Selling | (2.222.969) | |
General and administrative | (584.398) | |
Other operating revenues, net | (236.090) | |
(3.043.457) | ||
Operating income before the net financial expenses | (419.413) | |
Financial revenues (expenses): | ||
Financial revenues | 554.276 | |
Financial expenses | (850.536) | |
(296.260) | ||
Operating loss | (715.673) | |
Non-operating income | (37.663) | |
Loss before income tax, social contribution and minority shareholding | (753.009) | |
Provision for income tax and social contribution | (98.673) | |
Loss before minority shareholding | (852.009) | |
Minority shareholding | (21.464) | |
Loss for the period | (873.473) | |
Page: 9
4 Summary of Accounting Practices
a. Cash and cash equivalents
These comprise cash and bank balances and short-term, readily realizable investments in the money market, stated at cost, plus the related earnings up to the balance sheet date.
b. Accounts receivable
Accounts receivable from the telecommunications service costumers are calculated at the tariff rate ruling on the date of service rendering, including credits for services rendered but not billed until the balance sheet date, receivables from network use and receivables from sales of cell phone sets and accessories.
c. Allowance for doubtful accounts
The allowance for doubtful accounts is recorded based on the customer base profile, the aging of past due accounts, the economic scenario and the risks involved in each case. The allowance amount is considered sufficient to cover possible losses on receivables.
d. Inventories
These refer to cell phone sets and accessories, which are stated at the average acquisition cost. A provision was set up to adjust slow-moving and obsolete items balance to the related realizable value.
e. Prepaid expenses
These are stated at the amounts actually spent but not yet incurred.
In the quarter ended September 30, 2006, the subsidiaries decided to change the accounting treatment of costs related to subsidized sales to subscribers under the post-paid telephone system, whose agreements with the subsidiaries provide for penalties for early termination and minimum monthly charges over a 12-month period. In the subsidiaries´ opinion, the deferral of these costs, which is only permitted under certain conditions, better reflects the post-paid telephone segment´s performance, in that it allows checking costs against the related revenues. In the past, the subsidiaries recognized the cost of subsidized sales to all types of subscribers directly as income.
The conditions for cost deferral are as follows:
- Existence of a legally enforceable agreement;
- Costs that can be determined;
- The Management´s irrevocable intention to execute the agreement and;
- Clear evidence that the minimum net service revenues , as stipulated by contract, less the related direct costs of services rendered will exceed the deferred costs
Page: 10
This change has been made considering the modification in the subsidiaries´ sales strategies, the focus of which has been on high value-added clients since 2006. After the integration of operating subsidiaries has been completed in 2006, the contracted penalties have been strictly imposed on subscribers who cancel their subscription or migrate to the prepaid system over the duration of the agreement. Additionally, systems were implemented in 2006, which allow proper appropriation of costs relating to subsidies granted to subscribers under the post-paid telephone . The efect of this change in accounting practice on the income for the nine-month period ended September 30, 2006 was a R$135,932 credit to the telephone-sets-sold account, as a counterentry to prepaid expenses.
In prior years, given the inconsistent imposition of contracted penalties as well as the lack of managerial information and segregation of accounting data to enable calculation of the related costs, the quantification and deferral of costs was impractical.
f. Investments
The investments in subsidiaries are evaluated by the equity method, based on the subsidiaries´ stockholders equity, which is determined on the same date, by the same accounting principles used by the parent company.
The other investments are shown at cost, reduced to the realizable value, where applicable.
g. Property, plant and equipment
The property, plant and equipment items are shown at the acquisition and/or construction cost, net of accumulated depreciation, calculated on the straight-line method, over the useful life of assets involved. Any repair and maintenance costs incurred representing improvement, higher capacity or longer useful life are capitalized, whereas the others are recorded as income for the year.
Interest and other financial charges on financing taken for funding construction work in progress (assets and facilities under construction) are capitalized up to the startup date.
The long-term assets, especially property, plant and equipment, are periodically reviewed to determine and measure the need to record any provision for losses regarding the value of recovery of such assets.
The estimated useful lives of all property, plant and equipment items are regularly reviewed considering technological advances.
h. Deferred charges
The deferred charges comprise pre-operating expenses and financial costs of the required working capital at the subsidiaries´ pre-operating stage, which are amortized in ten years from the date the subsidiaries become operative.
Page: 11
i. Income tax and social contribution
Income tax is calculated based on the income adjusted for legally stipulated additions and exclusions. The social contribution is calculated at the legally stipulated rates applied to pretax income.
Based on the Constitutive Reports nos. 0144/2003 and 0232/2003 issued by ADENE Northeast Development Agency on March 31, 2003, the subsidiary TIM Nordeste Telecommunicações S.A., which was merged by TIM Nordeste S.A. (formerly Maxitel S.A.) became eligible to fiscal incentive consisting of: (i) 75% reduction of income tax and non-reimbursable surtaxes for a ten-year period, from fiscal 2002 through 2011, calculated based on the exploration income arising from implementation of its installed capacity for rendering digital cellular telephone services; and (ii) reduction of 37.5%, 25% and 12.5% of income tax and non-reimbursable surtaxes for fiscal 2003, 2004-2008 and 2009-2013, respectively, calculated based on the exploration income arising from implementation of its installed capacity for rendering of analogical cellular telephone services.
Deferred taxes are recognized taking into account temporary differences, tax losses and negative social contribution basis, where applicable. The amount of the previously mentioned income-tax-reduction benefit is accounted for as a reduction of income tax payable, against the Capital Reserve Fiscal Incentive, under the Stockholders´ Equity of TIM Nordeste Telecomunicações S.A. which was merged by TIM Nordeste S.A. (formerly Maxitel S.A.).
j. Loans and financing
Loans and financing include interest accrued to the balance sheet date. The companys subsidiaries have hedge cotracts which effectively convert obligations denominated in foreign currencies into Reais aiming at protecting them against risks associated with unexpected devaluation of the Real in relation to foreign currencies. Additionally, the Companys subsidiaries have hedge contracts to protect them against potential losses or increases in Companys financial expenses due to changes in interest rates. Gains and losses from hedge operations are recognized in the income statement under the accrual method, based on the contracted rates .
k. Provision for contingencies
The provision for contingencies, recorded based on estimates which take into consideration the opinion of the Companys management and its legal advisors, is updated based on the probable losses at the end of the litigations (see note 21).
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l. Revenue recognition
Service revenues are recognized as services are provided. Billings are monthly recorded. Unbilled revenues from the billing date to the month end are measured and recognized during the month in which services are provided. Revenues from prepaid telecommunication services are recognized on the accrual basis in the period of utilization. Revenues from the sale of cell phone sets and accessories are recognized as these products are delivered to, and accepted by end-consumers or distributors.
m. Financial income (expenses)
These are represented by interest and exchange and monetary variations on short-term investments in the money market, hedge contracts, loans and financing taken and granted.
n. Pension plan
The Company and its subsidiaries record the adjustments connected with the employees pension plan obligations according to the rules established by NPC 26 of IBRACON, approved by CVM Deliberation 371, which define the characteristics of the pension plan, and the related obligations and events (Note 32)
o. Minority shareholding
These are the interests of the minority stockholders in the subsidiaries TIM Sul S.A., which was merged by TIM Celular S.A., and TIM Nordeste Telecomunicações S.A., which was merged by TIM Nordeste S.A. (formerly Maxitel S.A.). In 2005 these subsidiaries were converted into wholly-owned subsidiaries of TIM Participações S.A.
p. Use of estimates
The preparation of quarterly information 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 balance sheet date, as well as the estimation of revenues and expenses for the year. The actual results may differ from those estimates.
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q. Foreign currency transactions
Transactions in foreign currency are recorded at the exchange rate prevailing at the transaction date. Foreign currency-denominated assets and liabilities are translated into Reais using the balance sheet date exchange rate, which is reported by the Brazilian Central Bank. Exchange gains and losses are recognized in the statement of income as incurred.
r. Employee profit sharing
The Company and its subsidiaries record a provision for employee profit sharing, based on the targets disclosed to its employees and approved by the Administrative Council. These amounts are recorded as personnel expenses and allocated to profit and loss accounts considering each employees cost center.
s. Interest on own capital
Interest on own capital paid and/or payable is recorded as financial expenses, which, for financial reporting purposes, are reclassified and disclosed as appropriation of net income for the year in the statement of stockholders equity. Interest on own capital received and/or receivable from subsidiaries is recorded as financial income. For presentation purposes, the income statements impacts are eliminated, being presented as a decrease in investments.
t. Supplementary information
For additional information purposes, the following is presented: a) Statements of Cash Flow, prepared in accordance with the NPC number 20 issued by the Institute of Independent Auditors of Brazil IBRACON, ; and b) Value-Added Statements prepared in accordance with the CFC Federal Accounting Council - Resolution number 1010.
5 Cash and cash equivalents
Parent Company | ||||
09/2006 | 06/2006 | |||
Cash and banks | 68 | 33 | ||
Short-term investments in the money market | 18,501 | 20,694 | ||
18,569 | 20,727 | |||
Consolidated | ||||
09/2006 | 06/2006 | |||
Cash and banks | 357,059 | 284,116 | ||
Short-term investments in the money market | 737,797 | 812,764 | ||
1,094,856 | 1,096,880 | |||
The Parent Companys readily realizable investments in the money market are backed by federal government securities (LFTs and LTNs). Besides these, the short-term investments of the subsidiaries comprise private bonds (Bank Deposit Certificates CDB and Debentures) issued by the banks, which are approved by internal policy of the companies. The average return of TIM Participações's consolidated investments is 102.1% of Interbank Deposit Certificates CDI.
These investments can be redeemed at any time, with no impact on recorded yield.
6 Accounts Receivable
Consolidated | ||||
09/2006 | 06/2006 | |||
Billed services | 696.978 | 667,633 | ||
Unbilled services | 395.470 | 370,430 | ||
Network use | 591.583 | 400,049 | ||
Goods sold | 769.572 | 730,186 | ||
Other receivables | 29.462 | 6,245 | ||
2.483.065 | 2,174,543 | |||
Allowance for doubtful accounts | (284.100) | (268,905) | ||
2.198.965 | 1.905,638 | |||
The criteria for setting up the allowance for doubtful accounts are periodically reviewed, in order to reflect the current risk surrounding receivables.
7 Inventories
Consolidated | ||||
09/2006 | 06/2006 | |||
Cell phone sets | 177.898 | 215,546 | ||
Accessories and prepaid card kits | 6.701 | 12,135 | ||
TIM "chips" | 19.821 | 5,195 | ||
204.420 | 232,876 | |||
Provision for adjustment to realizable value | (17.437) | (16,697) | ||
186.983 | 216,179 | |||
8 Recoverable Taxes and Contributions
Parent Company | ||||
09/2006 | 06/2006 | |||
Income tax | 8.021 | 8,021 | ||
Social contribution | 9 | 9 | ||
IRRF (withholding income tax) recoverable | 95 | 80 | ||
8.125 | 8,110 | |||
Short-term portion | (95) | - | ||
Long-term portion | 8.030 | (8,110) | ||
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Consolidated | ||||
09/2006 | 06/2006 | |||
Income tax | 46.843 | 54,994 | ||
Social contribution | 7.057 | 7,419 | ||
ICMS (value-added sales tax) | 404.715 | 403,091 | ||
PIS / COFINS (Social Integration Program and Contributions to | ||||
Social Security Funding) | 113.317 | 109,519 | ||
IRRF recoverable | 6.543 | 12,726 | ||
Other | 2.383 | 2,248 | ||
580.858 | 589,997 | |||
Short-term portion | (281.166) | (274.879) | ||
Long-term portion | 299.692 | 315.118 | ||
The amount recorded in long-term portion, in the parent company, refers to income tax recoverable, whereas the consolidated figure also includes ICMS on the subsidiaries permanent assets.
On March 13, 2006, a final sentence not subject to further appeal was given in connection with a suit filed by the indirectly controlled subsidiary TIM Nordeste S.A (formerly Maxitel S.A) against Law 9.718 of 11/27/1998, on alleged unconstitutionality for expanding the basis of calculation of taxes therein dealt with. Pursuant to this law, PIS and COFINS could not be levied on revenues other than sales revenues. After this sentence was given, the subsidiarys Management recorded R$ 52,317 of PIS and COFINS credits (as revenue), monetarily restated, for the periods from February 1999 through December 2002 (PIS) and February 1999 through January 2004 (COFINS).
9 Income Tax and Social Contribution
The deferred income tax and social contribution can be summarized as follows:
Parent Company | ||||
09/2006 | 06/2006 | |||
Tax loss | 3,014 | 3,014 | ||
Negative social contribution basis | 1,085 | 1,085 | ||
Provision for contingencies | 1,004 | 1,004 | ||
Provision for supplementary pension fund | 1,218 | 1,218 | ||
Provision for the employees´ profit sharing | 181 | 181 | ||
6,502 | 6,502 | |||
Provision for devaluation of tax credits | (6,502) | (6,502) | ||
- | - | |||
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Consolidated | ||||
09/2006 | 06/2006 | |||
Goodwill paid upon privatization | 272.035 | 309,131 | ||
Provision for maintaining the stockholders´ equity integrity | (179.543) | (204,027) | ||
Merger-generated tax credit | 92.492 | 105,104 | ||
Tax loss | 3.014 | 3,014 | ||
Negative social contribution basis | 1.085 | 1,085 | ||
Allowance for doubtful accounts | 28.119 | 28,119 | ||
Provision for contingencies | 16.537 | 16,537 | ||
Accelerated depreciation of TDMA equipment | 18.353 | 18,353 | ||
Provision for supplementary pension plan | 1.218 | 1,218 | ||
Provision for the employees´ profit sharing | 2.281 | 2,281 | ||
Other provisions | 4.527 | 4,527 | ||
167.626 | 180,238 | |||
Provision for devaluation of tax credits | (75.134) | (75,134) | ||
92.492 | 105,104 | |||
Short-term portion | (50.450) | (50,450) | ||
Long-term portion | 42.042 | 54,654 | ||
Merger-generated tax credit
The deferred tax asset represented by the merger-generated tax credit refers to future tax benefit under the restructuring plan started in 2000. As a counterentry to said tax is a special reserve composed of goodwill on stockholders´ equity. The tax is realized ratably to estimated future income, over the duration of the authorization granted, which is due to end by 2008. The goodwill amortization is recorded as Other operating expenses (note 27).
In the nine-month period ended September 30, 2006 R$ 37,837 of tax benefits were realized in connection with the above mentioned goodwill (R$ 37,837 for the same period in 2005)). Also, under the terms of the restructuring plan, the actual tax benefit for each fiscal year will be subsequently capitalized in the name of the controlling stockholder. The minority stockholders are ensured preemptive right on acquisition of an amount proportional to the new capital of the controlling stockholder. The special reserve for goodwill recorded by the Companys subsidiary represents the parent companys right to future capitalization (see Note 22-b).
Assets assigned on a loan-for-use basis
For accounting purposes, the average period for depreciation of subsidiaries cell phones assigned on a loan-for-use basis is two (02) years, whereas for fiscal purposes, this period is, generally, five (05) years.
Accordingly, in calculating social contribution on net income (CSLL), these companies were including the depreciation carrying value that exceeded the amounts allowed by the tax law.
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As requested by the Management, the Instituto Nacional de Tecnologia prepared and issued a technical appraisal report confirming at two (02) years the useful life of cell phone sets assigned on a loan-for-use basis. Based on this technical appraisal report and fiscal legislation guidance, the period for recognizing depreciation of cell phone sets assigned on a loan-for-use basis was standardized, eliminating any differences between the fiscal and the accounting depreciation rates.
Supported by its tax consultants´ opinion, in its income tax return for the base year 2005, the Company fully deducted intertemporary differences presented up to the end of the year 2005. Accordingly, the deferred tax on depreciation of assets assigned on loan-for-use basis had been fully reversed by June 30, 2006.
Provision for devaluation of tax credits
The Company recognized tax credits arising from tax losses and negative social contributions, the offsetting of which is limited to 30% of annual taxable income, with no statutes of limitation.
The Company and its subsidiaries TIM Nordeste Telecomunicações S.A. (merged by TIM Nordeste S.A.) and TIM Sul S.A. (merged by TIM Celular S.A.) recognized tax credits on temporary differences.
The subsidiaries TIM Celular S.A and TIM Nordeste S.A (formerly Maxitel S.A) decided to recognize tax credits arising from temporary differences, tax losses and negative social contribution basis only when there are good prospects of future taxable income generation.
Accordingly, due to the mergers described in Note 2-d, there is need for reviewing and adjusting the technical feasibility study dealing with the future taxable income generation in a scenario composed by only two operating companies, in order to conclude on the suitability of recording deferred tax assets. As the Company has not completed this technical study, we have conservatively set up a provision for devaluation of credits on temporary differences, tax losses and negative social contribution basis reflected in the balance sheet in the amount of R$6.502 (parent company) and R$75.134 (consolidated).
As projected by the Management, the deferred, long-term income tax and social contribution deriving from the merger generated tax credit will be realized as follows:
Consolidated
Consolidated | ||
2007 | 12,613 | |
2008 | 29,429 | |
42,042 | ||
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Unrecorded tax losses
The accumulated tax losses and negative social contribution basis as of September 30, 2006 can be summarized as follows:
09/2006 | ||||
Negative | ||||
Social | ||||
Contribution | ||||
Tax Losses | Basis - CSLL | |||
TIM Celular S.A | 3.693.348 | 3.693.348 | ||
TIM Nordeste S.A (formerly Maxitel S.A) | 2.067.553 | 2.067.553 | ||
TIM Participações | 12.062 | 12.063 |
Composition of income tax and social contribution expenses
Parent Company | Consolidated | |||||||||
09/2005 | ||||||||||
09/2006 | 09/2005 | 09/2006 | 09/2005 | Pro-forma | ||||||
Income tax for the period | - | (48.113) | (73.807) | (74.685) | ||||||
Social contribution for the period | - | (17.648) | (26.663) | (26.986) | ||||||
- | (65.761) | (100.470) | (101.671) | |||||||
Deferred income tax | (2.536) | 2.612 | (52.099) | 2.205 | 2.205 | |||||
Deferred social contribution | (913) | 940 | (18.776) | 793 | 793 | |||||
(3.449) | 3.552 | (70.875) | 2.998 | 2.998 | ||||||
(3.449) | 3.552 | (136.636) | (97.472) | (98.673) | ||||||
Below, the reconciliation of income tax and social contribution expenses calculated at legally stipulated tax rates combined with amounts reflected in the income:
Parent Company | ||||
09/2006 | 09/2005 | |||
Pretax income (loss) | (363.524) | 278.206 | ||
Combined tax rate | 34% | 34% | ||
Income tax and social contribution at the combined legally stipulated tax rate | ||||
(Additions)/Exclusions: | ||||
Equity pickup | (120.070) | 98.547 | ||
Provision for devaluation of tax credits | (6.502) | - | ||
Other | (475) | (405) | ||
(127.047) | 98.142 | |||
Income tax and social contribution (charged)/credited to the income | ||||
for the period | (3.449) | 3.552 | ||
Tax rate in effect | 0,95% | -1,28% | ||
Page: 19
Consolidated | ||||||
09/2005 | ||||||
09/2006 | 09/2005 | Pro-forma | ||||
Pretax income (loss) | (243.738) | 373.102 | (753.336) | |||
Combined tax rate | 34% | 34% | 34% | |||
Income tax and social contribution at the combined legally | ||||||
stipulated tax rate | 82.871 | (126.855) | 256.134 | |||
(Additions)/Exclusions: | ||||||
Realization of the provision for maintaining the stockholders´ equity integrity | 24.972 | 24.972 | 24.972 | |||
Exclusions of provisions | - | 4.516 | 4.516 | |||
Unrecorded tax losses and temporary differences | (172.770) | - | (384.190) | |||
Provision for devaluation of tax credits | (75.134) | - | - | |||
Other | 3.425 | (105) | (105) | |||
(219.507) | 29.383 | (354.807) | ||||
Income tax and social contribution charged to the income for the period | (136.636) | (97.472) | (98.673) | |||
Tax rate in effect | 56,06% | 26,12% | 13,10% | |||
10 Prepaid Expenses
Consolidated | ||||
09/2006 | 06/2006 | |||
Fistel Annual Rate (a) | 69.302 | 138.605 | ||
Subvention on selling cell-phones(b) | 135.932 | - | ||
Rentals | 11.859 | 12.054 | ||
Advertising expenses | 28.257 | 32.881 | ||
Financial charges | 9.719 | 10.625 | ||
Other | 6.947 | 11.796 | ||
262.016 | 205.961 | |||
Short-term portion | (246.832) | (189.146) | ||
Long-term portion | 15.184 | 16.815 | ||
(a) The Fistel Rate paid in March this year, referring to fiscal 2006, will be amortized in accordance with the respective tax event. The advertising expenses basically refer to the television sponsoring of Formula 1, also for this year.
(b) As mentioned in Note 4.e, retroactively to January 1, 2006, as from the quarter ended September 30, 2006 the Management has changed the accounting treatment of subsidized sale to subscribers under the post-paid telephone system, with deferral and amortization now being over the minimum 12-month period of contract duration. The contracted fines to clients who cancel their subscriptions or migrate to a prepaid system before the end of their agreements are invariably higher than the subsidy granted on each individual telephone set sale.
(c) The advertising expenses basically refer to the television sponsoring of Formula 1, also this year.
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11 Related-Party Transactions
The related-party transactions, which are performed under regular market conditions, similarly to those with third parties, are thus composed:
Parent Company
Expenses | ||||
Total | Total | |||
09/2006 | 09/2005 | |||
TIM Nordeste Telecom. S.A (a) | - | 246 | ||
TIM Sul S.A (a) | - | 356 | ||
Total | - | 602 | ||
(a) In January 2005 the loan agreements with subsidiaries were settled. These agreements were subject to charges in the equivalent to 104.22% of the monthly exchange variation of the Bank Deposit Certificates CDI.
Consolidated
Assets | ||||
Total | Total | |||
09/2006 | 06/2006 | |||
Telecom Personal Argentina (2) | 684 | 1.477 | ||
Telecom Sparkle (2) | 3.754 | 2.756 | ||
Telecom Italia S.p.A. (3) | 2.868 | 2.256 | ||
Brasil Telecom (1) | 141.517 | 104.494 | ||
Other | 1.968 | 1.487 | ||
Total | 150.791 | 112.470 | ||
Liabilities | ||||
Total | Total | |||
09/2006 | 06/2006 | |||
Telecom Italia S.p.A. (3) | 14.351 | 11.088 | ||
IT Telecom Italia (4) | 278 | 5.594 | ||
Telecom Personal Argentina (2) | 2.336 | 3.603 | ||
Telecom Sparkle (2) | 8.515 | 5.769 | ||
Brasil Telecom (1) | 61.798 | 39.340 | ||
Italtel (4) | 19.629 | 21.322 | ||
Other | 793 | 645 | ||
Total | 107.700 | 87.361 | ||
Page: 21
Revenue | ||||||
Total | ||||||
Total | Total | 09/2005 | ||||
09/2006 | 09/2005 | Pro-forma | ||||
TIM Celular S.A (1) | - | 68.692 | - | |||
Maxitel S.A (1) | - | 4 | - | |||
TIM Brasil Serv. E Participações (5) | 98 | - | 545 | |||
Telecom Itália S.p.A. (3) | 4.724 | - | 10.808 | |||
Telecom Personal Argentina (2) | 1.992 | - | - | |||
Brasil Telecom (1) | 428.351 | - | - | |||
Telecom Sparkle (2) | 2.544 | - | - | |||
Other | 1.356 | - | - | |||
Total | 439.065 | 68.696 | 11.353 | |||
Cost/Expense | ||||||
Total | ||||||
Total | Total | 09/2005 | ||||
09/2006 | 09/2005 | Pro-forma | ||||
TIM Celular S.A (1) | - | 6.204 | - | |||
Maxitel S.A (1) | - | 1.121 | - | |||
Blah! S.A | - | 2.828 | - | |||
Telecom Italia S.p.A. (3) | 15.675 | 11 | 14.000 | |||
TIM Brasil Serv. e Participações (5) | 285 | - | - | |||
Italtel (4) | 30.215 | - | - | |||
Brasil Telecom (1) | 86.231 | - | - | |||
Telecom Sparkle (2) | 13.691 | - | 9.249 | |||
Telecom Personal Argentina (2) | 6.029 | - | - | |||
Other | 841 | - | - | |||
Total | 152.967 | 10.164 | 23.249 | |||
(1) These agreements refer to telecommunications service operation covering interconnection, roaming, media assignment and co-billing agreements, as well as long-distance-related relationship.
(2) These refer to roaming, value-added services VAS and media assignment.
(3) Receivables and payables refer to international roaming and technical post-sales assistance.
(4) This refers to the development and maintenance of software pieces used in the telecommunications service billing.
(5) TIM Brasil Serviços e Participações S.As receivables and payables arose from loan agreements with its subsidiaries TIM Celular S.A. and TIM Nordeste S.A. (formerly Maxitel S.A.), bearing interest at the equivalent to 100% of the Bank Deposit Certificates CDI´ variation.
Page: 22
12 Judicial Deposits
Consolidated | ||||
09/2006 | 06/2006 | |||
Civil and Labor | 23.727 | 19,217 | ||
ICMS 69/98 Agreement | 2.234 | 2,317 | ||
ICMS 5% difference in determination in Santa Catarina | 11.779 | 11,779 | ||
Other tax-related | 25.978 | 25,314 | ||
63.718 | 58,627 | |||
13 Investments
Parent Company | ||||
09/2006 | 06/2006 | |||
Investments | ||||
Subsidiaries | 8.350.125 | 8.329.197 | ||
Other | 7.103 | 7.498 | ||
8.357.228 | 8.336.695 | |||
(a) participation in subsidiaries:
09/2006 | ||||||
TIM Celular | TIM Nordeste | |||||
S.A | Telecom. S.A (i) | Total | ||||
- Subsidiaries | ||||||
Number of shares held | 31,506,833,561 | |||||
Total participation in capital | 100% | |||||
Stockholders equity | 8,350,125 | |||||
Loss for the period | (416,006) | |||||
Equity pickup | (416,006) | 62,859 | (353,147) | |||
Investment value | 8,283,705 | 8,283,705 | ||||
Special goodwill reserve (*) | 66,420 | 66,420 | ||||
Investment value | 8,350,125 | 8,350,125 | ||||
- Other | ||||||
Goodwill cost | 16,918 | 16,918 | ||||
Goodwillaccumulated amortization | (9,815) | (9,815) | ||||
7,103 | 7,103 | |||||
(i) The investment in TIM Nordeste Telecomunicações S.A, merged by Maxitel S.A (note 2-d), for the period from January 1 through May 31, 2006 was evaluated on the equity method.
Page: 23
06/2006 | ||||||
TIM Celular | TIM Nordeste | |||||
S.A | Telecom. S.A | Total | ||||
- Subsidiaries | ||||||
Number of shares held | 31.506.833.558 | |||||
Total participation in capital | 100% | |||||
Stockholders equity | 8.329.197 | |||||
Loss for the period | (436.934) | |||||
Equity pickup | (436.934) | 62,859 | (374,075) | |||
Investment value | 8.237.506 | 8,237,506 | ||||
Special goodwill reserve (*) | 91.691 | 91,691 | ||||
Investment value | 8.329.197 | 8,329,197 | ||||
- Other | ||||||
Goodwill cost | 16.918 | 16,918 | ||||
Goodwillaccumulated | ||||||
amortization | (9.420) | (9,420) | ||||
7.498 | 7,498 | |||||
(*) The special goodwill reserve recorded at TIM Nordeste Telecomunicações S.A. (merged by Maxitel S.A.) and TIM Sul S.A. (merged by TIM Celular S.A.) represents the parent companys rights in future capitalizations. These tax benefits are connected with goodwill paid upon privatization of Tele Nordeste Celular Participações S.A.,(merged by TIM Participações S.A. in August 2004) and Tele Celular Sul Participações S.A. (TIM Participações S.As former name). This goodwill was recorded against the special goodwill reserve, under Stockholders equity, being realized ratably to the estimated future income and the time of the concession, which is expected to end by 2008.
(b) changes in investments in subsidiaries:
TIM Celular | TIM Nordeste | |||||||
S.A | Telecom. S.A | TIM Sul S.A | Total | |||||
Investment balance as of March 31, 2006 | 5.731.681 | 1.415.893 | 1.422.238 | 8.569.812 | ||||
.Capital increase through incorporation of shares | 1.424.347 | (1.424.347) | - | - | ||||
Capital increase through business merger | 1.357.999 | - | (1.357.999) | - | ||||
Equity pickup | (184.830) | 8.454 | (64.239) | (240.615) | ||||
Investment balance as of June 30, 2006 | 8.329.197 | - | - | 8.329.197 | ||||
Equity pickup | 20.928 | - | - | 20.928 | ||||
Investment balance as of September 30, 2006 | 8.350.125 | - | - | 8.350.125 | ||||
Page: 24
14 Property, plant and equipment
Consolidated | ||||||||||
09/2006 | 06/2006 | |||||||||
Annual average | Accumulated | |||||||||
depreciation rate % | Cost | Depreciation | Net | Net | ||||||
SMP exploration rights | 20 | 3.223.069 | (1.238.389) | 1.984.680 | 2.046.740 | |||||
Switching/transmission | ||||||||||
equipment | 14,29 | 6.416.106 | (3.395.407) | 3.020.699 | 3.064.974 | |||||
Loan-for-use handsets | 50 | 912.153 | (574.224) | 337.929 | 281.614 | |||||
Infrastructure | 33,33 | 1.460.607 | (532.003) | 928.604 | 918.849 | |||||
Leasehold improvements | 33,33 | 91.043 | (47.605) | 43.438 | 45.215 | |||||
Software and hardware | 20 | 940.890 | (455.445) | 485.445 | 498.477 | |||||
Assets for general use | 10 | 273.091 | (74.642) | 198.449 | 194.020 | |||||
Intangible assets | 20 | 2.955.302 | (1.244.200) | 1.711.102 | 1.681.785 | |||||
Assets and installations in service | 16.272.261 | (7.561.915) | 8.710.346 | 8.731.674 | ||||||
Plots of land | 24.326 | - | 24.326 | 22.365 | ||||||
Construction work in progress | 248.502 | - | 248.502 | 411.858 | ||||||
16.545.089 | (7.561.915) | 8.983.174 | 9.165.897 | |||||||
The construction work in progress basically refers to the construction of new transmission units (Base Radio Broadcast Station - ERB) for network expansion.
In the nine-month period ended September 30, 2006, R$ 12,573 of financial charges on loans taken to finance the construction was capitalized as property, plant and equipment, (R$ 8,962 in June 2006).
New technology implementation
The subsidiaries operate their service network using TDMA and GSM technology. On September 30, 2006, with the introduction of the GSM technology no provision for devaluation of fixed assets due to obsolescence was deemed necessary, as both technologies are to remain in operation at the companies until 2008, at least. The assets related to TDMA technology have been subject to accelerated depreciation and must be fully depreciated by 2008.
SMP ( Personal Mobile Service) exploitation rights
Consolidated | ||||||||
TIM | TIM | |||||||
Celular S.A | Nordeste S.A | 09/2006 | 06/2006 | |||||
SMP exploitation rights - principal | 1.943.320 | 854.729 | 2.798.049 | 2.798.049 | ||||
Band vacancy | 13.664 | - | 13.664 | 13.664 | ||||
Capitalized charges | 61.030 | 350.326 | 411.356 | 411.356 | ||||
2.018.014 | 1.205.055 | 3.223.069 | 3.223.069 | |||||
(1.238.38 | ||||||||
Accumulated amortization | (590.163) | (648.226) | 9) | (1.176.329) | ||||
1.427.851 | 556.829 | 1.984.680 | 2.046.740 | |||||
Page: 25
SMP authorizations and radiofrequency
The subsidiaries SMP (Personal Mobile Service) authorizations are presented by the terms signed in the years from 2001 through 2004 with ANATEL, for the exploration of this service. Previously, the subsidiaries TIM Sul S.A. (merged by TIM Celular S.A.) and TIM Nordeste S.A. (formerly Maxitel S.A., into which TIM Nordeste Telecomunicações S.A. was merged) had been granted by ANATEL a fifteen-year concession for the SMC (Mobile Communication Service), which was changed into authorization for the SMP in 2002. The remaining SMC concession period is the SMP authorization period.
From 2001 through 2004, the subsidiaries were authorized by ANATEL to use radio frequency blocs connected with the provision of SMP at 900 MHz and 1800 MHz.
Our authorizations for radio frequencies at 800 MHz, 900MHz and 1800MHz for provision of SMP services are due to expire early in September 2007, being renewable only one time for another 15-year period . However, ANATEL can reject our requests for renewal of these authorizations , if they find that we are not using the allocated spectrum in an appropriate, rational way; if the Company has repeatedly violated the applicable legislation or if the spectrum redistribution is deemed necessary.
15 Deferred Charges
Consolidated | ||||
09/2006 | 06/2006 | |||
Pre-operating expenses: | ||||
Third-party services | 228,665 | 228,665 | ||
Personnel expenses | 79,367 | 79,367 | ||
Rentals | 48,914 | 48,914 | ||
Materials | 3,439 | 3,439 | ||
Depreciation | 10,202 | 10,202 | ||
Financial charges net | 46,774 | 46,774 | ||
Other expenses | 5,990 | 5,990 | ||
423,351 | 423,351 | |||
Accumulated amortization | (180,178) | (169594) | ||
243,173 | 253,757 | |||
Page: 26
16 Suppliers
Parent Company | ||||
09/2006 | 06/2006 | |||
Local currency | ||||
Suppliers of materials and services | 541 | 931 | ||
541 | 931 | |||
Consolidated | ||||
09/2006 | 06/2006 | |||
Local currency | ||||
Suppliers of materials and services | 1.416.769 | 1.486.665 | ||
Interconnection (a) | 231.150 | 93.045 | ||
Roaming (b) | 13.602 | 10.285 | ||
Co-billing (c) | 86.372 | 72.938 | ||
1.747.893 | 1.662.933 | |||
Foreign currency | ||||
Suppliers of materials and services | 13.234 | 17.857 | ||
Roaming (b) | 39.423 | 32.752 | ||
52.657 | 50.609 | |||
1.800.550 | 1.713.542 | |||
(a) this refers to use of the network of other fixed and mobile cell telephone operators, where calls are initiated at TIM network and end in the network of other operators (detraf) .
(b) this refers to calls made when customers are outside their registration area, and are therefore considered visitors in the other network (roaming); and
(c) this refers to calls made by customers when they choose another long-distance call operator CSP.
Page: 27
17 Loans and Financing
Consolidated | ||||||
Guarantees | 09/2006 | 06/2006 | ||||
Local currency | ||||||
Banco BBA Creditanstalt S.A. debit balance restated based on the CDI rate plus interest at 3.3% p.a. | N.A | 3,414 | 3,269 | |||
Banco do Nordeste - financing subject to pre-fixed interest of 14% p.a. and a 15% and 25% bonus on payment on maturity, the subject matter of a hedging operation for which the rate is 69.8% and 76.90% of the CDI monthly variation . | Bank surety by Banco Bradesco S.A | 201,897 | 206,868 | |||
BNDES National Bank for Economic and Social Development: this financing bears interest at 6% p.a. plus variation of the TJLP (long-term interest rate) as disclosed by the Brazilian Central Bank or of the "UMBNDES" of the Basket of Currencies plus the rate from resolution 635/87 (average BNDES external funding rate). The Basket of Currencies financing was the subject matter of a swap to CDI operation at the rate of 65.75% | Revenue portions arising from provision of cellular mobile service and TIM Participações S/A surety | 4,978 | 9,574 | |||
BNDES (Banco Nacional do Desenvolvimento Econômico e Social): this financing bears interest at 3.85% p.a plus variation of the TJLP (long-term interest rate) as disclosed by the Brazilian Central Bank or of the "UMBNDES" of the Basket of Currencies. plus the rate from resolution 635/87 (average BNDES external funding rate). The Basket of Currencies financing was the subject matter of a swap to approximatelly 128% of the CDI monthly variation. | Direct portion: bank surety. Indirect portion: TIM Brasil surety, with part of the blocked service collection | 149,337 | 178,234 | |||
BNDES (Banco Nacional de Desenvolvimento Econômico e Social): this financing bears interest at an average rate of 4.20% p.a., plus variation of the TJLP (long-term interest rate) as disclosed by the Brazilian Central Bank. | TIM Brasil Serviços e Participações S.A. surety with part of the collection service blocked. | 1,135,176 | 1,131,099 | |||
BNDES (Banco Nacional de Desenvolvimento Econômico e social): this financing bears interest at an average rate of 3% p.a., plus variation of the TJLP (long-term interest rate) as disclosed by the Brazilian Central Bank. | Bank surety | 50,979 | 50,783 | |||
Syndicated Loan (a) the debit balance is restated based on the CDI rate variation plus a 0.90% p.a. margin until 12/31/06, and from then on a margin established in accordance with the ratio of the Net Consolidated Debt/Consolidated EBITDA. | TIM Brasil Serviços e Participações S.A. surety | 607,442 | 632,139 |
Page: 28
Consolidated | ||||||
Guarantees | 09/2006 | 06/2006 | ||||
Local Currency | ||||||
Compror: Bank financing for payment of goods and services suppliers, linked to foreign currency variations. 68% of the agreements denominated in US dollars (average coupon of 4.65% p.a.) and 32% of the agreements denominated in Yen (average coupon of 0.83% p.a.) These agreements are under hedge protection which result in cost of some 107.5% of the CDI daily rate. | N.A. | 666,149 | 673,548 | |||
Hedge contracts | 63,939 | 33,216 | ||||
2,881,525 | 2,918,875 | |||||
Short-term portion | (914,065) | (899,701) | ||||
Long-term portion | 1,967,460 | 2,019,174 | ||||
(a) The following Financial Institutions are part of this loan agreement: HSBC Bank Brasil S.A. Banco Múltiplo, Banco ABN AMRO Real S.A., Banco BNP Paribas Brasil S.A., Banco Bradesco S.A., Banco do Brasil S.A., Banco Itaú BBA S.A., Banco Santander Brasil S.A., Banco Société Générale Brasil S.A., Banco Votorantim S.A., Unibanco União de Bancos Brasileiros S.A.
The subsidiaries entered into hedging transactions as a safeguard against devaluation of the Brazilian currency (Real) in relation to foreign currencies and changes in the fair value of financing bearing prefixed interest rates with the same terms as the financing agreement.
The long-term portion of loans and financing as of September 30, 2006 matures as follows:
Consolidated
Consolidated | ||
2007 | 89.700 | |
2008 | 536.793 | |
2009 | 534.119 | |
2010 | 234.119 | |
2011 onwards | 572.616 | |
1.967.460 | ||
Page: 29
18 Labor obligations
Parent Company | ||||
09/2006 | 06/2006 | |||
Salaries and fees | - | 2 | ||
Payroll taxes | 110 | 130 | ||
Labor provisions | 855 | 656 | ||
Employees´ withholding | 38 | 67 | ||
1,003 | 855 | |||
Consolidated | ||||
09/2006 | 06/2006 | |||
Salaries and fees | 1,955 | 1,926 | ||
Payroll taxes | 27,543 | 23,072 | ||
Labor provisions | 100,703 | 77,177 | ||
Employees withholding | 4,707 | 4,333 | ||
134,908 | 106,508 | |||
19 Taxes, Charges and Contributions
Parent Company | ||||
09/2006 | 06/2006 | |||
ICMS (Value-Added Sales Tax) | 6 | - | ||
COFINS (Contributions to Social Security Funding) | 247 | - | ||
PIS (Social Integration Program) | 54 | - | ||
IRRF (Withholding Income Tax) | 1 | 4 | ||
Other | 38 | 12 | ||
346 | 16 | |||
Consolidated | ||||
09/2006 | 06/2006 | |||
IRPJ and CSL (Income Tax and Social Contribution) | - | 10,254 | ||
ICMS (Value-Added Sales Tax) | 245.595 | 215,912 | ||
COFINS (Contributions to Social Security Funding) | 31.340 | 25,673 | ||
PIS (Social Integration Program) | 6.790 | 5,563 | ||
FISTEL (Telecommunications inspection fund) | 12.527 | 12,240 | ||
FUST/FUNTTEL(Telecommunications Service Universalization Fund/ Telecommunication Technologic Development Fund) |
6.114 | 5,559 | ||
IRRF (Withholding Income Tax) | 2.423 | 2,563 | ||
ISS (Service Tax) | 19.551 | 19,351 | ||
Other | 5.451 | 8,229 | ||
329.791 | 305,344 |
Page: 30
20 Authorizations payable
Consolidated | ||||||||
TIM | TIM | |||||||
Celular | Nordeste | |||||||
S.A | S.A | 09/2006 | 06/2006 | |||||
SMP exploitation rights | ||||||||
Authorizations acquired | 82.154 | 82.406 | 164.560 | 164.560 | ||||
Payments | (82.154) | (75.065) | (157.219) | (157.219) | ||||
Monetary restatement | 18.382 | 18.697 | 37.079 | 36.728 | ||||
18.382 | 26.038 | 44.420 | 44.069 | |||||
Short-term portion | (18.382) | (19.600) | (37.982) | (34.792) | ||||
Long-term portion | - | 6.438 | 6.438 | 9.277 | ||||
21 Provision for Contingencies
The Company and its subsidiaries are party to certain lawsuits (labor, tax, regulatory and civil) arising in the normal course of their business, and have recorded provisions when management understands that the risk of loss is deemed probable, based on the opinion of their legal advisors.
The provision for contingencies is thus composed:
Parent Company | ||||
09/2006 | 06/2006 | |||
Civil | 274 | 274 | ||
Labor | 2,687 | 2,680 | ||
2,961 | 2.954 | |||
Consolidated | ||||
09/2006 | 06/2006 | |||
Civil | 45.067 | 41,047 | ||
Labor | 35.968 | 36,897 | ||
Tax | 52.732 | 52,584 | ||
Regulatory | 4.410 | 6,394 | ||
138.117 | 136,922 | |||
Page: 31
Civil contingencies
Several legal and administrative processes have been filed against the Company by consumers, suppliers, service providers and consumer protection agencies, dealing with various issues arising in the regular course of business. It is the Companys policy to analyze each legal or administrative process to determine whether it involves probable, possible or remote risk of contingencies. In doing so, the Company always takes into account the opinion of lawyers engaged to conduct the processes. The evaluation is periodically reviewed, with the possibility of being modified over the processes due to new facts or events such as jurisprudential changes.
Consumer lawsuits
Approximately 22,000 individual lawsuits (20,000 in June 2006) have been filed against the subsidiaries, mostly by consumers claiming for settlement of matters arising from their relationship with the Company. Among these, the allegedly undue collection, contract cancellation, defects of equipment and non-compliance with delivery deadlines stand out. Provisions have been set up for those processes involving probable losses.
Collective actions
There are three collective actions against subsidiaries involving the risk of probable loss, which can be summarized as follows: (i) a suit against TIM Celular S.A. claiming for the installation of a service unit for personal assistance in Rio Branco, AC.; (ii) a suit against TIM Nordeste S.A. in the state of Pernambuco questioning the Companys policy for defective phone replacement, allegedly in disagreement with the manufacturers warranty terms; (iii) a suit against TIM Nordeste S.A. in the state of Ceará, claiming for the Companys obligation to replace cell phone sets which have been the subject of fraud in that state. No provisions have been recorded for these contingencies, given the obligations involved therein and the impossibility of accurately quantifying the possibility of losses at the current stage of the processes.
Other Actions and Proceedings
The subsidiary TIM Nordeste S.A. has been sued by the Federal Audit Court at administrative level with the possibility of being submitted to a court of justice, for allegedly defaulting on payment of R$ 25,000 representing interest and monetary restatement on the second installment due on acquisition the Area 9 (Bahia and Sergipe) license. As the risk of an unfavorable outcome for the Company is deemed possible by both internal and external advisors, no provision has been set up.
Page: 32
The subsidiary currently TIM Nordeste S.A. is also defendant in an action filed by the legal services providers, the law firm Mattos & Callumby Lisboa Advogados, in Rio de Janeiro. They claim for success fees allegedly due under a service agreement for filing court injunctions against interest and monetary restatement on purchase prices of TIM Nordeste S.A.s Band B. As the risk of an unfavorable outcome for the Company is deemed possible by both internal and external advisors, no provision has been set up.
Labor contingencies
These refer to claims filed by both former employees in connection with salaries, salary differences and equalization, overtime, variable compensation/commissions and former employees of service providers who, based on pertinent legislation, claim for the Companys and/or its subsidiaries accountability for labor obligations defaulted on by their outsourced employers.
Labor claims
Of the 1,493 labor suits filed against the Company and its subsidiaries (1.372 in June 2006), over 60% involve claims against service providers, concentrated on certain companies from São Paulo, Rio de Janeiro and Recife.
Still on third parties´ claims, part of these relate to specific projects of service agreement review, often ended in rescission in 2006 and winding up of the companies and termination of employees involved. A further significant portion of contingencies refers to organizational restructuring, among which the discontinuance of the Client Relationship Centers in Fortaleza, Salvador and Belo Horizonte, and the termination of 800 own employees and outsourced personnel stand out. All processes involving the risk of loss have been provided for by the Company.
Occupational Accidents
With the enactment of the Constitutional Amendment no. 45/2004, the litigations involving occupational accidents that resulted in claims for damages, previously judged by the State Court began to be judged by the Labor Courts. Given the nature of the matters under discussion and considering that the amount of indemnifications (if any) is arbitrated by the Judiciary, involving a considerable level of subjectiveness, the related contingency has been estimated at some R$ 1,800, based on the total contingent loss.
DRT (Regional Labor Offices) and INSS (National Social Security Institute)
The subsidiary TIM Nordeste S.A. was assessed for R$ 778 by the Regional Labor Office from Minas Gerais, on charges of allegedly irregular engagement of third parties. The risk of loss was deemed probable by the Companys advisors, and an adequate provision was recorded.
Page: 33
Tax contingencies
IR (Income Tax) and CSLL (Social Contribution)
In 2005, the subsidiary TIM Nordeste S.A. (formerly Maxitel S.A.) was assessed by the Internal Revenue Secretariat of the State of Minas Gerais for R$ 126,933, for the following reasons: (i) taxation of monetary variations on swap operations and exchange variation on unsettled loans; (ii) a separate fine for default on payment of social contribution on an estimated monthly basis for the year 2002 and part of 2001; (iii) default on payment of corporate income tax on an estimated monthly basis for the year 2002; and (iv) remittance of interest abroad (IRRF Withholding Income Tax) a voluntary denunciation without payment of arrears charges. These assessments are now being discussed with the taxing authorities. Based on its internal and external advisors´ opinion, the Management estimates probable losses on these processes at R$ 32,750. As they refer to income tax and social contribution, had these payments been made on schedule, they would have been recorded as income tax and social contribution, and accordingly, the Company found it correct to record the related provision for contingency as expenses under Non-operating expenses.
In September 2003 the subsidiary TIM Nordeste Telecomunicações S.A. (merged by Maxitel S.A.) was assessed by the Internal Revenue Secretariat of the State of Ceará for R$ 12,721 referring to: (i) disallowance of R$ 8,402 expenses included in the IRPJ determination for the period from 1999 through 2001; (ii) R$ 3,208 of differences in CSLL payments for the years from 1998 through 2001; (iii) differences of R$ 334 and R$ 777, respectively, in the payment of PIS and COFINS for the years from 1998 through 2002. The Company filed an impugnation and a voluntary appeal against this assessment. Its internal and external lawyers classify as possible the risk of loss on this action, and accordingly, no provision has been set up.
ICMS (Value-added Sales Tax)
In 2003 and 2004 the subsidiary TIM Sul S.A. was assessed by the Internal Revenue Secretariat of the State of Santa Catarina totalizing the actual amount of R$ 85,114 mainly relating to dispute on the levying of ICMS on certain services provided ( with a reduction of R$ 10,552 in relation to June 2006, due to the Company´s partial gains). The Company is currently discussing these assessments with the tax authorities. According to its internal and external lawyers, the probable losses thereon, duly provided for, amount to R$ 14,430.
In 2006, the indirectly controlled subsidiary TIM Nordeste S.A. received from the State of Piauí´s taxing authorities tax assessment notices totaling R$7.308. The matter under dispute was the difference between intrastate and interstate ICMS rates applicable to acquisition of fixed assets and use and comsumption goods, and the determination of ICMS basis of calculation for acquisition of goods intended for sale. These assessments are being impugnated by the subsidiary at administrative level. No provision has been set up for these contingencies, the risk of loss on which is deemed possible by the Company´s internal and external lawyers.
Page: 34
The subsidiary TIM Celular S.A. was fined by the taxing authorities of the state of Rio de Janeiro for R$ 3,678, for delaying voluntary payment that included understated arrears interest. The subsidiary is currently discussing these assessments with the tax authorities. Based on its internal and external lawyers, the Management concluded that the action will probably be lost, having, therefore, set up a provision. Early in 2006, based on the opinion of its internal and external advisors, the subsidiary paid the amounts due, with reduction of interest and fine, under the tax amnesty scheme then implemented.
PIS (Social Integration Program) and COFINS (Contributions to Social Security Funding)
In 2004, the subsidiary TIM Nordeste S.A. (formerly Maxitel S.A.) was assessed in connection with PIS and COFINS due on exchange variation arising from revenue generated in 1999. Both assessment notices amounted to R$ 30,913. Because this is a controversial matter involving interpretation of applicable legislation, a provision was set up, in 2004, for the same amount. On March 13, 2006 the decision was issued on the action filed by the company against Law 9718 of November 27, 1998, with no right to further appeal. The company alleged that this law was unconstitutional concerning the expansion of the tax basis of calculation, preventing the collection of PIS and COFINS on non-operating revenue. In view of the final decision, the Management requested extinction of the tax assessment against the subsidiary, concerning PIS and COFINS on exchange variation and reversed, in 2006, the provision set up in 2004 (Note 27).
CPMF
In 2004, the subsidiary TIM Nordeste S.A. (formerly Maxitel S.A.) filed a court injunction claiming for the right not to pay CPMF on symbolic purchase and sales operations performed during the corporate conversion of foreign loans into its own capital. A R$ 10,005 judicial deposit was made to cover the amount of CPMF allegedly due on those operations. As the risk of loss on this process is deemed remote by the Companys internal and external advisors, no provision has been set up.
Regulatory Contingencies
Due to default on some SMPs provisions and quality targets defined under the PGMQ-SMP General SMP Quality Goals Plan ANATEL started some Procedures for Determining Default on Obligations PADO, involving the subsidiaries.
The subsidiaries have endeavored to avoid being assessed, with arguments, mostly of technical and legal nature, that may contribute to reduce significantly the initial fine charged or event definitively file the PADO, with no sanctions. The related provision recorded in the Companys balance sheet was set up based on the amount of fines charged, the risk of loss involved being classified probable according the opinion given by the Companys internal and external advisors.
Page: 35
FUST Telecommunications Service Universalization Fund
On December 15, 2005, Anatel issued its Summary no. 07 aimed at collecting contributions to the FUST out of interconnection revenues earned by providers of telecommunications services, as from the date of enactment of Law 9998 of August 17, 2000. The Company still believes that based on applicable legislation (including the sole paragraph of article 6 of Law 9998/00), the above revenues are not subject to the FUST charges, and accordingly, the Management has taken the necessary measures to protect their interests. Given Anatels diverging views, the Companys internal and external lawyers evaluated the favorable and the unfavorable arguments involved in its claims, and considering the status of the action, have concluded that the possibility of loss is remote. Therefore, in accordance with the applicable accounting practices, the Management has not set up a provision for this contingency. Currently ANATELs intended collection of FUST on interconnection revenues earned by the Company is suspended, because of the temporary order issued by the Federal Regional Court of the Federal District.
Possible contingencies not provided for
Civil, Labor, Regulatory and Tax-related actions have been filed against the Company and its subsidiaries involving risk of loss that is classified as possible by the management and the Companys lawyers. No provision has been set up for these contingencies.
Consolidated | ||||
09/2006 | 06/2006 | |||
Civil | 65.995 | 54.192 | ||
Labor | 35.234 | 31.055 | ||
Tax | 197.487 | 192.869 | ||
Regulatory | 23.368 | 23.368 | ||
322.084 | 301.484 | |||
The above described are the main actions involving the risk of possible loss.
22 Stockholders Equity
a. Capital
As authorized by the Administrative Council, regardless of the statutory reform, the Companys capital is represented by up to 2,500,000,000,000 (two trillion and five hundred billion ) shares.
Page: 36
At the General Extraordinary Stockholders´ Meeting of September 29, 2006, TIM Participações approved a capital increase of R$ 50,450, with issuance of 2,427,042,369 common shares and 4,698,352,944 preferred shares through capitalization of the Special Goodwill Reserve composed of tax benefit granted to the Company´s subsidiaries in 2005. TIM Brasil subscribed and paid in cash for the whole capital increase, using credits held against the Company due to tax benefit granted to the subsidiaries in connection with amortization of goodwill merged in 2000 (Note 22-b). Should any stockholder exercize their preferential rights , the amounts paid for acquisition of shares will be passed on to TIM Brasil. The minority stockholders´ preferential right will end on November 3, 2006.
Capital subscribed and paid-in as of September 30, 2006 comprises shares without par value, thus distributed:
09/2006 | 06/2006 | |||
Number of common shares | 793.544.276.988 | 791.117.234.619 | ||
Number of preferred shares | 1.536.170.582.578 | 1.531.472.229.634 | ||
2.329.714.859.566 | 2.322.589.464.253 | |||
b. Capital reserves
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 stockholder, with new issuance of shares. The respective capital increase will be subject to preemptive rights of the minority stockholders, in proportion to their shareholdings, by type 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 stockholder, in accordance with Instruction No. 319/99 of the Brazilian Securities Commission (CVM).
Page: 37
Reserve for future capital increase
In March 2005, capital increases were approved at the subsidiaries TIM Nordeste Telecomunicações S.A. (merged by TIM Nordeste S.A., formerly Maxitel S.A.) and TIM Sul S.A.(merged by TIM Celular S.A.) as a result of capitalization of part of the special goodwill reserve, as above mentioned. The period for the minority stockholders to exercise their preferential rights expired in April 2005, when TIM Participações S.A. received R$6,401 from the stockholders who have exercised their preferential rights. When such amount was received, the exchange of shares mentioned in note 2.a, whereby the subsidiaries became wholly-owned companies of TIM Participações S.A., and the related capital increases of the parent company had already been established. Therefore, the amount received from minority stockholders (now stockholders of TIM Participações S.A.) was recorded as Reserve for Future Capital Increase, to be realized with no further issuance of shares, to the benefit of all stockholders.
On September 29, 2006, the General Extraordinary Stockholders´ Meeting approved capital increase in the amount of R$ 6,401 without issuance of shares, in benefit of all stockholders.
c. Income reserves
Legal reserve
This refers to the 5% (five percent) of net income for every year ended December 31 to be appropriated to the legal reserve, which should not exceed 20% (twenty percent) of capital. Also, the Company may not set up a legal reserve when this reserve plus capital reserve exceeds 30% (thirty percent) of capital. This reserve will only be used for capital increase or compensation of accumulated losses.
Unearned income reserve
The unearned income reserve is originated 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 the year 2003.
On March 7, 2006, at the General Stockholders Meeting, the Companys management approved the distribution this amount as dividends.
Page: 38
Reserve for expansion
This reserve is composed of the remainder of net income for the year ended December 31, 2005, adjusted in accordance with art. 202 of Law 6.404/76 R$ 299,074 , as determined by the CVM Instruction No. 59/86, to be used for investments and network expansion. This reserve is formed based on paragraph 2, article 40 of the by-laws and article 194 of Law 6.404/76. Additionally, the investments to be made are supported by the capital budget approved at the General Extraordinary Stockholders Meeting held on March 7, 2006.
d. Dividends
Dividends are calculated in accordance with the Bylaws and Brazilian Corporate Law (Lei das Sociedades por Ações).
As stipulated in its by-laws, the Company shall distribute an amount equivalent to 25% of adjusted net income as obligatory dividend every year ended December 31, provided there are funds available for distribution.
Preferred shares are nonvoting but take priority on (i) the payment of capital at no premium, and (ii) payment of a minimum noncumulative dividend of 6% p.a. on the total obtained from dividing the capital stock representing this type of shares by the total number of the same class of shares issued by the Company.
In order to comply with the New Corporate Law, the Companys bylaws 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.
Page: 39
23 Net operating revenue
Consolidated | ||||||
09/2005 | ||||||
09/2006 | 09/2005 | Pro-forma | ||||
Telecommunications service revenue | ||||||
Subscription charges | 431.114 | 203.505 | 395.806 | |||
Use charges | 3.880.741 | 1.188.642 | 3.114.280 | |||
Network use | 2.324.716 | 692.709 | 1.834.819 | |||
Long-distance charges | 939.876 | 32.797 | 587.513 | |||
VAS Additional services | 635.349 | 153.005 | 407.960 | |||
Other | 65.997 | 43.547 | 85.241 | |||
8.277.793 | 2.314.205 | 6.425.619 | ||||
Sales of products | 1.505.810 | 515.843 | 1.546.543 | |||
Gross operating revenue | 9.783.603 | 2.830.048 | 7.972.162 | |||
Deductions from gross revenue | ||||||
Taxes | (2.120.574) | (589.463) | (1.701.812) | |||
Discounts | (330.110) | (114.678) | (230.905) | |||
Other | (134.844) | (11.375) | (49.011) | |||
(2.585.528) | (715.516) | (1.981.728) | ||||
7.198.075 | 2.114.532 | 5.990.434 | ||||
24 Cost of services rendered and goods sold
Consolidated | ||||||
09/2005 | ||||||
09/2006 | 09/2005 | Pro-forma | ||||
Personnel | (82.532) | (20.459) | (90.603) | |||
Third-party services | (218.773) | (54.374) | (202.434) | |||
Interconnection charges | (1.379.058) | (261.716) | (948.176) | |||
Depreciation and amortization | (976.684) | (280.121) | (806.292) | |||
Telecommunications inspection fund | (7.622) | (2.992) | (12.093) | |||
Other | (109.339) | (15.525) | (102.899) | |||
Cost of services rendered | (2.774.008) | (635.187) | (2.162.497) | |||
Cost of goods sold | (1.118.109) | (388.788) | (1.203.893) | |||
Total cost of services rendered and goods sold | (3.892.117) | (1.023.975) | (3.366.390) | |||
Page: 40
25 Selling expenses
Consolidated | ||||||
09/2005 | ||||||
09/2006 | 09/2005 | Pro-forma | ||||
Personnel | (223.340) | (47.792) | (166.456) | |||
Third-party services | (1.266.161) | (288.698) | (1.294.147) | |||
Allowance for doubtful accounts | (328.696) | (90.226) | (235.372) | |||
Telecommunications inspection fund | (310.796) | (91.080) | (268.655) | |||
Depreciation and amortization | (234.370) | (36.270) | (172.102) | |||
Other | (76.666) | (16.840) | (86.237) | |||
(2.440.029) | (570.906) | (2.222.969) | ||||
26 General and administrative expenses
Parent Company | ||||
09/2006 | 09/2005 | |||
Personnel | (4.003) | (4.039) | ||
Third-party services | (9.043) | (6.708) | ||
Other | (339) | (316) | ||
(13.385) | (11.063) | |||
Consolidated | ||||||
09/2005 | ||||||
09/2006 | 09/2005 | Pro-forma | ||||
Personnel | (139.907) | (23.792) | (114.968) | |||
Third-party services | (274.005) | (75.752) | (243.835) | |||
Depreciation and amortization | (249.517) | (31.329) | (178.409) | |||
Others | (58.730) | (9.561) | (47.186) | |||
(722.159) | (140.434) | (584.398) | ||||
27 Other operating revenues (expenses) - Net
Parent Company | ||||
09/2006 | 09/2005 | |||
Revenues | ||||
Reversal of provision for contingencies | 487 | 458 | ||
Dividends invalidated by prescription | 2.757 | 1.907 | ||
Other receivables | 488 | - | ||
3.732 | 2.365 | |||
Expenses | ||||
Taxes, rates and contributions | (301) | (803) | ||
Amortization of goodwill | (1.186) | (1.186) | ||
Provision for contingencies | (233) | (868) | ||
Other operating expenses | (1) | (301) | ||
(1.721) | (3.158) | |||
Other operating revenues (expenses) Net | 2.011 | (793) | ||
Page: 41
Consolidated | ||||||
06/2005 | ||||||
06/2006 | 06/2005 | Pro-forma | ||||
Revenues | ||||||
Fines on telecommunications services | 37.002 | 9.033 | 24.810 | |||
Reversal of provision for contingencies (a) | 35.079 | 1.716 | 3.525 | |||
PIS/COFINS recovery (Note 8) | 52.317 | - | - | |||
ICMS recovery | 15.868 | - | - | |||
Dividends invalidated by prescription | 4.522 | 3.165 | 3.165 | |||
Other operating revenues | 5.787 | 269 | 10.971 | |||
150.575 | 14.183 | 42.471 | ||||
Expenses | ||||||
Amortization of goodwill paid on privatization | (37.837) | (37.837) | (37.837) | |||
Concession amortization | (186.178) | (6.971) | (186.003) | |||
Amortization of deferred charges | (1.881) | - | (4.245) | |||
Taxes, rates and contributions | (1.186) | (1.186) | (1.186) | |||
Amortization of goodwill | (27.852) | (15.727) | (19.769) | |||
Provision for contingencies | (15.756) | (4.964) | (14.713) | |||
Losses on legal actions | (16.397) | (5.438) | (14.234) | |||
Other operating expenses | - | - | (574) | |||
(287.087) | (72.123) | (278.561) | ||||
Other operating revenues (expenses ) - Net | (136.512) | (57.940) | (236.090) | |||
(a) In 2006, this refers mainly to the reversal of provision for PIS and COFINS (Note 21).
28 Financial revenues
Parent Company | ||||
09/2006 | 09/2005 | |||
Interest on short-term investments | 1.245 | 1.734 | ||
Monetary restatement | 315 | 231 | ||
Other revenues | 56 | 178 | ||
1.616 | 2.143 | |||
Consolidated | ||||||
09/2005 | ||||||
09/2006 | 09/2005 | Proforma | ||||
Interest on short-term investments | 94.053 | 95.384 | 96.087 | |||
Monetary restatement | 3.052 | 5.760 | 6.213 | |||
Interest on trade receivables | 10.395 | 5.074 | 10.354 | |||
Exchange variation | 231.001 | 8.155 | 429.885 | |||
Other revenues | 13.272 | 3.218 | 11.737 | |||
351.773 | 117.591 | 554.276 | ||||
Page: 42
29 Financial Expenses
Parent Company | ||||
09/2006 | 09/2005 | |||
Interest on related-party loan agreement | - | (602) | ||
PIS/COFINS on financial revenues | - | (350) | ||
CPMF | (595) | (599) | ||
Other expenses | (24) | (375) | ||
(619) | (1.926) | |||
Consolidated | ||||||
09/2005 | ||||||
09/2006 | 09/2005 | Proforma | ||||
Interest on loans and financing | (181.227) | (7.706) | (58.297) | |||
Interest on suppliers trade payables | (29.294) | (188) | (10.397) | |||
Monetary restatement | (17.949) | (658) | (8.725) | |||
Interest on taxes and rates | (7.937) | (3.132) | (7.621) | |||
CPMF | (36.897) | (12.394) | (38.650) | |||
Discounts granted | (5.197) | (2.839) | (10.469) | |||
Charge payable in installment | (20.427) | (20.761) | (51.900) | |||
Exchange variation | (274.237) | (10.241) | (610.352) | |||
Other expenses | (30.811) | (6.014) | (54.125) | |||
(603.976) | (63.933) | (850.536) | ||||
30 Non-operating income (expense)
Consolidated | ||||||
09/2005 | ||||||
09/2006 | 09/2005 | Proforma | ||||
Revenues | ||||||
Property, plant and equipment disposals | 7.975 | 2.067 | 4.365 | |||
7.975 | 2.067 | 4.365 | ||||
Expenses | ||||||
Cost of property, plant and equipment disposed of | (6.768) | (3.900) | (8.807) | |||
Provision for contingencies (a) | - | - | (32.750) | |||
Other operating expenses | - | (471) | ||||
(6.768) | (3.900) | (42.028) | ||||
Non-operating income (expense) | 1.207 | (1.833) | (37.663) | |||
(a) A provision for contingencies arising from assessment notice received by TIM Nordeste S.A. (formerly Maxitel S.A.) in 2005 in connection with prior years´ income tax and social contribution (Note 21).
Page: 43
31 Financial instruments and risk management
Risk factors
The following are the main risks to which the Company and its subsidiaries are exposed:
(i) Exchange rate risks
The exchange rate risk relates to the possibility of the subsidiaries to compute 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.
On September 30, 2006, the subsidiaries loans and financing indexed to the UMBNDES exchange variance of a basket of currencies are covered by hedge contracts. Income or loss resulting from these hedge contracts is charged to the income.
There are no significant financial assets indexed to foreign currencies.
(ii) Interest rate risks
The interest rate risks relate to:
- possibility of changes in the fair value of financing indexed to prefixed interest rates, in the event the latter do not reflect the actual market conditions. In order to reduce this type of risk the subsidiaries sign hedge contracts with financial institutions, the income or loss on these contracts is recorded to the income;
- possibility of an unfavorable change in interest rates, with a resulting increase in financial expenses incurred by the subsidiaries, due to the fact that the interest rate of part of their hedge debt and obligations is floating. On
September 30, 2006, the subsidiaries financial resources are mostly invested in CDI, which considerably reduces this risk.
(iii) Credit risk inherent in services rendered
This risk is related to the possibility of the subsidiaries computing losses originating from the difficulty in collecting the amounts billed to customers. In order to mitigate this risk, the Company and its subsidiaries perform credit analysis that assist the management of risks related to collection problems, and monitor accounts receivable from subscribers, blocking the telephone, in case customers default on payment of their bills.
Page: 44
(iv) Credit risk related to the 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 credit risk levels accepted during the normal course of business. The choice of partners, the diversification of the accounts receivable portfolio, the monitoring of loan conditions, the positions and limits defined for orders placed by traders, the adoption of guarantees are procedures adopted by the subsidiaries to minimize possible collection problems with its commercial partners.There is no single client who accounts for more than 10% of net receivables from sales of goods as of September 30, 2006 and 2005, or sales revenues during the nine-month periods ended 2006 and 2005.
(v) Financial credit risk
This risk relates to the possibility of the Company and its subsidiaries computing losses originating from the difficulty in realizing its 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 in connection with work, service, concessions or rights that have not been mentioned above that could, if eliminated suddenly, severely impact the operations of the subsidiaries.
Market value of financial instruments
The estimated market value of financial instruments, especially cash and cash equivalents, accounts receivable and short-term financial instruments approximates their book value, given their short duration. Below, the financial instruments with market value different from their book value:
09/2006 | 06/2006 | |||||||
Market | ||||||||
Book value | value | Book value | Market value | |||||
Loans and financing | 2.817.586 | 2.840.073 | 2.885.659 | 2.885.946 | ||||
Hedge contracts | 63.939 | 69.373 | 33.216 | 48.332 | ||||
2.881.525 | 2.909.446 | 2.918.875 | 2.934.278 | |||||
The market value of loans and financing and hedge contracts was determined based on future discounted cash flow and at interest rates applicable to similar instruments which involve the same risks and conditions or are based on their market quotations.
The market values were estimated at a specific time, using available information and the Companys own evaluation methods. Any change in the underlying assumptions may significantly affect the estimates.
Page: 45
32 Pension Plan and other post-employment benefits
TIM Participações S.A. and its subsidiaries TIM Nordeste Telecomunicações S.A (merged by Maxitel S.A.) and TIM Sul S.A (merged by TIM Celular S.A.), have sponsored a private defined benefits pension plan for a group of TELEBRÁS systems former employees, 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 per 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, like 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 employee groups 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, 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 basic participants contribution, and the managing entity of TIMPREV shall ensure, on the approved statutory terms and conditions, the benefits listed below, not being held liable for granting any other, even if the government-sponsored social security agency starts granting them to beneficiaries:
Normal retirement pension
Early retirement pension
Disability pension
Deferred proportional benefit
Death pension
Page: 46
However, as not all of the Companys and its subsidiaries´ employees have migrated to TIMPREV plan, the pension and health care plans deriving from the TELEBRÁS system briefly listed below remain: 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; PBS Assistidos: private pension plan for employees receiving benefits (inactive), for multi-sponsored benefits;
Convênio de Administração: for managing pension payment to retirees and pensioners of the predecessors of the subsidiary companies;
PAMEC: health care plan granted to pensioners of the predecessors of the subsidiary companies;
PBT: plan for defined benefits for pensioners of the predecessors of the company and its subsidiaries;
PAMA: health care plan for retired employees and their dependents, on a shared cost basis.
In accordance with the rules established by NPC-26 issued by the Institute of Independent Auditors of Brazil IBRACON, as approved by CVM Deliberation No. 371, the actuarial position of these plans represents a surplus not recorded by the Company in view of the impossibility to recover such amounts and also considering that the amount of contributions will not be reduced for the future sponsor.
On January 31, 2006, TIM Participações S.A.´s Administrative Council approved the proposed migration of pension plans sponsored by TIM Sul S.A. (merged by TIM Celular S.A. ) and TIM Nordeste Telecomunicações S.A. (merged by Maxitel S.A.) at Fundação Sistel de Seguridade Social to a multisponsored plan linked to the HSBC Fundo de Pensão.
The Company. is the succeeding sponsoring company arising from the partial spin-off of Telecomunicações do Paraná S.A TELEPAR, of the private pension supplementation plans introduced in 1970 under a Collective Agreement, approved by the Atypical Contractual Agreement entered into by said company and the Unions representing the professional categories then existing.
In the nine-month period ended September 30, 2006, the contributions to pension plans and other post-employment benefits totaled R$190 (R$207 in the same period of 2005).
On August 7, 2006, the Administrative Council of TIM Participações S.A.approved the Supplementary Social Security Plan of the Company and its subsidiaries (TIM Celular S.A. and TIM Nordeste S.A.) contracted with Itaú Vida e Previdência S.A., to which are eligible all the Company´s and its subsidiaries´ employees who do not yet enjoy the benefits in question.
Page: 47
33 Insurance (unaudited)
It is the Company´s and its subsidiaries´ policy to monitor risks inherent in their operations, which is why as of September 30, 2006, they have insurance coverage against operating risks, third party liability, health, among others. The Management of the Company and its subsidiaries find the insurance coverage sufficient to cover any losses. The table below shows the main assets, liabilities or interests insured and the respective amounts:
Types | Amounts insured | |
Operating Risks | 7,495,463 | |
General Third Party Liability RCG | 4,600 | |
100% of Fipe Table (market value), | ||
Cars (Executive and Operational Fleets) | R$ 1.000 for Civil Responsibility |
34 Commitments
Under the terms of the Authorization for Mobile Personal Service (SMP) Exploitation, the subsidiaries compromised to implement mobile personal telecommunications cover for the assigned area, on a phased basis, within the quality standards established by such authorization. Should said terms fail to be met, the subsidiaries are subject to penalties.
ANATEL has brought administrative proceedings against the subsidiaries for (i) noncompliance with certain quality service indicators in 2003, 2004 and 2005 as established by the licenses for Personal Mobile Service (SMP); and (ii) noncompliance with other obligations assumed under the Terms of Authorization.
The subsidiaries have claimed to ANATEL that (i) noncompliance with quality indicators were mainly due to the migration from the Cellular Mobile Service (SMC) to the Personal Mobile Service (SMP), the change in the long-distance system, and the implementation of the GSM network; and (ii) in certain cases the obligations assumed under the Terms of Authorization were not met, whereas in others, this was due to several factors, many of which involuntary and unrelated to the companies´ activities and actions. The subsidiaries are unable to foresee the outcome of ANATEL processes at the moment. The provision for regulatory contingencies reflected in the balance sheet corresponds to losses expected by the Management (R$ 4,410 Note 21)
Page: 48
Supplementary information
a. Cash Flow Statements
Parent Company | Consolidated | |||||||
09/2005 | ||||||||
09/2006 | 09/2005 | 09/2006 | proforma | |||||
Operating Activities | ||||||||
Net Income (Loss) for the period | (366.973) | 281.758 | (380.374) | (873.473) | ||||
Adjustments for reconciliation of income to cash and cash equivalents: | ||||||||
Depreciation and amortization | 1.186 | 1.186 | 1.687.653 | 1.386.074 | ||||
Equity pickup | 353.147 | (289.845) | - | - | ||||
Residual value of permanent assets written off | - | - | 6.972 | 7.414 | ||||
Interest on own capital received | 146.776 | 126.037 | - | - | ||||
Deferred income tax and social contribution | 3.449 | (3.552) | 70.874 | (2.998) | ||||
Minority stockholding | - | - | - | 21.464 | ||||
Interest, monetary and exchange variation on loans | - | - | 253.746 | 78.449 | ||||
Interest, monetary and exchange variation on related-party loans | - | - | - | 192.994 | ||||
Allowance for doubtful accounts | - | - | 328.696 | 235.372 | ||||
Decrease (increase) in operating assets | ||||||||
Trade receivables | - | - | (456.029) | (476.852) | ||||
Taxes and contributions recoverable | 16.915 | 4.458 | (21.664) | (60.117) | ||||
Inventories | - | - | 28.258 | 25.324 | ||||
Related-party transactions | - | 106 | (141.955) | (4.691) | ||||
Other current assets | 184 | 105 | (208.886) | (16.061) | ||||
Other long-term assets | (565) | (57) | (11.807) | (13.336) | ||||
Increase (decrease) in operating liabilities | ||||||||
Labor obligations | (376) | 1.006 | 40.480 | 35.493 | ||||
Suppliers Trade payables | (2.823) | (35) | (1.623.916) | (755.483) | ||||
Taxes, rates and contributions | (20.563) | (15.824) | (18.770) | 42.492 | ||||
Provision for contingencies | (254) | 409 | (19.323) | 35.872 | ||||
Related-party transactions | - | (34.846) | 38.668 | 73.299 | ||||
Other short-term liabilities | (2.952) | (1.295) | 482 | (8.180) | ||||
Net cash and cash equivalents generated by operating activities | 127.151 | 69.611 | (426.895) | (76.944) | ||||
Investment activities: | ||||||||
Additions to property, plant and equipment | - | - | (882.136) | (1.466.251) | ||||
- | - | (882.136) | (1.466.251) | |||||
Financial activities | ||||||||
New loans | - | - | 1.078.445 | 1.085.319 | ||||
Related-party loans | - | - | - | 1.080.696 | ||||
Loan amortization | - | - | (332.409) | (210.715) | ||||
Amortization of related-party loans | - | - | - | (1.867.531) | ||||
Capital increase | - | 2.006 | - | 1.562.503 | ||||
Capital reserve increase | - | 6.401 | - | 6.401 | ||||
Dividends and interest on own capital paid | (114.554) | (68.494) | (114.749) | (92.804) | ||||
(114.554) | (60.087) | 631.287 | 1.563.869 | |||||
Increase (decrease) in cash and cash equivalents | 12,597 | 9,524 | (677,744) | 20,674 | ||||
Supplementary cash flow information: | ||||||||
Income tax and social contribution paid | - | - | 25.966 | 51.184 | ||||
Interest paid | - | - | 206.439 | 40.406 | ||||
Capitalized interest | - | - | 12.573 | 743 | ||||
Project of incorporation of shares of TIM Nordeste | ||||||||
Telecomunicações S.A. and TIM Sul S.A | - | 415.069 | - | 415.069 |
Page: 49
b. Value-Added Statements
Parent Company | Consolidated | |||||||
09/2005 | ||||||||
09/2006 | 09/2005 | 09/2006 | proforma | |||||
Revenues | ||||||||
Gross operating revenue | - | - | 9.783.603 | 7.972.161 | ||||
Allowance for doubtful accounts and losses | - | - | (328.696) | (235.372) | ||||
Discounts granted | - | - | (464.954) | (279.916) | ||||
Non-operating revenues (expenses) Net | - | - | 1.207 | (37.663) | ||||
- | - | 8.991.160 | 7.419.210 | |||||
Input bought from third parties | ||||||||
Costs of services rendered and goods sold | - | - | (2.722.480) | (2.361.235) | ||||
Materials, energy, third-party services and other | (5.614) | (5.657) | (1.503.547) | (1.609.598) | ||||
(5.614) | (5.657) | (4.226.027) | (3.970.833) | |||||
Retained items | ||||||||
Depreciation and amortization | (1.186) | (1.186) | (1.687.653) | (1.386.074) | ||||
Net added value produced | (6.800) | (6.843) | 3.077.480 | 2.062.303 | ||||
Added value received through transfer | ||||||||
Gain on investments | (353.147) | 289.845 | - | - | ||||
Financial revenues | 1.616 | 2.143 | 351.773 | 554.276 | ||||
(351.531) | 291.988 | 351.773 | ||||||
Total undistributed value-added | (358.331) | 285.145 | 3.429.253 | 2.616.579 | ||||
Value-added distribution | ||||||||
Personnel and related charges | 3.438 | 3.516 | 381.619 | 320.579 | ||||
Taxes, rates and contributions | 5.060 | (1.151) | 2.719.312 | 2.213.496 | ||||
Interest and rentals | 144 | 1.022 | 708.696 | 934.513 | ||||
Minority stockholding | - | - | - | 21.464 | ||||
Retained earnings (accumulated losses) | (366.973) | 281.758 | (380.374) | (873.473) | ||||
(358.331) | 285.145 | 3.429.253 | 2.616.579 | |||||
Page: 50
Free Translation into English of Quarterly Information (ITR)
Originally Issued in Portuguese
Code | Heading | 09/30/2006 | 06/30/2006 |
1 | Total assets | 13.890.189 | 13.745.126 |
1.01 | Current assets | 4.078.125 | 3.753.319 |
1.01.01 | Cash and cash equivalents | 1.094.856 | 1.096.880 |
1.01.02 | Accounts receivable | 2.198.965 | 1.905.638 |
1.01.02.01 | Accounts receivable | 2.198.965 | 1.905.638 |
1.01.03 | Inventories | 186.983 | 216.179 |
1.01.04 | Other | 597.321 | 534.622 |
1.01.04.01 | Recoverable taxes and contributions | 281.166 | 274.879 |
1.01.04.02 | Deferred income and social contribution taxes | 50.450 | 50.450 |
1.01.04.03 | Prepaid expenses | 246.832 | 189.146 |
1.01.04.04 | Other | 18.873 | 20.147 |
1.02 | Noncurrent assets | 578.594 | 564.635 |
1.02.01 | Sundry receivables | 341.734 | 369.772 |
1.02.01.01 | Taxes and contributions recoverable | 299.692 | 315.118 |
1.02.01.02 | Deferred income and social contribution taxes | 42.042 | 54.654 |
1.02.02 | Related parties | 150.791 | 112.470 |
1.02.02.01 | Affiliates | - | - |
1.02.02.02 | Subsidiaries | - | - |
1.02.02.03 | Other related parties | 150.791 | 112.470 |
1.02.03 | Other | 86.069 | 82.393 |
1.02.03.01 | Judicial deposits | 63.718 | 58.627 |
1.02.03.02 | Prepaid expenses | 15.184 | 16.815 |
1.02.03.03 | Other assets | 7.167 | 6.951 |
1.03 | Permanent assets | 9.233.470 | 9.427.172 |
1.03.01 | Investments | 7.123 | 7.518 |
1.03.01.01 | In affiliates | - | - |
1.03.01.02 | In subsidiaries | - | - |
1.03.01.03 | Other investments | 7.123 | 7.518 |
1.03.02 | Property, plant and equipment | 8.983.174 | 9.165.897 |
1.03.03 | Deferred charges | 243.173 | 253.757 |
Page: 51
Free Translation into English of Quarterly Information (ITR)
Originally Issued in Portuguese
Code | Heading | 09/30/2006 | 06/30/2006 |
2 | Total liabilities and shareholders' equity | 13.890.189 | 13.745.126 |
2.01 | Current liabilities | 3.411.776 | 3.233.760 |
2.01.01 | Loans and financing | 914.065 | 899.701 |
2.01.02 | Debentures | - | - |
2.01.03 | Suppliers | 1.800.550 | 1.713.542 |
2.01.04 | Taxes, charges and contributions | 329.791 | 305.344 |
2.01.05 | Dividends payable | 22.332 | 27.027 |
2.01.06 | Provisions | - | - |
2.01.07 | Related parties | 107.700 | 87.361 |
2.01.08 | Other | 237.338 | 200.785 |
2.01.08.01 | Labor liabilities | 134.908 | 106.508 |
2.01.08.02 | Authorizations payable | 37.982 | 34.792 |
2.01.08.03 | Other liabilities | 64.448 | 59.485 |
2.02 | Noncurrent liabilities | 2.115.659 | 2.168.957 |
2.02.01 | Loans and financing | 1.967.460 | 2.019.174 |
2.02.02 | Debentures | - | - |
2.02.03 | Provisions | 141.761 | 140.506 |
2.02.03.01 | Supplementary pension plan | 3.584 | 3.584 |
2.02.03.02 | Provision for contingency | 138.177 | 136.922 |
2.02.04 | Related parties | - | - |
2.02.05 | Other | 6.438 | 9.277 |
2.02.05.01 | Taxes, charges and contributions | - | - |
2.02.05.02 | Authorizations payable | 6.438 | 9.277 |
2.03 | Deferred income | - | - |
2.04 | Minority interests | - | - |
2.05 | Shareholders' equity | 8.362.754 | 8.342.409 |
2.05.01 | Capital | 7.512.710 | 7.455.859 |
2.05.02 | Capital reserves | 135.230 | 192.081 |
2.05.03 | Revaluation reserves | - | - |
2.05.03.01 | Own assets | - | - |
2.05.03.02 | Subsidiaries/affiliates | - | - |
2.05.04 | Income reserves | 1.081.787 | 1.081.787 |
2.05.04.01 | Legal reserve | 98.741 | 98.741 |
2.05.04.02 | Statutory reserve | - | - |
2.05.04.03 | Reserve for contingencies | - | - |
2.05.04.04 | Unearned income reserve | - | - |
2.05.04.05 | Retained earnings | - | - |
2.05.04.06 | Special reserve for undistributed dividends | - | - |
2.05.04.07 | Other income reserves | 983.046 | 983.046 |
2.05.05 | Retained earnings | (366.973) | (387.318) |
Page: 52
Free Translation into English of Quarterly Information (ITR)
Originally Issued in Portuguese
From 07/01/2006 to | From 01/01/2006 to | From 07/01/2005 to | From 01/01/2005 to | ||
Code | Heading | 09/30/2006 | 09/30/2006 | 09/30/2005 | 09/30/2005 |
3.01 | Gross revenues | 3.692.860 | 9.783.603 | 986.450 | 2.830.048 |
3.02 | Deductions from gross revenues | (946.990) | (2.585.528) | (250.337) | (715.516) |
3.03 | Net revenues | 2.745.870 | 7.198.075 | 736.113 | 2.114.532 |
3.04 | Cost of goods sold and services rendered | (1.507.215) | (3.892.117) | (349.657) | (1.023.975) |
3.05 | Gross profit | 1.238.655 | 3.305.958 | 386.456 | 1.090.557 |
3.06 | Operating income (expenses) | (1.219.645) | (3.550.903) | (244.866) | (715.622) |
3.06.01 | Selling | (850.020) | (2.440.029) | (197.020) | (570.906) |
3.06.02 | General and administrative | (233.608) | (722.159) | (44.984) | (140.434) |
3.06.03 | Financial income (expenses) | (79.891) | (252.203) | 19.257 | 53.658 |
3.06.03.01 | Financial income | 71.048 | 351.773 | 44.669 | 117.591 |
3.06.03.02 | Financial expenses | (150.939) | (603.976) | (25.412) | (63.933) |
3.06.04 | Other operating income | 32.664 | 150.575 | 7.144 | 14.183 |
3.06.05 | Other operating expenses | (88.790) | (287.087) | (29.263) | (72.123) |
3.06.06 | Equity pickup | - | - | - | - |
3.07 | Operating income | 19.010 | (244.945) | 141.590 | 374.935 |
3.08 | Nonoperating income | 884 | 1.207 | (7.593) | (1.833) |
3.08.01 | Income | 3.872 | 7.975 | (5.456) | 2.067 |
3.08.02 | Expenses | (2.988) | (6.768) | (2.137) | (3.900) |
3.09 | Income before taxation and participations | 19.894 | (243.738) | 133.997 | 373.102 |
3.10 | Provision for income and social contribution taxes | 451 | (65.761) | (40.595) | (100.470) |
3.11 | Deferred income tax | - | (70.875) | 3.393 | 2.998 |
3.12 | Participations/statutory contributions | - | - | - | - |
3.12.01 | Participations | - | - | - | - |
3.12.02 | Contributions | - | - | - | - |
3.13 | Reversal of interest on shareholders' equity | - | - | - | - |
3.14 | Minority interests | - | - | - | (21.464) |
3.15 | Net income for the period | 20.345 | (380.374) | 96.795 | 254.166 |
Page: 53
(Free translation from the original in Portuguese)
INDEPENDENT AUDITORS SPECIAL REVIEW REPORT
The Board of Directors and Shareholders
TIM PARTICIPAÇÕES S.A.
1. We have conducted a special review of the Quarterly Information (ITR) of TIM PARTICIPAÇÕES S.A., for the quarter ended in September 30, 2006, consisting of the balance sheet, both individual and consolidated, the statement of income, both individual and consolidated, and the performance and relevant information report, prepared in accordance with the accounting practices applicable in Brazil, under the responsibility of its management. Our responsibility is to issue a report on this set of information. The financial statements for the quarter ended in September 30, 2006 of the subsidiary Tim Celular S.A., the investment in which is evaluated by the equity method, and that were also basis for consolidation, were reviewed by other independent auditors. Our report thereon, regarding the book value of these investments and their effect on the income for the quarter and the consolidated figures are concerned, is supported solely by these other auditors review.
2. Our examination, which was conducted in accordance with specific standards jointly set by IBRACON Brazilian Institute of Independent Auditors and CFC - Federal Accounting Council, - consisted mainly of: (a) inquiries and discussion with the heads of the accounting, financial and operational departments, on the main criteria followed in preparing the Quarterly Information; and (b) review of information and subsequent events that have or could have important effects on the Companys financial position and operations.
3. Based on our special review and on other independent auditors review of the subsidiary Tim Celular S.A., we are not aware of any relevant modification that should be made to the above mentioned Quarterly Information to comply with the accounting practices applicable in Brazil, consistent with the standards of CVM Brazilian Securities Commission, specifically those applicable to the preparation of the Quarterly Information.
4. As mentioned in Note 4.e, in 2006 the Company and its subsidiaries changed the accounting practice for recognition of subsidized sales of cell phones to subscribers under the post-paid system.
5. Both the individual and consolidated balance sheets as of June 30, 2006, presented for comparative purposes, were reviewed by us, whose special review report thereon dated July 14, 2006, was unqualified. The income statements, both individual and consolidated, for the quarter ended in September 30, 2005, also presented for comparative purposes, were reviewed by other independent auditors, who issue an unqualified special review report, dated October 14, 2005.
Rio de Janeiro, October 11, 2006
Original report in Portuguese was signed by
Ernesto Rubens Gelbcke | |
CRC SP-013002/O-3F-RJ | Accountant CTCRC SP-071189/O-6S-RJ |
Page: 54
TIM PARTICIPAÇÕES S.A. Third Quarter of 2006
Financial and Operating Highlights |
TIM was again awarded Top of Mind 2006 in the mobile phone category, proving the power of its brand.
Maintaining its leadership in innovation, the Company launched TIM Casa, a pioneer home zone service which transforms mobile handsets into house phones.
TIM Participações recorded gross additions of 3.5 million in the 3Q06, the highest quarterly figure in the Companys history.
Leader in net additions: The Company added 1.7 million new clients in the 3Q06, or 42.5% of net market additions, reaching a market share of 25.1% (versus 22.9% in the 3Q05 and 24.3% in the 2Q06).
The client base totaled 24.1 million users at the close of the quarter, equaling the end-of-2006 estimate and 31.3% up year-on-year.
Leadership on net additions on postpaid segment: TIM expanded its postpaid client base by adding 352 thousand new subscribers, representing 56.6% of net market additions on postpaid segment in the third quarter of 2006.
ARPU (average revenues per user) totaled R$34.4 in the 3Q06; excluding the impact of the Bill & Keep elimination, ARPU would be R$30.0 in the 3Q06, in line with the 2Q06 figure (R$30.2) .
Continued growth of net service revenues: R$ 2.4 billion in the 3Q06, 38.4% up on the 3Q05; excluding the impact of Bill & Keep elimination, revenue growth would reach 20.7%, accelerating from the trend of 2Q06.
Subscriber acquisition cost (SAC) reduction: reduction of 13.1% and 5.2% over the 2Q06 and 3Q05, respectively, driven by tight control over subsidies.
Profitable growth: EBITDA of R$ 676.7 million and EBITDA margin of 24.6% . Excluding the effects of handset subsidies deferral and the impact of Bill & Keep elimination, EBITDA margin would stand at 22.6%, up 5.9 pp year-on-year.
Positive operating cash flow of R$ 147.3 million in the 3Q06.
Net income of R$ 20.3 million, versus a net loss of R$ 308.4 million in the 3Q05. Deducting handset subsidies deferral, the net loss for the quarter would come to R$115.6 million.
Key regulatory and accounting changes in the 3Q06 |
Elimination of the Bill & Keep system
With the introduction of the SMP (Personal Mobile Service) as of 2000, Anatel created the partial Bill & Keep concept, signifying that in calls between mobile operators in the same registration area (local), one operator is only obliged to pay to the other the VUM (interconnection rate) if traffic exceeds 55% of the total exchanged traffic.
On July 14, 2006, Anatel (through the Resolution 438) completely eliminated the B&K system, meaning that mobile company now have to pay termination charges on each local call to other mobile company.
Anticipated Expenses (Handset Subsidies Deferment)
Starting on the third quarter of 2006, and retroactive to the beginning of 2006, the Companys Management decided to change the accounting treatment related to the subsidies granted on postpaid handset sales, which started to be deferred and amortized in accordance with the minimum period stipulated in the contract signed by clients (12 months) so as to better reflect the post-paid segment performance (in the past, the subsidiaries recognized these costs of subsidized sales directly in the results). The nominal contractually stipulated fine for the clients that decide to cancel their subscription or to change to a prepaid handset before the determined period is higher than the average granted subsidy in each handset sold.
For further information, please refer to the explanatory notes (4.e. "Anticipated Expenses") of 3Q06 TIM´s Financial Statements and in the material fact, which are available at our Investor Relations website: www.timpartri.com.br
Message from Management |
Even in such a highly competitive market as Brazils, TIM Participações recorded yet another quarter of profitable growth.
Our client base grew by 31.1% , from 18.3 million in the third quarter of 2005, to 24.1 million at the end of September 2006, anticipating the end-of-year target. Net service revenues moved up 38.4% in the same period, resulting in annual growth of more than 20%, excluding the impact of the elimination of the Bill & Keep system in the quarter. In addition, increasing gains in scale led to impressive EBITDA growth of 57% (after deducting the non-recurring results and the impacts of the Bill & Keep elimination). Net income stood at R$20.3 million, versus the net loss of R$ 308.4 million recorded in the same three months last year, thanks to the substantial improvement in operating results.
It is worth pointing out that, right from the beginning; TIM Participações has always invested heavily in network quality and expansion, systems development, technological upgrading, and brand strengthening, in order to conquer client satisfaction. As a result, our service platform, billing systems and call centers are totally integrated and we are the only mobile telephony company with a nationwide presence. This gives us greater flexibility when it comes to developing and launching new services and has allowed us to adopt a more aggressive strategy in the high value segments. We possess a vast portfolio of corporate solutions and we currently head the business segment.
In 2006, TIM was awarded Top of Mind, in view of being the first mobile phone company remembered by the interviewees in the research conducted by Instituto Datafolha. Moreover, the Company was also awarded Best Mobile Phone Operator and Leading Company in the Mobile Phone Sector in 2006 by Anuário Telecom. Such awards evidence the power of its brand.
The Company always strives to come up with pioneering products. We were the first operator to launch BlackBerry, international roaming and special pre-paid plans (TIM+25 and TIM+5) for high-value clients. More recently, we launched TIM CASA, a pioneering service in Brazil that complements pre and postpaid plans, which transforms mobile handsets into house phones.
Yet again, the quarters numbers confirm that we are on the right path to sustain shareholder value creation, while conquering the recognition and satisfaction of our clients.
Management
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Operating and Financial Performance |
On March 16, TIM Participações S.A. Extraordinary Shareholders Meeting approved the merger of all TIM Celular S.A.s shares into TIM Participações S.A., turning the company into a wholly-owned subsidiary of TIM Participações S.A.. For the purposes of making year-on-year comparisons, therefore, pro-forma financial statements were drawn up as if the merger had occurred on January 1st, 2005.
Operating Performance |
19.8% market growth in the last 12 months |
The Brazilian market closed September/06 with 95.9 million clients, 19.8% up on the 80.0 million registered in September/05. National penetration reached 51.2%, and continues to show potential growth, especially when compared with other countries in Latin America. |
Total market net additions in the quarter came to 4.1 million, compared to 4.5 million in the same period of the previous year. The Company added 1.7 million new clients to its base in the 3Q06, consolidating its substantial share of sector growth (42.5% incremental market share). |
Market Share: 25.1% in the 3Q06 |
The Company ended the third quarter with 24.1 million clients, 31.3 % up year-on-year, and a market share of 25.1%, versus 22.9% in the 3Q05. The postpaid base grew by 35.4% in the last twelve months, outperforming the national average. As a result, these clients now account for 20.5% of the total client base, versus 19.9% in the same period last year. |
TIM: the largest GSM client base | At the end of the quarter, 89.4% of TIM Participações clients were using GSM technology. TIMs GSM coverage reached 91.5% of the countrys urban population, serving 2,394 cities. All municipalities with GSM also have access to GPRS, while 456 have the additional benefit of EDGE technology. These innovations facilitate access to and encourage clients to use data and multimedia services, leading to strong VAS revenue growth. |
In the 3Q06, the monthly average churn rate reached 2.6%, below the 2.7% reported in the 3Q05 and stable when compared to 2Q06s rate, evidencing very positive results in the high value segment. |
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Marketing Activities |
TIM once again proved to be a pioneer in innovative telecom technologies. The Company, in line with its leadership on innovation, recently launched TIM Casa, a revolutionary concept unprecedented in Brazil, which transforms mobile handsets into house phones.
In this quarter, TIM continued to offer its commemorative date promotions. As the Company maintains a nationwide presence, but adopts regional commercial strategies, it launched two campaigns featuring bonuses in minutes for local intranetwork calls, called Tarifa Zero and Prediletos (free calls to three TIM numbers). Such promotions have allowed TIM to leverage on different market opportunities and to substantially reduce subsidies on prepaid handsets. The TIM +25 and TIM +5 plans, targeting high-value prepaid clients, and the TIM Chip Only promotion, which grants bonuses for recharges made within 48 hours of activation, continued to fuel the number of prepaid additions.
TIM Participações maintained its strategy of encouraging the use of value-added services (VAS), which complement the service plans in all segments. In the quarter, the Company boosted content download (Monophonic and Polyphonic Sounds, Crazytones and Wallpapers) via their points of sale, so as to turn them into VAS sales channels. One of the quarterly highlights in the data segment was the TIM WEB Móvel promotion, designed to meet demand for wireless internet access, especially from small and medium-sized businesses, and increase the use of data in this segment. In addition, Nosso Link, which allows clients to sign up for data packages, was extended to the consumer segment in order to boost the use of data services, especially TIM Connect Fast.
The corporate segment has been the main driver of postpaid growth. The Company is the leader in mobile telephony solutions for this segment, with more than 2 million clients and an approximate market share of 30%.
The Companys marketing strategy has been extremely successful, chiefly due to efforts on the client acquisition and retention front, backed by continuous innovation, Customer Profiling Management, customized offers and specialized sales channels geared to small and medium-sized companies and large corporations.
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Economic and Financial Performance |
Selected Figures 1
R$ thousands | ||||||
3Q06 | 3Q05 | % Y-o-Y | ||||
Total Gross Revenue | 3,692,860 | 2,841,048 | 30.0% | |||
Gross Service Revenue | 3,157,578 | 2,287,831 | 38.0% | |||
Gross Handset Revenue | 535,282 | 553,217 | -3.2% | |||
Total Net Revenue | 2,745,870 | 2,104,843 | 30.5% | |||
Net Services Revenue | 2,394,327 | 1,729,781 | 38.4% | |||
Net Handsets Sales | 351,543 | 375,062 | -6.3% | |||
EBITDA | 676,663 | 351,097 | 92.7% | |||
EBITDA Margin | 24.6% | 16.7% | 8.0 p.p. | |||
EBIT | 98,902 | (136,882) | - | |||
EBIT Margin | 3.6% | -6.5% | 10.1 p.p. | |||
Net Income (Loss) | 20,345 | (308,402) | - | |||
Nota: (1) Consolidated data
Operating Revenues
Continuous service revenue growth |
Gross service revenues in the 3Q06 totaled R$ 3.2 billion, 38.0% up year-on-year, primarily due to the solid expansion of VAS and voice revenues, in turn pushed up by the increase in the subscriber base and higher traffic volume. |
After taxes and other discounts, net service income stood at R$2.4 million, versus R$1.7 million in the 3Q05, a 38.4% increase year-on-year. Excluding the impact of the Bill & Keep elimination, revenues would post year-on-year growth of 20.7%, still higher than the 20.0% expansion recorded in the previous quarter. |
|
Gross VAS revenues stood at R$ 217.0 million, 58.4% more than in the 3Q05, confirming the growth potential of value-added services. A more detailed breakdown of this item shows the outstanding performance of our pioneering services (MMS, GPRS, downloads, etc) which jointly accounted for 39% of these revenues, 3 p.p. higher year-on-year. |
|
Gross handset sale revenues totaled R$ 535.3 million, down 3.2% year-on-year. Sales volume fell by 24.8% (from 1.9 million in 3Q05 to 1.4 million in 3Q06), which evidences the Companys focus on reducing its participation in the handset sales market, while increasing its focus on promotions to the prepaid segment centered on usage and the SIM Card offer, with TIM Chip Only, for example. It is important to note that the quarterly handset mix has changed due to a big increase in the sales of mid-range and high-end phones, which include a greater range of options (tri-Band, MP3, MMS, GPRS, EDGE, infra-red, Bluetooth, browsers, internet, e-mail, Java, etc.), in turn increasing innovative VAS revenues. |
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The sales of MMS-enabled handsets grew by 69% in the period, while sales of those equipped with Java and a built-in camera moved up by 75% and 133% respectively. |
|
Net handset-sale revenues, deducting taxes and other discounts, stood at R$351.5 million in the 3Q06, or 6.3% down on the same quarter last year. |
|
Eliminating the Bill & K eep effect: ARPU emains stable QoQ |
Average revenue per user (ARPU) in the 3Q06 totaled R$ 34.4 million, 13.9% up on the 2Q06. Eliminating the effects of the extinction of the Bill & Keep system on revenues, ARPU would reach R$30.0, stable when compared to the 2Q06 (R$30.2 million), demonstrating the high quality of the customers acquired in this quarter. |
Operating Costs and Expenses
Interconnection cost impacted by Bill & Keep elimination |
Network and interconnection costs stood at R$ 815.1 million, versus R$418.1 million in the 3Q05. The upturn in costs in the period was chiefly due to re-introduction of full interconnection regime in July 14 when the Company began to pay interconnection charges on each mobile to mobile local call to other operators, and to the substantial increase in traffic (+36.5%) . Excluding the impact of the elimination of the Bill & Keep system, network and interconnection costs would have totaled close to R$ 498.0 million (+19% year-on-year). |
The cost of goods sold basically comprising cell-phone sales totaled R$335.2 million. The quarter-over-quarter and year-on-year reduction was the result of: (i) the deferral of the postpaid handset subsidies relative to the first nine months, which amounted R$ 135.9 million; and (ii) the reduction in prepaid subsidies accompanied by the pushing of the SIM Card sales, with the TIM Chip Only promotion for prepaid handsets. |
|
It is important to mention that the deferral of handset subsidies applies solely to the postpaid segment, in which clients sign an agreement to remain with the operator for at least 12 months and are fined in case of cancellation. |
|
Selling and marketing expenses came to R$559.1 million, 7.1% and 4.6% less than in the 3Q05 and 2Q06, respectively, primarily due to a less aggressive handset pricing, partially offset by more acquisitions in the postpaid segment. |
|
SAC : strong handset subsidies reduction |
Subscriber acquisition costs (SAC) stood at R$ 146, 5.2% and 13.1% lower than in the 3Q05 and 2Q06, respectively, largely due to the Companys policy of drastically reducing subsidies on prepaid handset sales, which accounted for 79.6% of the quarters gross additions. |
General and administrative expenses (G&A) - excluding depreciation, amortization and personnel expenses - totaled R$ 98.9 million, 0.8% down quarter-over-quarter and 12.9% less year-on-year, thanks to reduced outsourcing expenses, in line with the Companys strategy of controlling fixed costs and expenses tightly. |
|
Personnel expenses amounted to R$ 153.7 million, versus R$ 130.9 million in the 3Q05 and R$ 149.1 million in the 2Q06, pushed up by interim staff increases, in turn caused by improved customer service and client relations, as well as pre and post-sales support. |
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Bad debt expenses totaled R$ 126.3 million, accounting for 3.4% of total gross revenues versus 3.6% in the 3Q05 and 3.5% in the 2Q06. |
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Other net operating revenues came to R$ 19.0 million, versus R$7.7 million in the 3Q05. Other operating revenues basically comprise fines paid by clients related to past due payments or service cancellations, unpaid dividends, etc. and are partially offset by expenses with provisions for contingencies and various taxes on financial transactions. It is worth noting that the reduction over the 2Q06 was due to the booking of R$ 52.3 million from the recovery of PIS and COFINS taxes, following a judicial verdict in favor of the subsidiary TIM Nordeste S.A.
EBITDA
Third-quarter EBITDA (operating result before net financial expenses, excluding depreciation and amortization) totaled R$ 676.7 million, accompanied by an EBITDA margin of 24.6%, 7.9 pp up year-on-year. In this quarter EBITDA was impacted by the deferment of postpaid handset subsidies and by the elimination of the Bill & Keep system:
Adjusted EBITDA margin, excluding both the above-mentioned impacts, confirms our efforts to combine strong top-line growth with healthy margin expansion.
EBITDA and Margin EBITDA
Maintaining profitable growth |
Depreciation and Amortization
Depreciation and amortization expenses amounted to R$ 577.8 million, 18.4% higher than the R$ 488.0 million posted in the 3Q05, reflecting network and IT infrastructure expansion and improvement. This figure included R$ 62.0 million relative to the TIM Nordeste S.A. and TIM Celular S.A. concessions, which expire in 2013 and 2016, respectively.
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EBIT
EBIT (operating result before interest and taxes) stood at R$98.9 million, a R$235.8 million improvement over the negative R$136.9 reported in the 3Q05. The EBIT margin was 3.6% positive, up by 10.1 p.p. year-on-year.
Excluding the re-classification of handset subsidies and the elimination of the Bill & Keep system, the EBIT for the quarter would be negative by R$25.5 million, a R$ 111.4 million improvement when compared to the same quarter of last year.
Net Financial Result
Net financial expenses totaled R$79.9 million for the quarter, 36.5% higher than the negative R$125.7 million reported in the 3Q05, primarily due to the reduction in financial costs average and the improved results from exchange rate variation.
Indebtedness
On September 30, 2006, gross debt stood at R$ 2.882 billion, 1.3% down on the R$ 2,919 billion recorded at the end of the previous quarter, mostly comprising long-term loans and financing from the BNDES (National Development Bank) and the BNB (Banco do Nordeste do Brasil). Cash and cash equivalents amounted to R$ 1.1 billion, mainly made up of highly liquid financial investments.
Positive operating cash flow |
At the close of the third quarter, the Companys net debt (total debt less cash and cash equivalents) totaled R$ 1.8 billion, remaining stable over the previous three months. Free operating cash flow was R$147.3 million positive, a significant improvement on the 1Q06 (-R$1.25 billion), 2Q06 (-R$39 million) and 3Q05 (-R$124.6 million). |
Net Result
Net income for the quarter totaled R$20.3 million, a R$322.3 million improvement over the net loss of R$308.4 million loss recorded in the same period last year, thanks to the higher operating result and the positive impact of the deferral of handset subsidies relative to the first nine months, totaling R$135.9 million. On a normalized basis, excluding the re-classification of handset subsidies, the net loss for the quarter would be R$115.6 million, still evidencing a substantial improvement over the same quarter of last year.
CAPEX
Third-quarter investments amounted to R$ 374.4 million, 44% of which allocated to the expansion and improvement of the GSM networks capacity and quality. Thanks to strong traffic growth (+36.5% year-on-year), 20% of capex went to developing and improving IT systems and 36% to the comodato program, part of the Companys expansion and loyalty-building strategy for the corporate segment and others.
Capital Increase |
In the Extraordinary Shareholders Meeting of September 29, 2006, it was approved the Companys capital increase and the consequent issue of new shares, by capitalizing part of the Special Goodwill Reserve corresponding to tax benefits of R$50.4 million received by the Companys subsidiaries in 2005.
The same Meeting also approved a capital increase, with no issue of new shares, by capitalizing the Reserve for Future Capital Increases amounting to R$6.4 million.
Information on the subscription process is available to shareholders on the website www.timpartri.com.br.
About TIM Participações S.A. |
TIM Participações is controlled by TIM Brasil Serviços e Participações S.A., a subsidiary of the Telecom Italia Group. TIM Participações offers GSM technology Global System for Mobile Communications - the most widely used in the world. At the end of September 2006, its network covered 91.5% of the Brazilian urban population. The cities covered by the GSM network also have access to GPRS, while 456 cities have the additional benefit of EDGE technology. These are innovations that facilitate the use of data and multimedia services across the country.
The Company is proud to offer one of the widest product and service portfolios in the sector, with specific solutions for different client needs.
Disclaimer | This document may contain forward-looking statements. Such statements are not statements of historical fact and reflect the beliefs and expectations of the Company's management. The words "anticipates, "believes, "estimates, "expects, "forecasts, "plans, "predicts, "projects, "targets" and similar words are intended to identify these statements, which necessarily involve known and unknown risks and uncertainties foreseen, or not, by the Company. Therefore, the Companys future operating results may differ from current expectations and readers of this release should not base their assumptions exclusively on the information given herein. Forward-looking statements only reflect opinions on the date on which they are made and the Company is not obliged to update them in light of new information or future developments. |
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ATTACHMENTS |
Attachment 1: | Consolidated Operational Indicators | |
Attachment 2: | Glossary |
The Complete Financial Statements, including Explanatory Notes are available at the Company´s Investor Relations Website: www.timpartri.com.br
10 / 11
Attachment 1
TIM PARTICIPAÇÕES S.A.
Consolidated Operational Indicators
3Q06 | 3Q06 | 9M06 | 3Q05 | 2Q05 | 9M05 | Var. % 3Q06 X 2Q06 |
Var. % 3Q06 X 3Q05 |
Var. % 9M06 X 9M05 |
||||||||||
Estimated Population in the Region (millio | 187.2 | 186.6 | 187.2 | 181.9 | 181.3 | 181.9 | 0.3% | 2.9% | 2.9% | |||||||||
Municipalities Served - GSM | 2,412 | 2,394 | 2,412 | 2,202 | 2,124 | 2,202 | 0.8% | 9.5% | 9.5% | |||||||||
Estimated Total Penetration | 51.2% | 49.2% | 51.2% | 44.0% | 41.6% | 44.0% | 2.0 p.p. | 7.2 p.p. | 0.1 p.p. | |||||||||
Market Share | 25.1% | 24.3% | 24.3% | 22.9% | 22.2% | 22.9% | 0.8 p.p. | 2.2 p.p. | 1.4 p.p. | |||||||||
Total Lines | 24,084,501 | 22,338,399 | 24,084,501 | 18,340,277 | 16,751,986 | 18,340,277 | 7.8% | 31.3% | 31.3% | |||||||||
Prepaid | 19,138,001 | 17,743,944 | 19,138,001 | 14,687,965 | 13,350,848 | 14,687,965 | 7.9% | 30.3% | 30.3% | |||||||||
Postpaid | 4,946,500 | 4,594,455 | 4,946,500 | 3,652,312 | 3,401,138 | 3,652,312 | 7.7% | 35.4% | 35.4% | |||||||||
Gross Additions | 3,501,045 | 2,960,331 | 8,788,821 | 2,978,191 | 2,853,553 | 7,821,049 | 18.3% | 17.6% | 12.4% | |||||||||
Net Additions | 1,746,102 | 1,320,167 | 3,913,108 | 1,588,291 | 2,102,782 | 4,752,771 | 32.3% | 9.9% | -17.7% | |||||||||
Churn | 2.6% | 2.6% | 2.5% | 2.7% | 1.7% | 2.2% | 0.0 p.p | -14.3% | 31.0% | |||||||||
TOTAL ARPU | R$34.4 | R$30.2 | R$31.6 | R$32.8 | R$34.8 | R$34.4 | 13.8% | 4.9% | -8.2% | |||||||||
TOTAL MOU | 95 | 81 | 87 | 92 | 89 | 91 | 17.6% | 3.3% | -4.9% | |||||||||
Investment (R$ million) | 374.4 | 351.0 | 894.7 | 608.5 | 587.2 | 1,466.3 | 6.7% | -38.5% | -39.0% | |||||||||
Employees | 9,477 | 9,306 | 9,477 | 8,547 | 7,888 | 8,547 | 1.8% | 10.9% | 10.9% | |||||||||
Attachment 2
Glossary
Financial Terms | Operating indicators | |
EBIT = Earnings before interest and tax EBITDA = Earnings before interest, tax, depreciation and amortization EBITDA Margin = EBITDA/ Net Operating Revenue CAPEX (capital expenditure) capital investment Subsidy = (net revenue from goods cost of sales + vendors discounts) / gross additions Net debt = gross debt cash PL Shareholders Equity Technology and Services TDMA = Time Division Multiple Access GSM = Global System for Mobile Communications A system storing and coding cell phone data, such as user calls and data, enabling a user to be recognized anywhere in the country by the GSM network. The GSM is now the standard most used in the world. EDGE = Enhanced Data rates for Global Evolution technique developed to increase the speed of data transmission via cell phone, creating a real broadband for handsets with the GSM technology. The first EDGE handsets available offer speeds that can reach up to 200 Kbps, depending on the handset model. SMS = Short Message Service ability to send and receive alphanumerical messages. |
Customers = Number of wireless lines in service Gross additions = Total of customers acquired in the period Net additions = Gross Additions number of customers disconnected Market share = Company s total number of customers / number of customers in its operating area Marginal Market share = participation of estimated net additions in the operating area. Market penetration = Company s total number of customers + estimated number of customers of competitors / each 100 inhabitants in the Company s operating area Churn rate = number of customers disconnected in the period ARPU = Average Total Net Service Revenue per per customers in the period Blended ARPU = ARPU of the total customer base (contract + prepaid) Contract ARPU = ARPU of contract service customers Prepaid ARPU = ARPU of prepaid service customers MOU = minutes of use monthly average. in minutes of traffic per customer = (Total number of outgoing minutes + incoming minutes) / monthly average of customers in the period Contract MOU = MOU of contract service customers Prepaid MOU = MOU of prepaid service customers SAC = Customer acquisition cost = (marketing expenses + commission + Fistel + comodato + costs of retention) |
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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: November 05, 2006 | By: | /s/ Stefano De Angelis |
Name: Stefano De Angelis | ||
Title: Chief Financial Officer |