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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 6-K
 
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of the
Securities Exchange Act of 1934
 
For the month of February, 2006

Commission File Number 001-14491
 
 

TIM PARTICIPAÇÕES S.A.
(Exact name of registrant as specified in its charter)
 

TIM PARTICIPAÇÕES S.A.
(Translation of Registrant's name into English)
 

Av. das Américas, 3434, Bloco 1, 7º andar – Parte
22640-102 Rio de Janeiro, RJ, Brazil
(Address of principal executive office)
 

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F. 

Form 20-F ___X___ Form 40-F _______

 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.  

Yes _______ No ___X____

Parent Company and
Consolidated Financial
Statements

TIM Participações S.A.

December 31, 2005 and 2004
with Report of Independent Auditors

 

TIM PARTICIPAÇÕES S.A.

FINANCIAL STATEMENTS

December 31, 2005 and 2004

 

Contents

Report of Independent Auditors    1 
 
Audited Financial Statements:     
 
Balance Sheets    3 
Statements of Income    5 
Statements of Shareholders’ Equity    6 
Statements of Changes in Financial Position    7 
Notes to Financial Statements    8 

A free translation from Portuguese into English of the Report of Independent Auditors on financial statements prepared in Brazilian currency in accordance with the accounting practices adopted in Brazil

 

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
TIM Participações S.A.

1. We have audited the accompanying balance sheets of TIM Participações S.A. and the accompanying consolidated balance sheets of TIM Participações S.A. and its subsidiaries as of December 31, 2005 and 2004, and the related statements of income, of shareholders’ equity and of changes in financial position for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements.

2. We conducted our audits in accordance with generally accepted auditing standards in Brazil which comprised: (a) the planning of our work, taking into consideration the materiality of balances, the volume of transactions and the accounting and internal control systems of the Company and its subsidiaries, (b) the examination, on a test basis, of the documentary evidence and accounting records supporting the amounts and disclosures in the financial statements, and (c) an assessment of the accounting practices used and significant estimates made by the Company’s and subsidiaries’ management, as well as an evaluation of the overall financial statement presentation.

3. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of TIM Participações S.A. and the consolidated financial position of TIM Participações S.A. and its subsidiaries at December 31, 2005 and 2004, and the results of their operations, changes in their shareholders’ equity and changes in their financial position for the years then ended, in conformity with the accounting practices adopted in Brazil.

1

4. Our audits were conducted with the objective of expressing an opinion on the financial statements referred to in the first paragraph above. The statements of cash flows (company and consolidated) and value added (company and consolidated) for the year ended December 31, 2005, prepared in accordance with the accounting practices adopted in Brazil, are presented to provide additional information on the Company, and are not a required component of the financial statements. This supplementary information was submitted to the same audit procedures described in the second paragraph above and, in our opinion is fairly presented, in all material respects, in relation to the basic financial statements taken as a whole.

Rio de Janeiro, January 18, 2006

ERNST & YOUNG
Auditores Independentes S.S.
CRC-2SP015199/0-6-F-RJ

Mauro Moreira
Accountant CRC-1RJ072056/O-0

 

2

A free translation from Portuguese into English of the financial statements prepared in accordance with the accounting practices adopted in Brazil

TIM PARTICIPAÇÕES S.A.

BALANCE SHEETS
December 31, 2005 and 2004
(In thousands of reais)

    Parent company    Consolidated 
     
    2005    2004       2005       2004 
         
Assets                 
Current assets                 
   Cash and cash equivalents    5,972    1,299    1,281,768    856,332 
   Accounts receivable    -    -    723,335    608,122 
   Inventories    -    -    81,880    47,200 
   Taxes and contributions recoverable    18,167    13,587    114,065    91,154 
   Deferred income and social contribution                 
     taxes    1,137    1,512    103,118    108,706 
   Dividends and interest on capital                 
     recoverable    146,776    126,037    -    - 
   Prepaid expenses    -    -    6,321    1,195 
   Other current assets    294    474    2,952    3,638 
         
    172,346    142,909    2,313,439    1,716,347 
         
 
 
Noncurrent assets                 
   Taxes and contributions recoverable    6,873    -    69,946    46,750 
   Deferred income and social contribution                 
     taxes    2,312    2,156    117,478    163,114 
   Related parties    -    108    18,618    397 
   Escrow deposits    447    341    26,278    30,291 
   Other noncurrent assets    13    -    4,706    1,505 
         
    9,645    2,605    237,026    242,057 
         
 
Permanent assets                 
   Investments    2,727,775    2,012,656    8,310    9,890 
   Property, plant and equipment    -    -    1,826,288    1,627,862 
         
    2,727,775    2,012,656    1,834,598    1,637,752 
         
Total assets    2,909,766    2,158,170    4,385,063    3,596,156 
         

3

    Parent company    Consolidated 
     
    2005       2004    2005       2004 
         
 Liabilities and shareholders’ equity                 
 Current liabilities                 
       Suppliers    3,364    797    1,056,721    691,022 
       Loans and financing    -    -    25,707    62,872 
       Salaries and related charges    1,379    755    22,685    20,842 
       Taxes, charges and contributions    20,909    15,806    157,666    153,563 
       Concessions payable    -    -    8,741    11,361 
       Dividends and interest on capital                 
         payable    131,178    79,017    141,606    114,678 
       Related parties    -    34,948    45,042    2,944 
       Other current liabilities    194    -    21,909    21,238 
         
    157,024    131,323    1,480,077    1,078,520 
         
 
 Noncurrent liabilities                 
       Loans and financing    -    -    105,076    41,220 
       Taxes, charges and contributions    -    -    4,634    26,005 
       Provision for contingencies    3,215    2,643    42,787    32,602 
       Supplementary pension plan    3,584    3,697    3,584    3,697 
       Concessions payable    -    -    2,962    - 
         
    6,799    6,340    159,043    103,524 
         
 
 Minority interests    -    -    -    393,605 
         
 
 Shareholders’ equity                 
       Capital    1,472,075    884,504    1,472,075    884,504 
       Capital reserves    192,081    240,634    192,081    240,634 
       Income reserves    1,081,787    895,369    1,081,787    895,369 
         
    2,745,943    2,020,507    2,745,943    2,020,507 
         
Total liabilities and shareholders’ equity    2,909,766    2,158,170    4,385,063    3,596,156 
         

See accompanying notes.

4

TIM PARTICIPAÇÕES S.A.

STATEMENTS OF INCOME
Years ended December 31, 2005 and 2004
(In thousands of reais, except earnings per share, expressed in reais)

    Parent company    Consolidated 
     
    2005    2004         2005    2004 
         
Gross revenues                 
   Telecommunications services    -    -    3,169,742    2,782,403 
   Sale of goods    -    -    733,530    646,772 
         
    -    -    3,903,272    3,429,175 
 
Deductions from gross revenues    -    -    (985,057)   (864,543)
         
Net revenues    -    -    2,918,215    2,564,632 
 
Cost of services rendered    -    -    (841,102)   (784,233)
Cost of goods sold    -    -    (536,470)   (513,662)
         
Gross profit    -    -    1,540,643    1,266,737 
         
 
   Operating income (expenses):                 
         Selling    -    -    (798,106)   (647,277)
         General and administrative    (18,328)   (20,764)   (185,946)   (182,442)
         Equity pickup    463,407    334,788    -    - 
         Amortization of goodwill on privatization    -    -    (50,450)   (50,450)
         Amortization of concessions    -    -    (9,295)   (8,626)
         Other operating income (expenses)   (1,360)   (4,182)   (16,014)   10,164 
         
    443,719    309,842    (1,059,811)   (878,631)
         
 
Income before financial results    443,719    309,842    480,832    388,106 
 
   Financial income (expenses):                 
       Financial income    3,274    1,938    158,546    133,613 
       Financial expenses    (11,175)   (10,130)   (83,634)   (68,801)
       Foreign exchange variation, net    ,010    -    (2,482)   (4,241)
         
    (7,891)   (8,192)   72,430    60,571 
         
 
Operating income    435,828    301,650    553,262    448,677 
 
Non-operating loss    -    (4,997)   (2,260)   (4,592)
         
 
Income before income and social contribution taxes                 
and minority interests    435,828    296,653    551,002    444,085 
 
Provision for income and social contribution taxes    (1,339)   (9,781)   (130,338)   (108,037)
 
Income before minority interests    434,489    286,872    420,664    336,048 
 
Minority interests    -    -    (21,464)   (70,113)
         
 
Net income for the year    434,489    286,872    399,200    265,935 
         
Earnings per thousand shares outstanding at year-end                 
(R$)   0.49    0.41         
         

See accompanying notes.

5

TIM PARTICIPAÇÕES S.A.

STATEMENTS OF SHAREHOLDERS’ EQUITY
(PARENT COMPANY)
Years ended December 31, 2005 and 2004
(In thousands of reais)

        Capital reserves        Income reserves             
             
            Reserve                         
            for                         
        Special    future            Unearned             
        goodwill    capital    Legal    Dividends    income    Expansion    Retained     
     Capital    reserve    increase    reserve    payable    reserve     reserve    earnings     Total 
                   
 
Balances at December 31, 2003    369,163    148,565    -    29,835    -    -    379,423    -    926,986 
 
Capital increase with transfer of reserve    87,102    (27,102)       -    -    -    (60,000)   -    - 
Capital and reserves increase with incorporation                                     
   of net assets:                                     
         Tele Nordeste Celular Participações S.A.    428,239    119,171        32,839    2,300    18,838    280,194    -    881,581 
   Realization of special dividends reserve    -    -        -    (2,300)   -    -    -    (2,300)
   Net income for the year    -    -        -    -    -    -    286,872    286,872 
   Allocation of net income for the year:                                     
         Legal reserve    -    -        14,343    -    -    -    (14,343)   - 
         Interest on capital    -    -        -    -    -    -    (30,000)   (30,000)
         Dividends    -    -        -    -    -    -    (42,632)   (42,632)
         Expansion reserve    -    -        -    -    -    199,897    (199,897)   - 
                   
 
Balances at December 31, 2004    884,504    240,634    -    77,017    -    18,838    799,514    -    2,020,507 
 
   Capital increase with transfer of reserve    170,496    (54,954)   -    -    -    -    (115,542)   -    - 
   Capital increase with incorporation of shares:                                     
     TIM Sul S.A    208,220    -    -    -    -    -    -    -    208,220 
     TIM Nordeste Telecomunicações S.A.    206,849    -    -    -    -    -    -    -    206,849 
   Capital increase related to stock option plan    2,006    -    -    -    -    -    -    -    2,006 
   Capital reserve increase    -        6,401    -    -    -    -    -    6,401 
   Realization of unearned income reserve    -    -    -    -    -    (18,838)   -    -    (18.838)
   Net income for the year    -    -    -    -    -    -    -    434,489    434,489 
   Allocation of net income for the year:                                     
     Legal reserve    -    -    -    21,724    -    -    -    (21,724)   - 
     Interest on capital    -    -    -    -    -    -    -    (70,000)   (70,000)
     Dividends    -    -    -    -    -    -    -    (43,691)   (43,691)
     Expansion reserve    -    -    -    -    -    -    299,074    (299,074)   - 
 
                   
Balances at December 31, 2005    1,472,075    185,680    6,401    98,741    -    -    983,046    -    2,745,943 
                   

See accompanying notes.

6

TIM PARTICIPAÇÕES S.A.

STATEMENTS OF CHANGES IN FINANCIAL POSITION
Years ended December 31, 2005 and 2004
(In thousands of reais)

    Parent company    Consolidated 
     
    2005     2004    2005    2004 
         
Sources of working capital                 
   Net income for the year    434,489    286,872    399,200    265,935 
   Amounts which do not affect working capital:                 
       Exchange and monetary variation and interest    (875)   2,640    1,748    9,038 
       Provision for contingencies    ,572    2,589    6,676    11,678 
       Equity pickup    (463,407)   (334,788)   -    - 
       Depreciation and amortization    1,582    2,472    481,907    332,534 
       Residual value of fixed asset disposals    -    1,794    5,723    1,643 
       Gain on investments    -    5,950    -    - 
       Minority interests    -    -    21,464    45,526 
       Pension supplementation    (113)   (36)   (113)   (36)
         
Total from operations    (27,752)   (32,507)   916,605    666,318 
         
   From shareholders                 
       Capital subscription    417,075    -    417,075    - 
       Capital reserve increase    6,401    -    6,401    - 
 From subsidiaries                 
       Dividends receivable    61,775    65,591    -    - 
       Interest on capital receivable    100,000    71,112    -    - 
   Effect of merger with Tele Nordeste Celular Partic. S.A.:                 
       Noncurrent assets    -    (884)   -    (101,958)
       Investment    -    (889,316)   -    - 
       Property, plant and equipment    -    (2,621)   -    (662,453)
       Noncurrent liabilities    -    18,604    -    53,195 
       Minority interests    -    -    -    165,891 
       Net assets    -    881,581    -    881,579 
         
    585,251    144,067    423,476    336,254 
         
   From third parties                 
       Decrease in noncurrent assets    1,792    23,066    202,958    156,445 
       Increase in noncurrent liabilities    -    24,511    3,509    26,665 
       New loans and financing    -    -    85,349    - 
       Tax incentive – ADENE    -    -    35,289    25,611 
         
    1,792    47,577    327,105    208,721 
         
Total sources    559,291    159,137    1,667,186    1,211,293 
         
Applications of working capital                 
   Acquisition of fixed assets    -    -    684,474    586,355 
   Increase in investments with company merger    415,069    -    -    - 
   Increase in noncurrent assets    7,957    15,925    197,463    135,646 
   Decrease in noncurrent liabilities        45,950    42,116    110,879 
   Minority interests    -    -    415,069    - 
   Dividends    62,529    44,932    62,529    44,932 
   Interest on capital    70,000    30,000    70,000    30,000 
         
Total applications    555,555    136,807    1,471,651    907,812 
         
 
Increase in working capital    3,736    22,330    195,535    303,481 
         
 
Changes in working capital:                 
   Current assets                 
       At end of year    172,346    142,909    2,313,439    1,716,347 
       At beginning of year    142,909    47,220    1,716,347    752,695 
         
    29,437    95,689    597,092    963,652 
   Current liabilities                 
       At end of year    157,024    131,323    1,480,077    1,078,520 
       At beginning of year    131,323    57,964    1,078,520    418,349 
         
    25,701    73,359    401,557    660,171 
         
Increase in working capital    3,736    22,330    195,535    303,481 
         

See accompanying notes.

7

TIM PARTICIPAÇÕES S.A.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005 and 2004
(In thousands of reais)

1. Operations

TIM Participações S.A., with registered office located at Avenida das Américas, 3.434 – building 1, 7th floor – part, Rio de Janeiro – Rio de Janeiro state, is a listed entity directly controlled by TIM Brasil Serviços e Participações S.A., a company of the Telecom Italia Group, which has the ownership of 50.33% of the voting capital and 19.88% of the total capital, of which the business purpose is to control companies carrying out telecommunications services, including mobile telephony services, among others, in the areas of their concessions and/or authorizations.

The Company has the controlling ownership of TIM Sul S.A. and TIM Nordeste Telecomunicações S.A. TIM Sul S.A. provides mobile telephony services in the states of Paraná (except for the cities of Londrina and Tamarana), Santa Catarina and in the cities of Pelotas, Capão do Leão, Morro Redondo and Turuçu, in the state of Rio Grande do Sul. TIM Nordeste Telecomunicações S.A. provides mobile telephony services in the states of Alagoas, Ceará, Piauí, Rio Grande do Norte, Paraíba and Pernambuco.

Services provided by the subsidiaries and the respective rates are regulated by ANATEL (“Agência Nacional de Telecomunicações”), regulatory authority of telecomunications in Brazil.

2. Corporate Reorganization

a) Corporate merger

On June 1, 2004, Tele Celular Sul Participações S.A. and Tele Nordeste Celular Participações S.A., subsidiaries of TIM Brasil Serviços e Participações S.A., released significant information stating that their Boards of Directors authorized the Protocol and Justification of Merger, which proposed the merger of Tele Nordeste Celular Participações S.A. by Tele Celular Sul Participações S.A.

On August 30, 2004, with ANATEL approval, the Shareholders’ General Meeting of Tele Celular Sul Participações S.A. approved the proposal of the Board of Directors for the merger of net assets of Tele Nordeste Celular Participações S.A. at book value. In such meeting, Tele Celular Sul Participações S.A. was renamed TIM Participações S.A.

Net assets were included in the merging company’s equity through the transfer of credit and debit balances on a line by line basis. Accordingly, the merging company’s results include the revenues and expenses of the merged company until the base date of the merger (June 30, 2004).

8

 

2. Corporate Reorganization (Continued)

b) Incorporation of shares of TIM Sul S.A and TIM Nordeste Telecomunicações S.A.

On April 26, 2005, TIM Participações S.A. released significant information stating that its Boards of Directors authorized the Protocol and Justification of Merger, which proposed the incorporation of all the shares of TIM Sul S.A and TIM Nordeste Telecomunicações S.A by TIM Participações S.A.

On May 30, 2005, the Extraordinary General Meetings of TIM Sul S.A, TIM Nordeste Telecomunicações S.A. and TIM Participações S.A. approved the incorporation of all the shares of TIM Sul S.A. and TIM Nordeste Telecomunicações S.A. by TIM Participações S.A., making the companies into wholly-owned subsidiaries of TIM Participações S.A.

This operation intended to concentrate liquidity of the shares of the three companies into only one company, TIM Participações S.A., as well as to reduce expenses related to controls and the maintenance of several shareholders in different companies.

The withdrawing right of shareholders holding common shares of TIM Participações S.A., as well as that of minority shareholders of TIM Sul S.A. and TIM Nordeste Telecomunicações S.A., expired on July 1, 2005. The amount disbursed by the companies for payment of the dissident minority was of R$ 0.8, represented by 153,861 common shares and 154,407 preferred shares.

3. Presentation of the Financial Statements

a) Basis of presentation

The parent company and consolidated financial statements were prepared in accordance with the accounting practices adopted in Brazil and the rules applicable to concessionaires of public telecommunications services as well as the rules and accounting procedures established by the Brazilian Securities Commission (CVM).

TIM Participações S.A. is a publicly-traded company, with American Depositary Receipts being traded on the New York stock exchange – USA. Based on that, the Company is subject to the rules of the Security Exchange Commission (SEC) and, aiming to meet market needs, the Company adopts the procedure to disclose information simultaneously to both markets in Brazilian reais, in Portuguese and English.

9

 

3. Presentation of the Financial Statements (Continued)

b) Consolidated Financial Statements

The consolidated financial statements include assets, liabilities and the result of operations of the Company and its subsidiaries, which are as follows:

    Ownership % 
   
    2005    2004 
     
 
TIM Sul S.A.    100.00    81.73 
TIM Nordeste Telecomunicações S.A.    100.00    81.75 

The main consolidation procedures are as follows:

I. Elimination of asset and liability accounts among the consolidated companies;
II. Elimination of the participation in capital, reserves and retained earnings of the subsidiaries;
III. Elimination of revenues and expenses generated by transactions among the consolidated companies;
IV. Separate disclosure of the minority interest participation in the consolidated financial statements, where applicable.

Reconciliation of the results of operations is set out below:

    2005    2004 
     
Parent company    434,489    286,872 
ADENE tax incentive directly recorded in shareholders'         
equity of subsidiary TIM Nordeste Telecomunicações S.A.    (35,289)   (20,937)
     
Consolidated    399,200    265,935 
     

c) Comparability of the financial statements

To allow better comparison with the financial statements for the current year, certain reclassifications were made in the financial statements for 2004. However, the amount of said reclassifications is not material in relation to the financial statements, as such, are not being disclosed.

10

 

4. Summary of Accounting Practices

a) Cash and cash equivalents

These represent cash and bank balances and short-term investments, recorded at cost, plus interest accrued up to the balance sheet date.

b) Accounts receivable

Accounts receivable from mobile telephone subscribers are calculated at the tariff rate on the date the services were rendered. Accounts receivable also include services provided to customers up to the balance sheet date but not yet invoiced and receivables from sales of handsets and accessories.

c) Allowance for doubtful accounts

The allowance for doubtful accounts is recorded based on the customer base profile, the aging of overdue accounts, the economic scenario and the risks involved in each case. The allowance amount is considered sufficient to cover possible losses on the receivables.

d) Inventories

Refer to cellular handsets and accessories, which are stated at average acquisition cost, and does not exceed replacement cost. A provision to adjust the slow-moving items balance to the related realization value was recorded.

e) Investments

Investments in subsidiaries are carried under the equity method based on the subsidiaries’ equity at the balance sheet date and consistent with the accounting practices adopted by the Company.

Other investments are stated at acquisition cost, reduced to their realization value, when applicable.

f) Property, plant and equipment

Property, plant and equipment is stated at acquisition and/or construction cost, less accumulated depreciation calculated based on the straight-line method at rates that take into consideration the estimated useful lives of the assets. Repair and maintenance costs which extend the useful lives of the related assets are capitalized, while other routine costs are charged to the result of operations.

Interest computed on debts that finance the construction of property, plant and equipment, is capitalized until the related assets become operational.

11

 

4. Summary of Accounting Practices (Continued)

f) Property, plant and equipment (Continued)

Noncurrent assets, mainly property, plant and equipment, are periodically reviewed for possible impairment.

The useful lives of all property, plant and equipment items are regularly reviewed to reflect any technological changes.

g) Income and social contribution

Income tax is calculated based on the taxable income for the period, as determined by current legislation. Social contribution is calculated based on prevailing tax rates, considering pretax income.

The subsidiary TIM Nordeste Telecomunicações S.A., through Certificates (“Laudos Constitutivos”) No. 0144/2003 and No. 0232/2003, issued on March 31, 2003 by the Agency for Development of the Northeast Region of Brazil - ADENE, became eligible to the following tax incentives: (i) 75% reduction in income tax and non-refundable surtaxes, for 10 (ten) years, from 2002 to 2011, calculated on profit from tax incentive activities ("lucro da exploração") resulting from implementation of their installed capacity to render digital mobile telephony services; and (ii) reduction by 37.5%, 25% and 12.5% in income tax and refundable surtaxes, for fiscal years 2003, 2004 to 2008 and 2009 to 2013, respectively, calculated on profit from tax incentive activities resulting from the installed capacity for rendering analogical mobile telephony services.

Income tax is calculated based on the taxable income for the period, as determined by current legislation. Social contribution is calculated based on prevailing tax rates, considering pretax income. Deferred taxes are recognized on temporary differences and income and social contribution tax losses, when applicable. The amount of the aforementioned tax benefit of income tax reduction is recorded as a reduction in the provision for income tax payable, against capital reserve – tax incentive, in shareholders’ equity of the subsidiary TIM Nordeste Telecomunicações S.A.

Deferred taxes related to temporary differences and tax losses are recorded as current and noncurrent assets, and the expected realization is supported by projected future taxable income, which is reviewed every year and properly approved by Company’s management.

12

 

4. Summary of Accounting Practices (Continued)

h) Loans and financing

Loans and financing include accrued interest to the balance sheet date. The Company’s subsidiaries are party to certain derivative instruments, related to its U.S. dollar denominated liabilities with the objective of hedging themselves against risks associated with unexpected real/U.S. dollar exchange rates. Additionally, the subsidiaries also are party to certain derivative instruments with the objective of heding themselves against risk associated to variations of market interest rates. Gains and losses from such operations are recognized in the statement of income under the accrual method, based on the rates established in the contracts.

i) Provision for contingencies

The provision for contingencies is recorded based on estimates which take into consideration the opinion of the Company and its subsidiaries’ management and of their legal advisors, and is recorded based on the probable losses at the end of the claims.

j) Revenue recognition

Service revenues are recognized as the services are provided. Billings are monthly recorded. Unbilled revenues from the last billing date to a client and the month end are measured and recognized during the month in which the service was provided. Revenues from pre-paid telecommunication services are deferred and recorded to income in the period in which they are utilized. Revenues from the sale of handsets and accessories are recognized as the products are delivered to and accepted by end consumers or distributors.

k) Financial income (expenses)

It represents interest and exchange and monetary variations related to marketable securities, hedge contracts, loans and financing received and granted.

l) Pension plans

The Company and its subsidiaries record the adjustments related to the obligations of the employees’ pension plan in conformity with the rules established by IBRACON NPC 26, approved by CVM Instruction No. 371.

m) Minority interests

Minority interests correspond to the interest of the minority shareholders in the subsidiaries. On May 30, 2005, the subsidiaries were converted into wholly-owned subsidiaries of the Company.

13

 

4. Summary of Accounting Practices (Continued)

n) Use of estimates

The preparation of financial statements in conformity with accounting practices adopted in Brazil requires management to make estimates and assumptions concerning the amounts of recorded assets and liabilities and the disclosure of contingent assets and liabilities at the Financial Statements date, as well as the estimation of revenues and expenses for the period. The actual results may differ from those estimates.

o) Foreign currency transactions

Transactions in foreign currency are recorded at the rate of exchange prevailing of the transaction date. Foreign currency denominated assets and liabilities are translated into reais using the exchange rate of the balance sheet date, which is reported by the Central Bank of Brazil. Exchange gains and losses are recognized in the statement of income as they occur.

p) Employees’ profit sharing

The Company and its subsidiaries record a provision for employees’ profit sharing, based on the targets disclosed to its employees and approved by the Board of Directors. The related amounts are recorded as personnel expenses and allocated to profit and loss accounts considering each employee’s cost center.

q) Interest on capital

Interest on capital paid and/or payable are recorded against financial expenses, which, for financial reporting purposes, are reclassified and disclosed as appropriation of net income for the year, in the statement of shareholders’ equity. Interest on capital received and/or receivable are recorded against financial income, which are reclassified and disclosed as equity pickup. For presentation purposes, impacts on the result of operations are eliminated, and the reduction is presented in the investments account.

r) Supplemental information

In order to provide additional information, the following are being presented: a) statement of cash flows, prepared according to the Accounting Rules and Procedures – NPC 20 issued by IBRACON, and; b) value added statement, prepared according to Resolution – CFC #1.010.

14

 

5. Cash and Cash Equivalents

    Parent company 
   
    2005    2004 
     
 
Cash and banks    55    1,033 
Short-term investments    5,917    266 
     
    5,972    1,299 
     
 
    Consolidated 
   
    2005    2004 
     
 
Cash and banks    30,124    89,873 
Short-term investments    1,251,644    766,459 
     
    1,281,768    856,332 
     

The balance of short-term investments of the Company is backed by government securities (LFTs and LTN’s). The balance of short-term investments of the subsidiaries also include Bank Deposit Certificates (CDB) issued by first tier banks, with interest of 101.47% of Interbank Deposit Certificates (CDI) variation.

These investments can be withdrawn at any time, with no impact on recorded yield.

6. Accounts Receivable

    Consolidated 
   
    2005    2004 
     
 
Services billed    233,948    230,208 
Unbilled services    123,621    95,922 
Network use    176,810    129,393 
Sale of handsets    258,513    216,906 
     
    792,892    672,429 
 
Allowance for doubtful accounts    (69,557)   (64,307)
     
    723,335    608,122 
     

Annually, the criteria for determining the allowance for doubtful accounts are reviewed in order to reflect the current risk scenario related to accounts receivable.

15

 

7. Inventories

    Consolidated 
   
    2005    2004 
     
 
Cellular handsets    78,435    47,424 
Accessories and kits for prepaid cards    1,770    1,885 
TIM "chips"    9,100    3,373 
     
    89,305    52,682 
 
Provision for adjustment to realization value    (7,425)   (5,482)
     
    81,880    47,200 
     

8. Taxes and Contributions Recoverable

    Parent company 
   
       2005     2004 
     
 
Income tax    9,609    2,771 
Social contribution tax    9    9 
Withholding income tax (IRRF) on interest on capital    15,000    10,667 
IRRF recoverable    422    140 
     
    25,040    13,587 
 
Current    (18,167)   (13,587)
     
Noncurrent    6,873    - 
     
 
 
    Consolidated 
   
       2005     2004 
     
 
Income tax    18,761    12,335 
Social contribution tax    3,691    2,883 
ICMS    111,841    84,854 
PIS/COFINS    18,080    17,907 
IRRF on interest on capital    15,000    10,667 
IRRF recoverable    14,657    8,344 
Other    1,981    914 
     
    184,011    137,904 
 
Current    (114,065)   (91,154)
     
Noncurrent    69,946    46,750 
     

16

 

8. Taxes and Contributions Recoverable (Continued)

The noncurrent portion refers to recoverable income tax at the parent company level, and also refers to ICMS on fixed assets of the subsidiaries at the consolidated level.

9. Income and Social Contribution Taxes

The deferred income and social contribution taxes are comprised as follows:

    Parent company 
   
    2005     2004 
     
 
Tax loss carryforwards – income tax    650    1,009 
Tax loss carryforwards – social contribution tax    234    363 
Provision for contingencies    1,093    899 
Provision for pension plan    1,218    1,257 
Provision for employees’ profit sharing    254    140 
     
    3,449    3,668 
 
Current    (1,137)   (1,512)
     
Noncurrent    2,312    2,156 
     
 
    Consolidated 
   
    2005     2004 
     
 
Goodwill on privatization    383,322    531,704 
Reversal of the provision for integrity of equity    (252,992)   (350,924)
     
Tax credit from merger    130,330    180,780 
Tax loss carryforwards - income tax    5,912    25,639 
Tax loss carryforwards – social contribution tax    2,149    9,250 
Depreciation of free lease handsets    21,832    16,192 
Allowance for doubtful accounts    23,649    21,865 
Provision for contingencies    14,548    8,067 
Accelerated depreciation of TDMA equipment    14,682    4,663 
Provision for pension plans    1,218    1,257 
Provision for employees’ profit sharing    3,158    1,551 
Other provisions    3,118    2,556 
     
    220,596    271,820 
 
Current    (103,118)   (108,706)
     
Noncurrent    117,478    163,114 
     

The Company and its subsidiary TIM Sul S.A., based on the expectation of future taxable profit generation, recognize tax credits arising from tax loss related to income and social contribution taxes carried forward from prior years, which have no expiration date. The use of these tax credits is limited to 30% of the annual taxable income.

17

 

9. Income and Social Contribution Taxes (Continued)

The deferred tax asset related to the tax credit resulting from merger refers to the future tax benefit, as a consequence of the restructuring plan started in 2000. The matching account of the referred tax benefit is a special reserve for goodwill in shareholders’ equity and is realized based on the estimated future profitability and the time of the concession, which is expected to terminate in 2008. The goodwill amortization is recorded in the statement of income.

In 2005, R$50,450 (R$50,450 in 2004) related to such goodwill were realized. Also under the terms of the restructuring plan, the effective tax benefit for each fiscal year will be subsequently capitalized in the name of the controlling shareholder. The minority shareholders are ensured of preemptive right on acquisition of an amount proportional to the new capital of the controlling shareholder. The special goodwill reserve recorded by the Company’s subsidiary represents the parent company’s right on future capitalization (see Note 20-b).

In accordance with projections made by the subsidiaries’ management, the noncurrent portion of deferred taxes will be realized as follows:

  Consolidated 
 
2007  88,048 
2008  29,430 
   
  117,478 
   

Income and social contribution tax expenses are as follows:         
 
    Parent company    Consolidated 
     
    2005    2004    2005    2004 
         
 
   Current income tax    (818)   (3,589)   (95,208)   (68,648)
   Current social contribution tax    (302)   (1,301)   (34,355)   (25,189)
         
    (1,120)   (4,890)   (129,563)   (93,837)
         
 
   Deferred income tax    (161)   (3,596)   (570)   (10,762)
   Deferred social contribution tax    (58)   (1,295)   (205)   (3,438)
         
    (219)   (4,891)   (775)   (14,200)
         
 
    (1,339)   (9,781)   (130,338)   (108,037)
         

18

 

9. Income and Social Contribution Taxes (Continued)

The reconciliation between income and social contribution tax expenses, tax expense calculated based on combined statutory rates, and the amount recorded in the statement of income, is as follows:

    Parent company 
   
    2005    2004 
     
Income before income and social contribution taxes    435,828    296,653 
 
Combined statutory rate    34%    34% 
     
 
Income and social contribution taxes at combined statutory rate    (148,182)   (100,862)
 
(Additions)/Exclusions:         
 Equity pickup (net of interest on capital)   147,358    89,650 
 Amortization of goodwill reserve    (537)   (537)
 Other    22    1,968 
     
    146,843    91,081 
     
 
Income and social contribution taxes debited to income for the year    (1,339)   (9,781)
     
 
Effective rate    0.31%    3.30% 
     
 
    Consolidated 
   
    2005    2004 
     
 
Income before income and social contribution taxes    551,002    444,085 
 
Combined statutory rate    34%    34% 
     
 
Income and social contribution taxes at combined statutory rate    (187,341)   (150,989)
 
(Additions)/Exclusions:         
 Realization of the provision for equity integrity    33,297    33,297 
 Interest on capital    23,800    10,200 
 Exclusion of balances of provisions    4,516    - 
 Amortization of goodwill reserve    (537)   (537)
 Other    (4,073)   (8)
     
    57,003    42,952 
     
 
Income and social contribution taxes debited to income for the year    (130,338)   (108,037)
     
 
Effective rate    23.65%    24.33% 
     

19

 

10. Related Parties

The balances and transactions with related parties at December 31, 2005 are as follows:

Parent company

    Assets    Liabilities    Income    Expense 
         
    Total    Total    Total    Total    Total 
    2004    2004     2004    2005    2004 
           
 
TIM Nordeste Telecom. S.A.    -         17,265    15,755    246    1,381 
TIM Sul S.A.    108         17,683       1,071    356    991 
           
 
Total    108         34,948    16,826    602    2,372 
           

Loan agreement

In January 2005, loan agreements with subsidiaries were settled. These agreements borne interest of 104.22% of Interbank Deposit Certificate (CDI) variation.

Consolidated

    Assets 
   
    Accounts    Accounts         
    receivable    receivable –         
    – Network    Sales of    Total    Total 
    use    handsets    2005    2004 
         
 
TIM Celular S.A.    14,138    4,391    18,529    387 
Maxitel S.A.    89    -    89    11 
         
 
Total    14,227    4,391    18,618    397 
         

20

 

10. Related Parties (Continued)

    Liabilities 
   
        Accounts                 
    Accounts    payable –                 
    payable –    Purchase                 
    Network    of    CSP 41 -    Other    Total    Total 
    use    handsets    Cobilling    debts    2005    2004 
             
 
TIM Celular S.A.    28    3,403    32,984    -    36,415    253 
Maxitel S.A.    217    688    -    -    905    - 
Blah!    -    -    -    1,102    1,102    2,691 
Telecom Italia S.p.A.    -    -    -    5,285    5,285    - 
IT Telecom Italia    -    -    -    1,335    1,335    - 
             
 
Total    245    4,091    32,984    7,722    45,042    2,944 
             


    Income 
   
    Network    Sales of    Total 
    use    handsets    2005 
       
 
TIM Celular S.A.    111,481    6,666    118,147 
Maxitel S.A.    89    4               93 
       
 
Total    111,570    6,670    118,240 
       


    Cost/Expense 
   
    Network        Total    Total 
    Usage    Other    2005    2004 
         
 
TIM Celular S.A.    28    -    28    9,302 
Maxitel S.A.    217    -    217    - 
Blah!    -    4,771    4,771    13,824 
         
 
Total    245    4,771    5,016    23,126 
         

CSP 41 - Cobilling

Due to the superposition of licenses granted by Anatel with another already held by another company of the TIM Group in Brazil, the authorizations of the subsidiaries of TIM Participações S.A for long-distance services were terminated in 2005. The customers of the subsidiaries started to make long-distance calls selecting the code of any of the operators authorized to render the service. As such, the subsidiaries of TIM Participações S.A stopped to receive income from long-distance services and, consequently, do not incur costs related to this service.

21

10. Related Parties (Continued)

CSP 41 – Cobilling (Continued)

Since March 2005, TIM Celular, a company of the TIM Brazil Group, started to be the sole license holder in the TIM Group to render long-distance services. In view of this, the subsidiaries of TIM Participações S.A. started to record the amounts billed to their customers for use of the service as intercompany accounts payable (“cobilling”).

Network use

The subsidiaries of TIM Participações S.A. record as intercompany accounts receivable the revenues related to the tariff for network use (VU-M), received from the operator rendering long-distance services in the TIM Group, for calls made using their networks.

Handsets purchase and sale

In order to optimize excess inventory at TIM Group companies, handset purchase and sale operations were carried out in the year among Group companies. These operations were carried out at cost of acquisition of handsets from third parties.

Purchases of handsets from Group companies totaled R$ 10,769 in 2005.

Other expenses

The amount classified as other expenses refers to expenses with services rendered by Blah! Sociedade Anônima de Serviços e Comércio to the subsidiaries.

11. Escrow deposits

    Consolidated 
   
     2005     2004 
     
 
Civil and labor claims    5,037    3,305 
ICMS – Agreement 69/98    2,294    11,830 
ICMS 5% tax difference in Santa Catarina state    11,779    8,085 
Other    7,168    7,071 
     
    26,278    30,291 
     

22

 

11. Escrow deposits (Continued)

In September 2005, the subsidiary TIM Sul S.A. prevailed in a proceeding contesting ICMS Agreement 69/98 in the Paraná state, and the corresponding escrow deposit was assigned to the subsidiary. The remaining balance refers to the Santa Catarina state.

12. Investments

    Parent company 
   
    2005    2004 
     
 
Investments         
   Subsidiaries    2,719,487    2,002,786 
   Other    8,288    9,870 
     
    2,727,775    2,012,656 
     

a) Equity interest in subsidiaries

    2005 
   
    TIM Nordeste        
    Telecomunicações    Tim Sul     
    S.A.    S.A.    Total 
       
- Subsidiaries             
Capital    535,995    1,001,243     
 
Number of shares held    29,749,763,679    15,747,586,938     
 
Total equity interest held    100%    100%     
 
Adjusted shareholders’ equity    1,267,185    1,266,308     
       
 
Net income for the year    215,745    233,837     
       
 
Equity pickup    238,868    224,539    463,407 
       
 
Investment value    1,267,185    1,266,308    2,533,493 
Special goodwill reserve (*)   94,303    91,691    185,994 
       
Investment value    1,361,488    1,357,999    2,719,487 
       
 
- Other (**)            
Goodwill – cost        16,918    16,918 
 
Accumulated goodwill             
amortization        (8,630)   (8,630)
       
        8,288    8,288 
       

23

 

12. Investments (Continued)

a) Equity interest in subsidiaries (Continued)

    2004 
   
    TIM Nordeste         
    Telecomunicações    Tim Sul     
    S.A    S.A    Total 
       
- Subsidiaries             
Capital    508,799    971,470     
 
Number of shares held    23,760,037,374    12,529,889,700     
 
Total equity interest held    81.75%    81.73%     
Voting capital held    94.09%    90.65%     
 
Adjusted shareholders’ equity    1,066,755    1,088,788     
       
 
Net income for the year    184,766    199,197     
       
 
Equity pickup    171,985    162,803    334,788 
       
 
Investment value    872,072    889,866    1,761,938 
Special goodwill reserve (*)   119,384    121,464    240,848 
       
Investment value    991,456    1,011,330    2,002,786 
       
 
- Other (**)            
Goodwill – cost        16,918    16,918 
 
Accumulated goodwill             
amortization        (7,048)   (7,048)
       
        9,870    9,870 
       

(*) The special reserve for goodwill recorded at TIM Nordeste Telecomunicações S.A. and TIM Sul S.A. represents the parent company’s right on future capitalization. These tax benefits relate to goodwill paid on the privatization of Tele Nordeste Celular Participações S.A., as from August 2004 merged into TIM Participações S.A. (Note 2), and Tele Celular Sul Participações (former TIM Participações S.A.), and the matching account of the referred tax benefit is a special goodwill reserve in shareholders’ equity, which is realized based on the estimated future profitability and the time of the concession, which is expected to terminate in 2008.

24

 

12. Investments (Continued)

(**) Goodwill on TIM SUL S.A. was recorded based on future profitability and will be amortized over ten years. In view of projected results for the investee, for the first two years goodwill was amortized at a rate of 4% per annum and the remaining balance is being amortized on a straight line basis over the remaining eight years to 2008.

(b) Changes in investments in subsidiaries:

    TIM         
    Nordeste         
    Telecom.    TIM Sul     
    S.A.    S.A.    Total 
       
 
Balance of investment at December 31, 2003    -    921,336    921,336 
 
   Shareholders’ equity at December 31, 2003             
   of merged company    889,316    -    889,316 
   Interest on capital and dividends    (64,950)   (71,754)   (136,704)
   Equity pickup    171,985    162,803    334,788 
   Loss on goodwill capitalization    (4,895)   (1,055)   (5,950)
       
 
Balance of investment at December 31, 2004    991,456    1,011,330    2,002,786 
 
   Capital increase    206,849    208,220    415,069 
   Interest on capital and dividends    (75,685)   (86,090)   (161,775)
   Equity pickup    238,868    224,539    463,407 
       
 
Balance of investment at December 31, 2005    1,361,488    1,357,999    2,719,487 
       

25

 

13. Property, Plant and Equipment

        Consolidated 
     
        2005    2004 
       
    Annual                 
    depreciation                 
    rate        Accumulated         
    %     Cost    depreciation    Net    Net 
       
 
SMP exploration rights    20    43,527    (21,876)   21,651    30,690 
Switching/transmission                     
equipment    14.29    2,717,533    (1,852,942)   864,591    826,543 
Leasefree handsets    50    211,168    (145,396)   65,772    51,805 
Infrastructure    33.33    296,518    (118,724)   177,794    157,509 
Leasehold improvements    33.33    59,873    (32,571)   27,302    19,881 
Software and hardware    20    181,190    (87,104)   94,086    44,648 
Assets for general use    10    39,814    (18,124)   21,690    16,567 
Intangible assets    20    662,633    (314,412)   348,221    238,485 
           
Assets and installations in                     
service        4,212,256    (2,591,149)   1,621,107    1,386,128 
 
Land        6,397    -    6,397    6,241 
 
Construction in progress        198,784    -    198,784    235,493 
           
        4,417,437    (2,591,149)   1,826,288    1,627,862 
           

The subsidiaries use rented areas for installation of their transmission equipment, of which the rental amount is provisioned and posted monthly to income.

The balance of construction in progress basically refers to the construction of new transmission units (Cell Sites - BTS) for network expansion.

In 2005, the amount of R$1,352 was recorded in property, plant and equipment (R$ 1,607 in 2004) by subsidiary TIM Nordeste Telecomunicações S.A., referring to interest capitalization. There was no such recording by TIM Sul S.A in 2005 (R$ 4,869 in 2004).

SMP exploration rights

Authorization to render the Personal Mobile Service (SMP) of the subsidiaries was granted by means of the terms signed in 2002, 2003 and 2004 with Anatel for exploration of SMP during fifteen years within the companies’ operating area.

In 2003 and 2004, the subsidiaries obtained authorization from Anatel to use radiofrequency blocks associated to the authorization to render SMP at the frequency of 900 MHz and 1800 MHz, respectively.

26

 

13. Property, Plant and Equipment (Continued)

SMP exploration rights (Continued)

Authorization amounts for exploration of SMP are shown below:

             Consolidated 
   
    TIM             
    Nordeste             
    Telecom.    TIM Sul         
    S.A.    S.A.    2005    2004 
         
SMP exploration rights - principal                 
 Authorizations obtained in 2003    23,211    17,557    40,768    40,768 
 Authorizations obtained in 2004    2,759    -    2,759    2,759 
         
    25,970    17,557    43,527    43,527 
 
Accumulated amortization    (12,431)   (9,445)   (21,876)   (12,837)
         
    13,539    8,112    21,651    30,690 
         

Implementation of new technology

The subsidiaries of TIM Participações S.A. began, in the second six-month period of 2003, introducing GSM technology into their service network, supplementing current TDMA technology. At December 31, 2005 no adjustment to the property, plant and equipment account was considered to be necessary, as a result of the new GSM technology implementation, as both technologies are to remain in operation at the companies to 2008, at least. The assets related to TDMA technology have been subject to accelerated depreciation and must be 100% depreciated by 2008.

14. Suppliers

    Parent company    Consolidated 
     
    2005    2004    2005    2004 
         
 
Suppliers    3,364    797    1,030,937    655,686 
Network use services    -    -    25,784    35,336 
         
    3,364    797    1,056,721    691,022 
         

The balance payable for network use services comprises: (i) use of the network of other fixed and mobile cell telephone operators, where calls are initiated in TIM network and end in the network of other operators (detraf); (ii) calls made when customers are outside their registration area, and are therefore considered a visitor in the other network (roaming); and (iii) calls made by customers when they choose another long-distance call operator – CSP (“cobilling”).

27

 

15. Loans and Financing

    Consolidated 
   
    2005    2004 
     
Foreign currency – U.S. dollars         
 
Suppliers: bearing exchange rate variation and interest of 7.3% p.a. Subject matter of swap to CDI operation. 
   -    755 
European Bank of Investment: refers to direct financing of US$ 50,000, bearing interest based on the Libor rate for 3- month deposits + 1.625% p.a., subject matter of a hedging operation for which the rate is 100% of the CDI monthly variation to final maturity. 
   -    44,720 
Local currency 
        
Banco do Nordeste: financing subject to pre-fixed interest of 14% p.a., and bonus of 15% and 25% for payments made on time regarding interest. This financing is subject matter of a hedging operation, for which the rate is 69.8% and 75.75% of the CDI monthly variation to final maturity. 
   106,982    20,018 
BNDES – National Bank for Economic and Social Development: this financing bears interest of 4% p.a. plus variation of the TJLP (long-term interest rate) as disclosed by the Central Bank of Brazil or of the "UMBNDES" of the Basket of Currencies. The basket of currencies financing was subject matter of swap to CDI operation. 
   18,989    38,122 
 
Hedging contracts    4,812    477 
     
    130,783    104,092 
 
Current    (25,707)   (62,872)
     
Noncurrent    105,076    41,220 
     

The BNDES loans of subsidiary TIM Sul S.A. are subject to certain covenants covering specific ratios. Out of the five ratios required, the Company did not meet only one as of December 31, 2005.

Company management is carrying negotiations with BNDES to obtain formal debt waiver related to this ratio which was not met. Although the long-term debt in the amount of R$ 604 is scheduled for January 2007 and management believes that the debt waiver will be obtained, said amount was reclassified to current liabilities to meet the accounting practices adopted in Brazil.

28

 

15. Loans and Financing (Continued)

Guarantees for these financing operations are as follows: Banco do Nordeste – bank guarantee by Banco Bradesco S.A., and BNDES – link of installments from mobile cell telephone service income.

Subsidiaries enter into hedging transactions to protect themselves against devaluation of the Brazilian currency (“real”) in relation to U.S. dollar and against variation in the fair value of financing indexed to pre-fixed interest rates, of which the term is the same as that stipulated in the financing agreement.

The noncurrent portion of loans and financing matures, as follows:

  Consolidated 
 
2007  13,122 
2008  17,858 
2009  17,809 
2010  17,767 
2011 onwards  38,520 
   
  105,076 
   

16. Salaries and Related Charges

         Parent company 
   
    2005    2004 
     
 
Salaries and fees    -    41 
Social charges    250    102 
Labor provisions    1,077    571 
Employee retention    52    41 
     
    1,379    755 
     
 
    Consolidated 
   
     2005    2004 
     
 
Salaries and fees    1,743    2,067 
Social charges    3,901    3,582 
Labor provisions    16,120    14,312 
Employee retention    921    881 
     
    22,685    20,842 
     

29

 

17. Taxes, Charges and Contributions

    Parent company 
   
    2005    2004 
     
 
IRPJ and CSL    1,121    4,890 
COFINS    7,600    5,406 
PIS    1,650    1,174 
IRRF    10,538    4,336 
     
    20,909    15,806 
     
 
 
    Consolidated 
   
    2005    2004 
     
 
IRPJ and CSL    3,444    4,890 
ICMS    99,796    129,532 
COFINS    16,569    13,538 
PIS    3,594    2,936 
FISTEL    8,292    7,528 
FUST    1,187    1,247 
FUNTTEL    593    624 
IRRF    25,641    17,730 
Other    3,184    1,543 
     
    162,300    179,568 
 
Current    (157,666)   (153,563)
     
Noncurrent    4,634    26,005 
     

The subsidiary TIM Sul S.A., entered into an agreement with the Paraná state to defer ICMS tax to be paid in 48 months after the respective triggering event, restated by FCA/PR. This benefit was granted by the Paraná state under “Programa Paraná Mais Emprego”.

30

 

18. Concessions Payable

    Consolidated 
   
    TIM Nordeste             
    Telecomunicações    TIM Sul         
    S.A.    S.A.     2005    2004 
         
SMP exploration rights:                 
   Authorizations acquired    23,649    15,802    39,451    39,451 
   Payments    (21,166)   (15,802)   (36,968)   (36,968)
   Monetary adjustment    5,443    3,777    9,220    8,878 
         
    7,926    3,777    11,703    11,361 
 
Current    (4,964)   (3,777)    (8,741)   (11,361)
         
Noncurrent    2,962    -    2,962    - 
         

At the end of 2004, Management of the subsidiary TIM Nordeste Telcomunicações S.A. had the intention to liquidate in advance the concessions payable during 2005, which did not occur. Based on the current intention to liquidate such liabilities at the respective due dates, the installments payable after 2006 were reclassified to noncurrent liabilities.

Monetary adjustment of balances payable is based on the General Price Index – Internal Availability (IGP-DI) variation, plus interest of 1% per month.

19. Provision for Contingencies

The Company and its subsidiaries are party to certain legal proceedings (labor, tax and civil) arising in the ordinary course of their business, and have recorded provisions when management believes that it can reasonably estimate probable losses, based on the opinion of their legal advisors.

31

 

19. Provision for Contingencies (Continued)

The provision for contingencies is comprised as follows:

    Parent company 
   
     2005    2004 
     
 
Civil    200    192 
Labor    3,015    2,451 
     
    3,215    2,643 
     
 
 
    Consolidated 
   
     2005    2004 
     
 
Civil    15,893    11,356 
Labor    8,360    7,545 
Tax    15,631    13,701 
Regulatory    2,903    - 
     
    42,787    32,602 
     

Civil contingencies

Civil contingencies refer to claims filed by former customers in connection with billing disputes, as well as claims for civil damages.

Labor contingencies

These involve several labor claims, mainly related to salary differences, salary parity and overtime payment, among others.

32

 

19. Provision for Contingencies (Continued)

Tax contingencies

The subsidiary TIM Nordeste Telecomunicações S.A. was served delinquency notice by the Ceará state tax authorities, amounting to R$ 12,721, related to (i) disallowing of expenses used in the determination of IRPJ in the period 1999 to 2001, corresponding to the amount of R$ 8,402; (ii) unpaid CSLL differences in 1998 to 2001, in the amount of R$ 3,208; and (iii) unpaid PIS and COFINS differences in 1998 to 2002, in the amount of R$ 334 and R$ 777, respectively. The company filed a defense in connection with this delinquency notice, contesting this assessment by the tax authorities. The Company’s internal and external counsel classified the risk of loss on the delinquency notice as possible, as such, no corresponding provision was recorded.

The subsidiary TIM Sul S.A. was served delinquency notices by the Santa Catarina state tax authorities in 2003 and 2004, amounting to R$ 95,666, mainly related to disputes concerning applicability of ICMS taxation on certain services provided by the subsidiary. The subsidiary is currently discussing these notices with the tax authorities and, based on the opinion of both internal and external counsel, management concluded that probable losses to be incurred in these proceedings amount to R$ 15,631, being such properly recorded.

Regulatory contingencies

Due to noncompliance with certain provisions of the Personal Mobile Service Regulation (SMP) and quality targets, defined in the General Plan of Quality Targets for SMP (PGMQ-SMP), Anatel started a proceeding for noncompliance with obligations (PADO) against the subsidiaries.

The subsidiaries have endeavored to contest the proceeding. The defense arguments, most of which having technical and juridical nature, may contribute to a significant reduction in the penalty initially applied or result in definitive PADO revocation without any penalty application. The provision for regulatory contingencies was recorded based on the amount of the penalties received for which the risk of loss is considered probable.

33

 

19. Provision for Contingencies (Continued)

Fund for Universalization of Telecommunications Services – FUST contribution tax

Anatel issued on December 15, 2005 Abridgment of Law No. 01, aiming to collect the Fust contribution tax on interconnection revenues of telecommunications service providers, as from enactment of Law No. 9998, dated August 17, 2000. The Company believes that the referred to revenue is not subject to FUST levy, based on applicable legislation (including the provisions of sole paragraph of article 6 of Law No. 9998/00), and management intends to take applicable measures to defend Company interests. Due to the different opinion of Anatel about the matter, Company internal and external legal counsel evaluated arguments for and against Anatel’s opinion and, considering the current status of the discussion about the matter, they concluded that the likelihood of an unfavorable outcome for the Company is remote. In view of this and according to applicable accounting practices, management has not recorded any corresponding provision for this matter.

20. Shareholders’ Equity

a) Capital

At December 31, 2005, the subscribed and paid in capital was represented by no par value shares as follows:

    2005    2004 
     
 
Number of common shares    299,610,631,068    264,793,296,882 
Number of preferred shares    579,965,856,092    437,711,795,252 
     
    879,576,487,160    702,505,092,134 
     

b) Capital reserve

Special Goodwill Reserve

This reserve was set up during the corporate reorganization process in 2000. The portion of the special reserve corresponding to the tax benefit obtained may be capitalized at the end of each fiscal year for the benefit of the controlling shareholder, with new issuance of shares. The respective capital increase will be subject to preemptive rights of the minority shareholders, in proportion to their shareholdings, by kind and class, at the time of new issuance, and the amounts payable during the year in connection with this right must be delivered directly to the controlling shareholder, in accordance with Instruction No. 319/99 of the Brazilian Securities Commission (CVM).

Reserve for Future Capital Increase

34

 

In March 2005, capital increases were approved at the subsidiaries TIM Nordeste Telecomunicações S.A. and TIM Sul S.A. as a consequence of the capitalization of part of the special goodwill reserve, as above mentioned. The deadline for the non controlling shareholders to exercise their preference rights ended in April of 2005, when TIM received the amount of R$ 6.401 from the shareholders who exercised their rights. When the amount was received, the exchange relation of shares described in note 2b, in which the subsidiaries became wholly owned by TIM Participações S.A., and the respective capital increases had been established. Thus, the amount received from non controlling shareholders (now shareholders of TIM Participações S.A.) was recorded as Reserve for Future Capital Increase. Management intends to propose in the Shareholder’s meeting the capitalization of such amount, without the issuance of new shares, in the benefit of all shareholders.

35

 

20. Shareholders’ Equity (Continued)

c) Income reserves

Legal reserve

This refers to the 5% (five percent) of net income for every year ended December 31 to be applied to the legal reserve, which should not exceed 20% (twenty percent) of capital. Also, the Company may not set up the legal reserve when it exceeds 30% (thirty percent) of capital plus capital reserves. This reserve can be used only for capital increase or compensation of accumulated deficit.

Unearned income reserve

The unearned income reserve originates from the portion of equity pickup to be financially realized, substantially represented by the capital reserve from income tax incentive set up by the subsidiary. In conformity with Law No. 10303/01, the reserve, amounting to R$ 18,838, was set up for the amount of compulsory dividends, which exceeded the realized portion of net income for 2003.

Company’s management will propose the distribuition of the reserve at the Shareholders’ Meeting due to its realization in 2005. Assuming the approval by the shareholders, the balance was transferred in its entirety to dividends payable.

36

 

20. Shareholders’ Equity (Continued)

c) Income reserves (Continued)

Reserve for expansion

The remaining balance of net income for the year ended December 31, 2005, adjusted as required by Law No. 6404/76, article 202, in the amount of R$ 299,074, comprises the balance of the income reserve for expansion account, as determined by CVM Instruction (IN) No. 59/86, and will be used in the expansion of the Company’s network and of its IT environment as well as of its subsidiaries. The accrual of the reserve for expansion is provided for in paragraph 2, article 40 of the Company’s by-laws and in article 194 of Law No. 6404/76. In addition, the investments to be made are supported by capital budget to be approved by the General Meeting as proposed by management.

d) Dividends

Dividends are calculated in accordance with the by-laws and Brazilian Corporation Law (“Lei das Sociedades por Ações”).

Based on its by-laws, the Company shall distribute an amount equivalent to 25% of adjusted net income as minimum dividend every year ended December 31, provided there are funds available for distribution.

Preferred shares are nonvoting and enjoy priority on (i) the payment of capital at no premium, and (ii) payment of a minimum noncumulative dividend of 6% p.a., calculated on the result of the division of the capital stock represented by the total number of the same class of shares issued by the Company.

In order to comply with the New Corporation Law, the Company’s by-laws were amended, including the First Paragraph of Section 10, which ensures the holders of preferred shares, every year, the right to receive stock dividends, corresponding to 3% (three percent) of net earnings per share, based on the balance sheet most recently approved, whenever the dividend established according to this criterion exceeds the dividend calculated according to the criteria previously established, described in the preceding paragraph.

37

20. Shareholders’ Equity (Continued)

Dividends, which correspond to the greater of values determined within the minimum set by each of the methods provided for by the by-laws, were calculated as follows:

    2005     2004 
     
 
Net income for the year    434,489    286,872 
(-) Setup of legal reserve    (21,724)   (14,343)
     
Adjusted net income    412,765    272,529 
 
Compulsory dividends: 25%    103,191    68,132 
     
 
Interest on capital, net of withholding income tax         
of 15%    59,500    25,500 
 
Supplementary dividends    43,691    42,632 
     
    103,191    68,132 
 
Realization of unearned income reserve/dividends payable    18,838    2,300 
     
Total proposed dividends and interest on capital    122,029    70,432 
     

The balance of dividends and interest on capital payable includes amounts from prior years of R$ 9,149 (R$ 8,585 in 2004).

    2005    2004 
     
Dividends and interest on capital per 1,000 shares         
 (in reais)        
 
Common shares    0.1387    0.1003 
Preferred shares    0.1387    0.1003 

e) Stock option plan

On May 2, 2001, the Company’s shareholders approved a stock option plan with the following objectives:

(i) retain the services and opinions of key employees on which the Company depends respecting their judgment, initiatives and efforts;
(ii) provide key employees with a certain combination of compensation based on the Company’s market value increase; and
(iii)have general interests of key employees in line with the shareholders’ interests.

38

 

20. Shareholders’ Equity (Continued)

e) Stock option plan (Continued)

On April 26, 2005, the Company’s Board of Director approved capital increase by R$ 2,006 through issue of 595,198 lots of 1,000 preferred shares, for the price of R$ 3.37 per 1,000 shares, resulting from the exercise of share purchase options by 24 Company employees in connection with the Company’s stock option plan.

The market value of the Company’s preferred shares as of the date of capital increase was R$ 3.84 per 1,000 shares.

The term for exercise of stock options previously granted expired in 2005 and new stock options have not been granted.

39

 

21. Net Operating Income

    Consolidated 
   
    2005    2004 
     
 
Revenue from telecommunications services         
   Subscription charges    258,610    358,178 
   Use charges    1,664,512    1,246,666 
   Network use    940,251    822,576 
   Long distance service    32,797    202,963 
   Value-added services – VAS    218,965    118,396 
   Other    54,607    33,624 
     
    3,169,742    2,782,403 
 
Sales of products    733,530    646,772 
     
Gross operating income    3,903,272    3,429,175 
     
 
Deductions         
   Taxes    (813,302)   (723,716)
   Discounts    (150,624)   (134,253)
   Other    (21,131)   (6,574)
     
    (985,057)   (864,543)
     
 
    2,918,215    2,564,632 
     

22. Cost of Services Rendered and Goods Sold

    Consolidated 
   
    2005    2004 
     
 
Personnel    (26,868)   (23,158)
Third-party services    (71,581)   (54,800)
Interconnection charges    (340,323)   (334,630)
Depreciation and amortization    (378,351)   (351,018)
Telecommunications supervision fund (Fistel)   (2,643)   (2,987)
Other    (21,336)   (17,640)
     
Cost of services rendered    (841,102)   (784,233)
 
Cost of goods sold    (536,470)   (513,662)
     
Total cost of services rendered and goods sold    (1,377,572)   (1,297,895)
     

40

 

23. Selling Expenses

    Consolidated 
   
    2005    2004 
     
 
Personnel    (66,515)   (55,152)
Third-party services    (417,093)   (318,778)
Allowance for doubtful accounts    (117,978)   (112,605)
Telecommunications supervision fund (Fistel)   (123,858)   (95,624)
Depreciation and amortization    (49,194)   (46,103)
Other    (23,468)   (19,015)
     
    (798,106)   (647,277)
     

24. General and Administrative Expenses

    Parent company 
   
    2005    2004 
     
 
Personnel    (5,919)   (12,475)
Third-party services    (12,047)   (5,735)
Depreciation and amortization    -    (892)
Other    (362)   (1,662)
     
    (18,328)   (20,764)
     
 
 
    Consolidated 
   
    2005    2004 
     
 
Personnel    (31,781)   (37,349)
Third-party services    (98,489)   (91,392)
Depreciation and amortization    (43,486)   (40,133)
Other    (12,190)   (13,568)
     
    (185,946)   (182,442)
     

41

 

25. Other Operating Income (Expenses)

    Parent company 
   
    2005     2004 
     
 
Income         
 Prescribed dividends    1,907    662 
 Other operating income    489    765 
     
    2,396    1,427 
     
 
Expenses         
 Taxes, charges and contributions    (805)   (992)
 Goodwill amortization    (1,582)   (1,581)
 Provision for contingencies    (1,063)   (2,345)
 Loss on legal proceedings    (306)   (691)
     
    (3,756)   (5,609)
     
 
Other operating income (expenses)   (1,360)   (4,182)
     
 
    Consolidated 
   
    2005     2004 
     
 
Income         
 Telecommunication service fines    11,446    10,993 
 Prescribed dividends    3,165    1,069 
 Reversal of the provision for contingencies    3,566    3,223 
 Reversal of the allowance for doubtful accounts (a)   -    10,000 
 Other operating income    423    6,687 
     
    18,600    31,972 
     
 
Expenses         
 Taxes, charges and contributions    (16,660)   (5,907)
 Goodwill amortization    (1,582)   (1,581)
 Provision for contingencies    (10,242)   (9,063)
 Loss on judicial proceedings    (6,130)   (4,573)
 Other operating expenses    -    (684)
     
    (34,614)   (21,808)
     
 
Other operating income (expenses)   (16,014)   10,164 
     

(a) refers to recovery of receivables from other operating companies.

42

 

26. Financial Income

             Parent company 
   
    2005    2004 
     
 
Interest accrued on short-term investments    2,107    731 
Monetary adjustment    951    450 
Other    216    757 
     
    3,274    1,938 
     
 
    Consolidated 
   
    2005    2004 
     
 
Interest accrued on short-term investments    137,701    103,567 
Monetary adjustment    6,716    7,313 
Interest on accounts receivable    9,985    17,520 
Other    4,144    5,213 
     
    158,546    133,613 
     

27. Financial Expenses

    Parent company 
   
    2005    2004 
     
 
Interest on borrowings from related parties    (602)   (2,372)
PIS/COFINS on financial income    (9,602)   (5,608)
Monetary adjustment    (17)   - 
CPMF    (617)   (656)
Other    (337)   (1,494)
     
    (11,175)   (10,130)
     
 
    Consolidated 
   
    2005    2004 
     
 
Interest on loans and financing    (10,454)   (2,224)
PIS/COFINS on financial income    (12,334)   (15,957)
Monetary adjustment    (772)   (5,540)
Interest on taxes and charges    (2,581)   (4,597)
CPMF    (16,251)   (13,636)
Discounts granted    (18,642)   (14,836)
Credit card companies charges    (14,881)   (5,913)
Other    (7,719)   (6,098)
     
    (83,634)   (68,801)
     

43

 

28. Non-operating Result

    Parent         
    company    Consolidated 
     
    2004    2005    2004 
       
 
Income             
 Investment disposals    898    -    898 
 Fixed asset disposals    1,769    3,413    1,977 
       
    2,667    3,413    2,875 
       
 
Expenses             
 Loss on change in shareholding             
 percentage    (5,950)   -    (5,950)
 Cost of fixed assets disposed of    (1,714)   (5,673)   (1,517)
       
    (7,664)   (5,673)   (7,467)
       
 
Non-operating result    (4,997)   (2,260)   (4,592)
       

29. Financial Instruments and Risk Management

Risk factors

The risk factors affecting the Company and its subsidiaries instruments are the following:

(i) Exchange rate risk

The exchange rate risk relates to the possibility of the Company and its subsidiaries computing losses resulting from fluctuations in exchange rates, thus increasing debt balances of loans obtained in the market and the corresponding financial charges. In order to mitigate this kind of risk, the Company carries out hedge contracts with financial institutions.

At December 31, 2005, financings of the Company and its subsidiaries indexed to the “UMBNDES” exchange variance of a basket of currencies are 100% covered by hedge contracts. The income or loss resulting from these hedge contracts is charged to operating results.

There are no significant financial assets indexed to foreign currencies.

44

 

29. Financial Instruments (Continued)

(ii) Interest rate risk

Interest rate risk refers to:

- possible variation in the fair value of financing subject to pre-fixed interest rates, if such rates do not reflect current market conditions. In order to mitigate this type of risk, the Company and its subsidiaries enter into hedging contracts with financial institutions. Gain or loss from these hedge contracts is charged to operating results;

- possible unfavorable interest rate change, which would lead to an increase in financial expenses of the Company and its subsidiaries on debts and hedging operations entered into at variable interest rate. At December 31, 2005, financial resources of subsidiaries were mainly invested in Interbank Deposit Certificates (CDI), which significantly reduces this risk.

(iii) Credit risk related to services rendered

This risk relates to the possibility of the Company and its subsidiaries to incur losses arising from the difficulty in collecting accounts receivable billed to subscribers. In order to mitigate this risk, the Company and its subsidiaries perform credit rating analyses to support management of risk related to collection problems and also monitor accounts receivable from subscribers, disabling telephone lines of defaulting subscribers.

(iv) Credit risk related to sale of telephone sets and prepaid telephone cards

The policy adopted by the Company’s subsidiaries for the sale of telephone sets and distribution of prepaid telephone cards is directly related to the risk of credit levels accepted during the normal course of business. The selection of partners, the diversification of the accounts payable portfolio, the monitoring of loan conditions, the positions and limits of requests established for traders, the constitution of security interests are procedures adopted by the subsidiaries to minimize possible collection problems with its commercial partners. There are no customers accounting for more than 10% of accounts receivable from sale of goods at December 31, 2005 and 2004 or income from sale of goods in 2005 and 2004.

45

 

29. Financial Instruments (Continued)

(v) Financial credit risk

This risk relates to the possibility of the Company and its subsidiaries computing losses originating from the difficulty in realizing short-term investments and hedge contracts.

The Company and its subsidiaries minimize the risk associated to these financial instruments by investing in well-reputed financial institutions.

There is no concentration of available resources of work, service, concessions or rights that have not been mentioned above that could, if eliminated suddenly, severely impact the operations of the Company and its subsidiaries.

Market value of financial instruments

The estimated market value of financial instruments, mainly of cash and cash equivalents, accounts receivable and short-term financial instruments approximates the corresponding book value considering that maturity of these instruments is within short-term. Financial instruments whose market value differs from book value at December 31, 2005 are as follows:

    2005    2004 
     
            Market            Market 
    Book value        value    Book value        value 
             
 
Loans and financing    125,971        123,133    103,615        103,038 
Hedge contracts    4,812        4,206    477        (340)

The market value of loans and financing and of hedge contracts was determined through discounted future cash flows and use of interest rates applicable to instruments of similar nature involving the same conditions and risks, or is based on market quotations for such instruments.

Market value was estimated for a certain period, based on available information and own valuation methodology. Changes in assumptions may significantly affect such estimates.

46

 

30. Pension Plans and Other Post-Employment Benefits

TIM Participações S.A. and its subsidiaries have been sponsoring a private pension plan for defined benefits for a group of employees of the former TELEBRÁS system, which is managed by Fundação Sistel de Seguridade Social – SISTEL, as a consequence of the legal provisions applicable to the privatization process of these companies in July 1998.

Considering that in 1999 and 2000 the sponsors of the pension plans managed by SISTEL had already negotiated conditions for the creation of individual pension plans by sponsoring company and maintenance of joint liability only in relation to the participants already assisted on January 31, 2000, the Companies and their subsidiaries in 2002, alike other companies resulting from the former TELEBRÁS system, started the creation of a pension plan for defined contributions meeting the most modern social security standards adopted by private companies and allowing the possibility of migration to this plan of the group of employees linked to SISTEL.

On November 13, 2002, the Brazilian Secretariat for Supplemental Pension Plans, through official ruling No. 1917 CGAJ/SPC, approved the statutes of the new pension plan, denominated Statutes of the TIMPREV Benefits Plan, for defined contributions, which provide for new conditions for benefits granting and maintenance, as well as the rights and obligations of the Plan Managing Entity, the sponsoring companies, participants and the beneficiaries thereof.

Under the new plan, the contribution on the part of the sponsoring company shall be of 100% of the amount of the basic contribution on the part of participants, and the managing entity of TIMPREV shall ensure, on the terms and conditions of the approved plan statutes, the benefits listed below, not being held liable for granting any other, even if the government official social security adventitiously starts granting them to beneficiaries:

However, as not all employees of the controlled companies and their subsidiaries have migrated to TIMPREV plan, the pension and health plans deriving from the TELEBRÁS system continue existing and are briefly set out below:

PBS: benefits plan of SISTEL, for defined benefits which includes the employees paying contributions to the plan (active) who participated in the plans sponsored by the companies of the former TELEBRÁS system;

47

 

30. Pension Plan and Other Post-Employment Benefits (Continued)

“PBS Assistidos”: private pension plan for employees receiving benefits (inactive), for multi-sponsored benefits;

“Convênio de Administração”: covenant for managing pension payment to pensioners of the predecessors of the controlled companies;

PAMEC: health plan granted to pensioners of the predecessors of the controlled companies;

PBT: plan for defined benefits for pensioners of the predecessors of the companies and their subsidiaries;

PAMA: health plan for retired employees and their dependents, on a shared cost basis.

The actuarial position of assets and liabilities of said plans, in accordance with the rules established by IBRACON NPC-26, approved by CVM Instruction No. 371, presents a surplus not recorded by the Company due to the impossibility of refund thereof, and contributions on the part of sponsor will not be reduced in the future.

The Company is sponsor, as successor from the partial spin-off of Telecomunicações do Paraná S.A. - TELEPAR, of the pension supplementation plans introduced in 1970 by a Collective Agreement Document, approved by the Atypical Contractual Relationship Document entered into by the Company and the labor unions representing the major professional categories of employees.

In the year ended December 31, 2005, the contributions to TIMPREV totaled R$ 296, of which R$ 123 were contributed by TIM Nordeste Telecomunicações S.A and R$ 173 by TIM Sul S.A. (R$ 340 by TIM Nordeste Telecomunicações S.A. and R$ 198 by TIM Sul S.A, in 2004).

The actuarial position of assets and liabilities related to pension and health care plans as of December 31, 2005 is shown below, considering the rules defined in IBRACON NPC-26, as approved by CVM Instruction 371 for the plans existing prior to TIMPREV, and which still have active members.

48

 

30. Pension Plan and Other Post-Employment Benefits (Continued)

Parent company

a) Effects recognized as of December 31:

    Plans    Total
     
     PBS    PAMA     2005    2004 
         
 
Present value of actuarial liabilities    6,490    467    6,957    6,355 
         
Present value of actuarial liabilities    6,490    467    6,957    6,355 
Fair value of plan assets    (10,404)   (329)   (10,733)   (9,000)
         
Present value of liabilities in excess of fair                 
value of assets    (3,914)   138    (3,776)   (2,645)
         
Net actuarial liabilities (assets)   (3,914)   138    (3,776)   (2,645)
         

No asset was recognized by the sponsors due to the impossibility of refund of this surplus and because contributions on the part of sponsors will not be reduced in the future.

b) Changes in net actuarial liabilities (assets)

    Plans
   
    PBS    PAMA 
     
 
Net actuarial liabilities (assets) at 12/31/04    (2,742)   96 
 
Expenses (income) recognized in the prior year    (894)   (3)
Sponsor’s contributions    (6)   - 
Recognized actuarial (gains) losses    (272)   45 
     
 
Net actuarial liabilities (assets) at 12/31/05    (3,914)   138 

c) Statement of losses (gains)

    Plans 
   
    PBS    PAMA 
     
(Gain) Loss on actuarial liabilities    352    71 
(Gain) Loss on plan assets     (624)   (26)
     
(Gain) Loss at 12/31/05     (272)   45 
     
Corridor calculation (10% of equity and liabilities)   1,040    47 

49

 

30. Pension Plan and Other Post-Employment Benefits (Continued)

Parent company (Continued)

d) Reconciliation of present value of liabilities

    Plans 
   
    PBS    PAMA 
     
 
Value of liabilities as of 12/31/04    5,969    386 
Cost of current service    7    1 
Interest on actuarial liabilities    648    43 
Benefits paid during the year    (486)   (34)
Liabilities    352    71 
     
 
Value of liabilities as of 12/31/05    6,490    467 
     

e) Reconciliation of fair value of assets

    Plans 
     
    PBS    PAMA 
     
 
Fair value of assets at 12/31/04    8,711    289 
Benefits paid in the year    (486)   (34)
Participants’ contributions    5    - 
Sponsor’s contributions    6    1 
Actual yield of plan assets in the year    2,168    73 
     
 
Value of liabilities at 12/31/05    10,404    329 
     

f) Expenses expected for 2006

    Plans
   
    PBS    PAMA 
     
 
Cost of current service (with interest)   8    1 
Interest on actuarial liabilities    705    52 
Expected yield of plan assets    (1,397)   (44)
     
Total expenses recognized    (684)   9 
 
Expected participants’ contributions for next year    (5)   - 
     
 
Total net expenses (income) to be recognized    (689)   9 

50

 

30. Pension Plan and Other Post-Employment Benefits (Continued)

Consolidated

a) Effects recognized at December 31:

                             Consolidated 
   
    Plans    Total 
     
        PBS    Convênio de                     
    PBS    Assistidos    Administração    PAMEC    PBT    PAMA    2005    2004 
                 
Reconciliation of assets and liabilities at 12/31/05                             
 
Present value of actuarial liabilities    22,879    4,507    863    79    1,389    2,823    32,540    28,853 
 
Fair value of plan assets    (35,508)   (5,838)   (1,677)   (189)   (1,725)   (1,987)   (46,924)   (40,338)
 
Present value of liabilities in excess of fair                                 
value of plan assets    (12,629)   (1,331)   (814)   (110)   (336)   836    (14,384)   (11,485)
                 
 
Net actuarial liabilities / (assets)   (12,629)   (1,331)   (814)   (110)   (336)   836    (14,384)   (11,485)
                 

No asset was recognized by the sponsors due to the impossibility of refund of this surplus and because contributions on the part of sponsors will not be reduced in the future.

b) Changes in net actuarial liabilities (assets)

     Plans 
   
           PBS    Convênio de             
    PBS    Assistidos    Administração    PAMEC    PBT    PAMA 
             
 
Actuarial liabilities (assets) at 12/31/04    (9,401)   (1,246)   (814)   (97)   (390)   463 
 
Expenses (income) recognized in prior year    (2,994)   (188)   (170)   (19)   (127)   7 
Sponsor's contributions    (77)   -    -    -       -    (16)
Actuarial (gains) losses recognized    (157)   103    170    6    181    382 
             
 
Net actuarial liabilities (assets) at 12/31/05    (12,629)   (1,331)   (814)   (110)   (336)   836 
             

51

 

30. Pension Plan and Other Post-Employment Benefits (Continued)

Consolidated (Continued)

c) Statement of losses (gains)

    Plans 
   
    PBS   PBS
Assistidos 		   Convênio de
 Administração 		   PAMEC    PBT    PAMA 
             
             
 
(Gain) Loss on actuarial liabilities    1,130    248    81    9    93    888 
(Gain) Loss on plan assets    (1,310)   (145)   89    (3)   88    (506)
(Gain) Loss on employees' contributions    23    -    -    -    -    - 
 
             
(Gain) Loss at 12/31/05    (157)   103    170    6    181    382 
             
 
Corridor calculation (10% of equity and liabilities )   3,551    584    168    19    172    282 

d) Reconciliation of present value of liabilities

    Plans 
   
    PBS   PBS
Assistidos 		   Convênio de
 Administração 		   PAMEC    PBT    PAMA 
             
             
 
Value of liabilities at 12/31/04    20,762    4,149    764    64    1,267    1,847 
Cost of current service    208    -    -    -    -    26 
Interest on actuarial liabilities    2,269    450    83    6    137    205 
Benefits paid in the year    (1,490)   (340)   (65)   -    (108)   (143)
Liabilities    1,130    248    81    9    93    888 
 
             
Liabilities at 12/31/05    22,879    4,507    863    79    1,389    2,823 
             

e) Reconciliation of fair value of assets

    Plans 
   
    PBS   PBS
Assistidos 		   Convênio de
 Administração 		   PAMEC    PBT    PAMA 
             
             
 
Fair value of assets at 12/31/04    30,163    5,396    1,578    160    1,657    1,384 
Benefits paid in the year    (1,490)   (340)   (65)   -    (108)   (143)
Participants' contributions    60    -    -    -    -    - 
Sponsor's contributions    77    -    -    -    -    16 
Actual yield of plan assets in the year    6,698    782    164    29    176    730 
 
             
Liabilities at 12/31/05    35,508    5,838    1,677    189    1,725    1,987 
             

52

 

30. Pension Plan and Other Post-Employment Benefits (Continued)

f) Expenses expected for 2006

    Plans 
   
    PBS   PBS
Assistidos 		   Convênio de
 Administração 		   PAMEC    PBT    PAMA 
             
             
 
Cost of current service (with interest)   89    -    -    -    -    24 
Interest on actuarial liabilities    2,497    489    94    9    151    314 
Expected yield of plan assets    (4,786)   (779)   (226)   (26)   (229)   (268)
 
             
Total expenses recognized    (2,200)   (290)   (132)   (17)   (78)   70 
             
Expected participants' contributions for the                         
next year    (60)   -    -    -    -    - 
             
Total net expenses (income) to be recognized    (2,260)   (290)   (132)   (17)   (78)   70 

Actuarial assumptions adopted in the calculation

The main actuarial assumptions adopted in the calculation were as follows:

Nominal discount rate of actuarial liabilities:    11.30% p.a. 
Estimated nominal yield rate of plan assets:    13.75% p,a, 
Estimated nominal rate of salary increase:     7.10% p,a, 
Estimated nominal rate of benefit increase:     5.00% p,a, 
Biometric general mortality table:    UP94 severity-adjusted 2 years segregated by sex 
Biometric disability table:    Mercer Disability Table 
Estimated turnover rate:    Nil 
Retirement likelihood:    100% upon first eligibility to a plan benefit 
Estimated long-term inflation rate    5.00% 
Computation method    Projected Credit Unit Method 

31. Officers Compensation

Officers compensation in 2005 totaled R$ 1,385, less than the amount approved at the Ordinary Shareholders’ Meeting held in March 2005.

32. Insurance (unaudited)

As of December 31, 2005, the Company and its subsidiaries have insurance cover against fire and sundry risks for inventories and fixed assets, Management considers the amounts sufficient to cover any losses, based on the risks and amounts involved.

53

 

33. Commitments (unaudited)

On the terms of the Authorization for Mobile Personal Service (SMP) Exploitation, the subsidiaries committed themselves to implement mobile personal telecommunications cover for the assigned area, on a phased basis, within the quality standards established by said authorization. Subsidiaries are subject to penalties if the terms of the authorization are not complied with.

Anatel started administrative proceedings against the subsidiaries for noncompliance with certain service quality ratios provided for in the Personal Mobile Service (SMP) authorizations in 2003 and 2004, The subsidiaries submitted answers to Anatel explaining that noncompliance with certain quality ratios was mainly due migration from Mobile Service (SMC) to SMP, change in the long-distance system, as well as the implementation of GSM network. The subsidiaries cannot forecast the outcome of Anatel proceedings at this point. The provision for regulatory contingencies recorded in the balance sheet reflects the expected losses, per management’s expectations.

54

 

34. Supplementary Information (2004 unaudited)

a) Statements of cash flows

    Parent company    Consolidated 
     
     2005     2004       2005       2004 
         
Operating activities                 
   Net income for the year    434,489    286,872    399.200    265.935 
   Adjustments to reconcile net income to cash:                 
       Depreciation and amortization    1,582    2,472    532.357    382.984 
       Losses on nonoperating investments    -    5,950    -    - 
       Equity pickup    (463,407)   (334,788)   -    - 
       Book value of permanent asset disposal    -    1,794    5.723    1.643 
       Interest on capital received    126,037    30,108    -    - 
       Deferred income tax and social contribution    219    1,230    775    15.109 
       Minority interests        -    21,464    45.526 
       Interest, monetary and exchange variations on loans        -    16,396    8,657 
       Supplementary pension plan    (113)   (36)   (113)   (36)
       Allowance for doubtfull accounts    -    -    117.978    112.605 
 
   Effect of mergers:                 
       Current assets    -    -    -    (395,379)
       Current liabilities    -    -    -    340,797 
       Noncurrent assets    -    (884)   -    (101,958)
       Investment    -    (889,316)   -    - 
       Property, plant and equipment    -    (2,621)   -    (662,453)
       Noncurrent liabilities    -    18,604    -    53,195 
       Minority interests    -    -    -    165,891 
       Net assets    -    881,581    -    881,579 
 
   Decrease (increase) in operating assets                 
       Trade receivables    -    -    (233.191)   (281,925)
       Taxes recoverable    3,547    373    (31.107)   20.635 
       Inventories    -    -    (34.680)   (18.579)
       Related Parties    108    7,364    (18.221)   241 
       Other current assets    180    (412)   (4.440)   (4,703)
       Other noncurrent assets    (119)   580    812    (13.103)
 
   Increase (decrease) in operating liabilities                 
       Labor charges    624    (10,180)   1.843    (2.668)
       Suppliers    2,567    59    365.699    280.614 
       Taxes payable    (5,397)   9,916    (7.479)   15.862 
       Accrued interest    572    -    10.185    11.124 
       Related Parties    (34,948)   34,948    42.098    (10.391)
       Other current liabilities    (1,100)   (18,604)   (1.548)   7.312 
         
   Net cash generated by operating activities    64,841    27,401    1,183,751    1,127,920 
         
 
Investing activities                 
   Capital increase – stock option plan    2,006    -    2,006    - 
   Capital reserve increase    6,401    -    6,401    - 
   Purchase of fixed assets    -    -    (683,122)   (579,879)
         
    8,407    -    (674,715)   (579,879)
         
Financing activities                 
   New loans    -    -    85,319    20,000 
   Amortization of loans    -    -    (76,034)   (102,552)
   Concessions paid    -    -    -    (18,816)
   Dividends and interest on capital    (68,575)   (36,315)   (92,885)   (9,063)
         
    (68,575)   (36,315)   (83,600)   (110,431)
         
 
Increase (decrease) in cash and cash equivalents    4,673    (8,914)   425,436    437,610 
         

55

 

34. Supplementary Information (2004 unaudited) (Continued)

Supplemental cash flow information                 
         
 
Income and social contribution taxes paid    -    -    71,743    58,505 
         
Interest paid    -    -    10,067    85,086 
         
Capitalized Interest            1,352    6,476 
         
Merger of shares from TIM Nordeste and TIM Sul                 
    415,069    -    415,069    - 
         

b) Statements of value added

    Parent company    Consolidated     
       
    2005    2004    2005    2004 
         
Income                 
 Gross operating revenue    -    -    3,903,272    3,429,175 
 Losses and allowance for doubtful accounts    -    -    (117,978)   (112,605)
 Discounts    -    -    (171,756)   (140,827)
 Net operating income (expenses)   -    (4,997)   (2,260)   (4,592)
         
    -    (4,997)   3,611,278    3,171,151 
 
Consumables from third parties                 
 Cost of services rendered and goods sold    -    -    (950,678)   (905,598)
 Materials, energy, third-party services and others    (11,171)   (8,026)   (545,399)   (410,449)
         
    (11,171)   (8,026)   (1,496,077)   (1,316,047)
 
Retentions                 
     Depreciation and amortization    (1,582)   (2,472)   (532,357)   (498,142)
 
Net added value generated    (12,753)   (15,495)   1,582,844    1,356,961 
 
Added value received in transfer                 
     Gain on investments    463,407    334,788    -    - 
     Financial income    3,274    1,938    167,716    157,569 
         
    466,681    336,726    167,716    157,569 
 
Total added value available for distribution    453,928    321,231    1,750,560    1,514,530 
         
 
Distribution of added value                 
     Payroll and related charges    5,091    10,427    107,394    99,096 
     Taxes and contributions    13,318    19,163    1,127,918    987,097 
     Interest and rentals    1,030    4,769    94,584    92,289 
     Minority interest    -    -    21,464    70,113 
     Dividends and interest on capital    132,529    72,632    132,529    72,632 
     Retained earnings    301,960    214,240    266,671    193,303 
         
 
    453,928    321,231    1,750,560    1,514,530 
         

56

 

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



  TIM PARTICIPAÇÕES S.A.
 
Date: February 01, 2006 By: /s/ Paulo Roberto Cruz Cozza
    Name: Paulo Roberto Cruz Cozza
    Title: Chief Financial Officer