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Tim Participacoes SA – ‘6-K’ for 9/30/06

On:  Monday, 11/6/06, at 9:27am ET   ·   For:  9/30/06   ·   Accession #:  1292814-6-2685   ·   File #:  1-14491

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

11/06/06  Tim Participacoes SA              6-K         9/30/06    1:493K                                   MZ Technologies/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 6-K         Quarterly Financial Information - Itr 3Q06          HTML    400K 

01.01 – IDENTIFICATION

01.02 - HEAD OFFICE

01.03 - INVESTOR RELATIONS OFFICER (Company Mail Address)

01.04 - GENERAL INFORMATION/INDEPENDENT ACCOUNTANT

01.01 – IDENTIFICATION

01.05 - CAPITAL COMPOSITION

01.06 – CHARACTERISTICS OF THE COMPANY

01.07 - COMPANIES EXCLUDED FROM THE CONSOLIDATED FINANCIAL STATEMENTS

01.08 - DIVIDENDS AND OR INTEREST ON CAPITAL APPROVED AND/OR PAID DURING AND AFTER THE QUARTER

01.01 – IDENTIFICATION

01.09 - SUBSCRIBED CAPITAL AND CHANGES IN THE CURRENT YEAR

01.10 - INVESTOR RELATIONS OFFICER

Free Translation into English of Quarterly Information (ITR) Originally Issued in Portuguese

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Free Translation into English of Quarterly Information (ITR) Originally Issued in Portuguese

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Free Translation into English of Quarterly Information (ITR)
Originally Issued in Portuguese

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     Tim Participações S.A.
Notes to Quarterly Review Information
(In Thousand of Reais, except when otherwise stated)

1 Operations

TIM Participações S.A. headquartered at Avenida das Américas, 3434, block 1, 7^th floor, Rio de Janeiro, RJ, is a publicly-held company directly controlled by TIM Brasil Serviços e Participações S.A., a Telecom Italia Group’s company, holding interests of 81.25% of its voting capital and 69.75% of its total capital (these percent participations reflect TIM Brasil´s subscription of the whole capital increase approved at the General Extraordinary Stockholders´ Meeting of September 29, 2006, through capitalization of the Special Goodwill Reserve corresponding to the tax benefit granted to the Company´s subsidiaries in 2005. The minority stockholders´ preferential rights in connection with this capital increase will end on November 3, 2006 – Note 22-a).

Among TIM Participações S.A.´s objectives is the control of companies exploring telecommunications services in its concession and/or authorization areas, especially cellular telephones.

Concluding the transactions included in Note 2-d, the Company has full control of TIM Celular S.A., which in turn controls TIM Nordeste S.A. (formerly Maxitel S.A.). TIM Celular S.A. and its subsidiary TIM Nordeste S.A. jointly operate cellular telephone services in all Brazilian states.

The services provided by the subsidiaries and the respective tariffs are regulated by ANATEL – Brazilian Telecommunications Agency – authority in charge of regulating all Brazilian telecommunications. The subsidiaries´ authorizations mature as follows:

Page: 4

2 Corporate Restructuring

a. Incorporation of Shares of TIM Sul S.A and TIM Nordeste Telecomunicações S.A

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

This operation was intended to concentrate the liquidity of the three companies´ shares into those of one company, TIM Participações S.A., and to lower the expenses associated with controls and maintenance of the plurality of stockholders in separate entities.

The right of withdrawal of the stockholders owning common shares of the capital stock of TIM Participações S.A., as well as the minority stockholders of TIM Sul S.A. and TIM Nordeste Telecomunicações S.A., ended on July 1, 2005. The amount disbursed by the Company for payment to dissenting stockholders was R$ 0.8, represented by 153,861 common shares and 154,407 preferred shares.

b. Incorporation of Shares of TIM Celular S.A

On March 16, 2006, at the General Extraordinary Stockholders´ Meetings of TIM Celular S.A. and TIM Participações S.A, the incorporation of all shares of TIM Celular S.A. by TIM Participações S.A was approved, thus converting TIM Celular S.A. into a wholly-owned subsidiary of TIM Participações S.A.

This operation aimed at optimizing the companies´ and their subsidiaries´ organizational structure, by unifying and rationalizing their business administration and consequently reducing the related costs and increasing value for the stockholders, while enabling better use of intercompany synergy through operational combination of cellular telephone service companies operating under the name “TIM” nationwide.

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The right of withdrawal of the stockholders owning common shares of the capital stock of TIM Participações S.A., as well as the minority stockholders of TIM Celular S.A. ended on April 19, 2006. As no stockholder exercised their right of withdrawal, there was no disbursement by the companies.

c. Merger of the companies CRC - Centro de Relacionamento com Clientes Ltda. and Blah! Sociedade Anônima de Serviços e Comércio On March 30, 2006, the General Extraordinary Stockholders’ Meeting of TIM Celular S.A. approved the incorporation of the net assets of CRC - Centro de Relacionamento com Clientes Ltda. - and Blah! Sociedade Anônima de Serviços e Comércio, then wholly owned by TIM Celular S.A.

CRC - Centro de Relacionamento com Clientes Ltda. operated the call center service to clients, rendering these services to TIM Celular S.A on an exclusive basis. Blah! Sociedade Anônima de Serviços e Comércio rendered value-added services (VAS), basically for companies of the Grupo Telecom Italia.

d. Merger of TIM Nordeste Telecomunicações S.A. by Maxitel S.A. and of TIM Sul S.A. by TIM Celular S.A.

On May 4, 2006, the TIM Participações S.A.´s Administrative Council approved the signing of Protocols of Merger relating to the proposed merger of TIM Nordeste Telecomunicações S.A. by Maxitel S.A. and of TIM Sul S.A. by TIM Celular S.A.

On June 30, 2006, at the General Extraordinary Stockholders´ Meetings of TIM Celular S.A., Maxitel S.A., TIM Nordeste Telecomunicações S.A. and TIM Sul S.A approved the merger of TIM Nordeste Telecomunicações S.A. by Maxitel S.A. and of TIM Sul S.A. by TIM Celular S.A. On the same date, Maxitel S.A.´s name changed to TIM Nordeste S.A., and its headquarters moved from Belo Horizonte (MG) to Jaboatão dos Guararapes (PE).

This operation aimed at optimizing the companies organization structure, unifying and rationalizing their business and operations even more, lowering costs associated to the maintenance of distinct companies, enabling the intercompany synergy, including fiscal and financial efficiencies.

3 Presentation of the Quarterly Information

a. Presentation and Disclosure Criteria

The quarterly information (company and consolidated) was prepared in accordance with accounting practices adopted in Brazil, the rules applicable to concessionaires of public telecommunications services, and the CVM’s (Brazilian Securities Commission) accounting standards and procedures.

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TIM Participações S.A. is a publicly-held company, who owns American Depositary Receipts traded on the New York Stock Exchange – USA. Therefore, the Company is subject to the rules of the Securities and Exchange Commission (SEC) and, aiming at meeting market needs, it is the Company’s principle to disclose information simultaneously to both markets in Brazilian Reais, in Portuguese and English.

b. Consolidated Quarterly Information

The consolidated quarterly information includes assets, liabilities and the result of operations of the Company and its subsidiaries, as follows:

The following are the main consolidation procedures:

I. Elimination of intercompany consolidated assets and liabilities accounts;

II. Elimination of participation in capital, reserves and retained earnings of the subsidiaries;

III. Elimination of intercompany revenues and expenses;

IV. Separate disclosure of the minority interest participation in the consolidated quarterly information, when applicable.

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The reconciled income for the period can be thus shown:

c. Comparability of Quarterly Information

Pro forma information

For ease and as a matter of comparison of this information with the prior period’s quarterly information, the pro forma consolidated balance sheet and statement of income for the period of nine months ending at September 30, 2005 are shown below, as though the merger process mentioned in Note 2-b had occurred on January 1, 2005:

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4 Summary of Accounting Practices

a. Cash and cash equivalents

These comprise cash and bank balances and short-term, readily realizable investments in the money market, stated at cost, plus the related earnings up to the balance sheet date.

b. Accounts receivable

Accounts receivable from the telecommunications service costumers are calculated at the tariff rate ruling on the date of service rendering, including credits for services rendered but not billed until the balance sheet date, receivables from network use and receivables from sales of cell phone sets and accessories.

c. Allowance for doubtful accounts

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

d. Inventories

These refer to cell phone sets and accessories, which are stated at the average acquisition cost. A provision was set up to adjust slow-moving and obsolete items balance to the related realizable value.

e. Prepaid expenses

These are stated at the amounts actually spent but not yet incurred.

In the quarter ended September 30, 2006, the subsidiaries decided to change the accounting treatment of costs related to subsidized sales to subscribers under the post-paid telephone system, whose agreements with the subsidiaries provide for penalties for early termination and minimum monthly charges over a 12-month period. In the subsidiaries´ opinion, the deferral of these costs, which is only permitted under certain conditions, better reflects the post-paid telephone segment´s performance, in that it allows checking costs against the related revenues. In the past, the subsidiaries recognized the cost of subsidized sales to all types of subscribers directly as income.

The conditions for cost deferral are as follows:

- Existence of a legally enforceable agreement;

- Costs that can be determined;

- The Management´s irrevocable intention to execute the agreement and;

- Clear evidence that the minimum net service revenues , as stipulated by contract, less the related direct costs of services rendered will exceed the deferred costs

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This change has been made considering the modification in the subsidiaries´ sales strategies, the focus of which has been on high value-added clients since 2006. After the integration of operating subsidiaries has been completed in 2006, the contracted penalties have been strictly imposed on subscribers who cancel their subscription or migrate to the prepaid system over the duration of the agreement. Additionally, systems were implemented in 2006, which allow proper appropriation of costs relating to subsidies granted to subscribers under the post-paid telephone . The efect of this change in accounting practice on the income for the nine-month period ended September 30, 2006 was a R$135,932 credit to the telephone-sets-sold account, as a counterentry to prepaid expenses.

In prior years, given the inconsistent imposition of contracted penalties as well as the lack of managerial information and segregation of accounting data to enable calculation of the related costs, the quantification and deferral of costs was impractical.

f. Investments

The investments in subsidiaries are evaluated by the equity method, based on the subsidiaries´ stockholders equity, which is determined on the same date, by the same accounting principles used by the parent company.

The other investments are shown at cost, reduced to the realizable value, where applicable.

g. Property, plant and equipment

The property, plant and equipment items are shown at the acquisition and/or construction cost, net of accumulated depreciation, calculated on the straight-line method, over the useful life of assets involved. Any repair and maintenance costs incurred representing improvement, higher capacity or longer useful life are capitalized, whereas the others are recorded as income for the year.

Interest and other financial charges on financing taken for funding construction work in progress (assets and facilities under construction) are capitalized up to the startup date.

The long-term assets, especially property, plant and equipment, are periodically reviewed to determine and measure the need to record any provision for losses regarding the value of recovery of such assets.

The estimated useful lives of all property, plant and equipment items are regularly reviewed considering technological advances.

h. Deferred charges

The deferred charges comprise pre-operating expenses and financial costs of the required working capital at the subsidiaries´ pre-operating stage, which are amortized in ten years from the date the subsidiaries become operative.

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i. Income tax and social contribution

Income tax is calculated based on the income adjusted for legally stipulated additions and exclusions. The social contribution is calculated at the legally stipulated rates applied to pretax income.

Based on the Constitutive Reports nos. 0144/2003 and 0232/2003 issued by ADENE – Northeast Development Agency on March 31, 2003, the subsidiary TIM Nordeste Telecommunicações S.A., which was merged by TIM Nordeste S.A. (formerly Maxitel S.A.) became eligible to fiscal incentive consisting of: (i) 75% reduction of income tax and non-reimbursable surtaxes for a ten-year period, from fiscal 2002 through 2011, calculated based on the exploration income arising from implementation of its installed capacity for rendering digital cellular telephone services; and (ii) reduction of 37.5%, 25% and 12.5% of income tax and non-reimbursable surtaxes for fiscal 2003, 2004-2008 and 2009-2013, respectively, calculated based on the exploration income arising from implementation of its installed capacity for rendering of analogical cellular telephone services.

Deferred taxes are recognized taking into account temporary differences, tax losses and negative social contribution basis, where applicable. The amount of the previously mentioned income-tax-reduction benefit is accounted for as a reduction of income tax payable, against the Capital Reserve – Fiscal Incentive, under the Stockholders´ Equity of TIM Nordeste Telecomunicações S.A. which was merged by TIM Nordeste S.A. (formerly Maxitel S.A.).

j. Loans and financing

Loans and financing include interest accrued to the balance sheet date. The company’s subsidiaries have hedge cotracts which effectively convert obligations denominated in foreign currencies into Reais aiming at protecting them against risks associated with unexpected devaluation of the Real in relation to foreign currencies. Additionally, the Company’s subsidiaries have hedge contracts to protect them against potential losses or increases in Company’s financial expenses due to changes in interest rates. Gains and losses from hedge operations are recognized in the income statement under the accrual method, based on the contracted rates .

k. Provision for contingencies

The provision for contingencies, recorded based on estimates which take into consideration the opinion of the Company’s management and its legal advisors, is updated based on the probable losses at the end of the litigations (see note 21).

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l. Revenue recognition

Service revenues are recognized as services are provided. Billings are monthly recorded. Unbilled revenues from the billing date to the month end are measured and recognized during the month in which services are provided. Revenues from prepaid telecommunication services are recognized on the accrual basis in the period of utilization. Revenues from the sale of cell phone sets and accessories are recognized as these products are delivered to, and accepted by end-consumers or distributors.

m. Financial income (expenses)

These are represented by interest and exchange and monetary variations on short-term investments in the money market, hedge contracts, loans and financing taken and granted.

n. Pension plan

The Company and its subsidiaries record the adjustments connected with the employees’ pension plan obligations according to the rules established by NPC 26 of IBRACON, approved by CVM Deliberation 371, which define the characteristics of the pension plan, and the related obligations and events (Note 32)

o. Minority shareholding

These are the interests of the minority stockholders in the subsidiaries TIM Sul S.A., which was merged by TIM Celular S.A., and TIM Nordeste Telecomunicações S.A., which was merged by TIM Nordeste S.A. (formerly Maxitel S.A.). In 2005 these subsidiaries were converted into wholly-owned subsidiaries of TIM Participações S.A.

p. Use of estimates

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

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q. Foreign currency transactions

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

r. Employee profit sharing

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

s. Interest on own capital

Interest on own capital paid and/or payable is recorded as financial expenses, which, for financial reporting purposes, are reclassified and disclosed as appropriation of net income for the year in the statement of stockholders’ equity. Interest on own capital received and/or receivable from subsidiaries is recorded as financial income. For presentation purposes, the income statements impacts are eliminated, being presented as a decrease in investments.

t. Supplementary information

For additional information purposes, the following is presented: a) Statements of Cash Flow, prepared in accordance with the NPC number 20 issued by the Institute of Independent Auditors of Brazil – IBRACON, ; and b) Value-Added Statements prepared in accordance with the CFC – Federal Accounting Council - Resolution number 1010.

5 Cash and cash equivalents

The Parent Company’s readily realizable investments in the money market are backed by federal government securities (LFTs and LTNs). Besides these, the short-term investments of the subsidiaries comprise private bonds (Bank Deposit Certificates – CDB and Debentures) issued by the banks, which are approved by internal policy of the companies. The average return of TIM Participações's consolidated investments is 102.1% of Interbank Deposit Certificates – CDI.

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

6 Accounts Receivable

The criteria for setting up the allowance for doubtful accounts are periodically reviewed, in order to reflect the current risk surrounding receivables.

7 Inventories

8 Recoverable Taxes and Contributions

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The amount recorded in long-term portion, in the parent company, refers to income tax recoverable, whereas the consolidated figure also includes ICMS on the subsidiaries’ permanent assets.

On March 13, 2006, a final sentence not subject to further appeal was given in connection with a suit filed by the indirectly controlled subsidiary TIM Nordeste S.A (formerly Maxitel S.A) against Law 9.718 of 11/27/1998, on alleged unconstitutionality for expanding the basis of calculation of taxes therein dealt with. Pursuant to this law, PIS and COFINS could not be levied on revenues other than sales revenues. After this sentence was given, the subsidiary’s Management recorded R$ 52,317 of PIS and COFINS credits (as revenue), monetarily restated, for the periods from February 1999 through December 2002 (PIS) and February 1999 through January 2004 (COFINS).

9 Income Tax and Social Contribution

The deferred income tax and social contribution can be summarized as follows:

Page: 16

Merger-generated tax credit

The deferred tax asset represented by the merger-generated tax credit refers to future tax benefit under the restructuring plan started in 2000. As a counterentry to said tax is a special reserve composed of goodwill on stockholders´ equity. The tax is realized ratably to estimated future income, over the duration of the authorization granted, which is due to end by 2008. The goodwill amortization is recorded as “Other operating expenses” (note 27).

In the nine-month period ended September 30, 2006 R$ 37,837 of tax benefits were realized in connection with the above mentioned goodwill (R$ 37,837 for the same period in 2005)). Also, under the terms of the restructuring plan, the actual tax benefit for each fiscal year will be subsequently capitalized in the name of the controlling stockholder. The minority stockholders are ensured preemptive right on acquisition of an amount proportional to the new capital of the controlling stockholder. The special reserve for goodwill recorded by the Company’s subsidiary represents the parent company’s right to future capitalization (see Note 22-b).

Assets assigned on a loan-for-use basis

For accounting purposes, the average period for depreciation of subsidiaries’ cell phones assigned on a loan-for-use basis is two (02) years, whereas for fiscal purposes, this period is, generally, five (05) years.

Accordingly, in calculating social contribution on net income (CSLL), these companies were including the depreciation carrying value that exceeded the amounts allowed by the tax law.

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As requested by the Management, the Instituto Nacional de Tecnologia prepared and issued a technical appraisal report confirming at two (02) years the useful life of cell phone sets assigned on a loan-for-use basis. Based on this technical appraisal report and fiscal legislation guidance, the period for recognizing depreciation of cell phone sets assigned on a loan-for-use basis was standardized, eliminating any differences between the fiscal and the accounting depreciation rates.

Supported by its tax consultants´ opinion, in its income tax return for the base year 2005, the Company fully deducted intertemporary differences presented up to the end of the year 2005. Accordingly, the deferred tax on depreciation of assets assigned on loan-for-use basis had been fully reversed by June 30, 2006.

Provision for devaluation of tax credits

The Company recognized tax credits arising from tax losses and negative social contributions, the offsetting of which is limited to 30% of annual taxable income, with no statutes of limitation.

The Company and its subsidiaries TIM Nordeste Telecomunicações S.A. (merged by TIM Nordeste S.A.) and TIM Sul S.A. (merged by TIM Celular S.A.) recognized tax credits on temporary differences.

The subsidiaries TIM Celular S.A and TIM Nordeste S.A (formerly Maxitel S.A) decided to recognize tax credits arising from temporary differences, tax losses and negative social contribution basis only when there are good prospects of future taxable income generation.

Accordingly, due to the mergers described in Note 2-d, there is need for reviewing and adjusting the technical feasibility study dealing with the future taxable income generation in a scenario composed by only two operating companies, in order to conclude on the suitability of recording deferred tax assets. As the Company has not completed this technical study, we have conservatively set up a provision for devaluation of credits on temporary differences, tax losses and negative social contribution basis reflected in the balance sheet in the amount of R$6.502 (parent company) and R$75.134 (consolidated).

As projected by the Management, the deferred, long-term income tax and social contribution deriving from the merger generated tax credit will be realized as follows:

Consolidated

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Unrecorded tax losses

The accumulated tax losses and negative social contribution basis as of September 30, 2006 can be summarized as follows:

Composition of income tax and social contribution expenses

Below, the reconciliation of income tax and social contribution expenses calculated at legally stipulated tax rates combined with amounts reflected in the income:

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10 Prepaid Expenses 

(a) The Fistel Rate paid in March this year, referring to fiscal 2006, will be amortized in accordance with the respective tax event. The advertising expenses basically refer to the television sponsoring of Formula 1, also for this year.

(b) As mentioned in Note “4.e”, retroactively to January 1, 2006, as from the quarter ended September 30, 2006 the Management has changed the accounting treatment of subsidized sale to subscribers under the post-paid telephone system, with deferral and amortization now being over the minimum 12-month period of contract duration. The contracted fines to clients who cancel their subscriptions or migrate to a prepaid system before the end of their agreements are invariably higher than the subsidy granted on each individual telephone set sale.

(c) The advertising expenses basically refer to the television sponsoring of Formula 1, also this year.

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11 Related-Party Transactions

The related-party transactions, which are performed under regular market conditions, similarly to those with third parties, are thus composed:

Parent Company 

(a) In January 2005 the loan agreements with subsidiaries were settled. These agreements were subject to charges in the equivalent to 104.22% of the monthly exchange variation of the Bank Deposit Certificates – CDI.

Consolidated

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(1) These agreements refer to telecommunications service operation covering interconnection, roaming, media assignment and co-billing agreements, as well as long-distance-related relationship.

(2) These refer to roaming, value-added services – VAS and media assignment.

(3) Receivables and payables refer to international roaming and technical post-sales assistance.

(4) This refers to the development and maintenance of software pieces used in the telecommunications service billing.

(5) TIM Brasil Serviços e Participações S.A’s receivables and payables arose from loan agreements with its subsidiaries TIM Celular S.A. and TIM Nordeste S.A. (formerly Maxitel S.A.), bearing interest at the equivalent to 100% of the Bank Deposit Certificates– CDI´ variation.

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12 Judicial Deposits

13 Investments

(a) participation in subsidiaries:

(i) The investment in TIM Nordeste Telecomunicações S.A, merged by Maxitel S.A (note 2-d), for the period from January 1 through May 31, 2006 was evaluated on the equity method.

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(*) The special goodwill reserve recorded at TIM Nordeste Telecomunicações S.A. (merged by Maxitel S.A.) and TIM Sul S.A. (merged by TIM Celular S.A.) represents the parent company’s rights in future capitalizations. These tax benefits are connected with goodwill paid upon privatization of Tele Nordeste Celular Participações S.A.,(merged by TIM Participações S.A. in August 2004) and Tele Celular Sul Participações S.A. (TIM Participações S.A’s former name). This goodwill was recorded against the special goodwill reserve, under “Stockholders’ equity”, being realized ratably to the estimated future income and the time of the concession, which is expected to end by 2008.

(b) changes in investments in subsidiaries:

Page: 24

14 Property, plant and equipment

The construction work in progress basically refers to the construction of new transmission units (Base Radio Broadcast Station - ERB) for network expansion.

In the nine-month period ended September 30, 2006, R$ 12,573 of financial charges on loans taken to finance the construction was capitalized as property, plant and equipment, (R$ 8,962 in June 2006).

New technology implementation

The subsidiaries’ operate their service network using TDMA and GSM technology. On September 30, 2006, with the introduction of the GSM technology no provision for devaluation of fixed assets due to obsolescence was deemed necessary, as both technologies are to remain in operation at the companies until 2008, at least. The assets related to TDMA technology have been subject to accelerated depreciation and must be fully depreciated by 2008.

SMP ( Personal Mobile Service) exploitation rights

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SMP authorizations and radiofrequency

The subsidiaries’ SMP (Personal Mobile Service) authorizations are presented by the terms signed in the years from 2001 through 2004 with ANATEL, for the exploration of this service. Previously, the subsidiaries TIM Sul S.A. (merged by TIM Celular S.A.) and TIM Nordeste S.A. (formerly Maxitel S.A., into which TIM Nordeste Telecomunicações S.A. was merged) had been granted by ANATEL a fifteen-year concession for the SMC (Mobile Communication Service), which was changed into authorization for the SMP in 2002. The remaining SMC concession period is the SMP authorization period.

From 2001 through 2004, the subsidiaries were authorized by ANATEL to use radio frequency blocs connected with the provision of SMP at 900 MHz and 1800 MHz.

Our authorizations for radio frequencies at 800 MHz, 900MHz and 1800MHz for provision of SMP services are due to expire early in September 2007, being renewable only one time for another 15-year period . However, ANATEL can reject our requests for renewal of these authorizations , if they find that we are not using the allocated spectrum in an appropriate, rational way; if the Company has repeatedly violated the applicable legislation or if the spectrum redistribution is deemed necessary.

15 Deferred Charges

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16 Suppliers

(a) this refers to use of the network of other fixed and mobile cell telephone operators, where calls are initiated at TIM network and end in the network of other operators (detraf) .

(b) this refers to calls made when customers are outside their registration area, and are therefore considered visitors in the other network (roaming); and

(c) this refers to calls made by customers when they choose another long-distance call operator – CSP.

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17 Loans and Financing

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(a) The following Financial Institutions are part of this loan agreement: HSBC Bank Brasil S.A. – Banco Múltiplo, Banco ABN AMRO Real S.A., Banco BNP Paribas Brasil S.A., Banco Bradesco S.A., Banco do Brasil S.A., Banco Itaú BBA S.A., Banco Santander Brasil S.A., Banco Société Générale Brasil S.A., Banco Votorantim S.A., Unibanco – União de Bancos Brasileiros S.A.

The subsidiaries entered into hedging transactions as a safeguard against devaluation of the Brazilian currency (“Real”) in relation to foreign currencies and changes in the fair value of financing bearing prefixed interest rates with the same terms as the financing agreement.

The long-term portion of loans and financing as of September 30, 2006 matures as follows:

Consolidated

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18 Labor obligations

19 Taxes, Charges and Contributions

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20 Authorizations payable

21 Provision for Contingencies

The Company and its subsidiaries are party to certain lawsuits (labor, tax, regulatory and civil) arising in the normal course of their business, and have recorded provisions when management understands that the risk of loss is deemed probable, based on the opinion of their legal advisors.

The provision for contingencies is thus composed:

Page: 31

Civil contingencies

Several legal and administrative processes have been filed against the Company by consumers, suppliers, service providers and consumer protection agencies, dealing with various issues arising in the regular course of business. It is the Company’s policy to analyze each legal or administrative process to determine whether it involves probable, possible or remote risk of contingencies. In doing so, the Company always takes into account the opinion of lawyers engaged to conduct the processes. The evaluation is periodically reviewed, with the possibility of being modified over the processes due to new facts or events such as jurisprudential changes.

Consumer lawsuits

Approximately 22,000 individual lawsuits (20,000 in June 2006) have been filed against the subsidiaries, mostly by consumers claiming for settlement of matters arising from their relationship with the Company. Among these, the allegedly undue collection, contract cancellation, defects of equipment and non-compliance with delivery deadlines stand out. Provisions have been set up for those processes involving probable losses.

Collective actions

There are three collective actions against subsidiaries involving the risk of probable loss, which can be summarized as follows: (i) a suit against TIM Celular S.A. claiming for the installation of a service unit for personal assistance in Rio Branco, AC.; (ii) a suit against TIM Nordeste S.A. in the state of Pernambuco questioning the Company’s policy for defective phone replacement, allegedly in disagreement with the manufacturer’s warranty terms; (iii) a suit against TIM Nordeste S.A. in the state of Ceará, claiming for the Company’s obligation to replace cell phone sets which have been the subject of fraud in that state. No provisions have been recorded for these contingencies, given the obligations involved therein and the impossibility of accurately quantifying the possibility of losses at the current stage of the processes.

Other Actions and Proceedings

The subsidiary TIM Nordeste S.A. has been sued by the Federal Audit Court at administrative level with the possibility of being submitted to a court of justice, for allegedly defaulting on payment of R$ 25,000 representing interest and monetary restatement on the second installment due on acquisition the Area 9 (Bahia and Sergipe) license. As the risk of an unfavorable outcome for the Company is deemed possible by both internal and external advisors, no provision has been set up.

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The subsidiary currently TIM Nordeste S.A. is also defendant in an action filed by the legal services providers, the law firm Mattos & Callumby Lisboa Advogados, in Rio de Janeiro. They claim for success fees allegedly due under a service agreement for filing court injunctions against interest and monetary restatement on purchase prices of TIM Nordeste S.A.’s “Band B”. As the risk of an unfavorable outcome for the Company is deemed possible by both internal and external advisors, no provision has been set up.

Labor contingencies

These refer to claims filed by both former employees in connection with salaries, salary differences and equalization, overtime, variable compensation/commissions and former employees of service providers who, based on pertinent legislation, claim for the Company’s and/or its subsidiaries’ accountability for labor obligations defaulted on by their outsourced employers.

Labor claims

Of the 1,493 labor suits filed against the Company and its subsidiaries (1.372 in June 2006), over 60% involve claims against service providers, concentrated on certain companies from São Paulo, Rio de Janeiro and Recife.

Still on third parties´ claims, part of these relate to specific projects of service agreement review, often ended in rescission in 2006 and winding up of the companies and termination of employees involved. A further significant portion of contingencies refers to organizational restructuring, among which the discontinuance of the Client Relationship Centers in Fortaleza, Salvador and Belo Horizonte, and the termination of 800 own employees and outsourced personnel stand out. All processes involving the risk of loss have been provided for by the Company.

Occupational Accidents

With the enactment of the Constitutional Amendment no. 45/2004, the litigations involving occupational accidents that resulted in claims for damages, previously judged by the State Court began to be judged by the Labor Courts. Given the nature of the matters under discussion and considering that the amount of indemnifications (if any) is arbitrated by the Judiciary, involving a considerable level of subjectiveness, the related contingency has been estimated at some R$ 1,800, based on the total contingent loss.

DRT (Regional Labor Offices) and INSS (National Social Security Institute)

The subsidiary TIM Nordeste S.A. was assessed for R$ 778 by the Regional Labor Office from Minas Gerais, on charges of allegedly irregular engagement of third parties. The risk of loss was deemed probable by the Company’s advisors, and an adequate provision was recorded.

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Tax contingencies

IR (Income Tax) and CSLL (Social Contribution)

In 2005, the subsidiary TIM Nordeste S.A. (formerly Maxitel S.A.) was assessed by the Internal Revenue Secretariat of the State of Minas Gerais for R$ 126,933, for the following reasons: (i) taxation of monetary variations on swap operations and exchange variation on unsettled loans; (ii) a separate fine for default on payment of social contribution on an estimated monthly basis for the year 2002 and part of 2001; (iii) default on payment of corporate income tax on an estimated monthly basis for the year 2002; and (iv) remittance of interest abroad (IRRF – Withholding Income Tax) – a voluntary denunciation without payment of arrears charges. These assessments are now being discussed with the taxing authorities. Based on its internal and external advisors´ opinion, the Management estimates probable losses on these processes at R$ 32,750. As they refer to income tax and social contribution, had these payments been made on schedule, they would have been recorded as income tax and social contribution, and accordingly, the Company found it correct to record the related provision for contingency as expenses under “Non-operating expenses”.

In September 2003 the subsidiary TIM Nordeste Telecomunicações S.A. (merged by Maxitel S.A.) was assessed by the Internal Revenue Secretariat of the State of Ceará for R$ 12,721 referring to: (i) disallowance of R$ 8,402 expenses included in the IRPJ determination for the period from 1999 through 2001; (ii) R$ 3,208 of differences in CSLL payments for the years from 1998 through 2001; (iii) differences of R$ 334 and R$ 777, respectively, in the payment of PIS and COFINS for the years from 1998 through 2002. The Company filed an impugnation and a voluntary appeal against this assessment. Its internal and external lawyers classify as possible the risk of loss on this action, and accordingly, no provision has been set up.

ICMS (Value-added Sales Tax)

In 2003 and 2004 the subsidiary TIM Sul S.A. was assessed by the Internal Revenue Secretariat of the State of Santa Catarina totalizing the actual amount of R$ 85,114 mainly relating to dispute on the levying of ICMS on certain services provided ( with a reduction of R$ 10,552 in relation to June 2006, due to the Company´s partial gains). The Company is currently discussing these assessments with the tax authorities. According to its internal and external lawyers, the probable losses thereon, duly provided for, amount to R$ 14,430.

In 2006, the indirectly controlled subsidiary TIM Nordeste S.A. received from the State of Piauí´s taxing authorities tax assessment notices totaling R$7.308. The matter under dispute was the difference between intrastate and interstate ICMS rates applicable to acquisition of fixed assets and use and comsumption goods, and the determination of ICMS basis of calculation for acquisition of goods intended for sale. These assessments are being impugnated by the subsidiary at administrative level. No provision has been set up for these contingencies, the risk of loss on which is deemed possible by the Company´s internal and external lawyers.

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The subsidiary TIM Celular S.A. was fined by the taxing authorities of the state of Rio de Janeiro for R$ 3,678, for delaying voluntary payment that included understated arrears interest. The subsidiary is currently discussing these assessments with the tax authorities. Based on its internal and external lawyers, the Management concluded that the action will probably be lost, having, therefore, set up a provision. Early in 2006, based on the opinion of its internal and external advisors, the subsidiary paid the amounts due, with reduction of interest and fine, under the tax amnesty scheme then implemented.

PIS (Social Integration Program) and COFINS (Contributions to Social Security Funding)

In 2004, the subsidiary TIM Nordeste S.A. (formerly Maxitel S.A.) was assessed in connection with PIS and COFINS due on exchange variation arising from revenue generated in 1999. Both assessment notices amounted to R$ 30,913. Because this is a controversial matter involving interpretation of applicable legislation, a provision was set up, in 2004, for the same amount. On March 13, 2006 the decision was issued on the action filed by the company against Law 9718 of November 27, 1998, with no right to further appeal. The company alleged that this law was unconstitutional concerning the expansion of the tax basis of calculation, preventing the collection of PIS and COFINS on non-operating revenue. In view of the final decision, the Management requested extinction of the tax assessment against the subsidiary, concerning PIS and COFINS on exchange variation and reversed, in 2006, the provision set up in 2004 (Note 27).

CPMF

In 2004, the subsidiary TIM Nordeste S.A. (formerly Maxitel S.A.) filed a court injunction claiming for the right not to pay CPMF on symbolic purchase and sales operations performed during the corporate conversion of foreign loans into its own capital. A R$ 10,005 judicial deposit was made to cover the amount of CPMF allegedly due on those operations. As the risk of loss on this process is deemed remote by the Company’s internal and external advisors, no provision has been set up.

Regulatory Contingencies

Due to default on some SMP’s provisions and quality targets defined under the PGMQ-SMP – General SMP Quality Goals Plan – ANATEL started some Procedures for Determining Default on Obligations – PADO, involving the subsidiaries.

The subsidiaries have endeavored to avoid being assessed, with arguments, mostly of technical and legal nature, that may contribute to reduce significantly the initial fine charged or event definitively file the PADO, with no sanctions. The related provision recorded in the Company’s balance sheet was set up based on the amount of fines charged, the risk of loss involved being classified probable according the opinion given by the Company’s internal and external advisors.

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FUST – Telecommunications Service Universalization Fund

On December 15, 2005, Anatel issued its Summary no. 07 aimed at collecting contributions to the FUST out of interconnection revenues earned by providers of telecommunications services, as from the date of enactment of Law 9998 of August 17, 2000. The Company still believes that based on applicable legislation (including the sole paragraph of article 6 of Law 9998/00), the above revenues are not subject to the FUST charges, and accordingly, the Management has taken the necessary measures to protect their interests. Given Anatel’s diverging views, the Company’s internal and external lawyers evaluated the favorable and the unfavorable arguments involved in its claims, and considering the status of the action, have concluded that the possibility of loss is remote. Therefore, in accordance with the applicable accounting practices, the Management has not set up a provision for this contingency. Currently ANATEL’s intended collection of FUST on interconnection revenues earned by the Company is suspended, because of the temporary order issued by the Federal Regional Court of the Federal District.

Possible contingencies not provided for

Civil, Labor, Regulatory and Tax-related actions have been filed against the Company and its subsidiaries involving risk of loss that is classified as possible by the management and the Company’s lawyers. No provision has been set up for these contingencies.

The above described are the main actions involving the risk of possible loss.

22 Stockholders’ Equity

a. Capital

As authorized by the Administrative Council, regardless of the statutory reform, the Company’s capital is represented by up to 2,500,000,000,000 (two trillion and five hundred billion ) shares.

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At the General Extraordinary Stockholders´ Meeting of September 29, 2006, TIM Participações approved a capital increase of R$ 50,450, with issuance of 2,427,042,369 common shares and 4,698,352,944 preferred shares through capitalization of the Special Goodwill Reserve composed of tax benefit granted to the Company´s subsidiaries in 2005. TIM Brasil subscribed and paid in cash for the whole capital increase, using credits held against the Company due to tax benefit granted to the subsidiaries in connection with amortization of goodwill merged in 2000 (Note 22-b). Should any stockholder exercize their preferential rights , the amounts paid for acquisition of shares will be passed on to TIM Brasil. The minority stockholders´ preferential right will end on November 3, 2006.

Capital subscribed and paid-in as of September 30, 2006 comprises shares without par value, thus distributed:

b. Capital reserves

Special goodwill reserve

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

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Reserve for future capital increase

In March 2005, capital increases were approved at the subsidiaries TIM Nordeste Telecomunicações S.A. (merged by TIM Nordeste S.A., formerly Maxitel S.A.) and TIM Sul S.A.(merged by TIM Celular S.A.) as a result of capitalization of part of the special goodwill reserve, as above mentioned. The period for the minority stockholders to exercise their preferential rights expired in April 2005, when TIM Participações S.A. received R$6,401 from the stockholders who have exercised their preferential rights. When such amount was received, the exchange of shares mentioned in note 2.a, whereby the subsidiaries became wholly-owned companies of TIM Participações S.A., and the related capital increases of the parent company had already been established. Therefore, the amount received from minority stockholders (now stockholders of TIM Participações S.A.) was recorded as Reserve for Future Capital Increase, to be realized with no further issuance of shares, to the benefit of all stockholders.

On September 29, 2006, the General Extraordinary Stockholders´ Meeting approved capital increase in the amount of R$ 6,401 without issuance of shares, in benefit of all stockholders.

c. Income reserves 

Legal reserve 

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

Unearned income reserve

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

On March 7, 2006, at the General Stockholders’ Meeting, the Company’s management approved the distribution this amount as dividends.

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Reserve for expansion

This reserve is composed of the remainder of net income for the year ended December 31, 2005, adjusted in accordance with art. 202 of Law 6.404/76 – R$ 299,074 –, as determined by the CVM Instruction No. 59/86, to be used for investments and network expansion. This reserve is formed based on paragraph 2, article 40 of the by-laws and article 194 of Law 6.404/76. Additionally, the investments to be made are supported by the capital budget approved at the General Extraordinary Stockholders’ Meeting held on March 7, 2006.

d. Dividends

Dividends are calculated in accordance with the Bylaws and Brazilian Corporate Law (“Lei das Sociedades por Ações”).

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

Preferred shares are nonvoting but take priority on (i) the payment of capital at no premium, and (ii) payment of a minimum noncumulative dividend of 6% p.a. on the total obtained from dividing the capital stock representing this type of shares by the total number of the same class of shares issued by the Company.

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

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23 Net operating revenue

24 Cost of services rendered and goods sold 

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25 Selling expenses

26 General and administrative expenses