All other exemptions / exceptions provided for in IFRS 1 were observed, analyzed and produced no effects in relation to the accounting practices adopted in Brazil.
The following discussion of the Company’s financial condition and operating results should be read in conjunction with the Company’s audited consolidated financial statements as of December 31, 2010, 2009 and 2008 included in this Annual Report that have been prepared in accordance with IFRS, issued by IASB as well as with the information presented under “Item 3A. Key Information—Selected Financial Data.”
Merger of TIM Nordeste S.A. into TIM Celular
On October 30, 2009, the Board of Directors of TIM Participações approved the corporate reorganization of its subsidiaries, whereby TIM Nordeste S.A. would be merged into TIM Celular. On December 17, 2009 Anatel granted its approval of this proposal through Decision No. 7.477, and on December 31, 2009, the shareholders of TIM Nordeste S.A. and of TIM Celular S.A. approved the reorganization at their respective Extraordinary General Meetings.
The purpose of this reorganization was to optimize the companies’ organization structure by further consolidating and rationalizing their businesses and operations by leveraging tax and financial synergies and cutting costs associated with having separate legal entities. No impact on TIM Participações’s previous financial statements is expected.
Acquisition of Holdco/Intelig
At a meeting of the Board of Directors on April 16, 2009, the Company executed a Merger Agreement with Holdco, a subsidiary of JVCO, pursuant to which through a merger of Holdco into the Company, the Company would acquire indirect control of Intelig.
Anatel approved the merger on August 11, 2009 in Decision No. 4634, and decided to eliminate the overlapping geographic licenses held by TIM Celular and Intelig for Fixed Switched Telephone Services (STFC) within 18 months.
On December 30, 2009, the shareholders of TIM Participações approved the merger of Holdco into TIM Participações. As a result of this operation, the Company issued 127,288,023 shares (43,356,672 common and 83,931,352 preferred) for a book value of R$516,725, to JVCO. The acquisition date fair value of the consideration transferred totaled R$739,729. Holdco’s assets and liabilities acquired are, respectively, R$517,128 and R$403 on November 30, 2009.
The results of Intelig’s operations have not been included in the 2009 consolidated financial statements since the acquisition date was December 30, therefore only the balance sheet has been consolidated. Intelig is a provider of long distance and fixed line telecommunication services in Brazil. As a result of the acquisition, the Company will expand its long distance and fixed line services in Brazil.
The table below includes the fair value of the identified assets acquired and liabilities assumed on the date of acquisition.
| Assets | | | R$ | |
Cash and cash equivalents | | | 132,816 | |
Accounts receivable | | | 126,353 | |
Taxes recoverable | | | 23,074 | |
Court deposits | | | 33,453 | |
Property, plant and equipment | | | 780,845 | |
Intangible assets | | | 135,850 | |
Other assets | | | 25,114 | |
| Total identifiable assets purchased | | | 1,257,505 | |
| | | | | |
Liabilities | | | (342,431 | ) |
Loans | | | (118,402 | ) |
Contingencies | | | (140,107 | ) |
| Long-term taxes and contributions | | | (101,311 | ) |
Other liabilities | | | (25,540 | ) |
Total liabilities assumed | | | (727,791 | ) |
| | | | | |
Net identifiable assets acquired | | | 529,714 | |
`
As result of the adjustment to fair value of the identified assets acquired and liabilities assumed from Intelig upon the acquisition of the company, the fair value of the net assets purchased totaled R$529,714. Thus, we concluded that the amount of R$ 739,729, paid upon the acquisition of Intelig on December 30, 2009, exceeded the fair value of the net assets by R$210,015. Said surplus amount was recorded as goodwill and is based on expectations of future profitability of Intelig, supported by the projections prepared by the Company together with investment banks.
As result of the adjustment to fair value of the identified assets acquired and liabilities assumed from Intelig upon the acquisition of the company, the fair value of the net assets purchased totaled R$529,714. Thus, we concluded that the amount of R$ 739,729, paid upon the acquisition of Intelig on December 30, 2009, exceeded the fair value of the net assets by R$210,015. Said surplus amount was recorded as goodwill and is based on expectations of future profitability of Intelig, supported by the projections prepared by the Company together with investment banks.
If such transaction had occurred as of January 1, 2009, the net revenue and net income for the period ended December 31, 2009, considering the combination of TIM Participações and its subsidiaries with Intelig, would have been R$ 13,747,028 and R$ 801,223, respectively.
Pro forma information considers that our acquisition of 100.00% of Holdco/Intelig as if it was completed at January 1, 2009.
| | | Year ended December 31, | | | Percentage change | |
| | | 2010 | | | 2009 | | | 2010 - 2009 Pro-forma | | | | 2010 - 2009 | |
| | TIM Partic (1) | | | Intelig | | | Pro-forma (2) | |
| Net Operating Revenues | | | 14,457,450 | | | | 13,158,134 | | | | 588,894 | | | | 13,747,028 | | | | 5.20 | % | | | 9.90 | % |
| Cost of services and goods | | | -7,305,767 | | | | -6,672,369 | | | | -470,558 | | | | -7,142,927 | | | | 2.30 | % | | | 9.50 | % |
| Gross profit | | | 7,151,682 | | | | 6,485,765 | | | | 118,336 | | | | 6,604,101 | | | | 8.30 | % | | | 10.30 | % |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
| Selling expenses | | | -4,494,608 | | | | -4,436,751 | | | | -65,157 | | | | -4,501,908 | | | | -0.20 | % | | | 1.30 | % |
| General and administrative expenses | | | -1,008,694 | | | | -1,033,438 | | | | -100,366 | | | | -1,133,804 | | | | -11.00 | % | | | -2.40 | % |
| Other operating expenses | | | -448,247 | | | | -462,114 | | | | 1,321 | | | | -460,793 | | | | -2.70 | % | | | -3.00 | % |
| Total operating expenses | | | -5,951,549 | | | | -5,932,303 | | | | -164,202 | | | | -6,096,505 | | | | -2.40 | % | | | 0.30 | % |
| Operating income before financial results | | | 1,200,134 | | | | 553,462 | | | | -45,866 | | | | 507,596 | | | | 136.40 | % | | | 116.80 | % |
| Net financial income | | | -245,457 | | | | -245,115 | | | | 505,716 | | | | 260,601 | | | | -194.20 | % | | | 0.10 | % |
| Operating income before interest | | | 954,677 | | | | 308,347 | | | | 459,850 | | | | 768,197 | | | | 24.30 | % | | | 209.60 | % |
| Income and social contribution tax benefit | | | 1,257,038 | | | | 33,026 | | | | 0 | | | | 33,026 | | | | 3706.30 | % | | | 3706.30 | % |
| Net income | | | 2,211,715 | | | | 341,373 | | | | 459,850 | | | | 801,223 | | | | 176.00 | % | | | 547.90 | % |
The merger with Holdco Participações Ltda. and acquisition of control of Intelig has strategic and operational significance to the Company. Intelig’s strong network of optical fibers in Brazil’s major metropolitan areas and extensive long-distance network will enable the Company to enhance its capabilities in the corporate and data transmission segments, reduce costs and promote the development of the 3G network.
Merger of TIM Nordeste Telecomunicações into Maxitel and of TIM Sul into TIM Celular
On May 4, 2006, the Board of Directors of TIM Participações authorized the merger of TIM Nordeste Telecomunicações into Maxitel and the merger of TIM Sul into TIM Celular, each a wholly owned subsidiary of TIM Participações.
On June 30, 2006, the mergers of TIM Nordeste Telecomunicações into Maxitel and TIM Sul into TIM Celular were approved at the General Shareholders’ Meetings of TIM Celular, Maxitel, TIM Nordeste Telecomunicações and TIM Sul. On the same date, Maxitel was renamed TIM Nordeste S.A.
Acquisition of TIM Celular by TIM Participações
On March 16, 2006, we acquired all of the share capital of TIM Celular, a wholly-owned subsidiary of our controlling shareholder, TIM Brasil, pursuant to a transaction in which TIM Brasil received shares issued by TIM. As a result, TIM Celular and its operating subsidiary, TIM Maxitel, became our subsidiaries. The acquisition became effective following approval in the respective Extraordinary Shareholders’ Meetings of our shareholders and the shareholders of TIM Celular on March 16, 2006.
We accounted for the acquisition under Brazilian GAAP as a purchase at book value, generating no goodwill, pursuant to which the results of TIM and TIM Celular were combined with effect from January 1, 2006. For more information regarding the acquisition of TIM Celular by TIM, see “Presentation of Information.”
Due to the TIM Celular Acquisition, our 2007 consolidated financial statements are not comparable with our historical financial statements. In addition, we are unable to distinguish clearly between internal growth in 2007 and growth due to the TIM Celular Acquisition.
Critical Accounting Policies
Critical accounting policies are those that are important to the presentation of our financial condition and results of operations and require management’s most subjective, complex judgments, often requiring management to make estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the possible future resolution of the uncertainties increases, those judgments become more complex. We base our estimates and assumptions on historical experience, industry trends or other factors that we believe to be reasonable under the circumstances. Actual results may vary from what we anticipate, and different assumptions or estimates about the future could change our reported financial results. In order to provide an understanding about how our management has estimated the potential impact of certain uncertainties, including the variables and assumptions underlying the estimates, we have identified the critical accounting policies discussed below. We describe our significant accounting policies, including the ones discussed below, in note 3 to our consolidated financial statements.
Depreciation and Impairment of Long-Lived Assets
Property, plant and equipment are stated at cost of acquisition or construction. Depreciation is calculated using the straight-line method based on the estimated useful lives of the underlying assets. See notes 4.g and 10 to our consolidated financial statements. We currently depreciate automatic switching, transmission and other equipment
based on an estimated useful life of seven years. Free handsets for corporate customers (comodato) are depreciated over two years.
We review our long-lived assets, such as goodwill, for impairment whenever events or circumstances indicate the carrying value of an asset may not be recoverable from estimated future cash flows expected to result from its use and eventual disposition. At least annually, the Company applies the recoverability test on the recorded goodwill. The calculations were performed based on the discounted cash flow using as parameters the assumptions included in the Company’s 10 years Industrial Plan, growth rate compatible with our market conditions and a discount rate of 10% per year. The results of such tests indicated no need for an accounting provision.
The fair value of the cash generating units, as of the latest impairment testing date, is substantially in excess of their carrying value.
However, asset impairment evaluations are, by nature, highly subjective. If our projections are not met, we may have to record impairment charges not previously recognized. In analyzing potential impairments, we use projections based on our view of growth rates for our business, anticipated future economic, regulatory and political conditions and changes in technology. Such projections are subject to change, including as a result of technological developments that may render long-lived assets obsolete sooner than anticipated. See note 3.i to our consolidated financial statements.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the failure of our customers to make required payments. We revise our estimated percentage of losses on a regular basis, taking into account our most recent experience with non-payments (i.e. average percentage of receivables historically written-off, economic conditions and the length of time the receivables are past due). The provision for doubtful accounts for 2010 was based on the following estimates of percentages of receivables, classified by the number of days such receivables are overdue, that it projected to be uncollectible. These estimates were based on historical experience of write-offs and future expectations of conditions that might impact the collectability of accounts. The amount of the loss, if any, that we actually experience with respect to these accounts may differ from the amount of the allowance maintained in connection with them.
| | Percentage estimated to be uncollectible | |
Current* | | | 2.75% - 3.5 | % |
Receivables overdue 1 to 90 days* | | | 5.5% - 7 | % |
Receivables overdue 91 to 120 days | | | 50 | % |
Receivables overdue 121 to 150 days | | | 56 | % |
Receivables overdue 151 to 180 days | | | 90 | % |
Receivables overdue more than 180 days | | | 100 | % |
| * | Percentage varies based on area and customer composition. |
Deferred Income Tax and Social Contribution
We compute and pay income taxes based on results of operations under IFRS.
We regularly review deferred tax assets for recoverability. If, based on historical taxable income, projected future taxable income and expected timing of reversals we determine that it is more likely than not that the deferred tax assets will not be realized, we establish a valuation allowance. When performing such reviews, we are required to make significant estimates and assumptions about future taxable income.
In order to determine future taxable income, we need to estimate future taxable revenues and deductible expenses, which are subject to different external and internal factors such as economic conditions, industry trends, interest rates, shifts in our business strategy and changes in the type of services we offer. The use of different assumptions and estimates could significantly change our financial statements. A change in assumptions and
estimates with respect to our expected future taxable income could result in the recognition of a valuation allowance on deferred income tax assets, which would decrease our results of operations and shareholders’ equity.
If we operate at a loss or are unable to generate sufficient future taxable income, if there is a material change in the actual effective tax rates, if the time period within which the underlying temporary differences become taxable or deductible, or if there is any change in our future projections, we could be required to establish a valuation allowance against all or a significant portion of our deferred tax assets, resulting in a substantial increase in our effective tax rate and a material adverse impact on our operating results.
The taxable income projections used in determining the recoverability of our deferred tax assets as of December 31, 2009 were derived from our 2010-2012 Industrial Plan. At that time, our Industrial Plan forecasted our income for the next three fiscal years, with assumptions reflecting conditions we expected to exist and the course of actions we expect to take. Based on the three-year projections included in the Industrial Plan, we projected income out for a further seven years (i.e. to 2019). However, we did not extend the Industrial Plan projections beyond the basic three years for the valuation allowance of our deferred tax assets because we believe that the uncertainties described below made any extension of our projections beyond year three difficult to support at the more likely-than-not level, required for projections in this context. We limited our projections to three years in determining the amount of the valuation allowance for deferred tax assets at December 31, 2009.
The principal uncertainties underlying our decision to limit the projections to three years at December 31, 2009 were:
| | · | TIM Celular had a history of losses. |
| | · | at the end of 2009, Brazil was expecting a presidential election in 2010, generating uncertainties in relation to longer future projections and taxation. |
| | · | at the end of 2009, the economy was still recovering from the worldwide financial crises, generating a strong level of uncertainties in longer term future projections. In addition, we believed there remained fundamental uncertainties regarding the Brazilian economy, including with respect to domestic inflation and commodities prices. |
| | · | in 2009, compared to 2008, the subsidiary TIM Celular did not experience growth in revenues and had a modest growth in profitability. Further, as described before in this Form, the Company lost approximately five hundred thousand clients from its average post-paid customer during 2009 when compared to 2008, and had a deterioration in its brand awareness and customers satisfaction. As a result, substantial efforts were made to turn around the Company (including the subsidiary TIM Celular) starting in the second half of 2009, including: i) a substantial change in management (e.g CEO, COO, CTO); ii) re-launching of the strategy and positioning of TIM in the market; iii) new and innovative services and products (‘Infinity’, and ‘Liberty’). |
In addition to the above uncertainties, we also considered the inherent subjectivity of the positive evidence underlying our projections of future taxable income in the next three years, such as the expectation that new management and a new business plan at TIM Celular would lead to a turnaround at that business. In evaluating the negative and positive evidence in assessing the likelihood of predicable earnings after 2012, we believed that the negative evidence outweighed the positive evidence. As a result, of all of the foregoing, we believed that the valuation allowance as at December 31, 2009 was necessary because our projections showed that the deferred tax assets were not recoverable to the extent of the allowance.
By the end of 2010, TIM Celular had clear evidence of the success of the strategy implemented during the 2009. Accordingly, our actual 2010 results were significantly better than those we considered in our projections prepared in the end of 2009. The main positive factors that lead TIM Celular to better results were:
| | · | 2010 final customer base of 51 million, resulting in an additional 4.6 million of new customer when compared to the projected customer base. Revenues were higher by approximately R$200 million in comparison to .projected revenues; |
| | · | efficiency plans effectiveness. During 2010, our costs and expenses were lower by approximately R$250 million in comparison to the projected amounts, partially due to cost saving programs and partially due to synergies from Tim Nordeste merging process; |
| | · | success of the new products (‘Infinity’, and ‘Liberty’) launched during 2009; |
| | · | progressive exit from the handset subsidy; |
| | · | significant reduction of handsets classified as property, plant and equipment (handsets owned by the Company and provided free of charge to corporate customers) with consequent reduction in depreciation (actual depreciation amount in 2010 was lower by R$300 million in relation to projected one); |
| | · | increase in cash generation, resulting in reduced indebtedness and lower net financial expenses (financial expenses were approximately R$100 million lower than the expected in the projections). |
Considering the reduction in the uncertainties we had at the end of 2009, we updated our Industrial Plan for years 2011-2013 and following projections and we believe the future income generation will be much higher than we expected in the end of 2009. Based on the expected taxable income to be generated in future years, the reduction of uncertainties mentioned there were in place in the end of 2009, at the end of 2010 we released in its entirety the valuation allowance for tax loss carryforwards related to our subsidiary TIM Celular that was recorded at December 31, 2009.
Asset Retirement Obligations
Our subsidiaries are contractually obligated to dismantle their cellular towers from various sites they lease. We must record as asset retirement obligations the present value of the estimated costs to be incurred for dismantling
and removing cellular towers and equipment from leased sites. The offset to this provision is recorded as property, plant and equipment, and the depreciation is calculated based on the useful lives of the corresponding assets.
Contingent Liabilities
The accrual for a contingency involves considerable judgment on the part of management. A contingency is “an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur.”
We are subject to various claims, including regulatory, legal and labor proceedings covering a wide range of matters that arise in the ordinary course of business. We adopted a policy of analyzing each such proceeding and making a judgment as to whether a loss is probable, possible or remote. We make accruals for proceedings that we are party to when we determine that losses are probable and can be reasonably estimated. Our judgment is always based on the opinion of our legal advisors. Accrual balances are adjusted to account for changes in circumstances for ongoing matters and the establishment of additional accruals for new matters. While we believe that the current level of accruals is adequate, changes in the future could impact these determinations.
Revenue Recognition and Customer Incentive Programs
Revenues are recorded when services are rendered. As a result of our billing cycle cut-off times, we are required to make estimates for services revenue earned but not yet billed. These estimates, which are based primarily upon unbilled minutes of use, could differ from our actual experience. See note 3 to our consolidated financial statements.
Political, Economic, Regulatory and Competitive Factors
The following discussion should be read in conjunction with “Item 4. Information on the Company.” As set forth in greater detail below, our financial condition and results of operations are significantly affected by Brazilian telecommunications regulation, including the regulation of rates. See “Item 4B. Information on the Company—Business Overview—Regulation of the Brazilian Telecommunications Industry—Rate Regulation.” Our financial condition and results of operations have also been, and are expected to continue to be, affected by the political and economic environment in Brazil. See “Item 3D. Key Information—Risk Factors—Risks Relating to Brazil.” In particular, our financial performance will be affected by:
| | · | general economic and business conditions, including the price we are able to charge for our services and prevailing foreign exchange rates; |
| | · | our ability to generate free cash flow in the coming years; |
| | · | competition, including expected characteristics of network, offers, customer care and from increasing consolidation in our industry and nationwide presence of Claro, Vivo and Oi; |
| | · | our ability to secure and maintain telecommunications infrastructure licenses, rights-of-way and other regulatory approvals; |
| | · | our ability to anticipate trends in the Brazilian telecommunications industry, including changes in market size, demand and industry price movements, and our ability to respond to the development of new technologies and competitor strategies; |
| | · | our ability to expand and maintain the quality of the services we provide; |
| | · | the rate of customer churn we experience; |
| | · | changes in official regulations and the Brazilian government’s telecommunications policy; |
| | · | political economic and social events in Brazil; |
| | · | access to sources of financing and our level and cost of debt; |
| | · | our ability to integrate acquisitions; |
| | · | regulatory issues relating to acquisitions; |
| | · | the adverse determination of disputes under litigation; and |
| | · | inflation, interest rate and exchange rate risks. |
Overview
The international financial crisis had an adverse impact on the Brazilian economy in 2009. However, economic indicators in Brazil were less affected than in other areas including the United States and Europe, partially due to a combination of the positive effects of prior adjustments and a prompt fiscal, monetary and economic response by the Federal Government. During this period, the SELIC basic interest rate reached a historical level of 10.66% p.a. Low interest rates contributed to an increase of 1.1% in the Ibovespa during 2010. A strong inflow of foreign capital contributed to an approximately 4.4% appreciation of the Brazilian Real to the U.S. dollar.
The Brazilian mobile market reached 202.9 million lines nationwide at the end of December 2010, corresponding to a penetration ratio of 104.7% (compared to 90.6% in 2009) and an annual growth rate of 16.7% (compared to 15.5% in 2009). Brazil is the fifth largest mobile telephony market in the world, and telephony is currently the most common means of communication in Brazilian households among all social classes. According to Anatel (Brazil’s National Telecommunications Agency), mobile market net adds reached 29.0 million in 2010 which represents a 24.3% upturn from 2009. The prepaid mix continues to represent the greatest part of total subscriber base, 82.3%.
TIM’s subscriber base ended the year of 2010 with 51.0 million clients, 24.1% up from 2010, corresponding to a market share of 25.1%, while the service revenues share, our primary focus, reached 26.7% in 2009. The pre-paid segment reached 43.5 million (25.7% up from 2009) while the post-paid stood at 7.5 million users in the year (15.7% up from 2009). As for the client mix, post-paid accounted for 14.6% of the total subscriber base, compared to 15.7% from 2009, largely impacted by the increase of pre-paid base. In 2010, TIM added 9.9 million customers, up from 4.7 million in 2009. The increase reflects TIM’s success with Infinity and Liberty plans. TIM’s ARPU (average revenue per user) registered R$23.7 in 2010. On a yearly basis, ARPU dropped 10.8% which is partially attributed to an increase of 25.7% in the pre-paid segment (where the market growth is concentrated), and a lower incoming MOU.
ARPU is a key performance indicator which is calculated by the ratio between total net service revenue per average customer base per month. In 2010, our average customer base, calculated as the simple mean of monthly averages, increased 17.9% to 44.8 million, compared to 38.0 million customers in 2009.
The following table shows the total average number of customers during 2010 and 2009.
| | | | |
| | | | | | | |
Average number of customers using post-paid plans(1) | | | 6,916,279 | | | | 6,285,455 | |
Average number of customers using pre-paid plans(1) | | | 37,895,049 | | | | 31,708,947 | |
Total number of customers(1) | | | 44,811,328 | | | | 37,994,402 | |
| (1) | Average numbers are based on the number of customers at the end of each month during the relevant year. |
A. Operating Results
The following table shows certain components of our statement of operations for each year in the two-year period ended December 31, 2010, as well as the percentage change from year to year.
| | | | | | | |
| | | | | | | | | | | | | | | | 2010 - 2009 | |
Net Operating Revenues | | | 14,457,450 | | | | 13,158,134 | | | | 13,747,028 | | | | 5.2 | % | | | 9.9 | % |
Cost of services and goods | | | (7,305,767 | ) | | | (6,672,369 | ) | | | (7,142,927 | ) | | | 2.3 | % | | | 9.5 | % |
Gross profit | | | 7,151,682 | | | | 6,485,765 | | | | 6,604,101 | | | | 8.3 | % | | | 10.3 | % |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | |
Selling expenses | | | (4,494,608 | ) | | | (4,436,751 | ) | | | (4,501,908 | ) | | | -0.2 | % | | | 1.3 | % |
| General and administrative expenses | | | (1,008,694 | ) | | | (1,033,438 | ) | | | (1,133,804 | ) | | | -11.0 | % | | | -2.4 | % |
Other operating expenses | | | (448,247 | ) | | | (462,114 | ) | | | (460,793 | ) | | | -2.7 | % | | | -3.0 | % |
Total operating expenses | | | (5,951,549 | ) | | | (5,932,303 | ) | | | (6,096,505 | ) | | | -2.4 | % | | | 0.3 | % |
| Operating income before financial results | | | 1,200,134 | | | | 553,462 | | | | 507,596 | | | | 136.4 | % | | | 116.8 | % |
Net financial income | | | (245,457 | ) | | | (245,115 | ) | | | 260,601 | | | | -194.2 | % | | | 0.1 | % |
| Operating income before interest | | | 954,677 | | | | 308,347 | | | | 768,197 | | | | 24.3 | % | | | 209.6 | % |
| Income and social contribution tax benefit | | | 1,257,038 | | | | 33,026 | | | | 33,026 | | | | 3706.3 | % | | | 3706.3 | % |
Net income | | | 2,211,715 | | | | 341,373 | | | | 801,223 | | | | 176.0 | % | | | 547.9 | % |
| (1) | The 2009 Pro-forma information reflects the Intelig acquisition as if it had occurred on January 1st, 2009. See “Presentation of Financial Information”. |
Operating revenues
Our operating revenues consisted of:
| | · | monthly subscription charges; |
| | · | usage charges, which include roaming charges; |
| | · | interconnection charges; |
| | · | other service revenues; and |
| | · | proceeds from the sale of handsets and accessories. |
The composition of our operating revenues by category of service is presented in note 26 to our consolidated financial statements and discussed below. We do not determine net operating revenues or allocate cost by category of service.
The following table shows certain components of our operating revenues, as well as the percentage change of each component from the prior year, for 2010 and 2009:
Statement of Operations Data:
IFRS
| | | Year ended December 31, | | | Percentage change | |
| | | | | | | | | | | | | | | | 2010 - 2009 | |
| | | (in million of reais) | | | | | | | | |
| Monthly subscription charges and usage charges | | | 8,912.0 | | | | 8,068.2 | | | | 8,068.2 | | | | 10.5 | % | | | 10.5 | % |
Fixed services | | | 1,281.2 | | | | 1,074.2 | | | | 89.9 | | | | 19.3 | % | | | 1325.9 | % |
Interconnection charges | | | 3,679.4 | | | | 4,006.9 | | | | 4,042.6 | | | | -8.2 | % | | | -9.0 | % |
Long distance charges | | | 2,374.3 | | | | 1,943.1 | | | | 1,943.1 | | | | 22.2 | % | | | 22.2 | % |
Value added services | | | 2,241.5 | | | | 1,897.2 | | | | 1,907.2 | | | | 18.2 | % | | | 17.5 | % |
Other service revenues | | | 272.9 | | | | 306.0 | | | | 306.0 | | | | -10.8 | % | | | -10.8 | % |
| Gross operating revenues from services | | | 18,761.4 | | | | 17,295.7 | | | | 16,357.0 | | | | 8.5 | % | | | 14.7 | % |
| Value added and other taxes relating to services | | | (4,143.6 | ) | | | (3,779.0 | ) | | | (3,615.4 | ) | | | 9.6 | % | | | 14.6 | % |
Discounts on services | | | (1,046.2 | ) | | | (728.9 | ) | | | (542.6 | ) | | | 43.5 | % | | | 92.8 | % |
| Net operating revenues from services | | | 13,571.6 | | | | 12,787.9 | | | | 12,199.0 | | | | 6.1 | % | | | 11.3 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Sales of cellular handsets and accessories | | | 1,557.9 | | | | 1,717.7 | | | | 1,717.7 | | | | -9.3 | % | | | -9.3 | % |
| Value added and other taxes on handset sales | | | (332.2 | ) | | | (301.1 | ) | | | (301.1 | ) | | | 10.3 | % | | | 10.3 | % |
Discounts on handset sales | | | (339.8 | ) | | | (457.4 | ) | | | (457.4 | ) | | | -25.7 | % | | | -25.7 | % |
Our gross service revenue for the year ended December 31, 2010 was R$18,761.4 million, representing a 14.7% increase from R$16,357.0 million in the year ended December 31, 2009, mainly due to the acquisition of Intelig, which significantly boosted our fixed services revenues in 2010, as well as organic growth. This increase primarily reflected a strong increase in our long distance charges (22.2% up from the year ended December 31, 2009, due to the Intelig acquisition), fixed service charges (1,325.1% up from the year ended December 31, 2009, due to the Intelig acquisition), and value added services (17.5% up from the year ended December 31, 2009). All of these increases reflect the excellent amount of client acquisitions by the Company, which reached over the 50 million figures. The gross handset revenue for the year ended December 31, 2010 was R$1,557.9 million, a 9.3% decrease over R$1,717.7 for the year ended December 31, 2009, resulting from a client acquisition approach focused mainly in discounted services, rather than discounted handsets offer. Gross revenues for the year ended December 31, 2010 totaled R$20,319.3 billion, a 12.4% increase from the year ended December 31, 2009.
Gross service revenues for the year ended December 31, 2010 increased by 8.5% compared to R$17,295.7 million on a pro forma basis in the year ended December 31, 2009. This increase primarily reflected a strong increase in our long distance charges (22.2% up from the year ended December 31, 2009), fixed service charges (19.3% up from the year ended December 31, 2009), and value added services (18.2% up from the year ended December 31, 2009). All of these increases reflect the excellent amount of client acquisitions by the company, that reached over the 50 million figure. The gross handset revenue for the year ended December 31, 2010 was R$1,557.9 million, a 9.3% decrease over R$1,717.7 for the year ended December 31, 2009, resulting from a client acquisition approach focused mainly in discounted services, rather than discounted handsets offer. Gross revenues for the year ended December 31, 2010 totaled R$20,319.3 billion, a 6.9% increase from the year ended December 31, 2009.
Net operating revenues increased 9.9% to R$14,457.5 million in the year ended December 31, 2010 from R$13,158.1 million in the year ended December 31, 2009, due primarily to the acquisition of Intelig, as well as organic growth. This organic growth was primarily due to the expansion in the number customers, reflecting better results in several revenue lines, such as fixed services, long distance charges and value added services.
Net operating revenues increased 5.2% from R$13,747.1 million on a pro forma basis in the year ended December 31, 2009. This was primarily due to the expansion in the number customers, reflecting better results in several revenue lines, such as fixed services, long distance charges and value added services.
Monthly subscription charges and usage charges
Revenue from monthly subscription charges and usage charges was R$8,912.0 million in the year ended December 31, 2010, a 10.5% increase from R$8,068.2 million in the year ended December 31, 2009, due primarily to post the increase in the proportion of post-paid subscribers.
The total average monthly minutes of billed use per customer (“MOU”) for 2010 and 2009 were as follows:
| | | | |
| | | | | | | |
Average incoming MOU | | | 16 | | | | 21 | |
Average outgoing MOU | | | 100 | | | | 62 | |
Average total MOU | | | 116 | | | | 83 | |
Fixed Services
Revenue from fixed services was R$1,281.2 million in the year ended December 31, 2010, a 1,325.1% increase from R$89.9 million in December 31, 2009, mainly due to the acquisition of Intelig.
Revenue from fixed services increased 19.3% from R$1,074.2 million on a pro forma basis in December 31, 2009. The main reason for this increase was since the beginning of the year, Intelig had its brand reshaped and corporate offers remodeled, supporting the yearly revenue growth
Interconnection charges
Interconnection revenues consist of amounts paid to us by other mobile and fixed line providers for completion of calls on our network of calls originating on their networks. Our interconnection revenues were R$3,679.4 in the year ended December 31, 2010, a 9.0% decrease from R$4,042.6 in 2009. Despite subscriber growth, this decrease was mainly attributable to the strong on-net calls (calls originated and received by terminals of the same cellular company) stimulated by our new subscription plans and a fixed to mobile traffic reduction trend. Interconnection as a percentage of total gross revenues of services stood at 19.6% in the year ended December 31, 2010 compared to 24.7% in the year ended December, 2009.
Interconnection revenues decreased 8.2% from R$4,006.9 in 2009 on a pro forma basis. Interconnection as a percentage of total gross revenues of services stood at 19.6% in the year ended December 31, 2010 compared to 23.2% on a pro forma basis in the year ended December, 2009.
Long distance charges
Revenues from long distance charges increased 22.2% to R$2,374.3 million in the year ended December 31, 2010 from R$1,943.1 million in the year ended December 31, 2009, the increase reflecting our efforts to facilitate the use of our long distance service through lower cost service packages such as Liberty and Infinity.
Value-added services
Value-added service revenues increased 17.5% to R$2,241.5 million in the year ended December 31, 2010 from R$1,907.2 million the year ended December 31, 2009, principally due to an increase in our customer base, both on voice and data, and an expansion of products and services.
Value-added service revenues increased 18.2% from R$1,897.2 million on a pro forma basis in the year ended December 31, 2009.
Value-added services include short messaging services (SMS), multimedia message services (MMS), data transmission, downloads (wallpaper and ringtones), television access, voicemail and chat. SMS revenues represent a significant portion of our total value-added service revenues. Data transmission, supported by our 3G network, is also a key component to our value-added service revenues, and we have focused on improving our position in this
area through expanding partnerships, enhancing our smart phone portfolio, including through the addition of the iPhone 3GS and 4, and promoting our mobile broadband service through TIM web broadband.
Other service revenues
Revenues from other services decreased 10.8% to R$272.9 million in the year ended December 31, 2010 from R$306.0 million in the year ended December 31, 2009, principally reflecting revenues from other services consist mainly of site sharing and co-billing services, which occur when a customer is billed by his own operator on behalf of another long distance company for services provided by such carrier and contractual penalties.
Sales of mobile handsets
Sales of mobile handsets increased/decreased 9.3% to R$1,557.9 million in the year ended December 31, 2010 from R$1,717.7 million registered in the year ended December 31, 2009. This was mainly attributable to TIM´s strategy of SIM-only sales.
Value-added and other taxes relating to services
The principal tax on telecommunications services is ICMS tax, which is imposed at rates between 25% and 35%. ICMS is also the principal tax on sales of handsets, which is imposed at a rate between 7% and 17%. See “Item 4B. Information on the Company—Business Overview—Taxes on Telecommunications Goods and Services.” Two federal social contribution taxes, PIS and COFINS, are imposed at combined rates of 3.65% on gross revenues operating relating to telecommunications services and at combined rates of 9.25% on mobile telephone handset sales.
Our value-added and other taxes relating to services and handset sales was R$4,143.6 million in the year ended December 31, 2010 compared to R$3,615.4 million in the year ended December 31, 2009, an increase of 14.6% partly due to the acquisition of Intelig.
Value-added and other taxes relating to services and handset sales grew by 9.6% from R$3,779.0 million on a pro forma basis in the year ended December 31, 2009.
Discounts on services and handset sales increased 38.6% to R$1,386 million in the year ended December 31, 2010 compared to R$1,000 million in the year ended December 31, 2009. This increase was primarily due to the acquisition of Intelig and an effort to acquire and maintain clients based on innovation and prime services, rather than discounts.
Discounts on services and handset sales increased 16.8% from R$1,186.3 million on a pro forma basis in the year ended December 31, 2009.
Costs of services and goods
Costs of services and goods increased by 9.5% to R$7,305.8 in the year ended December 31, 2010 from R$6,672.4 in the year ended December 31, 2009, mainly due to the acquisition of Intelig, as well as organic growth. Cost of handsets and accessories sold increased 10.9% in the year ended December 31, 2010 due largely to campaigns to stimulate purchases of the TIM Chip alone, and the appreciation of the Brazilian Real.
Costs of services and goods increased by 2.3% from R$7,142.9 on a pro forma basis in the year ended December 31, 2009, due mainly to a increase in expenses related to interconnection, reflecting our campaigns to promote on-net calls and lower personnel expenses. The following table shows the composition of costs of services and sales of mobile handsets, as well as the percentage change from 2010 to 2009:
Statement of Operations Data:
IFRS
| | | | | | | |
| | | | | | | | | | | | | | | | 2010 - 2009 | |
| | | (in million of reais) | | | | | | | | |
Depreciation and amortization | | | (1,994.2 | ) | | | (1,906.3 | ) | | | (1,816.0 | ) | | | 4.6 | % | | | 9.8 | % |
Interconnection expenses | | | (3,603.0 | ) | | | (3,628.1 | ) | | | (3,351.8 | ) | | | -0.7 | % | | | 7.5 | % |
Circuit leasing and related expenses | | | (242.9 | ) | | | (212.0 | ) | | | (166.0 | ) | | | 14.6 | % | | | 46.3 | % |
Materials and services | | | (337.0 | ) | | | (338.4 | ) | | | (315.6 | ) | | | -0.4 | % | | | 6.8 | % |
Personnel | | | (58.4 | ) | | | (96.1 | ) | | | (60.8 | ) | | | -39.2 | % | | | -3.9 | % |
FISTEL tax and other | | | (44.2 | ) | | | (37.0 | ) | | | (37.0 | ) | | | 19.5 | % | | | 19.5 | % |
Total cost of services | | | (6,279.7 | ) | | | (6,217.7 | ) | | | (5,747.2 | ) | | | 1.0 | % | | | 9.3 | % |
| Cost of handsets and accessories sold | | | (1,026.1 | ) | | | (925.2 | ) | | | (925.2 | ) | | | 10.9 | % | | | 10.9 | % |
Total cost of services and goods | | | (7,305.8 | ) | | | (7,142.9 | ) | | | (6,672.4 | ) | | | 2.3 | % | | | 9.5 | % |
| (1) | The 2009 Pro-forma information reflects the Intelig acquisition as if it had occurred on January 1st, 2009. See “Presentation of Financial Information”. |
Depreciation and amortization
Depreciation and amortization expenses increased 9.8% to R$1,994.2 million in the year ended December 31, 2010 from R$1,816.0 million in the year ended December 31, 2009, mainly due to the acquisition of Intelig.
Depreciation and amortization expenses increased 4.6% from R$1,906.3 million on a pro forma basis in the year ended December 31, 2009. The increase in depreciation expenses was due largely to efforts by the Company to expand and improve its network and IT infrastructure.
Interconnection expenses
Interconnection expenses consist of the amount paid to fixed-line and other mobile service providers for termination of our outgoing calls on their networks. Interconnection costs increased 7.5% to R$3,603 million in the year ended December 31, 2010 from R$3,351.8 million in the year ended December 31, 2009, mainly due to the acquisition of Intelig
Interconnection costs decreased 0.7% from R$3,628.1 million on a pro forma basis in the year ended December 31, 2009, This decrease reflected the results of our campaign to encourage on-net usage through discounted fares and specific bundle plans (Liberty and Infinity Plans).
Circuit leasing and related expenses
Circuit leasing and related expenses represent lease payments to fixed carriers for the use of circuits, interconnecting our network and transporting our customer traffic through third-parties fixed infrastructure. Circuit leasing and related expenses increased 46.3% in the year ended December 31, 2010 to R$242.8 million from R$166.0 million in the year ended December 31, 2009, mainly due to the acquisition of Intelig
Circuit leasing and related expenses increased 14.6% from R$212.0 million on a pro forma basis in the year ended December 31, 2009. The increase was attributable to the growth in data traffic and value added services.
Materials and services
Materials and services costs were R$337 million in the year ended December 31, 2010, up 6.8% from R$315.6 million incurred in the year ended December 31, 2009, mainly due to the acquisition of Intelig,
Materials and services costs decreased 0.4% from R$338.4 million on a pro forma basis incurred in the year ended December 31, 2009. The decrease reflects reduced maintenance costs in the 3G and GSM network.
Personnel
Personnel costs decreased 0.9% to R$58.4 million in the year ended December 31, 2010 from R$60.8 million in the year ended December 31, 2009.
Personnel costs decreased 39.2% from R$96.1 million on a pro forma basis in the year ended December 31, 2009. The decrease was due principally to corporate restructuring, implementing a new administrative and commercial structure that led to headcount adjustment. During 2010, there has been a 1.6% decrease in our number of employees, from 9,231 in the year ended December 31, 2009 to 9,081 in the year ended December, 2010.
FISTEL tax and other
FISTEL tax and other costs increased 19.8% to R$44.2 million in the year ended December 31, 2010 from R$36.9 million in the year ended December 31, 2009, due to larger base obtained during 2010.
Costs of handsets and accessories sold
The cost of handsets and accessories sold in 2010 was R$1,206.1 million, representing a 10.9% of increase from R$925.2 million in the year ended December 31, 2009. This increase partially attributable to the effects of recent campaigns to stimulate the purchase of the TIM Chip alone, and the appreciation of the Real as most of our handset portfolio is imported.
Gross profit margins
The following table shows our gross profits, as well as the percentage change, from 2009 to 2010:
Statement of Operations Data:
IFRS
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | 2010 - 2009 | |
| | | (in million of reais) | | | | | | | | |
| Net operating revenues from services | | | 13,571.6 | | | | 12,787.9 | | | | 12,199.0 | | | | 6.1 | % | | | 11.3 | % |
Cost of services | | | (6,279.7 | ) | | | (6,217.7 | ) | | | (5,747.2 | ) | | | 1.0 | % | | | 9.3 | % |
Gross profit from services | | | 7,291.9 | | | | 6,570.1 | | | | 6,451.8 | | | | 11.0 | % | | | 13.0 | % |
| Net operating revenues from sales of cellular handsets and accessories | | | 885.8 | | | | 959.2 | | | | 959.2 | | | | -7.6 | % | | | -7.6 | % |
Cost of goods | | | (1,026.1 | ) | | | (925.2 | ) | | | (925.2 | ) | | | 10.9 | % | | | 10.9 | % |
| Gross loss from sales of cellular handsets and accessories | | | (140.3 | ) | | | 34.0 | | | | 34.0 | | | | -512.8 | % | | | -512.8 | % |
Gross profit | | | 7,151.7 | | | | 6,604.1 | | | | 6,485.8 | | | | 8.3 | % | | | 10.3 | % |
| (1) | The 2009 Pro-forma information reflects the Intelig acquisition as if it had occurred on January 1st, 2009. See “Presentation of Financial Information”. |
Our gross profit margin from services (gross profit as a percentage of net service revenues) increased from 52.9% in the year ended December 31, 2009 to 53.7% in the year ended December 31, 2010.
Our gross profit margin from services increased from 51.4% on a pro forma basis in the year ended December 31, 2009 to 53.7% in the year ended December 31, 2010. The increase was mainly due to a decrease of 15.3% in interconnection expenses during the period while registering significant outgoing traffic increase
Our negative gross margin for sales of mobile handsets and accessories decreased from 3.5% in the year ended December 31, 2009 to 15.8% in the year ended December 31, 2010. TIM changed its subsidy policy, and launched the “TIM Chip Avulso” offer, pursuant to which the clients can choose between having handsets purchased at a discount, or discounted monthly fees for stand alone TIM chip alone purchases. This campaign caused 50% of our fourth quarter handset sales to be subsidy-free.
We continue to aim to offer a complete and exclusive handset portfolio, which also supports VAS usage.
Our overall gross profit margin increased, from 49.3% in the year ended December 31, 2009 to 49.5% in December 31, 2010. This resulted primarily from an increase in gross profit margin on services, despite negative gross margin for handset sales. Our overall gross profit margin increased, from 48.0% on a pro forma basis in the year ended December 31, 2009 to 49.5% in December 31, 2010.
Operating expenses
The following table shows our operating expenses, as well as the percentage change from year to year of each component, for the years ended December 31, 2010 and 2009:
Statement of Operations Data:
IFRS
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | 2010 - 2009 | |
| | | (in million of reais) | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | | |
Selling expenses | | | (4,494.6 | ) | | | (4,501.9 | ) | | | (4,436.8 | ) | | | -0.2 | % | | | 1.3 | % |
General and administrative expenses | | | (1,008.7 | ) | | | (1,133.8 | ) | | | (1,033.4 | ) | | | -11.0 | % | | | -2.4 | % |
Other operating expenses, net | | | (448.2 | ) | | | (460.8 | ) | | | (462.1 | ) | | | -2.7 | % | | | -3.0 | % |
Total operating expenses | | | (5,951.5 | ) | | | (6,096.5 | ) | | | (5,932.3 | ) | | | -2.4 | % | | | 0.3 | % |
| (1) | The 2009 Pro-forma information reflects the Intelig acquisition as if it had occurred on January 1st, 2009. See “Presentation of Financial Information”. |
Our total operating expenses increased 0.3% to R$5,951.5 million in the year ended December 31, 2010 from R$5,932.3 million in December 31, 2009, mainly due to the acquisition of Intelig.
Our total operating expenses decreased 2.4% from R$6,096.5 million on a pro forma basis in December 31, 2009. This result was mainly attributable to a decrease in G&A expenses.
Selling expenses
Selling expenses increased 1.3% registering R$4,494.6 million in the year ended December 31, 2010 from R$4,436.8 million in the year ended December 31, 2009, mainly due to the acquisition of Intelig,
Selling expenses decreased 0.2% from R$4,501.9 million on a pro forma basis in the year ended December 31, 2009.
The allowance for doubtful accounts decreased from R$421.9 million in the year ended December 31, 2009 to R$310.5 million in the year ended December 31, 2010, as a result of rational go-to-market approach based on naked SIM-Card sales (which are sales of stand-alone SIM cards) and better customer credit scoring.
General and administrative expenses
General and administrative expenses decreased 2.4% to R$1,008.7 million in the year ended December 31, 2010 from R$1,033.4 million in the year ended December 31, 2009.
General and administrative expenses decreased 11.0% from R$1,133.8 million on a pro forma basis in the year ended December 31, 2009. This decrease was primarily attributable to lower maintenance and personnel costs for the year ended December 31, 2010.
Other operating expenses, net
Other net operating expenses decreased 3.0% to R$448.2 million in the year ended December 31, 2010 from R$462.1 million in the year ended December 31, 2009. This decrease was primarily due to a decrease of expense contingency.
Net financial expense
TIM registered a net financial expense of R$245.5 million in the year ended December 31, 2010, from a negative result of R$245.1 million in the year ended December 31, 2009 stable in a year over year comparison.
Net financial expense decreased from a positive result of R$260 million in the year ended December 31, 2009 on a pro forma basis. This decrease reflected a positive impact of FX revenues obtained in 2009 result from a non-hedged debt of Intelig.
Income and social contribution taxes
Income and social contribution taxes are calculated based on the separate income of each subsidiary, adjusted by the additions and exclusions permitted in the year ended December 31, 2010 under tax law. We recorded income and social contribution tax of R$1,257.0 million in the year ended December 31, 2010, compared to R$(33.0) million in the year ended December 31, 2009. The positive impact is largely due related to the release in its entirety of the valuation allowance for tax loss carryforwards related to our subsidiary TIM Celular in the end of 2010, reflecting a better judgment for utilization of such tax credit following expected improvements on earnings.
Net income
With the impact of the ‘tax credit’, our net income in the year ended December 31, 2010 was R$2,211.7 million, representing an increase of R$1,410.5 million or 176.0% from a net income of R$801.2 million in the year ended December 31, 2009.
B. Liquidity and Capital Resources
As of December 31, 2010, our cash equivalents was approximately R$2.4 billion and our working capital amounts to approximately R$0.7 million. Our cash flow from operations during 2010 was R$2.9 billion. Based on our business plan, we believe that our cash, cash equivalents, forecasted cash flows from operations and eventual new loans will be sufficient to meet our cash needs for working capital and capital expenditures for the next year.
We expect to finance our capital expenditures and other liquidity requirements for 2011 and 2013 with operating revenue, renewals of maturing indebtedness and new financing to be obtained from financial institutions.
In 2010, the Company disbursed new loans of R$433 million from (i) BNDES, for an amount of R$354.6 million; and (ii) European Investment Bank, or EIB, for an amount of R$78.7 million equivalent to € 34 million.
New financing obtained in 2010 included a long term soft loan (a loan with a below-market rate of interest) obtained from BNDES for an amount of R$716.9 million of which R$200 million have been disbursed until December 31, 2010.
The terms of our long term debt contain cross-default clauses, restrictions on our ability to merge with another entity and restrictions on our ability to prematurely redeem or repay such debt. We are currently not, and do not expect to be, in breach of any material covenants of our borrowings that would be construed as events of default under their terms.
In 2011, the Company plans to complete its current financing needs through its current long term facilities and partial renewal of its short term debt.
Sources of Funds
Cash from operations
Our cash flows from operating activities were R$1,372.0 million in the year ended December 31, 2010 compared to R$654.3 million in the year ended December 31, 2009. On December 31, 2010, we had positive working capital of R$14.1 million compared to negative working capital of R$142.2 million at December 31, 2009.
Financial Contracts
We and our subsidiaries are parties to the following material financial contracts:
| | · | Credit Agreement, dated as of June 28, 2004, among TIM Nordeste (incorporated by TIM Celular), as borrower, and Banco do Nordeste do Brasil S.A., as lender, in the principal amount of R$20 million. The amount outstanding as of December 31, 2010, including accrued interest, was R$5 million. The agreement, which matures on June 28, 2012, bears interest in the rate of 10.0% per annum. In connection with this agreement, Banco Bradesco S.A. issued a letter of guarantee, subject to the payment of fees corresponding to 1% per annum of the principal amount. The guarantee agreement executed by TIM Celular and Banco Bradesco S.A. provides for the issuance of a R$30 million promissory note by TIM Celular with TIM Participações as the guarantor of such promissory note. |
| | · | Credit Agreement, dated as of April 29, 2005, among TIM Nordeste (incorporated by TIM Celular), as borrower, and Banco do Nordeste do Brasil S.A., as lender, in the principal amount of approximately R$85.3 million. The amount outstanding as of December 31, 2010, including accrued interest, was R$33 million. The agreement, which matures on April 29, 2013, and bears interest at a rate of 10.0% per annum. In connection with this agreement, Banco Bradesco S.A. issued a letter of guarantee, subject to the payment of fees corresponding to 1% per annum of the principal amount. The guarantee agreement executed by TIM Celular and Banco Bradesco S.A. provides for the issuance of a R$128.0 million promissory note by TIM Celular with TIM Participações as the guarantor of such promissory note. |
| | · | Credit Agreement, dated as of June 28, 2004, among TIM Nordeste (incorporated by TIM Celular), as borrower, and Banco do Nordeste do Brasil S.A., as lender, in the principal amount of R$99.9 million. The amount outstanding as of December 31, 2010, including accrued interest, was R$23 million. The agreement, which matures on June 28, 2012, bears interest in the rate of 10.0% per annum. In connection with this agreement, Banco Bradesco S.A. issued a letter of guarantee, subject to the payment of fees corresponding to 1% per annum of the principal amount. The guarantee agreement executed by TIM Celular and Banco Bradesco S.A. provides for the issuance of a R$149.8 million promissory note by TIM Celular with TIM Participações as the guarantor of such promissory note. |
| | · | Credit Agreement, dated as of January 28, 2008, among TIM Nordeste (incorporated by TIM Celular), as borrower, and Banco do Nordeste do Brasil S.A., as lender, in the principal amount of R$67.0 million. The amount outstanding as of December 31, 2010, including accrued interest, was R$57 million. The agreement, which matures on January 31, 2016, bears interest in the rate of 10.0% per annum. In connection with this agreement, Banco Votorantim S.A. issued a letter of guarantee, subject to the payment of fees corresponding to 0.575% per annum of the integral principal amount offered in the Credit Agreement. The guarantee agreement executed by TIM Celular and Banco Votorantim S.A. provides for the issuance of a R$87.1 million promissory note by TIM Celular. TIM Participações is not the guarantor in this promissory note. |
| | · | Credit Agreement, dated as of August 10, 2005, among BNDES, as lender, TIM Celular, as borrower, and TIM Brasil as guarantor, in the principal amount of R$1.252 million. The agreement, which matures on August 15, 2013, bears the average interest fixed rate of 4.2% plus the TJLP, which was 6% per annum on |
| | | December 31, 2010. On December 31, 2010, the outstanding amount under this credit agreement, including accrued interest, was R$583 million. |
| | · | Credit Agreement, dated as of October 14, 2005, among BNDES, as lender, TIM Celular, as borrower, and Itaú, as guarantor, in the principal amount of R$49.3 million. The agreement, which matures on October 17, 2011, bears interest at a fixed rate of 3% plus the TJLP, which was 6% per annum on December 31, 2010. On December 31, 2010, the outstanding amount under this credit agreement, including accrued interest, was R$11 million. In connection with this agreement, Itaú issued a letter of guarantee, subject to the payment of fees corresponding to 0.64% per annum of the principal amount. |
| | · | Credit Agreement, dated as of October 6, 2009, among BNDES, as lender, TIM Celular and TIM Nordeste (incorporated by TIM Celular), as borrowers, and TIM Participações as guarantor, in the principal amount of R$400 million. The agreement, which matures on October 15, 2012, bears interest at a fixed rate of 4.82% plus the TJLP, which was 6% per annum on December 31, 2010. On December 31, 2010, the outstanding amount under this credit agreement, including accrued interest, was R$407 million. |
| | · | Credit Agreement, dated as of November 19, 2008, among BNDES, as lender, TIM Celular, as borrower, and TIM Participações as guarantor, in the principal amount of R$592.9 million. The agreement, which matures on July 15, 2017, bears the average interest fixed rate of 2.17% plus the TJLP and the interest rate of 2.62% plus the IPCA which was 7.61% per annum on December 31, 2010. On December 31, 2010, the outstanding amount under this credit agreement, including accrued interest, was R$628 million. |
| | · | Credit Agreement, dated as of November 19, 2008, among BNDES, as lender, TIM Nordeste (incorporated by TIM Celular), as borrower, and TIM Participações as guarantor, in the principal amount of R$201. The agreement, which matures on July 15, 2017, bears the average interest at a fixed rate of 2.03% plus the TJLP and the interest rate of 2.62% plus IPCA which was 7.61% per annum on December 31, 2010. On December 31, 2010, the outstanding amount under this credit agreement, including accrued interest, was R$212 million. |
| | · | Credit Agreement, dated as of November 19, 2008 and amended on 29/06/2010, among BNDES, as lender, TIM Celular, as borrower, and TIM Participações as guarantor, in the principal amount of R$716.9 million, which R$200 million was already disbursed. The agreement, which matures on July 15, 2018 bears interest of i) fixed rate of 3,62% plus the TJLP and ii) fixed interest rate of 4.5% per annum. On December 31, 2010, the outstanding amount under this credit agreement, including accrued interest, was R$180 million. |
| | · | Credit Agreement, dated as of August 26, 2005 as amended in 2008 and 2009, among HSBC, ABN Amro, Bradesco, Banco do Brasil, Itaú, Santander, BNP Paribas, Unibanco, Banco Votorantim, Societé Generale, as lenders, TIM Celular, as borrower, and TIM Participações, as guarantor, in the principal amount of R$568.75 million. The Tranche A of R$300 million, which matured on August 5, 2010, bears interest at a variable rate of 1.8% above the CDI interest rate. The Tranche B, which matured on August 5, 2010, bears interest at a variable rate of 2.75% above the CDI interest rate. The total debt was fully repaid during 2010. Hence, on December 31, 2010, the outstanding amount under this credit agreement, including accrued interest, was R$0. |
| | · | Credit Agreement, dated as of April 18, 2008, among Santander as lender, and TIM Celular, as borrower, in the principal amount of R$150.0 million. The agreement, which matures on April, 2011, bears interest at a variable rate of 110% of the CDI interest rate. On December 31, 2010, the outstanding amount under this credit agreement, including accrued interest, was R$154 million. |
| | · | Credit Agreement, dated as of May 5, 2008, among Santander as lender, and TIM Celular, as borrower, in the principal amount of R$50.0 million. The agreement, which matures on April 25, 2011, bears interest at a variable rate of 109.6% of the CDI interest rate. On December 31, 2010, the outstanding amount under this credit agreement, including accrued interest, was R$51 million. |
| | · | Several facility agreements contracted under Resolution CMN n. 2.770 (Foreign currency denominated debt already swapped into local floating interest rate denominated currency). The outstanding amount as of |
| | | December 31, 201 was R$166 million, including accrued interest. The last tranche of which matures on June 2011, bear an average cost of 108% of the CDI. No guarantees were offered for these loans. |
| | · | Finance Contract, dated as of June 3, 2008, between European Investment Bank, as lender, TIM Celular S.A. and TIM Nordeste (incorporated by TIM Celular) S.A., as borrowers and TIM Participações as guarantor, in the total principal amount of 200 million euros fully disbursed, and fully swapped into local currency, between September 2009 and June 2010. The total outstanding amount as of December 31, 2010 is R$479 million, including accrued interest. The drawings, the last of which matures on June 2017, bear an average cost of 95.40% of the CDI after hedging. The Guarantee was provided by BBVA Milan Branch and BES Portugal for the principal amount of € 200 million. |
| | · | Facility Agreement, dated as of November 28, 2008, between BNP Paribas, as lender, and TIM Celular S.A., borrower and TIM Participações as guarantor, in the total principal amount of U.S. $ 143.6 million fully disbursed and swapped on January 15, 2009. The total outstanding amount as of December 31, 2010 is R$245 million, including accrued interest. The agreement matures on December 2017 and bears an average cost of 95.01% of the CDI after hedging. |
| | · | The amount of USD 68 million with Morgan Stanley Senior Fund registered at Intelig as a long term liability on December 31, 2009, was fully prepaid at January 4, 2010. Hence, on December 31, 2010, the outstanding amount under this credit agreement, including accrued interest, was zero. |
See notes 18 and 37 in our consolidated financial statements for a further description of such financing agreements.
Uses of Funds
Principal uses of funds during the three-year period ended December 31, 2010, were the Capital Expenditures, the payment of dividends to our shareholders and loan repayments.
Investments in Fixed Assets
Our capital expenditures in 2010 and 2009, related primarily to:
| | · | deployment of our third generation (3G) network |
| | · | implementation and maintenance of our GSM and TDMA networks; |
| | · | purchases of equipment relating to our migration to PCS operations; |
| | · | expanding network capacity, geographic coverage and digitalization; |
| | · | developing new operational systems to meet customers’ demands and information technology systems; and |
| | · | free handsets provided to corporate customers (comodato). |
The following table contains a breakdown of our investments in fixed assets for the years ended December 31, 2010 and 2009:
| | | | |
Capital Expenditures Categories | | | | | | |
| | | (in millions of reais) | |
Network | | | 1,701.0 | | | | 1,319.4 | |
Information technology | | | 607.1 | | | | 499.9 | |
Handsets provided to corporate customers (comodato) | | | 182.8 | | | | 351.9 | |
Handsets provided to consumer customers (subsidies) | | | 290.3 | | | | 483.4 | |
Other | | | 54.4 | | | | 47.6 | |
Total capital expenditures | | R$ | 2,835.7 | | | R$ | 2,702.1 | |
| (1) | The 2009 Pro-forma information reflects the Intelig acquisition as if it had occurred on January 1st, 2009. See “Presentation of Financial Information”. |
Our Board of Directors has approved our budget for capital expenditures from 2011 to 2013 in the total amount of R$8.5 billion and R$2.9 billion in 2011 for expenditures relating to our subsidiaries TIM Celular and TIM Nordeste. Most of the capital expenditures we budgeted for 2011 to 2013 relate to the expansion of the capacity and quality of our 3G technology and development of technology infrastructure. See “Item 4.A. Information on the Company—History and Development of the Company—Capital Expenditures.”
Dividends
Our Dividends are calculated in accordance with our bylaws and the Brazilian Corporations Law. Pursuant to our bylaws, we must distribute an amount equivalent to 25% of adjusted net income as minimum dividend each year ended December 31, provided that there are funds available for distribution.
For the purposes of the Brazilian Corporations Law and in accordance with our bylaws, “adjusted net income” is the amount equal to the net profit adjusted to reflect allocations to or from: (i) the legal reserve, and (ii) a contingency reserve for probable losses, if applicable.
Preferred shares are nonvoting but take priority on (i) capital reimbursement, at no premium; and (ii) payment of a minimum non-cumulative dividend of 6% p.a. on the total obtained from dividing the capital stock by the total number of shares issued by us.
Following the latest amendment to the Brazilian Corporations Law (Law No. 10,303/01), our bylaws have been amended by including the First Paragraph of Section 10, to give holders of preferred shares, the right to receive dividends corresponding to 3% (three percent) of shareholders equity every year, based on the balance sheet most recently approved, whenever the amount then resulting exceeds the dividend amount as calculated pursuant to the criteria, described in the preceding paragraph.
Our management proposed that the outstanding balance of the adjusted net profits, in the amount of R$204.1 million be fully distributed as dividends to our preferred shareholders.
The following table contains a breakdown of the dividends and interest on shareholders’ equity actually paid (net of income taxes) by us to our shareholders during the years ended December 31, 2010, 2009 and 2008:
Dividend Distribution (1) | | | |
| | | | | | | | | | |
| | | (in millions of reais) | |
Dividends | | | 201.2 | | | | R$168.1 | | | | R$207.6 | |
Interest on shareholders’ equity | | | - | | | | - | | | | - | |
Total distributions | | | 201.2 | | | | R$168.1 | | | | R$207.6 | |
On April 11, 2011 our shareholders approved the distribution of R$496.6 as dividends in accordance of the minimum required on Brazilian Law, with respect to our 2010 results. On April 27, 2010 our shareholders approved the distribution of R$204.1 million as dividends to our shareholders with respect to our 2009 results. On April 2, 2009 our shareholders approved the distribution of R$171.1 million as dividends to our shareholders with respect to our 2008 results.
The Company paid dividends or interest on shareholders’ equity for the years-ended December 31, 2007, 2008 and 2009 below the minimum levels requested by the Brazilian Corporations Law. As a result, the holders of our preferred shares are entitled, from 2010 on, to have the same voting rights as the holders of common shares. Pursuant to Brazilian law, the voting rights of the Preferred Shareholders automatically terminate as soon as the Minimum Dividend is paid to them. On June 10, 2011, the 2010 Dividend was paid to the Preferred Shareholders and consequently the Preferred Shareholders ceased to have voting rights in the Shares
C. Research and Development
We do not independently develop new telecommunications hardware and depend upon the manufacturers of telecommunications products for the development of new hardware. Accordingly, we do not expect to incur material research and development expenses in the future.
D. Trend Information
Customer Base and Market Share
In the year ended December 31, 2010, TIM’s subscriber base ended the year with 51.0 million clients, 24.1% from the year ended December 31, 2009. This represented a market share of 25.1%, while the service revenues share, our primary focus, reached 27% in the year ended December 31, 2010, compared to 26% in the year ended December 31, 2009. The pre-paid segment reached 43.5 million users in the year ended December 31, 201-, an increase of 25.7% from the year ended December 31, 2009. The number of post-paid users was 7.5 million in the year ended December 31, 2010, a 15.7% increase from the year ended December 31, 2009.
Although no assurances can be given as to the size of our subscriber base and market share in the future, we intend to focus on maintaining and improving our strong position in the mobile and fixed telecommunications market in Brazil in terms of number of subscribers and our high quality customer composition. To do so we intend to utilize sophisticated strategies and our customer segmentation approach, which we believe has contributed to an increased subscriber base and to retain our current customers and attract new customers. In 2011, we plan to improve our growth phase, driven by the increase in fixed-mobile substitution and the growth in data. We are aiming to become a leader in the telecommunications market by targeting customer satisfaction through improvement in service quality, expansion of capacity and integration with Intelig.
Change of Mix Between Postpaid and Prepaid Customers
With respect to the composition of our clients, our post-paid customers accounted for 14.6% of our total subscriber base in the year ended December 31, 2010, compared to 15.7% from a year ago, largely due to the increase of pre-paid base.
Average Revenue Per User (ARPU) Per Month
TIM’s ARPU registered R$23.7 in the year ended December 31, 2010, a decrease of -10.8% when compared to R$26.6 presented in the year ended December 31, 2009. The trend is partially attributed to an increase of 25.7% in the pre-paid segment and a lower incoming revenue contribution.
Revenues from value-added services had an important role in offsetting ARPU’s downward trend of the market as a whole. In 2010 we registered a value-added service revenue growth of 18.1% and accounted for 11.9% of total gross service revenue (compared to 10.6% registered in 2009). We anticipate that revenues from value-added services will continue to increase and become a larger component of our total service revenues, particularly after the launch of our 3G offers (such as our mobile broadband solution). As the provision of value added services has a relatively low marginal cost, we anticipate that value added services will contribute to the growth of our operating margins.
Competitive Environment
Brazil has a competitive scenario that is almost unique in the world. The competition in the country’s mobile telephony sector has become fiercer with the recent mergers and acquisitions. This market has been growing at significant rates compared not only to the telecom industry but also to other sectors of the economy. Brazil is one of the few markets with four nationwide competitors, each with a market share between 20% and 30%, which TIM believes, acts as the driver of growth and for the development of differentiated and quality services at fair and competitive prices.
In 2010, despite the competitive environment, our gross acquisition cost (per gross addition) was R$73 for the year ended December 31, 2010, compared to R$115 in the year ended December 31, 2009. The decrease of 36.6%
reflects our different approach regarding subsidy and commission. Our chip only strategy reduced sharply the expenses of handset subsidy and the restructuring of commission policy and the adoption of new alternative sales channels decreased commission expenses.
In addition to competition from other traditional mobile telecommunications service providers, the level of competition from fixed-line service providers has increased, and we expect will continue to increase, as fixed-line service providers attempt to attract subscribers away from mobile service based on price and package offers that bundle multiple applications such as voice services (mobile and fixed-line), broadband and other services. Technological changes in the telecommunications field, such as the development of third generation, and number portability are expected to introduce additional sources of competition. It is also expected that Anatel will auction licenses to provide mobile telecommunications services over additional bandwidth frequencies to accommodate these emerging technologies.
In 2010, despite the competitive environment, our gross acquisition cost (per gross addition) was R$54 for the year ended December 31, 2010, compared to R$85 in the year ended December 31, 2009. The decrease of 36.4% reflects the rational go to market approach, with a sharp drop in subsidies, commission and advertisement expenses per gross addition.
In addition to competition from other traditional mobile telecommunications service providers, the level of competition from fixed-line service providers has increased, and we expect will continue to increase, as fixed-line service providers attempt to attract subscribers away from mobile service based on price and package offers that bundle multiple applications such as voice services (mobile and fixed-line), broadband and other services. Technological changes in the telecommunications field, such as the development of third generation, and number portability are expected to introduce additional sources of competition. It is also expected that Anatel will auction licenses to provide mobile telecommunications services over additional bandwidth frequencies to accommodate these emerging technologies.
The year 2010 continued to be marked by both by the government’s programs to encourage digital inclusion and the maturing of convergent services, recently inaccessible to the majority of the population.
The Brazilian mobile telephony market is the fifth largest in the world and reached a penetration level of 104.6 telephone lines for every 100 inhabitants in 2010. This confirms that mobile telephony is the mean of communication with the widest presence in Brazilian homes and across all social classes, which we believe is a consequence of chip-only offers (offer of SIM cards without a handset).
The prepaid segment has the largest growth in 2010, reaching167.1 million accesses (+16.4% A/A), which represents 82.3% of total market. The postpaid segment reached the mark of 35.8 million lines, an 18.1% YoY expansion. The key growth drivers to both sectors were the favorable economic scenario in Brazil, with increased credit, better income distribution (with part of population migrating from the D and E class to C class), and competition in Brazil’s mobile telephony market.
According to data published by Teleco’s website, the fixed telephony sector showed a slight growth of 1.2% compared to last year, ending the period with 42 million lines, representing a penetration level of approximately 21.7 lines for each 100 households.
The sector also went through important mergers and acquisitions in 2010, especially the sale of Portugal Telecom’s stake in Brasilcel (Vivo’s parent company) to Telefónica. After several attempts, the Spanish company became the sole controller of Vivo and has already started the integration process with its fixed telephony arm (Telesp) in Brazil.
With the capital acquired from the sale of Brasilcel, Portugal Telecom has purchased a stake in the controlling group of Oi. The company has kept its presence in Brazil and has given the Brazilian company enough capital to expand its operations after a year of stagnation.
Other important M&A event was Embratel’s tender offer for NET’s nonvoting shares. Embratel managed to take control of more than 90% of NET’s total capital and also started the consolidation process between its telecom
companies (Claro, NET and Embratel).See “Item 3D. Key Information—Risk Factors” and “Item 4B. Information on the Company—Business Overview—Competition.”
Network Investment
In order to support the sector’s high growth rates, substantial investments are required in technology and infrastructure, both for expansion and for improving the quality of services provided. As a provider of a service that is fundamental for the company’s social and economic development, TIM reiterates its commitment to invest in and work for universal access to telecommunications.
We maintain our investments in expanding our GSM network, reaching coverage of 94% of the country’s urban population, serving around 2,800 cities. GSM coverage counts with 100% of GPRS and around 75% of EDGE. Our 3G services (launched in the second quarter of 2008) are already in the main cities in Brazil. We will, however, continue to invest in selectively expanding our coverage of the Brazilian population, focusing on the quality of coverage we provide in major metropolitan areas by increasing our coverage in buildings, tunnels and major roads and on increasing capacity across our network to ensure it remains capable of absorbing high call volume in high usage areas. GSM is viewed as good pathway to more advanced technologies, and we expect relatively limited further investment will be required to make our current network capable of supporting emerging technologies such as 3G, 3.5G and High Speed Downlink Packet Access, or HSDPA.
E. Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
F. Tabular Disclosure of Contractual Obligations
The following table shows our contractual obligations and commercial commitments as of December 31, 2010:
| | | Payments due by Period (in millions of reais) | |
| | | | | | | | | | | | | | | | |
Total debt (post hedge) | | | 3,378,355 | | | | 953,498 | | | | 1,200,854 | | | | 365,699 | | | | 858,304 | |
Operating leases(1) | | | 1,777,083 | | | | 329,412 | | | | 696,852 | | | | 750,819 | | | | - | |
Total(2) | | | 5,155,438 | | | | 1,282,910 | | | | 1,897,706 | | | | 1,116,518 | | | | 858,304 | |
| (1) | The information regarding payments due by period under our operating leases reflects future payments due that are non-cancelable without payment of a penalty. See note 42 to our Consolidated Financial Statements. |
| (2) | Other than as set forth herein, we have no capital lease obligations, unconditional purchase obligations, commercial commitments (i.e., lines of credit, standby letters of credit, standby repurchase obligations or other commercial commitments) or other long-term obligations. Interest is not included in long-term debt since subject to variable interest – see note 15 to our consolidated financial statements. |
In 2011, we expect to have approximately R$2.9 billion in capital expenditures relating to our subsidiaries. Most of the planned 2011 capital expenditures relate to extending TIM’s infrastructure capacity and coverage, ensuring high quality levels and supporting the market strategies and updating and developing TIM’s systems and technological platforms. See “Item 4.A. Information on the Company—History and Development of the Company—Capital Expenditures.”
Contingent Pension Liabilities
Until December 1999, we participated in a multi-employer defined benefit plan (the “Telebrás Pension Plan”) that covered the employees of the Telebrás System who retired before the Breakup as well as those who continued working for the operating companies after the Breakup. We are contingently liable, jointly and severally with the other New Holding Companies, for the unfunded obligations of the Telebrás Pension Plan with respect to all such employees who retired before January 30, 2000. In December 1999, we changed to a defined benefit plan (the “PBS Plan”) that covers only those former employees of Telebrás who continued to be employed by us after December
1999. We are also contingently liable for the unfunded obligations of the PBS Plan with respect to our employees participating in this plan. See note 38 to our consolidated financial statements.
In November 2002, we created a separate defined contribution plan (the “TIMPREV Pension Plan”). Migration to this plan was optional for employees linked to the PBS Plan. Migration to the TIMPREV Pension Plan extinguishes the migrating participant’s rights under the PBS Plan. We are also contingently liable for the unfounded obligations of the TIMPREV Pension Plan with respect to our employees participating in this plan. See note 24 to our consolidated financial statements.
G. Safe harbor
Not applicable.
A. Directors and Senior Management
Board of Directors
We are administered by a Board of Directors (Conselho de Administração) and a Board of Executive Officers (Diretoria), which are overseen by a Fiscal Committee (Conselho Fiscal). The Board of Directors is comprised of three to nine members, serving for a two year term each with the possibility of re-election.
Our directors’ duties and responsibilities are set forth by Brazilian law, our Estatutos Sociais (“by-laws”) and our Política de Divulgação de Informações (Disclosure Policy), as determined by CVM Instruction 358. All decisions taken by our Board of Directors are registered in the books of the Board of Directors’ meetings. The Board of Directors holds regular meetings once every quarter of the fiscal year and also holds special meetings whenever discretionarily called by the chairman, by two directors or by the Chief Executive Officer. The chairman of the Board of Directors may also invite to the Board of Directors’ meetings, at his discretion, any of our key employees, in order to discuss any relevant corporate matter. Our Board of Directors does not have an independent directors’ committee. In 2008, the Board of Directors has implemented two special advisory committees: the Compensation Committee and the Internal Control and Corporate Governance Committee, both composed by at least one independent director.
Management is required to comply with, and has agreed to comply with, the Manual of Securities Trade and Information Use and Disclosure Policy, the Code of Ethics, issued by the Company, “Regulamento para Observância dos Atos Anatel nº 68.276, de 31 de outubro de 2007, e nº 3.804, de 07 de julho de 2009”, and “Regulamento para a observância do Acordo de 28 de abril de 2010 celebrado com o Conselho Administrativo de Defesa Econômica (CADE)”.
The following are the current effective members of the Board of Directors and their respective titles, whose terms of office will be valid until the Annual Shareholders’ Meeting to be held in 2013:
| | | | | | |
Manoel Horácio Francisco da Silva | | Chairman | | July 16, 1945 | | April 11, 2011 |
Gabriele Galateri di Genola e Suniglia | | Director | | January 11, 1947 | | April 11, 2011 |
Luca Luciani | | Director | | November 2, 1967 | | April 11, 2011 |
Marco Patuano | | Director | | June 6, 1964 | | April 11, 2011 |
Stefano de Angelis | | Director | | August 22, 1967 | | April 11, 2011 |
Andrea Mangoni | | Director | | June 5, 1963 | | April 11, 2011 |
Maílson Ferreira da Nóbrega | | Director | | May 14, 1942 | | April 11, 2011 |
Adhemar Gabriel Bahadian | | Director | | October 22, 1940 | | April 11, 2011 |
Carmelo Furci | | Director | | March 12, 1953 | | April 11, 2011 |
In addition, it shall be recorded that Messrs. Francisco da Silva, Nóbrega, Bahadian, and Furci are the members of the Board of Directors qualified as independent directors according to Brazilian independence standards. They are
scheduled to be re-elected or replaced at the Annual Shareholders’ Meeting to be held in 2013. Set forth below are brief biographical descriptions of the members of the Board of Directors.
Manoel Horácio Francisco da Silva. Mr. Francisco da Silva has been the Chief Executive Officer of Banco Fator since 2002. Before his current position, he was the Chief Executive Officer of Telemar and also managed the area of paper and cellulose from Cia. Vale do Rio Doce. Mr. Francisco da Silva worked in the Group Ericsson do Brasil for 23 years, where he reached the position of Chief Executive Officer in many companies of the Group. He was also the Chief Executive Officer of Ficap, Chief Executive Officer of Sharp Equipamentos Eletrônicos. He also performed as the Superintendent Officer of the Companhia Siderúrgica Nacional, being responsible for the restructuring process of the Cia. Vale do Rio Doce. He has also performed as member of the Board of Directors of many companies, such as Sadia, Bahia Sul, Group Ericson, Docenave and Telemar. He was appointed in 1989 as the major financial professional of the year by the Instituto Brasileiro de Executivos de Finanças (IBEF) and earned 3 prizes in 2001. Mr. Francisco da Silva holds a degree in Business Administration from Pontifícia Universidade Católica (PUC) of São Paulo and also completed the Advanced Management Program in the Harvard Business School.
Gabriele Galateri di Genola. Mr. Galateri di Genola was appointed Chairman of Telecom Italia on December 3, 2007 and confirmed in the office on April 15, 2008 until April 11, 2011, when he was reappointed as member of the Board of Directors of Telecom Italia After earning his MBA at the Columbia University Business School, Mr. Galateri di Genola began his career in 1971 at the Headquarters of the Banco di Roma, where he started as Head of the Financial Analysis Office before being appointed to manage the International Loans Office. From 1974 to 1976 he worked as Financial Director of the Saint Gobain Group in Italy and in Paris. In 1977, he joined FIAT S.p.A.., where he moved from Head of North, Central and South American Operations at the International Finance Office to Head of International Finance and, ultimately, Director of Finance. Mr. Galateri di Genola became CEO of Ifil S.p.A.. in 1986. In 1993, he took on the positions of CEO and General Manager of IFI, which he retained until 2002. In June 2002, he was appointed CEO of FIAT S.p.A.. Between April 2003 and June 2007, Mr. Galateri di Genola was Chairman of Mediobanca S.p.A.. He is, Chairman of the Board of Directors of Tim Brasil Serviços e Participaçoes SA, a non-executive Board Member of TIM Participações S.A., Banca CRS S.p.A.., Banca CARIGE, Italmobiliare S.p.A.., Azimut-Benetti S.p.A.., Fiera di Genova SpA, Accademia Nazionale di Santa Cecilia-Foundation, European Institute of Oncology and Edenred SA, He is a member of the General Council and of the Executive Board of Confindustria. He is also Confindustria’s Chairman Representative for telecommunications and broadband development. Mr. Galateri has been awarded the Cavaliere del Lavoro Honour. He is the Chairman of the Board of the Italian Institute of Technology and Member of the International Advisory Board of the Columbia Business School. He is a member of the General Council and of the Executive Board of Assolombarda. Since April 8 2011 he is Chairman of Assicurazioni Generali.
Luca Luciani. Mr. Luciani holds a degree in Economics and Trade from Univ. LUISS, in Rome. He worked at Procter & Gamble, in Italy, from 1990 to 1994, acting in the area of financial analysis and strategic planning, until he was retained as consultant by Bain, Cuneo and Associates, in 1994, rendering services for clients such as ENEL, Olivetti and Telecom Italia (Business Division). In 1998, he joined ENEL as Group Controller until 1999. From 1999 to 2008, he worked at Telecom Italia in several positions: from 1999 to 2002 he was the Group Controller, in 2002 and 2003 he was the Chief Financial Officer of TIM (Telecom Italia Mobile Company, listed in the Italian and U.S. market), from 2004 to 2006 he was responsible for Marketing, Sales and Operations in the TIM Business Mobile Unit. In 2007 he became the General Manager of the TIM Mobile Services Unit of Telecom Italia. Presently, he is the Chief Executive Officer of TIM Celular.
Marco Patuano. Mr. Patuano holds a degree in Economics from Università Commerciale Luigi Bocconi. He began his carrer in SIP Central Management in May 1990. From 1990 to 2002 he worked in various departments at Administration, Finance and Control. He was promoted through the ranks at Financial Management between 1998 and 2002. In April 2003, he became CFO at Tim Brasil and Telecom Italia America Latina S.A., a Group subsidiary based in Brazil. Between 2004 and 2006, he served as General Manager at Telecom Italia Latam. In 2006, he moved to Telecom Argentina as Head of Fixed-Line Telephony. He served as General Manager, Operations for Telecom Argentina between May 2007 and July 2008. He was appointed a director at Telecom Italia Media and the Italtel group in September 2008. From August 2008 to November 2009 he was Telecom Italia’s Chief Financial Officer. In November 2009 he is appointed responsible for Domestic Market for Telecom Italia. He is also member of the
Board of Bocconi Foundation and Telecom Italia Foundation. He sits in the Board of Shared Service Center Srl and TLC Commercial Services srl. Since April 13 2011 he is Chief Executive Officer of Telecom Italia SpA.
Stefano de Angelis. Mr. De Angelis is currently responsible for Administration and Control in Telecom Italia SpA. He is also member of the Board of Directors of Matrix S.p.A.., Pathnet S.p.A.., Telecontact Center S.p.A.. and Telenergia S.r.l (Telecom Italia Group Companies). He was the Chief Financial and Investor Relations Officer of TIM Participações S.A. between 2006 and 2007. He has also served as Chief Administration, Finance and Control Officer of the TIM Companies in Brazil since July 2004 and then responsible for the Planning and Control Department at Telecom Italia, since 2008. Between 2002 and 2004, he was responsible for the planning and controlling operations of Telecom Italia Mobile S.p.A.. in Italy. Mr. De Angelis also worked in the Consodata Group Ltd, H.M.C. S.p.A.., Stet S.p.A.. and at Fiat Geva. S.p.A... Mr. De Angelis was a member of the Board of Directors of Stream S.p.A.. between April 2000 and June 2000, TV Internazionale S.p.A.. (“La 7”) between June 2001 and December 2002, MTV Italia S.r.1. between April 2002 and December 2002, Officer of TVI Montecarlo S.A.M. between April 2002 and November 2002, Chief Executive Officer of Globo Communication S.A.M. between April 2002 and November 2002, and Chief Executive Officer and Officer of Consodata Group Ltd between October 2002 and January 2003. Mr. De Angelis holds a degree in Economics and Business Administration from Università degli Studi di Rome and also a MBA from Scuola di Amministrazione Aziendale dell’ Università di Torino, in Italy.
Andrea Mangoni. Mr. Mangoni graduated from the University of Rome in 1988 with a thesis on valuation and private financing of investments in public infrastructures. Presently, he is Responsible for Administration, Finance and Control & International Development in Telecom Italia. Mr. Mangoni joined the Telecom Italia Group on July 1, 2009, as Chairman of Telecom Italia Sparkle (from July 2009 to July 2010) and as Director of International Business at Telecom Italia S.p.A.. From 1996 to March 2009 he worked in Acea, where he was appointed Chief Executive Officer in November 2003; from March 2003 to November 2003 he was General Manager of Acea; from June 2001 to February 2003 was Chief Financial Officer, responsible of strategies, finance, budget, economic planning and control, investor relations of Acea; in 2002 he was appointed common representative of the Joint Venture among Acea, Electrabel and Energia Italiana which brought to the acquisition of Interpower, the third generation company sold by Enel; from January 2000 to May 2001 he was Strategic Planning Director of Acea; from January 1998 to December 1999 he worked as manager of the Finance Department of Acea and he was responsible of strategic planning; from 1996 to 1997 he was President Assistant, responsible for the transformation process of Acea from municipal company into share capital company. Mr. Mangoni worked for InterAmerican Development Bank (IDB).
Maílson Ferreira da Nóbrega. Mr. Nóbrega has been a member of our Board of Directors since April 2007. He holds a degree in Economics from Centro Universitário de Brasília (CEUB), and held the position of Brazil’s Minister of Finance from 1988 to 1990, after building an extensive career at Banco do Brasil and in the public sector, in which the following positions stand out: Chief Economist and Chief of Project Analysis Department at Banco do Brasil; Coordination Chief of Economic Affairs of the Ministry of Industry and Commerce, and Secretary General of the Ministry of Finance. He performed as the Deputy Managing Director of the European Brazilian Bank - EUROBRAZ, in London. As a minister, he became a member of the Board of the International Monetary Fund and the World Bank. Mr. Nóbrega is currently a member of the Board of Directors of a number of companies in Brazil and abroad. Mr. Nóbrega was also a member of our Fiscal Committee in 2004 and in 2005. He wrote three books and is now a columnist of the weekly Veja Magazine.
Adhemar Gabriel Bahadian. Mr. Bahadian holds a degree in Law from the Pontifícia Universidade Católica do Rio de Janeiro (PUC-RJ) and a master’s degree from Instituto Rio Branco. Mr. Bahadian was a Brazilian Ambassador in Rome from 2006 to 2009 and a Deputy-Chairman of the trade negotiations related to the Free Trade Area of Americas (FTAA) from 2003 to 2005.
Carmelo Furci. Mr. Furci is currently partner of Furci Consulting LTDA., focused on doing business in Brazil. In 2010, he became the Chief Executive Officer of the Ongoing Group, responsible for publishing economic diaries. He was appointed to the Board of Directors of TIM Participações S.A. on August 6th, 2008 and as Chairman of TIM Brasil Serviços e Participações S.A.. He was appointed as Vice President of Telecom Italia Group in Latin America, on June 14th, 2008. After earning his first degree in 1978, he worked as a consultant in Vector - Center for Social and Economic Studies in Amsterdam and Santiago, Chile. In 1982, he earned his Doctorate of Philosophy in
Economics and Government at the London School of Economics (LSE), part of London University. After three years working as a NATO Senior Fellow in Political Science, he spent the years of 1983 and 1984 at the London School of Economics (LSE), where he became an Honorary Fellow in Latin American Studies. In 1984, he taught international relations at American University of Rome (AUR). Mr. Furci worked at Enimont from 1985 to 1989 as Supervisor of International Relations. In the following year he joined the World Bank, as head of the department of Foreign Affairs for Europe and the Vatican State. Within 1994 and 1997, he worked as Manager of Strategies for International Affairs. Since he joined the Telecom Italia Group in 1998, he held several positions, starting as Chairman of the Board of Directors and Chief Executive Officer of Telecom Italia do Brasil, and head of Economic and Public Affairs of Telecom Italia Latin America. After returning to Italy, he joined the Division of Financial Management and Control in 2002, where he became responsible for relations with international financial organizations, to which position he was reelected in 2006. From December 2007 to May 2008, he was appointed as Coordinator of the Director Committee for Telefónica Group relations. Mr. Furci held the positions of director of Telecom Italia Group companies, namely: Solpart, Brazil Telecom, ETECSA Cuba, Entel Bolivia and Entel Chile. He was also the Chairman of Tele Nordeste Celular and Tele Celular Centro Sul in Brazil. He is a member of the OECD task force in China, and wrote several books about Latin America.
We do not have contracts with our directors providing benefits upon termination of their appointments.
Board of Executive Officers
As approved in the Annual and Extraordinary Shareholders’ Meeting held on April 27, 2010, our Board of Executive Officers is comprised of at least two and no more than nine members, who may or may not be shareholders. The title of the members of our Board of Executive Officers shall be as follows: (i) Chief Executive Officer, (ii) Corporative Support Officer, (iii) Chief Financial Officer, accumulating with the function of Investor Relations Officer,(iv) Purchasing & Supply Chain Officer, (v) Chief Commercial Officer, (vi) Chief Marketing Officer, (vii) Regulatory Affairs Officer, (viii) Wholesale Officer . Each member of our Board of Executive Officers, who serve two-year terms of office (with re-election permitted) may be elected or dismissed by our Board of Directors at any time and with no cause.
The following are the current members of the Board of Executive Officers and their respective titles, whose terms of office will remain valid until the first Board of Directors’ Meeting to be held after the Annual Shareholders’ Meeting of 2012:
| | | | | | |
Luca Luciani | | Chief Executive Officer | | November 2, 1967 | | May 3, 2010 |
Claudio Zezza | | Chief Financial Officer and Investors Relations Officer | | May 22, 1963 | | May 3, 2010 |
Daniel Junqueira Pinto Hermeto | | Purchase & Supply Chain Officer | | April 27, 1971 | | May 3, 2010 |
Luca Luciani | | Corporative Support Officer | | November 2, 1967 | | May 3, 2010 |
Lorenzo Federico Zanotti Lindner | | Chief Commercial Officer | | August 10, 1973 | | May 3, 2010 |
Rogerio Takayanagi | | Chief Marketing Officer | | October 5, 1974 | | May 3, 2010 |
Mario Girasole | | Regulatory Affairs Officer | | June 8, 1968 | | December 13, 2010 |
Antonino Ruggiero | | Wholesale Officer | | November 29, 1965 | | December 13, 2010 |
Set forth below are brief biographical descriptions of our executive officers.
Luca Luciani. Please find above the brief biographical description of Mr. Luciani.
Claudio Zezza. Mr. Zezza is an Italian citizen and holds a degree in Economics and Trade from the University of Rome, with specialization in Finance, Financial Statements and Economics. Currently, Mr. Zezza is the Chief Financial and Investor Relations Officer of the Company. Mr. Zezza joined Telecom Italia in 1990. In 1998, he began working in the area of International Businesses of TIM in Italy and, in 2000, he became responsible for the International Operational Management. Four years later, he became responsible for the Planning and Control Department. Mr. Zezza has also performed in the area of International Business Performance. His last position in
Italy, before coming to Brazil to become responsible for the Financial Office, was being responsible for the International Control in Administration, Finance and Control.
Daniel Junqueira Pinto Hermeto. Mr. Hermeto holds a degree in Electrical Engineering from the Escola Federal de Engenharia de Itajubá (1994), attended a post-graduate program in Business Administration at the Fundação Getulio Vargas – São Paulo (2002) and also holds a MBA in Executive Management from the Fundação Instituto de Administração – São Paulo (2007). He began his career in 1995 as a Product and Sales Engineer at Siemens - São Paulo. In 1997, Mr. Hermeto was promoted to the role of Senior Engineer, performing his duties in Munich. From 1998 to 2008, he worked for Motorola, where he worked as Manager of Purchasing and Senior Purchaser (1998-2002), performing his duties in the City of Jaguariúna, State of São Paulo, Senior Manager of MP&L (2003-2004), performing his duties in Mexico, Chief Officer of Manufacturing Operations (2005) and Chief Officer of Purchasing, Planning and Logistics (2006-2008), performing the duties of the last two positions in the City of Jaguariúna, State of São Paulo. Between February, 2008 and November, 2009, Mr. Hermeto worked as the Chief Officer of Purchasing and Logistics, in Claro, reporting directly to the Chief Executive Officer, and was responsible for the areas of Purchasing, Sourcing, Logistics and Inventory Management throughout the country, performing his duties in the City and State of São Paulo.
Lorenzo Federico Zanotti Lindner. Mr. Lindner holds a degree in Economics from the Universidade do Estado do Rio de Janeiro (UERJ) and a Master degree in Administration from the Instituto Coppead de Administração da Universidade Federal do Rio de Janeiro (Coppead-UFRJ). Mr. Lindner began his career in 1999 as a consultant in Booz-Allen & Hamilton. Mr. Lindner joined TIM in 2002, where he worked until 2008, and was responsible for several offices, including Budgeting & Control, Commercial Planning and CRM (Marketing). In the middle of 2008, Mr. Lindner joined the consultancy Bain & Company, where he worked until the beginning of 2009, when he returned to TIM as the Strategy & Business Monitoring Officer.
Rogerio Takayanagi. Mr. Takayanagi holds a degree in Electrical Engineering from the Escola Politécnica da Universidade de São Paulo (USP), is a specialist in Business Administration by the Fundação Getulio Vargas de São Paulo (FGV-SP) and has a broad experience in the telecommunications industry, where he has worked for twelve years on projects in Europe, Asia, Middle East, along with South America. Mr. Takayanagi worked for seven years for the consultancy Value Partners and for five years for Promon Telecom, managing strategic projects of mobile and fixed telecom, in the regulatory, public and technological areas.
Mario Girasole. Mr. Girasole is an Italian citizen, with Laurea Magistralis in Economics, University LUISS (Rome). Has an L.L.M. in International Business Law (London), post graduate in Competition Policy, in International Commerce and Modern Economic History, and executive education at London Business School (Finance) and Harvard (School of Government). He joined TIM in 1997, for the regulatory and pricing area, in Rome. Previously, he was responsible for economic analysis in antitrust in law firms. From 2000 until 2003, he headed, in Brussels, the TIM group relations with the institutions of the European Union, and was appointed to the position of Deputy-Chairman of the European Mobile Sector (GSM Europe). Since 2004 in Brazil, he became Chief of Public and Economic Affairs at Telecom Italia America Latina. During this period, he worked also as Director of Entel Bolivia and Alternate Director of TIM Participações S.A. Mr. Girasole is the Regulatory Affairs Officer of TIM Participações S.A., since January 2009, and member of Board of Directors and of Officers of national and international entities, including Febratel, Accel / Telebrasil, GSM Latin America, Department of Infrastructure and the House of FIESP Italo-Brazilian Trade.
Antonino Ruggiero. Mr. Ruggiero is an Italian citizen, graduated at the Instituto Tecnico Industriale Electronic Napoli (Italy). Worked in Technical Support Engineer of Ericsson (Mobile Network Area) and BT Italia (Long Distance Operator Area). From 1994 to 1997, he worked as Manager of Network Operations at Vodafone. From 1997 to 2000, he became Chief Technology Officer of Entel PCS, in Chile. From 2000 to 2005, he became Chief Technology Officer of Ária Ilethisim, in Turkey. From 2006 to 2008, he worked as Chief Technology Officer at TIM Celular S.A.. Since 2009, he holds the position of Wholesale Officer of TIM Celular S.A. and TIM Participações S.A. and, in 2010, he was elected the Chief Executive Officer of Intelig Telecomunicações Ltda.
Fiscal Committee
The Fiscal Committee’s composition for 2011 consisted of three members, two of which were elected by the majority common shareholders and one by the minority preferred shareholders.
The following are the current members of our Fiscal Committee:
| | | | | | |
| Alberto Emmanuel Carvalho Whitaker | | October 10, 1940 | | April 11, 2011 | | 1 year |
Oswaldo Orsolin (*) | | May 30, 1943 | | April 11, 2011 | | 1 year |
Carlos Alberto Caser | | December 8, 1960 | | April 11, 2011 | | 1 year |
Samuel de Paula Matos (*) | | March 22, 1948 | | April 11, 2011 | | 1 year |
Jorge Michel Lepeltier (*) | | September 29, 1947 | | April 11, 2011 | | 1 year |
| (*) | Audit Committee financial experts. |
Under Brazilian corporate law, the Fiscal Committee’s general duties and responsibilities include monitoring the actions of management and verifying its compliance with legal duties and appropriate statutes; providing opinions regarding management’s annual report, business plans and budgets; and performing reviews of, and opinions regarding our financial statements. All members serve independently from the company in their capacities on the Fiscal Committee.
Since our April 23, 2004 shareholders’ meeting, we have elected members of the Fiscal Committee who are independent from the Company and its affiliates. At a shareholders’ meeting held on May 6, 2004, we adopted internal regulations of our Fiscal Committee in order for it to serve also as an alternative structure to an Audit Committee in accordance with Rule 10A-3 under Section 301 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley. Such internal regulations were updated on the Shareholders’ Meeting held on March 16, 2006 and later at the Fiscal Committee’ Meeting held on June 24, 2009. See “Item 16D. Exemptions from the Listing Standards for Audit Committees.”
B. Compensation
At the year ended on December 31, 2010, we approved the aggregate amount of approximately R$4.3 million as compensation to our directors and executive officers. The officers and directors did not receive any benefit not included in the compensation referred to in this Annual Report. Accordingly, we did not set aside or accrue any amounts to provide pension, retirement or similar benefits to our officers and directors during 2010. Our executive officers and other managers of the company are eligible to receive an incentive (MBO or “Management by Objectives”) bonus. The general criteria for the MBO bonus are approved by our Board of Directors and provide that eligible executive officers and other managers may receive a multiple of their base salary if they achieve certain pre-established targets.
At the year ended on December 31, 2010, each member of our Board of Directors received R$168,000 and each member of our Fiscal Committee received an annual compensation of R$150,000, proportionally paid according to each member’s acquisition period.
We are not required under Brazilian law to disclose, and have not disclosed, the compensation of our officers on an individual basis. However, we are required to disclose the maximum, medium and minimum amounts paid to the members of each corporate body.
C. Board practices
See “Item 6A. Directors, Senior Management and Employees—Directors and Senior Management” and “Item 6B. Directors, Senior Management and Employees—Compensation.”
D. Our Employees
On December 31, 2010, we had 10,138 full-time employees. The following tables show a breakdown of our employees as of December 31, 2010, 2009 and 2008.
| | | | |
| | | | | | | | | | |
Total number of employees | | | 10,138 | | | | 9,811 | | | | 10,296 | |
Number of employees by category of activity | | | | | | | | | | | | |
Network | | | 980 | | | | 1,011 | | | | 771 | |
Sales and marketing | | | 3,020 | | | | 2,888 | | | | 3,420 | |
Information technology | | | 447 | | | | 459 | | | | 449 | |
Customer care | | | 4,703 | | | | 4,320 | | | | 4,589 | |
Support and other | | | 988 | | | | 1,133 | | | | 1,067 | |
(*) Includes 580 new employees from the merger with Intelig.
All employees are represented by state labor unions associated with the Federação Nacional dos Trabalhadores em Telecomunicações – Fenattel and the Federação Interestadual dos Trabalhadores em Telecomunicações – Fittel or the Sindicato dos Engenheiros do Estado do Paraná e Nordeste. We negotiate a new collective labor agreement every year with the local unions. The collective agreements currently in force expire in 2011. Management considers our relations with our work force to be satisfactory. We have not experienced a work stoppage that had a material effect on our operations.
Employee Benefit Plans
Our employees at the time of the Breakup of Telebrás had the right to maintain their rights and benefits in the Telebrás Pension Plan, managed by Fundação Telebrás de Seguridade Social – Sistel (“Sistel”), a multi-employer defined benefit plan that supplements government-provided retirement benefits. We make monthly contributions to the Telebrás Pension Plan in amounts equal to 13.5% of the salary of each employee covered by the defined benefit plans administered by Sistel. Each employee member also made a monthly contribution to Sistel based on age and salary. Members of the Telebrás Pension Plan qualified for full pension benefits after reaching age 57 provided they had been members of the Telebrás Pension Plan for at least ten uninterrupted years and have been affiliated with the social security system for at least 35 years. The Telebrás Pension Plan operated independently from us and their assets and liabilities were fully segregated from the sponsor’s, and operate with independent management; however, we were contingently liable for all of the unfunded obligations of the plan. Employees hired after the Privatization did not become members of the Telebrás Pension Plan, and we did not contribute to any defined benefit pension fund on behalf of such employees. See note 33 to our consolidated financial statements.
In January 2000, TIM and the other companies that formerly belonged to the Telebrás System agreed to break the existing solidarity basis of the Sistel Pension Plans, resulting in the creation of a subdivision of the original plan, covering the Telebrás System as a whole. These new private pension plans have retained the same terms and conditions of the Telebrás Pension Plan. The division served to allocate liability among the companies that formerly belonged to the Telebrás system according to each company’s contributions in respect of its own employees (currently PBS-A, comprised of retirees and pensionists). Joint liability among the Telebrás Pension Plan sponsors will continue with respect to retired employees who will necessarily remain members of the Telebrás Pension Plan. See note 38 to the consolidated financial statements.
During 2002, TIM created a new defined contribution pension plan (“TIMPREV”), which allowed employees to migrate from the former pension plan, which had its solidarity basis eliminated in 2000. TIMPREV was approved by the Secretary of Complementary Pension on November 13, 2002 in Notification 1,917 CGAJ/SPC. TIMPREV sets forth new guidelines for the granting and maintenance of benefits and outlines new rights and obligations for Sistel, the plan administrator; sponsors; participants and their respective beneficiaries.
Migration from the PBS Plan to TIMPREV is optional. In order to encourage migration to TIMPREV, we offered bonuses to those employees migrating before January 29, 2003. As of December 31, 2004, more than 90%
of the participants in our private plan had migrated to TIMPREV. Upon electing to migrate to TIMPREV, a participant extinguishes all rights to benefits under the PBS Plan.
During 2008, the Company made its best effort to encourage migration of the remaining participants of the defined benefit plans to TIMPREV. Even though employees agreed with the migration proposed, legal matters did not allow this change at that time. The situation was solved in 2009 and a new cycle of migration encouragement for TIMPREV was offered. On this occasion more participants migrated to TIMPREV plans, one of the plans (PBT) was closed.
As more employees participate in TIMPREV, we anticipate that the sponsor’s risk to eventual actuarial deficit will decrease, consistent with the characteristics of typical defined contribution plans. Under the rules of defined contribution plans, the sponsor normally contributes 100% of the basic contribution of the participant. In accordance with the terms and conditions of the approved rules, the administrator of TIMPREV will ensure the benefits listed below:
| | · | a regular retirement pension; |
| | · | an anticipated retirement pension; |
| | · | a deferred proportional benefit; and |
However, the administrator will not assume responsibility for granting any other benefit, even if social security officially grants it to its beneficiaries.
In accordance with Brazilian law, our employees also receive payments based on our financial performance. The amount of the payment is determined by negotiation between us and the unions representing our employees.
On January 31, 2006, the Board of Directors of the Company approved a proposal of migration of pension plans sponsored by the Company, TIM Sul, TIM Participações and TIM Nordeste Telecomunicações at Sistel to a multi-employer plan administered by HSBC Pension Fund. Such migration was approved by Secretary of Complementary Pension during the first quarter of 2007. Pursuant to this authorization, the HSBC began to administrate TIM´s Pension Plan in April 2007.
Defined Contribution Plan
On August 7, 2006, TIM Participações' Board of Directors approved the adoption of a supplementary defined contribution plan managed by Itaú Vida e Previdência S.A. for the Company and its subsidiaries. All employees not yet entitled to pension plans sponsored by the Company and its subsidiaries are eligible to this supplementary defined contribution plan.
Due to the incorporation of Intelig by TIM in 2010, the pension plan of this company was taken over by TIM. The Intelig pension plan is a closed defined contribution plan, managed by HSBC Pension Fund and it’s not offered to our employees anymore, since we have started a process with the Secretary of Complementary Pension to change the plan rules, in order to close the plan to new members. For new Intelig employees or those transferred from Intelig to TIM, we now offer the supplementary defined contribution plan managed by Itaú Vida e Previdência S.A, since Intelig also became a sponsor of this plan.
E. Share Ownership
The directors and members of our administrative, supervisory and management bodies do not hold, in the aggregate, more than 1% of either the common shares or preferred shares outstanding. As of December 31, 2010, our directors and executive officers, owned, in the aggregate, no common shares and 100 preferred shares.
A. Major Shareholders
Of our two classes of capital stock outstanding, only our common shares have full voting rights. The following table sets forth ownership information with respect to all shareholders that, to our knowledge, own 5% of the common shares or more as of December 31, 2010. The common shares held by TIM Brasil have the same voting rights as the other common shares.
| | | | | Percentage of Outstanding Common Shares | |
TIM Brasil Serviços e Participações S.A. | | | 650,537,118 | | | | 77.14 | % |
JVCO Participações Ltda. | | | 43,356,672 | | | | 5.14 | % |
All our officers and directors as a group * | | | 0 | % | | | 0 | % |
* Represents less than 1%.
TIM Brasil Serviços e Participações S.A. is a Brazilian subsidiary of a group controlled by Telecom Italia. See “Item 4C. Information on the Company—Organizational Structure.”
As of December 31, 2010, there were 349,964,441 preferred shares represented by ADSs. As of such date, the number of preferred shares represented by ADSs represented 21.44 of the total number of preferred shares outstanding and 14.1 of our total capital.
B. Related Party Transactions
As of December 31, 2010, we did not owe to our affiliates any amounts arising out of outstanding inter-company loans. We had inter-company receivables and payables in amounts of R$17.974 million and R$44,548 million, respectively on December 31, 2010. See note 36 to our consolidated financial statements.
Guarantees of Obligations of our Subsidiaries
We are a guarantor of a promissory note issued by TIM Celular in the amount of R$7.5 million as of December, 2010. This promissory note was issued pursuant to a guarantee agreement between Banco Bradesco S.A. and TIM Celular, in which Banco Bradesco S.A. issued a letter of guarantee for the Credit Agreement, dated as of June 28, 2004, between TIM Celular, as borrower, and Banco do Nordeste do Brasil S.A., as lender, in the principal amount of R$20 million . See “Item 5B. Operating and Financial Review and Prospects—Liquidity and Capital Resources— Sources of Funds—Financial Contracts.”
We are a guarantor of a promissory note issued by TIM Celular in the amount of R$37.5 million as of December 31, 2010. This promissory note was issued pursuant to a guarantee agreement between Banco Bradesco S.A. and TIM Celular, in which Banco Bradesco S.A. issued a letter of guarantee for the Credit Agreement, dated as of June 28, 2004, between TIM Celular, as borrower, and Banco do Nordeste do Brasil S.A., as lender, in the principal amount of R$99.9 million . See “Item 5B. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Sources of Funds—Financial Contracts.”
We are a guarantor of a promissory note issued by TIM Celular in the amount of R$49.8 million as of December 31, 2010. This promissory note was issued pursuant to a guarantee agreement between Banco Bradesco S.A. and TIM Celular, in which Banco Bradesco S.A. issued a letter of guarantee for the Credit Agreement, dated as of April 27, 2005, between TIM Celular, as borrower, and Banco do Nordeste do Brasil S.A., as lender, in the principal amount of R$85 million. See “Item 5B. Operating and Financial Review and Prospects—Liquidity and Capital Resources— Sources of Funds—Financial Contracts.”
We are the guarantor of a promissory note issued by TIM Celular, as borrower, in the amount of R$48.9 million as of December 31, 20. This promissory note was issued pursuant to a guarantee agreement between Unibanco and TIM Celular, in which Unibanco issued a letter of guarantee for the Credit Agreement dated October 14, 2005, between TIM Celular, as borrower, and BNDES, as lender, in the principal amount of R$35.9 million. See “Item 5B.
Operating and Financial Review and Prospects—Liquidity and Capital Resources— Sources of Funds—Financial Contracts.”
We are the guarantor of a promissory note issued by TIM Celular in the amount of R$73.9 million as of December 31, 2010. This promissory note was issued pursuant to a guarantee agreement between Banco Votorantim S.A. and TIM Celular, in which Banco Votorantim S.A. issued a letter of guarantee for the Credit Agreement, dated as of February 14, 2008, between TIM Celular, as borrower, and Banco do Nordeste do Brasil S.A., as lender, in the principal amount of R$67 million. See “Item 5B. Operating and Financial Review and Prospects—Liquidity and Capital Resources— Sources of Funds—Financial Contracts.”
We are guarantor for TIM Celular ´s Finance Contract with European Investment Bank in the principal amount of € 200 million as of December 31, 2010. BBVA Milan Branch and BES Portugal, issued, respectively, a guarantee in the principal amount of € 147 million and € 73 million, for the Finance Contract, dated as of June 3, 2008, between TIM Celular, as borrower, and European Investment Bank, as lender.
We are guarantor in favor of BNDES, in the amounts of: R$1,867.4 million under the Credit Agreement dated as of August 10, 2005, of TIM Celular; under the Credit Agreement dated as of November 19, 2008, of TIM Celular, under the Credit Agreement dated as of October 6, 2008 of TIM Celular and under the Credit Agreement dated as of October 6, 2008, of TIM Nordeste (incorporated by TIM Celular). See “Item 5B. Operating and Financial Review and Prospects—Liquidity and Capital Resources— Financial Contracts.”
Agreement between Telecom Italia S.p.A.. and TIM Participações
This agreement, originally signed in May 3, 2007, was extended for an additional 12 months beginning on January, 2010 pursuant to the approval by TIM Participações’ shareholders in a meeting held on April 27th, 2010. The purpose of the agreement is to enable us to benefit from Telecom Italia’s internationally recognized expertise, built throughout years of operation in more mature and developed markets. The cooperation and support activities to be performed by the parties will be focused in adding value to the operations of TIM Participações through:
| | · | Benefiting from Telecom Italia’s experience and industrial capacity as one of the major players in the European market; |
| | · | The systems/services/processes/best practices that were largely used in the Italian market and may be easily customized for the Brazilian market through limited investments and mitigated implementation risks; or |
| | · | An increase in efficacy and efficiency by adopting in-house solutions that have been widely tested and used. |
The second extended term of the agreement provides for a total price cap of € 8.9 million. The price cap represents the maximum consideration to be paid by TIM Participações operating companies for all the services and support rendered by Telecom Italia during 2010. Under the agreement’s first extended term, the price cap amounted to €10.5 million. Under the original agreement the price cap amounted to €14.5 million and for the year ending December 31, 2007 we made a provision of €13.6 million (approximately R$35 million). As customary, in transactions of this nature, we hired a specialized and independent firm (Accenture do Brasil) to perform an economic appraisal of the agreement. The report prepared by Accenture do Brasil and presented to our Board of Directors concluded that the amounts provided for in the agreement are more favorable to us than market prices.
C. Interests of experts and counsel.
Not applicable.
A. Consolidated Statements and Other Financial Information
See “Item 17. Financial Statements.”
Legal Proceedings
We are subject to various claims, including regulatory, legal and labor proceedings covering a wide range of matters that arise in the ordinary course of business. We adopted a policy of analyzing each such proceeding and making a judgment as to whether a loss is probable, possible or remote. We make accruals for legal proceedings that we are party to when we determine that losses are probable and can be reasonably estimated. Our judgment is always based on the opinion of our legal advisers. Accrual balances are adjusted to account for changes in circumstances for ongoing matters and the establishment of additional accruals for new matters. While we believe that the current level of accruals is adequate, changes in the future could impact these determinations.
Anatel Administrative Proceedings
Under the terms of the Authorization for Mobile Personal Service (SMP) Exploitation, TIM Celular and TIM Nordeste implemented mobile personal telecommunications cover for the assigned area. Under such Terms of Authorization, TIM Celular and TIM Nordeste are required to operate in accordance with the quality standards established by Anatel. If they fail to meet the minimum quality standards required, TIM Celular and TIM Nordeste are subject to PADO (Obligation Non-Compliance Determination Procedures) and applicable penalties. Anatel has brought administrative proceedings against TIM Celular and TIM Nordeste for (i) noncompliance with certain quality service indicators; and (ii) default of certain other obligations assumed under the Terms of Authorization and pertinent regulations. In their defense before Anatel, TIM Celular and TIM Nordeste attributed the lack of compliance to items beyond their control and not related to their activities and actions. We cannot predict the outcome of these proceedings at this time, but have accrued the amount in our balance sheet as a provision for all those cases in which we estimate our loss to be probable.
Civil Litigation
Litigation Related to the Conversion of Our Concessions into Authorizations
In January 2003, a type of class action (“ação popular”) was brought by an individual against Anatel and all the companies controlled by Telecom Italia in Brazil, including us. The claim sought to suspend the effects of Resolução 318, of September 27, 2002, and other acts by Anatel, including Authorizations PVCP/SPV Nos. 001/2002 to 011/2002, published on December 12, 2002, which authorized us to migrate from the SMC regime to the PCS regime.
The action specifically challenged the omission of provisions regulating the return of the assets (“bens reversíveis”) used by us in connection with the provision of telecommunication services by the time of the expiration of the authorizations. By reason of such omission, argues the claimant, the Brazilian Federal Government would suffer irreparable damage and, therefore, Anatel acts allowing the migration from SMC to PCS should be declared null and void.
We have challenged this action vigorously, and after some preliminary decisions by lower courts we have obtained a unanimous decision from the Regional Federal Court of Appeals (“Tribunal Regional Federal”) permitting the migration from SMC to PCS, reserving discussion about the return of the assets to the Brazilian Federal Government for a later date. The judge extinguished the action. The decision was subject to compulsory appeal at a superior court. On October 19, 2007, the court of appeals ordered the return of the case to the lower courts to allow other interested parties to take part in the litigation. Despite the call notice to summon other interested party, there was no admittance in this lawsuit. On July 2, 2009, the judge extinguished the action again, but this decision was subject of another compulsory appeal at a superior court. We are waiting for the second instance’s court decision.
We believe that the migration from the SMC regime to the PCS regime, and the related acts by Anatel, will not be suspended or modified. We expect proceedings relating to the return (“reversão”) to the federal government of our assets used in connection with the provision of telecommunication services to continue. In 2003, Anatel and the federal government informed the Court that Authorizations PVCP/SVP nos. 001/2002 to 011/2002 are valid and should not be voided by the Court.
We entered into amendments to our authorizations to provide for the contingency that in the event of the termination of our authorizations, the assets essential to our provision of services would be returned to the federal government.
Litigation Related to the Use of the Goodwill Arising Out of the Breakup of Telebrás
On April 4, 2002, a Congressman filed a lawsuit in federal court in Brasília, Federal District, against a number of governmental telecommunication entities and the New Holding Companies. The purpose of the lawsuit is to prevent the New Holding Companies from using the amortization of the goodwill paid by the New Holding Companies to the Brazilian government in the Breakup of Telebrás to generate tax benefits.
On January 10, 2010, the judge dismissed the case and the decision was subject to compulsory appeal at superior court. We are waiting for the second instance court’s decision.
Even though we are unable to predict the final outcome of this lawsuit, we believe that a ruling favorable to the plaintiff is unlikely. Accordingly, we have not created a reserve in connection with this litigation. If an unfavorable ruling is issued against us, we will lose the tax benefit derived from the premiums paid, and our tax liability will increase. We have already amortized a portion of the goodwill. We believe that an unfavorable decision would not have a material adverse effect on our business, results of operations, financial condition or prospects.
Litigation Arising Out of Events Prior to the Breakup of Telebrás
Telebrás and its operating subsidiaries, the legal predecessors of the Holding Company and TIM Sul and TIM Nordeste Telecomunicações, respectively, are defendants in a number of legal proceedings and subject to certain other claims and contingencies. Liability for any claims arising out of acts committed by Telebrás and its operating subsidiaries prior to the effective date of the spin-off of the cellular assets and liabilities of Telebrás and its operating subsidiaries to the TIM Sul and TIM Nordeste Telecomunicações remain with Telebrás and its operating subsidiaries, except for those liabilities for which specific accounting provisions were assigned to TIM Sul and TIM Nordeste Telecomunicações. Any claims against Telebrás and its operating subsidiaries that are not satisfied by Telebrás and its operating subsidiaries could result in claims against TIM Sul and TIM Nordeste Telecomunicações, to the extent that TIM Sul and TIM Nordeste Telecomunicações have received assets that might have been used to settle such claims had such assets not been spin off from Telebrás and its operating subsidiaries.
Under the terms of the Breakup of the Telebrás system, liability for any claims arising out of acts committed by Telebrás prior to the effective date of the Breakup remains with Telebrás, except for labor and tax claims (for which Telebrás and the New Holding Companies are jointly and severally liable by operation of law) and any liability for which specific accounting provisions were assigned to the Holding Company or one of the other New Holding Companies. In June 2007, the judge extinguished the action. This decision was compulsorily appealable at a second instance. In April 2011, this appeal was dismissed and we are waiting for the superior court’s instance decision. Our management believes that the chances of claims of nature materializing and having a material adverse financial effect on us are remote.
Litigation Related to the values charged for VU-M
In August 2007, GVT filed a lawsuit against TIM Celular, and other telecommunications companies, before the 4th Federal Court. The plaintiff claims that a contractual clause establishing the VU-M amount used by the defendants in their interconnection arrangements is illegal and abusive and as such plaintiff requires that (1) the clause be annulled and (2) all amounts allegedly charged in excess since July 2004 be refunded. A preliminary order was granted determining the payment by GVT to TIM and other defendants of VU-M on the basis of R$0.2899 per minute and that GVT shall deposit on court the difference between such amount and the value charged by the defendants. As both in-house and outside counsels find that the risk of loss for the subsidiary is possible, no provision has been recorded.
Other Litigation
We are a party to certain legal proceedings arising in the normal course of business. Most of these legal proceedings may be divided into two main categories: consumer protection claims and labor law claims. The most
common issue raised by claimants in the consumer protection cases against us is allegedly incorrect charges imposed by us as well as defects on mobile handsets we sell. Most labor law claims against us have been brought by former employees for alleged infringement of labor laws during the duration of their employment contracts with us. As of December 31, 2010, we were a party to approximately 69.669 consumer protection claims and 2,350 labor law claims. There are also 228 public civil actions and class actions (respectively “ação civil pública” and “ação popular”). We believe that such actions, if decided adversely to us, would not have a material adverse effect on our business, financial condition or results of operations.
Litigation Related to the Application of PIS and COFINS
In 2001, 2002 and 2004, the Federal Government, through the “Ministério Público Federal”, filed lawsuits to prevent TIM Sul and TIM Nordeste Telecomunicações from passing along to their respective customers’ costs regarding PIS and COFINS. See “Item 4B. Information on the Company—Business Overview—Taxes on Telecommunications Goods and Services.” The Federal Government also claimed that these entities should compensate their customers for these charges by paying each of them an amount equal to double the amount that was individually paid.
In March 2004, a decision favorable to Telpe Celular, now TIM Nordeste, was rendered by the second level Court, denying the claims of the Federal Government. The Federal Government appealed from this decision. Nonetheless, we are unable to predict the final outcome of these lawsuits. We are also unable to predict whether an unfavorable decision would have a material adverse effect on our business, results of operations, financial conditions or prospects.
Additionally, in 2005 we filed a lawsuit to recover the PIS and COFINS amounts paid in accordance with paragraph 1 of article 3 of Law No. 9718/98, which was deemed unconstitutional by the Federal Supreme Court.
Litigation Related to the Authorization to Operate in the State of São Paulo
Vivo and Claro brought an action seeking an injunction to annul the grant to TIM Celular by Anatel of its authorization to operate in the State of São Paulo, alleging that the granting of such authorization was improper by seeking to establish that Telecom Italia and Brasil Telecom were related parties at the time the authorization was granted, which would contravene applicable regulations. A preliminary injunction was denied by the lower court and this decision was upheld upon appellate review. This holding is subject to further review by the Brazilian Supreme Court. A judicial decision granted the motion in part, not receiving plaintiff’s indemnification claim. An appeal was filed, and now we are waiting for second instance court’s decision. We believe that the likelihood of an adverse ruling in this matter is remote.
Tax Litigation
Litigation Related to the Payment of Income Tax and CSLL
In September 2003, TIM Nordeste was assessed by the Ceará Federal Revenue Service (SRF) authorities for R$12.7 million referring to: (i) disallowance of R$8.4 million expenses included in the IRPJ determination for the period from 1999 through 2001; (ii) R$3.2 million of differences in CSLL payments for the years from 1998 through 2001; (iii) differences of R$0.3 million and R$0.8 million, respectively, in the payment of PIS and COFINS for the years from 1998 through 2002. The Company unsuccessfully filed an opposition and a voluntary appeal against this assessment, at the administrative level. As a consequence, based on its internal and external lawyers´ opinion the losses thereon are probable, the Management set up two provisions: one in the amount of R$11.2 million for IRPJ and CSLL, under the heading “Provision for Income Tax and Social Contribution,” and one in the amount of R$1.1 million, for PIS and COFINS, under the heading “Other Operating Expenses”.
In May 2005, the Brazilian tax authority in the state of Minas Gerais issued five tax assessment notices to TIM Nordeste. Two of these notices related to corporate income tax (IRPJ) assessments, two refer to social contribution on net income tax (CSLL) assessments, and one refers to an income tax withheld at the source (IRRF) assessment, all related to 2002. In the case of the IRPJ and CSLL notices, the asserted infractions are (i) alleged improper adjustments to net income in determining profits relating to inappropriate adjustments due to monetary variations in
swap arrangements; (ii) alleged exclusion of exchange rate variations of foreign debt that were improperly eliminated and deducted as an expense from cash flow statement; and (iii) the imposition of a penalty based on the argument that the tax should have been collected based on estimated income. The notice relating to the IRRF assessment alleges that the tax paid was less than the tax due because the calculation of IRRF was made considering as a basis of calculation the net amount between revenue and expense.
We are challenging these tax assessments with the appropriate Brazilian tax authorities and a final decision is pending. The total value of the five tax assessments notices is R$126.9 million. We believe that the probable amount that we would be required to pay is R$32.8 million and we have made provisions in this amount. In September of 2009, the former TIM Nordeste decided to adhere to REFIS, and made CSLL collections in the amount of R$4.9 million, referring to the CSLL assessment described in item (i) above, (alleged improper adjustments to net income in determining profits relating to inappropriate adjustments due to monetary variations in swap arrangements.) As R$8.5 million had already been provisioned to face the original CSLL assessments, a remaining amount of R$3.7 million was reverted in the Company’s balance sheet.
These tax assessment notices remain in discussion with the fiscal authorities. The remaining amount in discussion is R$209.8 million, with a provision of R$24.2 million.
In October of 2005, the former TIM Nordeste, current TIM Celular received Tax Foreclosure in the amount of R$5.6 million related to the absence of payment of IRRF over rents, royalties and at-will employment relationships. The controlled company moved to stay execution against referred tax foreclosure and intends to defend itself against such charge until in reaches the highest court of the Brazilian Judiciary.
In 2006, TIM Celular received a tax assessment notice remitted by the Federal Revenue Department of the State of Rio de Janeiro, in total amount of R$0.8 million, related to: supposed non homologation of diverse requests of compensation for the utilization of IRPJ and CSLL debt balance of calendar-year 1998 with COFINS, IRPJ and CSLL debts. Based on the opinion of internal and external legal advisers, it was concluded that the loss is probable. In September of 2009, the company adhered to REFIS, having made the payment of R$0.3 million, the remaining provisioned amount of R$0.5 million was reverted in favor of the controlled company (registered under caption “Income tax and social contribution provision”).
The controlled company Intelig applied for a Writ of Mandamus aiming for the recognition of exemption of Income Tax Withheld (IRF) over the remittances to international operators for payment of interconnection services, based in the provisions of the Melbourne Treaty. In December of 2006, the Regional Federal Appellate Court decided in favor of the controlled company, the lawsuit is in the Superior Court of Justice for the evaluation of appeal presented by the Federal Government.
In December of 2006, the controlled company Intelig received a tax assessment notice from the Federal Revenue Department in the sum of R$49.0 million resulting from the absence of payment of the IRRF and CIDE over remittances abroad for payment of international interconnection. The aforementioned notice is being contested, with the administrative proceeding on suspended liability. Considering that Intelig had a final positive decision related to the Writ of Mandamus issued by the company in order to recognize the effects of Melbourne Treaty in Brazil (exception of taxes), the tax assessment will be cancel by administrative authorities.
In 2008, TIM Participações received a tax assessment notice, remitted by the Federal Revenue Department of the State of Rio de Janeiro, in the total amount of R$3.2 million, related to the supposed non homologation of the compensation request for use of IRPJ debt balance of calendar-year 2003. Based on the opinion of internal and external legal advisers, it was concluded that the loss is probable.
In September of 2009, the controlled company adhered to REFIS (Brazilian Tax Debt Restructuring Program), amnesty of fines and interests and the possibility of federal tax debts to be paid in installments according to the Law n° 11.941/2009, having made the payment of R$3.2 million and the provisioned remaining amount of R$9.5 million was reverted in favor of the controlled company (R$0.8 million registered under the caption “Contingence provision reversal” and R$8.8 million under the caption “Income tax and social contribution provision”).
Also in September of 2009, the controlled company adhered to REFIS, having made payment of R$1.7 million and the remaining provisioned amount of R$1.5 million was reverted in favor of the controlled company (registered under caption “Income tax and social contribution provision”).
On March 22, 2011, TIM Celular, received a notice of tax assessment issued by the Brazilian Federal Revenue Office in the total amount of 1,265 million Brazilian reais (approximately 550 million euros), including penalties and interest, upon completion of a tax audit covering the years 2006, 2007, 2008 and 2009 of TIM Nordeste Telecomunicações S.A. and TIM Nordeste S.A. (formerly denominated Maxitel), companies that were merged in several steps into TIM Celular for the purpose of simplifying the corporate structure in Brazil.
The notice of tax assessment contained a number of matters, of which the most significant are summarized as follows: (i) the disallowance of the deduction of amortization of goodwill related to the acquisition of Tele Nordeste Celular Participações S.A. (“TNC”) which was originally recorded by Bitel Participações S.A. (Bitel); (ii) the incorrect exclusion of the goodwill previously amortized by Bitel, 1B2B and TNC, and transferred to the LALUR (Livro de Apuração do Lucro Real – IRPJ Taxable Income report) of the TIM Brasil group operating companies; and (iii) the disallowance of the tax effects of the merger between TIM Nordeste Telecomunicações S.A. and Maxitel S.A.
The matters raised in the notice of tax assessment will be challenged by TIM Celular in administrative court with the filing of an initial defense document by April 25, 2011. Management, with the assistance of external tax advisors, is compiling defense documentation and believes that the likelihood of a significant negative outcome for the Company in respect to this matter is not probable.
Litigation Related to the Deduction of Goodwill Paid in the Sistema Telebrás Auction
TIM Nordeste received on October 30, 2006 tax assessment notices at the amount of R$331.2 million, that was reduced to the amount of R$258.1 million, related to the set-off of the premium paid (goodwill) in the Sistema Telebrás auction (acquisition of mobile companies) against the company’s income for tax purposes. Such tax assessment notices and are based on the following facts: (a) non tax-deduction of the expense resulted from the goodwill pay-off; (b) exclusion of the goodwill registered in the book taxable income (LALUR) of the company merged into TIM Nordeste; (c) improper set-off of the debt disallowance and tax loss carryforward related to the previous fiscal years; (d) overdeduction of the activity profit tax break; (e) previous tax-deduction of the disallowance of the withholding Social Contribution on Net Income (CSLL); (f) improper deduction of the annual monetary adjustment of the prepaid Corporate Income Tax (IRPJ) and CSLL; (g) fine over the lack of payment of IRPJ and CSLL which are due based on a monthly estimative.
After timely challenging these assessment notices, the subsidiary awaits the taxing authorities’ decision on the matter.
In March 2007, the Brazilian Tax Authorities informed TIM that the amounts of IRPJ, CSLL and a separate fine totaling R$73 million (principal and separate fine) had been excluded from the assessment notice, which caused the reduction of the original assessment. As a consequence, this assessment was partially reduced, the discussion on the remainder being transferred to 160 compensation processes, currently totaling R$85.8 million.
In September of 2009, in one of the compensation lawsuits there was a decision partially favorable to the former TIM Nordeste reducing part of the credit compensated by the controlled company. Currently, the controlled company continues to defend the rest of the compensation lawsuits which have as a remaining balance the total of R$82.3 million.
In May and July 2008, TIM Nordeste received 49 compensation processes issued by the Federal Treasury related to the IR and CSL totaling R$10.9 million. Based on its internal and external lawyers’ opinion, we have not set up a provision for the above mentioned tax assessments.
In December 2010, TIM Celular received a tax assessment notice from the Federal Revenue Department in the sum of R$164.1 million related to the set-off of the premium paid (goodwill) against the company’s income, for tax purposes. Such tax assessment notices are based on the following facts: (a) non tax-deduction of the expense
resulted from the goodwill pay-off; (b) exclusion of the goodwill registered in the book taxable income (LALUR) of the company merged into TIM Nordeste; (c) the company was not entitled to enjoy the tax benefit relating to SUDENE because it failed to present the authorities the request based in which they should have acknowledged its right to use the tax benefit.
Claims Related to the Payment of PIS and COFINS Taxes by TIM Nordeste
In 2004, TIM Nordeste was assessed in connection with PIS and COFINS due on exchange variation arising from revenue generated in 1999. Both assessment notices amounted to R$30.9 million. Because this is a controversial matter involving interpretation of applicable legislation, a provision was established, in 2004, for the same amount. On March 13, 2006, a final decision was issued on the action filed by the company against Law 9718 of November 27, 1998. The company argued 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, in 2006, the Management of TIM Nordeste requested extinction of the tax assessment against TIM Nordeste, concerning PIS and COFINS on exchange variation, and reversed, the provision set up in 2004.
In April 2007, the amount of PIS on exchange variation claimed was reduced by R$5.3 million, after the matter was declared unconstitutional and recognized as such in the administrative level. The remainder – R$25.6 million – is now under discussion. TIM Nordeste awaits the recognition, at administrative level, of the impossibility of collecting the remaining related to the COFINS infraction.
In relation to the tax assessment notices, which discussed the charge of PIS and COFINS over exchange rate changes, in April of 2007, the demands of PIS related to exchange rate changes were canceled and, in February of 2009, the demands of COFINS related to exchange rate changes were also reduced by R$23.3 million, with R$2.3 million remaining under discussion.
TIM Celular and the former TIM Nordeste in October, November and December of 2009, received, respectively, 154 and 41 tax assessment notices in the amounts of R$20.5 million and R$5.5 million in which the tax authority considers some of COFINS compensation request to be unlawful, related to the import of services in the period between 2005 and 2007. These assessment notices are currently being administratively questioned by the Company.
In May, 2010, TIM Celular received a tax assessment notices issued by the Federal Revenue Department in the sum of R$50 million related to (i) lack of payment of Income Tax on income of residents abroad returned by way of international roaming and payment to beneficiaries not identified, (ii) non-payment of CIDE on royalties in remittances abroad and on remittances to international roaming, and (iii) reduction of tax losses (income tax and social contribution) for the deduction of expenses not substantiated by way of technical services. These assessments were timely contested by the subsidiary and awaiting a decision on an administrative level.
Litigation Related to the Application of ICMS
In June 1998, the governments of the individual Brazilian States agreed to construe existing Brazilian tax law in a way to apply ICMS in respect of certain revenues, including cellular activation fees and monthly subscription charges that had not previously been subject to such taxes. Under Brazilian law, there is a risk that the state governments could seek to apply this interpretation retroactively to activation and subscription fees charged during the five years preceding June 30, 1998. We believe that the attempt by the state governments to extend the scope of ICMS to services that are supplementary (such as monthly subscription charges) to basic telecommunications services is unlawful because:
| | · | the state governments acted beyond the scope of their authority; |
| | · | their interpretation would subject to taxation certain revenues, particularly activation fees, that are not considered to be payments for telecommunications services; and |
| | · | new taxes may not be applied retroactively. |
It should be noted that certain second level courts have addressed this issue and ruled that the ICMS is not applicable to services that are supplementary to basic telecommunications services, relieving TIM from the payment of the ICMS tax on activation fees in certain Brazilian States. In other States TIM is required to make judicial deposits in connection with the activation fee tax until a final decision is granted on the matter. There have been recent decisions favorable to the operators addressing the fact that certain revenues, including cellular activation fees and subscription charges are not subject to ICMS tax to date. TIM has been granted favorable final decisions relating to the states of Paraná, Santa Catarina, Sergipe, Alagoas, Rio Grande do Sul and Paraíba. Additionally, the Company has filed lawsuits in the Brazilian States of Pernambuco, Rio Grande do Norte, Piauí, Ceará, and Bahia, and has been granted favorable second level decisions in most of them. We have not made any accruals in connection therewith.
TIM Celular received notices from the fiscal authorities of the State of Santa Catarina in the years 2003 and 2004, which related mainly to disputes as to the applicability of ICMS taxation over telecommunication services rendered by the Incorporated Company (TIM Sul), as well as commercialization of mobile devices. The amount currently in discussion is of R$41.6 million considering diverse successes in administrative proceedings (the amount initially noticed was of R$95.4 million). The controlled company continues to discuss, on both administrative and judicial levels, such tax assessment notices and based on the opinion of internal and external legal advisers, Management concludes that the lawsuits still in discussion have been evaluated as a possible loss.
The controlled companies, the former TIM Nordeste and TIM Celular, received during the last few years tax assessment notices entered by fiscal authorities of various Brazilian States related to ICMS payment over operational activities of telecommunications services rendering, as well as commercialization of merchandise. Some of the alleged bases for the notices, according to plea by the ICMS inspection, included: (i) the liability for the difference between the internal and interstate ICMS tax rate in the acquisition of assets destined to the fixed, use and consumption assets, as well as determination of the basis of calculation of the referred tax over commercialization merchandise acquisition operations; (ii) bookkeeping of taxed services (according to the understanding of the National Treasury) as non-taxed by the controlled in the Sales Journal; (iii) alleged reduced payment through utilization of the wrong tax rate and entry of telecommunication services as non-taxed; (iv) alleged lack of payment due to differences in the amounts effectively paid and the declared; (v) payment of tax beyond term established by state legislation, among others. Referred tax assessment notices are being defended in administrative and judicial proceedings. The total amount involved in these cases, with respect to amounts greater than R$5.0 million, is R$105.7 million.
The controlled companies, former TIM Nordeste and TIM Celular, received tax assessment notices of ICMS entered by the fiscal authorities of the States of Rio de Janeiro and Bahia pleading the lack of payment of the tax, as well as the additional tax rate related to the Fight Against Poverty and Social Differences Fund supposedly incident over: (i) rendering of international roaming services; and (ii) rendering of services in the pre-paid modality. Referred notices are being defended administratively and total the sum of R$50.4 million.
The former TIM Nordeste and current TIM Celular, received, tax assessment notices entered by the fiscal authorities of the States of Paraíba, Rio de Janeiro, Bahia, São Paulo and Goiás in the respective amounts of R$8.2 million, 38.2 million, 8.5 million, 20 million, 47 million and R$7.4 million, related to the lack of proportional reversal of ICMS credits relative to exempt and non-taxed sales. The notices are being objected administratively by the controlled companies.
The controlled companies TIM Celular and former TIM Nordeste received tax assessment notices entered by the fiscal authorities of the States of São Paulo and Minas Gerais in the amounts of R$286.010 million and R$17.2 million, respectively, aiming at the supposed non inclusion of conditional discounts offered to clients in the base of calculation of ICMS. The companies intend to defend themselves against such charge until it reaches a higher court of the Judiciary.
In November 2002, the controlled company Intelig received a tax assessment notice entered by the State Treasury Department of Minas Gerais in the amount of R$8.5 million, related to the supposed undue utilization of ICMS credit in the acquisition of fixed assets and material destined to be used and consumed by the company. The tax assessment notice is being defended judicially.
In November of 2005, the controlled company Intelig received a tax assessment notice entered by the State Treasury of Mato Grosso in the amount of R$11.7 million related to the supposed undue utilization ICMS credit in the acquisition of fixed assets without the support of the respective invoice, and relating to the credit of difference rate of ICMS paid by the company in an interstate transfer or acquisition of fixed assets The tax assessment notice is being defended judicially.
In December of 2007 and December of 2008, the controlled company Intelig received two tax assessments notices entered by the State Treasury of São Paulo in the respective amounts of R$6.2 million and R$11.3 million, respectively, related to the supposed undue employment of ICMS credit in the years of 2002 and 2003, through reversal of debt in the canceling of telecommunication services effectively non rendered. The tax assessment notice received in 2002 finished administratively without success for the company and the judicial discussion of the debt was initiated. The tax assessment notice corresponding to the year of 2003 is still being defended administratively.
In August of 2009, the controlled company Intelig received a tax assessment notice entered by the State Treasury of Rio de Janeiro in the amount of R$4.8 million, related to the supposed undue utilization of ICMS credit by the application of the inadequate coefficient of reduction of the credit tax in relation to the exempt and non-taxed sales operations occurred in the period of 2004 to 2009. The notice is being defended administratively.
In 2008 and 2009, the former TIM Nordeste and TIM Celular, received tax assessment notices, in a total sum of R$122.2 million, entered by the fiscal authorities of the State of Ceará, São Paulo, Pernambuco, Paraná and Minas Gerais aiming at debt caused by the employment of ICMS credit in the acquisition of electric energy. The notices are being defended administratively by the companies.
In January, 2010, TIM Celular received a notice of tax assessment issued by the State of São Paulo related the debit originated from improper reversal of ICMS credit arising from goods shipped to the Zona Franca de Manaus (free trade zone) in the amount of R$6.4 million. The notice is being defended on administrative instance by the companies.
The controlled companies TIM Celular received notices of tax assessments in a total sum of R$56.4 million, entered by the fiscal authorities of the State of Paraíba and Paraná related to non-payment of ICMS on the provision of telecommunications service (pre-paid model). The notice is being defended on administrative instance by the companies.
In April 2010, TIM Celular received notices of tax assessments issued by the State of Rio de Janeiro, totaling R$17.558, about (i) non payment of ICMS as ST (responsible taxpayer), related to goods transferred from stock to fixed assets,; (ii) the company kept the credit of ICMS related to goods that were sold with the price below to the cost of acquisition. These tax assessments are being litigated on administrative instance.
In November, 2010, TIM Celular received notices of tax assessments issued by the State of São Paulo, totaling R$18.444, about the improper credit of ICMS on telecommunication services not provided due to subscription fraud, and alleged duplicity in crediting of ICMS on 2005. The tax assessments are being defended on administrative instance.
In November, 2010, TIM Celular received notices of tax assessments issued by the State of São Paulo and Rio Grande do Sul, totaling R$67.958, about reversal of ICMS credit on acquisition of fixed assets allegedly without proof of the merits of accounting book. The tax assessments are being defended on administrative instance.
Municipality of Rio de Janeiro ISS tax Charges
TIM Celular received a tax assessment notice from the Municipality of Rio de Janeiro related to the supposed lack of collection of ISS in the value of R$94.4 million. The main reason of this tax assessment notice is related to site-sharing agreements (infrastructure). The municipality wants to charge the ISS over these agreements in view of the Complementary Law nr. 116/03, exhibit item 3.04. However, we have strong arguments to fight against this law because the ISS is a tax on services and the site-sharing agreements do not involve services. Moreover, there is a lawsuit challenging the constitutionality of item 3.04 of the Complementary Law nr 116/03 (ADIN – Ação Direta de Inconstitucionalidade). TIM is challenging this tax assessment with the appropriate Brazilian tax authorities and a
final decision is pending. IM believes that there is a possibility of being required to pay this tax assessment but that it is not probable. Accordingly, no provision was made for this amount.
Litigation Related to the Payment of FUST
The FUST tax is levied at a rate of 1% on gross revenues, net of discount, cancel services, ICMS, PIS and COFINS, and its initial cost may not be passed on to clients. In light of a ruling issued by Anatel in 2005, the TIM Group, together with the other telecommunications mobile providers in Brazil, had filed a lawsuit and obtained a preliminary injunction (now confirmed by a first level decision, still subject to appeal) authorizing the company not to collect the FUST related to interconnection revenues received from other company. TIM has not been collected the FUST assessed on interconnection fees.
Since October of 2006, Anatel is entering tax assessments notices against the controlled of the Company, which are related to the amounts of FUST on revenues of interconnection supposedly due in the years of 2001 to 2005 as well as penalty. Such tax assessments notices sum the amount of R$194.7 million.
The Controlled Intelig received several tax assessments notices entered by Anatel totalizing the sum of R$45.6 million, which are related to the amounts of FUST on revenues of interconnection transferred to others companies, supposedly due in the period of January to December of 2001, 2002 and 2003, respectively. The referred notices are being defended administratively. We estimate the likelihood of an adverse ruling in this matter is possible.
Litigation Related to the Payment of FUNTTEL
The Ministry of Communications entered tax assessments notices against TIM Celular and the old TIM Nordeste, in the total sum of R$166.9 million, which make reference to the amounts of FUNTTEL on revenues of interconnection received from others companies, related to the years of 2001 to 2005, as well as penalty. The understanding of the Company is that the aforementioned revenues are not subject to incidence of FUNTTEL. It was applied injunction in order to cover the interests of the Company about the non-collection of FUNTTEL on revenues of interconnection based on the same arguments defended in the lawsuit of FUST.
TIM Group filed a writ of mandamus and obtained a preliminary injunction authorizing us not to collect the FUNTTEL tax related to interconnection revenues. We estimate the chance of an adverse ruling in this matter is possible. For this reason, we have not made any accrual in connection therewith.
The Controller Intelig received tax assessment notices entered by the Ministry of Communication in the sum of R$14.6 million, which are related to the amounts of FUNTTEL on revenues of interconnection transferred to others companies, for the periods of January to December of 2002, March to December of 2003, April to December of 2004 and January to November of 2005, respectively. The referred notices are being defended administratively.
Other Litigation
We are a party to certain legal proceedings arising in the normal course of business. Most of these legal proceedings may be divided into two main categories: consumer protection claims and labor law claims. The most common issue raised by claimants in the consumer protection cases against us is allegedly incorrect charges imposed by us as well as defects on mobile handsets we sell. Most labor law claims against us have been brought by former employees for alleged infringement of labor laws during the duration of their employment contracts with us. As of December 31, 2010, we were a party to approximately 61,141 consumer protection claims and 2,350 labor law claims. There are also 181 public civil actions and class actions (respectively “ação civil pública” and “ação popular”). We believe that such actions, if decided adversely to us, would not have a material adverse effect on our business, financial condition or results of operations.
Dividend Policy
Under our by-laws, we are required to distribute 25% of our adjusted net income to our shareholders, either as dividends or as tax-deductible interest on net worth (“General Dividend”). We are also required to pay a non-cumulative preferred dividend on our preferred shares in an amount equal to the greater of (“Preferred Dividend”):
| | · | 6% of our capital (“capital social”) divided by the total number of common and preferred shares and |
| | · | 3% of our net shareholders’ equity (“patrimônio líquido”) to the extent of retained earnings, according to the most recent financial statements approved by our shareholders. |
The amount of General Dividend, if any, payable by us to the holders of preferred shares is offset by the amount of Preferred Dividend paid to such preferred shareholders.
As a result of these provisions, holders of our preferred shares are entitled to receive in any year distributions of cash dividends prior to the holders of our Common Shares receiving any distribution of cash dividends in such year. In addition, distributions of cash dividends in any year are made:
| | · | first, to the holders of preferred shares, up to the amount of the Preferred Dividend that must be paid to the holders of preferred shares for such year; |
| | · | then, to the holders of common shares, until the amount distributed in respect of each Common Share is equal to the amount distributed in respect of each preferred shares; and |
| | · | thereafter, to the holders of common shares and preferred shares on a pro rata basis. |
If the dividend to be paid to the holders of preferred shares is not paid for a period of three years, holders of preferred shares will be entitled to full voting rights until the year when that dividend is paid in full for any year.
We may also make additional distributions to the extent of available distributable profits and reserves. TIM Celular is also subject to mandatory distribution requirements and, to the extent of distributable profits and reserves, is accordingly required to pay dividends to us. All of the aforementioned distributions may be made as dividends or as tax-deductible interest on capital.
Brazilian corporations may make payments to shareholders characterized as interest on the corporation’s capital (“juros sobre capital próprio”) as an alternative form of making dividend distributions to the shareholders. The rate of interest may not be higher than the Federal Government’s long-term interest rate as determined by BNDES from time to time. Dividends are not subject to withholding income tax when paid. On the other hand, interest on capital paid to shareholders is deductible from the corporation’s net profits for tax purposes, but the distributions are subject to withholding tax. See “Item 10E. Additional Information––Taxation––Brazilian Tax Considerations––Distributions of Interest on Capital.”
For the purposes of Brazilian Corporations Law, and in accordance with our by-laws, adjusted net income is an amount equal to net profit adjusted to reflect allocations to and from:
We are required to maintain a legal reserve, to which we must allocate 5% of net profits for each fiscal year until the amount for such reserve equals 20% of our capital. However, we are not required to make any allocations to our legal reserve in respect of any fiscal year in which our legal reserve, together with our other capital reserves, exceeds 30% of our capital. Losses, if any, may be charged against the legal reserve. On December 31, 2010, the balance of our legal reserve was R$226.8 million, which is approximately equal to 2.78% of our total capital.
Brazilian Corporations Law also provides for two discretionary allocations of net profits that are subject to approval by the shareholders at the annual meeting. First, a percentage of net profits may be allocated to a contingency reserve for anticipated losses that are deemed probable in future years. Any amount so allocated in a prior year must be either reversed in the fiscal year in which the loss was anticipated if such loss does not in fact occur, or written off in the event that the anticipated loss occurs. Second, if the mandatory distributable amount exceeds the sum of realized net profits in a given year, such excess may be allocated to unrealized revenue reserve. Under Brazilian Corporations Law, realized net profits are defined as the amount of net profits that exceeds the net
positive result of equity adjustments and profits or revenues from operations with financial results after the end of the next succeeding fiscal year.
Under Brazilian Corporations Law, any company may, as a term in its by-laws, create a discretionary reserve. By-laws which authorize the allocation of a percentage of a company’s net income to the discretionary reserve must also indicate the purpose, criteria for allocation and a maximum amount of the reserve. The Company’s by-laws authorize the allocation of the net income balance not allocated to the payment of the mandatory minimum dividend or to the preferred shares priority dividend to a supplementary reserve for the expansion of corporate business, not to exceed 80% (eighty percent) of the capital. The loss for the 2007 year was fully absorbed by the reserve for expansion and part of this reserve was used to pay dividends. On December 31, 2007, in accordance with our by-laws, we used our reserve for expansion to distribute dividends.
We may also allocate a portion of our net profits for discretionary appropriations for plant expansion and other capital investment projects, the amount of which would be based on a capital budget previously presented by our management and approved by shareholders. Under Brazilian Corporations Law, capital budgets covering more than one year must be reviewed at each annual shareholder’s meeting. After completion of the relevant capital projects, we may retain the appropriation until the shareholders vote to transfer all or a portion of the reserve to capital realized.
The amounts available for distribution may be further increased by a decrease in the contingency reserve for anticipated losses anticipated in prior years but not realized. The amounts available for distribution are determined on the basis of financial statements prepared in accordance with CVM Rules adapted to the IFRS.
The legal reserve is subject to approval by the shareholders voting at the annual meeting and may be transferred to capital but is not available to the payment of dividends in subsequent years. Our calculation of net profits and allocations to reserves for any fiscal year are determined on the basis of financial statements prepared in accordance with CVM Rules adapted to the IFRS.
Remaining amounts to be distributed are allocated first to the payment of a dividend to holders of Common Shares in an amount equal to the dividend paid to the preferred shareholders. The remainder is distributed equally among holders of preferred shares and common shares.
Under Brazilian Corporations Law, a company is permitted to suspend the mandatory dividend in respect of common shares and preferred shares not entitled to a fixed or minimum dividend if:
| | · | its management (Board of Directors and Board of Executive Officers) and Fiscal Committee report to the shareholders’ meeting that the distribution would be incompatible with the financial circumstances of that company; and |
| | · | the shareholders ratify this conclusion at the shareholders’ meeting. |
In this case,
| | · | the management must forward to the Brazilian Securities and Exchange Commission within five days of the shareholders’ meeting an explanation justifying the information transmitted at the meeting; and |
| | · | the profits which were not distributed are to be recorded as a special reserve and, if not absorbed by losses in subsequent fiscal years, are to be paid as dividends as soon as the financial situation permits. |
Our preferred shares are each entitled to a minimum dividend and thus the mandatory dividend may be suspended only with respect to our common shares. Dividends may be paid by us out of retained earnings or profit reserves in any given fiscal year.
For the purposes of Brazilian Corporations Law, the net income after income tax and social contribution for such fiscal year, net of any accumulated losses from prior fiscal years and any amounts allocated to warrants and employees’ and management’s participation in a company’s profits shall be distributed as dividends.
Payment of Dividends
We are required by law and by our by-laws to hold an annual shareholders’ meeting by April 30 of each year, at which, among other things, an annual dividend may be declared by decision of our shareholders on the recommendation of our executive officers, as approved by our Board of Directors. The payment of annual dividends is based on the financial statements prepared for the fiscal year ending December 31. Under Brazilian Corporations Law, dividends are required to be paid within 60 days following the date the dividend is declared to shareholders of record on such declaration date, unless a shareholders’ resolution sets forth another date of payment, which in any event shall occur prior to the end of the fiscal year in which such dividend was declared.
A shareholder has a three-year period from the dividend payment date to claim dividends in respect of its shares, after which we have no liability for such payment. Because our shares are issued in book-entry form, dividends with respect to any share are credited to the account holding such share. We are not required to adjust the amount of paid-in capital for inflation. Annual dividends may be paid to shareholders on a pro rata basis according to the date when the subscription price is paid to us.
Our preferred shares underlying the ADSs are held in Brazil by a Brazilian custodian, Banco Itaú Unibanco S.A., as the agent for the Depositary, J.P. Morgan Chase Bank, N.A., which is the registered owner of our shares. Payments of cash dividends and distributions in respect of the ADRs, if any, will be made in Brazilian currency to the custodian on behalf of the Depositary which will then convert those proceeds into dollars and will cause such dollars to be delivered to the Depositary for distribution to holders of ADRs. In the event that the custodian is unable to immediately convert the Brazilian currency received as dividends into dollars, the amount of dollars payable to holders of ADRs may be adversely affected by devaluations of the Brazilian currency that occur before such dividends are converted and remitted. Dividends in respect of our preferred shares paid to resident and non-resident shareholders, including holders of ADSs, are not currently subject to Brazilian withholding tax.
The Company did not fully pay the minimum dividends or interest on shareholders’ equity for the years-ended on December 31, 2008, and 2009. As a result, the holders of our preferred shares were entitled, from 2010 on, to have the same voting rights as the holders of common shares, until TIM Participações pays dividends again. At the Annual and Extraordinary Shareholders’ Meeting held on April 11, 2011, the distribution of the mandatory minimum dividends to the holders of common and preferred shares, which included the minimum dividends of the preferred shares was approved. Such mandatory minimum dividends are to be paid within 60 days from the shareholders´ meeting discussed above. Therefore, as soon as such payment is done, the holders of preferred shares shall not be entitled to full voting rights. Minimum dividends are noncumulative, calculated according to the Company’s bylaws.
B. Significant Changes
None.
A. Offer and Listing Details
The preferred shares trade principally on the BM&FBOVESPA under the symbol “TCSL4”. On December 31, 2010, we had 642,332,664 preferred shares and 192,744,359 common shares outstanding. The preferred shares traded in the United States on the NYSE are represented by ADSs, each ADS representing 10 preferred shares. The ADSs are issued by J.P. Morgan Chase Bank, N.A. (the “Depositary” or “J.P. Morgan”), pursuant to a Deposit Agreement among us, the Depositary and the registered holders and beneficial owners from time to time of ADRs. See “Item 12. Description of Securities Other than Equity Securities.” The ADSs trade on the NYSE under the symbol “TSU.”
The table below shows, for the indicated periods, the high and low closing prices of our ADSs on the New York Stock Exchange, in U.S. dollars, and the preferred shares on the São Paulo Stock Exchange, in reais:
| | | | | | | |
| | | | | | | | | | | | | |
| | | (in U.S. $ per ADS) | | | (in reais per preferred shares) | |
| Year ended | | | | | | | | | | | | |
December 31, 2006 | | | 40.60 | | | | 23.54 | | | | 8.66 | | | | 5.25 | |
December 31, 2007 | | | 46.40 | | | | 29.54 | | | | 8.10 | | | | 5.80 | |
December 31, 2008 | | | 43.80 | | | | 11.44 | | | | 7.33 | | | | 2.42 | |
December 31, 2009 | | | 30.13 | | | | 11.99 | | | | 5.20 | | | | 2.64 | |
December 31, 2010 | | | 35.07 | | | | 23.58 | | | | 5.90 | | | | 4.27 | |
| | | | | | | | | | | | | | | | | |
| Year ended December 31, 2009 | | | | | | | | | | | | | | | | |
First quarter | | | 15.50 | | | | 12.34 | | | | 3.68 | | | | 2.85 | |
Second quarter | | | 20.48 | | | | 11.99 | | | | 3.97 | | | | 2.64 | |
Third quarter | | | 25.44 | | | | 17.00 | | | | 4.59 | | | | 3.36 | |
Fourth quarter | | | 30.13 | | | | 23.27 | | | | 5.20 | | | | 4.08 | |
| | | | | | | | | | | | | | | | | |
| Year ended December 31, 2010 | | | | | | | | | | | | | | | | |
First quarter | | | 30.43 | | | | 24.68 | | | | 5.09 | | | | 4.45 | |
Second quarter | | | 28.69 | | | | 23.58 | | | | 4.94 | | | | 4.15 | |
Third quarter | | | 32.99 | | | | 26.25 | | | | 5.41 | | | | 4.59 | |
Fourth quarter | | | 35.07 | | | | 30.90 | | | | 5.73 | | | | 5.08 | |
| | | | | | | | | | | | | | | | | |
| Quarter ended March 31, 2011 | | | | | | | | | | | | | | | | |
March 31, 2011 | | | 43.72 | | | | 33.65 | | | | 7.12 | | | | 5.51 | |
| | | | | | | | | | | | | | | | | |
| Month ended | | | | | | | | | | | | | | | | |
December 31, 2010 | | | 34.62 | | | | 32.75 | | | | 5.63 | | | | 5.30 | |
January 31, 2011 | | | 39.12 | | | | 33.65 | | | | 6.17 | | | | 5.35 | |
February 28, 2011 | | | 38.72 | | | | 36.30 | | | | 6.13 | | | | 5.72 | |
March 31, 2011 | | | 43.72 | | | | 37.22 | | | | 6.92 | | | | 5.97 | |
April 30, 2011 | | | 47.42 | | | | 44.36 | | | | 7.31 | | | | 6.88 | |
May, 2011 | | | 49.14 | | | | 43.68 | | | | 7.81 | | | | 6.94 | |
B. Plan of Distribution
Not applicable.
C. Markets
Trading on the Brazilian Stock Exchanges
The BM&FBOVESPA is the only Brazilian Stock Exchange on which equity and debt securities issued by Brazilian companies are traded.
Trading on the BM&FBOVESPA is conducted every business day, from 10:00 a.m. to 5:00 p.m., or from 11:00 a.m. to 6:00 p.m. during daylight saving time in Brazil, on an electronic trading system called “Megabolsa.” Trading is also conducted between 5:45 p.m. and 7:00 p.m., or between 6:45 p.m. and 7:30 p.m. during daylight saving time in Brazil. The “after-market” trading is the scheduled after the close of principal trading sessions, when investors may send purchase and sell orders and make trades through the home broker system. This after-market trading is subject to regulatory limits on price volatility of securities traded by investors operating on the Internet.
When shareholders trade shares or units on BM&FBOVESPA, the trade is settled in three business days after the trade date, without adjustments to the purchase price. The seller is ordinarily required to deliver the shares or units to the exchange on the second business day following the trade date. Delivery of and payment for shares or units are made through the facilities of Central Depositária BM&FBOVESPA, BM&FBOVESPA’s clearing house.
In order to maintain control over the fluctuation of BM&FBOVESPA index, BM&FBOVESPA has adopted a “circuit breaker” system pursuant to which trading sessions may be suspended for a period of 30 minutes or one hour whenever BM&FBOVESPA index falls below 10% or 15%, respectively, in relation to the closing index levels of the previous trading session. The BM&FBOVESPA also implemented a 15% limit, up or down, on price fluctuations in shares traded on the spot market. The minimum and maximum price is based on a reference price for each asset, which will be the previous session’s closing quote, when considering the asset at the beginning of the day before the first trade, or the price of the day’s first trade. The asset’s reference price will be altered during the session if there is an auction sparked by the intraday limit being breached. In this case the reference price will become whatever results from the auction.
Although the Brazilian equity market is Latin America’s largest in terms of market capitalization, it is smaller and less liquid than the major U.S. and European securities markets. Moreover, BM&FBOVESPA is less liquid than the New York Stock Exchange and other major exchanges in the world. Although any of the outstanding shares of a listed company may trade on a Brazilian stock exchange, in most cases fewer than half of the listed shares are actually available for trading by the public, the remainder being held by small groups of controlling persons, governmental entities or one principal shareholder. Trading on Brazilian stock exchanges by non-residents of Brazil is subject to registration procedures.
Trading on Brazilian stock exchanges by a holder not deemed to be domiciled in Brazil, for Brazilian tax and regulatory purposes (a “non-Brazilian holder”), is subject to certain limitations under Brazilian foreign investment legislation. With limited exceptions, non-Brazilian holders may only trade on Brazilian stock exchanges in accordance with the requirements of Resolution CMN 2,689. Resolution CMN 2,689 requires that securities held by non-Brazilian holders be maintained in the custody of, or in deposit accounts with, financial institutions and be registered with a clearinghouse duly authorized by the Central Bank and the CVM. In addition, Resolution CMN 2,689 requires non-Brazilian holders to restrict their securities trading to transactions on Brazilian stock exchanges or qualified over-the-counter markets. With limited exceptions, non-Brazilian holders may not transfer the ownership of investments made under Resolution CMN 2,689 to other non-Brazilian holders through a private transaction. See “Item 10E. Additional Information—Taxation—Brazilian Tax Considerations” for a description of certain tax benefits extended to non-Brazilian holders who qualify under Resolution CMN 2,689.
Differentiated Levels of Corporate Governance and the New Market
In order to increase the transparency of the Brazilian capital markets and protect minority shareholders’ rights, BM&FBOVESPA has implemented certain new initiatives, including:
| | · | a classification system referred to as “Differentiated Levels of Corporate Governance” applicable to the companies already listed in BM&FBOVESPA; and |
| | · | a new separate listing segment for qualifying issuers referred to as the Novo Mercado, or New Market. |
The Differentiated Levels of Corporate Governance, Level 1 and Level 2, are applicable to listed companies that voluntarily comply with special disclosure and corporate governance practices established by the BM&FBOVESPA. The companies may be classified into two different levels, depending on their degree of adherence to the BM&FBOVESPA’s practices of disclosure and corporate governance.
To become a Level 1 company, an issuer must voluntarily satisfy, in addition to the obligations imposed by Brazilian law, the following requirements:
| | · | ensure that shares amounting to at least 25% of its capital are outstanding and available for trading in the market; |
| | · | adopt procedures that favor the dispersion of shares into the market whenever making a public offering; |
| | · | comply with minimum quarterly disclosure standards; |
| | · | follow stricter disclosure policies with respect to transactions with controlling shareholders, directors and officers involving the issuer’s securities; |
| | · | submit any existing shareholders’ agreements and stock option plans to the BM&FBOVESPA; and |
| | · | make a schedule of corporate events available to the shareholders. |
We are currently considering complying with these requirements for Level 1 of Corporate Governance.
To become a Level 2 company, an issuer must, in addition to satisfying the Level 1 criteria and the obligations imposed by Brazilian law, satisfy the following requirements:
| | · | require all directors to serve unstaggered one-year terms; |
| | · | prepare and publish annual financial statements in English and in accordance with U.S. GAAP or IFRS; |
| | · | create tag-along rights for minority shareholders, ensuring holders of common shares of the right to sell on the same terms as a controlling shareholder, and ensuring preferred shareholders a price equal to at least 80% of that received by the selling controlling shareholder; |
| | · | grant preferred shareholders the right to vote in certain cases, including, without limitation, the transformation, spin-off or merger of the company, and approval of agreements with related parties; |
| | · | make a tender offer for all outstanding shares, for a price equal to fair market value, in the event of delisting from Level 2 qualification; and |
| | · | agree to submit any disputes between the company and its investors exclusively to the BM&FBOVESPA’s Market Arbitration Chamber. |
The New Market is a separate listing segment for the trading of shares issued by companies that voluntarily adopt certain additional corporate governance practices and disclosure requirements which are more demanding than those required by the current law in Brazil. Companies may qualify to have their shares traded in the New Market, if, in addition to complying with the Level 2 corporate governance practices referred to above, their capital stock consists only of voting common shares.
On May 20th, 2011 the Board of Directors of TIM Participações Resolve and recommend to the Extraordinary General Shareholders’ Meeting of the Company its migration to the listing segment “Novo Mercado” of BM&FBOVESPA, which took place on June 22nd. With this migration TIM moves to the highest level of corporate governance. Only 26% of Brazilian listed companies are in the Novo Mercado and TIM will be the only telecom stock among them. After the migration, TIM will have only one class of share (ordinary) and will grant 100% tag-along rights in case the company is sold.
BM&FBOVESPA Market Administration Panel
Pursuant to Law Nr. 9,307/96, a Market Arbitration Panel (the “Panel”) has been established by the BM&FBOVESPA. The Panel was established to settle certain types of disputes, including disputes relating to corporate governance, securities issues, financial regulatory issues and other capital market matters, with respect to BM&FBOVESPA listed companies that have undertaken to voluntarily comply with Level 2 and New Market levels of corporate governance and disclosure. The Panel will provide a forum for dispute resolution involving, among others, the BM&FBOVESPA, the applicable listed company and the shareholders, directors and management of the applicable listed company.
Regulation of Brazilian Securities Markets
The Brazilian securities markets are principally governed by Law No. 6,385, of December 7, 1976, and Brazilian Corporations law, each as amended and supplemented, and by regulations issued by the CVM, which has authority over stock exchanges and the securities markets in general; the National Monetary Council; and the Central Bank, which has, among other powers, licensing authority over brokerage firms and regulates foreign investment and foreign exchange transactions.
These laws and regulations, among others, provide for licensing and oversight of brokerage firms, governance of the Brazilian stock exchanges, disclosure requirements applicable to issuers of traded securities, restrictions on price manipulation and protection of minority shareholders. They also provide for restrictions on insider trading. Accordingly, any trades or transfers of our equity securities by our officers and directors, our controlling shareholders or any of the officers and directors of our controlling shareholders must comply with the regulations issued by the CVM.
Under Brazilian Corporations law, a corporation is either publicly held (companhia aberta), as we are, or closely held (companhia fechada). All publicly held companies are registered with the CVM and are subject to reporting requirements. We have the option to ask that trading in securities on BM&FBOVESPA be suspended in anticipation of a material announcement. Trading may also be suspended on the initiative of BM&FBOVESPA or the CVM, based on or due to, among other reasons, a belief that a company has provided inadequate information regarding a material event or has provided inadequate responses to inquiries by the CVM or BM&FBOVESPA.
The Brazilian over-the-counter market consists of direct trades between individuals in which a financial institution registered with the CVM serves as intermediary. No special application, other than registration with the CVM, is necessary for securities of a public company to be traded in this market. The CVM requires that it be given notice of all trades carried out in the Brazilian over-the-counter market by the respective intermediaries.
Trading on BM&FBOVESPA by non-residents of Brazil is subject to limitations under Brazilian foreign investment and tax legislation. The Brazilian custodian for our preferred shares on behalf of the Depositary for the ADSs, has obtained registration from the Central Bank to remit U.S. dollars abroad for payments of dividends, any other cash distributions, or upon the disposition of the shares and sales proceeds thereto. In the event that a holder of ADSs exchanges preferred shares for ADSs, the holder will be entitled to continue to rely on the custodian’s registration for five business days after the exchange. Thereafter, the holder may not be able to obtain and remit U.S. dollars abroad upon the disposition of our preferred shares or upon distributions relating to our preferred shares, unless the holder obtains a new registration. See “Item 10B. Additional Information—Memorandum and Articles of Association.”
Brazilian regulations also require that any person or group of persons representing the same interest that has directly or indirectly acquired an interest corresponding to 5% of a type or class of shares of a publicly traded company must provide such publicly traded company with information on such acquisition and its purpose, and such company must transmit this information to the CVM. If this acquisition causes a change in the corporate control or in the administrative structure of the company, as well as when such acquisition triggers the obligation of making a public offering in accordance with CVM Instruction 358/03, then the acquiring entity shall disclose this information to the applicable stock exchanges and the appropriate Brazilian newspapers. Regulations also require disclosure of any subsequent increase or decrease of five percent or more in ownership of common shares, including warrants and debentures convertible into common shares in the same terms above.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the issue
Not applicable.
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
The following summarizes certain material provisions of TIM’s by-laws and the Brazilian Corporations Law, the main bodies of regulation governing us. Copies of TIM’s by-laws have been filed as exhibits to this annual report on Form 20-F. Except as described in this section, TIM’s by-laws do not contain provisions addressing the duties, authority or liabilities of the directors and senior management, which are instead established by Brazilian Corporations Law.
Registration
TIM’s by-laws have been registered with the Public Registry of the state of Rio de Janeiro under company number (NIRE) 33.3.0027696-3.
Corporate Purpose
Article 2 of our by-laws provides that our main corporate purpose is to exercise control over operating companies that provide mobile telephone and other services in their respective authorization and/or concession area. Other corporate purposes include:
| | · | promote, through our controlled or affiliated companies, the expansion of mobile telephone services in their respective concession areas; |
| | · | procure funding from internal or external sources; |
| | · | promote and foster study and research for the development of mobile telephone services; |
| | · | perform, through our controlled or affiliated companies, specialized technical services related to the mobile telephone industry; |
| | · | promote and coordinate, through our controlled or affiliated companies, the education and training of the staff required by the telephone services; |
| | · | effect or order the importation of goods and services for our controlled and affiliated companies; |
| | · | perform any other activities linked or related to our corporate purpose; and |
| | · | hold interests in other companies. |
Company Management
Following is a description of some of the provisions of our by-laws concerning members of the Board of Directors:
| | · | Pursuant to Art. 25, item XVII, the Board of Directors has the power to approve loans and financing as well as to issue promissory notes, for an amount exceeding 2% of the shareholders’ equity; |
| | · | Pursuant to Art. 25, item XXI, the Board of Directors has the power to allocate the total budget for management remuneration approved by the shareholders’ meeting among the directors and the executive officers, observed the allocations already approved by the Shareholders’ meeting; and |
| | · | Pursuant to Art. 27, paragraph 3, a member of the Board of Directors is not authorized to access information or to attend a meeting of the Board of Directors regarding subjects or proposals in respect of which such director has or represents an interest conflicting with those of TIM. |
Pursuant to the Brazilian Corporations Law, each member of the Board of Directors must have at least one share of our capital stock in order to qualify as a Director. There are no provisions in the by-laws with respect to:
| | · | a director’s power to vote compensation to him or herself in the absence of an independent quorum; |
| | · | borrowing powers exercisable by the directors; |
| | · | age limits for retirement of directors; |
| | · | required shareholding for director qualification; |
| | · | anti-takeover mechanisms or other procedures designed to delay, defer or prevent changes in our control; or |
| | · | disclosure of share ownership. |
The Executive Officers are the Company’s representative and executive body, and each one of them shall act within his/her respective scope of authority.” Following is a description of some of the provisions of our by-laws concerning the Board of Executive Officers:
| | · | Pursuant to Art. 32, item III, the Board of Executive Officers has the power to authorize the participation of the Company or its controlled companies in any joint venture, partnership, consortium or any similar structure; |
| | · | Pursuant to Art. 32, item VI, the Board of Executive Officers has the power to approve the execution by the Company or by its controlled companies, of active or passive agreements for the supply or lease of goods or services, whose annual value is greater than R$15.0 (fifteen million reais); and |
| | · | Pursuant to Art. 32, item VII, the Board of Executive Officers has the power to approve the contracting by the Company or by its controlled companies of loans, financing, or any other transactions implying indebtedness to the Company or its controlled companies, whose individual value is greater than R$30.0 (thirty million reais), provided that the provisions of item XVII of section 25 of this By-laws are observed. |
Rights Relating to our Shares
Dividend Rights
See “Item 8A. Financial Information―Consolidated Statements and Other Financial Information—Dividend Policy.”
Voting Rights
Each common share entitles the holder to one vote at meetings of shareholders. Our preferred shares do not entitle the holder to vote except as set forth below. Holders of our preferred shares are each entitled to attend or to address meetings of shareholders.
One of the members of our Fiscal Committee and his or her alternate may be elected by majority vote of the holders of our preferred shares represented at the annual meeting of shareholders at which members of the Fiscal Committee are elected.
Brazilian Corporations Law provides that certain non-voting shares, such as our preferred shares, at a minimum, acquire voting rights in the event we fail for three consecutive fiscal years to pay the dividend to which such shares are entitled until such payment is made.
In addition, our by-laws provide that our preferred shares are entitled to full voting rights with respect to:
| | · | the approval of any long-term contract between us or any of our subsidiaries, on the one hand, and any controlling shareholder or affiliates or related parties thereof, on the other hand, except in certain cases involving standard contracts entered into in the ordinary course of business; and |
| | · | resolutions modifying certain provisions of our by-laws. |
Any change in the preference, benefits, conditions of redemption and amortization of our preferred shares, or the creation of a class of shares having priority or preference over our preferred shares, would require the approval
of holders of a majority of our outstanding preferred shares at a special meeting of holders of our preferred shares. Such meeting would be called by publication of a notice in three Brazilian official gazettes at least thirty days prior to the meeting but would not generally require any other form of notice. In any circumstances in which holders of our preferred shares are entitled to vote, each of our preferred shares will entitle the holder to one vote.
Meeting of Shareholders
According to Brazilian law, shareholders must be previously notified through a notice published in three Brazilian official gazettes in order for an annual or extraordinary shareholders’ meeting to be held. The notification must occur at least 15 days prior to the meeting scheduled date. However, according to our by-laws, such notification must occur at least 30 days prior to the meeting convened to resolve on the matters listed on section 136 of the Brazilian Corporations Law. If the first meeting is not held for any reason on first notice, a second notification must be published at least eight days before the second meeting date.
On the first notice, meetings may be held only if shareholders holding at least one-fourth of voting shares are represented. Extraordinary meetings for the amendment of the by-laws may be held on the first notice only if shareholders holding at least two thirds of the voting capital are represented. On a second call, the meetings are held regardless of quorum.
Preemptive Rights
Each of our shareholders has a general preemptive right to subscribe shares in any capital increase, in proportion to its shareholding. A minimum period of 30 days following the publication of notice of the capital increase is allowed for the exercise of the right, and the right is transferable.
However, a shareholders’ meeting is authorized to eliminate preemptive rights with respect to the issuance of new shares, debentures and warrants convertible into new shares up to the limit of the authorized share capital, provided that the distribution of these securities is effected:
| | · | through an exchange of shares in a public offering the purpose of which is to acquire control of another company; or |
| | · | through the use of certain tax incentives. |
In the event of a capital increase that would maintain or increase the proportion of capital represented by the preferred shares, holders of the ADSs, or of the preferred shares, would have preemptive rights to subscribe only to newly issued preferred shares. In the event of a capital increase that would reduce the proportion of capital represented by the preferred shares, holders of the ADSs or the preferred shares would have preemptive rights to subscribe to preferred shares in proportion to their shareholdings and to the Common Shares only to the extent necessary to prevent dilution of their interest in the Holding Company.
Preemptive rights to purchase shares may not be offered to U.S. holders of the ADSs unless a registration statement under the Securities Act of 1933 is effective with respect to the shares underlying those rights, or an exemption from the registration requirements of the Securities Act of 1933 is available. Consequently, if you are a holder of our ADSs who is a U.S. person or is located in the United States, you may be restricted in your ability to participate in the exercise of preemptive rights.
Right of Redemption
Subject to certain exceptions, the common shares and the preferred shares are redeemable by shareholders exercising dissenter’s withdrawal rights in the event that shareholders representing over 50% of the voting shares adopt a resolution at a duly convened shareholders meeting to:
| | · | change the preference of our preferred shares or to create a class of shares having priority or preference over our preferred shares; |
| | · | reduce the mandatory distribution of dividends; |
| | · | change our corporate purpose; |
| | · | participate in group of companies; |
| | · | transfer all of our shares to another company in order to make us a wholly-owned subsidiary of that company; |
| | · | split up, subject to the conditions set forth by Brazilian Corporations Law; |
| | · | approve the acquisition of another company, the price of which exceeds certain limits set forth in the Brazilian Corporations Law; or |
| | · | merge or consolidate ourselves with another company. |
The redemption right expires 30 days after publication of the minutes of the relevant shareholders’ meeting or, whenever the resolution requires the approval of the holders of preferred shares in a special meeting of the holders of preferred shares affected by the resolution, within 30 days following the publication of the minutes of that special meeting. The shareholders would be entitled to reconsider any action giving rise to redemption rights within 10 days following the expiration of those rights if they determine that the redemption of shares of dissenting shareholders would jeopardize our financial stability.
The rights of withdrawal under Brazilian Corporations Law for dissenting shareholders to seek redemption of the shares in the case of a company’s decision to participate in a group of companies or to merge or consolidate itself with another company are not automatically available to holders of our preferred shares. These results from an exception under Brazilian Corporations Law that excludes dissenters’ rights in such cases for holders of shares that have a public float rate higher than 50% and that are “liquid.” Shares are defined as being “liquid” for these purposes if they are part of the Bovespa Index or another stock exchange index (as defined by the CVM). Our preferred shares are currently included on the Bovespa Index. For as long as our shares are part of any qualifying market index, the right of redemption shall not be extended to our shareholders with respect to decisions regarding our merger or consolidation with another company, or the participation in a group of companies as defined by Brazilian Corporations Law. Currently, neither our common nor preferred shares have a public float rate higher than 50%, such that withdrawal rights are applicable.
Unless otherwise provided in the by-laws, which is not the case with us, a shareholder exercising rights to redeem shares is entitled to receive the book value of such shares, determined on the basis of the last annual balance sheet approved by the shareholders. If the shareholders’ meeting giving rise to redemption rights occurs more than 60 days after the date of the last annual balance sheet, a shareholder may demand that its shares be valued on the basis of a new balance sheet that is as of a date within 60 days of such shareholders’ meeting.
Form and Transfer
Our shares are maintained in book-entry form with a transfer agent, Banco Bradesco S.A., and the transfer of our shares is made in accordance with the applicable provision of the Brazilian Corporations Law, which provides that a transfer of shares is effected by an entry made by the transfer agent on its books, debiting the share account of the seller and crediting the share account of the purchaser, against presentation of a written order of the seller, or judicial authorization or order, in an appropriate document which remains in the possession of the transfer agent. The preferred shares underlying our ADS are registered on the transfer agent’s records in the name of the Brazilian Depositary.
Transfers of shares by a foreign investor are made in the same way and executed by such investor’s local agent on the investor’s behalf except that, if the original investment was registered with the Central Bank under the Brazilian foreign investment in capital markets regulations, the foreign investor should also seek amendment, if necessary, though its local agent, of the certificate of registration to reflect the new ownership.
BM&FBOVESPA reports transactions carried out in its market to the Central Depositária BM&FBOVESPA, which is the exchange’s central clearing system. A holder of our shares may choose, at its discretion, to participate in this system. All shares elected to be put into the system will be deposited in custody with the relevant stock exchange, through a Brazilian institution duly authorized to operate by the Central Bank and CVM and having a clearing account with the relevant stock exchange. The fact that such shares are subject to custody with the relevant stock exchange will be reflected in our register of shareholders. Each participating shareholder will, in turn, be registered in our register of beneficial shareholders, as the case may be, maintained by the relevant stock exchange and will be treated in the same way as registered shareholders.
C. Material Contracts
See “Item 5B. Operating and Financial Review and Prospects — Liquidity and Capital Resources—Sources of Funds—Financial Contracts” the summary of the material contracts to which we have been a party in the past two years, other than contracts entered into in the ordinary course of business.
D. Exchange Controls
There are no restrictions on ownership of our preferred shares or common shares by individuals or legal entities domiciled outside Brazil. However, the right to convert dividend payments and proceeds from the sale of shares into foreign currency and to remit such amounts outside Brazil is subject to restrictions under foreign investment legislation which generally requires, among other things, that the relevant investments have been registered with the Central Bank. Foreign investors may register their investment under Law No. 4,131 of September 3, 1962 (“Law No. 4,131”), or Resolution CMN 2,689. Registration under Law No. 4,131 or under Resolution CMN 2,689 generally enables foreign investors to convert into foreign currency dividends, other distributions and sales proceeds received in connection with registered investments and to remit such amounts abroad. Resolution CMN 2,689 affords favorable tax treatment to foreign investors who are not resident in a tax haven jurisdiction, which is defined under Brazilian tax laws as a country that does not impose taxes or where the maximum income tax rate is lower than 20% or that restricts the disclosure of shareholder composition or ownership of investments. See “—E. Taxation—Brazilian Tax Considerations.” Such restrictions on the remittance of foreign capital abroad may hinder or prevent Banco Itaú S.A., as custodian for our preferred shares represented by ADSs, or holders who have exchanged ADRs for preferred shares, from converting dividends, distributions or the proceeds from any sale of such preferred shares, as the case may be, into U.S. dollars and remitting such U.S. dollars abroad. Holders of ADSs could be adversely affected by delays in, or refusal to grant any, required government approval for conversions of Brazilian currency payments and remittances abroad of our preferred shares underlying the ADSs.
Under Resolution CMN 2,689, foreign investors may invest in almost all financial assets and engage in almost all transactions available in the Brazilian financial and capital markets, provided that certain requirements are fulfilled. In accordance with Resolution CMN 2,689, foreign investors are individuals, corporations, mutual funds and collective investments domiciled or headquartered abroad.
Pursuant to Resolution CMN 2,689, foreign investors must:
| | · | appoint at least one representative in Brazil with powers to perform actions relating to the foreign investment; |
| | · | complete the appropriate foreign investment registration form; |
| | · | obtain registration as a foreign investor with the CVM; and |
| | · | register the foreign investment with the Central Bank. |
The securities and other financial assets held by the foreign investor pursuant to Resolution CMN 2,689 must be:
| | · | registered or maintained in deposit accounts or under the custody of an entity duly licensed by the Central Bank or by the CVM or |
| | · | registered in registration, clearing and custody systems authorized by the Central Bank or by the CVM. |
In addition, securities trading are restricted to transactions carried out on the stock exchanges or organized over-the-counter markets licensed by the CVM.
On January 26, 2000, the Central Bank enacted Circular No. 2,963, providing that beginning on March 31, 2000, all investments by a foreign investor under the Resolution CMN 2,689 are subject to the electronic registration with the Central Bank. Foreign investments registered under the Annex IV regulations were required to conform to the new registration rules by June 30, 2000.
Resolution No. 1,927 of the CMN provides for the issuance of depositary receipts in foreign markets in respect of shares of Brazilian issuers. The ADS program was approved under the Annex V regulations by the Central Bank and the Brazilian securities commission prior to the issuance of the ADSs. Accordingly, the proceeds from the sale of ADSs by ADR holders outside Brazil are free of Brazilian foreign investment controls and holders of the ADSs will be entitled to favorable tax treatment. See “—E. Taxation—Brazilian Tax Considerations.” According to Resolution CMN 2,689, foreign investments registered under Annex V Regulations may be converted into the new investment system and vice-versa, provided the conditions set forth by the Central Bank and the CVM are complied with.
An electronic registration has been generated in the name of the Depositary with respect to the ADSs and is maintained by the custodian on behalf of the Depositary. This electronic registration is carried on through the Central Bank’s information system. Pursuant to the registration, the custodian and the Depositary are able to convert dividends and other distributions with respect to our preferred shares represented by ADSs into foreign currency and remit the proceeds outside Brazil. In the event that a holder of ADSs exchanges such ADSs for preferred shares, such holder will be entitled to continue to rely on the Depositary’s certificate of registration for five business days after such exchange, following which such holder must seek to obtain its own certificate of registration with the Central Bank. Thereafter, any holder of preferred shares may not be able to convert into foreign currency and remit outside Brazil the proceeds from the disposition of, or distributions with respect to, such preferred shares, unless such holder qualifies under the Annex IV or the Resolution 2,689 regulations, or obtains its own certificate of registration. A holder that obtains a certificate of registration will be subject to less favorable Brazilian tax treatment than a holder of ADSs. See “—E. Taxation—Brazilian Tax Considerations.” In addition, if the holder is a qualified investor under Resolution CMN 2,689 but resides in a jurisdiction that does not impose income tax or where the income tax is imposed at a maximum rate of 20%, this holder will be subject to a less favorable tax treatment than a holder of ADSs.
Under current Brazilian legislation, the federal government may impose temporary restrictions on remittances of foreign capital abroad in the event of a serious imbalance or an anticipated serious imbalance of Brazil’s balance of payments. For approximately six months in 1989 and early 1990, the federal government froze all dividend and capital repatriations held by the Central Bank that were owed to foreign equity investors, in order to conserve Brazil’s foreign currency reserves. These amounts were subsequently released in accordance with federal government directives. The imbalance in Brazil’s balance of payments increased during 1999, and there can be no assurance that the federal government will not impose similar restrictions on foreign repatriations in the future.
E. Taxation
The following summary contains a description of the principal Brazilian and U.S. federal income tax consequences of the ownership and disposition of the preferred shares or ADSs, but it does not purport to be a comprehensive description of all the tax considerations that may be relevant to a decision to hold preferred shares or ADSs. The summary is based upon the tax laws of Brazil and regulations thereunder and on the federal income tax laws of the United States thereunder as of the date hereof, both of which are subject to change. Holders of preferred
shares or ADSs should consult their own tax advisers as to the tax consequences of the ownership and disposition of preferred shares or ADSs in their particular circumstances.
Although there is at present no income tax treaty between Brazil and the United States, the tax authorities of the two countries have had discussions that may culminate in such a treaty in the future. No assurance can be given, however, as to whether or when a treaty will enter into force or how it will affect the U.S. holders of preferred shares or ADSs.
Brazilian Tax Considerations
The following discussion summarizes the principal Brazilian tax consequences of the ownership and disposition of preferred shares or ADSs by a non-Brazilian holder. This discussion does not address all the Brazilian tax considerations that may be applicable to any particular non-Brazilian holder, and each non-Brazilian holder should consult its own tax adviser about the Brazilian tax consequences of investing in preferred shares or ADSs.
Taxation of Dividends
Dividends paid by us in cash or in kind from profits of periods beginning on or after January 1, 1996 (i) to the Depositary in respect of preferred shares underlying ADSs or (ii) to a non-Brazilian holder in respect of preferred shares will generally not be subject to Brazilian income tax withholding. The dividend distribution made in 2011 does not include any dividends relating to periods ending on or before January 1, 1996.
Taxation of Gains
According to Article 26 of Law No. 10,833 of December 29, 2003, which came into force on February 1, 2004, capital gains realized on the disposition of assets located in Brazil by non-Brazilian residents, whether or not to other non-residents and whether made outside or within Brazil, are subject to taxation in Brazil at a rate of 15%, or 25% if made by investors domiciled in a “tax haven” jurisdiction (i.e., a country that does not impose any income tax or that imposes tax at a maximum rate of less than 20%). Although we believe that the ADSs will not fall within the definition of assets located in Brazil for the purposes of Law No. 10,833, considering the general and unclear scope of Law 10,833 and the absence of any judicial guidance in respect thereof, we are unable to predict whether such interpretation will ultimately prevail in the Brazilian courts.
Gains realized by non-Brazilian holders on dispositions of preferred shares in Brazil or in transactions with Brazilian residents may be exempt from Brazilian income tax or taxed at a rate of 15% or 25%, depending on the circumstances. Gains realized through transactions on Brazilian stock exchanges, if carried out in accordance with Resolution CMN 2,689, as described below, are exempt from Brazilian income tax. Gains realized through transactions on Brazilian stock exchanges are otherwise subject to Brazilian income tax at a rate of 15% and also to Brazilian withholding tax at a rate of 0.005% (to offset the Brazilian income tax due on eventual capital gain). Gains realized through transactions with Brazilian residents or through transactions in Brazil not on the Brazilian stock exchanges are subject to tax at a rate of 15%, or 25% if made by investors resident in a tax haven jurisdiction.
Non-Brazilian holders of preferred shares registered under Resolution CMN 2,689 (which, pursuant to Resolution 1,927, includes ADSs) and which as of March 31, 2000 superseded the Annex IV Regulations, may be subject to favorable tax treatment if the investor has
| | · | appointed a representative in Brazil with power to take action relating to the investment in preferred shares; |
| | · | registered as a foreign investor with the CVM; and |
| | · | registered its investment in preferred shares with the Central Bank. |
Under Resolution CMN 2,689, securities held by foreign investors must be maintained under the custody of, or in deposit accounts with, financial institutions duly authorized by the Central Bank and the CVM. In addition, securities trading are restricted under Resolution CMN 2,689 to transactions on Brazilian stock exchanges or qualified over-the-counter markets. The preferential treatment afforded under Resolution CMN 2,689 and afforded to investors in ADSs is not available to investors resident or domiciled in tax havens.
Thus, holders of ADSs and non-Brazilian holders of preferred shares under Resolution CMN 2,689 will not be subject to Brazilian income tax on gains realized on the sale or other disposition of such ADSs or preferred shares, but, there can be no assurance that the current preferential treatment for holders of ADSs and non-Brazilian holders of preferred shares under Resolution CMN 2,689 will be maintained.
Gain on the disposition of preferred shares is measured by the difference between the amounts in Brazilian currency realized on the sale or exchange and the acquisition cost of the shares sold, measured in Brazilian currency, without any correction for inflation. The acquisition cost of shares registered as an investment with the Central Bank is calculated on the basis of the foreign currency amount registered with the Central Bank. See “—D. Exchange Controls” above.
There is a possibility that gains realized by a non-Brazilian holder upon the redemption of preferred shares will be treated as gains from the disposition of such preferred shares to a Brazilian resident occurring off of a stock exchange and will accordingly be subject to tax at a rate of 15%, or 25% if realized by investors resident in a tax haven jurisdiction.
Any exercise of preemptive rights relating to preferred shares or ADSs should not be subject to Brazilian taxation. Gains on the sale or assignment of preemptive rights relating to preferred shares should be subject to the same tax treatment applicable to a sale or disposition of our preferred shares.
The deposit of preferred shares in exchange for the ADSs may be subject to Brazilian income tax if the amount previously registered with the Central Bank as a foreign investment in our preferred shares is lower than
| | · | the average price per preferred share on the BM&FBOVESPA on the day of the deposit; or |
| | · | if no preferred shares were sold on that day, the average price per preferred share on the BM&FBOVESPA during the fifteen preceding trading sessions. |
The difference between the amount previously registered and the average price of the preferred shares, calculated as set forth above, will be considered a capital gain subject to income tax. Unless the preferred shares were held in accordance with Resolution CMN 2,689, in which case the exchange would be tax-free, the capital gain will be subject to income tax at the following rates: (i) 15%, for gains realized through transactions that were conducted on Brazilian stock exchanges; or (ii) 15%, or 25% if realized by investors resident in a tax haven jurisdiction, for gains realized through transactions in Brazil that were not conducted on the Brazilian stock exchanges.
The withdrawal of preferred shares in exchange for ADSs is not subject to Brazilian income tax, but is subject to the IOF/Bonds tax as described below. On receipt of the underlying preferred shares, a non-Brazilian holder entitled to benefits under Resolution CMN 2,689 will be entitled to register the U.S. dollar value of such shares with the Central Bank as described above in “—D. Exchange Controls.” If such non-Brazilian holder does not qualify under Resolution CMN 2,689, it will be subject to the less favorable tax treatment described above in respect of exchanges of preferred shares.
Distributions of Interest on Capital
A Brazilian corporation may make payments to its shareholders characterized as interest on the corporation's capital as an alternative form of making dividend distributions. See “Item 8A. Financial Information—Consolidated Statements and Other Financial Information—Dividend Policy.” The rate of interest may not be higher than the TJLP, as determined by the Central Bank from time to time. The total amount distributed as interest on capital may not exceed, for tax purposes, the greater of:
| | · | 50% of net income for the year in respect of which the payment is made, after the deduction of social contribution or net profits and before (1) making any deduction for corporate income taxes paid and (2) taking such distribution into account; or |
| | · | 50% of retained earnings for the year prior to the year in respect of which the payment is made. |
Payments of interest on capital are decided by the shareholders on the basis of recommendations by our Board of Directors.
Distributions of interest on capital paid to Brazilian and non-Brazilian holders of preferred shares, including payments to the Depositary in respect of preferred shares underlying ADSs, are deductible by us for Brazilian tax purposes up to the limit mentioned above. Such payments are subject to Brazilian income tax withholding at the rate of 15%, except for payments to beneficiaries who are exempt from tax in Brazil, which are free of Brazilian tax, and except for payments to beneficiaries domiciled in tax havens, which payments are subject to withholding at a 25% rate.
No assurance can be given that our Board of Directors will not recommend that future distributions of profits will be made by means of interest on capital instead of by means of dividends.
Other Brazilian Taxes
There are no Brazilian inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of the preferred shares or ADSs by a non-Brazilian holder except for gift and inheritance taxes levied by some States in Brazil on gifts made or inheritances bestowed by individuals or entities not resident or domiciled in Brazil or in the relevant state to individuals or entities that are resident or domiciled within such state in Brazil. There is no Brazilian stamp, issue, registration, or similar taxes or duties payable by holders of preferred shares or ADSs.
Tax on Foreign Exchange and Financial Transactions
Tax on foreign exchange transactions (“IOF/Exchange Tax”)
Brazilian law imposes the IOF/Exchange Tax on the conversion of reais into foreign currency and on the conversion of foreign currency into reais. Effective October 20, 2009, the Brazilian government increased the tax rate related to foreign investments in the Brazilian financial and capital markets from 0 to 2%, including investments made pursuant to Resolution CMN 2,689. The IOF/Exchange Tax applies upon conversion of foreign currency into Brazilian reais related to equity or debt investments on the Brazilian stock exchanges (such as BM&FBOVESPA, where our preferred shares are listed) by foreign investors, or the over-the-counter market, as well as private investment funds, Brazilian treasury notes and other fixed income securities. The outflow of funds from Brazil related to investments carried out pursuant to Resolution CMN 2,689, including for dividend payments and returns of capital, remains subject to the 0% rate. The Brazilian Government is permitted to increase the rate at any time up to 25%. However, any increase in rates may only apply to future transactions.
As a result of this increase in the IOF/Exchange Tax, any non-Brazilian holder will be subject to a 2.0% tax upon transferring foreign currency to Brazil to purchase securities, including our preferred shares.
Tax on transactions involving bonds and securities (“IOF/Bonds Tax”)
Brazilian law imposes the IOF/Bonds Tax on transactions involving bonds and securities, including those carried out on a Brazilian stock exchange. The rate of IOF/Bonds Tax applicable to transactions involving the cancellation of ADSs in exchange for preferred shares is currently 1.5%. The rate is applied to the product of the number of preferred shares received and the closing price for those shares on the date prior to the transfer, or if such closing price is not available, the last available closing price for such shares. The 1.5% IOF/Bonds Tax also applies on the deposit of preferred shares in exchange for ADSs.
Material U.S. Federal Income Tax Considerations
The following are the material U.S. federal income tax consequences to a U.S. Holder described below of owning and disposing of preferred shares or ADSs, but it does not purport to be a comprehensive description of all tax considerations that may be relevant to a particular person’s decision to hold or dispose of such securities. The discussion applies only to a U.S. Holder that holds preferred shares or ADSs as capital assets for tax purposes and it does not describe all tax consequences that may be relevant to U.S. Holders subject to special rules, such as:
| | · | certain financial institutions; |
| | · | dealers or traders in securities or foreign currencies who use a mark-to-market of tax accounting; |
| | · | persons holding preferred shares or ADSs as part of a hedge, “straddle,” integrated transaction or similar transaction; |
| | · | persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar; |
| | · | partnerships or other entities classified as partnerships for U.S. federal income tax purposes; |
| | · | persons liable for the alternative minimum tax; |
| | · | tax-exempt entities, including an “individual retirement account” or Roth IRA; |
| | · | persons holding shares in connection with a trade or business conducted outside of the United States; |
| | · | persons holding preferred shares or ADSs that own or are deemed to own ten percent or more of our voting stock; or |
| | · | persons who acquired our shares or ADSs pursuant to the exercise of any employee stock option or otherwise as compensation. |
If an entity that is classified as a partnership for U.S. federal income tax purposes holds preferred shares or ADSs, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and upon the activities of the partnership. Partnerships holding preferred shares or ADSs and partners in such partnerships should consult their tax advisers as to the particular U.S. federal income tax consequences of holding and disposing of the preferred shares or ADSs.
This discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), administrative pronouncements, judicial decisions and final, temporary and proposed Treasury regulations, all as of the date hereof. These laws are subject to change, possibly with retroactive effect. It is also based in part on representations by the Depositary and assumes that each obligation under the Deposit Agreement and any related agreement will be performed in accordance with its terms.
A “U.S. Holder” is a holder who, for U.S. federal tax purposes, is a beneficial owner of preferred shares or ADSs that is:
| | · | a citizen or individual resident of the United States; |
| | · | a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States or any political subdivision thereof; or |
| | · | an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source. |
In general, a U.S. Holder that owns ADSs will be treated as the owner of the underlying preferred shares represented by those ADSs for U.S. federal income tax purposes. Accordingly, no gain or loss will be recognized if a U.S. Holder exchanges ADSs for the underlying preferred shares represented by those ADSs.
The U.S. Treasury has expressed concerns that parties to whom American depositary shares are released before delivery of shares to the depositary or intermediaries in the chain of ownership between U.S. holders and the issuer of the security underlying the American depositary shares may be taking actions that are inconsistent with the claiming of foreign tax credits by U.S. holders of American depositary shares. Such actions would also be inconsistent with the claiming of the reduced rate of tax applicable to dividends received by certain non-corporate holders. Accordingly, the creditability of Brazilian taxes and the availability of the reduced tax rate for dividends received by certain non-corporate holders, each described below, could be affected by actions taken by such parties or intermediaries.
U.S. Holders should consult their tax advisers concerning the U.S. federal, state, local and foreign tax consequences of owning and disposing of preferred shares or ADSs in their particular circumstances.
This discussion assumes that the Company is not, and will not become, a passive foreign investment company, as described below.
Taxation of Distributions
Distributions paid on preferred shares or ADSs, including distributions of interest on capital, will generally be treated as dividends to the extent paid out of the Company’s current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Because the Company does not maintain calculations of its earnings and profits under U.S. federal income tax principles, it is expected that distributions generally will be reported to U.S. Holders as dividends. Subject to applicable limitations and the discussion above regarding concerns expressed by the U.S. Treasury, dividends paid by qualified foreign corporations to certain non-corporate U.S. Holders in taxable years beginning before January 1, 2013 are taxable at favorable rates, up to a maximum rate of 15%. A foreign corporation is treated as a qualified foreign corporation with respect to dividends paid on stock that is readily tradable on a securities market in the United States, such as the New York Stock Exchange where our ADSs are traded. U.S. Holders should consult their tax advisers to determine whether a favorable rate will apply to dividends they receive and whether they are subject to any special rules that limit their ability to be taxed at a favorable rate.
The amount of a dividend will include any amounts withheld by the Company in respect of Brazilian taxes on the distribution. The amount of the dividend will be treated as foreign-source dividend income to U.S. Holders and will not be eligible for the dividends-received deduction generally allowed to U.S. corporations under the Code. Dividends will be included in a U.S. Holder’s income on the date of the U.S. Holder’s or, in the case of ADSs, the Depositary’s receipt of the dividend. The amount of any dividend income paid in reais will be the U.S. dollar amount calculated by reference to the exchange rate in effect on the date of such receipt regardless of whether the payment is in fact converted into U.S. dollars. If the dividend is converted into U.S. dollars on the date of receipt, a U.S. Holder generally should not be required to recognize foreign currency gain or loss in respect of the dividend income. A U.S. Holder may have foreign currency gain or loss if the dividend is converted into U.S. dollars after the date of its receipt.
Sale or Other Disposition of Preferred Shares or ADSs
For U.S. federal income tax purposes, gain or loss realized on the sale or other disposition of preferred shares or ADSs will be capital gain or loss. The amount of the gain or loss will equal the difference between the U.S. Holder’s tax basis in the preferred shares or ADSs disposed of and the amount realized on the disposition, in each case as determined in U.S. dollars. Such gain or loss will generally be U.S.-source gain or loss for foreign tax credit purposes. If a Brazilian tax is withheld on the sale or disposition of preferred shares or ADSs, a U.S. Holder’s amount realized will include the gross amount of the proceeds of such sale or disposition before deduction of the Brazilian tax. See “—Brazilian Tax Considerations – Taxation of Gains” for a description of when a disposition may be subject to taxation by Brazil.
Foreign Tax Credits in Respect of Brazilian Taxes
Subject to applicable limitations that may vary depending upon a U.S. Holder’s circumstances and subject to the discussion above regarding concerns expressed by the U.S. Treasury, Brazilian income taxes withheld from dividends on preferred shares or ADSs generally will be creditable against a U.S. Holder’s U.S. federal income tax liability.
A U.S. Holder will be entitled to use foreign tax credits to offset only the portion of its U.S. tax liability that is attributable to foreign-source income. This limitation on foreign taxes eligible for credit is calculated separately with regard to specific classes of income. Because a U.S. Holder's gains from the sale or exchange of preferred shares or ADSs will generally be treated as U.S.-source income, this limitation may preclude a U.S. Holder from claiming a credit for all or a portion of the Brazilian taxes imposed on any such gains. U.S. Holders should consult their tax
advisers as to whether these Brazilian taxes may be creditable against the U.S. Holder’s U.S. federal income tax liability on foreign-source income from other sources.
Instead of claiming a credit, a U.S. Holder may elect to deduct such Brazilian taxes in computing its taxable income, subject to generally applicable limitations under U.S. law. An election to deduct foreign taxes instead of claiming foreign tax credits must apply to all taxes paid or accrued in the taxable year to foreign countries and possessions of the United States.
The Brazilian IOF/Exchange Tax imposed on the deposit of preferred shares in exchange for ADSs and the cancellation of ADSs in exchange for preferred shares (as discussed above under “—Brazilian Tax Considerations”) will not be treated as creditable foreign tax for U.S. federal income tax purposes. U.S. Holders should consult their tax advisers as to whether those taxes would be deductible for U.S. federal income tax purposes.
The rules governing foreign tax credits are complex and, therefore, U.S. Holders should consult their tax advisers regarding the availability of foreign tax credits in their particular circumstances.
Passive Foreign Investment Company Rules
The Company believes that it was not a “passive foreign investment company” (“PFIC”) for U.S. federal income tax purposes for its 2010 taxable year. However, since PFIC status depends upon the composition of a company’s income and assets and the market value of its assets from time to time, there can be no assurance that the Company will not be a PFIC for any taxable year.
If the Company were a PFIC for any taxable year during which a U.S. Holder held preferred shares or ADSs, gain recognized by such U.S. Holder on a sale or other disposition (including certain pledges) of the preferred shares or ADSs would be allocated ratably over the U.S. Holder’s holding period for the preferred shares or ADSs. The amounts allocated to the taxable year of the sale or other disposition and to any year before the Company became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for such taxable year, and an interest charge would be imposed on the amount allocated to such taxable year. Similar rules would apply to any distribution in respect of preferred shares or ADSs to the extent in excess of 125% of the average of the annual distributions on preferred shares or ADSs received by a U.S. Holder during the preceding three years or such holder’s holding period, whichever is shorter. Certain elections (such as a mark-to-market election) may be available that would result in alternative treatment under the PFIC rules. U.S. Holders should consult their tax advisers to determine whether the Company is a PFIC for any given taxable year and the tax consequences to them of holding shares in a PFIC.
Pursuant to a recent amendment to the Code, if the Company were a PFIC in any taxable year, a U.S. Holder may be required to file an annual informational report with the Internal Revenue Service (the "IRS").
Information Reporting and Backup Withholding
Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting and may be subject to backup withholding unless (i) the U.S. Holder is an exempt recipient or (ii) in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding.
The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s U.S. federal income tax liability and may entitle the U.S. Holder to a refund, provided that the required information is timely furnished to the IRS.
For taxable years beginning after March 18, 2010, certain U.S. Holders who are individuals are required to report information relating to stock of a non-U.S. person, subject to certain exceptions (including an exception for stock held in custodial accounts maintained by a U.S. financial institution). U.S. Holders are urged to consult their tax advisers regarding the effect, if any, of this legislation on their ownership and disposition of preferred shares or ADSs.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
Statements contained in this annual report as to the contents of any contract or other document referred to are not necessarily complete, and each of these statements is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit hereto. Anyone may read and copy this report, including the exhibits hereto, at the Securities and Exchange Commission’s public reference room in Washington, D.C. Information on the operation of the public reference room is available by calling 1-800-SEC-0330.
We are subject to the information and periodic reporting requirements of the Exchange Act and, in accordance therewith, will file periodic reports and other information with the SEC. These periodic reports and other information will be available for inspection and copying at the regional offices, public reference facilities of the SEC referred to above. As a foreign private issuer, we are exempt from certain provisions of the Exchange Act prescribing the furnishing and content of proxy statements and periodic reports and from Section 16 of the Exchange Act relating to short swing profits reporting and liability.
We will furnish to J.P. Morgan Chase N.A., as Depositary, copies of all reports we are required to file with the SEC under the Exchange Act, including our annual reports in English, containing a brief description of our operations and our audited annual consolidated financial statements, which will be prepared in accordance with the Brazilian Corporations Law accounting method and include a reconciliation to U.S. GAAP. In addition, we are required under the Deposit Agreement to furnish the Depositary with copies of English translations to the extent required under the rules of the SEC of all notices of preferred shareholders’ meetings and other reports and communications that are generally made available to holders of preferred shares. Under certain circumstances, the Depositary will arrange for the mailing to all ADR holders, at our expense, of these notices, reports and communications.
I. Subsidiary information.
Not applicable.
We are exposed to market risk from changes in both foreign currency exchange and interest rates. We are exposed to foreign exchange rate risk mainly because certain costs of ours are denominated in currencies (primarily U.S. dollars) other than those in which we earn revenues (primarily reais). Similarly, we are subject to market risk deriving from changes in interest rates, which may affect the cost of our financing. Prior to 1999, we did not use derivative instruments, such as foreign exchange forward contracts, foreign currency options, interest rate swaps and forward rate agreements, to manage these market risks. In 1999 (April 1999 for TND), we began entering into hedging agreements covering payments of principal on our foreign exchange denominated indebtedness. We also have entered into arrangements to hedge market risk deriving from changes in interest rates for some of our debt obligations. We do not hold or issue derivative or other financial instruments for trading purposes.
Interest Rate Risk
On December 31, 2010, our outstanding debt accrued interest at the CDI, TJLP and IPCA totaled R$3,378 million. On the same date, we had cash and cash equivalents, in the amount of R$2,376.0 million and R$31 million in Long-term instruments accruing interest at the CDI rate.
Over one year period, before accounting for tax expenses, a hypothetical, instantaneous and unfavorable change of 100 basis points in interest rates applicable to our financial assets and liabilities on December 31, 2010 would
have resulted in a variation of R$33.7 million in our interest expenses from financial contracts and a variation of R$23,7 million in our revenues from financial investments (assuming that this hypothetical 100 basis point movement in interest rates uniformly applied to each “homogenous category” of our financial assets and liabilities and that such movement in interest rates was sustained over the full one-year period). For purposes of this interest rate risk sensitivity analysis, financial assets and liabilities denominated in the same currency (e.g., U.S. dollars) are grouped in separate homogenous categories. This interest rate risk sensitivity analysis may therefore overstate the impact of interest rate fluctuations to us, as unfavorable movements of all interest rates are unlikely to occur consistently among different homogenous categories.
Exchange Rate Risk
As of December 31, 2010, we did not have any outstanding unhedged financial loans denominated in foreign currency and were thus not exposed to exchange rate risk based on our loans. We enter in to hedging agreements to hedge our borrowings denominated in foreign currency and thus have limited our exchange rate exposure regarding such borrowings. Our foreign-exchange hedging agreements protect us from devaluations of the real but expose us to potential losses in the event the foreign currencies decline in value against the real. However, any such decline in the value of foreign currencies would reduce our costs in reais in terms of planned capital expenditures as discussed below.
Our revenues are earned almost entirely in real, and we have no material foreign currency-denominated assets. We acquire our equipment and handsets from global suppliers, the prices of which are primarily denominated in U.S. dollars. Thus, we are exposed to foreign exchange risk arising from our need to make substantial dollar-denominated expenditures, particularly for imported components, equipment and handsets, that we have limited capacity to hedge. Furthermore, depreciation of the real against the U.S. dollar could create additional inflationary pressures in Brazil by increasing the price of imported products which may result in the adoption of deflationary government policies.
Description of American Depositary Receipts in Respect of Preferred Shares
Our depositary is J.P. Morgan, with its corporate trust office at which the ADRs will be administered is located at 1 Chase Manhattan Plaza, Floor 58, New York, NY, 10005-1401, United States.
Each ADS represents 10 preferred shares, deposited with the custodian and registered in the name of the depositary.
Charges of Depositary
The depositary may charge U.S$5.00 per 100 ADSs (or portion thereof) from each person to whom ADRs are issued against deposits of preferred shares, including deposits in respect of distributions of additional preferred shares, rights and other distributions, as well as from each person surrendering ADSs for withdrawal.
In addition, the following fees and charges will be incurred by ADR holders, any party depositing or withdrawing preferred shares or any party surrendering ADRs or to whom ADRs are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared by TIM Participações or an exchange of stock regarding the ADRs or deposited securities or a distribution of ADRs pursuant to the deposit agreement), whichever is applicable:
| Depositary Actions: | Description of Fees Incurred by ADR Holders per Payment: |
| Depositing or substituting the underlying shares | U.S. $5.00 per 100 ADSs (or portion thereof) |
| Selling or exercising rights | U.S. $5.00 per 100 ADSs for all distributions of securities or the net cash proceeds from the sale thereof |
| Withdrawal of an underlying security | U.S. $5.00 per 100 ADSs or portion thereof plus a U.S. $20.00 fee |
| Receiving or distributing dividends | U.S. $0.02 or less per ADS (or portion thereof) |
| Transferring, splitting, grouping receipts | U.S. $1.50 per ADR or ADSs for transfers made, to the extent not prohibited by the rules of any stock exchange or interdealer quotation system upon which the ADSs are traded |
| | As necessary, transfer or registration fees, if any, in connection with the deposit or withdrawal of deposited securities |
| General depositary services | As necessary, expenses incurred by the depositary in connection with the conversion of reais into U.S. dollars |
| | As necessary, cable, telex and facsimile transmission and delivery charges incurred at the request of persons depositing or delivering preferred shares, ADRs or any deposited securities |
| | As necessary, any fees and expenses incurred by the depositary in connection with the delivery of deposited securities or otherwise in connection with the depositary’s or its custodian’s compliance with applicable laws, rules or regulations. |
Ongoing Reimbursements by the Depositary
J.P. Morgan, as depositary, has agreed to reimburse certain reasonable Company’s expenses related to the establishment and maintenance of the ADR program. Such reimbursable expenses include legal fees, investor relations servicing, investor related presentations, broker reimbursements, ADR-related advertising and public relations in those jurisdictions in which the ADRs may be listed or otherwise quoted for trading, accountants´ fees in relation to this Form 20-F fillings with the SEC and other bona fide Program-related third party expenses.
During the year ended December 31, 2010, we received from our depositary U.S. $679,422 as reimbursement of expenses related to annual stock exchange listing fees, standard maintenance costs of ADRs, underwriting and legal fees and investor relations activities. See also “Item 10.E. Additional Information – Taxation.”
None.
None.
(a) Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2010. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are effective in ensuring that all material information required to be filed in this annual report has been made known to them in a timely fashion. Our disclosure controls
and procedures are effective in ensuring that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms and are effective in ensuring that information to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosure.
(b) Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). TIM’s internal control system was designed to provide reasonable assurance as to the integrity and reliability of the published financial statements. All internal control systems, no matter how well designed, have inherent limitations and can provide only reasonable assurance that the objectives of the control system are met.
Management evaluated the internal control over financial reporting under the supervision of our Chief Executive Officer, or CEO and Chief Financial Officer, or CFO as of December 31, 2010. Management evaluated the effectiveness of our internal control over financial reporting based on the criteria set out in the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) framework. TIM’s management concluded that as of December 31, 2010, our internal control over financial reporting was adequate and effective, based on those criteria.
Our independent registered public accounting firm, Pricewaterhousecoopers Auditores Independentes, has issued an audit report on the effectiveness of our internal controls over financial reporting as of December 31, 2010. The report on the audit of our internal control over financial reporting is included below.
(c) Audit Report of the Registered Public Accounting Firm
Pricewaterhousecoopers Auditores Independentes, the independent registered public accounting firm that has audited our consolidated financial statements, has issued an audit report on the effectiveness of our internal controls over financial reporting as of December 31, 2010. The audit report appears as follows:
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
TIM Participações S.A.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of comprehensive income, of cash flows and of changes in stockholders' equity present fairly, in all material respects, the financial position of TIM Participações S.A. and its subsidiaries (the "Company") at December 31,2010 and 2009, and the results of their operations and their cash flows for each of the two years in the period ended December 31,2010 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on internal control over financial reporting. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and· directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
PricewaterhouseCoopers
Auditores Independentes
Rio de Janeiro, Brazil
June 27, 2011
(d) Changes in Internal Control over Financial Reporting
A number of processes and systems are currently being changed in order to unify the operations of the various entities making up TIM Participações. An action plan is being implemented in order to comply with the best practices within the industry. However, these changes will not significantly affect these controls subsequent to the date of evaluation and do not constitute corrective action with regard to material weaknesses as a result of the evaluation. There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this annual report that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
Our Fiscal Committee, which functions as an audit committee, shall be comprised of three to five permanent members and an equal number of alternates, who may or may not be shareholders, elected by the Shareholders’ meeting. This year we have five members, three elected by the majority common shareholders, one by the minority common shareholders and one by the minority preferred shareholders. Our Fiscal Committee has declared that three of its members, Messrs. Samuel de Paula Matos, Jorge Michel Lepeltier and Oswaldo Orsolin, independent members of our Fiscal Committee under Brazilian rules, are “audit committee financial experts”, as such term is defined by the SEC.
We have adopted a Code of Conduct and Transparency that applies to our Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer and persons performing similar functions, as well as to our other directors, officers, controlling shareholders and members of our Fiscal Committee in accordance with CVM rules satisfying the requirements of Brazilian Law. Our code of ethics is filed as an exhibit to this annual report and is available on our website at http://www.tim.com.br/ri. The Code of Conduct and Transparency is also available free of charge upon request. Such request may be made by mail, telephone or fax at the address set forth in the second paragraph of “Item 4.A. Information on the Company—History and Development of the Company—Basic Information.” The Code of Ethics was updated on the Board of Directors’ Meeting held on September 30, 2008.
Our Code of Conduct and Transparency does not address all of the principles set forth by the Securities and Exchange Commission in Section 406 of the Sarbanes-Oxley Act. However, pursuant to company policy and section 156 of Brazilian Corporations Law No. 6.404 an officer is prohibited from taking part in any corporate transaction in which he has an interest that conflicts with the interests of the company. This disqualification must be disclosed to the board. Moreover, an officer may only contract with the company under reasonable and fair conditions, identical to those that prevail in the market or under which the company would contract with third parties. Any contract entered into or performed in violation of this article is voidable and requires the offending officer to disgorge any benefits he received from such violation.
In November 2006, a communication channel was created to address “complaints” related to breaking and/or suspicion of breaking the Control Model of the Company. The Control Model is a document based on the Code of Ethics, General Principles of Internal Control and Principles of Behavior with the Public Administration. This channel is accessible via email or letter addressed to the Internal Audit department.
During the same period, a committee formed by the directors of the Internal Auditing, Human Resources and Security was created to analyze reported complaints and take the necessary actions.
Audit and Non-Audit Fees
The following table sets forth the fees billed to us by our independent auditors, Pricewaterhousecoopers Auditores Independentes and Ernst Young, during the years ended December 31, 2010 and 2009:
| | | | |
| | | | | | | |
| | | (in thousands of reais) | |
Audit fees | | | 2,127 | | | | 7,137 | |
Audit-related fees | | | 281 | | | | 84 | |
Tax fees | | | - | | | | - | |
All other fees | | | - | | | | - | |
Total fees | | | 2,408 | | | | 7,221 | |
Audit fees in the above table are the aggregate fees billed Pricewaterhousecoopers Auditores Independentes in connection with the audit of our annual financial statements and limited reviews of our quarterly financial information for statutory purposes and the assessment required under Section 404 of the Sarbanes Oxley Act.
Audit-related fees in the above table are the aggregate fees billed by Pricewaterhousecoopers Auditores Independentes for a consolidation reporting package related to the company’s ultimate parent company.
Audit Committee Pre-Approval Policies and Procedures
The general authority to pre-approve the engagement of our independent auditors to render non-audit services is under the purview of our Fiscal Committee. Accordingly, the Fiscal Committee has established pre-approval procedures to control the provision of all audit and non-audit services by our independent auditors (the “Pre-
Approval Policy”). Under the Pre-Approval Policy, the engagement of our independent auditors to provide audit and non-audit services must be pre-approved by the Fiscal Committee, either in the form of a special approval or through the inclusion of the services in question in a list adopted by the Fiscal Committee of pre-approved services. The Pre-Approval Policy is detailed as to the particular services to be provided. Additionally, the Pre-Approval Policy affirms that the Fiscal Committee’s responsibilities under the Securities Exchange Act of 1934 are not delegated to management. All non-audit services provided by the Group’s principal auditing firm in 2009 were approved by the audit committee, and all such non-audit services to be provided in the future will also require approval from the audit committee.
Brazilian Corporations Law requires that we have a statutory Board of Auditors (referred to as our Fiscal Committee or Conselho Fiscal). Our Fiscal Committee meets the requirements of the general exemption set forth in Exchange Act Rule 10A-3(c)(3). See “Item 6A. Directors, Senior Management and Employees—Directors and Senior Management—Fiscal Committee.” Our Fiscal Committee is primarily charged with certain advisory, oversight and review functions with respect to the company’s financial statements, management acts and certain proposals to be submitted to shareholders’ meetings, such as proposals made by management regarding investment plans, capital expenditures budget, dividends distribution and corporate restructuring involving the company. However, the Fiscal Committee, as required by Brazilian Corporations Law, has only an advisory role and does not participate in the management of the company. Indeed, decisions of the Fiscal Committee are not binding on the company under Brazilian Corporations Law. Our Board of Directors, under Brazilian Corporations Law, is the only entity with the legal capacity to appoint and terminate any independent registered public accounting firm.
Since Brazilian Corporations Law does not specifically grant our Fiscal Committee the power to establish receipt, retention and complaint procedures regarding accounting, internal control and audit matters, or create policies for the confidential, anonymous treatment of employee concerns regarding accounting or auditing matters, we adopted a Fiscal Committee charter at a shareholders’ meeting held on May 6, 2004 and revised the charter at the shareholders’ meeting held on March 16, 2006 and later at the Fiscal Committee’s Meeting held on June 24, 2009, to clarify that the Fiscal Committee has certain powers and duties, which comprise among others the powers herein mentioned, and also further specifies heightened qualification requirements for members of the Fiscal Committee. On May 4, 2006, our Board of Directors approved the submission to the Shareholders’ Meeting of a proposal to amend our bylaws. The proposal provides for the incorporation of the above-mentioned powers, duties and qualifications relating to the Fiscal Committee into the bylaws. Said proposal was approved by the Shareholders’ meeting held on June 5, 2006.
We do not believe that our use of the Fiscal Committee in accordance with Brazilian Corporations Law, as opposed to the provisions set forth in Exchange Act Rule 10A-3(b), materially adversely affects the ability of the Fiscal Committee to act independently, satisfy the other applicable requirements of Exchange Act Rule 10A-3 or to fulfill its fiduciary and other obligations under Brazilian law. It is presently contemplated that the Fiscal Committee will continue to be independent. However, because the Fiscal Committee’s members will continue to be elected and its budget will continue to be set at the general shareholders’ meeting, we can make no assurance that the Fiscal Committee or its future members will continue to be independent from our controlling shareholder in the future.
None.
Ernst & Young Terco Auditores Independentes ("Ernst & Young ") were appointed as our independent registered public accounting firm in 2001 for a nine years period to cover the audit of our fiscal years up to December 31, 2009. Up to that date, our financial statements were prepared in accordance with Accounting Practices Adopted in Brazil ("BR GAAP") with a reconciliation to Accounting Principles Generally Accepted in the United States of America ("US GAAP"). On February 23, 2010 our Board of Directors, approved the appointment of PricewaterhouseCoopers Auditores Independentes ("PWC") to act as our registered independent public accounting firm beginning with fiscal year 2010. Considering the adoption of International Financial Reporting
Standards (IFRS) in 2010, Ernst & Young has audited the January 1, 2009 balance sheet as of the IFRS transition date, and PWC has audited the financial statements as of and for the two years ended December 31, 2009 and 2010. As a result of such arrangement, Ernst & Young were dismissed at the end of their nine-year contract period, effective upon the delivery of their report on the January 1, 2009 IFRS transition balance sheet, dated June 27, 2011.
Ernst & Young’s report on our balance sheet prepared at the IFRS transition date of January 1, 2009 does not contain an adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles. There were no adverse reports issued by Ernst & Young in either of the two most recent fiscal years.
During the two fiscal years ended December 31, 2009, there were no disagreements with Ernst & Young on any matter of accounting principles or practices, financial statement disclosure, or scope of audit procedures, which disagreement, if not resolved to the satisfaction of Ernst & Young, would have caused Ernst & Young to make a reference to the subject matter of the disagreement in connection with its audit reports for such years, as well as, in connection with Ernst & Young audit report over our balance sheet as at January 1, 2009.
We have requested Ernst & Young to furnish us with a letter addressed to the SEC stating whether or not it agrees with the above statements. A copy of this letter is filed as an exhibit to this Form 20-F.
Principal Differences Between Brazilian and US. Corporate Governance Practices
The significant differences between our corporate governance practices and those of the New York Stock Exchange are as follows:
Independence of Directors and Independence Tests
Neither our Board of Directors nor our management tests the independence of directors before elections are made. However, both Brazilian Corporations Law and the CVM establish rules for certain qualification requirements and restrictions, investiture, compensation, and duties and responsibilities of the companies’ executives and directors. We believe these rules provide adequate assurances that our directors are independent, and they permit us to have directors that would not otherwise pass the independence tests established by the NYSE.
Executive Sessions
According to Brazilian Corporations Law, up to one-third of the members of the Board of Directors can be elected for executive positions. The remaining non management directors are not expressly empowered to serve as a check on management and there is no requirement that those directors meet regularly without management. We currently have only one member of our Board of Directors also taking an executive position: Mr. Luca Luciani.
Committees
Even though we are not required under applicable Brazilian Corporate Law to have special advisory committees of the Board of Directors, we have two such committees: the Internal Control and Corporate Governance Committee and the Compensation Committee, which were implemented on September 30th, 2008. Pursuant to our bylaws our directors are elected by our shareholders at a general shareholders’ meeting. Compensation for our directors and executive officers is established by our shareholders.
Audit Committee and Additional Requirements
Because Brazilian Corporations Law does not specifically grant our Fiscal Committee the power to establish receipt, retention and complaint procedures regarding accounting, internal control and audit matters, or create policies for the confidential, anonymous treatment of employee concerns regarding accounting or auditing matters, we adopted a Fiscal Committee charter at the shareholders’ meeting held on May 6, 2004 and revised the charter at the shareholders’ meeting held on March 16, 2006 and later at the Fiscal Committee’s Meeting held on June 24,
2009, to clarify that the Fiscal Committee has certain powers and duties, which include the powers herein mentioned.
We do not believe that our use of the Fiscal Committee in accordance with Brazilian Corporations Law, as opposed to the provisions set forth in Exchange Act Rule 10A-3(b), materially adversely affects the ability of the Fiscal Committee to act independently, satisfy the other applicable requirements of Exchange Act Rule 10A-3 or fulfill its fiduciary and other obligations under Brazilian law. It is presently contemplated that the Fiscal Committee will continue to be independent. However, because the Fiscal Committee’s members will continue to be elected and its budget will continue to be set at the general shareholders’ meeting, we can make no assurances that the Fiscal Committee or its future members will continue to be independent from our controlling shareholder in the future.
Shareholder Approval of Equity Compensation Plans
NYSE rules require that shareholders be given the opportunity to vote on all equity compensation plans and material revisions thereto, with limited exceptions. Under the Brazilian Corporate Law, shareholders must approve all stock option plans. In addition, any issuance of new shares that exceeds our authorized share capital is subject to shareholder approval.
Corporate Governance Guidelines
NYSE rules require that listed companies adopt and disclose corporate governance guidelines. If we migrate to BM&FBOVESPA’s New Market, we will be subject to those rules on corporate governance, which includes a disclosure policy, a policy on publicizing acts or relevant facts, which requires the public disclosure of all relevant information pursuant to guidelines set forth by the CVM, as well as an insider trading policy, a policy on securities transactions, which, among other things, establishes black-out periods and requires insiders to inform management of all transactions involving our securities.
Code of Business Conduct and Ethics
NYSE rules require that listed companies adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. Applicable Brazilian law does not have a similar requirement.
We have responded to Item 18 in lieu of responding to this Item.
See our audited consolidated financial statements beginning at page F-1.
| 1.1* | By-laws of TIM Participações S.A., as amended (English translation). |
| 2.1 | Amendment to Contract for Forwarding of Resources Raised Overseas dated as of August 31, 2009, between Banco Santander Brasil S.A. as lender, and TIM Celular S.A., as borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 30, 2010. |
| 2.2 | Addendum to bank Credit Bill dated as of August 31, 2005, between Banco Santander S.A., as lender, and TIM Celular S.A., as borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 30, 2010. |
| 2.3 | Loan Agreement, dated as of October 6, 2009, between BNDES Bank, as lender, and TIM Celular S.A. as borrower and TIM Participações S.A., as intervening party, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 30, 2010.. |
| 2.4 | Loan Agreement, dated as of October 6, 2009, between BNDES Bank, as lender, and TIM Nordeste S.A. as borrower and TIM Participações S.A., as intervening party, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 30, 2010. |
| 2.5 | Confirmation of Swap Operation, dated as of March 9, 2009, between ABN AMRO Real S.A, as contracted party, and TIM Celular S.A., as contracting party, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 30, 2010. |
| 2.6 | Renewal of Financing Credit Line dated as of March 14, 2008, between Banco Santander S.A., as lender, and TIM Celular S.A., as borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 30, 2010. |
| 2.7 | Loan Agreement, dated as of August 31, 2009, between Banco Santander S.A., as lender, and TIM Celular S.A., as borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 30, 2010. |
| 2.8 | Contract for Transfer of Funds, dated as of August 31, 2009, between Banco Santander S.A., as lender, and TIM Celular S.A., as borrower which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 30, 2010. |
| 2.9 | Contract for Transfer of Funds, dated as of September 9, 2009, between Banco Santander S.A., as lender, and TIM Celular S.A., as borrower which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 30, 2010. |
| 2.10 | Contract for Transfer of Funds, dated as of September 9, 2009, between Banco Santander S.A., as lender, and TIM Celular S.A., as borrower which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 30, 2010. |
| 2.11 | Confirmation of Swap Operation, dated as of June 29, 2009, between Unibanco S.A., as contracted party, and TIM Celular S.A., as contracting party, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 30, 2010. |
| 2.12 | Confirmation of Swap Operation, dated as of June 29, 2009, between Unibanco S.A., as contracted party, and TIM Celular S.A., as contracting party, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 30, 2010. |
| 2.13 | Second Amendment to Bank Credit Bill, dated as of August 31, 2005, between Banco do Brasil S.A., as lender, and TIM Celular S.A., as borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 30, 2010. |
| 2.14 | Second Amendment to Bank Credit Bill, dated as of August 31, 2005, between Banco Santander S.A., as lender, and TIM Celular S.A., as borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 30, 2010. |
| 2.15 | Second Amendment to Bank Credit Bill, dated as of August 31, 2005, between Banco Itaú BBA S.A., as lender, and TIM Celular S.A., as borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 30, 2010. |
| 2.16 | Second Amendment to Bank Credit Bill, dated as of August 31, 2005, between Banco Itaú BBA S.A., as lender, and TIM Celular S.A., as borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 30, 2010. |
| 2.17 | Second Amendment to Bank Credit Bill, dated as of August 31, 2005, between HSBC Bank Brasil S.A., as lender, and TIM Celular S.A., as borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 30, 2010. |
| 2.18 | Second Amendment to Bank Credit Bill, dated as of August 31, 2005, between Banco Bradesco S.A., as lender, and TIM Celular S.A., as borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 30, 2010. |
| 2.19 | Second Amendment to Bank Credit Bill, dated as of August 31, 2005, between Votorantim S.A., as lender, and TIM Celular S.A., as borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 30, 2010. |
| 2.20 | Second Amendment to Bank Credit Bill, dated as of August 31, 2005, between Banco Societé Génerále Brasil S.A., as lender, and TIM Celular S.A., as borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 30, 2010. |
| 2.21 | Loan Agreement, dated as of March 14, 2008, between Banco Votorantim S.A., as lender, and TIM Celular S.A., as borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 2.22 | Credit Note, dated as of June 6, 2008, between Banco ABN AMRO Real S.A., as lender, and TIM Celular S.A., as borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 2.23 | Guarantee and Indemnity Agreement, dated as of June 3, 2008, between European Investment Bank, as lender, TIM Celular S.A., as borrower, and TIM Participações S.A. as Guarantor, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 2.24 | Guarantee and Indemnity Agreement, dated as of June 3, 2008, between European Investment Bank, as lender, TIM Nordeste S.A., as borrower, and TIM Participações S.A. as Guarantor, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 2.25 | Finance Contract, dated as of June 3, 2008, between European Investment Bank, as lender, and TIM Nordeste S.A., as borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 2.26 | Addendum to the Loan Agreement dated as of November 19, 2008, between BNDES Bank, as lender, and TIM Nordeste S.A., as borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 2.27 | Loan Agreement, dated as of November 19, 2008, between BNDES Bank, as lender, and TIM Nordeste S.A. and TIM Celular S.A., as borrowers, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 2.28 | Addendum to the Credit Agreement dated as of November 19, 2008, between BNDES Bank, as lender, and TIM Celular S.A., as borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 2.29 | Addendum to Credit Note dated as of August 31, 2005, between Unibanco Bank, as lender, and TIM Participações S.A., as borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 2.30 | Credit Note, dated as of December 30, 2008, between Unibanco Bank, as lender, and TIM Celular S.A., as borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 2.31 | Credit Note, dated as of December 30, 2008, between Unibanco Bank, as lender, and TIM Celular S.A., as borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 2.32 | Derivative Agreement, dated as of December 30, 2008, between Unibanco Bank, as contracted party, and TIM Celular S.A., as contracting party, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 2.33 | Derivative Agreement, dated as of December 30, 2008, between Unibanco Bank, as contracted party, and TIM Celular S.A., as contracting party, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 2.34 | Confirmation of Swap Operation, dated as of July 7, 2008, between ABN AMRO Real S.A, as contracted party, and TIM Celular S.A., as contracting party, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 2.35 | Facility Agreement, dated as of November 28, 2008, between BNP Paribas, as lender, and TIM Celular S.A., as borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 2.36 | Amendment to Credit Facility Agreement dated as of August 14, 2008, between ABN Amro Real S.A., BNP Paribas Brasil, 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., and Unibanco S.A. as lenders, and TIM Celular S.A., as borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 2.37 | Credit Note, dated as of March 14, 2008, between Banco Santander S.A., as lender, and TIM Celular S.A., as borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 2.38 | Credit Note, dated as of March 14, 2008, between Banco Santander S.A., as lender, and TIM Celular S.A., as borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 2.39 | Addendum to Credit Note dated as of August 31, 2005, between Banco Santander S.A., as lender, and TIM Participações S.A., as borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 2.40 | Addendum to Facility Agreement dated as of September 6, 2008, to contract signed June 14, 2007, between Banco Santander S.A., as lender, and TIM Celular S.A., as borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 2.41 | Second Amendment to the Cooperation and Support Agreement, dated as of April 22, 2009, between Telecom Itália S.p.A.. and TIM Celular S.A., which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 2.42 | Deposit Agreement, dated as of June 24, 2002, among Tele Celular Sul Participações S.A., J.P. Morgan Chase Bank, as Depositary, and holders of American Depositary Receipts issued thereunder, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 30, 2005. |
| 4.1 | Credit Agreement dated as of September 22, 2000, between TIM Nordeste Telecomunicações (then Telpe Celular), as borrower, and the European Investment Bank, as lender, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 30, 2005. |
| 4.2 | Guarantee and Indemnity Agreement dated as of September 22, 2000, between European Investment Bank and Tele Nordeste Celular Participações S.A., which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 30, 2005. |
| 4.3 | Indemnification Agreement dated as of September 22, 2000, between Banque Sudameris, as Guarantor, and Tele Nordeste Celular Participações S.A., as Indemnifier, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 30, 2005. |
| 4.4 | Counter Indemnity Agreement dated as of September 22, 2000, between Banque Sudameris, as Guarantor, and TIM Nordeste Telecomunicações (then Telpe Celular), as Borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 30, 2005. |
| 4.5 | Credit Agreement dated as of June 28, 2004, by and between Banco do Nordeste do Brasil S.A., as lender, and TIM Nordeste, as borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 30, 2005. |
| 4.6 | Guarantee Agreement dated as of June 24, 2004 among Banco Bradesco S.A., TIM Nordeste Telecomunicações and Tele Nordeste Celular Participações S.A. (English translation), which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 30, 2005. |
| 4.7 | Management Assistance Agreement, dated as of October 1, 2000, between Tele Nordeste Celular Participações S.A. and Telecom Italia Mobile S.p.A.., which is incorporated by reference to the annual report of Tele Nordeste Celular Participações S.A. filed on Form 20-F with the Securities and Exchange Commission on July 2, 2001. |
| 4.8 | Standard Concession Agreement for Mobile Cellular Service (Portuguese version), which is incorporated by reference to our registration statement filed on Form 20-F with the Securities and Exchange Commission on September 18, 1998. |
| 4.9 | Standard Concession Agreement for Mobile Cellular Service (English translation), which is incorporated by reference to our registration statement filed on Form 20-F with the Securities and Exchange Commission on September 18, 1998. |
| 4.10 | Authorization Agreement for Mobile Cellular Service for Telepar Celular (English translation), which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 18, 2003. |
| 4.11 | Authorization Agreement for Mobile Cellular Service for CTMR Celular (English translation), which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 18, 2003. |
| 4.12 | Authorization Agreement for Mobile Cellular Service for Telesc Celular (English translation), which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 18, 2003. |
| 4.13 | Authorization Agreement for Mobile Cellular Service for Telpe Celular (English translation), which is incorporated by reference to the annual report of Tele Nordeste Celular Participações S.A. filed on Form 20-F with the Securities and Exchange Commission on June 16, 2003. |
| 4.14 | Authorization Agreement for Mobile Cellular Service for Teleceara Celular (English translation), which is incorporated by reference to the annual report of Tele Nordeste Celular Participações S.A. filed on Form 20-F with the Securities and Exchange Commission on June 16, 2003. |
| 4.15 | Authorization Agreement for Mobile Cellular Service for Telasa Celular (English translation), which is incorporated by reference to the annual report of Tele Nordeste Celular Participações S.A. filed on Form 20-F with the Securities and Exchange Commission on June 16, 2003. |
| 4.16 | Authorization Agreement for Mobile Cellular Service for Telpa Celular (English translation), which is incorporated by reference to the annual report of Tele Nordeste Celular Participações S.A. filed on Form 20-F with the Securities and Exchange Commission on June 16, 2003. |
| 4.17 | Authorization Agreement for Mobile Cellular Service for Telern Celular (English translation), which is incorporated by reference to the annual report of Tele Nordeste Celular Participações S.A. filed on Form 20-F with the Securities and Exchange Commission on June 16, 2003. |
| 4.18 | Authorization Agreement for Mobile Cellular Service for Telepisa Celular (English translation), which is incorporated by reference to the annual report of Tele Nordeste Celular Participações S.A. filed on Form 20-F with the Securities and Exchange Commission on June 16, 2003. |
| 4.19 | Interconnection Network Agreement relating to Local Services dated as of June 1, 2003 between TIM Sul and Brasil Telecom (English translation), which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on May 19, 2004. |
| 4.20 | Credit Agreement, dated as of June 28, 2004, among TIM Nordeste, as borrower, and Banco do Nordeste do Brasil S.A., as lender, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on May 16, 2006. |
| 4.21 | Credit Agreement, dated as of April 29, 2005, among TIM Nordeste, as borrower, and Banco do Nordeste do Brasil S.A., as lender, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on May 16, 2006. |
| 4.22 | Credit Agreement, dated as of November 28, 2000, among BNDES, a syndicate of banks, Maxitel S.A., as borrower, and TIM Brasil Participações, as guarantor, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on May 16, 2006. |
| 4.23 | Credit Agreement, dated as of June 28, 2004, among Maxitel S.A., as borrower, and Banco do Nordeste do Brasil S.A., as lender, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on May 16, 2006. |
| 4.24 | Credit Agreement, dated as of August 10, 2005, among BNDES, as lender, TIM Celular, as borrower, and TIM Brasil, as guarantor, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on May 16, 2006. |
| 4.25 | Credit Agreement, dated as of October 14, 2005, among BNDES, as lender, and TIM Celular, as borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on May 16, 2006. |
| 4.26 | Credit Agreement, dated as of August 26, 2005, among a syndicate of banks, TIM Celular, as borrower, and TIM Brasil, as guarantor, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on May 16, 2006. |
| 4.27 | Credit Agreement, dated as of January 7, 2002, among Banco BBA Creditanstalt S.A., as lender, and TIM Rio Norte, as borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on May 16, 2006. |
| 4.28 | On Lending of Funds from BNDES Credit Agreement, dated as of November 22, 2000, between BNDES, as lender, and Maxitel S.A., as borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on May 16, 2006. |
| 4.29 | Credit Agreement, dated as of November 28, 2000, between BNDES, as lender, and Maxitel S.A., as borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 22, 2007. |
| 4.30 | Authorization agreement for TIM Celular S.A. dated May 25, 2007 pursuant to which TIM is authorized to provide land line switched telephone services (STFC) in regions I, II and III, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 3, 2008. |
| 4.31 | Credit Agreement, dated as of June 14, 2007, among Banco Santander Banespa S.A., as lender, and TIM Celular S.A., as borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 3, 2008. |
| 4.32 | Credit Agreement, dated as of December 6, 2007, among Banco Santander S.A., as lender, and TIM Celular S.A., as borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 3, 2008. |
| 4.33 | Term of Authorization for Use of Radiofrequencies, dated as of April 29, 2008, between Anatel (the National Telecommunications Agency) and TIM Nordeste S.A., which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 4.34 | Term of Authorization for Use of Radiofrequencies, dated as of April 29, 2008, between Anatel (the National Telecommunications Agency) and TIM Nordeste S.A., which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 4.35 | Term of Authorization for Use of Radiofrequencies, dated as of April 29, 2008, between Anatel (the National Telecommunications Agency) and TIM Nordeste S.A., which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 4.36 | Term of Authorization for Use of Radiofrequencies, dated as of April 29, 2008, between Anatel (the National Telecommunications Agency) and TIM Nordeste S.A., which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 4.37 | Term of Authorization for Use of Radiofrequencies, dated as of April 29, 2008, between Anatel (the National Telecommunications Agency) and TIM Nordeste S.A., which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 4.38 | Term of Authorization for Use of Radiofrequencies, dated as of April 29, 2008, between Anatel (the National Telecommunications Agency) and TIM Nordeste S.A., which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 4.39 | Term of Authorization for Use of Radiofrequencies, dated as of April 29, 2008, between Anatel (the National Telecommunications Agency) and TIM Nordeste S.A., which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 4.40 | Term of Authorization for Use of Radiofrequencies, dated as of April 29, 2008, between Anatel (the National Telecommunications Agency) and TIM Nordeste S.A., which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 4.41 | Term of Authorization for Use of Radiofrequencies, dated as of April 29, 2008, between Anatel (the National Telecommunications Agency) and TIM Celular S.A., which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 4.42 | Term of Authorization for Use of Radiofrequencies, dated as of April 29, 2008, between Anatel (the National Telecommunications Agency) and TIM Celular S.A., which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 4.43 | Term of Authorization for Use of Radiofrequencies, dated as of April 29, 2008, between Anatel (the National Telecommunications Agency) and TIM Celular S.A., which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 4.44 | Term of Authorization for Use of Radiofrequencies, dated as of April 29, 2008, between Anatel (the National Telecommunications Agency) and TIM Celular S.A., which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 4.45 | Term of Authorization for Use of Radiofrequencies, dated as of April 29, 2008, between Anatel (the National Telecommunications Agency) and TIM Celular S.A., which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 4.46 | Term of Authorization for Use of Radiofrequencies, dated as of April 29, 2008, between Anatel (the National Telecommunications Agency) and TIM Celular S.A., which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 26, 2009. |
| 4.47 | Term of Authorization for Use of Radiofrequencies, dated as of November 30, 2005, between Anatel (the National Telecommunications Agency) and Intelig Telecomunicações Ltda. |
| 4.48 | Term of Authorization for Use of Radiofrequencies, dated as of May 5, 2006, between Anatel (the National Telecommunications Agency) and Intelig Telecomunicações Ltda., which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 30, 2010. |
| 4.49 | Term of Authorization for Use of Radiofrequencies, dated as of April 2, 2007, between Anatel (the National Telecommunications Agency) and Intelig Telecomunicações Ltda., which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 30, 2010. |
| 4.50 | Foreign Onlending Agreement, dated February 24, 2006, between Banco ABN AMRO Real S.A., as lender, and TIM Celular, as borrower, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on May 16, 2006. |
| 4.51 | Credit Facility Agreement, dated February 16, 2006, between Santander Brasil S.A., as lender, and TIM Celular, as borrower, which is incorporated by reference to our annual report filed on Form 20-F with Securities and Exchange Commission on May 16, 2006. |
| 6.1 | Statement regarding computation of per share earnings, which is incorporated by reference to note [4.t] to our consolidated financial statements included in this annual report. |
| 8.1 | List of Subsidiaries, which is incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 22, 2006. |
| 11.1 | Code of Ethics (English translation), incorporated by reference to our annual report filed on Form 20-F with the Securities and Exchange Commission on June 30, 2010. |
| 12.1* | Section 302 Certification of the Chief Executive Officer. |
| 12.2* | Section 302 Certification of the Chief Financial Officer. |
| 13.1* | Section 906 Certification of the Chief Executive Officer and Chief Financial Officer. |
| 15.1* | Letter dated June 29, 2011 of Ernst & Young Terco Auditores Independentes S.S. to the SEC, as required by Item 16F of Form 20-F. |
The following explanations are not intended as technical definitions, but to assist the general reader to understand certain terms as used in this annual report.
Analog: A mode of transmission or switching which is not digital, e.g., the representation of voice, video or other modulated electrical audio signals which are not in digital form.
ARPU (Average Revenue Per User): A measure used in the mobile telecommunications industry to evaluate the revenue generated by customers.
Broadband services: Services characterized by a transmission speed of 2Mbps or more. According to international standards, these services are interactive services, including video telephone/videoconferencing (both point to point and multipoint).
Channel: One of a number of discrete frequency ranges utilized by a radio base station.
Digital: A mode of representing a physical variable such as speech using digits 0 and 1 only. The digits are transmitted in binary form as a series of pulses. Digital networks allow for higher capacity and higher flexibility through the use of computer-related technology for the transmission and manipulation of telephone calls. Digital systems offer lower noise interference and can incorporate encryption as a protection from external interference.
EDGE (Enhanced Data rates for Global Evolution): A technology that provides enhanced functionality and facilitates the use of advanced technology over mobile devices.
GSM (Global System Mobile): A standard of digital mobile telecommunications technology.
Interconnection charge: Amount paid per minute charged by network operators for the use of their network by other network operators. Also known as an “access charge.”
Mobile service: A mobile telecommunications service provided by means of a network of interconnected low powered radio base stations, each of which covers one small geographic cell within the total mobile telecommunications system service area.
Network: An interconnected collection of elements. In a telephone network, these consist of switches connected to each other and to customer equipment. The transmission equipment may be based on fiber optic or metallic cable or point-to-point connections.
Penetration: The measurement of the take-up of services. At any date, the penetration is calculated by dividing the number of customers by the population to which the service is available and multiplying the quotient by 100.
Roaming: A function that enables customers to use their mobile telephone on networks of service providers other than the one with which they signed their initial contract.
Switch: These are used to set up and route telephone calls either to the number called or to the next switch along the path. They may also record information for billing and control purposes.
TDMA (Time Division Multiple Access): A standard of digital mobile telecommunications technology.
Value-Added Services: Value-added services provide additional functionality to the basic transmission services offered by a telecommunications network.
WAP (Wireless Application Protocol): A specification for a set of telecommunications protocols to standardize the way that wireless devices, such as mobile telephones and radio receivers, can be used to access the internet.
The registrant hereby certifies that it meets all of the requirements for filing Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
| | | TIM PARTICIPAÇÕES S.A. | |
| Dated: | June 22, 2011 | | By: | /s/ Luca Luciani | |
| | | | | Name: | Luca Luciani | |
| | | | | Title: | Chief Executive Officer | |
| | | | |
| Dated: | June 30, 2011 | | By: | /s/ Claudio Zezza | |
| | | | | Name: | Claudio Zezza | |
| | | | | Title: | Chief Financial Officer | |
