TIM PARTICIPAÇÕES S.A.

(Exact name of Registrant as specified in its charter)

 

TIM HOLDING COMPANY (Translation of Registrant’s name into English)

THE FEDERATIVE REPUBLIC OF BRAZIL (Jurisdiction of incorporation or organization)

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Claudio Zezza

Chief Financial Officer

TIM Participações S.A.

Avenida das Américas, 3.434 - 7º andar

22640-102 Rio de Janeiro, RJ, Brazil

Tel: 55 21 4009-4000 / Fax: 55 21 4009-3990

czezza@timbrasil.com.br

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class	Name of each exchange on which registered
Preferred Shares, without par value*	New York  Stock Exchange
American Depositary Shares, as evidenced by American Depositary Receipts, each representing 10 Preferred Shares	New York  Stock Exchange
*   Not for trading, but only in connection with the listing of American Depositary Shares on the New York Stock Exchange

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Securities registered or to be registered pursuant to Section 12(g) of the Act:   None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:   None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

	Common Shares, without par value	798,350,977
	Preferred Shares, without par value	1,545,475,560

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   x Yes      o No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of 15(d) of the Securities Exchange Act of 1934 .    o Yes      x  No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x Yes        o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     o Yes       x   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one):

Large accelerated filer    x                                                 Accelerated filer    o                                           Non-accelerated filer  o

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

o   U.S GAAP   o International Financial Reporting Standards as issued by the International Accounting Standards Board  x Other

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

o    Item 17                     x     Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

o  Yes                     x     No

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TABLE OF CONTENTS

 

Page

 

PART I	6
Item 1. Identity of Directors, Senior Management and Advisers	6
Item 2. Offer Statistics and Expected Timetable	6
Item 3. Key Information	6
Item 4. Information on the Company	26
Item 4A. Unresolved Staff Comments	51
Item 5. Operating and Financial Review and Prospects	51
Item 6. Directors, Senior Management and Employees	72
Item 7. Major Shareholders and Related Party Transactions	79
Item 8. Financial Information	80
Item 9. The Offer and Listing	89
Item 10. Additional Information	93
Item 11. Quantitative and Qualitative Disclosures About Market Risk	111
Item 12. Description of Securities Other than Equity Securities	112
PART II	113
Item 13. Defaults, Dividend Arrearages and Delinquencies	113
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds	113
Item 15. Controls and Procedures	113
Item 16. [Reserved]	115
Item 16A. Audit Committee Financial Expert	115
Item 16B. Code of Ethics	115
Item 16C. Principal Accountant Fees and Services	115
Item 16D. Exemptions from the Listing Standards for Audit Committees	116
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers	116
Item 16F. Change in Registrant ’ s Certifying Accountant	116
Item 16G. Corporate Governance	116
PART III	118
Item 17. Financial Statements	118
Item 18. Financial Statements	118
Item 19. Exhibit Index	118
Technical Glossary	123

 

 

 

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PRESENTATION OF INFORMATION

 

In this annual report, TIM Participações S.A. , a corporation (sociedade anônima) organized under the laws of the Federative Republic of Brazil, is referred to as “TIM,” “TIM Participações” or the “Holding Company.” References to “we,” “us” and “our” are to TIM together with, where the context so requires and as explained more fully below, one or more of TIM Sul S.A. (“TIM Sul”), TIM Nordeste Telecomunicações S.A. (“TIM Nordeste Telecomunicações”), TIM Celular S.A. (“TIM Celular”) and Maxitel S.A. (“TIM Maxitel”) each a directly or indirectly wholly-owned operating subsidiary of the Holding Company and a corporation organized under the laws of the Federative Republic of Brazil.

 

The Holding Company is the result of the merger of Tele Nordeste Celular Participações S.A. (“TND”), then the controlling shareholder of TIM Nordeste Telecomunicações, with and into Tele Celular Sul Participações S.A. (“TSU”), then the controlling shareholder of TIM Sul, on August 30, 2004 (the “TND/TSU Merger”).

 

On March 16, 2006, we acquired all of the share capital of TIM Celular, a wholly-owned subsidiary of our controlling shareholder, TIM Brasil Serviços e Participações S.A. (“TIM Brasil”), to integrate the two companies’ operations, seeking to optimize the group’s financial structure and management, creating one of the largest Brazilian wireless companies in terms of market capitalization presenting an attractive investment for shareholders. As a result, TIM Celular and its operating subsidiary TIM Maxitel became our subsidiaries. On March 16, 2006, the acquisition (“TIM Celular Acquisition”) was approved by Extraordinary Shareholders’ Meetings of our shareholders and the shareholders of TIM Celular and became effective on such date. For accounting purposes, the acquisition was treated as if it had occurred on January 1, 2006. Except where specifically noted, information in this annual report does not account for the effects of such acquisition.

 

On June 30, 2006, at their respective Extraordinary Shareholders’ Meetings, TIM Celular, TIM Maxitel , TIM Nordeste Telecomunicações and TIM Sul approved the merger of TIM Nordeste Telecomunicações into TIM Maxitel and of TIM Sul into TIM Celular. On the same date, Maxitel’s name changed to TIM Nordeste S.A. (“TIM Nordeste”).

 

References in this annual report to the “preferred shares” and the “common shares” are, respectively, to the preferred shares, which have no voting rights, other than in the limited circumstances described in “Item 10B. Additional Information—Memorandum and Articles of Association—Rights Relating to our Shares—Voting Rights”, and common shares, of TIM. References to the “American Depositary Shares” or “ADSs” are to TIM’s American Depositary Shares, each representing 10 preferred shares. The ADSs are evidenced by American Depositary Receipts, or ADRs, which are listed on the New York Stock Exchange, or the NYSE, under the symbol “TSU”. The common shares and preferred shares are listed on the São Paulo Stock Exchange under the symbols “TCSL3” and “TCSL4”, respectively.

 

Pursuant to an Extraordinary Shareholders Meeting held on May 30, 2007, our shareholders approved a reverse stock split of the totality of shares issued by us. As a result, the shares were amalgamated at the ratio of one thousand (1,000) existent shares per one (1) share of the respective type. The reverse split approved did not result in modification in the amount of the capital stock and the amalgamated shares granted to their holders the same rights previously established in our bylaws for the respective type of share. The holders of American Depositary Receipt – ADR now have their receipts represented by ten (10) preferred shares each.

 

Market Share Data

 

Market share information is calculated by the Company based on information provided by the Agência Nacional de Telecomunicações , or Anatel. Penetration data is calculated by the Company based on information provided by the Instituto Brasileiro de Geografia e Estatística , or IBGE.

 

Presentation of Financial Information

 

Our consolidated financial statements were prepared in accordance with accounting practices adopted in Brazil (“Brazilian GAAP”), which include accounting principles derived from Brazilian Corporations Law and accounting standards and supplementary procedures established by the CVM and the Accounting Pronouncements Committee ( Comitê de pronunciamentos Contábeis - CPC ) of Brazil, and related rules applicable to telecommunications service operators.

 

 

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 See note 35 to our consolidated financial statements for a summary of the differences between Brazilian GAAP and generally accepted accounting principles in the United States, or U.S. GAAP, as well as a reconciliation to U.S. GAAP of our shareholders’ equity as of December 31, 2008 and 2007 and net income   for the years ended December 31, 2008, 2007 and 2006 as described below.

 

We account for the TIM Celular Acquisition under Brazilian GAAP as a purchase at book value, generating no goodwill, pursuant to which TIM Participações consolidated the results of TIM Celular with effect from January 1, 2006. All intercompany balances and transactions have been eliminated. Note 35 to our consolidated financial statements also includes (i) an explanation of how the amounts were calculated, including what adjustments were made; and (ii) a reconciliation of the amounts to US. GAAP.

 

All references herein to the “ real, ” “ reais ” or “R$” are to the Brazilian r eal , the official currency of Brazil . All references to “U.S. dollars,” “dollars” or “ U.S. $” are to United States   D ollars.

 

Solely for the convenience of the reader , we have translated some amounts included in “Item 3A. Key Information — Selected Financial Data” and elsewhere in this annual report from reais into U.S. dollars   using the commercial selling rate as reported by the Central Bank of Brazil (the “Central Bank”) at December 31, 2008 of R$2.3370 to U.S.$1.00. These translations should not be considered representations that any such amounts have been, could have been or could be converted into U.S. dollars at that or any other exchange rate. Such translations should not be construed as representations that the real amounts represent or have been or could be converted into U.S. dollars as of that or any other date. See “Item 3A. Key Information—Selected Financial Data—Exchange Rates” for information regarding exchange rates for the Brazilian currency.

 

Certain figures included in this annual report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures that precede them.

 

The “Technical Glossary” at the end of this annual report provides definitions of certain technical terms used in this annual report and in the documents incorporated in this annual report by reference.

 

 

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FORWARD LOOKING INFORMATION

 

This annual report contains statements in relation to our plans, forecasts, expectations regarding future events, strategies and projections, which are forward-looking statements and involve risks and uncertainties and are therefore, not guarantees of future results. Forward looking statements speak only as of the date they were made, and we undertake no obligation to update publicly or revise any forward-looking statements after we file this annual report because of new information, future events and other factors. We, and our representatives, may also make forward-looking statements in press releases and oral statements. Statements that are not statements of historical fact, including statements about the beliefs and expectations of our management, are forward-looking statements. Words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “plan,” “predict,” “project” and “target” and similar words are intended to identify forward-looking statements, which necessarily involve known and unknown risks and uncertainties. Our actual results and performance could differ substantially from those anticipated in our forward-looking statements. These statements appear in a number of places in this annual report, principally in “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects,” and include, but are not limited to, statements regarding our intent, belief or current expectations with respect to:

 

·	Brazilian wireless industry conditions and trends;

 

·	characteristics of competing networks’ products and services;

 

·	estimated demand forecasts;

 

·	growing our subscriber base and especially our postpaid subscribers;

 

·	development of additional sources of revenue;

 

·	strategy for marketing and operational expansion;

 

·	achieving and maintaining customer satisfaction;

 

·	development of higher profit margin activities, attaining higher margins, and controlling customer acquisition and other costs; and

 

·	capital expenditures forecasts.

 

Because forward-looking statements are subject to risks and uncertainties, our actual results and performance could differ significantly from those anticipated in such statements and the anticipated events or circumstances might not occur. The risks and uncertainties include, but are not limited to:

 

·	general economic and business conditions, including the price we are able to charge for our services and prevailing foreign exchange rates;

 

·	competition, including expected characteristics of competing networks, products and services and from increasing consolidation and services bundling in our industry;

 

·	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 our services 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;

 

 

 

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·	regulatory issues relating to acquisitions;

 

·	the adverse determination of disputes under litigation;

 

·	inflation, interest rate and exchange rate risks; and

 

·	other factors identified or discussed under “Item 3D. Key Information—Risk Factors” and elsewhere in this annual report.

 

 

 

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PART I

 

Item 1. Identity of Directors, Senior Management and Advisers

 

Not applicable.

 

Item 2. Offer Statistics and Expected Timetable

 

Not applicable.

 

Item 3. Key Information

 

A.             Selected Financial Data

 

The selected financial data presented below should be read in conjunction with our consolidated financial statements, including the notes thereto. Our consolidated financial statements have been audited by Ernst & Young Auditores Independentes S.S. The report of Ernst & Young Auditores Independentes S.S. on the consolidated financial statements appears elsewhere in this annual report.

 

 

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Selected Financial Data

 

The following table represents a summary of our selected financial data for the five years ended December 31, 2008. The data are derived from our consolidated financial statements, audited by Ernst & Young Auditores Independentes S.S., and should be read in conjunction with our consolidated financial statements, related notes, and other financial information included herein.

 

		Year Ended December 31,
			2008 U.S.$				2008 R$			2007 (3) as adjusted R$				2006 ( 2 )  (3)  as adjusted R$				2005 (2) as adjusted R$				2005 (1) (2) pro forma as adjusted R$				2004 (2) as adjusted R$				2004 (1) (2) pro forma as adjusted R$
		(millions of reais or U.S. dollars, unless otherwise indicated)
Statement of Operations Data:
Brazilian GAAP
Net operating revenue			5,597.4				1 3,081.0				12,4 41.6				10,138.2				2,918.2				8,368.1				2,564.6				6,253.8
Cost of goods and services			(3,022.6	)			(7,0 63.8	)			(6,7 31.8	)			(5,530. 0	)			(1,383.1	)			(4,650.8	)			(1,302.5	)			(3,971.9	)
Gross profit			2,574.8				6,017.2				5,7 09.8				4,6 08.2				1,535.1				3,717.3				1,262.1				2,281.9
Operating expenses:
Selling expenses			(1,753.7	)			(4,09 8.4	)			(3,8 90.9	)			(3,2 50.9	)			(798.1	)			(3,067.7	)			(647.3	)			(2,191.5	)
General and administrative expenses			(482.4	)			(1,1 27.4	)			(1,0 32.8	)			(9 54.9	)			(185.9	)			(795.2	)			(182.4	)			(613.8	)
Other net operating expense			(128.6	)			(300.5	)			( 269.5	)			( 202.3	)			(25.3	)			(255.5	)			1.6				(322.8	)
Operating income (loss) before financial income (expenses)			210.1				490.9				516 .6				200.1				525.8				(401.1	)			434.0				(846.2	)
Net financial income (expense)			(160.5	)			(3 75.0	)			(2 81.5	)			(2 64.0	)			63.3				(350.1	)			51.1				(201.5	)
Operating income (loss)			49.6				115.9				2 35.1				( 63.9	)			589.1				(751.2	)			485.1				(1,047.7	)
Net non-operating income (expense)			-				-				-				-				(2.2	)			(5.5	)			(4.6	)			(12.1	)
Income (loss) before taxes and minority interests			49.6				115.9				235.1				(63.9	)			586.9				(756.7	)			480.5				(1,059.8	)
Income and social contribution taxes			27.5				6 4.3				(1 66.8	)			( 203.1	)			(140.5	)			(176.1	)			(153.8	)			(157.1	)
Minority interests			-				-				-				-				(21.5	)			(21.5	)			(70.1	)			(70.1	)
Net income (loss)			77.1				180.2				68.3				(2 67.0	)			424.9				(954.3	)			256.6				(1,287.0	)
Net income (loss) per share in 2008 to 2007 and per 1,000 shares outstanding in 2006 to 2004 ( reais )			0.03				0.08				0.03				(0.11	)			0.48				n/a				0.38				n/a
Number of shares outstanding:
Common shares (in millions)			n/a				798				795				793,544				299,611				n/a				264,793				n/a
Preferred shares (in millions)			n/a				1,545				1,539				1,536,171				579,965				n/a				437,712				n/a
Dividends per share in 2008 to 2007 and per 1,000 shares in 2006 to 2004 – reais(4)			n/a				0.11				0.14				0.19				0.14				n/a				0.10				n/a
Dividends per share in 2008 to 2007 and per 1,000 shares in 2006 to 2004  – in U.S. dollars (5)			n/a				0.05				0.08				0.09				0.06				n/a				0.04				n/a
U.S. GAAP (6)
Net operating revenues			5,598.4				13,083.7				12,494.0				10,165.4				8,329.9				-				6,114.8				-
Operating income (expense)			175.9				411.2				469.6				130.2				(510.4	)			-				(983.0	)			-
Net income (loss)			64.8				151.5				92.0				(217.9	)			(950.7	)			-				(1,303.1	)			-
Balance Sheet Data:
Brazilian GAAP
Property, pla nt, equipment and software , net			4,113.4				6,971.4				7,021.8				7,185.9				1,872.7				7,815.9				1,663.5				6,807.4
Total assets			6,948.9				16,239.5				14,564.0				14,206.7				4,457.4				15,233.9				3,665.5				13,083.3
Loans, financing and debentures			1,496.7				3,497.7				2, 097.4				2, 156.3				129.0				1,819.6				104.1				593.5
Shareholders’ equity			3,333.6				7,790.5				7,771.8				7,910.3				2,714.8				8,622.7				1,999.0				7,575.8
Capital stock			3,257.9				7,613.6				7,550.5				7,512.7				1,472.1				7,455.9				884.5				6,503.7
U.S. GAAP (6)
Property, plant, equipment and software , net			1,972.3				6,781.6				6,916.9				7,028.8				7,714.0				-				6,766.2
Total assets			6,798.7				16,339.9				14,6 67.6				14,271.9				15,417.2								13,060.7
Loans and financing			1,496.7				3,497.7				2, 113.5				2,140.9				1,808.8								592.0
Shareholders’ equity			3,369.3				7,876.6				7,886.6				8,154.9				8,665.5								7,420.1

 

 

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(1)	The pro forma information 2005 and 2004 reflects the TIM Celular Acquisition (see note 2-a  to our consolidated financial statements)  as if it had occurred on January 1, 2004 for Statement of Operations information, and on December 31, 2004 for balance sheet information.

 

(2)

For consistency of presentation with 2008 and 2007, amounts in 2006, 2005 and 2004 have been adjusted to reflect: reclassification of the amortization of the tax benefit related to the goodwill paid in the privatization from other net operating expense to income and social contribution taxes, reclassification of PIS/COFINS tax credit, previously recorded as other net operating expenses, to credit in deductions from revenues and credit net financial income, reclassification of income tax on remittance from net financial expense to cost of services and adjustment of income tax incentive (Adene) to the net income (loss), resulting from the change in accounting principles . Please see notes 3 and 8 to our consolidated financial statements.

 

(3)

For consistency of presentation with 2008, amounts in 2007 and 2006 have been adjusted to reflect : reclassification of intangible assets intended for the Company’s operations to a   s pecific group called “intangible” ;   accounting of borrowing costs as a reduction of  “loans and financing” and amortization of them over the contract period (up to December 31, 2007, these costs were amortized on a straight-line basis, over the duration of the loan) ;   accounting of derivative instruments at fair value;   new treatment for lapsed dividends (dividends not claimed by shareholders within the time limit determined by Brazilian law), earlier accounted for in profit and loss, now to be accounted for within shareholders’ equity; reclassification of  non operating income to other operating income. S ee note 3- c and e to our consolidated financial statements for further detail . The 2005 and 2004 financial statements were not adjusted to reflect such effects.

 

(4)

Dividends per share have been computed as the sum of dividends and interest on shareholders’ equity (“ juros sobre capital próprio ,” according to Brazilian law), an alternative under Brazilian Corporations Law to the distribution of dividends to shareholders. The distribution of dividends and interest on shareholders’ equity, in each year, proceeded according to the terms set forth by our common shareholders, a t the relevant annual general meeting. Dividends per share have been determined as the sum of declared dividends and interest on shareholders’ equity, divided by the total number of common shares and preferred shares outstanding as of the common shareholders' meeting date. See “Item 10E. Additional Information — Taxation — Brazilian Tax Considerations― Distributions of Interest on Capital.”

 

(5)	Amounts expressed in U.S. dollars, according to the exchange rate applicable at the date of the relevant shareholders’ general meeting that approved the distributi on of dividends and interest on shareholders ’ equity.

 

(6)	The U.S. GAAP amounts of TIM Participações S.A.  reflect the TIM Celular Acquisition considered a business combination under common control similar to a pooling-of-interest. Accordingly, such exchange of shares was accounted for at historical carrying values.

 

 

 

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Brazilian Economic Environment

 

Our business, prospects, financial condition and results of operations are dependent on general economic conditions in Brazil .

 

The Brazilian economy has shown greater stability since the current federal administration took office in January 2003.  Overall, the Federal Government continues the macroeconomic policy of the previous administration by giving priority to fiscal responsibility.

 

In 2006, the real appreciated 8.7% against the U.S. dollar between December 31, 2005 and 2006. Despite this appreciation, the country had a positive current account balance of US$6.3 billion. For the fourth consecutive year, the Current Transactions/PIB ratio, an indicator of vulnerability to international financial crises, was positive, showing the country’s lower exposure to risk. The average unemployment rate increased to 10.0% as of December 31, 2006 in the country’s main metropolitan regions, in accordance with estimates disclosed by the IBGE. In 2006, the inflation rate, as measured by the IPCA, was 3.1%, and the average TJLP interest rate was 6.8%. International reserves also reached record levels and the highest quality thus far, reducing the presence of short-term capital.

 

Macroeconomic results for 2007 indicate accelerated economic growth and monetary stability. An exchange rate depreciation of 17.2% over the year contributed to an even higher reduction in the inflation rate, as measured by the IPCA.  The inflation rate for 2007 reached 4.6%, being within the target range established by the Comitê de Política Monetária (Brazilian Monetary Policy Committee), or COPOM. Externally, the accumulated trade surplus as of December 31, 2007, having reached US$40 billion, was relatively lower than that recorded for both 2005 and 2006; however, the country’s international reserves continued to increase. The average unemployment rate decreased to 7.4% as of December 31, 2007 in the country’s main metropolitan regions, in accordance with estimates disclosed by the IBGE. Accelerated economic growth towards the end of 2006 continued throughout 2007. Among the factors contributing for a stronger economic growth in 2007 are the continuing reduction in the basic interest rate, which stabilized at 11.25% in September, and the evolution of the credit supply.

 

The Brazilian economy performed well until the third quarter 2008, growing by 6.38%, which was across all components of GDP and was fully driven by domestic demand. The net contribution of domestic demand to GDP growth in the first nine months of 2008 was 8.1 percentage points, while the foreign demand had a net negative impact of 2.5 p.p. on GDP.   The new economic scenario that impacted the country's economy from October result ed in a slowdown in economic activity in the past quarter in a yearly comparison. Despite the adverse scenario that gripped the country in the last quarter of 2008, real economic growth in 2008 was more than 5% due to the strong economic growth in the first nine months.

M onetary policy had two distinct ive characteristics in 2008 :

·	before September 2008, it was restrictive, due to inflationary pressures, with interest rate rising by 250 basis points between April and September, pushing SELIC, the basic interest rate, from 11.25% p.a. to 13.75% p.a.

·

after September 2008, with the worsening of the international financial crisis and its adverse effects on the Brazilian economy, the Central Bank’s Monetary Policy Committee (COPOM) began signaling a change towards an expansionist policy and cut the Selic rate by 100 basis points in January 2009 to 12.75% p.a.

The table below sets forth data regarding GDP growth, inflation, interest and real /U.S. dollar exchange rates in the periods indicated:

 

		For the Year Ended December 31,
		2006				2007				2008
GDP growth (1)			3.8	%			5.4	%			5.1	%
Inflation (IGP-M) (2)			3.9	%			7.8	%			9.8	%
Inflation (IPCA) (3)			3.1	%			4.6	%			5.9	%
DI Rate (4)			13.1	%			11.8	%			12.4	%
TJLP (5)			6.8	%			6.2	%			6.2	%
Appreciation (devaluation) of the real against the U.S. dollar			8.7	%			17.2	%			(32.0	%)
Exchange rate (closing)—R$ per US$1.00			R$2.138				R$1.771				R$2.337
Average exchange rate—R$ per US$1.00 (6)			R$2.177				R$1.948				R$1.837

 

 

 

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(1)	The Brazilian GDP for 2006, 2007 and 2008 was calculated using the new procedures adopted by the IBGE.

 

(2)	Inflation (IGP-M) is the general market price index as measured by FGV, and represents data accumulated over  the 12 months in each year ended December 31, 2006, 2007 and 2008.

 

(3)	Inflation (IPCA) is a consumer price index measured by IBGE, and represents data accumulated over the 12 months in each year ended December 31, 2006, 2007 and 2008.

 

(4)	The DI rate is the average inter-bank deposit rate performed during the day in Brazil (accrued as of the last month of the period, annualized).

 

(5)	Represents the interest rate applied by BNDES in long-term financings (end of the period).

 

(6)	Average exchange rate on the last day of each year.

Sources: BNDES, Central Bank, FGV and IBGE.

 

Exchange Rates

 

We pay any cash dividends, interest on shareholders’ equity and any other cash distributions with respect to our preferred shares in reais . Accordingly, exchange rate fluctuations will affect the U.S. dollar amounts received by the holders of ADSs on conversion by the Depositary of dividends and other distributions in Brazilian currency on our preferred shares represented by ADSs. Fluctuations in the exchange rate between Brazilian currency and the U.S. dollar will affect the U.S. dollar equivalent price of our preferred shares on the Brazilian stock exchanges. In addition, exchange rate fluctuations may also affect our dollar equivalent results of operations. See “Item 5. Operating and Financial Review and Prospects.”

 

Prior to March 14, 2005 , there were two principal legal foreign exchange markets in Brazil :

 

·	the commercial rate exchange market; and

 

·	the floating rate exchange market.

 

Most trade and financial foreign-exchange transactions were carried out on the commercial rate exchange market. These transactions included the purchase or sale of shares or payment of dividends or interest with respect to shares. Foreign currencies could only be purchased in the commercial exchange market through a Brazilian bank authorized to operate in these markets. In both markets, rates were freely negotiated and could be influenced by Central Bank intervention.

 

Resolution No. 3.265 by the National Monetary Council, dated March 4, 2005 , consolidated the foreign exchange markets into one single foreign exchange market, effective as of March 14, 2005 . All foreign exchange transactions are now carried out through institutions authorized to operate in the consolidated market and are subject to registration with the Central Bank’s electronic registration system. Foreign exchange rates continue to be freely negotiated, but may be influenced by Central Bank intervention.

 

Since 1999, the Central Bank has allowed the real /U.S. dollar exchange rate to float freely, and during that period, the real /U.S. dollar exchange rate has fluctuated considerably. In the past, the Central Bank has intervened occasionally to control unstable movements in foreign exchange rates. We cannot predict whether the Central Bank or the Brazilian government will continue to let the real float freely or will intervene in the exchange rate market through a currency band system or otherwise. The real may depreciate or appreciate against the U.S. dollar substantially in the future. For more information on these risks, see “—D. Risk Factors—Risks Relating to Brazil .”

 

The following table shows the selling rate for U.S. dollars for the periods and dates indicated. The information in the “Average” column represents the annual average of the exchange rates during the periods presented.

 

		Reais per U.S. Dollar
Year		High				Low				Average				Year End
2004			3.2051				2.6544				2.9257				2.6544
2005			2.7621				2.1633				2.4341				2.3407
2006			2.3711				2.0586				2.1771				2.1380
2007			2.1520				1.7325				1.9483				1.7713
2008			2.5004				1.5593				1.8375				2.3370

 

 

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		Reais per U.S. Dollar
Month		High				Low
November 2008			2.4277				2.1210
December 2008			2.5004				2.3331
January 2009			2.2174				2.3803
February 2009			2.3916				2.2446
March 2009			2.4218				2.2375
April 2009			2.2899				2.1699
May 2009			2.1476				1.9730
June 2009 (through June 23 , 2009)			2.0074				1.9301

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Source: Central Bank/Bloomberg

 

Brazilian law provides that, whenever there is a serious imbalance in Brazil ’s balance of payments or serious reasons to foresee such imbalance, temporary restrictions may be imposed on remittances of foreign capital abroad. For approximately six months in 1989, and early 1990, for example, the Federal Government froze all dividend and capital repatriations that were owed to foreign equity investors. These amounts were subsequently released in accordance with Federal Government directives. There can be no assurance that similar measures will not be taken by the Federal Government in the future.

 

B.             Capitalization and Indebtedness

 

Not applicable .

 

C.             Reasons for the Offer and Use of Proceeds

 

Not applicable .

 

D.             Risk Factors

 

This section is intended to be a summary of more detailed discussions contained elsewhere in this annual report. The risks described below are not the only ones we face. Our business, results of operations or financial condition could be harmed if any of these risks materializes and, as a result, the trading price of our shares and our ADSs could decline.

 

 

Risks Relating to our Business

 

Our business will be adversely affected if we are unable to successfully implement our strategic objectives. Factors beyond our control may prevent us from successfully implementing our strategy.

 

            On December 3, 2008, we set out our strategic priorities for the 2009-2011 period. Our strategy is aimed at improving revenues and selective growth, while maintaining financial discipline. To achieve this goal, we will focus on strengthening our position by leveraging mobile telephony to enable b road b and growth and exploiting opportunities arising from fixed-line to mobile substitution. See “Item 4B. Information on the Company — Business Overview — Mobile Service Rates and Plans.”

 

            TIM’s ability to implement and achieve these strategic objectives may be influenced by certain factors, including factors outside of its control, such as:

 

·	regulatory decisions and changes in the regulatory environment in Brazil ;

 

·	increasing numbers of new competitors in the Brazilian telecommunications market which could reduce TIM’s market share;

 

·	increasing and stronger market competition in its principal markets with a consequent decline in the prices of services;

 

·	TIM’s ability to strengthen its competitive position in Brazil for mobile telecommunications;

 

·	TIM’s ability to develop and introduce new technologies which are attractive to the market, to manage innovation, to supply value added services and to increase the use of its fixed and mobile service;

 

 

 

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