(A free translation of the original in Portuguese)

 

 

 

 

 

 

 

 

 

 

TIM Participações S.A. and

TIM Participações S.A. and

Subsidiaries

Financial statements as at

December 31, 2013 and

independent auditor's report

Independent auditor's report

To the Board of Directors and Shareholders

TIM Participações S.A.

We have audited the accompanying financial statements of TIM Participações S.A. ("Parent Company"), which comprise the balance sheet as at December 31, 2013 and the statements of income, comprehensive income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.

We have also audited the accompanying consolidated financial statements of TIM Participações S.A. and its subsidiaries ("Consolidated"), which comprise the consolidated balance sheet as at December 31, 2013 and the consolidated statements of income, comprehensive income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management's responsibility
for the financial statements

Management is responsible for the preparation and fair presentation of the parent company financial statements in accordance with accounting practices adopted in Brazil, and for the consolidated financial statements in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and accounting practices adopted in Brazil, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor's responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Brazilian and International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error.

In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion on the parent company
financial statements

In our opinion, the parent company financial statements referred to above present fairly, in all material respects, the financial position of TIM Participações S.A. as at December 31, 2013, and its financial performance and its cash flows for the year then ended, in accordance with accounting practices adopted in Brazil.

Opinion on the consolidated
financial statements

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TIM Participações S.A. and its subsidiaries as at December 31, 2013, and their financial performance and their cash flows for the year then ended, in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and accounting practices adopted in Brazil.

Emphasis of matter

As discussed in note 3 to these financial statements, the parent company financial statements have been prepared in accordance with accounting practices adopted in Brazil. In the case of TIM Participações S.A., these practices differ from IFRS applicable to separate financial statements only in relation to the measurement of investments in subsidiaries based on equity accounting, while IFRS requires measurement based on cost or fair value. Our opinion is not qualified in respect of this matter.

Other matters

Supplementary information - statements
of value added

We also have audited the parent company and consolidated statements of value added for the year ended December 31, 2013, which are the responsibility of the Company's management. The presentation of these statements is required by the Brazilian corporate legislation for listed companies, but they are considered supplementary information for IFRS. These statements were subject to the same audit procedures described above and, in our opinion, are fairly presented, in all material respects, in relation to the financial statements taken as a whole.

Rio de Janeiro, February 13, 2014

PricewaterhouseCoopers

Sérgio Eduardo Zamora

Auditores Independentes

Contador CRC 1SP168728/O-4 "S" RJ

CRC 2SP000160/O-5 "F" RJ

1

TIM Participações S.A. and

TIM Participações S.A. and subsidiaries

Balance sheets at December 31

In thousands of reais

(A free translation of the original in Portuguese)

 

2

TIM Participações S.A. and

TIM Participações S.A. and subsidiaries

Statements of income

Years ended December 31

In thousands of reais

(A free translation of the original in Portuguese)

 

3

TIM Participações S.A. and

TIM Participações S.A. and subsidiaries

Statements of comprehensive income

Years ended December 31

In thousands of reais

(A free translation of the original in Portuguese)

The accompanying notes are an integral part of these financial statements.

4

TIM Participações S.A. and

TIM Participações S.A. and subsidiaries

Statements of changes in shareholders' equity

In thousands of reais

(A free translation of the original in Portuguese)

The accompanying notes are an integral part of these financial statements.

5

TIM Participações S.A. and

TIM Participações S.A. and subsidiaries

Statements of cash flows

Years ended December 31

In thousands of reais

(A free translation of the original in Portuguese)

The accompanying notes are an integral part of these financial statements.

6

TIM Participações S.A. and

TIM Participações S.A. and subsidiaries

Statements of value added

Years ended December 31

In thousands of reais

(A free translation of the original in Portuguese)

The accompanying notes are an integral part of these financial statements.

7

TIM Participações S.A. and

TIM Participações S.A. and Subsidiaries

Management´s Report

 TIM PARTICIPAÇÕES S.A.

Publicly-held Company

Corporate Taxpayer's ID (CNPJ/MF): 02.558.115/0001-21

Corporate Registry (NIRE): 33 300 276 963

To the Shareholders,

The management of TIM Participações S.A. (“TIM Participações”, “The Company” or “TIM”) hereby submits to you the Company’s Management Report and Consolidated Financial Statements, with the independent auditors’ report regarding the financial year ended on 31 December 2013.

The Company’s consolidated financial statements were prepared in accordance with the International Financial Reporting Standards – IFRS, as defined by the IASB (International Accounting Standards Board).

The operating and financial information of 2013 below, except when indicated otherwise, are presented in Reais (R$), based on consolidated figures and in accordance with Brazilian corporate law.

Profile

TIM Participações is a publicly held corporation that has shares listed on São Paulo Stock Exchange (BM&FBovespa) and ADRs (American Depositary Receipts) traded on New York Stock Exchange (NYSE). The Company is also part of a select group of companies that make up the ISE (Corporate Sustainability Index) portfolio and, moreover, it is the only telecommunications company to be part of the New Market, the highest level of corporate governance of BM&FBOVESPA and has recently implemented the Audit Committee, what highlights even more its corporate governance.

TIM Participações is controlled by TIM Brasil Serviços e Participações S.A., subsidiary of the Telecom Itália group. Innovation and quality are two of the strategic pillars that TIM shares with its parent company. In this regard, TIM invests substantially in network and IT and builds synergies with its parent group through the sharing of experiences and the adoption of best practices policy, always assuring innovative experiences for all its customers. Through our subsidiaries, TIM Celular S.A. and Intelig, we operate in the market for mobile, landline and long-distance telephony services and also data transmission throughout the national territory. TIM is also reference in provision of ultra broadband cable services, covering the metropolitan regions of Rio de Janeiro and São Paulo states.

We are the second largest provider of mobile telephony services in Brazil in terms of total number of lines, with 73.4 million clients and market share of 27.1%, according to ANATEL data of 31 December 2013. In this last period, we recorded 3.1 million net additions, a 4.3% increase compared with the number recorded in the same period ended on 31 December 2012. In 2013, our service net revenue was equivalent to R$ 16,700 million, a 1.7% increase compared with the same period ended in 2012. Our EBITDA has also increased in the comparison between such fiscal years, recording a 3.9% increase year-to-year.

With GSM technology, we reached, on 31 December 2013, nearly 95% of the country’s urban population, with presence in 3.4 thousand cities. We also have a sophisticated 3G network available for more than 78% of Brazil’s urban population and international roaming agreements that include 450 available networks in over 200 countries.

Our optical fiber network is installed from North to South of the country, with a vast long-distance network (backbone) of nearly 47 thousand km and metropolitan networks with unique capillarity to provide high quality ultra broadband services in the metropolitan regions of Rio de Janeiro and São Paulo states. Additionally, this year we started our metropolitan optical fiber network expansion Project in the 44 main Brazilian cities (reaching around 50% of the total traffic) by the end of 2014. This project is an important step for the Company, as it is fundamental to deliver a high performance data service, including 4G technology. Among other projects, such as the expansion of our optical fiber long-distance network, we completed the project for the construction of LT Amazonas in 2013, which consists of an optical fiber backbone that connects the main cities of the country’s Northern region, one region with the most inneficient infrastructure n the country.

Our brand is strongly associated with innovation. We were pioneers in the launch of several products in Brazil, such as the MMS and Blackberry. We believe some of the mobile telephony plans we had created, such as Liberty (unlimited use) and Infinity (pay-for-call concept), transformed the mobile telephony market in Brazil, in line with our strategies to stimulate voice traffic, long-distance calls and accelerating the landline-mobile replacement process (migration from traffic originated from landlines to traffic originated from mobile numbers) that started with voice traffic and now can also be noticed in data traffic. Our growth in the mobile telephony market does not generate any cannibalization effect in our revenue, as we do not have any legacy in the fixed market, which represents an opportunity to increase our share in the global revenue of the sector.

The Company is aware of the need to invest better and more in a sector which, by nature, is capital-intensive. In 2013 the investments amounted to R$3,871 million, a 2.8% growth compared with 2012. Most of this investment was concentrated on infrastructure, confirming our commitment to improve quality. For the three–year period starting in 2014, the projected investment is R$ 11 billion.

By the end of 2013, we had over twelve thousand points of sale, between Premium stores and resellers (exclusive or multi-brand), also counting on the capillarity of large retail chains. In addition to the traditional points of sale, our pre-paid clients have alternative recharging channels, such as supermarkets and newsstands, amounting to over 430,000 points of sale all over Brazil. It is also worth highlighting the 163 owned retail stores at the end of this year, 32 of which were opened in 2013.

1. Management Message

Dear Analyst and Shareholder,

The year of 2013 was a year of transitions, for both TIM as well as the market. The economy showed modest growth, with a still intense competitive scenario. In this context, we sought greater efficiency by focusing on managing costs without having to sacrifice the pace of accelerated business growth. The results we present today are a confirmation of this approach, which can be verified, for instance, by increasing postpaid sales numbers while at the same time reducing bad debt to its lowest historical levels and cutting the subscribers acquisitions costs when compared to the previous years. On the industrial side, our strategy to develop and operate our own infrastructure rather than depend on leased infrastructure resulted in a significant reduction of our network costs, even when accounting for much increased traffic volumes for both voice and data.

Our Strategic Priorities involving network and infrastructure, offer evolution, institutional relationships and people have been and continue to be executed with great attention and engagement of our team. Much has been done and much remains to be done and I have the strong belief that this path is key for our Company.

Network, Infrastructure, Offer

2013 was a very intense year for our main priority, the network and infrastructure development, and I would say that the year was marked by the strengthening and quality improvement of our network in many fronts. The main projects of the year were: (i) Quality improvement project for our 195 main cities, (ii) Mobile Broadband (iii) Fiber-To-The-Site (FTTS) deployment in ~40 key cities, (iv) Several pilot projects of small-cell and Wi-Fi infrastructure, and (v) the deployment of the LT Amazonas fiber transmission line project in the Amazon region.

We can see that all these efforts on the infrastructure side are already improving the quality perceived by our customers, as it can be seen in recent satisfaction surveys with our user base.

As for the marketing and sales activities, we had an important year, with the launch of new offers and services such as TIM Music, TIM Web+Torpedo, Exchange Top-up, amongst others, all of them supported by our very strong sales channels and partners - arguably the best in our industry. This approach of defending our user base and developing a new image has helped maintain TIM’s competitive position as the leader in the Pre-Paid segment and the second largest mobile operator in total number of subscribers, reaching a customer base of over 73 million users and growing above the market average growth.

4G operation

2013 marked the launch of our 4G operations, with an innovative and efficient approach. We adopted since the inception a model of infrastructure sharing (“RAN-Sharing”) with the operator Oi, while at the same time maintaining the strength of our Liberty offer platform to position and sell our 4G packages. As a result, we had a very satisfactory market performance, achieving a market-share of close to 31% of 4G users, above even our total market-share of 27.1%.

Institutional Image

I would also like to briefly call the attention to our results on the Institutional Image an Institutional Relationships front, as last year was marked by a significant improvement in the external positioning and image of the company, as well as in its recognition and relationship with all of its major stakeholders, including the Regulatory Agency, Ministries, Congress, Analysts, Press and all of its customers. With its innovative “Portas Abertas” (“Open Doors”) Project, the company strengthened its interaction with customers, reinforcing the perception of transparency and seeking to lead the industry discussions about the evolution of the mobile sector in the country.

What to Expect for 2014

At the end of 2013, there were many news and speculation about the future of TIM and an eventual consolidation movement in the Brazilian market. We are aware of the great importance of the Brazilian operation for the Telecom Italia Group and other stakeholders. I'm personally committed to ensure that rumors do not impact our operation and do not remove the focus of our daily execution. We are fully committed to the execution of our three-year plan and will not let rumors and speculation about our company hinder our results or divert us from our strategic path.

Without a question much has been done in 2013 on the improvement of our infrastructure, nonetheless we will continue to work at an intense pace in 2014. We are now much more prepared for the next leap that will come with the intense development of data services.

As challenges for 2014 we must: (i) continue to develop the potential of our customer base, which today is the largest community of users in the Brazilian market, through fixed-mobile substitution, especially in the use of mobile data; (ii) keep pursuing market leadership, especially in revenue growth and financial results, (iii) advance in the deployment and launch of innovative solutions and offers, and (iv) expand our quality and coverage in infrastructure, always striving for operational excellence in all we do. I am confident that we are on the right track.

Rodrigo Abreu

CEO

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TIM Participações S.A. and

TIM Participações S.A. and Subsidiaries

Management´s Report

2. Economic and Sectorial Outlook

2.1. Economic Environment:

In Brazil, 2013 was characterized by many economic readings, most of them negative. On the positive side, it is worth highlighting the return to the lowest unemployment rate since 2002, 4.6%, registered in November (in December 2012 the same number was registered). On the negative side, the highlights are the GDP of 2013 estimated at 1.91% and the return of a rise in inflation at 5.91%, which exceeded the 4.5% target, but did not reach the 6.5% limit stipulated by the Brazilian Central Bank. It is also worth mentioning that the inflation in 2013 was higher than the one registered last year. As a result, Banco Central had to review its SELIC ­­­­reduction policy, which closed 2012 in 7.25%, its lower historical plateau, while in 2013 it closed in 10.0%.

The national demand kept showing expansion, mainly due to the low unemployment rate and the domestic market expansion being those some of the main inflation generators seen in Brazil in 2013. The Federal Government has been adopting several measures to keep high consumption and investment. In relation of the exchange rate issue, it has been fighting an intense battle  to try to slowdown the dollar appreciation, which rose 15.2% this year, motivated by the decrease of monthly FED stimulus from US$90 billion to US$70 billion. Besides the practically daily participation in the foreign exchange market offering dollars, the government has also adopted several measures to curb its appreciation, such as the increase of IOF (tax on financial transactions) for transactions with prepaid debit cards, main method of payment used by Brazilian tourists abroad.

The trade balanceclosed out the year with an accumulated surplus of US$2.56 billion in 2013, with a decrease of 86.88% compared to 2012, the worst result since 2000. This poor performance might be explained by the increase in fuel imports, which accounted for a US$ 20 billion shortfall in the balance of trade and for 6.5% increase in imports, mainly due the strength of Real before dollar in the first half of the year.

2.2. Telecommunications Sector

The Brazilian mobile telecom market reached 271,1 million lines until the end of 2013, which represents an annual growth of 3.6% (vs. 8.1% in 2012), representing a teledensity rate of 136.4% vs. 132.8% registered in 2012, in accordance with ANATEL (National Telecommunications Agency). The decrease in the growth pace of the customers’ base results from a less dynamic economic environment, a highly penetrated market (due to the use of multiple SIM Cards) and from the competitive pressure stabilization. However, the growth of the mobile telecom market has been supported by three main factors: i) the M2M market, ii) the growth in demand for data service, especially  in smart/webphones and iii) the migration from pre-pay to contract plans.

The Brazilian mobile telecom market is the fifth largest in the world and it reached, in 2013, a teledensity rate of 136.4 lines for each 100 citizens. The mobile telephony has already been established as the communication mean that is mostly present in Brazilian homes no matter  social class, mainly because  market offers focused on calls made within the same telephone company.

The major part of the growth is still concentrated on the pre-paid segment, which reached 211.6 million of accesses (+0.3% y/y), representing 78% of the total market.

The postpaid segment reached 59.5 million lines, an expansion of 16.9% YoY. The market slowdown reflects the high penetration of mobile market, which managed to expand its scope, taking advantage of the recent moves towards credit expansion and a better income distribution.

The Company’s post-paid segment has been keeping its strong expansion due to the Company’s efficiency in migrating customers who have a better pre-paid plan use profile to hybrid post-paid plans, such as the ’Plano Controle’.

In accordance with ANATEL, the landline telephony sector had a slightly growth of 0.7% when compared to the previous year, closing out the period with 44.6 million accesses, which represents a penetration of nearly 22.7 lines for each 100 houses.

2.3. Particularities of the sector

The mobile telephony in Brazil is a private sector where the prices and fees are regulated by the market. ANATEL is the agency that regulates all the telecommunication sectors in Brazil with the mission “to foster the development of telecommunications in the country in order to endow it with a modern and efficient telecommunications infrastructure, capable to provide proper, diversified and fairly priced services to the society all over the country”.

In the competitive environment, the Brazilian mobile telephony sector is one of the most competitive in the world, being one of the few with four competitors with national presence and with market share between 18% to 28%. The strong movement of competition in the market implies more pressure on margins because of commercial expenditures with publicity and advertisement commissions and subsidy. The practice of subsidy as a competition tool is still being used by most of the operators, while the Company understands that it has to focus its offers on the use of the service. The Company sped up in this way during 2011, setting aside the tool of subsidies of devices, process that started in 2010 and focused on the stimulation of usage.

In 2013, the company kept this approach, being even more aggressive when selling smart/webphones and mini modems without subsidy, aiming to increase the penetration of these devices in the base to promote the data usage.

The intensive capital is also one of the main characteristics of the telecommunications industry. In order to support the increase in network traffic throughout the years, high investments in infrastructure are required to ensure scope and quality of the rendered services.

In 2012, due to the ANATEL demands for purposes of improvement of the quality of the rendered services by the sector, the Company pledged to make heavy investments in its networks in the following years.

In accordance with the Network Improvement Plan presented by TIM to ANATEL by mid of 2012, investments ataround R$8.2 billion will be made by the end of 2014, focused in infrastructure and quality.

The Company’s investments prioritize projects for (i) extend its network with forecast of 30% increase of antennas 2G and 24 thousand kilometers of optical fiber until 2014, (ii) the optimization of the network usage, with tweaks to improve the signal quality in the current areas of coverage and (iii) the mapping of the main causes of interruptions and flaws of the network, as well as the required measures to prevent these events, assuring the quality of the calls and the data connection so that the user has greater access capacity.

As a provider of a service that is fundamental for the country socioeconomic development, the Company strongly believes Brazil is consolidating in a prominent position in the global economic scenario and is satisfied to be able to contribute with the country infrastructure development, promoting the globalization of telecommunication services. The Company restates its investment commitment for 2014 and continuously seeks for more and better services, trying to meet all its shareholders’ needs.

2.4. Regulation of the Sector

The telecommunications sector is submitted to the regulation of the National Agency of Telecommunications - ANATEL, special autarchy responding to the Ministry of the Communications, with independent management. ANATEL is responsible for ruling standards related to telecommunications services and to the relationship between different operators, as provided in the General Law of Telecommunications (Law nº 9,472, of July 16^th, 1997).

Specifically concerning the operational activity of TIM, Intelig and TIM Fiber, ANATEL has developed a strict regulation of mobile communications services (Personal Mobile Service - SMP), of fixed telephony (Commuted Fixed Telephonic Service - STFC) and data-communication (Multimedia Service of Communication - SCM). In the second semester of 2012, the operators Fiber SP and Fiber RJ were incorporated by TIM, which assumed the continuity of service providing.

In light of the dynamism in the sector, especially because of changes in technology experienced by the operators, mainly regarding SMP, the standards issued by ANATEL might be regularly updated.

In order to share the planning of its action with the society and to optimize the implementation of the public policies established by the Executive, ANATEL approved the General Plan of Update of Telecommunications Regulation in Brazil - PGR (Resolution No. 516/2008). In PGR, the ANATEL establishes actions of short, medium and long run, defined, respectively, in 2, 5 and 10 years.

This process of normative adequacy takes in consideration the technical analyses of ANATEL specialized areas and the matters resulting of public hearings, by means of which the regulation update proposals are debated between ANATEL, state authorities and the society, always closely followed by the Company.

The publication of Presidential Decree no. 7,512, as of  June 30^th, 2011, also provided very important landmarks for the sector, as the auction of fourth generation radiofrequencies and the determination of quality goals for broadband, which resulted in a new regulation for SMP and SCM, setting quality standards for mobile and fixed broadband, in phase of implementation by means of a group of companies and ANATEL, whose full adaptation will require new investments and the Decree has also approved the new Public Consultation on the Regulation of the General Plan for Fixed Telephony Services in Public Regime (PGMU), to be mandatorily observed by the STFC (Service of Commuted Fixed Telephone) concessionaires.

Part of the new quality targets for the SMP have become mandatory at the end of March 2012 and the rest mandatory at the end of October 2012. However, the quality targets set for the SCM have become mandatory at the beginning of November 2012.

Due to the new PGMU, ANATEL issued the Regulation of Universal Access Obligations in October 2012.

Throughout 2012, other important regulations with great impact on TIM operation and Intelig were issued by ANATEL, especially those listed below:

·

Regulation for the Application of Administrative Penalties, issued on May 2012, revoking the previous regulation on the subject. It is relevant to point out the redefinition of suitable minimum and maximum values when the fine penalty is applied, in accordance with the economic size of the service provider, as well as the suspension of the enforceability of this penalty until PADO (Administrative Process of Verification of Non-Compliance with Obligations) is finished.

·

Regulation of Leased Lines – EILD, issued on May 2012, revoking the previous regulation on the subject, whose main topics are mentioned in item 2.4.2 of this document.

·

The Regulation of Supervision, edited in August 2012, revoking the previous regulation on the subject.

·

Resolution that approved the Overall Plan of Competition Targets – PGMC, issued in November 2012, introducing an important regulatory mark in the sector.

Finally, another important important regulatory mark for the telecommunications sector was the issue of the Law no. 12.485 on September 2011, which brought a new scenario for the pay-TV services and for the production and distribution of content, creating the Conditional Access Audiovisual Media and Service – SeAC. Due to this law, ANATEL issued, on March 2012, the Regulation of SeAC, establishing the conditions to provide this service and the paid TV services already existing.

Afterwards, throughout 2013, important Regulations and Public Consultations with great impact on TIM and Intelig operation were issued by ANATEL, mainly those listed below:

·

Approved alterations in the Regulations of SMP, issued in November 2012, so that successive calls with same origin and destination, with time interval shorter than 120 seconds, were considered as just one call for charging purposes.

·

Regulation of the new Internal Regime of the National Telecommunications Agency, issued on April 2013, which brought important changes in the assignments of each Superintendence.

·

Alteration of the Regulation of the Conditioned Access Service (SeAC), which regulates the paid TV services, the production, and the distribution of content, creating the Conditioned Access Audiovisual Media and Service.

·

Regulation concerning the providing of Fixed Switched Telephone Services (STFC) destined to the public out of the Basic Tariff Area (ATB), issued in August 2013, which has set the rules to users support in rural areas.

·

Regulation that approves the Users Council, issued on October 2013, which sets the basic rules for the implementation, operation and maintenance of the STFC, SMP, SME, SCM and paid TV Services Users Council.

·

Resolution that alters the Resolution of the Personal Mobile Service, approved by the Resolution no. 477 and determines that the SMP providers inform the Emergency Public Service the localization of the Mobile Station that calls the Public Emergency Service, issued on November 2011 and applied from 30 April 2014 on to serve the 2014 FIFA World Cup.

·

Regulation of the Term for the Adjustment of Conduct, issued on December 2013, shall allow the agency to sign Terms for the Adjustment of Conduct (TACs) with the telecommunications service providers. In practice, the regulatory agency may Exchange fines for investment commitments from the companies.

·

Regulation of the Destination of the Band of 700 MHz, issued on November 2013 (Resolution no. 625/2013), which approves the destination of the band from 698 MHz to 806 MHz for telecommunications services; the band currently used is the one for TV broadcast. The new destination of these frequencies for telecommunication services shall enter into force with the publication of the band bidding terms, which in its turn, is subject to the publication of the regulation against interferences, after the tests applied by ANATEL are finished and the replanning of radio broadcast channels is concluded.

·

In September 2013, ANATEL, in accordance with directive in Public Hearing no. 40, informs that from 2014 on TIM and other mobile telephone operators shall send two cost models besides the FAC HACA (Fully Allocated Cost historical Cost Accounting) sent since 2007. They refer to CCA (Current Cost Accounting) and LRIC (Long Run Incremental Cost) models. Before that, the mobile telephone operators were exempted of sending it.

·

In March 2013, ANATEL, in accordance with directive in Public Hearing no. 13, proposes a single regulation for the telecommunication sector, with general rules for customer care, collection and offers to consumers of fixed and mobile telephony services, broadband and paid TV services is being proposed by the National Telecommunication Agency (ANATEL). The initiative aims to adapt all the telecommunication services to the attendance rules foreseen in SAC Law (Customer Care), such as maximum time to answer the customer and period to keep information.

2.4.1. Radiofrequencies Spectrum

The Company has the license for SMP services in the frequency ranges 450 MHz, 800 MHz, 900 MHz, 1.8 GHz and 1.9/2.1 GHz and 2.5 GHz, what allows it to provide mobile communication services in the technologies 2G, 3G and 4G all over the country.

In October 2010, ANATEL started the bidding No. 002/2010-PVCP/SPV for sub band H (band of 1.9/2.1 GHz - 3G) and the leftovers of 1.8 GHz (2G) bands. Because of impediments defined by ANATEL, related to the limits for detention of radiofrequencies, the current SMP service providers, with operation in the band of 1.9/2.1 GHz, were not eligible for the bidding of sub band H.

The impossibility of participation of the current SMP service providers in the bidding of sub band H, allowed Nextel to buy a national 3G coverage and a 2G presence, in Region I of PGA, with a total investment of R$ 1,421.3 million.

In December 2011, Bidding nº 001/2011-PVCP/SPV started, with the remainder of the

Aforementioned bidding. 16 blocks in the band of 1.800 MHz were sold to the telecommunications service providers Claro, Oi, CTBC and TIM, which acquired the biggest amount of MHz with the lesser premium. TIM Authorization Terms for the use of radiofrequency were signed on May 2013.

As a result of its participation in both Biddings, TIM, with an investment of $ 65 million, related to bidding in December 2010 and R$73 million (value without monetary restatement), related to bidding in December 2011, may expand its coverage 2G and intensify its presence in the North and Midwest regions of the country, the states of Paraná, Espírito Santo, Rio Grande do Sul, Santa Catarina and Minas Gerais, areas that have registered strong economic growth.

In June 2012, ANATEL promoted the bidding of 450 MHz and 2500 MHz bands, in order to introduce the so-called fourth generation technology in Brazil (4G) to serve, until 30 April 2013, the host cities of the Confederations Cup – Belo Horizonte, Fortaleza, Rio de Janeiro, Recife, Salvador and Brasília, as well as to prepare to host the World Cup, in 2014 and the Olympic Games, in 2015, besides developing coverage in rural areas.

If there was a company that was interested just in 450 MHz national scope band (Lot 1), the lots of 2500 MHz would be bid isolatedly. However, before the inexistence of companies interested just in 450 MHz band, this band was bid along with the lots of 2500 MHz bands. As a result, the winner of each lot took part of the 2500 MHz national scope band and the 450 MHz in specific places, divided into the 4 (four) major SMP Brazilian operators (TIM, Vivo, Claro and Oi), which together form the Brazilian territory.

Claro won Lot 2, acquiring the 2510 to 2530 MHz and the 2630 to 2650 MHz national scope sub bands and the 450 MHz band for an amount higher than R$844 million in the states of Acre, Amazonas, Amapá, Bahia, Maranhão, Pará, Rondônia, Roraima, Tocantins and metropolitan region and coast of the state of São Paulo.

Vivo won Lot 3, acquiring the 2550 to 2570 MHz and the 2670 to 2690 MHz national scope sub bands and the 450 MHz band for an amount higher than R$1 billion in the states of Alagoas, Ceará, Minas Gerais, Paraíba, Pernanbuco, Piauí, Rio Grande do Norte, Sergipe and the interior of São Paulo.

TIM won Lot 4, acquiring the 2530 to 2540 MHz, the 2650 to 2660 MHz national scope sub bands, and the 450 MHz band for an amount of R$340 million in the states of Espírito Santo, Paraná, Rio de Janeiro and Santa Catarina (the 450 MHz band was acquired along with Intelig).

Finally, OI won Lot 5, acquiring the 2540 to 2550 MHz and the 2660 to 2670 MHz national scope sub bands and the 450 MHz band for an amount higher than R$330 million in the states of Goiás, Mato Grosso, Mato Grosso do Sul, Rio Grande do Sul and Distrito Federal.

The Terms of Authorization were signed in October 2012. The first commitment of coverage due to April 2013, which covers the host cities of the Confederation Cup met the deadline. The coverage solution was developed based on a RAN sharing agreement with OI, which has a complementary band besides TIM’s. The agreement foresees the access network sharing, preserving the individual autonomy of each service provider and the activation of both lots of radiofrequency owned by each operator.

The first commitments of rural coverage linked to the 450 MHz band shall be required in June 2014. The rural obligations will be served by Intelig, which took part in the bid along with TIM, using the STFC. The commitments of rural coverage are rather onerous and require heavy investments of coverage, service offer in rural schools, construction of towers and cession of means for the local STFC concessionaire to comply with the PGMU obligations and with the imposed commitment of acquiring products with national technology.

The authorizations that foresees the license for the use of radiofrequency to provide SMP are in force for undetermined period. They have the following dates of expiry, with the possibility of one single renewal for more than 15 years. In case of renewal, this must be confirmed each 2 years and the percentage figure of 2% over the net income of the first year shall be paid to the Granting Power each two years. Such payment takes into consideration only the net income of the region covered by the license that had been renewed. The SMP authorizations that are in force on 31 December 2013 are showed in the table below:

Terms of Authorization				Date of expiry
				450 MHz	800 MHz, 900 MHz and 1.800 MHz	Additional Frequencies 1800 MHz	1900 MHz and 2100 MHz (3G)	2500 MHz Band V1 (4G)	2500 MHz (Band P** (4G)
Amapá, Roraima, Pará, Amazonas and Maranhão				-	March, 2016	April, 2023	April, 2023	October, 2027	AM – September, 2014  PA – February, 2024*
Rio de Janeiro and Espírito Santo				October, 2027	March, 2016	ES - April, 2023	April, 2023	October, 2027	RJ – February, 2024*
Acre, Rondônia, Mato Grosso, Mato Grosso do Sul, Tocantins, Distrito Federal, Goiás, Rio Grande do Sul (except municipalities of Pelotas and region) and municipalities of Londrina and Tamarana in Paraná				PR - October, 2027	March, 2016	April, 2023	April, 2023	October, 2027	DF – February, 2024*
São Paulo				-	March, 2016	Interior - April, 2023	April, 2023	October, 2027	-
Paraná (except municipalities of Londrina and Tamarana)				October, 2027	September, 2022*	April, 2023	April, 2023	October, 2027	February, 2024*
Santa Catarina				October, 2027	September, 2023*	April, 2023	April, 2023	October, 2027	-
Municipality and region of Pelotas, in the state of Rio Grande do Sul				-	April, 2024*	-	April, 2023	October, 2027	-
Pernambuco				-	May, 2024*	-	April, 2023	October, 2027	-
Ceará				-	November, 2023*	-	April, 2023	October, 2027	-
Paraíba				-	December, 2023*	-	April, 2023	October, 2027	-
Rio Grande do Norte				-	December, 2023*	-	April, 2023	October, 2027	-
Alagoas				-	December, 2023*	-	April, 2023	October, 2027	-
Piauí				-	March, 2024*	-	April, 2023	October, 2027	-
Minas Gerais (except the municipalities of sector 3 of PGO for radiofrequencies 3G and leftovers)				-	April, 2013	April, 2023	April, 2023	October, 2027	February, 2015
Bahia and Sergipe				-	August, 2027*	-	April, 2023	October, 2027	-

* Terms already renewed for 15 years, so without right to a new renewal period.

** Only complementary areas in the specific states.

In the course of 2012 and 2013, such as in previous years, TIM faced again discussions when the licenses to use radiofrequencies were extended. As a result of this extension, ANATEL understand that TIM is responsible for (i) providing a new licensing of its SMP radio-base and mobile stations, with the respective collection of the new TFI (Installation Fiscalization Taxes), as well as (ii) collecting public price corresponding to onus of 2% (two per cent) over its SMP income, which comprehends the service plans, interconnection and facilities and additional amenities (Value Added Services – SVA) incomes.

TIM understands the aforementioned demands are improper and promoted the challenge of the collected amounts, through administrative channels, before ANATEL, as well as along the Judiciary, in order to obtain the confirmation of its understanding and the annulment of charges from the Agency.

2.4.2. MTR and Wholesale Market

The interconnection of telecommunications operators is mandatory, allowing the users of different telecommunications services of collective interest (in special, STFC, SMP and the Mobile Service Specialized - SME) originated and terminated on different networks.

In the case of SMP, ANATEL has established that, whenever its network is used to originate or to receive calls, the operators shall receive the “Valor de uso de rede do SMP”  (MTR), also known as mobile termination rate, of free agreement between the related parties.

In the scope of its participation in the Bidding nº 002/2007/SPV, which assured to the Company  the licenses to use radio frequencies in 3G sub bands, ANATEL urged TIM to adopt a single MTR by Region of the SMP License General Plan - PGA, valid from  November 1^st, 2010, of free agreement between the related parts (Act no. 8.849/2009-CD).

In October 2011, Anatel approved Resolution no. 576/2011, which stablishs a mechanism of reduction of values for fixed-mobile calls of STFC incunbents (VC-1), by means of an 18% reduction in February 2012, 12% in 2013, and 10% in 2014, on the Telecommunications Services Index - IST. Actually, this negative readjustment of VC-1 rates should be followed by new negotiations for agreement of the VU-M of SMP operators, whose criterion defined in the aforementioned Regulation imputes that the full nominal reduction of the VC-1 will be forwarded to the VU-M.

Considering the aforementioned rules, through the Act no. 486/2012, ANATEL established the first reduction of VC-1 of the STFC concessionaires, in force from 25 February 2012 on. Furthermore, considering that the operators did not succeed in negotiating new VU-M amounts, the Agency set the new remuneration values of the SMP providers for the calls originated in the concessionaires networks, also in force from 25 February 2012 (Act no. 1.055/2012, subsequently rectified by the Act no. 1.480/2012).

By understanding that the VU-M reduction, as determined by ANATEL, did not take into consideration the need of preserving the competition in SMP market, TIM filled an administrative appeal against the respective acts. To the same end and considering the deadlock in the agreement negotiation of its VU-M values with the other operators, TIM opened arbitration proceedings at ANATEL.

In December 2012, as the Agency Board of Directors had dismissed the appeals brought by TIM and kept the VU-M figures fixed through the Act no. 1.055/2012, such as rectified through the Act no. 1.480/2012, TIM requested the Arbitration Board of Interconection, an instance of ANATEL, the confirmation of these same figures for its interconnecting relationship with the other operators (in some cases, the negotiation for the agreement of these figures were reopened).

Notwithstanding, before the News that the reduction of VC-1 of the STFC concessionaires was (or might be) left over under legal measures obtained by these operators, TIM has been preserving for such hypotheses – also by administrative measures at ANATEL – its right to the previous VU-M applicable to in the respective interconnection relationships.

On the other hand, regarding other wholesale market of significant interest for TIM, ANATEL published in May 2012, as a result of the Public Hearing no. 50/2010, which approved the new Regulation of the Industrial Exploration of Dedicated Lines – EILD (REILD), disciplining mechanisms for the optimization of the operational structure for the hiring of transmission circuits, in order to enhance the transparency of the hiring costs and allowing isonomic treatment to the operators that are independent from the concessionaire Groups.

Indeed, the new REILD represented a meaningful advance, inasmuch as it established, especially, (1) more effective rules concerning the definition of projects such as the Standard or Special EILD, as well as the deadlines for hiring and beginning of supply and (ii) specific procedure for the solution of conflicts involving the supply of EILD.

In parallel, ANATEL approved, also in May 2012, the Act no. 2.716/2012, which set the reference EILD values – significantly inferior to those indicated by the Act no. 50.065/2005 -, which equally represented a great advance, in order to guide the figures arbitration in case of conflicts among the operators.

In accordance with the new REILD, the agreements previously made to its editing should be adapted within 120 (one hundred and twenty) days counted from the publication of Resolution no. 590/2012. Although TIM had started negotiations aiming to adapt its EILD agreements, in certain cases the existence of deadlock among the parties took this operator to require ANATEL’s intervention to solve the conflict. Notwithstanding, the new REILD sets a specific procedure for the prompt solution of conflicts involving the supply of dedicated lines, the adoption of legal measures by the companies of Group Oi has delayed the effective adequacy of the EILD agreements made with TIM.

Finally, it is worth highlighting that, in November 2012, after a long period of public hearing, ANATEL edited the Resolution no. 600/2012, which approved the General Plan of Competition Targets (PGMC). Besides the general rationality regarding the rule, it may not be different from the version submited to the Public Hearing no. 41/2011 – implementing in the sector regulation the identification of the relevant markets, in which there are competition risks and Groups which have Dominant Position (PMS) to impose Asymmetric Regulatory Measures in order to promote the competition – several specific rules were largely altered.

All in all, the PGMC set the following relevant wholesale markets (i) interconnection in fixed telephone networks; (ii) interconnection in mobile network; (iii) interconnection Class V; (iv) infrastructure and access networks in fixed network; (v) infrastructure and transport networks, which includes the supply of EILD; (vi) passive infrastructure and network; (vii) national roaming and (viii) interconnection.

In parallel, ANATEL edited 5 (five) acts identifying Groups with PMS in the following relevant markets defined by PGMC: (i) Offer of Access Fixed Network Infrastructure for Data Transmission through a Copper Pair or a Coaxial Cable in Transmission Rates Equal or Inferior to 10 Mbps (Act no. 6.615, as of 8 November 2012); (ii) Wholesale Offer of Fixed Network Infrastructure of Local and Long Distance Transport for Data Transmission in Transmission Rates Equal or Inferior to 34 Mbps (Act no. 6.619, as of 8 November 2012); (iii) Passive Infrastructure for transport and access networks (Act no. 6.620, as of 8 of November 2012); (iv) Ending of Calls in Mobile Networks (Act no. 6.621, as of 8 of November 2012); and National Roaming (Act no. 6.622, as of 8 November 2012).

Group TIM was characterized as having PMS in the following markets: (i)  Passive Infrastructure for transport and access networks (supply of towers); (ii) Ending of Calls in Mobile Networks; and (iii) National Roaming.

Among the Asymmetric Regulatory Measures initially set by ANATEL, it is worth highlighting (i) obligation to create Reference Offers in order to assure greater transparency in the offers made by PMS Groups, (ii) possibility of setting reference values in protective measures committee, (iii) guarantee of attending the demands from Groups which do not have PMS and (iv) creation of entities to provide the most effectiveness to the PGMC rules.

On the other hand, the PGMC established of Bill & Keep rules to be followed by PMS Groups in the interconnection in mobile network market, as well as the limits to the VU-M reference values of PMS Groups from 2014 on. Such rules that were not contained in the initial draft submitted to the Public Hearing no. 41/2011, motivated the presentation of partial annulment of PGMC by TIM, registered at ANATEL on 26 December 2012.

The new VU-M to be practiced from 24 February 2014 on were published in the official government gazette, following the rules set in PGMC. However, in order to assure the period of 12 months for the application of readjustments on the VU-M, TIM appealed to the act, requesting that its application took place from 6 April 2014 on. The request of the PGMC annulment and the request of application of VU-M values of PGMC from 6 April on have not been judged by the Agency yet.

The Resolution Nº 588/2012 , redefined the criteria applied to the remuneration of Commuted Fixed Telephone Service Providers destined for the use of the general public (STFC) through the use of its STFC networks, when interconnected to networks of other Collective Interest Telecommunication Service Providers. Among the main alterations, it is important highlighting:

(i)

From  January 1^st, 2014 on, as for the relationship among STFC Providers in local modality, the remuneration for the use of the STFC Local Network shall not be paid;

(ii)

In situations when the remuneration for the use of Local Network is due, in calls from National and International long distance modalities, LDN and LDI, respectively and from terminals of other telecommunication services, the determination of values in calls made in Single Tariff Time, shall consider a reducer of 30% (thirty per cent) on the TU-RL amount;

(iii)

the TU-COM amount shall be equal to half the TU-RL amount

(iv)

the TU-RIU1 and the TU-RIU2 amount shall be limited for the STFC Incunbent in National Long-Distance modality; the tariff of Grade 4 foreseen in its Basic Plan of Service, observed the hour modulation and other conditions established in the regulation or concession agreements, in the following percentages:

a) 25% (twenty-five per cent) until  December 31^th, 2012;

b) 20% (twenty per cent) from  January 1^st, 2013 on.

2.4.3. Costs Model

The implementation of a costs model by Anatel is being developed since March 2005, with the publication of Resolution No. 396/2005, which approved the Document of Separation and Allocation of Accounts - DSAC, for pricing of STFC and SMP interconnection, as well as wholesale market supplies, especially dedicated lines (EILD) and unbundling.

In continuity to the process for its effective implementation by Anatel, in August 2011, a consortium headed by Advisia Consultancy was hired by means of bidding in partnership with the International Telecommunications Union - ITU, so as to develop the optimized modeling of costs, with two years term for conclusion, which will be the base of all the models the agency will use, especially for setting rates and prices of telecommunications services inputs.

The optimized implementation of the costs model was one of the short-term goals set forth in the PGR, with expectation of conclusion for October 2010; however, its technical complexity indicates that Anatel will only effectively use it in 2014.

As a result of these efforts, in July 2012 ANATEL submitted to the Public Hearing no. 26/12 the Proposal of Relevant Documents for the telecommunication cost model. The deadline for the presentation of contributions ended in 30 August 2012, with the register of 121 contributions to Anatel.

In December 2012, Anatel, along with UIT and Advisia, society that leads the international consortium hired to develop the cost model, promoted a seminar on the project that has been developed, highlighting that the model will be fundamental so that ANATEL complies with the sectorial public policies, once it will allow the access to cost management information of different business areas and product lines of the telecommunication service providers.

To summarize, the three financial models that shall serve as conceptual framework for decision-making are: (i) FAC-HCA to discuss cost recovery, (ii) FAC CCA to analyze new members, and (iii) LRIC for analyzing and promoting competition. As a main  result of this activity, ANATEL approved the adoption of reference values, especially the VU-M, through the PGMC, from February 2016, shall have as basis the developed cost model.

In 2013, ANATEL reviewed nearly all regulation of cost models through the publications of the Resolutions no. 608/2013 and no. 619/2013. In accordance with these new resolutions, which update the previous provision in Resolution no. 396/2005, the level of information reported to the Agency and the amount of products analyzed are highly expanded, besides having a standardization for all operators with regard to the cost allocation costs, which shall allow the comparison among their results. Furthermore, in September 2013, Anatel, through the provision in the Public Hiring no. 40, informs that from 2014 on, TIM and the other mobile operators shall send more two cost models besides FAC HCA (Fully Allocated Cost Historical Cost Accounting) sent since 2007. They comprehend the CCA (Current Cost Accounting) and LRIC (Long Run Incremental Cost). Before that, the mobile operators did not have to send it.

In 31 December 2013, in accordance with the PGMC determinations, ANATEL would disclose the interconnection tariffs (VUM) which shall come into effect from 2016 on, values resulting from its long-term bottom up model (LRIC – Long Run Incremental Cost). However, the need for major analysis on the tariff figures by the Agency postponed this disclosure, whose most likely foreseen date is February 2014.

2.4.4. Regulation on Quality

Published by ANATEL in October 2011, the SMP and SCM Quality Management Regulations impose quality parameters that will have to be met by the mobile telephony and internet connection operators.

Most of the targets set started to be required by the end of October 2012 and beginning of November 2012.

Among such parameters of quality, we highlight the ones related to the quality of the networks, both mobile and fixed, creating obligations of minimum and average speeds in figures way above the ones currently used by the operators, which demanded, in short term, investments so that such obligations were met.

Becauseof the necessity of better quantification of the financial impacts, Oi’s Group has presented a cancellation request along with a revision request of certain indicators, with the objective to request ANATEL the presentation of technical surveys and economic impacts that motivated the issuance of such regulations.

The aforementioned mentioned request was submitted for a  hearing by ANATEL, which resulted in a series of contrary contributions to the maintenance of quality metrics, on the part of telecommunications services operators implied, which are under examination by the Agency.

Regarding the STFC, the ANATEL Board of Directors approved the edition of the Quality Management Regulation for providers of this service in December 2012, which was published in February 2013. The new STFC quality targets started to be required from June 2013 on.

The aim of these new Regulations is making Available a new Quality Management model, which includes, besides the network and customer care technical requirements, the consumer’s perception regarding the service rendered and the inclusion of indicators to provide broadband in mobile networks and indicators regardless the Service Provider (reaction indicators).

In practice, the measurements have already been made since May 2012. However, the Internet indicators, Guarantee of Hired Immediate Transmission Rate and Guarantee of Hired Average Transmission Rate started partial measurements in November 2012. Until now, ANATEL is disclosing to the general public only internet indicators.

Consolidation of STFC Authorizations of TIM and Intelig and Incorporation of the operators Fiber SP and Fiber RJ by TIM with the waive of SCM authorizations by the incorporated operators.

With the acquisition of Intelig by TIM Participações (operation approved by ANATEL through the Act no. 4.364/2009), the Group TIM, pursuant the regulation in force, had to eliminate the overlaps of existing authorizations (both TIM Celular and Intelig had STFC authorizations in Local National Long Distance – LDN and International Long Distance – LDI).

To that end, a period of 18 months was stipulated, from the operation closing (Act no. 5.470/2010) to eliminate such overlap, prolonged for more 12 months (Act no. 4.559/2011), which ended on 30 June 2012.

In this respect,  TIM registered, on 30 December 2011, petitions formalizing to the Agency the consolidation of its Terms of Authorization of STFC in local modality in Intelig and the consolidation of its Terms of Authorization of STFC LDN and LDI in TIM Celular. Therefore, since 30 June 2012, TIM Celular no longer has authorization to provide STFC in local modality and Intelig no long has authorizations to provide STFC in long-distance modalities. As a result, TIM does not make use of CSP 23 anymore and it gave it back to ANATEL, remaining its STFC LDN and LDI operation linked to the CSP 41, under the authorization of TIM Celular, remaining with Intelig the authorization of Local STFC.

Moreover, all impacted subscribers received a communication, either by mass circulation newspapers in the country, correspondences, telecommunication services invoices and SMS, in order to clarify all the imposed changes due to the need of eliminating the overlap of grants hold by these operators.

The additives to the Terms of Authorization of STFC signed between the Group TIM and ANATEL regarding the aforementioned situation were published on  October 26^th, 2012.

In  August 29^th, 2012 the companies Fiber SP and Fiber RJ formalized at ANATEL their waive to the authorizations to explore SCM. Then there was the incorporation of both by TIM, which already has authorization to provide this service. Before the waive, the Fibers authorizations of SCM were eliminated by ANATEL. With the incorporation of Fibers, TIM, as successor, started rendering the services previously rendered by those companies.

3. Services

3.1. Our Business

A strong brand associated with innovation. We believe that we have a strong brand and an innovative reputation, since TIM has been the pioneer in the launching of many products in Brazil, such as the introduction of payment per call, offerred in the Brazilian market (Infinity Pré), followed by a prepaid Internet package per day used (Infinity Web), a daily package combining Internet and text messages (Infinity Web+Torpedo), and many others. Our mobile telephony plans, such as Infinity Pré and Liberty, transformed the mobile telecommunications market in Brazil, together with our strategy to increase the voice traffic and long-distance calls in the country and increase the growth trend in the substitution of the fixed telephony services to mobile telephony services. According to the marketing research carried out with telephone users throughout Brazil, conducted by Instituto Ipsos, in may 2013, hired by TIM, we were recognized as market leader in terms of innovation and brand preference, among other attributes.

We believe that our innovative offers in the Brazilian market has contributed to the increase of voice traffic in Brazil and has been essential for positioning the Company as a service provider capable to estabilsh a new standard in the market. Amongst these plans, we have Infinity pré, in the pre-paid segment, which introduced the concept of charge per call (instead of per minute) and equalization of fees for local and long-distance calls within our network. In the postpaid segment, we launched the concept of unlimited calls within the network TIM together with TIM Liberty plan. We believe that the further development of other plans based on these concepts (Infinity Web - prepaid data; Liberty Web - postpaid data; Mais Infinity - calls to fixed-line telephones; and Infinity Torpedo – text message package) strengthens our leadership in relation to our competitors regarding innovation.

3.2. Our Strategy

Our strategy includes:

Strengthening of our clients basis and network improvement. Brazilian mobile market kept its pace in recent years. Despite of a slower growth rythm observed in 2013, we believe that there is still a significant opportunity for growth in the sector, especially, due to the mobile internet market, machine-to-machine market (M2M) and an organic growth of the voice clients basis.

Our strategy aims mainly to take advantage on the opportunity of growth of mobile Internet in the Brazilian market. We believe that the mobile operators are in an excellent position to take the opportunity of growth of the broadband internet in Brazil, since mobile operators have flexible price plans (including prepaid plans), which are most suitable for the majority of the Brazilian population. In addition, the lack of fixed infrastructure is still an important issue that hinder the access to the fixed internet services, especially in suburban areas, where mobile coverage is more suitable. In addition to the advantages of accessibility and coverage of mobile operators, cultural changes in such locations reinforce the demand for mobile internet, since there is a constant desire of internet connection every time, everywhere.

Taking advantage of fixed-to-mobile substitution. We sought to take advantage of the growth opportunity for voice and data traffic as well as to stimulate the use of mobile devices, instead of fixed lines, for long distance communication and Internet, through the fixed-to-mobile substitution. We believe that the main advantage of our offers is that its users are capable to use our network more than that of other suppliers of mobile telecommunications. Our prepaid Infinity plans and postpaid Liberty plans were developed in 2009 initially in connection with this strategy and continue to be improved, as they are keys elements for our growth.

In the voice market, this strategy has been successful, in part, due to the limited offers of other long distance operators in Brazil and the acceleration of the fixed-mobile replacement. We became the leader of the long distance telecommunications market, since our market share was 5.9% in 2007 and, in June 2013, exceeded 50%, according to the latest report of Anatel. The fixed-mobile replacement is becoming increasinlgy evident in the Brazilian market, as the fixed telephony operators have verified a stability in the number of users and revenues. Considering that we are essentially a mobile telephony operator with a robust network infrastructure, the impact of any reduction in the fixed telephony market does not affect our performance and, therefore, stimulate the acceleration of the fixed-mobile replacement, which in turn increases the demand for our services.

3.3. Commercial Operations

TIM has a wide distribution channel of SIM cards and prepaid recharges in all states of Brazil, consolidating its national presence since 2002. The company has over 12,000 points of sale, between Premium stores and resellers (exclusive or multi-brand), also counting on the capillarity of large retail chains. Our prepaid customers have, in addition to the traditional points of sale, alternative recharging channels, such as supermarkets and newsstands, totaling over 430.000 points all over Brazil.

For the corporate market, TIM has over 300 commercial partners focused on servicing small and medium enterprises, as well as a sales team that rely on 60 employees focused on large enterprises.

The regulatory scenario is still challenging and remains as an extra motivator for TIM to continue in its path of innovation, with even bigger focus on quality of services and costumer satisfaction and after ANATEL’s decision to suspend sales in 2012, the Company  renovated its efforts in the post paid services, reaching over 7 million sales in 2013. Among the factors that contributed to such result, we emphasize: I) directioning in the sales opportunities, for pre-paid clients with high use profile, of the Plano Controle that represented 50% of our sales in 2013 II) introduction of the Plano Controle’ in the portfolio of the big retail chains that historically focused on sales of pre-paid services; and III) opening of 2 new regional sales offices in Bahia and in  Sao Paulo, that represent, respectively, 7% and 12% of the whole mobile market. Such  offices will allow the development and execution of sales strategies specific to the local needs.

On the pre-paid segment, the main growth engine continued to be the “Infinity Pre” plan, released in 2009, and we reached 36 million sales in 2013. Adding to that, TIM  launched another innovative offer called “Recarga Promocional”, that allows users to recharge their pre-paid phones with just R$ 2.00, and such amount is referred to as “Change” in our advertising offer material.

For the corporate segment, TIM has conducted a restructuring of the channel that renewed 3.8% of the partnerships based on financial and quality indicators. This effort will be maintained in 2014 with the goal of assuring alignment between the needs of our clients and the strategies of our channel.

4. The TIM brand and the advertising campaigns

4.1. The TIM brand

TIM maintains its path of innovation and offer of services based on Transparency, Quality and Innovation. The Company recently exceeded 73 million customers, maintaining the leadership in the prepaid segment and, thus, made the digital inclusion of many people possible.

Such numbers are the result of consistent work and innovative services that stimulate the category, such as the launching of Liberty Controle: a plan that combines elements of postpaid and prepaid, characterized by the fact that, even without credit, the customer can continue speaking (using the services) unlimited with any TIM in Brazil; and the launching of Infinity Web+Torpedo, that allows customers, for only R$ 0.75, to use the services of mobile Internet and unlimited sending of SMS.

Another important measure taken by TIM, and which confirmed the success expectations, was the launching of the website Open Doors [Portas Abertas], through which the Company reaffirms its commitment with Quality, Transparency and Innovation. Such website had, in 2013 alone, over 1 million accesses.

4.2. Advertising campaigns

TIM invests in innovation and quality services with the final and major objective of improving the life of its customers through technology, i.e., to help them talk more, do more and go further. These benefits were portrayed in the campaign Testimonials [Depoimentos], which featured stories of people who went further using TIM's services.

Later, we chose to materialize the transformation power of TIM using a physical resource that, at the same time, is full of metaphors: the blue train. Its main function is to help people arrive at the destination of their dreams.

In parallel, a consistent work of consolidation of the Liberty and Infinity plans was implemented, strengthening the concept of “smartchoice”, with relevant benefits for consumers. Also, new plans and services of said platforms were launched, such as Liberty Controle, Infinity Web Modem, Liberty Passaporte and Infinity Torcedor.

Moreover, innovative services such as TIM Music, an application that allows access to millions of songs with accessible price to customers of the prepaid and postpaid segments, were launched. Also, Liberty Controle Express, a plan of the postpaid segment in which customer pay invoices via charge to their credit cards, which is very convenient for users of the service and also helps in the reduction of debt deliquency.

In total, there were 10 mass campaigns with high impact, using media such as television, radio, Internet and press.

The work with the BlueMan Group (BMG) is also noteworthy for having matured and consolidated a successful partnership that promises new developments and accomplishments in 2014.

4.3. Human Resources

TIM has as one of its pillars the “People and Organization”, so that the focus on the people, the development of their capacities and qualifications and the implementation of initiatives of “Best Place to Work” are vectors that stimulate and renew its employees’ feeling of pride and belonging. Our goal is to stimulate creativity and encourage people to break the everyday barriers and overcome their limitations. All of that focused on the client, to bring unlimited communication, access to technology and full mobility to the entire TIM community.

The company manages its human resources aligning people’s expectations, the needs of the business and the market conditions. In a motivating and challenging work environment, TIM offers space and opportunities so that its team can expand the horizons, evolve and potentialize the company’s achievements.

TIM invests in the continuous promotion of professional development of its team, promoting the commitment of the employees with strategic targets and goals of the company.

4.3.1. People

The TIM Group has closed the year of 2013 with 12.167 employees all over Brazil. These people, with their history and knowledge, represent the intellectual capital of the company and act as fundamental elements for the development of the business.

With abilities and attitude essential to the growth of the company, the team is young and works with innovation and fulfilling energy. The average age is 31: 26% of the employees are 25 or under; 49% are between 25 and 35 years old; 19% are between 35 and 45 and 6% are over 45 years old.

42% of the people are taking or have already completed college courses and 6% of the internal public is post-graduated. The numbers and achievements show that the employees form a diverse and highly qualified team to overcome the challenges of the company.

TIM’s work force is complemented by 16 outsourced people, 306 interns and 381 apprentices.

4.3.2. Development and Training

At TIM, employees have access to innovative tools and well structured paths to evolve in the company and build a successful career. In sync with the company’s organizational values, they build professional paths from their own professional experiences and the knowledges acquired with the company’s investiment.

Because of that, TIM invests in on-site and online courses. In 2013, there were 15,321 participants in the Qualification and Training Program, totaling 2,135,529 hours, an average of 139.4 hours per employee. The courses are mainly focused on the pillars of technical, behavioral and managerial competencies required for the challenges of each position.

To guide the career of its employees, TIM maps and guides the evolution and follows the individual development to conduct the activities with more assertiveness. In addition to incentivating and offering real growth opportunities, the company recognizes the dedication and the outstanding performance of its professionals, using Performance Management as reference.

In the course of 2013, 2,098 employees were contemplated with merit actions and internal opportunities, reaching 43.9% of the eligible population, with the average salary increase of 22.10%

The attraction and development of the professionals of elevated potential are priorities for TIM. Through the Trainee Talents without Borders Program, TIM searches to identify and attract the best professional young people in the working market, preparing them to put in practice new ideas and assuming strategic positions in the company in a short time. In 2013, 16 new talents were selected to join the program, 13 of them in the beginning of 2014 totaling 17,743 who applied.

With the goal of attracting the best students in the market and forming our new future professionals, the Intern Without Borders Program bring to TIM young people with energy and determination, initiative, team spirit and, specially, interest for challenges. In 2013, more than 45 thousand university students from all over the country have applied in the program, an increase of around 52% in the number of applicants.

4.3.3. Integration and Life Quality

Among the actions directed to health, well being and life quality, the TIM Games deserve highlight. The internal competition of national scope with sports modalities reinforces the mobility and values such as overcoming, excellence and team spirit. In 2013, the event has involved more than 2,500 employees in 400 teams in the regional and final stages.

The values that lead the company’s actuation were also highlighted in the event of Children’s Day, on which the company welcomes the children of the employees in its facilities. The event, that reinforces the sense of belonging and bring the families closer to TIM’s reality, provided environmental awareness and cultural activities for the 4.000 participant children.

Also in 2013, we had campaigns such as Internal Week of Work Accident Prevention, Vaccination Campaign  and Mouth Health Campaign.

Internally, the corporative identity campaign gathered all the employees around the same goal, highlighting the importance of the work of each employee to the achievements of the company, focusing in the Pillars of Quality, Transparence and Innovation. The Blue Passion theme, permeated all the communication of the company throughout the year.

To acknowledge the commited performance of all the team with the strategic pillars and challenges overcame in 2013, confraternization events were held in the end of the year in all the regional sections.

4.3.4. Work Relations

TIM is in constant dialog with the syndicates, to conciliate the interests of the company and the representation entities of telecommunications. The employees have freedom to join the Union of its category (SINTTEL) and 100% of them are represented by the worker’s syndicates, according the brazilian legal system. The company negotiates 88 collective agreements a year, with the 27 unions.

4.4. Costumer Service

In 2013 the experience and costumer satisfaction continued to be strategic priorities for TIM. The Quality Board, that reposts directly to the CEO, kept developing and coordinating activities to constantly improve the services and narrow the relationship with the clients. The Quality action plans are elaborated from the input generated by the satisfaction surveys, by the information brought by clients in the contacts made by the several relationship channels and other important indicators that reflected its perception.

TIM ended 2013 registering good results, evolution demonstrated in the main indicators of public knowledge. The company consolidated in 2013, until November, last published result, the position of least sued in the sector of Tellecomunications in the general ranking of PROCONs integrated to the SINDEC (Consumer’s Defense Information National System), improving even more its performance in relation to 2012. In relation to the IDA (Assistance Performance Index), TIM kept the second leading position and in november, the last official results published by Anatel reached 91.85 points, being just 0.55 points from the leading operator and with 15.63 points above the last operator. Besides that, Anatel announced in November of 2013 that between May and July of 2013 (evaluation period of the 4^th Cycle of Improvement Plan follow up), TIM registered the lowest index of general complaint for 1,000 costumers in the Call Center of the own operator and second best index in relation to the registered complaints by the costumers of Anatel’s Call Center.

In a never before seen and pioneer initiative, TIM launched the Open Doors website, that allows everyone to follow the evolution of the service provided by TIM. The site reaffirms the commitment to the service quality and to transparency, reinforcing TIM’s innovative DNA. On this site, it is possible to know all the relevant information about the operator, coverage map and news about the telecommunications market and future tutorial videos about specificities of the services. The site also brings the action plan of improvement signed with the regulation agency to improve the network quality.

In 2013, the Open Doors website had over 1.2 million unique users and it was consolidated as a relevant channel for customers, allowing them to follow with transparency the evolution of the service provided by TIM. Reformulated in October, the website has relevant information on the operator, coverage map, news on the telecommunications market and tutorial videos on the specificities of the services. The website also brings the action plan for improvements submitted to Anatel, so that all can know and follow the commitment undertaken with the regulatory agency to improve the quality of the network. The Open Doors Application was also launched in 2013, which, in addition to allowing access to the main tools of the website, is part of a group of interactive channels through which customers can cooperate with the improvement of the service by informing on occurrences with the service provided. This set of initiatives strengthens the features of Transparency, Quality and Innovation and assists in the relationship with customers and in the improvement of the customers' perception of TIM's services.

5. Corporate Events

5.1. Corporate Restructuring processes of TIM Fiber RJ S.A and TIM Fiber SP Ltda.

According to the commercial strategy of expansion of the activities and strengthening of the TIM Participations infrastructure, on July 8^th, 2011, the integral subsidiary of the Company, TIM Celular S.A. (“TCEL”) celebrated with Companhia Brasiliana de Energia ("Brasiliana"), figuring the AES Elpa S.A. ("AES Elpa") as intervener-party, Purchase and Sale Agreementof all the quotas of Eletropaulo Telecomunicações Ltda. ("AES Telecom EP") and the shares of emission of AES Communications Rio de Janeiro S.A. ("AES Com Rio"), then controlled, respectively, by Brasiliana and AES Elpa.

“AES Telecom EP” and “AES Com Rio” were infrastructure and solutions providers for the high performance communication and served the main towns of the metropolitan area of the states of Rio de Janeiro and Sao Paulo, reaching a potential market of approximately 8,5 million homes and more then 550 thousand companies, in 21 cities, through an optical fiber network of 5.5 thousand kilometers.

On October 31^st 2011, In order to comply with the precedent conditions described in the Purchase and Sale Agreement referred above, it was concluded, the acquisition by TIM CELULAR of all the quotas of “AES Telecom EP”, by the total amount of R$ 1,074 million, and the acquisition of 98.26% of the shares of emission of AES Com Rio, for the total amount of R$448 million.  

Following with the conclusion of the acquisition, the social denomination of “AES Telecom EP” was altered to TIM Fiber SP Ltda. ("TIM Fiber SP") and the  “AES Com Rio” to TIM Fiber RJ S.A. ("TIM Fiber RJ"), respectively.

The closure of this transaction consolidates the business strategy of expanding the activities and strengthen the infrastructure of the Company. The TIM Fiber RJ and TIM Fiber SP became infrastructure and communication solution providers that supply the high performance of the main cities of the metropolitan areas of the states of Rio de Janeiro and Sao Paulo.

Coherent with the organization of the companies controlled by the Company, on August 29^th, 2012, “TIM Fiber RJ” and “TIM Fiber SP” were incorporated by TIM CELULAR. The goal of this operation was to simplify the organizational structure and improve the administrative, operational, and financial efficiency of the societies controlled by the Company.

5.2. Long Term Incentive Plan

On July 21^st 2011, the shareholders of TIM Participations were called to attend the Extraordinary General Meeting, held on august 5^th 2011, to deliberate about the Long Term Incentive Plan (“Plano”) of the Company.

The Plan has the goal to grant buying options or shares subscription emmited by TIM Participações to the directors and employees of the Company and its controlled entities, seeking to stimulate the expansion, the consecution and the success of the social goals of the Company, as well as align the Companie’s shareholders,  directors and employees objectives.

According  the approval by the Company’s General Meeting, the administration of the Plan is the duty of the Administration Board, respecting the Company’s Social Statute. The Administration Board can be advised by the Remuneration Comitee, composed by three of the members of the own Board, by the Directors of Human Resources, Legal and Financial, as well as by outside consultants.

To the Administration Board it is granted: (i) decide over each and all measures related to the administration, interpretation, detailing and application of the rules of the Plan; (ii) modify the terms and conditions of buying options or shares subscription

Granted to the benefeciaries of the Plan, with the goal of adapting them to possible demands that may become necessary because of any legal or regulation alteration applicable to the Plan; (iii) analyze the exceptional deriving cases, or related to, this Plan; and (iv) select the beneficiaries of the Plan, in the terms and rules stablished by the Plan itself.

The grant of the buying options or shares subscription is annual and will be held for 3 years, and the exercise of  the buying options or shares subscription will be held gradually, up to 33% in the first year, up to 66% the second year and up to 100% the third uear, counted from each one of the three grants. The legality period of the options is 6 years.

In July 30^th, 2013, the Board of Directors took note of the results noted on the 2^nd Vesting First Grant, for the period of 2011-2013.

The Board of Directors approved the proposal of the Third Grant of the Company’s Long-Term Incentive Plan, of the year of 2013, as well as the following points which compose the Third Grant: (i) the Base Price of the Share; (ii) the vesting and effectiveness period; (iii) the Minimum Relative Performance Goal and the Relative Performance Goal; (iv) the Minimum Absolute Performance Goal and the Absolute Performance Goal; (v) the list of the Similar Companies which composes the Relative Performance Comparison Index; (vi) the table of the correction of the Exercise Price; (vii) the Beneficiaries; and (viii) the amount of Options and Shares object of the Plan, all in accordance with the material presented and filed in the Company’s head offices

On August 23^th, 2013 the Council took note of the results of the 1^st Vesting (2012-2013) of the Second Grant Plan Long-Term Incentive Company, granted in 2012.

6. Network

6.1. National Coverage

TIM’s mobile network structure is based in the GSM technology. TIM has a national reach of approximately 95% of the Urban population, with  GSM national wide coverage of Brazil, present in 3.4 thousand cities. TIM also counts with a wide data coverage in all of the country, being 100% GPRS, of which, 80% EDGE, besides having a sophisticated network of Third Generation (3G) available for approximately 78% of the urban population of Brazil.

TIM made throughout the year, significant investiments, being R$3.5 billion just on network in the year of 2013, for expansion of coverage and capacity, following the growth of voice and data traffic, and will continue to invest to offer a high performance of mobile broadband (MBB).

The year of 2013 ends with the delivery of important infrastructure projects in benefit of the users. The improvements in the transmission of data make possible a differentiated navigation performance for the users of mobile broad band, through sites connected to high speed optical fibers, radio access updating and implementation of new network nucleus functionalities. By the end of 2013, 38 cities were benefited by the MBB and by 2016 another 200.

For the three year period that starts on 2014, TIM will invest around R$11 billion, which 90% in network infrastructure. The network investiment has been a priority of the operator in all of the country. IN 2013, TIM increased by 11% the volume of installation of the TRX equipment and also increased by 3,4 times the amount of places connected by optical fiber, making possible an increase of 21% of the capacity of data transportation, when compared to what was accomplished by the end of 2011. And the results are already seen, as Anatel has published in November 2013, that , between May and July of 2014, TIM has conquered the position of best operator in the access indicator to voice networl and kept the leadership in the network access indicator of the 3G data network in the consolidated vision Brazil, overcoming the goal of evaluation of each month and with a consistant tendency during the period.

 

The company kept the internal program initiated  in 2009 of monitoring of the network quality, based on sample measurements made in the main paths of the metropolitan areas of the country. The program follows up the performance of TIM’s network and also of the other mobile operators, and is used to make fine adjustments and provide improvements in the network quality.

According to ANATEL, in 2013, TIM has consolidated its favorable competitive position, keeping the second place amongst the mobile  operators in the Index of Caring Performance (IDA) of ANATEL, substantially reducing the difference to the operator in the first place. Such results demonstrate our continuum commitment to provide to our costumers the highest service quality and to answer, properly, the growing demand for services in Brazil.

In 2013, TIM has also standed out in relation to the number of complaints of clients in the Procons, integrated to the “SINDEC” system (Integrated Information National System), being the operator with the smallest number of complaints in the consolidates national result. Besides that, Anatel announced, in November 2013, that, in the period of May and July of 2013, TIM was the operator with the smallest index of general complaints by 1,000 costumers in the operator’s Call Center and, in relation to the registered complaints by costumers at ANATEL, the Company got the second best index.

6.2. International Coverage  (Roaming)

Abroad, TIM continues to expand the availability of services of international roaming: there are already more than 450 available networks in more than 200 destinations in the six continents (including Antarctica) for the use of voice and 150 destinations with data coverage (GPRS/EDGE). Besides that, the company is also leader in the coverage for pre paid costumers making the service available in 46 destinations. Since 2009, TIM has also made available 3G abroad, in 2012 the coverage was extended to more than 90 destinations. In the will of offering even more confort to the costumer of the service, the clients that travel abroad also have coverage on maritime cruises and airplanes, including some domestic flights (partnership of TIM, OnAir and TAM).

7.  Operational and Financial Performance

7.1. Operational Performance

Overview of the Brazilian Market

The Brazilian mobile market has reached 271,1 million lines by the of 2013, representing an annual growth of 3.6% (vs. 8.1% in 2012) and a penetration rate of 136,4% compaired to the  132,8% in the 4Q12. The reduction in the pace of growth of the customer base is a result of a less dynamic economical environment, a highly penetrated market (due to  the use of multiple SIM Cards) and by the estabilization of competitive pressure. The growth of the mobile market has been supported by three great factors: (i) the M2M market (ii) increase in the demand of data service, specially for smart/webphones, and (iii) the migration of pre paid to post paid plans.

 

Despite the market showing an acceleration in the net additions in October, the results of 4Q13 totaled 2.8 million additions, a reduction of 3.9% when compaired to the 2.9 million additions registered in the same period last year, influenced by the cleaning process of the operator’s basis.

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The pre-paid market has reached 211.6 million lines (+0.3% YoY), and represents 78% of the total Brazilian market

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The post-paid market has reached 59.5 million lines (increase of +16.9% versus december 2012). It is important to emphasize that post-paid voice (excluding M2M) has reached 44 million lines (+17.4% y/y), while the M2M was 8.3 million (+22.6% y/y).

In the full exercise of 2013, market net additions totaled 9.3 million, a slowdown of 52.5% in comparison to the additions registered in 2012.

 

 

 

TIM’s Performance

The total base of subscribers ended 2013 with 73.4 million lines, a growth of 4.3% in comparison to 2012, above the total growth of the market of 3.5% and representing a market participation of 27.1% (versus 26.9% a year before).

According the numbers of 2013, TIM registered gross additions of 39.6 million lines (versus 38.4 million in 2012), which resulted in a volume of 3.1 million total net additions).

 

 

The disconnections reached 36.6 million lines in the year, with a churn rate of 50.9% an increase of 34 bps in relation to 2012. The disconnection rate of the year was impactated by our severe disconnection policy for the pre-paid segment.

The post-paid client base reached 12.3 million users, a growth of 14.6% YoY (vs. +15.2% in 2012).

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Human voice and data (smartphone) accesses reached 10.5 million users (+20.7% YoY)

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The machine to machine business reached 1.2 million users (-5.4% YoY)

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Mobile broadband  (mini-modems and tablets) reached 663 thousand users (-19.1% YoY)

As for the pre-paid segment, the users totaled 61.1 million, a growth of 2.5% YoY and for the most part leveraged by the Infinity Pre Plan, that reached more than 59.5 million users, or 97.4% of the base of this segment. TIM continues to lead the pre paid segment in Brazil, due to unique and transparent concepts. Besides that, the companu added sequentially, offers and innovative resources to the Infinity Family ( “Infinity Web+Torpedo”, “Infinity Music” and “Infinity Torcedor”) so, continuing to be the most valuable choice of the market.