TAM S.A. 6-K 2006
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF THE
SECURITIES EXCHANGE ACT OF 1934
THROUGH SEPTEMBER 1, 2006(Commission File No. 1-32826)
(Exact name of Registrant as specified in its Charter)
Av. Jurandir, 856 Lote 4, 1° andar
04072-000 São Paulo, São Paulo
Federative Republic of Brazil
(Address of Regristrant's principal executive offices)
Indicate by check mark whether the registrant files or will file
annual reports under cover Form 20-F or Form 40-F.
Form 20-F ___X___ Form 40-F ______
Indicate by check mark whether the registrant by furnishing the
If "Yes" is marked, indicated below the file number assigned to the
registrant in connection with Rule 12g3-2(b):
(A translation of the original version in Portuguese, as published
01.01 - IDENTIFICATION
01.02 - HEAD OFFICE
01.03 - INVESTOR RELATIONS OFFICER (Company Mail Address)
01.04 -GENERAL INFORMATION/INDEPENDENT ACCOUNTANT
01.05 - CAPITAL COMPOSITION
01.06 - CHARACTERISTICS OF THE COMPANY
01.07 - COMPANIES EXCLUDED FROM THE CONSOLIDATED FINANCIAL STATEMENTS
01.08 - DISTRIBUTIONS APPROVED AND/OR PAID DURING AND AFTER THE QUARTER
01.09 - SUBSCRIBED CAPITAL AND ALTERATIONS IN THE CURRENT YEAR
01.10 - INVESTOR RELATIONS OFFICER
02.01 - Balance Sheet - Assets (R$ thousand)
02.02 - Balance Sheet - Liabilities and Stockholders' Equity (R$ thousand)
03.01 - Statement of Operations (R$ thousand)
04.01 Explanatory notes
TAM S.A. (TAM) is a corporation created on May 12, 1997, whose main objective is to invest in companies which carry out air transportation activities. TAM S.A. maintains an investment in the subsidiary TAM Linhas Aéreas S.A. (TLA), a company which operates scheduled flights carrying passengers and cargo both nationally and internationally, in Transportes Aéreos del Mercosur S.A. (Mercosur), an airline headquartered in Asunción, Paraguay, which operates scheduled flights in that country, as well as in Argentina, in Brazil, in Chile, in Uruguay and in Bolivia.
The TLA financial statements are consolidated with those of its subsidiary Fidelidade Viagens e Turismo Ltda. (Fidelidade). Fidelidade operates as a travel and tourism agency under the name of TAM Viagens.
On July 15, 2005, following the issue of a supplementary lot of shares, the Company concluded a Public Offering of shares on the São Paulo Stock Exchange BOVESPA. Its main objective was to raise funds to acquire or lease aircraft to renew and increase its fleet, in line with the strategy of consolidating and increasing its leadership in the domestic market and selectively expanding its participation in the international market. With the same objective, on March 10, 2006 the Company made a further Public Offering this time on the BOVESPA and the New York Stock Exchange NYSE, which was concluded on April 6, 2006, from the exercise of a supplementary lot of shares as permitted by the Preferencial Share Distribution agreement.
1.2 Risk Factors and its management
As a result of its activities, the Company´s administration takes risks inherent to its operations, related to the market, legislation, reputation, operational and management systems, solvency, credit risks, liquidity, exchange variations, utilization of guarantees, mortgages and liens etc. as well as risks outside of its control such as moratoriums, the partial or total closing of markets, changes in monetary policy and sovereign risk.
The monitoring of theses risks is the responsibility of Company management who use techniques, analyses and controls which envisage the minimization of their effects, but which cannot however guarantee the total elimination of the risks to which the Company is subject.
2 Presentation of the interim financial information
The individual and consolidated interim financial information were prepared in accordance with accounting practices derived from the Brazilian Corporation Law, the regulations issued by the Brazilian Securities Exchange Commission (CVM), accounting standards determined by IBRACON (Brazilian Institute of Independent Auditors) and the chart of accounts defined by the National Civil Aviation Agency ANAC, (formerly the Civil Aviation Department - DAC).
The Company has formally agreed with the São Paulo Stock Exchange BOVESPA, to adopt differentiated corporate governance practices Level 2. The Companys interim financial information meets the additional requirements of the Level 2 corporate governance practices.
3 Significant accounting practices
(a) Income statement
Income and expenses are recognized on the accrual basis, as follows:
i. Air transportation revenues are recognized when transportation services are rendered;
ii. Tickets sold but not used are classified as "advances from ticket sales" and are registered as current liabilities; and
iii. Other operational income from sales and/or services represents fees from changing flight reservations, sub-leasing of airplanes, partnerships with the Fidelity program for frequent flyers (TAM Fidelity Program), tickets cancelled on expiry and other services, which are recognized when the service is provided.
(b) Accounting estimates
The accounting estimates, which are reviewed quarterly, were based on objective factors and managements judgement to determine the appropriate amounts to be recorded in the interim financial information. Significant items subject to these estimates and assumptions include among others the residual value of property, plant and equipment, allowance for doubtful accounts, allowance for inventory losses, deferred income tax assets, provision for contingencies, valuation of derivative instruments, assets and liabilities related to employees benefits and liabilities arising from the frequent flyer program.
(c) Foreign currency
Monetary assets and liabilities denominated in foreign currencies, including those belonging to subsidiaries based abroad, were translated into Reais at the foreign exchange rate ruling at the balance sheet date. Foreign exchange differences arising on translation are recognized in the statement of income.
(d) Current and long-term assets
Allowance for doubtful accounts receivable
Other current and non-current assets
(e) Permanent assets
Investments in subsidiaries are stated using the equity method, plus positive goodwill or less negative goodwill, when applicable.
Goodwill arising on the purchase of TLA, is substantially based on expected future profitability, and is being amortized over ten years, as from the date on which benefits started to be generated. In the consolidated interim financial statements, the balance has been reclassified as "Deferred Assets".
Negative goodwill is considered to arise due to other economic reasons (art. 21, line c of the CVM Instruction 1/78) and will be amortized upon the eventual divestiture or extinction of the assets, in accordance with art. 14, paragraph 4, of CVM Instruction 247/96. In the consolidated interim financial statements, this amount is classified as deferred income.
Property, plant and equipment
Property, plant and equipment are recorded at the cost of acquisition, formation or construction, increased due to the revaluation of certain asset types. Depreciation is provided using the straight-line method at rates described in Note 11, which take into account the estimated useful lives of assets. Expenditures incurred with regular maintenance are recorded in the statement of income when incurred.
Deferred income in the consolidated financial statements substantially comprises goodwill arising on the acquisition of TLA.
(f) Current and long-term liabilities
Stated at the known or estimated amounts, plus, when applicable, the corresponding charges and/or monetary and exchange rate variations incurred up to the balance sheet date.
Provisions are recognized in the balance sheet when the Company has obligations of a legal nature or arising as a result of past events, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are recorded considering the best estimate of risks involved.
(h) Advances from ticket sales
Advances from ticket sales represent the liabilities connected with tickets sold and not yet used in the last 12 months. Such amounts are recognized as income when the associated service is carried out or when the tickets expire.
(i) Benefits to employees
The subsidiary TAM Linhas Aéreas S.A sponsors private defined contribution and defined benefit pension plans. In accordance with CVM Deliberation 371/00, the Company recognized the actuarial liability existing in 2001 and is amortizing it over a period of five years. For subsequent periods, obligations are recognized when incurred.
(j) Income tax and social contribution
Income and social contribution taxes, current and deferred, are recorded based on the effective rates of the income tax and social contribution on net income, and consider the offsetting of tax loss carryforwards and negative basis of social contribution, limited to 30% of the annual taxable income.
The deferred tax assets resulting from carryforward tax losses, negative basis of social contribution and temporary differences were recorded in accordance with CVM Instruction 371/02, and consider past profitability and expectations of future taxable income, based on a technical viability study.
The Company also recognizes deferred income tax and social contribution liabilities on surpluses generated by the restatement of assets.
Leases are recorded as follows:
Financial leases When a lease contract for an asset related to the Companys operations contains a bargain purchase option, the original cost of the leased asset is recorded as an asset against current and long-term leasing obligations;
Operating leases - Refer to leases without a bargain purchase option clause. Liabilities and the respective expenses of the lease instalments are recorded in the income statement when incurred, as Cost of services rendered.
(l) Financial instruments
The subsidiary TLA has operations involving financial instruments with the objective of reducing its exposure to exchange rates and fuel price variations. These risks are managed by defining operational strategies and establishing control systems. Gains and losses on these operations are recorded based on the updated values as per the curve of the bond or instrument, as positions are maintained until their due date.
(m) TAM Fidelity program
The Company sponsors a program to reward frequent flyers (TAM Fidelity program), whereby points are accumulated on TAM flights or flights with partner airline companies, by making purchases using the TAM Fidelity credit card, or by using services and products furnished by TAM´s partners.
On June 30, 2006, subsidiary TLA's customers have earned points which have still not been utilized.
In the quarter ended March 31, 2006, the Company, pursuing on-going improvements in best corporate governance practices and financial controls, changed its accounting practice and accrued a provision for future liabilities relating to the Fidelidade program.
Until the end of the previous quarter, such amounts were set out in an Explanatory Note and recorded as incurred.
The effect of this change in the amount of R$ 8,919 was recorded directly to Shareholders' Equity under Retained Earnings, net of the tax effect of R$ 4,597.
Income arising from TAM's partners on the program is recorded as received.
(n) Consolidated interim financial information
The accounting policies have been consistently applied by the consolidating companies and are consistent with those used in the previous period and year.
The quarterly financial information of consolidated subsidiaries except for that relating to the exclusive investment funds, has been reviewed by independent auditors, who have issued unqualified review reports.
The consolidated interim financial information includes the interim financial information of TAM S.A. and its subsidiaries, as listed below:
The financial statements of TAM Linhas Aéreas S.A., which were used as the basis for the consolidation by TAM S.A., take into consideration its balances consolidated with those of subsidiary Fidelidade Viagens e Turismo Ltda.
Description of main consolidation procedures:
(o) Supplementary information
In order to provide additional clarity and transparency to the market, the Company is disclosing its statement of cash flows and added value statement, as supplementary information.
4 Financial investments - Consolidated
Exclusive investment funds
In 2005 the Company and its subsidiary TLA began to make investment by direct applications in the following exclusive investment funds:
Through the above investment funds, indirect investment was made in the following funds:
Constellation Fundo de Investimento;
These funds are designed to invest in quotas of various classes of investment funds and/or in multimarket investment funds with the objective of obtaining an interest yield in excess of the interbank interest rate also known as DI.
A Investments, after 90 days, can be redeemed at any time without a monetary loss of the revenue recognized.
5 Trade accounts receivable Consolidated
(a) Balance composition
The item Others includes, substantially, accounts Receivables from Operations of sublease and barter transactions.
(b) Aging list Receivables by due date
At June 30, 2006, trade receivables by due date were as follows:
(c) Changes in the allowance for doubtful accounts
6 Inventories - Consolidated
7 Advances to aircraft manufacturers - Consolidated
The Company makes contractual pre-payments to AIRBUS Industrie, as part of its program to acquire A-320 and A-350 aircraft. Amounts outstanding at June 30, 2006 amounted to R$ 164,296 (03.31.2006 - R$ 153,576), equivalent to US$ 75,912 thousand (03.31.2006 US$ 70,694 thousand).
The amounts disbursed are reported as advances and classified as current assets, since the subsidiary Company TLA is guaranteed reimbursement of these prepaid amounts when the aircraft are delivered by the manufacturer in the coming year and the consequent formality of contracting a loan or lease is effected. Furthermore, in order to meet the timetable of payments as set out in the contracts, promissory notes were offered as guarantees by the Company, which at June 30, 2006, amounted to US$ 57,689 thousand (03.31.2006 - US$ 58,355 thousand).
8 Deposits in guarantee - Consolidated
Deposits and collateral in guarantee associated with the lease contracts for aircraft and turbines are stated based on the U.S. dollar exchange rate, with interest of the Semi-annual LIBOR rate plus a spread of 1% per annum. The terms for redemption of the deposits and collateral are defined in the lease agreements.
9 Investments in subsidiaries
(a) Composition of balances
(b) Information on subsidiaries
10 Related party transactions
During the first semester of 2006, the subsidiary TLA received R$ 568 (06.30.2005 - R$ 1,095) from Táxi Aéreo Marília S.A. (Marília), as a reimbursement of costs for using a small part of its structure, such as the import area, personnel department and aircraft insurance. Marília has indirect shareholders common to TLA.
The operations performed between the companies were carried out under normal market conditions.
The Company and its subsidiaries signed a contract with TAM Milor Táxi Aéreo, Representações, Marcas e Patentes S.A. (TAM Milor) for the right to use the TAM brand. This contract establishes a monthly fee, which in the quarter ended June 30, 2006 totalled R$ 3,549 ( 06.30.2005 R$ 4,567) and was recorded as Administrative expenses.
11 Property, plant and equipment consolidated
(a) Breakdown of balance
The line Flight equipment includes, motors and spare parts. Others principally comprises improvements carried out to the runway at the São Carlos Technology Center.
The weighted annual average rate of depreciation for flight equipment is 8.64% , for buildings it is 2.77% and for others it is 6.13% .
Mortgages were taken out on property and property improvements of subsidiary TLA in the amount of R$ 110,499, to guarantee some loans (see note 12).
(b) Revaluation ( Nota20(c))
The subsidiary company TLA, continued to adopt the accounting criteria of Revalued market value". Independent experts (Engeval Engenharia de Avaliações S/C Ltda.) issued an appraisal report at November 30, 2005 which was subsequently approved at an Extraordinary General meeting - AGE, held on December 28, 2005. The new revaluation, which included airplane engines and property, was recorded. This revaluation resulted in an increase in property, plant and equipment of R$ 35,963 (R$ 25,577 net of the provision for income tax and social contribution, as required by CVM Deliberation 273/98). The revaluation includes the replacement value of assets, under the same conditions in which they are identified. Consequently, when applicable, new estimates of the useful lives of these items were determined.
The subsidiary Mercosur, in accordance with accounting practices adopted by the Company, restated its aircraft and property balances at November 30, 2005, in accordance with an appraisal report issued by independent experts. This revaluation resulted in an equity increase, in the parent company, of R$ 2,152. The valuations include the replacement value of assets, under the same conditions in which they were found.
As required by CVM Deliberation 183/95, realization of the revaluation reserve was charged to retained earnings, and amounted to R$ 915 for the quarter ended June 30, 2006, (03.31.2006 - R$ 915).
12 Loans and financing Consolidated
FINIMP Import Financing
Long-term amounts fall due as follows:
On December 16, 2005, the Company signed a loan agreement contract with the International Finance Corporation IFC in the amount of US$ 50 million, of which US$ 33 million will be used as advances to aircraft manufacturers for aircraft to be acquired for its fleet and US$ 17 million as working capital. In the six months ended June 30, 2006, the US$ 17 million working capital portion was drawn down. The remainder will be made available as from July 2006. Contracts permitting liens on equipment and contracts giving liens on accounts receivable have been offered to secure the loan.
13 Financial leases - Consolidated
The lease obligations above are guaranteed by a letter of credit issued by the Company.
Long term amounts fall due as follows, per year:
(a) Operating leases Consolidated
The subsidiary TLA has operating lease commitments. The obligations under these lease commitments are not reflected in the balance sheet, because the contracts do not include purchase options for 22 Fokkers 100, 13 Airbus A319, 41 Airbus A320 and 10 Airbus A330 (03.31.2006 - 24 Fokkers 100, 13 Airbus A319, 37 Airbus A320 and 10 Airbus A330). These contracts are for periods of up to 192 months and are restated based on the U.S. dollar exchange rate variation, plus LIBOR. In the quarter ended June 30, 2006, expenses with lease contracts recognized in the consolidated statement of income as "Cost of services rendered" amounted to R$ 181,649 (2nd quarter of 2005 R$ 143,873), equivalent to US$ 83,146 thousand (2nd quarter of 2005 US$ 59,244 thousand).
All the above operations are guaranteed by letters of guarantee.
Future disbursements on these contracts, per year of maturity, are summarized below:
(b) Commitments for future aircraft acquisition
The subsidiary TLA has commitments to purchase 9 new Airbus 320 family aircraft, which have delivery schedules between 2006 and 2008. At the time of delivery, new leasing operations will be contracted.
During the second quarter of 2005, the Company signed an amendment to the contract with Airbus for the firm purchase of 20 Airbus A320 with an additional 20 options for the same aircraft family (including A319, A320 and A321). The delivery of the A320 family aircraft are scheduled between 2007 and 2010. It is intended to use them on domestic routes.
In the second quarter of 2006 the Company signed a Memorandum of Understanding signalling its intention to aquire a further 37 Airbus aircraft (15 A319, 16 A320 and 6 A330) for delivery by 2010.
The Company also signed a firm contract to purchase 10 A350-900 with an additional 5 options subject to future operational conditions. The A350s will start to be delivered at the end of 2012. They will have a 3-class configuration and will be used for the long-distance routes of the international market, replacing the A330 aircraft which currently operate the routes to Miami ,New York and Paris.
15 Reorganization of the Fokker 100 Fleet
As a result of the process of reorganization of the Fokker 100 fleet, on December 19, 2003, the subsidiary TLA cancelled 19 leasing contracts, of which ten were financial leases and nine were operating leases. As a result, the subsidiary TLA signed a contract for the payment of a penalty fine in 30 consecutive quarterly installments, falling due between April 2004 and July 2011 in the original amount of R$ 94,188. This amount was fully recognized in the statement in 2003. The installments are payable quarterly and letters of guarantee were offered by the Company.
TLA also renegotiated the maturity of certain overdue installments in the original amount of R$ 49,599.
These aircraft, as from the date of the contract up to their return, are classified as operating leases.
The return of these aircraft was originally planned to take place in the period from July 2004 to July 2005. By December 31, 2005, fourteen aircrafts had been returned in conformity with the original schedule. In January 2005, an amendment to the contract was signed extending the timeframe for the return of the last 5 aircraft from April to December 2006.
At June 30, 2006, the total commitment amounts to R$ 78,619 (03.31.2006 - R$ 86,333), equivalent to US$ 36,325 thousand (03.31.2006 - US$ 39,741 thousand), of which R$ 9,619 (03.31.2006 - R$ 10,298) was recorded in current liabilities (Other accounts payable).
Long-term maturities have the following distribution:
16 Advances from ticket sales
At June 30, 2006, the amount recorded as Advances from ticket sales is represented by 2,022,863 (03.31.2006 1,533,027) ticket coupons sold, but not used.
Based on the average number of passengers transported in the quarter ended June 30, 2006, the quantity of tickets sold and unused at June 30, 2006 represents 32 days of passenger travel.
17 Provision for contingencies and judicial deposits- Consolidated
Management of the subsidiaries TLA and Mercosur recorded provisions for the total amount being disputed in court for those cases where the Companys attorneys judge the probable outcome is likely to be unfavorable, or for those amounts which are disputed in court and the discussion is based on laws or decrees or where court decisions in similar cases have proved unfavorable.
As of June 30, 2006, the provision for contingencies is detailed as follows:
(i) Corresponds to the discussion of the constitutionality of Law 9718/98, which changed the taxation basis of PIS and increased the rate and calculation basis of COFINS. Judicial deposits were made for the period from June 1997 to April 1999. For the months in which no deposits were made, the subsidiary TLA has obtained a preliminary injunction. These amounts, net of their related judicial deposit, are being updated by the SELIC interest rate. The amount under discussion as of June,30 2006 was R$ 59,938 (03.31.2006 R$ 58,636), of which R$ 5,868 (03.31.2006 R$ 5,748) has been paid to the tax authorities or into court and would be refundable or compensated against other taxes payable were a decision favourable to the Company to be given.
(ii) A 1% charge on the amount of fares of all tickets sold for regular domestic lines which are not supplemented. Management of subsidiary TLA, based on the opinion of its legal advisors, contests the constitutionality of this charge, and the non-payment is supported by a judicial order.
(iii) Corresponds to a charge of 2.5% of the payroll for private social service and professional education entities. Management of TLA, based on the opinion of its legal advisors, contest the constitutionality of this charge, and its non-payment is supported by a judicial order.
The judicial deposits, related to the cases disputed in court, are recorded as long-term receivables and can be demonstrated as follows:
At the Extraordinary General Meeting held on April 7, 2003 shareholders approved the private issuance of non-convertible debentures, without the issuance of warrants or certificates, with a nominal value of R$ 100.00 each. These debentures have already been placed in three series. Each series falls due 60 months after the subscription date.
Debentures are guaranteed by a pledge of credit rights, and interest is 4.75% per annum plus interest equivalent to the Long-Term Interest Rate (TJLP).
The outstanding balance per issue is set ou below:
The guarantee offered corresponds to the cash balance deposited by travel agents and held at Bank Boston Banco Multiplo S.A., on each 24th day of the month, in amounts considered sufficient to settle the monthly installments.
19 Income tax and social contribution
(a) Reconciliation between nominal and effective income and social contribution taxes
The above statement reflects only the activity of the Company and the subsidiary TLA, since the subsidiary Mercosur, as prescribed by the legislation of its country of origin is subject to income tax directly on gross sales and tax credits on subsidiary Fidelidade have not been recognized. During the second quarter of 2005, the Company started to earn taxable income and management decided to recognize tax credits resulting from the previous negative results of its operations. It is expected that these credits will be fully utilized by the end of 2006.
TAM S.A.´s tax loss (March 31, 2006 R$829) was fully compensated in this quarter ), while the negative balance on social contribution amounts to:
(b) Composition of deferred income and social contribution tax assets
Based on annual taxable income projections, adjusted to present value based on market interest rates, as required by CVM Instruction 371/00, as well as current legislation related to the offset of taxable income (limited to 30% annually for tax losses and negative basis of social contribution), management of the Company and its subsidiary TLA estimates that the utilization of deferred tax credits will be completed by the end of the current financial year. If compensation of the tax benefit was to be performed on the criteria of nominal projected results, full realization would occur by 2007.
The estimates for realization of the tax benefit include several assumptions relating to quantitative and financial data which, at the moment, are considered the best available estimates. However, it is important to emphasize that variations may
occur between amounts budgeted and those effectively realized, considering TLAs dependence on the economic scenario and operating conditions.
(c) Deferred income and social contribution tax liabilities
As prescribed by CVM Deliberation 273/98, the revaluation reserve recorded at June 30, 2006 is net of income and social contribution tax charges incurring on revaluation increments calculated on aircraft turbines and property. The deferred taxes were calculated based on the rates estimated for taxation and totaled R$ 60,836 at June 30, 2006 (03.31.2006 - R$ 62,825).
20 Shareholders equity
Subscribed and fully paid capital is comprised of 150,563,341 (03.31.2006 149,059,462) shares, of which 59,794,845 (03.31.2006 59,794,845) are common shares and 90,768,496 (03.31.2006 89,264,617) are preference shares. Authorized capital amounts to R$ 1,200,000 (03.31.2006 R$ 1,200,000) and can be increased with the issuance of common and preferred shares after the board of directors' approval.
At June 30, 2006, the Company did not hold shares in treasury.
The preference shares do not have the right to vote at general meetings, except for certain matters, while the Company is listed at Level 2 on the BOVESPA; however, they have priority in the distribution of dividends, priority in capital reimbursement, without any premium, in the event the Company is liquidated and the right to participate, under the same terms as the ordinary shares, in the distribution of any benefits to the shareholders.
(i) In the Extraordinary Shareholders Meeting held on May 16, 2005, the shareholders approved the split of the shares issued by the Company, so that the holders of each share were then holders of two shares of the same class and type. As a result, the total number of shares went from 61,364,671 at March 31, 2005 to 122,729,342, of which 59,816,248 are common shares and 62,913,094 are preference shares, all with no par value and undividable in relation to the Company, bearing the same rights and advantages attributed to them by the Companys by-laws. The split had no impact in the paid-in capital and the new shares were credited to the shareholders respecting the proportion of shares as stated in the share registe.
(ii) At that same date, the following was approved:
The increase in the limit of the Companys authorized capital to R$ 1,200,000;
(iii) The Company made Public Offerings of nominative, no-nominal-value preference shares with the characteristics set out in the table below:
(iv) According to the Adhesion Contract signed with BOVESPA, the Company has up to three years from June 13, 2005, to comply with the 25% free float requirement. At June 30, 2006, free float was 45.3% (03.31.06 44.8%), which demonstrates that this requirement was met in less than one year.
(b) Capital reserve Share Premium account
The share premium originating from the subscription of shares is because of the surplus of the net amount received over the capital increase, and benefits all the shareholders equally.
(c) Revaluation reserve (Note 11(b))
An amount from the revaluation reserve constituted in previous years, proportionally to the depreciation over the amount of the revalued permanent assets, was transferred to the accumulated income line, and, in the second quarter of 2006, totaled R$ 915 (03.31.2006 R$ 915). Of the total reserve, R$ 34,285 corresponds to the revaluation of land, that will only be realized at the time of its eventual disposal.
In accordance with CVM Instruction 197/93, the tax charges on the revaluation reserve, which on June 30, 2006 amounted to R$ 60,836 (03.31.2006 R$ 62,825), are recognized in the statement of income as the reserve is realized.
In accordance with the Companys by laws, shareholders are guaranteed a minimum dividend of 25% of net profit for the year, after deducting 5% for the legal reserve, up to a maximum of 20% of capital. The preferred shares have priority in capital reimbursement and the right to a dividend at least equal to that distributed to the common shares.
(e) Retained Income Reserve
Article 196 of Corporation Law requires that the balance of net income after dividend distribution and other statutory appropriations is transferred to this reserve to finance the Company's capital budget and working capital requirements the future investment forseen is the leasing of additional aircraft.
(f) Stock Option Plan
An Extraordinary Shareholders´meeting held on September 29, 2005 approved a Plan which will permit that directors and employees are given share options. The Administrative Council is responsible for defining and managing the plan.
The Plan conforms to the decision of the Extraordinary General meeting of May 16, 2005, which limits dilution of the Company´s equity to 2%, for such share options.
The Administrative Council authorised the issuance of 715,252 share options. The exercise price is equivalent to the average share price in the month prior to the option being granted with a discount of 20%, but adjusted by the IGPM inflation index to the option date. Exceptionally for the first options granted, the same price as that of the 2005 IPO will be used i.e. R$18,00 to which the same 20% discount and inflation adjustments will apply.
(g) Prior year adjustment
In the quarter ended March 31, 2006, the Company, pursuing on-going improvements in best corporate governance practices and financial controls, changed its accounting practice and accrued a provision for future liabilities relating to the frequent flyer program (Fidelidade program).
Such liabilities at December 31, 2005 amounted to R$ 8,919 (net of the tax effect of R$ 4,597) and this amount has been charged to "Retained Earnings".
21 Gross sales segment report
The Company utilizes its gross sales segment report by type of service rendered. However, in order to make the information available to financial analysts and readers of the interim financial information in general, we are providing a breakdown of revenue by region and by product line as follows:
(a) By type of service rendered
(b) By region
(c) By product line
22 Breakdown of principal expense groups Consolidated
(a) Second Quarter
(b) Six-month period to June 30,
23 Financial result Consolidated
24 EBITDAR, EBITDA and EBIT - Consolidated
The Company uses the EBITDAR (net income before interest, taxes, depreciation, amortization and rents - leasing), the EBITDA (net income before interest, taxes, depreciation and amortization) and the EBIT (net income before interest and taxes) as indicators to determine its financial and economic performance.
These indicators are not described in Brazilian accounting standards. The Company uses the EBITDAR, EBITDA and EBIT since they are standard financial measures, with the first two extensively used in the aviation sector and the latter throughout the financial community.
The above indicators should not be analyzed on their own, but should be evaluated together with operational income and net income for the period, which are determined in accordance with accounting practices derived from Brazilian Corporation law.
We demonstrate below the calculations of the Companys EBITDAR, EBITDA and EBIT:
25 Financial debt - Consolidated
In order to improve the available information to the market, the Company is presenting below a summary of information already described in some notes to the interim financial information. The financial debt information is used by the Company as an indicator of its financial performance. The information is not required by the Brazilian accounting standards, however it is widely used by the financial community.
This indicator should be analyzed together with all of the Companys liabilities as recorded in the balance sheet in accordance with the Brazilian accounting practices.
26 Benefits for employees
(a) Supplementary pension plan
The subsidiary TLA sponsors three private pension plans (TAM Prev I, II and III) to supplement retirement pensions and benefits as follows:
(i) Retirement Plan - TAM Prev - Plan I
TAM Prev - Plan I is managed by MultiPensions Bradesco and started in October 1982 as a defined benefit plan, mainly for retirement, death and disability, and is partially funded by employee contributions and matched by sponsors contributions.
On November 26, 2004 the Secretary for Complementary Pensions approved the proposal to transfer participants from Plan I to Plan II. By June 30, 2006, 181 participants had adhered to this transfer proposal (41 participants still remain). This plan is no longer available for new participants.
(ii) Retirement Plan - TAM Prev - Plans II and III
TAM Prev - Plans II and III, also managed by MultiPensions Bradesco, started in April 1995 and December 1998, respectively, and are structured as defined contribution plans for retirement benefits partially funded by employee contributions and matched by the sponsor, and as a defined benefit plans for benefits of uncertain date (death and disability), which are entirely funded by the sponsor.
The total liability of the plans was calculated based on a report issued by independent actuaries, dated January 23, 2006, whose premises at the time did not result in any significant changes in 2005 or in the amount payable but not recorded in the accounts. This unrecorded liability, as required by the CVM Deliberation, is being recognized in the statement of income over five years as from January 01, 2002. The residual value to be amortized in 2006 amounts to R$ 867.
Since 2002, the amount recorded under other accounts payable totalled R$ 19,391 (03.31.2006 - R$ 18,958).
(iii) Methodology to calculate actuarial liability
The methodology adopted by the independent actuary (Towers, Perrins, Forster & Crosby Ltda.) to calculate the actuarial liabilities was the projected unit credit method, supported by the following actuarial assumptions:
(b) Profit sharing
In accordance with a Union agreement, the Company will pay a share of its profits as a result of it reaching certain performance indicators established in line with the annual budget. Consequently, management recorded as Salaries and social security charges at June 30, 2006, the provision for payment of this benefit in the amount of R$ 23,383 (03.31.2006 R$ 7,522).
27 Insurance coverage
The subsidiaries contract insurance coverage for amounts considered above the minimum mandatory amounts deemed as necessary for possible claims, considering the nature of the assets and the risks of the activity. At June 30, 2006, considering the aircraft fleet of the subsidiary TAM - Linhas Aéreas S.A. and Transportes Aéreos del Mercosur S.A., the coverage for the aviation activity (aircraft and civil responsibility together) will give a maximum indemnity amount of up to US$ 1.5 billion.
Following the September 11, 2001 terrorist attacks in the USA, insurance companies established surcharges on the insurance of aircraft bodies and on civil liabilities generated by acts of war or terrorism.
The insurance companies limited worldwide coverage to US$ 150,000 thousand per claim, and for higher amounts the premiums must be paid in cash for the total term of the policies, which has made an increase in the coverage by any amount, unviable.
As a consequence, the Brazilian Government, through Law 10744 of October 9, 2003 and Decreet nº 5035 of April 5, 2004, assumed the commitment to match up eventual expenses of civil liabilities for third parties generated by war or terrorist attacks that the Company may be required to pay. As regulated by this law, expenses for civil responsibilities assumed by the Federal Government are limited to the equivalent in Reais of one billion U.S. dollars.
28 Contingent assets
(a) Value-added tax - ICMS
ICMS payments made in the period from May 1989 to May 1994 were considered not due because of the unconstitutionality of the ICMS legislation. TLA management, together with its legal advisors, is taking appropriate measures to recover the total amounts paid. However, management of the subsidiary will recognize the total credits involved, estimated at approximately R$ 55,000 and the eventual monetary restatement, only when the financial recovery of this right is defined.
(b) Compensation for fare insufficiency
TLA filed a lawsuit against the Federal Government requesting compensation for breach of the economic-financial balance of the concession contract for air transportation services caused by insufficient fares. The variance occurred in the period from January 1988 to September 1993, when the fares were established by the Government.
In April 1998, the lawsuit was ruled in the Companys favor by the Federal Justice, and an indemnity of R$ 245 million was determined based on a calculation made by an expert. This amount is subject to interest on arrears from September 1993, and monetary restatement from November 1994. At present a special motion by the Company is pending decision at Supreme Court level as to whether or not the intervention of the Public Prosecutor should be sought.
Management has not recognized in the interim financial information any amount for this indemnity and will do so only when the lawsuit is legally confirmed in its final instance.
(c) Adicional de tarifas aeroportuárias (ATAERO)
TLA filed an ordinary lawsuit for anticipated custody addressing the legality of the additional 50% charged over tariffs (ATAERO). On June 30, 2006, the amount under discussion totaled R$ 388,319.
29 Financial instruments
(a) General Considerations
The Company performs transactions involving financial instruments to reduce the exposure to exchange rate risks. In addition, temporary cash surpluses are applied in line with current treasury policies, which are continuously reviewed, besides minimizing the impact of fuel price volatility.
The management of these financial instruments is made pursuant to pre-established policies pursuing liquidity, return and security. Management policy consists in monitoring contracted rates against current market rates. The Company does not invest in derivatives or any other high risk assets of a speculative nature.
Risk from the price of services - This risk relates to possible changes in the price of services provided by the Company, since it operates in an extremely competitive market, both locally and internationally. The cost of rendered services could be affected by changes in international prices of its main cost i.e. aviation fuel. To minimize this risk, the Company permanently monitors the price fluctuations in the domestic and international markets, in order to adjust the price of its services to the effective cost, and it has an aviation fuel hedge policy whereby it protects a percentage (approximately 30%) of its exposure for the following three months.
Interest rate risk - This risk arises from possible losses (or gains) as a result of fluctuations of the interest rates to which the Companys liabilities and assets are linked. To minimize possible impacts from interest rate volatility, the Company has adopted a policy of diversification, alternating between contracting fixed and variable rates (such as LIBOR and CDI), and periodically renegotiates its contracts, in order to adapt them to current market conditions.
Foreign exchange rate risk - This risk is related to possible foreign exchange rates volatility, affecting the financial expense (or income) and the outstanding liabilities (or assets) balances indexed to a foreign currency. To protect against these fluctuations, the Company has adopted a policy of contracting hedge operations, usually European/Asiatic Options operations, as demonstrated in item b below. Part of this risk is mitigated given the fact that the Company operates overseas and revenues from these transactions are denominated in hard currency. The existing policy for contracting hedges is to be protected by a percentage of hard currency payments (approximately 40%) for up to twelve of the following months. At June 30, 2006 the period protected against the foreign exchange rate risk amounted to only six months in function of a re-evaluation of procedures which has not yet been completed.
Credit risk - This risk arises from the possibility of not recovering amounts receivable from services provided to consumers and/or travel agencies, or from credits with financial institutions due to financial investments. To mitigate this risk the Company has adopted credit limits and permanently accompanies its debtor balance (basically with travel agencies). With respect to marketable securities, the Company only invests with institutions with low credit risk, as evaluated by rating agencies. In addition, each institution has a maximum limit for investments, as determined by the Financial Committee.
Foreign Exchange Rate
The Company contracts derivative financial operations, aimed mainly to protect its foreign currency exposure from fuel purchases, from contracting engine maintenance services from its manufacturers and from financing contracts related to the expansion/maintenance of its operational activities.
On June 30, 2006, contracts for options to provide hedge for liabilities from suppliers and financing amounted to R$ 541,075 - US$ 250,000 thousand (03.31.2006 - R$ 771,202 US$ 355,000 thousand), and have several maturity dates, up to December 27, 2006.
The above mentioned operations, if settled on June 30, 2006, would represent a loss of R$ 12,624 (03.31.2006 - R$ 69,479).
The foreign exchange exposure is mainly indexed to the US Dollar, as follows:
The Companys management understands that the effects of the aforementioned exposure are mitigated by the fact that part of its sales are abroad and in hard currency.
Price of Services
The Company enters into operations to protect its exposure to the price volatility of aviation fuel, its main cost.
As of June 30, 2006, these operations, with several maturities until October,1 2006, totalled approximately, R$ 128,005 (03.31.2006 - R$ 86,418), equivalent to about 800 thousand barrels (03.31.2006 - 600 thousand barrels).
If settled on June 30, 2006, the aforementioned operations would represent losses of R$ 2,020 (03.31.2006 R$ 601).
(c) Financial Investments
Represented by funds designed to invest in quotas of various classes of investment funds and/or in multimarket investment funds with the objective of obtaining an interest yield in excess of the interbank interest rate also known as DI.
The subsidiaries TAM Linhas Aéreas S.A and Transportes Aéreos del Mercosur S.A. are privately-held companies and therefore there is no information available about their market value.
30 Fidelity Program
In the quarter ended March 31, 2006, the Company, pursuing on-going improvements in best corporate governance practices and financial controls, changed its accounting practice for the recognition of costs of its frequent flyer Fidelidade program began to accrue a provision for future liabilities relating to the program.
The provision was calculated taking into consideration:
The quantity of points earned, converted into free flights;
The quantity of points which expired without being converted into flights;
The quantity of free flights flown with other airlines; and
Based on the present average occupation levels of our flights, the incremental cost involved, i.e. the addditional cost per passenger transported, represented by fuel, in-flight service, insurance and boarding card.
At June 30, 2006, the Fidelidade program's customers had earned but not used, the equivalent of 1,449,938 (03.31.2006 1,206,122) free flights.
The number of free flights earned by customers and not yet used represents the maximum number of free flights before deduction of the average number not used by customers. The average of unused points averages approximately 31.55%, which reduces the quantity of unused free flights to 992,482 (03.31.2006 825,591). In the quarter ended June 30, 2006 our customers utilized 312,596 (03.31.2006 170,744) free flights.
The free flights flown on other airlines corresponds to 1.87% at June 30, 2006 (03.31.2006 1.39%) of the free flights earned.
Taking into account the above variables and the incremental cost, the provision for future costs of the program at June 30, 2006 amounts to R$ 15,873 (03.31.2006 R$ 11,728) and has been classified as cost of services rendered . Using the same criteria at December 31, 2005, the provision then would be R$ 13,520.
Taking into consideration the change in accounting practice, the Company recorded an adjustment to prior years amounting to R$ 8,919, comprising the value of the provision calculated using this criteria, less the tax effect of R$ 4,597.
Taking into consideration that the conversion of points into free flights takes place, on average, when 10,000 points have been earned, at June 30, 2006 customers with enough points to effect the conversion amounted to 824,982 (03.31.2006 685,302) free domestic flights.
The points earned by our customers on the Fidelidade program are valid for two years for conversion into tickets. This limits the growth of the programs future cost there is a tendency of stability as to the quantity of passengers transported on the program.
The Fidelidade program earns income from partnerships forged with several companies. In the quarter ended June 30, 2006 such income amounted to R$ 57,918 (03.30.2005 R$ 17,522).
31 Subsequent events
At a meeting of the Administrative Council held on July 7, 2006:
(i) approval was given to increase share capital by R$486,775 (within authorized capital), by the capitalization of share premium accounts arising from the issue of shares and maintained within Capital Reserves.
(ii) approval was given for delivery to the CVM (Brazil´s SEC) of a preliminary prospectus for the first program to publicy issue debentures with a total value of R$1,000,000 and a time-limit for issue of two years.
(iii) approval was given for the issue of 50,000 debentures with a nominal value of R$ 10 each totalling R$500,000. This is the first time the Company has issued unsecured, nominal, registered, non-convertible debentures to the public. Subsidiary TLA will guarantee repayment.
The Company may choose to grant to financial institutions taking part in the issue, an option to distribute a further quantity of debentures corresponding to 15% of the issue as well as to increase the originally approved issue amount by 20%. The debentures will have a six year life, with repayments being made on August 1st of 2010, 2011 and 2012
32 Supplementary Information - Statement of Consolidated Cash Flows
(a) 2º Quarter
(b) Six month period
33 Supplementary Information Statements of Consolidated Added Value
BOARD OF DIRECTORS:
Noemy Almeida Oliveira Amaro
Maria Cláudia Oliveira Amaro Demenato
Edvaldo Massao Murakami
Marco Antonio Bologna
Líbano Miranda Barroso
05.01 Coments of performance in quarter
TAM S.A. presents its comments on performance for the second quarter on a consolidated basis with the operations of subsidiaries TAM Linhas Aéreas S.A. and Transportes Aéreos del Mercosur S.A., which provide air transport services.
See comments on consolidated performance in specific table.
06.01 - Consolidated Balance Sheet - Assets (R$ thousand)
06.02 - Consolidated Balance Sheet - Liabilities and Stockholders' Equity (R$ thousand)
07.01 - Consolidated Statement of Operations (R$ thousand)
08.01 - Comments on Consolidated Performance
The interim financial information was prepared, except when indicated otherwise, in conformity with the accounting practices adopted in Brazil based on the Corporation Law, the standards determined by the Brazilian Securities Exchange Commission (CVM), accounting standards determined by IBRACON (Brazilian Institute of Independent Auditors) and the chart of accounts defined by the National Civil Aviation Agency - ANAC (formerly DAC), which are referred to as BR GAAP and stated in Reais (R$). For the reader´s convenience we are also presenting financial statements prepared in accordance with US generally accepted accounting principles US GAAP.. Comparative analyses are presented between the interim financial information for the second quarter of 2006 (2Q06) and the second quarter of 2005 (2Q05).
TAM (BOVESPA: TAMM4,NYSE: TAM) has lead the Brazilian domestic market for three years and in June 2006 achieved a 47.6% market share while in the international market it achieved a 37.9% market penetration. The Company flies to 47 cities in Brazil. After considering commercial agreements with regional airlines, 72 domestic destinations are available to the TAM passenger. Furthermore, code-share agreements with other airlines permit passengers to fly to a diverse number of destinations around the world not just those served directly by TAM. TAM was the pioneer in Brazil in introducing a frequent flyer program denominated Fidelidade and now has 3.3 million associates and has distributed 3.6 million tickets.
1 Main operating and financial highlights
2 Operational performance
Terms used in the operational indicators
2.2 Aviation segment
2.3 TAM and the market
2.3.1 Market share TAM
2.3.2 Domestic market
According to ANAC data, TAM reached the leadership position in the domestic air transportation market in July 2003. By the end of the current quarter, it had achieved a 47.6% market share, having an average share of 45.9% in the domestic market in 2Q06.
2.3.3 International market
According to information from ANAC, TAM's market share in the international market at the end of 2Q06 was 37.9%, and it averaged 30.0% in that quarter.
3 Economic-financial performance
All the values shown in the table below were originally calculated in Brazilian Reais and are stated in millions and cents of Reais. Therefore, (i) the results of the sum and division of some amounts may not correspond to the total amounts shown due to rounding-up procedures; and (ii) the result of percentage variances may be different from the amounts shown in the table below.
Comments on the numbers of the second quarter of 2006 are on BR GAAP, except as indicated:
Gross operating revenue
Our gross operating revenue increased by 39.6%, to R$ 1,824,0 million in 2Q06 against R$ 1,307,0 million in 2Q05. Our total RPK increased by 39.4% and our total yield increased by 0.1%, reaching 30.21 cents of Reais in 2Q06. The increase in RPK was due mainly to the 23.8% increase in our availability in ASK, allied to an improvement in our load factor of 8.4 p.p., to an average in 2Q06 of 74.9% . Our domestic market share reached 45.9% in 2Q06, against 41.4% in 2Q05. Total RASK increased by 12.2% to R$ 21.49 cents in 2Q06 compared to R$ 19.16 cents in 2Q05.
The gross domestic passengers revenue (including regular and charter passengers) increased by 30.3%, reaching R$ 1,228,1 million in 2Q06, against R$ 942,7 million in 2Q05. Although our regular domestic yield fell 6.3% to 29,12 cents of Reais in 2Q06 from 31.06 cents of Reais in 2Q05, domestic demand increased 36.3% . reflecting an increase in the domestic load factor of 8.2 p.p. With these factors, our domestic RASK increased by 6.8% to 20.63 cents of Reais in 2Q06 from 19.32 cents in 2Q05.
The gross international passengers revenue (including regular and charter passengers) increased by 60.2%, reaching R$ 329.4 million in 2Q06, against R$ 205.7 million in 2Q05 The increase in revenue is due to the increase in availability in ASK of 31.1% arising from the addition of two flights per week to Buenos Aires and one daily flight to Paris, daily flights to New York and the Manaus-Miami route. A A320 was substituted by a A 330 in the route to Santiago. Our international demand increased 48.8% and there was an increase of 8.9 percentage points in the international load factor from 65.7% in 2Q05 to 74.6% in 2Q06. Regular international yield edged forward 7.2% from RealCents 19.06 in 2Q05 to RealCents 20.43 in 2Q06. Regular international yield expressed in US$ increased 16.0% - from 8.1 USCents to 9.4 USCents. Regular international RASK increased by 21.3%, from 12.61 cents in 2Q05 to 15.29 cents in 2Q06.
The gross cargo revenue (domestic and international) increased by 13.5%, reaching R$ 112,5 million in 2Q06, against R$ 99.1million in 2Q05, owing to the increase in the number of our international flights, resulting in greater space available in the aircraft holds which could be offered by TAM Express (product offered by the cargo division of TAM Linhas Aéreas S.A.)
Other gross revenues increased by 158.3%, reaching R$ 153.9 million in 2Q06, against R$ 59.6 million in 2Q05, largely due to increased income from the Fidelidade program and the increase in expired tickets which were cancelled in accordance with IATA regulations.
Sales deductions and taxes
Sales deductions and taxes increased by 52.5%, reaching R$ 91.6 million in 2Q06, against R$ 60.1 million in 2Q05, owing to the increase in domestic gross income of 30.3%, increase in domestic cargo income and an increase in other operational income of 158.3% . These constitute the principal components in calculating taxes and deductions.
Net operating revenue
Our net operating revenue increased by 38.9%, reaching R$ 1,732.4 million in 2Q06, against R$ 1,247.0 million in 2Q05.
Cost of services rendered and operating expenses
Our cost of services rendered and operating expenses increased by 21.1%, reaching R$ 1,506.8 million in 2Q06, compared to R$ 1,244.7 million in 2Q05. The increase is mainly due to an increase in the costs with fuel, leasing of aircraft and equipment, outsourced services and landing and take-off and navigation assistance charges. However total cost per ASK(CASK) decreased 2.2% from R$ 19.12 cents in 2Q05 to R$ 18.69 cents in 2Q06, principally owing to the better utilization of our aircraft (flown hours increased from 10.66 hours per aircraft per day to 12.04 flown hours), reduction in commercial costs and the 8.6% appreciation of the Real, mostly offset by the increase in fuel.
Fuel cost increased by 31.7%, reaching R$ 507.8 million in 2Q06, against R$ 385,7 million in 2Q05, due to the 23.8% increase in the liters of fuel used. In addition, the average price per liter of fuel in Reais increased by 6.8% . In 2Q06, our savings with the fuel tankering program were approximately R$ 8.1million. Fuel costs by ASK increased by 6.3% .
Selling and marketing expenses decreased by 10.1%, to R$ 195.7 million in 2Q06, against R$ 217.6 million in 2Q05, principally due to the implementation of a new policy of variable commissions and adjustment to discounts and incentives, together with a reduction in marketing expenses. Selling and marketing expenses by ASK fell by 27.4% .
Costs with aircraft and equipment lease increased by 25.7%, to R$ 185.8 million in 2Q06, against R$ 147.8 million in 2Q05, mainly due to the substitution of 8 Fokker 100 with 8 Airbus, partly compensated for by the 8.6% appreciation of the Brazilian Real in relation to the North-American Dollar. Costs with aircraft and equipment lease by ASK increased by 1.5% .
Personnel costs increased by 30.3%, reaching R$ 205.0 million in 2Q06, against R$ 157.4 million in 2Q05, mainly due to the 18.5% increase in the effective headcount from 8,829 to 10,471 in the end of the quarter and a salary increase of 6.0% .The increase in our headcount was lower than the increase of 23.8% in our ASK in the period. Labor costs per ASK decreased by 5.2% .
Maintenance and repairs (except personnel) increased by 8.6% to R$ 102.2 million in 2Q06 against R$ 94.2 million in 2Q05, basically due to the number of hours flown which increased by 19.5% and partly compensated for by the appreciation of the Real against the US dollar of 8.6% and by the reduction in the age of the fleet which is presently the most modern in the Country. Costs with maintenance and repairs (except personnel) by ASK fell by 12.3% .
Costs and expenses with outsourced services increased 27.1%, to R$ 118.6 million in 2Q06 against R$ 93.3 million in 2Q05, largely in line with the increase in our operations of 23.8% . Expenses with outsourced services by ASK increased by 2.6% .
Costs with landing and take-off and navigation charges increased by 36.2%, reaching R$ 72.8 million in 2Q06, against R$ 53.4 million in 2Q05, due to the 17.7% increase in the number of take-offs and to the increase in navigation assistance, which resulted from the 20.7% increase in kilometers flown and the increase in international flights whose costs are higher than for domestic flights. Costs with landing and take-off and navigation assistance charges by ASK increased by 10.0% .
Depreciation and amortization costs increased by 15.8%, reaching R$ 24.1 million in 2Q06, against R$ 20.8 million in 2Q05, mainly due to new additions, which, net of disposals, amounted to R$ 150.4 million in the year from 2Q05 to 2Q06. Costs with depreciation and amortization by ASK decreased by 6.5% .
Aircraft insurance costs decreased by 13.6%, to R$ 8.4 million in 2Q06, against R$ 9.7 million in 2Q05, mainly due to the net reduction in Real-denominated insurance premiums caused by the appreciation of the Brazilian Real in relation to the North-American Dollar of 8.6%, partly compensated for by an increase in passenger departures of 35.2% in 2Q06 compared to 2Q05. Costs with aircraft insurance by ASK were reduced by 30.2% .
Other operating expenses increased by 33.4%, reaching R$ 86.5 million in 2Q06, against R$ 64.9 million in 2Q05, principally owing to the 23.8% increase in the volume of operations. Other operating expenses by ASK increased by 7.7% .
Financial income (expense)
Our financial income (expense) comprised a net expense of R$ 60.0 million in 2Q06, against R$ 26.3 million in 2Q05, principally arising from the appreciation of the Real against the US dollar of 8.6% and income from financial investments compensated for by the accrual for unrealized losses with hedge operations.
Income tax and social contribution
The Income tax and social contribution comprised an expense of R$ 47.7 million in 2Q06 compared with a credit of R$ 14.4 million in 2Q05. Our effective rate of income tax and social contribution was 32.9% in 2Q06, compared with 36.5% in 2Q05.
Net income for the period
Our net income for the quarter reached R$ 97.1 million in 2Q06, against a loss of R$ 24.7 million in 2Q05 due to the factors explained above which represented an increase in the margin of 7.6 percentage points, totaling 5.6% in 2Q06 and 2.0% in 2Q05.
Our EBIT margin was 13.0%, representing R$ 225.4 million in 2Q06, against R$ 1.9 million in 2Q05, which represented an increase in the EBIT margin by 12.8 percentage points in 2Q06. The increase in EBIT is caused by the increase of 12.2% of RASK which despite the unfavorable fall of 6.3% in the domestic regular yield, was compensated for by the increase of 8.4 percentage points in our load factor. Furthermore we had a favorable fall in CASK of 2.2% .
Our EBITDAR margin was 25.1%, reaching R$ 435.7 million in 2Q06, against R$ 170.9 million in 2Q05, which represented an increase of 11.4 percentage points in the EBITDAR margin in 2Q06, due to the effects on our revenues and costs described above.
The Company´s current operational fleet as at June 30 is set out below
(*) 10 - A330-200s, of which 5 have 18 seats in first class, 36 seats in executive class, 171 seats in economy class (total of 225 seats) and 4 have 7 seats in first class, 46 seats in executive class and 175 seats in economy class (total of 228 seats), all with maximum cargo of 18 tons.
5 US GAAP
For the enlightenment of the reader we set out below statements of income for the second quarters of 2006 and 2005 together with balance sheets as at June 30, 2005 and 2006 all prepared in accordance with accounting principles generally accepted in the USA and known as US GAAP. The complete financial statements including an explanatory note setting out a reconciliation between net income and shareholders equity at the second quarter and the independent auditors limited review report are set out separately in a specific report which is being disclosed simultaneously to this report, through the same media.
Comments on 2Q06 results under US GAAP, except where indicated otherwise
We set out below our comments on the second quarter results. We will highlight only those accounts or group of accounts where the amounts here differ from those reported under Brazilian GAAP.
Other operational income in US GAAP increased 140.3% to R$ 143.2 million in 2Q06, compared with R$ 59.6 million in 2Q05, largely due to the frequent flyer Fidelidade program.
The difference between other operational income under BR and US GAAP arises from the deferral under US GAAP of the income earned from the sale of points to financial institution partners of the Fidelidade program in the amount of R$ 10.7 million.
Costs with leasing of aircraft and equipment under US GAAP increased by 41.7% to R$ 102.2 million in 2Q06 compared to R$ 72.1 million in 2Q05, arising from the increase of 4 aircraft A320 and return of 1 Fokker 100 aircraft and from the appreciation of the Real against the US dollar of 8.6% . The cost of leasing aircraft and equipment by ASK increased by 14.4% .
The difference between leasing of aircraft and equipment reported under BR GAAP and US GAAP is due to the recognition of certain contracts, which are accounted for as simple operating leases under BR GAAP and as financial leases under US GAAP. A financial lease requires both asset and liability to be recorded in the balance sheet and affects the results through the depreciation of the assets and interest accrued and foreign exchange variation on the liability. The charges arising from aircraft contracts under financial leases according to US GAAP totalled R$ 83.6 million in 2Q06 and R$ 75.7 million in 2Q05.
Costs and expenses with outsourced services under US GAAP increase by 49.5%, to R$ 116.7 million in 2Q06 against R$ 78.1 million in 2Q05, mainly due to the quantity of take-offs which increased 23.8% . Expenses with outsourced services by ASK increase by 20.7% .
The difference between outsourced services under BR GAAP and US GAAP largely arises from the exclusion of R$ 1.9 million in expenses with the public offering of shares in 2Q06, which, under US GAAP, is recorded against the line Paid in capital.
Depreciation and amortization costs under US GAAP increased by 10.6%, reaching R$ 56.0 million in 2Q06, against R$ 50.7 million in 2Q05. Costs with depreciation and amortization by ASK decreased by 6.5% .
The difference between depreciation and amortization costs under BR GAAP and US GAAP arises from: (a) accounting for certain leases as operating leases under BR GAAP (with consequent recognition of aircraft lease expense), and those same leases being considered finance leases under US GAAP and the consequent recording of depreciation and interest expense.and, (b) reversion of the depreciation expenses accounted under BR GAAP on the increases related to the accounting of such assets revaluation, which, for US GAAP purposes, is reversed. These effects generated an increase in these costs of R$ 31.9 million in 2Q06 and R$ 29.9 million in 2Q05.
Other operating expenses in US GAAP increased 58.2% to R$ 111.9 million in 2Q06 compared to R$ 70.7 million in 2Q05 due to the growth of 23.8% in our operations. Other operating expenses by ASK increased 27.8% .
The difference between other operating expenses under BR GAAP and US GAAP arise from : (a) reclassification under US GAAP of the lines other operating expenses and non-operating results to this line; (b) reversal of the gains arising from the change of financial lease to operating lease that occurred in 2Q06; (c) deferment of the gains arising from the A-330 sale and lease-back transactions that occurred in 2001; and (d) the gain or loss on the conversion of the Mercosur financial statements from guaranis into Reais; and (e) stock options. These effects increased other operating expenses by R$ 15.6 million in 2Q06 and R$ 5.8 million in 2Q05.
Our net financial income under US GAAP comprised an expense of R$ 21.0 million in 2Q06, compared with income of R$ 270.8 million in 2Q05, mainly due to the 8.6% appreciation of the Real against the United States Dollar.
The difference between net financial income under BR GAAP and US GAAP is due to: (a) interest and foreign exchange variation on certain financial lease contracts; (b) marking to market the transactions with financial instruments and (c) derivative financial instruments. These effects generated income of R$ 39.0 million in 2Q06 and R$ 297.1 million in 2Q05.
Non-operating results under US GAAP are reclassified to the line other operating expenses.
Income tax and social contribution under US GAAP fell 35.1% to R$ 74.8 million in 2Q06 against an expense of R$ 112.9 million 2Q05, due to the taxable results recorded in 2Q06.
The difference between Income tax and social contribution under BR GAAP and US GAAP are due to: (a) tax effects of US GAAP and BR GAAP accounting adjustments; and (b) reversal of the tax credits on accounting losses and the negative calculation base of social contribution. These effects resulted in expenses of R$ 27.1 million in 2Q06 and expenses of R$ 127.3 million in 2Q05.
Our net income for the quarter in US GAAP decreased 32.0% to R$ 146.3 million in 2Q06 compared with R$ 215.3 million in 2Q05 in function of the reasons set out above.
Condensed Balance Sheet
09.01 - Investments in Subsidiary and/or Associated Companies
12.01 - Comments on Business Projections
No information is provided.
13.01 - Business Projections
No information is provided.
16.01 - Other Information Considered Relevant by the Company
Breakdown of TAMs Shareholders
The Fiscal Council was constituted on January 11.
Shareholders with more than 5% included in the quantities demonstrated as being market (Free Float)
Shares belonging to members of the Administrative Council and Fiscal Council which were lent by members of the controlling group and declared as part of the controlling group shares in this report
Shares belonging to directors included in the free float section
As part of our wish to show exemplary standards of governance, below we set out below the shareholders who own more than 5% of the voting capital directly or indirectly and identify the individuals involved.
TAM Empreendimentos e Participações S.A.
Incluída no bloco de controle
Agropecuária Nova Fronteira Ltda
Aerosystem S.A. Empr. e Participações
At June 30, 2005, the Fiscal Council has not yet been constituted.
Shares belonging to members of the Administrative Council which were lent by members of the controlling group and declared as part of the controlling group shares in this report
As part of our wish to show exemplary standards of governance, below we set out the shareholders who own more than 5% of the voting capital directly or indirectly and identify the individuals involved.
TAM Empreendimentos e Participações S.A.
Aerosystem S.A. Empr. e Participações
The Company has included a clause in its Statutes which obliges it to use the Market´s Arbitration Chamber in case of disputes.
17.01 - Report on the Special Review - Without Exception
Independent accountants review report
1 We have reviewed the interim financial information (ITR) of TAM S.A. and the interim financial information of this Company and its subsidiaries (interim financial consolidated information) for the three-month period ended June 30, 2006, which comprises the balance sheet, the statement of income, management report and other relevant information, prepared in accordance with accounting practices adopted in Brazil and rules issued by the Brazilian Securities and Exchange Commission (CVM).
2 Our review was performed in accordance with review standards established by IBRACON - The Brazilian Institute of Independent Auditors and the Federal Council of Accounting, which comprised mainly: (a) inquiry and discussion with management responsible for the accounting, financial and operational areas of the Company and its subsidiaries, regarding the main criteria adopted in the preparation of the interim financial information; and (b) review of post-balance sheet information and events which may have a material effect on the financial position and the operations of the Company and its subsidiaries.
3 Based on our review, we are not aware of any material changes which should be made to the interim financial information described above, for them to be in accordance with the accounting practices adopted in Brazil and the regulations issued by the Brazilian Securities and Exchange Commission (CVM), specifically applicable to the preparation of interim financial information.
4 Our review was performed with the objective of issuing a review report on the interim financial information, as described in the first paragraph. The individual and consolidated statements of cash flows and the consolidated statement of added value of TAM S.A. and its subsidiaries for the three-period ended June 30, 2006 are supplementary information to the ITR, and have been included to facilitate additional analysis. These supplementary information were subjected to the same review procedures applied to the aforementioned ITR and, in our opinion, is presented fairly, in all material respects, in relation to the ITR taken as a whole.
5 The information presented in the management report described as US GAAP (prepared accordance with accounting principles generally accepted in the United States of America.), has been included to facilitate additional analysis of the Company and its subsidiaries, and was not reviewed by us.
August 4th, 2006 (except for the changes performed on the explanatory notes 4, 5 and 8 and on pages 6, 66, 106 and 108 for whom the effective date is August 9th, 2006)
18.01 - Statement of Operations of Subsidiary and Associated Companies (R$ thousand)
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: September 1, 2006
This press release may contain forward-looking statements. These statements are statements that are not historical facts, and are based on management's current view and estimates offuture economic circumstances, industry conditions, company performance and financial results. The words "anticipates", "believes", "estimates", "expects", "plans" and similar expressions, as they relate to the company, are intended to identify forward-looking statements. Statements regarding the declaration or payment of dividends, the implementation of principal operating and financing strategies and capital expenditure plans, the direction of future operations and the factors or trends affecting financial condition, liquidity or results of operations are examples of forward-looking statements. Such statements reflect the current views of management and are subject to a number of risks and uncertainties. There is no guarantee that the expected events, trends or results will actually occur. The statements are based on many assumptions and factors, including general economic and market conditions, industry conditions, and operating factors. Any changes in such assumptions or factors could cause actual results to differ materially from current expectations.