##### Table of Contents



As filed
with the Securities and Exchange Commission on June 29, 2006
    SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 20-F
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended: December 31, 2005
Commission file number: 000-51490
 CONTAX PARTICIPAÇÕES S.A.
  Contax Holding Company
    
    The Federative Republic of Brazil(Translation of Registrants Name into English)
    
    (Jurisdiction of Incorporation or Organization)
 Rua do Passeio 56, 16o andar (parte)
20021-290 Rio de Janeiro  RJ  Brazil
 Securities registered or to be registered pursuant to Section 12(b) of the Act:
 Title of Each Class
    
    Name of Each Exchange on Which RegisteredPreferred Shares, without par value (preferred shares)
    
    BovespaAmerican Depositary Shares, each representing one
preferred share
    
    
 None
 None
 
  254,747,800 preferred shares
 127,373,917 common shares
 o þ
 o þ
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
  o þ
 o þ




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##### Table of Contents



TABLE OF CONTENTS
 PagePRESENTATION OF INFORMATION
    
    
    1FORWARD-LOOKING INFORMATION
    
    
    2PART I.
    
    
    3Item 1. Identity of Directors, Senior Management and Advisers
    
    
    3Item 2. Offer Statistics and Expected Timetable
    
    
    3Item 3. Key Information
    
    
    3Item 4. Information on the Company
    
    
    17Item 4A. Unresolved Staff Comments
    
    
    30Item 5. Operating and Financial Review and Prospects
    
    
    30Item 6. Directors, Senior Management and Employees
    
    
    40Item 7. Major Shareholders and Related Party Transactions
    
    
    47Item 8. Financial Information
    
    
    50Item 9. The Offer and Listing
    
    
    53Item 10. Additional Information
    
    
    56Item 11. Quantitative and Qualitative Disclosures About Market Risk
    
    
    69Item 12. Description of Securities Other Than Equity Securities
    
    
    69PART II.
    
    
    70Item 13. Defaults, Dividend Arrearages and Delinquencies
    
    
    70Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    70Item 15. Controls and Procedures
    
    
    70Item 16. [Reserved]
    
    
    70Item 16A. Audit Committee Financial Expert
    
    
    70Item 16B. Code of Ethics
    
    
    70Item 16C. Principal Accountant Fees and Services
    
    
    71Item 16D. Exemptions from the Listing Standards for Audit Committees
    
    
    71Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    71PART III.
    
    
    72Item 17. Financial Statements
    
    
    72Item 18. Financial Statements
    
    
    72Item 19. Exhibits
    
    
    72Consolidated and Combined Financial Statements
    
    
    F-1EX-2.1: DEPOSIT AGREEMENTEX-4.6: FIRST AMENDMENT TO THE SERVICES AGREEMENTEX-4.7: SECOND AMENDMENT TO THE SERVICES AGREEMENTEX-8.1: LIST OF SUBSIDIARIESEX-12.1: CERTIFICATIONEX-12.2: CERTIFICATIONEX-13.1: CERTIFICATIONS
 i




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PRESENTATION OF INFORMATION
 sociedade por ações
   real reais
 reais reais
     Comissão de Valores
Mobiliários
   1




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##### Table of Contents



FORWARD-LOOKING INFORMATION
  
    
    the growth in the Brazilian outsourcing contact center sector; and
    
    the performance of the Brazilian economy in general.
  
    
    our future operations performance;
    
    the demand for our services;
    
    competitive factors in the sector in which we compete;
    
    changes in the regulatory framework for our clients in the telecommunications, utilities
and financial sectors in Brazil;
    
    changes in labor law and tax requirements;
    
    economic, business and political conditions in Brazil and in the international markets,
including governmental changes and restrictions on the ability to transfer capital across
borders; and
    
    the impact of fluctuations in the price of our shares.
 2




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##### Table of Contents



PART I
 
 Item 1. Identity of Directors, Senior Management and Advisers
  
 Item 2. Offer Statistics and Expected Timetable
  
 Item 3. Key Information
 Selected Financial Data
 reais reais
 3




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Selected Financial Data
 Year ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(in thousands ofreais, except per share data)Statement of Operations DataNet operating revenue from services
rendered
    
    
    1,044,787
    
    
    
    654,616
    
    
    
    410,690
    
    
    
    211,660
    
    
    
    145,805Cost of services rendered
    
    
    (855,907
    )
    
    
    (574,071
    )
    
    
    (334,751
    )
    
    
    (181,161
    )
    
    
    (107,969
    )Gross profit
    
    
    188,880
    
    
    
    80,545
    
    
    
    75,939
    
    
    
    30,499
    
    
    
    37,836Operating expenses
    
    
    (71,840
    )
    
    
    (47,845
    )
    
    
    (31,234
    )
    
    
    (21,444
    )
    
    
    (25,383
    )Operating income
    
    
    117,040
    
    
    
    32,700
    
    
    
    44,705
    
    
    
    9,055
    
    
    
    12,453Financial income (expenses) net
    
    
    14,352
    
    
    
    (4,662
    )
    
    
    (2,141
    )
    
    
    (6,923
    )
    
    
    (3,232
    )Income from continuing operations*
    
    
    81,240
    
    
    
    16,470
    
    
    
    61,240
    
    
    
    1,336
    
    
    
    6,159Loss from discontinued operations*
    
    
    
    
    
    
    (9,667
    )
    
    
    (59,336
    )
    
    
    (68,089
    )
    
    
    (30,709
    )Net income (loss) and comprehensive
income (loss) for the year
    
    
    81,240
    
    
    
    6,803
    
    
    
    1,904
    
    
    
    (66,753
    )
    
    
    (24,550
    )Earnings (Loss) per Share
(inreais)**Income from continuing operationsCommon shares  basic and diluted
    
    
    0.21
    
    
    
    0.04
    
    
    
    0.16
    
    
    
    
    
    
    
    0.02Preferred shares  basic and diluted
    
    
    0.21
    
    
    
    0.04
    
    
    
    0.16
    
    
    
    
    
    
    
    0.02Net income (loss)Common shares  basic and diluted
    
    
    0.21
    
    
    
    0.02
    
    
    
    
    
    
    
    (0.18
    )
    
    
    (0.08
    )Preferred shares  basic and diluted
    
    
    0.21
    
    
    
    0.02
    
    
    
    0.01
    
    
    
    (0.17
    )
    
    
    (0.06
    )Weighted average common shares
outstanding  basic and diluted
    
    
    127,373,917
    
    
    
    127,373,917
    
    
    
    127,373,917
    
    
    
    127,373,917
    
    
    
    127,373,917Weighted average preferred shares
outstanding  basic and diluted
    
    
    254,747,800
    
    
    
    254,747,800
    
    
    
    254,747,800
    
    
    
    254,747,800
    
    
    
    254,747,800Balance Sheet DataCash and cash equivalents
    
    
    229,488
    
    
    
    85,152
    
    
    
    33,268
    
    
    
    4,366
    
    
    
    3,312Property and equipment, net
    
    
    265,379
    
    
    
    182,936
    
    
    
    105,492
    
    
    
    225,690
    
    
    
    187,189Total assets
    
    
    620,466
    
    
    
    406,052
    
    
    
    326,333
    
    
    
    282,829
    
    
    
    239,945Current liabilities
    
    
    203,080
    
    
    
    111,289
    
    
    
    197,047
    
    
    
    47,273
    
    
    
    42,221Long-term liabilities
    
    
    56,831
    
    
    
    14,089
    
    
    
    3,093
    
    
    
    226,877
    
    
    
    176,336Shareholders equity
    
    
    360,555
    
    
    
    280,674
    
    
    
    126,193
    
    
    
    4,129
    
    
    
    21,542Total liabilities and shareholders
equity
    
    
    620,466
    
    
    
    406,052
    
    
    
    326,333
    
    
    
    282,829
    
    
    
    239,945Cash Flow DataOperating activities (continuing
operations*)
    
    
    219,889
    
    
    
    71,387
    
    
    
    88,272
    
    
    
    18,019
    
    
    
    (8,291
    )Operating activities (discontinued
operations*)
    
    
    
    
    
    
    (30,945
    )
    
    
    (26,449
    )
    
    
    (6,449
    )
    
    
    (49,234
    )Financing activities
    
    
    35,290
    
    
    
    114,112
    
    
    
    4,406
    
    
    
    53,861
    
    
    
    247,016Investing activities (continuing
operations*)
    
    
    (128,054
    )
    
    
    (102,670
    )
    
    
    (42,224
    )
    
    
    (59,139
    )
    
    
    (29,666
    )Investing activities (discontinued
operations*)
    
    
    17,211
    
    
    
    
    
    
    
    4,895
    
    
    
    (5,238
    )
    
    
    (157,429
    )
 
 *
    
    Discontinued operations relate to data center activities. See Note 18 to our Consolidated
and Combined Financial Statements.**
    
    The computation of earnings per share for all periods presented is based on the number of
shares outstanding of Contax Holding on the date of the spin-off, as described in Note 3 to
our Consolidated and Combined Financial Statements. Exchange Rates
 reais reais real
 4




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Banco Central do Brasil
 reais
 reais
 AveragePeriod
    
    Period-end
    
    for period*
    
    High
    
    Low2001
    
    
    2.3204
    
    
    
    2.3520
    
    
    
    2.8007
    
    
    
    1.93572002
    
    
    3.5333
    
    
    
    2.9309
    
    
    
    3.9552
    
    
    
    2.27092003
    
    
    2.8892
    
    
    
    3.0715
    
    
    
    3.6623
    
    
    
    2.82192004
    
    
    2.6544
    
    
    
    2.9259
    
    
    
    3.2051
    
    
    
    2.65442005
    
    
    2.3407
    
    
    
    2.4125
    
    
    
    2.7621
    
    
    
    2.1633January 2006
    
    
    2.2160
    
    
    
    2.2739
    
    
    
    2.3460
    
    
    
    2.2116February 2006
    
    
    2.1355
    
    
    
    2.1619
    
    
    
    2.2217
    
    
    
    2.1177March 2006
    
    
    2.1724
    
    
    
    2.1520
    
    
    
    2.2238
    
    
    
    2.1067April 2006
    
    
    2.0892
    
    
    
    2.1293
    
    
    
    2.1542
    
    
    
    2.0892May 2006
    
    
    2.3005
    
    
    
    2.1781
    
    
    
    2.3711
    
    
    
    2.0586June 2006 (through June 12)
    
    
    2.2707
    
    
    
    2.2634
    
    
    
    2.2713
    
    
    
    2.2500
 
 *  Average of the rates on each day in the period.Source:

    Central Bank of Brazil.  Risk Factors
  5




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Risks Relating to Our Business
 A large portion of our revenues originates from a limited number of clients, and the loss of one or
more of these clients could significantly impact our financial condition.
    Our main client, Telemar, is undergoing a corporate restructuring transaction, which will result in
the election of an independent Board of Directors, which may result in changes to our relationship
with this client.
   If the trend toward outsourcing of contact center services were reversed, the growth rate of our
business could be reduced.
    6




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Increases in the use of automated customer services could reduce the demand for our services.
  Our ability to recruit, motivate and retain qualified management and operators could affect the
quality of our services, which could impact our ability to attract new clients and retain existing
ones.
  Our inability to pass through cost increases could seriously harm our profit margins.
  Our operating results may be harmed if we are unable to maximize our contact center capacity
utilization.
  7




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If our clients are not successful, the amount of business they outsource may be diminished and
could result in lower revenues for us.
   The failure to keep our technology up to date may prevent us from remaining competitive.
    Interruption of our contact center services could have a material adverse effect on our financial
condition and results of operations.
   8




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Breaches of our contact center service contracts could expose us to significant monetary penalties.
     We may be unable to achieve the same performance levels we have been experiencing with our
performance-based compensation contracts.
  9




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We may be responsible for labor liabilities which could have an adverse effect on our
profitability.
     Our business is highly competitive and our failure to effectively compete could result in the loss
of clients or decreased profitability.
   Telemar Participações holds the majority of our voting shares and there may be circumstances in
which its interests differ from or conflict with the interests of our other shareholders.
  10




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We may be liable for fraudulent activities or misappropriation of our clients information by our
employees or third parties.




Risks Relating to Brazil


The Brazilian government has exercised, and continues to exercise, significant influence over the
Brazilian economy. This involvement, as well as Brazilian political and economic conditions, could
adversely impact our business, operations and the market price of our shares and ADSs.





    
    political instability;
    
    devaluations and other currency fluctuations;
    
    inflation rates;
    
    price instability;
    
    interest rates;
    
    liquidity of domestic capital and lending markets;
    
    energy shortages;
    
    exchange controls;
    
    monetary policy;
    
    tax policy; and
    
    other political, diplomatic, social and economic developments in or affecting Brazil.


11




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Inflation and certain government measures to curb inflation may have adverse effects on the
Brazilian economy, the Brazilian securities market, our business and operations and the market
price of the shares.


real Índice Geral de Preços-Mercado Fundação Getúlio Vargas Índice Geral de Preços
 Disponibilidade Interna Índice Nacional de Preços ao Consumidor Ampliado Instituto Brasileiro de Geografia e Estatística




Changes in Brazilian labor law may negatively affect us.


Consolidação das Leis do Trabalho




12




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Regulatory proposals, such as the creation of a do not call list, could restrict our contact
center services.




Exchange rate instability may adversely affect our financial condition.


real real real real


real real


We may be unable to convert reais into U.S. dollars to make dividend distributions to our ADS
holders.


reais


Economic and market conditions in other emerging market countries may adversely affect the
Brazilian economy and, therefore, the market value of our common shares and ADSs and our ability to
access the capital markets.


13




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Risks Relating to the ADSs and the Preferred Shares


You may not be able to sell the ADSs or preferred shares at the price or time you desire because an
active or liquid market for the ADSs or the preferred shares will not likely develop.




The relative volatility and illiquidity of the Brazilian securities markets may substantially limit
your ability to sell the preferred shares underlying the ADSs at the price and time you desire.




Holders of preferred shares and ADSs have limited voting rights.




Holders of ADSs are not entitled to attend shareholders meetings and may only vote through the
Depositary.




Holders of ADSs may have fewer and less well-defined shareholders rights than shareholders of U.S.
public companies.


14




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Holders of ADSs or preferred shares may not receive any dividends.






Exchange controls and restrictions on remittances abroad may adversely affect holders of ADSs.




Dividends received by United States individuals will not be qualified dividend income eligible
for a 15% tax rate.




15



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If you surrender your ADSs and withdraw preferred shares, you risk losing the ability to remit
foreign currency abroad and certain Brazilian tax advantages.
   Changes in Brazilian tax laws may have an adverse impact on the taxes applicable to the disposition
of the ADSs or preferred shares.
  Holders of ADSs may be unable to exercise preemptive rights with respect to our shares.
  Holders of ADSs may face difficulties in serving process on or enforcing judgments against us and
other persons.
 16
    Table of Contents    
 Item 4. Information on the Company
 History and Organizational Structure
 sociedade por ações
 sociedade por ações
        Table of Contents  Before Spin-off*
 
 
 *
    
    Shareholdings as of March 31, 2005.**
    
    Held indirectly through a wholly-owned
subsidiary. 18
    Table of Contents  After Spin-off*
 
 
 *
    
    Shareholdings as of December 31, 2005.**
    
    Held indirectly through a wholly-owned subsidiary. Overview
     19
    Table of Contents  Industry Overview
       
    
    Increasing importance for companies to retain and enhance customer relationships;
    
    Increasing need for companies to focus on core competencies rather than non-revenue
producing activities;
    
    Rapid changes in technology requiring personnel with specialized technical expertise and
continued investment in new contact center equipment and services;
    
    Increasing need to integrate and manage complex systems incorporating a variety of
hardware and software systems spanning a number of technology generations; and
    
    Extensive and ongoing training requirements.
 20
    Table of Contents   
  
    
    Increase in telephony penetration.Prior to
Brazils privatization of state-owned
telecommunications companies in 1998, telephony penetration in Brazil was very low,
limiting the use of contact centers as an effective way to deliver customer service on a
broad basis. Today, a larger portion of the Brazilian population can access customer
services in general through different communication channels, including both wireless and
fixed-line terminals. According to the Brazilian telecommunications regulatory agency
(Agência Nacional de Telecomunicações), or Anatel, total wireline and wireless penetration
grew from 42.8 million in 1999 to 128.3 million in 2005.
    
    Expansion of contact center-intensive service sectors due to economic stabilization and
privatization.In the mid-1990s, Brazil implemented successful
economic reforms which
created a stable macro-economic environment, spurring the growth of financial services and,
consequently, the consumer base of these companies. Brazil concurrently privatized large
state-owned service providers in the telecommunications, electric, water and gas sectors,
which brought about large investments and a rapid growth in customers.
    
    Pressure to reduce costs.Pricing pressures from competition and shareholder demands for
higher returns have forced Brazilian companies to streamline personnel, through
restructuring and outsourcing, and make other cost reductions, including reducing
face-to-face customer services.
   Our Strategy
     Customer service: 21
    Table of Contents    Debt collection
 Telemarketing
  Human resources
 Operational model:
 IT systems
 Commercial model:
  Competition
   22




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##### Table of Contents




    
    Atento.Atento is a part of the Spanish group Telefônica, which in Brazil controls a
large fixed-line operator (Telesp), an Internet provider (Terra) and, together with
Portugal Telecom, Brazils leading wireless operator (Vivo). Atento has operated in the
Brazilian market since 1999. After acquiring several companies in the sector, they became
one of the largest contact center services providers in Brazil. Two of Atentos major
clients are Telefônica and Unibanco.
    
    Teleperformance.Teleperformance is a French company that operates in approximately 36
countries. In 2004, Teleperformance increased its Brazilian operations by merging with
Companhia Brasileira de Contact Center, after which Teleperformance became one of the
largest contact center service providers in Brazil. We believe Teleperformances main
client, Brasil Telecom group (one of Brazils largest telecommunications operator and
comparable to Telemar in its breadth of services), accounts for most of the workstations
operated by their new combined operations.
    
    ACS.Controlled by Algar Group, a diversified Brazilian conglomerate, ACS was founded
in 1999 with headquarters located in Uberlândia in the state of Minas Gerais. We believe
ACS two main clients are CTBC (a telecom operator in Uberlândia that is part of the Algar
Group) and American Express.
    
    Brasil Center.Brasil Center is part of the Mexican group Telmex, which now controls
Embratel (one of Brazils largest telecommunications operators in long distance and data
services), and Claro (a subsidiary of America Movil and one of Brazils largest wireless
operators). To date, Brazil Center has not actively pursued the contact center services
market outside their controlling group.
    
    Dedic.Dedic is part of the Portuguese group Portugal Telecom which controls, jointly
with Telefonica, Brazils largest wireless operator Vivo. Dedic primarily services,
directly or indirectly, Portugal Telecoms subsidiaries in Brazil.
 Our Business
   23




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##### Table of Contents




    
    Customer Care. Our customer care services range from simple customer assistance, such
as providing information about products and services, to more complex requests, such as:
(i) initial troubleshooting of interrupted services, (ii) handling billing inquiries, and
(iii) activating new services and/or monitoring the installation of the required equipment
at the customers site.
    
    Telemarketing. This service is primarily focused on outbound client acquisition,
up-selling and cross-selling of our clients products and services. Our telemarketing
services include prospect identification, campaign management and data mining. We also
provide inbound telemarketing services, which are executed in coordination with our
clients marketing campaigns. We are also implementing aggressive cross-selling sales
strategies to monetize each inbound customer service contact.
    
    Technical Support. We provide comprehensive technical product support for our clients
customers. For example, we handle troubleshooting calls of consumer products, respond to
software and hardware problems, provide support for ISPs dial-up and broadband customers,
and manage corporate IT help desks. For such services, we employ qualified
personnel with specialized technical training in dedicated teams.
    
    Retention.We provide our clients with customer retention services, whether by
persuading their end-customers not to cancel a service or by observing customer behavior and
taking preventive measures to avoid cancellation requests. We collaborate with our clients
in order to develop new scripts as well as new retention offers to improve the results of
such activities.
    
    Debt Collection. We design debt collection strategies together with our clients to
maximize results, while emphasizing customer retention. We participate from the early
stages of developing our clients collection strategy to the actual execution of the
strategy, using database filters (systems that prioritize contacts and determine the type
of service each customer will receive), predictive dialers and other automatic contact
tools, such as voice mail and text messages typically sent to wireless handheld devices, in
order to maximize the likelihood of customer contact and behavior models that enable us to categorize
customers risk and identify the most efficient techniques of interacting with customers.
In order to enhance our performance, we launch pilot programs to test the statistical
efficiency of specific tools and strategies.
  Year ended December 31,Services
    
    2005
    
    2004
    
    2003Customer Care
    
    
    57.7
    %
    
    
    64.2
    %
    
    
    55.7
    %Telemarketing
    
    
    11.9
    %
    
    
    10.6
    %
    
    
    16.1
    %Technical Support
    
    
    2.7
    %
    
    
    2.3
    %
    
    
    1.1
    %Retention
    
    
    3.6
    %
    
    
    3.8
    %
    
    
    1.9
    %Debt Collection
    
    
    13.2
    %
    
    
    11.8
    %
    
    
    17.4
    %Other
    
    
    10.9
    %
    
    
    7.3
    %
    
    
    7.8
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  24




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##### Table of Contents



Markets and Clients
  
    
    Telecommunications. We provide a full range of contact center services to Telemar, our
largest client. Telemars operations include fixed line terminals, long-distance services,
mobile services, as well as broadband and corporate voice and data services. In addition
to traditional customer care services, we deliver extensive client retention and debt
collection services for Telemars retail and corporate customers. Because we have a strong
relationship with Telemar and because other telecom groups control their own contact center
companies, we have not actively pursued other opportunities in this sector.
    
    Financial Services.New financial products and service offerings have expanded our
opportunities in this sector. We provide a broad range of services to the credit card,
retail bank and insurance segments, as well as to consumer credit companies. We expect
this sector to grow in importance for us since many financial institutions have in-house
operations that fit into our strategy of focusing on clients with high volume and highly
complex services.
    
    Utilities.There are several large companies in Brazil in the power, water and sewage,
and gas distribution segments. Currently, we provide services to a few power distribution
companies in the Southeast and Northeast regions of Brazil. We intend to continue to
expand our activities in this sector and our success could be enhanced if there is further
privatization in the water and sewage segment.
    
    Internet. We have developed specific end-to-end services for Internet service
providers, or ISPs, by servicing iG, Brazils largest ISP, and, more recently, Telemars
new ISP subsidiary. We are particularly interested in providing customer acquisition,
retention and technical support services to the growing number of broadband Internet access
providers.
   Year ended December 31,Sector
    
    2005
    
    2004
    
    2003Telecommunications
    
    
    64.5
    %
    
    
    64.5
    %
    
    
    78.8
    %Financial Services
    
    
    27.4
    %
    
    
    27.6
    %
    
    
    14.6
    %Utilities
    
    
    1.5
    %
    
    
    1.4
    %
    
    
    2.5
    %Internet
    
    
    1.1
    %
    
    
    0.8
    %
    
    
    0.8
    %Other
    
    
    5.6
    %
    
    
    5.7
    %
    
    
    3.3
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Client Contracts
  25




---



##### Table of Contents



Result Variance and Seasonality
   26
    Table of Contents  Human Resource Management
      Facilities
    27
    Table of Contents  Lease ContractSites
    
    State
    
    # Work Stations
    
    # Employees
    
    Sq. Meters
    
    ExpirationPasseio*
    
    RJ
    
    
    3,781
    
    
    
    8,215
    
    
    
    21,880
    
    
    Sept. 30, 2010Niterói
    
    RJ
    
    
    1,735
    
    
    
    4,444
    
    
    
    8,370
    
    
    Dec. 31, 2009Makenzie
    
    RJ
    
    
    1,326
    
    
    
    2,733
    
    
    
    9,019
    
    
    Dec. 31, 2009Assembléia
    
    RJ
    
    
    969
    
    
    
    2,014
    
    
    
    3,700
    
    
    June 30, 2006Antartica
    
    SP
    
    
    2,804
    
    
    
    5,306
    
    
    
    17,665
    
    
    May 31, 2009Paulista
    
    SP
    
    
    1,941
    
    
    
    4,254
    
    
    
    8,875
    
    
    Dec. 31, 2006Prado
    
    MG
    
    
    2,900
    
    
    
    6,430
    
    
    
    12,400
    
    
    Dec. 31, 2009Nova Lima
    
    MG
    
    
    128
    
    
    
    232
    
    
    
    977
    
    
    May 14, 2007C. da Pólvora
    
    BA
    
    
    1,465
    
    
    
    3,760
    
    
    
    12,917
    
    
    Dec. 31, 2009Comércio
    
    BA
    
    
    1,462
    
    
    
    3,161
    
    
    
    6,850
    
    

March
31, 2009Borges de Mello
    
    CE
    
    
    2,478
    
    
    
    5,721
    
    
    
    12,685
    
    
    Dec. 31, 2010Príncipe
    
    PE
    
    
    938
    
    
    
    1,611
    
    
    
    2,766
    
    
    Dec. 31, 2009Boa Vista Nova
    
    PE
    
    
    317
    
    
    
    631
    
    
    
    1,586
    
    
    Dec. 31, 2009Porto Alegre
    
    RS
    
    
    206
    
    
    
    570
    
    
    
    500
    
    
    Sept. 17, 2006Distrito Federal
    
    DF
    
    
    70
    
    
    
    133
    
    
    
    180
    
    
    May 14, 2007Total
    
    
    
    
    
    
    22,481
    
    
    
    49,554
    
    
    
    120,370
 
 *
    
    Includes both contact center operations and our headquarters. Information Technology
     Capital Expenditures
  28
    Table of Contents  Year ended December 31,2005
    
    
    2004
    
    
    2003(in thousands ofreais)Telecommunications and IT systems
    
    
    75,564
    
    
    
    58,888
    
    
    
    22,827Improvements on third party assets
    
    
    37,392
    
    
    
    16,283
    
    
    
    13,022Furniture and fixtures
    
    
    8,552
    
    
    
    20,949
    
    
    
    3,362Other
    
    
    7,188
    
    
    
    6,550
    
    
    
    3,013Capital expenditures (Contax)
    
    
    128,696
    
    
    
    102,670
    
    
    
    42,224Capital expenditures in discontinued
operations*
    
    
    
    
    
    
    
    
    
    
    2,455Total capital expenditures
    
    
    128,696
    
    
    
    102,670
    
    
    
    44,679
 
 *
    
    Discontinued operations relate to data center activities. See Note 18 to
our Consolidated and Combined Financial Statements.  Sales and Marketing
      Insurance
  29
    Table of Contents     Coverage Type
    
    Amount CoveredProperty damage
    
    R$64,160 thousandBusiness interruption
    
    R$52,310 thousandGeneral liability
    
    R$5,000 thousandDirectors and officers liability
    
    U.S.$60,000 thousand
 Intellectual Property
 Instituto Nacional de
Propriedade Intelectual
 Núcleo de Informação e Coordenação do Ponto BR 
NIC.br
 
 Item 4A.
Unresolved Staff Comments
  
 Item 5. Operating and Financial Review and Prospects
  Executive Overview
   
    
    the acquisition or loss of a major client;
    
    fluctuations in demand for our services;
    
    our ability to pass through to our clients increases in costs;
 30




---



##### Table of Contents




    
    our ability to efficiently manage our workforce productivity; and
    
    success or failure with respect to our performance-based services.
 Acquisition or Loss of a Major Client
  Fluctuations in Demand for Our Services
  Our Ability to Pass Through to Our Clients Increases in Total Costs
   Our Ability to Efficiently Manage Our Workforce Productivity
    31




---



##### Table of Contents



Success or Failure with Respect to Our Performance-Based Services
  Key Events in 2005
 
    
    Effective January 1, 2005, all services which were provided by us to Tmar are now
rendered on a fully-outsourced basis. Prior to such contract, we performed all contact
center activities for Tmar, under various contracts, both on a fully outsourced as well as
on a partially outsourced basis. Such partial outsourcing services were usually performed
in facilities and with equipment owned by Tmar. Tmar was also responsible for all
facilities costs such as general maintenance, electricity, etc. Also on January 1, 2005,
all Tmar and Oi contracts underwent their annual price readjustments.
    
    Our revenues increased by approximately 60% as a result of providing an expanded range
of value-added services to Telemar on a fully outsourced basis and providing an expanded
range of services and higher volume to our clients, as well as having completely
implemented our contact center services agreement with Orbitall, which generated revenue
for the full year of 2005.
    
    In August 2005, the spin-off of our shares to shareholders of TNL was consummated. This
spin-off was approved by the shareholders of TNL at a shareholders meeting of TNL held on
December 29, 2005.
 Critical Accounting Policies and Estimates
   
    
    revenue recognition;
    
    depreciation of property and equipment;
    
    payroll and related accruals;
    
    contingencies; and
    
    deferred and recoverable income tax and social contribution.
 Revenue Recognition
 32
    Table of Contents  Depreciation of Property and Equipment
    Payroll and Related Accruals
 décimo terceiro salário
   Contingencies
   33
    Table of Contents    Labor Claims
    Tax Claims Instituto Nacional de
Seguridade Social Fundo
de Garantia por Tempo de Serviço
  Deferred and Recoverable Income Tax and Social Contribution
   34




---



##### Table of Contents



Results of Operations
 Results of Operations for the Year ended December 31, 2005 compared with the Year ended December
31, 2004
 Continuing Operations
 Period over
    
    
    Results as aPeriod over
    
    
    period
    
    
    percentage of net salesYear
    
    
    period
    
    
    percentage
    
    
    for the year endedended December 31,
    
    
    change
    
    
    change
    
    
    December 31,Favorable
    
    
    Favorable2005
    
    
    2004
    
    
    (unfavorable)
    
    
    (unfavorable)
    
    
    2005
    
    
    2004(in thousands ofreais)Net operating revenues of
services rendered
    
    
    1,044,787
    
    
    
    654,616
    
    
    
    390,171
    
    
    
    60
    
    
    
    100
    
    
    
    100Cost of services rendered
    
    
    (855,907
    )
    
    
    (574,071
    )
    
    
    (281,836
    )
    
    
    (49
    )
    
    
    (82
    )
    
    
    (88
    )Selling, general and
administrative expenses
    
    
    (59,742
    )
    
    
    (46,790
    )
    
    
    (12,952
    )
    
    
    (28
    )
    
    
    (6
    )
    
    
    (7
    )Other operating expenses, net
    
    
    (12,098
    )
    
    
    (1,055
    )
    
    
    (11,043
    )
    
    
    (1,047
    )
    
    
    (1
    )
    
    
    Operating income (loss)
    
    
    117,040
    
    
    
    32,700
    
    
    
    84,340
    
    
    
    259
    
    
    
    (11
    )
    
    
    5Net financial income
(expenses)
    
    
    13,627
    
    
    
    (4,662
    )
    
    
    18,289
    
    
    
    392
    
    
    
    1
    
    
    
    (1
    )Non-operating income
(expenses), net
    
    
    235
    
    
    
    
    
    
    
    235
    
    
    
    
    
    
    
    
    
    
    
    Income tax and social
contribution benefit
    
    
    (50,387
    )
    
    
    (11,568
    )
    
    
    (38,819
    )
    
    
    336
    
    
    
    (5
    )
    
    
    (2
    )Net income
    
    
    81,240
    
    
    
    16,470
    
    
    
    64,770
    
    
    
    393
    
    
    
    8
    
    
    
    3
 Net Operating Revenues of Services Rendered
   Cost of Services Rendered
  35




---



##### Table of Contents



Selling, General and Administrative Expenses
  Other Operating Expenses, Net
  Net Financial Income (Expenses)
  Non-operating Income (Expenses), Net
  Income Tax and Social Contribution Benefit
  Net Income
  36




---



##### Table of Contents



Results of operations for the Year Ended December 31, 2004 compared with the Year Ended December
31, 2003.
 Continuing Operations
 Period overPeriod over
    
    
    period
    
    
    Results as aYear ended
    
    
    period
    
    
    percentage
    
    
    percentage of net salesDecember 31,
    
    
    change
    
    
    change
    
    
    for the year endedFavorable
    
    
    Favorable2004
    
    
    2003
    
    
    (unfavorable)
    
    
    (unfavorable)
    
    
    2004
    
    
    2003(in thousands ofreais)Net operating revenues of
services rendered
    
    
    654,616
    
    
    
    410,690
    
    
    
    243,926
    
    
    
    59
    
    
    
    100
    
    
    
    100Cost of services rendered
    
    
    (574,071
    )
    
    
    (334,751
    )
    
    
    (239,320
    )
    
    
    (71
    )
    
    
    (88
    )
    
    
    (82
    )Selling, general and
administrative expenses
    
    
    (46,790
    )
    
    
    (30,506
    )
    
    
    (16,284
    )
    
    
    (53
    )
    
    
    (7
    )
    
    
    (7
    )Other operating expenses, net
    
    
    (1,055
    )
    
    
    (728
    )
    
    
    (327
    )
    
    
    (45
    )
    
    
    
    
    
    
    Operating income (loss)
    
    
    32,700
    
    
    
    44,705
    
    
    
    (12,005
    )
    
    
    (27
    )
    
    
    5
    
    
    
    11Net financial expenses
    
    
    (4,662
    )
    
    
    (2,141
    )
    
    
    (2,521
    )
    
    
    (118
    )
    
    
    (1
    )
    
    
    (1
    )Income tax and social
contribution benefit
    
    
    (11,568
    )
    
    
    18,676
    
    
    
    (30,244
    )
    
    
    (162
    )
    
    
    (2
    )
    
    
    5Net income (loss)
    
    
    16,470
    
    
    
    61,240
    
    
    
    (44,770
    )
    
    
    (73
    )
    
    
    3
    
    
    
    15
 Net Operating Revenues of Services Rendered
   Cost of Services Rendered
   37




---



##### Table of Contents



Selling, General and Administrative Expenses
  Net Financial Expenses
   Income Tax and Social Contribution Benefit
   Net Income (Loss)
  Discontinued Operations
  38




---



##### Table of Contents



Discontinued operationsYear ended December 31,(in thousands ofreais)2004
    
    
    2003Net operating revenues of services rendered
    
    
    
    
    
    
    10,181Cost of services rendered
    
    
    
    
    
    
    (32,038
    )Selling, general and administrative expenses
    
    
    (4,937
    )
    
    
    (2,344
    )Other operating expenses, net
    
    
    (47
    )
    
    
    (36,583
    )Operating loss
    
    
    (4,984
    )
    
    
    (60,784
    )Net financial expenses
    
    
    (9,663
    )
    
    
    (29,119
    )Income tax and social contribution benefit
    
    
    4,980
    
    
    
    30,567Loss
    
    
    (9,667
    )
    
    
    (59,336
    )
    Liquidity and Capital Resources
  
    
    Net cash flows from continuing operating activities increased R$148,502 thousand,
representing a growth of 208.0%, from R$71,387 thousand in 2004 to R$219,889 thousand in
2005. This increase was related primarily to growth of R$74,437 thousand of net income,
related to the growth in volume of a new portfolio of services rendered to old clients and
new clients and the increase of R$19,316 thousand of cash generated by advance of receipts
from our operations rendered to clients in 2005. There was an increase of R$19,739
thousand in current liabilities payable to suppliers due to negotiations of extension of
maturity dates.
    
    Net cash flows used in investing activities increased R$8,173 thousand, representing a
growth of 8.0% from R$102,670 thousand in 2004 to R$110,843 thousand in 2005. This
increase includes the purchase of property and equipment in the amount of R$26,026 thousand
and capital expenditures to support the growth of our operations, partially offset by the
sale of some unused assets in the amount of R$17,853 thousand. Our operations continue to
require capital expenditures mainly for capacity expansion due to business growth, as well
as for technology upgrades and the replacement of obsolete assets.
    
    Net cash flows from financing activities decreased R$78,822 thousand, representing a
reduction of 69.1% from R$114,112 thousand in 2004 to R$35,290 thousand in 2005. One of
the main reasons for such decrease in our net cash flows is explained by the fact that most
of our net cash flows in 2004 resulted from a R$90,000 thousand increase in our capital and reserves
provided by TNL in that year while there was no such similar capital increase for 2005. In
2005, there was an increase of R$32,062 thousand of long-term
 39




---



##### Table of Contents



liabilities mainly due to the
installments of property and equipment financed by financial institutions to support our
operational growth. Moreover, in 2005 we distributed R$1,359 thousand in dividends with
respect to the fiscal year ended December 31, 2004, as approved
at our Annual Shareholders
Meeting held in April 2005. At our Annual Shareholders Meeting held in April 2006, our
shareholders approved the payment of R$13,432 thousand in dividends with respect to our
fiscal year ended December 31, 2005, which was paid out to our shareholders in June 2006.
We do not have any debt obligations or indebtedness in the form of guaranteed or
unguaranteed, secured or unsecured, or indirect contingent indebtedness.
  Contractual Obligations at December 31, 2005
 Payments due by periodLess than
    
    
    
    
    
    
    
    
    
    
    More thanContractual obligations
    
    Total
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 years(in thousands ofreais)Capital (finance) lease
    
    
    39,539
    
    
    
    11,625
    
    
    
    20,752
    
    
    
    7,162
    
    
    
    Operating lease (facilities)*
    
    
    64,460
    
    
    
    17,413
    
    
    
    29,474
    
    
    
    17,572
    
    
    
    Total
    
    
    103,999
    
    
    
    29,038
    
    
    
    50,226
    
    
    
    24,734
    
    
    
    
 
 *
    
    Most of our facilities lease agreements can be terminated early, with one to six months
prior notice, subject to a penalty equivalent to three times the monthly rent.  Recent Developments
  
 Item 6. Directors, Senior Management and Employees
 Conselho de Administração Diretoria
 Board of Directors
   40




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##### Table of Contents



(i)
    
    holders of preferred shares representing at least 10% of the total capital
stock of a company may appoint one member to the Board of Directors and its respective
alternate;(ii)
    
    holders of common shares representing at least 15% of the total common shares
with voting rights may appoint one member to the Board of Directors and its respective
alternate; and(iii)
    
    if items (i) and (ii) above do not occur, holders of common shares and holders
of preferred shares representing together more than 10% of the total capital of a
company may jointly appoint one member to the Board of Directors and its respective
alternate.
  voto múltiplo
    Name
    
    PositionCarlos Francisco Ribeiro Jereissati
    
    ChairmanOtavio Marques de Azevedo
    
    DirectorLuiz Eduardo Falco Pires Corrêa
    
    DirectorRonaldo Iabrudi dos Santos Pereira
    
    DirectorCarlos Medeiros Silva Neto
    
    DirectorEduardo
Klingelhoefer de Sá
    
    DirectorJosé Luís Prola Salinas
    
    DirectorSergio Mamede Rosa do Nascimento
    
    DirectorIsabel S. Ramos Kemmelmeier
    
    Director
  Carlos Francisco Ribeiro Jereissati. Associação Brasileira de Shopping Centers
 41




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##### Table of Contents



Otavio Marques de Azevedo. Pontifícia Universidade Católica
 Luiz Eduardo Falco Pires Corrêa. Instituto Tecnológico da Aeronáutica Fundação Getúlio Vargas
 Ronaldo Iabrudi dos Santos Pereira. Fundação Dom Cabral Université de Paris
 Carlos Medeiros Silva Neto. GP
Tecnologia Mutimercado Fundos de Investimentos em Quotas de Fundos de Investimento em Títulos e
Valores Mobiliários
 Eduardo
Klingelhoefer de Sá. Universidade Federal do Rio de Janeiro
 José Luís Prola Salinas. Fundação Banco do Brasil Santos
Brasil Caixa de Previdência dos Funcionários do Banco do Brasil Fundação Educacional do Oeste de Santa Catarina Universidade Federal do Rio Grande do Sul École dês Hautes Études
Commerciales
 Sergio Mamede Rosa do Nascimento.
 42




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##### Table of Contents



Universidade de Franca Instituto Brasileiro de Mercado
de Capitais
 Isabel S. Ramos Kemmelmeier Pontifícia Universidade Católica Instituto Brasileiro de Mercado de Capitais (IBMEC-RJ).
 Executive Officers
   Name
    
    PositionFrancis James Leahy Meaney
    
    President (CEO)Michel Neves Sarkis
    
    Chief Financial Officer (CFO)/Investor Relations OfficerHumberto
Aparecido Bortoletto
    
    OfficerJosé Luiz Cardoso Albano
    
    Officer
 Francis James Leahy Meaney.
 Michel Neves Sarkis. Universidade Federal do Espírito Santo Faculdade Costa Braga Pontifícia Universidade
Católica
 José Luiz Cardoso Albano. Faculdade Cândido Mendes Universidade Federal de Minas Gerais Fundação Getúlio
Vargas
 43




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##### Table of Contents



Humberto Bortoletto. Fundação Getúlio Vargas Instituto Municipal de Ensino Superior de São Caetano do Sul
 Fiscal Council ( Conselho Fiscal )
 Conselho Fiscal
     Name
    
    PositionRicardo Scalzo
    
    Regular MemberSergio Bernstein
    
    Regular MemberItamaury Teles de Oliveira
    
    Regular MemberAllan Kardec
de Melo Ferreira
    
    Regular MemberMarcio Luciano Mancini
    
    Regular Member
 Ricardo Scalzo.
 44




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##### Table of Contents



Universidade Federal do Rio
de Janeiro
 Sergio Bernstein. Universidade Federal do Rio de Janeiro
 Itamaury Teles de Oliveira Universidade Federal de Minas Gerais Universidade Federal de Minas Gerais Universidade do Distrito Federal Universidade Federal de Minas Gerais Fundação Dom Cabral Universidade Federal de Minas
Gerais Universidade de Juiz de Fora
 Allan Kardec de Melo Ferreira. Departamento
de Estrada de Rodagem de Minas Gerais Empresa de
Transporte e Trânsito de Belo Horizonte Departamento Nacional de Estradas de Rodagem Pontifícia Universidade Católica de Minas Gerais Fundação Centro de Comércio Exterior Fundação Dom Cabral Construtora Andrade Gutierrez
 Marcio
Luciano Mancini. Fundação Getúlio
Vargas
 Compensation of Directors, Executive Officers and Fiscal Council Members
  Share Ownership
   45




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##### Table of Contents



Employees
  City/State
    
    Employees
    
    TraineesRio de Janeiro/RJ
    
    
    12,962
    
    
    
    61Niterói/RJ
    
    
    4,444
    
    
    
    5São Paulo/SP
    
    
    9,614
    
    
    
    42Salvador/BA
    
    
    6,921
    
    
    
    149Recife/PE
    
    
    2,527
    
    
    
    4Fortaleza/CE
    
    
    5,721
    
    
    
    78Belo Horizonte/MG
    
    
    6,662
    
    
    
    8Porto Alegre/RS
    
    
    570
    
    
    
    1Brasília/DF
    
    
    133
    
    
    
    Total
    
    
    49,554
    
    
    
    348
  Federação Interestadual
dos Trabalhadores em Telecomunicações
   Employee Benefits
  Career and Salary Plan
    46




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##### Table of Contents



Outsourcing
   Workplace Health and Safety
 Programa de Controle Médico de Saúde Ocupacional Programa de Prevenção de Riscos Ambientais Comissão
Interna de Prevenção de Acidentes
 
 Item 7. Major Shareholders and Related Party Transactions
 Major Shareholders
   Number of
    
    Percentage ofcommon
    
    outstandingShareholders
    
    shares owned
    
    common sharesTelemar Participações S.A.
    
    
    68,504,197
    
    
    
    53.78Caixa de Previdência dos Funcionários do Banco
do Brasil  PREVI
    
    
    6,754,850
    
    
    
    5.30Total
    
    
    75,259,047
    
    
    
    59.08
 47




---



##### Table of Contents



Number of
    
    
    Percentage ofcommon
    
    
    outstandingTelemar Participações shareholder
    
    shares owned
    
    
    common sharesBNDES Participações S.A.  BNDESPar
    
    
    858,225,280
    
    
    
    25.000Fiago Participações S.A.
    
    
    683,147,324
    
    
    
    19.900Lexpart Participações S.A.
    
    
    352,730,590
    
    
    
    10.275L.F. Tel S.A.
    
    
    352,730,590
    
    
    
    10.275Asseca Participações S.A.
    
    
    352,730,590
    
    
    
    10.275AG Telecom Participações S.A.
    
    
    352,730,590
    
    
    
    10.275Brasil Veículos Companhia de Seguros
    
    
    171,645,056
    
    
    
    5.000Brasil Cap Capitalização S.A.
    
    
    171,645,056
    
    
    
    5.000Fundação Atlântico de Seguridade Social
    
    
    137,316.044
    
    
    
    4.000Total
    
    
    3,432,901,120
    
    
    
    100.000
 Telemar Participações Shareholders Agreements
    Holders of ADSs
  48




---



##### Table of Contents



Related Party Transactions
  Telemar/Contax Contracts
      Facilities Lease Agreements
  Sale of TNext Building
  49




---



##### Table of Contents



Transactions with our Board of Directors or Executive Officers
   
 Item 8. Financial Information
 Consolidated Statements and Other Financial Information
  Legal Proceedings
 General
  At December 31,2005
    
    
    2004
    
    
    2003(in thousands ofreais)NatureLabor
    
    
    24,001
    *
    
    
    8,576
    *
    
    
    747Tax
    
    
    4,852
    
    
    
    1,966
    
    
    
    1,818Civil
    
    
    64
    
    
    
    314
    
    
    
    260Total
    
    
    28,917
    
    
    
    10,856
    
    
    
    2,825
 
 *
    
    Includes R$7,020 thousand provision related to former Inovação employees at
December 31, 2005 and December 31, 2004 and R$6,067 thousand provisions related to
former Tmar employees at December 31, 2005. Labor
 Judicial
 Ministério Público
do Trabalho
  50




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##### Table of Contents



As of December 31,2005(in thousands ofreais)Types of risk*Probable
    
    
    24,001Possible/Remote
    
    
    51,541Total
    
    
    75,542
 
 *
    
    The types of risk have been determined by our management, based on the opinion
of external legal counsel and existing legal precedents.   Administrative Proceedings
    Termo de Ajuste de Conduta
 51




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Tax
 Service Tax (ISS)  Municipality of Niterói
    Civil Litigation
   Policy on Dividend Distribution
  Significant Changes
  52




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Item 9. The Offer and Listing
 Information Regarding the Price History of the Stock to Be Offered or Listed
   Reaisper 1,000Preferred SharesHigh
    
    Low20053rd Quarter
    
    
    1.58
    
    
    
    1.254th Quarter
    
    
    2.86
    
    
    
    1.3920061st Quarter
    
    
    3.20
    
    
    
    2.50January
    
    
    3.20
    
    
    
    2.83February
    
    
    3.14
    
    
    
    2.90March
    
    
    2.99
    
    
    
    2.50April
    
    
    2.90
    
    
    
    2.26May
    
    
    2.45
    
    
    
    1.64June (through June 12, 2006)
    
    
    1.99
    
    
    
    1.77
 
 Source: Bloomberg
  U.S. dollars per ADSHigh
    
    Low20053rd Quarter
    
    
    0.75
    
    
    
    0.484th Quarter
    
    
    1.24
    
    
    
    0.5520061st Quarter
    
    
    1.40
    
    
    
    1.05January
    
    
    1.40
    
    
    
    1.15February
    
    
    1.39
    
    
    
    1.20March
    
    
    1.35
    
    
    
    1.05April
    
    
    1.33
    
    
    
    1.02May
    
    
    1.15
    
    
    
    0.70June (through June 12, 2006)
    
    
    0.83
    
    
    
    0.71
 
 Source: The Bank of New York ADR Inform
 Trading on the Brazilian Stock Exchanges
  53




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Sistema de Negociação Assistida por Computador Sistema Electrônico de Negociação Nacional
   Companhia Brasileira de Liquidação e Custódia S.A.
    54




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Regulation of the Brazilian Securities Market
 Conselho
Monetário Nacional
 companhia aberta companhia fechada
     Disclosure Requirements
   
    
    establish the concept of a material fact that gives rise to reporting requirements.
Material facts include decisions made by the controlling shareholders, resolutions of the
general shareholders meeting of
 55




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shareholders and of management of the company, or any other facts related to the companys
business (whether occurring within the company or otherwise somehow related thereto) that
may influence the price of its publicly traded securities, or the decision of investors to
trade such securities or to exercise any of such securities underlying rights;
    
    specify examples of facts that are considered to be material, which include, among
others, the execution of shareholders agreements providing for the transfer of control,
the entry or withdrawal of shareholders that maintain any managing, financial,
technological or administrative function with or contribution to the company, and any
corporate restructuring undertaken among related companies;
    
    require the officer of investor relations, controlling shareholders, other officers,
directors, members of the audit committee and other advisory boards to disclose material
facts;
    
    require simultaneous disclosure of material facts to all markets in which the
corporations securities are admitted for trading;
    
    require the acquirer of a controlling stake in a corporation to publish material facts,
including its intentions as to whether or not to de-list the corporations shares, within
one year;
    
    establish rules regarding disclosure requirements in the acquisition and disposal of a
material stockholding stake; and
    
    forbid the use of insider information.
 
 Item 10. Additional Information
 Memorandum and Articles of Association
  Organization
 Junta Comercial
  Qualification of Directors
  Allocation of Net Income and Distribution of Dividends
  56




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
    
    5% to a legal reserve, not to exceed 20% of the paid-in capital of Contax;
    
    at least 25% of adjusted net income against payment of dividends. As required by
Brazilian corporate law, such amount will be increased if required to satisfy payment of
dividends of preferred shares; and
    
    respecting the entry in the reserve for profits to be realized, the remaining net income
should be allocated in the reserve for expansion for working capital purposes. The total
amount registered in the reserve for expansion together with the amount enrolled in profit
reserves is limited to the total amount recorded as paid-in capital.
   Shareholders Meetings
   Valor
Econômico Diário Oficial do Estado do Rio de Janeiro
    57




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Voting Rights
    
    
    the creation of preferred shares or the increase of an existing class of shares without
preserving their proportion with other classes of shares, except as already authorized by
our by-laws;
    
    a change of a preference, privilege or redemption or amortization provision of any class
of preferred shares; and
    
    the creation of a new class of preferred shares that has a preference, privilege or redemption or amortization provision which is superior to those of existing preferred shares.
   
    
    a reduction of the mandatory dividend set forth in our by-laws;
    
    the approval of a merger, spin-off or consolidation;
    
    our participation in a group of companies, or grupo de sociedades, the management of
which is coordinated through contractual relationships and equity ownership, as defined
under Brazilian corporate law;
    
    a change in our business purpose;
    
    the creation of founders shares (partes
beneficiárias);
    
    the cessation of our liquidation process; and
    
    approval of our dissolution.
  
    
    amend the by-laws, including changing the rights of holders of common shares;
    
    elect or dismiss members of the Board of Directors or Fiscal Council, if in operation;
 58




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##### Table of Contents




    
    review the yearly accounts prepared by management and accept or reject managements
financial statements, and decide on the allocation of: (i) net profits for payment of the
mandatory dividend, and (ii) funds to the various reserve accounts;
    
    authorize the issuance of debentures and founders
shares (partes beneficiárias), except that the Board of
Directors is empowered to approve the issuance of simple debentures that are not
convertible into shares and have no real guarantee;
    
    suspend the rights of shareholders who have not fulfilled their obligations as imposed
by law or by the by-laws;
    
    accept or reject the valuation of assets contributed by a shareholder in consideration
for issuance of capital stock;
    
    pass resolutions authorizing: (i) the reorganization of our legal form; (ii) our
merger, spin-off, dissolution or liquidation; and (iii) the election or dismissal of
liquidators and the inspection of their accounts; and
    
    authorize our management to file for bankruptcy or request concordata(a reorganization
process similar to Chapter 11 proceedings under U.S. bankruptcy law).
 Interested Party Transactions
   Withdrawal Rights
    
    
    the creation of preferred shares or an increase of an existing class of shares without
preserving their proportion with other classes of shares, except as already authorized in
our by-laws;
 59




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##### Table of Contents




    
    a change in the preferences, privileges, or redemption or amortization provisions of any
class of preferred shares; or
    
    the creation of a new class of preferred shares that has a preference, privilege, or
redemption or amortization provision that is superior to those of existing preferred shares.
  
    
    a reduction of the mandatory dividend set forth in our by-laws;
    
    the approval of our consolidation or merger into another company;
    
    our participation in a grupo de sociedades;
    
    a change in our business purpose;
    
    our spin-off, if such spin-off implies (a) a change in our business purpose (except if
the spun-off assets revert to a company whose main purpose is the same as ours), (b) a
reduction of the mandatory dividend set forth in our by-laws, or (c) our participation in a
grupo de sociedades; or
    
    the acquisition of control of another company at a price which exceeds certain limits
set forth in Brazilian corporate law.
 grupo de sociedades
  fato relevante
   60




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Liquidation Procedures
  Form and Transfer of Securities
    Transfer of Control
   Amendments
  Disclosure of Shareholder Ownership
  61




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Material Contracts
    Exchange Controls and Other Limitations Affecting Shareholders
     62




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
    
    appoint at least one representative in Brazil with powers to take action relating to the
foreign investment;
    
    complete the appropriate foreign investor registration forms;
    
    obtain registration as a foreign investor with the CVM; and
    
    register their foreign investment with the Brazilian Central Bank.
       63




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Registered Capital
   Taxation
   Brazilian Tax Considerations
  Taxation of Dividends
  64




---



##### Table of Contents



Distribution of Interest on Capital
     Taxation of Gains Outside Brazil
  Taxation of Gains in Brazil
 65




---



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Taxation of Gains in Brazil
        Other Brazilian Taxes
  Imposto sobre Operações Financeiras
 66




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##### Table of Contents



IOF/Títulos IOF/Títulos
 Contribuição Provisória sobre a Movimentação Financeira
 Material United States Federal Income Tax Considerations
    Treatment of ADSs
  Receipt of Distributions
  67




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Sale or Exchange of Shares
  Information Reporting and Backup Withholding
  68




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##### Table of Contents



Non-U.S. Shareholders
  U.S. SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE APPLICATION OF U.S.
FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS, AS WELL AS ANY CONSEQUENCES OF THE
OWNERSHIP AND DISPOSITION OF SHARES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION.
 Documents On Display
 www.sec.gov
 
 Item 11. Quantitative and Qualitative Disclosures About Market Risk
 real
 
 Item 12. Description of Securities Other Than Equity Securities
  69




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PART II
 
 Item 13. Defaults, Dividend Arrearages and Delinquencies
  
 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
  
 Item 15. Controls and Procedures
    
 Item 16. [Reserved]
 
 Item 16A. Audit Committee Financial Expert
 Conselho Fiscal
 
 Item 16B. Code of Ethics
  70




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Item 16C. Principal Accountant Fees and Services
  Total Fees2004
    
    2005(in thousands ofreais)Audit Fees(1)
    
    
    88
    
    
    
    260Audit-Related Fees(2)
    
    
    
    
    
    
    267All Other Fees(3)
    
    
    
    
    
    
    240
 
 (1)
    
    Audit Fees for the years ended December 31, 2005 and 2004 consist of fees billed for
professional services rendered for the audits and reviews of the consolidated financial
statements of the Company and other services normally provided in connection with statutory
and regulatory filings.(2)
    
    Audit-Related Fees for the years ended December 31, 2005 and 2004 consist of fees billed for
assurance and related services that are traditionally performed by independent accountants
that are reasonably related to the performance of the audit or review of the Companys
financial statements. These services include consulting in connection with accounting and
reporting standards and services related to internal control reviews.(3)
    
    All Other Fees include advisory fees for the year ended December 31, 2005 billed for advisory
services rendered during the Companys registration process with the SEC in 2005 as a result
of the Companys spin-off to the shareholders of TNL. Pre-approval policies and procedures
  
 Item 16D. Exemptions from the Listing Standards for Audit Committees
  
 Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  71




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PART III
 
 Item 17. Financial Statements
  
 Item 18. Financial Statements
  
 Item 19. Exhibits
 No.
    
    Description1.1
    
    By-laws of Contax Holding as of November 30, 2004. (Incorporated by
reference to Exhibit 1.1 to the Companys Registration Statement on
Form 20-F filed on August 10, 2005.)2.1
    
    Deposit Agreement, dated as of August 12, 2005 among Contax Holding,
The Bank of New York, as Depositary, and Owners and Beneficial Owners
of American Depositary Receipts issued thereunder. (Filed herewith).4.1
    
    Services Agreement, dated November 30, 2004, among Telemar Norte
Leste S.A, TNL PCS S.A. and TNL Contax S.A. (Incorporated by
reference to Exhibit 4.1 to the Companys Registration Statement on
Form 20-F filed on August 10, 2005.)4.2
    
    Contact Center Services Agreement, dated April 1, 2004, between
Orbitall Serviços e Processamento de Informações Comerciais LTDA. and
Inovação Contact Center Serviços de Contatos Telefônicos Ltda.
(Incorporated by reference to Exhibit 4.2 to the Companys
Registration Statement on Form 20-F filed on August 10, 2005.)4.3
    
    Amendment to Services Agreement, dated May 28, 2004, between Orbitall
Serviços e Processamento de Informações Comerciais LTDA. and Inovação
Contact Center Serviços de Contatos Telefônicos Ltda. (Incorporated
by reference to Exhibit 4.3 to the Companys Registration Statement
on Form 20-F filed on August 10, 2005.)4.4
    
    Amendment to the Contact Center Service Agreement, dated September
27, 2004, between Orbitall Serviços e Processamento de Informações
Comerciais LTDA. and TNL Contax S.A. (Incorporated by reference to
Exhibit 4.4 to the Companys Registration Statement on Form 20-F
filed on August 10, 2005.)4.5
    
    Amendment to Temporary Service Agreement and Other Matters, dated
September 27, 2004, between Orbitall Serviços e Processamento de
Informações Comerciais LTDA. and TNL Contax S.A. (Incorporated by
reference to Exhibit 4.5 to the Companys Registration Statement on
Form 20-F filed on August 10, 2005.)4.6
    
    First Amendment, dated December 29, 2004, to the Services Agreement
between Telemar Norte Leste S.A., TNL PCS S.A. and TNL Contax S.A.
dated November 30, 2004. (Filed herewith).4.7
    
    Second Amendment, dated October 18, 2005, to the Services Agreement
between Telemar Norte Leste S.A., TNL PCS S.A. and TNL Contax S.A.
dated November 30, 2004. (Filed herewith).8.1
    
    List of Subsidiaries. (Filed herewith).11.1
    
    Code of Ethics of Contax Holding. (Incorporated by reference to
Exhibit 11.1 to the Companys Registration Statement on Form 20-F
filed on August 10, 2005.)12.1
    
    Certification of the Chief Executive Officer of the Company, pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith).
 72




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##### Table of Contents



No.
    
    Description12.2
    
    Certification of the Chief Financial Officer of the Company, pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith).13.1
    
    Certifications of the Chief Executive Officer and the Chief Financial
Officer of the Company, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. (Furnished herewith).




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##### Table of Contents



SIGNATURES

Contax Participações S.A. hereby certifies that it meets all of the
requirements for filing on Form 20-F and that it has duly caused and authorized
the undersigned to sign this annual report on its behalf.

CONTAX PARTICIPAÇÕES S.A.



| |                                                                                                   
| | --------------------------------------------------------------------------------------------------
| | By: /s/ Francis James Leahy Meaney
Name: Francis James Leahy Meaney
Title: Chief Executive Officer

Dated: June 28, 2006





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PageReports of Independent Registered Public Accounting Firm
    
    
    F-1Consolidated Balance Sheets as of December 31, 2005 and 2004
    
    
    F-2Consolidated and Combined Statements of Operations for the Years ended December 31, 2005, 2004 and 2003
    
    
    F-3Consolidated and Combined Statements of Cash Flows for the Years ended December 31, 2005, 2004 and 2003
    
    
    F-4Consolidated and Combined Statements of Changes in Shareholder's Equity for the Years ended December 31, 2005, 2004 and 2003
    
    
    F-5Notes to Consolidated Financial Statements
    
    
    F-6




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##### Table of Contents



Report of Independent Registered
Public Accounting Firm




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##### Table of Contents



Contax Participações S.A.
 Consolidated Balance Sheets
(Expressed in thousands of Brazilian Reais)
 As of December 31,2005
    
    
    2004Current assetsCash and cash equivalents
    
    
    229,488
    
    
    
    85,152Trade accounts receivable, netRelated parties
    
    
    1,217
    
    
    
    8,163Unrelated parties
    
    
    31,626
    
    
    
    30,876Deferred taxes
    
    
    13,736
    
    
    
    15,693Recoverable taxes
    
    
    32,021
    
    
    
    6,659Prepaid expenses
    
    
    2,764
    
    
    
    2,498Others
    
    
    1,357
    
    
    
    1,489Current assets from discontinued operations
    
    
    
    
    
    
    17,211Total current assets
    
    
    312,209
    
    
    
    167,741Property and equipment, net
    
    
    265,379
    
    
    
    182,936Other assetsDeferred taxes
    
    
    25,880
    
    
    
    47,078Receivable from Orbitall
    
    
    7,020
    
    
    
    7,020Receivable from Telemar
    
    
    6,067Other non-current assets
    
    
    3,911
    
    
    
    1,277Total other assets
    
    
    42,878
    
    
    
    55,375Total assets
    
    
    620,466
    
    
    
    406,052Current liabilitiesSuppliers
    
    
    52,787
    
    
    
    33,048Payroll and related accruals
    
    
    101,267
    
    
    
    64,783Taxes other than on income
    
    
    9,448
    
    
    
    6,806Taxes on income
    
    
    27,231
    
    
    
    4,493Current-portion of long-term debt
    
    
    11,625
    
    
    
    1,697Other current liabilities
    
    
    722
    
    
    
    462Total current liabilities
    
    
    203,080
    
    
    
    111,289Long-term liabilitiesProvisions for contingencies
    
    
    28,917
    
    
    
    10,856Long-term liabilities
    
    
    27,914
    
    
    
    3,233Total long-term liabilities
    
    
    56,831
    
    
    
    14,089Shareholders equityPreferred shares  254,747,800 issued, non-par-value shares
(2004 - 253,202,318)
    
    
    149,249
    
    
    
    149,249Common shares  127,373,917 issued, non-par-value shares
(2004 - 126,601,159)
    
    
    74,624
    
    
    
    74,624Additional paid-in capital
    
    
    50,000
    
    
    
    50,000Appropriated retained earnings
    
    
    15,773
    
    
    
    6,013Unappropriated retained earnings
    
    
    70,909
    
    
    
    788Total shareholders equity
    
    
    360,555
    
    
    
    280,674Total liabilities and shareholders equity
    
    
    620,466
    
    
    
    406,052
 The accompanying notes are an integral part of these financial statements. F-2




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Contax Participações S.A.
 Consolidated and Combined Statements of Operations
(Expressed in thousands of Brazilian Reais)
 Years ended December 31,2005
    
    
    2004
    
    
    2003Net operating revenue from services rendered
    
    
    1,044,787
    
    
    
    654,616
    
    
    
    410,690Cost of services rendered
    
    
    (855,907
    )
    
    
    (574,071
    )
    
    
    (334,751
    )Gross profit
    
    
    188,880
    
    
    
    80,545
    
    
    
    75,939Operating expensesSelling, general and administrative
    
    
    (59,742
    )
    
    
    (46,790
    )
    
    
    (30,506
    )Other operating expenses, net
    
    
    (12,098
    )
    
    
    (1,055
    )
    
    
    (728
    )Operating income before interest
    
    
    117,040
    
    
    
    32,700
    
    
    
    44,705Financial income (expenses), net
    
    
    14,352
    
    
    
    (4,662
    )
    
    
    (2,141
    )Operating income, net
    
    
    131,392
    
    
    
    28,038
    
    
    
    42,564Non-operating income, net
    
    
    235Operating income from continuing operations before
income tax and social contribution
    
    
    131,627
    
    
    
    28,038
    
    
    
    42,564Income tax and social contribution benefit (provision)
    
    
    (50,387
    )
    
    
    (11,568
    )
    
    
    18,676Income from continuing operations
    
    
    81,240
    
    
    
    16,470
    
    
    
    61,240Discontinued operations (Note 16)Loss from operations of discontinued components
    
    
    
    
    
    
    (14,647
    )
    
    
    (89,903
    )Income tax benefit
    
    
    
    
    
    
    4,980
    
    
    
    30,567Loss on discontinued operations
    
    
    
    
    
    
    (9,667
    )
    
    
    (59,336
    )Net income and comprehensive income for the year
    
    
    81,240
    
    
    
    6,803
    
    
    
    1,904Earnings per shares (in reais)Common shares  Basic and DilutedIncome from continuing operations
    
    
    0.21
    
    
    
    0.04
    
    
    
    0.16Net income for the year
    
    
    0.21
    
    
    
    0.02
    
    
    
    0.00Weighted average common shares outstanding
    
    
    127,373,917
    
    
    
    127,373,917
    
    
    
    127,373,917Preferred shares  Basic and DilutedIncome from continuing operations
    
    
    0.21
    
    
    
    0.04
    
    
    
    0.16Net income for the year
    
    
    0.21
    
    
    
    0.02
    
    
    
    0.00Weighted average preferred shares outstanding
    
    
    254,747,800
    
    
    
    254,747,800
    
    
    
    254,747,800
  F-3




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Contax Participações S.A.
 Consolidated and Combined Statements of Cash Flows
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 Year ended December 31,2005
    
    
    2004
    
    
    2003Operating activities:Net income for the year
    
    
    81,240
    
    
    
    6,803
    
    
    
    1,904Adjustments to reconcile net income to cash provided by
operating activities:Depreciation and amortization
    
    
    45,846
    
    
    
    25,347
    
    
    
    15,695Discontinued operation
    
    
    
    
    
    
    9,667
    
    
    
    59,336Contingencies and other provisions
    
    
    18,061
    
    
    
    1,011
    
    
    
    713Loss on permanent asset disposal
    
    
    (235
    )Deferred tax asset, net
    
    
    23,155
    
    
    
    (5,913
    )
    
    
    (22,926
    )(Increase) decrease in accounts receivable
    
    
    6,196
    
    
    
    (13,120
    )
    
    
    (895
    )(Increase) decrease in other current assets
    
    
    (25,496
    )
    
    
    (774
    )
    
    
    2,299Increase in other non-current assets
    
    
    (8,701
    )
    
    
    (830
    )
    
    
    (354
    )Increase in payroll and related accruals
    
    
    36,484
    
    
    
    23,075
    
    
    
    20,542Increase in accounts payable and accrued expenses
    
    
    2,642
    
    
    
    11,602
    
    
    
    10,847Increase (decrease) in other current liabilities
    
    
    18,302
    
    
    
    (510
    )
    
    
    895Increase (decrease) in accrued interest
    
    
    (343
    )
    
    
    7,574Increase in recoverable taxes
    
    
    22,738
    
    
    
    7,455
    
    
    
    216Net cash provided by continuing operating activities
    
    
    219,889
    
    
    
    71,387
    
    
    
    88,272Cash used by discontinued operation
    
    
    
    
    
    
    (30,945
    )
    
    
    (26,449
    )Net cash provided by operating activities
    
    
    219,889
    
    
    
    40,442
    
    
    
    61,823Investing activities:Capital expenditure for property and equipment
    
    
    (128,696
    )
    
    
    (102,670
    )
    
    
    (42,224
    )Capital expenditure for discontinued operation
    
    
    
    
    
    
    
    
    
    
    (2,455
    )Proceeds from disposal of property and equipment
    
    
    642Proceeds from disposal of property and equipment -
discontinued operation
    
    
    17,211
    
    
    
    
    
    
    
    7,350Cash used in investing activities
    
    
    (110,843
    )
    
    
    (102,670
    )
    
    
    (37,329
    )Financing activities:Payment of principal on intercompany loans
    
    
    
    
    
    
    (98,087
    )
    
    
    (236,488
    )Current portion of long-term debt
    
    
    11,625
    
    
    
    1,697Long-term loans, net of payment
    
    
    25,024
    
    
    
    2,890Intercompany loans obtained
    
    
    
    
    
    
    117,612
    
    
    
    240,734Payment of dividends
    
    
    (1,359
    )Capital increases
    
    
    
    
    
    
    90,000
    
    
    
    160Net cash provided by financing activities
    
    
    35,290
    
    
    
    114,112
    
    
    
    4,406Increase in cash and cash equivalents
    
    
    144,336
    
    
    
    51,884
    
    
    
    28,900Cash and cash equivalents at beginning of year
    
    
    85,152
    
    
    
    33,268
    
    
    
    4,368Cash and cash equivalents at end of year
    
    
    229,488
    
    
    
    85,152
    
    
    
    33,268Supplemental cash flow information:Income tax and social contribution paid
    
    
    27,230
    
    
    
    6,372Interest paid
    
    
    3,938
    
    
    
    22,804
    
    
    
    10,784Non-cash
transactions:Intercompany loan paid with current assets from
discontinued operations (account receivable)
    
    
    
    
    
    
    (76,468
    )Capitalization of intercompany loans
    
    
    
    
    
    
    57,678
    
    
    
    120,000
 The accompanying notes are an integral part of these financial statements. F-4




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Contax Participações S.A.
 Consolidated and Combined Statements
of Changes in Shareholders Equity
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 UnappropriatedRetainedNumber of shares outstanding
    
    
    Paid-in Capital
    
    
    Appropriated
    
    
    EarningsPreferred
    
    
    Common
    
    
    Additional
    
    
    Retained
    
    
    (AccumulatedPreferred
    
    
    Common
    
    
    Total
    
    
    Shares
    
    
    Shares
    
    
    Paid-in Capital
    
    
    Earnings
    
    
    losses)
    
    
    TotalAt December 31, 2002
    
    
    333,333
    
    
    
    166,667
    
    
    
    500,000
    
    
    
    82,770
    
    
    
    41,385
    
    
    
    
    
    
    
    46
    
    
    
    (120,072
    )
    
    
    4,129Paid-in capital increase
    
    
    10,666,656
    
    
    
    5,333,347
    
    
    
    16,000,003
    
    
    
    80,107
    
    
    
    40,053
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    120,160Net income for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,904
    
    
    
    1,904At December 31, 2003
    
    
    10,999,989
    
    
    
    5,500,014
    
    
    
    16,500,003
    
    
    
    162,877
    
    
    
    81,438
    
    
    
    
    
    
    
    46
    
    
    
    (118,168
    )
    
    
    126,193Elimination for combined
financial statements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (162,767
    )
    
    
    (81,383
    )
    
    
    
    
    
    
    (46
    )
    
    
    118,166
    
    
    
    (126,030
    )Paid-in capital increase
    
    
    242,202,329
    
    
    
    121,101,145
    
    
    
    363,303,474
    
    
    
    149,139
    
    
    
    74,569
    
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    273,708Net income for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,803
    
    
    
    6,803Appropriation of net income to:Legal reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    377
    
    
    
    (377
    )Unrealized earnings reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,636
    
    
    
    (5,636
    )At December 31, 2004
    
    
    253,202,318
    
    
    
    126,601,159
    
    
    
    379,803,477
    
    
    
    149,249
    
    
    
    74,624
    
    
    
    50,000
    
    
    
    6,013
    
    
    
    788
    
    
    
    280,674Split of shares
    
    
    1,545,482
    
    
    
    772,758
    
    
    
    2,318,240Net income for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81,240
    
    
    
    81,240Appropriation of net income to:Dividends approved
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,359
    )
    
    
    (1,359
    )Legal reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,033
    
    
    
    (4,033
    )Unrealized earnings reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,727
    
    
    
    (5,727
    )At December 31, 2005
    
    
    254,747,800
    
    
    
    127,373,917
    
    
    
    382,121,717
    
    
    
    149,249
    
    
    
    74,624
    
    
    
    50,000
    
    
    
    15,773
    
    
    
    70,909
    
    
    
    360,555
  F-5




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Contax Participações S.A.
 Notes to the Consolidated and Combined Financial Statements
at December 31, 2005 and 2004
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 1
    
    Description of Business(a)
    
    OperationsContax Participações S.A. (Contax Holding) is a holding company, whose only subsidiary, TNL
Contax S.A. (TNL Contax) (together with Contax Holding, the Company), offers a variety of
integrated customer interaction solutions covering each stage of the customer lifecycle -
acquisition and sales (cross-sales and up-sales), customer care and retention, technical support
and collections. Services can be provided through a wide variety of communication channels,
including telephone, web, printed mail, e-mail, and fax.(b)
    
    Corporate Reorganization(i)
    
    Contax HoldingContax Holding was incorporated on July 31, 2000, under the name Caroaci Participações S.A., as a
result of the partial split-off of Poconé Participações S.A. Its primary functions were of a
typical holding company. Before December 2003, it was under the majority control of GP
Administradora de Ativos S.A. In December 2003, Tele Norte Leste Participações (TNL) acquired
99.9% of the share capital of Contax Holding at its fair value. Until November 2004, Contax Holding
did not conduct any operational activity and did not have any subsidiary.On November 26, 2004, the Board of Directors of TNL approved the first phase of a corporate
reorganization, including the following steps:
 
    
    Change of name from Caroaci Participações S.A. to Contax Participações S.A..
    
    The transfer to Contax Holding of 100% of the share capital of TNL Contax, representing a capital increase in
the amount of R$126,030 (accounted for at book value of TNLs investment in TNL Contax as of October 31, 2004, as
both entities are under common control).
    
    The transfer to Contax Holding of the inter-company loan between TNL and TNL Contax in the amount of R$57,678.
    
    An additional capital increase in Contax Holding made in cash in the amount of R$90,000.
 F-6




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Contax Participações S.A.
 Notes to the Consolidated and Combined Financial Statements
at December 31, 2005 and 2004
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 On December 29, 2004, an Extraordinary General Meeting of TNL approved the transfer of full share
control of Contax Participações to TNLs shareholders, without changing the number of shares,
through a reduction in its capital share with the subsequent delivery of the Contax Participações
shares to all shareholders in the same percentage participations held in TNLs capital. After
sixty days following the announcement of the approval of this corporate restructuring through the
registration of the corresponding Minutes of the Stockholders Meeting with the Board of Trade, as
there was no opposition from the creditors or any of the stockholders. In accordance with
Brazilian Corporate Law, the corporate restructuring became effective on March 9, 2005.On February 17, 2005, TNL issued a Press Release relating to its capital reduction, communicating
that Contax Management was preparing the information to be filled with the São Paulo Stock Exchange
(BOVESPA) and also with the Securities and Exchange Commission (SEC), in order to establish an
American Depositary Receipts (ADRs) Program for the preferred shares of Contax Holding to be
traded in the Over-the-counter market of the United States of America.On August 17, 2005, an Extraordinary General Meeting of Contax Participações approved the split its
outstanding shares, implying in a issue of 2,318,240 new shares (772,758 common shares and
1,545,482 preferred shares), which have been fully allocated to TNL to be subsequently distributed,
accordingly to the aforementioned Extraordinary General Meeting held on December, 29, 2004, to
TNLs shareholders, in a ratio of 1:1, thus satisfying the capital share reduction mentioned above.
As a result, Contax Participações capital of R$ 223,873,116.10, is now represented by
382,121.717 shares, of which 127,373,917 are common shares and 254,747,800 are preferred shares
(see Details in Note 16).After the registration of Contax Holding at BOVESPA and SEC, the stocks and ADRs of the Contax
Holding were transferred to the shareholders and ADRs owners of TNL, on September 1 and 6, 2005,
respectively. Trading of the securities had been initiated on August 29, 2005 at BOVESPA and on
August 31, 2005 at the over-the-counter market of the United States.
 (ii)
    
    TNL ContaxTNL Contax is the result of a merger between two operating subsidiaries of TNL, Contax S.A. and
TNext S.A. (TNext) on February 3, 2003. Contax S.A. was formed on April 3, 2000, with the main
purpose of providing contact center services and became operational in November, 2000. TNext
became operational in June, 2001 as a hosting data base, information and equipment company, in
addition to providing special back-up and website management services. In connection with the
merger, Contax S.A. had its name changed to TNL Contax S.A. In addition, TNexts net assets were
sold to Hewlett Packard (HP) and TNL on June 30, 2003 (see Note 16).
 F-7




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Contax Participações S.A.
 Notes to the Consolidated and Combined Financial Statements
at December 31, 2005 and 2004
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 (c)
    
    Acquisition of InovaçãoOn April 1, 2004, after approval by TNLs Board of Directors and as part of winning the contact
center service contract for Orbitall Serviços e Processamento de Informações Comerciais Ltda.
(Orbitall), TNL Contax acquired all the quotas issued by Inovação Contact Center Serviços de
Contatos Telefônicos Ltda. (Inovação, an Orbitall subsidiary), which were purchased for an amount
of R$ 2,754, with neither goodwill nor negative goodwill being recorded on this transaction. On
the acquisition date, Inovaçãos operations consisted of 2,031 workstations, rendering services to
major clients such as Credicard, Citibank, Itaú, Caixa Econômica Federal and Banespa.As stipulated in the purchase and sale contract for Inovaçãos quotas, signed by Orbitall and TNL
Contax, the assets and liabilities of Inovação were to be taken over by TNL Contax on July 31,
2004, at book value.The purchase price was allocated as follows:
 Current assets
    
    
    1,605Property and equipment, net
    
    
    5,236Current liabilities
    
    
    (4,087
    )2,754
 2
    
    Summary of Significant Accounting Policies(a)
    
    Basis of presentationThe Consolidated and Combined Financial Statements were prepared in accordance with accounting
practices generally accepted in the United States of America (US GAAP), which differ in certain
respects from the accounting practices adopted in Brazil that are used to prepare the Companys
statutory financial statements.As discussed in Note 1, as from November 2004, Contax Holding became the parent company of TNL
Contax. This transaction has been accounted for as a merger of entities under common control at
historical cost. In order to present the financial statements in a format, which is comparable
throughout the years and represents the business of Contax Holding and its subsidiary going
forward, the financial information of these companies was combined for all periods presented.The consolidation and combination process for the balance sheet and the statements of operations,
cash flows and shareholders equity reflects the aggregate of the balances and changes in assets,
liabilities, shareholders equity and income and expense accounts,
according to their nature, together with the elimination of inter-company transactions and
unrealized profits. Additionally, certain financial, accounting, legal and administrative costs
 F-8




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Contax Participações S.A.
 Notes to the Consolidated and Combined Financial Statements
at December 31, 2005 and 2004
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 incurred by Tele Norte Leste Participações S.A. were allocated to the Company based on the relative
volume of transactions relating to the Companys operations. The allocated costs amounted to
R$2,743, R$5,920 and R$4,888 for the years ended December 31, 2005, 2004 and 2003, respectively.
Throughout 2005, those financial, accounting, legal and administrative costs were incurred by
Contax. The Companys management believes that the method of allocation used is reasonable and
that these expenses approximate the expenses that would have been incurred had the Company operated
on a stand-alone basis.
 (b)
    
    Fair value of financial instrumentsThe carrying amounts reported in the balance sheet for cash and cash equivalents, accounts
receivable, and other receivables and accrued expenses approximate their fair values due to the
short-term nature of these financial instruments.(c)
    
    Concentration of credit risksFinancial instruments which expose the Company to concentration of credit risk consist primarily of
cash equivalents and accounts receivable. All cash equivalents are maintained in Brazil with
prime financial institutions. Management believes its credit policies are prudent and reflect
normal business terms and risk. The Company does not anticipate nonperformance by the
counterparties and, accordingly, does not require collateral.(d)
    
    Use of estimatesThe Consolidated and Combined Financial Statements include estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingencies and the amounts of
revenues and expenses. The application of this significant accounting policy often requires
judgments made by management regarding the effects of matters that are inherently uncertain. Our
estimates, including but not limited to the provisions of accounts receivables and contingent
liabilities, may differ from the actual value of such assets or liabilities.(e)
    
    Cash and cash equivalentsCash and cash equivalents are considered to be all highly liquid investments with an original
maturity to the Company of three months or less.
 F-9




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Contax Participações S.A.
 Notes to the Consolidated and Combined Financial Statements
at December 31, 2005 and 2004
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 (f)
    
    Revenue recognitionWe recognize revenues on an accrual basis at the time the services are rendered, except with
respect to some of our performance-based services, which we recognize upon measurement and
acceptance by our client. The service contract revenues are calculated based on indicators like
quantity of workstations, speaking time and on performance targets. Revenues are calculated based
on information available in our IT systems that relate to the volume of data services rendered to
each client. Revenues related to our performance-based services are calculated based on data
available in our clients IT systems. In addition, we usually allocate operations managers to
review, reconcile and discuss such indicators with clients. Some revenue adjustments are recorded
after discussions with such clients.(g)
    
    Costs and expensesThe operating costs and expenses are recorded on an accrual basis and pertain mainly to personnel
expenses.(h)
    
    Financial income and expensesFinancial income and expenses pertain mainly to interest and monetary variations resulting from
financial investments and loan contracts signed with TNL (paid-off in 2004), recorded on an accrual
basis.(i)
    
    Property and equipmentThe investment in property and equipment is stated at original cost. Property and equipment is
depreciated using the straight-line method over their estimated useful lives. The principal
depreciation rates are detailed in Note 12.Management reviews long-lived assets, primarily buildings and equipment to be held and used in the
business, for the purpose of determining and measuring impairment on a recurring basis or when
events or changes in circumstances indicate that the carrying value of an asset or group of assets
may not be recoverable. Write-down of the carrying value of assets or groups of assets is
recorded if and when appropriate.(j)
    
    Provisions for contingenciesProvisions for contingencies are established for contingent risks considered as probable losses
by the Companys management and external legal consultants. The basis, amounts involved and
nature of the main provisions are described in Note 15.
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Contax Participações S.A.
 Notes to the Consolidated and Combined Financial Statements
at December 31, 2005 and 2004
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 (k)
    
    Income tax and social contributionProvisions for deferred and payable income tax and social contribution and tax credit on temporary
differences are established at the base rate of 34%, comprised of a 25% federal income tax rate
plus a 9% social contribution rate. In accordance with SFAS 109  Accounting for Income Taxes,
the deferred tax effects of tax loss carry forwards and temporary differences and adjustments to US
GAAP have been recognized in the Consolidated and Combined Financial Statements. A valuation
allowance is made when it is more likely than not that tax assets will not be fully recoverable in
the future.Prepaid income tax and social contribution are recorded as Recoverable taxes.(l)
    
    Payroll and related accrualsAmounts relating to vacation payable to employees are provided for proportionally to the vesting
period.The subsidiary TNL Contax had signed in 2005, trough a collective working agreement, a program
denominated PR, for profit sharing to all its workers, complying with the contract signed with
FITTEL  Interstate Federation of Telecommunications Companies Workers. This profit sharing
program is based on an increase in operating result and individual performance, covering all its
workers.(m)
    
    Other current assets and liabilitiesThese are stated at known or estimated amounts, including, when applicable, accrued credits and
charges and monetary variations incurred on a pro rata basis.3
    
    Earnings per ShareFor the purpose of these financial statements, the computation of earnings per share for the years
ended December 31, 2003, 2004 and 2005 is based on the number of shares outstanding of Contax
Holding on the date of the spin-off described in Note 1(b), after the consideration of the split of
its shares approved on August 17, 2005 by the Companys Shareholders to equalize its number of
shares to the number of TNL for share distribution purpose that occurred shortly after. The
split ratio was 1.006103 for each 1 Contax Holdings share (see details in Note 1).
 F-11




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##### Table of Contents



Contax Participações S.A.
 Notes to the Consolidated and Combined Financial Statements
at December 31, 2005 and 2004
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 Since preferred and common shareholders have different dividend, voting and liquidation rights,
basic and diluted earnings per share have been calculated using the ''two-class method. The
''two-class method is an earnings allocation formula that determines earnings per share for
preferred and common stock according to the dividends to be paid as required by the Companys
by-laws and participation rights in undistributed earnings. Basic earnings per common share is
computed by reducing net income by distributable and undistributable net income available to
preferred shareholders and dividing net income available to common shareholders by the number of
common shares outstanding. Net income available to preferred shareholders is the sum of the
preferred stock dividends and the preferred shareholders portion of undistributed net income.
Undistributed net income is computed by deducting total dividends (the sum of preferred and common
stock dividends) from net income. Undistributed net income is shared equally by the preferred and
common shareholders on a ''pro rata basis.4
    
    Recently Issued Accounting PronouncementsIn February 2006, the FASB issued FAS 155, Accounting for certain hybrid financial instruments,
which amends FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities,
and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. This Statement resolves issues addressed in Statement 133 Implementation Issue No.
D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. We
will apply this statement in the event it occurs in fiscal periods beginning after September 15,
2006.In November 2005, the FASB issued FASB Staff Positions (FSP) Nos. FAS 115-1 e FAS 124-1, The
meaning of other-than-temporary impairment and its application to certain investments which sets
the determination as to when an investment is considered impaired, whether that impairment is
temporary, and the measurement of an impairment loss. We will apply this statement, if applicable,
from fiscal periods beginning after December 15, 2005.In October 2005, the FASB issued FAS No. 13-1, Accounting for rental costs incurred during a
construction period which addresses the accounting for rental costs associated with operating
leases that are incurred during a construction period. We will apply this statement, if
applicable, from fiscal periods beginning after December 15, 2005.In October 2005, the FASB issued FAS No. 123(R)-2, Practical accommodation to the application of
grant date as defined in FASB Statement No 123(R) which addresses recent inquiries from
constituents to provide guidance on the application of grant date as defined in FASB Statement No
123 (revised 2005), Share-Based Payment. We will apply this statement, if applicable, from fiscal
periods beginning after December 15, 2005.
 F-12




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##### Table of Contents



Contax Participações S.A.
 Notes to the Consolidated and Combined Financial Statements
at December 31, 2005 and 2004
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 In July 2005, the FASB issued FSP No. APB 18-1, Accounting by an investor for its proportionate
share of accumulated other comprehensive income of an investee accounted for under the equity
method in accordance with APB Opinion no. 18 upon a loss of significant influence. We will apply
this statement, if applicable, from fiscal periods beginning after July 2005.In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. We do not
expect FASB No. 154 to have a significant impact on our financial position, results of operations
or cash flows.In March 2005, the FASB issued FSP FIN 46(R)-5, Consolidation of Variable Interests Entities to
address whether a reporting enterprise should consider whether it holds an implicit variable
interest in a variable interest entity (VIE) or potential VIE when specific conditions exist. We
adopted FSP FIN 46(R)-5 it which had no impact on our financial position, results of operations or
cash flows.In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset
Retirement Obligations which refers to legal obligations to perform asset retirement activities.
We do not expect FASB Interpretation No. 47 to have a significant impact on our financial position,
results of operations or cash flows.5
    
    Cost of Services Rendered and Operating Expenses
 Year ended December 31, 2005Selling,generalCost of
    
    
    andservices
    
    
    adminis-rendered
    
    
    trative
    
    
    TotalPersonnel (i)
    
    
    670,998
    
    
    
    28,771
    
    
    
    699,769Third party services (ii)
    
    
    93,055
    
    
    
    24,038
    
    
    
    117,093Depreciation (iii)
    
    
    41,907
    
    
    
    3,939
    
    
    
    45,846Facilities (iv)
    
    
    39,385
    
    
    
    1,354
    
    
    
    40,739Other costs and expenses
    
    
    10,562
    
    
    
    1,640
    
    
    
    12,202Total
    
    
    855,907
    
    
    
    59,742
    
    
    
    915,649
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Contax Participações S.A.
 Notes to the Consolidated and Combined Financial Statements
at December 31, 2005 and 2004
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 Year ended December 31, 2004Selling,generalCost of
    
    
    andservices
    
    
    adminis-rendered
    
    
    trative
    
    
    TotalPersonnel (i)
    
    
    464,893
    
    
    
    25,846
    
    
    
    490,739Third party services (ii)
    
    
    59,180
    
    
    
    13,782
    
    
    
    72,962Depreciation (iii)
    
    
    22,241
    
    
    
    3,106
    
    
    
    25,347Facilities (iv)
    
    
    16,610
    
    
    
    1,347
    
    
    
    17,957Other costs and expenses
    
    
    11,147
    
    
    
    2,709
    
    
    
    13,856Total
    
    
    574,071
    
    
    
    46,790
    
    
    
    620,861
 Year ended December 31, 2003Selling,generalCost of
    
    
    andservices
    
    
    adminis-rendered
    
    
    trative
    
    
    TotalPersonnel (i)
    
    
    273,030
    
    
    
    15,285
    
    
    
    288,315Third party services (ii)
    
    
    29,360
    
    
    
    9,378
    
    
    
    38,738Depreciation (iii)
    
    
    13,859
    
    
    
    1,836
    
    
    
    15,695Facilities (iv)
    
    
    6,286
    
    
    
    1,321
    
    
    
    7,607Other costs and expenses
    
    
    12,216
    
    
    
    2,686
    
    
    
    14,902Total
    
    
    334,751
    
    
    
    30,506
    
    
    
    365,257
 
 (i)
    
    Costs with personnel have increased constantly as a result of the increase in staff to
provide services to new clients. The number of employees at December 31, 2005 totaled 49,554
(2004  37,926 and 2003  28,032).(ii)
    
    Third party services considered as Costs of services rendered refer mainly to data
processing and workstation maintenance, while third-party services considered Selling,
general and administrative refer to expenses with consulting, traveling, legal counsel and
others.(iii)
    
    The increase in depreciation costs results mainly from the acquisition of equipment, due to
the expansion of the operations, new workstations and new sites.(iv)
    
    Facilities expenses include, mainly, amounts which are being paid for the rental of
properties and contact center operating infrastructure. F-14




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##### Table of Contents



Contax Participações S.A.
 Notes to the Consolidated and Combined Financial Statements
at December 31, 2005 and 2004
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 6.
    
    Other Operating Expenses, Net
 Years ended December 31,2005
    
    
    2004
    
    
    2003Provision for contingencies (Note 13)
    
    
    (10,908
    )
    
    
    (613
    )
    
    
    (570
    )Other, net
    
    
    (1,190
    )
    
    
    (442
    )
    
    
    (158
    )Total
    
    
    (12,098
    )
    
    
    (1,055
    )
    
    
    (728
    )
 
 (i)
    
    Other taxes, net refers, mainly, to IPTU  Municipal Real Estate Tax from the leased
buildings. 7
    
    Financial Income (Expenses), Net
 Years ended December 31,2005
    
    
    2004
    
    
    2003Financial incomeInterest on securities
    
    
    21,569
    
    
    
    864Other
    
    
    108
    
    
    
    38
    
    
    
    2421,677
    
    
    
    902
    
    
    
    24Financial expensesBank charges, including CPMF
    
    
    (5,341
    )
    
    
    (2,605
    )
    
    
    (1,787
    )Other
    
    
    (1,984
    )
    
    
    (2,959
    )
    
    
    (378
    )(7,325
    )
    
    
    (5,564
    )
    
    
    (2,165
    )14,352
    
    
    
    (4,662
    )
    
    
    (2,141
    )
 
 (i)
    
    Other expenses refers, mainly, to CPMF  Provisional contribution on financial
activities; taxes on financial operations; contingencies monetary variations; and interest on
short-term liabilities 8
    
    Income Tax and Social ContributionIncome taxes in Brazil comprise federal income tax and social contribution, which is an additional
federal tax. The statutory composite enacted tax rate applicable in the periods presented is 34%,
represented by a 25% federal income tax rate plus a 9% social contribution rate.
 F-15




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##### Table of Contents



Contax Participações S.A.
 Notes to the Consolidated and Combined Financial Statements
at December 31, 2005 and 2004
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 The amount reported as income tax expense in our consolidated financial information is reconciled
to the statutory rates as follows:
 Years ended December 31,2005
    
    
    2004
    
    
    2003Income from continuing operations before income
tax and social contribution
    
    
    131.627
    
    
    
    28.038
    
    
    
    42.564Federal income tax and social contribution expense at
statutory enacted rates
    
    
    (44.753
    )
    
    
    (9.534
    )
    
    
    (14.454
    )Adjustments to derive effective tax rate:Tax effects on permanent differences
    
    
    (5.634
    )
    
    
    (2.034
    )
    
    
    (3.728
    )Valuation allowance reversal (i)
    
    
    
    
    
    
    
    
    
    
    36.858Income tax and social contribution
(provision) benefit
    
    
    (50.387
    )
    
    
    (11.568
    )
    
    
    18.676Tax benefits generated by discontinued
operations
    
    
    
    
    
    
    4.980
    
    
    
    30.567(50.387
    )
    
    
    (6.588
    )
    
    
    49.243
 
 (i)
    
    The subsidiary company TNL Contax reversed in December 2003 a valuation allowance on tax loss
carryforwards amounting to R$ 36,858, based on estimates of future taxable income. As of December 31,2005
    
    
    2004Deferred taxes relative to temporary differencesProvision for contingencies
    
    
    5,382
    
    
    
    3,690Provision for loss on asset held for sale
    
    
    
    
    
    
    12,367Profit sharing
    
    
    1,152
    
    
    
    3,321Tax loss carryforwards
    
    
    33,082
    
    
    
    43,39339,616
    
    
    
    62,771Current deferred tax assets
    
    
    13,736
    
    
    
    15,693Lon-term deferred tax assets
    
    
    25,880
    
    
    
    47,078
 F-16




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##### Table of Contents



Contax Participações S.A.
 Notes to the Consolidated and Combined Financial Statements
at December 31, 2005 and 2004
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 9.
    
    Cash and Cash Equivalents
 As of December 31,2005
    
    
    2004Cash and banks accounts (i)
    
    
    75,539
    
    
    
    27,114Certificate of deposits (ii)
    
    
    153,949
    
    
    
    58,038229,488
    
    
    
    85,152
 
 (i)
    
    The amounts are kept in a current account, as the Company has accounts payable due on the
first days of each month, relating to the payment of suppliers, taxes and payroll.(ii)
    
    In general, these financial investments are indexed by the Brazilian Interbank Certificate of
Deposit (CDI) rate, with daily liquidity. 10
    
    Deferred Taxes
 As os December 31,2005
    
    
    2004Short
    
    
    Long
    
    
    Short
    
    
    Longterm
    
    
    term
    
    
    term
    
    
    termIncome tax on temporary differences
    
    
    854
    
    
    
    3,983
    
    
    
    11,540
    
    
    
    2,930Social Contribution on temporary differences
    
    
    305
    
    
    
    1,425
    
    
    
    4,153
    
    
    
    1,055Income tax on loss carryfowards
    
    
    9,248
    
    
    
    15,044
    
    
    
    
    
    
    
    31,678Social Contribution on loss carryfowards
    
    
    3,329
    
    
    
    5,428
    
    
    
    
    
    
    
    11,41513,736
    
    
    
    25,880
    
    
    
    15,693
    
    
    
    47,078
 11
    
    Recoverable Taxes
 As of December 31,2005
    
    
    2004Income tax
    
    
    18,254
    
    
    
    1,876Social contribution
    
    
    6,719
    
    
    
    694Withholding taxes
    
    
    5,243
    
    
    
    1,778Contributions to the National Social Security Institute
    
    
    1,248
    
    
    
    1,749Other
    
    
    557
    
    
    
    56232,021
    
    
    
    6,659
 F-17




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##### Table of Contents



Contax Participações S.A.
 Notes to the Consolidated and Combined Financial Statements
at December 31, 2005 and 2004
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 12
    
    Property and Equipment, Net
 As of December 31,2005
    
    
    2004AnnualAccumulated
    
    
    
    
    
    
    
    
    
    
    depreciationCost
    
    
    depreciation
    
    
    Net
    
    
    Net
    
    
    rate (%)Telecom and IT systems (i)
    
    
    224,991
    
    
    
    (76,712
    )
    
    
    148,279
    
    
    
    97,612
    
    
    
    20Improvements on third
party assets (i)
    
    
    88,203
    
    
    
    (12,628
    )
    
    
    75,575
    
    
    
    34,282
    
    
    
    10Furniture and fixtures (i)
    
    
    31,793
    
    
    
    (6,190
    )
    
    
    25,603
    
    
    
    30,253
    
    
    
    10Construction in progress
    
    
    3,853
    
    
    
    
    
    
    
    3,853
    
    
    
    8,058Other
    
    
    14,146
    
    
    
    (2,077
    )
    
    
    12,069
    
    
    
    12,731
    
    
    
    4 a 10Total
    
    
    362,986
    
    
    
    (97,607
    )
    
    
    265,379
    
    
    
    182,936
 
 (i)
    
    The increases which took place in 2005 are related to the increase in the amount of
customer workstations (2005  22,481 and 2004  17,507), associated with the expansion of the
Companys activities. The Company maintains several commercial leasing agreements for IT equipment, the amounts of
which are taken to income over the term of the agreements, although management intends to purchase
such equipment upon termination of the related agreements. Such transactions are recorded as
property, plant and equipment as a contra entry to accounts payable, the agreement amounts are
summarized as follows:
 Liability balances
    
    ExpensesInception
    
    Maturity
    
    Number of
    
    Assets balance
    
    Current part of long-term
    
    Long-term
    
    for the yearLessor
    
    date
    
    date
    
    installments
    
    2005
    
    2004
    
    2005
    
    2004
    
    2005
    
    2004
    
    2005
    
    2004HP Financial
    
    20/12/2004 to
29/09/2005
    
    20/11/2007 to
29/08/2008
    
    
    36
    
    
    
    8,584
    
    
    
    4,467
    
    
    
    3,890
    
    
    
    1,697
    
    
    
    4,694
    
    
    
    2,890
    
    
    
    2,945
    
    
    
    141IBM Leasing
    
    01/07/2005
to 29/07/2005
    
    01/06/2008
to 29/06/2008
    
    
    36
    
    
    
    591
    
    
    
    
    
    
    
    237
    
    
    
    
    
    
    
    355
    
    
    
    
    
    
    
    118
    
    
    Unibanco Leasing
    
    24/09/2005
to 16/01/2006
    
    24/08/2009
to 16/12/2009
    
    
    48
    
    
    
    10,768
    
    
    
    
    
    
    
    2,824
    
    
    
    
    
    
    
    7,944
    
    
    
    
    
    
    
    528
    
    
    HP Financial
    
    29/10/2005
to 27/04/2006
    
    29/09/2009
to 27/03/2010
    
    
    48
    
    
    
    15,246
    
    
    
    
    
    
    
    3,548
    
    
    
    
    
    
    
    11,698
    
    
    
    
    
    
    
    360
    
    
    CIT
    
    11/27/2005
    
    10/27/2009
    
    
    48
    
    
    
    3,593
    
    
    
    
    
    
    
    937
    
    
    
    
    
    
    
    2,655
    
    
    
    
    
    
    
    156
    
    
    IBM Leasing
    
    25/01/2006
    
    25/12/2009
    
    
    48
    
    
    
    757
    
    
    
    
    
    
    
    189
    
    
    
    
    
    
    
    568
    
    
    
    
    
    
    
    
    
    
    39,539
    
    
    
    4,467
    
    
    
    11,625
    
    
    
    1,697
    
    
    
    27,914
    
    
    
    2,890
    
    
    
    4,107
    
    
    
    141
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##### Table of Contents



Contax Participações S.A.
 Notes to the Consolidated and Combined Financial Statements
at December 31, 2005 and 2004
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 13
    
    Taxes Other than on Income
 As of December 31,2005
    
    
    2004Services Tax  ISS
    
    
    5,235
    
    
    
    4,050Program for Social Integration (PIS) and Contribution for
Social Security Financing (COFINS)
    
    
    4,213
    
    
    
    2,756Total
    
    
    9,448
    
    
    
    6,806
 14
    
    Taxes on Income
 As of December 31,2005
    
    
    2004Income tax payable
    
    
    19,810
    
    
    
    3,276Social contribution payable
    
    
    7,421
    
    
    
    1,217Total
    
    
    27,231
    
    
    
    4,493
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##### Table of Contents



Contax Participações S.A.
 Notes to the Consolidated and Combined Financial Statements
at December 31, 2005 and 2004
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 15
    
    Contingencies
 The provision for contingencies reflects managements best estimates for the amounts deemed
sufficient to cover probable losses from pending claims at the balance sheet date, based on the
expert opinions of legal advisors.
 As of December 31,2005
    
    
    2004TaxServices Tax  ISS (i)
    
    
    
    
    
    
    1,013Accrued Severance Pay  FGTS
    
    
    940
    
    
    
    744Contributions to the National Social Security Institute  INSS (ii)
    
    
    3,912
    
    
    
    2094,852
    
    
    
    1,966LaborOrbitall (iii)
    
    
    7,020
    
    
    
    7,020Telemar (iv)
    
    
    6,067Other (v)
    
    
    10,914
    
    
    
    1,55624,001
    
    
    
    8,576Civil
    
    
    64
    
    
    
    314Total
    
    
    28,917
    
    
    
    10,856
 
 (i)
    
    Contingency provision reversed as the risk no longer exists.(ii)
    
    Provision to adequate contributions to SENAC and SEBRAE entities, in the payments made to
INSS (National Institute of Social Security), accordingly to the FPAS (Pension and Social
Assistance Fund) table.(iii)
    
    As stipulated in the purchase and sale contract of Inovaçãos quotas signed by Orbitall and
TNL Contax, Orbitall would remain fully liable for any labor claims whose dates precede the
date of the acquisition of Inovação by TNL Contax (April 1, 2004). In 2004, TNL Contax
recorded a provision for labor contingencies in the amount of R$ 7,020, as a contra-entry to
Other assets  Receivable from Orbitall, in the amount mentioned above and corresponds to
the total amount at risk related to probable labor claims which have been filed and others
which may be filed against the Company by the former employees of Inovação. At December 31,
2005 this provision is sufficient to cover the risk related to 430 initiated claims considered
probable since it was estimated and recorded based on the maximum risk involving all former
employees. This provision will be written-off as these amounts are paid by TNL Contax,
presented and recovered from Orbitall. The Company is monitoring Orbitalls capacity to honor
this agreement and the recoverability of the recorded asset.(iv)
    
    As stipulated in the contract between Telemar Norte Leste S.A. (TMAR) and TNL PCS S.A.
(Oi) (jointly referred to as Telemar) and TNL Contax, any labor lawsuits that were
originated due to the migration of labor contracts are to be TMAR responsibility. This amount
is recorded under Other assets  Receivable from Telemar. This provision will be
written-off as these amounts are paid by TNL Contax, presented and recovered from Telemar.(v)
    
    All labor contingencies that are TNL Contax`s responsibility have been updated, to cover any
probable losses. F-20




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##### Table of Contents



Contax Participações S.A.
 Notes to the Consolidated and Combined Financial Statements
at December 31, 2005 and 2004
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 As a part of our ongoing operations, we have been the defendant in a number of lawsuits
brought by our employees, labor unions and the Labor Public Prosecution Office (Ministério Público
do Trabalho). We have established what we believe to be an adequate reserve to cover these
claims.The Company and its subsidiary have judicial deposits to guarantee their rights to appeal in labor
lawsuits (2005  R$ 2,798; 2004  R$ 1,277) and fiscal lawsuits (2005  R$ 986).16
    
    Shareholders Equity(a)
    
    Share capitalOn August 17, 2005, an Extraordinary General Meeting of Contax Participações approved the split of
its outstanding shares, resulting in the issue of 2,318,240 new shares (772,758 common shares and
1,545,482 preferred shares), which have been fully allocated to TNL to be subsequently distributed,
according to the aforementioned Extraordinary General Meeting held on December, 29, 2004, to TNLs
shareholders, in a ratio of 1:1, thus satisfying the capital share reduction previously mentioned
(see details in Note 1).As mentioned in Note 1, on November 2004, the Companys capital was increased by R$223,708,
corresponding to: (i) transfer of the total amount of shares issued by TNL Contax owned by TNL up
to October 31, 2004, with a book value of R$126,030; (ii) capitalization of a debt due to TNL
amounting to R$57,678, resulting from the balance of the loan between the parties and (iii)
R$40,000 in cash paid-in.At December 31, 2005, Contax Participações capital of R$ 223,873 is comprised of 382,121,717
shares, of which 127,373,917 are common shares and 254,747,800 are preferred shares. Common and
preferred shares issued due to the split share will participate in the same conditions with the
shares that originally comprised the Companys capital stock, in all benefits, including dividends
and any other capital remuneration. Additionally, according to the Annual General Meeting (held on
April 29, 2005), preferred shares have the right to receive the dividends approved therein.In an Annual General Meeting held on April 18, 2006, the shareholders of Contax approved the
destination of the net income for the year ended December 31, 2005 as follows: (a) appropriation of
R$ 4.033 as legal reserve; (b) dividends distribution in the total amount of R$ 13.432; (c)
appropriation of R$ 5.727 as unrealized income reserve, (d) appropriation of R$ 57.477 as statutory
reserve.
 F-21




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##### Table of Contents



Contax Participações S.A.
 Notes to the Consolidated and Combined Financial Statements
at December 31, 2005 and 2004
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 (b)
    
    Additional paid-in capitalIn addition to the capital increase, in November 2004 as mentioned above, R$50,000 was paid-in as a
capital reserve, which appropriation will be decided on at a shareholders meeting.(c)
    
    DividendsAccording to the Companys by-laws, Contax Holding has to distribute dividends for each fiscal year
in the amount of not less than 25% of the net profit adjusted in accordance with clause 202 of Law
No. 6404/76. The Company may also distribute quarterly dividends, as long as the total amount of
paid dividends does not exceed the capital reserve. In accordance with Brazilian Corporate Law,
on December 31, 2005, management proposed the payment of R$ 13,432 as dividends, approved by the
shareholders in the Annual General Meeting held on April 18, 2006.On April 29, 2005, the distribution of R$ 1,359 as dividends, proposed by management on December
31, 2004, was deliberated and approved by the annual shareholders meeting. On October 27, 2005 the
dividends were paid to Contax Holdings shareholders.The annual dividend distributed to holders of preferred shares (the Preferred Dividend) has
priority in the allocation of Minimum Dividends when determining the Preferred Dividend in relation
to the general dividend. Remaining amounts to be distributed, if any, are allocated first to the
payment of a dividend to holders of common shares in an amount equal to the Preferred Dividend and
the remainder, if any, is distributed equally among holders of preferred shares and common shares.The Preferred Dividends corresponds to a non-cumulative dividend equal to 6% of share capital
determined according to accounting practices adopted in Brazil, in proportion of preferred shares
to total capital, or 3% of shareholders equity book value per share, whichever is greater.
 F-22




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##### Table of Contents



Contax Participações S.A.
 Notes to the Consolidated and Combined Financial Statements
at December 31, 2005 and 2004
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 Operations
 As of December 31,2005
    
    
    2004
    
    
    2003Net income for the year
    
    
    81,240
    
    
    
    6,803
    
    
    
    1,904Less preferred shares dividends
    
    
    (8,955
    )
    
    
    (6,803
    )
    
    
    (1,904
    )Less common shares dividends
    
    
    (4,478
    )Remaining net income to be equally allocated
to preferred and common shares
    
    
    67,807Weighted average number of shares outstanding:Common
    
    
    127,373,917
    
    
    
    127,373,917
    
    
    
    127,373,917Preferred
    
    
    254,747,800
    
    
    
    254,747,800
    
    
    
    254,747,800Basic and diluted earnings per share:Common
    
    
    0.21
    
    
    
    0.02
    
    
    
    0.00Preferred
    
    
    0.21
    
    
    
    0.02
    
    
    
    0.00
 Continuing operations
 As of December 31,2005
    
    
    2004
    
    
    2003Income from continuing operations for the year
    
    
    81,240
    
    
    
    16,470
    
    
    
    61,240Less preferred shares dividends
    
    
    (8,955
    )
    
    
    (8,955
    )
    
    
    (8,955
    )Less common shares dividends
    
    
    (4,478
    )
    
    
    (4,478
    )
    
    
    (4,478
    )Remaining net income to be equally allocated
to preferred and common shares
    
    
    67,807
    
    
    
    3,037
    
    
    
    47,807Weighted average number of shares outstanding:Common
    
    
    127,373,917
    
    
    
    127,373,917
    
    
    
    127,373,917Preferred
    
    
    254,747,800
    
    
    
    254,747,800
    
    
    
    254,747,800Basic and diluted earnings per share from
continuing operations:Common
    
    
    0.21
    
    
    
    0.04
    
    
    
    0.16Preferred
    
    
    0.21
    
    
    
    0.04
    
    
    
    0.16
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##### Table of Contents



Contax Participações S.A.
 Notes to the Consolidated and Combined Financial Statements
at December 31, 2005 and 2004
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 (d)
    
    Appropriated retained earningsBrazilian legislation require that certain appropriations be made from retained earnings to reserve
accounts on an annual basis, all determined in accordance with amounts stated in the statutory
accounting records, as detailed below:
 Unrealized
    
    
    LegalEarnings Reserve
    
    
    Reserve
    
    
    TotalAt December 31, 2002 and 2003
    
    
    
    
    
    
    46
    
    
    
    46Appropriation from retained earnings
    
    
    5,636
    
    
    
    377
    
    
    
    6,013Elimination for combined financial statements
    
    
    
    
    
    
    (46
    )
    
    
    (46
    )At December 31, 2004
    
    
    5,636
    
    
    
    377
    
    
    
    6,013Appropriation from retained earnings
    
    
    5,727
    
    
    
    4,033
    
    
    
    9,760At December 31, 2005
    
    
    11,363
    
    
    
    4,410
    
    
    
    15,773
 The purpose and basis of appropriation to such reserves is described below:
 
    
    Unrealized earnings reserve  this represents mainly our
share of earnings of controlled entity, not yet received in
the form of cash dividends.
    
    Legal reserve  this reserve is a requirement for all
Brazilian corporations and represents the appropriation of 5%
of annual net income under accounting practices adopted in
Brazil up to a limit of 20% of the Company capital.
 At December 31, 2005, management is proposing to allocate R$ 57,477 to constitute the statutory
reserve for retained earnings and R$ 13,432 as proposed dividends, in the Annual General Meeting
held on April 18, 2006.The statutory reserve is an Investment reserve that is constituted to insure future investments and
to reinforce Contax Holdings working capital. Any statutory reserve, together with all
Appropriated retained earnings, is limited to the Companys capital.
 F-24




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##### Table of Contents



Contax Participações S.A.
 Notes to the Consolidated and Combined Financial Statements
at December 31, 2005 and 2004
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 17
    
    Transactions with Related PartiesThe main transactions between the Company and other related parties can be summarized as follows:
 2005BrasilBrasil CAP
    
    
    VeículosCapitali-
    
    
    Companhia
    
    
    TelemarTMAR
    
    
    Oi
    
    
    zações S.A.
    
    
    de Seguros
    
    
    Internet
    
    
    TotalAssetsAccounts receivable
    
    
    426
    
    
    
    
    
    
    
    243
    
    
    
    548
    
    
    
    
    
    
    
    1,217LiabilitiesSuppliers
    
    
    1,647
    
    
    
    132
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,779RevenuesRevenues from services
rendered
    
    
    572,378
    
    
    
    96,276
    
    
    
    2,699
    
    
    
    4,481
    
    
    
    5,331
    
    
    
    681,165Costs and expensesCosts of services rendered
    
    
    (7,016
    )
    
    
    (1,866
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,882
    )
 2004BrasilPegasus
    
    
    Brasil CAP
    
    
    VeículosTelecom
    
    
    Capitali-
    
    
    CompanhiaTMAR
    
    
    Oi
    
    
    S.A.
    
    
    zações S.A.
    
    
    de Seguros
    
    
    TotalAssetsAccounts receivable
    
    
    5,021
    
    
    
    2,018
    
    
    
    
    
    
    
    257
    
    
    
    867
    
    
    
    8,163LiabilitiesSuppliers
    
    
    1,182
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,182RevenuesRevenues from services
rendered
    
    
    352,221
    
    
    
    68,493
    
    
    
    
    
    
    
    2,361
    
    
    
    3,980
    
    
    
    427,055Costs and expensesCosts of services rendered
    
    
    (4,028
    )
    
    
    
    
    
    
    (472
    )
    
    
    
    
    
    
    
    
    
    
    (4,500
    )
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##### Table of Contents



Contax Participações S.A.
 Notes to the Consolidated and Combined Financial Statements
at December 31, 2005 and 2004
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 2003BrasilBrasil CAP
    
    
    VeículosCapitali-
    
    
    CompanhiaTMAR
    
    
    Oi
    
    
    iG
    
    
    zações S.A.
    
    
    de Seguros
    
    
    TotalRevenuesRevenues from services
rendered
    
    
    278,452
    
    
    
    47,075
    
    
    
    3,252
    
    
    
    1,435
    
    
    
    3,413
    
    
    
    333,627Costs and expensesCosts of services rendered
    
    
    (1,337
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,337
    )
 
 (*)
    
    TNL`s indirect interest in Internet Group Cayman (iG) was sold to a subsidiary of Brasil
Telecom S.A. in November 2004. The transactions with related parties are carried out at terms, rates and conditions similar
to those for third parties. The loans are remunerated at a rate of 102% of the Interbank Deposit
Certificate (CDI) and are classified under long-term assets, based on their expected settlement.18
    
    Discontinued OperationsAs mentioned in Note 1, the Company sold its data center assets to HP and TNL at book value on June
30, 2003. Upon this agreement, the Company signed (i) a sale contract with the parent company TNL
totaling R$ 61,586, and (ii) a sale contract with HP totaling R$ 7,350. Payment by TNL was done
on the basis of a reduction on outstanding balance of inter-company loans. Some additional assets
were sold to TMAR on November, 2003, at their respective book values, totaling R$ 12,814.Furthermore, based on an independent appraisal report prepared by Cushman & Wakefield Semco, the
Companys management recorded a provision amounting to R$36,375 to adjust the value of a building
prepared for data center activities to its realizable value on December 31, 2003. As of November
30, 2004, the Company entered into a sale and purchase agreement with TMAR. The agreement
foresees that TMAR should pay R$17,211, until January 2005, for the acquisition of such property.
The property was sold on January 17, 2005 to TMAR, which is now responsible for all risks and
applicable taxes to this property.
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##### Table of Contents



Contax Participações S.A.
 Notes to the Consolidated and Combined Financial Statements
at December 31, 2005 and 2004
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 The data center business is reported in these financial statements as discontinued operations and
the Consolidated and Combined Financial Statements for all prior periods have been adjusted to
reflect this presentation. The operating results included in discontinued operations are
presented in the following table:
 Years ended December 31,2004
    
    
    2003Net operating revenue
    
    
    
    
    
    
    10,181Cost of services
    
    
    
    
    
    
    (32,038
    )Gross loss
    
    
    
    
    
    
    (21,857
    )Operating expenses
    
    
    (4,984
    )
    
    
    (38,927
    )Operating loss before interest
    
    
    (4,984
    )
    
    
    (60,784
    )Financial result, net
    
    
    (9,663
    )
    
    
    (29,119
    )Loss before income tax and social contribution
    
    
    (14,647
    )
    
    
    (89,903
    )Income tax and social contribution benefit
    
    
    4,980
    
    
    
    30,567Loss for the year
    
    
    (9,667
    )
    
    
    (59,336
    )
 19
    
    Financial InstrumentsThe Company has evaluated its assets and liabilities relating to the market/realization values,
through available information and evaluation methodologies established by management. However,
the market data interpretation, as well as the selection of evaluation methods require a reasonable
judgment and estimate to produce the most adequate market value. Therefore, actual amounts may
differ from the estimates.(a)
    
    Cash and cash equivalents, accounts receivables, other assets and accounts payableThe recorded values approximate the market values.(b)
    
    Credit riskThe credit risk associated with accounts receivable is not relevant, due to the size of the
financial volume of the companies to which the Company provides services, in addition to the
monitoring controls imposed on the client portfolio. Doubtful accounts are adequately covered by
provisions for any possible future losses on their realization. Financial investments are
performed with leading financial institutions, avoiding any liquidity risk.As of December 31, 2005 and 2004, the Company had no transactions involving derivatives.
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##### Table of Contents



Contax Participações S.A.
 Notes to the Consolidated and Combined Financial Statements
at December 31, 2005 and 2004
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 20
    
    InsuranceThe Company has a corporative program for risk management to obtain minimum risks, searching at the
market compatibles covers with its size and operations. Management understands that the amounts
of the policies to cover any possible future material damages and loss of revenues arising from
such damages (loss of profits) are sufficient to guarantee the integrity of its assets and full
protection of the continuity of its operations.At December 31, 2005, The Company had the following main insurance policies contracted with third
parties:
 Segments
    
    Amounts insuredFire on property, plant and equipment
    
    
    45,000Comprehensive general liability
    
    
    5,000Loss of profit
    
    
    45,000