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Marcopolo S.A.
Consolidated financial statements
as of December 31, 2005 and 2004
and report of independent auditors


Report of Independent Auditors
The Board of Directors and Stockholders of Marcopolo S.A. We have audited the accompanying consolidated balance sheet of Marcopolo S.A. and its subsidiaries (the “Company”) as of December 31, 2005 and the related consolidated statements of income, of changes in stockholders’ equity, and of cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The audits of the financial statements of: (a) Polomex S.A. de C.V, a subsidiary, which statements reflect total assets of 4.87% of the related consolidated total as of December 31, 2005, and total net sales of 17.31% of the related consolidated total for the year ended December 31, 2005, and (b) of Marcopolo Indústrias de Carroçarias S.A., a whol y-owned subsidiary, which statements reflect total assets of 2.61% of the related consolidated total as of December 31, 2005, and total net sales of 3.32% of the related consolidated total for the year ended December 31, 2005, were conducted by other auditors. Our opinion, insofar as it refers to the amounts included for these companies, is based solely on the reports of these other auditors. We conducted our audit in accordance with auditing standards general y accepted in Brazil. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as wel as evaluating the overal financial statement presentation. We believe that our audit provide a reasonable basis for our opinion. In our opinion, based on our audit and on the report of the other auditors, the consolidated financial statements referred to above present fairly, in al material respects, the consolidated financial position of Marcopolo S.A. and its subsidiaries as of December 31, 2005 and the consolidated results of their operations and their consolidated cash flows for the year then ended, in accordance with accounting principles general y accepted in the United States of America. The audit of the consolidated financial statements at and for the year ended December 31, 2004, presented for comparison purposes, was conducted by other auditors who issued a qualified opinion thereon dated March 15, 2005. April 28, 2006 PricewaterhouseCoopers Auditores Independentes CRC 2SP000160/O-5 "F" RS Carlos Biedermann Contador CRC 1RS029321/O-4 (in thousands of U.S. Dol ars, except number of shares) The accompanying notes are an integral part of these consolidated financial statements. (in thousands of U.S. Dol ars, except number of shares) LIABILITIES
Commissions payable to sales representatives Accrued pension and other post retirement obligations Shareholders' equity
Preferred shares - no par value, 69,673,671 shares authorized and issued at December 31, 2005 and 2004 Common shares - no par value, 42,703,218 shares authorized and issued at December 31, 2005 and 2004 Treasury stock - 800,000 preferred shares at December 31, Total liabilities and shareholders’ equity The accompanying notes are an integral part of these consolidated financial statements. for the years ended December 31, 2005 and 2004 (in thousands of U.S. Dol ars, except number of shares and earnings per share) Administrators and employees profit sharing Equity in earnings of unconsolidated companies Income before taxes on income and minority interest Basic and diluted earnings per thousand shares - in US$: Number of weighted-average shares outstanding during the year The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the years ended December 31, 2005 and 2004 Net income as reported in the consolidated statement of income
Foreign currency translation adjustments Comprehensive income for the period
The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY for the years ended December 31, 2005 and 2004 (in thousands of U.S. Dol ars, except dividends per share) Cumulative other
Preferred Common
Treasury
Retained
comprehensive
earnings
Balances as of January 1, 2004
Interest on equity - $128.1 per 1,000 common and preferred Balances as of December 31, 2004
Interest on equity - $161.6 per 1,000 common and preferred Balances as of December 31, 2005
The accompanying notes are an integral part of these consolidated financial statements. for the years ended December 31, 2005 and 2004 Cash from operations activities
Adjustments to reconcile net income to cash flows from operating activities Equity earnings on unconsolidated companies Unrealized gains losses on derivatives, net Losses (gains) on disposal of property, plant and equipment Changes in asses and liabilities
(Increase) decrease in accounts receivable Increase (decrease) in accounts payable and accrued liabilities Increase in other assets net of other liabilities Net purchases and sales of trading short-term investments Net cash provided by operating activities
Cash flows from investing activities
Additions to property, plant and equipment Proceeds from sales of property, plant and equipment Net cash used in investing activities
The accompanying notes are an integral part of these consolidated financial statements. for the years ended December 31, 2005 and 2004 Cash flows from financing activities
Net cash provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Adjustment to opening balance of cash and cash equivalents (Note 3.3) Adjusted cash and cash equivalents at beginning of the year Cash and cash equivalents at end of year
Supplental cash flow data:
Non-cash transactions
Income tax payable set off with tax credits The accompanying notes are an integral part of these consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the years ended December 31, 2005 and 2004 (in thousands of U.S. Dol ars, unless otherwise stated) Operations
Marcopolo S.A. is a “sociedade anônima” incorporated as a limited liability company under the laws of the Federative Republic of Brazil. The principal business of Marcopolo S.A. (“Marcopolo”) in Brazil and of its subsidiaries in Portugal, South Africa and Mexico (col ectively the “Company”) is the production of buses, vehicles, wagons, parts, agricultural and industrial machinery. Marcopolo also operates as technological provider and adviser for other companies
2 Basis of presentation

2.1 Statutory records
The accompanying consolidated financial statements have been prepared in accordance with general y accepted accounting principles in the United States (“U.S. GAAP”), which differ in certain aspects from the accounting practices adopted in Brazil (“Brazilian GAAP”) applied by the Company in the preparation of its statutory financial statements and for other legal and regulatory purposes. The consolidated financial statements for statutory purposes are prepared
2.2 Currency translation
The Company has selected the United States dol ar as its reporting currency. The U.S. dol ar amounts have been translated, fol owing the criteria established in Statement of Financial Accounting Standards (“SFAS”) No. 52, “Foreign Currency Translation” from the financial statements expressed in the local currency of the countries where the Company and each The local currency is the functional currency for the operations of the Company and its subsidiaries. Their financial statements are translated from the functional currency into the United States dol ar. Assets and liabilities are translated at the exchange rate in effect at the end of each year. Average exchange rates [for the year] are used for the translation of revenues, expenses, gains and losses in the statement of income. Capital contributions, treasury stock transactions and dividends are translated using the exchange rate as of the date of the transaction. Translation gains and losses resulting from the translation methodology described above are recorded directly in “Cumulative other comprehensive loss” within shareholders’ equity. Gains and losses on foreign currency denominated transactions are included in the consolidated statement of income. The operations in Brazil have used the Brazilian currency (“Real”) as its functional currency as from January 1, 1998, when the Brazilian economy ceased to be hyperinflationary. As of January 1, 1998, we translated the U.S. dol ar amounts of non-monetary assets and liabilities into Reais at the then current exchange rate, and those amounts became the new carrying bases for such assets and liabilities. Prior to January 1, 1998, when Brazil was a hiperinflationy economy the US dol ar was used as the functional currency for the operations in Brazil. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the years ended December 31, 2005 and 2004 (in thousands of U.S. Dol ars, unless otherwise stated) Summary of significant accounting policies and practices
The fol owing is a summary of the significant accounting policies adopted in the preparation of
3.1 Consolidation
The consolidated financial statements include the financial statements of Marcopolo S.A. and al its whol y owned subsidiaries. Al significant intercompany balances and transactions have been eliminated in consolidation. The subsidiary companies included in the consolidated Percentage of interest
Ciferal Indústria de Ônibus Ltda. (Brazil) Ilmot International Corporation S.A. (Uruguay) Marcopolo Indústria de Carroçarias, S.A. (Portugal) Marcopolo International Corporation (Virgin Isl and) Marcopolo Latinoamérica S.A. (Argentina) Marcopolo South África Pty Ltd (South Africa) MVC Componentes Plásticos Ltda. (Brazil) Polo Serviços em Plásticos Ltda. (Brazil) Poloplast Componentes S.A. de C.V. (Mexico) Syncroparts Comércio e Dist. Peças Ltda. (Brazil) The consolidated financial statements include al the companies in which the Company has a control ing financial interest through direct or indirect ownership of a majority voting interest. The consolidated financial statements include, in addition to the operational companies presented in the table above, al the other companies that meet the criteria for consolidation under US GAAP, which consist of holding companies which invest in the operating companies Al significant intercompany balances and transactions have been eliminated on consolidation. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the years ended December 31, 2005 and 2004 (in thousands of U.S. Dol ars, unless otherwise stated)
3.2 Use of estimates
The preparation of financial statements in accordance with general y accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates include, but are not limited to, the al owance for doubtful accounts, provisions for losses on inventories, impairment of goodwil and of long-lived assets, useful lives of long-lived assets, valuation al owances for income taxes, actuarial assumptions (utilized in the calculation of pension benefit obligations) and contingencies. Actual results could differ from those estimates. 3.3 Cash and cash equivalents
As of December 31, 2005, cash equivalents are considered to be al highly liquid temporary cash investments, mainly time deposits, with original maturity dates of three months or less. In the consolidated statement of cash flows for the year ended December 31, 2004, the opening balance of cash and cash equivalent was adjusted to reclassify certain financial assets that do not meet the definition of cash and cash equivalent since they have original maturity dates of more than three months. Those reclassified balances include financial investments carried out by exclusive investment funds held by the Company: Fundo de Investimento Paradiso Multimercado, Fundo de Investimento Multimercado Double Deck, Fundo de Investimento Renda Fixa Andare e Gran-Vial e Fundo de Investimento Multimercado. As a result of such review, the opening balance of cash and cash equivalent as of January 1, 2005 Balance of cash and cash equivalents as reported as of
December 31, 2004
Amounts reclassified from cash and cash equivalents:
Adjusted opening balance of cash and cash equivalents as of January 1,
2005 for purposes of consolidated statement of cash flows
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the years ended December 31, 2005 and 2004 (in thousands of U.S. Dol ars, unless otherwise stated)
3.4 Short-term investments
Short-term investments as of December 31, 2005 consist of bank certificates of deposit and trading securities comprised by Brazilian government debt securities and shares in investment funds managed by commercial banks. The certificates of deposit and trading debt securities have maturities ranging from four months to one year at the time of purchase. Certificates of deposit are stated at cost plus accrued interest. Trading securities are recorded at fair value with changes in fair value recognized in the consolidated statement of income. 3.5 Trade accounts receivable
Accounts receivable are stated at estimated realizable values. Al owances are provided, when
necessary, in an amount considered by management to be sufficient to meet probable future losses related to uncol ectible accounts. 3.6 Inventories
Inventories are valued at the lower of cost or replacement or realizable value. Cost is determined using the average cost method.
3.7 Property, plant and equipment
Property, plant and equipment are recorded at cost, including capitalized interest incurred during the construction phase of major new facilities. Interest capitalized on loans denominated in reais includes the effect of indexation of principal required by certain loan agreements. Interest capitalized on foreign currency borrowings excludes the effects of foreign exchange gains and losses. Depreciation is computed under the straight-line method at rates which take into consideration the useful lives of the related assets: 25 years for buildings and improvements, 10 years for machinery and equipment, 10 years for furniture and fixtures, and 5 years for vehicles and computer equipment. Assets under construction are not depreciated until they are placed into service. Major renewals and improvements are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. Any gain or loss on the disposal of property plant and equipment is recognized on disposal. The Company evaluates the carrying value of its property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying value of a long-lived asset or group of such assets is considered impaired by the Company when the anticipated undiscounted cash flow from such asset(s) is separately identifiable and less than the carrying value. In that event, a loss would be recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value would be determined primarily using discounted anticipated cash flows. No impairment losses have been recorded for any of the periods NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the years ended December 31, 2005 and 2004 (in thousands of U.S. Dol ars, unless otherwise stated)
3.8 Equity investments

Investments in entities where the Company owns 20% to 50% of the voting interest or where the Company has the ability to exercise significant influence are accounted for under the equity method. As of December 31, 2005, the Company’s equity investments are comprised of a 50% interest in the capital of Superpolo S.A. (Colombia) and a 40% interest in the capital of As of December 31, 2005 and for the year then ended the Company accounts for its investment in Superpolo S.A. fol owing the equity method. As of December 31, 2004 and for the year then ended the financial statements of Superpolo were proportional y consolidated considering the interest of 50% held by Goodwill
The Company adopts SFAS No. 142 (“SFAS 142”), “Goodwil and Other Intangible Assets”. Under this standard, goodwil , including goodwil recognized for business combinations consummated before initial application of the standard, is no longer amortized but is tested for impairment at least annual y, using a two-step approach that involves the identification of “reporting units” and the estimation of fair value. During the years ended December 31, 2005 and 2004 goodwil was tested for impairment and
3.10 Pension benefits

The Company accrues its pension benefit obligations in accordance with SFAS No. 87, “Employers’ Accounting for Pensions”. The cost of pension is actuarial y determined using the projected unit credit method based on management’s best estimates of expected investment performance, salary increases, and retirement ages of employees. Assets of pension plans are valued at fair value. The excess of the net actuarial gains or losses over 10% of the greater of the benefit obligation and the fair value of the assets is amortized over the average remaining service period of the active employees (corridor approach). Past service costs from plan amendments are amortized on a straight-line basis over the average remaining service period of the active employees. 3.11 Compensated absences
Compensated absences are accrued over the vesting period. 3.12 Revenue recognition

The Company recognizes revenue on sales when products are delivered and the customer takes ownership and assumes risk of loss. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the years ended December 31, 2005 and 2004 (in thousands of U.S. Dol ars, unless otherwise stated)
3.13 Income taxes
The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”, which requires the application of the liability method of accounting for income taxes. Under this method, a company is required to recognize a deferred tax asset or liability for al temporary differences and tax loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of changes in tax rates is recognized in income for the period that includes the enactment date. Deferred tax assets are reduced through the establishment of a valuation al owance if, based on the weight of available evidence, it is more likely than not that the deferred tax asset wil not
3.14 Earnings per share

Earnings per share is computed by dividing consolidated net income by the number of common
and preferred shares outstanding of the Company during the relevant years. As mentioned in Note 17, preferred and common shares have the same dividends rights. Earnings per share is disclosed in amounts per thousand shares, as a lot of one thousand shares which is the minimum number of shares of the Company that can be traded on the The Company calculates earnings per share in accordance with SFAS No. 128, “Earnings Per 3.15 Interest on own capital
Brazilian corporations are permitted to distribute interest on own capital, similar to a dividend distribution, but which is deductible for income tax purposes. The amount payable may not exceed 50% of the greater of net income for the year or retained earnings, as measured under Brazilian Corporate Law. It also may not exceed the product of the Taxa de Juros Longo Prazo (“TJLP”) (long-term interest rate) and the balance of shareholders' equity, as measured under Payment of interest on equity is beneficial to the Company when compared to making a dividend payment, since it recognizes a tax deductible expense on its income tax return for such amount. The related tax benefit is recorded in the consolidated statement of income. Income tax is withheld from the stockholders with respect to interest on equity at the rate of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the years ended December 31, 2005 and 2004 (in thousands of U.S. Dol ars, unless otherwise stated)
3.16 Environmental and remediation costs

Expenditures relating to ongoing compliance with environmental regulations, designed to minimize the environmental impact of the Company’s operations, are capitalized or charged against earnings, as appropriate. Management believes that, at present, each of its facilities is in substantial compliance with the applicable environmental regulations. 3.17 Research, development and advertising costs
Research and development expenses and advertising expenses included in sales and marketing expenses were $224 and $425, respectively (2004 - $951 and $531), respectively. No research, development and advertising costs have been deferred. 3.18 Treasury stock
Common and preferred shares reacquired are recorded under "Treasury stock" within shareholders' equity at cost. Sales of treasury stock are recorded at the average cost of the shares in treasury held at such date. The difference between the sale price and the average cost is recorded as a reduction or increase in additional paid-in capital.
3.19 Derivative financial instruments
Derivative financial instruments that do not qualify for hedge accounting are recognized on the balance sheet at fair value with unrealized gains and losses recognized in the statement of To qualify as a hedge, the derivative must be (i) designated as a hedge of a specific financial asset or liability at the inception of the contract, (i ) effective at reducing the risk associated with the exposure to be hedged, and (i i) highly correlated with respect to changes either in its fair value in relation to the fair value of the item being hedged or with respect to changes in the cash flows, both at inception and over the life of the contract. The Company has not accounted for any derivative fol owing hedge accounting during the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the years ended December 31, 2005 and 2004 (in thousands of U.S. Dol ars, unless otherwise stated)
3.20 Recent accounting standards not yet adopted
In December 2004, the FASB issued its Statements of Financial Accounting Standards (“SFAS”) No. 153, Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29, which eliminates the exception from fair value measurements for non-monetary exchanges of similar productive assets and replaces it with an exception for exchanges that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS no. 153 is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005, with earlier adoption permitted. The company does not believe that the adoption of SFAS No. 153 wil have a material impact on the company's consolidated financial position or On December 16, 2004, the FASB issued its SFAS No. 123 (revised 2004), Share-Based Payment (Statement 123R), which addresses the accounting for employee stock options and eliminates the alternative to use Option 25’s intrinsic value method of accounting that was provided in Statement 123 as original y issued. This statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost wil be recognized over the period during which an employee is required to provide service in exchange for the award (vested period). The grant-date fair value of employee share options and similar instruments wil be estimated using option-pricing models adjusted to the unique characteristics of those instruments. The company does not believe that the adoption of SFAS No. 123R wil have any impact on the company's consolidated financial position or results of operations since it does not currently have any shared-based instrument issued. In November 2004, the FASB issued SFAS no. 151, Inventory Costs, an amendment of ARB no. 43, Chapter 4, which requires idle facility expenses, excessive spoilage, and double freight and rehandling costs to be treated as current period charges and also requires that the al ocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. Accounting Research Bul etin no. 43, Inventory Pricing, previously required such expenses to be treated as current period expenses only if they meet the criterion of "so abnormal", which was not a defined term. SFAS no. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005, with earlier adoption permitted. The company does not believe that the adoption of SFAS no. 151 wil have a material impact on the company’s consolidated financial position or results of operations. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the years ended December 31, 2005 and 2004 (in thousands of U.S. Dol ars, unless otherwise stated)
3.21 Reclassifications for comparability purposes

Certain reclassifications have been made to the financial statements for the year ended December 31, 2004 to the presentation in the current year as fol ows:
Balance sheet
Reclassified
originally
balance as of
presented as of
and for the
and for the year
year ended
ended December
December 31,
Reclassifications
Current assets
Non-current assets
Current liabilities
Non-current liabilities
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the years ended December 31, 2005 and 2004 (in thousands of U.S. Dol ars, unless otherwise stated) Cash and cash equivalents
As described in the note 3.3 the open balance at January 1, 2006 was decreased by $46,839 to eliminate short-term investments recorded as cash and cash equivalent as of December Short-term investments
The breakdown of short-term investments as of December 31, 2005 is presented below: Trade accounts receivable, net
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the years ended December 31, 2005 and 2004 (in thousands of U.S. Dol ars, unless otherwise stated) The movement in the al owance for doubtful accounts for trade accounts receivable for the years ended December 31, 2005 and 2004 was as fol ows: Write-downs charged against the al owance Inventories
Tax credits
Current assets
Brazilian value-added on tax on sales and services - ICMS Brazilian tax for financing of social integration program - PIS Brazilian tax for financing of social integration program - COFINS Non-current assets
Brazilian value-added on tax on sales and services - ICMS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the years ended December 31, 2005 and 2004 (in thousands of U.S. Dol ars, unless otherwise stated) Related parties
Balances and transactions as at and for the year ended December 31, 2005 with related parties which were not eliminated in the consolidated financial statements are presented below: Webasto S.A.
Superpolo S.A.
Loans receivable (presented within Other Acquisitions of raw materials and supplies Property, plant and equipment, net
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the years ended December 31, 2005 and 2004 (in thousands of U.S. Dol ars, unless otherwise stated) Equity investments
As described in the note 3.8, the financial statements of Superpolo S.A. were proportional y consolidated in the consolidated financial statements of the Company as at and for the year Goodwill
Goodwil is ful y al ocated to the reporting unit “Ciferal”, a component of the reportable segment “Urban”, which represents a reporting unit as defined by SFAS No. 142 “Goodwil and Intangible The balance of goodwil is presented net of impairment of $3,922 recorded during 2001, 2002 Balance at the beginning of the year
Balance at the end of the year
Short-term debt
Short-term debt consists of working capital loans mainly denominated in Brazilian Reais and export and import financing denominated U.S. dol ars. The weighted-average interest rates are approximately 5.92% p.a. (2004 - 8.09% p.a.). NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the years ended December 31, 2005 and 2004 (in thousands of U.S. Dol ars, unless otherwise stated) Long-term debt
(a) Balances
Long term debt denominated in foreign currencies
Advances for export contracts with interest rates of 4.26% Pre-export loan agreements with interest rate of LIBOR Working capital loan agreements with interest rates of Working capital loan agreements with interest rates of Long term debt denominated in Brazilian reais (*)
Pre-export loan agreements with interest rates of TJLP plus Working capital loan agreements and other financing agreements with interest rates ranging from TJLP plus Financial covenants
The Company working capital loan agreement denominated in U.S. dol ars with IFC - International Finance Corporation contains certain financial covenants which are required to be met by the Company depending on the specific terms of the loan. As of December 31, 2005 and for the year then ended the Company was in compliance with the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the years ended December 31, 2005 and 2004 (in thousands of U.S. Dol ars, unless otherwise stated) Maturities of long-term debt
The long-term portion as of December 31, 2005 and 2004, of loans matures in the fol owing Commitments and contingencies

15.1 Tax and legal contingencies
The Company is party to claims with respect to certain taxes, contributions and civil and labor claims. Management believes, based in part on advice from legal counsel, that the provision for contingencies is sufficient to meet probable and reasonably estimable losses in the event of The fol owing table summarizes the provision for contingencies Contingencies
Probable losses on claims, for which a provision was recorded
Provision for contingencies correspond to: (a) civil and labor claims due to overtime, health and risk premiums, among others; and b) tax matters mainly related to lawsuits regarding contributions for the Social Integration Program (“Programa de Integração Social” - PIS) and regarding the monetary corrections of State Value Added Tax (“Imposto Sobre Circulação de Mercadorias e Serviços” - ICMS). NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the years ended December 31, 2005 and 2004 (in thousands of U.S. Dol ars, unless otherwise stated) Possible losses on tax matters for which no provision was recorded
There are other contingent tax liabilities, for which the probability of losses are possible or remote and, therefore, are not recognized in the provision for contingencies. These claims amounts to approximately $13,168 related to assessments from the Brazilian authorities questioning the application of transfer pricing rules and other income tax matters. 15.2 Vendor financing
The Company provides guarantees to third parties (financial entities) for them to financing sales to selected customers. These sales are recognized at the time the products are delivered. Under the vendor program, the Company is the secondary obligor to the bank. At December 31, 2005, customer guarantees provided by the Company totaled $24,096 (2004 - $31,783). Pension Plan
The Company is the principal sponsor of Marcoprev - Sociedade de Previdência Privada, a civil, non-profit organization, formed in December 1995, whose main objective is to provide pension benefits complementing those of the government social security to al employees of the sponsor companies. The sponsor companies are: Marcopolo S.A., Syncroparts Comércio e Dist. Peças Ltda., Marcopolo Trading S.A., MVC Componentes Plásticos Ltda., Polo Serviços em Plásticos Ltda. and Fundação Marcopolo (a non-profit foundation supported by the Company). The benefits of the plan have a “defined benefit” component, where contributions are the exclusive responsibility of the sponsor and a “defined contribution” component with contributions made by the sponsor and the individual associate on an optional basis. Net periodic pension cost relating to the defined benefit component of the plan was as fol ows: Amortization of unrecognized transition obligation The funded status of the defined benefit component of the plan was as fol ows: Amounts recognized in the balance sheet, net NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the years ended December 31, 2005 and 2004 (in thousands of U.S. Dol ars, unless otherwise stated) Additional information for the plan is as fol ows: Change in benefit obligation
Benefit obligation at the beginning of the year Benefit obligation at the end of the year Change in plan assets
Fair value of plan assets at the beginning of the year Fair value of plan assets at the end of the year The assumptions used for the defined benefit component of the plan are presented below. The rates presented below are nominal rates and consider an estimated annual inflation rate of 5%. Assumptions used to determine benefit obligations (in % per year): Assumptions used to determine net periodic benefit cost for the year (in % per year): The plan asset return is the expected average return of each asset category weighted by target al ocations. Asset categories’ returns are based on long term macroeconomic scenarios. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the years ended December 31, 2005 and 2004 (in thousands of U.S. Dol ars, unless otherwise stated) The asset al ocation for the pension plan at the end of 2005 and 2004, and the target al ocation for 2006, by asset category are presented as fol ows: Percentage of plan assets
allocation for
at year ended
Asset category
The Company’s investment policies and strategies for the pension benefits do not use target al ocations for the individual asset categories. The Company’s investment goals are to maximize returns subject to specific risk management policies. Its risk management policies permit investments in mutual funds, and prohibit direct investments in debt and equity securities and derivative financial instruments. The Company addresses diversification by the use of mutual fund investments whose underlying investments are in domestic and international fixed income securities and domestic and international equity securities. These mutual funds are readily marketable and can be sold to fund benefit payment obligations as they become Shareholder’s equity

17.1 Share capital
As of December 31, 2005 and 2004 capital stock is represented by 42,703,218 common shares and 69,673,671 preferred shares; al without par value. The authorized capital of the Company is total y issued as of December 31, 2005 and 2004. Only the common shares are entitled to vote. Under the Company’s bylaws, specific rights are assured to the nonvoting preferred shares. There is no redemption provisions associated with the preferred shares.
17.2 Legal reserve
Under Brazilian law, the Company is required to transfer up to 5% of annual net income, determined in accordance with Brazilian Corporate Law and based on the statutory financial statements prepared under Brazilian GAAP, to a legal reserve until such reserve equals 20% of paid-in capital. The legal reserve may be utilized to increase capital or to absorb losses, but NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the years ended December 31, 2005 and 2004 (in thousands of U.S. Dol ars, unless otherwise stated)
17.3 Distribution of net income
Distribution of dividens and legal reserve
Out of net income determined in accordance with accounting practices adopted in Brazil and adjusted as required by Brazilian corporate law, a minimum of 25% (twenty five percent) must be al ocated to pay annual dividends on al of the Company’s shares, as compulsory dividends. The remaining balance of such net income wil be alocated, in ful, to form the folowing Other reserves
The undistributed earnings after legal reserves are composed by:
Reserve for future capital increases, to be used for future capital increases, to be made up of
70% of the reserves for the year, and can not exceed 60% of capital; Reserve to pay interim dividends, to be used to pay interim dividends provided under
Paragraph 1 of Article 33 of the Statutes, to be formed up to 15% of the reserves for each year, and cannot exceed 10% of capital;

Reserve to purchase own shares, to be used to purchase shares issued by the Company, for
cancel ation, remaining in treasury and/or respective sale, to be formed up to 15% of the reserves for the year,and cannot exceed 10% of capital.
Reserve to future investments, to be used in future investments or future al ocation based in
the shareholders’ decision, to be formed by the amount of the undistributed earnings after legal reserves and the other reserves described above.
17.4 Dividends - Interests on shareholders’ equity
Brazilian law permits the payment of cash dividends from retained earnings calculated in accordance with the provisions of the Brazilian Corporate Law and as presented in the statutory accounting records. As of December 31, 2005, retained earnings in the statutory accounting records correspond to the balance of the statutory reserves described in Note 17.3 above which amounts in the statutory records of Marcopolo to $90,788 (translated at the year-end exchange Al ocation of interest on equity, declared by Marcopolo, is as fol ows: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the years ended December 31, 2005 and 2004 (in thousands of U.S. Dol ars, unless otherwise stated) Income tax
18.1 Analysis of income tax expense
Income tax payable is calculated as required by the tax laws of the countries in which Current tax expense
Deferred tax expense (benefit)

18.2 Income tax reconciliation
A reconciliation of the income taxes in the statement of income to the income taxes calculated at the Brazilian statutory rates fol ows: Net income before taxes and minority interest Brazilian composite statutory income tax rate Benefit of deductible interest on equity paid to shareholders Effect of equity in earnings of unconsolidated companies Effect of other permanent differences including foreign income having different statutory income tax rates NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the years ended December 31, 2005 and 2004 (in thousands of U.S. Dol ars, unless otherwise stated)
18.3 Tax rates

Tax rates in the principal geographical areas in which the Company operates are presented South Africa

18.4 Analysis of deferred income tax balances
The composition of deferred tax assets and liabilities are presented below. Current assets and liabilities and non current assets and liabilities in the table below are presented net for each tax Deferred tax assets
Provision for contingencies not currently deductible Other provision not currently deductible Deferred tax liabilities
Deferred tax liability on tax deductible goodwil Fair value of derivative instruments not currently deductible Less: Current-portion of deferred income tax asset Non-current portion of deferred income tax asset NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the years ended December 31, 2005 and 2004 (in thousands of U.S. Dol ars, unless otherwise stated) In assessing the reliability of deferred tax assets, management considers whether it is more likely than not that some portion or al of the deferred tax assets wil not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company wil realize the benefits of these deductible differences. The amount of the deferred tax asset considered realizable, however, could be reduced if estimates of future taxable income are Brazilian tax law al ows tax losses to be carried forward indefinitely to be utilized to offset future taxable income, limited to 30% of taxable income in each year. Fair value of financial instruments
Pursuant to SFAS No. 107, “Disclosures About Fair Value of Financial Instruments”, the Company is required to disclose the fair value of financial instruments, including off-balance sheet financial instruments, when fair values can be reasonably estimated. The carrying value of the Company’s financial instruments approximates fair market value because of the short-term maturity or frequent re-pricing of these instruments. Based on borrowing rates currently available to the Company for bank loans with similar terms and average maturities, the fair market value of long-term debt at December 31, 2005 and 2004 Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Derivative instruments
The use of derivatives by the Company is limited. Derivative instruments are used to manage clearly identifiable foreign exchange risks arising out of the normal course of business. Although such instruments mitigate the foreign exchange and interest rate risks, they do not necessarily eliminate them. The Company general y does not hold derivative instruments for Al derivative instruments have been recorded at fair value and realized and unrealized losses are presented in the consolidated statement of income under “Gain (losses) on derivatives, NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the years ended December 31, 2005 and 2004 (in thousands of U.S. Dol ars, unless otherwise stated) Business segments
The Company’s’ reportable segments under SFAS No. 131 “Disclosures About Segments of an Enterprise and Related Information” correspond to the business units through which the Company manages its operations. The identifiable assets are trade accounts receivable, inventories and property, plant and equipment. Year ended December 31, 2005
Intercity
Microbus
Adjustments
Year ended December 31, 2004
Intercity
Microbus
Adjustments
Geographic information about the Company is as fol ows with revenues classified by the geographic region from were the products have been shipped, except for the Virgin Islands which corresponds to sales of goods produced in any of the other locations: Year ended December 31, 2005
Argentina
Portugal
Colombia
Year ended December 31, 2004
Argentina
Portugal
Colombia
The Colombia region is represented by Superpolo which was proportional y consolidated in the the year ended December 31, 2004 and accounted under equity method for the year ended NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the years ended December 31, 2005 and 2004 (in thousands of U.S. Dol ars, unless otherwise stated) Concentration of credit risks
No single customer of the Company accounted for more than 10% of net sales and no single supplier accounted for more than 10% of purchases. Historical y, the Company has not experienced significant losses on trade receivables.

Source: http://ri.marcopolo.com.br/enu/1584/Financial_Statements_2005.pdf